<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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;
8,961,762 SHARES OUTSTANDING AT NOVEMBER 13, 2000.
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<PAGE> 2
KENNEDY-WILSON, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PAGE
<S> <C>
Part I. Financial Information................................................................................. 3
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 2000 (Unaudited) and December 31, 1999........ 3
Consolidated Statements of Income for the Three-Month and Nine-Month Periods Ended
September 30, 2000 and 1999 (Unaudited)........................................................4
Consolidated Statements of Cash Flows for the Nine-Month Periods Ended
September 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>
------------- -------------
SEPTEMBER 30, DECEMBER 31,
2000 1999
(UNAUDITED)
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,481,000 $ 5,243,000
Cash - restricted 21,000 2,101,000
Accounts receivable 10,215,000 8,534,000
Notes receivable (Note 2) 23,453,000 30,643,000
Investments with related parties and non-affiliates (Note 3) 36,808,000 23,484,000
Real estate held for sale (Note 4) 25,277,000 25,733,000
Contracts, furniture, fixtures, and equipment and other assets 17,396,000 16,237,000
Goodwill, net 23,685,000 23,175,000
------------- -------------
TOTAL ASSETS $ 139,336,000 $ 135,150,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 1,497,000 $ 2,403,000
Accrued expenses and other liabilities 13,906,000 20,602,000
Deferred income taxes 812,000 812,000
Notes payable 11,228,000 9,213,000
Borrowings under lines of credit (Note 5) 27,622,000 27,533,000
Mortgage loans payable 12,001,000 11,401,000
Senior unsecured debt (Note 6) 14,514,000 -
Subordinated debt (Note 7) 7,500,000 16,500,000
------------- -------------
Total liabilities 89,080,000 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 8,961,762 in 2000 90,000 91,000
Additional paid-in capital 46,862,000 47,156,000
Accumulated retained earnings (deficit ) 3,450,000 (361,000)
Notes receivable from stockholders (146,000) (200,000)
------------- -------------
Total stockholders' equity 50,256,000 46,686,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 139,336,000 $ 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 NINE MONTH PERIODS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Property management and leasing fees $ 9,413,000 $ 8,527,000 $31,050,000 $21,245,000
Commission income 3,944,000 3,314,000 11,370,000 6,082,000
Sales of residential real estate - 17,049,000 25,692,000 23,927,000
Equity in income of investments with related parties
and non-affiliates 686,000 747,000 2,691,000 1,801,000
Gain on sale of commercial real estate - - - 1,106,000
Income on restructured notes receivable 516,000 609,000 2,803,000 2,100,000
Rental income, net - 1,653,000 77,000 4,769,000
Interest income and other 963,000 636,000 2,221,000 1,240,000
----------- ----------- ----------- -----------
Total Revenue 15,522,000 32,535,000 75,904,000 62,270,000
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Commissions and marketing expenses 1,955,000 298,000 6,788,000 663,000
Cost of residential real estate sold - 15,822,000 22,855,000 22,349,000
Compensation and related expenses 6,602,000 5,177,000 22,025,000 12,679,000
General and administrative 4,058,000 2,815,000 12,697,000 7,963,000
Depreciation and amortization 1,313,000 1,007,000 3,046,000 2,413,000
Interest expense 158,000 3,837,000 3,012,000 9,421,000
----------- ----------- ----------- -----------
Total Operating Expenses 14,086,000 28,956,000 70,423,000 55,488,000
----------- ----------- ----------- -----------
Income Before Provision for Income Taxes 1,436,000 3,579,000 5,481,000 6,782,000
Provision for Income Taxes 488,000 1,078,000 1,669,000 2,181,000
----------- ----------- ----------- -----------
NET INCOME $ 948,000 $ 2,501,000 $ 3,812,000 $ 4,601,000
=========== =========== =========== ===========
SHARE DATA:
Basic net income per share $0.11 $0.28 $0.42 $0.58
Basic weighted average shares 9,010,536 9,066,662 9,063,667 7,933,318
Diluted net income per share $0.10 $0.25 $0.40 $0.50
Diluted weighted average shares 10,154,688 10,393,787 10,202,068 9,521,312
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,812,000 $ 4,601,000
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 3,046,000 2,413,000
Equity in income of investments with related parties
and non-affiliates (2,691,000) (1,801,000)
Gains on sales of commercial real estate - (1,106,000)
Income on restructured notes receivable - non-cash (744,000) (771,000)
Change in assets and liabilities:
Accounts receivable (1,681,000) (4,772,000)
Other assets (2,885,000) (7,174,000)
Accounts payable (906,000) 912,000
Accrued expenses and other liabilities (6,696,000) (1,478,000)
------------ ------------
Net cash used in operating activities (8,745,000) (9,176,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of contract, furniture, fixtures and equipment (597,000) (1,225,000)
Purchase and additions to real estate held for sale (22,900,000) (29,587,000)
Proceeds from sales of real estate held for sale 23,226,000 30,792,000
Additions to notes receivable (1,695,000) (16,961,000)
Payments from notes receivable 9,629,000 9,756,000
Repayments from stockholders 18,000 4,000
Additions to goodwill (1,103,000) (1,768,000)
Distributions from joint ventures 6,191,000 1,984,000
Contributions to joint ventures (16,824,000) (7,090,000)
------------ ------------
Net cash used in investing activities (4,055,000) (14,095,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of mortgage loans payable 5,733,000 4,965,000
Repayment of mortgage loans payable (5,133,000) (4,402,000)
Borrowings under lines of credit 22,152,000 26,170,000
Repayment of lines of credit (22,063,000) (16,269,000)
Borrowings under notes payable 9,196,000 2,759,000
Repayment of notes payable (7,181,000) (13,810,000)
Issuance of senior note 14,514,000 7,500,000
Repayment of subordinated debt (9,000,000) (12,000,000)
Cash - restricted decrease 2,080,000 4,110,000
Issuance of common stock 134,000 18,477,000
Repurchase of common stock (394,000) (184,000)
------------ ------------
Net cash provided by financing activities 10,038,000 17,316,000
------------ ------------
Net (decrease) in cash (2,762,000) (5,955,000)
CASH, BEGINNING OF PERIOD 5,243,000 9,838,000
------------ ------------
CASH, END OF PERIOD $ 2,481,000 $ 3,883,000
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 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 of performing and 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 related parties, which were formed to
acquire, manage, develop and or sell real estate. These investments are
accounted for primarily 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. All investments
with related parties and non-affiliates are recorded at the lower of cost or
market.
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, add value through leasing,
improvements or entitlements, and then dispose of properties in the 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
NINE MONTHS ENDED SEPTEMBER 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
In July, the Company paid the remaining balance of $4.0 million of its
subordinated debt to Colony Capital. The debt bears interest rate of 14%.
NOTE 8 - EARNINGS PER SHARE
The following table reconciles the denominator used in calculating the
earnings per share for the nine-month periods ended September 30, 2000 and
1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
BASIC CALCULATION 2000 1999 2000 1999
----------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Income $ 948,000 $ 2,501,000 $ 3,812,000 $ 4,601,000
=========== =========== =========== ===========
Weighted average shares 9,010,536 9,066,662 9,063,667 7,933,318
----------- ----------- ----------- -----------
Basic EPS $ 0.11 $ 0.28 $ 0.42 $ 0.58
=========== =========== =========== ===========
DILUTED CALCULATION
Net Income $ 948,000 $ 2,501,000 $ 3,812,000 $ 4,601,000
Income effect of dilutive securities, tax effected 74,000 79,000 223,000 132,000
----------- ----------- ----------- -----------
Net Income available to stockholders $ 1,022,000 $ 2,580,000 $ 4,035,000 $ 4,733,000
=========== =========== =========== ===========
Weighted average shares 9,010,536 9,066,662 9,063,667 7,933,318
Convertible debentures 750,000 750,000 750,000 461,538
Common stock equivalents 394,152 577,125 388,401 1,126,456
----------- ----------- ----------- -----------
Total diluted shares 10,154,688 10,393,787 10,202,068 9,521,312
=========== =========== =========== ===========
Diluted EPS $ 0.10 $ 0.25 $ 0.40 $ 0.50
=========== =========== =========== ===========
</TABLE>
7
<PAGE> 8
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 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 - The Company has a nationwide commercial and
residential property management and leasing division, 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 - 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 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 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 nine-month period ended September 30, 2000 and balance sheet
data as of September 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 $ 29,640,000 $ 1,160,000 $ 250,000 $ 31,050,000
Commissions 2,963,000 7,622,000 785,000 11,370,000
Investment income and other 2,218,000 30,231,000 $ 1,035,000 33,484,000
------------ ------------ ------------ ------------ ------------
Total Revenue 32,603,000 11,000,000 31,266,000 1,035,000 75,904,000
Operating Expenses 26,632,000 5,808,000 28,067,000 9,916,000 70,423,000
------------ ------------ ------------ ------------ ------------
Income Before Provision for Income Taxes $ 5,971,000 $ 5,192,000 $ 3,199,000 $ (8,881,000) $ 5,481,000
============ ============ ============ ============ ============
Total Assets $ 15,158,000 $ 17,975,000 $ 76,911,000 $ 29,292,000 $139,336,000
============ ============ ============ ============ ============
</TABLE>
8
<PAGE> 9
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
UNAUDITED
The following table reconciles the Company's income and expense activity
for the nine-month period ended September 30, 1999, and balance sheet data as of
September 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 $ 18,004,000 $ 2,776,000 $ 465,000 0 $ 21,245,000
Commissions 304,000 5,036,000 742,000 0 6,082,000
Investment income and other 377,000 34,186,000 $ 380,000 34,943,000
------------ ------------ ------------ ------------ ------------
Total Revenue 18,308,000 8,189,000 35,393,000 380,000 62,270,000
Operating Expenses 12,740,000 4,064,000 33,223,000 5,461,000 55,488,000
------------ ------------ ------------ ------------ ------------
Income Before Provision for Income Taxes $ 5,568,000 $ 4,125,000 $ 2,170,000 $ (5,081,000) $ 6,782,000
============ ============ ============ ============ ============
Total Assets $ 6,884,000 $ 19,610,000 $164,174,000 $ 31,393,000 $222,061,000
============ ============ ============ ============ ============
</TABLE>
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 SEPTEMBER 30, 2000 AND 1999
TOTAL REVENUES
Total revenues for the three-month period ended September 30, 2000 were
$15.5 million, which represents a 52% decrease from $32.5 million for the
same period in 1999. Earnings before taxes for the three-month period ended
September 30, 2000 were $1.4 million, which represents a 60% decrease from
the same period in 1999 of $3.6 million. Net income for the three-month
period ended September 30, 2000 was $948,000, which represents a 62% decrease
from $2.5 million for September 30, 1999. The decline in total consolidated
revenue resulted from the high sales of residential real estate in the third
quarter of 1999 which was attributable to the sale of a $16 million company
owned apartment building in Los Angeles.
Property Management. Property management and leasing operations
generated $9.4 million of revenues in the third quarter of 2000, representing
61% of our total revenue and a 10% increase over property management revenue
of $8.5 million for the same period in 1999. During 1999 we acquired five
property management companies.
Brokerage. Brokerage commission revenues for the third quarter of 2000
were $3.9 million, representing 25% of total revenues and a 19% increase over
brokerage commission revenues for the third quarter of 1999 of $3.3 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. There were no sales of residential real estate during the
three month period ended September 30, 2000, due to labor shortages in the
strong economy that delayed the completion of our project in Cathedral City,
California. This project is expected to be completed and closed in the fourth
quarter of 2000. The sale of a 95-unit apartment building located in Los
Angeles, CA accounted for $16.0 million of the $17.0 million in revenue
generated from sales of residential real estate during the third quarter of
1999. The sale of 6 homes in a project located in Cathedral City, California
accounted for the balance of revenue during this period.
Equity in income of investments with related parties and non-affiliates
totaled $686,000 for the third quarter in 2000, or 4% of total revenue
compared to approximately $747,000 realized in the third quarter during 1999.
The 8% decrease in revenue is due, in part, to a decrease in revenue
associated with the mezzanine lending projects, most of which have matured.
Gains on restructured notes totaled $516,000 for the three-month period
ended September 30, 2000, or 3% of total revenues, a 15% decrease from
$609,000 for the three- month period ended September 30, 1999. The decrease
in revenue reflects the fact that most of the large assets have previously
been settled or restructured and we are now in the process of settling the
smaller assets. 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
Rental income declined to zero in the third quarter of 2000 compared to
$1.7 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.
Interest and other income totaled $963,000 for the three month period
ended September 30, 2000 or 6% of total revenue, a 51% increase from $636,000
during the same period in 1999. This income during the third quarter of 2000
primarily represents interest earned on restructured notes, and the
forfeiture of escrow deposit money and a lease termination fee. During the
same period in 1999, the income consisted primarily of interest earned on
notes held on commercial and residential properties and restructured notes.
TOTAL OPERATING EXPENSES
Operating expenses for the third quarter of 2000 were $14.1 million,
representing a 51% decrease from $29.0 million for the same period in 1999.
The decline in total expenses in the third quarter of 2000 compared to the
third quarter of 1999 included the reduced cost of residential real estate
sold, which corresponds with the revenue decline discussed above.
Compensation and general and administrative expense increased in the third
quarter of 2000 over the same period in 1999 primarily do to the increase in
operating expenses associated with the property management companies acquired
during the fourth quarter of 1999. When compared with the first and second
quarters of 2000, compensation and related expenses have decreased 19% and
11% respectively and general and administrative expense declined by
approximately 7% and 1% respectively as a result of our on-going program to
more efficiently manage our company. Depreciation and amortization expense
increased primarily do to the purchase of the property management companies,
while interest expense declined, in part because of the deconsolidation of
the commercial properties.
Brokerage commissions and marketing expenses increased to $2.0 million
for the quarter ended September 30, 2000 from approximately $298,000 during
the same period of 1999. This increase is a result of the increased broker
commission expense associated with sales and brokerage commissions generated
by our property management companies.
There was no revenue or associated cost of residential real estate sold
during the three month period ending September 30, 2000 as compared to $15.8
million in the third quarter of 1999 which correlates with the revenue from
the sales of apartment building discussed above.
Compensation and related expenses were $6.6 million for the third
quarter of 2000, up 28% from $5.2 million for the third quarter of 1999. The
increase was primarily a result of the acquisition of two property management
companies in the fourth quarter of 1999.
General and administrative expenses were $4.1 million for the third
quarter of 2000, representing a 44% increase over the same period in 1999 of
$2.8 million. The increase is primarily due to the expenses associated with
our expanded property management operations.
Depreciation and amortization expense was $1.3 million for the third
quarter of 2000, compared to $1.0 million during the same period in 1999, a
30% increase. The increase in depreciation and amortization expense resulting
from the deconsolidation of the five commercial properties discussed above
was offset by the amortization of goodwill, contracts and acquisition-related
costs associated with the purchase of the property management companies.
11
<PAGE> 12
Interest expense was $158,000 for the third quarter of 2000, compared
to $3.8 million during the same period in 1999, representing a 96% decrease.
The decrease resulted primarily from the elimination of interest expense
associated with the five commercial properties discussed above and the payoff
of various high interest notes including $9 million of subordinated debt at
14% interest. In addition, the accounting treatment of capitalizing the
average rate of interest relating to some of the Company's development
projects resulted in a credit to interest expense.
The provision for income taxes was $488,000 for the third quarter in
2000, a 55% decline over the third quarter in 1999 of $1.1 million due to the
lower pre-tax net income.
COMPARISON OF THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
TOTAL REVENUES
Total revenues for the nine month period ended September 30, 2000 were
$75.9 million, which represents a 22% increase over $62.3 million for the
same period in 1999. Earnings before taxes for the nine-month period ended
September 30, 2000 were $5.5 million, which represents a 19% decrease from
the same period in 1999 of $6.8 million. Net income for the nine-month period
ended September 30, 2000 was $3.8 million, which represents a 17% decrease
from $4.6 million for September 30, 1999.
Property Management. Property management and leasing operations
generated $31.1 million of revenues in the nine month period ended September
30, 2000, representing 41% of our total revenue and a 46% increase over
property management revenue of $21.2 million for the same period in 1999.
During 1999 we acquired five property management companies.
Brokerage. Brokerage commission revenues for the first nine months of
2000 were $11.4 million, representing 15% of total revenues and a 87%
increase over brokerage commission revenues for the same period in 1999 of
$6.1 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 $25.7 million for
the first nine months of 2000, representing 34% of total revenues and a
7% increase over $23.9 million for the same nine 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 nine months
period of 1999 from the sale of sixteen units of a 23 unit single family
development in Palm Desert, seven units from the Cathedral City project and
the sale of a 95-unit apartment building in Los Angeles, CA. 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 $2.7 million for the nine month period ended September 30, 2000, or
4% of total revenue compared to $1.8 million realized in the same period
during 1999, a 49% increase. Revenue from the mezzanine lending was
$1,305,000 for the nine month period ended September 30, 2000, compared to
$774,000 in the same period in 1999 due to maturing projects associated with
the loans.
Gains on restructured notes totaled $2.8 million in the nine month
period ended September 30, 2000, or 4% of total revenues, a 34% increase
from approximately $2.1 million for the nine month period ended September 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.
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Rental Income for the nine-month period ending September 30, 2000 was
$77,000 as compared to $4.8 million for the same period in 1999. This
represents a 98% decrease due to the deconsolidation of the commercial
buildings. The $77,000 was related to the condominium complex sold during
January of 2000.
Interest and other income totaled $2.2 million or 3% of total revenue
for the nine month period ended September 30, 2000, an increase of 79% from
$1.2 million during the same period in 1999. Included in this category is
interest earned on restructured notes, interest earned on the companies
deferred compensation plan, interest earned on commercial notes receivable,
the forfeiture of escrow deposit money and a lease termination fee and
expense reimbursement.
Gain on sale of commercial real estate of approximately $1.1 in for the
first nine 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 nine months of 2000 were $70.4
million, representing a 27% increase from $55.5 million for the same period
in 1999. This increase in operating expense was primarily associated with the
five property management companies acquired in 1999. The increase was
partially offset by the reduction in interest expense.
Brokerage commissions and marketing expenses increased to $6.8 million
for the nine month period ended September 30, 2000 from $663,000 during the
same period of 1999. The increase resulted from business development and
broker commissions expense which, for the most part, relates to income
generated by the property management companies acquired during the fourth
quarter of 1999.
Cost of residential real estate sold was $22.9 million for the nine
month period ended September 30, 2000, a 2% increase from $22.3 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 $22.0 million for the nine month
period ended September 30, 2000, up 74% from $12.7 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 $12.7 million during the first
nine months of 2000, representing a 59% increase over the same period in
1999 of $8.0 million. The increase is primarily due to the expenses
associated with our expanded property management operations.
Depreciation and amortization expense was $3.0 million for the first
nine months of 2000, compared to $2.4 million during the same period in 1999,
representing a 26% increase. The increase was due, in part, to the
amortization of the goodwill and property management contracts and related
expenses associated with the acquisition of the property management
companies.
Interest expense was $3.0 million for the first nine months of 2000,
compared to $9.4 million during the same period in 1999, representing a 68%
decrease. The decrease resulted from the elimination of the interest expense
associated with the five commercial properties discussed above and the payoff
of various high interest notes including $9 million of subordinated debt at
14% interest. In addition, the accounting treatment of capitalizing the
average rate of interest relating to some of the Company's development
projects resulted to a credit to interest expense.
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The provision for income taxes was approximately $1.7 million for the
first nine months of 2000, compared to $2.2 million for the same period in
1999 resulting from a decrease in pre-tax net income.
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 nine months ended
September 30, 2000 was $8.7 million, compared to $9.2 million for the same
period in 1999. The change resulted primarily from the change in net income
and accounts receivable.
Cash used in investing activities during the nine months ended
September 30, 2000 was $4.1 million, compared to $14.1 million during the
same period in 1999. The change resulted primarily from the decrease in notes
receivable acquired during 2000 compared to 1999, offset by the increase in
net contributions to joint ventures in 2000 compared to 1999.
Cash provided by financing activities was $10.0 million for the first
nine months of 2000, compared to about $17.3 million for the same period of
1999. The financing activities in the first nine months of 2000 consisted
primarily of the issuance of $15 million in senior unsecured debt, offset by
repayments of subordinated debt.
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>
27.0 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
None
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: November 13, 2000 KENNEDY-WILSON, INC.
---------------------
Registrant
/s/ Freeman A. Lyle
---------------------
Freeman A. Lyle
Executive Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
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