EX-99 7 kcaauditreport.txt 2001 KAAHUMANU CENTER ASSOCIATES FINANCIAL STATEMENTS Kaahumanu Center Associates (A Hawaii Limited Partnership) Financial Statements for Each of the Three Years Ended December 31, 2001, 2000 and 1999 and Independent Auditors' Report INDEPENDENT AUDITORS' REPORT To the Partners of Kaahumanu Center Associates: We have audited the accompanying balance sheets of Kaahumanu Center Associates (a Hawaii limited partnership) as of December 31, 2001 and 2000, and the related statements of operations, changes in partners' capital (deficit), and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Partnership at December 31, 2001 and 2000, and the results of its operations and its 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 Honolulu, Hawaii February 12, 2002 KAAHUMANU CENTER ASSOCIATES BALANCE SHEETS DECEMBER 31, 2001 AND 2000 ASSETS 2001 2000 CURRENT ASSETS: Cash $ 33,960 $ 32,578 Accounts receivable - less allowance of $250,073 and $95,298 for doubtful accounts 699,626 1,093,832 Prepaid expenses 31,023 70,905 Total current assets 764,609 1,197,315 PROPERTY: Land and land improvements 6,068,132 6,054,330 Building 83,724,161 83,580,660 Furniture, fixtures and equipment 5,147,455 5,182,690 Construction in process 261,380 65,071 Total property 95,201,128 94,882,751 Accumulated depreciation (28,849,489) (25,682,580) Property - net 66,351,639 69,200,171 OTHER ASSETS 1,274,227 1,710,131 TOTAL $68,390,475 $72,107,617 LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Bank overdraft $ -- $ 39,637 Current portion of long-term debt 1,228,322 1,126,451 Accounts payable 457,015 473,094 Due to Maui Land & Pineapple Company, Inc. 1,667,283 1,216,086 Other current liabilities 39,453 122,556 Total current liabilities 3,392,073 2,977,824 LONG-TERM DEBT - Less current portion 57,911,022 59,139,567 OTHER LONG-TERM LIABILITIES 90,726 87,175 Total liabilities 61,393,821 62,204,566 CONTINGENCIES AND COMMITMENTS PARTNERS' CAPITAL 6,996,654 9,903,051 TOTAL $68,390,475 $72,107,617 See notes to financial statements. KAAHUMANU CENTER ASSOCIATES STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 2001 2000 1999 REVENUES: Rental income - minimum $7,023,484 $7,552,188 $7,472,086 Rental income - percentage 1,009,772 1,372,884 1,112,419 Other operating income - primarily recoveries from tenants 7,172,942 6,728,646 5,921,174 Total revenues 15,206,198 15,653,718 14,505,679 COSTS AND EXPENSES: Interest 5,245,434 5,332,655 5,369,013 Depreciation and amortization 3,693,930 3,685,323 3,539,544 Utilities 3,301,571 3,400,142 2,668,013 Payroll and related costs 2,343,025 2,282,740 2,087,090 Repairs and maintenance 647,124 701,391 570,175 General excise taxes 594,008 616,644 566,518 Write down/loss on disposal of assets 364,646 - 88,074 Real property taxes 348,689 327,190 315,005 Insurance 303,817 333,704 366,253 Provision for doubtful accounts 302,613 44,497 57,349 Advertising and promotions 278,036 241,379 204,328 Management fee 251,038 278,907 268,264 Professional fees 194,613 207,240 143,646 Other expenses 244,051 143,992 62,677 Total costs and expenses 18,112,595 17,595,804 16,305,949 NET LOSS $(2,906,397) $(1,942,086)$(1,800,270) See notes to financial statements. KAAHUMANU CENTER ASSOCIATES STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 State of Hawaii Maui Land & Employees' Pineapple Retirement Company, Inc. System Total PARTNERS' CAPITAL (DEFICIT), DECEMBER 31, 1998 $(8,690,243) $22,335,650 $13,645,407 Net loss - 1999 (900,135) (900,135) (1,800,270) PARTNERS' CAPITAL (DEFICIT), DECEMBER 31, 1999 (9,590,378) 21,435,515 11,845,137 Net loss - 2000 (971,043) (971,043) (1,942,086) PARTNERS' CAPITAL (DEFICIT), DECEMBER 31, 2000 (10,561,421) 20,464,472 9,903,051 Net loss - 2001 (1,453,199) (1,453,198) (2,906,397) PARTNERS' CAPITAL (DEFICIT), DECEMBER 31, 2001 $(12,014,620) $19,011,274 $ 6,996,654 See notes to financial statements. KAAHUMANU CENTER ASSOCIATES STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 2001 2000 1999 OPERATING ACTIVITIES: Net loss $(2,906,397) $(1,942,086) $(1,800,270) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 3,693,930 3,685,323 3,539,544 Loss on property disposals 364,646 - 88,074 Decrease (increase) in accounts receivable 394,206 (474,932) (60,628) Decrease (increase) in noncurrent accounts receivable 288,927 (146,295) (285,546) (Decrease) increase in accounts payable (39,768) (702,026) 609,583 Net change in other operating assets and liabilities (11,026) 11,165 30,747 Net cash provided by operating activities 1,784,518 431,149 2,121,504 INVESTING ACTIVITIES: Purchases of property (1,099,123) (460,224) (1,831,275) Decrease in restricted cash - - 758,398 Net cash used in investing activities (1,099,123) (460,224) (1,072,877) FINANCING ACTIVITIES: Payments of long-term debt (1,126,674) (1,018,774) (948,603) Proceeds from Partner Advances, net of repayments 482,298 536,078 - (Decrease) increase in bank overdraft (39,637) 39,637 - Net cash used in financing activities (684,013) (443,059) (948,603) NET INCREASE (DECREASE) IN CASH 1,382 (472,134) 100,024 CASH, BEGINNING OF YEAR 32,578 504,712 404,688 CASH, END OF YEAR $ 33,960 $ 32,578 $ 504,712 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - Cash paid during the year for interest $5,242,000 $5,328,000 $5,369,000 SUPPLEMENTAL INFORMATION RELATING TO NONCASH INVESTING ACTIVITIES - Amounts included in accounts payable for additions to property totaled $8,000, $11,000, and $75,000 at December 31, 2001, 2000, and 1999, respectively. See notes to financial statements. KAAHUMANU CENTER ASSOCIATES NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 1. ORGANIZATION Kaahumanu Center Associates (Partnership) was formed on June 23, 1993 as a limited partnership between Maui Land & Pineapple Company, Inc. (ML&P), as general partner, and the Employees' Retirement System of the State of Hawaii (ERS), as limited partner. The purpose of the Partnership is to finance the expansion and renovation of and to own and operate Queen Ka'ahumanu Center (Center). The Center is a regional shopping mall located in Kahului, Maui, and currently consists of 570,000 square feet of gross leasable area. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting - The Partnership's policy is to prepare its financial statements using the accrual basis of accounting. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting periods. Future actual amounts could differ from those estimates. Restricted Cash - Restricted cash is a percentage of revenues retained for capital improvements as set forth in the Partnership Operating Agreement, as well as proceeds from the mortgage loan that were reserved for additional expansion costs. The partners agreed to waive the required capital improvement reserve for the years ended December 31, 2001 and 2000. Property - Property that was contributed to the Partnership by ML&P is stated at ML&P's net book value at the date of contribution; subsequent additions are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Advertising and Promotion - The costs of advertising and sales promotion activities are expensed as incurred. Income Taxes - The Partnership is not subject to federal and state income taxes. The distributive shares of income or loss and other tax attributes from the Partnership are reportable by the individual partners. Concentration of Credit Risk - The Partnership extends credit to its tenants in the course of its leasing operations. The creditworthiness of existing and potential tenants is evaluated and, under certain circumstances, a security deposit is required. Reclassifications - Certain amounts in the 1999 and 2000 financial statements have been reclassified to conform to the 2001 presentation. 3. PARTNERSHIP AGREEMENTS Capital Contributions - ML&P contributed the land and the shopping center improvements as they existed prior to the expansion and renovation project, subject to the existing first mortgage, together with approximately nine acres of adjacent land which became part of the expanded shopping center, for a 99% interest in the Partnership. ERS originally contributed $312,000 for a 1% interest in the Partnership and made a loan of $30.6 million to the Partnership. Effective April 30, 1995, after completion of the expansion and renovation and the satisfaction of certain conditions, ERS converted its loan to capital for an additional 49% interest and became a 50% partner with ML&P. Allocations and Distributions - Profit and loss allocations and cash distributions of the Partnership are based on the ownership interests of the partners. ERS and ML&P each have a 9% cumulative, non-compounded priority right to cash distributions based on their net contributions to the Partnership (preferred return). The ML&P preferred return is subordinate to the ERS preferred return. For the purpose of calculating the preferred returns, each partner's capital contribution had an agreed upon value of $30.9 million on April 30, 1995. The accumulated unpaid preferred returns at December 31, 2001 were $15.7 million each for ML&P and ERS. Management and Operations - The Partnership has an Operating Agreement with ML&P for the operation of the Center. The Operating Agreement has an initial term of 15 years, which commenced when ERS became a 50% partner, with options to renew for four additional 10-year periods. It provides for certain performance tests, which if not met, could result in termination of the Agreement. The tests were not met in 2001, but termination of the Agreement is not presently being considered. ML&P, as managing partner, is responsible for the day-to-day management of the Partnership's business affairs. Major decisions, as defined in the partnership agreement, require the unanimous approval of the partners. 4. RELATED PARTY TRANSACTIONS Pursuant to the Partnership Operating Agreement, the Partnership pays to ML&P an operator's fee equal to 3% of gross revenues, as defined. In 2001, 2000 and 1999, ML&P charged the Partnership $251,000, $279,000 and $268,000, respectively, for management fees. In accordance with the Limited Partnership Agreement, the Managing Partner may make cash advances to the Partnership as necessary in order to avoid a cash flow deficit. Such advances bear interest at 1% above the rate being charged the Partnership under the mortgage loan (see Borrowing Arrangements). Partner Advances totaled $1,018,000 and $536,000 at December 31, 2001 and 2000, respectively. Interest expense on the advances at 9.57% totaled $54,000 and $34,000 for 2001 and 2000, respectively. The Partnership does not have any employees. As such, ML&P provides all on-site and administrative personnel and also incurs other costs and expenses, primarily insurance, which are reimbursable by the Partnership. In 2001, 2000 and 1999, ML&P charged the Partnership $2,634,000, $2,637,000, and $2,417,000, respectively, for payroll and other costs and expenses. ML&P generates the majority of the electricity that is used by the Center. In 2001, 2000 and 1999, ML&P charged the Partnership $2,952,000, $3,049,000 and $2,263,000, respectively, for electricity. Amounts due to ML&P for management fees, electricity, Partner Advances, and reimbursable costs were $1,667,000 and $1,216,000 as of December 31, 2001 and 2000, respectively. 5. OTHER ASSETS Other assets at December 31, 2001 and 2000 consisted of the following: 2001 2000 Deferred costs $435,033 $582,010 Noncurrent accounts receivable 839,194 1,128,121 Total other assets $1,274,227 $1,710,131 Deferred costs are primarily leasing consultation costs and are net of accumulated amortization of $1,130,000 and $983,000, respectively, at December 31, 2001 and 2000. Noncurrent accounts receivable represents the excess of minimum rental income recognized on a straight-line basis, over the life of the lease, over amounts receivable according to the provisions of the lease, after deducting an estimated amount for amounts not recoverable. 6. BORROWING ARRANGEMENTS The Partnership has a mortgage loan which bears interest at 8.57% and is payable in monthly installments of $526,000, including interest, through 2005 when the entire balance is payable. The loan is collateralized by the Center and is nonrecourse except for the first $10 million, which is guaranteed by ML&P until the Center attains a defined level of net operating income. Scheduled principal maturities for the next four years from 2002 through 2005 are as follows: $1,228,000, $1,339,000, $1,446,000, and $55,126,000, respectively. 7. LEASES Tenant leases of the Center provide for monthly base rent plus percentage rents and reimbursement for common area maintenance and other costs. Future minimum rental income to be received under non-cancelable operating leases aggregates $44,213,000 and is receivable during the next five years (2002 through 2006) as follows: $5,975,000, $5,764,000, $5,024,000, $3,666,000, $2,980,000, respectively, and $20,804,000 thereafter. 8. CONTINGENCIES AND COMMITMENTS The Partnership had commitments under signed contracts totaling $305,000 at December 31, 2001. ******