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
September 30, 2020 and December 31, 2019 of approximately $90 million and $89
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 $19 million and $23
million, as of September 30, 2020 and December 31, 2019, 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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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 the first phase
has 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 first half of 2021, various contingencies, including, but not limited to,
governmental and market factors, the availability of a bond to secure the first
phase of the development and the considerable uncertainty surrounding the
COVID-19 pandemic 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.
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 $16 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).
Results of Operations
Reference is made to the footnotes to the financial statements for additional
discussion of items addressing comparability between years.
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The decrease in sales for the three and nine months ended September 30, 2020 as
compared to the three and nine months ended September 30, 2019 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 decrease in selling, general and administrative expenses for the three and
nine months ended September 30, 2020 as compared to the three and nine months
ended September 30, 2019 is due to the settlement of a legal matter during third
quarter 2019.
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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