-----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, VLCdc4DpIkQ4OqArzzfgVnwenCAuRu70QZHuxdNlwW941DgGjIwdTVur/hOudeQs ATptq4CrZ33oBNtET47pGA== 0000839437-97-000023.txt : 19971117 0000839437-97-000023.hdr.sgml : 19971117 ACCESSION NUMBER: 0000839437-97-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: CSX FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMFAC JMB HAWAII INC CENTRAL INDEX KEY: 0000839437 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE OPERATORS (NO DEVELOPERS) & LESSORS [6510] IRS NUMBER: 990217738 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-24180 FILM NUMBER: 97720144 BUSINESS ADDRESS: STREET 1: 900 N MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3124404800 MAIL ADDRESS: STREET 1: 900 N MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60611 FORMER COMPANY: FORMER CONFORMED NAME: 900 AQH FINANCE INC DATE OF NAME CHANGE: 19881113 10-Q 1 2 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Act of 1934 For the quarter ended September 30, 1997 Commission File Number 33-24180 AMFAC/JMB HAWAII, INC. (Exact name of registrant as specified in its charter) Hawaii 99-0217738 (State of organization) (I.R.S. Employer Identification No.) For the quarter ended September 30, 1997 Commission File Number 33-24180-01 AMFAC/JMB FINANCE, INC. (Exact name of registrant as specified in its charter) Illinois 36-3611183 (State of organization) (I.R.S. Employer Identification No.) 900 N. Michigan Ave., Chicago, Illinois 60611 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code 312-440-4800 See Table of Additional Registrants Below. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of November 14, 1997, each of Amfac/JMB Hawaii, Inc. and Amfac/JMB Finance, Inc. had 1,000 shares of Common Stock outstanding. All such Common Stock is owned by its respective parent and not traded on a public market. ADDITIONAL REGISTRANTS (1) Address, including, zip code, Exact name of State or other IRS and telephone number, registrant as jurisdiction of Employer including area code of specified in its incorporation or Identification registrant's principal Charter organization Number executive offices Kaanapali Coffee Hawaii 99-0176334 900 North Michigan Avenue Estates, Inc. Chicago, Illinois 60611 312/440-4800 Amfac Property Hawaii 99-0150751 900 North Michigan Avenue Development Corp. Chicago, Illinois 60611 312/440-4800 Amfac Property Hawaii 99-0202331 900 North Michigan Avenue Investment Chicago, Illinois 60611 Corp. 312/440-4800 Amfac Land Hawaii 99-0185633 900 North Michigan Avenue Company, Ltd. Chicago, Illinois 60611 312/440-4800 Amfac Vacations Hawaii 94-3261831 900 North Michigan Avenue Managers, Inc. Chicago, Illinois 60611 (312) 440-4800 Kaanapali Water Hawaii 99-0185634 900 North Michigan Avenue Corporation Chicago, Illinois 60611 312/440-4800 Kekaha Sugar Hawaii 99-0044650 900 North Michigan Avenue Company, Chicago, Illinois 60611 Limited 312/440-4800 H. Hackfeld Hawaii 99-0037425 900 North Michigan Avenue & Co., Ltd. Chicago, Illinois 60611 312/440-4800 The Lihue Hawaii 99-0046535 900 North Michigan Avenue Plantation Chicago, Illinois 60611 Company, 312/440-4800 Limited Oahu Sugar Hawaii 99-0105277 900 North Michigan Avenue Company, Chicago, Illinois 60611 Limited 312/440-4800 Pioneer Mill Hawaii 99-0105278 900 North Michigan Avenue Company, Chicago, Illinois 60611 Limited 312/440-4800 Puna Sugar Hawaii 99-0051215 900 North Michigan Avenue Company, Chicago, Illinois 60611 Limited 312/440-4800 Waiahole Hawaii 99-0144307 900 North Michigan Avenue Irrigation Chicago, Illinois 60611 Company, 312/440-4800 Limited Waikele Golf Hawaii 99-0304744 900 North Michigan Avenue Club, Inc. Chicago, Illinois 60611 312/440-4800 1) The Additional Registrants listed are wholly-owned subsidiaries of the registrant and are guarantors of the registrant's Certificate of Land Appreciation Notes due 2008. TABLE OF CONTENTS PART I FINANCIAL INFORMATION Item 1. Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 PART II OTHER INFORMATION Item 1. Legal Proceedings 34 Item 6. Exhibits and Reports on Form 8-K 34 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements AMFAC/JMB HAWAII, INC. Consolidated Balance Sheets September 30, 1997 and December 31, 1996 (Dollars in Thousands) (Unaudited) A S S E T S
September 30, December 31, 1997 1996 -------------- -------------- A S S E T S Current assets: Cash and cash equivalents $18,561 8,736 Receivables-net 11,566 4,741 Inventories 41,704 56,808 Prepaid expenses 2,598 3,439 -------- -------- Total current assets 74,429 73,724 -------- -------- Investments 46,536 46,187 -------- -------- Property, plant and equipment: Land and land improvements 282,071 289,294 Machinery and equipment 61,964 60,981 Construction in progress 2,200 1,365 -------- -------- 346,235 351,640 Less accumulated depreciation and amortization 38,001 33,856 -------- -------- 308,234 317,784 Deferred expenses, net 12,197 12,975 Other assets 37,448 32,935 -------- -------- $ 478,844 483,605 ========== ========== L I A B I L I T I E S Current liabilities: Accounts payable $ 6,230 5,719 Accrued expenses 7,421 9,274 Current portion of long-term debt 1,228 1,471 AMFAC/JMB HAWAII, INC. Consolidated Balance Sheets - Continued September 30, 1997 and December 31, 1996 (Dollars in Thousands) (Unaudited) September 30, December 31, 1997 1996 ------------- ------------- Current portion of deferred income taxes 4,761 5,422 Amounts due to affiliates 10,494 8,905 -------- -------- Total current liabilities 30,134 30,791 -------- -------- Amounts due to affiliates 128,836 103,579 Accumulated postretirement benefit obligation 54,713 57,662 Long-term debt 105,037 100,606 Other long-term liabilities 35,117 35,501 Deferred income taxes 86,504 88,345 Certificate of Land Appreciation Notes 220,692 220,692 -------- -------- Total liabilities 661,033 637,176 -------- -------- Commitments and contingencies (notes 2, 3, 4, 6, 7 and 8) S T O C K H O L D E R `S E Q U I T Y (D E F I C I T ) Common stock, no par value; authorized, issued and outstanding 1,000 shares 1 1 Additional paid-in capital (3,113) 6,278 Retained earnings (deficit) (179,077) (159,850) --------- --------- Total stockholder's equity (deficit) (182,189) (153,571) --------- --------- $ 478,844 483,605 ============ =========== The accompanying notes are an integral part of the consolidated financial statements.
AMFAC/JMB HAWAII, INC. Consolidated Statements of Operations Three and Nine Months Ended September 30, 1997 and 1996 (Dollars in Thousands) (Unaudited)
Three Months Ended Nine Months Ended September 30 September 30 -------------------- --------------------- 1997 1996 1997 1996 ------- ------- ------ ------ Revenue: Agriculture $17,508 19,081 25,774 41,513 Property 13,880 8,319 33,462 29,902 ------- ------- ------- ------- 31,388 27,400 59,236 71,415 ------- ------- ------- ------- Cost of sales: Agriculture 18,530 20,573 25,948 42,218 Property 12,117 4,547 28,330 18,271 ------- ------- -------- ------- 30,647 25,120 54,278 60,489 Selling, general and administrative 2,754 3,018 9,332 8,960 Depreciation and amortization 1,523 1,539 4,572 4,689 ------- ------- ------- ------- Total costs and expenses 34,924 29,677 68,182 74,138 Operating loss (3,536) (2,277) (8,946) (2,723) ------- ------- ------- ------- Non-operating income (expenses): Amortization of financing costs (301) (185) (1,022) (952) Interest expense (7,431) (6,892) (21,438) (20,290) Interest income 206 96 286 258 ------- ------- ------- ------- (7,526) (6,981) (22,174) (20,984) ------- ------- ------- ------- Loss before taxes (11,062) (9,258) (31,120) (23,707) Income tax benefit 4,202 3,327 11,893 8,720 ------- ------- ------- ------- Net loss $(6,860) (5,931) (19,227) (14,987) ======== ======= ======= ======= The accompanying notes are an integral part of the consolidated financial statements.
AMFAC/JMB HAWAII, INC. Consolidated Statements of Cash Flows Nine Months Ended September 30, 1997 and 1996 (Dollars in Thousands) (Unaudited)
1997 1996 -------- -------- Cash flows from operating activities: Net loss $(19,227) (14,987) Items not requiring (providing) cash: Depreciation and amortization 4,572 4,689 Amortization of deferred costs 1,022 952 Equity in earnings of investments 10 23 Income tax benefit (11,893) (8,720) Deferred interest 790 2,883 Changes in: Receivables - net (6,825) (4,422) Inventories 21,998 14,407 Prepaid expenses 841 (928) Accounts payable 511 (1,901) Accrued expenses (1,853) (7,29) Amounts due to affiliates 1,589 5,052 Other long-term liabilities (3,540) (3,557) -------- -------- Net cash used in operating activities (12,005) (13,803) -------- -------- Cash flows from investing activities: Property additions (1,945) (1,940) Property disposals and retirements - net 29 29 Investments in joint ventures and partnerships (359) (141) Other assets (4,513) (2,721) Other long-term liabilities (583) 815 -------- -------- Net cash used in investing activities (7,371) (3,958) -------- -------- AMFAC/JMB HAWAII, INC. Consolidated Statements of Cash Flows - Continued Nine Months Ended September 30, 1997 and 1996 (Dollars in Thousands) (Unaudited) 1997 1996 ------- -------- Cash flows from financing activities: Deferred expenses (244) 21 Net borrowings (repayments) of long-term debt 4,188 (1,425) Amounts due to affiliates 25,257 18,746 --------- -------- Net cash provided by financing activities 29,201 17,342 --------- -------- Net increase (decrease) in cash and cash equivalents 9,825 (419) Cash and cash equivalents, beginning of year 8,736 11,745 --------- -------- Cash and cash equivalents, end of period $18,561 11,326 ========= ======== Supplemental disclosure of cash flow information: Cash paid for interest (net of amount capitalized) $14,229 17,290 ========= ======== Schedule of non-cash investing and financing activities: Transfer of property actively held for sale to real estate inventories and accrued costs relating to real estate sales $ 6,894 2,654 ========= ======== The accompanying notes are an integral part of the consolidated financial statements.
AMFAC/JMB HAWAII, INC. Notes to Consolidated Financial Statements September 30, 1997 and 1996 (Dollars in Thousands) Readers of this quarterly report should refer to the Company's audited financial statements for the fiscal year ended December 31, 1996, which are included in the Company's 1996 Annual Report, as certain footnote disclosures which would substantially duplicate those contained in such audited financial statements have been omitted from this report. (1) BASIS OF ACCOUNTING On November 17, 1988, the stockholders of Amfac, Inc. ("Amfac") agreed to the merger ("Merger") of Amfac with an affiliate of JMB Realty Corporation ("JMB"). The Merger was consummated on November 18, 1988. Amfac/JMB Hawaii, Inc. (the "Company") was wholly-owned by Amfac, a subsidiary of Northbrook Corporation ("Northbrook"). In May 1995, Amfac was merged into Northbrook, with Northbrook being the surviving corporation. The Company has two primary business segments. The agriculture segment ("Agriculture") is responsible for the Company's activities related to the cultivation and processing of sugar cane and other agricultural products. The real estate segment ("Property") is responsible for development and sales activities related to the Company's owned land, all of which is in the State of Hawaii, and the management and operation of the Company's golf course facilities. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company's policy is to consider all amounts held with original maturities of three months or less in U.S. Government obligations, certificates of deposit and money market funds (approximately $15,743 and $4,900 at September 30, 1997 and December 31, 1996, respectively) as cash equivalents, which approximates market. These amounts include $2,502 and $1,552 at September 30, 1997 and December 31, 1996, respectively, which were restricted primarily to fund debt service on long-term debt related to the acquisition of power generation equipment (see note 4). As part of the Company's agriculture operations, the Company enters into commodities futures contracts and options in sugar as deemed appropriate to reduce the risk of future price fluctuations in sugar. These futures contracts and options are accounted for as hedges and, accordingly, gains and losses are deferred and recognized in cost of sales as part of the production cost. Investments in certain partnerships and joint ventures, if any, over which the Company exercises significant influence are accounted for by the equity method. Revenues include the Company's equity in net income or loss from such investments. To the extent the Company engages in such activities as a general partner, the Company is contingently liable for the obligations of its partnership and joint venture investments. AMFAC/JMB HAWAII, INC. Notes to Consolidated Financial Statements - Continued (Dollars in Thousands) Project costs associated with the acquisition, development and construction of real estate projects are capitalized and classified as construction in progress. Such capitalized costs are not in excess of the project's estimated fair value, as reviewed periodically or as considered necessary. Land actively held for sale and any related development costs transferred from construction in progress are reported as inventories in the accompanying consolidated balance sheets and are stated at the lower of cost or fair value less costs to sell. For financial reporting purposes, the Company uses the effective interest rate method and accrued interest on the Certificate of Land Appreciation Notes due 2008 ("COLAS") at 4% per annum, which is the "Mandatory Base Interest" (see note 3). Interest is capitalized to qualifying assets (principally real estate under development) during the period that such assets are undergoing activities necessary to prepare them for their intended use. Such capitalized interest is charged to cost of sales as revenue from the real estate development is recognized. Interest costs of $1,235 and $0 have been capitalized for the nine months ended September 30, 1997 and 1996, respectively. Net interest received (paid) on contracts that qualify as hedges is recognized over the life of the contract as an adjustment to interest income (expense) of the hedged financial instrument. The Company and its subsidiaries report their taxes as part of the consolidated tax return of the Company's parent, Northbrook. The Company and its subsidiaries have entered into a tax indemnification agreement with Northbrook that indemnifies the Company and its subsidiaries for responsibility for all past, present and future federal and state income tax liabilities (other than income taxes which are directly attributable to cancellation of indebtedness income caused by the repurchase or redemption of securities as provided for in or contemplated by the Repurchase Agreement). Current and deferred taxes have been allocated to the Company as if the Company were a separate taxpayer in accordance with the provisions of SFAS No. 109-Accounting for Income Taxes. However, to the extent the tax indemnification agreement does not require the Company to actually pay income taxes, current taxes payable or receivable have been reflected as deemed contributions or distributions, respectively, to additional paid-in capital in the accompanying consolidated financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. AMFAC/JMB HAWAII, INC. Notes to Consolidated Financial Statements - Continued (Dollars in Thousands) (2) AMOUNTS DUE TO AFFILIATES - FINANCING The approximately $15,097 of remaining acquisition-related financing owed to affiliates had a maturity date of June 1, 1998 and bore interest at a rate per annum based upon the prime interest rate (8.5% at September 30, 1997), plus 1%. On June 1, 1995, the Company borrowed $52,000 from Northbrook to redeem Class A COLAS pursuant to the Redemption Offer (see note 3). The Company has also borrowed approximately $18,746 and $9,814 during 1996 and 1995, respectively, to fund COLA Mandatory Base Interest payments and other operational needs. The loans from Northbrook were payable interest only, matured on June 1, 1998 and carried an interest rate per annum equal to the prime interest rate plus 2%. In February 1997 the above noted affiliate loans, along with certain other amounts due Northbrook, were converted into a new ten-year note payable. The new note is payable interest only and accrues interest at the prime rate plus 2%. The Company borrowed an additional $16,628 during the nine months ended September 30, 1997 to fund COLA Mandatory Base Interest payments and other operational needs. The total amount due Northbrook as of September 30, 1997 was $128,836, which includes accrued interest of $8,629. In October 1997, the Company repaid $7,000 of the amount due to Northbrook. Pursuant to the Indenture relating to the COLAS, the amounts borrowed from Northbrook are considered "Senior Indebtedness" to the COLAS. (3) CERTIFICATE OF LAND APPRECIATION NOTES The COLAS are unsecured debt obligations of the Company. Interest on the COLAS is payable semi-annually on February 28 and August 31 of each year. The COLAS mature on December 31, 2008, and bear interest after the Final Issuance Date (August 31, 1989) at a rate of 10% per annum ("Base Interest") of the outstanding principal balance of the COLAS on a cumulative, non-compounded basis, of which 6% per annum is contingent ("Contingent Base Interest") and payable only to the extent of Net Cash Flow (Net Cash Flow for any period is generally an amount equal to 90% of the Company's net cash revenues, proceeds and receipts after payment of cash expenditures, including the Qualified Allowance (as defined) other than federal and state income taxes and after the establishment by the Company of reserves) or Maturity Market Value (as defined below). The Company has not generated a sufficient level of Net Cash Flow to pay Contingent Base Interest on the COLAS from 1990 through the current date. Approximately $96,476 of the $104,100 cumulative deficiency of Contingent Base Interest related to the period from August 31, 1989 (Final Issuance Date) through September 30, 1997 has not been accrued in the accompanying consolidated financial statements as the Company believes that it is not probable at this time that a sufficient level of Net Cash Flow will be generated in the future or that there will be sufficient Maturity Market Value (as defined below) as of December 31, 2008 (the COLA maturity date) to pay such unaccrued Contingent Base Interest. The following table is a summary of Mandatory Base Interest and Contingent Base Interest for the nine months ended September 30, 1997 and the year ended December 31, 1996: 1997 1996 Mandatory Base Interest paid $8,828 8,828 Contingent Base Interest paid -- -- Cumulative deficiency of Contingent Base Interest at end of period $ 104,100 94,169 Net Cash Flow was $0 for 1996 and is expected to be $0 for 1997. AMFAC/JMB HAWAII, INC. Notes to Consolidated Financial Statements - Continued (Dollars in Thousands) In each calendar year, principal reductions may be made from remaining Net Cash Flow, if any, in excess of all current and unpaid deferred Contingent Base Interest. The COLAS will bear additional contingent interest in any year, after any principal reduction, equal to 55% of remaining Net Cash Flow. Upon maturity, holders of COLAS will be entitled to receive the remaining outstanding principal balance of the COLAS plus unpaid Mandatory Base Interest (4%) plus additional interest equal to the unpaid Contingent Base Interest, to the extent of the Maturity Market Value (Maturity Market Value generally means 90% of the excess of the Fair Market Value (as defined) of the Company's assets at maturity over its liabilities (including Qualified Allowance, but only to the extent earned and payable from Net Cash Flow generated through maturity) at maturity, which liabilities have been incurred in connection with its operations), plus 55% of the remaining Maturity Market Value. On March 14, 1989, Amfac/JMB Finance ("Finance"), a wholly- owned subsidiary of Northbrook, and the Company entered into an agreement (the "Repurchase Agreement") concerning Finance's obligations to repurchase, on June 1, 1995 and 1999, the COLAS upon request of the holders thereof. The COLAS were issued in two units consisting of one Class A and one Class B COLA. As specified in the Repurchase Agreement, the repurchase of the Class A COLAS may have been requested by the holders of such COLAS on June 1, 1995 at a price equal to the original principal amount of such COLAS ($.5) minus all payments of principal and interest allocated to such COLAS. The cumulative interest paid per Class A COLA through June 1, 1995 was $.135. The repurchase of the Class B COLAS may be requested of Finance by the holders of such COLAS on June 1, 1999 at a price equal to 125% of the original principal amount of such COLAS ($.5) minus all payments of principal and interest allocated to such COLAS. Through the date of this report, the cumulative interest paid per Class A and Class B COLA is approximately $.185 and $.185, respectively. On March 14, 1989, Northbrook entered into a keep-well agreement with Finance, whereby it agreed to contribute sufficient capital or make loans to Finance to enable Finance to meet its COLA repurchase obligations described above. Notwithstanding Finance's repurchase obligations, the Company may elect to redeem any COLAS requested to be repurchased at the specified price. On March 15, 1995, pursuant to the indenture that governs the terms of the COLAS (the "Indenture"), the Company elected to offer to redeem (the "Redemption Offer") all Class A COLAS from the registered holders at the same price as would be required of Finance under the Repurchase Agreement, thereby eliminating Finance's obligation to satisfy the Class A COLA repurchase options requested by such holders as of June 1, 1995. Pursuant to the Redemption Offer, and in accordance with the terms of the Indenture, the Company was therefore obligated to purchase any and all Class A COLAS submitted pursuant to the Redemption Offer at a price of $.365 per Class A COLA. In conjunction with the Company's Redemption Offer, the Company made a tender offer (the "Tender Offer") to purchase up to approximately $68,000 principal value of the Class B COLAS at a price of $.220 per Class B COLA from COLA holders electing to have their Class A COLAS repurchased. Approximately 229,000 Class A COLAS were submitted for repurchase pursuant to the Redemption Offer and approximately 99,000 Class B COLAS were submitted for repurchase pursuant to the Tender Offer, requiring an aggregate payment by the Company of approximately $105,450 on June 1, 1995. The Company used its available cash to purchase Class B COLAS pursuant to the Tender Offer and borrowed $52,000 from Northbrook to purchase Class A COLAS pursuant to the Redemption Offer. As of September 30, 1997, the Company had approximately 156,000 Class A COLAS and approximately 286,000 Class AMFAC/JMB HAWAII, INC. Notes to Consolidated Financial Statements - Continued (Dollars in Thousands) B COLAS outstanding, with a principal balance of approximately $78,000 and $143,000, respectively. As a result of the COLA repurchases in 1995, the Company retired approximately $164,045 in face value of COLA debt and recognized a financial statement gain in 1995 of approximately $32,544 (net of income taxes of $20,807, the write-off of deferred financing costs of $10,015, the write-off of accrued Contingent Base Interest of $5,667 and expenses of $894). Such gain was treated as cancellation of indebtedness income for tax purposes and, accordingly, the income taxes related to the Class A Redemption Offer (approximately $9,106) were not indemnified by the tax agreement with Northbrook (see note 1). The terms of the Indenture relating to the COLAS place certain restrictions on the Company's declaration and payment of dividends. Such restrictions generally relate to the source, timing and amounts that may be declared and/or paid. The COLAS also impose certain restrictions on, among other things, the creation of additional indebtedness for certain purposes, the Company's ability to consolidate or merge with or into other entities, and the Company's transactions with affiliates. (4) LONG-TERM DEBT In June 1991, the Company obtained a five-year $66,000 nonrecourse loan from the Employees' Retirement System of the State of Hawaii ("ERS"). The loan is secured by a first mortgage on the Kaanapali Golf Courses, and is considered "Senior Indebtedness" (as defined in the Indenture relating to the COLAS). The loan bore interest at a rate per annum equal to the greater of (i) the base interest rate announced by the Bank of Hawaii on the first of July for each year or (ii) ten percent per annum through September 30, 1993 and nine percent per annum thereafter. The annual interest payments were in excess of the cash flow generated by the Kaanapali Golf Courses. In April 1996, the Company reached an agreement with the ERS to amend the loan, extending the maturity date for five years. In exchange for the loan extension, the ERS received the right to participate in the "Net Disposition Proceeds" (as defined) related to the sale or refinancing of the golf courses or at the maturity of the loan. The ERS share of the Net Disposition Proceeds increases from 30% through September 30, 1997, to 40% for the period from July 1, 1997 to September 30, 1999 and to 50% thereafter. The loan amendment effectively adjusted the interest rate as of January 1, 1995 to 9.5% until September 30, 1996. After September 30, 1996, the loan bears interest at a rate per annum equal to 8.73%. The loan amendment requires the Company to pay interest at the rate of 7% for the period from January 1, 1995 to September 30, 1996, 7.5% from July 1, 1996 to September 30, 1997, 7.75% from July 1, 1997 to September 30, 1998 and 8.5% thereafter ("Minimum Interest"). Accrued Minimum Interest as of September 30, 1997 was $1,289. The scheduled Minimum Interest payments are paid quarterly on the principal balance of the $66,000 loan. The difference between the accrued interest expense and the Minimum Interest payment accrues interest and is payable on an annual basis from excess cash flow, if any, generated from the Kaanapali Golf Courses. The accrued interest payable from excess cash flow was $3,940 as of September 30, 1997. Although the outstanding loan balance remains nonrecourse, certain payments and obligations, such as the Minimum Interest payments and the ERS's share of appreciation, if any, are recourse to the Company. However, the Company's obligations to make future Minimum Interest payments and to pay the ERS a share of appreciation would be terminated if the Company tendered an executed deed to the golf course property to the ERS in accordance with the terms of the amendment. AMFAC/JMB HAWAII, INC. Notes to Consolidated Financial Statements - Continued (Dollars in Thousands) In January 1993, The Lihue Plantation Company, Limited ("Lihue") obtained a ten-year $13,250 loan used to fund the acquisition of Lihue's power generation equipment. The $13,250 loan, constituting "Senior Indebtedness" under the COLAS' Indenture, consists of two ten-year amortizing term loans of $10,000 and $3,250, respectively, payable in forty consecutive installments commencing July 1, 1993 in the principal amount of $250 and $81, respectively (plus interest). The remaining balance of the $3,250 loan was fully repaid in January 1997. The $10,000 loan has an outstanding balance of $5,418 as of September 30, 1997 and bears interest at a rate equal to prime rate (8.5% at September 30, 1997) plus three and one half percent. Lihue has purchased an interest rate agreement which protects against fluctuations in interest rates and effectively caps the prime rate at eight percent for the first seven years of the loan agreement. The loan is secured by the Lihue power generation equipment, sugar inventories and receivables, certain other assets and real property of the Company and has limited recourse to the Company and certain other subsidiaries. In October 1993, Waikele Golf Club, Inc. ("WGCI"), a wholly- owned subsidiary of the Company that owns and operates the Waikele Golf Course, obtained a five year $20,000 loan facility from two lenders. The loan consisted of two $10,000 amortizing loans. Each loan bore interest only for the first two years and interest and principal payments based upon an assumed 20 year amortization period for the remaining three years. The loans bore interest at prime plus 1/2% and LIBOR (5.6563% at September 30, 1997) plus 3%, respectively. In February 1997, WGCI entered into an amended and restated loan agreement with the Bank of Hawaii, whereby the outstanding principal amount of the loan was increased to $25,000, the maturity date was extended to February 2007, the interest rate was changed to LIBOR plus 2% until the fifth anniversary and LIBOR plus 2.25% thereafter and principal is to be repaid based on a 30-year amortization schedule. As of September 30, 1997, the outstanding principal balance was $24,847, with scheduled remaining annual principal maturities of $38 in 1997, $228 in 1998, 1999, 2000, 2001 and $23,897 thereafter. The loan is secured by WGCI's assets (the golf course and related improvements and equipment), is guaranteed by the Company, and is considered "Senior Indebtedness" (as defined in the Indenture relating to the COLAS). In December 1996, Amfac Property Development Corp., a wholly- owned subsidiary of the Company, obtained a $10,000 loan facility from a Hawaii bank. The loan is secured by a mortgage on property under development at the mill-site of Oahu Sugar (the sugar plantation was closed in 1995), and is considered "Senior Indebtedness" (as defined in the Indenture relating to the COLAS). The loan bears interest at the bank's base rate (8.5% at September 30, 1997) plus .5% and matures on December 1, 1998. AMFAC/JMB HAWAII, INC. Notes to Consolidated Financial Statements - Continued (Dollars in Thousands) (5) SEGMENT INFORMATION Agriculture and Property comprise separate industry segments of the Company. "Operating Income-Other" consists primarily of unallocated overhead expenses and "Total Assets-Other" consists primarily of cash and deferred expenses. Total assets at the balance sheet dates and capital expenditures, operating income (loss) and depreciation and amortization during the nine months ended September 30, 1997 and 1996 are set forth below by each industry segment:
September 30, December 31, 1997 1996 --------- --------- Total Assets: Agriculture $228,375 239,222 Property 223,527 225,372 Other 26,942 19,011 --------- --------- $478,844 483,605 ========= ========= Nine Months Nine Months Ended Ended September 30, September 30, 1997 1996 ----------- ----------- Capital Expenditures: Agriculture $1,474 1,351 Property 458 589 Other 13 -- --------- --------- $1,945 1,940 ========= ========= Operating income (loss): Agriculture $(3,562) (4,235) Property (2,237) 3,257 Other (3,147) (1,745) --------- --------- $(8,946) (2,723) ========== ========= Depreciation and amortization: Agriculture $2,953 3,095 Property 1,574 1,537 Other 45 57 --------- --------- $4,572 4,689 ========= =========
AMFAC/JMB HAWAII, INC. Notes to Consolidated Financial Statements - Continued (Dollars in Thousands) (6) TRANSACTIONS WITH AFFILIATES The Company incurred interest expense of approximately $8,629 for the nine months ended September 30, 1997 and approximately $6,520 for the nine months ended September 30, 1996 in connection with the acquisition and additional financing obtained from an affiliate. Approximately $8,629 of such interest was unpaid as of September 30, 1997. With respect to any calendar year, JMB or its affiliates may receive a Qualified Allowance in an amount equal to: (i) approximately $6,200 during each of the calendar years 1989 through 1993, and (ii) thereafter, 1-1/2% per annum of the Fair Market Value (as defined) of the gross assets of the Company and its subsidiaries (other than cash and cash equivalents and Excluded Assets (as defined)) for providing certain advisory services for the Company. The aforementioned advisory services, which are provided pursuant to a 30-year Services Agreement entered into between the Company, certain of its subsidiaries and JMB in November 1988, include making recommendations in the following areas: (i) the construction and development of real property; (ii) land use and zoning changes; (iii) the timing and pricing of properties to be sold; (iv) the timing, type and amount of financing to be incurred; (v) the agricultural business; and, (vi) the uses (agricultural, residential, recreational or commercial) for the land. However, the Qualified Allowance shall be earned and paid for each year prior to maturity of the COLAS only if the Company generates sufficient Net Cash Flow to pay Base Interest to the holders of the COLAS for such year of an amount equal to 8% of the average outstanding principal balance of the COLAS for such year; any portion of the Qualified Allowance not paid for any year shall cumulate without interest and JMB or its affiliates shall be paid such amount with respect to any succeeding year, after the payment of all Contingent Base Interest for such year, to the extent of 100% of remaining Net Cash Flow until an amount equal to 20% of the Base Interest with respect to such year has been paid, and thereafter, to the extent of the product of (a) remaining Net Cash Flow, multiplied by (b) a fraction, the numerator of which is the cumulative deficiency as of the end of such year in the Qualified Allowance and the denominator of which is the sum of the cumulative deficiencies as of the end of such year in the Qualified Allowance and Base Interest. A Qualified Allowance for 1989 of approximately $6,200 was paid on February 28, 1990. Approximately $54,400 of Qualified Allowance related to the period from January 1, 1991 through December 31, 1996 has not been earned and paid, and is payable only from future Net Cash Flow. Accordingly, because the Company does not believe it is probable at this time that a sufficient level of Net Cash Flow will be generated in the future to pay Qualified Allowance, the Company has not accrued for any Qualified Allowance in the accompanying consolidated financial statements. JMB has informed the Company that no incremental costs or expenses have been incurred relating to the provision of these advisory services. The Company believes that using an incremental cost methodology is reasonable. The following table is a summary of the Qualified Allowance for the year ended December 31, 1996: 1996 Qualified Allowance calculated $9,240 Qualified Allowance paid -- Cumulative deficiency of Qualified Allowance at end of year $60,632 AMFAC/JMB HAWAII, INC. Notes to Consolidated Financial Statements - Continued (Dollars in Thousands) The Qualified Allowance for 1997, which will not be calculated until the year is completed, is not expected to be paid. Net Cash Flow was $0 for 1996 and is expected to be $0 for 1997. After the maturity date of the COLAS, JMB will continue to provide advisory services pursuant to the Services Agreement, the Qualified Allowance for such years will continue to be 1-1/2% per annum of the Fair Market Value of the gross assets of the Company and its subsidiaries and the Qualified Allowance will continue to be payable from the Company's Net Cash Flow. Upon the termination of the Services Agreement, if there has not been sufficient Net Cash Flow to pay the cumulative deficiency in the Qualified Allowance, if any, such amount would not be due or payable to JMB. The Company, its subsidiaries, and their joint ventures reimburse Northbrook, JMB and their affiliates for direct expenses incurred on their behalf, including salaries and salary- related expenses incurred in connection with the management of the Company's or its subsidiaries' and the joint ventures' operations. The total of such costs was approximately $600 for the nine months ended September 30, 1997 and approximately $463 for the nine months ended September 30, 1996; approximately $600 of such costs were unpaid as of September 30, 1997. In addition, as of September 30, 1997, the other amounts due to affiliates includes $9,106 of income tax payable related to the Class A COLA Redemption Offer (see note 3). Also, the Company pays a non- accountable reimbursement of approximately $30 per month to JMB or its affiliates in respect of general overhead expense, all of which was paid as of September 30, 1997. JMB Insurance Agency, Inc. earns insurance brokerage commissions in connection with providing the placement of insurance coverage for certain of the properties and operations of the Company. Such commissions are comparable to those available to the Company in similar dealings with unaffiliated third parties. The total of such commissions for the nine months ended September 30, 1996 was approximately $478 and approximately $657 for the nine months ended September 30, 1997, all of which was paid as of September 30, 1997. Northbrook and its affiliates allocate certain charges for services to the Company based upon the estimated level of services. Such charges totaled $733 and $1,252 for the nine months ended September 30, 1997 and September 30, 1996, respectively. The affiliated charges for the third quarter of 1997 were offset by $212 of charges for services provided by the Company for Northbrook or reimbursement of costs paid by the Company on behalf of Northbrook. As of September 30, 1997, on a net basis, the amount due Northbrook totaled approximately $547 related to these services. These services and costs are intended to reflect the Company's separate costs of doing business and are principally related to the inclusion of the Company's employees in the Northbrook pension plan, payment of severance and termination benefits and reimbursement for insurance claims paid on behalf of the Company. All amounts described above, deferred or currently payable, do not bear interest and are expected to be paid in future periods. AMFAC/JMB HAWAII, INC. Notes to Consolidated Financial Statements - Continued (Dollars in Thousands) (7) EMPLOYEE BENEFIT PLANS The Company participates in benefit plans covering substantially all of its employees, which provide benefits based primarily on length of service and compensation levels. These plans are administered by Northbrook in conjunction with other plans providing benefits to employees of Northbrook and its affiliates. (8) COMMITMENTS AND CONTINGENCIES The Company is involved in various matters of litigation and other claims. Management, after consultation with legal counsel, is of the opinion that the Company's liability (if any), when ultimately determined, will not have a material adverse effect on the Company's financial position. The Company's Property segment had contractual commitments (related to project costs) of approximately $4,508 as of September 30, 1997. Additional development expenditures are dependent upon the Company's ability to obtain financing for such costs and on the timing and extent of property development and sales. As of September 30, 1997, certain portions of the Company's land not currently under development or used in sugar operations are mortgaged as security for approximately $6,297 of performance bonds related to property development. AMFAC/JMB HAWAII, INC. Notes to Consolidated Financial Statements - Concluded (Dollars in Thousands) (9) INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31, 1996 are as follows: Deferred tax (assets): Postretirement benefits $(22,488) Interest accruals (2,975) Other accruals (3,549) --------- Total gross deferred tax assets (29,012) --------- Deferred tax liabilities: Accounts receivable, related to profit on sale of sugar 3,065 Inventories, principally due to sugar production costs, capitalized costs, capitalized interest and purchase accounting adjustments 258 Plant and equipment, principally due to depreciation and purchase accounting adjustments 8,129 Land and land improvements, principally due to purchase accounting adjustments 89,537 Deferred gains, due to installment sales for income tax purposes 7,429 Investments in unconsolidated entities, principally due to purchase accounting adjustments 14,361 -------- Total deferred tax liabilities 122,779 -------- Net deferred tax liability $93,767 ========= (10) ADJUSTMENTS In the opinion of the Company, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation have been made to the accompanying figures as of September 30, 1997 and for the three and nine months ended September 30, 1997 and 1996. AMFAC/JMB FINANCE, INC. Balance Sheets September 30, 1997 and December 31, 1996 (Dollars in thousands, except per share information) (Unaudited)
A s s e t s September 30, December 31, 1997 1996 ----------- ----------- Cash $ 1 1 ========= ========== L i a b i l i t y a n d S t o c k h o l d e r ` s E q u i t y Repurchase obligation (note 2) Common stock, $1 par value; authorized, issued and outstanding - 1,000 shares $ 1 1 ========== ========== The accompanying notes are an integral part of these balance sheets.
AMFAC/JMB FINANCE, INC. Notes to the Balance Sheets (Unaudited) (Dollars in Thousands) (1) ORGANIZATION AND ACCOUNTING POLICY Amfac/JMB Finance, Inc. ("Finance") was incorporated November 7, 1988 in the State of Illinois. Finance has had no financial operations. All of the outstanding shares of Finance are owned by Northbrook Corporation ("Northbrook"). (2) REPURCHASE OBLIGATIONS On March 14, 1989, Finance and a subsidiary of Northbrook (Amfac/JMB Hawaii, Inc.) entered into an agreement (the "Repurchase Agreement") concerning Finance's obligation (on June 1, 1995 and 1999) to repurchase, upon request of the holders thereof, the Certificate of Land Appreciation Notes due 2008 ("COLAS"), to be issued by Amfac/JMB Hawaii, Inc. in conjunction with the acquisition of Amfac/JMB Hawaii, Inc.. A total aggregate principal amount of $384,737 of COLAS were issued during the offering, which terminated on August 31, 1989. The COLAS were issued in two units consisting of one Class A and one Class B COLA. As specified in the Repurchase Agreement, the repurchase of the Class A COLAS may have been requested of Finance by the holders of such COLAS on June 1, 1995 at a price equal to the original principal amount of such COLAS ($.500) minus all payments of principal and interest allocated to such COLAS. The cumulative interest paid per Class A COLA through June 1, 1995 was $.135. The repurchase of the Class B COLAS may be requested of Finance by the holders of such COLAS on June 1, 1999 at a price equal to 125% of the original principal amount of such COLAS ($.500) minus all payments of principal and interest allocated to such COLAS. To date, the cumulative interest paid per Class A and Class B COLA is approximately $.185 and $.185, respectively. On March 14, 1989, Northbrook entered into a keep-well agreement with Finance, whereby it agreed to contribute sufficient capital to Finance to enable Finance to meet the COLA repurchase obligations described above. Notwithstanding Finance's repurchase obligations, Amfac/JMB Hawaii, Inc. may elect to redeem any COLAS requested to be repurchased at the specified purchase price in accordance with the terms in the indenture that governs the terms of the COLAS (the "Indenture"). On March 15, 1995, pursuant to the Indenture, Amfac/JMB Hawaii, Inc. elected to exercise its right to redeem, and therefore was obligated to repurchase, any and all Class A COLAS submitted pursuant to the redemption offer at a price of $.365 per Class A COLA. PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All references to "Notes" herein are to Notes to Consolidated Financial Statements contained in this report. LIQUIDITY AND CAPITAL RESOURCES A significant portion of the Company's cash needs result from the nature of the real estate development business, which requires significant investment in preparing development plans, seeking land urbanization and other governmental approvals, and completing infrastructure improvements prior to the realization of sales proceeds. The Company has funded its cash requirements to date primarily through the use of short-term bank borrowings, long-term financing secured by its golf courses on Maui and Oahu and by a planned real estate project on Oahu, borrowings from affiliates and revenues generated from the development and sale of its properties and investments. Funding of the Company's future cash requirements is dependent upon obtaining appropriate financing and revenues generated from the development and sale of its properties. In order to generate additional cash flows for the Company, management has identified certain land parcels that are not included in the Company's long-term development plans. During the nine months ended September 30, 1997, the Company generated approximately $12.3 million from these non-strategic land sales. During 1996, the Company generated approximately $18.9 million in land sales, most of which related to non-strategic parcels. At September 30, 1997, the Company had cash and cash equivalents of approximately $18.6 million. The Company intends to use its cash reserves, sales proceeds and financing or joint venture arrangements to meet its short- term (next 12 months) and long-term (beyond the next 12 months) liquidity requirements, which include funding the development costs remaining at Waikele and on West Maui, Oahu and Kauai, agricultural deficits, payment of interest expense and the repayment of principal on debt obligations, as necessary. The Company's long-term remaining liquidity is dependent upon its ability to obtain additional financing and the consummation of certain property sales. There can be no assurance that additional long-term financing can be obtained or property sales consummated. The Company's land holdings on Maui and Kauai are its primary sources of future land sale revenues. However, due to current market conditions, the difficulty in obtaining land use approvals and the high development costs of required infrastructure, the planned development of these land holdings and the ability to generate cash flow from these land holdings are longer term in nature than the time frame experienced at Waikele. Accordingly, if no such financing can be obtained or additional property sales consummated, the Company will defer (to the extent possible) development costs and capital expenditures to meet liquidity requirements. Additionally, the Company's plans for property sales may also be adversely impacted by the inability of potential buyers to obtain financing. The Company has placed a relatively large portion of its land holdings on the market to generate cash to finance the Company's operations, to meet debt service requirements and to raise cash for the June 1999 Class B COLAS redemption option. Pursuant to this option, investors can elect to sell back to the Company their Class B COLAS at a specified price (currently estimated to be $410 per $500 Class B COLAS). The Company has approximately 12,000 acres of land listed for sale with various brokers. These lands include approximately 8,600 acres on Kauai, 400 acres on Maui and 2,600 acres on the Island of Hawaii. These lands consist primarily of large agricultural and conservation parcels. They represent approximately 25% of the Company's overall Hawaii land holdings. Although these lands represent a significant portion of the Company's overall land portfolio, these properties were not planned for development for at least 15 to 20 years and, therefore, is not expected to result in a material impact on the Company's near or medium term real estate development operations. There has been significant interest in many of these parcels and several are under contract for sale. However, these contracts have due diligence investigation periods which have not expired and which allow the purchasers to terminate the agreements. It is difficult to predict how successful the Company will be in selling these lands at acceptable prices. However, in the past the Company has achieved a reasonable level of success with its bulk land sale activities selling almost 7,000 acres in large parcels during the past four years. During the first nine months of 1997, cash increased by $9.8 million. Net cash used in operating activities of $12.0 million and in investing activities of $7.4 million was primarily provided by $25.3 million of long-term financing from the Company's parent and $5.0 million of additional long-term financing primarily related to the refinancing of the WGCI loan (see Note 4)partially offset by $.6 million of principal loan repayment on long-term debt. During the first nine months of 1997, net cash flow used in operating activities was $12.0 million, as compared to net cash used in operating activities of $13.8 million during the first nine months of 1996. The $1.8 million increase in cash flow related to operating activities was due to: (i) an increase in 1997 of the net loss (after adjusting for items not requiring or providing cash) by $9.7 million partially offset by (ii) changes in cash flow netting to an increase of $11.3 million, which related primarily to working capital components. During the first nine months of 1997, net cash flow used in investing activities totaled $7.4 million, principally due to property additions of $1.9 million and an increase in other assets of $4.5 million comprised of approximately $2.7 million of capitalizable costs related to future land developments and $2.2 million from a long-term receivable arising from a land sale in 1997. During the first nine months of 1996, investing activities used net cash of $4.0 million, principally due to property additions of $1.9 million and the incurrence of capitalizable costs related to future land developments of $2.7 million. During the first nine months of 1997, net cash flow provided by financing activities totaled approximately $29.2 million, due primarily to $25.3 million of long-term financing from the Company's parent and $5.0 million of additional long-term financing primarily related to the refinancing of the WGCI loan (see Note 4) partially offest by $.6 million of principal loan repayment on long-term debt. During the first nine months of 1996, net cash flow provided by financing activities totaled $17.3 million, due primarily to $18.7 million of long-term financing from the Company's parent, partially offset by $1.4 million of net repayments of long-term debt. On December 5, 1988, the Company commenced an offering to the public of COLAS pursuant to a Registration Statement on Form S-1 under the Securities Act of 1933. A total of 384,737 COLAS were issued prior to the termination of the offering on August 31, 1989. The net proceeds received from the sale of the COLAS totaled approximately $352 million (after deduction of organization and offering expenses of approximately $33 million). Such net proceeds were used to repay a portion of the acquisition- related financing, which was incurred to pay certain costs associated with the Merger, including a portion of the Merger consideration paid to shareholders of Amfac. On March 14, 1989, Amfac/JMB Finance ("Finance"), a wholly- owned subsidiary of Northbrook Corporation ("Northbrook"), and the Company entered into an agreement (the "Repurchase Agreement") concerning Finance's obligations (on June 1, 1995 and 1999) to repurchase the COLAS upon request of the holders thereof. The COLAS were issued in two units consisting of one Class A and one Class B COLA. As specified in the Repurchase Agreement, the repurchase of the Class A COLAS may have been requested by the holders of such COLAS on June 1, 1995 at a price equal to the original principal amount of such COLAS ($500) minus all payments of principal and interest allocated to such COLAS. The cumulative interest paid per Class A COLA through June 1, 1995 was $135. The repurchase of the Class B COLAS may be requested of Finance by the holders of such COLAS on June 1, 1999 at a price equal to 125% of the original principal amount of such COLAS ($500) minus all payments of principal and interest allocated to such COLAS. Through the date of this report, the cumulative interest paid per Class A and Class B COLA is approximately $185 and $185, respectively. On March 14, 1989, Northbrook entered into a keep-well agreement with Finance, whereby it agreed to contribute sufficient capital or make loans to Finance to enable Finance to meet its COLA repurchase obligations described above. Notwithstanding Finance's repurchase obligations, the Company may elect to redeem any COLAS requested to be repurchased at the specified price. On March 15, 1995, pursuant to the indenture that governs the terms of the COLAS (the "Indenture"), the Company elected to offer to redeem (the "Redemption Offer") all Class A COLAS from its registered holders. Pursuant to the Redemption Offer, and in accordance with the terms of the Indenture, the Company was therefore obligated to purchase any and all Class A COLAS submitted pursuant to the Redemption Offer at a price of $365 per Class A COLA. In conjunction with the Company's Redemption Offer, the Company made a tender offer (the "Tender Offer") to purchase up to approximately $68 million principal value of the Class B COLAS at a price of $220 per Class B COLA from COLA holders electing to have their Class A COLAS repurchased. Approximately 229,000 Class A COLAS were submitted for repurchase pursuant to the Redemption Offer and approximately 99,000 Class B COLAS were submitted for repurchase pursuant to the Tender Offer, requiring an aggregate payment of the Company of approximately $105 million on June 1, 1995. The Company used its available cash to purchase Class B COLAS pursuant to the Tender Offer and borrowed $52 million from Northbrook to purchase Class A COLAS pursuant to the Redemption Offer. As of September 30, 1997, the Company has approximately 156,000 Class A COLAS and approximately 286,000 Class B COLAS outstanding with a principal balance of approximately $78 million and $143 million, respectively. As a result of the COLA repurchases, the Company retired approximately $164 million face value of debt and recognized a financial statement gain in 1995 of approximately $32.5 million (net of income taxes of $20.8 million, the write-off of deferred financing costs of $10.0 million, the write-off of accrued contingent base interest of $5.7 million and expenses of $.9 million). Such gain was treated as cancellation of indebtedness income for tax purposes and, accordingly, the income taxes related to the Class A Redemption Offer (approximately $9.1 million) were not indemnified by the tax agreement with Northbrook (see Note 1). In addition to the $52 million borrowed from Northbrook to redeem Class A COLAS pursuant to the Redemption Offer (see Note 3), the Company also borrowed approximately $18.7 million and $9.8 million during 1996 and 1995, respectively, to fund COLA Base Interest payments and other operational needs. These loans from Northbrook, which have been subsequently refinanced, were payable interest only, had a maturity date of June 1, 1998 and carried an interest rate per annum equal to the prime interest rate plus two percent. In February 1997 the above noted affiliate loans, along with certain other amounts due Northbrook, were converted into a new ten-year note payable. The new note is payable interest only and accrues interest at the prime rate plus 2%. The Company borrowed an additional $16.6 million during the nine months ended September 30, 1997 to fund COLA Base Interest payments and other operational needs. The total amount due Northbrook as of September 30, 1997 was $128.8 million, which includes accrued interest of $8.6 million. Pursuant to the Indenture relating to the COLAS, the amounts borrowed from Northbrook are considered "Senior Indebtedness" to the COLAS. Pursuant to the terms of the Indenture relating to the COLAS, the Company is required to maintain a Value Maintenance Ratio of 1.05 to 1.00. Such ratio is equal to the relationship of the Company's Net Asset Value (defined as the excess of (i) Fair Market Value of the gross assets of the Company over (ii) the amount of the liabilities (excluding liabilities resulting from generally accepted accounting principles enacted subsequent to the date of the Indenture) of the Company other than the outstanding principal balance of the COLAS, any unpaid Mandatory and Contingent Base Interest, and certain other liabilities, to the sum of (x) the outstanding principal amount of the COLAS, plus (y) any unpaid Base Interest, plus (z) the outstanding principal balance of any Indebtedness incurred to redeem COLAS. The COLA Indenture requires the Company to obtain independent appraisals of the fair market value of the gross assets used to calculate the Value Maintenance Ratio as of December 31 in each even-numbered calendar year. Accordingly, the Company obtained independent appraisals of substantially all of its gross real estate assets as of December 31, 1996; the appraised values of such assets were sufficient to meet the Value Maintenance Ratio. In odd-numbered years (during which time appraisals are not required), the Fair Market Value of the gross assets of the Company used to compute the Value Maintenance Ratio is determined by the Company's management. To the extent that management believes that the aggregate Fair Market Value of the Company's assets exceeds by more than 5% the Fair Market Value of such assets included in the most recent appraisal, the Company must obtain an updated appraisal supporting such increase. It should be noted that the concept of Fair Market Value is intended to represent the value that an independent arm's-length purchaser, seeking to utilize such asset for its highest and best use would pay, taking into consideration the risks and benefits associated with such use or development, current restrictions on development (including zoning limitations, permitted densities, environmental restrictions, restrictive covenants, etc.) and the likelihood of changes to such restrictions; provided, however, that with respect to any Fair Market Value determination of all of the assets of the Company, such assets shall not be valued as if sold in bulk to a single purchaser. There can be no assurance that the Company's properties can be ultimately sold at prices equivalent to their appraised values. In June 1991, the Company obtained a five-year $66 million loan from the Employees' Retirement System of the State of Hawaii ("ERS"). The nonrecourse loan is secured by a first mortgage on the Kaanapali Golf Courses, and is considered "Senior Indebtedness" (as defined in the Indenture relating to the COLAS). The loan bore interest at a rate per annum equal to the greater of (i) the base interest rate announced by the Bank of Hawaii on the first of July for each year or (ii) ten percent per annum through September 30, 1993 and nine percent per annum thereafter. The annual interest payments were in excess of the cash flow generated by the Kaanapali Golf Courses. In April 1996, the Company reached an agreement to amend the loan with the ERS, extending the maturity date for five years. In exchange for the loan extension, the ERS received the right to participate in the "Net Disposition Proceeds" (as defined) related to the sale or the refinancing of the golf courses or at the maturity of the loan. The ERS share of the Net Disposition Proceeds increases from 30% from April 1996 through September 30, 1997, to 40% for the period from July 1, 1997 to September 30, 1999 and to 50% thereafter. The loan amendment effectively adjusted the interest rate as of January 1, 1995 to 9.5% until September 30, 1996. After September 30, 1996, the loan bears interest at a rate per annum equal to 8.73%. The loan amendment requires the Company to pay interest at the rate of 7% for the period from January 1, 1995 to September 30, 1996, 7.5% from July 1, 1996 to September 30, 1997, 7.75% from July 1, 1997 to September 30, 1998 and 8.5% thereafter ("Minimum Interest"). Accrued Minimum Interest as of September 30, 1997 was $1.3 million. The scheduled Minimum Interest payments are paid quarterly on the principal balance of the $66 million loan. The difference between the accrued interest expense and the Minimum Interest payment accrues interest and is payable on an annual basis from excess cash flow, if any, generated from the Kaanapali Golf Courses. The accrued interest payable from excess cash flow was approximately $3.9 million as of September 30, 1997. Although the outstanding loan balance remains nonrecourse, certain payments and obligations such as the Minimum Interest payments and the ERS's share of appreciation, if any, are recourse to the Company. However, the Company's obligations to make future Minimum Interest payments and to pay the ERS a share of appreciation would be terminated if the Company tendered an executed deed to the golf course property to the ERS in accordance with the terms of the amendment. In October 1993, Waikele Golf Club, Inc. ("WGCI"), a wholly- owned subsidiary of the Company that owns and operates the Waikele Golf Course, obtained a five year $20 million loan facility from two lenders. The loan consisted of two $10 million amortizing loans. Each loan bore interest only for the first two years with interest and principal payments based upon a 20 year amortization period for the remaining three years. The loans bore interest at prime (8.5% at September 30, 1997) plus 1/2% and LIBOR (5.6563% at September 30, 1997) plus 3%, respectively. In February 1997, WGCI entered into an amended and restated loan agreement with the Bank of Hawaii, (they bought out the other lender's interest), whereby the outstanding principal amount of the loan was increased to $25 million, the maturity date was extended to February 2007, the interest rate was changed to LIBOR plus 2% until the fifth anniversary and LIBOR plus 2.25% thereafter and principal will be repaid based on a 30-year amortization schedule. The loan is secured by WGCI's assets (see Note 4), is guaranteed by the Company and is considered "Senior Indebtedness" (as defined in the COLA Indenture). Pursuant to an agreement entered into with the City of Honolulu in 1991 relating to the development of the Company's Waikele project, if the Company sells the Waikele golf course land, depending on the price and certain other contingencies, a payment of up to $15 million might be required to be made to the City to be used to assist in the City's affordable housing developments. In December 1996, Amfac Property Development Corp., a wholly- owned subsidiary of the Company, obtained a $10 million loan facility from a Hawaii bank. The loan is secured by a mortgage on property under development at the mill-site of Oahu Sugar (the sugar plantation was closed in 1995), and is considered "Senior Indebtedness" (as defined in the Indenture relating to the COLAS). The loan bears interest at the bank's base rate (8.5% at September 30, 1997) plus .5% and matures on December 1, 1998. The Company uses the effective interest method and accrued interest on the COLAS at 4% per annum ("Mandatory Base Interest") for the nine months ended September 30, 1996 and 1997. The Company has not generated a sufficient level of Net Cash Flow to pay Base Interest on the COLAS (see Note 3) in excess of 4% ("Contingent Base Interest") from 1990 through the current date. Contingent Base Interest is payable only to the extent of Net Cash Flow (Net Cash Flow for any period is generally an amount equal to 90% of the Company's net cash revenues, proceeds and receipts after payment of cash expenditures, including the Qualified Allowance, other than federal and state income taxes and after the establishment by the Company of reserves) or Maturity Market Value (Maturity Market Value generally means 90% of the excess of the Fair Market Value (as defined below) of the Company's assets at maturity over its liabilities (including Qualified Allowance, but only to the extent earned and payable from Net Cash Flow generated through maturity) at maturity, which liabilities have been incurred in connection with its operations). Approximately $96.5 million of the $104.1 million cumulative deficiency of Contingent Base Interest related to the period from August 31, 1989 (Final Issuance Date) through September 30, 1997 has not been accrued in the accompanying consolidated financial statements as the Company believes that it is not probable at this time that a sufficient level of Net Cash Flow will be generated in the future or that there will be sufficient Maturity Market Value as of December 31, 2008 (the COLA maturity date) to pay any such unaccrued Contingent Base Interest. The following table is a summary of Mandatory Base Interest and Contingent Base Interest for the nine months ended September 30, 1997 and the year ended December 31, 1996 (dollars are in millions): 1997 1996 Mandatory Base Interest paid $ 8.8 8.8 Contingent Base Interest paid -- -- Cumulative deficiency of Contingent Base Interest at end of period $104.1 94.2 Net Cash Flow was $0 for 1996 and is expected to be $0 for 1997. With respect to any calendar year, JMB or its affiliates may receive a Qualified Allowance in an amount equal to: (i) approximately $6.2 million during each of the calendar years 1989 through 1993, and (ii) thereafter, 1-1/2% per annum of the Fair Market Value (Fair Market Value generally means the value which an independent arm's-length purchaser, seeking to utilize the asset for its highest and best use, would pay for such asset taking into consideration the associated risks, benefits, current restrictions and likelihood of changes to such restriction; provided, however, that with respect to any Fair Market Value determination of all of the Company's assets, such assets shall not be valued as if sold in bulk to a single purchaser) of the gross assets of the Company and its subsidiaries, other than cash and cash equivalents and Excluded Assets (Excluded Assets generally means assets acquired by the Company without the expenditure of any amount included in revenues or receipts for purposes of determining Net Cash Flow or assets designated as Excluded Assets, as restricted by the Indenture; the Company has not had any Excluded Assets), for providing certain advisory services for the Company. The aforementioned advisory services, which are provided pursuant to a 30-year Services Agreement entered into between the Company, certain of its subsidiaries and JMB in November 1988, include making recommendations in the following areas: (i) the construction and development of real property; (ii) land use and zoning changes; (iii) the timing and pricing of properties to be sold; (iv) the timing, type and amount of financing to be incurred; (v) the agricultural business; and, (vi) the uses (agricultural, residential, recreational or commercial) for the land. However, the Qualified Allowance shall be earned and paid for each year prior to maturity of the COLAS only if the Company generates sufficient Net Cash Flow to pay Base Interest to the holders of the COLAS for such year of an amount equal to 8% of the average outstanding principal balance of the COLAS for such year; any portion of the Qualified Allowance not paid for any year shall cumulate without interest and JMB or its affiliates shall be paid such amount with respect to any succeeding year, after the payment of all Contingent Base Interest for such year, to the extent of 100% of remaining Net Cash Flow until an amount equal to 20% of the Base Interest with respect to such year has been paid, and thereafter, to the extent of the product of (a) remaining Net Cash Flow, multiplied by (b) a fraction, the numerator of which is the cumulative deficiency as of the end of such year in the Qualified Allowance and the denominator of which is the sum of the cumulative deficiencies as of the end of such year in the Qualified Allowance and Base Interest. A Qualified Allowance for 1989 of approximately $6.2 million was paid on February 28, 1990. Approximately $54.4 million of Qualified Allowance related to the period from January 1, 1991 through December 31, 1996 has not been earned and paid, and is payable only from future Net Cash Flow. Accordingly, because the Company does not believe it is probable at this time that a sufficient level of Net Cash Flow will be generated in the future to pay Qualified Allowance, the Company has not accrued for any Qualified Allowance in the accompanying consolidated financial statements. JMB has informed the Company that no incremental costs or expenses have been incurred relating to the provision of these advisory services. The Company believes that using an incremental cost methodology is reasonable. The following table is a summary of the Qualified Allowance for the year ended December 31, 1996 (dollars are in millions): 1996 Qualified Allowance calculated $ 9.2 Qualified Allowance paid -- Cumulative deficiency of Qualified Allowance at end of year $ 60.6 The Qualified Allowance for 1997, which will not be calculated until the year is completed, is not expected to be paid. Net Cash Flow was $0 for 1996 and is expected to be $0 for 1997. After the maturity date of the COLAS, JMB will continue to provide advisory services pursuant to the Services Agreement, the Qualified Allowance for such years will continue to be 1-1/2% per annum of the Fair Market Value of the gross assets of the Company and its subsidiaries and the Qualified Allowance will continue to be payable from the Company's Net Cash Flow. Upon the termination of the Services Agreement, if there has not been sufficient Net Cash Flow to pay the cumulative deficiency in the Qualified Allowance, if any, such amount would not be due or payable to JMB. Upon maturity, holders of COLAS will be entitled to receive the remaining outstanding principal balance of the COLAS plus unpaid Mandatory Base Interest plus additional interest equal to the unpaid Contingent Base Interest, to the extent of the Maturity Market Value, plus 55% of the remaining Maturity Market Value. The Company continues to implement certain cost savings measures and to defer development project costs and capital expenditures for longer-term projects. The Company's Property segment is anticipated to expend an additional approximately $4.8 million in project costs during the remainder of 1997. As of September 30, 1997, contractual commitments related to project costs totaled approximately $4.5 million. The price of raw sugar that the Company receives is based upon the price of domestic sugar (less delivery and administrative costs) as currently controlled by U.S. Government price support legislation. On April 4, 1996, President Clinton signed the Federal Agriculture Improvement and Reform Act of 1996 ("the Act"). The Act, which expires in 2002, maintains the loan rate for raw sugar at 18 cents per pound. The "loan rate" refers to the minimum sugar price established by the government, which is supported primarily by the setting of import quotas. In addition, if prices fall below such minimum, the sugar grower is able to receive a 18-cent-a-pound loan, using their crop as collateral, and either repay the loan (with interest) or forfeit the sugar. However, the Act includes certain other adjustments to the sugar program including making crop loans recourse to the producer and repealing marketing allotments which may over time depress the domestic price of raw sugar. There can be no assurance that, in the future, the government price support will not be reduced or eliminated entirely. Such a reduction or an elimination of price supports could have a material adverse affect on the Company's agriculture operations, and possibly could cause the Company to evaluate the cessation of its remaining sugar cane operations. The sugar industry in Hawaii has experienced significant difficulties during the past several years. Growers in Hawaii have struggled with the high costs of production, which have led to the closure of several plantations, including the Company's sugar operations on Oahu in 1995. The Company has tried to address these challenges through a number of different measures, including a restructuring in 1995, whereby its two Kauai plantations were consolidated and all of its sugar operations (including the Maui plantation) were changed to a seasonal mode. Currently the Company is exploring modifications to the terms of its agreement with the International Longshoreman's & Warehouseman's Union ("ILWU"), which represents approximately 85% of the Company's agricultural employees. The Company and the ILWU have agreed to meet during the summer and fall of 1997 to discuss various ideas on how to make operations profitable. After these discussions are completed, negotiations for a new labor contract will begin in late 1997 (the current labor agreement expires on February 1, 1998). Although the Company is hopeful that it will reach a consensus on operational changes that can be reflected in a new labor agreement, there can be no assurance that sufficient changes will be identified or agreed upon. The absence of a new labor agreement with significant modifications from the existing agreement would cause the Company to evaluate the cessation of its sugar operations. In early March 1997, the Company announced a restructuring that has resulted in the creation of six separate operating entities in the following businesses: Sugar, Golf, Coffee, Water, Land Management and Real Estate Development. The Company also formed a corporate services division to handle accounting, MIS, human resources, tax and other administrative functions for the six operating groups. The Company believes it will operate more effectively as several smaller entrepreneurial-minded entities, rather than as one large, diverse conglomerate. Approximately four percent of the Company's total employees were released as part of the restructuring, which is expected to result in annual payroll savings of approximately $1.1 million. The Company incurred termination costs of approximately $.6 million related to the restructuring during the first quarter of 1997. RESULTS OF OPERATIONS GENERAL: The Company and its subsidiaries report their taxes as a part of the consolidated tax return of the Company's parent, Northbrook. The Company and its subsidiaries entered into a tax indemnification agreement with Northbrook, which indemnifies the Company and its subsidiaries for responsibility for all past, present and future federal and state income tax liabilities (other than income taxes which are directly attributable to cancellation of indebtedness income caused by the repurchase or redemption of securities as provided for in or contemplated by the Repurchase Agreement). Current and deferred taxes have been allocated to the Company as if the Company were a separate taxpayer in accordance with the provisions of SFAS No. 109 - Accounting for Income Taxes. However, to the extent the tax indemnification agreement does not require the Company to actually pay income taxes, current taxes payable or receivable (excluding income taxes which are directly attributable to cancellation of indebtedness income caused by the repurchase or redemption of securities as provided for in or contemplated by the Repurchase Agreement) have been reflected as deemed contributions and distributions, respectively, to additional paid-in capital in the accompanying consolidated financial statements. Long-term debt increased as of September 30, 1997 as compared to December 31, 1996, due primarily to the approximately $5.5 million of proceeds received related to the refinancing of the WGCI loan (see Note 4) offset in part by principal payments made on long-term debt. The long-term portion of amounts due to affiliates increased as of September 30, 1997 as compared to December 31, 1996, due primarily to $16.6 million of financing provided by affiliates to fund interest payments and other operational needs and the deferral of approximately $5.4 million of interest on the affiliate financing, which was added to the outstanding principal (see Note 6). AGRICULTURE: The Company's Agriculture segment is responsible for activities related to the cultivation, processing and sale of sugar cane and other agricultural products. Agriculture's revenues are primarily derived from the Company's sale of its raw sugar. The overall decrease in production for the year was offset in part by an 10% increase in acres harvested for the three months ended September 30, 1997 as compared to the three months ended September 30, 1996. Receivables increased as of September 30, 1997 as compared to December 31, 1996 primarily due to the timing of the harvest of sugar cane and the subsequent payment for the delivery of raw sugar. Agricultural revenues and cost of sales decreased for the three and nine months ended September 30, 1997 as compared to the three and nine months ended September 30, 1996 due to a decrease in tons produced and to the timing of sugar production and related sales. For the nine months ended September 30, 1997, the Company sold approximately 66,400 tons of sugar, a 38% decrease over the same period in 1996. The average price of sugar sold for the nine months ended September 30, 1997 of approximately $357 represents a 5% decrease over the average price for the nine months ended September 30, 1996. The Company harvested approximately 9,200 and 10,300 acres for the nine months ended September 30, 1997 and 1996, respectively. For the three months ended September 30, 1997, the Company sold approximately 46,400 tons of sugar, a 3% decrease over the same period in 1996. The average price of sugar sold for the three months ended September 30, 1997 of approximately $356 represents a 5% decrease over the average price for the three months ended September 30, 1996. The Company harvested approximately 5,400 and 4,900 acres for the three months ended September 30, 1997 and 1996, respectively. The Company's sugar plantation subsidiaries sell their raw sugar production to the Hawaiian Sugar and Transportation Company ("HSTC"), which is an agricultural cooperative owned by the major Hawaii producers of raw sugar (including the Company), under a marketing agreement. HSTC sells the raw sugar production to the California and Hawaii Sugar Company ("C&H") pursuant to a long- term supply contract. The terms of the supply contract do not require a specified level of production by the Hawaii producers; however, HSTC is obligated to sell and C&H is obligated to purchase any raw sugar produced. HSTC returns to its raw sugar suppliers proceeds based upon the domestic sugar price less delivery and administrative charges. The Company recognizes revenues and related cost of sales upon delivery of its raw sugar to C&H. Reference is made to the "Liquidity and Capital Resources" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of potential uncertainties regarding the price of raw sugar and the continuation of the Company's sugar cane operations. As part of the Company's agriculture operations, the Company enters into commodities futures contracts and options in sugar as deemed appropriate to reduce the risk of future price fluctuations in sugar. These futures contracts and options are accounted for as hedges and, accordingly, gains and losses are deferred and recognized in cost of sales as part of the production cost. PROPERTY: The Company's Property segment is responsible for the following: land planning and development activities; obtaining land use, zoning and other governmental approvals; selling or financing developed and undeveloped land parcels; and the management and operation of the Company's golf course facilities. For the nine months ended September 30, 1997 and 1996, the Company generated approximately $16.3 million and $12.3 million of land sales, respectively. Approximately $5.2 million of land sales for the nine months ended September 30, 1997 related to the remaining four ocean front lots in Kaanapali (see discussion below), approximately $4.0 million of land sales related to Kaanapali Golf Estates and the remaining $7.1 million was primarily from the sale of non-strategic land parcels on Kauai and Hawaii. For the nine months ended September 30, 1996, approximately $5.5 million of land sales related to Kaanapali Golf Estates and the remaining $6.5 million was primarily from the sale of non-strategic land parcels on Kauai, Oahu and Hawaii. Property revenues also include the operations of the three golf courses owned by the Company, which accounted for total revenues of $11.8 million and $11.7 million for the nine months ended September 30, 1997 and 1996, respectively. For the three months ended September 30, 1997, the Company generated approximately $4.0 million of land sales related to its development in Kaanapali Golf Estates and the remaining $2.7 million was primarily from the sale of non-strategic land parcels on Kauai and Hawaii. For the three months ended September 30, 1996, the Company generated approximately $2.6 million of land sales related to the sale of non-strategic land parcels on Kauai, Oahu and Hawaii. The Company has entered into contracts to sell bulk parcels of land on Maui and Kauai for approximately $30 million in aggregate. The closings are anticipated to take place during the 1st quarter of 1998. There can be no assurance that such sales will be consummated. Land and inventory decreased as of September 30, 1997 compared to December 31, 1996 due primarily to land sales having a cost basis of $14.3 million, offset in part by expenditures related to the light industrial subdivision project on the former mill site at Oahu Sugar Company. Other assets increased as of September 30, 1997 as compared to December 31, 1996 primarily due to a long-term receivable of $2.2 million arising from a land sale in 1997 and deferred costs of $2.3 million related to preliminary planning costs associated with potential future development projects. Property sales and cost of sales increased for the three and nine months ended September 30, 1997 as compared to the three and nine months ended September 30, 1996, however, operating income deteriorated due to lower margins realized on property sold during 1997. MAUI ACTIVITY The planned development of the Company's land on Maui is expected to be longer term in nature. As Maui is less populated than Oahu and more dependent on the resort/tourism industry, much of the Company's land is intended for resort and resort-related uses. Due to overall economic conditions and trends in tourism, demand for these land uses has not been strong. The Company's currently available homesite inventory on Maui, which is targeted to the second home buyer, has experienced slower sales activity to date than originally expected. The Company's competitors on Maui have also experienced slow sales activity in the second home market. The Company is continuing to evaluate its planned products and the timing of development of its land holdings in light of the current weak market demand and the capital resources needed for future development. The Company is marketing Kaanapali Golf Estates, a residential community that is part of South Beach Mauka adjacent to the Kaanapali Beach Resort in West Maui. The Company obtained final subdivision approval for a 32 lot subdivision of a parcel referred to as "17B" at Kaanapali Golf Estates in May 1997. Fifteen of these lots closed in August and September 1997 for sales prices of $.15 million to $.17 million per lot totaling $2.5 million. The Company commenced onsite construction of the subdivision improvements for parcel 17B in August 1997 and is expected to be completed in March 1998, at a cost of approximately $1.6 million. In addition, four lots in an adjacent parcel (referred to as "Parcel 14") closed in August 1997 for sales prices ranging from $.25 million to $.6 million totaling approximately $1.5 million. An additional 2 lots in Parcel 14 are in escrow and expected to close by the end of 1997, for sales prices ranging from approximately $.25 million to .6 million. In 1995, the Company subdivided an ocean front parcel in Kaanapali into six single family homesites of approximately one acre each. Sales of two of the lots in the project closed in December 1995, generating total sales proceeds of approximately $4.1 million. The Company sold the four remaining lots to a local builder in June 1997 for a price of $5.2 million. In 1986, the Company entered into a joint venture agreement with Tobishima Pacific Inc. ("Tobishima"), a wholly-owned subsidiary of a Japanese company, the purpose of which is to plan, manage and develop approximately 96 acres of beachfront property at Kaanapali (known as "North Beach"). The joint venture (in which the Company has a 50% interest) has State land use and County zoning approvals for the subdivision and development of the infrastructure improvements necessary to accommodate up to 3,200 hotel and/or condominium units on this site. This North Beach property constitutes nearly all of the remaining developable beachfront acreage at Kaanapali. The development of North Beach continues to be tied to the completion of the Lahaina bypass highway or other traffic mitigation measures satisfactory to the Maui County Planning Commission. The Company is seeking final approvals to develop a time- share resort on 14 acres of the North Beach property (the "Site"). A land option/purchase agreement was entered into with Tobishima in October 1996. This agreement gives the Company an option to purchase Tobishima's 50% interest in the Site for $7 million. The Company does not expect to consummate the purchase until all discretionary land use permits are received for development of the time-share resort. In accordance with the land option/purchase agreement, the Company has made nonrefundable deposits of $.2 million (which may be applied to the purchase price) to keep the option available through December 31, 1997. Additional nonrefundable deposits may be made to extend the option through August 31, 2000. On March 12, 1997, the Company filed an application for a special management area use permit with the County of Maui ("SMA Permit") for the time-share resort. A public hearing was held on the SMA Permit on July 10, 1997. Although there was a significant amount of testimony both for and against the project, a final decision was not made on the SMA Permit by the Maui Planning Commission at the public hearing. Instead, "intervention status" was granted to several parties who presented their specific objections to the SMA Permits in a judicial process commentary known as a "contested case" hearing, which was held in September and October 1997. Final Maui Planning Commission action on the Company's SMA Permit application is not anticipated until the first quarter of 1998. Although there is no assurance that the SMA Permit will be received (and that if such Permit is received, that its terms will be acceptable to the Company), management is optimistic that the Company will receive the necessary approvals to proceed with the project. In September 1997, the Company and Tobishima entered into an agreement with Maui County providing the County with the option to purchase 33 acres at North Beach (separate from the Site) for $15 million. The County cannot exercise its option to purchase unless and until the Company receives the SMA Permit. The acquisition of the 33 acres by the County would reduce the overall density of the North Beach development by approximately one-third. The Mayor of Maui County and the County Council have agreed that, assuming the reduction in density were to be effected, the infrastructure upgrades proposed by the Company would be sufficient for the development of the time-share resort. The Company believes that the potential for a successful time-share development at North Beach will be greatly enhanced by the involvement of a company with past experience in time-share development, and in the marketing and sale of time-share intervals (one week ownership rights). In February 1997, the Company formed a limited partnership with an affiliate of an experienced time-share development and management company. Known as Kaanapali Ownership Resorts L.P., the new limited partnership is owned 85% by affiliates of the Company and 15% by Kaanapali Partners Limited Partnership, an affiliate of the owners of The Ridge Tahoe in Nevada. After receipt of the SMA permit, the partnership will need to arrange project financing for the development of the resort. In addition, the land option/purchase agreement with Tobishima includes short-term seller financing, which the partnership may decide to utilize. In connection with certain of the Company's land use approvals on Maui, the Company has agreed to provide additional housing on Maui in the affordable price range, and to participate in the funding of the design and construction of the planned bypass highway extending from Lahaina to Kaanapali. The Company has entered into a development agreement with the State Department of Transportation covering the Company's participation in the design and construction of the bypass highway development. It is anticipated that, upon the receipt of government approvals, the Company will expend up to $3.5 million (in the aggregate), of which approximately $1.5 million has been spent as of September 30, 1997, toward the design of the bypass highway and/or the widening of the existing highway. The Company has committed another $6.7 million for the construction of the bypass highway, subject obtaining future entitlements on Maui. The development and construction of the bypass highway is expected to be a long- term project that will not be completed until the year 2004 or later. OAHU ACTIVITY The Company is currently developing the approximately 60 acres of fee simple land it owns at the mill-site of Oahu Sugar Company (which was shut down in 1995). The Company has received zoning for a light industrial subdivision on an approximately 37- acre portion of the property, which excludes property containing the sugar mill and adjacent buildings. In connection with the development of this property, the Company has received state land use urbanization for the entire 60-acre site. Marketing the first twenty lots within the light industrial subdivision commenced in August 1997. To date, the Company has received significant interest from potential buyers, however, the Company has not received any firm offers on these lots. The infrastructure for these first twenty lots is expected to cost approximately $5.9 million, of which $2.1 million has been spent through September 30, 1997. In addition, the Company has begun the process of seeking the necessary government approvals for the redevelopment of the remainder of the mill-site parcels, including planned commercial, public and quasi-public uses. Waiahole Irrigation Company ("WIC") is a wholly-owned subsidiary of the Company, which owns and operates a water collection and transmission system. This system provided water for the Company's sugar cane operations on Oahu from the early 1900's until 1995, when Oahu Sugar Company was closed. After the closure of Oahu Sugar Company, WIC negotiated agreements with several farmers and golf courses (the "Users") to deliver irrigation water to them for a fee. However, to consummate these agreements the Users' landlords are required by law to obtain water permits from the State of Hawaii water commission (the "Commission"). Therefore, the landowners and WIC applied to the Commission for the appropriate approvals. There has been, and continues to be, strong opposition to the water permit request. The opposition consists primarily of environmental and native Hawaiian groups who want the water to be used for stream restoration purposes, rather than being transported by the Waiahole System. After several years of processing, including about nine months of hearings, the Commission issued a draft decision in July 1997. The decision was not favorable to the landowners and WIC as it permits only a limited amount of water to be transported through the Waiahole System (approximately one-third of its capacity). At this low level and with the pricing provided for in the agreement between WIC and the Users, it is doubtful that WIC could generate enough revenues to cover its annual operating and maintenance costs of approximately $1 million per year. At this junction, the landowners and other supporting parties, including the City and County of Honolulu and the State Department of Agriculture, will work to have the Commission re- consider their draft decision. In the interim, WIC has decided to terminate the Users' agreement. After the Commission issues its final decision, WIC will then decide whether to re-negotiate the price for delivery of water through the system. Finally, if improvements cannot be made in either the pricing or volume of Waiahole System water, WIC will be forced to consider closing down the system or operating the system on a very limited basis. Such closing or limitation of the Waiahole System would not have a material adverse effect on the Company's financial condition or on its results of operations. KAUAI ACTIVITY In May 1996, Kauai County approved the Company's application to zone 552 acres of land on Kauai for a mixed use, master planned community which will include a variety of both affordable and market rate residential units, commercial and industrial projects and a number of community and public based facilities. However, before construction can commence, the Company must satisfy several conditions imposed during the approval process and obtain additional administrative development permits for requirements such as grading and subdivision. The Company does not plan to pursue those final permits until the real estate market on Kauai improves. Once construction commences, subject to market conditions, the project is expected to span over 20 years. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not involved in any material pending legal proceedings, other than ordinary routine litigation incidental to its business. The Company and/or certain of its affiliates have been named as defendants in several pending lawsuits. While it is impossible to predict the outcome of the litigation that is now pending (or threatened) and for which the potential liability is not covered by insurance, the Company is of the opinion that the ultimate liability from any of the litigation will not materially adversely affect the Company's results of operations or its financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a)The following documents are included as an exhibits to this report. 4.1* Indenture, including the form of COLAS, among Amfac/JMB Hawaii, Inc., its subsidiaries as Guarantors and Continental Bank National Association, as Trustee (dated as of March 14, 1989). 4.2** Amendment dated as of January 17, 1990 to the Indenture relating to the COLAS. 4.3*** $28,097,832 Promissory Note from Amfac, Inc. to Amfac/JMB Hawaii, Inc. extended and reissued effective December 31, 1993. 4.4**** The five year $66,000,000 loan with the Employees' Retirement System of the State of Hawaii to Amfac/JMB Hawaii, Inc. as of June 25, 1991. 4.5***** $13,250,000 Loan Agreement among Heller, Financial, Inc., as Lender, The Lihue Plantation Company Limited, as Borrower, and Amfac/JMB Hawaii, Inc., Kekaha Sugar Company, Limited, Oahu Sugar Company Limited and Pioneer Mill Company, Limited, as Guarantors December 30, 1992. 4.6****** $10,000,000 loan agreement between Waikele Golf Club, Inc. and ORIX USA Corporation. $10,000,000 loan agreement between Waikele Golf Club, Inc. and Bank of Hawaii. 4.7******* $52,000,000 Promissory Note to Northbrook Corporation from Amfac/JMB Hawaii, Inc. effective May 31, 1995 is filed herewith. 4.8******** Agreement for delivery and sale of raw sugar between Hawaii Sugar Transportation Corporation, as seller, and C&H, as Buyer, dated June 4, 1993. 4.9********* Previously filed as an exhibit to the Company's Form 10-Q report under the Securities Act of 1934 (File No. 33-24180) filed May 13, 1996 and hereby incorporated by reference. Standard Sugar Marketing Contracts between Hawaiian Sugar Transportation Company and Hawaii Sugar Growers dated June 4, 1993. 4.10********* Amendment to the $66,000,000 loan with the Employees' Retirement System of the State of Hawaii to Amfac/JMB Hawaii, Inc. as of April 18, 1996. 4.11********** Amended and Restated $52,000,000 Promissory Note to Northbrook Corporation from Amfac/JMB Hawaii, Inc. extended and reissued effective June 1, 1996. 4.12********** Amended and Restated $28,087,832 Promissory Note from Amfac, Inc. to Amfac/JMB Hawaii, Inc. extended and reissued effective June 1, 1996. 4.13*********** $10,000,000 loan agreement between Amfac Property Development Corp. and City Bank at December 18, 1996 4.14*********** $104,759,324 Promissory Note between Northbrook Corporation and Amfac/JMB Hawaii, Inc. dated February 17, 1997 4.15************ Amended and Restated $25,000,000 loan agreement with the Bank of Hawaii dated February 4, 1997. 4.16************ Limited Partnership Agreement for Kaanapali Ownership Resorts, L.P. dated February 1, 1997 for development of time-share resort on Kaanapali. 4.17 Revolving Credit Note between Amfac/JMB Hawaii, Inc. and Fred Harvey Transportation Company, Inc. dated February 27, 1997. 10.1* General Lease S- 4222, dated January 1, 1969, by and between the State of Hawaii and Kekaha Sugar Company, Limited. 10.2* Grove Farm Haiku Lease, dated January 25, 1974 by and between Grove Farm Company, Incorporated and The Lihue Plantation Company, Limited. 10.3* General Lease S- 4412, dated October 31, 1974, by and between the State of Hawaii and the Lihue Plantation Company, Limited. 10.4* General Lease S- 4576, dated March 15, 1978, by and between the State of Hawaii and The Lihue Plantation Company, Limited. 10.5* General Lease S- 3827, dated July 8, 1964, by and between the State of Hawaii and East Kauai Water Company, Ltd. 10.6* Amended and Restated Power Purchase Agreement, dated as of June 15, 1992 by and between The Lihue Plantation Company, Limited and Citizens Utilities Company. 10.7* Amendment to the Campbell Estate Lease, dated April 16, 1970, between Trustees under the Will and of the Estate of James Campbell, Deceased, and Oahu Sugar Company, Limited amending and restating the previous lease. 10.8* Bishop Estate Lease No. 24,878, dated June 17, 1977, by and between the Trustees of the Estate of Bernice Pauahi Bishop and Pioneer Mill Company, Limited. 10.9* General Lease S- 4229, dated February 25, 1969, by and between the State of Hawaii, by its Board of Land and Natural Resources and Pioneer Mill Company, Limited. 10.10* Honokohau Water License, dated December 22, 1980, between Maui Pineapple Company Ltd. and Pioneer Mill Company, Limited. 10.11* Water Licensing Agreement, dated September 22, 1980, by and between Maui Land & Pineapple Company, Inc. and Amfac, Inc. 10.12* Joint Venture Agreement, dated as of March 19, 1986, by and between Amfac Property Development Corp. and Tobishima Properties of Hawaii, Inc. 10.13* Development Agreement, dated March 19, 1986, by and between Kaanapali North Beach Joint Venture and Amfac Property Investment Corp. and Tobishima Pacific, Inc. 10.14** Keep-Well Agreement between Northbrook Corporation and Amfac/JMB Finance, Inc. 10.15** Repurchase Agreement, dated March 14, 1989, by and between Amfac/JMB Hawaii, Inc. and Amfac/JMB Finance, Inc. 10.16** Amfac Hawaii Tax Agreement, dated November 21, 1988 between Amfac/JMB Hawaii, Inc., and Amfac Property Development Corp.; Amfac Property Investment Corp.; Amfac Sugar and Agribusiness, Inc.; Kaanapali Water Corporation; Amfac Agribusiness, Inc.; Kekaha Sugar Company, Limited; The Lihue Plantation Company, Limited; Oahu Sugar Company, Limited; Pioneer Mill Company, Limited; Puna Sugar Company, Limited; H. Hackfeld & Co., Ltd.; and Waiahole Irrigation Company, Limited. 10.17** Amfac-Amfac Hawaii Tax Agreement, dated February 27, 1989 between Amfac, Inc. and Amfac/JMB Hawaii, Inc. 10.18** Services Agreement, dated November 18, 1988, between Amfac/JMB Hawaii, Inc., and Amfac Property Development Corp.; Amfac Property Investment Corp.; Amfac Sugar and Agribusiness, Inc.; Kaanapali Water Corporation; Amfac Agribusiness, Inc.; Kekaha Sugar Company, Limited; The Lihue Plantation Company, Limited; Oahu Sugar Company, Limited; Pioneer Mill Company, Limited; Puna Sugar Company, Limited; H. Hackfeld & Co., Ltd.; and Waiahole Irrigation Company, Limited and JMB Realty Corporation. 19.0******* $35,700,000 agreement for sale of C&H and certain other C&H assets, to A&B Hawaii, Inc. in June of 1993. Pursuant to item 6.01 (b)(4) of Regulation SK, the registrant hereby undertakes to provide the commission upon its request a copy of any agreement with respect to long-term indebtedness of the registrant and its consolidated subsidiaries that does not exceed 10 percent of the total assets of the registrant and its subsidiaries on a consolidated basis.
* Previously filed as exhibits to the Company's Registration Statement of Form S-1 (as amended) under the Securities Act of 1933 (File No. 33-24180) and hereby incorporated by reference. ** Previously filed as exhibits to the Company's Form 10-K report under the Securities Act of 1934 (File No. 33-24180) filed on March 27, 1989 and hereby incorporated by reference. *** Previously filed as exhibits to the Company's Form 10-K report under the Securities Act of 1934 (File No. 33-24180) filed on March 27, 1991 and hereby incorporated by reference. **** Previously filed as exhibits to the Company's Form 10-Q report under the Securities Act of 1934 (File No. 33-24180) filed on August 13, 1991 and hereby incorporated by reference. ***** Previously filed as exhibit to the Company's Form 10-Q report under the Securities Act of 1934 (File No. 33-24180) filed on May 14, 1993 and hereby incorporated by reference. ****** Previously filed as exhibit to the Company's Form 10-Q report under the Securities Act of 1934 (File No. 33-24180) filed November 11, 1993 and hereby incorporated by reference. ******* Previously filed as exhibit to the Company's Form 10-K report under the Securities Act of 1934 (File No. 33-24180) filed March 27, 1994 and hereby incorporated by reference. ******** Previously filed as an exhibit to the Company's Form 10- Q report under the Securities Act of 1934 (File No. 33-24180) filed May 12, 1995 and hereby incorporated by reference. ********* Previously filed as exhibit to the Company's Form 10-Q report under the Securities Act of 1934 (File No. 33-24180) filed May 13, 1996 and hereby incorporated by reference. ********** Previously filed as exhibit to the Company's Form 10-Q report under the Securities Act of 1934 (File No. 33-24180) filed on November 14August 13, 1996 and hereby incorporated by reference. *********** Previously filed as an exhibit to the Company's Form 10-K report under the Securities Act of 1934 (File No. 33-24180) filed March 21, 1997 and hereby incorporated by reference. ************ Previously filed as exhibit to the Company's Form 10-Q report under the Securities Act of 1934 (File No. 33-24180) filed May 15, 1997 and hereby incorporated by reference. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMFAC/JMB HAWAII, INC. By: Edward J. Kroll Vice President Date: November 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person in the capacity and on the date indicated. Edward J. Kroll Principal Accounting Officer Date: November 14, 1997 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMFAC/JMB FINANCE, INC. By: Edward J. Kroll Vice President Date: November 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person in the capacity and on the date indicated. Edward J. Kroll Principal Accounting Officer Date: November 14, 1997 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Kaanapali Coffee Estates, Inc. By: Edward J. Kroll Vice President Date: November 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person in the capacity and on the date indicated. Edward J. Kroll Principal Accounting Officer Date: November 14, 1997 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMFAC PROPERTY DEVELOPMENT CORP. By: Edward J. Kroll Vice President Date: November 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person in the capacity and on the date indicated. Edward J. Kroll Principal Accounting Officer Date: November 14, 1997 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMFAC PROPERTY INVESTMENT CORP. By: Edward J. Kroll Vice President Date: November 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person in the capacity and on the date indicated. Edward J. Kroll Principal Accounting Officer Date: November 14, 1997 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMFAC LAND COMPANY, LTD. By: Edward J. Kroll Vice President Date: November 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person in the capacity and on the date indicated. Edward J. Kroll Principal Accounting Officer Date: November 14, 1997 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMFAC VACATIONS MANAGERS, INC. By: Edward J. Kroll Vice President Date: November 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person in the capacity and on the date indicated. Edward J. Kroll Principal Accounting Officer Date: November 14, 1997 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KAANAPALI WATER CORPORATION By: Edward J. Kroll Vice President Date: November 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person in the capacity and on the date indicated. Edward J. Kroll Principal Accounting Officer Date: November 14, 1997 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KEKAHA SUGAR COMPANY, LIMITED By: Edward J. Kroll Vice President Date: November 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person in the capacity and on the date indicated. Edward J. Kroll Principal Accounting Officer Date: November 14, 1997 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. H. HACKFELD & CO., LTD. By: Edward J. Kroll Vice President Date: November 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person in the capacity and on the date indicated. Edward J. Kroll Principal Accounting Officer Date: November 14, 1997 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE LIHUE PLANTATION COMPANY, LIMITED By: Edward J. Kroll Vice President Date: November 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person in the capacity and on the date indicated. Edward J. Kroll Principal Accounting Officer Date: November 14, 1997 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OAHU SUGAR COMPANY, LIMITED By: Edward J. Kroll Vice President Date: November 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person in the capacity and on the date indicated. Edward J. Kroll Principal Accounting Officer Date: November 14, 1997 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PIONEER MILL COMPANY, LIMITED By: Edward J. Kroll Vice President Date: November 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person in the capacity and on the date indicated. Edward J. Kroll Principal Accounting Officer Date: November 14, 1997 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PUNA SUGAR COMPANY, LIMITED By: Edward J. Kroll Vice President Date: November 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person in the capacity and on the date indicated. Edward J. Kroll Principal Accounting Officer Date: November 14, 1997 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WAIAHOLE IRRIGATION COMPANY, LIMITED By: Edward J. Kroll Vice President Date: November 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person in the capacity and on the date indicated. Edward J. Kroll Principal Accounting Officer Date: November 14, 1997 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WAIKELE GOLF CLUB, INC. By: Edward J. Kroll Vice President Date: November 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person in the capacity and on the date indicated. Edward J. Kroll Principal Accounting Officer Date: November 14, 1997 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE REGISTRANT'S FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT INCLUDED IN SUCH REPORT 0000839437 AMFAC/JMB HAWAII, INC. 9-MOS DEC-31-1997 SEP-30-1997 18,561 0 11,556 0 41,704 74,429 346,235 38,001 478,844 30,134 325,729 0 0 1 (182,189) 478,844 59,236 59,522 54,278 68,182 1,022 0 21,438 (22,174) 11,893 (19,227) 0 0 0 (19,227) (19.2) (19.2)
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