SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period
ended September 30, 2004 Commission file #0-50273
KAANAPALI LAND, LLC
(Exact name of registrant as specified in its charter)
Delaware 01-0731997
(State of organization) (IRS Employer Identification No.)
900 N. Michigan Ave., Chicago, IL 60611
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 312/915-1987
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange 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 (the "Exchange Act") during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant has 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 October 31, 2004, the registrant had 1,792,292 shares of common stock
outstanding.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements. . . . 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . 15
Item 4. Controls and Procedures. . . . . . . . . . . . . . 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 19
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
KAANAPALI LAND, LLC
Condensed Consolidated Balance Sheets
September 30, 2004 and December 31, 2003
(Dollars in Thousands, except share data)
(Unaudited)
A S S E T S
-----------
September 30, December 31,
2004 2003
------------- -----------
Cash and cash equivalents . . . . . . $ 31,085 28,995
Receivables, net. . . . . . . . . . . 622 777
Property, net . . . . . . . . . . . . 105,656 104,926
Notes receivable, net of deferred
gain of $5,304. . . . . . . . . . . 11,692 26,058
Prepaid pension costs . . . . . . . . 26,206 25,989
Other assets. . . . . . . . . . . . . 3,369 2,728
-------- --------
$178,630 189,473
======== ========
L I A B I L I T I E S
---------------------
Accounts payable and accrued
expenses. . . . . . . . . . . . . . $ 1,200 2,444
Deferred income taxes . . . . . . . . 19,403 19,369
Accumulated postretirement benefit
obligation. . . . . . . . . . . . . 9,829 13,743
Other liabilities . . . . . . . . . . 47,807 52,498
Mortgage payable. . . . . . . . . . . 7,208 8,288
-------- --------
Total liabilities . . . . . . 85,447 96,342
Commitments and contingencies
S T O C K H O L D E R S' E Q U I T Y
-------------------------------------
Common stock, at 9/30/04 and 12/31/03
non par value (shares authorized -
4,500,000; shares issued 1,792,292
and 1,791,274, respectively). . . . -- --
Additional paid-in capital. . . . . . 5,357 5,357
Accumulated earnings. . . . . . . . . 87,826 87,774
-------- --------
Total stockholders' equity. 93,183 93,131
-------- --------
$178,630 189,473
======== ========
The accompanying notes are an integral part
of the condensed consolidated financial statements.
KAANAPALI LAND, LLC
Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2004 and 2003
(Unaudited)
(Dollars in Thousands, except share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenues:
Sales . . . . . . . . . $ 1,544 34,070 5,401 49,940
Interest and
other income. . . . . 548 330 1,661 511
-------- -------- -------- --------
2,092 34,400 7,062 50,451
-------- -------- -------- --------
Cost and expenses:
Cost of sales . . . . . 1,055 19,828 2,983 34,061
Reduction of post-
retirement benefit
obligation. . . . . . (890) (2,425) (2,669) (7,277)
Selling, general and
administrative. . . . 1,734 5,206 5,378 12,081
Interest. . . . . . . . 201 287 499 869
Depreciation and
amortization. . . . . 248 286 785 880
-------- -------- -------- --------
2,348 23,182 6,976 40,614
-------- -------- -------- --------
Operating income (loss) . (256) 11,218 86 9,837
Equity in income (loss)
from unconsolidated
investments . . . . . -- (110) -- (402)
-------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes
and gain on disposi-
tion of unconsolidated
investment. . . . . . (256) 11,108 86 9,435
Income tax benefit
(expense) . . . . . . 99 (4,350) (34) (3,811)
-------- -------- -------- --------
Income (loss) from
continuing
operations. . . . . . (157) 6,758 52 5,624
Gain on disposition
of unconsolidated
investment. . . . . . -- 61,083 -- 61,083
-------- -------- -------- --------
Net income (loss) . $ (157) 67,841 52 66,707
======== ======== ======== ========
Earnings per share:
Net income (loss) . . . $ (.09) 36.41 .03 35.81
======== ======== ======== ========
The accompanying condensed notes are an integral part
of the condensed consolidated financial statements.
KAANAPALI LAND, LLC
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2004 and 2003
(Unaudited)
(Dollars in Thousands)
2004 2003
-------- --------
Net cash used in operating activities . . $(10,281) (8,045)
Cash flows from investing activities:
Property additions. . . . . . . . . . . (1,600) (685)
Property sales, net . . . . . . . . . . 685 17,966
Note receivable . . . . . . . . . . . . 14,366 --
Contributions to investments in
unconsolidated entities . . . . . . . -- (438)
-------- --------
Net cash provided by investing
activities. . . . . . . . . . . . . . . 13,451 16,843
Cash flows from financing activities:
Repayments of debt. . . . . . . . . . . (1,080) (83)
-------- --------
Cash used in financing activities . . . (1,080) (83)
-------- --------
Net increase (decrease) in cash
and cash equivalents. . . . . . 2,090 8,715
Cash and cash equivalents at
beginning of period . . . . . . 28,995 15,848
-------- --------
Cash and cash equivalents at
end of period . . . . . . . . . $ 31,085 24,563
======== ========
Supplemental disclosure of cash
flow information:
Cash paid for interest. . . . . . . . . $ 394 485
======== ========
Non-cash investing and financing activities:
Note receivable received in sale
of Lot 2. . . . . . . . . . . . . . . $ -- 14,366
Deferred gain . . . . . . . . . . . . . -- (5,304)
-------- --------
-- 9,062
Note receivable received in sale
of Lot 4. . . . . . . . . . . . . . . -- 17,000
-------- --------
Note receivable, net. . . . . . . . . . $ -- 26,062
======== ========
The accompanying notes are an integral part
of the condensed consolidated financial statements.
KAANAPALI LAND, LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Dollars in Thousands)
The accompanying unaudited condensed consolidated financial statements
are prepared in accordance with accounting principles generally accepted in
the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements, and therefore, should be read in conjunction with the
Company's Annual Report on Form 10-K (File No. 0-50273) for the year ended
December 31, 2003. Capitalized terms used but not defined in this
quarterly report have the same meanings as the Company's 2003 Annual Report
on Form 10-K.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF ACCOUNTING
Kaanapali Land, LLC ("Kaanapali Land"), a Delaware limited liability
company, is the reorganized entity resulting from the Joint Plan of
Reorganization of Amfac Hawaii, LLC (now known as KLC Land Company, LLC
("KLC Land")), certain of its subsidiaries (together with KLC Land, the
"KLC Debtors") and FHT Corporation ("FHTC" and, together with the KLC
Debtors, the "Debtors") under Chapter 11 of the Bankruptcy Code, dated
June 11, 2002 (as amended, the "Plan").
The 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"). Kaanapali Land
continues to implement the restructuring transactions that are contemplated
to be effected under the Plan, including, among other things, the
resolution of all outstanding claims and distributions on all claims that
are allowed under the Plan.
The Company's continuing operations are in three business segments -
agriculture, property and golf. The Agriculture segment grows seed corn
under a contract with, and leases land currently cultivated in coffee to,
third parties. The Property segment primarily develops land for sale and
negotiates bulk sales of undeveloped land. The Golf segment is responsible
for the management and operation of the Waikele Golf Course. The
properties on which the Property, Agriculture and Golf segments operate are
all in the State of Hawaii. For further information on the Company's
business segments see Note 10.
PROPERTY
The Company's principal land holdings are on the island of Maui. The
Company has determined, based on its current projections for the
development and/or disposition of its land holdings, that the land holdings
are not currently recorded in an amount in excess of proceeds that the
Company expects that it will ultimately obtain from the disposition
thereof.
USE OF ESTIMATES
The financial statements have been prepared in conformity with
accounting principles generally accepted in the United States, which
require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities (including disclosure of
contingent assets and liabilities) at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of the statement of financial position and results of
operations for the interim periods presented have been included in these
financial statements and are of a normal and recurring nature.
Operating results for the three and nine months ended September 30,
2004 are not necessarily indicative of the results that may be achieved in
future periods.
RECLASSIFICATIONS
Certain amounts in the 2003 consolidated financial statements have
been reclassified to conform to the 2004 presentation.
(2) INVESTMENTS
On September 9, 2003, the Company and certain affiliates consummated a
settlement agreement with the ERS that resulted, among other things, in the
foreclosure of the Company's indirect interests in the RKGC. As a
consequence of such settlement, the Company has received certain easements
and other rights respecting certain of the golf course land, including,
among other things, drainage rights, utility line easements, access rights
and the right to reconfigure one of the golf holes to accommodate the
construction of a road to serve certain other land owned by the Company. In
2003 the Company escrowed cash as required by the settlement agreement in
the approximate amount of $1,500, primarily to satisfy certain debts to
former creditors and employees and to ensure that funds are available for
the reconfiguration of a golf hole that was needed by the Company in order
to construct a roadway on adjacent land. During the first quarter of 2004,
the Company entered into a contract for the completion of such
reconfiguration work which required the Company to deposit an additional
approximate amount of $200 into escrow. The first phase of such work has
been completed and the remaining work is currently ongoing. A portion of
the amounts so funded is to be reimbursed to the Company by AFLP which
formerly owned a majority indirect interest in the RKGC. Due to
uncertainty of collection, the receivable from AFLP has been fully
reserved.
(3) LAND SALES AND MORTGAGES RECEIVABLE
On January 31, 2003, an option to purchase Lot 2 (an approximate 11.5
acre site in the North Beach area of Kaanapali) was exercised. A non-
refundable payment was made for $2 million (before closing costs and
prorations). The remainder of the purchase price was reflected by a note
secured by a mortgage due March 31, 2004 for approximately $14,000. The
note was paid in March 2004. Approximately one-half of the proceeds of the
note is subject to adjustment based on the number of units ultimately
approved for construction on the site.
The Company is recording the sale under the cost recovery method of
accounting. The entire deferred gain will be recognized upon determination
of the final number of units approved for construction on the site.
The Company received a purchase money note from the sale of Lot 4 in
2003 in the amount of $17,000. The note is due no later than August 2006.
(4) MORTGAGE AND OTHER NOTES PAYABLE
The Company's mortgage payable was entered into by Waikele Golf
Course, LLC, an operating subsidiary of the Company and generally places
certain specified restrictions on the transfer of the individual
subsidiary's assets, as well as on the use of proceeds generated from
operations and the sales of such assets.
The Waikele Golf Course debt, secured by the Waikele Golf Course, had
an original principal balance of $8,500, an interest rate of LIBOR plus
3.75% (LIBOR floor of 3%), principal amortization based on a 25-year
amortization schedule and a maturity date of December 1, 2006. The loan
has certain cash flow and other financial covenants.
Effective June 1, 2004, the debt was modified pursuant to a loan
modification agreement with the lender. In accordance with the agreement,
a $1,000 principal payment was made to the lender to reduce the outstanding
principal balance of the note, the interest rate was modified to LIBOR plus
4.25% with no LIBOR floor, and the debt was extended to mature on
December 1, 2011. The loan continues to have certain cash flow and other
financial covenants.
In December 1996, Oahu MS, a wholly-owned subsidiary of Kaanapali
Land, obtained a $10,000 loan facility from City Bank. The loan, which had
been extended through December 1, 2002 with certain modifications, was
secured by a mortgage on certain property at the Oahu Sugar mill-site (the
sugar plantation was closed in 1995). On the maturity date, Oahu MS did
not pay the balance due. On January 2, 2003, City Bank filed a complaint
for foreclosure and Oahu MS asserted certain defenses. As a consequence of
court-supervised mediation commencing in August 2003, Oahu MS and Oahu
Sugar entered into a settlement of certain litigation with City Bank and
certain other parties and in December 2003 the settlement was consummated.
The settlement resulted in Oahu MS no longer having title to the property
as well as the Company being released from its obligations relating to the
mortgage encumbered by the property; however, City Bank also released
certain other security to Oahu MS. Certain contingencies to the final
effectiveness of such settlement were satisfied during the first quarter of
2004 and the settlement is now final.
(5) RENTAL ARRANGEMENTS
The Company leases various office space with average annual rental of
approximately $250 per year. Leases expire at various times through
December 2005. Although the Company is a party to certain other leasing
arrangements, none of them are material.
(6) EMPLOYEE BENEFIT PLANS
(a) PENSION PLANS
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 components of the net periodic pension benefit (credit) for the
three and nine months ended September 30, 2004 and 2003 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Service cost. . . . . . . $ 19 -- 57 --
Interest cost . . . . . . 664 -- 1,992 --
Expected return on plan
assets. . . . . . . . . (1,040) -- (3,120) --
Recognized net actuarial
gain. . . . . . . . . .
Amortization of prior
service cost. . . . . . 232 -- 696 --
Special termination
benefit . . . . . . . . 54 124 158 1,257
-------- -------- -------- --------
Net periodic pension
expense (credit). . . . $ (71) 124 (217) 1,257
======== ======== ======== ========
(b) RETIREE HEALTH AND LIFE INSURANCE BENEFITS
In addition to providing pension benefits, KLC Land and certain of its
affiliates currently provide certain healthcare and life insurance benefits
to certain eligible retired employees. Where such benefits are offered,
substantially all employees may become eligible for such benefits if they
reach a specified retirement age while employed by KLC Land (or the
applicable affiliate) and if they meet a certain length of service
criteria. The postretirement healthcare plans are contributory and contain
cost-sharing features such as deductibles and copayments. However, these
features, as they apply to bargaining unit retirees, are subject to
collective bargaining provisions of a labor contract between each such
entity and the International Longshoremen's & Warehousemen's Union as they
may have been amended or settled through agreements or memoranda executed
with the union at about the time each operating facility was closed. The
postretirement life insurance plan is non-contributory.
Each relevant entity continues to fund its benefit costs on a
pay-as-you-go basis, and each entity expects to continue funding its post-
retirement health care obligations until the end of 2004, which is a date
on or after the date when its required cost maintenance period as defined
under Internal Revenue Code Section 420 expires. Most of these entities
terminated the postretirement life insurance benefits effective at the end
of 2003. Retiree medical benefits for most of these entities are expected
to terminate at the end of 2004. Kaanapali Land has not assumed any
obligation to fund the cost of these benefits on behalf of any of its
affiliates.
Net periodic postretirement benefit credit for the three and nine
months ended September 30, 2004 includes the following components:
Three Months Nine Months
Ended Ended
September 30, September 30,
2004 2004
------------- -------------
Service cost. . . . . . . . . . . . . . $ 3 9
Interest cost . . . . . . . . . . . . . 71 213
Amortization of net gain. . . . . . . . (840) (2,517)
Recognized settlement gain. . . . . . . (124) (374)
--------- --------
Net periodic postretirement
benefit credit. . . . . . . . . . . . $ (890) (2,669)
======== ========
The retiree health and life insurance benefits plan recognized credits
of $2,425 and $7,277 for the three and nine months ended September 30,
2003, respectively.
The relevant entities have elected to defer recognition of the
effects, if any, of the Medicare Prescription Drug Improvement and
Modernization Act of 2003 on the actuarial projections and assumptions
utilized by the plans.
(7) INCOME TAXES
The statutes of limitations have expired with respect to the Company's
Federal income tax returns for all years through 1997. The examination of
the Company's Federal income tax returns for the periods 1998-2000 has been
completed and as a result of that examination the IRS has proposed
adjustments which would result in taxes of approximately $6,000 (before
interest), which the Company is in the process of contesting. In order to
reduce the potential cost should the Company's position not prevail,
approximately $2,900 was paid during the third quarter of 2004 toward the
proposed adjustments and the IRS has billed the Company approximately
$1,000 in interest on that amount. No expense was recognized in
conjunction with this payment as a result of a reserve established in prior
periods for potential tax liabilities. The statutes of limitations with
respect to the Company's tax returns for 1998-2003 remain open. The
Company believes adequate provisions for Federal income taxes have been
recorded for all years.
(8) COMMITMENTS AND CONTINGENCIES
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. In proceedings filed prior to the Petition Date where a Debtor is
a defendant, such proceedings were stayed as against such Debtor by the
filing of the Reorganization Case. Those proceedings could now continue
since the Plan Effective Date has occurred so long as the plaintiffs
therein filed timely claims under the Plan. However, all such proceedings
with the exception of the proceedings with the IRS mentioned above have
either been settled or discharged by the Bankruptcy Court and thus the
underlying legal proceedings should not result in any further liability to
the Debtors. Proceedings against subsidiaries or affiliates of Kaanapali
Land that are not Debtors were not stayed by the Plan and may proceed.
Oahu Sugar Company, LLC, successor by merger to Oahu Sugar Company,
Limited ("Oahu Sugar") and Oahu MS Development Corp. were involved in
certain litigation arising out of and in connection with the sale of
certain sugar cane processing equipment at the Waipahu mill. The
litigation was concluded in March 2004. For a more complete discussion of
that litigation, please see the company's previous periodic reporting.
On June 3, 2003, Trustees filed a Complaint against Oahu MS, a
subsidiary of Kaanapali Land, and City Bank in Trustees Under the Will and
the Estate of Bernice Paugahi Bishop, deceased, also known as Kamehameha
Schools v. Amfac Property Development Corp., et al, in the Circuit Court of
the First Circuit, State of Hawaii, Civil No. 03-1-1154-05, seeking, among
other things, cancellation of its leases with APDC, collection of unpaid
net rents on the leases, and appointment of a receiver to collect future
subrents under the subleases. Concurrent therewith, Trustees filed a
motion for appointment of receiver. Oahu MS filed its answer on June 24,
2003.
On October 22, 2004, the parties entered into a settlement agreement
to resolve the case and related issues. Under the terms of the settlement,
and in consideration of among other things APDC's payment of $400 to Bishop
Estate, the parties have entered into mutual releases of pending claims
arising out of or in connection with the pending lawsuit, the leased
properties, and the receivership. Under the terms of the settlement and
upon payment of the above-mentioned sum which is expected to take place in
the fourth quarter, the parties have agreed to execute a stipulation of
dismissal of the suit against APDC.
On or about February 23, 2001 Kekaha Sugar Co., Ltd., a subsidiary of
Kaanapali Land, received a letter from the Hawaii Department of Health
("HDOH") assigning the Kekaha Sugar Co., Ltd. site a high priority status
based on HDOH's review of available environmental data. In the letter,
HDOH identified five major areas of potential environmental concern
including the former wood treatment plant, the herbicide mixing plant, the
seed dipping plant, the settling pond, and the Kekaha Sugar Mill. While
setting forth specific concerns, the HDOH reserved the right to designate
still further areas of potential concern which might require further
investigation and possible remediation. HDOH further reserved the right to
modify its prioritization of the site should conditions warrant. The
assignment of the high priority status will likely result in a high degree
of oversight by the HDOH as the issues raised are studied and addressed.
Kekaha Sugar Co., Ltd. has responded to the letter. The United States
Environmental Protection Agency has performed a visual inspection of the
property and indicated there will be some testing performed. HDOH has
performed some testing at the site and results are pending. Kekaha Sugar
Co., Ltd. is substantially without assets and further pursuit of this
matter by HDOH could have a material adverse effect on the financial
condition of Kekaha Sugar Co., Ltd.
On or about February 23, 2001, Lihue Plantation, a subsidiary of
Kaanapali Land, received a similar letter from the HDOH assigning the LPCo
site a high priority status based on HDOH's review of available
environmental data. In the letter, HDOH identified four major areas of
potential environmental concern including the Lihue Plantation herbicide
mixing plant, the seed dipping plant, the settling pond and the Lihue Sugar
Mill. While setting forth specific concerns, the HDOH reserved the right
to designate still further areas of potential concern which might require
further investigation and possible remediation. In that regard, HDOH
visited the site for the purpose of taking additional soil samples in
September 2004. As noted above, the high priority assignment could result
in a high degree of oversight by the HDOH as the issues raised are studied
and addressed. Lihue Plantation is substantially without assets, other
than the two mills and associated power plant and further pursuit of this
matter by HDOH could have a material adverse effect on the financial
condition of LPCo.
Pioneer Mill, a subsidiary of Kaanapali Land, is engaged in an ongoing
cleanup arising out of the discovery of petroleum, lead and arsenic
contamination found at the Pioneer Mill site. The Pioneer Mill site has
been assigned a high priority and the HDOH has shown an interest in the
environmental conditions relating to or arising out of the former
operations of Pioneer Mill. These issues will have to be addressed as they
are raised. Pioneer Mill has received a report on the results of
environmental testing conducted on the site by the United States
Environmental Protection Agency and HDOH. Pioneer Mill has taken action to
address issues raised by the testing and has submitted a report to HDOH
seeking a no further action letter relating to this site. Pioneer Mill
received such no further action letter from HDOH in a letter dated July 27,
2004.
As a result of an administrative order issued to Oahu Sugar, a
subsidiary of Kaanapali Land, by the HDOH, Order No. CH 98-001, dated
January 27, 1998, Oahu Sugar is currently engaged in environmental site
assessment of lands it leased from the U.S. Navy and located on the Waipio
Peninsula. Oahu Sugar has submitted a Remedial Investigation Report to the
HDOH. The HDOH has provided comments which indicate additional testing may
be required. Oahu Sugar has responded to these comments with additional
information. On January 9, 2004, the United States Environmental
Protection Agency, Region IX (hereinafter, "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 seeks, 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 has responded to the
information requests. Oahu Sugar is substantially without assets and the
pursuit of any action, informational, enforcement, or otherwise by HDOH or
EPA could have a material adverse effect on the financial condition of Oahu
Sugar.
The IRS filed a claim in the bankruptcy proceedings in the aggregate
amount of approximately $20,600 for taxes, interest and penalties related
to the years 1998-2000. However, the Company has entered into a
stipulation with the IRS whereby the IRS has withdrawn its claim due to the
fact that the Plan leaves the IRS unimpaired relative to any taxes that may
be due. The statutes of limitations have expired with respect to the
Company's Federal income tax returns for all years through 1997. The
examination of the Company's Federal income tax returns for the periods
1998-2000 has been completed and as a result of that examination the IRS
has proposed adjustments which would result in taxes of approximately
$6,000 (before interest), which the Company is in the process of
contesting. In order to reduce the potential cost should the Company's
position not prevail, approximately $2,900 was paid during the third
quarter of 2004 toward the proposed adjustments and the IRS has billed the
Company approximately $1,000 in interest on that amount. No expense was
recognized in conjunction with this payment as a result of a reserve
established in prior periods for potential tax liabilities. The statutes
of limitations with respect to the Company's tax returns for 1998-2003
remain open. The Company believes adequate provisions for Federal income
taxes have been recorded for all years. However, there can be no assurance
that the Company will be successful in such contest and, although the
Company has reserved for potential tax liabilities on its financial
statements, to the extent that the Company is unsuccessful in defending
against any such claims, the amount 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. A number of cases against D/C are pending on the mainland and
are alleged based on such subsidiary's prior business operations. Each
company believes that it has meritorious defenses against these actions,
but can give no assurances as to their ultimate outcome. D/C is without
sufficient assets to satisfy all of its liabilities for these cases, and
therefore any material existing or future judgments against D/C in these
cases will have a material adverse effect on D/C's financial condition.
Kaanapali Land does not believe that it has liability, directly or
indirectly, for D/C's obligations.
Northbrook Corporation ("Northbrook"), a predecessor by merger to
Kaanapali Land was named in a lawsuit filed in August 2003 in the Circuit
Court of Cook County, Chicago, Illinois, styled Silverado Golf & Country
Club, Inc. v. JMB Realty Corporation and Northbrook Corporation. The
lawsuit sought unspecified damages and alleges that the defendants engaged
in fraudulent conduct in connection with the administration and termination
of a defined benefit pension plan that had been sponsored by Northbrook
Corporation and certain affiliates and predecessors. The complaint has
since been amended. In the eight count amended complaint, plaintiff seeks
unspecified general damages, the imposition of a constructive trust, an
accounting, attorneys' fees and costs, interest, punitive damages and such
other further relief as is deemed appropriate by the court under the
circumstances. Plaintiff seeks return of approximately $1,000 in pension
related costs paid by it over the period 1989-1994, the return of all
pension related costs paid by it since 1995, and all fees, costs and other
consideration charged to or received by defendants from plaintiff since
1988. The participants in the pension plan included employees of an
affiliate who were engaged in employment at the Silverado Country Club &
Resort, in Napa, California (the "Resort"). The Resort was and continues
to be operated pursuant to a Management Agreement between the plaintiff and
Xanterra Parks & Resorts, L.L.C. ("Xanterra"), a former subsidiary of
Northbrook that continues to be under common control with the defendants.
The plaintiffs are also pursuing their claims in a separate action against
Xanterra that is currently being arbitrated in San Francisco, California.
The defendants in the Chicago action vigorously deny all of the plaintiff's
claims. No significant action has occurred pending the conclusion of
arbitration in San Francisco. Once the arbitration is concluded, the
defendants intend to defend, among other things, on the basis that it had
no relationship with the plaintiff and no duties to them whatsoever and
that the plaintiff was not a participating employer in the pension plan and
otherwise had no interest therein. In addition, to the extent that the
California arbitration is finally decided in favor of Xanterra, such
decision could provide further defenses for Kaanapali Land (as successor by
merger to Northbrook). However, there can be no assurance that the
plaintiffs will not ultimately prevail on some or all of their claims.
Other than as described above and the Reorganization Case 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) CALCULATION OF NET INCOME PER SHARE
The following tables set forth the computation of net income (loss)
per share - basic and diluted:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
(Amounts in thousands except per share amounts)
NUMERATOR:
Net income (loss) . . $ (157) 67,841 52 66,707
======== ======== ======== ========
DENOMINATOR:
Denominator for net
income (loss) per
share - basic and
diluted. . . . . . . 1,792 1,863 1,792 1,863
======== ======== ======== ========
Net income (loss)
per share -
basic and diluted. . $ (.09) 36.41 .03 35.81
======== ======== ======== ========
(10) BUSINESS SEGMENT INFORMATION
As described in Note 1, the Company operates in three business
segments. Total revenues and operating profit by business segment are
presented in the tables below.
Total revenues by business segment includes primarily (i) sales, all
of which are from unaffiliated customers and (ii) interest income that is
earned from outside sources on assets which are included in the individual
industry segment's identifiable assets.
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, income taxes, and equity in income (loss) from unconsolidated
investments.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenues:
Property. . . . . . . . $ 430 31,744 1,502 44,369
Agriculture . . . . . . 249 229 1,548 901
Golf. . . . . . . . . . 996 1,024 2,996 3,168
Corporate . . . . . . . 417 1,403 1,016 2,013
-------- -------- -------- --------
$ 2,092 34,400 7,062 50,451
======== ======== ======== ========
Operating Profit (loss):
Property. . . . . . . . $ (531) 12,256 (1,056) 10,828
Agriculture . . . . . . 93 (1,237) 716 (1,314)
Golf. . . . . . . . . . 116 94 468 443
-------- -------- -------- --------
Operating income (loss) . (322) 11,113 128 9,957
Corporate . . . . . . . . 267 392 457 749
Interest expense. . . . . (201) (287) (499) (869)
Equity in income (loss)
from unconsolidated
investments . . . . . . -- (110) -- (402)
-------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes . . $ (256) 11,108 86 9,435
======== ======== ======== ========
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
General
In addition to historical information, this Report contains forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements are based on management's current
expectations about its businesses and the markets in which the Company
operates. Such forward-looking statements are not guarantees of future
performance and involve known and unknown risks, uncertainties or other
factors which may cause actual results, performance or achievements of the
Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements.
Actual operating results may be affected by various factors including,
without limitation, changes in 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.
The Debtors continue 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.
On November 14, 2002, pursuant to the Plan, all of the KLC Debtors
executed and delivered to Kaanapali Land a certain Secured Promissory Note
in the principal amount of $70 million. 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 real
property owned by the KLC Debtors, 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 Non-Debtor KLC
Subsidiaries continue to be liable to Kaanapali Land under certain
guarantees (the "Guarantees") that they had previously provided to support
certain Senior Indebtedness (as defined in the Plan) and the Certificate of
Land Appreciation Notes ("COLA Notes") formerly issued by Amfac/JMB Hawaii,
Inc. (as predecessor to KLC Land). Although such Senior Indebtedness and
COLA Notes were discharged under the Plan, the Guarantees of the Non-Debtor
KLC Subsidiaries were not. Thus, to the extent that the holders of the
Senior Indebtedness and COLA Notes did not receive payment on the
outstanding balance thereof from distributions made under the Plan, the
remaining amounts due thereunder remain obligations of the Non-Debtor KLC
Subsidiaries under the Guarantees. Under the Plan, the obligations of the
Non-Debtor KLC Subsidiaries under such Guarantees were assigned by the
holders of the Senior Indebtedness and COLA Notes to Kaanapali Land on the
Plan Effective Date. Kaanapali Land has notified each of the Non-Debtor
KLC Subsidiaries that are liable under such Guarantees that their
respective guarantee obligations are due and owing and that Kaanapali Land
reserves all of its rights and remedies in such regard. Given the
financial condition of such Non-Debtor KLC Subsidiaries, however, it is
unlikely that Kaanapali Land will realize payments on such Guarantees that
are more than a small percentage of the total amounts outstanding
thereunder or that in the aggregate will generate any material proceeds to
the Company. 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.
As of September 30, 2004, the Company had cash of approximately $31
million, which is available for working capital requirements, including
future operating expenses, and the Company's obligations for Kaanapali 2020
development costs, environmental remediation costs, including those on
former mill-sites, other potential environmental costs, potential tax
liabilities resulting from the IRS audits, retiree medical insurance
benefits (which are generally expected to be paid through the end of 2004),
and existing and possible future litigation.
However, availability of cash to specific subsidiaries of Kaanapali
Land depends on such subsidiaries' individual cash balances and other
assets that can be reduced to cash. To the extent that any subsidiary of
Kaanapali Land has insufficient cash and other assets to satisfy its
obligations, there is no assurance that Kaanapali Land or any other
subsidiary will contribute or loan amounts to such subsidiary to satisfy
those obligations. The primary business of Kaanapali Land is the land
development of the Company's assets on the Island of Maui. The Kaanapali
2020 development plan will take many years at significant expense to fully
implement, although the material portion of such anticipated expenses are
not currently subject to any contractual commitments. Proceeds from land
sales are the Company's only source of significant cash proceeds and the
Company's ability to meet its liquidity needs over the longer term is
dependent on the timing and amount of such proceeds.
The Company's current indebtedness includes a mortgage loan secured
by the Waikele Golf Course. Effective June 1, 2004, the debt was modified
pursuant to a loan modification agreement with the lender. In accordance
with the agreement, a $1 million principal payment was made to the lender
to reduce the outstanding principal balance of the note to $7.2 million,
the interest rate was modified to LIBOR plus 4.25% (5.95% per annum at
September 30, 2004) with no LIBOR floor, and the debt was extended to
mature on December 1, 2011.
The Company's continuing operations have in recent periods been
primarily reliant upon the net proceeds of sales of developed and
undeveloped land parcels. A purchase money note receivable related to
Lot 2 in the amount of approximately $14.4 million was paid in March 2004.
Approximately one-half of the proceeds of the note is subject to adjustment
based upon the number of units ultimately approved for construction on
Lot 2. A purchase money note related to Lot 4 in the amount of
approximately $17 million is due no later than August 2006. If such note
is paid upon maturity, the Company expects that it will have adequate
liquidity for the foreseeable future and the Company expects that it now
has sufficient liquidity to fund the Company's operations until that time.
However, there can be no assurance that the cash proceeds relating to Lot 4
will be realized or that the proceeds from the Lot 2 note will not be
adjusted down upon final approval of the development plan on Lot 2.
Although the Company does not currently believe that it has
significant liquidity problems over the near term, should the Company prove
to be unable to satisfy its liquidity requirements from its existing
resources 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. Therefore, there can be no assurance
that there will be any available financing, and a lack of such financing if
needed would have a material adverse effect on the operations of the
Company.
RESULTS OF OPERATIONS
Reference is made to the footnotes to the financial statements for
additional discussion of items addressing comparability between years.
Note receivable, net decreased in the accompanying balance sheets due
to the collection of the note receivable received in the sale of Lot 2.
Other assets increased in the accompanying balance sheets due to the
payments of insurance premiums for the next twelve months which are
recorded as prepaid insurance and amortized over the twelve month period.
The increase is also due to an increase in the required amount of deposit
with the state of California for workers compensation insurance.
The accumulated post-retirement benefit obligation decreased due in
part to benefits paid but primarily due to the effect of the expected
termination of most of the post-retirement obligations. Such reductions
have been reflected as reduction of post-retirement benefit obligation in
the Condensed Consolidated Statement of Operations.
Other liabilities decreased primarily due to the Company's payment of
approximately $2.9 million to the U.S. Treasury as a result of the IRS'
examination and resulting tax adjustments related to the Company's Federal
tax returns for the 1998 and 1999 periods. The decrease is also a result
of the settlement of certain personal injury actions.
Mortgage payable decreased in the accompanying balance sheets due to
the debt modification agreement reached with the lender of the Waikele Golf
Course. In conjunction with the loan modification, a principal payment of
$1 million was made to the lender to decrease the outstanding principal
balance of the note.
The decrease in sales and cost of sales for the three and nine months
ended September 30, 2004 compared to the same periods in 2003 is primarily
due to the sale of Lot 2 during the first quarter of 2003 and the sale of
Lot 4 during the third quarter of 2003.
Interest and other income increased primarily as a result of income
earned on notes receivable arising from 2003 property sales and interest
earned on a higher average cash balance invested during 2004.
Selling, general and administrative decreased primarily as a result of
the recovery from an insurance company of amounts previously expensed by
D/C relating to the defense of certain liability claims, a decrease in
legal fees incurred during the first nine months of 2004 as a result of the
settlement of ERS and other litigation during 2003 and a reduction in
payroll related costs as a result of the reduction in personnel in 2004.
Interest decreased due to the settlement with City Bank which resulted
in the Company being released from its obligations relating to the mortgage
with City Bank.
The decrease in income tax expense for the three and nine months ended
September 30, 2004 is a result of the decrease in the Company's income from
continuing operations.
The gain on disposition of unconsolidated investment is due to the
Company's settlement with the ERS that resulted, among other things, in the
foreclosure of the Company's indirect interest in the RKGC.
INFLATION
Due to the lack of significant fluctuations in the level of inflation
in recent years, inflation generally has not had a material effect on real
estate development.
In the future, high rates of inflation may adversely affect real
estate development generally because of their impact on interest rates.
High interest rates not only increase the cost of borrowed funds to the
Company, but can also have a significant effect on the affordability of
permanent mortgage financing to prospective purchasers. However, high rates
of inflation may permit the Company to increase the prices that it charges
in connection with real property sales, subject to general economic
conditions affecting the real estate industry and local market factors, and
therefore may be advantageous where property investments are not highly
leveraged with debt or where the cost of such debt has been previously
fixed.
ITEM 4. CONTROLS AND PROCEDURES
The principal executive officer and the principal financial officer of
the Company have evaluated the effectiveness of the Company's disclosure
controls and procedures as defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934, as amended, (the "Exchange Act") as of the end of the
period covered by this report. Based on such evaluation, the principal
executive officer and the principal financial officer have concluded that
the Company's disclosure controls and procedures were effective to ensure
that information required to be disclosed was recorded, processed,
summarized and reported within the time periods specified in the applicable
rules and form of the Securities and Exchange Commission.
There was no change in internal control over financial reporting that
occurred during the period covered by this report that materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 8 to the Condensed Consolidated Financial
Statements included in Part I of this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1 Amended and Restated Limited Liability Company Agreement
of Kaanapali Land, LLC dated November 14, 2002 filed as
an exhibit to the Company's Form 10 filed May 1, 2003 and
hereby incorporated by reference.
31.1. Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) is filed herewith.
31.2. Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) is filed herewith.
32. Certifications pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 are filed herewith.
(b) No reports on Form 8-K were filed since the beginning of the
last quarter of the period covered by the report.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KAANAPALI LAND, LLC
By: Pacific Trail Holdings, LLC
(sole member)
/s/ Gailen J. Hull
---------------------
By: Gailen J. Hull
Senior Vice President
Date: November 12, 2004