EX-99 8 kcaaudit02.txt 2002 KAAHUMANU CENTER ASSOCIATES FINANCIAL STATEMENTS Kaahumanu Center Associates (A Hawaii Limited Partnership) Financial Statements for Each of the Three Years Ended December 31, 2002, 2001 and 2000 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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. /S/ DELOITTE & TOUCHE LLP February 14, 2003 KAAHUMANU CENTER ASSOCIATES BALANCE SHEETS DECEMBER 31, 2002 AND 2001 ASSETS 2002 2001 CURRENT ASSETS: Cash $ 34,424 $ 33,960 Accounts receivable - less allowance of $390,250 and $250,073 for doubtful accounts 985,845 699,626 Prepaid expenses 80,518 31,023 Total current assets 1,100,787 764,609 PROPERTY: Land and land improvements 6,075,618 6,068,132 Building 84,163,258 83,724,161 Furniture, fixtures and equipment 5,317,157 5,147,455 Construction in process 273,314 261,380 Total property 95,829,347 95,201,128 Less accumulated depreciation (32,381,614) (28,849,489) Property - net 63,447,733 66,351,639 OTHER ASSETS 1,182,878 1,274,227 TOTAL $65,731,398 $68,390,475 LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Current portion of long-term debt $ 1,339,432 $ 1,228,322 Accounts payable 661,311 457,015 Due to Maui Land & Pineapple Company, Inc. 2,487,836 1,667,283 Other current liabilities 53,508 39,453 Total current liabilities 4,542,087 3,392,073 LONG-TERM DEBT 56,571,347 57,911,022 OTHER LONG-TERM LIABILITIES 116,611 90,726 Total liabilities 61,230,045 61,393,821 CONTINGENCIES AND COMMITMENTS PARTNERS' CAPITAL 4,501,353 6,996,654 TOTAL $65,731,398 $68,390,475 See notes to financial statements. KAAHUMANU CENTER ASSOCIATES STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 2002 2001 2000 REVENUES: Rental income - minimum $6,889,397 $7,023,484 $ 7,552,188 Rental income - percentage 1,204,622 1,009,772 1,372,884 Other operating income - primarily recoveries from tenants 6,755,260 7,172,942 6,728,646 Total revenues 14,849,279 15,206,198 15,653,718 COSTS AND EXPENSES: Interest 5,202,495 5,245,434 5,332,655 Depreciation and amortization 3,689,228 3,693,930 3,685,323 Utilities 3,128,503 3,301,571 3,400,142 Payroll and related costs 2,245,133 2,343,025 2,282,740 Repairs and maintenance 617,771 647,124 701,391 General excise taxes 591,145 594,008 616,644 Insurance 495,307 303,817 333,704 Real property taxes 360,222 348,689 327,190 Advertising and promotions 287,903 278,036 241,379 Management fee 252,936 251,038 278,907 Provision for doubtful accounts 160,933 302,613 44,497 Professional fees 150,428 194,613 207,240 Loss on disposal of assets 4,170 364,646 -- Other expenses 158,406 244,051 143,992 Total costs and expenses 17,344,580 18,112,595 17,595,804 NET LOSS $(2,495,301) $(2,906,397) $(1,942,086) See notes to financial statements. KAAHUMANU CENTER ASSOCIATES STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 State of Hawaii Maui Land & Employees' Pineapple Retirement Company, Inc. System Total 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 Net loss - 2002 (1,247,651) (1,247,650) (2,495,301) PARTNERS' CAPITAL (DEFICIT), DECEMBER 31, 2002 $(13,262,271) $17,763,624 $ 4,501,353 See notes to financial statements. KAAHUMANU CENTER ASSOCIATES STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 2002 2001 2000 OPERATING ACTIVITIES: Net loss $(2,495,301) $(2,906,397) $(1,942,086) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 3,689,228 3,693,930 3,685,323 Loss on property disposals 4,170 364,646 -- Decrease (increase) in accounts receivable (286,219) 394,206 (474,932) Decrease (increase) in noncurrent accounts receivable (55,627) 288,927 (146,295) (Decrease) increase in accounts payable and due to Maui Land & Pineapple Company, Inc. 35,344 (39,768) (702,026) Net change in other operating assets and liabilities (9,555) (11,026) 11,165 Net cash provided by operating activities 882,040 1,784,518 431,149 INVESTING ACTIVITIES - Purchases of property (630,112) (1,099,123) (460,224) FINANCING ACTIVITIES: Payments of long-term debt (1,228,565) (1,126,674) (1,018,774) Proceeds from Partner Advances, net of repayments 977,101 482,298 536,078 (Decrease) increase in bank overdraft -- (39,637) 39,637 Net cash used in financing activities (251,464) (684,013) (443,059) NET INCREASE (DECREASE) IN CASH 464 1,382 (472,134) CASH, BEGINNING OF YEAR 33,960 32,578 504,712 CASH, END OF YEAR $ 34,424 $33,960 $ 32,578 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - Cash paid during the year for interest $5,202,000 $5,242,000 $5,328,000 SUPPLEMENTAL INFORMATION RELATING TO NONCASH INVESTING ACTIVITIES - Amounts included in accounts payable for additions to property totaled approximately $12,000, $8,000, and $11,000 at December 31, 2002, 2001, and 2000, respectively. See notes to financial statements. KAAHUMANU CENTER ASSOCIATES NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 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 was to finance the expansion and renovation of Queen Ka'ahumanu Center (Center), which was substantially completed in 1994. The Partnership currently owns and operates the Center. The Center is a regional shopping mall located in Kahului, Maui, and currently consists of 570,000 square feet of gross leasable area. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting - The Partnership's policy is to prepare its financial statements using the accrual basis of accounting. Use of Estimates - The preparation of financial statements in conformity with 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. 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. New Accounting Pronouncement - On January 1, 2002, the Partnership adopted Financial Accounting Standards Board (FASB) Statement No. 144, Accounting for the Impairment of Long-lived Assets. FASB Statement No. 144 provides a single accounting model for impairment of long-lived assets, including discontinued operations. The adoption of FASB Statement No. 144 did not have a material impact on the Partnership's financial statements. 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, 2002 were $18 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. Although the tests were not met in 2002, the Partnership has not notified ML&P that it intends to terminate the Agreement. ML&P, as managing partner, is responsible for the day-to-day management of the Partnership's business affairs. Major decisions, as defined in the partnership agreement, require the unanimous approval of the partners. The Partnership Operating Agreement sets forth that a percentage of revenues be retained for capital improvements. The partners agreed to waive the required capital improvement reserve for the years ended December 31, 2002 and 2001. 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 2002, 2001, and 2000, ML&P charged the Partnership $253,000, $251,000, and $279,000, respectively, for management fees. In accordance with the Limited Partnership Agreement, the partners 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 $1,995,000 and $1,018,000 at December 31, 2002 and 2001, respectively. Interest expense on the advances at 9.57% totaled $113,000, $54,000, and $34,000 for 2002, 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 2002, 2001, and 2000, ML&P charged the Partnership $2,259,000, $2,634,000, and $2,637,000, respectively, for payroll and other costs and expenses. ML&P generates the majority of the electricity that is used by the Center. In 2002, 2001, and 2000, ML&P charged the Partnership $2,655,000, $2,952,000, and $3,049,000, respectively, for electricity. Amounts due to ML&P for management fees, electricity, Partner Advances, and reimbursable costs were approximately $2,488,000 and $1,667,000 as of December 31, 2002 and 2001, respectively. 5. OTHER ASSETS Other assets at December 31, 2002 and 2001 consisted of the following: 2002 2001 Deferred costs $ 288,059 $ 435,033 Noncurrent accounts receivable 894,819 839,194 Total other assets $1,182,878 $1,274,227 Deferred costs are primarily leasing consultation costs and are net of accumulated amortization of $1,277,000 and $1,130,000, respectively, at December 31, 2002 and 2001. 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 June 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 three years from 2003 through 2005 are as follows: $1,339,000, $1,446,000, and $55,125,000, 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 $30,626,000 and is receivable during the next five years (2003 through 2007) as follows: $6,036,000, $4,984,000, $3,644,000, $2,945,000, $1,703,000, respectively, and $11,312,000 thereafter. 8. CONTINGENCIES AND COMMITMENTS The Partnership had commitments under signed contracts totaling $129,000 at December 31, 2002. ******