Kaahumanu Center Associates (A Hawaii
Limited Partnership)
Financial Statements for Each of the Three
Years Ended December 31, 2002, 2001 and
2000 and Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
To the Partners of Kaahumanu Center Associates:
We have audited the accompanying balance sheets of Kaahumanu
Center Associates (a Hawaii limited partnership) as of December
31, 2002 and 2001, and the related statements of operations,
changes in partners' capital (deficit), and cash flows for each
of the three years in the period ended December 31, 2002.
These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. 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 the
Partnership at December 31, 2002 and 2001, and the results of
its operations and its cash flows for each of the three years
in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States
of America.
/S/ DELOITTE & TOUCHE LLP
February 14, 2003
KAAHUMANU CENTER ASSOCIATES
BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS 2002 2001
CURRENT ASSETS:
Cash $ 34,424 $ 33,960
Accounts receivable - less
allowance of $390,250 and
$250,073 for doubtful accounts 985,845 699,626
Prepaid expenses 80,518 31,023
Total current assets 1,100,787 764,609
PROPERTY:
Land and land improvements 6,075,618 6,068,132
Building 84,163,258 83,724,161
Furniture, fixtures and equipment 5,317,157 5,147,455
Construction in process 273,314 261,380
Total property 95,829,347 95,201,128
Less accumulated depreciation (32,381,614) (28,849,489)
Property - net 63,447,733 66,351,639
OTHER ASSETS 1,182,878 1,274,227
TOTAL $65,731,398 $68,390,475
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,339,432 $ 1,228,322
Accounts payable 661,311 457,015
Due to Maui Land & Pineapple
Company, Inc. 2,487,836 1,667,283
Other current liabilities 53,508 39,453
Total current liabilities 4,542,087 3,392,073
LONG-TERM DEBT 56,571,347 57,911,022
OTHER LONG-TERM LIABILITIES 116,611 90,726
Total liabilities 61,230,045 61,393,821
CONTINGENCIES AND COMMITMENTS
PARTNERS' CAPITAL 4,501,353 6,996,654
TOTAL $65,731,398 $68,390,475
See notes to financial statements.
KAAHUMANU CENTER ASSOCIATES
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
REVENUES:
Rental income - minimum $6,889,397 $7,023,484 $ 7,552,188
Rental income - percentage 1,204,622 1,009,772 1,372,884
Other operating income -
primarily recoveries
from tenants 6,755,260 7,172,942 6,728,646
Total revenues 14,849,279 15,206,198 15,653,718
COSTS AND EXPENSES:
Interest 5,202,495 5,245,434 5,332,655
Depreciation and amortization 3,689,228 3,693,930 3,685,323
Utilities 3,128,503 3,301,571 3,400,142
Payroll and related costs 2,245,133 2,343,025 2,282,740
Repairs and maintenance 617,771 647,124 701,391
General excise taxes 591,145 594,008 616,644
Insurance 495,307 303,817 333,704
Real property taxes 360,222 348,689 327,190
Advertising and promotions 287,903 278,036 241,379
Management fee 252,936 251,038 278,907
Provision for doubtful accounts 160,933 302,613 44,497
Professional fees 150,428 194,613 207,240
Loss on disposal of assets 4,170 364,646 --
Other expenses 158,406 244,051 143,992
Total costs and expenses 17,344,580 18,112,595 17,595,804
NET LOSS $(2,495,301) $(2,906,397) $(1,942,086)
See notes to financial statements.
KAAHUMANU CENTER ASSOCIATES
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
State of
Hawaii
Maui Land & Employees'
Pineapple Retirement
Company, Inc. System Total
PARTNERS' CAPITAL (DEFICIT),
DECEMBER 31, 1999 $(9,590,378) $21,435,515 $11,845,137
Net loss - 2000 (971,043) (971,043) (1,942,086)
PARTNERS' CAPITAL (DEFICIT),
DECEMBER 31, 2000 (10,561,421) 20,464,472 9,903,051
Net loss - 2001 (1,453,199) (1,453,198) (2,906,397)
PARTNERS' CAPITAL (DEFICIT),
DECEMBER 31, 2001 (12,014,620) 19,011,274 6,996,654
Net loss - 2002 (1,247,651) (1,247,650) (2,495,301)
PARTNERS' CAPITAL (DEFICIT),
DECEMBER 31, 2002 $(13,262,271) $17,763,624 $ 4,501,353
See notes to financial statements.
KAAHUMANU CENTER ASSOCIATES
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
OPERATING ACTIVITIES:
Net loss $(2,495,301) $(2,906,397) $(1,942,086)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Depreciation and
amortization 3,689,228 3,693,930 3,685,323
Loss on property
disposals 4,170 364,646 --
Decrease (increase) in
accounts receivable (286,219) 394,206 (474,932)
Decrease (increase) in
noncurrent accounts
receivable (55,627) 288,927 (146,295)
(Decrease) increase in
accounts payable and
due to Maui Land &
Pineapple Company, Inc. 35,344 (39,768) (702,026)
Net change in other
operating assets and
liabilities (9,555) (11,026) 11,165
Net cash provided by
operating activities 882,040 1,784,518 431,149
INVESTING ACTIVITIES -
Purchases of property (630,112) (1,099,123) (460,224)
FINANCING ACTIVITIES:
Payments of long-term debt (1,228,565) (1,126,674) (1,018,774)
Proceeds from Partner
Advances, net of
repayments 977,101 482,298 536,078
(Decrease) increase in
bank overdraft -- (39,637) 39,637
Net cash used in
financing activities (251,464) (684,013) (443,059)
NET INCREASE (DECREASE) IN CASH 464 1,382 (472,134)
CASH, BEGINNING OF YEAR 33,960 32,578 504,712
CASH, END OF YEAR $ 34,424 $33,960 $ 32,578
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION - Cash
paid during the
year for interest $5,202,000 $5,242,000 $5,328,000
SUPPLEMENTAL INFORMATION RELATING TO NONCASH INVESTING ACTIVITIES
- Amounts included in accounts payable for additions to property
totaled approximately $12,000, $8,000, and $11,000 at
December 31, 2002, 2001, and 2000, respectively.
See notes to financial statements.
KAAHUMANU CENTER ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
1. ORGANIZATION
Kaahumanu Center Associates (Partnership) was formed on June
23, 1993 as a limited partnership between Maui Land &
Pineapple Company, Inc. (ML&P), as general partner, and the
Employees' Retirement System of the State of Hawaii (ERS), as
limited partner. The purpose of the Partnership was to
finance the expansion and renovation of Queen Ka'ahumanu
Center (Center), which was substantially completed in 1994.
The Partnership currently owns and operates the Center.
The Center is a regional shopping mall located in Kahului,
Maui, and currently consists of 570,000 square feet of gross
leasable area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting - The Partnership's policy is to prepare
its financial statements using the accrual basis of
accounting.
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in
the United States of America requires management to make
estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amount of revenues and expenses during the reporting
periods. Future actual amounts could differ from those
estimates.
Property - Property that was contributed to the Partnership by
ML&P is stated at ML&P's net book value at the date of
contribution; subsequent additions are stated at cost.
Depreciation is computed using the straight-line method over
the estimated useful lives of the respective assets.
Advertising and Promotion - The costs of advertising and sales
promotion activities are expensed as incurred.
Income Taxes - The Partnership is not subject to federal and
state income taxes. The distributive shares of income or loss
and other tax attributes from the Partnership are reportable
by the individual partners.
Concentration of Credit Risk - The Partnership extends credit
to its tenants in the course of its leasing operations. The
creditworthiness of existing and potential tenants is
evaluated and, under certain circumstances, a security deposit
is required.
New Accounting Pronouncement - On January 1, 2002, the
Partnership adopted Financial Accounting Standards Board
(FASB) Statement No. 144, Accounting for the Impairment of
Long-lived Assets. FASB Statement No. 144 provides a single
accounting model for impairment of long-lived assets,
including discontinued operations. The adoption of FASB
Statement No. 144 did not have a material impact on the
Partnership's financial statements.
3. PARTNERSHIP AGREEMENTS
Capital Contributions - ML&P contributed the land and the
shopping center improvements as they existed prior to the
expansion and renovation project, subject to the existing
first mortgage, together with approximately nine acres of
adjacent land which became part of the expanded shopping
center, for a 99% interest in the Partnership.
ERS originally contributed $312,000 for a 1% interest in the
Partnership and made a loan of $30.6 million to the
Partnership. Effective April 30, 1995, after completion of
the expansion and renovation and the satisfaction of certain
conditions, ERS converted its loan to capital for an
additional 49% interest and became a 50% partner with ML&P.
Allocations and Distributions - Profit and loss allocations
and cash distributions of the Partnership are based on the
ownership interests of the partners.
ERS and ML&P each have a 9% cumulative, non-compounded
priority right to cash distributions based on their net
contributions to the Partnership (preferred return). The ML&P
preferred return is subordinate to the ERS preferred return.
For the purpose of calculating the preferred returns, each
partner's capital contribution had an agreed upon value of
$30.9 million on April 30, 1995. The accumulated unpaid
preferred returns at December 31, 2002 were $18 million each
for ML&P and ERS.
Management and Operations - The Partnership has an Operating
Agreement with ML&P for the operation of the Center. The
Operating Agreement has an initial term of 15 years, which
commenced when ERS became a 50% partner, with options to renew
for four additional 10-year periods. It provides for certain
performance tests, which if not met, could result in
termination of the Agreement. Although the tests were not met
in 2002, the Partnership has not notified ML&P that it intends
to terminate the Agreement.
ML&P, as managing partner, is responsible for the day-to-day
management of the Partnership's business affairs. Major
decisions, as defined in the partnership agreement, require
the unanimous approval of the partners.
The Partnership Operating Agreement sets forth that a
percentage of revenues be retained for capital improvements.
The partners agreed to waive the required capital improvement
reserve for the years ended December 31, 2002 and 2001.
4. RELATED PARTY TRANSACTIONS
Pursuant to the Partnership Operating Agreement, the
Partnership pays to ML&P an operator's fee equal to 3% of
gross revenues, as defined. In 2002, 2001, and 2000, ML&P
charged the Partnership $253,000, $251,000, and $279,000,
respectively, for management fees.
In accordance with the Limited Partnership Agreement, the
partners may make cash advances to the Partnership as
necessary in order to avoid a cash flow deficit. Such
advances bear interest at 1% above the rate being charged the
Partnership under the mortgage loan (see Borrowing
Arrangements). Partner Advances totaled $1,995,000 and
$1,018,000 at December 31, 2002 and 2001, respectively.
Interest expense on the advances at 9.57% totaled $113,000,
$54,000, and $34,000 for 2002, 2001, and 2000, respectively.
The Partnership does not have any employees. As such, ML&P
provides all on-site and administrative personnel and also
incurs other costs and expenses, primarily insurance, which
are reimbursable by the Partnership. In 2002, 2001, and 2000,
ML&P charged the Partnership $2,259,000, $2,634,000, and
$2,637,000, respectively, for payroll and other costs and
expenses.
ML&P generates the majority of the electricity that is used by
the Center. In 2002, 2001, and 2000, ML&P charged the
Partnership $2,655,000, $2,952,000, and $3,049,000,
respectively, for electricity.
Amounts due to ML&P for management fees, electricity, Partner
Advances, and reimbursable costs were approximately $2,488,000
and $1,667,000 as of December 31, 2002 and 2001, respectively.
5. OTHER ASSETS
Other assets at December 31, 2002 and 2001 consisted of the
following:
2002 2001
Deferred costs $ 288,059 $ 435,033
Noncurrent accounts
receivable 894,819 839,194
Total other assets $1,182,878 $1,274,227
Deferred costs are primarily leasing consultation costs and
are net of accumulated amortization of $1,277,000 and
$1,130,000, respectively, at December 31, 2002 and 2001.
Noncurrent accounts receivable represents the excess of
minimum rental income recognized on a straight-line basis,
over the life of the lease, over amounts receivable according
to the provisions of the lease, after deducting an estimated
amount for amounts not recoverable.
6. BORROWING ARRANGEMENTS
The Partnership has a mortgage loan which bears interest at
8.57% and is payable in monthly installments of $526,000,
including interest, through June 2005 when the entire balance
is payable. The loan is collateralized by the Center and is
nonrecourse except for the first $10 million, which is
guaranteed by ML&P until the Center attains a defined level of
net operating income.
Scheduled principal maturities for the next three years from
2003 through 2005 are as follows: $1,339,000, $1,446,000, and
$55,125,000, respectively.
7. LEASES
Tenant leases of the Center provide for monthly base rent plus
percentage rents and reimbursement for common area maintenance
and other costs. Future minimum rental income to be received
under non-cancelable operating leases aggregates $30,626,000
and is receivable during the next five years (2003 through
2007) as follows: $6,036,000, $4,984,000, $3,644,000,
$2,945,000, $1,703,000, respectively, and $11,312,000
thereafter.
8. CONTINGENCIES AND COMMITMENTS
The Partnership had commitments under signed contracts
totaling $129,000 at December 31, 2002.
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