MAUI LAND & PINEAPPLE CO INC - Quarter Report: 2013 September (Form 10-Q)

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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, 2013

 

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, Lahaina, 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.

 

Class		Outstanding at October 31, 2013
Common Stock, no par value		18,773,171 shares

 

 

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 Balance Sheets, September 30, 2013 and December 31, 2012	3
Condensed Consolidated Statements of Operations and Comprehensive Loss, Three Months Ended September 30, 2013 and 2012	4
Condensed Consolidated Statements of Operations and Comprehensive Loss, Nine Months Ended September 30, 2013 and 2012	5
Condensed Consolidated Statements of Stockholders’ Deficiency, Nine Months Ended September 30, 2013 and 2012	6
Condensed Consolidated Statements of Cash Flows, Nine Months Ended September 30, 2013 and 2012	7
Notes to Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
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	22
Item 1A. Risk Factors	22
Item 6. Exhibits	23
Signature	24
EXHIBIT INDEX
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 BALANCE SHEETS

 

(UNAUDITED)

 

		September 30,			December 31,
		2013			2012
		(in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	420		$	829
Accounts receivable, less allowance of $144 and $262 for doubtful accounts		1,127			1,138
Prepaid expenses and other assets		491			466
Assets held for sale		2,215			2,483
Total Current Assets		4,253			4,916
PROPERTY		80,816			83,169
Accumulated depreciation		(39,346		)	(37,668		)
Net Property		41,470			45,501
OTHER ASSETS
Deferred development costs		7,777			7,612
Other noncurrent assets		3,168			3,456
Total Other Assets		10,945			11,068
TOTAL		$	56,668		$	61,485
LIABILITIES & STOCKHOLDERS’ DEFICIENCY
CURRENT LIABILITIES
Current portion of long-term debt		$	50,507		$	4,068
Trade accounts payable		620			1,341
Payroll and employee benefits		308			151
Current portion of accrued retirement benefits		594			626
Income taxes payable		1,598			2,457
Deferred revenue		169			48
Accrued contract terminations		4,094			4,094
Other accrued liabilities		1,121			1,900
Total Current Liabilities		59,011			14,685
LONG-TERM LIABILITIES
Long-term debt		—			45,200
Accrued retirement benefits		28,437			30,394
Other noncurrent liabilities		5,176			5,569
Total Long-Term Liabilities		33,613			81,163
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS’ DEFICIENCY
Common stock—no par value, 43,000,000 shares authorized, 18,724,494 and 18,664,068 shares issued and outstanding		76,741			76,410
Additional paid in capital		9,242			9,236
Accumulated deficit		(94,978		)	(92,430		)
Accumulated other comprehensive loss		(26,961		)	(27,579		)
Total Stockholders’ Deficiency		(35,956		)	(34,363		)
TOTAL		$	56,668		$	61,485

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

(UNAUDITED)

 

		Three Months Ended September 30,
		2013			2012
		(in thousands except
		share amounts)
OPERATING REVENUES
Real estate
Commissions		$	206		$	90
Leasing		1,315			1,413
Utilities		1,010			1,085
Resort amenities and other		303			1,034
Total Operating Revenues		2,834			3,622
OPERATING COSTS AND EXPENSES
Real estate
Other		613			396
Leasing		726			707
Utilities		588			791
Resort amenities and other		266			996
General and administrative		685			667
Loss on asset dispositions		61			5
Depreciation		583			719
Pension and other postretirement expense (Note 10)		222			266
Total Operating Costs and Expenses		3,744			4,547
Operating Loss		(910		)	(925		)
Interest expense, net		(641		)	(759		)
Loss from Continuing Operations, net of income taxes of $0		(1,551		)	(1,684		)
(Loss) Income from Discontinued Operations (Note 6), net of income taxes of $0		(13		)	68
NET LOSS		(1,564		)	(1,616		)
Pension, net of income taxes of $0		228			185
COMPREHENSIVE LOSS		$	(1,336	)	$	(1,431	)
NET LOSS PER COMMON SHARE—BASIC AND DILUTED
Continuing Operations		$	(0.08	)	$	(0.09	)
Discontinued Operations		—			—
Net Loss		$	(0.08	)	$	(0.09	)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

(UNAUDITED)

 

		Nine Months Ended September 30,
		2013			2012
		(in thousands except
		share amounts)
OPERATING REVENUES
Real estate
Sales		$	—		$	1,500
Commissions		397			653
Leasing		3,838			4,394
Utilities		2,793			2,628
Resort amenities and other		2,266			3,209
Total Operating Revenues		9,294			12,384
OPERATING COSTS AND EXPENSES
Real estate
Cost of sales		—			149
Other		1,452			1,270
Leasing		2,115			2,022
Utilities		1,682			1,673
Resort amenities and other		2,180			3,093
General and administrative		2,156			2,525
Loss (Gain) on asset dispositions		61			(229		)
Depreciation		1,958			2,183
Pension and other postretirement expense (Note 10)		666			798
Total Operating Costs and Expenses		12,270			13,484
Operating Loss		(2,976		)	(1,100		)
Interest expense, net		(1,841		)	(1,859		)
Loss from Continuing Operations, net of income taxes of $0		(4,817		)	(2,959		)
Income from Discontinued Operations (Note 6), net of income taxes of $116 and $0		2,269			65
NET LOSS		(2,548		)	(2,894		)
Pension, net of income taxes of $0		618			555
COMPREHENSIVE LOSS		$	(1,930	)	$	(2,339	)
NET INCOME (LOSS) PER COMMON SHARE—BASIC AND DILUTED
Continuing Operations		$	(0.26	)	$	(0.16	)
Discontinued Operations		0.12			—
Net Loss		$	(0.14	)	$	(0.16	)

 

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, 2013 and 2012

 

(in thousands)

 

													Accumulated
							Additional						Other
		Common Stock					Paid in			Accumulated			Comprehensive
		Shares		Amount			Capital			Deficit			Loss			Total
Balance, January 1, 2013		18,664		$	76,410		$	9,236		$	(92,430	)	$	(27,579	)	$	(34,363	)
Share-based compensation expense							319									319
Issuance of shares for incentive plan		33		133												133
Vested restricted stock issued		56		313			(313		)							—
Shares cancelled to pay tax liability		(29	)	(115		)										(115		)
Other comprehensive income-pension													618			618
Net loss										(2,548		)				(2,548		)
Balance, September 30, 2013		18,724		$	76,741		$	9,242		$	(94,978	)	$	(26,961	)	$	(35,956	)
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	)

 

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,
		2013			2012
		(in thousands)
NET CASH USED IN OPERATING ACTIVITIES		$	(4,941	)	$	(2,320	)
INVESTING ACTIVITIES
Purchases of property		(8		)	(203		)
Proceeds from disposals of property		3,760			405
Payments for other assets		(92		)	(134		)
NET CASH PROVIDED BY INVESTING ACTIVITIES		3,660			68
FINANCING ACTIVITIES
Proceeds from long-term debt		4,800			3,500
Payments of long-term debt		(3,561		)	(1,453		)
Debt issuance costs and other		(367		)	(115		)
NET CASH PROVIDED BY FINANCING ACTIVITIES		872			1,932
NET DECREASE IN CASH AND CASH EQUIVALENTS		(409		)	(320		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		829			890
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	420		$	570
Cash paid during the period:
Interest (net of amounts capitalized)		$	1,762		$	1,608
Income taxes		$	550		$	—

 

Supplemental Non-Cash Investing and Financing Activities—

 

·                  Amounts included in trade accounts payable for additions to property and for other investing activities totaled $1,000 and $6,000 at September 30, 2013 and 2012, respectively.

·                  $133,100 and $150,300 of common stock were issued to certain members of the Company’s management at September 30, 2013 and 2012, respectively.

 

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, 2012, 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, 2013 and 2012. 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, 2012.

 

LIQUIDITY

 

The Company reported a net loss of $2.5 million for the nine months ended September 30, 2013. Included in the net loss was a $1.9 million gain from the sale of a 7-acre parcel in June 2013 that was part of the Company’s former agricultural processing facilities. The Company reported negative cash flows from operations of $4.9 million for the nine months ended September 30, 2013. The Company had an excess of current liabilities over current assets of $54.8 million and a stockholders’ deficiency of $36 million at September 30, 2013.

 

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 are scheduled to mature in May 2014 and have been classified as currently due. The Company is required to pay $2.3 million to reduce its principal balance to $20 million by December 31, 2013 under the American AgCredit credit facility.

 

The Company’s cash outlook for the next twelve months and its ability to continue to meet its loan covenants is highly dependent on selling certain real estate assets at acceptable prices. If the Company is unable to meet its loan covenants, borrowings under the Company’s credit facilities may become immediately due, and the Company would not have sufficient liquidity to repay such outstanding borrowings. In addition, the Company is subject to several commitments and contingencies that could negatively impact its future cash flows, including a commitment of up to $35 million to purchase the spa, beach club improvements and the sundry store (the “Amenities”) from the new owners of the Residences at Kapalua Bay, a U.S. Equal Employment Opportunity Commission (EEOC) matter related to the Company’s discontinued agricultural operations, the timing of payments under an Internal Revenue Service (IRS) settlement related to previously filed tax returns, and funding requirements related to the Company’s defined benefit pension plans. These matters are further described in Notes 8, 10, 11, 13 and 15.

 

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 in active negotiations with the new owners of the Residences at Kapalua Bay project to resolve its limited guarantees with respect to the completion of the project (as described in Note 8) and purchase commitment for the Amenities. The Company is also actively working with its lenders to extend the maturity dates of its credit facilities.

 

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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.

 

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

 

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2013		2012		2013		2012
Basic and diluted		18,712,284		18,636,479		18,694,775		18,618,189
Potentially dilutive		110,193		192,908		110,193		192,908

 

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 potentially dilutive 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, 2013, assets held for sale included a 10-acre parcel in West Maui. At December 31, 2012, assets held for sale included a 7-acre parcel in Central Maui and a 630-acre parcel in Upcountry Maui.

 

In June 2013, the Company sold a 7-acre parcel that was the last of its former agricultural processing facilities in Central Maui for $4.0 million. The sale resulted in a gain of $1.9 million and has been reflected in discontinued operations.

 

In January 2012, the Company sold an 89-acre former agricultural parcel in Upcountry Maui for $1.5 million. The sale resulted in a gain of $1.4 million.

 

5.              Long-Term Debt

 

Long-term debt at September 30, 2013 and December 31, 2012 consisted of the following:

 

		September 30, 2013			December 31, 2012
		(in thousands)
Wells Fargo revolving loans, 4.00% and 4.05%, respectively		$	28,200		$	25,200
American AgCredit term loan, 5.00% and 5.25%, respectively		22,307			24,068
Total		50,507			49,268
Less current portion		50,507			4,068
Long-term debt		$	—		$	45,200

 

WELLS FARGO

 

The Company has a $32.7 million revolving line of credit with Wells Fargo that is scheduled to mature on May 1, 2014. 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 (as defined) of $3 million, maximum total liabilities of $175 million, and a limitation on new indebtedness. The credit agreement includes predetermined release prices for the real property securing the credit facility. There are no commitment fees on the unused portion of the revolving facility. 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 of the revolving line of credit on the maturity date. As of September 30, 2013, the Company had $4.5 million available borrowing capacity.

 

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AMERICAN AGCREDIT

 

The Company has a $22.3 million term loan with American AgCredit that is scheduled to mature on May 1, 2014. 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 that the principal balance be paid down to $20 million by December 31, 2013. The 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, maximum total liabilities of $175 million and a limitation on new indebtedness. It also requires mandatory principal repayments of 100% of the net proceeds of the sale of any real property pledged as collateral for the loan and tiered mandatory principal repayments 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 $1.8 million and $353,000 of principal repayments in June 2013 and January 2012, respectively, in conjunction with the sales of non-collateralized real property. The loan is collateralized by approximately 3,100 acres of the Company’s real estate holdings in West Maui and Upcountry Maui. 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, 2013, the Company believes it is in compliance with the covenants under the Wells Fargo and American AgCredit credit facilities.

 

6.              Discontinued Operations

 

In September 2011, the Company ceased all retail operations at the Kapalua Resort. In March 2011, the Company ceased operations of 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.

 

Income (loss) from discontinued operations for the nine months ended September 30, 2013 included a $1.9 million gain from the sale of a 7-acre parcel in Central Maui that was part of the Company’s former agricultural processing facilities and a $0.5 million reversal of accrued income taxes and related interest resulting from the Company’s settlement with the IRS.

 

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

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2013			2012			2013			2012
		(in thousands)						(in thousands)
Income (Loss) from Discontinued Operations
Retail		$	6		$	11		$	2		$	(14	)
Agriculture		(19		)	57			2,267			79
Total		$	(13	)	$	68		$	2,269		$	65

 

7.              Recently Issued Accounting Pronouncements

 

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220)—Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU adds new disclosure requirements for items reclassified out of accumulated other comprehensive income and requires entities to present information about significant items reclassified out of accumulated other comprehensive income by component either (1) on the face of the statement where net income is presented or (2) as a separate disclosure in the notes to the financial statements. The amendments in this ASU should be applied prospectively, and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. Amounts reclassified from accumulated other comprehensive income related to defined benefit pension items were $618,000 and $555,000 for the nine months ended September 30, 2013 and 2012, respectively. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

 

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8.              Investments in Affiliates

 

The Company has a 51% ownership interest in Kapalua Bay Holdings, LLC (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 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. 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 that matured on August 1, 2011.  The loan was 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.  The foreclosure was completed on June 13, 2013 and the loan collateral including the unsold inventory, leasehold spa improvements, and the Amenities purchase and sale agreements between the Company and Kapalua Bay, were transferred to a firm affiliated with one of the two remaining lenders.

 

Pursuant to previous agreements, the Company agreed to purchase from Kapalua Bay certain Amenities that were completed in 2009 at the actual construction cost of approximately $35 million. These purchase and sale agreements were part of the lenders’ loan collateral and were foreclosed upon in June 2013. In 2010, Bay Holdings recorded impairment charges in its consolidated financial statements of approximately $23 million related to the Amenities. The Company does not have sufficient liquidity to purchase the Amenities at the actual construction cost of approximately $35 million and is in active negotiations with the new owners of the project to resolve its purchase commitment for the Amenities. If the Amenities are subsequently acquired, they will be evaluated for impairment and could result in a loss.

 

The Company has recorded $4.1 million in accrued contract terminations in the condensed consolidated balance sheets representing its remaining expected exposure to certain purchase commitments, contingencies and other legal matters associated with the project. These matters are further described in Note 13.

 

Summarized operating information for Bay Holdings for the three and nine months ended September 30, 2013 and 2012 were as follows:

 

		Three Months						Nine Months
		Ended September 30,						Ended September 30,
		2013			2012			2013			2012
		(in thousands)						(in thousands)
Revenues		$	—		$	(455	)	$	14		$	(873	)
Expenses		4,131			17,190			(134,694		)	37,335
Net (Loss) Income		$	(4,131	)	$	(17,645	)	$	134,708		$	(38,208	)

 

The nine months period ended September 30, 2013 information above includes the recognition of Kapalua Bay’s gain on foreclosure of approximately $165 million resulting from $228 million of debt forgiveness. 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 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.

 

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9.              Share-Based Compensation

 

The total compensation expense recognized for share-based compensation was $106,000 and $112,000 for the three months ended September 30, 2013 and 2012, respectively, and $319,000 and $379,000 for the nine months ended September 30, 2013 and 2012, 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 2.9% and 3.2%, as of September 30, 2013 and 2012, respectively. Estimated forfeitures will be reassessed in subsequent periods and may change based on new facts and circumstances. Executive officers and management were awarded an incentive bonus of $133,100 and $150,300 in February 2013 and 2012, respectively, 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 33,187 and 39,294 shares of common stock in February 2013 and 2012, respectively.

 

Stock Options

 

A summary of stock option award activity as of and for the nine months ended September 30, 2013 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, 2012		79,000		$	23.52
Forfeited or cancelled		(19,000	)	$	35.82		$	12.29
Outstanding at September 30, 2013		60,000		$	19.63		$	7.33		3.6		$	—
Exercisable at September 30, 2013		55,000		$	20.94		$	7.77		3.4		$	—
Expected to vest at September 30, 2013 (2)		3,600		$	5.20		$	2.48		5.4		$	—

(1)         For in-the-money options

(2)         Options expected to vest reflect estimated forfeitures

 

There were no stock options granted or exercised during the nine months ended September 30, 2013 or 2012. The fair values of shares vested during the nine months ended September 30, 2013 and 2012 were $12,000 and $79,000, respectively. As of September 30, 2013, there was $5,000 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 0.4 years.

 

Restricted Stock

 

During the nine months ended September 30, 2013, 55,944 shares of restricted stock vested as directors’ and management’s service requirements were met.

 

A summary of restricted stock activity as of and for the nine months ended September 30, 2013 is as follows:

 

				Weighted
				Average
				Grant-Date
		Shares		Fair Value
Nonvested balance at December 31, 2012		94,137		$	5.56
Granted		12,000		$	4.35
Vested		(55,944	)	$	4.77
Nonvested balance at September 30, 2013		50,193		$	5.73

 

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10.       Components of Net Periodic Benefit Cost

 

The net periodic benefit costs for pension benefits for the three and nine months ended September 30, 2013 and 2012 were as follows:

 

		Three Months						Nine Months
		Ended September 30,						Ended September 30,
		2013			2012			2013			2012
		(in thousands)
Interest cost		$	720		$	798		$	2,160		$	2,394
Expected return on plan assets		(726		)	(717		)	(2,178		)	(2,151		)
Recognized actuarial loss		228			185			684			555
Net expense		$	222		$	266		$	666		$	798

 

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 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. In November 2012, the Company executed a settlement agreement with the PBGC and pledged security of approximately 7,000 acres in West Maui that will be released in five years if the Company does not otherwise default on the agreement. No formal appraisal or determination of the fair value of the 7,000 acres was performed by the Company in connection with the settlement agreement with the PBGC.

 

In June 2013, the State of Hawaii enacted a bill directing the Department of Land and Natural Resources (DLNR), in consultation with the Hawaiian Islands Land Trust, to engage in the purchase of an approximately 270-acre parcel of former agricultural land in West Maui, known as Lipoa Point, from the Company. The bill further requires the DLNR to ensure to the maximum extent practicable that the Company uses the proceeds of the sale to benefit the Company’s defined benefit pension plans. As of September 30, 2013, the Company had unfunded pension fund liabilities of $24.2 million. The unfunded obligations are secured by approximately 8,400 acres in West Maui with a carrying value of $1.8 million, which includes Lipoa Point.  The passage of the bill does not obligate the DLNR to purchase the property or obligate the Company to sell the property. Any such sale would be subject to negotiation between the parties, including the purchase price. There is no certainty that any such sale will take place, and even if it does, the amount by which the Company’s unfunded pension fund liabilities would be reduced is uncertain. Any such reduction may not be sufficient to release the security interest on any of the Company’s other West Maui real estate holdings securing the Company’s unfunded pension fund liabilities.

 

The minimum required contributions to the Company’s defined benefit pension plans in 2013 are expected to be $2.1 million, of which $1.6 million has been funded through September 30, 2013. Management believes that it will be able to fund the remaining contribution.

 

11.       Income Taxes

 

The effective tax rate for 2013 and 2012 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 operations and comprehensive loss; and such amounts are included in income taxes payable on the Company’s condensed consolidated balance sheets.

 

At September 30, 2013, the Company had a liability of $28,000 for unrecognized tax benefits and accrued interest thereon of $295,000. At September 30, 2013 there were no unrecognized tax benefits for which the liability for such taxes were recognized as deferred tax liabilities; and the unrecognized tax benefits, if recognized, would affect the effective tax rate.

 

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In April 2013, the Company and the IRS arrived at a settlement which concluded the IRS examination of the Company’s federal income tax returns for 2003 through 2008. Under terms of the settlement, the Company agreed to pay $1.8 million to the IRS, of which $0.6 million was paid at September 30, 2013. The Company is currently in discussion with the IRS regarding the remaining payment terms of the settlement. As a result of the settlement, the Company reversed $0.5 million it had previously accrued in income taxes payable and accrued interest in estimating its exposure for this matter. The reversal has been reported in discontinued operations in the accompanying condensed consolidated financial statements as it relates to the Company’s former agricultural operations.

 

12.       Operating Segment Information

 

The Company’s presentation of its reportable operating segments 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 include 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, 2013 and 2012 were as follows:

 

		Three Months						Nine Months
		Ended September 30,						Ended September 30,
		2013			2012			2013			2012
		(in thousands)
Operating Revenues
Real Estate		$	206		$	90		$	397		$	2,153
Leasing		1,315			1,413			3,838			4,394
Utilities		1,010			1,085			2,793			2,628
Resort Amenities		300			1,031			2,255			3,171
Other		3			3			11			38
Total Operating Revenues		$	2,834		$	3,622		$	9,294		$	12,384
Operating Loss (1)
Real Estate		$	(605	)	$	(440	)	$	(1,552	)	$	272
Leasing		80			81			(26		)	471
Utilities		269			131			652			472
Resort Amenities		18			(6		)	—			(65		)
Other (2)		(672		)	(691		)	(2,050		)	(2,250		)
Total Operating Loss		(910		)	(925		)	(2,976		)	(1,100		)
Interest Expense, net		(641		)	(759		)	(1,841		)	(1,859		)
Loss from Continuing Operations		(1,551		)	(1,684		)	(4,817		)	(2,959		)
Income (Loss) from Discontinued Operations (Note 6)		(13		)	68			2,269			65
Net Loss		$	(1,564	)	$	(1,616	)	$	(2,548	)	$	(2,894	)

 

(1)  Includes allocations of general and administrative expenses.

 

(2) Consists primarily of unallocated general and administrative, pension, and other expenses.

 

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