Liquidity and Capital Resources
General
In addition to historical information, this Report contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements are based on management's current expectations about its
businesses and the markets in which the Company operates. Such forward-looking
statements are not guarantees of future performance and involve known and
unknown risks, uncertainties or other factors which may cause actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Actual operating results may be affected by various
factors including, without limitation, changes in international, national and
Hawaiian economic conditions, competitive market conditions, uncertainties and
costs related to the imposition of conditions on receipt of governmental
approvals and costs of material and labor, the effect of the outbreak of the
COVID-19 virus, and actual versus projected timing of events all of which may
cause such actual results to differ materially from what is expressed or
forecast in this report.
Certain subsidiaries of Kaanapali Land are jointly indebted to Kaanapali Land
pursuant to a certain Secured Promissory Note in the principal amount of $70
million, dated November 14, 2002, and due September 30, 2029, as extended. Such
note had an outstanding balance of principal and accrued interest as of
March 31, 2021 and December 31, 2020 of approximately $90 million and $90
million, respectively. The interest rate currently is 0.39% per annum and
compounds semi-annually. The note, which is prepayable, is secured by
substantially all of the remaining real property owned by such subsidiaries,
pursuant to a certain Mortgage, Security Agreement and Financing Statement,
dated as of November 14, 2002 and placed on record in December 2002. The note
has been eliminated in the consolidated financial statements because the
obligors are consolidated subsidiaries of Kaanapali Land.
The Company had cash and cash equivalents of approximately $18 million and $18
million, as of March 31, 2021 and December 31, 2020, respectively, which is
available for, among other things, working capital requirements, including
future operating expenses, and the Company's obligations for engineering,
planning, regulatory and development costs, drainage and utilities,
environmental remediation costs on existing and former properties, potential
liabilities resulting from tax audits, and existing and possible future
litigation. The Company does not anticipate making any distributions for the
foreseeable future.
The primary business of Kaanapali Land is the investment in and development of
the Company's assets on the Island of Maui. The various development plans will
take many years at significant expense to fully implement. Proceeds from land
sales are the Company's only source of significant cash proceeds and the
Company's ability to meet its liquidity needs is dependent on the timing and
amount of such proceeds.
The Company's operations have in recent periods been primarily reliant upon the
net proceeds of sales of developed and undeveloped land parcels.
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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 $7.5 million, the
Consent Decree would resolve liability asserted by the U.S. government against
the Company under the Comprehensive Environmental Response Compensation and
Liability Act (CERCLA) as well as under the Clean Water Act, both for response
costs (those costs expended for investigation and cleanup) and for natural
resource damages.
The Company has been in discussions with Fireman's Fund, the insurance carrier
with which the Company and certain of its subsidiaries maintained liability
policies, regarding the payment or reimbursement by Fireman's Fund of a
significant portion of the settlement amount to be paid by the Company under the
Consent Decree. The Company can give no assurances as to what portion, if any,
of the settlement payment will be recovered from Firemen's Fund.
The Consent Decree is subject to a number of contingencies that could prevent it
from being finalized with its current terms. In particular, and without
limitation, (i) the Consent Decree has been lodged with the District Court for a
period of at least 30 days for public notice and comment, and the United States
has reserved the right to withdraw or withhold its consent if the comments
regarding the Consent Decree disclose facts or considerations that indicate the
Consent Decree is inappropriate, improper or inadequate, (ii) the Company may
oppose entry of the Consent Decree as the result of any objection in other
pending proceedings to use by the Company of site-related insurance proceeds
from Fireman's Fund; and (iii) the District Court in Hawaii might determine not
to enter the Consent Decree as currently written or as approved by the federal
government. There can be no assurance that the contingencies will not preclude
entry of the Consent Decree.
The Company is in the planning stages for the development of a 295-acre parcel
in the region mauka of the Kaanapali Coffee Farms ("KCF Mauka"). The parcel is
to be comprised of 61 agricultural lots that will be offered to individual
buyers. The Company expects to develop the parcel in phases and all phases have
been submitted to the County for subdivision approval. 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. Although the
Company expects to market the lots in the first phase beginning in the second
half of 2021, 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 and the considerable uncertainty surrounding the COVID-19
pandemic and its continuing repercussions may impact the viability or timing of
the project. Therefore, there can be no assurance the Company will be able to
meet such timetable, that the subdivision will ultimately be approved or that
the lots will sell for prices deemed advantageous by the Company.
In January 2021, the Company entered into agreements with an unrelated third
party for that third party to prepare plans to develop Puukolii Village Mauka
and another subdivision on the Company's property. The plans are to include
development segments and timeline, offsite and onsite infrastructure,
construction cost analysis, proposed budgets and proforma financial statements.
If after discussion and negotiation the Company and the third party are unable
to agree on the plans, then either the Company or the third party may terminate
the agreements.
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The Commission on Water Resource Management ("CWRM") consists of approximately
seven members appointed by the governor and confirmed by the Hawaii State
Senate. CWRM assists the state as trustee of water resources pursuant to the
state water code. CWRM exercises jurisdiction over land-based surface sources
and conducts water resource assessments and regulatory activities over, among
other things, freshwater streams throughout Maui. The Company is reliant on
water sourced from its irrigation systems which divert water from streams and
development tunnels into a system of ditches, tunnels, flumes, siphons and
reservoirs.
The Company does not consider the excess assets of the Pension Plan
(approximately $18 million) to be a source of liquidity due to the substantial
cost, including Federal income tax consequences, associated with liquidating the
Pension Plan.
Although the Company does not currently believe that it has significant
liquidity problems over the near term, should the Company be unable to satisfy
its liquidity requirements from its existing resources and future property
sales, it will likely pursue alternate financing arrangements. However it cannot
be determined at this time what, if any, financing alternatives may be available
and at what cost.
In March 2020, the World Health Organization declared the outbreak of COVID-19
as a pandemic, and the U.S. and Hawaiian economy began to experience pronounced
disruptions. Quarantine, travel restrictions and other governmental restrictions
to reduce the spread of COVID-19 has caused and is likely to continue to have an
adverse impact on economic activity, including business closures, increased
unemployment, financial market instability, and reduced tourism to Maui. The
duration of the disruption on global, national, and local economies cannot be
reasonably estimated at this time. Therefore, while this matter will negatively
and materially impact our results and financial position, the related financial
impact cannot be reasonably estimated at this time. The Company continues to
monitor the economic impact of the COVID-19 pandemic, as well as mitigating
emergency assistance programs, such as the Coronavirus Aid, Relief, and Economic
Security Act (CARES Act) and other subsequent federal legislation.
Results of Operations
Reference is made to the footnotes to the financial statements for additional
discussion of items addressing comparability between years.
The decrease in other assets at March 31, 2021 as compared to December 31, 2020
is primarily due to refundable AMT tax credits received from the IRS in February
2021.
The decrease in sales for the three months ended March 31, 2021 as compared to
the three months ended March 31, 2020 is primarily due to the negative impact on
coffee sales due to continued mandates including restrictions on travel, both
inter-island and trans-Pacific arrivals to the Hawaiian islands, and other
mandates negatively impacting business and the economy in Hawaii related to the
COVID-19 pandemic.
The increase in selling, general and administrative expenses for the three
months ended March 31, 2021 as compared to the three months ended March 31, 2020
is due to the adjustment of the loss contingency related to the Waipio site at
March 31, 2021.
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Inflation
Due to the lack of significant fluctuations in the level of inflation in recent
years, inflation generally has not had a material effect on real estate
development.
In the future, high rates of inflation may adversely affect real estate
development generally because of their impact on interest rates. High interest
rates not only increase the cost of borrowed funds to the Company, but can also
have a significant effect on the affordability of permanent mortgage financing
to prospective purchasers. However, high rates of inflation may permit the
Company to increase the prices that it charges in connection with real property
sales, subject to general economic conditions affecting the real estate industry
and local market factors, and therefore may be advantageous where property
investments are not highly leveraged with debt or where the cost of such debt
has been previously fixed.
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