<PAGE>
FILED PURSUANT TO RULE 424(B)(4)
REGISTRATION NO. 333-74391
PROSPECTUS
[LOGO]
THE OFFERING
- - We are offering for sale 2,000,000 shares of common stock.
OFFERING PROCEEDS
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- -------------
<S> <C> <C>
- - Price to public............ $ 9.00 $ 18,000,000
- - Underwriting discounts and
commissions................ $ 0.45 $ 900,000
- - Proceeds to us............. $ 8.55 $ 17,100,000
</TABLE>
UNDERWRITING
- - Friedman, Billings, Ramsey & Co., Inc. and Wedbush Morgan Securities Inc. have
agreed to underwrite this offering on a firm commitment basis.
- - We have granted the underwriters a 30-day option to purchase up to an
additional 300,000 shares of common stock to cover over-allotments.
OUR COMMON SHARES
- - The common shares offered by this prospectus will be listed for trading on the
NASDAQ NATIONAL MARKET under the trading symbol "KWIC."
- - On May 11, 1999, the closing price of our shares on the NASDAQ National Market
was $9.9375 per share.
OUR BUSINESS
We are an integrated, international real estate services and investment company.
- - We offer a complementary array of real estate services including property
management, asset management, leasing, brokerage and auctioning services.
- - We invest as a principal in real estate and distressed note pools.
OUR GROWTH OBJECTIVES
- - Continue to rapidly expand our nationwide property management business both
internally and through acquisitions in what we believe is a highly fragmented
industry.
- - Provide our real estate services to the Japanese real estate market through
our long-standing relationships.
- - Manage and participate in capital funds which purchase undervalued loans and
real estate.
- - Make principal investments in real estate and distressed note pools in the
U.S. and Japan and provide mezzanine financing for real estate developments in
the U.S.
------------------------
INVESTING IN COMMON STOCK INVOLVES RISKS. YOU SHOULD CONSIDER CAREFULLY THE
RISK FACTORS BEGINNING ON PAGE 8 BEFORE PURCHASING OUR COMMON STOCK.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
FRIEDMAN BILLINGS RAMSEY WEDBUSH MORGAN SECURITIES
THIS PROSPECTUS IS DATED MAY 12, 1999
<PAGE>
DESCRIPTION OF ARTWORK
1. FRONT INSIDE COVER OF FOLD IN PROSPECTUS. The name of the Company and
its web site address (www.kennedywilson.com) are in the upper left hand corner.
Pictures of three office buildings adorn the right half of the page. The Company
provides leasing services for the top building, holds a principal investment in
the middle building, and provided brokerage services for the sale of the bottom
building. The left side below the Company's name and website lists the real
estate services provided by the Company: "Property Management, Asset Management,
Leasing Services, Real Estate Brokerage, Auction Services and Principal
Investments." A box of text in the lower left hand corner reads:
"Who We Are
We are an international real estate services and investment company.
Through our seven principal U.S. offices and our office in Tokyo, we
provide a range of professional real estate services to a
well-established institutional client base. We also invest for our own
account and manage for our clients investments in pools of distressed
notes.
Our Growth Objectives
- Continue to rapidly expand our nationwide property management business
both internally and through acquisitions.
- Provide our real estate services to the Japanese real estate market
through our long-standing relationships.
- Manage and participate in joint ventures which purchase undervalued
loans and real estate.
- Make principal investments in real estate and distressed note pools in
the U.S. and Japan and provide mezzanine financing for real estate
developments."
"KWIC" is printed in rows throughout the page.
2. FOLD-OUT IN PROSPECTUS. The Company's mission statement, "We will seize
the opportunity" is across the top. A map of the United States and insert of
Japan list principal offices and territories where the Company has property
management operations, principal investments and where the Company provides
brokerage and auction services. A partial list of clients is also displayed.
3. BACK INSIDE COVER OF PROSPECTUS. The Company states its vision:
"Kennedy-Wilson is a cross-cultural family of seasoned, creative, real estate
professionals - Through our focus and integrity, we strive to generate long term
and loyal relationships with our clients, employees and investors." The Company
also states its mission: "To be the most recognized and respected company in
real estate services and investments - To create an environment of fairness and
integrity, which allows our employees to achieve their professional and personal
goals - To strive to maximize profits and shareholder value - To be innovative
and responsive to market changes."
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION DISCUSSED IN MORE DETAIL ELSEWHERE IN
THIS PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER BEFORE DECIDING TO INVEST IN OUR COMMON
STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE RISKS OF
INVESTING IN OUR COMMON STOCK DISCUSSED UNDER "RISK FACTORS" AND THE MORE
DETAILED DESCRIPTION OF OUR BUSINESS IN THE SECTIONS HEADED "BUSINESS" AND
"CONSOLIDATED FINANCIAL STATEMENTS", TOGETHER WITH THE CORRESPONDING NOTES,
BEFORE INVESTING IN OUR COMMON STOCK.
WHO WE ARE
We are an international real estate services and investment company. Through
our seven principal U.S. offices and our office in Tokyo, we provide a range of
professional real estate services to a well-established institutional client
base. We also invest for our own account and manage for our clients investments
in pools of distressed notes, meaning notes where the borrower has stopped
paying or is late in paying. At the end of 1998, we had total assets of $204.8
million and our revenues for the year were $50.9 million, representing an
increase of 88.4% over revenues for 1997. Our earnings before interest, taxes,
depreciation and amortization were $16.6 million in 1998, a 103.7% increase over
1997 results of $8.2 million.
Our three primary business lines are:
- property and asset management services;
- brokerage and auction services; and
- our investments as a principal in commercial and residential real estate
and distressed note pools.
As a result of our July 1998 acquisition of Heitman Properties, Ltd., which
we renamed Kennedy-Wilson Properties Ltd., we are now a national property
management company. We have over 51 million gross square feet of commercial and
residential real estate under management in 83 cities located in 25 states and
in the District of Columbia. We believe the property management industry is
highly fragmented and, as a result, acquisition opportunities exist. Thus, one
of our strategies for growth is to acquire additional property management
companies and to continue to expand our geographic scope.
Last year in our brokerage business we sold $522.9 million worth of
commercial and residential real estate for our clients and ourselves in 30 sales
transactions. Our brokerage clients include major U.S. and Japanese corporations
and financial institutions. We expect our property management business to
provide us with additional brokerage opportunities.
In the past, our brokerage relationships provided us with attractive
commercial and residential real estate investment opportunities in the U.S.
Within the next year, we plan to liquidate our currently held, U.S.,
wholly-owned commercial real estate investments due to our belief that these
assets are or soon will be stabilized, meaning that our planned improvements and
leasing plans are or soon will be completed. We anticipate that our property
management and brokerage operations will provide us opportunities to make
selective U.S. real estate investments.
We believe that the U.S. commercial real estate market may have matured
because strong growth in the U.S. economy has resulted in higher sales prices.
In contrast, we think that the Japanese real estate market offers significant
growth and investment opportunities due to depressed real estate prices
resulting from the recent Asian economic downturn. Over the last 10 years,
through our brokerage operations, we have developed strong relationships with
Japanese corporations and financial institutions. We believe that these
relationships resulted in the joint ventures that we have entered into with
companies and partnerships affiliated with Colony Capital, Inc. and Cargill,
Incorporated to invest in Japanese real estate and distressed notes. Under the
typical joint venture arrangement, including the Colony Capital and Cargill
agreements, we make minor equity investments and earn a profit participation as
well as acquisition and management fees.
We also broker the sales of commercial real estate in Japan. We expect this
business to increase based on our belief that as the Japanese economy recovers,
outside sources of capital will increase their investments in Japan.
3
<PAGE>
OUR STRATEGIES FOR GROWTH
- Expand our fee income by growing our property management and real estate
related services in the U.S. and Japan.
- Increase the cross-marketing of our services through newly-acquired
business lines.
- Grow our Japanese business by leveraging our existing relationships in,
and knowledge of, the Japanese real estate market.
- Bolster our presence on the Internet through the development of eKWIC.com,
an Internet real estate auctioning business scheduled for debut in the
fall of 1999.
- Take advantage of our improved capital structure and enhanced borrowing
ability as a result of this offering.
OUR COMPETITIVE ADVANTAGES
- Well-regarded reputation in the markets we serve.
- Complementary array of real estate services.
- Long-standing relationships with clients for whom we satisfy diverse real
estate needs.
- Entrepreneurial culture embodied in our organization and compensation
structures.
- Established relationships in, and knowledge of, the Japanese real estate
market.
- Experienced management team with low turnover.
THE OFFERING
The following summarizes this offering of common stock. We are presenting
this information as if the underwriters do not exercise their over-allotment
option by purchasing an additional 300,000 shares from us.
<TABLE>
<S> <C>
6,770,276
Common stock outstanding as of May 11, 1999.............. shares(1)
Common stock offered by us............................... 2,000,000 shares
8,770,276
Common stock to be outstanding after the offering........ shares(1)
Use of proceeds.......................................... debt reduction
NASDAQ National Market Symbol............................ KWIC
</TABLE>
- ------------------------
(1) Excludes 2,332,755 shares of common stock subject to outstanding options,
warrants and convertible debentures. See "Management--Stock Option Plans"
and "Our Capital Stock."
The underwriters expect to deliver the shares of common stock to purchasers
on May 17, 1999 by way of book entry with the Depository Trust Company.
EXCEPT AS NOTED, ALL OF THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. ALL COMMON STOCK SHARE
DATA REFLECTS ALL STOCK DIVIDENDS PAID PRIOR TO THE DATE OF THIS PROSPECTUS, AND
ALL REFERENCES TO "US" AND "WE" INCLUDE ALL OF OUR SUBSIDIARIES WHERE WE EXERT
CONTROL OVER THEIR OPERATIONS.
4
<PAGE>
RECENT DEVELOPMENTS
On April 21, 1999, we reported preliminary results of operations for the
three months ended March 31, 1999. Revenues for the first quarter were $16.9
million, and net income for the first quarter was $1.2 million or $0.16 per
share. For the first quarter ended March 31, 1998, revenues were $4.4 million
and net income was $0.7 million or $0.11 per share.
On March 27, 1999, we entered into an agreement with Coastal Commercial Real
Estate Services, Inc., doing business as R&B Commercial Real Estate Services, to
purchase all of its assets consisting primarily of property management
contracts. R&B Commercial will either assign such contracts to us or appoint us
as sub-agent thereunder. These property management contracts cover approximately
5.0 million gross square feet of commercial and residential properties. The
purchase price was $1.0 million plus up to an additional $1.2 million payable
over the next three years depending on the pre-tax net operating income
generated by the purchased assets. We financed the initial payment of the
purchase price with borrowings under our line of credit with East-West Bank.
On April 21, 1999, eKWIC Inc., our wholly owned subsidiary, signed a letter
of intent with Guidance Solutions, Inc. to jointly develop an interactive
Internet auction service for the marketing and sale of residential and
commercial real estate. The service will be located at www.eKWIC.com. Subject to
the execution of a definitive agreement, Guidance Solutions will create and
maintain the website in exchange for an initial 15% ownership of eKWIC and up to
an additional 10% ownership if certain capital raising requirements, budget
goals and performance deadlines are met. We will provide to eKWIC the hardware
and software necessary to support the website and our real estate marketing,
sales and auction expertise.
On April 26, 1999, we issued and sold 6% subordinated convertible debentures
in the original aggregate principal amount of $7,500,000 to Cahill, Warnock
Strategic Partners Fund, L.P. and Strategic Associates, L.P. pursuant to a
Convertible Debenture Purchase Agreement dated as of April 15, 1999. The
debentures mature on April 15, 2006 and bear interest at 6% per annum payable
monthly in arrears and at maturity. Holders of the debentures may convert their
debentures at any time into common stock at a conversion price of $10.00 per
share subject to adjustments as provided in the Purchase Agreement. We used the
proceeds from the sale of the debentures to pay down amounts borrowed under our
line of credit with East-West Bank.
We recently leased to various tenants approximately 334,000 square feet of
office space in the New York City office building in which we own a 15%
interest. These leases increased the occupancy in that building from
approximately 45% to approximately 87%.
We have entered into discussions with Nippon Jisho, an office building
management affiliate of Nippon Credit Bank, to form a joint venture to manage
and broker real property in Japan.
5
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following is a summary of our consolidated historical financial data. It
is derived from our audited financial statements as of and for each of the
previous five years ended December 31. The unaudited pro forma data for the year
ended December 31, 1998 is presented as if our acquisition of Heitman
Properties, Ltd. on July 17, 1998 had occurred at January 1, 1998. See
"Business--Our Business Operations--Property Management and Leasing." The pro
forma information is not necessarily indicative of what our actual results would
have been as of and for the periods indicated; nor does it purport to represent
our future results of operations. The summary historical and pro forma
consolidated financial and other data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes and pro
forma financial statements and related notes in this prospectus.
KENNEDY-WILSON, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, UNAUDITED UNAUDITED
----------------------------------------------------- PRO FORMA PRO FORMA
1994 1995 1996 1997 1998 1998 AS ADJUSTED(6)
--------- --------- --------- --------- --------- ----------- --------------
(IN 000S, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Property management fees......... -- -- -- -- $ 14,194 $ 31,024 $ 31,024
Brokerage commissions............ $ 16,554 $ 6,557 $ 5,873 $ 5,895 4,917 4,917 4,917
Investments
Sales of residential real
estate....................... 16,495 10,631 19,743 6,753 13,828 13,828 13,828
Gain on sale of
investments(1)............... 2,990 2,087 4,511 10,375 10,642 10,642 10,642
Equity in income of investments
with related parties and non-
affiliates................... 1,393 138 178 1,431 612 612 612
Rental income.................. -- 642 1,467 1,629 4,583 4,583 4,583
Other income(2).................. 1,215 555 195 916 2,096 3,131 3,131
--------- --------- --------- --------- --------- ----------- --------------
Total revenues................... 38,647 20,610 31,967 26,999 50,872 68,737 68,737
--------- --------- --------- --------- --------- ----------- --------------
OPERATING EXPENSES
General, administrative and
compensation................... 14,786 11,683 7,852 12,319 21,472 33,115 33,115
Cost of residential real estate
sold........................... 15,147 10,610 16,732 5,592 12,249 12,249 12,249
Depreciation and amortization.... 895 623 268 790 2,059 2,939 2,939
Interest expense................. 635 1,472 1,964 3,139 8,398 10,122 8,505
Other(3)......................... 6,126 9,364 1,560 928 532 532 532
--------- --------- --------- --------- --------- ----------- --------------
Total operating expenses......... 37,589 33,752 28,376 22,768 44,710 58,957 57,340
--------- --------- --------- --------- --------- ----------- --------------
Income (loss) before provision
for income taxes and
extraordinary items(4)......... 1,058 (13,142) 3,591 4,231 6,162 9,780 11,397
Provision for income taxes....... 48 44 60 280 837 2,176 2,849
--------- --------- --------- --------- --------- ----------- --------------
Income (loss) before
extraordinary items............ 1,010 (13,186) 3,531 3,951 5,325 7,604 8,548
Extraordinary items.............. 79
--------- --------- --------- --------- --------- ----------- --------------
Net income (loss)................ $ 1,010 $ (13,186) $ 3,531 $ 4,030 $ 5,325 $ 7,604 $ 8,548
--------- --------- --------- --------- --------- ----------- --------------
--------- --------- --------- --------- --------- ----------- --------------
SHARE DATA
Earnings (loss) per share
Basic.......................... $ 0.13 $ (1.74) $ 0.50 $ 0.66 $ 0.85 $ 1.22 $ 1.03
Diluted........................ $ 0.13 NA $ 0.50 $ 0.65 $ 0.78 $ 1.12 $ 0.97
Weighted average shares
Basic.......................... 7,594,000 7,575,000 7,087,000 6,104,000 6,254,000 6,254,000 8,264,000
Diluted........................ 7,686,000 NA 7,094,000 6,187,000 6,801,000 6,801,000 8,801,000
Other
EBITDA(5)...................... $ 2,588 $ (11,047) $ 5,823 $ 8,160 $ 16,619 $ 22,840 $ 22,841
Interest expense............... $ 635 $ 1,472 $ 1,964 $ 3,139 $ 8,398 $ 10,122 $ 8,505
Cash flow provided by (used in)
Operating activities........... $ (4,290) $ (4,514) $ 533 $ (2,971) $ 3,658 n/a n/a
Investing activities........... $ (5,004) $ (12,829) $ (11,667) $ 21,517 $(136,049) n/a n/a
Financing activities........... $ 5,088 $ 13,786 $ 10,843 $ (9,999) $ 131,781 n/a n/a
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------------------
AS
ACTUAL ADJUSTED(7)
----------------------------------------------------- -------------
1994 1995 1996 1997 1998 1998
--------- --------- --------- --------- --------- -------------
(IN 000S)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents..... $ 5,599 $ 2,192 $ 1,901 $ 10,448 $ 9,838 $ 9,838
Total assets.................. $ 37,014 $ 37,651 $ 51,114 $ 45,718 $ 204,816 $ 204,816
Mortgage debt................. $ 7,610 $ 24,449 $ 20,516 $ 15,102 $ 115,130 $ 115,130
Total long-term debt.......... $ 7,610 $ 24,699 $ 28,711 $ 19,866 $ 150,421 $ 150,421
Total liabilities............. $ 15,995 $ 29,706 $ 40,732 $ 34,124 $ 182,036 $ 165,936
Total stockholders' equity.... $ 21,019 $ 7,945 $ 10,382 $ 11,594 $ 22,780 $ 38,880
</TABLE>
- --------------------------
(1) Includes gains on restructured notes receivable, on sale of partnership and
on sales of commercial real estate.
(2) Includes interest and other income.
(3) Includes commissions, marketing expenses, and restructuring charges in 1995.
(4) During 1997, we recognized a $79,000 extraordinary gain comprised of a
$288,000 gain from debt extinguishment and a $209,000 loss from loan
prepayment penalties.
(5) EBITDA is not intended to represent cash flow from operations as defined by
generally accepted accounting principles and should not be used as an
alternative to net income as an indicator of operating performance or to
cash flow as a measure of liquidity. "EBITDA" is defined as earnings before
minority interest, extraordinary items, interest expense, interest income,
income taxes, depreciation and amortization expense. EBITDA is included in
this prospectus to provide additional information with respect to our
ability to satisfy our debt service, capital expenditures and working
capital requirements.
(6) Adjusted to reflect the sale of 2,000,000 shares of common stock as if
offered by us on January 1, 1998 at an offering price of $9.00 per share,
after deducting underwriting discounts and commissions and estimated
offering expenses, and the receipt and application of the net proceeds from
the offering toward the reduction of existing debt obligations of the
Company. See "Use of Proceeds" and "Capitalization."
(7) Adjusted to reflect the sale of 2,000,000 shares of common stock on the
Company's financial position as of December 31, 1998, at an offering price
of $9.00 per share, after deducting underwriting discounts and commissions
and estimated offering expenses, and the receipt and application of the net
proceeds from the offering toward the reduction of existing debt obligations
of the Company.
OUR CORPORATE HEADQUARTERS:
KENNEDY-WILSON, INC.
9601 WILSHIRE BOULEVARD
SUITE 220
BEVERLY HILLS, CALIFORNIA, 90210
(310) 887-6400
WWW.KENNEDYWILSON.COM
[LOGO]
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RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A NUMBER OF RISKS. BEFORE MAKING
AN INVESTMENT DECISION, YOU SHOULD CAREFULLY CONSIDER ALL OF THE RISKS DESCRIBED
IN THIS PROSPECTUS. IF ANY OF THE RISKS DISCUSSED IN THIS PROSPECTUS ACTUALLY
OCCUR, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE
MATERIALLY ADVERSELY AFFECTED. IF THIS WERE TO OCCUR, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE SIGNIFICANTLY AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT.
THE RISK FACTORS DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL
RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US MAY ALSO IMPAIR OUR BUSINESS
OPERATIONS.
WE MAY BE ADVERSELY AFFECTED BY A DOWNTURN IN ECONOMIC CONDITIONS
Our business is closely tied to real estate. Our economic performance, the
value of real estate and our ability to implement our business strategies may be
affected by changes in national and local economic conditions. The condition of
the real estate markets in which we operate tends to be cyclical and related to
the condition of the economy in the U.S. and Japan as a whole and to the
perceptions of investors of the overall economic outlook. Rising interest rates,
declining demand for real estate or periods of general economic slowdown or
recession have had a direct negative impact on the real estate market in the
past and a recurrence of these conditions in the U.S. or a deeper recession in
Japan could result in a reduction in our revenues. In addition, the economic
condition of each local market where we operate may be dependent on one or more
industries. Our ability to vary our portfolio promptly in response to economic
or other conditions is limited. Certain significant expenditures, such as debt
service costs, real estate taxes, and operating and maintenance costs are
generally not reduced when market conditions are poor. These factors would
impede us from responding quickly to changes in the performance of our
investments and could adversely impact our business, financial condition and
results of operations. An economic recession could lead to:
- a general decline in rents due to defaulting tenants or less favorable
terms for renewed or new leases;
- fewer purchases and sales of properties by clients, resulting in a
decrease in property management fees, brokerage commissions and auction
revenues;
- a decline in actual and projected sale prices of our properties meaning
lower returns on the properties in which we have invested;
- higher interest rates, higher loan costs, less desirable loan terms and a
reduction in the availability of mortgage loans and mezzanine financing
which could limit our ability to acquire additional real estate assets;
and
- a decrease in the availability of lines of credit and other sources of
capital used to purchase real estate investments and distressed notes.
OUR REAL ESTATE INVESTMENTS INVOLVE RISK OF LOSSES AND FLUCTUATIONS IN OPERATING
RESULTS
As of December 31, 1998, we were involved as a principal investor in 16 real
estate investments. Our book value for those investments as of that date was
approximately $122.4 million and our total equity investment was approximately
$7.3 million. Our participation as a principal in real estate investments and
the timing of our purchases and sales of those investments could result in
significant fluctuations in our net operating results and cash flow. We may
experience one or more quarters without acquiring or disposing of real estate,
which could have a material adverse effect on our business, financial condition
and results of operations.
There is the inherent possibility in all of our real estate investments that
we will lose all or part of our investment. Moreover, in our joint ventures that
invest in real estate, we may not be able to
8
<PAGE>
unilaterally decide the timing of the disposition of an investment, and as a
result, may not control when and whether any gain will be realized or loss
avoided. Our investments can also be diminished by:
- civil unrest, acts of war and acts of God, including earthquakes,
hurricanes and other natural disasters (which may result in uninsured or
under insured losses);
- the impact of present or future legislation in the U.S. or in Japan
(including environmental regulation, changes in laws concerning foreign
ownership of property, changes in real estate tax rates, changes in zoning
laws and laws requiring upgrades for disabled persons) and the cost of
compliance with such legislation; and
- liabilities relating to claims to the extent insurance is not available or
is inadequate.
Part of our investment strategy is to locate and acquire real estate assets
that we believe are undervalued and to improve them to increase their resale
value. We face risks arising from the acquisition of properties not yet fully
developed or in need of substantial renovation or redevelopment, particularly
the risk that we overestimate the value of the property and the risk the cost or
time to complete the renovation or redevelopment will exceed the budgeted
amount. Such delays or cost overruns may arise from:
- shortages of materials or skilled labor;
- a change in the scope of the original project;
- the difficulty in obtaining necessary zoning, land-use, building,
occupancy and other governmental permits and authorizations;
- the discovery of structural or other latent defects in the property once
construction has commenced; and
- delays in obtaining tenants.
Any failure to complete a redevelopment project in a timely manner and
within budget or to sell or lease the project after completion could have a
material adverse effect upon our business, results of operation and financial
condition.
We also have made and expect to continue to make or acquire mezzanine loans,
which are loans that are secured by real property, but are subject to the
interests of lenders who are senior to us. These mezzanine loans are considered
to involve a high degree of risk compared to other types of loans secured by
real property. This is due to a variety of factors, including that a foreclosure
by the holder of the senior loan could result in our mezzanine loan becoming
uncollectible. Accordingly, we may not recover the full amount, or any, of our
investment in mezzanine loans. In addition, mezzanine loans may have higher loan
to value ratios than conventional term loans. See "Business--Our Business
Operations--Real Estate Investments And Asset Management."
WE WILL BE SUBJECT TO NEW RISKS RESULTING FROM INCREASED JAPANESE OPERATIONS
In 1998, 3.1% of our revenues were earned as a result of our operations and
investments in Japan. One of our strategies for the future is to increase our
operations and investments in Asia, particularly, in Japan. In furtherance of
this strategy, we expect to commit additional resources to expand our sales and
marketing activities in Japan and expand our service offerings and products in
selected markets throughout Asia. If we are successful in implementing this
strategy, the increased scope of our international operations may lead to more
volatile financial results and difficulties in managing our businesses. This
volatility and difficulty could be caused by, among other things, the following:
- currency fluctuations, restrictions and problems relating to the
repatriation of profits;
- our relative inexperience in investing in Japanese real estate and loan
pools;
9
<PAGE>
- difficulties and costs of staffing and managing international operations;
- the burden of complying with multiple and potentially conflicting laws;
- laws restricting foreign companies from conducting business and unexpected
changes in regulatory requirements;
- the impact of different business cycles and economic instability;
- political instability and civil unrest;
- greater difficulty in perfecting our security interests, collecting
accounts receivable, foreclosing on security and protecting our interests
as creditors in bankruptcies in certain geographic regions;
- potentially adverse tax consequences;
- share ownership restrictions on foreign operations;
- Japanese property and income taxes, tax withholdings and tariffs; and
- geographic, time zone, language and cultural differences between personnel
in different areas of the world.
We may experience an operating loss in one or more regions of the world for
one or more periods, which could have a material adverse effect on our business,
operating results and financial condition. If we are unable to successfully
implement these plans, to maintain adequate long-term strategies that
successfully manage the risks associated with our international business or to
adequately manage operational fluctuations, our business, financial condition
and results of operations could be materially and adversely affected.
During 1997 and 1998, Japan and other parts of Asia were impacted by
financial turmoil which was initially reflected in rapidly falling exchange
rates relative to the U.S. Dollar. This led to falling stock prices and asset
values in Asia and reduced economic growth prospects in Asia. Several property
markets in Asia were affected by real estate developments that resulted in an
oversupply of completed or partially completed space. Property prices fell along
with prices of other investments and asset values.
These events reduced Asian economic growth in 1998 and, as economic growth
is generally a significant factor affecting property markets, demand for
property in Asia is generally weaker than in prior years. Also important to a
recovery in Asian property markets will be the adjustment to the current
significant oversupply of space in many markets which is likely to take time to
correct. The short-term outlook for real estate in Asia includes depressed rents
and capital values. The length and severity of the downturn is likely to vary in
different markets within the region. Our ability to realize profits from
acquisitions of distressed notes and the subsequent sale of any real estate
securing those notes may be materially adversely affected by a prolonged
depression in the value of real estate in the region. Conversely, a strong Asian
economy could reduce the availability of undervalued real estate and distressed
note pools in Asia. This could adversely effect our operations in Japan. We
cannot be sure that we will be successful with our Asian investments. See
"Business--Our Strategies For Growth-- Grow Our Japanese Business."
OUR REVENUES AND EARNINGS MAY BE AFFECTED BY FOREIGN CURRENCY FLUCTUATIONS
Our revenues from non-U.S. operations have been primarily denominated in the
local currency where the associated revenues were earned. Thus, we may
experience significant fluctuations in revenues and earnings because of
corresponding fluctuations in foreign currency exchange rates. To date, our
foreign currency exposure has been limited to the Japanese Yen. For the twelve
months
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ended December 31, 1998, 8.4% of our net income was denominated in Yen. As we
increase our foreign operations, fluctuations in the value of the U.S. Dollar
relative to the other currencies in which we may generate earnings could
materially adversely affect our business, operating results and financial
condition. Fluctuations in currencies relative to the U.S. Dollar may make it
more difficult to perform period-to-period comparisons of our reported results
of operations. Due to the constantly changing currency exposures to which we
will be subject and the volatility of currency exchange rates, there can be no
assurance that we will not experience currency losses in the future, nor can we
predict the effect of exchange rate fluctuations upon future operating results.
Our management may decide to use currency hedging instruments including foreign
currency forward contracts, purchased currency options where applicable and
borrowings in foreign currency. Economic risks associated with these hedging
instruments include unexpected fluctuations in inflation rates impacting cash
flow relative to paying down debt, and unexpected changes in the underlying net
asset position. There can be no assurance that any hedging will be effective.
See "Business--Our Strategies For Growth--Grow Our Japanese Business."
OUR JOINT VENTURE ACTIVITIES INVOLVE UNIQUE RISKS
We have utilized joint ventures for large commercial investments and real
estate developments. We plan to continue to acquire interests in additional
limited and general partnerships, joint ventures and other enterprises
(collectively, "Joint Ventures") formed to own or develop real property or
interests in real property or note pools. It is our strategy in Japan to invest
primarily through Joint Ventures. We have acquired and may acquire minority
interests in Joint Ventures and we may also acquire interests as a passive
investor without rights to actively participate in management of the Joint
Ventures. Investments in Joint Ventures involve additional risks, including the
possibility that the other participants may become bankrupt or have economic or
other business interests or goals which are inconsistent with our own, that we
will not have the right or power to direct the management and policies of the
Joint Ventures and that other participants may take action contrary to our
instructions or requests and against our policies and objectives. Should a Joint
Venture participant act contrary to our interest, it could have a material
adverse effect upon our business, results of operations and financial condition.
Moreover, we cannot be certain that we will continue these investments, or that
we can identify suitable Joint Venture partners and form new Joint Ventures in
the future. See "Business-- Our Business Operations--Real Estate Investments And
Asset Management" and "--Distressed Note Pool Investments."
WE MAY INCUR LOSSES ON OUR NOTE INVESTMENTS
We purchase notes that are unsecured or secured by real or personal
property. These notes are generally non-performing or sub-performing, and most
likely are in default at the time of purchase. In general, the distressed notes
we acquire are highly speculative investments and have a greater than normal
risk of future defaults and delinquencies as compared to newly originated loans.
Returns on loan investments depend on the borrower's ability to make required
payments or, in the event of default, our security interests, if any, and our
ability to foreclose and liquidate whatever property may be securing the note.
We cannot be sure that we will be able to collect on a defaulted loan or
foreclose on security successfully or in a timely fashion. There may also be
instances when we are able to acquire title to an underlying property and sell
it, but not make a profit on our investment. See "Business-- Our Business
Operations--Distressed Note Pool Investments."
OUR OPERATING RESULTS MAY VARY FROM QUARTER TO QUARTER
We have experienced a fluctuation in our financial performance from quarter
to quarter due in part to the significance of revenues from the sales of our
real estate to our overall performance. The timing of purchases and sales of our
real estate investments has varied, and will continue to vary, widely from
quarter to quarter, due to variability in market opportunities, changes in
interest rates, and
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the overall demand for residential and commercial real estate, among other
things. While these factors have contributed to our experiencing increased
operating income and earnings in the fourth quarter in past years, there can be
no assurance that we will continue to perform better in the fourth quarter.
In addition, the timing and magnitude of brokerage commissions paid to us
may vary widely from quarter to quarter depending upon overall activity in the
general real estate market and the nature of our brokerage assignments, among
other things. See "Management's Discussion and Analysis of Financial Condition
And Results Of Operations--Quarterly Operating Results."
THE REAL ESTATE SERVICES AND INVESTMENT BUSINESSES ARE HIGHLY COMPETITIVE
Real estate services and investment businesses are highly competitive. Our
principal competitors include both large multinational companies and national
and regional firms, such as LaSalle Partners, Inc., Jones Lang LaSalle Inc.,
Trammell Crow Company, CB Richard Ellis Services, Inc. and Insignia Financial
Group. Most of these competitors have greater financial resources and a broader
global presence than Kennedy-Wilson. We compete with these companies and others
in the U.S. and to a limited extent, in Japan:
- selling commercial and residential properties on behalf of customers
through brokerage and auction services;
- leasing and property management, including construction and engineering
services;
- purchasing commercial and residential properties, as well as undeveloped
land for our own account; and
- acquiring secured and unsecured non-performing loans.
Our property management operations must compete with a growing number of
national firms seeking to expand market share. In addition, as the Japanese
economy begins to recover, we expect to experience increased competition with
our Japanese operations. There can be no assurance that we will be able to
continue to compete effectively, maintain current fee levels or arrangements,
continue to purchase investment property profitably or not encounter increased
competition.
WE MAY LOSE PROPERTY MANAGEMENT AGREEMENTS OR CLIENT RELATIONSHIPS
We are highly dependent on long-term client relationships and on revenues
received for services under various property management and leasing agreements
with third party owners of properties. A considerable amount of our revenues are
derived from fees related to these agreements. Over the last six months of 1998,
we derived $14.2 million from these agreements, accounting for approximately
27.9% of our total revenues for 1998. Approximately 52% of our revenues earned
for the management and leasing of properties in 1998 related to properties owned
or asset managed by Heitman Capital Management Corporation. Prior to our
acquisition of Heitman Properties, Ltd., now known as Kennedy-Wilson Properties
Ltd., in July 1998, Heitman Properties, Ltd. and Heitman Capital Management
Corporation were owned by the same company.
Heitman Capital Management Corporation has sold certain of the properties
that we, and our predecessor, Heitman Properties, Ltd., managed for Heitman
Capital. We expect Heitman Capital to sell more of its properties in the future.
Accordingly, the number of properties that we manage for Heitman Capital will
probably decrease. Further, during the years prior to our acquisition of Heitman
Properties, Heitman Properties experienced a decline in the total square footage
of property under management, property management fees and leasing commissions.
You should review the Heitman Properties' Consolidated Balance Sheets and
Statements of Operations in this prospectus for more information about Heitman
Properties' financial condition and results of operations prior to our
acquisition.
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The majority of our property management agreements are cancelable prior to
their expiration by the client for any reason on as little as 30 to 60 days'
notice. These contracts also may not be renewed when their respective terms
expire. We believe many of our clients will continue to use our services for
their current holdings and will engage us for newly acquired properties. If,
however, we fail to maintain existing relationships, fail to develop and
maintain new client relationships or otherwise lose a substantial number of
management agreements, we could experience a material adverse change in our
business, financial condition and results of operations.
Our property management fees are generally structured as a percentage of the
revenues generated by the properties that we manage. Similarly, our leasing
commissions typically are based on the value of the lease revenues commitments.
As a result, our revenues are adversely affected by decreases in the performance
of the properties we manage. Property performance will depend upon our ability
to attract and retain creditworthy tenants, our ability to control operating
expenses (some of which are beyond our control), financial conditions generally
and in the specific areas where properties are located and the condition of the
real estate market generally. See "Business--Our Business Operations--Property
Management And Leasing."
THE GROWTH OF OUR BUSINESS DEPENDS ON OUR ABILITY TO RENEW LEASES OR SECURE NEW
TENANTS
A significant portion of our property management business involves
facilitating the leasing of commercial space. In certain areas of operation,
there may be inadequate commercial space to meet demand and there is a potential
for a decline in the number of our overall lease and brokerage transactions. In
areas where the supply of commercial space exceeds demand, we may not be able to
renew leases or obtain new tenants for our owned and managed rental properties
as leases expire. Moreover, the terms of new leases and renewals (including
renovation costs or costs of concessions to tenants) may be less favorable than
current leases. Our revenues may be adversely affected by the failure to
promptly find tenants for substantial amounts of vacant space, if rental rates
on new or renewal leases are significantly lower than expected, or if reserves
for costs of re-leasing prove inadequate. We cannot be sure that we can continue
to lease properties for our clients and for our own account in a profitable
manner. See "Business--Our Business Operations--Property Management And
Leasing."
Our ability to lease properties also depends on:
- the attractiveness of the properties to tenants;
- competition from other available space;
- our ability to provide for adequate maintenance and insurance and to pay
increased operating expenses which may not be passed through to tenants;
- the availability of capital to periodically renovate, repair and maintain
the properties, as well as for other operating expenses; and
- the existence of potential tenants desiring to lease the properties.
THE GROWTH OF OUR BUSINESS DEPENDS ON OUR ABILITY TO INTEGRATE ACQUISITIONS INTO
OUR EXISTING OPERATIONS
Acquisitions and expansion have been, and will continue to be, a significant
component of our growth strategy for the future. Last year, we acquired Heitman
Properties, Ltd., a nationwide property management and leasing operation. While
maintaining our existing business lines, we intend to continue to pursue a
sustained growth strategy by increasing revenues from existing clients,
expanding the breadth of our service offerings, seeking selective co-investment
opportunities and pursuing strategic acquisitions.
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Our ability to manage our growth will require us to effectively integrate
new acquisitions into our existing operations while managing development of
principal properties. We expect that significant growth in several business
lines occurring simultaneously will place substantial demands on our managerial,
administrative, operational and financial resources. Our future success and
profitability will depend, in part, on our ability to attract, retain and
motivate qualified managers and other personnel, and successfully implement
enhancements to management and operating systems. In addition, expansion will
likely require increased financing from third party lenders. We cannot be sure
that we will be able to successfully manage all factors necessary for a
successful expansion of our business. Moreover, our strategy of growth depends
on the existence of and our ability to identify attractive and synergistic
acquisition targets. The unavailability of suitable acquisition targets, or our
inability to find them, may result in a decline in our business, financial
condition and results of operations. See "Business--Our Strategies For Growth."
WE DEPEND ON KEY PERSONNEL WHOSE CONTINUED SERVICE IS NOT GUARANTEED
Our continued success is dependent to a significant degree upon the efforts
of certain senior executives. William McMorrow, our Chairman and Chief Executive
Officer; Freeman Lyle, our Executive Vice President, Chief Financial Officer and
Secretary; Lewis Halpert, our Executive Managing Director and the President of
our Residential and Notes Groups; and Barry Schlesinger, the Chairman and Chief
Executive Officer of Kennedy-Wilson Properties, Ltd. (formerly Heitman
Properties, Ltd.), have each been essential to our business. In addition,
Richard Mandel, the Managing Director and President of our Commercial Brokerage
Division, has been key to real estate brokerage and investment activities in
markets outside Los Angeles, including in Japan. Ryosuke Homma, President and
Representative Director of our Japanese subsidiary, Kennedy-Wilson Japan, has
been vital to our business in Japan. These executives have employment contracts
with us that are renewable annually. The departure of all or any of these
executives for whatever reason or the inability of all or any of them to
continue to serve in their present capacities or our inability to attract and
retain qualified personnel could have a material adverse effect upon our
business, financial condition and results of operations.
Each of these individuals has built a highly regarded reputation in the real
estate industry. Each attracts business opportunities and assists us both in
negotiations with lenders and potential joint venture partners and in the
representation of large and institutional clients. If we lost their services,
our relationships with lenders, joint venturers and clients would diminish
significantly.
In addition, our other officers have strong regional reputations and they
aid us in attracting and identifying opportunities and negotiating for us and on
behalf of our clients. In particular, we view the establishment and maintenance
of strong relationships through these individuals as critical to our success in
the Japanese market.
As we continue to grow, our success will be largely dependent upon our
ability to attract and retain qualified personnel in all areas of business. We
cannot be sure that we will be able to continue to hire and retain a sufficient
number of qualified personnel to support or keep pace with our planned growth.
See "Management."
OWNERSHIP OF OUR COMMON STOCK IS CONCENTRATED IN THE HANDS OF DIRECTORS AND
OFFICERS
After giving effect to this offering and including all director and
executive officer stock options exercisable within the next 60 days, our
directors and executive officers will together own approximately 45.2% of our
issued and outstanding shares of common stock if the underwriter's
over-allotment option is not exercised, with William McMorrow, our Chief
Executive Officer, owning 17.3%, Lewis Halpert, our Executive Managing Director
owning 15.8%, and Thomas Barrack, a member of our Board of Directors, owning
9.6%. Accordingly, our directors and officers will have the power to influence
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substantially the election of all of the members of our Board of Directors and
the outcome of most corporate actions requiring stockholder approval. Such
voting control may prevent the approval of certain types of transactions,
including a proposal by third parties to acquire us. See "Security Ownership Of
Certain Beneficial Owners And Management."
WE ARE HIGHLY DEPENDENT UPON CALIFORNIA OPERATIONS
Certain of our business activities are concentrated in California. As of
December 31, 1998:
- 84.7% of the total amount that we have invested in real estate is invested
in real estate located in California;
- 54.3% of our brokerage revenues in 1998 related to property located in
California; and
- 18.8% of our property management revenues in 1998 related to property
located in California.
Consequently, our business, results of operations and financial condition
are dependent upon general trends in the California economy and its real estate
market. Although it is currently in a period of recovery, the California economy
experienced a recession in the early 1990s that was accompanied by a sustained
decline in the value of California real estate. Real estate market declines may
become so severe that the market value of the properties securing loans may be
significantly less than the outstanding balances of those loans, and real estate
market declines may negatively affect our ability to sell our property at a
profit. We purchased all of the California real estate that we currently own
after July 1994, during, what we believe to be the recovery period following the
early 1990s recession. In addition, California historically has been vulnerable
to certain natural disaster risks, such as earthquakes, floods, wild fires and
erosion-caused mudslides. The existence of adverse economic conditions or the
occurrence of natural disasters in California could have a material adverse
effect on our business, financial condition and results of operations.
OUR USE OF DEBT TO FINANCE ACQUISITIONS COULD ADVERSELY IMPACT OUR RESULTS
We have historically financed new acquisitions and property purchases with
cash derived from secured and unsecured loans and lines of credit. For instance,
we typically purchase real property with loans secured by a mortgage on the
property acquired. We have also pledged shares of our property management
subsidiary as collateral for the loan we used to finance the acquisition of that
subsidiary. As of December 31, 1998, 98% of the real properties that we own
individually (based on book value) were encumbered by debt. We anticipate
continuing this trend. We do not have a policy limiting the amount of debt that
we may incur. Accordingly, our management and Board of Directors have discretion
to increase the amount of our outstanding debt at any time. We could become more
highly leveraged, resulting in an increase in debt service costs that could
adversely affect our results of operations and increase the risk of default on
our debt.
As of December 31, 1998, we had $131.8 million in variable rate borrowings.
As a result, we are subject to fluctuating interest rates that may impact,
adversely or otherwise, our results of operations and cash flows.
We may be subject to risks normally associated with debt financing,
including the risk that our cash flow will be insufficient to make required
payments of principal and interest, and the risk that existing indebtedness on
our properties will not be able to be refinanced or that the terms of available
financing will not be as favorable as the terms of existing indebtedness. If we
were unable to satisfy the obligations owed to any lender with a lien on one of
our properties, the lender could foreclose on the real property or other assets
securing the loan and we would lose that property or asset. The loss of any
property or asset to foreclosure could have a material adverse effect on our
business, financial condition and results of operations. See "Business--Our
Strategies For Growth" and "Business--Our Business Operations--Real Estate
Investments And Asset Management."
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OUR OPERATIONS MAY BE ADVERSELY AFFECTED BY YEAR 2000 ISSUES
Many computer systems and software products are coded to accept only two
digit entries in the date code field. As a result, those computer programs and
systems may recognize a date using "00" as the year 1900 rather than the year
2000. Significant uncertainty exists concerning the potential effects associated
with these year 2000 issues.
We rely upon our computer systems to conduct operations. Without the use of
our computer systems, we would have difficulty processing transactions, paying
invoices or engaging in similar normal business activities. We have implemented
plans to review, test, remediate and upgrade or replace our existing computer
systems to ensure that they are year 2000 compliant. If, however, we are unable
to attract and retain qualified personnel who are able to detect and remediate
any year 2000 problems, or to do so in a timely manner, or if the year 2000
problems are more costly than anticipated to remediate, there could be a
material adverse effect on our business, financial condition and results of
operations.
There is also "embedded technology" in our core property systems. Embedded
technology consists of micro-processing chips which are embedded in the workings
of mechanical devices, for example, elevators, fire safety systems, air
conditioning and heating, and keyless entry systems in the buildings we manage.
If non-compliant embedded technology fails, it may cause our core property
systems to fail. As a result, the building's tenants may be able to cancel
leases, the owner may be subject to fines or penalties under terms of the leases
and owners may be unable to compensate us for our services. These events could
have a material adverse effect on our business, results of operations and
financial condition. Additionally, although we are not aware of any threatened
claims related to year 2000 issues, we may be subject to litigation from year
2000 claims. Adverse outcomes of any year 2000 litigation could have a material
adverse effect on our business, financial condition and results of operations.
Furthermore, if our suppliers have not successfully become year 2000
compliant, they may not be able to provide the services or deliver the products
to us as currently provided and delivered. If our suppliers fail to become year
2000 compliant, there could be a material adverse effect on our business,
operating results and financial condition. We would then have to try to contract
with other suppliers with sufficient capacity to accommodate our needs. There
can be no assurance that we would be able to contract with any new suppliers on
acceptable terms, if at all. See "Management's Discussion And Analysis Of
Financial Condition And Results of Operations--Year 2000 Issue."
WE MAY HAVE LIABILITIES IN CONNECTION WITH REAL ESTATE BROKERAGE AND PROPERTY
MANAGEMENT ACTIVITIES
As a licensed real estate broker, we, and our licensed employees, are
subject to certain statutory due diligence, disclosure and standard-of-care
obligations. Failure to fulfill these obligations could subject us or our
employees to litigation from parties who purchased, sold or leased properties
they brokered or managed. In addition, we may become subject to claims by
participants in real estate sales claiming that we did not fulfill our statutory
obligations as a broker.
In our property management capacity, we hire and supervise third party
contractors to provide construction and engineering services for our properties.
While our role is limited to that of a supervisor, we cannot be sure that we
will not be subjected to claims for construction defects or other similar
actions. Adverse outcomes of property management litigation could have a
material adverse effect on our business, financial condition and results of
operations. See "Business--Our Business Operations--Property Management And
Leasing" and "--Distressed Note Pool Investments" and
"--Real Estate Brokerage."
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OUR PROPERTIES MAY SUBJECT US TO POTENTIAL ENVIRONMENTAL LIABILITY
Under various federal, state and local laws, ordinances and regulations, a
current or previous owner or operator of real estate may be liable for the clean
up of hazardous or toxic substances and may be liable to a governmental entity
or to third parties for property damage and for investigation and clean-up costs
incurred by governmental entities or third parties in connection with the
contamination. Such laws typically impose liability without regard to whether
the owner or operator knew of, or was responsible for, the presence of the
hazardous or toxic substances, even when the contaminants were associated with
previous owners or operators. The costs of investigation, remediation or removal
of hazardous or toxic substances may be substantial, and the presence of those
substances, or the failure to properly remediate those substances, may adversely
affect the owner's or operator's ability to sell or rent the affected property
or to borrow using the property as collateral. The presence of contamination at
a property can impair the value of the property even if the contamination is
migrating onto the property from an adjoining property. Additionally, the owner
of a site may be subject to claims by parties who have no relation to the
property based on damages and costs resulting from environmental contamination
emanating from the site.
In connection with the direct or indirect ownership, operation, management
and development of real properties, we may be considered an owner or operator of
those properties or as having arranged for the disposal or treatment of
hazardous or toxic substances. Therefore, we may be potentially liable for
removal or remediation costs.
Certain federal, state and local laws, regulations and ordinances also
govern the removal, encapsulation or disturbance of asbestos-containing
materials during construction, remodeling, renovation or demolition of a
building. Such laws may impose liability for release of asbestos-containing
materials, and third parties may seek recovery from owners or operators of real
properties for personal injuries associated with asbestos-containing materials.
We may be potentially liable for those costs for properties that we own. In the
past, we have been required to remove asbestos from certain buildings that we
own. There can be no assurance that in the future we will not be required to
remove asbestos from our buildings or incur other substantial costs of
environmental remediation.
Before consummating the acquisition of a particular piece of property, it is
our policy to retain independent environmental consultants to conduct a thorough
environmental review of the property to check for contaminants, including
performing a Phase I environmental review. These assessments have included,
among other things, a visual inspection of the properties and the surrounding
area and a review of relevant federal, state and historical documents. To date,
the assessments we have had done have not revealed any environmental liability
that we believe would have a material adverse effect on our business, assets or
results of operations as a whole, nor are we aware of any material environmental
liability of the types described. Nevertheless, it is possible that the
assessments we commissioned do not reveal all environmental liabilities or that
there are material environmental liabilities of which we are currently unaware.
There can be no assurance that future laws, ordinances or regulations will not
impose any material environmental liability or that the current environmental
condition of our properties will not be affected by tenants, by the condition of
land or operations in the vicinity of those properties, or by third parties
unrelated to us. We believe that our properties are in substantial compliance in
all material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances. We have not been notified
by any governmental authority, and are not otherwise aware of any material
noncompliance, liability or claim relating to hazardous or toxic substances in
connection with any of our properties. There can be no assurance that federal,
state and local agencies or private plaintiffs will not bring these types of
actions in the future, or that those actions, if adversely resolved would not
have a material adverse effect on our business, financial condition and results
of operations. See "Business--Our Business Operations--Property Management And
Leasing" and "--Real Estate Investments And Asset Management."
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WE MAY INCUR UNANTICIPATED EXPENSES RELATING TO LAWS BENEFITING DISABLED PERSONS
The Americans with Disabilities Act (the "ADA") generally requires that
public accommodations such as hotels and office buildings be accessible to
disabled people. We currently own in the U.S., individually and with partners,
12 office or other commercial buildings (one of which is under construction) a
hotel and a ski resort. We believe that our properties are in substantial
compliance with the ADA and that we will not be required to make substantial
capital expenditures to address the requirements of the ADA. If, however, our
properties were not in compliance with the ADA, the U.S. federal government
could fine us or private litigants could be awarded money damages against us. If
we are required to make substantial alterations to one or more of our
properties, our results of operations could be materially adversely affected.
See "Business--Our Business Operations--Property Management And Leasing" and
"--Real Estate Investments And Asset Management."
WE HAVE INSURANCE COVERAGE LIMITATIONS
We carry comprehensive general liability coverage and umbrella coverage on
all of our properties of which we own more than 50% with limits of liability
which we deem adequate and appropriate under the circumstances (subject to
deductibles) to insure against liability claims and provide for the cost of
legal defense. There are, however, certain types of extraordinary losses that
may be either uninsurable, or that are not generally insured because it is not
economically feasible to insure against those losses. Should any uninsured loss
occur, we could lose our investment in, and anticipated revenues from, a
property, which loss or losses could have a material adverse effect on our
operations. Currently, we also insure some of our properties for loss caused by
earthquake in levels we deem appropriate and, where we believe necessary, for
loss caused by flood. We cannot be sure that the occurrence of an earthquake,
flood or other natural disaster will not have a materially adverse effect on our
business, financial condition and results of operations.
OUR STOCK PRICE MAY BE VOLATILE
Since the beginning of 1997 the market price of our common stock has
fluctuated from a low of $1.77 to a high of $13.37 and may be subject to
fluctuations in the future. Factors contributing to these fluctuations may
include:
- the announcement of new acquisitions or renovation projects by us or our
competitors;
- quarterly variations in our operating results or the operating results of
our competitors; and
- changes in earnings (losses) or other estimates by analysts or reported
results that vary from those estimates.
In addition, while a public market currently exists for our common stock,
trading activity has been somewhat limited. As of May 11, 1999, there were
approximately 6.8 million shares of common stock outstanding held by
approximately 1,250 holders. Thus, trading of relatively small blocks of shares
of common stock could have a significant impact on the price at which the common
stock is traded.
Furthermore, stock markets have experienced significant price and volume
fluctuations which could affect the market price of our common stock which may
be unrelated to our operating performance. Investors may be unable to resell
their shares of our common stock at or above the offering price. In the past,
companies that have experienced volatility in the market price of their stock
have been the object of securities class action litigation. If anyone brings a
lawsuit of this type against us, it could result in substantial costs and a
diversion of management's attention and our resources. See "Price Range Of Our
Common Stock."
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WE ARE SUBJECT TO CERTAIN ANTI-TAKEOVER EFFECTS UNDER DELAWARE LAW
Because we are a Delaware corporation, management and board of directors
could utilize certain provisions of the Delaware code to make it more difficult
for a third party to acquire control of our company, even if the change of
control would be beneficial to our stockholders. These provisions include a
classified, staggered Board of Directors, the inability of stockholders to take
action by written consent without a meeting, the inability of the stockholders
to call for a special meeting of stockholders, the inability to remove directors
without cause and a requirement that certain business combinations be approved
by the holders of 66 2/3% of the common stock. This could discourage potential
takeover attempts which may adversely affect the market price of our common
stock. See "Business--Certain Provisions Of Delaware Law."
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SPECIAL NOTES OF CAUTION
REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this prospectus 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 prospectus 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;
- Degree and nature of our competition; and
- The other factors referenced in this prospectus, including, without
limitation, under the captions "Risk Factors", "Management's Discussion
And Analysis Of Financial Condition And Results Of Operation" and
"Business".
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 of our forward-looking statements entirely by
these cautionary factors.
REGARDING ADDITIONAL INFORMATION
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the common stock.
20
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the 2,000,000 shares of common
stock, after deducting underwriting discounts, commissions and estimated
offering expenses and based upon a public offering price of $9.00 per share of
common stock are estimated to be $16,100,000. We intend to use the net proceeds
from this offering as follows:
<TABLE>
<S> <C> <C>
The estimated net proceeds to us............................................. $16,100,000(1)
Repay loan from FBR Asset Investment Corporation with a maturity of the
earlier of June 3, 1999 and the closing of this offering and interest due
at 17% per annum, the proceeds of which were used to purchase note pools... $7,675,000
Repay portion of loan from Colony K-W, LLC, an affiliate of Colony Capital,
Inc., with a maturity date of January 15, 2000 and interest due at 14% per
annum, the proceeds of which were used to acquire Heitman Properties,
Ltd........................................................................ $7,000,000
Repay portion of borrowings under line of credit with East-West Bank with a
maturity date of June 6, 2000 and interest due monthly at three month LIBOR
plus 2% per annum, the proceeds of which were used for working capital..... $1,425,000
Balance of proceeds.......................................................... $ 0
</TABLE>
- ------------------------
(1) If the underwriters exercise their over-allotment option in full, the
estimated net proceeds to us will be $18,700,000. We intend to use the
additional proceeds from exercise of the over-allotment option to repay an
additional portion of borrowings under the line of credit with East-West
Bank and for general corporate purposes, including selected acquisitions or
investments in real estate businesses or products. While from time to time
we evaluate potential acquisitions of business and investments and
anticipate continuing to make these evaluations, there are no present
understandings, commitments or agreements with respect to any acquisition of
business or investments for which we will use the proceeds of this offering.
21
<PAGE>
PRICE RANGE OF OUR COMMON STOCK
The following table sets forth, for the fiscal periods indicated, the range
of high and low closing sale prices per share of our common stock, traded under
the symbol "KWIC", as reported on the NASDAQ National Market.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C> <C>
1997
1(st) Quarter............................................................... $ 2.22 $ 1.77
2(nd) Quarter............................................................... 2.97 2.13
3(rd) Quarter............................................................... 3.33 2.73
4(th) Quarter............................................................... 4.39 3.08
1998
1(st) Quarter............................................................... 8.78 3.67
2(nd) Quarter............................................................... 12.67 6.33
3(rd) Quarter............................................................... 9.00 6.00
4(th) Quarter............................................................... 8.50 5.00
1999
1(st) Quarter............................................................... 13.37 7.25
2(nd) Quarter through May 11, 1999.......................................... 10.50 8.56
</TABLE>
These prices, where appropriate, are adjusted to give retroactive effect to
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. As of May 11, 1999 there
were 6,770,276 shares of common stock outstanding held by approximately 1,250
holders.
DIVIDEND POLICY
We have not paid any cash dividends on our common stock. We expect to use
the earnings from our investments and operations to pursue our growth strategies
by:
- acquiring property management companies;
- investing in real estate and pools of distressed notes; and
- expanding our operations.
Although we have a policy of not paying cash dividends on our common stock,
we may determine to pay dividends on our common stock in the future. Any future
declaration or payment of dividends will be at the discretion of our Board of
Directors and will depend on our results of operations, financial condition,
contractual restrictions and other factors that our Board of Directors decides
is relevant at that 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 FBR Asset's prior consent.
22
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998
and as adjusted as of that date to give effect to the sale of 2,000,000 shares
of common stock at the offering price of $9.00 per share. You should read this
information in conjunction with our audited financial statements and the notes
to those audited financial statements which are included elsewhere in this
prospectus.
CAPITALIZATION
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED(1)
--------- --------------
(IN 000S)
<S> <C> <C>
Total debt(2).......................................................................... $ 48,805 $ 32,705
Stockholders' equity
Preferred stock $.01 par value; shares authorized 2,000,000 as of December 31, 1998
and 5,000,000 as of the date hereof; 0 shares issued............................... n/a n/a
Common stock $.01 par value; shares authorized 10,000,000 as of December 31, 1998,
and 50,000,000 as of the date hereof; 6,597,075 shares issued and outstanding,
actual; 8,597,075 shares issued and outstanding, as adjusted....................... 66 86(3)
Additional paid-in-capital............................................................. 28,888 44,968
Accumulated deficit.................................................................... (5,970) (5,970)
Notes receivable from stockholders..................................................... (204) (204)
--------- -------
Total stockholders' equity........................................................... 22,780 38,880
--------- -------
Total capitalization................................................................. $ 71,585 $ 71,585
--------- -------
--------- -------
</TABLE>
- ------------------------
(1) Adjusted to reflect a sale by us of 2,000,000 shares of common stock at an
offering price of $9.00 per share after deducting the estimated underwriting
discounts and commissions, estimated offering expenses and the application
of the estimated net proceeds as described in the "Use of Proceeds" section
of this prospectus.
(2) Excludes notes payable on real estate held for sale of $115,130,000.
(3) Excludes 1,445,705 shares of common stock subject to outstanding options and
warrants. See "Management--Stock Option Plans" and "Our Capital Stock."
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED CONSOLIDATED FINANCIAL DATA" AND OUR CONSOLIDATED FINANCIAL STATEMENTS
AND THE CORRESPONDING NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are an integrated, 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 were $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 to $100.0 million, $2.0 million of
which would be invested by us, in Japanese real estate and pools of distressed
notes, of which approximately half has been invested to date. Under the terms of
the joint venture agreement, we provide Japanese real estate expertise and
receive acquisition, management and disposition fees. The joint venture
agreement also requires us to provide 2% 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 with an
affiliate of Cargill, Incorporated in March 1999 to invest in small and
medium-sized pools of distressed notes. See "Risk Factors--We Will Be Subject To
New Risks Resulting From Increased Japanese Operations."
When we sell residential real property, we recognize as gross revenues the
total sales price of residential real estate 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 the property
management and leasing company, Heitman Properties, Ltd., in July 1998 which was
renamed Kennedy-Wilson Properties Ltd. We funded this acquisition with a $21.0
million loan from Colony K-W, LLC. We made this acquisition as part of our
strategy to increase recurring fee income as a percentage of total revenues. We
expect that this acquisition will be a platform for future growth of our
property management business in both the U.S. and Japan. We acquired Heitman
Properties for $21.0 million in cash and 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.
24
<PAGE>
We are conducting this offering for the primary purpose of restructuring our
balance sheet. We intend to use the proceeds of this offering to repay $7.0
million of our existing subordinated debt owed to Colony K-W, LLC and all
amounts owed under our loan from FBR Asset Investment Corporation which
currently has a balance of approximately $7.7 million. We intend to use the
balance of the proceeds to repay a portion of the outstanding balance on our
line of credit with East-West Bank. We believe that our resulting capital
structure will provide us with the ability to procure new credit facilities with
more attractive terms, with the goal of providing us with the flexibility to
effect our strategies for growth. See "Use Of Proceeds."
RESULTS OF OPERATIONS
The following tables set forth certain of our Consolidated Statements of
Income information as a percentage of revenues during the periods indicated:
REVENUES AND EXPENSES AS A PERCENTAGE OF TOTAL REVENUES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenues
Property management............................................................. -- -- 27.9%
Brokerage(1).................................................................... 18.4% 21.8% 9.7
Investments..................................................................... 81.0 74.8 58.3
Other........................................................................... 0.6 3.4 4.1
--------- --------- ---------
Total revenues.................................................................... 100.0% 100.0% 100.0%
--------- --------- ---------
Cost of revenues
Commissions and marketing expense............................................... 4.9% 3.4% 1.0%
Cost of residential real estate sold............................................ 52.3 20.7 24.1
--------- --------- ---------
Total cost of revenues............................................................ 57.2% 24.1% 25.1%
--------- --------- ---------
Gross profit...................................................................... 42.8% 75.9% 74.9%
--------- --------- ---------
Operating expenses
General administrative and compensation......................................... 24.6% 45.6% 42.2%
--------- --------- ---------
Income from operations............................................................ 18.2% 30.2% 32.7%
--------- --------- ---------
Interest expense.................................................................. 6.2% 11.6% 16.5%
Depreciation and amortization..................................................... 0.8 2.9 4.0
Provision for income taxes........................................................ 0.2 1.0 1.7
--------- --------- ---------
Income before extraordinary items................................................. 11.0% 14.6% 10.5%
--------- --------- ---------
Extraordinary items............................................................... -- 0.3% --
--------- --------- ---------
Net income........................................................................ 11.0% 14.9% 10.5%
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) Includes brokerage commissions from related parties of $1.1 million in 1996,
$900,000 in 1997 and $1.2 million in 1998.
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
25
<PAGE>
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., which is now called Kennedy-Wilson Properties Ltd.
PROPERTY MANAGEMENT. In 1998, our property management and leasing
operations generated $14.2 million of revenues, representing 27.9% of our total
revenues in 1998. 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, we had under management a portfolio of approximately 48
million gross 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 as
compared to residential properties. In addition, the costs associated with a
commercial assignment tend to be lower than those associated with a residential
assignment.
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 ten 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 land 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 potential appreciation.
Equity in income of investments with related parties and affiliates and gain
on sale of partnership interests increased in total to $4.7 million (including
proceeds of $4.1 million from the sale of a partnership interest) in 1998, or
9.2% of total revenues, a 227.7% increase from the $1.4 million realized in
1997. The increase was substantially due to the gain on the sale in 1998 of our
interest in a joint venture that owned two commercial office buildings in
downtown Los Angeles. We sold our interest in the joint venture because we had
completed the process of stabilizing the properties, which included increasing
average occupancy of the properties from approximately 45% at acquisition in
1996 to approximately 80% at the time of sale. Both 1998 and 1997 included
revenues from the sale of 88 condominium units from a 109 unit joint venture
project located near downtown Los Angeles. The sales of these units occurred
over two years as planned improvements to the units were completed.
Gain on sale of commercial real estate was $2.7 million in 1998, or 5.2% of
total revenues, down 58.1% 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, CA, a 50,000 square foot property in West
Los Angeles, a 30,000 square foot property in Anaheim, CA, a 61,000 square foot
property in Pasadena, CA, and a 20,000 square foot property in Santa Monica, CA.
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.
26
<PAGE>
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% of total revenues,
representing a 181.3% increase from $1.6 million in 1997. The increase reflects
our acquisition of approximately 1.0 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, CA 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, CA consisting of 52,000 square feet, and a property in Van
Nuys, CA 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 our property management and
leasing subsidiary, formerly known as 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%
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., renamed Kennedy-Wilson
Properties Ltd. In addition, we implemented a deferred compensation program in
1997 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 increased property
management operations.
Depreciation and amortization expense increased to $2.1 million in 1998, a
160.6% increase over $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, we began amortizing the goodwill arising from our July
1998 acquisition of Heitman Properties, Ltd. The amount amortized in 1998 was
approximately $800,000.
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. Approximately $115.1
million of the debt in 1998 was in the form of loans to finance commercial and
residential properties as discussed in the "Liquidity And Capital Resources"
section.
27
<PAGE>
COMPARISON OF 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 in 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 totalling $424.0 million in
value, compared to 70 transactions in 1996 totalling $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
in Beverly Hills. This compares to residential real estate sales in 1996 which
included revenues from the sale of four projects, including 33 condominium units
from a property in Hawaii, 42 condominium units from a property in south San
Francisco, 9 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 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% 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%
increase. The increase reflects the increased collections from the note pools
acquired in 1996 and 1997.
Net rental income was $1.6 million in 1997, or 6% of total revenues, versus
$1.5 million in 1996, resulting in an 11% increase. The increase resulted from
an increase in the average occupancy of properties in our portfolio in 1997 due
to our management and leasing programs.
TOTAL OPERATING EXPENSES
Total expenses in 1997 were $22.8 million, a 19.8% 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.
28
<PAGE>
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 66.6% 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% to $7.7 million in 1997 from
$4.7 million in 1996, resulting from an increase in executive employees and
incentive compensation, including the implementation of a deferred compensation
program.
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 as a
result of the timing of property acquisitions and dispositions.
Interest expense increased 59.8% to $3.1 million in 1997 from $2 million in
1996. Although our total debt decreased to $28.9 million in 1997 from $37.6
million in 1996, the average balance in 1997 was higher.
29
<PAGE>
QUARTERLY OPERATING RESULTS
The following tables present quarterly operating results for 1997 and 1998.
The results in the third and fourth quarters of 1998 include the operations of
Kennedy-Wilson Properties Ltd., our property management and leasing subsidiary
acquired in July 1998. This data has been derived from unaudited interim
consolidated financial statements prepared on substantially the same basis as
the audited Consolidated Financial Statements contained elsewhere in this
prospectus. In the opinion of management, this information includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information when read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
prospectus. The operating results for any quarter are not necessarily indicative
of the operating results for any future period.
<TABLE>
<CAPTION>
1997
------------------------------------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED
------------------------------------------
<CAPTION>
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
--------- --------- --------- ---------
(IN 000S EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES
Property management(1)............................................ -- -- -- --
Brokerage......................................................... $ 718 $ 1,407 $ 963 $ 2,807
Investments....................................................... 4,996 2,208 4,578 8,542
Corporate......................................................... 156 351 273 --
--------- --------- --------- ---------
TOTAL REVENUES.................................................... 5,870 3,966 5,814 11,349
TOTAL OPERATING EXPENSES.......................................... 5,234 3,767 5,282 8,485
--------- --------- --------- ---------
Income before provision for income taxes and extraordinary
items........................................................... 636 199 532 2,864
Provision for income taxes........................................ 50 50 65 115
--------- --------- --------- ---------
Income before extraordinary items................................. 586 149 467 2,749
Extraordinary items............................................... -- 288 -- (209)
--------- --------- --------- ---------
NET INCOME........................................................ $ 586 $ 437 $ 467 $ 2,540
--------- --------- --------- ---------
--------- --------- --------- ---------
SHARE DATA
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 $ 0.46
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
------------------------------------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED
------------------------------------------
<CAPTION>
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
--------- --------- --------- ---------
(IN 000S EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES
Property management............................................... -- -- $ 6,361 $ 7,833
Brokerage......................................................... $ 2,142 $ 1,592 1,501 (318)
Investments....................................................... 1,785 4,426 12,701 6,842
Corporate......................................................... 470 441 271 4,825
--------- --------- --------- ---------
TOTAL REVENUES.................................................... 4,397 6,459 20,834 19,182
TOTAL OPERATING EXPENSES.......................................... 3,625 6,221 19,132 15,732
--------- --------- --------- ---------
Income before provision for income taxes.......................... 772 238 1,702 3,450
Provision for income taxes........................................ 98 36 311 392
--------- --------- --------- ---------
NET INCOME........................................................ $ 674 $ 202 $ 1,391 $ 3,058
--------- --------- --------- ---------
--------- --------- --------- ---------
SHARE DATA
Basic net income per share........................................ $ 0.11 $ 0.03 $ 0.21 $ 0.46
Basic weighted average shares..................................... 5,924,800 5,954,943 6,520,855 6,606,858
Diluted net income per share...................................... $ 0.11 $ 0.03 $ 0.20 $ 0.43
Diluted weighted average shares................................... 6,366,289 6,583,598 7,093,199 7,150,513
</TABLE>
- ------------------------------
(1) We acquired our property management operations in July, 1998.
30
<PAGE>
Revenues and income before income taxes during the fourth fiscal quarter
historically have been somewhat greater than in the first three fiscal quarters,
primarily because our brokerage assignments and sales of investments have a
demonstrated tendency to close toward the end of the fiscal year. The timing and
introduction of new contracts, the disposition of real estate investments and
other factors may also cause quarterly fluctuations in our operating results.
See "Risk Factors--Our Operating Results May Vary From Quarter to Quarter."
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources requirements include expenditures for
the acquisition and improvement of real estate held for sale, the acquisition
and resolution of distressed note 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 the underlying 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. The 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 $3.7 million in 1998, compared to
$3.0 million in cash used in operating activities in 1997. The change included
an increase in accounts receivable attributable primarily to the property
management fees which are received one month in arrears, as well as leasing
commissions earned but not received until the related tenant moves in, offset by
increased accrued expenses which includes bonuses and deferred compensation. The
$3.0 million cash used in operating activities in 1997 compares to $533,000 in
cash provided by operating activities in 1996. The change resulted from an
increase in 1997 in gains on sale of real estate, which are excluded from cash
flows from operating activities, offset by an increase in accrued expenses.
Cash used in investing activities was $136.0 million in 1998, compared to
$21.5 million in cash provided by investing activities in 1997. The change
resulted primarily from our purchase of $123.0 million of commercial properties.
In addition, 1998, we purchased Heitman Properties, Ltd. for $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 of $18.8 million.
Cash provided by financing activities was $131.8 million in 1998, compared
to cash used in financing activities in 1997 of $10.0 million. The change
resulted primarily from our borrowing $114.7 million in mortgage loans to
finance the purchase of the commercial properties referred to above. In
addition, we issued $21.0 million in subordinated debt to finance the purchase
of Heitman Properties, Ltd. The $10.0 million in cash used in financing
activities in 1997 compares to cash provided by financing activities of $10.8
million in 1996. The change resulted from repayments of mortgage loans payable
of $19.7 million and repayment of notes payable of $7.1 million. See "Use of
Proceeds."
Prior to September 1998, we had a $15.0 million unsecured credit facility
with East-West Bank with an interest rate of prime plus 1%. In September 1998,
we increased the facility to $21.0 million with interest at a rate payable
monthly of three month LIBOR plus 2% and a maturity date of June 30, 2000. In
April 1999, we increased the facility to $22.5 million with no change to the
interest rate or maturity date. 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. We plan to repay a
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<PAGE>
portion of the outstanding balance, which as of May 11, 1999 was $12.7 million,
with the proceeds from this offering.
In July 1998, we entered into a bridge loan agreement with Colony K-W, LLC
that provided us with $21.0 million in subordinated debt, the proceeds from
which we utilized to consummate our acquisition of Heitman Properties, Ltd. This
debt bears interest at a rate of 14%, and the principal is payable in three
installments of $7.0 million due on July 30 in each of 1999, 2000 and 2001.
Promptly after completion of this offering, we plan to repay $7.0 million of
this debt with a portion of the proceeds of this offering.
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. These loans are secured by both first and second
mortgage liens on the underlying properties. 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 million
bearing interest at 12% per annum. The loan was amended to increase the interest
rate effective as of December 3, 1998 to 13% per annum payable monthly plus 4%
per annum compounded monthly and payable at maturity and extend the maturity to
the earlier of a closing of any public offering and June 30, 1999. As of May 11,
1999, the outstanding principal balance was approximately $7.7 million. We used
the proceeds of this loan to purchase note pools. We plan to repay the this loan
with the proceeds of this offering.
To the extent that we engage in additional strategic investments, including
real estate, note portfolio, or acquisitions of other property management
companies, we may need to obtain third party financing which could include bank
financing or the public sale or private placement of debt or equity securities.
We believe that existing cash, plus capital generated from property management
and leasing, brokerage, sales of real estate owned, collections from notes
receivable, as well as our current line of credit with East-West Bank, will
provide us with sufficient capital requirements for the foreseeable future.
Our need, if any, to raise additional funds to meet our working capital and
capital requirements will depend on numerous factors, including the success and
pace of the implementation of our strategy for growth. We regularly monitor
capital raising alternatives to be able to take advantage of other available
avenues to support our working capital and investment needs, including strategic
partnerships and other alliances, bank borrowings, and the sale of equity or
debt securities. We intend to retain earnings to finance our growth and,
therefore, do not anticipate paying any dividends.
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.
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<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below represents the contractual balances of our financial
instruments at the expected maturity dates as well as their fair value at
December 31, 1998. The expected maturity categories take into consideration
actual amortization of principal and does not take into consideration
reinvestment of cash. The weighted average interest rate for the various assets
and liabilities presented are actual as of December 31, 1998. See Consolidated
Financial Statements--Note 2, Fair Value of Financial Instruments.
<TABLE>
<CAPTION>
PRINCIPAL MATURING IN: FAIR VALUE
--------------------------------------------------------------------- DECEMBER 31,
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
---------- ---------- ---------- --------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate sensitive
assets
Cash and cash
equivalents $9,838,000 -- -- -- -- -- $ 9,838,000 $9,838,000
Average interest
rate 4.00% -- -- -- -- -- 4.00% --
---------- ---------- ---------- --------- --------- ----------- ----------- ------------
$9,838,000 -- -- -- -- -- $ 9,838,000 $9,838,000
---------- ---------- ---------- --------- --------- ----------- ----------- ------------
---------- ---------- ---------- --------- --------- ----------- ----------- ------------
Weighted average
interest rate 4.00% -- -- -- -- -- 4.00% --
---------- ---------- ---------- --------- --------- ----------- ----------- ------------
---------- ---------- ---------- --------- --------- ----------- ----------- ------------
Interest rate sensitive
liabilities -- -- -- -- -- -- -- --
Variable rate
borrowings $23,596,000 $ 408,000 $99,412,000 $1,114,000 $ 83,000 $7,283,000 $131,896,000 1$31,896,000
Average interest
rate 8.91% 9.16% 9.66% 10.16% 10.66% 10.66% 9.58% --
Fixed rate borrowings 16,789,000 14,000,000 -- -- -- 1,250,000 32,039,000 32,039,000
Average interest
rate 14.40% 14.65% -- -- -- 16.15% 14.58% --
---------- ---------- ---------- --------- --------- ----------- ----------- ------------
$40,385,000 $14,408,000 $99,412,000 $1,114,000 $ 83,000 $8,533,000 $163,935,000 1$63,935,000
---------- ---------- ---------- --------- --------- ----------- ----------- ------------
---------- ---------- ---------- --------- --------- ----------- ----------- ------------
Weighted average
interest rate 11.19% 14.49% 9.66% 10.16% 10.66% 11.46% 10.56% --
---------- ---------- ---------- --------- --------- ----------- -----------
---------- ---------- ---------- --------- --------- ----------- -----------
</TABLE>
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
Statement Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, was issued in June, 1998 and is applicable
to all fiscal years beginning after June 15, 1999. At this time, our management
has not completed its analysis of this pronouncement's impact on our financial
statements.
YEAR 2000 ISSUE
WHAT IS THE YEAR 2000 ISSUE?
The "Year 2000 Issue" arose because many computer systems identify a
particular year on the basis of the last two digits of that year. Hence, a
computer system may interpret incorrectly the digits "00" to be the year "1900"
instead of the year "2000." The inability of computer systems to properly
recognize a year, if not corrected, may result in the failure of, or the
production of erroneous results within, the computer system. This failure of
systems, production of erroneous results and the resulting damages is commonly
known as 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 potentially 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 systems in the buildings we manage and own,
such as fire safety systems, key
33
<PAGE>
card access devices and air conditioning and heating units, may be reliant, to
some degree, on computer systems for various functions. See "Risk Factors--Year
2000 Issue."
WHAT IS THE STATE OF READINESS OF OUR INFORMATION TECHNOLOGY SYSTEMS?
In January, 1999, we formed an internal information services group that
developed a plan to bring our information technology systems into Year 2000
compliance by September, 1999, consisting of the following:
- Educate management of the nature and scope of the Year 2000 Issue;
- Inventory all hardware and software systems which we use;
- Scan these systems with two industry standard programs for Year 2000
compliance and repair or replace those identified as non-compliant;
- Install a new computer network and server which will allow us to back up
all of our data every evening; and
- Test new systems in a "non-live environment" by turning their internal
clocks forward while monitoring and recording responses and hire outside
consultants to audit and validate our results.
We project our new network will be up and running no later than June 1,
1999, and we presently anticipate to be through with all internal testing by
September, 1999. We plan to have outside consultants perform and complete their
valuation audit of our testing by the fourth quarter of 1999. We estimate based
on current testing, that we will have to replace approximately 20 computers of
the 120 in use at our five corporate offices.
Most of the properties to which we provide property management services have
computer terminals. While these terminals will be tested, they will not be
placed on our network. We do not presently believe Year 2000 compliance problems
with these terminals will have a material adverse affect on our property
management operations.
WHAT IS THE STATE OF READINESS OF OUR BUILDING SYSTEMS?
In the first quarter of 1998, we formed a Year 2000 Compliance Task Force to
formulate and draft a Year 2000 compliance program for the various properties we
manage. Each individual property owner 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. The
following is a summary of our compliance program:
- Notify all our clients of the Year 2000 Issue for building owners and
offer each an opportunity to participate in our compliance program;
- Request property owners to make a determination of which of their
buildings will participate in the program;
- Contact tenants to discuss their individual Year 2000 Issue concerns;
- Have property managers of participating properties compile a list of all
systems in their buildings which operate with the aid of computer
technology;
- Evaluate the completed surveys;
- Create a schedule of manufacturers and vendors of the various systems and
any service providers under applicable service or warranty agreements;
34
<PAGE>
- Contact each manufacturer, vendor or service provider for an update on the
status of compliance for each relevant system, and where necessary,
request Year 2000 compliance testing;
- Submit a plan of action and budget to the property owner based on the
results of the tests and implement the property owners' approved
renovations; and
- Supervise necessary Year 2000 compliance renovations to the properties we
own.
As of May 11, 1999, approximately 80% of the properties under management are
participating in the Year 2000 compliance program. For those properties, we have
substantially completed reviews of the preliminary inventories and testing and
have submitted proposals to those owners. We will contact owners of
non-participating buildings to determine if they would now like to participate
in our Year 2000 compliance program. We are also implementing this compliance
program with respect to the properties we own.
HOW DOES THE YEAR 2000 ISSUE IMPACT US?
We are not currently aware of any internal Year 2000 problems that could be
reasonably expected to have a material adverse impact on our business, results
of operations and financial condition. The vendors from which we will acquire
hardware and software for our new information technology system have indicated
the products we plan to use are currently Year 2000 compliant. The current
review of the preliminary systems inventories from our participating managed
properties revealed few Year 2000 Issues.
However, there can be no assurance that we will not discover Year 2000
problems with our systems that will require their repair or replacement. We
cannot give assurances that third-party software, hardware or services
incorporated into our material systems, or systems upon which we are reliant,
will not need to be revised or replaced, which could be time consuming and
expensive. In addition, we cannot give assurances that governmental agencies,
utilities, third-party service providers and others outside of our control will
be Year 2000 compliant. The failure of such entities to become compliant could
result in a systemic failure beyond our control, such as loss of
telecommunications or electricity, which could adversely impact our information
technology systems or may allow tenants at the buildings we own or manage to
terminate leases if such failures persist.
WHAT WILL IT COST TO IMPLEMENT THE YEAR 2000 PLANS?
We estimate that we will incur approximately $150,000 in our Year 2000
compliance efforts. We have incurred approximately $20,000 to date. The majority
of this amount will be spent on replacing hardware and software and on testing.
We have not had to defer any of our information technology plans as a result of
our Year 2000 preparations. However, these estimates are based on our current
assessment and are subject to change. We will continue to assess our Year 2000
Issue compliance efforts and as a result, we may need to revise our budget to
implement new measures in the future.
CONTINGENCY PLAN
We are currently developing a Year 2000 Contingency Plan. The results of
current and future testing and responses of vendors, manufacturers and service
providers will be taken into account in developing this plan.
35
<PAGE>
BUSINESS
OVERVIEW
We are an integrated, international real estate services and investment
company. Founded as a California company 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 780 full- and 50 part-time employees in our offices
located in numerous U.S. cities and in our Tokyo office.
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, rather than solely by size and 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 and our established relationships and reputation with Japanese
institutions.
OUR STRATEGIES FOR GROWTH
EXPAND FEE INCOME. We intend to grow our recurring fee income by:
- aggressively marketing our property management services to clients with
substantial real estate holdings, such as pension funds;
- acquiring companies with established portfolios of property management
engagements and companies offering real estate related services that would
expand our current capabilities or geographic scope; and
- investing in Japanese and, to a lesser extent, U.S. joint ventures where,
in addition to our equity investments, we receive management and
acquisition fees for our providing real estate and marketing expertise.
CROSS-MARKET OUR SERVICES. Due to our recent growth and the addition of new
business lines, we foresee opportunities to further "cross-market" our services.
In the past, we have been able to identify and execute on investment
opportunities arising from our brokerage relationships. Going forward, we
believe our property management business will also provide us with significant
marketing opportunities, particularly, opportunities to broker sales of the
buildings that we manage, lease, and upgrade for our property management
clients. We believe the diversity of our operations will also lessen our
reliance on the overall state of the real estate market.
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<PAGE>
GROW OUR JAPANESE BUSINESS. We believe our long-standing relationships in Japan
will afford us significant opportunities:
- to broker Japanese real estate to institutional investors both in and
outside of Japan; and
- to purchase undervalued real estate generally acquired on a negotiated
basis and to resell it so as to generate long-term gains for us and our
joint venture partners.
We intend to purchase Japanese assets through joint ventures that will allow
us to diversify our equity risks and to simultaneously earn substantial income
through not only profit participation arrangements, but also acquisition, asset
management and disposition fees. Further, we believe that our enhanced profile
in Japan associated with our increased investment and brokerage activities will
allow us to establish our property management business in Japan.
BOLSTER OUR INTERNET PRESENCE. We believe the Internet will allow us the
opportunity to expand our traditional real estate auctioning services by
reaching new customers and introducing greater efficiencies to the real estate
auction process. To date, we have signed a binding letter of intent with
Guidance Solutions, Inc. to develop jointly through eKWIC Inc. an interactive
Internet auction service to be located at www.eKWIC.com. eKWIC Inc. is a
wholly-owned subsidiary of Kennedy-Wilson Properties, Inc. Guidance Solutions
may receive up to a 25% stake in eKWIC for its role in assisting to create and
manage the website. We are designing the website as a mechanism for the
marketing and auction sale of residential and commercial real estate. We
anticipate that the website will include photographs of properties available for
sale, real estate reports on each of such properties and an automated bidding
process. eKWIC Inc. is currently scheduled to debut in the fall of 1999.
TAKE ADVANTAGE OF OUR IMPROVED CAPITAL STRUCTURE. We intend to use all of the
proceeds of this offering for debt reduction. We believe that as a result of
this offering we will gain access to less expensive sources of debt for
financing our anticipated growth.
MAKE SELECTIVE DOMESTIC INVESTMENTS. We intend to continue to acquire pools of
distressed notes and to selectively invest for our own account in U.S. real
estate. We hired three new professionals last year to locate, analyze and, where
appropriate, negotiate acquisitions of these types of investments.
OUR COMPETITIVE ADVANTAGES
NAME RECOGNITION. Kennedy-Wilson is a name that we believe is widely recognized
throughout the real estate industry for our successful execution of high-end
brokerage transactions, our national real estate auction services, our
representation of Japanese clients with respect to their U.S. real estate
investments and our high level of customer service.
COMPLEMENTARY SERVICES. Our real estate services are interrelated, and as a
result, we believe that we can increase our business by providing the multiple
services necessary to meet more of the complex real estate needs of our clients.
For example, we can assist a client with assessing property acquisition
opportunities, consummating an acquisition, analyzing and supervising building
improvements, upgrading technology, improving energy efficiency, leasing and
managing the property and brokering its sale.
IDENTIFYING AND SATISFYING OUR CLIENTS' NEEDS. We believe that we have
long-standing relationships with clients who have diverse real estate needs. We
often develop a relationship with a client by offering a single service and
later expand the relationship by recommending and implementing strategies
designed to meet the client's other real estate needs.
ENTREPRENEURIAL CULTURE. We have crafted our employee compensation structure to
reward key executives and employees with performance-based compensation and
stock options derived from personal, group and organizational performance. We
believe that our growth strategies, incentive-based
37
<PAGE>
compensation and the significant level of employee ownership will motivate our
employees to achieve a high level of performance. Immediately following this
offering, our executive officers and directors will collectively own 45.2% of
our outstanding stock.
ESTABLISHED MARKET PRESENCE IN JAPAN. We believe that we have established
significant relationships in, and knowledge of, the Japanese real estate market
that will give us a competitive advantage for identifying privately-negotiated
real estate opportunities. Due to this competitive advantage, we believe that
institutional investors, similar to the Colony Capital and Cargill affiliates,
will continue to seek business relationships with us.
EXPERIENCED MANAGEMENT TEAM. The members of our senior management team have an
average of approximately 15 years of experience in brokering, managing and
investing in real estate. Historically, we have had low turnover among
management and key employees, which we believe gives us a significant advantage
in our relationship oriented businesses. Since we authorized our deferred
compensation plan in 1997, only one of the 20 employees that have participated
in that plan has left.
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 and renamed it Kennedy-Wilson
Properties Ltd. As a result of this acquisition, we have become a nationwide
commercial and residential property management and leasing company. We provide a
full range of services relating to property management, including:
- Commercial and residential building management;
- Leasing;
- Construction management;
- Engineering services;
- Technical services; and
- Environmental management.
We have managers in six regional offices--Beverly Hills, Sunnyvale (a city
in the San Francisco metropolitan area), Dallas, Houston, Minneapolis and
Chicago--supervising approximately 660 full-time and 50 part-time employees who
assist in managing more than 120 office and industrial buildings, commercial
garages and multi-unit residential complexes in 25 different states and the
District of Columbia. We have approximately 51 million gross square feet of real
estate under management, including approximately 14,000 residential units.
Nearly all of the properties that we manage are owned directly or
beneficially by large institutional clients. The following is a partial listing
of those property owners:
- Bell Atlantic Corporation;
- Endowment Realty Investment, Inc.;
- Florida State Board of Administration;
- Heitman Capital Management Corporation;
- JMB Realty;
- LA Fire & Police Pension Fund;
- Pennsylvania State Employee Retirement System;
- Teachers Annuity; and
- Tower Realty Corporation;
- TRW, Inc.;
- Walton Street Capital Acquisition Co. II LLC.
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<PAGE>
A significant portion of our property management and leasing revenues are
earned on properties owned or asset managed by Heitman Capital Management
Corporation. In 1998, we earned 52% of our property management and leasing
revenues from properties owned or assets managed by Heitman Capital.
Our management fees and leasing commissions are structured in a variety of
ways to meet the particular needs of our clients and the properties managed and
to respond to local market conditions. Generally, management fees are 1.5% to 2%
of the rentals collected and leasing commissions are $2.00 to $3.00 per square
feet of space rented or 4% to 6% of the value of the lease, in each case,
depending on the amount of space leased and the length of the lease obtained. In
1998, our property management revenues were $14.2 million, representing 27.9% of
our 1998 revenues.
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 obtain 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. 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 and
broker 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 (HK) Limited, 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 real estate services that we provide in connection with our brokerage
activities:
- Property valuations;
- Development and implementation of marketing plans;
- Sealed bid auctions; and
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<PAGE>
- Open bid auctions.
When we receive a new brokerage engagement, we begin by developing with our
client a sales strategy that we believe will maximize the sales proceeds while
taking into account our client's individual situation, including time
parameters, sensitivity to publicity and cash flow needs. We also investigate
and analyze, among other things, the physical condition of the property, its
cash flow and tenant characteristics, market rents and market dynamics within
submarkets and comparable transactions. We conduct commercial property sales
primarily through private negotiations and, to a lesser extent, sealed bid
sales. We conduct residential property sales primarily through sealed bid and
open bid auctions and conventional brokerage activities.
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. The following is a partial listing of the clients for
whom we have brokered commercial real estate sales in the last three years:
<TABLE>
<S> <C> <C> <C>
BANKING INSTITUTIONS: DEVELOPERS AND MANUFACTURERS:
- - Chase Manhattan Bank - Japan Building Project
- - Industrial Bank of Japan, Ltd. - Larwin Company
- - Long-Term Credit Bank of Japan, Ltd. - Northrop Grumman Corporation
- - Bank of Tokyo-Mitsubishi - Rolaco Services
- - Mitsubishi Trust & Banking Corporation - Tobishima Corporation
- - Yasuda Trust & Banking Corporation Co., Ltd.
</TABLE>
We believe that we are not dependent upon any single brokerage customer, the
loss of which would have a material adverse effect on us. No brokerage client
accounted for 10% or more of our brokerage commission revenues in 1996 or 1997.
In 1998, Fuji Bank accounted for 17% of our brokerage commission revenues and
Rolaco Services accounted for 12.8% of our brokerage commission revenues.
With our acquisition of Heitman Properties, Ltd. we acquired established
relationships with the owners of the more than 120 properties that were managed
by Heitman Properties. We view each of those owners as a potential brokerage
client and source of real estate investment opportunities.
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 order to establish ourselves as brokers in the Japanese
real estate market, in 1995 we opened our office in Tokyo and are now brokering
the sales of commercial property in Japan.
40
<PAGE>
When we engage in a competitive bidding process for brokerage engagements,
our brokerage commission rates are often structured to demonstrate our
confidence in our ability to sell the property at a high price. For example, we
might offer a property owner a market or below-market brokerage commission rate
for selling a property at the price the owner initially expects and a higher
rate for selling the property for a higher price. On average, our commercial
brokerage assignments last for six months from the listing of the property to
the payment of a brokerage commission upon its sale. Generally, we do not enter
into long-term contracts for brokerage services.
RESIDENTIAL BROKERAGE SERVICES. We specialize in designing marketing
programs to sell single-family home developments and condominium projects using
conventional sales and auction-marketing programs. We also design and implement
sealed bid marketing programs for exclusive estates and land for residential
development. Most of the residential properties that we have brokered are
located in California. Our clients include builders, developers, private
sellers, financial institutions and government agencies.
AUCTION SERVICES. We provide our clients with auction marketing services to
sell both commercial and residential real estate. Auctions provide a seller an
opportunity to concentrate the marketing efforts and sell its holdings on one
established date. By doing so, the seller can increase liquidity and avoid
long-term carrying costs and the risk of a drop in market value. For these
reasons, we believe that the net proceeds to the seller following an auction
sale of multiple units often exceeds what the net proceeds would have been had
the units been sold individually through conventional brokerage arrangements.
The typical auction marketing program spans approximately four months from the
time that we sign the agreement with our client to the date of the auction.
REAL ESTATE INVESTMENTS AND ASSET MANAGEMENT
We invest in commercial and residential real estate with joint venture
partners and on our own account. We also provide asset management services for
some of our joint ventures.
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
a 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 typically 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.
Before acquiring any property, we carefully analyze it under the following
criteria:
- whether the purchase price is less than the combined value of the land and
the cost of replacing the buildings and improvements on it;
- whether the property is located in a growing real estate market and lacks
significant environmental and structural problems;
- in the case of commercial property, whether there is significant space
available for lease, whether the existing lease rentals are below market
rates and whether the current rents are sufficient for profitable
operations;
- in the case of commercial property, whether we believe that we can sell it
for a profit within five years of the acquisition date, with the targeted
holding period being between 18 and 24 months;
- in the case of residential property, whether we believe we can sell it for
a profit within two years of the acquisition date, with the targeted
holding period being 18 months or less; and
41
<PAGE>
- in the case of residential properties, whether our projected return on
equity is in excess of 100% and whether projected profits at the time of
disposition will exceed 15% of the projected sales revenues.
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 nearly all of our real estate acquisitions in the
U.S. These operations provide us with unique investment opportunities in the
form of close relationships with clients that have substantial real estate
investments. We expect our property management and brokerage operations to
continue to provide select opportunities for us to acquire additional U.S. real
estate investments suitable for our stabilization techniques.
Occasionally, our clients desire to sell some or all of their real estate
holdings through means other than conventional brokerage or auction services.
For example, financial institutions are generally not in the business of holding
and managing property and they may have regulatory or internal requirements that
mandate the rapid sale of real property acquired through foreclosure. Thus, a
financial institution client that has acquired a property through a foreclosure
may desire to sell it in less time than it would take for a conventional
brokerage or auction sale. Similarly, as a result of the current economic
conditions in Asia, a client in Asia may have the need or desire to sell a real
estate holding in a rapid manner with little publicity. In the past, we have
been able to meet the needs of these types of clients by purchasing their
properties quickly and discretely for our own account.
Depending on the size of the property, the availability of capital and our
assessment of risks, we either acquire a property as part of a joint venture or
entirely for our own account. Historically, we have used joint ventures to
acquire larger commercial buildings, typically those with more than 250,000
square feet of space. In these transactions, our joint venture partner
contributed the majority of the capital while we contributed the remainder of
the capital along with our marketing expertise. In some cases we have provided
the joint venture fee based asset management services. These transactions have
offered us the ability to leverage our capital and diversify the risks
associated with owning these larger properties.
We generally finance the acquisitions of our wholly-owned real estate with
mortgage loans and mezzanine financing. Our lenders have included Heller
Financial, Credit Suisse First Boston, GE Capital and Tokai Bank of California.
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
42
<PAGE>
of arrangement, we typically 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 limited partnership
agreements with affiliates of Colony Capital, Inc. and Cargil, Incorporated to
invest in Japanese real estate and note pools. Our partnership with Colony
Capital calls for an investment of 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 Kennedy-Wilson/Cargil partnership was formed to pursue investments from $3.0
to $10.0 million. The investment strategy of both partnerships 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. Under the terms of the Kennedy-Wilson/ Colony partnership, we locate and
negotiate the acquisition of desirable investments. One of the Colony Capital
affiliates, however, controls the selection and structure of investments and the
development and implementation of budgets and operating plans. We are obligated
to present to the Kennedy-Wilson/Colony partnership all Japanese investment
opportunities that we desire to pursue as a principal, but no party is obligated
to make the capital contributions necessary to purchase any investment. Once the
Kennedy-Wilson/Colony partnership acquires an asset, whether a pool of notes or
real estate, we manage that investment on behalf of the partnership for a fee.
In order to create greater incentive to effectively manage these assets, the
Kennedy-Wilson/Colony partnership has offered some of our employees a limited
opportunity to invest and they have invested their personal funds into each of
the assets acquired by the partnership. These employee investments are described
in more detail in the "Certain Transactions" section under the heading "Colony
Agreements." Thus far, the partnership has purchased a 356,000 square foot
office building in Kawasaki, Japan occupied by high tech tenants and a pool of
notes as described in the "Distressed Note Pool Investments" section that
follows this section.
Between January 1, 1996 and December 31, 1998 we sold our interests in 10
commercial properties for a net profit of $14.5 million and 269 residential
units for a total net profit of $6.1 million. The following tables provide
information about our commercial and residential properties that we have sold
between January 1, 1996 and December 31, 1998 as well as our current commercial
real estate holdings.
COMMERCIAL REAL ESTATE INVESTMENTS WHERE WE OWNED A MAJORITY INTEREST
SOLD BETWEEN JANUARY 1, 1996 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
DATE MONTH/YEAR PERCENT WE
LOCATION APPROX. S.F. ACQUIRED SOLD OWNED
<S> <C> <C> <C> <C>
Santa Monica, CA 56,000 Apr-95 Nov-96 100%
Santa Monica, CA 46,000 Apr-95 Mar-97 100%
Pasadena, CA 61,000 Nov-96 Jul-97 100%
Santa Monica, CA 20,000 Aug-96 Dec-97 100%
Anaheim, CA 30,000 Jan-97 Dec-97 100%
Los Angeles, CA 50,000 Aug-94 Dec-97 100%
Santa Monica, CA 36,000 Oct-96 Sep-98 100%
Los Angeles, CA 28,000 Jul-98 Dec-98 100%
</TABLE>
43
<PAGE>
RESIDENTIAL REAL ESTATE INVESTMENTS OF WHICH WE OWNED A MAJORITY INTEREST
SOLD BETWEEN JANUARY 1, 1996 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
DATE MONTH/YEAR PERCENT WE
LOCATION UNITS ACQUIRED SOLD OWNED
<S> <C> <C> <C> <C>
San Francisco, CA 1 unit Jun-95 Jan-96 100%
San Francisco, CA 42 units Sept-95 1996 100%
Waikoloa, HI 40 units Dec-95 1996-97 100%
Corona Del Mar, CA 14 units Dec-96 1997-98 100%
Beverly Hills, CA land Jun-97 Sep-97 100%
Los Angeles, CA 24 units Apr-98 Aug 98 100%
Los Angeles, CA 1 sfr(1) Oct-97 Sep-98 100%
Granada Hills, CA 10 sfr Jun-97 1998 100%
Palm Desert, CA 7 sfr Feb-98 1998 100%
</TABLE>
- ------------------------
(1) "sfr" means single family residence.
REAL ESTATE INVESTMENTS WHERE WE OWNED LESS THAN A MAJORITY INTEREST
SOLD BETWEEN JANUARY 1, 1996 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
MONTH/YEAR
LOCATION DESCRIPTION DATE ACQUIRED SOLD PERCENT WE OWNED
Los Angeles, CA 365,000 sq. ft. Nov-96 Nov-98 25%
commercial
Los Angeles, CA 143,000 sq. ft. Nov-96 Nov-98 25%
commercial
Los Angeles, CA 9 residential Aug-95 Apr-96 50%
units
Los Angeles, CA 109 residential Dec-96 1997-98 50%
units
</TABLE>
44
<PAGE>
OUR COMMERCIAL REAL ESTATE INVESTMENTS
WHERE WE OWN A MAJORITY INTEREST AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
OUR PURCHASE
PRICE,
IMPROVEMENTS AND OUR EQUITY
COSTS AS OF INVESTED AS OF PERCENT
LOCATION APPROX. S.F./TYPE DATE ACQUIRED 12/31/98 12/31/98 WE OWN
Santa Monica, CA 4 lots Oct 96/Dec 97 $ 2,402,000 $2,402,000 100%
Los Angeles, CA 9,000 Oct-97 $ 336,000 $ 336,000 100%
Pasadena, CA 52,000 Dec-97 $ 8,886,000 $ 222,000 75%
Van Nuys, CA 74,000 Jan-98 $ 6,771,000 $ 472,000 100%
Los Angeles, CA 282,000 Feb-98 $24,937,000 $1,678,000 100%
Los Angeles, CA 133,000 Mar-98 $16,223,000 $1,256,000 100%
Monrovia, CA 21,000 May-98 $ 1,399,000 $1,399,000 100%
Long Beach, CA 1 sfr and 2 commercial Jul-98 $ 41,000 $ 41,000 100%
bldgs. 2,000 sq. ft.
Los Angeles, CA 161,000 Sept-98 $19,821,000 $ 769,000 100%
Los Angeles, CA 306,000 Sept-98 $29,166,000 $1,351,000 100%
</TABLE>
OUR RESIDENTIAL AND UNDEVELOPED REAL ESTATE INVESTMENTS
WHERE WE OWN A MAJORITY INTEREST AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
OUR PURCHASE
PRICE,
IMPROVEMENTS AND OUR EQUITY
COSTS AS OF INVESTED AS OF PERCENT
LOCATION UNITS DATE ACQUIRED 12/31/98 12/31/98 WE OWN
Pacific Palisades, CA 3 sfr Dec-97/Feb-98 $ 2,154,000 $ 528,000 60%
Palm Desert, CA 16 sfrs Feb-98 $ 2,902,000 $ 544,000 100%
San Diego, CA 155 acres May-98 $ 283,000 $ 283,000 100%
Riverside, CA 3.7 acres May-98 $ 87,000 $ 87,000 100%
Cathedral City, CA 112 lots Sept-98 $ 2,386,000 $ 894,000 70%
</TABLE>
45
<PAGE>
OUR REAL ESTATE INVESTMENTS WHERE WE
OWN LESS THAN A MAJORITY INTEREST AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
OUR SHARE OF
PURCHASE PRICE,
IMPROVEMENTS AND OUR EQUITY
COSTS AS OF INVESTED AS OF PERCENT
LOCATION DESCRIPTION DATE ACQUIRED 12/31/98 12/31/98 WE OWN
Monarch, CO ski resort Nov-96 $ 963,000 $ 603,000 25%
Los Angeles, CA 417,000 vacant sq. ft. Sep-97 $7,487,000 $3,227,000 50%
commercial
New York, NY 1,014,000 sq. ft. commercial Jan-98 $4,194,000 $4,174,000 15%
Kohala Coast, HI 3,000 acres Mar-98 $4,611,000 $ 591,000 13%
Various cities, Japan 17 residential and commercial Sept-98 $ 38,000 $ 11,000 7%
properties
Valencia, CA commercial to be developed Sept-98 $ 297,000 $ 300,000 8%
Kawasaki, Japan 244,000 sq. ft. commercial Feb-99 $ 756,000 $ 756,000 2%
</TABLE>
DISTRESSED NOTE POOL INVESTMENTS
Since 1994, we have been in the business of 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 notes through a joint venture. In September 1998, the
Kennedy-Wilson/Colony partnership purchased for $24.0 million a pool of
distressed Japanese notes with a face value in excess of $400.0 million, some of
which are secured by real estate and personal property. In addition, the pool
also included 17 commercial and residential properties. As of December 31, 1998,
this note pool had generated for the Kennedy-Wilson/Colony partnership revenues
in excess of $1.6 million, of which $109,000 represents revenues for us. In
addition to any amounts paid by the borrowers in this note pool, we will also
earn an asset management fee for managing the notes and real estate acquired.
In March, 1999, we entered into a joint venture agreement with an entity
affiliated with Cargill, Incorporated. The present investment strategy of the
Kennedy-Wilson/Cargill joint venture is to acquire on a privately negotiated
basis pools of distressed Japanese real estate secured notes that cost from $3.0
million to $10.0 million. We will provide the Kennedy-Wilson/Cargill joint
venture asset management and disposition services on a fee basis and will
provide capital contributions ranging between 5% and 10% of each investment.
Although the Kennedy-Wilson/Colony partnership arrangements require us to
present all Japanese investment opportunities to that partnership, the assets
targeted by the Kennedy-Wilson/Cargill partnership do not fit within the current
Kennedy-Wilson/ Colony partnership strategic investment plan.
46
<PAGE>
The following table illustrates the performance of our note pool
investments:
NOTE AND NOTE POOL INVESTMENTS HELD AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OUR PORTION OF OUR GAINS
THE FROM NOTE
ACQUISITION OUR EQUITY PERCENT WE POOLS AS OF
MONTH ACQUIRED PRICE INVESTED OWN 12/31/98
Nov-94 $ 584,941 $ 584,941 100% $2,112,081
Aug-96 $6,333,340 $1,533,340 100% $3,179,131
Apr-96 $ 105,078 $ 105,078 100% $ 237,932
Dec-96 $1,916,565 $ 586,565 100% $ 281,477
Dec-96 $5,024,544 $1,026,471 100% $2,020,506
Jun-97 $1,248,800 $ 30,000 100% $ 845,873
Oct-97 $1,106,314 $ 6,314 100% $ 438,783
May-98 $1,756,985 $ 10,500 100% $ 334,778
Jun-98 $2,776,930 $ 776,930 100% $1,551,286
Aug-98 $ 182,489 $ 182,489 100% $ 2,620
Sep-98 $1,688,503 $ 198,000 7% $ 108,987
</TABLE>
We also invest in individual distressed notes secured by real property.
Presently, we hold two nonperforming distressed notes secured by undeveloped
land in the Kailua-Kona region of Hawaii that we acquired in 1998. In one of
those notes we have an equity investment of $3.9 million secured by 450 acres of
ocean front, undeveloped land. In the second note, we have an equity investment
of $540,000, 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. At the closing of each loan, we generally collect a 1% set-up fee.
As of May 11, 1999 we have made seven mezzanine loans, each of which remains
outstanding. The aggregate outstanding principal balance of all seven loans is
approximately $6.5 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.
47
<PAGE>
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 $10.0 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 or property
management activities.
In various states, governmental entities license individual auctioneers
and/or administer various regulations governing their activities and may require
that auctioneers post bonds. We believe that we are in substantial compliance
with all material licensing and bonding requirements in all states in which
auctioning licenses and bonds are required and in which we are engaged in
material auction activities.
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. Some of our publicly traded competitors are
LaSalle Partners, Inc., Jones Lang LaSalle Inc., Trammell Crow Company, CB
Richard Ellis Services, Inc. and Insignia Financial Group. Several of these
companies are significantly larger than us and possess greater financial
resources. We compete against real estate services companies with regard to,
among other things, property management fees, leasing commissions, brokerage
commissions and quality of service 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. However, some of these
competitors focus on acquisitions which are larger in size than those
historically targeted by us. We believe that to a lesser degree we also compete
with real estate investment trusts that seek to acquire similar assets. We
compete with these other investors primarily on the basis of the amounts that we
pay for the investments acquired. See "Risk Factors--The Real Estate Services
And Investment Businesses Are Highly Competitive."
INSURANCE
We maintain errors and omissions, directors' and officers' liability,
property, earthquake casualty and workers' compensation insurance, with policy
limits that we believe are adequate and appropriate under the circumstances. We
periodically review and revise these limits as necessary.
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<PAGE>
EMPLOYEES
We have approximately 780 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
motivate the employees that are an integral part of our profitability.
Generally, executive officers and brokers receive a base salary and a variety of
performance based rewards including stock options and either profit sharing or
bonuses. These employees, other than those in our property management and
leasing group, receive a relatively low base salary, with the bulk of their
salary being paid in the form of a performance based bonuses. The upper level
employees in the property management and leasing group receive a market based
salary and performance based bonuses. In either case, the bonuses are based in
part upon the profitability of the group with which the employees are affiliated
as well as our overall performance. As a result, employees are encouraged to
meet individual goals as well as to contribute their expertise and efforts on
behalf of their group. In addition to promoting the generation of revenues, our
bonus structure also encourages our commercial real estate brokers to control
costs because the bonuses paid are based on the profits of the commercial
brokerage operations as opposed to gross brokerage revenues. In furtherance of
our compensation philosophy, we have granted approximately 3% of our employees
stock options to reward excellent performance and to further align their
personal interests with those of our other stockholders. Finally, approximately
4% of our employees are entitled to participate in a deferred compensation plan
in which we match each employee's contribution up to a specified maximum
according to our overall performance.
FACILITIES
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 88,000 square feet of leased space, with an annual aggregate base
rental of approximately $1.2 million. Each of these leases is scheduled to
expire within the next five years. We believe that we will be able to renew any
expiring lease or obtain suitable office space to replace the facility, as
necessary, without any material increase in our rental costs.
LEGAL PROCEEDINGS
We are involved in various legal proceedings generally incidental to our
business and routine. While 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.
See "Risk Factors--We May Have Liabilties In Connection With Real Estate
Brokerage And Property Management Activities."
49
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are listed below:
<TABLE>
<CAPTION>
BOARD TERM
NAME AGE TITLE EXPIRES
- --------------------------------- --- ------------------------------------------------------ ----------------
<S> <C> <C> <C>
William McMorrow................. 52 Chairman of the Board of Directors and Chief Executive 2001
Officer
Lewis Halpert.................... 47 Director and Executive Managing Director, President of 1999
Kennedy-Wilson Residential and Notes Group
Richard Mandel................... 36 Director and Managing Director, President of our 2000
Commercial Group
Barry Schlesinger................ 58 Director and President of Kennedy-Wilson Properties 2000
Ltd.
Donald Prell..................... 75 Director and Chairman of the Audit Committee 2001
Kent Mouton...................... 46 Director and Chairman of the Compensation Committee 1999
Thomas Barrack, Jr............... 52 Director 1999
Freeman Lyle..................... 45 Executive Vice President, Chief Financial Officer and not applicable
Secretary
Terry Wachsner................... 50 Senior Managing Director of Kennedy-Wilson Properties not applicable
Ltd.
</TABLE>
WILLIAM MCMORROW has been Chairman of our Board of Directors and Chief
Executive Officer since joining our predecessor company in 1988. From that time,
he has been instrumental to our growth into a diversified real estate services
and investment company.
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 subsidiary of Imperial Bancorp,
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 our Board of Directors since joining our
predecessor company at the same time as Mr. McMorrow in 1988, and is Executive
Managing Director and President of our 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 us, 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 our Board of Directors since December
1995. He is President of our Commercial Group, responsible for all of our
commercial brokerage operations in the U.S. and Asia. Since joining us in 1993,
Mr. Mandel has established our office in Tokyo and has been
50
<PAGE>
instrumental in developing our Japan-based relationships. In 1996, Mr. Mandel
opened our 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 our Board of
Directors and President of Kennedy-Wilson Properties, Ltd., our wholly-owned
property management and leasing subsidiary. Mr. Schlesinger serves as President
of Kennedy-Wilson Properties through an Executive Services Agreement. From 1990
to July 1998, he served as Chairman of the Board of Directors and Chief
Executive Officer of Heitman Properties, Ltd. Mr. Schlesinger was appointed to
our Board of Directors in accordance with the Executive Services Agreement. The
Executive Services Agreement is discussed in more detail in "Certain
Transactions."
Prior to joining Heitman Properties in 1971, Mr. Schlesinger was responsible
for project planning and scheduling for Tishman Realty and Construction Company.
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 our Board of Directors 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 our Board of Directors 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.
Mr. Mouton holds Bachelor of Arts Degree and Juris Doctor Degree from UCLA.
THOMAS BARRACK, JR. has served as a member of our Board of Directors 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 purchased a 10.0% equity
interest in our company in July 1998. Mr. Barrack founded Colony Capital in
1991. Prior to forming Colony Capital, he was a principal with the 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 public companies Continental Airlines Corporation, Public Storage, Inc., and
Harveys Casino Resorts.
Mr. Barrack holds a Bachelor of Arts Degree from the University of San Diego
and a Juris Doctor Degree from the University of Southern California. Mr.
Barrack was appointed to our Board based on our agreement with Colony Capital.
FREEMAN LYLE has been our Chief Financial Officer, Executive Vice President
and Secretary since joining us in April of 1996. He is responsible for all of
our financial matters including overseeing capital structure and arranging and
maintaining our credit facilities.
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<PAGE>
Prior to joining us, 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
we 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.
BOARD COMPOSITION
We currently have seven directors, with a total of nine authorized. In
accordance with the terms of our Certificate of Incorporation, the terms of
office of the Board of Directors are divided into three classes: the Class I
term will expire at the annual meeting of stockholders to be held in 1999; the
Class II term will expire at the annual meeting of stockholders to be held in
2000; and the Class III term will expire at the annual meeting of stockholders
to be held in 2001. The Class I directors are Messrs. Mouton, Barrack and
Halpert, the Class II directors are Messrs. Mandel and Schlesinger, and the
Class III directors are Messrs. McMorrow and Prell. At each annual meeting of
stockholders, the successors to directors whose terms are expiring will be
elected to serve from the time of election and qualification until the third
annual meeting following election. Our Certificate of Incorporation provides
that the authorized number of directors may be changed by resolution of the
Board of Directors or stockholders. Any additional directorships resulting from
an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one-third of
the directors. This classification of the Board of Directors may have the effect
of delaying or preventing changes in control or management our company. Our
directors may be removed for cause by the affirmative vote of the holders of a
majority of the common stock.
None of our directors or executive officers are related to one another by
blood or marriage. One Class II board seat and one Class III board seat are
currently vacant. Our Board of Directors has not nominated anyone to fill these
seats, but intends to fill them by the end of this year with two independent
directors.
COMMITTEES OF THE BOARD OF DIRECTORS
OUR AUDIT COMMITTEE is composed of Donald Prell (Chairman) and Kent Mouton.
This committee is responsible for reviewing our financial policies and
objectives, and monitoring our financial condition and our requirements for
funds in conjunction with management. In addition, our Audit Committee meets
with our independent auditors to review their audit report and consider any
recommendations.
OUR COMPENSATION COMMITTEE is composed of Kent Mouton (Chairman) and Donald
Prell. This committee establishes our general compensation policies and
determines the compensation levels for the Chief Executive Officer and each
employee that receives annual compensation in excess of $100,000. The
Compensation Committee also has oversight responsibility for administering our
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).
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued by us
during each of the last three fiscal years to our Chief Executive Officer and
our four most highly compensated executive officers who served in either of
those capacities during fiscal 1998 (collectively, the "Named Executive
Officers") for services rendered:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
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 1997 300,000 1,270,734 120,607 90,000
Chief Executive Officer 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 Mandel ................................... 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- 1997 -- -- -- --
Wilson 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 Executive 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 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.
(3) Mr. Schlesinger is employed by KW-A, LLC. An Executive Services Agreement
between us and KW-A, LLC requires us 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 Transaction."
Our compensation policy is to ensure that a substantial portion of potential
aggregate annual compensation be contingent upon our performance. The goals of
the compensation programs are to align compensation with performance and to
enable us to attract, retain and reward personnel who contribute to our success.
We are committed to providing incentive opportunities that, together with
base salaries (where appropriate), provide for competitive and equitable total
cash compensation opportunities. Aggregate base salaries, where appropriate, are
set relative to average market pay practices, while target incentives
opportunities are set somewhat above average market pay practices. Additionally,
future base salary
53
<PAGE>
increases and commission or incentive pay opportunities are directly linked to
the achievement of key financial objectives. Our Compensation Committee has
determined that, as current employment agreements and compensation packages are
renewed or reevaluated in the future, it will consider adding features that
impose ceiling protection in total base plus bonus compensation levels in order
to establish more certainty in the total compensation we pay.
DEFERRED COMPENSATION PLAN
In 1997, we established a nonqualified deferred compensation plan to provide
specific benefits to a select group of management, highly compensated employees
or directors who contribute materially to our continued growth, development and
future business success. Under our plan, participants are able to defer up to
100% of their annual total compensation including their bonuses. We are
authorized to make discretionary matching contributions in varying degrees based
on the performance of our company. In the fiscal year ended December 31, 1998,
we 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
We maintain a 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 our Board of Directors. No
contributions were made for the years ended December 31, 1996, 1997 and 1998.
We also have a qualified profit sharing plan under the provisions of Section
401(k) of the Internal Revenue Code. 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 us to make discretionary contributions. During 1998
we made $27,000 in matching contributions to this plan. During 1997 we 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 our efforts to employ qualified and experienced
professionals, we have three stock option plans. The Incentive Stock Option Plan
("Plan A") and the Non-statutory Stock Option Plan ("Plan B") allow us to grant
stock options to our employees and our consultants. We believe that both plans
help us 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 our overall success. The administration of
these two plans is guided by our overall compensation philosophy of rewarding
managers, employees and consultants based on their relative contributions to our
overall accomplishments. The Compensation Committee has sole discretion to
decide which eligible managers, employees and consultants are granted options,
the number of options granted, and, subject to the plans, the terms and
conditions of each grant. The Non-employee Director Stock Option Plan ("Plan C")
allows us to grant stock options to our non-employee directors in order to
further align their interests with those of our 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 our valued employees to stay with us, the Compensation Committee
typically grants options which vest over a three year period. The exercise price
for shares of
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<PAGE>
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 our 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
1,466,620 shares have been issued. Of these options 1,240,000 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.
The amount, price and terms of each grant under Plan C are automatic. Upon
election to our Board of Directors, non-employee directors receive an option to
purchase 13,500 shares of common stock at a price equal to fair market value on
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 our Board of Directors. Several aspects of
Plan C operate to encourage capable individuals to remain on our Board of
Directors. 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 our 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 May 11, 1999, we had options
outstanding under Plan C for 28,620 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.
STOCK OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENTAGE VALUE OF ASSUMED
OF TOTAL ANNUAL RATES OF STOCK
NUMBER OF OPTIONS PRICE APPRECIATION OF
SECURITIES GRANTED TO EXERCISE OPTION TERMS
UNDERLYING EMPLOYEES IN PRICE PER EXPIRATION ----------------------
NAMED 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 $ 160,259
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 $ 160,259
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
</TABLE>
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%.
55
<PAGE>
The following table provides information about stock options held by our
Named Executive Officers as of December 31, 1998.
AGGREGATED OPTION EXERCISES IN 1998
AND OPTION VALUES AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
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 -------------------------- --------------------------
NAMED 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
</TABLE>
DIRECTOR COMPENSATION
Each director who is not also one of our employees 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, we maintain Plan C
described above under the heading "Stock Option Plans" as further compensation
for our non-employee directors. Our employees who also are directors receive no
additional compensation for their service on our Board of Directors or on any
Board committee.
EMPLOYMENT CONTRACTS
Each of our Named Executive Officers has entered into an employment contract
for 1999. They are described below:
- 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 1(st)
and 2(nd) quarter profits and at year end based on 3(rd) and 4(th) quarter
profits.
- 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.
- MR. MANDEL'S contract provides for a term expiring on December 31, 1999, a
base salary of $250,000 plus an incentive bonus of 12.5% to 20% of the
profits allocated to our Commercial Group.
- MR. LYLE'S contract, which expired on March 31, 1999, provided for a base
salary of $180,000 plus a discretionary performance bonus of 0% to 100% of
base salary. The Compensation Committee is in the process of renewing Mr.
Lyle's contract on similar terms.
- 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 us. 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
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<PAGE>
$3,333,000, and a discretionary bonus in respect of the net profits of
Kennedy-Wilson Properties Ltd. in excess of $5,033,000 and (ii) an "add-on
bonus" in 1999 of $270,000. Under an Executive Services Agreement dated as
of July 17, 1998 with KW-A, LLC we have 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 us with
executive management services. The Executive Services Agreement is
discussed in more detail in "Certain Transactions."
In addition to compensation as noted above, each contract sets forth the
services the Named Executive Officer is to provide to us, his benefits and
expense 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 Name
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 the parties who control us.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATIONS
Kent Mouton and Donald Prell were the only two people who served on our
Board of Directors' Compensation Committee in 1998. Neither Mr. Mouton nor Mr.
Prell was an officer or employee of ours during the fiscal year ended December
31, 1998, nor have either of them been an officer of ours at any time. Mr.
Mouton is a partner in the law firm of Kulik, Gottesman & Mouton. During our
fiscal year 1998, we paid Kulik, Gottesman & Mouton a total of approximately
$496,191 in legal fees.
INDEMNIFICATION
Our Certificate of Incorporation requires that we indemnify our directors
and officers to the maximum extent permitted by Delaware law. Delaware law
provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for (i) any breach of their duty of loyalty to the corporation or its
stockholders, (ii) acts or omissions not in good faith or which intentional
misconduct or a knowing violation of law, (iii) unlawful payments of dividends
or unlawful stock repurchases or redemptions, or (iv) any transaction from which
the director derived an improper personal benefit. Such limitation of liability
does not apply to liabilities arising under the federal securities laws and does
not affect the availability of equitable remedies such as injunctive relief or
rescission.
Prior to incorporating in Delaware in 1992, our predecessor company operated
as a California S corporation. At the time of the termination of such
predecessor company's S corporation status in 1992, we agreed to indemnify its
former shareholders, including William McMorrow and Lewis Halpert, for certain
federal and state tax liabilities incurred by them as a result of a final
determination of an adjustment to the tax returns of the predecessor company or
former shareholders for the 1992 tax year.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of May 11, 1999 the total number of our
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
known to us of more than five percent (5%) of the outstanding shares of common
stock. 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.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY
NAME 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............ 4,224,146 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
</TABLE>
- ------------------------
* Less than 1%
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 Blvd., Suite 220, Beverly Hills, CA 90210-5205.
(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
our 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 our
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.
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<PAGE>
(5) As reported in a Schedule 13D dated July 24, 1998 filed with 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
is Colony GP III, Inc., a Delaware corporation. Mr. Barrack holds a 60%
interest in Colony GP III. Mr. Barrack and Colony Investors have shared
voting and investment power with respect to those shares. The mailing
address of Colony Investors and Thomas Barrack, Jr., as indicated in the
Schedule 13D, is 1999 Avenue of the Stars, Suite 1200, Los Angeles, CA
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) As reported in a Schedule 13G dated April 26, 1999 filed with the SEC,
Edward Cahill; David Warnock; Cahill, Warnock Strategic Partners, L.P.;
Cahill Warnock Strategic Partners Fund, L.P.; Cahill, Warnock & Company, LLC
and Strategic Associates, L.P. beneficially own 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. The
debentures are convertible at any time by the holders. According to the
Schedule 13G, the principal business address of the beneficial owners is One
South Street, Suite 2150, Baltimore, MD 21202.
(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.
59
<PAGE>
CERTAIN TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
The following are brief descriptions of transactions between us or one or
more of our subsidiaries and any of our directors, executive officers or
stockholders known to us to own beneficially more than 5% of our shares, 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 our Board of Directors and Chief Executive
Officer of Kennedy-Wilson Properties Ltd., holds a 7.1% interest in two
buildings for which we provide 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. During the period of July 17, 1998 to
December 31, 1998 we earned $23,000 in management fees for these buildings.
Presently, the management fees are $25,000 per year per building. We expect our
revenues related to these buildings to be approximately $50,000 for 1999. We may
terminate the management contracts on 30 days notice.
PIONEER JOINT VENTURES
In November, 1996 we entered into a joint venture with parties who are
affiliated with Goodwin Gaw, a former member of our Board of Directors. In
particular, we 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 we
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.
We acquired an interest in this joint venture for approximately $1.4 million. In
the first calendar quarter of 1998, we entered into two further joint ventures
with parties who are affiliated with Mr. Gaw. In January 1998, we 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, we acquired for about $300,000 a 40% interest in a joint venture
that acquired a note collateralized by a hotel in Beverly Hills, California. We
subsequently sold our interest in that note for $612,717. Mr. Gaw resigned from
his position as a member of our Board of Directors on November 5, 1998.
LEGAL FEES
In 1998, we paid the firm of Kulik, Gottesman & Mouton approximately
$496,191 in legal fees. Kent Mouton is a partner in that firm and a member of
our Board of Directors.
COLONY AGREEMENTS
Thomas Barrack, Jr., a member of our Board of Directors and a beneficial
owner of more than 5% of our common stock, holds a 60% interest in Colony GP
III. Colony GP III is the sole general partner of Colony Investors III, L.P.
Colony Investors III is the sole member of Colony K-W, LLC, a real estate
investment fund.
In July 1998, we 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, pursuant to a
Bridge Loan Agreement dated as of July 16, 1998 among Colony K-W, us and certain
of our subsidiaries. The loan bears interest at a rate of 14% per annum and
matures on January 15, 2000. The loan is guaranteed by certain of our
subsidiaries on a subordinated basis and, pursuant to a Pledge Agreement dated
as of July 16, 1998 made by us in favor of Colony K-W, is secured by a pledge of
all of the outstanding shares of Heitman Properties, now known as Kennedy-Wilson
Properties Ltd. The terms of the loan agreement restrict, among other things,
certain borrowings, distributions and mergers involving us and the guarantors
and is subject to
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additional customary restrictive covenants. We plan to pay down $7.0 million of
principal of the loan from the proceeds of this offering.
On July 16, 1998, Colony Investors III entered into a Stock Purchase
Agreement and a Warrant Agreement with us, pursuant to which Colony Investors
III 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 our
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 Colony stock and warrant, Colony
Investors III entered into an Investor's Agreement with us, dated as of July 16,
1998, pursuant to which we have agreed, during the term and subject to the
provisions thereof, which include the continued ownership of a specified minimum
number of shares of our common stock, among other things, to take all action
necessary so that our Board of Directors will include one class III director
designated by Colony Investors III, and thereafter, to use its best efforts to
cause a person designated by Colony Investors III to be included in each slate
of proposed class III directors put forth by us and our stockholders and
recommended for election in any proxy solicitation materials disseminated by us.
Colony Investors III's initial director nominee was its affiliate, Thomas
Barrack, Jr., who is now a member of our Board of Directors. With certain
exceptions as described in the Investor's Agreement, Colony Investors has
preemptive purchase rights to maintain its beneficial ownership percentage for
so long as its investment continues to represent at least 5% of our stock, which
it has waived with respect to this offering.
We and Colony Investors III executed a Registration Rights Agreement on July
16, 1998 with respect to the Colony warrant and any common stock issued under
that warrant. Pursuant to the Registration Rights Agreement, and subject to the
terms and conditions thereof, the Colony warrant beneficially owned by Colony
Investors III is subject to demand and piggyback registration rights. The
Registration Rights Agreement is discussed in more detail in the section headed
"Registration Rights."
Colony Investors III is also the general partner of Colony K-W Genpar Ltd.
and Colony K-W Genpar is the general partner of Colony-KW Partners, L.P. Colony
K-W, L.P., K-W Japan Investments, Inc. and EBISU Investors I, LLC are the
limited partners in Colony K-W Partners, L.P. K-W Japan Investments, Inc. is one
of our wholly-owned subsidiaries. EBISU is owned in part by William McMorrow
(26.32%), Richard Mandel (26.32%), Ryosuke Homma (15.79%), and Lewis Halpert
(10.52%). The remainder is owned by some of our employees in our Tokyo office.
Colony-K-W Genpar and Colony K-W, L.P. together have a 97.5% interest in Colony
K-W Partners, K-W Japan Investments has a 2.0% interest and EBISU has a 0.5%
interest. The Colony K-W Partners 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, we entered into a Japanese partnership agreement with Meguro
Investors, LLC. Meguro is owned in part by William McMorrow (25%), Richard
Mandel (25%) and Ryosuke Homma (25%). The remainder is owned by some of our
employees in our Tokyo office. 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 is the beneficial owner of the holding company acquired and we
are the legal owners.
ARROWHEAD BROKERAGE
William McMorrow, our Chairman and Chief Executive Officer, and Lewis
Halpert, our Executive Managing Director, each own 20% of some real property
located in Lake Arrowhead, California. They
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have retained us as the exclusive broker for selling that property. We will earn
a fee of 4% of the sale price at the close of escrow. We estimate the property's
value at approximately $12.5 million.
EXECUTIVE SERVICES AGREEMENT
On July 17, 1998, we entered into an agreement with KW-A, LLC to purchase
executive management services. Barry Schlesinger, a member of our Board of
Directors and Chairman of Kennedy-Wilson Properties Ltd., Terry Wachsner, Senior
Managing Director of Kennedy-Wilson Properties Ltd., Larry Beasley and Jerome
Powalish are equal members in KW-A. We pay KW-A an amount equal to all sums
payable by KW-A to its members under their respective employment agreements
whose services we use. The amount received in 1998 by Mr. Schlesinger under this
arrangement is described in the "Employment Contract" section. Mr. Wachsner
received $430,000 for his professional services in 1998. The terms of our
agreement with KW-A expire the earlier of the termination of employment by KW-A
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
our Board of Directors. On November 10, 1998, we purchased from Mr. Gaw 135,000
shares of our common stock for $6.716 per share for a total of $906,750. The
closing price for our shares on the NASDAQ National Market on that date was
$7.281 per share. All 135,000 shares were subsequently retired.
BROKERAGE ENGAGEMENTS
In the past we have been retained, and we anticipate that from time to time
in the future we will be retained, to perform auction or brokerage services for
entities controlled by certain of our executive officers and/or directors. We
believe 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 our company.
INDEBTEDNESS OF MANAGEMENT
In December 1997, we loaned an aggregate of $1,319,652 to 18 key employees.
We made the loans to enable those employees to acquire in a private, unsolicited
transaction approximately 73,314 shares of our 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 our
directors and executive officers:
DECEMBER 1997 LOANS TO DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
MAXIMUM AMOUNT AMOUNT OWED AS OF
BORROWER OWED IN 1998 MAY 11, 1999
- ---------------------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
William McMorrow, .......................................................... $ 226,008 $ 0
Chairman of our Board of Directors and Chief
Executive Officer
Lewis Halpert, Director..................................................... $ 225,972 $ 0
Freeman Lyle, .............................................................. $ 225,972 $ 110,000
Executive Vice President, Chief Financial Officer and Secretary
Richard Mandel, ............................................................ $ 162,000 $ 0
Managing Director
</TABLE>
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BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors and certain of our officers, as well as persons who own ten
percent or more of our outstanding common stock ("Insiders"), to file an initial
report of beneficial ownership of their stock and reports of changes in
beneficial ownership with the SEC. Section 16(a) requires Insiders to deliver
copies of all reports filed under Section 16(a) to us. Based solely on a review
of these copies received, we believe that our 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.
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OUR CAPITAL STOCK
SHARES AUTHORIZED
We are authorized to issue 55,000,000 shares, consisting of 50,000,000
shares of common stock at a par value of $.01 per share and 5,000,000 shares of
preferred stock at a par value of $.01 per share. At May 11, 1999, we had
6,770,276 shares of common stock outstanding and no shares of preferred stock
outstanding. The following description of the terms and provisions of our shares
of stock and certain other matters does not purport to be complete and is
subject to and qualified in its entirety by reference to the applicable
provisions of the Delaware General Corporation Law and our Certificate of
Incorporation and Bylaws.
COMMON STOCK
The holders of our common stock are entitled to one vote for each share held
of record on all matters to be voted on by the stockholders. The holders of
common stock do not have cumulative voting rights. The holders of our common
stock are entitled to receive, ratably, dividends when, as and if declared by
our Board of Directors out of funds legally available for dividends. In the
event of a liquidation, dissolution or winding up of our Company, the holders of
common stock will be entitled, subject to the rights of holders of preferred
stock issued by us, if any, to share ratably in all assets remaining available
for distribution to them after payment of our debts and other liabilities and
after provision is made for each class of stock, if any, having preference over
the common stock.
The holders of shares of common stock, as such, have no conversion,
preemptive or other subscription rights and there are no redemption provisions
applicable to the common stock. All of the outstanding shares of common stock
are, and the shares of common stock offered by us in this prospectus, when
issued against the consideration set forth in this prospectus, will be validly
issued, fully paid and nonassessable.
PREFERRED STOCK
We are authorized to issue preferred stock in one or more series with such
designations, rights and preferences as may be determined from time to time by
our Board of Directors. Accordingly, our Board of Directors is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of our common stock. If issued, the
preferred stock could, under certain circumstances, delay or prevent an
acquisition or change in control. We do not currently intend to register or
issue any shares of preferred stock.
WARRANTS
In December 1998 we issued a warrant to purchase 131,096 shares of our
common stock at an exercise price of $7.5526 per share, as adjusted for our
stock dividend paid December 15, 1998, to FBR Asset Investment Corporation, an
affiliate of one of the underwriters, in connection with the loan that FBR Asset
made to us in 1998. We have issued a warrant to purchase 198,039 shares of our
common stock at $10.00 per share, as adjusted for our stock dividend paid
December 15, 1998, to Colony Investors III, L.P. in connection with the warrant
agreement dated as of July 16, 1998. The Colony Investors warrant and the FBR
Assets warrant are presently exercisable, but, to date, no part of the warrants
have been exercised. The FBR Assets warrant expires on the fifth anniversary of
its grant and the Colony warrant expires on the seventh anniversary of its
grant.
DEBENTURES
On April 26, 1999, we issued and sold 6% subordinated convertible debentures
in the original aggregate principal amount of $7,500,000 to Cahill, Warnock
Strategic Partners Fund, L.P. and Strategic Associates, L.P. pursuant to a
convertible debenture purchase agreement dated as of April 15, 1999. Holders of
the debentures may convert their debentures at any time into common stock at a
conversion price of $10.00 per share subject to adjustment as provided in the
purchase agreement.
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SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock in the public market
could adversely affect market prices prevailing from time to time. Upon
completion of this offering, we will have outstanding 8,770,276 shares of common
stock, 9,070,276 shares assuming the full exercise of the underwriter's
over-allotment option. Of these shares, 4,316,728 (4,616,728 assuming the full
exercise of the underwriters' over-allotment option) will generally be freely
tradable without restriction or further registration under the Securities Act
except for any shares held by any of our "affiliates", as that term is defined
under Rule 144 promulgated under the Securities Act. Of the remaining 4,453,548
shares, 21,000 shares are held by us as treasury stock, 2,982,625 shares of
common stock may be sold in the public market, subject to Rule 144, upon
expiration of the proposed lock-up agreements described below, an additional
688,158 shares may be publicly sold only if they are registered under the
Securities Act or sold in accordance with a applicable exemption from
registration, such as Rule 144. In general, under Rule 144, as currently in
effect, a person who has beneficially owned shares for at least one year,
including an "affiliate," as that term is defined in Rule 144, is entitled to
sell, within any three-month period, a number of "restricted" shares that does
not exceed the greater of one percent (1%) of the then outstanding shares of
common stock (approximately 88,000 shares immediately after this offering) or
the average weekly trading volume during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain manner of sale
limitations, notice requirements, and the availability of current public
information about us. Rule 144(k) provides that a person who is not deemed an
"affiliate" and who has beneficially owned shares for at least two years is
entitled to sell such shares at any time under Rule 144 without regard to the
limitations described above.
In addition, holders of vested options to purchase 432,630 shares of common
stock as of the date of this prospectus will be able to sell any shares acquired
under the options without restriction pursuant to a Form S-8 registration
statement filed or soon to be filed with respect to those shares. We have also
issued warrants that may presently be exercised for the purchase of 329,135
shares of common stock. Shares issued under those warrants may only be publicly
sold if registered under the Securities Act or sold in accordance with an
applicable exemption from registration, such as Rule 144. We have agreed to
issue on April 26, 1999 debentures in the aggregate principal amount of
$7,500,000 which may be converted into common stock at any time by the holders
at a conversion price of $10.00 per share. We have agreed to register the shares
issuable upon the conversion of such debentures. Shares registered under those
registration statements will, subject to Rule 144 volume limitations applicable
to affiliates, be available for sale in the open market, unless those shares are
subject to the lock-up agreements described below or the registration statements
are no longer effective. Future sales of shares by existing stockholders could
have an adverse effect on the market price of our common stock or otherwise
impair our ability to raise additional capital.
The Underwriting Agreement requires executive officers and directors to
enter into "lock-up" agreements providing that they will not offer, sell,
pledge, contract to sell, grant any option to purchase or otherwise dispose of
any common stock, or any options, warrants or other securities convertible into
or exercisable or exchangeable for common stock, whether now owned or hereafter
acquired, or in any manner transfer all or a portion of the economic
consequences associated with their ownership of our common stock without the
prior written consent of the underwriter, except for estate planning purposes,
certain charitable donations or to pay for the exercise of stock options as
permitted by our stock option plans, until 180 days after the date of this
prospectus. Under the lock-up agreements, the executive officers and directors
will be permitted to maintain existing arrangements under which they pledged
certain of their shares of common stock to secure loans, and enter into new
pledge arrangements, provided that such new pledges are for loans that mature
more than 180 days after the date of this prospectus and generally have
foreclosure rights tied only to non-payment of the loans.
Colony Investors III, L.P. and FBR Asset Investment Corporation have agreed
to enter into "lock-up" agreements containing similar sales restrictions except
that each may transfer ownership of common stock to an "associate" as that word
is defined in Rule 12b-2 promulgated by the SEC under the Securities Act. The
length of the lock-up period is 90 days from the date of this prospectus for
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Colony Investors and 180 days from the date of this prospectus for FBR Asset.
Colony and FBR Asset have also agreed not to exercise registration rights for a
period of 90 days in the case of Colony and 180 days in the case of FBR Asset.
As a result of these contractual restrictions, shares subject to lock-up
agreements will not be saleable until the agreements expire.
REGISTRATION RIGHTS
The holders of the Colony Investors III, L.P. warrant for 198,039 shares of
our common stock and the FBR Asset Investment Corporation warrant for 131,096
shares of our common stock and 660,127 unregistered shares of our common stock
sold to Colony Investors have certain rights of registration with respect to
those securities and any shares of common stock to be issued thereunder. The
holders may require us to file a registration statement under the Securities Act
of 1933 with respect to their shares. In addition, if we register any of our
securities, for our own account or the account of other security holders, the
holders of the Colony shares and the shares issuable upon exercise of the Colony
warrant are entitled to include their shares in the registration, with certain
limitations. The registration rights related to the FBR Asset warrant expire two
years after the issuance of the warrant. Colony has informed us that it will not
exercise its registration rights with respect to its shares or warrant in
connection with this offering.
We are also required to file by August 13, 1999 a registration statement
under the Securities Act with respect to the shares of our common stock which
will be issuable upon the conversion of our $7,500,000 subordinated convertible
debentures issued on April 26, 1999. We are required to maintain the
effectiveness of that registration statement so long as any of the debentures
are outstanding and thereafter for a two year period or until all of the shares
which may be purchased by the holders of the debentures have been purchased and
sold, whichever occurs first.
We must bear all expenses incurred in connection with any of those
registrations, other than underwriting discounts and commissions. These
registration rights could result in substantial future expenses to us and
adversely affect any of our future equity or debt offerings.
CERTAIN PROVISIONS OF DELAWARE LAW
We are a Delaware corporation subject to Section 203 of the Delaware General
Corporation Law. In general, Section 203 prevents an "interested stockholder"
(defined generally as a person owning 15% or more of our outstanding voting
stock) from engaging in a "business combination" (as defined in Section 203)
with us for three years following the date that person became an interested
stockholder unless: (1) before that person became an interested stockholder, our
Board of Directors approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination; (2) upon
completion of the transaction that resulted in the interested stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of our voting stock outstanding at the time the transaction commenced
(excluding stock held by any director who is also one of our officers and by
employee stock plans that do not provide employees with the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer); or (3) on or following the date on which that person
became an interested stockholder, the business combination is approved by our
Board of Directors and authorized at a meeting of stockholders by the
affirmative vote of the holders of at least 66 2/3% of the outstanding voting
stock not owned by the interested stockholder.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C. is our transfer agent and registrar
of our common stock.
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U.S. FEDERAL INCOME TAX CONSEQUENCES
In the opinion of White & Case LLP, our special tax counsel, the following
is a description of the principal U.S. federal income tax consequences of the
purchase, ownership and disposition of common stock by a Non-U.S. Holder
(defined below). This description is based on (1) the Internal Revenue Code of
1986, as amended (the "Code"), (2) income tax regulations (proposed and final)
issued under the Code, and (3) administrative and judicial interpretations of
the Code and regulations, each as in effect and available as of the date of this
prospectus. These income tax laws, regulations, and interpretations, however,
may change at any time, and any change could be retroactive to the date of this
offering. These income tax laws and regulations are also subject to various
interpretations, and the Internal Revenue Service (the "IRS") or the courts
could later disagree with the explanations or conclusions contained in this
description. The IRS has not formally ruled (and we do not intend to seek a
ruling) on the tax consequences of purchasing, owning and disposing of shares of
common stock.
Except where we state otherwise, this description deals only with shares of
common stock held as capital assets (as defined in the Code) by a holder who is
a Non-U.S. Holder (as defined below). We do not, however, address all of the tax
consequences that may be relevant to a Non-U.S. Holder.
- A "Non-U.S. Holder" is a beneficial owner of common stock who for U.S.
federal income tax purposes is not:
- a citizen or resident of the U.S.;
- a corporation or partnership created or organized in or under the laws of
the U.S. or any State (including the District of Columbia);
- an estate if its income is subject to U.S. federal income taxation
regardless of its source; or
- a trust if it has validly has elected to be treated as a U.S. person for
U.S. federal income tax purposes or if (1) a U.S. court can exercise
primary supervision over its administration and (2) one or more U.S.
persons have the authority to control all of its substantial decisions.
We also do not address, except as stated below, any of the tax consequences
to (1) holders that may be subject to special tax treatment such as financial
institutions, real estate investment trusts, tax-exempt organizations, regulated
investment companies, insurance companies and brokers and dealers or traders in
securities or currencies, (2) persons that will hold common stock as part of a
position in a straddle or as part of a hedging or conversion transaction, (3)
persons whose functional currency is not the U.S. Dollar and (4) persons other
than Non-U.S. Holders.
Further, we do not address any state, local or foreign tax consequences of
purchasing, owning and disposing of common stock.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS IN
LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES AS TO THE U.S. FEDERAL INCOME TAX
CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF COMMON STOCK, AS WELL AS THE
EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
DIVIDENDS ON COMMON STOCK
Dividends paid to a Non-U.S. Holder that are not effectively connected with
the conduct of a trade or business in the U.S. generally will be subject to
withholding of U.S. federal income tax at a rate of 30% on the gross amount of
the dividend unless the rate is reduced by applicable U.S. income tax treaty.
Currently, dividends paid to an address in a foreign country generally are
presumed to be paid to a resident of that country in determining the
applicability of a tax treaty with respect to that payment. Treasury Regulations
issued on October 6, 1997, as amended by an IRS notice, however, would, for
dividends paid after December 31, 1999, require a Non-U.S. Holder to file
certain forms to obtain the benefit of any applicable tax treaty. Those forms
generally would contain the
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Non-U.S. Holder's name and address and an official statement by the competent
authority in the foreign country (as designated in the applicable tax treaty)
attesting to the holder's status as a resident thereof.
Except as otherwise provided in an applicable tax treaty, a Non-U.S. Holder
will be taxed at ordinary U.S. federal income tax rates (on a net income basis)
on dividends that are effectively connected with the conduct of a trade or
business of the Non-U.S. Holder within the U.S. and will not be subject to the
withholding described above. If the Non-U.S. Holder is a foreign corporation, it
may also be subject to a 30% branch profits tax unless it qualifies for a lower
rate under an applicable tax treaty.
To claim the benefit of a tax treaty or to claim an exemption from
withholding because the income is effectively connected with a U.S. trade or
business, a Non-U.S. Holder must provide a properly executed Form 1001 or 4224
(or any successor form as the IRS designates), as applicable, prior to the
payment of dividends.
SALE OR EXCHANGE OF COMMON STOCK
Subject to the discussion below under "--STATUS AS U.S. REAL PROPERTY
HOLDING CORPORATION", a Non-U.S. Holder generally will not be subject to U.S.
federal income tax in respect of gain recognized from the sale or exchange of
common stock unless:
- the gain is effectively connected with a trade or business conducted by
the Non-U.S. Holder within the U.S. (in which case, the branch profits tax
described above under "--DIVIDENDS ON COMMON STOCK" may also apply if the
holder is a foreign corporation);
- in the case of a Non-U.S. Holder who is a non-resident alien individual,
the holder is present in the U.S. for 183 days or more in the taxable year
of the sale or exchange and certain other conditions are met; or
- the Non-U.S. Holder is subject to tax pursuant to the provisions of the
Code applicable to certain U.S. expatriates.
STATUS AS U.S. REAL PROPERTY HOLDING CORPORATION
We believe that we are likely to constitute a U.S. real property holding
corporation within the meaning of the Code. Under certain provisions of the Code
and the income tax regulations, gain realized by a Non-U.S. Holder who would not
ordinarily be subject to U.S. federal income tax on gains would, under certain
circumstances, be subject to tax (the "special tax") on gain realized on the
sale or exchange (and possible withholding tax on the proceeds from the sale
(the "withholding tax")) of common stock, notwithstanding the Non-U.S. Holder's
lack of other connections with the U.S. If, however, the common stock is
regularly traded on an established securities market, the special tax and the
withholding tax would apply to the sale or exchange by a Non-U.S. Holder only if
the Non-U.S. Holder held directly or indirectly, at any time during the
five-year period ending on the date of the sale or exchange, more than 5% of the
common stock. Generally, the rule for an interest in a U.S. real property
holding corporation takes precedent over relief provided by U.S. income tax
treaties.
FEDERAL ESTATE TAXES
Common stock that is held by an individual who at the time of death is not a
citizen or resident of the U.S. generally will be included in the individual's
gross estate for U.S. federal estate tax purposes, unless an applicable U.S.
estate tax treaty provides otherwise.
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BACKUP WITHHOLDING TAX AND INFORMATION REPORTING REQUIREMENTS
U.S. backup withholding tax and information reporting requirements generally
apply to certain payments to certain noncorporate holders of stock. Information
reporting generally will apply to payments within the U.S. of dividends on, and
to proceeds from the sale or redemption of, common stock by a payor to a holder
of common stock (other than an "exempt recipient," including a corporation, a
payee that is a Non-U.S. Holder that provides an appropriate certification and
certain other persons). A payor will be required to withhold 31% of any payments
of the proceeds within the U.S. from the sale or redemption of common stock to a
holder (other than an "exempt recipient") if the holder fails to furnish its
correct taxpayer identification number or otherwise fails to comply with the
backup withholding tax requirements.
Income tax regulations issued on October 6, 1997, and a recent IRS Notice
announcing amendments to those regulations, would modify certain of the rules
discussed above generally with respect to payments on common stock made after
December 31, 1999. In particular, a payor will be required to withhold 31% of
any payments within the U.S. of dividends on, or proceeds from the sale of,
common stock to a holder (other than an exempt recipient such as a corporation
or a Non-U.S. Holder that provides an appropriate certification) if the holder
fails to furnish its correct taxpayer identification number or otherwise fails
to comply with, or establish an exemption from, the backup withholding tax
requirements. In the case of those payments by a payor within the U.S. to a
foreign partnership (other than payments to a foreign partnership that qualifies
as a withholding foreign partnership within the meaning of such income tax
regulations and payments to a foreign partnership that are effectively connected
with the conduct of a trade or business in the U.S.), the partners of the
partnership will be required to provide a certification in order to establish an
exemption from backup withholding tax and information reporting requirements.
Moreover, a payor may rely on a certification provided by a Non-U.S. Holder only
if the payor does not have actual knowledge or a reason to know that any
information or certification stated in the certificate is unreliable.
PROSPECTIVE PURCHASERS OF COMMON STOCK ARE URGED TO CONSULT THEIR TAX
ADVISORS WITH REGARD TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO
THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER
THE LAWS OF ANY FOREIGN, STATE, LOCAL OR OTHER TAXING JURISDICTION.
69
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated May 11, 1999 (the "Underwriting Agreement"), the underwriters
named below (the "Underwriters") have severally, but not jointly, agreed to
purchase from us the following respective numbers of shares of common stock on a
firm commitment basis at the offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ---------------------------------------------------------------------------------------------------- ------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc............................................................... 1,120,000
Wedbush Morgan Securities Inc....................................................................... 480,000
Crowell, Weedon & Co................................................................................ 50,000
Cruttenden Roth Incorporated........................................................................ 50,000
Hoefer & Arnett Incorporated........................................................................ 50,000
Janney Montgomery Scott Inc......................................................................... 50,000
Ragen Mackenzie Incorporated........................................................................ 50,000
The Seidler Companies Incorporated.................................................................. 50,000
Sutro & Co. Incorporated............................................................................ 50,000
First Security Van Kasper........................................................................... 50,000
------------
Total............................................................................................. 2,000,000
------------
------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the common stock offered hereby if any of the shares are
purchased.
The Underwriters have advised us that they propose to offer the shares to
the public at the offering price set forth on the cover page of this prospectus
and to certain dealers at the same price less a concession not in excess of
$0.27 per share. The Underwriters may allow, and the dealers may reallow, a
concession not in excess of $0.10 per share to certain other dealers. After the
offering, the Underwriters may change the offering price and other selling
terms.
We have granted to the Underwriters an option, exercisable not later than 30
days after the date of the prospectus, to purchase up to 300,000 additional
shares of our common stock at the offering price less the underwriting discounts
and commissions shown below and set forth on the cover page of this prospectus.
If the Underwriters choose to exercise this option, the Underwriters will be
obligated to purchase the additional shares of common stock, and we will be
obligated to sell those shares to the Underwriters. The Underwriters may
exercise this option only to cover over-allotments made in connection with the
sale of common stock offered in this prospectus. If the Underwriters exercise
the option, they will offer the additional shares on the same terms as those on
which it is offering the 2,000,000 shares of common stock.
The following table is a summary of the underwriting discounts and
commissions that we will pay to the Underwriters:
<TABLE>
<CAPTION>
TOTAL
------------------------------
<S> <C> <C> <C>
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
----------- -------------- --------------
Underwriting discounts and commissions paid by us...................... $ 0.45 $ 900,000 $ 1,035,000
</TABLE>
As described in the Underwriting Agreement, we have agreed to reimburse the
Underwriters for their out-of-pocket legal expenses up to $262,500 and to
indemnify the Underwriters against certain liabilities, including liabilities
under the Securities Act. We have been advised that in the opinion of the
70
<PAGE>
SEC our indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that the Underwriters assert
a claim for indemnification against those liabilities, we will, unless in the
opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of competent jurisdiction the question whether our
indemnification is against public policy as expressed in the Securities Act. We
will be bound by the final adjudication of that matter.
The Underwriters have advised us that they do not intend to confirm sales to
any account over which they exercise discretionary authority.
In connection with this offering, the Underwriters and their affiliates may
engage in transactions on NASDAQ that stabilize, maintain or otherwise affect
the market price of our common stock. These transactions may include
stabilization transactions effected in accordance with Rule 104 of Regulation M.
Under Regulation M, the Underwriters and their affiliates may bid for or
purchase our common stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for their own account by selling
more of our common stock in connection with this offering than it is committed
to purchase from us, and in such case may purchase our common stock in the open
market following completion of this offering to cover all or a portion of their
short position. The Underwriters may also cover all or any portion of such short
position, up to 300,000 shares of common stock, by exercising their
over-allotment option referred to above.
In connection with this offering, the Underwriters and their affiliates who
are qualified registered market makers on NASDAQ may engage in passive market
making transactions in our common stock on NASDAQ in accordance with Rule 103 of
Regulation M, during a specified period before the commencement of offers or
sales of our common stock. The passive market making transactions must comply
with applicable volume and price limits and be identified as such. In general, a
passive market maker may display its bid at a price not in excess of the highest
independent bid for such security; if all independent bids are lowered below the
passive market maker's bid, however, such bid must then be lowered when certain
purchase limits are exceeded.
Any of the transactions described in the preceding two paragraphs may result
in the maintenance of the price of our common stock at a level above that which
might otherwise prevail in the open market. None of the transactions described
in the preceding paragraph are required, and if such transactions are
undertaken, they may be discontinued at any time.
FBR Asset Investment Corporation, a real estate investment trust managed by
an affiliate of Friedman, Billings, Ramsey & Co., Inc. ("Friedman, Billings"),
made a loan to us in June 1998. The loan was in the principal amount of $10.0
million and bore interest at 12% per annum. The loan was amended to increase,
effective as of December 31, 1998, the interest rate to 13% per annum payable
monthly plus 4% per annum compounded monthly and to extend the maturity date
until the earlier of a public offering of our common stock and June 3, 1999. As
of May 11, 1999, the principal balance under this loan was approximately $7.7
million. We plan to repay this loan in full with the proceeds of this offering.
In connection with this loan, in December 1998 we issued a warrant to FBR Asset
to purchase 131,096 shares of our common stock (subject to certain adjustments)
at a purchase price of $7.5526 per share. Although the warrant is presently
exercisable, to date, no part of the warrant has been exercised. Futhermore, the
terms of the warrant provide that FBR Asset may not sell, transfer, assign or
hypothocate the warrant or the shares of common stock issuable upon exercise of
the warrant for a period of one year from the date of this prospectus. The
warrant expires in December 2003. The holders of the warrant have certain
registration rights with respect to any shares of common stock to be issued upon
exercise of the warrant. The holders may require us to file one registration
statement under the Securities Act with respect to their shares. The
registration rights related to the warrant will expire in December 2000. In
addition, in connection with our engagement letter with Friedman, Billings,
dated December 15, 1998, we have granted to Friedman, Billings the right to act
as managing
71
<PAGE>
underwriter in connection with any public offering of our equity securities by
us for a period of one year following the completion of this offering.
LEGAL MATTERS
The validity of our common stock offered for sale in this prospectus will be
passed upon for us by White & Case LLP, Los Angeles, California. Certain legal
matters with respect to the offering of our common stock will be passed upon for
the underwriter by Brobeck, Phleger & Harrison LLP, Irvine, California.
EXPERTS
The consolidated financial statements and financial statement schedules
included in this prospectus and elsewhere in the registration statement have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report included herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We are subject to the informational requirements of the Exchange Act and, in
accordance therewith, we file reports, proxy statements and other information
with the SEC. You may inspect and copy these documents at the public reference
facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the SEC's regional offices located at Seven World
Trade Center, 13(th) Floor, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies of this
material from the Public Reference Section of the SEC, at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The SEC maintains a web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of the
SEC's Web site is http://www.sec.gov.
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act, relating to our common stock. This prospectus does not contain
all the information set forth in the registration statement or amendments, if
any, to the registration statement and the exhibits thereto. Certain parts of
the registration statement are omitted from this prospectus in accordance with
the rules and regulations of the SEC. Statements contained in this prospectus as
to the content of any contract document are not necessarily complete. In each
instance in this prospectus that we reference a copy of a contract or other
document filed as an exhibit to the registration statement, the related
statement shall be qualified in all respects by such reference and the exhibits
thereto. For further information, reference is hereby made to the registration
statement and the exhibits thereto.
We are required to furnish holders of our common stock with annual reports
containing audited financial statements with a report thereon by our independent
certified public accountants.
72
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Pro Forma Condensed Consolidated Financial Statement (Unaudited) F-2
Pro Forma Condensed Consolidated Statement of Income for the Year Ended December 31, 1998 (Unaudited) F-3
Notes to Pro Forma Condensed Consolidated Financial Statement (Unaudited) F-4
KENNEDY-WILSON, INC. AND SUBSIDIARIES
Independent Auditors' Report F-5
Consolidated Balance Sheet as of December 31, 1998 and 1997 F-6
Consolidated Statements of Income for the Three Years Ended December 31, 1998 F-7
Consolidated Statements of Stockholders' Equity for the Three Years Ended December 31, 1998 F-8
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1998 F-9
Notes to Consolidated Financial Statements F-10
HEITMAN PROPERTIES LTD.
Independent Auditors' Report F-34
Consolidated Balance Sheets as of June 30, 1998 (Unaudited) and December 31, 1997 and 1996 F-35
Consolidated Statements of Operations for the Six Months Ended June 30, 1998 and 1997 (Unaudited) and for
the Three Years Ended December 31, 1997 F-36
Consolidated Statements of Stockholders' Equity as of June 30, 1998 (Unaudited) and for the Three Years
Ended December 31, 1997 F-37
Consolidated Statements of Cash Flows for the Six Months ended June 30, 1998 and 1997 (Unaudited) and for
the Three Years Ended December 31, 1997 F-38
Notes to Consolidated Financial Statements F-39
</TABLE>
F-1
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENT
(UNAUDITED)
The following unaudited pro forma condensed consolidated statement of income for
the year ended December 31, 1998 is presented as if the acquisition of Heitman
Properties, Ltd. had occurred at January 1, 1998. This pro forma condensed
consolidated financial statement should be read in conjunction with the
historical consolidated financial statements and notes thereto of the Company
and Heitman Properties Ltd. included elsewhere in this Prospectus.
The pro forma condensed consolidated financial statement is not necessarily
indicative of what the actual results of operations would have been had the
Company completed the transaction described above.
F-2
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
------------------------------------------------
OTHER TOTAL
PRO FORMA COMPANY
ADJUSTMENTS PRO FORMA
HISTORICAL ----------- ---------------
KENNEDY
WILSON, INC. HEITMAN
------------ PROPERTIES, LTD.
(A) ----------------
(B)
<S> <C> <C> <C> <C>
REVENUES
Property management fees $14,194 $15,535 $ 1,295(C) $ 31,024
Commission 4,917 4,917
Sales of residential real estate 13,828 13,828
Equity in income of investments with related parties and
non-affiliates 612 612
Proceeds from sale of partnership 4,077 4,077
Gain on sale of commercial real estate 2,654 2,654
Rental income, net 4,583 4,583
Gain on restructured notes receivable 3,911 3,911
Other income 2,096 955 80(C) 3,131
------------ ------- ----------- ---------------
Total revenue 50,872 16,490 1,374 68,737
------------ ------- ----------- ---------------
OPERATING EXPENSES
Commissions and marketing expenses 532 532
Cost of residential real estate sold 12,249 12,249
Compensation and related expenses 14,582 7,688 641(C) 22,911
General and administrative 6,890 8,155 217(C) 10,205
(5,557)(G)
500(F)
Depreciation and amortization 2,059 1,499 (620)(E) 2,938
Interest expense 8,398 1,724(D) 10,122
------------ ------- ----------- ---------------
Total operating expenses 44,710 17,342 (3,095) 58,957
------------ ------- ----------- ---------------
Income before provision for income taxes 6,162 (852) 4,470 9,780
Provision for income taxes 837 1,339(H) 2,176
------------ ------- ----------- ---------------
NET INCOME $ 5,325 $ (852) $ 3,131 $ 7,604
------------ ------- ----------- ---------------
------------ ------- ----------- ---------------
SHARE DATA
Basic net income per share $ 1.22
Basic weighted average shares 6,254,000
Diluted net income per share $ 1.12
Diluted weighted average shares 6,801,000
</TABLE>
F-3
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(A) Kennedy Wilson, Inc. for the year ended December 31, 1998
(B) Heitman Properties, Ltd. unaudited financial statements as of June 30, 1998
(C) To reflect pro forma results of operations of Heitman Properties, Ltd. for
two weeks from July 1, 1998 to the date of acquisition.
(D) To reflect interest expense on note payable to Colony Capital Inc. for the
period from January 1, 1998 to July 16, 1998.
<TABLE>
<CAPTION>
INTEREST
AMOUNT ESTIMATED EXPENSE
ACCOUNT CAPITALIZED LIFE 28 WEEKS
- ------------------------------------------------------------------------------- ------------- ----------- -----------
<S> <C> <C> <C>
Interest ($21 Million at 14% per year) $ 1,583
Amortization of Loan Origination Cost $ 393 18 mos 141
-----------
$ 1,724
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30, 1998
-------------
<S> <C>
(E) Determined as follows:
-- To eliminate historical depreciation and amortization recorded by Heitman Properties, Ltd. $ (1,499)
-- To reflect depreciation and amortization on goodwill management contracts, office relocation
and property and equipment. 879
-------------
$ (620)
-------------
-------------
</TABLE>
<TABLE>
<CAPTION>
ESTIMATED
AMOUNT DEPRECIABLE AMORTIZATION AMORTIZATION
ACCOUNT CAPITALIZED LIFE ONE YEAR 28 WEEKS
- -------------------------------------------------------- -------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
Goodwill $16 Million 30 Yrs $ 533 $ 287
Management Contracts $7 Million 7 Yrs 1,000 538
Property and Equipment $0.5 Million 5 Yrs 100 54
------ -----
$ 1,633 $ 879
------ -----
------ -----
</TABLE>
<TABLE>
<S> <C>
(F) To record service contract between Kennedy Wilson Inc. and Heitman
Financial $ 500
-----------
-----------
(G) To eliminate Heitman Properties, Ltd. corporate cost allocation $ (5,557)
-----------
-----------
(H) To record tax provision at 37% of incremental income $ 1,339
-----------
-----------
</TABLE>
F-4
<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. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
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.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 26, 1999
F-5
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1998
-------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 10,448,000 $ 9,838,000
Cash--restricted (Note 2) 174,000 8,168,000
Accounts receivable 1,018,000 6,674,000
Notes receivable (Notes 3 and 8) 9,546,000 23,115,000
Real estate held for sale (Notes 4 and 9) 18,628,000 122,407,000
Investments with related parties and non-affiliates (Notes 5 and 11) 4,899,000 9,209,000
Contracts, furniture, fixtures and equipment and other assets (Note 6) 1,005,000 9,238,000
Goodwill, net (Note 2) 16,167,000
-------------- --------------
TOTAL ASSETS $ 45,718,000 $ 204,816,000
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 666,000 $ 1,752,000
Accrued expenses and other liabilities 4,553,000 15,721,000
Deferred taxes (Note 12) 628,000
Notes payable (Note 8) 4,764,000 14,291,000
Borrowings under lines of credit (Note 7) 9,039,000 13,514,000
Mortgage loans payable (Note 9) 15,102,000 115,130,000
-------------- --------------
Total liabilities 34,124,000 161,036,000
-------------- --------------
Subordinated debt (Note 10) 21,000,000
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY (Notes 14 and 15)
Preferred stock, $.01 par value; shares authorized: 2,000,000, none issued
Common stock $.01 par value; shares authorized: 10,000,000 in 1998 and
5,000,000 in 1997; shares issued: 6,597,075 in 1998 and 5,923,548 in 1997 59,000 66,000
Additional paid-in capital 23,768,000 28,888,000
Accumulated deficit (10,913,000) (5,970,000)
Notes receivable from stockholders (1,320,000) (204,000)
-------------- --------------
Total stockholders' equity 11,594,000 22,780,000
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 45,718,000 $ 204,816,000
-------------- --------------
-------------- --------------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
KENNEDY-WILSON, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<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 (Notes 2 and 3) 3,057,000 4,036,000 3,911,000
Other income 195,000 916,000 2,096,000
------------- ------------- -------------
Total Revenues 31,967,000 26,999,000 50,872,000
------------- ------------- -------------
OPERATING EXPENSES
Commissions and marketing expenses 1,560,000 928,000 532,000
Cost of residential real estate sold 16,523,000 5,592,000 12,249,000
Cost of residential real estate sold--related parties 209,000
Compensation and related expenses 4,726,000 7,658,000 14,582,000
General and administrative 3,126,000 4,661,000 6,890,000
Depreciation and amortization 268,000 790,000 2,059,000
Interest expense 1,964,000 3,139,000 8,398,000
------------- ------------- -------------
Total Operating Expenses 28,376,000 22,768,000 44,710,000
------------- ------------- -------------
Income Before Provision for Income Taxes and Extraordinary Items 3,591,000 4,231,000 6,162,000
Provision for Income Taxes (Note 12) 60,000 280,000 837,000
------------- ------------- -------------
Income Before Extraordinary Items 3,531,000 3,951,000 5,325,000
Extraordinary Items (Note 17) 79,000
------------- ------------- -------------
NET INCOME $ 3,531,000 $ 4,030,000 $ 5,325,000
------------- ------------- -------------
------------- ------------- -------------
SHARE DATA
Basic net income before extraordinary items per share $ 0.50 $ 0.65 $ 0.85
Basic extraordinary items per share N/A $ 0.01 N/A
Basic net income per share $ 0.50 $ 0.66 $ 0.85
Basic weighted average shares 7,086,848 6,104,497 6,254,470
Diluted net income before extraordinary items per share $ 0.50 $ 0.64 $ 0.78
Diluted extraordinary items per share N/A $ 0.01 N/A
Diluted net income per share $ 0.50 $ 0.65 $ 0.78
Diluted weighted average shares 7,093,958 6,187,280 6,801,356
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
COMMON STOCK RECEIVABLE
--------------------- ADDITIONAL ACCUMULATED FROM
SHARES AMOUNT PAID-IN-CAPITAL DEFICIT STOCKHOLDERS TOTAL
---------- --------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 7,563,236 $ 75,000 $ 22,669,000 $ (14,799,000) $ 7,945,000
Repurchase of common stock (891,000) (9,000) (1,085,000) (1,094,000)
Net income 3,531,000 3,531,000
---------- --------- -------------- -------------- -------------- --------------
Balance, December 31, 1996 6,672,236 66,000 21,584,000 (11,268,000) 10,382,000
Repurchase of common stock (748,688) (7,000) (1,491,000) (1,498,000)
Stock dividend 3,675,000 (3,675,000)
Notes receivable from
stockholders (Note 16) $ (1,320,000) (1,320,000)
Net income 4,030,000 4,030,000
---------- --------- -------------- -------------- -------------- --------------
Balance, December 31, 1997 5,923,548 59,000 23,768,000 (10,913,000) (1,320,000) 11,594,000
Issuance of common stock 808,878 8,000 5,645,000 5,653,000
Repurchase of common stock (135,351) (1,000) (907,000) (908,000)
Stock dividends 382,000 (382,000)
Repayment on notes receivable
from stockholders (Note 16) 1,116,000 1,116,000
Net income 5,325,000 5,325,000
---------- --------- -------------- -------------- -------------- --------------
Balance, December 31, 1998 6,597,075 $ 66,000 $ 28,888,000 $ (5,970,000) $ (204,000) $ 22,780,000
---------- --------- -------------- -------------- -------------- --------------
---------- --------- -------------- -------------- -------------- --------------
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
--------------------------------------
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 items, net (79,000)
Change in assets and liabilities:
Accounts receivable 751,000 (24,000) (5,656,000)
Other assets (720,000) (184,000) (1,403,000)
Accounts payable (191,000) (227,000) 1,086,000
Accrued expenses and other liabilities (937,000) 2,343,000 11,168,000
----------- ----------- ------------
Net Cash Provided By (Used In) Operating Activities 533,000 (2,971,000) 3,658,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of contract, furniture, fixtures and equipment (197,000) (178,000) (7,280,000)
Dispositions of contracts, furniture, fixtures and equipment 559,000 18,000
Purchase and additions to real estate held for sale (21,341,000) (18,841,000) (122,671,000)
Proceeds from sales of real estate held for sale 25,914,000 36,304,000 21,743,000
Proceeds from sale of joint venture 5,348,000
Additions to notes receivable (13,015,000) (26,235,000)
Payments from notes receivable 4,930,000 13,293,000
Additions to goodwill (16,412,000)
Stockholders (loans to) repayments from (1,320,000) 1,116,000
Distributions from joint ventures 20,000 2,775,000 2,271,000
Contributions to joint ventures (3,607,000) (2,153,000) (7,240,000)
----------- ----------- ------------
Net Cash (Used In) Provided By Investing Activities (11,667,000) 21,517,000 (136,049,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of mortgage loans payable 26,577,000 14,320,000 114,679,000
Repayment of mortgage loans payable (30,510,000) (19,734,000) (14,651,000)
Borrowings under lines of credit 15,345,000 14,063,000 40,348,000
Repayment of lines of credit (7,453,000) (13,941,000) (35,873,000)
Borrowings under notes payable 10,128,000 3,737,000 19,740,000
Repayment of notes payable (1,933,000) (7,168,000) (10,213,000)
Issuance of subordinated debt 21,000,000
Cash -- restricted (increase) decrease (217,000) 222,000 (7,994,000)
Common stock (repurchase) issuance (1,094,000) (1,498,000) 4,745,000
----------- ----------- ------------
Net Cash Provided By (Used In) Financing Activities 10,843,000 (9,999,000) 131,781,000
----------- ----------- ------------
Net (decrease) increase in cash (291,000) 8,547,000 (610,000)
CASH, BEGINNING OF YEAR 2,192,000 1,901,000 10,448,000
----------- ----------- ------------
CASH, END OF YEAR $ 1,901,000 $10,448,000 $ 9,838,000
----------- ----------- ------------
----------- ----------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest $ 2,113,000 $ 2,930,000 $ 7,754,000
Interest capitalized $ 57,000 $ 340,000 $ 640,000
Income taxes $ 34,000 $ 246,000 $ 633,000
</TABLE>
See notes to consolidated financial statements.
F-9
<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 $21.0 million.
The Company used the purchase method of accounting to record the transaction.
Accordingly, the results of operations of Heitman Properties, Ltd. (renamed
Kennedy-Wilson Properties, Ltd.) are included in the consolidated financial
statements from the date of acquisition (see Note 19).
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries and joint ventures in
which the Company has a controlling interest. For foreign operations, assets and
liabilities are translated at year-end exchange rates, and income statement
items are translated at average exchange rates prevailing during the year. All
significant inter-company transactions have been eliminated.
REVENUE RECOGNITION--Property management fees are recognized over time as earned
based upon the terms of the management agreement. Brokerage commissions are
generally recognized when all services to be provided by the Company have been
performed and title to real property has passed from the seller to the buyer.
Residential real estate sales revenue and gains on sale of commercial property
are recognized at the close of escrow when title to the real property passes to
the buyer. The Company follows the guidelines for profit recognition as set
forth by Statement of Financial Accounting Standards (SFAS) NO. 66 ACCOUNTING
FOR SALES OF REAL ESTATE. Gains on notes receivable are recognized ratably upon
constructive receipt of cash or a restructured note including a significant cash
component.
INVESTMENTS IN AFFILIATES AND JOINT VENTURES--The Company accounts for
investments in affiliates and joint ventures with a non-controlling interest of
50% or less using the equity method.
ACCOUNTING ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
GOODWILL--The Company's purchase of Heitman Properties, Ltd., a property
management company in July 1998 resulted in goodwill totaling approximately
$16.0 million. Goodwill results from the difference between the purchase price
and the fair value of assets acquired based upon the Purchase Method of
accounting for business combinations under ACCOUNTING PRINCIPALS BOARD OPINION
NUMBER 16. The allocated amount, as determined by Company management, is being
amortized over 30 years using the straight-line method. Goodwill is reviewed for
impairment on a regular basis by Company management by comparison to future
expected undiscounted cash flows. Amortization of goodwill for the year ended
1998 totaled $244,000.
F-10
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
CASH AND CASH EQUIVALENTS--Cash consists of cash and all highly liquid
investments purchased with maturities of three months or less and refundable
deposits in escrow.
RESTRICTED CASH--Restricted cash consists of cash reserves for capital
expenditures, tenant improvements, property taxes and insurance, as required by
the Company's mortgage lenders.
LONG LIVED ASSETS--During 1996, the Company adopted SFAS No. 121, ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
Among other provisions, the statement changed current accounting practices for
the evaluation of impairment of long-lived assets. The adoption did not have a
material effect on the Company's financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The Company reports the fair value of
financial instruments in accordance with SFAS 107, Disclosures about Fair Value
of Financial Instruments. The estimated fair value of the Company's financial
instruments is determined using available market information and appropriate
valuation methodologies. Considerable judgment, however, is necessary to
interpret market data and develop the related estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that could be realized upon disposition of the financial
instruments. The use of different market assumptions or estimation methodologies
may have a material impact on the estimated fair value amounts.
Cash, accounts receivable and accounts payable are carried at their book values
as the recorded amount of these instruments approximates fair market value due
to their short term maturities. Notes receivable approximate market value as
they are negotiated based upon market values of loans with similar
characteristics. Bank lines of credit, and short and long term debt approximate
fair market value as the interest rates are comparable to the rates currently
being offered to the Company.
CONCENTRATION OF CREDIT RISK--Financial instruments that subject the Company to
credit risk consist primarily of accounts and notes receivable and cash and cash
equivalents. Credit risk is generally diversified due to the large number of
entities composing the Company's customer base and their geographic dispersion
throughout the U.S. and in Japan. The Company performs ongoing credit
evaluations of its customers and debtors. Cash and cash equivalents are invested
in institutions insured by government agencies. Certain accounts contain
balances in excess of the insured limits.
INFLATION--The Company's long-term leases contain provisions designed to
mitigate the adverse impact of inflation on its results from operations. Such
provisions include escalation clauses, which generally increase rental rates
during the terms of the respective agreements. Such escalation clauses are often
related to increases in the CPI or similar inflation indices. In addition, many
of the Company's leases and management agreements are for terms of less than ten
years, which permits the Company to seek to increase rents and fees at market
rates if they are below then existing market rates. Many of the Company's leases
require the tenants to pay a pro rata share of operating expenses, including
common area maintenance, real estate taxes, insurance and utilities, thereby
reducing the Company's exposure to increases in costs and operating expenses
resulting from inflation.
EARNINGS PER SHARE--In accordance with SFAS No. 128, EARNINGS PER SHARE, basic
income per share for any period is computed by dividing net income by the
weighted average number of shares of common stock outstanding during such
period. Diluted net income per share for any period is computed by dividing net
income by the weighted average number of shares of common stock and common stock
equivalents outstanding during such period.
F-11
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
The basic weighted average number of shares used to compute net income per share
(adjusted for the 20% stock dividend in 1997 and the 200% and 50% stock
dividends in 1998) was 6,254,470, 6,104,497, and 7,086,848 for the years ended
December 31, 1998, 1997 and 1996, respectively. The diluted weighted average
number of shares used to compute net income per share were 6,801,356, 6,187,280
and 7,093,958 for the years ended December 31, 1998, 1997 and 1996,
respectively.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS--SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INVESTMENTS AND HEDGING ACTIVITIES was issued June 1998, applicable for all
fiscal years beginning after June 15, 1999. At this time, management has not
completed their analysis of this pronouncement's impact on the Company's
financial statements.
RECLASSIFICATION--Certain reclassifications have been made to the 1997 and 1996
balances to conform with the 1998 presentation.
NOTE 3--NOTES RECEIVABLE
Notes receivable consists primarily of non-performing notes and related assets
acquired from financial institutions. A majority of these notes are typically
collateralized by real estate, personal property or guarantees.
F-12
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 4--REAL ESTATE HELD FOR SALE
Real estate held for sale is comprised of commercial, residential properties and
land stated at cost plus additional capital improvements less accumulated
depreciation and amortization of $1,026,000 and $119,000 at December 31, 1998
and 1997 respectively.
Real estate held for sale includes the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
<S> <C> <C>
1997 1998
------------- --------------
COMMERCIAL PROPERTIES AND LAND:
1055 Wilshire Blvd., Los Angeles, California--281,649 Sq. Ft. office building $ 24,937,000
6380 Wilshire Blvd., Los Angeles, California--132,730 Sq. Ft. office building 16,223,000
5900 Sepulveda Blvd., Van Nuys, California--74,428 Sq. Ft. office building 6,771,000
7080 Hollywood Blvd., Los Angeles, California--161,140 Sq. Ft. office building 19,821,000
6255 Sunset Blvd., Los Angeles, California--306,025 Sq. Ft. office building 29,166,000
Zeller, Long Beach, California--1 residential and 2 commercial buildings 41,000
802 Huntington Dr., Monrovia, California--20,876 Sq. Ft. automotive center 1,399,000
1304 15th St., Santa Monica, California--37,000 Sq. Ft. office building $ 3,089,000
Santa Monica, California, lots 4 in 1998, 3 in 1997 1,800,000 2,402,000
4350 11th Ave., Los Angeles, California--9,000 Sq. Ft. office building 438,000 336,000
301 S. Fair Oaks Dr., Pasadena, California--51,710 Sq. Ft. office building 8,808,000 8,886,000
------------- --------------
14,135,000 109,982,000
------------- --------------
RESIDENTIAL PROPERTIES AND LAND:
Vista Paseo Heights, Palm Desert, California--23 housing lots 2,902,000
Cathedral City, California,--112 housing lots 2,386,000
Vulcan Mtn., San Diego, California--155 acres of land 283,000
Riverside, California--3.78 acres of land 87,000
Koala, Hawaii--3,000 acres of land 4,611,000
Pacific Palisades, California--3 residential homes in 1998; 1 in 1997 608,000 2,156,000
Riverside, California--31 housing lots 293,000
Los Angeles, CA--residential home 237,000
Villa Del Este, Corona Del Mar, California--14 condominium units 112,000
Vista Del Valle, Granada Hills, California, 10 housing lots 2,810,000
Juneau, Alaska--9 housing lots 433,000
------------- --------------
4,493,000 12,425,000
------------- --------------
$ 18,628,000 $ 122,407,000
------------- --------------
------------- --------------
</TABLE>
F-13
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 5--INVESTMENTS WITH RELATED PARTIES AND NON-AFFILIATES
The Company has a number of partnerships and joint venture interests ranging
from 6% to 50%, some with former related parties, that were formed to acquire,
manage, develop and or sell real estate assets. These investments are accounted
for under the equity method. Summarized financial data of the ventures are as
follows:
<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
Receivables 32,000 44,000 76,000
Real estate 31,018,000 5,829,000 36,847,000
------------- ------------- -------------
Total assets $ 31,513,000 $ 5,888,000 $ 37,401,000
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES
Accounts payable and accrued expense $ 173,000 $ 38,000 $ 211,000
Mortgages payable 18,354,000 4,480,000 22,834,000
------------- ------------- -------------
Total liabilities 18,527,000 4,518,000 23,045,000
------------- ------------- -------------
PARTNERS' CAPITAL
Kennedy-Wilson 3,118,000 685,000 3,803,000
Related parties 9,868,000 9,868,000
Other partners 685,000 685,000
------------- ------------- -------------
Total partners' capital 12,986,000 1,370,000 14,356,000
------------- ------------- -------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 31,513,000 $ 5,888,000 $ 37,401,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------
WITH RELATED WITH
PARTIES NON-AFFILIATES TOTAL
------------ ------------- ------------
<S> <C> <C> <C>
STATEMENT OF INCOME
Revenues $2,195,000 $ 390,000 $ 2,585,000
Expenses 1,690,000 258,000 1,948,000
------------ ------------- ------------
Net income $ 505,000 $ 132,000 $ 637,000
------------ ------------- ------------
------------ ------------- ------------
Net income allocated to:
Kennedy-Wilson $ 112,000 $ 66,000 $ 178,000
Related parties 393,000 66,000 459,000
Other partners
------------ ------------- ------------
Net income $ 505,000 $ 132,000 $ 637,000
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
F-14
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
<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
Receivables 1,816,000 455,000 2,271,000
Real estate 52,050,000 972,000 53,022,000
------------- ------------- -------------
Total assets $ 57,185,000 $ 2,586,000 $ 59,771,000
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES
Accounts payable and accrued expense $ 2,248,000 $ 524,000 $ 2,772,000
Mortgages payable 43,836,000 43,836,000
------------- ------------- -------------
Total liabilities 46,084,000 524,000 46,608,000
------------- ------------- -------------
PARTNERS' CAPITAL
Kennedy-Wilson 3,509,000 1,390,000 4,899,000
Related parties 7,592,000 7,592,000
Other partners 672,000 672,000
------------- ------------- -------------
Total partners' capital 11,101,000 2,062,000 13,163,000
------------- ------------- -------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 57,185,000 $ 2,586,000 $ 59,771,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-15
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------
WITH RELATED WITH
PARTIES NON-AFFILIATES TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
STATEMENT OF INCOME
Revenues $ 12,913,000 $ 9,284,000 $ 22,197,000
Expenses 12,238,000 7,393,000 19,631,000
------------- ------------- -------------
Net income $ 675,000 $ 1,891,000 $ 2,566,000
------------- ------------- -------------
------------- ------------- -------------
Net income allocated to:
Kennedy-Wilson $ 115,000 $ 1,316,000 $ 1,431,000
Related partners 560,000 560,000
Other partners 575,000 575,000
------------- ------------- -------------
Net income $ 675,000 $ 1,891,000 $ 2,566,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
WITH
NON-AFFILIATES
-----------------
<S> <C> <C>
BALANCE SHEET
ASSETS
Cash and cash equivalents $ 10,588,000
Receivables 3,278,000
Real estate 109,507,000
-----------------
Total assets $ 123,373,000
-----------------
-----------------
LIABILITIES
Accounts payable and accrued expense $ 7,626,000
Mortgages payable 73,342,000
-----------------
Total liabilities 80,968,000
-----------------
PARTNERS' CAPITAL
Kennedy-Wilson 9,209,000
Other partners 33,196,000
-----------------
Total partners' capital 42,405,000
-----------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 123,373,000
-----------------
-----------------
</TABLE>
F-16
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
WITH
NON-AFFILIATES
-----------------
<S> <C>
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>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
F-17
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 7--BORROWINGS UNDER LINES OF CREDIT
In 1998, the Company entered into a loan agreement that provides the Company
with a $21 million revolving credit facility (the "facility"). The facility is
available for acquisitions and working capital. The loans under the facility
bear interest at LIBOR plus 2%, payable monthly. At December 31, 1998, LIBOR was
approximately 5.1%. The facility expires in June 2000. The principal amount of
outstanding loans was $13,057,000 at December 31, 1998 and $8,952,000 at
December 31, 1997.
The Company's Japanese subsidiary has unsecured yen denominated lines of credit
pursuant to which it can borrow up to $1.0 million. At December 31, 1998, yen
borrowings in the principal amount of $457,000 were outstanding under these
lines of credit and $87,000 at December 31, 1997. These borrowings bear interest
rates from 1.9% to 2.6% per annum.
NOTE 8--NOTES PAYABLE
Notes payable were incurred primarily in connection with the acquisition of
notes receivable (See Note 3), and include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998
--------- ----------
<S> <C> <C>
Note payable to FBR Asset Investment Corporation, fixed interest
rate of 17% per annum, 13% payable monthly, 4% payable at
maturity, due in full at the earlier of (i) the closing of a
public offering or (ii) June 3, 1999, whichever comes first $7,500,000
Note payable, fixed interest rate of 12%, interest payable monthly,
due July 1, 1999, collateralized by a note receivable 2,289,000
Note payable, variable interest rate based on Prime Rate plus 1.5%,
payable monthly, 9.25% at December 31, 1998, due April 30, 1999 502,000
Note payable, variable interest based on Prime Rate plus 4%, 11.75%
at December 31, 1998, collateralized by a 3,000-acre parcel of
land in Hawaii due April 30, 1999 4,000,000
Note payable, variable interest rate based on Prime Rate plus 1.5%,
payable monthly, 10% at December 31, 1997 due June 1998 $1,000,000
Note payable, variable interest rate based on Prime Rate plus 1.5%,
payable monthly, 10% at December 31, 1997 due May 1998 3,764,000
--------- ----------
$4,764,000 $14,291,000
--------- ----------
--------- ----------
</TABLE>
F-18
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 9--MORTGAGE LOANS PAYABLE
Mortgage loans payable include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998
------------ -----------
<S> <C> <C>
COMMERCIAL PROPERTIES:
Mortgage note payable, variable interest based on the LIBOR plus
1.75%, 7.50% at December 31, 1998, principal and interest
payable monthly, due December 1, 2004, collateralized by 301
S. Fair Oaks., Pasadena, California $ 7,300,000 $ 7,613,000
Mortgage note payable, fixed interest of 10%, principal and
interest payable from excess cash flow as defined, due
November 24, 2007, collateralized by 301 S. Fair Oaks.,
Pasadena, California 1,250,000 1,250,000
Mortgage note payable, variable interest based on LIBOR plus
3.5%, 8.75% at December 31, 1998, principal and interest
payable monthly, due March 31, 2001, collateralized by 6380
Wilshire., Los Angeles, California 13,263,000
Mortgage note payable, variable interest based on LIBOR plus 4%,
9.22% at December 31, 1998, interest payable monthly, due
March 31, 2001, secured by common shares of the single purpose
entity holding title to 6380 Wilshire., Los Angeles,
California 2,561,000
Mortgage note payable, variable interest base on Prime Rate plus
1.5%, 9.25% at December 31, 1998, principal and interest
payable monthly, due January 30, 2001, collateralized by 5900
Sepulveda., Los Angeles, California 4,951,000
Mortgage note payable, variable interest based on LIBOR plus 4%,
9.22% at December 31, 1998, interest payable monthly, due
January 23, 2001, secured by common shares of the single
purpose entity holding title to 5900 Sepulveda., Los Angeles,
California 1,610,000
Mortgage note payable, variable interest based on LIBOR plus
4.88%, 10.44% at December 31, 1998, principal and interest
payable monthly, due February 28, 2001, collateralized by 1055
Wilshire, Los Angeles, California 10,894,000
Mortgage note payable, variable interest based on LIBOR plus
2.5%, 8.10% at December 31, 1998, interest payable monthly,
due February 28, 2001, collateralized by 1055 Wilshire, Los
Angeles, California 7,948,000
Mortgage note payable, variable interest based on LIBOR plus 4%,
9.22% at December 31, 1998, principal and interest payable
monthly, due February 28, 2001, secured by common shares of
the single purpose entity holding title to 1055 Wilshire., Los
Angeles, California 4,688,000
</TABLE>
F-19
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
Mortgage note payable, variable interest base on the monthly
weighted average interest rate for the Eleventh District
Savings and Loan Associations plus 2.5%, 10% at December 31,
1998, principal and interest payable monthly, due May 1, 2002,
collateralized by an automotive center in Monrovia, California 1,096,000
Mortgage note payable, variable interest base on LIBOR plus
3.56%, 9.12% at December 31, 1998, principal and interest
payable monthly, due September 11, 2001, collateralized by
6255 Sunset, Los Angeles, California 28,500,000
Mortgage note payable, variable interest base on LIBOR plus 4%,
9.22% at December 31, 1998, principal and interest payable
monthly, due September 15, 2001, secured by common shares of
the single purpose entity holding title to 6255 Sunset., Los
Angeles, California 5,300,000
Mortgage note payable, variable interest base on LIBOR plus
3.56%, 9.12% at December 31, 1998, principal and interest
payable monthly, due September 11, 2001, collateralized by
7080 Hollywood, Los Angeles, California 16,800,000
Mortgage note payable, variable interest base on LIBOR plus 4%,
9.22% at December 31, 1998, principal and interest payable
monthly, due August 30, 2001, secured by common shares of a
single purpose entity holding title to 7080 Hollywood., Los
Angeles, California 3,359,000
Mortgage note payable, variable interest based on LIBOR, 8.32%
at December 31, 1997, principal and interest payable monthly,
due September 1, 2003, collateralized by 1304 15th Street.,
Santa Monica, California 2,952,000
Mortgage note payable, variable interest based on Prime Rate
plus 1%, 9.50% at December 31, 1998, principal and interest
payable monthly, due September 1, 2003, collateralized by 15th
Street lot., Santa Monica, California 885,000
------------ -----------
12,387,000 109,833,000
------------ -----------
</TABLE>
F-20
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
RESIDENTIAL PROPERTIES:
Mortgage note payable, variable interest base on Prime Rate plus
1.25%, 9% at December 31, 1998, principal and interest payable
monthly, due March 1, 1999, collateralized by 23 housing lots
in Palm Desert, California 2,191,000
Mortgage note payable, variable interest base on Prime Rate plus
1.5%, 9.25% at December 31, 1998, interest payable monthly,
due March 19, 1999, collateralized by three single family
homes located in Pacific Palisades, California 1,628,000
Mortgage note payable, variable interest base on Prime Rate plus
1%, 8.75% at December 31, 1998, interest payable monthly, due
November, 20 1999, collateralized by 112 housing lots in
Cathedral City, California 1,478,000
Mortgage note payable, variable interest base on Prime Rate plus
4%, 9.25% at December 31, 1997, principal and interest payable
monthly, due October 31, 1999, collateralized by 10
residential homes, Granada Hills, California 2,294,000
Mortgage note payable, variable interest base on Prime Rate plus
1.5%, interest payable monthly, due November, 20 1999,
collateralized by 14 condominium units, Corona Del Mar,
California 421,000
------------ -----------
2,715,000 5,297,000
------------ -----------
Total Mortgage Loans Payable $ 15,102,000 $115,130,000
------------ -----------
------------ -----------
</TABLE>
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:
<TABLE>
<S> <C>
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
-----------
-----------
</TABLE>
F-21
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 10--SUBORDINATED DEBT
In July 1998, the Company incurred $21 million in subordinated debt to finance
its purchase of Heitman Properties, Ltd. The debt has a fixed interest rate of
14%, payable monthly and a maturity date of January 15, 2000. The Company has
the option to prepay $7 million after January 15, 1999 and before July 16, 1999
and the option to prepay $14 million thereafter. The debt is secured by the
common stock of a wholly-owned subsidiary Kennedy-Wilson Properties, Ltd.
NOTE 11--RELATED PARTY TRANSACTIONS
On November 5, 1998, Goodwin Gaw resigned from his position as a member of our
Board of Directors. On November 10, 1998, we purchased from Mr. Gaw 135,000
shares (as adjusted for the December 15, 1998 50% stock dividend) of our common
stock for $6.716 per share for a total of $906,750. The closing price for our
shares on the NASDAQ National Market on that date was $7.281 per share. All
135,000 shares were subsequently retired. As at December 31, 1998 Mr. Gaw no
longer had an ownership interest in the Company, and had resigned from his
positions with the Company.
In March 1998, the Company acquired 40% interest in a joint venture Beverly
Crescent, LLC, with a former related party. The joint venture which purchased a
note collateralized by a hotel in Beverly Hills, CA. The Company's original
investment was approximately $300,000. In May 1998, the Company sold its
interest in the joint venture and recorded a gain of approximately $298,000.
In January 1998, the Company acquired a 15% interest in a joint venture Downtown
Properties, NY. LLC, with a former related party, which owns a commercial
property with approximately 1.0 million square foot of rental space, located in
Manhattan, New York. The Company's investment at December 31, 1998 was
approximately $4.2 million.
In 1998, the firm of Kulik, Gottesman & Mouton Ltd., was paid a total of
$496,000 in attorney fees. In addition, Kent Mouton, a partner in the firm and a
member of the Company's Board of Directors, was paid a total of $27,500 in
director's fees. For 1997, the amounts were $470,000 and $21,000, respectively.
In 1997, the Company entered into a joint venture with parties who are
affiliated with Goodwin Gaw, who at that time, was one of the Company's Managing
Directors, a member of the Board of Directors, and a significant stockholder.
The joint venture was formed to invest in a Los Angeles office building. See
Note 5.
During 1998 and 1997, the Company received brokerage and leasing commissions
from affiliates and partnerships with related parties in the amounts of
$1,201,000 and $894,000 respectively.
During 1998 and 1997, the Company received $179,000 and $156,000, respectively,
in commissions from the sale of properties owned by a partnership which includes
William J. McMorrow, the Company's Chief Executive Officer and Chairman of the
Board, and Lewis A. Halpert, a director, Executive Managing Director and
President of the Company's Brokerage Group, as principals. The Company was also
reimbursed $210,000 for marketing expenses in 1997.
In 1996, the Company accrued and subsequently paid $209,000 as profit
participation to William J. McMorrow and Lewis A. Halpert for a loan advanced to
the Company in 1995. The loan terms were reviewed and approved by disnterested
members of the Company's Board of Directors.
F-22
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 12--INCOME TAXES
The provisions for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
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
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-23
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
The following summarizes the effect of deferred income tax items and the impact
of "temporary differences" between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured by tax laws. Temporary
differences and carryforwards which give rise to deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------------- ----------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Prepaid expenses $ (117,000) $ (208,000)
Accrued reserves $ 110,000 $ 267,000
Deferred auction marketing expenses 22,000 51,000
Foreign subsidiary 1,647,000
Deferred gain on sale of asset (791,000)
Asset basis and depreciation differences 372,000 (3,454,000)
Charitable contribution carryover 26,000
Federal net operating loss carryover 1,719,000 74,000
Valuation allowance (1,341,000)
------------- ----------- ------------- -------------
Total $ 908,000 $ (908,000) $ 2,039,000 $ (3,662,000)
------------- ----------- ------------- -------------
------------- ----------- ------------- -------------
</TABLE>
As of December 31, 1998, the Company has available a net operating loss
carryforward approximately $219,000 to offset future federal taxable income.
This carryforward expires through the year 2011. The Company has tax credits to
carryforward of approximately $173,000 to offset future federal income taxes.
NOTE 13--COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS--Future minimum rental commitments, net of sublease income, as
of December 31, 1998 under the non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1999 $ 1,865,000
2000 1,748,000
2001 1,687,000
2002 933,000
2003 612,000
Thereafter
------------
Future minimum lease payments $ 6,845,000
------------
------------
</TABLE>
Approximately $2,627,000 is due the Company in years 1999 through 2002 under
sublease agreements.
Rental expense amounted to $931,000, $433,000, and $200,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
EMPLOYMENT AGREEMENTS--The Company has entered into employment agreements with
all of its principal officers which provide for annual base compensation in the
aggregate amount of $1,255,000 and expire at various dates through December
1999. The employement agreements provide for the payment of an annual bonus
based upon the achievement of certain agreed-upon earnings objectives. The
Company also has employment agreements with various other non-officer employees
which provide
F-24
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
for minimum annual compensation of $2,021,000 in total, and expiring at various
dates through December 1999.
LITIGATION--The Company is currently a defendant in certain routine litigation
arising in the ordinary course of business. It is management's opinion that the
outcome of these actions will not have a material effect on the financial
position or results of operations of the Company.
NOTE 14--STOCK OPTION PLANS AND WARRANTS
The Company currently has the 1992 Incentive and Non-statutory Stock Option
Plan, which includes a Plan A and a Plan B and the 1992 Non-Employee Director
Stock Option Plan ("Plan C"). An aggregate of 1,080,000 shares of common stock
are reserved for issuance under Plan A and B. The Company has 81,000 shares of
common stock reserved for issuance under Plan C. Plan A permits the granting of
Incentive Stock Options to employees, including employee-directors. Plan B
permits the granting of nonstatutory stock options to employees, including
employee-directors and consultants. Plan C permits the granting of options to
non-employee-directors. Options granted under Plan A and B have an option price
of 100% of the fair market value of the common stock on the date of grant. Under
Plan C each director, upon being elected to the Board of Directors, is
automatically granted an option to purchase 13,500 shares at the fair market
value at the date of grant. Additionally, each director is granted an option to
purchase an additional 540 shares at the fair market value on the date of grant
when re-elected. The vesting schedule for options granted under Plan A and Plan
B is determined by a committee of the Board of Directors and the Compensation
Committee of the Board of Directors is currently responsible. Options granted
under Plan C become exercisable on the first anniversary of the date of the
initial grant provided that the optionee continues to serve as a director for at
least one year from the date of such initial grant. Options granted under Plan A
may be exercised for a period of up to five years from the grant date; options
granted under Plan B may be exercised for a period of up to 10 years from the
grant date. Under Plan C, options expire on the earlier of the tenth anniversary
of the date of grant and 90 days after the individual ceases to be a director of
the Company.
F-25
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
Details of activity under the plans for the years ended December 31, 1996, 1997
and 1998 are as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISE PRICE WEIGHTED AVERAGE
STOCK OPTIONS OPTIONS PER SHARE EXERCISE PRICE
- ---------------------------------------------- ----------- -------------- -----------------
<S> <C> <C> <C>
Balance January 1, 1996 163,782 $ 12.96-$0.93 $ 8.11
Granted 162,540 $ 1.55-$0.95 $ 1.23
Forfeited (28,836) $ 12.96 $ 12.96
-----------
Balance December 31, 1996 297,486 $ 12.96-$0.93 $ 3.72
Granted 558,000 $ 3.72-$2.17 $ 2.61
Forfeited (23,166) $ 12.96-$2.17 $ 12.96
-----------
Balance December 31, 1997 832,320 $ 12.96-$2.17 $ 2.72
Granted 420,900 $ 3.67-$8.33 $ 6.74
Exercised (120,450) $ 0.95-$3.73 $ 1.63
Forfeited (16,200) $ 3.01-$7.41 $ 3.74
-----------
Balance December 31, 1998 1,116,570 $ 0.95-$8.33 $ 4.11
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
RANGE OF NUMBER OF WEIGHTED AVERAGE EXERCISABLE
EXERCISE OUTSTANDING SHARES WEIGHTED AVERAGE REMAINING SHARES
PRICES AT 12/31/98 EXERCISE PRICE CONTRACTUAL LIFE AS OF 12/31/98
- -------------- ------------------ ----------------- ------------------- -----------------
<S> <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 pro forma basis at December 31, 1998 would
have been $4,114,085. In addition, on a pro forma basis, the Company's basic and
diluted net income per share at December 31, 1998, would have been $0.66 and
$0.60, respectively. The effect for 1997 and 1996, was not disclosed as it was
not material.
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: (a) no dividend yield, (b) expected volatility of the Company's
stock of 63%, (c) risk free interest rate of 4.75%, (d) expected option life of
three years. The effects of applying SFAS No. 123 may not be representative of
the effects on disclosed pro forma net income for future years because options
vest over several years and additional awards can be made each year.
F-26
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 15--CAPITAL STOCK TRANSACTIONS
ISSUANCE OF CAPITAL STOCK AND WARRANTS
In July 1998, Colony Investors III, L.P. acquired a 10% equity position in the
Company. The purchase involved a private placement sale of 660,128 shares of the
Company's common stock and warrants exercisable for seven years to purchase
198,039 shares of the Company's common stock.
In June 1998, as part of the loan (see Note 8) obtained from FBR Assets
Investment Corporation, the Company issued warrants of 131,096 shares which
represent 2% of the outstanding shares on a fully diluted bases on June 3, 1998.
The warrants have an exercise price of $7.56 per share which reflects the
average of the closing price for a share of Common Stock on NASDAQ for the
twenty business days proceeding December 4, 1998. The warrants have an
expiration date of June 3, 2003.
STOCK REPURCHASE
In November 1998, the Company purchased 90,000 shares of the Company's stock
from a former officer and director. (Note 11)
STOCK DIVIDEND
In December 1998, the Company declared a 3 for 2 stock split in the form of a
50% dividend. In March 1998, the Company declared a 3 for 1 stock split in the
form of a 200% stock dividend. In October 1997, the Company declared a twenty
percent stock dividend. All historical share and per share amounts have been
retroactively restated to reflect the dividends.
INCREASE IN AUTHORIZED CAPITAL
On April 29, 1998 at a Regular Meeting of the Company's stockholders, the
Company's Certificate of Incorporation was amended to increase the authorized
capital stock to 10 million of common shares and 2 million preferred shares. On
December 15, 1997, at a Special Meeting of the Stockholders, an amendment to the
Company's Certificate of Incorporation was passed effecting an increase to the
number of authorized shares from 2,500,000 to 6,000,000, consisting of 5,000,000
shares of common stock and 1,000,000 shares of preferred stock.
NOTE 16--EMPLOYEE BENEFIT ARRANGEMENTS
EMPLOYEE PROFIT SHARING PLAN
The Company maintains a profit sharing plan covering all full time employees
over the age of 21, who have completed three months of service prior to January
1 and July 1 of each year. Contributions to the profit sharing plan are made
solely at the discretion of the Company's Board of Directors. No contributions
were made for the years ended December 31, 1998, 1997 and 1996.
In addition, the Company has a qualified profit sharing plan under provisions of
Section 401(k) of the Internal Revenue Code. Under this plan, participants are
able to make salary deferral contributions of up to 15% of their total
compensation, up to a specified maximum. The 401(k) plan also includes
provisions which authorize the Company to make discretionary contributions.
During 1998 and 1997 the Company made matching contributions of $27,000 and
$24,000, respectively to this plan.
F-27
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
DEFERRED COMPENSATION PLAN
In 1997, the Company established a non-qualified deferred compensation plan to
provide specified benefits to a select group of management or highly compensated
employees and directors who contribute materially to the continued growth,
development and future business success of the Company. Under this plan,
participants are able to make salary deferral contribution of up to 100% of
their total compensation. The plan also includes provisions which authorize the
Company to make discretionary contributions. During 1998 and 1997, the Company
made matching contributions of $1,078,000 and $314,000, respectively.
NOTES RECEIVABLE FROM STOCKHOLDERS
In December 1997, a group of key employees, including its principal executive
officers, purchased 73,314 shares of the Company's outstanding stock for cash in
a private transaction with an institutional investor. The purchase represents
approximately 5.6% of the Company's outstanding shares. The Company provided
recourse loans for the employees to purchase the stock totaling approximately
$1.3 million. The terms of the notes receivable are Prime plus 1% (9.5% at
December 31, 1997) interest payable semi-annually with a maturity date of the
earlier of 3 years, or at termination of employment, or sale of stock by the
employee. As at December 31, 1998 and 1997 $204,000 and $1,320,000 were
outstanding on these loans, respectively.
NOTE 17--EXTRAORDINARY ITEMS
During 1997, the Company recognized a $79,000 extraordinary gain comprised of a
$288,000 gain from debt extinguishment and a $209,000 loss from loan prepayment
penalties.
F-28
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 18--SEGMENT INFORMATION
The Company's business activities currently consist of property management,
commercial and residential brokerage, and various type of real estate
investments.
In the 1998 property management segment, approximately $7.4 million or 52% of
the fees are generated by property management contracts with Heitman Financial
Ltd.
The following tables reconcile the Company's income and expense activity for the
year ended December 31, 1996 and balance sheet data as of December 31, 1996.
1996 RECONCILIATION OF REPORTABLE SEGMENT INFORMATION
<TABLE>
<CAPTION>
BROKERAGE INVESTMENTS CORPORATE CONSOLIDATED
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 5,888,000 $ 25,983,000 $ 96,000 $ 31,967,000
Operating expenses 5,087,000 20,037,000 3,252,000 28,376,000
------------ ------------- ------------- -------------
Income before provision for income taxes 801,000 5,946,000 (3,156,000) 3,591,000
Provision for income taxes 60,000 60,000
------------ ------------- ------------- -------------
Net income $ 801,000 $ 5,946,000 $ (3,216,000) $ 3,531,000
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
BROKERAGE INVESTMENTS CORPORATE CONSOLIDATED
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
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>
F-29
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
The following tables reconcile the Company's income and expense activity for the
year ended December 31, 1997 and balance sheet data as of December 31, 1997.
1997 RECONCILIATION OF REPORTABLE SEGMENT INFORMATION
<TABLE>
<CAPTION>
BROKERAGE INVESTMENTS CORPORATE CONSOLIDATED
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 5,895,000 $ 21,085,000 $ 19,000 $ 26,999,000
Operating expenses 4,719,000 12,502,000 5,547,000 22,768,000
------------ ------------- ------------- -------------
Income before provision for income taxes 1,176,000 8,583,000 (5,528,000) 4,231,000
Provision for income taxes 280,000 280,000
------------ ------------- ------------- -------------
Income before provision for extraordinary items 1,176,000 8,583,000 (5,808,000) 3,951,000
Extraordinary items 213,000 (134,000) 79,000
------------ ------------- ------------- -------------
Net income $ 1,176,000 $ 8,796,000 $ (5,942,000) $ 4,030,000
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
BROKERAGE INVESTMENTS CORPORATE CONSOLIDATED
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
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
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
F-30
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
The following tables reconcile the Company's income and expense activity for the
year ended December 31, 1998 and balance sheet data as of December 31, 1998.
1998 RECONCILIATION OF REPORTABLE SEGMENT INFORMATION
<TABLE>
<CAPTION>
PROPERTY
MANAGEMENT BROKERAGE INVESTMENTS CORPORATE CONSOLIDATE
------------- ------------ ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 14,194,000 $ 4,917,000 $ 31,604,000 $ 157,000 $ 50,872,000
Operating expenses 8,311,000 3,182,000 22,250,000 10,967,000 44,710,000
------------- ------------ ------------- -------------- -------------
Income before provision for income
taxes 5,883,000 1,735,000 9,354,000 (10,810,000) 6,162,000
Provision for income taxes 837,000 837,000
------------- ------------ ------------- -------------- -------------
Net income $ 5,883,000 $ 1,735,000 $ 9,354,000 $ (11,647,000) $ 5,325,000
------------- ------------ ------------- -------------- -------------
------------- ------------ ------------- -------------- -------------
</TABLE>
<TABLE>
<CAPTION>
MANAGEMENT BROKERAGE INVESTMENTS CORPORATE CONSOLIDATED
------------- ------------ -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Total assets $ 27,697,000 $ 2,368,000 $ 160,537,000 $ 14,214,000 $ 204,816,000
------------- ------------ -------------- ------------- --------------
------------- ------------ -------------- ------------- --------------
Total liabilities $ 3,111,000 $ 959,000 $ 128,034,000 $ 28,932,000 $ 161,036,000
Subordinated debt 21,000,000 21,000,000
Stockholders' equity 24,586,000 1,409,000 32,503,000 (35,718,000) 22,780,000
------------- ------------ -------------- ------------- --------------
Total liabilities and stockholders'
equity $ 27,697,000 $ 2,368,000 $ 160,537,000 $ 14,214,000 $ 204,816,000
------------- ------------ -------------- ------------- --------------
------------- ------------ -------------- ------------- --------------
</TABLE>
F-31
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 19--UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
The following pro forma consolidated statement of income give effect to the
acquisition of all of the outstanding shares of Heitman Properties, Ltd, a
property management company, in July 1998. The pro forma adjustments are based
upon available information and certain assumptions that the Company believes are
reasonable. This unaudited pro forma condensed consolidated information does not
purport to represent what the actual results of operations of the Company would
have been assuming the acquisition had been completed as set forth above, nor do
they purport to predict the results of operations for future periods.
<TABLE>
<CAPTION>
1997 1998
PRO FORMA PRO FORMA
------------- -------------
<S> <C> <C>
Total Revenue $ 63,525,000 $ 68,737,000
Total Operating Expenses 50,074,000 58,957,000
------------- -------------
Income Before Income Taxes 13,451,000 9,780,000
Provision for Income Taxes 3,691,000 2,176,000
------------- -------------
Net Income $ 9,760,000 $ 7,604,000
------------- -------------
------------- -------------
Share data
Pro forma basic net income per share $ 1.60 $ 1.22
Pro forma basic weighted average shares 6,104,497 6,254,470
Pro forma diluted net income per share $ 1.58 $ 1.12
Pro forma diluted weighted average shares 6,187,280 6,801,356
</TABLE>
F-32
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 20--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 taxes and extraordinary
items 636,000 199,000 532,000 2,864,000
Provision for income taxes 50,000 50,000 65,000 115,000
------------ ------------ ------------ -------------
Income before extraordinary items 586,000 149,000 467,000 2,749,000
Extraordinary items -- 288,000 -- (209,000)
------------ ------------ ------------ -------------
Net income $ 586,000 $ 437,000 $ 467,000 $ 2,540,000
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
SHARE DATA
Basic 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 (I) DEC. 31 (I)
------------ ------------ ------------- -------------
<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 taxes 772,000 238,000 1,702,000 3,450,000
Provision for income taxes 98,000 36,000 311,000 392,000
------------ ------------ ------------- -------------
Net income $ 674,000 $ 202,000 $ 1,391,000 $ 3,058,000
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
SHARE DATA
Basic net income per share $ 0.11 $ 0.03 $ 0.21 $ 0.46
Basic weighted average shares 5,924,800 5,954,943 6,520,855 6,606,858
Diluted net income per share $ 0.11 $ 0.03 $ 0.20 $ 0.43
Diluted weighted average shares 6,366,289 6,583,598 7,093,199 7,150,513
</TABLE>
- ------------------------
(i) includes acquisition of Heitman Properties, Ltd.
F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder
of Heitman Properties Ltd.
We have audited the accompanying consolidated balance sheets of Heitman
Properties Ltd. (an Illinois Corporation) and subsidiaries (the "Company") as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholder's equity, and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Heitman
Properties Ltd. and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations, and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
July 10, 1998
F-34
<PAGE>
HEITMAN PROPERTIES LTD.
(A WHOLLY OWNED SUBSIDIARY OF HEITMAN FINANCIAL LTD.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1996 1997 1998
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ 53,000 $ 157,000 $ 149,000
Commissions and fees receivable, related party (Note
3) 3,594,000 3,696,000 1,393,000
Prepaid and other 688,000 659,000 226,000
---------- ---------- ----------
Total current assets 4,335,000 4,512,000 1,768,000
---------- ---------- ----------
Advances to affiliate (Note 2) 1,993,000 5,668,000 8,946,000
---------- ---------- ----------
Property and equipment--
Net of accumulated depreciation and
amortization (Note 4) 2,526,000 2,174,000 1,809,000
---------- ---------- ----------
Property management contracts--
Net of amortization (Note 2) 26,388,000 11,558,000 10,453,000
---------- ---------- ----------
TOTAL ASSETS $35,242,000 $23,912,000 $22,976,000
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 871,000 $ 854,000 $ 591,000
Accrued salaries and bonuses 1,338,000 1,259,000 1,438,000
---------- ---------- ----------
Total current liabilities 2,209,000 2,113,000 2,029,000
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
Stockholder's equity 33,033,000 21,799,000 20,947,000
---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $35,242,000 $23,912,000 $22,976,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-35
<PAGE>
HEITMAN PROPERTIES LTD.
(A WHOLLY OWNED SUBSIDIARY OF HEITMAN FINANCIAL LTD.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME
Property management fees--related party
(Note 3) $40,175,000 $35,980,000 $ 30,922,000 $17,430,000 $14,638,000
Other--related part (Note 3):
Leasing commissions, net 1,902,000 1,755,000 2,526,000 1,113,000 897,000
Construction and development 3,165,000 3,673,000 2,480,000 1,080,000 713,000
Accounting fees 575,000 809,000 585,000 295,000 227,000
Other 17,000 5,000 13,000 10,000 15,000
----------- ----------- ------------ ----------- -----------
Total income 45,834,000 42,222,000 36,526,000 19,928,000 16,490,000
----------- ----------- ------------ ----------- -----------
EXPENSES
Compensation and related expenses 19,969,000 20,299,000 15,789,000 8,116,000 7,688,000
General and administrative 6,116,000 4,618,000 3,991,000 1,927,000 1,707,000
Rent, related party (Notes 3 and 6) 3,981,000 2,396,000 1,976,000 1,016,000 891,000
Management fees and administrative,
related party (Note 3) 12,568,000 14,369,000 13,150,000 6,583,000 5,557,000
Depreciation and amortization 2,718,000 2,953,000 2,854,000 1,514,000 1,499,000
Provision for loss on note receivable
(Note 7) 2,000,000
Provision for loss on management
contracts (Note 2) 10,000,000
----------- ----------- ------------ ----------- -----------
Total expenses 45,352,000 46,635,000 47,760,000 19,156,000 17,342,000
----------- ----------- ------------ ----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR
(BENEFIT IN LIEU OF) INCOME TAXES 482,000 (4,413,000) (11,234,000) 772,000 (852,000)
PROVISION FOR (BENEFIT IN LIEU OF) INCOME
TAXES (Note 5) 232,000 (232,000) 309,000
----------- ----------- ------------ ----------- -----------
NET INCOME (LOSS) $ 250,000 $(4,181,000) $(11,234,000) $ 463,000 $ (852,000)
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-36
<PAGE>
HEITMAN PROPERTIES LTD.
(A WHOLLY OWNED SUBSIDIARY OF HEITMAN FINANCIAL LTD.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
THREE YEARS ENDED DECEMBER 31, 1997 AND
THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
--------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1995 $ 40,000 $ 35,476,000 $ 1,448,000 $ 36,964,000
Net income 250,000 250,000
--------- ------------- -------------- -------------
Balance, December 31, 1995 40,000 35,476,000 1,698,000 37,214,000
Net loss (4,181,000) (4,181,000)
--------- ------------- -------------- -------------
Balance, December 31, 1996 40,000 35,476,000 (2,483,000) 33,033,000
Net loss (11,234,000) (11,234,000)
--------- ------------- -------------- -------------
Balance, December 31, 1997 40,000 35,476,000 (13,717,000) 21,799,000
Net loss (Unaudited) (852,000) (852,000)
--------- ------------- -------------- -------------
Balance, June 30, 1998
(Unaudited) $ 40,000 $ 35,476,000 $ (14,569,000) $ 20,947,000
--------- ------------- -------------- -------------
--------- ------------- -------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE>
HEITMAN PROPERTIES LTD.
(A WHOLLY OWNED SUBSIDIARY OF HEITMAN FINANCIAL LTD.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 250,000 $(4,181,000) $(11,234,000) $ 463,000 $ (852,000)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization 2,718,000 2,953,000 2,854,000 1,514,000 1,499,000
Provision for (benefit in lieu
of) income taxes 232,000 (232,000) 309,000
Provision for loss on note
receivable 2,000,000
Provision for loss on management
contracts 10,000,000
Decrease (increase) in:
Accounts receivable (515,000) (1,313,000) (102,000) 3,032,000 2,303,000
Prepaid and other assets (586,000) 240,000 29,000 (327,000) 433,000
Accounts payable and accrued
expenses (414,000) 181,000 (17,000) (459,000) (263,000)
Accrued salaries and bonuses (351,000) (79,000) (937,000) 179,000
---------- ---------- ----------- ---------- ----------
Net cash provided by (used in)
operating activities 1,685,000 (703,000) 1,451,000 3,595,000 3,299,000
---------- ---------- ----------- ---------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Expenditures for property and
equipment (572,000) (1,179,000) (424,000) (146,000) (29,000)
Guaranteed property management
fees 412,000 1,620,000 2,752,000
---------- ---------- ----------- ---------- ----------
Net cash (used in) provided by
investing activities (160,000) 441,000 2,328,000 (146,000) (29,000)
---------- ---------- ----------- ---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
(Advances to) repayments from
affiliate (1,452,000) 175,000 (3,675,000) (3,046,000) (3,278,000)
---------- ---------- ----------- ---------- ----------
Net increase (decrease) in cash 73,000 (87,000) 104,000 403,000 (8,000)
CASH, BEGINNING OF PERIOD 67,000 140,000 53,000 53,000 157,000
---------- ---------- ----------- ---------- ----------
CASH, END OF PERIOD $ 140,000 $ 53,000 $ 157,000 $ 456,000 $ 149,000
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-38
<PAGE>
HEITMAN PROPERTIES LTD.
(A WHOLLY OWNED SUBSIDIARY OF HEITMAN FINANCIAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997 AND
THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
1. ORGANIZATION
ORGANIZATION--Heitman Properties Ltd. ("HPL," or the "Company") is a 100% owned
subsidiary of Heitman Financial Ltd. ("HFL"), which in turn is a 100% owned
subsidiary of United Asset Management Corporation ("UAM"). The Company provides
commercial real estate services in the United States. Its principal lines of
business include property management, brokerage, infrastructure management, and
leasing services.
As a routine part of the Company(1)s operations, HPL provides on-site personnel
to maintain properties under management. These services include, although are
not limited to, janitorial, engineering and security. Based upon contractual
arrangements with the property owners, the Company is reimbursed by the
properties for the actual cost of its employees.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION--The accompanying consolidated financial statements include the
accounts of the Heitman Properties Ltd. and its wholly-owned subsidiaries.
Material intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION--The Company recognizes fees from property management
services and infrastructure management services over the terms of the respective
management contracts. Most of the property management contracts are cancelable
at will or with 30 days notice. The infrastructure management contracts
generally range from three to five years.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents consist of cash and
short-term, highly liquid investments with maturities of 90 days or less when
purchased.
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS--Furniture and equipment are
stated at cost. Depreciation is computed using the straight-line method over
useful lives ranging from 3 to 10 years. Leasehold improvements are amortized
over the lease term.
ADVANCES TO AFFILIATE--Advances are between HFL and HPL, are non-interest
bearing and have no stated terms for repayment.
PROPERTY MANAGEMENT CONTRACTS--Property management contracts are stated at cost,
net of accumulated amortization of $16,134,000 (1997) and $4,852,000 (1996).
Costs assigned to contracts relate to purchased property management contracts
contributed to the Company by UAM. The cost of contracts is being amortized over
15 years.
During 1997, management reassessed the recorded value of capitalized property
management contracts. Based upon the fact that a significant proportion of the
contracts purchased and under management were expected to be terminated due to
the intentions of various investors to dispose of their real property managed
under these contracts, the Company recorded an impairment charge of $10,000.00
against the cost of previously acquired management contracts.
F-39
<PAGE>
HEITMAN PROPERTIES LTD.
(A WHOLLY OWNED SUBSIDIARY OF HEITMAN FINANCIAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997 AND
THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
The former owner of the purchased management contracts provided guarantees to
reimburse the Company for certain managed property contracts should the
contracts be terminated prematurely. These amounts, as received, have been
applied as a reduction of the cost of the original contracts.
INCOME TAXES--The Company accounts for income taxes using the liability method.
Deferred income taxes result from temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for federal income tax purposes, and are measured using the enacted
tax rates and laws that will be in effect when the differences reverse. Deferred
income taxes are not material for any period.
HPL files a consolidated state income tax return with its Parent, HFL, and is
included in the consolidated federal tax return of HFL's parent, UAM. HPL remits
payments in settlement of all current and deferred income tax obligations to
HFL, which in turn remits such payments to UAM. The portion of such payments
attributable to HPL is netted against amounts due from HFL in the accompanying
balance sheet.
CONCENTRATION OF CREDIT RISK--The Company provides services to owners of real
estate assets in the United States. The Company performs credit evaluations of
its customers and generally does not require collateral. The risk associated
with this concentration is limited because of the large number of customers and
their geographic dispersion.
LONG-LIVED ASSETS--Long-lived assets, including purchased contracts, are
evaluated when indicators of impairment are present and provisions for possible
losses are recorded when undiscounted cash flows estimated to be generated by
those assets are less than the assets' carrying amount.
USE OF ESTIMATES--The preparation of financial statements requires the Company
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL STATEMENTS--The unaudited interim financial
statements have been prepared in accordance with generally accepted accounting
principles and the rules and regulations of the Securities and Exchange
Commission and reflect all adjustments consisting of normal reoccurring accruals
which are in the opinion of management necessary for fair presentation of the
results of the periods presented.
3. RELATED-PARTY TRANSACTIONS AND COST ALLOCATION
Substantially all of the Company's income is earned from properties that are
asset managed by HFL or an affiliate for its clients. Accordingly, the
accompanying financial statements may or may not necessarily be indicative of
the conditions that would have existed or the results of operations that would
have occurred if the Company had operated without such affiliation.
F-40
<PAGE>
HEITMAN PROPERTIES LTD.
(A WHOLLY OWNED SUBSIDIARY OF HEITMAN FINANCIAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997 AND
THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
HFL pays and allocates certain occupancy costs to HPL based upon space occupied
by HPL employees. Such allocated expenses and were approximately $600,000 for
the six months ended June 30, 1998 and 1997 and $1,200,000, 1997; $1,360,000,
1996; $2,971,000, 1995.
Administrative expenses consisting primarily of employee salaries and related
expenses incurred by Heitman Financial Services Ltd. ("HFSL"), in connection
with the business activities of HFL and all its subsidiaries, are allocated to
its various subsidiaries based upon management's estimates of the time devoted
by employees of HFL to the operations of each Subsidiary. Such expenses
allocated to HPL were approximately as follows: $3,484,000 for the six months
ended June 30, 1998 and $4,510,000 the six months ended June 30, 1997 and
$9,004,000, 1997; $10,635,000, 1996; $8,456,000, 1995.
Based upon the terms of an agreement between HFL, its principal officers and
UAM, HFL remits a portion of its revenues, as defined, to UAM. These totals, as
remitted, are used to satisfy obligations with respect to licensing and
management fees charged by an affiliate of UAM. Such amounts charged to HPL are
as follows: $2,073,000 for the six months ended June 30, 1998 and $2,073,000 for
the six months ended June 30, 1998 and $2,073,000 for the six months ended June
30, 1997 and $4,146,000, 1997; $3,734,000, 1996; $4,112,000, 1995.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following at June 30, 1998 and December
31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30, 1998
1996 1997 -------------
------------- ------------- (UNAUDITED)
<S> <C> <C> <C>
Furniture and equipment $ 4,609,000 $ 5,006,000 $ 5,033,000
Leasehold improvements 1,557,000 1,583,000 1,585,000
Less: accumulated depreciation and amortization (3,640,000) (4,415,000) (4,809,000)
------------- ------------- -------------
Property and equipment, net $ 2,526,000 $ 2,174,000 $ 1,809,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
5. INCOME TAXES
The provision (benefit in lieu of) income taxes consists of the following for
the six month periods ended June 30, and the years ended December 31:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal $ 197,000 $(197,000) $ -- $ 247,000 $ --
State 35,000 (35,000) 62,000
--------- --------- --------- --------- ---------
$ 232,000 $(232,000) $ -- $ 309,000 $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-41
<PAGE>
HEITMAN PROPERTIES LTD.
(A WHOLLY OWNED SUBSIDIARY OF HEITMAN FINANCIAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997 AND
THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
The differences between the provisions for income taxes and the amounts computed
by applying the statutory federal income tax rates to income (loss) before
income taxes consist of the following for the six month periods ended June 30
and the years ended December 31:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Tax (benefit) at statutory rate
applied to income (loss) before
income taxes $ 164,000 $(164,000) $(3,145,000) $ 253,000 $(239,000)
State income taxes, net of federal
income tax benefit 28,000 (28,000) (1,349,000) 56,000 (102,000)
--------- --------- ---------- --------- ---------
192,000 (192,000) (4,494,000) 309,000 (341,001)
Increase in taxes, resulting from non-
deductible meals, entertainment and
other 40,000 (40,000)
Valuation allowance 4,494,000 341,000
--------- --------- ---------- --------- ---------
$ 232,000 $(232,000) $ -- $ 309,000 $ --
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
</TABLE>
The Company has not recorded a tax benefit for the six month period ended June
30, 1998 and the year ended 1997 as no assurance can be provided that these
benefits would be realized in future periods.
6. OPERATING LEASES
The Company has commitments under operating leases for office space and office
equipment. Minimum future rentals under noncancelable operating lease
commitments in effect at June 30 and December 31 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
-------------- -----------
(UNAUDITED)
<S> <C> <C>
1998 $ 961,000 $ 480,000
1999 256,000 256,000
2000 182,000 182,000
2001 15,000 15,000
2002
Thereafter
-------------- -----------
$1,414,000 $ 933,000
-------------- -----------
-------------- -----------
</TABLE>
Rental amounts include fixed operating expense payments but do not include
increases for rate escalations.
F-42
<PAGE>
HEITMAN PROPERTIES LTD.
(A WHOLLY OWNED SUBSIDIARY OF HEITMAN FINANCIAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997 AND
THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
7. EMPLOYEE BENEFIT PLANS
The Company's employees participate in a defined contribution savings plan,
which provides the opportunity for pretax contributions by employees. The
Company's contribution expense for the years ended December 31 are as follows:
$170,000, 1997; $200,000, 1996; and $45,000, 1995.
8. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are defendants in lawsuits that arise in the
normal course of business. In management's judgment, the ultimate liability, if
any, from such legal proceedings is not material to the Company's financial
statements.
9. SUBSEQUENT EVENT
Subsequent to December 31, 1997, the parent company, Heitman Financial Ltd.,
entered into an agreement to sell its interest in Heitman Properties Ltd.,
including certain assets and liabilities as defined. The purchase and sale
transaction closed on July 17, 1998.
F-43
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY US OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD
BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN OUR
AFFAIRS OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 8
Special Notes Of Caution....................... 20
Use Of Proceeds................................ 21
Price Range Of Our Common Stock................ 22
Dividend Policy................................ 22
Capitalization................................. 23
Management's Discussion And Analysis Of
Financial Condition And Results Of
Operations................................... 24
Business....................................... 36
Management..................................... 50
Security Ownership Of Certain Beneficial Owners
And Management............................... 58
Certain Transactions........................... 60
Our Capital Stock.............................. 64
U.S. Federal Income Tax Consequences........... 67
Underwriting................................... 70
Legal Matters.................................. 72
Experts........................................ 72
Additional Information......................... 72
Index To Consolidated Financial Statements..... F-1
</TABLE>
2,000,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
FRIEDMAN BILLINGS RAMSEY
WEDBUSH MORGAN SECURITIES
MAY 12, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
