SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K405/A
AMENDMENT NO. 1
Filed pursuant to Section 12, 13, or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended
December 31, 1998 Commission File Number 33-24180
AMFAC/JMB HAWAII, L.L.C.
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(Exact name of registrant as specified in its charter)
Hawaii 36-3109397
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(State of organization) (I.R.S. Employer Identification No.)
For the fiscal year ended
December 31, 1998 Commission File Number 33-24180-01
AMFAC/JMB FINANCE, INC.
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(Exact name of registrant as specified in its charter)
Illinois 36-3611183
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(State of organization) (I.R.S. Employer Identification No.)
900 N. Michigan Ave., Chicago, Illinois 60611
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(Address of principal executive office) (Zip Code)
The undersigned registrant hereby amends the following sections of its
Report for the year ended December 31, 1998 on Form 10-K405 as set forth in
the pages attached hereto:
PART I
ITEM 1. Business. Pages 1 through 8
ITEM 2. Properties. Pages 8 through 13
PART II
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Pages 15 through 30
ITEM 8. Financial Statements and Supplementary Data.
Pages 31 through 63
PART III
ITEM 13. Certain Relationships and Related Transactions.
Pages 67 through 71
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
AMFAC/JMB HAWAII, L.L.C.
/s/ EDWARD J. KROLL
By: Edward J. Kroll, Vice President
Date: March 25, 1999
Dated: March 25, 1999
<PAGE>
PART I
ITEM 1. BUSINESS
Amfac/JMB Hawaii, L.L.C. (the "Company") is a Hawaii limited liability
company. The Company is wholly-owned by Northbrook Corporation
("Northbrook"). The primary business activities of the Company are land
development and sales, golf course management and agriculture. The Company
owns approximately 34,000 acres of land located on the islands of Oahu,
Maui, Kauai and Hawaii in the State of Hawaii. All of this land is held by
the Company's wholly-owned subsidiaries. In addition to its owned lands,
the Company leases approximately 49,000 acres of land used primarily in
conjunction with its agricultural operations. The Company's operations are
subject to significant government regulation.
In early March 1997, the Company restructured its operations into the
following six separate operating divisions: Sugar, Golf, Coffee, Water,
Land Management and Real Estate Development. The Company also formed a
corporate services division to provide accounting, MIS, human resources,
tax and other administrative services for the six operating divisions. At
December 31, 1998, the Company and its subsidiaries employed 842 persons.
In February 1998, the Company announced the relocation of the
headquarters for its real estate development division from Honolulu to
Kaanapali, Maui. Due to poor market conditions on Kauai and a shortage of
land inventory on Oahu, the focus of the Company's land development
operations is on Maui. In connection with the office re-location, four
executives and one administrative person resigned their positions with the
Company. These changes resulted in one-time termination and relocation
costs of approximately $.5 million during 1998. Annual recurring cost
savings are expected to be approximately $.7 million from lower
compensation, rent and other employee-related costs. The Company has hired
a new president, a Maui resident, for the Maui development office which the
Company believes will improve coordination of its planning and entitlement
efforts, and in dealing with and responding to community concerns.
The Company is the successor to Amfac/JMB Hawaii, Inc. ("A/J Hawaii").
On March 3, 1998, A/J Hawaii was merged (the "Merger") with and into the
Company pursuant to an Agreement and Plan of Merger dated February 27, 1998
by and between A/J Hawaii and the Company (which was then named Amfac/JMB
Mergerco, L.L.C.). The Merger was consummated to change the Company's
entity form from a corporation to a limited liability company. The Company
was a nominally capitalized limited liability company which was formed on
December 24, 1997, solely for the purpose of effecting the Merger. In the
Merger, the Company succeeded to all the assets and liabilities of A/J
Hawaii in accordance with the Hawaii Business Corporation Act and the
Hawaii Uniform Limited Liability Company Act. In addition, A/J Hawaii, the
Company, The First National Bank of Chicago (the "Trustee") and various
guarantors entered into a Second Supplemental Indenture dated as of
March 1, 1998. Pursuant to the Second Supplemental Indenture, the Company
expressly assumed all obligations of A/J Hawaii under the Indenture dated
as of March 14, 1989, as amended (the "Indenture") by and among A/J Hawaii,
the Trustee and the guarantors named therein and the holders of the
Certificates of Land Appreciation Notes due 2008 Class A (the "Class A
COLAs") and the holders of the Certificates of Land Appreciation Notes
Class B (the "Class B COLAs" and, collectively with the Class A COLAs, the
"COLAs"). The Merger did not require the consent of the holders of the
COLAs under the terms of the Indenture. The Company has succeeded to A/J
Hawaii's reporting obligations under the Securities Exchange Act of 1934,
as amended. Unless otherwise indicated, references to the Company prior to
March 3, 1998 shall mean A/J Hawaii and A/J Hawaii's subsidiaries.
<PAGE>
The real estate development, golf course operations and agricultural
operations of the Company comprise its three primary industry segments,
"Property", "Golf" and "Agriculture", respectively. The Company segregates
total revenues, operating income (loss), total assets, capital expenditures
and depreciation and amortization by each industry segment. The Company
owns no patents, trademarks, licenses or franchises which are material to
its business.
All references to "Notes" are to Notes to the Consolidated Financial
Statements contained in this report.
PROPERTY SEGMENT.
The Company's Property segment is responsible for the following
operations: land planning; obtaining land use, zoning and other
governmental approvals; development activities and the selling or financing
of developed and undeveloped land parcels. Land Management and Real Estate
Development operations make up the Property segment. In general, the
Company maintains and manages its land holdings until: (i) conditions are
favorable for their sale, or (ii) a feasible development plan can be formed
and approved. Once the Company has obtained the necessary development
approvals ("entitlements"), the Company may elect to either sell the land
with its entitlements or develop all or a portion of the land. In the past,
the Company has typically done "horizontal" development work, including
site work (e.g., grading, excavation) and installation of infrastructure
(i.e., roadways and utilities). Once the horizontal development is
complete, the Company often sells the "improved" development parcels to
homebuilders, shopping center developers and others who will complete the
"vertical" development of the site consistent with the Company's original
development plans and the entitlements.
SALES OF AGRICULTURAL PROPERTIES. The Company has placed a substantial
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
to redeem on June 1, 1999, such Class B COLAs that are "put" to Amfac/JMB
Finance, Inc. ("AJF") (see "Liquidity and Capital Resources" section
below). The Company has currently listed for sale approximately 500 acres
of land on Kauai and 250 acres on Maui. These lands consist primarily of
unentitled agricultural and conservation parcels. Approximately 2,000
acres are under contract for sale with sales prices exceeding $7 million in
the aggregate. However, these contracts have due diligence investigation
periods which allow the prospective purchasers to terminate the agreements.
There can be no assurance that the signed contracts for sale will in fact
close under their current terms or any other terms or that the Company will
be successful in selling other lands at acceptable prices. During 1998,
1997 and 1996, the Company generated approximately $26.4 million, $7.4
million and $7.6 million, respectively, in revenue primarily from the sale
of unentitled, agricultural and conservation land parcels.
DEVELOPMENT. Company management actively monitors development
opportunities for its land holdings. As development opportunities arise,
management typically prepares feasibility analyses to assess the profit
potential of the development. As part of the feasibility analyses,
management considers factors such as the location and physical
characteristics of the property, demographic patterns and perceived market
demand, estimated project costs, as well as regulatory and environmental
considerations and availability of utilities and governmental services.
Once a decision is made to proceed with a development project,
approvals must be obtained from both the State and County governments in
Hawaii. The State of Hawaii Land Use Commission has classified all lands in
Hawaii as urban, agricultural or conservation. In general, only lands
classified as urban can be developed. Although in some cases agricultural
lands can be used for lower density residential developments, agricultural
lands are typically not developed. Conservation lands also cannot be
developed, and are typically located in heavily forested, mountainous
regions and along the oceanfront.
<PAGE>
There are multiple layers of approvals required from the County
governments in Hawaii. Initially, a project must be included in the
"General" or "Community" plan for the applicable County. Next, the
developer must apply for formal zoning. In general, zoning classifications
are more detailed than either the State urbanization designation or the
general or community plans. Zoning normally addresses the specific use of
each parcel of land and the density of the development. The impact of the
development on the local community is normally assessed as part of the
zoning process. Zoning approvals in Hawaii are typically accompanied by
impact fees and required improvements to public facilities and
infrastructure, such as roadways, schools, utilities and parks that must be
paid for by the developer.
For oceanfront parcels, a special management area ("SMA") permit must
also be obtained from the County government, in addition to general or
community plan and zoning approvals. The SMA permitting process allows the
County an additional opportunity to review potential environmental,
ecological and other impacts from the development, and may also result in
additional conditions on, or concessions from, the developer.
The ability of the Company to develop its properties may be materially
adversely affected by State or County restrictions or conditions that might
be imposed in certain communities having either inadequate public
infrastructure or local opposition to continued growth.
After all of the discretionary approvals described above have been
received, a subdivision approval must be obtained along with certain other
permits such as grading and building permits. Normally, these approvals are
more ministerial in nature. However, the Company has experienced certain
problems obtaining these permits in the past and, in one instance, has had
to pay an impact fee to obtain a grading permit for one of its golf
courses.
The following table shows the entitlement status of the Company's land
holdings (in acres) as of December 31, 1998.
State Classification County Zoning
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Urban Agri. Cons. Hotel Com. Res. Agri. Cons.
----- ------ ------ ----- --------- ----- ------ -----
Maui 939 6,431 4,886 106 25 1,061 6,179 4,886
Kauai 722 10,676 9,760 -- 343 301 10,638 9,875
Oahu 154 -- 468 -- 15 -- -- 607
Hawaii 24 -- -- -- 4 20 -- --
----- ------ ------ ----- ----- ----- ------ ------
Total 1,839 17,107 15,114 106 387 1,382 16,817 15,368
===== ====== ====== ===== ===== ===== ====== ======
Explanations for the abbreviations used above are as follows:
Agri. - Agricultural
Com. - Commercial/Industrial
Res. - Residential (single or multi-family)
Cons. - Conservation/Preservation/Open space
The Company's development projects are described in Item 2 below.
<PAGE>
The Company plans to focus its future development activities on its
Maui land holdings located adjacent to the Kaanapali Beach Resort. As a
result, the primary competition for the Company's development activities is
expected to come from similar types of master-planned resort developments
at the Kapalua and Wailea resorts on Maui. To a lesser extent, competition
also comes from other master-planned resort communities located on the
islands of Kauai and Hawaii, as well as from other states or countries
offering resort-type properties.
MARKET CONDITIONS, REGULATORY APPROVALS AND DEVELOPMENT COSTS. There
are a number of current factors that negatively impact the Company's
development and land sale activities, including poor market conditions, the
difficulty in obtaining regulatory approvals and the high development cost
of required infrastructure. As a result, the planned development of many of
the Company's land holdings, and the ability to generate cash flow from
these land holdings, is expected to be primarily long-term in nature.
The Hawaii economy experienced a downturn beginning in late 1990 after
the Persian Gulf War, a recession in Japan and a slowdown in California's
economy. The real estate market in Hawaii was negatively impacted by these
events as demonstrated by general decreases in the volume of real estate
transactions and a stagnation or decrease in the perceived value and
pricing for certain types of real estate. The economy in California has
improved, but the Company believes that any rebound in Hawaii real estate
is dependent also on improvements in the economies of Hawaii and Japan.
Recent economic trends in Japan and much of Southeast Asia contributed to
poor market conditions. The Company believes that improvements in tourism
arrivals and the length of stay (in Hawaii) will also be important to
turning around Hawaii's real estate market. There can be no assurance that
Hawaii's real estate market will improve in the near term.
The current regulatory approval process for a development project can
take three to five years or more and involves substantial expense. There is
no assurance that all necessary approvals and permits will be obtained with
respect to the Company's current and future projects. Generally,
entitlements are extremely difficult to obtain in Hawaii. There is often
significant opposition to proposed developments from numerous groups
including native Hawaiians, environmental organizations, various community
and civic groups, condominium associations and politicians advocating
no-growth policies, among others.
The Company is subject to a number of statutes imposing registration,
filing and disclosure requirements with respect to its residential real
property developments including, among others, the Federal Interstate Land
Sales Full Disclosure Act, the Federal Consumer Credit Protection Act,
environmental statutes and the State Uniform Land Sales Practices Act.
GOLF SEGMENT.
The Company's Golf segment is responsible for the management and
operation of the Company's golf course facilities. The Company owns three
18-hole golf courses on certain of its lands. A significant portion of
golf revenues in the past has been from eastbound (primarily Japanese) tour
groups. Recent economic trends in Japan and much of Southeast Asia have
contributed to fewer rounds being played at the higher visitor rates.
Improvements in the number of tourist arrivals and length of stay (in
Hawaii) may be critical to improving performance of the Company's golf
courses. There can be no assurance that such improvements will be obtained
in the near term. Due to depressed golf course revenues, on January 1,
1999, the Company did not pay the required interest payment due on the $66
million loan secured by the Kaanapali Golf Courses. The lender issued a
default notice, and the Company is currently pursuing renegotiation of the
loan (see Note 6).
<PAGE>
The Company's two golf courses located at the Kaanapali Beach resort
on West Maui face strong competition from other resort courses on Maui such
as those at Kapalua and Wailea. The Company's golf course located at the
Company's completed Waikele project in central Oahu competes with other
privately owned and municipal golf courses on Oahu. To a lesser extent,
all three of these courses face competition from golf courses on the other
islands in the State of Hawaii.
AGRICULTURE SEGMENT.
The Company's Agriculture segment is responsible for activities
related to the cultivation, processing and sale of sugar cane and coffee.
Agriculture's revenues are primarily derived from the sale of raw sugar.
Approximately 7,300 acres of the Company's land holdings and approximately
16,000 acres of land leased by the Company are currently under cultivation.
The remaining approximately 59,700 acres of land owned and leased by the
Company are predominantly conservation land and land appurtenant to the
cultivation of sugar cane and do not generate significant revenues.
The Company owns and operates two sugar plantations on Kauai and one
on Maui. The principal competitive factors in the Company's sugar business
are sugar yields and processing capabilities and costs.
SALES & PRICING. The Company's sugar plantations sell all 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). Pursuant to a long term supply contract
expiring in the year 2003, HSTC is required to sell, and the California and
Hawaiian Sugar Company ("C&H") is required to purchase, all raw sugar
produced by HSTC's cooperative members. HSTC remits to its cooperative
members the remaining proceeds from its sugar sales after storage, delivery
and administrative costs. The Company recognizes revenues and related cost
of sales upon delivery of its raw sugar by HSTC to C&H.
Since HSTC operates as the storage and transportation "arm" of the
Hawaii sugar growers, C&H is the ultimate and sole customer for the
Company's raw sugar. The loss of C&H could have a material adverse impact
on the Company's agricultural operations. The domestic raw sugar price is a
price that includes delivery "f.o.b." to New York, New York. As C&H's
refinery is located in Crockett, California, there are considerable
delivery cost savings that accrue to HSTC and the Company. These delivery
costs savings result in a "locational" discount given to C&H in the
long-term supply contract. If C&H ceased purchasing the Hawaii growers' raw
sugar, HSTC would be free to sell raw sugar to various sugar refineries
located on the east coast and along the Gulf of Mexico. It is unlikely that
HSTC would provide the "locational" discount to these prospective customers
if C&H ceased being the sole customer. Accordingly, the higher costs of
storage and delivery would probably be offset by a higher selling price.
However, in the absence of C&H, there is no guarantee that HSTC or the
Company would be able to locate buyers for raw sugar at acceptable prices.
The price of raw sugar that the Company receives is based upon the
price of domestic sugar as currently controlled by U.S. Government price
support legislation, less the "locational" discount described above and
less HSTC's storage, delivery and administrative costs. On April 4, 1996,
President Clinton signed the Federal Agriculture Improvement and Reform Act
of 1996 ("the Act"). The Act, which expires in 2002, sets a target price
range for raw sugar. The target raw sugar price, established by the
government, is supported primarily by setting quotas to restrict the
importation of raw sugar to the U.S. There can be no assurance that the
government price supports will not be reduced or eliminated entirely in the
future. Such a reduction or an elimination of price supports could have a
material adverse affect on the Company's sugar operations, and possibly
could cause the Company to consider shutting down its remaining sugar cane
operations.
<PAGE>
The Company enters into commodities futures contracts and options in
sugar as deemed appropriate to reduce the risk of future price fluctuations
in raw sugar. These futures contracts and options are accounted for as
hedges and, accordingly, gains and losses are deferred and recognized in
the cost of sales for sugar. The Company's hedging activity does not have
a material impact on the Company.
SUGAR OPERATIONS IN HAWAII. The sugar industry in Hawaii has
experienced significant difficulties for a number of years. Growers in
Hawaii have long struggled with high costs of production, which have led to
the closure of many plantations, including the Company's Oahu Sugar
plantation in 1995. Transportation costs of raw sugar to the C&H refinery
are also significant. Over the years, the Company has implemented numerous
cost reduction and consolidation plans.
After lengthy negotiations with the union in April 1998, the union
membership at the two Kauai plantations ratified a two-year contract which
includes a 10% reduction in wages as well as other concessions. In June
1998, the union membership at Pioneer Mill on Maui ratified a three-year
contract which includes a 9% reduction in wages for one year as well as
other concessions. Although the concessions will have a meaningful,
positive impact on current operations, they do not provide the type of
structural changes necessary to provide for long-term profitability and a
secure future for the Company's sugar operations.
The Company has completed the 1998 harvest campaign. Decisions
regarding the future of the Company's sugar operations will be made on a
year-to-year basis after taking into account the actual operating results
and forecasts for the upcoming year. There can be no assurance that the
Company will continue with sugar production in the future.
In March 1999, the Company announced its plans to shut down its sugar
operations at Pioneer Mill on Maui at the end of the 1999 harvest season
(September 1999). Pioneer Mill has consistently incurred losses in prior
years and it was expected those losses would continue in the future. The
Company expects to use portions of the land at Pioneer Mill for alternative
crops. The Company's estimated future costs to shut down sugar operations
at Pioneer Mill are not expected to have a material adverse effect on the
financial condition of the Company.
DIVERSIFIED AGRICULTURE. The Company has considered various uses for
its agricultural lands, such as alternative crops, to address the
uncertainty of the long-term viability of the sugar industry. Although the
Company still continues to explore alternative crops, including cultivating
approximately 500 acres of specialty coffee trees on Maui, alternative
crops remain a small portion of the Company's Agriculture segment.
The Company has received a "matching funds" commitment of $1.5 million
under the federal Rural Economic Transaction Assistance - Hawaii program.
The Company planted several new agricultural crops on Kauai using these
"matching funds", including 225 acres of alfalfa, 350 acres of seed corn,
350 acres of high biomass or energy cane and approximately 25 acres of
mangos, papayas and other similar types of fruit corps. At this time, the
Company has successfully planted and cultivated these crops. However, the
short-term success of the Kauai diversified agriculture program is
contingent upon the ability of the Company to continue to market and sell
these agricultural products at favorable prices.
POWER PRODUCTION. The Company historically has been involved in the
production of energy through the burning of bagasse, the fibrous by-product
of sugar cane processing, in the sugar plantations' boilers. The Company
generates electrical energy and steam for the sugar plantations' own
consumption and for sale to the local public utilities, pursuant to power
purchase agreements entered into with the local utilities. Gross revenues
from the Company's operations at its Lihue power plant totaled
approximately $4.3 million, $4.9 million and $4.9 million for 1998, 1997
and 1996, respectively. Revenues are significantly smaller from the Kekaha
<PAGE>
and Pioneer Mill power plants since the contracts with the local utilities
do not require the Company to commit to a certain level of capacity for
power production and, therefore, the Company receives a significantly lower
rate for its power sales.
WATER RESOURCES. The Company must maintain access to significant
water sources to conduct its agricultural operations and, in many cases,
must demonstrate a sufficient supply of water in order to obtain land
development permits. To distribute most of this water, the Company owns
extensive civil engineering improvements including tunnels, ditches,
reservoirs and pumps. The Company believes that it has sufficient water
resources for its present and planned uses; however, there can be no
assurance that the Company will be able to retain or obtain sufficient
water rights to support all of its current or future agricultural and land
development plans. Currently, on the islands of Kauai and Maui, the Company
controls over 100 million gallons of water per day, most of which is on
land which the Company owns and the remainder on land which is leased by
the Company. Most of the Company's water is currently used for irrigating
sugar cane.
As the Company's sugar production decreases, the Company's water needs
will also decrease. Subject to significant state regulatory restrictions,
excess water may be used for other purposes and the Company is exploring
alternative uses for such water. Waiahole Irrigation Company, Limited
("WIC") is a wholly-owned subsidiary of the Company and owns and operates a
water collection and transmission system on the island of Oahu commonly
referred to as the "Waiahole Ditch" (a series of tunnels and ditches
constructed in the early 1900's). The Waiahole Ditch has the capacity to
transport approximately 27 million gallons of water per day from the
windward part of Oahu to the central Oahu plain leeward of the Ko'olau
mountain range. This water was used by the Company's Oahu Sugar operations
from the early 1900s until 1995, when the plantation was closed.
After the closure of Oahu Sugar in 1995, WIC negotiated a collective
agreement with several farms and golf courses (the "Users") to deliver
irrigation water to them for a fee. However, to consummate these
agreements, water permits (the "Water Permits") were applied for from the
State of Hawaii Water Commission (the "Water Commission"). The Water
Commission issued a final decision in December 1997 relating to the Water
Permits which allowed only about one-half of the capacity of the Waiahole
Ditch to be transported through the system. The continued operation of the
Waiahole Ditch and receipt of the delivery fees (from the agreement with
the Users) were predicated upon an allocation from the Water Commission at
or near the capacity of the Waiahole Ditch. When the lower allocation was
received, WIC terminated the agreements with the Users. Currently, water is
delivered to the Users on a month-to-month basis at the originally agreed-
upon fees.
After several months of discussions with prospective purchasers, the
Company reached an agreement with the State of Hawaii pursuant to which the
State will purchase the stock or substantially all of the assets of WIC for
$8.5 million (which includes 450 acres of conservation land). The purchase
was subject to state legislative approval which was obtained in May 1998.
Closing remains conditional upon other factors, including resolution of
certain third party claims to portions of the Waiahole Ditch water. The
purchase agreement has been further extended after an initial expiration on
October 3, 1998. If the sale is not completed, WIC will then decide
whether to re-negotiate the fee for delivery of water through the system.
Finally, if improvements cannot be made in either the pricing or volume of
Waiahole Ditch water, WIC will consider reducing or terminating the
operations of the Waiahole Ditch. A closure or limitation of the Waiahole
Ditch would not have a material adverse effect on the Company's financial
condition or on its results of operations.
The Company has signed a stock purchase agreement for the sale of
Kaanapali Water Corporation, the Company's water utility business on West
Maui, which serves the Kaanapali Beach Resorts for a price of approximately
$5.5 million. The sale is contingent upon State of Hawaii Public Utilities
Commission approval.
<PAGE>
AMFAC/JMB FINANCE, INC.
Amfac/JMB Finance, Inc. ("AJF") is a wholly-owned subsidiary of
Northbrook Corporation ("Northbrook"). The sole business of AJF is to
repurchase Class B COLAs on June 1, 1999 from those holders who "put" their
Class B COLAs pursuant to the terms of a repurchase agreement between the
Company and AJF (the "Repurchase Agreement"). The Company has agreed to
cause AJF to perform its obligations under the Repurchase Agreement. In
connection with such repurchase obligations of AJF, Northbrook has agreed
to contribute sufficient capital or make loans to AJF pursuant to an
agreement (the "Keep-Well Agreement"), to enable AJF to meet its repurchase
obligations of the COLAs under the Repurchase Agreement. The Company has,
under the terms of the Repurchase Agreement, the option to elect to redeem
any or all of the Class B COLAs "put" to AJF for repurchase. The Company
intends to make this election to the extent it has access to available cash
on June 1, 1999. For a description of such obligations pursuant to the
Repurchase Agreement and the Keep-Well Agreement, see Notes 2 and 3 of
Notes to Balance Sheets of AJF. For a description of the COLAs, see Note 5
of Notes to Consolidated Financial Statements of the Company.
ITEM 2. PROPERTIES
LAND HOLDINGS.
The major real properties owned by the Company are described below by
island.
(a) OAHU.
On the island of Oahu, the Company owns approximately 620 acres of
land of which approximately 150 acres is classified as urban and
approximately 470 acres is classified as conservation open land. After the
closure of the Oahu Sugar plantation in 1995, the Company began developing
the 64-acre mill site located in Waipahu, which is approximately 10 miles
west of downtown Honolulu near Pearl Harbor. The Company received county
zoning approval for a light industrial subdivision on the property.
In November 1998, the Company sold a portion of this mill site
property, which served as collateral for a $10 million loan from City Bank
for an approximate sales price of $7.7 million in cash (plus 2% of the
gross sales price of subsequent parcel sales of all or any portion of the
property by the purchaser) and paid $6 million of the sales proceeds as a
principal reduction on the loan. The purchaser assumed responsibility for
completion of the infrastructure requirements for this portion of the mill-
site development project. The Company received a one-year extension on
repayment of the $4 million remaining balance of the loan which is secured
by another parcel at the mill-site. The extended loan bears interest at
the bank's base rate (7.75% at December 31, 1998) plus 1.25% and matures on
December 1, 1999.
The Company is marketing the remaining land in bulk at the mill-site
development. The Company does not anticipate expending funds for
infrastructure at this development.
The Company also owns the Waikele Golf Course located at the Company's
completed Waikele project. Waikele is located directly north of the Oahu
Sugar mill site development in Central Oahu. The Waikele Golf Course has
experienced a significant drop in play from eastbound (primarily Japanese)
tour groups which has depressed rounds played, average rate and, as a
result, net operating income. The Company has developed and implemented a
marketing plan to return the golf course to its previous levels of
profitability. It is difficult, however, to predict how effective these
efforts will be. The Waikele Golf Course generated approximately $5.0
million, $5.8 million and $6.0 million, respectively, in revenues during
1998, 1997 and 1996.
<PAGE>
The Company's approximately 470 acres of conservation lands on Oahu,
primarily watershed lands located on the northeastern side of the Ko'olau
mountains, relate to the Waiahole Ditch. These lands will be sold as part
of the Waiahole Ditch sale agreement with the State of Hawaii (assuming
such transaction is ultimately completed).
(b) MAUI.
The Company owns approximately 12,200 acres of land on the island of
Maui, most of which are classified as agricultural land (approximately
6,400 acres) and conservation land (approximately 4,900 acres) for State
and County purposes. All of the Company's land holdings are located in West
Maui near the Lahaina and the Kaanapali Beach Resort areas.
In general, the development of the Company's land on Maui is expected
to be long-term in nature. Maui is less populated than Oahu and more
dependent on the resort/tourism industry, so 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 been weak.
The Company's homesite inventory on Maui, which is targeted to the second
home buyer, has experienced slower sales activity over the past five years
than originally expected. The Company's competitors on Maui have also
experienced slow sales activity. The Company is continuing to evaluate its
plans 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 has determined that the focus of its development efforts
should be on its Kaanapali/Honokowai land holdings (approximately 3,200
acres) on Maui. Although additional governmental approvals are required for
most of these lands, approximately 900 acres of the Company's
Kaanapali/Honokowai land holdings already have some form of entitlements.
The Company believes its development efforts are best concentrated in this
area where it has certain development approvals already secured.
The Company's Kahoma and Launiupoko properties (in total,
approximately 7,000 acres) are considered to be better suited in the near
term for agricultural uses and possibly for lower density, more rural
developments. The Company has decided to sell certain portions of these
land holdings as unentitled parcels, and may consider selling additional
portions of these lands based upon market conditions and the cash needs of
the Company. The Company had 250 acres of land on Maui listed for sale as
of December 31, 1998. (See also discussion of land sales in "Liquidity and
Capital Resources" below.)
The Company owns and operates the Royal Kaanapali Golf Courses
("RKGC"), which are two 18-hole golf courses located at the Kaanapali Beach
Resort on West Maui. The courses occupy approximately 320 acres of land.
The two Kaanapali golf courses generated approximately $9.5 million, $9.8
million and $9.2 million, respectively, in revenues during 1998, 1997 and
1996. (Reference is made to Note 6 concerning the default notice issued as
of January 1, 1999 by the lender concerning the indebtedness secured by the
golf courses.)
<PAGE>
The Company's primary development projects located in the Kaanapali/
Honokowai area are as follows:
Project Acres Uses Status
- ------- ----- ---- ------
Kaanapali
Golf Estates 204 Single family residential Actively selling/
pending infra-
structure
North Beach
Lot #1 14 280 Unit time share resort Fully zoned
North Beach 82 Hotel/condo/time share Pending SMA
Lots #2, 3 & 4 approvals
North Beach
Mauka 318 Golf/retail/time share/condo Needs urbaniza-
tion & zoning
Puukolii
Village 249 Single and multi-family Pending major
residential/retail/commer- infrastructure
cial/community/civic
Each of these projects is described in greater detail below.
KAANAPALI GOLF ESTATES. The Company is marketing Kaanapali Golf
Estates ("KGE"), a residential community that is part of the Kaanapali
Beach Resort in West Maui. KGE is divided into several parcels and is
approved for 340 homesites of which the Company has sold approximately 90
homesites through individual lot and bulk parcel sales.
In May 1997, the Company obtained final subdivision approval for a 32-
lot subdivision of one such parcel, referred to as "Parcel 17B". The
Company commenced on-site construction of the subdivision improvements for
Parcel 17B in August 1997 and completed these improvements in March 1998 at
a cost of approximately $1.7 million. During 1997, the Company generated
revenues of approximately $2.8 million from the sale of 18 lots at Parcel
17B. During 1998, the Company generated revenue of approximately $2.3
million from the sale of the remaining 14 lots at Parcel 17B.
In May 1998, the Company sold Parcel 18, an 18-lot subdivision in KGE,
in bulk for $1.8 million.
Currently under contract for sale in bulk is 17 acre Parcel 16.
NORTH BEACH. In October 1998, the Company received the final county
approval needed to develop the Kaanapali Ocean Resort ("KOR"), a 280 unit
time share project on the 14 acre Lot 1 ("KOR Site") of Kaanapali North
Beach. In connection with the special management area use permit with the
County of Maui ("SMA Permit") for KOR, the Company signed a settlement
agreement with certain Maui citizens who were opposing the project in
"contested case hearings". Additionally, several opposing citizens who did
not enter into the settlement agreement signed letters agreeing to withdraw
from the contested case hearings. The Company submitted the (ultimately
approved) settlement agreement to the Maui Planning Commission in October
1998. Key provisions of the settlement agreement include the Company's
obligation to provide a new 10-acre public recreation area on North Beach,
a maximum limit of 1,950 units density on North Beach (versus the existing
3,200 units) and a requirement to implement certain drainage improvements
associated with the development of the Company's remaining Kaanapali lands.
Concurrent with construction of KOR, the Company plans to begin
construction of improvements for a 13-acre public park at Wainee, Maui.
The park land and improvements will be donated by the Company to the County
of Maui. The Company has completed the purchase of Tobishima Pacific,
Inc.'s ("TPI") 50% ownership interest in North Beach. The Company and TPI
<PAGE>
were unable to agree on key operating decisions related to the development
of KOR and the future development plan for the entire North Beach property.
To break the deadlock on these issues, the Company exercised a buy/sell
option using a $12 million stated purchase price, and TPI elected to sell
its interest. The Company financed with TPI 80% of the purchase price for
TPI's interest in North Beach and signed a note and first mortgage in favor
of TPI for $9.6 million for the balance. The note is payable in five
equal, annual principal installments beginning in September 1999, with
interest of 8.5% payable quarterly. In January 1999, the Company paid TPI
$2.2 million on its note to release Lot #1 for KOR and the new 10-acre
public recreation area at North Beach.
In February 1997, the Company formed a limited partnership with an
affiliate of a time share company. Kaanapali Ownership Resorts L.P., the
new limited partnership ("KOR"), is owned 85% by subsidiaries of the
Company and 15% by Kaanapali Partners Limited Partnership, an affiliate of
the owners of The Ridge Tahoe resort in Nevada. Construction plans for KOR
are expected to be finalized and construction begun by summer 1999. The
Company is working with various lenders to obtain construction and other
financing for KOR. Assuming development proceeds, sales of time share
intervals are scheduled to begin during the fall of 1999.
In September 1997, the Company and TPI entered into an agreement with
Maui County providing the County with the option to purchase up to 33 acres
at North Beach (separate from the KOR Site) for $15 million. In connection
with receiving the SMA permit for KOR, the Company agreed to extend the
County's option for a period of six to twelve months (depending on the
election described below) in 1999 and to provide alternate park sites for
the County's consideration. Specifically, the County could decide to
purchase a smaller portion of the original 33 acre site for the original
per acre purchase price. Alternatively, the County could decide to
purchase 17 acres located directly to the south of the original option site
again for the original per acre purchase price. Based on the County's
actions, the option will expire June 30, 1999. The Company will work
directly with the new County administration and Council on this option.
NORTH BEACH MAUKA. The Company has plans for an additional 18-hole
golf course, condominiums, commercial/retail and residential uses. The
Company also plans to evaluate adding a significant time-share component to
the development plans for this 318-acre parcel. Currently, the Company has
Community Plan approvals and R-3 zoning (residential, minimum 10,000 square
foot lots) for North Beach Mauka. State urbanization is required, along
with final zoning and subdivision.
PUUKOLII VILLAGE. The Company has regulatory approval to develop a
project, known as "Puukolii Village", on approximately 249 acres located
"Mauka" ("towards the mountains") of Kaanapali Beach Resort. A significant
portion of this project will be affordable housing. Development of most of
Puukolii Village cannot commence until after completion of the planned
Lahaina/Kaanapali bypass highway. The proposed development of Puukolii
Village is expected to satisfy the Company's affordable housing
requirements in connection with its Kaanapali/Honokowai land use
entitlements.
For the portion of Puukolii Village that is not dependent upon
completion of the Lahaina/Kaanapali bypass highway, the Company has
unsuccessfully attempted to sell several residential parcels to home
builders and multi-family residential developers. Until such time that the
Company reaches an acceptable agreement with a housing developer, limited
funds will be expended on infrastructure for Puukolii Village.
<PAGE>
MAUI INFRASTRUCTURE COSTS. In connection with certain of the
Company's land use approvals on Maui, the Company has agreed to provide
employee and affordable housing and to participate in the funding of the
design and construction of the planned Lahaina/Kaanapali bypass highway.
The Company has entered into an agreement with the State of Hawaii
Department of Transportation covering the Company's participation in the
design and construction of the bypass highway. In conjunction with state
urbanization of the Company's Kaanapali Golf Estates project, the Company
committed to spend up to $3.5 million, (of which approximately $.8 million
has been spent as of December 31, 1998) toward the design of the highway.
Due to lengthy delays by the State in the planned start date for the bypass
highway, the Company recently funded approximately $1.0 million for the
engineering and design of the widening (from 2 to 4 lanes) of the existing
highway through the Kaanapali Beach Resort. The Company believes this $1.0
million will be credited against the $3.5 million commitment discussed
above. The Company's remaining commitment of another $6.7 million for the
construction of the bypass highway is subject to the Company obtaining
future entitlements on Maui and the actual construction of the bypass
highway. 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.
(c) KAUAI.
The Company owns approximately 21,200 acres of land on the island of
Kauai, the vast majority of which is classified and zoned, by the State of
Hawaii and the County of Kauai respectively, as agricultural and
conservation lands. There are two large contiguous parcels which comprise
the bulk of these Kauai land holdings, located in Kapaa and Lihue/Hanamaulu
on the eastern side of Kauai. Large portions of the agricultural lands are
currently used for sugar cane cultivation, and portions of the conservation
lands are utilized by the Company's sugar plantations to collect, store and
transmit irrigation water from mountainous areas to the sugar cane fields.
The Company has state urbanization and county zoning for a 552 acre
master-planned community known as the Lihue/Hanamaulu Town Expansion, which
includes approximately 1,800 affordable and market rate residential units,
commercial and industrial facilities and a number of community and other
public uses. The Company does not plan to pursue subdivision and building
permits for this project until the real estate market on Kauai improves.
The Company has decided to list for sale large portions of its
remaining Kauai land holdings, which includes 2,000 acres in Kapaa. The
Company has certain additional lands also listed for sale; however, many of
these are smaller remnant parcels. The Company may consider selling
additional portions of these lands based upon market conditions and the
cash needs of the Company. (See also discussion of land sales in the
"Liquidity and Capital Resources" section below.)
LEASES.
Several of the Company's plantation subsidiaries lease agricultural
lands from unrelated third parties. Such leases vary in length from
month-to-month to eight years and cover parcels of land ranging in size
from one acre to over 20,000 acres. Certain of such leases provide the
Company, as lessee, with licenses for water use. Almost all of the leased
land of the Company is used in connection with the cultivation of sugar
cane. Most of the leases provide that the Company pay fixed annual minimum
rents (ranging from $10 to $131 per usable acre), plus additional rents
based upon a percentage of gross receipts above a specified level. During
the past three years, the Company has paid only minor amounts of percentage
rent on the leases (listed below). There is no assurance that any of the
Company's leases will be renewed.
<PAGE>
The following summary lists the material land leases of the Company's
subsidiaries, as lessees, and certain material terms thereof:
Annual
Expiration Sugar Cane Gross Minimum
Plantation Date Acreage Acreage Rent
---------- ------------- ---------- ------- --------
Kekaha month to month 6,892 27,720 $251,500
Lihue 10/30/99 4,054 6,200 $ 56,370
Lihue 12/15/02 0 3,106 $ 20,630
Lihue 12/31/99 1,822 4,783 $ 19,132
Lihue 6/28/06 773 844 $ 9,208
Pioneer month to month 889 1,639 $ 51,000
Pioneer 12/31/05 770 2,509 $100,937
Pioneer 12/07/04 450 450 $ 35,000
Pioneer 9/20/03 395 395 $ 4,115
OTHER PROPERTY.
In addition to the real property discussed above, the Company also
owns three sugar mills, each with its own power plant. The mills and power
plants are located in Lahaina, Maui and in Kekaha and Lihue, Kauai. Each of
these facilities is involved in the production of raw sugar from sugar cane
and the production of electrical and steam power.
ITEM 3. 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 pending (or threatened) litigation for which potential liability is not
covered by insurance, the Company is of the opinion that the ultimate
liability from such litigation will not materially adversely affect the
Company's results of operations or its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
1997 and 1998.
PART II
ITEM 5. MARKET FOR THE COMPANY'S AND AJF'S COMMON EQUITY AND
RELATED SECURITY HOLDER MATTERS
The Company is a wholly-owned subsidiary of Northbrook and, hence,
there is no public market for the Company's membership interest. AJF is a
wholly-owned subsidiary of Northbrook and there is no public market for
AJF's common stock.
<PAGE>
ITEM 7. 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
GENERAL.
A significant portion of the Company's cash needs result from the
nature of the real estate development business, which requires a
substantial investment in preparing development plans, seeking land
urbanization and other governmental approvals and completing infrastructure
improvements prior to sale. Additionally, the Company's sugar operations
incur a cash deficit during the first half of the year of $10 to $20
million. This seasonal cash deficit is due to the sugar plantation's
operating costs being incurred fairly ratably during the year, while
revenues are received between May and December, concurrent with raw sugar
deliveries to C&H. In addition to seasonal cash needs, in many years cash
flow from sugar operations has been negative, requiring a net cash
investment to fund the operating deficits and any capital costs. Other
significant cash needs also include overhead expenses, debt service and the
intended exercise of the Company's right to redeem on June 1, 1999 Class B
COLAs that are "put" by the holders to AJF for repurchase.
The Company believes that additional borrowings from Northbrook or its
affiliates will be necessary to meet its short-term and long-term liquidity
needs. Northbrook or its affiliates has made such borrowings available to
the Company in the past and, in the short-term, intends to continue making
such borrowings available, to the extent it has available liquidity.
However, there is no assurance that Northbrook or its affiliates will have
sufficient funds, or that Northbrook or its affiliates will make such funds
available to the Company, to meet the Company's long-term liquidity needs.
To the extent that Northbrook or its affiliates make such borrowings
available to the Company during 1999, Northbrook and its affiliates intend
to defer until December 31, 2001 any interest accruing on such borrowings.
As of December 31, 1998, the Company agreed to exercise its option to
redeem Class B COLAs that are "put" to AJF for repurchase (as described
above under Item 1 - "Business"), in partial consideration for (a) the
agreement by the Company's affiliate, Fred Harvey Transportation Company
("Fred Harvey"), to defer until December 31, 2001 all interest accruing
from January 1, 1998 through December 31, 2001 and relating to the
approximately $100 million of senior indebtedness of the Company currently
owing to Fred Harvey (as described in Note 4); and (b) Northbrook agreeing
to cause approximately $55.1 million of the Company's indebtedness that was
senior to the COLAs to be contributed to the capital of the Company. In
connection with the foregoing deferral of interest and contribution of
capital, the Company agrees to allow the senior debt held by Northbrook and
its affiliates to be secured by assets of the Company. As a result of the
contribution, in the Company's December 31, 1998 balance sheet, the
"Amounts due to affiliates - senior debt financing" were decreased, and the
Company's "Member's equity (deficit)" was increased, by approximately $55.1
million. The deferral of interest, together with this contribution to
capital, were made as part of the Company's effort to alleviate significant
liquidity constraints and continue to meet the Value Maintenance Ratio
requirement under the Indenture. At current interest rates, and assuming
no further advances of senior indebtedness, approximately $45 million of
such deferred interest relating to currently existing senior indebtedness
will become due and payable on December 31, 2001. There can be no
assurance that, at such time, the Company will either (i) have unrestricted
cash available for meeting such obligation or (ii) have the ability to
refinance such $45 million obligation. Failure to meet such obligation, if
called, would cause all senior indebtedness owing to Fred Harvey or its
affiliates to be immediately due and payable. A default on senior
indebtedness of such magnitude could constitute an event of default under
<PAGE>
the Indenture. To the extent that Northbrook or any of its affiliates make
additional advances of senior indebtedness to the Company during 1999 (as
described above), interest in excess of $45 million will be due and payable
on December 31, 2001 and such excess could be substantial.
In recent years, the Company has funded its significant cash
requirements primarily through senior debt borrowings from Northbrook and a
subsidiary and to a lesser extent from revenues generated by the
development and sale of its properties. Significant short-term cash
requirements relate to the funding of agricultural deficits, interest
expenses, costs to process the SMA permit for North Beach, development
costs on Oahu and Maui and overhead expenses. At December 31, 1998, the
Company had unrestricted cash and cash equivalents of approximately $24.6
million, subject to its election to redeem Class B COLAs as discussed
below. The Company intends to use its cash reserves, land sales proceeds
and proceeds from new financings or joint venture arrangements to meet its
short-term liquidity requirements. However, there can be no assurance that
new financings can be obtained or property sales completed. 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 Company does not believe that it will be able to
generate significant amounts of cash in the short-term from the development
of these lands. As a result, the Company is marketing for sale certain
unentitled agricultural and conservation parcels.
The Company has placed for sale 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 meet potential
obligations in connection with the possible exercise by the holders of
Class B COLAs of their right to "put" to AJF their Class B COLAs on June 1,
1999. If all holders of Class B COLAs elect to exercise their "put"
rights, AJF's maximum repurchase obligation would be approximately $117
million. The Company is obligated to cause AJF to comply with AJF's
repurchase obligations, and therefore the Company may become liable with
respect to all or a portion of the maximum $117 million Class B COLA
repurchase obligation. In addition, the Company has the option to redeem
Class B COLAs that are tendered to AJF for repurchase; the Company
currently expects to exercise such option to the extent that it has access
to available cash. The Company has approximately 500 acres of land on the
Kauai and 250 acres on Maui currently listed for sale. These lands consist
primarily of unentitled agricultural and conservation parcels.
Approximately 2,000 acres are under contract for sale with sales prices
approximating $7 million in the aggregate. However, these contracts have
due diligence investigation periods which allow the prospective purchasers
to terminate the agreements. There can be no assurance that the signed
contracts for sale will in fact close under their current terms or any
other terms or that the Company will be successful in selling these lands
at acceptable prices.
During 1998, the Company generated approximately $41.3 million of land
sales, of which approximately $16 million came from the sale of the 6,700
acre Kealia parcel in June 1998. The Company has received $11.2 million in
cash from the sale of the Kealia parcel ($5.6 million at closing and $5.6
million from subsequent installment payments); the remaining $4.8 million
is payable (pursuant to the terms of a first mortgage note and amendment)
in March 1999. The sale of the 740-acre Olowalu parcel on Maui closed in
September 1998 for a sales price of $9.6 million, paid in full at closing.
The Company was able to lease back approximately 395 acres of the mauka
("towards the mountains") portion of Olowalu for its agricultural
operations. While the Company is pursuing other bulk parcel sales, there
can be no assurance that any such sales will be consummated. In November
1998, the Company received approximately $7.7 million in cash from the sale
<PAGE>
of certain mill-site property at Oahu Sugar. The Company used a portion of
the proceeds to pay down $6 million on the Company's $10 million City Bank
loan and received a one-year extension on the repayment of the $4 million
remaining balance. Additionally, the Company generated approximately $4.1
million of lot sales related to Kaanapali Golf Estates and approximately
$3.0 million primarily from the sale of unentitled agricultural and
conservation land parcels on Kauai and Hawaii. During 1997, the Company
generated approximately $21.2 million of land sales, of which $4.8 million
came from land related to Kaanapali Golf Estates on Maui; $5.2 million was
from the four remaining oceanfront residential lots at Kai Ala Place; and
$7.4 million was from the sale of unentitled agricultural and conservation
land parcels on the islands of Kauai and Hawaii. During 1996, the Company
generated approximately $13.4 million from sales of unentitled agricultural
and conservation parcels and an additional $5.5 million from lot sales at
the Kaanapali Golf Estates.
The Company continues to implement certain cost savings measures and
to defer certain development costs and capital expenditures for longer-term
projects. The Company's Property segment expended approximately $7.0
million, $10.1 million and $7.9 million in project costs during 1998, 1997
and 1996, respectively, and anticipates expending approximately $8.0
million in project costs during 1999. As of December 31, 1998, contractual
commitments related to project costs totaled approximately $3.4 million.
The Company has completed the purchase of its former joint venture
partner's 50% interest in the 96 acre beachfront parcel commonly referred
to as Kaanapali North Beach. The Company and TPI were unable to agree on
key operating decisions related to the development of KOR and the future
development plan for the entire North Beach property. To break the
deadlock on these issues, the Company exercised a buy/sell option using a
$12 million stated purchase price, and TPI elected to sell its interest.
The Company financed 80% of the purchase price for TPI's interest in North
Beach and signed a note and first mortgage in favor of TPI for $9.6
million. The note is payable in five equal, annual principal installments
beginning in September 1999 and with interest at 8.5% per annum payable
quarterly beginning in December 1998. In January 1999, the Company paid
TPI $2.2 million on its note to release Lot #1 for KOR and the new 10-acre
public recreation area at North Beach.
The Company has made significant changes in the operations of its
sugar plantations in an effort to reduce operating costs and increase
productivity. The sugar industry in Hawaii has experienced significant
difficulties for a number of years. Growers in Hawaii have long struggled
with high costs of production, which have led to the closure of many
plantations, including the Oahu Sugar Company. Transportation costs of raw
sugar to the C&H refinery are also significant. Over the years, the
Company has implemented numerous cost reduction and consolidation plans.
After lengthy negotiations with the union, in April 1998, the union
membership at the Kauai plantation ratified a two-year contract which
included a 10% reduction in wages as well as other concessions. In June
1998, the union membership at Pioneer Mill ratified a three-year contract
which included a 9% reduction in wages for one year as well as other
concessions. Although the concessions will have a meaningful, positive
impact on current operations, they do not provide the type of structural
changes that the Company was seeking to provide for long-term profitability
and a secure future for the Company's sugar operations.
The Company has completed the 1998 harvest campaign. Decisions
regarding the future of the Company's sugar operation will be made on a
year-to-year basis taking into account the actual 1998 operating results
and forecasts for the upcoming year. There can be no assurance that the
Company will continue with sugar production in the future.
<PAGE>
In March 1999, the Company announced its plans to shut down its sugar
operations at Pioneer Mill on Maui at the end of the 1999 harvest season
(September 1999). Pioneer Mill has consistently incurred losses in prior
years and it was expected that those losses would continue in the future.
The Company expects to use portions of the land at Pioneer Mill for
alternative crops. The Company's estimated future costs to shut down sugar
operations at Pioneer Mill are not expected to have a material adverse
effect on the financial condition of the Company.
Company management cannot predict precisely the actual cost of a
plantation shutdown until a shut down plan is developed. There are a
significant number of factors that impact the actual cost including: the
exact timing of the shutdown, potential environmental issues (currently
unknown), the market and pricing for the possible sale or lease of the
plantation's field and mill equipment, and employee termination costs
(which are subject to union negotiation). Other significant unknowns (in
the case of Kauai) relate to the costs associated with terminating the
power sale agreements with the local utility company.
Changes in the price of raw sugar could also impact the level of
agricultural deficits, and as a result the annual cash needs of the
Company. Although government legislation, which is in place through 2002,
sets a target price range for raw sugar, it is possible that such
legislation could be amended or repealed resulting in a reduction in the
price of raw sugar. Such a reduction could also cause the Company to
consider the shutdown of its remaining sugar plantations.
1998 Compared to 1997
During 1998, cash increased by approximately $17.4 million from 1997.
Net cash provided by operating activities of $6.6 million and financing
activities of $26.6 million was primarily provided by $24.8 million of
long-term senior debt financing proceeds from Northbrook and $9.6 million
of additional debt related to the acquisition of TPI's 50% ownership
interest in the 96 acre parcel at North Beach (as discussed below),
partially offset by principal loan repayments on other long-term debt of
approximately $7.7 million and cash used in investing activities of $15.8
million as discussed below.
During 1998, net cash flow provided by operating activities was $6.6
million, as compared to net cash flow used in operating activities of $10.4
million during 1997. The $17.0 million increase in net cash flow provided
by operating activities during 1998 as compared to 1997 was due primarily
to (i) a $27.7 million decrease in inventory primarily attributable to the
increase in real estate sales in 1998 as compared to 1997 and a decrease in
the real estate inventory held for sale at year-end; offset in part by (ii)
a $4.5 million increase in receivable balances in 1998 as compared to 1997
related primarily to the increase in the receivable related to the sale of
land parcels at Kealia of approximately $7.0 million offset by a decrease
in sugar receivables from C&H of approximately $1.3 million; and (iii) a
$5.4 million increase in the Company's net loss (after adjusting for items
not requiring or providing cash) in 1998 as compared to 1997.
During 1998, net cash flow used in investing activities was $15.8
million as compared to $9.0 million during 1997. The $6.8 million increase
in net cash used in investing activities was principally due to (i) an
increase in property additions of $17.6 million primarily due to the
acquisition of TPI's 50% ownership interest in North Beach for $12 million
(as discussed above); and (ii) a decrease of $6.9 million in other assets
during 1998 compared to 1997 primarily due to the reclassification of a
note receivable recorded in connection with a prior year land sale from
noncurrent to current in 1998 as compared to an increase in other assets of
$2.1 million for such note in 1997 and the reclassification of
approximately $1.8 million of other assets to inventory in 1998. The note
receivable which is due in 1999 has an outstanding balance of approximately
$1.1 million and is classified in current receivables at December 31, 1998.
<PAGE>
During 1998, net cash flow provided by financing activities increased
to $26.6 million from $19.7 million during 1997. The $6.9 million increase
is due primarily to (i) an increase in net advances by affiliates (senior
debt) totaling $24.8 million during 1998 as compared to $16.6 million
during 1997 (see Note 4) and (ii) $9.6 million of additional debt related
to the acquisition of TPI's 50% ownership interest in the 96 acre parcel of
North Beach compared to $5.0 million of additional long-term financing
primarily related to the loan secured by the golf course owned by WGCI in
1997. These amounts were also partially offset by $7.7 million and $2.0
million of principal loan repayments on long-term debt in 1998 and 1997,
respectively.
1997 Compared to 1996
In 1997, cash increased by $.4 million from 1996. Net cash flow used
in operating activities of $10.3 million and in investing activities of
$9.0 million was primarily provided by $16.6 million of long-term financing
proceeds from Northbrook and $5.0 million related to refinancing proceeds
from the Waikele Golf Club, Inc. ("WGCI") loan (see Note 6), partially
offset by principal loan repayments on long-term debt of approximately $2.0
million.
During 1997, net cash flow used in operating activities was $10.3
million, as compared to net cash flow used in operating activities of $27.4
million during 1996. The $17.1 million decrease in net cash flow used in
operating activities was due primarily to: (i) a $15.7 million increase in
working capital resulting from a refinancing as long-term debt of operating
advances from Northbrook and (ii) a decrease in 1997 of the Company's net
loss by $1.4 million (after adjusting for items not requiring or providing
cash).
During 1997, net cash flow used in investing activities was $9.0
million as compared to $9.8 million in 1996. The $.8 million decrease in
net cash flow used in investing activities was principally due to property
additions of $2.8 million in 1997 as compared to $4.3 million of property
additions in 1996. The property additions consisted primarily of machinery
and equipment improvements at the Company's sugar plantations.
During 1997, net cash flow provided by financing activities decreased
to $19.7 million from $34.3 million in 1996. The $14.6 million decrease is
due primarily to (i) a decrease in net advances by affiliates (senior debt)
totaling $16.6 million in 1997 as compared to $26.7 million in 1996 (see
Note 4) and (ii) $5.0 million of additional long-term financing primarily
related to the loan secured by the golf course owned by WGCI in 1997 as
compared to an additional $10 million in borrowings in 1996 related to the
loan facility which is secured by a mortgage on property under development
on the former mill site of Oahu Sugar (see Note 6). These amounts were also
partially offset by $2.0 million and $2.4 million of principal loan
repayment on long-term debt in 1997 and 1996, respectively.
COLA RELATED OBLIGATIONS. AJF and the Company are parties to the
Repurchase Agreement pursuant to which AJF is obligated to repurchase on
June 1, 1999 the Class B COLAs tendered by the holders thereof. Northbrook
agreed, pursuant to the Keep-Well Agreement, to contribute sufficient
capital or make loans to AJF to enable AJF to meet the COLA repurchase
obligations, if any, described above. In addition, the Company is obligated
to cause AJF to comply with AJF's repurchase obligation. AJF currently
does not have significant assets, and the Company is uncertain of the
extent to which AJF will be able to perform its repurchase obligation.
Notwithstanding AJF's repurchase obligations, the Company has the option to
redeem the Class B COLAs that are "put" to AJF for repurchase. The Company
currently expects to exercise such option to the extent that it has or can
obtain access to available cash.
<PAGE>
The COLAs were issued in units consisting of one Class A COLA and one
Class B COLA. The repurchase of the Class B COLAs on June 1, 1999 may be
required of AJF by the holders of such COLAs 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 since August 31, 1989 (the
"Final Issuance Date"). As of December 31, 1998, the Company had
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. The redemption price for the Class B COLAs at
June 1, 1999 will be approximately $410 per unit. Therefore, the maximum
potential repurchase obligation will be $117.3 million (of which
approximately $37 million relates to Class B COLAs held by an affiliate of
the Company as described below). At December 31, 1998, the cumulative
interest paid per Class A COLA and Class B COLA was approximately $205 and
$205, respectively. The Company expects to redeem the Class B COLAs which
are tendered by holders in lieu of the repurchase by AJF.
AF Investors, LLC, a Delaware limited liability company and an
affiliate of the Company ("AF Investors"), currently holds approximately
89,330 Class B COLAs as described below. AF Investors will cause some, but
not all, of such Class B COLAs to be "put" pursuant to the Repurchase
Agreement. AF Investors has agreed to take back senior debt of the Company
for the portion so put to the extent that the Company does not have
sufficient cash available to meet the put obligation and currently intends
to retain at least $10 million to $15 million of its Class B COLAs.
Notwithstanding AJF's obligation under the Repurchase Agreement, the
Company's obligation to cause AJF to perform under the Repurchase
Agreement, Northbrook's obligation under the Keep-Well Agreement, the
Company's intention to redeem Class B COLAs, (thereby reducing or
potentially eliminating AJF's obligation, and as a consequence,
Northbrook's obligation), AJF, Northbrook and the Company in the aggregate
do not currently have, and are not expected to have by June 1, 1999,
sufficient available resources to meet the maximum potential obligation of
approximately $81 million should all Class B COLAs (excluding Class B COLAs
held by AF Investors) be put pursuant to the Repurchase Agreement
(approximately $117 million including the Class B COLAs held by AF
Investors). Failure to meet these obligations could lead to a claim
against the Company, AJF and, in turn, Northbrook. The number, if any, of
Class B COLA holders (other than AF Investors) who will elect to have their
Class B COLAs redeemed is not currently determinable and, accordingly, the
amount of resources necessary to enable the Company to redeem such Class B
COLAs is not determinable. Based upon prior experience, the Company does
not anticipate that all of the Class B COLAs will be "put" pursuant to the
Repurchase Agreement and does anticipate having sufficient resources to
redeem the Class B COLAs actually put to the Company. However, there can
be no assurance that the Company and its affiliates will have sufficient
resources to redeem the Class B COLAs actually put to the Company.
On January 30, 1998, Amfac Finance Limited Partnership ("Amfac
Finance"), an Illinois limited partnership and an affiliate of the Company,
extended a tender offer to purchase (the "Class B Tender Offer") up to
$65.4 million principal amount of separately Certificated Class B COLAs
("Separate Class B COLAs") for cash at a unit price of $375 to be paid by
Amfac Finance on each Separate Class B COLA tendered on or about March 24,
1998. The maximum cash to be paid under the Class B Tender Offer was
approximately $49.0 million (130,842 Separate Class B COLAs at a unit price
of $375 each). Approximately 62,857 Separate Class B COLAs were submitted
to Amfac Finance for repurchase pursuant to the Class B Tender Offer,
requiring an aggregate payment by Amfac Finance of approximately $23.6
million on March 31, 1998. In addition, on October 23, 1998, Amfac Finance
extended a Tender Offer to Purchase (the "Class A/B Tender Offer") up to
approximately $22.5 million principal amount of Jointly Certificated Class
A and B COLAs (together "COLA Units") for cash at a unit price of $460 to
be paid by Amfac Finance on each COLA Unit on or about December 23, 1998.
The maximum cash to be paid under the Tender Offer was approximately $12.2
<PAGE>
million (26,600 COLA Units at a unit price of $460 for each COLA Unit).
Approximately 26,473 COLA Units were submitted to Amfac Finance for
repurchase pursuant to the Tender Offer requiring an aggregate payment by
Amfac Finance of approximately $12.2 million on December 23, 1998. Neither
the Class B nor the Class A/B Tender Offer reduced the outstanding
indebtedness of the Company. In December 1998, Amfac Finance contributed
its COLA Units to AF Investors. The COLA Units held by AF Investors remain
outstanding pursuant to the terms of the Indenture. Except as provided in
the last sentence of this paragraph, AF Investors is entitled to the same
rights and benefits of any other holder of COLA Units, including having the
right to have AJF repurchase on June 1, 1999, the separate Class B COLAs
that it owns. AF Investors currently intends to require some, but not all
of the Class B COLAs which it will own on such date to be repurchased
pursuant to the Repurchase Agreement. AF Investors has agreed to take back
senior debt of the Company for the portion so put to the extent that the
Company does not have sufficient cash available to meet the put obligation.
Because AF Investors is an affiliate of the Company, AF Investors will not
be able to participate in determining whether the holders of the required
principal amount of debt under the Indenture have concurred in any
direction, waiver or consent under the terms of the Indenture.
As a result of the Class B and Class A/B Tender Offers, the Company
recognized approximately $7.9 million and $14.3 million, respectively, of
taxable gain in accordance with income tax regulations for certain
transactions with affiliates. Such gain is treated as cancellation of
indebtedness income for income tax purposes only and, accordingly, the
income taxes related to the Class B Tender Offer (approximately $3.1
million) and Class A/B Tender Offer (approximately $5.7 million) were, or
will be, indemnified by Northbrook through the tax agreement between
Northbrook and the Company (See Note 1 to Notes to the Consolidated
Financial Statements).
Pursuant to the terms of the Indenture, the Company is required to
maintain a Value Maintenance Ratio (defined in the Indenture) of 1.05 to
1.00. Such ratio is equal to the relationship of the Company's Net Asset
Value to the sum of: (i) the outstanding principal amount of the COLAs,
(ii) any unpaid Base Interest that is required to be paid, and (iii) the
outstanding principal balance of any Indebtedness incurred to redeem COLAs
(the "COLA Obligation"). Net Asset Value represents the excess of the Fair
Market Value (as defined in the Indenture) of the gross assets of the
Company over the liabilities of the Company other than the COLA obligations
and certain other liabilities. 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.
The Company has received independent appraisals indicating that the
appraised value of substantially all of its gross assets as of December 31,
1998, was at least approximately $453 million. Based upon the appraisals
and, where a lower value was indicated, a contract to sell, the Company was
able to meet the Value Maintenance Ratio as of December 31, 1998. It should
be noted that, under the Indenture, the concept of Fair Market Value
generally is defined as 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 will be able to sell its real estate assets for their aggregate
appraised value. Because of the size and diversity of the real estate
holdings of the Company and the uncertainty of the Hawaii real estate
market, it is likely that it would take a considerable period of time for
the Company to sell its assets. In recent years, the Company has sold some
of its real estate for less than their appraised value to meet cash needs.
<PAGE>
The Company uses the effective interest method and as such interest on
the COLAs is accrued at the Mandatory Base Interest rate (4% per annum).
The Company has not generated a sufficient level of Net Cash Flow to incur
or pay Contingent Base Interest (interest in excess of 4%) on the COLAs
(see Note 5) from 1990 through 1998. Contingent Base Interest through 2008
is due 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,
excluding federal and state income taxes and after the establishment by the
Company of reserves. At December 31, 2008, certain levels of Contingent
Base Interest may also be due and payable to the extent of Maturity Market
Value. Maturity Market Value generally means 90% of the excess of the Fair
Market Value of the Company's assets at maturity over its liabilities
(including Qualified Allowance (described in the next paragraph), but only
to the extent earned and payable from Net Cash Flow generated through
maturity) at maturity. Approximately $113.1 million of the $120.7 million
cumulative deficiency of deferred Contingent Base Interest related to the
period from August 31, 1989 (Final Issuance Date) through December 31, 1998
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 deferred Contingent Base
Interest. The following table is a summary of Mandatory Base Interest and
deferred Contingent Base Interest (i.e. not currently due and payable) for
the years ended December 31, 1998, 1997 and 1996 (dollars are in millions):
1998 1997 1996
------ ------ ------
Mandatory Base Interest paid . . . . . . . . . . $ 8.8 8.8 8.8
Contingent Base Interest due and paid. . . . . . -- -- --
Cumulative deferred Contingent Base
Interest at end of year. . . . . . . . . . . . $120.7 107.4 94.2
Net Cash Flow was $0 for 1998, 1997 and 1996.
With respect to any calendar year, JMB Realty Corporation ("JMB"), an
affiliate of the Company, or its affiliates may receive a Qualified
Allowance in an amount equal to 1.5% per annum of the Fair Market Value of
the gross assets of the Company (other than cash and cash equivalents and
certain other types of assets as provided for in the Indenture) for
providing certain advisory services to the Company. The aforementioned
advisory services, which are provided pursuant to a 30-year Services
Agreement entered into between the Company 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 for such year in an amount
equal to 8% . Any portion of the Qualified Allowance not paid for any year
shall cumulate without interest and JMB or its affiliates shall be paid
such deferred amount in succeeding years, only after the payment of all
Contingent Base Interest for such succeeding year and then, only to the
extent that Net Cash Flow exceeds levels specified in the Indenture.
<PAGE>
A Qualified Allowance for 1989 of approximately $6.2 million was paid
on February 28, 1990. Approximately $74.1 million of Qualified Allowance
related to the period from January 1, 1990 through December 31, 1998 has
not been earned and paid, and is payable only to the extent that future Net
Cash Flow is sufficient. 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 the Qualified Allowance, the Company has
not accrued for any Qualified Allowance payments 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 years ended December 31, 1998, 1997 and 1996
(dollars are in millions):
1998 1997 1996
------ ------ ------
Qualified Allowance calculated . . . . . . . . . $ 9.8 10.1 9.2
Qualified Allowance paid . . . . . . . . . . . . -- -- --
Cumulative deficiency of Qualified
Allowance at end of year. . . . . . . . . . . . $ 74.1 64.3 54.4
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 1.5% 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 certain levels of unpaid
Contingent Base Interest, to the extent of the Maturity Market Value 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.
RESULTS OF OPERATIONS
GENERAL:
The Company and its subsidiaries report its taxes as a part of the
consolidated tax return for Northbrook. The Company and its subsidiaries
have 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 to additional paid-in capital or distributions from related
earnings (deficit)/member's equity (deficit) in the accompanying
consolidated financial statements. As such, the deferred income tax
liabilities reflected on the Company's consolidated balance sheet are not
expected to result in cash payments by the Company.
YEAR 2000
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define a year. Consequently, any
computer programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations
including, among other things, a temporary inability to process
transactions or engage in other normal business activities.
The Company is reviewing its computer systems for year 2000
compliancy. The Company has completed an internal assessment of its
information system technology and currently does not anticipate any
hardware upgrade; however, it had determined a need to upgrade portions of
the Company's software so that its computer systems would function properly
with respect to dates in the year 2000 and thereafter.
The Company has completed an internal review of its accounting, human
resources and payroll applications which are supported by approximately six
different major software vendors. Except for the golf course and water
company division, the Company has received software upgrades for the
financial applications and expects to complete testing and implementation
of the new software upgrades by the end of March 1999. The Company has
installed the software upgrade for the payroll application, which is
expected to be year 2000 compliant. However, the Company uses a third
party service bureau to process its payroll and it is not currently
possible to conduct testing to verify that the software provided will be
year 2000 compliant. The Company has not incurred and does not expect to
incur any costs with respect to the testing and implementation of the
software upgrades. The accounting systems at the golf courses and the
water company are not yet year 2000 compliant. The Company currently
expects new accounting system software to be tested and implemented by the
end of September 1999 at a cost of approximately $60,000 to $80,000.
However, in the event the Company's system reveals that, contrary to
software vendors' claims, the system upgrades or new software are not year
2000 compliant, the Company believes it has the ability to make the
necessary changes through the use of third party consultants as well as the
utilization of internal resources. The Company does not have an estimate
of the length of time which could potentially be required to make these
changes, nor an estimate of the costs involved to make such changes.
The Company's agriculture operations are testing and reviewing their
operational systems at certain of their plantations. At those locations
where a review has not been completed, reviews are expected to be completed
by the end of the first quarter of 1999. The agriculture operations have
also begun identifying and contacting key third party vendors with whom
these operations have a material relationship to determine their year 2000
readiness and expect to have completed contacting its key vendors by the
end of March 1999. If these vendors are not year 2000 compliant or are
unsuccessful in their efforts to become year 2000 compliant, a disruption
in service and supplies may result in the inability of the Company to
process and deliver its agricultural products to market. The subsequent
loss in revenues may have a material adverse effect on the financial
position of the Company.
The Company's Property operations (which include the development and
sales activities of the Company's land operations as well as the Company's
water operations) and the Company's Golf operations have reviewed their
operational systems in the fourth quarter of 1998. Key third party vendors
with whom these operations have a material relationship were contacted to
determine their year 2000 readiness. While these vendors have indicated
that they are or expect to be year 2000 compliant by the end of 1999, there
can be no assurance that they will be successful in their efforts to become
year 2000 compliant. A disruption in service and/or supplies may disrupt
the Company's conduct of its real estate activities, its water deliveries
and/or its golf operations. A resulting loss in revenues might have a
material adverse effect on the financial position of the Company.
<PAGE>
The Company's transfer agent has been upgrading its computer systems
so that its computer systems will function properly with respect to dates
in the years 2000 and thereafter. The Company's transfer agent has begun
testing its computer systems and will continue to test throughout 1999.
The Company has no contingency plans in place in the event that the
Company's transfer agent systems upgrades are not year 2000 compliant.
The Company has reviewed its non-information technology systems (such
as its telephone, utilities, sprinkler and alarm systems) and has contacted
the appropriate third party vendors to determine their year 2000
compliancy. The Company does not have an estimate of the cost, if any,
that may be required to make its non-information systems year 2000
compliant. In addition, the Company has begun contacting the various
banks, insurance companies and state regulatory agencies with whom the
Company has material relationships to determine their year 2000 readiness.
The entities contacted have indicated that they are currently implementing
and/or are testing the required changes to be year 2000 compliant.
If the steps taken by the Company and its vendors to be year 2000
compliant are not successful, the Company could experience various
operational difficulties. These could include, among other things, an
inability to process transactions to the correct accounting period,
difficulties in posting general ledger interfaces, an inability to process
computer-generated checks, bank transactions posted to the wrong periods,
and the failure of scheduling applications which are date sensitive.
The Company currently has no contingency plans in place in the event
it does not complete all phases of the year 2000 compliance program. The
Company plans to continue to monitor the on-going results of the review and
testing phases as well as the status of completion to determine whether
such a plan is necessary.
The foregoing discussion of year 2000 issues and the Company's
responses thereto is based upon information presently known and certain
assumptions and estimates (including those relating to costs and timing of
remediation) currently made by the Company, as well as statements and
representations made to the Company by its third party vendors. There are
various risks that assumptions and estimates made by the Company will not
prove to be correct, that delays in testing or remediation may occur and/or
that significant additional remediation efforts may be required. In
addition, the Company is also relying on the efforts and statements and
representations of third parties, in particular its third party software
vendors. Accordingly, the information concerning the year 2000 issues and
the Company's responses thereto, including the nature, extent, timing and
cost of the Company's remediation efforts, are subject to change and such
changes could be material. In addition, there is no assurance that the
software applications and packages currently believed to be year 2000
compliant will prove to be so after testing.
SENIOR DEBT. Interest expense increased for the year ended
December 31, 1998 as compared to the year ended December 31, 1997 due to
additional senior debt financing from affiliates.
<PAGE>
The following table sets forth operating results by industry segment
(see Note 13), for the years indicated (in 000's):
1998 1997 1996
-------- -------- --------
Agriculture Segment:
Revenues. . . . . . . . . . . . . . . $ 34,551 41,949 51,805
Cost of sales . . . . . . . . . . . . 33,534 40,862 54,640
-------- ------- -------
1,017 1,087 (2,835)
Operating expenses. . . . . . . . . . 5,066 4,460 4,690
-------- ------- -------
Operating income (loss) . . . . . . . (4,049) (3,373) (7,525)
-------- ------- -------
Golf Segment:
Revenues. . . . . . . . . . . . . . . 14,485 15,618 15,191
Cost of sales . . . . . . . . . . . . 9,911 9,877 9,687
-------- ------- -------
4,574 5,741 5,504
Operating expenses. . . . . . . . . . 1,861 2,021 1,959
-------- ------- -------
Operating income. . . . . . . . . . . 2,713 3,720 3,545
-------- ------- -------
Property Segment:
Revenues. . . . . . . . . . . . . . . 49,642 28,430 29,947
Cost of sales . . . . . . . . . . . . 57,657 27,580 24,940
-------- ------- -------
(8,015) 850 5,007
Operating expenses:
Reduction to carrying value of
investments in real estate. . . . (16,805) (2,279) (18,315)
Other . . . . . . . . . . . . . . . (7,290) (7,692) (7,820)
-------- ------- -------
Operating income (loss):
Reduction to carrying value of
investments in real estate . . . . (16,805) (2,279) (18,315)
Other. . . . . . . . . . . . . . . . (15,305) (6,842) (2,813)
-------- ------- -------
Unallocated operating expenses
(primarily overhead). . . . . . . . . (2,349) (3,225) (3,045)
-------- ------- -------
Total operating loss . . . . . . . . . . . $(35,795) (11,999) (28,153)
======== ======= =======
The variances in the above-noted results of operations for the
Agriculture segment, Golf segment and the Property segment are discussed in
the following sections.
AGRICULTURE SEGMENT:
The Company's Agriculture segment is responsible for activities
related to the cultivation, processing and sale of sugar cane and coffee.
Agriculture's revenues are primarily derived from the Company's sale of its
raw sugar. 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 raw sugar as deemed
appropriate to reduce the risk of future price fluctuations. 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.
<PAGE>
1998 Compared to 1997
During 1998, agriculture revenues were $34.6 million as compared to
$41.9 million in 1997. The $7.3 million decrease was due primarily to a
decrease of $7.5 million in revenues resulting from a 20% decrease in the
tons of sugar sold in 1998 as compared to 1997, offset in part by a $.3
million increase in revenues resulting from a 1% increase in the price of
sugar to $362 per ton in 1998 as compared to $359 per ton in 1997. During
1998, approximately 87,300 tons of sugar were sold as compared to 109,000
tons of sugar in 1997. The Company harvested approximately 9,700 and
11,300 acres in 1998 and 1997, respectively.
During 1998, cost of sales were $33.5 million as compared to $40.8
million in 1997. The $7.3 million decrease was due primarily to: (i) a $7.6
million decrease in cost of sales resulting from a 20% reduction in the
tons of sugar sold in 1998 as compared to 1997 (as discussed above); offset
in part by an increase in the unit cost per ton (or $2.2 million increase
in cost of sales) due to a certain level of fixed costs which negatively
impacted the cost per ton due to the lower production volume and (ii) a
reduction of $1.7 million in reserves for future costs related to a
discontinued sugar operation.
Agriculture operating expenses were $5.1 million and $4.5 million for
1998 and 1997, respectively, and consisted primarily of depreciation
expense.
The increase in the operating loss of $4.0 million in 1998 as compared
to $3.4 million in 1997 was due primarily to the reductions in revenues and
cost of sales (as discussed above).
1997 Compared to 1996
During 1997, agriculture revenues were $41.9 million as compared to
$51.8 million in 1996. The $9.9 million decrease was due primarily to (i) a
decrease of $6.6 million in revenues resulting from a 14% decrease in the
tons of sugar sold in 1997 as compared to 1996. During 1997, approximately
109,000 tons of sugar were sold as compared to 127,000 tons of sugar sold
in 1996. Approximately 12,000 tons of the raw sugar produced in late 1995
were delivered to C&H and recognized in revenues in 1996; (ii) a $1.6
million decrease in revenues resulting from a 4% decrease in the average
price of sugar to $359 per ton in 1997 as compared to $374 per ton in 1996;
and (iii) a $1.4 million decrease in other agricultural revenues.
During 1997, cost of sales were $40.8 million as compared to $54.6
million in 1996. The $13.8 million decrease was due primarily to: (i) a
$7.2 million decrease in cost of sales resulting from a 14% reduction in
the tons of sugar sold in 1997 as compared to 1996 (as discussed above);
and (ii) a $6.6 million decrease in cost of sales primarily attributable to
cost reduction efforts for certain expenditures related to sugar
production.
Agriculture operating expenses were $4.5 million and $4.7 million for
1997 and 1996, respectively, and consisted primarily of depreciation
expense.
The decrease in the operating loss of $7.5 million in 1996 as compared
to $3.4 million in 1997 was due primarily to the reductions in revenues and
cost of sales (as discussed above).
PROPERTY SEGMENT:
The Company's Property segment is responsible for land planning and
development activities; obtaining land use, zoning and other governmental
approvals and selling or financing developed and undeveloped land parcels.
<PAGE>
1998 Compared to 1997
Revenues increased to $49.6 million during 1998 from $28.4 million
during 1997. Property revenues include revenues from land sales of
approximately $41.3 million and $21.2 million for 1998 and 1997,
respectively. Land sales included revenues for 1998 of approximately $16
million from the sale of the 6,700 acre Kealia parcel on Kauai, $9.6
million from the sale of the 740-acre Olowalu parcel on Maui, $4.1 million
of land sales related to Kaanapali Golf Estates, $7.7 million from the sale
of certain mill-site property at the Company's former Oahu Sugar Plantation
and $3.9 million primarily from the sale of various other land parcels on
Oahu, Kauai and Hawaii. The Company has received $11.2 million of the $16
million Kealia parcel sales proceeds and the remaining $4.8 million is
payable (pursuant to the terms of a first mortgage note and amendment) in
March 1999.
During 1998, property cost of sales were $57.7 million as compared to
$27.6 million in 1997. The $30.1 million increase in costs was due
primarily to an increase in sales volume associated with land parcels sold
(as discussed above).
Property operating expenses were $7.3 million and $7.7 million for
1998 and 1997, respectively, and consisted primarily of employment costs
and other general and administrative expenses.
Property sales and cost of sales increased in 1998 as compared to 1997
due to higher sales volume. Operating income deteriorated primarily due to
lower margins realized on property sold during 1998.
In accordance with the provisions of the COLA Indenture, appraisals
were performed for substantially all of the assets of the Company as of
December 31, 1998 which reflected a decline in value for certain
properties. Certain of the assets appraised as of December 31, 1998 are
properties that are either being actively marketed by the Company or
properties for which the Company intends to sell in the near future. Four
of the land parcels expected to be disposed of by the Company within the
next two years, having a cost basis of approximately $20.2 million, were
estimated by the Company to have a total fair market value (less costs to
sell) of approximately $13.2 million as of December 31, 1998. Accordingly,
the Company recorded a $7 million loss in the fourth quarter of 1998
related to these properties. Additionally, the Company reduced its
carrying value of one of its land parcels in the fourth quarter of 1998 by
$9.8 million to properly reflect the estimated market value of this land
parcel.
1997 Compared to 1996
Revenues decreased slightly to $28.4 million in 1997 from $30 million
in 1996. Property revenues included revenues from land sales of
approximately $21.2 million and $18.9 million for 1997 and 1996,
respectively. Land sales included revenues in 1997 from $5.2 million of
land sales related to the remaining four oceanfront lots at Kai Ala Place
in Kaanapali, approximately $4.8 million of land sales related to Kaanapali
Golf Estates and $11.2 million primarily from the sale of unentitled
agricultural and conservation and various other land parcels on Kauai,
Hawaii and Maui. Approximately $5.5 million of 1996 land sales related to
the Kaanapali Golf Estates and the remaining $13.4 million was primarily
from the sale of unentitled agricultural and conservation and various other
land parcels on Maui, Kauai and Hawaii.
During 1997, property cost of sales were $27.6 million as compared to
$24.9 million in 1996. The $2.7 million increase was due primarily to an
increase in costs associated with land parcels sold (as discussed above).
Property operating expenses were $7.7 million and $7.8 million for
1997 and 1996, respectively, and consisted primarily of employment costs
and other general and administrative expenses.
<PAGE>
In accordance with the provisions of the Indenture, appraisals were
performed for certain assets of the Company as of December 31, 1996 which
reflected a decline in value for certain properties. Certain of the assets
appraised as of December 31, 1996 are properties that were either being
actively marketed by the Company or properties for which the Company had a
plan to sell the assets in the near future. Five of the land parcels
expected to be disposed of by the Company within the next two years, having
a cost basis of approximately $40.3 million were estimated by the Company
to have a total fair value, less costs to sell, of approximately $22.0
million as of December 31, 1996. Accordingly, the Company recorded an $18.3
million loss in the fourth quarter of 1996 related to these properties, and
the Company reduced its carrying value of one of its land parcels in the
fourth quarter of 1997 by $2.3 million to properly reflect the estimated
market value of this land parcel.
Property sales and cost of sales increased for the year ended
December 31, 1997 as compared to the year ended December 31, 1996 (as
discussed above), however, operating income deteriorated primarily due to
lower margins realized on property sold during 1997.
GOLF SEGMENT:
The Company's golf segment is responsible for the management and
operation of the two golf courses at Kaanapali Golf Courses in Kaanapali,
Maui and the Waikele Golf Club on Oahu.
1998 Compared to 1997
During 1998, golf revenues were $14.5 million as compared to $15.6
million in 1997. The $1.1 million decrease is due primarily to a 5%
decrease in the total golf rounds played and a 1% decrease in the average
rate per round at the three courses. During 1998, approximately 187,000
rounds of golf were played as compared to 196,000 in 1997.
Golf cost of sales were $9.9 million in 1998 and 1997. Golf operating
expenses of $1.9 million and $2.0 million in 1998 and 1997, respectively,
consisted primarily of depreciation expense.
The decrease in the operating income of $2.7 million in 1998 as
compared to $3.7 million in 1997 was due primarily to the reduction in
revenues (as discussed above).
1997 Compared to 1996
During 1997, golf revenues were $15.6 million as compared to $15.2
million in 1996. The $.4 million increase is due primarily to a 2%
increase in the total golf rounds played at the three courses. During
1997, approximately 196,000 rounds of golf were played as compared to
192,000 in 1996.
Golf cost of sales were $9.9 million and $9.7 million in 1997 and
1996, respectively. Golf operating expenses were $2.0 million in 1997 and
1996, and consisted primarily of depreciation expense.
The increase in the operating income of $3.7 million in 1997 as
compared to $3.5 million in 1996 was due primarily to the increase in
revenues (as discussed above).
<PAGE>
INFLATION
Due to the lack of significant fluctuations in the level of inflation
in recent years, inflation generally has not had a material effect on real
estate development.
In the future, high rates of inflation may adversely affect real
estate development generally because of their impact on interest rates.
High interest rates not only increase the cost of borrowed funds to the
Company, but can also have a significant effect on the affordability of
permanent mortgage financing to prospective purchasers. However, high rates
of inflation may permit the Company to increase the prices that it charges
in connection with real property sales, subject to general economic
conditions affecting the real estate industry and local market factors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's future earnings, cash flows and fair values relevant to
financial instruments are dependent upon prevalent market rates. Market
risk is the risk of loss from adverse changes in market prices and interest
rates. The Company manages its market risk by matching projected cash
inflows from operating properties, financing activities, and investing
activities with projected cash outflows to fund debt payments, capital
expenditures and other cash requirements. The Company also utilizes
certain derivative financial instruments to limit market risk. The
Company's primary risk exposure is to interest rate risk. The Company's
derivatives are used for hedging purposes rather than speculation. The
Company does not enter into financial instruments for trading purposes.
The Company's long-term debt arrangements are both fixed and variable
rate. Based upon the Company's indebtedness and interest rates at
December 31, 1998, a 1% increase in market rates would decrease future
earnings and cash flows by approximately $1.4 million. A 1% decrease in
market rates would increase future earnings and cash flows by approximately
$1.4 million.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMFAC/JMB HAWAII, L.L.C.
INDEX
Report of Independent Auditors
Consolidated Balance Sheets, December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Member's Equity (Deficit) for
the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
SCHEDULE
Valuation and Qualifying Accounts . . . . . . . . . II
Schedules not filed:
All schedules other than the one indicated in the index have been
omitted as the required information is inapplicable or the information is
presented in the financial statements or related notes.
AMFAC/JMB FINANCE, INC.
INDEX
Report of Independent Auditors
Balance Sheets, December 31, 1998 and 1997
Notes to the Balance Sheets
Schedules not filed:
All schedules have been omitted as the required information is
inapplicable or the information is presented in the financial statements or
related notes.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Member
AMFAC/JMB HAWAII, L.L.C.
We have audited the accompanying consolidated balance sheets of
Amfac/JMB Hawaii, L.L.C. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, member's equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1998.
Our audits also included the financial statement schedule listed in the
Index at Item 8. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Amfac/JMB Hawaii, L.L.C. at December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
Honolulu, Hawaii
March 8, 1999
<PAGE>
AMFAC/JMB HAWAII, L.L.C.
Consolidated Balance Sheets
December 31, 1998 and 1997
(Dollars in Thousands)
A s s e t s
-----------
1998 1997
-------- --------
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 26,526 9,115
Receivables - net. . . . . . . . . . . . . . . 13,248 6,743
Inventories. . . . . . . . . . . . . . . . . . 29,770 61,469
Prepaid expenses . . . . . . . . . . . . . . . 2,048 2,648
-------- --------
Total current assets . . . . . . . . . . 71,592 79,975
-------- --------
Investments. . . . . . . . . . . . . . . . . . . 40 46,496
-------- --------
Property, plant and equipment:
Land and land improvements . . . . . . . . . . 291,617 262,233
Machinery and equipment. . . . . . . . . . . . 65,641 63,497
Construction in progress . . . . . . . . . . . 737 1,035
-------- --------
357,995 326,765
Less accumulated depreciation
and amortization . . . . . . . . . . . . . . 44,865 38,726
-------- --------
313,130 288,039
Deferred expenses. . . . . . . . . . . . . . . . 10,862 11,872
Other assets . . . . . . . . . . . . . . . . . . 35,456 37,863
-------- --------
$431,080 464,245
======== ========
L i a b i l i t i e s
---------------------
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . $ 6,773 6,289
Accrued expenses . . . . . . . . . . . . . . . 8,111 9,213
Current portion of long-term debt. . . . . . . 7,166 11,243
Current portion of deferred income taxes . . . 81 4,325
Amounts due to affiliates. . . . . . . . . . . 12,310 10,719
-------- --------
Total current liabilities. . . . . . . . 34,441 41,789
-------- --------
Amounts due to affiliates - senior debt
financing. . . . . . . . . . . . . . . . . . . 110,325 125,290
Accumulated postretirement benefit obligation. . 51,314 54,375
Long-term debt (including $66,000 of
indebtedness considered to be in default
as of January 1, 1999) . . . . . . . . . . . . 100,240 94,312
Other long-term liabilities. . . . . . . . . . . 30,908 34,525
Deferred income taxes. . . . . . . . . . . . . . 60,971 84,151
Certificate of Land Appreciation Notes . . . . . 220,692 220,692
-------- --------
Total liabilities. . . . . . . . . . . . 608,891 655,134
-------- --------
Commitments and contingencies (notes 3, 4, 5, 6, 7, 8, 9, and 11)
<PAGE>
AMFAC/JMB HAWAII, L.L.C.
Consolidated Balance Sheets - Continued
M e m b e r ' s E q u i t y ( D e f i c i t )
-------------------------------------------------
1998 1997
-------- --------
Common stock, no par value
Authorized, issued and outstanding
1,000 shares. . . . . . . . . . . . . . . . -- 1
Additional paid-in capital . . . . . . . . . . . -- 14,384
Retained earnings (deficit). . . . . . . . . . . -- (205,274)
Member's equity (deficit). . . . . . . . . . . . (177,811) --
-------- --------
Total member's equity (deficit). . . . . (177,811) (190,889)
-------- --------
$431,080 464,245
======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
AMFAC/JMB HAWAII, L.L.C.
Consolidated Statements of Operations
Years ended December 31, 1998, 1997 and 1996
(Dollars in Thousands)
1998 1997 1996
-------- -------- --------
Revenues:
Agriculture. . . . . . . . . . . . $ 34,551 41,949 51,805
Property . . . . . . . . . . . . . 49,642 28,430 29,947
Golf . . . . . . . . . . . . . . . 14,485 15,618 15,191
-------- -------- --------
98,678 85,997 96,943
-------- -------- --------
Cost of sales:
Agriculture. . . . . . . . . . . . 33,534 40,862 54,640
Property . . . . . . . . . . . . . 57,657 27,580 24,940
Golf . . . . . . . . . . . . . . . 9,911 9,877 9,687
-------- -------- --------
101,102 78,319 89,267
Operating expenses:
Selling, general and
administrative . . . . . . . . . 9,994 11,188 11,160
Depreciation and amortization. . . 6,572 6,210 6,354
Reduction to carrying value of
investments in real estate . . . 16,805 2,279 18,315
-------- -------- --------
Total costs and expenses . . 134,473 97,996 125,096
-------- -------- --------
Operating loss . . . . . . . (35,795) (11,999) (28,153)
-------- -------- --------
Non-operating income (expenses):
Amortization of deferred costs . . (1,238) (1,347) (1,222)
Interest income. . . . . . . . . . 976 386 463
Interest expense . . . . . . . . . (33,437) (29,649) (26,297)
-------- -------- --------
(33,699) (30,610) (27,056)
-------- -------- --------
Loss before taxes. . . . . . . . (69,494) (42,609) (55,209)
Income tax benefit . . . . . . . (27,759) (17,037) (21,043)
-------- -------- --------
Net income (loss). . . . . . $(41,735) (25,572) (34,166)
======== ======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
AMFAC/JMB HAWAII, L.L.C.
Consolidated Statements of Member's Equity (Deficit)
Years ended December 31, 1998, 1997 and 1996
(Dollars in Thousands)
Total
Stock- Total
Retained holder's Member's
Common Paid-In Earnings Equity Equity
Stock Capital (Deficit) (Deficit) (Deficit)
------ ------- --------- --------- ---------
Balance,
December 31,
1995. . . . . . $ 1 14,384 (128,573) (114,188) --
Net loss . . . . -- -- (34,166) (34,166) --
Capital distri-
bution - current
income taxes
(note 12) . . . -- -- (5,217) (5,217) --
-------- -------- -------- -------- ---------
Balance,
December 31,
1996. . . . . . 1 14,384 (167,956) (153,571) --
Net loss . . . . -- -- (25,572) (25,572) --
Capital distri-
bution - current
income taxes
(note 12) . . . -- -- (11,746) (11,746) --
-------- -------- -------- -------- ---------
Balance,
December 31,
1997. . . . . . 1 14,384 (205,274) (190,889) --
Conversion to
limited
liability
Company . . . . (1) (14,384) 205,274 190,889 (190,889)
Net loss . . . . -- -- -- -- (41,735)
Capital distri-
bution - current
income taxes
(note 12) . . . -- -- -- -- (335)
Contribution of
certain senior
debt financing. -- -- -- -- 55,148
-------- -------- -------- -------- ---------
Balance,
December 31,
1998. . . . . . $ -- -- -- -- (177,811)
======== ======== ======== ======== =========
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
AMFAC/JMB HAWAII, L.L.C.
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
(Dollars in Thousands)
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net income (loss). . . . . . . . . $(41,735) (25,572) (34,166)
Items not requiring (providing) cash:
Depreciation and amortization. . 6,572 6,210 6,354
Amortization of deferred costs . 1,238 1,347 1,222
Equity in earnings of
investments. . . . . . . . . . 81 111 (14)
Income tax benefit . . . . . . . (27,759) (17,037) (21,043)
Reduction to carrying value of
investments in real estate. . . 16,805 2,279 18,315
Deferred interest. . . . . . . . 794 1,039 1,441
Interest on advances from
affiliates . . . . . . . . . . 15,355 5,083 --
Other long-term liabilities. . . (3,288) -- --
Changes in:
Receivables - net. . . . . . . . (6,505) (2,002) 3,979
Inventories. . . . . . . . . . . 46,879 19,201 22,052
Prepaid expenses . . . . . . . . 600 791 (337)
Accounts payable . . . . . . . . 484 570 (2,843)
Accrued expenses . . . . . . . . (1,102) (61) (3,994)
Amounts due to affiliates. . . . 1,591 1,814 (13,957)
Other long-term liabilities. . . (3,386) (4,125) (4,489)
-------- -------- --------
Net cash provided by
(used in) operating
activities . . . . . . . . 6,624 (10,352) (27,480)
-------- -------- --------
Cash flows from investing activities:
Property additions . . . . . . . . (17,596) (2,766) (4,257)
Property sales, disposals and
retirements - net. . . . . . . . 514 160 63
Investments in joint ventures
and partnerships . . . . . . . . -- (420) (1,093)
Other assets . . . . . . . . . . . 2,031 (4,928) (4,467)
Other long-term liabilities. . . . (798) (1,063) (53)
-------- -------- --------
Net cash used in
investing activities . . . (15,849) (9,017) (9,807)
-------- -------- --------
Cash flows from financing activities:
Deferred expenses. . . . . . . . . (43) (244) 28
Net amounts due to affiliates. . . . 24,828 16,628 26,668
Net (repayments) proceeds of
long-term debt . . . . . . . . . . 1,851 3,364 7,582
-------- -------- --------
Net cash provided by
financing activities . . . 26,636 19,748 34,278
-------- -------- --------
<PAGE>
AMFAC/JMB HAWAII, L.L.C.
Consolidated Statements of Cash Flows - Continued
1998 1997 1996
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents . . . . . . . . 17,411 379 (3,009)
Cash and cash equivalents,
beginning of year. . . . . . . . 9,115 8,736 11,745
-------- -------- --------
Cash and cash equivalents,
end of year. . . . . . . . . . . $ 26,526 9,115 8,736
======== ======== ========
Supplemental disclosure of cash
flow information:
Cash paid for interest (net
of amount capitalized). . . . . . $ 17,436 24,816 31,111
======== ======== ========
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 . $ 15,180 23,862 29,219
======== ======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
AMFAC/JMB HAWAII, L.L.C.
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF ACCOUNTING
Amfac/JMB Hawaii, L.L.C. (the "Company") is a Hawaii limited liability
company. The Company is wholly-owned by Northbrook Corporation
("Northbrook"). The primary business activities of the Company are land
development and sales, golf course management and agriculture. The Company
owns approximately 34,000 acres of land located on the islands of Oahu,
Maui, Kauai and Hawaii in the State of Hawaii. All of this land is held by
the Company's wholly-owned subsidiaries. In addition to its owned lands,
the Company leases approximately 49,000 acres of land used primarily in
conjunction with its agricultural operations. The Company's operations are
subject to significant government regulation.
The Company is the successor to Amfac/JMB Hawaii, Inc. ("A/J Hawaii").
On March 3, 1998, A/J Hawaii was merged (the "Merger") with and into the
Company pursuant to an Agreement and Plan of Merger dated February 27, 1998
(the "Merger Agreement") by and between A/J Hawaii and the Company (which
was then named Amfac/JMB Mergerco, L.L.C.). The Merger was consummated to
change the Company's form of entity from a corporation to a limited
liability company. The Company was a nominally capitalized limited
liability company which was formed on December 24, 1997, solely for the
purpose of effecting the Merger. The Company succeeded to all the assets
and liabilities of A/J Hawaii in accordance with the Hawaii Business
Corporation Act and the Hawaii Uniform Limited Liability Company Act. In
addition, A/J Hawaii, the Company, The First National Bank of Chicago (the
"Trustee") and various guarantors entered into a Second Supplemental
Indenture dated as of March 1, 1998, pursuant to which the Company
expressly assumed all obligations of A/J Hawaii under the Indenture dated
as of March 14, 1989, as amended (the "Indenture") by and among A/J Hawaii,
the Trustee and the guarantors named therein and the holders of
Certificates of Land Appreciation Notes due 2008 Class A (the "Class A
COLAs") and the Certificates of Land Appreciation Notes Class B (the "Class
B COLAs" and, collectively, with the Class A COLAs the "COLAs"). The Merger
did not require the consent of the holders of the COLAs under the terms of
the Indenture. The Company has succeeded to A/J Hawaii's reporting
obligations under the Securities Exchange Act of 1934, as amended. Unless
otherwise indicated, references to the Company prior to March 3, 1998 shall
mean A/J Hawaii and A/J Hawaii's subsidiaries.
The Company will continue until at least December 31, 2027, unless
earlier dissolved. Except as noted in Notes 2 and 3 to Notes to the
Balance Sheets of Amfac/JMB Finance, Inc., the Company's sole member
(Northbrook) is not obligated for any debt, obligation or liability of the
Company.
The Company has three 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. The golf segment ("Golf") is
responsible for the management and operation of the Company's golf course
facilities.
PRINCIPLES OF CONSOLIDATION
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.
<PAGE>
STATEMENT OF CASH FLOWS
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 $24,188 and
$5,400 at December 31, 1998 and 1997, respectively) as cash equivalents
which approximates market. These amounts include $1,923 and $2,067 at
December 31, 1998 and 1997, respectively, which were restricted primarily
to fund debt service on long-term debt related to the acquisition of power
generation equipment (see note 6).
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("SFAS No. 107"),
"Disclosures about Fair Value of Financial Instruments", requires entities
to disclose the SFAS No. 107 value of certain on-and off-balance sheet
financial instruments for which it is practicable to estimate. Value is
defined in SFAS No. 107 as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. The Company believes the carrying amounts of
its financial instruments classified as current assets and liabilities in
its balance sheet approximate SFAS No. 107 value due to the relatively
short maturity of these instruments. Except for the loan secured by the
Kaanapali Golf Courses, the Company believes the carrying value of its
long-term debt (notes 4 and 6) approximates fair value. The debt secured
by the Kaanapali Golf Courses has been declared in default by the lender as
of January 1, 1999 (see note 6), and as a consequence, the Company
considers the disclosure of the SFAS 107 value of such debt to be
impracticable. SFAS No. 107 states that quoted market prices are the best
evidence of the SFAS No. 107 value of financial instruments, even for
instruments traded only in thin markets. On March 15, 1995, pursuant to the
indenture that governs the terms of the COLAs (the "Indenture"), the
Company elected to exercise its right to redeem, and therefore was
obligated to purchase, any and all Class A COLAs submitted pursuant to the
Redemption Offer at a price of $.365 per Class A COLA (see note 5). In
conjunction with the Company's election to repurchase the Class A COLAs
submitted for repurchase, 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. The Redemption Offer and
the Tender Offer expired on June 1, 1995. Since such expiration, the
secondary market for COLAs has been extremely limited. Since June 1, 1995,
a limited number of COLA units have been sold in transactions arranged by
brokers for amounts ranging from approximately $.250 to $.348 per Class B
COLA and from approximately $.301 to $.565 per combined Class A and Class B
COLA. Based on the range of transactions since June 1, 1995 and the number
of COLAs outstanding (with a per unit carrying value of $1.0 and a total
carrying value of $220,692 at December 31, 1998 in the accompanying
consolidated financial statements), the implied SFAS No. 107 value of the
COLAs would range from approximately $79,000 to $133,000. However, due to
restrictions on prepayment and redemption as specified in the COLA
Indenture, as well as the methodology used to determine such value, the
Company does not believe that it would be able to refinance or repurchase
all of its outstanding COLA units as of December 31, 1998 at this value.
Reference is made to note 5 for results of the Redemption and Tender Offer.
In January 1998 and October 1998, an affiliate of the Company extended two
separate Tender Offers to purchase up to approximately $65,421 principal of
Separately Certificated Class B COLAs and $22,500 principal amount of
jointly Certificated COLAs Class A and Class B, respectively (see Note 5).
<PAGE>
INVENTORY CAPITALIZATION AND RECOGNITION OF REVENUE FROM THE SALE OF SUGAR
The Company capitalizes all of the expenditures incurred in bringing
crops to their existing condition and location. Such capitalized
expenditures include those costs related to the planting, cultivation and
growing of sugar cane grown on the agricultural properties of the Company.
Inventory reflected in the accompanying consolidated balance sheets at
December 31, 1998 and 1997, which includes $11,300 and $10,800,
respectively, related to agricultural operations, is not in excess of its
estimated net realizable value. Reductions in the estimated net realizable
value of unsold sugar are recognized when anticipated. In determining the
net realizable value of unsold sugar, the price the Company uses is based
upon the domestic price of sugar. The Company recognizes revenue and
related cost of sales upon delivery of its raw sugar to the California and
Hawaii Sugar Company ("C&H").
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, sets a
target price range for raw sugar. The target raw sugar price established by
the government, is supported primarily by the setting of quotas to restrict
the importation of raw sugar to the U.S. 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.
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. The
sugar futures contracts obligate the Company to make or receive a payment
equal to the net change in value of the contracts at its maturity. The
sugar option contracts permit, but do not require, the Company to purchase
specified numbers of futures contracts at specified prices until the
expiration dates of the contracts. The sugar futures and options contracts
are designated as hedges of the Company's firm sales commitments, are
short-term in nature to correspond to the commitment period, and are
effective in hedging the Company's exposure to changes in sugar prices
during that cycle.
These contracts are marked to market with unrealized gains and losses
deferred and recognized in earnings when realized as an adjustment to cost
of sales as part of the production cost (the deferral accounting method).
The related amounts due to or from the exchange are included in inventory.
Unrealized changes in fair value of contracts no longer effective as hedges
are recognized in income from the date the contracts become ineffective
until their expiration.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities. The Company expects to
adopt the Statement effective January 1, 2000. The Statement will require
the Company to recognize all derivatives on the balance sheet at fair
value. The Company does not anticipate that the adoption of this Statement
will have a significant effect on results of operations or financial
position.
INVESTMENTS
Investments in certain partnerships and joint ventures, if any, over
which the Company exercises significant influence are accounted for by the
equity method. To the extent the Company engages in such activities as
general partner, the Company is contingently liable for the obligations of
its partnership and joint venture investments.
<PAGE>
LAND DEVELOPMENT
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. In addition, interest is capitalized to qualifying assets 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 approximately $766, $1,272 and $1,327 have been
capitalized for the years ended 1998, 1997, and 1996, respectively.
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.
LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standard Board issued
Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"),
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, which requires impairment losses to be recorded
on long-lived assets used in operation when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS No. 121 also
addresses the accounting for long-lived assets that are expected to be
disposed of.
In accordance with the provisions of the COLA Indenture, appraisals
were performed for certain assets of the Company as of December 31, 1998,
which reflected a decline in value for certain properties. Certain of the
assets appraised as of December 31, 1998 are properties that are either
being actively marketed by the Company or properties for which the Company
intends to sell in the near future. Four of the land parcels expected to
be disposed of by the Company within the next two years, having a cost
basis of approximately $20,193, were estimated by the Company to have a
total fair market value (less costs to sell) of approximately $13,188 as of
December 31, 1998. Accordingly, the Company recorded a $7,005 loss in the
fourth quarter of 1998 related to these properties. Additionally, the
Company reduced its carrying value of one of its land parcels in the fourth
quarter of 1998 by $9,800 to properly reflect the estimated market value of
this land parcel.
In accordance with the provisions of the COLA Indenture, appraisals
were performed for certain assets of the Company as of December 31, 1996,
which reflected a decline in value for certain properties. Certain of the
assets appraised as of December 31, 1996 were properties that were either
being actively marketed by the Company or properties for which the Company
had plans to sell soon after December 31, 1996. Five of the land parcels
then expected to be disposed of by the Company within two years after
December 31, 1996 having a cost basis of approximately $40,280, were
estimated by the Company to have a total fair market value, less costs to
sell, of approximately $21,965 as of December 31, 1996. Accordingly, the
Company recorded a $18,315 loss in the fourth quarter of 1996 related to
these properties and the Company reduced its carrying value of one of its
land parcels in the fourth quarter of 1997 by $2,279 to properly reflect
the estimated market value of this land parcel.
EFFECTIVE INTEREST
For financial reporting purposes, the Company uses the effective
interest rate method and accrued interest on the COLAs at 4% per annum
("Mandatory Base Interest") for the years ended December 31, 1998, 1997 and
1996.
<PAGE>
INTEREST RATE SWAPS AND CAPS
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.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is
based on the straight-line method over the estimated economic lives of
20-40 years for land improvements and 3-18 years for machinery and
equipment, or the lease term, whichever is less. Maintenance and repairs
are charged to operations as incurred. Renewals and significant betterments
and improvements are capitalized and depreciated over their estimated
useful lives.
DEFERRED EXPENSES
Deferred expenses consist primarily of financing costs related to the
COLAs. Such costs are being amortized over the term of the COLAs on a
straight-line basis.
RECOGNITION OF PROFIT FROM REAL PROPERTY SALES
For real property sales, profit is recognized in full when the
collectibility of the sales price is reasonably assured and the earnings
process is virtually complete. When the sale does not meet the requirements
for full profit recognition, a portion of the profit is deferred until such
requirements are met.
INCOME TAXES
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 in which Northbrook 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 to additional paid-in capital or distributions to
retained earnings (deficit)/member's equity (deficit) in the accompanying
consolidated financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the December 31, 1996 and 1997 financial statements
have been reclassified to conform to the December 31, 1998 presentation.
<PAGE>
(2) ASSETS AND LIABILITIES INFORMATION
1998 1997
-------- --------
Receivables - net:
Trade accounts and notes
(net of allowance) . . . . . . . . . . . . $ 1,458 1,529
Sugar and molasses . . . . . . . . . . . . . 2,780 4,055
Other. . . . . . . . . . . . . . . . . . . . 9,010 1,159
-------- --------
$ 13,248 6,743
======== ========
Accrued expenses:
Payroll and benefits . . . . . . . . . . . . $ 2,118 2,537
Interest . . . . . . . . . . . . . . . . . . 4,306 4,454
Other. . . . . . . . . . . . . . . . . . . . 1,687 2,222
-------- --------
$ 8,111 9,213
======== ========
(3) INVESTMENTS
The Company's investments at December 31, 1998 and 1997 consist of the
following:
Ownership Carrying
Percentage Value
----------------- -----------------
Description 1998 1997 1998 1997
- ----------- -------- -------- -------- ------
Sugar Cooperatives . . . . . . . 26% 26.0% $ 40 41
North Beach Joint Venture. . . . 100% 50.0% -- 46,455
------- ------
$ 40 46,496
======= ======
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 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. The Company holds a 26%
equity interest in HSTC. 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.
The North Beach joint venture was formed during 1986 to plan, manage
and develop approximately 96 acres of beachfront property located at the
Kaanapali Beach Resort on West Maui. The Company has completed the
purchase of Tobishima Pacific, Inc.'s ("TPI") 50% ownership interest in the
96-acre beachfront parcel commonly referred to as Kaanapali North Beach.
The Company and TPI were unable to agree on key operating decisions related
to the development of the Kaanapali Ocean Resort and the future development
plan for the entire North Beach property. To break the deadlock on these
issues, the Company exercised a buy/sell option with a $12,000 purchase
price and TPI elected to sell its interest. The Company financed 80% of
the purchase price for TPI's interest in North Beach and signed a note and
first mortgage in favor of TPI for $9,600. The note is payable in five
equal, annual principal installments beginning in September 1999 and with
interest at 8.5% per annum payable quarterly. In January 1999, the Company
paid TPI approximately $2,200 on its note to release Lot #1 for the
Kaanapali Ocean Resort and the new 10-acre public recreation area at North
Beach.
<PAGE>
The Company's investment in the North Beach joint venture is 100% and
accordingly is consolidated in the Company's financial statements. The
following is the condensed, combined financial statement information
(unaudited) of HSTC and the North Beach joint venture:
1998 1997
------- -------------------
North
Beach
Joint
HSTC Venture HSTC
------- ------- -------
Current assets . . . . . . . . . . . $15,215 319 20,289
Noncurrent assets. . . . . . . . . . 4 40,100 16
Current liabilities. . . . . . . . . (15,110) (274) (20,196)
Noncurrent liabilities . . . . . . . -- -- --
------- ------- -------
Equity . . . . . . . . . . . . . . . $ 109 40,145 109
======= ======= =======
1998 1997 1996
------- ------- -------
Revenue . . . . . . . . . . . . $147,156 135,929 203,342
Cost and expenses . . . . . . . 13,464 16,169 19,618
-------- ------- -------
Net income. . . . . . . . . . . $133,692 119,760 183,724
======== ======= =======
(4) AMOUNTS DUE AFFILIATES - SENIOR DEBT 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 (7.75% at December 31,
1998), plus one percent. In addition to the $52,000 borrowed from
Northbrook in 1995 to redeem Class A COLAs pursuant to the Redemption Offer
(see Note 5), the Company had also borrowed approximately $18,746 and
$9,814 during 1996 and 1995, respectively, to fund COLA Mandatory Base
Interest payments, Royal Kaanapali Golf Course debt interest payments and
other operational needs. These loans from Northbrook 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. Pursuant to the
Indenture relating to the COLAs, the amounts borrowed from Northbrook are
"Senior Indebtedness" to the COLAs.
In February 1997, the above-noted affiliate loans, along with certain
other amounts due Northbrook, were converted into a new $104,759 ten year
note payable. In 1998, the $104,759 note was cancelled pursuant to a split
Note Agreement and bifurcated into two nine-year notes: (i) a $99,595 note
payable to an affiliate of Northbrook and (ii) a $15,000 note payable (with
an initial balance of $7,920) to Northbrook. The bifurcated notes are
payable interest only and accrue interest at the prime rate plus 2%. The
Company borrowed an additional $16,628 during 1997 and $24,828 during 1998
to fund COLA Mandatory Base Interest payments and other operational needs
from a subsidiary of Northbrook under a separate note which is payable
interest only and accrues at the prime rate plus 2%.
As of December 31, 1998, the Company agreed to exercise its option to
redeem Class B COLAs that are "put" to AJF for repurchase (as described
above under Item 1 - "Business"), in partial consideration for (a) the
agreement by the Company's affiliate, Fred Harvey Transportation Company
("Fred Harvey"), to defer until December 31, 2001 all interest accruing
from January 1, 1998 through December 31, 2001 and relating to the
approximately $100,000 of senior indebtedness of the Company currently
owing to Fred Harvey (as described above); and (b) Northbrook agreeing to
<PAGE>
cause approximately $55,100 of the Company's indebtedness that was senior
to the COLAs to be contributed to the capital of the Company. In
connection with the foregoing deferral of interest and contribution of
capital, the Company agrees to allow the senior debt held by Northbrook and
its affiliates to be secured by assets of the Company. As a result of the
contribution, in the Company's December 31, 1998 balance sheet, the
"Amounts due to affiliates - senior debt financing" were decreased, and the
Company's "Member's equity (deficit)" was increased, by approximately
$55,100. The deferral of interest together with this contribution to
capital were made as part of the Company's effort to alleviate significant
liquidity constraints and continue to meet the Value Maintenance Ratio
requirement under the Indenture. At current interest rates, and assuming
no further advances of senior indebtedness, approximately $45,000 of such
deferred interest relating to currently existing senior indebtedness will
become due and payable on December 31, 2001. At such time, there can be no
assurance that the Company will either (i) have unrestricted cash available
for meeting such obligation or (ii) have the ability to refinance such
$45,000 obligation. Failure to meet such obligation, if called, would
cause all senior indebtedness owing to Fred Harvey or its affiliates to be
immediately due and payable. A default on senior indebtedness of such
magnitude could constitute an event of default under the Indenture. To the
extent that Northbrook or any of its affiliates make additional advances of
senior indebtedness to the Company during 1999, Northbrook or its
affiliates intend to defer any interest accruing on such additional
indebtedness until December 31, 2001. Therefore, interest in excess of
$45,000 may be due and payable on December 31, 2001 and any such excess may
be substantial.
The total amount due Northbrook and its subsidiary as of December 31,
1998 was $110,325, which includes deferred interest to affiliates on senior
debt of $13,896, ($10,731 of which has been deferred until December 31,
2001, as described above). Pursuant to the Indenture, the amounts borrowed
from Northbrook or its affiliates are "Senior Indebtedness" to the COLAs.
(5) 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 due 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 incur or
pay Contingent Base Interest on the COLAs from 1990 through 1998.
Approximately $113,028 of the $120,652 cumulative deferred Contingent Base
Interest (i.e. not due and payable in the absence of events which have not
occurred) related to the period from August 31, 1989 (Final Issuance Date)
through December 31, 1998 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 and deferred Contingent Base Interest. The following
table is a summary of Mandatory Base Interest and Contingent Base Interest
for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996
-------- ------ ------
Mandatory Base Interest paid . . . . $ 8,828 8,828 8,828
Contingent Base Interest
due and paid. . . . . . . . . . . . -- -- --
Cumulative deferred Contingent
Base Interest at end of year. . . . $120,652 107,411 94,169
<PAGE>
Net Cash Flow was $0 for 1998, 1997 and 1996.
In each calendar year, principal reductions may be made from remaining
Net Cash Flow, if any, in excess of all current and unpaid deferred
Contingent Base Interest and will be made at the election of the Company
(subject to certain restrictions). The COLAs will bear additional
contingent interest in any year, after any principal reduction, equal to
55% of remaining Net Cash Flow. Upon maturity, holders of COLAs will be
entitled to receive the remaining outstanding principal balance of the
COLAs plus Unpaid Mandatory Base Interest plus additional interest equal to
certain levels of the unpaid Contingent Base Interest, to the extent of the
Maturity Market Value (Maturity Market Value generally means 90% of the
excess of the Fair Market Value (as defined) of the Company's assets at
maturity over its liabilities (including Qualified Allowance, but only
to the extent earned and payable from Net Cash Flow generated through
maturity) at maturity, which liabilities have been incurred in connection
with its operations), plus 55% of the remaining Maturity Market Value.
On March 14, 1989, Amfac/JMB Finance ("AJF"), a wholly-owned
subsidiary of Northbrook, and the Company entered into an agreement (the
"Repurchase Agreement") concerning AJF's obligations to repurchase, on
June 1, 1995 and 1999, the COLAs upon request of the holders thereof. The
COLAs were issued in two units consisting of one Class A and one Class B
COLA. As specified in the Repurchase Agreement, the repurchase of the Class
A COLAs may have been requested by the holders of such COLAs on June 1,
1995 at a price equal to the original principal amount of such COLAs ($.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 $.135.
The repurchase of the Class B COLAs may be requested of AJF by the holders
of such COLAs on June 1, 1999 at a price equal to 125% of the original
principal amount of such COLAs ($.5) minus all payments of principal and as
of December 31, 1998, the cumulative interest paid per Class A and Class B
COLA was approximately $205 and $205, respectively.
On March 14, 1989, Northbrook entered into a Keep-Well Agreement with
AJF, whereby it agreed to contribute sufficient capital or make loans to
AJF to enable AJF to meet its COLA repurchase obligations described above.
Notwithstanding AJF's repurchase obligations, the Company may elect, and
intends to so elect, to redeem any COLAs requested to be repurchased at the
specified price.
AF Investors currently holds 89,330 Class B COLAs (with a put value of
$36,625) as described below. AF Investors will cause some, but not all, of
such Class B COLAs to be "put" pursuant to the Repurchase Agreement. AF
Investors has agreed to take back senior debt of the Company for the
portion so put to the extent that the Company does not have sufficient cash
available to meet the put obligation and currently intends to retain at
least $10,000 to $15,000 of its Class B COLAs. AF Investor's Class B COLAs
were contributed by Amfac Finance Limited Partnership ("Amfac Finance"), an
Illinois limited partnership and an affiliate of the Company, to AF
Investors in December 1998. Notwithstanding AJF's obligation under the
Repurchase Agreement, the Company's obligation to cause AJF to perform
under the Repurchase Agreement, Northbrook's obligation under the Keep-Well
Agreement, and the election that the Company intends to make to redeem
Class B COLAs put to AJF (thereby reducing or potentially eliminating AJF's
obligation, and as a consequence, Northbrook's), AJF, Northbrook and the
Company in the aggregate do not currently have, and are not expected to
have by June 1, 1999, sufficient available resources to meet the maximum
potential obligation of approximately $80,681 should all Class B COLAs
<PAGE>
(excluding the Class B COLAs held by AF Investors) be put pursuant to the
Repurchase Agreement (approximately $117,306 including the Class B COLAs
held by AF Investors). Failure to meet these obligations could lead to a
claim against the Company, AJF and, in turn, Northbrook. The number, if
any, of Class B COLA holders (other than AF Investors) who will elect to
have their Class B COLAs redeemed is not currently determinable and,
accordingly, the amount of resources necessary to enable the Company to
redeem such Class B COLAs is not determinable. Based upon prior
experience, the Company does not anticipate that all of the Class B COLAs
will be "put" pursuant to the Repurchase Agreement and does anticipate
having sufficient resources to redeem the Class B COLAs actually put to the
Company. However, there can be no assurance that the Company and its
affiliates will have sufficient resources to redeem the Class B COLAs
actually put to the Company.
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, thereby
eliminating AJF'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 December 31, 1998, the
Company had approximately 156,000 Class A COLA units and approximately
286,000 Class B COLA units outstanding, with a principal balance of
approximately $78,000 and $143,000, respectively.
As a result of repurchases, the Company retired approximately $164,045
in face value of COLA debt and recognized a financial statement
extraordinary gain 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).
On January 30, 1998, Amfac Finance extended a Tender Offer to Purchase
(the "Class B Tender Offer") up to approximately $65,421 Principal amount
of Separately Certificated Class B COLAs ("Separate Class B COLAs") for
cash at a unit price of $.375 to be paid by Amfac Finance on each Separate
Class B COLA on or about March 24, 1998. The maximum cash to be paid under
the Class B Tender Offer was approximately $49,066 (130,842 Separate Class
B COLAs at a unit price of $.375 for each separate Class B COLA).
Approximately 62,857 Separate Class B COLAs were submitted to Amfac Finance
for repurchase pursuant to the Tender Offer, requiring an aggregate payment
by Amfac Finance of approximately $23,571 on March 31, 1998. In addition,
on October 23, 1998, Amfac Finance extended a Tender Offer to Purchase (the
"Class A/B Tender Offer") up to approximately $22,500 principal amount of
Jointly Certificated Class A and B COLAs (together "COLA Units") for cash
at a unit price of $.460 to be paid by Amfac Finance on each COLA Unit on
or about December 23, 1998. The maximum cash to be paid under the Tender
Offer was approximately $12,236 (26,600 COLA Units at a unit price of $.460
for each COLA Unit). Approximately 26,473 COLA Units were submitted to
Amfac Finance for repurchase pursuant to the Tender Offer requiring an
aggregate payment by Amfac Finance of approximately $12,178 on December 23,
<PAGE>
1998. Neither the Class B nor the Class A/B Tender Offer reduced the
outstanding indebtedness of the Company. In December 1998, Amfac Finance
contributed its COLA Units to AF Investors. The COLA Units held by AF
Investors remain outstanding pursuant to the terms of the Indenture.
Except as provided in the last sentence of this paragraph, AF Investors is
entitled to the same rights and benefits of any other holder of COLA Units,
including having the right to have AJF repurchase on June 1, 1999, the
separate Class B COLAs that it owns. AF Investors currently intends to
require some, but not all of the Class B COLAs which it will own on such
date to be repurchased pursuant to the Repurchase Agreement. AF Investors
has agreed to take back senior debt of the Company for the portion so put
to the extent that the Company does not have sufficient cash available to
meet the put obligation. Because AF Investors is an affiliate of the
Company, AF Investors will not be able to participate in determining
whether the holders of the required principal amount of debt under the
Indenture have concurred in any direction, waiver or consent under the
terms of the Indenture.
As a result of the Class B and Class A/B Tender Offers, the Company
recognized approximately $7,857 and $14,295, respectively, of taxable gain
in accordance with income tax regulations for certain transactions with
affiliates. Such gain is treated as cancellation of indebtedness income
for income tax purposes only and, accordingly, the income taxes related to
the Class B Tender Offer (approximately $3,064) and Class A/B Tender Offer
(approximately $5,575) were, or will be, indemnified by Northbrook through
the tax agreement between Northbrook and the Company (See Note 1 above).
The terms of the Indenture place certain restrictions on the Company's
declaration and payment of dividends. Such restrictions generally relate to
the source, timing and amounts which 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.
(6) LONG-TERM DEBT
In June 1991, the Company obtained a five-year $66,000 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 "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
June 30, 1993 and nine percent per annum thereafter.
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% through June 30, 1997, to 40%
for the period from July 1, 1997 to June 30, 1999 and to 50% thereafter.
The loan amendment effectively adjusted the interest rate as of January 1,
1995 to 9.5% until June 30, 1996. After June 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 June 30, 1996, 7.5% from July 1, 1996 to June 30, 1997,
7.75% from July 1, 1997 to June 30, 1998 and 8.5% thereafter ("Minimum
Interest"). The Company made payments in 1998 and 1997 totaling $5,240 and
$4,989, respectively, which represents the Minimum Interest due through
September 30, 1998. Accrued Minimum Interest as of December 31, 1998 was
$1,414. The scheduled minimum 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 annual interest payments were in excess of the cash flow
<PAGE>
generated by the Kaanapali Golf Courses. The total accrued interest
payable from excess cash flow was approximately $4,983 as of December 31,
1998. 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. Due to depressed golf course
revenues, the Company did not pay to the ERS the Minimum Interest payment
due on January 1, 1999. As expected, the Company received a default notice
from the ERS and is currently pursuing renegotiation of the loan terms.
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 $3,260 as of December 31, 1998 and bears interest at
a rate equal to prime rate (7.75% at December 31, 1998) 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, has
limited recourse to the Company and certain other subsidiaries and is
"Senior Indebtedness" as defined in the Indenture relating to the COLAs.
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 (5.172% at December 31,
1998) 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 has been increased to $25,000, the
maturity date has been extended to February 2007, the interest rate has
been changed to LIBOR plus 2% until the fifth anniversary and LIBOR plus
2.5% thereafter and principal is to be repaid based on a 30-year
amortization schedule. The loan is secured by WGCI's assets (the golf
course and related improvements and equipment), is guaranteed by the
Company, and is "Senior Indebtedness" (as defined in the Indenture relating
to the COLAs). As of December 31, 1998, the outstanding balance was
$24,546, with scheduled annual principal maturities of $246 in 1999 through
2006 and the balance of $22,578 in 2007.
In December 1996, Amfac Property Development Corp. ("APDC"), a wholly-
owned subsidiary of the Company, obtained a $10,000 loan facility from City
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 "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, 1998) plus .5% and originally was scheduled to mature on
December 1, 1998. In November 1998, APDC sold certain mill-site property
which served as collateral for the $10,000 City Bank loan for an
approximate sales price of $7,690 in cash plus 2% of the gross sales price
of subsequent parcel sales of all or any portion of the property by the
purchaser. The bank required $6,000 of the sales proceeds as a principal
reduction on the loan in order to release the collateral. APDC received a
one-year extension on the $4,000 remaining balance of the loan which is
secured by another parcel at the mill-site. The extended loan bears
interest at the bank's base rate (7.75% at December 31, 1998) plus 1.25%
and matures on December 1, 1999.
<PAGE>
In September 1998, Amfac Property Investment Corporation. ("APIC"), a
wholly-owned subsidiary of the Company, purchased TPI's 50% ownership
interest in the 96-acre beachfront parcel (commonly referred to as
Kaanapali North Beach) for $12,000. APIC paid $2,400 in cash and signed a
note for $9,600. The note is secured by a mortgage on the property in
favor of TPI and is "Senior Indebtedness" (as defined in the Indenture
relating to the COLAs). The note is payable in five annual installments in
the principal amount of $1,920 beginning in September 1999. The note bears
interest of 8.5% and is payable quarterly. In January 1999, the Company
paid TPI approximately $2,200 on its note to release Lot #1 for the
Kaanapali Ocean Resort and the new 10-acre public recreation area at North
Beach.
(7) RENTAL ARRANGEMENTS
As Lessee
The Company rents, as lessee, various land, facilities and equipment
under operating leases. Most land leases provide for renewal options and
minimum rentals plus contingent payments based on revenues or profits.
Included in rent expense are minimum rentals and contingent payments for
operating leases in the following amounts:
1998 1997 1996
------- ------- -------
Minimum and fixed rents. . . . . $ 2,236 2,280 2,357
Contingent payments. . . . . . . 1,219 1,340 1,181
Property taxes, insurance
and other charges. . . . . . . 857 1,008 1,241
------- ------ ------
$ 4,312 4,628 4,779
======= ====== ======
Future minimum lease payments under noncancelable operating leases
aggregate approximately $9,190 and are due as follows: 1999, $1,577; 2000,
$1,586; 2001, $1,437; 2002, $1,311, 2003, $1,178 and thereafter $2,101.
There can be no assurance that any of the Company's leases will be renewed.
(8) EMPLOYEE BENEFIT PLANS
The Company participates in benefit plans covering substantially all
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.
Northbrook's policy is to fund pension costs in accordance with the
minimum funding requirements under provisions of the Employee Retirement
Income Security Act ("ERISA"). Under ERISA guidelines, amounts funded may
be more or less than the pension expense recognized for financial reporting
purposes. One of the Company's defined benefit plans, the Retirement Plan
for the Employees of Amfac, Inc. (the "Plan"), terminated effective
December 31, 1994. The settlement of the plan occurred in May 1995. The
Company replaced this plan with the "Core Retirement Award Program", a
defined contribution plan that commenced on January 1, 1995. In the new
plan, an Eligible Employee (as defined) is credited with an annual
contribution equal to 3% of the employee's qualified compensation. The new
plan's cost to the Company and the benefits provided to the participants
are comparable to the former plan.
Charges for pension and Core Retirement Award costs allocated to the
Company aggregated approximately $545, $545 and $628 for the years ended
December 31, 1998, 1997 and 1996, respectively.
<PAGE>
In addition to providing pension benefits, the Company also provides
certain healthcare and life insurance benefits to eligible retired
employees of some of its businesses. Where such benefits are offered,
substantially all employees may become eligible for such benefits if they
reach a specified retirement age while employed by the Company and if they
meet a certain length of service criteria. The postretirement healthcare
plan is contributory and contains cost-sharing features such as deductibles
and copayments. However, these features, as they apply to bargaining unit
retirees, are subject to collective bargaining provisions of a labor
contract between the Company and the International Longshoremen's &
Warehousemen's Union. The postretirement life insurance plan is
non-contributory. The Company continues to fund benefit costs for both
plans on a pay-as-you-go basis.
For measuring the expected postretirement benefit obligation, an 11%
annual rate of increase in the per capita claims cost was assumed for 1997
through 2003. This rate was assumed to decrease to 6% in 2003 and remain at
that level thereafter. The healthcare cost trend rate assumption has a
significant effect on the amount of the obligation and periodic cost
reported. An increase and (decrease) in the assumed healthcare trend rate
by 1% in 1998 would increase and (decrease) the medical plans' accumulated
postretirement benefit obligation as of December 31, 1998 by $900 and
($801), respectively, and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for the year then
ended by $100 and ($90), respectively.
Net periodic postretirement benefit cost (credit) for 1998, 1997 and
1996 includes the following components:
1998 1997 1996
Total Total Total
------- ------ ------
Service cost . . . . . . . . . . . . . $ 287 303 417
Interest cost. . . . . . . . . . . . . 1,817 1,867 1,970
Amortization of net (gain) loss. . . . (2,907) (3,160) (3,366)
------- ------ ------
Net periodic postretirement
benefit cost (credit) . . . . . . . . $ (803) (990) (979)
======= ====== ======
The following table sets forth the plans' change in benefit obligation
and benefit cost as of December 31, 1998 and 1997 as follows:
December 31, December 31,
1998 1997
------------ ------------
Benefit obligation at beginning of year. . $ 25,384 26,101
Service cost . . . . . . . . . . . . . . . 286 302
Interest cost. . . . . . . . . . . . . . . 1,818 1,867
Actuarial gains. . . . . . . . . . . . . . (864) (589)
Employer contribution. . . . . . . . . . . (2,258) (2,297)
---------- ----------
Benefit obligation at end of year. . . . . 24,366 25,384
Unrecognized net actuarial gain. . . . . . 26,948 28,991
---------- ----------
Accumulated postretirement benefit cost. . $ 51,314 54,375
========== ==========
<PAGE>
The Company currently amortizes unrecognized gains over the shorter of
10 years or the average remaining service period of active plan
participants. However, due to the significant amount of unrecognized gain
at December 31, 1998, which is included in the financial statements as a
liability, and the disproportionate relationship between the unrecognized
gain and accumulated postretirement benefit obligation at December 31,
1998, the Company may, in the future, change its amortization policy to
accelerate the recognition of the unrecognized gain. In considering such
change, the Company would need to determine whether significant changes in
the accumulated postretirement benefit obligation and unrecognized gain may
occur in the future as a result of changes in actuarial assumptions,
experience and other factors. Any future change to accelerate the
amortization of the unrecognized gain would have no effect on the Company's
cash flows, but could have a significant effect on its statement of
operations.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% as of December 31, 1998 and
1997.
(9) TRANSACTIONS WITH AFFILIATES
With respect to any calendar year, JMB Realty Corporation ("JMB"), an
affiliate of the Company, 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 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 $74,102
of Qualified Allowance related to the period from January 1, 1990 through
December 31, 1998 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 the 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 years ended December 31, 1998, 1997 and 1996.
<PAGE>
1998 1997 1996
------- ------ ------
Qualified Allowance calculated . . . $ 9,776 10,082 9,240
Qualified Allowance paid . . . . . . $ -- -- --
Cumulative deficiency of Qualified
Allowance at end of year. . . . . . $74,102 64,326 54,407
Net Cash Flow was $0 for 1998, 1997 and 1996.
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 for the years ended
December 31, 1998, 1997 and 1996 was approximately $669, $658 and $653,
respectively, of which $1,275 was unpaid as of December 31, 1998. In
addition, as of December 31, 1998, the current portion of amounts due to
affiliates includes $9,106 of income tax payable related to the Class A
COLA Redemption Offer (see Note 5). 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 December 31, 1998.
JMB Insurance Agency, Inc., an affiliate of JMB, 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 years ended December 31, 1998, 1997 and 1996 was
approximately $587, $742 and $774, respectively, all of which was paid as
of December 31, 1998.
Northbrook and its affiliates allocated certain charges for services
to the Company based upon the estimated level of services for the years
ended December 31, 1998, 1997 and 1996 of approximately $923, $780 and
$1,460, respectively, of which $1,928 was unpaid as of December 31, 1998.
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.
In February 1997, the affiliate loans (see Note 4), along with certain
other amounts due Northbrook, were converted into a new $104,759 ten-year
note payable. The new note was payable interest only and accrued interest
at the prime rate plus 2%. In 1998, the $104,759 note was cancelled
pursuant to a Split Note Agreement and bifurcated into two nine-year notes
(i) a $99,595 note payable to an affiliate of Northbrook and (ii) a $15,000
<PAGE>
note payable (with an initial balance of $7,920) to Northbrook. The
bifurcated notes were payable interest only and accrue interest at the
prime rate plus 2%. Pursuant to the Indenture relating to the COLAs, the
amounts borrowed from Northbrook and its affiliates are "Senior
Indebtedness" to the COLAs. The Company borrowed an additional $16,628
during 1997 and $24,828 during 1998 to fund COLA Mandatory Base Interest
payments and other operational needs from a subsidiary of Northbrook under
a separate note which is payable interest only and accrues at the prime
rate plus 2%. In October 1997, the Company repaid $7,000 of the amount due
the affiliate. In connection with such affiliated loans, the Company
incurred interest expense of approximately $15,355, $12,083 and $8,935 for
the years ended December 31, 1998, 1997 and 1996, respectively.
As of December 31, 1998, the Company agreed to exercise its option to
redeem Class B COLAs that are "put" to AJF for repurchase (as described
above under Item 1 - "Business"), in partial consideration for (a) Fred
Harvey's agreement to defer until December 31, 2001 all interest accruing
from January 1, 1998 through December 31, 2001 and relating to the
approximately $100,000 of senior indebtedness of the Company currently
owing to Fred Harvey (as described in Note 4 above); and (b) Northbrook
agreeing to cause approximately $55,100 of the Company's indebtedness that
was senior to the COLAs to be contributed to the capital of the Company.
As a result of the contribution, in the Company's December 31, 1998 balance
sheet, the "Amounts due to affiliates - senior debt financing" were
decreased, and the Company's "Member's equity (deficit)" was increased, by
approximately $55,100. The deferral of interest together with this
contribution to capital were made as part of the Company's effort to
alleviate significant liquidity constraints and continue to meet the Value
Maintenance Ratio requirement under the Indenture. At current interest
rates, and assuming no further advances of senior indebtedness,
approximately $45,000 of such deferred interest relating to currently
existing senior indebtedness will become due and payable on December 31,
2001. At such time, there can be no assurance that the Company will either
(i) have unrestricted cash available for meeting such obligation or (ii)
have the ability to refinance such $45,000 obligation. Failure to meet
such obligation, if called, would cause all senior indebtedness owing to
Fred Harvey or its affiliates to be immediately due and payable. A default
on senior indebtedness of such magnitude could constitute an event of
default under the Indenture. To the extent that Northbrook or any of its
affiliates make additional advances of senior indebtedness to the Company
during 1999, Northbrook or its affiliates intend to defer any interest
accruing on such additional indebtedness until December 31, 2001.
Therefore, interest in excess of $45,000 may be due and payable on December
31, 2001 and any such excess may be substantial.
The total amount due Northbrook and its subsidiary as of December 31,
1998 was $110,325, which includes deferred interest to affiliates on the
senior debt of approximately $13,896 ($10,731 of which has been deferred
until December 31, 2001, as described above). Pursuant to the Indenture
relating to the COLAs, the amounts borrowed from Northbrook and its
affiliates are "Senior Indebtedness" to the COLAs.
(10) SIGNIFICANT CUSTOMER
As a result of the Company's interest in HSTC, C&H is contractually
bound to purchase all of the sugar the Company produces. If, for any
reason, C&H were to cease its operations, the Company would seek other
purchasers for its sugar.
(11) 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.
<PAGE>
The Company's property segment had contractual commitments (related to
project costs) of approximately $3,365 as of December 31, 1998. Additional
development expenditures are dependent upon the ability to obtain financing
and the timing and extent of property development and sales.
As of December 31, 1998, certain portions of the Company's land not
currently under development are mortgaged as security for $2,477 of
performance bonds related to property development.
(12) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1998,
1997 and 1996 consists of:
Current Deferred Total
-------- -------- --------
Year ended December 31, 1998:
U.S. federal . . . . . . . . . . . $ (283) (23,205) (23,488)
State. . . . . . . . . . . . . . . (52) (4,219) (4,271)
-------- -------- --------
$ (335) (27,424) (27,759)
======== ======== ========
Year ended December 31, 1997:
U.S. federal . . . . . . . . . . . $ (9,939) (4,477) (14,416)
State. . . . . . . . . . . . . . . (1,807) (814) (2,621)
-------- -------- --------
$(11,746) (5,291) (17,037)
======== ======== ========
Year ended December 31, 1996:
U.S. federal . . . . . . . . . . . $ (4,414) (13,391) (17,805)
State. . . . . . . . . . . . . . . (803) (2,435) (3,238)
-------- -------- --------
$ (5,217) (15,826) (21,043)
======== ======== ========
In 1995, income tax expense related to the COLA redemption
approximated $20,807. Of this amount, approximately $9,106 was attributable
to current taxes related to the redeemed Class A COLA's and, accordingly,
was not indemnified by Northbrook (see Note 9). Current income tax expense
attributable to the Class B COLA's of approximately $9,490 was indemnified
by Northbrook and, accordingly, was deducted from the 1995 current tax
benefit of $12,379 attributable to loss before extraordinary gain to derive
the 1995 capital contribution related to current income taxes.
Income tax benefit differs from the amounts computed by applying the
U.S. federal income tax rate of 35 percent to pretax loss as a result of
the following:
1998 1997 1996
-------- -------- --------
Computed "expected" tax benefit. . . $(24,324) (14,914) (19,323)
Increase (reduction) in income
taxes resulting from:
Pension and Core Retirement
Award expense . . . . . . . . . . 232 226 321
State income taxes, net of
federal income tax benefit. . . . (2,847) (1,747) (2,158)
Other, net . . . . . . . . . . . . . (582) 42 117
Charitable deduction of
appreciated property . . . . . . . (238) (644) --
-------- -------- --------
Total . . . . . . . . . . . . . $(27,759) (17,037) (21,043)
======== ======== ========
<PAGE>
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, 1998 and 1997 are as follows:
1998 1997
-------- --------
Deferred tax (assets):
Postretirement benefits . . . . . . . . . . . . $(20,012) (21,206)
Interest accruals . . . . . . . . . . . . . . . (3,047) (3,021)
Cancellation of Debt Income on
COLA tenders. . . . . . . . . . . . . . . . . (8,639) --
Other accruals. . . . . . . . . . . . . . . . . (2,039) (3,274)
-------- --------
Total deferred tax assets . . . . . . . . (33,737) (27,501)
-------- --------
Deferred tax liabilities:
Accounts receivable related to profit
on sales of sugar. . . . . . . . . . . . . . 3,216 3,960
Inventories, principally due to
sugar production costs, capitalized
costs, capitalized interest and
purchase accounting adjustments. . . . . . . (870) (1,422)
Plant and equipment, principally due to
depreciation and purchase accounting
adjustments . . . . . . . . . . . . . . . . . 9,920 8,759
Land and land improvements, principally
due to purchase accounting adjustments. . . . 75,163 84,004
Deferred gains due to installment sales for
income tax purposes . . . . . . . . . . . . . 7,676 7,456
Investments in unconsolidated entities,
principally due to purchase accounting
adjustments. . . . . . . . . . . . . . . . . . (316) 13,220
-------- --------
Total deferred tax liabilities. . . . . . . 94,789 115,977
-------- --------
Net deferred tax liability. . . . . . . . . $ 61,052 88,476
======== ========
(13) SEGMENT INFORMATION
Agriculture, Property and Golf comprise the separate industry segments
of the Company. Operating income (loss)-Other consists primarily of
unallocated overhead expenses and Total assets-Other consists primarily of
cash and deferred expenses.
Total revenues, operating income (loss), assets, capital expenditures,
and depreciation and amortization by industry segment for 1998, 1997 and
1996 are set forth below:
1998 1997 1996
-------- -------- --------
Revenues:
Agriculture. . . . . . . . . . . $ 34,551 41,949 51,805
Property . . . . . . . . . . . . 49,642 28,430 29,947
Golf . . . . . . . . . . . . . . 14,485 15,618 15,191
-------- -------- --------
$ 98,678 85,997 96,943
======== ======== ========
<PAGE>
1998 1997 1996
-------- -------- --------
Operating income (loss):
Property:
Reduction to carrying value
of investments in real
estate . . . . . . . . . . . $(16,805) (2,279) (18,315)
Other. . . . . . . . . . . . . (15,305) (6,842) (2,813)
Agriculture. . . . . . . . . . . (4,049) (3,373) (7,525)
Other. . . . . . . . . . . . . . (2,349) (3,225) (3,045)
Golf . . . . . . . . . . . . . . 2,713 3,720 3,545
-------- -------- --------
$(35,795) (11,999) (28,153)
======== ======== ========
Total assets:
Property . . . . . . . . . . . . $121,957 145,768 147,109
Agriculture. . . . . . . . . . . 197,288 222,693 239,222
Other. . . . . . . . . . . . . . 34,191 18,807 19,011
Golf . . . . . . . . . . . . . . 77,644 76,977 78,263
-------- -------- --------
$431,080 464,245 483,605
======== ======== ========
Capital expenditures:
Property . . . . . . . . . . . . $ 13,612 276 230
Agriculture. . . . . . . . . . . 2,052 2,132 3,160
Other. . . . . . . . . . . . . . -- 13 252
Golf . . . . . . . . . . . . . . 1,932 345 615
-------- -------- --------
$ 17,596 2,766 4,257
======== ======== ========
Depreciation and amortization:
Property . . . . . . . . . . . . $ 822 865 831
Agriculture. . . . . . . . . . . 4,496 3,890 4,120
Other. . . . . . . . . . . . . . 4 45 55
Golf . . . . . . . . . . . . . . 1,250 1,410 1,348
-------- -------- --------
$ 6,572 6,210 6,354
======== ======== ========
(14) Subsequent Events
COLA Interest Payment
On March 1, 1999, an interest payment (representing Mandatory Base
Interest through February 28, 1999) of approximately $4,414 was paid to the
holders of COLAs.
Maui Sugar Operations
In March 1999, the Company announced its plans to shut down its sugar
operations at Pioneer Mill on Maui at the end of the 1999 harvest season
(September 1999). Pioneer Mill has consistently incurred losses in prior
years and it was expected that those losses would continue in the future.
The Company expects to use portions of the land at Pioneer Mill for
alternative crops. The Company's estimated future costs to shut down sugar
operations at Pioneer Mill are not expected to have a material adverse
effect on the financial condition of the Company.
<PAGE>
Schedule II
AMFAC/JMB HAWAII, L.L.C.
Valuation and Qualifying Accounts
Years ended December 31, 1998, 1997 and 1996
(Dollars in Thousands)
Additions Additions
Balance at Charges to Charges to Balance at
Beginning Cost and Other End
Description of Period Expenses Accounts Deductions of Period
- ----------- ---------- ---------- ---------- ---------- ----------
Year ended December 31, 1998:
- ----------------------------
Allowance for
doubtful
accounts:
Trade
accounts $ 625 76 106 595
Claims and
other -- -- -- -- --
------ ----- ----- ----- -----
$ 625 76 106 595
====== ===== ===== ===== =====
Year ended December 31, 1997:
- ----------------------------
Allowance for
doubtful
accounts:
Trade
accounts $ 318 394 -- 87 625
Claims and
other -- -- -- -- --
------ ----- ----- ----- -----
$ 318 394 -- 87 625
====== ===== ===== ===== =====
Year ended December 31, 1996:
- ----------------------------
Allowance for
doubtful
accounts:
Trade
accounts $ 361 11 -- 54 318
Claims and
other -- -- ---- -- --
------ ----- ----- ----- -----
$ 361 11 -- 54 318
====== ===== ===== ===== =====
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
AMFAC/JMB FINANCE, INC.
We have audited the accompanying balance sheets of Amfac/JMB Finance,
Inc. as of December 31, 1998 and 1997. These balance sheets are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these balance sheets based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheets are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheets. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the balance sheets referred to above present fairly,
in all material respects, the financial position of Amfac/JMB Finance, Inc.
at December 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Honolulu, Hawaii
March 8, 1999
<PAGE>
AMFAC/JMB FINANCE, INC.
Balance Sheets
December 31, 1998 and 1997
(Dollars in thousands, except per share information)
A S S E T S
-----------
1998 1997
-------- --------
Current assets:
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
-------------------------------------------------------------------
Commitments and contingencies
(Notes 2 and 3)
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.
<PAGE>
AMFAC/JMB FINANCE, INC.
Notes to the Balance Sheets
December 31, 1998 and 1997
(Dollars in Thousands)
(1) ORGANIZATION AND ACCOUNTING POLICY
Amfac/JMB Finance, Inc. ("AJF") was incorporated November 7, 1988 in
the State of Illinois. AJF has had no financial operations. All of the
outstanding shares of AJF are owned by Northbrook Corporation
("Northbrook").
(2) KEEP-WELL AGREEMENT
On March 14, 1989, Northbrook entered into a Keep-Well Agreement with
AJF, whereby it agreed to contribute sufficient capital or make loans to
AJF to enable AJF to meet the COLA repurchase obligations described below
in note 3.
On March 15, 1995, pursuant to the indenture that governs the terms of
the COLAs (the "Indenture"), AMFAC/JMB Hawaii, L.L.C. (the "Company")
elected to exercise its right to redeem, and therefore was obligated to
purchase, any and all Class A COLAs submitted pursuant to the June 1, 1995
Redemption Offer at a price of $.365 per Class A COLA. Pursuant to the
Company's election to redeem the Class A COLAs for repurchase, the Company
assumed AJF's maximum amount of its liability from the June 1, 1995 COLA
repurchase obligation of $140,425.
(3) REPURCHASE OBLIGATION
On March 14, 1989, AJF and the Company entered into an agreement (the
"Repurchase Agreement") concerning AJF'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"), issued by the Company. A
total aggregate principal amount of $384,737 of COLAs were issued during
the offering, which terminated on August 31, 1989. The COLAs were issued in
two units consisting of one Class A and one Class B COLA. As specified in
the Repurchase Agreement, the repurchase of the Class A COLAs may have been
requested of AJF by the holders of such COLAs on June 1, 1995 at a price
equal to the original principal amount of such COLAs ($.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 $.135. The
repurchase of the Class B COLAs may be requested of AJF by the holders of
such COLAs on June 1, 1999 at a price equal to 125% of the original
principal amount of such COLAs ($.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 $.215 and $.215, respectively.
On June 1, 1999, each COLA investor has an option to have his or her
Class B COLAs repurchased by AJF at a price of approximately $.410 per each
Class B COLA, which represents the 125% of the original investment of $.500
less all interest paid through such date that has been allocated to the
Class B COLAs (approximately $.215 per Class B COLA, which includes the
payment of Mandatory Base Interest paid through March 1, 1999). In lieu of
AJF's repurchase obligation, the Company, may, in its sole discretion,
elect, and intends to so elect, to redeem the Class B COLAs from the
investors who exercise their repurchase option in 1999 at the same
discounted price. The maximum potential amount of such liability if every
COLA holder elects repurchase is approximately $117,306. AF Investors, LLC
("AF Investors"), a Delaware limited liability company and an affiliate of
<PAGE>
the Company, currently holds 89,330 Class B COLAs (put value of
approximately $36,625). Such Class B COLAs were contributed by Amfac
Finance Limited Partnership ("Amfac Finance"), an Illinois limited
partnership and an affiliate of the Company, to AF Investors in December
1998. AF Investors does not intend to require cash payments in the event
it chooses to exercise its right to "put" any or all of its Class B COLAs
unless sufficient cash would be available to the Company after satisfying
the put obligation to the non-affiliated Class B COLA holders. AF
Investors will cause some, but not all, of such Class B COLAs to be "put"
pursuant to the Repurchase Agreement. AF Investors has agreed to take back
senior debt of the Company for the portion so put to the extent that the
Company does not have sufficient cash available to meet the put obligation
and currently intends to retain at least $10,000 to $15,000 of its Class B
COLAs. As of the date of this report, there are insufficient funds
currently available to satisfy the maximum potential repurchase obligation
(approximately $117,306 if every COLA holder elects repurchase including
the Class B COLAs held by AF Investors). As of December 31, 1998,
Northbrook Corporation and its subsidiaries (including the Company) had
approximately $53,600 in unrestricted cash, cash equivalents, and liquid
short-term investments; of these amounts, approximately $24,600 in
unrestricted cash, cash equivalents, and liquid short-term investments;
were held by the Company. Notwithstanding AJF's obligation under the
Repurchase Agreement, the Company's obligation to cause AJF to perform
under the Repurchase Agreement, Northbrook's obligation under the Keep-Well
Agreement, and the election that the Company intends to make to offer to
redeem Class B COLAs, (thereby reducing or potentially eliminating AJF's
obligation, and as a consequence, Northbrook's), AJF, Northbrook and the
Company in the aggregate do not have, and are not expected to have by
June 1, 1999, sufficient available resources to meet the maximum potential
obligation of approximately $80,681 should all Class B COLAs (excluding the
Class B COLAs held by AF Investors) be put pursuant to the Repurchase
Agreement. Failure to meet their obligations could lead to a claim against
AJF and, in turn, Northbrook. The number, if any, of Class B COLA holders
(other than AF Investors) who will elect to have their Class B COLAs
redeemed is not currently determinable and, accordingly, the amount of
resources necessary to enable the Company to redeem such Class B COLAs is
not determinable. Based upon prior experience, the Company does not
anticipate that all of the Class B COLAs will be "put" pursuant to the
Repurchase Agreement and does anticipate having sufficient resources to
redeem the Class B COLAs actually put to the Company. However, there can
be no assurance that the Company and its affiliates will have sufficient
resources to redeem the Class B COLAs actually put to the Company.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with the accountants during
the fiscal years 1998 and 1997.
<PAGE>
(5) Compensation (including salary, bonus and severance) for
Chris J. Kanazawa, former Senior Vice President and Director for 1998, 1997
and 1996 was $199,134, $350,000 and $475,000, respectively. Compensation
(including salary, bonus and severance) for Teney K. Takahashi, former Vice
President for 1998, 1997 and 1996 was $177,089, $231,000 and $291,000,
respectively. Compensation (including salary, bonus and severance) for
Timothy E. Johns, former Vice President for 1998, 1997 and 1996 was
$108,219, $139,000 and $131,350, respectively.
(6) As Mr. Nunokawa and Mr. Edsall were hired by the Company during
the year, the salary amount disclosed in the above table is the amount
earned for the partial year of employment with the Company. Mr. Nunokawa's
and Mr. Edsall's annualized salary had they been employed by the Company
for the entire year was $135,000 and $155,000, respectively.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding shares of the Company are owned by Northbrook.
Approximately 6.4% of the shares of Northbrook are owned by JMB and
approximately 90.2% are owned directly or indirectly by individuals who are
shareholders or employees of JMB or members of their families (or trusts
for their benefit). The remaining shares are owned by third parties that
are not related to JMB. Randi Malkin Steinberger, Stephen Malkin and Barry
Malkin, individually or through trusts which they control, each have
beneficial ownership of approximately 9.7% of the shares of Northbrook.
Leslie Bluhm, Andrew Bluhm and Meredith Bluhm, individually or through
trusts which they control, each have beneficial ownership of approximately
10.0% of the shares of Northbrook. Kathleen Schreiber, in her capacity as
trustee of various trusts for the benefit of members of her family, which
trusts comprise the managing partners of a partnership which owns
Northbrook shares, has beneficial ownership of approximately 6.1% of the
shares of Northbrook. Stuart Nathan, Executive Vice President and a
director and shareholder of JMB, and his children, Scott Nathan and Robert
Nathan, collectively have beneficial ownership of approximately 5.1% of the
shares of Northbrook; each of them, primarily by virtue of their status as
general partners of partnerships which own such shares would also be
considered to individually have beneficial ownership of substantially all
of such shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than as contained under Items 10 and 11 above, and this Item 13,
there were no other significant transactions or business relationships with
Northbrook, JMB, affiliates or their management.
The Company, its subsidiaries and the joint ventures in which the
Company or its subsidiaries are partners are permitted to engage in various
transactions involving Northbrook, JMB and their affiliates, as described
under the captions "Description of the COLAs - Limitation on Dividends,
Purchases of Capital Stock and Indebtedness" and "Limitations on Mergers
and Certain Other Transactions" and "Purchase or Joint Venture of
Properties by Affiliates; Development of Properties as Excluded Assets;
Residual Value of Company in Certain Projects" at pages 41-45, and "Risk
Factors - Conflicts of Interest" at page 19 of the Prospectus, a copy of
which descriptions are hereby incorporated herein by reference to
Exhibit 28.1 to the Company's Report on Form 10-K for December 31, 1988
(File No. 33-24180) dated March 21, 1989. The relationship of the Company
(and its directors and executive officers and certain other officers) to
its affiliates is set forth above in Item 10.
<PAGE>
The approximately $15 million 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 (7.75% at
December 31, 1998), plus one percent. In addition to the $52 million
borrowed from Northbrook in 1995 to redeem Class A COLAs pursuant to the
Redemption Offer (see Note 5), the Company had also borrowed approximately
$18.7 million and $9.8 million during 1996 and 1995, respectively, to fund
COLA Mandatory Base Interest payments, ERS interest payments and other
operational needs. These loans from Northbrook were payable interest only,
were to mature on June 1, 1998 and carried an interest rate per annum equal
to the prime interest rate plus two percent. Pursuant to the Indenture
relating to the COLAs, the amounts borrowed from Northbrook and its
affiliates are "Senior Indebtedness" to the COLAs.
In February 1997, the above-noted affiliate loans, along with certain
other amounts due Northbrook, were converted into a new $104 million ten
year note payable. In 1998, the $104.8 million note was cancelled pursuant
to a split Note Agreement and bifurcated into two nine-year notes (i) a
$99.5 million note payable to an affiliate of Northbrook and (ii) a $15
million note payable (with an initial balance of $7.9 million) to
Northbrook. The bifurcated notes are payable interest only and accrue
interest at the prime rate plus 2%. The Company borrowed an additional
$16.6 million during 1997 and $24.8 million during 1998 to fund COLA
Mandatory Base Interest payments and other operational needs from a
subsidiary of Northbrook under a separate note which is payable interest
only and accrues at the prime rate plus 2%.
As of December 31, 1998, the Company agreed to exercise its option to
redeem Class B COLAs that are "put" to AJF for repurchase (as described
above under Item 1 - "Business"), in partial consideration for (a) Fred
Harvey's agreement to defer until December 31, 2001 all interest accruing
from January 1, 1998 through December 31, 2001 and relating to the
approximately $100 million of senior indebtedness of the Company currently
owing to Fred Harvey (as described in Note 4 to the Consolidated Financial
Statements of the Company); and (b) Northbrook agreeing to cause
approximately $55.1 million of the Company's indebtedness that was senior
to the COLAs to be contributed to the capital of the Company. In
connection with the foregoing deferral of interest and contribution of
capital, the Company agrees to allow the senior debt held by Northbrook and
its affiliates to be secured by assets of the Company. As a result of the
contribution, in the Company's December 31, 1998 balance sheet, the
"Amounts due to affiliates - senior debt financing" were decreased, and the
Company's "Member's equity (deficit)" was increased, by approximately $55.1
million. The deferral of interest together with this contribution to
capital were made as part of the Company's effort to alleviate significant
liquidity constraints and continue to meet the Value Maintenance Ratio
requirement under the Indenture. At current interest rates, and assuming
no further advances of senior indebtedness, approximately $45 million of
such deferred interest relating to currently existing senior indebtedness
will become due and payable on December 31, 2001. At such time, there can
be no assurance that the Company will either (i) have unrestricted cash
available for meeting such obligation or (ii) have the ability to refinance
such $45 million obligation. Failure to meet such obligation, if called,
would cause all senior indebtedness owing to Fred Harvey or its affiliates
to be immediately due and payable. A default on senior indebtedness of
such magnitude could constitute an event of default under the Indenture.
To the extent that Northbrook or any of its affiliates make additional
advances of senior indebtedness to the Company during 1999, Northbrook or
its affiliates intend to defer any interest accruing on such additional
indebtedness until December 31, 2001. Therefore, interest in excess of $45
million may be due and payable on December 31, 2001 and any such excess may
be substantial.
The total amount due Northbrook and its subsidiary as of December 31,
1998 was $110.3 million, which includes deferred interest to affiliates on
senior debt of approximately $13.9 million ($10.7 million of which has been
deferred until December 31, 2001, as described above). Pursuant to the
Indenture, the amounts borrowed from Northbrook or its affiliates are
"Senior Indebtedness" to the COLAs.
<PAGE>
The Company incurred interest expense of approximately $15.4 million,
$12.8 million and $8.9 million for the years ended 1998, 1997 and 1996,
respectively, in connection with the acquisition and additional senior debt
financing obtained from affiliates.
With respect to any calendar year, JMB or its affiliates may receive a
Qualified Allowance in an amount equal to 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 $6.2 million was paid on February 28, 1990. Approximately
$74.1 million of Qualified Allowance related to the period from January 1,
1990 through December 31, 1998 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 years ended December 31, 1998, 1997 and 1996
(dollars are in millions):
1998 1997 1996
-------- -------- --------
Qualified Allowance calculated . . . . $ 9.8 10.1 9.2
Qualified Allowance paid . . . . . . . -- -- --
Cumulative deficiency of Qualified
Allowance at end of year . . . . . . $ 74.1 64.3 54.4
Net Cash Flow was $0 for 1998, 1997 and 1996.
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.
<PAGE>
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 through December 31,
1998, 1997 and 1996 was $.7 million, $.7 million and $.7 million,
respectively, of which $1.3 million was unpaid as of December 31, 1998. In
addition, as of December 31, 1998, the current portion of amounts due
affiliates includes approximately $9.1 million of income tax payable
related to the Class A Redemption Offer. Also, the Company pays a
non-accountable reimbursement of approximately $.030 million per month to
JMB or its affiliates in respect of general overhead expense, all of which
was paid as of December 31, 1998.
JMB Insurance Agency, Inc. an affiliate of JMB, 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 years ended December 31, 1998, 1997 and 1996 was
approximately $.6 million, $.7 million and $.8 million, all of which was
paid as of December 31, 1998.
Northbrook and its affiliates allocated certain charges for services
to the Company based upon the estimated level of services for the years
ended December 31, 1998, 1997 and 1996 of approximately $.9 million, $.8
million and $1.5 million, respectively, of which $1.9 million was unpaid as
of December 31, 1998. 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.
On January 30, 1998, Amfac Finance Limited Partnership ("Amfac
Finance"), an Illinois limited partnership and an affiliate of the Company
extended a tender offer to purchase (the "Class B Tender Offer") up to
$65.4 million principal amount of separately Certificated Class B COLAs
("Separate Class B COLAs") for cash at a unit price of $375 to be paid by
Amfac Finance on each Separate Class B COLA on or about March 24, 1998.
The maximum cash to be paid under the Class B Tender Offer was $49.0
million (130,842 Separate Class B COLAs at a unit price of $375 each).
Approximately 62,857 Separate Class B COLAs were submitted to Amfac Finance
for repurchase pursuant to the Class B Tender Offer requiring an aggregate
payment by Amfac Finance of approximately $23.6 million on March 31, 1998.
In addition, on October 23, 1998, Amfac Finance extended a Tender Offer to
Purchase (the "Class A/B Tender Offer") up to approximately $22.5 million
principal amount of Jointly Certificated Class A and B COLAs (together
"COLA Units") for cash at a unit price of $460 to be paid by Amfac Finance
on each COLA Unit on or about December 23, 1998. The maximum cash to be
paid under the Tender Offer was approximately $12.2 million (26,600 COLA
Units at a unit price of $460 for each COLA Unit). Approximately 26,473
COLA Units were submitted to Amfac Finance for repurchase pursuant to the
Tender Offer requiring an aggregate payment by Amfac Finance of
approximately $12.2 million on December 23, 1998. Neither the Class B nor
the Class A/B Tender Offer reduced the outstanding indebtedness of the
Company. In December 1998, Amfac Finance contributed its COLA Units to AF
Investors. The COLA Units held by AF Investors remain outstanding pursuant
to the terms of the Indenture. Except as provided in the last sentence of
this paragraph, AF Investors is entitled to the same rights and benefits of
any other holder of COLA Units, including having the right to have AJF
repurchase on June 1, 1999, the separate Class B COLAs that it owns. AF
Investors currently intends to require some, but not all of the Class B
COLAs which it will own on such date to be repurchased pursuant to the
Repurchase Agreement. AF Investors has agreed to take back senior debt of
<PAGE>
the Company for the portion so put to the extent that the Company does not
have sufficient cash available to meet the put obligation and currently
intends to retain at least $10 million to $15 million of its Class B COLAs.
Because AF Investors is an affiliate of the Company, AF Investors will not
be able to participate in determining whether the holders of the required
principal amount of debt under the Indenture have concurred in any
direction, waiver or consent under the terms of the Indenture.
As a result of the Class B and Class A/B Tender Offers, the Company
recognized approximately $7.9 million and $14.3 million, respectively, of
taxable gain in accordance with income tax regulations for certain
transactions with affiliates. Such gain is treated as cancellation of
indebtedness income for income tax purposes only and, accordingly, the
income taxes related to the Class B Tender Offer (approximately $3.1
million) and Class A/B Tender Offer (approximately $5.7 million) were, or
will be, indemnified by Northbrook through the tax agreement between
Northbrook and the Company (See Note 1 to Notes to the Consolidated
Financial Statements).
