<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
-----------
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-20418
KENNEDY-WILSON, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4364537
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
9601 WILSHIRE BLVD, # 220
BEVERLY HILLS, CALIFORNIA 90210
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(310) 887-6400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
-----------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO / /
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: COMMON STOCK, $.01 PAR VALUE;
6,770,276 SHARES OUTSTANDING AT MAY 12, 1999.
1
<PAGE>
KENNEDY-WILSON, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
MARCH 31, 1999
<TABLE>
<CAPTION>
PAGE
<S> <C>
Part I. Financial Information............................................................................................... 3
Item 1.Financial Statements:
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998.................................. 3
Consolidated Statements of Operations for the Three Months Ended March 31, 1999 and 1998................ 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998.................................................................................. 5
Notes to Consolidated Financial Statements..............................................................6-8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 9
Part II. Other Information...................................................................................................13
Item 4. Submission of Matters to a Vote of Security Holders.......................................................... 13
Item 5. Other Information............................................................................................ 13
Item 6. Exhibits and Reports on Form 8-K............................................................................. 13
</TABLE>
2
<PAGE>
PART 1
FINANCIAL INFORMATION
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------- -------------
ASSETS 1999 1998
------------- -------------
<S> <C> <C>
Cash and cash equivalents $ 7,699,000 $ 9,838,000
Cash - restricted 7,978,000 8,168,000
Accounts receivable 5,285,000 6,674,000
Notes receivable 28,565,000 23,115,000
Real estate held for sale 123,825,000 122,407,000
Investments with related parties and non-affiliates 11,589,000 9,209,000
Contracts, furniture, fixtures and equipment and other assets 9,578,000 9,238,000
Goodwill, net 16,033,000 16,167,000
------------- -------------
TOTAL ASSETS $ 210,552,000 $ 204,816,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 2,981,000 $ 1,752,000
Accrued expenses and other liabilities 11,151,000 15,721,000
Deferred taxes 628,000 628,000
Notes payable 14,286,000 14,291,000
Borrowing under lines of credit 20,640,000 13,514,000
Mortgage loans payable 115,638,000 115,130,000
------------- -------------
Total liabilities 165,324,000 161,036,000
------------- -------------
Subordinated debt 21,000,000 21,000,000
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; shares authorized:
2,000,000 as of December 31, 1998, 5,000,000 as
of March 31, 1999; none issued -- --
Common stock $.01 par value; shares authorized:
10,000,000 as of December 31, 1998, 50,000,000 as of
March 31, 1999; shares issued 6,597,075 as of
December 31, 1998, 6,757,662 as of March 31, 1999 68,000 66,000
Additional paid-in capital 29,159,000 28,888,000
Accumulated deficit (4,799,000) (5,970,000)
Notes receivable from stockholders (200,000) (204,000)
------------- -------------
Total stockholders' equity 24,228,000 22,780,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 210,552,000 $ 204,816,000
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
REVENUES:
Property management and leasing fees $ 6,528,000 $ --
Commissions income 1,841,000 $ 2,142,000
Sales of residential real estate 4,964,000 183,000
Equity in income of investments with related parties and
non-affiliates 455,000 268,000
Rental income, net 1,686,000 679,000
Gain on restructured notes receivable 844,000 655,000
Other income 539,000 470,000
----------- -----------
TOTAL REVENUE 16,857,000 4,397,000
----------- -----------
OPERATING EXPENSES:
Commissions and marketing expenses 52,000 105,000
Cost of residential real estate sold 4,801,000 131,000
Compensation and related expenses 3,352,000 1,220,000
General and administrative 3,036,000 992,000
Depreciation and amortization 611,000 164,000
Interest expense 3,232,000 1,013,000
----------- -----------
TOTAL OPERATING EXPENSES 15,084,000 3,625,000
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,773,000 772,000
PROVISION FOR INCOME TAXES 603,000 98,000
----------- -----------
NET INCOME $ 1,170,000 $ 674,000
----------- -----------
----------- -----------
Basic net income per share $ 0.17 $ 0.11
Basic weighted average shares 6,707,284 5,924,800
Diluted net income per share $ 0.16 $ 0.11
Diluted weighted average shares 7,329,809 6,366,289
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,170,000 $ 674,000
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 611,000 164,000
Equity in income of investments with related parties
and non-affiliates (455,000) (268,000)
Gains on sales of real estate -- (52,000)
Gains on restructured notes receivable - non-cash (684,000) (449,000)
Change in assets and liabilities:
Accounts receivable 1,389,000 (1,136,000)
Other assets (290,000) (186,000)
Accounts payable 1,229,000 335,000
Accrued expenses and other liabilities (4,570,000) (1,764,000)
------------ ------------
Net cash used in operating activities (1,600,000) (2,682,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of contract, furniture, fixtures and equipment (441,000) --
Dispositions of contracts, furniture, fixtures and equipment 2,000 --
Purchase and additions to real estate held for sale (6,607,000) (50,578,000)
Proceeds from sales of real estate held for sale 5,101,000 183,000
Additions to notes receivable (5,773,000) (2,731,000)
Payments from notes receivable 1,007,000 --
Repayments from stockholders 4,000 --
Distributions from joint ventures 86,000 762,000
Contributions to joint ventures (2,011,000) (3,997,000)
------------ ------------
Net cash used in investing activities (8,632,000) (56,361,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of mortgage loans payable 1,836,000 46,141,000
Repayment of mortgage loans payable (1,328,000) (33,000)
Borrowings under lines of credit 7,476,000 3,057,000
Repayment of lines of credit (350,000) --
Borrowings under notes payable -- 4,000,000
Repayment of notes payable (5,000) (932,000)
Cash - restricted (decrease) increase 190,000 (446,000)
Issuance of common stock 274,000 18,000
------------ ------------
Net cash provided by financing activities 8,093,000 51,805,000
------------ ------------
Net decrease in cash (2,139,000) (7,238,000)
CASH, BEGINNING OF YEAR 9,838,000 10,448,000
------------ ------------
CASH, END OF YEAR $ 7,699,000 $ 3,210,000
------------ ------------
------------ ------------
</TABLE>
5
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
UNAUDITED
NOTE 1 - FINANCIAL STATEMENT PRESENTATION
The above financial statements have been prepared by Kennedy-Wilson,
Inc. a Delaware corporation, and subsidiaries (the "Company") without audit
by independent public accountants, pursuant to the Rules and Regulations
promulgated by the Securities and Exchange Commission. The statements, in
the opinion of the Company, present fairly the financial position and results
of operations for the dates and periods indicated. The results of operations
for interim periods are not necessarily indicative of results to be expected
for full fiscal years. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
Rules and Regulations promulgated by the Securities and Exchange Commission.
The Company believes that the disclosures contained in the financial
statements are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998. Certain reclassifications
have been made to prior period balances to conform to the current period
presentation.
NOTE 2 - NOTES RECEIVABLE
Notes receivable consists primarily of non-performing notes and
related assets acquired from financial institutions. A majority of these
notes are typically collateralized by real estate, personal property or
guarantees. Notes receivable also includes mezzanine loans to real estate
developers for new single-family residential developments.
In January 1999, the Company executed a mezzanine loan agreement for
$750,000 bearing an interest rate of 10% per annum secured by two third trust
deeds, a pledge of the borrower's cash distribution in a non-related project
and a personal guarantee by the borrower. The Company is entitled to a
participation in any profits from the development.
In February 1999, the Company executed a mezzanine loan agreement
for $342,122 bearing an interest rate of 10% per annum with a maturity date
no later than July 31, 2000. The loan is secured by a deed of trust, security
agreement and fixture filing encumbering the project and a repayment
guarantee from members of the borrower. Also in February 1999, the Company
executed a mezzanine loan agreement for $300,753 bearing an interest rate of
10% per annum with a maturity date no later than July 31, 2000. The loan is
secured by a deed of trust, security agreement and fixture filing encumbering
the project and a repayment guarantee from members of the borrower. The
Company is entitled to a participation in any profits from both projects.
In March 1999, the Company executed a mezzanine loan agreement for a
maximum sum of $5,760,000, bearing an interest rate of 12% per annum. The
amount outstanding as of March 31, 1999 was $3,465,030. The loan is secured
by a construction deed of trust, assignment of leases, security agreement and
fixture filing encumbering the property.
6
<PAGE>
NOTE 3 - INVESTMENTS WITH RELATED PARTIES AND NON-AFFILIATES
In January 1999, the Company acquired a 2.5% interest in a joint
venture ("First Colony KW") with Colony Capital Inc., an affiliate of
Thomas Barrack, Jr., a current director. First Colony KW purchased a
commercial property with approximately 244,000 square feet of rental space,
located in Kawasaki, Japan. The Company's investment at March 31, 1999 was
approximately $756,000.
In March 1999, the Company acquired a 5% interest in a joint venture
("KA Capital") with Cargill Japan, to purchase distressed loans and
properties from Japanese financial institutions. The Company's investment at
March 31, 1999 was approximately $742,000.
NOTE 5 - SEGMENT INFORMATION
The Company's business activities currently consist of property management,
commercial and residential brokerage, and various type of real estate
investments.
The following tables reconcile the Company's income and expense activity
for the three months March 31, 1999.
1999 Reconciliation of Reportable Segment Information
<TABLE>
<CAPTION>
Property
Management Brokerage Investments Corporate Consolidated
<S> <C> <C> <C> <C> <C>
Revenues: 6,528,000 1,841,000 8,389,000 99,000 16,857,000
Operating expenses: 3,892,000 1,230,000 8,190,000 1,772,000 15,084,000
---------- ---------- ---------- ---------- ----------
Income before provision
for income taxes 2,636,000 611,000 199,000 (1,673,000) 1,773,000
Provision for income taxes -- -- -- 603,000 603,000
---------- ---------- ---------- ---------- ----------
Net Income 2,636,000 611,000 199,000 (2,276,000) 1,170,000
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
7
<PAGE>
The following tables reconcile the Company's income and expense activity
for the months ended March 31, 1998.
1998 Reconciliation of Reportable Segment Information
<TABLE>
<CAPTION>
Property
Management Brokerage Investments Corporate Consolidated
<S> <C> <C> <C> <C> <C>
Revenues: 592,000 1,140,000 2,154,000 71,000 3,957,000
Operating expenses: 62,000 954,000 1,453,000 716,000 3,185,000
---------- ---------- ---------- ---------- ----------
Income before provision
for income taxes 530,000 186,000 701,000 (645,000) 772,000
Provision for income taxes -- -- -- 98,000 98,000
---------- ---------- ---------- ---------- ----------
Net Income 530,000 186,000 701,000 (743,000) 674,000
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
NOTE 6 - SUBSEQUENT EVENTS
In April 1999, the Company acquired all of the assets of Coastal
Commercial Real Estate Services, Inc., which does business as R&B Commercial
Real Estate Services, a Los Angeles based company that manages and leases a
portfolio of approximately 5 million gross square feet of real estate
primarily located in Arizona, Texas and throughout California for
approximately $1 million plus up to an additional $1.2 million to be paid in
three annual installments provided that a specified pretax net operating
income is achieved in each of the three years.
In April 1999, the Company's line of credit with East West Bank was
increased from $21 million to approximately $22.5 million with a maturity
date of June 6, 2000, and interest due monthly at a rate equal to three month
LIBOR plus 2%.
In April 1999, the Company issued and sold convertible
subordinated debentures in the aggregate principal amount of $7.5 million.
The debentures have a term of seven years and an interest rate of 6%,
payable monthly. The debentures are convertible into the Company's Common
Stock at any time by the holders thereof at a conversion price of $10 per
share (subject to adjustment). At the current conversion price, the
debentures are convertible into 750,000 shares of the Company's Common
Stock. The Company is obligated to register the shares of the Company's
Common Stock which may be purchased upon conversion with the Securities and
Exchange Commission under the Securities Act of 1933 by August 13, 1999. Also
in April 1999, the Company purchased 21,000 shares of the Company's Common
Stock from one of the holders of the debentures.
In May 1999, the Company registered, issued and sold 2,300,000
shares of its Common Stock in an underwritten public offering.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are an international real estate services and investment
company. We provide property management and leasing services, asset
management, commercial and residential brokerage, and auction services to
clients primarily in the U.S. and Japan. Our clients include financial
institutions, major corporations, real estate developers, insurance companies
and governmental agencies. We also invest in commercial and residential real
estate, as well as individual and pools of distressed notes both in the U.S.
and Japan.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
TOTAL REVENUES.
Total revenue for the three months ended March 31, 1999 was
approximately $16.9 million representing a 326% increase over total revenue
for 1998 of approximately $4.0 million. Revenues increased in every category
with the largest increase of 1003% occurring in property management and
leasing fees. We acquired our property management and leasing subsidiary
Kennedy-Wilson Properties Ltd. in July 1998.
Property management and leasing fees. Property management and
------------------------------------
leasing fees during the first quarter of 1999 increased 1000% over the same
period in 1998. The acquisition of Kennedy-Wilson Properties Ltd. in July 1998
increased property related fees by approximately $5.4 million and additional
fees of $709,000 were earned by our commercial brokerage group relating to the
leasing and asset management of commercial buildings in Japan and New York
in which we hold equity interests of 2% and 15%, respectively. This is
compared to $592,000 of leasing fees earned in the first quarter of 1998.
Brokerage. Commission income during the first quarter of 1999
---------
increased by 62% over the first quarter of 1998 due to an increased number of
brokerage closings including two hotels located in Washington, D.C. and San
Francisco, California and a commercial office building in Santa Monica,
California.
Investments. For the three months ended March 31, 1999, revenue
-----------
from the sales of residential real estate of approximately $5.0 million
reflects the sales of 15 homes, which are part of a project located in Palm
Desert, California. Sales revenue of $183,000 in the same period in 1998
represents the sale of one condominium unit in a project in Corona Del Mar,
California.
Equity in income of investments with related parties and
non-affiliates increased 70% in the first quarter of 1999 over the same
period in 1998 primarily due to investment activities in Japan.
Rental income, net for the three months ended March 31, 1999 was
$1.69 million equating to a 149% increase compared to $679,000 during the
first quarter in 1998. This was due to the addition of 2 large commercial
office buildings purchased in the second half of 1998, as well as, the
effects of an intensified leasing program.
Gain on restructured notes receivable for the first quarter of
1999 was $844,000 compared to $655,000 during the same period in 1998
resulting in a 29% increase. This was due to the settlement of several large
non-performing notes.
Other income increased 15% due to increased asset management and
consulting fees earned in Japan.
9
<PAGE>
TOTAL OPERATING EXPENSES.
Operating expenses increased 316.2% for the quarter ending March
31, 1999 compared to the three months ended March 31, 1998 due primarily to
the acquisition of Kennedy-Wilson Properties Ltd. and a larger commercial
properies portfolio.
Brokerage commissions and marketing expenses during the period
decreased 50.4% over the same period in 1998 due to a decrease in residential
auctions which typically result in higher brokerage commissions and marketing
expenses.
Cost of residential real estate sold increased 3564.9% resulting
from the sales of the 15 homes discussed above.
Compensation and general and administrative expense increased
174.8% due primarily to the acquisition of Kennedy-Wilson Properties Ltd.
Depreciation and amortization expense increased 273% due to the
amortization of the goodwill and other assets relating to the purchase of
Kennedy-Wilson Properties Ltd.
Interest expense on the debt we incurred to finance the
acquisition of Kennedy-Wilson Properties Ltd. and our commercial property
portfolio resulted in a 219% increase in interest expense over the same
period in 1998.
Provision for taxes for the three months ending March 31
increased 515.3% to $603,000 in 1999 from $98,000 in 1998. The tax expense
during past years has been significantly less than the statutory rate due to
substantial net operating losses carried forward which have been utilized in
reducing our federal tax liabilities. We anticipate paying the statutory rate
in 1999.
Earnings before taxes for 1999 in the first quarter were
approximately $1.8 million, which represents a 130% increase over the same
period in 1998. Net income for the first quarter 1999 was $1.17 million,
which represents a 74% increase over 1998.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources requirements include
expenditures for real estate held for sale, distressed notes pools, the
acquisition of property management portfolios, and working capital needs.
Historically, we have not required significant capital resources to support
our brokerage operations. We finance our operations with internally generated
funds and borrowings under our revolving lines of credit as described below.
Our investments in real estate are typically financed by mortgage loans
secured primarily by that real estate. These mortgage loans are generally
nonrecourse in that, in the event of a default, recourse will be limited to
the mortgaged property serving as collateral, subject to certain exceptions
that are standard in the real estate industry. Exceptions where the lender
may proceed against the borrower or guarantor, if any, generally include the
voluntary transfer of the mortgaged property by the borrower, the voluntary
initiation of bankruptcy proceedings by the borrower, fraud or
misrepresentation in obtaining the loan, and other similar acts.
Cash used in operating activities during the three months ended
March 31 was about $1.6 million in 1999, compared to $2.7 million in cash
used in operating activities in 1998. The change included an increase in
accounts receivable attributable primarily to property management fees which
are received one month in arrears, as well as leasing commissions earned but
not received until the related tenant moves in, offset by the decrease in
accrued expenses as payments were made for 1998 bonuses and deferred
compensation.
Cash used in investing activities during the three months ended
March 31 was about $9.2 million in 1999, compared to $56.4 million in cash
used by investing activities during the same period in 1998. The change
resulted primarily from no acquisition of commercial properties in 1999
compared with three in the first quarter of 1998.
Cash provided by financing activities was about $8.6 million in
1999, compared to cash used in financing activities in 1998 of about $51.8
million. The change resulted from issuance of about $46 million of mortgage
loans payable in 1998 and none in 1999.
To the extent that we engage in additional strategic investments,
including real estate, note portfolio, or acquisitions of other property
management companies, we may need to obtain third party financing which could
include bank financing or the public sale or private placement of debt or
equity securities. We believe that existing cash, plus capital generated from
property management and leasing, brokerage, sales of real estate owned,
collections from notes receivable, as well as our total current unsecured
$22.5 million lines of credit with East-West Bank maturing June 6, 2000,
which had an outstanding balance as of May 11, 1999 of $12.7 million and an
interest rate due monthly equal to three month LIBOR plus 2%, will provide us
with sufficient capital requirements for the foreseeable future.
We intend to retain earnings to finance our growth and,
therefore, do not anticipate paying any dividends. We believe that funds
generated from operations together with existing cash and available credit
under our credit facilities will be sufficient to finance our current
operations, planned investments, acquisitions of the property management
companies, and internal growth. Our need, if any, to raise additional funds
to meet our working capital and capital requirements will depend on numerous
factors, including the success and pace of the implementation of our strategy
for growth. We regularly monitor capital raising alternatives to be able to
take advantage of other available avenues to support our working capital and
investment needs, including strategic partnerships and other alliances, bank
borrowings, and the sale of equity or debt securities.
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. Such factors are
discussed in our Registration Statement (Registration No. 333-74391) under
"Risk Factors" and elsewhere, and in other reports filed with the Securities
and Exchange Commission. These factors include, but are not limited to (a)
the inability to lease currently vacant space in properties; (b) the
inability of tenants to pay contractual rent and other expenses; (c)
bankruptcies of tenants; (d) increases in certain operating costs at
properties; (e) decreases in rental rate available from tenants leasing space
in properties; (f) unavailability of financing for acquisitions, development
and redevelopment of properties; (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.
11
<PAGE>
YEAR 2000 ISSUE
HOW DOES THE YEAR 2000 ISSUE IMPACT US?
We are not currently aware of any internal Year 2000 problems
that could be reasonably expected to have a material adverse impact on our
business, results of operations and financial condition. The vendors from
which we will acquire hardware and software for our new information
technology system have indicated the products we plan to use are currently
Year 2000 compliant. The majority of the mechanical systems at the properties
we own and manage have manual overrides. We plan to have a management team at
each building immediately prior to January 1, 2000 who will be able to
respond to any contingencies. In addition, our team at Kennedy-Wilson, Tech.,
who is supervising Year 2000 compliance efforts at buildings we manage whose
owners have chosen to participate in our program and at buildings we own,
will be assembled in their office ready to respond to any inquiries from the
management teams.
However, there can be no assurance that we will not discover Year
2000 problems in information technology systems or mechanical systems that
will require substantial revisions or replacement. We cannot give assurances
that third-party software, hardware or services incorporated into our
material systems or systems upon which we are reliant will not need to be
revised or replaced, which could be time consuming and expensive.
In addition, we cannot give assurances that governmental
agencies, utilities third-party service providers and others outside of our
control will be Year 2000 compliant. The failure of such entities to become
compliant could result in a systemic failure beyond our control, such as loss
of telecommunications or electrical failure, which could adversely impact our
information technology systems or would allow tenants at the buildings we own
or manage to terminate leases if such failures persist.
SUBSEQUENT EVENTS
In April 1999, the Company acquired all of the assets of Coastal
Commercial Real Estate Services, Inc., which does business as R&B Commercial
Real Estate Services, a Los Angeles based company that manages and leases a
portfolio of approximately 5 million gross square feet of real estate
primarily located in Arizona, Texas and throughout California for
approximately $1 million plus up to an additional $1.2 million to be paid in
three annual installments provided that a specified pretax net operating
income is achieved in each of the three years.
In April 1999, the Company's line of credit with East West Bank was
increased from $21 million to approximately $22.5 million with a maturity
date of June 6, 2000, and interest due monthly at a rate equal to three month
LIBOR plus 2%.
In April 1999, the Company issued and sold convertible subordinated
debentures in the aggregate principal amount of $7.5 million. The debentures
have a term of seven years and an interest rate of 6%, payable monthly. The
debentures are convertible into the Company's Common Stock at any time by the
holders thereof at a conversion price of $10 per share (subject to
adjustment). At the current conversion price, the debentures are convertible
into 750,000 shares of the Company's Common Stock. The Company is obligated
to register the shares of the Company's Common Stock which may be purchased
upon conversion with the Securities and Exchange Commission under the
Securities Act of 1933 by August 13, 1999. Also in April 1999, the Company
purchased 21,000 shares of the Company's Common Stock from one of the holders
of the debentures.
In May 1999, the Company registered, issued and sold 2,300,000
shares of its Common Stock in an underwritten public offering.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 25, 1999, a special meeting of our stockholders was held
to consider and act upon proposed amendments to: (i) our 1992 Incentive and
Nonstatutory Stock Option Plan to increase the number of shares available for
issuance under the plan from 1,080,000 to 1,700,000 and (ii) our Certificate
of Incorporation to effect an increase in the number of authorized shares of
common stock and preferred stock from 10,000,000 and 2,000,000 to 50,000,000
and 5,000,000, respectively. Both amendments were approved by our
stockholders. In voting for the amendment to our stock option option plan,
stockholders of 4,975,383 shares voted for, stockholders of 403,657 shares
voted against, and stockholders of 2,061 shares abstained. The amendment to
our Certificate of Incorporation was approved with stockholders of 4,993,631
shares voting for, stockholders of 385,293 shares voting against and
stockholders of 2,177 shares abstaining. No broker non-votes were recorded
for either proposal.
ITEM 5. OTHER INFORMATION
The Annual Meeting of Stockholders is scheduled for June 23,
1999. Shareholder proposals for inclusion in this year's Annual Meeting of
Stockholders are being accepted until May 28, 1999, four days before we
expect to mail proxy statements to our stockholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following Exhibits are included herein:
EXHIBIT INDEX
<TABLE>
<CAPTION>
ITEM DESCRIPTION
- ---- -----------
<S> <C>
3.0 1999 Amendment to Certificate of Incorporation (Filed as Exhibit
3.1.2 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-74391) and incorporated herein by this
reference).
10.1 1999 Amendment to 1992 Incentive and Nonstatutory Stock Option Plan
(Filed as Exhibit 10.4.4 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-74391) and
incorporated herein by this reference).
10.2 Convertible Debenture Purchase Agreement dated as of April 15,
1999 among the Registrant, William McMorrow, Lewis Halpert,
Cahill, Warnock Strategic Partners Fund, L.P. and Strategic
Associates, L.P. (Filed as Exhibit 10.31.1 to the Registrant's
Registration Statement on Form S-1 (Registration No. 333-74391)
and incorporated herein by this reference).
10.3 Registration Rights Agreement dated as of April 15, 1999 among the
Registrant, Cahill, Warnock Strategic Partners Fund, L.P. and
Strategic Associates, L.P. (Filed as Exhibit 10.31.2 to the
Registrant's Registration Statement on Form S-1 (Registration No.
333-74391) and incorporated herein by this reference).
10.4 Form of Convertible Subordinated Note issued by the Registrant on
April 26, 1999 to Cahill, Warnock Strategic Partners Fund, L.P.
and Strategic Associates, L.P. (Filed as Exhibit 10.31.3 to the
Registrant's Registration Statement on Form S-1 (Registration No.
333-74391) and incorporated herein by this reference).
10.5 First Amendment to Credit Agreement and Note dated as of April 1,
1999 between the Registrant and East-West Bank.
27.0 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
On March 11, 1999, we filed a report on Form 8-K disclosing
the contents of a press release announcing our proposed
secondary offering of our Common Stock, which was subsequently
consummated on May 17, 1999.
13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 17, 1999 KENNEDY-WILSON, INC.
------------------------------
Registrant
/s/ Freeman A. Lyle
------------------------------
Freeman A. Lyle
Executive Vice President
Chief Financial Officer & Secretary
(Principal Financial and Accounting Officer)
14
<PAGE>
FIRST AMENDMENT TO CREDIT AGREEMENT AND NOTE
THIS FIRST AMENDMENT TO CREDIT AGREEMENT AND NOTE is entered into as
of April 1, 1999 between KENNEDY-WILSON, INC., a Delaware corporation
("Borrower"), and EAST-WEST BANK, a California banking corporation ("Lender").
RECITALS
A. Borrowed and Lender are parties to the Amended and Restated
Revolving Credit Agreement dated as of September 10, 1998 (the "Credit
Agreement"). Debt outstanding under the Credit Agreement is evidenced by the
Amended and Restated Promissory Note dated September 10, 1998 in the
principal amount of $20,000,000 made by Borrower and payable to the order of
Lender (the "Note").
B. Borrower and Lender desire to increase the amount available to
borrow under the Credit Agreement and accordingly wish to enter into this
Agreement.
AGREEMENT
1. AMENDMENTS.
(a) "$20,000,000" in Sections 1.1(c)(i), 1.3(a)(c)(i), 1.3(c),
2.4(b)(i) of the Credit Agreement, the form of Certification for Loan Request
set forth as Exhibit A to the Credit Agreement and on the first page of the
Note is deleted and "$21,500,000" is inserted in its place. Also, "Twenty
Million" on the first page of the Note is deleted and "Twenty-One Million
Five Hundred Thousand" is inserted in its place.
(b) A Section 4.15 is added to the Credit Agreement as follows:
"4.15 POSITIVE NET INCOME. Borrower shall earn net income (calculated in
accordance with generally accepted accounting principles) in each fiscal
year."
2. CONDITIONS PRECEDENT. The effectiveness of the amendments set
forth in Section 1 above is subject to the following conditions precedent:
(a) Lender shall have received from Colony K-W, LLC a consent to
the increase in the amount of credit available under the Credit Agreement and
the Note and a confirmation that its loans to Borrower continue to be
subordinate in right of repayment to the credit extended pursuant to the
Credit Agreement; and
(b) such other conditions as Lender shall reasonably require.
3. OTHER AMENDMENTS. Each reference in the Credit Agreement and the
Note to the Credit Agreement and the Note will mean and be a reference to the
Credit Agreement and Note as amended by this Amendment.
-1-
<PAGE>
4. FULL FORCE AND EFFECT. Borrower represents that it has no rights
of setoff relating to or defenses against payment of the credit extended by
the Credit Agreement and the Note, that the indebtedness owing under the
Credit Agreement and Note is payable in accordance with the terms of such
documents, and, except as provided in or contemplated by this Amendment, such
documents remain unmodified and in full force and effect.
5. ENTIRE AGREEMENT. This Amendment constitutes the entire agreement
and understanding among the parties with respect to the subject matter of
such amendments and supersedes all prior agreements and understandings with
respect to such subject matter, whether oral or written.
6. FEES AND EXPENSES. Borrower agrees, on Lender's demand, to pay
all costs and expenses incurred by Lender in connection with this Amendment.
KENEDY-WILSON, INC., a Delaware
corporation
By: /s/ [ILLEGIBLE]
----------------------------
EAST-WEST BANK, a California banking
corporation
By:
-------------------------------
Kathleen Kwan, Vice President
-2-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 15,677,000
<SECURITIES> 0
<RECEIVABLES> 33,850,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 133,403,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 210,552,000
<CURRENT-LIABILITIES> 165,324,000
<BONDS> 115,638,000
0
0
<COMMON> 68,000
<OTHER-SE> 24,160,000
<TOTAL-LIABILITY-AND-EQUITY> 210,552,000
<SALES> 0
<TOTAL-REVENUES> 16,857,000
<CGS> 0
<TOTAL-COSTS> 15,084,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,232,000
<INCOME-PRETAX> 1,773,000
<INCOME-TAX> 603,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,170,000
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.16
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