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MLP > SEC Filings for MLP > Form 10-K on 2-Mar-2012All Recent SEC Filings

Show all filings for MAUI LAND & PINEAPPLE CO INC

Form 10-K for MAUI LAND & PINEAPPLE CO INC


2-Mar-2012

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the forward-looking statements disclaimer set forth at the beginning of this annual report, the risk factors set forth in Item 1A of this annual report, and our Consolidated Financial Statements and the Notes to those statements set forth in Item 8 of this annual report. This discussion reflects the effects of the immaterial restatements discussed in Note 15 to the Consolidated Financial Statements.


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RESULTS OF OPERATIONS

Comparison of Years Ended December 31, 2011 and 2010

CONSOLIDATED

                                                        Year Ended
                                                       December 31,
                                               2011                    2010
                                           (in thousands, except share amounts)
  Consolidated Revenues                   $         14,542       $           23,055
  Loss From Continuing Operations         $         (9,550 )     $          (11,425 )
  Income From Discontinued Operations     $         14,628       $           36,177
  Net Income                              $          5,078       $           24,752
  Net Income Per Common Share             $           0.27       $             1.99

We reported net income of $5.1 million or $0.27 per share for 2011 compared to net income of $24.8 million or $1.99 per share for 2010. Net income for 2011 includes $15.1 million of gain from the sale of the Bay Course and maintenance facility, which is included in discontinued operations. Included in net income for 2010 are settlement and curtailment gains totaling $16.6 million from the termination of our post-retirement health and life benefits, of which $14.9 million was included in discontinued operations. Net income for 2010 also includes a $26.7 million recognized gain from the March 2009 sale of the PGC. Consolidated revenues were lower by 37% in 2011 compared to 2010 primarily reflecting the absence of real estate inventory sales.

REAL ESTATE

                                                    Year Ended
                                                   December 31,
                                                  2011      2010
                                                  (in thousands)
                   Revenues                      $ 1,070   $ 9,311
                   % of consolidated revenues          7 %      40 %
                   Operating Profit (Loss)       $  (661 ) $ 3,416

Real estate sales commissions were $1.1 million for 2011 compared to $1.5 million for 2010. The decrease primarily reflects fewer transactions in 2011 and lower average values per transaction. Revenues for 2010 also included three real estate inventory sales that resulted in revenues of $7.9 million and pre-tax income of $5.8 million. There were no sales of real estate inventory in 2011.

Real estate development and sales are cyclical and depend on a number of factors. Results for one period are therefore not necessarily indicative of future performance trends in this segment.

LEASING

                                                   Year Ended
                                                  December 31,
                                                 2011       2010
                                                 (in thousands)
                  Revenues                     $  5,144   $  4,994
                  % of consolidated revenues         35 %       22 %
                  Operating Loss               $ (1,000 ) $ (1,137 )

In 2011, we entered into several new agreements, including lease and licensing arrangements with third parties who now operate the retail locations and golf courses pro shops at the Kapalua Resort. In 2011, expense for third party services for management and operation of our leased and leasable properties increased, but labor costs were approximately 30% lower in 2011 compared to 2010 reflecting staff reductions. Leasing segment revenues increased as a percentage of total revenues principally because of the decrease in consolidated revenues from 2010 to 2011.


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UTILITIES

                                                    Year Ended
                                                   December 31,
                                                  2011      2010
                                                  (in thousands)
                   Revenues                      $ 3,418   $ 3,254
                   % of consolidated revenues         24 %      14 %
                   Operating Loss                $  (319 ) $  (127 )

Increased revenues in the Utilities segment in 2011 reflect increased consumption and a 5% sewer rate increase that went into effect in July 2010. The operating loss for 2011 was primarily due to higher electricity, maintenance, repairs and outside service costs that more than offset the higher revenues and reduced labor costs in the Utilities segment. Labor costs were approximately 20% lower in 2011 compared to 2010 reflecting staff reductions. Utilities segment revenues increased as a percentage of total revenues principally because of the decrease in consolidated revenues from 2010 to 2011.

RESORT AMENITIES

                                                    Year Ended
                                                   December 31,
                                                  2011      2010
                                                  (in thousands)
                   Revenues                      $ 3,854   $ 3,583
                   % of consolidated revenues         27 %      16 %
                   Operating Loss                $  (803 ) $  (108 )

Increased revenues were due to higher spa service and treatment revenues as a result of price increases in November and December 2011, an increase in the number of treatments and services performed, and to increased membership dues revenues as a result of increases in the membership base. In 2011, increased labor, supplies and other operating expense at the spa and the increased costs relating to club memberships more than offset the higher revenues in the Resort Amenities segment. Resort Amenities segment revenues increased as a percentage of total revenues principally because of the decrease in consolidated revenues from 2010 to 2011.

OTHER

                                                   Year Ended
                                                  December 31,
                                                 2011       2010
                                                 (in thousands)
                  Revenues                     $  1,056   $  1,913
                  % of consolidated revenues          7 %        8 %
                  Operating Loss               $ (4,499 ) $ (6,373 )

Other includes miscellaneous revenues and unallocated general, administrative and marketing costs, and pension and other post-retirement expense (credit). General and administrative expenses are incurred at the corporate level and at the operating segment level. Results of operations presented above for the reportable operating segments include an allocation of a portion of the general and administrative expense at the corporate level. Such allocations are made on the basis of our evaluation of the level of services provided to the operating segments.

The operating loss for 2010 includes approximately $3.2 million of gains recognized from asset sales.


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General and administrative expense was $6.3 million in 2011 compared to $8.6 million in 2010. The expense was lower in 2011 primarily because of lower compensation expense and reduced professional service costs. Salaries and wages decreased by approximately 25% compared to 2010 as we closed business units and reduced staffing levels. Professional service costs decreased in 2011 as we resolved outstanding legacy issues and downsized our operations. General and administrative expense for 2011 includes $1.5 million contribution expense representing the fair value of approximately 22 acres that we contributed to Maui Preparatory Academy in 2011 and gain on asset dispositions for 2011 includes an offsetting $1.5 million gain on the land contributed.

Selling and marketing expense decreased from $1.8 million in 2010 to $800,000 in 2011 as we discontinued operating certain businesses, and the lessees and licensees of our properties and trade names assumed the responsibility for marketing. Our marketing department was closed in March 2011.

Pension and other post-retirement expenses were $1.2 million in 2011 and a credit of $15.7million in 2010 of which a credit of $14.9 million was recorded to discontinued operations. The credit in 2010 was due to settlement and curtailment gains recognized upon the termination of our postretirement health and life insurance plans (Note 9 to Consolidated Financial Statements in Item 8 of this annual report).

DISCONTINUED OPERATIONS

Year Ended
December 31,
2011 2010
(in thousands)

Income From Discontinued Operations Before Income Taxes $ 14,628 $ 36,177

Our former retail, golf and agriculture operations are reported as discontinued operations. Income from discontinued operations for 2011 includes $15.1 million gain from the sale of the Bay Course; and income from discontinued operations for 2010 includes $26.7 million gain from sale of the PGC. Income from discontinued agriculture operations for 2010 includes a credit of $14.9 million representing the gain from settlement of our post-retirement health and life insurance plans. See Note 7 to Consolidated Financial Statements in Item 8 of this annual report.

INTEREST EXPENSE

Interest expense was $2,729,000 for 2011 compared to $9,496,000 for 2010 of which $300,000 and $2,105,000 were included in discontinued operations in 2011 and 2010, respectively. The reduction in interest expense was primarily due to lower average interest rates and lower average borrowings in 2011. In August 2010, our $40 million convertible notes were extinguished and in December 2010, we modified our primary credit agreements which lowered the interest rates (Note 4 to Consolidated Financial Statements in Item 8 of this annual report). Interest expense in 2010 for our $40 million convertible notes was approximately $2.9 million. Our average interest rate on borrowings was 4.8% for 2011 compared to 5.7% for 2010 and average borrowings were approximately $30 million less in 2011 compared to 2010.

LIQUIDITY AND CAPITAL RESOURCES

Current Debt Position

At December 31, 2011, our total debt was $45.5 million compared to $45.2 million at December 31, 2010. At December 31, 2011, we had approximately $12.9 million available under our revolving line of credit and $890,000 in cash. Of the total available under our revolving line of credit, $2.1 million is currently designated solely for the payment of legacy costs (Note 4 to Consolidated Financial Statements in Item 8 of this annual report).


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Revolving Line of Credit with Wells Fargo

We have 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 our 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 $4 million 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, including the absence of any material adverse change in financial condition and maintenance of the loan to value ratio of the collateral. In July 2011, we paid down the line of credit with $4.1 million of proceeds from the sale of real estate and in August 2011, the line of credit agreement was modified to reserve $4.1 million of credit availability for the payment of legacy costs (as defined) and exclude $4.1 million from the credit line availability in the calculation of the minimum liquidity financial covenant. As of December 31, 2011, the amount reserved for legacy costs and excluded from credit availability has been reduced by $2.0 million as legacy costs were paid. There are no commitment fees on the unused portion of the revolving facility.

As of December 31, 2011, we had irrevocable letters of credit totaling $0.5 million that were secured by the line of credit, $21.1 million of borrowings outstanding and $12.9 million available for borrowing under the line of credit.

Term Loan with American AgCredit

We have a $24.4 million 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. The credit agreement is collateralized by approximately 3,100 acres of our 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.

Amended Construction Loan Agreement with Lehman Brothers Holdings Inc.

Bay Holdings has a construction loan agreement with Lehman and other lenders under which $276 million was outstanding at December 31, 2011 that is due and payable in full. The loan is collateralized by the Residences of Kapalua Bay project assets including the land that underlies the project, which is owned by Bay Holdings. We 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 payment of the loan. Construction of the project was completed in 2009, but the completion guaranty will remain in place until all construction contracts have been fully settled and paid. We have recorded $4.1 million in other accrued liabilities in the accompanying consolidated balance sheet as our estimated share of the completion and recourse guarantees, and do not have any other funding commitments to Bay Holdings. Bay Holdings is currently working with the lenders to settle the terms of the loan.


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Operating Cash Flows

Net cash used in operating activities for 2011 and 2010 was $10.2 million and $9.4 million, respectively. Net cash used in operating activities for 2011 increased from 2010 primarily due to $5.9 million of income tax refunds received in 2010, partially offset by a higher amount of interest paid in 2010 compared to 2011.

Interest paid in 2011 and 2010 was $2.0 million and $6.9 million, respectively. Tax refunds received in 2011 and 2010 were $55,000 and $5.9 million, respectively.

Investing and Financing Cash Flows

Cash provided by investing activities in 2011 included the following:


$9.0 million from the sale of approximately 13 acres of our former agriculture facility in Kahului.


$899,000 released from escrow upon completion of post-closing obligations related to asset sales in 2010.

Cash used in investing activities in 2011 included the following:


$4.1 million withheld in escrow after the closing of the sale of the Kahului property.

Cash provided by investing and financing activities in 2010 included the following significant transactions:


Gross proceeds from our rights offering were $40 million.


Sale of the Bay Course produced net cash proceeds of $22.8 million.


Sale of three properties and miscellaneous equipment that were used in operations produced cash proceeds of $7.6 million.

Cash used in investing and financing activities in 2010 included the following significant transactions:


Net payments of long-term debt totaled $51.0 million. This included $20 million of proceeds from the sale of the Bay Course and $35.2 million of proceeds from the rights offering that were applied to pay down outstanding borrowings.


Cash outflow for property purchases was $4.3 million and was primarily for the replacement of the irrigation system at the PGC as required by the sale of the golf course in 2009.

Future Cash Inflows and Outflows

Our plans for 2012 include the possible sale of certain operating and non-operating real estate assets that could result in net cash proceeds which would be partially used to repay outstanding indebtedness and for general working capital. There can be no assurance that we will be able to sell any of our real estate assets on acceptable terms, if at all.

Our cash outlook for the next twelve months and our ability to continue to meet our financial covenants is highly dependent on selling certain real estate assets in a difficult market. If we are unable to meet our financial covenants resulting in the borrowings becoming immediately due, we would not have sufficient liquidity to repay such outstanding borrowings. In addition, we are subject to several commitments and contingencies that could negatively impact our future cash flows, including purchase commitments up to $35 million related to our investment in Bay Holdings to purchase the Amenities, an EEOC matter related to our discontinued agricultural operations, and funding requirements related to our defined benefit pension plans. These matters are further described in Note 14 to the Consolidated Financial Statements. The aforementioned circumstances raise substantial doubt about


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our ability to continue as a going concern. There can be no assurance that we will be able to successfully achieve the initiatives discussed below in order to continue as a going concern.

In response to these circumstances, we continue to undertake significant efforts to generate cash flow by employing our real estate assets in leasing and other arrangements, by the sale of several real estate assets and by continued cost reduction efforts. As part of the restructured credit agreement with Wells Fargo, we are allowed to use proceeds from the sale of certain properties to settle obligations related to our prior operations, instead of reducing borrowings under the line of credit as was previously required in the credit agreement. We are currently in discussions with the other members of Bay Holdings and the lenders to negotiate the terms of the purchase and sale agreement for the Amenities including the purchase and payment terms.

Contributions to our defined benefit pension plans are expected to be approximately $2.5 million in 2012.

We do not expect any significant capital expenditures in 2012.

CRITICAL ACCOUNTING POLICIES

Our accounting policies are described in Summary of Significant Accounting Policies, Note 1 to our Consolidated Financial Statements (included in Item 8 of this annual report). The preparation of financial statements in conformity with generally accepted accounting principles requires the use of accounting estimates. Some of these estimates and assumptions involve a high level of subjectivity and judgment and therefore the impact of a change in these estimates and assumptions could materially affect the amounts reported in our financial statements. The accounting policies and estimates that we have identified as critical to the Consolidated Financial Statements are as follows:


Our investment in Bay Holdings was written down to zero at December 31, 2009 to recognize an other-than-temporary impairment and to record losses incurred by Bay Holdings in the third quarter of 2009. We and the other members of Bay Holdings have guaranteed to the lenders completion of the project and recourse with regard to certain acts, and we have recorded $4.1 million in other accrued liabilities on the consolidated balance sheet at December 31, 2011 as our share of the completion and recourse guarantees. In determining the fair value of this investment, assessing whether any identified impairment was other-than-temporary, as well as estimating the liability for the completion and recourse guarantees, significant estimates were made and considerable judgment was involved. These estimates and judgments were based, in part, on our current and future evaluation of economic conditions in general, as well as Bay Holdings' current and future plans. These impairment calculations contain additional uncertainties because they also require management to make assumptions and apply judgments to, among others, estimates of future cash flows, probabilities related to various cash flow scenarios, and appropriate discount rates. The impairment losses recorded by Bay Holdings required Bay Holdings' management to estimate total sales revenues that will be received by the project, as well as estimating the number of buyers of units from which nonrefundable deposits have been received that will not close on the purchase of their units.


Our long-lived assets are reviewed for impairment if events or circumstances indicate that the carrying amount of the long-lived asset may not be recoverable. Management has evaluated certain long-lived assets for impairment, and in 2011 we recognized impairment charges of $1.1 million related to long-lived assets and in 2010 recognized impairment charges totaling $3.1 million related to real estate assets held for sale because carrying values were in excess of estimated fair values less the estimated costs of disposal. These asset impairment loss analyses contain uncertainties because they require management to make assumptions and apply considerable judgments to, among others, estimates of the timing and amount of future cash flows, expected useful lives of the assets, uncertainty about future events, including changes in


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economic conditions, changes in operating performance, changes in the use of the assets, and ongoing costs of maintenance and improvements of the assets; thus, the accounting estimates may change from period to period. If management uses different assumptions or if different conditions occur in future periods, our financial condition or future operating results could be materially impacted.


Deferred development costs, principally predevelopment costs and offsite development costs related to various projects in the planning stages by our Real Estate segment, totaled $7.5 million at December 31, 2011. Based on our future development plans for the Kapalua Resort and other properties such as Pulelehua, and Hali`imaile Town, and the estimated value of these future projects, management has concluded that these deferred costs will be recoverable from future development projects. The volatility of this assumption arises because of the long-term nature of our development plans and the uncertainty of when or if certain parcels will be developed.


Determining pension expense for our two defined benefit pension plans utilizes actuarial estimates of employees' age at retirement, and retirees' life span, the long term rate of return on investments and other factors. In addition, pension expense is sensitive to the discount rate utilized. This rate should be commensurate with the interest rate yield of a high quality corporate fixed income investment portfolio. These assumptions are subject to the risk of change as they require significant judgment and have inherent uncertainties that management or its consulting actuaries may not control or anticipate. As of December 31, 2011, the fair value of the assets of our defined benefit plans totaled approximately $39.1 million, compared with $41.3 million as of December 31, 2010. The recorded net pension liability was approximately $27.6 million as of December 31, 2011 compared to a net pension liability of $22.1 million as of December 31, 2010. The $5.5 million increase in net pension liability during 2011 was mainly attributed to a decline in the discount rate used to determine our pension obligations and lower than expected returns from the pension plans investments.


Stock-based compensation expense is calculated based on assumptions as to the expected life of the options, price volatility, risk-free interest rate and expected forfeitures. While management believes that the assumptions made are appropriate, compensation expense recorded currently and future compensation expense would vary based on the assumptions used.


Management calculates the income tax provision, current and deferred income taxes along with the valuation allowance based upon various complex estimates and interpretations of income tax laws and regulations. Deferred tax assets are reduced by a valuation allowance to the extent that it is more likely than not that they will not be realized. To the extent we begin to generate taxable income in future years, and it is determined the valuation allowance is no longer required, the tax benefit for the remaining deferred tax assets will be recognized at such time. As of December 31, 2011, valuation allowances of $61.4 million have been established primarily for tax credits, net operating loss carry forwards, and accrued retirement benefits to reduce future tax benefits expected to be realized.


Our results of operations could be affected by significant litigation or contingencies adverse to the Company, including, but not limited to, liability claims, environmental matters, and contract terminations. We record accruals for legal matters when the information available indicates that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We make adjustments to these accruals to reflect the impact and status of negotiations, settlements, rulings, advice of counsel and other information and events that may pertain to a particular matter. Predicting the outcome of claims and lawsuits and estimating related costs and exposure involves substantial uncertainties that could cause actual costs to vary materially from those estimates. In making determinations of likely outcomes of litigation

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