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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

FOR THE TRANSITION PERIOD FROM ________ TO ________.

Commission File Number 20418

KENNEDY-WILSON, INC.
(Exact name of registrant as specified in its charter)

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 o

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; 9,896,476 shares outstanding at November 11, 2002.

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KENNEDY-WILSON, INC.

FORM 10-Q

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KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

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KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

See accompanying notes to consolidated financial statements.

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KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

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KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(UNAUDITED)

Supplemental disclosures of non-cash investing and financing activities:

In May 2002, the Company contributed real estate to a joint venture investment with the following consideration, reduction of real estate of $2,948,000, addition to investments in joint ventures of $2,045,000 and addition to notes receivable of $903,000.

In June 2002, the holder of the convertible subordinated debentures converted the debentures into 749,000 shares of the Company’s common stock at a conversion price of $5.31 per share with the following consideration, extinguishment of $7.5 million of convertible subordinated debt, issuance of $3,977,000 of common stock, issuance of $2,773,000 of subordinated debt and a non-cash gain on extinguishment of debt of $750,000.

As a result of the deconsolidation of the Company’s Japan subsidiary, cash decreased by $6,181,000, accounts receivable decreased by $599,000, notes receivable decreased by $3,592,000, other assets decreased by $4,358,000, accounts payable decreased by $172,000, accrued expenses decreased by $2,597,000, accrued salaries decreased by $245,000, notes payable decreased by $6,903,000, borrowing under lines of credit decreased by $3,335,000 offset by an increase in investments in joint ventures of $1,478,000.

See accompanying notes to consolidated financial statements.

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KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)

NOTE 1 - FINANCIAL STATEMENT PRESENTATION

The accompanying consolidated financial statements have been prepared by Kennedy-Wilson, Inc. a Delaware corporation, and subsidiaries (the “Company”) without audit by independent auditors, 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, 2002 and 2001 has not been audited by independent auditors, 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, 2002 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, 2001.  Certain reclassifications have been made to prior period balances to conform to the current period presentation.

In September 2002, the Company completed a secondary public stock offering and the private sale of 2,000 shares of the stock of its Japan subsidiary.  The Company retained ownership of 37% of the subsidiary’s shares after the offering.  Subsequent to this transaction, the subsidiary, which had been consolidated in the Company’s financial statements, is accounted for as an equity method investment.  See Note 8.

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”).  SFAS 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 has performed an evaluation of its goodwill and has determined that there was no goodwill impairment as of September 30, 2002.

Goodwill amortization expense for the three and nine month periods ended September 30, 2001, after tax, was $219,000 and $663,000, respectively.

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The effects on earnings and earnings per share of excluding such goodwill amortization from the third quarter and first nine months of 2001 are as follows:

Property management contracts of $9,448,000 were acquired between 1998 and 1999 and estimated to have a useful life of seven years at the time of acquisition.  At September 30, 2002, the contracts have remaining useful lives ranging from three to four years and a net book value of $4,174,000.  The Company has performed an evaluation of the carrying amount of the contracts and has determined that there is no impairment.

In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”).  SFAS 144 supercedes SFAS 121, Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of, and applies to all long-lived assets, including discontinued operations.  SFAS 144 establishes a single accounting model for the impairment of disposal of long-lived assets, including discontinued operations.  Additionally, SFAS 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction.  SFAS 144 is effective for fiscal years beginning after December 15, 2001.  The adoption of SFAS 144 did not have a material impact on the Company’s financial position or results of operations.

In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS 145”).  The provisions of SFAS 145 relating to the early extinguishment of debt are effective for fiscal years beginning after May 15, 2002.  The Company early adopted these provisions, effective April 1, 2002.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Certain reclassifications have been made to the 2001 balances to conform with the 2002 presentation.

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.

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NOTE 3 - 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.  The Company has significant influence over these entities, but not control and accordingly, 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.

Management monitors the valuation of each individual investment on an ongoing basis. During the third quarter of 2002, management concluded that the cost basis of two investments included in investment in joint ventures in the accompanying consolidated balance sheet was not probable of recovery. Based on the analysis performed by management, the basis of one of the investments was reduced by $2.5 million and the other was reduced by $1.4 million, resulting in cost basis of the associated assets of $1 million and zero, respectively.

NOTE 4 - LINES OF CREDIT

In June 2002, the Company entered into a loan agreement that provides the Company with an unsecured revolving credit facility in the amount of $30 million.  The loan bears interest at a range of rates from prime to prime plus 0.50%, or, at borrower’s option, LIBOR plus 2.50% to LIBOR plus 3.00%.  The principal repayments under these facilities for the years 2002, 2003, 2004 and 2005 are $15 million, $10 million, $0 and $5 million, respectively. In September 2002, $7.5 million was repaid.

The Company’s ability to borrow under these facilities is subject to compliance with certain financial covenants.  As of September 30, 2002, the Company was in compliance with the covenants.

NOTE 5 - SENIOR UNSECURED NOTES

In connection with the issuance of the senior unsecured notes, the Company issued 597,888 warrants to the purchasers of the notes at an exercise price of $6.25 expiring June 2006.  The warrants contain a put provision that requires the Company, at the option of the note holders, to repurchase the common shares issued upon exercise of the warrants, at the prevailing market price, during years four through six of the warrant term.

The fair value of the warrants was estimated using a combination of the Black-Scholes Option Pricing Model and Monte Carlo Simulation.  The estimated fair value of the warrants at issuance was recorded as deferred loan costs and deducted from the note balance.  The deferred loan costs are being amortized on a straight-line basis over the life of the notes.  A liability was also recorded for the fair value of the warrants, which is adjusted quarterly to record the warrants at their estimated fair value while they are outstanding.  The estimated fair value of the warrants was $666,000 and $714,000 at September 30, 2002 and December 31, 2001, respectively, and is included in accrued expenses and other liabilities.  For the nine months ended September 30, 2002, the change in value, which amounted to a decrease of $48,000, was recorded as valuation adjustment - warrants.

NOTE 6 - CONVERTIBLE SUBORDINATED DEBT

In June 2002, the convertible subordinated debentures were exchanged for 749,000 of the Company’s common shares at the then-prevailing market price of $5.31 per share, for a total value of $3,977,000.  Subordinated debt was issued in exchange for the balance of the convertible subordinated debt in the amount of $2,773,000.  See Note 7.  The Company recognized a gain of $750,000 on the extinguishment of the debt.

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NOTE 7 - SUBORDINATED DEBT

In June 2002, the Company issued $2,773,000 of unsecured subordinated debentures. The debentures have a term of 46 months and an interest rate of 6%, interest only payable monthly.

NOTE 8 - MINORITY INTEREST

In February 2002, the Company completed an initial public offering of the shares of its formerly consolidated subsidiary, Kennedy Wilson Japan, on NASDAQ-Japan (stock symbol 4321).  The initial public offering consisted of 4,500 newly issued shares and 2,500 shares sold by the Company.  In September 2002, the Company completed a secondary public stock offering and the private sale of 2,000 shares of the stock of its Japan subsidiary.  The Company retained ownership of 37% of the subsidiary’s shares after the two offerings. Effective with the completion of the secondary offering, Kennedy Wilson Japan became an unconsolidated subsidiary in the Company’s financial statements.  As a result of the public offerings and the sale of shares, the Company recorded net gains of $4,077,000 in the third quarter and $8,822,000 in the first quarter of 2002.  In accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 51, the Company records gains as a result of equity transactions by its subsidiaries in the consolidated statements of operations.  Non-recurring, non-cash Japan IPO expense includes $1.1 million related to incentive stock issued to employees of the Company in connection with the IPO.

NOTE 9 - RESTRICTED STOCK

In April 2002, the Company’s Chairman and Chief Executive Officer was awarded a grant of 1,000,000 shares of restricted stock with dilution protection that vests over the remaining term of his employment agreement, which expires in December 2009.

NOTE 10 - COMPREHENSIVE INCOME

Comprehensive income consists of net income and other comprehensive income.  Accumulated other comprehensive income consists of foreign currency translation adjustments.  The tax provision associated with items included in other comprehensive income for the Company was $153,000 for the nine months ended September 30, 2002.  The following table provides a summary of the comprehensive income:

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NOTE 11 - INCOME TAXES

The provision for income taxes was $2,497,000 for the first nine months of 2002.  This equates to an overall tax rate that was lower than the federal statutory rate due to a portion of the gain on the sale of stock of a subsidiary not being subject to taxation.

NOTE 12 - EARNINGS PER SHARE

The following table sets forth the calculation of basic and diluted earnings per share:

Potentially dilutive securities excluded from the diluted earnings per share calculation for being anti-dilutive are as follows:

NOTE 13 - 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 Company also provides asset management services for some of our joint ventures.

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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, 2002 and balance sheet data as of September 30, 2002.

2002 Reconciliation of Reportable Segment Information

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The following tables reconcile the Company’s income and expense activity for the three and nine months ended September 30, 2001.

2001 Reconciliation of Reportable Segment Information