Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Act of 1934
For the fiscal year
ended December 31, 2003 Commission File Number #0-50273
KAANAPALI LAND, LLC
(Exact name of registrant as specified in its charter)
Delaware 01-0731997
(State of organization) (I.R.S. Employer Identification No.)
900 N. Michigan Ave., Chicago, Illinois 60611
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 312-915-1987
Securities to be registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which each class
to be so registered is to be registered
------------------- ---------------------
N/A N/A
Securities registered pursuant to Section 12(g) of the Act:
Limited Liability Company Interests (Class A Shares)
----------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 (the "Act") during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ X ]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such
common equity, as of the last business day of the registrant's most
recently completed second fiscal quarter. Not applicable.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes [ X ] No [ ]
Documents incorporated by reference: None
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . 19
PART II
Item 5. Market Price of and Dividends on the
Registrant's Common Equity and
Related Stockholder Matters. . . . . . . . . . . 19
Item 6. Financial Information. . . . . . . . . . . . . . 20
Item 7. Management's Discussion and
Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . 21
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk. . . . . . . . . . . . . . . . 26
Item 8. Financial Statements and
Supplementary Data . . . . . . . . . . . . . . . 27
Item 9. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . 60
Item 9A. Controls and Procedures. . . . . . . . . . . . . 60
PART III
ITEM 10. Managers and Executive Officers
of the Registrant. . . . . . . . . . . . . . . . 60
Item 11. Executive Compensation . . . . . . . . . . . . . 63
Item 12. Security Ownership of Certain
Beneficial Owners and Management . . . . . . . . 64
Item 13. Certain Relationships and
Related Transactions . . . . . . . . . . . . . . 65
Item 14. Principal Accountant Fees and Services . . . . . 65
PART IV
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K. . . . . . . . . . . . . 66
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . 68
i
PART I
ITEM 1. BUSINESS
Kaanapali Land, LLC ("Kaanapali Land"), a Delaware limited liability
company, is the reorganized entity resulting from the Joint Plan of
Reorganization of Amfac Hawaii, LLC (now known as KLC Land Company, LLC
("KLC Land")), Certain of its subsidiaries (together with KLC Land, the
"KLC Debtors") and FHT Corporation ("FHTC" and, together with the KLC
Debtors, the "Debtors") under Chapter 11 of the Bankruptcy Code, dated June
11, 2002 (as amended, the "Plan"). As indicated in the Plan, Kaanapali
Land has elected to be taxable as a corporation. The Debtors had filed
their petitions for reorganization under Chapter 11 on February 27, 2002
(the "Petition Date") in the United States Bankruptcy Court for the
Northern District of Illinois, Eastern Division (the "Bankruptcy Court"),
which petitions were consolidated into a single joint proceeding by the
Bankruptcy Court (the "Reorganization Case").
The principal goal of the Plan was to address the Debtors' debt
burdens so that the Debtors could emerge from Chapter 11 with a viable
capital structure and with the resources necessary to operate their land
development business. The Plan achieved this goal by converting certain
indebtedness and other liabilities of the Debtors into new equity of
Kaanapali Land (to the extent such creditors did not elect an available
cash distribution option). Another goal of the Plan was to secure
additional liquidity for the Debtors to help fund future operations. The
Plan achieved this goal through the Merger of FHTC with Northbrook
Corporation ("Northbrook"), which made the assets and liquidity of
Northbrook available to the Debtors to help fund their land development
business. FHTC was the surviving entity in such merger, and shortly
thereafter was in turn merged into Kaanapali Land pursuant to the Plan.
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, including, among other things, the resolution of
all outstanding claims and distributions on all claims that are allowed
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 its
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 (since 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 will pursue 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) Land
Development, Management, Investment and Sales, (ii) Agriculture and (iii)
Golf. As discussed below, of the foregoing, the Company's primary business
is Land Development, Management, Investment and Sales. 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, with the exception of a potential claim of the
Internal Revenue Service ("IRS") described below, are known.
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, 2003, Kaanapali Land has distributed or has
authorized its distribution agent to distribute, in the aggregate,
approximately $1,804,000 in cash and approximately 159,761 Class A Shares
on account of the claims that have been made, and expects that ultimately
an additional approximately $27,000 in cash and approximately 16,000
Class A Shares will be distributed on account of such remaining claims,
assuming that all holders of such claims comply with the requirements for
distribution.
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.
A number of claims, primarily relating to matters that were in
litigation on the Petition Date, or personal injury or employee matters
where litigation was threatened, have not been resolved and are being
disputed by the Company. The Company has petitioned the Bankruptcy Court
to dismiss such claims. Even if the Bankruptcy Court ruled that all such
claims were allowed claims entitled to distribution, which the Company
believes is highly unlikely, the maximum cash exposure to the Company
thereon is not material and the maximum exposure for the issuance of
additional Class A Shares is approximately 1,281 shares.
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. However, the Company has entered into a
stipulation with the IRS whereby the IRS has withdrawn its claim due to the
fact that the Plan leaves the IRS unimpaired relative to any taxes that may
be due. As a result of the examination relative to the years 1998-2000 the
IRS has proposed adjustments which in the aggregate reflect deficiencies in
taxes of approximately $7.4 million (before interest). The Company is in
the process of reviewing the proposed adjustments and intends to contest
the deficiency. 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
intends to 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 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. Other than the
dissolution of inactive subsidiaries, the Company has (i) contributed its
remaining North Beach lots on Maui to newly formed limited liability
companies, 50% owned each by KLC and KDC, (2) obtained modest cash proceeds
for the redemption of its indirect interest in the majority owner of APIC,
and (3) merged Oahu Sugar Company, Limited into a newly-formed limited
liability company. Subsequent to the consummation of the ERS settlement
during the third quarter of 2003 (as described below), the Company merged
PMCo into a newly formed limited liability company and transferred PMCo's
remaining Kaanapali lands to KDC in order that all lands relating to the
Kaanapali 2020 development (or adjacent thereto) are held for development
or sale by KDC. It is expected that further restructuring transactions
will be undertaken over time as entities wind up their affairs or are
otherwise no longer necessary to the ongoing business of the Company.
These transactions will likely be in the form of dissolutions or mergers.
LAND DEVELOPMENT, MANAGEMENT, INVESTMENT AND SALES
KAANAPALI 2020 DEVELOPMENT 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 Kaanapali Land's principal entitlement
focus. The development 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 development plan. While some of these lands have some
form of entitlements, it is anticipated that all of the land to be
developed 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
development. 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 or sell 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.
For the last few years, KDC has been working with the West Maui
community to involve the community in plans for the use and development 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. This development strategy has 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 development plan can be implemented
with the support of the community that meets Kaanapali Land's long-term
financial objectives.
The Kaanapali 2020 development plan is currently at a predevelopment
stage. The development plan is now in the process of being finalized to
the extent necessary to commence the entitlement process, and it is
expected that the aforementioned applications will be submitted during the
second quarter of 2004. However, these applications are preliminary in
nature as KDC has been advised by the applicable government agencies that
their submittal is a prerequisite to the review and approval of the
environmental impact statement ("EIS") that is included as an exhibit.
Although KDC does not believe as a legal matter that submission of the
applications is a necessary prerequisite to the submittal and approval of
the EIS, KDC has decided to proceed as requested by such agencies. Thus,
it is expected that later amendments will be submitted as KDC continues to
refine its market and feasibility studies for the project. Approximately
990 acres of land have been identified for development expected to contain
approximately 3,000 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 which it holds for development rather than
investment, is designed to enhance the value of its properties in phases.
In most instances, the development process begins with the preparation of
market and feasibility studies that consider potential uses for the
property, as well as costs associated with the development of those uses.
The studies consider factors such as location, physical characteristics,
demographic patterns, anticipated absorption rates, transportation,
development 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 development 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 development projects.
Applications for entitlements include applications for state land use
reclassification, county community plan amendments and changes in zoning.
The entitlement process can involve 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 by the development 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 to the developer, 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 of the development.
The Company may also be subject to conditions that the entitlement will be
revoked if the development of 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 feasibility
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 to develop the property as originally planned, the Company may
be required to revise its land plan. In that case, development of the land
in accordance with revised plans may not be as economically viable as the
original land 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.
OAHU SUGAR MILL SITE DEVELOPMENT. In 1995, the Company closed the
Oahu Sugar Company plantation. The former sugar mill site, owned by a
subsidiary of Kaanapali Land, was comprised of approximately 15 acres and
is located in Waipahu, approximately 10 miles west of downtown Honolulu,
near Pearl Harbor. The subsidiary had received county zoning approval for
a light industrial subdivision on the property. The Company had expected
to market this property in bulk after addressing certain identified
environmental issues. However, sale of the property was not expected to
yield significant net cash proceeds to the Company because the property was
encumbered by liens totalling approximately $3.4 million, including accrued
interest, as of December 12, 2003 pursuant to bank mortgage financing in an
amount which approximates the anticipated value of the property. The
lender filed a complaint for foreclosure of the property after prolonged
negotiations for extension of the financing. In December 2003, a
settlement was reached with the lender which resulted in the Company no
longer having an ownership interest in the property in consideration of the
Company being released from its obligations relating to the mortgage and
accrued interest encumbering the property.
LAND MANAGEMENT AND SALES. Apart from the golf course property
(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. However, the Company believes
that certain portions of the Wainee Lands might be developed for a number
of uses compatible with the close proximity of the Wainee Lands to the
Lahaina city-center, including both affordable and market housing and
certain recreational and service uses, once the property is reclassified
and rezoned. However, the Company is currently considering several options
for the Wainee Lands. 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 former sugar mill sites,
other land associated with now-closed sugar growing and processing
operations 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 is in the
process of liquidating its 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 is in the process of purchasing the Company's coffee
mill equipment which should be completed during either the first or second
quarter of 2004. Most sugar mill equipment with significant value has
already been sold.
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 income, this operation is politically 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 Club on Oahu. The assets and operations of the
Waikele Golf Club represent all of the golf segment for purposes of
business segment information. The Waikele Golf Course operates at a modest
level of profit after debt service. Substantial improvements in local
economic conditions and the Hawaiian tourism industry would be necessary
for the Company to realize significant net cash proceeds (after debt
service) from this business segment. There can be no assurance that such
improvements will occur in the near term.
Other golf courses, known as the Royal Kaanapali Golf Courses
("RKGC"), are on Maui. The RKGC were owned by Amfac Property Investment
Corp. ("APIC"), a corporation that is approximately 16.7% owned by two
subsidiaries of Kaanapali Land and 83.3% owned by AF Investors, LLC
("AFI"), an affiliate of Kaanapali Land in which Kaanapali Land has no
direct or indirect interest. APIC, and with respect to certain specified
limited amounts, two other subsidiaries of the Company were borrowers under
a $66 million loan made by the Employees' Retirement System of the State of
Hawaii ("ERS") in 1991. The loan, which as of September 9, 2003 had a
balance of approximately $83 million, is secured by the RKGC (and certain
adjacent lands owned by APIC). All of APIC's assets are subject to the
loan. The loan matured in June 2001 and was not extended, despite efforts
of the borrowers to obtain such an extension as described below.
The borrowers previously engaged in settlement negotiations with ERS
since 2000, which negotiations have resulted in the execution of a
definitive settlement agreement (the "ERS Settlement Agreement") in March
2003. The ERS Settlement Agreement was consummated during the third
quarter of 2003 which resulted in the Company having no further ownership
interests in or obligations related to the RKGC.
For a description of financial information by segment, please read
Note 10 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 is reflected by a note secured by a mortgage due March 31,
2004 for approximately $14.4 million, approximately one-half of which is
subject to possible later adjustment based on the number of units approved
for development pursuant to the Special Management Area permit that SVO is
seeking for the parcel. 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 promissory note is
secured by a first mortgage encumbering Lot 4, and it is due on the earlier
to occur of (i) August 4, 2006, or (ii) sixty days following the issuance
by the County of Maui of certain entitlements for the development of any
portion of Lot 4. 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 costs in
excess of the escrowed funds associated with the road improvements and
sewer and drainage costs and has accrued approximately $3 million as an
estimate of such costs.
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 2004. Pioneer
Mill is engaged in an ongoing cleanup arising out of the discovery of
petroleum contamination found at the Pioneer Mill site. The Pioneer Mill
site has been 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. These
issues will have to be addressed as they are raised. 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.
Pioneer Mill is currently making arrangements to address the issues
evidenced by the test results, which are not currently believed to be
material to the Company. EPA has designated HDOH as the oversight agency
for Pioneer Mill.
EMPLOYEES.
At March 1, 2004, Kaanapali Land and its subsidiaries employed
approximately 92 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
including 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 have negatively impacted Kaanapali
Land's development and land sale activities, including market conditions,
the difficulty in obtaining regulatory approvals, the high development cost
of required infrastructure and the Company's operating deficits in its
other business segments. As a result, the planned development 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.
The Hawaii economy experienced a downturn beginning in late 1990 after
the initial Persian Gulf War, a recession in Japan and a slowdown in
California's economy. The real estate market in Hawaii was negatively
impacted by these events and its recovery was slow and incomplete. The
severe negative impact of the September 11, 2001 terrorist attacks on
tourism and investment, although primarily experienced on Oahu, to a lesser
extent, further exacerbated the problems.
Maui's real estate market has experienced improvement during 2003.
The areas of primary and secondary residential homes, condominiums and time
share units have been relatively strong compared to other parts of the
economy and sales prices during the past couple years have approximated
those experienced in the early and mid-1990's, but prices are still at
levels below the late 1980's and below replacement cost of many of the
properties. Despite these improvements, the real estate market, and
especially the market for unimproved land, has not achieved the levels
experienced during the late 1980's. 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 land
development business on Maui, many of which have greater resources. The
number of competitive properties in a particular market could have a
material adverse effect on the Company's success in its development
operations.
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 development 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 to proposed developments from numerous groups -
including native Hawaiians, environmental organizations, various community
and civic groups, condominium associations and politicians advocating no-
growth policies, among others.
Currently, Kaanapali Land is preparing applications for the necessary
entitlements to carry out the Kaanapali 2020 development plan. While some
of these lands have some form of entitlements, it is anticipated that all
of the land to be developed 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 development. 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. The Kaanapali 2020 development plan is currently at a predevelopment
stage. First, market and feasibility studies must be completed. If they
indicate that there is appropriate market demand and economic feasibility,
the plan will be finalized and the entitlement process will commence. For
the last few years, the Company has been working with the West Maui
community to plan possible or potential use and development of the
Kaanapali 2020 lands. Committees, comprised of private sector individuals
from the community as well as public employee participants, have been
working with the company to create a vision for the future of the Kaanapali
lands.
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 the environmental
conditions at the Pioneer Mill and Oahu Sugar sites.
ITEM 2. PROPERTIES
LAND HOLDINGS.
The major real properties owned by the Company are described under
Item 1. Business.
MAUI.
As of December 31, 2003, the Company owned approximately 4,900 acres
of land on the island of Maui, most of which was classified as agricultural
land or conservation land for State and County purposes. All of the
Company's Maui land holdings are located in West Maui near the Lahaina and
the Kaanapali Beach Resort areas. Included in this acreage is
approximately 19.7 acres of land at Lahaina that contain the former Pioneer
Mill sugar mill, closed in 1999, and the coffee mill operations of
Kaanapali Estate Coffee, Inc., which has wound up its affairs.
OTHER PROPERTY.
In addition to the real property discussed above, the Company also
owns less than 100 acres of miscellaneous parcels located on the islands of
Kauai and Oahu, consisting principally of two sugar mills on Kauai, each
with its own power plant. The mills and power plants are located in Kekaha
and Lihue, Kauai. Each of these facilities was involved in the production
of raw sugar from sugar cane and the production of electrical and steam
power until their closings in late 2000. The Lihue power plant continued
to operate pursuant to a modified agreement with the local electric
utility, through the end of 2002. At this time, no commercial operations
are being coordinated at either facility and it is not expected that the
sale (either in bulk or in pieces) will yield any significant proceeds to
the Company.
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 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.
APIC, which is not a Debtor and is owned approximately 16.7% by the
Company, was the primary borrower under a $66 million loan made by the ERS
in 1991. The loan, which had a balance as of September 9, 2003 of
approximately $83 million, is secured by the RKGC (and certain adjacent
lands). All of APIC's assets are subject to the loan. The loan matured in
June 2001 and was not extended, despite efforts of the borrowers to obtain
such an extension.
The borrowers were engaged in settlement negotiations with ERS at
least since 2000, which negotiations resulted in the execution of the ERS
Settlement Agreement in March 2003. On September 9, 2003, the Company and
APIC consummated their settlement agreement with the ERS. As a consequence
of such transaction, the Company and APIC no longer have any interest in or
obligation to the Royal Kaanapali Golf Courses. However, the Company has
received certain easements and other rights respecting certain of the golf
course land, including, among other things, drainage rights, utility line
easements, access rights and the right to reconfigure one of the golf holes
to accommodate the construction of a road to serve certain other land owned
by the Company. In 2003 the Company escrowed cash as required by the
settlement agreement in the approximate amount of $1.5 million, primarily
to satisfy certain debts of APIC to its former creditors and employees and
to ensure that funds are available for the reconfiguration of the golf hole
as described above. The Company recently entered into a contract for the
completion of such reconfiguration work which required the Company to
deposit an additional approximate amount of $.2 million into such escrow.
Such work is expected to be conducted during the second and third quarters
of 2004. A portion of the amounts so funded are expected to be reimbursed
to the Company by Amfac Finance Limited Partnership ("AFLP"). As discussed
below, an additional amount of approximately $1.1 million was funded by the
Company to satisfy certain of its obligations relating to the settlement,
other than through the closing escrow, primarily relating to former
employees, which amount was paid during the fourth quarter of 2003. The
settlement also provides the Company and its affiliates and related parties
with various releases from the ERS and ensures that the ERS will file no
claims with the Bankruptcy Court.
Concurrently with the consummation of the ERS Settlement Agreement,
APIC entered into a mutual release agreement with the union representing
the bargaining unit employees employed by APIC at the time the receivership
commenced. Such agreement resulted in certain amounts being paid or
distributed to such employees in return for releases by each of them and
the union in favor of APIC and the Company. APIC handled its former non-
bargaining unit employees employed at the RKGC in substantially the same
manner. The total amount paid to APIC's former employees as a consequence
of the consummation of such settlement was approximately $1.1 million and
was paid during the fourth quarter of 2003.
On September 20, 1996, Oahu Sugar Company, LLC, successor by merger to
Oahu Sugar Company, Limited ("Oahu Sugar") and a subsidiary of Kaanapali
Land, filed a lawsuit (the "First Arakaki Case"), Oahu Sugar v. Walter
Arakaki and Steve Swift, Case No. 96-3880-09, in the Circuit Court of the
First Circuit, State of Hawaii. In the lawsuit, Oahu Sugar, which is a
Non-Debtor KLC Subsidiary, alleged that it entered into an agreement to
sell to defendants certain sugar cane processing equipment at Oahu Sugar's
sugar cane mill in Waipahu. Oahu Sugar alleged that defendants failed to
timely dismantle and remove the equipment, as required by the agreement,
and that defendants were obligated to pay Oahu Sugar rent for the area
occupied by the equipment beyond the time provided for by the parties.
Oahu Sugar further alleged that it provided notice to defendants that Oahu
Sugar was entitled to treat the equipment as abandoned property and to sell
the equipment, because the equipment had not been removed from the property
in a timely fashion, as required by the parties' agreement. In its
complaint, Oahu Sugar sought, among other things, declaratory relief that
it was entitled to treat the equipment as abandoned, damages for breach of
contract, and rent under an unjust enrichment theory.
Defendants filed an answer, as amended, denying the substantive
allegations of Oahu Sugar's complaint and asserting various affirmative
defenses. In addition, the defendants filed a seven-count counterclaim
against Oahu Sugar. In the counterclaim, defendants alleged, among other
things, that Oahu Sugar failed to make the equipment available for removal
on a timely basis, and that Oahu Sugar otherwise improperly interfered with
defendants' plans for the removal and subsequent sale of the equipment. In
the counterclaim, defendants sought, among other things, general, special
and punitive damages, attorneys' fees, costs, and such other relief as the
Court may have deemed appropriate.
Oahu Sugar's declaratory relief claim was settled in advance of trial.
Oahu Sugar obtained dismissals and directed verdicts on six of defendants'
claims. The remaining portions of the complaint and counterclaim proceeded
to a jury trial and verdict. On December 2, 1999, the jury denied Oahu
Sugar relief on its remaining claims and awarded the defendants
approximately $2.6 million in damages on their counterclaim. On March 2,
2000, the trial court entered a judgment against Oahu Sugar for the $2.6
million in damages awarded by the jury. In addition, the trial court
awarded counterclaimants $751 thousand in attorneys' fees, $28 thousand in
costs and $866 thousand in prejudgment interest. Oahu Sugar's post trial
motions for judgment as a matter of law and for a new trial were denied.
Oahu Sugar filed a notice of appeal. Since no appeal bond was obtained,
the defendants began efforts to collect the amounts awarded to them.
Defendants caused garnishee summons to be issued to various affiliated and
unaffiliated entities. The defendants scheduled a debtor's examination for
August 23, 2000 which was not concluded. The Hawaii Supreme Court also
scheduled the case for an appellate conference and mediation that was
unsuccessful. Then, on January 3, 2001, the Hawaii Supreme Court entered
an order dismissing the appeal. The Supreme Court held that it lacked
jurisdiction over the appeal because the judgment entered on March 2, 2000
was legally defective in that it did not identify the claim for which
judgment was entered or dismiss all of the other claims and counterclaims
of the parties. In light of the order of the Hawaii Supreme Court, the
parties filed legal briefs before the trial court to have the court
determine, among other things, whether a corrected judgment consistent with
the jury verdict was to be entered as of March 2, 2000 or a new judgment
order was required. After hearing the arguments of the parties, on
March 19, 2001, the trial court ruled that it would not enter a corrected
judgment as of March 2, 2000 and that a new judgment order was required.
On April 12, 2001, the court entered the new judgment order on the
counterclaims providing for the payment of approximately $2.6 million in
damages, $730 thousand in attorneys' fees, $28 thousand in costs, $867
thousand in prejudgment interest, and additional prejudgment interest from
January 20, 2000 through April 12, 2001. From and after entry of the
order, post-judgment interest was to accrue on the unpaid balance at the
statutory rate of ten percent per annum until paid in full. Oahu Sugar
continued to pursue its appeal in the First Arakaki Case and the opposing
side filed a cross appeal seeking further relief on any potential retrial
of the matter. The case was fully briefed and was awaiting a decision by
the Hawaii Supreme Court. However, the First Arakaki Case is subject to an
overall potential settlement with the Second Arakaki Case and the City Bank
Foreclosure case, each as described below.
On or about December 15, 2000, Oahu Sugar and Oahu MS Development
Corp. ("Oahu MS", f/k/a Amfac Property Development Corp.), subsidiaries of
Kaanapali Land, among others, were named in a lawsuit (the "Second Arakaki
Case") entitled Walter Arakaki and Steve Swift v. Oahu Sugar Company,
Limited et al, Civil No. 00-1-3817-12, and filed in the Circuit Court of
the First Circuit of Hawaii. This case is also the subject of a potential
settlement as described below. In the complaint, as amended, plaintiffs
sought a declaration that certain conveyances of real estate made by Oahu
Sugar or Oahu MS, since December 1996, were allegedly fraudulent transfers
made in violation of the common law, the Hawaii fraudulent transfer act,
and rights which they claim arose in connection with the claims they filed
in the First Arakaki Case. Plaintiffs sought, among other things,
injunctive and declaratory relief, compensatory damages, punitive damages,
orders of attachment against sales proceeds, voidance of certain transfers,
foreclosure and other remedies in connection with various transfers of real
estate made by Oahu Sugar to Oahu MS, the Young Men's Christian Association
of Honolulu ("YMCA"), and the Filipino Community Center, Inc. ("FCC"),
among others, all over the years 1996-2000. Although the amount of damages
sought in the Second Arakaki Case was unspecified, the case arose in
connection with the plaintiffs' efforts to realize on their judgment in the
First Arakaki Case described above. The YMCA and FCC were also named
defendants in this action and have filed cross-claims for relief against
Oahu Sugar and Oahu MS for alleged breach of warranty of title, indemnity
and contribution in connection with their respective transactions, and
seeking, among other things, damages, attorneys' fees, costs, and
prejudgment interest. Oahu Sugar and Oahu MS filed answers to the
complaint, as amended, and the cross-claims. On May 3, 2001, plaintiffs
filed an amended complaint dropping the remedy of foreclosure in connection
with certain property transferred to the YMCA and adding various
allegations including, without limitation, allegations regarding the final
judgment entered in the underlying matter.
On October 23, 2002, Oahu MS was named in a civil action entitled City
Bank v. Amfac Property Development Corp., et al, pending in the Circuit
Court of the First Circuit, State of Hawaii, Civil No. 02-2494-10. In this
case, plaintiff sought injunctive relief and declaratory relief to cease
actions preventing City Bank and its consultants from gaining access to the
mortgaged property for environmental testing. In addition, the complaint
sought unspecified damages as may be shown at trial, costs, interest and
reasonable attorneys' fees, and such other further relief as the Court
would choose to award. A stipulation for dismissal without prejudice was
entered on July 9, 2003.
On January 2, 2003, Oahu MS was named in a civil action (the "City
Bank Foreclosure Case") entitled City Bank v. Amfac Property Development
Corp., et al, in the Circuit Court of the First Circuit, State of Hawaii,
Civil No. 03-1-0005-01. In this case, plaintiff sought foreclosure of
property owned by Oahu MS and encumbered by a mortgage in favor of City
Bank. City Bank made a $10.0 million loan to APDC under a loan agreement
dated December 18, 1996. The loan became due on December 1, 2002. City
Bank claimed that as a result of Oahu MS's failure to pay the loan when
due, Oahu MS was in default under the loan documents. It alleged that the
amount due as of December 2, 2002 was approximately $2.9 million plus a per
diem charge of approximately $1 thousand accruing on the unpaid principal,
until payment was made and/or interest changes, plus advances and expenses
incurred in connection with the action. In its complaint, City Bank sought
all amounts allegedly due and owing to City Bank, together with legal
interest thereafter to accrue thereon and all advances, costs and
attorneys' fees; a foreclosure decree and sale; the appointment of a
receiver to conduct an environmental audit on a specified portion of the
secured property and to collect rents being paid on a portion of the
mortgaged properties that consist of subleases on improved land; the entry
of an order of deficiency against APDC to the extent such exists after sale
with execution to follow thereon; and such other relief as the court may
deem proper. This action had been consolidated with the Second Arakaki
Case described above (together, the "Consolidated Action"). Together with
the Complaint, City Bank filed a Motion for Appointment of Receiver
alleging that it was entitled to have a receiver appointed for an
environmental audit on the mortgaged property and collection of all net
rental income assigned to City Bank. With regard to the subleases, on
June 28, 2002, Oahu MS and City Bank executed three assignments of net
rental income as security for the loan Oahu MS had obtained from City Bank
in 1996 ("Assignments"). Two of the Assignments pertained to subleases
under leases with the Trustees Under the Will and of the Estate of Bernice
Pauahi Bishop, Deceased, also known as Kamehameha Schools ("Trustees"):
Lease Number 24,710 ("Bougainville Assignment"), and Lease Number 24,720
("Halawa Assignment"). The third Assignment pertained to subleases and
leases with Queen's Hospital located on Bougainville Industrial Park and
the Halawa Light Industrial Park ("Queen's Assignment"). The three
Assignments gave City Bank certain rights in the net rental income derived
from each of the properties. This motion was granted.
The parties to the City Bank Foreclosure Action commenced settlement
discussions in January 2003. Although City Bank argued that no agreement
had been reached between the two parties, Oahu MS contended that a valid
and enforceable settlement agreement had been reached as to all material
terms providing for a modification and extension of the terms of the loan
in question.
On May 12, 2003, City Bank filed a motion for partial summary judgment
against all defendants and interlocutory decree of foreclosure and for
entry of final judgment pursuant to Hawaii Rules of Civil Procedure 54(b),
seeking foreclosure on the Assignments. The motion was granted at a
hearing on June 16, 2003.
Soon thereafter, on June 5, 2003, Trustees filed a motion to intervene
in order to assert their interests in the rental income from the Halawa and
Bougainville Assignments. Trustees' Motion was granted on July 23, 2003,
and Trustees filed their answer to complaint in this action on July 24,
2003, with a Cross-Claim against Oahu MS. Thereafter, Trustees, City Bank
and Oahu MS reached agreement on the terms of a stipulation pertaining to
the receivership.
Mediation of the Consolidated Action and certain matters concerning
the receivership commenced in late August 2003. Trustees did not
participate in the mediation as their claims as intervenor had been
resolved through agreement with City Bank and their claims against Oahu MS
were to be determined through the arbitration proceedings described below.
However, Oahu Sugar did participate in the mediation in order that both
Oahu MS and its affiliates could achieve an overall settlement of the
claims surrounding both the Consolidated Action and the First Arakaki Case.
Mediation was unsuccessful at the initial session; however, the parties
continued to meet thereafter with the participation of the mediator and,
occasionally, the judge in the Consolidated Action. This resulted in a
settlement that was signed by the attorneys for all parties in late
September 2003. Such agreement provided the principal terms of the
settlement and stated that a more formal and detailed settlement agreement
would be drafted and signed.
In December 2003 the settlement was consummated. In general, the
terms of the settlement provided that Oahu MS convey the mill site property
that is encumbered by the City Bank loan to City Bank and pay Swift and
Arakaki the amount of $100 thousand, and pay City Bank certain expenses of
the transactions. YMCA and FCC also contributed money to the settlement,
as well as Ticor Title Insurance Company, which had written title insurance
policies insuring City Bank and YMCA. City Bank provided the plaintiffs
with what amounted to a participation in the property and will perform any
environmental cleanup required on the property. All parties were released
from the claims brought against them in the Consolidated Action and the
First Arakaki Case, effective as of the date that is 91 days after the
property was deeded by Oahu MS to City Bank.
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 its
leases with APDC (the leases are the subject matter of the Halawa and
Bougainville Assignments discussed above), 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 July 2, 2003, Oahu MS filed a demand for arbitration of Trustees'
claims with the American Arbitration Association ("AAA"), and on July 3,
2003, APDC filed a motion to dismiss, or in the alternative, to stay
plaintiffs' complaint pending arbitration. On July 2, 2003, Trustees filed
a motion for partial summary judgment against all defendants. Both motions
were set to be heard on August 11, 2003. Prior to that date, however, the
Court informally advised the parties that it would likely enforce the
arbitration provisions contained in the leases, and the parties thereafter
reached agreement on a stipulation staying the case pending arbitration.
The parties thereafter entered into mediation and have reached a settlement
in principle, pending the collection of various information necessary to
the completion thereof. There are no assurances that the settlement will
be consummated.
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. 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 is engaged in an ongoing cleanup arising out of the
discovery of petroleum contamination found at the Pioneer Mill site. The
Pioneer Mill site has been assigned a high priority and the HDOH has shown
an interest in the environmental conditions relating to or arising out of
the former operations of Pioneer Mill. These issues will have to be
addressed as they are raised. 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. Pioneer Mill is currently making
arrangements to address the issues evidenced by the test results, which are
not currently believed to be material to the Company. EPA has designated
HDOH as the oversight agency for Pioneer Mill.
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, the United States Environmental Protection
Agency, Region IX (hereinafter, "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 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 $20.6 million for taxes, interest and penalties
related to the years 1998-2000. However, the Company has entered into a
stipulation with the IRS whereby the IRS has withdrawn its claim due to the
fact that the Plan leaves the IRS unimpaired relative to any taxes that may
be due. As a result of the examination relative to the years 1998-2000 the
IRS has proposed adjustments which in the aggregate reflect deficiencies in
taxes of approximately $7.4 million (before interest). The Company is in
the process of reviewing the proposed adjustments and intends to contest
the deficiency. 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.
EC Managers, Inc., a subsidiary of Kaanapali Land, and general partner
of EC Partners, L.P., formerly known as Arvida/JMB Partners, L.P.-II (the
"Partnership"), was named a defendant in a lawsuit filed on January 11,
1996 in the Circuit Court in and for the Eighteenth Judicial Circuit,
Seminole County, Florida entitled Land Investment I, Ltd., Heathrow Land &
Development Corporation, Heathrow Shopping Center Associates and Paulucci
Investments v. Arvida/JMB Managers-II, Inc., Arvida/JMB Partners, L.P.-II,
Arvida Company and JMB Realty Corporation, Case No. 96-62-CA-15E. The
complaint, as amended, included counts for breach of the management
agreement, fraud in the inducement and conspiracy to commit fraud in the
inducement, breach of the Heathrow partnership agreement and constructive
trust in connection with the purchase and management of the Heathrow
development. Plaintiffs sought, among other things, unspecified
compensatory damages, punitive damages, prejudgment interest, attorneys'
fees, costs, and such other relief as the Court deemed appropriate.
On June 24, 1999, the Court granted partial summary judgment in favor
of the plaintiffs against Arvida Company, finding that Arvida Company owed
plaintiffs a fiduciary duty as a broker and advisor under the management
agreement. The ruling did not reach the issue of the statute of
limitations defense nor whether any such duties were owed in connection
with the Partnership's acquisition of an interest in the Heathrow
development through the Heathrow partnership.
On October 16-17, 2003, the court heard arguments relating to the
parties' motions for summary judgment. After argument, the court indicated
that it was inclined to enter an order striking all but one claim. At a
mediation held on October 18, 2003, the parties entered into a settlement
agreement resolving the entire case in consideration of the payment of
$3.25 million made on behalf of all of the defendants. A subsidiary of the
Company that was the general partner of one of the defendants agreed to
contribute $1.95 million to the settlement payment. Mutual general
releases were entered into between the parties and the case was dismissed
with prejudice on October 24, 2003.
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 130 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 alleges 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. The complaint has
since been amended. In the eight count amended complaint, plaintiff seeks
unspecified general damages, the imposition of a constructive trust, an
accounting, attorneys' fees and costs, interest, punitive damages and such
other further relief as is deemed appropriate by the court under the
circumstances. Plaintiff seeks return of approximately $1.0 million in
pension related costs paid by it over the period 1989-1994, the return of
all pension related costs paid by it since 1995, and all fees, costs and
other consideration charged to or received by defendants from plaintiff
since 1988. The participants in the pension plan included employees of an
affiliate who were engaged in employment at the Silverado Country Club &
Resort, in Napa, California (the "Resort"). The Resort was and continues
to be operated pursuant to a Management Agreement between the plaintiff and
Xanterra Parks & Resorts, L.L.C. ("Xanterra"), a former subsidiary of
Northbrook that continues to be under common control with the defendants.
The plaintiffs are also pursuing their claims in a separate action against
Xanterra that is currently being arbitrated in San Francisco, California.
The defendants in the Chicago action vigorously deny all of the plaintiff's
claims. Although the amended complaint has only recently been filed and an
answer has not yet been filed, the defendants intend to defend, among other
things, on the basis that it had no relationship with the plaintiff and no
duties to them whatsoever and that the plaintiff was not a participating
employer in the pension plan and otherwise had no interest therein. In
addition, to the extent that the California arbitration is decided in favor
of Xanterra, such decision would provide further defenses for Kaanapali
Land (as successor by merger to Northbrook). However, there can be no
assurance that the plaintiffs will not ultimately prevail on some or all of
their claims.
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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 31, 2003 there were approximately 421 holders of record
of the Company's Class A Shares and approximately 16 holders of record of
the Company's 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 2003 or 2002 and the Company does not
anticipate making any distributions for the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
KAANAPALI LAND, LLC (a)
For the years ended December 31, 2003, 2002, 2001, 2000 and 1999
(Dollars in Thousands Except Per Share Amounts)
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Total revenues
(c) . . . . . . . $ 66,640 11,112 81,894 79,247 106,254
======== ======== ======== ======== ========
Net income
(loss) (d). . . . $ 70,636 140,784 (17,082) (45,707) (34,245)
======== ======== ======== ======== ========
Income (loss)
from continuing
operations per
Share, basic
and diluted . . . 5.86 (b) (6,794) (13,206) (8,561)
======== ======== ======== ======== ========
Net income
(loss) per
share, basic
and diluted . . . 39.44 (b) (4,270) (11,427) (8,561)
======== ======== ======== ======== ========
Total assets . . . $189,473 189,626 223,628 311,705 391,118
======== ======== ======== ======== ========
Certificate of
Land Apprecia-
tion Notes. . . . $ -- -- 139,413 139,413 139,413
======== ======== ======== ======== ========
(a) The above selected financial data should be read in conjunc-
tion with the financial statements and the related notes appearing
elsewhere in this registration statement. 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 and 1999, the Company recognized as revenue a gain from
the extinguishment of debt of $10,653 and $12,678, respectively.
(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. 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.
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 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, are expected to represent no more than
approximately 9.5% of the ownership of the Company when all distributions
under the Plan are completed.
At December 31, 2003, the Company had cash of approximately $29
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, retiree medical
insurance benefits (which are generally expected to be paid through the end
of 2004), 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 current indebtedness includes an $8.3 million mortgage
loan secured by the Waikele Golf Course which has a maturity date of
December 1, 2006, with an interest rate of LIBOR plus 3.75% (LIBOR floor of
3%) (6.75% at December 31, 2003). The Company currently expects to service
and ultimately refinance such loan in the ordinary course of business.
The Company's continuing operations are 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, approximately one-half of which is subject to possible later
adjustment based upon the number of units approved for development, is due
in March 2004 and a purchase money note related to Lot 4 in the amount of
approximately $17 million is due no later than August 2006. If such notes
are paid upon maturity, the Company expects that it will have adequate
liquidity for the foreseeable future. However, there can be no assurance
that any of such cash proceeds will be realized.
Although the Company does not currently believe that it has any
liquidity problems over the near term, should the Company be unable to
satisfy its liquidity requirements from proceeds of land sales it will
likely pursue alternate financing arrangements. However it cannot be
determined at this time what, if any, financing alternatives may be
available and at what cost. Therefore, there can be no assurance that
there will be any available financing, and a lack of such financing would
have a material adverse effect on the operations of the Company.
RESULTS OF OPERATIONS
Reference is made to the footnotes to the financial statements for
additional discussion of items addressing comparability between years.
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 City Bank.
Accounts payable and accrued expenses decreased due to the settlement
of the First Arakaki Case and the Second Arakaki Case 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
properties associated with the City Bank Foreclosure Case as well as the
reversal of accruals relating to the ERS Settlement Agreement.
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 with City Bank which resulted in Oahu MS no longer being
obligated to the loan encumbering the Oahu MS mill site property in
exchange for Oahu MS conveying the property to City Bank.
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 the ERS, 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 the First Arakaki
Case and the Second Arakaki Case litigation offset by an increase in the
allowance for receivables relating to the loans made by Kaanapali Land to
AFLP in conjunction with the consummation of the ERS Settlement Agreement.
Because there can be no assurance that AFLP 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 Kauai
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 APIC.
The increase in income tax expense is a result of the increase in the
Company's income from continuing operations.
2002 COMPARED TO 2001
The restructuring in 2002 resulted in significant changes to the
balance sheet, particularly causing (i) decreases in mortgage and other
notes payable, deferred income taxes, deferred costs and other assets and
(ii) changes in the equity of the Company principally due to the gain on
reorganization. The restructuring also resulted in the decrease in
interest expense and the increase in restructuring costs.
Sales and cost of sales declined principally due to the decline in
land sales. The decrease in other liabilities is primarily the result of a
settlement of future obligations relating to a land sale in a prior year
for an amount less than was recorded at the time of sale.
The reduction to carrying value of investments was the primary cause
for the decrease in property. The decrease in accumulated post retirement
benefit obligation is primarily due to the decrease in the unrecognized net
actuarial gain. The change in equity in income (loss) from unconsolidated
investments is primarily due to the Company's share of the loss in 2001 for
value impairment at the Royal Kaanapali Golf Courses versus the gain in
2002 from the sale of the Company's interest in a hotel.
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, 2003, the Partnership had the known material
contractual obligations set forth in the following table:
Payments Due by Period
----------------------------------------------
Less More
Contractual Than 1-3 3-5 Than
Obligations Total 1 Year Years Years 5 years
- ----------- ------ ------ ------ ------ -------
Long-term debt
obligations. . . . . . . $8,288 108 8,180 -- --
Capital lease
obligations. . . . . . . -- -- -- -- --
Operating lease
obligations. . . . . . . -- -- -- -- --
Purchase obligations . . . -- -- -- -- --
Other long-term
liabilities reflected
on the Partnership's
balance sheet under
GAAP. . . . . . . . . . . -- -- -- -- --
------ ------ ------ ------ ------
Total. . . . . . . . . $8,288 108 8,180 -- --
====== ====== ====== ====== ======
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. 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 arrangements are at variable rates. Based upon the
Company's indebtedness and interest rates at December 31, 2003, a 1%
increase in market rates or a 1% decrease in market rates would have no
significant affect on future earnings and cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
KAANAPALI LAND, LLC
INDEX
Report of Independent Auditors
Consolidated Balance Sheets, December 31, 2003 and 2002
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity (Deficit) for
the years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001
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 AUDITORS
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, 2003 and 2002, 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, 2003. 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 auditing standards generally
accepted in the 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. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as 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, 2003 and 2002, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Chicago, Illinois
March 25, 2004
KAANAPALI LAND, LLC
Consolidated Balance Sheets
December 31, 2003 and 2002
(Dollars in Thousands, except share data)
A S S E T S
-----------
2003 2002
-------- ----------
Cash and cash equivalents. . . . . . . . . . . . . . $ 28,995 15,848
Receivables, net . . . . . . . . . . . . . . . . . . 777 1,959
Property, net. . . . . . . . . . . . . . . . . . . . 104,926 142,832
Notes receivable, net of deferred gain
of $5,308. . . . . . . . . . . . . . . . . . . . . 26,058 --
Prepaid pension costs. . . . . . . . . . . . . . . . 25,989 25,905
Other assets . . . . . . . . . . . . . . . . . . . . 2,728 3,082
-------- --------
$189,473 189,626
======== ========
L I A B I L I T I E S
---------------------
Accounts payable and accrued expenses. . . . . . . . $ 2,444 10,202
Deferred income taxes. . . . . . . . . . . . . . . . 19,369 9,143
Accumulated postretirement benefit obligation. . . . 13,743 23,560
Other liabilities. . . . . . . . . . . . . . . . . . 52,498 51,705
Mortgage and other notes payable . . . . . . . . . . 8,288 11,248
Investment in unconsolidated entities,
at equity. . . . . . . . . . . . . . . . . . . . . -- 61,273
-------- --------
Total liabilities. . . . . . . . . . . . . . 96,342 167,131
Commitments and contingencies
S T O C K H O L D E R S' E Q U I T Y (D E F I C I T )
------------------------------------------------------
Common stock, at 12/31/03 and 12/31/02 non par
value (shares authorized - 4,500,000; shares
issued 1,791,274 and 1,863,213.49,
respectively . . . . . . . . . . . . . . . . . . . -- --
Additional paid-in capital . . . . . . . . . . . . . 5,357 5,357
Accumulated earnings . . . . . . . . . . . . . . . . 87,774 17,138
-------- --------
Total stockholders' equity . . . . . . . . . 93,131 22,495
-------- --------
$189,473 189,626
======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
KAANAPALI LAND, LLC
Consolidated Statements of Operations
Years ended December 31, 2003, 2002 and 2001
(Dollars in Thousands Except Per Share Amounts)
2003 2002 2001
-------- -------- --------
Revenues:
Sales. . . . . . . . . . . . . . . . . . $ 59,178 11,085 59,079
Interest and other income. . . . . . . . 7,462 27 12,162
Extinguishment of debt . . . . . . . . . -- -- 10,653
-------- -------- --------
66,640 11,112 81,894
-------- -------- --------
Cost and expenses:
Cost of sales. . . . . . . . . . . . . . 39,564 5,176 50,796
Reduction of post-retirement
benefit obligation . . . . . . . . . . (7,679) (9,520) --
Selling, general and administrative. . . 11,332 12,505 15,652
Interest . . . . . . . . . . . . . . . . 1,129 2,395 11,387
Depreciation and amortization. . . . . . 1,164 2,994 3,621
Reduction to carrying value of
investments. . . . . . . . . . . . . . -- 13,717 18,109
-------- -------- --------
45,510 27,267 99,565
-------- -------- --------
Operating income (loss). . . . . . . . . . 21,130 (16,155) (17,671)
Equity in income (loss) from
unconsolidated investments . . . . . . (402) 5,180 (12,967)
-------- -------- --------
Income (loss) from continuing
operations before income taxes,
discontinued operations, gain
on disposition of unconsolidated
investment and extraordinary
gain on reorganization . . . . . . . . 20,728 (10,975) (30,638)
Income tax (expense) benefit . . . . . . (10,226) 15,141 3,462
-------- -------- --------
Income (loss) from continuing
operations . . . . . . . . . . . . . . 10,502 4,166 (27,176)
Income from discontinued
operations, net of applicable
income taxes . . . . . . . . . . . . . -- -- 10,094
Gain on disposition of
unconsolidated investment. . . . . . . 60,134 -- --
Extraordinary gain on
reorganization, net. . . . . . . . . . -- 136,618 --
-------- -------- --------
Net income (loss). . . . . . . . . $ 70,636 140,784 (17,082)
======== ======== ========
Earnings per share:
Income (loss) from continuing
operations, basic and diluted. . . . . 5.86 (a) (6,794)
======== ======== ========
Net income (loss), basic and
diluted. . . . . . . . . . . . . . . . 39.44 (a) (4,270)
======== ======== ========
(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 Stockholders' Equity (Deficit)
Years ended December 31, 2003, 2002 and 2001
(Dollars in Thousands)
Total
Accumu- Stock-
Additional lated holders'
Common Paid-In (Deficit) Treasury Equity
Stock Capital Earnings Stock (Deficit)
-------- --------- -------- -------- --------
Balance at January 1, 2001 . . $ 81 91,845 (160,079) (3,781) (71,934)
Net loss . . . . . . . . . . . -- -- (17,082) -- (17,082)
Distribution of uncon-
solidated investment . . . . -- -- (312) -- (312)
Spinoff of subsidiary. . . . . -- -- (34,318) -- (34,318)
-------- -------- -------- -------- --------
Balance at December 31, 2001 . 81 91,845 (211,791) (3,781) (123,646)
Net income . . . . . . . . . . -- -- 140,784 -- 140,784
Effect of reorganization . . . (81) (86,488) 88,145 3,781 5,357
-------- -------- -------- -------- --------
Balance at December 31, 2002 . -- 5,357 17,138 -- 22,495
Net income . . . . . . . . . . -- -- 70,636 -- 70,636
-------- -------- -------- -------- --------
Balance at December 31, 2003 . $ -- 5,357 87,774 -- 93,131
======== ======== ======== ======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
KAANAPALI LAND, LLC
Consolidated Statements of Cash Flows
Years ended December 31, 2003, 2002 and 2001
(Dollars in Thousands)
2003 2002 2001
-------- -------- --------
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . $ 70,636 140,784 (17,082)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) continuing operations:
Income from discontinued operations,
net. . . . . . . . . . . . . . . . . -- -- (10,094)
Extraordinary gain on reorganiza-
tion, net. . . . . . . . . . . . . . -- (136,618) --
Gains on sale of property. . . . . . . (18,657) -- --
Gain on disposition of uncon-
solidated investment . . . . . . . . (60,134) -- --
Restructuring costs. . . . . . . . . . -- (3,042) --
Depreciation and amortization. . . . . 1,164 2,994 3,621
Equity in loss (income) from
unconsolidated investments . . . . . 402 (5,180) 12,967
Reduction to carrying value of
investments. . . . . . . . . . . . . -- 13,717 18,109
Interest deferred on long-term debt. . -- -- (167)
Extinguishment of debt . . . . . . . . -- -- (10,717)
Changes in operating assets and
liabilities:
Receivables, net . . . . . . . . . . . 1,118 207 568
Accounts payable, accrued expenses
and other. . . . . . . . . . . . . . (17,048) (9,662) 17,470
Deferred income taxes. . . . . . . . . 10,226 (15,141) (3,462)
-------- -------- --------
Net cash provided by (used in)
operating activities . . . . . . . . . . (12,293) (11,941) 11,213
-------- -------- --------
Cash flows from investing activities:
Property additions . . . . . . . . . . . (1,190) (178) (532)
Property sales, disposals and
retirements, net . . . . . . . . . . . 26,994 457 3,191
Distributions from (contributions to)
investments in unconsolidated
entities, at equity, net . . . . . . . (254) 10,475 381
-------- -------- --------
Net cash provided by
investing activities . . . . . . . . . . 25,550 10,754 3,040
-------- -------- --------
KAANAPALI LAND, LLC
Consolidated Statements of Cash Flows - Continued
Years ended December 31, 2003, 2002 and 2001
(Dollars in Thousands)
2003 2002 2001
-------- -------- --------
Cash flows from financing activities:
Loan proceeds. . . . . . . . . . . . . . -- -- 8,500
Net repayments of debt . . . . . . . . . (110) (103) (19,027)
Loan acquisition costs . . . . . . . . . -- -- (23)
Settlement payments pursuant to
the Plan . . . . . . . . . . . . . . . -- (2,850) --
-------- -------- --------
Net cash used in
financing activities . . . . . . (110) (2,953) (10,550)
-------- -------- --------
Net increase (decrease) in
cash and cash equivalents. . . . 13,147 (4,140) 3,703
Cash and cash equivalents
at beginning of year . . . . . . 15,848 19,988 16,285
-------- -------- --------
Cash and cash equivalents
at end of year . . . . . . . . . $ 28,995 15,848 19,988
======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid for interest from
continuing operations. . . . . . . . . $ 643 916 7,083
======== ======== ========
Cash received (paid) for
income taxes . . . . . . . . . . . . . $ -- 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 L