<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
-----------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 20418
KENNEDY-WILSON, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4364537
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
9601 WILSHIRE BLVD, # 220
BEVERLY HILLS, CALIFORNIA 90210
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(310) 887-6400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
-----------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: COMMON STOCK, $.01 PAR VALUE;
9,100,162 SHARES OUTSTANDING AT AUGUST 14, 2000.
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<PAGE> 2
KENNEDY-WILSON, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 2000
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I. Financial Information......................................................................................... 3
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 2000 (Unaudited) and December 31, 1999........... 3
Consolidated Statements of Income for the Three-Month and Six-Month Periods Ended
June 30, 2000 and 1999 (Unaudited)...........................................................4
Consolidated Statements of Cash Flows for the Six-Month Periods Ended
June 30, 2000 and 1999 (Unaudited).......................................................... 5
Notes to Consolidated Financial Statements (Unaudited).................................... 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............10-14
Item 3. Quantitative and Qualitative Disclosure about Market Risk...........................................15
Part II. Other Information............................................................................................16
Item 6. Exhibits and Reports on Form 8-K................................................................... 16
</TABLE>
2
<PAGE> 3
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,726,000 $ 5,243,000
Cash - restricted 754,000 2,101,000
Accounts receivable 8,864,000 8,534,000
Notes receivable (Note 2) 28,010,000 30,643,000
Real estate held for sale (Note 4) 23,252,000 25,733,000
Investments with related parties and non-affiliates (Note 3) 31,150,000 23,484,000
Contracts, furniture, fixtures, and equipment and other assets 18,883,000 16,237,000
Goodwill, net 23,460,000 23,175,000
------------- -------------
TOTAL ASSETS $ 140,099,000 $ 135,150,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 2,309,000 $ 2,403,000
Accrued expenses and other liabilities 14,741,000 20,602,000
Deferred income taxes 812,000 812,000
Notes payable 15,256,000 9,213,000
Borrowings under lines of credit (Note 5) 21,349,000 27,533,000
Mortgage loans payable 9,430,000 11,401,000
Senior unsecured debt (Note 6) 14,500,000 --
Subordinated debt (Note 7) 11,500,000 16,500,000
------------- -------------
Total liabilities 89,897,000 88,464,000
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; shares authorized 5,000,000;
none issued -- --
Common stock $.01 par value; shares authorized: 50,000,000;
shares issued 9,066,662 in 1999 and 9,100,162 in 2000 91,000 91,000
Additional paid-in capital 47,799,000 47,156,000
Accumulated retained earnings (deficit ) 2,503,000 (361,000)
Notes receivable from stockholders (182,000) (200,000)
------------- -------------
Total stockholders' equity 50,202,000 46,686,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 140,099,000 $ 135,150,000
============= =============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED SIX MONTH PERIODS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Property management and leasing fees $ 8,454,000 $ 6,190,000 $16,949,000 $12,718,000
Commission income 5,021,000 597,000 7,494,000 2,768,000
Sales of residential real estate 2,693,000 1,914,000 25,692,000 6,878,000
Equity in income of investments with related parties
and non-affiliates 669,000 599,000 2,005,000 1,054,000
Gain on sale of commercial real estate -- 1,106,000 -- 1,106,000
Income on restructured notes receivable 880,000 819,000 2,287,000 1,491,000
Rental income, net -- 1,430,000 77,000 3,116,000
Interest income and other 506,000 223,000 1,255,000 604,000
----------- ----------- ----------- -----------
Total Revenue 18,223,000 12,878,000 55,759,000 29,735,000
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Commissions and marketing expenses 125,000 34,000 218,000 86,000
Cost of residential real estate sold 2,598,000 1,726,000 22,855,000 6,527,000
Compensation and related expenses 7,471,000 4,429,000 15,599,000 7,781,000
General and administrative 4,099,000 2,112,000 8,456,000 5,148,000
Depreciation and amortization 762,000 795,000 1,732,000 1,406,000
Interest expense 1,371,000 2,352,000 2,854,000 5,584,000
----------- ----------- ----------- -----------
Total Operating Expenses 16,426,000 11,448,000 51,714,000 26,532,000
----------- ----------- ----------- -----------
Income Before Provision for Income Taxes 1,797,000 1,430,000 4,045,000 3,203,000
Provision for Income Taxes 617,000 500,000 1,181,000 1,103,000
----------- ----------- ----------- -----------
NET INCOME $ 1,180,000 $ 930,000 $ 2,864,000 $ 2,100,000
=========== =========== =========== ===========
SHARE DATA:
Basic net income per share $ 0.13 $ 0.12 $ 0.32 $ 0.29
Basic weighted average shares 9,100,162 8,000,080 9,090,525 7,357,253
Diluted net income per share $ 0.12 $ 0.11 $ 0.29 $ 0.24
Diluted weighted average shares 10,187,462 9,247,329 10,226,019 8,900,893
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,864,000 $ 2,100,000
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,732,000 1,406,000
Equity in income of investments with related parties
and non-affiliates (2,005,000) (1,054,000)
Gains on sales of commercial real estate -- (1,106,000)
Income on restructured notes receivable - non-cash (744,000) (725,000)
Change in assets and liabilities:
Accounts receivable (330,000) 932,000
Other assets (3,816,000) (3,729,000)
Accounts payable (94,000) 599,000
Accrued expenses and other liabilities (5,861,000) (4,648,000)
------------ ------------
Net cash used in operating activities (8,254,000) (6,225,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of contract, furniture, fixtures and equipment (535,000) (683,000)
Purchase and additions to real estate held for sale (19,557,000) (14,065,000)
Proceeds from sales of real estate held for sale 22,594,000 17,171,000
Additions to notes receivable (645,000) (7,678,000)
Payments from notes receivable 3,379,000 5,179,000
Repayments from stockholders 18,000 (4,000)
Additions to goodwill (225,000) (1,009,000)
Distributions from joint ventures 6,156,000 805,000
Contributions to joint ventures (11,817,000) (8,194,000)
------------ ------------
Net cash used in investing activities (632,000) (8,478,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of mortgage loans payable 3,121,000 3,693,000
Repayment of mortgage loans payable (5,092,000) (3,281,000)
Borrowings under lines of credit 11,104,000 7,475,000
Repayment of lines of credit (17,288,000) (7,351,000)
Borrowings under notes payable 8,880,000 1,750,000
Repayment of notes payable (2,837,000) (13,804,000)
Issuance of senior unsecured debt 15,000,000 --
Issuance of subordinated debt -- 7,500,000
Repayment of subordinated debt (5,000,000) (7,000,000)
Cash - restricted decrease 1,347,000 2,692,000
Issuance of common stock 134,000 18,292,000
------------ ------------
Net cash provided by financing activities 9,369,000 9,966,000
------------ ------------
Net increase (decrease) in cash 483,000 (4,737,000)
CASH, BEGINNING OF PERIOD 5,243,000 9,838,000
------------ ------------
CASH, END OF PERIOD $ 5,726,000 $ 5,101,000
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
UNAUDITED
NOTE 1 - FINANCIAL STATEMENT PRESENTATION
The above financial statements have been prepared by
Kennedy-Wilson, Inc. a Delaware corporation, and subsidiaries (the
"Company") without audit by independent public accountants, pursuant to
the Rules and Regulations promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934. The statements, in
the opinion of the Company, present fairly the financial position and
results of operations for the dates and periods indicated. The results
of operations for interim periods are not necessarily indicative of
results to be expected for full fiscal years. Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the Rules and Regulations of the
Securities and Exchange Commission. The Company believes that the
disclosures contained in the financial statements are adequate to make
the information presented not misleading. These financial statements
should be read in conjunction with the financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999. Certain reclassifications have been
made to prior period balances to conform to the current period
presentation. In accordance with SFAS No. 130, Reporting Comprehensive
Income, the Company does not have any material disclosure items under
comprehensive income.
NOTE 2 - NOTES RECEIVABLE
Notes receivable consists primarily of non-performing notes and
related assets acquired from financial institutions. A majority of these
notes are typically collateralized by real estate, personal property or
guarantees.
NOTE 3 - INVESTMENTS WITH RELATED PARTIES AND NON-AFFILIATES
The Company has a number of partnerships and joint venture
interests ranging from 2% to 50%, some with former related parties, that
were formed to acquire, manage, develop and or sell real estate. These
investments are accounted for under the equity method. Investments with
related parties and non-affiliates also include mezzanine loans to real
estate developers for new single-family residential developments.
NOTE 4 - REAL ESTATE HELD FOR SALE
Real estate held for sale is comprised of commercial and
residential properties and land, and is accounted for at the lower of
carrying amount or fair value less cost to sell. Real estate is
classified as held for sale since the Company's intent is to acquire and
dispose of properties as part of its normal course of business.
NOTE 5 - BORROWINGS UNDER LINES OF CREDIT
In June 2000, the Company extended its unsecured revolving
credit facilities with East West Bank and Tokai Bank of California to
June 2002 in the amounts of $20 million and $13 million respectively.
The facilities are available for acquisitions and working capital. The
facilities bear interest at three-month LIBOR plus 3%, payable monthly.
6
<PAGE> 7
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
UNAUDITED
NOTE 6 - SENIOR UNSECURED DEBT
In June 2000, the Company issued $15 million in senior unsecured
debt to GATX Capital Corporation, a diversified financial services
company that is a subsidiary of GATX Corporation, and affiliates of Aon
Corporation, an international insurance brokerage and consulting
company. The notes are interest only at 12%, payable quarterly with a
maturity date of June 22, 2006. The Company also issued warrants to the
purchasers of the notes for 597,888 shares of the Company's common stock
at an exercise price of $6.25 per share. The Company accounts for the
debt and warrants in accordance with APB 14, Accounting for Convertible
Debt and Debt Issued with Stock Purchase Warrants.
NOTE 7 - SUBORDINATED DEBT
During the first quarter of 2000, the Company paid down $5.0
million of its subordinated debt to Colony Capital. The debt bears
interest at 14%.
NOTE 8 - EARNINGS PER SHARE
The following table reconciles the denominator used in
calculating the earnings per share for six month the periods ended June
30, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC CALCULATION
Net Income $ 1,180,000 $ 930,000 $ 2,864,000 $ 2,100,000
=========== =========== =========== ===========
Weighted average shares 9,100,162 8,000,080 9,090,525 7,357,253
----------- ----------- ----------- -----------
Basic EPS $ 0.13 $ 0.12 $ 0.32 $ 0.29
=========== =========== =========== ===========
DILUTED CALCULATION
Net Income $ 1,180,000 $ 930,000 $ 2,864,000 $ 2,100,000
Income effect of dilutive securities,
tax effected 74,000 53,000 149,000 53,000
----------- ----------- ----------- -----------
Net Income available to stockholders $ 1,254,000 $ 983,000 $ 3,013,000 $ 2,153,000
=========== =========== =========== ===========
Weighted average shares 9,100,162 8,000,080 9,090,525 7,357,253
Weighted average shares,
including convertible debentures 750,000 647,138 750,000 319,998
Common stock equivalents 337,300 600,111 385,494 1,223,642
----------- ----------- ----------- -----------
Total diluted shares 10,187,462 9,247,329 10,226,019 8,900,893
=========== =========== =========== ===========
Diluted EPS $ 0.12 $ 0.11 $ 0.29 $ 0.24
=========== =========== =========== ===========
</TABLE>
7
<PAGE> 8
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
UNAUDITED
NOTE 9 - SEGMENT INFORMATION
The Company's business activities currently consist of property
management, commercial and residential brokerage, and various types of
real estate and note investments. The Company's segment disclosure with
respect to the determination of segment profit or loss and segment
assets is based on these services and its various investments:
Property Management - As a result of recent acquisitions, the
Company has become a nationwide commercial and residential
property management and leasing company, providing a full range
of services relating to property management, including tenant
representation. The Company also provides asset management
services for some of our joint ventures.
Brokerage - Through it's various offices, the Company provides
specialized brokerage services for both commercial and
residential real estate and provides other real estate services
such as property valuations, development and implementation of
marketing plans, arranging financing, sealed bid auctions and
open bid auctions.
Investments - With joint venture partners and on its own, the
Company invests in commercial and residential real estate and
purchases and manages pools of distressed notes. The Company's
current real estate portfolio focuses on commercial buildings
and multiple and single-family residences. The Company has
entered into joint ventures with large international investors,
to invest in both U.S. and Japanese real estate and note pools.
The Company also makes mezzanine loans to real estate developers
for new single-family, residential developments.
The following table reconciles the Company's income and expense
activity for the six month period ended June 30, 2000 and balance sheet
data as of June 30, 2000. The Company does not disclose based on
geographic segments due to immateriality.
2000 Reconciliation of Reportable Segment Information
<TABLE>
<CAPTION>
Property
Management Brokerage Investments Corporate Consolidated
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Property management and leasing fees $ 16,329,000 $ 620,000 $ 16,949,000
Commissions 2,004,000 4,980,000 $ 510,000 7,494,000
Investment income and other 1,362,000 29,395,000 $ 559,000 31,316,000
------------ ------------ ------------ ------------ ------------
Total Revenue 18,333,000 6,962,000 29,905,000 559,000 55,759,000
Operating Expenses 14,159,000 3,259,000 27,256,000 7,040,000 51,714,000
------------ ------------ ------------ ------------ ------------
Income Before Provision for Income Taxes $ 4,174,000 $ 3,703,000 $ 2,649,000 $ (6,481,000) $ 4,045,000
============ ============ ============ ============ ============
Total Assets $ 15,275,000 $ 19,766,000 $ 71,412,000 $ 33,646,000 $140,099,000
============ ============ ============ ============ ============
</TABLE>
8
<PAGE> 9
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
UNAUDITED
The following table reconciles the Company's income and expense activity
for the six month period ended June 30, 1999, and balance sheet data as of June
30, 1999.
1999 Reconciliation of Reportable Segment Information
<TABLE>
<CAPTION>
Property
Management Brokerage Investments Corporate Consolidated
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Property Management and Leasing Fees $ 11,314,000 $ 939,000 $ 465,000 $ 12,718,000
Commissions 2,453,000 315,000 2,768,000
Other 376,000 13,667,000 $ 206,000 14,249,000
------------ ------------ ------------ ------------ ------------
Total Revenue 11,314,000 3,768,000 14,447,000 206,000 29,735,000
Operating Expenses 7,339,000 2,325,000 12,526,000 4,342,000 26,532,000
------------ ------------ ------------ ------------ ------------
Income Before Provision for Income Taxes $ 3,975,000 $ 1,443,000 $ 1,921,000 $ (4,136,000) $ 3,203,000
============ ============ ============ ============ ============
Total Assets $ 8,767,000 $ 13,922,000 $154,968,000 $ 32,488,000 $210,145,000
============ ============ ============ ============ ============
</TABLE>
NOTE 10 - SUBSEQUENT EVENTS
In July 2000, the Company paid the remaining balance of $4 million of
its subordinated debt to Colony Capital.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are an international real estate services and investment
company. We provide property management and leasing services, asset
management, commercial and residential brokerage, and auction services
to clients primarily in the U.S. and Japan. Our clients include
financial institutions, major corporations, real estate developers,
insurance companies and governmental agencies. We also invest in
commercial and residential real estate, as well as individual and pools
of distressed notes both in the U.S. and Japan.
COMPARISON OF THE THREE MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
TOTAL REVENUES
Total revenues for the three month period ended June 30, 2000
were approximately $18.2 million, which represents a 41.5% increase over
approximately $12.9 million for the same period in 1999. Earnings before
taxes for the three month period ended June 30, 2000 were approximately
$1.8 million, which represents a 25.7% increase over the same period in
1999 of approximately $1.4 million. Net income for the three month
period ended June 30, 2000 was approximately $1.2 million, which
represents a 26.9% increase over approximately $930,000 for June 30,
1999.
Property Management. Property management and leasing operations
generated approximately $8.5 million of revenues in the second quarter
of 2000, representing 46.4% of our total revenue and a 36.6% increase
over property management revenue of approximately $6.2 million for the
same period in 1999. During 1999 we acquired five property management
companies.
Brokerage. Brokerage commission revenues for the second quarter
of 2000 were approximately $5.0 million, representing 27.6% of total
revenues and a 741.0% increase over brokerage commission revenues for
the second quarter of 1999 of approximately $597,000. The increase
reflects the continued expansion of our brokerage services both in the
U.S. and Japan, as well as our tenant representation business.
Investments. Sales of residential real estate were approximately
$2.7 million for the three month period ended June 30, 2000,
representing 14.8% of total revenues and a 40.7% increase over
approximately $1.9 million for the same three month period in 1999. This
increase is due to sales of ten units in a 109 unit single family
development in Cathedral City, CA and a single family home in West Los
Angeles. This compares to revenues for the second quarter of 1999 from
the sale of the final unit of a 23 unit single family development in
Palm Desert and seven units from the Cathedral City project. The sales
of residential real estate for both years reflect our continuing
strategy to sell upon completion of planned improvements, rather than
holding for speculation.
Equity in income of investments with related parties and
non-affiliates totaled approximately $669,000 for the second quarter in
2000, or 3.7% of total revenue compared to approximately $599,000
realized in the second quarter during 1999, a 11.7% increase. Revenue
from the mezzanine lending was approximately $361,000 for the three
month period ended June 30, 2000, compared to approximately $109,000 in
the same period in 1999 due to maturing projects associated with the
loans.
Gains on restructured notes totaled approximately $880,000 for
the three month period ended June 30, 2000, or 4.8% of total revenues, a
7.4% increase from approximately $819,000 for the three month period
ended June 30, 1999. The gain reflects our continued progress in
liquidating our portfolios of distressed notes that were purchased at
substantial discounts to face value both in the U.S. and Japan. 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.
10
<PAGE> 11
Gain on sale of commercial real estate of approximately $1.1 in
the second quarter of 1999 resulted from the sale of two land parcels in
Hawaii. There were no sales of commercial real estate during the same
period of 2000.
Rental income declined to zero in the second quarter of 2000
compared to approximately $1.4 million in the same period in 1999 as a
result of the sale of 6255 Sunset Blvd. office building, and the
deconsolidation of the single purpose entities which acquired five
commercial properties in Los Angeles.
TOTAL OPERATING EXPENSES
Operating expenses for the second quarter of 2000 were
approximately $16.4 million, representing a 43.5% increase from
approximately $11.4 million for the same period in 1999. Part of the
increase represents the higher cost of sales associated with the sales
of residential real estate discussed above. The balance of the increase
in operating expense was primarily associated with the five property
management companies acquired in 1999. The increase was offset by the
reductions in interest expense and depreciation and amortization expense
as a result of the deconsolidation of the commercial properties
discussed above.
Brokerage commissions and marketing expenses increased to
approximately $125,000 for the quarter ended June 30, 2000 from
approximately $34,000 during the same period of 1999, a 267.6% increase,
as a result of the increased commission income discussed above.
Cost of residential real estate sold was approximately $2.6
million for the three month period ended June 30, 2000, a 50.5% increase
from approximately $1.7 million for the same period in 1999. The
increase correlates with the increased revenues from the sales of
residential real estate discussed above.
Compensation and related expenses was approximately $7.5 million
for the second quarter of 2000, up 68.7% from approximately $4.4 million
for the second quarter of 1999. The increase was primarily a result of
the acquisition of five property management companies in 1999.
General and administrative expenses were approximately $4.1
million for the second quarter of 2000, representing a 94.1% increase
over the same period in 1999 of approximately $2.1 million. The increase
is primarily due to the expenses associated with our expanded property
management operations.
Depreciation and amortization expense was approximately $762,000
for the second quarter of 2000, compared to approximately $795,000
during the same period in 1999.
Interest expense was approximately $1.4 million for the second
quarter of 2000, compared to approximately $2.4 million during the same
period in 1999, representing a 41.7% decrease. The decrease resulted
primarily from the elimination of the interest expense associated with
the five commercial properties discussed above.
The provision for income taxes was approximately $617,000 for
the second quarter in 2000, a 23.4% increase over the second quarter in
1999 of approximately $500,000 due to the higher pre-tax net income.
11
<PAGE> 12
COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
TOTAL REVENUES
Total revenues for the six months ended June 30, 2000 were
approximately $55.8 million, which represents a 87.5% increase over
approximately $29.7 million for the same period in 1999. Earnings before
taxes for the six month period ended June 30, 2000 were approximately
$4.0 million, which represents a 26.3% increase over the same period in
1999 of approximately $3.2 million. Net income for the six month period
ended June 30, 2000 was approximately $2.9 million, which represents a
36.4% increase over approximately $2.1 million for June 30, 1999.
Property Management. Property management and leasing operations
generated approximately $16.9 million of revenues in the six month
period ended June 30, 2000, representing 30.4% of our total revenue and
a 33.3% increase over property management revenue of approximately $12.7
million for the same period in 1999. During 1999 we acquired five
property management companies.
Brokerage. Brokerage commission revenues for the first six
months of 2000 were approximately $7.5 million, representing 13.4% of
total revenues and a 170.7% increase over brokerage commission revenues
for the same period in 1999 of approximately $2.8 million. The increase
reflects the continued expansion of our brokerage services both in the
U.S. and Japan, as well as our tenant representation business.
Investments. Sales of residential real estate were approximately
$25.7 million for the first six months of 2000, representing 46.1% of
total revenues and a 273.5% increase over approximately $6.9 million for
the same six months in 1999. This increase is due to sales from three
projects, including the sale of a 53-unit condominium complex in West
Los Angeles, twenty five units in a 109 unit single family development
in Cathedral City, CA, and two single family homes in West Los Angeles.
This compares to revenues for the first six months period of 1999 from
the sale of sixteen units of a 23 unit single family development in Palm
Desert and seven units from the Cathedral City project. The sales of
residential real estate for both years reflect our continuing strategy
to sell upon completion of planned improvements, rather than holding for
speculation.
Equity in income of investments with related parties and
non-affiliates totaled approximately $2.0 million for the six month
period ended June 30, 2000, or 3.6% of total revenue compared to
approximately $1.1 million realized in the same period during 1999, a
90.2% increase. Revenue from the mezzanine lending was approximately
$1,173,000 for the six month period ended June 30, 2000, compared to
approximately $212,000 in the same period in 1999 due to maturing
projects associated with the loans.
Gains on restructured notes totaled approximately $2.3 million
in the six month period ended June 30, 2000, or 4.1% of total revenues,
a 53.4% increase from approximately $1.5 million for the six month
period ended June 30, 1999. The gain reflects our continued progress in
liquidating our portfolios of distressed notes that were purchased at
substantial discounts to face value both in the U.S. and Japan. 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.
Gain on sale of commercial real estate of approximately $1.1 in
for the first six months of 1999 resulted from the sale of two land
parcels in Hawaii. There were no sales of commercial real estate during
the same period of 2000.
TOTAL OPERATING EXPENSES
Operating expenses for the first six month period of 2000 were
approximately $51.7 million, representing a 94.9% increase from
approximately $26.5 million for the same period in 1999. Part of the
increase represents the higher cost of sales associated with the sales
of residential real estate discussed above. The balance of the increase
in operating expense was primarily associated with the five property
management companies acquired in 1999. The increase was offset by the
reductions in interest expense and depreciation and amortization expense
as a result of the deconsolidation of the commercial properties
discussed above.
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Brokerage commissions and marketing expenses increased to
approximately $218,000 for the six month period ended June 30, 2000 from
approximately $86,000 during the same period of 1999, an increase of
153.5%, as a result of the increased commission income discussed above.
Cost of residential real estate sold was approximately $22.9
million for the six month period ended June 30, 2000, a 250.2% increase
from approximately $6.5 million for the same period in 1999. The
increase correlates with the increased revenues from the sales of
residential real estate discussed above.
Compensation and related expenses was approximately $15.6
million for the six month period ended June 30, 2000, up 100.5% from
approximately $7.8 million for the same period in 1999. The increase was
primarily a result of the acquisition of five property management
companies in 1999.
General and administrative expenses were approximately $8.5
million during the first six months of 2000, representing a 64.3%
increase over the same period in 1999 of approximately $5.1 million. The
increase is primarily due to the expenses associated with our expanded
property management operations.
Depreciation and amortization expense was approximately $1.7
million for the first six months of 2000, compared to approximately $1.4
million during the same period in 1999, representing a 23.2% increase.
The increase was due, in part, to the amortization of the goodwill and
property management contracts associated with the acquisition of the
property management companies.
Interest expense was approximately $2.9 million for the first
six months of 2000, compared to approximately $5.6 million during the
same period in 1999, representing a 48.9% decrease. The decrease
resulted from the elimination of the interest expense associated with
the five commercial properties discussed above.
The provision for income taxes was approximately $1.2 million
for the first six months of 2000, compared to approximately $1.1 million
for the same period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources requirements include
investments in joint ventures, expenditures for distressed notes pools,
real estate held for sale and working capital needs. We finance our
operations and investments with internally generated funds, borrowings
under our revolving lines of credit, mortgage loans, and joint venture
partner capital. Our investments in real estate are typically financed
by mortgage loans secured by that real estate. These mortgage loans are
generally nonrecourse in that, in the event of default, recourse will be
limited to the mortgaged property serving as collateral, subject to
certain exceptions that are standard in the real estate industry.
Cash used in operating activities during the six months ended
June 30, 2000 was approximately $8.3 million, compared to approximately
$6.2 million for the same period in 1999. The change resulted from a 36%
increase in net income, offset by a decrease in accrued expenses and an
increase in accounts receivable.
Cash used in investing activities during the six months ended
June 30, 2000 was approximately $632,000, compared to approximately $8.5
million during the same period in 1999. The change resulted primarily
from the decrease in notes receivable acquired during 2000 compared to
1999, as well as the decrease in net contributions to joint ventures in
2000 compared to 1999.
Cash provided by financing activities was approximately $9.4
million for the first six months of 2000, compared to about
approximately $10.0 million for the same period of 1999. The financing
activities in the first half of 2000 consisted primarily of the issuance
of $15 million in senior unsecured debt, offset by repayments of
borrowings under lines of credit and subordinated debt.
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We regularly monitor our working capital and investment
financing needs, as well as our capital raising alternatives. To the
extent that we engage in additional strategic investments we may need to
obtain third party financing which could include joint venture partners,
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 unsecured $33
million lines of credit with East-West Bank and Tokai Bank, will provide
us with sufficient capital requirements for the foreseeable future. We
also intend to continue to retain earnings to finance our growth and,
therefore, do not anticipate paying any dividends. Our need, if any, to
raise additional funds will depend on numerous factors, including the
success and pace of the implementation of our growth strategy.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's exposure to market risk has not materially changed
from what was reported on the Company's Form 10-K for the year ended
December 31, 1999.
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements as well as
historical information. Forward looking statements, which are included
in accordance with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, may involve known and unknown
risks, uncertainties and other factors that may cause the company's
actual results and performance to be materially different from any
results or performance suggested by the statements in this report. 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.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following Exhibits are included herein:
EXHIBIT INDEX
<TABLE>
<CAPTION>
ITEM DESCRIPTION
---- -----------
<S> <C>
10.32 Note Purchase Agreement, dated as of June 22, 2000, by and
between Kennedy-Wilson, Inc. and GATX Capital Corp.
10.33 Note Purchase Agreement, dated as of June 22, 2000, by and
between Kennedy-Wilson, Inc. and Combined Insurance Company
of America.
10.34 Note Purchase Agreement, dated as of June 22, 2000, by and
between Kennedy-Wilson, Inc. and Virginia Surety Company,
Inc.
10.35 Note Purchase Agreement date as of June 22, 2000, by and
between Kennedy-Wilson, Inc. and Resource Life Insurance
Company.
10.36 12% Senior Note due June 22, 2006, dated June 22, 2000, made
payable to GATX Capital Corp., duly executed by
Kennedy-Wilson, Inc. in the amount of $10,000,000.
10.37 12% Senior Note due June 22, 2006, dated June 22, 2000, made
payable to Combine Insurance Company of America, duly
executed by Kennedy-Wilson, Inc. in the amount of
$2,000,000.
10.38 12% Senior Note due June 22, 2006, dated June 22, 2000, made
payable to Virginia Surety Company, duly executed by
Kennedy-Wilson, Inc. in the amount of $2,000,000.
10.39 12% Senior Note due June 22, 2006, dated June 22, 2000, made
payable to Resource Life Insurance Company, duly executed by
Kennedy-Wilson, Inc. in the amount of $1,000,000.
10.40 Warrants to Purchase Shares of Common Stock, dated June 22,
2000, duly executed by Kennedy-Wilson, Inc. in favor of GATX
Capital Corp.
10.41 Warrants to Purchase Shares of Common Stock, dated June 22,
2000, duly executed by Kennedy-Wilson, Inc. in favor of
Combined Insurance Company of America.
10.42 Warrants to Purchase Shares of Common Stock, dated June 22,
2000, duly executed by Kennedy-Wilson, Inc. in favor of
Virginia Surety Company, Inc.
10.43 Warrants to Purchase Shares of Common Stock, dated June 22,
2000, duly executed by Kennedy-Wilson, Inc. in favor of
Resource Life Insurance Company
10.44 First Amendment to Loan Agreement dated as of June 6, 2000
between Kennedy-Wilson International, Kennedy-Wilson
Properties, Ltd. and K-W Properties Inc., and East-West
Bank.
10.45 Second Amendment to Loan Agreement dated as of June 6, 2000
between Kennedy-Wilson International and Kennedy-Wilson
Properties, Ltd., K-W Properties Inc., and East-West Bank.
10.46 Third Modification Agreement to Loan Agreement dated as of
June 20, 2000 between Kennedy-Wilson International and
Kennedy-Wilson Properties, Ltd., K-W Properties Inc., and
Tokai Bank of California.
10.47 Fourth Modification Agreement to Loan Agreement dated as of
July 7, 2000 between Kennedy-Wilson International and
Kennedy-Wilson Properties, Ltd., K-W Properties Inc., and
Tokai Bank of California.
27.0 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2000 KENNEDY-WILSON, INC.
Registrant
/S/ Freeman A. Lyle
------------------------------------------------
Freeman A. Lyle
Executive Vice President &
Chief Financial Officer
(Principal Financial and Accounting Officer)
17
