KANP 10-K
Kaanapali Land LLC (KANP)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended | |
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or
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| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from _____ to _____
| Commission file number: |
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
(Zip Code) |
Registrant's telephone number, including area
code
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) |
Name of each exchange on which registered |
Securities registered pursuant to Section 12(g) of the Act:
Limited Liability Company Interests (Class A Shares)
(Title of Class)
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ]
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ]
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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 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.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | [ ] | Accelerated filer | [ ] | |||
| [ X ] | Smaller reporting company | [ |
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| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes [ ] No [ ]
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. [ ]
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). [ ]
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ]
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. .
As of April 10, 2023, the registrant had Common Shares and 52,000 Class C Shares outstanding.
Documents incorporated by reference: None
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| Part I | Page | |||
| Item 1. | Business | 4 | ||
| Item 1A. | Risk Factors | 12 | ||
| Item 1B. | Unresolved Staff Comments | 18 | ||
| Item 2. | Properties | 18 | ||
| Item 3. | Legal Proceedings | 18 | ||
| Item 4. | Mine Safety Disclosures | 18 | ||
| Part II | ||||
| Item 5. |
Market for Registrant’s Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities |
18 | ||
| Item 6. | [Reserved] | 19 | ||
| Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
19 | ||
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 25 | ||
| Item 8. | Financial Statements and Supplementary Data | 26 | ||
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 57 | ||
| Item 9A. | Controls and Procedures | 57 | ||
| Item 9B. | Other Information | 58 | ||
| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections ` | 58 | ||
| Part III | ||||
| Item 10. | Directors, Executive Officers and Corporate Governance | 59 | ||
| Item 11. | Executive Compensation | 61 | ||
| Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
62 | ||
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | 62 | ||
| Item 14. | Principal Accountant Fees and Services | 63 | ||
| Part IV | ||||
| Item 15. | Exhibits and Financial Statement Schedules | 64 | ||
| Item 16. | Form 10-K Summary | 64 | ||
| Signatures | 65 | |||
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Part I
Item 1. Business
Kaanapali Land, LLC ("Kaanapali Land" or the “Company”), a Delaware limited liability company, is the reorganized entity resulting from the Joint Plan of Reorganization of Amfac Hawaii, LLC (now known as KLC Land Company, LLC (“KLC Land”)), certain of its subsidiaries (together with KLC Land, the “KLC Debtors”) and FHT Corporation (“FHTC” and, together with the KLC Debtors, the “Debtors”) under Chapter 11 of the Bankruptcy Code, dated June 11, 2002 (as amended, the “Plan”). The Plan was filed jointly by all Debtors to consolidate each case for joint administration in the Bankruptcy Court in order to (a) permit the petitioners to present a joint reorganization plan that recognized, among other things, the common indebtedness of the debtors (i.e. the Certificate of Land Appreciation Notes (“COLAs”) and Senior Indebtedness) and (b) facilitate the overall administration of the bankruptcy proceedings. As indicated in the Plan, Kaanapali Land has elected to be taxable as a corporation.
The 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”). During August 2005, pursuant to a motion for entry of final decree, the bankruptcy cases were closed.
The Company operates in two primary business segments: (i) Property and (ii) Agriculture. The Company operates through a number of subsidiaries, each of which is owned directly or indirectly by Kaanapali Land, LLC.
KLC Land is the direct subsidiary of Kaanapali Land through which the Company conducts substantially all of its remaining operations. KLC Land conducts substantially all of its business through various subsidiaries. Those subsidiaries with remaining assets of significant net value include KLC Holding Corp. ("KLC"), Pioneer Mill Company, LLC ("PMCo"), Kaanapali Land Management Corp. ("KLMC" formerly known as Kaanapali Development Corp.) and PM Land Company, LLC. In 2013, the Kaanapali Coffee Farms Lot Owners’ Association (“KCF LOA”) was consolidated with the interests of third-party owners reflected as non-controlling interests. The KCF LOA was deconsolidated in the third quarter of 2022 as a result of the turnover of control of the KCF LOA board of directors to the third-party owners of the lots in the subdivision.
All dollar amounts are in thousands of dollars unless otherwise noted.
Project Planning and Development. The Company's real estate development approach, for land that it holds for development rather than investment, is designed to enhance the value of its properties in phases. In most instances, the process begins with the preparation of market and feasibility studies that consider potential uses for the property, as well as costs associated with those uses. The studies consider factors such as location, physical characteristics, demographic patterns, anticipated absorption rates, transportation, infrastructure costs, both onsite and offsite, and regulatory and environmental requirements.
For any property targeted for development, the Company will generally prepare a land plan that is consistent with the findings of the studies and then commence the process of applying for the entitlements necessary to permit the use of the property in accordance with the land plan. The length and difficulty of obtaining the requisite entitlements by government agencies, as well as the cost of complying with any conditions attached to the entitlements, are significant factors in determining the viability of the Company's projects. Applications for entitlements may include, among other things, applications for state land use reclassification, county community plan amendments, changes in zoning, and if applicable, subdivision.
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Kaanapali 2020 Development Plan. The Company's developable lands are located on the west side of the Island of Maui in the State of Hawaii. The majority of the developable lands are located near to the Kaanapali resort area. The Kaanapali development lands have been the subject of a community-based planning process that commenced in 1999 for the Kaanapali 2020 Development Plan. The Kaanapali 2020 Development Plan includes a mix of residential (including workforce affordable housing), commercial, quasi-public facilities, recreation, agriculture, rural, and open space. Any development plan for any of the Company's land, including the Kaanapali 2020 Development Plan, will be subject to approval and regulation by various state and county agencies and governing entities, especially insofar as the nature and extent of zoning, and improvements necessary for site infrastructure, building, transportation, water management, environmental and health are concerned. A substantial portion of the Company’s Kaanapali 2020 Development Plan land will require state district boundary amendments and county general plan and community plan amendments, as well as rezoning approvals. In Hawaii, the governmental entities may impose limits or controls on growth in their communities during the review and consideration of the various entitlement process mainly through restrictive conditions, including limitations on density, impact fees, infrastructure contribution, among others, all of which may materially affect utilization of the land and the costs associated with developing the land. In addition, Maui County currently requires certain percentages and levels of affordability to be included in proposed residential developments or subdivisions of land, thereby affecting the feasibility of these projects. There can be no assurance that the Company will be successful in obtaining the necessary zoning and related entitlements for development of any currently unentitled Maui lands. At this time, the only Kaanapali 2020 Development Plan land that has sufficient entitlements to commence development is the Puukolii Village Mauka development, as described below.
The current regulatory approval process for a development project takes a number of years or more and involves substantial expense. The applications generally require the submission of comprehensive plans that involve the use of consultants and other professionals. A substantial portion of the Company's Kaanapali 2020 Development Plan land will require state district boundary amendments and county general plan and community plan amendments, as well as rezoning approvals. There is no assurance that all necessary approvals and permits will be obtained with respect to the current projects or future projects of the Company. Generally, entitlements are extremely difficult to obtain in Hawaii. There is often significant opposition to proposed developments from numerous local groups, environmental organizations, various community and civic groups, condominium associations and politicians advocating no-growth policies, among others. Any such group with standing can challenge submitted applications, which may substantially delay the process. Generally, once the applications are deemed acceptable, the various governing agencies involved in the entitlement process commence consideration of the requested entitlements. The applicable agencies often impose conditions, which may be costly and time consuming, on any approvals of the entitlements. The substantial time and expense of obtaining entitlements and the uncertainty of success in obtaining the entitlements could have a material adverse effect on the Company's success.
At the state level, all land in Hawaii is divided into four land use classifications: urban, rural, agricultural and conservation. The majority of the Kaanapali 2020 Development Plan land is currently classified as either agricultural or conservation.
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A relatively small portion (approximately 300 acres) of the Kaanapali 2020 Development Planning area owned by the Company, known as Puukolii Village Mauka, comprised of two parcels known as Puukolii Village Mauka and another parcel adjacent to Puukolii Village Mauka, received entitlements in 1993 under the terms of a superseded law that fast tracked entitlements for planned mixed use developments that contained the requisite percentage of affordable housing units. The requirements imposed on the Company relative to these entitlements proved uneconomic and thus the developments were not pursued. The Company proposed revisions to certain entitlement conditions as well as the development agreement with the applicable state agencies and is continuing to plan for the development of the Puukolii Village Mauka area, which will, if ultimately developed, include certain affordable and market housing units, a small commercial area, a school, a park and associated improvements. From 2007 through 2009, the Company received various approvals of its proposed revisions of entitlement conditions and of the development agreement including the addition of the County housing department as an added party.
Despite the hurdles mentioned above, the Company remains hopeful that it will generally be able to develop that portion of its land for which it can obtain classification as an urban district from the State Land Use Commission. However, it is uncertain whether the Company will be able to obtain all necessary entitlements or, if so, how long it will take, and it cannot be predicted what the market will be for such land (or the associated development costs) at such time. Conservation land is land that has been considered by the state as necessary for preserving natural conditions as well as to protect water resources and cannot be developed. Lands within agricultural and rural districts have limited development potential, especially as it relates to density and use. Pursuant to the Kaanapali 2020 Development Plan, the Company intends to apply to the State Land Use Commission for reclassification of a portion of the agricultural lands to urban, and perhaps some rural, but does not intend to apply for reclassification of the conservation lands.
During 2012, Maui County updated its General Plan which projects general growth of the County over the next few decades. This update included a new component with maps which show directed growth areas. The County of Maui recognized the Kaanapali 2020 Development Plan to be within the urban growth limits identified in these directed growth maps. Development of the Kaanapali 2020 Development Plan lands in accordance with the Kaanapali 2020 Development Plan will require, in addition to State Land Use reclassification of some of the land from agriculture to urban, appropriate designation under the County community plan, and the appropriate County zoning designation included in the Maui County General Plan noting it as an urban growth area. In December 2021, the West Maui Community Plan (“WMCP”), which consists of a vision statement, goals, policies, and actions to guide growth and preservation in West Maui, was updated and became part of the General Plan. The Company is evaluating the effect, if any, the changes to the WMCP will have on its development plans. Obtaining any and all of these approvals can involve a substantial amount of time and expense, and approvals may need to be resubmitted if there is any subsequent, material deviation in current approved plans or significant objections by the responsible government agencies. There are no assurances that the Company can obtain approvals or deviations.
In connection with any successful petition to change any of the various land use classifications (state land use district, county community plan, county zoning) of the Kaanapali 2020 Development Plan, the Company may be required to make significant improvements in public facilities (such as roads), to dedicate property for public use, to provide employee/workforce housing units and to make other concessions, monetary or otherwise. The ability of the Company to perform its development activities may also be adversely affected by restrictions that may be imposed by government agencies and the surrounding communities because of inadequate public facilities, such as roads, water management areas and sewer facilities, and by local opposition to continued growth. However, as part of the Kaanapali 2020 Development Plan, the Company has included a number of community members and local government officials in the development planning process and has
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earned significant community support for its preliminary Kaanapali 2020 Development Plans. It also believes that it enjoys general local community support for its new Puukolii Village Mauka concept. The Company hopes that carrying on with this process will continue to generate substantial support from local government and the community for the Company's development plans.
There can be no assurance that all necessary approvals will be obtained, that modifications to those plans will not require additional approvals, or that such additional approvals will be obtained, nor can there be any assurance as to the timing of such events.
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 of Maui (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, 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.
KLMC is a party to an agreement with the State of Hawaii for the development of the Lahaina Bypass Highway. An approximate 2.4 mile portion of this two lane state highway has been completed. Construction to extend the southern terminus was completed mid-2018. The northern portion of the Bypass Highway, which extends to KLMC’s lands, is in the early stage of planning. Under certain circumstances, which have not yet occurred, KLMC remains committed for approximately $1.1 million of various future costs relating to the planning and design of the uncompleted portion of the Bypass Highway. Under certain conditions, which have not yet been met, KLMC has agreed to contribute an amount not exceeding $6.7 million toward construction costs. Any such amount contributed would be reduced by the value of KLMC’s land actually contributed to the State for the Bypass Highway.
These potential commitments have not been reflected in the accompanying consolidated financial statements. While the completion of the Bypass Highway would add value to KLMC’s lands north of the town of Lahaina, there can be no assurance that it will be completed or when any future phases will be undertaken.
Other Maui Property. The Company owns approximately 19 acres in Lahaina, known as the Pioneer Mill Site, which is zoned primarily industrial. This is the former site of Pioneer Mill's sugar mill on Maui and continues to be the site of the coffee mill operation. In addition, portions of this parcel are subject to various short-term license agreements with third parties that generate income for the Company. Plans are in process for future potential development of the site.
Agriculture
Current Operations. Agricultural operations consist primarily of cultivation, milling and sale of coffee. During the late 1980s one of the Company’s subsidiaries participated in field trials with the University of Hawaii College of Tropical Agriculture & Human Resources experimenting with over 20 coffee varietals (out of approximately 300 coffee varieties) in different test plots throughout the state. As a result of the trial, four coffee varieties were found to be best suited for growing in West Maui. Based on the results of the trial, in the early 1990s, the Company converted approximately 500 acres of sugar cane land for use as a commercial coffee operation. The coffee farm
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was shut down during the early 2000’s and brought back into production in the mid to late 2000’s and is currently in full production. The coffee farming operation includes manpower and equipment required to fertilize, prune and maintain the coffee plantations as well as equipment required to harvest and haul coffee cherry to the Company’s processing plant (the “Mill”) located on the former sugar mill site in Lahaina, Hawaii. The Company also maintains and operates a system of irrigation infrastructure including development tunnels, ditches, tunnels, siphons, flumes and reservoirs required to irrigate the Company’s agricultural operations and future planned developments with non-potable water.
The Company sells milled green coffee under the brand name Mauigrown Coffee to mostly interisland Hawaii customers, generally roasters who have retail coffee shops and also sell to grocery stores and online. Based on availability, green coffee is also shipped and sold to mainland and international customers, including roasters, dealers, and traders. Portions of the coffee farms are operated as part of the 336-acre Kaanapali Coffee Farms agricultural subdivision, in which a portion of each lot owned by the lot owner is used for their single-family dwelling, while the remainder of the lot containing coffee trees is farmed by the Company. The Company has entered into certain agreements with the Kaanapali Coffee Farms Lot Owners Association in this regard. The planned 295-acre, second phase of KCF Mauka will be within the coffee farming area as well. The Company continues to plant additional acreage of coffee on its agricultural land not currently included in the developable lands of Kaanapali 2020 Development Plan.
Coffee production and yields are subject to many factors, particularity weather related factors, including rainfall and the availability of sufficient irrigation water flowing through its irrigation system. Yields may be reduced in years of drought when irrigation water and rainfall is insufficient. Reference is made to Item 1A. Risk Factors for risks relating to agriculture. The Company purchases crop insurance annually which reduces certain coffee crop production risks. The Company received crop insurance proceeds in 2022 related to losses sustained to the 2021 coffee crop due to an insured event. Additionally, acreage under production is reduced annually by required tree pruning of approximately one quarter to one third of total coffee acreage in production.
The coffee is sold as Maui origin “specialty coffee” (as defined by the Specialty Coffee Association) as is most coffee produced in Hawaii. Hawaiian coffees generally command a higher price per pound green than many other specialty coffees produced around the world but there can be no assurance such prices will continue or that coffee prices or yields will be sufficient to cover all costs of production and sales.
In addition to the Company’s commercial coffee farming operations, the Company grows bananas, citrus, and alfalfa. The Company also has approximately 660 acres of fenced pasture for cattle grazing as well as approximately 40 acres of fenced pasture for goat grazing. The Company’s banana operation currently consists of approximately 14 acres. The bananas are sold by the Company to certain customers for distribution on Maui. KLMC also grows and sells various citrus including grapefruit and lemons. These are sold to various local venders to be sold at farmer’s markets on Maui. Although the Company realizes minor amounts of revenue relating to these agricultural operations there are certain property tax advantages with land engaged in active agriculture.
For a description of financial information by segment, please read Note 8 to the attached consolidated financial statements, which information is incorporated herein by reference.
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Employees
At March 1, 2023, Kaanapali Land and its subsidiaries employed a total of 24 employees. Certain corporate services are provided by Pacific Trail Holdings, LLC (“Pacific Trail”) and its affiliates. Pacific Trail owns in excess of 80% of the Common Shares of Kaanapali Land. Kaanapali Land reimburses Pacific Trail and its affiliates for these services and related overhead at cost.
Trademarks and Service Marks
The Company maintains a variety of trademarks and service marks that support each of its business segments. These marks are filed in various jurisdictions, including the United States Patent and Trademark Office, the State of Hawaii Department of Commerce and Consumer Affairs and foreign trademark offices. The trademarks and service marks protect, among other things, the use of the term "Kaanapali" and related names in connection with the developments in the vicinity of the Kaanapali Resort area on Maui and the various trade names and service marks obtained in connection with the Company's coffee operations. Certain trademarks, trade names and service marks have also been registered in connection with the Kaanapali Coffee Farms development. Also protected are certain designs and logos associated with the names protected. Certain marks owned by the Company have been licensed to third parties, however, the income therefrom is not material to the Company's financial results. To the extent deemed advantageous in connection with the Company's ongoing businesses, to satisfy contractual commitments with respect to certain marks or where the Company believes that there are future licensing opportunities with respect to specific marks, the Company intends to maintain such marks to the extent necessary to protect their use relative thereto. The Company also intends to develop and protect appropriate marks in connection with its future land development and agricultural activities.
Market Conditions and Competition
There are a number of factors that historically have negatively impacted Kaanapali Land's property activities, including market conditions, the difficulty in obtaining regulatory approvals, the high cost of required infrastructure and the Company's ability to maintain operating surplus in its other business segment. As a result, the planned use of many of the Company's land holdings and the ability to generate cash flow from these land holdings have become long-term in nature, and the Company has found it necessary to sell certain parcels in order to raise cash rather than realize their full economic potential through the entitlement process.
Maui's residential real estate market experienced a dramatic slowdown beginning in the latter part of 2005. The international credit crisis resulted in both national and global economic downturns and had a significant adverse impact on the Hawaiian economy. Market conditions moved in a positive direction from 2014 through 2019. The COVID-19 pandemic adversely impacted real estate development and caused overall economic and financial market instability during 2020 and early 2021. Market conditions improved during 2021 but a resurgence of COVID-19, or the emergence of new, significant variants, could cause a weakening of the Maui real estate market which could negatively impact the Company.
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There are several developers, operators, real estate companies and other owners of real estate that compete with the Company in its property business on Maui, many of which have greater resources. The number of competitive properties in a particular market could have a material adverse effect on the Company's success. In addition, many properties previously purchased from the Company by retail buyers are listed for resale and could provide additional competition to the Company in future years.
Government Regulations and Approvals
The current regulatory approval process for a project can take many years 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. Many different agencies at the state and county level are involved in the entitlement process. There is often significant opposition from numerous local groups - including environmental organizations, various community and civic groups, condominium associations and politicians advocating no-growth policies, among others. Certain ordinances adopted by the County of Maui have placed additional requirements on developers, some of which may be difficult or expensive to satisfy. Other proposed ordinances that have not yet passed may place moratoria on new development. It is currently unknown to what extent new legislative initiatives will impact the cost or timing of the Company's planned developments.
At its June 14, 2022 meeting, the State of Hawaii Commission on Water Resource Management (“CWRM”) unanimously voted to accept Findings of Fact and the Chairperson’s recommendation to Designate the Lahaina Aquifer Sector Area as both a Surface Water and Ground Water Management Area including the Honokohau, Honolua, Honokahua, Kahana, Honokowai, Wahikuli, Kahoma, Kaua`ula, Launiupoko, Olowalu, and Ukumehame Groundwater Hydrologic Units, Island of Maui, Hawaii. By accepting the recommendation, CWRM thereby established administrative control over the ground and surface waters in the Lahaina Aquifer Sector Area. The intended purpose of that designation was described by the CWRM staff as serving to “ensure protection and reasonable beneficial use of” those waters. The Lahaina Aquifer Sector includes the Honokowai hydrologic unit from which the Company currently derives almost all of its non-potable water. The designation means that the Company and all users of water in the Lahaina Aquifer Sector Area will be required to apply for water use permits pursuant to a process that will call for the water purveyors (and potentially their end-users) to demonstrate that their existing uses meet the “reasonable beneficial use” standards adopted by CWRM. Applications for permits to use water for future uses likely will be considered only after existing users have completed their applications based on existing uses. One possible result of the designation is a potential inability to secure permits from CWRM for future uses.
By letters dated October 28, 2022, CWRM officially designated all six Aquifer System Areas of the Lahaina Aquifer Sector, Maui, as Ground Water Management Areas, as of August 6, 2022. CWRM notified the Company that by August 5, 2023, the Company would need to apply for ground and surface water use permits to continue the Company's use of certain wells that are integral to the Company's entire operations. The permits, when applied for and granted and subject to various conditions, would preserve the Company's existing water uses as of August 6, 2022. The Company is preparing permit applications to cover its existing uses. The Company cannot provide any assurances that CWRM will approve such permit applications for the amounts of water the Company seeks or impose conditions on such use that might affect the Company’s operations. If CWRM should fail to approve the Company’s water requests or impose onerous conditions on its use, CWRM’s actions could delay the Company’s development in substantial and material respects and affect the Company’s operations. Further, in the event
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permits adequate to the Company's plans are not received or not received timely, there could be negative impacts on the west Maui real estate market as a whole and the development and sale of the Company's lands on the Island of Maui, thereby materially and adversely affecting the Company's operations, land sales, land values, results, and financial position.
By letter dated March 13, 2023, CWRM provided the Company a notice of alleged water violation covering the metering and monitoring of certain designated areas with the Honokowai aquifer and hydrologic unit, as well as certain waste conditions CWRM allegedly observed on prior investigations of those certain areas. The Company is reaching out to address the alleged violations with CWRM and to seek clarification of the issues. The Company does not believe that such issues, when and if addressed by Company action, will prove material in cost, but there are no assurances of same.
Kaanapali Land continues to work toward the necessary entitlements for the Kaanapali 2020 Development Plan. While some of these lands have some form of entitlements, it is anticipated that at least a substantial portion of the land will require state district boundary amendments and Community Plan amendments, as well as rezoning approvals. In January 2009 the Company received approval of revisions to its development plans for the Puukolii Village Mauka parcels. The Kaanapali 2020 Development Plan is recognized within the urban growth areas identified in the growth maps of the Maui County General Plan. Approximately 1,500 acres of the Company's Maui land which is contiguous to Kaanapali 2020 Development Plan land is located toward the top of mountain ridges and in gulches is classified as conservation, which precludes most other use. This conservation land, and other land that will be designated as open space, is an important component of the overall project, allowing for the protection of water and other natural resources, and its existence is expected to influence obtaining the entitlements for the remaining land.
Environmental Matters
The Company is subject to environmental and health safety laws and regulations related to the ownership, operation, development and acquisition of real estate, or the operation of former business units. Under those laws and regulations, the Company may be liable for, among other things, the costs of removal or remediation of certain hazardous substances. In addition, the Company may find itself having to defend against personal injury lawsuits based on exposure to substances including asbestos related liabilities. Regarding asbestos related liabilities, Kaanapali Land, as successor to other entities and D/C Distribution Corporation (“D/C”) have been named as defendants in personal injury actions allegedly based on exposure to asbestos. Those laws and regulations often impose liability without regard to fault. With regard to other environmental matters as generally described in the risk factors set forth below, no assurance can be given that those matters will not have a material adverse effect on the Company’s consolidated financial position or results of operations. Reference is made to Item 1A. Risk Factors and Note 7 of the consolidated financial statements for a description of certain legal proceedings related to environmental conditions.
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Item 1A. Risk Factors
The Company faces numerous risks and uncertainties, including those set forth below. The risks described below are not the only risks that the Company faces. New risk factors emerge from time to time and it is not possible to predict all such risk factors. Risk factors include a number of factors that could negatively impact Kaanapali Land's property activities. Any of the risks described below and potential new risks not yet identified may have a material adverse effect on the Company's success, consolidated financial position or results of operations.
Reference is made to Item 1. Business and Item 3. Legal Proceedings for an item specific detailed discussion of some of the risk factors facing Kaanapali Land, LLC.
Risks Related to Hawaiian Real Estate and Development Markets
The Kaanapali 2020 Development Plan (including, without limitation, Kaanapali Coffee Farms and Puukolii Village Mauka), as well as the Company's other development activities, are, apart from the risks associated with the entitlement process described above, subject to the risks generally incident to the ownership and development of real property. These include the possibility that cash generated from sales will not be sufficient to meet the Company's continuing obligations. This could result from inadequate pricing or declines on asset values or pace of sales of properties or disruptions and delays in the supply of construction material or changes in costs of construction or development; increased and continuing government mandates; adverse changes in Hawaiian economic conditions, such as increased costs resulting from continuing high rates of inflation, and availability of labor, increased costs of marketing and production, restricted availability of financing; adverse changes in local, national and/or international economic conditions (including adverse changes in exchange rates of foreign currencies for U.S. dollars); adverse effects of international political events, such as geopolitical events in Europe, the Middle East, Asia, and Russia’s invasion of Ukraine, additional terrorist activity in the U.S. or abroad that lessen travel, tourism and investment in Hawaii; substantial increase in cost of travel to Hawaii due to the increase in fuel costs or other events in the airline industry that could lessen travel and tourism in Hawaii; the spread of contagious viruses or diseases, including the COVID-19 coronavirus, or the emergence of new, significant variants, that could negatively impact commerce generally and travel to Hawaii; the need for unanticipated improvements or unanticipated expenditures in connection with environmental matters; increase in real estate tax rates and other expenses; delays in obtaining permits or approvals for construction or development and adverse changes in laws, governmental rules and fiscal policies; acts of God, including earthquakes, volcanic eruptions, floods, droughts, fires, tsunamis, unusually heavy or prolonged rains, and hurricanes; and other factors which are beyond the control of the Company. Because of these risks and others, real estate ownership and development is subject to unexpected increases in costs.
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During 2012, Maui County updated its General Plan which projects general growth of the County over the next few decades. This update included a new component with maps which show directed growth areas. The County of Maui recognized the Kaanapali 2020 Development Plan to be within the urban growth limits identified in these directed growth maps. Development of the Kaanapali 2020 lands in accordance with the Kaanapali 2020 Development Plan will require, in addition to State Land Use reclassification of some of the land from agriculture to urban, appropriate designation under the County community plan, and the appropriate County zoning designation included in the Maui County General Plan noting it as an urban growth area. In December 2021, the West Maui Community Plan (“WMCP”), which consists of a vision statement, goals, policies, and actions to guide growth and preservation in West Maui, was updated and became part of the General Plan. The Company is evaluating the effect, if any, the changes to the WMCP will have on its development plans. Obtaining any and all of these approvals can involve a substantial amount of time and expense, and approvals may need to be resubmitted if there is any subsequent, material deviation in current approved plans or significant objections by the responsible government agencies. There are no assurances that the Company can obtain approvals or deviations.
At its June 14, 2022 meeting, the State of Hawaii Commission on Water Resource Management (“CWRM”) unanimously voted to accept Findings of Fact and the Chairperson’s recommendation to Designate the Lahaina Aquifer Sector Area as both a Surface Water and Ground Water Management Area including the Honokohau, Honolua, Honokahua, Kahana, Honokowai, Wahikuli, Kahoma, Kaua`ula, Launiupoko, Olowalu, and Ukumehame Groundwater Hydrologic Units, Island of Maui, Hawaii. By accepting the recommendation, CWRM thereby established administrative control over the ground and surface waters in the Lahaina Aquifer Sector Area. The intended purpose of that designation was described by the CWRM staff as serving to “ensure protection and reasonable beneficial use of” those waters. The Lahaina Aquifer Sector includes the Honokowai hydrologic unit from which the Company currently derives almost all of its non-potable water. The designation means that the Company and all users of water in the Lahaina Aquifer Sector Area will be required to apply for water use permits pursuant to a process that will call for the water purveyors (and potentially their end-users) to demonstrate that their existing uses meet the “reasonable beneficial use” standards adopted by CWRM. Applications for permits to use water for future uses likely will be considered only after existing users have completed their applications based on existing uses. One possible result of the designation is a potential inability to secure permits from CWRM for future uses.
By letters dated October 28, 2022, CWRM officially designated all six Aquifer System Areas of the Lahaina Aquifer Sector, Maui, as Ground Water Management Areas, as of August 6, 2022. CWRM notified the Company that by August 5, 2023, the Company would need to apply for ground and surface water use permits to continue the Company's use of certain wells that are integral to the Company's entire operations. The permits, when applied for and granted and subject to various conditions, would preserve the Company's existing water uses as of August 6, 2022. The Company is preparing permit applications to cover its existing uses. The Company cannot provide any assurances that CWRM will approve such permit applications for the amounts of water the Company seeks or impose conditions on such use that might affect the Company’s operations. If CWRM should fail to approve the Company’s water requests or impose onerous conditions on its use, CWRM’s actions could delay the Company’s development in substantial and material respects and affect the Company’s operations
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and finances. Further, in the event permits adequate to the Company's plans are not received or not received timely, there could be negative impacts on the west Maui real estate market as a whole and the development and sale of the Company's lands on the Island of Maui, thereby materially and adversely affecting the Company's operations, land sales, land values, results, and financial position.
By letter dated March 13, 2023, CWRM provided the Company a notice of alleged water violation covering the metering and monitoring of certain designated areas with the Honokowai aquifer and hydrologic unit, as well as certain waste conditions CWRM allegedly observed on prior investigations of those certain areas. The Company is reaching out to address the alleged violations with CWRM and to seek clarification of the issues. The Company does not believe that such issues, when and if addressed by Company action, will prove material in cost, but there are no assurances of same.
The Company may, from time to time and to the extent economically advantageous, sell rezoned, undeveloped or partially developed parcels, such as portions of the Kaanapali 2020 Development Plan lands and/or the former Pioneer Mill site. The Company currently intends to develop the balance of its lands for residential, resort, affordable housing, limited commercial and recreational purposes. There can be no assurances that the Company will be successful in such efforts.
Any increase in interest rates or downturn in the international, national or Hawaiian economy could affect the value of Company's properties and its profitability and sales. A downturn of the economy could have a profound negative effect on the Hawaiian real estate market. However, the Kaanapali resort area has historically enjoyed a significant mainland tourist market in the United States and Canada. A weakening of the Maui real estate market has in the past, and would in the future negatively impact the Company.
The Company's real estate activities may be adversely affected by possible changes in the tax laws, including changes which may have an adverse effect on resort and residential real estate development. High rates of inflation adversely affect real estate development generally because of their impact on interest rates. High interest rates not only increase the cost of borrowed funds to developers, but also have a significant effect on the affordability of permanent mortgage financing to prospective purchasers. High rates of inflation may permit the Company to increase the prices that it charges in connection with land sales, subject to economic conditions in the real estate industry generally and local market factors. There can be no assurance that Hawaiian real estate values will rise, or that, if such values do rise, the Company's properties will benefit.
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Risks Relating to Natural Events
The Company's development lands are located in an area that is susceptible to hurricanes and seismic activity. In addition, during certain times of year, heavy rainfall is not uncommon. These events may adversely impact the Company's development activities and infrastructure assets, such as roadways, reservoirs, water courses and drainage ways. Significant events may cause the Company to incur substantial expenditures for investigation and restoration of damaged structures and facilities. Climate change, flooding, drought, fires, wind, prolonged heavy rains, and other natural perils can adversely impact agricultural production and water transmission and storage resources on lands owned or used by the Company. In addition, similar events elsewhere in Hawaii may cause regulatory responses that impact all landowners. For example, as described in Note 7 of the consolidated financial statements, the Company received notice from the Hawaii Department of Land and Natural Resources ("DLNR") that DLNR on a periodic basis would inspect all significant dams and reservoirs in Hawaii, including those maintained by the Company on Maui in connection with its agricultural operations. A series of such inspections have taken place over the period from 2006 through the most recent inspections that occurred in April 2022. To date, the DLNR has cited certain deficiencies concerning two of the Company’s reservoirs relating to dam and reservoir safety standards established by the State of Hawaii. These deficiencies include, among other things, vegetative overgrowth, erosion of slopes, uncertainty of inflow control, spillway capacity, and freeboard, and uncertainty of structural stability under certain loading and seismic conditions. The Company has taken certain corrective actions, including lowering the reservoir operating level; as well as updating important plans to address emergency events and basic operations and maintenance. Remediation of all cited deficiencies could result in significant and costly improvements which may be material to the Company.
The DLNR categorizes the reservoirs as "high hazard" under State of Hawaii Administrative Rules and State Statutes concerning dam and reservoir safety. This classification, which bears upon government oversight and reporting requirements, may increase the cost of managing and maintaining these reservoirs in a material manner.
Risks Relating to Agriculture
The Company remains engaged in farming, harvesting, and milling operations relating to coffee orchards. The Company incurs significant risks relating to the cost of growing and maintaining the coffee trees and producing and selling the coffee. The Company is experiencing rising costs in its farming operations as a result of the global supply chain disruptions, local labor shortages and the continued rise in inflation. Such cost increases may negatively impact the Company’s results of operations in the future and may cause disruptions in the Company’s development plans. The Company also incurs the risk that coffee farming could be materially affected because of the adverse effects on coffee yields caused by coffee berry borer (“CBB”), coffee leaf rust (“CLR”) or through regulatory risk, as described below. The Company relies on water sourced from its irrigation systems, which divert water from streams and development tunnels into a network of ditches, tunnels, flumes, siphons and reservoirs. In the event CWRM or any other regulatory body limits the Company’s ability to divert stream waters to its irrigation systems, the result could have a negative impact on the Company’s ability to continue with its agricultural operations and development plans.
Several years ago, CBB, a beetle native to Central Africa and that has existed for some time in Central and South America, was discovered on the islands of Hawaii and Oahu. In 2017 the CBB appeared on the island of Maui. Effective May 1, 2017, the Hawaii Department of Agriculture (“HDOA”) began restricting the shipping of coffee grown on Maui to other Hawaiian Islands due to the discovery of the CBB on the island. The restriction requires specific treatment and inspection by HDOA Plant Quarantine inspectors before shipping to other islands.
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In September 2020, the Company discovered the CBB on its land. The Company has been aware of the possible spread to its crops and has maintained sound management practices. The Company has developed an integrated management program designed to manage all aspects for cultural control of the CBB. Such program has resulted in an increase in the costs of farming the coffee and the CBB may lower the quantity and quality of salable coffee.
The overall effect of the CBB is to reduce the yield and quality of the coffee bean. Farming methods have been developed to reduce the effect on the islands of Hawaii and Oahu, and the Company has incorporated many of these practices into its integrated management program. While the Company intends to continue to utilize the best practices available, there can be no assurance that the action by the HDOA or the spread of the CBB to its crops will not have a material effect on its coffee operations.
In October 2020, agriculture officials with Hawaii Department of Agriculture (HDOA) confirmed the presence of coffee leaf rust (“CLR”) on Maui. HDOA also confirmed the presence of CLR on the island of Hawaii in November 2020. The Company found evidence of CLR on its farm in January 2021, which was subsequently confirmed by HDOA. CLR is one of the most devastating diseases of coffee plants. It is established in all of the other major coffee-growing areas of the world but had not previously been found in Hawaii. The HDOA has since discovered CLR in all of the coffee-growing regions of Hawaii and is working to determine how CLR may have been introduced to Hawaii.
CLR can cause severe defoliation. Infected leaves drop prematurely, greatly reducing the plant’s photosynthetic capacity and reducing berry growth. Long-term effects of CLR can have a stronger impact by causing dieback, which reduces the number of productive nodes on branches, significantly impacting the following year’s yield.
The Company has implemented an integrated past management program designed to manage all aspects for cultural control of CLR. As with the CBB, such program may result in an increase in the costs of farming the coffee and lower the quantity and quality of salable coffee, and there can be no assurance that CLR will not have a material adverse effect on the Company’s coffee operations.
Risks Relating to Hawaiian, U.S. and World Economies Generally
The Company's businesses will be subject to risks generally confronting the Hawaiian, U.S. and world economies. All of the Company's tangible property is located in Hawaii. As a result, the Company's revenues will be exposed to the risks of investment in Hawaii and to the economic conditions prevalent in the Hawaiian real estate market. While the Hawaiian real estate market is subject to economic cycles that impact tourism and investment (particularly in the United States, Japan and other Pacific Rim countries), it is also influenced by the level of economic development in Hawaii generally and by external and internal political forces.
Adverse macroeconomic conditions continue to cause economic uncertainty and market volatility. Continued high levels of inflation, slower growth or recession, changes to fiscal and monetary policy, higher interest rates, currency fluctuations, challenges in the supply chain and other adverse macroeconomic conditions, may continue. The evolving nature of the COVID-19 pandemic, the emergence of new variants, and the administration and continued effectiveness of vaccines (and boosters), public health restrictions, or a resurgence of COVID-19 or a new, significant variant could negatively impact the Hawaiian economy and the Maui real estate market. Such uncertainty and risk may negatively impact the Company’s performance and financial results, including any potential negative impact to the values of its property holdings on Maui and future planned development and sales of parcels of such development, changes in law and/or regulation, and uncertainty regarding government and regulatory policy.
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Various factors impact the desire of people to travel, particularly by air. Discretionary income and unemployment throughout the world also impact travel to Hawaii and the market for real estate. Thus, Hawaii is subject to higher risks than other portions of the United States due to its disproportionate reliance on air travel and tourism. The visitor industry is Hawaii's most important source of economic activity, accounting for a significant portion of Gross State Product. The outbreak of the COVID-19 coronavirus materially impacted and limited the travel and tourism industry and could again trigger a prolonged adverse effect on such economic activity.
Because of the foregoing considerations, the risks associated with the large reliance by Hawaii on a visitor base, both from foreign countries and the United States mainland, will disproportionately impact the Company in future years, as market and visitation cycles play out.
Environmental Risks and Environmental Regulations
The Company is subject to environmental and health safety laws and regulations related to the ownership, operation, development and acquisition of real estate, or the operation of former business units. Under various federal, state and local laws, ordinances and regulations, a current or previous owner, developer or operator of real estate may be liable for the costs of removal or remediation of certain hazardous toxic substances at, on, under or in its property. The costs of such removal or remediation of such substances could be substantial. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the actual release or presence of such hazardous or toxic substances. The presence of such substances may adversely affect the owner's ability to sell or rent such real estate or to borrow using such real estate as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances also may be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws impose liability for the release of asbestos containing material into the air, pursuant to which third parties may seek recovery from owners or operators of real properties for personal injuries associated with such materials, and prescribe specific methods for the removal and disposal of such materials. The cost of legal counsel and consultants to investigate and defend against these claims is often high and can significantly impact the Company's operating results, even if no liability is ultimately shown. No assurance can be given that the Company will not incur liability in the future for known or unknown conditions and any significant claims may have a material adverse impact on the Company.
Kaanapali Land, as successor by merger to other entities, and D/C have been named as defendants in personal injury actions allegedly based on exposure to asbestos. While there are relatively few cases that name Kaanapali Land, there were a substantial number of cases that were pending against D/C on the U.S. mainland (primarily in California). Cases against Kaanapali Land (hereafter, “Kaanapali Land asbestos cases”) are allegedly based on its prior business operations in Hawaii and cases against D/C were allegedly based on sale of asbestos-containing products by D/C's prior distribution business operations primarily in California. Certain asbestos-related proofs of claims in the bankruptcy case have been withdrawn in connection with closing the bankruptcy discussed below. Each entity defending these cases believes that it has meritorious defenses against these actions, but can give no assurances as to the ultimate outcome of these cases. The defense of these cases had a material adverse effect on the financial condition of D/C as it was forced to file a voluntary petition for liquidation. Such bankruptcy case is in the process of being closed. Kaanapali Land does not believe that it has liability, directly or indirectly, for D/C's obligations in those cases. Kaanapali Land does not presently believe that the cases in which it is named will result in any material liability to Kaanapali Land; however, there can be no assurance in that regard. Reference is made to Note 7 of the Company’s consolidated financial statements for additional discussion.
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Risks Relating to the Company’s Shares
The Company’s shares are not listed on a major exchange in the United States and are instead traded via the over-the-counter broker-dealer network. Therefore, there may be additional steps and fees when trading the Company’s shares. The Company’s shares have less liquidity, low trading volume, price volatility, and may experience larger spreads between bid price and ask price.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Land Holdings
The major real properties owned by the Company are described under Item 1. Business.
Item 3. Legal Proceedings
The information set forth under the “Commitments and Contingencies” section in Note 7 of Notes to Consolidated Financial Statements, included in Part II, Item 8 of this report, is incorporated herein by reference.
Item 4. Mine Safety Disclosures
None.
Part II
Item 5. Market for Registrant’s Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities
As of December 31, 2022 there were approximately 630 holders of record of the Company's 1,792,613 Common Shares and 52,000 Class C 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 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 were paid by the Company in 2022 and the Company does not anticipate making any distributions for the foreseeable future.
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Item 6. [Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
All references to "Notes" herein are to Notes to Consolidated Financial Statements contained in this report. Information is not presented on a reportable segment basis in this section because in the Company's judgment such discussion is not material to an understanding of the Company's business.
In addition to historical information, this Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations about its businesses and the markets in which the Company operates. Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties or other factors which may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual operating results may be affected by various factors including, without limitation, changes in international, national and Hawaiian economic conditions, continued increases in the rate of inflation, 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, 2022 and 2021 of approximately $90 million and $91 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 $20 million and $17 million as of December 31, 2022 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. To the extent the Company is not delayed by certain regulatory agencies, the Company expects the distribution of surplus Pension Plan assets to enhance the Company’s liquidity. 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, other than the planned reversion of the pension plan assets, 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. KLMC may, at its discretion, design, construct, install, and complete all or portions of the offsite road, sewer and or electrical improvements, in which case, the developer shall pay to KLMC the total costs thereof, less the KLMC committed amount. In this regard, KLMC has entered into a contract to install a sewer line, a portion of which runs adjacent to this property and is subject to the improvements noted above. Although certain offsite construction continues at the site, the commitment remains outstanding as construction of such improvements does not yet trigger such funding. In conjunction with the property and option purchase agreement, the Company retains certain approval rights relating to the uses and designs of the site to ensure the uses and designs are aligned with the Company's planned master development. If such uses result in a dispute with the developer of the site, such dispute could delay the development of the site. 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. The Company closed on the sale of this lot on March 22, 2022. The purchase price was $5 million, paid in cash at closing. As of December 31, 2022, the Company had sold all the lots at Kaanapali Coffee Farms including one lot in March 2022 and one in December 2021.
The Company is in the planning stages for the development of a 295-acre parcel in 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, 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.
The Company is in the planning stages for the development of a 241-acre residential development site in the region south of Kaanapali Coffee Farms known as Puukolii Village. The conceptual master plan is comprised of 20 developable parcels planned for 940 units including a mix of affordable and market priced homes, both single and multi-family, mixed use commercial, parks, school, and community facilities. Puukolii Village is fully entitled. In conjunction with the potential development of Puukolii Village and in coordination with the possible development by an unrelated third party of the 14.9 acre site to be used for a critical access hospital, as noted above, the Company entered into a contract to install a sewer line from the Puukolii Village site to the critical care hospital site. The developer of the critical access hospital site is obligated to share in the sewer line cost for the portion of the sewer line fronting the critical care hospital site.
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At its June 14, 2022 meeting, the State of Hawaii Commission on Water Resource Management (“CWRM”) unanimously voted to accept Findings of Fact and the Chairperson’s recommendation to Designate the Lahaina Aquifer Sector Area as both a Surface Water and Ground Water Management Area including the Honokohau, Honolua, Honokahua, Kahana, Honokowai, Wahikuli, Kahoma, Kaua`ula, Launiupoko, Olowalu, and Ukumehame Groundwater Hydrologic Units, Island of Maui, Hawaii. By accepting the recommendation, CWRM thereby established administrative control over the ground and surface waters in the Lahaina Aquifer Sector Area. The intended purpose of that designation was described by the CWRM staff as serving to “ensure protection and reasonable beneficial use of” those waters. The Lahaina Aquifer Sector includes the Honokowai hydrologic unit from which the Company currently derives almost all of its non-potable water. The designation means that the Company and all users of water in the Lahaina Aquifer Sector Area will be required to apply for water use permits pursuant to a process that will call for the water purveyors (and potentially their end-users) to demonstrate that their existing uses meet the “reasonable beneficial use” standards adopted by CWRM. Applications for permits to use water for future uses likely will be considered only after existing users have completed their applications based on existing uses. One possible result of the designation is a potential inability to secure permits from CWRM for future uses.
By letters dated October 28, 2022, CWRM officially designated all six Aquifer System Areas of the Lahaina Aquifer Sector, Maui, as Ground Water Management Areas, as of August 6, 2022. CWRM notified the Company that by August 5, 2023, the Company would need to apply for ground and surface water use permits to continue the Company's use of certain wells that are integral to the Company's entire operations. The permits, when applied for and granted and subject to various conditions, would preserve the Company's existing water uses as of August 6, 2022. The Company is preparing permit applications to cover its existing uses. The Company cannot provide any assurances that CWRM will approve such permit applications for the amounts of water the Company seeks or impose conditions on such use that might affect the Company’s operations. If CWRM should fail to approve the Company’s water requests or impose onerous conditions on its use, CWRM’s actions could delay the Company’s deelopment in substantial and material respects and affect the Company’s operations and finances. Further, in the event permits adequate to the Company’s plans are not received or not received timely, there could be negative impacts on the west Maui real estate market as a whole and the development and sale of the Company’s lands on the Island of Maui, thereby materially and adversely affecting the Company’s operations, land sales, land values, results, and financial position.
By letter dated March 13, 2023, CWRM provided the Company a notice of alleged water violation covering the metering and monitoring of certain designated areas with the Honokowai aquifer and hydrologic unit, as well as certain waste conditions CWRM allegedly observed on prior investigations of those certain areas. The Company is reaching out to address the alleged violations with CWRM and to seek clarification of the issues. The Company does not believe that such issues, when and if addressed by Company action, will prove material in cost, but there are no assurances of same.
The Company’s Pension Plan (the “Plan”) has excess assets of approximately $19 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 Plan and terminate the Plan on or about June 1, 2022. Effective February 7, 2022, the Level 1 and Level 2 Plan asset investments were reallocated to a money market fund. Benefit accruals were frozen on March 31, 2022. The Company paid approximately $420 thousand to Plan participants during October 2022, thereby settling all Plan liabilities.
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The Company currently expects to transfer during 2023 at least 25% of the remaining Plan assets to a qualified replacement plan (“QRP”) in which 100% of the participants in the terminated Plan remaining employed by the Company would become active participants in the QRP. The QRP is also expected to include the employees of certain affiliates of the Company. Thereafter, remaining assets of the terminated Plan will revert to the Company. Under such circumstances, the Company will be subject to a 20% excise tax includible in the Company’s taxable income. There can be no assurances that the Company will be successful in executing such plan or that the Company will not be subject to additional taxes.
Although the Company does not currently believe that it has significant liquidity problems over the near term, should the Company be unable to satisfy its liquidity requirements from its existing resources and future property sales, it will likely pursue alternate financing arrangements. However it cannot be determined at this time what, if any, financing alternatives may be available and at what cost.
Results of Operations
Reference is made to the footnotes to the financial statements for additional discussion of items addressing comparability between years.
2022 Compared to 2021
Property, net decreased at December 31, 2022 as compared to December 31, 2021 due to the sale of a lot during first quarter 2022.
The decrease in other assets at December 31, 2022 as compared to December 31, 2021 is primarily due to a receivable recorded at December 31, 2021 for the insurance recoveries related to the Waipio site received in March 2022.
The decrease in other liabilities at December 31, 2022 as compared to December 31, 2021 is due to the reversal of a contingency reserve pursuant to the settlement payment made in March 2022 related to the Waipio site.
The increase in sales and the related increase in costs of sales for the year ended December 31, 2022 as compared to the year ended December 31, 2021 is primarily due to the sale of the 55 acre agricultural lot during the first quarter 2022.
The increase in selling, general and administrative expenses for the year ended December 31, 2022 as compared to the year ended December 31, 2021 is due to the insurance recoveries related to asbestos claims offset by the adjustment of the loss contingency during first quarter 2021.
2021 Compared to 2020
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.
23
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.
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.
Prior to the termination of the Plan and settlement of the Plan benefit obligations, pension assumptions were significant inputs to the actuarial models that measured pension benefit obligations and related effects on operations. Two assumptions - discount rate and expected return on assets – were important elements of plan expense and asset/liability measurement. The Company evaluated these critical assumptions at least annually. The Company periodically evaluated other assumptions involving demographic factors such as mortality, and updated the assumptions to reflect experience and expectations for the future. Such assumptions required significant judgment by the Company and its actuaries and therefore actual results in any given year may have differed 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.
24
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.
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 prevailing market rates. Market risk is the risk of loss from adverse changes in market prices and interest rates. The Company manages its market risk by matching projected cash inflows from operating properties, financing activities, and investing activities with projected cash outflows to fund capital expenditures and other cash requirements. The Company does not enter into financial instruments for trading purposes.
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Item 8. Financial Statements and Supplementary Data
Kaanapali Land, LLC
Index
Report of Independent Registered Public Accounting
Firm (PCAOB ID Number
Consolidated Balance Sheets, December 31, 2022 and 2021
Consolidated Statements of Operations for the years ended December 31, 2022, 2021 and 2020
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2022,
2021 and 2020
Consolidated Statements of Equity for the years ended December 31, 2022, 2021 and 2020
Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020
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.
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Managing Member and Stockholders
Kaanapali Land, LLC
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Kaanapali Land, LLC (a Delaware limited liability company) and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
27
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Asbestos Loss Contingencies
As described further in note 7 to the financial statements, the Company, as successor by merger to other entities, and D/C Distribution Corporation (“D/C”) have been named as defendants in personal injury actions allegedly based on exposure to asbestos. Cases are allegedly based on 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 the state of California.
The Company has recognized loss contingencies related to these claims, which are included in other liabilities in the consolidated balance sheet as of December 31, 2022. We identified these asbestos loss contingencies as a critical audit matter.
The principal considerations for our determination that asbestos loss contingencies represent a critical audit matter are (i) the substantial use of estimates that involve significant measurement uncertainty and (ii) the significant auditor subjectivity involved in evaluating the reasonableness of the related judgments.
Our audit procedures related to the asbestos loss contingencies included the following, among others:
| · | We evaluated the design of controls relating to accounting for contingencies, including the Company’s ability to develop the estimates utilized in recognizing the related liabilities. |
| · | We inspected summary reports of actual claims prepared by third party law firms involved in these matters, and recomputed expected aggregate settlement amounts based on settlement averages and number of plaintiffs. |
| · | We recomputed the aggregate amount accrued for expected but not reported claims based on settlement averages, expected number of annual future claims, and estimated market discount rate. We also evaluated the reasonableness of expected future claims based on past claim settlement data, an estimated market discount rate, and other factors. |
| · | We inspected settlement agreements and cash disbursement evidence on a sample basis and agreed amounts to the analyses referenced above. |
| · | We inspected confirmation letters received directly from third party law firms as well as Company internal counsel involved in these matters, assessing responses for consistency and corroboration with the Company’s accounting treatment and related disclosures. |
28
/s/
We have served as the Company’s auditor since 2015.
April 10, 2023
29
Kaanapali Land, LLC
Consolidated Balance Sheets
December 31, 2022 and 2021
(Dollars in Thousands, except share data)
| 2022 | 2021 | ||||
| Assets | |||||
| Cash and cash equivalents | $ | $ | |||
| Restricted cash | |||||
| Property, net | |||||
| Pension plan assets | |||||
| Other assets | |||||
| Total assets | $ | $ | |||
| Liabilities | |||||
| Accounts payable and accrued expenses | $ | $ | |||
| Deposits and deferred gains | |||||
| Deferred income taxes | |||||
| Other liabilities | |||||
| Total liabilities | |||||
| Commitments and contingencies (Note 7) | |||||
| Equity | |||||
|
Common equity, at 12/31/22 and 12/31/21 Shares authorized – unlimited, Class C shares ; shares issued and outstanding in 2022 and 2021, Class C shares issued and outstanding in 2022 and 2021 |
|||||
| Additional paid-in capital | |||||
|
Accumulated other comprehensive income (loss), net of tax |
|||||
| Accumulated earnings | |||||
| Shareholders’ equity | |||||
| Non-controlling interests | |||||
| Total equity | |||||
| Total liabilities and shareholders’ equity | $ | $ | |||
The accompanying notes are an integral part of the consolidated financial statements.
30
Kaanapali Land, LLC
Consolidated Statements of Operations
Years ended December 31, 2022, 2021 and 2020
(Dollars in Thousands except Per Share Amounts)
| 2022 | 2021 | 2020 | ||||||
| Revenues: | ||||||||
| Sales | $ | $ | $ | |||||
| Interest and other income | ||||||||
| Cost and expenses: | ||||||||
| Cost of sales | ||||||||
| Selling, general and administrative | ( |
|||||||
| Depreciation and amortization | ||||||||
Operating income (loss) before other income and income taxes |
( | |||||||
| Other income: | ||||||||
Settlement gain on pension plan assets (before taxes) |
||||||||
| Income (loss) before income taxes | ( | |||||||
| Income tax benefit (expense) | ( |
( |
||||||
| Net income (loss) | ( |
( | ||||||
Less: Net income (loss) attributable to non-controlling interests |
( |
( |
( | |||||
| Net income (loss) attributable to shareholders | $ | $ | $ | ( | ||||
| Net income (loss) per share – basic and diluted | $ | $ | $ | ) | ||||
The accompanying notes are an integral part of the consolidated financial statements.
31
Kaanapali Land, LLC
Consolidated Statements of Comprehensive Income (Loss)
Years ended December 31, 2022, 2021 and 2020
(Dollars in Thousands except Per Share Amounts)
| 2022 | 2021 | 2020 | ||||||
| Net income (loss) | $ | $ | ( |
$ | ( | |||
| Other comprehensive income (loss): | ||||||||
| Net realized gains on pension plan assets | ( |
|||||||
|
Income tax expense related to items of other comprehensive income |
( |
( | ||||||
|
Other comprehensive income (loss), net of tax |
( |
|||||||
| Comprehensive income (loss) | ( | |||||||
|
Comprehensive loss attributable to non-controlling interests |
( |
( |
( | |||||
|
Comprehensive income (loss) attributable to shareholders |
$ | $ | $ | ( | ||||
The accompanying notes are an integral part of the consolidated financial statements.
32
Kaanapali Land, LLC
Consolidated Statements of Equity
Years ended December 31, 2022, 2021 and 2020
(Dollars in Thousands)
|
Common Stock |
Additional Paid-In Capital |
Accumu- lated (Deficit) Earnings |
Accumu- lated Other Compre- hensive Income/ (Loss) |
Total Stock- holders’ Equity |
Non Controlling Interests |
Total Equity | |||||||||||||||
|
Balance December 31, 2019 |
$ | $ | $ | ( |
$ | $ | $ | ||||||||||||||
|
Effect of consolidat- ing Kaanapali Coffee Farms Lot Owners’ Association |
|||||||||||||||||||||
|
Other comprehensive income, net of tax |
|||||||||||||||||||||
| Net loss | ( |
( |
( |
( | |||||||||||||||||
|
Balance December 31, 2020 |
|||||||||||||||||||||
|
Effect of consolidat- ing Kaanapali Coffee Farms Lot Owners’ Association |
|||||||||||||||||||||
|
Other comprehensive income, net of tax |
|||||||||||||||||||||
| Net income (loss) | ( |
( | |||||||||||||||||||
|
Balance December 31, 2021 |
|||||||||||||||||||||
|
Effect of deconsolidat- ing Kaanapali Coffee Farms Lot Owners’ Association |
( |
( |
( |
( | |||||||||||||||||
|
Other comprehensive loss, net of tax |
( |
( |
( | ||||||||||||||||||
| Net income | ( |
||||||||||||||||||||
|
Balance December 31 2022 |
$ | $ | $ | $ | $ | $ | |||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
33
Kaanapali Land, LLC
Consolidated Statements of Cash Flows
Years ended December 31, 2022, 2021 and 2020
(Dollars in Thousands)
| 2022 | 2021 | 2020 | ||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | $ | ( |
$ | ( | |||
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
| Proceeds from property sales | ||||||||
| Gain on property sales | ( |
( |
||||||
| Net periodic pension cost (credit) | ( |
( |
( | |||||
| Depreciation and amortization | ||||||||
| Deferred income taxes | ( | |||||||
Effect of deconsolidating the Kaanapali Coffee Farms Lot Owners’ Association |
||||||||
| Changes in operating assets and liabilities: | ||||||||
| Other assets | ( |
|||||||
|
Accounts payable, accrued expenses, deposits, deferred gains and other |
( |
( | ||||||
| Net cash provided by (used in) operating activities | ( |
( | ||||||
| Cash flows from investing activities: | ||||||||
| Property additions | ( |
( |
( | |||||
Relinquishment of property as a result deconsolidating the Kaanapali Coffee Farms Lot Owners’ Association |
||||||||
|
Effect of deconsolidating Kaanapali Coffee Farms Lot Owners’ Association |
( |
|||||||
| Net cash used in investing activities | ( |
( |
( | |||||
| Cash flows from financing activities: | ||||||||
| Contributions | ||||||||
| Distributions | ( | |||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash and cash equivalents | ( |
( | ||||||
|
Cash, cash equivalents and restricted cash at beginning of year |
||||||||
|
Cash, cash equivalents and restricted cash at end of year |
$ | $ | $ | |||||
The accompanying notes are an integral part of the consolidated financial statements.
34
Kaanapali Land, LLC
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(1) Summary of Significant Accounting Policies
Organization and Basis of Accounting
Kaanapali Land, LLC ("Kaanapali Land"), a Delaware limited liability company is the reorganized entity resulting from the Joint Plan of Reorganization of Amfac Hawaii, LLC (now known as KLC Land Company, LLC ("KLC Land")), certain of its subsidiaries (together with KLC Land, the "KLC Debtors") and FHT Corporation ("FHTC" and, together with the KLC Debtors, the "Debtors") under Chapter 11 of the Bankruptcy Code, dated June 11, 2002 (as amended, the "Plan"). The Plan was filed jointly by all Debtors to consolidate each case for joint administration in the Bankruptcy Court in order to (a) permit the petitioners to present a joint reorganization plan that recognized, among other things, the common indebtedness of the debtors (i.e. the Certificate of Land Appreciation Notes ("COLAs") and Senior Indebtedness) and (b) facilitate the overall administration of the bankruptcy proceedings. As indicated in the Plan, Kaanapali Land has elected to be taxable as a corporation.
The 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"). During August 2005, pursuant to a motion for entry of final decree, the bankruptcy cases were closed.
There are Common Shares and Class C Shares issued, all of which are outstanding at December 31, 2022.
The accompanying consolidated financial statements include the accounts of Kaanapali Land and all of its subsidiaries and its predecessor (collectively, the "Company"), which include KLC Land and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Prior to July 1, 2022, the Kaanapali Coffee Farms Lot Owners’ Association (“LOA”) was consolidated into the Company’s consolidated financial statements and the interests of third-party owners of the lots in the Kaanapali Coffee Farms subdivision were reflected as equity including non-controlling interests. The Company sold its last owned lot in the Kaanapali Coffee Farms subdivision in early 2022 and as a consequence, the Company elected to turnover control of the LOA board of directors to the third-party owners of the lots in the subdivision. An election for a new board of directors, comprised entirely of third-party lot owners, was held during June 2022 and the results of the election were announced July 1, 2022. Therefore, effective July 1, 2022, the Company deconsolidated the LOA due to the loss of control over the LOA and derecognized the assets, liabilities, equity (including the non-controlling interests) and results of operations in its financial statements. The Company does not have any direct or indirect retained interest in the LOA. The Company currently has agreements with the LOA to farm coffee, perform common area maintenance services and provide non-potable water.
35
The Company's continuing operations are in two business segments - Agriculture and Property. The Agriculture segment remains engaged in farming, harvesting and milling operations relating to coffee orchards on behalf of the applicable land owners. The Company also cultivates, harvests and sells bananas and citrus fruits and engages in certain ranching operations. The Property segment primarily develops land for sale and negotiates bulk sales of undeveloped land. The Property and Agriculture segments operate exclusively in the State of Hawaii. For further information on the Company's business segments see Note 8.
Cash and Cash Equivalents
The Company considers as
cash equivalents all investments with maturities of three months or less when purchased. Included in this balance as of December 31,
2022 is a money market fund for $
Subsequent Events
The Company has performed an evaluation of subsequent events from the date of the financial statements included in this annual report through the date of its filing with the Securities and Exchange Commission.
Revenue Recognition
Revenue from real property sales is recognized at the time of closing when control of the property transfers to the customer. After closing of the sale transaction, the Company has no remaining performance obligation.
Other revenues are recognized when control of goods or services transfers to the customers, in the amount that the Company expects to receive for the transfer of goods or provision of services.
Revenue recognition standards require entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange. The revenue recognition standards have implications for all revenues, excluding those that are under the specific scope of other accounting standards.
The Company’s revenues that were subject to revenue recognition standards for the years ended December 31, 2022, 2021 and 2020, were as follows (in thousands):
| Years ended December 31, | |||||||||
| 2022 | 2021 | 2020 | |||||||
| Sales of real estate | $ | $ | $ | ||||||
| Coffee and other crop sales | |||||||||
| Total | $ | $ | $ | ||||||
The revenue recognition standards require the use of a five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation.
36
Lease Accounting
The Company’s lease
arrangements, both as lessor and as lessee, are short-term leases. The Company leases land to tenants under operating leases, and the
Company leases property, primarily office and storage space, from lessors under operating leases. During the years ended December 31,
2022, 2021 and 2020, the Company recognized $
Recently Adopted Accounting Standards
In June 2016, the FASB updated ASC Topic 326 Financial Instruments – Credit Losses with ASU 2016-13 Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 enhances the methodology of measuring expected credit losses to include the use of forward-looking information to better inform credit loss estimates. ASU 2016-13 is effective for annual periods beginning after December 15, 2019 for public companies except for smaller reporting companies, whose effective date is for periods beginning after December 15, 2022. The adoption of ASU 2016-13 did not have a material impact on the Company’s consolidated financial statements.
In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (ASU 2020-04) which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuance of LIBOR or another referenced rate. ASU 2020-04 is effective for fiscal years beginning after December 31, 2022. The adoption of ASU 2020-04 did not have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements
In December 2022, the FASB issued ASU No. 2022-06, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848". The amendments in this Update defer the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The amendments in this Update are effective for all entities upon issuance of this Update. While the Company is currently evaluating the effect that implementation of this update will have on its consolidated financial statements, no significant impact is anticipated.
Land Development
During the first quarter of 2006,
the Company received final subdivision approval on an approximate 336 acre parcel in the region "mauka" (toward the mountains)
from the main highway serving the area. This project, called Kaanapali Coffee Farms, originally consisted of
37
Project costs associated with the development and construction of real estate projects are capitalized and classified as Property, net. Such capitalized costs are not in excess of the projects' estimated fair value as reviewed periodically or as considered necessary. In addition, interest, insurance and property tax are capitalized to qualifying assets during the period that such assets are undergoing activities necessary to prepare them for their intended use.
For development projects, capitalized costs are allocated using the direct method for expenditures that are specifically associated with the lot being sold and the relative-sales-value method for expenditures that benefit the entire project.
Recognition of Profit From Real Property Sales
In accordance with the core principle of ASC 606, revenue from real property sales is recognized at the time of closing when control of the property transfers to the customer. After closing of the sale transaction, the Company has no remaining performance obligation. When the sale does not meet the requirements for full profit recognition, all or a portion of the profit is deferred until such requirements are met.
Other revenues in the scope of ASC 606 are recognized when control of goods or services transfers to the customers, in the amount that the Company expects to receive for the transfer of goods or provision of services.
Property
Property is stated at cost.
Depreciation is based on the straight-line method over the estimated economic lives of
Provisions for impairment losses related to long-lived assets, if any, are recognized when expected future cash flows are less than the carrying values of the assets. If indicators of impairment are present, the Company evaluates the carrying value of the related long-lived assets in relationship to the future undiscounted cash flows of the underlying operations or anticipated sales proceeds. The Company adjusts the net book value of property to fair value if the sum of the expected undiscounted future cash flow or sales proceeds is less than book value. Assets held for sale are recorded at the lower of the carrying value of the asset or fair value less costs to sell.
| 2022 | 2021 | ||||
| Property, net: | |||||
| Land | $ | $ | |||
| Buildings | |||||
| Machinery and equipment | |||||
| Accumulated depreciation | ( |
( | |||
| Property, net | $ | $ | |||
38
Inventory of land held for
sale of approximately $
The Company's significant
property holdings are on the island of Maui consisting of approximately
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
Other Liabilities
Other liabilities are comprised of estimated liabilities for losses, commitments and contingencies related to various divested assets or operations. These estimated liabilities include the estimated effects of certain asbestos related claims, obligations related to former officers and employees such as pension, post-retirement benefits and workmen's compensation. Management's estimates are based, as applicable, on taking into consideration claim amounts filed by third parties, life expectancy of beneficiaries, advice of consultants, negotiations with claimants, historical settlement experience, the number of new cases expected to be filed and the likelihood of liability in specific situations. Management periodically reviews the adequacy of each of its loss contingency amounts and adjusts such as it determines the appropriate loss contingency amount to reflect current information. Reference is made to Note 7, Commitments and Contingencies.
39
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Short-Term Investments
It is the Company's policy to classify all of its investments in U.S. Government obligations with original maturities greater than three months as held-to maturity, as the Company has the ability and intent to hold these investments until their maturity, and are recorded at amortized cost, which approximates fair value.
Income Taxes
Income taxes are accounted for under the asset and liability approach which requires recognition of deferred tax assets and liabilities for the differences between the financial reporting and tax basis of assets and liabilities. A valuation allowance reduces deferred tax assets when it is more likely than not some portion or all of the deferred tax assets will not be realized. As of December 31, 2022 and 2021, there were no uncertain tax positions that had a material impact on the Company's consolidated financial statements.
(2) Mortgage Note Payable
Certain subsidiaries of Kaanapali
Land are jointly indebted to Kaanapali Land pursuant to a certain Secured Promissory Note in the principal amount of $
(3) Rental Arrangements
During 2022, 2021 and 2020,
the Company leased various office spaces with average annual rental of approximately $
40
(4) Employee Benefit Plans
As of December 31, 2021, the Company participated in a defined benefit pension plan (the “Pension Plan”) that covered substantially all its eligible employees. The Pension Plan is sponsored and maintained by Kaanapali Land in conjunction with other plans providing benefits to employees of Kaanapali Land and its affiliates.
The Company’s Pension
Plan has excess assets of approximately $
The Company currently expects to transfer during 2023 at least 25% of the remaining Pension Plan assets to a qualified replacement plan (“QRP”) in which 100% of the participants in the terminated Pension Plan remaining employed by the Company would become active participants in the QRP. The QRP is also expected to include the employees of certain affiliates of the Company. Thereafter, remaining assets of the terminated Pension Plan will revert to the Company. Under such circumstances, the Company will be subject to a 20% excise tax includible in the Company’s taxable income. There can be no assurances that the Company will be successful in executing such plan or that the Company will not be subject to additional taxes.
FASB ASC Topic 820, Fair Value Measurements and Disclosures, establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described as follows:
| Level 1 - | Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets. | |
| Level 2 - | Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in inactive markets; or other inputs that are observable for the asset or liability. | |
| Level 3 - | Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
41
The asset or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize unobservable inputs.
Following is a description of the valuation methodologies used for Pension Plan assets measured at fair value.
| -- | Common and Preferred Stock: Valued at the closing price reported in the active market in which the individual security is traded. | |
| -- | Mutual Funds Holding Corporate Notes, Bonds and Debentures and Collective Investment Funds: Valued at the closing price reported in the active market in which the mutual fund is traded, or the market value of the underlying assets. | |
| -- | Private Equity Investments: Valued at net asset value ("NAV") of shares/ownership units held by the Pension Plan at year-end. NAV represents the Pension Plan's interests in the net assets of these investments which consisted primarily of equity and debt securities, some of which are exchange-traded or valued using independent pricing feeds (i.e. Bloomberg or Reuters) or independent broker quotes. In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in the table below are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position. |
The following table sets forth by level, within the fair value hierarchy, the Pension Plan's assets at fair value as of December 31, 2022:
| Level 1 | Level 2 | Level 3 | Total | |||||||||
| Cash and cash equivalents | $ | $ | $ | $ | ||||||||
| $ | $ | $ | $ | 19,000 | ||||||||
| Investments in private equity funds | ||||||||||||
|
Total Pension Plan assets at fair value |
$ | |||||||||||
The following table sets forth by level, within the fair value hierarchy, the Pension Plan's assets at fair value as of December 31, 2021:
| Level 1 | Level 2 | Level 3 | Total | |||||||||
| Mutual funds | $ | $ | $ | $ | ||||||||
| Collective investment funds | ||||||||||||
| Cash and cash equivalents | ||||||||||||
| $ | $ | $ | $ | 19,400 | ||||||||
| Investments in private equity funds | ||||||||||||
|
Total Pension Plan assets at fair value |
$ | |||||||||||
42
Changes in Level 3 Investments and Investments Measured at Net Asset Value
The following table sets forth a summary of changes in fair value of the plan's assets measured at net asset value “NAV” for the year ended December 31, 2022:
|
Measured at NAV |
||||||
|
Investment in Private Equity Funds |
Total | |||||
| Balance, beginning of year | $ | $ | ||||
| Net earned interest and realized/unrealized gains (losses) | ) | ( | ||||
| Purchases, sales, issuance and settlements | ) | ( | ||||
| Balance, end of year | $ | $ | ||||
The following table sets forth a summary of changes in fair value of the plan's assets measured at net asset value “NAV” for the year ended December 31, 2021:
|
Measured at NAV |
||||||
|
Investment in Private Equity Funds |
Total | |||||
| Balance, beginning of year | $ | $ | ||||
| Net earned interest and realized/unrealized gains (losses) | ||||||
| Purchases, sales, issuance and settlements | ) | ( | ||||
| Balance, end of year | $ | $ | ||||
The following tables summarize the components of the change in pension benefit obligations, plan assets and funded status of the Company's defined benefit pension plan at December 31, 2022, 2021 and 2020.
43
| 2022 | 2021 | 2020 | |||||||
| Benefit obligation at beginning of year | $ | $ | $ | ||||||
| Service cost | |||||||||
| Interest cost | |||||||||
| Actuarial gain | ( |
( |
( | ||||||
| Benefits paid | ( |
( | |||||||
| Lump sum payments | ( |
` | |||||||
| Curtailment gain | ( |
||||||||
|
Accumulated and projected benefit obligation at end of year |
|||||||||
| Fair value of plan assets at beginning of year | |||||||||
| Actual return on plan assets | ( |
||||||||
| Benefits paid | ( |
( | |||||||
| Settlement | ( |
||||||||
| Fair value of plan assets at end of year | |||||||||
| Funded status | |||||||||
| Unrecognized net actuarial (gain) loss | ( |
( | |||||||
| Prepaid pension cost | $ | $ | $ | ||||||
At December 31, 2022, approximately
The pension plan has investment policies. These generally are written guidelines or general instructions for making investment management decisions. The investment policy of the plan is to invest the plan’s assets in accordance with sound investment practices that emphasize long-term investment fundamentals, taking into account the time horizon available for investment, the nature of the plan’s cash flow requirements, the plan’s role within the Company’s long-term financial plan and other factors that affect the plan’s risk tolerance.
The components of the net periodic pension credit for the years ended December 31, 2022, 2021 and 2020 (which are reflected as selling, general and administrative in the consolidated statements of operations) are as follows:
| 2022 | 2021 | 2020 | |||||||
| Service costs | $ | $ | $ | ||||||
| Interest cost | |||||||||
| Expected return on plan assets | ( |
( |
( | ||||||
| Recognized net actuarial (gain) loss | ( |
||||||||
| Amortization of prior service cost | |||||||||
| Curtailment gain | ( |
||||||||
| Settlement gain | ( |
||||||||
| Net periodic pension cost (credit) | $ | ( |
$ | ( |
$ | ( | |||
44
The principal weighted average assumptions used to determine the net periodic pension benefit (credit) and the actuarial value of the accumulated benefit obligation were as follows:
| 2022 | 2021 | 2020 | ||||
| As of January 1, | ||||||
| Discount rate | 0.66% | 1.95% | 2.93% | |||
| Rates of compensation increase | 3% | 3% | 3% | |||
| Expected long-term rate of return on assets | 1.40% | 6% | 6% | |||
| As of December 31, | ||||||
| Discount rate – net periodic pension credit | ||||||
| Discount rate – accumulated benefit obligation | N/A | |||||
| Rates of compensation increase | N/A | |||||
| Expected long-term rate of return on assets |
The above long-term rates of return were selected based on historical asset returns and expectations of future returns.
The Company amortized experience gains and losses as well as effects of changes in actuarial assumptions and plan provisions over a period no longer than the average expected mortality of participants in the pension plan.
The measurement date is October 5, 2022, the date on which all Pension Plan liabilities were settled through lump sum payments.
A comparison of the market value of the Pension Plan's net assets with the present value of the benefit obligations indicates the Company's ability at a point in time to pay future benefits. The fair value of the Pension Plan's assets available for benefits will fluctuate.
There was no contribution required in 2022 to the pension plan. Furthermore, due to ERISA full funding limits, no contribution, whether required or discretionary, could be made and deducted on the corporation's tax return for the current fiscal year.
The Company's target asset allocations reflect the Company's investment strategy of minimizing risk and maintaining the current balance of plan assets prior to the liquidators of the Plan during 2023.
The Company recognizes the
over funded or under funded status of its employee benefit plans as an asset or liability in its consolidated statements of financial
position and recognizes changes in its funded status in the year in which the changes occur through comprehensive income. Included in
accumulated other comprehensive income at December 31, 2022 and 2021 are the following amounts that have not yet been recognized in net
periodic pension cost: unrecognized actuarial gain of $
45
The Company maintains a nonqualified
deferred compensation arrangement (the "Rabbi Trust") which provides certain former directors of Amfac and their spouses with
pension benefits. The Rabbi Trust invests in marketable securities and cash equivalents (Level 1). The deferred compensation liability
of $
(5) Income Taxes
Income tax expense/(benefit) attributable to income from continuing operations for the years ended December 31, 2022, 2021 and 2020 consist of:
| Current | Deferred | Total | |||||||
| Year ended December 31, 2022: | |||||||||
| U.S. federal | $ | $ | $ | ||||||
| State | |||||||||
| $ | $ | $ | |||||||
| Year ended December 31, 2021: | |||||||||
| U.S. federal | $ | $ | $ | ||||||
| State | |||||||||
| $ | $ | $ | |||||||
| Year ended December 31, 2020: | |||||||||
| U.S. federal | $ | $ | ( |
$ | ( | ||||
| State | ( |
( | |||||||
| $ | $ | ( |
$ | ( | |||||
The Tax Cuts and Jobs Act
(the Act) repealed the corporate alternative minimum tax and provided that prior alternative minimum tax credits (AMT credits) would be
refundable. Any remaining AMT credits became refundable incrementally from 2018 through 2021. The Coronavirus Aid, Relief, and Economic
Security Act (“CARES”) accelerated the refund schedule, enabling the Company to claim the refund in full. In February and
July 2021, the Company received $
The Act is a comprehensive tax reform bill containing a number of other provisions that either currently or in the future could impact the Company, particularly the effect of certain limitations effective for the tax year 2018 and forward (prior losses remain subject to the prior 20 year carryover period) on the use of federal net operating loss carryforwards (NOLs) which will generally be limited to being used to offset 80% of future annual taxable income.
46
Income tax expense/(benefit)
attributable to income from continuing operations differs from the amounts computed by applying the U.S. federal income tax rate of
| 2022 | 2021 | 2020 | |||||||
| Federal provision at 21% | $ | $ | $ | ( | |||||
| State provision at 5% | ( | ||||||||
| Federal NOLs utilized | |||||||||
| Federal NOLs generated | |||||||||
| State NOLs utilized | ( |
||||||||
| State NOLs generated | |||||||||
| Other | |||||||||
| Total | $ | $ | $ | ( | |||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The deferred tax effects of temporary differences at December 31, 2022, 2021 and 2020 are as follows:
| December 31, | |||||||||
| 2022 | 2021 | 2020 | |||||||
| Deferred tax assets: | |||||||||
|
Loss contingencies related primarily to losses on divestitures, less recognized insurance recovery |
$ | $ | $ | ||||||
| Loss carryforwards | |||||||||
| Other, net | |||||||||
| Total deferred tax assets | |||||||||
| Less – valuation allowance | |||||||||
| Total deferred tax assets | |||||||||
| Deferred tax liabilities: | |||||||||
Property, plant and equipment, principally due to purchase accounting adjustments, net of impairment charges |
|||||||||
| Prepaid pension costs | |||||||||
| Total deferred tax liabilities | |||||||||
| Net deferred tax liability | $ | $ | $ | ||||||
As
of December 31, 2022, the Company has a deferred tax asset related to federal net operating losses (NOLs) of $
47
The statutes of limitations with respect to the Company's taxes for 2019 and more recent years remain open to examinations by tax authorities, subject to possible utilization of loss carryforwards from earlier years. Notwithstanding the foregoing, all NOLs generated and not yet utilized are subject to adjustment by the IRS. The Company believes adequate provisions for income tax have been recorded for all years, although there can be no assurance that such provisions will be adequate. To the extent that there is a shortfall, any such shortfall for which the Company may be liable could be material.
(6) Transactions with Affiliates
An affiliated insurance agency,
JMB Insurance Agency, Inc., which has some degree of common ownership with the Company, earns insurance brokerage commissions in connection
with providing the placement of insurance coverage for certain of the properties and operations of the Company. The total of such commissions
for the years ended December 31, 2022, 2021 and 2020 was approximately $
The Company reimburses affiliates
of Pacific Trail Holdings, LLC, the owner of approximately 81.8% of the Company’s Common Shares, for general overhead expense and
for direct expenses incurred on its behalf, including salaries and salary-related expenses incurred in connection with the management
of the Company's operations. Generally, the entity that employs the person providing the services receives the reimbursement. Substantially
all of such reimbursable amounts were incurred by JMB Realty Corporation or its affiliates, 900FMS, LLC, 900Work, LLC, and JMB Financial
Advisors, LLC, all of which have some degree of common ownership with the Company. The total costs recorded in cost of sales and selling,
general and administrative expenses in the consolidated statement of operations for the years ended 2022, 2021 and 2020 were $
The Company had derived revenue
from farming and common area maintenance services and for providing non-potable water to the Kaanapali Coffee Farms Lot Owners Association
(“LOA”). The LOA is the association of the lot owners of the Kaanapali Coffee Farms. Effective July 1, 2022, the LOA
is no longer an affiliate of the Company due to the loss of control over the LOA. The revenues were $
(7) Commitments and Contingencies
Material legal proceedings of the Company are described below. Unless otherwise noted, the parties adverse to the Company in the legal proceedings described below have not made a claim for damages in a liquidated amount and/or the Company believes that it would be speculative to attempt to determine the Company's exposure relative thereto, and as a consequence believes that an estimate of the range of potential loss cannot be made.
Two former subsidiaries, Oahu Sugar Company, LLC (“Oahu Sugar”) and D/C Distribution Corporation (“D/C”), filed subsequent petitions for liquidation under Chapter 7 of the Bankruptcy Code in April 2005 and July 2007, respectively, as described below. On December 17, 2019, the Oahu Sugar bankruptcy case was closed. As a consequence of the Chapter 7 filing, D/C is not under control of the Company.
48
As a result of an administrative order issued to Oahu Sugar by the Hawaii Department of Health (“HDOH”), Order No. CH 98-001, dated January 27, 1998, Oahu Sugar engaged in environmental site assessment of lands it leased from the U.S. Navy and located on the Waipio Peninsula. Oahu Sugar submitted a Remedial Investigation Report to the HDOH. The HDOH provided comments that indicated that additional testing may be required. Oahu Sugar responded to these comments with additional information. On January 9, 2004, the Environmental Protection Agency (“EPA”) issued a request to Oahu Sugar seeking information related to the actual or threatened release of hazardous substances, pollutants and contaminants at the Waipio Peninsula portion of the Pearl Harbor Naval Complex National Priorities List Superfund Site. The request sought, among other things, information relating to the ability of Oahu Sugar to pay for or perform a cleanup of the land formerly occupied by Oahu Sugar. Oahu Sugar responded to the information requests and notified both the Navy and the EPA that while it had some modest remaining cash that it could contribute to further investigation and remediation efforts in connection with an overall settlement of the outstanding claims, Oahu Sugar was substantially without assets and would be unable to make a significant contribution to such an effort. Attempts at negotiating such a settlement were fruitless and Oahu Sugar received an order from EPA in March 2005 that purported to require certain testing and remediation of the site. As Oahu Sugar was substantially without assets, the pursuit of any action, informational, enforcement, or otherwise, would have had a material adverse effect on the financial condition of Oahu Sugar.
Therefore, as a result of the pursuit of further action by the HDOH and EPA as described above and the immediate material adverse effect that the actions had on the financial condition of Oahu Sugar, Oahu Sugar filed with the United States Bankruptcy Court, Northern District of Illinois, Eastern Division in April 2005, its voluntary petition for liquidation under Chapter 7 of Title 11, United States Bankruptcy Code. Such filing was not expected to have a material adverse effect on the Company as Oahu Sugar was substantially without assets at the time of the filing. While it was not believed that other affiliates had any responsibility for the debts of Oahu Sugar, EPA made a claim against Kaanapali Land as further described below.
Prior to the claims filing
deadline, Kaanapali Land, on behalf of itself and certain subsidiaries, filed claims that aggregated approximately $
49
With regard to the Waipio Peninsula alleged environmental issues, EPA sent three requests for information to Kaanapali Land regarding, among other things, Kaanapali Land's organization and relationship, if any, to entities that may have, historically, operated on the site and with respect to operations conducted on the Waipio site. Kaanapali Land responded to these requests for information. By letter dated February 7, 2007, pursuant to an allegation that Kaanapali Land is a successor to Oahu Sugar Company, Limited, a company that operated at the site prior to 1961 ("Old Oahu"), EPA advised Kaanapali that it believed it was authorized by the Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”) to amend the existing Unilateral Administrative Order against Oahu Sugar Company, LLC, for the cleanup of the site to include Kaanapali Land as an additional respondent. The purported basis for EPA's position was that Kaanapali Land, by virtue of certain corporate actions, was jointly and severally responsible for the performance of the response actions, including, without limitation, clean-up at the site. No such amendment was made. Instead, after a series of discussions between Kaanapali and the EPA, on or about September 30, 2009, the EPA issued a Unilateral Administrative Order to Kaanapali Land for the performance of work in support of a removal action at the former Oahu Sugar pesticide mixing site located on Waipio peninsula. The work consisted of the performance of soil and groundwater sampling and analysis, a topographic survey, and the preparation of an engineering evaluation and cost analysis of potential removal actions to abate an alleged "imminent and substantial endangerment" to public health, welfare or the environment. The order appeared to be further predicated primarily on the alleged connection of Kaanapali Land to Old Oahu and its activities on the site. Kaanapali Land engaged in performing work, including the conduct of sampling at the site, required by the order while reserving its rights to contest liability regarding the site. With regard to liability for the site, Kaanapali Land believed that its liability, if any, should have related solely to a portion of the period of operation of Old Oahu at the site, although in some circumstances CERCLA permits imposition of joint and several liability, which can exceed a responsible party's equitable share. Kaanapali Land believed that the U.S. Navy bore substantial liability for the site by virtue of its ownership of the site throughout the entire relevant period, both as landlord under its various leases with Oahu Sugar and Old Oahu and by operating and intensively utilizing the site directly during a period when no lease was in force. The Company believed that the cost of the work as set forth in the pending order would not have been material to the Company as a whole; however, in the event that the EPA were to issue an order requiring remediation of the site, the Company gave no assurances that the cost of said remediation would not ultimately have a material adverse effect on the Company. In addition, the Company believed that if there were litigation regarding the site, there could be no assurance that the cost of such litigation would not be material or that such litigation would result in a judgment in favor of the Company. Kaanapali and the EPA exchanged comments relative to further studies to be performed at the site, including a possible ecological risk assessment. After years of performing work at the Site, the parties engaged in discussions to resolve the matter. The matter was ultimately resolved pursuant to the Consent Decree set forth below.
On February 11, 2015, the Company filed a complaint for declaratory judgment, bad faith and damages against Fireman’s Fund Insurance Company (“Fireman’s Fund”) in the Circuit Court of the First Circuit, State of Hawaii, Civil No. 15-1-0239-02, in connection with costs and expenses it might incur in connection with the Waipio site. In the five-count complaint, the Company sought, among other things, a declaratory judgment of its rights under various Fireman’s Fund policies and an order that Fireman’s Fund defend and indemnify Kaanapali Land from all past, present and future costs and expenses in connection with the site, including costs of investigation and defense incurred by Kaanapali and the professionals it has engaged. In addition, Kaanapali sought general, special, and punitive damages, prejudgment and post judgment interest, and such other legal or equitable relief as the court deems just and proper. Fireman’s Fund has filed a responsive pleading. This litigation was settled and dismissed with prejudice pursuant to an agreement between Fireman’s Fund and the Company dated on or about November 24, 2021 (“Insurance Settlement”). The dismissal order was entered on March 31, 2022.
50
Under the Insurance Settlement
Fireman’s Fund paid $6,800 into an escrow that was used to fund the Consent Decree, described below, that was entered into with
various federal agencies. The $
On April 16, 2021,
the U.S. Department of Justice and the U.S. Environmental Protection Agency, on behalf of various federal agencies of the United States
of America, executed a Consent Decree with Kaanapali Land, LLC, a Delaware limited liability company (the “Company”) that,
if entered by the U.S. District Court sitting in the District of Hawaii, United States of America v. Kaanapali Land, and Oahu Sugar Company,
LLC Case No. 1:21-CV-00190, would resolve the U.S. federal government’s current environmental claims against the Company with respect
to contamination at the former mixing site on Waipio Peninsula on Oahu in Hawaii that had been leased by Oahu Sugar Company LLC, a former
subsidiary of the Company. In return for payments by the Company totaling $
Kaanapali Land, as successor by merger to other entities, and D/C have been named as defendants in personal injury actions allegedly based on exposure to asbestos. While there are relatively few cases that name Kaanapali Land, there were a substantial number of cases that were pending against D/C on the U.S. mainland (primarily in California). Cases against Kaanapali Land (hereafter, “Kaanapali Land asbestos cases”) are allegedly based on its prior business operations in Hawaii and cases against D/C are allegedly based on sale of asbestos-containing products by D/C's prior distribution business operations primarily in California. Each entity defending these cases believes that it has meritorious defenses against these actions, but can give no assurances as to the ultimate outcome of these cases. The defense of these cases had a material adverse effect on the financial condition of D/C as it was forced to file a voluntary petition for liquidation as discussed below. Kaanapali Land does not believe that it has liability, directly or indirectly, for D/C's obligations in those cases. Kaanapali Land does not presently believe that the cases in which it is named will result in any material liability to Kaanapali Land; however, there can be no assurance in that regard.
51
On February 12,
2014, counsel for Fireman’s Fund, the carrier that has been paying defense costs and settlements for the Kaanapali Land asbestos
cases, stated that it would no longer pay settlements or judgments in the Kaanapali Land asbestos cases due to then pending D/C and Oahu
Sugar bankruptcies. In its communications with Kaanapali Land, Fireman’s fund expressed its view that the automatic stay in effect
in the D/C bankruptcy case barred Fireman’s Fund from making any payments to resolve the Kaanapali Land asbestos claims because
D/C Distribution was also alleging a right to coverage under those policies for asbestos claims against it. However, in the interim, Fireman’s
Fund advised that it intended to continue to pay defense costs for those cases, subject to whatever reservations of rights that might
be in effect and subject further to the policy terms. Fireman’s Fund also indicated that to the extent that Kaanapali Land cooperated
with Fireman’s Fund in addressing settlement of the Kaanapali Land asbestos cases through coordination with its adjusters, it was
Fireman’s Fund’s intention to reimburse any such payments by Kaanapali Land, subject, among other things, to the terms of
any lift-stay order, the limits and other terms and conditions of the policies, and prior approval of the settlements. Kaanapali Land
and Fireman’s Fund entered into a settlement agreement on or about November 24, 2021 whereby Fireman’s Fund paid $
On February 15, 2005, D/C
was served with a lawsuit entitled American & Foreign Insurance Company v. D/C Distribution and Amfac Corporation, Case No. 04433669
filed in the Superior Court of the State of California for the County of San Francisco, Central Justice Center. No other purported party
was served. In the eight-count complaint for declaratory relief, reimbursement and recoupment of unspecified amounts, costs and for such
other relief as the court might grant, plaintiff alleged that it was an insurance company to whom D/C tendered for defense and indemnity
various personal injury lawsuits allegedly based on exposure to asbestos containing products. Plaintiff alleged that because none of
the parties had been able to produce a copy of the policy or policies in question, a judicial determination of the material terms of
the missing policy or policies was needed. Plaintiff sought, among other things, a declaration: of the material terms, rights, and obligations
of the parties under the terms of the policy or policies; that the policies were exhausted; that plaintiff was not obligated to reimburse
D/C for its attorneys' fees in that the amounts of attorneys' fees incurred by D/C had been incurred unreasonably; that plaintiff was
entitled to recoupment and reimbursement of some or all of the amounts it has paid for defense and/or indemnity; and that D/C breached
its obligation of cooperation with plaintiff. D/C filed an answer and an amended cross-claim. D/C believed that it had meritorious defenses
and positions, and intended to vigorously defend. In addition, D/C believed that it was entitled to amounts from plaintiffs for reimbursement
and recoupment of amounts expended by D/C on the lawsuits previously tendered. In order to fund such action and its other ongoing obligations
while such lawsuit continued, D/C entered into a Loan Agreement and Security Agreement with Kaanapali Land, in August 2006, whereby Kaanapali
Land provided certain advances against a promissory note delivered by D/C in return for a security interest in any D/C insurance policy
at issue in this lawsuit. In June 2007, the parties settled this lawsuit with payment by plaintiffs in the amount of $
52
Because D/C was substantially
without assets and was unable to obtain additional sources of capital to satisfy its liabilities, D/C filed with the United States Bankruptcy
Court, Northern District of Illinois, its voluntary petition for liquidation under Chapter 7 of Title 11, United States Bankruptcy
Code on July 17, 2007, Case No. 07-12776. Such filing is not expected to have a material adverse effect on the Company as D/C was
substantially without assets at the time of the filing. Kaanapali Land filed claims in the D/C bankruptcy that aggregated approximately
$
On January 21, 2020, certain asbestos claimants filed a Stay Relief Motion in the Bankruptcy Court for the Northern District of Illinois, Eastern Division, Case No. 07-12776 (“motion to lift stay”) in connection with the D/C proceeding. The motion sought the entry of an order, among other things, modifying the automatic stay in the D/C bankruptcy to permit those claimants to prosecute various lawsuits in state courts against D/C Distribution, LLC, and to recover on any judgment or settlement solely from any available insurance coverage. Various oppositions to the motion to lift stay were filed, and the matter was heard and taken under advisement in April 2020. On July 21, 2020, the bankruptcy court issued an order granting the motion to lift stay to permit the movants to pursue their claims and to recover any judgment or settlement from and to the extent of any available insurance coverage of D/C Distribution, LLC, only.
The bankruptcy trustee for D/C is now in the process of closing the bankruptcy case. Certain asbestos-related proofs claims in the bankruptcy case have been withdrawn in connection with closing. A court hearing was held on March 29, 2023 in which the court awarded the trustee’s compensation and expenses and therefore D/C no longer has any assets. The closing of the D/C bankruptcy case is pending. Upon the closing the case, the Company expects to reverse a related contingent liability. After the closing of the case, there is no guaranty that personal injury claimants will not assert asbestos-related claims against D/C in the future.
The Company has received notice from Hawaii’s Department of Land and Natural Resources (“DLNR”) that DLNR on a periodic basis would inspect all significant dams and reservoirs in Hawaii, including those maintained by the Company on Maui in connection with its agricultural operations. A series of such inspections have taken place over the period from 2006 through the most recent inspections that occurred in April 2022. To date, the DLNR cited certain deficiencies concerning two of the Company’s reservoirs relating to dam and reservoir safety standards established by the State of Hawaii. These deficiencies include, among other things, vegetative overgrowth, erosion of slopes, uncertainty of inflow control, spillway capacity, and freeboard, and uncertainty of structural stability under certain loading and seismic conditions. The Company has taken certain corrective actions, including lowering the reservoir operating level; as well as updating important plans to address emergency events and basic operations and maintenance. In 2018, the Company contracted with an engineering firm to develop plans to address certain DLNR cited deficiencies on one of the Company’s reservoirs. Remediation plans for addressing all deficiencies have been submitted to DLNR. In 2012, the State of Hawaii issued new Hawaii Administrative Rules for Dams and Reservoirs which require dam owners to obtain from DLNR Certificates of Impoundment (“permits”) to operate and maintain dams or reservoirs. Obtaining such permits requires owners to completely resolve all cited deficiencies. Therefore, the process may involve further analysis of dam and reservoir safety requirements, which will involve continuing engagement with specialized engineering consultants, and ultimately could result in significant and costly improvements which may be material to the Company.
53
The DLNR categorizes the reservoirs as "high hazard" under State of Hawaii Administrative Rules and State Statutes concerning dam and reservoir safety. This classification, which bears upon government oversight and reporting requirements, may increase the cost of managing and maintaining these reservoirs in a material manner. The Company does not believe that this classification is warranted for either of these reservoirs and has initiated a dialogue with DLNR in that regard. In April 2008, the Company received further correspondence from DLNR that included the assessment by their consultants of the potential losses that result from the failure of these reservoirs. In April 2009, the Company filed a written response to DLNR to correct certain factual errors in its report and to request further analysis on whether such "high hazard" classifications are warranted. It is unlikely that the “high hazard” designation will be changed.
Other than as described above, the Company is not involved in any material pending legal proceedings, other than ordinary routine litigation incidental to its business. The Company and/or certain of its affiliates have been named as defendants in several pending lawsuits. While it is impossible to predict the outcome of such routine litigation that is now pending (or threatened) and for which the potential liability is not covered by insurance, the Company is of the opinion that the ultimate liability from any of this litigation will not materially adversely affect the Company's consolidated results of operations or its financial condition.
The Company often seeks insurance recoveries under its policies for costs incurred or expected to be incurred for losses or claims under which the policies might apply. During second quarter 2022, the Company received $155 in insurance proceeds related to an insured event that occurred during the 2021 crop year. This amount has been reflected in sales and rental revenues in the Company’s consolidated financial statements.
Kaanapali Land Management Corp.
(KLMC) is a party to an agreement with the State of Hawaii for the development of the Lahaina Bypass Highway. An approximate 2.4 mile
portion of this two lane state highway has been completed. Construction to extend the southern terminus was completed mid-2018. The northern
portion of the Bypass Highway, which extends to KLMC’s lands, is in the early stage of planning. Under certain circumstances, which
have not yet occurred, KLMC remains committed for approximately $
These potential commitments have not been reflected in the consolidated financial statements. While the completion of the Bypass Highway would add value to KLMC’s lands north of the town of Lahaina, there can be no assurance that it will be completed or when any future phases will be undertaken.
54
(8) Business Segment Information
As described in Note 1, the Company operates in two business segments. Total revenues, operating profit, identifiable assets, capital expenditures, and depreciation and amortization by business segment are presented in the tables below.
Total revenues by business segment include primarily (i) sales, all of which are to unaffiliated customers and (ii) interest income that is earned from outside sources on assets which are included in the individual industry segment's identifiable assets.
Operating income (loss) is comprised of total revenue less cost of sales and operating expenses. In computing operating income (loss), none of the following items have been added or deducted: general corporate revenues and expenses, interest expense and income taxes.
Identifiable assets by business segment are those assets that are used in the Company's operations in each industry. Corporate assets consist principally of cash and cash equivalents, prepaid pension costs and receivables related to previously divested businesses.
| 2022 | 2021 | 2020 | |||||||
| Revenues: | |||||||||
| Property | $ | $ | $ | ||||||
| Agriculture | |||||||||
| Corporate |
|
||||||||
| $ | $ | $ | |||||||
| Operating income (loss): | |||||||||
| Property | $ | ( |
$ | ( |
$ | ( | |||
| Agriculture | ( |
( | |||||||
| ( |
( | ||||||||
| Corporate | ( | ||||||||
|
Operating income (loss) before other income and income taxes |
$ | $ | $ | ( | |||||
| Identifiable Assets: | |||||||||
| Property | $ | $ | $ | ||||||
| Agriculture | |||||||||
| Corporate | |||||||||
| $ | $ | $ | |||||||
The Company’s property segment consists primarily of revenue received from land sales and lease and licensing agreements.
The Company’s agricultural segment currently consists primarily of coffee operations and licensing agreements.
The Company is exploring alternative agricultural operations, but there can be no assurance that replacement operations at any level will result.
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Agricultural identified assets include land classified as agricultural or conservation for State and County purposes.
| 2022 | 2021 | 2020 | |||||||
| Capital Expenditures: | |||||||||
| Property | $ | $ | $ | ||||||
| Agriculture | |||||||||
| $ | $ | $ | |||||||
| Depreciation and Amortization: | |||||||||
| Property | $ | $ | $ | ||||||
| Agriculture | |||||||||
| $ | $ | $ | |||||||
The following tables set forth the computation of net income (loss) per share - basic and diluted:
|
Year Ended December 31, 2022 |
Year Ended December 31, 2021 |
Year Ended December 31, 2020 | |||||||
| (Amounts in thousands except per share amounts) | |||||||||
| Numerator: | |||||||||
| Net income (loss) | $ | $ | ( |
$ | ( | ||||
|
Less: Net loss attributable to non-controlling interests |
( |
( |
( | ||||||
| Net income (loss) attributable to stockholders | $ | $ | $ | ( | |||||
| Denominator: | |||||||||
|
Number of weighted average shares – basic and diluted |
|||||||||
|
Net income (loss) per share, attributable to Kaanapali Land – basic and diluted |
$ | $ | $ | ) | |||||
As of December 31, 2022, the Company had issued and outstanding Common Shares and Class C Shares. The Class C Shares have the same rights as the Common Shares except that the Class C Shares will not participate in any distributions until the holders of the Common Shares have received aggregate distributions equal to $19 per share, subject to customary antidilution adjustments. Net income per share data is based on the aggregate 1,844,613 outstanding shares.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The principal executive officer and the principal financial officer of the Company have evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") as of the end of the period covered by this report. Based on such evaluation, the principal executive officer and the principal financial officer have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed was recorded, processed, summarized and reported within the time periods specified in the applicable rules and form of the Security and Exchange Commission (“SEC”).
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of management including the principal executive officer and the principal financial officer management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can only provide reasonable assurances with respect to financial statement preparation and presentation.
A material weakness was detected while preparing the financial statements for the year ended December 31, 2021. Because of this material weakness, management concluded that the Company did not maintain effective control over the review and evaluation of an insurance recovery with regard to the Waipio Peninsula settlement for reporting and disclosure within the financial statements. The material weakness was identified and the insurance settlement was recovered prior to the issuance of the Company’s December 31, 2021 consolidated financial statements. The Company has fully remediated the material weakness by implementing enhanced review of non-routine and complex transactions, improving documentation of accounting for such transactions, and implementation of improved information technology by utilizing upgraded accounting research tools.
Based on the Company’s evaluation under the framework in Internal Control – Integrated Framework (2013 Framework), management concluded that its internal control over financial reporting was effective as of December 31, 2022.
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Internal Control Over Financial Reporting
Except as described above, there have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fourth quarter of 2022 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 9B. Other Information
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None
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Part III
Item 10. Directors, Executive Officers and Corporate Governance
The sole managing member of Kaanapali Land, LLC is Pacific Trail, which is also Kaanapali Land's largest shareholder. Pacific Trail manages the business of Kaanapali Land pursuant to the terms of the Company’s LLC Agreement. Although the executive officers of Kaanapali Land are empowered to manage its day-to-day business affairs, under the Company’s LLC Agreement, most significant actions of Kaanapali Land outside the ordinary course of business must first be authorized by Pacific Trail, which is responsible and has full power and authority to do all things deemed necessary and desirable by it to conduct the business of Kaanapali Land. Pacific Trail may be removed as manager in certain specified circumstances. As of December 31, 2022, the executive officers and certain other officers of the Company were as follows:
| Name | Position Held with the Company | |
| Stephen A. Lovelette | President, Chief Executive Officer and Chief Financial Officer | |
| Richard Helland | Vice President and Principal Accounting Officer |
Certain of these officers are also officers and/or directors of JMB Realty Corporation ("JMB") and numerous affiliated companies of JMB (hereinafter collectively referred to as "JMB affiliates"). JMB affiliates outside of the Company have not materially engaged in the agriculture business and have primarily purchased, or made mortgage loans securing, existing commercial, retail, office, industrial and multi-family residential rental buildings or have owned or operated hotels on various other hospitality businesses. However, certain partnerships sponsored by JMB and other affiliates of JMB were previously engaged in land development activities including planned communities, none of which are in Hawaii.
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The following sets forth certain business experience during the past five years of such officers of the Company.
Stephen A. Lovelette (age 66) has been the President of KLC Land and Kaanapali Land since March 2019. Since March 2019, Mr. Lovelette has been Chief Executive Officer of Kaanapali Land and since June 2018, Mr. Lovelette has been Chief Financial Officer of Kaanapali Land. Mr. Lovelette is in charge of implementing the Kaanapali 2020 Development Plan. Mr. Lovelette has been associated with JMB and its affiliates for over 30 years. Mr. Lovelette holds a bachelor's degree from The College of the Holy Cross and an MBA from Seton Hall University. In addition, Mr. Lovelette has extensive experience in corporate finance and has been responsible for obtaining substantial financial commitments from institutional lenders relating to the assets of JMB and its affiliates. During the past five years, Mr. Lovelette has also been a Managing Director of JMB.
It is currently anticipated that Stephen A. Lovelette will devote approximately 25 to 50 percent of his time to the operations of the Company. The percentage is largely dependent upon potential land sale transactions, the entitlement processes relating to various land parcels and other matters (including attention devoted to litigation, overhead, staffing and operations).
Richard Helland (age 66) has been a Vice President of the Company since July 2004. Mr. Helland has been Principal Accounting Officer since June 2018. He holds a bachelor’s degree from Illinois State University and is a Certified Public Accountant. Mr. Helland has substantial experience in the management and reporting functions of both public and private entities.
In light of the fact that the Company's shares are not publicly traded, the Company is a limited liability company and the rights of members are governed by the Company’s LLC Agreement, the Company has determined that it is not necessary to have a separately designated audit committee, compensation committee, an audit committee financial expert or a code of ethics that applies to its principal executive, financial or accounting officers as those terms are defined in the rules and regulations of the SEC.
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Item 11. Executive Compensation
Certain of the officers of the Company listed in Item 10 above are officers of JMB and are compensated by JMB or an affiliate thereof (other than the Company and its subsidiaries). The Company will reimburse JMB, Pacific Trail and their affiliates for any expenses incurred while providing services to the Company.
Summary Compensation Table
| Name (2) | Principal Position | Year |
Salary ($) (2) |
All Other Compensation ($) |
Total ($) | |||||
| Stephen A. Lovelette |
President, Chief Executive Officer and Chief Financial Officer |
|||||||||
| 2022 | 334,444 | -- | 334,444 | |||||||
| 2021 | 336,667 | -- | 336,667 |
(1) Mr. Lovelette is the Company’s only executive officer.
(2) Salary amounts for Mr. Lovelette represents the portion of total compensation allocated and charged to the Company. The Company does not have a compensation committee as compensation is determined by the Company’s manager. Executive officer compensation was determined through deliberations with Pacific Trail representatives.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
| Title of Class |
Name and Address of Beneficial Owner |
Amount and Nature of Beneficial Ownership |
Percent of Class | |||
| Common Shares |
Pacific Trail Holdings, LLC 900 North Michigan Avenue Chicago, IL 60611 |
1,466,573 Common Shares owned directly (1) (2) |
81.8% | |||
| Class C Shares |
Stephen A. Lovelette 900 North Michigan Avenue Chicago, IL 60611 |
52,000 Class C Shares owned directly (2) |
100.0% | |||
| (1) | The sole managing member of Pacific Trail, Pacific Trail Holdings, Inc. ("PTHI"), may be deemed to beneficially own the Common Shares owned by Pacific Trail. PTHI disclaims beneficial ownership with respect to any of the shares owned by Pacific Trail. Each of the shareholders of PTHI may be deemed to own the Common Shares owned by Pacific Trail. Each of such shareholders, being Gary Nickele, Gailen J. Hull and Stephen A. Lovelette, disclaims beneficial ownership with respect to any of the shares owned by Pacific Trail. The addresses of PTHI and Messrs. Nickele, Hull and Lovelette are the same as for Pacific Trail. | |
| (2) | As of December 31, 2022, there were approximately 1,792,613 Common Shares and 52,000 Class C Shares issued and outstanding. |
No other person including any officer of the Company is known by the Company to beneficially own in excess of 5% of the Common Shares issued, outstanding and distributed.
Item 13. Certain Relationships and Related Transactions, and Director Independence
An affiliated insurance agency, JMB Insurance Agency, Inc., which has some degree of common ownership with the Company, earns insurance brokerage commissions in connection with providing the placement of insurance coverage for certain of the properties and operations of the Company. The total of such commissions for the year ended December 31, 2022 was approximately $41 thousand, all of which was paid as of December 31, 2022.
The Company reimburses Pacific Trail and its affiliates for general overhead expense and for direct expenses incurred on its behalf, including salaries and salary-related expenses incurred in connection with the management of the Company's operations. Generally, the entity that employs the person providing the services receives the reimbursement. Substantially all of such reimbursable amounts were incurred by JMB Realty Corporation or its affiliates, 900FMS, LLC, 900Work, LLC, and JMB Financial Advisors, LLC, all of which have some degree of common ownership with the Company. The total costs for the year ended December 31, 2022 was approximately $1.3 million, of which $267 thousand was unpaid as of December 31, 2022.
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The Company had derived revenue from farming and common area maintenance services and for providing non-potable water to the Kaanapali Coffee Farms Lot Owners Association (“LOA”). The LOA is the association of the lot owners of the Kaanapali Coffee Farms. Effective July 1, 2022, the LOA is no longer an affiliate of the Company due to the loss of control over the LOA. The revenues were $616 thousand for the year ended December 31, 2022. Through June 30, 2022, the revenue amounts have been eliminated in consolidated financial statements.
In light of the fact that the Company's shares are not publicly traded, is a limited liability company, and has no independent outside directors or managers, it has no formal policy or procedure for the review, approval or ratification of related party transactions that are required to be disclosed pursuant to Item 404 of Regulation S-K.
Item 14. Principal Accountant Fees and Services
In March 2015, the Company approved the engagement of Grant Thornton, LLP (“Grant Thornton”) as its independent registered public accounting firm. The fees billed by Grant Thornton for the years ended December 31, 2022 and 2021 are as follows:
(1) Audit Fees
The fees incurred for the years ended December 31, 2022 and 2021 for professional services for the audit of the Company’s consolidated financial statements were approximately $231 thousand and $221 thousand, respectively.
The fees incurred for the years ended December 31, 2022 and 2021 for professional services for the audit of the Pension Plan’s financial statements was approximately $42 thousand and $42 thousand, respectively.
(2) Audit Related Fees
None
(3) Tax Fees
The fees incurred for the years ended December 31, 2022 and 2021 for professional tax compliance services related to the Pension Plan’s IRS Form 5500 Annual Report was approximately $6 thousand and $5 thousand, respectively.
(4) All Other Fees
None.
All audit and permitted non-audit services proposed to be performed by the Company’s independent registered public accounting firm are approved by the managing member of the Company before the service is undertaken.
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Part IV
Item 15. Exhibits, Financial Statement Schedules
| (a) | Exhibits. | ||
| 2.1 | Order Confirming Second Amendment Joint Plan of Reorganization Dated June 1, 2002, including as an exhibit thereto, the Second Amended Joint Plan of Reorganization of Amfac Hawaii, LLC, Certain of its Subsidiaries and FHT Corporation Under Chapter 11 of the Bankruptcy Code incorporated herein by reference the Amfac Hawaii, LLC Current Report on Form 8-K for July 29, 2002 dated August 13, 2002 (File No. 33-24180). | ||
| 2.2 | Second Amended Disclosure Statement with Respect to Joint Plan of Reorganization of Amfac Hawaii, LLC, Certain of its Subsidiaries and FHT Corporation Under Chapter 11 of the Bankruptcy Code, incorporated herein by reference from the Amfac Hawaii, LLC Current Report on Form 8-K for July 29, 2002 dated August 13, 2002 (File No. 33-24180). | ||
| 3.1 | Amended and Restated Limited Liability Company Agreement of Kaanapali Land, LLC dated November 14, 2002 filed as an exhibit to the Company's Form 10 filed May 1, 2003 and hereby incorporated by reference. | ||
| 3.2 | Consent Decree entered into as of April 16, 2021, for the United States of America by U.S. Department of Justice and U.S. Environmental Protection Agency and by Kaanapali Land, LLC and Oahu Sugar Company, LLC filed as an exhibit to the Company’s report on Form 8-K filed April 22, 2021, and hereby incorporated by reference. | ||
| 4.1 | Description of the Registrant’s Common Shares is filed herewith. | ||
| 10.1 | Service Agreement, dated November 18, 1988, between Amfac/JMB Hawaii, Inc., and Amfac Property Development Corp.; Amfac Property Investment Corp.; Amfac Sugar and Agribusiness, Inc.; Kaanapali Water Corporation; Amfac Agribusiness, Inc.; Kekaha Sugar Company, Limited; The Lihue Plantation Company; Oahu Sugar Company, Limited; Pioneer Mill Company, Limited; Puna Sugar Company, Limited; H. Hackfeld & Co., Ltd.; and Waiahole Irrigation Company, Limited and JMB Realty Corporation, incorporated herein by reference to the Amfac Hawaii, LLC Annual Report on Form 10-K filed on March 22, 1989 (File No. 33-24180) for the year ended December 31, 1988. | ||
| 21 | List of Subsidiaries is filed herewith. | ||
| 31 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) is filed herewith. | ||
| 32 | Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are filed herewith. | ||
| (1) | Previously filed as exhibits to Amfac Hawaii, LLC's Registration Statement on Form S-1 (as amended) under the Securities Act of 1933 (File No. 33-24180) and hereby incorporated by reference. | ||
Item 16. Form 10-K Summary
None.
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Kaanapali Land, LLC | ||
| By: |
Pacific Trail Holdings, LLC (Sole Managing Member) | |
| /s/ Richard Helland | ||
| By: |
Richard Helland Vice President | |
| Date: | April 10, 2023 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| /s/ Richard Helland | ||
| By: |
Richard Helland Vice President and Principal Accounting Officer | |
| Date: | April 10, 2023 | |
| /s/ Stephen A. Lovelette | ||
| By: |
Stephen A. Lovelette President, Chief Executive Officer and Chief Financial Officer | |
| Date: | April 10, 2023 |
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