-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GEw3SEmTrhMai6/DdeK7cPEPvOtcaHfDbLJGpQVnBHnPhFYz3oF349yYmbTndLz2 c6HfDJt9bu48/N9b0d5M3A== 0000898430-01-503492.txt : 20020410 0000898430-01-503492.hdr.sgml : 20020410 ACCESSION NUMBER: 0000898430-01-503492 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KENNEDY WILSON INC CENTRAL INDEX KEY: 0000885720 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE AGENTS & MANAGERS (FOR OTHERS) [6531] IRS NUMBER: 954364537 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20418 FILM NUMBER: 1786001 BUSINESS ADDRESS: STREET 1: 9601 WILSHIRE SUITE 220 CITY: BEVERLY HILLS STATE: CA ZIP: 90210 BUSINESS PHONE: 3108876400 MAIL ADDRESS: STREET 1: 9601 WILSHIRE BLVD STREET 2: SUITE 220 CITY: BEVERLY HILLS STATE: CA ZIP: 90210 10-Q 1 d10q.txt FORM 10-Q 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 SEPTEMBER 30, 2001 [_] 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 Identification No.) incorporation or organization) 90210 9601 Wilshire Blvd., Suite 220 (Zip Code) Beverly Hills, CA (Address of principal executive offices) (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; 8,719,233 shares outstanding at November 12, 2001. KENNEDY-WILSON, INC. INDEX TO QUARTERLY REPORT ON FORM 10-Q SEPTEMBER 30, 2001
Page PART I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 (Unaudited) 3 Consolidated Statements of Income for the Three-Month and Nine-Month Periods Ended September 30, 2001 and 2000 (Unaudited) 4 Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2001 and 2000 (Unaudited) 5 Notes to Consolidated Financial Statements (Unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 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
2 KENNEDY-WILSON, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 2001 December 31, (Unaudited) 2000 ------------ ------------ ASSETS Cash and cash equivalents $ 9,279,000 $ 5,228,000 Cash - restricted 191,000 696,000 Accounts receivable 8,477,000 12,399,000 Notes receivable 16,311,000 11,320,000 Real estate held for sale 1,252,000 19,248,000 Investments in joint ventures 48,780,000 43,167,000 Contracts and other assets, net 16,803,000 16,599,000 Goodwill, net 24,184,000 24,447,000 ------------ ------------ Total assets $125,277,000 $133,104,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Accounts payable $ 762,000 $ 2,283,000 Accrued expenses and other liabilities 5,833,000 6,404,000 Accrued salaries and benefits 2,316,000 6,138,000 Deferred income taxes 3,580,000 4,475,000 Notes payable 9,433,000 8,423,000 Borrowings under lines of credit 29,678,000 28,938,000 Mortgage loans payable - 4,637,000 Senior unsecured notes 14,604,000 14,542,000 Subordinated debt 7,500,000 7,500,000 ------------ ------------ Total liabilities 73,706,000 83,340,000 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $0.01 par value: 5,000,000 shares authorized; none issued as of September 30, 2001 and December 31, 2000 - - Common stock, $0.01 par value: 50,000,000 shares authorized; 8,719,233 and 8,648,640 shares issued and outstanding as of September 30, 2001 and December 31, 2000, respectively 88,000 87,000 Additional paid-in capital 48,321,000 45,458,000 Restricted stock - deferred compensation (2,751,000) - Retained earnings 6,023,000 4,365,000 Notes receivable from stockholders (110,000) (146,000) ------------ ------------ Total stockholders' equity 51,571,000 49,764,000 ------------ ------------ Total liabilities and stockholders' equity $125,277,000 $133,104,000 ============ ============ See notes to consolidated financial statements. 3 KENNEDY-WILSON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the three months ended For the nine months ended September 30, September 30, ----------------------------- ----------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ REVENUE Property management and leasing fees $ 8,600,000 $ 9,413,000 $ 24,650,000 $ 26,362,000 Commissions 2,668,000 3,944,000 9,642,000 12,578,000 Sales of residential real estate 1,620,000 - 10,178,000 25,692,000 Equity in income of joint venture investments 1,308,000 686,000 3,929,000 2,691,000 Gain on sale of commercial real estate - - 281,000 - Gain on restructured notes receivable 130,000 516,000 177,000 2,803,000 Interest and other income 454,000 963,000 1,052,000 2,295,000 ------------ ------------ ------------ ------------ Total revenue 14,780,000 15,522,000 49,909,000 72,421,000 ------------ ------------ ------------ ------------ OPERATING EXPENSES Commissions and marketing expenses 2,018,000 1,955,000 5,740,000 3,313,000 Cost of residential real estate sold 1,594,000 - 9,879,000 22,855,000 Compensation and related expenses 5,721,000 6,602,000 17,880,000 22,201,000 General and administrative 2,776,000 4,058,000 8,389,000 12,514,000 Depreciation and amortization 978,000 1,313,000 2,904,000 3,045,000 Interest expense 659,000 158,000 2,441,000 3,012,000 ------------ ------------ ------------ ------------ Total operating expenses 13,746,000 14,086,000 47,233,000 66,940,000 ------------ ------------ ------------ ------------ Income before provision for income taxes 1,034,000 1,436,000 2,676,000 5,481,000 Provision for income taxes 394,000 488,000 1,018,000 1,669,000 ------------ ------------ ------------ ------------ NET INCOME $ 640,000 $ 948,000 $ 1,658,000 $ 3,812,000 ============ ============ ============ ============ Share data: Basic net income per share $ 0.07 $ 0.11 $ 0.19 $ 0.42 Basic weighted average shares 8,701,924 9,010,536 8,693,047 9,063,667 Diluted net income per share $ 0.07 $ 0.10 $ 0.19 $ 0.40 Diluted weighted average shares 8,901,610 10,154,688 8,842,060 10,202,068
See notes to consolidated financial statements. 4 KENNEDY-WILSON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended September 30, ------------------------------- 2001 2000 ------------ ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,658,000 $ 3,812,000 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 2,904,000 3,046,000 Equity in income of joint venture investments (3,929,000) (2,691,000) Compensation expense for restricted stock 223,000 - Gain on restructured notes receivable - non-cash - (744,000) Change in assets and liabilities: Accounts receivable 3,922,000 (1,681,000) Other assets (2,881,000) (2,885,000) Accounts payable (1,521,000) (906,000) Accrued expenses and other liabilities (1,588,000) (6,696,000) ------------ ----------- Net cash used in operating activities (1,212,000) (8,745,000) ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of contracts, furniture, fixtures and equipment (250,000) (597,000) Additions to goodwill (400,000) (1,103,000) Settlements of notes receivable 3,994,000 9,629,000 Additions to notes receivable (3,585,000) (1,695,000) Proceeds from sales of real estate held for sale 11,434,000 23,226,000 Purchase and additions to real estate held for sale (2,538,000) (22,900,000) Distributions from joint ventures 19,321,000 6,191,000 Contributions to joint ventures (20,298,000) (16,824,000) Cash - restricted decrease 505,000 2,080,000 ------------ ----------- Net cash provided by investing activities 8,183,000 (1,993,000) ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under notes payable 3,978,000 9,196,000 Repayment of notes payable (2,968,000) (7,181,000) Borrowings under lines of credit 20,879,000 22,152,000 Repayment of lines of credit (20,139,000) (22,063,000) Issuance of mortgage loans payable 1,730,000 5,733,000 Repayment of mortgage loans payable (6,367,000) (5,133,000) Senior unsecured notes 62,000 14,514,000 Repayment of subordinated debt - (9,000,000) Issuance of common stock 62,000 134,000 Repurchase of common stock (193,000) (394,000) Loan repayments from stockholders 36,000 18,000 ------------ ---------- Net cash (used in) provided by financing activities (2,920,000) 7,976,000 ------------ ---------- Net increase (decrease) in cash and cash equivalents 4,051,000 (2,762,000) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,228,000 5,243,000 ------------ ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,279,000 $2,481,000 ============ ==========
See notes to consolidated financial statements. 5 KENNEDY-WILSON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Supplemental Disclosures of Non-Cash Investing and Financing Activities: During 2001 the Company sold a real estate investment which, in addition to $1.4 million cash received, included the following consideration: reduction of real estate held for sale of $10.2 million and a reduction of deferred taxes of $3.7 million, offset by a note receivable of $5.4 million. During 2001 the Company acquired a preferred stock interest in a single purpose entity with the following consideration, reduction of real estate held for sale of $2.9 million offset against an investment in joint ventures, cost method of $2.9 million. During 2000 the Company acquired a preferred stock interest in a single purpose entity with the following consideration, reduction of prepaid expenses of $1.2 million and reduction of accounts payable of $80,000, offset against an investment in joint ventures, cost method of $1.12 million. 6 KENNEDY-WILSON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (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 information presented as of and for the three and nine month periods ended September 30, 2001 and 2000 has not been audited by independent accountants, but includes all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the results for such periods. The results of operations for the three and nine month periods ended September 30, 2001 are not necessarily indicative of results that might be expected for the full fiscal year. 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, 2000. Certain reclassifications have been made to prior period balances to conform to the current period presentation. The Company's adoption of Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", on January 1, 2001 did not have a material impact on the Company's financial position or results of operations. In July 2001, the Financial Accounting Standards Board ("FASB") approved SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 prospectively prohibits the pooling of interest method of accounting for business combinations initiated after June 30, 2001. SFAS No. 142, which is effective January 1, 2002, includes requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. The Company is currently evaluating the impact that these standards will have on its financial statements. The expense for amortization of goodwill and other intangible assets for the nine months ended September 30, 2001 and 2000 was approximately $1.7 million and $1.6 million, respectively. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses the accounting and reporting for the impairment and disposal of long-lived assets. SFAS No. 144 is effective January 1, 2002. The Company is currently evaluating the impact that this standard will have on its financial statements. NOTE 2 - INVESTMENTS IN JOINT VENTURES The Company has a number of partnerships and joint venture interests ranging from 2% to 50% that were formed to acquire, manage, develop and/or sell real estate. These investments are accounted for under the equity method. Investments in joint ventures also include mezzanine loans to real estate developers for new single-family residential developments. These investments are accounted for under the cost method. 7 NOTE 3 - REAL ESTATE HELD FOR SALE Real estate held for sale is comprised of 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 4 - EARNINGS PER SHARE The following table sets forth the calculation of basic and diluted earnings per share:
For the three months ended For the nine months ended September 30, September 30, ------------------------------ ----------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ BASIC CALCULATION Net income $ 640,000 $ 948,000 $ 1,658,000 $ 3,812,000 ============ ============ ============ ============ Weighted average shares 8,701,924 9,010,536 8,693,047 9,063,667 ============ ============ ============ ============ Earnings per share - Basic $ 0.07 $ 0.11 $ 0.19 $ 0.42 ============ ============ ============ ============ DILUTED CALCULATION Net income $ 640,000 $ 948,000 $ 1,658,000 $ 3,812,000 Income effect of dilutive securities, tax effected - 74,000 - 223,000 ------------ ------------ ------------ ------------ Diluted net income $ 640,000 $ 1,022,000 $ 1,658,000 $ 4,035,000 ============ ============ ============ ============ Weighted average shares 8,701,924 9,010,536 8,693,047 9,063,667 Convertible debentures - 750,000 - 750,000 Common stock equivalents 199,686 394,152 149,013 388,401 ------------ ------------ ------------ ------------ Total diluted shares 8,901,610 10,154,688 8,842,060 10,202,068 ============ ============ ============ ============ Earnings per share - Diluted $ 0.07 $ 0.10 $ 0.19 $ 0.40 ============ ============ ============ ============
At September 30, 2001, potentially dilutive convertible debentures are excluded from the diluted earnings per share calculation as their effect is anti-dilutive. NOTE 5 - 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 is a national commercial and residential property management and leasing company, providing a full range of services relating to property management, including tenant representation. The 8 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 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 tables reconcile the Company's income and expense activity for the three and nine months ended September 30, 2001 and balance sheet data as of September 30, 2001.
2001 Reconciliation of Reportable Segment Information For the three months ended September 30, 2001 ---------------------------------------------------------------------------------- Property Management Brokerage Investments Corporate Consolidated ----------- ----------- ----------- ----------- ------------ Property management and leasing fees $ 6,877,000 $ 1,367,000 $ 341,000 $ 15,000 $ 8,600,000 Commissions 419,000 2,142,000 253,000 (146,000) 2,668,000 Sales of residential real estate 1,620,000 1,620,000 Other 1,281,000 252,000 359,000 1,892,000 ----------- ----------- ----------- ----------- ------------ Total revenue 7,296,000 4,790,000 2,466,000 228,000 14,780,000 Operating expenses 5,989,000 2,924,000 1,740,000 3,093,000 13,746,000 ----------- ----------- ----------- ----------- ------------ Income before provision for income taxes $ 1,307,000 $ 1,866,000 $ 726,000 $(2,865,000) $ 1,034,000 =========== =========== =========== =========== ============
For the nine months ended September 30, 2001 ---------------------------------------------------------------------------------- Property Management Brokerage Investments Corporate Consolidated ----------- ----------- ----------- ----------- ------------ Property management and leasing fees $20,947,000 $ 2,923,000 $ 765,000 $ 15,000 $ 24,650,000 Commissions 1,450,000 7,595,000 743,000 (146,000) 9,642,000 Sales of residential real estate - 10,178,000 10,178,000 Other 4,090,000 855,000 494,000 5,439,000 ----------- ----------- ----------- ----------- ------------ Total revenue 22,397,000 14,608,000 12,541,000 363,000 49,909,000 Operating expenses 19,014,000 8,444,000 10,180,000 9,595,000 47,233,000 ----------- ----------- ----------- ----------- ------------ Income before provision for income taxes $ 3,383,000 $ 6,164,000 $ 2,361,000 $(9,232,000) $ 2,676,000 =========== =========== =========== =========== ============ Total assets $16,298,000 $24,946,000 $58,342,000 $25,691,000 $125,277,000 =========== =========== =========== =========== ============
9 The following tables reconcile the Company's income and expense activity for the three and nine months ended September 30, 2000. 2000 Reconciliation of Reportable Segment Information
For the three months ended September 30, 2000 ---------------------------------------------------------------------------------- Property Management Brokerage Investments Corporate Consolidated ----------- ----------- ----------- ----------- ------------ Property management and leasing fees $ 8,623,000 $ 790,000 $ 9,413,000 Commissions 1,027,000 2,642,000 $ 275,000 3,944,000 Sales of residential real estate Other 606,000 1,085,000 $ 474,000 2,165,000 ----------- ----------- ----------- ----------- ------------ Total revenue 9,650,000 4,038,000 1,360,000 474,000 15,522,000 Operating expenses 8,851,000 1,549,000 1,811,000 1,875,000 14,086,000 ----------- ----------- ----------- ----------- ------------ Income before provision for income taxes $ 799,000 $ 2,489,000 $ (451,000) $(1,401,000) $ 1,436,000 =========== =========== =========== =========== ============
For the nine months ended September 30, 2000 ---------------------------------------------------------------------------------- Property Management Brokerage Investments Corporate Consolidated ----------- ----------- ----------- ----------- ------------ Property management and leasing fees $24,952,000 $ 1,160,000 $ 250,000 $ 26,362,000 Commissions 4,171,000 7,622,000 785,000 12,578,000 Sales of residential real estate 25,692,000 25,692,000 Other 2,218,000 4,539,000 $ 1,032,000 7,789,000 ----------- ----------- ----------- ----------- ------------ Total revenue 29,123,000 11,000,000 31,266,000 1,032,000 72,421,000 Operating expenses 24,152,000 4,808,000 28,067,000 9,913,000 66,940,000 ----------- ----------- ----------- ----------- ------------ Income before provision for income taxes $ 4,971,000 $ 6,192,000 $ 3,199,000 $(8,881,000) $ 5,481,000 =========== =========== =========== =========== ============
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 MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 TOTAL REVENUE Total revenue for the three months ended September 30, 2001 was approximately $14.8 million, compared to $15.5 million during the same period in 2000. Earnings before taxes for the three months ended September 30, 2001 were approximately $ 1 million, compared to $1.4 million for the same period in 2000. Net income for the three months ended September 30, 2001 was $640,000, compared to $948,000 million for the same period in 2000. Property management and leasing operations generated $8.6 million of revenue in the third quarter of 2001, representing 58% of our total revenue as compared to approximately $9.4 million and 61% of total revenue for the same period in 2000. As of September 30, 2001, we had under management a portfolio of approximately 70 million square feet of commercial, industrial and apartment properties located in 24 states and Japan. Brokerage commission revenue for the third quarter of 2001 was approximately $2.7 million, representing 18% of total revenue, compared to approximately $3.9 million and 25% of total revenue for the third quarter of 2000. Sales of residential real estate were approximately $1.6 million for the three months ended September 30, 2001, representing 11% of total revenue compared to no sales for the same three months in 2000. Revenue for the three months ended September 30, 2001 represents the sale of seven units in a 109-unit, single family residential development near Palm Springs, California. The sales of residential real estate reflect our continuing strategy to sell upon completion of planned improvements, rather than holding for speculation. Equity in income of joint venture investments totaled approximately $1.3 million for the third quarter in 2001, or 9% of total revenue compared to $686,000 realized in the third quarter of 2000. The increase was due primarily to the increased income from our joint venture investments in Japan. Gain on restructured notes totaled $130,000 for the three months ended September 30, 2001, compared to $516,000 for the same period in 2000. The decrease reflects the fact that most of the large notes have been settled or 11 restructured and we are now in the process of settling the smaller notes. 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. TOTAL OPERATING EXPENSES Operating expenses for the third quarter of 2001 were approximately $13.7 million, compared to approximately $14.1 million for the same period in 2000. Compensation and general and administrative expenses decreased by $2.2 million which represents a 20% reduction from the same quarter last year, due to our continuing cost reduction initiatives. Cost of residential real estate sold was approximately $1.6 million for the three months ended September 30, 2001, compared to no cost for the same period in 2000. The increase correlates with the increased revenues from the sales of residential real estate discussed above. Compensation and related expenses were approximately $5.7 million for the third quarter of 2001, representing a 13% decrease from approximately $6.6 million for the third quarter of 2000. The decrease was primarily a result of the cost reduction initiatives mentioned above. General and administrative expenses were approximately $2.8 million for the third quarter of 2001, representing a 32% decrease from the same period in 2000 expenses of approximately $4.1 million. Again, the decrease was due primarily to the continuing cost reduction initiatives. Depreciation and amortization expense was $978,000 for the three months ended September 30, 2001, compared to $1.3 million for the same period of 2000. Interest expense was $659,000 for the third quarter of 2001, compared to $158,000 during the same period in 2000. The provision for income taxes was $394,000 for the third quarter in 2001, compared to $488,000 for the third quarter of 2000, as a result of the change in income before provision for income taxes. COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 TOTAL REVENUE Total revenue for the nine months ended September 30, 2001 was approximately $49.9 million, as compared to $72.4 million during the same period in 2000. Earnings before taxes for the nine months ended September 30, 2001 were approximately $2.7 million, compared to $5.5 million for the same period in 2000. Net income for the nine months ended September 30, 2001 was approximately $1.7 million, compared to approximately $3.8 million for the same period in 2000. 12 Property management and leasing operations generated approximately $24.7 million of revenue in the first nine months of 2001, representing 49% of our total revenue as compared to approximately $26.4 million for the same period in 2000. Brokerage commission revenue for the first nine months of 2001 was $9.6 million, representing 19% of total revenue, compared to brokerage commission revenue for the same period of 2000 of approximately $12.6 million. Sales of residential real estate were approximately $10.2 million for the nine months ended September 30, 2001, representing 20% of total revenue compared to approximately $25.7 million for the same period in 2000. Revenue for the first nine months of 2001 represents the sale of 43 units in a 109-unit, single family residential development near Palm Springs, California. This compares to sales in the same period of 2000 of three projects, a 53-unit condominium complex in West Los Angeles, 25 units in the same single family residential development mentioned above and two single family homes in West Los Angeles. Equity in income of joint venture investments totaled approximately $3.9 million for the first nine months of 2001, or 8% of total revenue compared to $2.7 million realized in the same period of 2000. The increase was due primarily to the increased income from our joint venture investments in Japan. Gain on sale of commercial real estate totaled $281,000 for the nine months ended September 30, 2001. There was no such similar gain in the same period of 2000. Gain on restructured notes was $177,000 for the nine months ended September 30, 2001 compared to approximately $2.8 million for the same period in 2000. The decrease reflects the fact that most of the large notes have been settled or restructured and we are now in the process of settling the smaller notes. 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. TOTAL OPERATING EXPENSES Operating expenses for the first nine months of 2001 were approximately $47.2 million, representing a 29% decrease from $66.9 million for the same period in 2000. The decrease was due, in part, to aggressive cost reduction initiatives that reduced compensation and general and administrative expenses by $8.4 million, or 24%, compared to the same period last year. Total expenses also decreased due to the reduced costs related to the sales of residential real estate as discussed above. Commissions and marketing expenses were $5.7 million for the nine months ended September 30, 2001 compared to $3.3 million during the same period of 2000, as a result of the increased broker commission expense associated with commission revenue and the leasing commission component of property management and leasing revenue. Cost of residential real estate sold was approximately $9.9 million for the nine months ended September 30, 2001, a 57% decrease from approximately $22.9 million for the same period in 2000. The decrease correlates with the decreased revenues from the sales of residential real estate discussed above. 13 Compensation and related expenses were approximately $17.9 million for the first nine months of 2001, representing a 19% decrease from approximately $22.2 million for the same period of 2000. The decrease was primarily a result of the continuing cost reduction initiatives mentioned above. General and administrative expenses were approximately $8.4 million for the first nine months of 2001, representing a 33% decrease from the same period in 2000 expenses of approximately $12.5 million. Again, the decrease is due primarily to the continuing cost reduction initiatives. Depreciation and amortization expense was $2.9 million for the nine months ended September 30, 2001 compared to $3 million during the same period of 2000. Interest expense was approximately $2.4 million for the first nine months of 2001, compared to approximately $3 million during the same period in 2000, representing a 19% decrease. The provision for income taxes was $1 million for the first nine months of 2001, compared to approximately $1.7 million for the same period of 2000, as a result of the change in income before provision for income taxes. LIQUIDITY AND CAPITAL RESOURCES Our liquidity and capital resource requirements include expenditures for joint venture investments, distressed note pools, real estate held for sale, and working capital needs. Historically, we have not required significant capital resources to support our property management and brokerage operations. We finance our operations with internally generated funds and borrowings under our revolving lines of credit as described below. Our investments in real estate are typically financed by mortgage loans secured primarily by that real estate. These mortgage loans are generally nonrecourse in that, in the event of 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, 2001 was approximately $1.2 million, compared to approximately $8.7 million in cash used in operating activities for the same period in 2000. The change included a decrease in accrued expenses offset by a decrease in accounts receivable. Cash provided by investing activities during the nine months ended September 30, 2001 was approximately $8.2 million, compared to approximately $2 million in cash used in investing activities during the same period in 2000. The change resulted primarily from the sale of residential real estate. Cash used in financing activities was approximately $2.9 million for the first nine months of 2001, compared to cash provided by financing activities for the same period of 2000 of approximately $8 million. The change resulted, in part, from a reduction in mortgage loans payable in 2001 and the issuance of senior unsecured notes in 2000. We intend to retain earnings to finance our growth and, therefore, do not anticipate paying any dividends. To the extent that we engage in additional strategic investments, 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 14 that existing cash, plus capital generated from operations as well as our unsecured lines of credit 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. 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, 2000. 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. 15 PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (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. KENNEDY-WILSON, INC. --------------------- Registrant Date: November 12, 2001 /S/ Freeman A. Lyle - ------------------------ Freeman A. Lyle Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) 16 -----END PRIVACY-ENHANCED MESSAGE-----