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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM
--------------- TO
---------------.
COMMISSION FILE NUMBER: 0-20418
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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 NUMBER)
530 WILSHIRE BOULEVARD, SUITE 101,
SANTA MONICA, CALIFORNIA 90401-1422
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 314-8400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on March 13, 1998 based on the closing price
reported on The NASDAQ National Market of such stock on such date was
approximately $8,000,000.
Registrant's Common Stock outstanding at March 13, 1998 was 1,316,344.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's proxy
statement for its 1998 Annual Meeting of Stockholders, to be held on April 29,
1998, are incorporated by reference into Part III as set forth herein.
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KENNEDY-WILSON, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
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PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 4
Item 3. Legal Proceedings........................................... 4
Item 4. Submission of Matters to a Vote of Security Holders......... 4
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 5
Item 6. Selected Financial Data..................................... 6
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 8
Item 8. Financial Statements and Supplementary Data................. 9
PART III
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 30
Item 10. Directors and Executive Officers of the Registrant.......... 30
Item 11. Executive Compensation...................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 30
Item 13. Certain Relationships and Related Transactions.............. 30
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form
8-K......................................................... 31
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ITEM 1. BUSINESS
General -- Kennedy-Wilson, Inc. (the "Company") was founded in 1977 and
incorporated in Delaware in 1992. Operations are principally conducted through
its wholly-owned operating subsidiaries, Kennedy-Wilson International, a
California corporation, and K-W Properties, a California corporation and its
wholly-owned subsidiaries. The Company's principal executive offices are located
at 530 Wilshire Boulevard, Suite 101, Santa Monica, California 90401, and its
telephone number is (310) 314-8400.
The Company provides real estate marketing and brokerage services through
its centrally-controlled international marketing network, primarily for
financial institutions, developers and government agencies. The Company has
offices in Santa Monica, San Francisco, New York, Tokyo, Hong Kong and Jakarta.
Since 1977 the Company has sold over $4 billion of commercial, hotel resort and
residential properties.
Commercial Brokerage -- The Company's commercial business concentrates on
single-seller sealed bid sales and private placement sales of high-end
commercial properties. The division opened offices in New York and Jakarta in
1997, which in addition to the Company's Tokyo and Hong Kong offices provides
greater access to the investment communities in Asia and the eastern U.S.
Auction-Marketing -- The auction-marketing method consists of a broad range
of services including market research and analysis, design and implementation of
a specific marketing plan and a professionally managed auction and closing
service. Auction-marketing provides real property owners with an opportunity to
sell their holdings on one established auction date, thereby increasing
liquidity and avoiding long-term carrying costs. In addition to real estate, the
Company has successfully used its auction-marketing methods for selling
broadband airwaves, personal property, industrial equipment and notes
collateralized by real estate.
Commercial Acquisitions -- The Company acquires selected commercial
properties that can be purchased at a significant discount to replacement cost.
In addition, the Company targets properties with a high value-added potential.
After acquisition, the Company typically implements an aggressive leasing and
capital improvement program aimed at rapid increases in cash flow and resulting
value. The Company may, depending on the availability of capital and its
assessment of risk, form joint ventures with third parties to acquire commercial
properties (See Note 4 of Notes to Consolidated Financial Statements in Item 8
hereof).
Residential Acquisitions -- K-W Properties, a wholly-owned subsidiary,
acquires, renovates and disposes of residential and income producing real
estate. These transactions generally arise as an offshoot of the Company's
normal marketing business as clients frequently want to sell property quickly
and with certainty rather than to take the time for an auction or other
marketing program. The Company may, depending on the availability of its capital
and assessment of risk, form partnerships with third parties to acquire the
residential projects. The holding period for residential projects is generally
less than one year, while commercial properties are typically held over one
year.
Note Acquisitions -- The Company, through its subsidiary KWP Financial,
purchases discounted note receivable portfolios, typically from governmental
agencies or financial institutions. The Company then either settles the notes
for cash, restructures them to performing status, or initiates foreclosure
proceedings on these assets secured by real estate.
Backlog -- At December 31, 1997, commissions subject to completion of sales
totaled approximately $2 million, compared to approximately $459,000 at December
31, 1996. Additionally, as of December 31, 1997, the Company had executed
marketing agreements on properties having an estimated aggregate gross value of
real estate sales of approximately $318 million. This compares to approximately
$143 million as of December 31, 1996.
Competition -- The real estate brokerage and auction-marketing industry
within which the Company operates is both highly fragmented and highly
competitive. The Company faces significant competition and must compete with
other commercial and residential real estate brokers and auction companies. Some
of these real estate brokerage companies are significantly larger than the
Company, possess greater financial resources and compete with the Company
directly in the auction market.
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Regulation -- The Company's real estate marketing operations are subject to
various regulations at the Federal, state and local levels as well as the
national level in various countries. The Company, through one of its officers,
must be licensed as a real estate broker in each state in which the Company
operates. State governmental bodies, such as the Department of Real Estate in
California, regulate the operations of the Company conducted under its various
real estate brokerage licenses. Company personnel performing certain functions
in the real estate marketing process must be licensed real estate salespersons
and must work under the supervision of the Company's officer/broker of record.
In certain jurisdictions in which the Company operates and as allowed by
applicable law, the Company associates with real estate brokers licensed in such
jurisdictions. The Company believes that it is in substantial compliance with
all material licensing requirements in all states and countries in which
licenses are required and in which the Company operates. In various states
including California, governmental entities license individual auctioneers and
administer various regulations governing the activities of auctioneers. The
Company believes that it is in substantial compliance with all material
licensing requirements in all states in which licenses are required for
auctioneers and in which the Company operates.
Insurance -- The Company currently maintains errors and omissions,
directors' and officers' liability, property, casualty and workers' compensation
insurance, with policy limits which the Company believes are adequate. The
Company periodically reviews and revises such limits.
Employees -- At March 13, 1998, the Company employed approximately 60
full-time and 2 part-time persons compared with 58 full-time and 2 part-time
persons at March 28, 1997. None of the Company's employees are represented by a
collective bargaining agent.
ITEM 2. PROPERTIES
The executive and administrative offices of the Company are located at 530
Wilshire Boulevard, Suite 101, Santa Monica, California, and consist of
approximately 9,000 square feet in a four story office building which the
Company purchased in April 1995. In March 1997, the Company sold the 530
Wilshire Blvd property and executed a lease agreement for the office space which
it continues to occupy for approximately $260,000 per year.
The Company also leases space for its regional and branch offices. These
facilities aggregate approximately 6,000 square feet, with an annual aggregate
base rental of approximately $227,000. The leases expire within the next five
years. The Company believes that it will be able to renew any expiring leases or
obtain suitable office space to replace such leased facilities, as necessary,
without any material increase in the Company's rental costs. As described in
Item 1 hereof, the Company acquires and disposes of income producing property in
the ordinary course of its business (See Note 3 of Notes to Consolidated
Financial Statements in Item 8 hereof).
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings generally incidental
to its business and routine. While the ultimate disposition of these ordinary
proceedings is not presently determinable, the Company's management believes
that the outcome of these proceedings will not have a material adverse effect on
the Company and such proceedings, individually or collectively, are not
material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Certificate of Incorporation was amended to effect an
increase in the number of authorized shares of common stock and preferred stock.
This amendment was approved at a Special Meeting of Stockholders held on
December 15, 1997 with 79% of the shares voted for and 21% shares abstaining.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on The NASDAQ National Market under the
symbol: KWIC. The following table sets forth the high and low closing sale
prices of the Company's Common Stock as reported in the NASDAQ National Market,
adjusted for a one-for-ten reverse stock split effective November 21, 1995 and a
20% stock dividend effective October 27, 1997:
HIGH LOW
---- ---
1995
First Quarter............................................ 14 3/5 7 2/7
Second Quarter........................................... 10 3/7 6 1/4
Third Quarter............................................ 9 8/9 4 1/6
Fourth Quarter........................................... 6 7/9 4 1/6
1996
First Quarter............................................ 5 4 1/6
Second Quarter........................................... 8 4 1/4
Third Quarter............................................ 8 1/8 6 7/8
Fourth Quarter........................................... 9 6 7/8
1997
First Quarter............................................ 10 3/7 8
Second Quarter........................................... 13 1/3 9 3/5
Third Quarter............................................ 15 12
Fourth Quarter........................................... 20 11 1/2
1998
First Quarter............................................ 22 7/8 16 1/2
As of March 13, 1998, there were 45 holders of record and approximately
1,200 beneficial holders of the Company's Common Stock. Since the completion of
the Company's initial public offering in August 1992, the Company has paid no
cash dividends, and has no present intention to commence the payment of cash
dividends.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company as of
and for each of the five fiscal years ended December 31, 1997. The data set
forth below should be read in conjunction with the Consolidated Financial
Statements and related Notes to Consolidated Financial Statements appearing
elsewhere herein and Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Total revenues.................................. $26,999 $31,967 $ 20,610 $38,647 $25,910
Total expenses.................................. $22,768 $28,376 $ 33,752 $37,589 $26,722
Income (loss) from operations................... $ 4,231 $ 3,591 $(13,142) $ 1,058 $ (812)
Net income (loss)............................... $ 4,030 $ 3,531 $(13,186) $ 1,010 $ (813)
Basic net income (loss) before extraordinary
items per share............................... $ 2.91 $ 2.24 $ (7.83) $ 0.60 $ (0.48)
Basic extraordinary item per share.............. $ 0.06 N/A N/A N/A N/A
Basic net income per share...................... $ 2.97 $ 2.24 $ (7.83) $ 0.60 $ (0.48)
Basic weighted average shares................... 1,357 1,575 1,683 1,687 1,698
Diluted net income(loss) before extraordinary
items per share............................... $ 2.87 $ 2.24 N/A $ 0.59 N/A
Diluted extraordinary item per share............ $ 0.06 N/A N/A N/A N/A
Diluted net income per share.................... $ 2.93 $ 2.24 N/A $ 0.59 N/A
Diluted weighted average shares................. 1,375 1,576 N/A 1,708 N/A
AS OF DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total assets..................................... $45,718 $51,114 $37,651 $37,014 $32,231
Total liabilities................................ $34,124 $40,732 $29,706 $15,995 $11,924
Total stockholders' equity....................... $11,594 $10,382 $ 7,945 $21,019 $20,307
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations for the Years ended December 31, 1997, 1996 and 1995
Commissions were virtually unchanged at $5.9 million from 1996 and down 10%
from $6.5 million in 1995 as a result of a decrease in residential
auction-marketing, both in number of auctions and value of properties sold and a
decline in commission rates due to competitive pressures. Sales of residential
real estate decreased 66% in 1997 compared with 1996 as a result of decreased
sales of residential real estate held for sale. Sales of residential real estate
in 1996 included three significant sales from three condominium projects located
in Hawaii, San Francisco and Los Angeles. This compares to sales of residential
real estate of $10.6 million in 1995. Cost of residential real estate sold
related to these sales also decreased 66% to $5.6 million in 1997 compared to
$16.5 million in 1996 and $10.5 million in 1995. In addition, cost of sales as a
percentage of revenue decreased to 83% in 1997 from 84% in 1996 and 99% from
1995.
Gain on sale of commercial real estate in the amount of $6.3 million for
1997 consists of the sale of four commercial properties in the ordinary course
of business. In 1996 the Company also sold a commercial property, for a net gain
of $1.5 million. There were no commercial property sales in 1995, See Note 3 of
Notes to Consolidated Financial Statements.
Gain on restructured notes receivable in the amount of $4 million in 1997
reflects the Company's increased expansion in the acquisition and disposition of
non-performing and under-performing real estate collateralized note receivable
portfolios. The notes are typically purchased at a substantial discount from
government agencies. See Item 1 and Note 2 of Notes to Consolidated Financial
Statements for further discussion.
Commission and marketing expenses decreased 40% in 1997 to $928,000 from
$1.6 million in 1996, which in turn decreased from $2.6 million in 1995.
Commission and marketing expenses decreased as a percentage of commission
revenue due to the lower costs associated with commercial brokerage compared
with auctions.
Compensation and related expenses increased by 61% in 1997 from 1996 due to
an increased number of executive employees and increased incentive compensation.
In comparison, compensation decreased 20% in 1996 from 1995 due to the reduced
number of employees resulting from the 1995 sale of a portion of the Company's
Commercial Brokerage Division and Australian subsidiary.
General and administrative expense increased 51% in 1997 to $4.7 million
from $3.1 million in 1996 which in turn decreased from $5.8 million in 1995. The
increase in 1997 was primarily due to increase in occupancy expense from the new
office in New York and corporate office rent, See Item 2. Additionally, legal
expense increased in connection with the collection and restructuring of notes
receivable, leasing and sales of commercial and residential properties.
Consulting and outside services increased primarily in connection with
acquisition of real estate and the evaluation and collection of notes
receivable. Property and liability insurance also increased due to the
acquisition of commercial real estate and construction of residential real
estate projects.
In 1995, the Company sold a portion of its Commercial Brokerage Division,
including European operations, and its Australian subsidiary. As a result, the
Company took a non-cash charge of $6,000,000 to reflect costs associated with
these actions. See Note 9 of Notes to Consolidated Financial Statements for
further discussion of the restructuring.
Year 2000 Compliance -- The inability of computers, software and other
equipment utilizing microprocessors to recognize and properly process
information containing a 2-digit year is commonly referred to as the Year 2000
Compliance issue. As the year 2000 approaches, such systems may be unable to
accurately process certain date-based information.
As the Company principally relies on third party vendors for its
applications, the Company has communicated with other companies whom it does
significant business to determine their Year 2000 Compliance readiness and the
extent to which the Company is vulnerable to any third party Year 2000 issues.
However, there can be no guarantee that the systems of other companies on which
the Company's systems
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rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with Company's systems, would not have a
material adverse effect on the Company.
The total cost to the Company of these Year 2000 Compliance activities has
not been determined and is not anticipated to be material to its financial
position or results of operations in any given year. These costs and the date on
which the Company plans to complete the Year 2000 modifications and testing
processes are based on management's best estimates, which were derived utilizing
numerous assumptions of future events including the continued availability of
certain resources, third party modification plans and other factors. However,
there can be no guarantee that the estimates will be achieved and actual results
could differ from those plans.
Liquidity and Capital Resources
The Company believes that cash and cash equivalents at December 31, 1997 of
$10.4 million, plus expected cash generated from ongoing real estate marketing
operations, continued sales of real estate owned, collections from notes
receivable, as well as a working capital line of credit, will provide the
Company with sufficient resources to fund its present and reasonably foreseeable
operations. The Company has not historically required major capital expenditures
to support its marketing operations. However, the Company believes that its
ability to make advances to its clients' marketing budgets provides a
competitive advantage. The Company's liquidity may in the future be adversely
affected by lower commission rates, or increased contributions to marketing
budgets, caused by competition from other marketing companies. Liquidity could
also be adversely affected by the Company's ability to sell real estate it has
acquired.
As discussed in Notes 7 and 8 of Notes to Consolidated Financial
Statements, the Company is obligated under various notes payable and mortgages
payable, which are secured by notes receivable and real estate held for sale.
Approximately $4.8 million of notes payable and $639,000 of mortgages are due in
1998. The Company anticipates that these amounts will be repaid from proceeds
from the sale of the related collateral.
To the extent the Company engages in additional strategic investments,
including real estate and note portfolio acquisitions, the Company may need to
obtain third party financing which could include bank financing or the public
sale or private placement of debt or equity securities. The Company has
historically been successful in arranging the required financing for its
investment activities. The increase in 1997 in the Company's acquisition line of
credit to $10 million, the additional lines of credit secured in 1997, and the
bank financing obtained for 1997 acquisitions, support the Company's belief that
it should be able to continue to secure the capital resources necessary to fund
its investments. (See Notes 8,9 and 10 of Notes to Consolidated Financial
Statements).
Forward Looking Statements
Management's Discussion and Analysis of Financial Conditions and Results of
Operations contains certain forward-looking statements that are subject to risk
and uncertainty. Investors and potential investors in the Company's securities
are cautioned that a number of factors could adversely affect the Company's
ability to obtain these results, including (a) the inability to lease currently
vacant space in the Company's properties; (b) the inability of tenants to pay
contractual rent and other expenses; (c) bankruptcies of tenants; (d) increases
in certain operating costs at the Company's properties; (e) decreases in rental
rate available from tenants leasing space in the Company's properties; (f)
unavailability of financing for acquisitions, development and redevelopment of
properties by the Company; (g) increases in interest rates; and (h) a general
economic downturn resulting in lower rents, rent delinquencies, and other
downward pressure on commissions, occupancies and rents at properties.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable. [See Item 305 of Reg. 5-K]
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
KENNEDY-WILSON, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
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Independent Auditors' Report................................ 10
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... 11
Consolidated Statements of Operations for the Three Years
Ended December 31, 1997................................... 12
Consolidated Statements of Stockholders' Equity for the
Three Years Ended December 31, 1997....................... 13
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1997................................... 14
Notes to Consolidated Financial Statements.................. 15
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Kennedy-Wilson, Inc. and Subsidiaries
Santa Monica, California
We have audited the accompanying consolidated balance sheets of
Kennedy-Wilson, Inc. and subsidiaries (the "Company"), as of December 31, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. Our audits also included the financial statement schedule listed in
the Index at Item 14. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Kennedy-Wilson, Inc. and subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 2, 1998
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KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
----------------------------
1997 1996
------------ ------------
Cash and cash equivalents................................... $ 10,448,000 $ 1,901,000
Cash -- restricted.......................................... 174,000 396,000
Accounts receivable -- other................................ 1,018,000 994,000
Notes receivable (Notes 2 and 7)............................ 9,546,000 13,787,000
Real estate held for sale (Notes 3, 8, 10 and Schedule
III)...................................................... 18,628,000 28,800,000
Investments with related parties and non-affiliates (Notes 4
and 10)................................................... 4,899,000 3,803,000
Other assets (Note 5)....................................... 1,005,000 1,433,000
------------ ------------
TOTAL ASSETS...................................... $ 45,718,000 $ 51,114,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable.......................................... $ 666,000 $ 893,000
Accrued expenses and other liabilities.................... 4,553,000 2,211,000
Notes payable (Note 7).................................... 4,764,000 8,195,000
Borrowing under lines of credit (Note 6).................. 9,039,000 8,917,000
Mortgage notes payable (Note 8 and Schedule III).......... 15,102,000 20,516,000
------------ ------------
Total liabilities................................. 34,124,000 40,732,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY (Notes 13, 14, 15, 16 and 19):
Preferred stock, $.01 par value; shares authorized;
1,000,000 in 1997 and 500,000 in 1996, none issued..... -- --
Common stock $.01 par value; shares authorized; 5,000,000
in 1997 and 2,000,000 in 1996, issued and outstanding;
1,316,344 in 1997 and 1,482,719 in 1996................ 13,000 12,000
Additional paid-in capital................................ 23,814,000 21,638,000
Accumulated deficit....................................... (10,913,000) (11,268,000)
Notes receivable from stockholders........................ (1,320,000) --
------------ ------------
Total stockholders' equity........................ 11,594,000 10,382,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 45,718,000 $ 51,114,000
============ ============
See notes to consolidated financial statements.
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KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
----------- ----------- ------------
REVENUES:
Commissions........................................... $ 5,001,000 $ 4,821,000 $ 6,468,000
Commissions -- related parties (Note 10).............. 894,000 1,052,000 89,000
Sales of residential real estate...................... 6,753,000 19,743,000 10,631,000
Equity in income of investments with related parties
and non-affiliates (Note 4)........................ 1,431,000 178,000 138,000
Gain on sale of commercial real estate................ 6,339,000 1,454,000 --
Gain on restructured notes receivable (Note 2)........ 4,036,000 3,057,000 160,000
Rental income, net.................................... 1,629,000 1,467,000 642,000
Interest income....................................... 535,000 102,000 82,000
Sale of assets and subsidiary (Note 9)................ -- -- 1,926,000
Other income.......................................... 381,000 93,000 474,000
----------- ----------- ------------
TOTAL REVENUE......................................... 26,999,000 31,967,000 20,610,000
----------- ----------- ------------
OPERATING EXPENSES:
Commissions and marketing expenses.................... 928,000 1,560,000 2,617,000
Auction-marketing expenses, net -- related parties.... -- -- 12,000
Cost of residential real estate sold.................. 5,592,000 16,523,000 10,488,000
Cost of residential real estate sold -- related
parties............................................ -- 209,000 122,000
Compensation and related expenses (Notes 12, 17, and
18)................................................ 7,658,000 4,726,000 5,883,000
General and administrative (Note 11).................. 4,661,000 3,126,000 5,800,000
Depreciation and amortization......................... 790,000 268,000 623,000
Interest expense...................................... 3,139,000 1,964,000 1,472,000
Cost of assets and subsidiary sold (Note 9)........... -- -- 735,000
Restructuring charge (Note 9)......................... -- -- 6,000,000
----------- ----------- ------------
TOTAL OPERATING EXPENSES.............................. 22,768,000 28,376,000 33,752,000
----------- ----------- ------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND
EXTRAORDINARY ITEMS................................... 4,231,000 3,591,000 (13,142,000)
PROVISION FOR INCOME TAXES (Note 11).................... 280,000 60,000 44,000
----------- ----------- ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS................ 3,951,000 3,531,000 (13,186,000)
----------- ----------- ------------
EXTRAORDINARY ITEMS (Note 20)........................... 79,000 -- --
----------- ----------- ------------
NET INCOME (LOSS)....................................... $ 4,030,000 $ 3,531,000 $(13,186,000)
=========== =========== ============
Basic net income (loss) before extraordinary items per
share................................................. $2.91 $2.24 $(7.83)
Basic extraordinary items per share..................... $0.06 -- --
Basic net income (loss) per share....................... $2.97 $2.24 $(7.83)
Basic weighted average shares........................... 1,356,777 1,574,855 1,683,429
Diluted net income (loss) before extraordinary items per
share................................................. $2.87 $2.24 N/A
Diluted extraordinary items per share................... $0.06 -- --
Diluted net income (loss) per share..................... $2.93 $2.24 N/A
Diluted weighted average share.......................... 1,374,951 1,576,435 N/A
See notes to consolidated financial statements.
12
13
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1997
COMMON STOCK ACCUMULATED NOTES
------------------- ADDITIONAL ACCUMULATED TRANSLATION RECEIVABLE
SHARES AMOUNT PAID IN CAPITAL DEFICIT ADJUSTMENT STOCKHOLDERS TOTAL
--------- ------- --------------- ------------ ----------- ------------ ------------
BALANCE, JANUARY 1, 1995.... 1,686,119 $17,000 $22,783,000 $ (1,613,000) $(168,000) -- $ 21,019,000
Foreign currency translation
adjustment................ -- -- -- -- 168,000 -- 168,000
Issuance of common stock.... 600 -- 6,000 -- -- -- 6,000
Repurchase of common
stock..................... (6,000) -- (62,000) -- -- -- (62,000)
Net loss.................... -- -- -- (13,186,000) -- -- (13,186,000)
--------- ------- ----------- ------------ --------- ----------- ------------
BALANCE, DECEMBER 31,
1995...................... 1,680,719 17,000 22,727,000 (14,799,000) -- -- 7,945,000
Repurchase of common
stock..................... (198,000) (2,000) (1,091,000) -- -- -- (1,093,000)
Net income.................. -- 3,531,000 -- -- 3,531,000
--------- ------- ----------- ------------ --------- ----------- ------------
BALANCE, DECEMBER 31,
1996...................... 1,482,719 15,000 21,636,000 (11,268,000) -- -- 10,383,000
Repurchase of common
stock..................... (166,375) (2,000) (1,497,000) -- (1,499,000)
Stock dividend.............. -- -- 3,675,000 (3,675,000) -- -- 0
Notes receivable from
stockholders.............. -- -- -- -- -- $(1,320,000) (1,320,000)
Net income.................. -- -- -- 4,030,000 -- -- 4,030,000
--------- ------- ----------- ------------ --------- ----------- ------------
BALANCE, DECEMBER 31,
1997...................... 1,316,344 $13,000 $23,814,000 $(10,913,000) -- $(1,320,000) $ 11,594,000
========= ======= =========== ============ ========= =========== ============
See notes to consolidated financial statements.
13
14
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 4,030,000 $ 3,531,000 $(13,186,000)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization............................. 790,000 268,000 623,000
Equity in income of investments with related parties and
non-affiliates.......................................... (1,431,000) (178,000) (139,000)
Gains on sales of real estate............................. (7,500,000) (1,454,000) (20,000)
Gains on sales of assets, subsidiary and partnership...... -- -- (1,543,000)
Restructuring charge...................................... -- -- 6,000,000
Extraordinary gain, net................................... (79,000) -- --
Change in assets and liabilities:
Cash -- restricted........................................ 222,000 (217,000) 718,000
Accounts receivable -- other.............................. (24,000) 751,000 3,706,000
Other assets.............................................. (184,000) (720,000) (560,000)
Accounts payable.......................................... (227,000) (191,000) (335,000)
Accrued expenses and other liabilities.................... 2,343,000 (937,000) 222,000
------------ ------------ ------------
Total adjustments.................................. (6,090,000) (2,678,000) 8,672,000
------------ ------------ ------------
Net cash provided by (used in) operating
activities....................................... (2,060,000) 853,000 (4,514,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment............... (178,000) (197,000) (160,000)
Dispositions furniture, fixtures and equipment.............. -- 559,000 24,000
Purchase and additions to real estate held for sale......... (18,841,000) (21,341,000) (31,150,000)
Proceeds from sales of real estate held for sale............ 36,304,000 25,914,000 10,631,000
Notes receivable............................................ 4,241,000 (13,552,000) 235,000
Loan receivable from stockholders........................... (1,320,000) -- --
Sales of assets, subsidiary and partnership................. -- -- 6,437,000
Distribution from partnerships.............................. 2,775,000 20,000 1,293,000
Investment in partnerships.................................. (2,153,000) (3,607,000) (139,000)
------------ ------------ ------------
Net cash provided by (used in) investing
activities....................................... 20,828,000 (12,204,000) (12,829,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations...................... -- -- 6,000
Issuance of mortgage notes payable.......................... 14,320,000 26,577,000 (61,000)
Repayment of mortgage notes payable......................... (19,734,000) (30,510,000) 28,879,000
Borrowings under lines of credit............................ 14,063,000 15,345,000 (12,040,000)
Repayment of lines of credit................................ (13,941,000) (7,453,000) --
Borrowings under notes payable.............................. 3,737,000 10,128,000 1,925,000
Repayment of notes payable.................................. (7,168,000) (1,933,000) (4,861,000)
Repurchase of common stock.................................. (1,498,000) (1,094,000) (62,000)
------------ ------------ ------------
Net cash used in financing activities.............. (10,221,000) 11,060,000 13,786,000
------------ ------------ ------------
Net increase (decrease) in cash.................... 8,547,000 (291,000) (3,407,000)
CASH, BEGINNING OF YEAR..................................... 1,901,000 2,192,000 5,599,000
------------ ------------ ------------
CASH, END OF YEAR........................................... $ 10,448,000 $ 1,901,000 $ 2,192,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest, net of capitalized interest of $340,000 in 1997,
$57,000 in 1996 and $606,000 in 1995 respectively....... $ 2,930,000 $ 2,113,000 $ 1,373,000
Income taxes.............................................. $ 246,000 $ 34,000 $ 33,000
See notes to consolidated financial statements.
14
15
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company -- Kennedy-Wilson, Inc. is a Delaware corporation, which was
incorporated in 1992. Kennedy-Wilson, Inc. and its wholly owned subsidiaries
(the "Company") provide real estate brokerage and marketing services throughout
the United States, and Asia, primarily to financial institutions, developers and
government agencies. The Company also acquires, renovates and resells
residential and commercial real estate; invests in non-performing note
receivable portfolios; and invests in various real estate joint ventures.
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries and
partnerships in which the Company has a controlling interest. For foreign
operations, assets and liabilities are translated at year-end exchange rates,
and income statement items are translated at average exchange rates prevailing
during the year. All significant inter-company transactions have been
eliminated.
Investments in Partnership -- The Company accounts for investments in
partnerships with a non-controlling interest of 50% or less using the equity
method.
Accounting Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Revenue Recognition
Commissions are generally recognized when all services to be provided by
the Company have been performed and title to real property has passed from the
seller to the buyer.
Residential real estate sales revenue and gains on sale of commercial
property are recognized at the close of escrow when title to the real property
passes to the buyer. The Company follows the guidelines for profit recognition
as set forth by Statement of Financial Accounting Statement No. 66 Accounting
for Sales of Real Estate.
Gains on notes receivable are recognized ratably upon receipt of cash or a
restructured note including a significant cash component.
Basic Net Income Per Share -- In accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings per Share, basic income per share
is computed by dividing net income by the weighted average number of shares of
common stock outstanding during the periods. Diluted net income per share is
computed by dividing net income by the weighted average number of shares of
common stock and common stock equivalents outstanding during the periods.
The basic weighted average number of shares used to compute net income per
share (restated for the 10 for 1 reverse stock split in 1995 and the 20% stock
dividend in 1997) was 1,356,777, 1,574,855, and 1,602,079 for the years ended
December 31, 1997, 1996 and 1995, respectively. The diluted weighted average
number of shares used to compute net income per share were 1,374,951 [and
1,576,435 for the years ended December 31, 1997 and 1996, respectively. For
1995, the diluted per share computation was not applicable.]
Cash and Cash Equivalents -- Cash consists of cash and all highly liquid
investments purchased with maturities of three months or less and deposits in
escrow.
Long Lived Assets -- During 1996, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. Among other
provisions, the statement changed current accounting practices for the
evaluation of
15
16
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1997
impairment of long-lived assets. The adoption did not have a material effect on
the Company's financial statements.
Fair Value of Financial Instruments
Cash, Accounts Receivable and Accounts Payable -- The carrying amounts
approximate fair value because of the short maturities of these instruments.
Bank Line of Credit -- The carrying amounts approximate fair value because
of the short maturity and because the interest varies with the prime rate. See
Note 6.
Notes Receivable and Notes Payable -- The carrying amounts approximate fair
value because of the short-term nature of these instruments. See Notes 2 and 7.
Concentration of Credit Risk -- Financial instruments that subject the
Company to credit risk consist primarily of accounts and notes receivable and
cash and cash equivalents. Credit risk is generally diversified due to the large
number of entities composing the Company's customer base and their geographic
dispersion. The Company performs ongoing credit evaluations of its customers.
Cash and cash equivalents are invested in institutions insured by government
agencies. Certain accounts contain balances in excess of the insured limits.
Inflation -- The Company's long-term leases contain provisions designed to
mitigate the adverse impact of inflation on its results from operations. Such
provisions include escalation clauses, which generally increase rental rates
during the terms of the leases. Such escalation clauses are often related to
increases in the CPI or similar inflation indices. In addition, many of the
Company's leases are for term of less than ten years, which permits the Company
to seek to increase rents upon re-rental at market rates if rents are below then
existing market rates. Many of the Company's leases require the tenants to pay a
pro rata share of operating expenses, including common area maintenance, real
estate taxes, insurance and utilities, thereby reducing the Company's exposure
to increases in costs and operating expenses resulting from inflation.
Adoption of Accounting Standards -- In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Standards No. 130 Reporting for
Comprehensive Income and No. 131, Disclosure about Segments of an Enterprise and
Related Information. These Statements are effective for financial statements
issued for fiscal years beginning after December 15, 1997. The Company has not
yet analyzed the impact of adopting these statements.
Reclassification -- Certain reclassifications have been made to the 1996
and 1995 balances to conform with the 1997 presentation.
NOTE 2 -- NOTES RECEIVABLE
Notes receivable consists primarily of non-performing loan portfolios
acquired from government agencies. The notes are typically secured by real
estate, UCC-1 filings, or are guaranteed by the borrowers.
During 1997, the Company purchased two portfolios of non-performing loans
for approximately $2.4 million. Also during 1997, the Company secured cash
settlements in the amount of approximately $12 million including interest, and
restructured notes receivable in the amount of $1.2 million.
NOTE 3 -- REAL ESTATE HELD FOR SALE
Real estate held for sale is comprised of commercial and residential
properties stated at cost plus additional capital improvements less accumulated
depreciation and amortization of $119,000 and $588,000 at December 31, 1997 and
1996 respectively.
16
17
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1997
Real estate held for sale includes the following:
DECEMBER 31,
-----------------------------
1997 1996
-------------- -----------
COMMERCIAL PROPERTIES:
530 Wilshire Blvd., Santa Monica, California -- 47,000
square foot office building............................ -- $ 7,853,000
10301 Pico, Los Angeles, California -- 50,000 square foot
office building........................................ -- 4,112,000
1131 Wilshire Blvd., Santa Monica, California -- 20,000
square foot office building............................ -- 2,873,000
1304 15th St. Santa Monica, California -- 37,000 square
foot office building................................... $ 4,889,000 4,437,000
4350 11th Ave, Los Angeles, California -- 9,000 square
foot office building................................... 438,000 --
301 S. Fair Oaks, Pasadena, California -- 55,000 square
foot office building................................... 8,808,000 --
150 E. Colorado, Pasadena, California -- 61,000 square
foot office building................................... -- 5,808,000
-------------- -----------
$14,135,000.00 $25,083,000
RESIDENTIAL PROPERTIES:
Vista Waikoloa, Waikoloa, HI -- 40 condominium units...... -- 1,494,000
Villa Del Este, Corona Del Mar, California -- 14
condominium units...................................... 112,000 2,223,000
Vista Del Valle, Granada Hills, California, 10 lots zoned
for residential units.................................. 2,810,000 --
Residential Home, Pacific Palisades, California........... 608,000 --
Younguist, Juneau, Alaska -- 9 lots zoned for residential
units.................................................. 433,000 --
Residential Home, Los Angeles, CA......................... 237,000 --
DDR, Riverside, California -- 31 lots zoned for
residential units...................................... 293,000 --
-------------- -----------
4,493,000 3,717,000
-------------- -----------
$ 18,628,000 $28,800,000
============== ===========
All real estate held for sale at December 31, 1997, except for Younguist,
DDR, 5241 Franklin and 4350 11th Ave, are collateralized by certain mortgage
loans (See Note 10 -- Mortgage notes payable). Commercial buildings and
improvements are depreciated on the straight-line method over the estimated
useful lives as follows:
Building -- 39 years
Tenant Improvement -- shorter of lease term or useful life ranging from
2 to 5 years
Depreciation expense was $428,000, $535,000, $412,000 for 1997, 1996 and
1995, respectively.
17
18
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1997
NOTE 4 -- INVESTMENTS WITH RELATED PARTIES AND NON-AFFILIATES
The Company has a number of joint venture interests ranging from 20% to
50%, some with related parties, that were formed to acquire, manage, develop and
or sell real estate assets. These investments are accounted for under the equity
method. Summarized financial data of the ventures is as follows:
DECEMBER 31, 1997
-------------------------------------------
WITH RELATED WITH
PARTIES NON-AFFILIATES TOTAL
------------ -------------- -----------
BALANCE SHEET
ASSETS
Cash and cash equivalents.......................... $ 3,319,000 $1,159,000 $ 4,478,000
Receivable......................................... 1,816,000 455,000 2,271,000
Real Estate........................................ 52,050,000 972,000 53,022,000
----------- ---------- -----------
TOTAL ASSETS.................................. $57,185,000 $2,586,000 $59,771,000
=========== ========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Accounts payable and accrued expense............... $ 2,248,000 $ 524,000 $ 2,772,000
Mortgages payable.................................. 43,836,000 -- 43,836,000
----------- ---------- -----------
Total Liabilities............................. 46,084,000 524,000 46,608,000
----------- ---------- -----------
PARTNERS' CAPITAL:
Kennedy-Wilson..................................... 3,509,000 1,390,000 4,899,000
Related parties.................................... 7,592,000 -- 7,592,000
Other partners..................................... -- 672,000 672,000
----------- ---------- -----------
Total partners' capital....................... 11,101,000 2,062,000 13,163,000
----------- ---------- -----------
TOTAL LIABILITIES AND
PARTNERS' CAPITAL........................... $57,185,000 $2,586,000 $59,771,000
=========== ========== ===========
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------
WITH RELATED WITH
PARTIES NON-AFFILIATES TOTAL
------------ -------------- -----------
STATEMENT OF OPERATIONS:
Revenues.............................................. $12,913,000 $9,284,000 $22,197,000
Expenses.............................................. 12,238,000 7,393,000 19,631,000
----------- ---------- -----------
Net income.................................... $ 675,000 $1,891,000 $ 2,566,000
=========== ========== ===========
Net income allocated to:
Kennedy-Wilson..................................... $ 115,000 $1,316,000 $ 1,431,000
Related parties.................................... 560,000 -- 560,000
Other partners..................................... -- 575,000 575,000
----------- ---------- -----------
$ 675,000 $1,891,000 $ 2,566,000
=========== ========== ===========
18
19
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1997
DECEMBER 31, 1996
---------------------------------------------
WITH RELATED WITH
PARTIES NON-AFFILIATES TOTAL
------------ -------------- -----------
BALANCE SHEET
ASSETS
Cash and cash equivalents.............. $ 463,000 $ 15,000 $ 478,000
Receivable............................. 32,000 44,000 76,000
Real Estate............................ 31,018,000 5,829,000 36,847,000
----------- ---------- -----------
TOTAL ASSETS...................... $31,513,000 $5,888,000 $37,401,000
=========== ========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Accounts payable and accrued expense... $ 173,000 $ 38,000 $ 211,000
Mortgages payable...................... 18,354,000 4,480,000 22,834,000
----------- ---------- -----------
Total Liabilities................. 18,527,000 4,518,000 23,045,000
----------- ---------- -----------
PARTNERS' CAPITAL:
Kennedy-Wilson......................... 3,118,000 685,000 3,803,000
Related parties........................ 9,868,000 -- 9,868,000
Other partners......................... -- 685,000 685,000
----------- ---------- -----------
Total partners' capital........... 12,986,000 1,370,000 14,356,000
----------- ---------- -----------
TOTAL LIABILITIES AND PARTNERS'
CAPITAL......................... $31,513,000 $5,888,000 $37,401,000
=========== ========== ===========
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------
WITH RELATED WITH
PARTIES NON-AFFILIATES TOTAL
------------ -------------- ----------
STATEMENT OF OPERATIONS:
Revenues.................................... $ 2,195,000 $390,000 $2,585,000
Expenses.................................... 1,690,000 258,000 1,948,000
------------ -------- ----------
Net income.......................... $ 505,000 $132,000 $ 637,000
============ ======== ==========
Net income allocated to:
Kennedy-Wilson........................... $ 112,000 $ 66,000 $ 178,000
Related parties.......................... 393,000 66,000 459,000
Other partners........................... -- -- --
------------ -------- ----------
$ 505,000 $132,000 $ 637,000
============ ======== ==========
19
20
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1997
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------
WITH RELATED WITH
PARTIES NON-AFFILIATES TOTAL
------------ -------------- ----------
STATEMENT OF OPERATIONS:
Revenues.................................... $ -- $2,307,000 $2,307,000
Expenses.................................... -- 2,031,000 2,031,000
------------ ---------- ----------
Net income.......................... $ -- $ 276,000 $ 276,000
============ ========== ==========
Net income allocated to:
Kennedy-Wilson........................... $ -- $ 138,000 $ 138,000
Related parties.......................... -- 138,000 138,000
Other partners........................... -- -- --
------------ ---------- ----------
$ -- $ 276,000 $ 276,000
============ ========== ==========
The related party transactions are with Goodwin Gaw and his company Pioneer
Industries International. Mr. Gaw holds 9.5% of the Company's stock and is also
a director of the Company.
The agreement for one of the investments with non-affiliates, known as
Hilltop Colony LLC, was amended, resulting in approximately $335,000 of
additional net income allocated to the Company.
NOTE 5 -- OTHER ASSETS
Other assets consist of the following:
DECEMBER 31
------------------------
1997 1996
---------- ----------
Office furniture and equipment.............................. $ 192,000 $ 917,000
Leasehold improvements...................................... 20,000 176,000
Equipment under capital leases.............................. 44,000 --
---------- ----------
256,000 1,093,000
Less accumulated depreciation and amortization.............. (100,000) (735,000)
---------- ----------
156,000 358,000
Prepaid insurance, taxes and commissions.................... 337,000 353,000
Loan fees................................................... 225,000 226,000
Deposits.................................................... 120,000 179,000
Acquisition and organization costs.......................... 114,000 117,000
Other....................................................... 53,000 200,000
---------- ----------
$1,005,000 $1,433,000
========== ==========
NOTE 6 -- BORROWINGS UNDER LINES OF CREDIT
In August 1997, the Company entered into an agreement for a real estate
acquisition facility in the amount of $60 million. $20 million of the facility
will provide 75% to 90% of the equity required for related investments, at a
rate of LIBOR plus 3.25% and a profit participation of 30% to 50%. The remaining
$40 million will be for debt financing of up to 80% of the cost at a rate of
LIBOR plus 3.25%. As of December 31, 1997, there was no balance outstanding
under this agreement.
In July 1997, the Company executed a letter of intent for a commercial
property acquisition facility in the amount of $100 million. The facility will
fund 85% of the cost of acquisitions and improvements with an initial
20
21
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1997
rate of LIBOR plus 350 basis points. As of December 31, 1997, there was no
balance outstanding under this letter of intent.
In July 1997, the Company entered into an agreement for an acquisition
facility of $24 million to be used to purchase loans. $6 million of the facility
will provide 75% to 90% of the total acquisition equity for related investments,
with a rate of LIBOR plus 425 basis points and a 30 to 45% profit participation.
The remaining $18 million will be for debt financing of up to 80% of acquisition
cost with a rate of LIBOR plus 375 basis points. As of December 31, 1997, there
was no balance outstanding under this agreement.
In May 1997, the Company entered into a loan agreement that provides the
Company with a $6 million credit facility to acquire additional notes receivable
(See Note 2). The outstanding balance as of December 31, 1997 was approximately
$3.8 million. The facility bears interest at Prime plus 1.5% and matures in May
1998.
In 1996, the Company entered into a loan agreement that provides the
Company with a $10.0 million credit facility (the "facility") which includes up
to $8.0 million in an acquisition facility and $2.0 million in an unsecured
working capital facility. In July 1997, the line of credit was increased from
$10 million to $12 million. $4 million of the facility is unsecured, and the
remaining $8 million of the facility is secured by real estate owned by the
Company. The actual availability under the secured facility is limited based on
the equity in such real estate. Proceeds from the sale of such secured real
estate are used to pay down the acquisition facility. This facility has a rate
of LIBOR plus 325 basis points. The working capital facility is due in full in
June 1998 and the acquisition facility will be due in full in 18 months from the
date of each advance. The outstanding balance as of December 31, 1998 was
$8,952,000. The principal balance is estimated to be paid in full during 1998.
The Company's Japanese subsidiary has unsecured lines of credit aggregating
approximately $500,000 under which $86,000 in borrowings were outstanding at
December 31, 1997. These borrowings bear interest at rates from 1.9% to 2.6% per
annum.
NOTE 7 -- NOTES PAYABLE
Notes payable were incurred primarily in connection with the acquisition of
notes receivable (See Note 2), and included the following:
DECEMBER 31,
------------------------
1997 1996
---------- ----------
Note payable, 10% fixed interest rate payable monthly, due
in full March 1, 1998, secured by notes receivable of
$3,857,000................................................ -- $2,867,000
Note payable, variable interest rate based on the Prime
Rate plus 2%, payable monthly, 10.25% at December 31,
1996, due in full December 31, 1997, secured by notes
receivable of $1,917,000............................... -- 1,330,000
Note payable, variable interest rate based on LIBOR plus
4.25%, payable monthly.................................... -- 3,998,000
Note payable, variable interest rate based on Prime Rate
plus 1.5%, payable monthly, 10% at December 31, 1997, due
in full June 1998, secured by notes receivable of
$1,250,000................................................ $1,000,000 --
Note payable, variable interest rate based on Prime Rate
plus 1.5%, payable monthly, 10% at December 31, 1997, due
in full May 1998, secured by notes receivable of
$6,545,000................................................ 3,764,000 --
---------- ----------
$4,764,000 $8,195,000
========== ==========
21
22
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1997
Principal is paid monthly based on a percentage of cash collections on the
notes receivable. The percentage of cash flow paid out is 80% of cash
collections. Principal balances are estimated to be paid in full during 1998.
NOTE 8 -- MORTGAGE NOTES PAYABLE
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
COMMERCIAL PROPERTIES:
Mortgage note payable, variable interest based on LIBOR,
8.32% at December 31, 1997, principal and interest
payable monthly, due September 1, 2003,
collateralized by 1304 15th Street................... $ 2,952,000 $ 3,133,000
Mortgage note payable, variable interest based on Prime
Rate plus 1%, 9.5% at December 31, 1997, principal
and interest payable monthly, due September 1, 2003,
collateralized by 1304 15th Street................... 885,000 --
Mortgage note payable, fixed interest based on the LIBOR
plus 1.75%, 7.5% at December 31, 1997 principal and
interest payable monthly, due December 1, 2004,
collateralized by 301 S. Fair Oaks................... 7,300,000 --
Mortgage note payable, fixed interest of 10%, principal
and interest payable from excess cash flow, due
November 24, 1999, collateralized by 301 S. Fair
Oaks................................................. 1,250,000 --
Mortgage note payable, 7.9% fixed interest, principal
and interest payable monthly due February 1, 2003,
collateralized by 530 Wilshire Blvd.................. -- 5,924,000
Mortgage note payable, variable interest based on LIBOR
plus 3.75%, 9.4% at December 31, 1996, principal and
interest payable monthly, due December 1, 2001,
collateralized by 150 E. Colorado.................... -- 3,850,000
Mortgage note payable, variable interest based on the
Prime Rate plus 4%, 9.5% at December 31, 1996,
principal and interest payable monthly, due October
31, 1999, collateralized by 150 E. Colorado.......... -- 1,125,000
Mortgage note payable, variable interest based on the
weekly average of secondary market interest rate on
6-month CD rounded upwards to the nearest one-eighth
of one percentage point (0.125%), 8.1% at December
31, 1996 and 8.375% at December 31, 1995, due April
1, 2003, collateralized by 10301 Pico Blvd........... -- 2,798,000
Mortgage note payable, variable interest based on Prime
Rate plus 1%, 7.7% at December 31, 1996, principal
and interest payable monthly, due August 1, 2001,
collateralized by 1131 Wilshire Blvd................. -- 2,009,000
----------- -----------
12,387,000 18,839,000
22
23
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1997
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
RESIDENTIAL PROPERTIES:
Mortgage note payable, variable interest based on the
Prime Rate plus 4%, 9.5% at December 31, 1996,
principal and interest payable monthly, due October
31, 1999, collateralized by Vista Del Valle.......... 2,294,000 --
Mortgage note payable, variable interest based on Prime
Rate plus 1.5%, interest payable monthly, due
December 7, 1998, collateralized by 737 Almar........ 421,000 --
Mortgage note payable, variable interest based on Prime
Rate plus 1.5%, interest payable monthly, due
September 15, 1997, collateralized by Villa Del
Este................................................. -- 1,677,000
----------- -----------
2,715,000 1,677,000
----------- -----------
$15,102,000 $20,516,000
=========== ===========
All of the mortgage notes payable are secured by deeds of trust on the
respective real estate properties (See Note 5). Aggregate maturities of mortgage
notes payable.
1998.................................................... $ 639,000
1999.................................................... 3,762,000
2000.................................................... 218,000
2001.................................................... 218,000
2002.................................................... 218,000
Thereafter.............................................. 10,047,000
-----------
$15,102,000
===========
NOTE 9 -- RESTRUCTURING PROGRAM AND SALE OF ASSETS
Net loss for the year ended December 31, 1995 includes charges relating to
a restructuring program designed to redirect the Company's resources and improve
operating profitability. Included in the Consolidated Statements of Operations
for the year ended December 31, 1995 are restructuring charges of $6 million,
primarily related to the write off of goodwill and certain assets, as well as
the accrual of certain lease termination costs.
In 1995, the Company sold its 50% general partnership interest in Realty
Holdings of America for an aggregate sales price of $4,575,000. The Company's
basis in the partnership was approximately $4,200,000 and after costs associated
with the sale of the Company recognized a gain of approximately $350,000.
In 1995, the Company sold the operations and certain assets of its
Commercial Brokerage Division to The Greenwich Group, L.L.C. ("TGG"), a Company
formed by the senior managers of such Division, in exchange for approximately
$1.9 million and $100,000 option which the Company exercised during 1996. TGG,
and its subsidiaries, acquired the Division's fixed assets in the Company's New
York, Chicago, Washington, European and Santa Monica offices. In addition, TGG
acquired existing marketing agreements for certain commercial and hotel property
sales which the Company was marketing. The Company's lease obligations for the
New York, Chicago, Washington, London and other European offices, as well as
certain equipment, were assigned to TGG in connection with this transaction. The
sale proceeds have been included as "Sale of assets and subsidiary" and the net
book value of the assets sold of $735,000 included as "Cost of assets and
subsidiary sold" in the Consolidated Statement of Operations.
23
24
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1997
Also in 1995, the Company sold the stock of its Australian subsidiary to
the senior managers of that entity in exchange for $31,000, forgiveness by the
Australian subsidiary of all intercompany receivable from the Company
(approximately $20,000) and the assurance that all liabilities of the subsidiary
would be paid by the subsidiary. The sale proceeds of approximately $51,000 have
been included as "Sales of Assets and Subsidiary" and the net book value of the
assets sold of ($18,000) as "Costs of Assets and Subsidiary Sold" in the
Consolidated Statement of Operations.
NOTE 10 -- RELATED PARTY TRANSACTIONS
In 1997, the Company entered into a joint venture with parties who are
affiliated with Goodwin Gaw, one of the Company's Managing Directors, a member
of the Board of Directors, and a significant stockholder. The purposes of the
joint venture is an investment in a Los Angeles office building. See Note 4.
In 1997, the firm of Kulik, Gottesman & Mouton was paid a total of $470,000
in attorney fees. In addition, Kent Mouton, a partner in the firm and a member
of the Company's Board of Directors, was paid a total of $21,000 in director's
fees for 1997.
During 1997, 1996 and 1995, the Company's auction-marketing division
conducted marketing programs for certain non-consolidated partnerships managed
by K-W Properties, a wholly owned subsidiary of the Company.
During 1997, the Company received $156,000 in commissions from the sale of
properties owned by a partnership which includes William J. McMorrow and Lewis
A. Halpert, as principals. The Company was also reimbursed $210,000 for
marketing expense.
The Company paid the spouse of one of its officers/major stockholders fees
of $16,000 and $52,000 for 1996, and 1995, respectively, for performing certain
graphic design services in connection with the printing of sales catalogues and
brochures by the Company.
In 1996, the Company entered into two joint ventures with related parties,
who are affiliated with Goodwin Gaw, one of the Company's Managing Directors, a
member of the Board of Directors, and a significant stockholder, See Note 4.
In 1995, the Company borrowed $250,000 from William J. McMorrow and Lewis
A. Halpert, current officers and directors and Kenneth V. Stevens a former
officer and director. Proceeds from such loan were used to purchase Kiowa
Gardens, a 9-unit condominium project in Brentwood, California for $2 million.
The Company also invested $250,000 in equity. The note payable required the
Company to pay a participation of up to 50% of the project's profits and the
related third party loan fees and costs. This note payable was repaid in 1996
from excess proceeds from sales of condominium units after the required payments
on the construction loan. The Company believes that the terms of this loan were
equal to or better than terms that would have been available to the Company
through an independent third party. This borrowing was reviewed and approved by
disinterested members of the Company's Board of Directors. During 1996, the
Company accrued a profit participation of $209,000 which was subsequently paid.
In 1995, the Company borrowed $400,000 from William J. McMorrow, Lewis A.
Halpert, Richard Mandel, current officers and directors, William R. Stevenson
and Kenneth V. Stevens, former officers and directors (the "Principals").
Proceeds from such loan were used to purchase Cathedral Hill Vistas, a 20-unit
condominium project in San Francisco, California for $2.6 million. The note
payable required the Company to pay a participation of up to 25% of the
project's profits and the interest at the Principals' cost of funds plus 2%, as
well as the related third party loan fees and costs. A profit participation of
$122,000 was recorded as cost of real estate sold-related parties during 1995.
The principal amount of this note payable was repaid in 1995, from proceeds from
sales of condominium units after the construction loan was paid in full. The
Company
24
25
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1997
believes that the terms of this loan were equal to or better than terms that
would have been available to the Company through an independent third party.
This borrowing was reviewed and approved by disinterested members of the
Company's Board of Directors. During 1995, the Company paid and capitalized loan
fees and interest totaling $69,000 and accrued a profit participation of
$122,000, of which $25,000 was paid in 1995 and the remaining balance in 1996.
During 1995, a director received a $12,500 consulting fee from the Company
for services performed in connection with evaluating various entity structures
suitable for the Company's income property investments.
NOTE 11 -- INCOME TAXES
The provisions for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- ------- -------
Current:
Federal.................................... $ 80,000 $ -- $ --
State...................................... 200,000 60,000 44,000
-------- ------- -------
280,000 60,000 44,000
Deferred..................................... -- -- --
-------- ------- -------
Total provision.................... $280,000 $60,000 $44,000
======== ======= =======
A reconciliation of the statutory federal income tax rate with the
Company's effective income tax rate is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
Tax (benefit) computed at statutory rate.... $ 1,472,000 $ 1,200,000 $(4,483,000)
State income tax, net of federal income tax
benefit................................... 132,000 40,000 44,000
Loss on disposition of foreign subsidiary... -- (1,189,000) --
Net tax effect of:
Meals and entertainment................... 12,000 11,000 --
Foreign income............................ 153,000 36,000 --
Other permanent adjustments............... 1,000 -- --
Valuation allowance......................... (1,490,000) (38,000) 4,483,200
----------- ----------- -----------
Provision for income taxes.................. $ 280,000 $ 60,000 $ 44,200
=========== =========== ===========
25
26
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1997
The following summarizes the effect of deferred income tax items and the
impact of "temporary differences" between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured by tax laws. Temporary
differences and carry-forwards which give rise to deferred tax assets and
liabilities are as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
DEFERRED INCOME TAX DEFERRED INCOME TAX
------------------------- -------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
----------- ----------- ----------- -----------
Prepaid expenses..................... $ -- $(117,000) $ -- $(100,000)
Accrued reserves..................... 110,000 -- 490,000 --
State taxes.......................... -- -- 20,000 --
Deferred auction marketing
expenses........................... 22,000 -- 42,000 --
Deferred gain on sale of asset....... -- (791,000) -- (691,000)
Depreciation......................... 372,000 612,000 --
Charitable contribution carryover.... 26,000 -- 31,000 --
Federal net operating loss
carryover.......................... 1,719,000 -- 3,035,000 --
State net operating loss carryover... -- -- 480,000 --
Valuation allowance.................. (1,341,000) -- (3,919,000) --
----------- --------- ----------- ---------
Total...................... $ 908,000 $(908,000) $ 791,000 $(791,000)
=========== ========= =========== =========
As of December 31, 1997, the Company had federal net operating loss
carryover of approximately $5,054,000. The federal net operating loss carryover
expires in 2009 through 2011.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
Lease Commitments -- Minimum rental commitments, net of sublease income, as
of December 31, 1997 under the non-cancelable operating leases are as follows:
YEAR ENDING NET OPERATING
DECEMBER 31, LEASES
------------ -------------
1998.................................................. $ 568,000
1999.................................................. 518,000
2000.................................................. 470,000
2001.................................................. 431,000
2001.................................................. 37,000
Thereafter............................................ --
----------
Minimum lease payments........................ $2,024,000
==========
Approximately $431,000 is due the Company in years 1998 through 2001 under
sublease agreements.
Rental expense amounted to $433,000, $200,000 and $800,000 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
Employment Agreements -- The Company has entered into employment agreements
with its principal officers which provide for annual base compensation in the
aggregate amount of $826,000 and expire at various dates through December 1999.
The employment agreements provide for the payment of an annual bonus based upon
the achievement of certain agreed-upon earnings objectives. The Company also has
employment agreements with various other non-officer employees which provide for
minimum annual compensation of $946,000 in total, and expiring at various dates
through December 1999.
26
27
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1997
Litigation -- The Company is currently a defendant in certain routine
litigation arising in the ordinary course of business. It is management's
opinion that the outcome of these actions will not have a material effect on the
financial position or results of operations of the Company.
NOTE 13 -- STOCK OPTION PLANS AND WARRANTS
The Company currently has the 1992 Incentive and Non-statutory Stock Option
Plan, which includes a Plan A and a Plan B and the 1992 Non-Employee Director
Stock Option Plan ("Plan C"). An aggregate of 240,000 shares of common stock are
reserved for issuance under Plan A and B. The Company has 18,000 shares of
common stock reserved for issuance under Plan C. Plan A permits the granting of
Incentive Stock Options to employees, including employee-directors. Plan B
permits the granting of nonstatutory stock options to employees, including
employee-directors and consultants. Plan C permits the granting of options to
non-employee-directors. Options granted under Plan A and B have an option price
of 100% of the fair market value of the common stock on the date of grant. Under
Plan C each director, upon being elected to the Board of Directors, is
automatically granted an option to purchase 2,500 shares at the fair market
value at the date of grant. Additionally, each director is granted an option to
purchase an additional 100 shares at the fair market value on the date of grant
when re-elected. The vesting schedule for options granted under Plan A and Plan
B is determined by a committee of the Board of Directors and the Compensation
Committee of the Board of Directors is currently responsible. Options granted
under Plan C become exercisable on the first anniversary of the date of the
initial grant provided that the optionee continues to serve as a director for at
least one year from the date of such initial grant. Options granted under Plan A
may be exercised for a period of up to five years from the grant date; options
granted under Plan B may be exercised for a period of up to 10 years from the
grant date. Under Plan C, each options expires on the earlier of the tenth
anniversary of the date of grant or 90 days after the individual ceases to be a
director of the Company.
Details of activity under the plans for the years ended December 31, 1995,
1996 and 1997 are as follows:
OUTSTANDING EXERCISE PRICE WEIGHTED AVERAGE
STOCK OPTIONS OPTIONS PER SHARE EXERCISE PRICE
------------- ----------- --------------- ----------------
Balance, January 1, 1995.................... 115,992 $58.33 - $ 4.17
Granted................................... 15,240 $ 6.78 - $ 4.17 $ 5.72
Forfeited................................. (94,836) $58.33 - $15.63 $37.29
-------
Balance, December 31, 1995.................. 36,396 $58.33 - $ 4.17
Granted................................... 36,120 $ 6.98 - $ 4.28 $ 5.54
Forfeited................................. (6,408) $58.33 $58.33
-------
Balance, December 31, 1996.................. 66,108 $58.33 - $ 4.17
Granted................................... 124,000 $16.75 - $ 9.75 $11.73
Forfeited................................. (5,148) $58.33 $58.33
-------
Balance, December 31, 1997.................. 184,960 $58.33 - $ 9.75
=======
WEIGHTED AVERAGE OUTSTANDING OPTIONS
REMAINING DECEMBER 31, RANGE WEIGHTED AVERAGE
CONTRACTUAL LIFE 1997 OF EXERCISE PRICE EXERCISE PRICE
- ---------------- ------------------- ----------------- ----------------
3.44 39,000 $ 4.17 - $ 4.79 $ 4.49
4.23 90,360 $ 6.98 - $ 9.58 $ 8.77
4.57 55,600 $13.54 - $58.33 $21.05
-------
184,960
=======
27
28
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1997
The fair value of the stock options granted during 1997 was $470,748. The
fair value of each stock grant is estimated using the Black-Scholes option
pricing model with the following assumptions: using the yield on a 5 year
treasury note as the risk-free interest rate; no dividend yield; expected life
of five years; and using historical cost for the volatility. The total number of
stock option shares exercisable at December 31, 1997 was 28,360.
The Company accounts for the plans in accordance with Accounting Principles
Board Opinion Number 25, under which no compensation cost has been recognized
for the stock option awards. Had compensation cost for the Company's stock
option plans been determined based on the fair value at the grant date,
consistent with the method of Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock Based Compensation, the effect on the Company's
net income and earnings per share would have been immaterial.
NOTE 14 -- REVERSE STOCK SPLIT
In 1995, at a Special Meeting of the Stockholders, an amendment to the
Company's Certificate of Incorporation effecting a one-for-ten reverse stock
split (the "Reverse Split") was approved. Effective upon such amendment, each
outstanding share automatically became one-tenth of a share. In 1996 the number
of authorized shares was also reduced by a one-for-ten ratio through an
amendment to the Company's Certificate of Incorporation. All historical share
and per share amounts have been retroactively restated to reflect the Reverse
Split.
NOTE 15 -- STOCK DIVIDEND
In October 1997, the Company declared a twenty percent stock dividend,
payable to holders of record as of October 27, 1997. All historical share and
per share amounts have been retroactively restated to reflect the dividend.
NOTE 16 -- INCREASE IN AUTHORIZED SHARES
On December 15, 1997, at a Special Meeting of the Stockholders, an
amendment to the Company's Certificate of Incorporation effecting an increase to
the number of authorized shares from 2,500,000 to 6,000,000, consisting of
5,000,000 shares of common stock and 1,000,000 shares of preferred stock.
NOTE 17 -- EMPLOYEE PROFIT SHARING PLAN
The Company maintains a profit sharing plan covering all full time
employees over the age of 21, who have completed three months of service prior
to January 1 and July 1 of each year. Contributions to the profit sharing plan
are made solely at the discretion of the Company's Board of Directors. No
contributions were made for the years ended December 31, 1997, 1996 and 1995.
In addition, the Company has a qualified profit sharing plan under
provisions of Section 401(k) of the Internal Revenue Code. Under this plan,
participants are able to make salary deferral contributions of up to 15% of
their total compensation, up to a specified maximum. The 401(k) plan also
includes provisions which authorize the Company to make discretionary
contributions. During 1997 and 1996 the Company made matching contributions of
$24,000 and $19,000, respectively to this plan. The Company made no
contributions in 1994.
NOTE 18 -- DEFERRED COMPENSATION PLAN
In 1997, the Company established a non-qualified deferred compensation plan
to provide specified benefits to a select group of management or highly
compensated employees and directors who contribute
28
29
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1997
materially to the continued growth, development and future business success of
the Company. Under this plan, participants are able to make salary deferral
contribution of up to 100% of their total compensation. The plan also includes
provisions which authorize the Company to make discretionary contributions.
During 1997, the Company made a matching contribution of $314,000.
NOTE 19 -- NOTES RECEIVABLE FROM STOCKHOLDERS
In December 1997, a group of key employees, including its principal
executive officers, purchased 73,314 shares of the Company's outstanding stock
for cash in a private transaction with an institutional investor. The purchase
represents approximately 5.6% of the Company's outstanding shares. The Company
provided recourse loans for the employees to purchase the stock totaling
approximately $1.3 million. The terms of the notes receivable are Prime plus 1%
(9.5% at December 31, 1997) interest payable semi-annually with a maturity date
of the earlier of 3 years, or at termination of employment, or sale of stock by
the employee.
NOTE 20 -- EXTRAORDINARY ITEMS
During 1997, the Company recognized a $79,000 extraordinary gain comprised
of a $288,000 gain from debt extinguishment and a $209,000 loss from loan
prepayment penalties.
NOTE 21 -- SUBSEQUENT EVENTS
In January 1998, the Company purchased the vacant lot adjacent to the 1304
15th Street building in Santa Monica, CA for $658,000. The purchase was financed
by a mortgage note in the amount of $450,000.
In January 1998, the Company purchased a 75,000 square foot office building
in Van Nuys, CA for approximately $7.4 million. The purchase was financed by a
mortgage note in the amount of $5.5 million plus an outside equity investment of
$1.5 million.
In January and February 1998, the Company purchased two residential homes
in Pacific Palisades, CA for $527,000 and $612,000 respectively. The purchases
were financed under one of the Company's lines of credit, See Note 8.
In January 1998, the Company acquired a 15% interest in a joint venture
("60 Broad Street"), with a related party, that owns a commercial property with
approximately 977,000 square foot of rental space, located in Manhattan, New
York. The Company invested approximately $3.8 million.
In February 1998, the Company purchased a 278,000 square foot office
building in downtown Los Angeles for approximately $28.6 million. The purchase
was financed by a mortgage note in the amount of $22 million plus a third party
equity investment of $4.6 million.
In March 1998, the Company purchased 23 lots zoned for residential units in
Palm Desert, CA for $1.5 million. The Company financed the purchase with a
mortgage payable of $1 million.
In March 1998, the Company purchased a note collateralized by a hotel in
Beverly Hills, CA for approximately $2.2 million. The purchase was financed by a
note payable of $1.7 million.
29
30
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the Directors and Executive Officers of the Company
will be set forth in the Company's definitive proxy statement which is to be
filed pursuant to Regulation 14A within 120 days after the Company's fiscal year
ended December 31, 1997, and such information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to Executive Compensation will be set forth in the
Company's definitive proxy statement which is to be filed pursuant to Regulation
14A within 120 days after the end of the Company's fiscal year ended December
31, 1997 and such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to Security Ownership of Certain Beneficial Owners and
Management will be set forth in the Company's definitive proxy statement which
is to be filed pursuant to Regulation 14A within 120 days after the end of the
Company's fiscal year ended December 31, 1997, and such information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to Certain Relationships and Related Transactions will
be set forth in the Company's definitive proxy statement which is to be filed
pursuant to Regulation 14A within 120 days after the end of the Company's fiscal
year ended December 31, 1997, and such information is incorporated herein by
reference.
30
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits
(1) Financial Statements. Reference is made to the Index to Financial
Statements and Schedules in Item 8 hereof.
(2) Financial Statement Schedules.
SCHEDULE III -- REAL ESTATE OWNED........................... S-1
Supplemental financial statement schedules not listed above are
omitted because either they are not applicable, not required or
because the information required is included in the consolidated
financial statements, including the notes thereto.
(3) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Certificate of Incorporation of registrant, as amended to
date.
3.2 Bylaws of the Registrant (filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (Registration
No. 33-46978) and incorporated herein by this reference.)
4.1 Form of Common Stock Certificate (filed as Exhibit 4.1 to
the Company's Registration Statement on Form S-1
(Registration No. 33-46978) and incorporated herein by this
reference.)
10.1 1992 Incentive and Nonstatutory Stock Option Plan (filed as
Exhibit 4 to the Company's Registration Statement on Form
S-8 (Registration No. 33-73324) and incorporated herein by
this reference.)
10.1.1 1997 Amendment to 1992 Incentive and Nonstatutory Stock
Option Plan.
10.2 Employment Agreement by and between the Registrant and
William J. McMorrow (filed as Exhibit 10.2 to the Company's
Registration Statement on Form S-1 (Registration No.
33-46978) and incorporated herein by this reference.) Third
Amendment to Employment Agreement dated March 31, 1995 by
and between the Registrant and William J. McMorrow. (filed
as Exhibit 10.38 of the Company's 1994 Annual Report on Form
10-K and incorporated herein by this reference). Fourth
Amendment to Employment Agreement dated as of January 1,
1996 by and between the Registrant and William J. McMorrow.
(filed as Exhibit 10.2 to the Company's 1996 Annual Report
on Form 10-K and incorporated herein by this reference).
Fifth Amendment to Employment Agreement dated as of May 19,
1997 by and between the Registrant and William J. McMorrow.
10.3 The Registrant's Employees' Profit Sharing Plan and Trust,
as amended (filed as Exhibit 10.11 to the Company's
Registration Statement on Form S-1 (Registration No.
33-46978) and incorporated herein by this reference.)
10.4 1992 Non-employee Director Stock Option Plan (filed as
Exhibit 10.26 to the Company's Registration Statement on
Form S-1 (Registration No. 33-46978) and incorporated herein
by this reference.)
10.5 Office Lease dated September 9, 1991 by and between the
Registrant and Barclay Cerci Investment Company (filed as
Exhibit 10.16 to the Company's Registration Statement on
Form S-1 (Registration No. 33-46978) and incorporated herein
by this reference.)
10.6 Indemnification Agreement dated August 13, 1992 by and among
the Registrant, Kennedy-Wilson, Inc., a California
corporation, William J. McMorrow, William R. Stevenson,
Lewis A. Halpert and Kenneth V. Stevens (filed as Exhibit
10.27 to the Company's Registration Statement on Form S-1
(Registration No. 33-46978) and incorporated herein by this
reference.)
31
32
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.7 Form of Stock Option Agreement under the Registrant's 1992
Incentive and Nonstatutory Stock Option Plan. (filed as
Exhibit 10.23 of the Company's 1992 Annual Report on Form
10-K and incorporated herein by this reference).
10.8 Form of Stock Option Agreement under the Registrant's 1992
Non-employee Director Stock Option Plan. (filed as Exhibit
10.24 of the Company's 1992 Annual Report on Form 10-K and
incorporated herein by this reference).
10.9 Employment Agreement dated as of January 1, 1997 by and
between the Registrant and Richard Mandel. (filed as Exhibit
10.9 to the Company's 1996 Annual Report on Form 10-K and
incorporated herein by this reference).
10.10 Loan Agreement dated March 12, 1996 by and between the
Registrant and East-West Bank. (filed as Exhibit 10.10 to
the Company's 1996 Annual Report on Form 10-K and
incorporated herein by this reference). Amendment to Loan
Agreement dated as of July 1, 1997 by and between the
Registrant and East West Bank.
10.11 Assignment and Assumption Agreement, dated as of December 8,
1995, by and among Kennedy-Wilson RHA Holding Company, Inc.
and Farallon U.S. Realty L.L.C. (filed as Exhibit 4.01 of
the Company's Current Report on Form 8-K dated December 15,
1995 and incorporated herein by this reference).
10.12 Employment Agreement dated January 1, 1996 by and between
the Registrant and Lewis Halpert. First Amendment to
Employment Agreement dated January 1, 1997 by and between
the Registrant and Lewis Halpert.
10.13 Employment Agreement dated April 1, 1996 by and between the
Registrant and Freeman Lyle. First Amendment to Employment
Agreement dated April 1, 1997 by and between the Registrant
and Freeman Lyle.
10.14 Loan Agreement dated May 22, 1997 by and between the
Registrant and Hawthorne Savings Bank.
21.1 List of Subsidiaries of the Registrant.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule
(b) Current Reports on Form 8-K.
None.
32
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 13, 1998 KENNEDY-WILSON, INC.
By: /s/ WILLIAM J. MCMORROW
------------------------------------
William J. McMorrow
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ WILLIAM J. MCMORROW Chairman of the Board and Chief March 13, 1998
- ----------------------------------------------------- Executive Officer (Principal
William J. McMorrow Executive Officer)
/s/ FREEMAN A. LYLE Executive Vice President, Chief March 13, 1998
- ----------------------------------------------------- Financial Officer and Secretary
Freeman A. Lyle (Principal Financial and
Accounting Officer)
/s/ LEWIS A. HALPERT Executive Managing Director and March 13, 1998
- ----------------------------------------------------- Director
Lewis A. Halpert
/s/ GOODWIN GAW Managing Director and Director March 13, 1998
- -----------------------------------------------------
Goodwin Gaw
/s/ RICHARD A. MANDEL Managing Director and Director March 13, 1998
- -----------------------------------------------------
Richard A. Mandel
/s/ DONALD F. KENNEDY Co-Founder and Director March 13, 1998
- -----------------------------------------------------
Donald F. Kennedy
/s/ DONALD B. PRELL Director March 13, 1967
- -----------------------------------------------------
Donald B. Prell
/s/ KENT MOUTON Director March 13, 1998
- -----------------------------------------------------
Kent Mouton
33
34
KENNEDY-WILSON, INC.
SCHEDULE III -- REAL ESTATE OWNED
FOR YEAR ENDING DECEMBER 31, 1997
COSTS CAPITALIZED
INITIAL COST SUBSEQUENT TO ACQUISITION
-------------------------- -------------------------
BUILDING AND CARRYING
ENCUMBRANCE LAND IMPROVEMENTS IMPROVEMENTS COSTS
COMMERCIAL PROPERTIES: ----------- ----------- ------------ ------------- ---------
1304 15th St. Santa Monica,
California --
37,000 square foot office
building...................... $ 3,838,000 $ 2,374,000 $ 2,041,000 $ 316,000 $257,000
4350 11th Ave. Los Angeles,
California --
9,000 square foot office
building...................... -- -- 438,000 -- --
301 S. Fair Oaks., Pasadena,
California --
55,000 square foot office
building...................... 8,550,000 1,841,000 6,987,000 -- --
----------- ----------- ----------- ----------- --------
12,388,000 4,215,000 9,466,000 316,000 257,000
RESIDENTIAL PROPERTIES:
Villa Del Este, Corona Del Mar,
California --
14 condominium units.......... -- 2,169,000 1,125,000 --
Vista Del Valle, Granada Hills,
California --
10 lots zoned for residential
units........................... 2,294,000 -- 2,733,000 -- 77,000
737 Almar, Brentwood,
California --
Residential home................ 420,000 608,000 -- --
Younguist, Juneau, Alaska
9 lots zoned for residential
units........................... 433,000 -- --
5241 Franklin Ave., Los Angeles,
California
Residential home................ -- 237,000 -- --
DDR, Riverside, California --
31 lots zoned for residential
units........................... -- 293,000 -- --
----------- ----------- ----------- ----------- --------
2,714,000 -- 6,473,000 1,125,000 77,000
----------- ----------- ----------- ----------- --------
Total..................... $15,102,000 $ 4,215,000 $15,939,000 $ 1,441,000 $334,000
=========== =========== =========== =========== ========
Balance at beginning of year...... $29,335,000
Additions during period:
Acquisitions.................. 16,982,000
Improvements.................. 1,775,000
Other:........................ -- 18,757,000
----------- -----------
Deductions during period:
Disposition of real estate
sold........................ 29,345,000
Other:........................ -- 29,345,000
----------- -----------
Balance at end of year............ $18,747,000
===========
GROSS AMOUNTS AT WHICH CARRIED
AT CLOSE OF PERIOD
-----------------------------------------
BUILDINGS AND ACCUMULATED DATE OF
LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION
COMMERCIAL PROPERTIES: ----------- ------------- ----------- ------------ ------------
1304 15th St. Santa Monica,
California --
37,000 square foot office
building...................... $ 2,374,000 $ 2,614,000 $ 4,988,000 $ (99,000) 1972
4350 11th Ave. Los Angeles,
California --
9,000 square foot office
building...................... -- 438,000 438,000 -- 1922
301 S. Fair Oaks., Pasadena,
California --
55,000 square foot office
building...................... 1,841,000 6,987,000 8,828,000 (20,000) 1980
----------- ----------- ----------- ---------
4,215,000 10,039,000 14,254,000 (119,000)
RESIDENTIAL PROPERTIES:
Villa Del Este, Corona Del Mar,
California --
14 condominium units.......... -- 112,000 112,000 n/a 1991
Vista Del Valle, Granada Hills,
California --
10 lots zoned for residential
units........................... -- 2,810,000 2,810,000 n/a n/a
737 Almar, Brentwood,
California --
Residential home................ -- 608,000 608,000 n/a 1994
Younguist, Juneau, Alaska
9 lots zoned for residential
units........................... -- 433,000 433,000 n/a n/a
5241 Franklin Ave., Los Angeles,
California
Residential home................ -- 237,000 237,000 n/a 1922
DDR, Riverside, California --
31 lots zoned for residential
units........................... 293,000 293,000 n/a n/a
----------- ----------- ----------- ---------
-- 4,493,000 4,493,000 --
----------- ----------- ----------- ---------
Total..................... $ 4,215,000 $14,532,000 $18,747,000 $(119,000)
=========== =========== =========== =========
Balance at beginning of year......
Additions during period:
Acquisitions..................
Improvements..................
Other:........................
Deductions during period:
Disposition of real estate
sold........................
Other:........................
Balance at end of year............
S-1