SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2007
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission file #0-50273
KAANAPALI LAND, LLC
(Exact name of registrant as specified in its charter)
Delaware 01-0731997
(State of organization) (IRS Employer Identification No.)
900 N. Michigan Ave., Chicago, IL 60611
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 312/915-1987
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 (the "Exchange Act") during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
accredited filer and large accelerated filer in Rule 12b-2 of the Exchange
Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ X ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes [ X ] No [ ]
As of April 30, 2007, the registrant had 1,792,613 shares of common stock
outstanding.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements. . . . 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . 15
Item 4. Controls and Procedures. . . . . . . . . . . . . . 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . 19
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 19
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . 20
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
KAANAPALI LAND, LLC
Condensed Consolidated Balance Sheets
March 31, 2007 and December 31, 2006
(Dollars in Thousands, except share data)
(Unaudited)
A S S E T S
-----------
March 31, December 31,
2007 2006
--------- -----------
Cash and cash equivalents . . . . . . . $ 35,357 39,624
Receivables, net. . . . . . . . . . . . 161 148
Property, net . . . . . . . . . . . . . 111,340 105,189
Prepaid pension costs . . . . . . . . . 30,613 29,150
Other assets. . . . . . . . . . . . . . 8,830 11,233
-------- --------
$186,301 185,344
======== ========
L I A B I L I T I E S
---------------------
Accounts payable and accrued
expenses. . . . . . . . . . . . . . . $ 5,274 4,488
Deferred income taxes . . . . . . . . . 28,713 28,647
Accumulated postretirement benefit
obligation. . . . . . . . . . . . . . 2,481 2,452
Other liabilities . . . . . . . . . . . 28,752 29,085
-------- --------
Total liabilities . . . . . . . 65,220 64,672
Commitments and contingencies
S T O C K H O L D E R S' E Q U I T Y
-------------------------------------
Common stock, at 3/31/07 and
12/31/06 non par value
(shares authorized - 4,500,000;
shares issued 1,792,613). . . . . . . -- --
Additional paid-in capital. . . . . . . 5,357 5,357
Accumulated other comprehensive
income. . . . . . . . . . . . . . . . 1,087 --
Accumulated earnings. . . . . . . . . . 114,637 115,315
-------- --------
Total stockholders' equity. . 121,081 120,672
-------- --------
$186,301 185,344
======== ========
The accompanying notes are an integral part
of the condensed consolidated financial statements.
KAANAPALI LAND, LLC
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2007 and 2006
(Unaudited)
(Dollars in Thousands, except per share data)
2007 2006
-------- --------
Revenues:
Sales . . . . . . . . . . . . . . . . $ 2,800 1,254
Interest and other income . . . . . . 626 884
-------- --------
3,426 2,138
-------- --------
Cost and expenses:
Cost of sales . . . . . . . . . . . . 1,894 1,034
Selling, general and administrative . 1,046 1,988
Depreciation and amortization . . . . 316 259
-------- --------
3,256 3,281
-------- --------
Operating income (loss) from
continuing operations before
income taxes. . . . . . . . . . . . 170 (1,143)
Income tax benefit (expense). . . . . (143) 446
-------- --------
Net income (loss) . . . . . . . . $ 27 (697)
======== ========
Earnings per share:
Net income (loss) . . . . . . . . . . $ .02 (.39)
======== ========
The accompanying condensed notes are an integral part
of the condensed consolidated financial statements.
KAANAPALI LAND, LLC
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2007 and 2006
(Unaudited)
(Dollars in Thousands)
2007 2006
-------- --------
Net cash provided by (used in)
operating activities. . . . . . . . . $ 2,968 (1,342)
Cash flows from investing activities:
Property additions. . . . . . . . . . (7,235) (1,241)
-------- --------
Net cash provided by (used in)
investing activities. . . . . . . . . (7,235) (1,241)
-------- --------
Net increase (decrease) in
cash and cash equivalents . . (4,267) (2,583)
Cash and cash equivalents
at beginning of period. . . . 39,624 51,677
-------- --------
Cash and cash equivalents
at end of period . . . . . . $ 35,357 49,094
======== ========
The accompanying notes are an integral part
of the condensed consolidated financial statements.
KAANAPALI LAND, LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Dollars in Thousands)
The accompanying unaudited condensed consolidated financial
statements are prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States
for complete financial statements, and therefore, should be read in
conjunction with the Company's Annual Report on Form 10-K (File No. 0-
50273) for the year ended December 31, 2006. Capitalized terms used but
not defined in this quarterly report have the same meanings as the
Company's 2006 Annual Report on Form 10-K.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF ACCOUNTING
Kaanapali Land, LLC ("Kaanapali Land"), a Delaware limited liability
company, is the reorganized entity resulting from the Joint Plan of
Reorganization of Amfac Hawaii, LLC (now known as KLC Land Company, LLC
("KLC Land")), certain of its subsidiaries (together with KLC Land, the
"KLC Debtors") and FHT Corporation ("FHTC" and, together with the KLC
Debtors, the "Debtors") under Chapter 11 of the Bankruptcy Code, dated
June 11, 2002 (as amended, the "Plan").
The Company's continuing operations are in 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 assets and operations of the golf course represent all of the golf
segment for purposes of business segment information. The Company ceased
operations at the Waikele Golf Course effective March 1, 2006 for five
months to allow for renovation of certain golf course greens and
facilities. The cost of the renovations and the shut-down of the course
did not have a material adverse effect on the overall financial conditions
of the Company. The Property, Agriculture and Golf segments operate
exclusively in the State of Hawaii.
PROPERTY
The Company's principal property holdings are on the island of Maui.
The Company has determined, based on its current projections for the
development and/or disposition of its property holdings, that the property
holdings are not currently recorded in an amount in excess of proceeds that
the Company expects that it will ultimately obtain from the disposition
thereof.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of the statement of financial position and results of
operations for the interim periods presented have been included in these
financial statements and are of a normal and recurring nature.
Operating results for the three months ended March 31, 2007 are not
necessarily indicative of the results that may be achieved in future
periods.
RECLASSIFICATIONS
Certain amounts in the 2006 consolidated financial statements have
been reclassified to conform to the 2007 presentation.
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. The
Company adopted FIN 48 effective January 1, 2007, as required. As a result
of the adoption, the Company recorded a cumulative effect adjustment of
approximately $700 through a reduction in January 1, 2007 accumulated
earnings.
As of the date of adoption and after recognizing the impact of
FIN 48, the Company's gross unrecognized tax benefits totaled approximately
$10,500, with up to approximately $8,500 expected to reverse within twelve
months of March 31, 2007, which would impact the effective tax rate. The
Company is no longer subject to U.S. federal, state and local income tax
examinations by tax authorities for years before 2003. The Company's
continuing practice is to recognize interest and penalties related to
income tax matters in income tax expense. The Company had approximately
$800 accrued for interest and no accrual for penalties at March 31, 2007.
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. The Company adopted SFAS No. 158 effective January 1, 2007, as
required. As a result of the adoption, the Company recorded accumulated
other comprehensive income of approximately $1,100 and increased prepaid
pension cost to the funded status of the Plan.
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.
(2) LAND DEVELOPMENT
During the first quarter of 2006, the Company received final
subdivision approval on an approximate 336 acre parcel in the region
"mauka" (toward the mountains) from the main 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. During the first quarter 2007, one of the bonds was
reduced from $18,600 to $11,300 and the collateral was reduced to $5,900,
which is reported in Other Assets in the consolidated balance sheet. 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.
(3) MORTGAGE AND OTHER NOTES PAYABLE
A subsidiary of Kaanapali Land ("Holder") holds a mortgage note
secured by 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 March 31, 2007, the note had an outstanding principal and
accrued interest balance of $9,523. The note has been eliminated in the
consolidated financial statements because the obligor and maker are
consolidated subsidiaries of Kaanapali Land.
(4) EMPLOYEE BENEFIT PLANS
(a) PENSION PLANS
The Company participates in a defined benefit pension plan that
covers substantially all its eligible employees. The Plan is sponsored and
maintained by Kaanapali Land in conjunction with other plans providing
benefits to employees of Kaanapali Land and its affiliates.
The components of the net periodic pension benefit (credit), included
in selling, general and administrative in the consolidated statements of
operations for the three months ended March 31, 2007 and 2006 are as
follows:
2007 2006
-------- --------
Service cost. . . . . . . . . . . . . . . . . . $ 5 7
Interest cost . . . . . . . . . . . . . . . . . 650 622
Expected return on plan assets. . . . . . . . . (1,215) (1,175)
Recognized net actuarial (gain) loss. . . . . . 160 130
-------- --------
Net periodic pension credit . . . . . . . . . . $ (400) (416)
======== ========
(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.
Net periodic postretirement benefit cost for the three months ended
March 31, 2007 and 2006 includes the following components:
2007 2006
------ ------
Interest cost . . . . . . . . . . . . . . . . . $ 125 --
Amortization of net gain. . . . . . . . . . . . (9) 33
Recognized settlement gain. . . . . . . . . . . -- (15)
------ ------
Net periodic postretirement benefit cost. . . . $ 116 18
====== ======
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
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) COMMITMENTS AND CONTINGENCIES
As security for performance of certain development obligations, the
Company is contingently liable under two subdivision bonds for
approximately $16,000.
At March 31, 2007, the Company's principal contractual obligations
are approximately $15,000 for the completion of land improvements in
conjunction with the Kaanapali Coffee Farms project.
Material legal proceedings of the Company are described below.
Unless otherwise noted, the parties adverse to the Company in the legal
proceedings described below have not made a claim for damages in a
liquidated amount and/or the Company believes that it would be speculative
to attempt to determine the Company's exposure relative thereto, and as a
consequence believes that an estimate of the range of potential loss cannot
be made.
On or about February 23, 2001, 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, 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 completed
with respect to an underground storage tank discovered on the site.
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. Such filing was not expected to
have a material adverse effect on the Company as Oahu Sugar was
substantially without assets at the time of the filing. While it is not
believed that any other affiliates have any responsibility for the debts of
Oahu Sugar, the EPA has indicated that it intends to make a claim against
Kaanapali Land as further described below, and therefore, there can be no
assurance that the Company will not incur significant costs in connection
with such claim.
The deadline for filing proofs of claim with the bankruptcy court
passed in April 2006. Prior to the deadline, Kaanapali Land, on behalf of
itself and certain subsidiaries, filed claims that aggregated approximately
$224,000, 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 invited
Kaanapali Land to engage in settlement discussions with the EPA to attempt
to resolve Kaanapali Land's alleged liability. Kaanapali Land 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, 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. The parties are engaged in
settlement discussions but there are no assurances that the matter can be
settled. 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 70 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 this regard.
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 makes inspection difficult and
could degrade the integrity of reservoir slopes and impact drainage. The
DLNR has required the vegetation clean-up as well as the Company's plan for
future maintenance, inspections and emergency response. Revised versions
of the required plans were submitted to DLNR in December 2006. 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.
(7) CALCULATION OF NET INCOME PER SHARE
The following tables set forth the computation of net income (loss)
per share - basic and diluted:
THREE MONTHS ENDED
MARCH 31,
-------------------
2007 2006
-------- --------
(Amounts in thousands
except per share amounts)
NUMERATOR:
Net income (loss) . . . . . . . . . . . . . . . $ 27 (697)
======== ========
DENOMINATOR:
Number of shares outstanding
basic and diluted . . . . . . . . . . . . . . 1,793 1,793
======== ========
Net income (loss) per share -
basic and diluted . . . . . . . . . . . . . . $ .02 (.39)
======== ========
(8) BUSINESS SEGMENT INFORMATION
As described in Note 1, the Company operates in three business
segments. Total revenues and operating profit by business segment are
presented in the tables below.
Total revenues by business segment includes primarily (i) sales, all
of which are from unaffiliated customers and (ii) interest income that is
earned from outside sources on assets which are included in the individual
industry segment's identifiable assets, as well as corporate assets.
Operating income (loss) is comprised of total revenue less operating
expenses. In computing operating income (loss), none of the following
items have been added or deducted: general corporate revenues and
expenses, interest expense and income taxes.
THREE MONTHS ENDED
MARCH 31,
-------------------
2007 2006
-------- --------
Revenues:
Property. . . . . . . . . . . . . . . . . . . $ 1,838 556
Agriculture . . . . . . . . . . . . . . . . . 446 559
Golf. . . . . . . . . . . . . . . . . . . . . 988 688
Corporate . . . . . . . . . . . . . . . . . . 154 335
-------- --------
$ 3,426 2,138
======== ========
Operating income (loss):
Property. . . . . . . . . . . . . . . . . . . $ 317 (112)
Agriculture . . . . . . . . . . . . . . . . . 9 17
Golf. . . . . . . . . . . . . . . . . . . . . 104 (116)
-------- --------
Operating income (loss) . . . . . . . . . . . . 430 (211)
Corporate . . . . . . . . . . . . . . . . . . . (260) (932)
-------- --------
Income (loss) from continuing operations
before income taxes . . . . . . . . . . . . . $ 170 (1,143)
======== ========
(9) SUBSEQUENT EVENT
On April 9, 2007, the Company entered into a Plan and Agreement of
Merger merging KLLLC Mergerco, LLC with and into the Company (the "Merger
Agreement"). Pursuant to the terms of the Merger Agreement and upon the
effective time of the merger, each Class A Share will be converted into the
right to receive $43.25 in cash per share. Each Class B Share shall remain
issued and outstanding and continue to represent a membership interest in
the Company, but shall no longer be denominated as Class B Shares and
instead shall be redesignated as a percentage interest in the Company.
Pursuant to the terms of the amended and restated limited liability company
agreement of the Company, approval of the holders of Class A Shares is not
required. The Company currently expects that the merger will close in the
second quarter of 2007. Following the merger, the Company will send to
holders of Class A Shares, a letter of transmittal which must be completed
and returned before they will receive their cash consideration in the
merger. Completion of the merger is subject to various conditions and
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. Any of such 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 any time 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 holder of Class A Shares. Kaanapali Land has
filed a report on Schedule 13E-3 with the SEC that describes the merger and
various matters in connection therewith. A copy of such Schedule 13E-3 can
be obtained on the SEC's EDGAR website.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
General
In addition to historical information, this Report contains forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements are based on management's current
expectations about its businesses and the markets in which the Company
operates. Such forward-looking statements are not guarantees of future
performance and involve known and unknown risks, uncertainties or other
factors which may cause actual results, performance or achievements of the
Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements.
Actual operating results may be affected by various factors including,
without limitation, changes in international, national and Hawaiian
economic conditions, competitive market conditions, uncertainties and costs
related to the imposition of conditions on receipt of governmental
approvals and costs of material and labor, and actual versus projected
timing of events all of which may cause such actual results to differ
materially from what is expressed or forecast in this report.
On April 9, 2007, the Company entered into a Plan and Agreement of
Merger merging KLLLC Mergerco, LLC with and into the Company (the "Merger
Agreement"). Pursuant to the terms of the Merger Agreement and upon the
effective time of the merger, each Class A Share will be converted into the
right to receive $43.25 in cash per share. Each Class B Share shall remain
issued and outstanding and continue to represent a membership interest in
the Company, but shall no longer be denominated as Class B Shares and
instead shall be redesignated as a percentage interest in the Company.
Pursuant to the terms of the amended and restated limited liability company
agreement of the Company, approval of the holders of Class A Shares is not
required. The Company currently expects that the merger will close in the
second quarter of 2007. Following the merger, the Company will send to
holders of Class A Shares, a letter of transmittal which must be completed
and returned before they will receive their cash consideration in the
merger. Completion of the merger is subject to various conditions and
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. Any of such 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 any time 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 holder of Class A Shares. Kaanapali Land has
filed a report on Schedule 13E-3 with the SEC that describes the merger and
various matters in connection therewith. A copy of such Schedule 13E-3 can
be obtained on the SEC's EDGAR website.
Certain subsidiaries of Kaanapali Land are jointly indebted to
Kaanapali Land pursuant to a certain Secured Promissory Note in the
principal amount of $70 million, dated November 14, 2002. Such note
matures on October 31, 2011 and carries an interest rate of 3.04%
compounded semi-annually. The note, which is prepayable, is secured by
substantially all of the remaining real property owned by such
subsidiaries, pursuant to a certain Mortgage, Security Agreement and
Financing Statement, dated as of November 14, 2002 and placed on record in
December 2002. The note has been eliminated in the consolidated financial
statements because the obligors are consolidated subsidiaries of Kaanapali
Land.
In addition to such Secured Promissory Note, certain other
subsidiaries of Kaanapali Land continue to be liable to Kaanapali Land
under certain guarantees (the "Guarantees") that they had previously
provided to support certain Senior Indebtedness (as defined in the Plan)
and the Certificate of Land Appreciation Notes ("COLA Notes") formerly
issued by Amfac/JMB Hawaii, Inc. (as predecessor to KLC Land). Although
such Senior Indebtedness and COLA Notes were discharged under the Plan, the
Guarantees of the Non-Debtor KLC Subsidiaries were not. Thus, to the
extent that the holders of the Senior Indebtedness and COLA Notes did not
receive payment on the outstanding balance thereof from distributions made
under the Plan, the remaining amounts due thereunder remain obligations of
the Non-Debtor KLC Subsidiaries under the Guarantees. Under the Plan, the
obligations of the Non-Debtor KLC Subsidiaries under such Guarantees were
assigned by the holders of the Senior Indebtedness and COLA Notes to
Kaanapali Land on the Plan Effective Date. Kaanapali Land has notified
each of the Non-Debtor KLC Subsidiaries that are liable under such
Guarantees that their respective guarantee obligations are due and owing
and that Kaanapali Land reserves all of its rights and remedies in such
regard. Given the financial condition of such Non-Debtor KLC Subsidiaries,
however, it is unlikely that Kaanapali Land will realize payments on such
Guarantees that are more than a small percentage of the total amounts
outstanding thereunder or that in the aggregate will generate any material
proceeds to the Company. Nevertheless, Kaanapali Land has submitted a
claim in the Chapter 7 bankruptcy proceeding of Oahu Sugar in order that it
may recover 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.
As of March 31, 2007, the Company had cash and cash equivalents of
approximately $35 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, costs of consummating the merger 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. 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 on
September 1, 2006.
A subsidiary of Kaanapali Land ("Holder") holds a mortgage loan
secured by 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
million 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 March 31, 2007 the note had an outstanding principal and
accrued interest balance of $9.5 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 the bonds with a cash deposit of $8.3 million into an interest
bearing collateral account. During the first quarter of 2007, one of the
bonds was reduced from $18.6 million to $11.3 million and the collateral
was reduced to $5.9 million. 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 August
2006 the Company closed on the sale of three lots at Kaanapali Coffee Farms
for aggregate 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. The Company is under contract for the sale of
an additional lot that is scheduled to close during the second quarter of
2007.
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.
Cash and cash equivalents decreased and property, net increased in
the accompanying balance sheets primarily due to the Kaanapali Coffee Farms
development costs incurred during the quarter partially offset by the sale
of one lot and the release of restricted cash held as collateral for
subdivision bonds.
Other assets decreased due to the reduction in the first quarter of
2007 of the collateral for two subdivision bonds obtained in conjunction
with the Kaanapali Coffee Farms project.
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 payment of certain
asbestos related claims during the first quarter of 2007.
Sales and cost of sales increased due to the sale of one lot during
the first quarter of 2007.
Selling, general and administrative expenses decreased due to the
reduction of certain legal fees incurred in conjunction with asbestos
related claims.
INFLATION
Due to the lack of significant fluctuations in the level of inflation
in recent years, inflation generally has not had a material effect on real
estate development.
In the future, high rates of inflation may adversely affect real
estate development generally because of their impact on interest rates.
High interest rates not only increase the cost of borrowed funds to the
Company, but can also have a significant effect on the affordability of
permanent mortgage financing to prospective purchasers. However, high rates
of inflation may permit the Company to increase the prices that it charges
in connection with real property sales, subject to general economic
conditions affecting the real estate industry and local market factors, and
therefore may be advantageous where property investments are not highly
leveraged with debt or where the cost of such debt has been previously
fixed.
ITEM 4. CONTROLS AND PROCEDURES
The principal executive officer and the principal financial officer
of the Company have evaluated the effectiveness of the Company's disclosure
controls and procedures as defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934, as amended, (the "Exchange Act") as of the end of the
period covered by this report. Based on such evaluation, the principal
executive officer and the principal financial officer have concluded that
the Company's disclosure controls and procedures were effective to ensure
that information required to be disclosed was recorded, processed,
summarized and reported within the time periods specified in the applicable
rules and form of the Securities and Exchange Commission.
There was no change in internal control over financial reporting that
occurred during the period covered by this report that materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 6 to the Condensed Consolidated Financial Statements
included in Part I of this report.
ITEM 1A. RISK FACTORS
There has been no known material changes from risk factors as
previously disclosed in the Company's Annual Report on Form 10-K for the
year ended December 31, 2006.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1 Amended and Restated Limited Liability Company Agreement
of Kaanapali Land, LLC dated November 14, 2002 filed as
an exhibit to the Company's Form 10 filed May 1, 2003 and
hereby incorporated by reference.
10.1 Plan and Agreement of Merger merging KLLLC Mergerco, LLC
with and into Kaanapali Land, LLC dated April 9, 2007
filed as an exhibit to the Company's Form 8-K filed
April 10, 2007 and hereby incorporated by reference.
31.1. Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) is filed herewith.
31.2. Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) is filed herewith.
32. Certifications pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 are filed herewith.
(b) The following report on Form 8-K was filed since the beginning
of the last quarter of the period covered by the report.
The Company's report on Form 8-K (File No. 0-50273) for
April 9, 2007, filed on April 10, 2007 describing the merger of
KLLLC Mergerco, LLC into Kaanapali Land, LLC was filed.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KAANAPALI LAND, LLC
By: Pacific Trail Holdings, LLC
(sole member)
/s/ Gailen J. Hull
---------------------
By: Gailen J. Hull
Senior Vice President
Date: May 14, 2007