SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-6510 MAUI LAND & PINEAPPLE COMPANY, INC. (Exact name of registrant as specified in its charter) HAWAII 99-0107542 (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) P. O. BOX 187, KAHULUI, MAUI, HAWAII 96733-6687 (Address of principal executive offices) Registrant's telephone number, including area code: (808) 877-3351 NONE Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x]No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at November 6, 1998 Common Stock, no par value 7,188,500 shares MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Balance Sheets, September 30, 1998 (Unaudited) and December 31, 1997 3 Condensed Statements of Operations and Retained Earnings, Three Months Ended September 30, 1998 and 1997 (Unaudited) 4 Condensed Statements of Operations and Retained Earnings, Nine Months Ended September 30, 1998 and 1997 (Unaudited) 5 Condensed Statements of Cash Flows, Nine Months Ended September 30, 1998 and 1997 (Unaudited) 6 Notes to Condensed Financial Statements (Unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 6. Exhibits and Reports on Form 8-K 13 PART I FINANCIAL INFORMATION Item 1. Financial Statements MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES CONDENSED BALANCE SHEETS Unaudited 9/30/98 12/31/97 (Dollars in Thousands) ASSETS Current Assets Cash $ 570 $ 1,611 Accounts and notes receivable 16,705 12,748 Inventories 20,917 18,713 Other current assets 4,033 4,076 Total current assets 42,225 37,148 Property 206,490 200,504 Accumulated depreciation (118,540) (112,457) Property - net 87,950 88,047 Other Assets 9,904 9,519 Total 140,079 134,714 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current portion of long-term debt and capital lease obligations 6,484 3,052 Trade accounts payable 4,722 6,166 Other current liabilities 6,633 7,647 Total current liabilities 17,839 16,865 Long-Term Liabilities Long-term debt and capital lease obligations 32,441 29,435 Accrued retirement benefits 22,169 21,571 Equity in losses of joint venture 7,560 6,655 Other long-term liabilities 956 1,292 Total long-term liabilities 63,126 58,953 Stockholders' Equity Common stock, no par value - 7,200,000 shares authorized, 7,188,500 issued and outstanding 12,318 12,318 Retained earnings 46,796 46,578 Stockholders' equity 59,114 58,896 Total $140,079 $ 134,714 See accompanying Notes to Condensed Financial Statements. MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (UNAUDITED) Three Months Ended 9/30/98 9/30/97 (Dollars in Thousands Except Share Amounts) Revenues Net sales $30,717 $29,082 Operating income 6,890 7,088 Other income 100 1,206 Total Revenues 37,707 37,376 Costs and Expenses Cost of goods sold 21,458 20,887 Operating expenses 6,447 6,722 Shipping and marketing 4,437 3,705 General and administrative 3,758 3,541 Equity in losses of joint ventures 167 263 Interest 793 799 Total Costs and Expenses 37,060 35,917 Income Before Income Taxes 647 1,459 Income Tax Expense 246 499 Net Income 401 960 Retained Earnings, Beginning of Period 46,395 47,376 Retained Earnings, End of Period 46,796 48,336 Per Common Share Net income $ .06 $ .13 See accompanying Notes to Condensed Financial Statements. MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (UNAUDITED) Nine Months Ended 9/30/98 9/30/97 (Dollars in Thousands Except Share Amounts) Revenues Net sales $73,138 $72,551 Operating income 22,298 20,937 Other income 876 5,886 Total Revenues 96,312 99,374 Costs and Expenses Cost of goods sold 50,860 51,300 Operating expenses 19,449 19,452 Shipping and marketing 11,605 10,516 General and administrative 10,926 11,005 Equity in losses of joint ventures 814 776 Interest 2,301 2,230 Total Costs and Expenses 95,955 95,279 Income Before Income Taxes 357 4,095 Income Tax Expense 139 1,474 Net Income 218 2,621 Retained Earnings, Beginning of Period 46,578 45,715 Retained Earnings, End of Period 46,796 48,336 Per Common Share Net income $ .03 $ .36 See accompanying Notes to Condensed Financial Statements. MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended 9/30/98 9/30/97 (Dollars in Thousands) Net Cash Used in Operating Activities $ (933) $(7,189) Investing Activities Purchases of property (5,354) (6,684) Proceeds from disposal of property 601 5,339 Contributions to joint ventures (275) (1,145) Distributions from joint venture -- 1,950 Other (1,518) (1,489) Net Cash Used in Investing Activities (6,546) (2,029) Financing Activities Payments of long-term debt and capital lease obligations (6,662) (8,470) Proceeds from long-term debt 13,100 18,205 Net Cash Provided by Financing Activities 6,438 9,735 Net Increase (Decrease) in Cash (1,041) 517 Cash at Beginning of Period 1,611 453 Cash at End of Period $ 570 $ 970 Supplemental Disclosure and Cash Flow Information - Interest (net of amounts capitalized) of $2,727,000 and $2,848,000 was paid during the nine months ended September 30, 1998 and 1997, respectively. Income taxes of $516,000 and $110,000 were paid during the nine months ended September 30, 1998 and 1997, respectively. Capital lease obligations of $740,000 were incurred during the nine months ended September 30, 1997. See accompanying Notes to Condensed Financial Statements. MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. In the opinion of management, the accompanying condensed financial statements contain all normal and recurring adjustments necessary to present a fair statement of financial position and results of operations for the interim periods ended September 30, 1998 and 1997. 2. The Company's reports for interim periods utilize numerous estimates of production, general and administrative expenses, and other costs for the full year. Consequently, amounts in the interim reports are not necessarily indicative of results for the full year. 3. The effective tax rate for 1998 and 1997 differs from the statutory federal rate of 34% primarily because of the state tax provision and refundable state tax credits. 4. Accounts and notes receivable are reflected net of allowance for doubtful accounts of $623,000 and $567,000 at September 30, 1998 and December 31, 1997, respectively. 5. Inventories as of September 30, 1998 and December 31, 1997 were as follows (in thousands): 9/30/98 12/31/97 Pineapple products Finished goods $ 8,595 $ 8,977 Work in progress 2,283 823 Raw materials 2,210 1,325 Real estate held for sale 1,460 1,349 Merchandise, materials and supplies 6,369 6,239 Total Inventories $20,917 $18,713 6. Business Segment Information (in thousands): Three Months Ended Nine Months Ended September 30 September 30 1998 1997 1998 1997 Revenues Pineapple $ 28,235 $ 26,493 $ 65,261 $ 64,912 Resort 8,472 8,680 27,908 30,070 Commercial & Property 1,000 2,191 3,127 4,369 Corporate -- 12 16 23 Total revenues 37,707 37,376 96,312 99,374 Operating profit (loss) Pineapple 2,015 2,210 2,608 3,217 Resort 361 173 3,155 5,567 Commercial & Property 83 1,060 (29) 851 Total operating profit 2,459 3,443 5,734 9,635 Corporate expenses - net (1,019) (1,185) (3,076) (3,310) Interest expense (793) (799) (2,301) (2,230) Income tax expense (246) (499) (139) (1,474) Net income $ 401 $ 960 $ 218 $ 2,621 7. Average common shares outstanding for the interim periods ended September 30, 1998 and 1997 were 7,188,500. On May 1, 1998, the Company effected a four-for-one split of its common stock. All references to the number of shares of common stock and per share amounts have been restated to reflect the split. 8. Certain prior period amounts have been restated to conform to the current presentation. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Consolidated Consolidated net income for the third quarter of 1998 was $401,000 compared to $960,000 for the third quarter of 1997. Revenues for the third quarter of 1998 were 1% higher than the third quarter of 1997. For the first nine months of 1998, the Company had net income of $218,000 compared to net income of $2.6 million for the first nine months of 1997. Revenues of $96 million for the first nine months of 1998 were 3% lower than the same period in 1997. The reduction in net income for the third quarter and first nine months of 1998 compared to the same periods in 1997 largely reflect differences in net profits from land sales. Net income for the third quarter of 1997 included approximately $650,000 from land sales in the Company's Commercial & Property segment. Land sales were responsible for approximately $140,000 and $3.3 million, respectively, of net income for the first nine months of 1998 and 1997. Interest expense was 1% lower for the third quarter and 3% higher for the first nine months of 1998 compared to the same periods in 1997 primarily as a result of differences in the average borrowing levels. Average interest rates were approximately the same in 1998 and 1997. General and administrative expenses were 6% higher for the third quarter and 1% lower for the first nine months of 1998 compared to the same periods in 1997. The increase in general and administrative expenses for the third quarter of 1998 is primarily due to charges in September of 1998 for pension and other postretirement expenses related to an early retirement incentive package that became effective on September 1, 1998. Lower general and administrative expenses for the first nine months of 1998 primarily reflect cost reductions in the land management area, lower insurance costs and lower salary expense. Pineapple Revenues from Pineapple operations were higher by 7% and 1%, for the third quarter and first nine months of 1998, respectively, as compared to the same periods in 1997. For the third quarter of 1998, a 4.5% increase in revenues was attributable to higher sales volume. Average prices were slightly lower in the third quarter of 1998. For the first nine months of 1998, revenues from fresh fruit and other sales and higher average prices for canned pineapple increased revenues by 2%. These increases were partially offset by lower sales volume. Pineapple operations produced an operating profit of $2 million for the third quarter of 1998 compared to $2.2 million for the third quarter of 1997. For the first nine months of 1998 Pineapple operations had an operating profit of $2.6 million compared to $3.2 million for the same period in 1997. Cost of sales per case sold was lower for the third quarter and the first nine months of 1998 compared to the same periods in 1997 largely because of better recoveries (cases per ton) and other production efficiencies. Charges in the third quarter of 1998 as a result of an early retirement incentive package and higher shipping and marketing costs were responsible for lower operating profits in 1998. Resort Revenues from the Company's Kapalua Resort segment were $8.5 million and $8.7 million for the third quarter of 1998 and 1997, respectively. For the first nine months of 1998 and 1997, revenues were $27.9 million and $30.1 million, respectively. Operating profits from the Resort were $361,000 and $173,000 for the third quarter of 1998 and 1997, respectively. For the first nine months of 1998 and 1997 operating profits were $3.2 million and $5.6 million, respectively. Resort revenues and operating profit for first nine months of 1997 includes $4.2 million from the sale of the land parcel next to the Kapalua Bay Hotel. Excluding this transaction, the resort's golf and other operations produced an operating profit of $3.2 million for the first nine months of 1998 compared to $1.4 million for the same period a year ago. Operating results for the third quarter and first nine months of 1998 included higher lease revenues from the Kapalua Bay Hotel ground lease, the Kapalua Shops tenant leases and other commercial leases primarily because in 1997 the Kapalua Bay Hotel was closed for part of the year for restoration work. The Kapalua Villas contributed to the improved 1998 results due to higher average room rates. Increases in paid rounds of golf and average green fees also contributed to the improved results for the first nine months of 1998. Commercial & Property Revenues from the Commercial & Property segment for the third quarters of 1998 and 1997 were $1 million and $2.2 million, respectively. For the first nine months of 1998 revenues were $3.1 million compared to $4.4 million for the first nine months of 1997. Operating profit from this segment was $83,000 for the third quarter of 1998 compared to $1.1 million for the third quarter of 1997. For the first nine months of 1998 the segment produced an operating loss of $29,000 compared to an operating profit of $851,000 for the first nine months of 1997. Higher contributions from land sales in the third quarter of 1997 were primarily responsible for the lower 1998 results. Losses from Kaahumanu Center were about the same for the third quarter of 1998 and the third quarter of 1997. For the first nine months of 1998, the Company's share of losses from this investment increased compared to the same period in 1997 primarily because of bad debt expense recorded in the first quarter of 1998. LIQUIDITY, CAPITAL RESOURCES AND OTHER At September 30, 1998, total debt including capital leases was $38.9 million, approximately $6 million higher than December 31, 1997. The increase in debt principally reflects the pineapple canning season that peaks in September and a lag in collection of receivables, particularly from sales to the U.S. government. Cash flows from operating activities are expected to be positive during the fourth quarter of 1998 and debt should be reduced by year-end. Unused short- and long-term lines of credit available to the Company at the end of the third quarter of 1998 totaled $13.9 million. Expenditures for fixed assets, investments and Resort deferred development costs are estimated to be approximately $11.1 million in 1998. Included in this amount is approximately $5.3 million for replacement of existing equipment for Pineapple and Resort operations. The Company expects to finance most of these expenditures with cash flows from operations. An enhanced early retirement package that was offered to employees in the pineapple and corporate divisions became effective on September 1, 1998. The package was offered as part of the Company's plan to consolidate certain pineapple operations and reduce the size of its workforce. The Company recorded charges of $343,000 in the third quarter of 1998 for termination benefits due to the enhanced early retirement package. Reductions in payroll related expenses for the last four months of 1998 are expected to offset part of the charges for termination benefits recorded in the third quarter. The Company has evaluated its data processing and computer application systems with respect to Year 2000 capability and has set target dates for compliance of all systems. Several of the Company's data processing applications use software programs purchased from outside vendors. Except as mentioned in the discussion that follows, all applications requiring upgrades from software vendors are now Year 2000 compliant. The Company has received, but not yet installed the vendor provided software upgrades for its human resource and time and attendance systems. Completion of installation and testing of these upgrades is set for the end of the first quarter 1999. The Year 2000 software upgrade for the Resort merchandise inventory control and golf reservations system has been partially received and the remainder of this upgrade is expected to be received by year-end 1998. The upgrade to the operating system for the equipment used by this application is presently available, but may require additional modification to function with the upgrades to the software applications. Installation and testing of software upgrades to the Resort merchandise inventory control data and golf reservation system are estimated to be completed by April 30, 1999, and the operating system for the equipment will be upgraded thereafter. The Resort merchandise inventory control system accumulates and processes data for approximately 150,000 items sold in ten retail outlets at the Kapalua Resort. Delay in the receipt, installation and testing of this software upgrade could affect merchandise purchase order procedures resulting in decreased control over inventory levels. Reorder lead times range from four to seven months and proper reorder control requires that active purchase orders be in the inventory control system. The vendor has assured the Company that it is committed to delivery of this software upgrade on a timely basis. The Company is presently accumulating information on alternative systems in the event that upgrades for the current system become unacceptably delayed. Several of the Company's custom data processing programs will require modification in order to be Year 2000 compliant. Among these programs, the pineapple sales system and the pineapple warehouse system have been identified as critical to the Company's operations. The Company's Information Services personnel have identified the necessary programming changes to these applications. It is estimated that programming and testing of the pineapple warehouse system will be complete by the end of November 1998 and the pineapple sales system will be compliant by the end of 1998. At this time it appears that the Company's current Information Services personnel will be able to complete all program modifications, installations and testing, and that no outside resources will be required. The Company has received responses to 90% of the letters initiated during the first half of 1998 assessing the risk of interruption of the Company's businesses by vendors, suppliers and trading partners. The responses all indicate that these trading partners' data processing systems are either already Year 2000 compliant or are expected to be compliant by the end of the first quarter of 1999. The Company has completed a checklist of its non-information technology systems and has identified a system that will require an upgrade to be Year 2000 compliant. The upgrade identified does not have any functional effect on the Company's operations. The Company is in the process of identifying the necessary upgrades to the numerous personal computers used in the Company and expects that this will be an ongoing process through the first half of 1999. Based on current information, no material expenditures associated with the Year 2000 issue have been identified. This report contains forward-looking statements, within the meaning of Private Securities Litigation Reform Act of 1995, as to the Company's expectations for positive cash flows from operating activities and reduction of expenses for the remainder of 1998, and its expectations regarding the Year 2000 issue. Forward-looking statements contained in this report or otherwise made by the Company are subject to certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Potential risks and uncertainties include, but are not limited to, the success of the Company in identifying systems and programs that contain two-digit year codes, the nature and amount of programming required to upgrade or replace each of the programs and systems affected by the two-digit year code, the timeliness of receipt and accuracy of vendor provided Year 2000 software upgrades, and other risks and uncertainties as disclosed in the Company's Form 10-K filing with the Securities and Exchange Commission. PART II OTHER INFORMATION Item 1. Legal Proceedings Antidumping Petition In April of 1998, the United States Court of Appeals for the Federal Circuit heard the appeals of Maui Pineapple Company, Ltd. and the Department of Commerce regarding the antidumping petition and calculation of duties on imports of canned pineapple fruit from Thailand. A final decision is expected by the end of 1998. In August of 1998, the final results of the second administrative review were announced by the Department of Commerce. The review resulted in lower duties for six of the seven Thai producers reviewed. The antidumping duties presently in place on imports of canned pineapple fruit from Thailand range from less than 1% up to 51%. The third administrative review covering the period from July 1997 to June 1998 commenced in August of 1998 and a preliminary determination is expected sometime in the second quarter of 1999. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (10) Material Contracts A. Maui Land & Pineapple Company, Inc. Executive Deferred Compensation Plan, effective as of October 1, 1998.* (27) Financial Data Schedule As of September 30, 1998 and for the nine months then ended.* *Filed Herewith (b) Reports on Form 8-K The Company filed no reports on Form 8-K for the period covered by this report. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MAUI LAND & PINEAPPLE COMPANY, INC. November 12, 1998 /S/ PAUL J. MEYER Date Paul J. Meyer Executive Vice President/Finance (Principal Financial Officer)