<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 22, 1999
REGISTRATION NO. 333-74391
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
PRE-EFFECTIVE AMENDMENT
NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
KENNEDY-WILSON, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 6531 95-4364537
(State or other Jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Code Number) Identification
Incorporation or Organization) Number)
</TABLE>
9601 WILSHIRE BOULEVARD
SUITE 220
BEVERLY HILLS, CALIFORNIA 90210-5205
(310) 887-6400
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
--------------------------
<TABLE>
<S> <C> <C>
WILLIAM J. MCMORROW (Copy to:) (Copy to:)
CHIEF EXECUTIVE OFFICER RICHARD K. SMITH, JR., ESQ. ROGER M. COHEN, ESQ.
9601 WILSHIRE BOULEVARD, SUITE 220 WHITE & CASE LLP ALLEN Z. SUSSMAN, ESQ.
BEVERLY HILLS, CA 90210-5205 633 WEST FIFTH STREET, SUITE 1900 BROBECK, PHLEGER & HARRISON LLP
(310) 887-6400 LOS ANGELES, CA 90071-2007 38 TECHNOLOGY DRIVE
(Name, Address, Including Zip Code, (213) 620-7700 IRVINE, CA 92612
and Telephone Number, Including Area (949) 790-6300
Code, of Agent for Service)
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE(2) OFFERING PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
2,300,000
Common stock, $0.01 par value............... shares(1) $9.875 $22,712,500 $6,314.08
</TABLE>
(1) Includes 300,000 shares of common stock that the underwriters have the
option to purchase solely to cover over-allotments.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933.
(3) Previously paid.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 22, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
[LOGO]
THE OFFERING
- - We are offering for sale 2,000,000 shares of common stock.
OFFERING PROCEEDS
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------- ----------
<S> <C> <C>
- - Price to public $ $
- - Underwriters' discounts and
commissions $ $
- - Proceeds to us $ $
</TABLE>
UNDERWRITING
- - Friedman, Billings, Ramsey & Co., Inc. and Wedbush Morgan Securities Inc. have
agreed to underwrite this offering on a firm commitment basis.
- - We have granted the underwriters a 30-day option to purchase up to an
additional 300,000 shares of common stock to cover over-allotments.
OUR COMMON SHARES
- - The common shares offered by this prospectus will be listed for trading on the
NASDAQ NATIONAL MARKET under the trading symbol "KWIC."
- - On April 21, 1999, the closing price of our shares on the NASDAQ National
Market was $9.875 per share.
OUR BUSINESS
We are an integrated, international real estate services and investment company.
- - We offer a complementary array of real estate services including property
management, asset management, leasing, brokerage and auctioning services.
- - We invest as a principal in real estate and distressed note pools.
OUR GROWTH OBJECTIVES
- - Continue to rapidly expand our nationwide property management business both
internally and through acquisitions in what we believe is a highly fragmented
industry.
- - Provide our real estate services to the Japanese real estate market through
our long-standing relationships.
- - Manage and participate in capital funds which purchase undervalued loans and
real estate.
- - Make principal investments in real estate and distressed note pools in the
U.S. and Japan and provide mezzanine financing for real estate developments in
the U.S.
------------------------
INVESTING IN COMMON STOCK INVOLVES RISKS. YOU SHOULD CONSIDER CAREFULLY THE
RISK FACTORS BEGINNING ON PAGE 8 BEFORE PURCHASING OUR COMMON STOCK.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
FRIEDMAN BILLINGS RAMSEY WEDBUSH MORGAN SECURITIES
THIS PROSPECTUS IS DATED MAY , 1999
<PAGE>
DESCRIPTION OF ARTWORK
1. FRONT INSIDE COVER OF FOLD IN PROSPECTUS. The name of the Company and
its web site address (www.kennedywilson.com) are in the upper left hand corner.
Pictures of three office buildings adorn the right half of the page. The Company
provides leasing services for the top building, holds a principal investment in
the middle building, and provided brokerage services for the sale of the bottom
building. The left side below the Company's name and website lists the real
estate services provided by the Company: "Property Management, Asset Management,
Leasing Services, Real Estate Brokerage, Auction Services and Principal
Investments." A box of text in the lower left hand corner reads:
"Who We Are
We are an international real estate services and investment company.
Through our seven principal U.S. offices and our office in Tokyo, we
provide a range of professional real estate services to a
well-established institutional client base. We also invest for our own
account and manage for our clients investments in pools of distressed
notes.
Our Growth Objectives
- Continue to rapidly expand our nationwide property management business
both internally and through acquisitions.
- Provide our real estate services to the Japanese real estate market
through our long-standing relationships.
- Manage and participate in joint ventures which purchase undervalued
loans and real estate.
- Make principal investments in real estate and distressed note pools in
the U.S. and Japan and provide mezzanine financing for real estate
developments."
"KWIC" is printed in rows throughout the page.
2. FOLD-OUT IN PROSPECTUS. The Company's mission statement, "We will seize
the opportunity" is across the top. A map of the United States and inserts of
Japan and Hong Kong list principal offices and territories where the Company has
property management operations, principal investments and where the Company
provides brokerage and auction services. A partial list of clients is also
displayed.
3. BACK INSIDE COVER OF FOLD IN PROSPECTUS. The Company states its vision:
"Kennedy-Wilson is a cross-cultural family of seasoned, creative, real estate
professionals through our focus and integrity, we generate long term and loyal
relationships with our clients, employees and investors." The Company states its
mission: "To be the most recognized and respected company in real estate
services and investments, to create an environment of fairness and integrity,
which allows our employees to achieve their professional and personal goals, to
achieve profits and shareholder value superior of our peers, to be innovative
and responsive to market changes."
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION DISCUSSED IN MORE DETAIL ELSEWHERE IN
THIS PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER BEFORE DECIDING TO INVEST IN OUR COMMON
STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE RISKS OF
INVESTING IN OUR COMMON STOCK DISCUSSED UNDER "RISK FACTORS" AND THE MORE
DETAILED DESCRIPTION OF OUR BUSINESS IN THE SECTIONS HEADED "BUSINESS" AND
"CONSOLIDATED FINANCIAL STATEMENTS", TOGETHER WITH THE CORRESPONDING NOTES,
BEFORE INVESTING IN OUR COMMON STOCK.
WHO WE ARE
We are an international real estate services and investment company. Through
our seven principal U.S. offices and our office in Tokyo, we provide a range of
professional real estate services to a well-established institutional client
base. We also invest for our own account and manage for our clients investments
in pools of distressed notes, meaning notes where the borrower has stopped
paying or is late in paying. At the end of 1998, we had total assets of $204.8
million and our revenues for the year were $50.9 million, representing an
increase of 88.4% over revenues for 1997. Our earnings before interest, taxes,
depreciation and amortization were $16.6 million in 1998, a 103.7% increase over
1997 results of $8.2 million.
Our three primary business lines are:
- property and asset management services;
- brokerage and auction services; and
- our investments as a principal in commercial and residential real estate
and distressed note pools.
As a result of our July 1998 acquisition of Heitman Properties, Ltd., we are
now a national property management company. We have over 51 million gross sq.
ft. of commercial and residential real estate under management in 83 cities
located in 25 states and in the District of Columbia. We believe the property
management industry is highly fragmented and, as a result, acquisition
opportunities exist. Thus, one of our strategies for growth is to acquire
additional property management companies and to continue to expand our
geographic scope.
Last year in our brokerage business we sold $522.9 million worth of
commercial and residential real estate for our clients and ourselves in 30 sales
transactions. Our brokerage clients include major U.S. and Japanese corporations
and financial institutions. We expect our property management business to
provide us with additional brokerage opportunities.
In the past, our brokerage relationships provided us with attractive
commercial and residential real estate investment opportunities in the U.S.
Within the next year, we plan to liquidate our currently held, U.S.,
wholly-owned commercial real estate investments due to our belief that these
assets are or soon will be stabilized, meaning that our planned improvements and
leasing plans are or soon will be completed. We anticipate that our property
management and brokerage operations will provide us opportunities to make
selective U.S. real estate investments.
We believe that the U.S. commercial real estate market may have matured
because strong growth in the U.S. economy has resulted in higher sales prices.
In contrast, we think that the Japanese real estate market offers significant
growth and investment opportunities due to depressed real estate prices
resulting from the recent Asian economic downturn. Over the last 10 years,
through our brokerage operations, we have developed strong relationships with
Japanese corporations and financial institutions. We believe that these
relationships resulted in the joint ventures that we have entered into with
companies and partnerships affiliated with Colony Capital, Inc. and Cargill,
Incorporated to invest in Japanese real estate and distressed notes. Under the
typical joint venture arrangement, including the Colony Capital and Cargill
agreements, we make minor equity investments and earn a profit participation as
well as acquisition and management fees.
We also broker the sales of commercial real estate in Japan. We expect this
business to increase based on our belief that as the Japanese economy recovers,
outside sources of capital will increase their investments in Japan.
3
<PAGE>
OUR STRATEGIES FOR GROWTH
- Expand our fee income by growing our property management and real estate
related services in the U.S. and Japan.
- Increase the cross-marketing of our services through newly-acquired
business lines.
- Grow our Japanese business by leveraging our existing relationships in,
and knowledge of, the Japanese real estate market.
- Bolster our presence on the Internet through the development of eKWIC.com,
an Internet real estate auctioning business scheduled for debut in the
fall of 1999.
- Take advantage of our improved capital structure and enhanced borrowing
ability as a result of this offering.
OUR COMPETITIVE ADVANTAGES
- Well-regarded reputation in the markets we serve.
- Complementary array of real estate services.
- Long-standing relationships with clients for whom we satisfy diverse real
estate needs.
- Entrepreneurial culture embodied in our organization and compensation
structures.
- Established relationships in, and knowledge of, the Japanese real estate
market.
- Experienced management team with low turnover.
THE OFFERING
The following summarizes this offering of common stock. We are presenting
this information as if the underwriters do not exercise their over-allotment
option by purchasing an additional 300,000 shares from us.
<TABLE>
<S> <C>
6,770,276
Common stock outstanding as of April 21, 1999.............. shares
2,000,000
Common stock offered by us................................. shares
8,770,276
Common stock to be outstanding after the offering.......... shares
Use of proceeds............................................ debt reduction
NASDAQ National Market Symbol.............................. KWIC
</TABLE>
- ------------------------
(1) Excludes 1,537,715 shares of common stock subject to outstanding options and
warrants. See "Management--Stock Option Plans."
The underwriters expect to deliver the shares of common stock to purchasers
on May 13, 1999 by way of book entry with the Depository Trust Company.
EXCEPT AS NOTED, ALL OF THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. ALL COMMON STOCK SHARE
DATA REFLECTS ALL STOCK DIVIDENDS PAID PRIOR TO THE DATE OF THIS PROSPECTUS, AND
ALL REFERENCES TO "US" AND "WE" INCLUDE ALL OF OUR SUBSIDIARIES WHERE WE EXERT
CONTROL OVER THEIR OPERATIONS.
4
<PAGE>
RECENT DEVELOPMENTS
On April 21, 1999, we reported preliminary results of operations for the
three months ended March 31, 1999. Revenues for the first quarter were $16.9
million, and net income for the first quarter was $1.2 million or $0.16 per
share. For the first quarter ended March 31, 1998, revenues were $4.4 million
and net income was $0.7 million or $0.11 per share.
On March 27, 1999, we entered into an agreement with Coastal Commercial Real
Estate Services, Inc., doing business as R&B Commercial Real Estate Services, to
purchase all of its assets consisting primarily of property management
contracts. R&B Commercial will either assign such contracts to us or appoint us
as sub-agent thereunder. These property management contracts cover approximately
5.0 million gross square feet of commercial and residential properties. The
purchase price was $1.0 million plus up to an additional $1.2 million payable
over the next three years depending on the pre-tax net operating income
generated by the purchased assets. We financed the initial payment of the
purchase price with borrowings under our line of credit with East-West Bank.
On April 21, 1999, eKWIC Inc., our wholly owned subsidiary, signed a letter
of intent with Guidance Solutions, Inc. to jointly develop an interactive
Internet auction service for the marketing and sale of residential and
commercial real estate. The service will be located at www.eKWIC.com. Subject to
the execution of a definitive agreement, Guidance Solutions will create and
maintain the website in exchange for an initial 15% ownership of eKWIC and up to
an additional 10% ownership if certain capital raising requirements, budget
goals and performance deadlines are met. We will provide to eKWIC the hardware
and software necessary to support the website and our real estate marketing,
sales and auction expertise.
On April 15, 1999, we entered into a Convertible Debenture Purchase
Agreement under which we agreed to issue and sell 6% subordinated convertible
debentures in the original aggregate principal amount of $7,500,000 to Cahill,
Warnock Strategic Partners Fund, L.P. and Strategic Associates, L.P. on April
26, 1999. The debentures mature on April 15, 2006 and bear interest at 6% per
annum payable monthly in arrears and at maturity. Holders of the debentures may
convert their debentures at any time into common stock at a conversion price of
$10.00 per share subject to adjustments as provided in such Purchase Agreement.
We expect to use the proceeds of the debentures to pay down amounts borrowed
under our line of credit with East-West Bank.
We recently leased to various tenants approximately 334,000 square feet of
office space in the New York City office building in which we own a 15%
interest. These leases increased the occupancy in that building from
approximately 45% to approximately 87%.
We have entered into discussions with Nippon Jisho, an office building
management affiliate of Nippon Credit Bank, to form a joint venture to manage
and broker real property in Japan.
5
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following is a summary of our consolidated historical financial data. It
is derived from our audited financial statements as of and for each of the
previous five years ended December 31. The unaudited pro forma data for the year
ended December 31, 1998 is presented as if our acquisition of Heitman
Properties, Ltd. on July 17, 1998 had occurred at January 1, 1998. See
"Business--Our Business Operations--Property Management and Leasing." The pro
forma information is not necessarily indicative of what our actual results would
have been as of and for the periods indicated; nor does it purport to represent
our future results of operations. The summary historical and pro forma
consolidated financial and other data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes and pro
forma financial statements and related notes in this prospectus.
KENNEDY-WILSON, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, UNAUDITED UNAUDITED
----------------------------------------------------- PRO FORMA PRO FORMA
1994 1995 1996 1997 1998 1998 AS ADJUSTED(6)
--------- --------- --------- --------- --------- ----------- --------------
(IN 000S, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Property management fees......... -- -- -- -- $ 14,194 $ 31,024 $ 31,024
Brokerage commissions............ $ 16,554 $ 6,557 $ 5,873 $ 5,895 4,917 4,917 4,917
Investments
Sales of residential real
estate....................... 16,495 10,631 19,743 6,753 13,828 13,828 13,828
Gain on sale of
investments(1)............... 2,990 2,087 4,511 10,375 10,642 10,642 10,642
Equity in income of investments
with related parties and non-
affiliates................... 1,393 138 178 1,431 612 612 612
Rental income.................. -- 642 1,467 1,629 4,583 4,583 4,583
Other income(2).................. 1,215 555 195 916 2,096 3,131 3,131
--------- --------- --------- --------- --------- ----------- --------------
Total revenues................... 38,647 20,610 31,967 26,999 50,872 68,737 68,737
--------- --------- --------- --------- --------- ----------- --------------
OPERATING EXPENSES
General, administrative and
compensation................... 14,786 11,683 7,852 12,319 21,472 33,115 33,115
Cost of residential real estate
sold........................... 15,147 10,610 16,732 5,592 12,249 12,249 12,249
Depreciation and amortization.... 895 623 268 790 2,059 2,939 2,939
Interest expense................. 635 1,472 1,964 3,139 8,398 10,122 8,389
Other(3)......................... 6,126 9,364 1,560 928 532 532 532
--------- --------- --------- --------- --------- ----------- --------------
Total operating expenses......... 37,589 33,752 28,376 22,768 44,710 58,957 57,224
--------- --------- --------- --------- --------- ----------- --------------
Income (loss) before provision
for income taxes and
extraordinary items(4)......... 1,058 (13,142) 3,591 4,231 6,162 9,780 11,513
Provision for income taxes....... 48 44 60 280 837 2,176 2,873
--------- --------- --------- --------- --------- ----------- --------------
Income (loss) before
extraordinary items............ 1,010 (13,186) 3,531 3,951 5,325 7,604 8,640
Extraordinary items.............. 79
--------- --------- --------- --------- --------- ----------- --------------
Net income (loss)................ $ 1,010 $ (13,186) $ 3,531 $ 4,030 $ 5,325 $ 7,604 $ 8,640
--------- --------- --------- --------- --------- ----------- --------------
--------- --------- --------- --------- --------- ----------- --------------
SHARE DATA
Earnings (loss) per share
Basic.......................... $ 0.13 $ (1.74) $ 0.50 $ 0.66 $ 0.85 $ 1.22 $ 1.05
Diluted........................ $ 0.13 NA $ 0.50 $ 0.65 $ 0.78 $ 1.12 $ 0.98
Weighted average shares
Basic.......................... 7,594,000 7,575,000 7,087,000 6,104,000 6,254,000 6,254,000 8,264,000
Diluted........................ 7,686,000 NA 7,094,000 6,187,000 6,801,000 6,801,000 8,801,000
Other
EBITDA(5)...................... $ 2,588 $ (11,047) $ 5,823 $ 8,160 $ 16,619 $ 22,840 $ 22,840
Interest expense............... $ 635 $ 1,472 $ 1,964 $ 3,139 $ 8,398 $ 10,122 $ 8,389
Cash flow provided by (used in)
Operating activities........... $ (4,290) $ (4,514) $ 533 $ (2,971) $ 3,658 n/a n/a
Investing activities........... $ (5,004) $ (12,829) $ (11,667) $ 21,517 $(136,049) n/a n/a
Financing activities........... $ 5,088 $ 13,786 $ 10,843 $ (9,999) $ 131,781 n/a n/a
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------------------
AS
ACTUAL ADJUSTED(7)
----------------------------------------------------- -------------
1994 1995 1996 1997 1998 1998
--------- --------- --------- --------- --------- -------------
(IN 000S)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents..... $ 5,599 $ 2,192 $ 1,901 $ 10,448 $ 9,838 $ 9,838
Total assets.................. $ 37,014 $ 37,651 $ 51,114 $ 45,718 $ 204,816 $ 204,816
Mortgage debt................. $ 7,610 $ 24,449 $ 20,516 $ 15,102 $ 115,130 $ 115,130
Total long-term debt.......... $ 7,610 $ 24,699 $ 28,711 $ 19,866 $ 150,421 $ 150,421
Total liabilities............. $ 15,995 $ 29,706 $ 40,732 $ 34,124 $ 182,036 $ 164,286
Total stockholders' equity.... $ 21,019 $ 7,945 $ 10,382 $ 11,594 $ 22,780 $ 40,530
</TABLE>
- --------------------------
(1) Includes gains on restructured notes receivable, on sale of partnership and
on sales of commercial real estate.
(2) Includes interest and other income.
(3) Includes commissions, marketing expenses, and restructuring charges in 1995.
(4) During 1997, we recognized a $79,000 extraordinary gain comprised of a
$288,000 gain from debt extinguishment and a $209,000 loss from loan
prepayment penalties.
(5) EBITDA is not intended to represent cash flow from operations as defined by
generally accepted accounting principles and should not be used as an
alternative to net income as an indicator of operating performance or to
cash flow as a measure of liquidity. "EBITDA" is defined as earnings before
minority interest, extraordinary items, interest expense, interest income,
income taxes, depreciation and amortization expense. EBITDA is included in
this prospectus to provide additional information with respect to our
ability to satisfy our debt service, capital expenditures and working
capital requirements and because certain covenants in EBITDA is frequently
used as a measure of operations and the ability to meet debt service
requirements, it is not necessarily comparable to other similarly titled
captions of other companies due to the potential inconsistencies in the
method of calculation.
(6) Adjusted to reflect the sale of 2,000,000 shares of common stock as if
offered by us on January 1, 1998 at the assumed offering price of $9.875 per
share, after deducting underwriting discounts and commissions and estimated
offering expenses, and the receipt and application of the net proceeds from
the offering toward the reduction of existing debt obligations of the
Company. See "Use of Proceeds" and "Capitalization."
(7) Adjusted to reflect the sale of 2,000,000 shares of common stock on the
Company's financial position as of December 31, 1998, at the assumed
offering price of $9.875 per share, after deducting underwriting discounts
and commissions and estimated offering expenses, and the receipt and
application of the net proceeds from the offering toward the reduction of
existing debt obligations of the Company.
OUR CORPORATE HEADQUARTERS:
KENNEDY-WILSON, INC.
9601 WILSHIRE BOULEVARD
SUITE 220
BEVERLY HILLS, CALIFORNIA
(310) 887-6400
WWW.KENNEDYWILSON.COM
[LOGO]
7
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A NUMBER OF RISKS. BEFORE MAKING
AN INVESTMENT DECISION, YOU SHOULD CAREFULLY CONSIDER ALL OF THE RISKS DESCRIBED
IN THIS PROSPECTUS. IF ANY OF THE RISKS DISCUSSED IN THIS PROSPECTUS ACTUALLY
OCCUR, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE
MATERIALLY ADVERSELY AFFECTED. IF THIS WERE TO OCCUR, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE SIGNIFICANTLY AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT.
THE RISK FACTORS DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL
RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US MAY ALSO IMPAIR OUR BUSINESS
OPERATIONS.
WE MAY BE ADVERSELY AFFECTED BY A DOWNTURN IN ECONOMIC CONDITIONS
Our business is closely tied to real estate. Our economic performance, the
value of real estate and our ability to implement our business strategies may be
affected by changes in national and local economic conditions. The condition of
the real estate markets in which we operate tends to be cyclical and related to
the condition of the economy in the U.S. and Japan as a whole and to the
perceptions of investors of the overall economic outlook. Rising interest rates,
declining demand for real estate or periods of general economic slowdown or
recession have had a direct negative impact on the real estate market in the
past and a recurrence of these conditions in the U.S. or a deeper recession in
Japan could result in a reduction in our revenues. In addition, the economic
condition of each local market where we operate may be dependent on one or more
industries. Our ability to vary our portfolio promptly in response to economic
or other conditions is limited. Certain significant expenditures, such as debt
service costs, real estate taxes, and operating and maintenance costs are
generally not reduced when market conditions are poor. These factors would
impede us from responding quickly to changes in the performance of our
investments and could adversely impact our business, financial condition and
results of operations. An economic recession could lead to:
- a general decline in rents due to defaulting tenants or less favorable
terms for renewed or new leases;
- fewer purchases and sales of properties by clients, resulting in a
decrease in property management fees, brokerage commissions and auction
revenues;
- a decline in actual and projected sale prices of our properties meaning
lower returns on the properties in which we have invested;
- higher interest rates, higher loan costs, less desirable loan terms and a
reduction in the availability of mortgage loans and mezzanine financing
which could limit our ability to acquire additional real estate assets;
and
- a decrease in the availability of lines of credit and other sources of
capital used to purchase real estate investments and distressed notes.
OUR REAL ESTATE INVESTMENTS INVOLVE RISK OF LOSSES AND FLUCTUATIONS IN OPERATING
RESULTS
As of December 31, 1998, we were involved as a principal investor in 38 real
estate investments. Our book value for those investments as of that date was
approximately $131.6 million and our total equity investment was approximately
$22.4 million. Our participation as a principal in real estate investments and
the timing of our purchases and sales of those investments could result in
significant fluctuations in our net operating results and cash flow. We may
experience one or more quarters without acquiring or disposing of real estate,
which could have a material adverse effect on our business, financial condition
and results of operations.
There is the inherent possibility in all of our real estate investments that
we will lose all or part of our investment. Moreover, in our joint ventures that
invest in real estate, we may not be able to
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unilaterally decide the timing of the disposition of an investment, and as a
result, may not control when and whether any gain will be realized or loss
avoided. Our investments can also be diminished by:
- civil unrest, acts of war and acts of God, including earthquakes,
hurricanes and other natural disasters (which may result in uninsured or
under insured losses);
- the impact of present or future legislation here in the U.S. or in Japan
(including environmental regulation, changes in laws concerning foreign
ownership of property, changes in real estate tax rates, changes in zoning
laws and laws requiring upgrades for disabled persons) and the cost of
compliance with these types of legislation; and
- liabilities relating to claims to the extent insurance is not available or
is inadequate.
Part of our investment strategy is to locate and acquire real estate assets
that we believe are undervalued and to improve them to increase their resale
value. We face risks arising from the acquisition of properties not yet fully
developed or in need of substantial renovation or redevelopment, particularly
the risk that we overestimate the value of the property and the risk the cost or
time to complete the renovation or redevelopment will exceed the budgeted
amount. Such delays or cost overruns may arise from:
- shortages of materials or skilled labor;
- a change in the scope of the original project;
- the difficulty in obtaining necessary zoning, land-use, building,
occupancy and other governmental permits and authorizations;
- the discovery of structural or other latent defects in the property once
construction has commenced; and
- delays in obtaining tenants.
Any failure to complete a redevelopment project in a timely manner and
within budget or to sell or lease the project after completion could have a
material adverse effect upon our business, results of operation and financial
condition.
We also have made and may continue to make or acquire mezzanine loans, which
are loans that are secured by real property, but are subject to the interests of
lenders who are senior to us. These mezzanine loans are considered to involve a
high degree of risk compared to other types of loans secured by real property.
This is due to a variety of factors, including that a foreclosure by the holder
of the senior loan could result in our mezzanine loan becoming uncollectible.
Accordingly, we may not recover the full amount, or any, of our investment in
mezzanine loans. In addition, mezzanine loans may have higher loan to value
ratios than conventional term loans. See "Business--Our Business
Operations--Real Estate Investments and Asset Management."
WE WILL BE SUBJECT TO NEW RISKS RESULTING FROM INCREASED JAPANESE OPERATIONS
In 1998, 3.1% of our revenues were earned as a result of our operations and
investments in Japan. One of our strategies for the future is to increase our
operations and investments in Asia, particularly, in Japan. In furtherance of
this strategy, we expect to commit additional resources to expand our sales and
marketing activities in Japan and expand our service offerings and products in
selected markets throughout Asia. If we are successful in implementing this
strategy, the increased scope of our international operations may lead to more
volatile financial results and difficulties in managing our businesses. This
volatility and difficulty could be caused by, among other things, the following:
- currency fluctuations, restrictions and problems relating to the
repatriation of profits;
- our relative inexperience in investing in Japanese real estate and loan
pools;
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- difficulties and costs of staffing and managing international operations;
- the burden of complying with multiple and potentially conflicting laws;
- laws restricting foreign companies from conducting business and unexpected
changes in regulatory requirements;
- the impact of different business cycles and economic instability;
- political instability and civil unrest;
- greater difficulty in perfecting our security interests, collecting
accounts receivable, foreclosing on security and protecting our interests
as creditors in bankruptcies in certain geographic regions;
- potentially adverse tax consequences;
- share ownership restrictions on foreign operations;
- Japanese property and income taxes, tax withholdings and tariffs; and
- geographic, time zone, language and cultural differences between personnel
in different areas of the world.
We may experience an operating loss in one or more regions of the world for
one or more periods, which could have a material adverse effect on our business,
operating results and financial condition. If we are unable to successfully
implement these plans, to maintain adequate long-term strategies that
successfully manage the risks associated with our international business or to
adequately manage operational fluctuations, our business, financial condition
and results of operations could be materially and adversely affected.
During 1997 and 1998, Japan and other parts of Asia were impacted by
financial turmoil which was initially reflected in rapidly falling exchange
rates relative to the U.S. Dollar. This led to falling stock prices and asset
values in Asia and reduced economic growth prospects in Asia. Several property
markets in Asia were affected by real estate developments that resulted in an
oversupply of completed or partially completed space. Property prices fell along
with prices of other investments and asset values.
These events reduced Asian economic growth in 1998 and, as economic growth
is generally a significant factor affecting property markets, demand for
property in Asia is generally weaker than in prior years. Also important to a
recovery in Asian property markets will be the adjustment to the current
significant oversupply of space in many markets which is likely to take time to
correct. The short-term outlook for real estate in Asia includes depressed rents
and capital values. The length and severity of the downturn is likely to vary in
different markets within the region. Our ability to realize profits from
acquisitions of distressed notes and the subsequent sale of any real estate
securing those notes may be materially adversely affected by a prolonged
depression in the value of real estate in the region. Conversely, a strong Asian
economy could reduce the availability of undervalued real estate and distressed
note pools in Asia. This could adversely effect our operations in Japan. We
cannot be sure that we will be successful with our Asian investments. See
"Business--Our Strategy For Growth--Grow Our Japanese Business."
OUR REVENUES AND EARNINGS MAY BE AFFECTED BY FOREIGN CURRENCY FLUCTUATIONS
Our revenues from non-U.S. operations have been primarily denominated in the
local currency where the associated revenues were earned. Thus, we may
experience significant fluctuations in revenues and earnings because of
corresponding fluctuations in foreign currency exchange rates. To date, our
foreign currency exposure has been limited to the Japanese Yen. For the twelve
months
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ended December 31, 1998, 8.4% of our net income was denominated in Yen. As we
increase our foreign operations, fluctuations in the value of the U.S. Dollar
relative to the other currencies in which we may generate earnings could
materially adversely affect our business, operating results and financial
condition. Fluctuations in currencies relative to the U.S. Dollar may make it
more difficult to perform period-to-period comparisons of our reported results
of operations. Due to the constantly changing currency exposures to which we
will be subject and the volatility of currency exchange rates, there can be no
assurance that we will not experience currency losses in the future, nor can we
predict the effect of exchange rate fluctuations upon future operating results.
Our management may decide to use currency hedging instruments including foreign
currency forward contracts, purchased currency options where applicable and
borrowings in foreign currency. Economic risks associated with these hedging
instruments include unexpected fluctuations in inflation rates impacting cash
flow relative to paying down debt, and unexpected changes in the underlying net
asset position. There can be no assurance that any hedging will be effective.
See "Business--Our Strategy for Growth--Grow Our Japanese Business."
OUR JOINT VENTURE ACTIVITIES INVOLVE UNIQUE RISKS
We have utilized joint ventures for large commercial investments and real
estate developments. We plan to continue to acquire interests in additional
limited and general partnerships, joint ventures and other enterprises
(collectively, "Joint Ventures") formed to own or develop real property or
interests in real property or note pools. It is our strategy in Japan to invest
primarily through Joint Ventures. We have acquired and may acquire minority
interests in Joint Ventures and we may also acquire interests as a passive
investor without rights to actively participate in management of the Joint
Ventures. Investments in Joint Ventures involve additional risks, including the
possibility that the other participants may become bankrupt or have economic or
other business interests or goals which are inconsistent with our own, that we
will not have the right or power to direct the management and policies of the
Joint Ventures and that other participants may take action contrary to our
instructions or requests and against our policies and objectives. Should a Joint
Venture participant act contrary to our interest, it could have a material
adverse effect upon our business, results of operations and financial condition.
Moreover, we cannot be certain that we will continue these investments, or that
we can identify suitable Joint Venture partners and form new Joint Ventures in
the future. See "Business-- Our Business Operations--Real Estate Investments and
Asset Management" and "--Distressed Note Pools."
WE MAY INCUR LOSSES ON OUR NOTE INVESTMENTS
We purchase notes that are unsecured or secured by real or personal
property. These notes are generally non-performing or sub-performing, and most
likely are in default at the time of purchase. In general, the distressed notes
we acquire are highly speculative investments and have a greater than normal
risk of future defaults and delinquencies as compared to newly originated loans.
Returns on loan investments depend on the borrower's ability to make required
payments or, in the event of default, our security interests, if any, and our
ability to foreclose and liquidate whatever property may be securing the note.
We cannot be sure that we will be able to collect on a defaulted loan or
foreclose on security successfully or in a timely fashion. There may also be
instances when we are able to acquire title to an underlying property and sell
it, but not make a profit on our investment. See "Business-- Our Business
Operations--Distressed Note Pools."
OUR OPERATING RESULTS MAY VARY FROM QUARTER TO QUARTER
We have experienced a fluctuation in our financial performance from quarter
to quarter due in part to the significance of revenues from the sales of our
real estate to our overall performance. The timing of purchases and sales of our
real estate investments has varied, and will continue to vary, widely from
quarter to quarter, due to variability in market opportunities, changes in
interest rates, and
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the overall demand for residential and commercial real estate, among other
things. While these factors have contributed to our experiencing increased
operating income and earnings in the fourth quarter in past years, there can be
no assurance that we will continue to perform better in the fourth quarter.
In addition, the timing and magnitude of brokerage commissions paid to us
may vary widely from quarter to quarter depending upon overall activity in the
general real estate market and the nature of our brokerage assignments, among
other things. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Quarterly Operating Results."
THE REAL ESTATE SERVICES AND INVESTMENT BUSINESSES ARE HIGHLY COMPETITIVE
Real estate services and investment businesses are highly competitive. Our
principal competitors include both large multinational companies and national
and regional firms, such as LaSalle Partners, Inc., Trammell Crow Company, CB
Richard Ellis Services, Inc. and Insignia Financial Group. Most of these
competitors have greater financial resources and a broader global presence than
Kennedy-Wilson. We compete with these companies and others in the U.S. and to a
limited extent, in Japan:
- selling commercial and residential properties on behalf of customers
through brokerage and auction services;
- leasing and property management, including construction and engineering
services;
- purchasing commercial and residential properties, as well as undeveloped
land for our own account; and
- acquiring secured and unsecured non-performing loans.
Our property management operations must compete with a growing number of
national firms seeking to expand market share. In addition, as the Japanese
economy begins to recover, we expect to experience increased competition with
our Japanese operations. There can be no assurance that we will be able to
continue to compete effectively, maintain current fee levels or arrangements,
continue to purchase investment property profitably or not encounter increased
competition.
WE MAY LOSE PROPERTY MANAGEMENT AGREEMENTS OR CLIENT RELATIONSHIPS
We are highly dependent on long-term client relationships and on revenues
received for services under various property management and leasing agreements
with third party owners of properties. A considerable amount of our revenues are
derived from fees related to these agreements. Over the last six months of 1998,
we derived $14.2 million from these agreements, accounting for approximately
27.9% of our total revenues for 1998. Approximately 52.0% of our revenues earned
for the management and leasing of properties in 1998 related to properties owned
or asset managed by Heitman Capital Management Corporation. Prior to our
acquisition of Heitman Properties, Ltd. in July 1998, Heitman Properties, Ltd.
and Heitman Capital Management Corporation were owned by the same company.
Heitman Capital Management Corporation has sold certain of the properties
that we, and our predecessor, Heitman Properties, Ltd., managed for Heitman
Capital. We expect Heitman Capital to sell more of its properties in the future.
Accordingly, the number of properties that we manage for Heitman Capital will
probably decrease. Further, during the years prior to our acquisition of Heitman
Properties, Heitman Properties experienced a decline in the total square footage
of property under management, property management fees and leasing commissions.
You should review the Heitman Properties' Consolidated Balance Sheets and
Statements of Operations in this prospectus for more information about Heitman
Properties' financial condition and results of operations prior to our
acquisition.
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The majority of our property management agreements are cancelable prior to
their expiration by the client for any reason on as little as 30 to 60 days'
notice. These contracts also may not be renewed when their respective terms
expire. We believe many of our clients will continue to use our services for
their current holdings and will engage us for newly acquired properties. If,
however, we fail to maintain existing relationships, fail to develop and
maintain new client relationships or otherwise lose a substantial number of
management agreements, we could experience a material adverse change in our
business, financial condition and results of operations.
Our property management fees are generally structured as a percentage of the
revenues generated by the properties that we manage. Similarly, our leasing
commissions typically are based on the value of the lease revenues commitments.
As a result, our revenues are adversely affected by decreases in the performance
of the properties we manage. Property performance will depend upon our ability
to attract and retain creditworthy tenants, our ability to control operating
expenses (some of which are beyond our control), financial conditions generally
and in the specific areas where properties are located and the condition of the
real estate market generally. See "Business--Our Business Operations--Property
Management and Leasing."
THE GROWTH OF OUR BUSINESS DEPENDS ON OUR ABILITY TO RENEW LEASES OR SECURE NEW
TENANTS
A significant portion of our property management business involves
facilitating the leasing of commercial space. In certain areas of operation,
there may be inadequate commercial space to meet demand and there is a potential
for a decline in the number of our overall lease and brokerage transactions. In
areas where the supply of commercial space exceeds demand, we may not be able to
renew leases or obtain new tenants for our owned and managed rental properties
as leases expire. Moreover, the terms of new leases and renewals (including
renovation costs or costs of concessions to tenants) may be less favorable than
current leases. Our revenues may be adversely affected by the failure to
promptly find tenants for substantial amounts of vacant space, if rental rates
on new or renewal leases are significantly lower than expected, or if reserves
for costs of re-leasing prove inadequate. We cannot be sure that we can continue
to lease properties for our clients and for our own account in a profitable
manner. See "Business--Our Business Operations--Property Management and
Leasing."
Our ability to lease properties also depends on:
- the attractiveness of the properties to tenants;
- competition from other available space;
- our ability to provide for adequate maintenance and insurance and to pay
increased operating expenses which may not be passed through to tenants;
- the availability of capital to periodically renovate, repair and maintain
the properties, as well as for other operating expenses; and
- the existence of potential tenants desiring to lease the properties.
THE GROWTH OF OUR BUSINESS DEPENDS ON OUR ABILITY TO INTEGRATE ACQUISITIONS INTO
OUR EXISTING OPERATIONS
Acquisitions and expansion have been, and will continue to be, a significant
component of our growth strategy for the future. Last year, we acquired Heitman
Properties, Ltd., a nationwide property management and leasing operation. While
maintaining our existing business lines, we intend to continue to pursue a
sustained growth strategy by increasing revenues from existing clients,
expanding the breadth of our service offerings, seeking selective co-investment
opportunities and pursuing strategic acquisitions.
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Our ability to manage our growth will require us to effectively integrate
new acquisitions into our existing operations while managing development of
principal properties. We expect that significant growth in several business
lines occurring simultaneously will place substantial demands on our managerial,
administrative, operational and financial resources. Our future success and
profitability will depend, in part, on our ability to attract, retain and
motivate qualified managers and other personnel, and successfully implement
enhancements to management and operating systems. In addition, expansion will
likely require increased financing from third party lenders. We cannot be sure
that we will be able to successfully manage all factors necessary for a
successful expansion of our business. Moreover, our strategy of growth depends
on the existence of and our ability to identify attractive and synergistic
acquisition targets. The unavailability of suitable acquisition targets, or our
inability to find them, may result in a decline in our business, financial
condition and results of operations. See "Business--Our Strategy for Growth."
WE DEPEND ON KEY PERSONNEL WHOSE CONTINUED SERVICE IS NOT GUARANTEED
Our continued success is dependent to a significant degree upon the efforts
of certain senior executives. William McMorrow, our Chairman and Chief Executive
Officer; Freeman Lyle, our Executive Vice President, Chief Financial Officer and
Secretary; Lewis Halpert, our Executive Managing Director and the President of
our Residential and Notes Groups; and Barry Schlesinger, the Chairman and Chief
Executive Officer of Kennedy-Wilson Properties, Ltd., have each been essential
to our business. In addition, Richard Mandel, the Managing Director and
President of our Commercial Brokerage Division, has been key to real estate
brokerage and investment activities in markets outside Los Angeles, including in
Japan. Ryosuke Homma, President and Representative Director of our Japanese
subsidiary, Kennedy-Wilson Japan, has been vital to our business in Japan. These
executives have employment contracts with us that are renewable annually. The
departure of all or any of these executives for whatever reason or the inability
of all or any of them to continue to serve in their present capacities or our
inability to attract and retain qualified personnel could have a material
adverse effect upon our business, financial condition and results of operations.
Each of these individuals has built a highly regarded reputation in the real
estate industry. Each attracts business opportunities and assists us both in
negotiations with lenders and potential joint venture partners and in the
representation of large and institutional clients. If we lost their services,
our relationships with lenders, joint venturers and clients would diminish
significantly.
In addition, our other officers have strong regional reputations and they
aid us in attracting and identifying opportunities and negotiating for us and on
behalf of our clients. In particular, we view the establishment and maintenance
of strong relationships through these individuals as critical to our success in
the Japanese market.
As we continue to grow, our success will be largely dependent upon our
ability to attract and retain qualified personnel in all areas of business. We
cannot be sure that we will be able to continue to hire and retain a sufficient
number of qualified personnel to support or keep pace with our planned growth.
See "Management."
OWNERSHIP OF OUR COMMON STOCK IS CONCENTRATED IN THE HANDS OF DIRECTORS AND
OFFICERS
After giving effect to this offering and including all director and
executive officer stock options exercisable within the next 60 days, our
directors and executive officers will together own approximately 45.2% of our
issued and outstanding shares of common stock if the underwriter's
over-allotment option is not exercised, with William McMorrow, our Chief
Executive Officer, owning 17.3%, Lewis Halpert, our Executive Managing Director
owning 15.8%, and Thomas Barrack, a member of our Board of Directors, owning
9.6%. Accordingly, our directors and officers will have the power to influence
substantially the election of all of the members of our Board of Directors and
the outcome of most
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corporate actions requiring stockholder approval. Such voting control may
prevent the approval of certain types of transactions, including a proposal by
third parties to acquire us. See "Security Ownership of Certain Beneficial
Owners and Management."
WE ARE HIGHLY DEPENDENT UPON CALIFORNIA OPERATIONS
Certain of our business activities are concentrated in California. As of
December 31, 1998:
- 84.7% of the total amount that we have invested in real estate is invested
in real estate located in California;
- 54.3% of the our brokerage revenues in 1998 related to property located in
California; and
- 18.8% of our property management revenues in 1998 related to property
located in California.
Consequently, our business, results of operations and financial condition
are dependent upon general trends in the California economy and its real estate
market. Although it is currently in a period of recovery, the California economy
experienced a recession in the early 1990s that was accompanied by a sustained
decline in the value of California real estate. Real estate market declines may
become so severe that the market value of the properties securing loans may be
significantly less than the outstanding balances of those loans, and real estate
market declines may negatively affect our ability to sell our property at a
profit. We purchased all of the California real estate that we currently own
after July 1994, during, what we believe to be the recovery period following the
early 1990s recession. In addition, California historically has been vulnerable
to certain natural disaster risks, such as earthquakes, floods, wild fires and
erosion-caused mudslides. The existence of adverse economic conditions or the
occurrence of natural disasters in California could have a material adverse
effect on our business, financial condition and results of operations.
OUR USE OF DEBT TO FINANCE ACQUISITIONS COULD ADVERSELY IMPACT OUR RESULTS
We have historically financed new acquisitions and property purchases with
cash derived from secured and unsecured loans and lines of credit. For instance,
we typically purchase real property with loans secured by a mortgage on the
property acquired. We have also pledged shares of our property management
subsidiary as collateral for the loan we used to finance the acquisition of that
subsidiary. As of December 31, 1998, 98% of the real properties that we own
individually (based on book value) were encumbered by debt. We anticipate
continuing this trend. We do not have a policy limiting the amount of debt that
we may incur. Accordingly, our management and Board of Directors have discretion
to increase the amount of our outstanding debt at any time. We could become more
highly leveraged, resulting in an increase in debt service costs that could
adversely affect our results of operations and increase the risk of default on
our debt.
As of December 31, 1998, we had $131.8 million in variable rate borrowings.
As a result, we are subject to fluctuating interest rates that may impact,
adversely or otherwise, our results of operations and cash flows.
We may be subject to risks normally associated with debt financing,
including the risk that our cash flow will be insufficient to make required
payments of principal and interest, and the risk that existing indebtedness on
our properties will not be able to be refinanced or that the terms of available
financing will not be as favorable as the terms of existing indebtedness. If we
were unable to satisfy the obligations owed to any lender with a lien on one of
our properties, the lender could foreclose on the real property or other assets
securing the loan and we would lose that property or asset. The loss of any
property or asset to foreclosure could have a material adverse effect on our
business, financial condition and results of operations. See "Business--Our
Strategy for Growth" and "Business--Our Business Operations--Real Estate
Investments and Asset Management."
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OUR OPERATIONS MAY BE ADVERSELY AFFECTED BY YEAR 2000 ISSUES
Many computer systems and software products are coded to accept only two
digit entries in the date code field. As a result, those computer programs and
systems may recognize a date using "00" as the year 1900 rather than the year
2000. Significant uncertainty exists concerning the potential effects associated
with these year 2000 issues.
We rely upon our computer systems to conduct operations. Without the use of
our computer systems, we would have difficulty processing transactions, paying
invoices or engaging in similar normal business activities. We have implemented
plans to review, test, remediate and upgrade or replace our existing computer
systems to ensure that they are year 2000 compliant. If, however, we are unable
to attract and retain qualified personnel who are able to detect and remediate
any year 2000 problems, or to do so in a timely manner, or if the year 2000
problems are more costly than anticipated to remediate, there could be a
material adverse effect on our business, financial condition and results of
operations.
There is also "embedded technology" in our core property systems. Embedded
technology consists of micro-processing chips which are embedded in the workings
of mechanical devices, for example, elevators, fire safety systems, air
conditioning and heating, and keyless entry systems in the buildings we manage.
If non-compliant embedded technology fails, it may cause our core property
systems to fail. As a result, the building's tenants may be able to cancel
leases, the owner may be subject to fines or penalties under terms of the leases
and owners may be unable to compensate us for our services. These events could
have a material adverse effect on our business, results of operations and
financial condition. Additionally, although we are not aware of any threatened
claims related to year 2000 issues, we may be subject to litigation from year
2000 claims. Adverse outcomes of any year 2000 litigation could have a material
adverse effect on our business, financial condition and results of operations.
Furthermore, if our suppliers have not successfully become year 2000
compliant, they may not be able to provide the services or deliver the products
to us as currently provided and delivered. If our suppliers fail to become year
2000 compliant, there could be a material adverse effect on our business,
operating results and financial condition. We would then have to try to contract
with other suppliers with sufficient capacity to accommodate our needs. There
can be no assurance that we would be able to contract with any new suppliers on
acceptable terms, if at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Issue."
WE MAY HAVE LIABILITIES IN CONNECTION WITH REAL ESTATE BROKERAGE AND PROPERTY
MANAGEMENT ACTIVITIES
As a licensed real estate broker, we, and our licensed employees, are
subject to certain statutory due diligence, disclosure and standard-of-care
obligations. Failure to fulfill these obligations could subject us or our
employees to litigation from parties who purchased, sold or leased properties
they brokered or managed. In addition, we may become subject to claims by
participants in real estate sales claiming that we did not fulfill our statutory
obligations as a broker.
In our property management capacity, we hire and supervise third party
contractors to provide construction and engineering services for our properties.
While our role is limited to that of a supervisor, we cannot be sure that we
will not be subjected to claims for construction defects or other similar
actions. Adverse outcomes of property management litigation could have a
material adverse effect on our business, financial condition and results of
operations. See "Business--Our Business Operations--Property Management and
Leasing" and "--Distressed Note Pools" and "Real Estate Brokerage."
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OUR PROPERTIES MAY SUBJECT US TO POTENTIAL ENVIRONMENTAL LIABILITY
Under various federal, state and local laws, ordinances and regulations, a
current or previous owner or operator of real estate may be liable for the clean
up of hazardous or toxic substances and may be liable to a governmental entity
or to third parties for property damage and for investigation and clean-up costs
incurred by governmental entities or third parties in connection with the
contamination. Such laws typically impose liability without regard to whether
the owner or operator knew of, or was responsible for, the presence of the
hazardous or toxic substances, even when the contaminants were associated with
previous owners or operators. The costs of investigation, remediation or removal
of hazardous or toxic substances may be substantial, and the presence of those
substances, or the failure to properly remediate those substances, may adversely
affect the owner's or operator's ability to sell or rent the affected property
or to borrow using the property as collateral. The presence of contamination at
a property can impair the value of the property even if the contamination is
migrating onto the property from an adjoining property. Additionally, the owner
of a site may be subject to claims by parties who have no relation to the
property based on damages and costs resulting from environmental contamination
emanating from the site.
In connection with the direct or indirect ownership, operation, management
and development of real properties, we may be considered an owner or operator of
those properties or as having arranged for the disposal or treatment of
hazardous or toxic substances. Therefore, we may be potentially liable for
removal or remediation costs.
Certain federal, state and local laws, regulations and ordinances also
govern the removal, encapsulation or disturbance of asbestos-containing
materials during construction, remodeling, renovation or demolition of a
building. Such laws may impose liability for release of asbestos-containing
materials, and third parties may seek recovery from owners or operators of real
properties for personal injuries associated with asbestos-containing materials.
We may be potentially liable for those costs for properties that we own. In the
past, we have been required to remove asbestos from certain buildings that we
own. There can be no assurance that in the future we will not be required to
remove asbestos from our buildings or incur other substantial costs of
environmental remediation.
Before consummating the acquisition of a particular piece of property, it is
our policy to retain independent environmental consultants to conduct a thorough
environmental review of the property to check for contaminants, including
performing a Phase I environmental review. These assessments have included,
among other things, a visual inspection of the properties and the surrounding
area and a review of relevant federal, state and historical documents. To date,
the assessments we have had done have not revealed any environmental liability
that we believe would have a material adverse effect on our business, assets or
results of operations as a whole, nor are we aware of any material environmental
liability of the types described. Nevertheless, it is possible that the
assessments we commissioned do not reveal all environmental liabilities or that
there are material environmental liabilities of which we are currently unaware.
There can be no assurance that future laws, ordinances or regulations will not
impose any material environmental liability or that the current environmental
condition of our properties will not be affected by tenants, by the condition of
land or operations in the vicinity of those properties, or by third parties
unrelated to us. We believe that our properties are in substantial compliance in
all material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances. We have not been notified
by any governmental authority, and are not otherwise aware of any material
noncompliance, liability or claim relating to hazardous or toxic substances in
connection with any of our properties. There can be no assurance that federal,
state and local agencies or private plaintiffs will not bring these types of
actions in the future, or that those actions, if adversely resolved would not
have a material adverse effect on our business, financial condition and results
of operations. See "Business--Our Business Operations--Property Management and
Leasing" and "--Real Estate Investments and Asset Management."
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WE MAY INCUR UNANTICIPATED EXPENSES RELATING TO LAWS BENEFITING DISABLED PERSONS
The Americans with Disabilities Act (the "ADA") generally requires that
public accommodations such as hotels and office buildings be accessible to
disabled people. We currently own in the U.S., individually and with partners,
12 office or other commercial buildings (one of which is under construction) a
hotel and a ski resort. We believe that our properties are in substantial
compliance with the ADA and that we will not be required to make substantial
capital expenditures to address the requirements of the ADA. If, however, our
properties were not in compliance with the ADA, the U.S. federal government
could fine us or private litigants could be awarded money damages against us. If
we are required to make substantial alterations to one or more of our
properties, our results of operations could be materially adversely affected.
See "Business--Our Business Operations--Property Management and Leasing" and
"--Real Estate Investments and Asset Management."
WE HAVE INSURANCE COVERAGE LIMITATIONS
We carry comprehensive general liability coverage and umbrella coverage on
all of our properties of which we own more than 50% with limits of liability
which we deem adequate and appropriate under the circumstances (subject to
deductibles) to insure against liability claims and provide for the cost of
legal defense. There are, however, certain types of extraordinary losses that
may be either uninsurable, or that are not generally insured because it is not
economically feasible to insure against those losses. Should any uninsured loss
occur, we could lose our investment in, and anticipated revenues from, a
property, which loss or losses could have a material adverse effect on our
operations. Currently, we also insure some of our properties for loss caused by
earthquake in levels we deem appropriate and, where we believe necessary, for
loss caused by flood. We cannot be sure that the occurrence of an earthquake,
flood or other natural disaster will not have a materially adverse effect on our
business, financial condition and results of operations.
OUR STOCK PRICE MAY BE VOLATILE
Since the beginning of 1997 the market price of our common stock has
fluctuated from a low of $1.77 to a high of $13.37 and may be subject to
fluctuations in the future. Factors contributing to these fluctuations may
include:
- the announcement of new acquisitions or renovation projects by us or our
competitors;
- quarterly variations in our operating results or the operating results of
our competitors; and
- changes in earnings (losses) or other estimates by analysts or reported
results that vary from those estimates.
In addition, while a public market currently exists for our common stock,
trading activity has been somewhat limited. As of April 21, 1999, there were
approximately 6.8 million shares of common stock outstanding held by
approximately 1,250 holders. Thus, trading of relatively small blocks of shares
of common stock could have a significant impact on the price at which the common
stock is traded.
Furthermore, stock markets have experienced significant price and volume
fluctuations which could affect the market price of our common stock which may
be unrelated to our operating performance. Investors may be unable to resell
their shares of our common stock at or above the offering price. In the past,
companies that have experienced volatility in the market price of their stock
have been the object of securities class action litigation. If anyone brings a
lawsuit of this type against us, it could result in substantial costs and a
diversion of management's attention and our resources. See "Price Range of Our
Common Stock."
18
<PAGE>
WE ARE SUBJECT TO CERTAIN ANTI-TAKEOVER EFFECTS UNDER DELAWARE LAW
Because we are a Delaware corporation, management and board of directors
could utilize certain provisions of the Delaware code to make it more difficult
for a third party to acquire control of our company, even if the change of
control would be beneficial to our stockholders. These provisions include a
classified, staggered Board of Directors, the inability of stockholders to take
action by written consent without a meeting, the inability of the stockholders
to call for a special meeting of stockholders, the inability to remove directors
without cause and a requirement that certain business combinations be approved
by the holders of 66 2/3% of the common stock. This could discourage potential
takeover attempts which may adversely affect the market price of our common
stock. See "Business--Certain Provisions of Delaware Law."
19
<PAGE>
SPECIAL NOTES OF CAUTION
REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this prospectus may constitute
"forward-looking statements" within the meaning of the federal securities laws.
Forward-looking statements are statements containing a projection of revenues,
income (loss), earnings (loss), capital expenditures, dividends, capital
structure or other financial terms or our plans and objectives for future
operations.
The forward-looking statements in this prospectus are based on our
management's beliefs, assumptions, and expectations of our future economic
performance, taking into account the information currently available to them.
These statements are not statements of historical fact. Forward-looking
statements involve risks and uncertainties that may cause our actual results,
performance or financial condition to be materially different from the
expectations of future results, performance or financial condition we express or
imply in any forward-looking statements. Some of the important factors that
could cause our actual results, performance or financial condition to differ
materially from our expectations are:
- General volatility of the capital markets and the market price of our
common shares;
- Changes in the real estate market, interest rates or the general economy
of the markets in which we operate;
- Our ability to identify and complete acquisitions and successfully
integrate businesses we acquire;
- Our ability to employ and retain qualified employees;
- Our ability, and the ability of our significant vendors, suppliers and
customers, to achieve Year 2000 compliance;
- Changes in government regulations that are applicable to our regulated
brokerage and property management businesses;
- Changes in the demand for our services;
- Degree and nature of our competition; and
- The other factors referenced in this prospectus, including, without
limitation, under the captions "Risk Factors", "Management's Discussion
and Analysis of Financial Condition and Results of Operation" and
"Business".
When used in our documents or oral presentations, the words "plan,"
"believe," "anticipate," "estimate," "expect," "objective," "projection,"
"forecast," "goal," or similar words are intended to identify forward-looking
statements. We qualify any and all of our forward-looking statements entirely by
these cautionary factors.
REGARDING ADDITIONAL INFORMATION
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the common stock.
20
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the 2,000,000 shares of common
stock, after deducting underwriting discounts and commissions and estimated
offering expenses and based upon an assumed public offering price of $9.875 per
share of common stock, which is the last reported sale price of our common stock
on April 21, 1999, are estimated to be $17,750,000. We intend to use the net
proceeds from this offering as follows:
<TABLE>
<S> <C> <C>
The estimated net proceeds to us............................................. $17,750,000(1)
Repay portion of loan from Colony K-W, LLC, an affiliate of Colony Capital,
Inc., with a maturity date of January 15, 2000 and interest due at 14% per
annum, the proceeds of which were used to acquire Heitman Properties,
Ltd........................................................................ $7,000,000
Repay loan from FBR Asset Investment Corporation with a maturity of the
earlier of June 3, 1999 and the closing of a public offering and interest
due at 17% per annum, the proceeds of which were used to purchase note
pools...................................................................... $7,630,000
Repay portion of borrowings under line of credit with East-West Bank with a
maturity date of June 6, 2000 and interest due monthly at three month LIBOR
plus 2% per annum, the proceeds of which were used for working capital..... $3,120,000
Balance of proceeds.......................................................... $ 0
</TABLE>
- ------------------------
(1) If the underwriters exercise their over-allotment option in full, the
estimated net proceeds to us will be $20,564,000. We intend to use the
additional proceeds from exercise of the over-allotment option for general
corporate purposes, including selected acquisitions or investments in real
estate businesses or products. While from time to time we evaluate potential
acquisitions of business and investments and anticipate continuing to make
these evaluations, there are no present understandings, commitments or
agreements with respect to any acquisition of business or investments for
which we will use the proceeds of this offering.
21
<PAGE>
PRICE RANGE OF OUR COMMON STOCK
The following table sets forth, for the fiscal periods indicated, the range
of high and low closing sale prices per share of our common stock, traded under
the symbol, "KWIC", as reported on the NASDAQ National Market.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1997
1(st) Quarter.............................................................. $ 2.22 $ 1.77
2(nd) Quarter.............................................................. 2.97 2.13
3(rd) Quarter.............................................................. 3.33 2.73
4(th) Quarter.............................................................. 4.39 3.08
1998
1(st) Quarter.............................................................. 8.78 3.67
2(nd) Quarter.............................................................. 12.67 6.33
3(rd) Quarter.............................................................. 9.00 6.00
4(th) Quarter.............................................................. 8.50 5.00
1999
1(st) Quarter.............................................................. 13.37 7.25
2(nd) Quarter through April 21, 1999....................................... 9.87 8.56
</TABLE>
These prices, where appropriate, are adjusted to give retroactive effect to
a 20% stock dividend paid October 27, 1997, a 200% stock dividend paid April 10,
1998 and a 50% stock dividend paid December 15, 1998. As of April 21, 1999 there
were 6,770,276 shares of common stock outstanding held by approximately 1,250
holders.
DIVIDEND POLICY
We have not paid any cash dividends on our common stock. We expect to use
the earnings from our investments and operations to pursue our growth strategies
by:
- acquiring property management companies;
- investing in real estate and pools of distressed notes; and
- expanding our operations.
Although we have a policy of not paying cash dividends on our common stock,
we may determine to pay dividends on our common stock in the future. Any future
declaration or payment of dividends will be at the discretion of our Board of
Directors and will depend on our results of operations, financial condition,
contractual restrictions and other factors that our Board of Directors decides
is relevant at that time. Presently, our loan agreement with FBR Asset
Investment Corporation prohibits us from declaring or paying any dividend with
respect to our common stock without first obtaining FBR Asset's prior consent.
22
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998
and as adjusted as of that date to give effect to the sale of the 2,000,000
shares of common stock at the assumed offering price of $9.875 per share. You
should read this information in conjunction with our audited financial
statements and the notes to those audited financial statements which are
included elsewhere in this prospectus.
CAPITALIZATION
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED(1)
--------- --------------
(IN 000S)
<S> <C> <C>
Total debt(2).......................................................................... $ 48,805 $ 31,055
Stockholders' equity
Preferred stock $.01 par value; shares authorized 2,000,000 as of December 31, 1998
and 5,000,000 as of the date hereof; 0 shares issued............................... n/a n/a
Common stock $.01 par value; shares authorized 10,000,000 as of December 31, 1998,
and 50,000,000 as of the date hereof; 6,597,075 shares issued and outstanding,
actual; 8,597,075 shares issued and outstanding, as adjusted....................... 66 86(3)
Additional paid-in-capital............................................................. 28,888 46,618
Accumulated deficit.................................................................... (5,970) (5,970)
Notes receivable from stockholders..................................................... (204) (204)
--------- -------
Total stockholders' equity........................................................... 22,780 40,530
--------- -------
Total capitalization................................................................. $ 71,585 $ 72,335
--------- -------
--------- -------
</TABLE>
- ------------------------
(1) Adjusted to reflect a sale by us of 2,000,000 shares of common stock at an
assumed offering price of $9.875 per share after deducting the estimated
underwriters' discount and estimated offering expenses and the application
of the estimated net proceeds as described in the "Use of Proceeds" section
of this prospectus.
(2) Excludes notes payable on real estate held for sale of $115,130,000.
(3) Excludes 1,445,705 shares of common stock subject to outstanding options and
warrants. See "Management--Stock Option Plans."
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED CONSOLIDATED FINANCIAL DATA" AND OUR CONSOLIDATED FINANCIAL STATEMENTS
AND THE CORRESPONDING NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are an integrated, 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. Our
revenues in 1996, 1997 and 1998 were $32.0 million, $27.0 million and $50.9
million, respectively. Our net income in the same periods were $3.5 million,
$4.0 million and $5.3 million, respectively.
In 1998, we substantially increased our activities in Japan, including a
joint venture with an affiliate of Colony Capital, Inc. This joint venture
provides a framework for the investment of up to $100.0 million, $2.0 million of
which would be invested by us, in Japanese real estate and pools of distressed
notes, of which approximately half has been invested to date. Under the terms of
the joint venture agreement, we provide Japanese real estate expertise and
receive acquisition, management and disposition fees. The joint venture
agreement also requires us to provide 2.0% of the required equity in any
investment. In addition, we made minority investments in brokerage and loan
servicing businesses in Japan and have expanded the size of our direct employee
base in Japan to nine real estate professionals. As part of our strategy, we
plan to grow our business in Japan, continuing to emphasize fee based sources of
income. In furtherance of this strategy, we entered into a joint venture with an
affiliate of Cargill, Incorporated in March 1999 to invest in small and
medium-sized pools of distressed notes. See "Risk Factors--We Will Be Subject To
New Risks Resulting From Increased Japanese Operations."
When we sell residential real property, we recognize as gross revenues the
total sales price of residential real estate and we recognize as an expense the
purchase price and improvements associated with that real estate. Therefore, a
sale of residential real property in any reported period has a disproportionate
effect on revenues and expense in that period relative to sales of other
investments and our other business lines. Our commercial real property
investments are accounted for on a net gain on sale basis.
Our 1998 growth was due principally to our acquisition of our property
management and leasing company, Heitman Properties, Ltd., in July 1998. We
funded this acquisition with a $21.0 million loan from Colony K-W, LLC. We made
this acquisition as part of our strategy to increase recurring fee income as a
percentage of total revenues. We expect that this acquisition will be a platform
for future growth of our property management business in both the U.S. and
Japan. We acquired Heitman Properties for $21.0 million in cash and accounted
for this transaction under the purchase method of accounting, resulting in
goodwill of $16.0 million which we are amortizing on a straight-line basis over
30 years.
Historically, we have purchased for our own account commercial and
residential real estate in the U.S. During 1996, 1997 and 1998, we acquired
$13.1 million, $10.8 million and $102.1 million, respectively, of commercial
properties, and $2.2 million, $2.8 million and $7.6 million, respectively, of
residential properties. We held or hold all these properties for resale. We
anticipate selling these domestic, wholly-owned properties within the next year.
24
<PAGE>
We are conducting this offering for the primary purpose of restructuring our
balance sheet. We intend to use the proceeds of this offering to repay $7.0
million our existing subordinated debt and our $7.5 million loan with FBR Asset
Investment Corporation. We intend to use the balance of the proceeds to repay a
portion of the outstanding balance on our line of credit with East-West Bank. We
believe that our resulting capital structure will provide us with the ability to
procure new credit facilities with more attractive terms, with the goal of
providing us with the flexibility to effect our strategies for growth. See "Use
of Proceeds."
RESULTS OF OPERATIONS
The following tables set forth certain of our Consolidated Statements of
Income information as a percentage of revenues during the periods indicated:
REVENUES AND EXPENSES AS A PERCENTAGE OF TOTAL REVENUES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenues
Property management............................................................. -- -- 27.9%
Brokerage(1).................................................................... 18.4% 21.8% 9.7
Investments..................................................................... 81.0 74.8 58.3
Other........................................................................... 0.6 3.4 4.1
--------- --------- ---------
Total revenues.................................................................... 100.0% 100.0% 100.0%
--------- --------- ---------
Cost of revenues
Commissions and marketing expense............................................... 4.9% 3.4% 1.0%
Cost of residential real estate sold............................................ 52.3 20.7 24.1
--------- --------- ---------
Total cost of revenues............................................................ 57.2% 24.1% 25.1%
--------- --------- ---------
Gross profit...................................................................... 42.8% 75.9% 74.9%
--------- --------- ---------
Operating expenses
General administrative and compensation......................................... 24.6% 45.6% 42.2%
--------- --------- ---------
Income from operations............................................................ 18.2% 30.2% 32.7%
--------- --------- ---------
Interest expense.................................................................. 6.2% 11.6% 16.5%
Depreciation and amortization..................................................... 0.8 2.9 4.0
Provision for income taxes........................................................ 0.2 1.0 1.7
--------- --------- ---------
Income before extraordinary items................................................. 11.0% 14.6% 10.5%
--------- --------- ---------
Extraordinary items............................................................... -- 0.3% --
--------- --------- ---------
Net income........................................................................ 11.0% 14.9% 10.5%
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) Includes brokerage commissions from related parties of $1.1 million in 1996,
$900,000 in 1997 and $1.2 million in 1998.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
TOTAL REVENUES
Total revenues for 1998 were $50.9 million, which represents an 88.4%
increase over 1997. Earnings before taxes for 1998 were $6.2 million, which
represents a 45.6% increase over 1997. Net
25
<PAGE>
income for 1998 was $5.3 million, which represents a 32.1% increase over 1997.
These increases are primarily attributable to our acquisition of Heitman
Properties, Ltd.
PROPERTY MANAGEMENT. In 1998, our property management and leasing
operations generated $14.2 million of revenues, representing 27.9% of our total
revenues in 1998. On July 17, 1998, we acquired Heitman Properties, Ltd. from
Heitman Financial, Inc., and renamed it Kennedy-Wilson Properties, Ltd. Between
July 17, 1998 and December 31, 1998, this subsidiary generated $12.7 million of
our $14.2 million in property management fees and leasing commissions. As of
December 31, 1998, we had under management a portfolio of approximately 48
million square feet of commercial, industrial and apartment properties located
in 26 states and the District of Columbia.
BROKERAGE. Brokerage commission revenues in 1998 were $4.9 million,
representing 9.7% of total revenues and a 16.6% decrease over brokerage
commission revenues in 1997 of $5.9 million. There were a total of 30
transactions in 1998 with an aggregate value of $522.9 million, compared to 57
transactions in 1997 with an aggregate value of $423.8 million. This reflects a
continued trend toward increased brokerage commissions from commercial sales and
decreased brokerage commissions from residential sales. Commercial properties
typically have higher sales prices but lower brokerage commission rates compared
to residential properties. The costs associated with a commercial assignment
tend to be lower than those associated with residential assignments.
INVESTMENTS. Sales of residential real estate were $13.8 million in 1998,
representing 27.2% of total revenues, compared to $6.8 million in 1997. This
equates to a 104.8% increase. This increase is due to sales from four projects
in 1998, including a ten unit single family home development in north Los
Angeles, seven units of a 23 unit single family development in Palm Desert, and
the bulk sale of a 24 unit condominium project in west Los Angeles. This
compares to revenues in 1997 from the sale of 13 units of a 14 unit condominium
project located in Orange County, California, the sale of the remaining seven
units in a condominium project in Hawaii, and the sale of land zoned for
condominium development in Beverly Hills. The sales of residential real estate
for both years reflect our strategy to sell upon completion of planned
improvements, rather than holding for potential appreciation.
Equity in income of investments with related parties and affiliates and gain
on sale of partnerships increased in total to $4.7 million (including proceeds
on sale of partnership of $4.1 million) in 1998, or 9.2% of total revenues, a
227.7% increase from the $1.4 million realized in 1997. The gain on the sale of
the partnership interest was $4.1 million. The increase was substantially due to
the gain on the sale in 1998 of the our interest in a joint venture that owned
two commercial office buildings in downtown Los Angeles. We sold our interest in
the joint venture because we had completed the process of stabilizing the
properties, which included increasing average occupancy of the properties from
approximately 45% at acquisition in 1996 to approximately 80% at the time of
sale. Both 1998 and 1997 included revenues from the sale of 88 condominium units
from a 109 unit joint venture project located in near downtown Los Angeles. The
sales of these units occurred over the two years as planned improvements to the
units were completed.
Gain on sale of commercial real estate was $2.7 million 1998, or 5.2% of
total revenues, down 58.1% from $6.3 million in 1997. The decline resulted from
the fact that in 1997 we sold five commercial properties including 46,000 square
foot property in Santa Monica, CA, a 50,000 square foot property in West Los
Angeles, and a 30,000 square foot property in Anaheim, CA, a 61,000 square foot
property in Pasadena, CA, and a 20,000 square foot property in Santa Monica, CA.
In 1998 we sold two commercial properties, consisting of a 36,000 square foot
building in Santa Monica, and a 28,000 square foot building in downtown Los
Angeles. All properties were sold after the completion of the stabilization
process.
26
<PAGE>
Gains on restructured notes totaled $3.9 million in 1998, or 7.7% of total
revenues, a 3.1% decrease from $4.0 million in 1997. This decrease can be
attributed to a reduction in the number of U.S. note purchases in 1998. The gain
in both years reflects our continued progress in liquidating our portfolios of
distressed notes that were purchased at substantial discounts to face value. Our
strategy to collect the note balances consists of either restructuring the note
to performing status, negotiating a payoff, or foreclosing and selling the
related collateral.
Net rental income was $4.6 million in 1998, or 9.0% of total revenues,
representing a 181.3% increase from $1.6 million in 1997. The increase reflects
our acquisition of approximately 1.0 million square feet of commercial office
properties in 1998. All of these acquisitions represent what we believe are
value-added opportunities in recovering sub-markets in Los Angeles County,
including two properties in Hollywood, CA consisting of 467,000 square feet, a
property in downtown Los Angeles consisting of 282,000 square feet, a property
in the Mid-Wilshire District of Los Angeles consisting of 133,000 square feet, a
property in Pasadena, CA consisting of 52,000 square feet, and a property in Van
Nuys, CA consisting of 74,000 square feet.
TOTAL OPERATING EXPENSES
Operating expenses in 1998 were $44.7 million, representing a 96.4% increase
over $22.8 million in 1997. This increase was due primarily to the addition of
new personnel in connection with the acquisition of Heitman Properties, Ltd.
Brokerage commissions and marketing expenses decreased 42.7% to $532,000 in
1998 from $928,000 in 1997, primarily as a result of the decreased auction
sales, which are typically more expensive than sealed bid sales or traditional
brokerage sales.
Cost of residential real estate sold was $12.2 million in 1998, a 119.0%
increase from $5.6 million in 1997. The increase correlates with the increased
revenues from the sales of residential real estate discussed above.
Compensation and related expenses was $14.6 million in 1998, up 90.4% from
$7.7 million in 1997. The increase reflects the increase in personnel from 60
employees in 1997 to approximately 700 employees in 1998, primarily as a result
of our acquisition of Heitman Properties, Ltd. In addition, in 1997 we
implemented a deferred compensation program designed to retain and motivate key
employees to help achieve targeted company-wide goals.
General and administrative expenses were $6.9 million in 1998, representing
a 47.8% increase over 1997 expenses of $4.7 million. The increase is due
primarily to the additional expenses associated with our property management
operations.
Depreciation and amortization expense increased to $2.1 million in 1998, a
160.6% increase over $790,000 in 1997. The increase was due to the increase in
the commercial property portfolio to $110.0 million in 1998 from $14.1 million
in 1997. In addition, we began amortizing the goodwill arising from our July
1998 acquisition of Heitman Properties, Ltd. The amount amortized in 1998 was
approximately $800,000.
Interest expense was $8.4 million in 1998, compared to $3.1 million in 1997,
representing a 167.5% increase. The increase results from the increase in total
debt to $163.9 million in 1998 from $28.9 million in 1997. Approximately $115.1
million of the debt in 1998 was in the form of loans to finance commercial and
residential properties as discussed in the "Liquidity and Capital Resources"
section.
27
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
TOTAL REVENUES
Total revenues in 1997 were $27.0 million, a 15.5% decrease from $32.0
million in 1996. Earnings before taxes for 1997 were $4.2 million, representing
a 17.8% increase over 1996. Net income for 1997 was $4.0 million, representing a
14.1% increase over 1996. Despite the decrease in sales of residential real
estate earnings before taxes, net income increased because of an increase in the
sale of commercial real estate. We had no property management revenues in 1996
or 1997.
BROKERAGE. Revenues from brokerage commissions were $5.9 million in both
1997 and 1996, representing 21.8% of total revenues in 1997 and 18.4% of total
revenues in 1996. In 1997 there were 57 transactions totalling $424.0 million in
value, compared to 70 transactions in 1996 totalling $359.6 million in value.
Also, in 1997 a greater proportion of the brokerage commissions were earned from
commercial property sales, as opposed to 1996 when sales of residential
properties, especially through the auction process, were greater. Commercial
properties typically have higher sales prices but lower brokerage commission
rates compared to residential properties. The costs associated with a commercial
assignment tend to be lower than those associated with residential assignments.
INVESTMENTS. Residential real estate sales were $6.8 million in 1997, equal
to 25.0% of total revenues, compared to $19.7 million in 1996, representing a
65.8% decline. Residential real estate sales in 1997 consisted of revenues from
three projects, including 13 units of a 14 unit condominium property in Orange
County, the remaining seven units in a condominium property in Hawaii and land
in Beverly Hills. This compares to residential real estate sales in 1996 which
included revenues from the sale of four projects, including 33 condominium units
from a property in Hawaii, 42 condominium units from a property in south San
Francisco, 9 units from a property in west Los Angeles, and the remaining unit
from a condominium project located in San Francisco.
Equity in income of investments with related parties and non-affiliates was
$1.4 million in 1997, or 5.3% of total revenues, compared to $178,000 in 1996.
The increase is due primarily to sales of 88 condominium units in a 109 unit
joint venture property located near downtown Los Angeles.
Gain on sale of commercial real estate was $6.3 million in 1997,
representing 23.5% of total revenues, compared to $1.4 million in 1996, equating
to a 336.0% increase. The increase is due primarily to the fact that in 1997 we
sold five commercial properties, including a 46,000 square foot property in
Santa Monica, California, a 50,000 square foot property in west Los Angeles, and
a 30,000 square foot property in Anaheim, California, a 61,000 square foot
property in Pasadena, California and a 20,000 square foot property in Santa
Monica. In 1996 we sold one commercial property consisting of 56,000 square feet
in Santa Monica.
Gains on restructured notes receivable were $4.0 million in 1997, or 15.0%
of total revenues, compared to $3.1 million in 1996, which equates to a 32.0%
increase. The increase reflects the increased collections from the note pools
acquired in 1996 and 1997.
Rental income net was $1.6 million in 1997, or 6.0% of total revenues,
versus $1.5 million in 1996, resulting in an 11.0% increase. The increase
resulted from an increase in the average occupancy of properties in our
portfolio in 1997 due to our management and leasing programs.
TOTAL OPERATING EXPENSES
Total expenses in 1997 were $22.8 million, a 19.8% decrease from $28.4
million in 1996. Despite the decrease in sales of residential real estate,
earnings before taxes and net income increased because of an increase in the
sales of commercial real estate. We had no property management revenues in 1996
or 1997.
28
<PAGE>
Brokerage commission and marketing expenses decreased 40.5% to $928,000 in
1997 from $1.6 million in 1996, reflecting the continued trend of less auction
marketing revenues which is typically more costly than single asset commercial
brokerage transactions.
Cost of residential real estate sold decreased 66.6% to $5.6 million in 1997
from $16.7 million in 1996. This was due primarily to the decreased revenues
from sales of residential real estate discussed above.
Compensation and related expenses increased 62.0% to $7.7 million in 1997
from $4.7 million in 1996, resulting from an increase in executive employees and
incentive compensation, including the implementation of a deferred compensation
program.
General and administrative expenses increased 49.1% to $4.7 million in 1997
from $3.1 million in 1996, due to an increase in occupancy costs associated with
opening our office in New York as well as the necessity of additional corporate
space, and to increased legal costs associated with increased collection and
restructuring of notes receivable and leasing and sales of commercial and
residential real estate.
Depreciation and amortization increased 195.0% to $790,000 in 1997 from
$268,000 in 1996. Although commercial properties held for sale at the end of
1997 totaled approximately $14.1 million, compared to approximately $25.1
million at the end of 1996, the average balance during 1997 was higher as a
result of the timing of property acquisitions and dispositions.
Interest expense increased 59.8% to $3.1 million in 1997 from $2 million in
1996. Although our total debt decreased to $28.9 million in 1997 from $37.6
million in 1996, the average balance in 1997 was higher.
29
<PAGE>
QUARTERLY OPERATING RESULTS
The following tables present quarterly operating results for 1997 and 1998.
The results in the third and fourth quarters of 1998 include the operations of
Heitman Properties, Ltd. This data has been derived from unaudited interim
consolidated financial statements prepared on substantially the same basis as
the audited Consolidated Financial Statements contained elsewhere in this
prospectus. In the opinion of management, this information includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information when read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
prospectus. The operating results for any quarter are not necessarily indicative
of the operating results for any future period.
<TABLE>
<CAPTION>
1997
------------------------------------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED
------------------------------------------
<CAPTION>
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
--------- --------- --------- ---------
(IN 000S EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES
Property management(1)............................................ -- -- -- --
Brokerage......................................................... $ 718 $ 1,407 $ 963 $ 2,807
Investments....................................................... 4,996 2,208 4,578 8,542
Corporate......................................................... 156 351 273 --
--------- --------- --------- ---------
TOTAL REVENUES.................................................... 5,870 3,966 5,814 11,349
TOTAL OPERATING EXPENSES.......................................... 5,234 3,767 5,282 8,485
--------- --------- --------- ---------
Income before provision for income taxes and extraordinary
items........................................................... 636 199 532 2,864
Provision for income taxes........................................ 50 50 65 115
--------- --------- --------- ---------
Income before extraordinary items................................. 586 149 467 2,749
Extraordinary items............................................... -- 288 -- (209)
--------- --------- --------- ---------
NET INCOME........................................................ $ 586 $ 437 $ 467 $ 2,540
--------- --------- --------- ---------
--------- --------- --------- ---------
SHARE DATA
Basic income per share before extraordinary items................. $ 0.09 $ 0.02 $ 0.08 $ 0.46
Basic net income per share........................................ $ 0.09 $ 0.07 $ 0.08 $ 0.43
Basic weighted average shares..................................... 6,463,211 6,075,270 5,957,469 5,932,058
Diluted income per share before extraordinary items............... $ 0.09 $ 0.02 $ 0.08 $ 0.46
Diluted net income per share...................................... $ 0.09 $ 0.07 $ 0.08 $ 0.42
Diluted weighted average shares................................... 6,528,483 6,151,593 6,065,619 6,057,639
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------------------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED
------------------------------------------
<CAPTION>
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
--------- --------- --------- ---------
(IN 000S EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES
Property management............................................... -- -- $ 6,361 $ 7,833
Brokerage......................................................... $ 2,142 $ 1,592 1,501 (318)
Investments....................................................... 1,785 4,426 12,701 6,842
Corporate......................................................... 470 441 271 4,825
--------- --------- --------- ---------
TOTAL REVENUES.................................................... 4,397 6,459 20,834 19,182
TOTAL OPERATING EXPENSES.......................................... 3,625 6,221 19,132 15,732
--------- --------- --------- ---------
Income before provision for income taxes.......................... 772 238 1,702 3,450
Provision for income taxes........................................ 98 36 311 392
--------- --------- --------- ---------
NET INCOME........................................................ $ 674 $ 202 $ 1,391 $ 3,058
--------- --------- --------- ---------
--------- --------- --------- ---------
SHARE DATA
Basic net income per share........................................ $ 0.11 $ 0.03 $ 0.21 $ 0.46
Basic weighted average shares..................................... 5,924,800 5,954,943 6,520,855 6,606,858
Diluted net income per share...................................... $ 0.11 $ 0.03 $ 0.20 $ 0.43
Diluted weighted average shares................................... 6,366,289 6,583,598 7,093,199 7,150,513
</TABLE>
- ------------------------------
(1) We acquired our property management operations in July, 1998.
30
<PAGE>
Revenues and income before income taxes during the fourth fiscal quarter
historically have been somewhat greater than in the first three fiscal quarters,
primarily because our brokerage clients have a demonstrated tendency to close
transactions toward the end of the fiscal year. The timing and introduction of
new contracts, the disposition of real estate investments and other factors may
also cause quarterly fluctuations in our operating results. See "Risk
Factors--Our Operating Results May Vary From Quarter to Quarter."
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources requirements include expenditures for
the acquisition and improvement of real estate held for sale, the acquisition
and resolution of distressed note 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 the underlying 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 provided by operating activities was $3.7 million in 1998, compared to
$3.0 million in cash used in operating activities in 1997. The change included
an increase in accounts receivable attributable primarily to the 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
increased accrued expenses which includes bonuses and deferred compensation. The
$3.0 million cash used in operating activities in 1997 compares to $533,000 in
cash provided by operating activities in 1996. The change resulted from an
increase in 1997 in gains on sale of real estate, which are excluded from cash
flows from operating activities, offset by an increase in accrued expenses.
Cash used in investing activities was $136.0 million in 1998, compared to
$21.5 million in cash provided by investing activities in 1997. The change
resulted primarily from our purchases of real estate held for sale of $123.0
million which was attributable to our commercial property acquisitions. In
addition, 1998, we purchased Heitman Properties, Ltd. for $21.0 million, which
was allocated to contracts, furniture and fixtures, and goodwill. The $21.5
million in cash provided by investing activities in 1997 compares to cash used
in investing activities in 1996 of $11.7 million. The change resulted primarily
from proceeds from sale of real estate held for sale in the amount of $36.3
million and collection of notes receivable of $4.9 million, offset by purchases
of real estate held for sale of $18.8 million.
Cash provided by financing activities was $131.8 million in 1998, compared
to cash used in financing activities in 1997 of $10.0 million. The change
resulted from $114.7 million in mortgage loans payable related primarily to the
purchase of the commercial properties referred to above. In addition, we issued
$21.0 million in subordinated debt related to the purchase of Heitman
Properties, Ltd. The $10.0 million in cash used in financing activities in 1997
compares to cash provided by financing activities of $10.8 million in 1996. The
change resulted from repayments of mortgage loans payable of $19.7 million and
repayment of notes payable of $7.1 million. See "Use of Proceeds."
Prior to September 1998, we had a $15.0 million unsecured credit facility
with East-West Bank with an interest rate of prime plus 1.0%. In September 1998,
we increased that facility to $21.0 million with interest at a rate payable
monthly of three month LIBOR plus 2% and a maturity date of June 30, 2000. We
use this facility primarily for working capital purposes and acquisitions. The
outstanding balance on this facility was $13.1 million as of December 31, 1998.
We plan to repay a portion of the outstanding balance, which as of April 21,
1999 was $18.4 million, with the proceeds from this offering.
31
<PAGE>
In July 1998, we entered into a bridge loan agreement with Colony K-W, LLC
that provided us with $21.0 million in subordinated debt, the proceeds from
which we utilized to consummate our acquisition of Heitman Properties, Ltd. This
debt bears interest at a rate of 14%, and the principal is payable in three
installments of $7.0 million due on July 30 in each of 1999, 2000 and 2001.
Promptly after completion of this offering, we plan to repay $7.0 million of
this debt with a portion of the proceeds thereof.
As of December 31, 1998, we had $115.1 million in mortgage notes payable. We
used proceeds from these loans to finance the acquisition of several commercial
and residential properties, and are secured by both first and second mortgage
liens. All but $5.3 million of these loans are non-recourse against the borrower
or guarantor, if any, except in certain circumstances that are standard in the
real estate industry. We plan to repay each note upon the sale of the
corresponding secured property.
In June 1998, we entered into a term loan agreement with FBR Asset
Investment Corporation which had an original principal amount of $10 million
bearing interest at 12% per annum. The loan was amended to increase the interest
rate effective as of December 3, 1998 to 13% per annum payable monthly plus 4%
per annum compounded monthly and payable at maturity and extend the maturity to
the earlier of a closing of any public offering and June 30, 1999. As of
December 31, 1998, the outstanding principal balance was $7.5 million. We used
the proceeds of this loan to purchase note pools. We plan to repay the this loan
with the proceeds of the public offering.
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 current line of credit with East-West Bank, will
provide us with sufficient capital requirements for the foreseeable future.
Our need, if any, to raise additional funds to meet our working capital and
capital requirements will depend on numerous factors, including the success and
pace of the implementation of our strategy for growth. We regularly monitor
capital raising alternatives to be able to take advantage of other available
avenues to support our working capital and investment needs, including strategic
partnerships and other alliances, bank borrowings, and the sale of equity or
debt securities. We intend to retain earnings to finance our growth and,
therefore, do not anticipate paying any dividends.
INFLATION
Our 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 respective agreements. Such escalation clauses are often related to
increases in the CPI or similar inflation indices. In addition, many of our
leases and management agreements are for terms of less than ten years, which
permits us to seek to increase rents and fees at market rates if they are below
then existing market rates. Many of our 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 our exposure to increases in
costs and operating expenses resulting from inflation.
32
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below represents the contractual balances of our financial
instruments at the expected maturity dates as well as their fair value at
December 31, 1998. The expected maturity categories take into consideration
actual amortization of principal and does not take into consideration
reinvestment of cash. The weighted average interest rate for the various assets
and liabilities presented are actual as of December 31, 1998. (See Consolidated
Financial Statements--Note 2, Fair Value of Financial Instruments)
<TABLE>
<CAPTION>
PRINCIPAL MATURING IN: FAIR VALUE
--------------------------------------------------------------------- DECEMBER 31,
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
---------- ---------- ---------- --------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate sensitive
assets
Cash and cash
equivalents $9,838,000 -- -- -- -- -- $ 9,838,000 $9,838,000
Average interest
rate 4.00% -- -- -- -- -- 4.00% --
---------- ---------- ---------- --------- --------- ----------- ----------- ------------
$9,838,000 -- -- -- -- -- $ 9,838,000 $9,838,000
---------- ---------- ---------- --------- --------- ----------- ----------- ------------
---------- ---------- ---------- --------- --------- ----------- ----------- ------------
Weighted average
interest rate 4.00% -- -- -- -- -- 4.00% --
---------- ---------- ---------- --------- --------- ----------- ----------- ------------
---------- ---------- ---------- --------- --------- ----------- ----------- ------------
Interest rate sensitive
liabilities -- -- -- -- -- -- -- --
Variable rate
borrowings $23,596,000 $ 408,000 $99,412,000 $1,114,000 $ 83,000 $7,283,000 $131,896,000 1$31,896,000
Average interest
rate 8.91% 9.16% 9.66% 10.16% 10.66% 10.66% 9.58% --
Fixed rate borrowings 16,789,000 14,000,000 -- -- -- 1,250,000 32,039,000 32,039,000
Average interest
rate 14.40% 14.65% -- -- -- 16.15% 14.58% --
---------- ---------- ---------- --------- --------- ----------- ----------- ------------
$40,385,000 $14,408,000 $99,412,000 $1,114,000 $ 83,000 $8,533,000 $163,935,000 1$63,935,000
---------- ---------- ---------- --------- --------- ----------- ----------- ------------
---------- ---------- ---------- --------- --------- ----------- ----------- ------------
Weighted average
interest rate 11.19% 14.49% 9.66% 10.16% 10.66% 11.46% 10.56% --
---------- ---------- ---------- --------- --------- ----------- -----------
---------- ---------- ---------- --------- --------- ----------- -----------
</TABLE>
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
Statement Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, was issued in June, 1998 and is applicable
for all fiscal years beginning after June 15, 1999. At this time, our management
has not completed its analysis of this pronouncement's impact on our financial
statements.
YEAR 2000 ISSUE
WHAT IS THE YEAR 2000 ISSUE?
The "Year 2000 Issue" arose because many computer systems identify a
particular year on the basis of the last two digits of that year. Hence, a
computer system may interpret incorrectly the digits "00" to be the year "1900"
instead of the year "2000." The inability of computer systems to properly
recognize a year, if not corrected, may result in the failure of, or the
production of erroneous results within, the computer system. This failure of
systems, production of erroneous results and the resulting damages is commonly
known as the "Year 2000 Issue."
It is difficult to estimate the impact the Year 2000 Issue may have on our
business, financial condition and results of operations. Based on current
testing, we have identified two primary systems affected by the Year 2000 Issue.
First, we rely upon information technology systems to run software for
databases, accounting, word processing, e-mail and other programs necessary to
our business. Second, certain systems in the buildings we manage and own, such
as fire safety systems, key card access devices
33
<PAGE>
and air conditioning and heating units, may be reliant, to some degree, on
computer systems for various functions. See "Risk Factors--Year 2000 Issue."
WHAT IS THE STATE OF READINESS OF OUR INFORMATION TECHNOLOGY SYSTEMS?
In January, 1999, we formed an internal information services group that
developed a plan to bring our information technology systems into Year 2000
compliance by September, 1999, consisting of the following:
- Educate management of the nature and scope of the Year 2000 Issue;
- Inventory all hardware and software systems which we use;
- Scan these systems with two industry standard programs for Year 2000
compliance and repair or replace those identified as non-compliant;
- Install a new computer network and server which will allow us to back up
all of our data every evening; and
- Test new systems in a "non-live environment" by turning their internal
clocks forward while monitoring and recording responses and hire outside
consultants to audit and validate our results.
We project our new network will be up and running no later than June 1,
1999, and we presently anticipate to be through with all internal testing by
September, 1999. We plan to have outside consultants perform and complete their
valuation audit of our testing by the fourth quarter of 1999. We estimate based
on current testing, that we will have to replace approximately 20 computers of
the 120 in use at our five corporate offices.
Most of the properties to which we provide property management services have
computer terminals. While these terminals will be tested, they will not be
placed on our network. We do not presently believe Year 2000 compliance problems
with these terminals will have a material adverse affect on our property
management operations.
WHAT IS THE STATE OF READINESS OF OUR BUILDING SYSTEMS?
In the first quarter of 1998, we formed a Year 2000 Compliance Task Force to
formulate and draft a Year 2000 compliance program for the various properties we
manage. Each individual property owner is ultimately responsible for assuring
its properties are ready for Year 2000, and our role as property manager is
limited to identifying potential problems and recommending remedial action.
However, we will make the necessary Year 2000 renovations to the properties we
own. The following is a summary of our compliance program:
- Notify all our clients of the Year 2000 Issue for building owners and
offer each an opportunity to participate in our compliance program;
- Request property owners to make a determination of which of their
buildings will participate in the program;
- Contact tenants to discuss their individual Year 2000 Issue concerns;
- Have property managers of participating properties compile a list of all
systems in their buildings which operate with the aid of computer
technology;
- Evaluate the completed surveys;
- Create a schedule of manufacturers and vendors of the various systems and
any service providers under applicable service or warranty agreements;
- Contact each manufacturer, vendor or service provider for an update on the
status of compliance for each relevant system, and where necessary,
request Year 2000 compliance testing;
34
<PAGE>
- Submit a plan of action and budget to the property owner based on the
results of the tests and implement the property owners' approved
renovations; and
- Make necessary Year 2000 compliance renovations to the properties we own.
As of April 21, 1999, approximately 80% of the properties under management
in 1998 are participating in the Year 2000 compliance program. For those
properties, we have substantially completed reviews of the preliminary
inventories and testing and have submitted proposals to those owners. We will
contact owners of non-participating buildings to determine if they would now
like to participate in our Year 2000 compliance program.
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 current
review of the preliminary systems inventories from our participating managed
properties revealed few Year 2000 Issues.
However, there can be no assurance that we will not discover Year 2000
problems with our systems that will require their repair 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 electricity, which could adversely impact our information
technology systems or may allow tenants at the buildings we own or manage to
terminate leases if such failures persist.
WHAT WILL IT COST TO IMPLEMENT THE YEAR 2000 PLANS?
We estimate that we will incur approximately $150,000 in our Year 2000
compliance efforts, of which we have spent approximately $16,000 to date. The
majority of this amount will be spent on replacing hardware and software and on
testing. We have not had to defer any of our information technology plans as a
result of our Year 2000 preparations. However, these estimates are based on our
current assessment and are subject to change. We will continue to assess our
Year 2000 Issue compliance efforts and as a result, we may need to revise our
budget to implement new measures in the future.
CONTINGENCY PLAN
We are currently developing a Year 2000 Contingency Plan. The results of
current and future testing and responses of vendors, manufacturers and service
providers will be taken into account in developing this plan.
35
<PAGE>
BUSINESS
OVERVIEW
We are an integrated, international real estate services and investment
company. Founded in 1977, we were later incorporated in Delaware and became a
public company in 1992. Through our subsidiaries, we deliver a complementary
array of real estate services. Headquartered in Beverly Hills, we have
approximately 700 full- and 50 part-time employees in our offices located in
numerous U.S. cities and in our Tokyo office.
We initially gained recognition in the U.S. real estate market through our
residential real estate auction services. Over time, we diversified our business
so that we now provide:
- Commercial and residential property management and leasing;
- Management of real estate and note pool investments; and
- Commercial and residential brokerage, including auction marketing.
In addition to these real estate related services, we invest for our account in:
- Commercial and residential real estate; and
- Pools of secured and unsecured distressed notes.
Our clients include large U.S. and Japanese financial institutions, major
corporations, pension funds, real estate developers, insurance companies and
governmental entities.
We have had a presence in Japan for ten years, through which we have
developed significant relationships with Japanese companies and financial
institutions. In 1995 we opened our Tokyo office. It is staffed with nine
Japanese employees, two of whom are Japanese licensed real estate brokers with
knowledge of the local culture and real estate market. We believe that success
in the Japanese real estate market is determined primarily by a company's
reputation and its business relationships, rather than solely by size and access
to capital. We have entered into joint venture relationships with companies and
partnerships affiliated with Colony Capital, Inc. and Cargill, Incorporated to
invest in Japanese real estate and distressed notes. We believe that these joint
venture parties were attracted to us, in large part, by our strong Japanese
presence and our established relationships and reputation with Japanese
institutions.
OUR STRATEGIES FOR GROWTH
EXPAND FEE INCOME. We intend to grow our recurring fee income by:
- aggressively marketing our property management services to clients with
substantial real estate holdings, such as pension funds;
- acquiring companies with established portfolios of property management
engagements and companies offering real estate related services that would
expand our current capabilities or geographic scope; and
- investing in Japanese and, to a lesser extent, U.S. joint ventures where,
in addition to our equity investments, we receive management and
acquisition fees for our providing real estate and marketing expertise.
CROSS-MARKET OUR SERVICES. Due to our recent growth and the addition of new
business lines, we foresee opportunities to further "cross-market" our services.
In the past, we have been able to identify and execute on investment
opportunities arising from our brokerage relationships. Going forward, we
believe our property management business will also provide us with significant
marketing opportunities, particularly, opportunities to broker sales of the
buildings that we manage, lease, and upgrade for our property management
clients. We believe the diversity of our operations will also lessen our
reliance on the overall state of the real estate market.
36
<PAGE>
GROW OUR JAPANESE BUSINESS. We believe our long-standing relationships in Japan
will afford us significant opportunities:
- to broker Japanese real estate to institutional investors both in and
outside of Japan; and
- to purchase undervalued real estate generally acquired on a negotiated
basis and to resell it so as to generate long-term gains for us and our
joint venture partners.
We intend to purchase Japanese assets through joint ventures that will allow
us to diversify our equity risks and to simultaneously earn substantial income
through not only profit participation arrangements, but also acquisition, asset
management and disposition fees. Further, we believe that our enhanced profile
in Japan associated with our increased investment and brokerage activities will
allow us to establish our property management business in Japan.
BOLSTER OUR INTERNET PRESENCE. We believe the Internet will allow us the
opportunity to expand our traditional real estate auctioning services by
reaching new customers and introducing greater efficiencies to the real estate
auction process. To date, we have signed a letter of intent with Guidance
Solutions, Inc. to develop jointly through eKWIC Inc. an interactive Internet
auction service to be located at www.eKWIC.com. eKWIC Inc. is a wholly-owned
subsidiary of Kennedy-Wilson Properties, Inc. Guidance Solutions may receive up
to a 25% stake in eKWIC in connection with this transaction. We are designing
the website as a mechanism for the marketing and auction sale of residential and
commercial real estate. We anticipate that the website will include photographs
of properties available for sale, real estate reports on each of such properties
and an automated bidding process. eKWIC Inc. is currently scheduled to debut in
the fall of 1999.
TAKE ADVANTAGE OF OUR IMPROVED CAPITAL STRUCTURE. We intend to use all of the
proceeds of this offering for debt reduction. We believe that as a result of
this offering we will gain access to less expensive sources of debt for
financing our anticipated growth.
MAKE SELECTIVE DOMESTIC INVESTMENTS. We intend to continue to acquire pools of
distressed notes and to selectively invest for our own account in U.S. real
estate. We hired three new professionals last year to locate, analyze and, where
appropriate, negotiate acquisitions of these types of investments.
OUR COMPETITIVE ADVANTAGES
NAME RECOGNITION. Kennedy-Wilson is a name that we believe is widely recognized
throughout the real estate industry for our successful execution of high-end
brokerage transactions, our national real estate auction services, our
representation of Japanese clients with respect to their U.S. real estate
investments and our high level of customer service.
COMPLEMENTARY SERVICES. Our real estate services are interrelated, and as a
result, we believe that we can increase our business by providing the multiple
services necessary to meet more of the complex real estate needs of our clients.
For example, we can assist a client with assessing property acquisition
opportunities, consummating an acquisition, analyzing and supervising building
improvements, upgrading technology, improving energy efficiency, leasing and
managing the property and brokering its sale.
IDENTIFYING AND SATISFYING OUR CLIENTS' NEEDS. We believe that we have
long-standing relationships with clients who have diverse real estate needs. We
often develop a relationship with a client by offering a single service and
later expand the relationship by recommending and implementing strategies
designed to meet the client's diverse real estate needs.
ENTREPRENEURIAL CULTURE. We have crafted our employee compensation structure to
reward key executives and employees with performance-based compensation and
stock options derived from personal, group and organizational performance. We
believe that our growth strategies, incentive-based
37
<PAGE>
compensation and the significant level of employee ownership will motivate our
employees to achieve a high level of performance. Immediately following this
offering, our executive officers and directors will collectively own 45.2% of
our outstanding stock.
ESTABLISHED MARKET PRESENCE IN JAPAN. We believe that we have established
significant relationships in, and knowledge of, the Japanese real estate market
that will give us a competitive advantage for identifying privately-negotiated
real estate opportunities. Due to this competitive advantage, we believe that
institutional investors, similar to the Colony Capital and Cargill affiliates,
will continue to seek business relationships with us.
EXPERIENCED MANAGEMENT TEAM. The members of our senior management team have an
average of approximately 15 years of experience in brokering, managing and
investing in real estate. Historically, we have had low turnover among
management and key employees, which we believe gives us a significant advantage
in our relationship oriented businesses. Since we authorized our deferred
compensation plan in 1997, only one of the 20 employees that have participated
in that plan has left.
OUR BUSINESS OPERATIONS
PROPERTY MANAGEMENT AND LEASING
On July 17, 1998, we acquired Heitman Properties, Ltd., a national property
management and leasing company founded in 1969. As a result of this acquisition,
we have become a nationwide commercial and residential property management and
leasing company. We provide a full range of services relating to property
management, including:
- Commercial and residential building management;
- Leasing;
- Construction management;
- Engineering services;
- Technical services; and
- Environmental management.
We have managers in six regional offices--Beverly Hills, Sunnyvale (a city
in the San Francisco metropolitan area), Dallas, Houston, Minneapolis and
Chicago--supervising approximately 660 full-time and 50 part-time employees who
assist in managing more than 120 office and industrial buildings, commercial
garages and multi-unit residential complexes in 25 different states and the
District of Columbia. We have approximately 51 million gross square feet of real
estate under management, including approximately 14,000 residential units.
Nearly all of the properties that we manage are owned directly or
beneficially by large institutional clients. The following is a partial listing
of those property owners:
- Bell Atlantic Corporation;
- Endowment Realty Investment, Inc.;
- Florida State Board of Administration;
- Heitman Capital Management Corporation;
- JMB Realty;
- LA Fire & Police Pension Fund;
- Pennsylvania State Employee Retirement System;
- Teachers Annuity; and
- Tower Realty Corporation;
- TRW, Inc.;
- Walton Street Capital Acquisition Co. II LLC.
38
<PAGE>
A significant portion of our property management and leasing revenues are
earned on properties owned or asset managed by Heitman Capital Management
Corporation. In 1998, we earned 52.0% of our property management and leasing
revenues from properties owned or assets managed by Heitman Capital.
Our management fees and leasing commissions are structured in a variety of
ways to meet the particular needs of our clients and the properties managed and
to respond to local market conditions. Generally, management fees are 1 1/2% to
2% of the rentals collected and leasing commissions are $2.00 to $3.00 per
square feet of space rented or 4% to 6% of the value of the lease, in each case,
depending on the amount of space leased and the length of the lease obtained. In
1998, our property management revenues were $14.2 million, representing 27.9% of
our 1998 revenues.
As part of our strategy for providing our property management clients with
the best services possible, we apply the same approach in managing our clients'
properties as we do in managing our own, where our primary objective is to
maximize the return on investment. To this end, we work with each client to
ascertain its goals and expectations and to design strategic plans for marketing
and improving each property in a way that increases the client's returns. We
also strive to maximize our clients' returns by reducing property operating
expenses through the discounts and lower prices that we generally obtain for
vendor services and supplies such as janitorial and gardening services and
office supplies. As a result of our national purchasing programs and service
provider alliances, we can sometimes obtain these services and supplies for less
than the manager of a single property.
We are actively seeking to expand our property management and leasing
operations through the acquisition of property management and leasing companies,
the marketing of our property management services to our existing brokerage
clients and the development of new, institutional clients. We have one senior
executive whose sole responsibility is to seek out, evaluate and negotiate
property management and leasing company acquisitions. We have marketing
personnel working out of our Beverly Hills, Phoenix and Chicago offices seeking
new property management engagements. We have also charged our property managers
and leasing agents with the responsibility of bringing in new business and we
compensate them with bonuses when they are successful in doing so. In addition
to expanding our property management business in the U.S, we also intend to
expand that business into Japan in concert with our efforts to invest in and
broker Japanese real estate.
REAL ESTATE BROKERAGE
Through our offices in Beverly Hills, New York and Tokyo, and with the
assistance of our affiliate in Hong Kong, Kennedy-Goldman, Ltd., we provide
specialized brokerage services for both commercial and residential real estate.
We market and sell on behalf of our clients and ourselves:
- Office and retail buildings;
- Multi- and single-family residences;
- Industrial sites;
- Hotels and resorts; and
- Undeveloped land.
The properties for which we have brokered sales are located throughout the U.S.
with a significant concentration in California. We have also sold properties in
Japan, Guam and Canada.
We strive to achieve the best results for our clients and to provide
superior customer service that focuses on personalized attention, frequent
updates on marketing efforts and utilization of our international relationships
and our complementary array of real estate services. The following is a sample
of real estate services that we provide in connection with our brokerage
activities:
- Property valuations;
- Development and implementation of marketing plans;
- Sealed bid auctions; and
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- Open bid auctions.
When we receive a new brokerage engagement, we begin by developing with our
client a sales strategy that we believe will maximize the sales proceeds while
taking into account our client's individual situation, including time
parameters, sensitivity to publicity and cash flow needs. We also investigate
and analyze, among other things, the physical condition of the property, its
cash flow and tenant characteristics, market rents and market dynamics within
submarkets and comparable transactions. We conduct commercial property sales
primarily through private negotiations and, to a lesser extent, sealed bid
sales. We conduct residential property sales primarily through sealed bid and
open bid auctions and conventional brokerage activities.
As part of our effort to ensure that our various offices work together to
provide the brokerage and marketing services that a particular client may need,
our compensation practices reward employees in all offices that participate in a
marketing effort for a particular client. We believe that our compensation
practice is particularly effective when our Asian clients are selling their U.S.
real estate holdings.
COMMERCIAL BROKERAGE SERVICES. We specialize in marketing commercial
properties with privately negotiated sealed bid sales. As part of our efforts to
market each commercial property, we develop and implement cost effective
marketing campaigns ranging from local to worldwide in scope. Each marketing
campaign is tailored to the client's objectives and the property's
characteristics. We also market properties directly to various investors with
whom we maintain ongoing business relationships. We believe that through these
efforts, we create a sales environment intended to enable our clients to obtain
the highest possible prices for their properties.
We obtain our commercial brokerage engagements primarily through our
existing relationships with over 100 institutional and corporate owners of real
estate located in the U.S. Our clients are located in the U.S., Japan, Canada,
Australia and Hong Kong. The following is a partial listing of the clients for
whom we have brokered commercial real estate sales in the last three years:
<TABLE>
<S> <C> <C> <C>
BANKING INSTITUTIONS: DEVELOPERS AND MANUFACTURERS:
- - Chase Manhattan Bank - Japan Building Project
- - Industrial Bank of Japan, Ltd. - Larwin Company
- - Long-Term Credit Bank of Japan, Ltd. - Northrop Grumman Corporation
- - Bank of Tokyo-Mitsubishi - Rolaco Services
- - Mitsubishi Trust & Banking Corporation - Tobishima Corporation
- - Yasuda Trust & Banking Corporation Co., Ltd.
</TABLE>
We believe that we are not dependent upon any single brokerage customer, the
loss of which would have a material adverse effect on us. No brokerage client
accounted for 10.0% or more of our brokerage commission revenues in 1996 or
1997. In 1998, Fuji Bank accounted for 17.0% of our brokerage commission
revenues and Rolaco Services accounted for 12.8% of our brokerage commission
revenues.
With our acquisition of Heitman Properties, Ltd. we acquired established
relationships with the owners of the more than 140 properties that were managed
by Heitman Properties. We view each of those owners as a potential brokerage
client and source of real estate investment opportunities.
Traditionally, our commercial brokerage marketing in Asia focused primarily
on selling properties located in the U.S. for Asian clients. Over the years, we
have built relationships with large Japanese financial institutions, developers,
investors and property owners and have developed what we believe to be a
reputation among them as successful marketer of commercial and residential real
estate in the U.S. In order to establish ourselves as brokers in the Japanese
real estate market, in 1995 we opened our office in Tokyo and are now brokering
the sales of commercial property in Japan.
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When we engage in a competitive bidding process for brokerage engagements,
our brokerage commission rates are often structured to demonstrate our
confidence in our ability to sell the property at a high price. For example, we
might offer a property owner a market or below-market brokerage commission rate
for selling a property at the price the owner initially expects and a higher
rate for selling the property for a higher price. On average, our commercial
brokerage assignments last for six months from the listing of the property to
the payment of a brokerage commission upon its sale. Generally, we do not enter
into long-term contracts for brokerage services.
RESIDENTIAL BROKERAGE SERVICES. We specialize in designing marketing
programs to sell single-family home developments and condominium projects using
conventional sales and auction-marketing programs. We also design and implement
sealed bid marketing programs for exclusive estates and land for residential
development. Most of the residential properties that we have brokered are
located in California. Our clients include builders, developers, private
sellers, financial institutions and government agencies.
AUCTION SERVICES. We provide our clients with auction marketing services to
sell both commercial and residential real estate. Auctions provide a seller an
opportunity to concentrate the marketing efforts and sell its holdings on one
established date. By doing so, the seller can increase liquidity and avoid
long-term carrying costs and the risk of a drop in market value. For these
reasons, we believe that the net proceeds to the seller following an auction
sale of multiple units often exceeds what the net proceeds would have been had
the units been sold individually through conventional brokerage arrangements.
The typical auction marketing program spans approximately four months from the
time that we sign the agreement with our client to the date of the auction.
REAL ESTATE INVESTMENTS AND ASSET MANAGEMENT
We invest in commercial and residential real estate with joint venture
partners and on our own account. We also provide asset management services for
some of our joint ventures.
Our current investment portfolio and our plans for future investments focus
on commercial buildings and multiple and single family residences. Generally, we
purchase properties that are subperforming in a manner which we believe can be
rectified with our expertise or financial resources. For example, a developer of
a residential real estate project may find it difficult or impossible to finish
the project because it cannot properly market the finished product or has
insufficient cash flow. In such a situation, we can purchase the project at a
discounted price then apply our marketing expertise and draw on our financial
resources to finish the project and sell it as a whole or to individual home
buyers for a profit. With regard to commercial properties, we typically acquire
subperforming buildings, make the improvements necessary to attract tenants,
lease to new tenants and then sell the buildings. We refer to this process as
stabilizing the asset.
Before acquiring any property, we carefully analyze it under the following
criteria:
- whether the purchase price is less than the combined value of the land and
the cost of replacing the buildings and improvements on it;
- whether the property is located in a growing real estate market and lacks
significant environmental and structural problems;
- in the case of commercial property, whether there is significant space
available for lease, whether the existing lease rentals are below market
rates and whether the current rents are sufficient for profitable
operations;
- in the case of commercial property, whether we believe that we can sell it
for a profit within five years of the acquisition date, with the targeted
holding period being between 18 and 24 months;
- in the case of residential property, whether we believe we can sell it for
a profit within two years of the acquisition date, with the targeted
holding period being 18 months or less; and
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- in the case of residential properties, whether our projected return on
equity is in excess of 100% and whether projected profits at the time of
disposition will exceed 15% of the projected sales revenues.
We believe that one of our strengths is our ability to quickly identify and
acquire desirable real estate assets. We do so by capitalizing on the
institutional knowledge we have developed through our brokerage and investment
business and by conducting quick and thorough investigations and analyses of the
properties, their financial condition and what we believe to be their financial
potential. We have extensive experience in identifying and analyzing the factors
that impact property values in the regions in which we do business, such as new
construction, the marketability of certain neighborhoods, leasing trends and the
types of businesses seeking various types of commercial space. Our
investigations and analyses are conducted by an experienced in-house team,
occasionally supplemented by outside due diligence professionals.
To date, a significant portion of the real estate in which we have invested
is located in California. Within the next year, we plan to liquidate the
commercial real estate investments that we currently wholly own in the U.S. due
to our belief that we will have stabilized or will soon stabilize these assets
in many markets. While we believe the current cycle of the U.S. commercial real
estate market has matured, we think that Japan offers significant real estate
opportunities due to the recent Asian economic downturn. Presently our brokerage
operations are the source of nearly all of our real estate acquisitions in the
U.S. These operations provide us with unique investment opportunities in the
form of close relationships with clients that have substantial real estate
investments. We expect our property management and brokerage operations to
continue to provide select opportunities for us to acquire additional U.S. real
estate investments suitable for our stabilization techniques.
Occasionally, our clients desire to sell some or all of their real estate
holdings through means other than conventional brokerage or auction services.
For example, financial institutions are generally not in the business of holding
and managing property and they may have regulatory or internal requirements that
mandate the rapid sale of real property acquired through foreclosure. Thus, a
financial institution client that has acquired a property through a foreclosure
may desire to sell it in less time than it would take for a conventional
brokerage or auction sale. Similarly, as a result of the current economic
conditions in Asia, a client in Asia may have the need or desire to sell a real
estate holding in a rapid manner with little publicity. In the past, we have
been able to meet the needs of these types of clients by purchasing their
properties quickly and discretely for our own account.
Depending on the size of the property, the availability of capital and our
assessment of risks, we either acquire a property as part of a joint venture or
entirely for our own account. Historically, we have used joint ventures to
acquire larger commercial buildings, typically those with more than 250,000
square feet of space. In these transactions, our joint venture partner
contributed the majority of the capital while we contributed the remainder of
the capital along with our marketing expertise. In some cases we have provided
the joint venture fee based asset management services. These transactions have
offered us the ability to leverage our capital and diversify the risks
associated with owning these larger properties.
We generally finance the acquisitions of our wholly-owned real estate with
mortgage loans and mezzanine financing. Our lenders have included Heller
Financial, Credit Suisse First Boston, GE Capital and Tokai Bank of California.
Currently, all but one of our wholly-owned commercial properties were acquired
with the use of mezzanine financing. In our typical mezzanine financing
transaction, we are required to make an equity investment of 25% to 35% of the
purchase price, of which 70% to 80% of that equity investment is financed by the
mezzanine lender. The remainder of the investment is generally financed by a
mortgage lender. Typically, the mezzanine lender receives interest on its loan
and a share of the sale proceeds. The share of the sale proceeds is generally
determined by the amount of the loan and the period of time which the property
is held. In this type
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of arrangement, we control the management of the property, including the timing
and marketing of the property's sale.
We are pursuing joint ventures with large international investors,
particularly in Japan. To this end, we have entered into limited partnership
agreements with affiliates of Colony Capital, Inc. and Cargil, Incorporated to
invest in Japanese real estate and note pools. Our partnership with Colony
Capital calls for an investment of up to $100.0 million of which $2.0 million
will be invested by us, in Japanese real estate and pools of distressed notes.
The Kennedy-Wilson/Cargil partnership was formed to pursue investments from $3.0
to $10.0 million. The investment strategy of both partnerships is to take
advantage of depressed Japanese real estate prices and the weakened Japanese
economy by purchasing Japanese real estate and distressed notes at discounted
prices. Under the terms of the Kennedy-Wilson/ Colony partnership, we locate and
negotiate the acquisition of desirable investments. One of the Colony Capital
affiliates, however, controls the selection and structure of investments and the
development and implementation of budgets and operating plans. We are obligated
to present to the Kennedy-Wilson/Colony partnership all Japanese investment
opportunities that we desire to pursue as a principal, but no party is obligated
to make the capital contributions necessary to purchase any investment. Once the
Kennedy-Wilson/Colony partnership acquires an asset, whether a pool of notes or
real estate, we manage that investment on behalf of the partnership for a fee.
In order to create greater incentive to effectively manage these assets, the
Kennedy-Wilson/Colony partnership has offered some of our employees a limited
opportunity to invest and they have invested their personal funds into each of
the assets acquired by the partnership. These employee investments are described
in more detail in the "Certain Transactions" section under the heading "Colony
Agreements." Thus far, the partnership has purchased a 356,000 square foot
office building in Kawasaki, Japan occupied by high tech tenants and a pool of
notes as described in the "Distressed Note Pool Investments" section that
follows this section.
Since January 1, 1996 we have sold our interests in 10 commercial properties
for a net profit of $14.5 million and 257 residential units for a total net
profit of $7.7 million. The following tables provide information about our
commercial and residential properties that we have sold from January 1, 1996 to
date as well as our current commercial real estate holdings.
COMMERCIAL REAL ESTATE INVESTMENTS WHERE WE OWN A MAJORITY INTEREST
SOLD SINCE JANUARY 1, 1996
<TABLE>
<CAPTION>
DATE MONTH PERCENT WE
LOCATION APPROX. S.F. ACQUIRED SOLD OWNED
<S> <C> <C> <C> <C>
Santa Monica, CA 56,000 Apr-95 Nov-96 100%
Santa Monica, CA 46,000 Apr-95 Mar-97 100%
Pasadena, CA 61,000 Nov-96 Jul-97 100%
Santa Monica, CA 20,000 Aug-96 Dec-97 100%
Anaheim, CA 30,000 Jan-97 Dec-97 100%
Los Angeles, CA 50,000 Aug-94 Dec-97 100%
Santa Monica, CA 36,000 Oct-96 Sep-98 100%
Los Angeles, CA 28,000 Jul-98 Dec-98 100%
</TABLE>
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<PAGE>
RESIDENTIAL REAL ESTATE INVESTMENTS OF WHICH WE OWNED A MAJORITY INTEREST
SOLD SINCE JANUARY 1, 1996
<TABLE>
<CAPTION>
DATE MONTH/YEAR PERCENT WE
LOCATION UNITS ACQUIRED SOLD OWNED
<S> <C> <C> <C> <C>
San Francisco, CA 1 unit Jun-95 Jan-96 100%
San Francisco, CA 42 units Sept-95 1996 100%
Waikoloa, HI 40 units Dec-95 1996-97 100%
Corona Del Mar, CA 14 units Dec-96 1997-98 100%
Beverly Hills, CA land Jun-97 Sep-97 100%
Los Angeles, CA 24 units Apr-98 Aug 98 100%
Los Angeles, CA 1 sfr(1) Oct-97 Sep-98 100%
Granada Hills, CA 10 sfr Jun-97 1998 100%
Palm Desert, CA 7 sfr Feb-98 1998 100%
</TABLE>
- ------------------------
(1) "sfr" means single family residence.
REAL ESTATE INVESTMENTS WHERE WE OWNED LESS THAN A MAJORITY INTEREST
SOLD SINCE JANUARY 1, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
MONTH/YEAR
LOCATION DESCRIPTION DATE ACQUIRED SOLD PERCENT WE OWNED
Los Angeles, CA 365,000 sq. ft. Nov-96 Nov-98 25%
commercial
Los Angeles, CA 143,000 sq. ft. Nov-96 Nov-98 25%
commercial
Los Angeles, CA 9 residential Aug-95 Apr-96 50%
units
Los Angeles, CA 109 residential Dec-96 1997-98 50%
units
</TABLE>
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OUR CURRENT COMMERCIAL REAL ESTATE INVESTMENTS
WHERE WE OWN A MAJORITY INTEREST
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
OUR
PURCHASE
PRICE,
IMPROVEMENTS
AND COSTS OUR EQUITY
AS OF INVESTED AS PERCENT WE
LOCATION APPROX. S.F./TYPE DATE ACQUIRED 12/31/98 OF 12/31/98 OWN
Santa Monica, CA 4 lots Oct 96/Dec 97 $2,402,000 $2,402,000 100%
Los Angeles, CA 9,000 Oct-97 $ 336,000 $ 336,000 100%
Pasadena, CA 52,000 Dec-97 $8,886,000 $ 222,000 75%
Van Nuys, CA 74,000 Jan-98 $6,771,000 $ 472,000 100%
Los Angeles, CA 282,000 Feb-98 2$4,937,000 $1,678,000 100%
Los Angeles, CA 133,000 Mar-98 1$6,223,000 $1,256,000 100%
Monrovia, CA 21,000 May-98 $1,399,000 $1,399,000 100%
Long Beach, CA 1 sfr and 2 Jul-98 $ 41,000 $ 41,000 100%
commercial bldgs.
2,000 sq. ft.
Los Angeles, CA 161,000 Sept-98 1$9,821,000 $ 769,000 100%
Los Angeles, CA 306,000 Sept-98 2$9,166,000 $1,351,000 100%
</TABLE>
OUR CURRENT RESIDENTIAL AND UNDEVELOPED REAL ESTATE INVESTMENTS
WHERE WE OWN A MAJORITY INTEREST
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
OUR
PURCHASE
PRICE,
IMPROVEMENTS
AND COSTS OUR EQUITY
AS OF INVESTED AS PERCENT WE
LOCATION UNITS DATE ACQUIRED 12/31/98 OF 12/31/98 OWN
Pacific Palisades, CA 3 sfr Dec-97--Feb-98 $2,154,000 $ 528,000 60%
Palm Desert, CA 16 sfrs Feb-98 $2,902,000 $ 544,000 100%
San Diego, CA 155 acres May-98 $ 283,000 $ 283,000 100%
Riverside, CA 3.7 acres May-98 $ 87,000 $ 87,000 100%
Cathedral City, CA 112 lots Sept-98 $2,386,000 $ 894,000 70%
</TABLE>
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<PAGE>
OUR CURRENT REAL ESTATE INVESTMENTS WHERE WE
OWN LESS THAN A MAJORITY INTEREST
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
OUR SHARE
OF PURCHASE
PRICE,
IMPROVEMENTS
AND COSTS OUR EQUITY
DATE AS OF INVESTED AS PERCENT WE
LOCATION DESCRIPTION ACQUIRED 12/31/98 OF 12/31/98 OWN
Monarch, CO ski resort Nov-96 $ 963,000 $ 603,000 25%
Los Angeles, CA 417,000 vacant sq. Sep-97 $7,487,000 $3,227,000 50%
ft. commercial
New York, NY 1,014,000 sq. ft. Jan-98 $4,194,000 $4,174,000 15%
commercial
Kohala Coast, HI 3,000 acres Mar-98 $4,611,000 $ 591,000 13%
Various cities, 17 residential and Sept-98 $ 38,000 $ 11,000 7%
Japan commercial
properties
Valencia, CA commercial to be Sept-98 $ 297,000 $ 300,000 8%
developed
Kawasaki, Japan 244,000 sq. ft. Feb-99 $ 756,000 $ 756,000 2%
commercial
</TABLE>
DISTRESSED NOTE POOL INVESTMENTS
Since 1994, we have been in the business of purchasing and managing pools of
distressed notes. Generally, distressed notes are those where the borrower has
stopped making payments or is late in making payments. Our note pools contain
notes that are secured and unsecured. The secured notes are collateralized by
real estate or personal property.
Historically, we have acquired these pools from regulatory agencies such as
the Federal Deposit Insurance Corporation and the Resolution Trust Corporation.
We have also purchased notes from various U.S. private sellers, such as banks,
savings institutions, mortgage companies and insurance companies. Most of these
notes were originated by lenders in California, Texas and Florida.
Recently, we expanded our operations to include the acquisition of a pool of
Japanese distressed note pools through a joint venture. In September 1998, the
Kennedy-Wilson/Colony partnership purchased for $24.0 million a pool of
distressed Japanese notes with a face value in excess of $400.0 million, some of
which are secured by real estate and personal property. In addition, the pool
also included 17 commercial and residential properties. As of December 31, 1998,
this note pool had generated for the Kennedy-Wilson/Colony partnership revenues
in excess of $1.6 million, of which $109,000 represents revenues for us. In
addition to any amounts paid by the borrowers in this note pool, we will also
earn an asset management fee for managing the notes and real estate acquired.
In March, 1999, we entered into a joint venture agreement with an entity
affiliated with Cargill, Incorporated. The present investment strategy of the
Kennedy-Wilson/Cargill joint venture is to acquire on a privately negotiated
basis pools of distressed Japanese real estate secured notes that cost from $3.0
million to $10.0 million. We will provide the Kennedy-Wilson/Cargill joint
venture asset management and disposition services on a fee basis and will
provide capital contributions ranging between 5 and 10 percent of each
investment. Although the Kennedy-Wilson/Colony partnership arrangements require
us to present all Japanese investment opportunities to that partnership, the
assets targeted by the Kennedy-Wilson/Cargill partnership do not fit within the
Kennedy-Wilson/Colony partnership strategic investment plan.
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<PAGE>
The following table illustrates the performance of our note pool
investments:
NOTE AND NOTE POOL INVESTMENTS HELD
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OUR PORTION OF OUR GAINS
THE FROM NOTE
ACQUISITION OUR EQUITY PERCENT WE POOLS AS OF
MONTH ACQUIRED PRICE INVESTED OWN 12/31/98
Nov-94 $ 584,941 $ 584,941 100% $2,112,081
Aug-96 $6,333,340 $1,533,340 100% $3,179,131
Apr-96 $ 105,078 $ 105,078 100% $ 237,932
Dec-96 $1,916,565 $ 586,565 100% $ 281,477
Dec-96 $5,024,544 $1,026,471 100% $2,020,506
Jun-97 $1,248,800 $ 30,000 100% $ 845,873
Oct-97 $1,106,314 $ 6,314 100% $ 438,783
May-98 $1,756,985 $ 10,500 100% $ 334,778
Jun-98 $2,776,930 $ 776,930 100% $1,551,286
Aug-98 $ 182,489 $ 182,489 100% $ 2,620
Sep-98 $1,688,503 $ 198,000 7% $ 108,987
</TABLE>
We also invest in individual distressed notes secured by real property.
Presently, we hold two nonperforming distressed notes secured by undeveloped
land in the Kailua-Kona region of Hawaii that we acquired in 1998. In one of
those notes we have an equity investment of $3.9 million secured by 450 acres of
ocean front, undeveloped land. In the second note, we have an equity investment
of $540,000, secured by 1,000 acres of undeveloped land.
MEZZANINE LENDING
In 1997, we began making mezzanine loans to real estate developers for new
single-family, residential developments. Total project costs for these
developments typically range from $5 to $25 million, and our mezzanine loans
typically range from $500,000 to $1 million. We expect to hold these loans for a
period of less than two years. Presently, the borrowers pay interest at 10% per
annum, and we are entitled to a participation in any profits from the
development. At the closing of each loan, we generally collect a 1% set-up fee.
As of April 20, 1999 we have made six mezzanine loans, each of which remains
outstanding. The aggregate outstanding principal balance of all six loans is
approximately $3.2 million.
EQUITY INVESTMENTS IN OTHER COMPANIES
KENNEDY GOLDMAN. In June, 1997 we acquired a 20% equity interest in Kennedy
Goldman (HK) Limited, a Hong Kong corporation, located in Hong Kong. Kennedy
Goldman is a real estate services company specializing in leasing and real
estate investment brokerage in Hong Kong. We acquired this interest in order to
maintain a presence in the Hong Kong real estate market and business relations
with Asian real estate investors. We have a director on Kennedy Goldman's Board
of Directors. The book value of our investment is $32,000.
ASSET ONE. In April, 1998 we acquired a 40% equity interest in Asset One, a
Japanese corporation with an office in Tokyo. Asset One is a loan servicing
company. Part of Asset One's business includes servicing the loans in our
distressed Japanese loan pools. The book value of our investment is $182,000.
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<PAGE>
JUTAKU RYUTSU. In March, 1998 we acquired a 30% equity interest in Jutaku
Ryutsu, a Japanese corporation with offices in Tokyo, Osaka and Fukuoka, Japan.
Jutaku Ryutsu is a brokerage company that specializes in selling real estate
assets between $500,000 and $10.0 million in value. Jutaku Ryutsu assists us
with our acquisition due diligence on our Japanese loan pools and real estate
and the disposition of those assets. The book value of our investment is
$253,000.
GOVERNMENT REGULATIONS
Our brokerage and property management operations are subject to various
federal, state and local regulations in the U.S. and in Japan. We must have an
officer licensed as a real estate broker or we must associate with a broker
licensed by each state within the U.S. in which we provide brokerage and
property management services. In California, we must have an officer licensed as
a real estate broker in order to be exempt from California's lender licensing
requirements with respect to the real estate secured mezzanine loans that we
make. Each of our employees that performs certain brokerage functions in any
particular state must be a licensed real estate salesperson in that state and he
or she must work under the supervision of a broker licensed by that state. In
addition to these licensing requirements, certain state governmental entities,
such as the California Department of Real Estate, regulate our brokerage and
property management operations by requiring our resident operative subsidiary to
be licensed. We believe that we are in substantial compliance with all material
licensing requirements and regulations in states and countries in which licenses
are required and in which we are engaged in material brokerage or property
management activities.
In various states, governmental entities license individual auctioneers
and/or administer various regulations governing their activities and may require
that auctioneers post bonds. We believe that we are in substantial compliance
with all material licensing and bonding requirements in all states in which
auctioning licenses and bonds are required and in which we are engaged in
material auction activities.
COMPETITION
Because of our unique combination of businesses, we compete with brokerage,
auction, leasing and property management companies as well as companies,
partnerships, trusts and individuals that invest in real estate and distressed
notes. We believe that the brokerage and property management industries are both
highly fragmented and highly competitive. We must compete with conventional
property management companies and commercial and residential real estate brokers
as well as other auction companies. Some of our publicly traded competitors are
LaSalle Partners, Inc., Trammell Crow Company, CB Richard Ellis Services, Inc.
and Insignia Financial Group. Several of these companies are significantly
larger than us and possess greater financial resources. We compete against real
estate services companies with regard to, among other things, property
management fees, leasing commissions, brokerage commissions and quality of
service provided.
Our investment operations compete to varying degrees with real estate
investment partnerships and other investment companies. Many of these
competitors have significantly greater capital resources. However, some of these
competitors focus on acquisitions which are larger in size than those
historically targeted by us. We believe that to a lesser degree we also compete
with real estate investment trusts that seek to acquire similar assets. We
compete with these other investors primarily on the basis of the amounts that we
pay for the investments acquired. See "Risk Factors--The Real Estate Services
and Investment Businesses are Highly Competitive."
INSURANCE
We maintain errors and omissions, directors' and officers' liability,
property, earthquake casualty and workers' compensation insurance, with policy
limits that we believe are adequate and appropriate under the circumstances. We
periodically review and revise these limits as necessary.
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<PAGE>
EMPLOYEES
We have approximately 700 full-time and 50 part-time employees in the U.S.
and in Japan. None of our employees are represented by a collective bargaining
agreement. Our compensation policies are designed to attract, retain and
motivate the employees that are an integral part of our profitability.
Generally, executive officers and brokers receive a base salary and a variety of
performance based rewards including stock options and either profit sharing or
bonuses. These employees, other than those in our property management and
leasing group, receive a relatively low base salary, with the bulk of their
salary being paid in the form of a performance based bonuses. The upper level
employees in the property management and leasing group receive a market based
salary and performance based bonuses. In either case, the bonuses are based in
part upon the profitability of the group with which the employees are affiliated
as well as our overall performance. As a result, employees are encouraged to
meet individual goals as well as to contribute their expertise and efforts on
behalf of their group. In addition to promoting the generation of revenues, our
bonus structure also encourages our commercial real estate brokers to control
costs because the bonuses paid are based on the profits of the commercial
brokerage operations as opposed to gross brokerage revenues. In furtherance of
our compensation philosophy, we have granted approximately 3% of our employees
stock options to reward excellent performance and to further align their
personal interests with those of our other stockholders. Finally, approximately
4% of our employees are entitled to participate in a deferred compensation plan
in which we match each employee's contribution up to a specified maximum
according to our overall performance.
FACILITIES
Our executive and administrative offices are located at 9601 Wilshire
Boulevard, Suite 220, Beverly Hills, California, and consist of approximately
26,000 square feet in an office building managed by us. We also lease space for
our regional and branch offices and sublease space to third parties. These
facilities, including our Beverly Hills headquarters, comprise a total of
approximately 88,000 square feet of leased space, with an annual aggregate base
rental of approximately $1.2 million. Each of these leases is scheduled to
expire within the next five years. We believe that we will be able to renew any
expiring lease or obtain suitable office space to replace the facility, as
necessary, without any material increase in our rental costs.
LEGAL PROCEEDINGS
We are involved in various legal proceedings generally incidental to our
business and routine. While the ultimate disposition of these ordinary
proceedings is not presently determinable, we believe, based upon currently
available information, that the outcome of these proceedings will not have a
material adverse effect on our financial position or results of operations and
that the existing proceedings, individually or collectively, are not material.
See "Risk Factors--We May Have Liabilties in Connection With Real Estate
Brokerage and Property Management Activities."
49
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are listed below:
<TABLE>
<CAPTION>
BOARD TERM
NAME AGE TITLE EXPIRES
- --------------------------------- --- ------------------------------------------------------ ----------------
<S> <C> <C> <C>
William McMorrow................. 52 Chairman of the Board of Directors and Chief Executive 2001
Officer
Lewis Halpert.................... 47 Director and Executive Managing Director, President of 1999
Kennedy-Wilson Residential and Notes Group
Richard Mandel................... 36 Director and Managing Director, President of our 2000
Commercial Group
Barry Schlesinger................ 58 Director and President of Kennedy-Wilson Properties, 2000
Ltd.
Donald Prell..................... 74 Director and Chairman of the Audit Committee 2001
Kent Mouton...................... 45 Director and Chairman of the Compensation Committee 1999
Thomas Barrack, Jr............... 51 Director 1999
Freeman Lyle..................... 45 Executive Vice President, Chief Financial Officer and not applicable
Secretary
Terry Wachsner................... 49 Senior Managing Director of Kennedy-Wilson Properties, not applicable
Ltd.
</TABLE>
WILLIAM MCMORROW has been Chairman of our Board of Directors and Chief
Executive Officer since joining our predecessor company in 1988. From that time,
he has been instrumental to our growth into a diversified real estate services
and investment company.
Prior to 1988, Mr. McMorrow had more than 17 years of finance experience
specializing in problem real estate held by financial institutions and insurance
companies. For five years, he was the Executive Vice President and Chairman of
the Credit Policy Committee at Imperial Bank, a publicly traded company
headquartered in Southern California. During his tenure with the Bank, he was
responsible for restructuring a significant portion of the Bank's assets, as
well as the marketing and disposition of properties it owned. Additionally, Mr.
McMorrow has held senior positions with various other financial services firms
including Fidelity Bank in Pennsylvania, where he was Senior Vice President for
eight years.
Mr. McMorrow holds a Bachelor of Science Degree and Master of Business
Administration from the University of Southern California. He is also a board
member of the George L. Graziadio School of Business at Pepperdine University in
Malibu, California.
LEWIS HALPERT has been a member of our Board of Directors since joining our
predecessor company at the same time as Mr. McMorrow in 1988, and is Executive
Managing Director and President of our Residential Properties Group. In these
positions, he is actively involved in developing new business opportunities and
is currently overseeing all residential and notes investments.
Mr. Halpert has over 20 years experience in all facets of real estate,
including investments and development, brokerage, management and marketing.
Prior to joining us, he operated his own independent investment brokerage firm
in Southern California.
Mr. Halpert holds a Bachelor of Arts Degree from California State University
at Sonoma.
RICHARD MANDEL has been a member of our Board of Directors since December
1995. He is President of our Commercial Group, responsible for all of our
commercial brokerage operations in the U.S. and Asia. Since joining us in 1993,
Mr. Mandel has established our office in Tokyo and has been
50
<PAGE>
instrumental in developing our Japan-based relationships. In 1996, Mr. Mandel
opened our New York Office. During his tenure, he has played a prominent role in
brokering U.S., European and Australian real estate assets to investors
throughout Asia. In addition, he has advised Japanese companies with the
acquisition and disposition of overseas assets.
Mr. Mandel was previously a director at Jones Lang Wootton where he was
involved with real estate investment banking including the disposition,
analysis, marketing, negotiations and closings relating to real estate assets
and with creating stronger ties to the investment community in Hong Kong,
Singapore, Indonesia and Taiwan. In addition, he advised Asian investors on
their U.S. real estate holdings, created a conduit for Asian investments into
the U.S. and researched new Asian markets.
Mr. Mandel holds a Bachelor of Arts Degree from Washington University in St.
Louis, Missouri and a Master of Business Administration from the JL Kellogg
School of Management at Northwestern University.
BARRY SCHLESINGER has served since July 1998 as a member of our Board of
Directors and President of Kennedy-Wilson Properties, Ltd., our wholly-owned
property management and leasing subsidiary. Mr. Schlesinger serves as President
of Kennedy-Wilson Properties through an Executive Services Agreement. From 1990
to July 1998, he served as Chairman of the Board of Directors and Chief
Executive Officer of Heitman Properties, Ltd. Mr. Schlesinger was appointed to
our Board of Directors in accordance with the Executive Services Agreement. The
Executive Services Agreement is discussed in more detail in "Certain
Transactions."
Prior to joining Heitman Properties in 1971, Mr. Schlesinger was responsible
for project planning and scheduling for Tishman Realty and Construction Company.
He has 36 years of real estate experience.
Mr. Schlesinger holds a Bachelor of Science Degree from the New York
University College of Engineering.
DONALD PRELL has served as a member of our Board of Directors since March
1992. For the past five years Mr. Prell has been a mediation consultant and
private investor. He also serves as a Trustee of the UCLA Foundation.
KENT MOUTON has served as a member of our Board of Directors since December
1995. Mr. Mouton has been a partner in the law firm of Kulik, Gottesman &
Mouton, LLP in Los Angeles, California since 1991. He specializes in the
practice of real estate transactions.
Mr. Mouton holds Bachelor of Arts Degree and Juris Doctor Degree from UCLA.
THOMAS BARRACK, JR. has served as a member of our Board of Directors since
July 1998. He is the chairman and Chief Executive Officer of Colony Capital,
Inc., a company that manages in excess of $1.0 billion in domestic and
international real estate assets. Colony Capital purchased a 10.0% equity
interest in our company in July 1998. Mr. Barrack founded Colony Capital in
1991. Prior to forming Colony Capital, he was a principal with the Robert M.
Bass Group, Inc., the principal investment vehicle of the Fort Worth, Texas
billionaire Robert M. Bass. Mr. Barrack also served as Deputy Under Secretary at
the Department of Interior in Washington, D.C. for a period during the Reagan
Administration. Mr. Barrack also serves as a member of the boards of directors
of public companies Continental Airlines Corporation, Public Storage, Inc., and
Harveys Casino Resorts.
Mr. Barrack holds a Bachelor of Arts Degree from the University of San Diego
and a Juris Doctor Degree from the University of Southern California. Mr.
Barrack was appointed to our Board based on our agreement with Colony Capital.
FREEMAN LYLE has been our Chief Financial Officer, Executive Vice President
and Secretary since joining us in April of 1996. He is responsible for all of
our financial matters including overseeing capital structure and arranging and
maintaining our credit facilities.
51
<PAGE>
Prior to joining us, Mr. Lyle was the President of Lyle Realty Group, Inc.,
which provided investment, financing and consulting services to real estate
owners and lenders. He also served as Vice President of Finance at R&B Realty
Group, an international real estate firm. During his tenure, he was responsible
for the performance of a diversified real estate and loan portfolio.
Mr. Lyle received his Bachelor of Science Degree at California State
University at Northridge and a Master of Business Administration from the
University of Southern California.
TERRY WACHSNER has been the Senior Managing Director of Kennedy-Wilson
Properties, Ltd. since July 1998 through the Executive Services Agreement
previously described in the discussion of Mr. Schlesinger in this section. He
joined Heitman Properties, Ltd. in 1980 and served as President from 1988 until
we purchased that company in July 1998. He has 23 years experience in property
management.
Mr. Wachsner holds a Bachelor of Arts Degree in Psychology and a Master of
Arts Degree in Architecture/Urban Planning from UCLA.
BOARD COMPOSITION
We currently have seven directors, with a total of nine authorized. In
accordance with the terms of our Certificate of Incorporation, the terms of
office of the Board of Directors are divided into three classes: the Class I
term will expire at the annual meeting of stockholders to be held in 1999; the
Class II term will expire at the annual meeting of stockholders to be held in
2000; and the Class III term will expire at the annual meeting of stockholders
to be held in 2001. The Class I directors are Messrs. Mouton, Barrack and
Halpert, the Class II directors are Messrs. Mandel and Schlesinger, and the
Class III directors are Messrs. McMorrow and Prell. At each annual meeting of
stockholders, the successors to directors whose terms are expiring will be
elected to serve from the time of election and qualification until the third
annual meeting following election. Our Certificate of Incorporation provides
that the authorized number of directors may be changed by resolution of the
Board of Directors or stockholders. Any additional directorships resulting from
an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one-third of
the directors. This classification of the Board of Directors may have the effect
of delaying or preventing changes in control or management our company. Our
directors may be removed for cause by the affirmative vote of the holders of a
majority of the common stock.
None of our directors or executive officers are related to one another by
blood or marriage. One Class II board seat and one Class III board seat are
currently vacant. Our Board of Directors has not nominated anyone to fill these
seats, but intends to fill them by the end of this year with two independent
directors.
COMMITTEES OF THE BOARD OF DIRECTORS
OUR AUDIT COMMITTEE is composed of Donald Prell (Chairman) and Kent Mouton.
This committee is responsible for reviewing our financial policies and
objectives, and monitoring our financial condition and our requirements for
funds in conjunction with management. In addition, our Audit Committee meets
with our independent auditors to review their audit report and consider any
recommendations.
OUR COMPENSATION COMMITTEE is composed of Kent Mouton (Chairman) and Donald
Prell. This committee establishes our general compensation policies and
determines the compensation levels for the Chief Executive Officer and each
employee that receives annual compensation in excess of $100,000. The
Compensation Committee also has oversight responsibility for administering our
stock option plans (other than Plan C for non-employee director stock options,
pursuant to which options are granted automatically upon the initial election of
a non-employee director and upon each subsequent re-election).
52
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued by us
during each of the last three fiscal years to our Chief Executive Officer and
our four most highly compensated executive officers who served in either of
those capacities during fiscal 1998 (collectively, the "Named Executive
Officers") for services rendered:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS(2)
- -------------------------------------------------- --------- ---------- ------------ --------------- -----------
<S> <C> <C> <C> <C> <C>
William McMorrow ................................. 1998 $ 300,000 $ 2,219,222 $ 501,844 37,500
Chairman of the Board and CEO 1997 300,000 1,270,734 120,607 90,000
1996 300,000 450,000 -- --
Lewis Halpert .................................... 1998 $ 150,000 $ 623,805 $ 101,133 --
Executive Managing Director 1997 150,000 396,800 31,083 45,000
1996 125,000 325,000 -- --
Richard Mandel ................................... 1998 $ 250,000 $ 315,318 $ 116,064 37,500
Managing Director 1997 225,000 284,267 35,917 243,000
1996 188,000 100,000 89,000 54,000
Barry Schlesinger(3) ............................. 1998 $ 169,231 $ 270,000 -- 75,000
Chairman of Kennedy- 1997 -- -- -- --
Wilson Properties, Ltd. 1996 -- -- -- --
Freeman Lyle ..................................... 1998 $ 161,625 $ 140,000 $ 60,325 45,000
Executive Vice-President, Chief 1997 150,000 100,000 15,020 --
Financial Officer and Secretary 1996 94,000 37,500 -- 54,000
</TABLE>
- ------------------------
(1) "Other annual compensation" includes, among other things, deferred
compensation contributions and car allowance contributions. In 1996, this
included a foreign cost of living and housing allowance for Mr. Mandel while
he was based in Hong Kong and Tokyo. In 1996, "Other Annual Compensation"
excluded compensation in the form of other personal benefits, for each of
the named officers other than Mr. Mandel, that did not exceed the lesser of
$50,000 or 10% of the annual salary and bonus reported for each year.
(2) Adjusted for 200% stock dividend paid April 10, 1998, and a 50% stock
dividend paid December 15, 1998.
(3) Mr. Schlesinger is employed by KW-A, LLC. An Executive Services Agreement
between us and KW-A, LLC requires us to pay to KW-A, LLC all amounts due Mr.
Schlesinger under his employment contract with KW-A, LLC. The Executive
Services Agreement is discussed in more detail in "Certain Transaction."
Our compensation policy is to ensure that a substantial portion of potential
aggregate annual compensation be contingent upon our performance. The goals of
the compensation programs are to align compensation with performance and to
enable us to attract, retain and reward personnel who contribute to our success.
We are committed to providing incentive opportunities that, together with
base salaries (where appropriate), provide for competitive and equitable total
cash compensation opportunities. Aggregate base salaries, where appropriate, are
set relative to average market pay practices, while target incentives
opportunities are set somewhat above average market pay practices. Additionally,
future base salary
53
<PAGE>
increases and commission or incentive pay opportunities are directly linked to
the achievement of key financial objectives. Our Compensation Committee has
determined that, as current employment agreements and compensation packages are
renewed or reevaluated in the future, it will consider adding features that
impose ceiling protection in total base plus bonus compensation levels in order
to establish more certainty in the total compensation we pay.
DEFERRED COMPENSATION PLAN
In 1997, we established a nonqualified deferred compensation plan to provide
specific benefits to a select group of management, highly compensated employees
or directors who contribute materially to our continued growth, development and
future business success. Under our plan, participants are able to defer up to
100% of their annual total compensation including their bonuses. We are
authorized to make discretionary matching contributions in varying degrees based
on the performance of our company. In the fiscal year ended December 31, 1998,
we contributed approximately $1.1 million to the plan. This amount includes the
amounts disclosed in the Summary Compensation Table, as applicable, for the
Named Executive Officers in the column labeled other annual compensation.
EMPLOYEE PROFIT SHARING AND 401(K) PLANS
We maintain a profit sharing plan covering all full time employees meeting
certain minimum age and service requirements. Contributions to the profit
sharing plan are made solely at the discretion of our Board of Directors. No
contributions were made for the years ended December 31, 1996, 1997 and 1998.
We also have a qualified profit sharing plan under the provisions of Section
401(k) of the Internal Revenue Code. Employees who are 21 or older who have
completed six months of service prior to January 1 or July 1 of each year are
eligible to participate. Under this plan, participants are able to reduce their
current compensation from 1% up to the lesser of 15% or the statutorily
prescribed annual limit allowable under Internal Revenue Service Regulations and
to have that amount contributed to the 401(k) Plan. The 401(k) plan also
includes provisions which authorize us to make discretionary contributions.
During 1998 we made $27,000 in matching contributions to this plan. During 1997
we made $24,000 in matching contributions. The 401(k) plan has a graduated
schedule of vesting over a six year period of employment.
STOCK OPTION PLANS
Consistent with our efforts to employ qualified and experienced
professionals, we have three stock option plans. The Incentive Stock Option Plan
("Plan A") and the Non-statutory Stock Option Plan ("Plan B") allow us to grant
stock options to our employees and our consultants. We believe that both plans
help us to attract and retain highly qualified individuals to fill high level
executive and officer positions and to give key employees and consultants an
additional incentive to contribute to our overall success. The administration of
these two plans is guided by our overall compensation philosophy of rewarding
managers, consultants and employees based on their relative contributions to our
overall accomplishments. The Compensation Committee has sole discretion to
decide which eligible employees, consultants and directors are granted options,
the number of options granted, and, subject to the plans, the terms and
conditions of each grant. The Non-employee Director Stock Option Plan ("Plan C")
allows us to grant stock options to our non-employee directors in order to
further align their interests with those of our stockholders.
The options granted under Plans A and B may be either incentive stock
options or options which are not intended to qualify as incentive stock options.
Only employees, however, are eligible for incentive stock options. In order to
encourage our valued employees to stay with us, the Compensation Committee
typically grants options which vest over a three year period. The exercise price
for shares of
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<PAGE>
common stock underlying an option is the fair market value of the stock on the
date the option is granted by the Compensation Committee unless the recipient of
the option grant already owns 10% or more of our common stock. For those
recipients, the exercise price is 110% of the fair market value of the stock on
the date the option is granted. Under Plans A and B, as amended, an aggregate of
1,700,000 shares of common stock are reserved for issuance. To date, options for
1,420,500 shares have been issued. Of these options 1,179,960 remain unexercised
and the balance have been exercised. All options granted under Plan A must be
exercised within five years of the grant date. All options granted under Plan B
must be exercised within ten years of the grant date. No option under either
Plan A or Plan B can be granted after May 11, 2002.
The amount, price and terms of each grant under Plan C are automatic. Upon
election to our Board of Directors, non-employee directors receive an option to
purchase 13,500 shares of common stock at a price equal to fair market value on
the date preceding the grant. Thereafter, each non-employee director receives an
option to purchase 540 shares of common stock on the same terms and conditions
each time he or she is re-elected to our Board of Directors. Several aspects of
Plan C operate to encourage capable individuals to remain on our Board of
Directors. For example, an option does not vest under Plan C until one year
after the date of the grant and only vests if the holder served as a director
during that entire period. Also, unexercised options lapse the earlier of 90
days after a non-employee director ceases to be one of our directors and the
tenth anniversary of the date the option was granted. No Plan C options may be
granted after May 11, 2002. A total of 81,000 shares of common stock are
reserved for issuance under Plan C. As of April 21, 1999, we had options
outstanding under Plan C for 28,080 shares, of which none have been exercised.
NAMED EXECUTIVE OFFICER STOCK OPTIONS
The following table provides information about stock option grants made to
each of the Named Executive Officers during 1998.
STOCK OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENTAGE VALUE OF ASSUMED
OF TOTAL ANNUAL RATES OF STOCK
NUMBER OF OPTIONS PRICE APPRECIATION OF
SECURITIES GRANTED TO EXERCISE OPTION TERMS
UNDERLYING EMPLOYEES IN PRICE PER EXPIRATION ----------------------
NAMED EXECUTIVE OFFICER OPTIONS GRANTED 1998 SHARE DATE 5% 10%
- --------------------------------- --------------- --------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
William McMorrow................. 37,500 9.52% $ 7.00 4/27/03 $ 72,524 $ 160,259
Lewis Halpert.................... 0 n/a n/a n/a n/a n/a
Richard Mandel................... 37,500 9.52% $ 7.00 4/27/03 $ 72,524 $ 160,359
Barry Schlesinger................ 75,000 19.04% $ 8.33 12/15/03 $ 172,607 $ 381,416
Freeman Lyle..................... 45,000 11.42% $ 3.67 1/20/03 $ 45,628 $ 100,826
</TABLE>
The potential realized value figures assume that the stock price at the time
each option is granted will appreciate at an annual rate of 5% or 10%.
55
<PAGE>
The following table provides information about stock options held by our
Named Executive Officers as of December 31, 1998.
AGGREGATED OPTION EXERCISES IN 1998
AND OPTION VALUES AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS IN-THE-MONEY OPTIONS ON
SHARES ON DECEMBER 31, 1998 DECEMBER 31, 1998
ACQUIRED ON VALUE -------------------------- --------------------------
NAMED EXECUTIVE OFFICER EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William McMorrow................. 0 n/a 30,000 97,500 $ 98,340 $ 196,680
Lewis Halpert.................... 0 n/a 15,000 30,000 $ 49,170 $ 98,340
Richard Mandel................... 18,000 $ 138,834 153,000 217,500 $ 830,142 $ 908,694
Barry Schlesinger................ 0 n/a n/a n/a n/a n/a
Freeman Lyle..................... 27,000 $ 155,610 9,000 63,000 $ 46,746 $ 251,190
</TABLE>
DIRECTOR COMPENSATION
Each director who is not also one of our employees receives a quarterly
retainer of $4,000 plus a fee of $1,000 for each board meeting attended and $500
for each Board committee meeting attended. In addition, we maintain Plan C
described above under the heading "Stock Option Plans" as further compensation
for our non-employee directors. Our employees who also are directors receive no
additional compensation for their service on our Board of Directors or on any
Board committee.
EMPLOYMENT CONTRACTS
Each of our Named Executive Officers has entered into an employment contract
for 1999. They are described below:
- MR. MCMORROW'S contract provides for a term expiring on December 31, 1999,
a base salary of 300,000 per annum and an advance of $100,000, payable
against a bonus of up to 20% of 1999 "profits" between $3,000,000 and
$35,000,000. "Profits" is defined as pre-tax, pre-reserves and prior to
payment of bonuses to other employees and our contributions to our
deferred compensation plan. The bonus is paid at 6 months based on 1(st)
and 2(nd) quarter profits and at year end based on 3(rd) and 4(th) quarter
profits.
- MR. HALPERT'S contract provides for a term expiring on December 31, 1999,
a base salary of $150,000 per annum plus a non-repayable advance of
$150,000, payable against an annual incentive bonus of 15% to 25% of the
net profit allocated to the Residential Properties Group.
- MR. MANDEL'S contract provides for a term expiring on December 31, 1999, a
base salary of $250,000 plus an incentive bonus of 12 1/2% to 20% of the
profits allocated to our Commercial Group.
- MR. LYLE'S contract, provides for a term expiring on March 31, 1999, a
base salary of $180,000 plus a discretionary performance bonus of 0% to
100% of base salary. The Compensation Committee is in the process of
extending Mr. Lyle's contract on similar terms.
- MR. SCHLESINGER'S employment contract is with KW-A, LLC and provides for a
term expiring on December 31, 2000. KW-A, LLC is a limited liability
company, of which Mr. Schlesinger is a member, that provides executive
management services to us. Mr. Schlesinger's employment contract provides
for an annual base salary of $400,000 plus (i) an annual incentive bonus
of 7.06% of the first $1,700,000 of net profits of Kennedy-Wilson
Properties, Ltd. in excess of
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<PAGE>
$3,333,000, and a discretionary bonus in respect of the net profits of
Kennedy-Wilson Properties in excess of $5,033,000 and (ii) an "add-on
bonus" in 1999 of $270,000. Under an Executive Services Agreement dated as
of July 17, 1998 with KW-A, LLC we have agreed to pay KW-A, LLC an amount
equal to all sums payable to Mr. Schlesinger under the terms of his
employment agreement. In return, KW-A, LLC is obligated to furnish us with
executive management services. The Executive Services Agreement is
discussed in more detail in "Certain Transactions."
In addition to compensation as noted above, each contract sets forth the
services the Named Executive Officer is to provide to us, his benefits and
expense reimbursement rights and obligations, if any, a non-competition covenant
and confidentiality agreement and terms for termination. Other than the
employment contract for Mr. McMorrow, none of these employment contracts provide
for any severance, change-in-control or related payments to be paid to the Name
Executive Officer upon termination of the employment contract. Mr. McMorrow's
employment contract provides for a severance payment equal to two times his
annual compensation as determined by the arithmetic average of his salary and
bonus for the prior three years in the event his employment contract is not
renewed other than for cause or there is a change in the parties who control us.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATIONS
Kent Mouton and Donald Prell were the only two people who served on our
Board of Directors' Compensation Committee in 1998. Neither Mr. Mouton nor Mr.
Prell was an officer or employee of ours during the fiscal year ended December
31, 1998, nor have either of them has been an officer of ours at any time. Mr.
Mouton is a partner in the law firm of Kulik, Gottesman & Mouton. During our
fiscal year 1998, we paid Kulik, Gottesman & Mouton a total of approximately
$496,191 in legal fees.
INDEMNIFICATION
Our Certificate of Incorporation indemnifies our directors and officers to
the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for (i) any
breach of their duty of loyalty to the corporation or its stockholders, (ii)
acts or omissions not in good faith or which intentional misconduct or a knowing
violation of law, (iii) unlawful payments of dividends or unlawful stock
repurchases or redemptions, or (iv) any transaction from which the director
derived an improper personal benefit. Such limitation of liability does not
apply to liabilities arising under the federal securities laws and does not
affect the availability of equitable remedies such as injunctive relief or
rescission.
Prior to incorporating in Delaware in 1992, our predecessor company operated
as a California S corporation. At the time of the termination of such
predecessor company's S corporation status in 1992, we agreed to indemnify its
former shareholders, including William McMorrow and Lewis Halpert, for certain
federal and state tax liabilities incurred by them as a result of a final
determination of an adjustment to the tax returns of the predecessor company or
former shareholders for the 1992 tax year.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of April 21, 1999 the total number of our
shares of common stock beneficially owned and the percentage of the outstanding
shares so owned by (i) each director, (ii) each Named Executive Officer, (iii)
all executive officers and directors as a group and (iv) each beneficial owner
known to us of more than five percent (5%) of the outstanding shares of common
stock. Except as otherwise indicated in the notes following the table, the
stockholders listed in the table are the beneficial owners of the shares listed
with sole voting and investment power over those shares. Shares subject to
options exercisable within 60 days are treated as outstanding when determining
the amount and percentage beneficially owned by a person or entity.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY
NAME OWNED PERCENT OF CLASS
- ----------------------------------------------------------- ---------------- -----------------
<S> <C> <C>
William McMorrow(1)........................................ 1,521,821 22.3
Lewis Halpert(2)........................................... 1,384,047 20.4
Richard Mandel(3).......................................... 282,500 4.0
Barry Schlesinger.......................................... 17,499 *
Donald Prell(4)............................................ 14,580 *
Kent Mouton(4)............................................. 14,040 *
Thomas Barrack, Jr.(5)..................................... 858,166 12.3
Freeman Lyle(6)............................................ 131,493 1.9
---------------- ---
All Executive Officers and Directors as a Group............ 4,224,147 57.5
Colony Investors, III, L.P.(5)............................. 858,166 12.3
Kenneth Stevens............................................ 766,200 11.3
Cahill, Warnock Strategic Partners Fund, L.P.(7)........... 750,000 10.0
Fidelity Management & Research Company(8).................. 400,000 5.9
</TABLE>
- ------------------------
* Less than 1%
Except as otherwise indicated in the following notes, the address for each
individual, company, or named group is in care of Kennedy-Wilson, Inc., 9601
Wilshire Blvd., Suite 220, Beverly Hills, CA 90210-5205.
(1) Includes approximately 4,190 shares held for Mr. McMorrow's account as well
as approximately 275 shares held for the account of Mr. McMorrow's spouse in
our 401(k) Profit Sharing Plan and Trust of which Mr. McMorrow expressly
disclaims beneficial ownership, and 42,500 shares which may be acquired
pursuant to exercise of outstanding stock options that are presently
exercisable or exercisable within 60 days.
(2) Includes approximately 1,368 shares held for Mr. Halpert's account in our
401(k) Profit Sharing Plan and Trust, and 15,000 shares which may be
acquired pursuant to exercise of outstanding stock options that are
presently exercisable or exercisable within 60 days.
(3) Includes beneficial ownership of 264,500 shares which may be acquired
pursuant to exercise of outstanding stock options that are presently
exercisable or exercisable within 60 days.
(4) Includes beneficial ownership of 14,040 shares which may be acquired
pursuant to exercise of outstanding stock options that are presently
exercisable.
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(5) As reported in a Schedule 13D dated July 24, 1998 filed with the SEC, Colony
Investors III, L.P., a Delaware limited partnership, holds of record 660,127
shares of common stock and a warrant to acquire 198,039 shares of common
stock that is now exercisable. The sole general partner of Colony Investors
is Colony GP III, Inc., a Delaware corporation. Mr. Barrack holds a 60%
interest in Colony GP III. Mr. Barrack and Colony Investors have shared
voting and investment power with respect to those shares. The mailing
address of Colony Investors and Thomas Barrack, Jr., as indicated in the
Schedule 13D, is 1999 Avenue of the Stars, Suite 1200, Los Angeles, CA
90067.
(6) Includes beneficial ownership of 33,000 shares which may be acquired
pursuant to exercise of outstanding stock options that are presently
exercisable or exercisable within 60 days.
(7) Includes beneficial ownership of 750,000 shares which may be acquired
pursuant to conversion of debentures in the aggregate principal amount of
$7,500,000 at the current exercise price of $10.00 per share. We have
entered into a Convertible Debenture Purchase Agreement to issue on April
26, 1999 these debentures to Cahill, Warnock Strategic Partners Fund, L.P.
and Strategic Associates, L.P., an affiliate of Cahill, Warnock, in the
principal amounts of $7,106,000 and $394,000, respectively. The mailing
address of Cahill, Warnock Strategic Partners Fund and Strategic Associates
is One South Street, Suite 2150, Baltimore, MD 21202.
(8) As reported in a Schedule 13G, dated February 12, 1999, filed with the SEC.
The mailing address of Fidelity Management & Research Company, as indicated
in Schedule 13G, is 82 Devonshire Street, Boston, Massachusetts 02109-3614.
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CERTAIN TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
The following are brief descriptions of transactions between us or one or
more of our subsidiaries and any of our directors, executive officers or
stockholders known to us to own beneficially more than 5% of our shares, or any
member of the immediate family of any of those persons during the fiscal year
ended December 31, 1998 where the amount involved exceeded $60,000:
PROPERTY MANAGEMENT CONTRACTS
Mr. Barry Schlesinger, a member of our Board of Directors and Chief
Executive Officer of Kennedy-Wilson Properties, Ltd., holds a 7.1% interest in
two buildings for which we provide property management services. During the
period of January 1, 1998 to July 16, 1998 Heitman Properties, Ltd. earned
$81,000 in management fees for these buildings. During the period of July 17,
1998 to December 31, 1998 we earned $23,000 in management fees for these
buildings. Presently, the management fees are $25,000 per year per building. We
expect our revenues related to these buildings to be approximately $50,000 for
1999. We may terminate the management contracts on 30 days notice.
PIONEER JOINT VENTURES
In November, 1996 we entered into a joint venture with parties who are
affiliated with Goodwin Gaw, a former member of our Board of Directors. In
particular, we acquired and paid $440,000 for a 25% interest in a joint venture
that purchased a ski resort in Colorado for $7.0 million. In September, 1997 we
acquired a 50% interest in a joint venture that purchased for $14.6 million an
office building in downtown Los Angeles with approximately 28,000 square feet.
We acquired an interest in this joint venture for approximately $1.4 million. In
the first calendar quarter of 1998, we entered into two further joint ventures
with parties who are affiliated with Mr. Gaw. In January 1998, we acquired for
$4.2 million a 15% interest in a joint venture that purchased for $62.0 million
a commercial building in New York with more than 1.0 million square feet. In
March 1998, we acquired for about $300,000 a 40% interest in a joint venture
that acquired a note collateralized by a hotel in Beverly Hills, California. We
subsequently sold our interest in that note for $612,717. Mr. Gaw resigned from
his position as a member of our Board of Directors on November 5, 1998.
LEGAL FEES
In 1998, we paid the firm of Kulik, Gottesman & Mouton approximately
$496,191 in legal fees. Kent Mouton is a partner in that firm and a member of
our Board of Directors.
COLONY AGREEMENTS
Mr. Thomas Barrack, Jr., a member of our Board of Directors and a beneficial
owner of more than 5% of our common stock, holds a 60% interest in Colony GP
III. Colony GP III is the sole general partner of Colony Investors III, L.P.
Colony Investors III is the sole member of Colony K-W, LLC, a real estate
investment fund.
In July 1998, we acquired Heitman Properties, Ltd. The purchase price and a
portion of the expenses associated with that acquisition were financed from the
proceeds of a $21.0 million subordinated loan made by Colony K-W, pursuant to a
Bridge Loan Agreement dated as of July 16, 1998 among Colony K-W, us and certain
of our subsidiaries. The loan bears interest at a rate of 14% per annum and
matures on January 15, 2000. The loan is guaranteed by certain of our
subsidiaries on a subordinated basis and, pursuant to a Pledge Agreement dated
as of July 16, 1998 made by us in favor of Colony K-W, is secured by a pledge of
all of the outstanding shares of Heitman Properties, now known as Kennedy-Wilson
Properties, Ltd., formerly known as Heitman Properties, Ltd. The terms of the
loan agreement restrict, among other things, certain borrowings, distributions
and mergers involving
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us and the guarantors and is subject to additional customary restrictive
covenants. We plan to pay down $7.0 million of principal of the loan from the
proceeds of this offering.
On July 16, 1998, Colony Investors III entered into a Stock Purchase
Agreement and a Warrant Agreement with us, pursuant to which Colony Investors
III purchased (a) 440,085 shares of common stock (660,127 shares as adjusted for
the December 15, 1998 50% stock dividend) and (b) a warrant, exercisable for
seven years from July 16, 1998, to purchase an additional 132,026 shares of our
common stock (198,039 shares as adjusted for such stock dividend) at an initial
exercise price of $15.00 per share ($10.00 per share as adjusted for such stock
dividend) subject to adjustment as provided in the Warrant Agreement, for a
total aggregate purchase price of $5,232,610.
In connection with the purchase of the Colony stock and warrant, Colony
Investors III entered into an Investor's Agreement with us, dated as of July 16,
1998, pursuant to which we have agreed, during the term and subject to the
provisions thereof, which include the continued ownership of a specified minimum
number of shares of our common stock, among other things, to take all action
necessary so that our Board of Directors will include one class III director
designated by Colony Investors III, and thereafter, to use its best efforts to
cause a person designated by Colony Investors III to be included in each slate
of proposed class III directors put forth by us and our stockholders and
recommended for election in any proxy solicitation materials disseminated by us.
Colony Investors III's initial director nominee was its affiliate, Thomas
Barrack, Jr., who is now a member of our Board of Directors. With certain
exceptions as described in the Investor's Agreement, Colony Investors has
preemptive purchase rights to maintain its beneficial ownership percentage for
so long as its investment continues to represent at least 5% of our stock, which
it has waived with respect to this offering.
We and Colony Investors III executed a Registration Rights Agreement on July
16, 1998 with respect to the Colony warrant and any common stock issued under
that warrant. Pursuant to the Registration Rights Agreement, and subject to the
terms and conditions thereof, the Colony warrant beneficially owned by Colony
Investors III is subject to demand and piggyback registration rights. The
Registration Rights Agreement is discussed in more detail in the section headed
"Registration Rights."
Colony Investors III is also the general partner of Colony K-W Genpar Ltd.
and Colony K-W Genpar is the general partner of Colony-KW Partners, L.P. Colony
K-W, L.P., K-W Japan Investments, Inc. and EBISU Investors I, LLC are the
limited partners in Colony K-W Partners, L.P. K-W Japan Investments, Inc. is one
of our wholly-owned subsidiaries. EBISU is owned in part by William McMorrow
(26.32%), Richard Mandel (26.32%), Ryosuke Homma (15.79%), and Lewis Halpert
(10.52%). The remainder is owned by some of our employees in our Tokyo office.
Colony-K-W Genpar and Colony K-W, L.P. together have a 97.5% interest in Colony
K-W Partners, K-W Japan Investments has a 2.0% interest and EBISU has a 0.5%
interest. The Colony K-W Partners partnership acquired a pool of distressed
notes from Sanwa Bank and its affiliates in September 1998 for approximately
$24.0 million and a building in Kawasaki, Japan in February 1999 for about $93.4
million.
MUROMACHI BUILDING MANAGEMENT K.K.
In March 1999, we entered into a Japanese partnership agreement with Meguro
Investors, LLC. Meguro is owned in part by William McMorrow (25%), Richard
Mandel (25%) and Ryosuke Homma (25%). The remainder is owned by some of our
employees in our Tokyo office. The K-W/Meguro partnership purchased an insolvent
Japanese real estate holding company called Muromachi Building Management K.K.
The purchase price was $83,000. Under the terms of the partnership agreement,
Meguro Investors is the beneficial owner of the holding company acquired and we
are the legal owners.
ARROWHEAD BROKERAGE
William McMorrow, our Chairman and Chief Executive Officer, and Lewis
Halpert, our Executive Managing Director, each own 20% of some real property
located in Lake Arrowhead, California. They
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have retained us as the exclusive broker for selling that property. We will earn
a fee of 4% of the sale price at the close of escrow. We estimate the property's
value at approximately $12.5 million.
EXECUTIVE SERVICES AGREEMENT
On July 17, 1998, we entered into an agreement with KW-A, LLC to purchase
executive management services. Barry Schlesinger, a member of our Board of
Directors and Chairman of Kennedy-Wilson Properties, Terry Wachsner, Senior
Managing Director of Kennedy-Wilson Properties, David Latvaaho, Larry Beasley
and Jerome Powalish are equal members in KW-A. We pay KW-A an amount equal to
all sums payable by KW-A to its members under their respective employment
agreements whose services we use. The amount received in 1998 by Mr. Schlesinger
under this arrangement is described in the "Employment Contract" section. Mr.
Wachsner received $430,000 for his professional services in 1998. The terms of
our agreement with KW-A expire the earlier of the termination of employment by
KW-A of the last member or December 31, 2000.
GOODWIN GAW SHARES
On November 5, 1998, Goodwin Gaw resigned from his position as a member of
our Board of Directors. On November 10, 1998, we purchased from Mr. Gaw 135,000
shares of our common stock for $6.716 per share for a total of $906,750. The
closing price for our shares on the NASDAQ National Market on that date was
$7.281 per share. All 135,000 shares were subsequently retired.
BROKERAGE ENGAGEMENTS
In the past we have been retained, and we anticipate that from time to time
in the future we will be retained, to perform auction or brokerage services for
entities controlled by certain of our executive officers and/or directors. We
believe that the terms of these brokerage transactions in the past have been
substantially comparable to those that would have been obtainable in similar
transactions with unaffiliated parties, and that they will have no material
effect on our company.
INDEBTEDNESS OF MANAGEMENT
In December 1997, we loaned an aggregate of $1,319,652 to 18 key employees.
We made the loans to enable those employees to acquire in a private, unsolicited
transaction approximately 73,314 shares of our common stock from an
institutional investor. The terms of each of the loans, other than the principal
balances, are identical. Each loan is unsecured, bears interest at an annual
rate equal to the commercial prime rate of Bank of America in effect from time
to time plus 1%. Interest is payable semiannually on August 31 and January 31.
The principal is due on the earlier of three years following the making of the
loan or six months following the employee/borrower's termination of employment.
The following table provides details of the loans that were made to our
directors and executive officers:
DECEMBER 1997 LOANS TO DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
MAXIMUM AMOUNT AMOUNT OWED AS OF
BORROWER OWED IN 1998 APRIL 21, 1999
- ---------------------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
William McMorrow, .......................................................... $ 226,008 $ 0
Chairman of our Board of Directors and Chief
Executive Officer
Lewis Halpert, Director..................................................... $ 225,972 $ 0
Freeman Lyle, .............................................................. $ 225,972 $ 110,000
Executive Vice President, Chief Financial Officer and Secretary
Richard Mandel, ............................................................ $ 162,000 $ 0
Managing Director
</TABLE>
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BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors and certain of our officers, as well as persons who own ten
percent or more of our outstanding common stock ("Insiders"), to file an initial
report of beneficial ownership of their stock and reports of changes in
beneficial ownership with the SEC. Section 16(a) requires Insiders to deliver
copies of all reports filed under Section 16(a) to us. Based solely on a review
of these copies received, we believe that our Insiders have complied with all
applicable Section 16(a) filing requirements for fiscal 1998, with the exception
of Goodwin Gaw, a former director who resigned on November 5, 1998, who reported
two transactions one day late.
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OUR CAPITAL STOCK
SHARES AUTHORIZED
We are authorized to issue 55,000,000 shares, consisting of 50,000,000
shares of common stock at a par value $.01 per share and 5,000,000 shares of
preferred stock at a par value $.01 per share. At April 21, 1999, we had
6,770,276 shares of common stock outstanding and no shares of preferred stock
outstanding. The following description of the terms and provisions of our shares
of stock and certain other matters does not purport to be complete and is
subject to and qualified in its entirety by reference to the applicable
provisions of the Delaware General Corporation Law and our Certificate of
Incorporation and Bylaws.
COMMON STOCK
The holders of our common stock are entitled to one vote for each share held
of record on all matters to be voted on by the stockholders. The holders of
common stock do not have cumulative voting rights. The holders of our common
stock are entitled to receive, ratably, dividends when, as and if declared by
our Board of Directors out of funds legally available for dividends. In the
event of a liquidation, dissolution or winding up of our Company, the holders of
common stock will be entitled, subject to the rights of holders of preferred
stock issued by us, if any, to share ratably in all assets remaining available
for distribution to them after payment of our debts and other liabilities and
after provision is made for each class of stock, if any, having preference over
the common stock.
The holders of shares of common stock, as such, have no conversion,
preemptive or other subscription rights and there are no redemption provisions
applicable to the common stock. All of the outstanding shares of common stock
are, and the shares of common stock offered by us in this prospectus, when
issued against the consideration set forth in this prospectus, will be validly
issued, fully paid and nonassessable.
PREFERRED STOCK
We are authorized to issue preferred stock in one or more series with such
designations, rights and preferences as may be determined from time to time by
our Board of Directors. Accordingly, our Board of Directors is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of our common stock. If issued, the
preferred stock could, under certain circumstances, delay or prevent an
acquisition or change in control. We do not currently intend to register or
issue any shares of preferred stock.
WARRANTS
In December 1998 we issued a warrant to purchase 131,096 shares of our
common stock at an exercise price of $7.5526 per share, as adjusted for our
stock dividend paid December 15, 1998, to FBR Asset Investment Corporation, an
affiliate of one of the underwriters, in connection with the loan that FBR Asset
made to us in 1998. We have issued a warrant to purchase 198,039 shares of our
common stock at $10.00 per share, as adjusted for our stock dividend paid
December 15, 1998, to Colony Investors III, L.P. in connection with the warrant
agreement dated as of July 16, 1998. The Colony Investors warrant and the FBR
Assets warrant are presently exercisable, but, to date, no part of the warrants
have been exercised. The FBR Assets warrant expires on the fifth anniversary of
its grant and the Colony warrant expires on the seventh anniversary of its
grant.
DEBENTURES
On April 15, 1999, we entered into a Convertible Debenture Purchase
Agreement under which we agreed to issue and sell on April 26, 1999 6%
subordinated convertible debentures in the original aggregate principal amount
of $7,500,000 to Cahill, Warnock Strategic Partners Fund, L.P. and Strategic
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Associates, L.P. Holders of the debentures may convert their debentures at any
time into common stock at a conversion price of $10.00 per share subject to
adjustment as provided in the purchase agreement.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock in the public market
could adversely affect market prices prevailing from time to time. Upon
completion of this offering, we will have outstanding 8,770,276 shares of common
stock, 9,070,276 shares assuming the full exercise of the underwriter's
over-allotment option. Of these shares, 5,078,518 (5,378,218 assuming the full
exercise of the underwriters' over-allotment option) will generally be freely
tradable without restriction or further registration under the Securities Act
except for any shares held by any of our "affiliates", as that term is defined
under Rule 144 promulgated under the Securities Act. Of the remaining 3,692,058
shares, 21,000 shares are held by us as treasury stock, 2,982,900 shares of
common stock may be sold in the public market, subject to Rule 144, upon
expiration of the proposed lock-up agreements described below, an additional
688,158 shares may be publicly sold only if they are registered under the
Securities Act or sold in accordance with a applicable exemption from
registration, such as Rule 144. In general, under Rule 144, as currently in
effect, a person who has beneficially owned shares for at least one year,
including an "affiliate," as that term is defined in Rule 144, is entitled to
sell, within any three-month period, a number of "restricted" shares that does
not exceed the greater of one percent (1%) of the then outstanding shares of
common stock (approximately 88,000 shares immediately after this offering) or
the average weekly trading volume during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain manner of sale
limitations, notice requirements, and the availability of current public
information about us. Rule 144(k) provides that a person who is not deemed an
"affiliate" and who has beneficially owned shares for at least two years is
entitled to sell such shares at any time under Rule 144 without regard to the
limitations described above.
In addition, holders of vested options to purchase 360,630 shares of common
stock as of the date of this prospectus will be able to sell any shares acquired
under the options without restriction pursuant to a Form S-8 registration
statement filed or soon to be filed with respect to those shares. We have also
issued warrants that may presently be exercised for the purchase of 337,883
shares of common stock. Shares issued under those warrants may only be publicly
sold if registered under the Securities Act or sold in accordance with an
applicable exemption from registration, such as Rule 144. We have agreed to
issue on April 26, 1999 debentures in the aggregate principal amount of
$7,500,000 which may be converted into common stock at any time by the holders
at a conversion price of $10.00 per share. We have agreed to register the shares
issuable upon the conversion of such debentures. Shares registered under those
registration statements will, subject to Rule 144 volume limitations applicable
to affiliates, be available for sale in the open market, unless those shares are
subject to the lock-up agreements described below or the registration statements
are no longer effective. Future sales of shares by existing stockholders could
have an adverse effect on the market price of our common stock or otherwise
impair our ability to raise additional capital.
Executive officers and directors have entered into "lock-up" agreements
providing that they will not offer, sell, pledge, contract to sell, grant any
option to purchase or otherwise dispose of any common stock, or any options,
warrants or other securities convertible into or exercisable or exchangeable for
common stock, whether now owned or hereafter acquired, or in any manner transfer
all or a portion of the economic consequences associated with their ownership of
our common stock without the prior written consent of the underwriter, except
for estate planning purposes or to pay for the exercise of stock options as
permitted by our stock option plans, until the earlier of 180 days after the
date the initial registration statement was filed and the date we notify the
underwriter that this offering will not take place. Under the lock up
agreements, the executive officers and directors will be permitted to maintain
existing arrangements under which they pledged certain of their shares of common
stock to secure loans, and enter into new pledge arrangements, provided that
such new pledges are for loans that mature more than 180 days after the
completion of the offering and generally have foreclosure rights tied only to
non-payment of the loans.
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Colony Investors III, L.P. and FBR Asset Investment Corporation have agreed
to enter into "lock up" agreements containing similar sales restrictions except
that each may transfer ownership of common stock to an "associate" as that word
is defined in Rule 12b-2 promulgated by the SEC under the Securities Act. The
length of the lock up period is 90 days from the date of the prospectus for
Colony Investors and 180 days form the date of the prospectus for FBR Asset.
Colony and FBR Asset have also agreed not to exercise registration rights for a
period of 90 days in the case of Colony and 180 days in the case of FBR Asset.
As a result of these contractual restrictions, shares subject to lock-up
agreements will not be saleable until the agreements expire.
REGISTRATION RIGHTS
The holders of the Colony Investors III, L.P. warrant for 198,039 shares of
our common stock and the FBR Asset Investment Corporation warrant for 131,096
shares of our common stock and 660,127 unregistered shares of our common stock
sold to Colony Investors have certain rights of registration with respect to
those securities and any shares of common stock to be issued thereunder. The
holders may require us to file a registration statement under the Securities Act
of 1933 with respect to their shares. In addition, if we register any of our
securities, for our own account or the account of other security holders, the
holders of the Colony shares and the shares issuable upon exercise of the Colony
warrant are entitled to include their shares in the registration, with certain
limitations. The registration rights related to the FBR Asset warrant expire two
years after the issuance of the warrant. Both Colony and FBR Asset have informed
us that neither will exercise its respective registration rights with respect to
its shares or warrant in connection with this offering.
We are also required to file by August 13, 1999 a registration statement
under the Securities Act with respect to the shares of our common stock which
will be issuable upon the conversion of our $7,500,000 subordinated convertible
debentures to be issued on April 26, 1999. We are required to maintain the
effectiveness of that registration statement so long as any such debentures are
outstanding and thereafter for a two year period or until all of the shares
which may be purchased by the holders have been purchased and sold, whichever
occurs first.
We must bear all expenses incurred in connection with any of those
registrations, other than underwriting discounts and commissions. These
registration rights could result in substantial future expenses to us and
adversely affect any of our future equity or debt offerings.
CERTAIN PROVISIONS OF DELAWARE LAW
We are a Delaware corporation subject to Section 203 of the Delaware General
Corporation Law. In general, Section 203 prevents an "interested stockholder"
(defined generally as a person owning 15% or more of our outstanding voting
stock) from engaging in a "business combination" (as defined in Section 203)
with us for three years following the date that person became an interested
stockholder unless: (1) before that person became an interested stockholder, our
Board of Directors approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination; (2) upon
completion of the transaction that resulted in the interested stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of our voting stock outstanding at the time the transaction commenced
(excluding stock held by any director who is also one of our officers and by
employee stock plans that do not provide employees with the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer); or (3) on or following the date on which that person
became an interested stockholder, the business combination is approved by our
Board of Directors and authorized at a meeting of stockholders by the
affirmative vote of the holders of at least 66 2/3% of the outstanding voting
stock not owned by the interested stockholder.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C. is our transfer agent and registrar
of our common stock.
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U.S. FEDERAL INCOME TAX CONSEQUENCES
In the opinion of White & Case LLP, our special tax counsel, the following
is a description of the principal U.S. federal income tax consequences of the
purchase, ownership and disposition of common stock by a Non-U.S. Holder
(defined below). This description is based on (1) the Internal Revenue Code of
1986, as amended (the "Code"), (2) income tax regulations (proposed and final)
issued under the Code, and (3) administrative and judicial interpretations of
the Code and regulations, each as in effect and available as of the date of this
prospectus. These income tax laws, regulations, and interpretations, however,
may change at any time, and any change could be retroactive to the date of this
offering. These income tax laws and regulations are also subject to various
interpretations, and the Internal Revenue Service (the "IRS") or the courts
could later disagree with the explanations or conclusions contained in this
description. The IRS has not formally ruled (and we do not intend to seek a
ruling) on the tax consequences of purchasing, owning and disposing of shares of
common stock.
Except where we state otherwise, this description deals only with shares of
common stock held as capital assets (as defined in the Code) by a holder who is
a Non-U.S. Holder (as defined below). We do not, however, address all of the tax
consequences that may be relevant to a Non-U.S. Holder.
- A "Non-U.S. Holder" is a beneficial owner of common stock who for U.S.
federal income tax purposes is not:
- a citizen or resident of the U.S.;
- a corporation or partnership created or organized in or under the laws of
the U.S. or any State (including the District of Columbia);
- an estate if its income is subject to U.S. federal income taxation
regardless of its source; or
- a trust if it has validly has elected to be treated as a U.S. person for
U.S. federal income tax purposes or if (1) a U.S. court can exercise
primary supervision over its administration and (2) one or more U.S.
persons have the authority to control all of its substantial decisions.
We also do not address, except as stated below, any of the tax consequences
to (1) holders that may be subject to special tax treatment such as financial
institutions, real estate investment trusts, tax-exempt organizations, regulated
investment companies, insurance companies and brokers and dealers or traders in
securities or currencies, (2) persons that will hold common stock as part of a
position in a straddle or as part of a hedging or conversion transaction, (3)
persons whose functional currency is not the U.S. Dollar and (4) persons other
than Non-U.S. Holders.
Further, we do not address any state, local or foreign tax consequences of
purchasing, owning and disposing of common stock.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS IN
LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES AS TO THE U.S. FEDERAL INCOME TAX
CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF COMMON STOCK, AS WELL AS THE
EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
DIVIDENDS ON COMMON STOCK
Dividends paid to a Non-U.S. Holder that are not effectively connected with
the conduct of a trade or business in the U.S. generally will be subject to
withholding of U.S. federal income tax at a rate of 30% on the gross amount of
the dividend unless the rate is reduced by applicable U.S. income tax treaty.
Currently, dividends paid to an address in a foreign country generally are
presumed to be paid to a resident of that country in determining the
applicability of a tax treaty with respect to that payment. Treasury Regulations
issued on October 6, 1997, as amended by an IRS notice, however, would, for
dividends paid after December 31, 1999, require a Non-U.S. Holder to file
certain forms to obtain the benefit of any applicable tax treaty. Those forms
generally would contain the
67
<PAGE>
Non-U.S. Holder's name and address and an official statement by the competent
authority in the foreign country (as designated in the applicable tax treaty)
attesting to the holder's status as a resident thereof.
Except as otherwise provided in an applicable tax treaty, a Non-U.S. Holder
will be taxed at ordinary U.S. federal income tax rates (on a net income basis)
on dividends that are effectively connected with the conduct of a trade or
business of the Non-U.S. Holder within the U.S. and will not be subject to the
withholding described above. If the Non-U.S. Holder is a foreign corporation, it
may also be subject to a 30% branch profits tax unless it qualifies for a lower
rate under an applicable tax treaty.
To claim the benefit of a tax treaty or to claim an exemption from
withholding because the income is effectively connected with a U.S. trade or
business, a Non-U.S. Holder must provide a properly executed Form 1001 or 4224
(or any successor form as the IRS designates), as applicable, prior to the
payment of dividends.
SALE OR EXCHANGE OF COMMON STOCK
Subject to the discussion below under "--STATUS AS U.S. REAL PROPERTY
HOLDING CORPORATION", a Non-U.S. Holder generally will not be subject to U.S.
federal income tax in respect of gain recognized from the sale or exchange of
common stock unless:
- the gain is effectively connected with a trade or business conducted by
the Non-U.S. Holder within the U.S. (in which case, the branch profits tax
described above under "--DIVIDENDS ON COMMON STOCK" may also apply if the
holder is a foreign corporation);
- in the case of a Non-U.S. Holder who is a non-resident alien individual,
the holder is present in the U.S. for 183 days or more in the taxable year
of the sale or exchange and certain other conditions are met; or
- the Non-U.S. Holder is subject to tax pursuant to the provisions of the
Code applicable to certain U.S. expatriates.
STATUS AS U.S. REAL PROPERTY HOLDING CORPORATION
We believe that we are likely to constitute a U.S. real property holding
corporation within the meaning of the Code. Under certain provisions of the Code
and the income tax regulations, gain realized by a Non-U.S. Holder who would not
ordinarily be subject to U.S. federal income tax on gains would, under certain
circumstances, be subject to tax (the "special tax") on gain realized on the
sale or exchange (and possible withholding tax on the proceeds from the sale
(the "withholding tax")) of common stock, notwithstanding the Non-U.S. Holder's
lack of other connections with the U.S. If, however, the common stock is
regularly traded on an established securities market, the special tax and the
withholding tax would apply to the sale or exchange by a Non-U.S. Holder only if
the Non-U.S. Holder held directly or indirectly, at any time during the
five-year period ending on the date of the sale or exchange, more than 5% of the
common stock. Generally, the rule for an interest in a U.S. real property
holding corporation takes precedent over relief provided by U.S. income tax
treaties.
FEDERAL ESTATE TAXES
Common stock that is held by an individual who at the time of death is not a
citizen or resident of the U.S. generally will be included in the individual's
gross estate for U.S. federal estate tax purposes, unless an applicable U.S.
estate tax treaty provides otherwise.
68
<PAGE>
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING REQUIREMENTS
U.S. backup withholding tax and information reporting requirements generally
apply to certain payments to certain noncorporate holders of stock. Information
reporting generally will apply to payments within the U.S. of dividends on, and
to proceeds from the sale or redemption of, common stock by a payor to a holder
of common stock (other than an "exempt recipient," including a corporation, a
payee that is a Non-U.S. Holder that provides an appropriate certification and
certain other persons). A payor will be required to withhold 31% of any payments
of the proceeds within the U.S. from the sale or redemption of common stock to a
holder (other than an "exempt recipient") if the holder fails to furnish its
correct taxpayer identification number or otherwise fails to comply with the
backup withholding tax requirements.
Income tax regulations issued on October 6, 1997, and a recent IRS Notice
announcing amendments to those regulations, would modify certain of the rules
discussed above generally with respect to payments on common stock made after
December 31, 1999. In particular, a payor will be required to withhold 31% of
any payments within the U.S. of dividends on, or proceeds from the sale of,
common stock to a holder (other than an exempt recipient such as a corporation
or a Non-U.S. Holder that provides an appropriate certification) if the holder
fails to furnish its correct taxpayer identification number or otherwise fails
to comply with, or establish an exemption from, the backup withholding tax
requirements. In the case of those payments by a payor within the U.S. to a
foreign partnership (other than payments to a foreign partnership that qualifies
as a withholding foreign partnership within the meaning of such income tax
regulations and payments to a foreign partnership that are effectively connected
with the conduct of a trade or business in the U.S.), the partners of the
partnership will be required to provide a certification in order to establish an
exemption from backup withholding tax and information reporting requirements.
Moreover, a payor may rely on a certification provided by a Non-U.S. Holder only
if the payor does not have actual knowledge or a reason to know that any
information or certification stated in the certificate is unreliable.
PROSPECTIVE PURCHASERS OF COMMON STOCK ARE URGED TO CONSULT THEIR TAX
ADVISORS WITH REGARD TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO
THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER
THE LAWS OF ANY FOREIGN, STATE, LOCAL OR OTHER TAXING JURISDICTION.
69
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated May , 1999 (the "Underwriting Agreement"), the underwriters
named below (the "Underwriters"), have severally, but not jointly, agreed to
purchase from us the following respective numbers of shares of common stock on a
firm commitment basis at the offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ---------------------------------------------------------------------------------------------------- ------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc...............................................................
Wedbush Morgan Securities Inc.......................................................................
------------
Total............................................................................................. 2,000,000
------------
------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the common stock offered hereby if any of the shares are
purchased.
The Underwriters have advised us that they propose to offer the shares to
the public at the offering price set forth on the cover page of this prospectus
and to certain dealers at the same price less a concession not in excess of
$ per share. The Underwriters may allow, and the dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After the
offering, the Underwriters may change the offering price and other selling
terms.
We have granted to the Underwriters an option, exercisable not later than 30
days after the date of the prospectus, to purchase up to 300,000 additional
shares of our common stock at the offering price less the underwriting discounts
and commissions shown below and set forth on the cover page of this prospectus.
If the Underwriters choose to exercise this option, the Underwriters will be
obligated to purchase the additional shares of common stock, and we will be
obligated to sell those shares to the Underwriters. The Underwriters may
exercise this option only to cover over-allotments made in connection with the
sale of common stock offered in this prospectus. If the Underwriters exercise
the option, they will offer the additional shares on the same terms as those on
which it is offering the 2,000,000 shares of common stock.
The following table is a summary of the underwriter discounts and
commissions that we are to pay the Underwriters and our estimated expenses:
<TABLE>
<CAPTION>
TOTAL
------------------------------
<S> <C> <C> <C>
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
------------ -------------- --------------
Underwriting discounts and commissions to be paid by us............. $ $ $
</TABLE>
As described in the underwriting agreement, we have agreed to reimburse the
Underwriters for their out-of-pocket expenses up to $262,500 and to indemnify
the Underwriters against certain liabilities, including liabilities under the
Securities Act. We have been advised that in the opinion of the SEC our
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that the Underwriters assert a claim
for indemnification against those liabilities, we will, unless in the opinion of
our counsel, the matter has been settled by controlling precedent, submit to a
court of competent jurisdiction the question whether our indemnification is
against public policy as expressed in the Securities Act. We will be bound by
the final adjudication of that matter.
The Underwriters have advised us that they do not intend to confirm sales to
any account over which they exercise discretionary authority.
70
<PAGE>
In connection with this offering, the Underwriters and their affiliates may
engage in transactions on NASDAQ that stabilize, maintain or otherwise affect
the market price of our common stock. These transactions may include
stabilization transactions effected in accordance with Rule 104 of Regulation M.
Under Regulation M, the Underwriters and their affiliates may bid for or
purchase our common stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for their own account by selling
more of our common stock in connection with this offering than it is committed
to purchase from us, and in such case may purchase our common stock in the open
market following completion of this offering to cover all or a portion of their
short position. The Underwriters may also cover all or any portion of such short
position, up to 300,000 shares of common stock, by exercising their
over-allotment option referred to above.
In connection with this offering, the Underwriters and their affiliates who
are qualified registered market markers on NASDAQ may engage in passive market
making transactions in our common stock on NASDAQ in accordance with Rule 103 of
Regulation M, during a specified period before the commencement of offers or
sales of our common stock. The passive market making transactions must comply
with applicable volume and price limits and be identified as such. In general, a
passive market maker may display its bid at a price not in excess of the highest
independent bid for such security; if all independent bids are lowered below the
passive market maker's bid, however, such bid must then be lowered when certain
purchase limits are exceeded.
Any of the transactions described in the preceding two paragraphs may result
in the maintenance of the price of our common stock at a level above that which
might otherwise prevail in the open market. None of the transactions described
in the preceding paragraph are required, and if such transactions are
undertaken, they may be discontinued at any time.
FBR Asset Investment Corporation, a real estate investment trust managed by
an affiliate of one of the underwriters, made a loan to us in June of 1998. The
loan was in the principal amount of $10.0 million and bears interest at 12% per
annum. The loan was amended to increase effective as of December 31, 1998 the
interest rate to 13% per annum payable monthly plus 4% per annum compounded
monthly and extend the maturity date until the earlier of a public offering of
our Common Stock and June 3, 1999. As of December 31, 1998, the principal
balance was $7.5 million. We plan to repay this loan in full with the proceeds
of this offering.
71
<PAGE>
LEGAL MATTERS
The validity of our common stock offered for sale in this prospectus will be
passed upon for us by White & Case LLP, Los Angeles, California. Certain legal
matters with respect to the offering of our common stock will be passed upon for
the underwriter by Brobeck, Phleger & Harrison LLP, Irvine, California.
EXPERTS
The consolidated financial statements and financial statement schedules
included in this prospectus and elsewhere in the registration statement have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report included herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We are subject to the informational requirements of the Exchange Act and, in
accordance therewith, we file reports, proxy statements and other information
with the SEC. You may inspect and copy these documents at the public reference
facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the SEC's regional offices located at Seven World
Trade Center, 13(th) Floor, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies of this
material from the Public Reference Section of the SEC, at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The SEC maintains a web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of the
SEC's Web site is http://www.sec.gov.
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act, relating to our common stock. This prospectus does not contain
all the information set forth in the registration statement or amendments, if
any, to the registration statement and the exhibits thereto. Certain parts of
the registration statement are omitted from this prospectus in accordance with
the rules and regulations of the SEC. Statements contained in this prospectus as
to the content of any contract document are not necessarily complete. In each
instance in this prospectus that we reference a copy of a contract or other
document filed as an exhibit to the registration statement, the related
statement shall be qualified in all respects by such reference and the exhibits
thereto. For further information, reference is hereby made to the registration
statement and the exhibits thereto.
We are required to furnish holders of our common stock with annual reports
containing audited financial statements with a report thereon by our independent
certified public accountants.
72
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Pro Forma Condensed Consolidated Financial Statement (Unaudited) F-2
Pro Forma Condensed Consolidated Statement of Income for the Year Ended December 31, 1998 (Unaudited) F-3
Notes to Pro Forma Condensed Consolidated Financial Statement (Unaudited) F-4
KENNEDY-WILSON, INC. AND SUBSIDIARIES
Independent Auditors' Report F-5
Consolidated Balance Sheet as of December 31, 1998 and 1997 F-6
Consolidated Statements of Income for the Three Years Ended December 31, 1998 F-7
Consolidated Statements of Stockholders' Equity for the Three Years Ended December 31, 1998 F-8
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1998 F-9
Notes to Consolidated Financial Statements F-10
HEITMAN PROPERTIES LTD.
Independent Auditors' Report F-34
Consolidated Balance Sheets as of June 30, 1998 (Unaudited) and December 31, 1997 and 1996 F-35
Consolidated Statements of Operations for the Six Months Ended June 30, 1998 and 1997 (Unaudited) and for
the Three Years Ended December 31, 1997 F-36
Consolidated Statements of Stockholders' Equity as of June 30, 1998 (Unaudited) and for the Three Years
Ended December 31, 1997 F-37
Consolidated Statements of Cash Flows for the Six Months ended June 30, 1998 and 1997 (Unaudited) and for
the Three Years Ended December 31, 1997 F-38
Notes to Consolidated Financial Statements F-39
</TABLE>
F-1
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENT
(UNAUDITED)
The following unaudited pro forma condensed consolidated statement of income for
the year ended December 31, 1998 is presented as if the acquisition of Heitman
Properties, Ltd. had occurred at January 1, 1998. This pro forma condensed
consolidated financial statement should be read in conjunction with the
historical consolidated financial statements and notes thereto of the Company
and Heitman Properties Ltd. included elsewhere in this Prospectus.
The pro forma condensed consolidated financial statement is not necessarily
indicative of what the actual results of operations would have been had the
Company completed the transaction described above.
F-2
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
--------------------------------------------
OTHER TOTAL
PRO FORMA COMPANY
ADJUSTMENTS PRO FORMA
HISTORICAL ----------- ---------------
KENNEDY
WILSON, HEITMAN
INC. PROPERTIES,
----------- LTD.
(A) --------------
(B)
<S> <C> <C> <C> <C>
REVENUES
Property management fees $ 14,194 $ 15,535 $ 1,295(C) $ 31,024
Commission 4,917 4,917
Sales of residential real estate 13,828 13,828
Equity in income of investments with related
parties and non-affiliates 612 612
Proceeds from sale of partnership 4,077 4,077
Gain on sale of commercial real estate 2,654 2,654
Rental income, net 4,583 4,583
Gain on restructured notes receivable 3,911 3,911
Other income 2,096 955 80(C) 3,131
----------- ------- ----------- ---------------
Total revenue 50,872 16,490 1,374 68,737
----------- ------- ----------- ---------------
OPERATING EXPENSES
Commissions and marketing expenses 532 532
Cost of residential real estate sold 12,249 12,249
Compensation and related expenses 14,582 7,688 641(C) 22,911
General and administrative 6,890 8,155 217(C) 10,205
(5,557)(G)
500(F)
Depreciation and amortization 2,059 1,499 (620)(E) 2,938
Interest expense 8,398 1,724(D) 10,122
----------- ------- ----------- ---------------
Total operating expenses 44,710 17,342 (3,095) 58,957
----------- ------- ----------- ---------------
Income before provision for income taxes 6,162 (852) 4,470 9,780
Provision for income taxes 837 1,339(H) 2,176
----------- ------- ----------- ---------------
NET INCOME $ 5,325 $ (852) $ 3,131 $ 7,604
----------- ------- ----------- ---------------
----------- ------- ----------- ---------------
SHARE DATA
Basic net income per share $ 1.22
Basic weighted average shares 6,254,000
Diluted net income per share $ 1.12
Diluted weighted average shares 6,801,000
</TABLE>
F-3
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(A) Kennedy Wilson, Inc. for the year ended December 31, 1998
(B) Heitman Properties, Ltd. unaudited financial statements as of June 30, 1998
(C) To reflect pro forma results of operations of Heitman Properties, Ltd. for
two weeks from July 1, 1998 to the date of acquisition.
(D) To reflect interest expense on note payable to Colony Capital Inc. for the
period from January 1, 1998 to July 16, 1998.
<TABLE>
<CAPTION>
INTEREST
AMOUNT ESTIMATED EXPENSE
ACCOUNT CAPITALIZED LIFE 28 WEEKS
- ------------------------------------------------------------------------------- ------------- ----------- -----------
<S> <C> <C> <C>
Interest ($21 Million at 14% per year) $ 1,583
Amortization of Loan Origination Cost $ 393 18 mos 141
-----------
$ 1,724
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30, 1998
-------------
<S> <C>
(E) Determined as follows:
-- To eliminate historical depreciation and amortization recorded by Heitman Properties, Ltd. $ (1,499)
-- To reflect depreciation and amortization on goodwill management contracts, office relocation
and property and equipment. 879
-------------
$ (620)
-------------
-------------
</TABLE>
<TABLE>
<CAPTION>
ESTIMATED
AMOUNT DEPRECIABLE AMORTIZATION AMORTIZATION
ACCOUNT CAPITALIZED LIFE ONE YEAR 28 WEEKS
- -------------------------------------------------------- -------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
Goodwill $16 Million 30 Yrs $ 533 $ 287
Management Contracts $7 Million 7 Yrs 1,000 538
Property and Equipment $0.5 Million 5 Yrs 100 54
------ -----
$ 1,633 $ 879
------ -----
------ -----
</TABLE>
<TABLE>
<S> <C>
(F) To record service contract between Kennedy Wilson Inc. and Heitman
Financial $ 500
-----------
-----------
(G) To eliminate Heitman Properties, Ltd. corporate cost allocation $ (5,557)
-----------
-----------
(H) To record tax provision at 37% of incremental income $ 1,339
-----------
-----------
</TABLE>
F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Kennedy-Wilson, Inc. and Subsidiaries
Beverly Hills, California
We have audited the accompanying consolidated balance sheets of Kennedy-Wilson,
Inc. and subsidiaries (the "Company"), as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 26, 1999
F-5
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1998
-------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 10,448,000 $ 9,838,000
Cash--restricted (Note 2) 174,000 8,168,000
Accounts receivable 1,018,000 6,674,000
Notes receivable (Notes 3 and 8) 9,546,000 23,115,000
Real estate held for sale (Notes 4 and 9) 18,628,000 122,407,000
Investments with related parties and non-affiliates (Notes 5 and 11) 4,899,000 9,209,000
Contracts, furniture, fixtures and equipment and other assets (Note 6) 1,005,000 9,238,000
Goodwill, net (Note 2) 16,167,000
-------------- --------------
TOTAL ASSETS $ 45,718,000 $ 204,816,000
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 666,000 $ 1,752,000
Accrued expenses and other liabilities 4,553,000 15,721,000
Deferred taxes (Note 12) 628,000
Notes payable (Note 8) 4,764,000 14,291,000
Borrowings under lines of credit (Note 7) 9,039,000 13,514,000
Mortgage loans payable (Note 9) 15,102,000 115,130,000
-------------- --------------
Total liabilities 34,124,000 161,036,000
-------------- --------------
Subordinated debt (Note 10) 21,000,000
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY (Notes 14 and 15)
Preferred stock, $.01 par value; shares authorized: 2,000,000, none issued
Common stock $.01 par value; shares authorized: 10,000,000 in 1998 and
5,000,000 in 1997; shares issued: 6,597,075 in 1998 and 5,923,548 in 1997 59,000 66,000
Additional paid-in capital 23,768,000 28,888,000
Accumulated deficit (10,913,000) (5,970,000)
Notes receivable from stockholders (1,320,000) (204,000)
-------------- --------------
Total stockholders' equity 11,594,000 22,780,000
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 45,718,000 $ 204,816,000
-------------- --------------
-------------- --------------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
KENNEDY-WILSON, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES
Property management and leasing fees (Note 18) $ 14,194,000
Commissions $ 4,821,000 $ 5,001,000 3,716,000
Commissions--related parties (Note 11) 1,052,000 894,000 1,201,000
Sales of residential real estate 19,743,000 6,753,000 13,828,000
Equity in income of investments with related parties and
non-affiliates (Note 5) 178,000 1,431,000 612,000
Gain on sale of joint venture 4,077,000
Gain on sale of commercial real estate 1,454,000 6,339,000 2,654,000
Rental income, net 1,467,000 1,629,000 4,583,000
Gain on restructured notes receivable (Notes 2 and 3) 3,057,000 4,036,000 3,911,000
Other income 195,000 916,000 2,096,000
------------- ------------- -------------
Total Revenues 31,967,000 26,999,000 50,872,000
------------- ------------- -------------
OPERATING EXPENSES
Commissions and marketing expenses 1,560,000 928,000 532,000
Cost of residential real estate sold 16,523,000 5,592,000 12,249,000
Cost of residential real estate sold--related parties 209,000
Compensation and related expenses 4,726,000 7,658,000 14,582,000
General and administrative 3,126,000 4,661,000 6,890,000
Depreciation and amortization 268,000 790,000 2,059,000
Interest expense 1,964,000 3,139,000 8,398,000
------------- ------------- -------------
Total Operating Expenses 28,376,000 22,768,000 44,710,000
------------- ------------- -------------
Income Before Provision for Income Taxes and Extraordinary Items 3,591,000 4,231,000 6,162,000
Provision for Income Taxes (Note 12) 60,000 280,000 837,000
------------- ------------- -------------
Income Before Extraordinary Items 3,531,000 3,951,000 5,325,000
Extraordinary Items (Note 17) 79,000
------------- ------------- -------------
NET INCOME $ 3,531,000 $ 4,030,000 $ 5,325,000
------------- ------------- -------------
------------- ------------- -------------
SHARE DATA
Basic net income before extraordinary items per share $ 0.50 $ 0.65 $ 0.85
Basic extraordinary items per share N/A $ 0.01 N/A
Basic net income per share $ 0.50 $ 0.66 $ 0.85
Basic weighted average shares 7,086,848 6,104,497 6,254,470
Diluted net income before extraordinary items per share $ 0.50 $ 0.64 $ 0.78
Diluted extraordinary items per share N/A $ 0.01 N/A
Diluted net income per share $ 0.50 $ 0.65 $ 0.78
Diluted weighted average shares 7,093,958 6,187,280 6,801,356
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
COMMON STOCK RECEIVABLE
--------------------- ADDITIONAL ACCUMULATED FROM
SHARES AMOUNT PAID-IN-CAPITAL DEFICIT STOCKHOLDERS TOTAL
---------- --------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 7,563,236 $ 75,000 $ 22,669,000 $ (14,799,000) $ 7,945,000
Repurchase of common stock (891,000) (9,000) (1,085,000) (1,094,000)
Net income 3,531,000 3,531,000
---------- --------- -------------- -------------- -------------- --------------
Balance, December 31, 1996 6,672,236 66,000 21,584,000 (11,268,000) 10,382,000
Repurchase of common stock (748,688) (7,000) (1,491,000) (1,498,000)
Stock dividend 3,675,000 (3,675,000)
Notes receivable from
stockholders (Note 16) $ (1,320,000) (1,320,000)
Net income 4,030,000 4,030,000
---------- --------- -------------- -------------- -------------- --------------
Balance, December 31, 1997 5,923,548 59,000 23,768,000 (10,913,000) (1,320,000) 11,594,000
Issuance of common stock 808,878 8,000 5,645,000 5,653,000
Repurchase of common stock (135,351) (1,000) (907,000) (908,000)
Stock dividends 382,000 (382,000)
Repayment on notes receivable
from stockholders (Note 16) 1,116,000 1,116,000
Net income 5,325,000 5,325,000
---------- --------- -------------- -------------- -------------- --------------
Balance, December 31, 1998 6,597,075 $ 66,000 $ 28,888,000 $ (5,970,000) $ (204,000) $ 22,780,000
---------- --------- -------------- -------------- -------------- --------------
---------- --------- -------------- -------------- -------------- --------------
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
--------------------------------------
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,531,000 $ 4,030,000 $ 5,325,000
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 268,000 790,000 2,059,000
Equity in income of investments with related parties and
non-affiliates (178,000) (1,431,000) (612,000)
Gain on sale of joint venture (4,077,000)
Gains on sales of real estate (1,454,000) (7,500,000) (4,233,000)
Gains on restructured notes receivable -- non-cash (537,000) (689,000) (627,000)
Deferred taxes 628,000
Extraordinary items, net (79,000)
Change in assets and liabilities:
Accounts receivable 751,000 (24,000) (5,656,000)
Other assets (720,000) (184,000) (1,403,000)
Accounts payable (191,000) (227,000) 1,086,000
Accrued expenses and other liabilities (937,000) 2,343,000 11,168,000
----------- ----------- ------------
Net Cash Provided By (Used In) Operating Activities 533,000 (2,971,000) 3,658,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of contract, furniture, fixtures and equipment (197,000) (178,000) (7,280,000)
Dispositions of contracts, furniture, fixtures and equipment 559,000 18,000
Purchase and additions to real estate held for sale (21,341,000) (18,841,000) (122,671,000)
Proceeds from sales of real estate held for sale 25,914,000 36,304,000 21,743,000
Proceeds from sale of joint venture 5,348,000
Additions to notes receivable (13,015,000) (26,235,000)
Payments from notes receivable 4,930,000 13,293,000
Additions to goodwill (16,412,000)
Stockholders (loans to) repayments from (1,320,000) 1,116,000
Distributions from joint ventures 20,000 2,775,000 2,271,000
Contributions to joint ventures (3,607,000) (2,153,000) (7,240,000)
----------- ----------- ------------
Net Cash (Used In) Provided By Investing Activities (11,667,000) 21,517,000 (136,049,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of mortgage loans payable 26,577,000 14,320,000 114,679,000
Repayment of mortgage loans payable (30,510,000) (19,734,000) (14,651,000)
Borrowings under lines of credit 15,345,000 14,063,000 40,348,000
Repayment of lines of credit (7,453,000) (13,941,000) (35,873,000)
Borrowings under notes payable 10,128,000 3,737,000 19,740,000
Repayment of notes payable (1,933,000) (7,168,000) (10,213,000)
Issuance of subordinated debt 21,000,000
Cash -- restricted (increase) decrease (217,000) 222,000 (7,994,000)
Common stock (repurchase) issuance (1,094,000) (1,498,000) 4,745,000
----------- ----------- ------------
Net Cash Provided By (Used In) Financing Activities 10,843,000 (9,999,000) 131,781,000
----------- ----------- ------------
Net (decrease) increase in cash (291,000) 8,547,000 (610,000)
CASH, BEGINNING OF YEAR 2,192,000 1,901,000 10,448,000
----------- ----------- ------------
CASH, END OF YEAR $ 1,901,000 $10,448,000 $ 9,838,000
----------- ----------- ------------
----------- ----------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest $ 2,113,000 $ 2,930,000 $ 7,754,000
Interest capitalized $ 57,000 $ 340,000 $ 640,000
Income taxes $ 34,000 $ 246,000 $ 633,000
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 1--ORGANIZATION
Kennedy-Wilson, Inc., a Delaware corporation, incorporated in 1992, and its
wholly owned subsidiaries (the "Company") provide real estate property
management, brokerage and marketing services throughout the U.S., and in Japan,
primarily to institutional investors, financial institutions, developers and
government agencies. The Company also acquires, renovates and resells commercial
and residential real estate; invests in non-performing note receivable
portfolios; and invests in various real estate joint ventures. In July 1998, the
Company acquired from Heitman Financial Ltd., a wholly owned subsidiary of
United Asset Management Corporation, all of the outstanding shares of Heitman
Properties, Ltd., a property management company for approximately $21.0 million.
The Company used the purchase method of accounting to record the transaction.
Accordingly, the results of operations of Heitman Properties, Ltd. (renamed
Kennedy-Wilson Properties, Ltd.) are included in the consolidated financial
statements from the date of acquisition (see Note 19).
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries and joint ventures 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.
REVENUE RECOGNITION--Property management fees are recognized over time as earned
based upon the terms of the management agreement. Brokerage 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 Standards (SFAS) NO. 66 ACCOUNTING
FOR SALES OF REAL ESTATE. Gains on notes receivable are recognized ratably upon
constructive receipt of cash or a restructured note including a significant cash
component.
INVESTMENTS IN AFFILIATES AND JOINT VENTURES--The Company accounts for
investments in affiliates and joint ventures 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.
GOODWILL--The Company's purchase of Heitman Properties, Ltd., a property
management company in July 1998 resulted in goodwill totaling approximately
$16.0 million. Goodwill results from the difference between the purchase price
and the fair value of assets acquired based upon the Purchase Method of
accounting for business combinations under ACCOUNTING PRINCIPALS BOARD OPINION
NUMBER 16. The allocated amount, as determined by Company management, is being
amortized over 30 years using the straight-line method. Goodwill is reviewed for
impairment on a regular basis by Company management by comparison to future
expected undiscounted cash flows. Amortization of goodwill for the year ended
1998 totaled $244,000.
F-10
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
CASH AND CASH EQUIVALENTS--Cash consists of cash and all highly liquid
investments purchased with maturities of three months or less and refundable
deposits in escrow.
RESTRICTED CASH--Restricted cash consists of cash reserves for capital
expenditures, tenant improvements, property taxes and insurance, as required by
the Company's mortgage lenders.
LONG LIVED ASSETS--During 1996, the Company adopted 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 impairment of long-lived assets. The adoption did not have a
material effect on the Company's financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The Company reports the fair value of
financial instruments in accordance with SFAS 107, Disclosures about Fair Value
of Financial Instruments. The estimated fair value of the Company's financial
instruments is determined using available market information and appropriate
valuation methodologies. Considerable judgment, however, is necessary to
interpret market data and develop the related estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that could be realized upon disposition of the financial
instruments. The use of different market assumptions or estimation methodologies
may have a material impact on the estimated fair value amounts.
Cash, accounts receivable and accounts payable are carried at their book values
as the recorded amount of these instruments approximates fair market value due
to their short term maturities. Notes receivable approximate market value as
they are negotiated based upon market values of loans with similar
characteristics. Bank lines of credit, and short and long term debt approximate
fair market value as the interest rates are comparable to the rates currently
being offered to the Company.
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
throughout the U.S. and in Japan. The Company performs ongoing credit
evaluations of its customers and debtors. 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 respective agreements. Such escalation clauses are often
related to increases in the CPI or similar inflation indices. In addition, many
of the Company's leases and management agreements are for terms of less than ten
years, which permits the Company to seek to increase rents and fees at market
rates if they 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.
EARNINGS PER SHARE--In accordance with SFAS No. 128, EARNINGS PER SHARE, basic
income per share for any period is computed by dividing net income by the
weighted average number of shares of common stock outstanding during such
period. Diluted net income per share for any period is computed by dividing net
income by the weighted average number of shares of common stock and common stock
equivalents outstanding during such period.
F-11
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
The basic weighted average number of shares used to compute net income per share
(adjusted for the 20% stock dividend in 1997 and the 200% and 50% stock
dividends in 1998) was 6,254,470, 6,104,497, and 7,086,848 for the years ended
December 31, 1998, 1997 and 1996, respectively. The diluted weighted average
number of shares used to compute net income per share were 6,801,356, 6,187,280
and 7,093,958 for the years ended December 31, 1998, 1997 and 1996,
respectively.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS--SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INVESTMENTS AND HEDGING ACTIVITIES was issued June 1998, applicable for all
fiscal years beginning after June 15, 1999. At this time, management has not
completed their analysis of this pronouncement's impact on the Company's
financial statements.
RECLASSIFICATION--Certain reclassifications have been made to the 1997 and 1996
balances to conform with the 1998 presentation.
NOTE 3--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.
F-12
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 4--REAL ESTATE HELD FOR SALE
Real estate held for sale is comprised of commercial, residential properties and
land stated at cost plus additional capital improvements less accumulated
depreciation and amortization of $1,026,000 and $119,000 at December 31, 1998
and 1997 respectively.
Real estate held for sale includes the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
<S> <C> <C>
1997 1998
------------- --------------
COMMERCIAL PROPERTIES AND LAND:
1055 Wilshire Blvd., Los Angeles, California--281,649 Sq. Ft. office building $ 24,937,000
6380 Wilshire Blvd., Los Angeles, California--132,730 Sq. Ft. office building 16,223,000
5900 Sepulveda Blvd., Van Nuys, California--74,428 Sq. Ft. office building 6,771,000
7080 Hollywood Blvd., Los Angeles, California--161,140 Sq. Ft. office building 19,821,000
6255 Sunset Blvd., Los Angeles, California--306,025 Sq. Ft. office building 29,166,000
Zeller, Long Beach, California--1 residential and 2 commercial buildings 41,000
802 Huntington Dr., Monrovia, California--20,876 Sq. Ft. automotive center 1,399,000
1304 15th St., Santa Monica, California--37,000 Sq. Ft. office building $ 3,089,000
Santa Monica, California, lots 4 in 1998, 3 in 1997 1,800,000 2,402,000
4350 11th Ave., Los Angeles, California--9,000 Sq. Ft. office building 438,000 336,000
301 S. Fair Oaks Dr., Pasadena, California--51,710 Sq. Ft. office building 8,808,000 8,886,000
------------- --------------
14,135,000 109,982,000
------------- --------------
RESIDENTIAL PROPERTIES AND LAND:
Vista Paseo Heights, Palm Desert, California--23 housing lots 2,902,000
Cathedral City, California,--112 housing lots 2,386,000
Vulcan Mtn., San Diego, California--155 acres of land 283,000
Riverside, California--3.78 acres of land 87,000
Koala, Hawaii--3,000 acres of land 4,611,000
Pacific Palisades, California--3 residential homes in 1998; 1 in 1997 608,000 2,156,000
Riverside, California--31 housing lots 293,000
Los Angeles, CA--residential home 237,000
Villa Del Este, Corona Del Mar, California--14 condominium units 112,000
Vista Del Valle, Granada Hills, California, 10 housing lots 2,810,000
Juneau, Alaska--9 housing lots 433,000
------------- --------------
4,493,000 12,425,000
------------- --------------
$ 18,628,000 $ 122,407,000
------------- --------------
------------- --------------
</TABLE>
F-13
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 5--INVESTMENTS WITH RELATED PARTIES AND NON-AFFILIATES
The Company has a number of partnerships and joint venture interests ranging
from 6% to 50%, some with former 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 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------
WITH RELATED WITH
PARTIES NON-AFFILIATES TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
BALANCE SHEET
ASSETS
Cash and cash equivalents $ 463,000 $ 15,000 $ 478,000
Receivables 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
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
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------
WITH RELATED WITH
PARTIES NON-AFFILIATES TOTAL
------------ ------------- ------------
<S> <C> <C> <C>
STATEMENT OF INCOME
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
------------ ------------- ------------
Net income $ 505,000 $ 132,000 $ 637,000
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
F-14
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------
WITH RELATED WITH
PARTIES NON-AFFILIATES TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
BALANCE SHEET
ASSETS
Cash and cash equivalents $ 3,319,000 $ 1,159,000 $ 4,478,000
Receivables 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
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
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-15
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------
WITH RELATED WITH
PARTIES NON-AFFILIATES TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
STATEMENT OF INCOME
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 partners 560,000 560,000
Other partners 575,000 575,000
------------- ------------- -------------
Net income $ 675,000 $ 1,891,000 $ 2,566,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
WITH
NON-AFFILIATES
-----------------
<S> <C> <C>
BALANCE SHEET
ASSETS
Cash and cash equivalents $ 10,588,000
Receivables 3,278,000
Real estate 109,507,000
-----------------
Total assets $ 123,373,000
-----------------
-----------------
LIABILITIES
Accounts payable and accrued expense $ 7,626,000
Mortgages payable 73,342,000
-----------------
Total liabilities 80,968,000
-----------------
PARTNERS' CAPITAL
Kennedy-Wilson 9,209,000
Other partners 33,196,000
-----------------
Total partners' capital 42,405,000
-----------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 123,373,000
-----------------
-----------------
</TABLE>
F-16
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
WITH
NON-AFFILIATES
-----------------
<S> <C>
STATEMENT OF INCOME:
Revenues $ 49,049,000
Expenses 45,070,000
-----------------
Net Income $ 3,979,000
-----------------
-----------------
Net income allocated to:
Kennedy-Wilson $ 612,000
Other partners 3,367,000
-----------------
Net Income $ 3,979,000
-----------------
-----------------
</TABLE>
In November 1998, the Company sold its 25% interest in the joint venture known
as Downtown Properties LLC for approximately $5.5 million. The company
recognized a gain on sale of approximately $4.1 million.
The agreement for one of the investments with non-affiliates, known as Hilltop
Colony LLC, was amended in 1997, resulting in approximately $335,000 of
additional net income allocated to the Company in 1997.
NOTE 6--CONTRACTS, FURNITURE, FIXTURES AND EQUIPMENT AND OTHER ASSETS
In July 1998, the Company allocated approximately $7.3 million to the property
management contracts acquired as part of the acquisition of Heitman Properties,
Ltd. The Company is amortizing these contracts over a 7 year period. In 1998,
the Company recorded $545,000 in amortization expense for these contracts.
Contracts, furniture fixtures, equipment and other assets consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Contracts $7,262,000
Office furniture and equipment $ 192,000 851,000
Leasehold improvements 20,000
Equipment under capital leases 44,000 6,000
--------- ---------
256,000 8,119,000
Less accumulated depreciation and amortization (100,000) (706,000)
--------- ---------
156,000 7,413,000
Prepaid insurance, taxes and commissions 337,000 671,000
Loan fees 225,000 130,000
Deposits and prepaid rents 120,000 386,000
Investments in marketable securities 250,000
Other 167,000 388,000
--------- ---------
$1,005,000 $9,238,000
--------- ---------
--------- ---------
</TABLE>
F-17
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 7--BORROWINGS UNDER LINES OF CREDIT
In 1998, the Company entered into a loan agreement that provides the Company
with a $21 million revolving credit facility (the "facility"). The facility is
available for acquisitions and working capital. The loans under the facility
bear interest at LIBOR plus 2%, payable monthly. At December 31, 1998, LIBOR was
approximately 5.1%. The facility expires in June 2000. The principal amount of
outstanding loans was $13,057,000 at December 31, 1998 and $8,952,000 at
December 31, 1997.
The Company's Japanese subsidiary has unsecured yen denominated lines of credit
pursuant to which it can borrow up to $1.0 million. At December 31, 1998, yen
borrowings in the principal amount of $457,000 were outstanding under these
lines of credit and $87,000 at December 31, 1997. These borrowings bear interest
rates from 1.9% to 2.6% per annum.
NOTE 8--NOTES PAYABLE
Notes payable were incurred primarily in connection with the acquisition of
notes receivable (See Note 3), and include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998
--------- ----------
<S> <C> <C>
Note payable to FBR Asset Investment Corporation, fixed interest
rate of 17% per annum, 13% payable monthly, 4% payable at
maturity, due in full at the earlier of (i) the closing of a
public offering or (ii) June 3, 1999, whichever comes first $7,500,000
Note payable, fixed interest rate of 12%, interest payable monthly,
due July 1, 1999, collateralized by a note receivable 2,289,000
Note payable, variable interest rate based on Prime Rate plus 1.5%,
payable monthly, 9.25% at December 31, 1998, due April 30, 1999 502,000
Note payable, variable interest based on Prime Rate plus 4%, 11.75%
at December 31, 1998, collateralized by a 3,000-acre parcel of
land in Hawaii due April 30, 1999 4,000,000
Note payable, variable interest rate based on Prime Rate plus 1.5%,
payable monthly, 10% at December 31, 1997 due June 1998 $1,000,000
Note payable, variable interest rate based on Prime Rate plus 1.5%,
payable monthly, 10% at December 31, 1997 due May 1998 3,764,000
--------- ----------
$4,764,000 $14,291,000
--------- ----------
--------- ----------
</TABLE>
F-18
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 9--MORTGAGE LOANS PAYABLE
Mortgage loans payable include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998
------------ -----------
<S> <C> <C>
COMMERCIAL PROPERTIES:
Mortgage note payable, variable interest based on the LIBOR plus
1.75%, 7.50% at December 31, 1998, principal and interest
payable monthly, due December 1, 2004, collateralized by 301
S. Fair Oaks., Pasadena, California $ 7,300,000 $ 7,613,000
Mortgage note payable, fixed interest of 10%, principal and
interest payable from excess cash flow as defined, due
November 24, 2007, collateralized by 301 S. Fair Oaks.,
Pasadena, California 1,250,000 1,250,000
Mortgage note payable, variable interest based on LIBOR plus
3.5%, 8.75% at December 31, 1998, principal and interest
payable monthly, due March 31, 2001, collateralized by 6380
Wilshire., Los Angeles, California 13,263,000
Mortgage note payable, variable interest based on LIBOR plus 4%,
9.22% at December 31, 1998, interest payable monthly, due
March 31, 2001, secured by common shares of the single purpose
entity holding title to 6380 Wilshire., Los Angeles,
California 2,561,000
Mortgage note payable, variable interest base on Prime Rate plus
1.5%, 9.25% at December 31, 1998, principal and interest
payable monthly, due January 30, 2001, collateralized by 5900
Sepulveda., Los Angeles, California 4,951,000
Mortgage note payable, variable interest based on LIBOR plus 4%,
9.22% at December 31, 1998, interest payable monthly, due
January 23, 2001, secured by common shares of the single
purpose entity holding title to 5900 Sepulveda., Los Angeles,
California 1,610,000
Mortgage note payable, variable interest based on LIBOR plus
4.88%, 10.44% at December 31, 1998, principal and interest
payable monthly, due February 28, 2001, collateralized by 1055
Wilshire, Los Angeles, California 10,894,000
Mortgage note payable, variable interest based on LIBOR plus
2.5%, 8.10% at December 31, 1998, interest payable monthly,
due February 28, 2001, collateralized by 1055 Wilshire, Los
Angeles, California 7,948,000
Mortgage note payable, variable interest based on LIBOR plus 4%,
9.22% at December 31, 1998, principal and interest payable
monthly, due February 28, 2001, secured by common shares of
the single purpose entity holding title to 1055 Wilshire., Los
Angeles, California 4,688,000
</TABLE>
F-19
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
Mortgage note payable, variable interest base on the monthly
weighted average interest rate for the Eleventh District
Savings and Loan Associations plus 2.5%, 10% at December 31,
1998, principal and interest payable monthly, due May 1, 2002,
collateralized by an automotive center in Monrovia, California 1,096,000
Mortgage note payable, variable interest base on LIBOR plus
3.56%, 9.12% at December 31, 1998, principal and interest
payable monthly, due September 11, 2001, collateralized by
6255 Sunset, Los Angeles, California 28,500,000
Mortgage note payable, variable interest base on LIBOR plus 4%,
9.22% at December 31, 1998, principal and interest payable
monthly, due September 15, 2001, secured by common shares of
the single purpose entity holding title to 6255 Sunset., Los
Angeles, California 5,300,000
Mortgage note payable, variable interest base on LIBOR plus
3.56%, 9.12% at December 31, 1998, principal and interest
payable monthly, due September 11, 2001, collateralized by
7080 Hollywood, Los Angeles, California 16,800,000
Mortgage note payable, variable interest base on LIBOR plus 4%,
9.22% at December 31, 1998, principal and interest payable
monthly, due August 30, 2001, secured by common shares of a
single purpose entity holding title to 7080 Hollywood., Los
Angeles, California 3,359,000
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.,
Santa Monica, California 2,952,000
Mortgage note payable, variable interest based on Prime Rate
plus 1%, 9.50% at December 31, 1998, principal and interest
payable monthly, due September 1, 2003, collateralized by 15th
Street lot., Santa Monica, California 885,000
------------ -----------
12,387,000 109,833,000
------------ -----------
</TABLE>
F-20
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
RESIDENTIAL PROPERTIES:
Mortgage note payable, variable interest base on Prime Rate plus
1.25%, 9% at December 31, 1998, principal and interest payable
monthly, due March 1, 1999, collateralized by 23 housing lots
in Palm Desert, California 2,191,000
Mortgage note payable, variable interest base on Prime Rate plus
1.5%, 9.25% at December 31, 1998, interest payable monthly,
due March 19, 1999, collateralized by three single family
homes located in Pacific Palisades, California 1,628,000
Mortgage note payable, variable interest base on Prime Rate plus
1%, 8.75% at December 31, 1998, interest payable monthly, due
November, 20 1999, collateralized by 112 housing lots in
Cathedral City, California 1,478,000
Mortgage note payable, variable interest base on Prime Rate plus
4%, 9.25% at December 31, 1997, principal and interest payable
monthly, due October 31, 1999, collateralized by 10
residential homes, Granada Hills, California 2,294,000
Mortgage note payable, variable interest base on Prime Rate plus
1.5%, interest payable monthly, due November, 20 1999,
collateralized by 14 condominium units, Corona Del Mar,
California 421,000
------------ -----------
2,715,000 5,297,000
------------ -----------
Total Mortgage Loans Payable $ 15,102,000 $115,130,000
------------ -----------
------------ -----------
</TABLE>
All of the mortgage loans payable are secured by deeds of trust on the
respective real estate properties (See Note 4). Aggregate maturities of notes
and mortgage notes payable are as follows:
<TABLE>
<S> <C>
1999 $ 5,582,000
2000 408,000
2001 99,412,000
2002 1,114,000
2003 83,000
Thereafter 8,531,000
-----------
$115,130,000
-----------
-----------
</TABLE>
F-21
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 10--SUBORDINATED DEBT
In July 1998, the Company incurred $21 million in subordinated debt to finance
its purchase of Heitman Properties, Ltd. The debt has a fixed interest rate of
14%, payable monthly and a maturity date of January 15, 2000. The Company has
the option to prepay $7 million after January 15, 1999 and before July 16, 1999
and the option to prepay $14 million thereafter. The debt is secured by the
common stock of a wholly-owned subsidiary Kennedy-Wilson Properties, Ltd.
NOTE 11--RELATED PARTY TRANSACTIONS
On November 5, 1998, Goodwin Gaw resigned from his position as a member of our
Board of Directors. On November 10, 1998, we purchased from Mr. Gaw 135,000
shares (as adjusted for the December 15, 1998 50% stock dividend) of our common
stock for $6.716 per share for a total of $906,750. The closing price for our
shares on the NASDAQ National Market on that date was $7.281 per share. All
135,000 shares were subsequently retired. As at December 31, 1998 Mr. Gaw no
longer had an ownership interest in the Company, and had resigned from his
positions with the Company.
In March 1998, the Company acquired 40% interest in a joint venture Beverly
Crescent, LLC, with a former related party. The joint venture which purchased a
note collateralized by a hotel in Beverly Hills, CA. The Company's original
investment was approximately $300,000. In May 1998, the Company sold its
interest in the joint venture and recorded a gain of approximately $298,000.
In January 1998, the Company acquired a 15% interest in a joint venture Downtown
Properties, NY. LLC, with a former related party, which owns a commercial
property with approximately 1.0 million square foot of rental space, located in
Manhattan, New York. The Company's investment at December 31, 1998 was
approximately $4.2 million.
In 1998, the firm of Kulik, Gottesman & Mouton Ltd., was paid a total of
$496,000 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 $27,500 in
director's fees. For 1997, the amounts were $470,000 and $21,000, respectively.
In 1997, the Company entered into a joint venture with parties who are
affiliated with Goodwin Gaw, who at that time, was one of the Company's Managing
Directors, a member of the Board of Directors, and a significant stockholder.
The joint venture was formed to invest in a Los Angeles office building. See
Note 5.
During 1998 and 1997, the Company received brokerage and leasing commissions
from affiliates and partnerships with related parties in the amounts of
$1,201,000 and $894,000 respectively.
During 1998 and 1997, the Company received $179,000 and $156,000, respectively,
in commissions from the sale of properties owned by a partnership which includes
William J. McMorrow, the Company's Chief Executive Officer and Chairman of the
Board, and Lewis A. Halpert, a director, Executive Managing Director and
President of the Company's Brokerage Group, as principals. The Company was also
reimbursed $210,000 for marketing expenses in 1997.
In 1996, the Company accrued and subsequently paid $209,000 as profit
participation to William J. McMorrow and Lewis A. Halpert for a loan advanced to
the Company in 1995. The loan terms were reviewed and approved by disnterested
members of the Company's Board of Directors.
F-22
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 12--INCOME TAXES
The provisions for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Current
Federal $ 80,000 $ 104,000
State $ 60,000 200,000 105,000
--------- --------- ---------
60,000 280,000 209,000
Deferred 628,000
--------- --------- ---------
Total $ 60,000 $ 280,000 $ 837,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Tax computed at statutory rate $1,200,000 $1,472,000 $2,156,000
State income net of federal benefit 40,000 132,000 145,000
Loss on disposition of foreign subsidiary (1,189,000)
Foreign income 153,000 (119,000)
Usage of net operating loss carryforward (1,490,000) (1,361,000)
Other 9,000 13,000 16,000
--------- --------- ---------
Provision for income taxes $ 60,000 $ 280,000 $ 837,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-23
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
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 carryforwards which give rise to deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------------- ----------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Prepaid expenses $ (117,000) $ (208,000)
Accrued reserves $ 110,000 $ 267,000
Deferred auction marketing expenses 22,000 51,000
Foreign subsidiary 1,647,000
Deferred gain on sale of asset (791,000)
Asset basis and depreciation differences 372,000 (3,454,000)
Charitable contribution carryover 26,000
Federal net operating loss carryover 1,719,000 74,000
Valuation allowance (1,341,000)
------------- ----------- ------------- -------------
Total $ 908,000 $ (908,000) $ 2,039,000 $ (3,662,000)
------------- ----------- ------------- -------------
------------- ----------- ------------- -------------
</TABLE>
As of December 31, 1998, the Company has available a net operating loss
carryforward approximately $219,000 to offset future federal taxable income.
This carryforward expires through the year 2011. The Company has tax credits to
carryforward of approximately $173,000 to offset future federal income taxes.
NOTE 13--COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS--Future minimum rental commitments, net of sublease income, as
of December 31, 1998 under the non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1999 $ 1,865,000
2000 1,748,000
2001 1,687,000
2002 933,000
2003 612,000
Thereafter
------------
Future minimum lease payments $ 6,845,000
------------
------------
</TABLE>
Approximately $2,627,000 is due the Company in years 1999 through 2002 under
sublease agreements.
Rental expense amounted to $931,000, $433,000, and $200,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
EMPLOYMENT AGREEMENTS--The Company has entered into employment agreements with
all of its principal officers which provide for annual base compensation in the
aggregate amount of $1,255,000 and expire at various dates through December
1999. The employement 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
F-24
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
for minimum annual compensation of $2,021,000 in total, and expiring at various
dates through December 1999.
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 14--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 1,080,000 shares of common stock
are reserved for issuance under Plan A and B. The Company has 81,000 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 13,500 shares at the fair market
value at the date of grant. Additionally, each director is granted an option to
purchase an additional 540 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, options expire on the earlier of the tenth anniversary
of the date of grant and 90 days after the individual ceases to be a director of
the Company.
F-25
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
Details of activity under the plans for the years ended December 31, 1996, 1997
and 1998 are as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISE PRICE WEIGHTED AVERAGE
STOCK OPTIONS OPTIONS PER SHARE EXERCISE PRICE
- ---------------------------------------------- ----------- -------------- -----------------
<S> <C> <C> <C>
Balance January 1, 1996 163,782 $ 12.96-$0.93 $ 8.11
Granted 162,540 $ 1.55-$0.95 $ 1.23
Forfeited (28,836) $ 12.96 $ 12.96
-----------
Balance December 31, 1996 297,486 $ 12.96-$0.93 $ 3.72
Granted 558,000 $ 3.72-$2.17 $ 2.61
Forfeited (23,166) $ 12.96-$2.17 $ 12.96
-----------
Balance December 31, 1997 832,320 $ 12.96-$2.17 $ 2.72
Granted 420,900 $ 3.67-$8.33 $ 6.74
Exercised (120,450) $ 0.95-$3.73 $ 1.63
Forfeited (16,200) $ 3.01-$7.41 $ 3.74
-----------
Balance December 31, 1998 1,116,570 $ 0.95-$8.33 $ 4.11
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
RANGE OF NUMBER OF WEIGHTED AVERAGE EXERCISABLE
EXERCISE OUTSTANDING SHARES WEIGHTED AVERAGE REMAINING SHARES
PRICES AT 12/31/98 EXERCISE PRICE CONTRACTUAL LIFE AS OF 12/31/98
- -------------- ------------------ ----------------- ------------------- -----------------
<S> <C> <C> <C> <C>
$ 1.00- $1.07 108,000 $ 1.01 2.02 72,000
$ 1.55- $2.13 378,000 $ 1.96 3.18 117,000
$ 3.33- $3.72 295,800 $ 3.67 3.90 56,550
$ 7.00- $8.33 292,650 $ 7.81 4.65
$ 0.93-$12.96 42,120 $ 8.67 4.81 42,120
---------- -------
1,116,570 287,670
---------- -------
---------- -------
</TABLE>
The Company has adopted the disclosure-only provision of SFAS No. 123,
"ACCOUNTING FOR STOCK-BASED COMPENSATION" and will continue to use the intrinsic
value based method of accounting prescribed by APB Opinion No. 25, "ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES," and related interpretations. Accordingly, no
compensation cost has been recognized for the options granted under the Stock
Plan. Had compensation cost for the Company's Stock Plan been determined based
on the fair value at the grant date consistent with the provisions of SFAS No.
123, the Company's net income on a pro forma basis at December 31, 1998 would
have been $4,114,085. In addition, on a pro forma basis, the Company's basic and
diluted net income per share at December 31, 1998, would have been $0.66 and
$0.60, respectively. The effect for 1997 and 1996, was not disclosed as it was
not material.
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: (a) no dividend yield, (b) expected volatility of the Company's
stock of 63%, (c) risk free interest rate of 4.75%, (d) expected option life of
three years. The effects of applying SFAS No. 123 may not be representative of
the effects on disclosed pro forma net income for future years because options
vest over several years and additional awards can be made each year.
F-26
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 15--CAPITAL STOCK TRANSACTIONS
ISSUANCE OF CAPITAL STOCK AND WARRANTS
In July 1998, Colony Investors III, L.P. acquired a 10% equity position in the
Company. The purchase involved a private placement sale of 660,128 shares of the
Company's common stock and warrants exercisable for seven years to purchase
198,039 shares of the Company's common stock.
In June 1998, as part of the loan (see Note 8) obtained from FBR Assets
Investment Corporation, the Company issued warrants of 131,096 shares which
represent 2% of the outstanding shares on a fully diluted bases on June 3, 1998.
The warrants have an exercise price of $7.56 per share which reflects the
average of the closing price for a share of Common Stock on NASDAQ for the
twenty business days proceeding December 4, 1998. The warrants have an
expiration date of June 3, 2003.
STOCK REPURCHASE
In November 1998, the Company purchased 90,000 shares of the Company's stock
from a former officer and director. (Note 11)
STOCK DIVIDEND
In December 1998, the Company declared a 3 for 2 stock split in the form of a
50% dividend. In March 1998, the Company declared a 3 for 1 stock split in the
form of a 200% stock dividend. In October 1997, the Company declared a twenty
percent stock dividend. All historical share and per share amounts have been
retroactively restated to reflect the dividends.
INCREASE IN AUTHORIZED CAPITAL
On April 29, 1998 at a Regular Meeting of the Company's stockholders, the
Company's Certificate of Incorporation was amended to increase the authorized
capital stock to 10 million of common shares and 2 million preferred shares. On
December 15, 1997, at a Special Meeting of the Stockholders, an amendment to the
Company's Certificate of Incorporation was passed 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 16--EMPLOYEE BENEFIT ARRANGEMENTS
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, 1998, 1997 and 1996.
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 1998 and 1997 the Company made matching contributions of $27,000 and
$24,000, respectively to this plan.
F-27
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
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 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 1998 and 1997, the Company
made matching contributions of $1,078,000 and $314,000, respectively.
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. As at December 31, 1998 and 1997 $204,000 and $1,320,000 were
outstanding on these loans, respectively.
NOTE 17--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.
F-28
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 18--SEGMENT INFORMATION
The Company's business activities currently consist of property management,
commercial and residential brokerage, and various type of real estate
investments.
In the 1998 property management segment, approximately $7.4 million or 52% of
the fees are generated by property management contracts with Heitman Financial
Ltd.
The following tables reconcile the Company's income and expense activity for the
year ended December 31, 1996 and balance sheet data as of December 31, 1996.
1996 RECONCILIATION OF REPORTABLE SEGMENT INFORMATION
<TABLE>
<CAPTION>
BROKERAGE INVESTMENTS CORPORATE CONSOLIDATED
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 5,888,000 $ 25,983,000 $ 96,000 $ 31,967,000
Operating expenses 5,087,000 20,037,000 3,252,000 28,376,000
------------ ------------- ------------- -------------
Income before provision for income taxes 801,000 5,946,000 (3,156,000) 3,591,000
Provision for income taxes 60,000 60,000
------------ ------------- ------------- -------------
Net income $ 801,000 $ 5,946,000 $ (3,216,000) $ 3,531,000
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
BROKERAGE INVESTMENTS CORPORATE CONSOLIDATED
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Total assets $ 1,154,000 $ 48,387,000 $ 1,573,000 $ 51,114,000
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Total liabilities $ 774,000 $ 29,484,000 $ 10,474,000 $ 40,732,000
Stockholders' equity 380,000 18,903,000 (8,901,000) 10,382,000
------------ ------------- ------------- -------------
Total liabilities and stockholders' equity $ 1,154,000 $ 48,387,000 $ 1,573,000 $ 51,114,000
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
F-29
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
The following tables reconcile the Company's income and expense activity for the
year ended December 31, 1997 and balance sheet data as of December 31, 1997.
1997 RECONCILIATION OF REPORTABLE SEGMENT INFORMATION
<TABLE>
<CAPTION>
BROKERAGE INVESTMENTS CORPORATE CONSOLIDATED
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 5,895,000 $ 21,085,000 $ 19,000 $ 26,999,000
Operating expenses 4,719,000 12,502,000 5,547,000 22,768,000
------------ ------------- ------------- -------------
Income before provision for income taxes 1,176,000 8,583,000 (5,528,000) 4,231,000
Provision for income taxes 280,000 280,000
------------ ------------- ------------- -------------
Income before provision for extraordinary items 1,176,000 8,583,000 (5,808,000) 3,951,000
Extraordinary items 213,000 (134,000) 79,000
------------ ------------- ------------- -------------
Net income $ 1,176,000 $ 8,796,000 $ (5,942,000) $ 4,030,000
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
BROKERAGE INVESTMENTS CORPORATE CONSOLIDATED
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Total assets $ 1,132,000 $ 37,117,000 $ 7,469,000 $ 45,718,000
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Total liabilities $ 290,000 $ 19,919,000 $ 13,915,000 $ 34,124,000
Stockholders' equity 842,000 17,198,000 (6,446,000) 11,594,000
------------ ------------- ------------- -------------
Total liabilities and stockholders' equity $ 1,132,000 $ 37,117,000 $ 7,469,000 $ 45,718,000
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
F-30
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
The following tables reconcile the Company's income and expense activity for the
year ended December 31, 1998 and balance sheet data as of December 31, 1998.
1998 RECONCILIATION OF REPORTABLE SEGMENT INFORMATION
<TABLE>
<CAPTION>
PROPERTY
MANAGEMENT BROKERAGE INVESTMENTS CORPORATE CONSOLIDATE
------------- ------------ ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 14,194,000 $ 4,917,000 $ 31,604,000 $ 157,000 $ 50,872,000
Operating expenses 8,311,000 3,182,000 22,250,000 10,967,000 44,710,000
------------- ------------ ------------- -------------- -------------
Income before provision for income
taxes 5,883,000 1,735,000 9,354,000 (10,810,000) 6,162,000
Provision for income taxes 837,000 837,000
------------- ------------ ------------- -------------- -------------
Net income $ 5,883,000 $ 1,735,000 $ 9,354,000 $ (11,647,000) $ 5,325,000
------------- ------------ ------------- -------------- -------------
------------- ------------ ------------- -------------- -------------
</TABLE>
<TABLE>
<CAPTION>
MANAGEMENT BROKERAGE INVESTMENTS CORPORATE CONSOLIDATED
------------- ------------ -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Total assets $ 27,697,000 $ 2,368,000 $ 160,537,000 $ 14,214,000 $ 204,816,000
------------- ------------ -------------- ------------- --------------
------------- ------------ -------------- ------------- --------------
Total liabilities $ 3,111,000 $ 959,000 $ 128,034,000 $ 28,932,000 $ 161,036,000
Subordinated debt 21,000,000 21,000,000
Stockholders' equity 24,586,000 1,409,000 32,503,000 (35,718,000) 22,780,000
------------- ------------ -------------- ------------- --------------
Total liabilities and stockholders'
equity $ 27,697,000 $ 2,368,000 $ 160,537,000 $ 14,214,000 $ 204,816,000
------------- ------------ -------------- ------------- --------------
------------- ------------ -------------- ------------- --------------
</TABLE>
F-31
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 19--UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
The following pro forma consolidated statement of income give effect to the
acquisition of all of the outstanding shares of Heitman Properties, Ltd, a
property management company, in July 1998. The pro forma adjustments are based
upon available information and certain assumptions that the Company believes are
reasonable. This unaudited pro forma condensed consolidated information does not
purport to represent what the actual results of operations of the Company would
have been assuming the acquisition had been completed as set forth above, nor do
they purport to predict the results of operations for future periods.
<TABLE>
<CAPTION>
1997 1998
PRO FORMA PRO FORMA
------------- -------------
<S> <C> <C>
Total Revenue $ 63,525,000 $ 68,737,000
Total Operating Expenses 50,074,000 58,957,000
------------- -------------
Income Before Income Taxes 13,451,000 9,780,000
Provision for Income Taxes 3,691,000 2,176,000
------------- -------------
Net Income $ 9,760,000 $ 7,604,000
------------- -------------
------------- -------------
Share data
Pro forma basic net income per share $ 1.60 $ 1.22
Pro forma basic weighted average shares 6,104,497 6,254,470
Pro forma diluted net income per share $ 1.58 $ 1.12
Pro forma diluted weighted average shares 6,187,280 6,801,356
</TABLE>
F-32
<PAGE>
KENNEDY-WILSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 20--UNAUDITED CONSOLIDATED QUARTERLY INFORMATION
<TABLE>
<CAPTION>
1997
-------------------------------------------------------
THREE MONTHS ENDED
-------------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues $ 5,870,000 $ 3,966,000 $ 5,814,000 $ 11,349,000
Total operating expenses 5,234,000 3,767,000 5,282,000 8,485,000
------------ ------------ ------------ -------------
Income before provision for taxes and extraordinary
items 636,000 199,000 532,000 2,864,000
Provision for income taxes 50,000 50,000 65,000 115,000
------------ ------------ ------------ -------------
Income before extraordinary items 586,000 149,000 467,000 2,749,000
Extraordinary items -- 288,000 -- (209,000)
------------ ------------ ------------ -------------
Net income $ 586,000 $ 437,000 $ 467,000 $ 2,540,000
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
SHARE DATA
Basic income per share before extraordinary items $ 0.09 $ 0.02 $ 0.08 $ 0.46
Basic net income per share $ 0.09 $ 0.07 $ 0.08 $ 0.43
Basic weighted average shares 6,463,211 6,075,270 5,957,469 5,932,058
Diluted income per share before extraordinary items $ 0.09 $ 0.02 $ 0.08 $ 0.45
Diluted net income per share $ 0.09 $ 0.07 $ 0.08 $ 0.42
Diluted weighted average shares 6,528,483 6,151,593 6,065,619 6,057,639
</TABLE>
<TABLE>
<CAPTION>
1998
--------------------------------------------------------
THREE MONTHS ENDED
--------------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 (I) DEC. 31 (I)
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 4,397,000 $ 6,459,000 $ 20,834,000 $ 19,182,000
Total operating expenses 3,625,000 6,221,000 19,132,000 15,732,000
------------ ------------ ------------- -------------
Income before provision for taxes 772,000 238,000 1,702,000 3,450,000
Provision for income taxes 98,000 36,000 311,000 392,000
------------ ------------ ------------- -------------
Net income $ 674,000 $ 202,000 $ 1,391,000 $ 3,058,000
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
SHARE DATA
Basic net income per share $ 0.11 $ 0.03 $ 0.21 $ 0.46
Basic weighted average shares 5,924,800 5,954,943 6,520,855 6,606,858
Diluted net income per share $ 0.11 $ 0.03 $ 0.20 $ 0.43
Diluted weighted average shares 6,366,289 6,583,598 7,093,199 7,150,513
</TABLE>
- ------------------------
(i) includes acquisition of Heitman Properties, Ltd.
F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder
of Heitman Properties Ltd.
We have audited the accompanying consolidated balance sheets of Heitman
Properties Ltd. (an Illinois Corporation) and subsidiaries (the "Company") as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholder's equity, and cash flows for each of the three years in
the period ended December 31, 1997. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Heitman
Properties Ltd. and subsidiaries at December 31, 1997 and 1996, and the
consolidated 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.
DELOITTE & TOUCHE LLP
Los Angeles, California
July 10, 1998
F-34
<PAGE>
HEITMAN PROPERTIES LTD.
(A WHOLLY OWNED SUBSIDIARY OF HEITMAN FINANCIAL LTD.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1996 1997 1998
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ 53,000 $ 157,000 $ 149,000
Commissions and fees receivable, related party (Note
3) 3,594,000 3,696,000 1,393,000
Prepaid and other 688,000 659,000 226,000
---------- ---------- ----------
Total current assets 4,335,000 4,512,000 1,768,000
---------- ---------- ----------
Advances to affiliate (Note 2) 1,993,000 5,668,000 8,946,000
---------- ---------- ----------
Property and equipment--
Net of accumulated depreciation and
amortization (Note 4) 2,526,000 2,174,000 1,809,000
---------- ---------- ----------
Property management contracts--
Net of amortization (Note 2) 26,388,000 11,558,000 10,453,000
---------- ---------- ----------
TOTAL ASSETS $35,242,000 $23,912,000 $22,976,000
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 871,000 $ 854,000 $ 591,000
Accrued salaries and bonuses 1,338,000 1,259,000 1,438,000
---------- ---------- ----------
Total current liabilities 2,209,000 2,113,000 2,029,000
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
Stockholder's equity 33,033,000 21,799,000 20,947,000
---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $35,242,000 $23,912,000 $22,976,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-35
<PAGE>
HEITMAN PROPERTIES LTD.
(A WHOLLY OWNED SUBSIDIARY OF HEITMAN FINANCIAL LTD.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME
Property management fees--related party
(Note 3) $40,175,000 $35,980,000 $ 30,922,000 $17,430,000 $14,638,000
Other--related part (Note 3):
Leasing commissions, net 1,902,000 1,755,000 2,526,000 1,113,000 897,000
Construction and development 3,165,000 3,673,000 2,480,000 1,080,000 713,000
Accounting fees 575,000 809,000 585,000 295,000 227,000
Other 17,000 5,000 13,000 10,000 15,000
----------- ----------- ------------ ----------- -----------
Total income 45,834,000 42,222,000 36,526,000 19,928,000 16,490,000
----------- ----------- ------------ ----------- -----------
EXPENSES
Compensation and related expenses 19,969,000 20,299,000 15,789,000 8,116,000 7,688,000
General and administrative 6,116,000 4,618,000 3,991,000 1,927,000 1,707,000
Rent, related party (Notes 3 and 6) 3,981,000 2,396,000 1,976,000 1,016,000 891,000
Management fees and administrative,
related party (Note 3) 12,568,000 14,369,000 13,150,000 6,583,000 5,557,000
Depreciation and amortization 2,718,000 2,953,000 2,854,000 1,514,000 1,499,000
Provision for loss on note receivable
(Note 7) 2,000,000
Provision for loss on management
contracts (Note 2) 10,000,000
----------- ----------- ------------ ----------- -----------
Total expenses 45,352,000 46,635,000 47,760,000 19,156,000 17,342,000
----------- ----------- ------------ ----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR
(BENEFIT IN LIEU OF) INCOME TAXES 482,000 (4,413,000) (11,234,000) 772,000 (852,000)
PROVISION FOR (BENEFIT IN LIEU OF) INCOME
TAXES (Note 5) 232,000 (232,000) 309,000
----------- ----------- ------------ ----------- -----------
NET INCOME (LOSS) $ 250,000 $(4,181,000) $(11,234,000) $ 463,000 $ (852,000)
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-36
<PAGE>
HEITMAN PROPERTIES LTD.
(A WHOLLY OWNED SUBSIDIARY OF HEITMAN FINANCIAL LTD.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
THREE YEARS ENDED DECEMBER 31, 1997 AND
THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
--------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1995 $ 40,000 $ 35,476,000 $ 1,448,000 $ 36,964,000
Net income 250,000 250,000
--------- ------------- -------------- -------------
Balance, December 31, 1995 40,000 35,476,000 1,698,000 37,214,000
Net loss (4,181,000) (4,181,000)
--------- ------------- -------------- -------------
Balance, December 31, 1996 40,000 35,476,000 (2,483,000) 33,033,000
Net loss (11,234,000) (11,234,000)
--------- ------------- -------------- -------------
Balance, December 31, 1997 40,000 35,476,000 (13,717,000) 21,799,000
Net loss (Unaudited) (852,000) (852,000)
--------- ------------- -------------- -------------
Balance, June 30, 1998
(Unaudited) $ 40,000 $ 35,476,000 $ (14,569,000) $ 20,947,000
--------- ------------- -------------- -------------
--------- ------------- -------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE>
HEITMAN PROPERTIES LTD.
(A WHOLLY OWNED SUBSIDIARY OF HEITMAN FINANCIAL LTD.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 250,000 $(4,181,000) $(11,234,000) $ 463,000 $ (852,000)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization 2,718,000 2,953,000 2,854,000 1,514,000 1,499,000
Provision for (benefit in lieu
of) income taxes 232,000 (232,000) 309,000
Provision for loss on note
receivable 2,000,000
Provision for loss on management
contracts 10,000,000
Decrease (increase) in:
Accounts receivable (515,000) (1,313,000) (102,000) 3,032,000 2,303,000
Prepaid and other assets (586,000) 240,000 29,000 (327,000) 433,000
Accounts payable and accrued
expenses (414,000) 181,000 (17,000) (459,000) (263,000)
Accrued salaries and bonuses (351,000) (79,000) (937,000) 179,000
---------- ---------- ----------- ---------- ----------
Net cash provided by (used in)
operating activities 1,685,000 (703,000) 1,451,000 3,595,000 3,299,000
---------- ---------- ----------- ---------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Expenditures for property and
equipment (572,000) (1,179,000) (424,000) (146,000) (29,000)
Guaranteed property management
fees 412,000 1,620,000 2,752,000
---------- ---------- ----------- ---------- ----------
Net cash (used in) provided by
investing activities (160,000) 441,000 2,328,000 (146,000) (29,000)
---------- ---------- ----------- ---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
(Advances to) repayments from
affiliate (1,452,000) 175,000 (3,675,000) (3,046,000) (3,278,000)
---------- ---------- ----------- ---------- ----------
Net increase (decrease) in cash 73,000 (87,000) 104,000 403,000 (8,000)
CASH, BEGINNING OF PERIOD 67,000 140,000 53,000 53,000 157,000
---------- ---------- ----------- ---------- ----------
CASH, END OF PERIOD $ 140,000 $ 53,000 $ 157,000 $ 456,000 $ 149,000
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-38
<PAGE>
HEITMAN PROPERTIES LTD.
(A WHOLLY OWNED SUBSIDIARY OF HEITMAN FINANCIAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997 AND
THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
1. ORGANIZATION
ORGANIZATION--Heitman Properties Ltd. ("HPL," or the "Company") is a 100% owned
subsidiary of Heitman Financial Ltd. ("HFL"), which in turn is a 100% owned
subsidiary of United Asset Management Corporation ("UAM"). The Company provides
commercial real estate services in the United States. Its principal lines of
business include property management, brokerage, infrastructure management, and
leasing services.
As a routine part of the Company(1)s operations, HPL provides on-site personnel
to maintain properties under management. These services include, although are
not limited to, janitorial, engineering and security. Based upon contractual
arrangements with the property owners, the Company is reimbursed by the
properties for the actual cost of its employees.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION--The accompanying consolidated financial statements include the
accounts of the Heitman Properties Ltd. and its wholly-owned subsidiaries.
Material intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION--The Company recognizes fees from property management
services and infrastructure management services over the terms of the respective
management contracts. Most of the property management contracts are cancelable
at will or with 30 days notice. The infrastructure management contracts
generally range from three to five years.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents consist of cash and
short-term, highly liquid investments with maturities of 90 days or less when
purchased.
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS--Furniture and equipment are
stated at cost. Depreciation is computed using the straight-line method over
useful lives ranging from 3 to 10 years. Leasehold improvements are amortized
over the lease term.
ADVANCES TO AFFILIATE--Advances are between HFL and HPL, are non-interest
bearing and have no stated terms for repayment.
PROPERTY MANAGEMENT CONTRACTS--Property management contracts are stated at cost,
net of accumulated amortization of $16,134,000 (1997) and $4,852,000 (1996).
Costs assigned to contracts relate to purchased property management contracts
contributed to the Company by UAM. The cost of contracts is being amortized over
15 years.
During 1997, management reassessed the recorded value of capitalized property
management contracts. Based upon the fact that a significant proportion of the
contracts purchased and under management were expected to be terminated due to
the intentions of various investors to dispose of their real property managed
under these contracts, the Company recorded an impairment charge of $10,000.00
against the cost of previously acquired management contracts.
F-39
<PAGE>
HEITMAN PROPERTIES LTD.
(A WHOLLY OWNED SUBSIDIARY OF HEITMAN FINANCIAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997 AND
THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
The former owner of the purchased management contracts provided guarantees to
reimburse the Company for certain managed property contracts should the
contracts be terminated prematurely. These amounts, as received, have been
applied as a reduction of the cost of the original contracts.
INCOME TAXES--The Company accounts for income taxes using the liability method.
Deferred income taxes result from temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for federal income tax purposes, and are measured using the enacted
tax rates and laws that will be in effect when the differences reverse. Deferred
income taxes are not material for any period.
HPL files a consolidated state income tax return with its Parent, HFL, and is
included in the consolidated federal tax return of HFL's parent, UAM. HPL remits
payments in settlement of all current and deferred income tax obligations to
HFL, which in turn remits such payments to UAM. The portion of such payments
attributable to HPL is netted against amounts due from HFL in the accompanying
balance sheet.
CONCENTRATION OF CREDIT RISK--The Company provides services to owners of real
estate assets in the United States. The Company performs credit evaluations of
its customers and generally does not require collateral. The risk associated
with this concentration is limited because of the large number of customers and
their geographic dispersion.
LONG-LIVED ASSETS--Long-lived assets, including purchased contracts, are
evaluated when indicators of impairment are present and provisions for possible
losses are recorded when undiscounted cash flows estimated to be generated by
those assets are less than the assets' carrying amount.
USE OF ESTIMATES--The preparation of financial statements requires the Company
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL STATEMENTS--The unaudited interim financial
statements have been prepared in accordance with generally accepted accounting
principles and the rules and regulations of the Securities and Exchange
Commission and reflect all adjustments consisting of normal reoccurring accruals
which are in the opinion of management necessary for fair presentation of the
results of the periods presented.
3. RELATED-PARTY TRANSACTIONS AND COST ALLOCATION
Substantially all of the Company's income is earned from properties that are
asset managed by HFL or an affiliate for its clients. Accordingly, the
accompanying financial statements may or may not necessarily be indicative of
the conditions that would have existed or the results of operations that would
have occurred if the Company had operated without such affiliation.
F-40
<PAGE>
HEITMAN PROPERTIES LTD.
(A WHOLLY OWNED SUBSIDIARY OF HEITMAN FINANCIAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997 AND
THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
HFL pays and allocates certain occupancy costs to HPL based upon space occupied
by HPL employees. Such allocated expenses and were approximately $600,000 for
the six months ended June 30, 1998 and 1997 and $1,200,000, 1997; $1,360,000,
1996; $2,971,000, 1995.
Administrative expenses consisting primarily of employee salaries and related
expenses incurred by Heitman Financial Services Ltd. ("HFSL"), in connection
with the business activities of HFL and all its subsidiaries, are allocated to
its various subsidiaries based upon management's estimates of the time devoted
by employees of HFL to the operations of each Subsidiary. Such expenses
allocated to HPL were approximately as follows: $3,484,000 for the six months
ended June 30, 1998 and $4,510,000 the six months ended June 30, 1997 and
$9,004,000, 1997; $10,635,000, 1996; $8,456,000, 1995.
Based upon the terms of an agreement between HFL, its principal officers and
UAM, HFL remits a portion of its revenues, as defined, to UAM. These totals, as
remitted, are used to satisfy obligations with respect to licensing and
management fees charged by an affiliate of UAM. Such amounts charged to HPL are
as follows: $2,073,000 for the six months ended June 30, 1998 and $2,073,000 for
the six months ended June 30, 1998 and $2,073,000 for the six months ended June
30, 1997 and $4,146,000, 1997; $3,734,000, 1996; $4,112,000, 1995.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following at June 30, 1998 and December
31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30, 1998
1996 1997 -------------
------------- ------------- (UNAUDITED)
<S> <C> <C> <C>
Furniture and equipment $ 4,609,000 $ 5,006,000 $ 5,033,000
Leasehold improvements 1,557,000 1,583,000 1,585,000
Less: accumulated depreciation and amortization (3,640,000) (4,415,000) (4,809,000)
------------- ------------- -------------
Property and equipment, net $ 2,526,000 $ 2,174,000 $ 1,809,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
5. INCOME TAXES
The provision (benefit in lieu of) income taxes consists of the following for
the six month periods ended June 30, and the years ended December 31:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal $ 197,000 $(197,000) $ -- $ 247,000 $ --
State 35,000 (35,000) 62,000
--------- --------- --------- --------- ---------
$ 232,000 $(232,000) $ -- $ 309,000 $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-41
<PAGE>
HEITMAN PROPERTIES LTD.
(A WHOLLY OWNED SUBSIDIARY OF HEITMAN FINANCIAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997 AND
THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
The differences between the provisions for income taxes and the amounts computed
by applying the statutory federal income tax rates to income (loss) before
income taxes consist of the following for the six month periods ended June 30
and the years ended December 31:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Tax (benefit) at statutory rate
applied to income (loss) before
income taxes $ 164,000 $(164,000) $(3,145,000) $ 253,000 $(239,000)
State income taxes, net of federal
income tax benefit 28,000 (28,000) (1,349,000) 56,000 (102,000)
--------- --------- ---------- --------- ---------
192,000 (192,000) (4,494,000) 309,000 (341,001)
Increase in taxes, resulting from non-
deductible meals, entertainment and
other 40,000 (40,000)
Valuation allowance 4,494,000 341,000
--------- --------- ---------- --------- ---------
$ 232,000 $(232,000) $ -- $ 309,000 $ --
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
</TABLE>
The Company has not recorded a tax benefit for the six month period ended June
30, 1998 and the year ended 1997 as no assurance can be provided that these
benefits would be realized in future periods.
6. OPERATING LEASES
The Company has commitments under operating leases for office space and office
equipment. Minimum future rentals under noncancelable operating lease
commitments in effect at June 30 and December 31 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
-------------- -----------
(UNAUDITED)
<S> <C> <C>
1998 $ 961,000 $ 480,000
1999 256,000 256,000
2000 182,000 182,000
2001 15,000 15,000
2002
Thereafter
-------------- -----------
$1,414,000 $ 933,000
-------------- -----------
-------------- -----------
</TABLE>
Rental amounts include fixed operating expense payments but do not include
increases for rate escalations.
F-42
<PAGE>
HEITMAN PROPERTIES LTD.
(A WHOLLY OWNED SUBSIDIARY OF HEITMAN FINANCIAL LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997 AND
THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
7. EMPLOYEE BENEFIT PLANS
The Company's employees participate in a defined contribution savings plan,
which provides the opportunity for pretax contributions by employees. The
Company's contribution expense for the years ended December 31 are as follows:
$170,000, 1997; $200,000, 1996; and $45,000, 1995.
8. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are defendants in lawsuits that arise in the
normal course of business. In management's judgment, the ultimate liability, if
any, from such legal proceedings is not material to the Company's financial
statements.
9. SUBSEQUENT EVENT
Subsequent to December 31, 1997, the parent company, Heitman Financial Ltd.,
entered into an agreement to sell its interest in Heitman Properties Ltd.,
including certain assets and liabilities as defined. The purchase and sale
transaction closed on July 17, 1998.
F-43
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY US OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD
BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN OUR
AFFAIRS OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 8
Special Notes of Caution....................... 20
Use of Proceeds................................ 21
Price Range of Our Common Stock................ 22
Dividend Policy................................ 22
Capitalization................................. 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 24
Business....................................... 36
Management..................................... 50
Security Ownership of Certain Beneficial Owners
and Management............................... 58
Certain Transactions........................... 60
Our Capital Stock.............................. 64
U.S. Federal Income Tax Consequences........... 67
Underwriting................................... 70
Legal Matters.................................. 72
Experts........................................ 72
Additional Information......................... 72
Index to Consolidated Financial Statements..... F-1
</TABLE>
2,000,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
FRIEDMAN BILLINGS RAMSEY
WEDBUSH MORGAN SECURITIES
MAY , 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth those expenses to be incurred by
Kennedy-Wilson, Inc. (the "Company") in connection with the issuance and
distribution of the common stock being registered. All amounts shown except SEC
filing fee are estimates.
<TABLE>
<CAPTION>
ITEM AMOUNT
- ---------------------------------------------------------------------------------- ----------
<S> <C>
SEC filing fee.................................................................... $ 6,314
NASD filing fee................................................................... 2,800
Printing and engraving fees....................................................... 100,000
Accountants' fees and expenses.................................................... 75,000
Legal fees and expenses........................................................... 637,000
Blue Sky fees and expenses........................................................ 2,500
Transfer agent fees............................................................... 10,000
Reimbursement of Underwriter's expenses........................................... 75,000
Miscellaneous expenses............................................................ 50,000
Total......................................................................... $ 958,614
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article XII of the Company's Certificate of Incorporation provides that the
Company shall, to the fullest extend permitted by the Delaware General
Corporation Law, as amended from time to time ("Delaware Law"), indemnify each
director and officer, present or former, of the Company whom it may indemnify
pursuant to the Delaware Law, including certain liabilities under the Securities
Act of 1933, as amended (the "Securities Act"). Section 145 of the Delaware Law
authorizes a corporation to indemnify its directors and officers in terms
sufficiently broad to permit such indemnification (including reimbursement of
expenses incurred) under certain circumstances for liabilities under the
Securities Act.
Section 145 of the Delaware Law provides that in the case of any action
other than one by or in the right of the corporation, a corporation may
indemnify any person who was or is a party, or is threatened to be made a party
to any action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation in such capacity on behalf of another corporation or
enterprise, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action if he acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interest of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
Section 145 of the Delaware Law provides that in the case of an action by or
in the right of a corporation to procure a judgment in its favor, a corporation
may indemnify any person who was or is a party, or is threatened to be made a
party to any action or suit by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or was serving at the
request of the corporation in such capacity on behalf of another corporation or
enterprise, against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted under standards similar to those set forth in the preceding
paragraph, except that no indemnification may be made in respect of any action
or claim as to which such person
II-1
<PAGE>
shall have been adjudged to be liable to the corporation, unless a court
determines that such person is fairly and reasonably entitled to
indemnification.
In addition, Article XII of the Company's Certificate of Incorporation
provides that a director of the Company shall not be liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
(iii) in respect of certain unlawful dividend payments or stock redemptions or
repurchases, and (iv) for any transaction from which the director derives an
improper personal benefit. The effect of the provision of the Company's
Certificate of Incorporation is to eliminate the rights of the Company and its
stockholders (through stockholders' derivative suits on behalf of the Company)
to recover monetary damages against a director for breach of the fiduciary duty
of care as a director (including breaches resulting from negligent or grossly
negligent behavior) except in the situations described in clauses (i) through
(iv) above. This provision does not limit or eliminate the rights of the Company
or any stockholder to seek nonmonetary relief such as an injunction or
rescission in the event of a breach of a director's duty of care. Furthermore,
Section 7.01 of Article VII of the Company's Bylaws provides that the Company
may indemnify, in addition to its directors and officers, employees and agents
against losses incurred by any such person by reason of the fact that such
person was acting in such capacity to the fullest extent authorized by Delaware
Law.
The Company currently maintains directors' and officers' liability
insurance. The policy insures directors and officers for liabilities incurred in
connection with or on behalf of the Company, except for losses incurred on
account of certain specified liabilities, including losses from matters which
may be deemed uninsurable under the law pursuant to which the policy shall be
construed.
Prior to incorporating in Delaware in 1992, the predecessor company of the
Company operated as a California S corporation. At the time of the termination
of such predecessor company's S corporation status in 1992, the Company agreed
to indemnify its former shareholders for certain federal and state tax
liabilities incurred by them as a result of a final determination of an
adjustment to the tax returns of the predecessor company or former shareholders
for the 1992 tax year.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following is a list of securities sold by us over the last three years
that were not registered under the Securities Act:
- In December 1998, we issued a warrant to purchase 131,096 shares of our
common stock at an exercise price of $7.5526 per share, as adjusted for
our stock dividend paid December 15, 1998, to FBR Asset Investment
Corporation.
- On July 16, 1998, we issued a warrant to purchase 198,039 shares of our
common stock at an exercise price of $10.00 per share, as adjusted for our
stock dividend paid December 15, 1998, to Colony Investors III, L.P.
- On July 16, 1998, we sold to Colony Investors III, L.P. 660,128 shares of
our common stock for $5,232,610 or 7.9267 per share, as adjusted for our
stock dividend paid December 15, 1998;
- On December 18, 1998, we purchased 100% of the issued and outstanding
stock of TechSource Services, Inc. from its four stockholders for $225,000
cash and 28,030 shares of our common stock at a per share price of $8.027;
- On April 15, 1999, we agreed to issue and sell on April 26, 1999 6%
subordinated convertible notes in the original aggregate principal amount
of $7,500,000 to Cahill Warnuck Strategic Partners Fund, L.P. and
Strategic Associates, L.P.
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<PAGE>
The sales of the FBR Asset warrant, the Colony warrant, the Colony shares,
the TechSource Services shares and the convertible notes were exempt from
registration under the Securities Act under Section 4(2) thereof. The securities
were not offered to any person other than FBR Asset, Colony Investors, the
shareholders of TechSource Services and Cahill and Strategic Partners,
respectively. Each of FBR Asset, Colony Investors and Cahill and Strategic
Partners represented at the time of each sale that it was an "accredited
investor" within the meaning of Regulation D under the Securities Act and that
it was acquiring the securities and any of our common stock issuable upon the
excise of the warrants or the convertible notes, as the case may be, for its own
account for investment and not with the view toward the distribution thereof
except in accordance with applicable federal and state securities laws. We
reasonably believed prior to the sale of the TechSource Services shares that
each of the purchasers had such knowledge and experience in financial and
business matters that each was capable of evaluating the merits and risks of an
investment in our Registrant.
ITEM 16. FINANCIAL STATEMENT AND EXHIBITS.
(a) EXHIBITS. The following exhibits are filed as part of this
Registration Statement:
<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement.
3.1.1 Certificate of Incorporation of Registrant, as amended. (Filed as Exhibit
3.1 to the Registrant's 1998 Annual Report on Form 10-K and incorporated
herein by this reference).
3.1.2* 1999 Amendment to Certificate of Incorporation of Registrant.
3.2 Bylaws of the Registrant (Filed as Exhibit 3.2 to the Registrant's 1992
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 Registrant's
1992 Registration Statement on Form S-1 (Registration No. 33-46978) and
incorporated herein by this reference).
5.1* Opinion of White & Case LLP.
10.1 Employee Profit Sharing Plan and Trust, as amended to date. (Filed as
Exhibit 10.11 to the Registrant's 1992 Registration Statement on Form S-1
(Registration No. 33-46978) and incorporated herein by this reference).
10.2 Deferred Compensation Plan dated September 1, 1997. (Filed as Exhibit 10.2
to the Registrant's 1998 Annual Report on Form 10-K and incorporated
herein by this reference).
10.3 1992 Non-employee Director Stock Option Plan. (Filed as Exhibit 10.26 to
the Registrant's 1992 Registration Statement on Form S-1 (Registration
No. 33-46978) and incorporated herein by this reference).
10.4.1 1992 Incentive and Nonstatutory Stock Option Plan. (Filed as Exhibit 4 to
the Registrant's 1993 Registration Statement on Form S-8 (Registration
No. 33-73324) and incorporated herein by this reference).
10.4.2 1993 Amendment to 1992 Incentive and Nonstatutory Stock Option Plan. (Filed
as Exhibit 10.4.1 to the Registrant's 1998 Annual Report on Form 10-K and
incorporated herein by this reference).
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
10.4.3 1997 Amendment to 1992 Incentive and Nonstatutory Stock Option Plan. (Form
of Amendment filed as Exhibit 10.1.1 to the Registrant's 1997 Annual
Report on Form 10-K and incorporated herein by this reference).
10.4.4* 1999 Amendment to 1992 Incentive and Nonstatutory Stock Option.
10.5.1 Employment Agreement dated August 14, 1992 between the Registrant and
William J. McMorrow. (Filed as Exhibit 10.2 to the Registrant's 1992
Registration Statement on Form S-1 (Registration No. 33-46978) and
incorporated herein by this reference).
10.5.2 Fifth Amendment to Employment Agreement dated as of May 19, 1997 between
the Registrant and William J. McMorrow. (Filed as Exhibit 10.5.1 to the
Registrant's 1998 Annual Report on Form 10-K and incorporated herein by
this reference).
10.5.3 Sixth Amendment to Employment Agreement dated as of August 20, 1998 between
the Registrant and William J. McMorrow. (Filed as Exhibit 10.5.2 to the
Registrant's 1998 Annual Report on Form 10-K and incorporated herein by
this reference).
10.6 Limited Liability Company Operating Agreement of KW-A, LLC dated as of July
17, 1998. (Filed as Exhibit 10.6 to the Registrant's 1998 Annual Report
on Form 10-K and incorporated herein by this reference).
10.7 Employment Agreement dated as of July 17, 1998 between KW-A, LLC and Barry
Schlesinger. (Filed as Exhibit 10.7 to the Registrant's 1998 Annual
Report on Form 10-K and incorporated herein by this reference).
10.8 Executive Services Agreement dated as of July 17, 1998 between the
Registrant and KW-A, LLC. (Filed as Exhibit 10.8 to the Registrant's 1998
Annual Report on Form 10-K and incorporated herein by this reference).
10.9.1 Employment Agreement dated as of January 1, 1997 between the Registrant and
Richard Mandel. (Filed as Exhibit 10.9 to the Registrant's 1996 Annual
Report on Form 10-K and incorporated herein by this reference).
10.9.2 First Amendment to Employment Agreement dated as of May 19, 1997 between
the Registrant and Richard Mandel. (Filed as Exhibit 10.9.1 to the
Registrant's 1998 Annual Report on Form 10-K and incorporated herein by
this reference).
10.9.3 Second Amendment to Employment Agreement dated as of January 1, 1998
between the Registrant and Richard Mandel. (Filed as Exhibit 10.9.2 to
the Registrant's 1998 Annual Report on Form 10-K and incorporated herein
by this reference).
10.10.1 Employment Agreement dated January 1, 1996 between the Registrant and Lewis
Halpert. (Filed as Exhibit 10.10 to the Registrant's 1998 Annual Report
on Form 10-K and incorporated herein by this reference).
10.10.2 First Amendment to Employment Agreement dated January 1, 1997 between the
Registrant and Lewis Halpert. (Filed as Exhibit 10.12 to the Registrant's
1997 Annual Report on Form 10-K and incorporated herein by this
reference).
10.10.3 Second Amendment to Employment Agreement dated as of January 1, 1998
between the Registrant and Lewis Halpert. (Filed as Exhibit 10.10.2 to
the Registrant's 1998 Annual Report on Form 10-K and incorporated herein
by this reference).
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
10.11.1 Employment Agreement dated April 1, 1996 between the Registrant and Freeman
Lyle. (Filed as Exhibit 10.13 to the Registrant's 1997 Annual Report on
form 10-K and incorporated herein by this reference).
10.11.2 Second Amendment to Employment Agreement dated April 1, 1998 between the
Registrant and Freeman Lyle. (Filed as Exhibit 10.11.1 to the
Registrant's 1998 Annual Report on Form 10-K and incorporated herein by
this reference).
10.11.3 Third Amendment to Employment Agreement dated as of August 15, 1998 between
the Registrant and Freeman Lyle. (Filed as Exhibit 10.11.2 to the
Registrant's 1998 Annual Report on Form 10-K and incorporated herein by
this reference).
10.12 Unsecured Promissory Note dated December 22, 1997 by Freeman Lyle in favor
of the Registrant. (Filed as Exhibit 10.12 to the Registrant's 1998
Annual Report on Form 10-K and incorporated herein by this reference).
10.13 Office Lease dated as of September 1, 1998 between the Registrant and
Wilshire-Camden Associates. (Filed as Exhibit 10.13 to the Registrant's
1998 Annual Report on Form 10-K and incorporated herein by this
reference).
10.14 Indemnification Agreement dated August 13, 1992 among the Registrant,
Kennedy-Wilson International, Inc., William J. McMorrow, William R.
Stevenson, Lewis A. Halpert and Kenneth V. Stevens. (Filed as Exhibit
10.27 to the Registrant's 1992 Registration Statement on Form S-1
(Registration No. 33-46978) and incorporated herein by this reference).
10.15 Form of Stock Option Agreement under the Registrant's 1992 Incentive and
Nonstatutory Stock Option Plan. (Filed as Exhibit 10.23 of the
Registrant's 1992 Annual Report on Form 10-K and incorporated herein by
this reference).
10.16 Form of Stock Option Agreement under the Registrant's 1992 Non-employee
Director Stock Option Plan. (Filed as Exhibit 10.24 of the Registrant's
1992 Annual Report on Form 10-K and incorporated herein by this
reference).
10.17 Amended and Restated Revolving Credit Agreement dated as of September 10,
1998 between the Registrant and East-West Bank. (Filed as Exhibit 10.17
to the Registrant's 1998 Annual Report on Form 10-K and incorporated
herein by this reference).
10.18 Loan Agreement dated as of July 28, 1998 between Kennedy-Wilson Properties,
Ltd. and East-West Bank. (Filed as Exhibit 10.18 to the Registrant's 1998
Annual Report on Form 10-K and incorporated herein by this reference).
10.19 Guaranty dated as of July 28, 1998 by the Registrant in favor of East-West
Bank. (Filed as Exhibit 10.19 to the Registrant's 1998 Annual Report on
Form 10-K and incorporated herein by this reference).
10.20 Loan Commitment Letter dated July 2, 1998 between KW-KAU, LLC, Kennedy-
Wilson International, Inc. and Old Standard Life Insurance Company.
(Filed as Exhibit 10.20 to the Registrant's 1998 Annual Report on Form
10-K and incorporated herein by this reference).
10.21.1 Loan and Warrant Agreement dated June 3, 1998 between the Registrant and
FBR Asset Investment Corporation (Filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q/A dated August 14, 1998 and
incorporated herein by this reference).
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
10.21.2 Loan Modification Agreement dated November 30, 1998 between the Registrant
and FBR Asset Investment Corporation (Filed as Exhibit 10.21.1 to the
Registrant's 1998 Annual Report on Form 10-K and incorporated herein by
this reference).
10.22 Common Stock Registration Rights Agreement dated as of June 3, 1998 between
the Registrant and FBR Asset Investment Corporation (Filed as Exhibit 4.1
to the Registrant's Quarterly Report on Form 10-Q/A dated August 14, 1998
and incorporated herein by this reference).
10.23 Form of Warrant issued by the Registrant to FBR Asset Investment
Corporation (Filed as Exhibit 10.1 to the Registrant's Quarterly Report
on Form 10-Q/A dated August 14, 1998 and incorporated herein by this
reference).
10.24 Bridge Loan Agreement dated as of July 16, 1998 among the Registrant,
Kennedy-Wilson International, Inc., K-W Properties, Kennedy-Wilson
Properties, Ltd. and Colony K-W LLC. (Filed as Exhibit 10.1 to the
Registrant's Current Report on Form 8-K/A dated September 30, 1998 and
incorporated herein by this reference).
10.25 Investor's Agreement dated July 16, 1998 between the Registrant and Colony
Investors III, L.P. (Filed as Exhibit 10.5 to the Registrant's Current
Report on Form 8-K/A dated September 30, 1998 and incorporated herein by
this reference).
10.26 Registration Rights Agreement dated as of July 16, 1998 between the
Registrant and Colony Investors III, L.P. (Filed as Exhibit 10.4 to the
Registrant's Current Report on Form 8-K/A dated September 30, 1998 and
incorporated herein by this reference).
10.27 Warrant Agreement dated as of July 16, 1998 between the Registrant and
Colony Investors III, L.P. (Filed as Exhibit 10.4 to the Registrant's
Current Report on Form 8-K/A dated September 30, 1998 and incorporated
herein by this reference).
10.28 Form of Warrant issued July 16, 1998 by the Registrant to Colony Investors
III, L.P. (Filed as Exhibit 10.4 to the Registrant's 1998 Current Report
on Form 8-K dated September 30, 1998 and incorporated herein by this
reference).
10.29 Agreement of Limited Partnership of Colony-KW Partners, L.P. (Filed as
exhibit 10.29 to the Registrant's 1998 Annual Report on Form 10-K and
incorporated herein by this reference).
10.30* K. A. Capital K.K. Shareholders Agreement dated as of March 9, 1999 between
Kennedy-Wilson Japan Co., Ltd. and Cargil Investments Japan Ltd.
10.31.1* 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.
10.31.2* Registration Rights Agreement dated as of April 15, 1999 among the
Registrant, Cahill, Warnock Strategic Partners Fund, L.P. and Strategic
Associates, L.P.
10.31.3* Form of Convertible Subordinated Note to be issued by the Registrant to
Cahill, Warnock Strategic Partners Fund, L.P. and Strategic Associates,
L.P.
21 List of Subsidiaries of the Registrant. (Filed as Exhibit 21 to the
Registrant's 1998 Annual Report on Form 10-K and incorporated herein by
this reference).
23* Consent of Deloitte & Touche LLP.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
27 Financial Data Schedule.
</TABLE>
- ------------------------
* Filed herewith.
(b) FINANCIAL STATEMENTS. See Index to Financial Statements of the
Company.
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-1 and has duly caused this Pre-Effective
Amendment No. 1 to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Beverly Hills, State of
California on April 21, 1999.
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 Act of 1933, this
Pre-Effective Amendment No. 1 to Registration Statement has been signed by the
following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ --------------------------- ---------------
<C> <S> <C>
Chairman of the Board and April 21, 1999
/s/ WILLIAM J. MCMORROW Chief Executive Officer
- ------------------------------ (Principal Executive
William J. McMorrow Officer)
Executive Vice President, April 21, 1999
* Chief Financial Officer
- ------------------------------ Secretary (Principal
Freeman A. Lyle Financial and Accounting
Officer)
* Executive Managing Director April 21, 1999
- ------------------------------ and Director
Lewis A. Halpert
* Managing Director and April 21, 1999
- ------------------------------ Director
Richard A. Mandel
* Director and President of April 21, 1999
- ------------------------------ Kennedy-Wilson
Barry S. Schlesinger Properties, Ltd.
* Director April 21, 1999
- ------------------------------
Donald B. Prell
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ --------------------------- ---------------
<C> <S> <C>
* Director April 21, 1999
- ------------------------------
Kent Y. Mouton
* Director April 21, 1999
- ------------------------------
Thomas J. Barrack, Jr.
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ WILLIAM J. MCMORROW
-------------------------
William J. McMorrow
(ATTORNEY-IN-FACT)
</TABLE>
II-9
<PAGE>
2,000,000 Shares
(Subject to increase of up to 300,000
additional shares to cover over-allotments)
KENNEDY WILSON, INC.
A DELAWARE CORPORATION
Common Stock
(par value $0.01 per share)
UNDERWRITING AGREEMENT
May ___, 1999
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
WEDBUSH MORGAN SECURITIES INC.
as Representatives of the several Underwriters
c/o FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
1001 19th Street North
Arlington, Virginia 22209
Dear Sirs:
Kennedy-Wilson, Incorporated, a Delaware corporation (the "Company"),
confirms its agreement with each of the Underwriters listed on Schedule I hereto
(collectively, the "Underwriters"), for whom Friedman, Billings, Ramsey & Co.,
Inc. and Wedbush Morgan Securities Inc. are acting as representatives (in such
capacity, the "Representatives"), with respect to (i) the sale by the Company of
2,000,000 shares (the "Initial Shares") of Common Stock, par value $0.01 per
share, of the Company ("Common Stock"), and the purchase by the Underwriters,
acting severally and not jointly, of the respective number of shares of Common
Stock set forth opposite the names of the Underwriters in Schedule I hereto, and
(ii) the grant of the option described in Section 1(b) hereof to purchase all or
any part of 300,000 additional shares of Common Stock to cover over-allotments
(the "Option Shares"), to the Underwriters. The 2,000,000 shares of Common
Stock to be purchased by the Underwriters and all or any part of the 300,000
shares of Common Stock subject to the option described in Section l(b) hereof
are hereinafter called, collectively, the "Shares."
The Company understands that the Underwriters propose to make a public
offering of the Shares on the terms set forth in the Prospectus, as hereinafter
defined, as soon as the Underwriters deem advisable after this Agreement has
been executed and delivered.
The Company has filed with the Securities and Exchange Commission (the
Commission"), a registration statement on Form S-1 (NO. 333-74391) and a related
preliminary prospectus for the registration of the Shares under the Securities
Act of 1933, as amended (the
<PAGE>
"Securities Act"), and the rules and regulations thereunder (the "Securities Act
Regulations"). The Company has prepared and filed such amendments thereto, if
any, and such amended preliminary prospectuses, if any, as may have been
required to the date hereof, and will file such additional amendments thereto
and such amended prospectuses as may hereafter be required. The registration
statement has been declared effective under the Securities Act by the
Commission. The registration statement as amended at the time it became
effective (including all information deemed (whether by incorporation by
reference or otherwise) to be a part of the registration statement at the time
it became effective pursuant to Rule 430A(b) of the Securities Act Regulations)
is hereinafter called the "Registration Statement," except that, if the Company
files a post-effective amendment to such registration statement which becomes
effective prior to the Closing Time (as defined below), "Registration Statement"
shall refer to such registration statement as so amended. Any registration
statement filed pursuant to Rule 462(b) of the Securities Act Regulations is
hereinafter called the "Rule 462(b) Registration Statement," and after such
filing the term "Registration Statement" shall include the 462(b) Registration
Statement. Each prospectus included in the registration statement, or
amendments thereof or supplements thereto, before it became effective under the
Securities Act and any prospectus filed with the Commission by the Company with
the consent of the Underwriters pursuant to Rule 424(a) of the Securities Act
Regulations is hereinafter called the "Preliminary Prospectus." The term
"'Prospectus" means the final prospectus, as first filed with the Commission
pursuant to paragraph (1) or (4) of Rule 424(b) of the Securities Act
Regulations, and any amendments thereof or supplements thereto. The Commission
has not issued any order preventing or suspending the use of any Preliminary
Prospectus.
The Company and the Underwriters agree as follows:
1. SALE AND PURCHASE:
a) INITIAL SHARES. Upon the basis of the warranties and
representations and other terms and conditions herein set forth, at the purchase
price per share of [$________], the Company agrees to sell to the Underwriters
2,000,000 Initial Shares, and each Underwriter agrees, severally and not
jointly, to purchase from the Company the number of Initial Shares set forth in
Schedule I opposite such Underwriter's name, plus any additional number of
Initial Shares which such Underwriter may become obligated to purchase pursuant
to the provisions of Section 8 hereof, subject in each case, to such adjustments
among the Underwriters as the Representatives in their sole discretion shall
make to eliminate any sales or purchases of fractional shares.
b) OPTION SHARES. In addition, upon the basis of the
warranties and representations and other terms and conditions herein set forth,
at the purchase price per share set forth in paragraph (a), the Company hereby
grants an option to purchase 300,000 shares of Common Stock to the Underwriters.
The option hereby granted will expire 30 days after the date hereof and may be
exercised in whole or in part from time to time only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Initial Shares upon notice by the Representatives to the
Company setting forth the number of Option Shares as to which the several
Underwriters are then exercising the option and the time
2
<PAGE>
and date of payment and delivery for such Option Shares. Any such time and date
of delivery (a "Date of Delivery") shall be determined by the Representatives,
but shall not be later than three full business days (or earlier, without the
consent of the Company, than two full business days) after the exercise of said
option, nor in any event prior to the Closing Time, as hereinafter defined. If
the option is exercised as to all or any portion of the Option Shares, the
Company will sell all or a portion of the 300,000 Option Shares, and each of the
Underwriters, acting severally and not jointly, will purchase that proportion of
the total number of Option Shares then being purchased which the number of
Initial Shares set forth in Schedule I opposite the name of such Underwriter
bears to the total number of Initial Shares, subject in each case to such
adjustments among the Underwriters as the Representatives in their sole
discretion shall make to eliminate any sales or purchases of fractional shares.
2. PAYMENT AND DELIVERY:
a) INITIAL SHARES AND WARRANTS. Payment of the purchase price
for the Initial Shares shall be made to the Company by wire transfer of
immediately available funds or certified or official bank check payable in
federal (same-day) funds at the offices of Brobeck, Phleger, & Harrison LLP
located at 550 South Hope Street, Los Angeles, California 90071 (unless another
place shall be agreed upon by the Representatives and the Company) against
delivery of the certificates for the Initial Shares to the Representatives for
the respective accounts of the Underwriters. Such payment and delivery shall be
made at 9:30 a.m., New York City time, on the third (fourth, if pricing occurs
after 4:30 p.m., New York City time) business day after the date hereof (unless
another time, not later than ten business days after such date, shall be agreed
to by the Representatives and the Company). The time at which such payment and
delivery are actually made is hereinafter sometimes called the "Closing Time."
Certificates for the Initial Shares shall be delivered to the Representatives in
definitive form registered in such names and in such denominations as the
Representatives shall specify. For the purpose of expediting the checking of
the certificates for the Initial Shares by the Representatives, the Company
agrees to make such certificates available to the Representatives for such
purpose at least one full business day preceding the Closing Time.
b) OPTION SHARES. In addition, payment of the purchase price
for the Option Shares shall be made to the Company by wire transfer of
immediately available funds or certified or official bank check payable in
federal (same-day) funds at the offices of Brobeck, Phleger, & Harrison located
at 550 South Hope Street, Los Angeles, California 90071 (unless another place
shall be agreed upon by the Representatives and the Company), against delivery
of the certificates for the Option Shares to the Representatives for the
respective accounts of the Underwriters. Such payment and delivery shall be
made at 9:30 a.m., New York City time, on each Date of Delivery determined
pursuant to Section 1(b) above. Certificates for the Option Shares shall be
delivered to the Representatives in definitive form registered in such names and
in such denominations as the Representatives shall specify. For the purpose of
expediting the checking of the certificates for the Option Shares by the
Representatives, the Company agrees to make such certificates available to the
Representatives for such purpose at least one full business day preceding the
relevant Date of Delivery.
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3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY:
I. The Company represents and warrants to the Underwriters that:
a) the Company has an authorized capitalization as set forth in the
Prospectus under the caption "Capitalization"; the outstanding shares of capital
stock of the Company and all of its subsidiaries (as identified in Schedule II
hereto) (the "Subsidiaries") have been duly and validly authorized and issued
and are fully paid and non-assessable, and all of the outstanding shares of
capital stock of each of the Company's Subsidiaries are directly or indirectly
owned of record and beneficially by the Company; except as disclosed in the
Prospectus, there are no outstanding (i) securities or obligations of the
Company or any of its Subsidiaries convertible into or exchangeable for any
capital stock of the Company or any such Subsidiary, (ii) warrants, rights or
options to subscribe for or purchase from the Company or any of its Subsidiaries
any such capital stock or any such convertible or exchangeable securities or
obligations, or (iii) obligations of the Company or any of its Subsidiaries to
issue any shares of capital stock, any such convertible or exchangeable
securities or obligation, or any such warrants, rights or options;
b) the Company and each of its Subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its respective jurisdiction of incorporation with full corporate power
and authority to own its respective properties and to conduct its respective
business as described in the Registration Statement and Prospectus and, in the
case of the Company, to execute and deliver this Agreement and to consummate the
transactions contemplated hereby;
c) the Company and all of its Subsidiaries are duly qualified or
licensed by each jurisdiction in which they conduct their respective businesses
and in which the failure, individually or in the aggregate, to be so qualified
or licensed could reasonably be expected to have a material adverse effect on
the assets, business, operations, earnings, prospects, properties or condition
(financial or otherwise) of the Company and its Subsidiaries taken as a whole (a
"Material Adverse Effect"), and the Company and its Subsidiaries are duly
qualified, and are in good standing, in each jurisdiction in which they own or
lease real property or maintain an office and in which such qualification is
necessary, except where the failure to be so qualified and in good standing
would not have a Material Adverse Effect; except as disclosed in the Prospectus,
no Subsidiary is prohibited or restricted, directly or indirectly, from paying
dividends to the Company, or from making any other distribution with respect to
such Subsidiary's capital stock or from repaying to the Company or any other
Subsidiary any amounts which may from time to time become due under any loans or
advances to such Subsidiary from the Company or such other Subsidiary, or from
transferring any such Subsidiary's property or assets to the Company or to any
other Subsidiary, and; other than as disclosed in the Prospectus, the Company
does not own, directly or indirectly, any capital stock or other equity
securities of any other corporation or any ownership interest in any
partnership, joint venture or other association;
d) the Company and its Subsidiaries are in compliance in all
material respects with all applicable laws, rules, regulations, orders, decrees
and judgments, including those
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relating to transactions with affiliates, except where the failure to so comply
could reasonably be expected to have a Material Adverse Effect;
e) neither the Company nor any of its Subsidiaries is in breach of
or in default under (nor has any event occurred which with notice, lapse of
time, or both would constitute a breach of, or default under), its respective
articles of incorporation or charter or by-laws, or in the performance or
observance of any obligation, agreement, covenant or condition contained in any
license, indenture, mortgage, deed of trust, loan or credit agreement or other
agreement or instrument to which the Company or any of its Subsidiaries is a
party or by which any of them or their respective properties is bound, except
for such breaches or defaults which would not have a Material Adverse Effect,
and the execution, delivery and performance of this Agreement, and consummation
of the transactions contemplated hereby will not conflict with, or result in any
breach of, or constitute a default under (nor constitute any event which with
notice, lapse of time, or both would constitute a breach of, or default under),
(i) any provision of the articles of incorporation or charter or bylaws of the
Company or any of its Subsidiaries, or (ii) any provision of any license,
indenture, mortgage, deed of trust, loan or credit agreement or other agreement
or instrument to which the Company or any of its Subsidiaries is a party or by
which any of them or their respective properties may be bound or affected, or
under any federal, state, local or foreign law, regulation or rule or any
decree, judgment or order applicable to the Company or any of its Subsidiaries,
except in the case of this clause (ii) for such breaches or defaults which would
not have a Material Adverse Effect; or result in the creation or imposition of
any lien, charge, claim or encumbrance upon any property or asset of the Company
or its Subsidiaries;
f) this Agreement has been duly authorized, executed and delivered
by the Company and is a legal, valid and binding agreement of the Company
enforceable in accordance with its terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally, and by general principles equity, and except to the
extent that the indemnification and contribution provisions of Section 9 hereof
may be limited by federal or state securities laws and public policy
considerations in respect thereof;
g) no approval, authorization, consent or order of or filing with
any federal, state or local governmental or regulatory commission, board, body,
authority or agency is required in connection with the Company's execution,
delivery and performance of this Agreement, its consummation of the transaction
contemplated hereby, and its sale and delivery of the Shares, other than (A)
such as have been obtained, or will have been obtained at the Closing Time or
the relevant Date of Delivery, as the case may be, under the Securities Act, (B)
such approvals as have been obtained in connection with the approval of the
quotation of the Shares on the Nasdaq National Market System (the "Nasdaq") and
(C) any necessary qualification under the securities or blue sky laws of the
various jurisdictions in which the Shares are being offered by the Underwriters;
h) each of the Company and its Subsidiaries has all necessary
licenses, authorizations, consents and approvals and has made all necessary
filings required under any federal, state or local law, regulation or rule, and
has obtained all necessary authorizations,
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consents and approvals from other persons, required in order to conduct their
respective businesses as described in the Prospectus, except to the extent that
any failure to have any such licenses, authorizations, consents or approvals, to
make any such filings or to obtain any such authorizations, consents or
approvals would not, individually or in the aggregate, have a Material Adverse
Effect; neither the Company nor any of its Subsidiaries is required by any
applicable law to obtain accreditation or certification from any governmental
agency or authority in order to provide the products and services which it
currently provides or which it proposes to provide as set forth in the
Prospectus; neither the Company nor any of its Subsidiaries is in violation of,
in default under, or has received any notice regarding a possible violation,
default or revocation of any such license, authorization, consent or approval or
any federal, state, local or foreign law, regulation or rule or any decree,
order or judgment applicable to the Company or any of its Subsidiaries the
effect of which could be material and adverse to the assets, business,
operations, earnings, prospects, properties or condition (financial or
otherwise) of the Company and its Subsidiaries taken as a whole; and no such
license, authorization, consent or approval contains a materially burdensome
restriction that is not adequately disclosed in the Registration Statement and
the Prospectus;
i) each of the Registration Statement and any Rule 462(b)
Registration Statement has become effective under the Securities Act and no stop
order suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement has been issued under the Securities Act and no
proceedings for that purpose have been instituted or are pending or, to the
knowledge of the Company, are threatened by the Commission, and any request on
the part of the Commission for additional information has been complied with;
j) the Preliminary Prospectus and the Registration Statement comply
and the Prospectus and any further amendments or supplements thereto will, when
they have become effective or are filed with the Commission, as the case may be,
comply in all material respects with the requirements of the Securities Act and
the Securities Act Regulations; the Registration Statement did not, and any
amendment thereto will not, in each case as of the applicable effective date,
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading; and
the Preliminary Prospectus does not, and the Prospectus or any amendment or
supplement thereto will not, as of the applicable filing date and at the Closing
Time and on each Date of Delivery (if any), contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the Company
makes no warranty or representation with respect to any statement contained in
the Registration Statement or the Prospectus in reliance upon and in conformity
with the information concerning the Underwriters and furnished in writing by or
on behalf of the Underwriters through the Representatives to the Company
expressly for use in the Registration Statement or the Prospectus (that
information being limited to that described in the last sentence of the first
paragraph of Section 9(b) hereof);
k) the Preliminary Prospectus and the Prospectus delivered to the
Underwriters for use in connection with this offering will be identical to the
versions of the Preliminary
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Prospectus and Prospectus created to be transmitted to the Commission for filing
via the Electronic Data Gathering Analysis and Retrieval System ("EDGAR"),
except to the extent permitted by Regulation S-T;
l) all legal or governmental proceedings, contracts or documents of
a character required to be filed as exhibits to the Registration Statement or to
be summarized or described in the Prospectus have been so filed, summarized or
described as required;
m) there are no actions, suits, proceedings, inquiries or
investigations pending or, to the knowledge of the Company, threatened against
the Company or any of its Subsidiaries or any of their respective officers and
directors or to which the properties, assets or rights of any such entity are
subject, at law or in equity, before or by any federal, state, local or foreign
governmental or regulatory commission, board, body, authority, arbitral panel or
agency which are reasonably likely to result in a judgment, decree, award or
order having a Material Adverse Effect;
n) the financial statements, including the notes thereto, included
in the Registration Statement and the Prospectus present fairly the consolidated
financial position of the entities to which such financial statements relate
(the "Covered Entities") as of the dates indicated and the consolidated results
of operations and changes in financial position and cash flows of the Covered
Entities for the periods specified; such financial statements have been prepared
in conformity with generally accepted accounting principles applied on a
consistent basis during the periods involved and in accordance with Regulation
S-X promulgated by the Commission; the financial statement schedules included in
the Registration Statement and the amounts in the Prospectus under the captions
"Prospectus Summary - Summary Financial Information" and "Selected Financial
Information" fairly present the information shown therein and have been compiled
on a basis consistent with the financial statements included in the Registration
Statement and the Prospectus; the unaudited pro forma financial information
(including the related notes) included in the Prospectus or any Preliminary
Prospectus complies as to form in all material respects to the applicable
accounting requirements of the Securities Act and the Securities Act
Regulations, and management of the Company believes that the assumptions
underlying the pro forma adjustments are reasonable; such pro forma adjustments
have been properly applied to the historical amounts in the compilation of the
information and such information fairly presents with respect to the Covered
Entities, the financial position, results of operations and other information
purported to be shown therein at the respective dates and for the respective
periods specified;
o) Deloitte & Touche LLP, whose reports on the consolidated
financial statements of the Company and its Subsidiaries are filed with the
Commission as part of the Registration Statement and Prospectus, are and were
during the periods covered by their reports independent public accountants as
required by the Securities Act and the Securities Act Regulations;
p) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except as may be
otherwise stated in the
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<PAGE>
Registration Statement or Prospectus, there has not been (A) any Material
Adverse Effect, whether or not arising in the ordinary course of business, (B)
any transaction, which is material to the Company and its Subsidiaries taken as
a whole, contemplated or entered into by the Company or any of its Subsidiaries,
(C) any obligation, contingent or otherwise, directly or indirectly incurred by
the Company or any of its Subsidiaries, which is material to the Company and its
Subsidiaries taken as a whole or (D) any dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock;
q) the Shares conform in all material respects to the description
thereof contained in the Registration Statement and the Prospectus;
r) there are no persons with registration or other similar rights to
have any equity securities, including securities which are convertible into or
exchangeable for equity securities, registered pursuant to the Registration
Statement, except for those registration or similar rights which have been
waived with respect to the offering contemplated by this Agreement, all of which
registration or similar rights described in clauses (i) and (ii) are fairly
summarized in the Prospectus;
s) the Shares have been duly authorized and, when issued and duly
delivered against payment therefor as contemplated by this Agreement, will be
validly issued, fully paid and nonassessable, free and clear of any pledge,
lien, encumbrance, security interest or other claim, and the issuance and sale
of the Shares by the Company is not subject to preemptive or other similar
rights arising by operation of law, under the articles of incorporation or
by-laws of the Company, under any agreement to which the Company or any of its
Subsidiaries is a party or otherwise;
t) the Company has not taken, and will not take, directly or
indirectly, any action which is designed to or which has constituted or which
might reasonably be expected to cause or result in stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Shares;
u) neither the Company nor any of its affiliates (i) is required to
register as a "broker" or "dealer" in accordance with the provisions of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or the rules
and regulations thereunder, or (ii) directly, or indirectly through one or more
intermediaries, controls or has any other association with (within the meaning
of Article I of the By-laws of the National Association of Securities Dealers,
Inc. (the "NASD")) any member firm of the NASD;
v) the Company has not relied upon the Representatives or legal
counsel for the Representatives for any legal, tax or accounting advice in
connection with the offering and sale of the Shares;
w) any certificate signed by any officer of the Company or any
Subsidiary delivered to the Representatives or to counsel for the Underwriters
pursuant to or in connection
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<PAGE>
with this Agreement shall be deemed a representation and warranty by the Company
to each Underwriter as to the matters covered thereby;
x) the form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory requirements,
with any applicable requirements of the articles of incorporation and by-laws of
the Company and the requirements of the Nasdaq;
y) the Company and the Subsidiaries have good and marketable title
in fee simple to all real property, if any, and good title to all personal
property owned by them, in each case free and clear of all liens, security
interests, pledges, charges, encumbrances, mortgages and defects, except such as
are disclosed in the Prospectus or such as do not materially and adversely
affect the value of such property and do not interfere with the use made or
proposed to be made of such property by the Company and the Subsidiaries; and
any real property and buildings held under lease by the Company or any
Subsidiary are held under valid, existing and enforceable leases, with such
exceptions as are disclosed in the Prospectus or are not material and do not
interfere with the use made or proposed to be made of such property and
buildings by the Company or such Subsidiary;
z) the descriptions in the Registration Statement and the Prospectus
of the contracts, leases and other legal documents therein described present
fairly the information required to be shown, and there are no contracts, leases,
or other documents of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement which are not described or filed as required;
aa) the Company and each of its Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences;
bb) each of the Company and the Subsidiaries has filed on a timely
basis all necessary federal, state, local and foreign income tax returns
required to be filed through the date hereof and have paid all taxes shown as
due thereon; and no tax deficiency has been asserted against any such entity,
nor does any such entity know of any tax deficiency which is likely to be
asserted against any such entity which if determined adversely to an, such
entity, could materially adversely affect the business, prospects, properties,
assets, results of operations or condition (financial or otherwise) of any such
entity, respectively; all tax liabilities are adequately provided for on the
respective books of such entities;
cc) each of the Company and its Subsidiaries maintain insurance
(issued by insurers of recognized financial responsibility) of the types and in
the amounts generally deemed adequate for their respective businesses and
consistent with insurance coverage maintained by
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similar companies in similar businesses, including, but not limited to,
insurance covering real and personal property owned or leased by the Company and
its Subsidiaries against theft, damage, destruction, acts of vandalism and all
other risks customarily insured against, all of which insurance is in full force
and effect;
dd) neither the Company nor any of its Subsidiaries has violated, or
received written notice of any violation with respect to, any applicable
environmental, safety or similar law applicable to the business of the Company
or any of its Subsidiaries, nor any federal or state law relating to
discrimination in the hiring, promotion or pay of employees, nor any applicable
federal or state wages and hours law, nor any provisions of the Employee
Retirement Income Security Act or the rules and regulations promulgated
thereunder, nor any state law precluding the denial of credit due to the
neighborhood in which a property is situated, the violation of any of which
could have a Material Adverse Effect;
ee) except as otherwise disclosed in the Prospectus, there are no
material outstanding loans or advances or material guarantees of indebtedness by
the Company or any of its Subsidiaries to or for the benefit of any of the
officers or directors of the Company or any of its Subsidiaries or any of the
members of the families of any of them;
ff) all securities issued by the Company, any of its Subsidiaries or
any trusts established by the Company or any Subsidiary, have been issued and
sold in compliance with (i) all applicable federal and state securities laws,
(ii) the laws of the applicable jurisdiction of incorporation of the issuing
entity and, (iii) to the extent applicable to the issuing entity, the
requirements of the Nasdaq;
gg) in connection with this offering, the Company has not offered and
will not offer its Common Stock or any other securities convertible into or
exchangeable or exercisable for Common stock in a manner in violation of the
Securities Act;
hh) the Company has not incurred any liability for any finder's fees
or similar payments in connection with the transactions herein contemplated;
ii) no relationship, direct or indirect, exists between or among the
Company or any of its Subsidiaries on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company or any of its Subsidiaries
on the other hand, which is required by the Securities Act and the Securities
Act Regulations to be described in the Registration Statement and the Prospectus
and which is not so described;
jj) neither the Company nor any of the Subsidiaries is and, after
giving effect to the offering and sale of the Shares, will be an "investment
company" or an entity "controlled" by an "investment company", as such terms are
defined in the Investment Company Act of 1940, as amended (the "Investment
Company Act");
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kk) there are no existing or, to the knowledge of the Company,
threatened labor disputes with the employees of the Company or any of its
Subsidiaries which are likely to have individually or in the aggregate a
Material Adverse Effect;
ll) except as disclosed in the Prospectus, all computer software
(including, without limitation software which forms a part of any hardware)
owned or used by the Company or any Subsidiary, or licensed by the Company or
any Subsidiary, as licensor or as licensee, other than any shrinkwrap software
available generally to retail customers, is "Year 2000 Compliant" (as
hereinafter defined). For purposes of this Agreement, "Year 2000 Compliant"
shall mean (i) all such software shall operate in 4-digit year format and, in
all material respects, without errors in the recognition, calculation and
processing of date data relating to century recognition, leap years, single and
multi-century formulae, date values and interfaces of date-related
functionalities; (ii) all date processing shall be conducted in a four-digit
year format and all date sorting that includes a "year field" or "year category"
shall be based upon a four-digit year format; and (iii) any date arithmetic
programs or calculators in the software shall operate in all material respects
in accordance with the related user documentation in the Year 2000, and the
years following, without degrading functionality or performance; and
4. CERTAIN COVENANTS:
The Company hereby agrees with each Underwriter:
a) to furnish such information as may be required and otherwise
to cooperate in qualifying the Shares for offering and sale under the
securities or blue sky laws of such states as the Representatives may designate
and to maintain such qualifications in effect as long as required for the
distribution of the Shares, provided that the Company shall not be required to
qualify as a foreign corporation or to consent to the service of process under
the laws of any such state (except service of process with respect to the
offering and sale of the Shares);
b) to prepare the Prospectus in a form approved by the
Underwriters and file such Prospectus with the Commission pursuant to Rule
424(b) not later than 10:00 a.m. (New York City time), on the day following the
execution and delivery of this Agreement and to furnish promptly (and with
respect to the initial delivery of such Prospectus, not later than 10:00 a.m.
(New York City time) on the day following the execution and delivery of this
Agreement) to the Underwriters as many copies of the Prospectus (or of the
Prospectus as amended or supplemented if the Company shall have made any
amendments or supplements thereto after the effective date of the Registration
Statement) as the Underwriters may reasonably request for the purposes
contemplated by the Securities Act Regulations, which Prospectus and any
amendments or supplements thereto furnished to the Underwriters will be
identical to the version created to be transmitted to the Commission for filing
via EDGAR, except to the extent permitted by Regulation S-T;
c) to advise the Representatives promptly and (if requested by
the Representatives) to confirm such advice in writing, when the Registration
Statement has become
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effective and when any post-effective amendment thereto becomes effective under
the Securities Act Regulations;
d) to advise the Representatives promptly, confirming such
advice in writing, of (i) the receipt of any comments from, or any request by,
the Commission for amendments or supplements to the Registration Statement or
Prospectus or for additional information with respect thereto, or (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus, or of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction, or of the
initiation or threatening of any proceedings for any of such purposes and, if
the Commission or any other government agency or authority should issue any such
order, to make every reasonable effort to obtain the lifting or removal of such
order as soon as possible; to advise the Representatives promptly of any
proposal to amend or supplement the Registration Statement or Prospectus and to
file no such amendment or supplement to which the Representatives shall
reasonably object in writing;
e) so long as the Underwriters are making a market in the
Common Stock, to furnish to the Underwriters for a period of five years from the
date of this Agreement (i) copies of all annual, quarterly and current reports
or other communications supplied to holders of shares of Common Stock when the
same are supplied to such holders, (ii) as soon as practicable after the filing
thereof, copies of all reports filed by the Company with the Commission, the
NASD or any securities exchange and (iii) such other information as the
Underwriters may reasonably request regarding the Company and its Subsidiaries;
f) to advise the Underwriters promptly of the happening of any
event known to the Company within the time during which a Prospectus relating to
the Shares is required to be delivered under the Securities Act Regulations
which, in the judgment of the Company, would require the making of any change in
the Prospectus then being used so that the Prospectus would not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, and, during such
time, to prepare and furnish, at the Company's expense, to the Underwriters
promptly such amendments or Supplements to such Prospectus as may be necessary
to reflect any such change and to furnish to the Underwriters a copy of such
proposed amendment or supplement before filing any such amendment or supplement
with the Commission;
g) to furnish promptly to the Representatives a signed copy of
the Registration Statement, as initially filed with the Commission, and of all
amendments or supplements thereto (including all exhibits filed therewith or
incorporated by reference therein) and such number of conformed copies of the
foregoing as the Representatives may reasonably request;
h) to furnish to the Representatives, not less than two
business days before filing with the Commission subsequent to the effective date
of the Prospectus and during the period referred to in paragraph (f) above, a
copy of any document proposed to be filed with the Commission pursuant to
Section 13, 14, or 15(d) of the Exchange Act;
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i) to apply the net proceeds of the sale of the Shares in
accordance with its statements under the caption "Use of Proceeds" in the
Prospectus;
j) to make generally available to its security holders as soon
as practicable, but in any event not later than the end of the fiscal quarter
first occurring after the first anniversary of the effective date of the
Registration Statement an earnings statement complying with the provisions of
Section 11(a) of the Securities Act (in form, at the option of the Company,
complying with the provisions of Rule 158 of the Securities Act Regulations,)
covering a period of 12 months beginning after the effective date of the
Registration Statement;
k) to use its best efforts to effect and maintain the quotation
of the Shares on the Nasdaq and to file with the Nasdaq all documents and
notices required by the Nasdaq of companies that have securities that are traded
in the over-the-counter market and quotations for which are reported by the
Nasdaq;
l) to engage and maintain, at its expense, a registrar and
transfer agent for the Shares;
m) to refrain during a period of 180 days from the date of the
Prospectus, without the prior written consent of Friedman, Billings, Ramsey &
Co., Inc. ("FBR"), which consent may be withheld in the sole discretion of FBR,
from (i) offering, pledging, selling, contracting to sell, selling any option or
contract to purchase, purchasing any option or contract to sell, granting any
option for the sale of, or otherwise disposing of or transferring, directly or
indirectly, any share of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock, or filing any registration
statement under the Securities Act with respect to any of the foregoing, or (ii)
entering into any swap or any other agreement or any transaction that transfers,
in whole or in part, directly or indirectly, the economic consequence of
ownership of the Common Stock, whether any such swap or transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the Shares to be sold hereunder, or (B) any shares of Common Stock issued
by the Company upon the exercise of an option or warrant or conversion of any
debenture of the Company outstanding on the date hereof and referred to in the
Prospectus;
n) to not itself and to use its best efforts to cause its
officers, directors and affiliates not to, (i) take, directly or indirectly
prior to termination of the underwriting syndicate contemplated by this
Agreement, any action designed to stabilize or manipulate the price of any
security of the Company, or which may cause or result in, or which might in the
future reasonably be expected to cause or result in, the stabilization or
manipulation of the price of any security of the Company, to facilitate the sale
or resale of any of the Shares, (ii) sell, bid for, purchase or pay anyone any
compensation for soliciting purchases of the Shares or (iii) pay or agree to pay
to any person any compensation for soliciting any order to purchase any other
securities of the Company;
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o) that the provisions of Sections 2, 3, and 10 of the letter
agreement dated December 15, 1998 between the Company and the Representatives
shall survive the execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby; and
p) if at any time during the 30-day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in the
reasonable opinion of the Representatives the market price of the Common Stock
has been or is likely to be materially affected (regardless of whether such
rumor, publication or event necessitates a supplement to or amendment of the
Prospectus) and after written notice from the Representatives advising the
Company to the effect set forth above, to forthwith prepare, consult with the
Representatives concerning the substance of, and disseminate a press release or
other public statement, reasonably satisfactory to the Company and
Representatives, responding to or commenting on such rumor, publication or
event.
5. PAYMENT OF EXPENSES:
a) The Company agrees to pay all costs and expenses incident to
the performance of its obligations under this Agreement, whether or not the
transactions contemplated hereunder are consummated or this Agreement is
terminated, including expenses, fees and taxes in connection with (i) the
preparation and filing of the Registration Statement, each Preliminary
Prospectus, the Prospectus, and any amendments or supplements thereto, and the
printing and furnishing of such copies of each thereof to the Underwriters and
to dealers (including costs of mailing and shipment as may be reasonably
requested for use in connection with the offering and sale of the Shares), (ii)
the preparation, issuance and delivery of the certificates for the Shares to the
Underwriters, including any stock or other transfer taxes or duties payable upon
the sale of the Shares to the Underwriters, (iii) the printing of this Agreement
and any dealer agreements and furnishing of copies of each to the Underwriters
and to dealers (including costs of mailing and shipment), (iv) the qualification
of the Shares for offering and sale under state laws that the Company and the
Representatives have mutually agreed are appropriate and the determination of
their eligibility for investment under state law aforesaid (including the
reasonable legal fees and filing fees and other disbursements of counsel for the
Underwriters), in an amount not to exceed $[________] assuming that the Common
Stock is approved for quotation on Nasdaq, and the printing and furnishing of
copies of any blue sky surveys or legal investment surveys to the Underwriters
and to dealers, (v) filing for review of the public offering of the Shares by
the NASD (including the legal fees and filing fees and other disbursements of
counsel for the Underwriters relating thereto), (vi) the fees and expenses of
any transfer agent or registrar for the Shares and miscellaneous expenses
referred to in the Registration Statement, (vii) the fees and expenses incurred
in connection with the inclusion of the Shaes in the NASD, (viii) making road
show presentations with respect to the offering of the Shares and (ix) the
performance of the Company's other obligations hereunder.
b) The Company agrees to reimburse the Representatives for
their reasonable out-of-pocket expenses in connection with the performance of
its activities under this Agreement, including, but not limited to, costs such
as printing, facsimile, courier service, direct
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computer expenses, accommodations and travel, but excluding the fees and
expenses of the Underwriters' outside legal counsel and any other advisors,
accountants, appraisers, etc. (other than the fees and expenses of counsel with
respect to state securities or blue sky laws and obtaining the filing for review
of the public offering of the Shares by the NASD, all of which shall be
reimbursed by the Company pursuant to the provisions of subsection (a) above).
6. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS:
The obligations of the Underwriters hereunder to purchase Shares at the
Closing Time or on the Date of Delivery, as applicable, are subject to the
accuracy of the representations and warranties on the part of the Company in all
material respects on the date hereof and at the Closing Time and on each Date of
Delivery, as applicable, the performance by the Company of their respective
obligations hereunder in all material respects and to the satisfaction of the
following further conditions at the Closing Time or on the Date of Delivery, as
applicable:
a) The Company shall furnish to the Underwriters, at the
Closing Time and on each Date of Delivery, an opinion of White & Case LLP,
counsel for the Company and its Subsidiaries, addressed to the Underwriters and
dated the Closing Time and each Date of Delivery and in form and substance
satisfactory to Brobeck, Phleger & Harrison LLP, counsel for the Underwriters,
stating that:
(1) the Company has an authorized capitalization as set forth in the
Prospectus under the caption "Capitalization"; the outstanding shares of
capital stock of the Company and its Material Subsidiaries (as defined in
Schedule III hereto) have been duly and validly authorized and issued and are
fully paid and non-assessable, and all of the outstanding shares of capital
stock of the Material Subsidiaries are directly or indirectly owned of record
and beneficially by the Company; and except as disclosed in the Prospectus, to
such counsel's knowledge, there are no outstanding (i) securities or obligations
of the Company or any of its Material Subsidiaries convertible into or
exchangeable for any capital stock of the Company or any such Subsidiary, (ii)
warrants, rights or options to subscribe for or purchase from the Company or any
such Subsidiary any such capital stock or any such convertible or exchangeable
securities or obligations, or (iii) obligations of the Company or any such
Subsidiary to issue any shares of capital stock, any such convertible or
exchangeable securities or obligation, or any such warrants, rights or options;
(2) the Company and its Material Subsidiaries each has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its respective jurisdiction of incorporation with full corporate power
and authority to own its respective properties and to conduct its respective
business as described in the Registration Statement and Prospectus and, in the
case of the Company, to execute and deliver this Agreement and to consummate the
transactions described in this Agreement;
(3) the Company and its Material Subsidiaries are duly qualified or
licensed by each jurisdiction in which they conduct their respective businesses
and in which the failure, individually or in the aggregate, to be so licensed
could have a Material Adverse Effect, and the
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Company and its Material Subsidiaries are duly qualified, and are in good
standing, in each jurisdiction in which they own or lease real property or
maintain an office and in which such qualification is necessary except where the
failure to be so qualified and in good standing could not reasonably be expected
to have a Material Adverse Effect; except as disclosed in the Prospectus, no
Subsidiary is prohibited or restricted, directly or indirectly, from paying
dividends to the Company, or from making any other distribution with respect to
such Subsidiary's capital stock or from repaying to the Company or any other
Subsidiary, any amounts which may from time to time become due under any loans
or advances to such Subsidiary from the Company or such other Subsidiary, or
from transferring any such Subsidiary's property or assets to the Company or to
any other Subsidiary;
(4) to such counsel's knowledge, the Company and its Material Subsidiaries
are in compliance in all material respects with all applicable laws, orders,
rules, regulations and orders, including those relating to transactions with
affiliates, the failure of which to comply with could reasonably be expected to
have a Material Adverse Effect;
(5) to such counsel's knowledge, neither the Company nor any of its
Material Subsidiaries is in breach of, or in default under (nor has any event
occurred which with notice, lapse of time, or both would constitute a breach of,
or default), any license, indenture, mortgage, deed of trust, loan or credit
agreement or any other agreement or instrument to which the Company or any of
its Material Subsidiaries is a party or by which any of them or their respective
properties may be bound or affected or under any law, regulation or rule or any
decree, judgment or order applicable to the Company or any of its Material
Subsidiaries, except such breaches or defaults which would not have a Material
Adverse Effect;
(6) the execution, delivery and performance of this Agreement by the
Company and the consummation by the Company of the transactions contemplated by
this Agreement do not and will not (A) conflict with, or result in any breach
of, or constitute a default under (nor constitute any event which with notice,
lapse of time, or both would constitute a breach of or default under), (i) any
provisions of the certificate of incorporation, charter or by-laws of the
Company or any Subsidiary, (ii) any provision of any material license,
indenture, mortgage, deed of trust, loan, credit or other agreement or
instrument to which the Company or any Subsidiary is a party or by which any of
them or their respective properties or assets may be bound or affected and of
which such counsel has knowledge, (iii) any law or regulation binding upon or
applicable to the Company or any Subsidiary or any of their respective
properties or assets, or (iv) any decree, judgment or order applicable to the
Company or any Subsidiary and of which such counsel has knowledge; or (B) result
in the creation or imposition of any lien, charge, claim or encumbrance upon any
property or assets of the Company or its Material Subsidiaries;
(7) this Agreement has been duly authorized, executed and delivered by the
Company and is a legal, valid and binding agreement of the Company enforceable
in accordance with its terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally, and by general principles of equity, and except that
enforceability of the indemnification and contribution provisions set forth in
Section 9 of
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this Agreement may be limited by the federal or state securities laws of the
United States or public policy underlying such laws;
(8) no approval, authorization, consent or order of or filing with any
federal or state governmental or regulatory commission, board, body, authority
or agency is required in connection with the execution, delivery and performance
of this Agreement, or the offer, sale and delivery of the Shares by the Company
as contemplated hereby, other than such as have been obtained or made under the
Securities Act and the Securities Act Regulations, and except that such counsel
need express no opinion as to any necessary qualification under the state
securities or blue sky laws of the various jurisdictions in which the Shares are
being offered by the Underwriters or any approval of the underwriting terms and
arrangements by the National Association of Securities Dealers, Inc.;
(9) the Shares have been duly authorized and when the Shares have been
issued and duly delivered against payment therefor as contemplated by this
Agreement, the Shares will be validly issued, fully paid and nonassessable, and
the Underwriters will acquire the good and marketable title to the Shares, free
and clear of any pledge, lien, encumbrance, security interest, or other claim;
(10) the issuance and sale of the Shares by the Company is not subject to
preemptive or other similar rights arising by operation of law, under the
certificate of incorporation, charter or by-laws of the Company, or under any
agreement to which the Company or any of its Material Subsidiaries is a party
or, to such counsel's knowledge, otherwise;
(11) the Shares conform in all material respects to the descriptions
thereof contained in the Registration Statement and Prospectus;
(12) the form of certificate used to evidence the Common Stock complies in
all material respects with all applicable statutory requirements, with any
applicable requirements of the articles of incorporation and by-laws of the
Company;
(13) the Registration Statement has become effective under the Securities
Act and no stop order suspending the effectiveness of the Registration Statement
has been issued and, to such counsel's knowledge, no proceedings with respect
thereto have been commenced or threatened;
(14) as of the effective date of the Registration Statement, the
Registration Statement and the Prospectus (except as to the financial
statements, the notes thereto and other financial and statistical data contained
therein, as to which such counsel need express no opinion) complied as to form
in all material respects with the requirements of the Securities Act and the
Securities Act Regulations;
(15) the statements under the captions "Business - Government Regulations,"
"Business - Legal Proceedings," "Management - Stock Option Plans," "Management -
Employment Contracts," "Description of Capital Stock," "Shares Eligible for
Future Sale" and
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"Indemnification of Directors and Officers" in the Registration Statement and,
where applicable, the Prospectus, insofar as such statements constitute a
summary of the legal matters referred to therein, provide a fair summary of such
legal matters in all material respects;
(16) to such counsel's knowledge, there are no actions, suits or
proceedings, inquiries, or investigations pending or threatened against the
Company or any of its Material Subsidiaries or any of their respective officers
and directors or to which the properties, assets or rights of any such entity
are subject, at law or in equity, before or by any federal, state, local or
foreign governmental or regulatory commission, board, body, authority, arbitral
panel or agency which are required to be described in the Prospectus but are not
so described;
(17) to such counsel's knowledge, there are no contracts or documents of a
character which are required to be filed as exhibits to the Registration
Statement or required to be described or summarized in the Prospectus which have
not been so filed, summarized or described, and all such summaries and
descriptions, in all material respects, fairly and accurately set forth the
material provisions of such contracts and documents;
Such counsel shall state that they have participated in conferences with
officers and other representatives of the Company, independent public
accountants of the Company, representatives of the Representatives, at which the
contents of the Registration Statement and Prospectus were discussed and,
although such counsel is not passing upon and does not assume responsibility for
the accuracy, completeness or fairness of the statements contained in the
Registration Statement or Prospectus (except as and to the extent stated in
subparagraphs (14), (15), (16) and (17) above), they have no reason to believe
that the Registration Statement, the Preliminary Prospectus or the Prospectus,
as of their respective effective or issue date, and as of the date of such
counsel's opinion, contained or contains an untrue statement of a material fact
or omitted or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading (it being understood that, in each
case, such counsel need express no view with respect to the financial statements
and the notes thereto and other financial and statistical data included in the
Registration Statement, Preliminary Prospectus or Prospectus).
b) The Representatives shall have received from Deloitte & Touche
LLP letters dated, respectively, as of the date of this Agreement, the Closing
Time and each Date of Delivery, as the case may be, addressed to the
Representatives, in form and substance satisfactory to the Representatives,
relating to the financial statements, including any pro forma financial
statements, of the Company and its Subsidiaries, and such other matters
customarily covered by comfort letters issued in connection with registered
public offerings.
c) The Representatives shall have received at the Closing Time and
on each Date of Delivery the favorable opinion of Brobeck, Phleger, & Harrison,
dated the Closing Time or such Date of Delivery, addressed to the
Representatives and in form and substance satisfactory to the Representatives.
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d) No amendment or supplement to the Registration Statement or
Prospectus shall have been filed to which the Underwriters shall have objected
in writing.
e) Prior to the Closing Time and each Date of Delivery (i) no stop
order suspending the effectiveness of the Registration Statement or any order
preventing or suspending the use of any Preliminary Prospectus or Prospectus has
been issued, and no proceedings for such purpose shall have been initiated or
threatened, by the Commission, and no suspension of the qualification of the
Shares for offering or sale in any jurisdiction, or of the initiation or
threatening of any proceedings for any of such purposes, has occurred; and (ii)
the Registration Statement and the Prospectus shall not contain an untrue
statement of material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
f) Between the time of execution of this Agreement and the Closing
Time or the relevant Date of Delivery (i) no material and unfavorable change in
the assets, business, operations, earnings, prospects, properties or condition
(financial or otherwise) of the Company and its Subsidiaries taken as a whole
shall occur or become known, and (ii) no transaction which is material and
unfavorable to the Company shall have been entered into by the Company or any of
its Subsidiaries.
g) The Shares shall have been approved for inclusion in the Nasdaq.
h) The NASD shall not have raised any objection with respect to the
fairness and reasonableness of the underwriting terms and arrangements.
i) The Representatives shall have received lock-up agreements from
Colony Capital and each person who is an executive officer or director of the
Company, in the form of Exhibit B attached hereto, and such letter agreements
shall be in full force and effect.
j) The Company will, at the Closing Time and on each Date of
Delivery, deliver to the Underwriters a certificate of its Chairman of the Board
and Chief Executive Officer, and its Vice President and Chief Financial Officer,
to the effect that, to each of such officer's knowledge, the representations and
warranties of the Company set forth in this Agreement are true and correct and
the conditions set forth in paragraphs (e), (f) and (g) have been satisfied, in
each case as of such date.
k) The Company shall have furnished to the Underwriters such other
documents and certificates as to the accuracy and completeness of any statement
in the Registration Statement and the Prospectus, the representations,
warranties and statement of the Company contained herein, and the performance by
the of its covenants contained herein, and the fulfillment of any conditions
contained herein, as of the Closing Time or any Date of Delivery as the
Underwriters may reasonably request.
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l) The Company shall have performed such of its obligations under
this Agreement as are to be performed by the terms hereof at or before the
Closing Time or the relevant Date of Delivery.
7. TERMINATION:
The obligations of the several Underwriters hereunder shall be subject to
termination in the absolute discretion of the Representatives, at any time prior
to the Closing Time or any Date of Delivery, (i) if any of the conditions
specified in Section 6 shall not have been fulfilled when and as required by
this Agreement to be fulfilled, or (ii) if there has occurred outbreak or
escalation of hostilities or other national or international calamity or crisis
or change in economic, political or other conditions the effect of which on the
financial markets of the United States is such as to make it, in the judgment of
the Representatives, impracticable to market the Shares or enforce contracts for
the sale of the Shares, or (iii) if trading in any securities of the Company has
been suspended by the Commission or by the Nasdaq, or if trading generally on
the New York Stock Exchange or in the Nasdaq market has been suspended
(including automatic halt in trading pursuant to market-decline triggers other
than those in which solely program trading is temporarily halted), or
limitations on prices for trading (other than limitations on hours or numbers of
days of trading) have been fixed, or maximum ranges for prices for securities
have been required, by such exchange or the NASD or the Nasdaq or by order of
the Commission or any other governmental authority, or (iv) a banking moratorium
shall have been declared by New York, California or United States authorities.
If the Representatives elect to terminate this Agreement as provided in
this Section 7, the Company and the Underwriters shall be notified promptly by
telephone, promptly confirmed by facsimile.
If the sale to the Underwriters of the Shares, as contemplated by this
Agreement, is not carried out by the Underwriters for any reason permitted under
this Agreement or if such sale is not carried out because the Company shall be
unable to comply in all material respects with any of the terms of this
Agreement, the Company shall not be under any obligation or liability under this
Agreement (except to the extent provided in Sections 5 and 9 hereof) and the
Underwriters shall be under no obligation or liability to the Company under this
Agreement (except to the extent provided in Section 9 hereof) or to one another
hereunder.
8. INCREASE IN UNDERWRITERS' COMMITMENTS:
If any Underwriter shall default at the Closing Time or on a Date of
Delivery in its obligation to take up and pay for the Shares to be purchased by
it under this Agreement on such date the Representatives shall have the right,
within 36 hours after such default, to make arrangements for one or more of the
non-defaulting Underwriters, or any other underwriters, to purchase all, but not
less than all, of the Shares which such Underwriter shall have agreed but failed
to take up and pay for (the "Defaulted Shares"). Absent the completion of such
arrangements within such 36 hour period, (i) if the total number of Defaulted
Shares does not exceed 10% of the total number of Shares to be purchased on such
date, each non-defaulting
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Underwriter shall take up and pay for (in addition to the number of Shares which
it is otherwise obligated to purchase on such date pursuant to this Agreement)
the portion of the total number of Shares agreed to be purchased by the
defaulting Underwriter on such date in the proportion that its underwriting
obligations hereunder bears to the underwriting obligations of all
non-defaulting Underwriters; and (ii) if the total number of Defaulted Shares
exceeds 10% of such total, the Representatives may terminate this Agreement by
notice to the Company, without liability to any non-defaulting Underwriter.
Without relieving any defaulting Underwriter from its obligations
hereunder, the Company agrees with the non-defaulting Underwriters that it will
not sell any Shares hereunder on such date unless all of the Shares to be
purchased on such date are purchased on such date by the Underwriters (or by
substituted Underwriters selected by the Representatives with the approval of
the Company or selected by the Company with the approval of the
Representatives).
If a new Underwriter or Underwriters are substituted for a defaulting
Underwriter in accordance with the foregoing provision, the Company or the
non-defaulting Underwriters shall have the right to postpone the Closing Time or
the relevant Date of Delivery for a period not exceeding five business days in
order that any necessary changes in the Registration Statement and Prospectus
and other documents may be effected.
The term Underwriter as used in this Agreement shall refer to and include
any Underwriter substituted under this Section 8 with the like effect as, if
such substituted Underwriter had originally been named in this Agreement.
9. INDEMNITY AND CONTRIBUTION BY THE COMPANY AND THE UNDERWRITERS:
a) (i) The Company agrees to indemnify, defend and hold harmless
each Underwriter and any person who controls any Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act, from and against any loss, expense, liability, damage or claim
(including the reasonable cost of investigation) which, jointly or
severally, any such Underwriter or controlling person may incur under the
Securities Act, the Exchange Act or otherwise, insofar as such loss,
expense, liability, damage or claim arises out of or is based upon (A) any
breach of any representation, warranty or covenant of the Company contained
herein, (B) any failure on the part of the Company to comply with any
applicable law, rule or regulation relating to the offering of securities
being made pursuant to the Prospectus, or (C) any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or in the Registration Statement as amended by any
post-effective amendment thereof by the Company) or in a Prospectus (the
term Prospectus for the purpose of this Section 9 being deemed to include
any Preliminary Prospectus, the Prospectus and the Prospectus as amended or
supplemented by the Company), or arises out of or is based upon any
omission or alleged omission to state a material fact required to be stated
in either such Registration Statement or Prospectus or necessary to make
the statements made therein, in the light of the circumstances under which
they were made, not misleading, except insofar as any such loss, expense,
liability, damage or claim arises out of or is based upon
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any untrue statement or alleged untrue statement or omission or alleged
omission of a material fact contained in and in conformity with information
furnished in writing by the Underwriters (or by any person controlling an
Underwriter) through the Representatives to the Company expressly for use
in such Registration Statement or such Prospectus, PROVIDED, HOWEVER, that
the indemnity agreement contained in this subsection (a)(i) with respect to
the Preliminary Prospectus or the Prospectus shall not inure to the benefit
of any Underwriter (or to the benefit of any person controlling such
Underwriter) with respect to any person asserting any loss, expense,
liability, damage or claim which is the subject thereof if the Prospectus
or any supplement thereto corrected any such alleged untrue statement or
omission and if such Underwriter failed to send or give a copy of the
corrected Prospectus or corrected supplement thereto to such person at or
prior to the written confirmation of the sale of Shares to such person,
unless such failure resulted from noncompliance by the Company with Section
4(b) above.
b) If any action is brought against an Underwriter or controlling
person in respect of which indemnity may be sought against the Company
pursuant to subsection (a) above, such Underwriter shall promptly notify
the Company in writing of the institution of such action, and the Company
shall assume the defense of such action, including the employment of
counsel and payment of expenses, PROVIDED, HOWEVER, that any failure or
delay to so notify the Company will not relieve the Company of any
obligation hereunder, except to the extent that its ability to defend is
actually impaired by such failure or delay. Such Underwriter or
controlling person shall have the right to employ its or their own counsel
in any such case, but the fees and expenses of such counsel shall be at the
expense of such Underwriter or such controlling person unless the
employment of such counsel shall have been authorized in writing by the
Company in connection with the defense of such action, or the Company shall
not have employed counsel to have charge of the defense of such action
within a reasonable time or such indemnified party or parties shall have
reasonably concluded (based on the advice of counsel) that there may be
defenses available to it or them which are different from or additional to
those available to the Company (in which case the Company shall have the
right to direct the defense of such action on behalf of the indemnified
party or parties), in any of which events such fees and expenses shall be
borne by the Company and paid as incurred (it being understood, however,
that the Company shall be liable for the expenses of more than one separate
firm of attorneys for the Underwriters or controlling persons in any one
action or series of related actions in the same jurisdiction (other than
local counsel in any such jurisdiction) representing the indemnified
parties who are parties to such action). Anything in this paragraph to the
contrary notwithstanding, the Company shall be liable for any settlement of
any such claim or action effected without the its written consent.
c) Each Underwriter agrees, severally and not jointly, to indemnify,
defend and hold harmless the Company, the Company's directors, the
Company's officers that signed the Registration Statement, and any person
who controls the Company within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act (each an "Indemnitee"), from and
against any loss, expense, liability, damage or claim (including the
reasonable cost of investigation) which, jointly or severally, any
Indemnitee may
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incur under the Securities Act, the Exchange Act or otherwise, but only
insofar as such loss, expense, liability, damage or claim arises out of or
is based upon any untrue statement or alleged untrue statement of a
material fact contained in and in conformity with information furnished in
writing by such Underwriter through the Representatives to the Company
expressly for use in the Registration Statement (or in the Registration
Statement as amended by any post-effective amendment thereof by the
Company) or in a Prospectus, or arises out of or is based upon any omission
or alleged omission to state a material fact in connection with such
information required to be stated either in such Registration Statement or
Prospectus or necessary to make such information, in the light of the
circumstances under which made, not misleading. The statements set forth
under the caption "Underwriting" in the Preliminary Prospectus and the
Prospectus (to the extent such statements relate to the Underwriters)
constitute the only information furnished by or on behalf of any
Underwriter through the Representatives to the Company for purposes of
Section 3(j) and this Section 9.
d) If any action is brought against the Company, or any such person
in respect of which indemnity may be sought against any Underwriter
pursuant to the foregoing paragraph, the Company or such person shall
promptly notify the Representatives in writing of the institution of such
action and the Representatives, on behalf of the Underwriters, shall assume
the defense of such action, including the employment of counsel and payment
of expenses, PROVIDED, HOWEVER, that any failure or delay to so notify the
Representatives will not relieve the Representatives or the Underwriters of
any obligation hereunder, except to the extent that their ability to defend
is actually impaired by such failure or delay. The Company, or such person
shall have the right to employ its own counsel in any such case, but the
fees and expenses of such counsel shall be at the expense of the Company,
or such person unless the employment of such counsel shall have been
authorized in writing by the Representatives in connection with the defense
of such action or the Representatives shall not have employed counsel to
have charge of the defense of such action within a reasonable time or such
indemnified party or parties shall have reasonably concluded (based on the
advice of counsel) that there may be defenses available to it or them which
are different from or additional to those available to the Underwriters (in
which case the Representatives shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties), in
any of which events such fees and expenses shall be borne by such
Underwriter and paid as incurred (it being understood, however, that the
Underwriters shall not be liable for the expenses of more than one separate
firm of attorneys in any one action or series of related actions in the
same jurisdiction (other than local counsel in any such jurisdiction)
representing the indemnified parties who are parties to such action).
Anything in this paragraph to the contrary notwithstanding, no Underwriter
shall be liable for any settlement of any such claim or action effected
without the written consent of the Representatives.
e) If the indemnification provided for in this Section 9 is
unavailable to an indemnified party under subsections (a) and (c) of this
Section 9 in respect of any losses, expenses, liabilities, damages or
claims referred to therein, then each applicable indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to
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the amount paid or payable by such indemnified party as a result of such
losses, expenses, liabilities, damages or claims (i) in such proportion as
is appropriate to reflect the relative benefits received by the Company,
and the Underwriters from the offering of the Shares or (ii) if (but only
if) the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only
the relative benefits referred to in clause (i) above but also the relative
fault of the Company, and of the Underwriters in connection with the
statements or omissions which resulted in such losses, expenses,
liabilities, damages or claims, as well as any other relevant equitable
considerations. The relative benefits received by the Company, and the
Underwriters shall be deemed to be in the same proportion as, the total
proceeds from the offering (net of underwriting discounts and commissions
but before deducting expenses) received by the Company bear to the
underwriting discounts and commissions received by the Underwriters. The
relative fault of the Company, and of the Underwriters shall be determined
by reference to, among other things, whether the untrue statement or
alleged untrue statement of a material fact or omission or alleged omission
relates to information supplied by the Company, or by the Underwriters and
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The amount
paid or payable by a party under this subsection (e) as a result of the
losses, claims, damages and liabilities referred to above shall be deemed
to include any legal or other fees or expenses reasonably incurred by such
party in connection with investigating or defending any claim or action.
f) The Company, and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 9 were determined by
pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to in subsection (e)(i)
and, if applicable (ii), above. Notwithstanding the provisions of this
Section 9, no Underwriter shall be required to contribute any amount in
excess of the underwriting discounts and commissions applicable to the
Shares purchased by such Underwriter. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 9 are several in proportion to their
respective underwriting commitments and not joint.
24
<PAGE>
10. SURVIVAL:
The indemnity and contribution agreements contained in Section 9 and the
covenants, warranties and representations of the Company contained in Sections
3, 4 and 5 of this Agreement shall remain in full force and effect regardless of
any investigation made by or on behalf of any Underwriter, or any person who
controls any Underwriter within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act, or by or on behalf of the Company, its
directors and officers, or any person who controls the Company within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act,
and shall survive any termination of this Agreement or the sale and delivery of
the Shares. The Company, and each Underwriter agree promptly to notify the
others of the commencement of any litigation or proceeding against it and, in
the case of the Company, against any of the Company's officers and directors, in
connection with the sale and delivery of the Shares, or in connection with the
Registration Statement or Prospectus.
11. NOTICES:
Except as otherwise herein provided, all statements, requests, notices and
agreements shall be in writing or by telegram and, if to the Underwriters, shall
be sufficient in all respects if delivered to Friedman, Billings, Ramsey & Co.,
Inc., 1001 19th Street North, Arlington, Virginia 22209, Attention: Syndicate
Department; if to the Company, shall be sufficient in all respects if delivered
to the Company at the offices of the Company at 9601 Wilshire Blvd., Beverly
Hills, California 90210-5205.
12. GOVERNING LAW; HEADINGS:
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
The section headings in this Agreement have been inserted as a matter of
convenience of reference and are not a part of this Agreement.
13. PARTIES AT INTEREST:
The Agreement herein set forth has been and is made solely for the benefit
of the Underwriters, the Company, and the controlling persons, directors and
officers referred to in Sections 9 and 10 hereof, and their respective
successors, assigns, executors and administrators. No other person,
partnership, association or corporation (including a purchaser, as such
purchaser, from any of the Underwriters) shall acquire or have any right under
or by virtue of this Agreement.
25
<PAGE>
14. COUNTERPARTS AND FACSIMILE SIGNATURES:
This Agreement may be signed by the parties in counterparts which together
shall constitute one and the same agreement among the parties. A facsimile
signature shall constitute an original signature for all purposes.
26
<PAGE>
If the foregoing correctly sets forth the understanding among the
Company, and the Underwriters, please so indicate in the space provided below
for the purpose, whereupon this Agreement shall constitute a binding agreement
among the Company and the Underwriters.
Very truly yours,
KENNEDY-WILSON, INCORPORATED
By:
-------------------------------
By:
Title:
Accepted and agreed to as
of the date first above written:
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
WEDBUSH MORGAN SECURITIES INC.
BY FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By:
--------------------------------
Title:
For itself and as Representative of the other
Underwriters named on Schedule I hereto.
27
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Initial
Underwriter Shares to be Purchased
- ----------- ----------------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc`. ............
Wedbush Morgan Securities Inc.......................
Total..........................................
</TABLE>
28
<PAGE>
SCHEDULE II
SUBSIDIARIES
29
<PAGE>
--------------------
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
KENNEDY-WILSON, INC.
--------------------
KENNEDY-WILSON, INC. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware,
DOES HEREBY CERTIFY:
FIRST: That pursuant to a written consent dated February 19, 1999, the
Board of Directors of the Corporation unanimously adopted resolutions declaring
it advisable that the Certificate of Incorporation of the Corporation be amended
and calling a special meeting of the stockholders of the Corporation for
consideration thereof. The resolution setting forth the proposed amendment is as
follows:
RESOLVED, that an amendment to Section 1 of Article V of the
Certificate of Incorporation is hereby approved so that said Section
1 will be amended in its entirety to read as follows:
"SECTION 1. Number of Authorized Shares. The Corporation shall be
authorized to issue two classes of shares of stock to be designated,
respectively, "Common Stock" and "Preferred Stock;" the total number
of shares of all classes of stock that the Corporation shall have
authority to issue is Fifty-Five Million (55,000,000) shares
consisting of Fifty Million (50,000,000) shares of Common Stock, par
value $.01 per share, and Five Million (5,000,000) shares of
Preferred Stock, par value $.01 per share."
SECOND: That thereafter, a special meeting of the stockholders of the
Corporation was duly called and held, upon notice in accordance with Section 222
of the General Corporation Law of the State of Delaware, at which meeting the
necessary number of shares as required by statute were voted in favor of said
amendment.
THIRD: That said amendment was duly adopted in accordance with Section 242
of the General Corporation Law of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, KENNEDY-WILSON, INC. has caused this Certificate
of Amendment to be executed and attested to by its undersigned officers this
15th day of April, 1999.
KENNEDY-WILSON, INC.
By: /s/ William J. McMorrow
-----------------------------------
Name: William J. McMorrow
Title: Chairman and Chief Executive
Officer
ATTEST:
By: /s/ Freeman Lyle
----------------------
Name: Freeman A. Lyle
Title: Secretary
-2-
<PAGE>
[Letterhead of White & Case LLP]
April 21, 1999
BY HAND
Kennedy-Wilson, Inc.
9601 Wilshire Boulevard
Suite 220
Beverly Hills, California 90210
Ladies and Gentlemen:
We have acted as special counsel to Kennedy-Wilson, Inc., a Delaware
corporation (the "Company"), in connection with the proceedings and documents
relating to the proposed registration by the Company, through a Registration
Statement on Form S-1 (the "Registration Statement"), to be filed by the Company
with the Securities and Exchange Commission, of up to 2,300,000 shares of its
Common Stock, $0.01 par value (the "Shares").
For the purposes of rendering this opinion, we have examined
originals or photostatic copies certified or otherwise identified to our
satisfaction, of the Registration Statement, corporate records, agreements,
certificates and statements of officers and accountants of the Company and of
public officials, and such other documents as we have deemed relevant and
necessary as a basis for the opinion hereinafter set forth. We express no
opinion herein as to any laws other than the General Corporation Law of the
State of Delaware.
Based on the foregoing, we are of the opinion that the Shares, when
issued and paid for in accordance with the terms and conditions set forth in the
Registration Statement, will be duly authorized, validly issued, fully paid and
nonassessable.
<PAGE>
We consent to the use of this opinion as an exhibit to the
Registration Statement, and we further consent to the use of our name under the
heading "Legal Matters" in the Prospectus which is a part of the Registration
Statement.
Sincerely,
/s/ White & Case LLP
White & Case LLP
-2-
<PAGE>
AMENDMENT NO. 3 TO THE 1992 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
WHEREAS, Kennedy-Wilson, Inc., a Delaware corporation (the
"Company") has adopted the Kennedy-Wilson, Inc. 1992 Incentive and Nonstatutory
Stock Option Plan (as amended, the "Plan");
WHEREAS, Section 4 of the Plan provides that the number of shares on
which options may be granted is 240,000;
WHEREAS, as a result of stock dividends the number of shares on
which options may be granted has been increased in accordance with the terms of
the plan to 1,080,000; and
WHEREAS, the Board of Directors of the Company has approved amending
the Plan to increase the number of shares of common stock under the Plan to
1,700,000;
NOW, THEREFORE, the Plan is hereby amended as follows:
1. Section 4(a) of the Plan is hereby amended by deleting the number
"240,000" wherever it appears and by inserting the number
"1,700,000" in its stead.
2. This amendment to the Plan shall be effective as of the date of
execution hereof; provided, however, that if this amendment is not
approved by the stockholders of the Company in accordance with
applicable federal and state law (and the rules and regulations
thereunder), this amendment shall be void and of no force or effect.
3. Except to the extent set forth above, the Plan is not otherwise
modified and shall remain in full force and effect.
IN WITNESS WHEREOF, the Board of Directors of the Company has caused
this Amendment to be executed by unanimous written consent on the 19th day of
February 1999.
Kennedy-Wilson, Inc.
<PAGE>
K.A. CAPITAL K.K.
SHAREHOLDERS AGREEMENT
THIS AGREEMENT is made effective as of March 9, 1999 between
Kennedy-Wilson Japan Co., Ltd., a company incorporated in Japan whose principal
place of business is at Nishi-Shinbashi Aiko Building, 1-6-15, Nishi-Shinbashi,
Minato-ku, Tokyo, Japan ("K-W") and Cargill Investments Japan Ltd., a company
incorporated in Japan whose principal place of business is at Fuji Building,
3-2-3 Marunouchi, Chiyoda-ku, Tokyo, 100, Japan ("CIJL").
WHEREAS, K-W and CIJL have agreed to establish K.A. Capital K.K., a
joint stock company (the "Company") as a joint venture whose business shall
include but not be limited to dealing in real estate related investments in
loans and properties; and
WHEREAS, K-W and CIJL wish to set out the terms and conditions upon
which the business of the Company is to be carried on and to govern their
respective rights and obligations.
NOW, THEREFORE, in consideration of the premises and undertakings
hereinafter set forth, the parties hereto agree as follows:
1. DEFINITIONS. When used in the Agreement the following terms shall have
the following meanings:
"Accountancy Firm" means a firm of independent public accountants that
is the Japanese affiliate of one of the "big five" accountancy firms in
the world, which at the date of this Agreement were agreed to be Arthur
Andersen, Deloitte and Touche, Ernst and Young, KPMG Peat Marwick and
Price Waterhouse Coopers LLP;
"Board of Directors" means the board of directors of the Company;
"Employee Secondment and Consulting Agreement" means that certain
Employee Secondment and Consulting Agreement of even date herewith
between K-W and the Company.
"Confidential Information" includes (i) know-how, trade secrets,
information relating to the activities of the Company, its finances,
confidential arrangements with agents, customers or sellers, and other
proprietary information of the Company, and (ii) other information that
a Shareholder may, by written notice, notify the other Shareholder as
being confidential;
"Deadlock" means any situation that has persisted for not less than
fourteen (14) days in which a matter that is material to the Company
cannot be resolved (i) by
<PAGE>
virtue of a substantial disagreement between the Shareholders and which
is manifested by an equality of votes at any meeting of the
Shareholders or the Board of Directors; or (ii) by virtue of an
inability to form a quorum at any meeting or adjourned meeting of the
Board of Directors or Shareholders;
"Shareholders" means K-W and CIJL or their respective successors and
permitted assigns and "Shareholder" shall mean either one of them; and
"Shares" means those shares of (Y)50,000 par value each in the capital
of the Company.
"Work Rules" means the Work Rules of K.A. Capital K.K. Concerning Loan
Servicing and Asset Management substantially in the form attached
hereto as Exhibit B, as amended or supplemented from time to time.
2. THE COMPANY
2.1 FORMATION OF THE COMPANY. The Shareholders have established the Company
as a joint stock corporation (kabushiki kaisha) incorporated under the
Commercial Code of Japan with an authorized share capital of eighty
million Yen ((Y)80,000,000) divided into one thousand six hundred
(1,600) ordinary Shares of fifty thousand Yen ((Y)50,000) each. The
Shareholders agree to invest in and operate the Company in accordance
with the terms and conditions set forth in this Agreement.
2.2 ARTICLES OF ASSOCIATION. The Articles of Association of the Company
are substantially in the form attached as Exhibit A.
2.3 PURPOSE. The purposes of the Company include dealing in loan and real
estate related investments, including but not limited to investment by
means of loan purchase, real estate purchase and loan participation.
2.4 COSTS. The costs of the preparation, registration and execution of this
Agreement and the incorporation of the Company shall be borne by the
Company.
3. SHARES
3.1 SHARE CAPITAL AND SHAREHOLDINGS. From the time of establishment of the
Company to the date of this Agreement, the Company issued and the
Shareholders subscribed for one thousand six hundred (1,600) Shares at
the price of (Y)50,000 per Share for an aggregate paid in capital of
eighty million Yen ((Y)80,000,000), as follows:
(a) K-W subscribed for eight hundred (800) Shares constituting
50% of the issued capital of the Company for which it paid
to the Company the sum of forty million Yen
((Y)40,000,000); and
2
<PAGE>
(b) CIJL subscribed for eight hundred (800) Shares constituting 50%
of the issued capital of the Company for which it paid to the
Company the sum of forty million Yen ((Y)40,000,000).
3.2 PREEMPTIVE RIGHTS. The Shareholders shall have pro-rata preemptive
shareholder's rights to subscribe for and acquire any additional Shares
which the Company may propose to issue subsequent to its establishment.
4. MANAGEMENT
4.1 BOARD OF DIRECTORS. Responsibility for the management, direction and
control of the Company shall be vested in the Board of Directors in
accordance with the laws of Japan, the Articles of Association and this
Agreement.
4.2 NUMBER. The Company shall have four directors, two of whom shall be
nominated by K-W and two of whom shall be nominated by CIJL. Each of
the Shareholders shall cause their Shares to be voted to elect each
person so nominated.
4.3 VACANCIES. In the event the position of a director of the Company
becomes vacant for any reason, the Shareholder that nominated the
director whose office is vacant shall nominate another person to fill
the vacancy.
4.4 REPRESENTATIVE DIRECTOR. The Company shall have one Representative
Director to be selected by K-W from among the directors nominated by
K-W. The Representative Director shall be assigned the title of
President and shall have the day-to-day operating responsibility for
the Company under the overall supervision of the Board of Directors and
the Statutory Auditor (see Section 4.8); provided, however, that such
day-to-day operation responsibility may be delegated or subcontracted
to consultants and/or asset managers as approved by the Board of
Directors.
4.5 MEETINGS OF THE BOARD. Meetings of the Board of Directors shall be held
when necessary as determined by the Board of Directors or as otherwise
required or permitted in accordance with the laws of Japan. Board of
Directors meetings shall be held at the head office of the Company
provided that such meetings may also be held at such other places as
may be agreed upon by the Board of Directors. Any costs incurred by any
director in attending meetings of the Board of Directors shall be borne
by the Shareholder which nominated such director.
4.6 QUORUM AND VOTING. Resolutions of the Board of Directors shall be
adopted by the affirmative vote of a majority of the directors of the
Company provided however, notwithstanding any other provision in this
Agreement to the contrary, the directors nominated by CIJL, in their
sole and absolute discretion and without the consent or approval of the
directors nominated by K-W, shall have the right to
3
<PAGE>
cause the Company to take action under the Employee Secondment and
Consulting Agreement, including termination of such agreement.
4.7 LANGUAGE. The notices, agendas, proposed resolutions and minutes of all
of the meetings of the Board of Directors of the Company shall be
prepared in English, which shall be the original and controlling
version, and also translated into Japanese.
4.8 STATUTORY AUDITOR. The Company shall have one statutory auditor (as
required by and defined in Chapter IV, Section III, Subsection III of
the Commercial Code of Japan). The Statutory Auditor shall be nominated
by CIJL and approved by the Board of Directors.
5. SHAREHOLDERS MEETINGS
5.1 MEETINGS. An ordinary general meeting of Shareholders shall be held
within three months after the end of each fiscal year of the Company at
the principal office of the Company or at any other location which
shall have been unanimously agreed by the Shareholders. Extraordinary
General Meetings of Shareholders shall be held whenever necessary
pursuant to a determination of the Board of Directors or otherwise in
accordance with the provisions of the Commercial Code of Japan.
5.2 QUORUM AND VOTING. Except for the matters set out in Clause 5.3 or as
otherwise required by law, resolutions of a general meeting of
Shareholders shall be adopted by the affirmative vote of a majority of
the Shares represented at a meeting of Shareholders attended by
Shareholders holding a majority of the total outstanding shares. Each
Shareholder shall be entitled to one vote for each Share owned by it.
5.3 SPECIAL MAJORITY. In addition to any statutory rights of the
Shareholders and except as otherwise required by mandatory provisions
of Japanese law, the following actions may be taken by the Company only
upon a resolution having the affirmative vote of the Shareholders
representing a two-third's (2/3) majority of the Shares represented at
the meeting:
(a) amendment, addition, change, modification or deletion of
any portion of the Articles of Association of the Company;
(b) liquidation or dissolution of the Company; or
(c) sale, lease, transfer or any other disposal of all or
substantially all of the assets or business of the Company.
5.4 VOTING BY PROXY. A Shareholder may exercise its vote by proxy, provided
the proxy is submitted to the Representative Director of the Company
prior to the
4
<PAGE>
Shareholders meeting at which the vote is to be taken.
5.5 LANGUAGE. The notices, agendas, proposed resolutions and minutes of all
of the meetings of the shareholders of the Company shall be prepared in
English.
6. INTENTIONALLY OMITTED.
7. TRANSFER OF SHARES. Without the prior written consent of the other
Shareholder which may be granted or denied in such other Shareholder's
sole and absolute discretion, a Shareholder shall not sell, transfer,
encumber, gift, donate, assign, pledge, hypothecate or otherwise
dispose of its shares, whether voluntarily or involuntarily, and
whether during a Shareholder's existence or upon or after its
insolvency and/or dissolution, including but not limited to, pursuant
to operation of law, court order, judicial process or foreclosure, levy
or attachment.
8. REPRESENTATIONS AND WARRANTIES.
Each Shareholder represents and warrants to each other that:
(a) it is a corporation validly organized and existing under
the laws of Japan and has full corporate power to enter into
and perform this Agreement; and
(b) the execution, delivery and performance of this Agreement
(i)have been duly authorized by all necessary corporate
action, (ii) will not violate or conflict with any provision,
law, rule or regulation to which such Shareholder is subject
or (iii) will not violate any of such Shareholder's
organizational documents; and
(c) this Agreement constitutes a valid and binding obligation
of such Shareholder.
9. DIVIDEND POLICY. All legally distributable net cash flow less
reasonable reserves, as determined by the Board of Directors, shall be
paid out each year to the Shareholders by way of dividends as such
times and in such amounts as may be determined by the Board of
Directors.
10. CONFIDENTIALITY. Each Shareholder agrees that the terms of this
Agreement are confidential and shall not be disclosed to any other
party without the other Shareholder's prior written consent; provided,
however, that either Shareholder may disclose the existence and/or
terms and conditions hereof to its employees, agents and financial,
legal and other advisors and if so required by law, so long as such
party first provides a copy of any such written request to the other
Shareholder and reasonably consults with it.
5
<PAGE>
11. TERM. This Agreement shall continue and remain in full force and effect
for the life of the Company unless sooner terminated in the manner as
specified below.
12. TERMINATING EVENTS. This Agreement shall terminate upon the occurrence
of any of the following events: (a) the liquidation of the Company; (b)
when all the Shares in the Company are beneficially held by one party;
or (c) the unanimous written agreement of the Shareholders upon the
unanimous recommendation of the Board of Directors.
13. CALL OPTION. If:
(a) K-W commits a material breach of its obligations under
this Agreement or the Employee Secondment and Consulting
Agreement and such breach is not capable of remedy or if
capable of remedy is not remedied within thirty (30) days
of notice; or
(b) The Company has not complied with the Work Rules and such
non-compliance is not cured within 30 days of the notice
of such non-compliance by either Shareholder to the Board
of Directors; or
(c) K-W becomes insolvent or enters bankruptcy, liquidation or
any form of winding up or similar proceedings under any
applicable law; or
(d) A Deadlock exists,
then CIJL, or its nominee, shall (without prejudice to its other rights
and remedies) have the right to purchase all of the Shares of K-W free
from any encumbrance or security interest, at any time during the
period of three (3) months from the date of the occurrence of the
events referred to in paragraph (a), (b), (c) or (d) above (the "Call
Option").
14. PUT OPTION. If:
(a) CIJL commits a material breach of its obligations under this
Agreement and such breach is not capable of remedy or if capable
of remedy is not remedied within thirty (30) days of notice; or
(b) CIJL becomes insolvent or enters bankruptcy, liquidation or any
form of winding up or similar proceedings under any applicable
law; or
(c) A Deadlock exists,
then K-W shall (without prejudice to its rights and remedies) have the
right to require CIJL, or its nominee, to purchase all of its Shares,
free from any security
6
<PAGE>
interest, at any time during the period of three (3) months from the
date of the occurrence of the breach referred to above (the "Put
Option").
15. OPTION NOTICE, PRICE AND PURCHASE.
15.1 NOTICE. CIJL and K-W may exercise the Call Option and Put Option,
respectively, by delivering written notice (an "Option Notice") of its
intention to exercise the relevant option to K-W or CIJL, respectively
(the Shareholder exercising such Call Option or Put Option shall be
referred to as the "Exercising Shareholder" and the other Shareholder
shall be referred to as the "Non-exercising Shareholder"). The Option
Notice shall not be revocable without the consent of the Non-exercising
Shareholder. Upon service of the Option Notice, the Exercising
Shareholder shall become bound to buy or to sell, as the case may be,
the Shares specified in the Option Notice at the price and in
accordance with the terms set out below.
15.2 PRICE. The price at which such purchase or sale shall take place shall
be the fair market value of the relevant Shares which shall be the
value agreed upon by the Shareholders, or, if not agreed within ten
(10) days, then as determined by an independent expert appraiser (the
"Expert"). The Expert shall be chosen by two independent expert
appraisers who are from different Accountancy Firms, one appointed by
the Exercising Shareholder and one appointed by the Non-exercising
Shareholder. The Expert shall be chosen from a third Accountancy Firm.
The parties shall use their respective reasonable endeavors to ensure
that the Expert is appointed within thirty (30) days of the Option
Notice and that the determination of the Expert is made within thirty
(30) days of referral of the matter to the Expert.
15.3 COMPLETION. Completion of the purchase or sale pursuant to an Option
Notice shall take place no later than fourteen (14) calendar days after
the date on which the applicable fair market value shall have been
determined.
16. NOTICES. All notices given under this Agreement shall be delivered
personally, sent by confirmed facsimile or by prepaid registered mail
to the address set out at the beginning of this Agreement or the last
address of a party as shall have been communicated in writing to the
other party. Notices sent by facsimile shall be deemed delivered on the
first business day after transmission. Notices sent by mail shall be
deemed delivered on the fourth business day after posting.
17. GOVERNING LAW. This Agreement shall be governed by and construed in all
respects in accordance with the laws of Japan.
18. LANGUAGE. English shall be used officially in respect of all matters in
connection with this Agreement, unless otherwise agreed in writing by
all the parties to this Agreement. This Agreement has been prepared in
the English language. In the case where any translations have been
prepared and any dispute arises over the
7
<PAGE>
meaning of any provision, the English language version shall prevail.
19. NON-ASSIGNMENT. This Agreement shall not be assigned to any third party
without prior written consent of all parties to this Agreement and the
approval of the Board of Directors.
20. ENTIRE AGREEMENT. This Agreement represents the entire agreement and
understanding between the parties to this Agreement with respect to the
subject matter of this Agreement and supersedes any other agreements or
understandings, written or verbal, that the parties may have had with
respect thereto.
21. SEVERABILITY. In the event that any provision contained herein shall be
held to be invalid, illegal or unenforceable, the validity, legality
and enforceability of all remaining provisions shall not in any way be
affected or impaired thereby.
22. FURTHER ASSURANCES. The parties shall promptly do and sign or execute
or procure to be done, signed or executed all such other acts, deeds,
documents and things as may be necessary or desirable to give effect to
this Agreement.
23. INCONSISTENCY WITH ARTICLES OF ASSOCIATION. In the event of any
conflict or inconsistency between the terms and conditions of this
Agreement, on the one hand, and the terms and conditions of the
Articles of Association of the Company, this Agreement shall prevail.
24. AMENDMENT. This Agreement may be amended only by an instrument in
writing signed by all parties in existence at the time of the
amendment.
25. ARBITRATION.
25.1 ARBITRATION BODY. All questions and disputes arising under this
Agreement that cannot be settled by good faith discussions between the
parties shall be fully and finally settled by binding arbitration in
Tokyo, Japan (or such other location as the parties may agree), under
the then current Rules of the Japan Commercial Arbitration Association
("JCAA"). The arbitration shall be conducted in English before a panel
of three (3) arbitrators, each of whom shall have the following
qualifications: (i) at least fifteen (15) years of experience as a
lawyer or judge, (ii) at least five (5) years of experience handling
international financial transactions, and (iii) at least five (5) prior
experiences as an arbitrator.
25.2 SELECTION OF ARBITRATORS. Each of CIJL and K-W shall designate one
arbitrator with the above qualifications within fourteen (14) days of
receiving notice from the other party of a desire to arbitrate, and
those two (2) arbitrators shall then mutually agree within fourteen
(14) days upon the third arbitrator who shall become the chairperson of
the arbitration committee. If, within the stated time periods, (i) the
initiating party fails to designate its arbitrator, then the
arbitration
8
<PAGE>
shall lapse unless the original initiating party sends a second (or
subsequent) notice of arbitration to the other party which shall
restart the arbitration time schedule, and (ii) either the responding
party fails to designate its arbitrator or the two arbitrators
designated cannot agree upon the third arbitrator, then the JCAA shall
make the selection of the arbitrator for the responding party and/or
the third arbitrator, as applicable.
25.3 COMPLETION OF ARBITRATION; AWARDS. The arbitration shall be completed
within sixty (60) days of the selection or designation, as applicable,
of the third arbitrator unless the parties mutually agree to an
extension. The arbitrators shall award attorneys fees, expert witness
fees, costs and expenses (including the fees of the arbitration and any
such fees and costs related to enforcement proceedings), to the
party(ies) that substantially prevails in its position, which shall be
stated to the arbitrators in a written declaration at the commencement
of the arbitration. Any arbitration award shall be entitled to full and
immediate enforcement by the Tokyo District Court and any other
competent court.
25.4 PROVISIONAL RELIEF. Nothing in this Agreement shall be deemed to
preclude any party from seeking provisional relief before a competent
court.
26. U.S. TAXES. For purposes of the US Internal Revenue Code (the "Code"),
the Company will be treated as a Controlled Foreign Corporation. K-W
and CIJL agree that they will cause their respective ultimate U.S.
shareholders to take a consistent approach to the U.S. tax treatment of
the income of the Company and any foreign tax credits generated
therefrom. As the intention and business of the Company is to deal in
such real estate related investments in loans and properties in Japan,
K-W and CIJL hereby agree that it would be appropriate to treat such
income as "dealer" income pursuant to Section 945(c)2(C) of the code
and to treat the foreign tax credits arising from any Japanese tax paid
by the Company as falling within the "financial services" basket
pursuant to Section 904(d)(2)(A)(c) of the Code. If the business of the
Company should change materially, K-W and CIJL will cause their
ultimate U.S. shareholders to discuss in good faith a consistent
treatment of the Company's income and foreign tax credits relating
thereto, for U.S. tax purposes.
27. COUNTERPARTS. This Agreement may be signed in any number of
counterparts and all such counterparts taken together shall be deemed
to constitute one and the same document.
9
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date and year first above written:
KENNEDY-WILSON JAPAN CO., LTD.:
/s/ Ryosuke Homma
- --------------------------------------------
Name: Ryosuke Homma
Title: Representative Director
CARGILL INVESTMENTS JAPAN LIMITED:
/s/ Yojiro Koizumi
- --------------------------------------------
Name: Yojiro Koizumi
Title: Representative Director
10
<PAGE>
CONVERTIBLE DEBENTURE
PURCHASE AGREEMENT
by and among
KENNEDY-WILSON, INC.
and
William J. McMorrow
and
Lewis A. Halpert
and
THE SEVERAL PURCHASERS NAMED IN SCHEDULE I
Dated as of April 15, 1999
<PAGE>
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT dated as of April 15, 1999 by and
among Kennedy-Wilson, Inc., a Delaware corporation (the "Company"), William J.
McMorrow and Lewis A. Halpert (the "Managing Stockholders"), and the several
purchasers named in the attached Schedule I (individually a "Purchaser" and
collectively the "Purchasers").
WHEREAS, the Company wishes to issue and sell to the Purchasers the
Company's 6% Subordinated Convertible Notes, due 2006, (the "Convertible
Debentures") in the original aggregate principal amount of $7,500,000; and
WHEREAS, the Purchasers, severally, wish to purchase the Convertible
Debentures on the terms and subject to the conditions set forth in this
Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained in this Agreement, the parties agree as follows:
ARTICLE I
THE CONVERTIBLE DEBENTURES
SECTION 1.01 Issuance, Sale and Delivery of the Convertible Debentures. On
the basis of the representations, warranties, covenants and agreements contained
herein and subject to the terms and conditions of this Agreement, the Company
agrees to issue and sell to each Purchaser, and each Purchaser hereby agrees to
purchase from the Company, the Convertible Debentures with the principal amount
set forth opposite the name of such Purchaser under the heading "Convertible
Debentures to be Purchased" on Schedule I, at the aggregate purchase price set
forth opposite the name of such Purchaser under the heading "Purchase Price for
Convertible Debentures" on Schedule I. The Convertible Debentures shall be
substantially in the form set forth as Exhibit A attached hereto. Except as set
forth in this Agreement, the Convertible Debentures shall (a) be payable on
April 15, 2006 and (b) bear interest (based on a 360-day year consisting of
twelve 30-day months) on the unpaid principal amount thereof until due and
payable at the rate of six percent (6%) per annum, which interest shall be
payable monthly in arrears on the last business day of each month, commencing
May , 1999, and at maturity or prior prepayment of the Convertible Debentures in
full.
SECTION 1.02 Closing. The closing shall take place at the offices of
Testa, Hurwitz & Thibeault, LLP, High Street Tower, 125 High Street, Boston,
Massachusetts 02110, at 10:00 a.m., Boston time, on or before April 15, 1999, or
at such later date on or before April 26, 1999 on which all conditions precedent
set forth in Article IV are satisfied or waived, or at such other location or
such later date and time as may be agreed upon between the Purchasers and the
Company (such closing being called the "Closing" and such date and time being
called the "Closing Date"). After the Closing and on or before April 26, 1999,
the Company shall issue and deliver to each Purchaser a Convertible Debenture,
payable to the order of such Purchaser, in the principal amount set forth
opposite the name of such Purchaser under the heading "Convertible Debentures to
be Purchased" on Schedule I. As payment in full for the Convertible
<PAGE>
Debentures being purchased by it under this Agreement, and against delivery of
the Convertible Debentures as aforesaid, on the Closing Date each Purchaser
shall transfer to the account of the Company by wire transfer the amount set
forth opposite the name of such Purchaser under the heading "Purchase Price for
Convertible Debenture" on Schedule I-.
SECTION 1.03 Repayment. The Company hereby unconditionally promises to pay
to each Holder of a Convertible Debenture the then unpaid principal amount of
the Convertible Debenture, all accrued and unpaid interest thereon on April 15,
2006.
SECTION 1.04 Registration of Transfer and Exchange; Payments and
Endorsements. The Company shall keep at its corporate headquarters located at
the address listed in Section 8.05 of this Agreement, or such other office as
the Company shall designate from time to time with prompt written notice, a
register (the "Security Register") maintained by a registrar (the "Security
Registrar") in which, subject to reasonable regulations as the Security
Registrar may prescribe, the Company shall provide for the registration of the
Convertible Debentures initially in the name of the Purchasers and upon the
transfer of the Convertible Debentures by each Purchaser in accordance with the
terms and conditions of this Agreement (the Purchasers and transferees and
distributees being referred to hereafter individually as a "Holder" and
collectively as "Holders"), in the name of the transferee. The Secretary of the
Company shall initially be the "Security Registrar" for the purpose of
registering the Convertible Debentures and transfers of Convertible Debentures.
Payments of principal and interest on the Convertible Debentures shall be
made without setoff or counterclaim directly by check duly mailed or delivered
to the Purchasers at their addresses referred to in Section 8.05 hereof, without
any presentment or notation of payment, except that prior to any transfer of any
Convertible Debentures, the Holder thereof shall endorse on such Convertible
Debentures a record of the date to which interest has been paid and all payments
made on account of principal of such Convertible Debentures. All payments and
prepayments of principal of and interest on the Convertible Debentures shall be
applied (to the extent thereof) to all of the Convertible Debentures pro rata
based on the principal amount outstanding and held by each Holder thereof.
SECTION 1.05 Default Rates of Interest. If an Event of Default described
in Section 9.01(c) (a "Ratio Default") has occurred and is continuing for at
least 30 days, from and after the 30th day after the date such Ratio Default
occurred the entire outstanding unpaid principal balance of the Convertible
Debentures and any unpaid interest from time to time due thereon shall bear
interest, payable on demand, at the rate of 15% per annum, or such lower rate as
then may be the maximum rate permitted by applicable law; provided, however,
that upon the cessation or cure of such Ratio Default, if no Payment Default (as
defined below) or Other Default (as defined below) is then continuing, the
Convertible Debentures shall again bear interest at the rate of 6% per annum as
set forth in Section 1.01 and if a Payment Default or Other Default is then
continuing, the Convertible Debentures shall bear interest at the rate required
by the applicable provision of this Section 1.05. If an Event of Default
described in Section 9.01(a) or (b) (a "Payment Default") has occurred and is
continuing for at least 30 days, from and after the 30th day after the date such
Payment Default occurred the entire outstanding
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<PAGE>
unpaid principal balance of the Convertible Debentures and any unpaid interest
from time to time due thereon shall bear interest, payable on demand, at the
rate of 8% per annum, or such lower rate as then may be the maximum rate
permitted by applicable law; provided, however, that upon the cessation or cure
of such Payment Default, if no Ratio Default or Other Default is then
continuing, the Convertible Debentures shall again bear interest at the rate of
6% per annum as set forth in Section 1.01 and if a Ratio Default or Other
Default is then continuing, the Convertible Debentures shall bear interest at
the rate required by any the applicable provision of this Section 1.05. If an
Other Default has occurred and is continuing, from and after the date such Other
Default occurred the entire outstanding unpaid principal balance of the
Convertible Debentures and any unpaid interest from time to time due thereon
shall bear interest, payable on demand, at the rate of 10% per annum, or such
lower rate as then may be the maximum rate permitted by applicable law;
provided, however, that upon the cessation or cure of such Other Default, if no
Ratio Default or Payment Default is then continuing, the Convertible Debentures
shall again bear interest at the rate of 6% per annum as set forth in Section
1.01 and if a Payment Default or Ratio Default is then continuing, the
Convertible Debentures shall bear interest at the rate required by the
applicable provision of this Section 1.05).
SECTION 1.06 Maximum Legal Rate of Interest. Nothing in this Agreement or
in the Convertible Debentures shall require the Company to pay interest at a
rate in excess of the maximum rate permitted by applicable law.
SECTION 1.07 Payment on Non-Business Days. Whenever any payment to be made
shall be due on a day which is not a business day, such payment may be made on
the next succeeding business day, and such extension of time shall in such case
not be included in the computation of payment of interest due.
SECTION 1.08 Optional Prepayment. Commencing only on April 15, 2002, upon
thirty (30) days prior written notice, the Company may prepay all, but not less
than all, of the unpaid principal amount and any outstanding interest on the
Convertible Debentures only if the market price of the Company's Common Stock
for the 30 consecutive trading days during the 35 trading days preceding the
date of such notice has been at least $20.00 per share (as adjusted from time to
time in the same manner as the Applicable Conversion Value pursuant to Article
IA hereof) provided, however, that upon thirty (30) days prior written notice,
the Company may prepay all, but not less than all, of the unpaid principal
amount and any outstanding interest on the Convertible Debentures at any time
the aggregate unpaid principal amount of all outstanding Convertible Debentures
is $1,000,000 or less.
SECTION 1.09 Transfer and Exchange of Convertible Debentures. The Holder
of any Convertible Debenture may, prior to maturity or prepayment thereof,
surrender such Convertible Debenture at the principal office of the Company for
transfer or exchange if (a) Convertible Debentures with at least $500,000 in
principal amount are transferred or (b) such transfer or exchange is in
connection with the dissolution or winding up of a Purchaser. Any Holder
desiring to transfer or exchange any Convertible Debenture shall first notify
the Company in writing at least five (5) days in advance of such transfer or
exchange. Within a reasonable time after such notice to the Company from a
Holder of its intention to make such exchange and
-3-
<PAGE>
without expense (other than transfer taxes, if any) to such Holder, the Company
shall issue in exchange therefor another Convertible Debenture, in such
denominations as requested by the Holder, for the same aggregate principal
amount, as of the date of such issuance, as the unpaid principal amount of the
Convertible Debenture so surrendered and having the same maturity and rate of
interest, containing the same provisions and subject to the same terms and
conditions as the Convertible Debenture so surrendered. Each new Convertible
Debenture shall be made payable to such person or persons, or assigns, as the
Holder of such surrendered Convertible Debenture may designate, and such
transfer or exchange shall be made in such a manner that no gain or loss of
principal or interest shall result therefrom. Unless the Convertible Debentures
have been registered under the Securities Act, if the Company so requests, the
transferee shall provide, and the Company shall not be required to effect a
transfer until it receives, an opinion of counsel that is reasonably
satisfactory to the Company to the effect that such transfer is not required to
be registered under the Securities Act, provided that such opinion shall not be
required in respect of a transfer to any partner of a Purchaser.
SECTION 1.10 Replacement of Convertible Debentures. Upon receipt of
evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of any Convertible Debenture and, if requested by the Company in the
case of any such loss, theft or destruction, upon delivery of an indemnity bond
or other agreement or security reasonably satisfactory to the Company, or, in
the case of any such mutilation, upon surrender and cancellation of such
Convertible Debenture, the Company will issue a new Convertible Debenture, of
like tenor and amount and dated the date to which interest has been paid, in
lieu of such lost, stolen, destroyed or mutilated Convertible Debenture;
provided, however, if any Convertible Debenture of which a Purchaser is the
Holder is lost, stolen or destroyed, the affidavit of an authorized partner or
officer of the Purchaser setting forth the circumstances with respect to such
loss, theft or destruction shall be accepted as satisfactory evidence thereof,
and no indemnification bond or other security shall be required as a condition
to the execution and delivery by the Company of a new Convertible Debenture in
replacement of such lost, stolen or destroyed Convertible Debenture other than
the Purchaser's written agreement to indemnify the Company.
SECTION 1.11 Subordination. The Company, the Purchasers and each Holder by
its acceptance of any Convertible Debenture agree, for the benefit of holders of
Senior Debt, that the principal of or interest on or any other amounts due with
respect to the Convertible Debentures shall be subordinated to the prior payment
in full of all Senior Debt as provided herein. Upon the maturity of any Senior
Debt (by lapse of time, acceleration or otherwise) all such Senior Debt which
has so matured and is then due and payable shall first be paid in full, or such
payment shall be duly provided for in a manner satisfactory to all holders of
such Senior Debt, before any payment is made on account of the principal of or
interest on or any other amounts due with respect to the Convertible Debentures.
Upon any distribution of assets of the Company in any dissolution, winding up,
liquidation or reorganization for the benefit of creditors of the Company
(whether in bankruptcy, insolvency or receivership proceedings or upon an
assignment for the benefit of creditors or otherwise):
(a) the holders of all Senior Debt shall first be entitled to
receive payments in full of all Senior Debt (including, without limitation,
interest accruing after the commencement
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<PAGE>
of any such proceeding at the rate specified in the documentation governing the
terms of such Senior Debt) in cash or in a manner satisfactory to all of its
holders before any Purchaser or any other Holder is entitled to receive any
payment from the Company on account of the principal of or interest on or any
other amounts due with respect to the Convertible Debentures;
(b) in the event that notwithstanding the foregoing provisions of
this Section 1.11, any payment or distribution or assets of the Company of any
kind or character, whether in cash, property or securities, shall be received by
a Purchaser or any other Holder on account of the principal of or interest on or
any other amounts due with respect to the Convertible Debentures before all
Senior Debt is paid in full, such payment or distribution shall be received and
held in trust for the benefit of, and shall be paid forthwith over and delivered
to the holders of such Senior Debt remaining unpaid or provided for or their
representative under the credit or other agreement under which such Senior Debt
may have been issued (pro rata on the basis of such unpaid Senior Debt held by
such holders), for application to the payment of such Senior Debt until all such
Senior Debt shall have been paid in full, after giving effect to any concurrent
payment or distribution or provision therefor to the holders of such Senior
Debt.
(c) Subrogation. Subject to the payment in full of all Senior Debt
and until the Convertible Debentures shall be paid in full, the Holders shall be
subrogated to the rights of the holders of Senior Debt (to the extent of
payments or distributions previously made to such holders of Senior Debt
pursuant to the provisions of this Section 1.11) to receive payments or
distributions of assets of the Company applicable to the Senior Debt. No such
payments or distributions applicable to the Senior Debt shall, as between the
Company and its creditors, other than the holders of Senior Debt and the Holders
, be deemed to be a payment by the Company to or on account of the Convertible
Debentures; and for the purposes of such subrogation, no payments or
distributions to the Holders of Senior Debt to which the Holders of the
Convertible Debentures would be entitled except for the provisions of this
Section 1.11 shall, as between the Company and its creditors, other than the
holders of Senior Debt and the Holders, be deemed to be a payment by the Company
to or on account of the Senior Debt.
(d) Scope of Section. The provisions of this Section 1.11 are
intended solely for the purpose of defining the relative rights of the Holders,
on the one hand, and the holders of the Senior Debt, on the other hand. Nothing
contained in this Section 1.11 or elsewhere in this Agreement or the Convertible
Debentures is intended to or shall impair, as between the Company, its creditors
other than the holders of Senior Debt, and the Holders, the obligation of the
Company, which is unconditional and absolute, to pay to the Holders the
principal of and interest on the Convertible Debentures as and when the same
shall become due and payable in accordance with the terms thereof, or to affect
the relative rights of the Holders and creditors of the Company other than the
holders of the Senior Debt, nor shall anything herein or therein prevent any
Holder from accepting any payment with respect to a Convertible Debenture or
exercising all remedies otherwise permitted by applicable law upon default under
a Convertible Debenture, subject to the rights, if any, under this Section 1.11
of the holders of Senior Debt in respect of cash, property or securities of the
Company received by the Holders.
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<PAGE>
ARTICLE IA
CONVERSION OF CONVERTIBLE DEBENTURES
1A.01. Conversion Right. Subject to and in compliance with the provisions
of this Article IA, all or any part of the principal amount outstanding (but no
part of the unpaid interest) of any Convertible Debenture may, at the option of
the Holder thereof, be converted at any time or from time to time into
fully-paid and non-assessable shares of Common Stock.
1A.02. Applicable Conversion Value. The price at which any Convertible
Debenture may be converted into Common Stock (the "Applicable Conversion Value")
shall, subject to adjustment as hereinafter provided, be $10.00 in principal
amount of the Convertible Debenture for each share of Common Stock.
1A.03. Adjustments for Sale of Common Stock.
(a) If the Company shall, while there are any Convertible Debentures
outstanding, issue or sell shares of its Common Stock in a single transaction or
series of transactions with an aggregate sales price of up to $5,000,000, in a
transaction where such shares are not registered pursuant to the Securities Act,
at a price per share greater than or equal to $5.00 (as adjusted for any
Extraordinary Common Stock Event) but less than the Fair Market Value on the day
immediately prior to such issuance or sale, then in each such case such
Applicable Conversion Value, upon each such issuance or sale, except as
hereinafter provided, shall be lowered so as to be equal to an amount determined
by multiplying the Applicable Conversion Value by a fraction:
(1) the numerator of which shall be (a) the number of shares of
Common Stock outstanding immediately prior to the issuance of such additional
shares of Common Stock, plus (b) the number of shares of Common Stock which the
net aggregate consideration, if any, received by the Company for the total
number of such additional shares of Common Stock so issued would purchase at the
Fair Market Value on the day immediately prior to such issuance, and
(2) the denominator of which shall be (a) the number of shares of
Common Stock outstanding immediately prior to the issuance of such additional
shares of Common Stock plus (b) the number of such additional shares of Common
Stock so issued.
(b) If the Company shall, while there are any Convertible Debentures
outstanding, issue or sell shares of its Common Stock in excess of the amount
set forth in (a) above in a transaction where such shares are not registered
pursuant to the Securities Act without consideration or at a price per share
less than the Applicable Conversion Value in effect immediately prior to such
issuance or sale, then in each such case the Applicable Conversion Value, upon
each such issuance or sale, except as hereinafter provided, shall be lowered so
as to be equal to an amount determined by multiplying the Applicable Conversion
Value by a fraction:
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<PAGE>
(1) the numerator of which shall be (a) the number of shares of
Common Stock outstanding immediately prior to the issuance of such additional
shares of Common Stock, plus (b) the number of shares of Common Stock which the
net aggregate consideration, if any, received by the Company for the total
number of such additional shares of Common Stock so issued would purchase at the
Applicable Conversion Value in effect immediately prior to such issuance, and
(2) the denominator of which shall be (a) the number of shares of
Common Stock outstanding immediately prior to the issuance of such additional
shares of Common Stock plus (b) the number of such additional shares of Common
Stock so issued.
This Section 1A.03 shall not apply under any circumstances under which
Section 1A.04 is applied.
1A.04. Adjustments Upon Issuance of Common Stock, Warrants, Options and
Rights to Common Stock.
(a) For the purposes of this Article IA, the issuance of any
warrants, options, subscriptions or purchase rights with respect to shares of
Common Stock and the issuance of any securities convertible into or exchangeable
for shares of Common Stock (or the issuance of any warrants, options or any
rights with respect to such convertible or exchangeable securities) shall be
deemed an issuance at such time of such Common Stock if the Net Consideration
Per Share (as hereinafter determined) which may be received by the Company for
such Common Stock shall be less than the Fair Market Value at the time of such
issuance. Any obligation, agreement or undertaking to issue shares of Common
Stock or warrants, options, subscriptions or purchase rights at any time in the
future shall be deemed to be an issuance at the time such obligation, agreement
or undertaking is made or arises. No adjustment of the Applicable Conversion
Value shall be made under this Article IA upon the issuance of any shares of
Common Stock which are issued pursuant to the exercise of any warrants, options,
subscriptions or purchase rights or pursuant to the exercise of any conversion
or exchange rights in any convertible securities if any adjustment shall
previously have been made upon the issuance of any such warrants, options or
subscriptions or purchase rights or upon the issuance of any convertible
securities (or upon the issuance of any warrants, options or any rights
therefor) as above provided or if such warrants, options or subscription rights
or purchase rights or convertible securities were issued or sold prior to the
date hereof.
Should the Net Consideration Per Share of any such warrants,
options, subscriptions or purchase rights or convertible securities be decreased
from time to time, then, upon the effectiveness of each such change, the
Applicable Conversion Value shall be adjusted to such Applicable Conversion
Value as would have obtained (1) had the adjustments made upon the issuance of
such warrants, options, rights or convertible securities been made upon the
basis of the actual Net Consideration Per Share of such securities, and (2) had
adjustments made to the Applicable Conversion Value since the date of issuance
of such securities been made to the Applicable Conversion Value as adjusted
pursuant to (1) above. Any adjustment of the Applicable Conversion Value with
respect to this paragraph which relates to warrants, options,
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<PAGE>
subscriptions or purchase rights with respect to shares of Common Stock shall be
disregarded if, as, and when all of such warrants, options, subscriptions or
purchase rights expire or are cancelled without being exercised, so that the
Applicable Conversion Value effective immediately upon such cancellation or
expiration shall be equal to the Applicable Conversion Value in effect at the
time of the issuance of the expired or canceled warrants, options, subscriptions
or purchase rights, with such additional adjustments as would have been made to
that Applicable Conversion Value had the expired or canceled warrants, options,
subscriptions or purchase rights not been issued.
(b) For purposes of this Article IA the "Net Consideration Per
Share" which may be received by the Company shall be determined as follows:
(i) The "Net Consideration Per Share" shall mean the amount
equal to the total amount of consideration, if any, received by the
Company for the issuance of warrants, options, subscriptions or other
purchase rights or convertible or exchangeable securities, plus the
minimum amount of consideration, if any, payable to the Company upon
exercise or conversion thereof, divided by the aggregate number of shares
of Common Stock that would be issued if all such warrants, options,
subscriptions or other purchase rights or convertible or exchangeable
securities were exercised, exchanged or converted.
(ii) The "Net Consideration Per Share" which may be received
by the Company shall be determined in each instance as of the date of
issuance of warrants, options, subscriptions or other purchase rights or
convertible or exchangeable securities without giving effect to any
possible future upward price adjustments or rate adjustments which may be
applicable with respect to such warrants, options, subscriptions or other
purchase rights or convertible or exchangeable securities.
(c) For purposes of this Article IA, if a part or all of the
consideration received by the Company in connection with the issuance of shares
of the Common Stock or the issuance of any of the securities described in this
Article IA consists of property other than cash, such consideration shall be
deemed to have a fair market value as is reasonably determined in good faith by
the Board of Directors of the Company.
(d) Sections 1A.03 and 1A.04 shall not apply under any of the
circumstances which would constitute an Extraordinary Common Stock Event (as
defined in Section 1A.05).
1A.05. Upon Extraordinary Common Stock Event. Upon the happening of an
Extraordinary Common Stock Event (as hereinafter defined), the Applicable
Conversion Value shall, simultaneously with the happening of such Extraordinary
Common Stock Event, be adjusted by multiplying the then effective Applicable
Conversion Value by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such Extraordinary
Common Stock Event and the denominator of which shall be the number of shares of
Common Stock outstanding immediately after such Extraordinary Common Stock
Event, and the product so obtained shall thereafter be the Applicable Conversion
Value. The Applicable Conversion Value,
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<PAGE>
as so adjusted, shall be readjusted in the same manner upon the happening of any
successive Extraordinary Common Stock Event or Events.
"Extraordinary Common Stock Event" shall mean (i) the issue of additional
shares of the Common Stock as a dividend or other distribution on outstanding
Common Stock, (ii) a subdivision of outstanding shares of Common Stock into a
greater number of shares of the Common Stock, or (iii) a combination of
outstanding shares of the Common Stock into a smaller number of shares of the
Common Stock.
1A.06. Intentionally Omitted.
1A.07. Adjustment for Dividends in Other Stock, Property, etc.;
Reclassification, etc. In case at any time or from time to time, the Holders of
Common Stock (or Other Securities) shall have received, or (on or after the
record date fixed for the determination of shareholders eligible to receive)
shall have become entitled to receive, without payment therefor:
(a) other or additional stock or other securities or property (other
than cash) by way of dividend, or
(b) any cash (excluding cash dividends payable solely out of
earnings or earned surplus of the Company), or
(c) other or additional stock or other securities or property
(including cash) by way of spin-off, split-up, reclassification,
recapitalization, combination of shares or similar corporate rearrangement,
other than additional shares of Common Stock issued as a stock dividend or in a
stock-split, then and in each such case each Holder of a Convertible Debenture,
on the conversion thereof as provided in this Article IA, shall be entitled to
receive the amount of stock and other securities and property (including cash in
the cases referred to in subdivisions (b) and (c) of this Section 1A.07) which
such Holder would hold on the date of such conversion if on the date hereof he
had been the Holder of record of the number of shares of Common Stock issuable
upon conversion of such Convertible Debenture and had thereafter, during the
period from the date hereof to and including the date of such conversion,
retained such shares and all such other or additional stock and other securities
and property (including cash in the cases referred to in subdivisions (b) and
(c) of this Section 1A.07) receivable by him as aforesaid during such period,
giving effect to all adjustments called for during such period under this
Article IA.
1A.08. Adjustment for Reorganization, Consolidation, Merger, etc.
(a) In case at any time or from time to time, the Company shall (a)
effect a reorganization, (b) consolidate with or merger into any other Person,
or (c) transfer all or substantially all of its properties or assets to any
other Person under any plan or arrangement contemplating the dissolution of the
Company, then, in each such case, each Holder of a Convertible Debenture, on the
conversion thereof as provided in this Article IA at any time after
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the consummation of such reorganization, consolidation or merger or the
effective date of such dissolution, as the case may be, shall receive, in lieu
of the Common Stock issuable on such exercise prior to such consummation or such
effective date, the stock and other securities and property (including cash) to
which such Holder would have been entitled upon such consummation or in
connection with such dissolution, as the case may be, if such Holder had so
converted its Convertible Debenture, immediately prior thereto, all subject to
further adjustment thereafter as provided under this Article IA.
(b) Dissolution. In the event of any dissolution of the Company
following the transfer of all or substantially all of its properties or assets,
the Company, prior to such dissolution, shall at its expense deliver or cause to
be delivered the stock and other securities and property (including cash, where
applicable) receivable by the Holders after the effective date of such
dissolution pursuant to this Section 1A.08 to a bank or trust company having its
principal office in Boston, Massachusetts, or Baltimore, Maryland, as trustee
for the Holders. Upon delivery of such stock, other securities and property
(including cash) to such a bank or trust company, the Company shall be
discharged from its obligations under Section 1A.08(a).
(c) Continuation of Terms. Upon any reorganization, consolidation,
merger or transfer (and any dissolution following any transfer) referred to in
this Section 1A.08, each Convertible Debenture shall continue in full force and
effect and the terms hereof shall be applicable to the shares of stock and other
securities and property receivable on the conversion of any Convertible
Debenture after the consummation of such reorganization, consolidation or merger
or the effective date of dissolution following any such transfer, as the case
may be, and shall be binding upon the issuer of any such stock or other
securities, including, in the case of any such transfer, the Person acquiring
all or substantially all of the properties or assets of the Company.
1A.09. Officer's Certificate as to Adjustments; Notice by Company. In each
case of an adjustment or readjustment of the Applicable Conversion Value, the
Company at its expense will furnish each Holder of a Convertible Debenture with
a certificate, prepared and certified by the chief financial officer or
treasurer of the Company, showing such adjustment or readjustment, and stating
in detail the facts upon which such adjustment or readjustment is based.
1A.10. Exercise of Conversion Privilege. To exercise its conversion
privilege, a Holder of a Convertible Debenture shall surrender such Convertible
Debenture being converted to the Company at its principal office, and shall give
written notice to the Company at that office that such Holder elects to convert
such Convertible Debenture, or a portion thereof. Such notice shall also state
the name or names (with address or addresses) in which the certificate or
certificates for shares of Common Stock issuable upon such conversion shall be
issued. The Convertible Debenture so surrendered for conversion shall be
accompanied by proper assignment thereof to the Company or in blank. The date
when such written notice is received by the Company, together with the
Convertible Debenture being converted, shall be the "Conversion Date." As
promptly as practicable after the Conversion Date, the Company shall issue and
shall deliver to the Holder of the Convertible Debenture being converted, or on
its written order, such certificate or certificates as it may request for the
number of whole shares of Common Stock issuable upon
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the conversion of such Convertible Debenture in accordance with the provisions
of this Article IA, cash in the amount of all accrued and unpaid interest on
such Convertible Debenture up to and including the Conversion Date, and cash, as
provided in Section 1A.11, in respect of any fraction of a share of Common Stock
issuable upon such conversion. Such conversion shall be deemed to have been
effected immediately prior to the close of business on the Conversion Date, and
at such time the rights of the Holder as a Holder of a Convertible Debenture
shall cease and the person or persons in whose name or names any certificate or
certificates for shares of Common Stock shall be issuable upon such conversion
shall be deemed to have become the Holder or Holders of record of the shares of
Common Stock represented thereby.
1A.11 Cash in Lieu of Fractional Shares. No fractional shares of Common
Stock or scrip representing fractional shares shall be issued upon the
conversion of a Convertible Debenture. Instead of any fractional shares of
Common Stock which would otherwise be issuable upon conversion of a Convertible
Debenture, the Company shall pay to the Holder of the Convertible Debenture
which was converted a cash adjustment in respect of such fractional shares in an
amount equal to the same fraction of the Fair Market Value per share of the
Common Stock at the close of business on the Conversion Date. The determination
as to whether or not any fractional shares are issuable shall be based upon the
total principal amount of Convertible Debentures being converted at any one time
by any Holder thereof, not upon each Convertible Debenture being converted.
1A.12. Partial Conversion. In the event some but not all of the principal
amount represented by a Convertible Debenture surrendered by a Holder is
converted, the Company shall execute and deliver to or on the order of the
Holder, at the expense of the Company, a new Convertible Debenture representing
the principal amount which was not converted.
1A.13. Notices of Record Date. In the event of
(a) any taking by the Company of a record of the holders of any
class of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification
or recapitalization of the capital stock of the Company, any merger or
consolidation of the Company, or any transfer of all or substantially all of the
assets of the Company to any other corporation, or any other entity or person,
or
(c) any voluntary or involuntary dissolution, liquidation or winding
up of the Company,
then and in each such event the Company shall mail or cause to be mailed to each
Holder of a Convertible Debenture a notice specifying (i) the date on which any
such record is to be taken for the purpose of such dividend, distribution or
right and a description of such dividend, distribution or right, (ii) the date
on which any such reorganization, reclassification, recapitalization, transfer,
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consolidation, merger, dissolution, liquidation or winding up is expected to
become effective and (iii) the time, if any, that is to be fixed, as to when the
Holders of record of Common Stock (or Other Securities) shall be entitled to
exchange their shares of Common Stock (or Other Securities) for securities or
other property deliverable upon such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding up. Such notice shall be mailed at least thirty (30) days prior to the
date specified in such notice on which such action is to be taken.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchasers that, except as set
forth in the Disclosure Schedule attached as Schedule II (which Disclosure
Schedule makes explicit reference to the particular representation or warranty
as to which exception is taken, which in each case shall constitute the sole
representation and warranty as to which such exception shall apply):
SECTION 2.01. Organization, Qualifications and Corporate Power.
(a) The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware and is duly
licensed or qualified to transact business as a foreign corporation and is in
good standing in each jurisdiction in which the nature of the business
transacted by it or the character of the properties owned or leased by it
requires such licensing or qualification except for such failure to so qualify
or be in such good standing, which, when taken together with all other such
failures, are not reasonably expected to have a material adverse effect on the
financial condition, regulatory condition, capital, properties, business results
of operations or prospects of the Company and its subsidiaries taken as a whole
(a "Material Adverse Effect"). The Company has the corporate power and authority
to own and hold its properties and to carry on its business as now conducted and
as proposed to be conducted, to execute, deliver and perform this Agreement and
the Registration Rights Agreement with the Purchasers in the form attached as
Exhibit B (the "Registration Rights Agreement," and together with this
Agreement, and any documents or agreements ancillary to this Agreement, the
"Transaction Documents"), to issue, sell and deliver the Convertible Debentures
and to issue and deliver the Conversion Shares.""
(b) The attached Schedule III contains a list of all subsidiaries
and affiliates of the Company and each other entity controlled, directly or
indirectly, by the Company of the Company. Except for such entities, the Company
does not (i) own of record or beneficially, directly or indirectly, (A) any
shares of capital stock or securities convertible into capital stock of any
other corporation or (B) any participating interest in any partnership, joint
venture or other non-corporate business enterprise or (ii) control, directly or
indirectly, any other entity. Each of the entities listed on Schedule III is a
duly formed entity, validly existing and in good standing under the laws of its
respective jurisdiction of formation and is duly licensed or qualified to
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transact business as a foreign entity and is in good standing in each
jurisdiction in which the nature of the business transacted by it or the
character of the properties owned or leased by it requires such licensing or
qualification except for such failure to so qualify or be in good standing
which, when taken together with all other such failures, are not reasonably
expected to have a Material Adverse Effect. Each of the entities listed on
Schedule III has the power and authority to own and hold its properties and to
carry on its business as now conducted and as proposed to be conducted. All of
the outstanding shares of capital stock or other equity interests of each of the
entities listed on Schedule III are owned beneficially and of record by the
Company, one of its other subsidiaries, or any combination of the Company and/or
one or more of its other subsidiaries, in each case free and clear of any liens,
charges, restrictions, claims or encumbrances of any nature whatsoever; and
there are no outstanding subscriptions, warrants, options, convertible
securities, or other rights (contingent or other) pursuant to which any of the
entities listed on Schedule III is or may become obligated to issue any shares
of its capital stock or other equity interests to any person other than the
Company or one of the other subsidiaries. As used in Section 2.06(i)-(vi) and
(vii) - (ii) and Sections through 2.09, 2.11 through 2.17, 2.21 and 2.23 through
2.29 inclusive, the term "Company" shall mean the Company and each of the
entities listed in Schedule III.
SECTION 2.02. Authorization of Agreements, Etc.
(a) The execution and delivery by the Company of the Transaction
Documents, the performance by the Company of its obligations thereunder, the
issuance, sale and delivery of the Convertible Debentures and the issuance and
delivery of the Conversion Shares have been duly authorized by all requisite
corporate action and does not (i) violate any provision of law, any order of any
court or other agency of government; (ii) violate the Certificate of
Incorporation of the Company, as amended (the "Charter") or the By-Laws of the
Company, as amended; (iii) violate any provision of any indenture, agreement or
other instrument to which the Company, any of its subsidiaries or any of their
respective properties or assets is bound; (iv) conflict with, result in a breach
of or constitute (with due notice or lapse of time or both) a default under any
such indenture, agreement or other instrument or (v) result in the creation or
imposition of any Lien, of any nature whatsoever upon any of the properties or
assets of the Company or any of its subsidiaries, except, in the case of clauses
(i), (iii), (iv) or (v), for such breaches, violations, defaults, conflicts or
Liens which, alone or in the aggregate, are not reasonably expected to have a
Material Adverse Effect or prevent, materially delay or materially burden the
transactions and acts contemplated by this Agreement.
(b) The Conversion Shares have been duly reserved for issuance upon
conversion of the Convertible Debentures and when so issued will be duly
authorized, validly issued, fully paid and nonassessable shares of Common Stock
with no personal liability attaching to the ownership thereof and will be free
and clear of all Liens, imposed by or through the Company. The issuance or
delivery of the Conversion Shares is not subject to any preemptive right of
stockholders of the Company or to any right of first refusal or other right in
favor of any person except for such rights that have been irrevocably waived in
writing.
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SECTION 2.03 Validity. This Agreement has been duly executed and delivered
by the Company and constitutes the legal, valid and binding obligation of the
Company, enforceable in accordance with its terms. The other Transaction
Documents, when executed and delivered in accordance with this Agreement, will
constitute the legal, valid and binding obligations of the Company, enforceable
in accordance with their respective terms.
SECTION 2.04 Authorized Capital Stock. The authorized capital stock of the
Company consists of (i) 5,000,000 shares of preferred stock, $.01 par value (the
"Preferred Stock"), of which no shares have been designated, and (ii) 50,000,000
shares of Common Stock. As of March 2, 1999, 6,746,681 shares of Common Stock
were validly issued and outstanding, fully paid and nonassessable with no
personal liability attaching to the ownership thereof and no shares of Preferred
Stock had been issued. The holders of subscriptions, warrants, options,
convertible securities, and other rights (contingent or other) to purchase or
otherwise acquire equity securities of the Company, and the number of shares of
Common Stock and the number of such subscriptions, warrants, options,
convertible securities, and other such rights held by each, are as set forth in
Section 2.04 of the attached Schedule II. Except as set forth in Section 2.04 of
the attached Schedule II, (i) no person owns of record or is known to the
Company to own beneficially any share of Common Stock, (ii) no subscription,
warrant, option, convertible security, or other right (contingent or other) to
purchase or otherwise acquire equity securities of the Company is authorized or
outstanding and (iii) there is no commitment by the Company to issue shares,
subscriptions, warrants, options, convertible securities, or other such rights
or to distribute to holders of any of its equity securities any evidence of
indebtedness or asset. Except as provided for in the Charter or as set forth in
Section 2.04 of the attached Schedule II, the Company has no obligation
(contingent or other) to purchase, redeem or otherwise acquire any of its equity
securities or any interest therein or to pay any dividend or make any other
distribution in respect thereof. Except as set forth in the Transaction
Documents or Section 2.04 of Schedule II, to the best of the Company's knowledge
there are no voting trusts or agreements, stockholders' agreements, pledge
agreements, buy-sell agreements, rights of first refusal, preemptive rights or
proxies relating to any securities of the Company or any of its subsidiaries
(whether or not the Company or any of its subsidiaries is a party thereto). All
of the outstanding securities of the Company were issued in compliance with all
applicable Federal and state securities laws.
SECTION 2.05 Company SEC Reports and Financial Statements.
(a) The Company has made available to Purchasers true and complete
copies of all periodic reports, statements and other documents that the Company
has filed with the SEC under the Exchange Act since December 31, 1995 and prior
to the date hereof and the Form S-1 Registration Statement (File 333-74391) (the
"Registration Statement") filed under the Securities Act (collectively, the
"Company SEC Reports"), each in the form (including exhibits and any amendments
thereto) required to be filed with the Securities and Exchange Commission (the
"SEC"). As of their respective dates, each of the Company's SEC Reports (i)
complied in all respects with all applicable requirements of the Securities Act
and the Exchange Act, and the rules and regulations promulgated thereunder,
respectively, (ii) were filed in a timely manner, and (iii) did not contain any
untrue statement of a material fact or omit to state a material fact
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required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. None of the subsidiaries are required to file any forms, reports or
other documents with the SEC.
(b) Each of the audited consolidated financial statements of the
Company (including any related notes and schedules thereto) included (or
incorporated by reference) in its Annual Report on Form 10-K for the fiscal year
ended December 31, 1998, (the "Financial Statements" and December 31, 1998, the
"Financial Statements Date"), or the Registration Statement, are accurate and
complete and fairly presents, in conformity with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
involved (except as may be noted therein), and in conformity with the SEC's
regulations, the consolidated financial position of the Company and its
consolidated subsidiaries as of its date and the consolidated results of
operations and changes in financial position for the period then ended.
SECTION 2.06 Events Subsequent to the Financial Statements Date. Since the
Financial Statements Date, except as set forth in Section 2.06 in Schedule II,
the Company has not (i) issued any stock, bond or other corporate security, (ii)
borrowed any amount or incurred or become subject to any liability (absolute,
accrued or contingent), except current liabilities incurred and liabilities
under contracts entered into in the ordinary course of business, (iii)
discharged or satisfied any lien or encumbrance or incurred or paid any
obligation or liability (absolute, accrued or contingent) other than current
liabilities shown on the Financial Statements and current liabilities incurred
since the Financial Statements Date in the ordinary course of business, (iv)
declared or made any payment or distribution to stockholders or purchased or
redeemed any share of its capital stock or other security, (v) mortgaged,
pledged, encumbered or subjected to lien any of its assets, tangible or
intangible, other than liens of current real property taxes not yet due and
payable, (vi) sold, assigned or transferred any of its tangible assets or
canceled any debt or claim except in the ordinary course of business, (vii)
incurred any recourse indebtedness, (viii) suffered any loss of property or
waived any right, of substantial value, whether or not in the ordinary course of
business, (ix) made any change in officer compensation except in the ordinary
course of business and consistent with past practice, (x) made any material
change in the manner of business or operations of the Company, (xi) entered into
any transaction except in the ordinary course of business or as otherwise
contemplated hereby or (xii) entered into any commitment (contingent or
otherwise) to do any of the foregoing.
SECTION 2.07 Litigation; Compliance with Law. There is no (i) action,
suit, claim, proceeding or investigation pending or, to the best of the
Company's knowledge, threatened against the Company, at law or in equity, or
before or by any Federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, (ii)
arbitration proceeding relating to the Company pending under collective
bargaining agreements or otherwise or (iii) governmental inquiry pending or, to
the best of the Company's knowledge, threatened against the Company (including
without limitation any inquiry as to the qualification of the Company to hold or
receive any license or permit), which, alone or in the aggregate, is reasonably
expected to have a Material Adverse Effect. The Company has not received any
opinion or memorandum or legal advice from legal counsel to the effect that it
is exposed, from a legal standpoint, to any liability or disadvantage to its
business, financial
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condition, operations, property or affairs except such exposure which, alone or
in the aggregate, is not reasonably expected to have a Material Adverse Effect.
The Company is not in default with respect to any order, writ, injunction or
decree known to or served upon the Company of any court or of any Federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign except such defaults which, alone
or in the aggregate, are not reasonably expected to have a Material Adverse
Effect. There is no action or suit by the Company pending, threatened or
contemplated against others. The Company has complied with all laws, rules,
regulations and orders applicable to its business, operations, properties,
assets, products and services, the Company has all necessary permits, licenses
and other authorizations required to conduct its business as conducted and as
proposed to be conducted, and the Company has been operating its business
pursuant to and in compliance with the terms of all such permits, licenses and
other authorizations except such noncompliance which, alone or in the aggregate,
is not reasonably expected to have a Material Adverse Effect. There is no
existing law, rule, regulation or order, and the Company after due inquiry is
not aware of any proposed law, rule, regulation or order, whether Federal,
state, county or local, which would prohibit or restrict the Company from, or
otherwise materially adversely affect the Company in, conducting its business in
any jurisdiction in which it is now conducting business.
SECTION 2.08 Intentionally Omitted.
SECTION 2.09 Intentionally Omitted.
SECTION 2.10 Title to properties. The Company and its subsidiaries have
sufficient title to their respective properties and assets reflected on the
Financial Statements or acquired by them since the date of the Financial
Statements (other than properties and assets disposed of in the ordinary course
of business since the date of the Financial Statements) to carry on business as
now conducted, and all such properties and assets are free and clear of Liens,
except for Liens disclosed in the Company SEC Reports or the Financial
Statements and except for liens for or current taxes not yet due and payable or
tax liabilities which are being contested in good faith and imperfections of
title, if any, not material in nature or amount and not materially detracting
from the value or marketability or impairing the use of the property subject
thereto or materially impairing the operations of the Company and its
subsidiaries. All real property of the Company and its subsidiaries is in
material compliance with all material laws and regulations applicable thereto
including, without limitation, environmental, zoning and other land use laws and
regulations except where failure to comply, alone or in the aggregate, is not
reasonably expected to have a Material Adverse Effect. To the best of the
Company's knowledge after due inquiry, there are no condemnation, environmental,
zoning or other land use regulation proceedings, either instituted or, to the
best of the Company's knowledge, planned to be instituted, which would
materially adversely affect the use or operation of the Company's and its
subsidiaries' properties and assets for their respective intended uses and
purposes, or the value of such properties, and neither the Company nor any
subsidiary has received written notice of any violation of any of such land use
regulations or special assessment proceedings which would affect such properties
and assets.
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SECTION 2.11 Leasehold Interests. Each lease or agreement to which the
Company is a party under which it is a lessee or lessor of any property, real or
personal, is a valid and subsisting agreement, duly authorized and entered into,
without any default of the Company thereunder and, to the best of the Company's
knowledge, without any default thereunder of any other party thereto, except
such defaults which, alone or in the aggregate, are not reasonably expected to
have a Material Adverse Effect. No event has occurred and is continuing which,
with due notice or lapse of time or both, would constitute a default or event of
default by the Company under any such lease or agreement or, to the best of the
Company's knowledge, by any other party thereto. The Company's possession of
such property, as lessee, has not been disturbed and, to the best of the
Company's knowledge after due inquiry, no claim has been asserted against the
Company materially adverse to its rights in such leasehold interests.
SECTION 2.12 Insurance. The Company holds valid policies covering all of
the insurance required to be maintained by it under Section 5.04.
SECTION 2.13 Taxes. The Company has filed all material tax returns,
Federal, state, county and local, required to be filed by it, and such returns
were complete and correct in all material respects. The Company has paid all
taxes shown to be due by such returns. The Company has paid all other taxes,
assessments and governmental charges which have become due or payable, including
without limitation all taxes which the Company is obligated to withhold from
amounts owing to employees, creditors and third parties, except (i) in such
instances where the failure to do so, alone or in the aggregate, are not
reasonably expected to have a Material Adverse Effect and (ii) taxes,
assessments and governmental charges which are being contested in good faith and
for which adequate reserves have been established. The Company has established
adequate reserves for all taxes accrued but not yet payable. No deficiency
assessment with respect to or proposed adjustment of the Company's Federal,
state, county or local taxes is pending or, to the best of the Company's
knowledge, threatened other than tax deficiencies which are being contested in
good faith and for which adequate reserves have been established. Neither the
Company nor any of its present or former stockholders has ever filed an election
pursuant to Section 1362 of the Internal Revenue Code of 1986, as amended (the
"Code"), that the Company be taxed as an S corporation.
SECTION 2.14 Other Agreements. Except as set forth in Section 2.14 in
Schedule II or the Company Registration Statement, the Company is not a party to
or otherwise bound by any written or oral agreement, instrument, commitment or
restriction which individually could reasonably be expected to have a Material
Adverse Effect or any other written or oral:
(a) agreement with any labor union representing employees of the
Company;
(b) agreement for the future purchase of fixed assets or for the
future purchase of materials, supplies or equipment in excess of its normal
operating requirements;
(c) agreement relating to the borrowing of money or to the
mortgaging or pledging of, or otherwise placing a lien or security interest on,
any asset of the Company;
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(d) guaranty of any obligation for borrowed money or otherwise;
(e) other agreement, instrument, commitment, plan or arrangement, a
copy of which would be required to be filed with the SEC as an exhibit to a
registration statement on Form S-1 if the Company were registering securities
under the Securities Act.
The Company, and to the best of the Company's knowledge, each other party
thereto have in all material respects performed all the obligations required to
be performed by them to date (or each non-performing party has received a valid,
enforceable and irrevocable written waiver with respect to its non-performance),
have received no notice of default and are not in default (with due notice or
lapse of time or both) under any agreement, instrument, commitment, plan or
arrangement to which the Company is a party or by which it or its property may
be bound except such defaults which, alone or in the aggregate, are not
reasonably expected to have a Material Adverse Effect. The Company has no
present expectation or intention of not performing all its material obligations
under each such agreement, instrument, commitment, plan or arrangement, and the
Company has no knowledge of any breach or anticipated breach by the other party
to any agreement, instrument, commitment, plan or arrangement to which the
Company is a party except for such breaches which, alone or in the aggregate,
are not reasonably expected to have a Material Adverse Effect. The Company is in
compliance with all of the material terms and provisions of its Charter and
By-Laws, as amended.
SECTION 2.15 Loans and Advances. Except as disclosed in the Company SEC
Reports and the Financial Statements, the Company does not have any material
outstanding loans or advances to any person and is not obligated to make any
such loans or advances, except, in each case, for advances to employees of the
Company in respect of reimbursable business expenses anticipated to be incurred
by them in connection with their performance of services for the Company.
SECTION 2.16 Assumptions, Guaranties, Etc. of Indebtedness of Other
Persons. The Company has not assumed, guaranteed, endorsed or otherwise become
directly or contingently liable on any indebtedness of any other person or on
any mortgages with respect to real property acquired by the Company or any of
its affiliates (including, without limitation, liability by way of agreement,
contingent or otherwise, to purchase, to provide funds for payment, to supply
funds to or otherwise invest in the debtor, or otherwise to assure the creditor
against loss), except for guaranties by endorsement of negotiable instruments
for deposit or collection in the ordinary course of business.
SECTION 2.17 Significant Customers and Suppliers. No customer or supplier
which was significant to the Company during the period covered by the financial
statements referred to in Section 2.05 or which has been significant to the
Company thereafter, has terminated, materially reduced or threatened to
terminate or materially reduce its purchases from or provision of products or
services to the Company, as the case may be.
SECTION 2.18 Governmental Approvals. Subject to the accuracy of the
representations and warranties of the Purchasers set forth in Article III, no
registration or filing with, or consent
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or approval of or other action by, any Federal, state or other governmental
agency or instrumentality is or will be necessary for the valid execution,
delivery and performance by the Company of the Transaction Documents, the
issuance, sale and delivery of the Convertible Debentures or, upon conversion
thereof, the issuance and delivery of the Conversion Shares, other than (i)
filings pursuant to state securities laws (all of which filings have been made
by the Company, other than those which are required to be made after the Closing
and which will be duly made on a timely basis) in connection with the sale of
the Convertible Debentures and (ii) with respect to the Registration Rights
Agreement, the registration of the shares covered thereby with the Commission
and filings pursuant to state securities laws.
SECTION 2.19 Disclosure. Neither this Agreement, nor any Schedule or
Exhibit to this Agreement, nor any documents furnished or made available to the
Purchasers relating to this Agreement, contains any material misstatement of
fact or omits to state a material fact necessary to make the statements
contained herein or therein, in light of the circumstances under which they are
made, not misleading. None of the statements, documents, certificates or other
items prepared or supplied by the Company with respect to the transactions
contemplated hereby contains any material misstatement of fact or omits to state
a material fact necessary to make the statements contained therein, in light of
the circumstances under which they are made, not misleading. There is no fact
which the Company has not disclosed to the Purchasers and their counsel in
writing and of which the Company is aware which, alone or in the aggregate, is
reasonably expected to have a Material Adverse Effect. The financial projections
and other estimates contained in any documents furnished to the Purchasers
relating to this Agreement were prepared by the Company based on the Company's
experience in the industry and on assumptions of fact and opinion as to future
events which the Company, believed to be reasonable, but which the Company
cannot and does not assure or guarantee the attainment of in any manner. As of
the date hereof no facts have come to the attention of the Company which would,
in its opinion, require the Company to materially revise or amplify the
assumptions underlying such projections and other estimates or the conclusions
derived therefrom.
SECTION 2.20 Offering of the Convertible Debentures. Neither the Company
nor any person authorized or employed by the Company as agent, broker, dealer or
otherwise in connection with the offering or sale of the Convertible Debentures
or any security of the Company similar to the Convertible Debentures has offered
the Convertible Debentures or any such similar security for sale to, or
solicited any offer to buy the Convertible Debentures or any such similar
security from, or otherwise approached or negotiated with respect thereto with,
any person or persons, and neither the Company nor any person acting on its
behalf has taken or will take any other action (including, without limitation,
any offer, issuance or sale of any security of the Company under circumstances
which might require the integration of such security with Convertible Debentures
under the Securities Act or the rules and regulations of the Commission
thereunder), in either case so as to subject the offering, issuance or sale of
the Convertible Debentures to the registration provisions of the Securities Act.
SECTION 2.21 Brokers. The Company has no contract, arrangement or
understanding with any broker, finder or similar agent with respect to the
transactions contemplated by this Agreement.
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SECTION 2.22 Intentionally Omitted.
SECTION 2.23 Intentionally Omitted.
SECTION 2.24 Employees. No officer or key employee of the Company has
advised the Company (orally or in writing) that he intends to terminate
employment with the Company. The Company has complied in all material respects
with all applicable laws relating to the employment of labor, including
provisions relating to wages, hours, equal opportunity, collective bargaining
and the payment of Social Security and other taxes.
SECTION 2.25 Intentionally Omitted.
SECTION 2.26 Environmental Protection. The Company has not caused or
allowed, or contracted with any party for, the generation, use, transportation,
treatment, storage or disposal of any Hazardous Substances (as defined below) in
connection with the operation of its business or otherwise. The Company, the
operation of its business, and any real property that the Company owns, leases
or otherwise occupies or uses (the "Premises") are in compliance with all
applicable Environmental Laws (as defined below) and orders or directives of any
governmental authorities having jurisdiction under such Environmental Laws,
including, without limitation, any Environmental Laws or orders or directives
with respect to any cleanup or remediation of any release or threat of release
of Hazardous Substances, except for any noncompliance which, alone or in the
aggregate, is not reasonably expected to have a Material Adverse Effect. The
Company has not received any citation, directive, letter or other communication,
written or oral, or any notice of any proceeding, claim or lawsuit, from any
person arising out of the ownership or occupation of the Premises, or the
conduct of its operations, that alleges that the Company is not in compliance
with any Environmental Laws and the Company is not aware of any basis therefor.
The Company has obtained and is maintaining in full force and effect all
necessary permits, licenses and approvals required by all Environmental Laws
applicable to the Premises and the business operations conducted thereon
(including operations conducted by tenants on the Premises), and is in
compliance with all such permits, licenses and approvals, except for any
noncompliance which, alone or in the aggregate, is not reasonably expected to
have a Material Adverse Effect. The Company has not caused or allowed a release,
or a threat of release, of any Hazardous Substance unto, at or near the
Premises, and neither the Premises nor any property at or near the Premises has
ever been subject to a release, or a threat of release, of any Hazardous
Substance. For the purposes of this Agreement, the term "Environmental Laws"
shall mean any Federal, state or local law or ordinance or regulation pertaining
to the protection of human health or the environment, and any common law or
equitable doctrines relating to such matters, including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
Sections 9601, et seq., the Emergency Planning and Community Right-to-Know Act,
42 U.S.C. Sections 11001, et seq., and the Resource Conservation and Recovery
Act, 42 U.S.C. Sections 6901, et seq. For purposes of this Agreement, the term
"Hazardous Substances" shall include oil and petroleum products, asbestos,
polychlorinated biphenyls, urea formaldehyde and any other materials classified
as pollutants, contaminants, hazardous or toxic under any Environmental Laws.
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SECTION 2.27 Intentionally Omitted.
SECTION 2.28 Foreign Corrupt Practices Act. The Company has not taken any
action which would cause it to be in material violation of the Foreign Corrupt
Practices Act of 1977, as amended, or any rules and regulations thereunder. To
the best of the Company's knowledge after due inquiry, there is not now, and
there has never been, any employment by the Company of, or beneficial ownership
in the Company by, any governmental or political official in any country in the
world.
SECTION 2.29 Federal Reserve Regulations. The Company is not engaged in
the business of extending credit for the purpose of purchasing or carrying
margin securities (within the meaning of Regulation G of the Board of Governors
of the Federal Reserve System), and no part of the proceeds of the Convertible
Debentures will be used to purchase or carry any margin security or to extend
credit to others for the purpose of purchasing or carrying any margin security
or in any other manner which would involve a violation of any of the regulations
of the Board of Governors of the Federal Reserve System.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser severally represents and warrants to the Company that:
(a) it is an "accredited investor" within the meaning of Rule 501
under the Securities Act and was not organized for the specific purpose of
acquiring the Convertible Debentures;
(b) it has sufficient knowledge and experience in investing in
companies similar to the Company in terms of the Company's stage of development
so as to be able to evaluate the risks and merits of its investment in the
Company and it is able financially to bear the risks thereof;
(c) it has had an opportunity to discuss the Company's business,
management and financial affairs with the Company's management;
(d) the Convertible Debentures being purchased by it are being
acquired for its own account for the purpose of investment and not with a view
to or for sale in connection with any distribution thereof;
(e) it understands that (i) the Convertible Debentures and the
Conversion Shares have not been registered under the Securities Act by reason of
their issuance in a transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof or Rule 505 or 506 promulgated
under the Securities Act, (ii) the
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Convertible Debentures and, upon conversion thereof, the Conversion Shares must
be held indefinitely unless a subsequent disposition thereof is registered under
the Securities Act or is exempt from such registration, (iii) the Convertible
Debentures and the Conversion Shares will bear a legend to such effect and (iv)
the Company will make a notation on its transfer books to such effect; and
(f) there are no actions, suits, claims or legal, administrative or
arbitration proceedings or investigations pending or, to its knowledge,
threatened against it, which could have a material adverse effect on its ability
to consummate the transactions contemplated hereby.
ARTICLE IV
CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS
The obligation of each Purchaser to purchase and pay for the Convertible
Debentures being purchased by it on the Closing Date is, at its option, subject
to the satisfaction, on or before the Closing Date, of the following conditions:
(a) Opinion of Company's Counsel. The Purchasers shall have received
from White & Case LLP, securities counsel for the Company, an opinion dated the
Closing Date, satisfactory to the Purchasers and their counsel.
(b) Representations and Warranties to be True and Correct. The
representations and warranties contained in Article II shall be true, complete
and correct on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of such date, and the
President and Treasurer of the Company shall have certified to such effect to
the Purchasers in writing.
(c) Performance. The Company shall have performed and complied with
all agreements contained herein required to be performed or complied with by it
prior to or at the Closing Date, and the President and Treasurer of the Company
shall have certified to the Purchasers in writing to such effect.
(d) All Proceedings to be Satisfactory. All corporate and other
proceedings to be taken by the Company in connection with the transactions
contemplated hereby and all documents incident thereto shall be satisfactory in
form and substance to the Purchasers and their counsel, and the Purchasers and
their counsel shall have received all such counterpart originals or certified or
other copies of such documents as they reasonably may request.
(e) Supporting Documents. The Purchasers and their counsel shall
have received copies of the following documents:
(i) (A) the Charter, certified as of a recent date by the
Secretary of State of the State of Delaware and (B) a certificate of said
Secretary dated as of a recent
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date as to the due incorporation and good standing of the Company, the
payment of all excise taxes by the Company and listing all documents of
the Company on file with said Secretary; and
(ii) a certificate of the Secretary or an Assistant Secretary
of the Company dated the Closing Date and certifying: (A) that attached
thereto is a true and complete copy of the By-laws of the Company as in
effect on the date of such certification; (B) that attached thereto is a
true and complete copy of all resolutions adopted by the Board of
Directors or the stockholders of the Company authorizing an increase in
the authorized capital stock, the execution, delivery and performance of
the Transaction Documents, the issuance, sale and delivery of the
Convertible Debentures and the reservation, issuance and delivery of the
Conversion Shares, and that all such resolutions are in full force and
effect and are all the resolutions adopted in connection with the
transactions contemplated by the Transaction Documents; (C) that the
Charter has not been amended since the date of the last amendment referred
to in the certificate delivered pursuant to clause (i)(B) above; and (D)
to the incumbency and specimen signature of each officer of the Company
executing any of the Transaction Documents and any certificate or
instrument furnished pursuant hereto, and a certification by another
officer of the Company as to the incumbency and signature of the officer
signing the certificate referred to in this clause (ii).
(f) Registration Rights Agreement. The Company shall have executed
and delivered the Registration Rights Agreement.
(g) Preemptive Rights. All stockholders of the Company having any
preemptive, first refusal or other rights with respect to the issuance of the
Convertible Debentures or the Conversion Shares shall have irrevocably waived
the same in writing.
(h) Fees of Purchasers' Counsel. The Company shall have paid in
accordance with Section 8.01 the fees and disbursements of Purchasers' counsel
invoiced at the Closing.
(i) Consents. The Company shall have received the written consent of
East-West Bank to the transactions contemplated hereby.
All such documents shall be satisfactory in form and substance to the Purchasers
and their counsel.
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ARTICLE V
COVENANTS OF THE COMPANY
The Company covenants and agrees with each of the Purchasers that:
SECTION 5.01 Information. Commencing on the Closing Date and continuing so
long as any Holder holds either (i) Convertible Debentures with an aggregate
principal amount of at least $5,000,000 or (ii) 500,000 Conversion Shares (as
adjusted from time to time to reflect any Extraordinary Common Stock Event) or
such earlier time as provided below, the Company shall deliver to such Holder
the information specified in this Section 5.01 unless any such Holder at any
time specifically requests that such information not be delivered to it:
(a) Annual Financial Statements. As soon as available, but in any
event within one hundred twenty (120) days after the end of each fiscal year of
the Company, a copy of the audited consolidated balance sheets of the Company
and its subsidiaries as at the end of such fiscal year and the related audited
consolidated statements of operations, stockholders' equity and cash flows of
the Company and its subsidiaries for such fiscal year, all in reasonable detail
and stating in comparative form the figures as at the end of and for the
immediately preceding fiscal year, accompanied (in the case of the audited
consolidated financial statements) by an opinion of an accounting firm of
recognized national standing selected by the Company, which opinion shall state
that such accounting firm's audit was conducted in accordance with generally
accepted auditing standards. All such financial statements shall be prepared in
accordance with GAAP applied on a consistent basis throughout the periods
reflected therein except as stated therein. Such financial statements shall be
supplemented with real property portfolio-level data.
(b) Quarterly Financial Statements. As soon as available, but in any
event not later than forty-five (45) days after the end of each quarterly fiscal
period (other than the last quarterly fiscal period in any fiscal year of the
Company), the unaudited consolidated balance sheet of the Company and its
subsidiaries as at the end of each such period and the related unaudited
consolidated statements of income and cash flows of the Company and its
subsidiaries for such period and for the elapsed period in such fiscal year, all
in reasonable detail and stating in comparative form (i) the figures as of the
end of and for the comparable periods of the preceding fiscal year and (ii) the
figures reflected in the operating budget (if any) for such period as specified
in the financial plan of the Company. All such financial statements shall be
prepared in accordance with GAAP applied on a consistent basis throughout the
periods reflected therein except as stated therein. Such financial statements
shall be supplemented with real property portfolio-level data.
(c) Monthly Financial Statements. Within thirty (30) days after the
end of each month in each fiscal year (other than the last month in each fiscal
year) an unaudited consolidated balance sheet of the Company and its
subsidiaries, if any, and the related unaudited consolidated statements of
income, certified by the Chief Financial Officer of the Company, such
consolidated balance sheet to be as of the end of such month and such
consolidated statements of
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income to be for such month and for the period from the beginning of the fiscal
year to the end of such month, in each case with comparative statements for the
prior fiscal year;
(d) Material Litigation. Within twenty (20) days after the Company
learns of the commencement or written threat of commencement of any litigation
or proceeding against the Company, any of its subsidiaries or any of the
Partnerships or any of their respective assets that could reasonably be expected
to have a Material Adverse Effect, written notice of the nature and extent of
such litigation or proceeding.
(e) Material Agreements. Within five (5) days after the expiration
of the applicable cure period, if any, or if no such cure period exists within
five (5) days after the receipt by the Company of written notice of a default by
the Company or any of its subsidiaries under any material contract, agreement or
document to which it is a party or by which it is bound, written notice of the
nature and extent of such default except for such defaults which, individually
or in the aggregate, are not reasonably expected to have a Material Adverse
Effect.
(f) Other Reports and Statements. Promptly upon any distribution to
its stockholders generally, to its directors or to the financial community of an
annual report, quarterly report, proxy statement, registration statement or
other similar report or communication, a copy of each such annual report,
quarterly report, proxy statement, registration statement or other similar
report or communication and promptly upon filing by the Company with the SEC or
with The National Market System, Inc., the National Association of Securities
Dealers, Inc. or any national securities exchange or other market system of all
regular and other reports or applications, a copy of each such report or
application; and a copy of such report or statement and copies of all press
releases and other statements made available generally by the Company to the
public concerning material developments in the Company.
(g) Accountants' Management Letters, Etc. Promptly after receipt by
the Company, copies of all accountants' management letters and all management
and board responses to such letters, and copies of all certificates as to
compliance, defaults, material adverse changes, material litigation or similar
matters relating to the Company and its subsidiaries, which shall be prepared by
the Company or its officers and delivered to the third parties.
(h) Annual Budget. Not later than 45 days after the beginning of
each fiscal year of the Company, a copy of a consolidated operating budget of
the Company and its subsidiaries prepared by the Company for such fiscal year,
which shall include at minimum a projected balance sheet and a projected
statement of operations and cash flows for each month in such fiscal year.
(i) Notices to Senior Lenders. Copies of all notices, reports,
certificates and other information furnished to the holders of Senior Debt or to
any agent or representative to such holders, in each case promptly after the
same are so furnished.
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(j) Other. Promptly, from time to time, such other information
regarding the business, prospects, financial condition, operations, property or
affairs of the Company and its subsidiaries as such Purchaser reasonably may
request.
SECTION 5.02 Reserve for Conversion Shares . The Company shall at all
times reserve and keep available out of its authorized but unissued shares of
Common Stock, for the purpose of effecting the conversion of the Convertible
Debentures and otherwise complying with the terms of this Agreement, such number
of its duly authorized shares of Common Stock as shall be sufficient to effect
the conversion of the Convertible Debentures from time to time outstanding or
otherwise to comply with the terms of this Agreement. If at any time the number
of authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of the Convertible Debentures or otherwise to comply with
the terms of this Agreement, the Company will forthwith take such corporate
action as may be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purposes.
The Company will obtain any authorization, consent, approval or other action by
or make any filing with any court or administrative body that may be required
under applicable state securities laws in connection with the issuance of
Conversion Shares.
SECTION 5.03 Corporate Existence. The Company shall maintain and cause
each of its subsidiaries (if any) to maintain, their respective corporate
existence, rights and franchises in full force and effect unless the failure to
maintain such existence (in the case of any subsidiaries), rights and franchises
are not reasonably expected to have a Material Adverse Effect.
SECTION 5.04 Properties, Business, Insurance. The Company shall maintain
and cause each of its subsidiaries to maintain as to their respective properties
and business, with financially sound and reputable insurers, insurance against
such casualties and contingencies and of such types and in such amounts as is
customary for companies similarly situated, which insurance shall be deemed by
the Company to be sufficient. The Company shall also maintain in effect "key
person" life insurance policies, payable to the Company, on the life of William
J. McMorrow (so long as he remains an employee of the Company), in the amounts
of $5,000,000. The Company shall not cause or permit any assignment or change in
beneficiary and shall not borrow against any such policy.
SECTION 5.05 Inspection and Consultation. The Company shall permit and
cause each of its subsidiaries to permit each Purchaser and such persons as it
may designate, at such Purchaser's expense, to visit and inspect any of the
properties of the Company and its subsidiaries during normal business hours,
examine their books and take copies and extracts therefrom, discuss the affairs,
finances and accounts of the Company and its subsidiaries with their officers,
employees and public accountants (and the Company hereby authorizes said
accountants to discuss with such Purchaser and such designees such affairs,
finances and accounts), and consult with the management of the Company and its
subsidiaries as to their affairs, finances and accounts, all upon reasonable
notice.
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SECTION 5.06 Restrictive Agreements Prohibited. Neither the Company nor
any of its subsidiaries shall become a party to any agreement which by its terms
restricts the Company's performance of any of the Transaction Documents.
SECTION 5.07 Transactions with Affiliates. Except for transactions
contemplated by this Agreement or as otherwise approved by the Board of
Directors, neither the Company nor any of its subsidiaries shall enter into any
transaction with any director, officer, employee or Holder of more than 5% of
the outstanding capital stock of any class or series of capital stock of the
Company or any of its subsidiaries, member of the family of any such person, or
any corporation, partnership, trust or other entity in which any such person, or
member of the family of any such person, is a director, officer, trustee,
partner or Holder of more than 5% of the outstanding capital stock thereof,
except for transactions on customary terms related to such person's employment.
SECTION 5.08 Directors. The Company shall identify one new independent
director acceptable to the Purchasers by July 30, 1999.
SECTION 5.09 Use of Proceeds. The Company agrees to use the full proceeds
from the sale of the Convertible Debentures to pay down or retire existing debt
of the Company.
SECTION 5.10 Restrictions on New Debt. The Company will obtain the prior
written consent of Holders of two-thirds or more of the principal amount of
Convertible Debentures then outstanding prior to issuing any Debt of the
Company, whether or not in combination with warrants or other equity securities
to any person; provided, that such consent shall not be required to issue (i)
Senior Debt so long as the Company does not grant any contractual preference or
priority for payment to one lender of Senior Debt over another lender of Senior
Debt; (ii) up to an aggregate of $13,500,000 of principal amount of Debt that is
pari passu with the Convertible Debentures or (iii) any Debt that is junior and
subordinate to the Convertible Debentures (the debt in (i), (ii) and (iii) is
the "Additional Permitted Debt").
SECTION 5.11 Intentionally Omitted.
SECTION 5.12 Intentionally Omitted.
SECTION 5.13 Intentionally Omitted.
SECTION 5.14 Intentionally Omitted.
SECTION 5.15 Compliance with Laws. The Company shall comply, and cause
each subsidiary to comply, with all applicable laws, rules, regulations and
orders, noncompliance with which could reasonably be expected to have a Material
Adverse Effect.
SECTION 5.16 Keeping of Records and Books of Account. The Company shall
keep, and cause each subsidiary to keep, adequate records and books of account,
in which complete entries will be made in accordance with generally accepted
accounting principles consistently applied, reflecting all financial
transactions of the Company and such subsidiary, and in which,
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for each fiscal year, all proper reserves for depreciation, depletion,
obsolescence, amortization, taxes, bad debts and other purposes in connection
with its business shall be made.
SECTION 5.17 Change in Nature of Business. The Company and its
subsidiaries taken as a whole shall not make any material change in the nature
of its business as set forth in any documents furnished by the Company relating
to the present Agreement.
SECTION 5.18 U.S. Real property Interest Statement. Upon a written request
by any Purchaser, the Company shall provide such Purchaser with a written
statement informing the Purchaser whether such Purchaser's interest in the
Company constitutes a U.S. real property interest. The Company's determination
shall comply with the requirements of Treasury Regulation Section 1.897-2(h)(1)
or any successor regulation, and the Company shall provide timely notice to the
Internal Revenue Service, in accordance with and to the extent required by
Treasury Regulation Section 1.897-2(h)(2) or any successor regulation, that such
statement has been made. The Company's written statement to any Purchaser shall
be delivered to such Purchaser within twenty (20) days of such Purchaser's
written request therefor.
SECTION 5.19 International Investment Survey Act of 1976. The Company
shall use its best efforts to file on a timely basis all reports required of it
under 22 U.S.C. Section 3104, or any similar statute, relating to a foreign
person's direct or indirect investment in the Company.
SECTION 5.20 Rule 144A Information. The Company shall, at all times during
which it is neither subject to the reporting requirements of Section 13 or 15(d)
of the Exchange Act, nor exempt from reporting pursuant to Rule 12g3-2(b) under
the Exchange Act, provide in writing, upon the written request of any Purchaser
or a prospective buyer of Conversion Shares from any Purchaser, all information
required by Rule 144A(d)(4)(i) of the General Regulations promulgated by the
Commission under the Securities Act ("Rule 144A Information"). The Company also
shall, upon the written request of any Purchaser, cooperate with and assist such
Purchaser or any member of the National Association of Securities Dealers, Inc.
PORTAL system in applying to designate and thereafter maintain the eligibility
of the Conversion Shares for trading through PORTAL. The Company's obligations
under this Section 5.20 shall at all times be contingent upon the relevant
Purchaser's obtaining from the prospective buyer of or Conversion Shares a
written agreement to take all reasonable precautions to safeguard the Rule 144A
Information from disclosure to anyone other than a person who will assist such
buyer in evaluating the purchase of any or Conversion Shares.
SECTION 5.21 Intentionally Omitted.
SECTION 5.22 Intentionally Omitted.
SECTION 5.23 Consolidation, Merger of Disposition of Assets. The Company
will not consolidate with or merge with any other person or convey, transfer or
lease substantially all of its assets in a single transaction or series of
transactions to any person unless the Company shall have paid all outstanding
principal and interest on the Convertible Debentures and all interest that would
have been due and payable on the Convertible Debentures had they been held to
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maturity. The Company shall provide each Holder of a Convertible Debenture with
written notice of such payment at least 30 business days in advance of any
proposed transaction.
SECTION 5.24 Debt to Equity Ratio. The Company shall not permit the Debt
to Equity Ratio to be greater than 3 to 1.
SECTION 5.25 Debt Coverage Ratio. The Company shall not permit the Debt
Coverage Ratio calculated on the last business day of any fiscal quarter of the
Company to be less than 1.5 to 1.
SECTION 5.26 FBR Asset Investment Corporation. The Company shall obtain
the written consent of FBR Asset Investment Corporation ("FBR") to the
transactions contemplated herein or shall repay in full any amounts due pursuant
to any written agreement with FBR by April 28, 1999.
SECTION 5.27 Termination of Covenants. The covenants set forth in Article
V shall terminate and be of no further force or effect as to each Holder when
such Holder no longer holds any Convertible Debentures.
ARTICLE VI
COVENANTS OF THE PURCHASERS
SECTION 6.01 Restriction on Transfers.
(a) The Purchasers shall not transfer Convertible Debentures or
Conversion Shares except in compliance with this Agreement and the applicable
provisions of the securities laws of the United States.
SECTION 6.02 Termination of Covenants. The covenant set forth in this
Article VI shall terminate and be of no further force or effect as to each of
the Purchasers when such Purchaser no longer holds any Convertible Debentures or
Conversion Shares.
ARTICLE VII
COVENANTS OF THE MANAGING STOCKHOLDERS
SECTION 7.01 Tag-Along Rights. For the purposes of this Section 7.01 only
the term "Shares" shall mean and include (i) in respect of a Managing
Stockholder, all voting securities of the Company now beneficially owned or
hereafter acquired by that Managing Stockholder and (ii) in the case of a
Purchaser, all Conversion Shares acquired by that Purchaser prior to the
termination of this Article VII.
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(a) Each Managing Stockholder agrees that if he (a "Selling
Stockholder") proposes to sell or transfer any of his Shares (the "Tag-Along
Securities") in a transaction that does not comply with the Manner of Sale
provisions of Rule 144(f) under the Securities Act, and the amount of such
Tag-Along Securities together with all other Shares sold by such Managing
Stockholder after the date hereof exceeds 320,000 shares in the case of William
McMorrow or 280,000 shares in the case of Lewis Halpert (subject to adjustment
for any Extraordinary Common Stock Event but excluding any shares sold in
compliance with the Manner of Sale provision of Rule 144(f) under the Securities
Act), then such Selling Stockholder shall provide written notice (the "Tag-Along
Offer Notice") of such intent to the Purchasers in the manner set forth in this
Section 7.01 (the date of receipt of such notice being the "Tag-Along Notice
Date"). The Tag-Along Offer Notice shall identify the proposed transferee(s)
(the "Tag-Along Purchaser"), the number of Tag-Along Securities proposed to be
purchased by the Tag-Along Purchaser, the Tag-Along Ratio (as defined in Section
7.01(b)(i)), the consideration offered per Tag-Along Security (the "Tag-Along
Offer Price") and any other material terms and conditions of the proposed
transfer (the "Tag-Along Offer") and, in the case of a Tag-Along Offer in which
the Tag-Along Offer Price consists in part or in whole of consideration other
than cash, such information relating to such consideration as the Purchasers may
reasonably request in order to evaluate such non-cash consideration. The
Purchasers shall have the right, exercisable as set forth below, to accept the
Tag-Along Offer to sell for up to the number of Shares determined pursuant to
Section 7.01(b). The Tag-Along Offer Price paid to any Purchaser shall be not
less than the highest price paid per Tag-Along Security to any Selling
Stockholder, which shall include any payments to such Selling Stockholder for an
agreement not to compete or any consulting or other similar fees payable to such
Selling Stockholder (other than fees for actually anticipated future services).
Any Purchaser that wishes to accept the Tag-Along Offer shall, within 10 days
after the Tag-Along Notice Date (the "Tag-Along Notice Period"), provide the
Selling Stockholder with written notice (a "Tag-Along Acceptance Notice")
specifying the number of Shares that the Purchaser wishes to sell, and shall
simultaneously provide a copy of such Tag-Along Acceptance Notice to the
Company.
Not less than 10 days prior to the proposed date of any sale pursuant to a
Tag-Along Offer (the "Transfer Date"), which date may not be earlier than 10
days after the termination of the Tag-Along Notice Period, the Selling
Stockholder shall notify the Company and the Purchasers of the Transfer Date.
Not less than three days prior to the Transfer Date, the participating
Purchasers shall deliver to the Company in escrow (pending the consummation of
the sale pursuant to the Tag-Along Offer) their duly endorsed certificates
representing the Shares to be transferred by the participating Purchasers
pursuant to the Tag-Along Offer, together with all other documents reasonably
required by the Company and/or the Tag-Along Purchaser to be executed in
connection with the sale of such Tag-Along Securities pursuant to the terms of
the Tag-Along Offer; provided, that each participating Purchaser shall, as a
condition to the sale of the Tag-Along Securities, have the right to receive all
documentation (the "Transfer Documentation") from the Selling Stockholder
relating to the sale of the Tag-Along Securities at least five days prior to the
consummation of such sale. Any material change in the terms of the Tag-Along
Offer (whether or not reflected in the Transfer Documentation) will require the
submission of a new Tag-Along Offer Notice and the recommencement of compliance
with all of the other applicable provisions of this Section 7.01.
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(b) (i) The Purchasers shall have the right to sell (and the Selling
Stockholder shall reduce the number of its shares to be sold by a
corresponding amount), pursuant to the Tag-Along Offer, a number of shares
equal to the product of the total number of Tag-Along Securities offered
to be purchased by the Tag-Along Purchaser as set forth in such Tag-Along
Offer multiplied by a fraction (the "Tag-Along Ratio"), the numerator of
which shall be the aggregate number of Shares owned by such Purchaser and
the denominator of which shall be the aggregate number of Shares owned at
that time by the Selling Stockholder and the participating Purchasers.
(ii) In no event may the Purchasers sell more than the total
number of Shares specified in such Purchasers' Tag-Along Notice applicable
to the relevant Tag-Along Offer. If, at the termination of the Tag-Along
Notice Period, any Purchaser shall not have accepted the Tag-Along Offer,
the Purchaser will be deemed to have waived any and all of its rights
under this Section 7.01 with respect to the sale of any of its Shares
pursuant to such Tag-Along Offer.
(c) The Selling Stockholder, shall have 60 days from the conclusion
of the Tag-Along Notice Period in which to consummate the sale contemplated by
the Tag-Along Offer to the Tag-Along Purchaser at the price and on the terms
contained in the Tag-Along Offer Notice. If, at the end of such 60-day period,
the Selling Stockholder has not completed the sale contemplated by the Tag-Along
Offer Notice, the right of the Selling Stockholder to effect such sale shall
terminate, and the Tag-Along Securities subject to such proposed sale shall
again be subject to all the restrictions on sale or other disposition and other
provisions contained in this Agreement.
(d) Immediately after the consummation of the sale of the Tag-Along
Securities pursuant to the Tag-Along Offer, the Selling Stockholder shall notify
the participating Purchasers and the Company thereof, shall remit to each of the
participating Purchasers their portion of the total sales price specified in the
Tag-Along Offer Notice, and shall furnish such other evidence of such sale
(including the time of completion) and the terms thereof as may be reasonably
requested by the Purchasers. The Company shall, upon being notified of the
consummation of such sale, return to each participating Purchaser a new stock
certificate, as the case may be, for the balance of the Shares not sold as part
of the Tag-Along Securities, in accordance with each Purchasers instructions.
(e) Notwithstanding anything contained in this Section 7.01, there
shall be no liability on the part of a Selling Stockholder to any Purchaser if
the sale of the Tag-Along Securities is not consummated for whatever reason.
(f) No Purchaser shall be required to make any representation or
warranty in connection with the Tag-Along Offer other than as to such
Purchaser's ownership and authority to sell, free of liens, claims and
encumbrances, the Shares proposed to be sold by it.
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SECTION 7.02 Termination. The covenants set forth in this Article VII
shall terminate and be of no further force or effect as to each Purchaser when
such Purchaser no longer holds at least 25% of the aggregate principal amount of
Convertible Debentures, or Conversion Shares issuable thereon, purchased hereby.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01 Expenses. Each party hereto will pay its own expenses in
connection with the transactions contemplated hereby, whether or not such
transactions shall be consummated, provided, however, that the Company shall
reimburse the Purchasers for all reasonable expenses of the Purchasers, not in
excess of $40,000, incurred by the Purchasers with respect to the due diligence,
documentation, and closing of the transactions contemplated by the present
Agreement, including but not limited to the fees and disbursements of the
Purchasers' special counsel, Testa, Hurwitz & Thibeault, LLP. Notwithstanding
the foregoing, the Company shall reimburse the Purchasers for all reasonable
out-of-pocket expenses and costs, including without limitation, reasonable
attorney's fees, expended or incurred by the Purchasers with respect to any
subsequent amendment, waiver, consent requested by the Company or enforcement of
the transactions contemplated by the present Agreement.
SECTION 8.02 Survival of Agreements. All covenants, agreements,
representations and warranties made in any of the Transaction Documents or any
certificate or instrument delivered to the Purchasers pursuant to or in
connection with any of the Transaction Documents shall survive the execution and
delivery of all of the Transaction Documents, the issuance, sale and delivery of
the Convertible Debentures, and the issuance and delivery of the Conversion
Shares unless such covenants, agreements, representations or warranties
expressly state otherwise, and all statements contained in any certificate or
other instrument delivered by the Company hereunder or thereunder or in
connection herewith or therewith shall be deemed to constitute representations
and warranties made by the Company.
SECTION 8.03 Brokerage. Each party hereto will indemnify and hold harmless
the others against and in respect of any claim for brokerage or other
commissions relative to this Agreement or to the transactions contemplated
hereby, based in any way on agreements, arrangements or understandings made or
claimed to have been made by such party with any third party.
SECTION 8.04 Parties in Interest. All representations, covenants and
agreements contained in this Agreement by or on behalf of any of the parties
hereto shall bind and inure to the benefit of the respective successors,
transferees, distributees and assigns of the parties hereto whether so expressed
or not, provided, that (i) the Company shall not have the right to assign its
rights hereunder or any interest therein without the prior written consent of
Holders of at least two-thirds of the shares of Common Stock issued or issuable
upon conversion of the Convertible
-32-
<PAGE>
Debentures and (ii) a Purchaser and its successor, transferee, distributee or
assign shall not have the right to assign its rights hereunder or any interest
therein without the written consent of the Company other than to a successor,
transferee, distributee or assign as permitted by the first sentence of Section
1.09.
SECTION 8.05 Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be delivered in person,
mailed by certified or registered mail, return receipt requested, or sent by
telecopier or telex, addressed as follows:
(a) if to the Company, at 9601 Wilshire Blvd., Suite 220, Beverly
Hills, CA 90210, Attention: Chief Executive Officer, with a copy to Richard K.
Smith, White & Case LLP, 633 West Fifth Street, Suite 1900, Los Angeles, CA
90071-2007; and
(b) if to any Purchaser, at the address of such Purchaser set forth
in Schedule I, with a copy to Leslie E. Davis, Esq., Testa, Hurwitz & Thibeault,
LLP, High Street Tower, 125 High Street, Boston, Massachusetts 02110;
or, in any such case, at such other address or addresses as shall have been
furnished in writing by such party to the others.
SECTION 8.06 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 8.07 Entire Agreement. This Agreement, including the Schedules and
Exhibits hereto, the Registration Rights Agreement and the Convertible
Debentures constitute the entire agreement of the parties with respect to the
subject matter hereof and thereof. All Schedules and Exhibits hereto are hereby
incorporated herein by reference.
SECTION 8.08 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
SECTION 8.09 Amendments. This Agreement may not be amended or modified,
and no provisions hereof may be waived, without the written consent of the
Company and the Holders of at least two-thirds of the shares of Common Stock
issued or issuable upon conversion of the Convertible Debentures and, with
respect to Article VII only, with the consent of each Managing Stockholder.
SECTION 8.10 Severability. If any provision of this Agreement shall be
declared void or unenforceable by any judicial or administrative authority, the
validity of any other provision and of the entire Agreement shall not be
affected thereby.
SECTION 8.11 Titles and Subtitles. The titles and subtitles used in this
Agreement are for convenience only and are not to be considered in construing or
interpreting any term or provision of this Agreement.
-33-
<PAGE>
SECTION 8.12 Indemnification.
(a) The Company agrees to indemnify and hold harmless the Purchasers
and their affiliates, and their respective partners, co-investors, officers,
directors, employees, agents, consultants, attorneys and advisers (each, an
"Indemnified Party"), from and against any and all actual losses, claims,
damages, liabilities, costs and expenses (including, without limitation,
environmental liabilities, costs and expenses and all reasonable fees, expenses
and disbursements of counsel), joint or several (hereinafter collectively
referred to as a "Loss"), which may be incurred by or asserted or awarded
against any Indemnified Party in connection with or in any manner arising out of
or relating to any investigation, litigation or proceeding or the preparation of
any defense with respect thereto, arising out of or in connection with or
relating to this Agreement, the other Transaction Documents or the transactions
contemplated hereby or thereby or any use made or proposal to be made with the
proceeds of the Purchasers' purchase of the Preferred Stock pursuant to this
Agreement, whether or not such investigation, litigation or proceeding is
brought by the Company, any of its subsidiaries, shareholders or creditors, an
Indemnified Party or any other person, whether or not any of the transactions
contemplated by this Agreement or the other Transaction Documents are
consummated, except to the extent such Loss is found in a final judgment by a
court of competent jurisdiction to have resulted from such Indemnified Party's
gross negligence or willful misconduct. The Company agrees that no Indemnified
Party shall have any liability (whether direct or indirect, in contract, tort or
otherwise) to the Company or any of its subsidiaries, shareholders or creditors
for or in connection with the transactions contemplated hereby, except to the
extent such liability is found in a final judgment by a court of competent
jurisdiction to have resulted from any Indemnified Party's gross negligence or
willful misconduct or the breach by a Purchaser of its obligations under the
Transaction Documents but in no event shall an Indemnified Party be liable for
punitive, exemplary or consequential damages.
(b) An Indemnified Party shall give written notice to the Company of
any claim with respect to which it seeks indemnification promptly (but in no
event later than thirty (30) days) after the discovery by such parties of any
matters giving arise to a claim for indemnification pursuant to Section 8.12(a);
provided that the failure of any Indemnified Party to give notice as provided
herein shall not relieve the Company of its obligations under this Section 8.12,
except to the extent that the Company is actually prejudiced by such failure to
give notice. In case any such action or claim is brought against any Indemnified
Party, the Company shall be entitled to participate in and, unless in the
judgment of the Indemnified Party a conflict of interest between such
Indemnified Party and the Company may exist in respect of such action or claim,
to assume the defense thereof, with counsel reasonably satisfactory to the
Indemnified Party and after notice from the Company to the Indemnified Party of
its election so to assume the defense thereof. If the Company elects in writing
to assume the defense of such action or claim, and does so assume the defense of
any such action or claim, the Company shall not be liable to such Indemnified
Party for any legal or other expenses subsequently incurred by the latter in
connection with the defense thereof other than reasonable costs of
investigation. In any event, unless and until the Company elects in writing to
assume and does so assume the defense of any such action or claim the
Indemnified Party's reasonable costs and expenses arising out of the
-34-
<PAGE>
defense, settlement or compromise of any such action or claim shall be Losses
subject to indemnification hereunder. If the Company elects to defend any such
action or claim, then the Indemnified Party shall be entitled to participate in
such defense with counsel of its choice at its sole cost and expense. The
Company shall not be liable for any settlement of any action or claim effected
without its written consent. Anything in this Section 8.12 to the contrary
notwithstanding, the Company shall not, without the Indemnified Party's prior
written consent, settle or compromise any claim or consent to entry of any
judgment in respect thereof that imposes any future obligation on the
Indemnified Party or that does not include, as an unconditional term thereof,
the giving by the claimant or the plaintiff to the Indemnified Party, a release
from all liability in respect of such claim.
SECTION 8.13 Remedies Cumulative. No remedy conferred in this Agreement or
the other Transaction Documents is intended to be exclusive of any other remedy
and each and every such remedy shall be cumulative and shall be in addition to
every other remedy given hereunder or now or hereafter existing at law or in
equity or otherwise.
SECTION 8.14 Remedies Not Waived. No course of dealing between the Company
and any Purchaser and no delay or failure in exercising any rights hereunder or
under any other Transaction Document shall operate as a waiver of any of the
rights of any Purchaser.
SECTION 8.15 Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
(a) "Conversion Shares" means the shares of Common Stock issuable
with respect to the Convertible Debentures.
(b) "Capital Lease Obligations" of any person means the obligations
of such person to pay rent or other amounts under any lease of (or other
arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such person under GAAP,
and the amount of such obligations shall be the capitalized amount thereof
determined in accordance with GAAP.
(c) "Debt" of any person means, without duplication, (a) all
obligations of such person for borrowed money, whether or not evidenced by
bonds, debentures, notes or similar instruments, (b) all Capital Lease
Obligations of such person, (c) all obligations of such person to pay the
deferred purchase price of property or services (other than current accounts
payable in the ordinary course of business), (d) all indebtedness secured by a
Lien on the property or assets of such person, whether or not such indebtedness
shall have been assumed by such person, (e) all obligations, contingent or
otherwise, with respect to the face amount of all letters of credit (whether or
not drawn) and banker's acceptances issued for the account of such person, (f)
all Suretyship Liabilities of such person, (g) all other obligations of such
person upon which interest charges are customarily paid (other than accounts
payable in
-35-
<PAGE>
the ordinary course of business which are not more than 90 days past due), (h)
all obligations of such person under conditional sale or other title retention
agreements relating to property or assets acquired by such person, (i) all net
obligations, contingent or otherwise, of such person with respect to any Hedging
Agreement, (j) all obligations of such person to redeem, purchase or otherwise
retire or extinguish any of its capital stock at a fixed or determinable date
(whether by operation of a sinking fund or otherwise), at another's option or
upon the occurrence of a condition not solely within the control of such person
(e.g., redemption from future earnings), and (k) all debt (as defined above) of
any partnership in which such person is a general partner (except to the extent
such debt is not recourse to such person).
(d) "Hedging Agreement" means any interest rate protection
agreement, foreign currency exchange agreement, commodity price protection
agreement or other interest or currency exchange rate or commodity price hedging
arrangement.
(e) "Suretyship Liability" means any agreement, undertaking or other
contractual arrangement by which any person guarantees, endorses or otherwise
becomes or is contingently liable upon (by direct or indirect agreement,
contingent or otherwise, to provide funds for payment, to supply funds to or
otherwise to invest in a debtor, or otherwise to assure a creditor against loss)
any Debt of any other person (other than by endorsements of instruments in the
course of collection), or guarantees the payment of dividends or other
distributions upon the shares of any other Person. The amount of any person's
obligation under any Suretyship Liability shall (subject to any limitation set
forth therein) be deemed to be the principal amount of the indebtedness,
obligation or other liability guaranteed thereby.
(f) "Measured Debt" means with respect to the Company and its
subsidiaries, all indebtedness and all liabilities for borrowed money of the
Company and its subsidiaries, whether or not evidenced by a written instrument,
except (i) the Convertible Debentures, (ii) Debt which by its terms is
subordinate and junior to, or pari passu with, the Convertible Debentures, (iii)
Debt of the Company and its subsidiaries with respect to which recourse for the
payment of the principal of and interest on such Debt is limited to the property
or assets financed with such Debt and (iv) Debt under any agreements identified
in Section 9.03.
(g) "Debt Coverage Ratio" means, at the date of calculation, the
ratio of EBITDA to Total Debt Interest computed on a twelve month trailing
basis.
(h) "Debt to Equity Ratio" means the ratio of Measured Debt to
Equity.
(i) "EBITDA" means, for any period, earnings for such period before
reduction for depreciation, interest, amortization and income taxes for such
period, determined in accordance with GAAP.
(j) "Equity" means the total stockholder's equity of the Company and
its subsidiaries, determined in accordance with GAAP plus (i) the Convertible
Debentures, (ii)
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<PAGE>
any Debt that ranks pari passu with, or is subordinated to, the Convertible
Debentures and (iii) any debt under any agreement identified in Section 9.03.
(k) "Exchange Act" means the Securities Exchange Act of 1934.
(l) "Fair Market Value" means if the Common Stock is publicly traded
(i) the average (on any date) of the high and low prices of the Common Stock on
the principal national securities exchange on which the Common Stock is traded,
if the Common Stock is then traded on a national securities exchange; or (ii)
the last reported sale price (on any date) of the Common Stock on the NASDAQ
National Market, if the Common Stock is not traded on a national securities
exchange; or (iii) the closing bid price (or average of bid prices) last quoted
(on that date) by an established quotation service for over-the-counter
securities, if the Common Stock is not reported on the NASDAQ National Market.
If the Common Stock is not publicly traded, "fair market value" shall mean the
fair value of the Common Stock as determined by the board of directors of the
Company after taking into consideration all factors which it deems appropriate.
If the prices or quotes discussed herein are unavailable for any date, the
prices or quotes for the last business day for which such prices or quotes are
available shall be used.
(m) "Lien" means mortgage, deed of trust, pledge, lien, security
interest or other charge or encumbrance (including the lien or retained security
title of a conditional vendor) of any nature.
(n) "person" shall mean an individual, corporation, trust,
partnership, joint venture, unincorporated organization, government agency or
any agency or political subdivision thereof, or other entity.
(o)_ "Securities Act" means the Securities Act of 1933.
(p) "Senior Debt" means all Debt of the Company, including any
extensions, renewals, replacements or refinancings thereof, whether outstanding
on the date hereof or hereafter created or incurred, which is not by its terms
subordinate and junior to the Convertible Debentures.
(q) "subsidiary" shall mean, as to the Company, any corporation of
which more than 50% of the outstanding stock having ordinary voting power to
elect a majority of the Board of Directors of such corporation (irrespective of
whether or not at the time stock of any other class or classes of such
corporation shall have or might have voting power by reason of the happening of
any contingency) is at the time directly or indirectly owned by the Company, or
by one or more of its subsidiaries, or by the Company and one or more of its
subsidiaries, and each other entity listed on Schedule III hereto.
(r) "Total Debt Interest" means the sum of the outstanding interest
due as of the date of calculation with respect to the Debt of the Company other
than Debt of the
-37-
<PAGE>
Company with respect to which recourse for the payment of the principal of and
interest on such Debt is limited to the property or assets financed with such
Debt.
ARTICLE IX
EVENTS OF DEFAULT
SECTION 9.01. Events of Default. If any of the following events ("Events
of Default") shall occur and be continuing :
(a) The Company shall fail to pay any installment of principal of
any of the Convertible Debentures within 5 days of when due; or
(b) The Company shall fail to pay any interest on any of the
Convertible Debentures within 5 days of when due; or
(c) The Company shall default in the performance of any covenant
contained in Section 5.24 or 5.25; or
(d) Any representation or warranty made by the Company in this
Agreement or by the Company (or any of its officers) in any certificate,
instrument or written statement contemplated by or made or delivered pursuant to
or in connection with this Agreement, shall prove to have been incorrect when
made in any material respect and shall remain incorrect 10 days after written
notice thereof to the Company; or
(e) The Company shall fail to perform or observe any other term,
covenant or agreement contained in the Transaction Documents or the Convertible
Debentures on its part to be performed or observed and any such failure remains
unremedied for thirty (30) business days after written notice thereof shall have
been given to the Company by any registered Holder of the Convertible
Debentures; or
(f) The Company or any Subsidiary shall (i) admit in writing its
inability to pay its debts generally as they become due; (ii) commence a
voluntary case under Title 11 of the United States Code as from time to time in
effect, or by its authorizing, by appropriate proceedings of its board of
directors or other governing body, the commencement of such a voluntary case;
(iii) file an answer or other pleading admitting or failing to deny the material
allegations of a petition filed against it commencing an involuntary case under
said Title 11, or seeking, consenting to or acquiescing in the relief therein
provided, or by its failing to controvert timely the material allegations of any
such petition; (iv) be the subject of an order entered for relief in any
involuntary case commenced under said Title 11 for at least 60 days; (v) seek
relief as a debtor under any applicable law, other than said Title 11, of any
jurisdiction relating to the liquidation or reorganization of debtors or to the
modification or alteration of the rights of creditors, or by its consenting to
or acquiescing in such relief; (vi) receive or have notice of an
-38-
<PAGE>
order by a court of competent jurisdiction (a) finding it to be bankrupt or
insolvent, (b) ordering or approving its liquidation, reorganization or any
modification or alteration of the rights of its creditors, or (c) assuming
custody of, or appointing a receiver or other custodian for, all or a
substantial part of its property; or (vii) make an assignment for the benefit
of, or entering into a composition with, its creditors, or appointing or
consenting to the appointment of a receiver or other custodian for all or a
substantial part of its property;
then, and in any such event,
(1) the Purchasers may, by notice to the Company, declare the entire
unpaid principal amount of the Convertible Debentures, all interest
accrued and unpaid thereon and all other amounts payable under this
Agreement to be forthwith due and payable, whereupon the Notes, all such
accrued interest and all such amounts shall become and be forthwith due
and payable (unless there shall have occurred an Event of Default under
subsection 9.01(h) in which case all such amounts shall automatically
become due and payable), without presentment, demand, protest or further
notice of any kind, all of which are hereby expressly waived by the
Company, and
(2) the Purchasers may proceed to protect and enforce their rights
by suit in equity (including without limitation a suit for rescission),
action at law and/or other appropriate proceeding either for specific
performance of any covenant, provision or condition contained or
incorporated by reference in this Agreement or any term of the Certificate
of Incorporation of the Company, or in aid of the exercise of any power
granted in this Agreement or in the Certificate of Incorporation of the
Company.
SECTION 9.02.Annulment of Defaults. Section 9.01 is subject to the
condition that, if at any time after the principal of any of the Convertible
Debentures shall have become due and payable, and before any judgment or decree
for the payment of the moneys so due, or any portion thereof, shall have been
entered, then and in every such case the Holders of sixty-six and two-thirds
percent (66 2/3%) or more in principal amount of all Convertible Debentures then
outstanding may, by written instrument filed with the Company, rescind and annul
such declaration and its consequences; but no such rescission or annulment shall
extend to or affect any subsequent default or Event of Default or impair any
right consequent thereon.
SECTION 9.03 Other Defaults. The Company's failure to repay in full any
amounts due under the Loan and Warrant Agreement dated June 3, 1998 by and
between the Company and FBR Asset Investment Corporation, as amended, and the
Bridge Loan Agreement dated as of July 16, 1998 among the Company, Colony K-W,
LLC and the other parties thereto, as amended, and to terminate each such
agreement on or prior to January 15, 2000 shall be an "Other Default".
-39-
<PAGE>
IN WITNESS WHEREOF, the Company, the Managing Stockholders, and
the Purchasers have executed this Convertible Debentures Purchase Agreement as
of the day and year first above written.
KENNEDY-WILSON, INC.
By: /s/ William J. McMorrow
---------------------------------
[Corporate Seal] Title: CEO
-----------------------------
Attest:
/s/ Freeman Lyle
- ---------------------------------
Secretary
<PAGE>
Convertible Debentures Purchase Agreement
Counterpart Signature Page
PURCHASERS:
Cahill, Warnock Strategic Partners Fund, L.P.
By: Cahill, Warnock Strategic Partners, L.P., its sole General Partner
By: /s/ E. Cahill
--------------------------------
Title:
-----------------------------
Strategic Associates, L.P.
By: Cahill, Warnock & Co., LLC, its sole General Partner
By: /s/ E. Cahill
--------------------------------
Title:
--------------------------------
<PAGE>
Convertible Debentures Purchase Agreement
Counterpart Signature Page
MANAGING STOCKHOLDERS:
/s/ William J. McMorrow
- ----------------------------------
William J. McMorrow
/s/ Lewis A. Halpert
- ----------------------------------
Lewis A. Halpert
<PAGE>
Purchasers
Name and Convertible Debentures to Purchase Price for
Address of Purchaser be Purchased Convertible Debentures
- -------------------- ------------ ----------------------
Cahill, Warnock Strategic $7,106,000 $7,106,000
Partners Fund, L.P.
One South Street
Suite 2150
Baltimore, MD 21202
Strategic Associates, L.P. $394,000 $394,000
One South Street
Suite 2150
Baltimore, MD 21202
<PAGE>
Disclosure Schedule
Section 2.01(b)
Pledged Stock
Pursuant to a Pledge Agreement dated as of July 16, 1998 between
Kennedy-Wilson Properties, Ltd., a Delaware corporation ("K-W Delaware"), and
Colony K-W, LLC, a Delaware limited liability company ("Colony"), K-W Delaware
pledged to and granted a first priority security interest in all shares of
Kennedy-Wilson Properties, Ltd., an Illinois corporation, then held or
thereafter acquired by K-W Delaware to Colony.
<PAGE>
Section 2.04
Authorized Capital Stock
I. Options Granted
Kennedy-Wilson, Inc. 1992 Incentive & Non-Statutory Stock Option Plan
<TABLE>
<CAPTION>
Total Remaining
Original Option Exercise Exercisable Exercise Expiration
Name Options Type Price Option Date Options Date Date
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mandel 54000 A 1.065 12/18/95 - 12/18/00
18,000 12/18/97
18,000 12/18/98
Mandel 54000 A 0.995 01/02/96 18,000 01/02/97 01/02/01
18,000 01/02/98
18,000 01/02/99
Gaw 27000 A 0.949 02/01/96 -
-
-
Lyle 27000 A 0.949 04/01/96 - 04/01/01
-
9,000 04/01/99
Stevens 27000 A 1.574 07/29/96 - 07/29/01
-
9,000 07/29/99
Homma 27000 A 1.552 10/01/96 - 10/01/97 10/01/01
- 10/01/98
9,000 10/01/99
Lyle 27000 A 1.806 12/31/96 - 12/31/01
9,000 12/31/98
9,000 12/31/99
Mandel 54000 A 1.806 01/01/97 18,000 01/04/98 01/01/02
18,000 01/01/99
18,000 01/01/00
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
Total Remaining
Original Option Exercise Exercisable Exercise Expiration
Name Options Type Price Option Date Options Date Date
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Collias 27000 A 1.806 01/01/97 - 01/01/02
-
9,000 01/01/00
Ricks 27000 A 1.806 01/01/97 01/01/02
- 01/01/99
9,000 01/01/00
Ozello 27000 A 1.806 01/01/97 9,000 01/01/98 01/01/02
9,000 01/01/99
9,000 01/01/00
Mandel 108000 A 2.130 05/19/97 36,000 05/19/98 05/19/02
36,000 05/19/99
36,000 05/19/00
Mandel 81000 A 2.130 05/19/97 27,000 05/19/98 05/19/02
27,000 05/19/99
27,000 05/19/00
Cramer 27000 A 2.129 05/19/97 - 05/19/02
9,000 05/19/99
9,000 05/19/00
Cramer 27000 A 3.333 09/30/97 - 09/30/02
9,000 09/30/99
9,000 09/30/00
Gaw 45000 A 3.722 10/28/97
Halpert 45000 A 3.722 10/28/97 15,000 10/28/98 10/28/02
15,000 10/28/99
15,000 10/28/00
McMorrow 90000 A 3.722 10/28/97 30,000 10/28/98 10/28/02
30,000 10/28/99
30,000 10/28/00
Lyle 45000 A 3.667 01/20/98 15,000 01/20/99 01/20/03
15,000 01/20/00
15,000 01/20/01
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
Total Remaining
Original Option Exercise Exercisable Exercise Expiration
Name Options Type Price Option Date Options Date Date
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ricks 22500 A 3.667 01/20/98 - 01/20/99 01/20/03
7,500 01/20/00
7,500 01/20/01
Homma 22500 A 3.667 01/20/98 - 01/20/99 01/20/03
7,500 01/20/00
7,500 01/20/01
Anodide 11250 A 3.667 01/20/98 3,750 01/20/99 01/20/03
3,750 01/20/00
3,750 01/20/01
McMorrow 37500 A 7.000 04/27/98 12,500 04/27/99 04/27/03
12,500 04/27/00
12,500 04/27/01
Mandel 37500 A 7.000 04/27/98 12,500 04/27/99 04/27/03
12,500 04/27/00
12,500 04/27/01
Homma 30000 A 7.000 04/27/98 10,000 04/27/99 04/27/03
10,000 04/27/00
10,000 04/27/01
Honda 7500 A 7.000 04/27/98 2,500 04/27/99 04/27/03
2,500 04/27/00
2,500 04/27/01
Baldwin 18900 A 8.167 04/29/98 6,300 04/29/99 04/29/03
6,300 04/29/00
6,300 04/29/01
Ozello 11250 A 8.250 06/10/98 3,750 06/10/99 06/10/03
3,750 06/10/00
3,750 06/10/01
Beasley 15000 A 8.333 07/15/98 5,000 07/15/99 12/15/03
5,000 07/15/00
5,000 07/15/01
Latvaaho 0 A 0.000 -
-
-
Powalish 15000 A 8.333 07/15/98 5,000 07/15/99 12/15/03
5,000 07/15/00
5,000 07/15/01
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
Total Remaining
Original Option Exercise Exercisable Exercise Expiration
Name Options Type Price Option Date Options Date Date
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Schlesinger 75000 A 8.333 07/15/98 25,000 07/15/99 12/15/03
25,000 07/15/00
25,000 07/15/01
Wachsner 22500 A 8.333 07/15/98 7,500 07/15/99 12/15/03
7,500 07/15/00
7,500 07/15/01
Schlesinger 100000 A 7.375 01/04/99 20,000 01/04/00 01/04/04
20,000 01/04/01
20,000 01/04/02
20,000 01/04/03
20,000 01/04/04
Waschner 20000 A 7.375 01/04/99 4,000 01/04/00 01/04/04
4,000 01/04/01
4,000 01/04/02
4,000 01/04/03
4,000 01/04/04
Beasley 15000 A 7.375 01/04/99 3,000 01/04/00 01/04/04
3,000 01/04/01
3,000 01/04/02
3,000 01/04/03
3,000 01/04/04
Powalish 15000 A 7.375 01/04/99 3,000 01/04/00 01/04/04
3,000 01/04/01
3,000 01/04/02
3,000 01/04/03
3,000 01/04/04
Zimmerman 25000 A 7.375 01/04/99 5,000 01/04/00 01/04/04
5,000 01/04/01
5,000 01/04/02
5,000 01/04/03
5,000 01/04/04
Ricks 10000 A 7.375 01/04/99 3,333 01/04/00 01/04/04
3,333 01/04/01
3,334 01/04/02
Collins 25000 A 7.500 01/11/99 8,333 01/11/00 01/11/04
8,333 01/11/01
8,334 01/11/02
Cerone 7500 A 9.000 03/19/99 2,500 03/19/00 03/19/04
2,500 03/19/01
2,500 03/19/02
</TABLE>
Kennedy-Wilson, Inc. 1992 Non-Employee Director Stock Option Plan
-5-
<PAGE>
<TABLE>
<CAPTION>
Total Option Exercise Option Exercisable Exercise Expiration
Name Options Type Price Date Options Date Date
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Elliott 13500 2 12.963 08/14/92 13,500 08/14/93 08/14/02
Elliott 540 2 1.620 05/11/95 540 05/11/96 05/11/05
Mouton 13,500 2 0.926 12/18/95 13,500 12/18/96 12/18/05
Mouton 540 2 1.713 06/13/96 540 06/13/97 06/13/06
Prell 13,500 2 12.963 08/14/92 13,500 08/14/93 08/14/02
Prell 540 2 1.620 05/11/95 540 05/11/96 05/11/05
- ---------------------------------------------------------------------------------------------------
</TABLE>
II. Rights to Acquire Equity Securities
<TABLE>
<CAPTION>
Underlying Shares of
Common Stock of
Name Right Amount the Company
---- ----- ------ -----------
<S> <C> <C> <C>
FBR Asset Investment Warrant 131,096 (subject to 131,096 (subject to
Corporation adjustment) adjustment)
Colony Investors III, Warrant 198,039 (subject to 198,039 (subject to
L.P. adjustment) adjustment)
Purchase An amount sufficient to An amount sufficient to
Colony Investors III, Rights maintain its pro rata maintain its pro rata
L.P. ownership ownership
</TABLE>
III. Pledge Agreements
Pursuant to a Pledge Agreement dated as of July 16, 1998 between
Kennedy-Wilson Properties, Ltd., a Delaware corporation ("K-W Delaware"), and
Colony K-W, LLC, a Delaware limited liability company ("Colony"), K-W Delaware
pledged to and granted a first priority security interest in all shares of
Kennedy-Wilson Properties, Ltd., an Illinois corporation, then held or
thereafter acquired by K-W Delaware to Colony.
-6-
<PAGE>
Section 2.06
Events Subsequent To Balance Sheet Date
None, except for borrowings and repayments under the Amended and Restated
Revolving Credit Agreement dated as of September 10, 1998 between the Company
and East-West Bank.
-7-
<PAGE>
Section 2.07
Litigation
The Company is engaged in Litigation in the ordinary course of its
operations. The Company does not believe that such Litigation will have a
material adverse affect on its business, financial condition, operations or
property.
-8-
<PAGE>
Section 2.09
Patents, Trademarks, Etc.
None.
-9-
<PAGE>
Section 2.14
Material Agreements
(c) (1) Amended and Restated Revolving Credit Agreement dated as of
September 10, 1998 between the Company and East-West Bank;
(2) Loan and Warrant Agreement dated June 3, 1998 between the
Company and FBR Asset Investment Corporation, as amended;
(3) $21,000,000 Bridge Loan Agreement dated as of July 16, 1998
among the Company, Kennedy-Wilson International, K-W Properties,
Kennedy-Wilson Properties, Ltd. and Colony K-W, LLC, as amended;
(4) Pledge Agreement dated as of July 16, 1998 between
Kennedy-Wilson Properties, Ltd. and Colony K-W, LLC; and
(5) The other agreements referenced in the Registration Statement
and the Financial Statements.
(d) In addition to providing industry standard limited recourse guarantees
in the acquisition of real property by the Company or its affiliates, the
Company has provided guarantees of borrowers' obligations under the
promissory notes and agreements listed below. The limited recourse
guarantees described in the preceding sentence do not relate to the
property being acquired or the payment of principal or interest under any
mortgage.
(1) Promissory Note in the principal amount of $1,000,000 dated July
28, 1998 by Kennedy-Wilson Properties, Ltd. in favor of East-West
Bank;
(2) Promissory Note in the principal amount of $2,300,000 dated July
9, 1998 by K-W KAU, LLC in favor Old Standard Life Insurance
Company;
(3) Promissory Note in the principal amount of $5,075,000 dated
February 20, 1998 by K-W Paseo Heights, LLC in favor INMC Mortgage
Holdings, Inc. (dba Construction Lending Corporation of America);
(4) Promissory Note in the principal amount of $540,000 dated April
30, 1998 by K-W Westlake 15, Inc. in favor of National Bank of
California;
(5) Promissory Note in the principal amount of $3,990,000 dated
November 23, 1998 by K-W Courtyard Homes, LLC in favor of Valley
Independent Bank;
(6) Promissory Note in the principal amount of $2,490,000 dated
March 19, 1998 by K-W Properties in favor of Century Bank;
(7) Overdraft Agreement (with maximum amount of (Y)30,000,000) dated
July 30, 1998 between Kennedy-Wilson Japan and Tokyo Mitsubishi
Bank;
(8) Overdraft Agreement (with maximum amount of (Y)30,000,000)
between Kennedy-Wilson Japan and Sumitomo Bank;
-10-
<PAGE>
(9) Overdraft Agreement (with maximum amount of (Y)30,000,000)
between Kennedy-Wilson Japan and Sumitomo Bank; and
(10) The other agreements referenced in the Registration Statement
and the Financial Statements.
-11-
<PAGE>
Section 2.16
Assumptions, Guarantees of Indebtedness of Other Persons
In addition to providing industry standard limited recourse guarantees in
the acquisition of real property by the Company or its affiliates, the Company
has provided guarantees of borrowers' obligations under the promissory notes and
agreements listed below. The limited recourse guarantees described in the
preceding sentence do not relate to the property being acquired or the payment
of principal or interest under any mortgage.
1. Promissory Note in the principal amount of $1,000,000 dated July 28,
1998 by Kennedy-Wilson Properties, Ltd. in favor of East-West Bank;
2. Promissory Note in the principal amount of $2,300,000 dated July 9,
1998 by K-W KAU, LLC in favor Old Standard Life Insurance Company;
3. Promissory Note in the principal amount of $5,075,000 dated February
20, 1998 by K-W Paseo Heights, LLC in favor INMC Mortgage Holdings,
Inc. (dba Construction Lending Corporation of America);
4. Promissory Note in the principal amount of $540,000 dated April 30,
1998 by K-W Westlake 15, Inc. in favor of National Bank of
California;
5. Promissory Note in the principal amount of $3,990,000 dated November
23, 1998 by K-W Courtyard Homes, LLC in favor of Valley Independent
Bank;
6. Promissory Note in the principal amount of $2,490,000 dated March
19, 1998 by K-W Properties in favor of Century Bank;
7. Overdraft Agreement (with maximum amount of (Y)30,000,000) dated
July 30, 1998 between Kennedy-Wilson Japan and Tokyo Mitsubishi
Bank;
8. Overdraft Agreement (with maximum amount of (Y)30,000,000) between
Kennedy-Wilson Japan and Sumitomo Bank;
9. Overdraft Agreement (with maximum amount of (Y)30,000,000) between
Kennedy-Wilson Japan and Sumitomo Bank; and
10. The other agreements referenced in the Registration Statement and
the Financial Statements.
-12-
<PAGE>
List of Subsidiaries and Affiliates
State or Other
Jurisdiction of
Name Incorporation
---- -------------
301 South Fair Oaks, LLC California
453 Barrington Property Group, Inc. California
801 Flower Group, Inc. California
5900 Sepulveda Property Group, Inc. California
11743 Kiowa Partners Corporation California
Asset One K.K. Japan
Beverly Crescent LLC California
Carriage Villas Group, Inc. California
Cathedral Hills Vistas California
Choei Building Management K.K. Japan
Choei Create K.K. Japan
Choei Kaihatsu K.K. Japan
Choei Urban K.K. Japan
Colony KW Investment Y.K. Japan
Colony-KW Partners, L.P. Delaware
Dealco One, Inc. California
Dealco Two, Inc. California
Del Mar Pasadena, LLC California
Downtown Properties NY LLC California
Edinger Business Centre Group, Inc. California
e-KWIC, Inc. California
<PAGE>
State or Other
Jurisdiction of
Name Incorporation
---- -------------
Hilltop Colony, LLC California
JUL K.K. Japan
Jutaku Ryutsu K.K. Japan
K.A. Capital K.K. Japan
Kennedy-Wilson DC Properties, Ltd. District of Columbia
Kennedy-Wilson Hong Kong Hong Kong
Kennedy-Wilson International California
Kennedy-Wilson Japan Co., Ltd. Japan
Kennedy-Wilson Japan K.K. Japan
Kennedy-Wilson Minnesota Management, Inc. Minnesota
Kennedy-Wilson Nevada Management, Inc. Nevada
Kennedy-Wilson Ohio Management, Inc. Ohio
Kennedy-Wilson Portfolio Fund I, LLC Delaware
Kennedy-Wilson Portfolio Fund II, LLC Delaware
Kennedy-Wilson Properties, Ltd. Illinois
Kennedy-Wilson Properties, Ltd. Delaware
Kennedy-Wilson Properties of Delaware, Ltd. Delaware
Kennedy-Wilson Properties of Louisiana, Ltd. Louisiana
Kennedy-Wilson Properties of Maryland, Ltd. Maryland
Kennedy-Wilson Properties of Oregon, Ltd. Oregon
Kennedy-Wilson RHA Holding Company, Inc. California
Kennedy Wilson Tech, Ltd. California
-2-
<PAGE>
State or Other
Jurisdiction of
Name Incorporation
---- -------------
Kennedy-Wilson Wisconsin Management, Inc. Wisconsin
KMK K.K. Japan
Kona Surf Group, Inc. California
Kona Surf Investors, LLC California
Kuhio Group, Inc. California
KW 1055 Wilshire Group, Inc. California
KW 6255 Sunset Group, Inc. California
K-W 6380 Wilshire Group, Inc. California
KW 7080 Hollywood Group California
K-W Black Oak, Inc. California
KW Capital Corporation California
KW Courtyard Homes Group, Inc. California
KW Courtyard Homes, LLC California
KW Crescent Group, Inc. California
KW Del Mar Group, Inc. California
K-W Euclid, Inc. California
K-W Falcon Crest, Inc. California
K-W Hilltop, Inc. California
KW Hilltop, Inc. California
KW Japan Investments, Inc. Delaware
KW Kau Group, Inc. California
KW Kau LLC California
-3-
<PAGE>
State or Other
Jurisdiction of
Name Incorporation
---- -------------
KW Kohanaiki Group, Inc. California
KW Kohanaiki LLC California
K-W Laurelwood, Inc. California
KW Management Svs. Inc. California
KW Maple Partners, Inc. California
KW Marengo Group, Inc. California
KW Mitchell, Inc. California
KW Paseo Group, Inc. California
KW Paseo Heights, Inc. California
KW Paseo Heights, LLC California
KW Portfolio Group I, Inc. Delaware
KW Portfolio Group II, Inc. Delaware
KW Properties California
KW Properties I California
KW Puako Group, Inc. California
KW Puako, LLC California
KW Reno Equity, Inc. California
KW Rochester 24, LLC California
KW Rochester Group, Inc. California
KW Rochester, Inc. California
KW Santiago, Inc. California
KW Upland Equities, Inc. California
-4-
<PAGE>
State or Other
Jurisdiction of
Name Incorporation
---- -------------
KW Valencia Group, Inc. California
KW Vista Del Valle, LLC California
KW Westlake 15, Inc. California
KW-A, LLC California
KW-LP Investments, Inc. California
KWP Financial I California
KWP Financial II California
KWP Financial III California
KWP Financial IV California
KWP Financial V California
MAY K.K. Japan
Monarch Investors, Inc. California
MPM K.K. Japan
Muromachi Building Management K.K. Japan
Mutual Capital Mortgage Company California
NOV K.K. Japan
OCT K.K. Japan
Plaza Centre Group, Inc. California
Prestonwood Group, Inc. California
Rancho Del Valle Properties Group California
SFR Properties, LLC California
Southwood Townhomes Group, Inc. California
-5-
<PAGE>
State or Other
Jurisdiction of
Name Incorporation
---- -------------
SSI K.K. Japan
SST K.K. Japan
Stonegate Group, Inc. California
TST K.K. Japan
TUE K.K. Japan
VDE Corona Group, Inc. California
Vista Del Valle, LLC California
Vista Waikoloa Group, Inc. California
Westborough Court Group, Inc. California
Wilshire & 7th Properties, Inc. California
Woodcreek, Inc. California
-6-
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made as of
April 15, 1999 by and among Kennedy-Wilson, Inc., a Delaware corporation
(the "Company"), Strategic Associates, L.P., a limited partnership organized
under the laws of the State of Delaware ("Associates"), and Cahill Warnock
Strategic Partners Fund, L.P., a limited partnership organized under the laws of
the State of Delaware ("Partners") (Associates and Partners are referred to
herein individually as a "Purchaser" and collectively as the "Purchasers").
WHEREAS, the Company and the Purchasers have entered into a Convertible
Debenture Purchase Agreement dated as of April 15, 1999 (the "Purchase
Agreement");
WHEREAS, pursuant to the Purchase Agreement, the Company and the
Purchasers desire to enter into this Agreement to provide Purchasers with
certain registration rights and to address related matters;
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, the parties agree as follows:
1. Registration. The Company agrees to use commercially reasonable best
efforts to cause a registration statement under the Securities Act of 1933 (the
"Act") on an appropriate form relating to all of the Conversion Shares (as
defined in the Purchase Agreement) to be filed with the Securities and Exchange
Commission ("SEC") by August 13, 1999. The Company shall have no obligation to
file a registration statement pursuant to this Section 1, unless and until the
Purchasers or the Purchasers' assigns, transferees and distributees as permitted
under the Purchase Agreement (collectively the "Permitted Assigns") shall have
furnished the Company all information and statements about or pertaining to the
Purchasers or their Permitted Assigns in such reasonable detail and on such
timely basis as is reasonably required by the Company in connection with the
preparation of the registration statement.
2. Registration Procedure. In using its commercially reasonable best
efforts to effect the registration described in Section 1, the Company shall, as
expeditiously as reasonably possible:
(a) prepare and file with the SEC a registration statement to
register the continuous offering of the Conversion Shares and use its
commercially reasonable best efforts (i) to cause such registration statement to
become effective as soon as reasonably practicable thereafter (provided that
before filing such a registration statement or prospectus or any amendments or
supplements thereto, the Company shall furnish one counsel for Purchasers with
copies of all such documents proposed to be filed) and (ii) to cause such
registration statement to remain effective until the earlier of the sale of all
Conversion Shares by the Purchasers or their Permitted Assigns or 2 years after
the Closing Date; provided, however, the Company may withdraw the use of the
registration statement upon written notice to the Purchasers or their
<PAGE>
Permitted Assigns for a period or periods of time not to exceed in the aggregate
30 days during any 12-month period, if there then exists material, non-public
information relating to the Company which, in the reasonable opinion of the
Company, would not be appropriate for disclosure during that time;
(b) prepare and file with the SEC such amendments and supplements to
such registration statement and prospectus used in connection therewith as may
be necessary to keep such registration statement effective for the period
specified in (a) above;
(c) furnish to each Purchaser such number of copies of such
registration statement, each amendment and supplement thereto, the prospectus
included in such registration statement (including each preliminary prospectus),
and such other documents as the Purchaser may reasonably request;
(d) use its commercially reasonable best efforts to register or
qualify such shares under such other securities or blue sky laws of such
jurisdictions in the United States of America as the Purchasers request (and to
maintain such registrations and qualifications effective for the period
specified in (a) above, and to do any and all other acts and things which may be
necessary or advisable to enable the Purchasers to consummate the disposition in
such jurisdictions of such shares (provided that the Company will not be
required to (i) qualify generally to do business in any jurisdiction where it
would not be required but for this Section 1.3(d), (ii) subject itself to
taxation in any such jurisdiction, or (iii) file any general consent to service
of process in any such jurisdiction);
(e) notify each Purchaser who is a registered owner of a Convertible
Debenture, at any time during which a prospectus relating thereto is required to
be delivered under the Act within the period that the Company is required to
keep a registration statement effective, of the happening of any event as a
result of which the prospectus included in such registration statement contains
an untrue statement of a material fact or omits any material fact necessary to
make the statements therein not misleading, and prepare a supplement or
amendment to such prospectus so that, as thereafter delivered to the purchasers
of such shares, such prospectus will not contain an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading;
(f) use its commercially reasonable best efforts to cause all such
Conversion Shares to be quoted on the NASDAQ National Market (or, if the common
stock of the Company is no longer quoted on the NASDAQ National Market, listed
on the principal exchange upon which the Company's common stock is then listed);
and
(g) enter into such customary agreements (including an underwriting
agreement in customary form) and take all such other actions as the Purchasers
shall reasonably request (and subject to Purchasers' reasonable approval) in
order to expedite or facilitate the disposition of such shares, provided that
the Company shall not be required to enter into any such agreement more than
once.
-2-
<PAGE>
3. Registration Expenses. All expenses incurred by the Company in
complying with Sections 1 and 2, including, without limitation, all registration
and filing fees, fees and disbursements of counsel and independent public
accountants for the Company, fees and expenses incurred in connection with
complying with state securities or "blue sky" laws, fees of the National
Association of Securities Dealers, Inc., transfer taxes and fees of transfer
agents and registrars, but excluding any Selling Expenses (as defined below),
are called "Registration Expenses." All underwriting discounts (if any) and
selling commissions applicable to the sale of Conversion Shares are called
"Selling Expenses."
The Company will pay all Registration Expenses in connection with the
registration statement under Section 1. All Selling Expenses in connection with
the registration statement under Section 1 and the sale of Conversion Shares
thereunder shall be borne by the Purchasers or their Permitted Assigns in
proportion to the number of shares sold by each.
4. Indemnity. (a) In connection with the registration of the Conversion
Shares under the Act pursuant to Section 1 hereof, the Company will indemnify
and hold harmless (i) each Purchaser and its Permitted Assigns, (ii) any
underwriter of such Conversion Shares thereunder and (iii) each other person, if
any, who controls such Purchaser, Permitted Assign or underwriter (each a
"Section 4(a) Indemnitee") within the meaning of the Act, against any losses,
claims, damages or liabilities, joint or several, to which such Section 4(a)
Indemnitee may become subject under the Act, the Securities Exchange Act of 1934
(the "Exchange Act"), state securities laws or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon (a) any untrue statement or alleged untrue statement of
material fact contained in the registration statement under which such
Conversion Shares were registered under the Act pursuant to Section 1 hereof,
any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereto, (b) the omission or alleged omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances under which they were made
or (c) any violation by the Company of any rule or regulation promulgated under
the Act, the Exchange Act or state securities laws applicable to the Company and
relating to action or inaction required of the Company in connection with such
registration, and the Company will reimburse each such Section 4(a) Indemnitee
for any legal or other expenses reasonably incurred by it in connection with
investigating or defending any such loss, claim, damage, liability or action,
provided, however, that the Company will not be liable in any such case if any
to the extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement, an omission or
alleged omission or a violation or alleged violation so made in conformity with
information furnished in writing by any such Section 4(a) Indemnitee for use in
such registration statement, preliminary prospectus, final prospectus, amendment
or supplement and provided, further that with respect to any such untrue or
alleged untrue statement in or omission or alleged omission from the related
preliminary prospectus, the indemnity contained in this Section 4 shall not
inure to the benefit of any Section 4(a) Indemnitee from whom the person
asserting any such loss, claim, damage or liability received Convertible
Debentures or Conversion Share to the extent such loss, claim, damage or
liability with respect to such Section 4(a) Indemnitee results from the fact
that both (A) a copy of the
-3-
<PAGE>
prospectus was not sent or given to such person at or prior to the written
confirmation of the sale of such Convertible Debenture or Conversion Share to
such person and (B) the untrue or alleged untrue statement in or omission or
alleged omission from the related preliminary prospectus was corrected in the
final prospectus.
(b) Each Purchaser and its Permitted Assigns Conversion Shares
pursuant to the registration in Section 1, severally and not jointly, will
indemnify and hold harmless the Company, each person, if any, who controls the
Company within the meaning of the Act, each officer of the Company who signs the
registration statement, each director of the Company, each underwriter and each
person who controls any underwriter within the meaning of the Act, (each a
"Section 4(b) Indemnitee"), against all losses, claims, damages or liabilities,
joint or several, to which a Section 4(b) Indemnitee may become subject under
the Act, the Exchange Act, state securities laws or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the registration statement, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, provided, however, that such Purchaser or
its Permitted Assigns will be liable hereunder in any such case if and only to
the extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information pertaining to such Purchaser or its Permitted Assigns, furnished by
such Purchaser or its Permitted Assigns; and provided, further, that in no event
shall any indemnity under this subsection 4(b) exceed the net proceeds from the
offering received by such Purchaser or its Permitted Assigns from the sale of
Conversion Shares.
(c) Promptly after receipt by an indemnified party hereunder of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party hereunder,
notify the indemnifying party in writing thereof, but the omission so to notify
the indemnifying party shall not relieve it from any liability which it may have
to such indemnified party other than under this Section 4 and shall only relieve
it from any liability which it may have to such indemnified party under this
Section 4 if and to the extent the indemnifying party is prejudiced by such
omission. In case any such action shall be brought against any indemnified party
and it shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in and, to the extent it
shall wish, to assume and undertake the defense thereof with counsel reasonably
satisfactory to such indemnified party, and, after notice from the indemnifying
party to such indemnified party of its election so to assume and undertake the
defense, the indemnifying party shall not be liable to such indemnified party
under this Section 4 for any legal expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation and of liaison with counsel so selected; provided,
however, that, if the defendants in any such action include both the indemnified
party and the indemnifying party and if the interests of the indemnified party
reasonably may be deemed to conflict with the interests of the indemnifying
party, the indemnified party shall have the right to select a separate counsel
and to assume such legal defenses and otherwise to participate in the
-4-
<PAGE>
defense of such action, with the expenses and fees of such separate counsel and
other expenses related to such participation to be reimbursed by the
indemnifying party as incurred. Each Indemnitee, as a condition to the
indemnification contained in this Section 4, shall use all reasonable efforts to
cooperate with the indemnifying party in the defense of any action or claim. No
indemnifying party shall, without the prior written consent of the Indemnitee
(which consent shall not be unreasonably withheld), effect any settlement of any
pending or threatened proceeding in respect of which any such Indemnitee is or
could have been a party and indemnification could have been sought hereunder by
such Indemnitee, unless such settlement includes an unconditional release of
such Indemnitee from all liability on claims that are the subject matter of such
proceeding.
(d) In order to provide for just and equitable contribution to joint
liability in any case in which a claim for indemnification is made pursuant to
this Section 4 but it is judicially determined (by the entry of a final judgment
or decree by a court of competent jurisdiction and the expiration of time to
appeal or the denial of the last right of appeal) that such indemnification may
not be enforced in such case notwithstanding the fact that this Section 4
provides for indemnification in such case, the Company and each Purchaser or its
Permitted Assign will contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (after contribution from others) in
proportion to the relative fault of the Company, on the one hand, and the
Purchaser or its Permitted Assign, severally, on the other hand; provided,
however, that, in any such case, no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any person or entity who was not guilty of
such fraudulent misrepresentation and; provided, further, that in no event shall
any contribution under this subsection 4(d) on the part of any seller exceed the
net proceeds received by such seller from the sale of Conversion Shares.
5. Additional Actions and Documents. Each of the parties hereto hereby
agrees to use its good faith best efforts to bring about the consummation of
this Agreement, and to take or cause to be taken such further actions, to
execute, deliver and file or cause to be executed, delivered and filed such
further documents and instruments, and to obtain such consents, as may be
necessary or as may be reasonably requested in order to fully effectuate the
purposes, terms and conditions of this Agreement.
6. Assignment. Each Purchaser may assign its rights under this Agreement
to any assignee, transferee or distributee of a Convertible Debenture or the
Conversion Shares issuable thereunder.
7. Entire Agreement; Amendment. This Agreement and the Purchase Agreement
including the other writings referred to herein or therein or delivered pursuant
hereto or thereto, constitute the entire agreement among the parties hereto with
respect to the transactions contemplated herein or therein and its supersedes
all prior oral or written agreements, commitments or understandings with respect
to the matters provided for herein. No amendment, modification or discharge of
this Agreement shall be valid or binding unless set forth in writing and duly
executed by the party against whom enforcement of the amendment, modification,
or discharge is sought.
-5-
<PAGE>
8. Binding Effect. This Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective successors and assigns.
9. Governing Law. This Agreement, the rights and obligations of the
parties hereto, and any claims or disputes relating thereto, shall be governed
by and construed in accordance with the laws of Delaware (excluding the choice
of law rules thereof).
10. Notices. All notices, demands, requests, or other communications which
may be or are required to be given, served, or sent by any party to any other
party pursuant to this Agreement shall be in writing and shall be mailed by
first-class, registered or certified mail, return receipt requested, postage
prepaid, or transmitted by hand delivery (including delivery by courier),
telegram, telex, or facsimile transmission, addressed as follows:
(a) If to the Company:
Kennedy-Wilson, Inc.
9601 Wilshire Boulevard
Suite 220
Beverly Hills, CA 90210-5205
Attention: Chief Executive Officer
with a copy (which shall not constitute notice) to:
White & Case LLP
633 West Fifth Street, 19th Floor
Los Angeles, CA 90071
Attention: Richard K. Smith, Jr., Esq.
Facsimile: 213-687-0758
(b) If to Associates
Strategic Associates, L.P.
One South Street, Suite 2150
Baltimore, Maryland 21202
Attention: Mr. Edward Cahill
Facsimile: 410-347-2963
with a copy (which shall not constitute notice) to:
Leslie E. Davis
Testa, Hurwitz & Thibeault
125 High Street
Boston, MA 02110
Facsimile: 617-248-7100
-6-
<PAGE>
(c) If to Partners
Cahill Warnock Strategic Partners Fund, L.P.
One South Street, Suite 2150
Baltimore, Maryland 21202
Attention: Mr. Edward Cahill
Facsimile: 410-347-2963
with a copy (which shall not constitute notice) to:
Leslie E. Davis
Testa, Hurwitz & Thibeault
125 High Street
Boston, MA 02110
Facsimile: 617-248-7100
Each party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter to so given, served or sent.
Each notice, demand, request, or communication which shall be mailed, delivered
or transmitted in the manner described above shall be deemed sufficiently given,
served, sent and received for all purposes at such time as it is delivered to
the addressee (with the return receipt, the delivery receipt, the affidavit of
messenger or (with respect to a telex) the answerback being deemed conclusive
(but not exclusive) evidence of such delivery) or at such time as delivery is
refused by the addressee upon presentation.
11. Execution in Counterparts. To facilitate execution, this Agreement may
be executed in as many counterparts as may be required; and it shall not be
necessary that the signatures of each party appear on each counterpart; but it
shall be sufficient that the signature of each party appear on one or more of
the counterparts. All counterparts shall collectively constitute a single
agreement. It shall not be necessary in making proof of this Agreement to
produce or account for more than a number of counterparts containing the
respective signatures of all of the parties hereto.
-7-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be duly executed on its behalf as of the date first above written.
KENNEDY-WILSON, INC.
By: /s/ William J. McMorrow
----------------------------------------
Name: William J. McMorrow
Title: CEO
STRATEGIC ASSOCIATES, L.P.
By: Cahill, Warnock & Company, LLC
its general partner
By: /s/ E. Cahill
----------------------------------------
Name:
Title:
CAHILL, WARNOCK STRATEGIC
PARTNERS FUND, L.P.
By: Cahill, Warnock Strategic Partners, L.P.
its general partner
By: /s/ E. Cahill
----------------------------------------
Name:
Title:
-8-
<PAGE>
THIS CONVERTIBLE DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR UNDER THE LAWS OF ANY STATE OF OTHER JURISDICTION. THIS
CONVERTIBLE DEBENTURE MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT OR PURSUANT TO AN
APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREOF.
KENNEDY-WILSON, INC.
CONVERTIBLE SUBORDINATED NOTE DUE 2006
$________ April __, 1999
For value received, Kennedy-Wilson, Inc., a Delaware corporation (the
"Company"), hereby promises to pay to ____________________ or its assigns who
are registered as the holder hereof on the Security Register maintained by the
Company (hereinafter referred to as the "Holder"), on or before April 15, 2006,
the principal sum of ____________________ Dollars ($______) or such part thereof
as then remains unpaid, to pay interest from the date hereof on the whole amount
of said principal sum remaining from time to time unpaid at the rate of six
percent (6%) per annum, such interest to be payable monthly in arrears on the
last business day of each month, the first such payment to be due and payable on
May 31, 1999, until the whole amount of the principal hereof remaining unpaid
shall become due and payable, and to pay interest at the rate of eight percent
(8%) (so far as the same may be legally enforceable) on all overdue principal
and interest. Principal, premium, if any, and interest shall be payable in
lawful money of the United States of America, by check to the Holder at the
address of the Holder set forth in the Security Register. Interest shall be
computed on the basis of a 360-day year and a 30-day month. The rate at which
interest is required to be paid may also change under certain circumstances as
described in the Agreement (defined below).
This Note is issued pursuant to and is entitled to the benefits of a
certain Convertible Debenture Purchase Agreement, dated as of April 15, 1999,
between the Company and the Purchasers named therein (as the same may be amended
from time to time, hereinafter referred to as the "Agreement"), and each Holder
of this Note, by his acceptance hereof, agrees to be bound by the provisions of
the Agreement, including, without limitation, that (i) the principal of and
interest on this Note is subordinated to Senior Debt, as defined in the
Agreement, (ii) in case of certain Events of Default defined in the Agreement,
the principal of this Note may become or may be declared due and payable in the
manner and with the effect provided in the Agreement and (iii) this Note is
convertible at the option of the Holder hereof into shares of Common Stock of
the Company in the manner set forth in this Agreement.
<PAGE>
As further provided in the Agreement, upon surrender of this Note for
transfer or exchange, a new Note or new Notes of the same tenor dated the date
to which interest has been paid on the surrender Note and in an aggregate
principal amount equal to the unpaid principal amount of the Note so surrendered
will be issued to, and registered in the name of, the transferee or transferees.
The Company may treat the person in whose name this Note is registered as the
owner hereof for the purpose of receiving payment and for all other purposes.
In case any payment herein provided for shall not be paid when due, the
Company promises to pay all cost of collection, including all reasonable
attorney's fees.
This Note shall be governed by, and construed in accordance with, the laws
of the State of Delaware and shall have the effect of a sealed instrument.
The Company and all endorsers and guarantors of this Note herein waive
presentment, demand, notice of nonpayment, protest and all other demands and
notices in connection with the delivery, acceptance, performance or enforcement
of this Note.
KENNEDY-WILSON, INC.
By:__________________________
Title:_______________________
Attest:
By:__________________________
Title:_______________________
-2-
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Kennedy-Wilson, Inc.
on Form S-1 of our report dated February 26, 1999, appearing in this
Prospectus, which is part of this Registration Statement.
We also consent to the use in this Registration Statement of Kennedy-Wilson,
Inc. on Form S-1 of our report dated July 10, 1998, on the financial
statements of Heitman Properties Ltd., appearing in the Prospectus, which is
part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Los Angeles, California
April 21, 1999
