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, 1995 and
1994, and the related statements of operations, changes in partners'
capital (deficit) and cash flows for the years ended December 31, 1995
and 1994 and the period from June 23, 1993 (date of formation) through
December 31, 1993. 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 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 the partnership at December
31, 1995 and 1994, and the results of its operations and its cash flows
for the years ended December 31, 1995 and 1994 and the period from June
23, 1993 through December 31, 1993 in conformity with generally accepted
accounting principles.
/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Honolulu, Hawaii
February 2, 1996
KAAHUMANU CENTER ASSOCIATES
Balance Sheets
December 31, 1995 and 1994
ASSETS
1995 1994
Current Assets
Cash $ 502,635 $ 1,814,186
Accounts receivable - less allowance of
$101,356 and $29,697 for doubtful accounts 816,645 1,313,880
Prepaid expenses 82,520 68,325
----------- -----------
Total Current Assets 1,401,800 3,196,391
----------- -----------
Property
Land and land improvements 5,787,383 5,687,452
Building 76,874,388 76,702,588
Furniture, fixtures and equipment 4,174,014 3,928,277
Construction in process 10,292 --
----------- -----------
Total Property 86,846,077 86,318,317
Accumulated depreciation 9,052,587 6,231,408
----------- -----------
Net Property 77,793,490 80,086,909
----------- -----------
Other Assets 5,976,139 2,608,015
----------- -----------
Total Assets $85,171,429 $85,891,315
=========== ===========
LIABILITIES & PARTNERS' CAPITAL (DEFICIT)
Current Liabilities
Current portion of long-term debt $ 661,888 $ 201,055
Accounts payable 277,145 92,761
Due to ML&P 842,934 1,743,802
Accrued interest -- 1,031,982
Other current liabilities 50,223 40,178
----------- -----------
Total Current Liabilities 1,832,190 3,109,778
----------- -----------
Long-Term Liabilities
Long-term debt 63,955,794 71,387,575
Due to ML&P -- 11,850,635
Construction and retainage payable -- 3,342,897
Rental deposits 55,026 34,134
----------- -----------
Total Long-Term Liabilities 64,010,820 86,615,241
----------- -----------
Partners' Capital (Deficit) 19,328,419 (3,833,704)
----------- -----------
Total Liabilities & Partners' Capital (Deficit) $85,171,429 $85,891,315
=========== ===========
See notes to financial statements.
KAAHUMANU CENTER ASSOCIATES
STATEMENTS OF OPERATIONS
Years Ended December 31, 1995 and 1994 and Period from
June 23, 1993 (Date of Formation) through December 31, 1993
1995 1994 1993
Revenue
Rental income - minimum $ 6,571,728 $2,805,574 $1,165,496
Rental income - percentage 819,960 877,437 490,723
Other operating income - primarily
recoveries from tenants 4,825,309 2,675,300 1,127,845
----------- ---------- ----------
Total Revenue 12,216,997 6,358,311 2,784,064
----------- ---------- ----------
Expenses
Utilities 2,540,736 1,345,027 542,864
Payroll and related costs 1,816,498 984,068 397,657
Depreciation and amortization 3,354,646 956,872 362,812
Interest 6,113,766 743,742 550,627
Repairs and maintenance 558,101 314,201 76,727
General excise taxes 470,808 251,388 108,600
Real property taxes 255,206 133,360 64,161
Insurance 263,168 91,315 38,073
Provision for doubtful accounts 184,940 43,944 25,618
Advertising and promotions 172,894 39,995 22,552
Management fee 163,633 -- --
Professional fees 159,528 32,443 15,941
Other expenses 69,402 43,021 61,798
----------- ---------- ----------
Total Expenses 16,123,326 4,979,376 2,267,430
----------- ---------- ----------
Net Income (Loss) $(3,906,329) $1,378,935 $ 516,634
=========== ========== ==========
See notes to financial statements.
KAAHUMANU CENTER ASSOCIATES
Statements of Changes in Partners' Capital (Deficit)
Years Ended December 31, 1995 and 1994 and Period from
June 23, 1993 (Date of Formation) through December 31, 1993
State of
Hawaii
Maui Land & Employees'
Pineapple Retirement
Company, Inc. System TOTAL
Capital Contributions:
Property and other assets $ 10,788,190 $ -- $ 10,788,190
Cash -- 312,121 312,121
Assumption of loan (14,142,584) -- (14,142,584)
Cash Distribution (2,687,000) -- (2,687,000)
Net Income - 1993 511,468 5,166 516,634
------------ ----------- ------------
Partners' Capital (Deficit),
December 31, 1993 (5,529,926) 317,287 (5,212,639)
Net Income - 1994 1,365,146 13,789 1,378,935
------------ ----------- ------------
Partners' Capital (Deficit),
December 31, 1994 $ (4,164,780) $ 331,076 $ (3,833,704)
Capital Contributions:
Conversion of loan -- 30,587,879 30,587,879
Conversion of payable balance 1,332,060 -- 1,332,060
Cash Distribution -- (4,851,487) (4,851,487)
Net Loss - 1995 (2,749,360) (1,156,969) (3,906,329)
------------ ----------- ------------
Partners' Capital (Deficit),
December 31, 1995 $ (5,582,080) $24,910,499 $ 19,328,419
============ =========== ============
See notes to financial statements.
KAAHUMANU CENTER ASSOCIATES
Statements of Cash Flows
Years Ended December 31, 1995 and 1994 and Period from
June 23, 1993 (Date of Formation) through December 31, 1993
1995 1994 1993
Operating Activities:
Net Income (Loss) $(3,906,329) $ 1,378,935 $ 516,634
Adjustments to reconcile
net income to cash provided
by operating activities:
Depreciation and
amortization 3,354,646 956,873 362,812
Increase (decrease) in
accounts receivable 225,457 (948,086) (365,794)
Increase in accounts payable 606,996 1,433,272 403,291
Net change in other operating
assets and liabilities (529,363) 107,454 45,660
----------- ------------ ------------
Net Cash Flow Provided by
(Used in) Operating Activities (248,593) 2,928,448 962,603
----------- ------------ ------------
Investment Activities:
Purchases of property (4,356,375) (41,768,581) (25,780,691)
Payments for deferred costs (2,124,624) (1,449,395) --
Increase in restricted cash (1,503,926) -- --
----------- ------------ ------------
Net Cash Used in Investment
Activities (7,984,925) (43,217,976) (25,780,691)
----------- ------------ ------------
Financing Activities:
Proceeds from long-term debt 69,188,291 38,549,619 19,149,068
Payments of long-term debt (45,571,361) (181,998) (70,643)
Increase (decrease) in amount
due to ML&P (11,843,476) 2,940,635 8,910,000
Cash distribution (4,851,487) -- (2,687,000)
Capital contribution -- -- 312,121
----------- ------------ ------------
Net Cash Provided by
Financing Activities 6,921,967 41,308,256 25,613,546
----------- ------------ ------------
Net Increase in Cash (1,311,551) 1,018,728 795,458
Cash, Beginning of Period 1,814,186 795,458 --
----------- ------------ ------------
Cash, End of Period $ 502,635 $ 1,814,186 $ 795,458
=========== ============ ============
See notes to financial statements.
KAAHUMANU CENTER ASSOCIATES
Notes to Financial Statements
Years Ended December 31, 1995 and 1994 and Period from
June 23, 1993 (Date of Formation) through December 31, 1993
ORGANIZATION
Kaahumanu Center Associates (the 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 is to finance the expansion and
renovation of and to own and operate the Kaahumanu Shopping Center
(the Center).
The Center is a regional shopping mall located in Kahului, Maui.
Prior to the expansion, the Center consisted of approximately
315,000 square feet of gross leasable area. The expansion and
renovation which was completed in November 1994, increased the
Center to approximately 566,000 square feet of gross leasable area.
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 generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during
the reporting periods. Future actual amounts could differ from
those estimates.
Property - Property which 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.
Noncurrent Accounts Receivable - The excess of minimum rental
income recognized on a straight-line basis over amounts receivable
according to provisions of the lease are classified as noncurrent
accounts receivable.
Deferred Costs - Amounts expended by the Partnership for
construction of tenant improvements are classified as deferred
costs and are amortized over the terms of the respective leases.
Construction and Retainages Payable - Amounts due for construction
and retainages payable were classified as noncurrent in 1994
because such amounts were to be financed with proceeds from long-
term debt.
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.
PARTNERSHIP AGREEMENT
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. In addition, on April 30, 1995, ML&P contributed
$1.3 million by conversion to capital of an amount owing to it.
ERS originally contributed $312,000 for a one percent 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 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,
1995 were $1,579,000 for both ERS and ML&P.
Management and Operations - 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.
STATEMENTS OF CASH FLOWS
Supplemental Disclosure of Cash Flow Information and Non-Cash
Investing and Financing Activities:
1. Interest (net of amounts capitalized) paid during 1995, 1994,
and the period ended December 31, 1993 was $6,671,000,
$655,000 and $430,000, respectively.
2. Effective April 30, 1995, the Employees' Retirement System of
the State of Hawaii converted its $30.6 million loan to an
additional 49% ownership in Kaahumanu Center Associates. At
the same time, ML&P contributed $1.3 million by conversion to
capital of an amount owing to it.
3. Property and other assets with a net book value of $10.8
million, subject to a loan of $14.1 million, were contributed
to the Partnership on July 1, 1993 by Maui Land & Pineapple
Company, Inc.
CAPITALIZED INTEREST
The Partnership incurred interest of $6,114,000 for 1995,
$5,178,000 for 1994 and $1,327,000 for 1993, of which $4,434,000
and $777,000, was capitalized, respectively, for 1994 and 1993.
RELATED PARTY TRANSACTIONS
The Partnership entered into an 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.
Pursuant to the agreement, the Partnership pays to ML&P an
operator's fee equal to 3% of gross revenues, as defined. In 1995,
ML&P charged the Partnership $164,000 for management fees.
Current amounts due to ML&P of $843,000 and $1,744,000 as of
December 31, 1995 and 1994, respectively, relate to operating costs
paid on behalf of the Center. Noncurrent amounts due to ML&P of
$11.9 million as of December 31, 1994 represented construction-
related costs funded for the Partnership by ML&P.
The Partnership does not have any employees. As such, all onsite
and administrative personnel are provided by ML&P. In 1995, 1994
and 1993, ML&P charged the Partnership $1,816,000, $984,000 and
$398,000, respectively, for payroll and labor-related costs.
ML&P generates the electricity which is used by the Center. ML&P
also incurs other costs and expenses, primarily insurance and real
property taxes, which are reimbursable by the Partnership. In
1995, 1994 and 1993 ML&P charged the Partnership $2,759,000,
$1,531,000 and $572,000, respectively, for electricity and other
costs and expenses.
OTHER ASSETS
Other Assets at December 31, 1995 and 1994 consisted of the
following:
1995 1994
Deferred costs $4,200,435 $2,608,015
Restricted cash 1,503,926 --
Noncurrent accounts receivable 271,778 --
---------- ----------
Total Other Assets $5,976,139 $2,608,015
========== ==========
Deferred costs are net of amortization of $669,605 and $169,276 at
December 31, 1995 and 1994, respectively. Restricted cash
represents proceeds from the mortgage loan which are reserved for
additional expansion costs (see BORROWING ARRANGEMENTS).
Noncurrent accounts receivable represent the excess of minimum
rental income recognized on a straight-line basis over amounts
receivable according to provisions of the lease.
BORROWING ARRANGEMENTS
Long-term debt at December 31, 1995 and 1994 consisted of the
following:
1995 1994
Mortgage loan, 8.57%, due through 2005 $64,617,682 $ --
Mortgage loan, 10% (see below) -- 13,889,943
Employees' Retirement System of the
State of Hawaii, 9% (see below) -- 30,587,879
Construction Loan, 8.75% (see below) -- 27,110,808
----------- -----------
Total 64,617,682 71,588,630
Less portion classified as current 661,888 201,055
----------- -----------
Long-term debt $63,955,794 $71,387,575
=========== ===========
As of April 30, 1995, the loan from ERS was contributed to the
Partnership in exchange for an additional 49% ownership interest in
the Partnership.
In May of 1995 the Partnership refinanced the 10% mortgage loan and
the 8.75% construction loan with a $65 million ten-year term loan
bearing interest at 8.57%. This financing arrangement, which is
collateralized by the Center, 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. Based on rates currently
available to the Partnership for debt with a similar term, the fair
value of this liability is estimated to be $71.1 million at
December 31, 1995.
Scheduled principal maturities for the next five years from 1996
through 2000 are as follows: $662,000, $792,000, $863,000,
$942,000 and $1,011,000.
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 of the Center aggregates
$66,818,000 and is receivable during the next five years (1996 to
2000) as follows: $6,616,000, $6,266,000, $6,113,000, $5,989,000,
$5,840,000, respectively, and $35,994,000 thereafter.
CONCENTRATION OF CREDIT RISK
The Partnership extends credit to its tenants in the course of its
leasing operations. The credit worthiness of existing and
potential tenants are evaluated and under certain circumstances a
security deposit is required.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Except for the mortgage loan (see BORROWING ARRANGEMENTS), the
Partnership believes the fair value of financial instruments
approximates carrying amounts.