SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2009
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission file #0-50273
KAANAPALI LAND, LLC
(Exact name of registrant as specified in its charter)
Delaware 01-0731997
(State of organization) (IRS Employer Identification No.)
900 N. Michigan Ave., Chicago, IL 60611
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 312/915-1987
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 (the "Exchange Act") during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-5)
Subsection 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, non-accelerated filer, or a smaller reporting
company. See definition of accredited filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [ X ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes [ X ] No [ ]
As of October 31, 2009, the registrant had 1,792,613 shares of Common
Shares and 39,000 Class C Shares outstanding.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements . . . . . 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. . . . . . . . . . . . . . . . . . . . . . 20
Item 4. Controls and Procedures . . . . . . . . . . . . . . . 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 25
Item 1A. Risk Factors. . . . . . . . . . . . . . . . . . . . . 25
Item 6. Exhibits. . . . . . . . . . . . . . . . . . . . . . . 25
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
KAANAPALI LAND, LLC
Condensed Consolidated Balance Sheets
September 30, 2009 and December 31, 2008
(Dollars in Thousands, except share data)
(Unaudited)
A S S E T S
-----------
September 30, December 31,
2009 2008
------------ -----------
Cash and cash equivalents. . . . . . . . $ 18,721 25,780
Receivables, net . . . . . . . . . . . . 102 46
Property, net. . . . . . . . . . . . . . 99,983 98,356
Pension plan assets. . . . . . . . . . . 10,655 9,061
Note receivable. . . . . . . . . . . . . 12,791 13,250
Other assets . . . . . . . . . . . . . . 3,664 4,013
-------- --------
$145,916 150,506
======== ========
L I A B I L I T I E S
---------------------
Accounts payable and accrued expenses. . $ 2,294 4,727
Deferred income taxes. . . . . . . . . . 17,515 18,591
Accrued benefit obligation . . . . . . . 2,006 1,932
Other liabilities. . . . . . . . . . . . 22,211 21,691
-------- --------
Total liabilities. . . . . . . . 44,026 46,941
Commitments and contingencies
S T O C K H O L D E R S' E Q U I T Y
-------------------------------------
Common stock, at 9/30/09 and
12/31/08 non par value
(Shares authorized - 4,500,000,
Class C shares 52,000; shares issued
and outstanding - common shares
1,792,613 and Class C shares
39,000). . . . . . . . . . . . . . . . -- --
Additional paid-in capital . . . . . . . 5,463 5,438
Accumulated other comprehensive
income, net of tax . . . . . . . . . . (13,661) (14,259)
Accumulated earnings . . . . . . . . . . 110,088 112,386
-------- --------
Total stockholders' equity . . . 101,890 103,565
-------- --------
$145,916 150,506
======== ========
The accompanying notes are an integral part
of the condensed consolidated financial statements.
KAANAPALI LAND, LLC
Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2009 and 2008
(Unaudited)
(Dollars in Thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2009 2008 2009 2008
-------- -------- -------- --------
Revenues:
Sales and
rental revenues. . . . . $ 578 336 1,950 1,622
Interest and
other income . . . . . . 295 125 901 578
-------- -------- -------- --------
873 461 2,851 2,200
-------- -------- -------- --------
Cost and expenses:
Cost of sales. . . . . . . 490 566 2,187 1,833
Selling, general and
administrative . . . . . 1,525 873 4,226 3,395
Depreciation and
amortization . . . . . . 72 56 212 164
-------- -------- -------- --------
2,087 1,495 6,625 5,392
-------- -------- -------- --------
Operating income (loss)
from continuing opera-
tions before income
taxes and income (loss)
from discontinued
operations . . . . . . . (1,214) (1,034) (3,774) (3,192)
Income tax benefit
(expense). . . . . . . . 492 (2,276) 1,476 4,088
-------- -------- -------- --------
Income (loss) before
income (loss) from
discontinued
operations . . . . . . . (722) (3,310) (2,298) 896
Income (loss) from
discontinued
operations, net of
income taxes . . . . . . -- 1,484 -- (2,391)
-------- -------- -------- --------
Net income (loss). . . $ (722) (1,826) (2,298) (1,495)
======== ======== ======== ========
KAANAPALI LAND, LLC
Condensed Consolidated Statements of Operations - Continued
Three and Nine Months Ended September 30, 2009 and 2008
(Unaudited)
(Dollars in Thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2009 2008 2009 2008
-------- -------- -------- --------
Earnings per share - basic:
Income (loss) before
income (loss) from
discontinued
operations . . . . . . . $ (.39) (1.82) (1.25) .50
Income (loss) from
discontinued
operations . . . . . . . -- .82 -- (1.33)
-------- -------- -------- --------
Net income (loss). . . . . $ (.39) (1.00) (1.25) (.83)
======== ======== ======== ========
Earnings per share - diluted:
Income (loss) before
income (loss) from
discontinued
operations . . . . . . . $ (.39) (1.82) (1.25) .48
Income (loss) from
discontinued
operations . . . . . . . -- .82 -- (1.32)
-------- -------- -------- --------
Net income (loss). . . . . $ (.39) (1.00) (1.25) (.84)
======== ======== ======== ========
The accompanying notes are an integral part
of the condensed consolidated financial statements.
KAANAPALI LAND, LLC
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2009 and 2008
(Unaudited)
(Dollars in Thousands)
2009 2008
-------- --------
Net cash provided by (used in)
operating activities . . . . . . . . . . $ (5,679) 2,401
Net cash provided by (used in)
investing activities . . . . . . . . . . (1,380) (3,189)
-------- --------
Net increase (decrease) in
cash and cash equivalents. . . . (7,059) (788)
Cash and cash equivalents
at beginning of period . . . . . 25,780 24,050
-------- --------
Cash and cash equivalents
at end of period . . . . . . . . $ 18,721 23,262
======== ========
The accompanying notes are an integral part
of the condensed consolidated financial statements.
KAANAPALI LAND, LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Dollars in Thousands)
The accompanying unaudited condensed consolidated financial
statements are prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States
for complete financial statements, and therefore, should be read in
conjunction with the Company's Annual Report on Form 10-K (File No. 0-
50273) for the year ended December 31, 2008. Capitalized terms used but
not defined in this quarterly report have the same meanings as the
Company's 2008 Annual Report on Form 10-K.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF ACCOUNTING
Kaanapali Land, LLC ("Kaanapali Land"), a Delaware limited liability
company, is the reorganized entity resulting from the Joint Plan of
Reorganization of Amfac Hawaii, LLC (now known as KLC Land Company, LLC
("KLC Land")), certain of its subsidiaries (together with KLC Land, the
"KLC Debtors") and FHT Corporation ("FHTC" and, together with the KLC
Debtors, the "Debtors") under Chapter 11 of the Bankruptcy Code, dated
June 11, 2002 (as amended, the "Plan").
The Company's continuing operations are in two business segments -
Agriculture and Property. The Agriculture segment grows seed corn and
soybeans under contract and is engaged in farming and milling operations
related to coffee orchards on behalf of the applicable land owners. The
Property segment primarily develops land for sale and negotiates bulk sales
of undeveloped land. The Golf segment, which was responsible for the
management and operation of the Waikele Golf Course was sold in November
2008 and is reported as discontinued operations. The assets and operations
of the Waikele Golf Course represented all of the golf segment for purposes
of business segment information. The Company continues to hold a first
mortgage on the Waikele Golf Course as security for a promissory note
received for a portion of the purchase price at closing, as further
described below. The Property and Agriculture segments operate exclusively
in the State of Hawaii.
PROPERTY
The Company's property holdings are primarily located on the island
of Maui. The Company has determined, based on its current projections for
the development and/or disposition of its property holdings, that the
property holdings are not currently recorded in an amount in excess of
proceeds that the Company expects that it will ultimately obtain from the
operation and disposition thereof.
On April 8, 2008, the Company executed a contract (as subsequently
amended) to sell its Waikele Golf Course for a purchase price of $23,290
(less commissions and closing costs). The sale closed on November 12, 2008
with total cash received, including previous non-refundable deposits,
aggregating $10,040. The balance of the purchase price is represented by a
promissory note in the original amount of $13,250 and is secured by the
property along with corporate and personal guarantees from the principal of
the purchaser and an affiliate. The note originally required monthly
interest only payments of 7% per annum and was due May 12, 2009. Certain
seller representations and warranties exist for one year after the date of
sale. The Company entered into a note modification agreement with the
purchaser on May 12, 2009 and subsequent note modification agreements on
May 19, 2009, June 16, 2009 and November 12, 2009. The note modifications
allowed the purchaser to defer payment of such promissory note until
May 12, 2010; provided, however, that the purchaser was required by such
agreement to make principal and interest payments in advance of maturity
(before certain deductions for commissions and other costs) of $200 on
May 12, 2009, $50 on May 20, 2009, $100 on June 16, 2009, $100 on June 23,
2009, $100 on September 12, 2009 and $1,000 on November 12, 2009. The note
modifications also increased the interest rate on the note to 8% per annum
beginning July 12, 2009 and require prepayment of interest through
January 12, 2010 on November 12, 2009. As of September 30, 2009, the note
had an outstanding principal and accrued interest balance of $12,791, as
presented in the condensed consolidated balance sheet.
Pursuant to the note modification agreement dated November 12, 2009
("Effective Date"), the purchaser owed the Company approximately $1,253 of
principal and interest payable on the Effective Date. The purchaser paid
$253 on the Effective Date. $1,000 has not yet been paid. The promissory
note is in default. The Company and the purchaser are continuing to
discuss a potential note modification, but there can be no assurance that
such modification will be negotiated or the terms thereof. In the event a
note modification is not consummated on terms acceptable to the Company,
the Company will consider other options including foreclosure or
litigation.
The Company reclassified the Waikele Golf Course as held for sale as
of April 8, 2008. The Company recorded a $3,900 asset impairment charge
(before taxes) related to its write-down of the carrying value of the
Waikele Golf Course to fair value during the second quarter ending June 30,
2008. As the Waikele Golf Course was deemed held for sale, the operations
and the impairment charge in 2008 have been classified on the consolidated
statement of operations as discontinued operations. Depreciation on these
assets ceased upon classification as held for sale.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
In the opinion of management, all adjustments necessary for a fair
presentation of the statement of financial position and results of
operations for the interim periods presented have been included in these
financial statements and are of a normal and recurring nature.
Operating results for the three and nine months ended September 30,
2009 are not necessarily indicative of the results that may be achieved in
future periods.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June of 2009, the FASB issued the FASB Codification Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
(the "Codification"), which superseded all then-existing non-SEC accounting
and reporting standards and became the source of authoritative U.S.
generally accepted accounting principles recognized by the FASB to be
applied by non-governmental entities. The adoption of the Codification, as
required effective for the quarter ended September 30, 2009, did not have a
material impact on the Company's results of operations or financial
position. The adoption of the Codification changes the way the Company
refers to accounting literature in reports beginning with the quarter ended
September 30, 2009.
Effective January 1, 2008, the rules governing fair value
measurements changed. These new rules established a comprehensive
framework for measuring fair value in accordance with accounting principles
generally accepted in the United States and expanded disclosures regarding
fair value measurement. The adoption of these rules did not have a
material effect on the Company's results of operations or financial
position.
In September 2009, the FASB amended FASB Accounting Standards
Codification 820, Fair Value Measurements and Disclosures, providing
additional fair value measurement guidance for investments in certain
entities that calculate net asset value per share (or its equivalent)
effective for interim and annual periods after December 15, 2009. The
Company expects this amendment will have an impact on the presentation of
certain assets held in the pension plan once adopted and are currently
assessing the impact it will have on the Company's results of operations
and financial position.
In December 2008, the FASB issued accounting guidance which amended
disclosure requirements about pensions and other postretirement benefits.
This guidance requires additional disclosures primarily around the types of
plan assets, associated risks in an employer's defined benefit pension or
other postretirement plans, and current events in the economy and markets
that could have a significant impact on the value of plan assets. The
disclosures about plan assets required by this guidance are effective for
fiscal years ending after December 15, 2009.
Effective for the quarter ended June 30, 2009, companies are required
to disclose the date through which subsequent events have been evaluated
and the basis for that date. The adoption of these rules did not have a
material effect on the Company's results of operations or financial
position. The Company has performed a review of subsequent events through
November 16, 2009, the date the financial statements were issued, and
concluded there were no events or transactions occurring during this period
that required recognition or disclosure in the Company's financial
statements.
(2) LAND DEVELOPMENT
During the first quarter of 2006, the Company received final
subdivision approval on an approximate 336 acre parcel in the region
"mauka" (toward the mountains) from the main Kaanapali 2020 area. This
project, called Kaanapali Coffee Farms, consists of agricultural lots,
which are available for sale to individual buyers. The land improvements
were completed during 2008. In conjunction with the final approval, the
Company was required to obtain two subdivision bonds in the amounts of
approximately $18,600 and $4,700 and was required to secure those bonds
with a cash deposit of $8,300 into an interest bearing collateral account.
During the first quarter 2007, one of the bonds was reduced from $18,600 to
$11,300 and the collateral was reduced to $5,900. During February 2008,
the $11,300 bond was released and the collateral account was further
reduced to $1,700. During November 2008 the remaining $1,700 was released.
The $4,700 bond was released during the fourth quarter of 2008. To date,
the Company has closed on the sale of six lots at Kaanapali Coffee Farms.
In conjunction with the sales of two of the lots, in addition to cash
proceeds, the Company received promissory notes for $692 and $737. The
promissory notes are due October 2009 and November 2010, respectively. The
note due in October 2009 was not paid on its schedule maturity date. Such
note is secured by a mortgage on the associated lot that is subordinated to
a purchase money mortgage held by a third-party lender. The Company has
notified the purchaser of such lot that the subordinated note is in default
and default interest has begun accruing thereon. The Company and such
purchaser are continuing to discuss a potential note modification, but
there can be no assurance that such a modification will be negotiated or
the terms thereof. In the event that the Company and such purchaser are
unable to agree to a modification of the terms of the such note, the
Company will consider its available remedies, including an action for
foreclosure.
(3) MORTGAGE AND OTHER NOTES PAYABLE
A subsidiary of Kaanapali Land ("Holder") holds a mortgage note that
was previously secured by Waikele Golf Course in the original principal
amount of $7,178. 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 a result of the sale of
the Waikele Golf Course, the outstanding principal and accrued interest was
reduced pursuant to a payment of $8,800 towards the note and accrued
interest and the mortgage security was released. As of September 30, 2009,
the note had an outstanding principal and accrued interest balance of
$1,161. The note is expected to be satisfied through future payments on
the promissory note provided by the purchaser of the Waikele Golf Course,
as described above. The note has been eliminated in the consolidated
financial statements because the obligor and maker are consolidated
subsidiaries of Kaanapali Land.
Certain subsidiaries of Kaanapali Land are jointly indebted to
Kaanapali Land pursuant to a certain Secured Promissory Note in the
principal amount of $70,000 dated November 14, 2002. Such note matures on
October 31, 2011, had an outstanding balance of principal and accrued
interest as of September 30, 2009 of approximately $81,000 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.
(4) EMPLOYEE BENEFIT PLANS
(a) PENSION PLANS
The Company participates in a defined benefit pension plan that
covers substantially all its eligible employees. The pension plan is
sponsored and maintained by Kaanapali Land in conjunction with other plans
providing benefits to employees of Kaanapali Land and its affiliates.
The components of the net periodic pension benefit (credit), included
in selling, general and administrative in the consolidated statements of
operations for the three and nine months ended September 30, 2009 and 2008
are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2009 2008 2009 2008
-------- -------- -------- --------
Service cost . . . . . . . $ 6 5 18 15
Interest cost. . . . . . . 592 632 1,776 1,896
Expected return on
plan assets. . . . . . . (1,130) (1,258) (3,390) (3,774)
Recognized net actuarial
(gain) loss. . . . . . . 332 121 996 363
-------- -------- -------- --------
Net periodic pension
credit . . . . . . . . . $ (200) (500) (600) (1,500)
======== ======== ======== ========
(b) RETIREE HEALTH AND LIFE INSURANCE BENEFITS
In addition to providing pension benefits, a subsidiary of KLC Land
currently provides certain healthcare and life insurance benefits to
certain eligible retired employees. The postretirement healthcare plan is
contributory and contains cost-sharing features such as deductibles and
copayments. The postretirement life insurance plan is non-contributory.
Net periodic postretirement benefit cost included in selling,
general, and administrative in the consolidated statements of operations
for the three and nine months ended September 30, 2009 and 2008 includes
the following components:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2009 2008 2009 2008
-------- -------- -------- --------
Interest cost. . . . . . . $ 25 29 75 87
Amortization of net gain . (5) (3) (15) (9)
-------- -------- -------- --------
Net periodic post-
retirement benefit
cost . . . . . . . . . . $ 20 26 60 78
======== ======== ======== ========
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 recognizes the over funded or under funded status of its
employee benefit plans as an asset or liability in its statement of
financial position and recognizes changes in its funded status in the year
in which the changes occur through comprehensive income. Included in
accumulated other comprehensive income at December 31, 2008 are the
following amounts that have not yet been recognized in net periodic
pension/post-retirement cost: unrecognized prior service costs of $4 ($2
net of tax) and unrecognized actuarial loss of $23,372 ($14,257 net of
tax). The prior service cost and actuarial loss included in accumulated
other comprehensive income and recognized in net periodic pension/post-
retirement cost for the period ending September 30, 2009 are $0 and $980
($596 net of tax), respectively.
The Company maintains a nonqualified deferred compensation
arrangement (the "Rabbi Trust") which provides certain former directors of
Amfac and their spouses with pension benefits. The Rabbi Trust invests in
marketable securities and cash equivalents. The deferred compensation
liability of approximately $1,405 represented in the Rabbi Trust and assets
of approximately $1,405 funding such deferred compensation liability are
presented in other liabilities and other assets, respectively, in the
Company's consolidated balance sheet.
(5) STOCK-BASED COMPENSATION
On April 15, 2008, the Company entered into an agreement with Stephen
Lovelette ("Lovelette"), an executive vice president of the Company in
charge of the Company's development activities, whereby the Company agreed
to issue up to 52,000 shares of a new class of common shares (the "Class C
Shares") in consideration for his services to the Company. The Class C
Shares have the same rights as the Shares except that the Class C Shares
will not participate in any distributions until the holders of the Shares
have received aggregate distributions equal to $19 per Share, subject to
customary antidilution adjustments. The Class C Shares became 50% vested
on April 15, 2008, an additional 25% vested on December 31, 2008. The
remaining 25% will vest on December 31, 2009 if Lovelette remains employed
by the Company through that date. The Company recognized compensation
expense of approximately $25 for stock based compensation for the nine
months ended September 30, 2009.
(6) INCOME TAXES
The Company uses 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. The Company's gross
unrecognized tax benefits total approximately $1,100 at September 30, 2009.
The Company's continuing practice is to recognize interest and penalties
related to income tax matters in income tax expense. Consolidated Balance
Sheets at September 30, 2009 and December 31, 2008 include $22 and $41,
respectively, accrued for the potential payment of interest and penalties.
Federal tax return examinations have been completed for all years
through 2005. In January 2008, the Company received notice from the IRS
that their 2005 tax return had been selected for audit. The audit was
completed with no changes to reported tax. The statutes of limitations
with respect to the Company's taxes for 2006 and subsequent years remain
open. The Company believes adequate provisions for income tax have been
recorded for all years, although there can be no assurance that such
provisions will be adequate. To the extent that there is a shortfall, any
such shortfall for which the Company could be liable could be material.
(7) COMMITMENTS AND CONTINGENCIES
At September 30, 2009, the Company's principal contractual
obligations are approximately $100 for the unpaid retention related to the
land improvements in conjunction with Phase I of the Kaanapali Coffee Farms
project and construction of a model home within a lot in the development.
Material legal proceedings of the Company are described below.
Unless otherwise noted, the parties adverse to the Company in the legal
proceedings described below have not made a claim for damages in a
liquidated amount and/or the Company believes that it would be speculative
to attempt to determine the Company's exposure relative thereto, and as a
consequence believes that an estimate of the range of potential loss cannot
be made.
On or about 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 has received a no action letter with certain
institutional controls to be followed with respect to the site.
As a result of an administrative order issued to Oahu Sugar by the
HDOH, Order No. CH 98-001, dated January 27, 1998, Oahu Sugar engaged in
environmental site assessment of lands it leased from the U.S. Navy and
located on the Waipio Peninsula. Oahu Sugar submitted a Remedial
Investigation Report to the HDOH. The HDOH provided comments that
indicated that additional testing may be required. Oahu Sugar responded to
these comments with additional information. On January 9, 2004, EPA issued
a request to Oahu Sugar seeking information related to the actual or
threatened release of hazardous substances, pollutants and contaminants at
the Waipio Peninsula portion of the Pearl Harbor Naval Complex National
Priorities List Superfund Site. The request sought, among other things,
information relating to the ability of Oahu Sugar to pay for or perform a
clean up of the land formerly occupied by Oahu Sugar. Oahu Sugar responded
to the information requests and had notified both the Navy and the EPA that
while it had some modest remaining cash that it could contribute to further
investigation and remediation efforts in connection with an overall
settlement of the outstanding claims, Oahu Sugar was substantially without
assets and would be unable to make a significant contribution to such an
effort. Attempts at negotiating such a settlement were fruitless and Oahu
Sugar received an order from EPA in March 2005 that purported to require
certain testing and remediation of the site. As Oahu Sugar was
substantially without assets, the pursuit of any action, informational,
enforcement, or otherwise, would have had a material adverse effect on the
financial condition of Oahu Sugar.
Therefore, as a result of the pursuit of further action by the HDOH
and EPA as described above and the immediate material adverse effect that
the actions had on the financial condition of Oahu Sugar, Oahu Sugar filed
with the United States Bankruptcy Court, Northern District of Illinois,
Eastern Division its voluntary petition for liquidation under Chapter 7 of
Title 11, United States Bankruptcy Code. Such filing was not expected to
have a material adverse effect on the Company as Oahu Sugar was
substantially without assets at the time of the filing. While it is not
believed that any other affiliates have any responsibility for the debts of
Oahu Sugar, the EPA has indicated that it intends to make a claim against
Kaanapali Land as further described below, and therefore, there can be no
assurance that the Company will not incur significant costs in connection
with such claim.
The deadline for filing proofs of claim against Oahu Sugar with the
bankruptcy court passed in April 2006. Prior to the deadline, Kaanapali
Land, on behalf of itself and certain subsidiaries, filed claims that
aggregated approximately $224,000, primarily relating to unpaid guarantee
obligations made by Oahu Sugar that were assigned to Kaanapali Land
pursuant to the Plan on the Plan Effective Date. In addition, the EPA and
the U.S. Navy filed a joint proof of claim that seeks to recover certain
environmental response costs relative to the Waipio Peninsula site
discussed above. The proof of claim contained a demand for previously
spent costs in the amount of approximately $260, and additional anticipated
response costs of between approximately $2,760 and $11,450. No specific
justification of these costs, or what they are purported to represent, was
included in the EPA/Navy proof of claim. Due to the insignificant amount
of assets remaining in the debtor's estate, it is unclear whether the
United States Trustee who has taken control of Oahu Sugar will take any
action to contest the EPA/Navy claim, or how it will reconcile such claim
for the purpose of distributing any remaining assets of Oahu Sugar.
EPA has sent three requests for information to Kaanapali Land
regarding, among other things, Kaanapali Land's organization and
relationship, if any, to entities that may have, historically, operated on
the site and with respect to operations conducted on the site. Kaanapali
Land responded to these requests for information. By letter dated
February 7, 2007, pursuant to an allegation that Kaanapali Land is a
successor to Oahu Sugar Company, Limited, a company that operated at the
site prior to 1961 ("Old Oahu"), EPA advised Kaanapali that it believes it
is authorized by CERCLA to amend the existing Unilateral Administrative
Order against Oahu Sugar Company, LLC, for the clean up of the site to
include Kaanapali Land as an additional respondent. The purported basis for
the EPA's position is that Kaanapali Land, by virtue of certain corporate
actions, is jointly and severally responsible for the performance of the
response actions, including, without limitation, clean-up at the site. No
such amendment has taken place as of the date hereof. Instead, after a
series of discussions between Kaanapali and the EPA, on or about
September 30, 2009, the EPA issued a Unilateral Administrative Order to
Kaanapali Land for the performance of work in support of a removal action
at the former Oahu Sugar pesticide mixing site located on Waipio peninsula.
The work consists of the performance of soil and groundwater sampling and
analysis, a topographic survey, and the preparation of an engineering
evaluation and cost analysis of potential removal actions to abate an
alleged "imminent and substantial endangerment" to public health, welfare
or the environment. The order appears to be further predicated primarily
on the alleged connection of Kaanapali Land to Old Oahu and its activities
on the site. Kaanapali Land has indicated its intention to perform the
work required by the order while reserving its rights to contest liability
regarding the site. Commencement of the work is expected to occur shortly.
Kaanapali contests that it has liability for the site. With regard to
liability for the site, Kaanapali Land believes that its liability, if any,
should relate solely to a portion of the period of operation of Old Oahu at
the site, although in some circumstances CERLCLA apparently permits
imposition of joint and several liability, which can exceed a responsible
party's equitable share. Kaanapali Land believes that the U.S. Navy bears
substantial liability for the site by virtue of its ownership of the site
throughout the entire relevant period, both as landlord under its various
leases with Oahu Sugar and Old Oahu and by operating and intensively
utilizing the site directly during a period when no lease was in force.
The Company believes that the cost of the work as set forth in the order
will not be material to the Company as a whole; however, in the event that
the EPA were to issue an order requiring remediation of the site, there can
be no assurances that the cost of said remediation would not ultimately
have a material adverse effect on the Company. In addition, if there is
litigation regarding the site, there can be no assurance that the cost of
such litigation will not be material or that such litigation will result in
a judgment in favor of the Company.
Federal tax return examinations have been completed for all years
through 2005. In January 2008, the Company received notice from the IRS
that their 2005 tax return had been selected for audit. The audit was
completed with no changes to reported taxes. The statutes of limitations
with respect to the Company's tax returns for 2006 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, a
subsidiary of Kaanapali Land, have been named as defendants in personal
injury actions allegedly based on exposure to asbestos. While there are
only a few such cases that name Kaanapali Land, there are a substantial
number of cases that are pending against D/C on the U.S. mainland
(primarily in California). Cases against Kaanapali Land are allegedly
based on its prior business operations in Hawaii and cases against D/C are
allegedly based on sale of asbestos-containing products by D/C's prior
distribution business operations primarily in California. Each entity
defending these cases believes that it has meritorious defenses against
these actions, but can give no assurances as to the ultimate outcome of
these cases. The defense of these cases has had a material adverse effect
on the financial condition of D/C as it has been forced to file a voluntary
petition for liquidation as discussed below. Kaanapali Land does not
believe that it has liability, directly or indirectly, for D/C's
obligations in those cases. Kaanapali Land does not presently believe that
the cases in which it is named will result in any material liability to
Kaanapali Land; however, there can be no assurance in this regard.
On February 15, 2005, D/C was served with a lawsuit entitled American
& Foreign Insurance Company v. D/C Distribution and Amfac Corporation, Case
No. 04433669 filed in the Superior Court of the State of California for the
County of San Francisco, Central Justice Center. No other purported party
was served. In the eight-count complaint for declaratory relief,
reimbursement and recoupment of unspecified amounts, costs and for such
other relief as the court might grant, plaintiff alleged that it is an
insurance company to whom D/C tendered for defense and indemnity various
personal injury lawsuits allegedly based on exposure to asbestos containing
products. Plaintiff alleged that because none of the parties have been
able to produce a copy of the policy or policies in question, a judicial
determination of the material terms of the missing policy or policies is
needed. Plaintiff sought, among other things, a declaration: of the
material terms, rights, and obligations of the parties under the terms of
the policy or policies; that the policies were exhausted; that plaintiff
was not obligated to reimburse D/C for its attorneys' fees in that the
amounts of attorneys' fees incurred by D/C have been incurred unreasonably;
that plaintiff was entitled to recoupment and reimbursement of some or all
of the amounts it has paid for defense and/or indemnity; and that D/C
breached its obligation of cooperation with plaintiff. D/C filed an answer
and an amended cross-claim. D/C believed that it had meritorious defenses
and positions, and intended to vigorously defend. In addition, D/C
believed that it was entitled to amounts from plaintiffs for reimbursement
and recoupment of amounts expended by D/C on the lawsuits previously
tendered. In order to fund such action and its other ongoing obligations
while such lawsuit continued, D/C entered into a Loan Agreement and
Security Agreement with Kaanapali Land, in August 2006, whereby Kaanapali
Land provided certain advances against a promissory note delivered by D/C
in return for a security interest in any D/C insurance policy at issue in
this lawsuit. In June 2007, the parties settled this lawsuit with payment
by plaintiffs in the amount of $1,618. Such settlement amount was paid to
Kaanapali Land in partial satisfaction of the secured indebtedness noted
above.
Because D/C was substantially without assets and was unable to obtain
additional sources of capital to satisfy its liabilities, D/C filed with
the United States Bankruptcy Court, Northern District of Illinois, its
voluntary petition for liquidation under Chapter 7 of Title 11, United
States Bankruptcy Code during July 2007, Case No. 07-12776. Such filing is
not expected to have a material adverse effect on the Company as D/C was
substantially without assets at the time of the filing. The deadline for
filing proofs of claim against D/C with the bankruptcy court passed in
October 2008. Prior to the deadline, Kaanapali Land filed claims that
aggregated approximately $26,800, relating to both secured and unsecured
intercompany debts owed by D/C to Kaanapali Land. In addition, a personal
injury law firm based in San Francisco that represents clients with
asbestos-related claims, filed proofs of claim on behalf of approximately
700 claimants. While it is not likely that a significant number of these
claimants have a claim against D/C that could withstand a vigorous defense,
it is unknown how the trustee will deal with these claims. It is not
expected, however, that the Company will receive any material additional
amounts in the liquidation of D/C.
The Company received notice from the Hawaii Department of Land and
Natural Resources ("DLNR") that it would inspect all significant dams and
reservoirs in Hawaii, including those maintained by the Company on Maui in
connection with its agricultural operations. Inspections were performed in
April and October 2006 and again in March 2008 and July 2009. To date, the
DLNR has cited certain maintenance deficiencies concerning two of the
Company's reservoirs, consisting primarily of overgrowth of vegetation that
makes inspection difficult and could degrade the integrity of reservoir
slopes and impact drainage. The DLNR has required the vegetation clean-up
as well as the Company's plan for future maintenance, inspections and
emergency response. Revised versions of the required plans were submitted
to DLNR in December 2006. In October 2009, DLNR delivered an inspection
report for one of these reservoirs to the Company which acknowledged the
work done to date but requested still more remediated action. The Company
is analyzing this report to determine its future course of actions. In
addition, the Company is working on revisions to its emergency action plans
for both reservoirs in accordance with revised DLNR requirements.
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 2010.
On October 15, 2006, a significant earthquake occurred that was felt
in most parts of the state. As a consequence of such earthquake, the DLNR,
in conjunction with the U.S. Army Corps of Engineers, has inspected each
reservoir and identified certain minor damage. In addition, Company
personnel have inspected various portions of its Maui water source and
transmission assets to determine if any other damage of significance has
occurred, but has so far found no material damage. While the damage to the
smaller reservoir cited by the recent DLNR inspection will not require any
immediate action, it is unclear at this time whether the DLNR will require
any work on the larger reservoir even though the damage is located in a
portion of the reservoir that is presently unused. There can be no
assurance that the expense of doing such required work will not be
material.
In September 2007, the Company received further correspondence from
DLNR that it preliminarily intended to categorize each of the reservoirs as
"high hazard" under a new statute recently passed by the State of Hawaii
concerning dam and reservoir safety. This classification, which bears upon
future government oversight and reporting requirements, may increase the
future cost of managing and maintaining these reservoirs in a material
manner. The Company does not believe that this classification is warranted
for either of these reservoirs and has initiated a dialogue with DLNR in
that regard. At this time, it is unknown what the final classification
assigned to these reservoirs will be or to what extent such classification
will impact the future use and maintenance cost of these assets. In April
2008 the Company received further correspondence from DLNR that included
the assessment by their consultants of the potential losses that result
from the failure of these reservoirs. In April 2009, the Company filed a
written response to DLNR to correct certain factual errors in its report
and to request further analysis on whether such "high hazard"
classifications are warranted. The Company and DLNR continue to engage in
dialogue concerning these matters (which have included further site visits
by DLNR personnel).
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 would 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 Twelve 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 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) CALCULATION OF NET INCOME (LOSS) PER SHARE
The following tables set forth the computation of net income (loss)
per share - basic and diluted:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
2009 2008 2009 2008
-------- -------- -------- --------
(Amounts in thousands except per share amounts)
NUMERATOR:
Income (loss) before
income (loss) from
discontinued
operations . . . . . . . $ (722) (3,310) (2,298) 896
Income (loss) from
discontinued
operations, net of
income tax . . . . . . . -- 1,484 -- (2,391)
-------- -------- -------- --------
Net income (loss). . . . . $ (722) (1,826) (2,298) (1,495)
======== ======== ======== ========
DENOMINATOR:
Number of weighted
average shares
outstanding - basic. . . 1,832 1,819 1,832 1,804
Effect of dilutive shares:
Number of weighted
average Class C
Shares (a) . . . . . . -- -- -- 11
-------- -------- -------- --------
Number of weighted
average shares
outstanding - diluted. . 1,832 1,819 1,832 1,815
======== ======== ======== ========
Net income (loss) per
share - basic:
Income (loss) before
income (loss) from
discontinued
operations . . . . . . $ (.39) (1.82) (1.25) .50
Income (loss) from
discontinued
operations, net of
income tax . . . . . . -- .82 -- (1.33)
-------- -------- -------- --------
Net income (loss)
per share -
basic (a) . . . . . . . . $ (.39) (1.00) (1.25) (.83)
======== ======== ======== ========
Net income (loss) per
share - diluted:
Income (loss) before
income (loss) from
discontinued
operations . . . . . . $ (.39) (1.82) (1.25) .48
Income (loss) from
discontinued
operations, net of
income tax . . . . . . -- .82 -- (1.32)
-------- -------- -------- --------
Net income (loss)
per share -
diluted . . . . . . . . . $ (.39) (1.00) (1.25) (.84)
======== ======== ======== ========
(a) As the Company reported a loss from continuing operations for
the three months ended September 30, 2009 and 2008, and nine months ended
September 30, 2009, the Company has excluded the unissued Class C shares
from the corresponding earnings per share calculations for these periods as
the effect would be anti-dilutive.
(9) BUSINESS SEGMENT INFORMATION
As described in Note 1, the Company operates in two business
segments. As noted in Note 1, the Golf Course was sold in 2008 and is now
reported as discontinued operations. Total revenues and operating profit
by business segment are presented in the tables below.
Total revenues by business segment includes primarily (i) sales, all
of which are from unaffiliated customers and (ii) interest income that is
earned from outside sources on assets which are included in the individual
industry segment's identifiable assets, as well as corporate assets.
Operating income (loss) is comprised of total revenue less operating
expenses. In computing operating income (loss), none of the following
items have been added or deducted: general corporate revenues and
expenses, interest expense and income taxes.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
2009 2008 2009 2008
-------- -------- -------- --------
Revenues:
Property . . . . . . . . $ 255 232 687 797
Agriculture . . . . . . 352 198 1,351 1,273
Corporate. . . . . . . . 266 31 813 130
-------- -------- -------- --------
$ 873 461 2,851 2,200
======== ======== ======== ========
Operating income (loss):
Property . . . . . . . . $ (1,101) (430) (1,485) (1,079)
Agriculture . . . . . . (30) (388) (831) (472)
-------- -------- -------- --------
Operating income (loss). . (1,131) (818) (2,316) (1,551)
Corporate. . . . . . . . . (83) (216) (1,458) (1,641)
-------- -------- -------- --------
Operating income (loss)
from continuing
operations before
income taxes and
income (loss) from
discontinued
operations . . . . . . . $ (1,214) (1,034) (3,774) (3,192)
======== ======== ======== ========
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
General
In addition to historical information, this Report contains forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements are based on management's current
expectations about its businesses and the markets in which the Company
operates. Such forward-looking statements are not guarantees of future
performance and involve known and unknown risks, uncertainties or other
factors which may cause actual results, performance or achievements of the
Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements.
Actual operating results may be affected by various factors including,
without limitation, changes in international, national and Hawaiian
economic conditions, competitive market conditions, uncertainties and costs
related to the imposition of conditions on receipt of governmental
approvals and costs of material and labor, and actual versus projected
timing of events all of which may cause such actual results to differ
materially from what is expressed or forecast in this report.
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, had an outstanding balance of principal and
accrued interest as of September 30, 2009 of approximately $81 million, and
carries an interest rate of 3.04% compounded semi-annually. The note,
which is prepayable, is secured by substantially all of the remaining real
property owned by such subsidiaries, pursuant to a certain Mortgage,
Security Agreement and Financing Statement, dated as of November 14, 2002
and placed on record in December 2002. The note has been eliminated in the
consolidated financial statements because the obligors are consolidated
subsidiaries of Kaanapali Land.
In addition to such Secured Promissory Note, certain other
subsidiaries of Kaanapali Land continue to be liable to Kaanapali Land
under certain guarantees (the "Guarantees") that they had previously
provided to support certain Senior Indebtedness (as defined in the Plan)
and the Certificate of Land Appreciation Notes ("COLA Notes") formerly
issued by Amfac/JMB Hawaii, Inc. (as predecessor to KLC Land). Although
such Senior Indebtedness and COLA Notes were discharged under the Plan, the
Guarantees of the Non-Debtor KLC Subsidiaries were not. Thus, to the
extent that the holders of the Senior Indebtedness and COLA Notes did not
receive payment on the outstanding balance thereof from distributions made
under the Plan, the remaining amounts due thereunder remain obligations of
the Non-Debtor KLC Subsidiaries under the Guarantees. Under the Plan, the
obligations of the Non-Debtor KLC Subsidiaries under such Guarantees were
assigned by the holders of the Senior Indebtedness and COLA Notes to
Kaanapali Land on the Plan Effective Date. Kaanapali Land has notified
each of the Non-Debtor KLC Subsidiaries that are liable under such
Guarantees that their respective guarantee obligations are due and owing
and that Kaanapali Land reserves all of its rights and remedies in such
regard. Given the financial condition of such Non-Debtor KLC Subsidiaries,
however, it is unlikely that Kaanapali Land will realize payments on such
Guarantees that are more than a small percentage of the total amounts
outstanding thereunder or that in the aggregate will generate any material
proceeds to the Company. Nevertheless, Kaanapali Land has submitted a
claim in the Chapter 7 bankruptcy proceeding of Oahu Sugar in order that it
may recover 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. The Company has commenced
discussions with the United States (the only other claimant in the Oahu
Sugar bankruptcy) concerning the potential for dividing such remaining
assets and closing such bankruptcy case. There can be no assurance that
such discussions will lead to a settlement acceptable 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 the
predecessor of Kaanapali Land and were holders of COLAs or the date that
the Plan was confirmed by the Bankruptcy Court, and their successors in
interest, represent approximately 9% of the ownership of the Company.
As of September 30, 2009, the Company had cash and cash equivalents
of approximately $19 million, which is available for, among other things,
working capital requirements, including future operating expenses in each
of the Agriculture and Property segments, and the Company's expenditures
for engineering, planning, regulatory and development costs, drainage,
water storage and distribution, utilities, environmental remediation costs
on existing and former properties, potential liabilities resulting from tax
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 small portion of such anticipated expenses are currently
subject to contractual commitments, however, significant additional costs
may be incurred. Proceeds from land sales and collection of the note
receivable related to the sale of the Waikele Golf Course are the Company's
only source of significant cash proceeds and the Company's ability to meet
its liquidity needs is dependent on the timing and amount of such proceeds.
The international credit crisis, which has resulted in both national and
global economic downturns, has had a significant adverse impact on the
Hawaiian economy during the second half of 2008 and continuing into 2009.
The result is substantial market uncertainty in the housing market and
declining home values. These factors have had a material adverse effect on
the Company's ability to market its residential lots and may, if they
persist, cause the Company to defer development opportunities further into
the future.
On April 8, 2008, the Company entered into a contract (as
subsequently amended) to sell its Waikele Golf Course for a purchase price
of approximately $23.3 million (less commissions and closing costs). The
sale closed on November 12, 2008 with total cash received, including
previous non-refundable deposits, aggregating $10 million. The balance of
the purchase price is represented by a promissory note in the original
amount of $13.3 million and is secured by the property along with corporate
and personal guarantees from the principal of the purchaser and an
affiliate. The note originally required monthly interest only payments of
7% per annum and was due May 12, 2009. Certain seller representations and
warranties exist for one year after the date of sale. The Company entered
into a note modification agreement with the purchaser on May 12, 2009 and
subsequent note modification agreements on May 19, 2009, June 16, 2009 and
November 12, 2009. The note modifications allowed the purchaser to defer
payment of such promissory note until May 12, 2010; provided, however, that
the purchaser was required by such agreement to make principal and interest
payments in advance of maturity (before certain deductions for commissions
and other costs) of $200 thousand on May 12, 2009, $50 thousand on May 20,
2009, $100 thousand on June 16, 2009, $100 thousand on June 23, 2009, $100
thousand on September 12, 2009 and $1 million on November 12, 2009. The
note modifications also increased the interest rate on the note to 8% per
annum beginning July 12, 2009 and require prepayment of interest through
January 12, 2010 on November 12, 2009. As of September 30, 2009, the note
had an outstanding principal and accrued interest balance of approximately
$12.8 million.
Pursuant to the note modification agreement dated November 12, 2009
("Effective Date"), the purchaser owed the Company approximately $1.3
million of principal and interest payable on the Effective Date. The
purchaser paid $253 thousand on the Effective Date. $1 million has not yet
been paid. The promissory note is in default. The Company and the
purchaser are continuing to discuss a potential note modification, but
there can be no assurance that such modification will be negotiated or the
terms thereof. In the event a note modification is not consummated on
terms acceptable to the Company, the Company will consider other options
including foreclosure or litigation.
A subsidiary of Kaanapali Land ("Holder") holds a mortgage loan that
was previously secured by Waikele Golf Course. 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 a result
of the sale of the Waikele Golf Course, the outstanding principal and
accrued interest was reduced pursuant to a payment of $8.8 million towards
the note and accrued interest and the mortgage security was released. As
of September 30, 2009, the note had an outstanding principal and accrued
interest balance of approximately $1.2 million. The note is expected to be
satisfied through future payments on the promissory note provided by the
purchaser of the Waikele Golf Course, as described above. 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 and the sale of the golf course.
The Company holds two promissory notes received in conjunction with
the 2007 sale of two lots at the Kaanapali Coffee Farms in the amount of
$692 thousand and $737 thousand. The promissory notes are due October 2009
and November 2010, respectively. The Company is under contract for the
sale of one additional lot that is scheduled to close no later than
December 2010. The note due in October 2009 was not paid on its scheduled
maturity date. Such note is secured by a mortgage on the associated lot
that is subordinated to a purchase money mortgage held by a third-party
lender. The Company has notified the purchaser of such lot that the
subordinated note is in default and default interest has begun accruing
thereon. The Company and such purchaser are continuing to discuss a
potential note modification, but there can be no assurance that such a
modification will be negotiated or the terms thereof. In the event that
the Company and such purchasers are unable to agree to a modification of
the terms of such note, the Company will consider its available remedies,
including an action for foreclosure.
On April 15, 2008, the Company entered into an agreement with
Stephen Lovelette ("Lovelette"), an executive vice president of the Company
in charge of the Company's development activities, whereby the Company
agreed to issue up to 52,000 shares of a new class of common shares (the
"Class C Shares") in consideration for his services to the Company. The
Class C Shares have the same rights as the Shares except that the Class C
Shares will not participate in any distributions until the holders of the
Shares have received aggregate distributions equal to $19 per Share,
subject to customary antidilution adjustments. The Class C Shares became
50% vested on April 15, 2008, an additional 25% vested on December 31, 2008
and the remaining 25% 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.
Cash and cash equivalents decreased primarily due to the payment of
the remaining retention amounts due relating to the Kaanapali Coffee Farms
project and additional capitalized costs related to the Kaanapali Coffee
Farms project.
Other assets decreased due to the reduction of the collateral account
securing a subdivision bond obtained in conjunction with the Kaanapali
Coffee Farms project.
Accounts payable and accrued expenses decreased due to the reduction
in retention amounts payable related to the Kaanapali Coffee Farms project.
Sales and cost of sales increased during the nine months ended
September 30, 2009 due to increases in farming revenues and coffee sales
revenues and coffee farming costs.
Interest and other income increased during the three and nine months
ended September 30, 2009 due to the interest received on the promissory
note related to the sale of the Waikele Golf Course.
Selling, general and administrative expenses increased during the
three and nine months ended September 30, 2009 due to an increase in
professional fees related to environmental matters and adjustments to
certain reserves.
Income (loss) from discontinued operations represents the results of
operations of the Waikele Golf Course and an asset impairment charge
related to the writedown of the carrying value of the golf course during
the second quarter of 2008. The golf course was sold during the fourth
quarter of 2008.
INFLATION
Due to the lack of significant fluctuations in the level of inflation
in recent years, inflation generally has not had a material effect on real
estate development.
In the future, high rates of inflation may adversely affect real
estate development generally because of their impact on interest rates.
High interest rates not only increase the cost of borrowed funds to the
Company, but can also have a significant effect on the affordability of
permanent mortgage financing to prospective purchasers. However, high rates
of inflation may permit the Company to increase the prices that it charges
in connection with real property sales, subject to general economic
conditions affecting the real estate industry and local market factors, and
therefore may be advantageous where property investments are not highly
leveraged with debt or where the cost of such debt has been previously
fixed.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES. The principal executive officer
and the principal financial officer of the Company have evaluated the
effectiveness of the Company's disclosure controls and procedures as
defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as
amended, (the "Exchange Act") as of the end of the period covered by this
report. Based on such evaluation, the principal executive officer and the
principal financial officer have concluded that 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.
INTERNAL CONTROL OVER FINANCIAL REPORTING. There have not been any
changes in the Company's internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
that occurred during the third quarter of 2009 that have materially
affected, or are reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7 to the Condensed Consolidated Financial Statements
included in Part I of this report.
ITEM 1A. RISK FACTORS
There has been no known material changes from risk factors as
previously disclosed in the Company's Annual Report on Form 10-K for the
year ended December 31, 2008.
ITEM 6. EXHIBITS
(a) Exhibits.
3.1 Amended and Restated Limited Liability Company Agreement
of Kaanapali Land, LLC dated November 14, 2002 filed as
an exhibit to the Company's report on Form 10 filed
May 1, 2003 and hereby incorporated by reference.
3.2 Amendment to the Amended and Restated Limited Company
Agreement of Kaanapali Land, LLC dated November 14, 2002
filed as an exhibit to the Company's report on Form 8-K
filed April 21, 2008 and hereby incorporated by
reference.
10.2 Restricted Share Agreement dated April 15, 2008 is filed
as an exhibit to the Company's report on Form 10-Q filed
August 14, 2008 and hereby incorporated by reference.
10.3 Waikele Golf Course, LLC - Waikele Country Club Inc.
Property Purchase Agreement, as amended, dated
October 29, 2008 filed as an exhibit to the Company's
report on Form 10-Q (File No. 0-50273) filed on
November 14, 2008 and hereby incorporated by reference.
10.4 Note Modification Agreement and Confirmation of Guarantee
dated May 12, 2009 filed as an exhibit to the Company's
report on Form 10-Q (File No. 0-50273) filed on May 13,
2009 and hereby incorporated by reference.
10.5 Third Note Modification Agreement and Confirmation of
Guarantee dated June 16, 2009 filed as an exhibit to the
Company's report on Form 10-Q (File No. 0-50273) filed
on August 12, 2009 and hereby incorporated by reference.
10.6 Fourth Note Modification Agreement and Confirmation of
Guarantee dated November 12, 2009 filed as an exhibit to
the Company's report on Form 10-Q (File No. 0-50273) is
filed herewith.
31.1. Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) is filed herewith.
31.2. Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) is filed herewith.
32. Certifications pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 are filed herewith.
(b) No reports on Form 8-K were filed since the beginning of the
last quarter of the period covered by the report.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KAANAPALI LAND, LLC
By: Pacific Trail Holdings, LLC
(sole member)
/s/ Gailen J. Hull
---------------------
By: Gailen J. Hull
Senior Vice President
Date: November 16, 2009