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EX-32 - KAANAPALI LAND LLCexh_32.txt
EX-31.2 - KAANAPALI LAND LLCexh_312.txt
EX-31.1 - KAANAPALI LAND LLCexh_311.txt


                  SECURITIES AND EXCHANGE COMMISSION
                        Washington, D.C.  20549

                               FORM 10-Q

     [ X ] Quarterly Report Pursuant to Section 13 or 15(d)
                of the Securities Exchange Act of 1934


             For the Quarterly Period Ended June 30, 2010

                                  or

     [   ] Transition Report Pursuant to Section 13 or 15(d)
                of the Securities Exchange Act of 1934

             For the transition period from _____ to _____

                       Commission file #0-50273


                          KAANAPALI LAND, LLC
        (Exact name of registrant as specified in its charter)

       Delaware                           01-0731997
(State of organization)        (IRS Employer Identification No.)

  900 N. Michigan Ave., Chicago, IL                   60611
(Address of principal executive office)             (Zip Code)

Registrant's telephone number, including area code 312/915-1987

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 (the "Exchange Act") 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 by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-5)
S232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).  Yes [  ]  No [   ]

Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, non-accelerated filer, or a smaller reporting
company.  See the definitions of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

     Large accelerated filer  [   ]   Accelerated filer           [   ]
     Non-accelerated filer    [   ]   Smaller reporting company   [ X ]
     (Do not check if a smaller
     reporting company)

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).  Yes  [   ]   No [ X ]

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.  Yes [ X ]  No [   ]

As of July 31, 2010, the registrant had 1,792,613 shares of Common Shares
and 52,000 Class C Shares outstanding.



TABLE OF CONTENTS PART I FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements. . . . 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . 17 Item 4. Controls and Procedures. . . . . . . . . . . . . . 21 PART II OTHER INFORMATION Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . 22 Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . 22 Item 6. Exhibits . . . . . . . . . . . . . . . . . . . . . 22 SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . 23
PART I FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS KAANAPALI LAND, LLC Condensed Consolidated Balance Sheets June 30, 2010 and December 31, 2009 (Dollars in Thousands, except share data) (Unaudited) A S S E T S ----------- June 30, December 31, 2010 2009 --------- ----------- Cash and cash equivalents . . . . . . . $ 9,360 16,936 Short-term investments. . . . . . . . . 15,966 -- Receivables, net. . . . . . . . . . . . 137 120 Property, net . . . . . . . . . . . . . 100,325 100,013 Pension plan assets . . . . . . . . . . 23,757 23,010 Note receivable . . . . . . . . . . . . -- 12,793 Other assets. . . . . . . . . . . . . . 2,843 2,723 -------- -------- $152,388 155,595 ======== ======== L I A B I L I T I E S --------------------- Accounts payable and accrued expenses . $ 1,734 1,986 Deferred income taxes . . . . . . . . . 23,358 23,261 Accrued benefit obligation. . . . . . . -- 1,713 Other liabilities . . . . . . . . . . . 21,357 21,949 -------- -------- Total liabilities . . . . . . . 46,449 48,909 Commitments and contingencies S T O C K H O L D E R S' E Q U I T Y ------------------------------------- Common stock, at 6/30/10 and 12/31/09 non par value (Shares authorized - 4,500,000, Class C shares 52,000; shares issued and outstanding - common shares 1,792,613 and Class C shares 52,000) . . . . . . . . . . . . . . . -- -- Additional paid-in capital. . . . . . . 5,471 5,471 Accumulated other comprehensive income, net of tax. . . . . . . . . . (5,741) (5,893) Accumulated earnings. . . . . . . . . . 106,209 107,108 -------- -------- Total stockholders' equity. . . 105,939 106,686 -------- -------- $152,388 155,595 ======== ======== The accompanying notes are an integral part of the condensed consolidated financial statements.
KAANAPALI LAND, LLC Condensed Consolidated Statements of Operations Three and Six Months Ended June 30, 2010 and 2009 (Unaudited) (Dollars in Thousands, except per share data) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------ 2010 2009 2010 2009 -------- -------- -------- -------- Revenues: Sales and rental revenues . $ 859 901 1,527 1,677 Interest and other income . 301 295 691 606 -------- -------- -------- -------- 1,160 1,196 2,218 2,283 -------- -------- -------- -------- Cost and expenses: Cost of sales . . . . . . . 926 995 1,833 1,697 Selling, general and administrative. . . . . . (524) 1,498 1,117 3,006 Depreciation and amortization. . . . . . . 76 73 151 140 -------- -------- -------- -------- 478 2,566 3,101 4,843 -------- -------- -------- -------- Operating income (loss) from continuing operations before income taxes. . . . . . . 682 (1,370) (883) (2,560) Income tax benefit (expense) . . . . . . . . (9) 527 (16) 984 -------- -------- -------- -------- Net income (loss). . . . $ 673 (843) (899) (1,576) ======== ======== ======== ======== Earnings per share - basic: Net income (loss). . . . $ 0.36 (0.46) (0.49) (0.86) ======== ======== ======== ======== Earnings per share - diluted: Net income (loss). . . . $ 0.36 (0.46) (0.49) (0.86) ======== ======== ======== ======== The accompanying notes are an integral part of the condensed consolidated financial statements.
KAANAPALI LAND, LLC Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2010 and 2009 (Unaudited) (Dollars in Thousands) 2010 2009 -------- -------- Net cash provided by (used in) operating activities. . . . . . . . . $ (3,942) (4,824) Net cash provided by (used in) investing activities Property additions. . . . . . . . . (461) (1,082) Proceeds from note receivable . . . 12,793 -- Purchase of short-term investments. (15,966) -- -------- -------- Net increase (decrease) in cash and cash equivalents . . (7,576) (5,906) Cash and cash equivalents at beginning of period. . . . 16,936 25,780 -------- -------- Cash and cash equivalents at end of period . . . . . . $ 9,360 19,874 ======== ======== The accompanying notes are an integral part of the condensed consolidated financial statements.
KAANAPALI LAND, LLC Notes to Condensed Consolidated Financial Statements (Unaudited) (Dollars in Thousands) The accompanying unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements, and therefore, should be read in conjunction with the Company's Annual Report on Form 10-K (File No. 0- 50273) for the year ended December 31, 2009. Capitalized terms used but not defined in this quarterly report have the same meanings as the Company's 2009 Annual Report on Form 10-K. (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BASIS OF ACCOUNTING Kaanapali Land, LLC ("Kaanapali Land"), a Delaware limited liability company, is the reorganized entity resulting from the Joint Plan of Reorganization of Amfac Hawaii, LLC (now known as KLC Land Company, LLC ("KLC Land")), certain of its subsidiaries (together with KLC Land, the "KLC Debtors") and FHT Corporation ("FHTC" and, together with the KLC Debtors, the "Debtors") under Chapter 11 of the Bankruptcy Code, dated June 11, 2002 (as amended, the "Plan"). The Company's continuing operations are in two business segments - Agriculture and Property. The Agriculture segment grows seed corn and soybeans under contract and is engaged in farming and milling operations relating to the coffee orchards on behalf of the applicable land owners. The Property segment primarily develops land for sale and negotiates bulk sales of undeveloped land. The Company held a first mortgage on the Waikele Golf Course and certain recourse guarantees as security for a promissory note received for a portion of the purchase price at closing. As described below, in May 2010, the Company sold such note and assigned the underlying security documents to a third party purchaser. The Property and Agriculture segments operate exclusively in the State of Hawaii. PROPERTY The Company's property holdings are on the island of Maui. The Company has determined, based on its current projections for the development and/or disposition of its property holdings, that the property holdings are not currently recorded in an amount in excess of proceeds that the Company expects that it will ultimately obtain from the operation and disposition thereof. During 2008, the Company sold the Waikele Golf Course. The Company received a promissory note in the sale in the original amount of $13,300 and the note is secured by the property along with corporate and personal guarantees from the principal of the purchaser and an affiliate. The note originally required monthly interest only payments of 7% per annum and was due May 12, 2009. Certain seller representations and warranties existed for one year after the date of sale. The Company entered into a note modification agreement with the purchaser on May 12, 2009 and subsequent note modification agreements on May 19, 2009, June 16, 2009 and November 12, 2009. The note modifications allowed the purchaser to defer payment of such promissory note until May 12, 2010; provided, however, that
the purchaser was required by such agreement to make principal and interest payments in advance of maturity (before certain deductions for commissions and other costs) of $200 on May 12, 2009, $50 on May 20, 2009, $100 on June 16, 2009, $100 on June 23, 2009, $100 on September 12, 2009 and $1,000 on November 12, 2009. The note modifications also increased the interest rate on the note to 8% per annum beginning July 12, 2009 and require prepayment of interest through January 12, 2010 on November 12, 2009. Pursuant to the note modification agreement dated November 12, 2009 ("Effective Date"), the purchaser owed the Company a payment of approximately $1,300 of principal and interest on the Effective Date. The purchaser paid $253 on the Effective Date and the remaining amount due was not paid. Pursuant to two letters dated November 30, 2009 and December 16, 2009 the guarantors of the promissory note were notified that the promissory note was in default. On January 13, 2010, the Company made a forbearance offer that was accepted by the purchaser. The forbearance offer stated that the Company would accrue interest at the default rate of 12% per annum for the period November 13, 2009 through and including January 12, 2010. Commencing as of January 13, 2010, interest accrued at the rate of 10% per annum. Beginning February 12, 2010, the purchaser was required to make monthly interest payments at a rate of 8% per annum on the unpaid balance of the note. The interest of 2% not included in the monthly pay rate was deferred until the earlier of payment of the promissory note in full or May 12, 2010. The entire $253 the purchaser paid on November 12, 2009, along with $103 the purchaser paid on January 20, 2010, were applied to the accrued interest at the default rate noted above. On March 20, 2010 the Company made a further offer of forbearance of up to 3% interest per month in the event the purchaser should choose to devote said amounts to current maintenance of the golf course in accordance with the terms of the offer including the recommendations of a specified consultant ("offered maintenance deferral"). Under the offered maintenance deferral, said interest was to be paid on the earlier of the payment of the note or May 12, 2010. The purchaser accepted this forbearance offer. Each forbearance offer by which the Company agreed to forebear from exercising its remedies under the Note, was subject to certain conditions apart from the interim payment requirements including, but not limited to the absence of additional defaults under the note and underlying security documents. All such agreements to defer interest and forebear from exercising remedies were to expire on the extended maturity date of the promissory note, May 12, 2010. On May 5, 2010, the Company entered into an agreement with an unaffiliated third party whereby the Company agreed to sell the promissory note and assign the first mortgage and recourse guarantees (and other security documents) to such third party, on a non-recourse basis, for an aggregate purchase price of $12,500. The purchase price, which includes all principal and accrued and unpaid interest on such promissory note (including, but not limited to, the amounts previously deferred by the Company), approximated the Company's net carrying value of the note. On May 6, 2010, such transaction closed and the Company received the purchase price. The Company recognized a gain of $138, included in interest and other income, from the sale of the note. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
In the opinion of management, all adjustments necessary for a fair presentation of the statement of financial position and results of operations for the interim periods presented have been included in these financial statements and are of a normal and recurring nature. Operating results for the three and six months ended June 30, 2010 are not necessarily indicative of the results that may be achieved in future periods. SHORT-TERM INVESTMENTS It is the Company's policy to classify all of its investments in U.S. Government obligations with original maturities greater than three months as held-to maturity, as the Company has the ability and intent to hold these investments until their maturity, and are recorded at amortized cost, which approximates fair value. At June 30, 2010, short-term investments consist of $15,966 of such securities purchased in June 2010 with $5,995 maturing in December 2010 and $9,971 maturing in June 2011. Additionally, the amortized discount of $2 at June 30, 2010 is reflected in interest and other income. (2) LAND DEVELOPMENT During the first quarter of 2006, the Company received final subdivision approval on an approximate 336 acre parcel in the region "mauka" (toward the mountains) from the main highway serving the area. This project, called Kaanapali Coffee Farms, consists of agricultural lots, which are available for sale to individual buyers. The land improvements were completed during 2008. To date, the Company has closed on the sale of six lots at Kaanapali Coffee Farms. In conjunction with the sales of two of the lots, in addition to cash proceeds, the Company received promissory notes for $692 and $737. The promissory notes have maturity dates of October 2009 and November 2010, respectively. The note due in October 2009 was not paid on its schedule maturity date. Such note is secured by a mortgage on the associated lot that is subordinated to a purchase money mortgage held by a third-party lender. The Company has notified the purchaser of such lot that the subordinated note is in default and default interest has begun accruing thereon. The Company and such purchaser are continuing to discuss a potential note modification, but there can be no assurance that such a modification will be negotiated or the terms thereof. In the event that the Company and such purchaser are unable to agree to a modification of the terms of the such note, the Company will consider its available remedies, including an action for foreclosure. The allowance for doubtful accounts had a balance of $727 and $710 at June 30, 2010 and December 31, 2009, respectively. (3) MORTGAGE AND OTHER NOTES PAYABLE At June 30, 2010, a subsidiary of Kaanapali Land ("Holder") holds a mortgage note that was previously secured by Waikele Golf Course in the original principal amount of $7,178. Interest on the principal balance accrues at an adjustable rate of prime plus 1%. The principal and accrued interest, which are prepayable, are due March 1, 2015. As a result of the sale of the Waikele Golf Course, the outstanding principal and accrued interest was reduced pursuant to a payment of $9,300 towards the note and accrued interest and the mortgage security was released. As of June 30, 2010 and December 31, 2009, the note had an outstanding principal and accrued interest balance of $684 and $672, respectively. The note will be satisfied by the payment to such subsidiary of a portion of the proceeds from the Company's sale of the promissory note provided by the purchaser of the Waikele Golf Course to a third party purchaser, as described above. The note has been eliminated in the consolidated financial statements because the obligor and maker are consolidated subsidiaries of Kaanapali Land.
Certain subsidiaries of Kaanapali Land are jointly indebted to Kaanapali Land pursuant to a certain Secured Promissory Note in the principal amount of $70,000 dated November 14, 2002. Such note matures on October 31, 2011, had an outstanding balance of principal and accrued interest as of June 30, 2010 and December 31, 2009 of approximately $82,800 and $81,600, respectively, and carries an interest rate of 3.04% compounded semi-annually. The note, which is prepayable, is secured by substantially all of the remaining real property owned by such subsidiaries, pursuant to a certain Mortgage, Security Agreement and Financing Statement, dated as of November 14, 2002 and placed on record in December 2002. The note has been eliminated in the consolidated financial statements because the obligors are consolidated subsidiaries of Kaanapali Land. (4) EMPLOYEE BENEFIT PLANS (a) PENSION PLANS The Company participates in a defined benefit pension plan that covers substantially all its eligible employees. The pension plan is sponsored and maintained by Kaanapali Land in conjunction with other plans providing benefits to employees of Kaanapali Land and its affiliates. During late 2009 the Company received final approval from the Internal Revenue Service which allowed the Company to transfer the residual assets of the Retirement Plan for Employees of AMFAC Inc. ("Retirement Plan") of $5,800 to the Pension Plan. The Retirement Plan was terminated December 31, 1994. Plan liabilities were settled and plan assets were subsequently distributed in 1995. Residual Retirement Plan assets were transferred to the Pension Plan in 2009. The value of the Retirement Plan transfer has been reflected in accumulated other comprehensive income, net of tax (based upon recording the funded status of the plan at year end) on the Company's consolidated balance sheet. The components of the net periodic pension benefit (credit), included in selling, general and administrative in the consolidated statements of operations for the three and six months ended June 30, 2010 and 2009 are as follows: THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 2010 2009 2010 2009 -------- -------- -------- -------- Service cost. . . . . . . $ 150 6 300 12 Interest cost . . . . . . 575 592 1,150 1,184 Expected return on plan assets . . . . . . (1,100) (1,130) (2,200) (2,260) Recognized net actuarial (gain) loss . . . . . . 225 332 450 664 -------- -------- -------- -------- Net periodic pension credit. . . . . . . . . $ (150) (200) (300) (400) ======== ======== ======== ======== (b) RETIREE HEALTH AND LIFE INSURANCE BENEFITS In addition to providing pension benefits, a subsidiary of KLC Land has been providing certain healthcare and life insurance benefits to certain eligible retired employees. As described below, the subsidiary of KLC Land discontinued providing such benefits effective June 2010. The postretirement healthcare plan was contributory and contained cost-sharing features such as deductibles and copayments. The postretirement life insurance plan was non-contributory.
Net periodic postretirement benefit cost included in selling, general, and administrative in the consolidated statements of operations for the three and six months ended June 30, 2010 and 2009 includes the following components: THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 2010 2009 2010 2009 -------- -------- -------- -------- Interest cost . . . . . . $ 23 25 46 50 Amortization of net gain. (6) (5) (12) (10) -------- -------- -------- -------- Net periodic post- retirement benefit cost. . . . . . . . . . $ 17 20 34 40 ======== ======== ======== ======== The Company recognizes the over funded or under funded status of its employee benefit plans as an asset or liability in its statement of financial position and recognizes changes in its funded status in the year in which the changes occur through comprehensive income. Included in accumulated other comprehensive income at December 31, 2009 are the following amounts that have not yet been recognized in net periodic pension/post-retirement cost: unrecognized prior service costs of $2 ($1 net of tax) and unrecognized actuarial loss of $9,658 ($5,892 net of tax). The prior service cost and actuarial loss included in accumulated other comprehensive income and recognized in net periodic pension/post-retirement cost for the period ending June 30, 2010 are $1 and $435 ($265 net of tax), respectively. Effective June 2010, the subsidiary of KLC Land discontinued providing retiree health and life insurance benefits to retired employees. The subsidiary paid a onetime lump sum cash payment to the participants totaling approximately $85. The Company recognized a settlement gain of approximately $1,928, recorded in selling, general and administrative, which included recognition of approximately $192 remaining in accumulated other comprehensive income relating to the post retirement benefit plan and approximately $1,736 from the reversal of the accrued benefit obligation. The Company maintains a nonqualified deferred compensation arrangement (the "Rabbi Trust") which provides certain former directors of Amfac and their spouses with pension benefits. The Rabbi Trust invests in marketable securities and cash equivalents. The deferred compensation liability of approximately $1,308 represented in the Rabbi Trust and assets funding such deferred compensation liability of approximately $1,126 are consolidated in the Company's balance sheet. (5) STOCK-BASED COMPENSATION On April 15, 2008, the Company entered into an agreement with Stephen Lovelette ("Lovelette"), an executive vice president of the Company in charge of the Company's development activities, whereby the Company agreed to issue up to 52,000 shares of a new class of common shares (the "Class C Shares") in consideration for his services to the Company. The Class C Shares have the same rights as the Shares except that the Class C Shares will not participate in any distributions until the holders of the Shares have received aggregate distributions equal to $19 per Share, subject to customary antidilution adjustments. The Class C Shares became 50% vested on April 15, 2008, an additional 25% vested on December 31, 2008. The remaining 25% became vested on December 31, 2009.
(6) INCOME TAXES The Company uses a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company's gross unrecognized tax benefits total approximately $2,000 at June 30, 2010. The Company's continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. Consolidated Balance Sheets at June 30, 2010 and December 31, 2009 include $85 and $68, respectively, accrued for the potential payment of interest and penalties. Federal tax return examinations have been completed for all years through 2005. The statutes of limitations with respect to the Company's taxes for 2006 and subsequent years remain open. The Company believes adequate provisions for income tax have been recorded for all years, although there can be no assurance that such provisions will be adequate. To the extent that there is a shortfall, any such shortfall for which the Company could be liable could be material. The Company has recorded a valuation allowance against any tax benefit or deferred tax asset generated in the first half of 2010. (7) COMMITMENTS AND CONTINGENCIES At June 30, 2010, the Company's principal contractual obligations are approximately $26 for the unpaid retention related to the land improvements in conjunction with Phase I of the Kaanapali Coffee Farms project and construction of a model home within a lot in the development. Material legal proceedings of the Company are described below. Unless otherwise noted, the parties adverse to the Company in the legal proceedings described below have not made a claim for damages in a liquidated amount and/or the Company believes that it would be speculative to attempt to determine the Company's exposure relative thereto, and as a consequence believes that an estimate of the range of potential loss cannot be made. As a result of an administrative order issued to Oahu Sugar by the HDOH, Order No. CH 98-001, dated January 27, 1998, Oahu Sugar engaged in environmental site assessment of lands it leased from the U.S. Navy and located on the Waipio Peninsula. Oahu Sugar submitted a Remedial Investigation Report to the HDOH. The HDOH provided comments that indicated that additional testing may be required. Oahu Sugar responded to these comments with additional information. On January 9, 2004, EPA issued a request to Oahu Sugar seeking information related to the actual or threatened release of hazardous substances, pollutants and contaminants at the Waipio Peninsula portion of the Pearl Harbor Naval Complex National Priorities List Superfund Site. The request sought, among other things, information relating to the ability of Oahu Sugar to pay for or perform a clean up of the land formerly occupied by Oahu Sugar. Oahu Sugar responded to the information requests and had notified both the Navy and the EPA that while it had some modest remaining cash that it could contribute to further investigation and remediation efforts in connection with an overall settlement of the outstanding claims, Oahu Sugar was substantially without assets and would be unable to make a significant contribution to such an effort. Attempts at negotiating such a settlement were fruitless and Oahu Sugar received an order from EPA in March 2005 that purported to require certain testing and remediation of the site. As Oahu Sugar was substantially without assets, the pursuit of any action, informational, enforcement, or otherwise, would have had a material adverse effect on the financial condition of Oahu Sugar.
Therefore, as a result of the pursuit of further action by the HDOH and EPA as described above and the immediate material adverse effect that the actions had on the financial condition of Oahu Sugar, Oahu Sugar filed with the United States Bankruptcy Court, Northern District of Illinois, Eastern Division its voluntary petition for liquidation under Chapter 7 of Title 11, United States Bankruptcy Code. Such filing is not expected to have a material adverse effect on the Company as Oahu Sugar was substantially without assets at the time of the filing. While it is not believed that any other affiliates have any responsibility for the debts of Oahu Sugar, the EPA has indicated that it intends to make a claim against Kaanapali Land as further described below, and therefore, there can be no assurance that the Company will not incur significant costs in connection with such claim. The deadline for filing proofs of claim against Oahu Sugar with the bankruptcy court passed in April 2006. Prior to the deadline, Kaanapali Land, on behalf of itself and certain subsidiaries, filed claims that aggregated approximately $224,000, primarily relating to unpaid guarantee obligations made by Oahu Sugar that were assigned to Kaanapali Land pursuant to the Plan on the Plan Effective Date. In addition, the EPA and the U.S. Navy filed a joint proof of claim that seeks to recover certain environmental response costs relative to the Waipio Peninsula site discussed above. The proof of claim contained a demand for previously spent costs in the amount of approximately $260, and additional anticipated response costs of between approximately $2,760 and $11,450. No specific justification of these costs, or what they are purported to represent, was included in the EPA/Navy proof of claim. Due to the insignificant amount of assets remaining in the debtor's estate, it is unclear whether the United States Trustee who has taken control of Oahu Sugar will take any action to contest the EPA/Navy claim, or how it will reconcile such claim for the purpose of distributing any remaining assets of Oahu Sugar. EPA has sent three requests for information to Kaanapali Land regarding, among other things, Kaanapali Land's organization and relationship, if any, to entities that may have, historically, operated on the site and with respect to operations conducted on the site. Kaanapali Land responded to these requests for information. By letter dated February 7, 2007, pursuant to an allegation that Kaanapali Land is a successor to Oahu Sugar Company, Limited, a company that operated at the site prior to 1961 ("Old Oahu"), EPA advised Kaanapali that it believes it is authorized by CERCLA to amend the existing Unilateral Administrative Order against Oahu Sugar Company, LLC, for the clean up of the site to include Kaanapali Land as an additional respondent. The purported basis for the EPA's position is that Kaanapali Land, by virtue of certain corporate actions, is jointly and severally responsible for the performance of the response actions, including, without limitation, clean-up at the site. No such amendment has taken place as of the date hereof. Instead, after a series of discussions between Kaanapali and the EPA, on or about September 30, 2009, the EPA issued a Unilateral Administrative Order to Kaanapali Land for the performance of work in support of a removal action at the former Oahu Sugar pesticide mixing site located on Waipio peninsula. The work consists of the performance of soil and groundwater sampling and analysis, a topographic survey, and the preparation of an engineering evaluation and cost analysis of potential removal actions to abate an alleged "imminent and substantial endangerment" to public health, welfare or the environment. The order appears to be further predicated primarily on the alleged connection of Kaanapali Land to Old Oahu and its activities on the site. Kaanapali Land is currently performing work required by the order while reserving its right to contest liability regarding the site. With regard to liability for the site, Kaanapali Land believes that its liability, if any, should relate solely to a portion of the period of operation of Old Oahu at the site, although in some circumstances CERLCLA apparently permits imposition of joint and several liability, which can exceed a responsible party's equitable share. Kaanapali Land believes that
the U.S. Navy bears substantial liability for the site by virtue of its ownership of the site throughout the entire relevant period, both as landlord under its various leases with Oahu Sugar and Old Oahu and by operating and intensively utilizing the site directly during a period when no lease was in force. The Company believes that the cost of the work as set forth in the order will not be material to the Company as a whole; however, in the event that the EPA were to issue an order requiring remediation of the site, there can be no assurances that the cost of said remediation would not ultimately have a material adverse effect on the Company. In addition, if there is litigation regarding the site, there can be no assurance that the cost of such litigation will not be material or that such litigation will result in a judgment in favor of the Company. Federal tax return examinations have been completed for all years through 2005. The statutes of limitations with respect to the Company's tax returns for 2006 and subsequent years remain open. The Company believes adequate provisions for income taxes have been recorded for all years, although there can be no assurance that such provisions will be adequate. To the extent that there is a shortfall, any such shortfall for which the Company could be liable could be material. Kaanapali Land, as successor by merger to other entities, and D/C have been named as defendants in personal injury actions allegedly based on exposure to asbestos. While there have been only a few such cases that name Kaanapali Land, there are a substantial number of cases that are pending against D/C on the U.S. mainland (primarily in California). Cases against Kaanapali Land are allegedly based on its prior business operations in Hawaii and cases against D/C are allegedly based on sale of asbestos- containing products by D/C's prior distribution business operations primarily in California. Each entity defending these cases believes that it has meritorious defenses against these actions, but can give no assurances as to the ultimate outcome of these cases. The defense of these cases has had a material adverse effect on the financial condition of D/C as it has been forced to file a voluntary petition for liquidation as discussed below. Kaanapali Land does not believe that it has liability, directly or indirectly, for D/C's obligations in those cases. Kaanapali Land does not presently believe that the cases in which it is named will result in any material liability to Kaanapali Land; however, there can be no assurance in this regard. On February 15, 2005, D/C was served with a lawsuit entitled American & Foreign Insurance Company v. D/C Distribution and Amfac Corporation, Case No. 04433669 filed in the Superior Court of the State of California for the County of San Francisco, Central Justice Center. No other purported party was served. In the eight-count complaint for declaratory relief, reimbursement and recoupment of unspecified amounts, costs and for such other relief as the court might grant, plaintiff alleged that it is an insurance company to whom D/C tendered for defense and indemnity various personal injury lawsuits allegedly based on exposure to asbestos containing products. Plaintiff alleged that because none of the parties have been able to produce a copy of the policy or policies in question, a judicial determination of the material terms of the missing policy or policies is needed. Plaintiff sought, among other things, a declaration: of the material terms, rights, and obligations of the parties under the terms of the policy or policies; that the policies were exhausted; that plaintiff is not obligated to reimburse D/C for its attorneys' fees in that the amounts of attorneys' fees incurred by D/C have been incurred unreasonably; that plaintiff was entitled to recoupment and reimbursement of some or all of the amounts it has paid for defense and/or indemnity; and that D/C breached its obligation of cooperation with plaintiff. D/C filed an answer and an amended cross-claim. D/C believed that it had meritorious defenses and positions, and intended to vigorously defend. In addition, D/C believed that it was entitled to amounts from plaintiffs for reimbursement and recoupment of amounts expended by D/C on the lawsuits previously tendered. In order to fund such action and its other ongoing obligations while such lawsuit continued, D/C entered into a Loan Agreement and Security Agreement
with Kaanapali Land, in August 2006, whereby Kaanapali Land provided certain advances against a promissory note delivered by D/C in return for a security interest in any D/C insurance policy at issue in this lawsuit. In June 2007, the parties settled this lawsuit with payment by plaintiffs in the amount of $1,618. Such settlement amount was paid to Kaanapali Land in partial satisfaction of the secured indebtedness noted above. Because D/C was substantially without assets and was unable to obtain additional sources of capital to satisfy its liabilities, D/C filed with the United States Bankruptcy Court, Northern District of Illinois, its voluntary petition for liquidation under Chapter 7 of Title 11, United States Bankruptcy Code during July 2007, Case No. 07-12776. Such filing is not expected to have a material adverse effect on the Company as D/C was substantially without assets at the time of the filing. The deadline for filing proofs of claim against D/C with the bankruptcy court passed in October 2008. Prior to the deadline, Kaanapali Land filed claims that aggregated approximately $26,800, relating to both secured and unsecured intercompany debts owed by D/C to Kaanapali Land. In addition, a personal injury law firm based in San Francisco that represents clients with asbestos-related claims, filed proofs of claim on behalf of approximately 700 claimants. While it is not likely that a significant number of these claimants have a claim against D/C that could withstand a vigorous defense, it is unknown how the trustee will deal with these claims. It is not expected, however, that the Company will receive any material additional amounts in the liquidation of D/C. The Company received notice from the Hawaii Department of Land and Natural Resources ("DLNR") that it would inspect all significant dams and reservoirs in Hawaii, including those maintained by the Company on Maui in connection with its agricultural operations. Inspections were performed in April and October 2006 and again in March 2008 and July 2009. To date, the DLNR has cited certain maintenance deficiencies concerning two of the Company's reservoirs, consisting primarily of overgrowth of vegetation that makes inspection difficult and could degrade the integrity of reservoir slopes and impact drainage. The DLNR has required the vegetation clean-up as well as the Company's plan for future maintenance, inspections and emergency response. Revised versions of the required plans were submitted to DLNR in December 2006. In October 2009, DLNR delivered an inspection report for one of these reservoirs to the Company which acknowledged the work done to date but requested still more remediated action, and DLNR issued an amended report in March 2010. The Company is analyzing this report to determine its response and future course of actions. In addition, the Company is working on revisions to its emergency action plans for both reservoirs in accordance with revised DLNR requirements. On October 15, 2006, a significant earthquake occurred that was felt in most parts of the state. As a consequence of such earthquake, the DLNR, in conjunction with the U.S. Army Corps of Engineers, has inspected each reservoir. In September 2007, the Company received correspondence from DLNR that it preliminarily intended to categorize each of the reservoirs as "high hazard" under a new statute recently passed by the State of Hawaii concerning dam and reservoir safety. This classification, which bears upon future government oversight and reporting requirements, may increase the future cost of managing and maintaining these reservoirs in a material manner. The Company does not believe that this classification is warranted for either of these reservoirs and has initiated a dialogue with DLNR in that regard. At this time, it is unknown what the final classification assigned to these reservoirs will be or to what extent such classification will impact the future use and maintenance cost of these assets. In April 2008 the Company received further correspondence from DLNR that included the assessment by their consultants of the potential losses that result from the failure of these reservoirs. In April 2009, the Company filed a written response to DLNR to correct certain factual errors in its report and to request further analysis on whether such "high hazard" classifications are warranted. The Company and DLNR continue to engage in dialogue concerning these matters (which have included further site visits by DLNR personnel).
In addition to the foregoing, the Company has received notice from DLNR that it intends to decommission a reservoir that is contained partly on DLNR land and partly on land owned by an unaffiliated third party, that was previously sold by the Company to such third party. Upon such sale, the Company reserved the right to use such reservoir and maintain it to the extent the Company determined to do so in its discretion. While the Company continues to use such reservoir, it has disclaimed any responsibility for the costs of rehabilitation and/or decommissioning and has determined not to expend funds there. DLNR has notified the third party owner that it may have liability for a portion of such decommissioning costs and such owner has notified DLNR that (1) it does not support the decommissioning of such reservoir and (2) nevertheless, the Company should be responsible for same as the operator. While the Company believes that it has defenses to any claims that may be made against if for such costs, there can be no assurance that such defenses will be successful or that the decommissioning of such reservoir will not have an adverse impact on the Company's other water rights and distributions operations. Other than as described above, the Company is not involved in any material pending legal proceedings, other than ordinary routine litigation incidental to its business. The Company and/or certain of its affiliates have been named as defendants in several pending lawsuits. While it is impossible to predict the outcome of such routine litigation that is now pending (or threatened) and for which the potential liability is not covered by insurance, the Company is of the opinion that the ultimate liability from any of this litigation will not materially adversely affect the Company's consolidated results of operations or its financial condition. (8) CALCULATION OF NET INCOME (LOSS) PER SHARE The following tables set forth the computation of net income (loss) per share - basic and diluted: THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 2010 2009 2010 2009 -------- -------- -------- -------- (Amounts in thousands except per share amounts) NUMERATOR: Net income (loss) . . . . $ 673 (843) (899) (1,576) ======== ======== ======== ======== DENOMINATOR: Number of weighted average shares outstanding - basic (a) and diluted 1,845 1,832 1,845 1,832 ======== ======== ======== ======== (a) As the Company reported a loss from continuing operations for the three and six months ended June 30, 2009, the Company has excluded the unissued Class C shares from the corresponding earnings per share calculations for these periods as the effect would be anti-dilutive.
(9) BUSINESS SEGMENT INFORMATION As described in Note 1, the Company operates in two business segments. Total revenues and operating profit by business segment are presented in the tables below. Total revenues by business segment includes primarily (i) sales, all of which are from unaffiliated customers and (ii) interest income that is earned from outside sources on assets which are included in the individual industry segment's identifiable assets, as well as corporate assets. Operating income (loss) is comprised of total revenue less operating expenses. In computing operating income (loss), none of the following items have been added or deducted: general corporate revenues and expenses, interest expense and income taxes. THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 2010 2009 2010 2009 -------- -------- -------- -------- Revenues: Property. . . . . . . . $ 234 205 526 432 Agriculture . . . . . . 662 727 1,098 1,304 Corporate . . . . . . . 264 264 594 547 -------- -------- -------- -------- $ 1,160 1,196 2,218 2,283 ======== ======== ======== ======== Operating income (loss): Property. . . . . . . . $ (231) (422) (718) (689) Agriculture . . . . . . 1,750 (333) 1,372 (496) -------- -------- -------- -------- Operating income (loss) . 1,519 (755) 654 (1,185) Corporate . . . . . . . . (837) (615) (1,537) (1,375) -------- -------- -------- -------- Operating income (loss) from continuing operations before income taxes. . . . . . $ 682 (1,370) (883) (2,560) ======== ======== ======== ========
PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES General In addition to historical information, this Report contains forward- looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations about its businesses and the markets in which the Company operates. Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties or other factors which may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual operating results may be affected by various factors including, without limitation, changes in international, national and Hawaiian economic conditions, competitive market conditions, uncertainties and costs related to the imposition of conditions on receipt of governmental approvals and costs of material and labor, and actual versus projected timing of events all of which may cause such actual results to differ materially from what is expressed or forecast in this report. Certain subsidiaries of Kaanapali Land are jointly indebted to Kaanapali Land pursuant to a certain Secured Promissory Note in the principal amount of $70 million, dated November 14, 2002. Such note matures on October 31, 2011, had an outstanding balance of principal and accrued interest as of June 30, 2010 and December 31, 2009 of approximately $82.8 million and $81.6 million, respectively, and carries an interest rate of 3.04% compounded semi-annually. The note, which is prepayable, is secured by substantially all of the remaining real property owned by such subsidiaries, pursuant to a certain Mortgage, Security Agreement and Financing Statement, dated as of November 14, 2002 and placed on record in December 2002. The note has been eliminated in the consolidated financial statements because the obligors are consolidated subsidiaries of Kaanapali Land. In addition to such Secured Promissory Note, certain other subsidiaries of Kaanapali Land continue to be liable to Kaanapali Land under certain guarantees (the "Guarantees") that they had previously provided to support certain Senior Indebtedness (as defined in the Plan) and the Certificate of Land Appreciation Notes ("COLA Notes") formerly issued by Amfac/JMB Hawaii, Inc. (as predecessor to KLC Land). Although such Senior Indebtedness and COLA Notes were discharged under the Plan, the Guarantees of the Non-Debtor KLC Subsidiaries were not. Thus, to the extent that the holders of the Senior Indebtedness and COLA Notes did not receive payment on the outstanding balance thereof from distributions made under the Plan, the remaining amounts due thereunder remain obligations of the Non-Debtor KLC Subsidiaries under the Guarantees. Under the Plan, the obligations of the Non-Debtor KLC Subsidiaries under such Guarantees were assigned by the holders of the Senior Indebtedness and COLA Notes to Kaanapali Land on the Plan Effective Date. Kaanapali Land has notified each of the Non-Debtor KLC Subsidiaries that are liable under such Guarantees that their respective guarantee obligations are due and owing and that Kaanapali Land reserves all of its rights and remedies in such regard. Given the financial condition of such Non-Debtor KLC Subsidiaries, however, it is unlikely that Kaanapali Land will realize payments on such Guarantees that are more than a small percentage of the total amounts outstanding thereunder or that in the aggregate will generate any material proceeds to the Company. Nevertheless, Kaanapali Land has submitted a claim in the Chapter 7 bankruptcy proceeding of Oahu Sugar in order that it
may recover the assets remaining in the bankruptcy estate, if any, that become available for creditors of Oahu Sugar. Any amounts so received would not be material to the Company. The Company has commenced discussions with the United States (the only other claimant in the Oahu Sugar bankruptcy) concerning the potential for dividing such remaining assets and closing such bankruptcy case. There can be no assurance that such discussions will lead to a settlement acceptable to the Company. These Guarantee obligations have been eliminated in the consolidated financial statements because the obligors are consolidated subsidiaries of Kaanapali Land, which is now the sole obligee thereunder. Those persons and entities that were not affiliated with the predecessor of Kaanapali Land and were holders of COLAs or the date that the Plan was confirmed by the Bankruptcy Court, and their successors in interest, represent approximately 9% of the ownership of the Company. The Company had cash and cash equivalents of approximately $9 million and $16 million, as of June 30, 2010 and December 31, 2009, respectively, which is available for, among other things, working capital requirements, including future operating expenses in each of the Agriculture and Property segments, and the Company's expenditures for engineering, planning, regulatory and development costs, drainage, water storage and distribution, utilities, environmental remediation costs on existing and former properties, potential liabilities resulting from tax audits, and existing and possible future litigation. Effective June 2010, a subsidiary of KLC Land discontinued providing retiree health and life insurance benefits to certain eligible retired employees. The subsidiary paid a onetime lump sum cash payment to the participants totaling approximately $85 thousand. The Company recognized a settlement gain of approximately $1.9 million, which included recognition of approximately $192 thousand remaining in accumulated other comprehensive income relating to the post retirement benefit plan and approximately $1.7 million from the reversal of the accrued benefit obligation. The primary business of Kaanapali Land is the investment in and development of the Company's assets on the Island of Maui. The various development plans will take many years at significant expense to fully implement. A small portion of such anticipated expenses are currently subject to contractual commitments, however, significant additional costs may be incurred. Proceeds from land sales are the Company's only source of significant cash proceeds and the Company's ability to meet its liquidity needs is dependent on the timing and amount of such proceeds. The international credit crisis, which has resulted in both national and global economic downturns, has had a significant adverse impact on the Hawaiian economy during the second half of 2008 and continuing into 2010. The result is substantial market uncertainty in the housing market and declining home values. These factors have had a material adverse effect on the Company's ability to market its residential lots and may, if they persist, cause the Company to defer development opportunities further into the future. During 2008, the Company sold the Waikele Golf Course. The Company received a promissory note in the sale in the original amount of $13.3 million and a mortgage secured by the property, along with corporate and personal guarantees from the principal of the purchaser and an affiliate. The promissory note originally required monthly interest only payments of 7% per annum and was due May 12, 2009. Certain seller representations and warranties existed for one year after the date of sale. The Company entered into a note modification agreement with the purchaser on May 12, 2009 and subsequent note modification agreements on May 19, 2009, June 16, 2009 and November 12, 2009. The note modifications allowed the purchaser to defer payment of such promissory note until May 12, 2010; provided,
however, that the purchaser was required by such agreement to make principal and interest payments in advance of maturity (before certain deductions for commissions and other costs) of $200 thousand on May 12, 2009, $50 thousand on May 20, 2009, $100 thousand on June 16, 2009, $100 thousand on June 23, 2009, $100 thousand on September 12, 2009 and $1 million on November 12, 2009. The note modifications increased the interest rate on the note to 8% per annum beginning July 12, 2009 and require prepayment of interest through January 12, 2010 on November 12, 2009. Pursuant to the note modification agreement dated November 12, 2009 ("Effective Date"), the purchaser owed the Company a payment of approximately $1.3 million of principal and interest on the Effective Date. The purchaser paid $253 thousand on the Effective Date and the remaining amount due was not paid. Pursuant to two letters dated November 30, 2009 and December 16, 2009 the guarantors of the promissory note were notified that the promissory note was in default. On January 13, 2010, the Company made a forbearance offer that was accepted by the purchaser. The forbearance offer stated that the Company would accrue interest at the default rate of 12% per annum for the period November 13, 2009 through and including January 12, 2010. Commencing as of January 13, 2010, interest accrued at the rate of 10% per annum. Beginning February 12, 2010, the purchaser was required to make monthly interest payments at a rate of 8% per annum on the unpaid balance of the note. The interest of 2% not included in the monthly pay rate was deferred until the earlier of payment of the promissory note in full or May 12, 2010. The entire $253 thousand the purchaser paid on November 12, 2009, along with $103 thousand the purchaser paid on January 20, 2010, were applied to the accrued interest at the default rate noted above. On March 20, 2010 the Company made a further offer of forbearance of up to 3% interest per month in the event the purchaser should choose to devote said amounts to current maintenance of the golf course in accordance with the terms of the offer including the recommendations of a specified consultant ("offered maintenance deferral"). Under the offered maintenance deferral, said interest was to be paid on the earlier of the payment of the note or May 12, 2010. The purchaser accepted this forbearance offer. Each forbearance offer by which the Company agreed to forebear from exercising its remedies under the Note, was subject to certain conditions apart from the interim payment requirements including, but not limited to the absence of additional defaults under the note and underlying security documents. All such agreements to defer interest and forebear from exercising remedies were to expire on the extended maturity date of the promissory note, May 12, 2010. On May 5, 2010, the Company entered into an agreement with an unaffiliated third party whereby the Company agreed to sell the promissory note and assign the first mortgage and recourse guarantees (and other security documents) to such third party, on a non-recourse basis, for an aggregate purchase price of $12.5 million. The purchase price, which includes all principal and accrued and unpaid interest on such promissory note (including, but not limited to, the amounts previously deferred by the Company), approximated the Company's net carrying value of the note. On May 6, 2010, such transaction closed and the Company received the purchase price. The Company recognized a gain of $138 thousand, included in interest and other income, from the sale of the note. At June 30, 2010, a subsidiary of Kaanapali Land ("Holder") holds a mortgage loan that was previously secured by Waikele Golf Course. Interest on the principal balance accrues at an adjustable rate of prime plus 1%. The principal and accrued interest, which are prepayable, are due March 1, 2015. As a result of the sale of the Waikele Golf Course, the outstanding principal and accrued interest was reduced pursuant to a payment of $9.3 million towards the note and accrued interest and the mortgage security was released. As of June 30, 2010 and December 31, 2009, the note had an outstanding principal and accrued interest balance of approximately $684 thousand and $672 thousand, respectively. The note will be satisfied by the payment to such subsidiary of a portion of the proceeds from the Company's sale of the promissory note provided by the purchaser of the Waikele Golf Course, to a third party purchaser as described above. The
note has been eliminated in the consolidated financial statements because the obligor and maker are consolidated subsidiaries of Kaanapali Land. The Company's continuing operations have in recent periods been primarily reliant upon the net proceeds of sales of developed and undeveloped land parcels and the recent sale of the promissory note secured by the golf course. The Company holds two promissory notes received in conjunction with the 2007 sale of two lots at the Kaanapali Coffee Farms in the amount of $692 thousand and $737 thousand. The promissory notes have maturity dates of October 2009 and November 2010, respectively. The Company is under contract for the sale of one additional lot that is scheduled to close no later than December 2010. The note due in October 2009 was not paid on its scheduled maturity date. Such note is secured by a mortgage on the associated lot that is subordinated to a purchase money mortgage held by a third-party lender. The Company has notified the purchaser of such lot that the subordinated note is in default and default interest has begun accruing thereon. The Company and such purchaser are continuing to discuss a potential note modification, but there can be no assurance that such a modification will be negotiated or the terms thereof. In the event that the Company and such purchasers are unable to agree to a modification of the terms of such note, the Company will consider its available remedies, including an action for foreclosure. The allowance for doubtful accounts had a balance of $727 thousand and $710 thousand at June 30, 2010 and December 31, 2009, respectively. Although the Company does not currently believe that it has significant liquidity problems over the near term, should the Company be unable to satisfy its liquidity requirements from its existing resources and future property sales, it will likely pursue alternate financing arrangements. However it cannot be determined at this time what, if any, financing alternatives may be available and at what cost. RESULTS OF OPERATIONS Reference is made to the footnotes to the financial statements for additional discussion of items addressing comparability between years. The decrease in cash and cash equivalents and related increase in investments in securities at June 30, 2010 as compared to December 31, 2009 is the result of the purchase of U.S. Government obligations maturing in December 2010 and June 2011. The decrease in note receivable is due to the sale of the promissory note on the Waikele Golf Course during the second quarter 2010. The decrease in accrued benefit obligation is due to the discontinuance of the retiree benefit payments to participants. Sales decreased as of June 30, 2010 due to the timing of certain lease revenues received in the first quarter 2009 and due to a decrease in farming revenues due to the timing of the receipt of certain farming revenues. Selling, general and administrative expenses decreased primarily due to the discontinuance of the retiree benefit payments to participants. INFLATION Due to the lack of significant fluctuations in the level of inflation in recent years, inflation generally has not had a material effect on real estate development.
In the future, high rates of inflation may adversely affect real estate development generally because of their impact on interest rates. High interest rates not only increase the cost of borrowed funds to the Company, but can also have a significant effect on the affordability of permanent mortgage financing to prospective purchasers. However, high rates of inflation may permit the Company to increase the prices that it charges in connection with real property sales, subject to general economic conditions affecting the real estate industry and local market factors, and therefore may be advantageous where property investments are not highly leveraged with debt or where the cost of such debt has been previously fixed. ITEM 4. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES. The principal executive officer and the principal financial officer of the Company have evaluated the effectiveness of the Company's disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") as of the end of the period covered by this report. Based on such evaluation, the principal executive officer and the principal financial officer have concluded that the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed was recorded, processed, summarized and reported within the time periods specified in the applicable rules and form of the Securities and Exchange Commission. INTERNAL CONTROL OVER FINANCIAL REPORTING. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the first quarter of 2010 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 7 to the Condensed Consolidated Financial Statements included in Part I of this report. ITEM 1A. RISK FACTORS There has been no known material changes from risk factors as previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2009. ITEM 6. EXHIBITS (a) Exhibits. 3.1 Amended and Restated Limited Liability Company Agreement of Kaanapali Land, LLC dated November 14, 2002 filed as an exhibit to the Company's report on Form 10 filed May 1, 2003 and hereby incorporated by reference. 3.2 Amendment to the Amended and Restated Limited Company Agreement of Kaanapali Land, LLC dated November 14, 2002 filed as an exhibit to the Company's report on Form 8-K filed April 21, 2008 and hereby incorporated by reference. 10.2 Restricted Share Agreement dated April 15, 2008 is filed as an exhibit to the Company's report on Form 10-Q filed August 14, 2008 and hereby incorporated by reference. 10.3 Waikele Golf Course, LLC - Waikele Country Club Inc. Property Purchase Agreement, as amended, dated October 29, 2008 filed as an exhibit to the Company's report on Form 10-Q (File No. 0-50273) filed on November 14, 2008 and hereby incorporated by reference. 10.4 Note Modification Agreement and Confirmation of Guarantee dated May 12, 2009 filed as an exhibit to the Company's report on Form 10-Q (File No. 0-50273) filed on May 13, 2009 and hereby incorporated by reference. 10.5 Third Note Modification Agreement and Confirmation of Guarantee dated June 16, 2009 filed as an exhibit to the Company's report on Form 10-Q (File No. 0-50273) filed on August 12, 2009 and hereby incorporated by reference. 10.6 Fourth Note Modification Agreement and Confirmation of Guarantee dated November 12, 2009 filed as an exhibit to the Company's report on Form 10-Q (File No. 0-50273) filed on November 16, 2009 and hereby incorporated by reference 31.1. Certification of Chief Executive Officer pursuant to Rule 13a-14(a) is filed herewith. 31.2. Certification of Chief Financial Officer pursuant to Rule 13a-14(a) is filed herewith. 32. Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are filed herewith. (b) No reports on Form 8-K were filed since the beginning of the last quarter of the period covered by the report.
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KAANAPALI LAND, LLC By: Pacific Trail Holdings, LLC (sole member) /s/ Gailen J. Hull --------------------- By: Gailen J. Hull Senior Vice President Date: August 13, 201