MAUI LAND & PINEAPPLE CO INC - Quarter Report: 2012 September (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2012

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 001-06510

 

MAUI LAND & PINEAPPLE COMPANY, INC.

(Exact name of registrant as specified in its charter)

 

 

200 Village Road, Kapalua, Maui, Hawaii 96761

(Address of principal executive offices)

 

Registrant’s telephone number, including area code: (808) 877-3351

 

None

(Former name, former address and former fiscal year, if changed since last report)

 

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.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

Table of Contents

 

MAUI LAND & PINEAPPLE COMPANY, INC.

AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION	3
Item 1. Financial Statements (unaudited)	3
Condensed Consolidated Statements of Comprehensive Loss, Three Months Ended September 30, 2012 and 2011	3
Condensed Consolidated Statements of Comprehensive Income (Loss), Nine Months Ended September 30, 2012 and 2011	4
Condensed Consolidated Balance Sheets, September 30, 2012 and December 31, 2011	5
Condensed Consolidated Statements of Stockholders’ Deficiency, Nine Months Ended September 30, 2012 and 2011	6
Condensed Consolidated Statements of Cash Flows, Nine Months Ended September 30, 2012 and 2011	7
Notes to Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Forward-Looking Statements and Risks	21
Item 3. Quantitative and Qualitative Disclosures About Market Risk	22
Item 4. Controls and Procedures	22
PART II. OTHER INFORMATION	23
Item 1A. Risk Factors	23
Item 5. Other Information	23
Item 6. Exhibits	23
Signature	24
EXHIBIT INDEX	25
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
Exhibit 101

 

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PART I FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

(UNAUDITED)

 

		Three Months Ended September 30,
		2012			2011
		(in thousands except
		share amounts)
OPERATING REVENUES
Real estate
Sales		$	—		$	—
Commissions		90			75
Leasing		1,413			1,380
Utilities		1,085			935
Resort amenities and other		1,034			981
Total Operating Revenues		3,622			3,371
OPERATING COSTS AND EXPENSES
Real estate
Cost of sales		—			—
Other		396			129
Leasing		707			796
Utilities		791			527
Resort amenities and other		996			950
Selling and marketing		38			47
General and administrative		629			678
Loss on asset dispositions		5			—
Depreciation		719			766
Pension and other postretirement expense (Note 10)		266			281
Total Operating Costs and Expenses		4,547			4,174
Operating Loss		(925		)	(803		)
Interest expense, net		(759		)	(624		)
Loss from Continuing Operations Before Income Taxes		(1,684		)	(1,427		)
Income Tax Benefit		—			(67		)
Loss from Continuing Operations		(1,684		)	(1,360		)
Income from Discontinued Operations (Note 6), net of income taxes of $0		68			21
NET LOSS		$	(1,616	)	$	(1,339	)
Pension, net of income taxes of $0		185			203
COMPREHENSIVE LOSS		$	(1,431	)	$	(1,136	)
NET LOSS PER COMMON SHARE—BASIC AND DILUTED
Continuing Operations		$	(0.09	)	$	(0.07	)
Discontinued Operations		—			—
Net Loss		$	(0.09	)	$	(0.07	)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

(UNAUDITED)

 

		Nine Months Ended September 30,
		2012			2011
		(in thousands except
		share amounts)
OPERATING REVENUES
Real estate
Sales		$	1,500		$	—
Commissions		653			695
Leasing		4,394			3,827
Utilities		2,628			2,651
Resort amenities and other		3,209			3,858
Total Operating Revenues		12,384			11,031
OPERATING COSTS AND EXPENSES
Real estate
Cost of sales		149			—
Other		1,270			740
Leasing		2,022			2,157
Utilities		1,673			1,714
Resort amenities and other		3,093			3,386
Selling and marketing		122			749
General and administrative		2,403			5,113
Gain on asset dispositions		(229		)	(1,376		)
Depreciation		2,183			2,648
Pension and other postretirement expense (Note 10)		798			879
Total Operating Costs and Expenses		13,484			16,010
Operating Loss		(1,100		)	(4,979		)
Interest expense, net		(1,859		)	(1,758		)
Loss from Continuing Operations Before Income Taxes		(2,959		)	(6,737		)
Income Tax Benefit		—			(67		)
Loss from Continuing Operations		(2,959		)	(6,670		)
Income from Discontinued Operations (Note 6), net of income taxes of $0		65			15,294
NET INCOME (LOSS)		$	(2,894	)	$	8,624
Pension, net of income taxes of $0		555			626
COMPREHENSIVE INCOME (LOSS)		$	(2,339	)	$	9,250
NET INCOME (LOSS) PER COMMON SHARE—BASIC AND DILUTED
Continuing Operations		$	(0.16	)	$	(0.36	)
Discontinued Operations		—			0.83
Net Income (Loss)		$	(0.16	)	$	0.47

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(UNAUDITED)

 

		September 30,			December 31,
		2012			2011
		(in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	570		$	890
Accounts receivable, less allowance of $93 and $519 for doubtful accounts		1,498			1,464
Prepaid expenses and other assets		706			684
Assets held for sale		2,480			2,280
Total Current Assets		5,254			5,318
PROPERTY		83,423			84,283
Accumulated depreciation		(37,203		)	(35,642		)
Net Property		46,220			48,641
DEFERRED DEVELOPMENT COSTS & OTHER ASSETS		9,973			10,113
TOTAL		$	61,447		$	64,072
LIABILITIES & STOCKHOLDERS’ DEFICIENCY
CURRENT LIABILITIES
Current portion of long-term debt		$	47,568		$	—
Trade accounts payable		1,122			1,217
Payroll and employee benefits		1,395			1,417
Income taxes payable		2,816			2,766
Deferred revenues		251			108
Accrued contract terminations		4,594			5,094
Other accrued liabilities		1,819			1,895
Total Current Liabilities		59,565			12,497
LONG-TERM LIABILITIES
Long-term debt		—			45,521
Accrued retirement benefits		25,967			27,882
Other noncurrent liabilities		4,093			4,425
Total Long-Term Liabilities		30,060			77,828
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS’ DEFICIENCY
Common stock—no par value, 43,000,000 shares authorized, 18,650,226 and 18,582,954 shares issued and outstanding		76,326			75,933
Additional paid in capital		9,232			9,211
Accumulated deficit		(90,722		)	(87,828		)
Accumulated other comprehensive loss		(23,014		)	(23,569		)
Stockholders’ Deficiency		(28,178		)	(26,253		)
TOTAL		$	61,447		$	64,072

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCY

 

(UNAUDITED)

 

For the Nine Months Ended September 30, 2012 and 2011

 

(in thousands)

 

													Accumulated
							Additional						Other
		Common Stock					Paid in			Accumulated			Comprehensive
		Shares		Amount			Capital			Deficit			Loss			Total
Balance, January 1, 2012		18,583		$	75,933		$	9,211		$	(87,828	)	$	(23,569	)	$	(26,253	)
Share-based compensation expense							379									379
Issuance of shares for incentive plan		39		150												150
Vested restricted stock issued		60		358			(358		)							—
Shares cancelled to pay tax liability		(32	)	(115		)										(115		)
Other comprehensive income-pension													555			555
Net loss										(2,894		)				(2,894		)
Balance, September 30, 2012		18,650		$	76,326		$	9,232		$	(90,722	)	$	(23,014	)	$	(28,178	)
Balance, January 1, 2011		18,516		$	75,461		$	9,159		$	(92,906	)	$	(16,894	)	$	(25,180	)
Share-based compensation expense							488									488
Vested restricted stock issued		68		445			(445		)							—
Shares cancelled to pay tax liability		(18	)	(88		)										(88		)
Other comprehensive income-pension													626			626
Net income										8,624						8,624
Balance, September 30, 2011		18,566		$	75,818		$	9,202		$	(84,282	)	$	(16,268	)	$	(15,530	)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(UNAUDITED)

 

		Nine Months Ended September 30,
		2012			2011
		(in thousands)
NET CASH USED IN OPERATING ACTIVITIES		$	(2,320	)	$	(8,719	)
INVESTING ACTIVITIES
Purchases of property		(203		)	(405		)
Proceeds from disposals of property		405			10,079
Proceeds from escrow		—			4,117
Payments for other assets		(134		)	(5,081		)
NET CASH PROVIDED BY INVESTING ACTIVITIES		68			8,710
FINANCING ACTIVITIES
Proceeds from long-term debt		3,500			8,400
Payments of long-term debt and capital lease obligations		(1,453		)	(9,953		)
Debt issuance costs and other		(115		)	(285		)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		1,932			(1,838		)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(320		)	(1,847		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		890			2,095
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	570		$	248
Cash paid (received) during the period:
Interest		$	1,608		$	1,790
Income taxes		$	—		$	(47	)

 

Supplemental Non-Cash Investing and Financing Activities—

 

·                  Amounts included in trade accounts payable for additions to property and for other investing activities totaled $6,000 and $115,000 at September 30, 2012 and 2011, respectively.

·                  $150,000 and $1.2 million of funds related to the sale of property were held in escrow pending the completion of post closing obligations at September 30, 2012 and 2011, respectively.

·                  In February 2012, $150,300 of common stock was issued to certain members of the Company’s management.

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(UNAUDITED)

 

1.              Basis of Presentation

 

The accompanying interim unaudited condensed consolidated financial statements have been prepared by Maui Land & Pineapple Company, Inc. (together with its subsidiaries, the “Company”) in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information that are consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, and pursuant to the instructions to Form 10-Q and Article 8 promulgated by Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes to financial statements required by GAAP for complete financial statements. In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to fairly present the Company’s financial position, results of operations and cash flows for the interim periods ended September 30, 2012 and 2011. The condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2011.

 

LIQUIDITY

 

The Company reported a net loss of $2,894,000 for the nine months ended September 30, 2012. Included in net loss was a profit of $1,351,000 recognized from the sale of a real estate parcel in January 2012.  The Company reported negative cash flows from operations of $2,320,000 for the nine months ended September 30, 2012. The Company had an excess of current liabilities over current assets of $54.3 million and a stockholders’ deficiency of $28.2 million at September 30, 2012.

 

The Company has two primary credit facilities that have financial covenants requiring among other things, a minimum of $4 million in liquidity (as defined), a maximum of $175 million in total liabilities, and a limitation on new indebtedness. The Company has pledged a significant portion of its real estate holdings as security for borrowings under these credit facilities. Both facilities mature in May 2013 and have been classified as currently due.

 

The Company’s cash outlook for the next twelve months and its ability to continue to meet its financial covenants is highly dependent on selling certain real estate assets in a difficult market and its ability to refinance its debt. If the Company is unable to restructure its credit agreements or extend the maturity dates beyond May 2013, the Company would not have sufficient liquidity to repay such outstanding borrowings. In addition, the Company is subject to several purchase commitments and contingencies that could negatively impact its future cash flows, including commitments of up to $35 million to purchase the spa, beach club improvements and the sundry store (the “Amenities”) of Kapalua Bay Holdings, LLC (Bay Holdings), a U.S. Equal Employment Opportunity Commission (EEOC) matter related to the Company’s discontinued agricultural operations, and funding requirements related to the Company’s defined benefit pension plans. These matters are further described in Notes 8, 10 and 13.

 

The aforementioned circumstances raise substantial doubt about the Company’s ability to continue as a going concern. There can be no assurance that the Company will be able to successfully achieve its initiatives discussed below in order to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments that might result should the Company be unable to continue as a going concern.

 

In response to these circumstances, the Company continues to undertake efforts to generate cash flow by employing its real estate assets in leasing and other arrangements, by the sale of several real estate assets, and by continued cost reduction efforts. The Company is also actively working with its lenders to extend the maturity dates of its credit facilities.

 

2.              Use of Estimates

 

The Company’s reports for interim periods utilize numerous estimates of general and administrative expenses and other costs for the full year. Future actual amounts may differ from the estimates. Amounts in the interim reports are not necessarily indicative of results for the full year.

 

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3.              Average Common Shares Outstanding Used to Compute Earnings (Loss) Per Share

 

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2012		2011		2012		2011
Basic and diluted		18,636,479		18,548,521		18,618,189		18,531,112
Potentially dilutive		192,908		267,267		192,908		260,104

 

Basic earnings (loss) per share is computed by dividing net income or loss by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares from share-based compensation arrangements had been issued.

 

Potentially dilutive shares arise from non-qualified stock options to purchase common stock and non-vested restricted stock. The treasury stock method is applied to determine the number of potentially dilutive shares for non-vested restricted stock and stock options assuming that the shares of non-vested restricted stock are issued for an amount based on the grant date market price of the shares and that the outstanding stock options are exercised. These amounts were excluded because the effect would be anti-dilutive.

 

4.              Assets Held for Sale and Real Estate Sales

 

At September 30, 2012, assets held for sale included a 7-acre parcel in Kahului and a 630-acre parcel in Upcountry Maui.

 

In January 2012, the Company sold an 89-acre parcel in Upcountry Maui for $1.5 million. The sale resulted in a gain of $1.4 million and the Company utilized $353,000 of the proceeds to repay its term loan with American AgCredit, in accordance with the terms of its credit agreement.

 

In September 2010, the Company sold the land, improvements, structures and fixtures comprising the Kapalua Bay Golf Course (Bay Course) and the adjacent maintenance facility for a total of $24.1 million in cash. Concurrent with the sale, the Company entered into an agreement to lease back the assets through March 31, 2011, and due to certain construction work required by the lease back arrangement and other continuing involvement, the sale was accounted for as a financing transaction. At the conclusion of the lease back period, the Company recognized a $15.1 million gain from the sale which has been reported in discontinued operations for the nine months ended September 30, 2011.

 

5.              Long-Term Debt

 

Long-term debt at September 30, 2012 and December 31, 2011 consisted of the following:

 

		September 30, 2012			December 31, 2011
		(in thousands)
Wells Fargo revolving loans, 4.05% and 4.12%, respectively		$	23,500		$	21,100
American AgCredit term loan, 5.25%		24,068			24,421
Total		47,568			45,521
Less current portion		47,568			—
Long-term debt		$	—		$	45,521

 

WELLS FARGO

 

The Company has a $34.5 million revolving line of credit with Wells Fargo that matures on May 1, 2013. Interest rates on borrowings are at LIBOR plus 3.8% and the line of credit is collateralized by approximately 880 acres of the Company’s real estate holdings at the Kapalua Resort. The line of credit agreement contains various representations, warranties, affirmative, negative and financial covenants and events of default customary for financings of this type. Financial covenants include a required minimum liquidity of $4 million (as defined, which includes the available line of credit) and maximum total liabilities of $175 million. The credit agreement includes predetermined release prices for the real property securing the credit facility and an option to extend the maturity date to May 1, 2014, upon satisfaction of certain conditions. The option to extend the maturity date may be exercised by the Company, provided that (i) the Company is not in default under the credit agreement, (ii) there has been no material adverse change, as determined by the lender, in the financial condition of the Company, (iii) the aggregate amount of the credit line does not exceed 40% of the value of the property securing the credit line, and (iv) the operating income attributable to the properties securing the credit line is at least 6% of the aggregate amount of the credit line.  If the loan-to-value or the operating income thresholds are not met, the credit agreement may still be extended, but the aggregate amount of the credit line will be reduced such that those percentages are satisfied.  The Company may not be able to extend the credit agreement if the conditions are not satisfied.  Even if the Company is

 

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able to extend the credit agreement, it may be required to repay a portion of its borrowings if the aggregate amount of the credit line is reduced.  Absent the sale of some of its real estate holdings or refinancing, the Company does not expect to be able to repay any significant amount of borrowings under the credit line. There are no commitment fees on the unused portion of the revolving facility. As of September 30, 2012, the Company had $10.5 million available borrowing capacity and irrevocable letters of credit totaling $0.5 million that were secured by the Wells Fargo revolving line of credit.

 

AMERICAN AGCREDIT

 

At September 30, 2012, the Company had $24.1 million outstanding under a term loan with American AgCredit that matures on May 1, 2013. The interest rate on this credit facility is based on the greater of 1.00% or the 30-day LIBOR rate, plus an applicable spread of 4.25%. The loan agreement provides for tiered reductions in the applicable spread to 3.75%, subject to corresponding reductions in the principal balance of the loan. The loan requires mandatory principal prepayments of 100% of the net proceeds of the sale of any real property pledged as collateral for the loan. It also requires tiered mandatory principal prepayments based on predetermined percentages ranging from 10% to 75% of the net proceeds from the sale of non-collateralized real property. In accordance with this provision, the Company made $353,000 of principal payments in January 2012 due to the real property sale discussed in Note 4. The credit agreement is collateralized by approximately 3,100 acres of the Company’s real estate holdings in West Maui and Upcountry Maui. The term loan agreement contains various representations, warranties, affirmative, negative and financial covenants and events of default customary for financings of this type.  Financial covenants include a required minimum liquidity (as defined) of $4 million and maximum total liabilities of $175 million. Absent the sale of some of its real estate holdings or refinancing, the Company does not expect to be able to pay the outstanding balance under the term loan on the maturity date.

 

As of September 30, 2012, the Company believes it is in compliance with the covenants under the Wells Fargo and American AgCredit credit facilities. Management is actively working with its lenders to extend the maturity dates of its credit facilities.

 

6.              Discontinued Operations

 

In September 2011, the Company ceased all retail operations at the Kapalua Resort.  At the conclusion of the lease-back arrangements in March 2011, the Company ceased operating the two championship golf courses at the Kapalua Resort.  In December 2009, the Company ceased all agriculture operations.  Accordingly, the operating results including any gains or losses from the disposal of assets related to these former operations have been reported as discontinued operations in the accompanying condensed consolidated financial statements.

 

Revenues and income (loss) before income taxes from discontinued operations were as follows:

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2012			2011			2012			2011
		(in thousands)						(in thousands)
Revenues
Golf courses		$	—		$	—		$	—		$	3,375
Retail		—			290			—			4,278
Total		$	—		$	290		$	—		$	7,653
Income (Loss) from Discontinued Operations
Golf courses		$	—		$	40		$	—		$	14,826
Retail		11			(64		)	(14		)	711
Agriculture		57			45			79			(243		)
Total		$	68		$	21		$	65		$	15,294

 

7.              Recently Issued Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Accounting Standards Codification (ASC) Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.  The amendments in this ASU result in common fair value measurement and disclosure requirements in U.S. GAAP and international financial reporting standards (IFRS). The ASU also provides for certain changes in current GAAP disclosure requirements, for example with respect to the measurement of level 3 assets and for measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity. The amendments in this ASU are to be applied prospectively, and are effective during interim and annual periods beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

 

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In June 2011, the FASB issued ASU No. 2011-15, Comprehensive Income (ASC Topic 220) — Presentation of Comprehensive Income.  The amendments from this update will result in more converged guidance on how comprehensive income is presented under both U.S. GAAP and IFRS. With this update to ASC 220, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Previous U.S. GAAP allowed reporting entities three alternatives for presenting other comprehensive income and its components in financial statements. One of those presentation options was to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This update eliminates that option. The amendments in this ASU should be applied retrospectively, and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

 

8.              Investments in Affiliates

 

The Company has a 51% ownership interest in Bay Holdings, which is the sole member of Kapalua Bay LLC (Kapalua Bay).  The other members of Bay Holdings are MH Kapalua Venture, LLC, 34%, and ER Kapalua Investors Fund, LLC, 15%. Bay Holdings is not a variable interest entity, as defined in GAAP. The Company accounts for its investment in Bay Holdings using the equity method of accounting because, although it has the ability to exercise significant influence over operating and financial policies, it does not control Bay Holdings through a majority voting interest or other means. Under the LLC agreement, major decisions require the approval of either 75% or 100% of the membership interests. The Company has been designated as the managing member of Bay Holdings. Profits and losses of Bay Holdings were allocated in proportion to the members’ ownership interests, which approximated the estimated cash distributions to the members.

 

Kapalua Bay constructed a residential and timeshare development called The Ritz-Carlton Club and Residences, Kapalua Bay on land that it owns at the site of the former Kapalua Bay Hotel, and a spa on an adjacent parcel of land that is owned by the Company and leased to Kapalua Bay. Through September 30, 2012, the sale of 28 (84 total) whole-ownership units and 177 (744 total) fractional units have closed escrow.

 

As a result of the 2009 losses incurred by Bay Holdings, the Company’s carrying value of its investment in Bay Holdings was written down to zero in 2009. The Company does not expect to recover any amounts from its investment in Bay Holdings. The Company will not recognize any additional equity in the earnings (losses) of Bay Holdings until the Company’s income attributable to Bay Holdings exceeds its accumulated losses. The Company had made cash contributions to Bay Holdings of $53.2 million and non-monetary contributions of land valued at $25 million.

 

Kapalua Bay has a construction loan agreement under which $284.1 million was outstanding at September 30, 2012, and that matured on August 1, 2011. The loan is collateralized by the project assets including the land that is owned by Kapalua Bay that underlies the project. The Company and the other members of Bay Holdings have guaranteed to the lenders completion of the project and recourse with regard to certain acts, but have not guaranteed repayment of the loan. On March 13, 2012, the lenders notified Kapalua Bay that the loan was in default and on June 13, 2012, the lenders filed for foreclosure against Kapalua Bay, Bay Holdings and other entities related to the project. The public auction for the foreclosure proceeding has been scheduled for December 3, 2012. On September 27, 2012, Kapalua Bay was notified that three of its five lenders assigned their loans and other interests to a third-party investment firm.

 

Pursuant to a previous agreement, the Company agreed to purchase from Kapalua Bay the Amenities that were completed in 2009 at the actual construction cost of approximately $35 million. Through December 31, 2010, Bay Holdings recorded impairment charges in its consolidated financial statements of approximately $23 million related to the Amenities. In 2011 and for the nine months ended September 30, 2012, loss from the operations of the Amenities was $432,000 and $394,000, respectively. The Company does not have sufficient liquidity to purchase the Amenities at the actual construction cost of approximately $35 million and has been in discussions with the other members of Bay Holdings and the lenders to negotiate the terms of the purchase and sale. No provision has been recorded in the accompanying condensed consolidated financial statements with respect to the Company’s executory contract to purchase the Amenities. If the Amenities are subsequently acquired, they will be evaluated for impairment and could result in a loss.

 

A group of owners of 10 whole-ownership units filed a lawsuit on June 7, 2012 against multiple parties, including Kapalua Bay and the Company. The lawsuit alleges that the defendant parties breached their fiduciary duties to the Association of Apartment Owners of Kapalua Bay Condominium (AOAO) and the plaintiffs. In addition, the lawsuit seeks certain injunctive and declaratory relief regarding the management and operations of the AOAO and the project. On July 10, 2012, The Ritz-Carlton Management Company, LLC (RCMC) issued a notice of default and termination to the AOAO and Kapalua Bay Vacation Owners Association (VOA) effective September 10, 2012 as a result of insufficient funding of the ongoing operating costs of the AOAO and VOA in accordance with the terms of its operating agreement. On August 31, 2012, the termination date was extended to October 29, 2012. The Company is presently unable to reasonably determine the impact, if any, of these matters on the accompanying condensed consolidated financial statements.

 

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The Company has recorded $4.1 million in accrued contract terminations in the condensed consolidated balance sheets representing the remaining expected exposure to loss related to our involvement with the project.

 

Summarized operating information for Bay Holdings for the three and nine months ended September 30, 2012 and 2011 were as follows:

 

		Three Months						Nine Months
		Ended September 30,						Ended September 30,
		2012			2011			2012			2011
		(in thousands)						(in thousands)
Revenues		$	(455	)	$	11,529		$	(873	)	$	17,391
Expenses		17,190			21,203			37,335			40,202
Net Loss		$	(17,645	)	$	(9,674	)	$	(38,208	)	$	(22,811	)

 

During June 2012, Bay Holdings recorded cancellations of contracts that will no longer be closed as scheduled.  Bay Holdings has not recognized any impairment of the project’s assets during the nine months ended September 30, 2012. As discussed above, the Company’s carrying value of its investment in Bay Holdings was written down to zero in the past, and the Company does not recognize any equity in the losses of Bay Holdings. As a result, management does not believe an adjustment for impairment charges, if any, would have a material impact to the condensed consolidated financial statements.

 

9.              Share-Based Compensation

 

The total compensation expense recognized for share-based compensation was $112,000 and $159,000 for the three months ended September 30, 2012 and 2011, respectively, and $379,000 and $488,000 for the nine months ended September 30, 2012 and 2011, respectively. There was no tax benefit or expense related thereto for each period presented. Recognized stock compensation was reduced for estimated forfeitures prior to vesting primarily based on historical annual forfeiture rates of approximately 3.2% and 3.7%, as of September 30, 2012 and 2011, respectively. Estimated forfeitures will be reassessed in subsequent periods and may change based on new facts and circumstances. In February 2012, executive officers and management were awarded an incentive bonus of $150,300 based on meeting certain performance metrics included in the Executive and Key Management Compensation Plan.  In accordance with the plan, the incentive award was settled through the issuance of 39,294 shares of common stock.

 

Stock Options

 

A summary of stock option award activity as of and for the nine months ended September 30, 2012 is as follows:

 

										Weighted
				Weighted			Weighted			Average		Aggregate
				Average			Average			Remaining		Intrinsic
				Exercise			Grant-Date			Contractual		Value
		Shares		Price			Fair Value			Term (years)		$(000)(1)
Outstanding at December 31, 2011		86,500		$	24.08
Forfeited or cancelled		(7,500	)	$	29.94		$	12.02
Outstanding at September 30, 2012		79,000		$	23.52		$	8.53		3.5		—
Exercisable at September 30, 2012		67,000		$	26.13		$	9.35		3.0		—
Expected to vest at September 30, 2012 (2)		8,600		$	8.93		$	3.94		6.2		—

 

(1)         For in-the-money options

(2)         Options expected to vest reflect estimated forfeitures

 

There were no stock options granted or exercised in the nine months ended September 30, 2012 or 2011. The fair values of shares vested during the nine months ended September 30, 2012 and 2011 were $79,000 and $89,000, respectively. As of September 30, 2012, there was $20,100 of total unamortized compensation expense for awards granted under the stock option plans that is expected to be recognized over a weighted average period of 1.1 years.

 

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Restricted Stock

 

During the nine months ended September 30, 2012, 59,621 shares of restricted stock vested as directors’ and management service requirements were met.

 

A summary of restricted stock activity as of and for the nine months ended September 30, 2012 is as follows:

 

				Weighted
				Average
				Grant-Date
		Shares		Fair Value
Nonvested balance at December 31, 2011		218,929		$	8.92
Granted		15,000		$	4.00
Vested		(59,621	)	$	5.42
Forfeited or cancelled		(60,400	)	$	4.25
Nonvested balance at September 30, 2012		113,908		$	6.08

 

10.       Components of Net Periodic Benefit Cost

 

The net periodic benefit costs for pension benefits for the three and nine months ended September 30, 2012 and 2011 were as follows:

 

		Three Months						Nine Months
		Ended September 30,						Ended September 30,
		2012			2011			2012			2011
		(in thousands)
Service cost		$	—		$	—		$	—		$	18
Interest cost		798			835			2,394			2,505
Expected return on plan assets		(717		)	(757		)	(2,151		)	(2,270		)
Amortization of prior service cost		—			—			—			8
Amortization of transition liability		—			—			—			11
Recognized actuarial loss		185			203			555			607
Net expense		$	266		$	281		$	798		$	879

 

The minimum required contributions to the Company’s defined benefit pension plans in 2012 are expected to be $2.0 million, of which $1.7 million has been funded through September 30, 2012.

 

The Company’s cessation of its pineapple operations at the end of 2009 and the corresponding reduction in the active participant count for the Pension Plan for Bargaining Unit and Hourly Employees (Bargaining Plan) triggered the requirement that the Company provide security to the Pension Benefits Guaranty Corporation (PBGC) of approximately $5.2 million to support the unfunded liabilities of the Bargaining Plan. In April 2011, the Company executed a settlement agreement with the PBGC and pledged security of approximately 1,400 acres in West Maui that will be released in five years if the Company does not otherwise default on the agreement. The Company was advised in October 2011 that the cessation of its golf operations and the corresponding reduction in the active participant count for the Bargaining Plan and the Pension Plan for Non-Bargaining Unit Employees has triggered the requirement that the Company provide additional security to the PBGC of approximately $18.7 million to support the unfunded liabilities of the two pension plans or to make contributions to the plans in excess of the minimum required amounts. The Company is currently working with the PBGC to reach an agreement as to the form and amount of collateral that will be provided to the PBGC in connection with the unfunded liabilities.

 

11.      Income Taxes

 

The effective tax rate for 2012 and 2011 reflects the recognition of expected federal alternative minimum tax liabilities and interim period tax benefits and changes to the tax valuation allowance.

 

The Company uses a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Interest accrued related to unrecognized tax benefits is recognized as interest expense and penalties are recognized in general and administrative expense in the Company’s condensed consolidated statements of comprehensive income (loss); and such amounts are included in income taxes payable on the Company’s condensed consolidated balance sheets.

 

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At September 30, 2012, the Company had a liability of $626,000 for unrecognized tax benefits and accrued interest and penalties thereon of $880,000. At September 30, 2012 there were no unrecognized tax benefits for which the liability for such taxes were recognized as deferred tax liabilities because net operating losses available to be carried back would offset any income tax liability; and the unrecognized tax benefits, if recognized, would affect the effective tax rate.

 

12.       Operating Segment Information

 

In September 2011, the Company revised its operating segments to reflect the September 2011 discontinuance of retail operations, the March 2011 discontinuance of golf operations and the Company’s increased emphasis on real estate, leasing, utilities and resort amenities operations. The reportable operating segment presentation adopted is consistent with how the Company’s chief operating decision maker determines the allocation of resources. Reportable segments are as follows:

 

·                  Real Estate includes the development and sale of real estate inventory and the operations of Kapalua Realty Company, a general brokerage real estate company located within the Kapalua Resort.

·                  Leasing primarily includes revenues and expenses from real property leasing activities, license fees and royalties for the use of certain of the Company’s trademarks and brand names by third parties, and the cost of maintaining the Company’s real estate assets, including conservation activities.

·                  Utilities primarily include the operations of Kapalua Water Company and Kapalua Waste Treatment Company, the Company’s water and sewage transmission operations (regulated by the Hawaii Public Utilities Commission) servicing the Kapalua Resort.  The operating segment also includes the management of ditch, reservoir and well systems that provide non-potable irrigation water to West and Upcountry Maui areas.

·                  Resort Amenities includes a spa, beach club and a membership program that provides certain benefits and privileges within the Kapalua Resort for its members.

 

Financial results for each of the Company’s reportable segments for the three and nine months ended September 30, 2012 and 2011 were as follows:

 

		Three Months						Nine Months
		Ended September 30,						Ended September 30,
		2012			2011			2012			2011
		(in thousands)
Operating Revenues
Real Estate		$	90		$	75		$	2,153		$	695
Leasing		1,413			1,380			4,394			3,827
Utilities		1,085			935			2,628			2,651
Resort Amenities		1,031			909			3,171			2,819
Other		3			72			38			1,039
Total Operating Revenues		$	3,622		$	3,371		$	12,384		$	11,031
Operating Loss (1)
Real Estate		$	(440	)	$	(206	)	$	272		$	(712	)
Leasing		81			(83		)	471			(721		)
Utilities		131			96			472			(174		)
Resort Amenities		(6		)	(89		)	(65		)	(351		)
Other (2)		(691		)	(521		)	(2,250		)	(3,021		)
Total Operating Loss		(925		)	(803		)	(1,100		)	(4,979		)
Interest Expense, net		(759		)	(624		)	(1,859		)	(1,758		)
Income Tax Benefit		—			67			—			67
Loss from Continuing Operations		(1,684		)	(1,360		)	(2,959		)	(6,670		)
Income from Discontinued Operations (Note 6)		68			21			65			15,294
Net Income (Loss)		$	(1,616	)	$	(1,339	)	$	(2,894	)	$	8,624

 

(1)  Includes allocations of selling and marketing and general and administrative expenses.

 

(2) Consists primarily of unallocated selling and marketing, general and administrative, pension, and miscellaneous expenses.

 

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