***Exhibit 99***

***Kapalua Bay Holdings, LLCand Subsidiary***

***(A Delaware LimitedLiabilityCompany)***

*ConsolidatedFinancial Statements as ofDecember 31, 2006 and 2005, for the Years EndedDecember 31, 2006 and 2005, and for the Period fromAugust 31, 2004 (Date of Formation) to December 31,2004, and Independent 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, 2006 and 2005, and therelated consolidated statements of operations, members’ capital, and cash flowsfor the years ended December 31, 2006 and 2005 and for the period from August31, 2004 (date of formation) to December 31, 2004. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour 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, 2006 and 2005, and the results oftheir operations and their cash flows for the years ended December 31, 2006 and2005 and for the period from August 31, 2004 (date of formation) toDecember 31, 2004, in conformity with accounting principles generallyaccepted in the United States of America.

/s/ DELOITTE &TOUCHE LLP

Honolulu, HawaiiMarch 7, 2007

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**KAPALUA BAYHOLDINGS, LLC AND SUBSIDIARY**

**(A DelawareLimited Liability Company)**

 

**CONSOLIDATEDBALANCE SHEETS**

**DECEMBER31, 2006 AND 2005**
| ** **                                                                    | ** ** | **2006**   | ** **  | **2005**   | ** ** |
|-------------------------------------------------------------------------------|------------|------------|-------------|------------|------------|
| **ASSETS**                                                                    | ** ** | ** ** | ** **  | ** ** | ** ** |
|                                                                          |       |       |        |       |       |
| CASH AND CASH  EQUIVALENTS                                                    |       | $          | 589,408     |       | $          | 655,054 |   |
|                                                                          |       |       |        |       |       |
| RESTRICTED CASH                                                               |       | 22,398,472 |        |       |       |
|                                                                          |       |       |        |       |       |
| ACCOUNTS RECEIVABLE,  Less allowance for doubtful accounts of $83,182 in 2005 |       | 13,166     |        | 1,311,797  |       |
|                                                                          |       |       |        |       |       |
| RECEIVABLES FROM  AFFILIATES                                                  |       |       |        | 1,592,318  |       |
|                                                                          |       |       |        |       |       |
| INVENTORIES                                                                   |       |       |        | 127,293    |       |
|                                                                          |       |       |        |       |       |
| PREPAID EXPENSES AND  OTHER ASSETS                                            |       |       |        | 326,768    |       |
|                                                                          |       |       |        |       |       |
| PROPERTY:                                                                     |       |       |        |       |       |
| Land                                                                          |       | 24,590,000 |        | 24,590,000 |       |
| Buildings, other  improvements, and equipment                                 |       | 410,000    |        | 3,095,157  |       |
|                                                                          |       |       |        |       |       |
| Total property                                                                |       | 25,000,000 |        | 27,685,157 |       |
| Less accumulated  depreciation and amortization                               |       | (410,000   | )           | (2,546,213 | )          |
|                                                                          |       |       |        |       |       |
| Property—net                                                             |       | 24,590,000 |        | 25,138,944 |       |
|                                                                          |       |       |        |       |       |
| PROJECT DEVELOPMENT  COSTS                                                    |       | 87,211,180 |        | 55,336,126 |       |
|                                                                          |       |       |        |       |       |
| TOTAL                                                                         |       | $          | 134,802,226 |       | $          | 84,488,300 |   |

 

(Continued)  

2

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**KAPALUA BAYHOLDINGS, LLC AND SUBSIDIARY**

**(A DelawareLimited Liability Company)**

 

**CONSOLIDATEDBALANCE SHEETS**

**DECEMBER31, 2006 AND 2005**

** **

 
| ** **                                     | ** ** | **2006**   | ** **  | **2005**   | ** ** |
|------------------------------------------------|------------|------------|-------------|------------|------------|
| **LIABILITIES  AND MEMBERS’ CAPITAL**     | ** ** | ** ** | ** **  | ** ** | ** ** |
|                                           |       |       |        |       |       |
| LIABILITIES:                                   |       |       |        |       |       |
| Accounts payable                               |       | $          | 739,587     |       | $          | 2,947,311 |   |
| Accrued expenses and other current liabilities |       |       |        | 2,680,992  |       |
| Customer deposits                              |       |       |        | 714,056    |       |
| Payable to affiliates                          |       | 6,141,487  |        | 232,775    |       |
| Insurance premium obligations                  |       | 3,975,578  |        |       |       |
| Construction loan payable                      |       | 41,589,079 |        | 29,493,099 |       |
| Deferred revenue                               |       | 21,160,972 |        |       |       |
| Other liabilities                              |       | 438,066    |        | 513,066    |       |
|                                           |       |       |        |       |       |
| Total liabilities                              |       | 74,044,769 |        | 36,581,299 |       |
|                                           |       |       |        |       |       |
| COMMITMENTS AND  CONTINGENCIES (Note 10)       |       |       |        |       |       |
|                                           |       |       |        |       |       |
| MEMBERS’ CAPITAL                          |       | 60,757,457 |        | 47,907,001 |       |
|                                           |       |       |        |       |       |
| TOTAL                                          |       | $          | 134,802,226 |       | $          | 84,488,300 |   |

Seenotes to consolidated financial statements.                                                                                                                    (Concluded)

 

3

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**KAPALUA BAYHOLDINGS, LLC AND SUBSIDIARY**

**(A DelawareLimited Liability Company)**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**YEARS ENDEDDECEMBER 31, 2006 AND 2005 AND PERIOD FROM**

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

 
| ** **                    | ** ** | **2006**   | ** **  | **2005**   | ** ** | **2004**   | ** ** |
|-------------------------------|------------|------------|-------------|------------|------------|------------|------------|
| ** **                    | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** |
| REVENUES:                     |       |       |        |       |       |       |       |
| Rooms                         |       | $          | 4,567,319   |       | $          | 16,791,593 |       | $ | 3,757,313 |   |
| Food and beverage             |       | 1,437,002  |        | 5,662,063  |       | 1,640,983  |       |
| Other operating departments   |       | 10,390     |        | 104,394    |       | 17,336     |       |
| Rental income                 |       | 849,881    |        | 1,932,096  |       | 523,631    |       |
|                          |       |       |        |       |       |       |       |
| Total revenues                |       | 6,864,592  |        | 24,490,146 |       | 5,939,263  |       |
|                          |       |       |        |       |       |       |       |
| COSTS AND  EXPENSES:          |       |       |        |       |       |       |       |
| Rooms                         |       | 1,554,877  |        | 5,878,807  |       | 1,440,234  |       |
| Food and beverage             |       | 1,638,478  |        | 6,416,288  |       | 1,870,920  |       |
| Other operating departments   |       | 195,840    |        | 508,072    |       | 147,334    |       |
| General and administrative    |       | 1,647,010  |        | 4,190,931  |       | 1,756,557  |       |
| Advertising and promotion     |       | 9,939,470  |        | 2,244,151  |       | 590,130    |       |
| Depreciation and amortization |       | 548,944    |        | 2,034,213  |       | 572,000    |       |
| Utilities costs               |       | 746,078    |        | 1,678,530  |       | 485,960    |       |
| Management fees               |       | 242,923    |        | 867,086    |       | 175,995    |       |
| Other expenses                |       | 834,857    |        | 1,561,663  |       | 428,537    |       |
|                          |       |       |        |       |       |       |       |
| Total costs and expenses      |       | 17,348,477 |        | 25,379,741 |       | 7,467,667  |       |
|                          |       |       |        |       |       |       |       |
| NET LOSS                      |       | $          | (10,483,885 | )          | $          | (889,595   | )          | $ | (1,528,404 | ) |

 

See notes to consolidated financial statements.

4

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**KAPALUA BAYHOLDINGS, LLC AND SUBSIDIARY**

**(A DelawareLimited Liability Company)**

 

**CONSOLIDATEDSTATEMENTS OF MEMBERS’ CAPITAL**

**YEARS ENDED DECEMBER 31, 2006 AND 2005 AND PERIOD FROM**

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

 

 
| ** **                      | ** ** | ** **            | ** ** | ** **            | ** ** | **ER Kapalua** | ** ** | ** **  | ** ** |
|---------------------------------|------------|-----------------------|------------|-----------------------|------------|---------------------|------------|-------------|------------|
| ** **                      | ** ** | **MLP KB**       | ** ** | **MH Kapalua**   | ** ** | **Investors**       | ** ** | ** **  | ** ** |
| ** **                      | ** ** | **Partner, LLC** | ** ** | **Venture, LLC** | ** ** | **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, In-kind |       | 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  |       |
|                            |       |                  |       |                  |       |                |       |        |       |
| CAPITAL  CONTRIBUTIONS          |       |                  |       |                  |       |                |       |        |       |
| Cash                            |       | 11,734,763            |       | 7,823,177             |       | 3,451,401           |       | 23,009,341  |       |
| In-kind                         |       | 225,000               |       | 100,000               |       |                |       | 325,000     |       |
|                            |       |                  |       |                  |       |                |       |        |       |
| Total capital contributions     |       | 11,959,763            |       | 7,923,177             |       | 3,451,401           |       | 23,334,341  |       |
|                            |       |                  |       |                  |       |                |       |        |       |
| 2006 NET LOSS                   |       | (5,346,781            | )          | (3,564,521            | )          | (1,572,583          | )          | (10,483,885 | )          |
|                            |       |                  |       |                  |       |                |       |        |       |
| BALANCE—December 31,  2006 |       | $                     | 31,104,803 |                  | $          | 20,636,537          |       | $           | 9,016,117  |   | $ | 60,757,457 |   |

 

See notes to consolidated financial statements.

 

5

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**KAPALUA BAYHOLDINGS, LLC AND SUBSIDIARY**

**(A DelawareLimited Liability Company)**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**YEARS ENDEDDECEMBER 31, 2006 AND 2005 AND PERIOD FROM**

**AUGUST 31, 2004 (DATE OF FORMATION) THROUGH DECEMBER31, 2004**

 
| ** **                                                                                                | ** ** | **2006**    | ** **  | **2005**   | ** ** | **2004**    | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------|-------------|------------|------------|-------------|------------|
| ** **                                                                                                | ** ** | ** **  | ** **  | ** ** | ** ** | ** **  | ** ** |
| OPERATING  ACTIVITIES:                                                                                    |       |        |        |       |       |        |       |
| Net loss                                                                                                  |       | $           | (10,483,885 | )          | $          | (889,595    | )          | $ | (1,528,404 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:Depreciation and amortization |       | 548,944     |        | 2,034,213  |       | 572,000     |       |
| Acquisition of project development rights (Note 1)                                                        |       |        |        |       |       | (45,665,000 | )          |
| Project development costs                                                                                 |       | (31,625,054 | )           | (5,281,079 | )          | (1,125,619  | )          |
| Changes in operating assets and liabilities:                                                              |       |        |        |       |       |        |       |
| Accounts receivable—net                                                                              |       | 1,298,631   |        | 43,176     |       | 108,509     |       |
| Affiliates—net                                                                                       |       | 6,175,764   |        | (1,799,312 | )          |        |       |
| Prepaid expenses and other assets                                                                         |       | 454,061     |        | 72,793     |       | (415,438    | )          |
| Restricted cash                                                                                           |       | (21,160,972 | )           |       |       |        |       |
| Accounts payable                                                                                          |       | (2,207,724  | )           | 1,138,676  |       | 606,056     |       |
| Customer deposits                                                                                         |       | (714,056    | )           | 259,474    |       | (140,893    | )          |
| Accrued expenses and other liabilities                                                                    |       | (2,680,992  | )           | (300,210   | )          | 1,485,208   |       |
| Deferred revenue                                                                                          |       | 21,160,972  |        |       |       |        |       |
|                                                                                                      |       |        |        |       |       |        |       |
| Net cash used in operating activities                                                                     |       | (39,234,311 | )           | (4,721,864 | )          | (46,103,581 | )          |
|                                                                                                      |       |        |        |       |       |        |       |
| INVESTING  ACTIVITIES:                                                                                    |       |        |        |       |       |        |       |
| Funding of insurance collateral account                                                                   |       | (618,750    | )           |       |       |        |       |
| 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                                                                     |       | (618,750    | )           | (23,157    | )          | (2,989,443  | )          |
|                                                                                                      |       |        |        |       |       |        |       |
| FINANCING  ACTIVITIES:                                                                                    |       |        |        |       |       |        |       |
| Proceeds from construction loan payable                                                                   |       | 47,016,104  |        | 3,493,099  |       | 26,000,000  |       |
| Payments on construction loan payable                                                                     |       | (34,920,124 | )           |       |       |        |       |
| Members’ capital contributions                                                                       |       | 23,009,341  |        |       |       | 25,000,000  |       |
| Proceeds from insurance premium obligations                                                               |       | 4,682,094   |        |       |       |        |       |
|                                                                                                      |       |        |        |       |       |        |       |
| Net cash provided by financing activities                                                                 |       | 39,787,415  |        | 3,493,099  |       | 51,000,000  |       |
|                                                                                                      |       |        |        |       |       |        |       |
|                                                                                                      |       |        |        |       |       |        |       |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                                     |       | (65,646     | )           | (1,251,922 | )          | 1,906,976   |       |
|                                                                                                      |       |        |        |       |       |        |       |
| CASH AND CASH  EQUIVALENTS:                                                                               |       |        |        |       |       |        |       |
| Beginning of year                                                                                         |       | 655,054     |        | 1,906,976  |       |        |       |
|                                                                                                      |       |        |        |       |       |        |       |
| End of year                                                                                               |       | $           | 589,408     |       | $          | 655,054     |       | $ | 1,906,976 |   |

(Continued)

 

6

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**KAPALUA BAYHOLDINGS, LLC AND SUBSIDIARY**

**(A DelawareLimited Liability Company)**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**YEARS ENDEDDECEMBER 31, 2006 AND 2005 AND PERIOD FROM**

**AUGUST 31, 2004 (DATE OF FORMATION) THROUGH DECEMBER31, 2004**

 
| ** **                                                                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004**   | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
|                                                                                       |       |     |       |     |       |       |       |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW  INFORMATION—Cash paid for interest capitalized |       | $        | 3,249,199  |     | $          | 1,533,629  |       | $ | 284,938 |   |
|                                                                                       |       |     |       |     |       |       |       |
|                                                                                       |       |     |       |     |       |       |       |
| SUPPLEMENTAL  NONCASH INVESTING AND  FINANCING ACTIVITIES:                                 |       |     |       |     |       |       |       |
| ·Members’ capital contributions for  services                                    |       | $        | 325,000    |     | $          | 325,000    |       | $ | — |   |
| ·Payments on insurance premium  obligations by an  affiliate                          |       | 706,516  |       |     |       |       |       |
| ·Payments to fund collateral account  paid by an  affiliate                           |       | 618,750  |       |     |       |       |       |
| ·Capital  contribution of land and other assets by MLP  KB Partner, LLC               |       |     |       |     |       | 25,000,000 |       |

 

See notes to consolidatedfinancial statements.                                                                                                                    (Concluded)

7

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**KAPALUA BAY HOLDINGS, LLC AND SUBSIDIARY**

**(A Delaware LimitedLiability Company)**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTSYEARS ENDED DECEMBER 31, 2006 AND 2005 AND PERIOD FROMAUGUST 31, 2004 (DATE OF FORMATION) TO DECEMBER 31, 2004**

**1.**                      ORGANIZATIONAND PURCHASE TRANSACTION

Kapalua Bay Holdings, LLC (“Bay Holdings”) was formedon August 31, 2004 as a Delaware limited liability company whose members areMLP 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 the purchaseof the leasehold interest in the land (“ground lease”) and hotel improvementsof the Kapalua Bay Hotel (“KBH”) from YCP Kapalua L.P. and YCP Kapalua OperatorInc. for $48.3 million. The KBH is located in Lahaina, Maui and has 196oceanfront rooms. MLP was the lessor under the ground lease with YCP. BayHoldings intends to redevelop the site and construct whole and fractionalownership residential units for sale to the public (the “Project”). The plan isto operate the hotel and adjacent retail shops for approximately 19 months,demolish these improvements, and then begin construction of the residentialunits. During this 19-month period, Bay Holdings will prepare the developmentplans, obtain the required governmental approvals, and prepare marketing andsales plans. In April 2006, the hotel and retail shops were closed forbusiness.

The purchase price of $48,300,000 was allocated asfollows: $2,635,000 to the hotel improvements (including furniture and equipment)and $45,665,000 to development rights (project development costs on the balancesheet). The fair value of the hotel improvements (and the Shops’ improvementsdiscussed below) considered Bay Holdings’ plan to demolish the improvementswithin two years. The fair value was based on the present value of the hotel’snet operating income (cash flows). The development rights represent the coststo secure the Project site and enable Bay Holdings’ development of the luxuryresidential units. The fair values of the hotel improvements and developmentrights were based on an independent 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 2006, managementdetermined that the acquired severance liability was overstated by $124,000.This amount was recorded as a reduction to project development costs in 2006.

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 oneyear of the acquisition date, management

8

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estimated the withdrawal liability to be $405,000, which resulted in aliability and a corresponding increase in project development costs by the sameamount. Management believes that its accounting for the severance benefits andthe withdrawal liability are consistent with the provisions of EITF No. 95-3,*Recognition of Liabilities in Connectionwith a Purchase Business Combination.*

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) its feeinterest 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, andExclusive Resorts contributed $7.5 million of cash to Bay Holdings for 15% ofthe outstanding membership interests in Bay Holdings.

In connection with the transaction, Kapalua Baysecured a $45 million credit agreement with two lenders. The credit agreementhad an initial term of two years and was 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. In July 2006, Bay Holdingsentered into a construction loan agreement with Lehman Brothers Holdings Inc. (“Lehman”).Upon closing of the loan, the lender disbursed an initial advance of $40.1million, which was used to repay the original credit agreement (see Note 6).

**2.**                      SUMMARYOF 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 ownedsubsidiary. All significant intercompany balances and transactions have beeneliminated in consolidation.

***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.

9

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***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.

***Restricted Cash***—Restricted cash includes customer salesdeposits of $21,161,000 and cash held at an intermediary of $1,238,000 thatserves as collateral for a Bay Holdings’ insurance policy.

***Concentration of Credit Risk—***The financial instruments thatpotentially expose Bay Holdings to concentrations of credit risk consistprimarily of cash deposits. 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.

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

***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 plannedProject. Costs include the acquisition of the development rights for theProject site, planning and design costs, and other development activities.

***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.

Sales of residential units are expected to berecognized as revenues in the period in which sufficient cash has beenreceived, collection of the balance is reasonably assured, and risks ofownership have passed to the buyer. At December 31, 2006, the Project wasstill in the preliminary stage. Customer sales deposits received are accountedfor as restricted cash and deferred revenue until Bay Holdings meets thecriteria to begin recognizing sales using the percentage-of-completion method.

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

***Sales and Marketing***—Sales and marketing activities areexpensed as incurred. Costs incurred to sell the residential units arecapitalized if they are expected to be recovered from the sale of theresidential units and are incurred for tangible assets that are used directlythroughout the selling period to aid in the

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sale of the Project. Other costs incurred to sell theresidential units are also capitalized if they are directly associated with,and their recovery is reasonably expected from, sales that will be accountedfor using the percentage-of-completion method.

***Income Taxes***—Bay Holdings is not subject to federaland state 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.

***Recently Issued AccountingPronouncements***—OnSeptember 15, 2006, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards (“SFAS”) No. 157, *Fair Value Measurements*, which defines fair value,establishes guidelines for measuring fair value, and expands disclosuresregarding fair value measurements. SFAS No. 157 does not require any new fairvalue measurements but rather eliminates inconsistencies in guidance found invarious prior accounting pronouncements. SFAS No. 157 is effective for fiscalyears beginning after November 15, 2007. Bay Holdings is currentlyevaluating the impact of SFAS No. 157, but does not expect that the adoption ofSFAS No. 157 will have a material impact on its consolidated financial position,results of operations, or cash flows.

***Reclassifications***—Certain amounts in the 2005 financialstatements have been reclassified to conform to the 2006 presentation.

**3.**                      ALLOCATIONOF NET INCOME (LOSSES) AND CASH DISTRIBUTIONS

Net losses are allocatedto the members based on their membership interests:  MLP—51%, Marriott—34%, and ExclusiveResorts—15%. Net income is allocated based on the estimated distributions of “NetCash Flow” (as defined in the agreement) to the members. The cash distributionsare based on each member’s “Priority Contribution Account” (“PCA”), as definedin the agreement, and MLP’s “Subordinated Contribution Account” (“SCA”), asdefined in the agreement. Under the agreement, only 50% of MLP’s $25.0 millionnon-monetary capital contribution was considered PCA. The initial PCA and SCAbalances 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 netcash flow to the members shall 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

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**4.**                      MANAGEMENTAGREEMENTS

Kapalua Bay (“Owner”) had a Hotel Management Agreementwith KB Hotel Operator Inc. (“Operator”), an affiliate of Marriott. The initialterm of the agreement was three years, and Operator was responsible for theoperation and management of the hotel. Hotel personnel were employees ofOperator, and Owner was responsible for all hotel costs and expenses. AtDecember 31, 2005, the net amount due from Operator was $930,000. Operatorreceived a base management fee equal to 3% of gross revenues (as defined in theagreement), and an incentive management fee based on operating profit (asdefined in the agreement). The base management fee for 2006, 2005, and 2004 was$217,000, $704,000, and $168,000, respectively, and there was an incentivemanagement fee of $31,000 and $86,000 in 2006 and 2005, respectively. There wasno incentive management fee in 2004. Operator also billed Owner $25,000,$686,000, and $165,000 in 2006, 2005, and 2004, respectively, for chainservices (e.g., reservations, advertising) and other services. Owner was alsorequired to establish a cash reserve fund equal to 1% of gross revenues for thereplacement of furniture, fixtures and equipment. In 2006, Owner exercised itsright to terminate the agreement in conjunction with the closure of the hotelto commence construction of the Project.

Kapalua Land Company, Ltd. (“KLC”), a subsidiary ofMLP, had an agreement to manage the Shops for an initial term of four years.Owner reimbursed KLC $26,000, $47,000, and $18,000 in 2006, 2005, and 2004,respectively, for KLC’s cost incurred to manage the Shops. In 2006, Ownerexercised its right to terminate the agreement in conjunction with the closureof the Shops to commence construction of the Project.

Bay Holdings has a Development Management Agreementwith Marriott (“Development Manager”) over the term of the Project. Under theagreement, Marriott will conduct activities to support the planning, designing,construction, furnishing, and equipping of the Project until its completion.Owner shall pay to the Development Manager a fee in the amount of $2,700,000 inequal installments of $54,000 per month. The development management fee for2006, 2005, and 2004 was $648,000, $648,000, and $216,000, respectively. Uponsuccessful completion of the Project, the Development Manager is entitled to aone-time incentive fee of $300,000 and a performance fee equal to 15% of thecost savings of the Project, as defined in the agreement.

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” (as definedin the agreement) require the approval of 100% of the membership interests. TheLLC agreement also contains provisions to deal with “deadlock” situations.

**5.**                      OTHERAGREEMENTS WITH MEMBERS

Bay Holdings has an agreement to sell a portion of thewhole ownership residential units to Exclusive Resorts.

Bay Holdings has an agreement with MLP for entitlement services relating tothe receipt of governmental permits and authorizations required for theProject. In 2006 and 2005, Bay Holdings received entitlement services from MLPwith an agreed upon value of $225,000 each year, 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 2006 and

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2005, Bay Holdings received services from Marriott with an agreed uponvalue of $100,000 each year, which was recorded as project development costsand a corresponding credit (in lieu of cash payment) to the members’ capitalaccount of MH Kapalua Venture, LLC.

In 2006, Bay Holdings entered into agreements with MLP and Marriott for themarketing and sale of whole ownership residential units in the Project(excluding units to be sold to Exclusive Resorts). MLP and Marriott receivecommission fees and additional fees based on percentages of the gross salesprice of each whole ownership residential unit sold through MLP and Marriott’smarketing and sales efforts. In 2006, Bay Holdings paid $341,000 and$1,679,000, respectively, to MLP and Marriott under these agreements.

In 2006, Bay Holdingsentered into agreements with MLP to sell the spa, beach club improvements, and the sundry store to MLP uponcompletion of construction at Bay Holdings’ actual construction cost.

**6.**                      FINANCINGARRANGEMENTS

Bay Holdings had a $45.0 million bank creditagreement, which was secured by a mortgage on the hotel and other improvements.Pursuant to terms in the credit agreement, the maximum loan commitmentavailable to Bay Holdings was adjusted to approximately $42.3 million during2005. The loan proceeds could be used for the purchase of the hotelimprovements and certain pre-development costs relating to the real estatedevelopment projects. The initial term of the loan was two years, maturing onAugust 31, 2006, with interest at adjustable rates based on either theone-month or three-month LIBOR plus 2.5% or the base rate (interest rateswere 6.92% at December 31, 2005). The loan agreement allowed for thelenders to withhold an interest reserve on the available balance if the debtservice coverage ratio, as defined in the credit agreement, fell below 1:1. AtDecember 31, 2005, the Company’s debt service coverage ratio fell below 1:1 andthe interest reserve of approximately $2,290,000 reduced the amounts availableunder the credit agreement. The loan agreement had a six-month extensionoption, which, if exercised, would require principal payments of $1.0 millionper month during the extension period. Bay Holdings paid a 1% fee to thelenders at the closing date of the loan. The outstanding loan balance atDecember 31, 2005 was $29.5 million, and the amount available under thecredit agreement was approximately $10.5 million at December 31, 2005.

Bay Holdings refinanced the loan agreement in July 2006 with LehmanBrothers Holdings Inc., a Delaware corporation (“Lehman”), a third-partylender, prior to the end of the term of the loan. The construction loan agreement (“the ConstructionLoan Agreement”) is for the lesser of $370 million or 61.6% of the totalprojected cost of the Project (the “Loan”). Upon closing of the Loan, thelender disbursed an initial advance of $40.1 million to Bay Holdings. BayHoldings paid Lehman a loan fee of $3.7 million out of the proceeds of theinitial advance under the Construction Loan Agreement, which payment representsone percent (1.0%) of the maximum Loan amount and is non-refundable regardlessof when the loan is repaid or whether any further advances of the Loan aremade. Loan fees are included in project development costs. Disbursements underthe Construction Loan Agreement are contingent upon, among other things, noevent of default or material adverse change occurring with respect to BayHoldings or the Project. The loan is not revolving in nature and amounts repaidmay not be subsequently advanced. All Loan proceeds disbursed shall be usedonly for specified budgeted items for which such proceeds were advanced. Thelender is not obligated to make further advances until certain building permitsfor the Project have been issued, and such building permits were issued in thefourth quarter of 2006.  After issuanceof the building permits, Bay Holdings may borrow up to an additional $44.9million for certain purposes, for a total advance of $85 million. Subsequentborrowings by Bay Holdings are contingent upon sales of residential units equalto or exceeding $285.0 million. As of February 2007, Bay Holdings has receivedapproximately $218 million in binding sales commitments.

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Interest accrues on the Loan at a floating rate equalto the one (1) month LIBOR rate plus two hundred twenty (220) basis points, or2.2% (the “Adjusted LIBOR Rate”). Subject to certain limitations, during theterm of the Loan, Bay Holdings may elect to have the then-current AdjustedLIBOR Rate apply to some or all of the outstanding Loan amount. All principaland interest amounts due under the Loan shall be due and payable in full onAugust 1, 2009 unless Bay Holdings elects to extend the maturity date for up totwo additional terms of twelve (12) months, which elections are subject to thesatisfaction of certain conditions. Bay Holdings may not prepay the Loan at anytime prior to the second anniversary of the Effective Date, but may prepay theLoan thereafter, provided that it pays certain costs and fees as set forth inthe Construction Loan Agreement.

The Loan is collateralized by the Project’s assets,including the fee simple interest in the land owned by Bay Holdings, theadjacent spa parcel owned by MLP, and all of the sales contracts.

MLP, Marriott, and ER Kapalua Investors Fund, LLC haveguaranteed to the lender completion of the Project and each member’s pro ratashare of costs and losses incurred by the lender as a result of the occurrenceof specified triggering events during the term of the Construction LoanAgreement. The members’ guarantee to the lender does not include payment infull of the Loan.

Interest cost incurred during 2006, 2005, and 2004 was$2,763,000, $1,984,000, and $393,000, respectively, and was capitalized asproject development costs. The Construction Loan Agreement contains covenantsthat, among other matters, restrict (or require prior approval by the lendersof) additional borrowings, guarantees, liens, transfers, changes in theprovisions of existing agreements, and leases.

In 2006, Bay Holdings entered into an agreement tofinance premiums for its owner-controlled insurance policy. Premiums of$4,682,000 included in project development costs were financed through athird-party lender and recorded as insurance premium obligations. Futureminimum payments under the agreement are due through 2008 and accrue interestat 6.363%. At December 31, 2006, payments are due as follows:  $3,014,000 in 2007 and $961,000 in 2008.

**7.**                      LEASES

**Lessor**

Bay Holdings leased space to retail tenants in thehotel and Shops, and also had a lease agreement with a concessionaire at thehotel. These operating leases provided for minimum rents and percentage rentsbased on revenues. For 2006, 2005, and 2004, minimum rents were $244,000,$409,000, and $306,000, respectively, and percentage rents were $268,000,$566,000, and $218,000, respectively. Rental income received from MLP totaled$112,000, $300,000, and $101,000 in 2006, 2005, and 2004, respectively.Property at December 31, 2005 included leased property of $3,045,000 (beforeaccumulated depreciation of $2,506,000). The hotel and Shops were demolished in2006 in conjunction with the construction of the Project. In January 2006, BayHoldings terminated an existing lease with a tenant in the hotel, which willrequire termination payments to the tenant of approximately $87,000 in 2006.

**Lessee**

Bay Holdings leased equipment under operating leaseagreements. Rent expense for 2006, 2005, and 2004 was $52,000, $52,400, and$20,000, respectively. At December 31, 2006, there were no outstandingoperating lease agreements.

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**8.**                      EMPLOYEEBENEFIT PLANS

Hotel employees were participants of a multi-employerdefined benefit pension plan. The expense for 2006, 2005, and 2004 relating tocontributions to this plan was $16,000, $101,000, and $26,000, respectively.

Certain Bay Holdings’ employees are participants of aMarriott defined contribution plan. Matching employer contributions to the plantotaled $9,000, $46,000, and $26,000 in 2006, 2005, and 2004, respectively.

**9.**                      DISCLOSUREABOUT 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.**               COMMITMENTS ANDCONTINGENCIES

Bay Holdings had commitments under signed sales contractstotaling approximately $218 million at December 31, 2006, which primarilyrelate to sales of the residential units.

In December 2006, construction was halted in two areasof the Project due to the discovery of ancient human remains. The authoritieswere notified and Bay Holdings is currently working with these agencies todetermine the extent of the burials and the proper course of action.Construction continues on the unaffected areas, but has been delayed in theaffected areas. Management expects to continue with the Project as planned,with completion of the Project anticipated in late 2008.

******

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