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, 2007 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, 2008, the registrant had approximately 1,792,613 Common
Shares outstanding.
Documents incorporated by reference: None
TABLE OF CONTENTS
Page
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PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . 1
Item 1A. Risk Factors. . . . . . . . . . . . . . . . . . 10
Item 1B. Unresolved Staff Comments . . . . . . . . . . . 15
Item 2. Properties. . . . . . . . . . . . . . . . . . . 15
Item 3. Legal Proceedings . . . . . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of
Security Holders. . . . . . . . . . . . . . . . 20
PART II
Item 5. Market Price of and Dividends on the
Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . 21
Item 6. Financial Information . . . . . . . . . . . . . 21
Item 7. Management's Discussion and
Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . 22
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk . . . . . . . . . . . . . . . 27
Item 8. Financial Statements and
Supplementary Data. . . . . . . . . . . . . . . 28
Item 9. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure. . . . . . . . . . . . 55
Item 9A. Controls and Procedures . . . . . . . . . . . . 55
Item 9B. Other Information . . . . . . . . . . . . . . . 55
PART III
ITEM 10. Managers and Executive Officers
of the Registrant . . . . . . . . . . . . . . . 56
Item 11. Executive Compensation. . . . . . . . . . . . . 58
Item 12. Security Ownership of Certain
Beneficial Owners and Management. . . . . . . . 59
Item 13. Certain Relationships and
Related Transactions. . . . . . . . . . . . . . 60
Item 14. Principal Accountant Fees and Services. . . . . 60
PART IV
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K . . . . . . . . . . . . 61
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . 63
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 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") provided for two classes of membership interests, "Class A
Shares" and "Class B Shares", which had substantially identical rights and
economic value under the LLC Agreement; except that holders of Class A
Shares were represented by a "Class A Representative" who was required to
approve certain transactions proposed by Kaanapali Land before they could
be undertaken. The Class A Representative was further entitled to receive
certain reports from the Company and meet with Company officials on a
periodic basis. Pursuant to the LLC Agreement, the Class A Shares and
Class B Shares were automatically redesignated as Common Shares on
November 15, 2007. Accordingly, the Company's Class A Shares and Class B
Shares ceased to exist separately on November 15, 2007. Reference is made
to the LLC Agreement for a more detailed discussion of these provisions.
Class B Shares were held by Pacific Trail and various entities and
individuals that are affiliated or otherwise associated with Pacific Trail.
Class A Shares were issued under the Plan to claimants who had no such
affiliation. Reference is made to Item 10 below for a further explanation
of the LLC Agreement.
Kaanapali Land distributed in the aggregate, approximately $1.8
million in cash and approximately 161,100 Class A Shares on account of the
claims that were made under the Plan and 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 had
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. In January 2008, the Company received notice from the IRS that
their 2005 tax return has been selected for audit. The audit is in its
early stages. The statutes of limitations with respect to the Company's
tax returns for 2004 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 Land Management Corp. ("KLM" fka Kaanapali Development
Corp.) 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
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 industrial
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,
50 of which are currently being offered to individual buyers. It is
anticipated that the land improvements will be completed in early to mid
2008. 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. 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. During
February 2008, the $11.3 million bond was released and the collateral
account was further reduced to $1.7 million. During July and early August
2006 the Company closed on the sale of three lots at Kaanapali Coffee
Farms. The Company has closed on the sale of three additional lots in
2007, one each in January, August and October. In conjunction with the
sales of the lots that closed in August and October 2007, in addition to
cash proceeds, the Company received promissory notes for $737 and $692,
respectively. The promissory notes are due July 2009 and October 2009.
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. The
Company has been engaged in numerous legal actions to quiet title to its
Wainee lands as a necessary predicate to such development. Such cases have
generally been contested and, while the Company has been successful in the
cases completed so far, a small number of them have survived summary
judgment motions by the Company, which may ultimately require trials at
uncertain additional cost and time to completion. As of the date hereof,
one case has been tried and was decided in favor of the Company. This case
and one other that was decided in the Company's favor on summary judgment
have been appealed by certain defendants, but those appeals were either
dismissed or decided in the Company's favor. At this time, no such cases
are on appeal. There can be no assurance that any of these actions,
whether now decided, still pending or yet to be filed, will regardless of
their outcome permit the Wainee development to go forward on an economic
basis.
The Company also owns less than 100 acres of miscellaneous land
parcels located on the Islands of Kauai, Maui and Oahu. These
miscellaneous parcels 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. In addition, there are certain additional small parcels of
land that appear to be owned by the Company in common with third parties or
in which the Company may be able to assert ownership through various legal
theories. One of those parcels has been the subject of a quiet title
action that was brought by a third party that resulted in a settlement
between PMCo and such third party, that will ultimately permit PMCo, after
satisfaction of certain title and entitlement requirements, to split the
proceeds of the sale of such parcel 50/50 with such third party. However,
it is not expected that the ultimate net proceeds to the Company from such
sale will be material to the Company. The Company continues to assess its
option with respect to certain other co-tenancy parcels in the Lahaina area
to determine whether the institution of proceedings to gain title thereto
will be to the Company's benefit.
AGRICULTURE
HISTORIC OPERATIONS. A significant portion of the Company's revenues
were formerly derived from agricultural operations primarily consisting of
the cultivation, milling and sale of raw sugar. The last remaining
operating sugar plantation of the Company, owned by a subsidiary of
Kaanapali Land, was shut down at the end of 2000. In September 2001, the
Company also ceased its coffee operations, which were owned by a subsidiary
of Kaanapali Land. The Company leased, or granted limited licenses to
operate, to a third party, certain portions of the Kaanapali 2020 land on
which the coffee trees are located for the purpose of continuing
agricultural coffee operations on such land. The lessee purchased the
Company's coffee mill equipment during the first quarter of 2004.
SEED CORN 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 according to Monsanto's specifications. In addition to
generating such revenue, this operation is otherwise advantageous, because
the cultivated land helps control dust and soil erosion and keeps the
fields green, to the benefit of the local community. The Company may seek
to expand this operation if it believes it can provide suitable arable
acreage with available irrigation water, find ready markets for its
products and it can operate at a level of profitability that the Company
deems sufficient. There can be no assurance that any expansion will occur
or that current operations will remain profitable.
GOLF
The Company 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 the entire 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
The Company has consummated various strategic sales of bulk land.
These transactions were generally pursued in order to raise additional cash
that would enhance the Company's ability to fund the Kaanapali 2020
developments including, but not limited to Kaanapali Coffee Farms, and
other Company overhead costs. The Company currently has no outstanding
agreements for the sale of land in bulk, but while this is not the current
focus of the Company, it does from time to time in the ordinary course of
business engage in discussions with third parties who may be interested in
certain parcels.
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, 2008, 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. Certain trademarks,
trade names and service marks have also been registered in connection with
the Kaanapali Coffee Farms development. Also protected are certain designs
and logos associated with the names protected. Certain marks owned by the
Company have been licensed to third parties, however, the income therefrom
is not material to the Company's financial results. To the extent deemed
advantageous in connection with the Company's ongoing businesses, to
satisfy contractual commitments with respect to certain marks or where the
Company believes that there are future licensing opportunities with respect
to specific marks, the Company intends to maintain such marks to the extent
necessary to protect their use relative thereto. The Company also intends
to develop and protect appropriate marks in connection with its future land
development 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
since the latter part of 2005 and through 2007 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. Certain ordinances adopted by the County of Maui in 2007
have placed additional requirements on developers, some of which may be
difficult or expensive to satisfy. Other proposed ordinances that have not
yet passed may place moratoria on new development while the County of Maui
works toward the adoption of a new General Plan. It is currently unknown
to what extent these new legislative initiatives will impact the cost or
timing of the Company's planned developments.
Currently, Kaanapali Land is preparing applications for the necessary
entitlements to carry out the Kaanapali 2020 plan. While some of these
lands have some form of entitlements, it is anticipated that at least a
substantial portion of the land will require state district boundary
amendments and county general plan amendments, as well as rezoning
approvals. 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, fires, tsunamis, unusually heavy or prolonged rains, and
hurricanes; and other factors which are beyond the control of the Company.
Because of these risks and others, real estate ownership and development is
subject to unexpected increases in costs.
The Company may, from time to time and to the extent economically
advantageous, sell rezoned, undeveloped or partially developed parcels,
such as portions of the Kaanapali 2020 Development Plan lands, the former
Pioneer Mill site and/or the Wainee land. It intends to develop the balance
of its lands for residential, resort, affordable housing, limited
commercial and recreational purposes.
Any increase in interest rates or downturn in the international,
national or Hawaiian economy could affect the Company's profitability and
sales. The downturn in the Asian economy, particularly the Japanese
economy, has had a profound effect on the Hawaiian real estate market.
However, the Kaanapali resort area has historically enjoyed a significant
mainland tourist market in the United States and Canada, which had
resulted, beginning in the late 1990's, in a strong market for resort
housing in the area. The September 11 attacks had a material adverse effect
on tourism in the Kaanapali area immediately following the attacks, but the
market rebounded during the period from 2002 into 2005 and the areas of
primary and secondary residential homes, condominiums and time share units
were relatively strong during this period. Markets have turned down
significantly since late 2005, which has negatively impacted the volume of
transactions completed in West Maui. 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, fires, wind, prolonged heavy rains, 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 and again in March 2008. 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.
On October 15, 2006, a significant earthquake occurred that was felt
in most parts of the state. As a consequence of such earthquake, the DLNR,
in conjunction with the U.S. Army Corps of Engineers inspected each
reservoir and identified certain minor damage. In 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.
In September 2007, the Company received further correspondence from
DLNR that it preliminarily intended to categorize each of the reservoirs as
"high hazard" under a new statute recently passed by the State of Hawaii
concerning dam and reservoir safety. This classification, which bears upon
future government oversight and reporting requirements, may increase the
future cost of managing and maintaining these reservoirs in a material
manner. The Company does not believe that this classification is warranted
for either of these reservoirs and has initiated a dialogue with DLNR in
that regard. At this time, it is unknown what the final classification
assigned to these reservoirs will be or to what extent such classification
will impact the future use and maintenance cost of these assets.
During the second quarter of 2007, the Company commenced portions of
the required remedial work on these reservoirs. Some of this work was
commenced in connection with improvements made to one of the reservoirs in
order to construct the new non-potable water system servicing the Kaanapali
Coffee Farms development. Such work has been substantially completed,
however certain portions of the remedial work that are not associated with
such improvements have not been commenced. The Company expects to address
the remaining portions of such work during 2008.
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 as well as
new courses that may open. 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 generally as at 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
is scheduled to 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, 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, two such
subsidiaries, Oahu Sugar and DC Distribution, filed subsequent petitions
for liquidation under Chapter 7 of the bankruptcy code in April 2005 and
July 2007, respectively), as described below.
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,
subsequently 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.
However, as LPCo was substantially without assets and has dissolved, the
ability of LPCo to perform any requested actions is doubtful.
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 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.
On or about July 19, 2007, at the request of the Hawaii Department of
Health and as a result of a report of vandalism and spilled transformer
fluid at a former transformer site, an inspection of various former
transformer sites on Maui was conducted. As a result of the inspection, oil
was tested for possible contaminants, drained from various transformers,
and disposed of in accordance with requirements of law. At one site, there
was spillage of transformer fluid that required remediation. The Company
is in the process of remediating the spilled transformer fluid and is
undertaking steps to complete the remediation in accordance with law.
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 is not expected to
have a material adverse effect on the Company as Oahu Sugar was
substantially without assets at the time of the filing. While it is not
believed that any other affiliates have any responsibility for the debts of
Oahu Sugar, the EPA has indicated that it intends to make a claim against
Kaanapali Land as further described below, and therefore, there can be no
assurance that the Company will not incur significant costs in connection
with such claim.
The deadline for filing proofs of claim with the bankruptcy court
passed in April 2006. Prior to the deadline, Kaanapali Land, on behalf of
itself and certain subsidiaries, filed claims that aggregated approximately
$224 million, primarily relating to unpaid guarantee obligations made by
Oahu Sugar that were assigned to Kaanapali Land pursuant to the Plan on the
Plan Effective Date. In addition, the EPA and the U.S. Navy filed a joint
proof of claim that seeks to recover certain environmental response costs
relative to the Waipio Peninsula site discussed above. The proof of claim
contained a demand for previously spent costs in the amount of
approximately $.3 million, and additional anticipated response costs of
between approximately $2.8 million and $11.5 million. No specific
justification of these costs, or what they are purported to represent, was
included in the EPA/Navy proof of claim. Due to the insignificant amount
of assets remaining in the debtor's estate, it is unclear whether the
United States Trustee who has taken control of Oahu Sugar will take any
action to contest the EPA/Navy claim, or how it will reconcile such claim
for the purpose of distributing any remaining assets of Oahu Sugar.
EPA has sent three requests for information to Kaanapali Land
regarding, among other things, Kaanapali Land's organization and
relationship, if any, to entities that may have, historically, operated on
the site and with respect to operations conducted on the site. Kaanapali
Land responded to these requests for information. By letter dated
February 7, 2007, pursuant to an allegation that Kaanapali Land is a
successor to Oahu Sugar Company, Limited, a company that operated at the
site prior to 1961 ("Old Oahu"), EPA advised Kaanapali that it believes it
is authorized by CERCLA to amend the existing Unilateral Administrative
Order against Oahu Sugar Company, LLC, for the clean up of the site to
include Kaanapali Land as an additional respondent. The purported basis for
the EPA's position is that Kaanapali Land, by virtue of certain corporate
actions, is jointly and severally responsible for the performance of the
response actions, including, without limitation, clean-up at the site. No
such amendment has taken place as of the date hereof. Instead, the EPA's
letter invited Kaanapali Land to engage in settlement discussions with the
EPA to attempt to resolve Kaanapali Land's alleged liability. 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 and intensively utilizing the site directly during a
period when no lease was in force. Discussions with the Navy have also
commenced. 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. In January 2008, the Company received notice from the IRS
that their 2005 tax return has been selected for audit. The audit is in
its early stages. The statutes of limitations with respect to the
Company's tax returns for 2004 and subsequent years remain open. The
Company believes adequate provisions for income taxes have been recorded
for all years, although there can be no assurance that such provisions will
be adequate. To the extent that there is a shortfall, any such shortfall
for which the Company could be liable could be material.
Kaanapali Land, as successor by merger to other entities, and D/C
have been named as defendants in personal injury actions allegedly based on
exposure to asbestos. While there are only a few such cases that name
Kaanapali Land, there are a substantial number of cases that are pending
against D/C on the U.S. mainland (primarily in California). Cases against
Kaanapali Land are allegedly based on its prior business operations in
Hawaii and cases against D/C are allegedly based on D/C's prior
distribution business operations in California. Each entity defending
these cases believes that it has meritorious defenses against these
actions, but can give no assurances as to the ultimate outcome of these
cases. The defense of these cases has nevertheless had a material adverse
effect on the financial condition of D/C as it has been forced to file a
voluntary petition for liquidation as discussed below. Kaanapali Land does
not believe that it has liability, directly or indirectly, for D/C's
obligations in those cases. Kaanapali Land does not presently believe that
the cases in which it is named will result in any material liability to
Kaanapali Land; however, there can be no assurance in the regard.
On February 15, 2005, D/C 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 sought, among other things, a declaration:
of the material terms, rights, and obligations of the parties under the
terms of the policy or policies; that the policies were exhausted; that
plaintiff is not obligated to reimburse D/C for its attorneys' fees in that
the amounts of attorneys' fees incurred by D/C have been incurred
unreasonably; that plaintiff 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
filed an answer and an amended cross-claim. D/C believed that it had
meritorious defenses and positions, and intended to vigorously defend. In
addition, D/C believed that it was entitled to amounts from plaintiffs for
reimbursement and recoupment of amounts expended by D/C on the lawsuits
previously tendered. In order to fund such action and its other ongoing
obligations while such lawsuit continued, D/C entered into a Loan Agreement
and Security Agreement with Kaanapali Land, in August 2006, whereby
Kaanapali Land provided certain advances against a promissory note
delivered by D/C in return for a security interest in any D/C insurance
policy at issue in this lawsuit. In June 2007, the parties settled this
lawsuit with payment by plaintiffs in the amount of $1.6 million. Such
settlement amount was paid to Kaanapali Land in partial satisfaction of the
secured indebtedness noted above.
Because D/C was substantially without assets and was unable to obtain
additional sources of capital to satisfy its liabilities, D/C filed with
the United States Bankruptcy Court, Northern District of Illinois, its
voluntary petition for liquidation under Chapter 7 of Title 11, United
States Bankruptcy Code during July 2007, Case No. 07-12776. Such filing is
not expected to have a material adverse effect on the Company as D/C was
substantially without assets at the time of the filing.
The Company received notice from the Hawaii Department of Land and
Natural Resources ("DLNR") that it would inspect all significant dams and
reservoirs in Hawaii, including those maintained by the Company on Maui in
connection with its agricultural operations. Inspections were performed in
April and October 2006 and again in March 2008. 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.
On October 15, 2006, a significant earthquake occurred that was felt
in most parts of the state. As a consequence of such earthquake, the DLNR,
in conjunction with the U.S. Army Corps of Engineers inspected each
reservoir and identified certain minor damage. In 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.
In September 2007, the Company received further correspondence from
DLNR that it preliminarily intended to categorize each of the reservoirs as
"high hazard" under a new statute recently passed by the State of Hawaii
concerning dam and reservoir safety. This classification, which bears upon
future government oversight and reporting requirements, may increase the
future cost of managing and maintaining these reservoirs in a material
manner. The Company does not believe that this classification is warranted
for either of these reservoirs and has initiated a dialogue with DLNR in
that regard. At this time, it is unknown what the final classification
assigned to these reservoirs will be or to what extent such classification
will impact the future use and maintenance cost of these assets.
During the second quarter of 2007, the Company commenced portions of
the required remedial work on these reservoirs. Some of this work was
commenced in connection with improvements made to one of the reservoirs in
order to construct the new non-potable water system servicing the Kaanapali
Coffee Farms development. Such work has been substantially completed,
however certain portions of the remedial work that are not associated with
such improvements have not been commenced. The Company expects to address
the remaining portions of such work during 2008.
On April 9, 2007, the Company entered into a Plan and Agreement of
Merger to merge KLLLC Mergerco, LLC ("KLLLC") with and into the Company
(the "Merger Agreement"), which provided, subject to the terms and
conditions of the Merger Agreement, that upon the effective time of the
merger, each Class A Share would have been converted into the right to
receive $43.25 in cash per share. Among the conditions to the Merger
Agreement was that there shall be no pending or threatened litigation that
could reasonably be expected (a) to have a material adverse effect on the
business, financial condition or results of operations of the Company or
KLLLC or (b) to increase the costs of the merger in any material respect.
On May 10, 2007, John G. Brant, P.C. Pension Trust and John G. Brant
filed a suit in the Court of Chancery in the State of Delaware against the
Company, Pacific Trail Holdings, LLC, Pacific Trail Holdings, Inc., KLLLC,
and certain officers and directors of the entity defendants. Among other
things, the complaint alleged that the price to be paid for each Class A
Share pursuant to the Merger Agreement was unfair and undervalued the
Company. While neither the Company nor KLLLC believed that the plaintiffs'
claims were meritorious, because the cost of defending and/or settling the
lawsuit could reasonably have been expected to be material, KLLLC
terminated the Merger Agreement pursuant to Article Twelfth of the Merger
Agreement. As a result, the holders of Class A Shares will remain as
shareholders of the Company and the Company will continue to operate under
its current structure. Accordingly, the merger transaction contemplated in
the Company's Schedule 13E-3 previously filed with the Securities and
Exchange Commission on April 9, 2007 was terminated. On or about August 8,
2007, the plaintiff in the Brant litigation filed a petition for attorneys'
fees seeking an award of attorneys' fees in the amount of $1,000 and
reimbursement of costs and expenses in an amount not to exceed $50. On
February 28, 2008, the Court entered an order dismissing the case with
prejudice and ordering the Company to pay plaintiff $250,000 in fees and
costs. The payment was made.
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, 2007 there were approximately 710 holders of
record of the Company's 1,792,613 Common 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 2007, 2006 and 2005 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, 2007, 2006, 2005, 2004 and 2003
(Dollars in Thousands Except Per Share Amounts)
2007 2006 2005 2004 2003
-------- -------- -------- -------- --------
Total revenues . . . . $ 12,674 11,547 37,251 13,916 63,783
======== ======== ======== ======== ========
Net income from
continuing opera-
tions . . . . . . . . $ 1,418 1,612 21,042 4,887 10,502
======== ======== ======== ======== ========
Income from
continuing
operations per
share, basic
and diluted . . . . . $ .79 .90 11.74 2.73 5.86
======== ======== ======== ======== ========
Total assets . . . . . $186,289 185,344 187,875 179,401 189,473
======== ======== ======== ======== ========
(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.
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 April 9, 2007, the Company entered into a Plan and Agreement of
Merger to merge KLLLC Mergerco, LLC ("KLLLC") with and into the Company
(the "Merger Agreement"), which provided, subject to the terms and
conditions of the Merger Agreement, that upon the effective time of the
merger, each Class A Share would have been converted into the right to
receive $43.25 in cash per share. Among the conditions to the Merger
Agreement was that there shall be no pending or threatened litigation that
could reasonably be expected (a) to have a material adverse effect on the
business, financial condition or results of operations of the Company or
KLLLC or (b) to increase the costs of the merger in any material respect.
On May 10, 2007, John G. Brant, P.C. Pension Trust and John G. Brant
filed a suit in the Court of Chancery in the State of Delaware against the
Company, Pacific Trail Holdings, LLC, Pacific Trail Holdings, Inc., KLLLC,
and certain officers and directors of the entity defendants. Among other
things, the complaint alleged that the price to be paid for each Class A
Share pursuant to the Merger Agreement was unfair and undervalued the
Company. While neither the Company nor KLLLC believed that the plaintiffs'
claims were meritorious, because the cost of defending and/or settling the
lawsuit could reasonably have been expected to be material, KLLLC
terminated the Merger Agreement pursuant to Article Twelfth of the Merger
Agreement. As a result, the holders of Class A Shares will remain as
shareholders of the Company and the Company will continue to operate under
its current structure. Accordingly, the merger transaction contemplated in
the Company's Schedule 13E-3 previously filed with the Securities and
Exchange Commission on April 9, 2007 was terminated. On or about August 8,
2007, the plaintiff in the Brant litigation filed a petition for attorneys'
fees seeking an award of attorneys' fees in the amount of $1.0 million and
reimbursement of costs and expenses in an amount not to exceed $50
thousand. On February 28, 2008, the Court entered an order dismissing the
case with prejudice and ordering the Company to pay plaintiff $250 thousand
in fees and costs. The payment was made.
Certain subsidiaries of Kaanapali Land are jointly indebted to
Kaanapali Land pursuant to a certain Secured Promissory Note in the
principal amount of $70 million dated November 14, 2002. Such note matures
on October 31, 2011 and carries an interest rate of 3.04% compounded semi-
annually. The note, which is prepayable, is secured by substantially all
of the remaining real property owned by such subsidiaries, pursuant to a
certain Mortgage, Security Agreement and Financing Statement, dated as of
November 14, 2002 and placed on record in December 2002. The note has been
eliminated in the consolidated financial statements because the obligors
are consolidated subsidiaries of Kaanapali Land.
In addition to such Secured Promissory Note, certain other
subsidiaries of Kaanapali Land continue to be liable to Kaanapali Land
under certain guarantees (the "Guarantees") that they had previously
provided to support certain Senior Indebtedness (as defined in the Plan)
and the Certificate of Land Appreciation Notes ("COLA Notes") formerly
issued by Amfac/JMB Hawaii, Inc. (as predecessor to KLC Land). Although
such Senior Indebtedness and COLA Notes were discharged under the Plan, the
Guarantees of the Non-Debtor KLC Subsidiaries were not. Thus, to the
extent that the holders of the Senior Indebtedness and COLA Notes did not
receive payment on the outstanding balance thereof from distributions made
under the Plan, the remaining amounts due thereunder remain obligations of
the Non-Debtor KLC Subsidiaries under the Guarantees. Under the Plan, the
obligations of the Non-Debtor KLC Subsidiaries under such Guarantees were
assigned by the holders of the Senior Indebtedness and COLA Notes to
Kaanapali Land on the Plan Effective Date. Kaanapali Land has notified
each of the Non-Debtor KLC Subsidiaries that are liable under such
Guarantees that their respective guarantee obligations are due and owing
and that Kaanapali Land reserves all of its rights and remedies in such
regard. Given the financial condition of such Non-Debtor Subsidiaries,
however, it is unlikely that Kaanapali Land will realize payments on such
Guarantees that are more than a small percentage of the total amounts
outstanding thereunder or that in the aggregate will generate any material
proceeds to the Company. Nevertheless, Kaanapali Land has submitted a
claim in the Chapter 7 bankruptcy proceeding of Oahu Sugar in order that it
may recover substantially all of the assets remaining in the bankruptcy
estate, if any, that become available for creditors of Oahu Sugar. Any
amounts so received would not be material to the Company. These Guarantee
obligations have been eliminated in the consolidated financial statements
because the obligors are consolidated subsidiaries of Kaanapali Land, which
is now the sole obligee thereunder.
Those persons and entities that were not affiliated with Northbrook
and were holders of COLAs (Certificate of Land Appreciation Notes) on the
date that the Plan was confirmed by the Bankruptcy Court, and their
successors in interest, represent approximately 9.0% of the ownership of
the Company.
At December 31, 2007, the Company had cash and cash equivalents of
approximately $24 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.
A subsidiary of Kaanapali Land holds a mortgage note secured by the
Waikele Golf Course in the original principal amount of approximately $7.2
million. 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 December 31, 2007 the note had an outstanding principal and
accrued interest balance of $9.9 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,
50 of which are currently being offered to individual buyers. It is
anticipated that the land improvements will be completed in early 2008. 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. 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. During February
2008, the $11.3 million bond was released and the collateral account was
further reduced to $1.7 million. During July and early August 2006 the
Company closed on the sale of three lots at Kaanapali Coffee Farms. The
Company has closed on the sale of three additional lots in 2007, one each
in January, August and October. In conjunction with the sales of the lots
that closed in August and October 2007, in addition to cash proceeds, the
Company received promissory notes for $737 and $692, respectively. The
promissory notes are due July 2009 and October 2009.
During January 2008 the Company became aware of an unsolicited tender
offer for shares made jointly by SCM Special Fund, LLC; Sutter Opportunity
Fund 4, LLC; MPF Flagship Fund II, LLC; MPF Dewaay Premier Fund 4, LLC; and
MPF Special Fund 8, LLC to purchase up to 32,000 Shares of the Company for
$30 per share. Pacific Trails, the manager of the Company, considered
certain matters and concluded that it would express no opinion and will
remain neutral with respect to the offer. The Company has since received
notice from the offerors that they have terminated the offer.
During 2008, the Company entered into an agreement in principal with
Stephen Lovelette ("Lovelette"), an executive vice president of the
Company, whereby the Company agreed to issue up to 52,000 shares of a new
class of common shares (the "Class C Shares") in consideration for his
services to the Company. The Class C Shares are expected to have the same
rights as the Shares except that the Class C Shares will not participate in
any distributions until the holders of the Shares have received aggregate
distributions equal to $19 per Share, subject to customary antidilution
adjustments. The Class C Shares are expected to become 50% vested at the
time of grant, an additional 25% will vest on December 31, 2008 if
Lovelette remains employed by the Company through that date the remaining
25% will vest on December 31, 2009 if Lovelette remains employed by the
Company through that date.
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.
2007 COMPARED TO 2006
Cash and cash equivalents decreased and property, net increased in
the accompanying balance sheets primarily due to the Kaanapali Coffee Farms
development costs incurred partially offset by the sale of three lots 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 the 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 amounts withheld from periodic payments until final
completion of the contract requirements for the Kaanapali Coffee Farms
project.
Other liabilities decreased primarily due to the net reduction of
certain reserves of approximately $4 million related to contingencies which
originated in prior years and were resolved in 2007. The offset of the net
reduction in reserves is reflected in selling, general and administrative
expenses.
Increase in sales resulted from the golf course having a full year of
operations in 2007 compared to the golf course being closed for five months
during 2006 for renovations.
Decrease in interest income resulted from the decrease in cash and
cash equivalents due to the Kaanapali Coffee Farms development costs
incurred.
Selling, general and administrative expenses increased primarily due
to the reduction of certain reserves of approximately $7.5 million in 2006
compared to the decrease in reserves in the current year of approximately
$4 million, as noted above.
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 amounts withheld from periodic payments until final
completion of the contract requirements 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.
INFLATION
Due to the lack of significant fluctuations in the level of inflation
in recent years, inflation generally has not had a material effect on real
estate development.
In the future, high rates of inflation may adversely affect real
estate development generally because of their impact on interest rates.
High interest rates not only increase the cost of borrowed funds to the
Company, but can also have a significant effect on the affordability of
permanent mortgage financing to prospective purchasers. However, high rates
of inflation may permit the Company to increase the prices that it charges
in connection with real property sales, subject to general economic
conditions affecting the real estate industry and local market factors, and
therefore may be advantageous where property investments are not highly
leveraged with debt or where the cost of such debt has been previously
fixed.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the Company's financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of
these financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosures of contingent assets and liabilities.
These estimates are based on historical experience and on various other
assumptions that management believes are reasonable under the
circumstances; additionally management evaluates these results on an on-
going basis. Management's estimates form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Different estimates could be made under
different assumptions or conditions, and in any event, actual results may
differ from the estimates.
The Company reviews its property for impairment of value. This
includes considering certain indications of impairment such as significant
changes in asset usage, significant deterioration in the surrounding
economy or environmental problems. If such indications are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying value, the Company will adjust the carrying value
down to its estimated fair value. Fair value is based on management's
estimate of the property's fair value based on discounted projected cash
flows.
There are various judgments and uncertainties affecting the
application of these and other accounting policies, including the
liabilities related to asserted and unasserted claims and the utilization
of net operating losses. Materially different amounts may be reported
under different circumstances or if different assumptions were used.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's future earnings, cash flows and fair values relevant to
financial instruments are dependent upon prevalent market rates. Market
risk is the risk of loss from adverse changes in market prices and interest
rates. The Company manages its market risk by matching projected cash
inflows from operating properties, financing activities, and investing
activities with projected cash outflows to fund capital expenditures and
other cash requirements. The Company does not enter into financial
instruments for trading purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
KAANAPALI LAND, LLC
INDEX
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets, December 31, 2007 and 2006
Consolidated Statements of Operations for the years ended
December 31, 2007, 2006 and 2005
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the years ended
December 31, 2007, 2006 and 2005
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, 2007 and 2006, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of
the three years in the period ended December 31, 2007. 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, 2007 and 2006, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2007, in conformity with U.S. generally accepted
accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
March 22, 2008
KAANAPALI LAND, LLC
Consolidated Balance Sheets
December 31, 2007 and 2006
(Dollars in Thousands, except share data)
A S S E T S
-----------
2007 2006
-------- --------
Cash and cash equivalents. . . . . . . . . . . . . $ 24,050 39,624
Receivables, net . . . . . . . . . . . . . . . . . 104 148
Property, net. . . . . . . . . . . . . . . . . . . 118,485 105,189
Pension Plan Assets. . . . . . . . . . . . . . . . 33,346 29,150
Other assets . . . . . . . . . . . . . . . . . . . 10,304 11,233
-------- --------
$186,289 185,344
======== ========
L I A B I L I T I E S
---------------------
Accounts payable and accrued expenses. . . . . . . $ 5,093 4,488
Deferred income taxes. . . . . . . . . . . . . . . 30,888 28,647
Accrued benefit obligation . . . . . . . . . . . . 2,181 2,452
Other liabilities. . . . . . . . . . . . . . . . . 25,092 29,085
-------- --------
Total liabilities. . . . . . . . . . . . . 63,254 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 12/31/07 and 12/31/06
Shares authorized - 4,500,000; shares
issued 1,792,613 . . . . . . . . . . . . . . . . -- --
Additional paid-in capital . . . . . . . . . . . . 5,357 5,357
Accumulated other comprehensive income,
net of tax . . . . . . . . . . . . . . . . . . . 1,650 --
Accumulated earnings . . . . . . . . . . . . . . . 116,028 115,315
-------- --------
Total stockholders' equity . . . . . . . . 123,035 120,672
-------- --------
$186,289 185,344
======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
KAANAPALI LAND, LLC
Consolidated Statements of Operations
Years ended December 31, 2007, 2006 and 2005
(Dollars in Thousands Except Per Share Amounts)
2007 2006 2005
-------- -------- --------
Revenues:
Sales. . . . . . . . . . . . . . . . . $ 10,481 8,274 34,988
Interest and other income. . . . . . . 2,193 3,273 2,263
-------- -------- --------
12,674 11,547 37,251
-------- -------- --------
Cost and expenses:
Cost of sales. . . . . . . . . . . . . 7,360 7,255 17,213
Reduction of post-retirement
benefit obligation . . . . . . . . . -- -- (206)
Selling, general and administrative. . 1,433 761 (5,083)
Interest . . . . . . . . . . . . . . . -- -- 168
Depreciation and amortization. . . . . 1,279 1,054 1,040
-------- -------- --------
10,072 9,070 13,132
-------- -------- --------
Operating income . . . . . . . . . . . . 2,602 2,477 24,119
Income tax expense . . . . . . . . . . (1,184) (865) (3,077)
-------- -------- --------
Net income . . . . . . . . . . . $ 1,418 1,612 21,042
======== ======== ========
Earnings per share:
Net income, basic and diluted. . . . . $ .79 .90 11.74
======== ======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
KAANAPALI LAND, LLC
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2007, 2006 and 2005
(Dollars in Thousands)
Accumu-
lated
Accumu- Other Total
Additional lated Compre- Stock-
Common Paid-In (Deficit) hensive holders'
Stock Capital Earnings Income Equity
-------- --------- -------- -------- --------
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
Adjustment to
adopt FIN 48 . . -- -- (705) -- (705)
Other comprehensive
income, net
of tax . . . . . -- -- -- 1,650 1,650
Net income . . . . -- -- 1,418 -- 1,418
-------- -------- -------- -------- --------
Balance at
December 31,
2007 . . . . . . $ -- 5,357 116,028 1,650 123,035
======== ======== ======== ======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
KAANAPALI LAND, LLC
Consolidated Statements of Cash Flows
Years ended December 31, 2007, 2006 and 2005
(Dollars in Thousands)
2007 2006 2005
-------- -------- --------
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . $ 1,418 1,612 21,042
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operations:
Property sales, disposals and
retirements, net . . . . . . . . . 2,770 2,666 13,825
Depreciation and amortization. . . . 1,279 1,054 1,040
Changes in operating assets and
liabilities:
Receivables, net . . . . . . . . . . 44 4,587 (4,290)
Pension Plan Assets. . . . . . . . . (2,631) (1,677) (935)
Accrued benefit obligation . . . . . (186) (264) (551)
Collateral deposit . . . . . . . . . 2,429 -- (8,333)
Accounts payable, accrued
expenses and other . . . . . . . . (5,593) (3,894) (8,613)
Deferred income taxes. . . . . . . . 2,241 450 3,077
-------- -------- --------
Net cash provided by (used in)
operating activities . . . . . . . . . 1,771 4,534 16,262
-------- -------- --------
Cash flows from investing activities:
Property additions . . . . . . . . . . (17,345) (16,587) (3,151)
-------- -------- --------
Net cash provided by (used in)
investing activities . . . . . . . . . (17,345) (16,587) (3,151)
-------- -------- --------
KAANAPALI LAND, LLC
Consolidated Statements of Cash Flows - Continued
Years ended December 31, 2007, 2006 and 2005
(Dollars in Thousands)
2007 2006 2005
-------- -------- --------
Cash flows from financing activities:
Net repayments of debt . . . . . . . . -- -- (7,178)
-------- -------- --------
Cash used in
financing activities . . . . . -- -- (7,178)
-------- -------- --------
Net increase (decrease) in
cash and cash equivalents. . . (15,574) (12,053) 5,933
Cash and cash equivalents
at beginning of year . . . . . 39,624 51,677 45,744
-------- -------- --------
Cash and cash equivalents
at end of year . . . . . . . . $ 24,050 39,624 51,677
======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid for interest . . . . . . . . $ -- -- 168
======== ======== ========
Cash received (paid) for
income taxes . . . . . . . . . . . . $ 129 4,397 --
======== ======== ========
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 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, 2007, approximately
1,793,000 Common 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
were divided into two classes: the Class A Shares, which were publicly
held and "Class B Shares" which were generally held by affiliates of
Kaanapali Land. Pursuant to the LLC Agreement, the Class A Shares and
Class B Shares were automatically redesignated Company Common Shares on
November 15, 2007. Accordingly, the Company's Class A Shares and Class B
Shares ceased to exist separately on November 15, 2007.
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
The Company adopted the provisions of FASB issued Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of
FASB Statement No. 109 ("FIN 48"), on January 1, 2007. 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 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 incremental effects of adopting the provisions of Statement 158
on the Company's statement of financial position are presented in the
following table. The adoption of Statement 158 had no effect on the
Company's consolidated statement of income for any period presented.
As Reported
Prior to Effect of at
Adopting Adopting December 31,
Statement 158 Statement 158 2007
------------- ------------- ------------
Prepaid pension cost . . . $ 30,727 2,619 33,346
(Accrued) other post-
retirement liability . . (2,273) 93 (2,180)
Accumulated other
comprehensive income,
before tax . . . . . . . -- (2,712) (2,712)
Included in accumulated other comprehensive income at December 31,
2007 are the following amounts that have not yet been recognized in net
periodic pension/post-retirement cost: unrecognized prior service costs of
$6 ($4 net of tax) and unrecognized actuarial gains $2,718 ($1,654 net of
tax). The prior service cost and actuarial gains included in accumulated
other comprehensive income and expected to be recognized in net periodic
pension/post-retirement cost during the fiscal year ended December 31, 2008
is $2, ($1 net of tax), and $362 ($221 net of tax), respectively.
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 $100 at
December 31, 2007 and 2006, 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,
50 of which are currently being offered to individual buyers. It is
anticipated that the land improvements will be completed in early to mid
2008. 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. 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. During
February 2008, the $11.3 million bond was released and the collateral
account was further reduced to $1.7 million. During July and early August
2006 the Company closed on the sale of three lots at Kaanapali Coffee
Farms. The Company has closed on the sale of three additional lots in
2007, one each in January, August and October. In conjunction with the
sales of the lots that closed in August and October 2007, in addition to
cash proceeds, the Company received promissory notes for $737 and $692,
respectively. The promissory notes are due July 2009 and October 2009.
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, 2007, 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.
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.
2007 2006
-------- --------
Property, net:
Land . . . . . . . . . . . . . . . . . . $100,957 87,578
Land improvements. . . . . . . . . . . . 1,886 1,886
Buildings. . . . . . . . . . . . . . . . 19,700 19,452
Machinery and equipment. . . . . . . . . 4,763 3,815
-------- --------
127,306 112,731
Accumulated depreciation . . . . . . . . (8,821) (7,542)
-------- --------
Property, net. . . . . . . . . . . . . . $118,485 105,189
======== ========
Land held for sale of approximately $27,400 and $19,000, representing
primarily Kaanapali Coffee Farms, was included in Property in the
consolidated balance sheets at December 31, 2007 and December 31, 2006,
respectively, 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, 2007), certain Kaanapali 2020 land that has been set aside for the
Company's seed corn 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 operation and 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.
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.
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
A subsidiary of Kaanapali Land holds a mortgage note secured by the
Waikele Golf Course in the original principal amount of $7,178. The
proceeds of the mortgage note were used to pay off a $7,178 mortgage held
by an unrelated third party in March 2005. 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, 2007 the note had an outstanding
principal and accrued interest balance of approximately $9,900. 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 $35 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, 2007, 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 change in
pension benefit obligations, plans assets and funded status of the
Company's defined benefit pension plan at December 31, 2007 and 2006.
2007 2006
------- -------
Benefit obligation at beginning of year. . . . . . $47,489 46,066
Service cost . . . . . . . . . . . . . . . . . . . 18 16
Interest cost. . . . . . . . . . . . . . . . . . . 2,583 2,494
Actuarial (gain) loss. . . . . . . . . . . . . . . (227) 3,202
Benefits paid. . . . . . . . . . . . . . . . . . . (4,013) (4,289)
------- -------
Benefit obligation at end of year. . . . . . . . . 45,850 47,489
------- -------
Fair value of plan assets at beginning of year . . 77,726 72,495
Actual return on plan assets . . . . . . . . . . . 5,483 9,520
Benefits paid. . . . . . . . . . . . . . . . . . . (4,013) (4,289)
------- -------
Fair value of plan assets at end of year . . . . . 79,196 77,726
------- -------
Funded status. . . . . . . . . . . . . . . . . . . $33,346 30,237
=======
Unrecognized net actuarial (gain) loss . . . . . . (1,095)
Unrecognized prior service cost. . . . . . . . . . 8
-------
Prepaid pension cost . . . . . . . . . . . . . . . $29,150
=======
At December 31, 2007, approximately 46% of the plan's assets are
invested in equity securities, 19% in fixed income funds and 35% in
alternative strategies.
The components of the net periodic pension credit for the years ended
December 31, 2007, 2006 and 2005 (which are reflected as selling, general
and administrative in the consolidated statements of operations) are as
follows:
2007 2006 2005
------- ------- -------
Service cost . . . . . . . . . . . . . . $ 18 16 28
Interest cost. . . . . . . . . . . . . . 2,583 2,494 2,573
Expected return on plan assets . . . . . (4,869) (4,698) (4,367)
Recognized net actuarial gain loss . . . 689 510 922
Amortization of prior service cost . . . 2 1 1
------- ------- -------
Net periodic pension credit. . . . . . . $(1,577) (1,677) (843)
======= ======= =======
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, 2007 2006 2005
---------------- ------- ------- -------
Discount rate. . . . . . . . . . . . . . 5.65% 5.65% 5.9%
======= ======= =======
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, 2007 2006 2005
------------------ ------- ------- -------
Discount rate. . . . . . . . . . . . . . 5.75% 5.65% 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, 2007 and
2006 equals approximately $46,000 and $47,000, 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 2007 to the pension plan.
Furthermore, due to ERISA full funding limits, no contribution, whether
required or discretionary, could be made and deducted on the corporation's
tax return for the current fiscal year.
The Company's target asset allocations reflect the Company's
investment strategy of maximizing the rate of return on plan assets and the
resulting funded status, within an appropriate level of risk. Plan assets
are reviewed and, if necessary, rebalanced in accordance with target
allocation levels once every three months.
The estimated future benefit payments under the Company's pension
plan are as follows (in thousands):
Amounts
-------
2008 . . . . . . . . . . . . . $ 3,866
2009 . . . . . . . . . . . . . 3,710
2010 . . . . . . . . . . . . . 3,628
2011 . . . . . . . . . . . . . 3,451
2012 . . . . . . . . . . . . . 3,341
2013-2017. . . . . . . . . . . 15,095
(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 and
is unfunded. 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 9%
annual rate of increase in the per capita claims cost was assumed through
2007. 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 2007
would increase (decrease) the medical plans' accumulated postretirement
benefit obligation as of December 31, 2007 by $1 and $(1), respectively,
and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year then ended by $1 and
$(1), respectively.
The costs of post-retirement healthcare benefits for the year ended
December 31, 2007, 2006 and 2005 were as follows:
2007 2006 2005
Total Total Total
------- ------- -------
Service cost . . . . . . . . . . . . $ -- -- 19
Interest cost. . . . . . . . . . . . 125 130 167
Amortization of net gain . . . . . . (9) (61) (53)
Recognized settlement gain . . . . . -- -- (339)
------- ------- -------
Net periodic postretirement
benefit cost/(income). . . . . . . $ 116 69 (206)
======= ======= =======
The following table sets forth the plans' change in accumulated post-
retirement benefit obligation and benefit cost as of December 31, 2007 and
2006 as follows:
December 31, December 31,
2007 2006
------------ ------------
Benefit obligation at beginning of year. $ 2,367 2,473
Interest cost. . . . . . . . . . . . . . 125 130
Actuarial losses (gain). . . . . . . . . (16) 97
Employer contribution. . . . . . . . . . (295) (333)
------- -------
Benefit obligation at end of year. . . . $ 2,181 2,367
Unrecognized net actuarial gain. . . . . ======= 85
-------
Accumulated post retirement
benefit cost . . . . . . . . . . . . . $ 2,716
=======
The Company does not fund its postretirement healthcare plan.
Accordingly, as of December 31, 2007 and 2006, the postretirement
healthcare plan held no assets. The following table provides the change in
plan assets for the years ended December 31, 2007 and 2006 (in thousands):
2007 2006
-------- --------
Fair value of plan assets at
beginning of year. . . . . . . . . . . . . . $ -- --
Company contributions. . . . . . . . . . . . . 294 333
Plan participants' contributions . . . . . . . 469 458
Benefits paid. . . . . . . . . . . . . . . . . (763) (791)
-------- --------
Fair value of plan assets at
end of year. . . . . . . . . . . . . . . . . $ -- --
======== ========
The subsidiary's expected contributions for 2008 through 2012 are
approximately $260 for each year of the five year period.
A 9% annual rate of increase in the per capita cost of covered
medical benefits was assumed for 2007. The rate was assumed to decrease to
8% for 2008, 7% for 2009 and 6% thereafter.
The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 5.75% as of December 31,
2007 and 5.65% as of December 31, 2006.
The estimated future employer paid benefits under the Company's
postretirement healthcare plan are as follows (in thousands):
Amounts
-------
2008 . . . . . . . . . . . . . $ 294
2009 . . . . . . . . . . . . . 279
2010 . . . . . . . . . . . . . 261
2011 . . . . . . . . . . . . . 244
2012 . . . . . . . . . . . . . 229
2013-2017. . . . . . . . . . . 900
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
The Company adopted the provisions of FIN No. 48 on January 1, 2007.
As a result of the implementation of FIN No. 48, the Company recognized a
net increase of $705 in the liability for unrecognized tax benefits, which
was accounted for as a decrease to the January 1, 2007 balance of retained
earnings. At January 1, 2007, the Company had approximately $10,500 in
gross unrecognized tax benefits. At December 31, 2007, the gross
unrecognized tax benefits accrued for within other liabilities on the
Consolidated Balance Sheets decreased to approximately $2,000 due to the
lapsing of applicable statutes of limitations.
The Company recognizes net interest and penalties related to
unrecognized tax benefits in income tax expense. The gross amount of
interest and penalties reflected in the Consolidated Statement of Income
for the year ended December 31, 2007 was $126. The Consolidated Balance
Sheets at December 31, 2007 and January 1, 2007 include $126 and $705,
respectively, accrued for the potential payment of interest and penalties.
Income tax expense attributable to income from continuing operations
for the years ended December 31, 2007, 2006 and 2005 consists of:
Current Deferred Total
-------- -------- --------
Year ended December 31, 2007:
U.S. federal. . . . . . . . . $ -- 1,066 1,066
State . . . . . . . . . . . . -- 118 118
-------- -------- --------
$ -- 1,184 1,184
======== ======== ========
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
======== ======== ========
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:
2007 2006 2005
-------- -------- --------
Provision at statutory rate. . . . . $ 910 867 8,442
Increase (reduction) in income
taxes resulting from:
Increase (reduction) in
valuation allowance. . . . . . . 1,644 834 (4,893)
Other, net . . . . . . . . . . . . (1,370) (836) (472)
-------- -------- --------
Total. . . . . . . . . . . . . $ 1,184 865 3,077
======== ======== ========
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, 2007 and
2006 are as follows:
2007 2006
-------- --------
Deferred tax assets:
Post retirement benefits . . . . . . . . . $ (851) (956)
Reserves related primarily to losses
on divestitures. . . . . . . . . . . . . (8,249) (8,492)
Loss carryforwards . . . . . . . . . . . . (5,064) (3,421)
Tax credit carryforwards . . . . . . . . . (2,816) (2,816)
Other, net . . . . . . . . . . . . . . . . (1,184) (1,081)
-------- --------
Total deferred tax assets. . . . . . . . (18,164) (16,767)
Less - valuation allowance . . . . . . . 7,880 6,237
-------- --------
Net deferred tax assets. . . . . . . . . (10,284) (10,531)
-------- --------
2007 2006
-------- --------
Deferred tax liabilities:
Property, plant and equipment,
principally due to purchase
accounting adjustments,
net of impairment charges. . . . . . . . 27,407 27,086
Prepaid pension and core retirement
award costs. . . . . . . . . . . . . . . 13,765 12,091
-------- --------
Total deferred tax liabilities . . . . 41,172 39,177
-------- --------
Net deferred tax liability . . . . . . $ 30,888 28,647
======== ========
The Company at December 31, 2007 has net operating loss carryforwards
("NOLs") of approximately $46,000 for state income tax purposes which can
be used to offset taxable income, if any, in future years. Federal NOLs of
approximately $9,000 originated in 2006 and 2007, 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. In January 2008, the Company received
notice from the IRS that their 2005 tax return has been selected for audit.
The audit is in its early stages. The statutes of limitations with respect
to the Company's taxes for 2004 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, 2007, 2006 and 2005 was approximately $48,
$74 and $13, respectively, all of which was paid as of December 31, 2007.
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, 2007.
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 2007. The total costs for the
years ended 2007, 2006 and 2005 were approximately $2,425, $2,675 and
$2,400, respectively, of which approximately $1,374 was unpaid as of
December 31, 2007.
(7) COMMITMENTS AND CONTINGENCIES
As security for performance of certain development obligations, the
Company, at December 31, 2007, is contingently liable under two subdivision
bonds for approximately $15,900. In February 2008, one of the two bonds
for $11,300 was released.
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 were permitted to
proceed. However, two such subsidiaries, Oahu Sugar and D/C, filed
subsequent petitions for liquidation under Chapter 7 of the Bankruptcy Code
in April 2005 and July 2007, respectively, as described below.
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,
subsequently 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.
However, as LPCo was substantially without assets and has dissolved, the
ability of LPCo to perform any requested actions is doubtful.
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 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.
On or about July 19, 2007, at the request of the Hawaii Department of
Health and as a result of a report of vandalism and spilled transformer
fluid at a former transformer site, an inspection of various former
transformer sites on Maui was conducted. As a result of the inspection, oil
was tested for possible contaminants, drained from various transformers,
and disposed of in accordance with requirements of law. At one site, there
was spillage of transformer fluid that required remediation. The Company
is in the process of remediating the spilled transformer fluid and is
undertaking steps to complete the remediation in accordance with law.
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 is not expected to
have a material adverse effect on the Company as Oahu Sugar was
substantially without assets at the time of the filing. While it is not
believed that any other affiliates have any responsibility for the debts of
Oahu Sugar, the EPA has indicated that it intends to make a claim against
Kaanapali Land as further described below, and therefore, there can be no
assurance that the Company will not incur significant costs in conjunction
with such claim.
The deadline for filing proofs of claim with the bankruptcy court
passed in April 2006. Prior to the deadline, Kaanapali Land, on behalf of
itself and certain subsidiaries, filed claims that aggregated approximately
$224,000, primarily relating to unpaid guarantee obligations made by Oahu
Sugar that were assigned to Kaanapali Land pursuant to the Plan on the Plan
Effective Date. In addition, the EPA and the U.S. Navy filed a joint proof
of claim that seeks to recover certain environmental response costs
relative to the Waipio Peninsula site discussed above. The proof of claim
contained a demand for previously spent costs in the amount of
approximately $260, and additional anticipated response costs of between
approximately $2,760 and $11,450. No specific justification of these
costs, or what they are purported to represent, was included in the
EPA/Navy proof of claim. Due to the insignificant amount of assets
remaining in the debtor's estate, it is unclear whether the United States
Trustee who has taken control of Oahu Sugar will take any action to contest
the EPA/Navy claim, or how it will reconcile such claim for the purpose of
distributing any remaining assets of Oahu Sugar.
EPA has sent three requests for information to Kaanapali Land
regarding, among other things, Kaanapali Land's organization and
relationship, if any, to entities that may have, historically, operated on
the site and with respect to operations conducted on the site. Kaanapali
Land responded to these requests for information. By letter dated
February 7, 2007, pursuant to an allegation that Kaanapali Land is a
successor to Oahu Sugar Company, Limited, a company that operated at the
site prior to 1961 ("Old Oahu"), EPA advised Kaanapali that it believes it
is authorized by CERCLA to amend the existing Unilateral Administrative
Order against Oahu Sugar Company, LLC, for the clean up of the site to
include Kaanapali Land as an additional respondent. The purported basis for
the EPA's position is that Kaanapali Land, by virtue of certain corporate
actions, is jointly and severally responsible for the performance of the
response actions, including, without limitation, clean-up at the site. No
such amendment has taken place as of the date hereof. Instead, the EPA's
letter invited Kaanapali Land to engage in settlement discussions with the
EPA to attempt to resolve Kaanapali Land's alleged liability. 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 and intensively utilizing the site directly during a
period when no lease was in force. Discussions with the Navy have also
commenced. 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. In
January 2008, the Company received notice from the IRS that their 2005 tax
return has been selected for audit. The audit is in its early stages. The
statutes of limitations with respect to the Company's tax returns for 2004
and subsequent years remain open. The Company believes adequate provisions
for income taxes have been recorded for all years, although there can be no
assurance that such provisions will be adequate. To the extent that there
is a shortfall, any such shortfall for which the Company could be liable
could be material.
Kaanapali Land, as successor by merger to other entities, and D/C
have been named as defendants in personal injury actions allegedly based on
exposure to asbestos. While there are only a few such cases that name
Kaanapali Land, there are a substantial number of cases that are pending
against D/C on the U.S. mainland (primarily in California). Cases against
Kaanapali Land are allegedly based on its prior business operations in
Hawaii and cases against D/C are allegedly based on D/C's prior
distribution business operations in California. Each entity defending
these cases believes that it has meritorious defenses against these
actions, but can give no assurances as to the ultimate outcome of these
cases. Nevertheless, these cases have had a material adverse effect on the
financial condition of D/C as it has been forced to file a voluntary
petition for liquidation as discussed below. Kaanapali Land does not
believe that it has liability, directly or indirectly, for D/C's
obligations in those cases. Kaanapali Land does not presently believe that
the cases in which it is named will result in any material liability to
Kaanapali Land; however, there can be no assurance in the regard.
On February 15, 2005, D/C 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 sought, among other things, a declaration:
of the material terms, rights, and obligations of the parties under the
terms of the policy or policies; that the policies were exhausted; that
plaintiff is not obligated to reimburse D/C for its attorneys' fees in that
the amounts of attorneys' fees incurred by D/C have been incurred
unreasonably; that plaintiff 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
filed an answer and an amended cross-claim. D/C believed that it had
meritorious defenses and positions, and intended to vigorously defend. In
addition, D/C believed that it was entitled to amounts from plaintiffs for
reimbursement and recoupment of amounts expended by D/C on the lawsuits
previously tendered. In order to fund such action and its other ongoing
obligations while such lawsuit continued, D/C entered into a Loan Agreement
and Security Agreement with Kaanapali Land, in August 2006, whereby
Kaanapali Land provided certain advances against a promissory note
delivered by D/C in return for a security interest in any D/C insurance
policy at issue in this lawsuit. In June 2007, the parties settled this
lawsuit with payment by plaintiffs in the amount of $1,618 which amount is
reflected as a reduction of selling, general and administrative expense in
the statement of operations for the year ended December 31, 2007. Such
settlement amount was paid to Kaanapali Land in partial satisfaction of the
secured indebtedness noted above.
Because D/C was substantially without assets and was unable to obtain
additional sources of capital to satisfy its liabilities, D/C filed with
the United States Bankruptcy Court, Northern District of Illinois, its
voluntary petition for liquidation under Chapter 7 of Title 11, United
States Bankruptcy Code during July 2007, Case No. 07-12776. Such filing is
not expected to have a material adverse effect on the Company as D/C was
substantially without assets at the time of the filing.
The Company received notice from the Hawaii Department of Land and
Natural Resources ("DLNR") that it would inspect all significant dams and
reservoirs in Hawaii, including those maintained by the Company on Maui in
connection with its agricultural operations. Inspections were performed in
April and October 2006 and again in March 2008. 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.
On October 15, 2006, a significant earthquake occurred that was felt
in most parts of the state. As a consequence of such earthquake, the DLNR,
in conjunction with the U.S. Army Corps of Engineers inspected each
reservoir and identified certain minor damage. In 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.
In September 2007, the Company received further correspondence from
DLNR that it preliminarily intended to categorize each of the reservoirs as
"high hazard" under a new statute recently passed by the State of Hawaii
concerning dam and reservoir safety. This classification, which bears upon
future government oversight and reporting requirements, may increase the
future cost of managing and maintaining these reservoirs in a material
manner. The Company does not believe that this classification is warranted
for either of these reservoirs and has initiated a dialogue with DLNR in
that regard. At this time, it is unknown what the final classification
assigned to these reservoirs will be or to what extent such classification
will impact the future use and maintenance cost of these assets.
During the second quarter of 2007, the Company commenced portions of
the required remedial work on these reservoirs. Some of this work was
commenced in connection with improvements made to one of the reservoirs in
order to construct the new non-potable water system servicing the Kaanapali
Coffee Farms development. Such work has been substantially completed,
however certain portions of the remedial work that are not associated with
such improvements have not been commenced. The Company expects to address
the remaining portions of such work during 2008.
On April 9, 2007, the Company entered into a Plan and Agreement of
Merger to merge KLLLC Mergerco, LLC ("KLLLC") with and into the Company
(the "Merger Agreement"), which provided, subject to the terms and
conditions of the Merger Agreement, that upon the effective time of the
merger, each Class A Share would have been converted into the right to
receive $43.25 in cash per share. Among the conditions to the Merger
Agreement was that there shall be no pending or threatened litigation that
could reasonably be expected (a) to have a material adverse effect on the
business, financial condition or results of operations of the Company or
KLLLC or (b) to increase the costs of the merger in any material respect.
On May 10, 2007, John G. Brant, P.C. Pension Trust and John G. Brant
filed a suit in the Court of Chancery in the State of Delaware against the
Company, Pacific Trail Holdings, LLC, Pacific Trail Holdings, Inc., KLLLC,
and certain officers and directors of the entity defendants. Among other
things, the complaint alleged that the price to be paid for each Class A
Share pursuant to the Merger Agreement was unfair and undervalued the
Company. While neither the Company nor KLLLC believed that the plaintiffs'
claims were meritorious, because the cost of defending and/or settling the
lawsuit could reasonably have been expected to be material, KLLLC
terminated the Merger Agreement pursuant to Article Twelfth of the Merger
Agreement. As a result, the holders of Class A Shares will remain as
shareholders of the Company and the Company will continue to operate under
its current structure. Accordingly, the merger transaction contemplated in
the Company's Schedule 13E-3 previously filed with the Securities and
Exchange Commission on April 9, 2007 was terminated. On or about August 8,
2007, the plaintiff in the Brant litigation filed a petition for attorneys'
fees seeking an award of attorneys' fees in the amount of $1,000 and
reimbursement of costs and expenses in an amount not to exceed $50. On
February 28, 2008, the Court entered an order dismissing the case with
prejudice and ordering the Company to pay plaintiff $250 thousand in fees
and costs. The payment was made.
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 include 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 and income taxes.
Identifiable assets by business segment are those assets that are
used in the Company's operations in each industry. Corporate assets consist
principally of cash and cash equivalents, prepaid pension costs and
receivables related to previously divested businesses.
2007 2006 2005
-------- -------- --------
Revenues:
Property . . . . . . . . . . . . . $ 6,298 6,929 31,180
Agriculture . . . . . . . . . . . 1,874 1,789 1,515
Golf . . . . . . . . . . . . . . . 3,860 2,003 3,719
Corporate. . . . . . . . . . . . . 642 826 837
-------- -------- --------
$ 12,674 11,547 37,251
======== ======== ========
Operating income (loss):
Property . . . . . . . . . . . . . $ 1,125 1,334 15,078
Agriculture . . . . . . . . . . . 155 323 1,192
Golf . . . . . . . . . . . . . . . (177) (1,456) 334
-------- -------- --------
Operating income (loss). . . . . . . 1,103 201 16,604
Corporate. . . . . . . . . . . . . . 1,499 2,276 7,683
Interest expense . . . . . . . . . . -- -- (168)
-------- -------- --------
Income (loss). . . . . . . . . . . . $ 2,602 2,477 24,119
======== ======== ========
Identifiable Assets:
Property . . . . . . . . . . . . . $ 59,130 59,387 60,155
Agriculture. . . . . . . . . . . . 55,698 54,478 51,633
Golf . . . . . . . . . . . . . . . 25,875 26,458 27,147
-------- -------- --------
140,703 140,323 138,935
Corporate. . . . . . . . . . . . . . 45,586 45,021 48,940
-------- -------- --------
$186,289 185,344 187,875
======== ======== ========
Agricultural identified assets include land classified as agricultural
or conservation for State and County purposes.
2007 2006 2005
-------- -------- --------
Capital Expenditures:
Property . . . . . . . . . . . . . $ 16,235 15,585 2,538
Agriculture. . . . . . . . . . . . 469 65 224
Golf . . . . . . . . . . . . . . . 641 935 389
Corporate. . . . . . . . . . . . . -- 2 --
-------- -------- --------
$ 17,345 16,587 3,151
======== ======== ========
Depreciation and Amortization:
Property . . . . . . . . . . . . . $ 101 59 70
Agriculture. . . . . . . . . . . . 96 102 75
Golf . . . . . . . . . . . . . . . 703 514 515
Corporate. . . . . . . . . . . . . 379 379 380
-------- -------- --------
Total. . . . . . . . . . . . . . . . $ 1,279 1,054 1,040
======== ======== ========
(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,
2007 2006 2005
------------ ------------ ------------
(Amounts in thousands
except per share amounts)
NUMERATOR:
Operating income (loss). . . . $ 2,602 2,477 24,119
========== ========== ==========
Net income (loss). . . . . . . $ 1,418 1,612 21,042
========== ========== ==========
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. . $ .79 .90 11.74
========== ========== ==========
As of December 31, 2007, the Company had issued and outstanding
1,792,613 Common Shares. The LLC Agreement initially provided for two
classes of membership interests, Class A Shares and Class B Shares, which
had substantially identical rights and economic value under the LLC
Agreement; except that holders of Class A Shares were represented by a
"Class A Representative" who was required to approve certain transactions
proposed by Kaanapali Land before they could be undertaken. Class B
Shares were held by Pacific Trail and various entities and individuals that
are affiliated with Pacific Trail. Class A Shares were issued under the
Plan to claimants who had no such affiliation. Pursuant to the LLC
Agreement, the Class A Shares and Class B Shares were automatically
redesignated as Common Shares on November 15, 2007. Accordingly, the
Company's Class A Shares and Class B Shares ceased to exist separately on
November 15, 2007.
(10) SUPPLEMENTARY QUARTERLY DATA (UNAUDITED)
2007
----------------------------------------------
At 3/31 At 6/30 At 9/30 At 12/31
---------- ---------- ---------- ----------
Total revenues . . . . . . $ 3,426 2,250 3,870 3,128
========== ========== ========== ==========
Net income (loss). . . . . $ 27 (1,001) 63 2,329
========== ========== ========== ==========
Net income (loss)
per Share. . . . . . . . $ .02 (.56) .03 1.30
========== ========== ========== ==========
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 Share. . . . . . . . $ (.39) (2.22) (1.65) 5.16
========== ========== ========== ==========
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 2007, 2006 and 2005.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The principal executive officer and the principal financial officer
of the Company have evaluated the effectiveness of the Company's disclosure
controls and procedures as defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934, as amended, (the "Exchange Act") as of the end of the
period covered by this report. Based on such evaluation, the principal
executive officer and the principal financial officer have concluded that
the Company's disclosure controls and procedures were effective to ensure
that information required to be disclosed was recorded, processed,
summarized and reported within the time periods specified in the applicable
rules and form of the Securities and Exchange Commission.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and
maintaining adequate internal control over financial reporting as such term
is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision
and with the participation of management including the principal executive
officer and the principal financial officer management conducted an
evaluation of the effectiveness of internal control over financial
reporting based on the framework in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Therefore, even those
systems determined to be effective can only provide reasonable assurances
with respect to financial statement preparation and presentation.
Based on the Company's evaluation under the framework in Internal
Control - Integrated Framework, management concluded that its internal
control over financial reporting was effective as of December 31, 2007.
This annual report does not include an attestation report of the
Company's independent registered public accounting firm regarding internal
control over financial reporting. Management's report was not subject to
attestation by the Company's registered public accounting firm pursuant to
temporary rules of the Security and Exchange Commission that permit the
Company to provide only management's report in this annual report.
ITEM 9B. OTHER INFORMATION
Not Applicable.
PART III
ITEM 10. 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, 2008, the executive officers and certain other
officers of the Company were as follows:
Position
Held with
Name the Company
---------- ------------
Gary Nickele President and
Chief Executive Officer
Stephen A. Lovelette Executive Vice President
Gailen J. Hull Senior Vice President and
Chief Financial Officer
Certain of these officers are also officers and/or directors of JMB
Realty Corporation ("JMB") and numerous affiliated companies of JMB
(hereinafter collectively referred to as "JMB affiliates"). JMB affiliates
outside of the Company have not materially engaged in the agriculture
business and have primarily purchased, or made mortgage loans securing,
existing commercial, retail, office, industrial and multi-family
residential rental buildings or have owned or operated hotels on various
other hospitality businesses. However, certain partnerships sponsored by
JMB and other affiliates of JMB were previously engaged in land development
activities including planned communities, none of which are in Hawaii.
There is no family relationship among any of the foregoing officers.
The LLC Agreement also provided for the appointment of a "Class A
Representative" to monitor the activities of Kaanapali Land on behalf of
its Class A Shareholders. The Class A Representative who was independent
was entitled to receive certain information from Kaanapali Land and was
required to approve certain actions that Kaanapali Land took outside the
course of business primarily related to debt that might be obtained from
affiliated parties. Pursuant to the LLC Agreement, the Class A Shares and
Class B Shares were automatically redesignated as Common Shares on November
15, 2007. Accordingly, the Company's Class A Shares and Class B Shares
ceased to exist separately on November 15, 2007. Reference is also made to
Item 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 55) 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 51) 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 58) 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 2007 180,000 100,000 N/A
and Chief 2006 180,000 100,000 N/A
Executive 2005 180,000 100,000 N/A
Officer
Stephen A.
Lovelette Executive 2007 255,000 100,000 N/A
Vice President 2006 255,000 100,000 N/A
2005 215,000 100,000 N/A
Gailen J. Hull Senior Vice 2007 175,000 50,000 N/A
President and 2006 175,000 50,000 N/A
Chief Financial 2005 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
- -------------- --------------------------- --------------------
Common Shares Pacific Trail Holdings, LLC 1,466,573 Shares
900 North Michigan Avenue owned directly
Chicago, Illinois 60611 (81.8% of the
Common Shares)
(1) (2)
(1) The sole managing member of Pacific Trail, Pacific Trail Holdings,
Inc. ("PTHI"), may be deemed to beneficially own the Shares
owned by Pacific Trail. PTHI disclaims beneficial ownership with
respect to any of the shares owned by Pacific Trail. Each of the
shareholders of PTHI may be deemed to own the Common Shares
owned by Pacific Trail. Each of such shareholders, being Gary
Nickele, Gailen Hull and 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, 2008, there were approximately 1,792,613 Common
Shares issued and outstanding.
No other person including any officer of the Company is known by the
Company to beneficially own in excess of 5% of the Common Shares issued,
outstanding and distributed.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
An affiliated insurance agency, JMB Insurance Agency, Inc., earns
insurance brokerage commissions in connection with providing the placement
of insurance coverage for certain of the properties and operations of the
Company. Such commissions are comparable to those that would be paid to
such affiliate insurance agency in similar dealings with unaffiliated third
parties, and are generally paid by the insurance carriers that the agency
represents out of the premiums paid by the Company for such coverage. The
total of such commissions for the years ended December 31, 2007, 2006 and
2005 was approximately $48 thousand, $74 thousand and $13 thousand,
respectively, all of which was paid as of December 31, 2007.
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, 2007.
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, 2007, 2006 and 2005 was approximately $2.4
million, $2.6 million and $2.4 million, respectively, of which
approximately $1.4 million was unpaid as of December 31, 2007.
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 2007, 2006 and 2005 were $237 thousand, $234
thousand and $178 thousand, respectively. In accordance with the SEC's
definitions and rules, "audit fees" are fees the Company paid E&Y for
professional services for the audit of the Company's consolidated financial
statements included in Form 10-K and review of financial statements
included in Form 10-Qs, and for services that are normally provided by the
accountant in connection with statutory and regulatory filings or
engagements. There were no non-audit related, tax or other services
provided by E&Y.
The Company has not adopted any pre-approval policies and procedures.
All audit and permitted non-audit services are approved by the managing
member of the Company before the service is undertaken.
PART IV
ITEM 15. EXHIBITS 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) The following reports on Form 8-K were 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 November 15, 2007, filed on December 11, 2007 describing
the automatic redesignation of the Company's outstanding
Class A Common Shares and Class B Common Shares to Company
Common Shares was filed.
The Company's report on Form 8-K (File No. 0-50273)
for January 18, 2008, filed on January 25, 2008 describing
an agreement to issue a new class of common shares was filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
KAANAPALI LAND, LLC
BY: Pacific Trail Holdings, LLC
(Sole Member)
/s/ Gailen J. Hull
---------------------
By: Gailen J. Hull
Senior Vice President
Date: March 31, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Gailen J. Hull
---------------------
By: Gailen J. Hull,
Senior Vice President
Chief Accounting Officer
and Chief Financial Officer
Date: March 31, 2008
/s/ Gary Nickele
---------------------
By: Gary Nickele,
President and
Chief Executive Officer
Date: March 31, 2008