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, 1997 and 1996, and the related statements of operations,
changes in partners' capital (deficit) and cash flows for each of
the three years ended December 31, 1997. 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
audited 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, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years ended December 31,
1997 in conformity with generally accepted accounting principles.
/S/ DELOITTE & TOUCHE
DELOITTE & TOUCHE LLP
Honolulu, Hawaii
February 6,1998
KAAHUMANU CENTER ASSOCIATES
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
1997 1996
Current Assets
Cash $ 552,879 $ 176,992
Accounts receivable - less allowance of
$247,624 and $34,942 for
doubtful accounts 318,404 480,147
Prepaid expenses 51,225 43,957
Total Current Assets 922,508 701,096
Property
Land and land improvements 5,976,029 5,976,029
Building 76,983,144 76,955,082
Furniture, fixtures and equipment 4,381,473 4,293,164
Construction in process 646,626 188,359
Total Property 87,987,272 87,412,634
Accumulated depreciation 14,582,615 11,831,746
Net Property 73,404,657 75,580,888
Other Assets 5,627,540 5,460,955
Total Assets $79,954,705 $81,742,939
LIABILITIES & PARTNERS' CAPITAL
Current Liabilities
Current portion of long-term debt $ 803,142 $ 748,840
Accounts payable 188,426 317,636
Due to ML&P 429,675 630,418
Other current liabilities 32,274 45,116
Total Current Liabilities 1,453,517 1,742,010
Long-Term Liabilities
Long-term debt 62,300,253 63,152,354
Other long-term liabilities 76,188 73,690
Total Long-Term Liabilities 62,376,441 63,226,044
Partners' Capital 16,124,747 16,774,885
Total Liabilities & Partners' Capital $79,954,705 $81,742,939
See notes to financial statements.
KAAHUMANU CENTER ASSOCIATES
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
Revenues
Rental income - minimum $7,521,860 $7,721,398 $6,571,728
Rental income - percentage 874,362 672,790 819,960
Other operating income - primarily
recoveries from tenants 5,548,824 5,283,092 4,825,309
Total Revenues 13,945,046 13,677,280 12,216,997
Costs and Expenses
Utilities 2,689,715 2,707,707 2,540,736
Payroll and related costs 1,938,328 1,843,850 1,816,498
Depreciation and
amortization 3,349,654 3,277,602 3,354,646
Interest 5,522,235 5,603,074 6,113,766
Repairs and maintenance 545,817 508,892 558,101
General excise taxes 547,949 538,472 470,808
Real property taxes 305,842 288,938 255,206
Insurance 320,284 281,276 263,168
Provision for doubtful
accounts 360,788 33,868 184,940
Advertising and promotions 148,972 106,425 172,894
Management fee 262,380 262,319 163,633
Professional fees 191,915 174,779 159,528
Other expenses 71,305 70,298 69,402
Total Costs and Expenses 16,255,184 15,697,500 16,123,326
Net Loss $(2,310,138) $(2,020,220) $(3,906,329)
See notes to financial statements.
KAAHUMANU CENTER ASSOCIATES
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
State of
Hawaii
Maui Land & Employees'
Pineapple Retirement
Company, Inc. System TOTAL
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
Adjustment to prior year
conversion of payable balance (533,314) -- (533,314)
Net Loss - 1996 (1,010,110) (1,010,110) (2,020,220)
Partners' Capital (Deficit),
December 31, 1996 (7,125,504) 23,900,389 16,774,885
Cash Calls 830,000 830,000 1,660,000
Net Loss - 1997 (1,155,069) (1,155,069) (2,310,138)
Partners' Capital (Deficit),
December 31, 1997 $(7,450,573) $23,575,320 $16,124,747
See notes to financial statements.
KAAHUMANU CENTER ASSOCIATES
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
Operating Activities:
Net Loss $(2,310,138) $(2,020,220) $(3,906,329)
Adjustments to reconcile
net loss to cash provided
by operating activities:
Depreciation and
amortization 3,349,654 3,277,602 3,354,646
Decrease in accounts
receivable 161,743 336,498 225,457
Increase (decrease) in
accounts payable (337,831) (359,679) 606,996
Increase in noncurrent
accounts receivable (139,743) (359,705) (271,778)
Net change in other operating
assets and liabilities (9,734) 34,936 (257,585)
Net Cash Provided by
(Used in) Operating Activities 13,951 909,432 (248,593)
Investment Activities:
Purchases of property (692,995) (584,175) (4,356,375)
Payments for deferred costs (651,939) (237,436) (2,124,624)
(Increase) decrease in
restricted cash 144,669 631,500 (1,503,926)
Net Cash Used in Investment
Activities (1,200,265) (190,111) (7,984,925)
Financing Activities:
Payments of long-term debt (797,799) (716,488) 45,571,361)
Payment to ML&P for adjustment
of prior year payable conversion -- (328,476) --
Proceeds from long-term debt -- -- 69,188,291
Increase (decrease) in amount
due to ML&P -- -- (11,843,476)
Cash distribution -- -- (4,851,487)
Proceeds from cash calls 1,660,000 -- --
Net Cash Provided by (Used in)
Financing Activities 862,201 (1,044,964) 6,921,967
Net Increase (Decrease) in Cash 375,887 (325,643) (1,311,551)
Cash, Beginning of Year 176,992 502,635 1,814,186
Cash, End of Year $552,879 $176,992 $502,635
See notes to financial statements.
KAAHUMANU CENTER ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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 573,000 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 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 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, after deducting an estimated
amount for amounts not recoverable.
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.
Interest Capitalization - Interest costs are capitalized during
the construction period of major capital projects.
Advertising and Promotion - The cost of advertising and sales
promotion activities is 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.
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. Effective April 30, 1995, an amount
of $1,332,000 owing to ML&P was considered a capital
contribution. This amount was reduced in 1996 by $533,000 for
items which would have impacted the previous amount owing,
including a payment of $328,000 to ML&P in 1996.
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.
In 1997 the Partnership received cash of $1,660,000 from the
partners pursuant to cash calls.
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, 1997 were $6.3 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.
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.
SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental Disclosure of Cash Flow Information and Non-Cash
Investing and Financing Activities:
1.Interest paid during 1997, 1996 and 1995 was $5,522,000,
$5,603,000 and $6,671,000, 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. This amount was adjusted in
1996 as discussed above.
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 1997, 1996 and 1995, ML&P charged the Partnership
$262,000, $262,000 and $164,000, respectively, for management
fees.
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 1997, 1996, and 1995 ML&P
charged the Partnership $2,240,000, $2,391,000 and $2,356,000,
respectively, for payroll and other costs and expenses. Prior to
1997, real property taxes were paid on behalf of the Partnership
by ML&P and were included in the reimbursable amounts.
ML&P generates a portion of the electricity which is used by the
Center. In 1997, 1996, and 1995 ML&P charged the Partnership
$2,312,000, $2,359,000 and $2,214,000, respectively, for
electricity.
Amounts due to ML&P for management fees, electricity and
reimbursable costs were $430,000 and $630,000 as of
December 31, 1997 and 1996, respectively.
OTHER ASSETS
Other Assets at December 31, 1997 and 1996 consisted of the
following:
1997 1996
Deferred costs $4,128,557 $3,957,047
Restricted cash 727,757 872,425
Noncurrent accounts receivable 771,226 631,483
Total Other Assets $5,627,540 $5,460,955
Deferred costs are net of amortization of $1,725,000 and
$1,180,000 at December 31, 1997 and 1996, respectively.
Restricted cash represents proceeds from the mortgage loan which
are reserved for additional expansion costs (see BORROWING
ARRANGEMENTS), as well as a percentage of revenues retained for
capital improvements as set forth in the Partnership Operating
Agreement.
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 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 five years from 1998
through 2002 are as follows: $803,000, $942,000, $1,011,000,
1,118,000 and $1,219,000.
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 aggregates $65,515,000 and
is receivable during the next five years (1998 to 2002) as
follows: $6,931,000, $6,868,000, $6,848,000, $6,709,000,
$6,371,000, respectively, and $31,788,000 thereafter.
COMMITMENTS
At December 31, 1997, the Partnership had commitments under a
signed lease of approximately $248,000 for tenant improvement
costs.
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.
* * * * *