ITEM 1. BUSINESS
Kaanapali Land, LLC ("Kaanapali Land"), a Delaware limited liability company, is the reorganized entity resulting from the Joint Plan of Reorganization of Amfac Hawaii, LLC (now known as KLC Land Company, LLC ("KLC Land")), certain of its subsidiaries (together with KLC Land, the "KLC Debtors") and FHT Corporation ("FHTC" and, together with the KLC Debtors, the "Debtors") under Chapter 11 of the Bankruptcy Code, dated June 11, 2002 (as amended, the "Plan"). As indicated in the Plan, Kaanapali Land has elected to be taxable as a corporation. The Debtors had filed their petitions for reorganization under Chapter 11 on February 27, 2002 (the "Petition Date") in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the "Bankruptcy Court"), which petitions were consolidated into a single joint proceeding by the Bankruptcy Court (the "Reorganization Case").
The principal goal of the Plan was to address the Debtors' debt burdens so that the Debtors could emerge from Chapter 11 with a viable capital structure and with the resources necessary to operate their land development business. The Plan achieved this goal by converting certain indebtedness and other liabilities of the Debtors into new equity of Kaanapali Land (to the extent such creditors did not elect an available cash distribution option). Another goal of the Plan was to secure additional liquidity for the Debtors to help fund future operations. The Plan achieved this goal through the Merger of Northbrook Corporation ("Northbrook") into FHTC and the subsequent merger of FHTC into Kaanapali Land, which made the assets and liquidity of Northbrook available to the Debtors to help fund their land development business.
The Plan was confirmed by the Bankruptcy Court by orders dated July 29, 2002 and October 30, 2002 (collectively, the "Order") and became effective November 13, 2002 (the "Plan Effective Date"). Kaanapali Land continues to work toward completion of the various requirements of the Plan and to implement the restructuring transactions that are contemplated to be effected under the Plan. All material requirements and transactions that the Company must implement under the Plan are described herein. 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 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 has expired, including the period for those whose executory contracts were rejected by the Debtors. Therefore, all claims that may be asserted by the creditors against the Debtors relative to amounts due on pre-petition obligations as of the Plan Effective Date are known. However, any claims of the Internal Revenue Service ("IRS") relative to pre-petition transactions were left unimpaired by the Plan, as described below.
The Limited Liability Company Agreement of Kaanapali Land (the "LLC Agreement") provides for two classes of membership interests, "Class A Shares" and "Class B Shares", which have substantially identical rights and economic value under the LLC Agreement; except that holders of Class A Shares are represented by a "Class A Representative" who must approve certain transactions proposed by Kaanapali Land before they can be undertaken. The Class A Representative is further entitled to receive certain reports from the Company and meet with Company officials on a periodic basis. Reference is made to the LLC Agreement for a more detailed discussion of these provisions. Class B Shares are held by Pacific Trail Holdings, LLC ("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. Reference is made to Item 11 below for a further explanation of the LLC Agreement and the rights and duties of the Class A Representative.
As of December 31, 2004, Kaanapali Land has distributed in the aggregate, approximately $1,813,000 in cash and approximately 161,100 Class A Shares on account of the claims that have been made and does not anticipate making any further distributions under the Plan.
Kaanapali Land has issued all Class B Shares required to be issued under the Plan to Pacific Trail and those entities and individuals who are affiliated with Pacific Trail that are entitled to Class B Shares. As a consequence, Kaanapali Land has approximately 1,631,513 Class B Shares outstanding.
The IRS filed a claim in the bankruptcy proceedings in the aggregate amount of approximately $20.6 million for taxes, interest and penalties related to the years 1998-2000. The Company entered into a stipulation with the IRS whereby the IRS withdrew its claim due to the fact that the Plan left the IRS unimpaired relative to any taxes that may be due. As a result of the examination relative to 2000, the IRS has asserted a deficiency in taxes, which the Company is contesting. Federal tax return examinations have been completed for years through 1999 and all required payments for taxes due and interest have been made. The statutes of limitations with respect to the Company's tax returns for 2001 and subsequent years remain open. The Company believes adequate provisions for income tax have been recorded for all years. However, there can be no assurance that the Company will be successful in such contest and, although the Company has reserved for potential tax liabilities on its financial statements, to the extent that the Company is unsuccessful in defending against any such claims, the amount for which the Company could be liable could be material.
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, LLC ("KLC") and Kaanapali Development Corp. ("KDC") and certain limited liability companies owned 50% each by KLC and KDC.
The Company has completed certain restructuring transactions and may complete others, as permitted by the Plan, for the purpose of simplifying the corporate structure and administrative organization of the Company. The general impact of such transactions will be to reduce the number of unneeded subsidiaries of Kaanapali Land and to move assets into those entities that make the most sense for administrative reasons or to facilitate future transactions with third parties.
PROPERTY
KAANAPALI 2020 PLANS. "Kaanapali 2020", the comprehensive plan for approximately 4,000 acres of land in the Kaanapali/Honokawai area on the west side of Maui, Hawaii is one of Kaanapali Land's principal entitlement focuses. The entitlement work is being done by KDC, which owns substantially all of the land within the Kaanapali 2020 boundaries. 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. Approximately 1,500 acres of this land is located toward the top of mountain ridges and in gulches and is classified as conservation land, which precludes other use. However, this land, and other land that will be designated as open space, is an important component of the overall project and is part of obtaining the entitlements for the land as a whole.
The process of determining market and project feasibility will be ongoing with pursuit of entitlements. If KDC obtains the necessary entitlements, it intends, if market and project feasibility studies justify it, to develop some or all of the project (either alone or through one or more joint ventures with strategic partners) and/or sell some or all of the entitled parcels. KDC will need to apply for subdivision of the land in order to develop the parcels. As a condition to subdivision of the land, the county will generally require the completion or bonding of certain infrastructure, including roads, water and sewer facilities, each of which will require their own building and grading permits as well as certain extractions.
For the last few years, KDC has been working with the West Maui community to involve the community in plans for the use of the Kaanapali 2020 lands. Committees, comprised of private sector individuals from the community as well as public employee participants, have been working with KDC to create a vision for the future of the Kaanapali lands. Variations of this strategy have been used in several communities, including the successful Weston, Florida planned community that has recently been substantially completed by an affiliate of Kaanapali Land. Management is optimistic that a plan can be implemented with the support of the community that meets Kaanapali Land's long-term financial objectives.
The Kaanapali 2020 plan is currently at a predevelopment stage. The plan is now in the process of being finalized to the extent necessary to commence the entitlement process. Approximately 990 acres of land have been identified to contain approximately 2,800 residential units along with commercial, retail and recreational assets. The balance of the land is expected to remain open space or agricultural. Over the next few years, the Company expects to seek the necessary approvals to pursue its business strategy.
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, costs and regulatory and environmental requirements.
The Company expects to 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, 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 include applications for state land use reclassification, county community plan amendments and changes in zoning.
The Company is working to market an approximate 270-acre parcel in the region to the east of the main Kaanapali-2020 area. The parcel is still in the planning stages but is expected to be comprised of 59 agricultural lots that will be offered to individual buyers. Although it is hoped that the marketing of lots will commence in the second half of 2005, various contingencies including, but not limited to, governmental and market factors may impact the viability or timing of the project. Therefore, there can be no assurance that the Company will be able to meet such timetable, that the subdivision will ultimately be approved or that the lots will sell for prices deemed advantageous by the Company.
The entitlement process involves substantial amounts of time and expense. The applications generally require the submission of comprehensive plans that involve the use of consultants and other professionals. Parties affected can challenge the applications at the time of submission, 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, on any approvals of the entitlements. These conditions may include the requirement that the Company dedicate land for public use, fund infrastructure improvements, pay impact fees and provide affordable housing in the area. The Company may also be subject to conditions that the entitlement will be revoked if the project does not take place within a particular time period. If there is a significant change in the land plans, if the governmental requirements change, or if market conditions change subsequent to obtaining the county approvals, the Company may be required to apply for amendments to the existing entitlement. The amendment process can also be lengthy and costly, and it may result in additional conditions attaching to any approvals.
If the Company is not successful in obtaining the necessary entitlements as originally planned, the Company may be required to revise its land plan. In that case, the revised plans may not be as economically viable as the original plan. 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.
OTHER PROPERTY. Apart from the golf course (discussed below) and the Kaanapali 2020 lands, the Company owns approximately 390 acres of remaining land. The site of the Pioneer Mill sugar mill that was closed in 1997 ("Pioneer Mill Site") located in Lahaina and owned by a subsidiary of the Company, is approximately 19.5 acres and is zoned for industrial use. Pioneer Mill 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. The Company believes that certain portions of the Wainee Lands might be available for a number of uses compatible with the close proximity of the Wainee Lands to the Lahaina Town-center, including both affordable and market housing and certain recreational and service uses, once the property is reclassified and rezoned. 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. A determination on the viability to proceed in the entitlement process will be made during 2005. However, the Company is currently considering several options for the Wainee Lands. During January 2005, the Company sold its mill sites and associated lands located on the Island of Kauai for approximately $1.3 million. The Company also owns less than 100 acres of miscellaneous land parcels located on the Islands of Kauai, Maui and Oahu. These miscellaneous parcels primarily include land associated with now- closed sugar growing and processing operations, remnant parcels abutting infrastructure improvements from previously sold lands, such as strips along roadways, and water-related assets. It is not expected that upon sale these miscellaneous parcels will yield any significant cash proceeds to the Company.
AGRICULTURE
HISTORIC OPERATIONS. A significant portion of the Company's revenues were formerly derived from agricultural operations primarily consisting of the cultivation, milling and sale of raw sugar. The last remaining sugar plantation of the Company, owned by a subsidiary of Kaanapali Land was shut down at the end of 2000. In September 2001, the Company also ceased its coffee operations, which were owned by a subsidiary of Kaanapali Land. The Company liquidated its remaining inventory of coffee beans and mill equipment. The Company leased to a third party 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 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 can find ready markets for their products and it is profitable to do so. There can be no assurance that any expansion will occur or that current operations will remain profitable. The Company and Monsanto have recently renewed these seed corn contracts on terms that are similar to the previous agreement.
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 assets and operations of the Waikele Golf Course represent all of the golf segment for purposes of business segment information. The Waikele Golf Course operates at a modest level of profit.
For a description of financial information by segment, please read Note 9 to the attached consolidated financial statements, which information is incorporated herein by reference.
SIGNIFICANT ASSET SALES
There are strategic land sales that the Company has consummated or that may occur based on options held by third parties. These transactions were generally pursued in order to raise additional cash that would enhance the Company's ability to fund the Kaanapali 2020 development. No further significant bulk land sales are currently contemplated by the Company.
NORTH BEACH. 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. In January 2003, the option for Lot 2 was exercised and the sale closed on January 31, 2003, at which time a non-refundable payment was made for $2 million (before closing costs and prorations). The remainder of the purchase price was reflected by a note secured by a mortgage due and paid in March 2004 for approximately $14.4 million. A minor portion of the proceeds of the note is subject to possible adjustment based on the number of units ultimately approved for construction on the site. On August 5, 2003, the Company closed the sale of Lot 4 (an approximately 40 acre site) for a purchase price of $33 million; of which $16 million was paid in cash (before closing costs and prorations) at closing and the balance was delivered in the form of a promissory note in the original principal amount of $17 million. The note was fully collected by the Company during December 2004. At closing, the Company also granted to the purchaser an option to purchase Lot 3, which expires in August 2005. The option price consists of a base price of $22.5 million, which is subject to potential adjustment upward depending on the number of units permitted to be developed on Lot 3 and Lot 4, and also an adjustment for inflation if the option is exercised after January 1, 2005. There can be no assurance that such option will be exercised or the timing thereof.
PARCEL 22/23. Kaanapali Golf Estates ("KGE") is a residential community that is part of the Kaanapali Beach Resort in West Maui. KGE has been subdivided into several parcels that have been sold to residential developers. There was one remaining parcel available for sale in the residential community called "Parcel 22/23". Parcel 22/23 includes approximately 110 acres. In December 2003, the Company closed on its sale of Parcel 22/23 to a third party for a purchase price of $12.5 million. Approximately $11.5 million was received in cash at closing and the Company deposited approximately $1 million into an escrow account. In conjunction with the sale, the Company has agreed to pay a portion of the cost of certain roadway improvements and pay the costs of the design and construction of an underground sewer line and drainage construction as well as the cost of certain other improvements. Such escrowed funds will fund the Company's portion of the costs associated with the road improvements and the sewer and drainage costs. The Company is responsible for certain costs in excess of the escrowed funds associated with the road improvements and sewer and drainage costs and has accrued approximately $1 million in excess of the amount escrowed as an estimate of such costs. These improvement projects are proceeding and are expected to be completed during 2005.
OTHER MAUI PROPERTY ASSETS
The company has certain other property assets on Maui that are not considered part of Kaanapali 2020. The most significant of such assets is the Pioneer Mill Site.
PIONEER MILL SITE. The Company owns approximately 19 acres in Lahaina, known as the Pioneer Mill Site, which is zoned for industrial development. This was the former site of Pioneer Mill's sugar and coffee mills on Maui. Pioneer Mill is currently evaluating strategic options relating to this site, but has in the interim entered into a contract for the demolition of the improvements on the Pioneer Mill Site. It is anticipated that such demolition will cost approximately $2.5 million and that the work will be completed during the second half of 2005. Pioneer Mill was engaged in a modest cleanup operation arising out of the discovery of petroleum contamination found at the Pioneer Mill site. The Pioneer Mill site was assigned a high priority by the Hawaii Department of Health ("HDOH") and the HDOH has shown an interest in the environmental conditions relating to or arising out of the former operations of Pioneer Mill. The United States Environmental Protection Agency, Region IX (hereinafter "EPA") has designated HDOH as the oversight agency for Pioneer Mill. Pioneer Mill has received a report on the results of environmental testing conducted on the site by the United States Environmental Protection Agency and HDOH. 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. It is possible that further clean up operations may become necessary in connection with the planned demolition of the former sugar mill buildings on the site.
EMPLOYEES.
At March 1, 2005, Kaanapali Land and its subsidiaries employed approximately 88 persons, more than half of whom are employed at the Waikele Golf Course. Certain corporate services are provided by Pacific Trail and its affiliates. Kaanapali Land reimburses for these services and related overhead at cost.
TRADEMARKS AND SERVICE MARKS.
The Company maintains a variety of trademarks and service marks that support each of its business segments. These marks are filed in various jurisdictions, including the United States Patent and Trademark Office, the State of Hawaii Department of Commerce and Consumer Affairs and foreign trademark offices. The trademarks and service marks protect, among other things, the use of the term "Kaanapali" and related names in connection with the developments in the vicinity of the Kaanapali Resort area on Maui, the various trade names and service marks obtained in connection with the Company's coffee operations and the use of the term "Waikele" in connection with the Waikele golf course and related developments. Also protected are certain designs and logos associated with the names protected. Certain marks owned by the Company have been licensed to third parties, however, the income therefrom is not material to the Company's financial results. To the extent deemed advantageous in connection with the Company's ongoing businesses, to satisfy contractual commitments with respect to certain marks or where the Company believes that there are future licensing opportunities with respect to specific marks, the Company intends to maintain such marks to the extent necessary to protect their use relative thereto. The Company also intends to develop and protect appropriate marks in connection with its future land development activities.
MARKET CONDITIONS AND COMPETITION.
There are a number of factors that historically have negatively impacted Kaanapali Land's property activities, including market conditions, the difficulty in obtaining regulatory approvals, the high cost of required infrastructure and the Company's operating deficits in its other business segments. As a result, the planned use of many of the Company's land holdings and the ability to generate cash flow from these land holdings have become long-term in nature, and the Company has found it necessary to sell certain parcels in order to raise cash rather than realize their full economic potential through the entitlement process.
Maui's real estate market has experienced improvement during 2004 and the areas of primary and secondary residential homes, condominiums and time share units have been relatively strong. There can be no assurance that the recent recovery of Maui's real estate market can be sustained.
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. 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, entitlements are extremely difficult to obtain in Hawaii. There is often significant opposition from numerous groups - including native Hawaiians, environmental organizations, various community and civic groups, condominium associations and politicians advocating no-growth policies, among others.
Currently, Kaanapali Land is preparing applications for the necessary entitlements to carry out the Kaanapali 2020 plan, including a 59 lot agricultural subdivision. 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. Approximately 1,500 acres of this land that 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. Under those laws and regulations, the Company may be liable for, among other things, the costs of removal or remediation of certain hazardous substances, including asbestos-related liability. 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 2.
ITEM 2. PROPERTIES
LAND HOLDINGS.
The major real properties owned by the Company are described under Item 1. Business.
ITEM 3.
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, all such proceedings have been resolved pursuant to the Plan. Any claims that were not filed on a timely basis under the Plan have been discharged by the Bankruptcy Court and thus any future legal proceedings relative to claims that predate the consummation of the Plan should not result in any liability to the Debtors.
Proceedings against subsidiaries or affiliates of Kaanapali Land that are not Debtors were not stayed by the Plan and may proceed.
On or about February 23, 2001 Kekaha Sugar Co., Ltd., a subsidiary of Kaanapali Land, received a letter from the HDOH assigning the Kekaha Sugar Co., Ltd. site a high priority status based on HDOH's review of available environmental data. In the letter, HDOH identified five major areas of potential environmental concern including the former wood treatment plant, the herbicide mixing plant, the seed dipping plant, the settling pond, and the Kekaha Sugar Mill. While setting forth specific concerns, the HDOH reserved the right to designate still further areas of potential concern which might require further investigation and possible remediation. HDOH further reserved the right to modify its prioritization of the site should conditions warrant. The assignment of the high priority status will likely result in a high degree of oversight by the HDOH as the issues raised are studied and addressed. Kekaha Sugar Co., Ltd. has responded to the letter.
The United States Environmental Protection Agency has performed a visual inspection of the property and indicated there will be some testing performed. HDOH has performed some testing at the site and results are pending. Kekaha Sugar Co., Ltd. is substantially without assets and further pursuit of this matter by HDOH could have a material adverse effect on the financial condition of Kekaha Sugar Co., Ltd.
On or about February 23, 2001, Lihue Plantation received a similar letter from the HDOH assigning the LPCo site a high priority status based on HDOH's review of available environmental data. In the letter, HDOH identified four major areas of potential environmental concern including the Lihue Plantation herbicide mixing plant, the seed dipping plant, the settling pond and the Lihue Sugar Mill. While setting forth specific concerns, the HDOH reserved the right to designate still further areas of potential concern which might require further investigation and possible remediation. In that regard, HDOH visited the site for the purpose of taking additional soil samples in September 2004. As noted above, the high priority assignment could result in a high degree of oversight by the HDOH as the issues raised are studied and addressed. Lihue Plantation is substantially without assets, and further pursuit of this matter by HDOH could have a material adverse effect on the financial condition of LPCo. The purchaser of the Kekaha and Lihue Plantation Sugar Mills properties in January 2005 assumed any obligations for environmental matters concerning the property it purchased. However, there can be no assurance that such purchaser will have sufficient assets to satisfy a claim should any substantial liabilities result.
Pioneer Mill was engaged in a modest cleanup operation arising out of the discovery of petroleum contamination found at the Pioneer Mill site. The Pioneer Mill site was assigned a high priority by the HDOH and the HDOH has shown an interest in the environmental conditions relating to or arising out of the former operations of Pioneer Mill. EPA has 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 United States Environmental Protection Agency 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. It is possible that further cleanup operations may become necessary in connection with the planned demolition of the former sugar mill buildings on the site.
As a result of an administrative order issued to Oahu Sugar by the HDOH, Order No. CH 98-001, dated January 27, 1998, Oahu Sugar is currently engaged in environmental site assessment of lands it leased from the U.S. Navy and located on the Waipio Peninsula. Oahu Sugar has submitted a Remedial Investigation Report to the HDOH. The HDOH has provided comments which indicate additional testing may be required. Oahu Sugar has responded to these comments with additional information. On January 9, 2004, EPA issued a request to Oahu Sugar seeking information related to the actual or threatened release of hazardous substances, pollutants and contaminants at the Waipio Peninsula portion of the Pearl Harbor Naval Complex National Priorities List Superfund Site. The request seeks, among other things, information relating to the ability of Oahu Sugar to pay for or perform a clean up of the land formerly occupied by Oahu Sugar. Oahu Sugar has responded to the information requests. Oahu Sugar received an order from EPA that would purport to require certain testing and remediation of the site. Oahu Sugar is in the process of evaluating the order. The cost of compliance can not be estimated at this time. However, Oahu Sugar is substantially without assets and the pursuit of any action, informational, enforcement, or otherwise by HDOH or EPA could have a material adverse effect on the financial condition of Oahu Sugar.
The IRS filed a claim in the bankruptcy proceedings in the aggregate amount of approximately $20.6 million for taxes, interest and penalties related to the years 1998-2000. The Company entered into a stipulation with the IRS whereby the IRS withdrew its claim due to the fact that the Plan left the IRS unimpaired relative to any taxes that may be due. As a result of the examination relative to 2000, the IRS has asserted a deficiency in taxes, which the Company is contesting. Federal tax return examinations have been completed for years through 1999 and all required payments for taxes due and interest have been made. The statutes of limitations with respect to the Company's tax returns for 2001 and subsequent years remain open. The Company believes adequate provisions for income tax have been recorded for all years. However, there can be no assurance that the Company will be successful in such contest and, although the Company has reserved for potential tax liabilities on its financial statements, to the extent that the Company is unsuccessful in defending against any such claims, the amount for which the Company could be liable could be material.
On February 15, 2005, D/C Distribution 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. In the eight-count complaint for declaratory relief, reimbursement and recoupment of unspecified amounts, costs and for such other relief as the court might grant, plaintiff alleges that it is an insurance company to whom D/C has tendered for defense and indemnity various personal injury lawsuits allegedly based on exposure to asbestos containing products. Plaintiff alleges that because none of the parties have been able to produce a copy of the policy or policies in question a judicial determination of the material terms of the missing policy or policies is needed. Plaintiff seeks, among other things, a declaration: of the material terms, rights, and obligations of the parties under the terms of the policy or policies; that the policies have been exhausted; that plaintiff is not obligated to
reimburse D/C for its attorneys' fees in that the amounts of attorneys' fees incurred by D/C have been incurred, unreasonably; that plaintiff is entitled to recoupment and reimbursement of some or all of the amounts it has paid for defense and/or indemnity; and that D/C has breached its obligation of cooperation with plaintiff. The litigation is in its early stages and D/C believes that it has meritorious defenses and positions, and intends to vigorously defend.
Kaanapali Land, as successor by merger to other entities, and D/C Distribution Corporation ("D/C"), a subsidiary of Kaanapali Land, have been named as defendants in personal injury actions allegedly based on exposure to asbestos. There are approximately 60 cases against such subsidiary that are pending on the mainland and are alleged based on such subsidiary's prior business operations. Each company believes that it has meritorious defenses against these actions, but can give no assurances as to the ultimate outcome of these cases. D/C is without sufficient assets to satisfy all of its liabilities for these cases, and therefore, any material existing or future judgments against D/C in these cases will have a material adverse effect on D/C's financial condition. Kaanapali Land does not believe that it has liability, directly or indirectly, for such subsidiary's obligations.
Northbrook Corporation ("Northbrook"), a predecessor by merger to Kaanapali Land was named in a lawsuit filed in August 2003 in the Circuit Court of Cook County, Chicago, Illinois, styled Silverado Golf & Country Club, Inc. v. JMB Realty Corporation and Northbrook Corporation. The lawsuit sought unspecified damages and alleged that the defendants engaged in fraudulent conduct in connection with the administration and termination of a defined benefit pension plan that had been sponsored by Northbrook Corporation and certain affiliates and predecessors. In the eight count amended complaint, the plaintiff sought unspecified general damages, the imposition of a constructive trust, an accounting, attorneys' fees and costs, interest, punitive damages and such other further relief as deemed appropriate by the court under the circumstances. The amended complaint was dismissed with prejudice on March 4, 2005, pursuant to a settlement and without any payment of money by defendants.
Other than as described above and the Reorganization Case as described above, the Company is not involved in any material pending legal proceedings, other than ordinary routine litigation incidental to its business. The Company and/or certain of its affiliates have been named as defendants in several pending lawsuits. While it is impossible to predict the outcome of such routine litigation that is now pending (or threatened) and for which the potential liability is not covered by insurance, the Company is of the opinion that the ultimate liability from any of this litigation will not materially adversely affect the Company's consolidated results of operations or its financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 31, 2004 there were approximately 415 holders of record of the Company's 161,100 outstanding Class A Shares and approximately 16 holders of record of the Company's 1,631,513 outstanding Class B Shares. The Company has no outstanding options, warrants to purchase or securities convertible into, common equity of the Company. There is no established public trading market for the Company's membership interests. The Company has elected to be treated as a corporation for federal and state income tax purposes. As a consequence, under current law, holders of membership interests in the Company will not receive annual K-1 reports or direct allocations of profits or losses relating to the financial results of the Company as they would for the typical limited liability company that elects to be treated as a partnership for tax purposes. In addition, any distributions that may be made by the Company will be treated as dividends.
However, no dividends have been paid by the Company in 2004 or 2003 and the Company does not anticipate making any distributions for the foreseeable future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
KAANAPALI LAND, LLC (a) For the years ended December 31, 2004, 2003, 2002, 2001 and 2000 (Dollars in Thousands Except Per Share Amounts)
2004 2003 2002 2001 2000 -------- -------- -------- -------- -------- Total revenues (c) . . . . . . $ 14,557 66,640 11,112 81,894 79,247 ======== ======== ======== ======== ======== Net income (loss) (d). . . $ 4,887 70,636 140,784 (17,082) (45,707) ======== ======== ======== ======== ========
Income (loss) from continuing operations per share, basic and diluted . . $ 2.73 5.86 (b) (6,794) (13,206) ======== ======== ======== ======== ========
Net income (loss) per share, basic and diluted . . $ 2.73 39.44 (b) (4,270) (11,427) ======== ======== ======== ======== ========
Total assets . . $179,401 189,473 189,626 223,628 311,705 ======== ======== ======== ======== ========
Certificate of Land Apprecia- tion Notes. . . $ -- -- -- 139,413 139,413 ======== ======== ======== ======== ========
(a) The above selected financial data should be read in conjunc- tion with the financial statements and the related notes appearing elsewhere in this report. The amounts reflected are those business segments of the Company's predecessor that are continuing in nature.
(b) The income per share from continuing operations for the period prior to the Plan Effective Date is $3,235 and the loss per share from continuing operations for the period after the Plan Effective Date is $5. The net income per share for the period prior to the Plan Effective Date is $37,389 and the net loss per share for the period after the Plan Effective Date is approximately $5.
(c) In 2001, the Company recognized as revenue a gain from the extinguishment of debt of $10,653.
(d) In 2002, the Company recognized an extraordinary gain on reorganization of $136,618. In 2003, the Company recognized a gain on disposition of unconsolidated investment of $60,134.
ITEM 7.
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. Due to the fact the Company emerged from bankruptcy in November 2002, substantially all of the 2002 and earlier operations relate to the operations of the predecessor, Northbrook. No material transactions (other than the issuance and distribution of the shares on or in connection with the Plan Effective Date, the effects of the restructuring and the related extraordinary gain) occurred in 2002 after the mergers of Northbrook into FHTC and FHTC into Kaanapali Land in November 2002.
In addition to historical information, this Report contains forward- looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations about its businesses and the markets in which the Company operates. Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties or other factors which may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual operating results may be affected by various factors including, without limitation, changes in national and Hawaiian economic conditions, competitive market conditions, uncertainties and costs related to, the imposition of conditions on receipt of governmental approvals and costs of material and labor, and actual versus projected timing of events all of which may cause such actual results to differ materially from what is expressed or forecast in this report.
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, the Debtors shall continue to exist after the Plan Effective Date as separate legal entities. Except as otherwise provided in the Order or the Plan, the Debtors have been discharged from all claims and liabilities existing through the Plan Effective Date. As such, all persons and entities who had receivables, claims or contracts with the Debtors that first arose prior to the Petition Date and have not previously filed timely claims under the Plan or have not previously reserved their right to do so in the Reorganization Case are precluded from asserting any claims against the Debtors or their assets for any acts, omissions, liabilities, transactions or activities that occurred before the Plan Effective Date.
On November 14, 2002, pursuant to the Plan, all of the KLC Debtors executed and delivered to Kaanapali Land a certain Secured Promissory Note in the principal amount of $70 million. Such note matures on October 31, 2011 and carries an interest rate of 3.04% compounded semi-annually. The note, which is prepayable, is secured by substantially all of the remaining real property owned by the KLC Debtors, pursuant to a certain Mortgage, Security Agreement and Financing Statement, dated as of November 14, 2002 and placed on record in December 2002. The note has been eliminated in the consolidated financial statements because the obligors are consolidated subsidiaries of Kaanapali Land.
In addition to such Secured Promissory Note, certain Non-Debtor KLC Subsidiaries continue to be liable to Kaanapali Land under certain guarantees (the "Guarantees") that they had previously provided to support certain Senior Indebtedness (as defined in the Plan) and the Certificate of Land Appreciation Notes ("COLA Notes") formerly issued by Amfac/JMB Hawaii, Inc. (as predecessor to KLC Land). Although such Senior Indebtedness and COLA Notes were discharged under the Plan, the Guarantees of the Non-Debtor KLC Subsidiaries were not. Thus, to the extent that the holders of the Senior Indebtedness and COLA Notes did not receive payment on the outstanding balance thereof from distributions made under the Plan, the remaining amounts due thereunder remain obligations of the Non-Debtor KLC Subsidiaries under the Guarantees. Under the Plan, the obligations of the Non-Debtor KLC Subsidiaries under such Guarantees were assigned by the holders 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. 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, 2004, the Company had cash and cash equivalents of approximately $45.7 million which is available for working capital requirements, including future operating expenses, and the Company's obligations for Kaanapali 2020 development costs, environmental remediation costs, including those on former mill-sites, other potential environmental costs, potential tax liabilities resulting from IRS audits, retiree medical insurance benefits for Pioneer Mill Company, and existing and possible future litigation. The primary business of Kaanapali Land is the land development of the Company's assets on the Island of Maui. The Kaanapali 2020 development plan will take many years at significant expense to fully implement, although the material portion of such anticipated expenses are not currently subject to any contractual commitments. Reference is made to Item 1 - Business, Item 3 - Legal Proceedings and the footnotes to the financial statements. Proceeds from land sales are the Company's only source of significant cash proceeds and the Company's ability to meet its liquidity needs is dependent on the timing and amount of such proceeds.
The Company's mortgage note payable as of December 31, 2004 was a loan secured by the Waikele Golf Course. The owner of the golf course repaid the mortgage in full on March 1, 2005, with proceeds obtained through a new mortgage loan granted by a subsidiary of Kaanapali Land in the original principal amount of approximately $7.2 million.
The Company's continuing operations have in recent periods been primarily reliant upon the net proceeds of sales of developed and undeveloped land parcels. A purchase money note receivable related to Lot 2 in the amount of approximately $14.4 million was paid in March 2004. A minor portion of the proceeds of the note is subject to possible adjustment based on the number of units ultimately approved for construction on the site. A purchase money note related to Lot 4 in the amount of approximately $17 million, which was due no later than August 2006, was paid in December 2004. The Company expects that it will have adequate liquidity for the foreseeable future.
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 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.
2004 COMPARED TO 2003
Cash and cash equivalents increased and notes receivable, net decreased in the accompanying balance sheets due to the collection of the notes receivable during 2004 which were received in the sales of Lots 2 and 4 during 2003.
The accumulated post-retirement benefit obligation decreased due in part to benefits paid but primarily due to the effect of the termination of most of the post-retirement obligations. Such reductions have been reflected as reduction of post-retirement benefit obligation in the Consolidated Statement of Operations.
Other liabilities decreased primarily due to the Company's payment to the U.S. Treasury as a result of the IRS' examination and resulting tax adjustments related to the Company's Federal tax returns for 1998 and 1999.
The decrease is also a result of the settlement of certain personal injury actions and the reduction of certain reserves related to obligations resulting from the sales of properties in prior years which have been completed.
Mortgage payable decreased in the accompanying balance sheets due to the debt modification agreement reached with the lender of the Waikele Golf Course. In conjunction with the loan modification, a principal payment of $1 million was made to the lender to decrease the outstanding principal balance of the note.
The decrease in sales and cost of sales is primarily due to the sale of Lot 2, the sale of Lot 4, and the sale of Parcel 22/23 during 2003.
Selling, general and administrative expense decreased primarily as a result of the recovery from an insurance company of amounts previously expensed by D/C relating to the defense of certain liability claims, a decrease in legal fees incurred during 2004 as a result of the settlement of various litigation matters during 2003 and a reduction in payroll related costs as a result of the reduction in personnel in 2004.
Interest decreased due to the settlement with a lender which resulted in the Company being released from its obligations under a mortgage indebtedness in December 2003. The decrease is also due to a lower interest rate on the mortgage payable secured by the Waikele Golf Course during the second half of 2004 as a result of the loan modification with the lender effective June 1, 2004, offset by interest paid for federal income taxes.
The reduction to carrying value of investments for the year ended December 31, 2004 represents impairment losses recognized to reduce the carrying value of certain land parcels and leasehold improvements which are not considered to be part of the Company's Kaanapali 2020 development plan.
The decrease in income tax expense is a result of the decrease in the Company's income from continuing operations as well as an increase in the deferred tax asset valuation allowance.
2003 COMPARED TO 2002
The decrease in receivables, net is primarily due to the collection of a receivable during 2003 relating to the participation in the sales price of various lots sold during 2002 by third parties in accordance with a sales contract on land sold in previous years by the Company and the collection of escrowed funds relating to a parcel sold in 2000 by the Company.
Property, net decreased and note receivable, net increased due to the sales of Lot 2 and Lot 4, the sale of Parcel 22/23 as well as the conveyance of the Oahu MS mill site property to its lender.
Accounts payable and accrued expenses decreased due to the settlement of litigation which resulted in the reversal of a litigation reserve which was recorded in a previous year. The decrease was also due to the reversal of accruals relating to the Oahu MS Mill site foreclosure as well as the reversal of accruals relating to various other litigation matters.
The accumulated post-retirement benefit obligation decreased due in part to benefits paid but primarily due to the effect of the expected termination of the post-retirement life insurance benefits at the end of 2003 and a significant portion of the health care obligations at the end of 2004. Such reductions have been reflected as reduction of post-retirement benefit obligation in the Consolidated Statement of Operations.
The decrease in Mortgage and other notes payable is due to the settlement in December 2003 with a lender which resulted in Oahu MS no longer being obligated under the loan encumbering the Oahu MS mill site property in exchange for Oahu MS conveying the property.
The investment in unconsolidated entities, at equity decrease and the gain on disposition of unconsolidated investment increase is due to the consummation of the settlement agreement with a lender, which resulted in the Company no longer having any ownership interests in or obligations related to the Royal Kaanapali Golf Courses.
The increase in sales and cost of sales is primarily due to the sale of Lot 2, the sale of Lot 4, and the sale of Parcel 22/23 during 2003.
Selling, general and administrative decreased primarily due to the reversal of certain accruals related to the settlement of litigation offset by an increase in the allowance for receivables relating to the loans made by Kaanapali Land. Because there can be no assurance that the obligor will have funds sufficient to satisfy the loans from Kaanapali Land, the total amount of the loans has been reserved.
Interest decreased principally due to the discharge of the COLA's and the Senior Indebtedness pursuant to the emergence of the Debtors from bankruptcy in 2002 and the restructuring transactions contemplated by the Plan.
Depreciation decreased principally due to the cessation of the Lihue Power Plant operations during the first quarter of 2003.
The change in equity in income (loss) from unconsolidated investments is primarily due to the Company's share of loss in 2003 from its investment in the owner of the Royal Kaanapali Golf Courses.
The increase in income tax expense is a result of the increase in the Company's income from continuing operations.
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.
At December 31, 2004, the Company's only known material contractual obligation was the mortgage loan of approximately $7.2 million which was paid off in March 2005.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the Company's financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that management believes are reasonable under the circumstances; additionally management evaluates these results on an on- going basis. Management's estimates form the basis for making judgements 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.
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 debt payments, capital expenditures and other cash requirements. Prior to the filing of the Reorganization Case, the Company's primary risk exposure had been to interest rate risk. The Company does not enter into financial instruments for trading purposes.
The Company's debt arrangement at December 31, 2004 was at a variable rate. Based upon the Company's indebtedness and interest rates at December 31, 2004, a 1% increase in market rates or a 1% decrease in market rates would have no significant effect on future earnings and cash flows.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
KAANAPALI LAND, LLC
INDEX
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets, December 31, 2004 and 2003
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
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 Shareholders Kaanapali Land, LLC
We have audited the accompanying consolidated balance sheets of Kaanapali Land, LLC (and the predecessors thereof as defined in Note 1) as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2004. 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 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. Our audit 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. Our audit also included 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 (and the predecessors thereof as defined in Note 1) at December 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Chicago, Illinois March 23, 2005
KAANAPALI LAND, LLC
Consolidated Balance Sheets
December 31, 2004 and 2003 (Dollars in Thousands, except share data)
A S S E T S ----------- 2004 2003 -------- --------
Cash and cash equivalents. . . . . . . . . . . . . $ 45,744 28,995 Receivables, net . . . . . . . . . . . . . . . . . 445 777 Property, net. . . . . . . . . . . . . . . . . . . 104,036 104,926 Notes receivable, net of deferred gain of $5,308 in 2003. . . . . . . . . . . . . . . . -- 26,058 Prepaid pension costs. . . . . . . . . . . . . . . 26,630 25,989 Other assets . . . . . . . . . . . . . . . . . . . 2,546 2,728 -------- -------- $179,401 189,473 ======== ========
L I A B I L I T I E S ---------------------
Accounts payable and accrued expenses. . . . . . . $ 1,647 2,444 Deferred income taxes. . . . . . . . . . . . . . . 25,120 19,369 Accumulated postretirement benefit obligation. . . 3,267 13,743 Other liabilities. . . . . . . . . . . . . . . . . 44,171 52,498 Mortgage note payable. . . . . . . . . . . . . . . 7,178 8,288 -------- -------- Total liabilities. . . . . . . . . . . . . 81,383 96,342
Commitments and contingencies
S T O C K H O L D E R S' E Q U I T Y -------------------------------------
Common stock, at 12/31/04 and 12/31/03 non par value (shares authorized - 4,500,000; shares issued 1,792,613 and 1,791,274, respectively . . . . . . . . . . . . . . . . . . -- -- Additional paid-in capital . . . . . . . . . . . . 5,357 5,357 Accumulated earnings . . . . . . . . . . . . . . . 92,661 87,774 -------- --------
Total stockholders' equity . . . . . . . . 98,018 93,131 -------- --------
$179,401 189,473 ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
KAANAPALI LAND, LLC
Consolidated Statements of Operations
Years ended December 31, 2004, 2003 and 2002 (Dollars in Thousands Except Per Share Amounts)
2004 2003 2002 -------- -------- -------- Revenues: Sales. . . . . . . . . . . . . . . . . $ 10,793 59,178 11,085 Interest and other income. . . . . . . 3,764 7,462 27 -------- -------- -------- 14,557 66,640 11,112 -------- -------- -------- Cost and expenses: Cost of sales. . . . . . . . . . . . . 2,693 39,564 5,176 Reduction of post-retirement benefit obligation . . . . . . . . . (8,860) (7,679) (9,520) Selling, general and administrative. . 6,897 11,332 12,505 Interest . . . . . . . . . . . . . . . 743 1,129 2,395 Depreciation and amortization. . . . . 1,136 1,164 2,994 Reduction to carrying value of investments. . . . . . . . . . . . . 1,310 -- 13,717 -------- -------- -------- 3,919 45,510 27,267 -------- -------- -------- Operating income (loss). . . . . . . . . 10,638 21,130 (16,155)
Equity in income (loss) from unconsolidated investments . . . . . -- (402) 5,180 -------- -------- -------- Income (loss) from continuing operations before income taxes, gain on disposition of uncon- solidated investment and extraordinary gain on reorganization . . . . . . . . . . . 10,638 20,728 (10,975) Income tax (expense) benefit . . . . . (5,751) (10,226) 15,141 -------- -------- -------- Income (loss) from continuing operations . . . . . . . . . . . . . 4,887 10,502 4,166 Gain on disposition of unconsolidated investment. . . . . . -- 60,134 -- Extraordinary gain on reorganization, net. . . . . . . . . -- -- 136,618 -------- -------- -------- Net income (loss). . . . . . . . $ 4,887 70,636 140,784 ======== ======== ======== Earnings per share: Income (loss) from continuing operations, basic and diluted. . . . $ 2.73 5.86 (a) ======== ======== ======== Net income (loss), basic and diluted. . . . . . . . . . . . . . . $ 2.73 39.44 (a) ======== ======== ========
(a) The income from continuing operations per share and the net income per share for the period prior to the Plan Effective Date is $3,235 and $37,389, respectively. The loss from continuing operations per share and the net loss per share for the period after the Plan Effective Date is $5 and $5, respectively.
The accompanying notes are an integral part of the consolidated financial statements.
KAANAPALI LAND, LLC
Consolidated Statements of Cash Flows
Years ended December 31, 2004, 2003 and 2002 (Dollars in Thousands)
2004 2003 2002 -------- -------- -------- Cash flows from operating activities: Net income (loss). . . . . . . . . . . $ 4,887 70,636 140,784 Adjustments to reconcile net income (loss) to net cash provided by (used in) continuing operations: Extraordinary gain on reorganiza- tion, net. . . . . . . . . . . . . -- -- (136,618) Gains on sale of property. . . . . . (5,723) (18,657) -- Gain on disposition of uncon- solidated investment . . . . . . . -- (60,134) -- Restructuring costs. . . . . . . . . -- -- (3,042) Depreciation and amortization. . . . 1,136 1,164 2,994 Equity in loss (income) from unconsolidated investments . . . . -- 402 (5,180) Reduction to carrying value of investments. . . . . . . . . . . . 695 -- 13,717 Changes in operating assets and liabilities: Receivables, net . . . . . . . . . . 332 1,118 207 Prepaid pension costs. . . . . . . . (549) (1,216) (3,465) Accumulated post-retirement benefit obligation . . . . . . . . (10,476) (9,817) (8,315) Accounts payable, accrued expenses and other. . . . . . . . . . . . . (9,117) (6,015) 2,118 Deferred income taxes. . . . . . . . 5,751 10,226 (15,141) -------- -------- --------
Net cash provided by (used in) operating activities . . . . . . . . . (13,064) (12,293) (11,941) -------- -------- --------
Cash flows from investing activities: Property additions . . . . . . . . . . (2,053) (1,190) (178) Property sales, disposals and retirements, net . . . . . . . . . . 1,610 26,994 457 Distributions from (contributions to) investments in unconsolidated entities, at equity, net . . . . . . -- (254) 10,475 Proceeds from notes receivable . . . . 31,366 -- -- -------- -------- -------- Net cash provided by investing activities . . . . . . . . . 30,923 25,550 10,754 -------- -------- --------
KAANAPALI LAND, LLC
Consolidated Statements of Cash Flows - Continued
Years ended December 31, 2004, 2003 and 2002 (Dollars in Thousands)
2004 2003 2002 -------- -------- -------- Cash flows from financing activities: Net repayments of debt . . . . . . . . (1,110) (110) (103) Settlement payments pursuant to the Plan . . . . . . . . . . . . . . -- -- (2,850) -------- -------- -------- Net cash used in financing activities . . . . . (1,110) (110) (2,953) -------- -------- -------- Net increase (decrease) in cash and cash equivalents. . . 16,749 13,147 (4,140)
Cash and cash equivalents at beginning of year . . . . . 28,995 15,848 19,988 -------- -------- -------- Cash and cash equivalents at end of year . . . . . . . . $ 45,744 28,995 15,848 ======== ======== ========
Supplemental disclosure of cash flow information: Cash paid for interest from continuing operations. . . . . . . . $ 743 643 916 ======== ======== ========
Cash received (paid) for income taxes . . . . . . . . . . . . $ (4,100) -- 8 ======== ======== ========
Extraordinary gain on reorganization: Reduction in other notes payable - COLAs. . . . . . . . . . . . . . . . $ -- -- 111,195 Reduction in deferred taxes. . . . . . -- -- 29,688 Reduction in accrued expenses. . . . . -- -- 3,059 Reduction in other assets/liabilities. -- -- 1,075 Payments of restructuring costs. . . . -- -- (3,042) Additional paid in capital - stock issuance . . . . . . . . . . . . . . -- -- (5,357) -------- -------- -------- Extraordinary gain on reorganization . $ -- -- 136,618 ======== ======== ========
Non-cash investing and financing activities: Note receivable received in sale of Lot 2 . . . . . . . . . . . . . . $ -- 14,366 -- Deferred gain. . . . . . . . . . . . . -- (5,308) -- -------- -------- -------- -- 9,058 -- Note receivable received in sale of Lot 4 . . . . . . . . . . . . . . -- 17,000 -- -------- -------- -------- Note receivable, net . . . . . . . . . $ -- 26,058 -- ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
KAANAPALI LAND, LLC
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF ACCOUNTING
Kaanapali Land, LLC ("Kaanapali Land"), a Delaware limited liability company is the reorganized entity resulting from the Joint Plan of Reorganization of Amfac Hawaii, LLC (now known as KLC Land Company, LLC ("KLC Land")), certain of its subsidiaries (together with KLC Land, the "KLC Debtors") and FHT Corporation ("FHTC" and, together with the KLC Debtors, the "Debtors") under Chapter 11 of the Bankruptcy Code, dated June 11, 2002 (as amended, the "Plan"). The Plan was filed jointly by all Debtors to consolidate each case for joint administration in the Bankruptcy Court in order to (a) permit the petitioners to present a joint reorganization plan that recognized, among other things, the common indebtedness of the debtors (i.e. the Certificate of Land Appreciation Notes ("COLAs") and Senior Indebtedness) and (b) facilitate the overall administration of the bankruptcy proceedings. As indicated in the Plan, Kaanapali Land has elected to be taxable as a corporation. The Debtors had filed their petition for reorganization under Chapter 11 on February 27, 2002 (the "Petition Date") in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the "Bankruptcy Court") which petitions were consolidated into a single joint proceeding by the Bankruptcy Court (the "Reorganization Case").
The principal goal of the Plan was to address the Debtors' debt burdens so that the Debtors could emerge from Chapter 11 with a viable capital structure and with the resources necessary to operate their land development business. The Plan achieved this goal by converting certain indebtedness and other liabilities of the Debtors into new equity of Kaanapali Land (to the extent such creditors did not elect an available cash distribution option). Another goal of the Plan was to secure additional liquidity for the Debtors to help fund future operations. The Plan achieved this goal through the Merger of Northbrook Corporation ("Northbrook") into FHTC and the subsequent merger of FHTC into Kaanapali Land, which made the assets and liquidity of Northbrook available to the Debtors to help fund their land development business.
The Plan was confirmed by the Bankruptcy Court by orders dated July 29, 2002 and October 30, 2002 (collectively, the "Order") and became effective November 13, 2002 (the "Plan Effective Date"). Kaanapali Land continues to work toward completion of the various requirements of the Plan and to implement the restructuring transactions that are contemplated to be effected under the Plan.
In accordance with the Plan, a maximum of 1,863,000 shares of Kaanapali Land were issuable. At December 31, 2004, approximately 1,793,000 shares were issued and outstanding and Kaanapali Land believes that no further shares will be issued under the Plan.
As a consequence of the merger of Northbrook into FHTC on November 8, 2002, and the subsequent merger of FHTC into Kaanapali Land on November 14, 2002, each pursuant to the Plan, the assets and liabilities of Kaanapali Land are essentially the same as those of Northbrook and its subsidiaries and, thus, Northbrook is considered to be the predecessor entity of Kaanapali Land for 2001 and the portion of 2002 prior to the Plan Effective Date was used and accordingly there was no effect on the consolidated financial statements of the Company as a result of these mergers. As greater than 85% of the shareholders in Kaanapali Land were shareholders or affiliates of shareholders in Northbrook, the assets and liabilities of Northbrook and FHTC merged into Kaanapali Land were recorded at their historical cost. The Company did not adopt fresh-start reporting due to the fact that holders of existing shares of Northbrook immediately before the confirmation received greater than 50% of the successor entity under the Plan. Subject to the foregoing, the occurrence of the Plan Effective Date did not result in a change in the Company's basis of accounting. The principal effect on the Company's 2002 financial statements was to (i) cease recording interest expense on the COLAs subsequent to the Petition Date and (ii) recognize an extraordinary gain on reorganization upon the confirmation of the Plan, net of restructuring costs.
Absent any change in the Company's basis of accounting, the presentation of predecessor financial statements has not been considered material to a fair presentation or meaningful to an understanding of the financial condition and results of operations of the Company. Fresh-start accounting was not adopted as the successor entity (Kaanapali Land LLC) had no previous operations and is a successor by merger to the predecessor entity (Northbrook Corporation) that had, on a consolidated basis, the same operations as the successor upon emergence from bankruptcy. Further, the financial statements are comparable between periods as the remaining assets and liabilities are carried at the same basis. The successor is not a new entity and, as part of the Plan, there were no divestitures of segments, disposal of assets, or other changes in the basic operations of the Company.
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. The liabilities compromised by the Plan have been presented at the present value of amounts expected to be paid as of the Plan Effective Date, which has been estimated to approximate the historical carrying values of such liabilities. Accordingly, the carrying value of all remaining liabilities at the Plan Effective Date reflected the present value of the amounts expected to be paid. 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 processed and marketed coffee (prior to the shutdown of operations in September 2001) and continues to grow seed corn under contract and lease land currently cultivated in coffee to a third party, 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 9.
STATEMENT OF CASH FLOWS
The Company considers as cash equivalents all investments with maturities of three months or less when purchased.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("SFAS No. 107"), "Disclosures about Fair Value of Financial Instruments", requires entities to disclose the SFAS No. 107 value of certain on and off balance sheet financial instruments for which it is practicable to estimate. Value is defined in SFAS No. 107 as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Company believes the carrying amounts of its financial instruments on its balance sheet approximate SFAS No. 107 value due to the relatively short maturity of these instruments. The Company believes the carrying value of its debt (see Note 3) approximates fair value.
RECEIVABLES
The allowance for doubtful receivables was $1,476 and $2,115 at December 31, 2004 and 2003, respectively.
LAND DEVELOPMENT
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 is capitalized to qualifying assets during the period that such assets are undergoing activities necessary to prepare them for their intended use. No interest has been capitalized for the periods presented.
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, 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, 2004, the Company held approximately $1,900 of non-depreciable land improvements and approximately $3,300 of depreciable land improvements, relating principally to the Waikele Golf Course, which are being depreciated over their estimated 15-year useful life. Maintenance and repairs are charged to operations as incurred. Significant betterments and improvements are capitalized and depreciated over their estimated useful lives.
In 2004 and 2002, the Company recognized impairment losses of $1,310 and $13,717, respectively. The 2004 impairment loss was primarily to reduce the carrying value of certain land parcels and leasehold improvements. The 2002 impairment loss consisted of the reduction of the carrying value of certain land parcels. The land parcels were not considered to be part of future development plans as such land parcels are not part of the Company's Kaanapali 2020 development plan.
Provisions for impairment losses related to long-lived assets, if any, are recognized when expected future cash flows are less than the carrying values of the assets. If indicators of impairment are present, the Company evaluates the carrying value of the related long-lived assets in relationship to the future undiscounted cash flows of the underlying operations or anticipated sales proceeds. The Company adjusts the net book value of property to fair value if the sum of the expected future cash flow or sales proceeds is less than book value. Assets held for sale are recorded at the lower of the carrying value of the asset or fair value less costs to sell.
2004 2003 -------- --------
Property, net: Land . . . . . . . . . . . . . . . . . . $ 89,833 90,528 Land improvements. . . . . . . . . . . . 4,658 3,344 Buildings. . . . . . . . . . . . . . . . 19,766 19,766 Machinery and equipment. . . . . . . . . 12,947 19,217 -------- -------- 127,204 132,855 Accumulated depreciation . . . . . . . . (23,168) (27,929) -------- -------- Property, net. . . . . . . . . . . . . . $104,036 104,926 ======== ========
Land held for sale of approximately $14,000, none of which has any current operations, is included in Property in the consolidated balance sheets at December 31, 2004 and 2003 and is 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 million at December 31, 2004), an approximate 800 acres of Kaanapali 2020 land that has been set aside for the Company's seed corn operations and an approximate 120 acres of coffee trees that have been leased to a third party.
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 $77 million. In addition, the Company's property holdings on the island of Oahu have a carrying value of approximately $27 million. The Company has determined, based on its current projections for the development and/or disposition of its property holdings, that the property holdings are not currently recorded in an amount in excess of proceeds that the Company expects that it will ultimately obtain from the disposition thereof.
LAND SALES AND MORTGAGES RECEIVABLE
On January 31, 2003, an option to purchase Lot 2 (an approximate 11.5 acre site in the North Beach area of Kaanapali) was exercised. A non- refundable payment was made for $2,000 (before closing costs and prorations). The remainder of the purchase price was reflected by a note secured by a mortgage due and paid in March 2004 for approximately $14,000.
A minor portion of the proceeds of the note is subject to possible later adjustment based on the number of units ultimately approved for construction on the site.
The Company recorded the sale under the cost recovery method of accounting. The full note was recorded, offset by the entire deferred gain of approximately $5,308 at December 31, 2003. The deferred gain was recognized during 2004 based upon the anticipated number of units approved for construction on the site.
On August 5, 2003, the Company closed the sale of Lot 4 (an approximate 40 acre site in the North Beach area of Kaanapali) for a purchase price of $33,000. The cash portion of the purchase price (before closing costs and prorations) of $16,000 was paid at closing and the balance was delivered in the form of a promissory note in the original principal amount of $17,000. The promissory note was paid in December 2004. The promissory note was secured by a first mortgage encumbering Lot 4, and bore interest at the rate of 8% per annum. Interest payments were paid monthly. The Company recognized approximately $13,000 of gain related to this transaction for financial reporting purposes during the third quarter of 2003.
At closing, the Company also granted to the purchaser an option to purchase Lot 3, which expires in August 2005. The option price consists of a base price of $22,500, which is subject to potential adjustment upward depending on the number of units permitted to be developed on Lots 3 and 4, and also an adjustment for inflation if the option is exercised after January 1, 2005. There can be no assurance that such option will be exercised or the timing thereof.
In December 2003, the Company closed on its sale of Parcel 22/23 to a third party for a purchase price of $12,500. Approximately $11,500 was received in cash at closing and the Company deposited approximately $1,000 into an escrow account. The Company recognized a gain of approximately $4,000 related to the transaction for financial reporting purposes in 2003.
In conjunction with the sale, the Company has agreed to pay a portion of the cost of certain roadway improvements and pay the costs of the design and construction of an underground sewer line and drainage construction as well as the cost of certain other improvements. Such escrowed funds will fund the Company's portion of the costs associated with the road improvements and the sewer and drainage construction costs. The Company is responsible for certain costs in excess of the escrowed funds associated with the road improvements and sewer and drainage construction costs and has accrued approximately $1,000 in excess of the amount escrowed as an estimate of such costs. These improvement projects are proceeding and are expected to be completed during 2005.
OTHER LIABILITIES
Other liabilities includes project completion costs on land sold in prior years, reserves for losses on divested segments, reserves for workmen's compensation and general liability claims, and reserves for commitments and contingencies as discussed in Note 8, including potential tax liabilities.
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.
RECLASSIFICATIONS
Certain amounts in the 2003 and 2002 consolidated financial statements have been reclassified to conform to the 2004 presentation.
(2) INVESTMENTS
The Company owns approximately 16.67% of Amfac Property Investment Corp. ("APIC"), which owned and operated the Royal Kaanapali Golf Courses ("RKGC") prior to the consummation of the settlement agreement with its lender. The remaining approximately 83.33% of the shares of APIC are owned by AF Investors, LLC ("AF Investors") which is a subsidiary of Amfac Finance Limited Partnership ("AFLP").
In December 2002, AFLP redeemed the interest held by Kaanapali Land (as successor to Northbrook) for approximately $60. Kaanapali Land remained obligated under certain circumstances to fund costs related to, among other things, golf course improvements required under the settlement agreement with the lender. A portion of these funding obligations was anticipated to be reimbursed by AFLP under the Funding Agreement entered into by Kaanapali Land, AFLP and certain other affiliated entities in October 2002. Subsequently, due to adverse developments in certain litigation, the expected source of funds to AFLP to make such repayments became impaired and it now appears doubtful that the Company will receive any meaningful portion of the amounts that were previously expected to be reimbursed under the Funding Agreement. The Company continued to record its investment in unconsolidated entities due to its funding obligations and because the Company was awaiting final consummation of the settlement agreement with the lender. The agreement was consummated on September 9, 2003, and as a consequence, the Company recorded a gain on disposition of its investment of approximately $60,134 for financial reporting purposes which represented the extent of the amount recorded as investment in unconsolidated entities.
In addition, equity in income (loss) from unconsolidated investments includes the gain from the 2002 sale of an interest in a hotel and the Company's share of the results of operations of the hotel prior to the sale of the Company's interest.
(3) MORTGAGE NOTE PAYABLE
The Waikele Golf Course mortgage note payable, secured by the Waikele Golf Course, had an outstanding principal balance of $7,178 and $8,288 at December 31, 2004 and 2003, respectively. The loan had certain cash flow and other financial covenants.
Effective June 1, 2004, the debt was modified pursuant to a loan modification agreement with the lender. In accordance with the agreement, a $1,000 principal payment was made to the lender to reduce the outstanding principal balance of the note, the interest rate was modified to LIBOR plus 4.25% with no LIBOR floor (6.43% at December 31, 2004), and the debt was extended to mature on December 1, 2011. The loan continued to have certain cash flow and other financial covenants. Waikele Golf Course, LLC repaid the mortgage in full on March 1, 2005, with proceeds obtained through a new mortgage loan granted by a subsidiary of Kaanapali Land in the original principal amount of approximately $7,200.
(4) 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 leases various office spaces with average annual rental of approximately $250 per year. Leases expire at various times through December 2005. Although the Company is a party to certain other leasing arrangements, none of them are material.
Certain leases where Debtors were the lessee were rejected pursuant to the Plan, which reduced any pre-Petition debt and prospective liability of the Company for those leases into claims that were allowed under the Plan, and have been satisfied or discharged.
(5) EMPLOYEE BENEFIT PLANS
(a) PENSION PLANS
As of December 31, 2004, the Company participates in a defined benefit pension plan that covers substantially all its eligible employees. The Plan is sponsored and maintained by Kaanapali Land in conjunction with other plans providing benefits to employees of Kaanapali Land and its affiliates. The Pension Plan for Bargaining Unit Employees of Amfac Plantations (the "Pension Plan") provides benefits based primarily on length of service and career-average compensation levels. Accordingly, there is no difference between the accumulated benefit obligation and the projected benefit obligation. Kaanapali Land's policy is to fund pension costs in accordance with the minimum funding requirements under provisions of the Employee Retirement Income Security Act ("ERISA"). Under such guidelines, amounts funded may be more or less than the pension expense or credit recognized for financial reporting purposes.
The following tables summarize the components of the funded status of the Company's defined benefit pension plan at December 31, 2004 and 2003, the net pension credit for 2004, 2003 and 2002, and major assumptions used to determine these amounts.
2004 2003 ------- -------
Benefit obligation at beginning of year. . . . . . $44,922 42,731 Service cost . . . . . . . . . . . . . . . . . . . 62 65 Interest cost. . . . . . . . . . . . . . . . . . . 2,695 2,939 Actuarial loss . . . . . . . . . . . . . . . . . . 1,928 4,720 Special termination benefit. . . . . . . . . . . . -- 1,404 Benefits paid. . . . . . . . . . . . . . . . . . . (4,615) (6,937) ------- ------- Benefit obligation at end of year. . . . . . . . . 44,992 44,922 ------- -------
Fair value of plan assets at beginning of year . . 67,870 60,515 Actual return on plan assets . . . . . . . . . . . 8,701 14,292 Benefits paid. . . . . . . . . . . . . . . . . . . (4,615) (6,937) ------- ------- Fair value of plan assets at end of year . . . . . 71,956 67,870 ------- -------
Funded status. . . . . . . . . . . . . . . . . . . 26,964 22,948 Unrecognized net actuarial (gain) loss . . . . . . (344) 3,029 Unrecognized prior service cost. . . . . . . . . . 10 12 ------- ------- Prepaid pension cost . . . . . . . . . . . . . . . $26,630 25,989 ======= =======
Unrecognized net gains or losses are amortized over a ten year period.
At December 31, 2004, approximately 53% of the plan's assets are invested in equity securities, 17% in fixed income funds and 30% in alternative strategies.
The components of the net periodic pension benefit (credit) for the years ended December 31, 2004, 2003 and 2002 (which are reflected as other income in the consolidated statements of operations) are as follows:
2004 2003 2002 ------- ------- -------
Service cost . . . . . . . . . . . . . . $ 62 65 49 Interest cost. . . . . . . . . . . . . . 2,695 2,939 3,041 Expected return on plan assets . . . . . (4,266) (4,647) (5,462) Recognized net actuarial (gain) loss . . . . . . . . . . . . . . . . . 867 154 (865) Amortization of prior service cost . . . 1 1 (11) Special termination benefit. . . . . . . -- 1,404 953 ------- ------- -------
Net periodic pension credit. . . . . . . $ (641) (84) (2,295) ======= ======= =======
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, 2004 2003 2002 ---------------- ------- ------- -------
Discount rate. . . . . . . . . . . . . . 6.25% 7.0% 7.5% ======= ======= =======
Rates of compensation increase . . . . . 3% 3% 3%
Expected long-term rate of return on assets. . . . . . . . . . . . . . . 7.0% 7.0% 7.5% ======= ======= =======
As of December 31, 2004 2003 2002 ------------------ ------- ------- -------
Discount rate. . . . . . . . . . . . . . 5.9% 6.25% 7.0% ======= ======= =======
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, 2004 and 2003 equals approximately $45,000 and $44,900, 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 is no required contribution payable in 2004 to the pension plan.
Furthermore, due to ERISA full funding limits, no contribution, whether required or discretionary, could be made and deducted on the corporation's tax return for the current fiscal year.
The Company's target asset allocations reflect the Company's investment strategy of maximizing the rate of return on plan assets and the resulting funded status, within an appropriate level of risk. Plan assets are reviewed and, if necessary, rebalanced in accordance with target allocation levels once every three months.
(b) RETIREE HEALTH AND LIFE INSURANCE BENEFITS
In addition to providing pension benefits, a subsidiary of KLC Land currently provides certain healthcare and life insurance benefits to certain eligible retired employees. Where such benefits are offered, substantially all employees may become eligible for such benefits if they reach a specified retirement age while employed by KLC Land (or the applicable affiliate) and if they meet a certain length of service criteria. The postretirement healthcare plan is contributory and contains cost-sharing features such as deductibles and copayments. However, these features, as they apply to bargaining unit retirees, are subject to collective bargaining provisions of a labor contract between each such entity and the International Longshoremen's & Warehousemen's Union as they may have been amended or settled through agreements or memoranda executed with the union at about the time each operating facility was closed. The postretirement life insurance plan is non-contributory.
Other entities continued to fund benefit costs for both plans on a pay-as-you-go basis, and each entity continued funding its post-retirement health care obligations until the end of 2004, which was a date on or after the date when its required cost maintenance period as defined under Internal Revenue Code Section 420 expired. Retiree medical benefits for these entities terminated at the end of 2004. Most post-retirement life insurance benefits were terminated effective at the end of 2003. Kaanapali Land has not assumed any obligation to fund the cost of these benefits on behalf of any of its affiliates.
For measuring the expected postretirement benefit obligation, an 11% annual rate of increase in the per capita claims cost was assumed through 2004. The healthcare cost trend rate assumption has a significant effect on the amount of the obligation and periodic cost reported. An increase (decrease) in the assumed healthcare trend rate by 1% in 2004 would increase (decrease) the medical plans' accumulated postretirement benefit obligation as of December 31, 2004 by $26 and $(24), respectively, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $7 and $(6), respectively.
Net periodic postretirement benefit credit for 2004, 2003 and 2002 includes the following components:
2004 2003 2002 Total Total Total ------- ------- -------
Service cost . . . . . . . . . . . . $ 12 1 1 Interest cost. . . . . . . . . . . . 284 550 622 Amortization of net gain . . . . . . (8,208) (7,777) (7,879) Recognized settlement gain . . . . . (948) (499) (233) ------- ------- ------- Net periodic postretirement benefit credit . . . . . . . . . . $(8,860) (7,725) (7,489) ======= ======= =======
The following table sets forth the plans' change in benefit obligation and benefit cost as of December 31, 2004 and 2003 as follows:
December 31, December 31, 2004 2003 ------------ ------------
Benefit obligation at beginning of year. $ 5,343 8,906 Service cost . . . . . . . . . . . . . . 12 1 Interest cost. . . . . . . . . . . . . . 284 550 Actuarial losses (gain). . . . . . . . . (72) 396 Employer contribution. . . . . . . . . . (1,616) (2,091) Plan change. . . . . . . . . . . . . . . -- (2,419) Settlement . . . . . . . . . . . . . . . (948) -- ------- ------- Benefit obligation at end of year. . . . 3,003 5,343 Unrecognized net actuarial gain. . . . . 264 8,400 ------- ------- Accumulated postretirement benefit cost. $ 3,267 13,743 ======= =======
The subsidiary's expected contributions for 2005 are approximately $345.
The subsidiary continuing to provide benefits currently amortizes unrecognized gains over the shorter of ten years or the average life expectancy of the inactive participants since almost all of the Plans' participants are inactive. The portion of the unrecognized net actuarial gain represented by the decrease in the Maintenance of Effort obligation was being amortized over four years, commencing in 2001.
The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 5.90% as of December 31, 2004 and 6.25% as of December 31, 2003.
At the time the Company performed its calculations related to the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the "Act") final rules were not yet released. The Company has not yet determined if its plan is Actuarially Equivalent (as defined in the Act) and thus, no adjustment has yet been recorded in the consolidated financial statements.
(6) INCOME TAXES
Income tax expense (benefit) attributable to income from continuing operations for the years ended December 31, 2004, 2003 and 2002 consists of:
Current Deferred Total -------- -------- -------- Year ended December 31, 2004: U.S. federal. . . . . . . . . $ -- 5,161 5,161 State . . . . . . . . . . . . -- 590 590 -------- -------- -------- $ -- 5,751 5,751 ======== ======== ======== Year ended December 31, 2003: U.S. federal. . . . . . . . . $ -- 9,177 9,177 State . . . . . . . . . . . . -- 1,049 1,049 -------- -------- -------- $ -- 10,226 10,226 ======== ======== ======== Year ended December 31, 2002: U.S. federal. . . . . . . . . $ -- (13,588) (13,588) State . . . . . . . . . . . . -- (1,553) (1,553) -------- -------- -------- $ -- (15,141) (15,141) ======== ======== ========
Income tax benefit 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 loss from operations as a result of the following: 2004 2003 2002 -------- -------- -------- Computed "expected" tax provision (benefit) . . . . . . . . . . . . . $ 3,723 7,255 (3,842) Increase (reduction) in income taxes resulting from: Increase (reduction) in valuation allowance. . . . . . . 2,365 3,756 (12,766) Other, net . . . . . . . . . . . . (337) (785) 1,467 -------- -------- -------- Total. . . . . . . . . . . . . $ 5,751 10,226 (15,141) ======== ======== ========
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, 2004 and 2003 are as follows: 2004 2003 -------- -------- Deferred tax assets: Post retirement benefits . . . . . . . . . $ (1,274) (5,360) Reserves related primarily to losses on divestitures. . . . . . . . . . . . . (8,491) (9,583) Loss carryforwards . . . . . . . . . . . . (6,216) (4,776) Tax credit carryforwards . . . . . . . . . (4,081) (4,144) Other, net . . . . . . . . . . . . . . . . (1,772) (3,301) -------- -------- Total deferred tax assets. . . . . . . . (21,834) (27,164) Less - valuation allowance . . . . . . . 10,297 7,932 -------- -------- Net deferred tax assets. . . . . . . . . (11,537) (19,232) -------- -------- Deferred tax liabilities: Property, plant and equipment, principally due to purchase accounting adjustments, net of impairment charges. . . . . . . . 25,667 28,465 Prepaid pension and core retirement award costs. . . . . . . . . . . . . . . 10,990 10,136 -------- -------- Total deferred tax liabilities . . . . 36,657 38,601 -------- -------- Net deferred tax liability . . . . . . $ 25,120 19,369 ======== ========
Subject to the results of the contest with respect to the Company's 2000 U.S. Federal income tax return described below, the Company at December 31, 2004 has net operating loss carryforwards ("NOLs") for Federal income tax purposes of approximately $9,000 and approximately $65,000 for state income tax purposes which can be used to offset taxable income, if any, in future years. The federal NOLs begin to expire in 2020 and the state NOLs begin to expire in 2005.
As a result of the examination relative to 2000, the IRS has asserted a deficiency in taxes, which the Company is contesting. Federal tax return examinations have been completed for years through 1999. All required payments for taxes due and interest, including approximately $4,000 in 2004 for 1998 and 1999, have been made. The statutes of limitations with respect to the Company's tax returns for 2001 and subsequent years remain open. The Company believes adequate provisions for income tax have been recorded for all years.
(7) 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, 2004, 2003 and 2002 was approximately $8, $102 and $75, respectively, all of which was paid as of December 31, 2004.
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, 2004.
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 affiliate, Management Services, LLC, during 2004. The total costs for the years ended 2004, 2003 and 2002 were approximately $1,800, $1,800 and $2,000, respectively, of which approximately $378 was unpaid as of December 31, 2004.
The Company had other amounts due from affiliates of approximately $300 at December 31, 2003. The amounts were paid during 2004.
(8) COMMITMENTS AND CONTINGENCIES
Material legal proceedings of the Company are described below. Unless otherwise noted, the parties adverse to the Company in the legal proceedings described below have not made a claim for damages in a liquidated amount and/or the Company believes that it would be speculative to attempt to determine the Company's exposure relative thereto, and as a consequence believes that an estimate of the range of potential loss cannot be made. In proceedings filed prior to the Petition Date where a Debtor is a defendant, such proceedings were stayed as against such Debtor by the filing of the Reorganization Case. Those proceedings may now continue since the Plan Effective Date has occurred so long as the plaintiffs therein filed timely claims under the Plan. However, any judgments rendered therein would be subject to the distribution provisions of the Plan, which would in most cases result in the entitlement of such claims to proceeds that are 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. Proceedings against subsidiaries or affiliates of Kaanapali Land that are not Debtors were not stayed by the Plan and may proceed.
On June 3, 2003, Trustees filed a Complaint against Oahu MS and City Bank in Trustees Under the Will and the Estate of Bernice Paugahi Bishop, deceased, also known as Kamehameha Schools v. Amfac Property Development Corp., et al, in the Circuit Court of the First Circuit, State of Hawaii, Civil No. 03-1-1154-05, seeking, among other things, cancellation of certain leases with APDC, collection of unpaid net rents on the leases, and appointment of a receiver to collect future subrents under the subleases. Concurrent therewith, Trustees filed a motion for appointment of receiver. Oahu MS filed its answer on June 24, 2003.
On October 22, 2004, the parties entered into a settlement agreement to resolve the case and related issues. Under the terms of the settlement, and in consideration of among other things APDC's payment of $400 to Bishop Estate, the parties have entered into mutual releases of pending claims arising out of or in connection with the pending lawsuit, the leased properties, and the receivership. Pursuant to the terms of the settlement, the above-mentioned sum was paid and the leases were cancelled effective December 29, 2004. The stipulation to dismiss the suit is expected to be filed shortly.
On or about February 23, 2001 Kekaha Sugar Co., Ltd., a subsidiary of Kaanapali Land, received a letter from the Hawaii Department of Health ("HDOH") assigning the Kekaha Sugar Co., Ltd. site a high priority status based on HDOH's review of available environmental data. In the letter, HDOH identified five major areas of potential environmental concern including the former wood treatment plant, the herbicide mixing plant, the seed dipping plant, the settling pond, and the Kekaha Sugar Mill. While setting forth specific concerns, the HDOH reserved the right to designate still further areas of potential concern which might require further investigation and possible remediation. HDOH further reserved the right to modify its prioritization of the site should conditions warrant. The assignment of the high priority status will likely result in a high degree of oversight by the HDOH as the issues raised are studied and addressed. Kekaha Sugar Co., Ltd. has responded to the letter. The United States Environmental Protection Agency has performed a visual inspection of the property and indicated there will be some testing performed. HDOH has performed some testing at the site and results are pending. Kekaha Sugar Co., Ltd. is substantially without assets and further pursuit of this matter by HDOH could have a material adverse effect on the financial condition of Kekaha Sugar Co., Ltd.
On or about February 23, 2001, Lihue Plantation received a similar letter from the HDOH assigning the LPCo site a high priority status based on HDOH's review of available environmental data. In the letter, HDOH identified four major areas of potential environmental concern including the Lihue Plantation herbicide mixing plant, the seed dipping plant, the settling pond and the Lihue Sugar Mill. While setting forth specific concerns, the HDOH reserved the right to designate still further areas of potential concern which might require further investigation and possible remediation. 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. Lihue Plantation is substantially without assets and further pursuit of this matter by HDOH could have a material adverse effect on the financial condition of LPCo.
Pioneer Mill was engaged in a modest cleanup operation arising out of the discovery of petroleum contamination found at the Pioneer Mill site. The Pioneer Mill site was assigned a high priority by the HDOH and the HDOH has shown an interest in the environmental conditions relating to or arising out of the former operations of Pioneer Mill. EPA has 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 United States Environmental Protection Agency 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. It is possible that further cleanup operations may become necessary in connection with the planned demolition of the former sugar mill buildings on the site.
As a result of an administrative order issued to Oahu Sugar by the HDOH, Order No. CH 98-001, dated January 27, 1998, Oahu Sugar is currently engaged in environmental site assessment of lands it leased from the U.S. Navy and located on the Waipio Peninsula. Oahu Sugar has submitted a Remedial Investigation Report to the HDOH. The HDOH has provided comments which indicate additional testing may be required. Oahu Sugar has responded to these comments with additional information. Oahu Sugar is substantially without assets and further pursuit of this matter by HDOH could have a material adverse effect on the financial condition of Oahu Sugar. 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 seeks, among other things, information relating to the ability of Oahu Sugar to pay for or perform a clean up of the land formerly occupied by Oahu Sugar. Oahu Sugar is in the process of responding to the information requests. Oahu Sugar received an order from EPA that would purport to require certain testing and remediation of the site. Oahu Sugar is in the process of evaluating the order. The cost of compliance can not be estimated at this time. However, Oahu Sugar is substantially without assets and the pursuit of any action, informational, enforcement, or otherwise, could have a material adverse effect on the financial condition of Oahu Sugar.
The IRS filed a claim in the bankruptcy proceedings in the aggregate amount of approximately $20,600 for taxes, interest and penalties related to the years 1998-2000. The Company entered into a stipulation with the IRS whereby the IRS withdrew its claim due to the fact that the Plan left the IRS unimpaired relative to any taxes that may be due. As a result of the examination relative to 2000, the IRS has asserted a deficiency in taxes, which the Company is contesting. Federal tax return examinations have been completed for years through 1999 and all required payments for taxes due and interest have been made. The statutes of limitations with respect to the Company's tax returns for 2001 and subsequent years remain open. The Company believes adequate provisions for income tax have been recorded for all years. However, there can be no assurance that the Company will be successful in such contest and, although the Company has reserved for potential tax liabilities on its financial statements, to the extent that the Company is unsuccessful in defending against any such claims, the amount for which the Company could be liable could be material.
On February 15, 2005, D/C Distribution 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. In the eight-count complaint for declaratory relief, reimbursement and recoupment of unspecified amounts, costs and for such other relief as the court might grant, plaintiff alleges that it is an insurance company to whom D/C has tendered for defense and indemnity various personal injury lawsuits allegedly based on exposure to asbestos containing products. Plaintiff alleges that because none of the parties have been able to produce a copy of the policy or policies in question a judicial determination of the material terms of the missing policy or policies is needed. Plaintiff seeks, among other things, a declaration: of the material terms, rights, and obligations of the parties under the terms of the policy or policies; that the policies have been exhausted; that plaintiff is not obligated to reimburse D/C for its attorneys' fees in that the amounts of attorneys' fees incurred by D/C have been incurred, unreasonably; that plaintiff is entitled to recoupment and reimbursement of some or all of the amounts it has paid for defense and/or indemnity; and that D/C has breached its obligation of cooperation with plaintiff. The litigation is in its early stages and D/C believes that it has meritorious defenses and positions, and intends to vigorously defend.
Kaanapali Land, as successor by merger to other entities, and D/C Distribution Corporation ("D/C"), a subsidiary of Kaanapali Land, have been named as defendants in personal injury actions allegedly based on exposure to asbestos. There are approximately 60 cases against such subsidiary that are pending on the mainland and are alleged based on such subsidiary's prior business operations. Each company believes that it has meritorious defenses against these actions, but can give no assurances as to the ultimate outcome of these cases. In the case of D/C, there can be no certainty that it will be able to satisfy all of its liabilities for these cases, as it is without assets to satisfy any material existing or future judgments, there can be no assurances that these cases (or any of them), if adjudicated in a manner adverse to the subsidiary, will not have a material adverse effect on the financial condition of such subsidiary. Kaanapali Land does not believe that it has liability, directly or indirectly, for such subsidiary's obligations.
Northbrook Corporation ("Northbrook"), a predecessor by merger to Kaanapali Land was named in a lawsuit filed in August 2003 in the Circuit Court of Cook County, Chicago, Illinois, styled Silverado Golf & Country Club, Inc. v. JMB Realty Corporation and Northbrook Corporation. The lawsuit sought unspecified damages and alleged that the defendants engaged in fraudulent conduct in connection with the administration and termination of a defined benefit pension plan that had been sponsored by Northbrook Corporation and certain affiliates and predecessors. In the eight count amended complaint, plaintiff sought unspecified general damages, the imposition of a constructive trust, an accounting, attorneys' fees and costs, interest, punitive damages and such other further relief as deemed appropriate by the court under the circumstances. The amended complaint was dismissed with prejudice on March 4, 2005, pursuant to a settlement and without any payment of money by defendants.
Other than as described above and the Reorganization Case as described above, the Company is not involved in any material pending legal proceedings, other than ordinary routine litigation incidental to its business. The Company and/or certain of its affiliates have been named as defendants in several pending lawsuits. While it is impossible to predict the outcome of such routine litigation that is now pending (or threatened) and for which the potential liability is not covered by insurance, the Company is of the opinion that the ultimate liability from any of this litigation will not materially adversely affect the Company's consolidated results of operations or its financial condition.
(9) BUSINESS SEGMENT INFORMATION
As described in Note 1, the Company operates in three business segments. Total revenues, operating profit, identifiable assets, capital expenditures, and depreciation and amortization by business segment are presented in the tables below.
Total revenues by business segment includes primarily (i) sales, all of which are from unaffiliated customers and (ii) interest income that is earned from outside sources on assets which are included in the individual industry segment's identifiable assets.
Operating profit is comprised of total revenue less operating expenses. In computing operating profit, none of the following items have been added or deducted: general corporate revenues and expenses, interest expense, income taxes, and equity in income (loss) from unconsolidated investments.
Identifiable assets by business segment are those assets that are used in the Company's operations in each industry. Corporate assets consist principally of cash and cash equivalents, prepaid pension costs and receivables related to previously divested businesses. Investments in net assets of unconsolidated investments are related to ownership interests held by the Company primarily in various real estate related entities.
2004 2003 2002 -------- -------- -------- Revenues: Property . . . . . . . . . . . . . $ 8,139 61,492 4,753 Agriculture . . . . . . . . . . . 1,354 1,241 1,972 Golf . . . . . . . . . . . . . . . 3,843 4,141 4,360 Corporate. . . . . . . . . . . . . 1,221 5,074 27 -------- -------- -------- $ 14,557 71,948 11,112 ======== ======== ========
Operating income (loss): Property . . . . . . . . . . . . . $ 4,981 21,234 1,323 Agriculture . . . . . . . . . . . 973 (912) (8,028) Golf . . . . . . . . . . . . . . . 381 580 764 -------- -------- --------
Operating income (loss). . . . . . . 6,335 20,902 (5,941)
Corporate. . . . . . . . . . . . . . 5,046 1,357 (7,819) Interest expense . . . . . . . . . . (743) (1,129) (2,395) Equity in income (loss) from unconsolidated investments . . . . -- (402) 5,180 -------- -------- -------- Income (loss) from continuing operations before income taxes, gain on disposition of uncon- solidated investment and extraordinary gain on re- organization . . . . . . . . . . . $ 10,638 20,728 (10,975) ======== ======== ========
Identifiable Assets: Property . . . . . . . . . . . . . $ 62,009 65,919 55,970 Agriculture. . . . . . . . . . . . 51,137 48,091 51,419 Golf . . . . . . . . . . . . . . . 27,362 29,084 29,076 -------- -------- --------
140,508 143,094 136,465
Corporate. . . . . . . . . . . . . . 38,893 46,379 53,161 -------- -------- -------- $179,401 189,473 189,626 ======== ======== ========
Agricultural identified assets include land classified as agricultural or conservation for State and County purposes.
2004 2003 2002 -------- -------- -------- Capital Expenditures: Property . . . . . . . . . . . . . $ 1,737 861 -- Agriculture. . . . . . . . . . . . 2 197 -- Golf . . . . . . . . . . . . . . . 314 132 163 Corporate. . . . . . . . . . . . . -- -- 15 -------- -------- -------- $ 2,053 1,190 178 ======== ======== ========
2004 2003 2002 -------- -------- -------- Depreciation and Amortization: Property . . . . . . . . . . . . . $ 92 87 90 Agriculture. . . . . . . . . . . . 91 60 1,417 Golf . . . . . . . . . . . . . . . 535 609 552 Corporate. . . . . . . . . . . . . 418 408 935 -------- -------- -------- Total. . . . . . . . . . . . . . . . $ 1,136 1,164 2,994 ======== ======== ========
(10) CALCULATION OF NET INCOME PER SHARE
The following tables set forth the computation of net income (loss) per share - basic and diluted: For the For the Period Period January 1, November 14, Year Ended Year Ended 2002 through 2002 through December 31, December 31, November 13, December 31, 2004 2003 2002 2002 ------------ ------------ ------------ ------------ (Amounts in thousands except per share amounts) NUMERATOR: Operating income (loss) . . . . . . . $ 10,638 21,130 (2,117) (14,038) ========== ========== ========== ========== Equity in income (loss) from unconsolidated investments. . . . . -- (402) 5,525 (345) ========== ========== ========== ========== Income (loss) from continuing operations . . . . . 4,887 10,502 12,939 (8,773)
Gain on disposition of unconsolidated investment . . . . . -- 60,134 -- --
Extraordinary gain . . -- -- 136,618 -- ---------- ---------- ---------- ---------- Net income (loss). . . $ 4,887 70,636 149,557 (8,773) ========== ========== ========== ========== DENOMINATOR: Denominator for net income (loss) per share - basic and diluted. . 1,793 1,791 4 1,863 ========== ========== ========== ========== Net income (loss) per share - basic and diluted. . $ 2.73 39.44 37,389.34 (4.71) ========== ========== ========== ========== Net income per share - basic and diluted: Income (loss) from continuing operations . . . . . $ 2.73 5.86 3,234.84 (4.71) Gain on disposition of unconsolidated investment . . . . . -- 33.58 -- -- Extraordinary gain . . -- -- 34,154.50 -- ---------- ---------- ---------- ---------- Net income per share basic and diluted. . . . . . . $ 2.73 39.44 37,389.34 (4.71) ========== ========== ========== ==========
Pursuant to the Plan, a maximum of 1,863,000 shares of the Company were issuable. As of December 31, 2004, the Company had issued and outstanding 1,631,513 Class B shares, non par value, and approximately 161,100 Class A shares, non par value stock. The Company does not expect to issue any additional shares under the Plan. The LLC Agreement provides for two classes of membership interests, Class A Shares and Class B Shares, which have substantially identical rights and economic value under the LLC Agreement; except that holders of Class A Shares are represented by a "Class A Representative" who must approve certain transactions proposed by Kaanapali Land before they can be undertaken. Class B Shares are held by Pacific Trail and various entities and individuals that are affiliated with Pacific Trail. Class A Shares were issued under the Plan to claimants who had no such affiliation.
ITEM 9.
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 2004, 2003 and 2002.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
The principal executive officer and the principal financial officer of the Company have evaluated the effectiveness of the Company's disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") as of the end of the period covered by this report. Based on such evaluation, the principal executive officer and the principal financial officer have concluded that the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed was recorded, processed, summarized and reported within the time periods specified in the applicable rules and form of the Securities and Exchange Commission.
PART III
ITEM 10.
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
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 (4) Year ($) ($) ($) - --------------- ------------ ----- ------- ------ ---------
Gary Nickele President 2004 180,000 100,000 N/A and Chief 2003 180,000 100,000 N/A Executive 2002 180,000 100,000 N/A Officer
Stephen A. Lovelette Executive 2004 195,000 100,000 N/A Vice President 2003 175,000 50,000 N/A 2002 175,000 50,000 N/A
Gailen J. Hull Senior Vice 2004 175,000 50,000 N/A President and 2003 175,000 50,000 N/A Chief Financial 2002 175,000 N/A 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.
(4) Positions listed are those for Kaanapali Land, and prior to its formation, with KLC Land.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security ownership of certain beneficial owners.
NAME AND ADDRESS AMOUNT AND NATURE OF BENEFICIAL OF BENEFICIAL TITLE OF CLASS OWNER OWNERSHIP - -------------- --------------------------- --------------------
Class B Shares Pacific Trail Holdings, LLC 1,466,573 Shares 900 North Michigan Avenue owned directly Chicago, Illinois 60611 (89.9% of the Class B Shares) (1) (2)
(1) The sole managing member of Pacific Trail, Pacific Trail Holdings, Inc. ("PTHI"), may be deemed to beneficially own the Class B Shares owned by Pacific Trail. PTHI disclaims beneficial ownership with respect to any of the shares owned by Pacific Trail. Each of the shareholders of PTHI may be deemed to own the Class B Shares owned by Pacific Trail. Each of such shareholders, being Gary Nickele, Gailen Hull and Andrew N. Todd, disclaims beneficial ownership with respect to any of the shares owned by Pacific Trail. The addresses of PTHI and Messrs. Nickele, Hull and Todd are the same as for Pacific Trail.
(2) As of March 15, 2005, there were 1,631,513 Class B Shares issued and outstanding.
No other person including any officer of the Company is known by the Company to beneficially own in excess of 5% of the Class A or Class B shares issued, outstanding and distributed. No officers of the Company own any Class A Shares.
ITEM 13.
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, 2004, 2003 and 2002 (including amounts related to discontinued operations in 2001) was approximately $8 thousand, $102 thousand and $75 thousand, respectively, all of which was paid as of December 31, 2004.
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, 2004.
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 affiliate, Management Services, LLC, during 2004. The total costs for the years ended December 31, 2004, 2003 and 2002 was approximately $1.8 million, $1.8 million and $2.0 million, respectively, of which approximately $378 thousand was unpaid as of December 31, 2004.
The Company had other amounts due from affiliates of approximately $300 thousand at December 31, 2003. The amounts were paid during 2004.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The aggregate audit fees incurred for professional services by Ernst and Young LLP ("E&Y") in 2004 and 2003 were $157,000 and $154,300, 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.
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 $10,000,000 loan agreement between Amfac Property Development Corp. and City Bank at December 18, 1996 filed as an exhibit to Amfac Hawaii, LLC's Form 10-K report for December 31, 1996 under the Securities Act of 1934 (File No. 33-24180) filed March 21, 1997 and hereby incorporated by reference.
10.2 General Lease S-3821, dated July 8, 1964, by and between the State of Hawaii and East Kauai Water Company, Ltd. (1)
10.3 U.S. Navy Waipio Peninsula Agricultural Lease, dated May 26, 1964, between The United States of America (as represented by the U.S. Navy) and Oahu Sugar Company, Ltd. (1)
10.4 Amendment to the Robinson Estate Hoaeae Lease, dated May 15, 1967, by and between various Robinsons, heirs of Robinsons, Trustees and Executors, etc. and Oahu Sugar Company, Limited amending and restating the previous lease. (1)
10.5 Amendment to the Campbell Estate Lease, dated April 16, 1970, between Trustees under the Will and of the Estate of James Campbell, Deceased, and Oahu Sugar Company, Limited amending and restating the previous lease. (1)
10.6 Bishop Estate Lease No. 24,878, dated June 17, 1977, by and between the Trustees of the Estate of Bernice Pauahi Bishop and Pioneer Mill Company, Limited. (1)
10.7 General Lease S-4229, dated February 25, 1969, by and between the State of Hawaii, by its Board of Land and Natural Resources and Pioneer Mill Company, Limited. (1)
10.8 Honokohau Water License, dated December 22, 1980, between Maui Pineapple Company Ltd. and Pioneer Mill Company, Limited. (1)
10.9 Water Licensing Agreement, dated September 22, 1980, by and between Maui Land & Pineapple Company, Inc. and Amfac, Inc. (1)
10.10 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.
10.11 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.
10.12 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.
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.
99.1 Settlement Agreement dated March 14, 2003 between Amfac Property Investment Corp., Amfac Hawaii, LLC, Pioneer Mill Company, Limited, and Employees' Retirement System of the State of Hawaii filed as an exhibit to the Company's report on Form 8-K (File No. 0-50273) filed on September 26, 2003 is hereby incorporated by reference.
(1) Previously filed as exhibits to Amfac Hawaii, LLC's Registration Statement on Form S-1 (as amended) under the Securities Act of 1933 (File No. 33-24180) and hereby incorporated by reference.
(b) No reports on Form 8-K were filed since the beginning of the last quarter of the period covered by the report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KAANAPALI LAND, LLC
BY: Pacific Trail Holdings, LLC (Sole Member)
/s/ Gailen J. Hull --------------------- By: Gailen J. Hull Senior Vice President Date: March 25, 2004
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 25, 2004
/s/ Gary Nickele --------------------- By: Gary Nickele, President and Chief Executive Officer Date: March 25, 2004