Results of Operations
All references to "Notes" herein are to Notes to Consolidated Financial
Statements contained in this report. Information is not presented on a
reportable segment basis in this section because in the Company's judgment such
discussion is not material to an understanding of the Company's business.
In addition to historical information, this Report contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements are based on management's current expectations about its
businesses and the markets in which the Company operates. Such forward-looking
statements are not guarantees of future performance and involve known and
unknown risks, uncertainties or other factors which may cause actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Actual operating results may be affected by various
factors including, without limitation, changes in international, national and
Hawaiian economic conditions, competitive market conditions, uncertainties and
costs related to the imposition of conditions on receipt of governmental
approvals and costs of material and labor, the effect of the COVID-19 virus and
variants, 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
Certain subsidiaries of Kaanapali Land are jointly indebted to Kaanapali Land
pursuant to a certain Secured Promissory Note in the principal amount of $70
million dated November 14, 2002, and due September 30, 2029, as extended. Such
note had an outstanding balance of principal and accrued interest as of
December 31, 2021 and 2020 of approximately $91 million and $90 million,
respectively. The interest rate currently is 0.39% per annum and compounds
semi-annually. The note, which is prepayable, is secured by substantially all of
the remaining real property owned by such subsidiaries, pursuant to a certain
Mortgage, Security Agreement and Financing Statement, dated as of November 14,
2002 and placed on record in December 2002. The note has been eliminated in the
consolidated financial statements because the obligors are consolidated
subsidiaries of Kaanapali Land.
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In addition to such Secured Promissory Note, certain other subsidiaries of
Kaanapali Land continue to be liable to Kaanapali Land under certain guarantees
(the "Guarantees") that they had previously provided to support certain Senior
Indebtedness (as defined in the Plan) and the Certificate of Land Appreciation
Notes ("COLA Notes") formerly issued by Amfac/JMB Hawaii, Inc. (as predecessor
to KLC Land). Although such Senior Indebtedness and COLA Notes were discharged
under the Plan, the Guarantees of the Non-Debtor KLC Subsidiaries were not.
Thus, to the extent that the holders of the Senior Indebtedness and COLA Notes
did not receive payment on the outstanding balance thereof from distributions
made under the Plan, the remaining amounts due thereunder remain obligations of
the Non-Debtor KLC Subsidiaries under the Guarantees. Under the Plan, the
obligations of the Non-Debtor KLC Subsidiaries under such Guarantees were
assigned by the holders of the Senior Indebtedness and COLA Notes to Kaanapali
Land on the Plan Effective Date. Kaanapali Land has notified each of the
Non-Debtor KLC Subsidiaries that are liable under such Guarantees that their
respective guarantee obligations are due and owing and that Kaanapali Land
reserves all of its rights and remedies in such regard. Given the financial
condition of such Non-Debtor Subsidiaries, however, it is unlikely that
Kaanapali Land will realize payments on such Guarantees that are more than a
small percentage of the total amounts outstanding thereunder or that in the
aggregate will generate any material proceeds to the Company. 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 a predecessor of the
Company and were holders of COLAs on the date that the Plan was confirmed by the
Bankruptcy Court, and their successors in interest, represent approximately 9.0%
of the ownership of the Company.
The Company had cash and cash equivalents of approximately $17 million and $18
million, as of December 31, 2021 and 2020, respectively, which is available for,
among other things, working capital requirements, including future operating
expenses, and the Company's obligations for engineering, planning, regulatory
and development costs, drainage and utilities, environmental remediation costs
on existing and former properties, potential liabilities resulting from tax
audits, and existing and possible future litigation. The Company does not
anticipate making any distributions for the foreseeable future.
The primary business of Kaanapali Land is the investment in and development of
the Company's assets on the Island of Maui. The various development plans will
take many years at significant expense to fully implement. Reference is made to
Item 1 - Business, Note 7 of the consolidated financial statements and other
footnotes to the consolidated 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 operations have in recent periods been primarily reliant upon the
net proceeds of sales of developed and undeveloped land parcels.
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In September 2014, Kaanapali Land Management Corp. ("KLMC"), pursuant to a
property and option purchase agreement with an unrelated third party, closed on
the sale of an approximate 14.9 acre parcel in West Maui. The purchase price was
$3.3 million, paid in cash at closing. The agreement (as subsequently amended)
commits KLMC to fund up to $0.6 million, depending on various factors, for
off-site roadway, sewer and electrical improvements that will also provide
service to other KLMC properties. Although certain offsite construction has
begun at the site, the commitment remains outstanding as construction of such
improvements does not yet trigger such funding. The 14.9 acre site is intended
to be used for a critical access hospital, skilled nursing facility, assisted
living facility, and independent living facility.
During the first quarter of 2006, the Company received final subdivision
approval on an approximate 336 acre parcel in the region "mauka" (toward the
mountains) from the main highway serving the area. This project, called
Kaanapali Coffee Farms, originally consisted of 51 agricultural lots, offered to
individual buyers. During the second quarter of 2021, the Company converted an
approximate 55 acre cultural resources lot to an agricultural lot, which has
been offered for sale. The Company entered into a contract to sell this lot in
December 2021 and the sale closed on March 22, 2022. The purchase price was $5
million, paid in cash at closing. As of December 31, 2021, the Company sold
fifty-one lots at Kaanapali Coffee Farms including one lot in December 2021.
The Company is in the planning stages for the development of a 295-acre parcel
in the region mauka of the Kaanapali Coffee Farms ("KCF Mauka"). The parcel is
to be comprised of 61 agricultural lots that will be offered to individual
buyers. The Company expects to develop the parcel in phases and all phases have
been submitted to the County for subdivision approval. The Company is working
with the County to resolve certain of the County's comments relating to the
subdivision. Upon final subdivision approval and receipt of final plat of the
first phase from the County, which requires a bond in the amount of the cost to
develop the first phase, the Company can pre-sell the undeveloped lots in the
first phase. The Company expects to market the lots in the first phase upon
receiving final approvals from the County of Maui, subject to various
contingencies, including, but not limited to, governmental and market factors
and the availability of a bond to secure the first phase of the development.
Therefore, there can be no assurance the Company will be able to meet such
timetable, that the subdivision will ultimately be approved or that the lots
will sell for prices deemed advantageous by the Company.
In January 2021, the Company entered into agreements with an unrelated third
party for that third party to prepare plans to develop Puukolii Village Mauka
and another subdivision on the Company's property. The plans are to include
development segments and timeline, offsite and onsite infrastructure,
construction cost analysis, proposed budgets and proforma financial statements.
If after discussion and negotiation the Company and the third party are unable
to agree on the plans, then either the Company or the third party may terminate
the agreements. Such discussions are ongoing.
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At a public meeting on January 18, 2022, the staff of the State of Hawaii
Commission on Water Resource Management ("CWRM") presented an informational
briefing on the "Designation of the Lahaina Aquifer Section; Maui as a Surface
Water and Ground Water Management Area" as recommended by the Chair of the
Commission. The Commission's primary responsibilities are to implement and
administer the State Water Code by planning, surveying, regulating, enforcing,
and conserving the State's water resources. This includes regulating the use of
water resources in water management areas. At its meeting on February 15, 2022,
the Commissioners of CWRM unanimously voted to accept the Chairperson's
recommendation. The next step in the designation process is for CWRM to hold
public hearings on the recommended designation. The proposed designation would
regulate the surface and groundwaters supplying the Company's irrigation systems
that take water from streams, development tunnels, and wells. The Company is
evaluating the potential effects, if any, this designation may have on its
agricultural operations and developments.
The Company's Pension Plan has excess assets of approximately $20 million. On
January 15, 2022, Pacific Trail Holdings LLC, the manager of the Company,
adopted a plan to freeze the benefit accruals under and close participation in
the Pension Plan and terminate the Pension Plan on or about June 1, 2022. After
distribution of Pension Plan benefits to participants, remaining surplus Pension
Plan assets are expected to be distributed from the Pension Plan in accordance
with the requirements of the Internal Revenue Code of 1986 (as amended) by
certain regulatory deadlines.
Although the Company does not currently believe that it has significant
liquidity problems over the near term, should the Company be unable to satisfy
its liquidity requirements from its existing resources and future property
sales, it will likely pursue alternate financing arrangements. However it cannot
be determined at this time what, if any, financing alternatives may be available
and at what cost.
In March 2020, the World Health Organization declared the outbreak of COVID-19
as a pandemic, and the U.S. and Hawaiian economy began to experience pronounced
disruptions. Quarantine, travel restrictions and other governmental restrictions
to reduce the spread of COVID-19 caused an adverse impact on economic activity,
including disruptions to global supply chains, business closures, stricter work
rules, increased unemployment, financial market instability, and reduced tourism
to Maui. Certain travel restrictions to the State of Hawaii and the County of
Maui were eased during 2021 resulting in a significant increase in visitor
arrivals to Maui. The effects of an improving economy could be negatively
impacted by potential surges in COVID-19 and new variants, the administration
and effectiveness of vaccines and government responses to future developments as
well as supply chain disruptions, labor shortages and rising inflation. The
duration of this disruption on global, national, and local economies cannot be
reasonably estimated at this time. Therefore, while this matter could negatively
and materially impact our results and financial position, the related financial
impact cannot be reasonably estimated at this time. The Company continues to
monitor the economic impact of the COVID-19 pandemic, as well as mitigating
emergency assistance programs, such as the Coronavirus Aid, Relief and Economic
Security Act (CARES Act).
Results of Operations
Reference is made to the footnotes to the financial statements for additional
discussion of items addressing comparability between years.
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2021 Compared to 2020
The increase in other assets at December 31, 2021 as compared to December 31,
2020 is primarily due insurance recoveries receivable related to the Waipio site
offset by refundable alternative minimum tax credits received from the IRS in
February and July 2021.
The increase in other liabilities at December 31, 2021 as compared to December
31, 2020 is due to the adjustment of the loss contingency related to the Waipio
site during the first quarter of 2021.
The decrease in selling, general and administrative expenses for the year ended
December 31, 2021 as compared to the year ended December 31, 2020 is due to the
adjustment of the loss contingency offset by insurance recoveries related to the
Waipio site.
The increase in sales and the related increase in costs of sales for the year
ended December 31, 2021 as compared to the year ended December 31, 2020 is
primarily due to sale of one lot during 2021, as compared to no lot sales in
2020.
2020 Compared to 2019
The decrease in sales for the year ended December 31, 2020 as compared to the
year ended December 31, 2019 is primarily due to the negative impact on coffee
sales due to the COVID-19 pandemic mandates which included restrictions on
travel, both inter-island and trans-Pacific arrivals to the Hawaiian islands,
and other mandates negatively impacting business and the economy in Hawaii
during 2020.
The related increase in interest and other income for the year ended December
31, 2020 as compared to the year ended December 31, 2019 is primarily due to a
nonrefundable option payment included in income when the option expired at
December 31, 2020.
Critical Estimates and Significant 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, assumptions, and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. These estimates are based on
historical experience and on various other assumptions that management believes
are reasonable under the circumstances; additionally management evaluates these
results on an on-going basis. Management's estimates form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Different estimates could be made under
different assumptions or conditions, and in any event, actual results may differ
from the estimates. The impact of a change in these estimates, assumptions, and
judgments could materially affect the amounts reported in the Company's
consolidated financial statements.
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The Company reviews its property for impairment of value if events or
circumstances indicate that the carrying amount of its property may not be
recoverable. Such reviews contain uncertainties due to assumptions and judgments
considering certain indicators 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 if significant changes occur in
future periods, future operating results could be materially impacted.
Pension assumptions are significant inputs to the actuarial models that measure
pension benefit obligations and related effects on operations. Two assumptions -
discount rate and expected return on assets - are important elements of plan
expense and asset/liability measurement. The Company evaluates these critical
assumptions at least annually. The Company periodically evaluates other
assumptions involving demographic factors such as mortality, and updates the
assumptions to reflect experience and expectations for the future. Such
assumptions require significant judgment by the Company and its actuaries and
therefore actual results in any given year will often differ from actuarial
assumptions because of economic and other factors. Reference is made to Note 4
of the consolidated financial statements for further discussion.
Deferred income taxes are accounted for in accordance with FASB ASC Topic 740 -
Income Taxes. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Topic 740
requires that deferred tax assets be reduced by a valuation allowance if it is
more likely than not that some portion of the deferred income tax asset will not
be realized. The Company has a deferred tax asset related to federal net
operating losses (NOLs) of $10,590, of which $6,953 has been subject to a
valuation allowance. Such allowance is subject to assumptions and judgment. If
the Company generates taxable income in future years and the Company determines
that the valuation allowance is no longer required, the tax benefit for the
remaining deferred tax asset will be recognized at that time. Reference is made
to Note 5 of the consolidated financial statements for further discussion.
Material legal proceedings of the Company include Kaanapali Land, as successor
by merger to other entities, and D/C having been named as defendants in personal
injury actions allegedly based on exposure to asbestos. Cases against Kaanapali
Land are allegedly based on its prior business operations in Hawaii and cases
against D/C are allegedly based on sale of asbestos-containing products by D/C's
prior distribution business operations primarily in California. The Company has
recognized loss contingencies related to these claims. Predicting the outcome of
such claims and estimating the costs and exposure requires the Company to make
estimates, assumptions, and judgments that could result in actual costs to be
materially different from such estimates. Reference is made to Note 7 of the
consolidated financial statements for further discussion.
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