Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
[ ] Transition report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _____ to _____
For the fiscal year Commission File Number #0-50273
ended December 31, 2010
KAANAPALI LAND, LLC.
(Exact name of registrant as specified in its charter)
Delaware 01-0731997
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
900 N. Michigan Ave., Chicago, Illinois 60611
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 312-915-1987
Securities to be registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
N/A N/A
Securities registered pursuant to Section 12(g) of the Act:
Limited Liability Company Interests (Class A Shares)
----------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [ X ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [ X ]
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 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-T)
Section 232.405 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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ X ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of "large accelerated filer", "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Nonaccelerated 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 Act). Yes [ ] No [ X ]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such
common equity, as of the last business day of the registrant's most
recently completed second fiscal quarter. Not applicable.
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 March 1, 2011, the registrant had approximately 1,792,613 Common
Shares and 52,000 Class C Shares outstanding.
Documents incorporated by reference: None
TABLE OF CONTENTS
Page
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PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . 1
Item 1A. Risk Factors. . . . . . . . . . . . . . . . . . . 10
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . 14
Item 2. Properties. . . . . . . . . . . . . . . . . . . . 14
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . 14
Item 4. [ Reserved ]. . . . . . . . . . . . . . . . . . . 19
PART II
Item 5. Market for Registrant's Common Equity,
Related Stockholder Matters and
Issuer Purchasers of Equity Securities. . . . . . 19
Item 6. Selected Financial Data . . . . . . . . . . . . . 20
Item 7. Management's Discussion and
Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . 21
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk . . . . . . . . . . . . . . . . 27
Item 8. Financial Statements and Supplementary Data . . . 28
Item 9. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure. . . . . . . . . . . . . 57
Item 9A. Controls and Procedures . . . . . . . . . . . . . 57
Item 9B. Other Information . . . . . . . . . . . . . . . . 57
PART III
ITEM 10. Directors, Executive Officers, and
Corporate Governance of the Registrant. . . . . . 58
Item 11. Executive Compensation. . . . . . . . . . . . . . 60
Item 12. Security Ownership of Certain
Beneficial Owners and Management
and Related Stockholder Matters . . . . . . . . . 61
Item 13. Certain Relationships and Related Transactions. . 62
Item 14. Principal Accounting Fees and Services. . . . . . 62
PART IV
Item 15. Exhibits, Financial Statement Schedules . . . . . 63
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 64
i
PART I
ITEM 1. BUSINESS
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"). As indicated in the Plan,
Kaanapali Land has elected to be taxable as a corporation.
The Plan was confirmed by the Bankruptcy Court by orders dated
July 29, 2002 and October 30, 2002 (collectively, the "Order") and became
effective November 13, 2002 (the "Plan Effective Date"). During August
2005, pursuant to a motion for entry of final decree, the bankruptcy cases
were closed. References in this Form 10-K to Kaanapali Land or the Company
for dates on or after the Plan Effective Date are to the entity surviving
the Plan Effective Date under the Plan and for dates before the Plan
Effective Date are to predecessor entities, unless otherwise specified.
KLC Land (formerly known as Amfac Hawaii, LLC and, previously,
Amfac/JMB Hawaii, LLC) is a Hawaii limited liability company that is a
wholly-owned subsidiary of Kaanapali Land. KLC Land and Kaanapali Land have
continued the businesses formerly conducted by KLC Land and Northbrook
Corporation, a Delaware corporation ("Northbrook") and their subsidiaries
prior to the bankruptcy, although some of such businesses have been
discontinued or reduced in scope as described herein.
Northbrook was formed in 1978 as a holding company to facilitate the
purchase of a number of businesses, generally relating to short line
railroads, rail car leasing and light manufacturing. Over 90% of the stock
of Northbrook was purchased by persons and entities affiliated with JMB
Realty Corporation, through a series of stock purchases in 1987 and 1988.
One of Northbrook's subsidiaries (later merged into Northbrook) purchased
the stock of Amfac, Inc. ("Amfac"), in 1988, pursuant to a public tender
offer, and thus Amfac became an indirect subsidiary of Northbrook at such
time. As a consequence of the merger of Amfac into Northbrook in 1995, KLC
Land, FHTC and Amfac's other direct subsidiaries became direct subsidiaries
of Northbrook. All existing shareholders of Northbrook contributed their
shares to Pacific Trail Holdings, LLC ("Pacific Trail") in 2000. Pursuant
to the Plan, Northbrook was merged into FHTC and FHTC was thereafter merged
into Kaanapali Land in November 2002.
Kaanapali Land's subsidiaries include the Debtors as reorganized
under the Plan, certain subsidiaries of KLC Land that were not debtors (the
"Non-Debtor KLC Subsidiaries") and other former subsidiaries of Northbrook
(collectively with Kaanapali Land, all the Reorganized Debtors, the Non-
Debtor KLC Subsidiaries and such other subsidiaries are referred to herein
as the "Company").
The Company operates in two primary business segments: (i) Property
and (ii) Agriculture. The Company operates through a number of
subsidiaries, each of which is owned directly or indirectly by Kaanapali
Land, LLC.
Material aspects of the history and business of the Company, the
Plan, the procedures for consummating the Plan and the risks attendant
thereto were set forth in a Second Amended Disclosure Statement With
Respect to Joint Plan of Reorganization of Amfac Hawaii, LLC, Certain of
Its Subsidiaries and FHT Corporation Under Chapter 11 of the Bankruptcy
Code, dated June 11, 2002 (the "Disclosure Statement"). The Disclosure
Statement and the Plan are each filed as Exhibits to Kaanapali Land's
Form 10 filed on May 1, 2003 and incorporated herein by reference.
All claims against the Debtors were deemed discharged as of the Plan
Effective Date.
The Limited Liability Company Agreement of Kaanapali Land (the "LLC
Agreement") provided for two classes of membership interests, "Class A
Shares" and "Class B Shares", which had substantially identical rights and
economic value under the LLC Agreement; except that holders of Class A
Shares were represented by a "Class A Representative" who was required to
approve certain transactions proposed by Kaanapali Land before they could
be undertaken. The Class A Representative was further entitled to receive
certain reports from the Company and meet with Company officials on a
periodic basis. Reference is made to the LLC Agreement for a more detailed
discussion of these provisions. Class B Shares were held by Pacific Trail
and various entities and individuals that are affiliated or otherwise
associated with Pacific Trail. Class A Shares were issued under the Plan
to claimants who had no such affiliation. Reference is made to Item 10
below for a further explanation of the LLC Agreement.
Kaanapali Land distributed in the aggregate, approximately $1.8
million in cash and approximately 161,100 Class A Shares on account of the
claims that were made under the Plan and has no further obligations to make
any further distributions under the Plan.
Kaanapali Land issued all Class B Shares required to be issued under
the Plan to Pacific Trail and those entities and individuals that were
entitled to Class B Shares. As a consequence, Kaanapali Land had
approximately 1,631,513 Class B Shares outstanding.
Pursuant to the LLC Agreement, the Class A Shares and Class B Shares
were automatically redesignated as Common Shares on November 15, 2007.
Accordingly, the Company's Class A Shares and Class B Shares ceased to
exist separately on November 15, 2007. 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 and the
remaining 25% became vested on December 31, 2009. As of December 31, 2010,
the Company had approximately 1,792,613 Common shares and 52,000 Class C
Shares Outstanding.
Federal tax return examinations have been completed for all years
through 2005. In January 2008, the Company received notice from the
Internal Revenue Service ("IRS") that its 2005 tax return had been selected
for audit. The audit was completed with no changes to reported tax. The
statutes of limitations with respect to the Company's tax returns for 2007
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.
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 thousand.
KLC Land is the direct subsidiary of Kaanapali Land through which the
Company conducts substantially all of its remaining operations. KLC Land
conducts substantially all of its business through various subsidiaries.
Those with remaining assets of significant net value include KLC Holdings
Corp. ("KLC"), Pioneer Mill Company, LLC ("PMCo"), Kaanapali Land
Management Corp. ("KLM" fka Kaanapali Development Corp.), PM Land Company,
LLC. and KCF-1, LLC.
PROPERTY
PROJECT PLANNING AND DEVELOPMENT. The Company's real estate
development approach, for land that it holds for development rather than
investment, is designed to enhance the value of its properties in phases.
In most instances, the process begins with the preparation of market and
feasibility studies that consider potential uses for the property, as well
as costs associated with those uses. The studies consider factors such as
location, physical characteristics, demographic patterns, anticipated
absorption rates, transportation, infrastructure costs, both on site and
offsite, and regulatory and environmental requirements.
For any property targeted for development, the Company will generally
prepare a land plan that is consistent with the findings of the studies and
then commence the process of applying for the entitlements necessary to
permit the use of the property in accordance with the land plan. The
length and difficulty of obtaining the requisite entitlements by government
agencies, as well as the cost of complying with any conditions attached to
the entitlements, are significant factors in determining the viability of
the Company's projects. Applications for entitlements may include, among
other things, applications for state land use reclassification, county
community plan amendments and changes in zoning.
KAANAPALI 2020. The Company's developable lands are located on the
west side of the Island of Maui in the State of Hawaii. The majority of
the developable lands are located in the Kaanapali resort area. The
Kaanapali development lands have been the subject of a community-based
planning process that commenced in 1999 for the Kaanapali 2020 Development
Plan. The Kaanapali 2020 Development Plan includes a mix of resort
recreation, residential units and some commercial and recreational
development sites, as well as affordable housing. While the oceanfront
resort properties have been sold, most of the other Kaanapali 2020 lands
continue to be owned by the Company. Any development plan for any of the
Company's land, including the Kaanapali 2020 Development Plan and the
Wainee development, will be subject to approval and regulation by various
state and county agencies and governing entities, especially insofar as the
nature and extent of zoning, and improvements necessary for site
infrastructure, building, transportation, water management, environmental
and health are concerned. In Hawaii, the governmental entities have the
right to impose limits or controls on growth in their communities through
restrictive zoning, density reduction, impact fees and development
requirements, which may materially affect utilization of the land and the
costs associated with developing the land. In addition, Maui County
requires, among other things, that up to fifty percent of new residential
units qualify as affordable housing and therefore be sold at below market
prices which could adversely affect the profitability of future projects
and render them unfeasible. There can be no assurance that the Company will
be successful in obtaining the necessary zoning and related entitlements
for development of any currently unentitled Maui lands. At this time, the
only Kaanapali 2020 lands that have sufficient entitlements to commence
development are those in Phase I of the Kaanapali Coffee Farms development
and the Puukolii Village development, as described below.
The current regulatory approval process for a development project
takes a number of years or more and involves substantial expense. The
applications generally require the submission of comprehensive plans that
involve the use of consultants and other professionals. A substantial
portion of the Company's Kaanapali 2020 land will require state district
boundary amendments and county general plan and community plan amendments,
as well as rezoning approvals. There is no assurance that all necessary
approvals and permits will be obtained with respect to the current projects
or future projects of the Company. Generally, entitlements are extremely
difficult to obtain in Hawaii. There is often significant opposition to
proposed developments from numerous groups including native Hawaiians,
environmental organizations, various community and civic groups,
condominium associations and politicians advocating no-growth policies,
among others. Any such group with standing can challenge submitted
applications, which may substantially delay the process. Generally, once
the applications are deemed acceptable, the various governing agencies
involved in the entitlement process commence consideration of the requested
entitlements. The applicable agencies often impose conditions, which may be
costly and time consuming, on any approvals of the entitlements. The
substantial time and expense of obtaining entitlements and the uncertainty
of success in obtaining the entitlements could have a material adverse
effect on the Company's success.
At the state level, all land in Hawaii is divided into four land use
classifications: urban, rural, agricultural and conservation. The
majority of the Kaanapali 2020 Development Plan land is currently
classified as either agricultural or conservation.
A relatively small portion (approximately 300 acres) of the Kaanapali
2020 Development Planning area owned by the Company, known as Puukolii
Village, comprised of two parcels known as the Puukolii Triangle and
Puukolii Mauka, received entitlements in 1993 under the terms of a
superseded law that fast tracked entitlements for planned mixed use
developments that contained the requisite percentage of affordable housing
units. The requirements imposed on the Company relative to these
entitlements proved uneconomic and thus the developments were not pursued.
The Company proposed revisions to the development agreement with the
applicable state agencies and is beginning to plan for the development of
the Puukolii Mauka area, which will, if ultimately developed, include
certain affordable and market housing units, a small commercial area, a
school, a park and associated improvements. In January 2009 the Company
received approval of its proposed revisions to the development agreement.
Despite the hurdles mentioned above, the Company remains hopeful that
it will generally be able to develop that portion of its land for which it
can obtain classification as an urban district from the State Land Use
Commission. However, it is uncertain whether the Company will be able to
obtain all necessary entitlements or, if so, how long it will take, and it
cannot be predicted what the market will be for such land (or the
associated development costs) at such time. Conservation land is land that
has been considered by the state as necessary for preserving natural
conditions and cannot be developed. Agricultural and rural districts are
not permitted to have concentrated development. Pursuant to the Kaanapali
2020 Development Plan, the Company intends to apply to the State Land Use
Commission for reclassification of a portion of the agricultural lands to
urban, but does not intend to apply for reclassification of the
conservation lands.
Development of the Kaanapali 2020 lands in accordance with the
Kaanapali 2020 Development Plan will require, in addition to
reclassification to urban, appropriate designation under the County of Maui
general, community and/or development plans and the appropriate County
zoning designation. Obtaining any and all of these approvals can involve a
substantial amount of time and expense, and approvals may need to be
resubmitted if there is any subsequent, material deviation in current
approved plans or significant objections by the responsible government
agencies.
In connection with seeking approvals from regulatory authorities of
the Kaanapali 2020 Development Plan, the Company may be required to make
significant improvements in public facilities (such as roads), to dedicate
property for public use, to provide employee/affordable housing units and
to make other concessions, monetary or otherwise. The ability of the
Company to perform its development activities may also be adversely
affected by restrictions that may be imposed by government agencies and the
surrounding communities because of inadequate public facilities, such as
roads, water management areas and sewer facilities, and by local opposition
to continued growth. However, as part of the Kaanapali 2020 Development
Plan, the Company has included a large number of community members and
local government officials in the development planning process and has
earned significant community support for its preliminary Kaanapali 2020 and
Wainee development plans. It also believes that it enjoys general local
community support for its new Puukolii Mauka concept. The Company hopes
that carrying on with this process will continue to generate substantial
support from local government and the community for the Company's
development plans.
There can be no assurance that all necessary approvals will be
obtained, that modifications to those plans will not require additional
approvals, or that such additional approvals will be obtained, nor can
there be any assurance as to the timing of such events.
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 currently being offered to individual buyers. The land
improvements were completed during 2008. In conjunction with the final
approval, the Company was required to obtain subdivision bonds that were
required to be secured with cash deposits. The final bonds and cash
deposits were released in 2008. As of December 31, 2010, the Company has
closed on the sale of six lots at Kaanapali Coffee Farms. In conjunction
with two of the lots that closed in 2007, in addition to cash proceeds, the
Company received promissory notes aggregating $1,429. Due to non-
performance by the buyers, reserves have been established for a substantial
majority of the original balances. In January and March 2011, the Company
closed on the sale of two lots for proceeds of approximately $1.2 million.
Effective September 30, 2010, the Company entered an agreement with
an unaffiliated third party to sell an approximately 14.990 acre parcel of
property (the "Hospital Site") within the Company's Kaanapali 2020
development area for the construction of a hospital and acute care facility
and associated improvements (the "Medical Center"). In addition to the
Hospital Site, the agreement provided the purchaser with two separate
options to purchase two additional adjacent parcels of property of
approximately 30 acres each which could only be exercised in the event that
the purchaser closed on the purchase of the Hospital Site.
Construction of the Medical Center on the Hospital Site was subject
to certain contingencies including obtaining certain approvals from
government agencies. In March, 2011, it became clear that such approvals
would not be obtained and notice was provided by the Company and the
unaffiliated third party to the applicable governmental entity withdrawing
their request for approval. The agreement was terminated and the parties
are exploring a new agreement to move the site of the Medical Center to
another location on Company lands.
There can be no assurance that a new agreement will be finalized or
that any contingencies imposed thereunder will be satisfied or that the
closing of such sale will occur.
OTHER MAUI PROPERTY. Apart from the Kaanapali 2020 lands, the
Company owns approximately 390 acres of remaining land on Maui, and has co-
tenancy interest in a number of other small lots in residential
neighborhoods in Lahaina.
The Company owns approximately 19 acres in Lahaina, known as the
Pioneer Mill Site, which is zoned for industrial development. This is the
former site of Pioneer Mill's sugar mill on Maui and continues to be the
site of the coffee mill operation. In addition, portions of this parcel
are subject to various short-term license agreements with third parties
that generate minor amounts of income for the Company. Pioneer Mill is
currently evaluating strategic options relating to this site.
The Company also owns several parcels, known collectively as the
"Wainee Lands", which are located in Lahaina south of the mill site. The
Wainee Lands include approximately 235 acres and are classified and zoned
for agricultural use and will need to obtain land use and zoning
reclassification in order to proceed with any development. The Company is
conducting various meetings with the West Maui community, public officials
and consultants to determine a plan for a portion of their lands. While it
is likely that this development, if pursued, will contain a significant
affordable housing component as required by county ordinance, the Company
believes that these lands may be available for a number of uses compatible
with the close proximity of them to the center of Lahaina, including both
affordable and market housing and certain recreational and service uses.
Therefore, the Company is considering several options for this land. The
Company has been engaged in numerous legal actions to quiet title to its
Wainee lands as a necessary predicate to such development. Such cases have
generally been contested and, while the Company has been successful in the
cases completed so far, a small number of them have survived summary
judgment motions by the Company. In the future, any cases that survive
summary judgment may ultimately require trials at uncertain additional cost
and time to completion. As of the date hereof, one case has been tried and
was decided in favor of the Company. This case and one other that was
decided in the Company's favor on summary judgment have been appealed by
certain defendants, but those appeals were either dismissed or decided in
the Company's favor. At this time, no such cases are in a posture beyond
summary judgment or on appeal. There can be no assurance that any of these
actions, whether now decided, still pending or yet to be filed, will
regardless of their outcome permit the Wainee development to go forward on
an economic basis.
The Company also owns less than 100 acres of miscellaneous land
parcels located on the Islands of Kauai, Maui and Oahu. These
miscellaneous parcels include remnant parcels abutting infrastructure
improvements from previously sold lands, such as strips along roadways, and
other water-related assets. It is not expected that upon sale these
miscellaneous parcels will yield any significant cash proceeds to the
Company. In addition, there are certain additional small parcels of land
that are owned by the Company in common with third parties or in which the
Company may be able to assert ownership through various legal theories.
One of those parcels was the subject of quiet title action that was brought
by a third party that resulted in a settlement between PMCo and such third
party and, in March 2009 of the award of title thereto 50% to PMCo, with
the remaining 50% divided between such third party and another third party
that was not a party to the original action. This will ultimately permit
PMCo, after satisfaction of certain title and entitlement requirements, to
receive 50% of the net proceeds of the sale of such parcel. However, it is
not expected that the ultimate net proceeds to the Company from such sale
will be material to the Company. The Company continues to assess its
option with respect to certain other co-tenancy parcels in the Lahaina area
to determine whether the institution of proceedings to gain title thereto
will be to the Company's benefit.
AGRICULTURE
HISTORIC OPERATIONS. A significant portion of the Company's revenues
were formerly derived from agricultural operations primarily consisting of
the cultivation, milling and sale of raw sugar. The last remaining
operating sugar plantation of the Company, owned by a subsidiary of
Kaanapali Land, was shut down at the end of 2000. In September 2001, the
Company also ceased its coffee operations, which were owned by a subsidiary
of Kaanapali Land. The Company leased, or granted limited licenses to
operate, to a third party, certain portions of the Kaanapali 2020 land on
which the coffee trees are located for the purpose of continuing
agricultural coffee operations on such land. The lessee purchased the
Company's coffee mill equipment during the first quarter of 2004. During
late 2008 the Company purchased back the coffee mill equipment and
terminated the third party leases and license agreements and assumed
greater responsibility for farming and milling operations relating to the
coffee orchards on behalf of the applicable land owners. In connection
with such transactions, affiliates of such third party entered into certain
consulting and marketing arrangements with the Company relative to the
farming, milling and sale of the coffee produced.
SEED CROP OPERATIONS. The Company's seed crop operations (primarily
corn but also growing other crops such as soy beans) are located on former
Maui sugar lands that are now part of the Kaanapali 2020 area. The Company
earns modest income, under a contract with Monsanto Seed Company, that
generates approximately $1.0 million of annual gross revenue, to grow seed
corn according to Monsanto's specifications. In addition to generating
such revenue, this operation is otherwise advantageous, because the
cultivated land helps control dust and soil erosion and keeps the fields
green, to the benefit of the local community. The Company may seek to
expand this operation if it believes it can provide suitable arable acreage
with available irrigation water, find ready markets for its products and it
can operate at a level of profitability that the Company deems sufficient.
There can be no assurance that any expansion will occur or that current
operations will remain profitable.
GOLF
The Company owned the golf course land and improvements and was
responsible for the management and operation of an 18-hole golf course
known as the Waikele Golf Course on Oahu. The assets and operations of the
Waikele Golf Course represented the entire golf segment for purposes of
business segment information.
On April 8, 2008, the Company executed a contract (as subsequently
amended) to sell its Waikele Golf Course for a purchase price of $23.3
million (less commissions and closing costs). The sale closed on
November 12, 2008 with total cash received, including previous non-
refundable deposits, aggregating $10 million. The balance of the purchase
price was represented by a promissory note in the original amount of $13.3
million and was 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 certain principal and
interest payments in advance of maturity (before certain deductions for
commissions and other costs).
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.
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.
For a description of financial information by segment, please read
Note 9 to the attached consolidated financial statements, which information
is incorporated herein by reference.
SIGNIFICANT ASSET SALES
The Company has in the past consummated various strategic sales of
bulk land. These transactions were generally pursued in order to raise
additional cash that would enhance the Company's ability to fund the
Kaanapali 2020 developments including, but not limited to Kaanapali Coffee
Farms, and other Company overhead costs. The Company currently has no
outstanding agreements for the sale of land in bulk, but while this is not
the current focus of the Company, it does from time to time in the ordinary
course of business engage in discussions with third parties who may be
interested in certain parcels.
EMPLOYEES.
At March 1, 2011, Kaanapali Land and its subsidiaries had employed
approximately 35 full time employees. Certain corporate services are
provided by Pacific Trail and its affiliates. Kaanapali Land reimburses
for these services and related overhead at cost.
TRADEMARKS AND SERVICE MARKS.
The Company maintains a variety of trademarks and service marks that
support each of its business segments. These marks are filed in various
jurisdictions, including the United States Patent and Trademark Office, the
State of Hawaii Department of Commerce and Consumer Affairs and foreign
trademark offices. The trademarks and service marks protect, among other
things, the use of the term "Kaanapali" and related names in connection
with the developments in the vicinity of the Kaanapali Resort area on Maui
and the various trade names and service marks obtained in connection with
the Company's coffee operations. Certain trademarks, trade names and
service marks have also been registered in connection with the Kaanapali
Coffee Farms development. Also protected are certain designs and logos
associated with the names protected. Certain marks owned by the Company
have been licensed to third parties, however, the income therefrom is not
material to the Company's financial results. To the extent deemed
advantageous in connection with the Company's ongoing businesses, to
satisfy contractual commitments with respect to certain marks or where the
Company believes that there are future licensing opportunities with respect
to specific marks, the Company intends to maintain such marks to the extent
necessary to protect their use relative thereto. The Company also intends
to develop and protect appropriate marks in connection with its future land
development and agricultural activities.
MARKET CONDITIONS AND COMPETITION.
There are a number of factors that historically have negatively
impacted Kaanapali Land's property activities, including market conditions,
the difficulty in obtaining regulatory approvals, the high cost of required
infrastructure and the Company's operating deficits in its other business
segments. As a result, the planned use of many of the Company's land
holdings and the ability to generate cash flow from these land holdings
have become long-term in nature, and the Company has found it necessary to
sell certain parcels in order to raise cash rather than realize their full
economic potential through the entitlement process.
Maui's residential real estate market has experienced a dramatic slow
down since the latter part of 2005. The international credit crisis, which
has resulted in both national and global economic downturns, has had a
significant adverse impact on the Hawaiian economy since the second half of
2008 and through all of 2010. The result is substantial market uncertainty
in the housing market and declining home values. A continuation or further
weakening of the Maui real estate market may negatively impact the Company.
There are several developers, operators, real estate companies and
other owners of real estate that compete with the Company in its property
business on Maui, many of which have greater resources. The number of
competitive properties in a particular market could have a material adverse
effect on the Company's success. In addition, many properties previously
purchased by retail buyers are listed for resale and provide additional
competition to the Company.
GOVERNMENT REGULATIONS AND APPROVALS
The current regulatory approval process for a project can take three
to five years or more and involves substantial expense. There is no
assurance that all necessary approvals and permits will be obtained with
respect to the Company's current and future projects. Generally, entitle-
ments are extremely difficult to obtain in Hawaii. Many different agencies
at the state and county level are involved in the entitlement process.
There is often significant opposition from numerous groups - including
native Hawaiians, environmental organizations, various community and civic
groups, condominium associations and politicians advocating no-growth
policies, among others. Certain ordinances adopted by the County of Maui
have placed additional requirements on developers, some of which may be
difficult or expensive to satisfy. Other proposed ordinances that have not
yet passed may place moratoria on new development while the County of Maui
works toward the adoption of a new General Plan. It is currently unknown
to what extent these new legislative initiatives will impact the cost or
timing of the Company's planned developments.
Currently, Kaanapali Land is preparing applications for the necessary
entitlements to carry out the Kaanapali 2020 plan. While some of these
lands have some form of entitlements, it is anticipated that at least a
substantial portion of the land will require state district boundary
amendments and county general plan amendments, as well as rezoning
approvals. In January 2009 the Company received approval of revisions to
its development plans for the Puukolii Village Mauka parcel. Entitlements
for an agricultural subdivision were received during the first quarter of
2006. Approximately 1,500 acres of the Company's Maui land which is
contiguous to Kaanapali 2020 land is located toward the top of mountain
ridges and in gulches is classified as conservation, which precludes most
other use. This conservation land, and other land that will be designated
as open space, is an important component of the overall project and its
existence is expected to influence obtaining the entitlements for the
remaining land.
ENVIRONMENTAL MATTERS.
The Company is subject to environmental and health safety laws and
regulations related to the ownership, operation, development and
acquisition of real estate, or the operation of former business units.
Under those laws and regulations, the Company may be liable for, among
other things, the costs of removal or remediation of certain hazardous
substances. In addition, the Company may find itself having to defend
against personal injury lawsuits based on exposure to such substances
including asbestos related liabilities. Those laws and regulations often
impose liability without regard to fault. While the Company is currently
involved in negotiations concerning certain environmental matters as
described in the risk factors set forth below, it does not currently
believe that it is likely that those matters will have a material adverse
effect on its consolidated financial position or results of operations;
however, no assurance can be given that any such condition does not exist
or may not arise in the future. Reference is made to Item 1A. Risk Factors
and Item 3. Legal Proceedings for a description of certain legal
proceedings related to environmental conditions.
ITEM 1A. RISK FACTORS
Kaanapali Land faces numerous risks, including those set forth below.
Reference is made to Item 1. Business and Item 3. Legal Proceedings
for an item specific detailed discussion of some of the risk factors facing
Kaanapali Land, LLC.
Risk factors include a number of factors that could negatively impact
Kaanapali Land's property activities. Any of the risks may have a material
adverse effect on the Company's success, consolidated financial position or
results of operations.
RISKS RELATED TO HAWAIIAN REAL ESTATE AND DEVELOPMENT MARKETS
The Kaanapali 2020 Development Plan (including, without limitation,
Kaanapali Coffee Farms and Puukolii Mauka) and the development of the
Wainee land, as well as the Company's other development activities, are,
apart from the risks associated with the entitlement process described
above, subject to the risks generally incident to the ownership and
development of real property. These include the possibility that cash
generated from sales will not be sufficient to meet the Company's
continuing obligations. This could result from inadequate pricing or pace
of sales of properties or changes in costs of construction or development;
increased government mandates; adverse changes in Hawaiian economic
conditions, such as increased costs of labor, marketing and production,
restricted availability of financing; adverse changes in local, national
and/or international economic conditions (including adverse changes in
exchange rates of foreign currencies for U.S. dollars); adverse effects of
international political events, such as additional terrorist activity in
the U.S. or abroad that lessen travel, tourism and investment in Hawaii;
the need for unanticipated improvements or unanticipated expenditures in
connection with environmental matters; changes in real estate tax rates and
other expenses; delays in obtaining permits or approvals for construction
or development and adverse changes in laws, governmental rules and fiscal
policies; acts of God, including earthquakes, volcanic eruptions, floods,
droughts, fires, tsunamis, unusually heavy or prolonged rains, and
hurricanes; and other factors which are beyond the control of the Company.
Because of these risks and others, real estate ownership and development is
subject to unexpected increases in costs.
The Company may, from time to time and to the extent economically
advantageous, sell rezoned, undeveloped or partially developed parcels,
such as portions of the Kaanapali 2020 Development Plan lands, the former
Pioneer Mill site and/or the Wainee land. It intends to develop the balance
of its lands for residential, resort, affordable housing, limited
commercial and recreational purposes.
Any increase in interest rates or downturn in the international,
national or Hawaiian economy could affect the Company's profitability and
sales. The downturn in the Asian economy, particularly the Japanese
economy, has had a profound effect on the Hawaiian real estate market.
However, the Kaanapali resort area has historically enjoyed a significant
mainland tourist market in the United States and Canada, which had
resulted, beginning in the late 1990's, in a strong market for resort
housing in the area. The September 11 attacks had a material adverse effect
on tourism in the Kaanapali area immediately following the attacks, but the
market rebounded during the period from 2002 into 2005 and the areas of
primary and secondary residential homes, condominiums and time share units
were relatively strong during this period. Markets have turned down
significantly since late 2005, which has negatively impacted the volume of
transactions completed in West Maui. The continuing national and global
recession has had an adverse impact on the Hawaiian economy and if it
continues for an extended period of time may adversely impact the Company's
pricing for its properties. While it is expected that the recent
earthquake and tsunami in Japan will have an immediate, short-term, adverse
impact on Hawaii tourism, it is as yet unclear whether such events will
affect pricing or demand for residential property on Maui. The soft Maui
real estate market continues to negatively impact the number of lot sales
to date and could continue to negatively impact the lot sales in the
foreseeable future. No assurance can be given as to when the current
market conditions will improve.
The Company's real estate activities may be adversely affected by
possible changes in the tax laws, including changes which may have an
adverse effect on resort and residential real estate development. High
rates of inflation 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 developers, but also have a
significant effect on the affordability of permanent mortgage financing to
prospective purchasers. High rates of inflation may permit the Company to
increase the prices that it charges in connection with land sales, subject
to economic conditions in the real estate industry generally and local
market factors. There can be no assurance that Hawaiian real estate values
will rise, or that, if such values do rise, the Company's properties will
benefit.
RISKS RELATING TO NATURAL EVENTS
The Company's development lands are located in an area that is
susceptible to hurricanes and seismic activity. In addition, during certain
times of year, heavy rainfall is not uncommon. These events may adversely
impact the Company's development activities and infrastructure assets, such
as roadways, reservoirs, water courses and drainage ways. Significant
events may cause the Company to incur substantial expenditures for
investigation and restoration of damaged structures and facilities.
Flooding, drought, fires, wind, prolonged heavy rains, and other natural
perils can adversely impact agricultural production and water transmission
and storage resources on lands owned or used by the Company. In addition,
similar events elsewhere in Hawaii may cause regulatory responses that
impact all landowners. For example, 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 make 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 required still more remediated action, and DLNR issued an amended
report in March 2010. A final report on one such reservoir was received in
August 2010 which essentially restated the March 2010 report for such
reservoir. The Company has completed the majority of the work required by
such report and continues its analysis with respect to the remaining items.
In addition, the Company has submitted 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 inspected each
reservoir and identified certain minor damage.
In September 2007, the Company received further 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" classifica-
tions are warranted. The Company and DLNR continue to engage in dialogue
concerning these matters (which have included further site visits by DLNR
personnel).
RISKS RELATING TO AGRICULTURE
While agricultural revenues are relatively insignificant to the
Company's financial success, competition in the agriculture business
segment affects the prices the Company may obtain for the land and other
assets it may lease to third parties for the production of agricultural
products. The Company currently earns a modest profit on its contract with
Monsanto for the production of seed corn on a portion of its Kaanapali 2020
Development Plan land. Regulatory, political, economic and scientific
issues, in addition to the normal risks attendant to the growing cycle for
any crop, may all weigh in to make such contract uneconomic for Monsanto,
with the result that ongoing revenues to the Company could be impaired in
the future. Such is also the case with the Company's coffee crop, in
particular because the Company incurs substantially all the risks relating
to the cost of growing and maintaining the trees and producing the crop, as
well as the market risk attendant to the sale of the crop.
RISKS RELATING TO HAWAIIAN, U.S. AND WORLD ECONOMIES GENERALLY
The Company's businesses will be subject to risks generally
confronting the Hawaiian, U.S. and world economies. All of the Company's
tangible property is located in Hawaii. As a result, the Company's revenues
will be exposed to the risks of investment in Hawaii and to the economic
conditions prevalent in the Hawaiian real estate market. While the Hawaiian
real estate market is subject to economic cycles that impact tourism and
investment (particularly in the United States, Japan and other Pacific Rim
countries), it is also influenced by the level of economic development in
Hawaii generally and by external and internal political forces.
The attacks of September 11, 2001 on the World Trade Center and
Pentagon had an adverse impact on the U.S., world and Hawaiian economies,
which in turn reduced discretionary income available for travel or the
purchase of retirement or vacation homes. These events have also negatively
impacted the desire of people to travel, particularly by air; the number of
international visitors to the United States, particularly from Japan upon
which Hawaii relies most-heavily, decreased as the United States became
perceived to be a higher risk destination. In addition, a perception
developed that because the United States was now at war, it no longer
sought leisure travelers from abroad. Though these attitudes have abated
somewhat in the years after the attacks and the Hawaiian economy has
rebounded, there is no assurance that future events will not occur that
would again dampen the inflow of money to Hawaii. The recent earthquake and
tsunami in Japan will further adversely impact travel from that country, at
least in the short-term. Also, the current credit and market crises have
created severe recession conditions that likewise have reduced
discretionary income and increased unemployment throughout the world, which
again have negatively impacted travel to Hawaii and the market for real
estate. Thus, it is clear that Hawaii is subject to higher risks than
other portions of the United States due to its disproportionate reliance on
air travel and tourism. The visitor industry is Hawaii's most important
source of economic activity, accounting for more than a quarter of Gross
State Product.
Because of the foregoing considerations, it is clear that the risks
associated with the large reliance by Hawaii on a visitor base, both from
foreign countries and the United States mainland, will disproportionately
impact the Company in future years, both positively and negatively, as
market and visitation cycles play out. It is unknown how long the current
downturn will continue or whether the current adverse impact on the
Company's business may ultimately impair the Company's financial position.
ENVIRONMENTAL RISKS AND ENVIRONMENTAL REGULATION
The Company is subject to environmental and health safety laws and
regulations related to the ownership, operation, development and
acquisition of real estate, or the operation of former business units.
Under various federal, state and local laws, ordinances and regulations, a
current or previous owner, developer or operator of real estate may be
liable for the costs of removal or remediation of certain hazardous toxic
substances at, on, under or in its property. The costs of such removal or
remediation of such substances could be substantial. Such laws often impose
liability without regard to whether the owner or operator knew of, or was
responsible for, the actual release or presence of such hazardous or toxic
substances. The presence of such substances may adversely affect the
owner's ability to sell or rent such real estate or to borrow using such
real estate as collateral. Persons who arrange for the disposal or
treatment of hazardous or toxic substances also may be liable for the costs
of removal or remediation of such substances at the disposal or treatment
facility, whether or not such facility is owned or operated by such person.
Certain environmental laws impose liability for the release of asbestos
containing material into the air, pursuant to which third parties may seek
recovery from owners or operators of real properties for personal injuries
associated with such materials, and prescribe specific methods for the
removal and disposal of such materials. The cost of legal counsel and
consultants to investigate and defend against these claims is often high
and can significantly impact the Company's operating results, even if no
liability is ultimately shown. No assurance can be given that the Company
will not incur liability in the future for known or unknown conditions and
any significant claims may have a material adverse impact on the Company.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2. PROPERTIES
LAND HOLDINGS.
The major real properties owned by the Company are described under
Item 1. Business.
ITEM 3. LEGAL PROCEEDINGS
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. Any claims that were not filed on a timely basis under the Plan
have been discharged by the Bankruptcy Court and thus the underlying legal
proceedings should not result in any liability to the Debtors. All other
claims have been satisfied. Proceedings against subsidiaries or affiliates
of Kaanapali Land that are not Debtors were not stayed by the Plan and may
proceed. However, two such subsidiaries, Oahu Sugar and DC Distribution,
filed subsequent petitions for liquidation under Chapter 7 of the
bankruptcy code in April 2005 and July 2007, respectively), as described
below.
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 was 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 might 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 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 would purport 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 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 million, 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 $.3 million, and additional anticipated response costs of
between approximately $2.8 million and $11.5 million. 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 rights 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. In January 2008, the Company received notice from the IRS
that their 2005 tax return had been selected for audit. The audit was
completed with no changes to reported taxes. The statutes of limitations
with respect to the Company's tax returns for 2007 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
Distribution Corporation ("D/C"), a subsidiary of Kaanapali Land, have been
named as defendants in personal injury actions allegedly based on exposure
to asbestos. While there are 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 the 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 $1.6 million. 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 $26.8 million, 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 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 make 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 required still
more remediated action, and DLNR issued an amended report in March 2010. A
final report on one such reservoir was received in August 2010 which
essentially restated the March 2010 report for such reservoir. The Company
has completed the majority of the work required by such report and
continues its analysis with respect to the remaining items. In addition,
the Company has submitted revisions to its emergency action plans for both
reservoirs in accordance with revised DLNR requirements.
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 intended 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 it 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.
The Company understands the DLNR and such third-party owner have reopened
talks whereby the reservoir may be rehabilitated and reconfigured instead
of decommissioned but the Company so far has not participated in such talks
in any material way.
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.
ITEM 4. [ Reserved ]
PART II
ITEM 5. MARKET REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
As of December 31, 2010 there were approximately 690 holders of
record of the Company's 1,792,613 Common Shares and 52,000 Class C Shares.
The Company has no outstanding options, warrants to purchase or securities
convertible into, common equity of the Company. There is no established
public trading market for the Company's membership interests. The Company
has elected to be treated as a corporation for federal and state income tax
purposes. As a consequence, under current law, holders of membership
interests in the Company will not receive annual K-1 reports or direct
allocations of profits or losses relating to the financial results of the
Company as they would for the typical limited liability company that elects
to be treated as a partnership for tax purposes. In addition, any
distributions that may be made by the Company will be treated as dividends.
However, no dividends have been paid by the Company in 2010 and 2009 and
the Company does not anticipate making any distributions for the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
KAANAPALI LAND, LLC (a)(b)
For the years ended December 31, 2010, 2009, 2008, 2007 and 2006
(Dollars in Thousands Except Per Share Amounts)
2010 2009 2008 2007 2006
-------- -------- -------- -------- --------
Total revenues . . . . $ 4,137 4,695 3,170 8,814 9,543
======== ======== ======== ======== ========
Net income (loss)
from continuing
operations. . . . . . $ (4,092) (5,278) (1,340) 1,757 2,731
======== ======== ======== ======== ========
Income (loss) from
continuing
operations per
share, basic
and diluted . . . . . $ (2.22) (2.88) (.73) .98 1.52
======== ======== ======== ======== ========
Total assets . . . . . $144,697 155,595 150,506 186,289 185,344
======== ======== ======== ======== ========
(a) The above selected financial data should be read in conjunc-
tion with the financial statements and the related notes appearing
elsewhere in this report. The amounts reflected are those business
segments of the Company's predecessor that are continuing in nature.
(b) Years ended December 31, 2007 and 2006 restated for amounts
treated as discontinued operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
All references to "Notes" herein are to Notes to Consolidated
Financial Statements contained in this report. Information is not
presented on a reportable segment basis in this section because in the
Company's judgment such discussion is not material to an understanding of
the Company's business.
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.
LIQUIDITY AND CAPITAL RESOURCES
A description of the reorganization of Kaanapali Land and its
subsidiaries pursuant to the Plan and a description of certain elements of
the Plan are set forth in Item 1 above.
Unless wound up by the Company or merged, the Debtors continued to
exist after the Plan Effective Date as separate legal entities. Except as
otherwise provided in the Order or the Plan, the Debtors have been
discharged from all claims and liabilities existing through the Plan
Effective Date. As such, all persons and entities who had receivables,
claims or contracts with the Debtors that first arose prior to the Petition
Date and have not previously filed timely claims under the Plan or have not
previously reserved their right to do so in the Reorganization Case are
precluded from asserting any claims against the Debtors or their assets for
any acts, omissions, liabilities, transactions or activities that occurred
before the Plan Effective Date. During August 2005, pursuant to a motion
for entry of final decree, the bankruptcy cases were closed.
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 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 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 substantially all of 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. 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 Northbrook
and were holders of COLAs (Certificate of Land Appreciation Notes) on the
date that the Plan was confirmed by the Bankruptcy Court, and their
successors in interest, represent approximately 9.0% of the ownership of
the Company.
At December 31, 2010, the Company had cash and cash equivalents of
approximately $12 million which is available for, among other things,
working capital requirements, including future operating expenses, and the
Company's obligations for engineering, planning, regulatory and development
costs, drainage and utilities, environmental remediation costs on existing
and former properties, potential liabilities resulting from tax audits, and
existing and possible future litigation.
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. Reference is made to Item 1 - Business, Item 3 - Legal
Proceedings and the footnotes to the financial statements. 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.
On April 8, 2008, the Company executed a contract (as subsequently
amended) to sell its Waikele Golf Course for a purchase price of $23.3
million (less commissions and closing costs). The sale closed on
November 12, 2008 with total cash received, including previous non-
refundable deposits, aggregating $10 million. The balance of the purchase
price was represented by a promissory note in the original amount of $13.3
million and was 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 exist 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 certain principal and
interest payments in advance of maturity (before certain deductions for
commissions and other costs).
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.
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.
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 $5.8 million 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 on the Company's consolidated balance
sheet.
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 thousand. The Company recognized a settlement
gain of approximately $1.9 million, recorded in selling, general and
administrative, 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.
A subsidiary of Kaanapali Land held a mortgage loan that was
previously secured by the Waikele Golf Course in the original principal
amount of approximately $7.2 million. Interest on the principal balance
accrued at an adjustable rate of prime plus 1%. The principal and accrued
interest, which were prepayable, were 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 accrual interest and the mortgage security was released. The note was
satisfied by the payment of $684 thousand to such subsidiary from a portion
of the proceeds from the sale of the promissory note provided by the
purchaser of the Waikele Golf Course, to a third party purchaser as
described above. The note had been eliminated in the consolidated
financial statements because the obligor and maker are consolidated
subsidiaries of Kaanapali Land.
The Company's operations have in recent periods been primarily
reliant upon the net proceeds of sales of developed and undeveloped land
parcels and the sale of the golf course.
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 currently being offered to individual buyers. The land
improvements were completed during 2008. In conjunction with the final
approval, the Company was required to obtain subdivision bonds that were
required to be secured with cash deposits. The final bonds and cash
deposits were released in 2008. As of December 31, 2010, the Company has
closed on the sale of six lots at Kaanapali Coffee Farms. In conjunction
with two of the lots that closed in 2007, in addition to cash proceeds, the
Company received promissory notes aggregating $1,429. Due to non-
performance by the buyers, reserves have been established for a substantial
majority of the original balances. In January and March 2011, the Company
closed on the sale of two lots for combined sales price of approximately
$1.2 million less closing costs and commissions.
Effective September 30, 2010, the Company entered an agreement with
an unaffiliated third party to sell an approximately 14.990 acre parcel of
property (the "Hospital Site") within the Company's Kaanapali 2020
development area for the construction of a hospital and acute care facility
and associated improvements (the "Medical Center"). In addition to the
Hospital Site, the agreement provided the purchaser with two separate
options to purchase two additional adjacent parcels of property of
approximately 30 acres each which could only be exercised in the event that
the purchaser closed on the purchase of the Hospital Site.
Construction of the Medical Center on the Hospital Site was subject
to certain contingencies including obtaining certain approvals from
government agencies. In March, 2011, it became clear that such approvals
would not be obtained and notice was provided by the Company and the
unaffiliated third party to the applicable governmental entity withdrawing
their request for approval. The agreement was terminated and the parties
are exploring a new agreement to move the site of the Medical Center to
another location on Company lands.
There can be no assurance that a new agreement will be finalized or
that any contingencies imposed thereunder will be satisfied or that the
closing of such sale will occur.
On April 15, 2008, the Company entered into an agreement in principal
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 anti-dilution adjustments. The Class C Shares became
50% vested on April 15, 2008, an additional 25% vested on December 31, 2008
and the remaining 25% became vested on December 31, 2009.
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.
2010 COMPARED TO 2009
The decrease in cash and cash equivalents and the related increase in
short-term investments at December 31, 2010 as compared to December 31,
2009 is primarily the result of the purchase of U.S. Government obligations
maturing in June 2011 which included using the proceeds received from the
sale of the golf course note receivable.
Property, net decreased and cost of sales increased as of
December 31, 2010 primarily due to the reduction of the carrying value of
inventory of land held for sale to approximate the lower of carrying value
or fair value less cost to sell.
The decrease in note receivable and the related decrease in interest
and other income is due to the sale of the promissory note on the Waikele
Golf Course during the second quarter of 2010.
Other assets decreased due to the decrease in the assets of the Rabbi
Trust.
The decrease in accounts payable and accrued expenses at December 31,
2010 as compared to December 31, 2009 is due to the payment of certain
accrued commissions as a result of the sale of the promissory note on the
Waikele Golf Course.
The decrease in accrued benefit obligation is due to the
discontinuance of the retiree health and life insurance benefits to retired
employees.
Selling, general and administrative expenses decreased primarily due
to the discontinuance of the retiree health and life insurance benefits to
retired employees.
2009 COMPARED TO 2008
Sales and cost of sales increased due to the increases in farming
revenues and coffee sales revenues and farming costs.
Interest and other income increased primarily due to the interest
received on the promissory note related to the sale of the Waikele Golf
Course.
Selling, general and administrative expenses increased primarily due
to adjustments to certain reserves during 2009, an increase in net periodic
pension costs related to the pension plan, an increase in professional fees
related to environmental matters and the reserve recorded for one of the
promissory notes received in the sale of a lot at Kaanapali Coffee Farms.
Income (loss) from discontinued operations represents the results of
operations of the Waikele Golf Course and an asset impairment charge
related to the writedown of the carrying value of the golf course during
the second quarter of 2008. The golf course was sold during the fourth
quarter of 2008.
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.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the Company's financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of
these financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosures of contingent assets and liabilities.
These estimates are based on historical experience and on various other
assumptions that management believes are reasonable under the
circumstances; additionally management evaluates these results on an on-
going basis. Management's estimates form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Different estimates could be made under
different assumptions or conditions, and in any event, actual results may
differ from the estimates.
The Company reviews its property for impairment of value. This
includes considering certain indications of impairment such as significant
changes in asset usage, significant deterioration in the surrounding
economy or environmental problems. If such indications are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying value, the Company will adjust the carrying value
down to its estimated fair value. Fair value is based on management's
estimate of the property's fair value based on discounted projected cash
flows.
There are various judgments and uncertainties affecting the
application of these and other accounting policies, including the
liabilities related to asserted and unasserted claims and the utilization
of net operating losses. Materially different amounts may be reported
under different circumstances or if different assumptions were used.
Pension assumptions are significant inputs to the actuarial models
that measure pension benefit obligations and related effects on operations.
Two assumptions - discount rate and expected return on assets - are
important elements of plan expense and asset/liability measurement. The
Company evaluates these critical assumptions at least annually. The
Company periodically evaluates other assumptions involving demographic
factors such as mortality, and updates the assumptions to reflect
experience and expectations for the future. Actual results in any given
year will often differ from actuarial assumptions because of economic and
other factors.
Accumulated and projected benefit obligations are measured as the
present value of future cash payments. The Company discounts those cash
payments using the weighted average of market-observed yields for high
quality fixed income securities with maturities that correspond to the
payment of benefits. Lower discount rates increase present values and
subsequent-year pension expense; higher discount rates decrease present
values and subsequent-year pension expense.
Our discount rates for principal pension plans at December 31, 2010,
2009 and 2008 were 5.24%, 5.77% and 5.50%, respectively, reflecting market
interest rates.
To determine the expected long-term rate of return on pension plan
assets, the Company considers current and expected asset allocations, as
well as historical and expected returns on various categories of plan
assets. Based on our analysis of future expectations of asset performance,
past return results, and our current and expected asset allocations, we
have assumed a 7% long-term expected return on those assets.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's future earnings, cash flows and fair values relevant to
financial instruments are dependent upon prevalent market rates. Market
risk is the risk of loss from adverse changes in market prices and interest
rates. The Company manages its market risk by matching projected cash
inflows from operating properties, financing activities, and investing
activities with projected cash outflows to fund capital expenditures and
other cash requirements. The Company does not enter into financial
instruments for trading purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
KAANAPALI LAND, LLC
INDEX
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets, December 31, 2010 and 2009
Consolidated Statements of Operations for the years ended
December 31, 2010, 2009 and 2008
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Cash Flows for the years ended
December 31, 2010, 2009 and 2008
Notes to Consolidated Financial Statements
Schedules not filed:
All schedules have been omitted as the required information is
inapplicable or the information is presented in the financial statements or
related notes.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Managing Member and Stockholders
Kaanapali Land, LLC
We have audited the accompanying consolidated balance sheets of Kaanapali
Land, LLC (the "Company") as of December 31, 2010 and 2009, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2010. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
We were not engaged to perform an audit of the Company's internal control
over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal
control over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Kaanapali
Land, LLC at December 31, 2010 and 2009, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2010, in conformity with U.S. generally accepted
accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
March 31, 2011
KAANAPALI LAND, LLC
Consolidated Balance Sheets
December 31, 2010 and 2009
(Dollars in Thousands, except share data)
A S S E T S
-----------
2010 2009
-------- --------
Cash and cash equivalents. . . . . . . . . . . . . $ 11,729 16,936
Short-term investments . . . . . . . . . . . . . . 10,004 --
Receivables, net . . . . . . . . . . . . . . . . . 112 120
Property, net. . . . . . . . . . . . . . . . . . . 98,029 100,013
Pension plan assets. . . . . . . . . . . . . . . . 22,964 23,010
Note receivable. . . . . . . . . . . . . . . . . . -- 12,793
Other assets . . . . . . . . . . . . . . . . . . . 1,859 2,723
-------- --------
$144,697 155,595
======== ========
L I A B I L I T I E S
---------------------
Accounts payable and accrued expenses. . . . . . . $ 913 1,986
Deferred income taxes. . . . . . . . . . . . . . . 19,383 23,261
Accrued benefit obligation . . . . . . . . . . . . -- 1,713
Other liabilities. . . . . . . . . . . . . . . . . 22,288 21,949
-------- --------
Total liabilities. . . . . . . . . . . . . 42,584 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 12/31/10 and 12/31/09
Shares authorized - 4,500,000, Class C shares
52,000; shares issued and outstanding
1,792,613 in 2010 and 2009, Class C shares
issued and outstanding 52,000 in 2010 and 2009 -- --
Additional paid-in capital . . . . . . . . . . . . 5,471 5,471
Accumulated other comprehensive income (loss),
net of tax . . . . . . . . . . . . . . . . . . . (6,374) (5,893)
Accumulated earnings . . . . . . . . . . . . . . . 103,016 107,108
-------- --------
Total stockholders' equity . . . . . . . . 102,113 106,686
-------- --------
$144,697 155,595
======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
KAANAPALI LAND, LLC
Consolidated Statements of Operations
Years ended December 31, 2010, 2009 and 2008
(Dollars in Thousands Except Per Share Amounts)
2010 2009 2008
-------- -------- --------
Revenues:
Sales. . . . . . . . . . . . . . . . . $ 3,395 3,315 2,345
Interest and other income. . . . . . . 742 1,380 825
-------- -------- --------
4,137 4,695 3,170
-------- -------- --------
Cost and expenses:
Cost of sales. . . . . . . . . . . . . 6,110 3,028 2,593
Selling, general and
administrative . . . . . . . . . . . 5,412 7,344 2,436
Depreciation and amortization. . . . . 302 284 221
-------- -------- --------
11,824 10,656 5,250
-------- -------- --------
Operating income (loss) from
continuing operations before
income taxes and income (loss)
from discontinued operations . . . . . (7,687) (5,961) (2,080)
Income tax benefit (expense) . . . . 3,595 683 740
-------- -------- --------
Income (loss) from continuing
operations . . . . . . . . . . . . (4,092) (5,278) (1,340)
Income (loss) from discontinued
operations, net of income
taxes. . . . . . . . . . . . . . . -- -- (2,302)
-------- -------- --------
Net income (loss). . . . . . . . $ (4,092) (5,278) (3,642)
======== ======== ========
Net income (loss) per share -
basic and diluted:
Income (loss) from continuing
operations . . . . . . . . . . . . $ (2.22) (2.88) (.73)
Income (loss) from discontinued
operations, net of income taxes. . -- -- (1.26)
-------- -------- --------
Net income (loss) per share -
basic and diluted. . . . . . . $ (2.22) (2.88) (1.99)
======== ======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
KAANAPALI LAND, LLC
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2010, 2009 and 2008
(Dollars in Thousands)
Accumu-
lated
Other
Accumu- Compre- Total
Additional lated hensive Stock-
Common Paid-In (Deficit) Income/ holders'
Stock Capital Earnings (Loss) Equity
-------- --------- -------- -------- --------
Balance at
December 31,
2007 . . . . . . $ -- 5,357 116,028 1,650 123,035
Share based
compensation . . -- 81 -- -- 81
Other comprehen-
sive loss,
net of tax . . . -- -- -- (15,909) (15,909)
Net loss . . . . . -- -- (3,642) -- (3,642)
-------- -------- -------- -------- --------
Balance at
December 31,
2008 . . . . . . -- 5,438 112,386 (14,259) 103,565
Share based
compensation . . -- 33 -- -- 33
Other comprehen-
sive income,
net of tax . . . -- -- -- 8,366 8,366
Net loss . . . . . -- -- (5,278) -- (5,278)
-------- -------- -------- -------- --------
Balance at
December 31,
2009 . . . . . . -- 5,471 107,108 (5,893) 106,686
Share based
compensation . . -- -- -- -- --
Other comprehen-
sive loss,
net of tax . . . -- -- -- (481) (481)
Net loss . . . . . -- -- (4,092) -- (4,092)
-------- -------- -------- -------- --------
Balance at
December 31,
2010 . . . . . . $ -- 5,471 103,016 (6,374) 102,113
======== ======== ======== ======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
KAANAPALI LAND, LLC
Consolidated Statements of Cash Flows
Years ended December 31, 2010, 2009 and 2008
(Dollars in Thousands)
2010 2009 2008
-------- -------- --------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . $ (4,092) (5,278) (3,642)
Adjustments to reconcile net loss
to net cash used in operations:
Share based compensation . . . . . . -- 33 81
Property sales, disposals and
retirements, net . . . . . . . . . -- -- 106
Impairment loss. . . . . . . . . . . 2,500 -- --
Impairment loss included in
discontinued operations. . . . . . -- -- 3,900
Pension plan assets. . . . . . . . . (546) (279) (1,862)
Depreciation and amortization
including discontinued
operations . . . . . . . . . . . . 302 284 492
Deferred income taxes. . . . . . . . (3,570) (679) (2,212)
Changes in operating assets and
liabilities:
Receivables, net . . . . . . . . . . 8 (74) 58
Other assets . . . . . . . . . . . . 864 1,290 2,005
Accrued benefit obligation . . . . . (1,910) (174) (182)
Collateral deposit . . . . . . . . . -- -- 4,180
Accounts payable, accrued
expenses and other . . . . . . . . (734) (2,483) (3,681)
-------- -------- --------
Net cash used in operating activities. . (7,178) (7,360) (757)
-------- -------- --------
Cash flows from investing activities:
Proceeds from property sales . . . . . -- -- 8,006
Property additions . . . . . . . . . . (818) (1,941) (5,519)
Purchase of short-term investments . . (10,004) -- --
Proceeds from note receivable. . . . . 12,793 457 --
-------- -------- --------
Net cash provided by (used in)
investing activities . . . . . . . . . 1,971 (1,484) 2,487
-------- -------- --------
Net increase (decrease) in
cash and cash equivalents. . . (5,207) (8,844) 1,730
Cash and cash equivalents
at beginning of year . . . . . 16,936 25,780 24,050
-------- -------- --------
Cash and cash equivalents
at end of year . . . . . . . . $ 11,729 16,936 25,780
======== ======== ========
Cash received (paid) for
income taxes . . . . . . . . . . . . $ -- -- --
======== ======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
KAANAPALI LAND, LLC
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(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 Plan was filed jointly by all
Debtors to consolidate each case for joint administration in the Bankruptcy
Court in order to (a) permit the petitioners to present a joint
reorganization plan that recognized, among other things, the common
indebtedness of the debtors (i.e. the Certificate of Land Appreciation
Notes ("COLAs") and Senior Indebtedness) and (b) facilitate the overall
administration of the bankruptcy proceedings. As indicated in the Plan,
Kaanapali Land has elected to be taxable as a corporation.
The Plan was confirmed by the Bankruptcy Court by orders dated
July 29, 2002 and October 30, 2002 (collectively, the "Order") and became
effective November 13, 2002 (the "Plan Effective Date"). During August
2005, pursuant to a motion for entry of final decree, the bankruptcy cases
were closed.
In accordance with the Plan, approximately 1,793,000 Common Shares
were issued all of which remained outstanding at December 31, 2010.
Kaanapali Land's membership interests are denominated as non par
value "Shares" and were originally divided into two classes: the Class A
Shares, which were widely held primarily by non-affiliated persons who had
previously held Company indebtedness prior to the Plan Effective Date and
"Class B Shares" which were generally held by affiliates of Kaanapali Land.
Pursuant to the LLC Agreement, the Class A Shares and Class B Shares were
automatically redesignated Company Common Shares on November 15, 2007.
Accordingly, the Company's Class A Shares and Class B Shares ceased to
exist separately on November 15, 2007.
During 2008, the Company issued up to 52,000 Class C Shares (the
"Class C Shares") pursuant to a stock-based compensation agreement with an
executive vice president of 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 aggregate
distributions of $19 per Share, subject to customary antidilution
adjustments. For further information on the Class C Shares see Note 5.
The accompanying consolidated financial statements include the
accounts of Kaanapali Land and all of its subsidiaries and its predecessor
(collectively, the "Company"), which include KLC Land and its wholly-owned
subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation. All references to acres/acreage are
unaudited.
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 Golf segment, which was responsible for the
management and operation of the Waikele Golf Course was sold in November
2008 and is reported as discontinued operations. The assets and operation
of the Waikele Golf Course represented all of the golf segment for purposes
of business segment information. The Property and Agriculture segments
operate exclusively in the State of Hawaii. For further information on the
Company's business segments see Note 9.
CASH AND CASH EQUIVALENTS
The Company considers as cash equivalents all investments with
maturities of three months or less when purchased.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2010, the process of identifying the primary
beneficiary of a Variable Interest Entity ("VIE") was changed, replacing
the previous quantitative-based analysis with a framework based more on
qualitative considerations and judgments. This new analysis requires the
primary beneficiary of a VIE to be identified as the party that both (a)
has the power to direct the activities of a VIE that most significantly
impact its economic performance and (b) has an obligation to absorb losses
or a right to receive benefits that could potentially be significant to the
VIE. As the Company's consolidated subsidiaries are wholly owned the
Company has the power to direct those activities that are material to its
subsidiaries, the adoption of these new rules had no impact on the
Company's consolidated results of operations or financial position.
Effective January 1, 2011, companies will be required to separately
disclose purchases, sales, issuances and settlements on a gross basis in
the reconciliation of recurring Level 3 fair value measurements. Outside of
enhanced footnote disclosures, the Company does not expect this will have a
material effect on its consolidated results of operations or financial
position.
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 currently being offered to individual buyers. The land
improvements were completed during 2008. In conjunction with the final
approval, the Company was required to obtain subdivision bonds that were
required to be secured with cash deposits. The final bonds and cash
deposits were released in 2008. As of December 31, 2010, the Company has
closed on the sale of six lots at Kaanapali Coffee Farms. In conjunction
with two of the lots that closed in 2007, in addition to cash proceeds, the
Company received promissory notes aggregating $1,429. Due to non-
performance by the buyers, reserves have been established for a substantial
majority of the original balances. In January and March 2011, the Company
closed on the sale of two lots for combined sales price of approximately
$1,200 less closing costs and commissions.
Project costs associated with the development and construction of
real estate projects are capitalized and classified as Property, net. Such
capitalized costs are not in excess of the projects' estimated fair value
as reviewed periodically or as considered necessary. In addition,
interest, insurance and property tax are capitalized to qualifying assets
during the period that such assets are undergoing activities necessary to
prepare them for their intended use.
For development projects, capitalized costs are allocated using the
direct method for expenditures that are specifically associated with the
lot being sold and the relative-sales-value method for expenditures that
benefit the entire project.
RECOGNITION OF PROFIT FROM REAL PROPERTY SALES
For real property sales, profit is recognized in full when the
collectibility of the sales price is reasonably assured and the earnings
process is virtually complete. When the sale does not meet the
requirements for full profit recognition, all or a portion of the profit is
deferred until such requirements are met.
PROPERTY
Property is stated at cost. Depreciation is based on the straight-
line method over the estimated economic lives of 15-40 years for the
Company's depreciable land improvements, 3-18 years for machinery and
equipment. Maintenance and repairs are charged to operations as incurred.
Significant betterments and improvements are capitalized and depreciated
over their estimated useful lives.
Provisions for impairment losses related to long-lived assets, if
any, are recognized when expected future cash flows are less than the
carrying values of the assets. If indicators of impairment are present,
the Company evaluates the carrying value of the related long-lived assets
in relationship to the future undiscounted cash flows of the underlying
operations or anticipated sales proceeds. The Company adjusts the net book
value of property to fair value if the sum of the expected undiscounted
future cash flow or sales proceeds is less than book value. Assets held
for sale are recorded at the lower of the carrying value of the asset or
fair value less costs to sell.
The Company reclassified the Waikele Golf Course as held for sale as
of April 8, 2008. The Company recorded a $3,900 asset impairment charge
(before taxes) related to its write-down of the carrying value of the
Waikele Golf Course during the second quarter ending June 30, 2008.
Depreciation on these assets ceased upon classification as held for sale.
As the Waikele Golf Course was deemed held for sale and sold on
November 12, 2008, operations and the impairment charge in 2008 have been
classified on the consolidated statement of operations as discontinued
operations for all periods presented.
2010 2009
-------- --------
Property, net:
Land . . . . . . . . . . . . . . . . . . $ 94,408 96,210
Buildings. . . . . . . . . . . . . . . . 4,078 4,049
Machinery and equipment. . . . . . . . . 3,740 3,648
-------- --------
102,226 103,907
Accumulated depreciation . . . . . . . . (4,197) (3,894)
-------- --------
Property, net. . . . . . . . . . . . . . $ 98,029 100,013
======== ========
Inventory of land held for sale of approximately $27,100 and $29,600,
representing primarily Kaanapali Coffee Farms, was included in Property,
net in the consolidated balance sheets at December 31, 2010 and
December 31, 2009, respectively, and is carried at the lower of cost or net
realizable value. Based on current and foreseeable market conditions,
discussions with real estate brokers and review of historical land sale
activity (level 2 and 3), the value of the inventory of land held for sale
was reduced by $2,500 during the third quarter of 2010 to reflect the land
held for sale at the lower of carrying value or fair value less costs to
sell, primarily using a market approach to estimate fair value. The value
adjustment is reflected in cost of sales in the consolidated statements of
operations at December 31, 2010. No land is currently in use except for
certain Kaanapali 2020 land that has been set aside for the Company's seed
corn operations and certain acreage of coffee trees which are being
maintained to support the Company's land development program.
The Company's significant property holdings are on the island of Maui
(including approximately 4,000 acres known as Kaanapali 2020, of which
approximately 1,500 acres is classified as conservation land which
precludes development). 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.
PROPERTY SALES AND MORTGAGES RECEIVABLE
On April 8, 2008, the Company executed a contract (as subsequently
amended) to sell its Waikele Golf Course for a purchase price of $23.3
million (less commissions and closing costs). The sale closed on
November 12, 2008 with total cash received, including previous non-
refundable deposits, aggregating $10,000. The balance of the purchase
price was represented by a promissory note in the original amount of
$13,300 and was 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 exist 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 certain principal and
interest payments in advance of maturity (before certain deductions for
commissions and other costs).
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. 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.
As of December 31, 2010 and 2009, the note had an outstanding
principal and accrued interest balance of $0 and $12,800, respectively, as
represented in the consolidated balance sheets.
Effective September 30, 2010, the Company entered an agreement with
an unaffiliated third party to sell an approximately 14.990 acre parcel of
property (the "Hospital Site") within the Company's Kaanapali 2020
development area for the construction of a hospital and acute care facility
and associated improvements (the "Medical Center"). In addition to the
Hospital Site, the agreement provided the purchaser with two separate
options to purchase two additional adjacent parcels of property of
approximately 30 acres each which could only be exercised in the event that
the purchaser closed on the purchase of the Hospital Site.
Construction of the Medical Center on the Hospital Site was subject
to certain contingencies including obtaining certain approvals from
government agencies. In March, 2011, it became clear that such approvals
would not be obtained and notice was provided by the Company and the
unaffiliated third party to the applicable governmental entity withdrawing
their request for approval. The agreement was terminated and the parties
are exploring a new agreement to move the site of the Medical Center to
another location on Company lands.
There can be no assurance that a new agreement will be finalized or
that any contingencies imposed thereunder will be satisfied or that the
closing of such sale will occur.
OTHER LIABILITIES
Other liabilities are primarily comprised of reserves for losses,
commitments and contingencies related to various divested assets or
operations. These reserves include the estimated effects of certain
asbestos related claims, certain lease and other real estate related
guarantees and obligations, obligations related to former officers and
employees such as pension, post-retirement benefits and workmen's
compensation, investigation and potential remedial efforts in connection
with environmental matters in the state of Hawaii, and reserves for
potential income tax exposure generally associated with real estate
operations. Management's estimates are based, as applicable, on taking
into consideration claim amounts filed by third parties, life expectancy of
beneficiaries, advice of consultants, negotiations with claimants,
historical settlement experience, the number of new cases expected to be
filed and the likelihood of liability in specific situations. Management
periodically reviews the adequacy of each of its reserve amounts and
adjusts such as it determines appropriate to reflect current information.
Reference is made to Note 8, Commitments and Contingencies.
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.
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 December 31, 2010, short-term
investments consist of $10,004 of such securities purchased in June 2010
maturing in June 2011. Additionally, the amortized discount of $17 at
December 31, 2010 is reflected in interest and other income.
INCOME TAXES
Income taxes are accounted for under the asset and liability approach
which requires recognition of deferred tax assets and liabilities for the
differences between the financial reporting and tax basis of assets and
liabilities. A valuation allowance reduces deferred tax assets when it is
more likely than not some portion or all of the deferred tax assets will
not be realized. As of December 31, 2010 and 2009, there were no uncertain
tax positions that had a material impact on the Company's consolidated
financial statements.
(2) MORTGAGE NOTE PAYABLE
A subsidiary of Kaanapali Land held a mortgage loan that was
previously secured by the Waikele Golf Course in the original principal
amount of $7,178. Interest on the principal balance accrued at an
adjustable rate of prime plus 1%. The principal and accrued interest,
which were prepayable, were 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 December 31, 2010
and 2009, the note had an outstanding principal and accrued interest
balance of approximately $0 and $672, respectively. 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 December 31, 2010 and 2009 of approximately $84,100 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.
(3) RENTAL ARRANGEMENTS
During 2010 and 2009, the Company leased various office spaces with
average annual rental of approximately $47 and $66 per year, respectively.
Although the Company was a party to certain other leasing arrangements,
none of them were material.
(4) EMPLOYEE BENEFIT PLANS
(a) PENSION PLAN
As of December 31, 2010, the Company participates in a defined
benefit pension plan that covers substantially all its eligible employees.
The Plan is sponsored and maintained by Kaanapali Land in conjunction with
other plans providing benefits to employees of Kaanapali Land and its
affiliates. The Pension Plan for Bargaining Unit Employees of Amfac
Plantations (the "Pension Plan") provides benefits based primarily on
length of service and career-average compensation levels. Kaanapali Land's
policy is to fund pension costs in accordance with the minimum funding
requirements under provisions of the Employee Retirement Income Security
Act ("ERISA"). Under such guidelines, amounts funded may be more or less
than the pension expense or credit recognized for financial reporting
purposes.
The Company does not consider the excess assets of the Pension Plan
to be a source of liquidity. While under certain circumstances the Company
could seek to use the excess assets to provide such funds, there are
substantial costs, including Federal income tax consequences, in doing so.
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 sheets.
FASB ASC Topic 820, Fair Value Measurements and Disclosures,
establishes a framework for measuring fair value. That framework provides
a fair value hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or
liabilities (level 1 measurements) and the lowest priority to unobservable
inputs (level 3 measurements). The three levels of the fair value
hierarchy are described as follows:
LEVEL 1 - Inputs to the valuation methodology are unadjusted quoted
prices for identical assets or liabilities in active markets.
LEVEL 2 - Inputs to the valuation methodology include: quoted prices
for similar assets or liabilities in active markets; quoted prices
for identical or similar instruments in inactive markets; or other
inputs that are observable for the asset or liability.
LEVEL 3 - Inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
The asset or liability's fair value measurement level within the fair
value hierarchy is based on the lowest level of any input that is
significant to the fair value measurement. Valuation techniques used need
to maximize the use of observable inputs and minimize unobservable inputs.
Following is a description of the valuation methodologies used for
Pension Plan assets measured at fair value.
. COMMON AND PREFERRED STOCK: Valued at the closing price reported
in the active market in which the individual security is traded.
. MUTUAL FUNDS HOLDING CORPORATE NOTES, BONDS AND DEBENTURES: Valued
at the closing price reported in the active market in which the
mutual fund is traded.
. PRIVATE EQUITY INVESTMENTS AND INVESTMENT IN PARTNERSHIPS: Valued
at net asset value ("NAV") of shares/ownership units held by the
Pension Plan at year-end. NAV represents the Pension Plan's interests
in the net assets of these investments which consisted primarily of
equity and debt securities, some of which are exchange-traded or
valued using independent pricing feeds (i.e. Bloomberg or Reuters) or
independent broker quotes.
. INVESTMENT CONTRACT WITH INSURANCE COMPANY: Valued at fair value
by recording a Market Value Adjustment to estimate the current
market value of fixed income securities held by the insurance
company.
The following table sets forth by level, within the fair value
hierarchy, the Pension Plan's assets at fair value as of December 31, 2010:
Level 1 Level 2 Level 3 Total
------- ------- ------- -------
Common and preferred stocks. . . $16,700 -- -- 16,700
Corporate notes, bonds and
debentures . . . . . . . . . . 16,800 -- -- 16,800
Investment in partnerships . . . -- -- 21,900 21,900
Investments in insurance
companies. . . . . . . . . . . -- -- 2,000 2,000
Investments in private equity
funds. . . . . . . . . . . . . -- -- 9,100 9,100
Cash and cash equivalents. . . . 200 -- -- 200
------- ------- ------- -------
Total Pension Plan assets
at fair value. . . . . . . $33,700 -- 33,000 66,700
======= ======= ======= =======
CHANGES IN LEVEL 3 INVESTMENTS
The following table sets forth a summary of changes in fair value of
the plan's level 3 assets for the year ended December 31, 2010:
Investment Investment
in Investment in Private
Insurance in Part- Equity
Companies nerships Funds Total
----------- ---------- ---------- -------
Balance, beginning
of year. . . . . . . . . $ 2,200 20,600 -- 22,800
Net earned interest and
realized/unrealized
gains (losses) . . . . . . 200 1,300 300 1,800
Transfers in to Level 3. . . 1,000 -- 8,800 9,800
Purchases, sales,
issuances and
settlements (net). . . . . (1,400) -- -- (1,400)
------- ------- ------- -------
Balance, end of year . . . . $ 2,000 21,900 9,100 33,000
======= ======= ======= =======
The following table sets forth by level, within the fair value
hierarchy, the plan's assets at fair value as of December 31, 2009:
Level 1 Level 2 Level 3 Total
------- ------- ------- -------
Common and preferred stocks. . . $18,900 -- -- 18,900
Corporate notes, bonds and
debentures . . . . . . . . . . 16,200 -- -- 16,200
Investment in partnerships . . . -- 1,500 20,600 22,100
Investments in insurance
companies. . . . . . . . . . . -- -- 2,200 2,200
Cash and cash equivalents. . . . 6,000 -- -- 6,000
------- ------- ------- -------
Total Pension Plan assets
at fair value. . . . . . . $41,100 1,500 22,800 65,400
======= ======= ======= =======
CHANGES IN LEVEL 3 INVESTMENTS
The following table sets forth a summary of changes in fair value of
the plan's level 3 assets for the year ended December 31, 2009:
Investment Investment
in Insurance in
Companies Partnerships Total
------------ ------------ ----------
Balance, beginning of year . . $ 2,400 20,900 23,300
Net earned interest and
realized/unrealized
gains (losses) . . . . . . . 200 2,600 2,800
Transfers in and/or out
of Level 3 . . . . . . . . . -- (2,900) (2,900)
Purchases, sales, issuances
and settlements (net). . . . (400) -- (400)
------- ------- -------
Balance, end of year . . . . . $ 2,200 20,600 22,800
======= ======= =======
The following tables summarize the components of the change in
pension benefit obligations, plan assets and funded status of the Company's
defined benefit pension plan at December 31, 2010, 2009 and 2008.
2010 2009 2008
------- ------- -------
Benefit obligation at beginning of year. $42,390 44,971 45,850
Service cost . . . . . . . . . . . . . . 642 756 24
Interest cost. . . . . . . . . . . . . . 2,378 2,365 2,533
Actuarial (gain) loss. . . . . . . . . . 2,406 (1,782) 779
Benefits paid. . . . . . . . . . . . . . (4,045) (3,920) (4,215)
------- ------- -------
Accumulated and projected benefit
obligation at end of year. . . . . . . 43,771 42,390 44,971
------- ------- -------
Fair value of plan assets at
beginning of year. . . . . . . . . . . 65,400 54,032 79,196
Transfer . . . . . . . . . . . . . . . . -- 5,791 --
Actual return on plan assets . . . . . . 5,380 9,497 (20,949)
Benefits paid. . . . . . . . . . . . . . (4,045) (3,920) (4,215)
------- ------- -------
Fair value of plan assets at
end of year. . . . . . . . . . . . . . 66,735 65,400 54,032
------- ------- -------
Funded status. . . . . . . . . . . . . . 22,964 23,010 9,061
Unrecognized net actuarial (gain) loss . 10,447 9,856 23,524
Unrecognized prior service cost. . . . . 1 2 4
------- ------- -------
Prepaid pension cost . . . . . . . . . . $33,412 32,868 32,589
======= ======= =======
At December 31, 2010, approximately 22% of the plan's assets are
invested in equity securities, 28% in fixed income funds and 50% in
alternative strategies. The allocations are within Company's target
allocations in association with the Company's investment strategy.
The components of the net periodic pension credit for the years ended
December 31, 2010, 2009 and 2008 (which are reflected as selling, general
and administrative in the consolidated statements of operations) are as
follows:
2010 2009 2008
------- ------- -------
Service cost . . . . . . . . . . . . . . $ 642 756 24
Interest cost. . . . . . . . . . . . . . 2,378 2,365 2,533
Expected return on plan assets . . . . . (4,522) (4,515) (4,938)
Recognized net actuarial loss. . . . . . 957 1,114 517
Amortization of prior service cost . . . 1 1 2
------- ------- -------
Net periodic pension credit. . . . . . . $ (544) (279) (1,862)
======= ======= =======
The principal weighted average assumptions used to determine the net
periodic pension benefit (credit) and the actuarial value of the
accumulated benefit obligation were as follows:
As of January 1, 2010 2009 2008
---------------- ------- ------- -------
Discount rate. . . . . . . . . . . . . . 5.77% 5.50% 5.75%
======= ======= =======
Rates of compensation increase . . . . . 3% 3% 3%
Expected long-term rate of return
on assets. . . . . . . . . . . . . . . 7.0% 7.0% 7.0%
======= ======= =======
As of December 31,
------------------
Discount rate - net periodic
pension credit . . . . . . . . . . . . 5.77% 5.50% 5.75%
======= ======= =======
Discount rate - accumulated benefit
obligation . . . . . . . . . . . . . . 5.24% 5.77% 5.50%
======= ======= =======
Rates of compensation increase . . . . . 3% 3% 3%
======= ======= =======
Expected long-term rate of return
on assets. . . . . . . . . . . . . . . 7.0% 7.0% 7.0%
======= ======= =======
The above long-term rates of return were selected based on historical
asset returns and expectations of future returns.
The Company amortizes experience gains and losses as well as effects
of changes in actuarial assumptions and plan provisions over a period no
longer than the average expected mortality of participants in the pension
plan.
The measurement date is December 31, the last day of the corporate
fiscal year.
A comparison of the market value of the Pension Plan's net assets
with the present value of the benefit obligations indicates the Company's
ability at a point in time to pay future benefits. The fair value of the
Pension Plan's assets available for benefits will fluctuate.
There was no contribution required in 2010 to the pension plan.
Furthermore, due to ERISA full funding limits, no contribution, whether
required or discretionary, could be made and deducted on the corporation's
tax return for the current fiscal year.
The Company's target asset allocations reflect the Company's
investment strategy of maximizing the rate of return on plan assets and the
resulting funded status, within an appropriate level of risk. Plan assets
are reviewed and, if necessary, rebalanced in accordance with target
allocation levels once every three months.
The estimated future benefit payments under the Company's pension
plan are as follows (in thousands):
Amounts
-------
2011 . . . . . . . . . . . . . $ 3,800
2012 . . . . . . . . . . . . . 3,656
2013 . . . . . . . . . . . . . 3,515
2014 . . . . . . . . . . . . . 3,359
2015 . . . . . . . . . . . . . 3,236
2016-2020. . . . . . . . . . . 14,563
Effect of a 1% change in the discount rate and salary increase rate
for the fiscal years ended December 31, 2010 and 2009:
2010 2010 2009 2009
Discount Salary Discount Salary
Rate Increase Rate Increase
-------- -------- -------- --------
Effect of a 1% increase on:
Net periodic pension
cost . . . . . . . $ (234) 1 (261) 1
Pension benefit
obligation
at year end. . . . $ (3,857) 4 (3,676) 3
Effect of a 1% decrease on:
Net periodic pension
cost . . . . . . . $ 269 (1) 302 --
Pension benefit
obligation
at year end. . . . $ 4,604 (3) 4,378 (2)
Effect of a 1% change in the rate of return on assets for the fiscal
year ended December 31, 2010:
1% Increase 1% Decrease
----------- -----------
Net periodic pension cost. . . . . . . . $ (646) 646
(b) RETIREE HEALTH AND LIFE INSURANCE BENEFITS
In addition to providing pension benefits, a subsidiary of KLC Land
had 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 and was unfunded. Kaanapali Land had
not assumed any obligation to fund the cost of any ongoing benefits on
behalf of any of its affiliates.
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.
For measuring the expected postretirement benefit obligation, a 7%
annual rate of increase in the per capita claims cost was assumed through
termination of the plan. The healthcare cost trend rate assumption had a
minimal effect on the amount of the obligation and periodic cost reported.
An increase (decrease) in the assumed healthcare trend rate by 1% in 2009
would increase (decrease) the medical plans' accumulated postretirement
benefit obligation as of December 31, 2009 by $3 and $(3), respectively,
and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year then ended by $1 and
$(1), respectively.
The costs of post-retirement healthcare benefits for the year ended
December 31, 2010, 2009 and 2008 were as follows:
2010 2009 2008
Total Total Total
------- ------- -------
Service cost . . . . . . . . . . . . . $ -- -- --
Interest cost. . . . . . . . . . . . . 46 99 117
Amortization of net gain . . . . . . . (12) (19) (12)
Recognized settlement gain . . . . . . -- -- --
------- ------- -------
Net periodic postretirement
benefit cost/(income). . . . . . . . $ 34 80 105
======= ======= =======
The following table sets forth the plans' change in accumulated post-
retirement benefit obligation and benefit cost as of December 31, 2010,
2009 and 2008 as follows:
December 31,
--------------------------------
2010 2009 2008
-------- -------- --------
Benefit obligation at
beginning of year. . . . . . . . . $ 1,713 1,932 2,180
Interest cost. . . . . . . . . . . . -- 99 117
Actuarial losses (gain). . . . . . . -- (65) (71)
Net benefits paid. . . . . . . . . . -- (253) (294)
Termination of plan. . . . . . . . . (1,713) -- --
-------- -------- --------
Benefit obligation at
end of year. . . . . . . . . . . . $ -- 1,713 1,932
======== ======== ========
Unrecognized gains and losses were amortized over the remaining life
expectancy of all participating retirees.
The Company did not fund its postretirement healthcare plan.
Accordingly, as of December 31, 2010, 2009 and 2008, the postretirement
healthcare plan held no assets. The following table provides the change in
plan assets for the years ended December 31, 2010, 2009 and 2008 (in
thousands):
December 31,
--------------------------------
2010 2009 2008
-------- -------- --------
Fair value of plan assets at
beginning of year. . . . . . . . . $ -- -- --
Company contributions. . . . . . . . -- 253 294
Plan participants' contributions . . -- 483 472
Benefits paid. . . . . . . . . . . . -- (736) (766)
-------- -------- --------
Fair value of plan assets at
end of year. . . . . . . . . . . . $ -- -- --
======== ======== ========
A 7% annual rate of increase in the per capita cost of covered
medical benefits was assumed for 2009. The rate was assumed to decrease to
6% thereafter.
The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 5.77% as of December 31,
2009 and 5.50% as of December 31, 2008.
The calculation of the accumulated postretirement benefit cost or the
net periodic postretirement benefit cost did not reflect the effects of the
Medicare Prescription Drug Improvement and Modernization Act of 2003 (the
"Act") as the Company was unable to conclude whether the benefits provided
by the plan are actually equivalent to Medicare Part D under the 2003
Medicare Act.
The Company recognizes the over funded or under funded status of its
employee benefit plans as an asset or liability in its consolidated
statements 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, 2010 and
2009 are the following amounts that have not yet been recognized in net
periodic pension/post retirement cost: unrecognized prior service costs of
$1 ($1 net of tax), and $2 ($1 net of tax), respectively, and unrecognized
actuarial loss of $10,447 ($6,373, net of tax) and $9,658 ($5,892, net of
tax), respectively.
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 (Level 1). The deferred
compensation liability of approximately $1,466 represented in the Rabbi
Trust and assets funding such deferred compensation liability of
approximately $811 are consolidated in the Company's consolidated 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, and an additional 25% vested on December 31, 2008. The
remaining 25% became vested on December 31, 2009. The Company recognized
compensation expense of approximately $0, $33 and $81 for stock based
compensation for the twelve months ended December 31, 2010, 2009 and 2008,
respectively.
(6) INCOME TAXES
The Company's gross unrecognized tax benefits total approximately
$1,931 and $1,682 at December 31, 2010 and 2009, respectively. The
Company's continuing practice is to recognize interest and penalties
related to income tax matters in income tax expense. The Consolidated
Balance Sheets at December 31, 2010, 2009 and 2008 include $49, $68 and
$41, respectively, accrued for the potential payment of interest and
penalties.
Income tax expense/(benefit) attributable to income from continuing
operations for the years ended December 31, 2010, 2009 and 2008 consists
of:
Current Deferred Total
-------- -------- --------
Year ended December 31, 2010:
U.S. federal. . . . . . . . . $ -- (3,236) (3,236)
State . . . . . . . . . . . . -- (359) (359)
-------- -------- --------
$ -- (3,595) (3,595)
======== ======== ========
Year ended December 31, 2009:
U.S. federal. . . . . . . . . $ -- (615) (615)
State . . . . . . . . . . . . -- (68) (68)
-------- -------- --------
$ -- (683) (683)
======== ======== ========
Year ended December 31, 2008:
U.S. federal. . . . . . . . . $ -- (666) (666)
State . . . . . . . . . . . . -- (74) (74)
-------- -------- --------
$ -- (740) (740)
======== ======== ========
Income tax expense attributable to discontinued operations for the
years ended December 31, 2010, 2009 and 2008 are $0, $0 and $(1,471),
respectively.
Income tax expense/(benefit) attributable to income from continuing
operations differs from the amounts computed by applying the U.S. federal
income tax rate of 35 percent to pretax income from operations as a result
of the following:
2010 2009 2008
-------- -------- --------
Provision at statutory rate. . . . . $ (2,680) (2,085) (728)
Increase (reduction) in income
taxes resulting from:
Increase (reduction) in
valuation allowance. . . . . . . (565) 1,774 330
Other, net . . . . . . . . . . . . (350) (372) (342)
-------- -------- --------
Total. . . . . . . . . . . . . $ (3,595) (683) (740)
======== ======== ========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
The deferred tax effects of temporary differences at December 31, 2010,
2009 and 2008 are as follows:
December 31,
--------------------------------
2010 2009 2008
-------- -------- --------
Deferred tax assets:
Post retirement benefits . . . $ -- (668) (753)
Reserves related primarily
to losses on divestitures. . (7,806) (7,566) (7,265)
Loss carryforwards . . . . . . (6,641) (7,231) (5,393)
Tax credit carryforwards . . . (2,777) (2,752) (2,816)
Other, net . . . . . . . . . . (1,129) (1,083) (1,018)
-------- -------- --------
Total deferred tax assets. . (18,353) (19,300) (17,245)
Less - valuation allowance . 9,418 9,983 8,209
-------- -------- --------
Total deferred tax assets. . (8,935) (9,317) (9,036)
-------- -------- --------
Deferred tax liabilities:
Property, plant and equipment,
principally due to purchase
accounting adjustments,
net of impairment charges. . 18,568 22,810 23,299
Prepaid pension and core
retirement award costs . . . 9,750 9,768 4,328
-------- -------- --------
Total deferred tax
liabilities. . . . . . . 28,318 32,578 27,627
-------- -------- --------
Net deferred tax
liability. . . . . . . . $ 19,383 23,261 18,591
======== ======== ========
The Company at December 31, 2010 has net operating loss carryforwards
("NOLs") of approximately $49,000 for state income tax purposes which can
be used to offset taxable income, if any, in future years. Federal NOLs of
approximately $13,000 originated in 2006 through 2009, and the state NOLs
begin to expire in 2010.
Federal tax return examinations have been completed for all years
through 2005. In January 2008, the Company received notice from the IRS
that their 2005 tax return had been selected for audit. The audit was
completed with no changes to reported tax. The statutes of limitations
with respect to the Company's taxes for 2007 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.
(7) TRANSACTIONS WITH AFFILIATES
An affiliated insurance agency, JMB Insurance Agency, Inc., earns
insurance brokerage commissions in connection with providing the placement
of insurance coverage for certain of the properties and operations of the
Company. Such commissions are believed by management to be comparable to
those that would be paid to such affiliate insurance agency in similar
dealings with unaffiliated third parties. The total of such commissions
for the years ended December 31, 2010, 2009 and 2008 was approximately $29,
$12 and $30, respectively, all of which was paid as of December 31, 2010.
The Company pays a non-accountable reimbursement of $30 per month to
JMB Realty Corporation in respect of general overhead expense, all of which
was paid as of December 31, 2010.
The Company reimburses their affiliates for direct expenses incurred
on its behalf, including salaries and salary-related expenses incurred in
connection with the management of the Company's operations. Generally, the
entity that employs the person providing the services receives the
reimbursement. Substantially all of such reimbursable amounts were
incurred by JMB Realty Corporation or its affiliates, 900 Financial
Management Services, LLC, and JMB Financial Advisors, LLC, during 2010.
The total costs recorded in cost of sales and selling, general and
administrative expenses in the consolidated statement of operations for the
years ended 2010, 2009 and 2008 were approximately $2,471, $2,422 and
$2,250, respectively, of which approximately $645 was unpaid as of
December 31, 2010.
(8) COMMITMENTS AND CONTINGENCIES
At December 31, 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.
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. Those proceedings could continue since the Plan Effective Date
had occurred so long as the plaintiffs therein filed timely claims under
the Plan. However, any judgments rendered therein were subject to the
distribution provisions of the Plan, which resulted in the entitlement of
such claims to proceeds that were substantially less than the face amount
of such judgments. Any claims that were not filed on a timely basis under
the Plan have been discharged by the Bankruptcy Court and thus the
underlying legal proceedings should not result in any liability to the
Debtors. All other claims have been satisfied. Proceedings against
subsidiaries or affiliates of Kaanapali Land that are not Debtors were not
stayed by the Plan and were permitted to proceed. However, two such
subsidiaries, Oahu Sugar and D/C, filed subsequent petitions for
liquidation under Chapter 7 of the Bankruptcy Code in April 2005 and July
2007, respectively, as described below.
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 was 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 would purport 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 conjunction
with such claim.
The deadline for filing proofs of claim 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 rights 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. In January 2008, the Company received notice from the IRS
that their 2005 tax return had been selected for audit. The audit was
completed with no changes to reported taxes. The statutes of limitations
with respect to the Company's tax returns for 2007 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 are 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 the 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 which amount is reflected as a reduction of selling,
general and administrative expense in the statement of operations for year
ended December 31, 2007. 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 claims 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 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 make 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 required still
more remediated action, and DLNR issued an amended report in March 2010. A
final report on one such reservoir was received in August 2010 which
essentially restated the March 2010 report for such reservoir. The Company
has completed the majority of the work required by such report and
continues its analysis with respect to the remaining items. In addition,
the Company has submitted 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 and identified certain minor damage.
In September 2007, the Company received further 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" classifica-
tions 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 intended 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 it 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.
The Company understands the DLNR and such third-party owner have reopened
talks whereby the reservoir may be rehabilitated and reconfigured instead
of decommissioned but the Company so far has not participated in such talks
in any material way.
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.
(9) BUSINESS SEGMENT INFORMATION
As described in Note 1, the Company operates in two business
segments. Total revenues, operating profit, identifiable assets, capital
expenditures, and depreciation and amortization by business segment are
presented in the tables below. The $2,500 impairment charge is shown in
the Property segment.
Total revenues by business segment include primarily (i) sales, all
of which are to 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.
Operating profit is comprised of total revenue less operating
expenses. In computing operating profit, none of the following items have
been added or deducted: general corporate revenues and expenses, interest
expense and income taxes.
Identifiable assets by business segment are those assets that are
used in the Company's operations in each industry. Corporate assets consist
principally of cash and cash equivalents, prepaid pension costs and
receivables related to previously divested businesses.
Amounts exclude the golf segment which was reclassified as
discontinued operations in 2008 prior to sale when the golf course was
classified as available for sale. See Note 1 for additional information.
2010 2009 2008
-------- -------- --------
Revenues:
Property . . . . . . . . . . . . . $ 1,450 1,037 1,144
Agriculture . . . . . . . . . . . 2,201 2,485 1,851
Corporate. . . . . . . . . . . . . 486 1,173 175
-------- -------- --------
$ 4,137 4,695 3,170
======== ======== ========
Operating income (loss):
Property . . . . . . . . . . . . . $ (4,661) (2,974) (1,556)
Agriculture . . . . . . . . . . . 926 (332) (384)
-------- -------- --------
Operating income (loss). . . . . . . (3,735) (3,306) (1,940)
Corporate. . . . . . . . . . . . . . (3,952) (2,655) (140)
-------- -------- --------
Operating income (loss) from
continuing operations before
income taxes and income (loss)
from discontinued operations . . . $ (7,687) (5,961) (2,080)
======== ======== ========
Identifiable Assets:
Property . . . . . . . . . . . . . $ 43,131 46,309 51,541
Agriculture. . . . . . . . . . . . 56,374 56,076 55,766
-------- -------- --------
99,505 102,385 107,307
Corporate. . . . . . . . . . . . . . 45,192 53,210 43,199
-------- -------- --------
$144,697 155,595 150,506
======== ======== ========
Agricultural identified assets include land classified as agricultural
or conservation for State and County purposes.
2010 2009 2008
-------- -------- --------
Capital Expenditures:
Property . . . . . . . . . . . . . $ 651 1,743 4,753
Agriculture. . . . . . . . . . . . 167 290 766
Corporate. . . . . . . . . . . . . -- -- --
-------- -------- --------
$ 818 2,033 5,519
======== ======== ========
Depreciation and Amortization:
Property . . . . . . . . . . . . . $ 91 94 101
Agriculture. . . . . . . . . . . . 211 190 120
-------- -------- --------
Total. . . . . . . . . . . . . . . . $ 302 284 221
======== ======== ========
(10) CALCULATION OF NET INCOME PER SHARE
The following tables set forth the computation of net income (loss)
per share - basic and diluted:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2010 2009 2008
------------ ------------ ------------
(Amounts in thousands
except per share amounts)
NUMERATOR:
Income (loss) before income
(loss) from discontinued
operations . . . . . . . . . $ (4,092) (5,278) (1,340)
Income (loss) from discon-
tinued operations, net
of income taxes. . . . . . . -- -- (2,302)
---------- ---------- ----------
Net income (loss). . . . . . . $ (4,092) (5,278) (3,642)
========== ========== ==========
DENOMINATOR:
Number of weighted average
shares outstanding . . . . . 1,845 1,832 1,824
========== ========== ==========
Net income (loss) per
share - basic and diluted:
Income (loss) from
continuing operations. . . $ (2.22) (2.88) (.73)
Income (loss) from
discontinued
operations . . . . . . . . -- -- (1.26)
---------- ---------- ----------
Net income (loss) per
share - basic and
diluted (a). . . . . . . . . $ (2.22) (2.88) (1.99)
========== ========== ==========
(a) As the Company reported a loss from continuing operations for
December 31, 2008, the Company has excluded the unissued Class C shares
from the corresponding earnings per share calculations for this period as
the effect would be anti-dilutive.
As of December 31, 2010, the Company had issued and outstanding
1,792,613 Shares and 52,000 Class C Shares. The LLC Agreement initially
provided for two classes of membership interests, Class A Shares and
Class B Shares, which had substantially identical rights and economic value
under the LLC Agreement; except that holders of Class A Shares were
represented by a "Class A Representative" who was required to approve
certain transactions proposed by Kaanapali Land before they could be
undertaken. Class B Shares were held by Pacific Trail and various entities
and individuals that are affiliated with Pacific Trail. Class A Shares
were issued under the Plan to claimants who had no such affiliation.
Pursuant to the LLC Agreement, the Class A Shares and Class B Shares were
automatically redesignated as Common Shares on November 15, 2007.
Accordingly, the Company's Class A Shares and Class B Shares ceased to
exist separately on November 15, 2007.
(11) SUPPLEMENTARY QUARTERLY DATA (UNAUDITED)
2010
----------------------------------------------
At 3/31 At 6/30 At 9/30 At 12/31
---------- ---------- ---------- ----------
Total revenues . . . . . . $ 1,058 1,160 1,140 779
========== ========== ========== ==========
Net income (loss). . . . . $ (1,572) 673 (3,383) 190
========== ========== ========== ==========
Net income (loss)
per Share -
basic and diluted . . . . $ (.85) .36 (1.83) .10
========== ========== ========== ==========
2009
----------------------------------------------
At 3/31 At 6/30 At 9/30 At 12/31
---------- ---------- ---------- ----------
Total revenues . . . . . . $ 1,087 1,196 968 1,444
========== ========== ========== ==========
Net income (loss). . . . . $ (733) (843) (722) (2,980)
========== ========== ========== ==========
Net income (loss)
per Share -
basic and diluted . . . . $ (.40) (.46) (.39) (1.63)
========== ========== ========== ==========
2008
----------------------------------------------
At 3/31 At 6/30 At 9/30 At 12/31
---------- ---------- ---------- ----------
Total revenues
(including discontinued
operations) . . . . . . . $ 2,142 1,630 1,444 1,443
========== ========== ========== ==========
Net income (loss). . . . . $ (848) 1,179 (1,826) (2,147)
========== ========== ========== ==========
Net income (loss)
per Share -
basic and diluted . . . . $ (.47) .65 (1.00) (1.17)
========== ========== ========== ==========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with the accountants during
the fiscal years 2010, 2009 and 2008.
ITEM 9A. 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,
as of the end of such period, the Company's disclosure controls and
procedures were effective.
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and
maintaining adequate internal control over financial reporting as such term
is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision
and with the participation of management including the principal executive
officer and the principal financial officer management conducted an
evaluation of the effectiveness of internal control over financial
reporting based on the framework in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Therefore, even those
systems determined to be effective can only provide reasonable assurances
with respect to financial statement preparation and presentation.
Based on the Company's evaluation under the framework in Internal
Control - Integrated Framework, management concluded that its internal
control over financial reporting was effective as of December 31, 2010.
This annual report does not include an attestation report of the
Company's independent registered public accounting firm regarding internal
control over financial reporting. Management's report was not subject to
attestation by the Company's independent registered public accounting firm
pursuant to temporary rules of the Security and Exchange Commission that
permit the Company to provide only management's report in this annual
report.
ITEM 9B. OTHER INFORMATION
Not Applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
OF THE REGISTRANT
The sole manager of Kaanapali Land, LLC is Pacific Trail, which is
also Kaanapali Land's largest shareholder. Pacific Trail manages the
business of Kaanapali Land pursuant to the terms of the LLC Agreement.
Although the executive officers of Kaanapali Land are empowered to manage
its day-to-day business affairs, under the LLC Agreement, most significant
actions of Kaanapali Land outside the ordinary course of business must
first be authorized by Pacific Trail, which is responsible and has full
power and authority to do all things deemed necessary and desirable by it
to conduct the business of Kaanapali Land. Pacific Trail may be removed as
manager in certain specified circumstances. As of March 29, 2011, the
executive officers and certain other officers of the Company were as
follows:
Position
Held with
Name the Company
---------- ------------
Gary Nickele President and
Chief Executive Officer
Stephen A. Lovelette Executive Vice President
Gailen J. Hull Senior Vice President and
Chief Financial Officer
Certain of these officers are also officers and/or directors of JMB
Realty Corporation ("JMB") and numerous affiliated companies of JMB
(hereinafter collectively referred to as "JMB affiliates"). JMB affiliates
outside of the Company have not materially engaged in the agriculture
business and have primarily purchased, or made mortgage loans securing,
existing commercial, retail, office, industrial and multi-family
residential rental buildings or have owned or operated hotels on various
other hospitality businesses. However, certain partnerships sponsored by
JMB and other affiliates of JMB were previously engaged in land development
activities including planned communities, none of which are in Hawaii.
There is no family relationship among any of the foregoing officers.
The LLC Agreement also provided for the appointment of a "Class A
Representative" to monitor the activities of Kaanapali Land on behalf of
its Class A Shareholders. The Class A Representative who was independent
was entitled to receive certain information from Kaanapali Land and was
required to approve certain actions that Kaanapali Land took outside the
course of business primarily related to debt that might be obtained from
affiliated parties. Pursuant to the LLC Agreement, the Class A Shares and
Class B Shares were automatically redesignated as Common Shares on
November 15, 2007. Accordingly, the Company's Class A Shares and Class B
Shares ceased to exist separately on November 15, 2007. Reference is also
made to Item 12 for more information.
There are no arrangements or understandings between or among any of
said officers and any other person pursuant to which any officer was
selected as such.
The following table sets forth certain business experience during the
past five years of such officers of the Company.
Gary Nickele (age 58) has been Manager of KLC Land since August, 2000
and President of KLC Land and certain of its subsidiaries since February
2001. He has been the President of Kaanapali Land since May 2002. Mr.
Nickele is also the President and Director of Arvida Company, the
administrator of ALP Liquidating Trust, which exists to manage the
liquidation of the former business of Arvida/JMB Partners, L.P. ("Arvida
Partners"). From October 1987 until September 2005, Arvida Partners
conducted land development activities primarily in Florida. Mr. Nickele
has been associated with JMB and Arvida Partners since February, 1984 and
September, 1987, respectively. He holds a J.D. degree from the University
of Michigan Law School and is a member of the Bar of the State of Illinois.
Mr. Nickele's experience relative to JMB, the Company and Arvida Partners
during the past five years has included overall responsibility for all
legal matters, oversight of the operations of the Company and Arvida
Partners, including matters relating to property development and sales and
general personnel and administrative functions. During the past five years,
Mr. Nickele has also been an Executive Vice President of JMB.
Stephen Lovelette (age 54) has been an Executive Vice President of
KLC Land since 2000 and Kaanapali Land since May 2002. Mr. Lovelette is in
charge of implementing the Kaanapali 2020 development plan. Mr. Lovelette
has been associated with JMB and its affiliates for over 20 years. Prior
to joining an affiliate of JMB, Mr. Lovelette worked for Arvida
Corporation, the predecessor to Arvida Partners, under its previous
ownership. Mr. Lovelette holds a bachelor's degree from The College of the
Holy Cross and an MBA from Seton Hall University. In addition, Mr.
Lovelette has extensive experience in corporate finance and has been
responsible for obtaining substantial financial commitments from
institutional lenders relating to the assets of JMB and Arvida Partners.
During the past five years, Mr. Lovelette has also been a Managing Director
of JMB.
Gailen J. Hull (age 62) is Senior Vice President and, since August
2002, Chief Financial Officer of Kaanapali Land. Mr. Hull has been
associated with JMB since March, 1982. He holds a Masters degree in
Business Administration from Northern Illinois University and is a
Certified Public Accountant. Mr. Hull has substantial experience in the
management of the accounting and financial reporting functions of both
public and private entities, primarily including those of JMB, Arvida
Partners, the Company and their respective affiliates. During the past five
years, Mr. Hull has also been a Senior Vice President of JMB.
It is currently anticipated that Gary Nickele will devote 25 to 50
percent of his time to the operations of the Company. The percentage is
largely dependant upon potential land sale transactions, the entitlement
processes relating to various land parcels and other matters (including
attention devoted to litigation, overhead, staffing and operations).
In light of the fact that the Company's shares are not publicly
traded, the Company is a limited liability company and the rights of
members are governed by the limited liability company agreement, the
Company has determined that it is not necessary to have a separately
designated audit committee, compensation committee, an audit committee
financial expert or a code of ethics that applies to its principal
executive, financial or accounting officers as those terms are defined in
the rules and regulations of the SEC.
ITEM 11. EXECUTIVE COMPENSATION
Certain of the officers of the Company listed in Item 10 above are
officers of JMB and are compensated by JMB or an affiliate thereof (other
than the Company and its subsidiaries). The Company will reimburse JMB,
Pacific Trail and their affiliates for any expenses incurred while
providing services to the Company.
SUMMARY COMPENSATION TABLE
Annual Compensation (1)(3)
---------------------------
Other
Annual
Compensa-
Principal Salary Bonus tion Total
Name (2) Position Year ($) ($) ($) ($)
--------------- --------------- ---- ------- ------- --------- -------
Gary Nickele President 2010 180,000 100,000 N/A 280,000
and Chief 2009 180,000 100,000 N/A 280,000
Executive 2008 180,000 100,000 N/A 280,000
Officer
Stephen A.
Lovelette Executive 2010 255,000 100,000 N/A 355,000
Vice President 2009 255,000 100,000 N/A 355,000
2008 255,000 100,000 N/A 355,000
Gailen J. Hull Senior Vice 2010 175,000 50,000 N/A 225,000
President and 2009 175,000 50,000 N/A 225,000
Chief Financial 2008 175,000 50,000 N/A 225,000
Officer
----------
(1) The Company does not have a compensation committee. Executive
officer compensation was determined through deliberations with Pacific
Trail representatives.
(2) Includes CEO and all other executive officers.
(3) Salary and bonus amounts for Messrs. Nickele, Lovelette and
Hull represent the portion of total compensation allocated and charged to
the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Security ownership of certain beneficial owners.
NAME AND ADDRESS AMOUNT AND NATURE
OF BENEFICIAL OF BENEFICIAL
TITLE OF CLASS OWNER OWNERSHIP
-------------- --------------------------- --------------------
Common Shares Pacific Trail Holdings, LLC 1,466,573 Shares
900 North Michigan Avenue owned directly
Chicago, Illinois 60611 (81.8% of the
Common Shares)
(1) (2)
(1) The sole managing member of Pacific Trail, Pacific Trail Holdings,
Inc. ("PTHI"), may be deemed to beneficially own the Shares
owned by Pacific Trail. PTHI disclaims beneficial ownership with
respect to any of the shares owned by Pacific Trail. Each of the
shareholders of PTHI may be deemed to own the Common Shares
owned by Pacific Trail. Each of such shareholders, being Gary
Nickele, Gailen Hull and Stephen A. Lovelette, disclaims beneficial
ownership with respect to any of the shares owned by Pacific Trail.
The addresses of PTHI and Messrs. Nickele, Hull and Lovelette are
the same as for Pacific Trail.
(2) As of March 15, 2011, there were approximately 1,792,613 Common
Shares and 52,000 Class C Shares issued and outstanding.
No other person including any officer of the Company is known by the
Company to beneficially own in excess of 5% of the Common Shares issued,
outstanding and distributed.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
An affiliated insurance agency, JMB Insurance Agency, Inc., earns
insurance brokerage commissions in connection with providing the placement
of insurance coverage for certain of the properties and operations of the
Company. Such commissions are comparable to those that would be paid to
such affiliate insurance agency in similar dealings with unaffiliated third
parties, and are generally paid by the insurance carriers that the agency
represents out of the premiums paid by the Company for such coverage. The
total of such commissions for the years ended December 31, 2010, 2009 and
2008 was approximately $29 thousand, $12 thousand and $30 thousand,
respectively, all of which was paid as of December 31, 2010.
The Company pays a non-accountable reimbursement of approximately $30
thousand per month to JMB Realty Corporation in respect of general overhead
expense, all of which was paid as of December 31, 2010.
The Company reimburses its affiliates for direct expenses incurred on
its behalf, including salaries and salary-related expenses incurred in
connection with the management of the Company's operations. Generally, the
entity that employs the person providing the services receives the
reimbursement. Substantially all of such reimbursable amounts were
incurred by JMB Realty Corporation or its affiliates, 900 Financial
Management Services, LLC, and JMB Financial Advisors, LLC during 2006. The
total costs for the years ended December 31, 2010, 2009 and 2008 was
approximately $2.5 million, $2.4 million and $2.2 million, respectively, of
which approximately $645 thousand was unpaid as of December 31, 2010.
In light of the fact that the Company's shares are not publicly
traded, is a limited liability company, and has no independent outside
directors or managers, it has no formal policy or procedure for the review,
approval or ratification of related party transactions that are required to
be disclosed pursuant to Item 404 of Regulation S-K.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The aggregate audit fees incurred for professional services by Ernst
and Young LLP ("E&Y") in 2010, 2009 and 2008 were $249 thousand, $249
thousand and $246 thousand, respectively. In accordance with the SEC's
definitions and rules, "audit fees" are fees the Company paid E&Y for
professional services for the audit of the Company's consolidated financial
statements included in Form 10-K and review of financial statements
included in Form 10-Qs, and for services that are normally provided by the
accountant in connection with statutory and regulatory filings or
engagements. There were no non-audit related, tax or other services
provided by E&Y.
The Company has not adopted any pre-approval policies and procedures.
All audit and permitted non-audit services are approved by the managing
member of the Company before the service is undertaken.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
2.1 Order Confirming Second Amendment Joint Plan of Reorganization
Dated June 11, 2002, including as an exhibit thereto, the
Second Amended Joint Plan of Reorganization of Amfac Hawaii,
LLC, Certain of its Subsidiaries and FHT Corporation Under
Chapter 11 of the Bankruptcy Code incorporated herein by
reference the Amfac Hawaii, LLC Current Report on Form 8-K for
July 29, 2002 dated August 13, 2002 (File No. 33-24180).
2.2 Second Amended Disclosure Statement with Respect to Joint Plan
of Reorganization of Amfac Hawaii, LLC, Certain of its
Subsidiaries and FHT Corporation Under Chapter 11 of the
Bankruptcy Code, incorporated herein by reference from the
Amfac Hawaii, LLC Current Report on Form 8-K for July 29, 2002
dated August 13, 2002 (File No. 33-24180).
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 Form 10 filed May 1, 2003 and hereby
incorporated by reference.
10.1 Service Agreement, dated November 18, 1988, between
Amfac/JMB Hawaii, Inc., and Amfac Property Development
Corp.; Amfac Property Investment Corp.; Amfac Sugar and
Agribusiness, Inc.; Kaanapali Water Corporation; Amfac
Agribusiness, Inc.; Kekaha Sugar Company, Limited; The
Lihue Plantation Company; Oahu Sugar Company, Limited;
Pioneer Mill Company, Limited; Puna Sugar Company,
Limited; H. Hackfeld & Co., Ltd.; and Waiahole
Irrigation Company, Limited and JMB Realty Corporation,
incorporated herein by reference to the Amfac Hawaii,
LLC Annual Report on Form 10-K filed on March 22, 1989
(File No. 33-24180) for the year ended December 31,
1988.
10.2 Waikele Golf Course, LLC - Waikele Country Club, Inc.
Property Purchase Agreement, as amended, dated October 29,
2008 filed on 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.
21. List of Subsidiaries
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.
(1) Previously filed as exhibits to Amfac Hawaii, LLC's Registration
Statement on Form S-1 (as amended) under the Securities Act of 1933 (File
No. 33-24180) and hereby incorporated by reference.
(b) No reports on Form 8-K were filed since the beginning of
the last quarter of the period covered by the report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 31, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Gailen J. Hull
---------------------
By: Gailen J. Hull,
Senior Vice President
Chief Accounting Officer
and Chief Financial Officer
Date: March 31, 2011
/s/ Gary Nickele
---------------------
By: Gary Nickele,
President and
Chief Executive Officer
Date: March 31, 201
