**Exhibit 99**

 

***Kapalua Bay Holdings, LLC and Subsidiary(A Delaware Limited LiabilityCompany)***

*** ***

*Consolidated Financial Statements as of December 31,2005 and 2004 and for the Year Ended December 31, 2005 and for the Periodfrom August 31, 2004 (Date of Formation) to December 31, 2004, andIndependent Auditors’ Report*

 

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**INDEPENDENT AUDITORS’ REPORT**

** **

To the Members of Kapalua Bay Holdings, LLC:

 

We have audited the accompanying consolidated balancesheets of Kapalua Bay Holdings, LLC and subsidiary (a Delaware limitedliability company) (“Company”) as of December 31, 2005 and 2004, and therelated consolidated statements of operations, members’ capital, and cash flowsfor the year ended December 31, 2005 and for the period from August 31,2004 (date of formation) to December 31, 2004. These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditingstandards generally accepted in the United States of America. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of Kapalua BayHoldings, LLC and subsidiary at December 31, 2005 and 2004, and theresults of their operations and their cash flows for the year ended December 31,2005 and for the period from August 31, 2004 (date of formation) to December 31,2004, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

 
| /s/ DELOITTE & TOUCHE LLP   |   |   |
|--------------------------------------|--------|--------|
|                                 |   |
| Honolulu, Hawaii  March 3, 2006 |   |

 

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**KAPALUA BAYHOLDINGS, LLC AND SUBSIDIARY****(ADelaware Limited Liability Company)**

 

**CONSOLIDATEDBALANCE SHEETS****AS OF DECEMBER 31,2005 AND 2004**

 
| ** **                                                                        | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **ASSETS**                                                                        |       |       |       |       |       |
|                                                                              |       |       |       |       |       |
| CURRENT ASSETS:                                                                   |       |       |       |       |       |
| Cash and cash equivalents                                                         |       | $          | 655,054    |       | $          | 1,906,976 |   |
| Accounts receivable, less allowance for doubtful  accounts of $83,182 and $64,408 |       | 1,311,797  |       | 1,354,973  |       |
| Receivables from affiliates                                                       |       | 1,592,318  |       | 196,432    |       |
| Inventories                                                                       |       | 127,293    |       | 127,293    |       |
| Prepaid expenses and other assets                                                 |       | 326,768    |       | 399,561    |       |
|                                                                              |       |       |       |       |       |
| Total current assets                                                              |       | 4,013,230  |       | 3,985,235  |       |
|                                                                              |       |       |       |       |       |
| PROPERTY:                                                                         |       |       |       |       |       |
| Land                                                                              |       | 24,590,000 |       | 24,590,000 |       |
| Buildings, other improvements, and equipment                                      |       | 3,095,157  |       | 3,072,000  |       |
|                                                                              |       |       |       |       |       |
| Total property                                                                    |       | 27,685,157 |       | 27,662,000 |       |
| Less accumulated depreciation and amortization                                    |       | (2,546,213 | )          | (512,000   | )          |
|                                                                              |       |       |       |       |       |
| Property—net                                                                 |       | 25,138,944 |       | 27,150,000 |       |
|                                                                              |       |       |       |       |       |
| PROJECT DEVELOPMENT COSTS                                                         |       | 55,336,126 |       | 47,148,619 |       |
|                                                                              |       |       |       |       |       |
| TOTAL                                                                             |       | $          | 84,488,300 |       | $          | 78,283,854 |   |

 

2

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| ** **                                     | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|
| **LIABILITIES AND MEMBERS’ CAPITAL**      |       |       |       |       |       |
|                                           |       |       |       |       |       |
| CURRENT LIABILITIES:                           |       |       |       |       |       |
| Accounts payable                               |       | $          | 2,947,311  |       | $          | 695,471 |   |
| Accrued expenses and other current liabilities |       | 3,194,058  |       | 1,776,004  |       |
| Customer deposits                              |       | 714,056    |       | 454,581    |       |
| Payable to affiliates                          |       | 232,775    |       | 636,202    |       |
|                                           |       |       |       |       |       |
| Total current liabilities                      |       | 7,088,200  |       | 3,562,258  |       |
|                                           |       |       |       |       |       |
| NOTE PAYABLE                                   |       | 29,493,099 |       | 26,000,000 |       |
|                                           |       |       |       |       |       |
| OTHER LIABILITIES                              |       |       |       | 250,000    |       |
|                                           |       |       |       |       |       |
| Total liabilities                              |       | 36,581,299 |       | 29,812,258 |       |
|                                           |       |       |       |       |       |
| COMMITMENTS AND CONTINGENCIES (Note 11)        |       |       |       |       |       |
|                                           |       |       |       |       |       |
| MEMBERS’ CAPITAL                          |       | 47,907,001 |       | 48,471,596 |       |
|                                           |       |       |       |       |       |
| TOTAL                                          |       | $          | 84,488,300 |       | $          | 78,283,854 |   |

 

See notes to consolidated financial statements.

 

3

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**KAPALUA BAYHOLDINGS, LLC AND SUBSIDIARY**

**(A DelawareLimited Liability Company)**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**FOR THE YEAR ENDED DECEMBER 31,2005 AND FOR THE PERIOD FROM**

**AUGUST 31,2004 (DATE OF FORMATION) TO DECEMBER 31, 2004**

 
| ** **                     | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| REVENUES:                      |       |       |       |       |       |
| Rooms                          |       | $          | 16,791,593 |       | $          | 3,757,313 |   |
| Food and beverage              |       | 5,662,063  |       | 1,640,983  |       |
| Other operating  departments   |       | 104,394    |       | 17,336     |       |
| Rental income                  |       | 1,932,096  |       | 523,631    |       |
|                           |       |       |       |       |       |
| Total revenues                 |       | 24,490,146 |       | 5,939,263  |       |
|                           |       |       |       |       |       |
| COSTS AND EXPENSES:            |       |       |       |       |       |
| Rooms                          |       | 5,878,807  |       | 1,440,234  |       |
| Food and beverage              |       | 6,416,288  |       | 1,870,920  |       |
| Other operating  departments   |       | 508,072    |       | 147,334    |       |
| General and administrative     |       | 4,190,931  |       | 1,756,557  |       |
| Advertising and promotion      |       | 2,244,151  |       | 590,130    |       |
| Depreciation and  amortization |       | 2,034,213  |       | 572,000    |       |
| Utilities costs                |       | 1,678,530  |       | 485,960    |       |
| Management fees                |       | 867,086    |       | 175,995    |       |
| Other expenses                 |       | 1,561,663  |       | 428,537    |       |
|                           |       |       |       |       |       |
| Total costs and expenses       |       | 25,379,741 |       | 7,467,667  |       |
|                           |       |       |       |       |       |
| NET LOSS                       |       | $          | (889,595   | )          | $          | (1,528,404 | ) |

 

See notes to consolidatedfinancial statements.

 

4

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**KAPALUA BAY HOLDINGS, LLC ANDSUBSIDIARY**

**(A Delaware Limited LiabilityCompany)**

 

**CONSOLIDATED STATEMENTS OF MEMBERS’CAPITAL**

**FOR THE YEAR ENDED DECEMBER 31, 2005 AND FOR THEPERIOD FROM**

**AUGUST 31, 2004 (DATE OF FORMATION) TO DECEMBER 31,2004**

 
| ** **                           | ** ** | **MLP KB  Partner, LLC** | ** ** | **MH Kapalua Venture, LLC** | ** ** | **ER Kapalua  Investors  Fund, LLC** | ** ** | **Total**  | ** ** |
|--------------------------------------|------------|--------------------------|------------|-----------------------------|------------|--------------------------------------|------------|------------|------------|
|                                 |       |                     |       |                        |       |                                 |       |       |       |
| CAPITAL CONTRIBUTIONS:               |       |                     |       |                        |       |                                 |       |       |       |
| Land and other assets                |       | $                        | 25,000,000 |                        | $          | —                               |       | $          | —     |   | $ | 25,000,000 |   |
| Cash                                 |       | 500,000                  |       | 17,000,000                  |       | 7,500,000                            |       | 25,000,000 |       |
|                                 |       |                     |       |                        |       |                                 |       |       |       |
| Total capital  contributions         |       | 25,500,000               |       | 17,000,000                  |       | 7,500,000                            |       | 50,000,000 |       |
|                                 |       |                     |       |                        |       |                                 |       |       |       |
| 2004 NET LOSS                        |       | (779,486                 | )          | (519,657                    | )          | (229,261                             | )          | (1,528,404 | )          |
|                                 |       |                     |       |                        |       |                                 |       |       |       |
| BALANCE—December 31,  2004 |       | 24,720,514               |       | 16,480,343                  |       | 7,270,739                            |       | 48,471,596 |       |
|                                 |       |                     |       |                        |       |                                 |       |       |       |
| CAPITAL CONTRIBUTIONS                |       | 225,000                  |       | 100,000                     |       |                                 |       | 325,000    |       |
|                                 |       |                     |       |                        |       |                                 |       |       |       |
| 2005 NET LOSS                        |       | (453,693                 | )          | (302,462                    | )          | (133,440                             | )          | (889,595   | )          |
|                                 |       |                     |       |                        |       |                                 |       |       |       |
| BALANCE—December 31,  2005 |       | $                        | 24,491,821 |                        | $          | 16,277,881                           |       | $          | 7,137,299  |   | $ | 47,907,001 |   |

 

Seenotes to consolidated financial statements.

 

5

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**KAPALUA BAY HOLDINGS, LLC AND SUBSIDIARY**

**(A Delaware Limited Liability Company)**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE YEAR ENDED DECEMBER 31, 2005 AND FOR THE PERIODFROM**

**AUGUST 31, 2004 (DATE OF FORMATION) THROUGH DECEMBER 31,2004**

 
| ** **                                                                                                       | ** ** | **2005**   | ** ** | **2004**    | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|
| ** **                                                                                                       | ** ** | ** ** | ** ** | ** **  | ** ** |
| OPERATING ACTIVITIES:                                                                                            |       |       |       |        |       |
| Net loss                                                                                                         |       | $          | (889,595   | )           | $          | (1,528,404 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities:                                     |       |       |       |        |       |
| Depreciation and  amortization                                                                                   |       | 2,034,213  |       | 572,000     |       |
| Acquisition of project  development rights (Note 1)                                                              |       |       |       | (45,665,000 | )          |
| Project development costs                                                                                        |       | (5,281,079 | )          | (1,125,619  | )          |
| Changes in operating  assets and liabilities:                                                                    |       |       |       |        |       |
| Accounts receivable—net                                                                                     |       | 43,176     |       | 108,509     |       |
| Affiliates—net                                                                                              |       | (1,799,312 | )          |        |       |
| Prepaid expenses and other  assets                                                                               |       | 72,793     |       | (415,438    | )          |
| Accounts payable                                                                                                 |       | 1,138,676  |       | 606,056     |       |
| Customer deposits                                                                                                |       | 259,474    |       | (140,893    | )          |
| Accrued expenses and other  liabilities                                                                          |       | (300,210   | )          | 1,485,208   |       |
|                                                                                                             |       |       |       |        |       |
| Net cash used in operating  activities                                                                           |       | (4,721,864 | )          | (46,103,581 | )          |
|                                                                                                             |       |       |       |        |       |
| INVESTING ACTIVITIES:                                                                                            |       |       |       |        |       |
| Purchases of property                                                                                            |       | (23,157    | )          | (27,000     | )          |
| Acquisition of hotel  improvements and other assets—net of acquired cash (Note 1)                           |       |       |       | (2,962,443  | )          |
|                                                                                                             |       |       |       |        |       |
| Net cash used in investing  activities                                                                           |       | (23,157    | )          | (2,989,443  | )          |
|                                                                                                             |       |       |       |        |       |
| FINANCING ACTIVITIES:                                                                                            |       |       |       |        |       |
| Proceeds from note payable                                                                                       |       | 3,493,099  |       | 26,000,000  |       |
| Members’ capital  contributions                                                                             |       |       |       | 25,000,000  |       |
|                                                                                                             |       |       |       |        |       |
| Net cash provided by  financing activities                                                                       |       | 3,493,099  |       | 51,000,000  |       |
|                                                                                                             |       |       |       |        |       |
| NET INCREASE (DECREASE) IN  CASH AND CASH EQUIVALENTS                                                            |       | (1,251,922 | )          | 1,906,976   |       |
|                                                                                                             |       |       |       |        |       |
| CASH AND CASH EQUIVALENTS—Beginning  of period                                                              |       | 1,906,976  |       |        |       |
|                                                                                                             |       |       |       |        |       |
| CASH AND CASH EQUIVALENTS—End  of period                                                                    |       | $          | 655,054    |        | $          | 1,906,976 |   |
|                                                                                                             |       |       |       |        |       |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW                                                                             |       |       |       |        |       |
| INFORMATION—Cash paid for interest                                                                          |       | $          | 1,533,629  |        | $          | 284,938 |   |
|                                                                                                             |       |       |       |        |       |
| SUPPLEMENTAL NONCASH INVESTING AND                                                                               |       |       |       |        |       |
| FINANCING ACTIVITIES:                                                                                            |       |       |       |        |       |
| •       Members’ capital  contributions for services                     |       | $          | 325,000    |        | $          | — |   |
| •       Capital  contribution of land and other assets by MLP KB Partner, LLC |       | —     |       | 25,000,000  |       |

 

See notes to consolidatedfinancial statements.

 

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**KAPALUA BAY HOLDINGS, LLC AND SUBSIDIARY**

**(A Delaware LimitedLiability Company)**

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**AS OF DECEMBER 31,2005 AND 2004 AND FOR THE YEAR ENDED DECEMBER 31, 2005 AND FOR THE PERIODFROM AUGUST 31, 2004 (DATE OF FORMATION) TO DECEMBER 31, 2004**

** **

**1.**                      ORGANIZATION AND PURCHASE TRANSACTION

** **

Kapalua Bay Holdings, LLC (“Bay Holdings”) was formedon August 31, 2004 as a Delaware limited liability company whose membersare MLP KB Partner, LLC, an affiliate of Maui Land & Pineapple Company, Inc.(“MLP”); MH Kapalua Venture, LLC, an affiliate of Marriott International (“Marriott”);and ER Kapalua Investors Fund, LLC, an affiliate of Exclusive Resorts (“ExclusiveResorts”). Bay Holdings formed a wholly owned limited liability company,Kapalua Bay LLC (“Kapalua Bay”).

 

On August 31, 2004, Kapalua Bay completed thepurchase of the leasehold interest in the land (“ground lease”) and hotelimprovements of the Kapalua Bay Hotel (“KBH”) from YCP Kapalua L.P. and YCPKapalua Operator Inc. for $48.3 million. The KBH is located in Kapalua, Mauiand has 196 oceanfront rooms. MLP was the lessor under the ground lease withYCP. Bay Holdings intends to redevelop the site and construct whole andfractional ownership residential units for sale to the public. The plan is tooperate the hotel and adjacent retail shops for approximately 19 months,demolish these improvements, and then begin construction of the residential units.During this 19-month period, Bay Holdings will prepare the development plans,obtain the required governmental approvals, and prepare marketing and salesplans.

 

The purchase price of $48,300,000 was allocated asfollows:  $2,635,000 to the hotelimprovements (including furniture and equipment) and $45,665,000 to developmentrights (project development costs on the balance sheet). The fair value of thehotel improvements (and the Shops’ improvements discussed below) considered BayHoldings’ plan to demolish the improvements within two years. The fair valuewas based on the present value of the hotel’s net operating income (cashflows). The development rights represent the costs to secure the project siteand enable Bay Holdings’ development of the luxury residential units. The fairvalues of the hotel improvements and development rights were based on anindependent appraisal.

 

Under the purchase agreement, Bay Holdings is responsible for employeeseverance pay. At December 31, 2004, the severance benefits to be paidwere not determinable; however, management believed that a liability wasincurred at the date of acquisition due to its obligations under the purchaseagreement, and that its obligation would not be less than $250,000.Accordingly, a liability equal to this amount was recognized (with acorresponding increase in project development costs). In 2005, within one yearof the acquisition date, management revised its estimate of the severanceliability at the acquisition date to $949,000, which resulted in a $699,000increase in the liability and project development costs.

 

In addition to its severance liability, Bay Holdings has a withdrawalliability relating to the hotel industry multi-employer defined benefit pensionplan, as a result of the hotel’s closure and the termination of employees. In2004, Bay Holdings was unable to reliably estimate its liability at the date ofacquisition for its withdrawal obligation and no liability was recorded at thedate of acquisition (August 31, 2004) or at December 2004. In 2005,within one year of the acquisition date, management estimated the withdrawalliability to be $405,000, which resulted in a liability and a corresponding increasein project development costs by the same amount. Management believes that itsaccounting for the severance benefits and the withdrawal liability areconsistent with the provisions of EITF No. 95-3, *Recognition of Liabilities in Connection with aPurchase Business Combination.*

 

7

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Bay Holdings separately paid approximately $415,000 in2004 for certain assets and liabilities assumed (e.g., guest receivables, guestdeposits, accrued vacations).

 

In connection with the formation of Bay Holdings andKapalua Bay, MLP contributed $500,000 of cash to Bay Holdings and contributedto Kapalua Bay (1) its lessor’s interest under the ground lease, (2) itsfee interest in the 21-acre land parcel underlying the KBH (ground leaseconcurrently cancelled), and (3) its rights and interests as landlord ofthe adjacent retail shops (“Shops”), including the retail leases. The Shops isa retail complex located adjacent to the KBH, and has approximately 22,000square feet of gross leasable area. The Shops’ improvements will also bedemolished, and Bay Holdings will construct an ocean-side spa and beach club onthe site. MLP will purchase the spa and beach club at Bay Holdings’ actualconstruction costs. The members (owners) valued these non-monetarycontributions at $25 million through arms-length negotiations, of which $24.59million was allocated to the land and $410,000 was allocated to the Shops basedon an independent appraisal. In exchange for its $25.5 million contribution toBay Holdings and Kapalua Bay, MLP received 51% of the outstanding membershipinterests of Bay Holdings. Marriott contributed $17.0 million of cash to BayHoldings for 34% of the outstanding membership interests in Bay Holdings, and ExclusiveResorts contributed $7.5 million of cash to Bay Holdings for 15% of theoutstanding membership interests in Bay Holdings.

 

In connection with the transaction, Kapalua Baysecured a $45 million credit agreement with two lenders. The credit agreementhas an initial term of two years and is secured by a mortgage on the hotel andother improvements. Kapalua Bay drew down $26 million under the creditagreement and, with the cash contributions made by the members, concluded thepurchase of the hotel and other improvements.

 

**2.**                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

** **

***Basis of Accounting***—Bay Holdings’ policy is to prepare itsfinancial statements using the accrual basis of accounting.

 

***Principles of Consolidation***—The accompanying consolidated financialstatements include the accounts of Bay Holdings and its wholly owned subsidiary.All significant intercompany balances and transactions have been eliminated inconsolidation.

 

***Statement of Cash Flows****—*Expenditures relating to the development andconstruction of whole and fractional ownership residential units for sale tothe public are reflected as “operating activities.”

 

***Use of Estimates***—The preparation of financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions thataffect the reported amount of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.Future actual amounts could differ from those estimates.

 

***Cash and Cash Equivalents***—Cash and cash equivalents include cashand liquid investments with an original maturity of three months or less fromthe date acquired. The majority of cash and cash equivalents are held at majorcommercial banks.

 

***Inventory***—Inventory, consisting primarily of foodand beverage products, is carried at average cost.

 

8

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***Property****—*The contributed land and Shops’ improvements, and theacquired hotel improvements, are stated at their fair values (acquisitioncosts) at the date of acquisition (see Note 1). Subsequent additions ofproperty and equipment are recorded at acquisition costs. Major renewals andbetterments are capitalized, while expenditures for maintenance and repairs arecharged to operations.

 

Depreciation is computed using the straight-linemethod over a 19-month useful life, due to the planned demolishment of thehotel and Shops improvements in 2006.

 

***Project Development Costs****—*Project development costs relate to the planned realestate development projects. Costs include the acquisition of the developmentrights for the project site, planning and design costs, and other developmentactivities.

 

***Deferred Financing Costs****—*Loan fees and other costs are being capitalized aspart of project development costs.

 

***Long-Lived Assets***—Long-lived assets held and used by BayHoldings are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. When such events or changes occur, an estimate of the future cashflows expected to result from the use of the assets and their eventualdisposition is made. If the sum of such expected future cash flows(undiscounted and without interest charges) is less than the carrying amount ofthe asset, an impairment loss is recognized in an amount by which the asset’snet book value exceeds its fair value.

 

***Revenue Recognition***—Rooms and food and beverage revenues arerecognized when the services are rendered. Rental income is recognized on astraight-line basis over the lease terms.

 

***Interest Capitalization***—Interest costs are capitalized duringthe development period of capital and real estate projects.

 

***Advertising and Promotion Costs***—The costs of advertising and promotionactivities are expensed as incurred.

 

***Income Taxes***—Bay Holdings is not subject to federal andstate income taxes. The distributive shares of income or loss and other taxattributes from Bay Holdings are reportable by the individual members in theirseparate tax returns; accordingly, Bay Holdings’ financial statements do notinclude a provision for income taxes.

 

9

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**3.**                      ALLOCATION OF NET INCOME (LOSSES) AND CASH DISTRIBUTIONS

** **

Net losses are allocated to the members based on theirmembership interests:  MLP—51%,Marriott—34%, and Exclusive Resorts—15%. Net income is allocated based on theestimated distributions of “Net Cash Flow” (as defined in the agreement) to themembers. The cash distributions are based on each member’s “Priority ContributionAccount” (“PCA”), as defined in the agreement, and MLP’s “SubordinatedContribution Account” (“SCA”), as defined in the agreement. Under theagreement, only 50% of MLP’s $25.0 million non-monetary capital contributionwas considered PCA. The initial PCA and SCA balances are as follows: 

 
| ** **        | ** ** | **PCA**    | ** ** | **SCA** | ** ** |
|-------------------|------------|------------|------------|---------|------------|
|              |       |       |       |    |       |
| MLP               |       | $          | 13,000,000 |    | $          | 12,500,000 |   |
| Marriott          |       | 17,000,000 |       |    |       |
| Exclusive Resorts |       | 7,500,000  |       |    |       |
|              |       |       |       |    |       |
|              |       | $          | 37,500,000 |    | $          | 12,500,000 |   |

 

The distributions of net cash flow to the membersshall be made in the following priorities:

 

•                  a specified percentage return on PCA balances

•                  reduce PCA balances to zero

•                  a specified percentage return on SCA balance

•                  reduce SCA balance to zero

•                  pro rata in proportion to membership interests

 

**4.**                      MANAGEMENT AGREEMENTS

** **

Kapalua Bay (“Owner”) has a Hotel Management Agreementwith KB Hotel Operator Inc. (“Operator”), an affiliate of Marriott. The initialterm of the agreement is three years, and Operator is responsible for theoperation and management of the hotel. Hotel personnel are employees ofOperator, and Owner is responsible for all hotel costs and expenses. At December 31,2005, the net amount due from Operator was $930,000, and at December 31,2004, the net amount due to Operator was $636,000. Owner has the right toterminate the agreement in conjunction with the closure of the hotel tocommence construction of the real estate development projects. Operatorreceives a base management fee equal to 3% of gross revenues (as defined in theagreement), and an incentive management fee based on operating profit (as definedin the agreement). The base management fee for 2005 and 2004 was $704,000 and $168,000,respectively, and there was an incentive management fee of $86,000 in 2005.There was no incentive management fee in 2004. Operator also billed Owner $686,000and $165,000 in 2005 and 2004, respectively, for chain services (e.g.,reservations, advertising) and other services. Owner must also establish a cashreserve fund equal to 1% of gross revenues for the replacement of furniture,fixtures and equipment.

 

Kapalua Land Company, Ltd. (“KLC”), a subsidiary ofMLP, has an agreement to manage the Shops for an initial term of four years.Owner has the right to terminate the agreement in conjunction with the closureof the Shops to commence construction of the real estate development projects.Owner reimbursed KLC $47,000 and $18,000 in 2005 and 2004, respectively, forKLC’s cost incurred to manage the Shops.

 

MLP is the managing member of Bay Holdings, and isresponsible for managing its business affairs. Under the LLC agreement, “ordinarymajor decisions” (as defined in the agreement) require the approval of at least75% of the membership interests, and “extraordinary major decisions” (asdefined in the agreement) require the approval of 100% of the membershipinterests. The LLC agreement also contains provisions to deal with “deadlock”situations. MLP is entitled to a monthly management fee of $2,500, plusreimbursement of its out-of-pocket expenses.

 

10

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**5.**                      OTHER AGREEMENTS WITH MEMBERS

** **

Bay Holdings has an agreement to sell a portion of thewhole ownership residential units to Exclusive Resorts. Under the LLCagreement, Bay Holdings anticipates entering into the following agreements withits members (and their affiliates) relating to the marketing, sale, andmanagement of the residential projects:

 

•                  Sale of the spa and beach club improvements to MLP at Bay Holdings’actual construction costs.

 

•                  Amenities agreement with MLP that grants purchasers of the whole andfractional ownership residential units certain privileges with respect to theKapalua Resort’s spa and beach club, golf courses, and tennis facilities.

 

•                  Marketing agreements with MLP and Marriott for the sale of wholeownership residential units in the project (excluding units to be sold toExclusive Resorts).

 

•                  Management agreements with Marriott for services relating to themanagement of the fractional ownership units, fractional ownership membershipprogram, and the project’s common areas.

 

Bay Holdings has an agreement with MLP for entitlement services relating tothe receipt of governmental permits and authorizations required for thedevelopment projects. In 2005, Bay Holdings received entitlement services fromMLP with an agreed upon value of $225,000, which was recorded as projectdevelopment costs and a corresponding credit (in lieu of cash payment) to themembers’ capital account of MLP KB Partner, LLC.

 

Bay Holdings has a technical services agreement with Marriott for designand construction services relating to the whole and fractional ownershipresidential units and ancillary improvements. In 2005, Bay Holdings receivedservices from Marriott with an agreed upon value of $100,000, which wasrecorded as project development costs and a corresponding credit (in lieu ofcash payment) to the members’ capital account of MH Kapalua Venture, LLC.

 

**6.**                      FINANCING ARRANGEMENTS

** **

Bay Holdings has a $45.0 million bank credit agreement,which is secured by a mortgage on the hotel and other improvements. Pursuant toterms in the credit agreement, the maximum loan commitment available to BayHoldings was adjusted to approximately $42.3 million during 2005. The loanproceeds can be used for the purchase of the hotel improvements and certainpre-development costs relating to the real estate development projects. Theinitial term of the loan is two years, maturing on August 31, 2006, withinterest at adjustable rates based on either the one-month or three-month LIBORplus 2.5% or the base rate (interest rates were 6.92% and 4.91% at December 31,2005 and 2004, respectively). Interest cost incurred during 2005 and 2004 was $1,984,000and $393,000, respectively, and was capitalized as project development costs.The loan agreement allows for the lenders to withhold an interest reserve onthe available balance if the debt service coverage ratio, as defined in thecredit agreement, falls below 1:1. At December 31, 2005, the Company’sdebt service coverage ratio fell below 1:1 and the interest reserve ofapproximately $2,290,000 reduced the amounts available under the creditagreement. The loan agreement has a six-month extension option, which, ifexercised, will require principal payments of $1.0 million per month during theextension period. Bay Holdings paid a 1% fee to the lenders at the closing dateof the loan. The outstanding loan balance at December 31, 2005 and 2004was $29.5 million and $26.0 million, respectively, (proceeds in 2004 were usedto purchase the hotel improvements and other assets on August 31, 2004),and the amount available under the credit agreement was approximately $10.5million at December 31, 2005.

 

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Bay Holdings intends to refinance the loan agreement in 2006 with a third-partylender prior to August 31, 2006 (the end of the term of the loan). If theloan agreement is not refinanced by August 2006, Bay Holdings intends toexercise its option to extend the term of the loan to February 2007.Accordingly, the outstanding loan amount of $29.5 million has been classifiedas a noncurrent liability in the accompanying balance sheet at December 31,2005.

 

The loan agreement contains covenants that, amongother matters, restrict (or require prior approval by the lenders of)additional borrowings, guarantees, liens, transfers, changes in the provisionsof existing agreements, and leases.

 

**7.**                      LEASES

** **

**Lessor**

 

Bay Holdings leases space to retail tenants in thehotel and Shops, and also has a lease agreement with a concessionaire at thehotel. These operating leases provide for minimum rents and percentage rentsbased on revenues. For 2005 and 2004, minimum rents were $409,000 and $306,000,respectively, and percentage rents were $566,000 and $218,000, respectively. Rentalincome received from MLP totaled $300,000 and $101,000 in 2005 and 2004,respectively. Property at December 31, 2005 and 2004 includes leasedproperty of $3,045,000 (before accumulated depreciation of $2,506,000 and $508,000,respectively). Future minimum rental income aggregates $157,000, and isexpected to be received in 2006.

 

The hotel and Shops will be demolished in 2006 inconjunction with the construction of the real estate development projects. In January 2006,Bay Holdings terminated an existing lease with a tenant in the hotel, whichwill require termination payments to the tenant of approximately $87,000 in2006.

 

**Lessee**

 

Bay Holdings leases equipment under operating leaseagreements. Rent expense for 2005 and 2004 was $52,400 and $20,000,respectively. Future minimum rental payments aggregate $8,300 in 2006 and 2007,and $1,400 in 2008.

 

**8.**                      EMPLOYEE BENEFIT PLANS

** **

Hotel employees are participants of a multi-employerdefined benefit pension plan. The expense for 2005 and 2004 relating tocontributions to this plan was $101,000 and $26,000, respectively.

 

Certain Bay Holdings’ employees are participants of aMarriott defined contribution plan. Matching employer contributions to the plantotaled $46,000 and $26,000 in 2005 and 2004, respectively.

 

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**9.**                      DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

** **

The carrying values of Bay Holdings’ financialinstruments approximate their fair values. The bank loan has adjustableinterest rates based on the LIBOR or base rates.

 

**10.**               CONCENTRATIONS OF CREDIT RISKS

** **

The financial instruments that potentially expose BayHoldings to concentrations of credit risk consist primarily of cash depositsand accounts receivable. Bay Holdings maintains portions of its cash in bankdeposit accounts, which, at times, may exceed federally insured limits.Management believes that Bay Holdings is not exposed to any significant creditrisk related to cash. In addition, Bay Holdings extends credit to hotel guests,travel agents, and its Shops’ tenants. The creditworthiness of existing andpotential tenants and customers is evaluated and, under certain circumstances,a security deposit is required.

 

**11.**               COMMITMENTS AND CONTINGENCIES

** **

Bay Holdings had commitments under signed contractstotaling approximately $4.8 million at December 31, 2005, which primarilyrelate to the real estate development projects.

 

******

 

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