Item 1. Business
All references to "Notes" are to Notes to the Consolidated Financial Statements contained in this report.
Amfac/JMB Hawaii, Inc. (the "Company"), has assets substantially all of which are agricultural and developmental real property and related assets located in Hawaii. The Company is an affiliate of JMB Realty Corporation ("JMB") as a result of the 1988 merger (the "Merger") of an affiliate of JMB into Amfac, Inc. ("Amfac"), the former parent corporation of the Company (see Note 1 for discussion of Amfac, Inc. merger into its parent, Northbrook Corporation, in May 1995), and the subsequent merger of a subsidiary of such affiliate into Amfac Hawaii, Inc., which (after changing its name to Amfac/JMB Hawaii, Inc.) continues as the surviving corporation. Unless otherwise indicated, references herein to the Company shall include the Company's subsidiaries.
The assets of the Company, held primarily through its wholly-owned subsidiaries, consist principally of approximately 46,700 acres of land, portions of which include acreage (i) in the process of development into residential, resort, commercial and industrial projects, (ii) currently being managed and operated as recreational facilities, and (iii) used in connection with the cultivation and processing of agricultural products, principally sugar cane and related sugar products. In addition, the Company leases approximately 55,300 acres of land used primarily in the production of sugar cane and for access to water sources.
The real properties owned by the Company are located on the four principal islands of the State of Hawaii: Oahu, Maui, Kauai and Hawaii. The Company has no real property located outside of the State of Hawaii. The Company's real properties are described in more detail under Item 2
Item 2. Properties
LAND HOLDINGS. The major real properties owned by the Company are described below by island.
(a) Oahu
At December 31, 1996, the Company owned approximately 800 acres of land on Oahu. These consist of approximately 136 acres for the Waikele Golf Course at Waikele, approximately 60 acres at the Oahu Sugar Company mill- site in Waipahu, approximately 500 acres on the northeastern, watershed area of windward Oahu (which have been designated by the State as conservation lands) and certain other land parcels.
Waikele is a master-planned community developed by the Company. It is situated on 577 acres of land located adjacent to Waipahu, a rapidly growing town eight miles west of downtown Honolulu, and at the intersection of Oahu's two major highways. Construction of the Waikele Project commenced in 1989 and includes approximately 2,900 residential units on 19 parcels, a retail commercial center and an 18-hole golf course. The development of the commercial center at Waikele is complete, while development of residential units, ranging from multi-family units to single-family homes, is continuing and is expected to be completed by the end of 1998. All of the residential land in Waikele was sold to 3 builders from 1990 through 1994. The Company sold the land used for the retail commercial center in 1992. The Waikele golf course, which is still owned by the Company, opened for public play in May 1993. Waikele competes with other master-planned communities on Oahu.
The Company expended approximately $1.3 million, $.5 million and $3.0 million in 1996, 1995 and 1994, respectively, for project costs at Waikele. Such costs include construction of roadways, utilities and related infrastructure improvements and the golf course and clubhouse. On a cumulative project-to- date basis, the Company has expended approximately $118 million on project costs and completed sales at Waikele of approximately $231 million. Such sales have included commercial property and parcel sales to home builders. Except for certain contingent participation rights, the Company has already received all of its proceeds from the sales of the residential and commercial parcels at Waikele.
The Company is currently developing the approximately 60 acres of fee simple land it owns at the mill-site of Oahu Sugar Company (which was shut down in 1995). The Company has received zoning for a light industrial subdivision on a 37- acre portion of the property, which excludes property containing the sugar mill and adjacent buildings. In connection with the development of this property, the Company has received state land use urbanization for the entire 60- acre site. Marketing of parcels within the light industrial subdivision is slated for mid-to-late 1997 after the subdivision is complete. In addition, the Company has begun the process of seeking the necessary government approvals for the redevelopment for the remainder of the mill-site parcels, including planned commercial, public and quasi-public uses.
During 1996, the Company sold approximately 3 acres on Oahu for $1 million, and received $.3 million for certain contingent participation rights at Waikele.
(b) Maui
On the island of Maui, the Company owns approximately 13,800 acres of land, most of which is currently in agriculture or classified as conservation land. Approximately all of the Company's land holdings are located on West Maui near the Kaanapali Beach Resort area. Approximately 900 acres in West Maui are presently designated urban and zoned for resort and residential development, including approximately 320 acres comprising the two Kaanapali Golf Courses. The Company is currently pursuing development approvals for portions of the surrounding acreage.
In March 1991, the Company received final land use approval from the State for development of approximately 240 residential lots on approximately 125 acres of land, known as "South Beach Mauka" and located adjacent to the existing Kaanapali Beach Resort. In connection with this land use approval, the Company is committed to providing additional housing on Maui in the affordable price range and to participating in the funding of the design and construction of the planned bypass highway extending from Lahaina to the north end of Kaanapali. The Company has entered into a development agreement with the State Department of Transportation covering the Company's participation in the design and construction of the bypass highway. It is anticipated that the Company will expend up to $3.5 million (in the aggregate), of which $2.2 million has been spent as of December 31, 1996, in the design of the bypass highway and widening of the existing highway. The Company is marketing Kaanapali Golf Estates, a residential community that is part of South Beach Mauka adjacent to the Kaanapali Beach Resort in West Maui. During 1996, the Company sold 18 homesites for approximately $5.5 million, which includes 10 homesites to a developer who plans to construct and sell houses on these lots. The Company currently has 6 homesites on the market, which are priced at approximately $.5 million each.
During 1993, the Company obtained final land use approval from the State, and certification through the State's Housing Finance Development Corporation ("HFDC"), for the development of a project on approximately 300 acres of Company land known as "Puukolii Village", which is also located near Kaanapali Beach Resort. A significant portion of the housing in this project will be in the affordable price range. The final land use approval and the HFDC development agreement contain certain conditions which must be satisfied in order for the Company to develop its lands in future periods. Moreover, development of most of Puukolii Village cannot commence until after completion of the state-planned Lahaina bypass highway (mentioned above). The proposed development of Puukolii Village is anticipated to satisfy the Company's affordable housing requirements in connection with the South Beach Mauka land use approval as well as for the Company's North Beach property (described below). The Company commenced construction of infrastructure for Puukolii Village in the last quarter of 1996, beginning with an access road.
The planned development of the Company's land on Maui is longer term in nature than the time frame experienced at Waikele. As Maui is less populated than Oahu and more dependent on the resort/tourism industry, much of the Company's land is intended for resort and resort-related uses. Due to overall economic conditions and trends in tourism, recent demand for these land uses has been relatively weak. The Company's currently available inventory of homesites on Maui, which is primarily targeted to the second home buyer, has experienced very slow sales activity to date. The Company's competitors on Maui have also experienced slow sales activity in the second home market. In connection with the development of North Beach Mauka and adjacent parcels, the Company has committed an additional $6.7 million for the construction of the bypass highway, subject to certain conditions. 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. The Company has over 300 acres of land in the adjacent North Beach Mauka area, currently designated by the State Land Use Commission for agricultural use, but with an underlying project district designation in the county community plan. The Company plans to seek State urbanization approval for this land. The Company is continuing to evaluate its planned products and the timing of development of its land holdings in light of the current weak market demand and the capital resources needed for future development. Concurrently, the Company is evaluating certain land parcels for bulk sales. These parcels are not considered strategic to the Company's long-term development plans.
In 1986, the Company entered into a joint venture agreement with Tobishima Pacific Inc., a wholly-owned subsidiary of a Japanese company, the purpose of which is to plan, manage and develop approximately 96 acres of beachfront property at Kaanapali (known as North Beach). The joint venture (in which the Company has a 50% interest) has State land use and County zoning approvals for the subdivision and development of the infrastructure improvements necessary to accommodate up to 3,200 hotel and/or condominium units on this site. This North Beach property constitutes nearly all of the remaining developable beachfront acreage at Kaanapali. In October 1992, the Company completed construction of a 3-acre park for public use on the North Beach site, which is part of the master plan for this property and was a requirement imposed by Maui County in obtaining certain permits. The development of North Beach continues to be tied to the completion of the aforementioned Lahaina bypass highway or other traffic mitigation measures satisfactory to the Maui County Planning Commission.
The Company is seeking final approvals to develop a time- share resort on 14 acres of the North Beach property (the "Site"). A land option/purchase agreement was entered into with Tobishima in October 1996. This agreement gives the Company an option to purchase Tobishima's 50% interest in the Site for $7 million. The Company does not expect to consummate the purchase until all discretionary land use permits are received for development of the time-share resort. In accordance with the land option/purchase agreement, the Company has made a nonrefundable deposit of $.1 million (which may be applied to the purchase price) to keep the option available through September 30, 1997. Additional nonrefundable deposits may be made to extend the option through August 31, 2000. The Company has filed development plans and related information with the County of Maui to obtain a Special Management Area ("SMA") permit for the time- share resort. Although there can be no assurance that the SMA permit will be received (and that if such permit is received, that its terms and conditions will be acceptable to the Company), management is optimistic that the Company will receive the necessary approvals to proceed with the project.
The Company believes that the potential for a successful time-share development at North Beach will be greatly enhanced by the involvement of a company with experience in the time- share business. As a result, on February 1, 1997, the Company entered into a partnership with affiliates of Interval Resorts West, the developer of The Ridge Tahoe resort in South Lake Tahoe, Nevada. The partnership will be responsible for constructing, developing, operating, maintaining, owning and managing the time-share resort project. The Company has a majority ownership interest in the partnership. After receipt of the SMA permit, the partnership will need to arrange project financing for the development of the time-share resort. In addition, the aforementioned land option/purchase agreement with Tobishima Pacific, Inc. includes short-term seller financing, which the time-share partnership may decide to utilize.
In February 1996, the Maui County Council adopted a Community Plan ordinance for West Maui that does not include any amendments to the current Community Plan designation of the Company's North Beach property, thus rejecting the recommendation of certain citizens groups that wanted two- third's of North Beach to be downzoned to "Park" designation. The ordinance was signed by the Mayor of the County of Maui and became effective on February 27, 1996.
Further, the Department of the Army has determined that there are two wetlands sites on the North Beach property, totaling approximately 21,800 square feet. The Company has retained experts to evaluate these sites and to ensure compliance with all laws. While there can be no assurance as to the ultimate determinations with respect to the wetlands issue, the Company does not anticipate that these sites will materially adversely affect the development plans for North Beach.
During 1996, the Company sold 10 acres on Maui for approximately $8.4 million, including 18 residential lots at Kaanapali Golf Estates.
The Company also owns and manages the championship Kaanapali Golf Courses, consisting of a clubhouse and two 18- hole golf courses located at the Kaanapali Beach Resort.
Approximately 4,900 acres of the Company's land on Maui are designated as a conservation district.
(c) Kauai
The Company owns approximately 28,700 acres of land on the island of Kauai, most of which is on the eastern (windward) side of the island. The large parcels of Company land on eastern Kauai are predominantly used for sugar cane cultivation. Approximately 700 acres of this land is zoned for urban development and approximately 12,300 acres has been classified as conservation land.
In June 1994, the Company submitted a Land Use Boundary Amendment Petition with the State of Hawaii Land Use Commission ("LUC") and a General Plan Amendment Application with the County of Kauai for the urbanization of approximately 552 acres of land on Kauai currently in sugar cane cultivation. The Company proposed a project planned to be a mixed use master planned community which will include a variety of both affordable and market rate residential units, commercial and industrial projects and a number of community and public based facilities. The filing of these land use applications is the first step required in converting agriculture zoned land into urban zoned land. There are a number of additional reports, studies, applications and permits that will be required before final land use approvals are obtained. In May 1995, the County of Kauai approved the Company's General Plan Amendment Application, subject to a number of conditions. In December 1995, the LUC granted the land use amendments sought by the Company, subject to a number of conditions. In May 1996, the Kauai County approved the Company's application to rezone the project. Before construction can commence, the Company must satisfy several conditions imposed during the approval process and obtain additional administrative development permits for requirements such as grading and subdivision. The permitting process in Hawaii has historically been a very difficult, time consuming and arduous process. There can be no guarantee that all permits will be obtained. Once construction commences, subject to market conditions and profitability needs, the project is expected to span over 20 years.
During 1996, the Company sold, in the aggregate, 711 acres of miscellaneous land parcels on Kauai for approximately $5.6 million.
(d) Hawaii
The approximately 3,400 acres of land owned by the Company on the island of Hawaii are located on the eastern (windward) side of the island, primarily in the Keaau and Pahoa districts, south of the town of Hilo. Portions of these lands are currently leased to independent papaya growers. The Company does not currently have any plans for real property development on the island of Hawaii, but will continue to pursue ad hoc parcel sales when opportunities exist.
During 1996, the Company sold, in the aggregate, 3,525 acres of miscellaneous land parcels on Hawaii for approximately $3.6 million.
LONG-TERM LEASES. Each of the Company's plantation subsidiaries leases agricultural lands from unrelated third parties. Such leases vary in length from month-to-month to 9 years and cover parcels of land ranging in acreage from one acre to 27,474 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 its agricultural businesses, primarily in connection with the cultivation and processing of sugar cane, with almost 15,000 acres of leased land currently under cultivation. Most of the leases provide for the Company to pay fixed annual minimum rents (ranging from $13 to $131 per usable acre), plus additional rents based upon a percentage of gross receipts generated by the Company's sugar cane operations on such land.
The following summary lists the material agricultural land leases of the Company's subsidiaries, as lessees, and certain material terms thereof:
Approximate Current Current Approximate Annual Additional Rent Expiration Sugar Cane Gross Minimum as % of Gross Renewal Lease Date Acreage Acreage Rent Receipts Option - ------ ------- --------- ----------- ------- -------- ----------
Kekaha mnth to mnth 7,926 27,474 $251,500 variable -- Lihue 10/30/99 4,054 6,200 $ 56,370 variable -- Lihue 12/15/02 0 3,106 $ 20,630 none -- Lihue 1/31/95(1) 1,919 5,151 $ 21,500 variable -- Pioneer mnth to mnth 889 1,639 $ 51,000 variable -- Pioneer 12/31/05 770 2,509 $100,917 7.25% --
(1) The Company is currently finalizing a new lease with the lessor.
Item 3.
Item 3. Legal Proceedings
The Company and/or certain of its affiliates have been named as defendants in several pending lawsuits, most of which constitute routine litigation arising from the ordinary conduct of its businesses. While it is impossible to predict the outcome of the pending (or threatened) litigation and 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 financial condition.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during 1995 and 1996.
PART II
Item 5.
Item 5. Market for the Company's and Finance's Common Equity and Related Security Holder Matters
The Company is a wholly-owned subsidiary of Northbrook Corporation and, hence, there is no public market for the Company's common stock. Finance is a wholly-owned subsidiary of Northbrook Corporation and there is no public market for Finance's common stock.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
All references to "Notes" herein are to Notes to Consolidated Financial Statements contained in this report.
On December 5, 1988, the Company commenced an offering to the public of COLAS pursuant to a Registration Statement on Form S-1 under the Securities Act of 1933. A total of 384,737 COLAS were issued prior to the termination of the offering on August 31, 1989. The net proceeds received from the sale of the COLAS totaled approximately $352 million (after deduction of organization and offering expenses of approximately $33 million). Such net proceeds have been used to repay a portion of the acquisition-related financing, which was incurred to pay certain costs associated with the Merger including a portion of the Merger consideration paid to shareholders of Amfac.
On March 14, 1989, Amfac/JMB Finance, Inc. ("Finance"), a wholly-owned subsidiary of Northbrook Corporation ("Northbrook") and the Company entered into an agreement (the "Repurchase Agreement") concerning Finance's obligations (on June 1, 1995 and June 1, 1999) to repurchase, upon request of the holders thereof, the COLAS. The COLAS were issued in units consisting of one Class A COLA and one Class B COLA. As specified in the Repurchase Agreement, the repurchase of the Class A COLAS on June 1, 1995 may have been requested of Finance by the holders of such COLAS 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 repurchase of the Class B COLAS on June 1, 1999 may be requested of Finance 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. Through the date of this report, the cumulative interest paid per Class A COLA and Class B COLA is approximately $165 and $165, respectively.
On March 14, 1989, Northbrook entered into a keep-well agreement with Finance, whereby it agreed to contribute sufficient capital or make loans to Finance to enable Finance to meet the COLA repurchase obligations, if any, described above. Notwithstanding Finance's repurchase obligations, the Company may elect to redeem any COLAS requested to be repurchased at the specified price.
On March 15, 1995, pursuant to the indenture that governs the terms of the COLAS (the "Indenture"), the Company elected to offer to redeem (the "Redemption Offer") all Class A COLAS from its registered holders. Pursuant to the Redemption Offer, and in accordance with the terms of the Indenture, the Company was therefore obligated to purchase any and all Class A COLAS submitted pursuant to the Redemption Offer at a price of $365 per Class A COLA. In conjunction with the Company's Redemption Offer, the Company made a tender offer (the "Tender Offer") to purchase up to approximately $68 million principal value of the Class B COLAS at a price of $220 per Class B COLA from COLA holders electing to have their Class A COLAS repurchased. Approximately 229,000 Class A COLAS were submitted for repurchase pursuant to the Redemption Offer and approximately 99,000 Class B COLAS were submitted for repurchase pursuant to the Tender Offer, requiring an aggregate payment of the Company of approximately $105 million on June 1, 1995. The Company used its available cash to purchase Class B COLAS pursuant to the Tender Offer and borrowed $52 million from Northbrook to purchase Class A COLAS pursuant to the Redemption Offer.
In addition to the $52 million borrowed from Northbrook to redeem Class A COLAS pursuant to the Redemption Offer (see Note 5), the Company has also borrowed approximately $18.8 million and $9.8 million during 1996 and 1995, respectively, to fund COLA Base Interest payments and other operational needs. These loans from Northbrook are payable interest only, mature on June 1, 1998 and carry 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 considered "Senior Indebtedness" to the COLAS.
As a result of the COLA repurchases, the Company retired approximately $164 million face value of debt and recognized a financial statement gain in the second quarter of 1995 of approximately $32.5 million (net of income taxes of $20.8 million, the write-off of deferred financing costs of $10.0 million, the write-off of accrued contingent base interest of $5.7 million and expenses of $.9 million). Such gain was treated as cancellation of indebtedness income for tax purposes and, accordingly, the income taxes related to the Class A Redemption Offer (approximately $9.1 million) were not indemnified by the tax agreement with Northbrook (see Note 1).
Pursuant to the terms of the Indenture relating to the COLAS, the Company is required to maintain a Value Maintenance Ratio of 1.05 to 1.00. Such ratio is equal to the relationship of the Company's Net Asset Value (defined as the excess of (i) Fair Market Value of the gross assets of the Company over (ii) the amount of the liabilities (excluding liabilities resulting from generally accepted accounting principles enacted subsequent to the date of the Indenture) of the Company other than the outstanding principal balance of the COLAS, any unpaid Mandatory and Contingent Base Interest, and certain other liabilities, to the sum of (x) the outstanding principal amount of the COLAS, plus (y) any unpaid Base Interest, plus (z) the outstanding principal balance of any Indebtedness incurred to redeem COLAS. The COLA Indenture requires the Company to obtain independent appraisals of the fair market value of the gross assets used to calculate the Value Maintenance Ratio as of December 31 in each even-numbered calendar year. Accordingly, the Company obtained independent appraisals of substantially all of its gross real estate assets as of December 31, 1996; the appraised values of such assets were sufficient to meet the Value Maintenance Ratio. In odd-numbered years (during which time appraisals are not required) the Fair Market Value of the gross assets of the Company used to compute the Value Maintenance Ratio is determined by the Company's management. To the extent that management believes that the aggregate Fair Market Value of the Company's assets exceeds by more than 5% the Fair Market Value of such assets included in the most recent appraisal, the Company must obtain an updated appraisal supporting such increase. It should be noted that the concept of Fair Market Value is intended to represent the value that an independent arm's-length purchaser, seeking to utilize such asset for its highest and best use would pay, taking into consideration the risks and benefits associated with such use or development, current restrictions on development (including zoning limitations, permitted densities, environmental restrictions, restrictive covenants, etc.) and the likelihood of changes to such restrictions; provided, however, that with respect to any Fair Market Value determination of all of the assets of the Company, such assets shall not be valued as if sold in bulk to a single purchaser. There can be no assurance that the Company's properties can be ultimately sold at prices equivalent to their appraised values.
In June 1991, the Company obtained a five-year $66 million loan from the Employees' Retirement System of the State of Hawaii ("ERS"). The nonrecourse loan is secured by a first mortgage on the Kaanapali Golf Courses, and is considered "Senior Indebtedness" (as defined in the Indenture relating to the COLAS). The loan bore interest at a rate per annum equal to the greater of (i) the base interest rate announced by the Bank of Hawaii on the first of July for each year or (ii) ten percent per annum through June 30, 1993 and nine percent per annum thereafter. The annual interest payments were in excess of the cash flow generated by the Kaanapali Golf Courses.
In April 1996, the Company reached an agreement to amend the loan with the ERS, extending the maturity date for five years. In exchange for the loan extension, the ERS received the right to participate in the "Net Disposition Proceeds" (as defined) related to the sale or 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 has made payments in 1996 totaling $6.5 million, which represents the Minimum Interest due through October 1, 1996. Accrued Minimum Interest as of December 31, 1996 was $1.2 million. The scheduled minimum payments are paid quarterly on the principal balance of the $66 million loan. The difference between the accrued interest expense and the Minimum Interest payment accrues interest and is payable on an annual basis from excess cash flow, if any, generated from the Kaanapali Golf Courses. The total accrued interest payable from excess cash flow was approximately $3.2 million as of December 31, 1996. Although the outstanding loan balance remains nonrecourse, certain payments and obligations, such as the Minimum Interest payments and the ERS's share of appreciation, if any, are recourse to the Company. However, the Company's obligations to make future Minimum Interest payments and to pay the ERS a share of appreciation would be terminated if the Company tendered an executed deed to the golf course property to the ERS in accordance with the terms of the amendment.
In October 1993, Waikele Golf Club, Inc. ("WGCI"), a wholly-owned subsidiary of the Company that owns and operates the Waikele Golf Course, obtained a five year $20 million loan facility from two lenders. The loan consists of two $10 million amortizing loans. Each loan bore interest only for the first two years with interest and principal payments based upon a 20 year amortization period for the remaining three years. The loans bear interest at prime (8.25% at December 31, 1996) plus 1/2% and LIBOR (5.5% at December 31, 1996) plus 3%, respectively. WGCI received an initial funding of $14 million of which $.6 million was held back by the lenders to pay interest. In October 1994, in accordance with the loan agreement, the Company received an additional funding of $6 million (part of the aggregate $20 million) and a release of the $.6 million interest holdback, both of which were contingent upon achieving a certain level of Net Operating Income (as defined) by the golf course during the first six months of 1994. The loan is secured by WGCI's assets (see Note 6), is guaranteed by the Company and is considered "Senior Indebtedness" (as defined in the COLA Indenture). 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 million, 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.
Pursuant to an agreement entered into with the City of Honolulu in 1991 relating to the development of the Company's Waikele project, if the Company sells the Waikele golf course and depending on the price and resolution of certain issues, a payment of up to $15 million might be required to be given to the City to be used to assist in the City's affordable housing developments.
In December 1996, Amfac Property Development Corporation, a wholly-owned subsidiary of the Company, obtained a $10 million loan facility from a Hawaii bank. The loan is secured by a mortgage on property under development at the former mill- site of Oahu Sugar, and is considered "Senior Indebtedness" (as defined in the Indenture relating to the COLAS). The loan bears interest at the bank's base rate (8.25% at December 31, 1996) plus .5% and matures on December 1, 1998.
A significant portion of the Company's cash needs result from the nature of the real estate development business, which requires significant investment in preparing development plans, seeking land urbanization and other governmental approvals, and completing infrastructure improvements prior to the realization of sales proceeds. The Company has funded its cash requirements to date primarily through the use of short- term bank borrowings, long-term financing secured by its golf courses on Maui and Oahu and by a planned real estate project on Oahu, borrowings from affiliates and revenues generated from the development and sale of its properties and investments. Funding of the Company's future cash requirements is dependent upon obtaining appropriate financing and revenues generated from the development and sale of its properties.
In order to generate additional cash flows for the Company, management has identified certain land parcels that are not included in the Company's long-term development plans. During 1996, the Company generated approximately $13.4 million from non-strategic land sales and an additional $5.5 million from the sale of 18 lots at the Kaanapali Golf Estates development on the island of Maui. During 1995, the Company generated approximately $30.8 million in land sales, most of which related to non-strategic parcels. In addition, during 1995 the Company received an approximate $1.0 million deposit, which represents the purchase price for 10 acres on Oahu.
During 1994, the Company generated approximately $44.3 million in property sales primarily from the sale of the last two remaining residential parcels at the Waikele project on Oahu for approximately $37 million. The remaining $7.3 million of property sales in 1994 related to land sales on the islands of Maui, Kauai and Hawaii. Additionally, the Company received an approximate $4.2 million deposit, which represented the purchase price for 452 acres on Maui.
At December 31, 1996, the Company had cash and cash equivalents of approximately $8.7 million.
The Company intends to use its cash reserves, sales proceeds and financing or joint venture arrangements to meet its short-term and long-term liquidity requirements, which include funding the remaining development costs at Waikele and on West Maui, Oahu and Kauai, agricultural deficits, payment of interest expense, and the repayment of principal on debt obligations, as necessary. The Company's long-term remaining liquidity is dependent upon its ability to obtain additional financing and the consummation of certain property sales. There can be no assurance that additional long-term financing can be obtained or property sales consummated. The Company's land holdings on Maui and Kauai are its primary source of future land sale revenues. However, due to current market conditions, the difficulty in obtaining land use approvals and the high development cost of required infrastructure, the planned development of these land holdings and the ability to generate cash flow from these land holdings are longer term in nature than the time frame experienced at Waikele. Accordingly, if no such financing can be obtained or additional property sales consummated, the Company will defer (to the extent possible) development costs and capital expenditures to meet long-term liquidity requirements. Additionally, the Company's plans for property sales may also be adversely impacted by the inability of potential buyers to obtain financing.
The Company uses the effective interest method and accrued interest on the COLAS at 4% per annum ("Mandatory Base Interest") for the years ended December 31, 1994, 1995 and 1996. The Company did not generate a sufficient level of Net Cash Flow to pay Base Interest on the COLAS (see Note 5) in excess of 4% for 1994, 1995 and 1996. With respect to any calendar year, JMB or its affiliates may receive a Qualified Allowance in an amount equal to: (i) approximately $6,200 during each of the calendar years 1989 through 1993, and (ii) thereafter, 1-1/2% per annum of the Fair Market Value (as defined) of the gross assets of the Company and its subsidiaries (other than cash and cash equivalents and Excluded Assets (as defined)) for providing certain advisory services for the Company. However, such amounts shall be earned and paid for each year only following the payment of a specified level of Base Interest to the holders of the COLAS. Any portion of the Qualified Allowance not paid for any year shall accumulate without interest. Any Qualified Allowance subsequent to 1989 has been deferred and is payable only to the extent future Net Cash Flows are sufficient to pay the holders of the COLAS a specified level of return and, accordingly, no such amounts have been reflected 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 Company continues to implement certain cost savings measures and to defer development project costs and capital expenditures for longer-term projects. The Company's Property segment expended approximately $7.9 million in project costs during 1996.
During 1995, the Company restructured its sugar operations to improve efficiencies and reduce costs, including consolidation of the operations at its two Kauai plantations and changing to a seasonal mode of operations at its Maui plantation (consistent with other global sugar operations).
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 supports 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, keeps the loan rate at 18 cents per pound. However, the Act includes certain other adjustments to the sugar program including making crop loans recourse to the producer and repealing marketing allotments which may over time depress the domestic price of raw sugar. There can be no assurance that, in the future, the government price support will not be reduced or eliminated entirely. Such a reduction or 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.
In August 1993, the Company announced its plans to phase out the sugar operations at its Oahu Sugar Company by mid- 1995, such phase out coinciding with the expiration of its major land lease on Oahu. Oahu Sugar, which operated almost entirely on leased land, had incurred losses in its sugar operations in prior years and expected those losses to continue in the future. Oahu Sugar completed the final harvest of its crop in April 1995. The Company has shut down Oahu Sugar and any estimated future costs related to the shut down are not expected to have a material adverse effect on the financial condition of the Company. The Company is currently pursuing development of the fee simple land it owns adjacent to the Oahu Sugar mill site, including seeking the necessary government approvals for a light industrial subdivision for a portion of the property, as discussed below.
The sugar industry in Hawaii has experienced significant difficulties during the past several years. Growers in Hawaii have struggled with the high costs of production, which have led to the closure of several plantations, including the Company's sugar operations on Oahu in 1995. The Company has tried to address these challenges through a number of different measures, including a restructuring in 1995, whereby its two Kauai plantations were consolidated and its sugar operations on Maui were changed to a seasonal mode.
While the above-noted changes have helped to reduce expenses, the Company must continue to explore alternatives to further address the high costs of sugar production. One such alternative relates to the three-year labor contract the Company has with its sugar plantation employees, which expires in February 1998. Within the contract is a provision that allows the Company and the union to renegotiate wages in 1997. In light of the difficulties the Company has had in trying to improve the operating results of its sugar business, management has been meeting with union representatives to discuss appropriate wage levels. After discussions and negotiations with the union, it was agreed that wages would remain at the current levels until the end of the contract. This agreement is subject to ratification by the union membership. The Company and the union have tentatively agreed to return to the bargaining table during the summer of 1997 to negotiate the terms for a new contract which will begin in 1998. Although the Company is hopeful that it will reach agreement on contract modifications that would help improve the viability of its sugar plantations, there can be no assurance that sufficient changes will be agreed upon.
In early March 1997, the Company announced a management restructuring that has resulted in the creation of six separately operating entities in the following businesses: Sugar, Golf, Coffee, Water, Land Management and Real Estate Development. Each separate company or division will be responsible for its own operations. The Company believes it will operate more effectively as several smaller entrepreneurial companies, rather than as one large conglomerate. Approximately four percent of the Company's total employees were released as a result of the restructuring.
Results of Operations
General:
The Company and its subsidiaries report its taxes as a 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, which indemnifies the Company and its subsidiaries for responsibility for all past, present and future federal and state income tax liabilities (other than income taxes which are directly attributable to cancellation of indebtedness income caused by the repurchase or redemption of securities as provided for in or contemplated by the Repurchase Agreement).
Current and deferred taxes have been allocated to the Company as if the Company were a separate taxpayer in accordance with the provisions of SFAS No. 109 - Accounting for Income Taxes. However, to the extent the tax indemnification agreement does not require the Company to actually pay income taxes, current taxes payable or receivable (excluding income taxes which are directly attributable to cancellation of indebtedness income caused by the repurchase or redemption of securities as provided for in or contemplated by the Repurchase Agreement) have been reflected as deemed contributions and distributions, respectively, to additional paid-in capital in the accompanying consolidated financial statements.
Accrued expenses decreased as of December 31, 1996 as compared to December 31, 1995, primarily due to the reclassification of deferred interest on the ERS loan to non- current.
Current portion of long-term debt decreased and long-term debt increased as of December 31, 1996 as compared to December 31, 1995, due primarily to the reclassification of the ERS loan from current to long-term (see Note 6). In addition, long-term debt increased as of December 31, 1996 as compared to December 31, 1995 due to financing obtained for the Oahu Industrial Project.
The current portion of amounts due to affiliates decreased as of December 31, 1996 as compared to December 31, 1995 due to the payment of interest on financing provided by affiliates and the reclassification of certain intercompany payables from current to long-term (see Note 9).
The long-term portion of amounts due to affiliates increased as of December 31, 1996 as compared to December 31, 1995, due to the reclassification of certain intercompany payables from current to long-term (see Note 9).
Other long-term liabilities increased as of December 31, 1996 as compared to December 31, 1995 primarily due to the difference between the interest expense accrued and Minimum Interest payments required under the amended terms of the ERS loan (see Note 6) offset in part by reductions to reserves for prior land sales.
Interest expense increased for the year ended December 31, 1996 as compared to the year ended December 31, 1995 primarily due to interest expense related to additional affiliated financing, partially offset by the early retirement of Class A and Class B COLAS.
Agriculture:
The Company's Agriculture segment is responsible for activities related to the cultivation, processing and sale of sugar cane and other agricultural products. Agriculture's revenues are primarily derived from the Company's sale of its raw sugar.
The Company's sugar plantation subsidiaries sell their raw sugar production to the Hawaiian Sugar and Transportation Company ("HSTC"), which is an agricultural cooperative owned by the major Hawaii producers of raw sugar (including the Company), under a marketing agreement. HSTC sells the raw sugar production to the California and Hawaii Sugar Company ("C&H") pursuant to a long-term supply contract. The terms of the supply contract do not require a specified level of production by the Hawaii producers; however, HSTC is obligated to sell and C&H is obligated to purchase any raw sugar produced. HSTC returns to its raw sugar suppliers proceeds based upon the domestic sugar price less delivery and administrative charges. The Company recognizes revenues and related cost of sales upon delivery of its raw sugar to C&H.
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 supports 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, keeps the loan rate at 18 cents per pound. However, the Act includes certain other adjustments to the sugar program including making crop loans recourse to the producer and repealing marketing allotments which may over time depress the domestic price of raw sugar. There can be no assurance that, in the future, the government price support will not be reduced or eliminated entirely. Such a reduction or 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. 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.
The sugar industry in Hawaii has experienced significant difficulties during the past several years. Growers in Hawaii have struggled with the high costs of production, which have led to the closure of several plantations, including the Company's sugar operations on Oahu in 1995. The Company has tried to address these challenges through a number of different measures, including a restructuring in 1995, whereby its two Kauai plantations were consolidated and its sugar operations on Maui were changed to a seasonal mode.
While the above-noted changes have helped to reduce expenses, the Company must continue to explore alternatives to further address the high costs of sugar production. One such alternative relates to the three-year labor contract the Company has with its sugar plantation employees, which expires in February 1998. Within the contract is a provision that allows the Company and the union to renegotiate wages in 1997. In light of the difficulties the Company has had in trying to improve the operating results of its sugar business, management has been meeting with union representatives to discuss appropriate wage levels. After discussions and negotiations with the union, it was agreed that wages would remain at the current levels until the end of the contract. This agreement is subject to ratification by the union membership. The Company and the union have tentatively agreed to return to the bargaining table during the summer of 1997 to negotiate the terms for a new contract which will begin in 1998. Although the Company is hopeful that it will reach agreement on contract modifications that would help improve the viability of its sugar plantations, there are no assurances that sufficient changes will be agreed upon.
In September 1992, Hurricane Iniki struck the Island of Kauai causing considerable damage and loss to the people and businesses on Kauai. The Company has two sugar plantations on Kauai, both of which sustained considerable damage. The Company's real estate assets on Kauai suffered very little damage, since most of the Company's development expenditures up to that time had been focused on the islands of Oahu and Maui. The Company finalized the settlement of its insurance claims in 1995 for damage suffered and collected approximately $30 million in proceeds over the approximately three year period subsequent to the hurricane.
Receivables decreased as of December 31, 1996 as compared to December 31, 1995 primarily due to the timing of production and related payments received for deliveries of raw sugar and the collection of certain insurance claims outstanding as of December 31, 1995.
Machinery and equipment increased as of December 31, 1996 as compared to December 31, 1995 due primarily to the purchase of equipment and improvements at the sugar plantations.
Agricultural revenues and cost of sales increased and the operating loss decreased for the year ended December 31, 1996 as compared to the year ended December 31, 1995 due to increased sales of raw sugar. The increase in cost of sales was offset in part by higher cost in 1995 associated with the final phase of operations at Oahu Sugar.
Agriculture's revenues from sugar operations decreased for the year ended December 31, 1995 as compared to the year ended December 31, 1994 as a result of lower production due to less acres harvested. Non-sugar revenues also decreased due to non-recurring revenues received in 1994. Agriculture's operating loss for the year ended December 31, 1995 increased as compared to the year ended December 31, 1994 due to a deterioration of gross margin resulting from lower production and the receipt of non-recurring non-sugar revenues in 1994. The lower production is attributable to the shutdown of Oahu Sugar and inclement weather which adversely affected operations at the Company's two Kauai plantations. Inclement weather has a greater impact on the Company's seasonal mode of operations because of reduced flexibility in the harvesting schedule.
Property:
The Company's Property segment is responsible for the following: land planning and development activities; obtaining land use, zoning and other governmental approvals; selling or financing developed and undeveloped land parcels; and the management and operation of the Company's golf course facilities.
Inventory increased as of December 31, 1996 as compared to December 31, 1995 due to the reclassification of land to inventory discussed below, offset in part by a decrease in agricultural inventory.
Land and land improvements decreased as of December 31, 1996 as compared to December 31, 1995 due primarily to land sales and the reclassification of certain land parcels held for sale to inventory.
In accordance with the provisions of the COLA Indenture, appraisals were performed for certain assets of the Company as of December 31, 1996 and 1994, which reflected a decline in value for certain properties. Accordingly, the Company recorded, as a matter or prudent accounting practice, reductions to the carrying value of these properties in the fourth quarter of 1996 and the fourth quarter of 1994 in the amounts of $18.3 million and $5.0 million, respectively, to properly reflect the estimated market value of the property in its current state of development.
Other assets increased as of December 31, 1996 as compared to December 31, 1995 primarily due to deferred costs related to preliminary planning costs associated with potential future development projects.
For the year ended December 31, 1996 and December 31, 1995, the Company generated approximately $18.9 million and $30.8 million of land sales, respectively.
Property sales decreased and cost of sales increased as of December, 31, 1996 as compared to December 31, 1995 primarily due to the lower level of sales of non-strategic land parcels in 1996 and the lower margins realized for the parcels sold in 1996.
During 1994, the Company generated approximately $44.3 million of land sales, primarily from the sales of the remaining two residential parcels at the Waikele project on Oahu for approximately $37 million. The balance of the 1994 proceeds resulted from the sale of parcels aggregating 225 acres on various islands for approximately $7.3 million. Additionally, the Company received an approximate $4.2 million deposit, which represented the purchase price for 452 acres of agriculture-zoned land on Maui. The gain from such sale is being deferred due to certain profit participation rights retained by the Company.
OAHU ACTIVITY
The Company expended approximately $1.3 million, $.5 million and $3 million in 1996, 1995 and 1994, respectively, for project costs at Waikele. Such costs include construction of roadways, utilities and related infrastructure improvements and the golf course and clubhouse. On a cumulative project-to- date basis, the Company has expended approximately $118 million on project costs and has completed sales at Waikele of approximately $231 million. Such sales have included commercial property and parcel sales to home builders. Except for certain contingent participation rights, the Company has received all of its proceeds from the sales of the residential and commercial parcels at Waikele.
The Company is currently developing the approximately 60 acres of fee simple land it owns at the mill-site of Oahu Sugar Company (which was shut down in 1995). The Company has received zoning for a light industrial subdivision on an approximately 37-acre portion of the property, which excludes property containing the sugar mill and adjacent buildings. In connection with the development of this property, the Company has received state land use urbanization for the entire 60 acre site. Marketing of parcels within the light industrial subdivision is slated for mid-to-late 1997 after subdivision is complete. In addition, the Company has begun the process of seeking the necessary government approvals for the redevelopment for the remainder of the mill-site parcels, including planned commercial, public and quasi-public uses.
MAUI ACTIVITY
The planned development of the Company's land on Maui is longer term in nature than the time frame experienced with Waikele. As Maui is less populated than Oahu and more dependent on the resort/tourism industry, much of the Company's land is intended for resort and resort-related uses. Due to overall economic conditions and trends in tourism, recent demand for these land uses has been relatively weak. The Company's currently available homesite product on Maui, which is targeted to the second home buyer, has experienced very slow sales activity to date. The Company's competitors on Maui have also experienced slow sales activity in the second home market. The Company is continuing to evaluate its planned products and the timing of development of its land holdings in light of the current weak market demand and the capital resources needed for future development.
The Company is marketing Kaanapali Golf Estates, a residential community that is part of South Beach Mauka, adjacent to the Kaanapali Beach Resort in West Maui. During 1996, the Company sold 18 homesites for approximately $5.5 million, which includes 10 homesites to a developer who plans to construct and sell houses on these lots. The Company currently has 6 homesites on the market, which are priced at approximately $.5 million.
In addition, the Company subdivided an ocean front parcel in Kaanapali into six single family homesites of approximately one acre each. The individual lot prices range from $1.9 million to $2.4 million. Sales of two of the lots in the project closed in December 1995, generating total sales proceeds of approximately $4.1 million. The Company is marketing the remaining four lots individually, and as a package to local builders.
In 1986, the Company entered into a joint venture agreement with Tobishima Pacific Inc. ("Tobishima"), a wholly- owned subsidiary of a Japanese company, the purpose of which is to plan, manage and develop approximately 96 acres of beachfront property at Kaanapali (known as "North Beach"). The joint venture (in which the Company has a 50% interest) has State land use and County zoning approvals for the subdivision and development of the infrastructure improvements necessary to accommodate up to 3,200 hotel and/or condominium units on this site. These development plans may be affected by the current review of state land designations (discussed below). This North Beach property constitutes nearly all of the remaining developable beachfront acreage at Kaanapali. In October 1992, the Company completed construction of a 3-acre park on the North Beach site, which is part of the master plan for this property and was a requirement imposed by the County in obtaining certain permits. The development of North Beach continues to be tied to the completion of the aforementioned Lahaina bypass highway or other traffic mitigation measures satisfactory to the Maui County Planning Commission.
The Company is seeking final approvals to develop a time- share resort on 14 acres of the North Beach property (the "Site"). A land option/purchase agreement was entered into with Tobishima in October 1996. This agreement gives the Company an option to purchase Tobishima's 50% interest in the Site for $7 million. The Company does not expect to consummate the purchase until all discretionary land use permits are received for development of the time-share resort. In accordance with the land option/purchase agreement, the Company has made a nonrefundable deposit of $.1 million (which may be applied to the purchase price) to keep the option available through September 30, 1997. Additional nonrefundable deposits may be made to extend the option through August 31, 2000. The Company has filed development plans and related information with the County of Maui to obtain a Special Management Area ("SMA") permit for the time- share resort. Although there can be no assurance that the SMA permit will be received (and that if such permit is received, that its terms and conditions will be acceptable to the Company), management is optimistic that the Company will receive the necessary approvals to proceed with the project.
The Company believes that the potential for a successful time-share development at North Beach will be greatly enhanced by the involvement of a company with experience in the time- share business. As a result, in February 1997, the Company entered into a partnership with affiliates of Interval Resorts West, the developer of The Ridge Tahoe resort in South Lake Tahoe, Nevada. The partnership will be responsible for constructing, developing, operating, maintaining, owning and managing the time-share resort project planned for the 14-acre portion of North Beach. The Company has majority ownership interest in the partnership. After receipt of the SMA permit, the partnership will need to arrange project financing for the development of the time-share resort. The aforementioned land option/purchase agreement with Tobishima includes short-term seller financing, which the time-share partnership may decide to utilize.
In February 1996, the Maui County Council adopted a Community Plan ordinance for West Maui that does not include any amendments to the current Community Plan designation of the Company's North Beach property, thus rejecting the recommendation of certain citizens groups that wanted two- third's of North Beach to be downzoned to "Park" designation. The ordinance was signed by the Mayor of the County of Maui and became effective on February 27, 1996.
Further, the Department of the Army has determined that there are two wetlands sites on the North Beach property, totaling approximately 21,800 square feet. The Company has retained experts to evaluate these sites and to insure compliance with all laws. While there can be no assurance as to the ultimate determinations with respect to the wetlands issue, the Company does not anticipate that these sites will materially adversely affect the development plans for North Beach.
In March 1991, the Company received final land use approval from the State for development of approximately 240 residential lots on approximately 125 acres of land known as "South Beach Mauka" and located adjacent to the existing Kaanapali Beach Resort. In connection with this land use approval, the Company is committed to providing additional housing on Maui in the affordable price range, and to participating in the funding of the design and construction of the planned bypass highway extending from Lahaina to the north end of Kaanapali. The Company has entered into a development agreement with the State Department of Transportation covering the Company's participation in the design and construction of the bypass highway. It is anticipated that the Company will expend up to $3.5 million (in the aggregate), of which $2.2 million has been spent as of December 31, 1996, in the design of the bypass highway and/or the widening of the existing highway.
In connection with the development of North Beach Mauka and adjacent parcels, the Company has committed $6.7 million for the construction of the bypass highway, subject to certain conditions. 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.
During 1993, the Company obtained final land use approval from the State, and certification through the State's Housing Finance Development Corporation ("HFDC"), for the development of a project on approximately 300 acres of Company land known as "Puukolii Village", which is also located near Kaanapali Beach Resort. A significant portion of the housing in this project will be in the affordable price range. The final land use approval and the HFDC development agreement contain certain conditions which must be satisfied in order for the Company to develop Puukolii Village, including realigning the access road, which will benefit uses for adjacent Company's to develop its lands in future periods. Moreover, development of most of Puukolii Village cannot commence until after completion of the state-planned Lahaina bypass highway (mentioned above). The proposed development of Puukolii Village is anticipated to satisfy the Company's affordable housing requirements in connection with the South Beach Mauka land use approval as well as for the Company's North Beach property (described above). The Company commenced construction of infrastructure of Puukolii Village in the last quarter of 1996, beginning with an access road.
KAUAI ACTIVITY
In June 1994, the Company submitted a Land Use Boundary Amendment Petition with the State of Hawaii Land Use Commission ("LUC") and a General Plan Amendment Application with the County of Kauai for the urbanization of approximately 552 acres of land on Kauai currently in sugar cane cultivation. The proposed project is planned to be a mixed use master planned community which will include a variety of both affordable and market rate residential units, commercial and industrial projects and a number of community and public based facilities. The filing of these land use applications is the first step required in converting agriculture zoned land into urban zoned land. There are a number of additional reports, studies, applications and permits that will be required before final land use approvals are obtained. In May 1995, the County of Kauai approved the Company's General Plan Amendment Application, subject to a number of conditions. In December 1995, the LUC granted the Company the land use amendments sought by the Company subject to a number of conditions. In May 1996, the Kauai County approved the Company's application to rezone the project. Before construction can commence, the Company must satisfy several conditions imposed during the approval process and obtain additional administrative development permits for requirements such as grading and subdivision. The permitting process in Hawaii has historically been a very difficult and arduous process and there is no guarantee that all permits will be obtained. Once construction commences, subject to market conditions, the project is expected to span over 20 years.
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 8. Financial Statements and Supplementary Data
AMFAC/JMB HAWAII, INC.
INDEX
Report of Independent Auditors Consolidated Balance Sheets, December 31, 1996 and 1995 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Stockholder's Equity (Deficit) for the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994
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, 1996 and 1995 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.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder AMFAC/JMB HAWAII, INC.
We have audited the accompanying consolidated balance sheets of Amfac/JMB Hawaii, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholder's equity (deficit), and cash flows for each of the three years in the period ended December 31, 1996. 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, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, 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 21, 1997
AMFAC/JMB HAWAII, INC.
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(Dollars in Thousands)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF ACCOUNTING
On November 17, 1988, the stockholders of Amfac, Inc. ("Amfac") agreed to the merger ("Merger") of Amfac with an affiliate of JMB Realty Corporation ("JMB"). The Merger was consummated on November 18, 1988. Amfac/JMB Hawaii, Inc. ("the Company") was wholly-owned by Amfac, a subsidiary of Northbrook Corporation ("Northbrook"). In May 1995, Amfac merged into Northbrook, with Northbrook being the surviving corporation.
The Company, or its subsidiaries, hold title to substantially all of the agricultural and developmental real property and related assets of its parent corporation, Northbrook, located in Hawaii. The Company is wholly-owned by Northbrook, and is an affiliate of JMB as a result of the Merger and the subsequent merger of a subsidiary of an affiliate of JMB into Amfac Hawaii, Inc., which (after changing its name to Amfac/JMB Hawaii, Inc.) continues as the surviving corporation.
On December 5, 1988, the Company commenced a public offering of Certificate of Land Appreciation Notes due 2008 ("COLAS") of which a total of 384,737 COLAS were subscribed for and issued. The offering terminated on August 31, 1989.
The Company has two primary business segments. The agriculture segment ("Agriculture") is responsible for the Company's activities related to the cultivation and processing of sugar cane and other agricultural products. The real estate segment ("Property") is responsible for land development activities related to the Company's owned land in the State of Hawaii.
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.
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 $4,900 and $3,700 at December 31, 1996 and 1995, respectively) as cash equivalents which approximates market. These amounts include $1,552 and $1,623 at December 31, 1996 and 1995, respectively, which were restricted primarily to fund debt service on long-term debt related to the acquisition of power generation equipment (see note 6).
AMFAC/JMB HAWAII, INC.
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands)
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. The Company believes the carrying value of its long-term debt (notes 4 and 6) approximates fair value. 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 thin. 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 $.330 per Class B COLA and from approximately $.482 to $.545 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, 1996 in the accompanying consolidated financial statements), the implied SFAS No. 107 value of the COLAS would range from approximately $108,000 to 128,000. 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, 1996 at this value. Reference is made to note 5 for results of the Redemption and Tender Offer.
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
AMFAC/JMB HAWAII, INC.
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands)
December 31, 1996 and 1995 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 supports 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, keeps the loan rate at 18 cents per pound. However, the Act includes certain other adjustments to the sugar program including making crop loans recourse to the producer and repealing marketing allotments which may over time depress the domestic price of raw sugar. There can be no assurance that, in the future, the government price support will not be reduced or eliminated entirely. Such a reduction or 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. These futures contracts and options are accounted for as hedges and, accordingly, gains and losses are deferred and recognized in cost of sales as part of the production cost.
INVESTMENTS
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.
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
AMFAC/JMB HAWAII, INC.
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands)
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 $1,327 have been capitalized for the year ended 1996. No material amounts have been capitalized for the year ended 1995 and 1994.
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. The Company adopted SFAS No. 121 in 1995, with no effect on the accompanying financial statements.
In accordance with the provisions of the COLA Indenture, appraisals were performed for certain assets of the Company as of December 31, 1996 and 1994, which reflected a decline in value for certain properties. Accordingly, the Company recorded, as a matter or prudent accounting practice, reductions to the carrying value of these properties in the fourth quarter of 1996 and the fourth quarter of 1994 in the amounts of $18,315 and $5,000, respectively, to properly reflect the estimated market value of the property in its current state of development.
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, 1996, 1995 and 1994.
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.
AMFAC/JMB HAWAII, INC.
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands)
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 that indemnifies the Company and its subsidiaries for responsibility for all past, present and future federal and state income tax liabilities (other than income taxes which are directly attributable to cancellation of indebtedness income caused by the repurchase or redemption of securities as provided for in or contemplated by the Repurchase Agreement).
Current and deferred taxes have been allocated to the Company as if the Company were a separate taxpayer in accordance with the provisions of SFAS No. 109-Accounting for Income Taxes. However, to the extent the tax indemnification agreement does not require the Company to actually pay income taxes, current taxes payable or receivable have been reflected as deemed contributions or distributions to additional paid-in capital 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.
AMFAC/JMB HAWAII, INC.
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands)
(2) ASSETS AND LIABILITIES INFORMATION 1996 1995 ------- ------- Receivables - net: Trade accounts and notes (net of allowance) $ 2,161 2,252 Sugar and molasses 1,663 3,877 Insurance claims, net -- 1,440 Other 917 1,151 ------- ------- $4,741 8,720 ======= ======= Accrued expenses: Payroll and benefits $ 2,540 2,592 Interest 4,470 7,929 Other 2,264 2,747 ------- ------- $ 9,274 13,268 ======= =======
(3) INVESTMENTS
The Company's investments at December 31, 1996 and 1995 consist of the following:
Carrying Value -------------- Ownership Description Percentage 1996 1995 - ----------- ----------- ------ ------ Sugar Cooperatives 26.0% $ 41 40 North Beach Joint Venture 50.0% 46,146 45,040 ------- ------- $ 46,187 45,080 ======= =======
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 percent 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.
AMFAC/JMB HAWAII, INC.
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands)
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 following is the condensed, combined financial statement information (unaudited) of HSTC and the North Beach joint venture:
1996 1995 ----------------- ----------------- North Beach North Beach Joint Venture HSTC Joint Venture HSTC -------------------- -------------------
Current assets $ 255 13,613 210 31,558
Noncurrent assets 40,100 1,907 40,122 3,797 Current liabilities (202) (14,011) (205) (31,046) Noncurrent liabilities -- (1,400) -- (4,200) -------- ------- ------- -------- Equity $ 40,153 109 40,127 109 ======== ======= ======== ========
1996 1995 1994 ------ ------ ------ Revenue $203,406 202,954 312,526 Cost and expenses 19,755 20,493 28,472 -------- -------- -------- Net income $183,651 182,461 284,054 ======== ======== ========
AMFAC/JMB HAWAII, INC.
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands)
(4) AMOUNTS DUE AFFILIATES - FINANCING
The maturity date of the approximately $15,097 of remaining acquisition- related financing owed to affiliates has been extended to June 1, 1998 and bears interest at a rate per annum based upon the prime interest rate (8.25% at December 31, 1996), 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 has also borrowed approximately $18,746 and $9,814 during 1996 and 1995, respectively, to fund COLA Base Interest payments and other operational needs. These loans from Northbrook are payable interest only, mature on June 1, 1998 and carry 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 considered "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. The new note is payable interest only, which accrues at the prime interest rate plus 2%.
(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 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 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).
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 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 incurred in connection with its operations), plus 55% of the remaining Maturity Market Value.
AMFAC/JMB HAWAII, INC.
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands)
On March 14, 1989, Amfac/JMB Finance ("Finance"), a wholly-owned subsidiary of Northbrook, and the Company entered into an agreement (the "Repurchase Agreement") concerning Finance's obligations to repurchase, on June 1, 1995 and 1999, the COLAS upon request of the holders thereof. The COLAS were issued in two units consisting of one Class A and one Class B COLA. As specified in the Repurchase Agreement, the repurchase of the Class A COLAS may have been requested by the holders of such COLAS on June 1, 1995 at a price equal to the original principal amount of such COLAS ($.5) minus all payments of principal and interest allocated to such COLAS. The cumulative interest paid per Class A COLA through June 1, 1995 was $.135. The repurchase of the Class B COLAS may be requested of Finance by the holders of such COLAS on June 1, 1999 at a price equal to 125% of the original principal amount of such COLAS ($.5) minus all payments of principal and interest allocated to such COLAS. Through the date of this report, the cumulative interest paid per Class A and Class B COLA is approximately $.165 and $.165, respectively.
On March 14, 1989, Northbrook entered into a keep-well agreement with Finance, whereby it agreed to contribute sufficient capital or make loans to Finance to enable Finance to meet its COLA repurchase obligations described above. Notwithstanding Finance's repurchase obligations, the Company may elect to redeem any COLAS requested to be repurchased at the specified price.
On March 15, 1995, pursuant to the indenture that governs the terms of the COLAS (the "Indenture"), the Company elected to offer to redeem (the "Redemption Offer") all Class A COLAS from the registered holders, thereby eliminating Finance's obligation to satisfy the Class A COLA repurchase options requested by such holders as of June 1, 1995. Pursuant to the Redemption Offer, and in accordance with the terms of the Indenture, the Company was therefore obligated to purchase any and all Class A COLAS submitted pursuant to the Redemption Offer at a price of $.365 per Class A COLA. In conjunction with the Company's Redemption Offer, the Company made a tender offer (the "Tender Offer") to purchase up to approximately $68,000 principal value of the Class B COLAS at a price of $.220 per Class B COLA from COLA holders electing to have their Class A COLAS repurchased. Approximately 229,000 Class A COLAS were submitted for repurchase pursuant to the Redemption Offer and approximately 99,000 Class B COLAS were submitted for repurchase pursuant to the Tender Offer, requiring an aggregate payment by the Company of approximately $105,450 on June 1, 1995. The Company used its available cash to purchase Class B COLAS pursuant to the Tender Offer and borrowed $52,000 from Northbrook to purchase Class A COLAS pursuant to the Redemption Offer.
As a result of the 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
AMFAC/JMB HAWAII, INC.
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands)
was treated as cancellation of indebtedness income for tax purposes and, accordingly, the income taxes related to the Class A Redemption Offer (approximately $9,106) were not indemnified by the tax agreement with Northbrook (see note 1).
The terms of the Indenture relating to the COLAS place certain restrictions on the Company's declaration and payment of dividends. Such restrictions generally relate to the source, timing and amounts 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 considered "Senior Indebtedness" (as defined in the Indenture relating to the COLAS). The loan bore interest at a rate per annum equal to the greater of (i) the base interest rate announced by the Bank of Hawaii on the first of July for each year or (ii) ten percent per annum through June 30, 1993 and nine percent per annum thereafter. The annual interest payments were in excess of the cash flow generated by the Kaanapali Golf Courses.
In April 1996, the Company reached an agreement to amend the loan with the ERS, extending the maturity date for five years. In exchange for the loan extension, the ERS received the right to participate in the "Net Disposition Proceeds" (as defined) related to the sale or the refinancing of the golf courses or at the maturity of the loan. The ERS share of the Net Disposition Proceeds increases from 30% 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 1996 totaling $6,512, which represents the Minimum Interest due through October 1, 1996. Accrued Minimum Interest as of December 31, 1996 was $1,244. 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 total accrued interest payable from excess cash flow was approximately $3,151 as of December 31, 1996. Although the outstanding loan balance remains nonrecourse, certain payments and obligations, such as the Minimum Interest payments and the ERS's share of appreciation, if any, are recourse to the Company. However, the Company's obligations to make future Minimum Interest payments and to pay the ERS a share of appreciation would be terminated if the Company tendered an executed deed to the golf course property to the ERS in accordance with the terms of the amendment.
AMFAC/JMB HAWAII, INC.
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands)
In January 1993, The Lihue Plantation Company, Limited ("Lihue") obtained a ten-year $13,250 loan used to fund the acquisition of Lihue's power generation equipment. The $13,250 loan, constituting "Senior Indebtedness" under the COLAS' Indenture, consists of two ten year amortizing term loans of $10,000 and $3,250, respectively, payable in forty consecutive installments commencing July 1, 1993 in the principal amount of $250 and $81, respectively (plus interest). The $10,000 and $3,250 loans have outstanding balances of $6,500 and $66, respectively, as of December 31, 1996 and bear interest at a rate equal to prime rate (8.25% at December 31, 1996) plus three and one half percent and prime rate plus four and one-half percent, respectively. Lihue has purchased an interest rate agreement which protects against fluctuations in interest rates and effectively caps the prime rate for the first seven years of the loan agreement at eight percent. The loan is secured by the Lihue power generation equipment, sugar inventories and receivables, certain other assets and real property of the Company and has limited recourse to the Company and certain other subsidiaries.
In October 1993, Waikele Golf Club, Inc. ("WGCI"), a wholly-owned subsidiary of the Company that owns and operates the Waikele Golf Course, obtained a five year $20,000 loan facility from two lenders. The loan consists of two $10,000 amortizing loans. Each loan bears 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 bear interest at prime plus 1/2% and LIBOR (5.5% at December 31, 1996) plus 3%, respectively. WGCI received an initial funding of $14,000, of which $600 was held back by the lenders to pay interest. In October 1994, in accordance with the loan agreement, the Company received an additional funding of $6,000 and a release of the $600 interest holdback, both of which were contingent upon achieving a certain level of Net Operating Income (as defined) by the golf course during the first six months of 1994. The loan is secured by WGCI's assets (the golf course and related improvements and equipment), is guaranteed by the Company, and is considered "Senior Indebtedness" (as defined in the Indenture relating to the COLAS). As of December 31, 1996, the outstanding balance was $19,511, with scheduled annual principal maturities of $405 in 1997 and the balance of $19,106 in 1998. 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.
In December 1996, Amfac Property Development Corporation, a wholly-owned subsidiary of the Company, obtained a $10,000 loan facility from a Hawaii bank. The loan is secured by a mortgage on property under development at the mill-site of Oahu Sugar, and is considered "Senior Indebtedness" (as defined in the Indenture relating to the COLAS). The loan bears interest at the bank's base rate (8.25% at December 31, 1996) plus .5% and matures on December 1, 1998.
AMFAC/JMB HAWAII, INC.
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands)
(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: 1996 1995 1994 ------ ------ ------ Minimum and fixed rents $2,357 2,789 3,956 Contingent payments 1,181 1,261 2,476 Property taxes, insurance and other charges 1,241 445 669 ------- ------ ------ $4,779 4,495 7,101 ======== ======== ======= Future minimum lease payments under noncancelable operating leases aggregate approximately $13,403 and are due as follows: 1997, $1,960; 1998, $2,138; 1999, $1,959; 2000, $2,005; 2001, $1,663; and thereafter, $3,678.
(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 $628, $961 and $1,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
AMFAC/JMB HAWAII, INC.
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands)
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.
Net periodic postretirement benefit cost (credit) for 1996, 1995 and 1994 includes the following components: December 31, December 31, December 31, 1996 1995 1994 ------------------ ----------------- ---------------- Life Life Life Medical Insurance Medical Insurance Medical Insurance Plans Plans Total Plans Plans Total Plans Plan Total ------- ------- ------ ------ ------- ------ ---- ----- ----- Service cost $394 23 417 378 15 393 483 17 500 Interest cost 1,681 289 1,970 1,991 296 2,287 3,428 292 3,720 Amortization of net(gain)loss (3,396) 30 (3,366) (3,310) 24 (3,286)(1,290) 35 (1,255) ------- ------ ------ ------ ----- ------ ----- ----- ----
Net periodic postretirement benefit cost (credit) $(1,321) 342 (979) (941) 335 (606) 2,621 344 2,965 ====== ====== ====== ====== ====== ===== ====== ===== ===== The following table sets forth the plans' combined funded status reconciled with the amounts included in the Company's consolidated financial statements at December 31, 1996 and 1995: December 31, December 31, 1996 1995 ------------------- ------------------ Life Life Medical Insurance Medical Insurance Plans Plan Total Plans Plan Total ------ ------- ------- ------ ------ -------- Accumulated postretirement benefit obligation: Retirees $17,385 3,827 21,212 16,048 3,915 19,963 Fully eligible active plan members 195 16 211 310 29 339 Other active plan members 4,514 164 4,678 6,928 153 7,081 ------ ------ ------ ------ ------ ----- 22,094 4,007 26,101 23,286 4,097 27,383 Unrecognized net gain(loss) 31,912 (351) 31,561 33,958 (304) 33,654 ------ ------ ------ ------ ------ ------ Acc. postretirement benefit cost 54,006 3,656 57,662 57,244 3,793 61,037 ====== ====== ====== ====== ===== ======
AMFAC/JMB HAWAII, INC.
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands)
For measuring the expected postretirement benefit obligation, an 11% annual rate of increase in the per capita claims cost was assumed for 1996 through 2002. 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 in the assumed healthcare trend rate by 1% in each year would increase the medical plans' accumulated postretirement benefit obligation as of December 31, 1996 by 7% and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by 8%. During 1995, premiums for health benefits for retirees were adjusted to match actual claims experience. This adjustment resulted in a reduction to the cost absorbed by the Company due to the cost sharing provisions of the health care benefit plan. This adjustment also resulted in the reduction of the accumulated postretirement benefit obligation as of December 31, 1995.
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, 1996, 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, 1996, 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, 1996 and 1995.
(9) TRANSACTIONS WITH AFFILIATES
The Company incurred interest expense of approximately $8,935, $5,360 and $1,267 for the years ended December 31, 1996, 1995 and 1994, respectively, in connection with the financing obtained from an affiliate (see note 4), all of which was paid as of December 31, 1996.
With respect to any calendar year, JMB or its affiliates may receive a Qualified Allowance in an amount equal to: (i) approximately $6,200 during each of the calendar years 1989 through 1993; and (ii) thereafter, 1-1/2% per annum of the Fair Market Value (as defined) of the gross assets of the Company and its subsidiaries (other than cash and cash equivalents and Excluded Assets (as defined)) for providing certain advisory services for the Company. However, such amounts shall be earned and paid for each year only following the payment of a specified level of Base Interest to the holders of the COLAS. Any portion of the Qualified Allowance not paid for any year shall accumulate without interest. A Qualified Allowance for 1989 of approximately $6,200 was paid on February 28, 1990. Any Qualified Allowance for 1990 through 1996 has been deferred and is payable only to the AMFAC/JMB HAWAII, INC.
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands)
extent future Net Cash Flows are sufficient to pay the holders of the COLAS a specified level of return, and accordingly, no such amounts have been reflected 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 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, 1996, 1995 and 1994 was approximately $653, $587 and $500, respectively, of which $1,241 was unpaid as of December 31, 1996. In addition, as of December 31, 1996, 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, 1996.
JMB Insurance Agency, Inc. earns insurance brokerage commissions in connection with providing the placement of insurance coverage for certain of the properties and operations of the Company. Such commissions are comparable to those available to the Company in similar dealings with unaffiliated third parties. The total of such commissions for the years ended December 31, 1996, 1995 and 1994 was approximately $774, $653 and $983, respectively, all of which was paid as of December 31, 1996.
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, 1996, 1995 and 1994 of approximately $1,460, $7,868 and $1,757, respectively, of which $6,488 was unpaid as of December 31, 1996. 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.
As discussed in note 4, in February 1997 certain intercompany payables to Northbrook totaling $7,922 were converted into a new ten year note payable. Accordingly, these intercompany amounts were classified as long-term as of December 31, 1996 in the accompanying consolidated financial statements.
(10) SIGNIFICANT CUSTOMER
During 1994, approximately 24% of the Company's revenues were derived from the sale of land parcels at Waikele to a single builder.
AMFAC/JMB HAWAII, INC.
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands)
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.
The Company's property segment had contractual commitments (related to project costs) of approximately $2,100 as of December 31, 1996. 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, 1996, certain portions of the Company's land not currently under development or used in sugar operations are mortgaged as security for $1,300 of performance bonds related to property development.
(12) INCOME TAXES
Total income tax expense (benefit) for the years ended December 31, 1996, 1995 and 1994 was allocated as follows: 1996 1995 1994 ------ -------- ------- Loss before extraordinary gain $(21,043) (8,019) (7,764) Extraordinary gain -- 20,807 -- ------- ------- ------ $(21,043) 12,788 (7,764) ======= ======= ====== Income tax expense (benefit) attributable to loss before extraordinary gain for the years ended December 31, 1996, 1995 and 1994 consists of: Current Deferred Total ------- --------- ------- 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) ======= ======= ======== Year ended December 31, 1995: U.S. federal $(10,475) 3,689 (6,786) State (1,904) 671 (1,233) ------- ------ ------
$(12,379) 4,360 (8,019) ======= ======= ======= Year ended December 31, 1994: U.S. federal $ 20,946 (27,515) (6,569) State 3,808 (5,003) (1,195) -------- ------- -------- $24,754 (32,518) (7,764) ======== ======= ========
AMFAC/JMB HAWAII, INC.
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands)
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 attributable to loss before extraordinary gain differs from the amounts computed by applying the U.S. federal income tax rate of 35 percent to pretax loss before extraordinary gain as a result of the following:
1996 1995 1994 ------ ------ ------
Computed "expected" tax benefit $(19,323) (9,749) (7,279) Increase (reduction) in income taxes resulting from: Pension and Core Retirement Award expense 321 2,478 365 State income taxes, net of federal income tax benefit (2,158) (823) (796) Other, net 117 75 (54) ------- ------- ------- Total $(21,043) (8,019) (7,764) ======== ======= =======
AMFAC/JMB HAWAII, INC.
Notes to Consolidated Financial Statements - Continued
(Dollars in Thousands)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31, 1996 and 1995 are as follows:
1996 1995 --------- -------- Deferred tax (assets): Postretirement benefits $ (22,488) (23,804) Interest accruals (2,975) (3,149) Other accruals (3,549) (3,074) -------- -------- Total deferred tax assets (29,012) (30,027) -------- --------
Deferred tax liabilities: Accounts receivable related to profit on sales of sugar 3,065 3,332 Inventories, principally due to sugar production costs,capitalized costs, capitalized interest and purchase accounting adjustments 258 4,716 Plant and equipment, principally due to depreciation and purchase accounting adjustments 8,129 7,696 Land and land improvements, principally due to purchase accounting adjustments 89,537 101,204 Deferred gains due to installment sales for income tax purposes 7,429 8,492 Investments in unconsolidated entities, principally due to purchase accounting adjustments. 14,361 14,180 ------- ------- Total deferred tax liabilities 122,779 139,620 ------- ------- Net deferred tax liability $ 93,767 109,593 ========= ========
AMFAC/JMB HAWAII, INC.
Notes to Consolidated Financial Statements - Concluded
(Dollars in Thousands)
(13) SEGMENT INFORMATION
Agriculture and Property 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 1996, 1995 and 1994 are set forth below: 1996 1995 1994 Revenues: Agriculture $51,805 47,656 89,237 Property 45,138 52,663 66,749 -------- -------- -------- $96,943 100,319 155,986 ======== ======== ======== Operating income (loss): Property: Reduction to carrying value of investments in real estate $(18,315) -- (5,000) Other 732 11,122 17,934 Agriculture (7,525) (10,882) (3,893) Other (3,045) (2,593) (3,800) -------- -------- -------- $ (28,153) (2,353) 5,241 ======== ======== ======== Total assets: Property $225,372 199,999 207,980 Agriculture 239,222 304,170 321,906 Other 19,011 23,429 84,661 -------- -------- -------- $483,605 527,598 614,547 ======== ======== ======== Capital expenditures: Property $ 845 1,529 2,872 Agriculture 3,160 3,616 3,891 Other 252 -- -- ------- -------- -------- $ 4,257 5,145 6,763 ======= ======== ======== Depreciation and amortization: Property $ 2,179 1,991 2,128 Agriculture 4,120 4,538 4,889 Other 55 194 199 ------- ------- -------- $ 6,354 6,723 7,216 ======= ======= ======== (14) Subsequent Event
On February 28, 1997, an interest payment of approximately $4,414 was paid to the holders of COLAS. The Company borrowed approximately $4,414 from Northbrook to make the interest payment.
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, 1996 and 1995. 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, 1996 and 1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Honolulu, Hawaii March 21, 1997
AMFAC/JMB FINANCE, INC.
Balance Sheets
December 31, 1996 and 1995
(Dollars in thousands, except per share information)
A S S E T S
1996 1995
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
Repurchase obligation (note 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.
AMFAC/JMB FINANCE, INC.
Notes to the Balance Sheets
December 31, 1996 and 1995
(Dollars in Thousands)
(1) ORGANIZATION AND ACCOUNTING POLICY
Amfac/JMB Finance, Inc. ("Finance") was incorporated November 7, 1988 in the State of Illinois. Finance has had no financial operations. All of the outstanding shares of Finance are owned by Northbrook Corporation ("Northbrook").
(2) KEEP-WELL AGREEMENT
On March 14, 1989, Northbrook entered into a keep-well agreement with Finance, whereby it agreed to contribute sufficient capital or make loans to Finance to enable Finance to meet 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, Inc. 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 Amfac/JMB Hawaii, Inc.'s election to redeem the Class A COLAS for repurchase, Amfac/JMB Hawaii, Inc. assumed Finance's maximum amount of its liability from the June 1, 1995 COLA repurchase obligation of $140,425.
(3) REPURCHASE OBLIGATION
On March 14, 1989, Finance and a subsidiary of Northbrook (Amfac/JMB Hawaii, Inc.) entered into an agreement (the "Repurchase Agreement") concerning Finance's obligation (on June 1, 1995 and 1999) to repurchase, upon request of the holders thereof, the Certificate of Land Appreciation Notes due 2008 ("COLAS"), to be issued by Amfac/JMB Hawaii, Inc. in conjunction with the acquisition of Amfac/JMB Hawaii, Inc.. A total aggregate principal amount of $384,737 of COLAS were issued during the offering, which terminated on August 31, 1989. The COLAS were issued in two units consisting of one Class A and one Class B COLA. As specified in the Repurchase Agreement, the repurchase of the Class A COLAS may have been requested of Finance by the holders of such COLAS on June 1, 1995 at a price equal to the original principal amount of such COLAS ($.500) minus all payments of principal and interest allocated to such COLAS. The cumulative interest paid per Class A COLA through June 1, 1995 was $.135. The repurchase of the Class B COLAS may be requested of Finance by the holders of such COLAS on June 1, 1999 at a price equal to 125% of the original principal amount of such COLAS ($.500) minus all payments of principal and interest allocated to such COLAS. To date, the cumulative interest paid per Class A and Class B COLA is approximately $.165 and $.165, respectively.
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 1996 and 1995.
PART III
Item 10. Directors and Executive Officers of the Registrant
As of December 31, 1996, the directors, executive officers and certain other officers of the Company were as follows:
Position Held with Name the Company
Judd D. Malkin Chairman Neil G. Bluhm Vice Chairman Edward G. Karl President, Chief Executive Officer and Director Gary Grottke Executive Vice President, Chief Operating Officer and Director Chris J. Kanazawa Senior Vice President and Director Peggy H. Sugimoto Senior Vice President and Chief Financial Officer Timothy E. Johns Vice President Teney K. Takahashi Vice President
Certain of these officers are also officers and/or directors of JMB and numerous affiliated companies of JMB (hereinafter collectively referred to as "JMB affiliates") and many of such officers are also partners of certain partnerships (herein collectively referred to as the "Associate Partnerships") which are associate general partners (or general partners thereof) in publicly offered real estate limited partnerships. The publicly offered partnerships in which the Associate Partnerships are partners have not engaged in the agriculture business and have primarily purchased, or made mortgage loans securing, existing commercial, retail, office, industrial and multi-family residential rental buildings. However, certain partnerships sponsored by JMB and other affiliates of JMB are engaged in development activities including planned communities, none of which are in Hawaii.
There is no family relationship among any of the foregoing directors or officers.
The foregoing directors have been elected to serve one- year terms until the next annual meeting to be held on the Second Tuesday of August 1997 or until his successor is elected and qualified. There are no arrangements or understandings between or among any of said directors or officers and any other person pursuant to which any director or officer was selected as such.
The business experience during the past five years of the directors and such officers of the Company includes the following:
Judd D. Malkin (age 59) is Chairman of the Board of JMB, an officer and/or director of various JMB affiliates and an individual general partner of several publicly offered real estate limited partnerships affiliated with JMB. Mr. Malkin has been associated with JMB since October 1969. Mr. Malkin is a director of Urban Shopping Centers, Inc., an affiliate of JMB that is a real estate investment trust in the business of owning, managing and developing shopping centers. He is a Certified Public Accountant.
Neil G. Bluhm (age 59) is President and director of JMB, an officer and/or director of various JMB affiliates and an individual general partner of several publicly offered real estate limited partnerships affiliated with JMB. Mr. Bluhm has been associated with JMB since August 1970. Mr. Bluhm is a director of Urban Shopping Centers, Inc., an affiliate of JMB that is a real estate investment trust in the business of owning, managing and developing shopping centers. He is a member of the Bar of the State of Illinois and a Certified Public Accountant.
Edward G. Karl (age 41) is President and Chief Executive Officer since January 1994. He was previously an officer of JMB and various partnerships related to JMB. Prior to joining JMB in 1984, Mr. Karl was a Manager at Peat, Marwick, Mitchell & Co. He is a Certified Public Accountant.
Gary R. Grottke (age 41) is Executive Vice President and Chief Operating Officer since January 1994. He was an officer of JMB from May 1989 to December 1993. Prior to joining JMB in 1989, Mr. Grottke was a Senior Manager at Peat, Marwick, Mitchell & Co. He holds a Masters degree in Business Administration from the Krannert School of Management at Purdue University and is a Certified Public Accountant.
Peggy H. Sugimoto (age 46) is Senior Vice President and Chief Financial Officer since 1994. Ms. Sugimoto has been associated with the Company since 1976. She is a Certified Public Accountant.
Chris Kanazawa (age 44) is Senior Vice President and Director of the Company since January 1, 1994 and has served as such since January 1990. Prior to assuming this position, Mr. Kanazawa was Vice President of Amfac Property Development Corporation (1986 to 1990). He has been associated with the Registrant since September 1981. Mr. Kanazawa holds a Bachelors degree in Economics from the University of Hawaii and a Masters degree in Business Administration from the University of Southern California.
Teney K. Takahashi (age 58) is Vice President of Amfac/JMB Hawaii - Properties since rejoining the Company in April 1995. Prior to rejoining Amfac, Mr. Takahashi served as President and Director of Princeville Corporation, and President and Director of Malama Pacific, Inc. Mr. Takahashi previously worked for Amfac from 1973 - 1988.
P. Eric Hohmann (age 38) is Vice President of Amfac/JMB Hawaii, Inc. - Properties Division since 1994. Mr. Hohmann served for 4 years as a Vice President of Amfac Property Development Corporation, which is a wholly-owned subsidiary of the Company. Prior to 1990, Mr. Hohmann was associated with JMB for 5 years. He holds a Masters degree in Business Administration from the UCLA Anderson Graduate School of Business.
Timothy E. Johns (age 40) is Vice President of Amfac/JMB Hawaii - Properties Division since January 1994. He holds a J.D. degree from the University of Southern California Law Center and is a member of the Hawaii State Bar Association.
Item 11. Executive Compensation
Except for the executive officers listed on the table below, certain of the listed officers and directors of the Company in item 10 above are officers and/or directors of JMB or Northbrook and are compensated by JMB, Northbrook, or an affiliate thereof (other than the Company and its subsidiaries). The Company will reimburse Northbrook, JMB and their affiliates for any expenses incurred while providing services to the Company as described under the caption "Description of the COLAS - Limitations on Mergers and Certain Other Transactions" at pages 42-43 of the Prospectus, a copy of which description was filed herewith and incorporated herein by reference. In addition, JMB and its affiliates may earn an amount, the Qualified Allowance (as defined), as described under the caption "Description of the COLAS - Certain Definitions" at page 51 of the Prospectus, a copy of which description was filed herewith and is incorporated herein by reference. See Item 13 below.
SUMMARY COMPENSATION TABLE
Annual Compensation ------------------------------------- Other Annual Compensa- Name Principal Salary Bonus tion (1) Position Year ($) (2) ($) ($) -------- ----------- ------- -------- ------- -------- Edward G. President, Chief Exec. 1996 80,000 N/A N/A Karl Officer and Director 1995 75,000 N/A N/A 1994 72,000 N/A N/A
Gary Executive Vice Pres. 1996 199,500 N/A N/A Grottke and Chief Operating 1995 190,000 N/A N/A Officer 1994 187,500 N/A N/A
Chris J. Senior Vice President 1996 275,000 200,000 N/A Kanazawa 1995 250,000 175,000 N/A 1994 250,000 75,000 N/A
Teney K. Vice President 1996 191,000 100,000 N/A Takahashi 1995 128,076 N/A N/A 1994 N/A N/A N/A
P. Eric Vice President 1996 150,000 90,000 N/A Hohmann 1995 142,000 85,000 N/A 1994 135,000 30,000 N/A
------------
(1) Includes CEO and 4 most highly compensated executives whose salary and bonus exceed $100,000.
(2) Salaries for Mr. Karl and Mr. Grottke represent the portions of their total compensation allocated and charged to the Company.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding shares of the Company are owned by Northbrook. Approximately 6% of the shares of Northbrook are owned by JMB and approximately 90% are owned directly or indirectly by individuals who are shareholders or employees of JMB or members of their families (or trusts for their benefit). 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 5.1% 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 slightly more than 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 set forth in Notes to Consolidated Financial Statements and Notes to Balance Sheets contained under Item 8 above, 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 27, 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.
The Company incurred interest expense of approximately $8.9 million, $5.4 million and $1.3 million for the years ended 1996, 1995 and 1994, respectively, in connection with the acquisition and additional financing obtained from an affiliate, all of which was paid as of December 31, 1996.
With respect to any calendar year, JMB or its affiliates may receive a Qualified Allowance in an amount equal to: (i) approximately $6.2 million during each of the calendar years 1989 through 1993; and (ii) thereafter, 1-1/2% per annum of the Fair Market Value (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. However, such amount shall be earned and paid for each year only following the payment of a specified level of Base Interest to the holders of the COLAS. Any portion of the Qualified Allowance not paid for any year shall accumulate without interest. A Qualified Allowance for 1989 of approximately $6.2 million was paid on February 28, 1990. Any Qualified Allowance for 1990 through 1996 has been deferred and is payable only to the extent future Net Cash Flows are sufficient to pay the holders of the COLAS a specified level of return, and accordingly, no such amounts have been reflected 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 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, 1996, 1995 and 1994 was $.7 million, $.6 million, $.5 million, respectively, of which $1.2 million was unpaid as of December 31, 1996. In addition, as of December 31, 1996, 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 $.03 million per month to JMB or its affiliates in respect of general overhead expense, all of which was paid as of December 31, 1996.
JMB Insurance Agency, Inc. earns insurance brokerage commissions in connection with providing the placement of insurance coverage for certain of the properties and operations of the Company. Such commissions are comparable to those available to the Company in similar dealings with unaffiliated third parties. The total of such commissions for the years ended December 31, 1996, 1995 and 1994 was approximately $.8 million, $.7 million and $1 million, all of which was paid as of December 31, 1996.
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, 1996, 1995 and 1994 of approximately $1.5 million, $7.9 million and $1.7 million, respectively, of which $6.5 million was unpaid as of December 31, 1996. 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 certain intercompany payables to Northbrook totaling $7.9 million were converted into a new ten year note payable. Accordingly these intercompany payables were classified as long-term as of December 31, 1996 in the accompanying consolidated financial statements.
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements (See Index to Financial Statements and Supplementary Data filed with this report.)
(2) Exhibits 3.1* Articles of Incorporation of Amfac/JMB Hawaii, Inc. 3.2* Amended and Restated By-Laws of Amfac/JMB Hawaii, Inc. 3.3* Articles of Incorporation of Amfac/JMB Finance, Inc. 3.4* Amended and Restated By-Laws of Amfac/JMB Finance, Inc. 3.7* Articles of Incorporation of Amfac Property Development Corp. 3.8* Amended and Restated By-Laws of Amfac Property Developments Corp. 3.9* Articles of Incorporation of Amfac Property Investment Corp. 3.10* Amended and Restated By-Laws of Amfac Property Investment Corp. 3.11* Articles of Incorporation of Amfac Sugar and Agribusiness, Inc. 3.12* Amended and Restated By-Laws of Kaanapali Water Corporation 3.13* Articles of Incorporation of Kaanapali Water Corporation. 3.14* Amended and Restated By-Laws of Amfac Agribusiness, Inc. 3.15* Articles of Incorporation of Amfac Agribusiness, Inc. 3.16* Amended and Restated By-Laws of Kekaha Sugar Company, Limited. 3.17* Articles of Association of Kekaha Sugar Company, Limited. 3.18* Amended and Restated By-Laws of The Lihue Plantation Company, Limited. 3.19* Articles of Association of The Lihue Plantation Company, Limited 3.20* Amended and Restated By-Laws of Oahu Sugar Company, Limited. 3.21* Articles of Association of Oahu Sugar Company, Limited. 3.22 Amended and Restated By-Laws of Pioneer Mill Company, Limited 3.23* Articles of Association of Pioneer Mill Company, Limited. 3.24 Amended and Restated By-Laws of Puna Sugar Company, Limited. 3.25* Articles of Association of Puna Sugar Company, Limited. 3.26 Amended and Restated By-Laws of H. Hackfeld & Co., Ltd. 3.27* Articles of Association of H. Hackfeld & Co., Ltd.
3.28 Amended and Restated By-Laws of Waiahole Irrigation Company, Limited. 3.29* Articles of Incorporation of Waiahole Irrigation Company, Limited. 4.1** Indenture, including the form of COLAS, among Amfac/JMB Hawaii, Inc., its subsidiaries as Guarantors and Continental Bank National Association, as Trustee (dated as of March 14, 1989). 4.2*** Amendment dated as of January 17, 1990 to the Indenture relating to the COLAS. 4.3*** $28,097,832 Promissory Note from Amfac, Inc. to Amfac/JMB Hawaii, Inc. Extended and Reissued Effective December 31, 1993. 4.4**** The five year $66,000,000 loan with the Employees' Retirement System of the State of Hawaii to Amfac/JMB Hawaii, Inc. as of June 25, 1991. 4.5***** $15,000,000 Credit Agreement dated March 31, 1993 among AMFAC/JMB Hawaii, Inc. and Continental Bank N.A.
4.6****** $10,000,000 loan agreement between Waikele Golf Club, Inc. and ORIX USA Corporation. $10,000,000 loan agreement between Waikele Golf Club, Inc. and Bank of Hawaii.
4.7******* $52,000,000 Promissory Note to Northbrook Corporation from Amfac/JMB Hawaii, Inc., effective May 31, 1995 is filed herewith.
4.8******** Agreement for delivery and sale of raw sugar between Hawaii Sugar Transportation Corporation, as seller, and C&H, as Buyer, dated June 4, 1993.
4.9********* Previously filed as an exhibit to the Company's Form 10-Q report under the Securities Act of 1934 (File No. 33-24180) filed May 13, 1996 and hereby incorporated by reference. Standard Sugar Marketing Contracts between Hawaiian Sugar Transportation Company and Hawaii Sugar Growers dated June 4, 1993.
4.10********** Amendment to the $66,000,000 loan with the Employees' Retirement System of the State of Hawaii to Amfac/JMB Hawaii, Inc. as of April 18, 1996.
4.11*********** Amended and Restated $52,000,000 Promissory Note to Northbrook Corporation from Amfac/JMB Hawaii, Inc. extended and reissued effective June 1, 1996.
4.12************ Amended and Restated $28,087,832 Promissory Note from Amfac, Inc. to Amfac/JMB Hawaii, Inc. extended and reissued effective June 1, 1996.
4.13 $10,000,000 loan agreement between Amfac Property Development Corp. and City Bank at December 18, 1996
4.14 $104,759,324 promissory Note between Northbrook Corporation and Amfac/JMB Hawaii, Inc. dated February 17, 1997
10.1* Escrow Deposit Agreement. 10.2* General Lease S-4222, dated January 1, 1969, by and between the State of Hawaii and Kekaha Sugar Company, Limited. 10.3* Grove Farm Haiku Lease, dated January 25, 1974 by and between Grove Farm Company, Incorporated and The Lihue Plantation Company, Limited. 10.4* General Lease S-4412, dated October 31, 1974, by and between the State of Hawaii and the Lihue Plantation Company, Limited. 10.5* General Lease S-4576, dated March 15, 1978, by and between the State of Hawaii and The Lihue Plantation Company, Limited. 10.6* General Lease S-3827, dated July 8, 1964, by and between the State of Hawaii and East Kauai Water Company, Ltd. 10.7* Amended and Restated Power Purchase Agreement, dated as of June 15, 1992, by and between The Lihue Plantation Company, Limited and Citizens Utilities Company. 10.8* U.S. Navy Waipio Peninsula Agricultural Lease, dated May 26, 1964, between The United States of America (as represented by the U.S. Navy) and Oahu Sugar Company, Ltd. 10.9* Amendment to the Robinson Estate Hoaeae Lease, dated May 15, 1967, by and between various Robinsons, heirs of Robinsons, Trustees and Executors, etc. and Oahu Sugar Company, Limited amending and restating the previous lease. 10.10* Amendment to the Campbell Estate Lease, dated April 16, 1970, between Trustees under the Will and of the Estate of James Campbell, Deceased, and Oahu Sugar Company, Limited amending and restating the previous lease. 10.11* Bishop Estate Lease No. 24,878, dated June 17, 1977, by and between the Trustees of the Estate of Bernice Pauahi Bishop and Pioneer Mill Company, Limited. 10.12* General Lease S-4229, dated February 25, 1969, by and between the State of Hawaii, by its Board of Land and Natural Resources and Pioneer Mill Company, Limited. 10.13* Honokohau Water License, dated December 22, 1980, between Maui Pineapple Company Ltd. and Pioneer Mill Company, Limited. 10.14* Water Licensing Agreement, dated September 22, 1980, by and between Maui Land & Pineapple Company, Inc. and Amfac, Inc. 10.15* Joint Venture Agreement, dated as of March 19, 1986, by and between Amfac Property Development Corp. and Tobishima Properties of Hawaii, Inc. 10.16* Development Agreement, dated March 19, 1986, by and between kaanapali North Beach Joint Venture and Amfac Property Investment Corp. and Tobishima Pacific, Inc.
10.19** Keep-Well Agreement between Northbrook Corporation and Amfac/JMB Finance, Inc. 10.20** Repurchase Agreement, dated March 14, 1989, by and between Amfac/JMB Hawaii, Inc. and Amfac/JMB Finance, Inc. 10.21** Amfac Hawaii Tax Agreement, dated November 21, 1988 between Amfac/JMB Hawaii, Inc., and Amfac Property Development Corp.; Amfac Property Investment Corp.; Amfac Sugar and Agribusiness, Inc.; Kaanapali Water Corporation; Amfac Agribusiness, Inc.; Kekaha Sugar Company, Limited; The Lihue Plantation Company, Limited; Oahu Sugar Company, Limited; Pioneer Mill Company, Limited; Puna Sugar Company, Limited; H. Hackfeld & Co., Ltd.; and Waiahole Irrigation Company, Limited.
10.22** Amfac-Amfac Hawaii Tax Agreement, dated February 27, 1989 between Amfac, Inc. and Amfac/JMB Hawaii, Inc. 10.23** Services Agreement, dated November 18, 1988, between Amfac/JMB Hawaii, Inc., and Amfac Property Development Corp.; Amfac Property Investment Corp.; Amfac Sugar and Agribusiness, Inc.; Kaanapali Water Corporation; Amfac Agribusiness, Inc.; Kekaha Sugar Company, Limited; The Lihue Plantation Company, Limited; Oahu Sugar Company, Limited; Pioneer Mill Company, Limited; Puna Sugar Company, Limited; H. Hackfeld & Co., Ltd.; and Waiahole Irrigation Company, Limited and JMB Realty Corporation. 19.0******* $35,700,000 agreement for sale of C&H and certain other C&H assets, to A&B Hawaii, Inc. in June of 1993. 22.1* Subsidiaries of Amfac/JMB Hawaii, Inc. 28.1** A copy of pages 19, 41-45 and 51 of the Prospectus of the Company dated December 5, 1988 (relating to SEC Registration Statement on Form S- 1 (as amended) File No. 33-24180) and hereby incorporated by reference.
Pursuant to Item 6.