-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BAOW31yMqkDid5OWdbipaYdDvzsa0f9uH7TBsCiU5cxsloxcy/LWJFZMG2pLl0/g LDxCdvO7oeUeo25z62ksRA== 0000063330-01-500006.txt : 20010326 0000063330-01-500006.hdr.sgml : 20010326 ACCESSION NUMBER: 0000063330-01-500006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAUI LAND & PINEAPPLE CO INC CENTRAL INDEX KEY: 0000063330 STANDARD INDUSTRIAL CLASSIFICATION: CANNED, FRUITS, VEG & PRESERVES, JAMS & JELLIES [2033] IRS NUMBER: 990107542 STATE OF INCORPORATION: HI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06510 FILM NUMBER: 1577621 BUSINESS ADDRESS: STREET 1: PO BOX 187 STREET 2: 120 KANE ST CITY: KAHULUI MAUI STATE: HI ZIP: 96732 BUSINESS PHONE: 8088773351 MAIL ADDRESS: STREET 1: PO BOX 187 CITY: KAHULUI STATE: HI ZIP: 96732 10-K 1 form.txt 2000 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-6510 MAUI LAND & PINEAPPLE COMPANY, INC. (Exact name of registrant as specified in its charter) HAWAII 99-0107542 (State or other jurisdiction (IRS Employer Identification of incorporation or organization) number) 120 KANE STREET, P. O. BOX 187, KAHULUI, MAUI, HAWAII 96733-6687 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (808) 877-3351 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock, without Par Value American Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value, as of February 13, 2001, of the voting stock held by non-affiliates of the registrant: $157,588,000. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at February 13, 2001 Common Stock, no par value 7,195,800 shares Documents incorporated by reference: Parts I, II and IV -- Portions of the 2000 Annual Report to Security Holders. Part III - Portions of Proxy Statement dated March 26, 2001. Exhibit Index--pages 15 - 17. PART I Item 1. BUSINESS (a) General Maui Land & Pineapple Company, Inc. is a Hawaii corporation, the successor to a business organized in 1909. The Company consists of a landholding and operating parent company as well as its principal wholly owned subsidiaries, Maui Pineapple Company, Ltd. and Kapalua Land Company, Ltd. The "Company," as used herein, refers to the parent and all of its subsidiaries. The Company participates in joint ventures that are accounted for by the equity method. The most significant of these joint ventures is Kaahumanu Center Associates, the owner and operator of a regional shopping center. The industry segments of the Company are as follows: (1) Pineapple - includes growing pineapple, canning pineapple in tinplated steel containers fabricated by the Company, production of pineapple juice and fresh cut pineapple products and marketing of canned pineapple products and fresh whole and fresh cut pineapple. (2) Resort - includes the development and sale of resort real estate, property management and the operation of recreational and retail facilities and utility companies at Kapalua, Maui. (3) Commercial & Property - includes the Company's investment in Kaahumanu Center Associates, the Napili Plaza shopping center, and non-resort real estate development, rentals and sales. It also includes the Company's land entitlement and land management activities. (b) Financial Information About Industry Segments The information set forth under Note 16 to Consolidated Financial Statements on page 18 of the Maui Land & Pineapple Company, Inc. 2000 Annual Report is incorporated herein by reference. (c) Narrative Description of Business (1) Pineapple Maui Pineapple Company, Ltd. is the operating subsidiary for the Company's Pineapple segment. It owns and operates fully integrated facilities for the production of pineapple products. Pineapple is cultivated on two Company-operated plantations on Maui that provided approximately 94% of the fruit processed in 2000. The balance of fruit processed was purchased from an independent Maui grower. Two pineapple crops are normally harvested from each new planting. The first, or plant crop, is harvested approximately 18 to 23 months after planting, and the second, or ratoon crop, is harvested 12 to 14 months later. A third crop, the second ratoon, may also be harvested depending on a number of conditions. Harvested pineapple is processed at the Company's cannery in Kahului, Maui, where a full line of canned pineapple products is produced, including solid pineapple in various grades and styles, juice and juice concentrates. The cannery is located in a foreign trade zone and operates most of the year; however, over 40% of production volume takes place during June, July and August. The metal containers used in canning pineapple are produced in a Company-owned can plant on Maui. The metal is imported from manufacturers in Japan. A warehouse is maintained at the cannery site for inventory purposes. The Company sells canned pineapple products as store-brand pineapple with 100% HAWAIIAN U.S.A. stamped on the can lid. Its products are sold principally to large grocery chains, other food processors, wholesale grocers, and to organizations offering a complete buyers' brand program to affiliated chains and wholesalers serving both retail and food service outlets. A substantial volume of the Company's pineapple products is marketed through food brokers. The Company sells fresh whole pineapple and fresh cut pineapple products to retail and wholesale grocers in Hawaii and the continental United States. Research to develop new fresh cut and canned pineapple products is ongoing. In 1999, the Company was granted a U.S. patent on its fresh cut pineapple technology, which enhances the quality of the product while extending the shelf life. The extended shelf life allows the Company to set up local warehouse programs, thereby facilitating distribution to retailers. In 1997, Royal Coast Tropical Fruit Company, Inc. (a wholly owned subsidiary of Maui Pineapple Company, Ltd.) entered into a joint venture with an Indonesian pineapple grower and canner. The joint venture, Premium Tropicals International, LLC, markets and sells Indonesian canned pineapple in the United States. In 1999, Royal Coast Tropical Fruit Company, Inc. formed a 51%-owned pineapple production subsidiary in Central America. Pineapple cultivated in Central America is sold principally as fresh whole fruit to the Company's customers in the United States and Europe. Sales of the Company's Central American pineapple began in the fourth quarter of 2000. In 2000, approximately 20 domestic customers accounted for about 64% of the Company's pineapple sales. Export sales, primarily to Japan, Canada and Western Europe, amounted to approximately 3.3%, 3.4% and 4.6% of total pineapple sales in 2000, 1999 and 1998, respectively. Sales to the U.S. government, mainly the United States Department of Agriculture, amounted to approximately 12.3%, 9.7% and 10.2% of total pineapple sales in 2000, 1999 and 1998, respectively. The Company's pineapple sales office is in Concord, California. As a service to its customers, the Company maintains inventories of its products in public warehouses in the continental U.S. The balance of its products is shipped directly from Hawaii to its customers. The Company's canned pineapple products are shipped from Hawaii by ocean transportation and are then taken by truck or rail to customers or to public warehouses. Fresh whole and fresh cut pineapple is shipped by air or by ocean transportation. The Company sells its products in competition with both foreign and U.S. companies. Its principal competitors are three U.S. companies, Dole Food Company, Inc., Del Monte Food Co., and Del Monte Fresh Produce Company, which produce substantial quantities of pineapple products, a significant portion of which is produced in Central America and Southeast Asia. Other producers of pineapple products in Thailand and Indonesia also are a major source of competition. Foreign production has the advantage of lower labor costs. The Company's principal marketing advantages are the high quality of its fresh and canned pineapple, the relative proximity to the West Coast United States fresh fruit market and being the only U.S. canner of pineapple. Other canned fruits and fruit juices also are a source of competition. The price of the Company's products is influenced by supply and demand of pineapple and other fruits and juices. The availability of water for irrigation is critical to the cultivation of pineapple. The Upcountry Maui area is commonly susceptible to drought conditions, which can adversely affect pineapple operations by resulting in poor yields (tons per acre) and lower recoveries (the amount of saleable product per ton of fruit processed). Approximately 83% of the fields in the Company's Upcountry Maui plantation (Haliimaile) are equipped with drip irrigation systems. Fields that are not drip irrigated are in areas that typically receive adequate rainfall. The Company's drip irrigation systems and Company controlled or operated water sources help to mitigate the effects of periodic drought conditions. However, during periods of prolonged drought, the water supply can drop below levels that are necessary to meet all of the Haliimaile plantation's water requirements. For further information regarding Pineapple operations, see Management's Discussion and Analysis of Financial Condition and Results of Operations. (2) Resort Kapalua Resort is a master-planned, golf resort community on Maui's northwest coast. The Resort encompasses 1,650 acres bordering the ocean with three white sand beaches and includes two hotels, eight residential subdivisions, three championship golf courses, two ten-court tennis facilities, a 22,000 square foot shopping center and over ten restaurants. Water and waste transmission utilities are included in the Resort's operating activities. Approximately 300 acres are available for further development within the Kapalua Resort. Kapalua Land Company, Ltd. is the developing and operating subsidiary of the Company's Resort segment. The Resort segment also includes the following wholly owned subsidiaries of the Company: Kapalua Water Company, Ltd. and Kapalua Waste Treatment Company, Ltd., public utilities providing water and waste transmission services for the Kapalua Resort; Kapalua Advertising Company, Ltd., an in-house advertising agency; and Kapalua Realty Company, Ltd. (wholly owned by Kapalua Land Company, Ltd.), a general brokerage real estate company located within the Resort. The Company, through subsidiaries and joint ventures, developed the Kapalua Resort, which opened in 1975 with The Bay Course. At Kapalua, the Company owns three golf courses (The Bay, The Village and The Plantation Courses), one tennis facility (The Tennis Garden), a shopping center (The Kapalua Shops), the land under both hotels (The Ritz-Carlton, Kapalua and Kapalua Bay Hotel), as well as the acreage available for development and various on-site administrative and maintenance facilities. The Company operates the golf and tennis facilities, the shopping center, ten retail shops, a vacation rental program (The Kapalua Villas), and certain services to the Resort, including shuttle, security and maintenance of common areas. The Company is the ground lessor under long-term leases for both hotels and also receives rental income from certain other properties. The Company manages The Kapalua Club, a membership program that provides certain rights and privileges within the Resort for its members. In January 2000, the Kapalua Golf Academy and the Hale Irwin-designed Village Course practice facility opened for business. In August 2000, the Village Clubhouse was opened. The clubhouse and golf academy development include an 18-hole putting course and two commercial retail parcels. This development provides the commercial foundation for the central resort area. The current master plan includes a future Town Center, resort spa and additional residential development. In December 2000, 12 of the 31 lots in Pineapple Hill Estates single-family subdivision were sold and closed escrow. No revenue was recognized on these sales in 2000 as they are being recognized on the percentage-of-completion method. Construction of Pineapple Hill Estates subdivision improvements will begin in the first quarter of 2001 and is scheduled to be substantially completed during the fourth quarter of 2001. In the fourth quarter of 1999, the Company began construction of 14 single-family lots on the remaining acreage of Plantation Estates Phase II. All of the lots were sold in 1999 and 12 sales closed escrow in November and December of 1999. Construction of the subdivision improvements was substantially completed during the second quarter of 2000. In 1997, the Company and an affiliate of Lend Lease Real Estate Investment, Inc. (Lend Lease), owner of the Kapalua Bay Hotel, formed a 50/50 joint venture, Kapalua Coconut Grove LLC, to develop a 12-acre parcel adjacent to the hotel. Lend Lease purchased a one-half interest in the land from the Company prior to formation of the venture. Presales of the 36 luxury beachfront condominiums, called The Coconut Grove on Kapalua Bay, began in August of 1999 and sales contracts on all 36 units were concluded by the second quarter of 2000. Mass grading and site work began in the fourth quarter of 1999. Sales are expected to begin closing in the second quarter of 2001 as construction of the buildings is completed and title is transferred to the buyers. The Kapalua Resort faces substantial competition from alternative visitor destinations and resort communities in Hawaii and throughout the world. Kapalua's marketing strategies target upscale visitors with an emphasis on golf. In 2000, approximately 19% of the visitors to Maui were international travelers and 81% were domestic. Kapalua's primary resort competitors on Maui are Kaanapali, which is approximately five miles from Kapalua, and Wailea on Maui's south coast. Kapalua's total guestroom inventory accounts for approximately 10% of the units available in West Maui and approximately 6% of the total inventory on Maui. Nationally televised professional golf tournaments have been a major marketing tool for Kapalua. Since January 1999, Kapalua has successfully hosted the Mercedes Championships, the season opening event for the PGA TOUR. Through the non-profit organization, Kapalua Maui Charities, Inc., the Company has agreements with Mercedes-Benz and the PGA TOUR to host and manage this event at Kapalua through January 2002 and is currently negotiating four year extensions of the agreements. Advertising placements in key publications are designed to promote Kapalua through the travel trade, consumer, golf and real estate media. For further information regarding Resort operations, see Management's Discussion and Analysis of Financial Condition and Results of Operations. (3) Commercial & Property Kaahumanu Center is the largest retail and entertainment center on Maui with a gross leasable area (GLA) of approximately 570,000 square feet. Kaahumanu Center is owned by Kaahumanu Center Associates (KCA), a 50/50 partnership between the Company, as general partner, and the Employees' Retirement System of the State of Hawaii, as a limited partner. As of December 31, 2000, 131 tenants occupied 97% of the available GLA. Kaahumanu Center faces substantial competition from other retail centers in Kahului and other areas of Maui. Kahului has approximately nine major shopping center destinations with a combined GLA of approximately 1.9 million square feet of retail space. Kaahumanu Center's primary competitors are the Maui Mall and the Maui Marketplace, both located within three miles of Kaahumanu Center. Napili Plaza is a 45,000 square foot retail and commercial office center located in West Maui. As of December 31, 2000, 19 tenants occupied 82% of the GLA. Napili Plaza faces competition from several retail locations in the Napili area, which have approximately 231,000 square feet of retail space. The Company's land entitlement and management activities are included in the Commercial & Property segment. Land entitlement is a lenghty process of obtaining the required county, state and federal approvals to proceed with planned development and use of the Company's land and satisfying all conditions and restrictions imposed in connection with such governmental approvals. The Company actively works with regulatory agencies and legislative bodies at all levels of government to obtain necessary entitlements. For further information regarding Commercial & Property operations, see Management's Discussion and Analysis of Financial Condition and Results of Operations. (4) Employees In 2000, the Company employed approximately 1,890 employees. Pineapple operations employed approximately 520 full-time and approximately 780 seasonal or intermittent employees. Approximately 57% of the Pineapple operations employees were covered by collective bargaining agreements. Resort operations employed approximately 480 employees, of which approximately 14% were part-time employees and approximately 29% were covered by collective bargaining agreements. The Company's Commercial & Property operations employed approximately 80 employees and approximately 30 employees were engaged in administrative activities. (5) Other Information The Company's Pineapple segment engages in continuous research to develop techniques to reduce costs through crop production and processing innovations and to develop and perfect new products. Improved production systems have resulted in increased productivity by the labor force. Research and development expenses approximated $845,000 in 2000, $839,000 in 1999 and $815,000 in 1998. The Company has reviewed its compliance with federal, state and local provisions that regulate the discharge of materials into the environment or otherwise relate to the protection of the environment. The Company does not expect any material future financial impact as a result of compliance with these laws. The Company has a commitment relating to the filtration of water wells, as described in Note 13 to Consolidated Financial Statements. The Company's share of the cost to maintain and operate the filtration systems for the existing wells and its share of the cost of the letter of credit has been estimated and a reserve for this liability was recorded in 1999. The reserve recorded in 1999 and adjustments made thereto in 2000 did not have a material effect on the Company's financial statements for the years ended December 31, 2000 and 1999. The Company is unable to estimate the range of potential financial impact for the possible filtration cost for any future wells acquired or drilled by the County of Maui and, therefore, has not made a provision in its financial statements for such costs. (d) Financial Information About Foreign and Domestic Operations and Export Sales Export sales only arise in the Company's Pineapple segment. Export sales of pineapple products are primarily to Japan, Western Europe and Canada. For the last three years, these sales did not exceed 10% of total consolidated revenues. Executive Officers of Registrant Below is a list of the names and ages of the Company's executive officers, indicating their position with the Company and their principal occupation during the last five years. The current terms of the executive officers expire in May of 2001 or at such time as their successors are elected. Gary L. Gifford (53) President and Chief Executive Officer since 1995 Paul J. Meyer (53) Executive Vice President/Finance since 1984 Douglas R. Schenk (48) Executive Vice President/Pineapple since 1995 Donald A. Young (53) Executive Vice President/Resort since 1995 J. Susan Corley (57) Vice President/Human Resources since 2000; Director/Human Resources 1998 to 2000; Director/Industrial Relations of Reynolds Metals Co., Inc. 1994 to 1998 Scott A. Crockford (45) Vice President/Retail Property since 1995 Warren A. Suzuki (48) Vice President/Land Management & Development since 1995 Item 2. PROPERTIES The Company owns approximately 28,600 acres of land on Maui. Approximately 30% of the acreage is used directly or indirectly in the Company's operations and the remaining land is primarily in pasture or forest reserve. This land, most of which was acquired from 1911 to 1932, is carried on the Company's balance sheet at cost. The Company believes it has clear and unencumbered marketable title to all such property, except for the following: (a) a perpetual conservation easement granted to the State of Hawaii on a 13-acre parcel at Kapalua; (b) certain easements and rights-of-way that do not materially affect the Company's use of its property; (c) a mortgage on approximately 4,400 acres used in pineapple operations, which secures the Company's $15 million term loan agreement; (d) a mortgage on the three golf courses at Kapalua, which secures the Company's $15 million revolving credit and $8.8 million development line arrangement; (e) a permanent conservation easement granted to The Nature Conservancy of Hawaii, a non-profit corporation, covering approximately 8,600 acres of forest reserve land; (f) a $4,721,000 mortgage on the fee interest in Napili Plaza shopping center; and (g) a small percentage of the Company's land in various locations on which multiple claims exist, for some of which the Company has initiated quiet title actions. Approximately 22,800 acres of the Company's land are located in West Maui, approximately 5,700 acres are located in East Maui and approximately 28 acres are located in Kahului, Maui. The 22,800 acres in West Maui comprise a largely contiguous parcel that extends from the sea to an elevation of approximately 5,700 feet and includes nine miles of ocean frontage with approximately 3,300 lineal feet along sandy beaches, as well as agricultural and grazing lands, gulches and heavily forested areas. The West Maui acreage includes approximately 3,600 acres comprising the Company's Honolua pineapple plantation and approximately 1,650 acres designated for the Kapalua Resort. The East Maui property is situated at elevations between 1,000 and 3,000 feet above sea level on the slopes of Haleakala and approximately 3,140 acres are in pineapple operations as the Company's Haliimaile plantation. The Kahului acreage includes a can manufacturing plant and a pineapple-processing cannery with interconnected warehouses at the cannery site where finished product is stored and the Company's administrative offices. Approximately 3,500 acres of leased land are used in the Company's pineapple operations. A major operating lease covering approximately 1,500 acres of land expired on December 31, 1999 and is currently being renegotiated for a minimum term of ten years. Fourteen leases expiring at various dates through 2018 cover the balance of the leased property. The aggregate land rental for all leased land was $589,000 in 2000. Item 3. LEGAL PROCEEDINGS None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information set forth under the caption "Common Stock" on page 19 of the Maui Land & Pineapple Company, Inc. 2000 Annual Report is incorporated herein by reference. Item 6. SELECTED FINANCIAL DATA The information set forth under the caption "Selected Financial Data" on page 20 of the Maui Land & Pineapple Company, Inc. 2000 Annual Report is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 21 through 24 of the Maui Land & Pineapple Company, Inc. 2000 Annual Report is incorporated herein by reference. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK "Market Risk" on page 24 of the Maui Land & Pineapple Company, Inc. 2000 Annual Report is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The "Independent Auditors' Report," "Consolidated Financial Statements," "Notes to Consolidated Financial Statements" and "Quarterly Earnings (unaudited)" on pages 7 through 19 of the Maui Land & Pineapple Company, Inc. 2000 Annual Report are incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth under the captions "Security Ownership of Management," "Section 16(a) Beneficial Ownership Reporting Compliance" and "Election of Directors" on pages 6 through 8 of the Maui Land & Pineapple Company, Inc. Proxy Statement, dated March 26, 2001, is incorporated herein by reference. Information regarding the registrant's executive officers is included in Part I, Item 1. BUSINESS. Item 11. EXECUTIVE COMPENSATION The information set forth under the caption "Executive Compensation" on pages 9 through 13 and under the subcaption "Directors' Meetings and Committees" on page 8 of the Maui Land & Pineapple Company, Inc. Proxy Statement, dated March 26, 2001, is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" on pages 4 through 6 of the Maui Land & Pineapple Company, Inc. Proxy Statement, dated March 26, 2001, is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "Compensation Committee Interlocks and Insider Participation" on page 13 of the Maui Land & Pineapple Company, Inc. Proxy Statement, dated March 26, 2001, is incorporated herein by reference. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following Financial Statements of Maui Land & Pineapple Company, Inc. and subsidiaries and the Independent Auditors' Report are included in Item 8 of this report: Consolidated Balance Sheets, December 31, 2000 and 1999 Consolidated Statements of Operations and Retained Earnings for the Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements (a) 2. Financial Statement Schedules The following Financial Statement Schedule of Maui Land & Pineapple Company, Inc. and subsidiaries and the Independent Auditors' Report is filed herewith: II. Valuation and Qualifying Accounts for the Years Ended December 31, 2000, 1999 and 1998. (a) 3. Exhibits Exhibits are listed in the "Index to Exhibits" found on pages 15 to 17 of this Form 10-K. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the last quarter of the period covered by this report. (d) The Financial Statements of Kaahumanu Center Associates for the Years Ended December 31, 2000, 1999 and 1998 are filed as exhibits. INDEPENDENT AUDITORS' REPORT To the Stockholders and Directors of Maui Land & Pineapple Company, Inc.: We have audited the consolidated financial statements of Maui Land & Pineapple Company, Inc. and its subsidiaries as of December 31, 2000 and 1999 and for each of the three years in the period ended December 31, 2000, and have issued our report thereon, dated February 1, 2001. Such consolidated financial statements and report are included in your 2000 Annual Report and are incorporated herein by reference. Our audits also included the financial statement schedule of Maui Land & Pineapple Company, Inc. listed in Item 14(a)2. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /S/ DELOITTE & TOUCHE LLP Honolulu, Hawaii February 1, 2001 SCHEDULE II MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 ADDITIONS (DEDUCTIONS) ADDITIONS CHARGED BALANCE AT CHARGED TO TO OTHER BALANCE BEGINNING COSTS AND ACCOUNTS DEDUCTIONS AT END DESCRIPTION OF PERIOD EXPENSES (describe) (describe) OF PERIOD (a) (b) (Dollars in Thousands) Allowance for Doubtful Accounts 2000 $ 793 $ 465 $ -- $ (215) $ 1,043 1999 (c) 504 291 161 (163) 793 1998 (c) 567 202 9 (274) 504 (a) Recoveries. (b) Write off of uncollectible accounts. (c) Restated to include allowance for non-current receivables. 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. MAUI LAND & PINEAPPLE COMPANY, INC. March 23, 2001 By /S/ GARY L. GIFFORD Gary L. Gifford President & 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 and in the capacities and on the dates indicated. By /S/ RICHARD H. CAMERON Date March 23, 2001 Richard H. Cameron Chairman of the Board By /S/ PAUL J. MEYER Date March 23, 2001 Paul J. Meyer Executive Vice President/Finance (Principal Financial Officer) By /S/ ADELE H. SUMIDA Date March 23, 2001 Adele H. Sumida Controller & Secretary (Principal Accounting Officer) By /S/ DAVID A. HEENAN Date March 23, 2001 David A. Heenan Director By /S/ RANDOLPH G. MOORE Date March 23, 2001 Randolph G. Moore Director By /S/ FRED E. TROTTER III Date March 23, 2001 Fred E. Trotter III Director INDEX TO EXHIBITS The exhibits designated by an asterisk (*) are filed herewith. The exhibits not so designated are incorporated by reference to the indicated filing. All previous exhibits were filed with the Securities and Exchange Commission in Washington D. C. under file number 0-6510. 3. Articles of Incorporation and By-laws 3. (i) Restated Articles of Association, as of February 24, 2000. 3. (ii) Bylaws (Amended as of March 29, 1999). Exhibit (3ii) to Form 10-Q for the quarter ended March 31, 1999. 4. Instruments Defining the Rights of Security Holders. Instruments defining the rights of holders of long-term debt have not been filed as exhibits where the amount of debt authorized thereunder does not exceed ten percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company hereby undertakes to furnish a copy of any such instrument to the Commission upon request. 4.1 (i) Amended and Second Restated Revolving Credit and Term Loan Agreement, dated as of December 4, 1998. Exhibit 4.1(i) to Form 10-K for the year ended December 31, 1998. (ii) 1999 Loan Modification Agreement, dated as of December 30, 1999. (iii) 2000 Loan Modification Agreement, effective as of June 30, 2000. Exhibit 4 to Form 10-Q for the quarter ended June 30, 2000. (iv)* Loan Modification Agreement (December 2000), effective as of December 11, 2000. 4.2 (i) Bridge Loan Agreement between Pacific Coast Farm Credit Services, ACA and Maui Land & Pineapple Company, Inc., dated December 30, 1998. Exhibit 4.2(i) to Form 10-K for the year ended December 31, 1998. (ii) Term Loan Agreement between Pacific Coast Farm Credit Services and Maui Land & Pineapple Company, Inc., entered into as of June 1, 1999. Exhibit 4(A) to Form 10-Q for the quarter ended June 30, 1999. (iii) Modifications to Term Loan Agreement, dated February 16, 2000. 10. Material Contracts 10.1 (i) Limited Partnership Agreement of Kaahumanu Center Associates, dated June 23, 1993. Exhibit (10)A to Form 10-Q for the quarter ended June 30, 1993. (ii) Cost Overrun Guaranty Agreement, dated June 28, 1993. Exhibit (10)B of Form 10-Q for the quarter ended June 30, 1993. (iii) Environmental Indemnity Agreement, dated June 28, 1993. Exhibit (10)C to Form 10-Q for the quarter ended June 30, 1993. (iv) Indemnity Agreement, dated June 28, 1993. Exhibit (10)D to Form 10-Q for the quarter ended June 30, 1993. (v) Direct Liability Agreement, dated June 28, 1993. Exhibit (10)E to Form 10-Q for the quarter ended June 30, 1993. (vi) Amendment No. 1 to Limited Partnership Agreement of Kaahumanu Center Associates. Exhibit (10)B to Form 8-K, dated as of April 30, 1995. (vii) Conversion Agreement, dated April 27, 1995. Exhibit ( 10)C to Form 8-K, dated as of April 30, 1995. (viii) Indemnity Agreement, dated April 27, 1995. Exhibit (10)D to Form 8-K, dated as of April 30, 1995. 10.2 (i)* Second Amended and Restated Hotel Ground Lease (The Ritz-Carlton, Kapalua) between Maui Land & Pineapple Company, Inc. (Lessor) and RCK Hawaii, LLC dba RCK Hawaii-Maui (Lessee), effective as of January 31, 2001. 10.3 Compensatory plans or arrangements (i) Executive Deferred Compensation Plan (revised as of 8/16/91). Exhibit (10)A to Form 10-Q for the quarter ended September 30, 1994. (ii) Executive Insurance Plan (Amended). Exhibit (10)A to Form 10-K for the year ended December 31, 1980. (iii) Supplemental Executive Retirement Plan (effective as of January 1, 1988). Exhibit (10)B to Form 10-K for the year ended December 31, 1988. (iv) Restated and Amended Executive Change-In-Control Severance Agreement (Gary L. Gifford, President/CEO), dated as of March 16, 1999. Exhibit 10.3 (iv) to Form 10-K for the year ended December 31, 1998. (v) Restated and Amended Executive Change-In-Control Severance Agreement (Paul J. Meyer, Executive Vice President/Finance), dated as of March 17, 1999. Exhibit 10.3 (v) to Form 10-K for the year ended December 31, 1998. (vi) Restated and Amended Executive Change-In-Control Severance Agreement (Donald A. Young, Executive Vice President/Resort), dated as of March 16, 1999. Exhibit 10.3 (vi) to Form 10-K for the year ended December 31, 1998. (vii) Restated and Amended Executive Change-In-Control Severance Agreement (Douglas R. Schenk, Executive Vice President/Pineapple), dated as of March 23, 1999. Exhibit 10.3 (vii) to Form 10-K for the year ended December 31, 1998. (viii) Restated and Amended Change-In-Control Severance Agreement (Warren A. Suzuki, Vice President/Land Management), dated as of March 16, 1999. Exhibit 10.3 (viii) to Form 10-K for the year ended December 31, 1998. (ix) Restated and Amended Change-In-Control Severance Agreement (Scott A. Crockford, Vice President/Retail Property), dated as of March 16, 1999. Exhibit 10.3 (ix) to Form 10-K for the year ended December 31, 1998. (x) Executive Severance Plan, as amended through November 6, 1998. Exhibit 10.3 (x) to Form 10-K for the year ended December 31, 1998. 10.4 (i) Hotel Ground Lease between Maui Land & Pineapple Company, Inc. and The KBH Company. Exhibit (10)B to Form 10-Q for the quarter ended September 30, 1985. (ii) Third Amendment of Hotel Ground Lease, dated and effective as of September 5, 1996. Exhibit (10)A to Form 10-Q for the quarter ended September 30, 1996. 10.5 (i) Settlement Agreement and Release of All Claims (Board of Water Supply of the County of Maui vs. Shell Oil Company, et al.) 11. Statement re computation of per share earnings: Net Income (Loss) divided by weighted Average Common Shares Outstanding equals Net Income (Loss) Per Common Share. 13.* Annual Report to Security Holders: Maui Land & Pineapple Company, Inc. 2000 Annual Report. 21. Subsidiaries of registrant: All of the following were incorporated in the State of Hawaii: Maui Pineapple Company, Ltd. Kapalua Land Company, Ltd. Kapalua Advertising Company, Ltd. Kapalua Water Company, Ltd. Kapalua Waste Treatment Company, Ltd. Honolua Plantation Land Company, Inc. 99. Additional Exhibits. 99.1* Financial Statements of Kaahumanu Center Associates for the years ended December 31, 2000, 1999 and 1998. EX-4 2 loandoc.txt LOAN MODIFICATION AGREEMENT (DECEMBER 2000) LOAN MODIFICATION AGREEMENT (December 2000) THIS AGREEMENT effective as of December 11, 2000, by and among MAUI LAND & PINEAPPLE COMPANY, INC., a Hawaii corporation (the "Borrower"), BANK OF HAWAII, a Hawaii banking corporation ("BOH"), FIRST HAWAIIAN BANK, a Hawaii banking corporation ("FHB"), CENTRAL PACIFIC BANK, a Hawaii banking corporation ("CPB")(BOH, FHB and CPB are each sometimes called a "Lender" and collectively called the "Lenders"), and BANK OF HAWAII, as Agent for the Lenders to the extent and in the manner provided in the Loan Documents described below and in the Agency Agreement described in the Loan Agreement described below (in such capacity, the "Agent"), and KAPALUA LAND COMPANY, LTD., a Hawaii corporation ("Accommodation Party") W I T N E S S E T H: WHEREAS, the Borrower, the Lenders and Bank of America, National Trust and Savings Association ("BOA") (the Lenders and BOA are collectively called the Original Lenders") and the Agent are parties to that certain Revolving and Term Loan Agreement, dated as of December 31, 1992, as amended by a First Loan Modification Agreement, dated as of March 1, 1993, and supplemented by letter agreements dated April 30, 1993 and June 24, 1993, and further amended by Second Loan Modification Agreement, dated September 8, 1993, by a Third Loan Modification Agreement, dated September 30, 1993, by a Fourth Loan Modification Agreement, dated March 8, 1994, by a Fifth Loan Modification Agreement, dated effective as of December 31, 1994, by a Sixth Loan Modification Agreement, dated effective as of March 31, 1995, and by a Seventh Loan Modification Agreement dated effective as of December 31, 1995, each among the Borrower, the Original Lenders and the Agent (as so amended and supplemented, the "Original Loan Agreement"); WHEREAS, the Original Loan Agreement and the other "Loan Documents" referred to therein, as respectively amended, set forth the terms and conditions upon which the Original Lenders (i) have made available to the Borrower the Revolving Loans in the original aggregate principal amount of up to $40,000,000 at any one time outstanding (subject to mandatory reduction, from time to time, of such aggregate principal amount available) and (ii) shall make available to the Borrower the Term Loans in an amount up to the aggregate principal amount of the Revolving Loans outstanding upon expiration of the Revolving Loan Period, all as more particularly described therein; WHEREAS, the parties hereto entered into that certain Amended and Restated Revolving Credit and Term Loan Agreement dated December 4, 1996, as amended by letter agreement dated February 21, 1997, by First Loan Modification Agreement dated December 31, 1997, and by Second Loan Modification Agreement dated March 17, 1998 (as so amended, the "First Restatement"); WHEREAS, the parties hereto entered into that certain Amended and Second Restated Revolving Credit and Term Loan Agreement dated as of December 4, 1998 ("Second Restatement") to, among other things, establish a development line in the aggregate principal amount of $15,000,000, being the Village Course Facility more particularly described in the Second Restatement; WHEREAS, the Lenders having purchased the interests of BOA under the Original Loan Agreement and the other Loan Documents referred to therein (the "BOA Purchase"), and BOH having purchased a portion of the interest of FHB under the Original Loan Agreement, as amended by the First Restatement and by the Second Restatement (the Original Loan Agreement as the same has been and may hereafter be amended, the "Loan Agreement"), and under the other Loan Documents referred to in the Loan Agreement, the respective "Individual Loan Commitment Percentage" of each Lender is now as follows: (1) BOH's Individual Loan Commitment Percentage is equal to 53.667% with respect to the Original Facility and 50% with respect to the Village Course Facility; (2) FHB's Individual Loan Commitment Percentage is equal to 33.333% with respect to the Original Facility and 33.333% with respect to the Village Course Facility; and (3) CPB's Individual Loan Commitment Percentage is equal to 13.000% with respect to the Original Facility and 16.667% with respect to the Village Course Facility; WHEREAS, the Aggregate Loan Commitment with respect to the Original Facility having been reduced to $15,000,000, the respective Individual Loan Commitments of the Lenders are as follows: (1) BOH's Individual Loan Commitment is equal to $8,050,000 with respect to the Original Loan Facility, subject to further permanent reduction from time to time in accordance with the terms of the Loan Agreement, and $7,500,000 with respect to the Village Course Facility; (2) FHB's Individual Loan Commitment is equal to $5,000,000 subject to further permanent reduction from time to time in accordance with the terms of the Loan Agreement, and $5,000,000 with respect to the Village Course Facility; and (3) CPB's Individual Loan Commitment is equal to $1,950,000, subject to further permanent reduction from time to time in accordance with the terms of the Loan Agreement, and $2,500,000 with respect to the Village Course Facility; WHEREAS, the parties hereto entered into that certain 1999 Loan Modification Agreement dated as of December 30, 1999, and that certain 2000 Loan Modification Agreement dated June 30, 2000; WHEREAS, the performance of Borrower's obligations under the Loan Documents is secured by the following (collectively, the "Mortgages"): (1) Mortgage and Security Agreement dated March 1, 1993, made by Borrower, as Mortgagor, and recorded in the Bureau of Conveyances of the State of Hawaii as Document No. 93-036896, which mortgage was confirmed by instrument dated December 4, 1998, recorded in said Bureau as Document No. 98-185558; (2) Mortgage and Security Agreement dated March 1, 1993, made by Borrower, as Mortgagor, and recorded in the Bureau of Conveyances of the State of Hawaii as Document No. 93-036898, which mortgage was confirmed by instrument dated December 4,1998, recorded in said Bureau as Document No. 98-185558; and (3) Additional Security Mortgage and Security Agreement dated March 1, 1993, made by KAPALUA LAND COMPANY, LTD., a Hawaii corporation, ("Accommodation Party") and recorded in the Bureau of Conveyances of the State of Hawaii as Document No. 93-036900, which mortgage was amended and confirmed by instrument dated December 4, 1998, recorded in said Bureau as Document No. 98-185559; WHEREAS, Borrower has requested a further modification of the Loan Documents and Lenders are willing to accommodate such modification under the terms of this Agreement; WHEREAS, for their mutual convenience, the parties wish to restate all amendments effected by said 1999 Loan Modification Agreement or by said 2000 Loan Modification Agreement and not further amended or otherwise superceded by a subsequent amendment or modification to the Loan Documents; and WHEREAS, the Village Course Facility has been fully drawn and Borrower is not entitled to any further Advances thereunder; NOW, THEREFORE, in consideration of the premises, the mutual covenants set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower, the Lenders and the Agent hereby agree as follows: 1. The Loan Documents are amended to conform to the following: (a) Expiry Date - Revolving Loans. The Expiry Date is extended from December 31, 2001, to December 31, 2002. (b) Maturity Date - Term Loans. The Maturity Date is extended from December 31, 2004, to December 31, 2005. (c) Village Course Facility Maturity Date. The Village Course Facility Maturity Date is extended from December 11, 2001, to March 31, 2002. (d) Interest Rate - Revolving Loans. Outstanding balances of principal of the Revolving Loans during the Revolving Loan Period shall bear interest at either of the following interest rate options that Borrower may select in accordance with the terms of the Loan Agreement (1) a floating rate equal to the Base Rate in effect from time to time or (2) LIBOR, plus: (i) if Borrower's Recourse Debt to Net Worth Ratio is less than or equal to 0.20, one and one- half percentage points (1.50%); (ii) if Borrower's Recourse Debt to Net Worth Ratio is greater than 0.20 but not more than 0.40, one and three-fourths percentage points (1.75%); (iii)if Borrower's Recourse Debt to Net Worth Ratio is greater than 0.40 but not more than 0.60, two percentage points (2.00%); (iv) if Borrower's Recourse Debt to Net Worth Ratio is greater than 0.60 but not more than 0.80, two and one-fourth percentage points (2.25%); and (v) if Borrower's Recourse Debt to Net Worth Ratio is greater than 0.80, two and one-half percentage points (2.50%). (e) Interest Rate - Term Loans. In the event that the Term Loans shall be made, then during the period (the "Term Loan Period") commencing on the Expiry Date, to and including the date that the Term Loans are paid in full, at the option of the Borrower initially either (i) a floating rate per annum equal to the Base Rate in effect from time to time, or (ii) LIBOR, plus: (i) if Borrower's Recourse Debt to Net Worth Ratio is less than or equal to 0.20, one and three- fourths percentage points (1.75%); (ii) if Borrower's Recourse Debt to Net Worth Ratio is greater than 0.20 but not more than 0.40, two percentage points (2.00%); (iii)if Borrower's Recourse Debt to Net Worth Ratio is greater than 0.40 but not more than 0.60, two and one-fourth percentage points (2.25%); (iv) if Borrower's Recourse Debt to Net Worth Ratio is greater than 0.60 but not more than 0.80, two and one-half percentage points (2.50%); and (v) if Borrower's Recourse Debt to Net Worth Ratio is greater than 0.80, two and three-fourths percentage points (2.75%). (f) Interest Rate - Village Course Facility Advances. The Borrower agrees to pay interest on the outstanding principal balance of the Advances pursuant to the following interest rate options that the Borrower may select in accordance with the provisions of the Loan Agreement: (1) a floating rate equal to the Base Rate in effect from time to time; or (2) LIBOR plus: (i) if Borrower's Recourse Debt to Net Worth Ratio is less than or equal to 0.20, one and one- half percentage points (1.50%); (ii) if Borrower's Recourse Debt to Net Worth Ratio is greater than 0.20 but not more than 0.40, one and three-fourths percentage points (1.75%); (iii)if Borrower's Recourse Debt to Net Worth Ratio is greater than 0.40 but not more than 0.60, two percentage points (2.00%); (iv) if Borrower's Recourse Debt to Net Worth Ratio is greater than 0.60 but not more than 0.80, two and one-fourth percentage points (2.25%); and (v) if Borrower's Recourse Debt to Net Worth Ratio is greater than 0.80, two and one-half percentage points (2.50%). (g) Recourse Debt to Net Worth Ratio. "Recourse Debt to Net Worth Ratio" or "Recourse Debt/Net Worth Ratio" shall mean the quotient obtained by dividing (i) Recourse Debt by (ii) Net Worth. For the purpose of determining the interest rate applicable to the Loans, such ratio shall be based of the most recent financial reports referred to in Section 5.1(a)(1) of the Loan Agreement and any KCA debt which is nonrecourse to the Borrower shall be disregarded. (h) Reductions of Commitment - Original Facility. Section 2.6(a) of the Loan Agreement is amended to read as follows: (a) Mandatory Reduction. Except as otherwise provided by Section 2.8(c) hereof: by the close of business on each date the Borrower or any Subsidiary receives any net sales proceeds (i.e., gross sales proceeds less closing costs acceptable to the Lenders) in respect of the sale of any real estate assets of the Borrower or any Subsidiary, the Borrower shall notify the Agent of such sale and the Borrower's receipt of such net sale proceeds and shall pay to the Lenders through the Agent 75% of the after-tax net proceeds so received by the Borrower as a mandatory payment of the outstanding principal amount of the Loans under the Original Facility; provided, however, that such mandatory payments of principal shall not permanently reduce the Aggregate Loan Commitment with respect to the Original Facility. (i) Payments of Principal - Village Course Facility. Section 2.8(c) of the Loan Agreement is amended to read as follows: (c) Village Course Facility. (1) On or before December 31, 2000, Borrower shall pay the amount, if any, by which the outstanding principal balance of the Village Course Facility exceeds $12,000,000.00 and, on or before March 31, 2001, Borrower shall pay the amount, if any, by which the outstanding principal balance of the Village Course Facility exceeds $8,000,000. (2) Until such time as the unpaid principal balance of the Village Course Facility is reduced to $8,000,000.00 or less: within ten(10) days after the close of the sale of any lot in the real estate development project known as "Pineapple Hill Estates", built or intended to be built on land identified as Tax Map Key (2)4-2-04:24, Borrower will make a payment of principal in the amount of $400,000.00 with respect to the Village Course Facility from the proceeds of each such sale. (3) All principal and accrued interest then outstanding with respect to the Village Course Facility shall be due and payable in full on or before the Village Course Facility Maturity Date. (j) Net Worth. Section 5.1(e)(3) of the Loan Agreement is amended to read as follows: (3) A Net Worth of not less than $60,100,000.00, plus 50% of the cumulative net profits after December 31, 1998 (but not the net losses) of Borrower. (k) Capital Expenditures. Section 5.2(d) of the Loan Agreement is amended to read as follows: (d) Neither the Borrower nor any Subsidiary will make any Capital Expenditure that is not approved in writing by Lenders that causes Borrower to exceed (on an aggregated basis) the following Capital Expenditure limits: $10,800,000 for fiscal year 1998; $11,500,000 for fiscal year 1999; $15,250,000 for fiscal year 2000; $14,500,000 for fiscal year 2001; and $12,000,000 for each fiscal year thereafter. Capital Expenditures for work at the Village Course at Kapalua (described in Section 5.1(n)) shall not be counted towards such Capital Expenditure limits. (l) Current Ratio. For the purpose of determining the Current Ratio for the second, third and fourth quarters of fiscal year 2000, Consolidated Current Liabilities shall not include deferred revenue related to lot sales in the real estate development projects known as "Plantation Estates" and "Pineapple Hill Estates", built or intended to be built on land identified as Tax Map Key (2)4-2-05:1 through 14, inclusive, 44 and 45 and Tax Map Key (2)4-2-04:24, respectively. For the purpose of determining the Current Ratio for all quarters of fiscal year 2001, Consolidated Current Liabilities shall not include deferred revenue related to lot sales in the real estate development project known as "Pineapple Hill Estates", built or intended to be built on land identified as Tax Map Key (2)4-2-04:24. (m) Consolidated Current Assets and Consolidated Current Liabilities. Section 1.14 of the Loan Agreement is amended to read as follows: 1.14 "Consolidated Current Assets" and "Consolidated Current Liabilities" mean, at any time, all assets or liabilities, respectively, that, in accordance with generally accepted accounting principles consistently applied, should be classified as current assets or current liabilities, respectively, on a consolidated balance sheet of the Borrower and its Subsidiaries, except that "Consolidated Current Assets" shall not include growing crops and that "Consolidated Current Liabilities" shall not include the current portion of long term debt related to the Village Course Facility, at the time of determination, minus the lesser of (1) the available portion of the Aggregate Loan Commitment with respect to the Original Facility, at the time of determination, or (2) $8,000,000. 2. Upon execution of this Agreement and in consideration of these amendments: (a) Borrower shall pay to the Agent,on demand, for distribution to the Lenders a non-refundable fee with respect to the Original Facility in the amount of $10,000 as follows: to BOH 53.667% ($5,366.67); to FHB 33.33% ($3,333.33); and to CPB 13.00%($1,300.00). (b) Borrower shall pay to the Agent, on demand, for distribution to the Lenders the following non-refundable fee with respect to the Village Course Facility in the amount of $2,500 as follows: to BOH 50.00% ($1,250.00); to FHB 33.33% ($833.33); and to CPB 16.667% ($416.67). 3. Capitalized terms used, but not defined, in this Agreement, shall have the definitions stated in the Loan Agreement. 4. Borrower and Accommodation Party each agrees that to its actual knowledge it has no claims, defenses, or offsets against the Lenders or the Agent with respect to said credit facility or to the enforcement of the Loan Documents arising prior to the date of this Agreement and that all such claims, defenses and offsets are hereby released. 5. The execution of this Agreement by the Borrower constitutes the certification of the persons signing this Agreement on behalf of the Borrower that, to the best of their actual knowledge, the representations and warranties made in Article IV of the Loan Agreement are true and correct as of the date of this Agreement. 6. In all other respects, the Loan Documents, as amended, remain in full force and effect and the provisions of the Loan Documents including, without limitation, all promises, representations, warranties, covenants, and conditions, are ratified and confirmed as of the date of this Agreement by the parties hereto. 7. Borrower and Accommodation Party acknowledge that the Mortgages remain in full force and effect and continue to secure the remaining Loan Documents. 8. This Agreement is binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns. 9. The parties hereto agree that this instrument may be executed in counterparts, each of which shall be deemed an original, and said counterparts shall together constitute one and the same agreement, binding all of the parties hereto, notwithstanding all of the parties are not signatory to the original or the same counterparts. Duplicate unexecuted pages of the counterparts may be discarded and the remaining pages assembled as one document. To signify their agreement, the parties have executed this Agreement as of the date first written above. MAUI LAND & PINEAPPLE COMPANY, BANK OF HAWAII,individually INC. and as Agent By: /S/PAUL J. MEYER By: /S/DEREK CHANG Paul J. Meyer Derek Chang Its Executive Vice President/ Its Asst. Vice President Finance FIRST HAWAIIAN BANK By: /S/GARY L. GIFFORD Gary L. Gifford By: /S/LANCE A. MIZUMOTO Its President Lance A. Mizumoto Its Vice President KAPALUA LAND COMPANY, LTD. CENTRAL PACIFIC BANK By: /S/PAUL J. MEYER Paul J. Meyer By: /S/ALAN TAMANAHA Its Executive Vice President/ Alan Tamanaha Finance Its Vice President By: /S/DON YOUNG Don Young Its President EX-10 3 rclse.txt SECOND AMENDED AND RESTATED HOTEL GROUND LEASE SECOND AMENDED AND RESTATED HOTEL GROUND LEASE (THE RITZ-CARLTON, KAPALUA) BETWEEN MAUI LAND & PINEAPPLE COMPANY, INC. (LESSOR) AND RCK HAWAII, LLC dba RCK HAWAII-MAUI (LESSEE) TABLE OF CONTENTS I DEFINITIONS 1 1.1 USE OF DEFINED TERMS 1 1.2 TERM 2 1.3 DEFINED TERMS 2 a. ADDITIVE CHANGE ORDER 2 b. AFFILIATE 2 c. AFFILIATED CONCESSIONAIRE 2 d. AIA GENERAL CONDITIONS 2 e. AMENDMENT AND RESTATEMENT OF TENNIS OPERATING AGREEMENT 2 f. ANNUAL STATEMENT 3 g. BEST OFFER 3 h. BEST OFFER ENTITY 3 i. BEST OFFER ENTITY REVIEW PERIOD 3 j. CHANGE ORDERS 3 k. COMMENCEMENT OF CONSTRUCTION 3 l. COMPLETED AND COMPLETION 3 m. CONCESSIONAIRE 3 n. CONSTRUCTION 3 o. DECLARATION OF COVENANTS, CONDITIONS, AND RESTRICTIONS 3 p. ESTIMATED MONTHLY PERCENTAGE RENT 4 q. FORECLOSURE 4 r. GOLF COURSE USE AGREEMENT 4 s. GROSS ANNUAL PERCENTAGE RENT 4 t. GROSS REVENUES 4 u. HOTEL 4 v. HOTEL OPERATING AGREEMENT 4 w. HOTEL OPERATOR 4 x. HOTEL ROOM 4 y. INITIAL LEASE DATE 4 z. INSTITUTIONAL LENDER 5 aa. JOINT MAI 5 bb. KAPALUA RESORT AREA 5 cc. KMA 5 dd. KRA 5 ee. KRA ADVERTISING 5 ff. LAND 5 gg. LEASE YEAR, RENTAL YEAR AND YEAR 5 hh. LEASEHOLD MORTGAGE FORECLOSURE PURCHASER 5 ii. LEASEHOLD MORTGAGEES 5 jj. LESSEE'S MAI 5 kk. LESSEE'S REVIEW PERIOD 5 ll. LESSOR MORTGAGE 6 mm. LESSOR'S COST OF MONEY 6 nn. LESSOR'S MAI 6 oo. MAUI LAND & PINEAPPLE, INC.'S OFFER 6 pp. MORTGAGEE 6 qq. NEW LEASE 6 rr. OFF-SITE IMPROVEMENTS 6 ss. OFF-SITE PARKING SPACES 6 tt. PERSON 6 uu. PLANS 6 vv. PRECONDITIONS FOR CONSTRUCTION 6 ww. PREMISES 6 xx. QUALIFIED PURCHASER 6 yy. QUIET HOURS 7 zz. RC'S OFFER 7 aaa. RECORD AND FILE 7 bbb. TENNIS CENTER 7 ccc. TENNIS SITE 7 ddd. TERM 7 eee. THIRD PARTY OFFER 7 fff. THIRD PARTY SALE AGREEMENT 7 ARTICLE II DEMISE AND QUIET ENJOYMENT; INTERRELATIONSHIP OF INTERESTS 7 2.1 DEMISE 7 2.2 QUIET ENJOYMENT 7 2.3 INTERRELATIONSHIP OF INTERESTS 8 ARTICLE III RENTAL 8 3.1 LESSEE TO PAY NET RENT 8 3.2 GROSS REVENUES 8 3.3 MINIMUM RENT 9 3.4 PERCENTAGE RENT ("GROSS ANNUAL PERCENTAGE RENT" 9 a. JANUARY 1, 1995 THROUGH DECEMBER 31, 1998 9 b. JANUARY 1, 1999, THROUGH DECEMBER 31, 2094 9 c. RECORDS AND ANNUAL STATEMENT 10 d. ACCOUNTING METHOD 11 3.5 ACCESS TO GUEST LISTS 11 3.6 GROSS EXCISE TAX 11 3.7 PAYMENT 12 a. PERCENTAGE RENT 12 b. CURRENCY; AGENT 12 3.8 LATE PAYMENT 12 3.9 OFF-SITE IMPROVEMENTS 12 ARTICLE IV CONSTRUCTION OF IMPROVEMENTS 12 4.1 CONSTRUCTION REQUIREMENTS 12 a. LESSOR'S APPROVAL 13 b. LESSEE'S NOTIFICATION OF ARCHITECT AND CONTRACTOR 13 4.2 PRE-CONDITIONS FOR CONSTRUCTION 13 a. PERFORMANCE AND PAYMENT BONDS 13 b. GOVERNMENTAL APPROVALS 13 c. FINANCING COMMITMENTS 13 d. CONSTRUCTION LIABILITY INSURANCE 14 4.3 CHANGE ORDERS 14 4.4 FORCE MAJEURE 14 4.5 MINIMUM INTERFERENCE DURING CONSTRUCTION 15 4.6 RISK OF OBTAINING GOVERNMENTAL APPROVALS FOR CONSTRUCTION 16 4.7 DELIVERY OF PLANS AND SPECIFICATIONS UPON COMPLETION 16 ARTICLE V FINANCING 16 5.1 RIGHT TO MORTGAGE 16 5.2 NOTICE TO AND RIGHTS OF LEASEHOLD MORTGAGES 17 5.3 NEW LEASE IF NO BANKRUPTCY 19 5.4 CONSENT OF MORTGAGEE 20 5.5 NO MERGER 20 5.6 FINANCING BY LESSOR 20 5.7 [INTENTIONALLY DELETED] 20 5.8 OPTION FOR NEW LEASE IF BANKRUPTCY 21 5.9 [INTENTIONALLY DELETED] 22 ARTICLE VI INSURANCE 22 A. INSURANCE OF BUILDINGS 22 6.1 FIRE AND HAZARD INSURANCE 22 6.2 PAYMENT OF INSURANCE PROCEEDS 22 6.3 USE OF INSURANCE PROCEEDS 22 6.4 UNINSURED CASUALTY AND ABATEMENT OF RENT 23 B. LIABILITY INSURANCE 24 6.5 LESSEE TO OBTAIN LIABILITY INSURANCE 24 C. GENERAL INSURANCE REQUIREMENTS 24 6.6 POLICY PROVISIONS 24 6.7 CERTIFICATES OF INSURANCE 25 ARTICLE VII CONDEMNATION 25 7.1 TOTAL CONDEMNATION 25 7.2 PARTIAL CONDEMNATION 25 a. TERMINATION AS TO PORTION 25 b. CONTINUED OPERATIONS 26 c. TERMINATION OF LEASE 26 7.3 COMPENSATION AND DAMAGES 27 a. LAND 27 b. IMPROVEMENTS 27 7.4 CONDEMNATION OF LEASEHOLD INTEREST 27 7.5 LOSS OF BUSINESS DAMAGES 27 7.6 CONVEYANCE AS CONDEMNATION 28 ARTICLE VIII MAINTENANCE AND USE OF PREMISES 28 8.1 TAXES AND ASSESSMENTS 28 8.2 LESSEE TO PAY ALL RATES AND CHARGES 29 8.3 IMPROVEMENTS REQUIRED BY LAW 29 8.4 REPAIR AND MAINTENANCE 29 8.5 OBSERVANCE OF LAWS 30 8.6 INSPECTION OF PREMISES 30 8.7 WASTE AND UNLAWFUL USE 30 8.8 USE OF PREMISES 30 a. OPERATION OF HOTEL 30 b. HOTEL OPERATING AGREEMENT 31 c. PROHIBITED USES 32 d. NUISANCE 32 8.9 LIENS 32 8.10 KAPALUA RESORT ASSOCIATION 32 8.11 KAPALUA MARKETING ASSOCIATION 32 8.12 VISITOR STATISTICS 33 8.13 COVENANT TO OPERATE HOTEL 33 8.14 NAME OF HOTEL 33 ARTICLE IX DEFAULT 34 9.1 EVENTS AND CONSEQUENCES OF DEFAULT 34 a. FAILURE TO PAY RENT 34 b. BREACH OF COVENANT 34 c. ABANDONMENT 34 d. BANKRUPTCY, INSOLVENCY OR TAKING 34 9.2 ACCEPTANCE OF RENT NOT WAIVER 35 9.3 LIMITED LIABILITY OF LESSEE. 35 ARTICLE X SURRENDER 35 10.1 SURRENDER 35 ARTICLE XI GENERAL PROVISIONS 36 11.1 BEACH 36 11.2 ASSUMPTION OF RISK 36 11.3 HOLDING OVER 36 11.4 ACCEPTANCE OF NEARBY OR ADJACENT LAND USE 36 a. PINEAPPLE AND SIMILAR AGRICULTURAL OPERATIONS 36 b. GOLF COURSES 37 11.5 NOTICES 37 11.6 ARTICLE AND PARAGRAPH HEADINGS 37 11.7 ASSIGNMENTS AND SUBLEASES 38 11.8 ATTORNEYS' FEES 44 11.9 INDEMNITY 44 11.10 MULTIPLE LESSEES 45 11.11 NO INCREASE OF LESSEE'S ESTATE 45 11.12 CALENDAR PERIODS 45 11.13 INTEREST ON ALL LATE PAYMENTS 45 11.14 NEITHER LESSOR NOR LESSEE DEEMED DRAFTER 45 11.15 SUCCESSORS AND ASSIGNS 46 11.16 LESSOR'S RIGHT TO SELL FEE 46 11.17 ENTIRE AGREEMENT 46 11.18 CONSENT 46 11.19 AMENDMENT 46 11.20 ESTOPPEL CERTIFICATES 46 11.21 TIME OF THE ESSENCE 46 11.22 CONVEYANCE AND HOTEL ROOM TAXES 47 11.23 SHORT-FORM LEASE 47 ARTICLE XII SPECIAL PROVISIONS 47 12.1 LESSEE'S RIGHT OF FIRST REFUSAL 47 a. SALE OF FEE SIMPLE TITLE AND/OR LEASE 47 b. SALE OF INTERESTS IN ADDITION TO FEE SIMPLE TITLE AND/OR LEASE 48 12.2 NON-COMPETITION 49 12.3 SIGNAGE 49 12.4 NO LICENSE OF BUTTERFLY LOGO 49 12.5 ADDITIONAL PARKING SPACES 49 EXHIBIT "A" - PREMISES EXHIBIT "A-1" - OFF-SITE PARKING MAP EXHIBIT "A-2" - TENNIS ACCESS ROADWAY MAP EXHIBIT "B" - OFF-SITE IMPROVEMENTS EXHIBIT "C" - BUTTERFLY LOGO SECOND AMENDED AND RESTATED HOTEL GROUND LEASE THIS SECOND AMENDED AND RESTATED LEASE is made effective as of January 31, 2001 (the "Effective Date"), by and between MAUI LAND & PINEAPPLE COMPANY, INC., a Hawaii corporation, whose principal place of business is 120 Kane Street, Kahului, Maui, Hawaii, and whose post office address is P.O. Box 187, Kahului, Maui, Hawaii 96732, hereinafter called the "Lessor", and RCK HAWAII, LLC dba RCK HAWAII-MAUI, a Delaware limited liability company, whose principal place of business is 10400 Fernwood Road, Bethesda, Maryland 20817, hereinafter called the "Lessee". This instrument is sometimes referred to herein as "this Lease", and may be referred to as the "Lease." W I T N E S S E T H: Whereas, Lessor and NI Hawaii Resort, Inc. entered into that certain unrecorded Hotel Ground Lease dated February 24, 1996, but effective as of January 1, 1996 (the "Hotel Ground Lease"), a Memorandum of which dated February 24, 1996, but effective as of January 1, 1996, was recorded in the Bureau of Conveyances of the State of Hawaii as Document No. 96-046331. Whereas, the Hotel Ground Lease was amended by that certain First Amendment of Hotel Ground Lease dated April 15, 1999, recorded as aforesaid as Document No. 99-059178, and by that certain Second Amendment of Hotel Ground Lease dated September 27, 2000, recorded as aforesaid as Document No. 2000-135417. Whereas, the Hotel Ground Lease, as amended, was assigned to Lessee by that certain Assignment of Ground Lease dated September 27, 2000, recorded as aforesaid as Document No. 2000-135421. Whereas, Lessor and Lessee desire to further amend the Hotel Ground Lease, as amended, and to restate the Hotel Ground Lease as so amended in its entirety. Now Therefore, in consideration of the respective and mutual covenants of Lessor and Lessee and the rent set forth in this Lease below, Lessor and Lessee hereby agree to all of the following terms, conditions and covenants. ARTICLE I Definitions 1.1 Use of Defined Terms. For purposes of construing and interpreting this Lease, the terms defined in Sections 1.2 and 1.3 when written with initial capital letters in this Lease shall have the meaning given such terms in those sections. The terms defined in Sections 1.2 and 1.3 may be used in the singular or plural or in varying tenses or forms, but such variation shall not affect the meaning of such terms set forth in those sections so long as those terms are written in initial capital letters. When such terms are used in this Lease but are written without initial capital letters, such terms shall have the meaning they have in common usage; provided, however, that where legal, technical or trade terms are used and the context in which such terms are used indicates that such terms are to be given their legal, technical or trade usage meanings, such terms shall be given such legal, technical or trade usage meanings. 1.2 Term. "Term" shall mean the term of this Lease which shall commence as of January 1, 1996 ("Initial Lease Date") of this Lease, except for Sections 3.1 and 3.4 which shall be effective January 1, 1995, and terminate at midnight on December 31, 2094. 1.3 Defined Terms. a. Additive Change Order. "Additive Change Order" shall have the definition set forth in Section 4.3. b. Affiliate. An "Affiliate" of a person or entity is a person or entity that directly or indirectly controls, is controlled by, or is under common control with, such person or entity. The term "control", as used in the immediately preceding sentence means, with respect to an entity that is a corporation, the right to the exercise, directly or indirectly, of more than fifty percent (50%) of the voting rights attributable to the shares of the controlled corporation, and with respect to a person or entity that is not a corporation, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of the controlled person or entity. c. Affiliated Concessionaire. An "Affiliated Concessionaire" is a Concessionaire in which any one of (i) Lessee, (ii) Lessee's general or limited partners, if any, (iii) Affiliates of Lessee or Lessee's general or limited partners, (iv) any shareholder of Lessee, of Lessee's general or limited partners or an Affiliate of Lessee or its general or limited partners holding alone or in the aggregate more than twenty-five percent (25%) of the stock of any one such entity, (v) employees or agents of Lessee, Lessee's general or limited partners or Affiliate of Lessee or Lessee's general or limited partners, or (vi) immediate family members of officers of Lessee, Lessee's general or limited partners, or any Affiliates of Lessee or its general or limited partners, (vii) immediate family members of shareholders owning alone or in the aggregate more than twenty- five percent (25%) of the stock of any one of Lessee, Lessee's general or limited partners or any Affiliate of Lessee or Lessee's general or limited partners or (viii) Affiliates of the persons or entities set forth in clauses (i) through (vii) above, have an ownership-interest, whether equitable or otherwise. d. AIA General Conditions. The "AIA General Conditions" shall mean the standard general conditions of the standard form AIA construction agreement. e. Amendment and Restatement of Tennis Operating Agreement. The "Amendment and Restatement of Tennis Operating Agreement" shall mean the unrecorded Amendment and Restatement of Tennis Operating Agreement dated January 9, 1996, by and between Lessee, as Owner, and Kapalua Land Company, Ltd., as Operator, as the same may be amended from time to time. f. Annual Statement. "Annual Statement" shall have the definition set forth in Section 3.4. g. Best Offer. "Best Offer" shall have the definition set forth in Section 11.7. h. Best Offer Entity. "Best Offer Entity" shall have the definition set forth in Section 11.7. i. Best Offer Entity Review Period. "Best Offer Entity Review Period" shall have the definition set forth in Section 11.7. j. Change Orders. "Change Orders" shall have the definition set forth in Section 4.3. k. Commencement of Construction. "Commencement of Construction" shall mean "visible commencement of operations" as that term is defined in Section 507-41 of the Hawaii Revised Statutes in effect on the date of this Lease. l. Completed and Completion. A structure, improvement, building or room which is "Completed" is a structure, improvement, building or room for which a "certificate of occupancy" has been issued by the appropriate governmental authority. The "Completion" of a structure, improvement, building or room shall mean the issuance of a "certificate of occupancy" by the appropriate governmental agency for such structure, improvement, building or room. m. Concessionaire. "Concessionaire" shall mean a person or entity, including without limitation a shopkeeper, retailer or provider of services which has entered into a sublease, concession agreement, contract, license or similar agreement with Lessee for the transaction of business on or from the Premises or the operation of the Hotel. n. Construction. "Construction" shall have the definition set forth in Section 4.1. o. Declaration of Covenants, Conditions, and Restrictions. "Declaration of Covenants, Conditions, and Restrictions" shall mean the Declaration of Covenants, Conditions, and Restrictions dated September 26, 1990, recorded in the Bureau of Conveyances of the State of Hawaii as Document No. 90-149096. p. Estimated Monthly Percentage Rent. "Estimated Monthly Percentage Rent" shall be the amount computed by multiplying the Gross Revenues for the month by the percentage rate under Section 3.4. q. Foreclosure. "Foreclosure" shall mean foreclosure of the lien imposed by a Leasehold Mortgage by power of sale or judicial foreclosure or by deed in lieu of foreclosure or the exercise of remedies under the Leasehold Mortgage which results in the Lessee losing possession of the Property, or which results in a transfer of title to or possession of the Lessee's interest in this Ground Lease. The term "Foreclosure" shall include, without limitation, any one or more of the following events, if they occur in connection with a default under a Mortgage: (i) a transfer by judicial foreclosure; (ii) a transfer by deed or assignment in lieu of foreclosure; (iii) the appointment by a court of a receiver to assume possession of the Premises, and (iv) a transfer of either ownership or control of the Lessee; r. Golf Course Use Agreement. The "Golf Course Use Agreement" shall mean the Amended and Restated Golf Course Use Agreement dated September 27, 2000, by and among Maui Land & Pineapple Company, Inc., NI Hawaii Resort, Inc., and The Ritz- Carlton Hotel Company, L.L.C., a memorandum of which was recorded as aforesaid as Document No. 2000-135418, with respect to golf course use. s. Gross Annual Percentage Rent. "Gross Annual Percentage Rent" shall have the definition set forth in Section 3.4. t. Gross Revenues. "Gross Revenues" shall have the definition set forth in Section 3.2. u. Hotel. "Hotel" shall mean the hotel known as of January 1, 1996 as The Ritz-Carlton, Kapalua, together with lobbies, kitchens, dining rooms, bars, swimming pool, landscaping, parking areas, roadways, walkways and all other facilities and improvements now or hereafter constructed and situated on the Premises. v. Hotel Operating Agreement. "Hotel Operating Agreement" shall mean an agreement between Lessee and Hotel Operator for the operation and management of the Hotel. w. Hotel Operator. "Hotel Operator" shall mean The Ritz-Carlton Hotel Company, L.L.C., a Delaware limited liability company, or its successor or successors as permitted by Section 8.8(b). x. Hotel Room. "Hotel Room" shall mean the smallest room or combination of rooms in the Hotel which may be rented to overnight guests. y. Initial Lease Date. "Initial Lease Date" shall have the definition set forth in Section 1.2. z. Institutional Lender. "Institutional Lender" shall mean a foreign or domestic commercial bank, trust company, savings bank, savings and loan association, life insurance company, real estate investment trust, pension trust, pension plan or pension fund, a public or privately-held fund engaged in real estate and/or corporate lending, university endowment fund, grantor trust, investment bank or any other financial institution (or any Affiliate thereof) having a minimum paid up capital (or net assets) of One Hundred Million Dollars ($100,000,000) (or any Affiliate thereof), whether acting for its own account or in a representative, fiduciary or trust capacity, including as trustee in connection with a securitization of commercial mortgage loans or any entity owned by any of the foregoing. aa. Joint MAI. "Joint MAI" shall have the definition set forth in Section 12.1. bb. Kapalua Resort Area. The "Kapalua Resort Area" shall mean the existing and proposed development of the Kapalua area on Maui, more particularly set forth in Lessor's Master Plan for the Kapalua Resort, as amended from time to time. cc. KMA. "KMA" shall have the definition set forth in Section 8.11. dd. KRA. "KRA" shall have the definition set forth in Section 8.10. ee. KRA Advertising. "KRA Advertising" shall have the definition set forth in Section 3.5. ff. Land. "Land" shall mean the land included in the Premises exclusive of any improvements existing at any time on such land. gg. Lease Year, Rental Year and Year. The terms "Lease Year," "Rental Year," and "Year" as used herein shall mean a time period of 12 calendar months. hh. Leasehold Mortgage Foreclosure Purchaser. "Leasehold Mortgage Foreclosure Purchaser" shall have the definition set forth in Section 5.1. ii. Leasehold Mortgagees. "Leasehold Mortgagees" shall have the definition set forth in Section 5.1. jj. Lessee's MAI. "Lessee's MAI" shall have the definition set forth in Section 12.1. kk. Lessee's Review Period. "Lessee's Review Period" shall have the definition set forth in Section 11.7. ll. Lessor Mortgage. "Lessor Mortgage" shall have the definition set forth in Section 5.6. mm. Lessor's Cost of Money. "Lessor's Cost of Money" for any period during the Term shall mean an annual rate of interest equal to the lesser of: (i) two percent (2%) over the prime interest rate for such period of time, which shall be the prime interest rate then in effect or announced by Manufacturers Hanover Trust Company or any successor thereto or other major national bank directed by Lessor if such bank ceases to announce a prime rate, or (ii) the maximum per annum rate of interest permitted to be charged by then applicable law. nn. Lessor's MAI. "Lessor's MAI" shall have the definition set forth in Section 12.1. oo. Maui Land & Pineapple, Inc.'s Offer. "Maui Land & Pineapple, Inc.'s Offer" shall have the definition set forth in Section 11.7. pp. Mortgagee. "Mortgagee" shall have the definition set forth in Section 5.8. qq. New Lease. "New Lease" shall have the definition set forth in Section 5.8. rr. Off-Site Improvements. "Off-Site Improvements" shall have the definition set forth in Section 3.9. ss. Off-Site Parking Spaces. "Off-Site Parking Spaces" shall have the definition set forth in Section 12.5. tt. Person. "Person" shall mean an individual, partnership, corporation, trust, unincorporated association, joint stock company, or other entity or association. uu. Plans. "Plans" shall have the definition set forth in Section 4.1. vv. Preconditions for Construction. The "Preconditions for Construction" shall mean all of the conditions set forth in subsections 4.2(a) through 4.2(d). ww. Premises. The "Premises" shall mean the land described in Exhibit "A" (including the Tennis Site) attached hereto and incorporated herein by reference and all rights, easements, privileges and appurtenances belonging or appertaining to such land on the date hereof or at any time thereafter. xx. Qualified Purchaser. "Qualified Purchaser" shall have the definition set forth in Section 11.7(a). yy. Quiet Hours. "Quiet Hours" shall mean the hours between 10 p.m. and 7 a.m. each day. zz. RC's Offer. "RC's Offer" shall have the definition set forth in Section 11.7. aaa. Record and File. To "Record" a document shall mean to record such document in the Bureau of Conveyances of the State of Hawaii. To "File" a document shall mean to file such document in the Office of the Assistant Registrar of the Land Court of the State of Hawaii. bbb. Tennis Center. "Tennis Center" shall mean the approximately ten-court tennis center on the Tennis Site. ccc. Tennis Site. "Tennis Site" shall mean that portion of the Premises on which the Tennis Center is built. ddd. Term. "Term" shall have the definition set forth in Section 1.2. eee. Third Party Offer. "Third Party Offer" shall have the definition set forth in Section 11.7. fff. Third Party Sale Agreement. "Third Party Sale Agreement" shall have the definition as set forth in Section 11.7. ARTICLE II Demise and Quiet Enjoyment; Interrelationship of Interests 2.1 Demise. In consideration of the Lessee's agreement to, and acceptance of, the terms, conditions and covenants of this Lease and the rent set forth in this Lease below, Lessor hereby leases the Premises to Lessee for the Term, subject to all of the terms and conditions of this Lease. 2.2 Quiet Enjoyment. Upon observance and performance by Lessee of the covenants and conditions of this Lease and the Declaration of Covenants, Conditions and Restrictions, Lessor hereby covenants with the Lessee that the Lessee shall peaceably hold and enjoy the Premises for the Term without hindrance or interruption by the Lessor or any other person or persons claiming by, through, or under Lessor except as in this Lease expressly provided. 2.3 Interrelationship of Interests. The Lessor and the Lessee covenant and agree that the interest of the Lessee in the Hotel on the Premises and the interest of the Lessee in this Lease are not separately transferable by the Lessee. Thus, under no circumstances, may the Hotel be separated from the leasehold interest in the Premises; and the Hotel may only be transferred or encumbered together with the leasehold interest in the Premises; provided that a Lessee may sublet the Premises for tax or other legal compliance reason (such as to comply with restrictions on real estate investment trusts or pension funds). During the Term of this Lease, Lessee shall own all right, title, and interest in and to all improvements on the Premises and shall retain all rights to depreciation deductions and tax credits arising from the ownership of such improvements. However, upon termination of this Lease, title to all improvements in the Premises shall thereupon revert to the Lessor subject to Section 10.1. ARTICLE III Rental 3.1 Lessee to Pay Net Rent. Throughout the Term, Lessee shall pay to Lessor the annual minimum and percentage rents set forth in Sections 3.3 and 3.4 in the manner set forth in this Article, net of any and all taxes, rates, assessments, charges, impositions, and expenses payable under this Lease and without deductions of any kind whatsoever. Minimum and percentage rent shall not be reduced or abated except as expressly provided in this Lease. 3.2 Gross Revenues. The term "Gross Revenues" shall mean all revenues, receipts and income of any kind derived directly or indirectly by the Lessee in the form of cash, property or services (i.e., barter, "contra", accounts, and such alternatives to cash payments, which together with property and services, shall be valued at their fair market value) from or in connection with the Hotel or the Tennis Center (including any loss of income insurance proceeds paid to the Lessee or the Lessor in the event of casualty to the Hotel, or as a result of the occurrence of any other event making use of all or a portion of the Hotel impossible or impractical), and rentals or other payments under the Amendment and Restatement of Tennis Operating Agreement and/or the Golf Course Use Agreement, and from any condominium units managed by the Lessee in the Kapalua Resort Area, and from Concessionaires (but not including their gross receipts), whether on a cash basis or credit, paid or collected, determined in accordance with generally accepted accounting principles and Uniform System; excluding, however: (i) funds furnished by the Owner under the Hotel Operating Agreement, (ii) interest accrued on amounts in the reserve under the Hotel Operating Agreement, (iii) federal, state and municipal excise, sales, use and room taxes collected directly from patrons and guests or as part of the sales price of any foods, services or displays, such as gross receipts, admissions, cabaret or similar or equivalent taxes and paid over to federal, state or municipal governments, (iv) gratuities, (v) proceeds of insurance (excluding loss of income insurance proceeds which shall be included as a part of Gross Revenues) and condemnation, (vi) value of free or any discounted portion of rooms or services under the Amendment and Restatement of Tennis Operating Agreement and/or the Golf Course Use Agreement or complimentary policies of the Hotel approved by the Lessor, (vii) any loan proceeds, and (viii) proceeds from the sale of the Hotel or the improvements and furniture, fixtures and equipment owned by the Lessee. When there are Affiliated Concessionaires operating at the Hotel, if the rental rate to any Affiliated Concessionaire is lower than the rental rate which is being charged another third party, non-Affiliated Concessionaires operating a business similar to those of the Affiliated Concessionaires in a location at the Hotel similar to that of the Affiliated Concessionaire, the Gross Revenues from such Affiliated Concessionaire shall be deemed to be the same as the rental rate being charged such other Concessionaire, and Gross Revenues shall be computed as so determined. If there is no third party non-Affiliated Concessionaire operating a similar business in a similar location to that of an Affiliated Concessionaire, then for purposes of determining Gross Revenues, the Gross Revenues from such Affiliated Concessionaire shall be determined according to rental rates that would have been charged to a non-Affiliated Concessionaire in an "arm's length" negotiation to acquire the same concession for the same business in the same location as given such Affiliated Concessionaire. Gross Revenues shall be reduced for actual bad debts reasonably determined to be uncollectible by the Lessee, which reduction shall not include payments for any bad debt reserve or sinking fund or similar fund or reserve, for bad debts. If any debts previously deducted as uncollectible shall subsequently be collected, such collected amounts shall be included in Gross Revenues in the fiscal year collected after deducting reasonable collection expenses actually incurred. "Gross Revenues" shall be determined on an annual basis, except that in computing Estimated Monthly Percentage Rent, Gross Revenues shall be determined either just for that month or on a quarterly basis, as the case may be. 3.3 Minimum Rent. Commencing January 1, 1996, and continuing through the Term of this Lease, no minimum rent shall be paid hereunder. 3.4 Percentage Rent ("Gross Annual Percentage Rent"). a. January 1, 1995 Through December 31, 1998. For each calendar year or portion thereof during the period from January 1, 1995 through December 31, 1998, the percentage rent shall be an amount equal to 2.5% of the Gross Revenues for that year, or a prorated amount for any portion of such year. b. January 1, 1999 Through December 31, 2094. For each year during the period from January 1, 1999, through December 31, 2094, the percentage rent shall be an amount equal to 1% of Gross Revenues for that year; provided, however, if the total Gross Revenues for any twelve (12) consecutive calendar months during this period exceeds SIXTY MILLION AND NO/100 DOLLARS ($60,000,000), the percentage rent for the remainder of the Term shall increase, effective the first month following such twelve (12) consecutive months, to an amount equal to 1.5% of Gross Revenues. Lessor and Lessee acknowledge and agree that, prior to the date of this Second Amended and Restated Hotel Ground Lease, such target was achieved and, therefore, the percentage rent payable for each year of the remainder of the Term is 1.5% of Gross Revenues. c. Records and Annual Statement. Lessee shall maintain and keep full and accurate records on the Premises of all business under the control of Lessee done or transacted in, upon or from the Premises which may reasonably assist Lessor in determining the percentage rent to be paid by Lessee under this Lease, and shall retain and preserve such records on the Premises(or the Island of Maui) for at least five (5) years after submission of the annual audited statement provided for in this paragraph and permit Lessor upon reasonable advance notice to inspect such records at any and all reasonable times during business hours. Lessor shall also be given access at the Hotel upon reasonable advance notice at any and all reasonable times during business hours to any other books or records of Lessee, and to any other books or records of Concessionaires, including but not limited to Affiliated Concessionaires, that may be necessary to enable Lessor to make a full and proper audit of the Gross Revenues derived from all business done in, upon or from the Premises. The Lessee shall submit to the Lessor on or before the expiration of ninety (90) days following the end of each calendar year of the Term after the commencement of the 1st Rental Year of the Term, a complete statement (the "Annual Statement") audited and signed by a certified public accountant firm of recognized national and industry stature, entirely at Lessee's sole expense; provided, however, Lessor and Lessee agree and acknowledge that Lessee may fulfill such requirement for an audited Annual Statement if Lessee provides to Lessor the audited and signed Annual Statement given by the then current Hotel Operator to Lessee pursuant to the terms of any hotel operating agreement by and between the then current Hotel Operator and Lessee. The Annual Statement shall be certified and signed by an officer of Lessee, showing in reasonable detail satisfactory to the Lessor Gross Revenues, prior to the deductions and exclusions from Gross Revenues permitted under Section 3.2, and a reasonably detailed statement of the deductions and exclusions from Gross Revenues claimed by the Lessee, for the preceding year, and the amount of Gross Annual Percentage Rent due under this Lease for such year. The Lessor agrees to treat all such information, records and reports as confidential and, except in response to a valid court subpoena or proceeding, shall not divulge any of the same to third parties without the prior written consent of the Lessee, which consent may be unreasonably withheld. In addition to the Annual Statement, Lessor shall have the right to audit, at Lessor's expense except as provided in the immediately following sentence, all records of Lessee and Concessionaires relating to the Hotel and the concessions, and statements furnished by the Lessee for purposes of determining percentage rent. If such an audit shall reveal errors or improper entries or similar facts which result in a difference in annual percentage rent exceeding two percent (2%), all costs of such audit shall be borne by the Lessee. The Lessor's right to audit shall include the right to take such steps as are generally deemed proper in auditing practices and shall include the right to audit Concessionaires, including but not limited to Affiliated Concessionaires. Lessee shall cooperate in any audit made by Lessor. After completion of the audit, whichever party is then owing money for an adjusting refund to the other by the audit shall pay the amount shown to be due for such refund by the within fourteen (14) days after completion of the audit by cash payment to Lessor (together with interest in accordance with Section 11.13 from the date the moneys should have been paid) or by credit against the next monthly rents due if to Lessee. Completion of the audit shall be deemed to occur at the time of delivery of the auditor's report to both Lessor and the Lessee. If the Lessor is due an adjusting refund, the Lessee shall pay the same in cash to the Lessor (together with interest in accordance with Section 11.13 from the date the rent adjustment should have been paid) at the time of delivery of the Annual Statement. d. Accounting Method. Lessee shall keep its books of account in accordance with generally accepted accounting principles. 3.5 Access to Guest Lists. Lessee understands that Lessor may desire from time to time to distribute information with respect to the Kapalua Resort Area ("KRA Advertising") to former guests of the Hotel. Lessor understands that (i) Lessee is vitally interested in the image of the Hotel and the Kapalua Resort Area presented to former and prospective guests of the Hotel, and (ii) Lessee's guest lists constitute valuable and confidential trade secrets of Lessee. Accordingly, Lessor shall not be entitled to such guest lists but may require Lessee to distribute, at Lessor's cost, any KRA Advertising to the persons listed on Lessee's guest lists provided that such KRA Advertising consists of advertising and promotion of the Kapalua Resort Area or projects located therein, is of a first-class nature and quality consistent with the Kapalua luxury resort image, and does not refer to any hotel other than the Hotel or to any villa, condominium and/or apartment rental program other than that operated by Lessee. Any questionnaires must be general without naming the Hotel. 3.6 Gross Excise Tax. In addition to the rents, taxes and all other charges of every description payable hereunder, the Lessee shall pay the Lessor, as additional rent, together with each payment of rent or any other payment required hereunder, an amount equal to the amount of excise taxes payable by the Lessor pursuant to the State of Hawaii General Excise Tax Law, as it may be amended from time to time, or any successor or similar law, assessed or based on gross income of every description actually or constructively received (to the extent taxed) by the Lessor under this Lease, including without limiting the generality of the foregoing: (i) the rents payable hereunder; (ii) any amount directly or constructively received by the Lessor (to the extent so taxed) by reason of payment by the Lessee to the Lessor, governmental agency or others of real property taxes, insurance premiums or any other charges or costs hereunder, (iii) amounts paid to Lessor pursuant to this provision. Said amount payable to Lessor shall take the character of the gross income on which it is based and shall be an amount which, when added to such rental or other payment, shall yield to the Lessor, after deduction of all such tax payable by the Lessor with respect to all such rent and other payments, a net amount equal to that which the Lessor would have realized from such payments had no such tax been imposed. 3.7 Payment. a. Percentage Rent. Annual percentage rent for each year for which such rent is due as provided in Section 3.4 shall be paid in monthly installments of "Estimated Monthly Percentage Rent", computed for each month of such year, due on the 12th day of the month after the month for which the Estimated Monthly Percentage Rent is computed. Any adjusting payments required will be made at the calendar year end at the time of delivery to Lessor of the Annual Statement. If the Lessee is due an adjusting refund from the Lessor, the Lessor will make a like credit against the next monthly rents unless the Lessor disputes the Annual Statement. If the Lessor is due an adjusting refund, the Lessee shall pay the same in cash to the Lessor (together with interest in accordance with Section 11.13 from the date the rent adjustment should have been paid) at the time of delivery of the Annual Statement. b. Currency; Agent. All rent and all other charges payable by Lessee under this Lease shall be paid in lawful currency of the United States of America to the Lessor or to such agent as shall be designated by the Lessor in written notice to the Lessee at least twelve (12) days prior to any rent payment due date. 3.8 Late Payment. If Lessee fails to pay the percentage rent within ten (10) days after such rent is due, Lessor shall be entitled to a "late charge" equal to four percent (4%) of the rent due to compensate Lessor for the administrative burden of handling the late payment of rent. In addition, interest shall be charged on such rent in accordance with Section 11.13. 3.9 Off-Site Improvements. Lessor has completed all off-site improvements described in Exhibit "B" attached hereto and incorporated herein by reference (the "Off-Site Improvements"), all in accordance with applicable government requirements. Lessor and Lessee shall, subject to Lessor's and Lessee's approval, join in any grant of easements which may be necessary to bring any utility services from the boundaries of the Land to the improvements thereon. Lessor expressly acknowledges and agrees that it shall maintain, at Lessor's sole expense, all Off-Site Improvements owned by Lessor. ARTICLE IV Construction of Improvements 4.1 Construction Requirements. Prior to Commencement of Construction on the Premises of any construction for material extension and/or alterations on the outside dimension of the Hotel in excess of ONE MILLION AND NO/100 DOLLARS ($1,000,000) ("Construction"), Lessee shall comply with all of the conditions set forth in Sections 4.1(a) and 4.1(b) and all of the Preconditions for Construction set forth in Sections 4.2(a) through 4.2(d); provided, however, this section 4.1 shall not apply to any interior additions and/or improvements to the Hotel of THREE MILLION AND NO/100 DOLLARS ($3,000,000) or less, interior renovations, any exterior maintenance, and any furniture, fixtures, and equipment. a. Lessor's Approval. Lessee shall inform Lessor of the nature of any Construction which Lessee is then planning to construct on the Premises prior to Commencement of Construction thereof. Lessee shall, prior to commencing any Construction, submit a copy of the layout, location, elevation and renderings ("Plans") for such Construction for Lessor's approval, which shall not be unreasonably withheld. Lessor shall approve or disapprove the Plans within thirty (30) days after Lessee delivers them to Lessor. If Lessee does not receive written disapproval of the Plans within such thirty (30) day period, the Plans shall be deemed approved by the Lessor. If Lessor disapproves in writing of such Plans, Lessor shall, within such thirty (30) day period, give the Lessee in reasonable detail the reasons why. All such Plans shall also conform to the provisions of the Declaration of Covenants, Conditions and Restrictions pertaining to the Premises. b. Lessee's Notification of Architect and Contractor. The Lessee shall notify the Lessor of the identity of the architect and contractor to be utilized for the Construction. 4.2 Pre-Conditions for Construction. Prior to construction on the Premises of any Construction, Lessee shall comply with all of the conditions set forth in Sections 4.2(a) through 4.2(d) (the "Preconditions for Construction"). a. Performance and Payment Bonds. Lessee shall deposit with the Lessor certificates or other satisfactory evidence that the contractor has procured one or more customary payment and performance bonds for a total amount not less than one hundred percent (100%) of the total cost of the Construction, naming the Lessor and Lessee as co-obligees, in customary form and content and with a surety or sureties approved by Lessor and authorized to do business in Hawaii, guaranteeing the full and faithful performance of the construction contract for such construction free and clear of all mechanics' and materialmen's liens and the full payment of all subcontractors, labor and materialmen. b. Governmental Approvals. Lessee shall furnish Lessor with evidence (which may be in form of an opinion of counsel reasonably satisfactory to Lessor) that all governmental approvals necessary to commence the construction have been obtained including without limitation the issuance of a building permit for such construction. c. Financing Commitments. Lessee shall provide Lessor with a construction budget for proposed construction projects and evidence that there are funds available and committed to Lessee sufficient to pay for one hundred percent (100%) of the total direct and indirect costs of construction of the entire construction. Such evidence may include, but not be limited to, an executed copy of the building loan agreement or its equivalent, and an executed copy of Acceptable Loan Commitments for interim financing for such construction and any permanent financing necessary to permit the Lessee to finance the repayment of the interim loan. d. Construction Liability Insurance. In addition to the requirements of part A of Article VI and the requirements of parts B and C of Article VI, beginning with the Commencement of Construction and continuing until all construction is completed, Lessee shall maintain a comprehensive general liability insurance policy in customary form and content and with an insurance company authorized to do business in Hawaii and insuring the Lessor and Lessee against at least all of the following: loss or damage to third parties or their property from excavation, pile driving, loss of subterranean support, boiler explosion as well as all other hazards normally insured against in the construction industry. Prior to the Commencement of Construction, Lessee shall deliver to Lessor certificates of insurance certifying that such insurance is in full force and effect. 4.3 Change Orders. a. Throughout the course of any Construction for which Lessee is required under this Lease to comply with the requirements of Sections 4.1(a) and 4.1(b) above, any proposed substantial and material variation in such Plans previously approved by Lessor shall be made pursuant to supplemental plans and specifications and "change orders", as that term is defined in the AIA General Conditions, and Lessee shall submit for the Lessor's approval in the same manner as in Section 4.1(a) and retention copies of any and all such supplemental plans and specifications and proposed change orders and obtain such approval before undertaking any such Construction. b. If the Lessee proposes to enter into an "additive change order" as that term is used in the AIA General Conditions, which additive change order would have the effect of depleting entirely the amount provided for contingencies in the construction budget, then prior to the execution of such additive change order, Lessee shall make funding arrangements reasonably satisfactory to Lessor to fund the additional sums required to cover the amount by which the construction budget, after all contingencies have been depleted or committed, is increased by the additive change order. Lessee must make such funding arrangements reasonably satisfactory to lessor prior to the execution of any such additive change order. 4.4 Force Majeure. If any performance or condition required to be completed by Lessor or Lessee under the terms of this Lease is delayed by war, riots, insurrection, earthquake, fire, flood, Acts of God, or other similar disaster, by governmental ruling, regulation or law, by strike in the State of Hawaii or on the Island of Maui, or by general transportation or shipping strikes, or by strikes or shortages which affect the delivery of materials critical to construction on the Premises, which conditions are not within such party's control and are not such party's fault, then the time for the completion of such performance or such condition shall be extended by a time period equal to the duration of such delay; provided, however, that the Lessee's obligations to pay any and all sums due under this Lease, including but not limited to percentage rent, shall not be affected by any such extension and the time for payment of such sums shall not be so extended; and provided further, that in no event shall the Term be so extended. 4.5 Minimum Interference During Construction. a. During the portion of the Term while any construction on the Premises is underway, Lessee shall take all steps and precautions reasonably possible to provide that Lessee's construction activities do not interfere with the operation of the Kapalua Resort Area or result in inconvenience to guests, tenants and residents in the Kapalua Resort Area, including but not limited to the following: (i) Except under emergency conditions, Lessee shall obtain the Lessor's approval, which approval will not be unreasonably withheld, for any anticipated disruption of water, electricity, sewerage, traffic or other utility services to such guests, tenants or residents at least fourteen (14) days prior to such disruption. Lessee shall minimize the frequency and duration of such disruptions and shall notify (through the Hotel Operator, if a hotel, and through the condominium association, if a condominium project) all affected utility users at least ten (10) days prior to such disruption. (ii) If Lessee's construction activities result in damage to water or sewer lines, electrical systems, streets or other utility systems, Lessee shall immediately notify Lessor of such damage. If such damage occurs, Lessor may either (1) require that Lessee immediately repair such damage at Lessee's sole expense or (2) repair such damage and require that Lessee pay all of Lessor's reasonable expenses. Lessor and Lessee agree that in addition to repair or payment of expenses as set forth in the immediately preceding sentence, if such damage to any utility facilities results in an interruption in utility services not approved and announced as provided in clause (i) above, Lessee shall also pay for such interruption any actual damages incurred. (iii) If piles must be driven during any construction on the Premises, Lessee shall take all reasonable precautions to reduce noise and shall use the quietest pile driving equipment reasonably available in Hawaii under the then current state of technology and shall engage in such activity only between the hours of 9 o'clock a.m. and 4 o'clock p.m. (iv) Lessee shall institute noise and dust controls at all times during the construction to minimize the emission of noise and dust on or from the Premises, including but not limited to observing and requiring compliance with the Lessor's Quiet Hours. Lessee shall incorporate appropriate provisions in its construction contract to implement the conditions set forth in subsections (i) through (iv) above, including without limitation, a provision requiring that Lessee's contractor comply with Lessee's noise and dust controls. Lessee agrees that Lessee's covenant to indemnify Lessor set forth in Section 11.9 below shall include the indemnification of Lessor for any liability or expenses arising from dust, noise, or utility interruptions caused by construction on the Premises. b. If Lessor has any construction activities of its own which affect the Premises, Lessor shall also comply with the provisions of Section 4.5(a). 4.6 Risk of Obtaining Governmental Approvals for Construction. It is specifically understood and agreed that the risk of obtaining all governmental approvals needed for construction, including but not limited to the risk of down- zoning of the Premises, is on the Lessee. Failure to obtain such approvals and Lessee's resulting inability to construct any improvements shall in no event terminate the Lessee's obligation to make the payments required in this Lease, including but not limited to the obligation for rent, or extend the time for or reduce the amount of any rental or other payment due under the Lease. 4.7 Delivery of Plans and Specifications Upon Completion. After completion of any construction on the Premises required to be made under the Preconditions for Construction, Lessee shall provide Lessor with a copy of a complete set of plans and specifications for the entirety of such construction certified by a licensed professional architect as showing the completed construction "as built", all at Lessee's sole expense. ARTICLE V Financing 5.1 Right to Mortgage. a. Lessee may, from time to time, with the consent of Lessor, which consent shall not be unreasonably withheld, hypothecate, mortgage, pledge or alienate Lessee's leasehold estate and rights hereunder, and/or may cause a pledge of its shares or other ownership interests, as security for payment of any indebtedness of Lessee. Lessor's consent shall be deemed to be given for any hypothecation, mortgage, pledge or alienation of Lessee's leasehold estate and rights hereunder, and/or pledge of Lessee's shares or other ownership interests, as security for payment of any indebtedness of Lessee, to an Institutional Lender, so long as the indebtedness to be thereby secured, together with any other then-existing indebtedness of Lessee, does not exceed eighty-five percent (85%) of the fair market value at such time of the Hotel and Lessee's rights hereunder; provided, however that in no event may the aggregate principal amount of mortgages encumbering Lessee's leasehold estate outstanding at the time of granting of any such mortgage, exceed eighty percent (80%) of the fair market value at such time of the Hotel and Lessee's rights hereunder. The holder or holders of any such lien or pledge shall be referred to herein as "Leasehold Mortgagees". b. A Leasehold Mortgagee or its assignee may enforce its mortgage, lien or pledge and acquire title to the leasehold estate or ownership or control of Lessee in any lawful way and, pending Foreclosure of such lien, the Leasehold Mortgagee or its assigns may take possession of and operate the Premises, performing all obligations to be performed by Lessee. Upon Foreclosure of such lien, the Leasehold Mortgagee or any wholly owned affiliate of the Leasehold Mortgagee may purchase or acquire the leasehold estate and rights hereunder or the stock or other ownership interests of Lessee (the Leasehold Mortgagee or any such affiliate thereof being hereinafter referred to as a "Leasehold Mortgagee Foreclosure Purchaser"), without the consent of the Lessor and without any obligation to comply with the provisions of Section 11.7(d) hereof, provided that the Leasehold Mortgagee Foreclosure Purchaser must meet the requirements of Section 11.7(a) clauses (i), (ii), (iii) and (iv) if foreclosing on the mortgage on the leasehold estate and meet the requirements of Section 11.7(a) clauses (i), (ii) and (iii) if foreclosing on a pledge of the stock or other ownership interest of Lessee. After completion of Foreclosure, a Leasehold Mortgagee Foreclosure Purchaser may sell and assign the leasehold estate hereby created and the rights of Lessee hereunder, or ownership or control of Lessee, but any purchaser or assignee must meet the requirements Section 11.7(a) clauses (i), (ii), and (iii) and, if transferring the leasehold estate, clause (iv) and any such sale which occurs more than twelve (12) months after completion of Foreclosure must comply with the provisions of Section 11.7(d) and any such sale or transfer prior to twelve months after completion of Foreclosure shall not be subject to the provisions of Section 11.7(d). In addition, upon Foreclosure of a Leasehold Mortgage, a purchaser or transferee which is not the Leasehold Mortgagee or a wholly-owned affiliate of a Leasehold Mortgagee shall not be subject to the provisions of Section 11.7(d) hereof, but any future sale or transfer by such purchaser or transferee shall be subject to Section 11.7 (d) hereof. Any Leasehold Mortgagee Foreclosure Purchaser acquiring such leasehold estate shall be liable to perform the obligations imposed on Lessee by this Lease only during the period such Person has ownership of said leasehold estate or possession of the Premises. 5.2 Notice to and Rights of Leasehold Mortgages. a. When giving notice to Lessee with respect to any default hereunder, Lessor shall also serve a copy of each such written notice upon any Leasehold Mortgagee who shall have given Lessor a written notice specifying its name and address. If Lessee shall default in the performance of any of the terms, covenants, agreements and conditions of this Lease on Lessee's part to be performed, any Leasehold Mortgagee shall have the right, within the grace period available to Lessee for curing such default, plus such additional grace periods which may be allotted to the Leasehold Mortgagee, to cure or make good such default or to cause the same to be cured or made good whether the same consists of the failure to pay rent or the failure to perform any other obligation and Lessor shall accept such performances on the part of any Leasehold Mortgagee as though the same had been done or performed by the Lessee. b. In case of a default by Lessee in the payment of money, Lessor will take no action to effect a termination of this Lease by reason thereof unless such default has continued beyond forty (40) days after Lessor shall have served a copy of such written notice upon Lessee and any Leasehold Mortgagee, it being the intent hereof and the understanding of the parties that any Leasehold Mortgagee shall be allowed up to, but not in excess of, forty-five (45) days to cure any default of Lessee in the payment of rent or in the making of any other monetary payment required under the terms of this Lease in addition to the ten (10) days granted to Lessee to make such payments. c. In the case of any other default by Lessee, Lessor will take no action to effect a termination of this Lease by reason thereof unless Lessee or any Leasehold Mortgagee fails, within forty-five (45) days after written notice from Lessor to any Leasehold Mortgagee of Lessor's intention to terminate the Lease: (i) to commence to cure such default, if such default is susceptible of being cured by the Leasehold Mortgagee without the Leasehold Mortgagee obtaining possession of the Premises; (ii) to commence and diligently pursue efforts to obtain possession of the Premises (including possession by a receiver) and to cure such default in the case of a default which is susceptible of being cured when the Leasehold Mortgagee has obtained possession thereof; or (iii) to institute foreclosure proceedings and to complete such foreclosure proceedings or otherwise acquire Lessee's interest under this Lease, or the right of possession hereunder, with reasonable and continuous diligence in the case of a default which is not so susceptible of being cured by the Leasehold Mortgagee, provided it is the intention hereof and the understanding of the parties that any Leasehold Mortgagee shall be allowed up to, but not in excess of, forty-five (45) days in addition to the time period granted to Lessee pursuant to Section 9.1(b) to commence action under Sections 5.2(c)(i)-(iii); and provided, further, that a Leasehold Mortgagee shall not be required to continue such possession or continue such foreclosure proceedings if the default which prompted the service of such a notice has been cured. d. The time available to a Leasehold Mortgagee to initiate foreclosure proceedings as aforesaid shall be deemed extended by the number of days of delay occasioned by judicial restriction against such initiation or occasioned by other circumstances beyond the Leasehold Mortgagee's control. e. During the period that a Leasehold Mortgagee shall be in possession of the Premises and/or during the pendency of any foreclosure proceedings instituted by a Leasehold Mortgagee, the Leasehold Mortgagee shall pay or cause to be paid the rent specified in Article III above and all other charges of whatsoever nature payable by Lessee hereunder which have been accrued and are unpaid and which will thereafter accrue during said period. Following the acquisition of Lessee's leasehold estate by the mortgagee or a Qualified Purchaser, either as a result of foreclosure or acceptance of an assignment in lieu of foreclosure, or the right of possession hereunder, the Leasehold Mortgagee or party acquiring title to Lessee's leasehold estate shall, as promptly as possible, commence the cure of all defaults (other than money defaults, it being understood that any such money defaults would have already been cured and that thereafter all rent and other money items would be kept current) hereunder to be cured and thereafter diligently process such cure to completion, except such defaults which cannot in the exercise of reasonable diligence be cured or performed by the Leasehold Mortgagee or party acquiring title to Lessee's leasehold estate, whereupon Lessor's right to effect a termination of this Lease based upon the default in question shall be deemed waived. Any default not susceptible of being cured by the Leasehold Mortgagee or party acquiring title to Lessee's leasehold estate shall be, and shall be deemed to have been waived by Lessor upon completion of the foreclosure proceedings or acquisition of Lessee's interest in this Lease by any Qualified Purchaser (who may, but need not be, the Leasehold Mortgagee) at the foreclosure sale, or who otherwise acquires Lessee's interest from the Leasehold Mortgagee or by virtue of a Leasehold Mortgagee's exercise of its remedies. Any such purchaser, or successor of purchaser, shall be liable to perform the obligations imposed on Lessee by this Lease incurred or accruing only during such purchaser's or successor's ownership of the leasehold estate or possession of the Premises. f. Nothing herein shall preclude Lessor from exercising any of Lessor's rights or remedies with respect to any other default by Lessee during any period of any such forbearance, subject to the rights of any Leasehold Mortgagee as herein provided. g. All notices by Lessor to Leasehold Mortgagees shall be given by registered or certified mail, return receipt requested, addressed to the Leasehold Mortgagees at the address last specified to Lessor by the Leasehold Mortgagees, and any such notice shall be deemed to have been given and served as provided in Section 11.5. h. If two or more Leasehold Mortgagees each exercise their rights hereunder and there is a conflict which renders it impossible to comply with all such requests, the Leasehold Mortgagee whose Leasehold Mortgage would be senior in priority if there were a foreclosure shall prevail. If any Leasehold Mortgagee pays any rental or other sums due hereunder which relate to periods other than during its actual ownership of the leasehold estate, such Leasehold Mortgagee shall be subrogated to any and all rights which may be asserted against Lessor with respect to such periods of time. 5.3 New Lease if No Bankruptcy. If this Lease is terminated or cancelled for any reason where the Leasehold Mortgagee has not been given an opportunity to cure pursuant to Section 5.2 and if Section 5.8 below is not applicable, any mortgagee shall have the right, within thirty (30) days after the receipt of notice of such termination, to demand a new Lease covering the Premises for a term to commence on the date of procurement by Lessor of possession of the Premises and to expire on the same date as this Lease would have expired if it had otherwise continued uninterrupted until its scheduled date of termination, and containing all of the same rights, terms, covenants, considerations, unexpired options, and obligations as set forth in this Lease. Such new lease shall be executed and delivered by Lessor to the Leasehold Mortgagee within thirty (30) days after receipt by Lessor of written notice from the Leasehold Mortgagee of such election and upon payment by the Leasehold Mortgagee of all sums owing by Lessee under the provisions of this Lease (less any rent and other income actually collected by Lessor in the meantime from subtenants or other occupants of the Premises) and upon performance by the Leasehold Mortgagee of all other obligations of Lessee under the provisions of this Lease with respect to which performance is then due and which are susceptible of being cured by a Leasehold Mortgagee. After such termination of this Lease and prior to the expiration of the period within which the Leasehold Mortgagee may elect to obtain such new lease from Lessor, Lessor shall refrain from terminating any existing subleases and from executing any new subleases without the prior written consent of all Leasehold Mortgagees, and Lessor shall account to the Leasehold Mortgagee for all rent collected from subtenants during such period. Any new lease granted to a Leasehold Mortgagee shall enjoy the same priority as this Lease over any mortgage or other lien created by Lessor, in its capacity as Lessor, before or after the date of such new lease. 5.4 Consent of Mortgagee. Without the prior written consent of all Leasehold Mortgagees, neither this Lease nor the leasehold estate created by this Lease shall be surrendered, cancelled, modified or amended (except with respect to termination pursuant to any eminent domain proceedings concerning the whole of the Premises, as provided in Article VII below), unless the mortgagee has had an opportunity to cure any default of Lessee pursuant to Section 5.2 and has failed to do so. No agreement purporting to surrender, cancel, terminate, modify or amend this Lease without such consent shall be valid or effective. 5.5 No Merger. No merger of Lessee's leasehold estate into Lessor's fee title shall result or be deemed to result by reason of ownership of Lessor's or Lessee's estates by the same party or by reason of any other circumstances, without the prior written consent of the Leasehold Mortgagee, unless such merger results from a default by Lessee where the Leasehold Mortgagee has been given an opportunity to cure and has failed to do so. 5.6 Financing by Lessor. Any mortgage made by Lessor (referred to herein as "Lessor Mortgage") covering its interest in the Premises shall be subject to the rights of Lessee and any Leasehold Mortgagees in the Premises, as set forth in this Lease. Lessor agrees that any such Lessor Mortgage shall include a clause stating that such Lessor Mortgage is so subject as set forth above, but any such Lessor Mortgage shall automatically be subject to this Lease regardless of whether or not any such clause is in fact included in such Lessor Mortgage. The basic substance of the foregoing provisions shall be included in the short form Lease described in Section 11.23. If any proceedings are brought for the foreclosure of, or in the event of exercise of the power of sale under, any Lessor Mortgage or if Lessor sells, conveys or otherwise transfers its interest in the Premises, Lessee hereby agrees to attorn to whatever party legally succeeds to the interest of Lessor in the Premises. 5.7 [Intentionally deleted] 5.8 Option for New Lease if Bankruptcy. a. If there is an actual or deemed rejection of the Lease (or of the new lease hereinafter described), under any provision of the Bankruptcy Code (Title 11, United States Code) or any successor law having similar effect, which results in a termination of the Lease (or such new lease), Lessor agrees that the senior leasehold mortgagee (the "Mortgagee") shall have the right, for a period of sixty (60) days subsequent to such termination, to demand from Lessor a new lease of the Premises (the "New Lease"). The New Lease shall be for a term commencing on the date the Lease was terminated and expiring on the date stated in the Lease as the fixed date for the expiration thereof. The rental and all provisions, covenants and conditions of the New Lease shall be the same as the rental, provisions, covenants and conditions of the Lease as of the date of termination thereof, except that the liability of the Mortgagee under the New Lease shall not extend beyond the period of its occupancy thereunder. As the Lessee under the New Lease, the Mortgagee (with respect to the Lessor) shall have the same right, title and interest in and to the buildings and improvements on the Premises as the Lessee had under the Lease immediately prior to its termination. b. If the Mortgagee shall elect to demand such New Lease, the Mortgagee shall, within such period, deliver written notice to the Lessor of such election; and thereupon, within fifteen (15) days thereafter, the Lessor and the Mortgagee shall execute and deliver such New Lease upon said term, rental, provisions, covenants and conditions, and the Mortgagee shall, at the time of the execution and delivery of such New Lease, pay to the Lessor all rental, charges, and taxes, owing by the Lessee to the Lessor under the terms of the Lease immediately prior to the termination of the Lease together with reasonable attorneys' fees and expenses incurred by the Lessor in connection with the rejection and termination of the Lease and the preparation, execution and delivery of the New Lease, and all rentals, charges and taxes owing by the Mortgagee, as lessee under such New Lease. The Mortgagee shall also indemnify and hold the Lessor harmless from and against all claims, damages, losses and expenses, including reasonable attorneys' fees arising out of or in connection with the termination of the Lease and the issuance of the New Lease. The Lessor may, at its option, require the Mortgagee to obtain an appropriate order from the Bankruptcy Court. c. The Lessor shall be under no obligation to accept rent from or otherwise agree to an attornment from any subtenants of the Premises whose rental agreements or subleases shall have terminated upon the termination of the Lease. If the Mortgagee demands such New Lease as provided herein, the New Lease will be issued by Lessor subject to (and together with a quitclaim assignment of Lessor's interests in) any and all subleases or rights or tenants in possession and the Mortgagee shall have the rights and obligations as landlord or sublessor with respect to such sublessees or tenants and the same obligations to indemnify and hold the Lessor harmless from any and all expenses connected with and Claims from such sublessee or tenants, as the Lessee had under the Lease (to the same extent and effect as if the Lease had been assigned to the Mortgagee). The Mortgagee shall be given credit for any net rents and income actually collected and accepted by the Lessor from such sublessees or tenants of the Premises. d. Any and all mortgages, or other lien, on the Lessor's interest in the Premises, subsequent to the date of filing or recording, to the extent permitted by law, shall be subject and subordinate to this Lease. Any New Lease issued pursuant to the provisions hereof, to the extent permitted by law, shall be superior and prior to any such mortgage or other lien. 5.9 [Intentionally Deleted] ARTICLE VI Insurance A. Insurance of Buildings. 6.1 Fire and Hazard Insurance. In order to secure the rents due the Lessor, the Lessee shall, at its own expense, at all times during the Term keep all buildings, other improvements and fixtures, by whomsoever installed or constructed, existing on the Premises on the date of the Lease or at any time thereafter, insured against (a) the "all risks" coverage (including, if available and without exorbitant costs, earthquake, flood, boiler, machinery, and war insurance), and (b) such other hazards or risks which are covered by customary insurance by similar hotels in the area (including the Kaanapali area of Maui). All such insurance shall be in an amount equal to the full replacement cost of such buildings, improvements and fixtures without deduction for depreciation, with an "agreed amount endorsement" and with an "inflation guard" endorsement. All such insurance shall be with an insurance company or companies authorized to do business in Hawaii, naming Lessor, any mortgagee of Lessor, and any mortgagee of Lessee, as additional insureds as their interests may appear. Loss shall be adjusted with Lessee. 6.2 Payment of Insurance Proceeds. Every policy of the insurance described in Section 6.1 shall be issued to cover and insure all the several interests in the buildings, improvements, fixtures and rent required to be insured in Section 6.1 of the Lease, the Lessor and any Mortgagees under any mortgage of this Lease, as their respective interests are defined in this section below, and shall be made payable in case of loss or damage to the respective parties as their interests may appear. The respective interest of the Lessor, the Lessee and any Mortgagees in any proceeds of the insurance required in Section 6.1 above payable for insured loss or damage shall be fixed and determined as of the date of such loss or damage. 6.3 Use of Insurance Proceeds. In case the buildings, improvements or fixtures required to be insured in Section 6.1 or any part thereof shall be destroyed or damaged by fire or such other casualty required to be insured against, then and as often as the same shall happen, all proceeds of such insurance shall be available for and used with all reasonable dispatch by the Lessee in rebuilding, repairing, replacing or otherwise reinstating the buildings, improvements or fixtures so destroyed or damaged in a good and substantial manner according to the plan and elevation thereof, or according to such modified plan as shall be approved under Section 4.1(a), and to pay the rent due the Lessor. If the available insurance proceeds shall be insufficient for rebuilding, repairing, replacing or otherwise reinstating such buildings, improvements or fixtures in the manner provided in this section above, then the Lessee shall provide the balance of all funds required to completely rebuild, repair, replace or otherwise reinstate such buildings, improvements or fixtures. Lessee shall undertake promptly to reinstate the building or buildings, or portions thereof, so destroyed or damaged according to the original plan and elevation thereof, or according to such modified plan as shall be approved by Lessor pursuant to Section 4.1(a). If a casualty under this Section 6.1 shall occur in the last ten (10) years of the Term of this Lease, the Lessee shall have the option of notifying the Lessor that the Lessee does not intend to rebuild the buildings, improvements, or fixtures so destroyed, but rather elects to terminate the Lease as of the date of the casualty, by giving Lessor written notice at least thirty (30) days after the date of the casualty, and then Lessee will, at its own expense, pay all real property taxes and any assessments then outstanding and shall pay over all insurance proceeds to the Lessor, except if requested by Lessor, Lessee shall use the insurance proceeds to promptly remove from the Premises, all buildings, improvements and trade fixtures, and restore the Land then remaining to good, orderly and sanitary condition and even grade, and upon so doing the Lessee shall then surrender any remaining balance of the insurance proceeds (if any), surrender this Lease and Lessee shall be relieved of further performance under this Lease. If the available insurance proceeds shall be insufficient, then Lessee shall provide the balance of all funds required to remove from the Premises, all buildings, improvements and trade fixtures, and restore the Land then remaining to good, orderly and sanitary condition and even grade. 6.4 Uninsured Casualty and Abatement of Rent. If a portion of the Hotel, as it exists from time to time, the value of which exceeds ten percent (10%) of the value of the entire Hotel, shall be rendered untenantable by casualty not required by this Lease to be insured against, Lessee shall not have any obligation to rebuild, repair or otherwise reinstate such buildings. If Lessee shall undertake to reinstate the building or buildings, or portions thereof, so destroyed or damaged according to the original plan and elevation thereof, or according to such modified plan, then such plans shall be subject to approval by the Lessor pursuant to Section 4.1(a). If the Lessee does not rebuild, repair or otherwise reinstate such buildings, Lessee will at its own expense, pay all real property taxes and any assessments then outstanding and, if requested by Lessor, promptly remove from the Premises all buildings, improvements and trade fixtures and restore the Land then remaining to good, orderly and sanitary condition and even grade, and upon so doing the Lessee shall then surrender this Lease and thereby be relieved of further performance under this Lease. B. Liability Insurance. 6.5 Lessee to Obtain Liability Insurance. The Lessee shall maintain at its own expense during the Term a policy or policies of comprehensive general liability insurance naming the Lessor (and its wholly-owned subsidiaries) and the Lessee as insureds thereunder with respect to liability for personal injury, death and property damage arising from use, management, ownership or occupation of the Premises in form and with coverage reasonably satisfactory to and reasonably approved by the Lessor (including a broad form CGL endorsement and full liquor law or dramshop liability coverage as well as business automobile liability coverage including non-owned and hired automobile liability coverages), with minimum limits of not less than TWENTY-FIVE MILLION DOLLARS ($25,000,000) for injury to more than one person in any one accident, and for property damage in any one accident, in any insurance company or companies authorized to do business in Hawaii. Lessee shall periodically, but not less frequently than annually, reevaluate the scope of the risks covered and the liability limits of such insurance and, if necessary, increase such coverage or liability limits in order to provide coverage of risks and liability limits which a prudent businessman would provide for property being put to uses similar to those of the Premises. C. General Insurance Requirements. 6.6 Policy Provisions. Each policy of comprehensive general liability or hazard insurance required in parts A and B of this Article above and in Section 4.2(d) of Article IV shall, to the extent available and customary for hotels on Maui: a. provide that the liability of the insurer thereunder shall not be affected by, and that the insurer shall not claim, any right of setoff, counterclaim, apportionment, proration, or contribution by reason of, any other insurance obtained by or for Lessor, Lessee, or any person claiming by, through, or under any of them; b. contain no provision relieving the insurer from liability for loss occurring while the hazard to buildings, improvements and fixtures is increased, whether or not within the knowledge or control of, or because of any breach of warranty or condition or any other act or neglect by, Lessor, Lessee, or any person claiming by, through, or under any of them; c. provide that such policy may not be cancelled, changed or modified (except to increase coverage), whether or not requested by Lessee, except upon the insurer giving at least thirty (30) days' prior written notice thereof to Lessor, Lessee, every mortgagee of any interest in the Premises, and every other person in interest who has requested such notice of the insurer; d. contain a waiver by the insurer of any right of subrogation to any right of Lessor or Lessee against any of them or any person claiming by, through, or under any of them; and e. in the case of hazard insurance, contain a standard mortgagee clause which shall: (i) provide that any reference to a Mortgagee in such policy shall mean and include all holders of mortgages of any interests in the Premises, in their respective order and preference as provided in their respective mortgages; (ii) provide that such insurance as to the interest of any Mortgagee shall not be invalidated by any act or neglect of Lessor, Lessee or any person claiming by, through, or under any of them; and (iii) waive any provision invalidating such Mortgagee clause by reason of the failure of any Mortgagee or Lessor, Lessee, or any person claiming by, through, or under any of them to notify the insurer of any hazardous use or vacancy, any requirement that any Mortgagee pay any premium thereon, or any contribution clause. 6.7 Certificates of Insurance. Lessee shall deposit and maintain with Lessor current certificates of insurance issued by the insurance carriers certifying that Lessee has in effect all the insurance required in parts A and B of this Article with certificates of renewal delivered by Lessee to Lessor at least thirty (30) days prior to the expiration date of such policies. All such certificates shall specify that the Lessor (and where applicable, its wholly-owned subsidiaries) is a named insured and that the policies to which they relate cannot be cancelled or modified on less than thirty (30) days (or ten (10) days in the case of failure to pay premiums) prior written notice to Lessor. ARTICLE VII Condemnation 7.1 Total Condemnation. If at any time during the Term, all of the Premises shall be taken or condemned by any authority having the power of eminent domain, then the estate and interest of the Lessee in the Premises shall at once cease and determine. The Term of the Lease shall cease as of the day possession is taken by such authority and all rents shall be paid up to that date. 7.2 Partial Condemnation. a. Termination As To Portion. If at any time or times during the Term any part of the Premises shall be taken or condemned by any authority having the power of eminent domain, then and in every such case the estate and interest of the Lessee in any part of the Premises so taken or condemned shall at once cease and determine, and this Lease shall terminate as to the portion taken. b. Continued Operations. If after a partial condemnation, this Lease is not terminated pursuant to Section 7.2(c), then: (i) Taking or condemnation of a part of the Premises, whether of the Land or any buildings or improvements on the Land, shall not affect the provisions for determination or payment of percentage rent set forth in this Lease. (ii) If an economically viable hotel of the same quality at the time of any condemnation can be restored, rebuilt or otherwise repaired on the remaining portion of the Premises at a cost not exceeding the condemnation award paid with respect to buildings or improvements so taken or condemned, then all such amounts shall be available for and used with all reasonable dispatch by the Lessee in rebuilding, repairing or otherwise reinstating or replacing such portion of such building or improvement taken or condemned on the balance of the Land, to the extent of such condemnation award, in a good and substantial manner according to such plan as shall be approved by the Lessor in accordance with Section 4.1(a). The provisions of this paragraph relate only to the handling of condemnation proceeds attributable to the partial taking of any building or improvements and do not in any way alter the provisions of Section 7.3(a) with respect to condemnation proceeds paid for the taking of all or any portion of the Land. c. Termination of Lease. If only part of the Premises shall be so taken or condemned, Lessee shall have the right and option to terminate this Lease if: (i) The balance of the Premises is unsuitable for construction and operation of an economically viable hotel of the same quality as the Hotel, or (ii) a portion of the Hotel, as it exists from time to time, the value of which exceeds twenty-five percent (25%) of the value of the entire Hotel shall be taken or condemned. If Lessee elects to terminate, Lessee will notify Lessor and upon such notification Lessee's obligation to pay rent shall cease, and Lessee shall pay all real property taxes and assessments then due and, if requested by Lessor, remove all buildings and other improvements then remaining on the Premises and restore the Land then remaining to good and orderly condition and even grade, and terminate this Lease. Upon such termination the Lessee shall be relieved of all further obligations under this Lease, the Lessor shall refund to the Lessee any unearned portion of the rent paid in advance prior to the effective date of such termination and Lessee shall receive the Lessee's interest in such condemnation compensation and damages. 7.3 Compensation and Damages. a. Land. In every case of taking or condemnation of all or any part of the Premises, all compensation and damages payable for or on account of the taking of all or any part of the Land shall be payable to and be the sole property of the Lessor, and neither Lessee nor any mortgagee of the Lessee's interest under this Lease shall have any interest or claim to such compensation or damages or any part thereof whatsoever. b. Improvements. Subject to this Section 7.3 all compensation and damages payable for or on account of the taking of all of any buildings and other improvements erected on the Land and any plans and other preparations therefor shall be payable to the Lessee and any mortgagee of the Lessee's interest under this Lease, in accordance with their respective interests, after deducting the Lessor's interest; provided, however, if the mortgage was approved by the Lessor or otherwise permitted under Section 5.1 hereof, the Mortgagee shall be entitled to be paid the then outstanding balance of the mortgage before deducting the Lessor's interest. The Lessor's interest therein shall be a proportionate amount of such compensation and damages in the ratio which the expired portion of the Term starting with the Initial Lease Date bears to the total Term (less the portion prior to the Initial Lease Date). 7.4 Condemnation of Leasehold Interest. In the event at any time or times during the Term a leasehold interest in the Premises or any part of such interest shall be taken or condemned, then and in every such case, notwithstanding the foregoing provisions of this Article VII, Lessee shall have the option to terminate and/or be fully released and discharged from all further liabilities and obligations under this Lease by paying to Lessor all compensation and damages for the taking or condemnation of such leasehold interest (exclusive of all compensation and damages for any taking or condemnation of the Hotel), or, if Lessee does not elect to terminate this Lease, then such taking or condemnation shall not result in any reduction in minimum or percentage rent under this Lease, nor excuse the Lessee from the full and faithful performance of any or all of its covenants and obligations under this Lease for the payment of money, nor excuse or relieve the Lessee from the performance of its covenants and obligations under this Lease except to the extent that, and for so long as, the performance of such covenants and obligations shall be rendered impossible by reason of the loss by the Lessee of possession of such part of the Premises subject to such taking or condemnation. In every such case of taking or condemnation of all or a part of the Lessee's leasehold interest, the Lessee shall be entitled to claim and recover from the condemning authority its damages sustained by reason of such taking, and all compensation and damages payable for or on account of such taking or condemnation of any part of such leasehold interest shall be payable to and be the sole property of the Lessee unless Lessee elects to terminate this Lease as set forth above. 7.5 Loss of Business Damages. Notwithstanding the foregoing provisions of this Article VII, if and only if such claim for damages is not adverse to any interest of Lessor, the Lessee and/or the Hotel Operator shall have the right to claim and recover from the condemning authority but not from the Lessor, such compensation as may be separately awarded or recoverable by the Lessee and/or the Hotel Operator in its own right on account of any and all damage to its business by reason of any condemnation and for or on account of any cost or loss to which the Lessee and/or the Hotel Operator might be put in removing its furnishings and equipment. 7.6 Conveyance as Condemnation. The term "condemnation" as used in this Lease shall include any conveyance made under threat or imminence of condemnation by any public or private authority having the power of eminent domain. ARTICLE VIII Maintenance and Use of Premises 8.1 Taxes and Assessments. Lessee shall pay throughout the Term, beginning as of the date of this Lease, directly to the appropriate taxing or other applicable authority at least three (3) days before the same become delinquent, all real property taxes and assessments of every description attributable to the Premises or any part thereof or improvement thereon, or for which the Lessor or Lessee in respect thereof, are now or may during the term be assessed or become liable, whether assessed to or payable by Lessor or Lessee (with the property taxes for the first and last Lease years prorated if applicable); provided, however, that with respect to any assessment made under any betterment or improvement law which may be payable in installments, Lessee shall be required to pay only such installments of principal and interest as shall become due and payable during the Term. Lessee's covenant for the payment of the taxes set forth in the preceding sentence shall include the payment of any new tax (except federal or state net income taxes) which supplements or replaces either the real property tax or increases in real property taxes and is assessed upon the Premises or any part thereof or upon the rents received under this Lease by Lessor or upon Lessor in respect of any of the preceding items. Lessee shall also pay the gross excise tax on such taxes and assessments in accordance with Section 3.6. Subject to all of the conditions set forth in this sentence, Lessee may contest in good faith at Lessee's sole expense by appropriate proceedings, as may be allowed by law, the validity or amount of any tax or assessment required in this paragraph to be paid by the Lessee, which conditions are as follows: (a) such actions must be commenced before any such tax or assessment becomes delinquent, (b) the action commenced by the Lessee must be an action which either stays the collectibility of such tax or prevents the sale of the Premises in satisfaction of such tax or assessment or lien securing such tax or assessment, or in the alternative to the previous two types of actions, an action in which Lessee pays such tax or assessment while such action ensues, (c) Lessee complies with all requirements of such action, including but not limited to the posting of bond or payment of such tax or assessment while such action ensues, (d) Lessee gives notice to Lessor of Lessee's intention to contest such tax or assessment not less than ten (10) days before such taxes or assessments become delinquent, and (e) prior to undertaking such action, Lessee gives security, reasonably satisfactory to Lessor in both quality and quantity, to Lessor for payment of such taxes; provided, however, that notwithstanding the foregoing, Lessee shall pay all such taxes, rates, assessments or charges, together with all interest, penalties or fines accrued thereon or imposed in connection therewith, immediately upon the commencement of proceedings to foreclose any lien which attached to the Premises or any part thereof as security for such taxes, rates, assessments or charges. If the Lessee shall fail to pay any taxes or assessments as provided in this paragraph and elects not to dispute such taxes or assessments in accordance with the provisions above, then the Lessor may at any time thereafter pay the same, together with any interest, penalties, fines and costs accrued thereon or imposed in connection therewith, and Lessee shall repay to the Lessor upon demand therefor the full amount so paid by the Lessor, together with interest at Lessor's Cost of Money accruing from the date such payments were due until Lessor is reimbursed for such payments by Lessee. 8.2 Lessee to Pay All Rates and Charges. Lessee shall pay directly before such charges and rates become delinquent, all utility charges, water and sewer rates, garbage rates, Kapalua Resort Association and Kapalua Marketing Association assessments, and other charges and outgoings of every description attributable to the Premises or any part thereof or improvement thereon, or for which Lessor or Lessee in respect thereof may during the Term be assessed or become liable, whether assessed to or payable by Lessor or Lessee and whether such charges and rates are imposed by governmental authority, public or private utility together with the gross excise tax, if applicable, as required by Section 3.6. Anything in this Lease to the contrary notwithstanding, Lessee shall not be required to pay any tax or assessment in the nature of an income, state, or inheritance tax imposed because of Lessor's receipt of rental payments from Lessee or because of Lessor's ownership of the fee title to the Premises or because of Lessor's interest in the Lease or in the Premises. 8.3 Improvements Required by Law. The Lessee shall at its own expense during the whole of the Term of this Lease make, build, maintain and repair all fences, roads, curbs, sidewalks, sewers, drains, parkways and parking areas and other improvements on the Premises which may be required by law to be made, built, maintained or repaired upon or adjoining or in connection with or for the use of the Premises or any part thereof except for improvements which are to be located on property owned or leased by others. Without limiting the foregoing sentence, Lessee agrees that all such improvements shall be subject to the Lessor's right of approval as provided in Article IV above. 8.4 Repair and Maintenance. In order to preserve the high aesthetic standards in the Kapalua Resort Area, the Lessee will at its own expense keep the Premises, all landscaping, all structural and non-structural portions of all buildings and other improvements existing on the Premises at any time during the Term, in good order, condition, maintenance and repair including without limitation (a) repainting the exterior of the Hotel as required to maintain the appearance of the Hotel, (b) complying with the landscaping and other maintenance requirements and covenants imposed upon the Lessor as Grantor under the Preservation and Conservation Easement described in Exhibit "A" hereof, and (c) maintaining landscaping to screen the Hotel's Aloha Pavilion from Office Road. All repairs which would constitute Construction shall be subject to the Preconditions for Construction in Sections 4.2(a) and 4.2(b). Repairs which constitute Construction but which return the Premises to their original condition and aesthetic appearance as shown in plans and specifications previously approved by Lessor shall not require Lessor's prior consent but shall meet without limitation the Preconditions for Construction. Any change of color of exterior painting of the Hotel must be approved by Lessor. 8.5 Observance of Laws. The Lessee shall during the Term keep the Premises in a strictly clean and sanitary condition and observe and perform all laws, ordinances, rules and regulations whether now or hereafter made by any governmental authority for the time being applicable to the Premises or the use thereof, and except with respect to the negligence or willful misconduct of Lessor or Lessor's agents, employees or contractors, Lessee shall indemnify the Lessor against all actions, suits, claims and damages by whomsoever brought or made by reason of the nonobservance or nonperformance of such laws, ordinances, rules and regulations or this covenant. 8.6 Inspection of Premises. The Lessee shall permit the Lessor and its agents upon reasonable advance notice and at reasonable times during the Term to enter and examine the state of repair and condition of the Premises. If any significant safety hazard defect comes to Lessor's attention, Lessor may give notice of such defect to Lessee and within sixty (60) days after such notice, Lessee shall repair and make good such defect if required by the terms of this Lease to be repaired and made good by the Lessee; provided, however, that if such repair or correction may be made within a reasonable period of time but cannot reasonably be made within sixty (60) days, then such repair or correction shall be deemed to be made if begun within the sixty (60) day period and thereafter continuously and diligently undertaken to completion by Lessee. If the Lessee shall refuse or neglect to commence and complete such repairs within the time period provided in the preceding sentence, the Lessor may make such repairs or cause the same to be made and shall not be responsible to the Lessee or any persons claiming by or through Lessee for any loss or damage that may be caused to the property or business of the Lessee or such persons claiming by or through Lessee by reason of such repairs, except for Lessor's negligence or willful misconduct and if the Lessor shall make such repairs or cause the same to be made, the Lessee shall pay forthwith on demand to the Lessor the cost of such repairs, with interest at Lessor's Cost of Money. 8.7 Waste and Unlawful Use. The Lessee will not make or suffer any strip or waste or unlawful, improper or offensive use of the Premises or any part thereof. 8.8 Use of Premises. a. Operation of Hotel. The Lessee will use the Premises for the purposes of, and for no other purpose than, maintaining and operating the Hotel, the Tennis Center, and the rental and management of villas, condominiums and apartments, including all facilities and related commercial retail operations, operated by Lessee or Concessionaires, reasonably related to a resort hotel operation; provided, however, Lessee agrees not to engage in the business of renting villas, condominiums and apartments so long as Lessor is actually renting villas, condominiums and apartments in the Kapalua Resort Area. Lessee agrees that Lessee will maintain and operate a hotel at the Premises at quality standards generally found in those full service resort hotels in the State of Hawaii with at least a 4- Diamond rating from the American Automobile Association as of January 1, 1996. Lessee covenants that it will in good faith diligently and continuously operate the Hotel in accordance with reasonable business practices. Any commercial operations on the Premises, whether conducted by Lessee or a Concessionaire, involving any unreasonably noisy, dangerous or obnoxious activities or the leasing or rental of unreasonably noisy, dangerous or obnoxious equipment, including without limitation water ski rides or instruction and rental of "jet skis", mopeds or similar items, shall require the prior written approval of Lessor and Lessor may unreasonably withhold such approval or require the termination of any such commercial operations then in existence on the Premises. Since only a hotel operation is intended as aforesaid, the area on the Premises occupied by commercial retail operations (exclusive of the area occupied by any and all restaurants, laundries, health clubs and other similar facilities proximately related to the operation of a hotel to a standard provided in this Lease) shall not exceed the initial area (plus up to ten (10%) percent more) agreed upon in the initial construction of the Hotel. The Lessee shall use its best efforts to ensure that any concession, commercial activity, or other Hotel activity shall be in keeping with the first-class image of the Kapalua Resort Area. b. Hotel Operating Agreement. Lessee agrees that proper management and operation of the Hotel is necessary to maximize Lessor's percentage rent. Accordingly, Lessee shall enter into a Hotel Operating Agreement for the management and operation of the Hotel by Hotel Operator with the consent of Lessor, which consent shall not be unreasonably withheld if the Hotel Operating Agreement expressly provides that the Hotel Operator has read this Lease and agrees to observe and where applicable perform the terms and conditions of this Lease in connection with the operation of the Hotel. Such agreement(s) shall be maintained for the term of the Lease, with any successor Hotel Operator being subject to Lessor's consent. Any amendment, modification or replacement of the Hotel Operating Agreement such that the amended, modified or new Hotel Operating Agreement provides for monthly deposits into an FF&E Reserve Account or its equivalent of an amount less than three percent (3%) of "Gross Revenues" as defined in the Management Agreement between Ground Lessee and The Ritz-Carlton Hotel Company, L.L.C. dated January __, 2001 from the Hotel, regardless of the identity of the Hotel Operator, shall require the Lessor's prior written approval. Hotel Operator shall have the right to assign its rights and obligations under the Hotel Operating Agreement to any assignee who (a) acquires all, or substantially all, of the assets of Hotel Operator; (b) assumes its obligations, including those pursuant to the Hotel Operating Agreement; (c) enters into an agreement with Owner that the assignee will continue to operate the Hotel as a luxury hotel as part of the Ritz-Carlton chain or to the Ritz-Carlton Standards as defined in the Hotel Operating Agreement or at quality standards generally found in those full service resort hotels in the State of Hawaii with at least a 4- Diamond rating from the American Automobile Association as of January 1, 1996; and (d) has sufficient financial capability and experience to carry out its obligations under the Hotel Operating Agreement. The following criteria shall be applied to determine the reasonableness of Lessor in consenting to any Hotel Operator selected by Lessee, or as to any Affiliate or any proposed assignee selected by Hotel Operator: (a) whether as its primary business, it owns, leases or operates any casino or gambling facility if such business, ownership, leasing or operation might reasonably impair the ability of the Lessee, the Hotel Operator or their respective Affiliates, as applicable, to obtain or retain any necessary regulatory approvals for the operation of the Hotel; (b) whether it owns or operates a distillery, winery or brewery or a distributorship of alcoholic beverages if such ownership or operation might reasonably impair the ability of the Lessee, the Hotel Operator or their respective Affiliates, as applicable, to obtain or retain liquor licenses for the Hotel; (c) whether it has sufficient financial capability and experience to carry out its obligations under the Hotel Operating Agreement; and (d) whether it has the capability to operate the Hotel to a quality standard generally found in those full service resort hotels in the State of Hawaii with at least a 4-Diamond rating from the American Automobile Association as of January 1, 1996. c. Prohibited Uses. Lessee shall not use the Premises for commercial retail operations (except as otherwise provided in this Lease), a realty sales office (except for a Kapalua Land Company realty sales office) and shops selling items bearing the Kapalua logo, which is a stylized butterfly with a pineapple in the center, unless operated or licensed by Kapalua Land Company. Lessee shall not use the Hotel's parking lot for storage or stockpiling of supplies and materials. d. Nuisance. At all times during the Term, but especially during Quiet Hours, Lessee covenants that it will use its best efforts to prevent the escape from the Premises of loud noises, obnoxious bright lights, odors, dust, smoke or other noxious agents which could disrupt the quiet, sleep and peaceful enjoyment of the Kapalua Resort Area of guests of other hotels or other residents of the Kapalua Resort Area. 8.9 Liens. Lessee shall keep the Premises at all times free and clear of all liens, charges and encumbrances of every nature, other than such mortgages as may be permitted under this Lease, and will indemnify and save harmless the Lessor from all loss, cost and expense, including reasonable attorneys' fees, with respect to any such liens, charges and encumbrances. 8.10 Kapalua Resort Association. Lessee shall become a member of the Kapalua Resort Association (the "KRA") in accordance with KRA's articles and bylaws. As a member of KRA, Lessee shall comply with the articles and bylaws of the KRA and pay a pro rata portion of the annual KRA budget in monthly installments as provided in the articles and bylaws of the KRA. Lessor reserves all voting rights in KRA as it pertains to the Land and Lessee shall have all voting rights in KRA as it pertains to the Hotel (excluding the Land). 8.11 Kapalua Marketing Association. The Lessee shall become a member of the Kapalua Marketing Association ("KMA") and shall pay its pro rata share up to one-half percent (0.5%) of the Gross Revenues for the applicable years as Lessee's contribution towards KMA's annual budget so long as the Kapalua Bay Hotel is a member of KMA and pays the same percentage of its gross revenues (as defined under its lease). 8.12 Visitor Statistics. For purposes of Lessor's forecasting and planning for the development of the Kapalua Resort Area, on the 30th day of each month of the Term, Lessee shall provide Lessor the following information regarding operation of the Hotel for the preceding month: a. the number of available room days at the Hotel; b. the number of room days occupied broken down into rented, complimentary and staff occupied categories; c. the average occupancy rate for the hotel rooms in the Hotel; d. the average number of guests per room at the Hotel; and e. the percentage of the total number of the Hotel's guests who are in tour groups. Lessor shall have the right to inspect Lessee's records to verify the information set forth above, but shall not share this information with any other hotel in the Kapalua Resort Area or with any other third party without Lessee's consent (except the Hawaii Visitors Bureau, Pannell, Kerr, Forster, and similar organizations which compile visitor statistics but without identifying individual properties), which consent may be unreasonably withheld by Lessee. 8.13 Covenant to Operate Hotel. Lessee understands that Lessor's expectation of lease rent revenues, especially percentage rent, is predicated on Lessee operating a successful hotel on the Premises which maximizes long-term revenues. Accordingly, Lessee covenants and agrees that it will in good faith diligently and continuously operate (or cause to be operated) a hotel on the Premises 365 days each year in accordance with reasonable business practices and the standards of Section 8.8(a) with the goal of maximizing long-term revenues. During the time of any failure to operate continuously the Hotel, Lessor shall, in addition to any other remedies available to it under this Lease, be entitled to receive a rental which shall be no less than the average of that payable during the preceding three full Rental Years. Notwithstanding the foregoing, Lessee shall have the right from time to time to close the Hotel or parts thereof for such reasonable periods of time as may be required to make repairs, alterations, remodeling, or for any reconstruction. Lessee will use its best efforts to ensure that any such period of time will not exceed six months with the exception of any reconstruction of the Hotel as described in Sections 6.3, 6.4, and 7.2, subject to any delay caused by force majeure. 8.14 Name of Hotel. Lessee will not change the name of the Hotel without the prior written consent of Lessor, which consent shall not be unreasonably withheld. ARTICLE IX Default 9.1 Events and Consequences of Default. This Lease is entered into upon the express condition that if any one or more of the events of default set forth in Sections 9.1(a) through 9.1(d) shall occur, the Lessor may, subject to requirements of notice and opportunity to cure any default to be given to Mortgagees of the Lessee's interests under this Lease and any subordination rights under Section 5.1 and as provided in Section 5.3 and subject to the limited liability provided in Section 9.3, upon the occurrence of such event of default or at any time thereafter during the continuance of such default, may then or at any time thereafter bring an action for summary possession of the Premises or any part thereof as provided by law, all without prejudice to any other remedy or right of action which the Lessor may have for arrears of rent or for any preceding or other breach of contract. If this Lease is Filed or Recorded, such termination of this Lease may but need not necessarily be made effective by Filing if the Lease is Filed or Recording if the Lease is Recorded an order of a court of the State of Hawaii canceling this Lease. The events of default are as follows: a. Failure to Pay Rent. (i) The Lessee shall fail to make full payment of any payment of rent or any other payments required under this Lease within ten (10) days after the date such payment is due, whether such payment shall or shall not have been legally demanded, and (ii) such payment shall not have been cured in full together with the late payment due thereon under Section 3.8 and the interest thereon due under Section 11.13, within ten (10) days after written notice of such default by Lessor to Lessee; or b. Breach of Covenant. The Lessee shall fail to observe or perform any of the covenants contained in this Lease and on the part of the Lessee to be observed and performed, and such failure shall continue for a period of thirty (30) days after written notice of such failure given by the Lessor to the Lessee without substantial action having been initiated by Lessee within such period to diligently and continuously continue to remedy such failure; or c. Abandonment. The Lessee shall abandon the Premises; or d. Bankruptcy, Insolvency or Taking. The making by Lessee of any general assignment for the benefit of creditors; the filing by or against Lessee of a petition to have Lessee adjudged a bankrupt or the petition for reorganization or arrangement under any law relating to bankruptcy unless, in the case of a petition filed against Lessee, the same is dismissed within ninety (90) days; the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within ninety (90) days; or the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease where such seizure is not discharged within ninety (90) days. 9.2 Acceptance of Rent Not Waiver. The acceptance of rent by the Lessor or its agent shall not be deemed to be a waiver by Lessor of any breach by the Lessee of any covenant contained in this Lease or of the right of the Lessor to terminate this Lease and reenter the Premises. The express waiver by the Lessor of any breach shall not operate to extinguish the covenant or condition the breach of which has been waived nor be deemed to be a waiver by the Lessor of its right to declare a forfeiture of this lease for any breach thereof. 9.3 Limited Liability of Lessee. Notwithstanding anything to the contrary herein, from and after the Initial Lease Date the Lessee shall not be responsible for any liability under this Lease arising after any termination under Section 9.1 or any foreclosure sale pursuant to Section 5.1 other than to bring the rents and any other money charges current up to that date plus one year's rent (including one year's real property taxes) based on the rent paid for the immediately preceding full Rental Year; or unless from and after the Initial Lease Date the Lessee shall give Lessor at least one year's notice of its election to terminate this Lease, in which case the Lessee shall pay the rent and other money charges due as of that termination date and have no future liability under this Lease. In either case, title to the improvements on the Premises (including the Hotel, the Tennis Center and all of the Hotel's and Tennis Center's furniture, furnishings, equipment and at Lessor's option, any sublease, license or contract related to the Hotel including the Hotel Operating Agreement or to the Tennis Center) shall automatically revert to Lessor and if requested by Lessor, the Lessee shall quitclaim any interest it has in any such improvements on the Premises to the Lessor and if Lessee shall refuse, then the Lessor is hereby appointed the attorney-in-fact of the Lessee to execute such quitclaim documents in the name of the Lessee to the Lessor, and such power of attorney shall be deemed to be a power of attorney coupled with an interest; and, if a casualty is involved, Lessee shall pay over any insurance proceeds to the Lessor. If a termination of this Lease occurs in the last twenty (20) years of the Term, Lessor shall have the option of requiring the Lessee to remove the improvements pursuant to Section 10.1. ARTICLE X Surrender 10.1 Surrender. Subject to the terms of Section 6.4 dealing with termination of the Lease in the event of an uninsured casualty, and Article VII, dealing with termination of the Lease in the event of condemnation under certain conditions, at the end of the Term or sooner termination of this Lease, the Lessee shall peaceably deliver to the Lessor possession of the Premises. Lessee shall, at its expense and within ninety (90) days after the end of said Term or other termination date, at Lessor's option, remove all buildings, improvements located on the Premises and all debris resulting from such removal and restore the Land to even grade and good and orderly condition, with the Lessee receiving any salvage value of the materials if Lessee's contractor does such removal. ARTICLE XI General Provisions 11.1 Beach. Lessee covenants and agrees that Lessee will, at its cost and expense, keep the section of the Honokahua Beach immediately fronting the Premises in a clean and orderly condition, free of litter and rubbish to the water's edge. 11.2 Assumption of Risk. The Lessee shall and does hereby assume all risk of loss or damage to furnishings, furniture, fixtures, supplies, merchandise and other property, by whomsoever owned, stored, placed or affixed in the Premises for events occurring from the date hereof, including any damage from construction, and does hereby agree that the Lessor shall not be responsible for loss or damage to any such property, and except with respect to the negligence or willful misconduct of Lessor or Lessor's agents, employees or contractors, the Lessee hereby agrees to indemnify and save harmless the Lessor from and against any and all claims for such loss or damage. 11.3 Holding Over. If the Lessee shall, without the consent of the Lessor, remain in possession of the Premises after the expiration of the Term without executing any extension or renewal of this Lease, Lessee shall be deemed to occupy the Premises as a tenant from month-to-month subject to all of the terms and conditions of the Lease, to the extent such terms and conditions are applicable to a month-to-month tenancy except that each month's rent shall be one twelfth (1/12) of one thousand percent (1000%) of the amount of the annual percentage rent, if any, paid for the year preceding the expiration date. This section shall not apply to any reasonable extension of the Lease required by Lessor's election to require the Lessee to remove improvements pursuant to Section 10.1 or any other provision of this Lease. 11.4 Acceptance of Nearby or Adjacent Land Use. a. Pineapple and Similar Agricultural Operations. Lessee understands and agrees that Lessor's subsidiary Maui Pineapple Company, Limited, is engaged in the operation of a pineapple plantation and similar agricultural operations within the areas adjacent to the Premises and that the operations, milling and other activities incident to a pineapple plantation or similar agricultural activities may result in the creation of nuisances during the Term and that Maui Pineapple Company, Limited holds a perpetual right and easement over and upon the Premises for nuisances of every description arising from activities incidental to the operation of a pineapple plantation or similar agricultural activities by Haul Pineapple Company, Limited, its successors and assigns. The Lessee shall not hold or attempt to hold the Lessor or Maui Pineapple Company, Limited responsible for the creation of such nuisances, arising out of or in connection with such pineapple or similar agricultural operations. Lessor will use its best efforts to inform the Lessee, at Lessee's request, of any harvesting schedule for such pineapple operations. All such pineapple operations shall be done in accordance with applicable state and federal regulations. b. Golf Courses. Lessee understands and agrees that the Premises are adjacent to golf courses operated by Lessor or its subsidiaries; that Lessee desired and sought such location with the understanding that this location may result in nuisances or hazards to persons and property on the Premises including without limitation those caused by stray golf balls. Lessee covenants that during the Term of this Lease, Lessee agrees to such nuisances and hazards and shall assume all risks associated with such location, including but not limited to the risk of property damage or personal injury suffered by Lessee (but not by a guest) arising from stray golf balls. 11.5 Notices. Any notice or demand to be given to or served upon either the Lessor or the Lessee in connection with this Lease shall be in writing and shall be given or served for all purposes by being sent by certified mail, postage prepaid, return receipt requested, addressed to such party at the following address, or at such other post office address as such party may from time to time designate in writing to the other party, or by being delivered personally to any officer of such party within the State of Hawaii, and any such notice or demand shall be deemed conclusively to have been given or served on the date indicated on the return receipt or upon the date of such personal delivery: Notices to Lessor shall be sent to: Maui Land & Pineapple Company, Inc. 120 Kane Street P.O. Box 187 Kahului, Hawaii 96733-0187 Attention: Executive Vice President/Resort Notices to Lessee shall be sent to: RCK Hawaii, LLC d/b/a RCK Hawaii-Maui c/o Blackacre Capital Management, L.L.C. 450 Park Avenue, 28th Floor New York, New York 10022 And to: RCK Hawaii LLC d/b/a RCK Hawaii-Maui 10400 Fernwood Road Bethesda, Maryland 20817 11.6 Article and Paragraph Headings. The article and paragraph headings in this Lease are inserted only for convenience and reference and shall in no way define, limit or describe the scope or intent of any provision of this Lease. 11.7 Assignments and Subleases. a. Subject to Section 11.7(d), this Lease may be assigned or transferred in whole or in part by Lessee without Lessor's consent if: (i) The assignee does not as its primary business own, lease or operate any casino or gambling facility if such business, ownership, leasing or operating might reasonably impair the ability of the Lessee or the Hotel Operator, as applicable, to obtain or retain any necessary regulatory approvals for the operation of the Hotel. (ii) The assignee does not own or operate a distillery, winery or brewery or a distributorship of alcoholic beverages if such ownership or operation might reasonably impair the ability of the Lessee or the Hotel Operator, as applicable, to obtain or retain liquor licenses for the Hotel. (iii)The assignee is not considered in the relevant business community to be engaged in criminal, dishonest, or unethical conduct, has not been convicted of a felony in any state or federal court, and is not in control of or controlled by persons who have been convicted of felonies in any state or federal court. (iv) The assignee has a verifiable net worth, determined in accordance with generally accepted accounting principles, after giving effect to such transfer, of not less than the lesser of (x)THIRTY MILLION AND NO/100 DOLLARS ($30,000,000) (after adjustment to reflect increases after the date hereof in the U.S. Bureau of Labor Statistics' Consumer Price Index (CPI-U)) or (y)twenty percent (20%) of the value of the Hotel and Lessee's interest hereunder (which, in connection with any sale or assignment of the Hotel and Lessee's interest hereunder, shall be equal to the purchase price, or, in connection with a foreclosure, shall be equal to the appraised value of the Hotel and Lessee's interest hereunder at the time of the making of the loan), but in no event shall such standard be less than THIRTY MILLION AND NO/100 DOLLARS ($30,000,000). For purposes of this paragraph, the term "net worth" means total assets less total liabilities (based on book value) of the Lessee. For purposes of determining the net worth of a Lessee or assignee, if the Lessee or assignee has, for tax or other legal compliance reason (such as to comply with restrictions on real estate investment trusts or pension funds), subleased the Premises to an Affiliate, the net worth of the both the Lessee/assignee and its Affiliate as subtenant shall be combined (and any inter-Affiliate debt directly related to the Hotel excluded) so long as the Affiliate agrees to be directly liable to the Lessor on this Lease; it being intended that the required capitalization need not be duplicated as a condition of a sublease to an Affiliate. And, (v) The most recent Hotel Operating Agreement approved by Lessor remains in effect after such assignment, with only such material amendments or modification as Lessor has approved, or a new Hotel Operating Agreement is approved by Lessor in connection with the assignment. Except for mortgages or pledges permitted without consent under Section 5.1(a) or transfers pursuant to Section 5.1(b), any other assignment, sublease, or transfer of this Lease of any kind shall require Lessor's prior written consent, which consent shall not be unreasonably withheld. In the event of any such other assignment, Lessee acknowledges and agrees that Lessor may withhold its consent to any proposed assignee that does not satisfy the requirements of clauses (i), (ii), (iii) and (iv) of this Section 11.7(a). For purposes of this Lease, a change in ownership or control of the Lessee shall be deemed to be an assignment of this Lease, but such change of ownership or control of the Lessee shall not require Lessor's consent if, subsequent to such change, the Lessee continues to satisfy the requirements of clauses (i), (ii), (iii), (iv) and (v) of this Section 11.7(a) and the Person(s) acquiring ownership or control of the Lessee satisfy the requirements of clauses (i), (ii), and (iii) of this Section 11.7(a). For purposes of this Lease, a change in ownership or control includes: (a) If the Lessee (or a multiple Lessee) is a corporation, a change or changes in the ownership, whether voluntary, involuntary, by operation of law, or otherwise, which aggregates fifty percent (50%) or more of the total capital stock of Lessee or fifty percent (50%) or more of the voting capital stock of Lessee; (b) If the Lessee (or a multiple Lessee) is a partnership, any change of control, whether voluntarily, involuntarily, by operation of law, or otherwise, including any addition or withdrawal of a general partner of the partnership or of any partnership which is a partner in the partnership (including in the case of a corporate general partner, a change of control using the test of the preceding sentence); and (c) If the Lessee (or a multiple Lessee) is a limited liability company, any change in control of the Lessee, whether voluntarily, involuntarily, by operation of law, or otherwise, including, without limitation, the transfer of fifty percent (50%) or more of the interest(s) of the member(s) of the company in the company's capital or profits (whether accomplished by the sale, transfer or exchange of interests or by the admission of new members) and any change or change in control of a managing member of the Company. Notwithstanding any of the foregoing, Lessor acknowledges and agrees that changes in ownership of Capital Hotel Investments, LLC shall not require Lessor's consent and shall not be subject to Section 11.7(d) so long the Lessee, after such transfer, continues to satisfy the requirements of clauses (i), (ii), (iii), (iv), and (v) of this Section 11.7(a). Any Person who satisfies the requirements for assignment without Lessor's consent under clauses (i), (ii), and (iii), and if applicable (iv) and (v) of this Section 11.7(a), or to whom Lessor otherwise consents in writing, shall be considered a "Qualified Purchaser." The consent by Lessor, if required, to one assignment, subletting, mortgage, pledge, hypothecation or encumbrance shall not be deemed to be a consent to any further assignment, subletting, mortgage, pledge, hypothecation or encumbrance for which consent is required. In the absence of an express agreement in writing to the contrary and executed by Lessor or except as otherwise provided herein, no assignment, mortgage, pledge, hypothecation, encumbrance, subletting or license hereof or hereunder shall act as a release of Lessee from any of the provisions, covenants and conditions of this Lease on the part of Lessee to be kept and performed, the assignor shall remain primarily liable hereunder and any amendment of this Lease subsequent thereto shall not release the assignor or sublessor from said liability. b. Lessee shall be entitled to assign and transfer this Lease to any corporation or entity that is an Affiliate of Lessee or (subject to obtaining consent required in connection with any change of ownership or control that constitutes an assignment pursuant to Section 11.7(a)) to the surviving corporation in the event of a consolidation or merger to which Lessee shall be a party; provided, however, that such subsidiary, affiliated firm or surviving corporation shall in writing expressly assume all of the provisions, covenants and conditions of this Lease on the part of Lessee to be kept and performed; and provided, further, that no such assignment or transfer shall act as a release of Lessee from any of the provisions, covenants and conditions of this Lease on the part of Lessee to be kept and performed. c. Except as provided in Section 5.1 or otherwise herein, any assignment, mortgage, pledge, hypothecation, encumbrance, subletting or license of this Lease, the leasehold estate hereby created, or the Premises or any portion thereof, either voluntary or involuntary, whether by operation of law or otherwise, without the prior required written consent of Lessor, shall be null and void, and shall at the option of Lessor terminate this Lease. d. (i) Except as provided in Section 5.1, if at any time Lessee intends to sell, assign or transfer the Hotel and/or this Lease, or any portion which is fifty percent (50%) or more thereof, Lessee shall give written notice of such intention stating Lessee's intention to sell, assign or transfer the Hotel and/or this Lease to (i) Maui Land & Pineapple Company, Inc., so long as Maui Land & Pineapple Company, Inc., is the owner of the Premises at such time written notice of such intention stating Lessee's intention to sell, assign or transfer the Hotel and/or this Lease is given and (ii) The Ritz-Carlton Hotel Company, L.L.C. so long as The Ritz-Carlton Hotel Company, L.L.C. is the Hotel Operator at such time written notice of such intention stating Lessee's intention to sell, assign or transfer the Hotel and/or this Lease is given. Within fourteen (14) days of receipt of such written notice from Lessee stating Lessee's intention to sell, assign or transfer the Hotel and/or this Lease, Maui Land & Pineapple Company, Inc. shall provide written notice of its desire to negotiate with Lessee for the sale, assignment or transfer of the Hotel and/or this Lease to Maui Land & Pineapple Company, Inc. If no such written notice from Maui Land & Pineapple Company, Inc. stating its desire to negotiate with Lessee for the sale, assignment or transfer of the Hotel and/or this Lease is received by Lessee in such fourteen (14) day period then Lessee shall be entitled, at any time after such failure, to sell, assign or transfer the Hotel and/or this Lease to any other party. Maui Land & Pineapple Company, Inc. understands, acknowledges and agrees that notwithstanding Maui Land & Pineapple Company, Inc.'s decision to negotiate with Lessee for the sale, assignment or transfer of the Hotel and/or this Lease, The Ritz-Carlton Hotel Company, L.L.C. will have the same rights, including the same time period, to elect to negotiate (perhaps in addition to Maui Land & Pineapple Company, Inc.) with Lessee for the sale, assignment or transfer with respect to the Hotel of the Hotel and/or this Lease. (ii) If Maui Land & Pineapple Company, Inc. elects to enter into negotiations with Lessee for the sale, assignment or transfer of the Hotel and/or this Lease and provides written notice to Lessee within such fourteen (14) day period, the parties shall enter into good faith negotiations for the sale, assignment or transfer of the Hotel and/or this Lease. The Lessee shall promptly, upon request, provide Maui Land & Pineapple Company, Inc. such due diligence materials, including operating statements, contracts and other materials with respect to the Hotel as may be reasonably requested by it (collectively "Due Diligence Materials") and shall afford Maui Land & Pineapple Company, Inc. and its representatives and agents the opportunity to inspect and investigate the Hotel, subject to customary indemnification during the period beginning on the date Lessee gives notice to Maui Land & Pineapple Company, Inc. of its intent to sell, assign or transfer the Hotel and/or this Lease or any portion which is fifty percent (50%) or more thereof and ending thirty (30) days after the date of Maui Land & Pineapple Company, Inc.'s notice provided for in the following sentence. Within thirty (30) days from the date of Maui Land & Pineapple Company, Inc.'s written notice to Lessee of its desire to negotiate with Lessee for the sale, assignment or transfer by Lessee of the Hotel and/or this Lease, Maui Land & Pineapple Company, Inc. shall submit in writing to Lessee a firm and binding offer by Maui Land & Pineapple Company, Inc. of the terms and conditions of a proposed sale, assignment or transfer of the Hotel and/or this Lease by Lessee to Maui Land & Pineapple Company, Inc. (the "Maui Land & Pineapple Company, Inc.'s Offer"). Maui Land & Pineapple Company, Inc.'s Offer shall include, at a minimum, (i) the purchase price of the proposed sale, assignment or transfer which purchase price shall be paid by cash or cash equivalent, (ii) closing date, (iii) due diligence period, (iv) any and all contingencies or conditions which must be completed by Lessee prior to the closing date or any date prior to the closing date and (v) a representation that Maui Land & Pineapple Company, Inc.'s Offer will remain firm and binding on Maui Land & Pineapple Company, Inc. for a period of thirty (30) days from the day of receipt of Maui Land & Pineapple Company, Inc.'s Offer. Maui Land & Pineapple Company, Inc. understands, acknowledges and agrees that notwithstanding Maui Land & Pineapple Company, Inc.'s Offer, The Ritz-Carlton Hotel Company, L.L.C. will have the same rights, including the same time period, to submit a firm and binding offer (the "RC's Offer"). Lessee, in its sole and absolute discretion, shall determine whether to accept Maui Land & Pineapple Company, Inc.'s Offer. Lessee shall be under no obligation to accept either Maui Land & Pineapple Company, Inc.'s Offer or RC's Offer. However, if Lessee selects either Maui Land & Pineapple Company, Inc.'s Offer or RC's Offer then the other party's offer is deemed rejected by Lessee. (iii) If no written acceptance of Maui Land & Pineapple Company, Inc.'s Offer is received by Maui Land & Pineapple Company, Inc. in the thirty (30) day period following Lessee's receipt of Maui Land & Pineapple Company, Inc.'s Offer, Lessee is deemed to reject Maui Land & Pineapple Company, Inc.'s Offer. Upon the earlier of (i) such thirty (30) day period or (ii) written notice by Lessee to Maui Land & Pineapple Company, Inc. that Lessee rejects Maui Land & Pineapple Company, Inc.'s Offer (the "Lessee's Review Period"), Lessee may proceed to sell, assign or transfer the Hotel and/or this Lease to any other party subject to the following terms and conditions. (iv) If Lessee rejects both Maui Land & Pineapple Company, Inc.'s Offer and RC's Offer, Lessee may sell, assign or transfer or agree to sell, assign or transfer to a third party provided that such third party sale is completed within fifteen (15) months following the end of the Lessee's Review Period, and provided, further, that, subject to the terms set forth below, the purchase price paid by such third party (which shall be paid in cash or cash equivalent) is no less than ninety-five percent (95%) of the highest purchase price of either Maui Land & Pineapple Company, Inc.'s Offer or RC's Offer (the "Best Offer") (provided that if the consideration is payable over time then such consideration (inclusive of interest payments) shall be adjusted using a discount rate of ten percent (10%) to reflect differences in payment dates). If Lessee enters into a binding purchase and sale agreement subject to arms length conditions and contingencies ("Third Party Sale Agreement"), with an original stated purchase price (which shall be paid in cash or cash equivalent) of not less than ninety-five percent (95%) of the purchase price contained in the Best Offer (provided that if the consideration is payable over time then such consideration (inclusive of interest payments) shall be adjusted using a discount rate of ten percent (10%) to reflect differences in payment dates), neither Maui Land & Pineapple Company, Inc. nor The Ritz-Carlton Hotel Company, L.L.C. shall have any right to purchase as contained herein, provided that the closing under the Third Party Sale Agreement occurs not later than fifteen (15) months following the end of the Lessee's Review Period. (v) If Lessee desires to accept a purchase offer from a third party (a "Third Party Offer") that has a cash or cash equivalent purchase price that is less than ninety-five percent (95%) of the purchase price contained in the Best Offer (provided that if the consideration is payable over time then such consideration (inclusive of interest payments) shall be adjusted using a discount rate of ten percent (10%) to reflect differences in payment dates), the entity offering the Best Offer (the "Best Offer Entity") shall have the right within thirty (30) days after receipt of written notice from Lessee to conduct due diligence and to elect to purchase the Hotel and/or Lease (as the case may be) (the "Best Offer Entity Review Period") on terms identical to those set forth in the Third Party Offer as set forth in the notice from Lessee, with no exception unless expressly agreed by Lessee in its sole and absolute discretion; provided, however, (i) in no event shall Best Offer Entity's right to purchase the Hotel and/or the Lease (as the case may be) contain a due diligence period or contingency (it being understood that the Best Offer Entity shall have the opportunity to conduct due diligence during the Best Offer Entity Review Period), and the closing under such right to purchase shall occur no later than thirty (30) days from Best Offer Entity's written election to purchase, and (ii) that if any of the terms and conditions of the proposed transfer are not reasonably susceptible of performance by the Best Offer Entity (for example, third party guarantees of debt, property exchanges, stock exchanges, etc.), Lessee shall, in its notice to the Best Offer Entity, propose alternative terms and conditions of Lessee which are the substantial economic equivalent of such terms and conditions and which reasonably can be expected to be performed by the Best Offer Entity. During the thirty (30) day period after receipt of written notice as aforesaid, the Lessee shall, upon request, provide the Best Offer Entity with updated Due Diligence Materials and an opportunity to further inspect and investigate the Hotel, subject to customary indemnification. If the Best Offer Entity timely elects to purchase the Hotel and/or Lease (as the case may be) within the Best Offer Entity Review Period then upon acceptance, the Best Offer Entity shall deposit, with an escrow company in the State of Hawaii mutually acceptable to the Best Offer Entity and Lessee, a sum of TEN MILLION DOLLARS ($10,000,000) which shall be nonrefundable if the transaction with the Best Offer Entity fails to close as the result of a breach by the Best Offer Entity of any term or condition of the purchase agreement (or any alternate term or condition as set forth above). In the event of such failure to close by the Best Offer Entity, its rights under this Section 11.7(d) are null and void. (vi) If the Best Offer Entity fails to give written notice of the Best Offer Entity's election to purchase within the Best Offer Entity Review Period or fails to provide a deposit of TEN MILLION DOLLARS ($10,000,000) within the Best Offer Entity Review Period, Lessee shall be entitled to sell, assign or transfer the Hotel and/or this Lease to any third party at a purchase price which is no less than ninety-five percent (95%) of the purchase price contained in the "Third Party Offer" (provided that if the consideration is payable over time then such consideration (inclusive of interest payments) shall be adjusted using a discount rate of ten percent (10%)) and otherwise upon the terms and conditions set forth in the Third Party Offer within fifteen (15) months following the end of the Lessee's Review Period. (vii) If the third party transaction to which Lessee's notice to the Best Offer Entity applied does not close for any reason then Lessee shall have the remainder of the fifteen (15) months from the end of Lessee's Review Period to sell, assign or transfer or agree to sell, assign or transfer to another third party; provided that such third party sale is completed within fifteen (15) months following the end of Lessee's Review Period, and provided, further, that, subject to the terms set forth below, the purchase price paid by the third party (which shall be paid in cash or cash equivalent) is no less than (a) ninety-five percent (95%) of the highest purchase price of the Best Offer Entity (with an adjustment of the consideration (inclusive of interest) if payable over time, using a discount rate of ten percent (10%)), or (b) ninety-five percent (95%) of the purchase price contained in the Third Party Offer (with an adjustment of the consideration (inclusive of interest) if payable over time, using a discount rate of ten percent (10%)), whichever is less. If no sale, assignment or transfer of the Hotel and/or this Lease is completed within fifteen (15) months following the end of Lessee's Review Period, then, subject to the above provisions, the rights of Maui Land & Pineapple Company, Inc. and The Ritz-Carlton Hotel Company, L.L.C. under this Section 11.7(d) shall commence again if any time after the end of the fifteen (15) months following the end of Lessee's Review Period, Lessee intends to sell, assign or transfer the Hotel and/or the Lease or any portion thereof. (viii) Within five (5) days of executing a letter of intent with a prospective purchaser, Lessee shall notify Maui Land & Pineapple Company, Inc. of the identity of such prospective purchaser. (ix) Maui Land & Pineapple Company, Inc. understands, acknowledges and agrees that the provisions of this Section 11.7(d) are for the benefit of only Maui Land & Pineapple Company, Inc. so long as Maui Land & Pineapple Company, Inc. is the fee simple owner of the Premises and/or The Ritz-Carlton Hotel Company, L.L.C. so long as The Ritz-Carlton Hotel Company, L.L.C. is the Hotel Operator, and the provisions of this Section 11.7(d) shall not inure to the benefit of its successors or assigns unless agreed to otherwise by Lessee in its sole discretion. e. Notwithstanding the foregoing, Lessee may, without the consent of Lessor, operate the Hotel as a hotel and license, sublease or enter into concession agreements for use of a portion of the Premises for commercial use normally found in hotels in accordance with this Lease but in compliance with Section 8.8(a). 11.8 Attorneys' Fees. If any action, suit or proceeding is brought by any party hereto with respect to this Lease, the prevailing party in any such action, suit or proceeding shall be entitled to recover from the other party or parties, in addition to such other relief as the court may award, all reasonable attorneys' fees and costs of suit incurred by the prevailing party in connection with such action, suit or proceeding. 11.9 Indemnity. a. Lessee shall defend, indemnify and hold the Lessor harmless from and against any and all claims and demands for loss or damage, including claims for property damage, personal injury or wrongful death, arising out of or in connection with the use or occupancy of the Premises by the Lessee or any other person claiming by, through or under Lessee, or any accident or fire on the Premises, or any nuisance made or suffered thereon, or any failure of the Lessee to maintain the Premises in a safe condition, and the Lessee shall reimburse the Lessor for all costs and expenses, including reasonable attorneys' fees, paid or incurred by the Lessor in connection with defense of any such claims, including but not limited to all costs of Lessor's defense to any such claim or in any such action as well as all costs for research regarding settlement or other preventive measures which Lessor may take prior to the filing of such action or to attempt to prevent the filing of such an action. b. Lessor shall defend, indemnify and hold the Lessee harmless from and against any and all claims and demands for loss or damage, including claims for property damage, personal injury or wrongful death, arising out of or in connection with the use or occupancy of the Premises by the Lessor or any other person claiming by, through or under Lessor, or any accident or fire on the Premises, or any nuisance made or suffered thereon, or any failure of the Lessor to maintain the Premises in a safe condition, and the Lessor shall reimburse the Lessee for all costs and expenses, including reasonable attorneys' fees, paid or incurred by the Lessee in connection with defense of any such claims, including but not limited to all costs of Lessee's defense to any such claim or in any such action as well as all costs for research regarding settlement or other preventive measures which Lessee may take prior to the filing of such action or to attempt to prevent the filing of such an action. 11.10 Multiple Lessees. If more than one Lessee is entering into this Lease, then all such Lessees shall be jointly and severally bound by the Lessee's covenants in this Lease and any notice given to any one such Lessee by Lessor shall be deemed to be notice upon all such Lessees. 11.11 No Increase of Lessee's Estate. Lessee hereby waives and relinquishes any and all rights given to a lessee under Chapter 516 of the Hawaii Revised Statutes (1968), as amended from time to time, or any similar law which may be enacted at any time during the Term giving Lessee the right to expand Lessee's leasehold estate under this Lease, which the Lessee would not have under the terms of this Lease in the absence of such chapter or such law, it being understood and agreed by and between Lessor and Lessee that the provisions of such chapter or such law shall not apply to this Lease. Any attempt by Lessee or any person claiming by or through Lessee to expand its estate under this Lease pursuant to such chapter or such law shall be a breach of this Lease. 11.12 Calendar Periods. Unless explicitly provided otherwise in this Lease, all references in this Lease to periods of time, including without limitation days, months, quarters, and years, shall mean calendar periods of time. 11.13 Interest on All Late Payments. All payments required to be made by Lessee to Lessor or by Lessor to Lessee under this Lease which are not paid within ten (10) days of the due date for such payments required in the Lease shall bear interest at a rate equal to Lessor's Cost of Money accruing from the due date until such overdue payments are paid in full. 11.14 Neither Lessor nor Lessee Deemed Drafter. All provisions of this Lease have been negotiated by Lessor and Lessee at "arm's length" and with full representation of their respective legal counsel and Lessor and Lessee agree that neither party shall be deemed to be the drafter of this Lease and further that in the event that this Lease is ever construed by a court of law, such court shall not construe this Lease or any provision of this Lease against either party as the drafter of the Lease. 11.15 Successors and Assigns. All the terms, covenants and conditions of this Lease shall inure to the benefit of and be binding upon the successors and permitted assigns of the Lessor and Lessee to the same extent as said terms, covenants and conditions inure to the benefit of and are binding upon the Lessor and the Lessee, respectively. 11.16 Lessor's Right to Sell Fee. Subject to the right of first refusal contained in Section 12.1, Lessee agrees that nothing in this Lease shall be construed to prevent the Lessor from selling, assigning or otherwise transferring all or any part of the Lessor's fee simple interest in the Premises subject to this Lease. In the event of Lessor's transfer of all of Lessor's fee simple interest in the Premises subject to this Lease, Lessee agrees that, so long as the assignee assumes in writing this Lease, any and all obligations of Lessor under this Lease not then accrued shall terminate upon the effective date of such sale and Lessee hereby releases Lessor from any obligations or covenants under this Lease which have not accrued prior to such effective date. 11.17 Entire Agreement. This Lease constitutes the full and complete agreement of Lessor and Lessee and all other prior oral and written agreements shall be deemed to have merged into this Lease and have no further force or effect. This Lease may be amended only in writing, signed by both Lessor and Lessee. 11.18 Consent. Where the consent or approval of the Lessor or Lessee is required by any provision of this Lease, all such approvals or consents shall be in writing and unless expressly so provided to the contrary, such consent shall not be unreasonably withheld or delayed. 11.19 Amendment. This Lease may only be amended in writing executed by both Lessor and Lessee. 11.20 Estoppel Certificates. Within ten (10) days of written notice from Lessor or Lessee, Lessor or Lessee shall execute, acknowledge and deliver to the other a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to the other's knowledge, any uncured defaults on the part of the other hereunder, or specifying such defaults if any are claimed, such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. 11.21 Time of the Essence. Time is of the essence of this Lease. 11.22 Conveyance and Hotel Room Taxes. Lessee shall be responsible for paying any conveyance tax that may be required to be paid as a result of this Lease and any hotel room taxes (including but not limited to taxes under the Hawaii Transient Accommodations Tax Law). 11.23 Short-Form Lease. Lessor and Lessee shall execute and Record or File a short form of this Lease at the same time as this Lease is executed. ARTICLE XII Special Provisions 12.1 Lessee's Right of First Refusal. a. Sale of Fee Simple Title and/or Lease. If at any time the Lessor shall receive an offer to purchase the fee simple title to the Premises and/or its interest in this Lease, and the Lessor intends to accept such offer, or Lessor otherwise intends to sell, assign, or transfer the fee simple title and/or its interest in the Lease (other than by way of Lessor's Mortgage, which pursuant to Section 5.6 shall be subject to the rights of Lessee under this Section 12.1), then the Lessor shall give Lessee written notice of such offer or intention stating (i) Lessor's intention to sell, assign or transfer the Premises and/or this Lease to such purchaser and (ii) all of the terms and conditions of such offer, proposal or agreement; if Lessor has a proposed written agreement or offer, Lessor shall include a copy of such agreement or offer with such notice to Lessee. If any of the terms and conditions of the proposed transfer are not reasonably susceptible to performance by Lessee (for example, third-party guarantees of debt, property exchanges, stock exchanges, etc.), Lessor shall, in its notice to Lessee, propose alternative terms and conditions which are the substantial economic equivalent of such terms and conditions and which reasonably can be expected to be performed by Lessee. Lessee shall have the right within sixty (60) days after receipt of such notice within which to elect to purchase the Premises and/or this Lease (as the case may be) on terms identical (or alternate terms and conditions as set forth above) to those set forth in the notice from Lessor; with the only exception that the consummation of Lessee's purchase from Lessor shall occur on the later of the sixtieth day following the date of Lessee's acceptance or the date set forth in Lessor's notice to Lessee. If Lessee fails to give notice of Lessee's election to purchase within sixty (60) days of receipt of Lessor's notice or elects not to so purchase, Lessor shall be entitled, at any time after such failure or election, to sell the Premises and/or this Lease (as provided in Lessor's notice to Lessee) to the purchaser with respect to whom Lessor's notice to Lessee applied and upon the terms and conditions set forth in such notice within one hundred twenty (120) days after such failure of or election by Lessee, subject to Lessee's consent as set forth above. Lessor may not, however, sell or agree to sell during that 120-day period or thereafter to a purchaser on more favorable terms and conditions without offering the more favorable terms and conditions to Lessee again under this paragraph. b. Sale of Interests in Addition to Fee Simple Title and/or Lease. Lessor agrees that if the offer to purchase and/or intent to sell the fee simple title to the Premises and/or Lessor's interest in this Lease is part of a transaction which includes the sale, assignment, transfer or conveyance of any other interest (whether real or personal property or intangible), Lessor will offer the fee simple title to the Premises and/or Lessor's interest in this Lease to Lessee as a separate and independent transaction from any other interests which Lessor intends to sell, assign, transfer or otherwise convey; provided, however, that neither this Section 12.1(b) nor Section 12.1(a) shall apply if the fee simple title to the Premises and/or Lessor's interest in this Lease is sold, assigned, transferred or conveyed as part of a sale, assignment, transfer or conveyance of the interests of Lessor and/or its Affiliates in multiple parcels, and such transaction involves in the aggregate one-half or more of the total number of acres of real property within the Kapalua Resort Area to which Maui Land & Pineapple Company and/or its Affiliates held fee simple title as of December 31, 1995. The purchase price for the separate and independent interest in the fee simple title to the Premises and/or Lessor's interest in this Lease shall be the lesser of (i) the price allocated by the proposed transaction to the fee simple title to the Premises and/or Lessor's interest in this Lease as part of an offer involving more than the sale of such interest or (ii) the fair market value of the fee simple title to the Premises and/or Lessor's interest in this Lease as determined by appraisal. Lessee shall notify Lessor of its intent to proceed to appraisal, and Lessor and Lessee shall each, within twenty (20) days of Lessee's notification to Lessor of Lessee's intent to proceed to appraisal, appoint an Appraiser who is a Member of the Appraisers' Institute. The Appraiser appointed by Lessor shall be referred to as "Lessor's MAI" while the Appraiser appointed by Lessee shall be referred to as "Lessee's MAI." Lessor's MAI and Lessee's MAI shall then determine the fair market value of Lessor's fee estate in the Premises for the purpose set forth herein. If within fifteen (15) days following the appointment of Lessor's MAI and Lessee's MAI, Lessor's MAI and Lessee's MAI are unable to agree on the fair market value of Lessor's fee estate in the Premises, then the Lessor and Lessee shall within ten (10) days appoint a third appraiser who is a Member of the Appraisers' Institute ("Joint MAI"), and the majority of Lessor's MAI, Lessee's MAI, and Joint MAI shall determine the fair market value of Lessor's fee estate in the Premises within fifteen (15) days of the appointment of the Joint MAI. If either the Lessor or the Lessee fails or refuses to appoint their respective Appraiser within the time provided aforesaid, the other party shall appoint the two Appraisers who shall then determine the value of this Lease. If either the Lessor or the Lessee fails or refuses to appoint a Joint MAI as aforesaid, the Lessee shall apply to the Court having proper jurisdiction over this subject matter for the appointment of such Joint MAI who shall also be a Member of the Appraisers' Institute whereupon the majority of the three so appointed shall determine the fair market value of Lessor's fee estate in the Premises. The Appraisers shall reduce to writing and deliver to each party a statement of the fair market value of the Lessor's fee estate in the Premises and such value shall serve as fair market value of the Lessor's fee estate in the Premises for any excess proceeds. Lessor and Lessee shall each pay for the cost of their respective appraiser and shall each pay one-half (1/2) of the cost of the Joint MAI, if such appraiser is needed. For the purposes of this Section 12.1, any offer or sale, assignment or transfer by Lessor to any Affiliate of Lessor shall not be subject to Lessee's right of first refusal. 12.2 Non-Competition. Lessor shall not itself develop, or permit a third party to develop, another luxury oceanfront hotel within the Kapalua Resort Area within ten (10) years after the Initial Lease Date, except for: (a) the Kapalua Bay Hotel site (including the existing hotel, any expansions, replacements or the like), (b) the adjacent Site 29 property; and (c) specialized housing such as for a health spa, international center not containing a luxury oceanfront hotel, and similar developments including condominium projects. 12.3 Signage. During the Term hereof, Lessor shall use its best efforts to cause KRA (or where it is in Lessor's control) to erect and maintain within the Kapalua Resort Area appropriate directional signage for the Hotel as reasonably requested by the Lessee. To the extent controllable by Lessor, such rights shall not be subject to termination by a transfer of the rights of the Lessor. Any such signage shall be in compliance with KRA regulations and any applicable government rules and regulations and shall be compatible with the signage theme in the Kapalua Resort Area. 12.4 No License of Butterfly Logo. Lessor does not grant to Lessee or the Hotel Operator any right or license, non-exclusive or otherwise, to use the butterfly logo depicted on Exhibit "C" of the Golf Course Use Agreement in connection with the operation, advertising and promotion of the Hotel or any condominium units in the Kapalua Resort Area owned or managed by the Lessee or the Hotel Operator and/or the merchandising, manufacture, promotion, sale and distribution of goods or services related thereto, at the Hotel or such condominium units, or in connection with anything else. Any such license shall be in the sole and absolute discretion of the Lessor and neither the Lessee nor the Hotel Operator shall use the butterfly logo without the prior written consent of the Lessor, which consent may be unreasonably and arbitrarily withheld. 12.5 Additional Parking Spaces. Lessee shall have the right, for the Term hereof, to use the thirty (30) parking spaces within the parking lot on Lot 1B, as described in Exhibit "A" (the "Off-Site Parking Spaces") shown on the map of the parking lot attached hereto as Exhibit "B" and made a part hereof. Lessor and Lessee shall mutually agree upon the location of signs and markings to identify the same. Throughout the Term, Lessee shall have first priority to use the Off-Site Parking Spaces for hotel parking only. At such time that Lessee chooses to exercise its right to utilize the Off-Site Parking Spaces, Lessee shall provide the Lessor with prior written notice of its intent to do so and shall specify the commencement date of its use. At all times that Lessee uses the Off-Site Parking Spaces, certain sections of the Ground Lease listed below shall apply to Lessee's use provided, however, that the interpretation and application of such sections shall be modified by substituting the term "Off-Site Parking Spaces" in place of the term "Premises" in each provision and by the fact that the parties have agreed that Lessor, and not Lessee, shall bear the obligation, at Lessor's sole expense, to repair and maintain the Off-Site Parking Spaces in good order and condition. Section 8.7, Waste and Unlawful Use, Section 8.9, Liens, and Section 11.9, Indemnity, of the Ground Lease, modified as hereinbefore described, shall apply to the Off-Site Parking Spaces during any period that Lessee exercises its right to use the Off-Site Parking Spaces. In addition, during any period that Lessee exercises its right to use the Off-Site Parking Spaces, Lessee shall add the Off-Site Parking Spaces to the areas covered by the comprehensive general liability insurance policy that Lessee is required to maintain under Section 6.5 of the Ground Lease and shall provide the Lessor with evidence of such insurance coverage. It is understood and agreed that Lessee may for a period of time terminate its use of the Off-Site Parking Spaces by providing written notice to Lessor of its intent to do so and that Lessee shall also have the right from time to time during the Term of the Ground Lease to re-commence its use of the Off- Site Parking Spaces in the same manner and on the same conditions as described herein above. It is further understood and agreed that during any period that Lessee chooses not to exercise its right to utilize the Off-Site Parking Spaces, Lessor may use the Off-Site Parking Spaces for resort parking. IN WITNESS WHEREOF, the Lessor and Lessee have caused these presents to be executed as of the day and year first above written. MAUI LAND & PINEAPPLE COMPANY, RCK HAWAII, LLC dba RCK INC., Lessor HAWAII-MAUI, Lessee By BCM/CHI RCK Kapalua, Inc. its sole member By /S/DON YOUNG By /S/ RONALD J. KRAVIT Don Young Ronald J. Kravit Its Executive Vice President/Resort Its President EX-13 4 annrpt.txt 2000 ANNUAL REPORT MAUI LAND & PINEAPPLE COMPANY, INC ANNUAL REPORT 2000 CONTENTS Letter to Shareholders 2 Pineapple 4 Resort 5 Commercial & Property 6 Independent Auditors' Report 7 Consolidated Balance Sheets 8 Consolidated Statements of Operations and Retained Earnings 10 Consolidated Statements of Comprehensive Income 10 Consolidated Statements of Cash Flows 11 Notes to Consolidated Financial Statements 12 Quarterly Earnings 19 Common Stock 19 Selected Financial Data 20 Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Officers and Directors inside back cover THE COMPANY Maui Land & Pineapple Company, Inc., a Hawaii corporation organized in 1909, is a land-holding and operating company with several wholly owned subsidiaries, including two major operating companies, Maui Pineapple Company, Ltd. and Kapalua Land Company, Ltd. The Company, as used herein, refers to the parent and its subsidiaries. The Company's principal business activities are Pineapple, Resort and Commercial & Property. The Company owns approximately 28,600 acres of land on the island of Maui, of which about 8,400 acres are used directly or indirectly in the Company's operations. The Company employed approximately 1,890 people in 2000 on a year-round or seasonal basis. Maui Pineapple Company, Ltd. is the operating subsidiary for Pineapple. Its canned pineapple, pineapple juice and fresh pineapple are found in supermarkets throughout the United States. The canned pineapple products are sold as store-brand pineapple with 100% HAWAIIAN U.S.A. imprinted on the can lid. In addition, the products are sold through institutional, industrial and export distribution channels. Kapalua Land Company, Ltd. is the development and operating subsidiary for the Kapalua Resort. The Kapalua Resort is a master-planned, golf resort community on Maui's northwest coast. The property encompasses 1,650 acres bordering the ocean with three white sand beaches. Commercial & Property includes the operations of various properties, including Kaahumanu Center, the largest retail and entertainment center on Maui. It also includes the Company's land entitlement and management activities and land sales that are not part of the Kapalua Resort. On the cover: The Village Clubhouse at Kapalua Resort opened in August 2000. To request a copy of news releases or other financial reports, contact us at our corporate offices or visit our web sites. Printed in Hawaii 10-K REPORT Shareholders who wish to receive, free of charge, a copy of the Company's 10-K Report to the Securities and Exchange Commission (excluding certain exhibits) may write to: Corporate Secretary Maui Land & Pineapple Company, Inc. P. O. Box 187 Kahului, Hawaii 96733-6687 OFFICES Corporate Offices Pineapple Marketing Office Maui Land & Pineapple Company, Inc. Maui Pineapple Company, Ltd. P. O. Box 187 P. O. Box 4003 Kahului, Hawaii 96733-6687 Concord, California 94524-4003 Telephone: 808-877-3351 Telephone: 925-798-0240 Fax: 808-871-0953 Fax: 925-798-0252 www.mauiland.com Maui Pineapple Company, Ltd. P. O. Box 187 Kahului, Hawaii 96733-6687 Telephone: 808-877-3351 Fax: 808-871-0953 www.pineapplehawaii.com Kapalua Land Company, Ltd. 1000 Kapalua Drive Kapalua, Hawaii 96761-9028 Telephone: 808-669-5622 Fax: 808-669-5454 www.kapaluamaui.com Kaahumanu Center 275 Kaahumanu Avenue Kahului, Hawaii 96732-1612 Telephone: 808-877-3369 Fax: 808-877-5992 www.kaahumanu.net Transfer Agent & Registrar Independent Auditors Mellon Investor Services LLC Deloitte & Touche LLP P. O. Box 3315 1132 Bishop Street, Suite 1200 South Hackensack, New Jersey 07606-1915 Honolulu, Hawaii 96813-2870 Telephone: 800-356-2017 Telephone: 808-543-0700 www.mellon-investor.com MAUI LAND & PINEAPPLE COMPANY, INC. & SUBSIDIARIES FINANCIAL HIGHLIGHTS
2000 1999 1998 (Dollars in Thousands Except Per Share Amounts) REVENUES Pineapple $ 85,892 $ 94,535 $ 97,658 Resort 50,262 47,950 41,929 Commercial & Property 5,043 4,381 4,087 Corporate 286 132 37 Total 141,483 146,998 143,711 NET INCOME 452 4,670 3,596 NET INCOME PER COMMON SHARE $ .06 $ .65 $ .50 AVERAGE COMMON SHARES OUTSTANDING 7,195,800 7,188,840 7,188,500 TOTAL ASSETS $ 169,951 $ 153,387 $136,247 CURRENT RATIO 1.7 1.5 2.1 LONG-TERM DEBT and CAPITAL LEASES $ 41,012 $ 25,497 $ 23,592 STOCKHOLDERS' EQUITY 65,922 66,400 62,492 STOCKHOLDERS' EQUITY PER COMMON SHARE $ 9.16 $ 9.23 $ 8.69 EMPLOYEES 1,890 2,040 2,030
TO OUR SHAREHOLDERS and EMPLOYEES: We are disappointed to report that net income fell from $4,670,000 in 1999 to $452,000 in 2000. While substantial progress in terms of profit contribution was made in the Resort division, extremely competitive market conditions in the United States for canned pineapple products resulted in a dramatically lower profit contribution from the Pineapple division. Our strategic focus remains on improving the level of consistent profitability, particularly from the cyclical Pineapple segment. Our goal for the Company remains to produce a 10% to 15% return on equity. Net income for 2000 includes a $2 million pre-tax profit contribution from the sale of single family home lots in Plantation Estates Phase II at Kapalua. Land sales and development activity contributed approximately $1.3 million to net income in 2000 and $1.5 million in 1999. Cash provided by operating activities decreased by $16.8 million from $18.5 million in 1999 to $1.7 million in 2000. The decrease in cash flow from operations on a year-to-year basis is attributable to lower operating results and cash flow in the Pineapple division. Investment in property, plant and equipment was approximately $18.2 million in both 1999 and 2000, and the Company's total debt, including capital leases, increased by $16 million, from $28.6 million in 1999 to $44.5 million in 2000. As a result, interest expense increased substantially, from $1.8 million in 1999 to $3.1 million in 2000. Interest of approximately $643,000 in 1999 and $840,000 in 2000 was capitalized in connection with construction projects, such as the Village Clubhouse and Kapalua Golf Academy project. Interest expense in 2000 also increased because of higher average interest rates on the Company's debt. The Company's Pineapple division reported an operating loss of $2.9 million in 2000, a $9 million reduction from the 1999 operating profit of $6.1 million. Sales volume in cases sold declined primarily due to a high level of imported canned pineapple products entering the retail stores in 2000 and highly competitive market conditions. Contributing to the operating loss for the year was a lower average per case sales price for canned pineapple products due to the same competitive conditions. Also contributing to the Pineapple operating loss in 2000 was the effect of very low rainfall experienced over the last several years. Lower rainfall had the effect of reducing the quality of fruit processed in the cannery and, as a result, the recovery of finished goods per ton of fresh pineapple was lower in 2000 than in 1999. We were pleased with the increase in sales volume of fresh whole pineapple and fresh cut pineapple products. The increases in fresh sales volume were, however, more than offset by the reduction in canned pineapple sales. Next week, we will present testimony to the U.S. International Trade Commission in support of a five-year renewal of anti-dumping duties on canned pineapple fruit imported from Thailand into the United States. These duties have been in effect for the last five years and are an important element in the future profitability and success of the Company's canned pineapple business. The decision of the Commission on whether to renew the tariffs for another five years should be made by mid-year. In addition to cost reduction, a major element of strategic planning for the Pineapple division is to diversify its revenue sources by development of new and higher margin products. Considerable success has been realized in the development and sale of fresh cut pineapple in various container sizes and fruit configurations. Further market penetration and sales volume must be achieved before the product line makes a major profit contribution. Sales of single strength pineapple juice packed in 64 ounce plastic containers grew to significant levels in 2000. Distribution was limited to the California market and, hopefully, will increase as distribution to other market areas is achieved. The contribution from the Resort division increased substantially in 2000. Operating profit of $7.8 million was up 36% over the operating profit of $5.7 million in 1999. Almost all of the improvement in contribution was realized as a result of better performance from Resort operations. The Resort continued to benefit from a healthy U.S. economy for most of the year, high consumer confidence levels and a record year for the Hawaii visitor industry with over 7 million visitors and a statewide increase in occupancy in 2000 of 7%. The Kapalua Resort experienced significantly higher occupancy and average room rates in 2000 compared to 1999. The island of Maui continued to benefit from a strong appeal to visitors from the mainland, an important factor in the operating performance at Kapalua. Another important element of the Resort's performance is the recognition provided by the Mercedes Championships Golf Tournament, which was held again in January. This nationally televised event featuring tournament champions from the 2000 PGA tour provides an extraordinary level of market exposure for the Kapalua Resort. It is very important to the Company and the continued success of the Kapalua Resort that Maui's infrastructure issues, particularly adequacy of highways and roads, be addressed in a positive manner in the near term. For this purpose, we will continue to urge the State and County governments to address the deficiencies. The Resort made substantial progress in improving the quality of its guest experience in 2000. Completion of the Village Clubhouse and Kapalua Golf Academy at a cost of over $16 million represents a major improvement in the golf operation. We believe that the commitment to providing a quality guest experience results in increased value and return to the Company over the long term. The appeal of the Resort as a residential community was demonstrated in the last year by the level of sales of residential real estate. Coconut Grove on Kapalua Bay is the first condominium project undertaken at Kapalua since the early 1980s. The project is completely sold and the first of the finished condominiums is expected to be delivered to the buyers in the second quarter of this year. To date, 16 of 31 single family homesites in Pineapple Hill Estates have been sold. Construction commenced in March 2001 and this project is expected to be completed in the fourth quarter of this year. The recent slowing of economic activity in the United States and dramatic drop in consumer confidence levels appear to have had a negative impact on the pace of advanced hotel reservations in Hawaii and in the pace of real estate sales. As a result, the contribution from Resort operations may be somewhat lower in 2001. The contribution provided by development activities at the Kapalua Resort should, however, be substantially higher due to recognition of profit from the two real estate projects mentioned above. The Commercial & Property division posted modestly improved results in 2000. The operating loss of $441,000 was $13,000 better than the operating loss incurred in 1999. Merchandise sales at Kaahumanu Center, Maui's largest shopping center, increased by approximately 6% over 1999 levels. Continued improvement in the general economy of Maui led by higher occupancy and rates in the visitor industry and construction activity continue to have a positive impact. The opening of two new shopping centers, located at Wailea and in Kihei, and the expected opening of two major new retailers, Home Depot and Walmart, are expected to worsen the current oversupply of retail space. As a result, we expect the highly competitive retail business environment to continue. Sales at Napili Plaza increased in 2000 by approximately 7%, but contribution to net income remained about the same as 1999. At its meeting on March 7, 2001, the Company's Board of Directors received the resignation of Mr. Daniel H. Case as a director and approved his appointment as a director emeritus. Concurrently, the board unanimously appointed Mr. John H. Agee as director to fill the unexpired term of Mr. Case. We welcome Mr. Agee to the board and believe, with his extensive experience, he will make significant contributions. We are very pleased to continue to have the benefit of continued participation by Mr. Case as a director emeritus. The business climate for the Pineapple division will continue to be difficult in 2001. The oversupply of canned pineapple products in the market should persist due to the high level of imports. While the economic environment for the Resort division likely will not be as favorable as 2000, we believe the Resort will continue to make a significant contribution. While not demonstrated by 2000 financial performance, we believe progress has been made in enhancing the long-term value of the Company's assets and in moving toward the Company's financial goal of a consistent higher level of profitability. Thank you for your continued support and for your commitment to the Company's success. /S/ RICHARD H. CAMERON Richard H. Cameron Chairman /S/ GARY L. GIFFORD Gary L. Gifford President & CEO March 7, 2001 PINEAPPLE The Pineapple division reported an operating loss in 2000, before allocated interest and income taxes, of $2.9 million compared to an operating profit in 1999 of $6.1 million. Pineapple revenue for 2000 was $85.9 million, down 9% from 1999 revenue of $94.5 million. Canned pineapple produced 86% of the total revenue and overall case volume decreased 9% compared to 1999. Case sales volume of grocery and institutional fruit, the largest and third largest categories within the canned fruit product line, decreased by 22% and 15%, respectively, from 1999 levels. Juice case sales volume increased overall by 2%. The introduction of pineapple juice in 64 ounce plastic bottles (commonly called "PET") into the California market contributed to the increase in juice case sales volume. Concentrate case sales volume was down 76% in 2000 compared to 1999 as the company shifted product to more profitable lines. The decline in canned fruit case sales volume in 2000 is mainly due to a 39% increase in pineapple imports in 1999 versus 1998 that acted to suppress market pricing as much of this product came into retail stores in 2000. The suppression of market pricing in 2000 was particularly true of the national brands as they fought to recapture lost share caused by shortage of product from 1998 through mid-1999. In addition, Y2K concerns resulted in consumer pantry-loading in the last quarter of 1999 and in lower purchases of canned food products in early 2000 as consumers worked through their household inventory. In 2000, a reduction in unit values of imports also put severe downward pricing pressure on the U.S. market, the company's primary market. Although the case volume of imports decreased in 2000, the total average unit value for imports of canned pineapple and pineapple juice concentrate also decreased 17% and 29%, respectively. Case volume of canned pineapple imports into the United States were down 9% through November 2000 versus 1999 with most of the decrease reflecting a 32% decline in imports from Thailand. The decrease in import case volume appears to be a result of antidumping duties on canned pineapple fruit imported from Thailand. We believe that the reduction in import case volume, combined with the decline in unit values, is reflective of a general decrease in demand for canned fruits. Fresh whole pineapple net sales for 2000 were 8% higher than 1999 sales and tons sold were up 8% from 1999. Sales of Jet Fresh pineapple, the company's largest fresh fruit category, surged in the fourth quarter and ended the year with a 12% increase over 1999. Maui sales of fresh whole pineapple also were strong with case sales up 17% over 1999. Although a small part of the overall volume, fresh cut pineapple case sales volume increased by 73%. This increase was important to the company as the product continues to get a favorable reaction from retailers and we further expand distribution of fresh cut pineapple on the West Coast. The pineapple crop on Maui experienced another prolonged drought in 2000. Rainfall at every key rain gauge station on the Haliimaile and Honolua plantations was once again recorded at levels below the five-year historical average. This was the sixth consecutive year of dry weather conditions. The most stressed areas were in the Kula and Omaopio fields of the Haliimaile farm. The new Haliimaile well and the irrigation systems on both plantations were used at maximum capacity available to mitigate effects of the drought, resulting in higher than expected irrigation costs. Total tonnage of pineapple harvested in 2000 was below 1999 levels, partially because of dry conditions, but more so due to a planned reduction in the company's plantings in less productive fields. While tonnage is expected to be lower in the future, we anticipate a reduction in cost of production and improvement in the quality of our fruit. Fruit and juice recovery in 2000 were below 1999 levels due to less than favorable weather conditions and smaller than normal fruit size in part due to higher tonnage from ratoon fields. Total production costs increased significantly in 2000 due to price increases in steel, fiber, fuel, fertilizer and water. In 2000, the company was successful in obtaining an exclusion from the 95% antidumping duties levied against our steel supplier from Japan. Because of this, we expect to have lower steel costs in 2001. Antidumping duties were in effect on canned pineapple from Thailand throughout 2000. The U.S. Department of Commerce concluded the fourth annual review of these tariffs and determined that all Thai pineapple companies reviewed continued to dump, but overall the dumping margins were lower than those currently being assessed. A "Sunset Review" of antidumping duties on imports of canned pineapple is now in progress. The Department of Commerce determined that the revocation of the antidumping duty on canned pineapple from Thailand would likely result in continued dumping by these companies. The International Trade Commission (ITC) is expected to determine by mid-year 2001 whether the domestic industry will be injured again if these duties are removed. If the ITC decision is affirmative, the duties will stay in place until the next "Sunset Review" in five years. A new federal law was passed in 2000 that provides for the distribution of all antidumping and countervailing duties collected by U.S. Customs to the injured U.S. companies. The ITC has listed Maui Pineapple Company, Ltd. as qualifying for the distribution of antidumping duties. Until regulations and procedures to administer this new law are written, the company is unable to estimate the amount or timing of the potential distribution. In 2000, extensive progress was made with new products, both in the fresh cut and canned categories. We expect to test market several of these new products in 2001. Our emphasis on fresh fruit will continue through 2001. We expect 2001 will be a challenging year as we proceed with expanding and improving our business. RESORT Overall, 2000 was a very good year for the resort division with record profits from ongoing operations and the fourth consecutive year of improved total profits. For 2000, operating profit before allocated interest and taxes totaled $7.8 million compared with $5.7 million in 1999. Kapalua resort operations benefited from a positive external business environment in 2000. Hawaii's visitor industry achieved a record number of visitors to the State, resort real estate demand continued to grow and Hawaii's economy finally began to show improvement. These trends were fueled primarily from the strength of the U.S. economy and were seen throughout the State, including the island of Maui. Maui again led all islands with an annual hotel occupancy in 2000 of 80.1% and an increase of almost 13% in revenue per available room. Kapalua resort continued to show significant increased demand reflected in a 4% gain in occupancy and a 16% increase in revenue per available room. Profits from resort operations increased almost 36% and accounted for most of the total resort division profit in 2000. All major revenue segments of golf, villas, retail and leasing showed significant growth with a 12% gain in total gross revenue. In addition to the increase in occupancy, our operations benefited from the opening of the Kapalua Golf Academy (January) and new Village Clubhouse (August). In total, this development represents a major investment of over $16 million and is a key foundation for the future Central Resort development and our strategic positioning as one of the world's finest resort golf communities. In September 2000, Marriott International purchased The Ritz- Carlton Kapalua hotel from Nissho Iwai for $144 million. After securing a long-term hotel management contract for Ritz-Carlton, Marriott sold the hotel in February 2001 at approximately the same price to Capital Hotel Investments LLC, a joint venture between Marriott International and affiliates of Blackacre Capital Management LLC. The sale provides assurance for the long-term management of the hotel by Ritz-Carlton with no significant changes to our ground lease. Resort development also showed substantial progress in 2000, but most of the financial impact will be recognized in 2001. Resort real estate trends continued to demonstrate strong gains through year-end with a 33% increase in total resale volume on Maui. Kapalua led Maui resorts with an increase of 154% in total resale dollar volume, mostly from the growth in luxury single- family home sales. Inventory of resort real estate available for resale is at record low levels, resulting in continued pricing pressure. This resale growth occurred despite significant new product sales at Kapalua. Profit from resort development in 2000 was due mostly to the fourteen two-acre lots in Plantation Estates II. The last two lots closed escrow in the first quarter of 2000, but profits have been accounted for using the percentage-of-completion method, which resulted in profit recognition of $2 million in 2000. Significant progress has been made on The Coconut Grove on Kapalua Bay, the 36 luxury beachfront condominiums we are developing through a 50/50 partnership with Lend Lease Real Estate Investment, Inc., owner of the Kapalua Bay Hotel. All 36 exclusive residences are under binding contract for a total sales volume of $68.6 million. Profits will be recorded when title to the residences is delivered after construction is completed, which is now scheduled for the second quarter of 2001. In November 2000, we began sales of 31 half-acre custom lots in Pineapple Hill Estates. To date, escrow has closed on 16 lots with total sales prices of $10.2 million and two additional lots are under contract. Construction of the subdivision improvements is expected to begin in March 2001 and be completed by year end. Profits will be recorded on a percentage-of-completion method and should result in full profit recognition in 2001 for sales that have closed escrow. We are proceeding with design and entitlements of future resort development, including the Central Resort and additional residential opportunities in Project District 2, which primarily surrounds the Village Course. The Mercedes Championships continue to be an important feature of our marketing plan and strategic positioning for the Kapalua resort. The recently completed 2001 event was a great success highlighted by another dramatic finish on the last hole. Our winner, Jim Furyk, is a Kapalua property owner, having previously purchased a lot at Plantation Estates. With one year remaining on our initial contract with the PGA TOUR and Mercedes-Benz, we are optimistic that a four-year extension will be concluded in 2001. We anticipate 2001 will reflect significant development profits from The Coconut Grove on Kapalua Bay and Pineapple Hill Estates, but as with any development, this is subject to substantial timing and other normal development risks. Signs of concern are being expressed for both Hawaii's visitor industry and resort real estate market, reflecting the recent downturn and uncertainty of the U.S. economy. As a result, we believe 2001 will be a more difficult year for Kapalua resort operations. Despite this challenge in 2001, we are confident the resort division continues to be very well positioned for the future. COMMERCIAL & PROPERTY The Commercial & Property business segment produced an operating loss, before allocation of interest and income taxes, of $441,000 in 2000 compared to a slightly higher operating loss of $454,000 in 1999. Revenue increased from $4.4 million in 1999 to $5.0 million in 2000. Joint venture losses at Kaahumanu Center, a 570,000 square foot regional mall in Kahului, increased from $1,800,000 in 1999 to $1,942,000 in 2000. Kaahumanu Center's revenue increased by 7% in 2000 and expenses increased by 15% compared to 1999. Higher minimum and percentage rents contributed to improved revenues. Factors that led to the increased expenses included higher repairs and maintenance, professional fees and payroll-related costs. The Company's share of these losses, together with management fees and other expenses, resulted in an operating loss of $207,000 compared to an operating loss of $468,000 in 1999. The reduction in the overall loss from Kaahumanu Center in 2000 was due to improved recoveries on the sale of electricity from the Company to Kaahumanu Center. Occupancy at Kaahumanu Center remained about the same as 1999. Several new merchants opened in 2000, including Hot Topic, Motherhood, Moondoggy's, Tahitian Pearl, First At Hemp, Maui Mudworks, Maui Waterwear and North Shore Break. Merchant sales at Kaahumanu Center increased over 6% compared to the prior year. In 2000, Kaahumanu Center formulated a plan to increase its marketing efforts. Key elements of the plan include modification of the name, a new logo and a new look for the center. This will be extended to numerous enhancements of signage, d,cor, graphics, entertainment and cultural heritage. Napili Plaza, the Company's 45,000 square foot community shopping center, showed a profit of $200,000 in 2000, which was very close to the results for 1999. New tenants included Cinemagic, Third Heaven, an expansion of Boss Frog Dive Shop and an architectural office. Merchant sales at Napili Plaza were up almost 7% in 2000 compared to the previous year. Both revenue and expenses were up slightly for Napili Plaza in 2000 compared to 1999. Operating losses in other property-related and land management and development activities increased from $409,000 in 1999 to $491,000 in 2000. Gains from land sales decreased in 2000 by $148,000 from the prior year. In 2000, the Company obtained land use entitlement approvals from the County of Maui for approximately 11 acres of land within Haliimaile Village in Upcountry Maui. Of the 11 acres of Company- owned lands that were rezoned, approximately 2 acres were rezoned to Country Town Business District with the remaining 9 acres rezoned to Light Industrial District. In 1998, approximately 2.5 acres of Company-owned lands within Haliimaile Village were rezoned to County Town Business District. Planning work that commenced in 1999 for the business-commercial development of the initial 2.5 acres of land rezoned to Country Town Business District was amended to include the additional 11 acres of rezoned lands. The Maui Planning Commission, during a special meeting held November 27, 2000, granted approval of the Special Management Area Permit for the Company's Kapua Village Employee Subdivision in West Maui. The Special Management Area Permit is the final discretionary permit needed for the subdivision. Construction documents for infrastructure improvements for the subdivision were submitted to the governmental agencies for their initial review in December 2000. It is anticipated that work on the construction phase of the subdivision will commence sometime in 2001. In 2000, the Land Management & Development Division also initiated work on the conceptual development planning, evaluation of development alternatives and feasibility analysis for other Company-owned lands. Overall in 2000, the Land Management & Development Division continued to work toward strategies, goals and objectives to more effectively and responsibly manage, plan and develop the Company's valuable land and water assets. INDEPENDENT AUDITORS' REPORT To the Stockholders and Directors of Maui Land & Pineapple Company, Inc.: We have audited the accompanying consolidated balance sheets of Maui Land & Pineapple Company, Inc. and its subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations and retained earnings, comprehensive income, and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 consolidated financial statements present fairly, in all material respects, the financial position of the Companies at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /S/DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Honolulu, Hawaii February 1, 2001 MAUI LAND & PINEAPPLE COMPANY, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2000 and 1999
2000 1999 (Dollars in Thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $ 351 $ 2,657 Accounts and notes receivable, less allowance of $1,028 and $783 for doubtful accounts 16,032 15,098 Inventories Pineapple products 15,332 9,714 Real estate held for sale 1,592 577 Merchandise, materials and supplies 7,332 6,634 Prepaid expenses and other assets 5,498 4,779 Total Current Assets 46,137 39,459 INVESTMENTS AND OTHER ASSETS 14,089 12,952 PROPERTY Land 4,940 4,737 Land improvements 56,013 46,062 Buildings 58,529 50,317 Machinery and equipment 115,950 105,784 Construction in progress 6,745 18,058 Total Property 242,177 224,958 Less accumulated depreciation 132,452 123,982 Net Property 109,725 100,976 TOTAL $169,951 $153,387 2000 1999 (Dollars in Thousands) LIABILITIES & STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable and current portion of long-term debt $ 3,120 $ 2,792 Current portion of capital lease obligations 388 264 Trade accounts payable 8,476 12,492 Customers' deposits 1,460 1,264 Payroll and employee benefits 4,484 4,662 Deferred revenue 8,102 3,365 Other accrued liabilities 803 1,696 Total Current Liabilities 26,833 26,535 LONG-TERM LIABILITIES Long-term debt 40,330 25,077 Capital lease obligations 682 420 Accrued retirement benefits 23,575 23,204 Accumulated losses of joint venture in excess of investment 9,990 8,944 Other noncurrent liabilities 2,215 2,361 Total Long-Term Liabilities 76,792 60,006 MINORITY INTEREST IN SUBSIDIARY 404 446 CONTINGENCIES AND COMMITMENTS STOCKHOLDERS' EQUITY Common stock--no par value, 7,200,000 shares authorized, 7,195,800 shares issued and outstanding 12,455 12,455 Retained earnings 53,498 53,945 Accumulated other comprehensive loss (31) -- Stockholders' Equity 65,922 66,400 TOTAL $169,951 $153,387 See Notes to Consolidated Financial Statements
MAUI LAND & PINEAPPLE COMPANY, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998 (Dollars in Thousands Except Per Share Amounts) REVENUES Net sales $103,194 $112,191 $113,391 Operating revenue 36,908 33,982 29,123 Other income 1,381 825 1,197 Total Revenues 141,483 146,998 143,711 COSTS AND EXPENSES Cost of goods sold 72,803 74,494 76,049 Operating expenses 30,169 27,440 26,168 Shipping and marketing 18,289 18,479 16,673 General and administrative 15,825 16,408 15,094 Equity in losses of joint ventures 972 956 1,160 Interest 3,061 1,834 3,039 Total Costs and Expenses 141,119 139,611 138,183 INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 364 7,387 5,528 INCOME TAX EXPENSE (CREDIT) (88) 2,717 1,188 INCOME BEFORE EXTRAORDINARY LOSS 452 4,670 4,340 EXTRAORDINARY LOSS, NET OF INCOME TAX CREDIT OF $456 -- -- (744) NET INCOME 452 4,670 3,596 RETAINED EARNINGS, BEGINNING OF YEAR 53,945 50,174 46,578 CASH DIVIDENDS 899 899 -- RETAINED EARNINGS, END OF YEAR 53,498 53,945 50,174 PER COMMON SHARE Income Before Extraordinary Loss .06 .65 .60 Extraordinary Loss, Net of Income Tax Credit -- -- (.10) Net Income .06 .65 .50 Cash Dividends $ .125 $ .125 $ -- Average Common Shares Outstanding 7,195,800 7,188,840 7,188,500
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998 (Dollars in Thousands) NET INCOME $ 452 $ 4,670 $ 3,596 Other comprehensive loss - Foreign currency translation adjustment (31) -- -- COMPREHENSIVE INCOME $ 421 $ 4,670 $ 3,596 See Notes to Consolidated Financial Statements.
MAUI LAND & PINEAPPLE COMPANY, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998 (Dollars in Thousands) OPERATING ACTIVITIES Net income $ 452 $ 4,670 $ 3,596 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 9,002 8,445 8,176 Undistributed equity in losses of joint ventures 1,025 1,019 1,194 Gain on property disposals (113) (49) (627) Deferred income taxes (776) 552 (523) Increase in accounts receivable (1,630) (1,700) (526) Increase in inventories (6,660) (2,360) 5,193 Increase (decrease) in trade payables (2,595) 3,798 (420) Net change in other operating assets and liabilities 2,987 4,094 1,568 NET CASH PROVIDED BY OPERATING ACTIVITIES 1,692 18,469 17,631 INVESTING ACTIVITIES Purchases of property (18,179) (18,213) (8,230) Proceeds from sale of property 371 509 634 Contributions to joint ventures -- (575) (425) Payments for other investments (512) (2,735) (1,632) NET CASH USED IN INVESTING ACTIVITIES (18,320) (21,014) (9,653) FINANCING ACTIVITIES Proceeds from long-term debt 34,196 15,632 30,647 Payments of long-term debt (18,720) (13,659) (35,780) Proceeds from short-term debt 105 729 -- Payments on capital lease obligations (318) (494) (1,009) Dividend paid (899) (899) -- Other (42) 446 -- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 14,322 1,755 (6,142) NET INCREASE (DECREASE) IN CASH (2,306) (790) 1,836 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,657 3,447 1,611 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 351 $ 2,657 $ 3,447
Supplemental Disclosures of Cash Flow Information and Non-Cash Investing and Financing Activities: 1. Cash paid during the year (in thousands): Interest (net of amount capitalized) $ 2,952 $ 1,711 $ 4,809 Income taxes 1,490 1,842 984 2. Amounts included in accounts payable for additions to property and other investments totaled $2,024,000, $3,445,000 and $1,227,000, respectively, at December 31, 2000, 1999 and 1998. 3. In December 1999, 7,300 shares of Company stock, which was held by a wholly owned subsidiary of the Company, were contributed to the Company's Employee Stock Ownership Plan (see Note 5 to Consolidated Financial Statements). 4. Capital lease obligations of $704,000 in 2000 were incurred for new equipment. 5. During the fourth quarter of 2000, the Company received land, including two water reservoirs, in satisfaction of $486,000 of trade receivables. See Notes to Consolidated Financial Statements. MAUI LAND & PINEAPPLE COMPANY, INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include the accounts of Maui Land & Pineapple Company, Inc. and subsidiaries, primarily Maui Pineapple Company, Ltd. and Kapalua Land Company, Ltd. Significant intercompany balances and transactions have been eliminated. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, deposits in banks and commercial paper with original maturities of three months or less. INVENTORIES Inventories of tinplate, cans, ends and canned pineapple products are stated at cost, not in excess of market value, using the dollar value last-in, first-out (LIFO) method. The costs of growing pineapple are charged to production in the year incurred rather than deferred until the year of harvest. For financial reporting purposes, each year's total cost of growing and harvesting pineapple is allocated to products on the basis of their respective market values; for income tax purposes, the allocation is based upon the weight of fruit included in each product. Real estate held for sale is stated at the lower of cost or fair value less cost to sell. Merchandise, materials and supplies are stated at cost, not in excess of market value, using retail and average cost methods. INVESTMENTS AND OTHER ASSETS Cash surrender value of life insurance policies is reflected net of loans against the policies. Investments in joint ventures are generally accounted for using the equity method. PROPERTY AND DEPRECIATION Property is stated at cost. Major replacements, renewals and betterments are capitalized while maintenance and repairs that do not improve or extend the life of an asset are charged to expense as incurred. When property is retired or otherwise disposed of, the cost of the property and the related accumulated depreciation are written off and the resulting gains or losses are included in income. Depreciation is provided over estimated useful lives of the respective assets using the straight-line method. POSTRETIREMENT BENEFITS The Company's policy is to fund pension cost at a level at least equal to the minimum amount required under federal law, but not more than the maximum amount deductible for federal income tax purposes. Deferred compensation plans for certain management employees provide for specified payments after retirement. The present value of estimated payments to be made were accrued over the period of active employment. On October 1, 1998, these plans were terminated (see Note 5 to Consolidated Financial Statements). The estimated cost of providing postretirement health care and life insurance benefits is accrued over the period employees render the necessary services. REVENUE RECOGNITION Revenue from the sale of pineapple is recognized when title to the product is transferred to the customer. The timing of the transfer of title varies according to the shipping and delivery terms of the sale. Sales of real estate are recognized as revenues in the period in which sufficient cash has been received, collection of the balance is reasonably assured and risks of ownership have passed to the buyer. When the Company's remaining obligation to complete improvements is significant, the sale is recognized on the percentage-of-completion method. Revenue from other activities is recognized when delivery has occurred or services have been rendered, the sales price is fixed or determinable and collectibility is reasonably assured. INTEREST CAPITALIZATION Interest costs are capitalized during the construction period of major capital projects. ADVERTISING AND RESEARCH AND DEVELOPMENT The costs of advertising and research and development activities are expensed as incurred. LEASES Leases that transfer substantially all of the benefits and risks of ownership of the property are accounted for as capital leases. Amortization of capital leases is included in depreciation expense. Other leases are accounted for as operating leases. INCOME TAXES The Company's provision for income taxes is calculated using the liability method. Deferred income taxes are provided for all temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. FOREIGN CURRENCY TRANSLATION The assets and liabilities of the Company's majority owned subsidiary in Central America are translated into U.S. dollars at exchange rates in effect at the balance sheet date, and revenues and expenses are translated at weighted average exchange rates in effect during the period. Translation adjustments are reported as other comprehensive income and accumulated in Stockholders' Equity. Transaction gains and losses that arise from exchange rate changes on transactions denominated in a currency other than the functional currency are included in income as incurred. During 2000 and 1999, foreign transaction adjustments were not material. 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 amounts 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. Future actual amounts could differ from those estimates. NEW ACCOUNTING PRONOUNCEMENT FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, became effective on January 1, 2001. The Company has performed an assessment of its contracts and agreements and to date, has not identified any derivative instruments. EARNINGS PER COMMON SHARE Earnings per common share is computed using the weighted average number of shares outstanding during the period. The Company has no dilutive potential common shares outstanding. 2. INVENTORIES Pineapple product inventories were comprised of the following components at December 31, 2000 and 1999: 2000 1999 (Dollars in Thousands) Finished Goods $ 12,855 $ 7,399 Work In Progress 1,030 839 Raw Materials 1,447 1,476 Total $ 15,332 $ 9,714 The replacement cost of pineapple product inventories at year end approximated $27 million in 2000 and $21 million in 1999. In 1998, there was a partial liquidation of LIFO inventories; thus, cost of sales included prior years' inventory costs, which were lower than current costs. Had current costs been charged to cost of sales, net income for 1998 would have decreased by $1,360,000 or $.19 per share. 3. INVESTMENTS AND OTHER ASSETS Investments and Other Assets at December 31, 2000 and 1999 consisted of the following: 2000 1999 (Dollars in Thousands) Deferred Costs $ 5,922 $ 6,657 Cash Surrender Value of Life Insurance Policies (net) 798 633 Prepaid Pension Asset 4,068 2,774 Kapalua Coconut Grove LLC 1,058 905 Other 2,243 1,983 Total $14,089 $12,952 Deferred costs are primarily intangible predevelopment costs related to various projects at the Kapalua Resort that will be allocated to future development projects. Cash surrender value of life insurance policies are stated net of policy loans, totaling $597,000 at December 31, 2000 and 1999. KAPALUA COCONUT GROVE LLC Kapalua Coconut Grove LLC (KCG) is a Hawaii limited liability company whose members are the Company and an affiliate of Lend Lease Real Estate Investments, Inc. KCG was formed in June 1997 to own, develop and sell the 12-acre parcel of beachfront property adjacent to the Kapalua Bay Hotel. Each member contributed to the venture its 50% interest in the land parcel and $1.1 million in cash. Presales of the 36 luxury residential condominiums to be constructed on the parcel began in August 1999 and mass grading and site work began in November 1999. As of June 2000, all 36 condominiums were under binding sales contracts. Sales are expected to close beginning in the second quarter of 2001 as construction of the buildings is completed and title is delivered to the buyers. Each member has a 50% interest in KCG and the Company has accounted for its investment in KCG by the equity method. The Company's pre-tax share of KCG's net income (loss) was $(62,000) in 2000, $(172,000) in 1999 and $1,000 in 1998. KAAHUMANU CENTER ASSOCIATES In June 1993, Kaahumanu Center Associates (KCA) was formed to finance the expansion and renovation of and to own and operate Kaahumanu Center. KCA is a partnership between the Company as general partner and the Employees' Retirement System of the State of Hawaii (ERS) as a limited partner. The Company contributed the then existing shopping center, subject to a first mortgage, and approximately nine acres of adjacent land. ERS contributed $312,000 and made a $30.6 million loan to the partnership. The expansion and renovation were substantially complete by the end of November 1994. Effective April 30, 1995, the ERS converted its $30.6 million loan to an additional 49% ownership in KCA. Effective with conversion of the ERS loan, the Company and ERS each have a 50% interest in KCA and the Company has accounted for its investment in KCA by the equity method. The Company has a long-term agreement with KCA to manage Kaahumanu Center. The agreement provides for certain performance tests that, if not met, could result in termination of the agreement. The tests were not met in 2000, but termination of the agreement is not presently being considered. KCA does not have any employees. As manager, the Company provides all administrative and on-site personnel and incurs other costs and expenses, primarily insurance, which are reimbursable by KCA. The Company generates a portion of the electricity used by Kaahumanu Center. In accordance with the limited partnership agreement, the Company as manager may make cash advances to KCA in order to avoid a cash flow deficit. The advances bear interest at one percent above the interest rate on KCA's first mortgage loan. In 2000, cash advances from the Company to KCA totaled $586,000 and interest on the advances at 9.57% totaled $34,000. In 2000, 1999 and 1998, reimbursements from KCA for payroll and other costs and expenses totaled $2,637,000, $2,417,000 and $2,303,000, respectively, and the Company charged KCA $3,328,000, $2,531,000 and $2,402,000, respectively, for electricity and management fees. At December 31, 2000 and 1999, $1,216,000 and $1,154,000, respectively, were due to the Company from KCA for cash advances, management fees, electricity and reimbursable costs. Summarized balance sheet information for KCA as of December 31, 2000 and 1999 and operating information for each of the three years ended December 31, 2000 follows: 2000 1999 (Dollars in Thousands) Current assets $ 1,197 $ 1,188 Property and equipment, net 69,200 72,277 Other assets, net 1,710 1,701 Total Assets 72,107 75,166 Current liabilities 2,978 2,969 Noncurrent liabilities 59,226 60,352 Total Liabilities 62,204 63,321 Partners' Capital $ 9,903 $ 11,845 2000 1999 1998 Revenues $ 15,654 $ 14,506 $ 13,625 Costs and Expenses 17,596 16,306 16,104 Net Loss $ (1,942) $ (1,800) $ (2,479) The Company's share of losses from KCA was $971,000, $900,000 and $1,240,000, respectively, for 2000, 1999 and 1998. ERS and the Company each have a 9% cumulative, non-compounded priority right to cash distributions based on their net contributions to the partnership (preferred return). For the purpose of calculating preferred returns, each partner's capital contribution had an agreed upon value of $30.9 million on May 1, 1995. The Company's preferred return is subordinate to the ERS preferred return. As of December 31, 2000, the accumulated unpaid preferred return was $13 million each for ERS and the Company. The Company's investment in KCA is a negative $9.9 million at December 31, 2000. The negative balance is a result of (1) recording the Company's initial contribution in 1993 at net book value of the assets contributed, reduced by the related debt and (2) the Company's share of KCA's accumulated losses since 1995. 4. BORROWING ARRANGEMENTS During 2000, 1999 and 1998, the Company had average borrowings outstanding of $43.5 million, $29.5 million and $33 million, respectively, at average interest rates of 8.5%, 7.8% and 8.9%, respectively. Short-term bank lines of credit available to the Company at December 31, 2000 were $1.4 million. These lines provide for interest at the prime rate (9.5% at December 31, 2000) plus 1/4% to 1/2%. There were no borrowings under these lines at December 31, 2000, but $618,000 in letters of credit was reserved against these lines to secure the Company's deductible portion of insurance claims administered by various insurance companies. The Company has a $900,000 working capital credit facility for its Central American operations. At December 31, 2000 and 1999, the Company had borrowings outstanding of $834,000 and $729,000 under this facility at 7.15% and 7.55%, respectively. Long-term debt at December 31, 2000 and 1999 consisted of the following (interest rates represent the rates at December 31): 2000 1999 (Dollars in Thousands) Term loan, 7.87% to 8.39% and 9.44% to 9.73% $ 15,000 $ 15,000 Revolving credit agreement, 8.5% and 8.83% to 8.91% 10,850 3,400 Development line of credit, 8.62% to 9.03% 8,800 -- Mortgage loan, 7.25% 4,721 4,807 Equipment loans, 6.76% to 8.46% 3,245 3,932 Total 42,616 27,139 Less portion classified as current 2,286 2,062 Long-term debt $ 40,330 $25,077 The Company has a $15 million term loan that is secured by certain parcels of the Company's real property on Maui. Principal payments are due from September 2004 through June 2009. Interest rates on the loan are adjustable to 2.15% to 2.55% above six-month, one-year and three-year rates made available by the Federal Farm Credit Bank. The agreement includes certain financial covenants, including the maintenance of a minimum tangible net worth and debt coverage ratio, maximum funded debt to capitalization ratio, and limits on capital expenditures, investments and the payment of dividends. The Company has a revolving credit agreement with participating banks under which it may borrow up to $15 million in revolving loans through December 31, 2002. Amounts outstanding at that date, at the Company's option, may be converted to a three-year term loan payable in six equal semi- annual installments. The agreement also includes an $8.8 million non-revolving development line of credit facility for construction of the Village Course Clubhouse and Kapalua Golf Academy. The development facility reduces to $8 million in March 2001 and matures in March 2002. Commitment fees of 1/4% are payable on the unused portions of the revolving credit line and the development facility. At the Company's option, interest on advances under both the revolving credit line and the development facility is at the prime rate or based on a LIBOR rate. The loan is collateralized by the Company's three golf courses at the Kapalua Resort. The agreement contains certain financial covenants, including the maintenance of consolidated net worth and working capital at certain levels and limits on the incurrence of other indebtedness and capital expenditures. Declaration and payment of cash dividends is restricted to 30% of prior year's net income. The mortgage loan is collateralized by the Napili Plaza shopping center and matures on December 31, 2005. Payments are based on a 25-year amortization. Effective January 1, 1999, the interest rate on the loan was amended to 7.25% until January 1, 2002. The interest rate will be adjusted to the lender's then prevailing rate of interest for such loans as of January 1, 2002 and January 1, 2005. The Company has agreements that provide for term loans that were used to purchase assets for the Company's pineapple and resort operations. At December 31, 2000, $1,188,000 of these term loans had interest rates that were adjustable to one month LIBOR plus 2.25%. The balance of these loans is at fixed interest rates. The loans mature through December 2004. The agreements include certain financial covenants that are similar to those in the Company's revolving credit agreement. One of the agreements also requires the maintenance of a minimum tangible net worth and debt coverage ratio (as defined). Maturities of long-term debt during the next five years, from 2001 through 2005, are as follows: $2,286,000 $9,192,000 $4,386,000 $3,828,000 and $3,741,000. 5. POSTRETIREMENT BENEFITS The Company has defined benefit pension plans and defined benefit postretirement health care and life insurance plans. Changes in benefit obligations and changes in plan assets for 2000 and 1999 and the funded status of the plans and amounts recognized in the balance sheets as of December 31, 2000 and 1999 were as follows:
Pension Benefits Other Benefits 2000 1999 2000 1999 (Dollars in Thousands) Change in benefit obligations: Benefit obligations at beginning of year $ 35,863 $ 35,071 $ 13,263 $ 15,379 Service cost 1,501 1,443 358 359 Interest Cost 2,535 2,396 920 895 Actuarial gain (127) (897) (400) (2,657) Amendments 265 -- 194 -- Benefits paid (2,145) (2,150) (716) (713) Benefit obligations at end of year 37,892 35,863 13,619 13,263 Change in plan assets: Fair value of plan assets at beginning of year 46,167 41,807 -- -- Actual return on plan (2,133) 6,367 -- -- assets Employer contributions 346 143 716 713 Benefits paid (2,145) (2,150) (716) (713) Fair value of plan assets at end of year 42,235 46,167 -- -- Funded status 4,343 10,304 (13,619) (13,263) Unrecognized actuarial gain (1,186) (7,548) (5,469) (5,425) Unrecognized net transition (224) (759) -- -- asset Unrecognized prior service cost 376 185 (845) (1,172) Net amounts recognized 3,309 2,182 (19,933) (19,860) Amounts recognized in balance sheets consist of: Prepaid benefit cost 4,068 2,774 -- -- Accrued benefit liability (759) (592) (19,933) (19,860) Net amounts recognized $ 3,309 $ 2,182 $(19,933) $(19,860)
Net periodic benefit costs for 2000, 1999 and 1998 included the following components:
2000 1999 1998 (Dollars in Thousands) Pension benefits: Service cost $ 1,501 $ 1,443 $ 1,240 Interest cost 2,535 2,396 2,261 Expected return on plan assets (4,036) (3,638) (2,925) Amortization of net transition asset (535) (535) (535) Amortization of prior service cost 74 59 61 Recognized net actuarial (gain) loss (319) (14) 3 Special termination benefits -- -- 314 Net expense (credit) (780) (289) 419 Other benefits: Service cost 358 359 411 Interest cost 920 895 1,024 Amortization of prior service cost (133) (146) (147) Recognized net actuarial gain (356) (320) (209) Special termination benefits -- -- 29 Net expense $ 789 $ 788 $ 1,108
In 1998, in an effort to reduce the size of its workforce, the Company offered a voluntary, enhanced early retirement program to employees in the Pineapple and Corporate divisions based on age and years of service. Net pension expense for 1998 increased by $314,000 and net expense for other postretirement benefits increased by $29,000 as a result of implementing this program. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plan with accumulated benefits in excess of plan assets were $1,328,000, $744,000 and $-0-, respectively, as of December 31, 2000 and $1,028,000, $578,000 and -0-, respectively, as of December 31, 1999. The benefit obligations for pensions and other postretirement benefits were determined using a discount rate of 7.25% as of December 31, 2000 and 1999, and compensation increases ranging up to 4.5%. The expected long-term rate of return on assets ranged up to 9% for 2000 and 1999. The accumulated postretirement benefit obligation for health care as of December 31, 2000 and 1999 was determined using a health care cost trend rate of 10% in 1995, decreasing by .5% each year from 1995 through 2004 and 5% thereafter. The effect of a 1% annual increase in these assumed cost trend rates would increase the accrued postretirement benefit obligation by approximately $1,642,000 as of December 31, 2000, and the aggregate of the service and interest cost for 2000 by approximately $173,000; a 1% annual decrease would reduce the accrued postretirement benefit obligation by approximately $1,345,000 as of December 31, 2000, and the aggregate of the service and interest cost for 2000 by approximately $140,000. The Company has an Employee Stock Ownership Plan (ESOP) for non-bargaining salaried employees and for bargaining unit clerical employees of Maui Pineapple Company, Ltd. All of the shares originally sold to the ESOP in 1979 have been allocated to participants since December 1993. In December 1999, 7,300 shares of the Company's common stock held by a wholly owned subsidiary were contributed to the ESOP. The Company recorded a charge to employee benefit expense of $137,000 and a corresponding credit to Common Stock. Effective December 31, 1999, the Company's Board of Directors approved a plan amendment to freeze the ESOP. Accordingly, after 1999 there were no further contributions to the ESOP and no additional employees became participants of the plan. On October 1, 1998, deferred compensation plans that provided for specified payments after retirement for certain management employees were terminated. At the termination date, these employees were given credit for existing years of service and future accruals were discontinued. 6. MINORITY INTEREST IN SUBSIDIARY In February 1999, Royal Coast Tropical Fruit Company, Inc. (a wholly owned subsidiary of Maui Pineapple Company, Ltd.) formed a subsidiary company in Central America and invested $503,000 for a 51% ownership interest in a new pineapple production company. The minority stockholders contributed $460,000. The minority stockholders' share of the 2000 and 1999 operating losses were not material. 7. DEFERRED REVENUE Deferred revenue for 2000 and 1999 primarily represents proceeds received on closed lot sales at the Kapalua Resort in excess of revenue recognized on the percentage-of-completion method. In December 2000, 12 of the 31 lots in Pineapple Hill Estates closed escrow. No revenue was recognized on these sales in 2000. Construction of the Pineapple Hill Estates subdivision improvements is expected to begin in the first quarter of 2001 and is scheduled to be substantially completed during the fourth quarter of 2001. At December 31, 1999, 12 of the 14 lots in Plantation Estates Phase II had closed escrow and revenue was recognized on the percentage-of-completion method. Construction of the Plantation Estates Phase II subdivision improvements began in the fourth quarter of 1999 and was substantially complete in the second quarter of 2000. 8. LEASES LESSEE The Company has capital leases, primarily on equipment used in pineapple operations, which expire at various dates through 2005. At December 31, 2000 and 1999, property included capital leases of $1,615,000 and $900,000, respectively (accumulated depreciation of $506,000 and $452,000, respectively). Future minimum rental payments under capital leases aggregate $1,180,000 (including $110,000 representing interest) and are payable as follows (2001 to 2005): $436,000, $325,000, $122,000, $114,000 and $183,000. The Company has various operating leases, primarily for land used in pineapple operations, which expire at various dates through 2012. A major operating lease covering approximately 1,500 acres used primarily for pineapple operations expired on December 31, 1999. The lease currently is being renegotiated for a minimum term of ten years. Total rental expense under operating leases was $821,000 in 2000, $801,000 in 1999 and $746,000 in 1998. Future minimum rental payments under operating leases aggregate $5,307,000 and are payable during the next five years (2001 to 2005) as follows: $691,000, $614,000, $501,000, $482,000, $479,000, respectively, and $2,540,000 thereafter. LESSOR The Company leases land and land improvements, primarily to hotels at Kapalua, and buildings, primarily to retail tenants. The leases generally provide for minimum rents and, in most cases, percentage rentals based on tenant revenues. In addition, the leases generally provide for reimbursement of common area maintenance and other expenses. Total rental income under these operating leases was as follows: 2000 1999 1998 (Dollars in Thousands) Minimum rentals $ 1,832 $ 1,744 $ 1,694 Percentage rentals 3,140 2,232 1,279 Total $ 4,972 $ 3,976 $ 2,973 Property at December 31, 2000 and 1999 includes leased property of $20,519,000 and $20,473,000, respectively (accumulated depreciation of $11,279,000 and $10,623,000, respectively). Future minimum rental income aggregates $6,884,000 and is receivable during the next five years (2001 to 2005) as follows: $1,314,000, $1,067,000, $849,000, $667,000, $607,000, respectively, and $2,380,000 thereafter. 9. INCOME TAXES The components of the income tax provision (credit) were as follows: 2000 1999 1998 (Dollars in Thousands) Current Federal $ 984 $ 1,831 $ 1,225 State (296) 334 30 Total 688 2,165 1,255 Deferred Federal (777) 584 (415) State 1 (32) (108) Total (776) 552 (523) Total provision (credit) $ (88) $ 2,717 $ 732 Reconciliation between the total provision and the amount computed using the statutory federal rate of 34% follows: 2000 1999 1998 (Dollars in Thousands) Federal provision at statutory rate $ 124 $ 2,512 $ 1,471 Adjusted for State income taxes, net of effect on federal income taxes (210) 200 (91) Appreciated property donation -- -- (721) Other (2) 5 73 Total income tax provision (credit) $ (88) $ 2,717 $ 732 Deferred tax assets and liabilities were comprised of the following types of temporary differences as of December 31, 2000 and 1999: 2000 1999 (Dollars in Thousands) Accrued retirement benefits $ 6,789 $ 6,921 Minimum tax credit carryforward 3,379 2,567 Accrued liabilities 1,491 1,120 Inventory 468 439 Allowance for doubtful accounts 359 216 Net operating loss carryforward 85 70 Total deferred tax assets 12,571 11,333 Deferred condemnation proceeds (5,891) (5,864) Property net book value (2,923) (2,629) Income from partnerships (1,847) (1,840) Pineapple marketing costs (691) (583) Other (146) (120) Total deferred tax liabilities (11,498) (11,036) Net deferred tax asset $ 1,073 $ 297 A valuation allowance against deferred tax assets as of December 31, 2000 and 1999 is not considered necessary as the Company believes that it is more likely than not the deferred tax assets will be fully realized. At December 31, 2000, the Company had federal minimum tax credit carryforwards of $3.4 million. The Company's federal income tax return for 1993 is under examination by the Internal Revenue Service. The revenue agent's report on this examination has not been issued and the Company presently cannot predict the outcome of this examination. 10. INTEREST CAPITALIZATION Interest cost incurred in 2000, 1999 and 1998 was $3,901,000, $2,477,000 and $3,179,000, respectively, of which $840,000, $643,000 and $140,000, respectively, was capitalized. 11. ADVERTISING AND RESEARCH AND DEVELOPMENT Advertising expense totaled $2,000,000 in 2000, $1,801,000 in 1999 and $1,397,000 in 1998. Research and development expenses totaled $845,000 in 2000, $839,000 in 1999 and $815,000 in 1998. 12. EXTRAORDINARY LOSS In December 1998, the Company retired $20 million of 8.86% senior unsecured notes. Principal payments on the $20 million loan were due from 1999 through 2003. A prepayment penalty of $1.2 million was paid for early extinguishment of the 8.86% notes and has been accounted for as an extraordinary loss of $744,000 (net of income tax credit of $456,000). 13. CONTINGENCIES AND COMMITMENTS In 1996, the County of Maui sued several chemical manufacturers claiming that they were responsible for the presence of a nematocide commonly known as DBCP in certain water wells on Maui. The Company was a Third Party Defendant in the suit as a result of a 1978 agreement for the sale of DBCP to the Company from one of the DBCP manufacturers. In August 1999, settlement of the case was reached. The Company's portion of the cash payment in 1999 to install filtration systems in existing contaminated wells was substantially covered by proceeds of a settlement concluded on this issue with its insurance carrier. The Company and the other defendants as a group have agreed that until December 1, 2039, they will pay for 90% of the capital cost to install filtration systems in any future wells if DBCP contamination exceeds specified levels and for the ongoing maintenance and operating cost for filtration systems on existing and future wells. The level of DBCP in the existing wells should decline over time as the wells are pumped, which may end the requirement for filtration before 2039. To secure the obligations of the defendants under the settlement agreement, the defendants are required to furnish to the County of Maui an irrevocable standby letter of credit throughout the entire term of the agreement. The Company had estimated a range of its share of the cost to operate and maintain the filtration systems for the existing wells and its share of the cost of the letter of credit, and recorded a reserve for this liability in 1999. The reserve recorded in 1999 and adjustments thereto in 2000 did not have a material effect on the Company's financial statements for the years ended December 31, 2000 and 1999. There are procedures in the settlement agreement to minimize the DBCP impact on future wells by relocating the wells to areas unaffected by DBCP or by using less costly methods to remove DBCP from the water. The Company is unable to estimate the range of potential financial impact for the possible filtration cost for any future wells acquired or drilled by the County of Maui and, therefore, has not made a provision in its financial statements for such costs. There are various claims and legal actions pending against the Company. In the opinion of management, after consultation with legal counsel, the resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. The Company has guaranteed the payment of up to $10 million of the $60 million mortgage loan of Kaahumanu Center Associates. The lender will release the guaranty when Kaahumanu Center attains a defined level of net operating income. Premium Tropicals International, LLC (PTI) is a joint venture between Royal Coast Tropical Fruit Company, Inc. (a wholly owned subsidiary of Maui Pineapple Company, Ltd.) and an Indonesian pineapple grower and canner. The joint venture markets and sells Indonesian canned pineapple in the United States. The Company is a guarantor of a $3 million line of credit, which supports letters of credit to be issued on behalf of PTI for import trading purposes. At December 31, 2000, the Company had commitments under signed contracts totaling $2,786,000. 14. CONCENTRATIONS OF CREDIT RISK A substantial portion of the Company's trade receivables results from sales of pineapple products, primarily to food distribution customers in the United States. Credit is extended after evaluating creditworthiness and no collateral generally is required from customers. Notes receivable result principally from sales of real estate in Hawaii and are collateralized by the property sold. 15. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Except for certain long-term debt, the carrying amount of the Company's financial instruments is considered to be the fair value. The fair value of long-term debt was estimated based on rates currently available to the Company for debt with similar terms and remaining maturities. The estimated fair values for these financial instruments at December 31, 2000 and 1999 were as follows: 2000 1999 (Dollars in Thousands) Carrying Fair Carrying Fair Amount Value Amount Value Long-Term Debt $42,616 $42,302 $ 27,139 $ 26,348 16. BUSINESS SEGMENTS The Company's reportable segments are Pineapple, Resort and Commercial & Property. Each segment is a line of business requiring different technical and marketing strategies. Pineapple includes growing pineapple, canning pineapple in tin-plated steel containers fabricated by the Company and marketing canned and fresh pineapple products. Resort includes the development and sale of real estate, property management and the operation of recreational and retail facilities and utility companies at Kapalua on Maui. Commercial & Property covers non-resort real estate activities, including the Company's investment in Kaahumanu Center Associates, Napili Plaza shopping center and non-resort real estate development, rentals and sales. It includes the Company's land entitlement and land management activities. The accounting policies of the segments are the same as those described in Note 1, Summary of Significant Accounting Policies. Commercial 2000 Pineapple Resort & Property Other Consolidated (Dollars in Thousands) Revenues (1) $85,892 $ 50,262 $ 5,043 $ 286 $ 141,483 Operating profit (loss) (2) (2,891) 7,752 (441) (995) 3,425 Interest expense (1,572) (992) (164) (333) (3,061) Income (loss) before income taxes and extraordinary loss (4,463) 6,760 (605) (1,328) 364 Depreciation 5,106 3,222 498 176 9,002 Equity in earnings (losses)of joint ventures 61 (62) (971) -- (972) Investment in joint ventures 206 1,058 (9,990) -- (8,726) Segment assets (3) 81,294 69,227 7,169 12,261 169,951 Expenditures for segment assets 8,378 9,069 304 2,225 19,976 1999 Revenues (1) $94,535 $ 47,950 $ 4,381 $ 132 $ 146,998 Operating profit (loss) (2) 6,071 5,702 (454) (2,098) 9,221 Interest expense (919) (443) (133) (339) (1,834) Income (loss) before income taxes and extraordinary loss 5,152 5,259 (587) (2,437) 7,387 Depreciation 5,040 2,796 481 128 8,445 Equity in earnings (losses) of joint ventures 116 (172) (900) -- (956) Investment in joint ventures 198 905 (8,944) -- (7,841) Segment assets (3) 69,733 64,943 7,190 11,521 153,387 Expenditures for segment assets 8,365 13,750 226 795 23,136 1998 Revenues (1) $97,658 $ 41,929 $ 4,087 $ 37 $ 143,711 Operating profit (loss) (2) 5,480 5,239 (1,085) (1,067) 8,567 interest expense (1,543) (1,089) (167) (240) (3,039) Income (loss) before income taxes and extraordinary loss 3,937 4,150 (1,252) (1,307) 5,528 Depreciation 4,795 2,743 487 151 8,176 Equity in losses of joint 79 1 (1,240) -- (1,160) ventures Investment in joint ventures 145 495 7,969) -- (7,329) Segment assets (3) 2,384 53,323 6,780 13,760 136,247 Expenditures for segment assets 6,433 3,930 406 997 11,766 (1) Amounts are principally revenues from external customers. Intersegment revenues and interest revenues were insignificant. Sales to any single customer did not exceed 10% of consolidated revenues. Revenues attributed to foreign countries were $2.6 million, $3.1 million and $4.3 million, respectively, in 2000, 1999 and 1998. Foreign sales are attributed to countries based on the location of the customer. (2) "Operating profit (loss)" is total revenues less all expenses except allocated interest expenses and income taxes. Operating profit (loss) included in "Other" is primarily unallocated corporate expenses. (3) Segment assets are located in the United States, primarily Maui. Other assets are corporate and non-segment assets. QUARTERLY EARNINGS (unaudited)
First Second Third Fourth Quarter Quarter Quarter Quarter (Dollars in Thousands Except Per Share Amounts) 2000 Total revenues $34,775 $30,921 $37,195 $38,592 Net sales 24,138 21,135 28,279 29,642 Cost of sales 15,719 14,341 19,675 23,068 (a) Net income (loss) 1,945 300 556 (2,349)(a) Net income (loss) per common share .27 .04 .08 (.33) 1999 Total revenues $33,647 $30,371 $39,659 $43,321 (b) Net sales 23,284 22,013 31,277 35,617 (b) Cost of sales 14,742 13,776 21,592 24,384 income 1,624 381 1,270 1,395 Net income per common share .23 .05 .18 .19
(a) In the fourth quarter of 2000, the per unit cost of sales for pineapple products increased primarily as a result of a decrease in the planned production tonnage for the year. In addition, the Pineapple segment incurred increased fourth quarter 2000 charges for marketing and bad debt expenses. (b) Total revenues and net sales for the fourth quarter of 1999 included $5.4 million from lot sales at the Plantation Estates Phase II. COMMON STOCK The Company's common stock is traded on the American Stock Exchange under the symbol "MLP." A dividend of $.125 per share was paid in March of 2000 and 1999. The declaration and payment of cash dividends are restricted by the terms of borrowing arrangements to 30% of prior year's net income. At February 13, 2001, there were 467 shareholders of record. The following chart reflects high and low sales prices during each of the quarters in 2000 and 1999: First Second Third Fourth Quarter Quarter Quarter Quarter 2000 High $ 17.50 $ 23.50 $ 26.63 $ 26.75 Low 14.00 14.75 22.13 21.00 1999 High $ 10.00 $ 15.88 $ 30.75 $ 21.75 Low 9.00 9.88 15.00 17.38 SELECTED FINANCIAL DATA
2000 1999 1998 1997 1996 (Dollars in Thousands Except Per Share Amounts) FOR THE YEAR Summary of Operations Revenues $141,483 $ 46,998 $ 43,711 $136,498 $136,335 Cost of goods sold 72,803 74,494 76,049 72,200 75,279 Operating expenses 30,169 27,440 26,168 26,027 24,030 Shipping and marketing 18,289 18,479 16,673 18,053 19,185 General and administrative 15,825 16,408 15,094 14,600 14,507 Equity in losses of joint ventures 972 956 1,160 1,211 882 Interest expense 3,061 1,834 3,039 3,045 3,575 Income tax expense (credit) (88) 2,717 1,188 499 (376) Income (loss) before extraordinary loss 452 4,670 4,340 863 (747) Extraordinary loss, net of income tax credit -- -- (744) -- -- Net income (loss) 452 4,670 3,596 863 (747) Per Common Share (1) Income (loss) before extraordinary loss .06 .65 .60 .12 (.10) Extraordinary loss, net of income tax credit -- -- (.10) -- -- Net income (loss) .06 .65 .50 .12 (.10) Other Data Cash dividends Amount 899 899 -- -- 90 Per common share (1) .125 .125 -- -- .01 Depreciation $ 9,002 $ 8,445 $ 8,176 $ 8,041 $ 8,606 Return on beginning stockholders' equity .7% 7.5% 6.1% 1.5% (1.3%) Percent of net income (loss) to revenues .03% 3.2% 2.5% .6% (.5%) AT YEAR END Current assets less current liabilities (2)$19,304 $ 12,924 $ 18,985 $ 20,283 $ 19,467 Ratio of current assets to current liabilities (2) 1.7 1.5 2.1 2.2 2.2 Property, net of depreciation $109,725 $100,976 $ 89,921 $ 88,047 $ 86,610 Total assets 169,951 153,387 136,247 135,507 132,851 Long-term debt and capital leases 41,012 25,497 23,592 29,435 28,898 Stockholders' equity Amount 65,922 66,400 62,492 58,896 58,033 Per common share (1) $ 9.16 $ 9.23 $ 8.69 $ 8.19 $ 8.07 Common shares outstanding (1) 7,195,800 7,195,800 7,188,500 7,188,500 7,188,500
(1) All references to the number of shares of common stock and per share amounts prior to 1999 have been restated to reflect the four-for-one common stock split as of May 1, 1998. (2) Current assets less current liabilities and ratio of current assets to current liabilities for 1999 decreased primarily because of increased accounts payable resulting from the high level of construction in progress at year-end. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS 2000 vs. 1999 The Company reported consolidated net income of $452,000 for 2000 compared to $4.7 million for 1999. The lower net income in 2000 was attributable to losses from the Pineapple segment and increased interest expense, which more than offset substantially increased operating profit from the Resort segment. General and administrative expenses for 2000 of $15.8 million were lower than 1999 by 4%. In 2000, the Company's payroll related costs decreased compared to 1999 primarily because there were no accruals for bonus incentives for 2000. The cost for outside consultants also was lower in 2000 because in 1999 the Company wrote off $1.1 million of deferred costs for consultants who were engaged to analyze and develop strategic plans for the Company. This reduction in outside consultant costs were partially offset by increased expenses in 2000 for consultants related to the selection of an integrated accounting and information technology system, which the Company is in the process of implementing. Pension expense was lower in 2000 compared to 1999 primarily because of a discount rate increase as of year-end 1999 and because of favorable investment returns in 1999. Expenses for medical and general insurance, workers compensation and vacation accruals increased in 2000 compared to 1999. Interest expense increased by 67% in 2000 compared to 1999 because of higher average borrowings and higher interest rates. Average borrowings were higher in 2000 as a result of lower cash flows from operating activities combined with a large amount of capital expenditures, in particular construction at the Kapalua Resort. An increase in the amount of interest capitalized in 2000, primarily because of construction of the Village Course Clubhouse, partially offset the increase in interest expense. PINEAPPLE Pineapple revenues of $86 million for 2000 were lower by 9% as compared to 1999. The segment produced an operating loss of $2.9 million in 2000 compared to operating profit of $6.1 million in 1999. The reduction in revenues was a result of both a lower case sales volume (the number of cases sold) as well as lower prices in 2000. These results reflect the highly competitive market conditions for canned pineapple products that the Company has been faced with throughout 2000 and anticipates continuing through the first half of 2001. Revenues from fresh whole and fresh cut pineapple products increased in 2000. The increased operating loss in 2000 also was due to higher marketing and bad debt expense and higher per case cost of sales primarily because of processing fewer tons of fruit in 2000. The average unit value of imported canned pineapple products declined significantly in 2000 compared to 1999, which put severe downward pressure on the market prices in the U.S. In addition market prices were suppressed in 2000 as a result of much of the 1999 imports entering the U.S. retail stores in 2000. In 1999, imports of canned pineapple products into the U.S. increased by 39%. Total imports of canned pineapple into the United States decreased by 9% in 2000 compared to 1999 primarily reflecting reduced import volume from Thailand. The reduced case volume of imports appears to be a result of the antidumping duties on canned pineapple fruit from Thailand. The Company believes that the reduction in import case volume combined with the decline in unit values is reflective of a general decrease in demand for canned fruits. Antidumping duties were in effect on canned pineapple fruit imported from Thailand since mid-1995 as a result of an antidumping petition in 1994 to which the Company was a party. The amount of duties on pineapple imports from Thailand is subject to annual administrative reviews by the U. S. Department of Commerce. Either the Company or the Thai producers may request these reviews. If the cost of production changes relative to the selling price of the product in the U.S., the duties would be adjusted. Some of the Thai pineapple companies have significantly reduced their antidumping duties through the annual review process. Present antidumping duties on imports of canned pineapple from Thailand range from less than 1% up to 51%. Final results of the fourth annual administrative review, covering the period from July 1, 1998 to June 30, 1999, were released in December 2000. Overall, the nine Thai pineapple companies reviewed were found to have lower dumping margins than those reflected in the antidumping duties currently being assessed. In 2000, the Department of Commerce initiated proceedings for the "Sunset Review" of antidumping duties on imports of canned pineapple from Thailand. Preliminary results released by the Department of Commerce in the third quarter of 2000 indicate that revocation of the antidumping duties on canned pineapple from Thailand likely would result in continued dumping by Thai pineapple companies. The U. S. International Trade Commission (ITC) also began its proceedings for the Sunset Review in 2000. The Company anticipates that preliminary results from the ITC may be available in April or May 2001. For a continuation of existing duties, the Company must convince the ITC during the Sunset Review that elimination of the duties will potentially cause injury to the domestic industry. Elimination of the import duties could have a material adverse effect on the Company. In 2000, a new federal law was passed that provides for disbursement to injured U.S. companies of all antidumping duties collected by U.S. Customs. Although Maui Pineapple Company, Ltd. is listed as a company qualifying for these disbursements, the Company is unable to estimate the amount or timing of the potential disbursements until regulations and procedures to administer this new law are written. RESORT Kapalua Resort revenues, including operations and development, of $50.2 million for 2000 were 5% higher than 1999. Resort operating profit was $7.8 million in 2000 compared to $5.7 million in 1999. Higher revenues and operating profit generated by resort operations more than offset lower results from the sale of real estate inventories. Revenues from golf operations increased 11%, merchandise sales increased 12% and income from lease rents increased 26%. These improved results were largely due to higher average green fees, increased room occupancies at the hotels and increased ground lease percentages from the hotels. Revenue from The Kapalua Villas operations increased 12% in 2000 as a result of increased room occupancies and higher average room rates. Commissions from Kapalua Realty operations increased 71% in 2000, reflecting increased activity in the resale of Resort real estate. In addition to these revenue increases, improved operating results in 2000 also were due to general excise tax refunds related to prior years. Revenue from real estate sales decreased 21% in 2000 compared to 1999. Contribution to operating profit from sale of real estate inventory was $2 million in 2000 compared to $2.2 million in 1999. In the fourth quarter of 1999, the Company began the construction and sale of Plantation Estates Phase II, a fourteen single-family lot subdivision at Kapalua. Twelve of the fourteen lots closed escrow in 1999 and the Company recognized profits on the percentage-of-completion method. The last two lots closed escrow in the first quarter of 2000 and construction of improvements was substantially complete in the second quarter of 2000. In December of 2000, the Company began selling lots in Pineapple Hill Estates, a 31 single-family lot subdivision in the Kapalua Resort. Twelve sales closed escrow in 2000 and all of the proceeds were recorded as deferred revenues. Revenue will be recognized in 2001 on the percentage-of-completion method as construction of the subdivision improvements takes place. COMMERCIAL & PROPERTY Revenue from Commercial & Property was $5 million in 2000 compared to $4.4 million in 1999. These revenues include gains from land sales of $75,000 in 2000 and $223,000 in 1999. The operating loss from this segment was $441,000 in 2000 or 3% lower than 1999. The reduced loss in 2000 from the Commercial & Property segment is primarily due to improved recoveries on electricity sales from the Company to Kaahumanu Center Associates. The Company's equity in the losses of Kaahumanu Center Associates was $971,000 in 2000 or $71,000 higher than the loss in 1999. Although Kaahumanu Center minimum and percentage rents increased in 2000, increased operating expenses, in particular repairs and maintenance, professional fees and payroll related expenses, more than offset the higher rental revenues. 1999 vs. 1998 CONSOLIDATED The Company reported consolidated net income of $4.7 million for 1999 compared to $3.6 million for 1998. Higher net income in 1999 was due to improved results from all of the Company's business segments and to lower interest expense. In addition, net income for 1998 included an extraordinary loss of $744,000 (net of taxes) for the prepayment of $20 million of debt. General and administrative expenses for 1999 were higher than 1998 by 9% or $1.3 million. Included in 1999 were $1.1 million of deferred cost write-offs for consultants who were engaged to analyze and develop potential strategic plans for the Company. These costs were charged to expense in the second quarter of 1999 because of the then pending sale of approximately 41% of the Company's outstanding shares by certain shareholders. Other components of the increased expense in 1999 were increased accruals for bonus incentives for the Company's non-bargaining personnel and a reserve for the Company's portion of costs of filtration of certain water wells on Maui (see Note 13 to Consolidated Financial Statements). Partially offsetting these increases were lower pension expense as a result of favorable investment experiences and lower expense for postretirement health and life insurance because of lower premium cost and a reduction in the number of covered employees. Interest expense was lower in 1999 by 40% compared to 1998 as a result of lower average borrowings and interest rates and because of a greater amount of interest capitalized in 1999. Borrowings were lower in 1999 because a large part of the 1999 capital expenditures and other cash outflows for investing activities were funded by cash flows from operating activities. The higher amount of interest capitalized was due largely to commencing construction during 1999 of the Village Course Clubhouse and Kapalua Golf Academy. PINEAPPLE Pineapple revenues decreased in 1999 by 3% or $3.1 million compared to 1998. Operating profit was $6.1 million in 1999 compared to $5.5 million in 1998. Lower revenues were due largely to a decline in case sales volume (the number of cases sold) of canned pineapple. Lower case sales volume was attributed in part to a planned reduction in the acreage planted to eliminate planting in unreliable fields with a history of low yields. The decrease in case volume also was attributable to a substantial increase in imports of canned pineapple into the United States during the second half of 1999. The decrease in revenues caused by lower sales volume was partially offset by higher average prices. Higher average prices in 1999 were largely the result of low inventories of imports at the beginning of the year, which kept prices firm through the first half of 1999. Competitive pressure on prices increased in the second half of 1999, reflecting the large increase in imports after May. Pineapple cost of sales decreased in 1999 by 4% or $2.8 million largely because of the decrease in case sales volume. Average cost of sales per case of pineapple sold was higher in 1999 primarily because in 1998 there was a partial liquidation of LIFO inventories, resulting in lower costs from prior years being included in cost of sales. Cost of sales for 1998 would have been higher by $1.6 million based on current production costs for 1998. Unit production cost in 1999 and 1998 were approximately the same. Lower shipping and selling costs in 1999, as a result of the reduction in case sales volume and decreased general and administrative costs, more than offset increased marketing expenses. RESORT Kapalua Resort revenues, including operations and development, increased in 1999 by 14% or $6 million compared to 1998. Resort operating profit was $5.7 million in 1999 compared to $5.2 million in 1998. Approximately 30% of the revenue increase in 1999 was due to tournament operations fees received for hosting the Mercedes Championships in January of 1999. Costs and expenses to host the tournament more than offset the tournament operations fees and were charged primarily to marketing expense in 1999. In 1998, Kapalua did not host a major golf tournament; thus, the 1999 tournament expenses were the primary reason for the increase in Resort marketing expense in 1999. Revenue from the sale of real estate inventories increased 3% in 1999 and the contribution to operating profit was $2.2 million in 1999 compared to $2.8 million in 1998. In the fourth quarter of 1999, construction and sale of fourteen single-family lots in Plantation Estates Phase II began. Profit was recognized in 1999 on the percentage-of-completion method for sales that closed prior to year-end. Construction was substantially complete in the second quarter of 2000. Sale of Resort real estate inventories in 1998 included a December 1998 sale of a 75- acre parcel in Plantation Estates Phase II. Revenues from the Resort golf operations increased 8%, merchandise sales increased 16%, income from The Kapalua Villas rental program increased 20% and income from lease rents increased 58%. A large part of the increase in lease rent income was attributable to recognizing lease rents from The Ritz Carlton, Kapalua Hotel as of January 1, 1999. The Company did not recognize revenue from that ground lease since December 31, 1995, as a result of an agreement to offset lease rents against a previous loan from the partnership that originally owned the hotel. As of January 1, 1999, the remaining loan balance was canceled. For accounting purposes, the loan was written off against the related off site improvements in 1995. In addition to these lease rents, revenue increased in 1999 because of increased hotel room occupancies throughout the Resort and at The Kapalua Villas, as well as higher room rates at The Kapalua Villas, an increase in paid rounds of golf and higher green fees and cart fees. COMMERCIAL & PROPERTY Revenue from Commercial & Property was $4.4 million in 1999 compared to $4.1 million in 1998. Gains from land sales of $223,000 in 1999 were comparable to 1998. The segment produced an operating loss of $454,000 in 1999 compared to $1.1 million in 1998. The primary reason for the lower operating loss was a reduction in the loss from Kaahumanu Center. The Company's equity in losses of Kaahumanu Center Associates was $900,000 in 1999 or $340,000 less than 1998. Improved results from Kaahumanu Center primarily reflected increased rental revenues because of an increase in the percentage of space occupied and higher sales reported by the tenants, higher recoveries of common area costs and lower expense for bad debts. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2000, the Company's total debt, including capital leases, was $44.5 million, an increase of $16 million from year-end 1999. Unused short- and long-term credit lines available to the Company at December 31, 2000 totaled $7.9 million. The increased debt level in 2000 primarily was the result of negative cash flows from Pineapple operations and construction activity at the Kapalua Resort. In 2000, the Resort completed construction of the Village Course Clubhouse and Kapalua Golf Academy. Although cash flow requirements for the Company's Pineapple operations are seasonal, overall, cash flow from Pineapple operations are expected to improve in 2001 as a lower level of production is planned. Distribution of proceeds from the closing of condominium sales by the Kapalua Coconut Grove LLC also is expected to contribute to debt reduction in 2001. All of the 36 luxury beachfront condominiums, called The Coconut Grove on Kapalua Bay, presently are under binding sales contract. The condominium units are scheduled for completion beginning in April 2001 and sales are scheduled to close thereafter. Construction of improvements for the 31 lot Pineapple Hill Estates subdivision is expected to begin in the first quarter of 2001 and may result in increased debt as proceeds received in December 2000 from the closing of twelve lot sales were used to reduce debt in 2000. The credit facilities currently available to the Company are estimated to be adequate to cover the 2001 cash requirements. Resort capital expenditures and planning costs are expected to be $8.2 million in 2001. This amount includes approximately $4 million for replacements, the most significant being renovation of the Bay Course and replacement of its irrigation system. Pineapple capital expenditures are expected to be $5.9 million in 2001 of which approximately $3.8 million is for the replacement of existing equipment and facilities. Other capital expenditures and planning and entitlement costs are anticipated to be approximately $3 million in 2001. This includes $1.9 million for completion of the implementation and installation of an integrated accounting and information system. The Company, as a partner in various partnerships, may under particular circumstances be called upon to make additional capital contributions (see Note 3 to Consolidated Financial Statements). IMPACT OF INFLATION AND CHANGING PRICES The Company uses the LIFO method of accounting for its pineapple inventories. Under this method, the cost of products sold approximates current cost and, during periods of rising prices, the ending inventory is reflected at an amount below current cost. The replacement cost of pineapple inventory was $26.5 million at December 31, 2000, which was $11 million more than the amount reflected in the financial statements. Most of the land owned by the Company was acquired from 1911 to 1932 and is carried at cost. A small portion of "Real Estate Held for Sale" represents land cost. Replacements and additions to the Pineapple operations occur every year and some of the assets presently in use were placed in service in 1934. At Kapalua, some of the fixed assets were constructed and placed in service in the mid-to-late 1970s. Depreciation expense would be considerably higher if fixed assets were stated at current cost. MARKET RISK The Company's primary market risk exposure with regard to financial instruments is to changes in interest rates. The Company manages this risk by monitoring interest rates and future cash requirements and evaluating opportunities to refinance borrowings at various maturities and interest rates. At December 31, 2000, 77% of the Company's short- and long-term borrowing commitments carried interest rates that were periodically adjustable to the prime rate, a Federal Farm Credit Bank index rate or to a LIBOR rate and 23% carried interest at fixed rates. Based on debt outstanding at the end of 2000, a hypothetical decrease in interest rates of 100 basis points would increase the fair value of the Company's long-term debt by approximately $388,000. At December 31, 2000, the carrying value of the Company's long-term debt exceeded the fair value by approximately $314,000 as a result of a general increase in quoted interest rates. FORWARD-LOOKING STATEMENTS The Company's Annual Report to Shareholders contains forward- looking statements (within the meaning of Private Securities Litigation Reform Act of 1995) as to the future of new products and new business development, future cost reductions in pineapple operations, results of the International Trade Commission's "Sunset Review" of antidumping duties on canned pineapple, completion of development and close of sales of condominiums comprising The Coconut Grove on Kapalua Bay, completion of development and sale of Pineapple Hill Estates, extension of the PGA TOUR and Mercedes-Benz contract for the Mercedes Championships and 2001 expectations as to cash flow. In addition, from time to time, the Company may publish forward- looking statements as to those matters or other aspects of the Company's anticipated financial performance, business prospects, new products, marketing initiatives or similar matters. Forward-looking statements contained in the Annual Report to Shareholders or otherwise made by the Company are subject to numerous factors (in addition to those otherwise noted in the Company's Annual Report or in its filings with the Securities and Exchange Commission) that could cause the Company's actual results and experience to differ materially from expectations expressed by the Company. Factors that might cause such differences, among others, include (1) changes in domestic, foreign or local economic conditions that affect availability or cost of funds, or the number, length of stay or expenditure levels of international or domestic visitors, or agricultural production and transportation costs of the Company and its competitors or Maui retail or real estate activity; (2) the effect of weather conditions on agricultural operations of the Company and its competitors; (3) the success of the Company in obtaining land use entitlements; (4) the possibility of an unfavorable outcome in the "Sunset Review" of antidumping duties; (5) events in the airline industry affecting passenger or freight capacity or cost; (6) possible shifts in market demand; and (7) the impact of competing products, competing resort destinations and competitors' pricing. MAUI LAND & PINEAPPLE COMPANY, INC. Officers President & Chief Executive Officer Gary L. Gifford Executive Vice President/Finance Paul J. Meyer Executive Vice President/Pineapple Douglas R. Schenk Executive Vice President/Resort Donald A. Young Vice President/Human Resources J. Susan Corley Vice President/Retail Property Scott A. Crockford Vice President/Land Management & Development Warren A. Suzuki Treasurer Darryl Y. H. Chai Controller & Secretary Adele H. Sumida Directors Richard H. Cameron--Chairman Private Investor John H. Agee President and Chief Executive Officer Ka Po'e Hana LLC David A. Heenan Trustee The Estate of James Campbell Randolph G. Moore Chief Executive Officer Kaneohe Ranch Claire C. Sanford Co-owner Top Dog Studio Fred E. Trotter III President F. E. Trotter, Inc. Daniel H. Case-Director Emeritus Chairman of the Board Case Bigelow & Lombardi Mary C. Sanford-Director Emeritus Retired Chairman of the Board Maui Publishing Company, Ltd. Compensation Committee Fred E. Trotter III-Chairman John H. Agee Richard H. Cameron Daniel H. Case David A. Heenan Randolph G. Moore Claire C. Sanford Mary C. Sanford Audit Committee Randolph G. Moore-Chairman David A. Heenan Fred E. Trotter III PRINCIPAL SUBSIDIARIES MAUI PINEAPPLE COMPANY, LTD. Officers President & Chief Executive Officer Douglas R. Schenk Executive Vice President/Sales & Marketing James B. McCann Executive Vice President/Finance Paul J. Meyer Vice President/Quality Assurance & Product Development Eduardo E. Chenchin Vice President/Agricultural Business Development L. Douglas MacCluer Treasurer Darryl Y. H. Chai Secretary Adele H. Sumida Controller Stacey M. Jio Directors Richard H. Cameron-- Chairman John H. Agee Gary L. Gifford David A. Heenan Paul J. Meyer Randolph G. Moore Claire C. Sanford Douglas R. Schenk Fred E. Trotter III Daniel H. Case-Director Emeritus Mary C. Sanford-Director Emeritus KAPALUA LAND COMPANY, LTD. Officers President & Chief Executive Officer Donald A. Young Executive Vice President/Finance Paul J. Meyer Vice President/Marketing Kim D. Carpenter Vice President/Administration Caroline P. Egli Vice President/Development Robert M. McNatt Vice President/Resort Operations Gary M. Planos Vice President/Kapalua Club & Villas David M. Sosner Treasurer Darryl Y. H. Chai Secretary Adele H. Sumida Controller Russell E. Johnson Directors Richard H. Cameron-- Chairman John H. Agee Gary L. Gifford David A. Heenan Paul J. Meyer Randolph G. Moore Claire C. Sanford Fred E. Trotter III Donald A. Young Daniel H. Case-Director Emeritus Mary C. Sanford--Director Emeritus EX-99 5 kca00.txt FINANCIAL STATEMENTS OF KAAHUMANU CENTER ASSOCIATE Kaahumanu Center Associates (A Hawaii Limited Partnership) Financial Statements for Each of the Three Years Ended December 31, 2000, 1999 and 1998 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, 2000 and 1999, 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, 2000. 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, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /S/DELOITTE & TOUCHE LLP Honolulu, Hawaii February 1, 2001 KAAHUMANU CENTER ASSOCIATES BALANCE SHEETS DECEMBER 31, 2000 AND 1999 ASSETS 2000 1999 Current Assets Cash $ 32,578 $ 504,712 Accounts receivable - less allowance of $95,298 and $107,707 for doubtful accounts 1,093,832 618,900 Prepaid expenses 70,905 64,305 Total current assets 1,197,315 1,187,917 Property Land and land improvements 6,054,330 6,054,330 Building 83,580,660 81,879,796 Furniture, fixtures and equipment 5,182,690 5,128,820 Construction in process 65,071 1,348,581 Total property 94,882,751 94,411,527 Accumulated depreciation 25,682,580 22,134,416 Property - net 69,200,171 72,277,111 Other Assets 1,710,131 1,700,997 Total Assets $72,107,617 $75,166,025 LIABILITIES AND PARTNERS' CAPITAL Current Liabilities Bank overdraft $ 39,637 -- Current portion of long-term debt 1,126,451 $1,018,643 Accounts payable 473,094 690,470 Due to Maui Land & Pineapple Company, Inc. 1,216,086 1,153,658 Other current liabilities 122,556 105,764 Total Current Liabilities 2,977,824 2,968,535 Long-Term Debt - Less current portion 59,139,567 60,266,149 Other Long-Term Liabilities 87,175 86,204 Total Liabilities 62,204,566 63,320,888 Contingencies and Commitments Partners' Capital 9,903,051 11,845,137 Total Liabilities and Partners' Capital $72,107,617 $75,166,025 See notes to financial statements. KAAHUMANU CENTER ASSOCIATES STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 2000 1999 1998 Revenues Rental income - minimum $7,552,188 $7,472,086 $7,235,108 Rental income - percentage 1,372,884 1,112,419 1,029,760 Other operating income - primarily recoveries from tenants 6,728,646 5,921,174 5,359,743 Total Revenues 15,653,718 14,505,679 13,624,611 Costs and Expenses Interest 5,332,655 5,369,013 5,447,733 Depreciation and amortization 3,685,323 3,539,544 3,452,639 Utilities 3,400,142 2,668,013 2,427,054 Payroll and related costs 2,282,740 2,087,090 1,976,969 Repairs and maintenance 701,391 570,175 652,390 General excise taxes 616,644 566,518 530,313 Insurance 333,704 366,253 278,605 Real property taxes 327,190 315,005 314,181 Management fee 278,907 268,264 258,275 Advertising and promotions 241,379 204,328 158,493 Professional fees 207,240 143,646 175,971 Provision for doubtful accounts 44,497 57,349 327,914 Other expenses 143,992 150,751 103,414 Total Costs and Expenses 17,595,804 16,305,949 16,103,951 Net Loss $(1,942,086) $(1,800,270) $(2,479,340) See notes to financial statements. KAAHUMANU CENTER ASSOCIATES STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 State of Hawaii Maui Land & Employees' Pineapple Retirement Company, Inc. System TOTAL Partners' Capital (Deficit), December 31, 1997 $(7,450,573) $23,575,320 $16,124,747 Net Loss - 1998 (1,239,670) (1,239,670) (2,479,340) Partners' Capital (Deficit), December 31, 1998 (8,690,243) 22,335,650 13,645,407 Net Loss - 1999 (900,135) (900,135) (1,800,270) 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 See notes to financial statements. KAAHUMANU CENTER ASSOCIATES STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 2000 1999 1998 Operating Activities: Net loss $(1,942,086) $(1,800,270) $(2,479,340) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 3,685,323 3,539,544 3,452,639 Loss on property disposals -- 88,074 -- Increase in accounts receivable (474,932) (60,628) (239,868) Increase (decrease) in accounts payable (702,026) 609,583 548,765 Increase in noncurrent accounts receivable (146,295) (285,546) (192,282) Net change in other operating assets and liabilities 11,165 30,747 77,282 Net Cash Provided by Operating Activities 431,149 2,121,504 1,167,196 Investing Activities: Purchases of property (460,224) (1,831,275) (414,746) (Increase) decrease in restricted cash -- 758,398 (30,641) Net Cash Used in Investing Activities (460,224) (1,072,877) (445,387) Financing Activities: Payments of long-term debt (1,018,774) (948,603) (870,000) Proceeds from Partner Advances 536,078 -- -- Increase in bank overdraft 39,637 -- -- Net Cash Used in Financing Activities (443,059) (948,603) (870,000) Net Increase (Decrease) in Cash (472,134) 100,024 (148,191) Cash, Beginning of Year 504,712 404,688 552,879 Cash, End of Year $ 32,578 $504,712 $404,688 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - Cash paid during the year for interest $5,328,000 $5,369,000 $ 5,448,000 SUPPLEMENTAL INFORMATION RELATING TO NONCASH INVESTING ACTIVITIES - Accounts payable included purchases of property of $11,000 and $75,000 as of December 31, 2000 and 1999, respectively. See notes to financial statements. KAAHUMANU CENTER ASSOCIATES NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 1. 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, 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 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. Restricted Cash - Restricted cash is a percentage of revenues retained for capital improvements as set forth in the Partnership Operating Agreement, as well as proceeds from the mortgage loan that were reserved for additional expansion costs. The partners agreed to waive the required capital improvement reserve for the years ended December 31, 2000 and 1999. 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 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. 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, 2000 were $13 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. The tests were not met in 2000, but termination of the Agreement is not presently being considered. 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. 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 2000, 1999 and 1998, ML&P charged the Partnership $279,000, $268,000, and $258,000, respectively, for management fees. In accordance with the Limited Partnership Agreement, the Managing Partner 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). In 2000, Partner Advances totaled $586,000, and interest expense on the advances at 9.57% totaled $34,000. 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 2000, 1999 and 1998, ML&P charged the Partnership $2,637,000, $2,417,000 and $2,303,000, respectively, for payroll and other costs and expenses. ML&P generates a portion of the electricity which is used by the Center. In 2000, 1999 and 1998, ML&P charged the Partnership $3,049,000, $2,263,000 and $2,144,000, respectively, for electricity. Amounts due to ML&P for management fees, electricity, Partner Advances, and reimbursable costs were $1,216,000 and $1,154,000 as of December 31, 2000 and 1999, respectively. 5. OTHER ASSETS Other assets at December 31, 2000 and 1999 consisted of the following: 2000 1999 Deferred costs $ 582,010 $ 719,171 Noncurrent accounts receivable 1,128,121 981,826 Total other assets $1,710,131 $1,700,997 Deferred costs are primarily leasing consultation costs and are net of amortization of $983,000 and $845,000, respectively, at December 31, 2000 and 1999. Noncurrent accounts receivable represents the excess of minimum rental income recognized on a straight-line basis 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 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 2001 through 2005 are as follows: $1,126,000, $1,228,000, $1,339,000, $1,459,000 and $1,659,000, 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 $48,453,000 and is receivable during the next five years (2001 through 2005) as follows: $7,068,000, $6,747,000, $6,618,000, $5,850,000, $4,386,000, respectively, and $17,784,000 thereafter. 8. CONTINGENCIES AND COMMITMENTS The Partnership had commitments under signed contracts totaling $124,000 at December 31, 2000. 9. 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. * * * * * * -----END PRIVACY-ENHANCED MESSAGE-----