SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20459
___________________
SCHEDULE 13E-3
(RULE 13e-100)
RULE 13e-3 TRANSACTION STATEMENT
UNDER SECTION 13(e) OF THE SECURITIES EXCHANGE ACT OF 1934
KAANAPALI LAND, LLC
(Name of Issuer)
PACIFIC TRAIL HOLDINGS, LLC
PACIFIC TRAIL HOLDINGS, INC.
KAANAPALI LAND, LLC
KLLLC MERGERCO, LLC
(Name of Persons Filing Statement)
LIMITED LIABILITY COMPANY INTERESTS, CLASS A SHARES
(Title of Class of Securities)
48282H100
(CUSIP Number of Class of Securities)
Gailen J. Hull
Senior Vice President and
Chief Accounting Officer
Kaanapali Land, LLC
900 North Michigan Avenue
Suite 1400
Chicago, Illinois 60611
(312) 915-1987
(Name, Address, and Telephone Numbers of Person Authorized
to Receive Notices and Communications on Behalf
of the Persons Filing Statement)
With copies to:
Edward J. Schneidman
Michael L. Hermsen
Mayer, Brown, Rowe & Maw LLP
71 South Wacker Drive
Chicago, IL 60606
(312) 782-0600
This statement is filed in connection with (check the appropriate box):
a. [ ] this filing of solicitation materials or an information
statement subject to Regulation 14A, Regulation 14C or
Rule 13e-3(c) under the Securities Exchange Act of 1934
(the "Exchange Act").
b. [ ] The filing of a registration statement under the Securities Act
of 1933.
c. [ ] A tender offer.
d. [ X ] None of the above.
i
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: [ ]
Check the following box if the filing is a final amendment reporting the
results of the transaction: [ ]
CALCULATION OF FILING FEE
Transaction Valuation Amount of Filing Fee
$6,967,582.35 $213.91
* For purposes of calculating the filing fee only. The transaction
valuation was determined by the product of (i) the 161,100.17 Limited
Liability Company Interests, Class A Shares ("Class A Shares") of
Kaanapali Land, LLC that are proposed to be retired in the merger and
(ii) the merger consideration of $43.25 per Class A Share.
[ ] Check the box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing with which the offsetting
fee was previously paid. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
Amount Previously Paid: Filing Party:
Form or Registration No.: Date Filed:
INTRODUCTION
This Rule 13e-3 Transaction Statement on Schedule 13E-3 (this "Schedule
13E-3") is being filed by (1) Kaanapali Land, LLC, a Delaware limited
liability company and the issuer of the equity securities which are the
subject to the Rule 13e-3 transaction ("Kaanapali Land", and, together with
its subsidiaries, the "Company"), (2) Pacific Trail Holdings, LLC, a Delaware
limited liability company ("Pacific Trail"), (3) Pacific Trail Holdings, Inc.,
a Delaware corporation and the managing member of Pacific Trail ("PTHI"), and
(4) KLLLC Mergerco, LLC, a Delaware limited liability company ("Mergerco"), a
wholly owned subsidiary of Pacific Trail. This Schedule 13E-3 relates to the
Agreement and Plan of Merger, dated as of April 9, 2007 (the "Merger
Agreement"), a copy of which is attached hereto as Annex A, among Kaanapali
Land, Pacific Trail and Mergerco, whereby Mergerco will merge into Kaanapali
Land, with Kaanapali Land as the surviving entity (the "Merger"). Kaanapali
Land's membership interests are denominated as "shares" and are divided into
two classes: the Class A Shares, which are publicly held and are the subject
of this Schedule 13E-3, and "Class B Shares" which are generally held by
affiliates of Kaanapali Land. As of December 31, 2006, Kaanapali Land had
161,100.17 outstanding Class A Shares (approximately 8.897% of total
outstanding membership interests) and 1,631,513.49 outstanding Class B Shares
(approximately 91.013% of total outstanding membership interests).
Kaanapali Land 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 and FHT Corporation (collectively
the "Debtors") under Chapter 11 of the Bankruptcy Code, dated June 11, 2002
(as amended, the "Plan"). As indicated in the Plan, Kaanapali Land elected to
be taxable as a corporation. The Debtors filed their petitions for
reorganization under Chapter 11 on February 27, 2002 in the United States
Bankruptcy Court for the Northern District of Illinois, Eastern Division (the
"Bankruptcy Court"), which petitions were consolidated into a single joint
proceeding by the Bankruptcy Court (the "Reorganization Case").
All references in this Schedule 13E-3 to Items numbered 1001 through
1016 are references to Items contained in Regulation M-A under the Exchange
Act that are required to be disclosed in a Schedule 13E-3. The missing items
are not required to be disclosed in this Schedule.
The information contained in this Schedule 13E-3 concerning Kaanapali
Land was supplied by Kaanapali Land and none of the other filing persons takes
responsibility for the accuracy of such information. Similarly, the
information contained in this Schedule 13E-3 concerning each filing person
other than Kaanapali Land was supplied by each such filing person and no other
filing person, including Kaanapali Land, takes responsibility for the accuracy
of any information not supplied by such filing person.
In addition to historical information, this Schedule 13E-3 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. These risks, uncertainties and other factors
are identified in more detail below, as well as in Kaanapali Land's
filings with the Securities and Exchange Commission, including Kaanapali
Land's most recent Annual Report on Form 10-K for the year ended
December 31, 2006, as amended, which is attached hereto as Annex B.
No person has been authorized to give any information or to make any
representation on behalf of Kaanapali Land or any of its affiliates that
is not contained in this Schedule 13E-3, the exhibits hereto or any
documents incorporated herein by reference or in any subsequent
amendments thereof filed with the SEC, or in any related written
materials later provided to holders of Class A Shares in connection with
the processing of payments therefor, and, if given or made, such
information or representation must no be relied upon as having been
authorized or accurate.
HOLDERS OF CLASS A SHARES OF KAANAPALI LAND WILL BE ENTITLED TO RECEIVE CASH
FOR SUCH CLASS A SHARES UPON CONSUMMATION OF THE MERGER DESCRIBED HEREIN. IN
ORDER TO RECEIVE SUCH CASH, REGISTERED HOLDERS MUST SUBMIT AN EXECUTED
TRANSMITTAL LETTER AND FORM W-9 WHICH WILL BE DISTRIBUTED TO HOLDERS OF CLASS
A SHARES FOLLOWING THE MERGER. HOLDERS WHO HOLD THEIR CLASS A SHARES IN
"STREET NAME" (THAT IS THROUGH A BROKER OR OTHER NOMINEE) WILL RECEIVE CASH
FOR SUCH SHARES FROM THEIR NOMINEE.
ITEM 1. SUMMARY TERM SHEET.
Item 1001
For a summary of the terms of the Merger and the impact on the holders
of Class A Shares, please see the letter accompanying this Schedule 13E-3
distributed to holders of Class A Shares.
ITEM 2. SUBJECT COMPANY INFORMATION.
Item 1002
(a) NAME AND ADDRESS. The principal executive offices of Kaanapali
Land, LLC are located at 900 North Michigan Avenue, Suite 1400, Chicago,
Illinois 60611 and its telephone number is (312) 915-1987.
(b) SECURITIES. Kaanapali Land is a Delaware limited liability company
and has issued two classes of membership interests that are denominated as
"Shares". As of April 9, 2007, there were 161,100.17 Class A Shares of
Kaanapali Land issued and outstanding. These are the securities that are the
subject of this filing. Kaanapali Land also has 1,631,513.49 issued and
outstanding Class B Shares.
(c) TRADING MARKET AND PRICE. There is no established trading market
for the Class A Shares. A small secondary market for the Class A Shares has
developed, without Company participation, on the Other - OTC Securities market
operated by The NASDAQ Stock Market, Inc. ("NASDAQ"). This market is
essentially unregulated and is not supported by market makers or any
institutionalized quotation system with centrally collected bids and offers. A
summary of the monthly high and low bid prices and the trading volume in Class
A Shares since January 1, 2005, based solely upon information obtained from
NASDAQ's web site, is attached hereto as Annex C.
(d) DIVIDENDS. No distributions have been paid to holders of Class A
Shares during the past two years.
(e) PRIOR PUBLIC OFFERINGS. Kaanapali Land has not made any offer of
Class A Shares during the past three years.
(f) PRIOR STOCK PURCHASES. None of the filing persons (including the
individuals identified on Schedule I to this Schedule 13E-3) have purchased
any Class A Shares during the past two years.
ITEM 3. IDENTITY AND BACKGROUND OF FILING PERSONS.
Item 1003
(a) NAME AND ADDRESS. The names of the filing persons are (i)
Kaanapali Land, LLC (the subject company), whose address is Suite 1400, 900
North Michigan Avenue, Chicago, Illinois 60611, and whose telephone number is
(312) 915-1987; (ii) Pacific Trail Holdings, LLC (the Manager and controlling
member of Kaanapali Land), whose address is Suite 1400, 900 North Michigan
Avenue, Chicago, Illinois 60611, and whose telephone number is (312) 915-1987;
(iii) Pacific Trail Holdings, Inc. (the managing member of Pacific Trail),
whose address is Suite 1400, 900 North Michigan Avenue, Chicago, Illinois
60611, and whose telephone number is (312) 915-1987; and (iv) KLLLC Mergerco,
LLC (a wholly owned subsidiary of Pacific Trail formed in connection with the
transaction discussed herein), whose address is Suite 1400, 900 North Michigan
Avenue, Chicago, Illinois 60611, and whose telephone number is (312) 915-1987.
(b) BUSINESS AND BACKGROUND OF ENTITIES.
Kaanapali Land operates in three business segments - Agriculture,
Property and Golf. The Agriculture segment grows seed corn and soybeans under
contract and leases or provides harvesting rights to a third party on certain
lands currently cultivated in or used for the processing of coffee, while
maintaining additional coffee acreage for possible future use. 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 Agriculture, Property and Golf
segments operate exclusively in the State of Hawaii.
Pacific Trail is a holding company whose sole material asset is
its controlling membership interest in Kaanapali Land. Pacific Trail also acts
as the Manager of Kaanapali Land pursuant to the terms of the Kaanapali Land
Amended and Restated Limited Liability Company Agreement (the "Operating
Agreement"). It conducts no other business.
PTHI was formed for the purpose of being the sole managing member
of Pacific Trail. It holds no material assets other than its membership
interest in Pacific Trail and conducts no business other than acting in its
capacity as the managing member of Pacific Trail.
Mergerco was formed on February 16, 2007, for the sole purpose of
effecting the Merger described in this Schedule 13E-3. It has no material
assets.
None of Kaanapali Land, Pacific Trail, PTHI, Mergerco or the
individuals listed on Schedule I have, during the past five years, been
convicted in a criminal proceeding or been a party to any judicial or
administrative proceedings that resulted in a judgment, decree or final order
enjoining such person from future violations of, or prohibiting activities
subject to, federal or state securities laws, or a finding of any violation of
federal or state securities laws.
(c) BUSINESS AND BACKGROUND OF NATURAL PERSONS.
The name, citizenship, principal business address, business phone
number, principal occupation or employment and five year employment history
for each of the executive officers of Kaanapali Land, Pacific Trail and
Mergerco and the executive officers and director of PTHI, and certain other
information is set forth on Schedule 1 hereto.
ITEM 4. TERMS OF THE TRANSACTION.
Item 1004
(a) MATERIAL TERMS.
(1) Tender Offers. The Merger does not involve a tender offer
for the Class A Shares or any other security of Kaanapali
Land.
(2) Merger and similar transactions. The material terms of the
merger transaction are described elsewhere in this Schedule
13E-3. For a brief description of the transaction, the
consideration offered to the holders of Class A Shares, the
reasons for engaging in the transaction, and the federal
income tax consequences, you should read Item 7 of this
Schedule 13E-3 titled "Purposes, Alternatives, Reasons and
Effects."
(c) DIFFERENT TERMS. All holders of Class A Shares shall be treated
in the same manner in this transaction and will receive cash for their Class A
Shares. Holders of Class B Shares will remain as owners of Kaanapali Land and
their membership interests in Kaanapali Land after the Merger will be re-
designated as the single class of equity interests of Kaanapali Land on a
prorata basis to their Class B Shares immediately prior to the Merger.
(d) APPRAISAL RIGHTS. Holders of Class A Shares are not entitled to
any appraisal rights in connection with the Merger.
(e) PROVISIONS FOR UNAFFILIATED SECURITY HOLDERS. No provision is
being made by any filing person in connection with the Merger to grant
unaffiliated security holders access to the files of Kaanapali Land (or any
other filing person) or to obtain counsel or appraisal services at the expense
of any filing person.
(f) ELIGIBILITY FOR LISTING OR TRADING. No securities of any filing
person are being offered as consideration in the Merger.
ITEM 5. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS.
Item 1005
(a) TRANSACTIONS. Except as set forth below, no transactions have
occurred during either of the past two years between Kaanapali Land or any of
its subsidiaries and any other filing person (including the individuals
identified on Schedule I to this Schedule 13E-3) where the aggregate value of
the transactions is more than one percent of Kaanapali Land's consolidated
revenues in such year.
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
affiliated 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, 2006 and 2005 was
approximately $74 thousand and $13 thousand, respectively, all of which was
paid as of December 31, 2006.
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, 2006.
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 or its affiliates during 2005 and 2006. The total costs for the years
ended December 31, 2006 and 2005 was approximately $2.6 million and $2.4
million, respectively, of which approximately $856 thousand was unpaid as of
December 31, 2006.
(b) SIGNIFICANT CORPORATE EVENTS. During the past two years, there
have been no negotiations, transactions or material contacts between Kaanapali
Land or its affiliates and any filing person (including the individuals
identified on Schedule I) concerning any merger, consolidation, acquisition,
tender offer of securities for Kaanapali Land or sale or transfer or a
material amount of assets of Kaanapali Land other than the Merger contemplated
hereby.
(c) NEGOTIATIONS OR CONTRACTS. Other than as described in paragraph
(b) of this Item 5, there have been no negotiations, or material contracts
concerning the matters described in paragraph (b) of this Item 5 during the
past two years between affiliates of Kaanapali Land or between Kaanapali Land
or any of its affiliates and any person not affiliated with Kaanapali Land who
would have a direct interest in such matters.
(e) AGREEMENTS INVOLVING THE SUBJECT COMPANY'S SECURITIES. Except
with respect to the Operating Agreement of Kaanapali Land or as otherwise
described herein, there are no agreements, arrangements or understandings
between any filing person (including the individuals identified on Schedule I
to this Schedule 13E-3) and any other person with respect to the Class A
Shares.
ITEM 6. PURPOSES OF THE TRANSACTION AND PLANS OR PROPOSALS.
Item 1006
(b) USE OF SECURITIES ACQUIRED. The Class A Shares of the Company
will be retired in connection with the Merger. The Operating Agreement of the
Company will be restated by the remaining holders of Class B Shares to, among
other things, provide for a single class of membership interest in Kaanapali
Land, and each holder of Class B Shares will have their Class B Shares
redenominated as such a single-class membership interest in Kaanapali Land
after the Merger in proportion to the Class B Shares so held.
(c) PLANS.
(1) Other than the Merger described herein, there are no current
plans, proposals or negotiations that relate to or would
result in any extraordinary transaction, such as a merger,
reorganization or liquidation, involving Kaanapali Land or
any of its subsidiaries. The Company intends to conduct its
business and operations after the consummation of the Merger
in substantially the same manner as they are currently being
conducted. The Company, however, reserves the right to
engage in transactions in the ordinary course of business to
restructure the Company's businesses, merge or consolidate
subsidiaries, dissolve inactive subsidiaries or form new
subsidiaries as deemed necessary or desirable for the
ongoing business of the Company.
(2) There are no current plans, proposals or negotiations that
relate to or would result in any purchase, sale or transfer
of a material amount of assets of the Company. However, a
subsidiary of Kaanapali Land is currently offering
subdivided agricultural lots for sale to the general public
in a portion of its lands that may, over time, in the
aggregate, result in a material sale of assets. While the
Company, in the ordinary course of business, has recently
been engaged in preliminary discussions with third-parties
for the joint development and/or leasing of certain of the
properties owned by subsidiaries of the Company, these
discussions have not yet resulted in any specific written
offers and are at this point considered speculative. In
addition, the Company from time to time receives oral or
written offers for specific land assets. At this time, any
such offers that the Company may now regard as open would
either be immaterial to the Company or are at terms
significantly below what the Company is willing to consider.
(3) There are no current plans, proposals or negotiations that
relate to or would result in any material change in the
present dividend rate or policy, or indebtedness or
capitalization of Kaanapali Land.
(4) Kaanapali Land has no board of directors and no employment
contracts with its executive officers. There are no current
plans, proposals or negotiations that relate to or would
result in any change of management of Kaanapali Land.
(5) There are no current plans, proposals or negotiations that
relate to or would result in any other material change in
the Company's corporate structure or business. However, the
Company reserves the right to consider offers that may be
made by third parties for the Company or its significant
assets, such as those described in Item (2) above.
(6) No class of equity securities of Kaanapali Land is listed on
a national securities exchange.
(7) As a result of the Merger, Kaanapali Land will terminate its
reporting obligations with respect to the Class A Shares
under the Exchange Act.
(8) The Merger will cause Kaanapali Land to have fewer than 300
equity holders and no longer be a publicly reporting company
under the Exchange Act, and thus Kaanapali Land will no
longer have the obligation to file reports under Section
15(d) of the Exchange Act, and does not intend to do so.
(9) There are no current plans, proposals or negotiations for
the acquisition by any person of additional securities in
Kaanapali Land, or, except as provided in the Merger, the
disposition of securities of Kaanapali Land.
(10) Except as described in paragraph (b) of this Item 6 above,
there are no current plans, proposals or negotiations for
any changes in the Operating Agreement of Kaanapali Land,
or, except as contemplated by the Merger, other actions that
could impede the acquisition of control of Kaanapali Land.
ITEM 7. PURPOSES, ALTERNATIVES, REASONS AND EFFECTS.
Item 1013
(a) PURPOSES. The primary purpose of the Rule 13e-3 Transaction is
to reduce the number of holders of shares of Kaanapali Land below 300 and
thereby avoid the future expenditure of company funds and management time on
the preparation and issuance of audited financial statements, various reports
required under the Exchange Act and otherwise applicable to publicly reporting
companies. The Class A Shares represent less than 9% of its outstanding equity
interests in Kaanapali Land but comprise approximately 700 registered holders.
In addition, while the Company does not have access to specific information in
this regard, the Company has reason to believe, based upon historical
information, there are more than 10,000 beneficial owners who hold their
shares in street name through brokerage firms. Nevertheless, Kaanapali Land's
annual expenditures for auditing, financial reporting, report preparation and
dissemination, transfer agent fees and costs and related legal fees were
approximately $600,000 in 2006. The reporting requirements have substantially
increased for public companies since the passage of the Sarbanes-Oxley Act of
2002, and the Company's expenses are expected to increase substantially if and
when Kaanapali Land becomes subject to the internal control reporting
requirements mandated by Section 404 of the Sarbanes-Oxley Act and the rules
and regulations of the Securities and Exchange Commission and the Public
Company Accounting Oversight Board promulgated thereunder (currently scheduled
to be applicable to Kaanapali Land for the year ended December 31, 2007).
Continuing to incur these expenditures (or the increased costs that these new
rules and regulations will entail) is of no benefit to the Company or the
approximately 91% of the shareholders represented by the Class B Shares, who
are indirectly financing 91% of the cost thereof for the approximately 9%
minority holders of the Class A Shares. Because the assets of the Company
consist primarily of undeveloped land, a substantial portion of which is
expected to obtain entitlements and be developed and sold over a long time
horizon, with no expected distributions to investors in the near term, these
costs are expected to continue unabated for numerous years until the Company
could eventually realize on its investments and liquidate, and would
constitute a continuing drain on the profitability and liquidity of the
Company, especially considering its relatively modest current asset base in
comparison to the magnitude of these costs.
Another consideration for the Merger is to provide the Class A
Shareholders with cash consideration that constitutes fair value for their
Class A Shares. In recent years, several professional small lot tender offer
firms have initiated tender offers seeking to acquire Class A Shares. Not
only do these tender offers generally involve offers for only a limited number
of Class A Shares over a limited time period, but such offers are made without
any meaningful disclosures and are made at a small fraction of the value of
the Class A Shares. The professional purchasers then resell the Class A
Shares into the secondary market at many times the original purchase price.
For example, Kaanapali Land believes, based solely upon copies of tender offer
materials that it received, the NASDAQ trading data and reports from its
transfer agent, that one purchaser obtained tenders of at least 3,600 Class A
Shares in 2006 at a tender price of $1.00 per share, and that such purchaser
was successful in reselling most if not all of those shares within a few
months of such purchase. During the time of such sales, the minimum ask price
reported by NASDAQ was $25 per share. Kaanapali Land is required to incur
significant cost and management time in examining and taking a position on
each such tender offer when it occurs and further believes that it is not in
the best interest of Kaanapali Land or the holders of Class A Shares to
perpetuate a situation where such holders may feel that selling for less than
value may be the only alternative for disposing a minor illiquid investment.
(b) ALTERNATIVES. The management of Kaanapali Land discussed
possible alternatives to the Merger, with the goal of avoiding future public
reporting requirements, improving liquidity for the Company and/or providing
liquidity to the members. Management considered initiating a tender offer for
the Class A Shares but there would be no assurance that sufficient tenders
could be received to allow Kaanapali Land to terminate its reporting
requirements. As a result, Kaanapali Land may have incurred significant costs
and nevertheless found itself implementing a merger in order to achieve its
goals, in effect incurring many of the costs attendant to a going private
transaction twice. Management also considered merging into a public
development company or finding a buyer for the entire business. However,
management concluded either alternative was not realistic at any reasonable
valuation given the current status of the Company's development efforts and
liabilities, contingent or otherwise, and given the small size of the Company
and its modest asset base. In addition, management believed that the
existence of a small, widely-held class of membership would be a negative
consideration to any such buyer in the future, for many of the same reasons
expressed herein. Also discussed was the alternative of continuing to operate
as a public reporting company, which was dismissed because it would not
achieve the purposes described above. In accordance with the Operating
Agreement, the Manager has determined that the Merger and the transactions
contemplated thereby are on terms that are no less favorable to the Company
than those that could be obtained from any unaffiliated third party for a
similar transaction.
(c) REASONS. As a consequence of the Plan in the Reorganization
Case becoming effective, Kaanapali Land issued two classes of membership
interests at that time, which were designated as Class A Shares and Class B
Shares. Class A Shares, which comprise approximately 9% of the outstanding
membership interests of Kaanapali Land, are the subject securities in this
transaction, were issued to certain non-affiliated holders who had claims
against the Debtors, primarily former note holders, but also certain unsecured
creditors. Class B Shares, comprising approximately 91% of the outstanding
membership interests of Kaanapali Land, were issued to various entities and
individuals who were affiliated with the Company or were present or former
officers, directors or employees of such affiliates (or members of their
families). The Class B Shares were issued primarily on account of substantial
senior indebtedness held by these entities or affiliates that had priority
over the notes held by the holders of Class A Shares, or on account of
significant liquidity contributed to the Company by affiliates through merger
at the time of the consummation of the Plan.
While the Reorganization Case served to dramatically improve the
solvency and liquidity of the Company in the short term, it did little to
improve the underlying facts surrounding the Company's ongoing business
operations and development efforts. In the period since that time, the Company
has, on the one hand, engaged in significant overhead reduction efforts on
Oahu and Kauai, and, on the other hand, significantly increased its
expenditures for the development of its West Maui lands, including hiring new
personnel for the Maui development office. While the Company has completed
several bulk sales of land to developers in the past few years that improved
the Company's cash position, most future revenues are expected to be derived
from more direct development efforts by the Company to maximize the amounts
that can be achieved from the eventual sale of the West Maui land, including
significant work to quiet title to land and obtain government entitlements in
order that development could proceed. These efforts have proved very cash
intensive and have taken longer to accomplish than originally contemplated.
In addition, the softening of real estate markets in Hawaii and elsewhere
beginning in late 2005 made it evident that revenue for the developments that
were entitled would be realized at a slower pace than originally expected.
The competitive environment for non-resort golf courses on Oahu has also
resulted in weaker results than anticipated for the Waikele Golf Course, even
after the completion of a significant renovation of the course and clubhouse
in 2006. Finally, the Reorganization Case did not eliminate liabilities or
claims for the entities that were not Debtors, or for environmental issues
that related to lands that were still owned or operated by the Company. Thus,
Kaanapali Land and various of its subsidiaries continue to defend against
various claims at significant ongoing cost to the Company.
Due primarily to the foregoing, it became clear that distributions to
the members of Kaanapali Land were unlikely to be made for a number of years,
if ever. The fact that additional significant cash was being spent on an
annual basis on public reporting functions, and also that the existence of a
widely-held minority interest was constraining the options that the Company
had to move its businesses forward, has led Kaanapali Land to begin to
evaluate whether it would make sense to pursue a "going private" transaction
to solve these issues and provide an exit for holders of Class A Shares at a
fair value. As detailed in subsection (b) above, while Kaanapali Land
considered various alternatives in this regard that might have included third
parties, it was determined that the pursuit of any third-party transactions at
this time would be unrealistic given the Company's current financial condition
and business prospects. Therefore, in light of these considerations, Kaanapali
Land, through its Manager, resolved by unanimous written consent of such
Manager, dated April 9, 2007, as well as by separate consent of the directors
of the Manager's managing member, dated April 9, 2007, to authorize the
formation of a subsidiary of such Manager and the merger of such subsidiary
into Kaanapali Land, as well as the preparation of this Schedule 13E-3 and all
transactions and documentation relating thereto. For a further discussion of
the purposes, alternatives, reasons and effects of the Merger, see Item 7
below.
As stated above, Kaanapali Land continues to incur significant expense
relative to the public reporting obligations attendant to the Class A Shares.
Completing the Merger at this time will result in cost savings in this regard
relative to audits for years after 2006. As more specifically described under
Item 7(d) below, there continues to be significant risk and uncertainty
concerning the ability of the Company to realize on its investments in the
short or intermediate term, and in the ultimate net proceeds that the Company
will be able to realize when such investments are ultimately sold.
Furthermore, uncertainties concerning the amounts that will need to be
expended, both to resolve existing and prospective liabilities and to maximize
the ultimate revenues, are also significant and ongoing. These costs could be
materially higher than currently anticipated and thus erode the value of the
Company significantly relative to the amount expressed herein. Consequently,
Kaanapali Land has determined that there is no benefit to Kaanapali Land or
its members to delay the Merger. The structure of the transaction itself is
quite simple and is designed to (i) permit the Subject Company to "go private"
and be the surviving company in the Merger and continue in business
thereafter, (ii) give the holders of Class A Shares cash for their Class A
Shares, which Class A Shares will then be retired, and (iii) reclassify the
Class B Shares as the sole equity interests in Kaanapali Land.
(d) EFFECTS. Pacific Trail, currently the majority shareholder of
Kaanapali Land, has formed Mergerco as a wholly-owned subsidiary with minimum
capitalization. Mergerco will be merged into Kaanapali Land, with Kaanapali
Land as the surviving entity. As a consequence of the Merger, and as further
stated in the Merger Agreement, each holder of Class A Shares will receive
cash in the amount of $43.25 per share for their Class A Shares. The Class B
Shares will be reclassified as the sole membership interests in Kaanapali Land
and the current holders of Class B Shares will hold such membership interests
in direct proportion to the number of their respective Class B Shares therein.
The benefits and detriments to Kaanapali Land, its affiliates and the
unaffiliated security holders depend primarily on (1) the ability of the
Company to successfully operate its businesses and realize a profit on the
sale of its assets, (2) the ability of the Company to manage successfully its
actual and contingent liabilities and (3) the cash price to be paid for the
Class A Shares by Kaanapali Land at the time of the Merger. While the cash
price is fixed and, as described herein, Kaanapali Land and its Manager
reasonably believe such price is fair to the holders of Class A Shares,
significant risks, contingencies and uncertainties will combine in the future
to determine whether the remaining holders of membership interests in
Kaanapali Land will ultimately realize more or less per Share, as adjusted for
the time value of money, than is being paid to the holders of the Class A
Shares in connection with the Merger. Such risks, contingencies and
uncertainties are described in detail in this Item 7(d) and in Item 8(b)
below.
(i) PERCEIVED BENEFITS AND DETRIMENTS TO MERGER
POTENTIAL DETRIMENTS TO HOLDERS OF CLASS A SHARES AND/OR
BENEFITS TO KAANAPALI LAND AND AFFILIATES
. As a consequence of the Merger, holders of Class A
Shares will cease to own any interest in Kaanapali
Land and therefore such holders will have no
opportunity to participate in any future increase in
the value of the Company and its assets or any
distributions in cash or other assets that Kaanapali
Land may make in the future. However, the detriment
to the holders of Class A Shares depends in large
measure on how the Company performs against other
alternative investments that are available to such
holders with the cash received in the Merger, which
may afford such holders with a better opportunity for
return or lower risk on their investment.
. As a consequence of the Merger and the retirement of
the Class A Shares, which represent approximately
8.987% of all equity interests in Kaanapali Land, each
holder of Class B Shares will thereafter hold an
interest in Kaanapali Land that is approximately 9.87%
larger than such holder's current percentage interest.
Offsetting this increase is the fact that the asset
base of the Company will be reduced by the amount of
cash being paid for the Class A Shares plus the
expenses of this transaction.
. After the consummation of the Merger, Kaanapali Land
will have fewer than 300 holders of membership
interests, it will terminate its reporting obligations
with the Securities and Exchange Commission and will
no longer incur the significant costs and related
overhead costs associated with the obligation to file
periodic reports with the SEC.
. After consummation of the Merger, Kaanapali Land will
be substantially wholly-owned by affiliated persons
and entities and will not be subject to any of the
restrictions and covenants contained in the Operating
Agreement that currently protect holders of Class A
Shares. In addition, Kaanapali Land may no longer have
to take into account any possible conflicts of
interest in its future business dealings with any
duties it might have otherwise owed to holders of
Class A Shares.
. The cash payment per Class A Share will be $43.25. To
the extent that the Company is successful in managing
its liabilities and executing its business plan so
that the net asset value exceeds $77,530,541, as
adjusted for the time value of money, the holders of
Class B Shares will not have to share that increased
value with the holders of Class A Shares, to the
detriment of the holders of Class A Shares and the
benefit of the holders of Class B Shares.
. Additional potential benefits to the Company and the
affiliated holders of Class B Shares are attributable
to the factors set forth in Items 7(a) and 7(c) above.
As these relate to the ongoing operations of the
Company after the Merger and are not generally subject
to execution without the Merger, they do not
constitute benefits or detriments to the holders of
Class A Shares, who will no longer have an interest in
the Company after the Merger.
POTENTIAL BENEFITS TO HOLDERS OF CLASS A SHARES AND/OR
DETRIMENTS TO KAANAPALI LAND AND AFFILIATES
. Each holder of Class A Shares will receive an
immediate cash payment therefor at a fair value for an
interest with limited liquidity and a thin trading
market. The amount so received may then be redeployed
to other investments and/or otherwise utilized by such
holders as they may determine in their sole
discretion. There is no assurance, absent the Merger,
how long each holder of Class A Shares would have to
wait in order to obtain value for such interests, nor
is there any assurance as to the amount that each
holder may ultimately receive, which could be
considerably less, or zero.
. Holders of Class A Shares will no longer be subject to
mini-tender offers by third parties that do not
provide substantial information and are often at a
price that is at a substantial discount to the
informal trading price for the Class A Shares and at a
substantial discount to the Merger Consideration.
. In the event that the Company is not able to increase
its net asset value as described above or finds that
the risk factors mentioned herein have combined to
erode the value of the Company below the amount of
cash per share to be paid to the holders of Class A
Shares, then such failure will fall entirely on the
holders of Class B Shares to their detriment, and to
the benefit of the holders of Class A Shares who were
able to receive cash in the Merger and avoid such
losses.
. A portion of the liquidity of the Company will be
spent by Kaanapali Land on the expenses relating to
the Merger, including those expenses estimated in Item
10(c) below and any other expenses incurred in the
planning for and consummation of the Merger and
related transactions, plus the price to be paid in
exchange for the Class A Shares, which is currently
estimated to total approximately $7,000,000. This is
cash that could otherwise be used for the Company's
development efforts or the satisfaction of its other
obligations and thus will increase the liquidity risk
of Kaanapali Land to the possible detriment of
Kaanapali Land and its affiliates. The holders of
Class A Shares will not be subject to this increased
risk because they have received a cash payment for
their interests and will no longer have any investment
in Kaanapali Land.
(ii) RISK FACTORS THAT WEIGH UPON THE POTENTIAL BENEFITS AND
DETRIMENTS TO KAANAPALI LAND AND/OR HOLDERS OF CLASS A
SHARES
(A) FACTORS ATTRIBUTABLE TO THE MERGER
MERGER CONSIDERATION MAY BE LESS THAN FAIR VALUE OF
THE CLASS A SHARES
The objectives and motivation of Kaanapali Land and
its Manager in establishing the merger consideration may
conflict with the interests of the holders of the Class A
Shares in receiving the highest amount for such shares. The
future value of Kaanapali Land's properties and assets is
uncertain, and the merger consideration could be
significantly less than the net proceeds a holder of Class A
Shares might have realized from continuing to hold the
Class A Shares, and a holder of Class A Shares, as a result
of the Merger, will lose the opportunity to participate in
any future benefits from ownership of the Class A Shares.
CONFLICTS OF INTEREST
Kaanapali Land is controlled by Pacific Trail, who
will remain as the principal equity holder of Kaanapali Land
after the consummation of the Merger. Pacific Trail is in
turn controlled by PTHI. The officers and directors of PTHI
owe fiduciary duties to PTHI and PTHI owes a fiduciary duty
to the Pacific Trail and its members. Pacific Trail, as
Manager of Kaanapali Land, may in addition owe certain
duties (fiduciary or otherwise, pursuant to the Delaware
Limited Liability Company Act and other relevant laws, as
well as pursuant to the Operating Agreement) to Kaanapali
Land. As such, the duties owed to Kaanapali Land may
conflict with other duties owed to other direct or indirect
stakeholders in Kaanapali Land. The Operating Agreement
provides explicitly that Pacific Trail, as Manager, is under
no obligation to consider the separate interests of the
Members (including, without limitation, tax consequences to
the Members) in deciding whether to cause Kaanapali Land to
take (or decline to take) any acts that Pacific Trail has
undertaken in good faith on behalf of Kaanapali Land.
Although Kaanapali Land has employed KPMG Corporate Finance,
LLC ("KPMGCF") to provide Pacific Trail with KPMGCF's view
regarding the aggregate value of the outstanding membership
interests of Kaanapali Land, expressed as a range, and
although all of the filing persons herein, as affiliates of
Kaanapali Land for purposes of Rule 13e-3 of the Exchange
Act, have considered the fairness of the Merger to the
holders of Class A Shares as required by such Rule 13e-3,
these conflicting duties may prevent Pacific Trail, PTHI and
Kaanapali Land from evaluating the value of the Class A
Shares objectively and may cause them to make decisions or
take actions (or refrain from taking actions) in connection
with the Merger that are not in the best interest of the
holders of the Class A Shares. NO THIRD PARTY OR INDEPENDENT
COMMITTEE OR REPRESENTATIVE HAS BEEN APPOINTED OR RETAINED
TO PROVIDE A FAIRNESS OPINION OR NEGOTIATE THE TERMS OF THE
MERGER WITH KAANAPALI LAND ON BEHALF OF THE HOLDERS OF
CLASS A SHARES. KPMGCF'S VALUATION REPORT WAS DIRECTED TO
PACIFIC TRAIL, AS MANAGER OF KAANAPALI LAND, AND ONLY
ADDRESSED THE AGGREGATE VALUE OF KAANAPALI LAND'S
OUTSTANDING MEMBERSHIP INTERESTS AS OF DECEMBER 31, 2006.
THE SUMMARY OF KPMGCF'S VALUATION REPORT IN THIS SCHEDULE
13E-3 IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF THE WRITTEN VALUATION REPORT WHICH IS INCLUDED AS
ANNEX D TO THIS SCHEDULE 13E-3 AND SETS FORTH THE PROCEDURES
FOLLOWED, ASSUMPTIONS MADE, QUALIFICATIONS AND LIMITATIONS
ON THE REVIEW UNDERTAKEN AND OTHER MATTERS CONSIDERED BY
KPMGCF IN PREPARING ITS VALUATION REPORT. NEITHER KPMGCF'S
VALUATION REPORT NOR THE SUMMARY OF ITS VALUATION REPORT SET
FORTH IN THIS SCHEDULE 13E-3 ARE INTENDED TO BE, AND DO NOT
CONSTITUTE, ADVICE OR A RECOMMENDATION TO HOLDERS OF CLASS A
SHARES AS TO HOW SUCH HOLDERS SHOULD ACT ON ANY MATTER OR
WITH RESPECT TO ANY TRANSACTION OR INVESTMENT DECISION.
In order to promote efficiency and save costs, each of
Kaanapali Land, Pacific Trail, PTHI and Mergerco, to the
extent required, have been and will be represented by the
same legal counsel with respect to the Merger, which counsel
also represent some or all of these entities on various
other matters. Holders of Class A Shares will not be
represented by counsel in connection with the Merger and no
provision has been made by the Company for such
representation.
As the majority holder of Class B Shares, Pacific
Trail will, together with certain affiliates that also hold
Class B Shares, benefit from the future cash flow and
appreciation in value of the Company's assets after the
Merger, if any, in a greater proportion thereafter than
prior thereto as a consequence of the retirement of the
Class A Shares.
As a result of the foregoing considerations, despite
Kaanapali Land's assessment set forth herein as to the
fairness of the Merger, the Manager of the Company may be
motivated to maximize the returns to the holders of the
Class B Shares by paying a lower price to the holders of
Class A Shares. Although Kaanapali Land cannot predict with
any assurance the future value of its membership interests
or underlying net assets, the price to be paid to the
holders of Class A Shares may be significantly less than the
net proceeds per Class A Share that such holders could
realize from a liquidation of the Company following the sale
of all of its assets.
CONSUMMATION OF THE MERGER IS SUBJECT TO CERTAIN
CONDITIONS
The Merger Agreement sets forth certain conditions to
the consummation of the Merger (and therefore to the payment
of the exchange price for the Class A Shares as described
herein). Kaanapali Land is not obligated to consummate the
Merger until all such conditions are satisfied, some of
which are beyond the control of Kaanapali Land and its
affiliates. Among such conditions are (i) that there is no
pending or threatened litigation or governmental action or
proceeding against Kaanapali Land, its affiliates or any
related persons, challenging the Merger that could
reasonably be expected to have a material adverse effect on
Kaanapali Land or its affiliates or related persons or that
would materially increase the cost of consummating the
Merger (including a material increase in the merger
consideration), (ii) no temporary restraining order,
preliminary or permanent injunction or other order or decree
issued by any court or governmental or quasi-governmental
agency that could reasonably be expected to have a material
adverse effect on Kaanapali Land or its affiliates, related
persons or otherwise could reasonably be expected to prevent
or materially delay the consummation of the Merger or that
would materially increase the cost of consummating the
Merger (including a material increase in the merger
consideration), and (iii) each of the parties to the Merger
Agreement shall have obtained all required or requested
governmental approvals and third party consents relative to
the consummation of the Merger unless such approvals or
consents, if withheld, would not, individually or in the
aggregate, reasonably be expected to have a material adverse
effect on the business, financial condition or results of
operations of any such party. Any of the foregoing
conditions may be waived by any such party at its sole and
absolute discretion. In addition, the parties to the Merger
Agreement shall have the right to terminate the Merger
Agreement and abandon the Merger at anytime prior to its
consummation, or restructure the Merger Agreement or assign
their rights thereunder to affiliates or third parties,
provided that any such action does not materially adversely
affect the interests of the holders of Class A Shares.
(B) FACTORS AFFECTING THE VALUE OF THE SECURITIES
LACK OF CASH DISTRIBUTIONS
Kaanapali Land has not made any cash distributions and
does not expect to make distributions so long as the Company
needs its cash reserves for its continuing development
efforts, as well as to fund its ongoing administrative costs
and defense costs (including any settlements that it may
fund) relating to any actual or threatened litigation or
other claims. It is expected, therefore, that cash
distributions will not be made until the Company is much
further along with its various development projects, has
worked through its material actual and contingent
liabilities (including but not limited to environmental and
personal injury claims) and has received revenues and
retained cash in excess of its prospective business needs,
which may not occur for many years, if ever. Moreover, in
the event that the Company is unsuccessful in its
development efforts, it is possible that the Company will
exhaust all of its cash reserves and be forced to sell
assets at distressed prices in order to continue in business
and satisfy existing obligations, with no cash remaining for
distribution even upon the liquidation of the Company. There
can be no assurance that Kaanapali Land will make
distributions to its members.
UNCERTAINTY OF THE TERM OF INVESTMENT
While the Company expects to eventually liquidate, it
is not obligated to do so and it is currently impossible to
predict when this will occur. It is likely that liquidation
will not occur for many years. Under the Operating
Agreement, Kaanapali Land may continue in existence in
perpetuity and shall not be dissolved until the first to
occur of the following events: (a) the affirmative vote or
consent of the holders of a majority of the outstanding
Common Shares to dissolve the Company; or (b) the entry of a
decree of judicial dissolution of the Company under Section
18-802 of the Delaware Limited Liability Act. Since a
majority of such shares is held by affiliates of Kaanapali
Land, the decision to dissolve and wind up the affairs of
the Company is essentially solely within their control.
There can be no assurance as to how long a member's
investment in the Company will need to be held to realize
any value thereon, nor as to the amount of value that will
ultimately be realized, if any.
LACK OF TRADING MARKET
Were the Merger not to occur and Kaanapali Land
continue to operate with the same shareholders, there could
be no assurance regarding the future development of a more
active trading market for the Class A Shares, the ability of
holders thereof to sell their Class A Shares or the price
for which such holders may be able to sell their Class A
Shares. Kaanapali Land is under no obligation to cause its
shares to be listed on any securities exchange or quoted for
trading on any automated quotation system and does not
intend to do so. While a market for the Class A Shares has
emerged on the secondary market, trading in such shares has
been thin and sporadic. Future trading prices of the Class A
Shares will depend on many factors, including factors beyond
the control of Kaanapali Land. Unless Kaanapali Land were
to issue additional shares over time to third parties, which
is unlikely under current circumstances, the expected market
capitalization and public float of the Class A Shares will
likely continue to be too limited for an adequate trading
market to develop. Furthermore, the liquidity of, and
trading market for, the Class A Shares may be adversely
affected by price declines and volatility in the market for
similar securities, as well as by any changes in the
Company's financial condition or results of operations.
NO MANAGEMENT RIGHTS
Under the Operating Agreement, management of Kaanapali
Land is vested in the Manager, Pacific Trail Holdings, LLC,
which also holds approximately 80% of the outstanding
membership interests. The Class A Shares represent less than
9% of the outstanding membership interests and possess very
modest voting rights. Even these modest voting rights are
of negligible importance, since the Manager and its
affiliates holding Class B Shares retain the power to vote
on over 91% of the outstanding membership interests. While
the Operating Agreement contains provisions that afford
certain monitoring and enforcement authority in an
independent third party known as the "Class A
Representative", that authority does not amount to any right
to manage the affairs of the Company or participate in its
decisions (other than as may relate to decisions concerning
obtaining significant financing from affiliates), and the
provisions relating to the Class A Representative are
scheduled to expire on November 13, 2007. Therefore, the
holders of Class A Shares have no effective right to manage
the Company's affairs or influence Company decisions.
(C) RISKS RELATING TO THE COMPANY AND ITS SUBSIDIARIES
RISKS RELATED TO ENTITLEMENT PROCESS
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 will 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 preparing the studies and
obtaining the requisite entitlements, as well as the cost of
complying with any conditions attached to the entitlements
by government agencies, 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.
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. There are an additional
approximately 235 acres in the Lahaina, Maui, area known as
Wainee, a portion of which may be developable. In addition,
the Company has recently completed the demolition and
removal of the former Pioneer Mill sugar mill structures
(except for certain minor storage facilities), thereby
freeing up approximately 19.5 acres of land that is zoned
for industrial use near the center of Lahaina, which may be
used for retail and/or industrial, residential or other
commercial development in the future. 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, residential units and some
commercial and recreational development sites, as well as
affordable housing. While the oceanfront resort properties
and a number of bulk parcels 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 affect
materially utilization of the land and the costs associated
with developing the land. In addition, a recent ordinance
enacted by Maui County that 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 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 the Maui lands.
At this time, the only lands in Maui that have
sufficient entitlements to commence development are those in
Phase I of the Kaanapali Coffee Farms development, as
described below. Otherwise, the Kaanapali 2020 Development
Plan is currently at a predevelopment stage. The plan is now
in the process of being finalized to the extent necessary to
commence the entitlements process. Approximately 990 acres
of land have been identified to contain residential units
along with commercial, retail and recreational assets. Over
the next few years the Company expects to seek the necessary
approvals to pursue its business strategy.
The current regulatory approval process for a
development project can take three to five 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 Plan 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. Recently, the
Company has 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. However, no agreement has
been reached with any agency to modify the terms of the
development agreement and it is currently unclear whether an
agreement will be reached, or on what terms.
The Wainee development land, which is south of the
mill site, is currently classified as agricultural and will
need to obtain land use and zoning reclassifications in
order to proceed with any development. 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 their
close proximity 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. In the meantime, 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,
one is currently on appeal and a small number of them have
survived summary judgment motions by the Company, which may
ultimately require trials at uncertain additional cost and
time to completion. There can be no assurance that these
actions will achieve an ultimate level of success that will
permit the Wainee development to go forward on an economic
basis.
Despite the hurdles mentioned above, the Company
believes 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.
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, tsunamis 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 has 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 during the past fifteen months, which has
negatively impacted the volume of transactions completed in
West Maui. At present the Company is unable to predict
whether current market conditions will materially impact
pricing for its properties, but such conditions have
negatively impacted the number of lots sold during the past
12 months. No assurance can be given, however, as to whether
current market conditions will again improve, or when, or as
to whether pricing for the Company's land assets will
ultimately soften.
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.
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 2006, the Company commenced the development of a
58-lot agricultural subdivision known as Kaanapali Coffee
Farms - Phase I, which comprises approximately 336 acres. In
connection with such development, the Company has committed
substantial resources to contracts for the construction of
roads, water lines and other infrastructure, and has
incurred significant costs in planning and pre-development
efforts. As of December 31, 2006, such commitments totaled
approximately $30 million, of which approximately $21
million had not yet been paid. In addition, the Company
continues to incur substantial overhead and marketing costs
in connection with the development, including, among other
things, the maintenance of the agricultural component of the
development, which consists of approximately 180 acres of
coffee trees, and the ditch, flume, reservoir and irrigation
system that supplies the development with irrigation water.
The lots have been registered federally with the US
Department of Housing and Urban Development and with the
states of Hawaii, California and Illinois. Sales commenced
in July 2006 but so far only 4 lots have been sold.
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,
wind and other natural perils can adversely impact
agricultural production on the Company's lands. 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. 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.The Company has
obtained bids for portions of the required remedial work and
expects to commence same during the second quarter of 2007.
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.
Bureau of Reclamation has inspected each reservoir and
identified certain minor damage. In addition, Company
personnel have inspected various portions of its Maui water
source and transmission assets to determine if any other
damage of significance has occurred, but the Company has so
far found no material damage. While the damage to the
smaller reservoir cited by the recent DLNR inspection will
not require any immediate action, it is unclear at this time
whether the DLNR will require any work on the larger
reservoir even though the damage is located in a portion of
the reservoir that is presently unused. There can be no
assurance that the expense of doing such required work will
not be material.
RISKS RELATED TO THE HAWAIIAN GOLF MARKET
A subsidiary of Kaanapali Land owns the Waikele Golf
Course on Oahu. The performance of golf courses in Hawaii
depends heavily on the strength of the tourism industry in
Hawaii. Thus, Kaanapali Land is subject to the risks
generally associated with operating tourism-related
businesses. These include adverse changes in national and
international economic conditions (including adverse changes
in exchange rates of foreign currencies for U.S. dollars)
and in national and international political situations that
constrain travel, tourism and investment in Hawaii. The
performance of golf courses in Hawaii is also affected by
competition from comparable courses in the surrounding
areas, which include a number of courses that have opened,
reopened or been significantly upgraded in recent years. In
addition, the Debtors are aware of an additional new golf
course that is currently being constructed to the west of
the Waikele Golf Course, as well as two other Oahu golf
courses that are currently in the planning phase, which may
or may not ultimately be built. There can be no assurance
that additional courses will not be developed that will
compete with the Waikele Golf Course.
In addition to market risks, Waikele Golf Course
operations are subject to operating risks such as adverse
weather conditions, including heavy prolonged rains and
hurricanes, employee-related issues such as labor shortages
and disruptions (including, but not limited to disruptions
of food and beverage service by the third-party restaurant
operator who leases space in the clubhouse from the
Company), blight or other diseases affecting grass or other
vegetation and costs of merchandise, equipment and supplies.
The Waikele Golf Course is not affiliated with an
existing resort, but is located in a high-density
residential area. The Waikele Golf Course has historically
had a significant amount of Japanese tourist play as well as
a high level of Hawaii resident play from the surrounding
residential areas. During the 1980's and into the mid
1990's, Asian visitors comprised as much as half of the
total rounds played at certain courses in Hawaii. With the
downturn in the Japanese economy, there has been a
significant drop in Asian visitors and this has had a
material effect on Hawaiian golf course rounds. The
mainland tourism market was very strong, particularly on the
neighboring islands, prior to the terrorist attacks of
September 11, but this had little direct impact on the
Waikele Golf Course. Since September 11, the Asian visitor
levels in Hawaii dropped precipitously and golf course
rounds have dropped as much as fifty percent at some Hawaii
golf courses. Asian tourist play is controlled by a
relatively small number of tour operators who include golf
as part of their tour packages. These operators are
extremely price sensitive, which limits the ability of golf
courses such as Waikele to increase greens fees. While Asian
tourist visitation to Hawaii has rebounded somewhat in the
past two years, it does not appear that this rebound has
given a significant boost to the number of golf rounds being
played on Oahu.
Since the initial reduction in the Japanese visitor
levels in the mid-1990's, many courses have attempted to
offset some of the loss from the tourism market by
attracting local Hawaiian resident play. The Waikele Golf
Course has been successful at increasing the Hawaii resident
rounds at the course; however, Hawaii residents receive a
significant discount on fees at most courses, known as
"Kamaiina rates", and Kamaiina rounds are therefore less
profitable than other rounds.
In order to reverse the downward trend in rounds
played at Waikele Golf Course, particularly by visiting
tourists from Asia and elsewhere, the Company embarked on a
$1.2 million renovation project in 2006, which resulted in
the golf course being closed for approximately five months
in 2006. This renovation included the reconstruction of all
greens and a number of tees, plus a modest renovation of the
golf course clubhouse.
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 leases 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 all the risks
relating to the cost of growing and maintaining the trees
and producing the crop (except for a minor portion of the
coffee land that is leased to a third party who maintains
the trees on such land), and a portion of the market risk
attendant to the sale of the crop as well. That is because
the harvesting and marketing of the crop has been contracted
to a third-party grower, who will pay the Company (or the
homeowners' association with respect to the coffee land
within Kaanapali Coffee Farms Phase I) only a modest fixed
amount for the privilege of taking the coffee beans, with a
more substantial payment due based on a percentage of
revenues obtained from the crop by such grower.
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 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. Thus, it is clear that Hawaii is
subject to higher risks than other portions of the Untied
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 from foreign countries will
disproportionately impact the Company in future years, both
positively and negatively, as market and visitation cycles
play out.
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, or 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.
The Company is currently engaged in, or is on notice
of, a number of environmental matters.
On or about February 23, 2001 Kekaha Sugar Co., Ltd.
("KSCo"), a company that was, prior to its dissolution, a
subsidiary of Kaanapali Land, received a letter from the
Hawaii Department of Health ("HDOH") assigning the former
KSCo 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. KSCo responded to the letter soon after it was
received. The United States Environmental Protection Agency
("EPA") later performed a visual inspection of the property
and indicated there will be some testing performed. HDOH has
performed some testing at the site and it is not known
whether such test results, if any, will require any further
response activities. However, as KSCo was substantially
without assets and dissolved, the ability of KSCo to perform
any requested actions is doubtful.
On or about February 23, 2001, The Lihue Plantation
Company, Limited, now known as LPC Corporation ("LPCo")
received a similar letter from the HDOH assigning the former
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 relative
to LPCo's former operations including the 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. HDOH further reserved the right to
modify its prioritization of the site should conditions
warrant. As noted above, the high priority assignment will
likely result in a high degree of oversight by the HDOH as
the issues raised are studied and addressed. LPCo is
substantially without assets and further pursuit of this
matter by HDOH could have a material adverse effect on the
financial condition of LPCo.
The purchaser of the Kekaha and Lihue Plantation Sugar
Mills properties in January 2005 assumed any obligations for
environmental matters concerning the property it purchased.
However, there can be no assurance that such purchaser will
have sufficient assets to satisfy a claim should any
substantial liabilities result.
Pioneer Mill engaged in a modest cleanup operation
arising out of the discovery of petroleum contamination
found at the Pioneer Mill site. The Pioneer Mill site was
assigned a high priority by the HDOH and the HDOH has shown
an interest in the environmental conditions relating to or
arising out of the former operations of Pioneer Mill. EPA
designated HDOH as the oversight agency for Pioneer Mill.
Pioneer Mill received a report on the results of
environmental testing conducted on the site by the EPA and
HDOH. However, Pioneer Mill's cleanup efforts to date have
satisfied HDOH and Pioneer Mill received a no further action
letter during the fourth quarter of 2004. Further routine
cleanup operations in connection with the demolition of the
former sugar mill buildings on the site were conducted with
respect to an underground storage tank discovered on the
site. Such work has been completed as of the date of this
Schedule 13E-3.
As a result of an administrative order issued to Oahu
Sugar Company, LLC ("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 was in the process of
responding 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, 11 U.S.C. Subsection 101-1330 on April 19,
2005, Case No. 05-15100. 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 and
it is not believed that any other affiliates have any
responsibility for the debts of Oahu Sugar.
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 deemed assigned to
Kaanapali Land by the holders of the public debt of KLC 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 $260,000 and additional
anticipated response costs of between approximately
$2,760,000 and $11,450,000. 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
has responded to these requests for information. By letter
dated February 7, 2007, on the basis 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, the EPA's letter has invited Kaanapali Land
to engage in settlement discussions with the EPA to attempt
to resolve Kaanapali Land's alleged liability. Kaanapali is
in the preliminary stages of evaluating the positions taken
by the EPA. While Kaanapali Land believes that it has
defenses to the EPA's position, Kaanapali Land has
nevertheless begun such settlement discussions with EPA to
determine if the matter can be resolved on reasonable terms.
Even if Kaanapali Land were found to be the successor to Old
Oahu, Kaanapali Land believes that its liabilities, if any,
should relate solely to a portion of the period of operation
of Old Oahu at the site. Moreover, Kaanapali Land believes
that any settlement should involve substantial participation
of the U.S. Navy, which has owned the site throughout the
entire relevant period, both as landlord under its various
leases with Oahu Sugar and Old Oahu and by operating the
site directly during a period when no lease was in force.
There can be no assurances that the matter can be resolved
on terms acceptable to Kaanapali Land or that this matter
will not ultimately have a material adverse effect on the
Company.
The Company cannot give assurances that it is aware of
all potential environmental liabilities that may exist
relating to its properties. To the extent that the Company
is able to predict the financial impact of its environmental
issues it has done so during its reporting and budgeting
processes. However, because such predictions are subject to
numerous risks and contingencies, there can be no assurance
that the amounts so used (nor the timing thereof) are
accurate, nor that the actual amounts when known will not be
materially different.
RISKS RELATED TO PRE-PLAN BUSINESS OPERATIONS AND
TAXES ARISING FROM AUDIT ADJUSTMENTS
Following the consummation of the Plan and the mergers
described therein, Kaanapali Land succeeded, among other
things, to the liabilities of Northbrook Corporation, a
Delaware corporation ("Northbrook"), which were left
unimpaired by the Plan. Northbrook conducted various other
businesses in the past and, while Kaanapali Land does not
believe that these liabilities would have a material adverse
effect on Kaanapali Land, there are no guarantees that there
will be no such effect.
Federal tax return examinations have been completed
for all years through 2002. Refunds aggregating
approximately $4.7 million for years through 2000 have been
received by Kaanapali Land for previous payments of taxes
and interest. No liability for Federal taxes was determined
for 2001 or 2002; however, in connection with the settlement
of those years reached in 2006, the Company agreed to adjust
certain tax attributes, including the tax basis of assets.
The effect in 2006 on the Company's consolidated balance
sheet was to increase deferred tax liabilities by
approximately $1.9 million. Income tax expense was also
recorded for the year ended December 31, 2006 due to the
finalization of the Company's 2005 tax return and a payment
made in regard to the settlement of a prior year state tax
matter of approximately $300 thousand. The statutes of
limitations with respect to the Company's tax returns for
2003 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 is
ultimately found to be liable could be material.
Kaanapali Land, as successor by merger to other
entities, and its wholly owned subsidiary, D/C Distribution,
LLC, an Illinois limited liability company ("D/C"),
successor by merger to D/C Distribution Corporation, a
California corporation, 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 in excess of 60 cases against D/C
that are pending on the U.S. mainland (primarily in
California) and are allegedly based on D/C's prior business
operations. 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. In the case of D/C, there can be no certainty that it
will be able to satisfy all of its liabilities for these
cases or future judgments, if any. There can be no
assurances that these cases (or any of them), if adjudicated
in a manner adverse to D/C, will not have a material adverse
effect on the financial condition of D/C. Kaanapali Land
does not believe that it has liability, directly or
indirectly, for D/C's obligations, other than for workers
compensation claims that Kaanapali agreed to assume in the
past. 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 has been 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 alleges that it
is an insurance company to whom D/C has tendered for defense
and indemnity various personal injury lawsuits allegedly
based on exposure to asbestos containing products. Plaintiff
alleges 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 seeks, 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 have been 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 is entitled to recoupment and reimbursement of
some or all of the amounts it has paid for defense and/or
indemnity; and that D/C has breached its obligation of
cooperation with plaintiff. D/C has filed an answer and an
amended cross-claim. D/C believes that it has meritorious
defenses and positions, and intends to vigorously defend.
Although Kaanapali Land has reserves for tax and other
potential liabilities, reflected in its financial
statements, which management believes to be adequate, it is
possible that Kaanapali Land could incur tax or other
liabilities which could materially exceed these reserve
amounts or which could have a material adverse effect on
Kaanapali Land.
LACK OF POSITIVE CASH FLOW FROM PRIMARY BUSINESS
The ability to generate any return on an investment in
Kaanapali Land will depend on Kaanapali Land being able to
execute its business plan. While the Company had cash and
cash equivalents of approximately $48 million as of
December 31, 2006, a substantial portion of the Company's
liquidity has already been committed to the Kaanapali Coffee
Farms development (including, among other things, as
restricted collateral for the Company's construction bond
obligations) or is projected to be utilized for general
overhead, pre-development and development costs relative to
the Company's other development efforts, costs of defense
and investigation relative to actual and threatened claims
against the Company, costs for rehabilitation of various
water assets controlled by the Company and other expenses.
As a result, the successful execution of this business plan
may require the sale of certain assets of the Company in
bulk if revenues or other sources of liquidity do not
develop quickly enough to avoid such sales. In such event,
there can be no assurance of the price at which the assets
may be sold.
COMPETITION
Competition is intense in the real estate development
business generally and in Hawaii in particular. Competition
in land development is based primarily on location, land use
and zoning designations, availability of capital, timing of
development and price. In addition, a substantial number of
real estate investment partnerships and other entities are
presently managed or advised by or through affiliates which
may be in competition under some circumstances with the
Company for real property investments. Affiliates also
invest in real estate for their own accounts. Other than in
connection with Kaanapali Land, JMB and its affiliates do
not currently have any interest in real estate in Hawaii.
However, JMB and its affiliates are not restricted from
acquiring, owning or developing real property in Hawaii,
either for their own accounts, jointly with others through
partnerships or other investment vehicles or for third
parties. There is no obligation that affiliates present to
Kaanapali Land any particular investment or development
opportunity that comes to its or their attention.
Affiliates may acquire and develop properties located nearby
or adjacent to Kaanapali Land properties.
SIGNIFICANT INFLUENCE OF PRINCIPAL MEMBER
Pacific Trail and its affiliates (and persons closely
related thereto) own approximately 91% of the outstanding
membership interests in Kaanapali Land. In addition,
Pacific Trail is the Manager of Kaanapali Land. Through its
ownership and management positions, Pacific Trail and its
affiliates ultimately control all matters concerning the
operation of the Company and all items that will be
submitted to a vote of the members.
DEPENDENCE ON KEY PERSONNEL AND AFFILIATES
The Company is dependent upon the efforts and talents
of a relatively small number of people, some of whom are
employed by entities other than Kaanapali Land and its
subsidiaries. These personnel have generally acquired
significant knowledge and expertise about the Company, its
assets, liabilities and operations over the term of their
association with the Company, which knowledge would be
difficult to replace in the event of their departure. Loss
of key personnel could have a material adverse impact on the
Company's success.
(iii) MATERIAL U.S FEDERAL INCOME TAX CONSIDERATIONS RELATIVE
TO THE MERGER
GENERAL
THE FOLLOWING DISCUSSION SUMMARIZES THE MATERIAL U.S.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER APPLICABLE TO THE
HOLDERS OF CLASS A SHARES. THE SUMMARY IS PROVIDED FOR
INFORMATIONAL PURPOSES ONLY AND IS BASED ON THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED (THE "CODE"), THE TREASURY REGULATIONS
PROMULGATED THEREUNDER, JUDICIAL AUTHORITY, PUBLISHED POSITIONS OF
THE INTERNAL REVENUE SERVICE ("IRS"), AND OTHER APPLICABLE
AUTHORITIES, ALL AS CURRENTLY IN EFFECT AND ALL OF WHICH ARE
SUBJECT TO CHANGE OR DIFFERING INTERPRETATIONS (POSSIBLY WITH
RETROACTIVE EFFECT).
THE SUMMARY DOES NOT ADDRESS ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF CLASS A
SHARES IN LIGHT OF ITS PARTICULAR FACTS AND CIRCUMSTANCES. THE
SUMMARY ASSUMES THAT HOLDERS OF CLASS A SHARES HOLD THEIR CLASS A
SHARES AS "CAPITAL ASSETS" WITHIN THE MEANING OF SECTION 1221 OF
THE CODE. THE SUMMARY DOES NOT DISCUSS ANY ASPECTS OF STATE,
LOCAL, OR FOREIGN TAX CONSEQUENCES. THE SUMMARY DOES NOT ADDRESS
ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO CERTAIN
TYPES OF HOLDERS OF CLASS A SHARES SUBJECT TO SPECIAL TREATMENT
UNDER U.S. FEDERAL INCOME TAX LAWS, SUCH AS:
. financial institutions;
. insurance companies;
. tax-exempt organizations;
. dealers in securities or currencies;
. persons whose functional currency is not the U.S.
dollar;
. traders in securities that elect to use a mark to
market method of accounting;
. persons that hold Class A Shares as part of a
straddle, hedge, constructive sale or conversion
transaction; and
. non-U.S. holders.
If a partnership or other entity taxed as a partnership
holds Class A Shares, the tax treatment of a partner in the
partnership generally will depend upon the status of the partner
and the activities of the partnership. Partnerships and partners
in such a partnership should consult their tax advisers about the
tax consequences of the merger to them.
This discussion does not address the tax consequences of the
Merger under state, local or foreign tax laws. No assurance can be
given that the IRS would not assert, or that a court would not
sustain, a position contrary to any of the tax consequences set
forth below.
HOLDERS OF CLASS A SHARES SHOULD CONSULT WITH THEIR OWN TAX
ADVISORS AS TO THE TAX CONSEQUENCES OF THE MERGER IN THEIR
PARTICULAR CIRCUMSTANCES, INCLUDING THE APPLICABILITY AND EFFECT
OF THE ALTERNATIVE MINIMUM TAX AND ANY STATE, LOCAL OR FOREIGN AND
OTHER TAX LAWS AND OF CHANGES IN THOSE LAWS.
For purposes of this section, the term "U.S. holder" means a
beneficial owner of Class A Shares that for U.S. federal income
tax purposes is:
. a citizen or resident of the United States;
. a corporation or partnership, or other entity treated
as a corporation or partnership for federal income tax
purposes, created or organized in or under the laws of
the United States or any State or the District of
Columbia;
. an estate that is subject to U.S. federal income tax
on its income regardless of its source; or
. a trust, the substantial decisions of which are
controlled by one or more U.S. persons and which is
subject to the primary supervision of a U.S. court, or
a trust that validly has elected under applicable
Treasury regulations to be treated as a U.S. person
for U.S. federal income tax purposes.
For purposes of this section, the term "non-U.S. holder"
means a beneficial owner of Class A shares that is not a U.S.
holder.
RECEIPT OF CASH FOR CLASS A SHARES PURSUANT TO THE
MERGER GENERALLY
A holder of Class A Shares will be treated as having
received the cash as a distribution from Kaanapali Land in
redemption of all of such holder's Class A Shares. Under Section
302 of the Code, a holder of Class A Shares who, immediately after
the Merger, does not own any shares of Kaanapali Land either
directly (i.e., through the ownership of Class B Shares) or
indirectly after giving effect to certain constructive ownership
rules (for example, through actual or constructive ownership of an
interest in Pacific Trail or PTHI) will (subject to possible
application of the recapture or market discount rules discussed
below) recognize capital gain or loss on the deemed redemption in
an amount equal to the difference between the amount of cash
received and the holder's adjusted tax basis in the Class A Share
redeemed. Any capital gain or loss will be long-term capital gain
or loss if the holder has held the Class A Share for more than one
year at the time of completion of the Merger. Long-term capital
gain of an individual generally is subject to a maximum U.S.
federal income tax rate of 15%. Short-term capital gains of an
individual generally are subject to a maximum U.S. federal income
tax rate of 35%. The deductibility of capital losses is subject to
limitations.
Shareholders holding blocks of Class A Shares with different
tax bases and/or holding periods will be required to determine
recognized gain or loss (and determine the long- or short-term
character of that gain or loss) separately for each identifiable
block of shares exchanged for cash in the Merger.
Holders of Class A Shares, if any, who continue to own
shares of Kaanapali Land after the Merger (actually or
constructively) may nevertheless be entitled to capital gain or
loss treatment, as described above, if certain tests provided in
section 302(b) of the Code are satisfied. These rules are complex
and dependent upon the specific factual circumstances particular
to each holder. Consequently, each holder of Class A Shares who
continues to own Kaanapali Land shares after the Merger (actually
or constructively) should consult its tax advisor as to the
application of these rules to the particular facts relevant to
such holder. If such holder cannot satisfy any of the section
302(b) tests, the cash payment would be taxable as ordinary
dividend income to the extent of the current or accumulated
earnings and profits of Kaanapali Land.
RULES CONCERNING RECAPTURE OF BAD DEBT LOSSES AND
MARKET DISCOUNT
Most holders of Class A Shares received their shares in
exchange for their claims under the Plan ("COLA Note Claims") that
were based upon their prior ownership of certain Certificate of
Land Appreciation Notes due 2008, Class A and Class B (the "COLA
Notes"), originally issued by Amfac/JMB Hawaii, Inc., predecessor
in-interest to KLC Land. The following rules may apply to a holder
of Class A Shares who received the Class A Shares in exchange for
claims under the Plan that were based upon prior ownership of COLA
Notes.
First, to the extent any such holder claimed a bad debt loss
under section 166 of the Code or otherwise claimed an ordinary
loss on the exchange of COLA Notes for Class A Shares, the amount
of any gain recognized with respect to such shares pursuant to the
Merger (but not in excess of the amount of the bad debt or
ordinary loss previously claimed) would be required to be reported
as ordinary income.
Second, persons who acquired COLA Notes with market discount
and exchanged such COLA Notes for Class A Shares pursuant to the
Plan may be required to treat any gain recognized with respect to
the Class A Shares pursuant to the Merger as ordinary income to
the extent of any "accrued market discount" which was not
recognized previously pursuant to the Plan or otherwise.
In general, in the case of a note issued without original
issue discount, market discount generally equals the excess of the
stated redemption price of the note over the basis of the
instrument in the hands of the holder immediately after its
acquisition by the holder. Market discount will accrue on a
straight-line basis, unless the holder of the note elects to
accrue such discount on a constant yield-to-maturity basis.
Unless the holder of the note elects to include market discount in
income currently as it accrues, accrued market discount will not
be included in income until maturity of the note (or in certain
circumstances, its earlier disposition).
If a COLA Note was acquired with market discount, any gain
recognized by a holder of the COLA Note at the time of Plan
implementation should have been treated as ordinary income to the
extent of the market discount that accrued thereon (unless the
holder previously elected to include market discount in income as
it accrued) while the COLA Note was owned by such holder. In the
case of a holder who exchanged a COLA Note for Class A Shares (or
Class A Shares plus cash), any remaining accrued market discount
(that was not recognized previously or, if cash was received under
the Plan, recognized on the exchange at the time of Plan
implementation), should have carried over to the Class A Shares
received for the COLA Note. Any gain recognized upon the exchange
of Class A Shares pursuant to the Merger should then be treated as
ordinary income to the extent of this remaining accrued market
discount. Although the foregoing treatment is likely, there is no
exact precedent governing the carryover of market discount under
the Plan and its subsequent treatment under the Merger. A prior
holder of a COLA Note with market discount who is exchanging
Class A Shares in the Merger should consult its tax advisor
concerning the effect of the market discount provisions.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Cash payments received in the Merger by a holder of Class A
Shares may, under certain circumstances, be subject to information
reporting and backup withholding at a rate of 28% of the cash
payable to such holder, unless the holder provides proof of an
applicable exemption, furnishes its taxpayer identification number
(in the case of individuals, their social security number) or
provides a certification of foreign status on IRS Form W-8BEN or
other appropriate form, and otherwise complies with all applicable
requirements of the backup withholding rules. Any amounts withheld
from payments to a holder under the backup withholding rules are
not additional tax and will be allowed as a refund or credit
against the shareholder's U.S. federal income tax liability,
provided the required information is timely furnished to the IRS.
IMPORTANCE OF OBTAINING PROFESSIONAL TAX ASSISTANCE
THE FOREGOING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN AND IS NOT A
SUBSTITUTE FOR CAREFUL TAX PLANNING WITH A TAX PROFESSIONAL. THE
ABOVE DISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT TAX
ADVICE. THE TAX CONSEQUENCES ARE IN MANY CASES UNCERTAIN AND MAY
VARY DEPENDING ON A HOLDER'S INDIVIDUAL CIRCUMSTANCES.
ACCORDINGLY, HOLDERS ARE URGED TO CONSULT WITH THEIR TAX ADVISORS
ABOUT THE FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX
CONSEQUENCES OF THE MERGER.
ITEM 8. FAIRNESS OF THE TRANSACTION.
Item 1014
(a) FAIRNESS. Kaanapali Land (together with Pacific Trail, PTHI and
Mergerco, as affiliates for purposes of Rule 13e-3 of the Exchange Act)
reasonably believes that the price to be paid in cash in exchange for the
Class A Shares under the Merger is fair to the unaffiliated holders of Class A
Shares. The terms of the Merger were determined unilaterally by Kaanapali Land
and its Manager and were not negotiated with any holder of Class A Shares, or
any representative thereof or any independent third party acting on behalf of
holders of the Class A Shares. BECAUSE THE PARTICIPATION IN THE MERGER BY THE
HOLDERS OF CLASS A SHARES IS NOT VOLUNTARY AND IS NOT SUBJECT TO THE VOTE OF
SUCH HOLDERS, NO PERSON (INCLUDING, BUT NOT LIMITED TO, KAANAPALI LAND) HAS
MADE ANY RECOMMENDATION TO ANY HOLDER OF CLASS A SHARES AS TO ANY ACTION TO BE
TAKEN IN CONNECTION WITH THE MERGER. THE ONLY ACTION THAT IS REQUIRED OF THE
HOLDERS OF RECORD OF CLASS A SHARES IN CONNECTION WITH THE MERGER WILL BE THE
COMPLETION OF CERTAIN DOCUMENTS TO BE PROVIDED BY KAANAPALI LAND AFTER CLOSING
IN ORDER TO CONFIRM OWNERSHIP, PROVIDE CERTAIN WITHHOLDING INFORMATION AND
DIRECT PAYMENT OF THE CASH PAYMENT TO BE MADE BY KAANAPALI LAND ON ACCOUNT OF
SUCH HOLDERS' CLASS A SHARES. IF A HOLDER OF CLASS A SHARES HOLDS ITS CLASS A
SHARES IN "STREET NAME" (THAT IS THROUGH A BROKER OR OTHER NOMINEE), SUCH
HOLDER WILL NOT RECEIVE FURTHER DOCUMENTS FROM THE COMPANY AFTER CLOSING. THE
CASH PAYMENT WILL BE MADE TO SUCH HOLDER'S NOMINEE WHO WILL BE RESPONSIBLE FOR
ENSURING THAT IT IS PLACED IN SUCH HOLDER'S ACCOUNT. ANY CORRESPONDENCE
NECESSARY TO ASSURE THAT A HOLDER OF CLASS A SHARES RECEIVES THE CASH PAYMENT
DUE WILL COME FROM SUCH HOLDER'S NOMINEE AND MUST BE RETURNED TO SUCH NOMINEE.
(b) FACTORS CONSIDERED IN DETERMINING FAIRNESS. In reaching the
determination described herein that the merger consideration is fair to the
holders of the Class A Shares, Kaanapali Land and its Manager considered the
factors described below. While Kaanapali Land and its Manager did not
prioritize or perform any weighting analysis on these factors, all of them
have been taken into account in determining whether the price to be paid for
the Class A Shares under the Merger is fair.
OPPORTUNITY FOR PROMPT PAYMENT FOR CLASS A SHARES
As described in more detail in Item 7(a) and below, the Class A Shares
enjoy only a very limited secondary market that is subject to thin and
unpredictable trading. The Class A Shares are thus relatively illiquid
investments. The Merger will give holders of Class A Shares a prompt means to
receive cash for their membership interests at a price that Kaanapali Land
reasonably believes to be fair.
NO CASH FLOW TO HOLDERS OF CLASS A SHARES
Kaanapali Land is not presently making any distributions to its
shareholders and none are anticipated to be made for many years. As a result,
the Merger will provide an immediate return to the holders of Class A Shares.
SIGNIFICANT RISK FACTORS IMPACT VALUE
Numerous risk factors exist that will impact, to a greater or lesser
extent, the performance of the Company and the value of the membership
interests in Kaanapali Land. Many of these have been identified in Item 7(d)
above.
PRICES ACHIEVED IN SECONDARY MARKET FOR CLASS A SHARES
While Kaanapali Land has not listed the shares on any recognized
securities exchange and does not intend to do so, a small secondary market for
the Class A Shares has developed, without Company participation, on the "Other
- - OTC Securities" market operated by The NASDAQ Stock Market, Inc. This market
is essentially unregulated and is not supported by market makers or any
institutionalized quotation system with centrally collected bids and offers.
Although there have been sales of Class A Shares during recent months at
prices that are slightly in excess of the price to be paid pursuant to the
Merger, Kaanapali Land does not believe that those sales are necessarily
representative of the market value of the Class A Shares. For the reasons set
forth below, Kaanapali Land believes that the KPMGCF valuation report attached
hereto as Annex D to this Schedule 13E-3 provides a better indication of the
value of the Class A Shares. While such prices might be obtainable from
certain buyers for small lots on a sporadic basis, Kaanapali Land does not
believe that such prices would generally be obtainable from a third-party
buyer offering to purchase all Class A Shares in a single transaction. None of
these transactions have been effected by insiders. Most sales have been for
relatively small positions at prices below the price being paid by Kaanapali
Land pursuant to the Merger. In addition, as further described in Item 7(a),
recent tenders by third parties have offered prices far below the amount being
paid under the Merger, with tenders for Class A Shares being made for as
little as $1.00 per share. A summary of the high and low bid prices and the
trading volume in Class A Shares since January 1, 2005 is attached hereto as
Annex C.
VALUATION OF MEMBERSHIP INTERESTS
The price to be paid pursuant to the Merger of $43.25 is slightly above
the high end of the range of values per membership interest reflected in the
KPMGCF valuation report. As more fully described below, the KPMGCF valuation
report addressed the aggregate value of Kaanapali Land's outstanding
membership interests as of December 31, 2006 and did not give effect to any
premium or discount that may be attributable by reason of any control premium,
minority or illiquidity discounts or other rights, restrictions or limitations
that may be attributable to individual membership interests or block of
membership interests. A copy of the KPMGCF valuation report which sets forth
the procedures followed, assumptions made, qualifications and limitations on
the review undertaken and other matters considered by KPMGCF in preparing its
valuation is attached hereto as Annex D to this Schedule 13E-3. While
Kaanapali Land reasonably believes that the range of values in KPMGCF's
valuation report is a fair assessment of the value of the Class A Shares, the
KPMGCF valuation report only addressed the aggregate value of the outstanding
membership interests of Kaanapali Land as of December 31, 2006, expressed as a
range, and was not intended to and did not take into account the impact of
certain matters that Kaanapali Land believes would likely reduce the aggregate
proceeds to the Company and its securityholders if the Company's assets were
to be marketed for sale all at once, including:
. THIN MARKET. The market for unentitled development land on
Maui is thin. Other than oceanfront property to be used for resort
purposes, very few developers have experience with the land
entitlement process and have actually developed properties for
residential purposes on Maui in recent years. Those developers
generally are from Hawaii and understand the risks associated with
development there and, therefore offer to buy at prices that are
at a significant discount to the value of entitled property.
. MARKET SATURATION. The simultaneous marketing of all of the
Company's properties on Maui would saturate the market with
product that could not be absorbed in the short run. As a
consequence, a buyer would likely demand a significant discount to
market value to take into account the generally long holding
period that would be associated with this land. Significant
landholdings on Maui are also being marketed to developers by
other major landholders and thus the Company's properties would
have to deal with competition from alternative investments.
. BULK SALES. It would be unrealistic to market undeveloped parcels
in numerous small transactions, and the Company would likely have
no alternative but to market and sell its land assets in a
relatively small number of bulk sales. The price generally
obtainable for land sold in such fashion is typically less, on a
per acre basis, than the price that the Company could expect to
receive in the event that it was able to sell it in smaller
parcels to retail buyers.
. BARGAINING POWER. If all land were to be marketed at once, buyers
would have significant bargaining power over the Company due to
the obvious need for the Company to sell on an expedited basis.
. TRANSACTION COSTS. In order to accomplish an immediate sale,
intermediaries would need to be engaged to market that land and
would likely demand compensation in excess of the amount that
would normally be required in a more orderly sale program. While
the financial estimates and projections with respect to the future
financial performance of Kaanapali Land provided to KPMGCF by
Kaanapali Land's management incorporated transaction costs based
on an orderly sale of Kaanapali Land's assets in the ordinary
course of business, Kaanapali Land believes that it would incur
significantly higher transaction costs if it sought an immediate
sale of such assets. In addition, various contracts have been
entered into by the Company with consultants and contractors for
the purpose of obtaining entitlements or developing infra-
structure. These contracts may have little or no value to a
potential buyer but, as described above, would likely result, in
some cases, in the Company incurring unwind costs in order to
settle and/or assign any remaining liabilities.
. INCREASED SETTLEMENT AND DEFENSE COSTS. Kaanapali Land's
financial statements contain Kaanapali Land's best estimate of its
currently existing liabilities under generally accepted accounting
principles ("GAAP") and have been used as the basis for
determining the amount to be subtracted from the net market value
of the assets. Due to the nature of the Company's contingent
liabilities, Kaanapali Land does not believe that there is any
substantial likelihood that Kaanapali Land could be sold as a
going concern in a "stock sale" whereby all the membership
interests were sold and, as a result, all liabilities passed with
such membership interests to the buyer without a substantial
discount to the market value of the assets. A buyer would likely,
due to bargaining leverage and the desire to ensure that all risks
were adequately covered, demand that a safety factor be applied to
the liabilities as shown on the Company's balance sheet.
Conversely, if an asset sale were effected and the Company were to
need to settle its contingent liabilities on an expedited basis,
the Company could be forced to settle such liabilities at amounts
in excess of their probable true value in order to be able to
liquidate and make a final distribution to its investors. Further,
the liabilities recorded in the financial statements of Kaanapali
Land do not reflect future legal fees and other defense costs
related to such litigation and claims. These expenses have
increased from $1.1 million to $1.8 million to $2.4 million over
the last three years. A number of the legal issues confronting
Kaanapali Land have remained unresolved for a number of years and
the time frame for resolution cannot be predicted.
. POLITICAL COSTS. With respect to many of its anticipated
developments, the Company has already spent many years in the
entitlement pipeline, developing plans and generating community
support, while educating politicians and other government
officials. Moreover, due to the fact that the Company owns certain
land parcels that could, if necessary, be utilized for various
public purposes that may be of value in obtaining such
entitlements on an overall basis, purchasers of separate parcels
would likely not have the same benefits to offer public agencies
and would instead need to satisfy any requirements with cash.
Moreover, the Company over the years has entered into various
agreements with government agencies that grant it certain
development rights on properties that are not yet fully entitled
that may not be transferable to a third party buyer. In such
cases, the buyer may not be able to utilize the property to the
same level of development as the Company, at least not without
negotiating similar agreements, which would indicate a lower value
to the buyer.
. LACK OF REPRESENTATIONS AND WARRANTIES. In a rapid disposition of
properties, all properties are generally sold on an "AS-IS" basis
and no material ongoing representations or warranties are provided
by the seller to the buyer. The purchase prices attainable by the
Company would likely be subject to a further discount because a
buyer would receive no representations from the seller nor would
it have any recourse to the seller for damages in the event of
defects in the property, particularly relating to environmental
claims that may arise.
. NON-RECURRING NATURE OF BUSINESS. While Kaanapali Land also
maintains agricultural and golf businesses, its principal source
of revenues has been from property sales. The Company's land
holdings on Maui are finite with little likelihood that any
significant additional land holdings will be acquired. The
Company's recurring administrative costs have averaged in excess
of $5.5 million per year over the last three years. While a
portion of these costs is expected to decrease as a result of the
Merger, a significant majority of them will continue. Such costs
have not been factored into the determination of the purchase
price for the Class A Shares.
. ILLIQUID NATURE OF CLASS A SHARES AND MINORITY POSITION. The
KPMGCF valuation report addressed the aggregate value of Kaanapali
Land's outstanding membership interests as of December 31, 2006
and did not give effect to any premium or discount that may be
attributable by reason of any control premium, minority or
illiquidity discounts or other rights, restrictions or limitations
that may be attributable to individual membership interests or
blocks of membership interests. As a consequence, the KPMGCF
valuation report did not address the illiquid nature of the
Class A Shares or that they represent only a minority interest in
the Company. For more information, please read 'Prices Achieved
in the Secondary Market for Class A Shares' above under this
Item 14(a).
Because these factors have not been taken into account, Kaanapali Land
believes that the price to be paid pursuant to the Merger is greater than the
amount that Kaanapali Land believes would likely be received if all assets and
liabilities were to be liquidated now, since such factors would come into play
in any such liquidation. While Kaanapali Land could seek to take into account
the foregoing adjustments, quantifying them would require that Kaanapali Land
make further assumptions and engage in additional analysis. Consequently,
Kaanapali Land has determined to utilize the aggregate value of Kaanapali
Land's outstanding membership interests as of December 31, 2006, expressed as
a range, set forth in the KPMGCF valuation report and not consider further
discounts based on a likely liquidation scenario. Further, KPMGCF's analysis
has not taken into account the effects on value of a forced liquidation of the
Company's assets.
The valuation analyses performed by KPMGCF in connection with the
preparation of its valuation report rely upon a number of estimates and
assumptions that, although developed and considered reasonable by Kaanapali
Land's management, are inherently subject to economic, competitive and other
uncertainties and contingencies that are beyond the control of Kaanapali
Land's and KPMGCF. Changes in such estimates and assumptions could have a
material impact on the results of KPMGCF's analyses and the conclusions
reached in its valuation report. Furthermore, although the KPMGCF valuation
report addresses the aggregate value of Kaanapali Land's outstanding
membership interests as of December 31, 2006, Kaanapali Land does not believe
that the value of Kaanapali Land's outstanding membership interests will be
substantially different, in the aggregate, on the date of the Merger.
There can be no assurance of the values that would in fact be realized
if Kaanapali Land's assets were, in fact, marketed and sold in the short term.
In addition, any such sale that would be undertaken would necessarily take
place in future circumstances that cannot currently be predicted. The amounts
of actual and contingent liabilities and claims against the Company could vary
significantly from the estimates set forth herein, depending on the claims
that may be asserted during the liquidation process and the Company's success
in the resolution of all existing and future claims that are of uncertain
amount and/or liability. No value was assigned to additional proceeds that
might result from the sale of intangible assets, though it is not expected
that any such amounts would be material.
Moreover, Kaanapali Land reasonably believes that the value of any
distributions from the net proceeds of any liquidation to Kaanapali Land's
members might not occur for a substantial period of time due to the
significant contingent liabilities that remain. In this regard, it is possible
that distribution of the proceeds of the liquidation could be delayed for
significantly longer than a year after the completion of such liquidation in
order to resolve all claims and liabilities and prepare for distributions. In
such event, administrative expenses would likely be further increased, and any
earnings on such proceeds may not exceed the returns that an investor might
get on such proceeds were they to be invested independently. The effects of
this delay on the value of distributions under the hypothetical sale of assets
and settlement of liabilities have not been considered.
PRICE IS FAIR TO REMAINING HOLDERS OF MEMBERSHIP INTERESTS
In determining whether to proceed with the Merger, pursuant to the terms
of the Operating Agreement, the Manager of Kaanapali Land must take into
consideration the interests of the holders of Class B Shares as well as the
holders of Class A Shares. Kaanapali Land believes that the price to be paid
by Kaanapali Land for the Class A Shares in the Merger, while slightly above
the high end of the range of values per membership interest reflected in the
KPMGCF valuation report. As more fully described below, the KPMGCF valuation
report addressed the aggregate value of Kaanapali Land's outstanding
membership interests as of December 31, 2006 and did not give effect to any
premium or other discount that may be attributable by reason of any control
premium, minority or illiquidity discounts or other rights, restrictions or
limitations that may be attributable to individual membership interests or
blocks of membership interests. Although the price to be paid by Kaanapali
Land for the Class A Shares in the Merger is potentially dilutive of the
interests of the holders of Class B Shares, Kaanapali Land does not believe it
will imperil the Company's ongoing business prospects or unfairly compensate
the holders of Class A Shares at the expense of the holders of Class B Shares.
The Manager of Kaanapali Land, which also holds a majority of the membership
interests in Kaanapali Land, has approved the transaction after taking into
account this consideration and is willing to proceed at this price.
LIQUIDATION VALUE WAS NOT RELIED UPON BY KAANAPALI LAND FOR
PURPOSES OF DETERMINING THE AMOUNT TO BE PAID TO HOLDERS OF
CLASS A SHARES UNDER THE MERGER
Kaanapali Land has determined, based on the factors described above,
including without limitation, the bargaining power that buyers would have and
increased transaction costs in connection with a liquidation, that the amount
to be paid to holders of Class A Shares in the Merger is significantly greater
than the amount they would be reasonably likely to receive through the
distribution of the net proceeds from a liquidation of the Company and
consequently has not utilized a liquidation value analysis in such
determination.
While Kaanapali Land did not attempt to quantify this difference in
value between the market value approach it did utilize and a liquidation
analysis approach, virtually all additional factors or assumptions that would
serve to differentiate the two approaches (including, but not limited to,
those described above) would tend to reduce the value of the Company, and thus
Kaanapali Land did not believe that it was necessary to its determination of
fairness to attempt a quantification.
BOOK VALUE NOT A FAIR INDICATION OF VALUE
The book value per share of Kaanapali Land is significantly higher than
the range of values per membership interest of Kaanapali Land as of
December 31, 2005 indicated by the KPMGCF valuation report and the amount
being paid to the holders of Class A Shares under the Merger. Kaanapali Land
believes the primary reasons for such differences include the following:
. Kaanapali Land maintains the Pension Plan for Bargaining Unit
Employees of Amfac Plantations (the "Pension Plan"), which,
pursuant to GAAP, had assets in excess of projected benefit
obligations of approximately $29 million as of December 31, 2006.
While Kaanapali Land could seek to use the excess assets of the
Pension Plan to provide liquidity, there are substantial costs to
doing so. In order for the excess assets to be available for use,
Kaanapali Land must terminate the Pension Plan. Upon Pension Plan
termination, annuity contracts must be purchased to provide for
the required payment of benefits to participants and
beneficiaries. Because the cost of currently purchasing annuity
contracts for fully vested benefits on Pension Plan termination
will likely be greater than the cost of benefits as calculated for
the Pension Plan on an ongoing basis, the excess assets actually
available upon Pension Plan termination would likely be less than
the amount reflected above. In addition, if the excess assets are
distributed to Kaanapali Land, Kaanapali Land must pay an excise
tax of up to 50% of the amount it receives on such distribution,
as well as income tax on the gross distribution amount at its
normal corporate rate. As a consequence, the true value of these
excess Pension Plan assets outside of the Pension Plan is
significantly lower than the amount recorded for purposes of GAAP
and shown on the Company's financial statements.
. The parameters concerning write down of assets not held for sale,
which represents the vast majority of the Company's land holdings,
results in a difference between the book value of these assets and
their current net present realizable value. GAAP requires that an
impairment loss shall be recorded only if the carrying value of a
long-lived asset is not recoverable and exceeds fair value.
Accordingly, if the undiscounted cash flows expected to result
from its continued use exceed its carrying amount, an impairment
loss for the carrying amount in excess of its fair value is not
recognized for financial reporting purposes.
GOING CONCERN VALUE NOT A FAIR INDICATION OF VALUE
As stated above, due to the existence of a class of widely held
securities, the current status of the Company's development efforts and
contingent liabilities, and the general character of real estate-based
companies, Kaanapali Land and its Manager determined that selling the Company
as a going concern is not a realistic alternative at present. Moreover, the
Company's assets consist almost exclusively of real property assets that would
not support a goodwill value over and above the value of the underlying
assets. Even though the Company's businesses are to some degree supported by
trademarks and other protected intellectual property assets, these are
primarily attached to the assets themselves and not to the Company's entities,
and are not of a character where significant value is generated from consumer
brand recognition beyond the value of the underlying assets themselves. While
the licensing of these intellectual property assets may result in value to the
Company in the future, no such arrangements are currently being contemplated
and it is believed that any revenues to be derived therefrom will not be
material. In addition, KPMGCF did not include any amount for goodwill of the
Company in its valuation analyses and Kaanapali Land does not believe that
there is sufficient goodwill attributable to the Company to result in a going
concern value materially greater than would be determined under a market value
analysis such as the one described above.
(c) APPROVAL OF SECURITY HOLDERS. No approval of the holders of
Class A Shares is required or sought.
(d) UNAFFILIATED REPRESENTATIVE. Kaanapali Land has no board of
directors. No special committee or other independent person has been retained
by Kaanapali Land or its Manager to act on behalf of the Company or the
holders of Class A Shares in connection with the Merger. However, Pacific
Trail, as manager of Kaanapali Land, has retained KPMGCF, which is
unaffiliated with the Company, to provide Pacific Trail with KPMGCF's view
regarding the aggregate value of the outstanding membership interests of
Kaanapali Land, expressed as a range. The valuation report was one of a
number of factors considered by Kaanapali Land and Pacific Trail in
determining whether the price to be paid for the Class A Shares in the Merger
is on terms no less favorable than those that could be obtained from an
unaffiliated third party for a similar transaction; and, based in part on such
report, Kaanapali Land and its Manager reasonably believe the price to be paid
to the holders of the Class A Shares under the Merger is fair. KPMGCF'S
VALUATION REPORT WAS DIRECTED TO PACIFIC TRAIL AS THE MANAGER OF KAANAPALI
LAND AND ONLY ADDRESSED THE AGGREGATE VALUE OF KAANAPALI LAND'S OUTSTANDING
MEMBERSHIP INTERESTS AS OF DECEMBER 31, 2006. THE SUMMARY OF KPMGCF'S
VALUATION REPORT IN THIS SCHEDULE 13E-3 IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF THE WRITTEN VALUATION REPORT WHICH IS INCLUDED
AS ANNEX D TO THIS SCHEDULE 13E-3.
(e) APPROVAL OF DIRECTORS. Kaanapali Land has no board of directors
and no employees, and thus the Merger was not approved by a majority of
directors who are not employees of Kaanapali Land. Kaanapali Land, through its
Manager, resolved by unanimous written consent of such Manager dated April 9,
2007, as well as by separate consent of the directors of the Manager's
managing member, dated April 9, 2007, to authorize the formation of a
subsidiary of such Manager and the merger of such subsidiary into Kaanapali
Land, as well as the preparation of this Schedule 13E-3 and all transactions
and documentation relating thereto.
(f) OTHER OFFERS. Kaanapali Land and its affiliates did not receive,
during the past two years, any offers from any other person for any of the
following: a merger or consolidation of Kaanapali Land with or into another
person, or vice versa; the sale or transfer of all or any substantial part of
the assets of Kaanapali Land; or a purchase of Kaanapali Land securities that
would enable the holder to exercise control of Kaanapali Land.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND NEGOTIATIONS.
Item 1015
(a) REPORT, OPINION OR APPRAISAL. Kaanapali Land engaged KPMGCF
pursuant to a letter agreement dated as of February 12, 2006, to provide
Pacific Trail with KPMGCF's view regarding the aggregate value of the
outstanding membership interests of Kaanapali Land, expressed as a range.
Kaanapali Land selected KPMGCF based on its qualifications, experience and
reputation. KPMGCF is regularly engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, leveraged buyouts and
valuations for corporate and other purposes.
(b) PREPARER AND SUMMARY OF THE REPORT, OPINION OR APPRAISAL.
VALUATION OF KPMGCF
On April 6, 2007, KPMGCF rendered its oral valuation to Pacific Trail
(which was subsequently confirmed in writing by delivery of KPMGCF's written
valuation dated the same date) to the effect that, based upon and subject to
the assumptions, qualifications, limitations and other matters described in
its written valuation, as of December 31, 2006, the aggregate value of
Kaanapali Land's outstanding membership interests was approximately
$70,000,000 to $77,500,000 or, dividing such amounts by the number outstanding
membership interests in Kaanapali Land as of December 31, 2006, $39.05 to
$43.23 per membership interest in Kaanapali Land; it being understood that
such latter calculation does not give effect to any premium or discount that
may be attributable by reason of any control premium, minority or illiquidity
discounts or other rights, restrictions or limitations that may be
attributable to individual membership interests or blocks of membership
interests.
KPMGCF's valuation was directed to Pacific Trail, as manager of
Kaanapali Land, and only addressed the aggregate value of Kaanapali Land's
outstanding membership interests as of December 31, 2006. The summary of
KPMGCF's valuation in this Schedule 13E-3 is qualified in its entirety by
reference to the full text of the written valuation which is included as Annex
D to this Schedule 13E-3 and sets forth the procedures followed, assumptions
made, qualifications and limitations on the review undertaken and other
matters considered by KPMGCF in preparing its valuation. Kaanapali Land
encourages you to carefully read the full text of KPMGCF's written valuation.
However, neither KPMGCF's valuation nor the summary of its valuation set forth
in this Schedule 13E-3 are intended to be, and do not constitute, advice or a
recommendation as to how any holder of Class A Shares should act on any matter
or with respect to any transaction or investment decision.
PROCEDURES FOLLOWED
In connection with its valuation, KPMGCF made such reviews, analyses and
inquiries as it deemed necessary and appropriate under the circumstances.
Among other things, KPMGCF:
. considered certain financial and other information relating to
Kaanapali Land that was publicly available or furnished to KPMGCF
by Kaanapali Land, including the audited consolidated balance
sheet of the Company as of December 31, 2006 and financial
estimates and projections with respect to the future financial
performance of Kaanapali Land provided to KPMGCF by Kaanapali
Land's management as well as estimates and other information
provided by Kaanapali Land's management and independent actuarial
consultants regarding the assets and liabilities of the Pension
Plan and the potential tax liabilities associated with Kaanapali
Land's use of any surplus assets of the Pension Plan;
. discussed with members of Kaanapali Land's management the assets,
liabilities, business, operations, historical financial results
and future prospects of Kaanapali Land;
. conducted site inspections of certain of Kaanapali Land's real
properties;
. considered the financial terms of certain transactions involving
the direct or indirect sale of real property or interests therein
that KPMGCF deemed relevant;
. performed a discounted cash flow analysis with respect to certain
cash flows generated by Kaanapali Land's assets or businesses; and
. considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria as
KPMGCF deemed relevant and appropriate.
MATERIAL ASSUMPTIONS MADE AND QUALIFICATIONS AND LIMITATIONS ON THE REVIEW
UNDERTAKEN
In connection with their review:
(1) KPMGCF relied upon and assumed, without independent verification,
the accuracy and completeness of all financial and other
information that was publicly available or furnished to KPMGCF by
Kaanapali Land. With respect to the financial estimates and
projections KPMGCF reviewed, KPMGCF assumed that they were
reasonably prepared on bases reflecting the best currently
available estimates and judgments of Kaanapali Land's management
as of December 31, 2006 as to the future financial performance of
Kaanapali Land and the best estimates and judgments of Kaanapali
Land's independent actuarial consultants with respect to the
assets and liabilities of the Pension Plan as of December 31,
2006.
(2) KPMGCF did not make an independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of the Kaanapali
Land except for certain valuation analyses not constituting an
appraisal performed by KPMGCF or its representatives with respect
to (x) certain of the Company's real property or interests therein
and (y) based on estimates and other information provided by
Kaanapali Land's management and independent actuarial consultants,
the potential tax liabilities associated with Kaanapali Land's use
of the Pension Plan's surplus assets. Except for the report of
Kaanapali Land's independent actuarial consultants, KPMGCF was not
furnished with any other such evaluations or appraisals. KPMGCF
was not requested to, and did not, solicit third party indications
of interest in acquiring all or any part of Kaanapali Land. While
KPMGCF's valuation assumed the continuation of the business of
Kaanapali Land as a going concern, KPMGCF did not evaluate any
impact that goodwill may have on the value of the Company.
(3) KPMGCF did not express any view regarding the solvency of
Kaanapali Land, nor did KPMGCF perform any procedures to determine
the solvency of Kaanapali Land, and KPMGCF's views expressed in
its valuation should not be relied upon for such purposes.
(4) KPMGCF were not asked to advise the manager of Kaanapali Land, and
did not provide the manager with any advice with respect to, the
terms of any particular transaction or the merits of any
particular transaction as opposed to other transactions or
business strategies that may be available to Kaanapali Land.
(5) KPMGCF were not asked to address, and the valuation should not be
construed to address, the decision by the Manager or Kaanapali
Land to undertake any transaction or be viewed as a recommendation
to any security holder of Kaanapali Land as to how to act on any
matter or with respect to any transaction or other investment
decision or any related matter.
(6) KPMGCF expressed no view as to the federal, state or local tax
consequences of any transaction.
(7) KPMGCF's valuation was based on business, economic, market and
other conditions as they existed as of December 31, 2006 or, if
earlier, as of the date of the information provided to KPMGCF.
(8) KPMGCF's valuation does not address the prices at which Kaanapali
Land or membership interests therein could actually be purchased
or sold which may depend on a number of factors beyond the control
of Kaanapali Land and KPMGCF. In addition, KPMGCF was advised by
the Company and assumed that the membership interests in the
Company have identical rights and preferences, regardless of
class.
KPMGCF has no obligation to update its views and has expressly disclaimed any
responsibility to do so. The valuation was furnished for the use and benefit
of Kaanapali Land's manager and was not intended to, and does not, confer any
rights or remedies upon any other person or create a fiduciary duty on the
part of KPMGCF to any person.
OTHER MATTERS
Kaanapali Land engaged KPMGCF pursuant to a letter agreement dated as of
February 12, 2007, to provide Pacific Trail with KPMGCF's view regarding the
aggregate value of the outstanding membership interests of Kaanapali Land,
expressed as a range. Kaanapali Land selected KPMGCF based on its
qualifications, experience and reputation. KPMGCF is regularly engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts and valuations for corporate and other
purposes.
KPMGCF will receive a fee for its services, payable upon delivery of its
valuation, regardless of the conclusions expressed therein, no portion of
which is contingent on the consummation of any transaction. In addition,
Kaanapali Land has agreed to reimburse KPMGCF's expenses and to indemnify
KPMGCF and certain related parties against certain liabilities arising out of
its engagement.
KPMGCF and its affiliates provide a variety of financial advice and services.
KPMG LLP, an affiliate of KPMGCF, has provided audit and other services to
certain affiliates of Kaanapali Land, none of which affiliates are controlled
by Kaanapali Land or are consolidated with Kaanapali Land or its controlling
shareholders, and KPMG LLP may continue to provide such audit and other
services to such entities in the future.
(c) AVAILABILITY OF DOCUMENTS. The KPMGCF valuation report is
attached as Annex D to this Schedule 13E-3 which is being mailed to Class A
Shareholders. The KPMGCF valuation report will also be made available for
inspection and, at the holder's expense, copying at the principal offices of
Kaanapali Land during its normal business hours by any holder of Class A
Shares or a representative of such a holder who has been designated in
writing.
ITEM 10. SOURCE AND AMOUNTS OF FUNDS OR OTHER CONSIDERATION.
Item 1007
(a) SOURCE OF FUNDS. Cash to be paid pursuant to the Merger to the
holders of Class A Shares in exchange therefor will be paid by Kaanapali Land,
as the surviving entity in the Merger, out of its existing cash balances.
Based on the current outstanding number of Class A Shares (161,100.17) and the
cash price of $43.25 per share, the expected total cash payment will be
$6,967,582.35.
(b) CONDITIONS. As described in paragraph (a) of Item 10, no external
financing is being obtained and therefore no conditions are applicable to the
receipt of funds.
(c) EXPENSES. Set forth below is an itemized estimate of the
expenses incurred or expected to be incurred by Kaanapali Land in connection
with this Rule 13E-3 Transaction and all such expenses shall be the obligation
of Kaanapali Land.
Fees Related to Printing and Mailing $ 45,000
Filing Fees and Expenses 214
Paying Agent Fees and Fees for
Identification of Holders 35,000
Legal Fees 150,000
Accounting Costs 5,000
Valuation Report 275,000
--------
Total: $510,214
========
The estimated amounts are subject to substantial contingencies and
uncertainties based upon the numerous issues that may arise in the course of
the preparation and execution of the Merger.
(d) BORROWED FUNDS. No part of the Merger consideration is expected
to be borrowed, directly or indirectly.
ITEM 11. INTEREST IN SECURITIES OF THE SUBJECT COMPANY.
Item 1008
(a) SECURITIES OWNERSHIP. To the knowledge of Kaanapali Land, no
Class A Shares are beneficially owned by any person named in Item 3 to this
Schedule 13E-3 (including the individuals identified on Schedule I) or by any
associate or majority-owned subsidiary of any such person.
(b) SECURITIES TRANSACTIONS. To the knowledge of Kaanapali Land,
no filing person (including the individuals identified on Schedule I to this
Schedule 13E-3) or executive officer, director, affiliate or subsidiary of any
filing person, including Kaanapali Land or any subsidiary of Kaanapali Land
nor any pension, profit sharing or similar plan of Kaanapali Land or any
affiliate thereof, has engaged in any transaction in Class A Shares during the
past 60 days.
ITEM 12. THE SOLICITATION OR RECOMMENDATION.
Item 1012
(d) INTENT TO TENDER OR VOTE IN A GOING PRIVATE TRANSACTION. The
Merger has been approved by the Manager of Kaanapali Land and is being
conducted under the authority provided in the Operating Agreement. As a
consequence no vote is being solicited from any of the members of Kaanapali
Land. The Manager holds no Class A Shares. In addition, there is no tender
offer associated with this transaction; all Class A Shares in Kaanapali Land
will be exchanged for cash and all Class B Shares will be re-designated as the
sole class of membership interests in Kaanapali Land. Therefore, no vote or
intention to tender by any executive officer or affiliate of Kaanapali Land is
applicable to the Merger.
(e) RECOMMENDATION OF OTHERS. As described by paragraph (d) of
this Item 12, no vote is being solicited and no tender offer is associated
with this transaction. Therefore, except as described herein, to the
knowledge of Kaanapali Land. No executive officer or affiliate of Kaanapali
Land has made a recommendation in support of or opposed to the Merger.
ITEM 13. FINANCIAL STATEMENTS.
Item 1010
(a) FINANCIAL INFORMATION. The audited financial statements for
Kaanapali Land for the fiscal years ended December 31, 2006, 2005 and 2004 are
incorporated herein by reference to Kaanapali Land's Annual Report on Form 10-
K for the year ended December 31, 2006, as amended.
Kaanapali Land files reports, proxy statements and other information with the
Securities and Exchange Commission under the Securities Exchange Act of 1934.
You may read and copy any of this information at the following location of the
Securities and Exchange Commission:
Public Reference Room
100 F Street, NE
Washington, DC 20549
You may obtain information on the operation of the Securities and
Exchange Commission's Public Reference Room by calling the Commission at 1-
800-SEC-0330. The Securities and Exchange Commission also maintains an
Internet web site that contains reports, proxy statements and other
information regarding issuers, including Kaanapali Land, who file
electronically with the Securities and Exchange Commission. The address of
that site is http://www.sec.gov.
(b) PRO FORMA INFORMATION. Not applicable.
ITEM 14. PERSONS/ASSETS, RETAINED, EMPLOYED, COMPENSATED OR USED.
Item 1009
(b) EMPLOYEES AND CORPORATE ASSETS. An itemized estimate of the
expenses incurred or expected to be incurred by Kaanapali Land in connection
with this Rule 13E-3 Transaction is set forth in Item 10(c) above. All such
expenses shall be the obligation of Kaanapali Land and shall be paid out of
the Company's cash balances. To the extent practicable, such expenses will be
billed directly to Kaanapali Land. In some cases, Kaanapali Land will
reimburse affiliates who incur such expenses in connection with the Merger. In
addition, as stated above, the sole source of all of the cash to be used for
the purchase of the Class A Shares will be Kaanapali Land's cash resources.
ITEM 15. ADDITIONAL INFORMATION.
Item 1011
(a) OTHER MATERIAL INFORMATION. None.
ITEM 16. EXHIBITS.
Item 1016
(a)(1) None.
(a)(2) None.
(a)(3) None; all disclosure that would otherwise be contained in a
going-private disclosure document has been included in the body of this
Schedule 13E-3.
(a)(4) None.
(a)(5)(i) Annual Report on Form 10-K for the year ended December 31,
2006 (attached hereto as Annex B)
(a)(5)(ii) Form of cover letter to be provided to holders of Class A
Shares
(b) None.
(c) Valuation report of KPMG Corporate Finance, LLC dated as of
April 6, 2007 (attached hereto as Annex D)
(d) Agreement and Plan of Merger, dated as of April 9, 2007, merging
KLLLC Mergerco, LLC with and into Kaanapali Land, LLC (attached hereto as
Annex A)
(f) None.
(g) None.
Annexes
A. Agreement and Plan of Merger, dated as of April 9, 2007, merging
KLLLC Mergerco, LLC with and into Kaanapali Land, LLC
B. Annual Report on Form 10-K for the year ended December 31, 2006,
as amended
C. Summary of Trading Information Reported on NASDAQ Other - OTC
Securities market
D. Valuation report, dated as of April 6, 2007, by KPMG Corporate
Finance, LLC
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and
correct.
Date: April 9, 2007
KAANAPALI LAND, LLC
By: Pacific Trail Holdings, LLC, its Manager
By: /s/ Gary Nickele
------------------------------
Name: Gary Nickele
------------------------------
Title: President
------------------------------
PACIFIC TRAIL HOLDINGS, LLC
By: /s/ Gary Nickele
------------------------------
Name: Gary Nickele
------------------------------
Title: President
------------------------------
PACIFIC TRAIL HOLDINGS, INC.
By: /s/ Gary Nickele
------------------------------
Name: Gary Nickele
------------------------------
Title: President
------------------------------
KLLLC MERGERCO, LLC
By: /s/ Gary Nickele
------------------------------
Name: Gary Nickele
------------------------------
Title: President
------------------------------
SCHEDULE I
The description of the executive officers and directors, as
applicable, of Kaanapali Land, Pacific Trail, PTHI and Mergerco are set forth
below. Each such person is a citizen of the United States of America. None of
such persons has, during the past five years (i) been convicted in a criminal
proceeding (excluding traffic violations and similar misdemeanors) or (ii)
been a party to any judicial or administrative proceedings that resulted in
judgment, decree or final order enjoining person from future violations of, or
prohibiting activities subject to federal or state securities laws, or a
finding of any violation of federal or state securities laws.
Gary Nickele (age 54) has been the Manager of KLC Land, the
principal holding company subsidiary of Kaanapali Land involved in the
Company's agriculture and land development businesses, 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, President of Pacific
Trail since October 2000, President and Director of PTHI since October 2000
and President of Mergerco since January 2007. His business address is the same
as Kaanapali Land's set forth above. 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.
During the past five years, Mr. Nickele has also been an Executive Vice
President of JMB Realty Corporation ("JMB"). Mr. Nickele has been associated
with JMB and Arvida Partners since February, 1984 and September, 1987,
respectively, and has been associated with KLC Land since November, 1988. 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
Kaanapali Land and its affiliates, including matters relating to property
development and sales and general personnel and administrative functions. Mr.
Nickele is also a shareholder of PTHI.
Stephen Lovelette (age 50) has been an Executive Vice President of
KLC Land and certain of its subsidiaries since February 2001. He has also been
the Executive Vice President of Kaanapali Land since May 2002. Mr. Lovelette
is in charge of implementing the Company's Kaanapali 2020 Development Plan as
well as its other development initiatives on the Island of Maui, and also has
general oversight authority for the Waikele Golf Course. Mr. Lovelette has
been associated with JMB and its affiliates for over 15 years. Prior to
joining an affiliate of JMB, Mr. Lovelette worked for Arvida Corporation, the
predecessor to Arvida Partners, under its previous ownership, and thereafter
continued his involvement in the land development activities of Arvida
Partners. 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, Arvida Partners and their affiliates, as well
as on a consulting basis for third-party borrowers. During the past five
years, Mr. Lovelette has also been a Managing Director of JMB.
Gailen J. Hull (age 56) has, since May 2002, been Senior Vice
President and Chief Accounting Officer and, since March 2003, Chief Financial
Officer of Kaanapali Land. Mr. Hull has also been Senior Vice President of KLC
Land and certain of its subsidiaries since February 2001, Senior Vice
President of Pacific Trail since October 2000, Vice President of PTHI since
October 2000 and Senior Vice President of Mergerco since January 2007. 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,
Kaanapali Land and their respective past and present affiliates. During the
past five years, Mr. Hull has also been a Senior Vice President of JMB and he
is a shareholder of PTHI.
Neil G. Bluhm (age 69) is a Director of PTHI. He is also President
and a Director of JMB and has been associated with JMB since August, 1970.
Mr. Bluhm has also been a principal of Walton Street Capital, L.L.C., which
sponsors real estate investment funds, since its inception in November 1994.
He is a member of the Bar of the State of Illinois.
Judd D. Malkin (age 69), is a Director of PTHI. He is also the
Chairman and a director of JMB, was also its Chief Financial Officer from
February 1996 until August 2002. Mr. Malkin has been associated with JMB
since October, 1969. He is also a director of Chisox Corporation, which is
the general partner of a limited partnership that owns the Chicago White Sox,
a Major League Baseball team, and a director of CBLS, Inc., which is the
general partner of the general partner of a limited partnership that owns the
Chicago Bulls, a National Basketball Association team.
ANNEX A
-------
Agreement and Plan of Merger, dated as of April 9, 2007,
merging KLLLC Mergerco, LLC with and into Kaanapali Land, LLC
PLAN AND AGREEMENT OF MERGER
MERGING
KLLLC MERGERCO, LLC
WITH AND INTO
- ----------------------------------------------------------------------------
This Plan and Agreement of Merger, dated this 6th day of April, 2007, pursuant
to Title 6, Section 18-209 of the Delaware Limited Liability Company Act
("Delaware Law"), between Kaanapali Land, LLC, a Delaware limited liability
company ("Kaanapali"), and KLLLC Mergerco, LLC, a Delaware limited liability
company ("KLLLC"), has been approved by (1) Written Consent by Pacific Trail
Holdings, LLC, a Delaware limited liability company ("Pacific Trail"), in its
capacity as the Manager of Kaanapali, (2) Unanimous Written Consent of the
Directors of Pacific Trail Holdings, Inc., a Delaware corporation, the
Managing Member of Pacific Trail, and (3) Written Consent of Pacific Trail as
the sole Member of KLLLC, each on April 6, 2007.
FIRST: MERGER. Pursuant to the provisions of the Delaware Law and the
respective organizational documents of Kaanapali and KLLLC, KLLLC
shall be merged with and into Kaanapali with Kaanapali being the
surviving entity (the "Merger"). The Merger shall become
effective upon the filing of the Certificate of Merger with the
Delaware Secretary of State in accordance with Delaware Law or at
such other time as specified in the Certificate of Merger in
accordance with Delaware Law (the "Effective Time"). At the
Effective Time, Kaanapali shall continue its corporate existence
as a limited liability company formed under Delaware Law
(sometimes hereinafter referred to as the "Surviving Entity").
The separate existence of KLLLC shall cease at the Effective Time.
SECOND: CERTIFICATE OF FORMATION. The Certificate of Formation of the
Surviving Entity from and after the Effective Time shall be the
Certificate of Formation of Kaanapali in effect immediately prior
to the Effective Time and said Certificate of Formation shall
continue in full force and effect as provided under Delaware Law.
THIRD: OPERATING AGREEMENT. The operating agreement of the Surviving
Entity from and after the Effective Time will be the operating
agreement of Kaanapali in effect immediately prior to the
Effective Time and will continue in full force and effect until
thereafter amended as provided therein and under Delaware Law.
FOURTH: OFFICERS. Until their successors are duly elected and shall have
qualified, the officers and manager of Kaanapali immediately prior
to the Effective Time shall be the initial officers and manager of
the Surviving Entity from and after the Effective Time.
FIFTH: EFFECT ON CLASS A SHARES AND CLASS B SHARES. At the Effective
Time, by virtue of the Merger and without any further action on
the part of KLLLC or Kaanapali, or their respective managers or
members:
(a) The membership interest in KLLLC owned by Pacific Trail
shall automatically be cancelled and shall cease to exist
and no payment shall be made with respect thereto;
(b) Each Class B Share of Kaanapali immediately prior to the
Effective Time shall remain issued and outstanding and
continue to represent a membership interest in the Surviving
Entity, but shall no longer be denominated as Class B Shares
and instead shall be redesignated as a percentage interest
in the Surviving Entity equal to the fraction, expressed as
a percentage, of one Class B Share divided by the total
number of Class B Shares issued and outstanding immediately
prior to the Effective Time;
(c) Each Class A Share of Kaanapali issued and outstanding
immediately prior to the Effective Time, including all
accrued and unpaid distributions thereon, if any, shall
automatically be converted into and become the right to
receive $43.25 (the "Class A Merger Consideration"). The
Class A Merger Consideration shall be paid in cash. At the
Effective Time, all such Class A Shares (and the membership
interests represented thereby) shall automatically be
canceled and shall cease to exist, and each holder of
Class A Shares in Kaanapali (a "Class A Shareholder")
immediately prior to the Effective Time (i) who was a member
of Kaanapali shall cease to be a member of Kaanapali and
shall not be a member of the Surviving Entity, and (ii)
shall cease to have any rights with respect to such Class A
Shares, except the right to receive the Class A Merger
Consideration; and,
(d) Notwithstanding anything to the contrary in this Agreement,
if the Merger is of another type or structure contemplated
by Section NINTH below, (i) each Class A Share shall be
converted into the right to receive the Class A Merger
Consideration, and (ii) the other provisions of this Section
FIFTH shall be modified by the parties hereto to give the
effect to such type of structure.
SIXTH: AUTHORIZATION AND EXECUTION OF DOCUMENTS. Upon satisfaction of
all of the conditions to the Merger set forth herein, or at such
earlier time as may be determined by the respective officers of
Kaanapali and KLLLC, each officer of Kaanapali and KLLLC is hereby
authorized to execute and file the Certificate of Merger on behalf
of said entities in conformity with Delaware Law and the proper
officers of Kaanapali and KLLLC are hereby authorized, empowered
and directed to do any and all acts and things, and to make,
execute, deliver, file and/or record any and all instruments,
papers and documents which shall be or become necessary, proper or
convenient to carry out or put into effect any of the provisions
contained in this Plan and Agreement of Merger or to otherwise
effectuate the Merger including, without limitation, the
qualification of this Company to transact business as a foreign
corporation in such jurisdictions he, she or they may deem
advisable.
SEVENTH: SUCCESSOR TO ASSETS AND LIABILITIES. At and after the Effective
Time, the Surviving Entity shall possess all the rights,
privileges, powers and franchises, of both a public and private
nature, and be subject to all the restrictions, disabilities and
duties of KLLLC and all property real, personal and mixed, and all
debts due on whatever account, and all other things in action or
belonging to KLLLC shall be vested in the Surviving Entity; and
all debts, liabilities, duties and obligations of KLLLC shall
thenceforth attach to the Surviving Entity and may be enforced
against the Surviving Entity to the same extent as if said debts,
liabilities, duties and obligations have been incurred or
contracted by the Surviving Entity in the same manner and to the
same extent as enforceable against KLLLC.
EIGHTH: VESTING OF PROPERTY RIGHTS BY OPERATION OF LAW. The Merger shall
not be deemed to constitute an assignment or transfer to the
Surviving Entity of any interest in any property, lease or other
contract; it being understood that any and all such interests
shall be vested in the Surviving Entity without revision or
impairment by virtue of the Merger and without any further action
by any person whatsoever.
NINTH: CHANGE OF MERGER STRUCTURE. Notwithstanding anything to the
contrary in this Agreement, the parties shall have the right, in
their sole discretion, to (i) change the type or structure of,
and/or the parties to, the Merger, including changing the
structure of the Merger so that (x) Kaanapali merges with and into
KLLLC with KLLLC being the surviving entity, (y) an affiliate of
Pacific Trail other than KLLLC merges with and into Kaanapali with
Kaanapali being the surviving entity and (z) an affiliate of
Pacific Trail other than KLLLC merges with and into Kaanapali with
such other affiliate being the surviving entity and/or (ii) assign
any or all of their rights, interests, duties or obligations under
this Agreement to any affiliate of Pacific Trail, provided that
any action taken by any party pursuant to this Section NINTH shall
not, individually or when taken together with any or all other
actions under this Section NINTH, have an adverse effect on any
member of Kaanapali or KLLLC. If an entity other than KLLLC is a
party to the Merger, then, without the need for any additional act
or consent of any other person or entity, such entity shall
execute a counterpart to the Agreement and shall thereupon become
a party hereto.
TENTH: (a) DEPOSIT OF PAYMENT FUND. On or before the Effective Time,
Kaanapali shall deposit, or cause to be deposited, with
Wells Fargo Bank, N.A., as paying agent for the payment of
the Class A Merger Consideration (the "Paying Agent"), at
least an amount in cash equal to the sum of the product of
(i) the Class A Merger Consideration and (ii) the number of
Class A Shares (the "Payment Fund").
(b) PAYMENT PROCEDURE. As soon as reasonably practicable after
the Effective Time Kaanapali shall use commercially
reasonable efforts to cause the Paying Agent to mail to each
Class A Shareholder of record immediately prior to the
Effective Time whose Class A Shares were converted into the
right to receive the Class A Merger Consideration, pursuant
to Section 2.1(c) and (d) and this Section 2.2(b), a form of
letter of transmittal (the "Letter of Transmittal") which
shall specify that delivery shall be effected, and risk of
loss and title to the Class A Shares held by a person or
entity shall pass, only upon delivery or presentation to the
Paying Agent of evidence reasonably satisfactory to the
Paying Agent that such person or entity was, immediately
prior to the Effective Time, the holder of Class A Shares it
purported to own as of such ("Ownership Evidence"). Upon
delivery or presentation to the Paying Agent of a properly
completed and executed Letter of Transmittal, together with
Ownership Evidence (including any information or
certification required for tax purposes) and such other
documents or evidence as the Surviving Entity or the Paying
Agent may reasonably request, the Class A Shareholder shall
be entitled to receive the Class A Merger Consideration for
each Class A Share owned immediately prior to the Effective
Time, as determined pursuant to this Agreement. No interest
shall be paid or shall accrue on any Class A Merger
Consideration payable pursuant to this Agreement or
otherwise.
(c) NO FURTHER OWNERSHIP RIGHTS IN CLASS A SHARES. All Class A
Merger Consideration paid in exchange for Class A Shares in
accordance with this Section TENTH shall be full
satisfaction for such Class A Shares exchanged for such
Class A Merger Consideration and all rights related to such
Class A Shares. At the close of business on the date on
which the Effective Time occurs, the transfer records of
Kaanapali pertaining to the Class A Shares shall be closed
and there shall be no further registration of transfers, on
the transfer records of Kaanapali, of Class A Shares that
were outstanding immediately prior to the Effective Time.
(d) TERMINATION OF PAYMENT FUND. Any portion of the Payment Fund
that remains undistributed to Class A Shareholders for
twelve (12) months after the Effective Time shall be
delivered to the Surviving Entity, upon demand, and any
Class A Shareholders who have not theretofore complied with
this Section TENTH shall thereafter look solely to the
Surviving Entity for, and, subject to Section TENTH (e), the
Surviving Entity shall remain liable for, payment of their
claim for Class A Merger Consideration.
(e) NO LIABILITY. None of Kaanapali, KLLLC, Pacific Trail, the
Surviving Entity or the Paying Agent shall be liable to any
person or entity in respect of cash from the Payment Fund in
each case delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law. If
any Class A Shares have not been exchanged for Class A
Merger Consideration prior to the second anniversary of the
date on which the Effective Time shall occur (or immediately
prior to such earlier date on which any Class A Merger
Consideration would otherwise escheat to or become the
property of any governmental entity), any such Class A
Merger Consideration in respect thereof shall, to the extent
permitted by applicable law, become the property of the
Surviving Entity, free and clear of all claims or interest
of any person or entity previously entitled thereto.
(f) INVESTMENT OF PAYMENT FUND. The Paying Agent shall invest
the Payment Fund on a daily basis as directed by the
Surviving Entity; provided, however, that such investments
shall be solely in one or ore of the following: (a) direct
obligations of, or obligations the principal of and interest
on which are unconditionally guaranteed by, the United
States of America (or by any agency thereof to the extent
such obligations are backed by the full faith and credit of
the United States of America), in each case maturing within
one year from the date of acquisition thereof; (b)
investments in commercial paper maturing within two hundred
seventy (270) days from the date of acquisition therof and
having, at such date of acquisition, the highest credit
rating obtainable from S&P or Moody's; (c) investments in
certificates of deposit, banker's acceptances and time
deposits maturing within one hundred eighty (180) days from
the date of acquisition thereof issued or guaranteed by or
placed with, and money market deposit accounts issued or
offered by, any domestic office of any commercial bank
organized under the laws of the United States of America or
any State therof which has a combined capital and surplus
and undivided profits of not less than $500,000,000; (d)
fully collateralized repurchase agreements with a term of
not more than thirty (30) days for securities described in
clause (a) above and entered into with a financial
institution satisfying the criteria described in clause (c)
above; and (e) investments in money market funds that (i)
comply with the criteria set forth in Securities and
Exchange Commission Rule 2a-7 under the Investment Company
Act of 1940, (ii) are rated AAA by S&P and Aaa by Moody's
and (iii) have portfolio assets of at least $5,000,000,000.
All interest and other income resulting from such
investments shall be paid to the Surviving Entity on at
least as often as quarterly; provided, however, that as
additional consideration for this Agreement, Paying Agent
may retain and pay over to itself, at the same time(s) that
the balance of such interest is remitted to the Company, the
greater of (x) 20% of the amount of such interest, and (y)
the lesser of the amount of such interest of $100 per month
for the months during which such interest was earned
(prorated for any partial months), and, provided, further,
that Paying Agent shall be entitled to retain all interest
earned from and after 24 months after the Effective Time.
(g) WITHHOLDING RIGHTS. The Surviving Entity and/or the Paying
Agent shall be entitled to deduct and withhold from the
consideration otherwise payable pursuant to this Agreement
to any Class A Shareholder such amounts as the Surviving
Entity or the Paying Agent is required to deduct and
withhold with respect to making such payment under the
Internal Revenue Code or any provision of domestic or
foreign (whether national, federal, state, provincial,
local, or otherwise) tax law, To the extent that amounts are
so withheld and paid over to the appropriate taxing
authority by the Surviving Entity or the Paying Agent, such
withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the Class A Shareholder in
respect of which such deduction and withholding was made by
the Surviving Entity or the Paying Agent.
ELEVENTH: CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGER. The
respective obligations of each party to consummate the
transactions contemplated by this Agreement are subject to the
satisfaction or waiver of the following conditions at or prior to
the Closing Date:
(a) Each of Kaanapali and KLLLC shall have received all
governmental approvals and third party consents required to
be obtained in connection with the Merger except where the
failure to so obtain any such approval or consent would not,
individually or in the aggregate, reasonably be expected (i)
to have a material adverse effect on the business, financial
condition or results of operations of Kaanapali and/or KLLLC
or (ii) to increase the costs of the Merger in any material
respect (including an increase in the Class A Merger
Consideration) (a "Material Adverse Effect");
(b) No temporary restraining order, preliminary or permanent
injunction or other order or decree issued by any court or
governmental entity of competent jurisdiction or other legal
restraint or prohibition that could reasonably be expected
to have (i) a Material Adverse Effect or (ii) the effect of
preventing the consummation of the Merger, shall be in
effect; and,
(c) There shall be no pending or threatened litigation or
governmental action or proceeding challenging the Merger
that could reasonably be expected to have a Material Adverse
Effect.
TWELFTH: TERMINATION. Either party may, at its sole discretion, upon
failure of any of the conditions set forth in Section ELEVENTH, or
for any other reason or no reason, at any time after the date
hereof and prior to the Effective Time, give the other party
notice terminating this Agreement and abandoning the Merger. In
the event of the termination of this Agreement and the abandonment
of the Merger pursuant hereto, this Agreement shall thereupon
become null and void and have no effect and no party hereto (or
any of its direct or indirect partners or members, or any of their
respective, officers, directors, members, managers, employees or
agents) shall have any liability or obligation to any Class A
Shareholder or to any other party to this Agreement.
THIRTEENTH: FURTHER ASSURANCES. Unless this Agreement is terminated under
Section TWELFTH, each of Kaanapali and KLLLC shall use its
reasonable efforts to take all actions necessary and appropriate
to effectuate the Merger, including, if necessary, executing any
additional documents or other instruments and filing such
documents or other instruments with the appropriate governmental
authorities.
FOURTEENTH: NO APPRAISAL RIGHTS. The Class A Shareholders are not entitled to
any appraisal or dissenters' rights under the operating agreement
of Kaanapali or applicable law as a result of the Merger.
FIFTEENTH: GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware.
SIXTEENTH: ENTIRE AGREEMENT. This Agreement, including the exhibits hereto,
reflects the entire agreement of the parties regarding the subject
matter hereof and supersedes all prior agreements and
understandings among the parties with respect thereto.
SEVENTEENTH:SEVERABILITY. If any provision of this Agreement is held or deemed
to be void, unenforceable or otherwise of no force and effect,
each other provision of this Agreement shall remain in full force
and effect and shall be construed without giving effect to the
provision that is void, unenforceable or of no force and effect.
EIGHTEENTH: AMENDMENT. This Agreement shall be amended only by a writing
signed by all parties hereto.
NINETEENTH: NO THIRD PARTY BENEFICIARY. This Agreement shall be for the sole
and exclusive benefit of the parties hereto, and no other party
shall have any direct or indirect right or interest in or arising
out of this Agreement.
TWENTIETH: COUNTERPARTS. This Agreement may be signed in two or more
counterparts which, when taken together, shall constitute a fully
executed version of this Agreement.
IN WITNESS WHEREOF, the undersigned entities have caused this Plan and
Agreement of Merger to be executed by their duly authorized officers this 6th
day of April, 2007.
KAANAPALI LAND, LLC
a Delaware limited liability company
By: Pacific Trail Holdings, LLC,
its manager
/s/ Gary Nickele
------------------------------
Vice President
KLLLC, LLC
a Delaware limited liability company
By: Pacific Trail Holdings, LLC,
its sole member
/s/ Paul Nielsen
------------------------------
Vice President
ANNEX B
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ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2006, AS AMENDED
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Act of 1934
For the fiscal year
ended December 31, 2006 Commission File Number #0-50273
KAANAPALI LAND, LLC
(Exact name of registrant as specified in its charter)
Delaware 01-0731997
(State of organization) (I.R.S. Employer Identification No.)
900 N. Michigan Ave., Chicago, Illinois 60611
(Address of principal executive office) (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 each class
to be so registered is to be 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 (the "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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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, or a non-accelerated filer. See definition of
"accelerated filer" and "large accelerated filer" in Rule 12b-2 of the
Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Nonaccelerated filer [ X ]
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, 2007, the registrant had 1,792,613 shares of which
161,100.17 were Class A shares.
Documents incorporated by reference: None
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . 1
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . 3
Item 1B. Unresolved Staff Comments. . . . . . . . . . . . 14
Item 2. Properties . . . . . . . . . . . . . . . . . . . 14
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . 19
PART II
Item 5. Market Price of and Dividends on the
Registrant's Common Equity and
Related Stockholder Matters. . . . . . . . . . . 20
Item 6. Financial Information. . . . . . . . . . . . . . 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. . . . . . . . . . . . . . . . 25
Item 8. Financial Statements and
Supplementary Data . . . . . . . . . . . . . . . 26
Item 9. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . 52
Item 9A. Controls and Procedures. . . . . . . . . . . . . 52
Item 9B. Other Information. . . . . . . . . . . . . . . . 52
PART III
ITEM 10. Managers and Executive Officers
of the Registrant. . . . . . . . . . . . . . . . 53
Item 11. Executive Compensation . . . . . . . . . . . . . 55
Item 12. Security Ownership of Certain
Beneficial Owners and Management . . . . . . . . 56
Item 13. Certain Relationships and
Related Transactions . . . . . . . . . . . . . . 57
Item 14. Principal Accountant Fees and Services . . . . . 57
PART IV
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K. . . . . . . . . . . . . 58
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . 60
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 Debtors had
filed their petitions for reorganization under Chapter 11 on February 27,
2002 (the "Petition Date") in the United States Bankruptcy Court for the
Northern District of Illinois, Eastern Division (the "Bankruptcy Court"),
which petitions were consolidated into a single joint proceeding by the
Bankruptcy Court (the "Reorganization Case").
The principal goal of the Plan was to address the Debtors' debt
burdens so that the Debtors could emerge from Chapter 11 with a viable
capital structure and with the resources necessary to operate their land
development business. The Plan achieved this goal by converting certain
indebtedness and other liabilities of the Debtors into new equity of
Kaanapali Land (to the extent such creditors did not elect an available
cash distribution option). Another goal of the Plan was to secure
additional liquidity for the Debtors to help fund future operations. The
Plan achieved this goal through the Merger of Northbrook Corporation
("Northbrook") into FHTC and the subsequent merger of FHTC into Kaanapali
Land, which made the assets and liquidity of Northbrook available to the
Debtors to help fund their land development business.
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"). After the Plan
Effective Date, Kaanapali Land continued to implement the restructuring
transactions that were contemplated to be effected under the Plan. All
material requirements and transactions that the Company implemented under
the Plan are described herein. On August 21, 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 Reorganization Case 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 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"). Kaanapali Land pursues its businesses utilizing the
assets of the KLC Debtors and the Non-Debtor KLC Subsidiaries and the
assets formerly owned by Northbrook and its other subsidiaries.
The Company operates in three primary business segments: (i)
Property, (ii) Agriculture and (iii) Golf. The Company operates through a
number of subsidiaries, each of which is 100% owned directly or indirectly
by Kaanapali Land, LLC.
SUMMARY OF PLAN
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, provided that creditors with allowed claims became entitled
to receive distributions under the Plan as of that date and provided that
the Plan does not impair any claims of taxing authorities. The time for
filing proofs of claim relating to all classes of claims expired prior to
the Plan Effective Date, including the period for those whose executory
contracts were rejected by the Debtors. Therefore, all claims that could
be asserted by the creditors against the Debtors relative to amounts due on
pre-petition obligations as of the Plan Effective Date are known and have
since been liquidated or otherwise disposed of. However, any claims of the
Internal Revenue Service ("IRS") relative to pre-petition transactions were
left unimpaired by the Plan, as described below.
The Limited Liability Company Agreement of Kaanapali Land (the "LLC
Agreement") provides for two classes of membership interests, "Class A
Shares" and "Class B Shares", which have substantially identical rights and
economic value under the LLC Agreement; except that holders of Class A
Shares are represented by a "Class A Representative" who must approve
certain transactions proposed by Kaanapali Land before they can be
undertaken. The Class A Representative is 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 are 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 and the rights and
duties of the Class A Representative.
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 does not anticipate making 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 has
approximately 1,631,513 Class B Shares outstanding.
Federal tax return examinations have been completed for all years
through 2002. Refunds aggregating approximately $4.7 million for years
through 2000 have been received by Kaanapali Land for previous payments of
taxes and interest. Pursuant to a settlement agreed to with the IRS in
2006, no liability for Federal taxes was determined for 2001 or 2002;
however, in connection with the settlement of those years, the Company
agreed to adjust certain tax attributes, including the tax basis of assets.
The effect in 2006 on the Company's consolidated balance sheet was to
increase deferred tax liabilities by approximately $1.9 million. Income tax
expense was also recorded for the year ended December 31, 2006 due to the
finalization of the Company's 2005 tax return and a payment made in regard
to the settlement of a prior year state tax matter of approximately $300
thousand. The statutes of limitations with respect to the Company's tax
returns for 2003 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.
KLC Land is the direct subsidiary of Kaanapali Land through which the
Company conducts substantially all of its operations, except those relating
to the Waikele Golf Course whose operations are conducted by another direct
subsidiary of Kaanapali Land. KLC Land conducts 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 Development Corp. ("KDC") and PM Land Company, 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 to 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. There are
an additional approximately 235 acres in the Lahaina, Maui, area known as
Wainee, a portion of which may be developable. In addition, the Company has
recently completed the demolition and removal of the former Pioneer Mill
sugar mill structures (except for certain minor storage facilities),
thereby freeing up approximately 19 acres of land that is zoned for
industrial use near the center of Lahaina, which may be used for retail
and/or infrastructure development in the future. 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 affect materially utilization
of the land and the costs associated with developing the land. In addition,
a recent ordinance enacted by Maui County that 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 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 the Maui lands. At this time, the only lands in Maui that have
sufficient entitlements to commence development are those in Phase I of the
Kaanapali Coffee Farms development, as described below.
The current regulatory approval process for a development project can
take three to five 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.
Recently, the Company has 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. However, no
agreement has been reached with any agency to modify the terms of the
development agreement and it is currently unclear whether an agreement will
be reached, or on what terms.
Despite the hurdles mentioned above, the Company believes 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 Kaanapali 2020 area. This
project, called Kaanapali Coffee Farms, consists of 58 agricultural lots of
which are being offered to individual buyers. It is anticipated that the
land improvements will be completed in 2007. In conjunction with the final
approval, the Company was required to obtain two subdivision bonds in the
amounts of approximately $18.6 million and $4.7 million and was required to
secure those bonds with a cash deposit of $8.3 million into an interest
bearing collateral account. Subsequently, one of the bonds was reduced
from $18.6 million to $11.3 million and the collateral was reduced to $5.9
in early 2007. The funds will be withdrawn from the collateral account by
the Company based upon stage of completion of the subdivision improvements
and the release of the bonds. During July and early August 2006 the
Company closed on the sale of three lots at Kaanapali Coffee Farms for
aggregate net sales proceeds of $4.4 million. It also entered into a joint
venture agreement with a local builder for the design, construction and
sale of residential improvements on another lot. In January 2007, the
Company closed on the sale of one lot for net sales proceeds of
approximately $1.3 million.
OTHER MAUI PROPERTY. Apart from the golf course (discussed below)
and the Kaanapali 2020 lands, the Company owns approximately 390 acres of
remaining land.
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 former Pioneer Mill coffee mill operation now operated by a
third party under a land lease agreement with Pioneer. Pioneer Mill is
currently evaluating strategic options relating to this site. During 2006
the Company entered into a contract for the demolition of the sugar mill
buildings on the Pioneer Mill site. The work was completed during 2006 at
a cost of approximately $2.8 million. Previously, Pioneer Mill had been
engaged in a modest cleanup operation arising out of the discovery of
petroleum contamination found at the Pioneer Mill site. The Pioneer Mill
site was assigned a high priority by the Hawaii Department of Health
("HDOH") as HDOH had been designated by the United States Environmental
Protection Agency, Region IX (hereinafter "EPA") as the oversight agency
for Pioneer Mill. However, Pioneer Mill's cleanup efforts to date have
satisfied HDOH and Pioneer Mill received a no further action letter during
the fourth quarter of 2004. Further routine cleanup operations in
connection with the demolition of the former sugar mill buildings on the
site were conducted with respect to an underground storage tank discovered
on the site. All such work has been completed.
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. A
determination on the viability to proceed in the entitlement process is
expected to be made during 2007. In the meantime, 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, one is currently on appeal and a small number of them have survived
summary judgment motions by the Company, which may ultimately require
trials at uncertain additional cost and time to completion. There can be
no assurance that these actions will achieve an ultimate level of success
that will 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 primarily include land associated with now-closed
sugar growing and processing operations, remnant parcels abutting
infrastructure improvements from previously sold lands, such as strips
along roadways, and water-related assets. It is not expected that upon
sale these miscellaneous parcels will yield any significant cash proceeds
to the Company.
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 liquidated its remaining inventory of
coffee beans and mill equipment. 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.
SEED CORN AND SOYBEAN OPERATIONS. The Company's seed corn operations
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 $1.2 million of annual gross
revenue, to grow seed corn and soybeans 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 can find
ready markets for their products and it is sufficiently profitable to do
so. There can be no assurance that any expansion will occur or that
current operations will remain profitable.
GOLF
The Company owns the golf course land and improvements and is
responsible for the management and operation of an 18-hole golf course
known as the Waikele Golf Course on Oahu. The Company ceased operations at
the golf course effective March 1, 2006 for five months to allow for
renovations of the golf course greens and facilities. The golf course
resumed operations on September 1 2006. The assets and operations of the
Waikele Golf Course represent all of the golf segment for purposes of
business segment information. The cost of the renovations and the shut-
down of the course did not have a material adverse effect on the overall
financial condition of the Company.
For a description of financial information by segment, please read
Note 8 to the attached consolidated financial statements, which information
is incorporated herein by reference.
SIGNIFICANT ASSET SALES
There are strategic land sales that the Company has consummated or
that may occur based on options held by third parties. 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. No further significant bulk land sales are currently contemplated
by the Company.
NORTH BEACH. At the Plan Effective Date and prior to the sale of
Lots 2 and 4 in 2003, the Company owned three beachfront lots that total
approximately 62 developable acres, commonly known as Lots 2, 3 and 4. All
three lots are zoned for hotel development. In December 2000, the Company
sold a fourth parcel, the 14-acre Kaanapali Ocean Resort ("KOR") site known
as Lot 1, to SVO Pacific, Inc. ("SVO"), an affiliate of Starwood Hotels and
Resorts, which is in the process of developing time-share units on the
property. In addition, SVO received an option to purchase Lot 2, which
contains approximately 11.5 acres. During 2003, the Company closed on the
sales of Lots 2 and 4. At the closing of Lot 4, the Company granted to the
purchaser an option to purchase Lot 3. On June 21, 2005, the Company
closed the sale of Lot 3 for a base price of $22.5 million, pursuant to the
option. On September 12, 2005, the Company received $6 million from the
purchaser of Lot 4 in connection with its subsequent sale of Lot 3 to SVO,
pursuant to a purchase price adjustment agreement negotiated by the parties
in settlement of certain defaults claimed by the Company relative to the
Lot 3 option agreement.
EMPLOYEES.
At March 1, 2007, Kaanapali Land and its subsidiaries had employed
approximately 60 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,
the various trade names and service marks obtained in connection with the
Company's coffee operations and the use of the term "Waikele" in connection
with the Waikele golf course and related developments. 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 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 slow down
during the latter part of 2005 and 2006 after it had experienced a recovery
during 2003, 2004 and the first half of 2005. It is not clear how long the
current slow down will last.
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.
The golf course operated by the Company competes with several other
golf courses located in its proximity and with other entertainment and
tourist activities. In order to improve the golf course's competitive
position, the Company closed the golf course during 2006 in order to
implement certain improvements. The golf course was closed for five months
and resumed operations on September 1, 2006. Competition in the
agriculture business segment affects the prices the Company may obtain for
the land and other assets it leases to third parties for the production of
agricultural products.
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. 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.
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. Entitlements for a 58 lot 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 other use. This conservation land, and other
land that will be designated as open space, is an important component of
the overall project and is expected to be part of 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. The Company is not aware of any
environmental condition on any of its properties which is likely to 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 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, tsunamis 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 has
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 during the past fifteen months, which has negatively impacted
the volume of transactions completed in West Maui. At present the Company
does not expect that current market conditions will materially impact
pricing for its properties, but will instead impact the number of lots sold
in the near term. No assurance can be given, however, as to whether current
market conditions will again improve, or when, or as to whether pricing for
the Company's land assets will ultimately soften.
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, wind and other natural perils can adversely impact
agricultural production on the Company's lands. 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. 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.The Company has obtained bids for portions of the required
remedial work and expects to commence same during the second quarter of
2007.
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. Bureau of Reclamation has inspected each
reservoir and identified certain minor damage. In addition, Company
personnel have inspected various portions of its Maui water source and
transmission assets to determine if any other damage of significance has
occurred, but the Company has so far found no material damage. While the
damage to the smaller reservoir cited by the recent DLNR inspection will
not require any immediate action, it is unclear at this time whether the
DLNR will require any work on the larger reservoir even though the damage
is located in a portion of the reservoir that is presently unused. There
can be no assurance that the expense of doing such required work will not
be material.
RISKS RELATED TO THE HAWAIIAN GOLF MARKET
A subsidiary of Kaanapali Land owns the Waikele Golf Course on Oahu.
The performance of golf courses in Hawaii depends heavily on the strength
of the tourism industry in Hawaii. Thus, Kaanapali Land is subject to the
risks generally associated with operating tourism-related businesses. These
include adverse changes in national and international economic conditions
(including adverse changes in exchange rates of foreign currencies for U.S.
dollars) and in national and international political situations that
constrain travel, tourism and investment in Hawaii. The performance of golf
courses in Hawaii is also affected by competition from comparable courses
in the surrounding areas, which include a number of courses that have
opened, reopened or been significantly upgraded in recent years. In
addition, the Debtors are aware of an additional new golf course that is
currently being constructed to the west of the Waikele Golf Course, as well
as two other Oahu golf courses that are currently in the planning phase,
which may or may not ultimately be built. There can be no assurance that
additional courses will not be developed that will compete with the Waikele
Golf Course.
In addition to market risks, Waikele Golf Course operations are
subject to operating risks such as adverse weather conditions, including
heavy prolonged rains and hurricanes, employee-related issues such as labor
shortages and disruptions (including, but not limited to disruptions of
food and beverage service by the third-party restaurant operator who leases
space in the clubhouse from the Company), blight or other diseases
affecting grass or other vegetation and costs of merchandise, equipment and
supplies.
The Waikele Golf Course is not affiliated with an existing resort,
but is located in a high-density residential area. The Waikele Golf Course
has historically had a significant amount of Japanese tourist play as well
as a high level of Hawaii resident play from the surrounding residential
areas. During the 1980's and into the mid-1990's, Asian visitors comprised
as much as half of the total rounds played at certain courses in Hawaii.
With the downturn in the Japanese economy, there has been a significant
drop in Asian visitors and this has had a material effect on Hawaiian golf
course rounds. The mainland tourism market was very strong, particularly on
the neighboring islands, prior to the terrorist attacks of September 11,
but this had little direct impact on the Waikele Golf Course. Since
September 11, the Asian visitor levels in Hawaii dropped precipitously and
golf course rounds have dropped as much as fifty percent at some Hawaii
golf courses. Asian tourist play is controlled by a relatively small number
of tour operators who include golf as part of their tour packages. These
operators are extremely price sensitive, which limits the ability of golf
courses such as Waikele to increase greens fees. While Asian tourist
visitation to Hawaii has rebounded somewhat in the past two years, it does
not appear that this rebound has given a significant boost to the number of
golf rounds being played on Oahu.
Since the initial reduction in the Japanese visitor levels in the
mid-1990's, many courses have attempted to offset some of the loss from the
tourism market by attracting local Hawaiian resident play. The Waikele Golf
Course has been successful at increasing the Hawaii resident rounds at the
course; however, Hawaii residents receive a significant discount on fees at
most courses, known as "Kamaiina rates", and Kamaiina rounds are therefore
less profitable than other rounds.
In order to reverse the downward trend in rounds played at Waikele
Golf Course, particularly by visiting tourists from Asia and elsewhere, the
Company embarked on a $1.2 million renovation project in 2006, which
resulted in the golf course being closed for approximately five months in
2006. This renovation included the reconstruction of all greens and a
number of tees, plus a modest renovation of the golf course clubhouse.
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 leases 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 all the risks relating to the cost of
growing and maintaining the trees and producing the crop (except for a
minor portion of the coffee land that is leased to a third party who
maintains the trees on such land), and a portion of the market risk
attendant to the sale of the crop as well. That is because the harvesting
and marketing of the crop has been contracted to a third-party grower, who
will pay the Company (or the homeowners' association with respect to the
coffee land within Kaanapali Coffee Farms Phase I) only a modest fixed
amount for the privilege of taking the coffee beans, with a more
substantial payment due based on a percentage of revenues obtained from the
crop by such grower.
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 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. Thus, it is clear that
Hawaii is subject to higher risks than other portions of the Untied 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 from foreign
countries will disproportionately impact the Company in future years, both
positively and negatively, as market and visitation cycles play out.
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, or 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. In proceedings filed prior to the Petition Date where a Debtor
was a defendant, such proceedings were stayed as against such Debtor by the
filing of the Reorganization Case. 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 may proceed. However, one such
subsidiary, Oahu Sugar, filed a subsequent petition for liquidation under
Chapter 7 of the bankruptcy code in April 2005, as described below.
On or about February 23, 2001 Kekaha Sugar Co., Ltd. ("KSCo"), a
company that was, prior to its dissolution, a subsidiary of Kaanapali Land,
received a letter from the Hawaii Department of Health ("HDOH") assigning
the former KSCo, 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. KSCo responded to the letter soon
after it was received. The United States Environmental Protection Agency
("EPA") later performed a visual inspection of the property and indicated
there will be some testing performed. HDOH has performed some testing at
the site and it is not known whether such test results, if any, will
require any further response activities. However, as KSCo was
substantially without assets and has dissolved, the ability of KSCo to
perform any requested actions is doubtful.
On or about February 23, 2001, The Lihue Plantation Company, Limited,
now known as LPC Corporation ("LPCo") 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 relative to LPCo's former
operations including the 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. HDOH further reserved the right to modify its prioritization
of the site should conditions warrant. As noted above, the high priority
assignment will likely result in a high degree of oversight by the HDOH as
the issues raised are studied and addressed. LPCo is substantially without
assets, and further pursuit of this matter by HDOH could have a material
adverse effect on the financial condition of LPCo.
The purchaser of the Kekaha and Lihue Plantation sugar mills
properties in January 2005 assumed any obligations for environmental
matters concerning the property it purchased. However, there can be no
assurance that such purchaser will have sufficient assets to satisfy a
claim should any substantial liabilities result.
Pioneer Mill was engaged in a modest cleanup operation arising out of
the discovery of petroleum contamination found at the Pioneer Mill site.
The Pioneer Mill site was assigned a high priority by the HDOH and the HDOH
has shown an interest in the environmental conditions relating to or
arising out of the former operations of Pioneer Mill. EPA designated HDOH
as the oversight agency for Pioneer Mill. Pioneer Mill received a report
on the results of environmental testing conducted on the site by the EPA
and HDOH. However, Pioneer Mill's cleanup efforts to date have satisfied
HDOH and Pioneer Mill received a no further action letter during the fourth
quarter of 2004. Further routine cleanup operations in connection with the
demolition of the former sugar mill buildings on the site were conducted
with respect to an underground storage tank discovered on the site. Such
work has been completed as of the date of this report.
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 was in
the process of responding 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, 11 U.S.C. Subsection 101-1330 on
April 19, 2005, Case No. 05-15100. 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 and it is not believed that any
other affiliates have any responsibility for the debts of Oahu Sugar.
Nevertheless, the Company continues to expend cash and management time on
this issue and cannot guarantee that the Company will not ultimately be
made responsible for all or a portion of such clean-up, due to the facts
set forth below.
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, on the basis 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, the EPA's letter has invited
Kaanapali Land to engage in settlement discussions with the EPA to attempt
to resolve Kaanapali Land's alleged liability. Kaanapali is in the
preliminary stages of evaluating the positions taken by the EPA. While
Kaanapali Land believes that it has defenses to the EPA's position,
Kaanapali Land has nevertheless begun such settlement discussions with EPA
to determine if the matter can be resolved on reasonable terms. Even if
Kaanapali Land were found to be the successor to Old Oahu, Kaanapali Land
believes that its liabilities, if any, should relate solely to a portion of
the period of operation of Old Oahu at the site. Moreover, Kaanapali Land
believes that any settlement should involve substantial participation of
the U.S. Navy, which has owned the site throughout the entire relevant
period, both as landlord under its various leases with Oahu Sugar and Old
Oahu and by operating the site directly during a period when no lease was
in force. There can be no assurances that the matter can be resolved on
terms acceptable to Kaanapali Land or that this matter will not ultimately
have a material adverse effect on the Company.
Federal tax return examinations have been completed for all years
through 2002. Refunds aggregating approximately $4.7 million for years
through 2000 have been received by Kaanapali Land for previous payments of
taxes and interest. Pursuant to a settlement agreed to with the IRS in
2006, no liability for Federal taxes was determined for 2001 or 2002;
however, in connection with the settlement of those years, the Company
agreed to adjust certain tax attributes, including the tax basis of assets.
The effect in 2006 on the Company's consolidated balance sheet was to
increase deferred tax liabilities by approximately $1.9 million. Income
tax expense was also recorded for the year ended December 31, 2006 due to
the finalization of the Company's 2005 tax return and a payment made in
regard to the settlement of a prior year state tax matter of approximately
$300 thousand. The statutes of limitations with respect to the Company's
tax returns for 2003 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.
On February 15, 2005, D/C Distribution Corporation ("D/C"), a
subsidiary of Kaanapali Land, 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
has been 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 alleges that it is an
insurance company to whom D/C has tendered for defense and indemnity
various personal injury lawsuits allegedly based on exposure to asbestos
containing products. Plaintiff alleges 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 seeks, 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 have been 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 is entitled to recoupment and reimbursement of
some or all of the amounts it has paid for defense and/or indemnity; and
that D/C has breached its obligation of cooperation with plaintiff. D/C
has filed an answer and an amended cross-claim. D/C believes that it has
meritorious defenses and positions, and intends to vigorously defend. In
February 2006, in order to simplify its administration and facilitate an
additional capital contribution by Kaanapali Land, D/C merged into a newly-
formed Illinois limited liability company named D/C Distribution, LLC.
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 in excess of 60 cases against D/C that are
pending on the U.S. mainland (primarily in California) and are allegedly
based on D/C's prior business operations. 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. In the
case of D/C, there can be no certainty that it will be able to satisfy all
of its liabilities for these cases or future judgments, if any. There can
be no assurances that these cases (or any of them) if adjudicated in a
manner adverse to D/C, will not have a material adverse effect on the
financial condition of D/C. 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 August 30, 2006, a third party complaint was filed against, KLC
Land Company, LLC, Amfac/JMB Hawaii, LLC, and Amfac/JMB Hawaii, Inc., and
Amfac Distribution Corporation in an action entitled The Queen Emma
Foundation v. Lenox Resources, Inc. and Alan Hornstein, Civil No. CV05-
00546 HG KSC. In the third party action, third party plaintiff seeks to
recover a share of clean up costs for contamination allegedly discharged by
one or more of the third party defendants at a former commercial site.
Third party plaintiff seeks, among other things, an unspecified amount of
money, attorneys' fees and costs. The matter has been resolved and
dismissed without any monetary contribution by the subject third party
defendants.
The Company has 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. 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. The Company
has obtained bids for portions of the required remedial work and expects to
commence same during the second quarter of 2007.
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 addition, Company
personnel have inspected various portions of its Maui water source and
transmission assets to determine if any other damage of significance has
occurred, but has so far found no material damage. While the damage to the
smaller reservoir cited by the recent DLNR inspection will not require any
immediate action, it is unclear at this time whether the DLNR will require
any work on the larger reservoir even though the damage is located in a
portion of the reservoir that is presently unused. There can be no
assurance that the expense of doing such required work will not be
material.
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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 31, 2006 there were approximately 696 holders of
record of the Company's 161,100 outstanding Class A Shares and
approximately 14 holders of record of the Company's 1,631,513 outstanding
Class B 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 2006, 2005 and 2004 and the Company does not anticipate making
any distributions for the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
KAANAPALI LAND, LLC (a)
For the years ended December 31, 2006, 2005, 2004, 2003 and 2002
(Dollars in Thousands Except Per Share Amounts)
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
Total revenues . . . . $ 11,547 37,251 13,916 63,783 11,112
======== ======== ======== ======== ========
Net income (loss)
(c) . . . . . . . . . $ 1,612 21,042 4,887 70,636 140,784
======== ======== ======== ======== ========
Income (loss) from
continuing
operations per
share, basic
and diluted . . . . . $ .90 11.74 2.73 5.86 (b)
======== ======== ======== ======== ========
Net income (loss)
per share, basic
and diluted . . . . . $ .90 11.74 2.73 39.44 (b)
======== ======== ======== ======== ========
Total assets . . . . . $185,344 187,875 179,401 189,473 189,626
======== ======== ======== ======== ========
(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) The income per share from continuing operations for the period
prior to the Plan Effective Date is $3,235 and the loss per share from
continuing operations for the period after the Plan Effective Date is $5.
The net income per share for the period prior to the Plan Effective Date is
$37,389 and the net loss per share for the period after the Plan Effective
Date is approximately $5.
(c) In 2002, the Company recognized an extraordinary gain on
reorganization of $136,618. In 2003, the Company recognized a gain on
disposition of unconsolidated investment of $60,134.
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. On August 31, 2005, pursuant to a motion
for entry of final decree, the bankruptcy cases were closed.
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 remaining
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 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, 2006, the Company had cash and cash equivalents of
approximately $39.6 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 including roadway construction, drainage and utilities, environmental
remediation costs on existing and former properties, potential tax
liabilities resulting from IRS audits, retiree medical insurance benefits
for Pioneer Mill Company, 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. A significant portion of such anticipated expenses are
currently subject to contractual commitments, however, significant
additional costs may be incurred. 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.
The Company ceased operations at the Waikele Golf Course effective
March 1, 2006 for five months to allow for renovations of the golf course
greens and facilities. The cost of renovations and the shut-down of
operations did not have a material adverse effect on the overall financial
condition of the Company. The golf course resumed operations September 1,
2006.
The Company's mortgage note payable as of December 31, 2004 was a
loan secured by the Waikele Golf Course. The owner of the golf course
repaid the mortgage in full on March 1, 2005, with proceeds obtained
through a new mortgage loan granted by a subsidiary of Kaanapali Land in
the original principal amount of approximately $7.2 million and is secured
by the Waikele Golf Course. The mortgage loan was amended March 31, 2006
upon which the accrued interest was added to principal and the Holder
agreed to make future advances under the note in an amount not to exceed
$3,000 for purposes of funding the golf course improvements. Interest on
the principal balance accrues at an adjustable rate of prime plus 1%. The
principal and accrued interest, which are prepayable, are due March 1,
2015. As of December 31, 2006 the note had an outstanding principal and
accrued interest balance of $9.3 million. The note has been eliminated in
the consolidated financial statements because the obligor and maker are
consolidated subsidiaries of Kaanapali Land.
The Company's continuing operations have in recent periods been
primarily reliant upon the net proceeds of sales of developed and
undeveloped land parcels.
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 Kaanapali 2020 area. This
project, called Kaanapali Coffee Farms, consists of 58 agricultural lots
that are being offered to individual buyers. It is anticipated that the
land improvements will be completed in 2007. In conjunction with the final
approval, the Company was required to obtain two subdivision bonds in the
amounts of approximately $18.6 million and $4.7 million and was required to
secure those bonds with a cash deposit of $8.3 million into an interest
bearing collateral account. Subsequently, one of the bonds was reduced
from $18.6 million to $11.3 million and the collateral was reduced to $5.9
in early 2007. The funds will be withdrawn from the collateral account by
the Company based upon stage of completion of the subdivision improvements
and the release of the bonds. During July and early August 2006 the
Company closed on the sale of three lots at Kaanapali Coffee Farms for
aggregate net sales proceeds of $4.4 million. It also entered into a joint
venture agreement with a local builder for the design, construction and
sale of residential improvements on another lot. In January 2007, the
Company closed on the sale of one lot for net sales proceeds of
approximately $1.3 million.
During April 2006 the Company became aware of an unsolicited tender
offer for shares made jointly by Sutter Capital Management, LLC and
MacKenzie Patterson Fuller, LP to purchase up to 8,000 Class A Shares
(approximately 4.9%) of the outstanding Class A Shares in the Company for
$1 per share. Pacific Trails, the manager of the Company, determined that
the offer was inadequate and not in the best interests of the shareholders.
Accordingly, Pacific Trails recommended that the shareholders not accept
the offer and not tender their Class A Shares pursuant to such offer.
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.
2006 COMPARED TO 2005
Cash and cash equivalents decreased and property, net increased in
the accompanying balance sheets due to the Kaanapali Coffee Farms
development costs incurred during the year partially offset by the sales of
three lots.
Receivables, net decreased due to refunds received for previous
payments of taxes and interest as a result of the recently concluded
examination of the 2000 Federal tax return.
Accounts payable and accrued expenses increased due to the accrual of
development costs and retention holdback incurred for the Kaanapali Coffee
Farms project.
Other liabilities decreased primarily due to the net reduction of
certain reserves of approximately $7.5 million related to contingencies
which originated in prior years and were resolved in 2006, the offset of
which is reflected in selling, general and administrative expenses. While
certain reserve elements of other liabilities were adjusted in 2006 due to
changing circumstances, the primary cause of the overall decrease in other
liabilities was the completion of Federal tax return examinations for the
years 1998 to 2002 which were settled by the Company at amounts which
reduced significantly the need for reserves for potential income tax
exposure.
The decrease in sales and cost of sales is primarily due to the sale
of the mill sites and associated lands on the Island of Kauai, the sale of
Lot 3 and the purchase price adjustment on Lot 3 during 2005 offset by the
sales of three lots during 2006.
2005 COMPARED TO 2004
Cash and cash equivalents increased and property, net decreased due
to the sale of Lot 3 during 2005 offset by development costs incurred
during the year and the deposit of cash into a collateral deposit account
to secure two subdivision bonds.
Receivables, net increased due to refunds due for previous payments
of taxes and interest as a result of the recently concluded examination of
the 2000 Federal tax return.
Other assets increased primarily due to a cash deposit into an
interest bearing collateral account to secure two subdivision bonds
relating to the Kaanapali Coffee Farms project.
The accumulated post-retirement benefit obligation decreased
primarily due to the recognition of the effect of ending retiree medical
and life insurance coverage as of December 31, 2005 for all remaining
active employees.
Other liabilities and selling, general and administrative expenses
decreased primarily due to the reduction of certain reserves related to
contingencies which originated in prior years and were resolved in 2005.
The net reduction in reserves of approximately $8.6 million resulted in a
credit to selling, general and administration expenses in 2005.
Mortgage note payable and interest decreased due to the repayment of
the Waikele Golf Course mortgage in full during the first quarter of 2005.
The increase in sales and cost of sales is primarily due to the sale
of the mill sites and associated lands on the Island of Kauai, and the sale
of Lot 3 and the purchase price adjustment on Lot 3 during 2005.
The decrease in the reduction of post-retirement benefit obligations
was due to the effect of the expected termination of most of the post-
retirement obligations at the end of 2004.
The decrease in income tax expense is a result of utilization of
deferred tax assets that had previously been subject to a valuation
allowance.
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
judgements 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.
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. Prior to the filing of the Reorganization Case,
the Company's primary risk exposure had been to interest rate risk. 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, 2006 and 2005
Consolidated Statements of Operations for the years ended
December 31, 2006, 2005 and 2004
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005 and 2004
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 as of December 31, 2006 and 2005, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of
the three years in the period ended December 31, 2006. 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, 2006 and 2005, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2006, in conformity with U.S. generally accepted
accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
March 23, 2007
KAANAPALI LAND, LLC
Consolidated Balance Sheets
December 31, 2006 and 2005
(Dollars in Thousands, except share data)
A S S E T S
-----------
2006 2005
-------- --------
Cash and cash equivalents. . . . . . . . . . . . . . $ 39,624 51,677
Receivables, net . . . . . . . . . . . . . . . . . . 148 4,735
Property, net. . . . . . . . . . . . . . . . . . . . 105,189 92,322
Prepaid pension costs. . . . . . . . . . . . . . . . 29,150 27,473
Other assets . . . . . . . . . . . . . . . . . . . . 11,233 11,668
-------- --------
$185,344 187,875
======== ========
L I A B I L I T I E S
---------------------
Accounts payable and accrued expenses. . . . . . . . $ 4,488 1,351
Deferred income taxes. . . . . . . . . . . . . . . . 28,647 28,197
Accumulated post-retirement benefit obligation . . . 2,452 2,716
Other liabilities. . . . . . . . . . . . . . . . . . 29,085 36,551
-------- --------
Total liabilities. . . . . . . . . . . . . . 64,672 68,815
Commitments and contingencies
S T O C K H O L D E R S' E Q U I T Y
-------------------------------------
Common stock, at 12/31/06 and 12/31/05
Class A and Class B Shares authorized
- 4,500,000; shares issued 1,792,613 . . . . . . . -- --
Additional paid-in capital . . . . . . . . . . . . . 5,357 5,357
Accumulated earnings . . . . . . . . . . . . . . . . 115,315 113,703
-------- --------
Total stockholders' equity . . . . . . . . . 120,672 119,060
-------- --------
$185,344 187,875
======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
KAANAPALI LAND, LLC
Consolidated Statements of Operations
Years ended December 31, 2006, 2005 and 2004
(Dollars in Thousands Except Per Share Amounts)
2006 2005 2004
-------- -------- --------
Revenues:
Sales. . . . . . . . . . . . . . . . . . $ 8,274 34,988 10,793
Interest and other income. . . . . . . . 3,273 2,263 3,123
-------- -------- --------
11,547 37,251 13,916
-------- -------- --------
Cost and expenses:
Cost of sales. . . . . . . . . . . . . . 7,255 17,213 2,693
Reduction of post-retirement
benefit obligation . . . . . . . . . . -- (206) (8,860)
Selling, general and administrative. . . 761 (5,083) 6,256
Interest . . . . . . . . . . . . . . . . -- 168 743
Depreciation and amortization. . . . . . 1,054 1,040 1,136
Reduction to carrying value of
investments. . . . . . . . . . . . . . -- -- 1,310
-------- -------- --------
9,070 13,132 3,278
-------- -------- --------
Operating income (loss). . . . . . . . . . 2,477 24,119 10,638
Income tax (expense) benefit . . . . . . (865) (3,077) (5,751)
-------- -------- --------
Net income (loss). . . . . . . . . $ 1,612 21,042 4,887
======== ======== ========
Earnings per share:
Net income (loss), basic and
diluted. . . . . . . . . . . . . . . . $ .90 11.74 2.73
======== ======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
KAANAPALI LAND, LLC
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2006, 2005 and 2004
(Dollars in Thousands)
Accumu- Total
Additional lated Stock-
Common Paid-In (Deficit) holders'
Stock Capital Earnings Equity
-------- --------- -------- --------
Balance at
December 31,
2003 . . . . . . $ -- 5,357 87,774 93,131
Net income . . . . -- -- 4,887 4,887
-------- -------- -------- --------
Balance at
December 31,
2004 . . . . . . -- 5,357 92,661 98,018
Net income . . . . -- -- 21,042 21,042
-------- -------- -------- --------
Balance at
December 31,
2005 . . . . . . -- 5,357 113,703 119,060
Net income . . . . -- -- 1,612 1,612
-------- -------- -------- --------
Balance at
December 31,
2006 . . . . . . $ -- 5,357 115,315 120,672
======== ======== ======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
KAANAPALI LAND, LLC
Consolidated Statements of Cash Flows
Years ended December 31, 2006, 2005 and 2004
(Dollars in Thousands)
2006 2005 2004
-------- -------- --------
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . $ 1,612 21,042 4,887
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operations:
Property sales, disposals and
retirements, net . . . . . . . . . . 2,666 13,825 (4,113)
Depreciation and amortization. . . . . 1,054 1,040 1,136
Reduction to carrying value of
investments. . . . . . . . . . . . . -- -- 695
Changes in operating assets and
liabilities:
Receivables, net . . . . . . . . . . . 4,587 (4,290) 332
Prepaid pension costs. . . . . . . . . (1,677) (935) (549)
Accumulated post-retirement
benefit obligation . . . . . . . . . (264) (551) (10,476)
Collateral deposit . . . . . . . . . . -- (8,333) --
Accounts payable, accrued expenses
and other. . . . . . . . . . . . . . (3,894) (8,613) (9,117)
Deferred income taxes. . . . . . . . . 450 3,077 5,751
-------- -------- --------
Net cash provided by (used in)
operating activities . . . . . . . . . . 4,534 16,262 (11,454)
-------- -------- --------
Cash flows from investing activities:
Property additions . . . . . . . . . . . (16,587) (3,151) (2,053)
Proceeds from notes receivable . . . . . -- -- 31,366
-------- -------- --------
Net cash provided by (used in)
investing activities . . . . . . . . . . (16,587) (3,151) 29,313
-------- -------- --------
KAANAPALI LAND, LLC
Consolidated Statements of Cash Flows - Continued
Years ended December 31, 2006, 2005 and 2004
(Dollars in Thousands)
2006 2005 2004
-------- -------- --------
Cash flows from financing activities:
Net repayments of debt . . . . . . . . . -- (7,178) (1,110)
-------- -------- --------
Cash used in
financing activities . . . . . . -- (7,178) (1,110)
-------- -------- --------
Net increase (decrease) in
cash and cash equivalents. . . . (12,053) 5,933 16,749
Cash and cash equivalents
at beginning of year . . . . . . 51,677 45,744 28,995
-------- -------- --------
Cash and cash equivalents
at end of year . . . . . . . . . $ 39,624 51,677 45,744
======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid for interest . . . . . . . . . $ -- 168 743
======== ======== ========
Cash received (paid) for
income taxes . . . . . . . . . . . . . $ 4,397 -- (4,100)
======== ======== ========
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 Debtors had
filed their petition for reorganization under Chapter 11 on February 27,
2002 (the "Petition Date") in the United States Bankruptcy Court for the
Northern District of Illinois, Eastern Division (the "Bankruptcy Court")
which petitions were consolidated into a single joint proceeding by the
Bankruptcy Court (the "Reorganization Case").
The principal goal of the Plan was to address the Debtors' debt
burdens so that the Debtors could emerge from Chapter 11 with a viable
capital structure and with the resources necessary to operate their land
development business. The Plan achieved this goal by converting certain
indebtedness and other liabilities of the Debtors into new equity of
Kaanapali Land (to the extent such creditors did not elect an available
cash distribution option). Another goal of the Plan was to secure
additional liquidity for the Debtors to help fund future operations. The
Plan achieved this goal through the Merger of Northbrook Corporation
("Northbrook") into FHTC and the subsequent merger of FHTC into Kaanapali
Land, which made the assets and liquidity of Northbrook available to the
Debtors to help fund their land development business.
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"). After the Plan
Effective Date, Kaanapali Land continued to implement the restructuring
transactions that were contemplated to be effected under the Plan,
including, among other things, the resolution of all outstanding claims and
distributions on all claims that were allowed under the Plan. On
August 31, 2005, pursuant to a motion for entry of final decree, the
bankruptcy cases were closed.
In accordance with the Plan, a maximum of 1,863,000 shares of
Kaanapali Land were issuable. At December 31, 2006, approximately
1,793,000 shares were issued and outstanding and Kaanapali Land believes
that no further shares will be issued under the Plan.
Kaanapali Land's membership interests are denominated as "shares" and
are divided into two classes: the Class A Shares, which are publicly held
and "Class B Shares" which are generally held by affiliates of Kaanapali
Land.
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.
The Company's continuing operations are in three business segments -
Agriculture, Property and Golf. The Agriculture segment grows seed corn
and soybeans under contract and leases or provides harvesting rights to a
third party on certain lands currently cultivated in or used for the
processing of coffee, while maintaining additional coffee acreage for
possible future use. 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 Property, Agriculture and Golf segments operate exclusively in the
State of Hawaii. For further information on the Company's business
segments see Note 8.
STATEMENT OF CASH FLOWS
The Company considers as cash equivalents all investments with
maturities of three months or less when purchased.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
("FIN 48"), to create a single model to address accounting for uncertainty
in tax positions. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This Interpretation
also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. FIN 48
is effective for fiscal years beginning after December 15, 2006. The
Company is currently evaluating the impact of this Interpretation on
results of operations and financial position.
In September 2006, the FASB issued SFAS No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans -- an
amendment of FASB Statements No. 87, 88, 106, and 132(R). This statement
requires an employer to recognize the over funded or under funded status of
a defined benefit postretirement plan as an asset or liability in its
statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive
income. SFAS No. 158 is effective for fiscal years that ended after
December 15, 2006. The Company does not believe the adoption of this
statement will have a significant impact on the financial position of the
Company.
On September 15, 2006, the FASB issued SFAS No. 157 ("SFAS No. 157"),
"Fair Value Measurements," which defines fair value, establishes guidelines
for measuring fair value, and expands disclosures regarding fair value
measurements. SFAS No. 157 does not require any new fair value
measurements but rather eliminates inconsistencies in guidance found in
various prior accounting pronouncements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. The Company is currently
evaluating the impact of this standard on results of operations and
financial position.
RECEIVABLES
The allowance for doubtful receivables was $100 and $53 at
December 31, 2006 and 2005, respectively.
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 Kaanapali 2020 area. This
project, called Kaanapali Coffee Farms, consists of 58 agricultural lots
that are being offered to individual buyers. It is anticipated that the
land improvements will be completed in 2007. In conjunction with the final
approval, the Company was required to obtain two subdivision bonds in the
amounts of approximately $18,600 and $4,700 and was required to secure
those bonds with a cash deposit of $8,300 into an interest bearing
collateral account which is reported as Other Assets in the consolidated
balance sheet. Subsequently, one of the bonds was reduced from $18,600 to
$11,300 and the collateral was reduced to $5,900 in early 2007. The funds
will be withdrawn from the collateral account by the Company upon stage of
completion of the subdivision improvements and release of the bonds.
During July and early August 2006 the Company closed on the sale of three
lots at Kaanapali Coffee Farms for aggregate net sales proceeds of $4,426.
It also entered into a joint venture agreement with a local builder for the
design, construction and sale of residential improvements on another lot.
In January 2007, the Company closed on the sale of one lot for net sales
proceeds of approximately $1,300.
Project costs associated with the development and construction of
real estate projects are capitalized and classified as Property. 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, or the lease term if less. At December 31, 2006, the Company
held approximately $1,900 of non-depreciable land improvements and
approximately $4,100 of depreciable land improvements, relating principally
to the Waikele Golf Course, which are being depreciated over their
estimated 15-year useful life. Maintenance and repairs are charged to
operations as incurred. Significant betterments and improvements are
capitalized and depreciated over their estimated useful lives.
In 2004, the Company recognized an impairment loss of $1,310. The
2004 impairment loss was primarily to reduce the carrying value of certain
land parcels and leasehold improvements. The land parcels were not
considered to be part of future development plans as such land parcels are
not part of the Company's Kaanapali 2020 development plan.
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 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.
2006 2005
-------- --------
Property, net:
Land . . . . . . . . . . . . . . . . . . $ 87,578 74,412
Land improvements. . . . . . . . . . . . 1,886 1,886
Buildings. . . . . . . . . . . . . . . . 19,452 18,490
Machinery and equipment. . . . . . . . . 3,815 4,022
-------- --------
112,731 98,810
Accumulated depreciation . . . . . . . . (7,542) (6,488)
-------- --------
Property, net. . . . . . . . . . . . . . $105,189 92,322
======== ========
Land held for sale of approximately $19,000, representing primarily
Kaanapali Coffee Farms, was included in Property in the consolidated
balance sheets at December 31, 2006 and was carried at the lower of cost or
fair value less cost to sell. No land is currently in use except for the
land associated with the Waikele Golf Course (carrying value of
approximately $8,000 at December 31, 2006), certain Kaanapali 2020 land
that has been set aside for the Company's seed corn and soybean operations
and certain acreage of coffee trees that have been leased to a third party
plus additional coffee acreage being maintained to support the Company's
land development program.
The Company's principal 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) and have a carrying value of approximately $78,000.
In addition, the Company's property holdings on the island of Oahu have a
carrying value of approximately $27,000. 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 disposition thereof.
The Company ceased operations at the golf course effective March 1,
2006 for five months to allow for renovations of the golf course greens and
facilities. The golf course resumed operations as of September 1, 2006.
The assets and operations of the Waikele Golf Course represent all of the
golf segment for purposes of business segment information. The cost of the
renovations and the shut-down of the course did not have a material adverse
effect on the overall financial condition of the Company.
LAND SALES AND MORTGAGES RECEIVABLE
On January 20, 2005, the Company sold its mill sites and associated
lands on the Island of Kauai for approximately $1,300 before closing costs
and prorations.
On June 21, 2005, the Company closed the sale of Lot 3 for a base
purchase price of $22,500, pursuant to an option that the purchaser of
Lot 4 (a parcel which is contiguous to Lot 3 and sold by the Company in
2003) held on the property. The purchase price was paid in cash (before
closing costs and prorations) at closing. Pursuant to a purchase price
adjustment agreement entered into at closing as required in the option
agreement, the purchase price was subject to potential increase under
certain circumstances.
The purchaser's performance of its obligations under the purchase
price adjustment agreement was secured by a mortgage in favor of Lot 3 and
covering the property, which was filed at closing. On September 12, 2005,
the Company received $6,000 from the purchaser of Lot 4 in connection with
its subsequent sale of Lot 3 pursuant to the purchase price adjustment
agreement negotiated by the parties in settlement of certain defaults
claimed by the Company relative to the Lot 3 option agreement.
During March 2004, the Company received approximately $14,000 as full
payment on a $14,000 promissory note received in the sale of Lot 2 during
2003. The Company recorded the sale of Lot 2 under the cost recovery
method of accounting. The full note was recorded, offset by the entire
deferred gain of approximately $5,308 at December 31, 2003. The deferred
gain was recognized during 2004 based upon the anticipated number of units
approved for construction on the site.
During December 2004, the Company received $17,000 as full payment on
a $17,000 promissory note received in the sale of Lot 4 during 2003.
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 existing and
potential 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 7, Commitments and Contingencies.
At December 31, 2006 other liabilities decreased primarily due to the
net reduction of certain reserves of approximately $7,500 related to
contingencies which originated in prior years and were resolved in 2006,
the offset of which is reflected in selling, general and administrative
expenses. While certain reserve elements of other liabilities were
adjusted in 2006 due to changing circumstances, the primary cause of the
overall decrease in other liabilities was the completion of Federal tax
return examinations for the years 1998 to 2002 which were settled by the
Company at amounts which reduced significantly the need for reserves for
potential income tax exposure.
At December 31, 2005 other liabilities decreased primarily due to the
net reduction of certain reserves related to contingencies which originated
in prior years and were resolved in 2005, the offset of which is reflected
in selling, general and administrative expenses. The net reduction in
reserves of approximately $8,600 resulted in a credit to selling, general
and administration expenses in 2005.
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.
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.
(2) MORTGAGE NOTE PAYABLE
The Waikele Golf Course mortgage note payable, secured by the Waikele
Golf Course, had an outstanding principal balance of $7,178 at December 31,
2004. The loan had 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 (6.43% at December 31, 2004), and the debt was
extended to mature on December 1, 2011. The loan continued to have certain
cash flow and other financial covenants. Waikele Golf Course, LLC repaid
the mortgage in full on March 1, 2005, with proceeds obtained through a new
mortgage loan granted by a subsidiary of Kaanapali Land in the original
principal amount of $7,178. The mortgage loan was amended March 31, 2006
upon which the accrued interest was added to principal and the Holder
agreed to make future advances under the note in an amount not to exceed
$3,000 for purposes of funding the golf course improvements. Interest on
the principal balance accrues at an adjustable rate of prime plus 1%. The
principal and accrued interest, which are prepayable, are due March 1,
2015. As of December 31, 2006 the note had an outstanding principal and
accrued interest balance of approximately $9,300. The note has been
eliminated in the consolidated financial statements because the obligor and
maker are consolidated subsidiaries of Kaanapali Land.
(3) RENTAL ARRANGEMENTS
The Company has rented, as lessee, various land, facilities and
equipment under operating leases. Most land leases provided for renewal
options and minimum rentals plus contingent payments based on revenues or
profits. The Company has formerly been involved in various sandwich leases
for land.
The Company leased various office spaces with average annual rental
of approximately $150 per year. Leases that expired at various times in
2006 were not renewed beyond the end of 2006. Although the Company was a
party to certain other leasing arrangements, none of them were material.
(4) EMPLOYEE BENEFIT PLANS
(a) PENSION PLANS
As of December 31, 2006, 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. Accordingly,
there is no difference between the accumulated benefit obligation and the
projected benefit obligation. 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 following tables summarize the components of the funded status of
the Company's defined benefit pension plan at December 31, 2006 and 2005,
the net pension credit for 2006, 2005 and 2004, and major assumptions used
to determine these amounts.
2006 2005
------- -------
Benefit obligation at beginning of year. . . . . . . $46,066 44,992
Service cost . . . . . . . . . . . . . . . . . . . . 16 28
Interest cost. . . . . . . . . . . . . . . . . . . . 2,494 2,573
Actuarial loss . . . . . . . . . . . . . . . . . . . 3,202 3,007
Benefits paid. . . . . . . . . . . . . . . . . . . . (4,289) (4,534)
------- -------
Benefit obligation at end of year. . . . . . . . . . 47,489 46,066
------- -------
Fair value of plan assets at beginning of year . . . 72,495 71,956
Actual return on plan assets . . . . . . . . . . . . 9,520 5,073
Benefits paid. . . . . . . . . . . . . . . . . . . . (4,289) (4,534)
------- -------
Fair value of plan assets at end of year . . . . . . 77,726 72,495
------- -------
Funded status. . . . . . . . . . . . . . . . . . . . 30,237 26,429
Unrecognized net actuarial (gain) loss . . . . . . . (1,095) 1,035
Unrecognized prior service cost. . . . . . . . . . . 8 9
------- -------
Prepaid pension cost . . . . . . . . . . . . . . . . $29,150 27,473
======= =======
Unrecognized net gains or losses are amortized over a ten year
period. At December 31, 2006, approximately 51% of the plan's assets are
invested in equity securities, 19% in fixed income funds and 30% in
alternative strategies.
The components of the net periodic pension credit for the years ended
December 31, 2006, 2005 and 2004 (which are reflected as selling, general
and administrative in the consolidated statements of operations) are as
follows:
2006 2005 2004
------- ------- -------
Service cost . . . . . . . . . . . . . . $ 16 28 62
Interest cost. . . . . . . . . . . . . . 2,494 2,573 2,695
Expected return on plan assets . . . . . (4,698) (4,367) (4,266)
Recognized net actuarial gain loss . . . 510 922 867
Amortization of prior service cost . . . 1 1 1
------- ------- -------
Net periodic pension credit. . . . . . . $(1,677) (843) (641)
======= ======= =======
The principal 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, 2006 2005 2004
---------------- ------- ------- -------
Discount rate. . . . . . . . . . . . . . 5.65% 5.9% 6.25%
======= ======= =======
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, 2006 2005 2004
------------------ ------- ------- -------
Discount rate. . . . . . . . . . . . . . 5.65% 5.9% 5.9%
======= ======= =======
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 measurement date is December 31, the last day of the corporate
fiscal year. The accumulated benefit obligation at December 31, 2006 and
2005 equals approximately $47,000 and $46,000, respectively.
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 and certain
future obligations of the Pension Plan may be subject to bargaining unit
agreements.
There was no contribution required in 2006 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.
(b) RETIREE HEALTH AND LIFE INSURANCE BENEFITS
In addition to providing pension benefits, a subsidiary of KLC Land
currently provides certain healthcare and life insurance benefits to
certain eligible retired employees. The postretirement healthcare plan is
contributory and contains cost-sharing features such as deductibles and
copayments. The postretirement life insurance plan is non-contributory.
Certain consolidated entities continued funding their post-retirement
health care obligations until the end of 2004, which was a date on or after
the date when its required cost maintenance period as defined under
Internal Revenue Code Section 420 expired. Retiree medical benefits for
these entities terminated at the end of 2004. Most post-retirement life
insurance benefits were terminated effective at the end of 2003. Kaanapali
Land has not assumed any obligation to fund the cost of any ongoing
benefits on behalf of any of its affiliates.
For measuring the expected postretirement benefit obligation, a 10%
annual rate of increase in the per capita claims cost was assumed through
2006. The healthcare cost trend rate assumption currently has 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 2006
would increase (decrease) the medical plans' accumulated postretirement
benefit obligation as of December 31, 2006 by $2 and $(2), 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.
Net periodic postretirement benefit cost/(income) for 2006, 2005 and
2004 includes the following components:
2006 2005 2004
Total Total Total
------- ------- -------
Service cost . . . . . . . . . . . . . $ -- 19 12
Interest cost. . . . . . . . . . . . . 130 167 284
Amortization of net gain . . . . . . . (61) (53) (8,208)
Recognized settlement gain . . . . . . -- (339) (948)
------- ------- -------
Net periodic postretirement
benefit cost/(income). . . . . . . . $ 69 (206) (8,860)
======= ======= =======
The following table sets forth the plans' change in benefit
obligation and benefit cost as of December 31, 2006 and 2005 as follows:
December 31, December 31,
2006 2005
------------ ------------
Benefit obligation at beginning of year. . $ 2,473 3,003
Service cost . . . . . . . . . . . . . . . -- 19
Interest cost. . . . . . . . . . . . . . . 130 167
Actuarial losses (gain). . . . . . . . . . 97 (32)
Employer contribution. . . . . . . . . . . (333) (345)
Settlement . . . . . . . . . . . . . . . . -- (339)
------- -------
Benefit obligation at end of year. . . . . 2,367 2,473
Unrecognized net actuarial gain. . . . . . 85 243
------- -------
Accumulated postretirement benefit cost. . $ 2,452 2,716
======= =======
The subsidiary's expected contributions for 2007 through 2011 are
approximately $300 for each year of the five year period.
The subsidiary continuing to provide benefits currently amortizes
unrecognized gains over the shorter of ten years or the average life
expectancy of the inactive participants since almost all of the Plans'
participants are inactive. The portion of the unrecognized net actuarial
gain represented by the decrease in the Maintenance of Effort obligation
was being amortized over four years, commencing in 2001.
The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 5.65% as of December 31,
2006 and 5.65% as of December 31, 2005.
The calculation of the accumulated postretirement benefit cost or the
net periodic postretirement benefit cost does not reflect the effects of
the Medicare Prescription Drug Improvement and Modernization Act of 2003
(the "Act").
The Company maintains a nonqualified deferred compensation
arrangement (the "Rabbi Trust") which provides certain former directors of
Amfac and their spouses with pension benefits. The Rabbi Trust invests in
marketable securities and cash equivalents. The deferred compensation
liability represented in the Rabbi Trust and assets funding such deferred
compensation liability are consolidated in the Company's balance sheet.
(5) INCOME TAXES
Income tax expense attributable to income from continuing operations
for the years ended December 31, 2006, 2005 and 2004 consists of:
Current Deferred Total
-------- -------- --------
Year ended December 31, 2006:
U.S. federal. . . . . . . . . $ -- 484 484
State . . . . . . . . . . . . 327 54 381
-------- -------- --------
$ 327 538 865
======== ======== ========
Year ended December 31, 2005:
U.S. federal. . . . . . . . . $ -- 2,762 2,762
State . . . . . . . . . . . . -- 315 315
-------- -------- --------
$ -- 3,077 3,077
======== ======== ========
Year ended December 31, 2004:
U.S. federal. . . . . . . . . $ -- 5,161 5,161
State . . . . . . . . . . . . -- 590 590
-------- -------- --------
$ -- 5,751 5,751
======== ======== ========
Income tax expense 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:
2006 2005 2004
-------- -------- --------
Computed "expected" tax provision. . $ 867 8,442 3,723
Increase (reduction) in income
taxes resulting from:
Increase (reduction) in
valuation allowance. . . . . . . 834 (4,893) 2,365
Other, net . . . . . . . . . . . . (836) (472) (337)
-------- -------- --------
Total. . . . . . . . . . . . . $ 865 3,077 5,751
======== ======== ========
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, 2006 and
2005 are as follows:
2006 2005
-------- --------
Deferred tax assets:
Post retirement benefits . . . . . . . . . $ (956) (1,059)
Reserves related primarily to losses
on divestitures. . . . . . . . . . . . . (8,492) (6,433)
Loss carryforwards . . . . . . . . . . . . (3,421) (1,322)
Tax credit carryforwards . . . . . . . . . (2,816) (4,081)
Other, net . . . . . . . . . . . . . . . . (1,081) (1,048)
-------- --------
Total deferred tax assets. . . . . . . . (16,767) (13,943)
Less - valuation allowance . . . . . . . 6,237 5,403
-------- --------
Net deferred tax assets. . . . . . . . . (10,531) (8,540)
-------- --------
Deferred tax liabilities:
Property, plant and equipment,
principally due to purchase
accounting adjustments,
net of impairment charges. . . . . . . . 27,086 25,339
Prepaid pension and core retirement
award costs. . . . . . . . . . . . . . . 12,091 11,398
-------- --------
Total deferred tax liabilities . . . . 39,177 36,737
-------- --------
Net deferred tax liability . . . . . . $ 28,647 28,197
======== ========
The Company at December 31, 2006 has net operating loss carryforwards
("NOLs") of approximately $41,000 for state income tax purposes which can
be used to offset taxable income, if any, in future years. Federal NOLs of
approximately $5,100 originated in 2006 and the state NOLs begin to expire
in 2010.
Federal tax return examinations have been completed for all years
through 2002. Refunds aggregating approximately $4,700 for years through
2000 have been received by Kaanapali Land for previous payments of taxes
and interest. Pursuant to a settlement agreed to with the IRS in 2006, no
liability for Federal taxes was determined for 2001 or 2002; however, in
connection with the settlement of those years, the Company agreed to adjust
certain tax attributes, including the tax basis of assets. The effect in
2006 on the Company's consolidated balance sheet was to increase deferred
tax liabilities by approximately $1,900. Other liabilities were reduced in
the fourth quarter of 2006 due to the completion of Federal tax return
examinations for the years 1998 to 2002 which were settled by the Company
at amounts which reduced significantly the need for reserves for potential
income tax exposure. Income tax expense was also recorded for the year
ended December 31, 2006 due to the finalization of the Company's 2005 tax
return and a payment made in regard to the settlement of a prior year state
tax matter of approximately $300. The statutes of limitations with respect
to the Company's taxes for 2003 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.
(6) 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, 2006, 2005 and 2004 was approximately $74,
$13 and $8, respectively, all of which was paid as of December 31, 2006.
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, 2006.
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, Management Services,
LLC, and JMB Financial Advisors, LLC, during 2006. The total costs for the
years ended 2006, 2005 and 2004 were approximately $2,675, $2,400 and
$1,800, respectively, of which approximately $856 was unpaid as of
December 31, 2006.
(7) COMMITMENTS AND CONTINGENCIES
As security for performance of certain development obligations, the
Company is contingently liable under two subdivision bonds for
approximately $23,300.
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. 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. 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 may proceed.
However, one such subsidiary, Oahu Sugar, filed a subsequent petition for
liquidation under Chapter 7 of the Bankruptcy Code in April 2005, as
described below.
On or about February 23, 2001 Kekaha Sugar Co., Ltd. ("KSCo"), a
company that was, prior to its dissolution, a subsidiary of Kaanapali Land,
received a letter from the Hawaii Department of Health ("HDOH") assigning
the former KSCo 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. KSCo responded to the letter soon
after it was received. The United States Environmental Protection Agency
("EPA") later performed a visual inspection of the property and indicated
there will be some testing performed. HDOH has performed some testing at
the site and it is not known whether such test results, if any, will
require any further response activities. However, as KSCo was
substantially without assets and has dissolved, the ability of KSCo to
perform any requested actions is doubtful.
On or about February 23, 2001, The Lihue Plantation Company, Limited,
now known as LPC Corporation ("LPCo") 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 relative to LPCo's former
operations including the 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. HDOH further reserved the right to modify its prioritization
of the site should conditions warrant. As noted above, the high priority
assignment will likely result in a high degree of oversight by the HDOH as
the issues raised are studied and addressed. LPCo is substantially without
assets, and further pursuit of this matter by HDOH could have a material
adverse effect on the financial condition of LPCo.
The unaffiliated purchaser of the Kekaha and Lihue Plantation sugar
mills properties in January 2005 assumed any obligations for environmental
matters concerning the property it purchased. However, there can be no
assurance that such purchaser will have sufficient assets to satisfy a
claim should any substantial liabilities result.
Pioneer Mill was engaged in a modest cleanup operation arising out of
the discovery of petroleum contamination found at the Pioneer Mill site.
The Pioneer Mill site was assigned a high priority by the HDOH and the HDOH
has shown an interest in the environmental conditions relating to or
arising out of the former operations of Pioneer Mill. EPA designated HDOH
as the oversight agency for Pioneer Mill. Pioneer Mill received a report
on the results of environmental testing conducted on the site by the EPA
and HDOH. However, Pioneer Mill's cleanup efforts to date have satisfied
HDOH and Pioneer Mill received a no further action letter during the fourth
quarter of 2004. Further routine cleanup operations in connection with the
demolition of the former sugar mill buildings on the site were conducted
with respect to an underground storage tank discovered on the site. Such
work has been completed as of the date of this report.
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 was in
the process of responding 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, 11 U.S.C. Subsection 101-1330 on
April 19, 2005, Case No. 05-15100. 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 and it is not believed that any
other affiliates have any responsibility for the debts of Oahu Sugar.
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, on the basis 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, the EPA's letter has invited
Kaanapali Land to engage in settlement discussions with the EPA to attempt
to resolve Kaanapali Land's alleged liability. Kaanapali is in the
preliminary stages of evaluating the positions taken by the EPA. While
Kaanapali Land believes that it has defenses to the EPA's position,
Kaanapali Land has nevertheless begun such settlement discussions with EPA
to determine if the matter can be resolved on reasonable terms. Even if
Kaanapali Land were found to be the successor to Old Oahu, Kaanapali Land
believes that its liabilities, if any, should relate solely to a portion of
the period of operation of Old Oahu at the site. Moreover, Kaanapali Land
believes that any settlement should involve substantial participation of
the U.S. Navy, which has owned the site throughout the entire relevant
period, both as landlord under its various leases with Oahu Sugar and Old
Oahu and by operating the site directly during a period when no lease was
in force. There can be no assurances that the matter can be resolved on
terms acceptable to Kaanapali Land or that this matter will not ultimately
have a material adverse effect on the Company.
Federal tax return examinations have been completed for all years
through 2002. Refunds aggregating approximately $4,700 for years through
2000 have been received by Kaanapali Land for previous payments of taxes
and interest. Pursuant to a settlement agreed to with the IRS in 2006, no
liability for Federal taxes was determined for 2001 or 2002; however, in
connection with the settlement of those years, the Company agreed to adjust
certain tax attributes, including the tax basis of assets. The effect in
2006 on the Company's consolidated balance sheet was to increase deferred
tax liabilities by approximately $1,900. Income tax expense was also
recorded for the year ended December 31, 2006 due to the finalization of
the Company's 2005 tax return and a payment made in regard to the
settlement of a prior year state tax matter of approximately $300. The
statutes of limitations with respect to the Company's tax returns for 2003
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.
On February 15, 2005, D/C Distribution Corporation ("D/C"), a
subsidiary of Kaanapali Land, 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
has been 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 alleges that it is an
insurance company to whom D/C has tendered for defense and indemnity
various personal injury lawsuits allegedly based on exposure to asbestos
containing products. Plaintiff alleges 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 seeks, 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 have been 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 is entitled to recoupment and reimbursement of
some or all of the amounts it has paid for defense and/or indemnity; and
that D/C has breached its obligation of cooperation with plaintiff. D/C
has filed an answer and an amended cross-claim. D/C believes that it has
meritorious defenses and positions, and intends to vigorously defend. In
February 2006, in order to simplify its administration and facilitate an
additional capital contribution by Kaanapali Land, D/C merged into a newly-
formed Illinois limited liability company named D/C Distribution, LLC.
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 in excess of 60 cases against D/C that are
pending on the U.S. mainland (primarily in California) and are allegedly
based on D/C's prior business operations. 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. In the
case of D/C, there can be no certainty that it will be able to satisfy all
of its liabilities for these cases or future judgments, if any. There can
be no assurances that these cases (or any of them) if adjudicated in a
manner adverse to D/C, will not have a material adverse effect on the
financial condition of D/C. 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 August 30, 2006, a third party complaint was filed against, KLC
Land Company, LLC, Amfac/JMB Hawaii, LLC, and Amfac/JMB Hawaii, Inc., and
Amfac Distribution Corporation in an action entitled The Queen Emma
Foundation v. Lenox Resources, Inc. and Alan Hornstein, Civil No. CV05-
00546 HG KSC. In the third party action, third party plaintiff seeks to
recover a share of clean up costs for contamination allegedly discharged by
one or more of the third party defendants at a former commercial site.
Third party plaintiff seeks, among other things, an unspecified amount of
money, attorneys' fees and costs. The matter has been resolved and
dismissed without any monetary contribution by the subject third party
defendants.
The Company has 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. 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. The Company
has obtained bids for portions of the required remedial work and expects to
commence same during the second quarter of 2007.
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 addition, Company
personnel have inspected various portions of its Maui water source and
transmission assets to determine if any other damage of significance has
occurred, but has so far found no material damage. While the damage to the
smaller reservoir cited by the recent DLNR inspection will not require any
immediate action, it is unclear at this time whether the DLNR will require
any work on the larger reservoir even though the damage is located in a
portion of the reservoir that is presently unused. There can be no
assurance that the expense of doing such required work will not be
material.
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 alleged 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. In the eight count
amended complaint, the plaintiff sought unspecified general damages, the
imposition of a constructive trust, an accounting, attorneys' fees and
costs, interest, punitive damages and such other further relief as deemed
appropriate by the court under the circumstances. The amended complaint
was dismissed with prejudice on March 4, 2005, pursuant to a settlement and
without any payment of money by defendants.
Other than as described above, the Company is not involved in any
material pending legal proceedings, other than ordinary routine litigation
incidental to its business. The Company and/or certain of its affiliates
have been named as defendants in several pending lawsuits. While it is
impossible to predict the outcome of such routine litigation that is now
pending (or threatened) and for which the potential liability is not
covered by insurance, the Company is of the opinion that the ultimate
liability from any of this litigation will not materially adversely affect
the Company's consolidated results of operations or its financial
condition.
(8) BUSINESS SEGMENT INFORMATION
As described in Note 1, the Company operates in three business
segments. Total revenues, operating profit, identifiable assets, capital
expenditures, and depreciation and amortization 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.
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.
2006 2005 2004
-------- -------- --------
Revenues:
Property . . . . . . . . . . . . . $ 6,929 31,180 8,139
Agriculture . . . . . . . . . . . 1,789 1,515 1,354
Golf . . . . . . . . . . . . . . . 2,003 3,719 3,843
Corporate. . . . . . . . . . . . . 826 837 580
-------- -------- --------
$ 11,547 37,251 13,916
======== ======== ========
2006 2005 2004
-------- -------- --------
Operating income (loss):
Property . . . . . . . . . . . . . $ 1,334 15,078 4,981
Agriculture . . . . . . . . . . . 323 1,192 973
Golf . . . . . . . . . . . . . . . (1,456) 334 381
-------- -------- --------
Operating income (loss). . . . . . . 201 16,604 6,335
Corporate. . . . . . . . . . . . . . 2,276 7,683 5,046
Interest expense . . . . . . . . . . -- (168) (743)
-------- -------- --------
Income (loss). . . . . . . . . . . . $ 2,477 24,119 10,638
======== ======== ========
Identifiable Assets:
Property . . . . . . . . . . . . . $ 79,525 60,155 62,009
Agriculture. . . . . . . . . . . . 54,478 51,633 51,137
Golf . . . . . . . . . . . . . . . 26,458 27,147 27,362
-------- -------- --------
160,461 138,935 140,508
Corporate. . . . . . . . . . . . . . 24,883 48,940 38,893
-------- -------- --------
$185,344 187,875 179,401
======== ======== ========
Agricultural identified assets include land classified as agricultural
or conservation for State and County purposes.
2006 2005 2004
-------- -------- --------
Capital Expenditures:
Property . . . . . . . . . . . . . $ 15,585 2,538 1,737
Agriculture. . . . . . . . . . . . 65 224 2
Golf . . . . . . . . . . . . . . . 935 389 314
Corporate. . . . . . . . . . . . . 2 -- --
-------- -------- --------
$ 16,587 3,151 2,053
======== ======== ========
Depreciation and Amortization:
Property . . . . . . . . . . . . . $ 59 70 92
Agriculture. . . . . . . . . . . . 102 75 91
Golf . . . . . . . . . . . . . . . 514 515 535
Corporate. . . . . . . . . . . . . 379 380 418
-------- -------- --------
Total. . . . . . . . . . . . . . . . $ 1,054 1,040 1,136
======== ======== ========
(9) 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,
2006 2005 2004
------------ ------------ ------------
(Amounts in thousands
except per share amounts)
NUMERATOR:
Operating income (loss). . . . . $ 2,477 24,119 10,638
========== ========== ==========
Net income (loss). . . . . . . . $ 1,612 21,042 4,887
========== ========== ==========
DENOMINATOR:
Denominator for net income
(loss) per share -
basic and diluted. . . . . . . 1,793 1,793 1,793
========== ========== ==========
Net income (loss) per
share - basic and diluted. . . $ .90 11.74 2.73
========== ========== ==========
Pursuant to the Plan, a maximum of 1,863,000 shares of the Company
were issuable. As of December 31, 2006, the Company had issued and
outstanding 1,631,513 Class B shares, non par value, and approximately
161,100 Class A shares, non par value stock. The Company does not expect
to issue any additional shares under the Plan. The LLC Agreement provides
for two classes of membership interests, Class A Shares and Class B Shares,
which have substantially identical rights and economic value under the LLC
Agreement; except that holders of Class A Shares are represented by a
"Class A Representative" who must approve certain transactions proposed by
Kaanapali Land before they can be undertaken. Class B Shares are 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.
(10) SUPPLEMENTARY QUARTERLY DATA (UNAUDITED)
2006
----------------------------------------------
At 3/31 At 6/30 At 9/30 At 12/31
---------- ---------- ---------- ----------
Total revenues . . . . . . $ 2,138 1,116 6,002 2,291
========== ========== ========== ==========
Net income (loss). . . . . $ (697) (3,983) (2,962) 9,254
========== ========== ========== ==========
Net income (loss)
per Interest . . . . . . $ (.39) (2.22) (1.65) 5.16
========== ========== ========== ==========
2005
----------------------------------------------
At 3/31 At 6/30 At 9/30 At 12/31
---------- ---------- ---------- ----------
Total revenues . . . . . . $ 2,932 24,125 9,256 938
========== ========== ========== ==========
Net income (loss). . . . . $ 49 4,487 (7,642) 24,148
========== ========== ========== ==========
Net income (loss)
per Interest . . . . . . $ .03 2.50 (4.26) 13.47
========== ========== ========== ==========
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 2006, 2005 and 2004.
ITEM 9A. 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.
ITEM 9B. OTHER INFORMATION
Not Applicable.
PART III
ITEM 10. MANAGERS AND EXECUTIVE OFFICERS 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 not be
removed as manager except in those circumstances described in Item 11
below. As of March 15, 2007, 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 provides 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 must be
independent is entitled to receive certain information from Kaanapali Land
and must approve certain actions that Kaanapali Land may take outside the
course of business primarily related to debt that might be obtained from
affiliated parties. The current Class A Representative is RSM McGladry,
Inc. Reference is also made to Item 11 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 54) 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 50) 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 15 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 57) 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 either 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 5 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
Name (2) Position Year ($) ($) ($)
- --------------- ------------ ----- ------- ------ ---------
Gary Nickele President 2006 180,000 100,000 N/A
and Chief 2005 180,000 100,000 N/A
Executive 2004 180,000 100,000 N/A
Officer
Stephen A.
Lovelette Executive 2006 255,000 100,000 N/A
Vice President 2005 215,000 100,000 N/A
2004 195,000 100,000 N/A
Gailen J. Hull Senior Vice 2006 175,000 50,000 N/A
President and 2005 175,000 50,000 N/A
Chief Financial 2004 175,000 50,000 N/A
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
Security ownership of certain beneficial owners.
NAME AND ADDRESS AMOUNT AND NATURE
OF BENEFICIAL OF BENEFICIAL
TITLE OF CLASS OWNER OWNERSHIP
- -------------- --------------------------- --------------------
Class B Shares Pacific Trail Holdings, LLC 1,466,573 Shares
900 North Michigan Avenue owned directly
Chicago, Illinois 60611 (89.9% of the
Class B Shares)
(1) (2)
(1) The sole managing member of Pacific Trail, Pacific Trail Holdings,
Inc. ("PTHI"), may be deemed to beneficially own the Class B 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 Class B Shares owned by
Pacific Trail. Each of such shareholders, being Gary Nickele, Gailen
Hull and Andrew N. Todd, disclaims beneficial ownership with respect
to any of the shares owned by Pacific Trail. The addresses of PTHI
and Messrs. Nickele, Hull and Todd are the same as for Pacific Trail.
(2) As of March 15, 2007, there were 1,631,513 Class B 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 Class A or Class B
shares issued, outstanding and distributed. No officers of the Company own
any Class A Shares.
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, 2006, 2005 and
2004 was approximately $74 thousand, $13 thousand and $8 thousand,
respectively, all of which was paid as of December 31, 2006.
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, 2006.
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, Management Services,
LLC, and JMB Financial Advisors, LLC during 2006. The total costs for the
years ended December 31, 2006, 2005 and 2004 was approximately $2.6
million, $2.4 million and $1.8 million, respectively, of which
approximately $856 thousand was unpaid as of December 31, 2006.
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 ACCOUNTANT FEES AND SERVICES
The aggregate audit fees incurred for professional services by Ernst
and Young LLP ("E&Y") in 2006, 2005 and 2004 were $207,500, $167,600 and
$157,000, 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 AND REPORTS ON FORM 8-K
(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 Funding Agreement dated October 29, 2002 between
Kaanapali Land and certain affiliates filed as an exhibit to
the Company's Form 10 filed May 1, 2003 and hereby incorporated
by reference.
10.2 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.
10.3 Property Purchase and Option Agreement by and between NB
Lot 4, LLC, Maui Beach Resort Limited Partnership, and NB
Lot 3, LLC dated August 4, 2003 filed as an exhibit to the
Company's report on Form 8-K (File No. 0-50273) filed on
August 22, 2003 is hereby incorporated by reference.
10.4 Lot 3 Option Agreement by and between NB Lot 3, LLC and
Maui Beach Resort Limited Partnership dated August 5, 2003
filed as an exhibit to the Company's report on Form 8-K
(File No. 0-50273) filed on June 21, 2005 is 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 23, 2007
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 23, 2007
/s/ Gary Nickele
---------------------
By: Gary Nickele,
President and
Chief Executive Officer
Date: March 23, 2007
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Act of 1934
For the fiscal year
ended December 31, 2006 Commission File Number #0-50273
KAANAPALI LAND, LLC
(Exact name of registrant as specified in its charter)
Delaware 01-0731997
(State of organization) (I.R.S. Employer Identification No.)
900 N. Michigan Ave., Chicago, Illinois 60611
(Address of principal executive office) (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 each class
to be so registered is to be 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 (the "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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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, or a non-accelerated filer. See definition of
"accelerated filer" and "large accelerated filer" in Rule 12b-2 of the
Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Nonaccelerated filer [ X ]
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, 2007, the registrant had 1,792,613 shares of which
161,100.17 were Class A shares.
Documents incorporated by reference: None
----------------------------------------------------------------------
EXPLANATORY NOTE
This amendment is filed solely to clarify disclosure presented in
Item 1A. Risk Factors of the original Annual Report on Form 10-K filed
March 30, 2007. No other changes to the Form 10-K of KAANAPALI LAND, LLC
have been made, and this Form 10-K/A does not reflect events occurring
after the filing of the original Report or modify or update those
disclosures affected by subsequent events.
----------------------------------------------------------------------
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. The Company is not aware of any
environmental condition on any of its properties which is likely to 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 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, tsunamis 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.
10
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 has
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 during the past fifteen months, which has negatively impacted
the volume of transactions completed in West Maui. At present the Company
is unable to predict whether current market conditions will materially
impact pricing for its properties, but such conditions have negatively
impacted the number of lots sold during the past 12 months. No assurance
can be given, however, as to whether current market conditions will again
improve, or when, or as to whether pricing for the Company's land assets
will ultimately soften.
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, wind and other natural perils can adversely impact
agricultural production on the Company's lands. 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. 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.The Company has obtained bids for portions of the required
remedial work and expects to commence same during the second quarter of
2007.
11
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. Bureau of Reclamation has inspected each
reservoir and identified certain minor damage. In addition, Company
personnel have inspected various portions of its Maui water source and
transmission assets to determine if any other damage of significance has
occurred, but the Company has so far found no material damage. While the
damage to the smaller reservoir cited by the recent DLNR inspection will
not require any immediate action, it is unclear at this time whether the
DLNR will require any work on the larger reservoir even though the damage
is located in a portion of the reservoir that is presently unused. There
can be no assurance that the expense of doing such required work will not
be material.
RISKS RELATED TO THE HAWAIIAN GOLF MARKET
A subsidiary of Kaanapali Land owns the Waikele Golf Course on Oahu.
The performance of golf courses in Hawaii depends heavily on the strength
of the tourism industry in Hawaii. Thus, Kaanapali Land is subject to the
risks generally associated with operating tourism-related businesses. These
include adverse changes in national and international economic conditions
(including adverse changes in exchange rates of foreign currencies for U.S.
dollars) and in national and international political situations that
constrain travel, tourism and investment in Hawaii. The performance of golf
courses in Hawaii is also affected by competition from comparable courses
in the surrounding areas, which include a number of courses that have
opened, reopened or been significantly upgraded in recent years. In
addition, the Debtors are aware of an additional new golf course that is
currently being constructed to the west of the Waikele Golf Course, as well
as two other Oahu golf courses that are currently in the planning phase,
which may or may not ultimately be built. There can be no assurance that
additional courses will not be developed that will compete with the Waikele
Golf Course.
In addition to market risks, Waikele Golf Course operations are
subject to operating risks such as adverse weather conditions, including
heavy prolonged rains and hurricanes, employee-related issues such as labor
shortages and disruptions (including, but not limited to disruptions of
food and beverage service by the third-party restaurant operator who leases
space in the clubhouse from the Company), blight or other diseases
affecting grass or other vegetation and costs of merchandise, equipment and
supplies.
The Waikele Golf Course is not affiliated with an existing resort,
but is located in a high-density residential area. The Waikele Golf Course
has historically had a significant amount of Japanese tourist play as well
as a high level of Hawaii resident play from the surrounding residential
areas. During the 1980's and into the mid-1990's, Asian visitors comprised
as much as half of the total rounds played at certain courses in Hawaii.
With the downturn in the Japanese economy, there has been a significant
drop in Asian visitors and this has had a material effect on Hawaiian golf
course rounds. The mainland tourism market was very strong, particularly on
the neighboring islands, prior to the terrorist attacks of September 11,
but this had little direct impact on the Waikele Golf Course. Since
September 11, the Asian visitor levels in Hawaii dropped precipitously and
golf course rounds have dropped as much as fifty percent at some Hawaii
golf courses. Asian tourist play is controlled by a relatively small number
of tour operators who include golf as part of their tour packages. These
operators are extremely price sensitive, which limits the ability of golf
courses such as Waikele to increase greens fees. While Asian tourist
visitation to Hawaii has rebounded somewhat in the past two years, it does
not appear that this rebound has given a significant boost to the number of
golf rounds being played on Oahu.
12
Since the initial reduction in the Japanese visitor levels in the
mid-1990's, many courses have attempted to offset some of the loss from the
tourism market by attracting local Hawaiian resident play. The Waikele Golf
Course has been successful at increasing the Hawaii resident rounds at the
course; however, Hawaii residents receive a significant discount on fees at
most courses, known as "Kamaiina rates", and Kamaiina rounds are therefore
less profitable than other rounds.
In order to reverse the downward trend in rounds played at Waikele
Golf Course, particularly by visiting tourists from Asia and elsewhere, the
Company embarked on a $1.2 million renovation project in 2006, which
resulted in the golf course being closed for approximately five months in
2006. This renovation included the reconstruction of all greens and a
number of tees, plus a modest renovation of the golf course clubhouse.
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 leases 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 all the risks relating to the cost of
growing and maintaining the trees and producing the crop (except for a
minor portion of the coffee land that is leased to a third party who
maintains the trees on such land), and a portion of the market risk
attendant to the sale of the crop as well. That is because the harvesting
and marketing of the crop has been contracted to a third-party grower, who
will pay the Company (or the homeowners' association with respect to the
coffee land within Kaanapali Coffee Farms Phase I) only a modest fixed
amount for the privilege of taking the coffee beans, with a more
substantial payment due based on a percentage of revenues obtained from the
crop by such grower.
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 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. Thus, it is clear that
Hawaii is subject to higher risks than other portions of the Untied States
due to its disproportionate reliance on air travel and tourism. The visitor
13
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 from foreign
countries will disproportionately impact the Company in future years, both
positively and negatively, as market and visitation cycles play out.
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, or 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.
14
PART IV
ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed as part of this Amendment No. 1 to
Form 10-K/A:
(a) Exhibits.
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.
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: April 6, 2007
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: April 6, 2007
/s/ Gary Nickele
---------------------
By: Gary Nickele,
President and
Chief Executive Officer
Date: April 6, 2007
ANNEX C
--------
Summary of Trading Information Reported
on NASDAQ Other - OTC Securities Market
Period High Bid ($) Low Bid ($) Volume
- ------ ------------ ----------- ------
2007
- ----
March 45.00 44.60 1,500
February 45.00 44.60 1,368
January 45.00 44.00 3,341
2006
- ----
December 43.90 42.20 2,839
November 42.50 41.75 4,229
October 42.17 41.50 1,844
September 42.00 41.00 3,234
August 43.00 31.00 7,792
July 35.50 25.00 14,470
June 50.00 5.50 13,727
May 6.50 .0001 4,968
April .0001 .0001 0
March .0001 .0001 0
February .0001 .0001 0
January .0001 .0001 0
2005
- ----
December .0001 .0001 0
November .0001 .0001 300
October .0001 .0001 0
September .0001 .0001 0
August .0001 .0001 100
July .0001 .0001 0
June .0001 .0001 0
May .0001 .0001 0
April .0001 .0001 400
March .10 .0001 575
February .10 .10 0
January .10 .0001 1,300
ANNEX D
-------
VALUATION REPORT, DATED AS OF APRIL 6, 2007,
BY KPMG CORPORATE FINANCE, LLC
[KPMG Corporate Finance letterhead]
April 6, 2007
Kaanapali Land, LLC
c/o Pacific Trail Holdings, LLC, its Manager
900 N. Michigan Ave.
Chicago, Illinois 60611
To the Manager:
You have requested our view with respect to the aggregate value of the
outstanding membership interests of Kaanapali Land, LLC as of December 31,
2006, expressed as a range.
As part of our review, we or our representatives have:
(a) considered certain financial and other information relating to the
Company that was publicly available or furnished to us by the
Company, including the audited consolidated balance sheet of the
Company as of December 31, 2006 and financial estimates and
projections with respect to the future financial performance of the
Company provided to us by the Company's management as well as
estimates and other information provided by the Company's management
and independent actuarial consultants regarding the assets and
liabilities of a pension plan for certain retired employees of the
Company (the "Pension Plan") and the potential tax liabilities
associated with Company's use of any surplus assets of the Pension
Plan;
(b) discussed with members of the Company's management the assets,
liabilities, business, operations, historical financial results and
future prospects of the Company;
(c) conducted site inspections of certain of the Company's real
properties;
(d) considered the financial terms of certain transactions involving the
direct or indirect sale of real property or interests therein that we
deemed relevant;
(e) performed a discounted cash flow analysis with respect to certain
anticipated cash flows to be generated by the Company's assets or
businesses; and
(f) considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria as we
deemed relevant and appropriate.
The views expressed below are subject to the following qualifications and
limitations:
(i) We have relied upon and assumed, without independent verification,
the accuracy and completeness of all financial and other information
that was publicly available or furnished to us by the Company. With
respect to the financial estimates and projections we reviewed, we
have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of
the Company's management as of December 31, 2006 as to the future
financial performance of the Company and the best estimates and
judgments of the Company's independent actuarial consultants with
respect to the assets and liabilities of the Pension Plan as of
December 31, 2006.
(ii) We have not made an independent evaluation or appraisal of the assets
or liabilities (contingent or otherwise) of the Company except for
certain valuation analyses not constituting an appraisal performed by
us or our representatives with respect to (x) certain of the
Company's real property or interests therein and (y) based on
estimates and other information provided by the Company's management
and independent actuarial consultants, the potential tax liabilities
associated with Company's use of the Pension Plan's surplus assets.
Except for the report of the Company's independent actuarial
consultants, we have not been furnished with any other such
evaluations or appraisals. We have not been requested to, and did
not, solicit third party indications of interest in acquiring all or
any part of the Company.
(iii) We are not expressing any view regarding the solvency of the Company,
nor have we performed any procedures to determine the solvency of the
Company, and our views expressed herein should not be relied upon for
such purposes.
(iv) We were not asked to advise you, and have not provided you with any
advice with respect to, the terms of any particular transaction or
the merits of any particular transaction as opposed to other
transactions or business strategies that may be available to the
Company.
(v) We have not been asked to address, and the views expressed herein
should not be construed to address, the decision by the Manager or
the Company to undertake any transaction or be viewed as a
recommendation to any security holder of the Company as to how to act
on any matter or with respect to any transaction or other investment
decision.
(vi) We express no view as to the federal, state or local tax consequences
of any transaction.
(vii) Our views are based on business, economic, market and other
conditions as they existed as of December 31, 2006 or, if earlier, as
of the date of the information provided to us.
(viii) We have no obligation to update our views and expressly disclaim any
responsibility to do so.
(ix) KPMG Corporate Finance's valuation does not address the prices at
which Kaanapali or membership interests therein could actually be
purchased or sold which may depend on a number of factors beyond the
control of Kaanapali and KPMG Corporate Finance. In addition, we
have been advised by the Company and have assumed that the membership
interests in the Company have identical rights and preferences,
regardless of class.
We will receive a fee as compensation for our services, regardless of the
conclusions expressed herein, no portion of which is contingent on the
consummation of any transaction. This letter and the views expressed
herein are being furnished for the use and benefit of the Company's Manager
and are not intended to, and do not, confer any rights or remedies upon any
other person or create a fiduciary duty on our part to any person.
Based upon and subject to the foregoing, it is our view that, as of
December 31, 2006, the aggregate value of the Company's outstanding
membership interests was approximately $70,000,000 to $77,500,000 or,
dividing such amounts by the number outstanding membership interests in the
Company as of December 31, 2006, $39.05 to $43.23 per membership interest
in the Company; it being understood that such latter calculation does not
give effect to any premium or discount that may be attributable by reason
of any control premium, minority or illiquidity discounts or other rights,
restrictions or limitations that may be attributable to individual
membership interests or blocks of membership interests.
Yours sincerely,
KPMG CORPORATE FINANCE LLC