EX-13 6 annualreport01.txt 2001 ANNUAL REPORT TO SHAREHOLDERS MAUI LAND & PINEAPPLE COMPANY, INC ANNUAL REPORT 2001 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 20 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, the successor to a business 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 1,830 people in 2001 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 Queen Ka'ahumanu Center, the largest retail and entertainment center on Maui. It also includes the Company's land entitlement and management activities and land sales and development activities that are not part of the Kapalua Resort. On the cover: Maui Pineapple's newest products. 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 Queen Ka'ahumanu 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, Honolulu, Hawaii 96813-2870 New Jersy 07606-1915 Telephone: 808-543-0700 Telephone: 800-356-2017 www.melloninvestor.com MAUI LAND & PINEAPPLE COMPANY, INC. & SUBSIDIARIES FINANCIAL HIGHLIGHTS
2001 2000 1999 (Dollars in Thousands Except Per Share Amounts) REVENUES Pineapple $ 97,426 $ 85,892 $ 94,535 Resort 70,078 50,262 47,950 Commercial & Property 5,029 5,043 4,381 Corporate 47 286 132 Total 172,580 141,483 146,998 NET INCOME 7,568 452 4,670 NET INCOME PER COMMON SHARE $ 1.05 $ .06 $ .65 AVERAGE COMMON SHARES OUTSTANDING 7,195,800 7,195,800 7,188,840 TOTAL ASSETS $ 176,433 $ 169,951 $153,387 CURRENT RATIO 2.1 1.7 1.5 LONG-TERM DEBT and CAPITAL LEASES $ 39,581 $ 41,012 $ 25,497 STOCKHOLDERS' EQUITY 73,419 65,922 66,400 STOCKHOLDERS' EQUITY PER COMMON SHARE $ 10.20 $ 9.16 $ 9.23 EMPLOYEES 1,830 1,890 2,040
TO OUR SHAREHOLDERS and EMPLOYEES: We are pleased to report that net income increased from $452,000 or $0.06 per share in 2000 to $7.6 million or $1.05 per share in 2001. The increased net income for the year was due entirely to real estate sales at the Kapalua Resort. In 2001, all 36 condominium units in the Coconut Grove on Kapalua Bay closed escrow, with 18 closings taking place in the fourth quarter. This luxury condominium project is a joint venture in which the Company owns a 50 percent interest. Also in 2001, the Kapalua Resort division recognized profit on sales of 20 of the 31 single-family lots at Pineapple Hill Estates subdivision. We also believe we have made substantial progress in the transformation of our pineapple business. The Pineapple division substantially increased revenue and contribution from non-canned pineapple products, further reducing the Company's reliance on the highly cyclical canned pineapple product category. The tragic terrorist attacks on the New York World Trade Center and on the Pentagon on September 11, 2001 had significant, immediate and longer-term negative impact on all of the Company's operations. The cessation of commercial air transportation in the U.S. immediately after September 11 stopped air freight fresh pineapple shipments and sales, and also resulted in an almost 40 percent reduction in occupancy at the Kapalua Resort. The U.S. economy, which was already experiencing lower consumer confidence levels and a general slowdown in business activity, turned for the worse. In particular, vacation travel from the U.S. and Japan to Hawaii slowed dramatically. The combination of uncertainty posed by the ensuing war on terrorism, the possibility of further terrorist attacks, the general shock with the magnitude of the attacks, the ensuing fighting in Afghanistan and the worsening level of economic activity in Japan, the U.S. and Europe, has had a lingering negative effect on the Company's operations which is expected to persist through 2002. The impacts of the above events of September 11 on the Company's business segments are more fully described in the attached additional sections of this report. We expect these impacts to limit our progress toward our goal of a 10 to 15 percent return on equity in 2002, and possibly into 2003. Revenues of $173 million for 2001 were an all-time record and were higher by 22 percent than 2000. Net income for 2001 includes a $12 million profit contribution from real estate projects and land sales. The largest profit contribution was from the Coconut Grove project, which was responsible for about 60 percent of the development contribution. The sale of lots in the Pineapple Hill Estates project was responsible for approximately 30 percent of the development contribution. Lastly, sale of an undeveloped parcel at the Kapalua Resort for conservation purposes was responsible for about 5 percent of the contribution from development activities. Land sales and development activity, by comparison, contributed approximately $1.3 million to net income in 2000 and $1.5 million in 1999. Cash provided by operating activities increased substantially from $1.5 million in 2000 to $16 million in 2001. This increase in cash flow from operations is primarily attributable to improved results from development activities. Investment in property, plant and equipment was $13.4 million in 2001, a reduction of $4.8 million from 2000 levels. The Company's total debt, including capital leases, decreased $1.2 million from $44.5 million to $43.3 million. Due to lower average interest rates experienced in 2001, partially offset by a lower level of interest capitalized during the year, interest expense declined to $2.9 million from $3.1 million in the year 2000. The Company's Pineapple division reported an operating loss of $3.2 million in 2001, an increase from the $2.9 million operating loss incurred in 2000. Revenues of $97.4 million were up 13 percent over 2000 due to higher average sales prices for canned pineapple, increased case volume of sales and increased sales of non-canned products. These increases were more than offset by increased production costs, legal costs, pension and other expenses. The Company continued to experience highly competitive market conditions for canned pineapple products in the United States throughout the year. According to the Food Industry Press, indications are that canned pineapple production in Thailand was down in the second half of 2001 and is expected to be lower in the first half of 2002 compared to prior periods. In addition, the volume of canned pineapple imported from Thailand and the Philippines appears to have declined through the first eleven months of 2001 compared to prior periods. Despite a 6 percent reduction in number of tons of fruit processed in the Company's cannery, the total number of cases packed increased by approximately 4 percent. Included in the Pineapple division results for 2001 is receipt of a $1.8 million distribution from the U.S. Customs Service pursuant to the Continued Dumping and Subsidy Offset Act of 2000. This law, which provides for distribution of anti-dumping duties collected by the U.S. Customs Service to the injured domestic industries, could result in payment in 2002. The Pineapple division continued to make good progress in diversifying its revenues by development of new and higher margin products. Sales of the newest product line, Maui Fresh (trademark) fresh-cut pineapple products, increased by 119 percent over 2000. In addition, fresh whole pineapple sales increased by 31 percent over last year due primarily to the increased sales of Hawaiian Gold (trademark) hybrid pineapple. Sales of fresh whole pineapple from the Company's Central American activities increased by 118 percent from 2000. Further market penetration and sales volume of non-canned products are key to the Company's future success. These products are expected to consistently provide higher margins than canned pineapple and to be less susceptible to the cyclical oversupply of canned pineapple products experienced during the past decade. As mentioned earlier, contribution from the Resort division increased substantially due to real estate development profit. Contribution from Resort operations, however, was significantly and negatively affected by the dramatic reduction in business in Hawaii's visitor industry as a result of the events of September 11. The Hawaii visitor industry was already experiencing lower levels of occupancy through the first nine months of last year. The events of September 11 and the resulting drop in occupancies in the second half of September and in the fourth quarter were severe. As a result, the contribution from Resort operations declined by 196 percent from the record levels of 2000 and, for the full year, Resort occupancy declined by 16 percent from 2000. In addition to the decline in occupancy, the events of September 11 resulted in a severe slowdown in the pace of resort real estate sales in Hawaii; no new sales contracts were written last year for sale of lots in the Pineapple Hill Estates project after September 11. We believe the reduction in occupancy arising from economic downturn and the events of September 11 will moderate as the U.S. economy improves and that the level of real estate sales of resort properties similarly will improve. The strategic positioning of the Kapalua Resort is highly oriented toward golf. 2001 was the first full year of operation for the new Village Course Clubhouse, practice facility and Kapalua Golf Academy. These new facilities place the Kapalua Resort in a leadership position of golf resorts in Hawaii. In addition, the January 2002 Mercedes Championships event brought considerable attention to the Resort and its golf facilities. The worldwide television coverage and the dramatic victory by Sergio Garcia brought additional media attention to Kapalua. We believe the Resort is well positioned to take advantage of an increasing demand for residential home and second home product in a resort environment in the next several years. The Company's Commercial & Property operations recorded an operating loss of $1.4 million last year compared to a loss of $441,000 in the year 2000. Before September 11, retail trends on Maui were showing weakness compared to the year 2000, which was due to the substantial increase in retail commercial property in 2001 and the slowing economy compared to 2000. After September 11, Maui retail sales were negatively affected by the decrease in visitor occupancy and further reduced level of economic activity. This translated directly to lower sales by retail tenants in the fourth quarter and lower full year retail sales for Queen Ka'ahumanu Center and Napili Plaza. As a result of the economic downturn and difficult business environment, several national tenants either filed for bankruptcy or reduced their number of stores. Queen Ka'ahumanu Center was negatively affected by store closings and experienced lower average occupancy in 2001 compared to the year 2000. The management of our Commercial & Property business segment was reorganized to strengthen our development planning and to more closely align division resources. Don Young has assumed additional duties as Executive Vice President/Resort & Commercial Properties, including the Queen Ka'ahumanu Center and Napili Plaza. Bob McNatt, promoted to Vice President/Land Planning & Development, is now responsible for Company-wide development activities. These changes allow greater focus on the retail opportunities available at the Kapalua Resort and also provide greater focus and attention on the Company's strategic goal of efficient use of the Company's land assets. The overall business climate for the Company's Resort and commercial property activities will continue to be difficult in 2002. We expect that the oversupply of commercial retail property and the lower level of visitor activity due to the national economic slowdown will continue to be a drag on Resort operations and commercial property performance. We are hopeful that the oversupply of canned pineapple products will moderate somewhat in 2002, allowing the Company to obtain fair pricing on its canned pineapple products. We will continue to aggressively expand our market penetration in fresh pineapple products. While not demonstrated by 2001 operating contributions, we believe substantial progress has been made in enhancing the value of the Company's assets and in moving toward a higher, consistent level of operating profit. Thank you for your continued support and commitment to the Company. /S/ RICHARD H. CAMERON Richard H. Cameron Chairman /S/ GARY L. GIFFORD Gary L. Gifford President & CEO March 6, 2002 PINEAPPLE The Company's Pineapple division reported an operating loss, before allocated interest and income taxes, of $3.2 million for the year 2001 compared to an operating loss of $2.9 million for 2000. In 2001, higher average sales prices for canned pineapple products and increased case volume of sales were more than offset by increased production costs, legal costs, pension expense and other general administrative expenses. Pineapple revenues for 2001 were $97.4 million, up 13% from 2000. All major business categories, canned pineapple, Maui Fresh (trademark) fresh-cut pineapple, Hawaiian Gold (trademark) hybrid pineapple, and Royal Coast Tropical Fruit Company, Inc. (primarily Central American fresh pineapple), had increased net sales. Canned pineapple, the Pineapple division's largest product line, had an 8% increase in overall case sales volume. Case sales volume of concentrate, a relatively small product line, increased 26%. Pineapple juice case sales volume, including both canned 46- ounce and the new 64-ounce juice in plastic bottles (PET), was down less than 1% versus 2000. Within the canned pineapple category, grocery case sales declined 7% and institutional sales declined 14%. These declines can be partially attributed to the lingering economic impact of the events of September 11 and general economic weakness throughout the year. This contributed to fewer and lower cost meals eaten away from home. In addition, hotels, resorts and cruise ships experienced lower occupancy rates, which in turn led to a decline in institutional food sales. Despite declines in Thailand's pineapple imports, the U.S. market continued to have depressed grocery pricing for canned pineapple throughout 2001. The lower retail prices were partially caused by Thailand's inventory surpluses carried over from 2000 production. These surpluses were larger than usual due to weak international markets. The total average unit value for U.S. imports of canned pineapple declined 5% for the eleven months through November 2001 versus 2000. U.S. imports of canned pineapple from the Philippines had an even more significant 13% decline in average unit value for the eleven months through November 2001 versus 2000. Offsetting these declines in price and volume in the grocery and institutional fruit categories was a 73% increase in case sales of canned pineapple to the government and a 119% increase in Maui Pineapple's newest product line of Maui Fresh (trademark) fresh-cut pineapple. The increase in sales to the U.S. government resulted from additional purchases by the U.S. Department of Agriculture. Although we expect the government fruit business in the future to be strong, we do not expect to match the sales volume of 2001. The large increase in Maui Fresh (trademark) fresh-cut sales following the 73% gain in 2000 is an indication that Maui Fresh (trademark) fresh-cut pineapple is being well received by retailers and consumers on the West Coast. Revenues from fresh fruit sales represented about 16% of the Pineapple division revenues in 2001. Fresh whole pineapple net sales for 2001 were 31% higher than 2000 sales. Tons of fresh fruit sold in 2001 increased 22% from 2000 levels, mainly due to increased production of Hawaiian Gold (trademark) hybrid pineapple. Within this product line, sales to customers on the mainland increased and tons sold were up 62% in 2001 versus 2000, in part due to a new warehouse account on the West Coast. Sales of fresh whole pineapple in Hawaii declined 19% in 2001 compared to 2000. Much of this decline in local sales reflects the reduced numbers of visitors to Hawaii in 2001, especially following September 11. Total net sales for our subsidiary Royal Coast Tropical Fruit Company, Inc. in 2001 increased 118% from 2000. 2001 was the first full year of operation and sales from our Central American subsidiary. We anticipate that improvement in product quality from strict quality control procedures, increased hybrid production and a recovery in the East Coast fresh pineapple market will allow us to improve the contribution from this product line. In 2001, the overall weather conditions on Maui for growing pineapple improved over the previous year. However, rainfall at every key rain gauge station on the Company's lands was below the five-year average, with the exception of two stations in the Makawao and Pukalani area of east Maui. The Company's irrigation systems continued to provide adequate water to produce a high quality, reliable fruit supply. Total tonnage of pineapple harvested in 2001 was higher than expected due to the favorable growing conditions, yet below 2000 levels due to a planned reduction in acreage under cultivation. Fruit and juice recovery in terms of cases per ton of fruit improved in 2001 over 2000 levels. This was due to better growing conditions and a higher percentage of plant crop fruit. In 2001, the Company continued its plan to consolidate and streamline its production operations. This plan includes purchasing or leasing farmland in central or east Maui and partially phasing out of more remote farmland in west Maui. This will substantially reduce the cost of transporting fruit from our Honolua plantation to the cannery or to Kahului airport. Antidumping duties on canned pineapple from Thailand were in effect throughout 2001. In October 2001, the U.S. Department of Commerce concluded the fifth annual administrative review process resulting in lower antidumping assessment rates for certain Thai pineapple producers. The "all others" rate, which covers exporters who have not been included in a previous part of the proceeding, remains at its original level. In December 2001, the Company received a $1.8 million cash distribution from the U.S. Customs Service. The distribution was made pursuant to the Continued Dumping and Subsidy Offset Act of 2000, which provides for distribution of antidumping duties to injured domestic producers. A "Sunset Review" of antidumping duties was concluded in 2001 by the U.S. Department of Commerce, which determined that revocation of the antidumping order on canned pineapple fruit from Thailand would likely lead to a continuation or a reoccurrence of dumping at the original weighted average margins. Subsequently, the U.S. International Trade Commission determined that revoking the existing antidumping duty orders on imports of canned pineapple from Thailand would likely lead to continuation or reoccurrence of material injury within a reasonably foreseeable time. As a result of the Commission's affirmative determination, the existing antidumping duty order on imports of canned pineapple fruit from Thailand will remain in place for another five years. In 2001, substantial progress was made in developing PET pineapple juice products as well as products sold under the Hawaiian Gold (trademark) label and the Maui Fresh (trademark) brand. These product categories have been well received by retailers and consumers. They represent areas of growth and opportunity that will continue to be the main focus of our strategic plan. We expect 2002 to be another challenging year as we continue to transform our Company to produce more fresh and higher margin products. RESORT The resort division had a record year in 2001 with total operating profit, before allocated interest and taxes, of $19.8 million compared to $7.8 million in 2000. This was the fifth consecutive year of increased total operating profit. Development accounted for most of the profit, which more than offset the unexpected decline in profit from ongoing operations resulting from the economic impact of the events of September 11. Almost all of the development profit came from two projects - Coconut Grove on Kapalua Bay and Pineapple Hill Estates. Coconut Grove, which was developed through a 50/50 partnership with YCP Site 29, Inc., contributed a profit of $11.5 million on total sales of $70.3 million. Construction of the 36 luxury beachfront condominiums was completed in December and all of the profit was recognized in 2001 as title was delivered to the buyers upon completion of the individual residences. Construction of subdivision improvements for the 31 half-acre custom lots of Pineapple Hill Estates was completed late in 2001. Profit was recorded in 2001 on 20 lots (12 had closed escrow in 2000), which were sold for a total of $12.8 million. At current list prices, the remaining 11 lots represent a total sales value of almost $7 million, with one lot presently under contract of sale. The resort development profit for 2001 also included the sale of a one-acre parcel adjacent to The Ironwoods condominiums. Two other lots, located next to the entrance to Plantation Estates were subdivided in early 2001 and the sale of both parcels closed escrow in early 2002. Resort real estate activity on Maui declined sharply after September 11, resulting in a decrease in the number of sales transactions for the year compared to 2000. Although Kapalua's resale volume declined, total value of 2001 real estate sales for the resort, including both resales and new product, increased to over $116 million. Kapalua Realty, which participated in over 80% of this total volume, continues to play an important role for both development and resort operations. Progress continues to be made with the planning and entitlements of future resort development. In addition to the Central Resort master plan, which includes the new Village Clubhouse and Golf Academy, we have moved forward with seeking entitlements for longer-term development, including Kapalua Mauka. Kapalua Mauka would expand the Resort into approximately 925 acres surrounding the Village Course that are currently zoned for agricultural use. If rezoning and other necessary governmental approvals are received and this development proceeds, the expanded Resort area could, as currently contemplated, include up to 690 residential units, commercial components, and an expansion of the Village Course. The Central Resort master plan includes a commercial Town Center, resort spa and additional residential development. These additional projects are not scheduled to be completed in 2002. In 2001, Hawaii's visitor industry suffered a dramatic reduction in business, similar to what occurred throughout the travel and hospitality industry worldwide. Prior to September 11, Hawaii was already experiencing a decline in visitors due mostly to the weakening U.S. economy and weak Japanese economy. The events of September 11 created heightened concerns regarding travel safety and added to economic problems as consumer spending declined. Statewide hotel occupancy declined 25% in September 2001 compared to the prior year, followed by similar declines for October and November, before recovering slightly with a 13% drop in December. For the full-year, Hawaii's hotel occupancy declined 8% to 71.9% with all islands showing similar occupancy decreases. Maui continued to maintain the highest occupancy at 74.5% and was the only island to show an increase in revenues per available room due to higher average room rates. Kapalua resort occupancy for 2001 reflected a decrease of almost 16%, mostly from a reduction in group business after the events of September 11. The resort operations profit decreased $4.8 million from the record 2000 level due mostly to the dramatic reduction in resort revenues following September 11. Gross revenues for September through December of 2001 dropped 26% from the prior year with all major revenue segments of golf, villas, retail and leasing showing significant decreases. As a result, gross revenues for the full- year were down 10% while operating costs increased about $1.8 million, partly due to the full-year operation of the new Village Clubhouse, which opened in August 2000. The Mercedes Championships highlight our commitment to positioning Kapalua as one of the world's finest golf resort communities. The January 2002 event again brought the world's best golfers and international media attention to Kapalua for the PGA TOUR season-opening tournament. Sergio Garcia's dramatic victory on the final hole provided another exciting finish at the Plantation Course. Most importantly, we recently concluded an agreement with the PGA TOUR and Mercedes-Benz to host this prestigious event at Kapalua through the year 2006. In 2002, we expect to continue extensive marketing efforts to sell the remaining inventory of Pineapple Hill Estates lots. Overall, it looks as though 2002 will be a difficult year for resort operations as Hawaii's visitor industry continues to recover from the events of September 11. Most visitor industry projections assume this economic recovery will be gradual and take at least until 2003. Despite the near-term challenges, we continue to believe Kapalua remains well positioned for the future. COMMERCIAL & PROPERTY The Commercial & Property business segment recorded an operating loss, before allocated interest and taxes, of $1.4 million in 2001 compared to a loss of $441,000 in 2000. Total revenues of $5 million for the segment in 2001 remained the same as the prior year. Most of this increased operating loss was from shopping center operations, which continues to be faced with a very difficult competitive market on Maui. During this past year, the oversupply of retail commercial inventory on the island increased significantly with the addition of approximately 665,000 sq.ft. gross leasable area (GLA) of retail space, an increase of over 21%. Major additions include the Piilani Shopping Center in Kihei, the expanded Shops at Wailea and Home Depot and Wal-Mart at the Maui Marketplace in Kahului. Prior to September 11, retail trends were beginning to show weakness on Maui due to a slowdown in the visitor industry and the increased inventory of commercial retail space. After September 11, Maui retail sales followed the national trend of reduced consumer spending and were further impacted by a dramatic decrease from Maui's visitor market. As a result of decreased sales over the last four months of 2001, full-year retail sales declined by 5.1% at Queen Ka'ahumanu Center and by 9.8% at Napili Plaza. In total, commercial property operations had an operating loss of $846,000 compared to a break-even performance in 2000. Queen Ka'ahumanu Center, the 570,000 sq.ft. GLA regional mall in Kahului, which the Company manages as part of its joint venture with the Employees' Retirement System of the State of Hawaii, accounted for most of these results. The Company's share of joint venture losses, net of management fees and other related revenues and expenses, was a loss of $908,000 in 2001 compared to a loss of $207,000 in 2000. Total joint venture losses at Queen Ka'ahumanu Center increased to $2.9 million in 2001 compared to $1.9 million in 2000. Increased administrative expenses, mostly related to store closings, accounted for the majority of the increased loss. Total revenues decreased only 2.9% as lower minimum and percentage lease revenues were partially offset by cancellation fees. In addition to the decrease in retail sales, higher vacancies during 2001 contributed to the full-year decrease in lease revenues. Partially offsetting the 50% joint venture loss allocation are revenues received from the joint venture for management and other services. These revenues, however, also declined in 2001 from 2000 levels. Operating profit for Napili Plaza, the Company's 45,000 sq.ft. GLA community shopping center, decreased from $200,000 in 2000 to $60,000 in 2001. Most of this profit reduction is related to the decrease in lease revenues from lower retail sales and higher administrative expenses. Management of the Commercial & Property business segment was reorganized last year in an effort to strengthen our development planning and more closely align our divisional resources. Robert McNatt was promoted to Vice President/Land Planning & Development for the Company reporting to Gary Gifford, and is now responsible for overall development activity for the divisions, including Kapalua Land Company. Also reporting to Mr. Gifford is Warren Suzuki as Vice President/Land & Water Asset Management with continued responsibilities for these Company assets. Scott Crockford, Vice President/Retail Property has assumed responsibility for the Kapalua commercial property and now reports to Don Young, whose duties as Executive Vice President/Resort & Commercial Property for the Company have been expanded to include all Resort and non-resort commercial properties. In addition to the land planning and development activity in 2001 for the Kapalua Resort division, significant progress was made outside of the resort. Design and environmental analysis continues on the proposed Upcountry Town Center. As part of the entitlement process, we expect to present this 40-acre mixed-use residential and commercial project to the Maui Planning Commission for its review later this year. In August 2001, the County of Maui approved construction plans for infrastructure improvements for the Company's Kapua Village employee housing subdivision in West Maui. Due to delays in the approval process, construction did not begin in 2001 as planned. Construction of the improvements and sale of the 45 single-family lots is expected to be completed in 2002. Also in 2001, the State of Hawaii approved a permit for construction of a new well in Upcountry Maui to supplement the Company's water resources. We anticipate that drilling of the well will commence in 2002. We expect 2002 will continue to present a difficult competitive market for commercial properties. In addition, we foresee limited near-term opportunities for non-resort development and land sales. We will continue to pursue the land planning and entitlements necessary for future development opportunities consistent with the needs of our community. 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, 2001 and 2000, 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, 2001. 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 Maui Land & Pineapple Company, Inc. and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. /S/DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Honolulu, Hawaii February 12, 2002 MAUI LAND & PINEAPPLE COMPANY, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2001 and 2000
2001 2000 (Dollars in Thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $ 2,173 $ 351 Accounts and notes receivable, less allowance of $689 and $1,028 for doubtful accounts 15,992 16,032 Inventories Pineapple products 15,822 15,332 Real estate held for sale 3,709 1,592 Merchandise, materials and supplies 6,894 7,332 Prepaid expenses and other assets 4,510 5,498 Total Current Assets 49,100 46,137 INVESTMENTS AND OTHER ASSETS 14,287 14,089 PROPERTY Land 5,384 4,940 Land improvements 59,503 56,013 Buildings 59,244 58,529 Machinery and equipment 125,573 115,950 Construction in progress 5,602 6,745 Total Property 255,306 242,177 Less accumulated depreciation 142,260 132,452 Net Property 113,046 109,725 TOTAL $176,433 $169,951 2001 2000 (Dollars in Thousands) LIABILITIES & STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable and current portion of long-term debt $ 3,287 $ 3,120 Current portion of capital lease obligations 472 388 Trade accounts payable 10,534 8,476 Payroll and employee benefits 4,640 4,484 Income taxes payable 1,635 298 Customers' deposits 1,240 1,460 Deferred revenue 988 8,102 Other accrued liabilities 841 505 Total Current Liabilities 23,637 26,833 LONG-TERM LIABILITIES Long-term debt 38,295 40,330 Capital lease obligations 1,286 682 Accrued retirement benefits 24,072 23,575 Accumulated losses of joint venture in excess of investment 11,518 9,990 Other noncurrent liabilities 3,636 2,215 Total Long-Term Liabilities 78,807 76,792 MINORITY INTEREST IN SUBSIDIARY 570 404 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 61,066 53,498 Accumulated other comprehensive loss (102) (31) Stockholders' Equity 73,419 65,922 TOTAL $176,433 $169,951 See Notes to Consolidated Financial Statements.
MAUI LAND & PINEAPPLE COMPANY, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999 (Dollars in Thousands Except Per Share Amounts) REVENUES Net sales $124,720 $103,194 $112,191 Operating revenues 36,864 36,908 33,982 Equity in earnings of joint ventures 6,996 -- -- Other income 4,000 1,381 825 Total Revenues 172,580 141,483 146,998 COSTS AND EXPENSES Cost of goods sold 85,014 72,803 74,494 Operating expenses 33,677 30,169 27,440 Shipping and marketing 19,095 18,289 18,479 General and administrative 19,430 15,825 16,408 Equity in losses of joint ventures 1,453 972 956 Interest 2,903 3,061 1,834 Total Costs and Expenses 161,572 141,119 139,611 INCOME BEFORE INCOME TAXES 11,008 364 7,387 INCOME TAX EXPENSE (CREDIT) 3,440 (88) 2,717 NET INCOME 7,568 452 4,670 RETAINED EARNINGS, BEGINNING OF YEAR 53,498 53,945 50,174 CASH DIVIDENDS -- 899 899 RETAINED EARNINGS, END OF YEAR 61,066 53,498 53,945 PER COMMON SHARE Net Income 1.05 .06 .65 Cash Dividends $ -- $ .125 $ .125 Average Common Shares Outstanding 7,195,800 7,195,800 7,188,840
MAUI LAND & PINEAPPLE COMPANY, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999 (Dollars in Thousands) NET INCOME $ 7,568 $ 452 $ 4,670 Other comprehensive loss - Foreign currency translation adjustment (71) (31) -- COMPREHENSIVE INCOME $ 7,497 $ 421 $ 4,670 See Notes to Consolidated Financial Statements.
MAUI LAND & PINEAPPLE COMPANY, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999 (Dollars in Thousands) OPERATING ACTIVITIES Net income $ 7,568 $ 452 $ 4,670 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 10,226 9,002 8,445 Undistributed equity in losses of joint ventures 1,452 1,025 1,019 Gain on property disposals (1,201) (113) (49) Deferred income taxes 1,792 (776) 552 (Increase) decrease in accounts receivable 835 (1,094) (1,700) Increase in inventories (2,169) (6,660) (2,360) Increase (decrease) in trade payables 2,304 (3,345) 3,798 Net change in other operating assets and liabilities (4,854) 2,987 4,094 NET CASH PROVIDED BY OPERATING ACTIVITIES 15,953 1,478 18,469 INVESTING ACTIVITIES Purchases of property (13,356) (18,179) (18,213) Proceeds from sale of property 1,019 371 509 Distributions from joint ventures 857 -- -- Contributions to joint ventures -- -- (575) Payments for other investments (1,252) (1,048) (2,735) NET CASH USED IN INVESTING ACTIVITIES (12,732) (18,856) (21,014) FINANCING ACTIVITIES Proceeds from long-term debt 38,367 34,196 15,632 Payments of long-term debt (40,248) (18,720) (13,659) Proceeds from short-term debt 13 105 729 Payments on capital lease obligations (472) (318) (494) Dividends paid -- (899) (899) Other 941 708 446 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,399) 15,072 1,755 NET INCREASE (DECREASE) IN CASH 1,822 (2,306) (790) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 351 2,657 3,447 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,173 $ 351 $ 2,657
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) $ 2,994 $ 2,952 $ 1,711 Income taxes 39 1,490 1,842 2. Amounts included in accounts payable for additions to property and other investments totaled $1,003,000, $2,024,000 and $3,445,000, respectively, at December 31, 2001, 2000 and 1999. 3. In December 1999, 7,300 shares of Company stock, which were 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 incurred for new equipment in 2001 and 2000 were $1,160,000 and $704,000, respectively. 5. In 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. LONG-LIVED ASSETS Long-lived assets and certain intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When such events or changes occur, an estimate of the future cash flows expected to result from the use of the assets and their eventual disposition is made. If the sum of such expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized in an amount by which the assets' net book values exceed fair values. 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 was 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 Revenues from the sale of pineapple are recognized when title to the product is transferred to the customer. The timing of 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. Revenues from other activities are 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 tax rates enacted by law or regulation. 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 2001, 2000 and 1999, such transaction gains and losses 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 PRONOUNCEMENTS In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The statement provides a single accounting model for impairment of long-lived assets, including discontinued operations. The provisions of this statement are effective for years beginning after December 15, 2001, with early adoption permitted and, in general, are to be applied prospectively. Although the Company has not fully assessed the implications of SFAS No. 144, management does not believe adoption of this statement will have a material impact on the Company's financial statements. On January 1, 2001, the Company adopted FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes the accounting and reporting standards for derivative instruments and hedging activities. The adoption of this standard did not have a material effect on the Company's financial statements. 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 securities outstanding that would potentially dilute common shares outstanding. RECLASSIFICATIONS Certain amounts for prior years have been reclassified to conform to the presentation for the current year. 2. INVENTORIES Pineapple product inventories were comprised of the following components at December 31, 2001 and 2000: 2001 2000 (Dollars in Thousands) Finished Goods $ 13,968 $12,855 Work In Progress 663 1,030 Raw Materials 1,191 1,447 Total $ 15,822 $15,332 The replacement cost of pineapple product inventories at year end approximated $26 million in 2001 and $27 million in 2000. 3. INVESTMENTS AND OTHER ASSETS Investments and Other Assets at December 31, 2001 and 2000 consisted of the following: 2001 2000 (Dollars in Thousands) Deferred Costs $ 6,791 $ 5,922 Cash Surrender Value of Life Insurance Policies (net) 944 798 Prepaid Pension Asset 4,154 4,068 Kapalua Coconut Grove LLC 9 1,058 Other 2,389 2,243 Total $14,287 $14,089 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 is stated net of policy loans, totaling $597,000 at December 31, 2001 and 2000. KAPALUA COCONUT GROVE LLC Kapalua Coconut Grove LLC (KCG) is a Hawaii limited liability company whose members are the Company and YCP Site 29, Inc. KCG was formed in June 1997 to own, develop and sell luxury condominiums on 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. At the end of 2000, all 36 luxury residential condominiums were under binding sales contracts, but construction was not completed. In 2001, sales of all units closed escrow as title was delivered to the buyers upon completion of the individual residences. 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 $6,993,000 in 2001, $(62,000) in 2000 and $(172,000) in 1999. In 2001, the Company also recognized income of $3.9 million representing its pre-contribution gain on the land parcel contributed to the venture. Summarized balance sheet information for KCG as of December 31, 2001 and 2000 and operating information for each of the three years ended December 31, 2001 follows: (Unaudited) 2001 2000 (Dollars in Thousands) Other current assets $ 1,559 $ 262 Work in progress -- 35,405 Total Assets 1,559 35,667 Total Liabilities 1,540 24,934 Members' Equity $ 19 $10,733 (Unaudited)(Unaudited) 2001 2000 1999 Revenues $ 70,265 $ 237 $ 5 Cost and Expenses 56,279 361 350 Net Income (Loss) $ 13,986 $ (124) $ (345) KAAHUMANU CENTER ASSOCIATES In June 1993, Kaahumanu Center Associates (KCA) was formed to finance the expansion and renovation of and to own and operate Queen Ka'ahumanu 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 Queen Ka'ahumanu 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 2001, 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 Queen Ka'ahumanu Center. In accordance with the limited partnership agreement, the partners 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 2001 and 2000, cash advances from the Company to KCA totaled $482,000 and $586,000, respectively, and interest on the advances at 9.57% totaled $54,000 and $34,000, respectively. In 2001, 2000 and 1999, reimbursements from KCA for payroll and other costs and expenses totaled $2,634,000, $2,637,000 and $2,417,000, respectively, and the Company charged KCA $3,203,000, $3,328,000 and $2,531,000, respectively, for electricity and management fees. At December 31, 2001 and 2000, $1,667,000 and $1,216,000, 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, 2001 and 2000 and operating information for each of the three years ended December 31, 2001 follows: 2001 2000 (Dollars in Thousands) Current assets $ 764 $ 1,197 Property and equipment, net 66,352 69,200 Other assets, net 1,274 1,710 Total Assets 68,390 72,107 Current liabilities 3,392 2,978 Noncurrent liabilities 58,001 59,226 Total Liabilities 61,393 62,204 Partners' Capital $ 6,997 $ 9,903 2001 2000 1999 Revenues $15,206 $15,654 $ 14,506 Costs and Expenses 18,112 17,596 16,306 Net Loss $(2,906) $(1,942) $ (1,800) The Company's pre-tax share of losses from KCA was $1,453,000, $971,000 and $900,000, respectively, for 2001, 2000 and 1999. 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, 2001, the accumulated unpaid preferred return was $15.7 million each for ERS and the Company. The Company's investment in KCA is a negative $11.5 million at December 31, 2001. 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. 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 Queen Ka'ahumanu Center attains a defined level of net operating income. 4. BORROWING ARRANGEMENTS During 2001, 2000 and 1999, the Company had average borrowings outstanding of $46.4 million, $43.5 million and $29.5 million, respectively, at average interest rates of 6.9%, 8.5% and 7.8%, respectively. Short-term bank lines of credit available to the Company at December 31, 2001 were $3.0 million. These lines provide for interest at the prime rate (4.75% at December 31, 2001) plus 1/4% to 1/2%. There were no borrowings under these lines at December 31, 2001, but $561,000 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 $1,200,000 working capital credit facility for its Central American operations. At December 31, 2001 and 2000, the Company had borrowings outstanding of $847,000 and $834,000 under this facility at 2.75% and 7.15%, respectively. Long-term debt at December 31, 2001 and 2000 consisted of the following (interest rates represent the rates at December 31): 2001 2000 (Dollars in Thousands) Term loan, 4.43% to 6.60% and 7.87% to 8.39% $ 15,000 $ 15,000 Revolving credit agreement, 4.15% to 4.75% and 8.5% 14,000 10,850 Development line of credit, 8.62% to 9.03% -- 8,800 Mortgage loan, 7.25% 4,629 4,721 Equipment loans, 4.16% to 8.46% and 6.76% to 8.46% 5,606 3,245 Non-revolving term loan, 4.75% to 4.94% 1,500 -- Total 40,735 42,616 Less portion classified as current 2,440 2,286 Long-term debt $ 38,295 $ 40,330 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 based on six-month and one-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 and the payment of dividends. The Company has a revolving credit agreement with participating banks under which it may borrow up to $25 million in revolving loans through December 31, 2003. On December 31, 2003, the commitment reduces to $15 million and amounts outstanding at that date, at the Company's option, may be converted to a three-year term loan of up to $15 million repayable in six equal semi-annual installments. Commitment fees of 1/4% are payable on the unused portion of the revolving credit line. At the Company's option, interest on advances is at the prime rate or based on the London Interbank Offered Rate (LIBOR). 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 at certain levels, minimum debt coverage ratio 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, 2002, the interest rate on the loan was amended to 6.25% until January 1, 2005. The interest rate will be adjusted to the lender's then prevailing rate of interest for such loans as of January 1, 2005. The Company has agreements that provide for term loans that were used to purchase equipment for the Company's pineapple and resort operations. At December 31, 2001, $4.5 million of these term loans had interest rates that were adjustable based on one to six-month LIBOR. The balance of these loans is at fixed interest rates. The loans mature through December 2006. 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 (as defined). The Company's majority owned Central American subsidiary has a non-revolving term loan that was used to repay intercompany loans initially granted for investments in infrastructure, buildings and operations. The Company guarantees the loan. Monthly principal and interest payments begin in 2002 with the final payment due in 2006. Interest on the loan is adjustable based on six-month LIBOR. Maturities of long-term debt during the next five years, from 2002 through 2006, are as follows: $2,440,000, $2,199,000, $6,941,000, $11,299,000 and $6,508,000. 5. POSTRETIREMENT BENEFITS The Company has defined benefit pension plans covering substantially all regular employees. Pension benefits are based primarily on years of service and compensation levels. The Company has defined benefit postretirement health and life insurance plans that cover primarily non-bargaining salaried employees and certain bargaining unit employees. Postretirement health and life insurance benefits are principally based on the employee's job classification at the time of retirement and on years of service. Changes in benefit obligations and changes in plan assets for 2001 and 2000 and the funded status of the plans and amounts recognized in the balance sheets as of December 31, 2001 and 2000 were as follows:
Pension Benefits Other Benefits 2001 2000 2001 2000 (Dollars in Thousands) Change in benefit obligations: Benefit obligations at beginning of year $ 37,892 $ 35,863 $ 13,619 $ 13,263 Service cost 1,728 1,501 410 358 Interest Cost 2,701 2,535 986 920 Actuarial (gain) loss (85) (127) 1,946 (400) Amendments 216 265 48 194 Benefits paid (2,371) (2,145) (761) (716) Benefit obligations at end of year 40,081 37,892 16,248 13,619 Change in plan assets: Fair value of plan assets at beginning of year 42,235 46,167 -- -- Actual return on plan assets (2,435) (2,133) -- -- Employer contributions 262 346 761 716 Benefits paid (2,371) (2,145) (761) (716) Fair value of plan assets at end of year 37,691 42,235 -- -- Funded status (2,390) 4,343 (16,248) (13,619) Unrecognized actuarial (gain) loss 4,823 (1,186) (3,189) (5,469) Unrecognized net transition (asset) obligation 282 (224) -- -- Unrecognized prior service cost 516 376 (674) (845) Net amounts recognized 3,231 3,309 (20,111) (19,933) Amounts recognized in balance sheets consist of: Prepaid benefit cost 4,154 4,068 -- -- Accrued benefit liability (923) (759) (20,111) (19,933) Net amounts recognized $ 3,231 $ 3,309 $(20,111) $(19,933)
Net periodic benefit costs for 2001, 2000 and 1999 included the following components:
2001 2000 1999 (Dollars in Thousands) Pension benefits: Service cost $ 1,728 $ 1,501 $ 1,443 Interest cost 2,701 2,535 2,396 Expected return on plan assets (3,673) (4,036) (3,638) Amortization of net transition asset (505) (535) (535) Amortization of prior service cost 74 74 59 Recognized net actuarial (gain) loss 13 (319) (14) Net expense (credit) 338 (780) (289) Other benefits: Service cost 410 358 359 Interest cost 986 920 895 Amortization of prior service cost (134) (133) (146) Recognized net actuarial gain (323) (356) (320) Net expense $ 939 $ 789 $ 788
Effective December 31, 2001, three of the Company's defined benefit pension plans covering bargaining unit employees and certain hourly employees were merged into a single plan. The Company estimates that the merger of the plans will reduce future administrative costs while maintaining the benefits and provisions of each plan. 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 $1,246,000, $698,000 and $-0-, respectively, as of December 31, 2001 and $1,328,000, $744,000 and -0-, respectively, as of December 31, 2000. The benefit obligations for pensions and other postretirement benefits were determined using a discount rate of 7.25% as of December 31, 2001 and 2000, and compensation increases ranging up to 4.5%. The expected long-term rate of return on assets ranged up to 9% for 2001 and 2000. The accumulated postretirement benefit obligation for health care as of December 31, 2001 and 2000 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 $2,009,000 as of December 31, 2001, and the aggregate of the service and interest cost for 2001 by approximately $189,000; a 1% annual decrease would reduce the accrued postretirement benefit obligation by approximately $1,649,000 as of December 31, 2001, and the aggregate of the service and interest cost for 2001 by approximately $153,000. The Company has investment and savings plans that allow eligible employees on a voluntary basis to make pre-tax contributions of their cash compensation. Substantially all employees are eligible to participate in one or more plans. The Company can elect to make contributions to the plans and, in 2000, the Company's cost for contribution to one of the plans was $107,000. 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. In 2001, the Company contributed $153,000 to the capital of the Central American subsidiary and the minority shareholders contributed proportionately, thus maintaining the ownership interest percentages. The minority stockholders' share of the 2001, 2000 and 1999 operating losses was not material. 7. DEFERRED REVENUE Deferred revenue at December 31, 2000 primarily represented proceeds received on closed lot sales at the Kapalua Resort in excess of revenues recognized on the percentage-of-completion method. In December 2000, 12 of the 31 lots in Pineapple Hill Estates closed escrow. No revenues were recognized on these sales in 2000. Construction of the Pineapple Hill Estates subdivision improvements began in the first quarter of 2001 and was completed in the fourth quarter of 2001. 8. LEASES LESSEE The Company has capital leases, primarily on equipment used in pineapple operations, which expire at various dates through 2006. At December 31, 2001 and 2000, property included capital leases of $2,028,000 and $1,615,000, respectively (accumulated depreciation of $422,000 and $506,000, respectively). Future minimum rental payments under capital leases aggregate $1,924,000 (including $166,000 representing interest) and are payable as follows (2002 to 2006): $541,000, $339,000, $330,000, $392,000 and $322,000. The Company has various operating leases, primarily for land used in pineapple operations, which expire at various dates through 2018. 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 $811,000 in 2001, $821,000 in 2000 and $801,000 in 1999. Future minimum rental payments under operating leases aggregate $4,585,000 and are payable during the next five years (2002 to 2006) as follows: $619,000, $451,000, $435,000, $431,000, $440,000, respectively, and $2,209,000 thereafter. LESSOR The Company leases land and land improvements, primarily to hotels at Kapalua, and space in 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: 2001 2000 1999 (Dollars in Thousands) Minimum rentals $ 1,835 $ 1,832 $ 1,744 Percentage rentals 2,572 3,140 2,232 Total $ 4,407 $ 4,972 $ 3,976 Property at December 31, 2001 and 2000 includes leased property of $20,659,000 and $20,519,000, respectively (accumulated depreciation of $11,789,000 and $11,279,000, respectively). Future minimum rental income aggregates $6,966,000 and is receivable during the next five years (2002 to 2006) as follows: $1,449,000, $1,195,000, $941,000, $868,000, $539,000, respectively, and $1,974,000 thereafter. 9. INCOME TAXES The components of the income tax provision (credit) were as follows: 2001 2000 1999 (Dollars in Thousands) Current Federal $ 1,904 $ 984 $ 1,831 State (256) (296) 334 Total 1,648 688 2,165 Deferred Federal 1,594 (777) 584 State 198 1 (32) Total 1,792 (776) 552 Total provision (credit) $ 3,440 $ (88) $ 2,717 Reconciliation between the total provision and the amount computed using the statutory federal rate of 34% follows: 2001 2000 1999 (Dollars in Thousands) Federal provision at statutory rate $ 3,743 $ 124 $ 2,512 Adjusted for State income taxes, net of effect on federal income taxes (50) (210) 200 Federal research credits (177) -- -- Other (76) (2) 5 Total provision (credit) $ 3,440 $ (88) $ 2,717 Deferred tax assets and liabilities were comprised of the following types of temporary differences as of December 31, 2001 and 2000: 2001 2000 (Dollars in Thousands) Accrued retirement benefits $ 7,388 $ 6,789 Minimum tax credit carryforward 3,975 3,379 Accrued liabilities 1,926 1,491 Inventory -- 468 Allowance for doubtful accounts 260 359 Net operating loss and tax credit carryforwards 393 85 Total deferred tax assets 13,942 12,571 Deferred condemnation proceeds (6,297) (5,891) Property net book value (4,849) (2,923) Income from partnerships (1,835) (1,847) Pineapple marketing costs (756) (691) Inventory (722) -- Other (202) (146) Total deferred tax liabilities (14,661) (11,498) Net deferred tax (liability) asset $ (719) $ 1,073 A valuation allowance against deferred tax assets as of December 31, 2001 and 2000 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, 2001, the Company had federal minimum tax credit carryforwards of $4.0 million. The Company's federal income tax return for 1995 is under examination by the Internal Revenue Service. The Company has consented to keep federal income tax returns for 1993 and 1994 open because the returns for an entity in which the Company was previously a 25% general partner is under examination by the Internal Revenue Service. The revenue agent's reports on these examinations have not been issued and the Company presently cannot predict the outcome of these examinations. 10. INTEREST CAPITALIZATION Interest cost incurred in 2001, 2000 and 1999 was $3,502,000, $3,901,000 and $2,477,000, respectively, of which $599,000, $840,000 and $643,000, respectively, was capitalized. 11. ADVERTISING AND RESEARCH AND DEVELOPMENT Advertising expense totaled $1,901,000 in 2001, $2,000,000 in 2000 and $1,801,000 in 1999. Research and development expenses totaled $1,073,000 in 2001, $984,000 in 2000 and $839,000 in 1999. 12. 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. 13. 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 carrying amount of long-term debt at December 31, 2001 and 2000 was $40,735,000 and $42,616,000, respectively, and the fair value was $40,874,000 and $42,302,000, respectively. 14. 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 includes 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 2001 Pineapple Resort & Property Other Consolidated (Dollars in Thousands) Revenues (1) $97,426 $ 70,078 $ 5,029 $ 47 $ 172,580 Operating profit (loss)(2) (3,233) 19,757 (1,414) (1,199) 13,911 Interest expense (1,765) (801) (211) (126) (2,903) Income (loss) before income taxes (4,998) 18,956 (1,625) (1,325) 11,008 Depreciation 5,582 3,690 479 475 10,226 Equity in earnings (losses) of joint ventures 3 6,993 (1,453) -- 5,543 Investment in joint ventures 207 9 (11,518) -- (11,302) Segment assets (3) 79,068 72,198 8,051 17,116 176,433 Expenditures for segment assets 4,794 5,415 411 4,599 15,219 2000 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 (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 8,346 8,965 279 2,225 19,815 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 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 7,921 13,282 164 795 22,162 (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 $1.7 million, $2.6 million and $3.1 million, respectively, in 2001, 2000 and 1999. 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. 15. 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 and 2001 did not have a material effect on the Company's financial statements. 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. In connection with pre-development planning for a land parcel in Upcountry Maui, pesticide residues in the parcel's soil were discovered in levels that are in excess of Federal and Hawaii State limits. Studies by environmental consultants, in consultation with the State Department of Health, indicate that remediation probably will be necessary. The cost of remediation will depend on the various alternatives as to the use of the property and the method of remediation. Until the Company makes further progress on obtaining proper entitlements for the parcel, the ultimate use of the property remains uncertain and, therefore, an estimate of the remediation cost cannot be made. 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. 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 and a $1 million line of credit used for working capital purposes. The Company, as a partner in various partnerships, may under particular circumstances be called upon to make additional capital contributions. At December 31, 2001, the Company had purchase commitments under signed contracts totaling $903,000, which primarily relate to real estate projects. QUARTERLY EARNINGS (unaudited)
First Second Third Fourth Quarter Quarter Quarter Quarter (Dollars in Thousands Except Per Share Amounts) 2001 Total revenues* $38,739 $39,453 $45,943 $48,445 (a) Net sales 27,417 29,367 31,959 35,977 (a) Cost of sales 18,917 19,705 23,456 22,936 Net income 779 265 1,974 4,550 Net income per common share .11 .04 .27 .63 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 (b) Net income (loss) 1,945 300 556 (2,349) (b) Net income (loss) per common share .27 .04 .08 (.33)
(a) Total revenues and net sales for the fourth quarter of 2001 were higher primarily due to real estate sales at the Kapalua Resort. In the fourth quarter of 2001, the sale of 18 units in the Coconut Grove on Kapalua Bay closed escrow. (b) 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. * Total revenues for the first and second quarters of 2001 have been restated to conform to the full year presentation. 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. 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 12, 2002, there were 432 shareholders of record. The following chart reflects high and low sales prices during each of the quarters in 2001 and 2000: First Second Third Fourth Quarter Quarter Quarter Quarter 2001 High $ 24.00 $ 27.53 $ 26.60 $ 25.10 Low 18.00 17.00 19.75 19.99 2000 High $ 17.50 $ 23.50 $ 26.63 $ 26.75 Low 14.00 14.75 22.13 21.00 SELECTED FINANCIAL DATA
2001 2000 1999 1998 1997 (Dollars in Thousands Except Per Share Amounts) FOR THE YEAR Summary of Operations Revenues $ 172,580 $ 141,483 $ 146,998 $ 143,711 $ 136,498 Cost of goods sold 85,014 72,803 74,494 76,049 72,200 Operating expenses 33,677 30,169 27,440 26,168 26,027 Shipping and marketing 19,095 18,289 18,479 16,673 18,053 General and administrative 19,430 15,825 16,408 15,094 14,600 Equity in losses of joint ventures 1,453 972 956 1,160 1,211 Interest expense 2,903 3,061 1,834 3,039 3,045 Income tax expense (credit) 3,440 (88) 2,717 1,188 499 Income before extraordinary loss 7,568 452 4,670 4,340 863 Extraordinary loss, net of income tax credit (1) -- -- -- (744) -- Net income 7,568 452 4,670 3,596 863 Per Common Share (2) Income before extraordinary loss 1.05 .06 .65 .60 .12 Extraordinary loss, net of income tax credit -- -- -- (.10) -- Net income 1.05 .06 .65 .50 .12 Other Data Cash dividends Amount -- 899 899 -- -- Per common share (2) -- .125 .125 -- -- Depreciation $10,226 $ 9,002 $ 8,445 $ 8,176 $ 8,041 Return on beginning stockholders' equity 11.5% .7% 7.5% 6.1% 1.5% Percent of net income to revenues 4.4% .3% 3.2% 2.5% .6% AT YEAR END Current assets less current liabilities (3) $25,463 $ 19,304 $ 12,924 $ 18,985 $ 20,283 Ratio of current assets to current liabilities (3) 2.1 1.7 1.5 2.1 2.2 Property, net of depreciation $113,046 $ 109,725 $ 100,976 $ 89,921 $ 88,047 Total assets 176,433 169,951 153,387 136,247 135,507 Long-term debt and capital leases 39,581 41,012 25,497 23,592 29,435 Stockholders' equity Amount 73,419 65,922 66,400 62,492 58,896 Per common share (2) $ 10.20 $ 9.16 $ 9.23 $ 8.69 $ 8.19 Common shares outstanding (2) 7,195,800 7,195,800 7,195,800 7,188,500 7,188,500
(1) In 1998, the Company incurred an extraordinary loss of $744,000 (net of taxes) for prepayment of $20 million of debt. (2) 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. (3) 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 2001 vs. 2000 CONSOLIDATED The Company reported consolidated net income of $7.6 million for 2001 compared to net income of $452,000 for 2000. The increase in net income was due to real estate sales at the Kapalua Resort, which more than offset the reduced profit contribution from Resort operations and increased operating losses from the Pineapple, Commercial & Property and other operations. General and administrative expenses for 2001 (including amounts allocated to the business segments) exceeded the prior year by $3.6 million or 23%. The operating results reported for all of the Company's business segments were negatively affected by increases in general and administrative expenses. The net periodic cost for the Company's defined benefit pension plans increased by $1.1 million in 2001 compared to 2000 primarily because of decreased investment returns in 2000. These expenses are expected to increase further in 2002 as a result of lower investment results in 2001 and because the transition assets realized upon adoption of FASB Statement No. 87 in 1987 were fully amortized as of the end of 2001. Fees paid to outside consultants increased by over $1 million in 2001 compared to 2000. A large part of this increase was due to lawsuits related to Pineapple operations, which the Company filed in 2001. General and administrative expenses were also higher in 2001 because of expenses for employment-related litigation, increased salaries and wages and other employment related expenses. Interest expense of $2.9 million for 2001 was 5% lower than 2000. The decrease was the result of lower average interest rates, partially offset by higher average borrowings and a reduced amount of capitalized interest. Higher debt balances resulted primarily from borrowings in 2000 to finance negative operating cash flows from the Pineapple operations and construction activity at Kapalua Resort. The Company's total debt balance remained relatively high in 2001 as cash from operating activities was used to finance a large portion of the Company's capital expenditures. PINEAPPLE Pineapple revenues increased to $97.4 million in 2001 as compared to $85.9 million in 2000. The segment produced an operating loss of $3.2 million in 2001 compared to an operating loss of $2.9 million in 2000. The average sales price for canned pineapple products and the case volume of canned pineapple sales were higher in 2001 as compared to 2000. Contribution to revenues from fresh cut and fresh whole pineapple products grew substantially in 2001; however, these product lines represent less than 17% of net sales from the Pineapple segment. The operating loss from the Pineapple segment increased in 2001 because of higher per unit production costs and shipping and selling expenses as well as increased general and administrative expenses. Higher production costs in 2001 were primarily the result of increased cost for petroleum products and supplies and scheduled collective bargaining wage increases. Mitigating the loss from Pineapple operations in 2001 was the receipt of $1.8 million in December 2001 from the U.S. Customs Service. The cash distribution was made pursuant to the Continued Dumping and Subsidy Offset Act of 2000, which provided for an annual distribution of antidumping duties to injured domestic producers. The Company currently expects to receive a distribution of antidumping duties in 2002, but anticipates that it may be less than the 2001 distribution. For the first eleven months of 2001, the case volume of imports of canned pineapple into the United States was lower and the average unit value of these imports was higher than the same period in 2000. These results are in part due to a tightening supply of pineapple from Thailand, one of the world's largest pineapple suppliers, as well as lower supplies from certain other pineapple producing countries. The reduction in supply of foreign pineapple is considered to be a reaction to low prices; therefore, as prices rise, plantings and canned pineapple production are expected to increase. Antidumping duties were in effect on canned pineapple fruit imported from Thailand since mid-1995 as a result of an antidumping petition filed in 1994 in which the Company was a party as petitioner. 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. As a result of the annual reviews, the duties can 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%. In 2000, the U. S. Department of Commerce and the U. S. International Trade Commission initiated proceedings for the "Sunset Review" of antidumping duties on imports of canned pineapple fruit from Thailand. In April 2001, the U. S. International Trade Commission announced its unanimous decision that the existing antidumping duty on imports of canned pineapple fruit from Thailand would remain in place. Pursuant to its investigation under the five-year "Sunset Review," the U. S. International Trade Commission determined that revocation of the antidumping duty order would likely result in continuation or recurrence of material injury to the domestic industry. In October 2001, the U. S. Department of Commerce released final antidumping margins pursuant to the fifth annual administrative review of antidumping duties on canned pineapple fruit imports from Thailand. As a result of this review, the dumping margin for one of the larger importers was ruled to be de minimis and, therefore, no deposit of duties is currently required from that importer. The Company is appealing this decision. If the dumping margin for an importer is determined to be de minimis for three consecutive years, the importer is exempt from the duty order. Preliminary results of the sixth annual administrative review covering the period July 1, 2000 through June 30, 2001 are scheduled to be released by July 31, 2002. The Company manufactures all of the cans it uses to can pineapple at its Kahului cannery with tin-coated steel imported from Japan. In October 2001, the U.S. International Trade Commission by a 3 to 3 vote ruled that the domestic steel industry has been injured by the importation of foreign steel into the United States. On March 5, 2002, President George W. Bush, by executive order, imposed three-year tariffs on imported steel products, including the tin-coated steel the Company uses. The Company has filed for exemptions from the tariff. If it is not granted exemption from the tariff, the Company's cost of canning pineapple is expected to increase by approximately $800,000 in 2002 and up to $1.0 million in 2003. RESORT Kapalua Resort revenues, including operations and development, increased to $70.1 million in 2001 from $50.3 million in 2000. The operating profit from this segment was $19.8 million in 2001 compared to $7.8 million in 2000. The increase in revenues and operating profit in 2001 was attributable to development activity related to real estate sales, which contributed $18.2 million to Resort operating profit in 2001 compared to $1.4 million in 2000. In 2001, the sales of all 36-luxury condominium units in the Coconut Grove on Kapalua Bay closed escrow and title passed to the buyers. At the end of 2000, all of the units were under binding sales contract, but construction had not been completed. The Company's equity in earnings of Kapalua Coconut Grove LLC, the developer of the project, was $7.0 million in 2001. In 1997, the Company had contributed to the venture its 50% interest in the 12-acre parcel for the development. In 2001, the Company recognized income of $3.9 million representing the pre- contribution gain on sale of this land parcel. In 2001, the Resort segment recognized profit on sales of 20 of the 31 single-family lots at the Pineapple Hill Estates subdivision. In 2000, 12 of the lots had closed escrow and all of the proceeds received were recorded as deferred revenue. Revenues were recognized throughout 2001 on the percentage-of- completion method. Construction of the subdivision improvements was completed in November 2001. In 2000, the Company recognized profit on the percentage-of- completion method for sale of 14 single-family lots in Plantation Estates Phase II. Construction of the subdivision improvements and all of the sales were completed by the end of second quarter 2000. Resort real estate development and Resort real estate sales are cyclical and depend on a number of factors. Results of real estate sales activity for 2001 are not necessarily indicative of future performance trends for this segment. Revenues and operating profit from Resort operations (excluding real estate development activity) were lower in 2001 compared to 2000 due primarily to lower resort occupancy. Occupancy is responsible for much of the activity at the Resort and revenues from operations. Revenues from golf operations decreased by 3%, merchandise sales declined by 7% and income from lease rents were lower by 14% in 2001 compared to 2000. Revenues from The Kapalua Villa operations decreased by 17% in 2001 compared to 2000. While occupancies at The Kapalua Villas were lower in 2001 compared to 2000, average room rates increased slightly. Partially offsetting the reduction in revenues from these operations was a 46% increase in commission income from Kapalua Realty, largely reflecting the real estate sales mentioned above. Room occupancies in 2001 at Kapalua and for the state of Hawaii were lower than 2000 for every month, but the economic impact of the events of September 11 resulted in a further decline in visitors. The rate of room reservations rebounded somewhat in the last quarter of 2001 and early 2002. Resort marketing initiatives to increase visitors to Kapalua is an ongoing focus and challenge for the Company. In February 2002, contracts were completed for a four-year extension for Kapalua to host the Mercedes Championships golf tournament. This is a major marketing event for the Resort. COMMERCIAL & PROPERTY Revenues from the Commercial & Property segment totaled $5 million in 2001 or approximately the same as in 2000. Revenues for 2001 include $189,000 from land sales compared to $75,000 for 2000. The operating loss from this segment increased to $1.4 million in 2001 from $441,000 in 2000. The increased operating loss was largely attributable to lower results from Queen Ka'ahumanu Center. However, increased land management expenses, primarily as a result of additional personnel, and lower profit contribution from Napili Plaza added to the increased loss from this segment. The Company's equity in the losses of Queen Ka'ahumanu Center was $1.5 million in 2001 compared to $971,000 in 2000. The increased losses largely related to store closures and rent concessions, which resulted in reduced rental income, write-off of tenant improvement allowances and increases in reserves for uncollectible accounts. Partially offsetting these losses in 2001 was an increase in lease cancellation fees received. The Company, as manager of Queen Ka'ahumanu Center for Kaahumanu Center Associates, has realigned management personnel in 2001 to place increased focus on improving the operation. Management presently anticipates that cash advances from the partners of approximately $1.7 million may be required to cover cash deficits of the partnership in 2002. 2000 vs. 1999 CONSOLIDATED 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 incentive compensation for 2000. The cost for outside consultants 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 assist in developing strategic plans for the Company. This reduction in outside consultant costs was 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 an increase in discount rate 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 related expenditures 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 $85.9 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 lower case volume of canned pineapple sales as well as lower prices in 2000. These results reflect the highly competitive market conditions for canned pineapple products that the Company was faced with throughout 2000. 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 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 appeared to be a result of antidumping duties on canned pineapple fruit from Thailand. 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. Revenues 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. Revenues 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 profit 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 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 proceeds were recorded as deferred revenues. COMMERCIAL & PROPERTY Revenues from Commercial & Property were $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 was primarily due to improved recoveries of expenses from the tenants. 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 Queen Ka'ahumanu 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. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2001, the Company's total debt, including capital leases, was $43.3 million, a decrease of $1.2 million from year-end 2000. In 2001, cash distributions from Kapalua Coconut Grove LLC totaled $12.4 million, which was used primarily to retire long-term debt. During 2001, the Company incurred new debt of $6.8 million in the form of equipment loans, capital leases and other long-term debt to finance capital expenditures. In 2001, the Company's debt level declined by only $1.2 million due to income levels and cash flows from operations being negatively affected by the events of September 11 and the downturn in economic activity. Part of the reduced cash flow was caused by the higher than usual level of ripe pineapple in December, which required additional costs to be incurred to process this fruit to inventory. Also, the Company had a relatively high level of unsold real estate inventory consisting of eleven lots in the Pineapple Hill Estates project. The sale of real estate inventories will be a significant variable in the projection of operating cash flows for 2002. While the level of real estate sales that have closed escrow through early 2002 is a positive indication that the market conditions for resort real estate may be improving, if the Company does not sell a significant portion of its real estate inventories in 2002, the Company may elect to reduce capital expenditures and take additional measures to control operating expenses. Unused short- and long-term credit lines available to the Company at December 31, 2001 totaled $13.5 million. As of December 31, 2001, the commitment under the Company's revolving credit agreement was increased from $15 million to $25 million for 2002 and 2003 and short-term bank lines of credit available to the Company were increased from $2 million to $3 million for 2002. The increase in the availability under these facilities was deemed appropriate to fund the seasonal working capital needs of the Company's operations and capital expenditures in 2002 and to provide an appropriate reserve of credit availability. The Company anticipates that it may finance some 2002 capital expenditures with new equipment loans or capital leases. Pineapple capital expenditures are expected to be $5 million in 2002, of which approximately $1.5 million is for the replacement of existing equipment and facilities. A majority of new capital expenditures for the Pineapple segment relates to equipment and facilities for fresh pineapple products. Resort capital expenditures and planning and entitlement expenditures are expected to be approximately $3.9 million in 2002, which includes approximately $1.7 million for replacements. Other capital expenditures and planning and entitlement costs are anticipated to be approximately $3.2 million in 2002, which includes approximately $2 million for completion of the implementation of an integrated accounting and information system and for other computer-related equipment and facilities. A portion of these capital expenditures could be deferred into future periods. Following are summaries of the Company's contractual obligations and other commercial commitments as of December 31, 2001 (in thousands): Payment due by period (years) Contractual Less Obligations Total Than 1 1-3 4-5 After 5 Long-term debt $40,735 $ 2,440 $9,140 $ 17,807 $11,348 Capital lease Obligations 1,924 541 669 714 -- Operating leases 4,585 619 886 871 2,209 Total Contractual Cash Obligations $47,244 $ 3,600 $10,695 $ 19,392 $13,557 Commitment expiration period (years) Other Commercial Less Commitments Total Than 1 1-3 4-5 After 5 Lines of Credit $14,639 $ 1,200 $13,439 $ -- $ -- Guarantees 14,000 4,000 -- -- 10,000 Commitments Under Signed Contracts 903 903 -- -- -- Standby Letters of Credit 561 561 -- -- -- Total Other Commercial Commitments $30,103 $ 6,664 $13,439 $ -- $10,000 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, 2001, which is $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 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, 2001, 90% 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 10% carried interest at fixed rates. Based on debt outstanding at the end of 2001, a hypothetical decrease in interest rates of 100 basis points would increase the fair value of the Company's long-term debt by approximately $386,000. At December 31, 2001, the fair value of the Company's long-term debt exceeded the carrying value by approximately $140,000 as a result of a general decrease 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 success of non- canned pineapple products, future sales of canned pineapple to the U.S. government, receipt of distribution of antidumping duties in 2002, sale of the remaining lots in Pineapple Hill Estates, construction and sale of Kapua Village employee housing subdivision, commencement of drilling of a new Upcountry Maui well and 2002 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) events in the airline industry affecting passenger or freight capacity or cost; (5) possible shifts in market demand; (6) the possibility of tariffs or import quotas on imported steel products; 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 & Commercial Property Donald A. Young Vice President/Human Resources J. Susan Corley Vice President/Retail Property Scott A. Crockford Vice President/Land Planning & Development Robert M. McNatt Vice President/Land & Water Asset Management Warren A. Suzuki Treasurer Darryl Y. H. Chai Controller & Secretary Adele H. Sumida Directors Richard H. Cameron--Chairman Assistant Manager Waldenbooks 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 Teacher, Department of Education State of Hawaii 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/Operations Eduardo E. Chenchin Vice President/Agricultural Business Development L. Douglas MacCluer Vice President/Grocery Sales Renata E. Muller 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/Land Planning & 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