-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RZHiH95N4CDNJpqndx4NdI65RGRyBvG5kvgIAAKAXFI3P7xJBdUSRIZfCdp2AT3h VJQIclLqyvLCBnbEj8S9IQ== 0000063330-98-000026.txt : 19980327 0000063330-98-000026.hdr.sgml : 19980327 ACCESSION NUMBER: 0000063330-98-000026 CONFORMED SUBMISSION TYPE: ARS PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980326 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAUI LAND & PINEAPPLE CO INC CENTRAL INDEX KEY: 0000063330 STANDARD INDUSTRIAL CLASSIFICATION: CANNED, FRUITS, VEG & PRESERVES, JAMS & JELLIES [2033] IRS NUMBER: 990107542 STATE OF INCORPORATION: HI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: ARS SEC ACT: SEC FILE NUMBER: 001-06510 FILM NUMBER: 98574170 BUSINESS ADDRESS: STREET 1: PO BOX 187 STREET 2: 120 KANE ST CITY: KAHULUI MAUI STATE: HI ZIP: 96732 BUSINESS PHONE: 8088773351 MAIL ADDRESS: STREET 1: PO BOX 187 CITY: KAHULUI STATE: HI ZIP: 96732 ARS 1 MAUI LAND & PINEAPPLE COMPANY, INC ANNUAL REPORT 1997 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 Cash Flows 11 Notes to Consolidated Financial Statements 12 Common Stock 19 Selected Financial Data 20 Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Officers and Directors 24 THE COMPANY Maui Land & Pineapple Company, Inc., a Hawaii corporation organized in 1909, is a land-holding and operating company with several wholly owned subsidiaries, including two major operating companies, Maui Pineapple Company, Ltd. and Kapalua Land Company, Ltd. The Company, as used herein, refers to the parent and its wholly owned 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 8,100 acres are used directly or indirectly in the Company's operations. The Company employed approximately 2,270 people in 1997 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.(TM) imprinted on the can lid. In addition, the products are sold through institutional, industrial and export distribution channels. Kapalua Land Company, Ltd. is the development and operating subsidiary for the Kapalua Resort. The Kapalua Resort is a master-planned golf resort community on Maui's northwest coast. The property encompasses 1,650 acres bordering the ocean with three white sand beaches. Commercial & Property includes the operations of various properties, including Kaahumanu Center, the largest retail and entertainment center on Maui. It also includes the Company's land entitlement and management activities and land sales that are not part of the Kapalua Resort. 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: 510-798-0240 Fax: 808-871-0953 Fax: 510-798-0252 http://www.mauiland.com Maui Pineapple Company, Ltd. P. O. Box 187 Kahului, Hawaii 96733-6687 Telephone: 808-877-3351 Fax: 808-871-0953 http://www.pineapplehawaii.com Kapalua Land Company, Ltd. 1000 Kapalua Drive Kapalua, Hawaii 96761-9028 Telephone: 808-669-5622 Fax: 808-669-5454 http://www.kapaluamaui.com Kaahumanu Center 275 Kaahumanu Avenue Kahului, Hawaii 96732-1612 Telephone: 808-877-3369 Fax: 808-877-5992 http://www.maui.net/~kcenter/ Transfer Agent & Registrar Independent Auditors ChaseMellon Shareholder Services Deloitte & Touche LLP 85 Challenger Road 1132 Bishop Street, Suite 1200 Ridgefield Park, New Jersey 07660 Honolulu, Hawaii 96813-2870 Telephone: 800-356-2017 Telephone: 808-543-0700 MAUI LAND & PINEAPPLE COMPANY, INC. & SUBSIDIARIES FINANCIAL HIGHLIGHTS
1997 1996 1995 (Dollars in Thousands Except Per Share Amounts) REVENUES Pineapple $ 90,949 $ 95,700 $ 81,052 Resort 40,338 35,676 34,330 Commercial & Property 5,065 4,850 10,123 Corporate 146 109 72 Total 136,498 136,335 125,577 NET INCOME (LOSS) 863 (747) (1,559) NET INCOME (LOSS) PER COMMON SHARE $ .48 $ (.42) $ (.87) AVERAGE COMMON SHARES OUTSTANDING 1,797,125 1,797,125 1,797,125 TOTAL ASSETS $ 134,714 $ 132,851 $137,085 CURRENT RATIO 2.20 2.23 2.78 LONG-TERM DEBT and CAPITAL LEASES $ 29,435 $ 28,898 $ 36,227 STOCKHOLDERS' EQUITY 58,896 58,033 58,870 STOCKHOLDERS' EQUITY PER COMMON SHARE $ 32.77 32.29 $ 32.76 EMPLOYEES 2,270 2,160 1,990
TO OUR SHAREHOLDERS AND EMPLOYEES Nineteen ninety-seven was a year of progress for Maui Land & Pineapple Company, Inc. A net profit was posted for the first time since 1991. In many ways however, operating results did not reflect the substantial progress that has been made in the Company's operations over the last three years and, in this respect, the magnitude of the net profit was disappointing. Through the end of the third quarter, the Company posted a net profit of $2.6 million. The fourth quarter net loss of $1.8 million reduced the net profit for the full year to $863,000. The fourth quarter loss was primarily attributable to the Resort segment experiencing a decline in occupancy, golf rounds and merchandise sales as well as bad debts due to tenant turnover and a decline in electricity revenue in the Commercial segment. The focus and concentrated effort of our strategic planning program has led to the development of new products, to the creation of two new joint venture affiliations and to planning for a number of near-term development projects that are promising. The sales volume and profits from new product opportunities, projects and new lines of business have not developed as fast as we would have liked. Last year, we referred to a number of fundamental improvements that will have long-term positive impact on our businesses, such as the repositioning of the Kapalua Bay Hotel. Although the Company did not benefit from the full profit impact of these fundamental improvements in 1997, we are confident it will in the future. The 1997 net profit of $863,000 was an improvement over the 1996 net loss of $747,000 and a further improvement from the 1995 loss of $1.6 million. The 1997 results include the profit recognized from three land sale transactions concluded in the second and third quarters, equivalent to $3.3 million on an after- tax basis. Further information on these land sales transactions is provided in the Resort and Commercial & Property sections of this report. Revenues in 1997 were almost identical to 1996 revenues at approximately $136 million. The operating results from our major business segments, Pineapple, Resort and Commercial & Property, were a $3.7 million profit, a $4.8 million profit, and a $127,000 profit, respectively. This compares to operating results of a $4 million profit, a $2.2 million profit, and a $105,000 profit, respectively, for Pineapple, Resort and Commercial & Property segments in 1996. It should be noted that although Pineapple's operating results declined by approximately $300,000, the operating profit in 1997 was generated with sales of 6% fewer cases sold than 1996 while sales prices were only marginally better in 1997. Production of cases packed was 8% higher than 1996. These operating results show a substantially improved level of operating efficiency in the Pineapple division. The Kapalua Resort's improvement in operating profit of $2.6 million in 1997 is due entirely to results from development activities, specifically the sale of a one-half interest in the Kapalua Coconut Grove project. Despite increased real estate activity in 1997, resort ongoing operations experienced a decline in operating profit from $2 million in 1996 to $800,000 due to effects of the closure for renovation of the Kapalua Bay Hotel for a majority of the year and the continued weak level of visitor arrivals and visitor occupancy on Maui. The improved operating profit from Commercial & Property activities reflects two land sale transactions, which generated an operating profit of $1 million offset by the loss for the year from Kaahumanu Center as a result of continued poor retail economic conditions on Maui. We are concerned that three factors that had negative influences on the Company's operations and profitability in 1997 will persist without significant improvement in 1998. First, the poor performance of the Hawaii economy in the face of excellent business conditions in the rest of the U.S. and the lack of meaningful steps to reduce the costs of doing business in Hawaii need immediate attention. We have devoted considerable effort to participating in and supporting the initiatives of the joint public and private Economic Recovery Task Force as a starting point. These initiatives must be enacted by the State legislature. Progress beyond these initiatives must continue on a priority basis in terms of reducing the size and cost of our State government and in reducing the costs of doing business, such as health care, workers' compensation, insurance, torts and taxes. We hope the State legislators and administration take the necessary steps to improve this situation. Second, the extension of the runway at Kahului Airport from 7,000 feet to 9,600 feet has yet to be accomplished despite broad community and County government support. Lack of progress on this project remains the most serious impediment to the health of our key retail and visitor industries on Maui, and continues to limit sales of the Company's fresh pineapple products. Third, financial difficulties in the major Asian countries continue to have a negative impact on Maui's visitor and retail industries. It appears unlikely that we will see significant improvement in 1998 in these three key areas. Due to devaluation of foreign currencies, we would, under normal circumstances, expect to see some downward pressure in pineapple pricing; however, foreign suppliers are experiencing low inventories and pricing has remained steady. Notwithstanding the poor climate for business in Hawaii, progress was made in 1997. The Pineapple division completed a joint venture affiliation with the U.S. subsidiary of an Indonesian pineapple producer. The joint venture, Premium Tropicals International, LLC, markets pineapple products from Indonesia to U.S. grocery chain customers. This strategic alliance broadens the Company's product line and presents marketing opportunities that we were not able to take advantage of in prior years. Shipments by Premium Tropicals in 1997 and sales in early 1998, while lower than our expectations because a severe drought in Indonesia limited product availability, were well received by Premium Tropicals' customers. The volume of sales and profit contribution from Premium Tropicals should increase if drought conditions in Indonesia moderate and a greater volume of pineapple products become available. Progress also was made in the Pineapple division in developing additional markets for fresh whole pineapple, including both Jet Fresh pineapple grown and packed on Maui and pineapple grown in other countries and marketed through our wholly owned subsidiary, Royal Coast Tropical Fruit Company. We expect the volume of fresh whole pineapple and the contribution from these activities to grow in the future, subject to resolution of transportation and distribution issues, such as the Kahului Airport runway extension. Considerable progress was made in analyzing consumer preferences for fresh cut pineapple products and in analyzing and resolving production issues for this new product line. While sales and shipments of fresh cut products were lower than expected in 1997, we remain convinced that fresh cut pineapple is an excellent product opportunity for the Company and will represent an important and growing source of revenues and profits in the future. The Kapalua Resort also made progress in 1997. Kapalua Bay Hotel was placed under the management of Halekulani Corporation by its new owner, ERE Yarmouth. The hotel was closed for part of the year while a renovation costing some $16 million was completed. As a result, we did not receive any benefit from occupancy of the hotel by guests nor did we receive any rent under the ground lease of the hotel property. The hotel re-opened late in the year and accrual of rent under the ground lease was reinstated. In June of 1997, ERE Yarmouth purchased a 50% interest in the 12-acre parcel of land adjoining the hotel and a joint venture was formed with ERE Yarmouth for development of that parcel. Market studies indicate that demand for luxury condominiums on that site should be reasonably strong and we hope to proceed with that project in 1998. Real estate activity at Kapalua increased significantly in 1997, resulting in the sale of the final three lots owned by our joint venture, Plantation Club Associates. As a result, this partnership was dissolved as of year-end 1997. With the improvement in real estate activity at the resort, the Company has accelerated its planning efforts for future projects. The selection of Kapalua as the site for the prestigious PGA Tour Mercedes Championships for 1999 through 2002 should serve to enhance Kapalua's reputation as one of the leading golf resorts in the world. While the business outlook for 1998 is not expected to improve substantially, improved financial performance should result from repositioning the Kapalua Bay Hotel and the additional international recognition received by the resort. Results of the Company's Commercial & Property division are dominated by the Kaahumanu Center, which at 573,000 square feet of gross leaseable area is Maui's largest shopping center. High turnover of tenants and a lackluster level of sales resulting from a very competitive retail market on Maui negatively impacted 1997 results. Considerable progress was made in attracting new, high quality tenants to the Center and overall tenant sales volume increased approximately 5% over 1996 levels. Kaahumanu Center continues to demonstrate the ability to attract new tenants, which should result in improved financial performance for 1998. At the end of 1997, the Company's total debt, including capital leases, was $32.5 million, a $2.3 million increase from year-end 1996. While this level of debt is still above the target level of financial leverage for the Company, by year-end the Company had paid entirely its revolving loans from bank lenders. We are disappointed that 1997 did not result in a substantial level of net profit for the Company. We believe the progress made in 1997 has the effect of positioning Maui Land & Pineapple Company, Inc. for substantially improved results under better economic conditions. Thank you for your continued support. /S/ MARY C. SANFORD Mary C. Sanford Chairman /S/ GARY L. GIFFORD Gary L. Gifford President & CEO February 6, 1998 PINEAPPLE In 1997, Maui Pineapple Company, Ltd. reported operating profits before allocated interest and corporate expenses of $3,749,000, $258,000 lower than 1996. This was the second year of profitability after three years of net losses. Pineapple's revenue for 1997 was $91 million, down 5% from 1996 levels. Total canned pineapple case sales volume was down 6%. Canned fruit, our largest category, experienced an 8% case volume decline. Price increases partially offset the effect of lower sales volume. Case volume shortfalls in our domestic markets resulted from low inventory levels, which affected product delivery during the key Easter and Christmas holiday periods. Export case volume was down significantly due to poor economic conditions that continue to persist in the Asian markets. Canned juice case volume was down 2% compared with 1996, while pricing increased 5%. Supported by the State of California Women, Infants and Children Supplemental Nutritional Feeding Program contract, which we were awarded in 1997, volume and pricing for the grocery juice segment was ahead of 1996 levels by 5%. All other juice segments experienced case volume decreases. Pricing increased in the industrial, club, frozen juice, institutional and government segments. Due to consumers purchasing fewer canned juices, we expect the canned juice category to experience downward pricing pressure as sales continue to decline. Net sales of the fresh whole fruit segment increased 2% over 1996 levels as the number of tons sold increased. Growth in this category will be limited until the Kahului Airport runway is extended. The company expects to increase sales volume of its Jet Fresh fruit once the airport runway expansion is completed. The company had a very good pineapple crop in the second half of 1997, in contrast to the first half when we experienced weather- related fruit shortages and quality problems. Pineapple fruit and juice recovery was higher than 1996. These increases resulted in a higher pack than expected and provided an opportunity to improve our beginning inventory balances of canned pineapple for 1998. This past year was excellent for plant growth and fruit development. The company's plantings are in good condition for 1998 and beyond. Increased pack, good weather conditions and the company's continued emphasis on cost reduction contributed to lower operating costs. The company continues to closely monitor canned pineapple imports. Through November 1997, case volume of imported canned pineapple fruit and juice increased 6% and 2%, respectively, over 1996 levels. Juice concentrate import volume was down 7%. Antidumping duties on canned pineapple fruit from Thailand were in effect throughout 1997. The company does not expect any significant changes in these duties in 1998. This past year the company and the Department of Commerce each filed an appeal with the Court of Appeals for the Federal Circuit challenging a decision by the United States Court of International Trade. This decision required the Department of Commerce to recalculate the antidumping duties using accounting methods not normally used by Thai producers. This method understates how much dumping is occurring and the Company and the Department of Commerce believe the decision should be overturned by the Court of Appeals for the Federal Circuit. In the annual review process, the company is aggressively pursuing the issue of canned pineapple sales in the U.S. at prices below fair value by several Thai producers. Winter crop output in both Indonesia and Thailand has been poor, resulting in relatively firm marketplace pricing. Even though raw material costs in Thailand have fallen since last year's peak, the devaluation of the Thai baht continues to exert upward pressure on other Thai production costs. It is unclear what the long-term effect of the Thailand economic crisis will have on pricing or the antidumping duties. As part of the Company's strategic plan, we are continuing our efforts in new product and new business development. During 1997 we made steady progress, including gaining marketplace experience in developing a new fresh cut fruit program. Through our Royal Coast Tropical Fruit Company, Inc. subsidiary, we formed a joint venture with P.T. Great Giant Pineapple Co., an Indonesian pineapple grower and canner and one of the largest and lowest cost producers in the world. The joint venture company, Premium Tropicals International, LLC, will market and sell Indonesian canned pineapple in the United States. Sales through this joint venture began in 1998. Under the Royal Coast label, the company also sells fresh whole fruit from Central and South America in the U.S. market. From a profit standpoint, our financial results in both new businesses were less than expected. Assuming favorable market conditions, we have laid the groundwork for growth of these businesses in the coming years. The company continues to be a leader in environmental issues. This past fall, at a cost of $3.2 million, the cannery completed a water-recycling program. This new system provides cannery- processed water to Hawaiian Commercial & Sugar Company for seed cane irrigation. Both Haliimaile and Honolua plantations have been given Integrated Pest Management certification through the University of Hawaii. This program reduces the overall use of chemicals by using innovative agricultural practices to control pests. The company also remains committed to retaining the pristine condition of the Colin C. Cameron Puu Kukui Conservation Easement. The company's main focus over the next year is to improve profitability by continued emphasis on cost reductions in operations, maximizing yields and improving recovery. Significant resources will continue to be directed toward improving product quality and sales volume in the fresh cut categories where customer demand is growing. Sales and marketing objectives are to achieve the highest return from sales of "100% HAWAIIAN U.S.A.T" canned pineapple and to expand sales through the Royal Coast label and the Premium Tropicals International joint venture. We expect 1998 to be another challenging year as we continue to expand and improve our business. RESORT In 1997, Kapalua Land Company, Ltd. had a profit, before allocated interest and corporate expenses, of $4.8 million compared with a profit of $2.2 million in 1996. All of the increased profit was due to the $4.2 million gain on the sale of a 50% interest in a 12-acre oceanfront development parcel (Site 29) next to the Kapalua Bay Hotel. ERE Yarmouth, the owner of the Kapalua Bay Hotel, exercised its option to purchase an interest in Site 29 and, after closing the transaction in June of 1997, we formed Kapalua Coconut Grove LLC, a 50/50 limited liability corporation with Yarmouth. Preliminary development plans for approximately 40 luxury condominiums on Site 29 have been completed and an application for Special Management Area (SMA) approval is expected to be submitted in the first half of 1998. Overall, Hawaii's resort real estate market continued to show signs of strengthening. Resort residential property resale activity for all of Maui in 1997 increased 14% in total dollar volume with prices stabilized or up slightly. Kapalua's resale volume increased about 7% in 1997, mostly from residential property and land sales activity. In addition to the resale activity, the final three lots in Phase I of Plantation Estates closed escrow in 1997. Although there was significant cash generated by these sales, there was very little profit recognition. Following these sales, we concluded an agreement with our joint venture partner to dissolve Plantation Club Associates. As part of the distribution at year-end, Kapalua Land Company received ownership of the remaining development assets comprised of the 142-acre Plantation Estates Phase II. Our net cash proceeds from Plantation Club Associates in 1997 was approximately $1.5 million. We are proceeding with plans to reconfigure Plantation Estates Phase II into fewer, larger lots as an alternative residential product that would complement the two-acre single family lot product in Phase I and the overall resort master plan for Kapalua. The sale of a 75-acre portion of Phase II, which was placed in escrow last year subject to a number of contingencies, is tentatively scheduled to close escrow in 1998. Results for our real estate brokerage operation, Kapalua Realty, continued to improve in 1997 with a 50% increase in total commission income and a dominant market share of both listings and sales for the resort. In addition to Site 29, our primary planning focus has been on the near-term development of the 55-acre Central Resort area of Kapalua. Significant progress has been made in finalizing conceptual plans that include a new golf clubhouse and practice facility for the Village Course, a resort spa, villa reception center, Town Center and new villa product. We hope to obtain the approvals and appropriate financing necessary to begin construction of the Village Course redevelopment in 1998. Hawaii's visitor industry finished 1997 with lower hotel occupancy and growing concern over the trend in the declining number of eastbound visitors and their expenditures. The recent Asian financial crisis has added a new level of uncertainty and concern for Hawaii's visitor industry in 1998. Maui's hotel occupancy rate declined about 2 percentage points last year to 71.6%, mostly because of the loss of eastbound visitors to the Island of Hawaii which has benefited from the recently lengthened Keahole-Kona airport runway. Excluding the impact of closing the Kapalua Bay Hotel for renovation, our resort occupancy increased more than 11% in 1997. Excluding the sale of Site 29, our ongoing resort operations had an operating profit of approximately $800,000 in 1997 compared to $2 million in 1996. Total resort revenues from ongoing operations increased 2% to $36.1 million. Increased golf green fees from higher rates and increased Kapalua Club membership income were offset by lower merchandise sales and higher resort operating expenses. The closure of the Kapalua Bay Hotel for major renovations in 1997 had a much greater negative impact on our operations than we had anticipated and accounted for most of the decrease in profits. The hotel closed on April 1 and did not fully reopen until the fourth quarter. In addition to reduced hotel and commercial lease rents and lower retail revenues due to the closing of the hotel, we also incurred significant expense to settle a lawsuit related to the sale of the hotel. The agreement with Yarmouth to consolidate the short-term villa rentals under our villa operation (The Kapalua Villas) resulted in a significant and almost equal increase in both revenues and expenses for 1997. With an inventory of over 260 resort villas now under management by The Kapalua Villas, this operation clearly gives Kapalua a more unified and stronger market position that complements the resort's two hotels. Our resort marketing continues to emphasize golf, our unique resort environment and Kapalua special events. Beginning in January 1999, Kapalua and The Plantation Course will host the prestigious Mercedes Championships, which will be the season opening event for the PGA Tour. The Mercedes Championships replaces the Lincoln-Mercury Kapalua International and gives us a significant opportunity to further position Kapalua as one of the premiere golf resort communities in the world. Despite projections for another difficult year for Hawaii's tourism industry, our resort operations should show improved results in 1998 from having the Kapalua Bay Hotel reopened under the management of Halekulani Corporation. Development profit in 1998 is expected to be limited to the pending sale of a 75-acre parcel in Plantation Estates Phase II. With the planned development of Site 29 and continued improvement from resort operations, the longer-term outlook for Kapalua Land Company continues to be positive. COMMERCIAL & PROPERTY The Commercial & Property business segment produced slightly higher revenue and operating profits in 1997 compared to 1996. Revenue increased from $4.9 million in 1996 to slightly over $5.0 million in 1997. Operating profit, before allocation of interest and corporate expenses, was $127,000 in 1997 compared to $105,000 in 1996. Land sales arising from two transactions contributed a total of $1.3 million in cash flow and $1.0 million in operating profit for 1997. The two transactions involved the sale of an existing residence on a two-acre parcel of land along Kaluanui Road in Makawao to a private buyer and two parcels of land in West Maui to the County of Maui. Kaahumanu Center, Maui's largest shopping center, posted results lower than expected due mostly to higher than anticipated tenant turnover and the timing of new tenant installations. Kaahumanu Center continues to attract new quality tenants, including Sam Choy's Kahului, Spencer Gifts, Perfumania, Forever 21, PrimeCo, Madison Avenue, Cesia, Cinnabon, Hoaloha Heirlooms, Gold Mart and Papyrus. Traffic at Kaahumanu Center remained strong despite new competition. Tenant sales increased 5% over 1996. Recent exit surveys conducted at Kahului Airport indicated that Kaahumanu Center showed significant improvement in both eastbound and westbound tourist traffic in 1997. Kaahumanu Center continues to increase its entertainment component with the addition of new restaurants and a contemplated expansion of the existing multiplex cinema. Napili Plaza, a 44,000 square foot community center, showed improved results due to higher occupancy and tenant sales. New competition from Honokowai Marketplace, a 75,000 square foot center to be anchored by Star Market and currently under construction, may negatively impact Napili Plaza's results in the future. In 1997, the Land Management Division devoted significant time and effort to monitor various proposed legislation before the County of Maui and State of Hawaii that could potentially impact the ability of the Company to benefit from its land and water resources. The Land Management Division is nearing completion of a Land and Water Use and Development Plan and a Management Information System Database for our land and water resources. Once completed, the plan and database will ensure the effective management and development of the Company's land and water resources. In December of 1997, Change in Zoning, District Boundary Amendment and Special Management Area Permit applications were submitted to the County of Maui for the 45-lot Kapua Village Employee Subdivision in West Maui. Current plans are to commence construction of subdivision improvements during the last quarter of 1998. 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, 1997 and 1996, and the related consolidated statements of operations and retained earnings and of cash flows for each of the three years in the period ended December 31, 1997. 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 generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Companies as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /S/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Honolulu, Hawaii February 6, 1998 (February 26, 1998 as to the seventh paragraph of Note 4) MAUI LAND & PINEAPPLE COMPANY, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996
1997 1996 (Dollars in Thousands) ASSETS CURRENT ASSETS Cash $ 1,611 $ 453 Accounts and notes receivable, less allowance of $567 and $698 12,748 14,343 Inventories Pineapple products 11,125 9,740 Real estate held for sale 1,349 339 Merchandise, materials and supplies 6,239 6,405 Prepaid expenses and other assets 4,076 4,028 Total Current Assets 37,148 35,308 NOTES RECEIVABLE--REAL ESTATE SALES 370 419 INVESTMENTS AND OTHER ASSETS 9,575 10,514 PROPERTY Land 4,614 4,605 Land improvements 42,761 42,184 Buildings 48,374 47,991 Machinery and equipment 98,700 93,472 Construction in progress 5,144 2,747 Total Property 199,593 190,999 Less accumulated depreciation 111,972 104,389 Net Property 87,621 86,610 TOTAL $134,714 $132,851 1997 1996 (Dollars in Thousands) LIABILITIES & STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 2,043 $ 53 Current portion of capital lease obligations 1,009 1,201 Trade accounts payable 6,166 7,661 Payroll and employee benefits 4,637 4,235 Accrued interest 702 898 Other accrued liabilities 2,308 1,793 Total Current Liabilities 16,865 15,841 LONG-TERM LIABILITIES Long-term debt 28,257 27,347 Capital lease obligations 1,178 1,551 Accrued retirement benefits 21,571 21,983 Equity in losses of joint venture 6,655 6,256 Other noncurrent liabilities 1,292 1,840 Total Long-Term Liabilities 58,953 58,977 CONTINGENCIES AND COMMITMENTS STOCKHOLDERS' EQUITY Common stock--no par value, 1,800,000 shares authorized, 1,797,125 shares issued and outstanding 12,318 12,318 Retained earnings 46,578 45,715 Stockholders' Equity 58,896 58,033 TOTAL $134,714 $132,851 See Notes to Consolidated Financial Statements
MAUI LAND & PINEAPPLE COMPANY, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 (Dollars in Thousands Except Per Share Amounts) REVENUES Net sales $101,421 $106,666 $ 91,227 Operating revenue 29,058 28,062 30,104 Other income 6,019 1,607 4,246 Total Revenues 136,498 136,335 125,577 COSTS AND EXPENSES Cost of goods sold 72,200 75,279 69,314 Operating expenses 26,027 24,030 24,315 Shipping and marketing 18,053 19,185 16,793 General and administrative 14,600 14,507 15,160 Equity in (earnings) losses of joint ventures 1,211 882 (4,001) Interest 3,045 3,575 7,021 Total Costs and Expenses 135,136 137,458 128,602 INCOME (LOSS) BEFORE INCOME TAXES 1,362 (1,123) (3,025) INCOME TAXES (CREDITS) 499 (376) (1,466) NET INCOME (LOSS) 863 (747) (1,559) RETAINED EARNINGS, BEGINNING OF YEAR 45,715 46,552 48,111 CASH DIVIDENDS -- (90) -- RETAINED EARNINGS, END OF YEAR 46,578 45,715 46,552 PER COMMON SHARE Net Income (Loss) .48 (.42) (.87) Cash Dividends $ -- $ .05 $ -- See Notes to Consolidated Financial Statements.
MAUI LAND & PINEAPPLE COMPANY, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 (Dollars in Thousands) OPERATING ACTIVITIES Net income (loss) $ 863 $ (747) $(1,559) Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation 8,041 8,606 10,202 Undistributed equity in (earnings) losses of joint ventures 1,211 1,010 (3,850) Gain on property disposals (5,254) (812) (3,408) Deferred income taxes (313) (389) (1,471) (Increase) decrease in accounts receivable 1,446 (1,105) (723) (Increase) decrease in refundableincome taxes (38) (44) 1,392 (Increase) decrease in inventories (1,219) 3,191 862 Increase (decrease) in trade payables (1,356) 1,602 573 Net change in other operating assets and liabilities 72 442 124 NET CASH PROVIDED BY OPERATING ACTIVITIES 3,453 11,754 2,142 INVESTING ACTIVITIES Purchases of property (8,388) (5,284) (5,679) Proceeds from sale of property 5,882 845 3,469 Distributions from joint ventures 1,460 712 303 Contributions to joint ventures (1,030) -- -- Payments for other investments (1,815) (437) (3,563) Proceeds from surrender of insurance policies -- 3,125 -- Reimbursement from Kaahumanu Center Associates -- 328 11,843 NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (3,891) (711) 6,373 FINANCING ACTIVITIES Proceeds from long-term borrowings 23,891 18,800 16,388 Payments of long-term debt (20,991) (28,097) (25,515) Payments on capital lease obligations (1,304) (1,369) (1,491) Dividend paid -- (90) -- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,596 (10,756) (10,618) NET INCREASE (DECREASE) IN CASH 1,158 287 (2,103) CASH AT BEGINNING OF YEAR 453 166 2,269 CASH AT END OF YEAR $ 1,611 $ 453 $ 166 Supplemental Disclosures of Cash Flow Information and Non-Cash Investing and Financing Activities: 1. Cash paid (received) during the year (in thousands): Interest (net of amount capitalized) $ 3,235 $ 3,751 $ 7,339 Income taxes $ 335 $ 301 $(1,205) 2. Capital lease obligations of $739,000 in 1997 and $1,092,000 in 1996 were incurred for new equipment. 3. Effective December 31, 1997, the Company's investment in Plantation Club Associates (PCA) was liquidated and the Company assumed PCA's remaining assets totaling $1.4 million (see Note 3 to Consolidated Financial Statements). 4. Effective April 30, 1995, the Employees' Retirement System of the State of Hawaii converted its $30.6 million loan to an additional 49% ownership in Kaahumanu Center Associates (see Note 3 to Consolidated Financial Statements). 5. In 1995, the $4.7 million loan from Kaptel Associates to the Company was offset against the cost of the related off-site improvements (see Note 3 to Consolidated Financial Statements). 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 its wholly owned subsidiaries, primarily Maui Pineapple Company, Ltd. and Kapalua Land Company, Ltd. Significant intercompany balances and transactions have been eliminated. 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 are reflected net of loans against the policies. Investments in joint ventures are generally accounted for using the equity method. PROPERTY AND DEPRECIATION Property is stated at cost. Major replacements, renewals and betterments are capitalized while maintenance and repairs that do not improve or extend the life of an asset are charged to expense as incurred. When property is retired or otherwise disposed of, the cost of the property and the related accumulated depreciation are written off and the resulting gains or losses are included in income. Depreciation is provided over estimated useful lives of the respective assets using the straight-line method. POSTRETIREMENT BENEFITS The Company's policy is to fund pension cost at a level at least equal to the minimum amount required under federal law, but not more than the maximum amount deductible for federal income tax purposes. Deferred compensation plans for certain management employees provide for specified payments after retirement. The present value of estimated payments to be made are accrued over the period of active employment. The estimated cost of providing postretirement health care and life insurance benefits is accrued over the period employees render the necessary services. REVENUE RECOGNITION Revenue from the sale of pineapple is recognized when title to the product is transferred to the customer. The timing of the transfer of title varies according to the shipping and delivery terms of the sale. Sales of real estate are recognized as revenues in the period in which sufficient cash has been received, collection of the balance is reasonably assured and risks of ownership have passed to the buyer. INTEREST CAPITALIZATION Interest costs are capitalized during the construction period of major capital projects. ADVERTISING AND RESEARCH AND DEVELOPMENT The costs of advertising and research and development activities are expensed as incurred. LEASES Leases that transfer substantially all of the benefits and risks of ownership of the property are accounted for as capital leases. Amortization of capital leases is included in depreciation expense. Other leases are accounted for as operating leases. INCOME TAXES The Company's provision for income taxes is calculated using the liability method. Deferred income taxes are provided for all temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported 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. NET INCOME (LOSS) PER COMMON SHARE Net income (loss) per common share is computed using the weighted average number of shares outstanding during the period. 2. INVENTORIES Pineapple product inventories were comprised of the following components at December 31, 1997 and 1996: 1997 1996 (Dollars in Thousands) Finished Goods $ 8,977 $ 7,306 Work In Progress 823 1,645 Raw Materials 1,325 789 Total $ 11,125 $ 9,740 The replacement cost of pineapple product inventories at year-end approximated $25 million in 1997 and $22 million in 1996. In 1996 and 1995 there were partial liquidations of LIFO inventories; thus, cost of sales included prior years' inventory costs which were lower than current costs. Had current costs been charged to cost of sales, the net losses for 1996 and 1995 would have increased by $795,000 or $.44 per share and $54,000 or $.03 per share, respectively. 3. INVESTMENTS AND OTHER ASSETS Investments and Other Assets at December 31, 1997 and 1996 consisted of the following: 1997 1996 (Dollars in Thousands) Plantation Club Associates $ -- $ 2,961 Cash Surrender Value of Life Insurance Policies (net) 532 386 Deferred Costs 6,206 4,889 Other 2,837 2,278 Total $ 9,575 $10,514 Cash surrender values of life insurance policies are stated net of policy loans totaling $892,000 at December 31, 1997 and 1996. Deferred costs are primarily intangible predevelopment costs related to various projects at the Kapalua Resort, which will be allocated to future development projects. PLANTATION CLUB ASSOCIATES Plantation Club Associates (PCA) was an unincorporated joint venture in which Kapalua Land Company, Ltd. (Kapalua) was the managing venturer. Profits and losses of the joint venture were allocated based on the estimated distributions to the partners, which was 85% to Kapalua and 15% to the other partner. The partnership agreement required that all major decisions receive unanimous approval of the partners. In 1997 the three remaining lots in Plantation Estates Phase I were sold and the partners concluded an agreement to liquidate PCA as of December 31, 1997. After distribution of the joint venture's cash to the partners, Kapalua assumed PCA's remaining assets of $1.4 million, primarily land and planning costs for Plantation Estates Phase II. Summarized balance sheet information for PCA as of December 31, 1996 and operating information for the years ended December 31, 1997, 1996 and 1995 follows: 1996 (Dollars in Thousands) Real estate inventories $ 2,608 Other assets 1,351 Total Assets 3,959 Less: Total Liabilities 547 Partners' Capital $ 3,412 1997 1996 1995 Revenues $ 1,823 $ 560 $ 672 Costs and Expenses 1,850 397 481 Net Income (Loss) $ (27) $ 163 $ 191 Kapalua's pre-tax share of the joint venture's net income (loss) was $(56,000), $128,000 and $152,000 for 1997, 1996 and 1995, respectively. These amounts include expenses incurred by the Company related to the investment (primarily amortization of capitalized interest cost). The Company received cash distributions from PCA of $1,460,000, $850,000 and $465,000 in 1997, 1996 and 1995, respectively. KAPTEL ASSOCIATES Kapalua Investment Corp. (KIC), a wholly owned subsidiary of Maui Land & Pineapple Company, Inc., was a 25% general partner in Kaptel Associates, the partnership that owned The Ritz-Carlton Kapalua Hotel. In February of 1995, Kaptel defaulted on its $186 million non-recourse financing arrangement. NI Hawaii Resorts, Inc. (NI), the major general partner, acquired the indebtedness and on October 31, 1995, the partners of Kaptel concluded an agreement to dissolve the partnership. KIC transferred its interest in the partnership to NI. Because of the dissolution agreement, the Company's equity in the losses of Kaptel Associates aggregating $4,990,000 recorded through December 31, 1994, were reversed in 1995 and recorded as a credit to equity in (earnings) losses of joint ventures. The Company leased the 36-acre hotel site to Kaptel under a long-term lease. In 1990, the Company borrowed $4,750,000 from Kaptel for construction of certain off-site improvements related to the hotel property. Principal and interest payments on the loan were payable solely from rental income receivable by the Company under the hotel ground lease. The lease was renegotiated with the hotel owner, effective January 1, 1996. The renegotiated lease subordinates the Company's fee interest to a $65 million first mortgage and requires that ground rents be applied against the off-site loan with any balance remaining on the loan at January 1, 1999 to be canceled. For accounting purposes, the off-site loan was offset against the cost of the off-site improvements as of December 31, 1995, and the Company will not recognize any income from the ground lease until January 1, 1999. KAAHUMANU CENTER ASSOCIATES In June 1993 Kaahumanu Center Associates (KCA) was formed to finance the expansion and renovation of and to own and operate Kaahumanu Center. KCA is a partnership between the Company as general partner and the Employees' Retirement System of the State of Hawaii (ERS) as a limited partner. The Company contributed the then existing shopping center, subject to a first mortgage, and approximately nine acres of adjacent land. ERS contributed $312,000 and made a $30.6 million loan to the partnership. The remainder of the construction cost was funded principally by bank loans. The expansion and renovation was 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 the 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. Prior to the conversion, the financial statements of KCA were consolidated with those of the Company. The Company has a long-term agreement with KCA to manage the Kaahumanu Center. The agreement provides for certain performance tests, which if not met could result in termination of the agreement. KCA does not have any employees. As manager the Company provides all on-site and administrative personnel and also incurs other costs and expenses, primarily insurance, which are reimbursable by KCA. The Company generates a portion of the electricity used by Kaahumanu Center. In 1997 and 1996 reimbursements from KCA for payroll and other costs and expenses totaled $2,240,000 and $2,391,000, respectively, and the Company charged KCA $2,574,000 and $2,621,000, respectively, for electricity and management fees. For the eight months ended December 31, 1995, reimbursements for payroll and other costs and expenses totaled $1,512,000 and charges by the Company for electricity and management fees totaled $1,695,000. At December 31, 1997 and 1996, $430,000 and $630,000, respectively, were due to the Company from KCA for management fees, electricity and reimbursable costs. Summarized balance sheet information for KCA as of December 31, 1997 and 1996 and operating information for the years ended December 31, 1997 and 1996, and for the eight months ended December 31, 1995 follows: 1997 1996 (Dollars in Thousands) Current assets $ 923 $ 701 Property and equipment, net 73,405 75,581 Other assets, net 5,627 5,461 Total Assets 79,955 81,743 Current liabilities 1,454 1,742 Noncurrent liabilities 62,376 63,226 Total Liabilities 63,830 64,968 Partners' Capital $ 16,125 $16,775 1997 1996 1995 Revenues $ 13,945 $13,677 $ 8,991 Costs and Expenses 16,255 15,697 11,272 Net Loss $ 2,310 $ 2,020 $ 2,281 The Company's share of losses from KCA was $1,155,000, $1,010,000 and $1,141,000, respectively, for 1997, 1996 and for the eight months ended December 31, 1995. 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, 1997, the accumulated unpaid preferred return was $6.3 million each for ERS and the Company. Pursuant to cash calls, the partners each contributed $830,000 to the partnership in 1997. The Company's investment in KCA is a negative $6.7 million at December 31, 1997. The negative balance is a result of recording the Company's initial contribution in 1993 at net book value of the assets contributed, reduced by the related debt. In 1995, $1.3 million owing to the Company by KCA was considered a capital contribution. This amount was reduced in 1996 by $533,000 for items which would have impacted the previous amount owing, including a payment of $328,000 to the Company. 4. BORROWING ARRANGEMENTS Short-term bank lines of credit available to the Company at December 31, 1997 were $2 million. These lines provide for interest at the prime rate (8.5% at December 31, 1997) plus 1/4% to 1%. There were no borrowings under these lines at December 31, 1997, but a $775,000 letter of credit has been reserved against these lines to secure the Company's portion of insurance claims administered by an insurance company. During 1997, 1996 and 1995, the Company had average borrowings outstanding of $32.8 million, $36.5 million and $67.6 million, respectively, at average interest rates of 8.8%, 8.9% and 9.7%, respectively. Long-term debt at December 31, 1997 and 1996 consisted of the following (interest rates represent the rates at December 31): 1997 1996 (Dollars in Thousands) Revolving credit agreement, 8.5% and 8.25% $ -- $ 2,400 Senior unsecured notes, 8.86% 20,000 20,000 Mortgage loan, 8.25% 4,948 5,000 Pacific Coast Farm Credit Services, 8.14% to 8.68% 4,335 -- Other 8.45% 1,017 -- Total 30,300 27,400 Less portion classified as current 2,043 53 Long-term debt $ 28,257 $27,347 The Company has a revolving credit agreement with participating banks under which it may borrow up to $15 million in revolving loans through December 31, 1999. Amounts outstanding at that date may, at the Company's option, be converted to a three-year term loan payable in six equal semi- annual installments. Commitment fees of 1/4% are payable on the unused portions of this credit line. At the Company's option, interest on advances is at the prime rate or based on a Eurodollar rate. The agreement contains certain financial covenants, including the maintenance of consolidated net worth and working capital at certain levels, limits on the incurrence of other indebtedness and capital expenditures and restrictions on the payment of dividends. The loan is collateralized by the Company's three golf courses at the Kapalua Resort. In September 1993 the Company concluded a private placement of $20 million in ten-year, 8.86% senior unsecured notes. Mandatory annual principal payments of 20% of the original principal amount will begin in 1999. The agreement includes financial covenants that are similar to the Company's revolving credit agreement, except that payment of dividends is restricted to 30% of cumulative net earnings after January 1, 1993. 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. The interest rate, presently fixed at 8.25%, will be adjusted as of January 1, 2000 and January 1, 2003. In April 1997 the Company entered into a $5 million loan agreement with Pacific Coast Farm Credit Services. Advances under this loan are to be used to purchase assets for the Company's pineapple operations. The loan includes a revolving period of approximately two years and a final maturity date of January 1, 2002. At the Company's option, interest on advances is to be based on the prime rate, a Western Farm Credit Bank rate, or a Eurodollar rate. The agreement includes certain financial covenants that are similar to those in the Company's revolving credit agreement, plus a requirement for the maintenance of a minimum tangible net worth and debt coverge ration (as defined). The Company was not in compliance with the annual debt coverage ratio as of December 31, 1997. On February 26, 1998, the lender waived the covenant requirement with respect to the year ended December 31, 1997. Maturities of long-term debt during the next five years, from 1998 through 2002, are as follows: $2,043,000, $5,787,000, $5,396,000, $4,323,000, $4,168,000. 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 projected benefit obligations were determined using discount rates of 7.5% and 8% as of December 31, 1997 and 1996, respectively, and compensation increases ranging up to 4.5%. The expected long-term rate of return on assets was 8% for 1997 and 1996. The assets of the plans consist primarily of stocks, bonds, real estate and short-term investments. Net pension cost for 1997, 1996 and 1995 included the following components: 1997 1996 1995 (Dollars in Thousands) Service cost--benefits earned during the year $ 1,030 $ 982 $ 882 Interest cost on projected benefit obligation 2,161 2,190 2,076 Actual return on plan assets (5,742) (3,117) (5,294) Net amortization and deferral 2,708 258 2,863 Net pension expense $ 157 $ 313 $ 527 The following table sets forth the funded status of the pension plans and the amounts recognized in the balance sheets at December 31:
1997 1996 Assets Accumulated Assets Accumulated Exceed Benefits Exceed Benefits Accumulated Exceed Accumulated Exceed Benefits Assets Benefits Assets (Dollars in Thousands) Actuarial present value of benefit obligations Vested benefits $ 26,132 $ 1,254 $ 25,086 $ 1,243 Nonvested benefits 378 55 256 79 Accumulated benefit obligation 26,510 1,309 25,342 1,322 Effect of assumed increase in compensation levels 2,842 354 2,670 320 Projected benefit obligation for services rendered to date 29,352 1,663 28,012 1,642 Assets of plans at fair value 36,679 851 32,216 776 Assets over (under) projected benefit obligation 7,327 (812) 4,204 (866) Unrecognized net (gain) loss (3,210) 155 (272) 168 Unrecognized net transition (asset) obligation (2,223) 393 (2,787) 421 Unrecognized prior service cost 245 60 298 67 Adjustment required to recognize minimum liability -- (253) -- (336) Pension asset (liability) recognized in balance sheets $ 2,139 $ (457) $ 1,443 $ (546)
The Company has an Employee Stock Ownership Plan (ESOP) for non-bargaining salaried employees and bargaining unit clerical employees of Maui Pineapple Company, Ltd. Since December of 1993, the 205,533 shares originally sold to the ESOP in 1979 have all been allocated to participants' accounts, and there have been no contributions paid to the ESOP since 1994. The Company has contributory, defined contribution plans covering all non-bargaining salaried employees and all bargaining unit employees of Maui Pineapple Company, Ltd. The participants may elect to make pretax contributions to the plans. The Company can also elect to contribute, but made no contributions to the plans in 1997, 1996 or 1995. In addition to providing pension benefits, the Company provides certain health care and life insurance benefits to substantially all retirees. The net periodic cost of these benefits for 1997, 1996 and 1995 consisted of the following components:
1997 1996 1995 (Dollars in Thousands) Service cost $ 325 $ 328 $ 337 Interest cost 991 1,012 985 Net amortization and deferral (447) (371) (374) Net expense $ 869 $ 969 $ 948
The funded status of these plans as of December 31, 1997 and 1996 was as follows: 1997 1996 (Dollars in Thousands) Accumulated postretirement benefit obligation: Retirees $ 6,913 $ 6,901 Fully eligible active plan participants 2,410 2,576 Other active plan participants 4,817 4,136 Accumulated postretirement benefit obligation 14,140 13,613 Unrecognized prior service cost 1,471 1,619 Unrecognized net gain 3,772 4,033 Accrued postretirement benefit obligation recognized in balance sheets $ 19,383 $19,265
Measurements of the accumulated postretirement benefit obligation as of December 31, 1997 and 1996 were determined using discount rates of 7.5% and 8%, respectively, and compensation increases ranging up to 4.5%. The accumulated postretirement benefit obligation as of December 31, 1997 and 1996 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 $2,215,000 as of December 31, 1997 and the aggregate of the service and interest cost for 1997 by approximately $255,000 . 6. REAL ESTATE SALES Other income for 1997, 1996 and 1995 includes $5.2 million, $700,000 and $3.4 million, respectively, attributable to real estate sales. 7. LEASES LESSEE The Company has capital leases, primarily on equipment used in pineapple operations, which expire at various dates through 2002. At December 31, 1997 and 1996, property included capital leases of $6,013,000 and $5,842,000, respectively (accumulated depreciation of $2,403,000 and $1,756,000, respectively). Future minimum rental payments under capital leases aggregate $2,416,000 (including $229,000 representing interest) and are payable during the next five years (1998 to 2002) as follows: $1,123,000, $562,000, $298,000, $272,000 and $161,000. The Company also has various operating leases, primarily for land used in pineapple operations, which expire at various dates through 2012. A major operating lease covering approximately 1,500 acres used primarily for pineapple operations expires on December 31, 1999. Total rental expense under operating leases was $804,000 in 1997, $736,000 in 1996 and $818,000 in 1995. Future minimum rental payments under operating leases aggregate $2,409,000 and are payable during the next five years (1998 to 2002) as follows: $599,000, $484,000, $192,000, $122,000, $113,000, respectively, and $899,000 thereafter. LESSOR The Company leases land and land improvements, primarily to the hotels at Kapalua, and buildings, primarily to retail tenants. The leases generally provide for minimum rents and, in most cases, percentage rentals based on tenant revenues. In addition, the leases generally provide for reimbursement of common area maintenance and other expenses. Total rental income under these operating leases was as follows: 1997 1996 1995 (Dollars in Thousands) Minimum rentals $ 1,575 $ 2,370 $ 4,569 Percentage rentals 1,140 738 1,235 Total $ 2,715 $ 3,108 $ 5,804 Property at December 31, 1997 and 1996 includes leased property of $19,043,000 and $18,886,000, respectively (accumulated depreciation of $8,770,000 and $8,176,000, respectively). Future minimum rental income aggregates $7,413,000 and is receivable during the next five years (1998 to 2002) as follows: $1,482,000, $1,043,000, $870,000, $563,000, $391,000, respectively, and $3,064,000 thereafter. 8. INCOME TAXES The components of the income tax provision (credit) were as follows: 1997 1996 1995 (Dollars in Thousands) Current Federal $ 931 $ 51 $ 32 State (119) (38) (27) Total 812 13 5 Deferred Federal (433) (379) (1,197) State 120 (10) (274) Total (313) (389) (1,471) Total provision (credit) $ 499 $ (376) $(1,466) Reconciliation between the total provision (credit) and the amount computed using the statutory federal rate of 34% follows: 1997 1996 1995 (Dollars in Thousands) Federal provision (credit) at statutory rate $ 463 $ (382) $(1,028) Adjusted for State income taxes-- net of effect on federal income taxes (5) (19) (192) Appreciated property donation -- -- (228) Other 41 25 (18) Total income tax provision (credit) $ 499 $ (376) $(1,466) Deferred tax assets and liabilities were comprised of the following types of temporary differences as of December 31, 1997 and 1996: 1997 1996 (Dollars in Thousands) Accrued retirement benefits $ 7,358 $ 7,440 Net operating loss carryforward 2,134 3,366 Minimum tax credit carryforward 3,641 2,709 Accrued liabilities 1,215 1,224 Allowance for doubtful accounts 211 264 Inventory 264 87 Total deferred tax assets 14,823 15,090 Deferred condemnation proceeds (6,397) (6,507) Property net book value (4,546) (4,729) Income from partnerships (1,363) (1,796) Charitable contributions (1,410) (1,357) Pineapple marketing costs (685) (624) Other (96) (64) Total deferred tax liabilities (14,497) (15,077) Net deferred tax asset $ 326 $ 13 At December 31, 1997 the Company had federal income tax net operating loss carryforwards of approximately $5 million, which expire in 2009. The Company also had federal minimum tax credit carryforwards of $3.6 million. The Company's federal income tax returns for 1989 through 1994 are under examination by the Internal Revenue Service. The revenue agent's report on these years has not yet been issued and the Company cannot presently predict the outcome of these examinations. 9. INTEREST CAPITALIZATION Interest cost incurred in 1997, 1996 and 1995 was $3,214,000, $3,633,000, and $7,043,000, respectively, of which $169,000, $58,000 and $22,000, respectively, was capitalized. 10. ADVERTISING AND RESEARCH AND DEVELOPMENT Advertising expense totaled $1,594,000 in 1997, $1,537,000 in 1996 and $1,254,000 in 1995. Research and development expenses totaled $601,000 in 1997, $543,000 in 1996 and $410,000 in 1995. 11. CONTINGENCIES AND COMMITMENTS There are various claims and legal actions pending against the Company. In the opinion of management, after consultation with legal counsel, the resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. The Department of Health of the State of Hawaii (DOH) has cited the Company for improper disposal of its cannery cooling and processing wastewater. The Company is in negotiation with the DOH regarding the penalties it may impose on the Company. In addition, the Company is a party to litigation related to the County of Maui's claim against certain chemical manufacturers because of chemical contamination in certain water wells on Maui. Based on discussion with counsel, the Company believes that the final resolution of these matters will not have a material effect on the Company's financial position or results of operations. The Company has guaranteed the payment of up to $10 million of debt service for Kaahumanu Center Associates. The lender will release the guaranty when Kaahumanu Center attains a defined level of net operating income. Premium Tropicals International, LLC (PTI) is a joint venture between Royal Coast Tropical Fruit Company, Inc. (a wholly owned subsidiary of Maui Pineapple Company, Ltd.) and an Indonesian pineapple grower and canner. The joint venture will market and sell Indonesian canned pineapple in the United States. The Company is a guarantor of a $2 million line of credit, which supports letters of credit to be issued on behalf of PTI for import trading purposes. 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 is generally 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 as indicated below, the carrying amount is considered to be the fair value of financial instruments. The following methods and assumptions were used to estimate the fair value of certain financial instruments: Notes and Interest Receivable: The fair value of these assets was estimated based on rates currently available for similar types of transactions. Long-Term Debt and Accrued Interest: The fair value of these liabilities was estimated based on rates currently available to the Company for debt with similar terms and remaining maturities. The estimated fair values for these financial instruments at December 31, 1997 and 1996 were as follows: 1997 1996 (Dollars in Thousands) Carrying Fair Carrying Fair Amount Value Amount Value Notes and Interest Receivable $ 954 $ 931 $ 739 $ 717 Long-Term Debt and Accrued Interest $31,859 $32,064 $29,189 $29,033
14. RECLASSIFICATIONS Certain amounts for prior years have been reclassified to conform to the presentation for the current year. 15. 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. It also includes the Company's investments in Plantation Club Associates and Kaptel Associates (through 1995). Commercial & Property covers non-resort real estate activities including Kaahumanu Center (investment in Kaahumanu Center Associates, effective May 1, 1995), Napili Plaza shopping center, non-resort property rentals and sales and the Company's land entitlement and management activities. The accounting policies of the segments are the same as those described in Note 1, Summary of Significant Accounting Policies. Commercial 1997 Pineapple Resort & Property Other Consolidated (Dollars in Thousands) Revenues (1)(4) $90,949 $ 40,338 $ 5,065 $ 146 $ 136,498 Operating profit (2) 3,749 4,758 127 -- 8,634 Interest expense (1,479) (1,102) (164) (300) (3,045) Corporate expense (1,670) (986) (606) (965) (4,227) Income (loss) before income taxes 600 2,670 (643) (1,265) 1,362 Depreciation 4,562 2,898 415 166 8,041 Equity in earnings (losses) of joint ventures -- (56) (1,155) -- (1,211) Investment in joint ventures 100 112 (6,655) -- (6,443) Segment assets (3) 63,760 52,437 6,922 11,595 134,714 Expenditures for segment assets 6,485 4,153 1,002 822 12,462 1996 Revenues (1)(4) 95,700 35,676 4,850 109 136,335 Operating profit (2) 4,007 2,190 105 -- 6,302 Interest expense (1,777) (1,381) (181) (236) (3,575) Corporate expense (1,323) (898) (613) (1,016) (3,850) Income (loss) before income taxes 907 (89) (689) (1,252) (1,123) Depreciation 4,943 3,050 415 198 8,606 Equity in earnings (losses) of joint ventures -- 128 (1,010) -- (882) Investment in joint ventures -- 2,961 (6,256) -- (3,295) Segment assets (3) 61,969 53,731 7,943 9,208 132,851 Expenditures for segment assets 4,657 2,309 289 707 7,962 1995 Revenues (1)(4) 81,052 34,330 10,123 72 125,577 Operating profit (loss)(2)(5) (3,548) 7,338 3,312 -- 7,102 Interest expense (2,232) (1,707) (2,795) (287) (7,021) Corporate expense (1,175) (760) (756) (415) (3,106) Income (loss) before income taxes (6,955) 4,871 (239) (702) (3,025) Depreciation 5,112 3,492 1,355 243 10,202 Equity in earnings (losses) of joint ventures (5) -- 5,142 (1,141) -- 4,001 Investment in joint ventures -- 3,683 (4,637) -- (954) Segment assets (5) 63,321 56,340 8,244 9,180 137,085 Expenditures for segment assets $ 1,537 $ 1,482 $ 1,301 $ 917 $ 5,237
(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 $3.4 million, $5.2 million and $5.4 million, respectively, in 1997, 1996 and 1995. 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 corporate and interest expenses and income taxes. (3) Segment assets are located in the United States, primarily Maui. Other assets are corporate and non-segment assets. (4) Resort includes gains on land sales of $4.2 million in 1997. Commercial & Property includes gains on land sales of $1 million in 1997, $700,000 in 1996 and $3.4 million in 1995. (5) Resort operating profit for 1995 includes noncash profits of $4,990,000, representing the reversal of the Company's previous equity in losses of Kaptel Associates. COMMON STOCK In compliance with the terms of certain borrowing arrangements, the Company did not declare any dividends in 1997. The Company paid a dividend of five cents per share in the fourth quarter of 1996. At February 2, 1998, there were 379 shareholders of record. Stock is traded over the counter nationally. The range of common stock bid prices which follow were supplied by the National Quotation Bureau Incorporated. The quotes reflect inter- dealer prices and do not include retail markup, markdown or commission and may not necessarily represent actual transactions. First Second Third Fourth Quarter Quarter Quarter Quarter 1997 High 42.5 37 40.5 43.75 Low 35 34 36 40.5 1996 High 48 46.5 44.5 47 Low 46 43.5 43.5 40 SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993 (Dollars in Thousands Except Per Share Amounts) FOR THE YEAR Summary of Operations Revenues` $136,498 $ 136,335 $ 125,577 $ 125,882 $ 131,172 Cost of goods sold 72,200 75,279 69,314 67,321 84,932 Operating expenses 26,027 24,030 24,315 23,853 22,577 Shipping and marketing 18,053 19,185 16,793 16,568 17,673 General and administrative 14,600 14,507 15,160 14,352 18,657 Equity in (earnings) losses of joint ventures 1,211 882 (4,001) 4,844 1,018 Interest expense 3,045 3,575 7,021 5,682 4,797 Income taxes (credits) 499 (376) (1,466) (2,829) (7,423) Net Income (Loss) 863 (747) (1,559) (3,909) (11,059) Per Common Share Net Income (Loss) .48 (.42) (.87) (2.18) (6.15) Other Data Cash dividends Amount -- 90 -- -- 1,348 Per common share -- .05 -- -- .75 Depreciation $ 8,041 $ 8,606 $ 10,202 $ 10,851 $ 10,315 Return on beginning stockholders' equity 1.5% (1.3%) (2.6%) (6.1%) (14.5%) Percent of net income (loss) to revenues .6% (.5%) (1.2%) (3.1%) (8.4%) AT YEAR END Current assets less current liabilities (1) $20,283 $ 19,467 $ 23,428 $ (1,097) $ 29,398 Ratio of current assets to current liabilities (1) 2.20 2.23 2.78 .97 2.47 Property, net of depreciation (2) $87,621 $ 86,610 $ 88,557 $ 180,194 $ 148,774 Total assets (2) 134,714 132,851 137,085 235,411 211,588 Long-term debt and capital leases (2) 29,435 28,898 36,227 99,180 96,108 Stockholders' equity Amount 58,896 58,033 58,870 60,429 64,321 Per common share $ 32.77 $ 32.29 $ 32.76 $ 33.63 $ 35.79 Common shares outstanding 1,797,125 1,797,125 1,797,125 1,797,125 1,797,125
(1) At December 31, 1994, current liabilities exceeded current assets because borrowings totaling $27.8 million on a revolving credit commitment were classified as current. After the amendment to the commitment in July of 1995, borrowings under this line have been classified as noncurrent. (2) Property, net of depreciation, total assets and long-term debt and capital leases decreased in 1995 primarily because, as of April 30, 1995, the Company no longer consolidated Kaahumanu Center Associates (see Note 3 to Consolidated Financial Statements). MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS 1997 vs. 1996 CONSOLIDATED The Company reported consolidated net income of $863,000 for 1997 compared to a net loss of $747,000 for 1996. The improved results were due to land sales that contributed $3.3 million to net income in 1997. In the second quarter of 1997, the Resort segment recorded the sale of a 50% interest in the 12-acre parcel of land adjacent to the Kapalua Bay Hotel. In the third quarter of 1997, the Commercial & Property division recorded the sales of two land parcels. General and administrative expenses increased by about 1% in 1997 compared to 1996 as increases due to wage adjustments and the use of outside consultants were partially offset by lower expenses for pensions, postretirement benefits and insurance. Interest expense decreased by 15% in 1997 compared to 1996. The decrease is a result of lower average borrowings in 1997 and lower average interest rates. The rate reduction is the result of moving borrowings into lower fixed rate loans at the end of 1996 and during 1997, and renewing the Company's revolving credit lines at lower rates in 1997. PINEAPPLE Revenues from Pineapple operations were $90.9 million in 1997 compared to $95.7 million in 1996. Operating profits from Pineapple were $3.7 million in 1997 compared to $4 million in 1996. Lower case sales volume (the number of cases sold) and a change in the mix of products sold (fruit, juice, concentrate) resulted in a $6.8 million decline in revenue from Pineapple operations. This decline was partially offset by higher average sales prices and higher fresh fruit and other sales. Pineapple cost of sales decreased with the reduction in sales volume. The average cost of sales per case sold in 1997 was higher than 1996 because in 1996 there was a partial liquidation of LIFO inventories that resulted in lower costs from prior years being included in cost of sales. Cost of sales for 1996 would have been higher by $1,281,000 based on current production costs for that year. In 1997 recoveries (the amount of saleable product per ton of fruit processed) were better than in 1996, resulting in a lower unit production cost of canned pineapple product. In 1996 unfavorable weather conditions resulted in poor yield (tons per acre) and lower recoveries and in turn, an increase in unit production costs. Pineapple shipping and marketing costs were lower in 1997 compared to 1996 as a result of the lower volume of cases sold and changes in marketing programs. RESORT Revenues from the Kapalua Resort operations were $40.3 million in 1997 compared to $35.7 million in 1996. Operating profits from this segment were $4.8 million in 1997 compared to $2.2 million in 1996. Revenues and operating profits for 1997 include the sale to the owners of the Kapalua Bay Hotel of a 50% interest in the 12-acre parcel of land that is adjacent to the Hotel. This transaction added $4.2 million to Resort revenues and operating profits. Operating profits from Resort ongoing operations declined in 1997 compared to 1996 from $2 million to $.8 million. Lower operating profits in 1997 largely reflect a 30% decline in income from commercial leases and an 8% reduction in merchandise sales. The most significant lease rent reduction was attributable to the Kapalua Bay Hotel, which was closed during part of 1997 for restoration work. The ground lease for the Kapalua Bay Hotel was renegotiated as of September 1996 to include a one year moratorium on ground rent and two years of reduced rents. Closure of the hotel also affected Kapalua's other operations, including merchandise sales and percentage rents from other commercial leases. The Kapalua Villas program contributed a 22% increase in revenue due to additional units in the program in 1997. Kapalua has managed approximately 55% more units within its villa program since September of 1996. The expansion of the Villas rental program resulted in significantly higher operating expenses in 1997, which offset increased revenue. Resort golf operations contributed a 5% increase in revenues in 1997 due to an increase in the number of paid rounds. Commission income from Kapalua Realty Company increased by 40% in 1997 and Resort membership income increased over 60%. However, these gains were more than offset by increased legal expenses, resort maintenance and repairs and administration costs. COMMERCIAL & PROPERTY Revenues from the Commercial & Property division were $5.1 million in 1997 compared to $4.9 million in 1996. Operating profits attributable to this segment were $127,000 in 1997 compared to $105,000 in 1996. Improved revenues and operating profits in 1997 were due to two land sales in the third quarter of 1997. Land sales in 1997 added $1 million to revenues and operating profits compared to $700,000 in 1996. Costs and expenses charged to Commercial & Property were $4.9 million in 1997 compared to $4.7 million in 1996. Included in costs and expenses is the Company's equity in the losses of Kaahumanu Center Associates, which was $1.2 million in 1997 compared to $1 million in 1996. Increased revenues at Kaahumanu Center were more than offset by higher expenses, most significantly higher payroll and related costs and bad debt expense. 1996 vs. 1995 CONSOLIDATED For the year 1996 the Company reported a net loss of $747,000 compared to a net loss of $1. 6 million for 1995. Operating results from the Company's Pineapple operations improved by $7.5 million in 1996 compared to 1995. However, 1995 included $5 million of income representing the reversal of the Company's prior years equity in losses of Kaptel Associates (see Note 3 to Consolidated Financial Statements). Also offsetting the improved 1996 results from Pineapple operations was lower income from land sales, which was $700,000 in 1996 compared to $3.4 million in 1995. General and administrative expenses decreased by 4% in 1996 compared to 1995. The decrease was largely a result of accounting for Kaahumanu Center Associates (KCA) by the equity method since May 1, 1995. Prior to that time, the financial statements of KCA were consolidated with those of the Company (see Note 3 to Consolidated Financial Statements). Partially offsetting this decrease were higher expenses for outside consultants and increased employment-related costs as a result of wage adjustments and additional employees. Interest expense decreased by 49% in 1996 as a result of lower average borrowings and lower average rates. For the first four months of 1995, the Company's consolidated debt was higher by approximately $75 million as a result of financing arrangements for Kaahumanu Center. This was the primary reason for higher average borrowings and rates in 1995. PINEAPPLE Revenue from Pineapple was $96 million in 1996 compared to $81 million in 1995. In 1996, Pineapple operations contributed an operating profit of $4 million compared to an operating loss of $3.5 million for 1995. Increased case sales volume (the number of cases sold) provided an $8 million revenue increase; higher prices also resulted in revenue increases of $8 million. A change in the mix of products sold (fruit, juice, concentrate), lower fresh fruit sales and other income resulted in a $1 million net revenue decline. Higher cost of sales in 1996 resulted primarily from increased sales volume. Production costs were higher in 1996 because of lower quality fruit in the fourth quarter as a result of unfavorable weather conditions. Lower quality fruit reduces the recovery (the amount of saleable product per ton of fruit processed) and thereby increases the unit cost of the product. In 1996 and 1995 there were partial liquidations of LIFO inventories, which resulted in lower costs from prior years being included in cost of sales. Cost of sales for 1996 and 1995 would have been higher by $1,281,000 and $104,000, respectively, based on current production costs for the respective years. Shipping and marketing costs increased in 1996 due to the higher volume of sales, increased marketing and promotional efforts and higher surface and ocean freight costs. RESORT In 1996 the Resort segment contributed revenue of $35.7 million compared to $34.3 million in 1995. Operating profit for 1996 was $2.2 million compared to $7.3 million for 1995. In 1995 the Resort operating profit included $5 million representing the reversal of the Company's equity in prior years' losses of Kaptel Associates (see Note 3 to Consolidated Financial Statements). Operating profit from Resort ongoing operations declined in 1996 compared to 1995, largely reflecting lower revenues from commercial leasing, golf and membership operations coupled with increased costs and expenses. Partially offsetting these declines were increased operating profits from The Kapalua Villas and the water and sewer utility operations. Overall costs and expenses related to ongoing resort operations increased by $1.6 million, of which over 50% represented higher labor costs. Marketing expenses were higher, primarily as a result of new advertising initiatives that began in 1996. Other costs and expenses were largely commensurate with corresponding revenues. In September of 1996 the number of condominium units in The Kapalua Villas program increased by 79 units as a result of an agreement for the Company to take over management of units previously managed by the Kapalua Bay Hotel. This operation contributed revenue increases of 39% in 1996. Merchandise sales increased by 4%. Revenues from the water and sewer utilities increased by 48% as a result of the Public Utility Commission's approval of rate increases. Lower revenues from Resort golf operations and decreased land lease revenue partially offset these increases. The number of paid golf rounds increased in 1996. However, lower average rates resulted in a decrease in total revenue from golf operations. Maturation of the membership program resulted in a decrease in initiation fees that was not offset by increases in annual dues. Revenue from land leases declined because of renegotiation of the leases for the land underlying The Ritz-Carlton Kapalua (see Note 3 to Consolidated Financial Statements) and the Kapalua Bay Hotel. In September 1996 the owners of the Kapalua Bay Hotel sold the hotel to a third party. In connection with this transaction, the Company, as ground lessor, agreed to amend certain terms of the lease, including no minimum rent for the first seven years and no percentage rent for the first year. COMMERCIAL & PROPERTY The Commercial & Property segment contributed revenue of $4.9 million in 1996 compared to $10.1 million in 1995. The net result was an operating profit in 1996 of $105,000 compared to an operating profit of $3.3 million in 1995. Costs and expenses charged to this segment were $4.7 million in 1996 compared to $6.8 million for 1995. Revenue and operating profit for 1996 included two land sales totaling $700,000 compared to $3.4 million of land sales in 1995. Land sales in 1995 included $1.8 million from the State of Hawaii for the land taken under condemnation for the King Kekaulike High School and sales of three other parcels for $1.6 million. Excluding results from land sales, the decrease in revenue and costs and expenses from this segment was primarily the result of accounting for Kaahumanu Center Associates (KCA) by the equity method since April 30, 1995. Prior to that time, the results of KCA were consolidated with the Company (see Note 3 to Consolidated Financial Statements). In 1996 the loss produced by Kaahumanu Center was reduced by 48% compared to results for the year 1995. The Company's equity in the losses of KCA were $131,000 lower in 1996 compared to 1995. LIQUIDITY, CAPITAL RESOURCES AND OTHER At December 31, 1997, the Company's total debt, including capital leases, was $32.5 million compared to $30.2 million at year-end 1996. Average debt outstanding during 1997 was approximately 10% lower than 1996. Unused short- and long-term lines of credit available to the Company at year-end 1997 totaled $21.9 million. These credit lines will be sufficient to fund seasonal cash requirements during 1998. The Company's capital expenditures and other cash requirements for 1998 are expected to be funded principally by operating cash flows. Consolidated capital expenditures are expected to be approximately $9 million in 1998. Pineapple capital expenditures are expected to be $6.2 million, of which approximately 54% is for replacement of existing equipment. Capital expenditures for the Resort segment are expected to be $2.5 million in 1998, of which about 79% is for equipment replacements. In addition to capital expenditures, the Company expects to expend approximately $2.1 million in 1998 for Resort development and planning. Duties up to 51% on canned pineapple fruit imported from Thailand into the United States were in effect throughout 1997 as a result of an antidumping petition in 1994 to which the Company was a party. In 1997 both the Company and the Department of Commerce appealed a November 1996 decision by the United States Court of International Trade (USCIT) regarding the appropriate method to allocate cost to canned pineapple. If the decision reached by the USCIT is upheld, the duties presently imposed on these imports could be substantially reduced. A final decision by the United States Court of Appeals for the Federal Circuit is not expected before mid-1998. The amount of duties on pineapple imports from Thailand is subject to annual administrative reviews by the Department of Commerce. These reviews can be called for by either the Company or the Thai producers. If the cost of production changes relative to the selling price of the product in the U.S., the duties would be adjusted. Based on results of the recently finalized first review, there were no significant adjustments to the duties. Results of the second review, which covers the period from July 1996 to June 1997, are pending. In 1997 approximately 85% of the canned pineapple sold in the United States was produced in foreign countries, most significantly, in Thailand, the Philippines and Indonesia. To the extent that devaluation of foreign currencies have the effect of lowering competitors' cost of production, the Company could be adversely affected. Approximately 20% of the visitors to Maui and 40% of the visitors to the State of Hawaii are eastbound. Continuation of the present Asian economic crisis could affect the financial results of Kapalua Resort because visitors from Asia, in particular Japan, represent a significant part of Kapalua's market for merchandise, golf, real estate and accommodations. In June of 1997, at a total cost of $3.2 million, the Company completed a system for disposal of its cannery cooling and processing wastewater. The system replaced the Company's previous system, which was cited by the Department of Health of the State of Hawaii (DOH) as not meeting certain regulations. The Company is in negotiation with the DOH regarding the penalties it may impose on the Company. In addition, the Company is a party to litigation related to the County of Maui's claim against certain chemical manufacturers because of chemical contamination in certain water wells on Maui. Presently, the Company cannot predict the outcome of these issues with certainty; however, based on discussions with counsel, the Company believes that there will be no material adverse effect on its financial position or results of operations. The Company is in the process of reviewing the corrective action necessary to enable all of its data processing systems and computer applications to properly identify dates after 1999. A significant number of the Company's data processing applications use software programs purchased from outside vendors. The vendors of the Company's core data processing applications have already provided or will have provided all necessary system modifications by the end of 1998. At this time it appears that the Company's current information services personnel will be able to modify the Company's other software programs without using outside resources. Currently, no material prospective expenditures for "Year 2000" compliance have been identified. The Company, as a partner in various partnerships, may under certain circumstances be called upon to make additional capital contributions (see Note 3 to Consolidated Financial Statements). IMPACT OF INFLATION AND CHANGING PRICES The Company uses the LIFO method of accounting for its pineapple inventories. Under this method, the cost of products sold approximates current cost and during periods of rising prices the ending inventory is reflected at an amount below current cost. The replacement cost of pineapple inventory was $25 million at December 31, 1997, which was $14 million more than the amount reflected in the financial statements. Most of the land owned by the Company was acquired from 1911 to 1932 and is carried at cost. A small portion of "Real Estate Held for Sale" represents land cost. Replacements and additions to the Pineapple operations occur every year and some of the assets presently in use were placed in service in 1934. At Kapalua, some of the fixed assets were constructed and placed in service in the mid-to-late 1970s. Depreciation expense would be considerably higher if fixed assets were stated at current cost. 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 Company's expectations concerning 1998 profitability, the future of new products and new business development, distribution of pineapple through Premium Tropicals International LLC and under the Royal Coast label, the winter crop output in Thailand and Indonesia, the appeal of a decision affecting antidumping duties, development of the 12-acre site next to the Kapalua Bay Hotel, and the effects of changes involving the Kapalua Bay Hotel and The Kapalua Villas. 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 the number, length of stay, or expenditure levels of eastbound or westbound 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 possibility of an adverse ruling on appeal of the antidumping decision; (4) events in the airline industry affecting passenger or freight capacity or cost; (5) possible shifts in market demand; and (6) the impact of competing products, competing resort destinations, and competitors' pricing. MAUI LAND & PINEAPPLE COMPANY, INC. Officers President & Chief Executive Officer Gary L. Gifford Executive Vice President/Finance Paul J. Meyer Executive Vice President/Pineapple Douglas R. Schenk Executive Vice President/Resort Donald A. Young Vice President/Retail Property Scott A. Crockford Vice President/Land Management Warren A. Suzuki Treasurer Darryl Y. H. Chai Secretary Adele H. Sumida Controller & Assistant Treasurer Ted L. Proctor Directors Mary C. Sanford--Chairman Chairman of the Board Maui Publishing Company, Ltd. Richard H. Cameron--Vice Chairman Publisher Maui Publishing Company, Ltd. Peter D. Baldwin President Baldwin Pacific Corporation Samuel K. Himmelrich, Sr. Chairman of the Board Inland Leidy, Inc. Randolph G. Moore Chief Executive Officer Kaneohe Ranch Fred E. Trotter III President F. E. Trotter, Inc. Andrew T. F. Ing--Director Emeritus Retired Financial Vice President & Treasurer Hawaiian Electric Industries, Inc. Audit and Compensation Committees Peter D. Baldwin Richard H. Cameron Samuel K. Himmelrich, Sr. Andrew T. F. Ing Randolph G. Moore--Chairman, Audit Mary C. Sanford Fred E. Trotter III--Chairman, Compensation 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/Cannery Eduardo E. Chenchin Vice President/Plantations L. Douglas MacCluer Treasurer Darryl Y. H. Chai Secretary Adele H. Sumida Controller Stacey M. Jio Assistant Treasurer Ted L. Proctor Directors Mary C. Sanford--Chairman Richard H. Cameron--Vice Chairman Peter D. Baldwin Douglas B. Cameron Gary L. Gifford Andrew T. F. Ing Paul J. Meyer Randolph G. Moore Claire C. Sanford Douglas R. Schenk Fred E. Trotter III KAPALUA LAND COMPANY, LTD. Officers President & Chief Executive Officer Donald A. Young Executive Vice President/Finance Paul J. Meyer Vice President/Administration Caroline P. Egli Vice President/Development Robert M. McNatt Vice President/Resort Operations Gary M. Planos Vice President/Marketing Peter A. Sanborn Treasurer Darryl Y. H. Chai Secretary Adele H. Sumida Controller Russell E. Johnson Assistant Treasurer Ted L. Proctor Directors Mary C. Sanford--Chairman Richard H. Cameron--Vice Chairman Peter D. Baldwin Gary L. Gifford Andrew T. F. Ing Paul J. Meyer Randolph G. Moore Jared B. H. Sanford Fred E. Trotter III Donald A. Young -----END PRIVACY-ENHANCED MESSAGE-----