ITEM 1. BUSINESS
GENERAL: Kennedy-Wilson, Inc. (the "Company") was founded in 1977 and incorporated in Delaware in 1992. Operations are principally conducted through its wholly owned operating subsidiaries, Kennedy-Wilson International, a California corporation, and K-W Properties, a California corporation and its wholly owned subsidiaries. The Company's principal executive offices are located at 530 Wilshire Boulevard, Suite 101, Santa Monica, California 90401, and its telephone number is (310) 314-8400.
The Company provides real estate marketing and brokerage services through its centrally-controlled international marketing network, primarily for financial institutions, developers and government agencies. The Company has offices in the Santa Monica, San Francisco, New York, Tokyo, Hong Kong and Jakarta. Since 1977 the Company has sold over $4 billion of residential, commercial, hotel and resort properties.
COMMERCIAL BROKERAGE: The Company's commercial business concentrates on single-seller sealed bid sales and private placement sales of commercial properties. The division opened offices in New York and Jakarta in 1996, which in addition to the Company's Tokyo and Hong Kong offices, will provide greater access to the investment communities in Asia and the eastern U.S.
AUCTION-MARKETING: The auction-marketing method as employed by the Company consists of a broad range of services necessary to complete the sale of properties, including market research and analysis, design and implementation of a specific marketing plan and, a professionally managed auction and closing service. Auction-marketing provides real property owners with an opportunity to sell their holdings on one established auction date, thereby increasing liquidity and avoiding long-term carrying costs. In addition to real estate, the Company has successfully used its auction-marketing methods for selling broadband airwaves, personal property, industrial equipment and notes collateralized by real estate.
REAL ESTATE ACQUISITIONS: K-W Properties, a wholly owned subsidiary, acquires, renovates and disposes of residential and income producing real estate. These transactions generally arise as an offshoot of the Company's normal marketing business as clients frequently want to sell property quickly and with certainty rather than to take the time for an auction or other marketing program. The Company may, depending on the availability of its capital and assessment of risk, form partnerships with third parties to acquire the residential projects. The holding period for residential projects are generally less than one year, while income properties are typically held over one year.
NOTE ACQUISITIONS: The Company, through its subsidiary KWP Financial, purchases discounted note receivable portfolios, typically from governmental agencies. The Company then either settles the notes for cash, restructures them to performing status, or initiates foreclosure proceedings on these assets secured by real estate.
JOINT VENTURES: The Company has in the past entered into, and anticipates that in the future it will continue to enter into, various joint ventures with regard to its real estate marketing services and acquisition activities. Historically in joint ventures, the Company has been responsible for providing its standard real estate marketing services and the Company's joint venture partner has been responsible for identifying properties to be sold, preparing due diligence materials and providing certain sales personnel; See Note 6.
LICENSING: The Company sold its Australian subsidiary in 1995 to a related party and, as part of such sale, granted a license to the entity to use the Kennedy-Wilson International name in Australia and New Zealand. The Company terminated this agreement in 1996 due to lower than expected profits.
BACKLOG: At December 31, 1996, commissions subject to completion of sales totaled approximately $459,000, compared to approximately $738,000 at December 31, 1995. Additionally, as of December 31, 1996, the Company had executed marketing agreements on properties having an estimated aggregate gross value of real estate sales of approximately $143 million. This compares to approximately $213 million as of December 31, 1995.
COMPETITION: The real estate brokerage and auction-marketing industry within which the Company operates is both highly fragmented and highly competitive. The Company faces significant competition and must compete with other auction companies, and conventional residential and commercial real estate brokers. Several of these real estate brokerage companies are significantly larger than the Company, possess greater financial resources and compete with the Company directly in the auction market.
REGULATION: The Company's real estate marketing operations are subject to various regulations at the Federal, State and local levels as well as the national level in various countries. The Company, through one of its officers, must be licensed as a real estate broker in each state in which the Company operates. State governmental bodies, such as the Department of Real Estate in California, regulate the operations of the Company conducted under its various real estate brokerage licenses. Company personnel performing certain functions in the real estate marketing process must be licensed real estate salespersons and must work under the supervision of the Company's officer/ broker of record. In certain jurisdictions in which the Company operates and as allowed by applicable law, the Company associates with real estate brokers licensed in such jurisdictions. The Company believes that it is in substantial compliance with all material licensing requirements in all states and countries in which licenses are required and in which the Company operates.
In various states including California, governmental entities license individual auctioneers and administer various regulations governing the activities of auctioneers. The Company believes that it is in substantial compliance with all material licensing requirements in all states in which licenses are required and in which the Company operates.
INSURANCE: The Company currently maintains errors and omissions, directors' and officers' liability, property, casualty and workers' compensation insurance, with policy limits which the Company believes are adequate. The Company periodically reviews and revises such limits.
EMPLOYEES: At March 21, 1997, the Company employed approximately 54 full-time and 2 part-time persons compared with 52 full-time and 31 part-time persons at March 21, 1996. None of the Company's employees are represented by a collective bargaining agent.
ITEM 2.
ITEM 2. PROPERTIES
The executive and administrative offices of the Company are located at 530 Wilshire Boulevard, Suite 101, Santa Monica, California, and consist of approximately 9,000 square feet in a four story office building which the Company purchased for investment purposes in April 1995.
The Company also leases space for its regional and branch offices. These facilities aggregate approximately 6,000 square feet, with an annual aggregate base rental of approximately $227,000. The leases expire within the next five years. The Company believes that it will be able to renew any expiring leases or obtain suitable office space to replace such leased facilities, as necessary, without any material increase in the Company's rental costs. As described in Item 1 hereof, the Company acquires and disposes of income producing property in the ordinary course of its business.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings generally incidental to its business and routine. While the ultimate disposition of these ordinary proceedings is not presently determinable, the Company's management believes that the outcome of these proceedings will not have a material adverse effect on the Company and such proceedings, individually or collectively, are not material.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Certificate of Incorporation was amended to effect a reduction in the number of authorized shares of common stock. This amendment was approved at a Special Meeting of Stockholders held on November 19, 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on The Nasdaq Stock Market under the symbol: KWIC. The following table sets forth the high and low closing sale prices of the Company's Common Stock as reported in the Nasdaq National Market, adjusted for a one-for-ten reverse stock split effective November 21, 1995:
As of March 28, 1997, there were 89 holders of record and approximately 1200 beneficial holders of the Company's Common Stock. Since the completion of the Company's initial public offering in August 1992, no dividends have been declared by the Company.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company as of and for each of the five fiscal years ended December 31, 1996. The data set forth below should be read in conjunction with the Consolidated Financial Statements and related Notes to Consolidated Financial Statements appearing elsewhere herein and Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations for the Years ended December 31, 1996, 1995 and 1994
Commissions decreased 10% to $5.9 million in 1996 from $6.5 million in 1995 as a result of a decrease in residential auction-marketing, both in number of auctions and value of properties sold and a decline in commission rates due to competitive pressures. In addition, commissions decreased in 1995 compared to 1994 due to the 1995 disposition of a portion of the Company's Commercial Brokerage Division, including European operations, and the separate sale of the Company's Australian subsidiary. These dispositions are reflective of the Company's decision to narrow its focus and concentrate on its already successful operations in California and Asia. In connection with this determination, during 1996, the Company opened an office in New York to expand its commercial brokerage business and further emphasize single seller sealed bid sales and private placement sales.
Sales of residential real estate increased 86% in 1996 compared with 1995 as a result of the sale of three condominium projects in 1996 totaling approximately $19.7 million. This compares to sales of residential real estate of $10.6 million in 1995 from the sale of four condominium projects, which represented a decline from the 1994 sale of five projects. Cost of residential real estate sold related to these sales increased 58% to $16.5 million in 1996 compared to $10.5 million in 1995 and $15.1 million in 1994. In addition, cost of sales as a percentage of revenue decreased to 84% in 1996 from 99% in 1995 and 92% from 1994.
Gain on sale of commercial real estate in the amount of $1.5 million for 1996 consists of the sale of one commercial property. In 1994 the Company also sold a commercial property, for a net gain of $3 million. There were no commercial property sales in 1995, See Note 5.
Gain on restructured notes receivable in the amount of $3.1 million in 1996 reflects the Company's increased expansion in the acquisition and disposition of non-performing and under-performing real estate collateralized note receivable portfolios. The notes are typically purchased at a substantial discount from government agencies. See Item 1 and Note 4 for further discussion.
Commission and marketing expenses decreased 40% in 1996 to $1.6 million from $2.6 million in 1995, which in turn decreased from $6.1 million in 1994. In addition, commission and marketing expenses decreased as a percentage of commissions revenue due to the lower costs associated with commercial brokerage compared with auctions.
Compensation and related expenses decreased by 20% in 1996 from 1995 and 23% in 1995 from 1994 due to the reduced number of employees resulting from the 1995 sale of a portion of the Company's Commercial Brokerage Division and Australian subsidiary.
General and administrative expense decreased 46% in 1996 compared to 1995 and also decreased 23% in 1995 as compared with 1994 primarily due to the 1995 sale of the Company's Commercial Brokerage Division and Australian subsidiary. Also, in 1995 the Company moved from approximately 25,000 square feet of leased space into approximately 7,000 square feet in a building it owns.
In 1995, the Company sold a portion of its Commercial Brokerage Division, including European operations, and its Australian subsidiary. As a result, the Company took a non-cash charge of $6,000,000 to reflect costs associated with these actions. See Note 11 for further discussion of the restructuring.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that cash and cash equivalents at December 31, 1996 of $1.9 million, plus expected cash generated from ongoing real estate marketing operations, continued sales of real estate owned, collections from notes receivable, as well as the working capital line of credit, will provide the Company with sufficient resources to fund its present and reasonably foreseeable operations. The Company has not historically required major capital expenditures to support its marketing operations. However, the Company believes that its ability to make advances to its clients' marketing budgets provides a competitive advantage. The Company's liquidity may in the future be adversely affected by lower commission rates, or increased contributions to marketing budgets, caused by competition from other marketing companies. Liquidity could also be adversely affected by the Company's ability to sell real estate it has acquired.
As discussed in Note 9 and 10, the Company is obligated under various notes payable and mortgages payable, which are secured by notes receivable and real estate held for sale. Approximately $1.9 million of notes payable and $2.1 million of mortgages are due in 1997. The Company anticipates that these amounts will be repaid from proceeds from the sale of the related collateral.
As discussed in Note 18, in February 1997, the Company acquired approximately 89,000 shares of its common stock from a former officer and director. The terms required an initial payment of $200,000 (which has been paid), plus two additional payments of approximately $370,000 each on April 30, 1997 and September 30, 1997. The Company expects to be able to meet these future obligations from cash generated from operations.
To the extent the Company engages in additional strategic investments, including real estate and note portfolio acquisitions, the Company may need to obtain third party financing which could include bank financing or the public sale or private placement of debt or equity securities. The Company has historically been successful in arranging the required financing for its investment activities. The increase in 1996 in its acquisition line of credit to $8 million, and the bank financing obtained for 1996 acquisitions, supports the Company's belief that it should be able to continue to secure the capital resources necessary to fund its investments. (See Notes 8,9 and 10 of Notes to Consolidated Financial Statements).
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
KENNEDY-WILSON, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Kennedy-Wilson, Inc. and Subsidiaries Santa Monica, California
We have audited the accompanying consolidated balance sheets of Kennedy-Wilson, Inc. and subsidiaries (the "Company"), as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Kennedy-Wilson, Inc. and subsidiaries at December 31, 1996 and 1995, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP Los Angeles, California March 14, 1997
KENNEDY-WILSON, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
KENNEDY-WILSON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements.
KENNEDY-WILSON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See notes to consolidated financial statements.
KENNEDY-WILSON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
See notes to consolidated financial statements.
KENNEDY-WILSON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Kennedy-Wilson, Inc. is a Delaware corporation which was incorporated in 1992. Kennedy-Wilson, Inc. and its wholly owned subsidiaries (the "Company") provide real estate marketing services throughout the United States, and Asia, primarily to financial institutions, developers and government agencies. The Company also acquires, renovates and resells residential and commercial real estate; invests in non-performing note receivable portfolios; and invests in various real estate partnerships.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and partnerships in which the Company has a controlling interest. For foreign operations, assets and liabilities are translated at year-end exchange rates, and income statement items are translated at average exchange rates prevailing during the year. All significant intercompany transactions have been eliminated.
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.
Investment in Partnerships
The Company accounts for investments in partnerships with a non-controlling interest of 50% or less under the equity method.
Revenue Recognition
Commissions are generally recognized when all services to be provided by the Company have been performed and title to real property has passed from the seller to the buyer. Residential real estate sales revenue and gains on sale of commercial property are recognized at the close of escrow. Gains on notes receivable are recognized ratably upon receipt of cash or a restructured note including a significant cash component.
Net Income (Loss) Per Common Share
Net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding during the periods.
The weighted average number of common shares used to compute net income (loss) per share (restated for the 10 for 1 reverse stock split) was 1,312,379, 1,402,858, and 1,406,279 for the years ended December 31, 1996, 1995 and 1994, respectively.
KENNEDY-WILSON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Cash and Cash Equivalents
Cash consists of cash and all highly liquid investments purchased with maturities of three months or less.
Long Lived Assets
During 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. Among other provisions, the statement changed current accounting practices for the evaluation of impairment of long-lived assets. The adoption did not have a material effect on the Company's financial statements.
Fair Value of Financial Instruments:
Cash, Accounts Receivable and Accounts Payable - The carrying amounts approximate fair value because of the short maturities of these instruments.
Bank Line of Credit - The carrying amounts approximate fair value because of the short maturity and because the interest varies with the prime rate. See Note 8.
Notes Receivable and Notes Payable - The carrying amounts approximate fair value because of the short term nature of these instruments. See Notes 4 and 9.
Concentration of Credit Risk
Financial instruments that subject the Company to credit risk consist primarily of accounts and notes receivable, and cash and cash equivalents. Credit risk is generally diversified due to the large number of entities composing the Company's customer base and their geographic dispersion. The Company performs ongoing credit evaluations of its customers. Cash and cash equivalents are invested in insured financial institutions. However, certain accounts contain balances in excess of the insured limits.
Reclassifications
Certain reclassifications have been made to the 1995 and 1994 balances to conform with the 1996 presentation.
NOTE 2 - CASH - RESTRICTED
Restricted cash as of December 31, 1996 and 1995 of $396,000 and $179,000, respectively, consists of funds received from clients in connection with marketing contracts. Such funds are held in separate trust accounts at financial institutions, and are restricted for the purposes of satisfying expenses incurred in connection with each marketing contract.
NOTE 3 - ACCOUNTS RECEIVABLE
Included in accounts receivable are marketing advances. Certain marketing advances are collateralized by security interests in the real estate marketed by the Company.
KENNEDY-WILSON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 4 - NOTES RECEIVABLE
The notes receivable balance was $13.8 million at December 31, 1996 and $235,000 at December 31, 1995. Notes receivable consists primarily of non-performing loan portfolios acquired from government agencies. The notes are typically secured by real estate, UCC-1 filings, or are guaranteed by the borrowers.
During 1996, the Company purchased four portfolios of non-performing loans for approximately $13.5 million. The Company secured cash settlements in the amount of approximately $3.7 million, and restructured notes receivable in the amount of $1.9 million.
Gains are recognized when notes receivable are settled for cash, or are restructured to performing status along with a substantial cash payment by the borrowers. In 1996, the Company recognized a gain on notes receivable transactions of approximately $3.1 million, compared to $160,000 in 1995.
NOTE 5 - REAL ESTATE HELD FOR SALE
Real estate held for sale is comprised of commercial and residential properties stated at cost plus additional capital improvements less accumulated depreciation and amortization of $588,000 and $412,000 at December 31, 1996 and 1995 respectively.
Real estate held for sale includes the following:
KENNEDY-WILSON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
All real estate held for sale at December 31, 1996, except for Vista Waikoloa, are collaterized by certain mortgage loans (See Note 10 - Mortgage notes payable). Commercial buildings and improvements are depreciated on the straight line method over the estimated useful lives as follows:
Building - 39 years Tenant Improvement - shorter of lease term or useful life ranging from 2 to 5 years
Depreciation expense was $535,000, $412,000 and $433,000, for 1996, 1995 and 1994, respectively. These amounts are included in the Statement of Operations in Rental Income, Net.
Gain on the sale of commercial property is recognized upon the transfer of title and is included in the Company's revenues, net of the related cost basis.
Sales of residential properties are also recognized upon the transfer of title. The net sales price of residential properties is included in revenue, and the related cost is included in cost of residential real estate sold.
NOTE 6 - INVESTMENTS IN AFFILIATES AND PARTNERSHIPS
Investments in affiliates and partnerships consists primarily of the following:
In December 1996 the Company acquired a 50% interest in a joint venture ("Hilltop Colony, LLC") that owns a 114 unit condominium project in Los Angeles for $600,000. The total investment at December 31, 1996 was $667,000, and is accounted for under the equity method.
In November 1996 the Company acquired a 25% interest in a joint venture ("Downtown Properties, LLC") with a related party, that owns two commercial properties with approximately 515,000 square feet of rental space, located in downtown Los Angeles for $2,570,000. The total investment at December 31, 1996 was $2,679,000, and is accounted for under the equity method.
Summarized financial data of the joint venture is as follows:
KENNEDY-WILSON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
In November 1996 the Company also acquired a 25% interest in a joint venture ("Ski Monarch, LLC") with a related party, that owns a ski resort and hotel located near Crested Butte, Colorado for $440,000. The total investment at December 31, 1996 was $454,000, and is accounted for under the equity method.
In addition, the Company had various interests in other joint ventures of approximately $3,000 and $38,000 at December 31,1996 and 1995, respectively, which are accounted for under the equity method.
In 1995, the Company sold its 50% general partnership interest in Realty Holdings of America for an aggregate sales price of $4,575,000. The Company's basis in the partnership was approximately $4,200,000 and after costs associated with the sale the Company recognized a gain of approximately $350,000.
NOTE 7 - OTHER ASSETS
Other assets consist of the following:
Furniture, fixtures and equipment are depreciated over a 5 year useful life, on the straight line method.
Capitalized costs, which include acquisition and organization cost, loan fees and deferred expenses are being amortized over a period of between 12 and 18 months.
KENNEDY-WILSON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 8 - BORROWINGS UNDER LINES OF CREDIT
In 1996, the Company entered into a loan agreement that provides the Company with a $10.0 million credit facility (the "facility") which includes up to $8.0 million in an acquisition facility and $2.0 million in an unsecured working capital facility. The acquisition facility is secured by existing real estate owned by the Company and the actual availability under the facility is limited based on the equity in such real estate. Proceeds from the sale of such secured real estate are used to pay down the acquisition facility. The outstanding balance at December 31, 1996 was approximately $8.5 million, of which $7.5 million was for the acquisition facility and $1 million was for the working capital facility. The facilities bear interest at the prime rate plus 1%, which was 9.25% at December 31, 1996. The working capital facility will be due in full in June 1997 and the acquisition facility will be due in full in 18 months from the date of each advance. Approximately, 2.7 million will be paid in 1997 and 5.8 million in 1998.
The Company had a revolving line of credit of $4 million with a bank which had a balance of $3,961,00 at December 31, 1994 and which expired and was paid in full in 1995.
The Company's Japanese subsidiary has unsecured lines of credit aggregating approximately $500,000 under which $419,000 in borrowings were outstanding at December 31, 1996. These borrowings bear interest at rates from 1.9% to 2.6% per annum.
NOTE 9 - NOTES PAYABLE
Notes payable were incurred primarily in connection with the acquisition of notes receivable, (see Note 4), and included the following:
Principal is paid down monthly based on a percentage of cash collections on the note receivable. The percentage of cash flow paid out ranges from 88% to 90%. Principal balances are estimated to be paid in full during 1997.
KENNEDY-WILSON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 10 - MORTGAGE NOTES PAYABLE Mortgage notes payable include the following
All of the mortgage notes payable are secured by deeds of trust on the respective real estate properties (See Note 5 - Real Estate Held for Sale). Aggregate maturities of mortgage notes payable through 2001 are: 1997-$2,137,000, 1998-$587,000, 1999-$922,000, 2000-$321,000, 2001-$5,836,000 and $10,714,000 thereafter.
Note 11 - Restructuring Program and Sale of Assets
Net loss for the year ended December 31, 1995 includes charges relating to a restructuring program designed to redirect the Company's resources and improve operating profitability. Included in the Consolidated Statements of Operations for the year ended December 31, 1995 are restructuring charges of $6.0 million, primarily related to the write off of goodwill and certain assets, as well as the accrual of certain lease termination costs.
In 1995, the Company sold the operations and certain assets of its Commercial Brokerage Division to The Greenwich Group, L.L.C. ("TGG"), a Company formed by the senior managers of such Division, in exchange for approximately $1.9 million and $100,000 option which the Company exercised during 1996. TGG, and its subsidiaries, acquired the Division's fixed assets in the Company's New York, Chicago, Washington, European and Santa Monica offices. In addition, TGG acquired existing marketing agreements for certain commercial and hotel property sales which the Company was marketing. The Company's lease obligations for the New York, Chicago, Washington, London and other European offices as well as for certain equipment were assigned to TGG in connection with this transaction. The sale proceeds have been included as "Sale of assets and subsidiary" and the net book value of the assets sold of $753,000 included as "Cost of assets and subsidiary sold" in the Consolidated Statement of Operations.
Also in 1995, the Company sold the stock of its Australian subsidiary to the senior managers of that entity in exchange for $31,000, forgiveness by the Australian subsidiary of all intercompany receivable from the Company (approximately $20,000) and the assurance that all liabilities of the subsidiary would be paid by the subsidiary. The sale proceeds of approximately $51,000 have been included as "Sales of Assets and Subsidiary" and the net book value of the assets sold of $(18,000) as "Costs of Assets and Subsidiary Sold" in the Consolidated Statement of Operations.
Note 12 - Related Party Transactions
During 1996, 1995 and 1994, the Company's auction-marketing division conducted marketing programs for certain non-consolidated partnerships managed by K-W Properties, a wholly owned subsidiary of the Company.
The Company paid the spouse of one of its officers/major stockholders fees of $16,000, $52,000, and $64,000 for 1996, 1995, and 1994, respectively, for performing certain graphic design services in connection with the printing of sales catalogues and brochures by the Company.
In 1996, the Company entered into two joint ventures with related parties, who are affiliated with Goodwin Gaw, one of the Company's Managing Directors, a member of the Board of Directors, and a significant stockholder, See Note 6.
In 1996, the firm of Kulik, Gottesman & Mouton was paid a total of $277,000 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 $25,000 in director's fees for 1996.
In 1995, the Company borrowed $250,000 from William J. McMorrow and Lewis A. Halpert, current officers and directors and Kenneth V. Stevens a former officer and director. Proceeds from such loan were used to purchase Kiowa Gardens, a 9 unit condominium project in Brentwood, California for $2 million. The Company also invested $250,000 in equity. The note payable required the Company to pay a participation of up to 50% of the project's profits and the related third party loan fees and costs. This note payable was repaid in 1996 from excess proceeds from sales of condominium units after the required payments on the construction loan. The Company believes that the terms of this loan were equal to or better than terms that would have been available to the Company through an independent third party. This borrowing was reviewed and approved by disinterested members of the Company's Board of Directors. During 1996, the Company accrued a profit participation of $209,000 which was paid.
In 1995, the Company borrowed $400,000 from William J. McMorrow, Lewis A. Halpert, Richard Mandel, current officers and directors, William R. Stevenson and Kenneth V. Stevens, former officers and directors (the "Principals"). Proceeds from such loan were used to purchase Cathedral Hill Vistas, a 20 unit condominium project in San Francisco, California for $2.6 million. The note payable required the Company to pay a participation of up to 25% of the project's profits and the interest at the Principals' cost of funds plus 2%, as well as the related third party loan fees and costs. A profit participation of $122,000 was recorded as cost of real estate sold-related parties during 1995.
The principal amount of this note payable was repaid in 1995, from proceeds from sales of condominium units after the construction loan was paid in full. The Company believes that the terms of this loan were equal to or better than terms that would have been available to the Company through an independent third party. This borrowing was reviewed and approved by disinterested members of the Company's Board of Directors. During 1995, the Company paid and capitalized loan fees and interest totaling $69,000 and accrued a profit participation of $122,000, of which $25,000 was paid in 1995 and the remaining balance in 1996.
During 1995, a director received a $12,500 consulting fee from the Company for services performed in connection with evaluating various entity structures suitable for the Company's income property investments.
During 1994, one of the Company's directors received a $10,000 consulting fee from the Company for services performed in connection with the Company's acquisition of a 10% interest in a mortgage company.
NOTE 13 - INCOME TAXES
The following summarizes the effect of deferred income tax items and the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. Temporary differences and carry-forwards which give rise to deferred tax assets and liabilities are as follows:
The provisions for income taxes consists of the following:
A reconciliation of the statutory federal income tax rate with the Company's effective income tax rate is as follows:
As of December 31, 1996, the Company had federal net operating loss carryover of approximately $8,924,000 and state net operating loss carryover of approximately $4,746,000. The federal net operating loss carryover expires in 2009 through 2011, and the state net operating loss carryover expires in three to five years.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
Minimum rental commitments, net of sublease income, as of December 31, 1996 under the non-cancelable operating leases are as follows:
Approximately $431,000 is due the Company in years 1997 through 2001 under sublease agreements.
Rental expense amounted to $300,000, $800,000 and $1.4 million for the years ended December 31, 1996, 1995 and 1994, respectively. Rental expense will increase by $252,000 per year as a result of the lease executed pursuant to the sale of the 530 Wilshire property in March 1997. See Note 18.
Employment Agreements
The Company has entered into employment agreements with its principal officers which provide for annual base compensation in the aggregate amount of $925,000 and expire at various dates through December 1998. The employment agreements provide for the payment of an annual bonus based upon the achievement of certain agreed-upon earnings objectives.
The Company also has employment agreements with various other non-officer employees which provide for minimum annual compensation of $614,000 in total, and expiring at various dates through December 1998.
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 15 - Stock Option Plans and Warrants
The Company currently has three option plans: the 1992 Incentive Stock Plans ("Plan A"), the 1992 Nonstatutory Stock Plan ("Plan B"), and the 1992 Non-Employee Director Stock Option Plan ("Plan C"). In May 1992, the Company authorized 140,000 shares of stock under these plans. Plan A permits the granting of options to employees and directors, Plan B permits the granting of options to employees, directors and consultants, and Plan C permits the granting of options to non-employee directors. Plan B is inactive and has no options granted. Under Plan A, options are granted for common stock at the fair market value at the time the options were granted. Under Plan C, each director, upon being elected to the Board of Directors, shall automatically be granted the option to purchase 2,500 shares at the fair market value at the date of grant. In addition, the director shall be granted the option to purchase an additional 100 shares at the fair market value, upon being re-elected. Vesting for Plan A is determined by a Committee of the Board of Directors of the Company (the " Committee") appointed by the Board of Directors. Options under Plan C become exercisable on the first anniversary of the date of the initial grant, but only if the recipient continues to serve as a director for at least one year from the date of the initial grant. The options under Plan A may be exercised for a period of up to five years from the grant date. Under Plan C, each option expires on the earlier of the tenth anniversary of the date of grant or ninety days after the date the individual ceases to be a director of the Company, whichever comes firsts.
Details of activity under the plans for the years ended December 31, 1994, 1995 and 1996 are as follows:
The fair value of the stock options granted during 1996 was $74,348. The fair value of each stock grant is estimated using the Black-Scholes option pricing model with the following assumptions: using the yield on a 5 year treasury note as the risk-free interest rate; no dividend yield; expected life of five years; and using historical cost for the volatility. The total number of stock option shares exercisable at December 31, 1996 was 12,239.
The Company accounts for the plans in accordance with Accounting Principles Board Opinion Number 25, under which no compensation cost has been recognized for the stock option awards. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date, consistent with the method of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based Compensation, the effect on the Company's net income and earnings per share would have been immaterial.
Note 16 - Reverse Stock Split
In 1995, at a Special Meeting of the Stockholders, an amendment to the Company's Certificate of Incorporation effecting a one-for-ten reverse stock split (the "Reverse Split") was approved. Effective upon such amendment, each outstanding share automatically became one-tenth of a share. In 1996 the number of authorized shares was also reduced by a one-for-ten ratio through an amendment to the Company's Certificate of Incorporation. All historical share and per share amounts have been retroactively restated to reflect the Reverse Split.
Note 17 - Employee Profit Sharing Plan
The Company maintains a profit sharing plan covering all full time employees over the age of 21, who have completed three months of service prior to January 1 and July 1 of each year. Contributions to the profit sharing plan are made solely at the discretion of the Company's Board of Directors. No contributions were made for the years ended December 31, 1996, 1995 and 1994.
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 10% 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 1996 and 1995 the Company made matching contributions of $19,000 and $24,000, respectively to this plan. The Company made no contributions in 1994.
Note 18 - Subsequent Events
In January 1997, the Company purchased a 20,000 square feet office building in Santa Ana, California for $1.3 million. The purchase was financed in part by a mortgage in the amount of $1.2 million.
In February 1997, the Company acquired approximately 89,000 shares of its common stock from a former officer and director in a private transaction for approximately $940,000. Per the terms of the agreement, an initial payment of $200,000 was made on February 28, 1997, (the "Closing Date") with additional payments of $370,000 due on April 30, 1997 and July 30, 1997. If payments are not made on the designated dates, interest shall accrue from the Closing Date, at a rate of 10% per annum. The terms of the agreement also include a termination of employment and mutual release provision.
In February 1997, the Company initiated foreclosure proceedings against the borrower of one of the Company's notes receivable which is secured by a first trust deed with a face value of $5 million, on a commercial property in Orange County. No loss is expected to be incurred on this transaction.
In March 1997, the Company sold the 530 Wilshire Blvd. property in which it currently resides, for approximately $9.5 million. The Company has executed a lease agreement to remain in its current location, which obligates it for rental payment of approximately $21,000 per month through the year 2001. The Company expects to recognize a gain on this transaction.
EXHIBIT 22.1
KENNEDY-WILSON, INC. LIST OF SUBSIDIARIES
STATE OR OTHER -------------- EXHIBIT NUMBER DESCRIPTION - ------- -------------- PART III
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the Directors and Executive Officers of the Company will be set forth in the Company's definitive proxy statement which is to be filed pursuant to Regulation 14A within 120 days after the Company's fiscal year ended December 31, 1996, and such information is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to Executive Compensation will be set forth in the Company's definitive proxy statement which is to be filed pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year ended December 31, 1996, and such information is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to Security Ownership of Certain Beneficial Owners and Management will be set forth in the Company's definitive proxy statement which is to be filed pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year ended December 31, 1996, and such information is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to Certain Relationships and Related Transactions will be set forth in the Company's definitive proxy statement which is to be filed pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year ended December 31, 1996, and such information is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits
(1) Financial Statements. Reference is made to the Index to Financial Statements and Schedules in Item 8 hereof. (2) Financial Statement Schedules.
SCHEDULE III - REAL ESTATE OWNED S-1
Supplemental financial statement schedules not listed above are omitted because either they are not applicable, not required or because the information required is included in the consolidated financial statements, including the notes thereto.
(3) Exhibits:
(b) Current Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KENNEDY-WILSON, INC.
Date: March 28, 1997
By: /s/WILLIAM J. McMORROW ------------------------------------ William J. McMorrow Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
KENNEDY-WILSON, INC. SCHEDULE OF REAL ESTATE OWNED For Year Ending December 31, 1996
KENNEDY-WILSON, INC. SCHEDULE OF REAL ESTATE OWNED For Year Ending December 31, 1996
EXHIBIT INDEX