-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LkqdPsJCkVTWTrUL6/gTbUi4u4kQF7D8Jxg8Hb0rO5IcHJavGug4OY0byWmjwVp9 wlX8bVuGycJzl7bz3EomKg== 0000892626-03-000282.txt : 20030725 0000892626-03-000282.hdr.sgml : 20030725 20030724184626 ACCESSION NUMBER: 0000892626-03-000282 CONFORMED SUBMISSION TYPE: 10-12G/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20030725 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KAANAPALI LAND LLC CENTRAL INDEX KEY: 0001230058 STANDARD INDUSTRIAL CLASSIFICATION: LAND SUBDIVIDERS & DEVELOPERS (NO CEMETERIES) [6552] FILING VALUES: FORM TYPE: 10-12G/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-50273 FILM NUMBER: 03801849 BUSINESS ADDRESS: STREET 1: C/O JME REALTY CORP STREET 2: 900 NORTH MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60611 MAIL ADDRESS: STREET 1: 900 NORTH MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60611 10-12G/A 1 kaa_10a.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10/A FORM 10 GENERAL FORM FOR REGISTRATION OF SECURITIES Pursuant to Section 12(b) or (g) of The Securities Exchange Act of 1934 KAANAPALI LAND, LLC ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 01-0731997 ------------------------- ------------------- (State or other jurisdic- (I.R.S. Employer tion of incorporation or Identification No.) organization) 900 North Michigan Avenue Chicago, Illinois 60611 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (312) 915-1987 Securities to be registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which each class to be so registered is to be registered ------------------- --------------------- N/A N/A ------------------- --------------------- Securities to be registered pursuant to Section 12(g) of the Act: Class A Shares ------------------------------------------------------------ (Title of class) ------------------------------------------------------------ (Title of class) TABLE OF CONTENTS Page ---- Item 1. Business . . . . . . . . . . . . . . . . . . 1 Item 2. Financial Information. . . . . . . . . . . . 11 Item 2A. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . 12 Item 2B. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . . . . . 16 Item 3. Properties . . . . . . . . . . . . . . . . . 16 Item 4. Security Ownership of Certain Beneficial Owners and Management . . . . . . 16 Item 5. Managers and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . 17 Item 6. Executive Compensation . . . . . . . . . . . 19 Item 7. Certain Relationships and Related Transactions . . . . . . . . . . . . 20 Item 8. Legal Proceedings. . . . . . . . . . . . . . 20 Item 9. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters. . . . . . . . . . . . . 27 Item 10. Recent Sales of Unregistered Securities. . . 27 Item 11. Description of Registrant's Securities to be Registered . . . . . . . . . . . . . . 28 Item 12. Indemnification of Directors and Officer . . 30 Item 13. Financial Statements and Supplementary Data. 31 Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . 61 Item 15. Financial Statement and Exhibits . . . . . . 61 i ITEM 1. BUSINESS Kaanapali Land, LLC ("Kaanapali Land"), a Delaware limited liability company is the reorganized entity resulting from the Joint Plan of Reorganization of Amfac Hawaii, LLC ("AHI"), Certain of Its Subsidiaries (together with AHI, the "AHI Debtors") and FHT Corporation ( " FHTC " and, together with the AHI Debtors, the "Debtors") under Chapter 11 of the Bankruptcy Code, dated June 11, 2002 (as amended, the "Plan"). As indicated in the Plan, Kaanapali Land has elected to be taxable as a corporation. The Debtors had filed their petitions for reorganization under Chapter 11 on February 27, 2002 (the "Petition Date") in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the "Bankruptcy Court"), which petitions were consolidated into a single joint proceeding by the Bankruptcy Court (the "Reorganization Case"). The principal goal of the Plan was to address the Debtors' debt burdens so that the Debtors could emerge from Chapter 11 with a viable capital structure and with the resources necessary to operate their land development business. The Plan achieved this goal by converting certain indebtedness and other liabilities of the Debtors into new equity of Kaanapali Land (to the extent such creditors did not elect an available cash distribution option). Another goal of the Plan was to secure additional liquidity for the Debtors to help fund future operations. The Plan achieved this goal through the Merger of FHTC with Northbrook Corporation ("Northbrook"), which made the assets and liquidity of Northbrook available to the Debtors to help fund their land development business. FHTC was the surviving entity in such merger, and shortly thereafter was in turn merged into Kaanapali Land pursuant to the Plan. The Plan was confirmed by the Bankruptcy Court by orders dated July 29, 2002 and October 30, 2002 (collectively, the "Order") and became effective November 13, 2002 (the "Plan Effective Date"). Kaanapali Land continues to work toward completion of the various requirements of the Plan and to implement the restructuring transactions that are contemplated to be effected under the Plan, including, among other things, the resolution of all outstanding claims and distributions on all claims that are allowed under the Plan. All material requirements and transactions that the Company must implement under the Plan are described herein. References in this Form 10 to Kaanapali Land or the Company for dates on or after the Plan Effective Date are to the entity surviving the Reorganization Case and for dates before the Plan Effective Date are to predecessor entities, unless otherwise specified. AHI (formerly known as Amfac/JMB Hawaii, LLC), is a Hawaii limited liability company that is a wholly-owned subsidiary of Kaanapali Land. AHI and Kaanapali Land have continued the businesses formerly conducted by AHI and its subsidiaries prior to the bankruptcy, although some of such businesses have been discontinued or reduced in scope as described herein. As such, AHI and its subsidiaries operated the same three business segments as described below. FHTC was incorporated on December 9, 1963 in the state of Arizona. FHTC was purchased by a former affiliate of AHI in 1968. FHTC conducted a transportation and tourism business through the mid-1990s, consisting primarily of owning (or leasing) buses and related assets and offering bus tours for visitors to tourist destinations in the Western United States. In 1997, FHTC became a direct subsidiary of Northbrook. However, as of the date of the bankruptcy filing it no longer had any physical assets, but continued to have financial assets and liabilities, primarily with related entities. FHTC's most significant asset at the time of the bankruptcy filing was its senior secured loan to AHI. Northbrook was formed in 1978 as a holding company to facilitate the purchase of a number of businesses, generally relating to short line railroads, rail car leasing and light manufacturing. Over 90% of the stock of Northbrook was purchased by persons and entities affiliated with JMB Realty Corporation, through a series of stock purchases in 1987 and 1988. One of Northbrook's subsidiaries (since merged into Northbrook) purchased the stock of Amfac, Inc., in 1988, pursuant to a public tender offer, and thus became an indirect subsidiary of Northbrook at such time. As a consequence of the merger of Amfac, Inc. ("Amfac") into Northbrook in 1995, AHI, FHTC and Amfac's other direct subsidiaries became direct subsidiaries of Northbrook. All existing shareholders of Northbrook contributed their shares to Pacific Trail Holdings, LLC ("Pacific Trail"), which was formerly called Amfac Holdco, LLC, in 2000. Pursuant to the Plan, Northbrook was merged into FHTC and FHTC was thereafter merged into Kaanapali Land in November 2002. At December 31, 2002, none of the former Northbrook subsidiaries had any significant ongoing business operations except for those described below. Kaanapali Land's subsidiaries include the Debtors as reorganized under the Plan, certain subsidiaries of AHI that were not debtors (the "Non- Debtor AHI Subsidiaries") and other former subsidiaries of Northbrook (collectively with Kaanapali Land, all the Reorganized Debtors, the Non- Debtor AHI Subsidiaries and such other subsidiaries are referred to herein as the "Company"). Kaanapali Land will pursue its businesses utilizing the assets of the AHI Debtors and the Non-Debtor AHI Subsidiaries and the assets formerly owned by Northbrook and its other subsidiaries. The Company operates three primary business segments: (i) Land Development, Management and Sales, (ii) Agriculture and (iii) Golf. As discussed below, of the foregoing, the Company's primary business is Land Development, Management and Sales. SUMMARY OF PLAN Material aspects of the history and business of the Company, the Plan, the procedures for consummating the Plan and the risks attendant thereto were set forth in a Second Amended Disclosure Statement With Respect to Joint Plan of Reorganization of Amfac Hawaii, LLC, Certain of Its Subsidiaries and FHT Corporation Under Chapter 11 of the Bankruptcy Code, dated June 11, 2002 (the "Disclosure Statement"). The Disclosure Statement and the Plan are each filed as Exhibits to this Form 10. All claims against the Debtors were deemed discharged as of the Plan Effective Date, provided that creditors with allowed claims became entitled to receive distributions under the Plan as of that date and provided that the Plan does not impair any claims of taxing authorities. The time for filing proofs of claim relating to all classes of claims has expired, including the period for those whose executory contracts were rejected by the Debtors. Therefore, all claims that may be asserted by the creditors against the Debtors relative to amounts due on pre-petition obligations as of the Plan Effective Date, with the exception of a potential claim that may be filed by the Employees' Retirement System of the State of Hawaii ("ERS") and a potential claim of the Internal Revenue Service ("IRS") described below, are known. Under the distribution provisions of the Plan, consummation of the Plan entitled creditors with allowed claims in the impaired classes to receive, as of the Plan Effective Date, distributions from Kaanapali Land. Under the Plan, all claimants that were entitled to receive shares were entitled to receive shares of Kaanapali Land following the Plan Effective Date. The Limited Liability Company Agreement of Kaanapali Land (the "LLC Agreement") provides for two classes of membership interests, "Class A Shares" and "Class B Shares", which have substantially identical rights and economic value under the LLC Agreement; except that holders of Class A Shares are represented by a "Class A Representative" who must approve certain transactions proposed by Kaanapali Land before they can be undertaken. The Class A Representative is further entitled to receive certain reports from the Company and meet with Company officials on a periodic basis. Reference is made to the LLC Agreement for such provisions. Class B Shares are held by Pacific Trail Holdings, LLC ("Pacific Trail") and various entities and individuals that are affiliated with Pacific Trail. Class A Shares were issued under the Plan to claimants who had no such affiliation. Reference is made to Item 11 below for a further explanation of the LLC Agreement and the rights and duties of the Class A Representative. As of July 16, April 23, 2003, Kaanapali Land has distributed or has authorized its distribution agent to distribute, in the aggregate, approximately $1,777,000 $2,477,000 in cash and approximately 159,756 139,776 Class A Shares on account of the claims that have been made, and expects that ultimately an additional approximately $84,000 in cash and 18,892 Class A Shares will be distributed on account of such remaining claims, assuming that all holders of such claims comply with the requirements for distribution. Kaanapali Land has issued all Class B Shares required to be issued under the Plan to Pacific Trail and those entities and individuals who are affiliated with Pacific Trail that are entitled to Class B Shares. As a consequence, Kaanapali Land has approximately 1,631,513 Class B Shares outstanding. A number of claims, primarily relating to matters that were in litigation on the Petition Date, or personal injury or employee matters where litigation was threatened, have not been resolved and are likely to be disputed by the Company if they cannot be resolved in the near future. The Company would likely in those cases petition the Bankruptcy Court to dismiss such claims. Even if the Bankruptcy Court ruled that all such claims were allowed claims entitled to distribution, which the Company believes is highly unlikely, the maximum cash exposure to the Company thereon is not material to the Company and the maximum exposure for the issuance of additional Class A Shares is approximately 1,281 shares. However, this does not take into account a potential claim by ERS that could be asserted against the Debtors as described in more detail in Item 8 below. The dispute with the ERS is subject to a settlement agreement with the Company and certain affiliates that has been approved by the Bankruptcy Court in April 2003 and was is expected to be approved by the Circuit Court of Hawaii in May 2003. Such settlement is expected to close in the third quarter of 2003, whereupon any further potential claim against the Debtors by ERS would be extinguished. However, there can be no assurance that the state court will approve the settlement or that closing of the transactions thereunder will occur. As a result of such settlement, it is not expected that any claim will be filed by ERS, although there can at this time be no assurance that one will not be so filed, as the parties have agreed to an extension of the time required for ERS to file such a claim until 5 business days after notice by the Debtors. The Debtors do not intend to issue such a notice so long as the settlement appears likely to close. However, in the event that such a claim is ultimately filed, the Company intends to vigorously defend against it and reassert counterclaims that it raised in the underlying litigation. In addition, the IRS filed a claim in the bankruptcy proceedings in the aggregate amount of approximately $20,600,000 for taxes, interest and penalties related to the years 1998-2000. The Company has contacted the IRS to request that it withdraw its claim due to the fact that the Plan leaves the IRS unimpaired relative to any taxes that may be due. Although the Company is optimistic that the IRS will withdraw such claim, it has not yet done so and there can be no assurance that it will. In any event, the IRS audit of the period covered by the claim is in its preliminary stages, and no deficiencies in taxes have been proposed by the auditors. The Company intends to dispute vigorously any IRS claim for additional taxes, whether asserted by means of the claim filed in the bankruptcy proceeding, arising in the pending audit, or in future audits. However, there can be no assurance that the Company will be successful in such defense and, although the Company has reserved for potential tax liabilities on its financial statements, to the extent that the Company is unsuccessful in defending against any such claims, either in the bankruptcy court or in connection with the IRS audits, the amount for which the Company could be liable could have a material adverse effect on the Company, given its relatively modest cash position. AHI is the direct subsidiary of Kaanapali Land through which the Company conducts substantially all of its operations, except those relating to the Waikele Golf Course whose operations are conducted by another direct subsidiary of Kaanapali Land. AHI conducts all of its business through various subsidiaries. Those with remaining assets of significant net value include KLC Holdings, LLC ("KLC"), Kaanapali Development Corp. ("KDC") and Pioneer Mill Company, Limited ("PMCo") and certain limited liability companies owned 50% each by KLC and KDC. The Company has completed certain restructuring transactions and intends to complete others, as permitted by the Plan, for the purpose of simplifying the corporate structure and administrative organization of the Company. The general impact of such transactions will be to reduce the number of subsidiaries of Kaanapali Land and to move assets into those entities that make the most sense for administrative reasons or to facilitate future transactions with third parties. Other than the dissolution of inactive subsidiaries, the Company has (i) contributed its remaining North Beach lots on Maui to newly formed limited liability companies, 50% owned each by KLC and KDC, (2) obtained modest cash proceeds for the redemption of its indirect interest in the majority owner of APIC, and (3) merged Oahu Sugar Company, Limited into a newly-formed limited liability company. Soon after the consummation of the ERS settlement, currently projected to occur during the third quarter of 2003, the Company intends to merge PMCo into a newly formed limited liability company and transfer PMCo's remaining Kaanapali lands to KDC in order that all lands relating to the Kaanapali 2020 development (or adjacent thereto) are held for development or sale by KDC. It is expected that further restructuring transactions will be undertaken over time as entities wind up their affairs or are otherwise no longer necessary to the ongoing business of the Company. These transactions will likely be in the form of dissolutions or mergers. LAND DEVELOPMENT, MANAGEMENT AND SALES KAANAPALI 2020 DEVELOPMENT PLANS. "Kaanapali 2020", Kaanapali Land's comprehensive plan for approximately 4,000 acres of land in the Kaanapali/Honokawai area on the west side of Maui, Hawaii is its principal entitlement focus. Currently, Kaanapali Land is preparing market and feasibility studies in anticipation of applying for the necessary entitlements to carry out the Kaanapali 2020 development plan. While some of these lands have some form of entitlements, it is anticipated that all of the land to be developed will require state district boundary amendments and county general plan amendments, as well as rezoning approvals. Approximately 1,500 acres of this land is located toward the top of mountain ridges and in gulches and is classified as conservation land, which precludes development. However, this land, and other land that will be designated as open space, is an important component of the overall project and is part of obtaining the entitlements for the land as a whole. The process of determining market and project feasibility will be ongoing with pursuit of entitlements. If Kaanapali Land obtains the necessary entitlements, it intends, if market and project feasibility studies justify it, to develop some or all of the project (either alone or through one or more joint ventures with strategic partners) and/or sell some or all of the entitled parcels. Kaanapali Land will need to apply for subdivision of the land in order to develop or sell the parcels. As a condition to subdivision of the land, the county will generally require the completion or bonding of certain infrastructure, including roads, water and sewer facilities, each of which will require their own building and grading permits. For the last few years, Kaanapali Land has been working with the West Maui community to involve the community in plans for the use and development of the Kaanapali 2020 lands. Committees, comprised of private sector individuals from the community as well as public employee participants, have been working with Kaanapali Land to create a vision for the future of the Kaanapali lands. This development strategy has been used in several communities, including the successful Weston, Florida planned community that has recently been substantially completed by an affiliate of Kaanapali Land. Management is optimistic that a development plan can be implemented with the support of the community that meets Kaanapali Land's long-term financial objectives. The Kaanapali 2020 development plan is currently at a predevelopment stage. Once the initial market and financial feasibility studies are completed, if they justify moving forward, the development plan will be finalized and the entitlement process will commence. Approximately 990 acres of land have been identified for development with up to approximately 3,000 residential units along with commercial, retail and recreational assets. The balance of the land is expected to remain open space or agricultural. Over the next few years, the Company expects to seek the necessary approvals to pursue its business strategy. PROJECT PLANNING AND DEVELOPMENT. The Company's real estate development approach, for land which it holds for development rather than investment, is designed to enhance the value of its properties in phases. In most instances, the development process begins with the preparation of market and feasibility studies that consider potential uses for the property, as well as costs associated with the development of those uses. The studies consider factors such as location, physical characteristics, demographic patterns, anticipated absorption rates, transportation, development costs and regulatory and environmental requirements. The Company expects to prepare a land plan that is consistent with the findings of the studies and then to commence the process of applying for the entitlements necessary to permit the development of the property in accordance with the land plan. The length and difficulty of obtaining the requisite entitlements, as well as the cost of complying with any conditions attached to the entitlements, are significant factors in determining the viability of the Company's development projects. Applications for entitlements include applications for state land use reclassification, county community plan amendments and changes in zoning. The entitlement process can involve substantial amounts of time and expense. The applications generally require the submittal of comprehensive plans that involve the use of consultants and other professionals. Parties affected by the development can challenge the applications at the time of submittal, which may substantially delay the process. Generally, once the applications are deemed acceptable, the various governing agencies involved in the entitlement process commence consideration of the requested entitlements. The applicable agencies often impose conditions, which may be costly to the developer, on any approvals of the entitlements. These conditions may include the requirement that the Company dedicate land for public use, fund infrastructure improvements, pay impact fees and provide affordable housing in the area of the development. The Company may also be subject to conditions that the entitlement will be revoked if the development of the project does not take place within a particular time period. If there is a significant change in the land plans, if the governmental requirements change, or if market feasibility conditions change subsequent to obtaining the county approvals, the Company may be required to apply for amendments to the existing entitlement. The amendment process can also be lengthy and costly, and it may result in additional conditions attaching to any approvals. If the Company is not successful in obtaining the necessary entitlements to develop the property as originally planned, the Company may be required to revise its land plan. In that case, development of the land in accordance with revised plans may not be as economically viable as the original land plan. There can be no assurance that all necessary approvals will be obtained, that modifications to those plans will not require additional approvals, or that such additional approvals will be obtained, nor can there be any assurance as to the timing of such events. OAHU SUGAR MILL SITE DEVELOPMENT. In 1995, the Company closed the Oahu Sugar Company plantation. The former sugar mill site, now owned by a subsidiary of Kaanapali Land, comprises approximately 15 acres and is located in Waipahu, approximately 10 miles west of downtown Honolulu, near Pearl Harbor. The subsidiary has received county zoning approval for a light industrial subdivision on the property. The Company had expected to market this property in bulk after addressing certain identified environmental issues. However, sale of the property is not expected to yield significant net cash proceeds to Company because the property was is encumbered by liens totalling approximately $2.9 million, including accrued interest, as of December 31, 2002 pursuant to bank mortgage financing in an amount which approximates the anticipated value of the property. The lender has filed a complaint for foreclosure of the property after prolonged negotiations for extension of the financing. Therefore, there can be no assurance that the Company will be able to sell the property, particularly given the disputes that have arisen between the Company and the lender. LAND MANAGEMENT AND SALES. Apart from the golf course properties (discussed below), the Kaanapali 2020 lands and the Oahu Sugar mill site, the Company owns approximately 500 acres of remaining land. Parcel 22/23 (defined in and more fully discussed in Section III.C.) is the only remaining fully entitled parcel in the Kaanapali Golf Estates development and consists of approximately 110 acres zoned for residential development. Parcel 22/23 is currently undeveloped. The site of the Pioneer Mill Company sugar mill that was closed in 1997 ("Pioneer Mill Site") located in Lahaina and owned by a subsidiary of the Company, is approximately 19.5 acres and is zoned for industrial use. Pioneer Mill also owns several parcels, known collectively as the "Wainee Lands", which are located in Lahaina south of the mill site. The Wainee Lands include approximately 235 acres and are classified and zoned for agricultural use. However, the Company believes that certain portions of the Wainee Lands might be developed as an affordable housing community once the property is reclassified and rezoned. However, the Company is currently considering several options for the Wainee Lands. The Company also owns less than 100 acres of miscellaneous land parcels located on the Islands of Kauai, Maui and Oahu. These miscellaneous parcels primarily include mill sites, other land associated with now-closed sugar growing and processing operations and water-related assets. It is not expected that upon sale these miscellaneous parcels will yield any significant cash proceeds to the Company. AGRICULTURE HISTORIC OPERATIONS. A significant portion of the Company's revenues were formally derived from agricultural operations primarily consisting of the cultivation, milling and sale of raw sugar. The last remaining sugar plantation of the Company, owned by a subsidiary of Kaanapali Land was shut down at the end of 2000. In September 2001, the Company also ceased its coffee operations, which were owned by a subsidiary of Kaanapali Land. The Company is in the process of liquidating its remaining inventory of coffee beans and its mill equipment. However, the Company is in negotiations with a third party concerning the leasing of portions of the Kaanapali 2020 land on which the coffee trees are located for the purpose of continuing agricultural coffee operations on such land. If such negotiations result in a binding lease agreement, the lessee may also purchase the Company's coffee mill equipment. Most sugar mill equipment with significant value has already been sold. SEED CORN OPERATIONS. The Company's seed corn operations are located on former Maui sugar lands that are now part of the Kaanapali 2020 area. The Company earns modest income under a contract with Monsanto Seed Company that generates approximately $1.1 million of annual revenue , to grow seed corn according to Monsanto's specifications. In addition to generating such income, this operation is politically advantageous, because the cultivated land helps control dust and soil erosion and keeps the fields green, to the benefit of the local community. The Company may seek to expand this operation if it can find ready markets for their products and it is profitable to do so. There can be no assurance that any expansion will occur or that current operations will remain profitable. The Company and is currently negotiating with Monsanto have recently renewed these on the renewal of their seed corn contracts on terms that are similar to the previous agreement . There can be no assurance that such renewal will be consummated. GOLF The Company owns the golf course land and improvements and is responsible for the management and operation of an 18-hole golf course known as the Waikele Golf Club on Oahu. In 2002, the The Waikele Golf Course operated at a modest level of profit after debt service. is modestly profitable at current levels of debt. Substantial improvements in local economic conditions and the Hawaiian tourism industry would be necessary for the Company to realize significant net cash proceeds (after debt service) from this business segment. There can be no assurance that such improvements will occur in the near term. Other golf courses, known as the Royal Kaanapali Golf Courses ("RKGC"), are on Maui. The RKGC are owned by Amfac Property Investment Corp. ("APIC"), a corporation that is approximately 16.7% owned by two subsidiaries of Kaanapali Land and 83.3% owned by AF Investors, LLC ("AFI"), an affiliate of Kaanapali Land in which Kaanapali Land has no direct or indirect interest as of December 31, 2002. APIC, and with respect to certain specified limited amounts, two other subsidiaries of the Company are borrowers under a $66 million loan made by the Employees' Retirement System of the State of Hawaii ("ERS") in 1991. The loan, which as of December 31, 2002 had a balance of approximately $81 million, is secured by the RKGC (and certain adjacent lands owned by APIC). All of APIC's assets are subject to the loan. The loan matured in June 2001 and has not been extended, despite efforts of the borrowers to obtain such an extension as described below. The borrowers have been engaged in settlement negotiations with ERS since 2000, which negotiations have resulted in the execution of a definitive settlement agreement (the "ERS Settlement Agreement") in March 2003. Although the borrowers believe that the transactions contemplated by the ERS Settlement Agreement will be consummated during the third quarter of 2003, the ERS Settlement Agreement is subject to contingencies including approval by the state court which has authority over the underlying litigation. Such approval is anticipated in the second quarter of 2003. As a consequence of such contingencies, there can be no assurance as to the consummation of such settlement agreement. Consummation of the ERS Settlement Agreement and the transactions contemplated therein would provide the Company with easements and other rights that it considers adequate for the development or sale of Parcel 22/23 as described below, but would also result in the Company having no further interest in the RKGC. For a description of financial information by segment, please read note 10 to the attached consolidated financial statements, which information is incorporated herein by reference. PROJECTED ASSET SALES There are strategic land sales that the Company is currently pursuing or considering in order to raise additional cash that would enhance the Company's the ability to fund the Kaanapali 2020 development. PARCEL 22/23. Kaanapali Golf Estates ("KGE") is a residential community that is part of the Kaanapali Beach Resort in West Maui. KGE has been subdivided into several parcels that have been sold to residential developers. There is one remaining parcel available for sale in the residential community called "Parcel 22/23". Parcel 22/23 includes approximately 110 acres. Parcel 22/23 is currently subject to a property purchase agreement for sale to a third party that is expected to close during the second half of 2003 assuming that the ERS Settlement Agreement is consummated and certain other contingencies in the property purchase agreement are satisfied. However, the litigation with the ERS described below (in the event that the ERS Settlement Agreement is not consummated) may adversely impact the Company's ability to consummate the sale. The amount of net sales proceeds are also subject to completion by the Company of site improvements required by the buyer. Therefore, there can be no assurance that such sale will be consummated or the amount of proceeds will be as projected . NORTH BEACH. Prior to the sale of Lot 2 in 2003, the Company owned three beachfront lots that total approximately 62 developable acres, commonly known as Lots 2, 3 and 4. All three lots are zoned for hotel development. In December 2000, the Company sold a fourth parcel, the 14- acre Kaanapali Ocean Resort ("KOR") site known as Lot 1, to SVO Pacific, Inc. ("SVO"), an affiliate of Starwood Hotels and Resorts, which is in the process of developing time-share units on the property. In addition, SVO received an option to purchase Lot 2, which contains approximately 11.5 acres. In January 2003, the option for Lot 2 was exercised and the sale closed on January 31, 2003. A non-refundable payment was made for $2 million (before closing costs and prorations). The remainder of the purchase price is secured by a note due March 31, 2004 for approximately $14.4 million, a portion of which is subject to refund based on the number of units approved for development on the sale pursuant to the Special Management Area permit that SVO is seeking for the parcel. Lot 4 contains approximately 40 acres but, due to requirements arising from an earlier entitlement proceeding, five acres are subject to a requirement that the land be used as a community park. Lot 4 has previously been offered for sale but and is currently not under contract . Although the Company continues to discuss a potential transaction with a third party, in the event that no contract is entered into with such party, the Company's current intention is to retain Lot 3 and Lot 4 with a scheduled closing in the third quarter of 2003. There are certain contingencies to the contract and there is no assurance that the transaction will be consummated under its existing or any other terms. Lot 3 is intended to be retained for the foreseeable future. PIONEER MILL SITE. The Company owns approximately 19 acres in Lahaina, known as the Pioneer Mill Site, which is zoned for industrial development. This was the former site of Pioneer Mill's sugar and coffee mills on Maui. Pioneer Mill is currently evaluating strategic options relating to this site. Pioneer Mill has discovered petroleum contamination at the site and has been in the process of remediating the contamination. The United States Environmental Protection Agency has conducted some environmental testing at the site and Pioneer Mill is awaiting a report on the results of that investigation. Due to the current environmental issues at the site, is not likely that any sale or development will take place in the near term. Although Pioneer Mill does not currently believe that it has significant additional environmental exposure on this site, any sale of the property may, among other things, either require Pioneer Mill to demolish most of the current site improvements or adjust the price so that a buyer would undertake such demolition. EMPLOYEES. At April 1, 2003, Kaanapali Land and its subsidiaries employed approximately 100 persons. Certain corporate services are provided by Pacific Trail and its affiliates. Kaanapali Land reimburses for these services including overhead at cost. TRADEMARKS AND SERVICE MARKS. The Company maintains a variety of trademarks and service marks that support each of its business segments. These marks are filed in various jurisdictions, including the United States Patent and Trademark Office, the State of Hawaii Department of Commerce and Consumer Affairs and foreign trademark offices. The trademarks and service marks protect, among other things, the use of the term "Kaanapali" and related names in connection with the developments in the vicinity of the Kaanapali Resort area on Maui, the various trade names and service marks obtained in connection with the Company's coffee operations and the use of the term "Waikele" in connection with the Waikele golf course and related developments. Also protected are certain designs and logos associated with the names protected. Certain marks owned by the Company have been licensed to third parties, however, the income therefrom is not material to the Company's financial results. To the extent deemed advantageous in connection with the Company's ongoing businesses, to satisfy contractual commitments with respect to certain marks or where the Company believes that there are future licensing opportunities with respect to specific marks, the Company intends to maintain such marks to the extent necessary to protect their use relative thereto. The Company also intends to develop and protect appropriate marks in connection with its future land development activities. MARKET CONDITIONS AND COMPETITION. There are a number of current factors that have negatively impacted Kaanapali Land's development and land sale activities, including market conditions, the difficulty in obtaining regulatory approvals, the high development cost of required infrastructure and the Company's operating deficits in its other business segments. As a result, the planned development of many of the Company's land holdings and the ability to generate cash flow from these land holdings have become long-term in nature, and the Company has found it necessary to sell certain parcels in order to raise cash rather than realize their full economic potential through the entitlement process. The Hawaii economy experienced a downturn beginning in late 1990 after the initial Persian Gulf War, a recession in Japan and a slowdown in California's economy. The real estate market in Hawaii was negatively impacted by these events and its recovery was slow and incomplete. The severe negative impact of the September 11, 2001 terrorist attacks on tourism and investment further exacerbated the problems. The Company believes that improvements in tourism arrivals and the length of stay (in Hawaii) are also important to improving Hawaii's economy and its real estate market. Although there can be no assurance that Hawaii's real estate market will improve in the near term, there have been recent improvements. The areas of primary and secondary residential homes, condominiums and time share units have been relatively strong compared to other parts of the economy and sales prices during the past couple years have approximated those experienced in the early and mid-1990's, but prices are still at levels below the late 1980's and below replacement cost of many of the properties. Despite these improvements, the real estate market, and especially the market for unimproved land, has not achieved the levels experienced during the late 1980's. Additionally, there can be no assurance that any possible recovery of Hawaii's real estate market can be sustained. There are several developers, operators, real estate companies and other owners of real estate that compete with the Company in its land development business on Maui, many of which have greater resources. The number of competitive properties in a particular market could have a material adverse effect on the Company's success in its development operations. The golf course operated by the Company competes with several other golf courses located in its proximity and with other entertainment and tourist activities. Competition in the agriculture business segment affects the prices the Company may obtain for the land and other assets it leases to third parties for the production of agricultural products. GOVERNMENT REGULATIONS AND APPROVALS The current regulatory approval process for a development project can take three to five years or more and involves substantial expense. There is no assurance that all necessary approvals and permits will be obtained with respect to the Company's current and future projects. Generally, entitlements are extremely difficult to obtain in Hawaii. There is often significant opposition to proposed developments from numerous groups - including native Hawaiians, environmental organizations, various community and civic groups, condominium associations and politicians advocating no- growth policies, among others. Currently, the Company is preparing market and feasibility studies in anticipation of applying for the necessary entitlements to carry out the Kaanapali 2020 development plan. While some of these lands have some form of entitlements, it is anticipated that all of the land to be developed will require state district boundary amendments and county general plan amendments, as well as rezoning approvals. Approximately 1,500 acres of this land that is located toward the top of mountain ridges and in gulches is classified as conservation, which precludes development. This conservation land, and other land that will be designated as open space, is an important component of the overall project and is expected to be part of obtaining the entitlements for the remaining land. The Kaanapali 2020 development plan is currently at a predevelopment stage. First, market and feasibility studies must be completed. If they indicate that there is appropriate market demand and economic feasibility, the plan will be finalized and the entitlement process will commence. For the last few years, the Company has been working with the West Maui community to plan possible or potential use and development of the Kaanapali 2020 lands. Committees, comprised of private sector individuals from the community as well as public employee participants, have been working the company to create a vision for the future of the Kaanapali lands. ENVIRONMENTAL MATTERS. The Company is subject to environmental and health safety laws and regulations related to the ownership, operation, development and acquisition of real estate. Under those laws and regulations, the Company may be liable for, among other things, the costs of removal or remediation of certain hazardous substances, including asbestos-related liability. Those laws and regulations often impose liability without regard to fault. The Company is not aware of any environmental condition on any of its properties which is likely to have a material adverse effect on its consolidated financial position or results of operations; however, no assurance can be given that any such condition does not exist or may not arise in the future. Reference is made to Item 8. Legal Proceedings for a description of certain legal proceedings related to the environmental conditions at the Pioneer Mill and Oahu Sugar sites. ITEM 2. FINANCIAL INFORMATION KAANAPALI LAND, LLC (a) For the years ended December 31, 2002, 2001, 2000, 1999 and 1998 (Dollars in Thousands Except Per Share Amounts) 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- Total revenues (c). . . . . . $ 11,112 81,894 79,247 106,254 110,084 ======== ======== ======== ======== ======== Net income (loss) (d) . . $140,784 (17,082) (45,707) (34,245) (60,582) ======== ======== ======== ======== ======== Income (loss) from continuing operations per Share. . . . . (b) (6,794) (13,206) (8,561) (15,145) ======== ======== ======== ======== ======== Net income (loss) per share. . . . . (b) (4,270) (11,427) (8,561) (15,145) ======== ======== ======== ======== ======== Total assets. . $189,626 223,628 311,705 391,118 486,614 ======== ======== ======== ======== ======== Certificate of Land Apprecia- tion Notes . . $ -- 139,413 139,413 139,413 220,692 ======== ======== ======== ======== ======== (a) The above selected financial data should be read in conjunc- tion with the financial statements and the related notes appearing elsewhere in this registration statement. The amounts reflected are those business segments of the Company's predecessor that are continuing in nature. (b) The income per share from continuing operations for the period prior to the Plan Effective Date is $3,235 and the loss per share from continuing operations for the period after the Plan Effective Date is $5. The net income per share for the period prior to the Plan Effective Date is $37,389 and the net loss per share for the period after the Plan Effective Date is approximately $5. (c) In 2001 and 1999, the Company recognized as revenue a gain from the extinguishment of debt of $10,653 and $12,678, respectively. (d) In 2002, the Company recognized an extraordinary gain on reorganization of $136,618. ITEM 2A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All references to "Notes" herein are to Notes to Consolidated Financial Statements contained in this report. Information is not presented on a reportable segment basis in this section because in the Company's judgment such discussion is not material to an understanding of the Company's business. Due to the fact the Company emerged from bankruptcy in November 2002, substantially all of the 2002 and earlier operations relate to the operations of the predecessor, Northbrook. No material transactions (other than the issuance and distribution of the shares on or in connection with the Plan Effective Date, the effects of the restructuring and the related extraordinary gain) occurred after the mergers of Northbrook into FHTC and FHTC into Kaanapali Land in November 2002. LIQUIDITY AND CAPITAL RESOURCES General In addition to historical information, this Report contains forward- looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations about its businesses and the markets in which the Company operates. Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties or other factors which may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual operating results may be affected by various factors including, without limitation, changes in national and Hawaiian economic conditions, competitive market conditions, uncertainties and costs related to, the imposition of conditions on receipt of governmental approvals and costs of material and labor, and actual versus projected timing of events all of which may cause such actual results to differ materially from what is expressed or forecast in this report. A description of the reorganization of Kaanapali Land and its subsidiaries pursuant to the Plan and a description of certain elements of the Plan are set forth in Item 1 above. Pursuant to the terms and conditions of the Plan and except as otherwise determined in compliance with the Plan or the Order, the Debtors shall continue to exist after the Plan Effective Date as separate legal entities. Except as otherwise provided in the Order or the Plan, the Debtors have been discharged from all claims and liabilities existing through the Plan Effective Date. As such, all persons and entities who had receivables, claims or contracts with the Debtors that first arose prior to the Petition Date and have not previously filed timely claims under the Plan or have not previously reserved their right to do so in the Reorganization Case are precluded from asserting any claims against the Debtors or their assets for any acts, omissions, liabilities, transactions or activities that occurred before the Plan Effective Date. On November 14, 2002, pursuant to the Plan, all of the AHI Debtors executed and delivered to Kaanapali Land a certain Secured Promissory Note in the principal amount of $70 million. Such note matures on October 31, 2011 and carries an interest rate of 3.04% compounded semi-annually. The note, which is prepayable, is secured by substantially all of the real property owned by the AHI Debtors, pursuant to a certain Mortgage, Security Agreement and Financing Statement, dated as of November 14, 2002 and placed of record in December 2002. The note has been eliminated in the consolidated financial statements because the obligors are consolidated subsidiaries of Kaanapali Land . In addition to such Secured Promissory Note, certain Non-Debtor AHI Subsidiaries continue to be liable to Kaanapali Land under the portion of the Senior Indebtedness (as defined in the Plan) not discharged under the Plan, which Senior Indebtedness is secured against certain of the real property assets that such Non-Debtor AHI Subsidiaries continue to own by mortgages that were placed of record at various times prior to the petition date. Such remaining Senior Indebtedness was deemed assigned to Kaanapali Land on the Plan Effective Date. In addition, on the Plan Effective Date, Kaanapali Land was deemed to have succeeded to the interest of the COLA Holders with respect to all indebtedness under the Certificate of Land Appreciation Notes(" COLA Notes ") formerly issued by Amfac/JMB Hawaii, Inc. (as predecessor to AHI) that was not satisfied under the Plan, which indebtedness was deemed under the Plan to continue to be enforceable against the Non-Debtor AHI Subsidiaries that were guarantors of the COLA Notes under the COLA Indenture. Kaanapali Land has notified each of the Non-Debtor AHI Subsidiaries that are liable on such indebtedness that such indebtedness is due and owing and that Kaanapali Land reserves all of its rights and remedies in such regard. Given the financial condition of such Non-Debtor AHI Subsidiaries, however, it is unlikely that Kaanapali Land will realize payments on such indebtedness that are more than a small percentage of the total amounts outstanding thereunder. The Senior Indebtedness and the remaining COLA indebtedness have has been eliminated in the consolidated financial statements because the obligors are consolidated subsidiaries of Kaanapali Land, which is now the sole obligee thereunder . Those persons and entities that were not affiliated with Northbrook and were holders of COLAs (Certificate of Land Appreciation Notes) on the date that the Plan was confirmed by the Bankruptcy Court, and their successors in interest, are expected to represent approximately 9.5% of the ownership of the Company when all distributions under the Plan are completed. The COLAs were originally issued in 1988 for approximately $385 million. The net proceeds from the COLAs were applied toward the purchase of the net assets of Amfac Hawaii. As of the time of the bankruptcy filing, the COLAs were reduced to approximately $142 million including accrued interest (including those held by Northbrook and its affiliates). Approximately $112 million of such amount represented COLAs held by non- affiliates that were entitled to cash or Class A Shares of the Company. The primary business of Kaanapali Land is the land development of the Company's assets on the Island of Maui. The Kaanapali 2020 development plan will take many years at significant expense to fully implement, although the material portion of such anticipated expenses are not currently subject to any contractual commitments. At December 31, 2002, the Company had cash of approximately $15.8 million which is available for working capital requirements, including future operating expenses, and the Company's obligations for Kaanapali 2020 development costs, environmental remediation costs, including those on former mill-sites, other potential environmental costs, costs pursuant to the ERS settlement agreement, retiree medical insurance benefits (which are generally expected to be paid through the end of 2004), and existing and possible future litigation. Reference is made to Item 1 - Business, Item 8 - - Legal Proceedings and the footnotes to the financial statements. Proceeds from land sales are the Company's only source of significant cash proceeds and the Company's ability to meet its liquidity needs is dependent on the timing and amount of such proceeds. The Company's current indebtedness includes an $8.4 million mortgage loan secured by the Waikele Golf Course which has a maturity date of December 1, 2006 , with an interest rate of 6.75% per annum at December 31, 2002 . The Company currently expects to service and ultimately refinance such loan in the ordinary course of business. Oahu MS, a subsidiary of Kaanapali Land, is also the borrower under a $2.8 million mortgage loan which has been due and payable since December 1, 2002. At its maturity, this loan carried an interest rate of 6.29% per annum; however, as described in Item 8 below, the lender asserts that interest continues to accrue at the default rate of 18% per annum from and after such maturity date. The Company and the lender have engaged in negotiations regarding a possible further extension of the loan. Oahu MS does not have the funds necessary to pay the remaining balance of the loan. If such loan cannot be further extended it would likely result in Oahu MS no longer having an ownership interest in the property. The lender has commenced foreclosure proceedings that would lead to such result if the foreclosure they were consummated. The Company's continuing operations are primarily reliant upon the net proceeds of sales of developed and undeveloped land parcels. As described above, a purchase money note receivable related to Lot 2 is due in March 2004. Additionally, Parcels 22/23 is and Lot 4 are under contract for sale. If such note is paid upon maturity and such sale is s are consummated, the Company expects that it will have adequate liquidity for the foreseeable future. However, there can be no assurance that any of such cash proceeds will be realized. Should the Company be unable to satisfy its liquidity requirements from proceeds of land sales it will likely pursue alternate financing arrangements. However it cannot be determined at this time what, if any, financing alternatives may be available and at what cost; and therefore there can be no assurance that there will be any available financing and a lack of such financing would have a material adverse effect on the operations of the Company. RESULTS OF OPERATIONS Reference is made to the footnotes to the financial statements for additional discussion of items addressing comparability between years. 2002 COMPARED TO 2001 The restructuring in 2002 resulted in significant changes to the balance sheet, particularly causing (i) decreases in mortgage and other notes payable, deferred income taxes, deferred costs and other assets and (ii) changes in the equity of the Company principally due to the gain on reorganization. The restructuring also resulted in the decrease in interest expense and the increase in restructuring costs. Sales and cost of sales declined principally due to the decline in land sales. The amount reflected as a negative cost of sales in 2002 is primarily related to the decrease in the accumulated post retirement benefit obligation for retired agricultural workers. The decrease in other liabilities is primarily the result of a settlement of future obligations relating to a land sale in a prior year for an amount less than was recorded at the time of sale. The reduction to carrying value of investments was the primary cause for the decrease in property. The decrease in accumulated post retirement benefit obligation is primarily due to the decrease in the unrecognized net actuarial gain. The change in equity in income (loss) from unconsolidated investments is primarily due to the Company's share of the loss in 2001 for value impairment at the Royal Kaanapali Golf Courses versus the gain in 2002 from the sale of the Company's interest in a hotel. 2001 COMPARED TO 2000 Sales and cost of sales decreased in the aggregate due to significant decreases in agricultural operations (primarily as a result of the shutdown of the sugar operations on Kauai in 2000) and in Golf Course operations (primarily as a result of the Royal Kaanapali Golf Courses being accounted for on the equity method in 2001). Sales and cost of sales increased in 2001 due to significant land sales on Kauai and Maui. The extinguishment of debt in 2001 is the result of the retirement of debt securing the Waikele Golf Course for an amount less than its carrying amount. Interest and other income in 2001 included the effects of the net periodic pension credit and the reimbursement to the Company of certain administrative and other charges. The operations of the Royal Kaanapali Golf Courses on the equity method of accounting are reflected as equity in income (loss) from unconsolidated investments in 2001. The application of the equity method was the primary cause of the decrease in interest expense and the loss from unconsolidated investments. The reduction to carrying value of investments includes approximately $13.7 million and $15.9 million for land in 2001 and 2000, respectively, and approximately $4.4 million and $22.0 million for assets used in agricultural operations in 2001 and 2000, respectively. INFLATION Due to the lack of significant fluctuations in the level of inflation in recent years, inflation generally has not had a material effect on real estate development. In the future, high rates of inflation may adversely affect real estate development generally because of their impact on interest rates. High interest rates not only increase the cost of borrowed funds to the Company, but can also have a significant effect on the affordability of permanent mortgage financing to prospective purchasers. However, high rates of inflation may permit the Company to increase the prices that it charges in connection with real property sales, subject to general economic conditions affecting the real estate industry and local market factors, and therefore may be advantageous where property investments are not highly leveraged with debt or where the cost of such debt has been previously fixed. CRITICAL ACCOUNTING POLICIES The discussion and analysis of the Company's financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that management believes are reasonable under the circumstances; additionally management evaluates these results on an on- going basis. Management's estimates form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Different estimates could be made under different assumptions or conditions, and in any event, actual results may differ from the estimates. The Company reviews its property for impairment of value. This includes considering certain indications of impairment such as significant changes in asset usage, significant deterioration in the surrounding economy or environmental problems. If such indications are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying value, the Company will adjust the carrying value down to its estimated fair value. Fair value is based on management's estimate of the property's fair value based on discounted projected cash flows. There are various judgments and uncertainties affecting the application of these and other accounting policies, including the liabilities related to asserted and unasserted claims and the utilization of net operating losses. Materially different amounts may be reported under different circumstances or if different assumptions were used. ITEM 2B. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's future earnings, cash flows and fair values relevant to financial instruments are dependent upon prevalent market rates. Market risk is the risk of loss from adverse changes in market prices and interest rates. The Company manages its market risk by matching projected cash inflows from operating properties, financing activities, and investing activities with projected cash outflows to fund debt payments, capital expenditures and other cash requirements. Prior to the filing of the Reorganization Case, the Company's primary risk exposure had been to interest rate risk. The Company does not enter into financial instruments for trading purposes. The Company's debt arrangements are at variable rates. Based upon the Company's indebtedness and interest rates at December 31, 2002, a 1% increase in market rates or a 1% decrease in market rates would have no significant affect on future earnings and cash flows. ITEM 3. PROPERTIES LAND HOLDINGS. The major real properties owned by the Company are described under Item 1. Business. MAUI. As of December 31, 2002, the Company owned approximately 4,900 acres of land on the island of Maui, most of which was classified as agricultural land or conservation land for State and County purposes. All of the Company's Maui land holdings are located in West Maui near the Lahaina and the Kaanapali Beach Resort areas. Included in this acreage is approximately 19.7 acres of land at Lahaina that contain the former Pioneer Mill sugar mill, closed in 1999, which also housed the coffee mill operations of Kaanapali Estate Coffee, Inc., which is winding up its affairs. OTHER PROPERTY. In addition to the real property discussed above, the Company also owns two sugar mills on Kauai, each with its own power plant. The mills and power plants are located in Kekaha and Lihue, Kauai. Each of these facilities was involved in the production of raw sugar from sugar cane and the production of electrical and steam power until their closings in late 2000. The Lihue power plant continued to operate pursuant to a modified agreement with the local electric utility, through the end of 2002. ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security ownership of certain beneficial owners. NAME AND ADDRESS AMOUNT AND NATURE OF BENEFICIAL OF BENEFICIAL TITLE OF CLASS OWNER OWNERSHIP - -------------- --------------------------- -------------------- Class B Shares Pacific Trail Holdings, LLC 1,466,573 Shares 900 North Michigan Avenue owned directly (1) Chicago, Illinois 60010 (1) As the sole managing member of Pacific Trail, Pacific Trail Holdings, Inc. may be deemed to beneficially own the Class B Shares owned by Pacific Trail. Pacific Trail Holdings, Inc. disclaims beneficial ownership with respect to any of the shares owned by Pacific Trail. No Class A or Class B shares of the Company are owned by any of its executive officers. (2) As of April 23, 2003, there were 1,631,513 Class B Shares issued and outstanding, all of which were held by Pacific Trail and individuals and entities that are affiliated with it. Pacific Trail is owned in excess of 95%, directly or indirectly, by JMB Realty Corporation, certain of its current and former shareholders, officers and directors and their families. (3) No other person is known by the Company to beneficially own in excess of 5% of the Class A or Class B shares issued, outstanding and distributed. As of April 23, 2003, there were approximately 139,776 Class A Shares issued, outstanding and distributed, and the Company is not aware of any person that is the beneficial owner of more than 5% of the Class A Shares. As of April 23, 2003, there were 1,631,513 Class B Shares issued and outstanding, all of which were held by Pacific Trail and individuals and entities that are affiliate with it. Pacific Trail is owned in excess of 95%, directly or indirectly, by JMB Realty Corporation, certain of its current and former shareholders, officers and directors and their families. No shares of the Company are owned by any executive officer. ITEM 5. MANAGERS AND EXECUTIVE OFFICERS OF THE REGISTRANT The sole manager of Kaanapali Land, LLC is Pacific Trail, which is also Kaanapali Land's largest shareholder. Pacific Trail manages the business of Kaanapali Land pursuant to the terms of the LLC Agreement. Although the executive officers of Kaanapali Land are empowered to manage its day-to-day business affairs, under the LLC Agreement, most significant actions of Kaanapali Land outside the ordinary course of business must first be authorized by Pacific Trail , which is responsible and has full power and authority to do all things deemed necessary and desirable by it to conduct the business of Kaanapali Land. Pacific Trail may not be removed as manager except in those circumstances described in Item 10 below. under certain narrow circumstances that are not expected to occur. As of April 15, 2003, the executive officers and certain other officers of the Company were as follows: Position Held with Name the Company ---------- ------------ Gary Nickele President and Chief Executive Officer Peggy H. Sugimoto Senior Vice President Tamara G. Edwards Senior Vice President Stephen A. Lovelette Executive Vice President Gailen J. Hull Senior Vice President and Chief Financial Officer Certain of these officers are also officers and/or directors of JMB Realty Corporation ("JMB") and numerous affiliated companies of JMB (hereinafter collectively referred to as "JMB affiliates"). JMB affiliates outside of the Company have not materially engaged in the agriculture business and have primarily purchased, or made mortgage loans securing, existing commercial, retail, office, industrial and multi-family residential rental buildings or have owned or operated hotels on various other hospitality businesses. However, certain partnerships sponsored by JMB and other affiliates of JMB are engaged in land development activities including planned communities, none of which are in Hawaii. There is no family relationship among any of the foregoing officers. The LLC Agreement also provides for the appointment of a "Class A Representative" to monitor the activities of Kaanapali Land on behalf of its Class A Shareholders. The Class A Representative who must be independent is entitled to receive certain information from Kaanapali Land and must approve certain actions that Kaanapali Land may take outside the course of business primarily related to debt that might be obtained from affiliated parties. The current Class A Representative is American Express Tax and Business Services, Inc. There are no arrangements or understandings between or among any of said officers and any other person pursuant to which any officer was selected as such. The business experience during the past five years of such officers of the Company includes the following: Gary Nickele (age 50) has been Manager of AHI since August, 2000 and President of AHI and certain of its subsidiaries since February 2001. He has been the President of Kaanapali Land since May 2002. Mr. Nickele is also the President and Director of Arvida/JMB Managers, Inc., the sole general partner of Arvida/JMB Partners, L.P. ("Arvida Partners"). Arvida Partners conducts land development activities primarily in Florida. Mr. Nickele has been associated with JMB and Arvida Partners since February, 1984 and September, 1987, respectively. He holds a J.D. degree from the University of Michigan Law School and is a member of the Bar of the State of Illinois. Mr. Nickele's experience relative to JMB, the Company and Arvida Partners during the past five years has included overall responsibility for all legal matters, oversight of the relationship of Arvida Partners and its affiliates, including matters relating to property development and sales and general personnel and administrative functions. During the past five years, Mr. Nickele has also been an Executive Vice President of JMB. Peggy H. Sugimoto (age 52) has been Senior Vice President and Chief Financial Officer of AHI since 1994 and had been Manager from August 1996 to February 1999. Ms. Sugimoto has been a Senior Vice President of Kaanapali Land since May, 2002. Ms. Sugimoto has been associated with the Company since 1976. She is a Certified Public Accountant. During the past five years, Ms. Sugimoto has been responsible for the accounting and treasury functions of AHI and its subsidiaries in Hawaii. Tamara G. Edwards (age 48) has been Senior Vice President of AHI since August 1996. Ms. Edwards has been President of several of the subsidiaries since March 1997. Ms. Edwards served as Senior Counsel for the Company from 1995 through 1997. She was also formerly a Manager of AHI and Director of certain of its subsidiaries. She is a member of the Bar of California, Florida and Hawaii. During the past five years, Ms. Edwards has been responsible for the land sale activities of AHI and its subsidiaries and the management of non-agricultural and non-development activities concerning the Company's land assets. Stephen Lovelette (age 47) has been an Executive Vice President of AHI since 2000 and Kaanapali Land since May 2002. Mr. Lovelette is in charge of implementing the Kaanapali 2020 development plan. Mr. Lovelette has been associated with JMB and its affiliates for over 15 years. Prior to joining an affiliate of JMB, Mr. Lovelette worked for Arvida Company under its previous ownership and continues to oversee its development efforts. Mr. Lovelette holds a bachelor's degree from The College of the Holly Cross and an MBA from Seton Hall University. In addition, Mr. Lovelette has extensive experience in corporate finance and has been responsible for obtaining substantial financial commitments from institutional lenders relating to the assets of JMB and Arvida Partners. During the past five years, Mr. Lovelette has also been a Managing Director of JMB. Gailen J. Hull (age 54) is Senior Vice President and, since August 2002, Chief Financial Officer of Kaanapali Land. Mr. Hull has been associated with JMB since March, 1982. He holds a Masters degree in Business Administration from Northern Illinois University and is a Certified Public Accountant. Mr. Hull has substantial experience in the management of the accounting and financial reporting functions of both public and private entities, primarily including those of JMB, Arvida Partners, the Company and their respective affiliates. During the past five years, Mr. Hull has also been a Senior Vice President of JMB. It is currently anticipated that Gary Nickele will devote 25 to 50 percent of his time to the operations of the Company. The percentage is largely dependant upon potential land sale transactions, the entitlement processes relating to various land parcels and other matters (including attention devoted to litigation, overhead, staffing and operations). ITEM 6. EXECUTIVE COMPENSATION Certain of the officers of the Company listed in Item 5 above are officers of JMB and are compensated by JMB or an affiliate thereof (other than the Company and its subsidiaries). The Company will reimburse JMB, Pacific Trail and their affiliates for any expenses incurred while providing services to the Company. SUMMARY COMPENSATION TABLE Annual Compensation (1)(3) --------------------------- Other Annual Compensa- Principal Salary Bonus tion Name (2) Position (4) Year ($) ($) ($) - --------------- ------------ ----- ------- ------ --------- Gary Nickele President 2002 180,000 100,000 N/A and Chief 2001 172,300 N/A N/A Executive Officer Peggy Sugimoto Senior Vice 2002 165,000 55,000 N/A President 2001 160,000 50,000 N/A 2000 155,000 50,000 N/A Tamara G. Edwards Senior Vice 2002 250,000 100,000 N/A President 2001 250,000 41,500 N/A 2000 250,000 115,000 N/A Stephen A. Lovelette Executive Vice President 2002 175,000 50,000 N/A Gailen J. Hull Senior Vice 2002 175,000 N/A N/A President and Chief Financial Officer - ---------- (1) The Company does not have a compensation committee. Executive officer compensation was determined through deliberations with Pacific Trail representatives. (2) Includes CEO and 4 most highly compensated executives whose salary and bonus exceed $100,000. (3) Salary and bonus amounts for Messrs. Nickele, Lovelette and Hull represent the portion of total compensation allocated and charged to the Company. (4) Positions listed are those for Kaanapali Land, and prior to its formation, with AHI. ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS An affiliated insurance agency , JMB Insurance Agency, Inc., earns insurance brokerage commissions in connection with providing the placement of insurance coverage for certain of the properties and operations of the Company. Such commissions are comparable to those that would be paid to such affiliate insurance agency in similar dealings with unaffiliated third parties, and are generally paid by the insurance carriers that the agency represents out of the premiums paid by the Company for such coverage. The total of such commissions for the years ended December 31, 2002, 2001 and 2000 (including amounts related to discontinued operations in 2001 and 2000) was approximately $75 thousand, $1.1 million and $1.3 million, respectively, not all of which was paid as of December 31, 2002. The Company pays a non-accountable reimbursement of approximately $30 thousand per month to JMB Realty Corporation an affiliate in respect of general overhead expense, all of which was paid as of December 31, 2002. The Company reimburses their affiliates for direct expenses incurred on its behalf, including salaries and salary-related expenses incurred in connection with the management of the Company's operations. Generally, the entity that employs the person providing the services receives the reimbursement. Substantially all of such reimbursable amounts were incurred by JMB Realty Corporation or its affiliate, Management Services, LLC, during 2002. The total costs for the years ended 2002, 2001 and 2000 was approximately $2.0 million, $1.1 million and $2.8 million, respectively, of which approximately $.5 million was unpaid as of December 31, 2002. Employees of certain of the Company's unconsolidated affiliates are entitled to participate in the Company's defined contribution pension plan. Pursuant to an agreement through December 31, 2001 Northbrook was entitled to receive a reimbursement from such affiliates in an amount equal to the service cost related to these employees. The amount of the reimbursement for 2002, 2001 and 2000 was $0, $1.2 million and $1.5 million, respectively, all of which was paid as of December 31, 2002. The Company had other amounts due from affiliates of $19 thousand and $.3 million at December 31, 2002 and 2001, respectively. Such amounts relate primarily to amounts due from former affiliates and do not relate to ongoing transactions. ITEM 8. LEGAL PROCEEDINGS Material legal proceedings of the Company are described below. Unless otherwise noted, the parties adverse to the Company in the legal proceedings described below have not made a claim for damages in a liquidated amount and/or the Company believes that it would be speculative to attempt to determine the Company's exposure relative thereto, and as a consequence believes that an estimate of the range of potential loss cannot be made. In proceedings filed prior to the Petition Date where a Debtor is a defendant, such proceedings were stayed as against such Debtor by the filing of the Reorganization Case. Those proceedings may now continue since the Plan Effective Date has occurred so long as the plaintiffs therein filed timely claims under the Plan. However, any judgments rendered therein would be subject to the distribution provisions of the Plan, which would in most cases result in the entitlement of such claims to proceeds that are substantially less than the face amount of such judgments. Any claims that were not filed on a timely basis under the Plan have been discharged by the Bankruptcy Court and thus the underlying legal proceedings should not result in any liability to the Debtors. Proceedings against subsidiaries or affiliates of Kaanapali Land that are not Debtors were not stayed by the Plan and may proceed. APIC, which is not a Debtor and is owned approximately 16.7% by the Company, is the primary borrower under a $66 million loan made by the ERS in 1991. The loan, which has a balance as of December 31, 2002 of approximately $81 million, is secured by the RKGC (and certain adjacent lands). All of APIC's assets are subject to the loan. The loan matured in June 2001 and has not been extended, despite efforts of the borrowers to obtain such an extension as described below. Due to insufficient cash flow generated by the RKGC and because of disagreements with the lender over, among other things, lender's failure (i) to consent to a grant of required easements in order for the Company to develop and market its adjoining properties and (ii) to release adjacent lands that are not related to the golf course operations from the mortgage, as required under the loan documents, APIC and the other borrowers under the loan did not pay the required interest payments due in 2000 on the loan secured by these golf courses. ERS then issued a default notice and instituted a foreclosure action in August 2000 (Employees' Retirement System of the State of Hawaii v. Amfac/JMB Hawaii, L.L.C., et. al., Civil No. 00-1-2597-08, First Circuit Court, State of Hawaii). Pursuant to an agreement between the lender and the borrowers, the borrowers paid approximately $3.8 million in September 2000 to the ERS for a portion of the past due interest amounts and the ERS agreed to temporarily suspend its action to realize upon its security while the parties attempted to negotiate a definitive agreement to extend the loan beyond its June 30, 2001 maturity date. Efforts of the borrowers to negotiate such an agreement broke down in December 2001, only after Northbrook (an affiliate of APIC that had no obligations under the loan) had funded certain minimum interest payments (together with the ERS' legal fees and other related costs). In January 2002, ERS recommenced its foreclosure action, which the borrowers are contesting. The borrowers have also brought counterclaims against ERS relative to the lender's defaults described above, which defaults have caused APIC and the Company substantial damages relating to its efforts to sell either the unrelated parcels that the ERS refused to release from the mortgage or other land parcels that required easements and other rights to which the ERS was required to consent. The borrowers' counterclaims against the ERS in such litigation assert, among other things, that because of the refusal of the ERS to perform in accordance with the loan documents and grant the required consents and releases, dating back to the inception of the loan, the Company suffered damages over time relating to various development projects and sale transactions that APIC and/or the Company consummated or attempted to consummate since 1991. Also alleged is that these refusals and the interference of the ERS with APIC's and the Company's legitimate development efforts was intended by ERS to give the ERS leverage over APIC and the Company's development and land sale activities to the benefit of ERS, not to protect the ERS' bargained for security for its loan on the RKGC. Some projects allegedly were substantially delayed by the ERS' defaults and significant land sales were allegedly either substantially delayed or failed altogether. Income from sales allegedly was also adversely affected in addition to the expenses of development caused by the ERS' delays and refusals. In addition, APIC and the Company allegedly suffered significant damages relative to the costs of attorneys and other professionals that the Company was forced to pay (including those of ERS' attorneys and professionals) in its failed attempt to obtain the consents and releases. Failure to obtain the necessary easements promised by ERS allegedly could allegedly subject APIC and/or the Company to damages claims from landowners on parcels previously sold by the Company and, particu- larly, could allegedly significantly negatively impact the value and marketability of its remaining land parcels in Kaanapali Golf Estates, which requires such easements for access and to ensure that the parcel enjoys necessary water and drainage rights. As a consequence of the ERS' alleged actions, the borrowers' counterclaims allege, among other things, that the ERS breached its duties under the contract, breached the ERS' implied covenant of good faith and fair dealing, fraudulently induced the borrowers to enter into the loan, acted in a fraudulent manner respecting its fiduciary relationship with the borrowers and/or acted in bad faith. The counterclaim seeks, among other things, damages, attorneys' fees and costs, and an order directing the ERS to provide the releases and consents required by the loan documents. There can be no assurance that defendants will prevail in the counterclaim or in the defense of ERS's attempt to realize on its security. On March 19, 2002, the court entered an order appointing a receiver for the property that is security for the loan, as well as for the golf course operations related thereto. The receiver has taken over the golf course operations from APIC and hired most of APIC's former employees. APIC's former employees are seeking from APIC payment of severance and certain benefits, among other things. The borrowers have been engaged in settlement negotiations with ERS since 2000, which negotiations have resulted in the execution of the ERS Settlement Agreement in March 2003. Although the borrowers believe that the transactions contemplated by the ERS Settlement Agreement will be consummated during the third quarter of 2003, the ERS Settlement Agreement is subject to contingencies including approval by the state court which has authority over the underlying litigation. Such approval is anticipated in the second quarter of 2003. As a consequence of such contingencies, there can be no assurance as to the consummation of such settlement agreement. Consummation of the ERS Settlement Agreement and the transactions contemplated therein would provide the Company with easements and other rights that it considers adequate for the development or sale of Parcel 22/23, but would also result in the Company having no further interest in the RKGC. In October 2002, in anticipation of the finalization of the ERS Settlement Agreement, Kaanapali Land, AHI and certain related entities entered into a Funding Agreement (the "Funding Agreement") with APIC, AFI and AFI's parent, Amfac Finance Limited Partnership ("AFLP") that specifies how amounts paid by Kaanapali Land as "Funding Entity" under such settlement agreement will be treated. Kaanapali Land was willing to enter into the Funding Agreement because, among other things, the ERS had threatened to file a significant claim (in an amount that has not been specified by ERS) in the Reorganization Case against the borrowers who are Debtors, which claim, if allowed in whole or significant part would likely cause a material adverse impact on the Company and its prospects for successfully implementing the Plan. Although the Debtors believe that any such claim would be without merit, either in whole or substantial part there could be no assurance that it would not ultimately be allowed in a significant amount. The existence of the Funding Agreement made it possible to enter into the ERS Settlement Agreement, which in turn has significantly reduced, if not eliminated, the risk that any such claim will be filed by ERS under the Plan. Generally, 1/6 of the funded amounts shall be treated as capital contributions to AHI and Pioneer Mill and then to APIC, on account of AHI's stock ownership in APIC. The remaining 5/6 of such amounts shall be treated as a loan by Kaanapali Land to AFLP, which will then be treated as having been contributed by AFLP, through AFI, to APIC on account of AFI's stock ownership in APIC. The ability of AFLP to reimburse Kaanapali Land for such loan amounts depends on the recovery by AFLP of a judgment it has obtained in certain litigation that is unrelated to the Company. There can be no assurance that AFLP will ultimately realize on such judgment or that it will obtain proceeds relative thereto or otherwise in an amount sufficient to satisfy the loan from Kaanapali Land. Concurrently with the execution of the ERS Settlement Agreement, APIC entered into a settlement agreement with the union representing the bargaining unit employees employed by APIC at the time the receivership commenced. Such settlement shall, upon consummation of the ERS Settlement Agreement, result in certain amounts being paid or distributed to such employees in return for releases by each of them and the union in favor of APIC and the Company. APIC intends to handle its former non-bargaining unit employees employed at the RKGC at such time in substantially the same manner. However, there can be no assurance that such settlement will be consummated, nor that all eligible former employees will take advantage of it. The total amount estimated to be paid to APIC's former employees as a consequence of such settlement is approximately $1.24 million. In connection with the Reorganization Case, the ERS, the Debtors and APIC, during the third quarter of 2002, entered into a Stipulation approved by the Bankruptcy Court, which as amended from time to time and approved by the Bankruptcy Court since originally entered, among other things, currently (i) provides for an extension of the bar date by which the ERS must file any claims it may have against any of the Debtors until five (5) business days after written notice from the Debtors and (ii) reserves the rights of the ERS and the Debtors with respect to objections that the ERS may have to the treatment of its claims under the Plan and further provides that such objections, if asserted, will be resolved by the Bankruptcy Court following confirmation of the Plan in the manner as set forth in the Stipulation. The consummation of the ERS Settlement Agreement would result in the release and waiver of any claims that the ERS might have against the Debtors in the Reorganization Case. On September 20, 1996, Oahu Sugar Company, LLC, successor by merger to Oahu Sugar Company, Limited ("Oahu Sugar") and a subsidiary of Kaanapali Land, filed a lawsuit, Oahu Sugar v. Walter Arakaki and Steve Swift, Case No. 96-3880-09, in the Circuit Court of the First Circuit, State of Hawaii. In the lawsuit, Oahu Sugar, which is a Non-Debtor AHI Subsidiary, alleged that it entered into an agreement to sell to defendants certain sugar cane processing equipment at Oahu Sugar's sugar cane mill in Waipahu. Oahu Sugar alleged that defendants failed to timely dismantle and remove the equipment, as required by the agreement, and that defendants were obligated to pay Oahu Sugar rent for the area occupied by the equipment beyond the time provided for by the parties. Oahu Sugar further alleged that it provided notice to defendants that Oahu Sugar was entitled to treat the equipment as abandoned property and to sell the equipment, because the equipment had not been removed from the property in a timely fashion, as required by the parties' agreement. In its complaint, Oahu Sugar sought, among other things, declaratory relief that it was entitled to treat the equipment as abandoned, damages for breach of contract, and rent under an unjust enrichment theory. Defendants filed an answer, as amended, denying the substantive allegations of Oahu Sugar's complaint and asserting various affirmative defenses. In addition, the defendants filed a seven-count counterclaim against Oahu Sugar. In the counterclaim, defendants alleged, among other things, that Oahu Sugar failed to make the equipment available for removal on a timely basis, and that Oahu Sugar otherwise improperly interfered with defendants' plans for the removal and subsequent sale of the equipment. In the counterclaim, defendants sought, among other things, general, special and punitive damages, attorneys' fees, costs, and such other relief as the Court may have deemed appropriate. Oahu Sugar's declaratory relief claim was settled in advance of trial. Oahu Sugar obtained dismissals and directed verdicts on six of defendants' claims. The remaining portions of the complaint and counterclaim proceeded to a jury trial and verdict. On December 2, 1999, the jury denied Oahu Sugar relief on its remaining claims and awarded the defendants approximately $2.6 million in damages on their counterclaim. On March 2, 2000, the trial court entered a judgment against Oahu Sugar for the $2.6 million in damages awarded by the jury. In addition, the trial court awarded counterclaimants $751 thousand in attorneys' fees, $28 thousand in costs and $866 thousand in prejudgment interest. Oahu Sugar's post trial motions for judgment as a matter of law and for a new trial were denied. Oahu Sugar filed a notice of appeal. The defendants began efforts to collect the amounts awarded to them. Defendants caused garnishee summons to be issued to various affiliated and unaffiliated entities. The defendants scheduled a debtor's examination for August 23, 2000 which was not concluded. The Hawaii Supreme Court scheduled the case for an appellate conference and mediation that was unsuccessful. Then, on January 3, 2001, the Hawaii Supreme Court entered an order dismissing the appeal. The Supreme Court held that it lacked jurisdiction over the appeal because the judgment entered on March 2, 2000 was legally defective in that it did not identify the claim for which judgment was entered or dismiss all of the other claims and counterclaims of the parties. In light of the order of the Hawaii Supreme Court, the parties filed legal briefs before the trial court to have the court determine, among other things, whether a corrected judgment consistent with the jury verdict may be entered as of March 2, 2000 or a new judgment order is required. After hearing the arguments of the parties, on March 19, 2001, the trial court ruled that it would not enter a corrected judgment as of March 2, 2000 and that a new judgment order will be required. On April 12, 2001, the court entered the new judgment order on the counterclaims providing for the payment of approximately $2.6 million in damages, $730 thousand in attorneys' fees, $28 thousand in costs, $867 thousand in prejudgment interest, and additional prejudgment interest from January 20, 2000 through April 12, 2001. From and after entry of the order, post-judgment interest will accrue on the unpaid balance at the statutory rate of ten percent per annum until paid in full. Oahu Sugar is pursuing an appeal and the opposing side has filed a cross appeal seeking further relief on any potential retrial of the matter. The case is fully briefed and awaits a decision by the Hawaii Supreme Court. Oahu Sugar continues to believe that it is entitled to affirmative relief on its complaint and that it has meritorious defenses to the counterclaim that it has pursued on appeal. The Company, however, can provide no assurances that it will be successful in obtaining affirmative relief or overturning the verdict against Oahu Sugar. This verdict, if upheld, could have a material adverse effect on the Oahu Sugar's financial condition. On or about December 15, 2000, Oahu Sugar and Oahu MS Development Corp. ("Oahu MS", f/k/a Amfac Property Development Corp.), subsidiaries of Kaanapali Land, among others, were named in a lawsuit entitled Walter Arakaki and Steve Swift v. Oahu Sugar Company, Limited et al., Civil No. 00-1-3817-12, and filed in the Circuit Court of the First Circuit of Hawaii. In the complaint, as amended, plaintiffs seek a declaration that certain conveyances of real estate made by Oahu Sugar or Oahu MS, since December 1996, were allegedly fraudulent transfers made in violation of the common law, the Hawaii fraudulent transfer act, and rights which they claim arose in connection with the claims they filed in Oahu Sugar v. Walter Arakaki and Steve Swift, Case No. 96-3880-09, discussed above (hereinafter, "underlying matter"). Plaintiffs seek, among other things, injunctive and declaratory relief, compensatory damages, punitive damages, orders of attachment against sales proceeds, voidance of certain transfers, foreclosure and other remedies in connection with various transfers of real estate made by Oahu Sugar to Oahu MS the Young Men's Christian Association of Honolulu ("YMCA"), and the Filipino Community Center, Inc. ("FCC"), among others, all over the years 1996-2000. Although the amount of damages sought in this case are unspecified, the case arises in connection with the plaintiffs' efforts to realize on their judgment in the earlier action against Oahu Sugar described above. The YMCA and FCC have also been named defendants in this action and have filed cross-claims for relief against Oahu Sugar and Oahu MS for alleged breach of warranty of title, indemnity and contribution in connection with their respective transactions, and seeking, among other things, damages, attorneys' fees, costs, and prejudgment interest. Oahu Sugar and Oahu MS have filed answers to the complaint, as amended, and the cross-claims. On May 3, 2001, plaintiffs filed an amended complaint dropping the remedy of foreclosure in connection with certain property transferred to the YMCA and adding various allegations including, without limitation, allegations regarding the final judgment entered in the underlying matter. The case is proceeding and is set for mediation in July 2003 and for trial in April 2004. Oahu Sugar and Oahu MS believe they have meritorious defenses and intend to pursue their defenses vigorously. However, there can be no assurances that this case, when once adjudicated, will not have a material adverse effect on the financial condition of Oahu Sugar or Oahu MS. The Company believes that Oahu Sugar has meritorious defenses to the above referenced pending lawsuits that continue to be pending and Oahu Sugar will defend itself vigorously. However, as Oahu Sugar is substantially without assets to satisfy any material existing or future judgment, there can be no assurances that these cases (or any of them), if adjudicated in a manner adverse to Oahu Sugar, will not have a material adverse effect on the financial condition of Oahu Sugar. On October 23, 2002, Oahu MS was named in a civil action entitled City Bank v. Amfac Property Development Corp., et. al. pending in the Circuit Court of the First Circuit, State of Hawaii, Civil No. 02-2494-10. In this case, plaintiff seeks injunctive relief and declaratory relief to cease actions preventing City Bank and its consultants from gaining access to the mortgaged property for environmental testing. In addition, the complaint seeks unspecified damages as may be shown at trial, costs, interest and reasonable attorneys' fees, and such other further relief as the Court award. Although plaintiff filed a Motion for Preliminary Injunction, no hearing has been set on the motion. On January 2, 2003, Oahu MS was named in a civil action entitled City Bank v. Amfac Property Development Corp., et. al. pending in the Circuit Court of the First Circuit, State of Hawaii, Civil No. 03-1-0005-01. In this case, plaintiff seeks foreclosure of property owned by Oahu and encumbered by a mortgage in favor of Plaintiff. City Bank made a $10.0 million loan to APDC under a loan agreement dated December 18, 1996. City Bank claims that as a result of alleged defaults, the entire amount of the presently unpaid obligations under the loan documents is due and remains due and payable. It alleges that the amount due as of December 2, 2002 is $2,872,862.66 plus a per diem charge of $1,405.47 accruing on the unpaid principal, until payment is made and/or interest changes, plus advances and expenses incurred in connection with the action. In its complaint, City Bank seeks all amounts allegedly due and owing to City Bank, together with legal interest thereafter to accrue thereon and all advances, costs and attorneys' fees; a foreclosure decree and sale; the appointment of a receiver to conduct an environmental audit on a specified portion of the secured property and to collect rents being paid on a portion of the mortgaged properties; the entry of an order of deficiency against APDC to the extent such exists after sale with execution to follow thereon; and such other relief as the court may deem proper. Together with the Complaint, City Bank filed a Motion for Appointment of Receiver alleging that it is entitled to have a receiver appointed for an environmental audit on the mortgaged property and collection of all net rental income assigned to City Bank. This motion was granted. On or about February 23, 2001 Kekaha Sugar Co., Ltd., a subsidiary of Kaanapali Land, received a letter from the Hawaii Department of Health ("HDOH") assigning the Kekaha Sugar Co., Ltd. site a high priority status based on HDOH's review of available environmental data. In the letter, HDOH identified five major areas of potential environmental concern including the former wood treatment plant, the herbicide mixing plant, the seed dipping plant, the settling pond, and the Kekaha Sugar Mill. While setting forth specific concerns, the HDOH reserved the right to designate still further areas of potential concern which might require further investigation and possible remediation. HDOH further reserved the right to modify its prioritization of the site should conditions warrant. The assignment of the high priority status will likely result in a high degree of oversight by the HDOH as the issues raised are studied and addressed. Kekaha Sugar Co., Ltd. has responded to the letter. The United States Environmental Protection Agency has performed a visual inspection of the property and indicated there will be some testing performed. Kekaha Sugar Co., Ltd. is substantially without assets and further pursuit of this matter by HDOH could have a materially adverse effect on the financial condition of Kekaha Sugar Co., Ltd. On or about February 23, 2001, Lihue Plantation received a similar letter from the HDOH assigning the LPCo site a high priority status based on HDOH's review of available environmental data. In the letter, HDOH identified four major areas of potential environmental concerning including the Lihue Plantation herbicide mixing plant, the seed dipping plant, the settling pond and the Lihue Sugar Mill. While setting forth specific concerns, the HDOH reserved the right to designate still further areas of potential concern which might require further investigation and possible remediation. HDOH further reserved the right to modify its prioritization of the site should conditions warrant. As noted above, the high priority assignment will likely result in a high degree of oversight by the HDOH as the issues raised are studied and addressed. Oahu MS has discovered chlorinated solvents in the groundwater at the former Oahu Sugar Waipahu Sugar Mill site. The contamination does not appear in high concentrations. Oahu MS' recommendation for remediation using hydrogen-releasing compounds has been rejected by the HDOH. Oahu MS may have to do further work at the site. At this point, Oahu MS is unable to identify with certainty the treatment options, if any, that the HDOH may require or approve for the site, or the costs of same. Pioneer Mill is engaged in an ongoing cleanup arising out of the discovery of petroleum contamination found at the Pioneer Mill site. The Pioneer Mill site has been assigned a high priority and the HDOH has shown an interest in the environmental conditions relating to or arising out of the former operations of Pioneer Mill. These issues will have to be addressed as they are raised. Currently, Pioneer Mill is awaiting a report on the results of environmental testing conducted on the site by the United States Environmental Protection Agency. As a result of an administrative order issued to Oahu Sugar by the Hawaii Department of Health, Order No. CH 98-001, dated January 27, 1998, Oahu Sugar is currently engaged in environmental site assessment of lands it leased from the U.S. Navy and located on the Waipio Peninsula. Sampling is underway and the investigation is otherwise still in its preliminary stages. Oahu Sugar has submitted a Remedial Investigation Report to the HDOH. The HDOH has provided comments which indicate additional testing may be required. In addition, the IRS filed a claim in the bankruptcy proceedings in the aggregate amount of approximately $20,600,000 for taxes, interest and penalties related to the years 1998-2000. The Company has contacted the IRS to request that it withdraw its claim due to the fact that the Plan leaves the IRS unimpaired relative to any taxes that may be due. Although the Company is optimistic that the IRS will withdraw such claim, it has not yet done so and there can be no assurance that it will. In any event, the IRS audit of the period covered by the claim is in its preliminary stages and no deficiencies in taxes have been proposed by the auditors. The Company intends to dispute vigorously any IRS claim for additional taxes, whether asserted by means of the claim filed in the bankruptcy proceeding, arising in the pending audit, or in future audits. However, there can be no assurance that the Company will be successful in such defense and, although the Company has reserved for potential tax liabilities on its financial statement,s to the extent that the Company is unsuccessful in defending against any such claims, either in the bankruptcy court or in connection with the IRS audits, the amount for which the Company could be liable could have a material adverse effect on the Company, given its relatively modest cash position. EC Managers, Inc., a subsidiary of Kaanapali Land, and general partner of EC Partners, L.P., formerly known as Arvida/JMB Partners, L.P.-II (the "Partnership"), has been named a defendant in a lawsuit filed on January 11, 1996 in the Circuit Court in and for the Eighteenth Judicial Circuit, Seminole County, Florida entitled Land Investment I, Ltd., Heathrow Land & Development Corporation, Heathrow Shopping Center Associates and Paulucci Investments v. Arvida/JMB Managers-II, Inc., Arvida/JMB Partners, L.P.-II, Arvida Company and JMB Realty Corporation, Case No. 96-62-CA-15E. The complaint, as amended, includes counts for breach of the management agreement, fraud in the inducement and conspiracy to commit fraud in the inducement, breach of the Heathrow partnership agreement and constructive trust in connection with the purchase and management of the Heathrow development. Plaintiffs seek, among other things, unspecified compensatory damages, punitive damages, prejudgment interest, attorneys' fees, costs, and such other relief as the Court deems appropriate. Substantial fact discovery has been conducted to date and the defendants expect further substantial discovery, both of fact and expert witnesses, to take place. On June 24, 1999, the Court granted partial summary judgment in favor of the plaintiffs against Arvida Company, finding that Arvida Company owed plaintiffs a fiduciary duty as a broker and advisor under the management agreement. The ruling did not reach the issue of the statute of limitations defense nor whether any such duties were owed in connection with the Partnership's acquisition of an interest in the Heathrow development through the Heathrow partnership. No discovery cut-off date or trial date has been set, although the court has indicated a desire to try this case in November, 2003. Kaanapali Land, as successor by merger, and D/C Distribution, a subsidiary of Kaanapali Land, have been named as defendants in personal injury actions allegedly based on exposure to asbestos. There are approximately 110 cases against such subsidiary that are pending on the mainland and are alleged based on such subsidiary's prior business operations. Each company believes that it has meritorious defenses against these actions, but can give no assurances as to the ultimate outcome of these cases. In the case of the subsidiary, there can be no certainty that such subsidiary will be able to satisfy all of its liabilities for these cases. As the subsidiary is without assets to satisfy any material existing or future judgments, there can be no assurances that these cases (or any of them), if adjudicated in a manner adverse to the subsidiary, will not have a material adverse effect on the financial condition of such subsidiary. Kaanapali Land does not believe that it has liability, directly or indirectly, for such subsidiary's obligations. Other than as described above and the Reorganization Case as described above, the Company is not involved in any material pending legal proceedings, other than ordinary routine litigation incidental to its business. The Company and/or certain of its affiliates have been named as defendants in several pending lawsuits. While it is impossible to predict the outcome of such routine litigation that is now pending (or threatened) and for which the potential liability is not covered by insurance, the Company is of the opinion that the ultimate liability from any of this litigation will not materially adversely affect the Company's consolidated results of operations or its financial condition. ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of June 30, 2003 there were approximately 360 holders of record of the Company's Class A Shares and approximately 16 holders of record of the Company's Class B Shares. The Company has no outstanding options, warrants to purchase or securities convertible into, common equity of the Company, has no Class A Shares that can be sold pursuant to Rule 144, and, although all 1,613,513 outstanding Class B Shares held by Pacific Trail and related parties are saleable in accordance with the provisions of Rule 144, the Company has no securities that are being publicly offered or that it is proposing to publicly offer. There is no public market for the Company's membership interests. The Company has elected to be treated as a corporation for federal and state income tax purposes. As a consequence, under current law, holders of membership interests in the Company will not receive annual K-1 reports or direct allocations of profits or losses relating to the financial results of the Company as they would for the typical limited liability company that elects to be treated as a partnership for tax purposes. In addition, any distributions that may be made by the Company will be treated as dividends. However, the Company does not anticipate making any distributions for the foreseeable future. ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES As of December 31, 2002, a total of 122,005 Class A Shares and 1,613,513 Class B Shares had been issued and distributed pursuant to the Plan in reliance on the exemption set forth in Section 1145 of the U.S. Bankruptcy Code. ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED GENERAL. The LLC Agreement provides for the issuance of an unlimited number of membership interests in Kaanapali Land which may be denominated as shares. Kaanapali Land has currently denominated two classes of common equity membership interests, Class A Shares and Class B Shares. As of July 16, April 23, 2003, there were in the aggregate approximately 159,756 139,776 Class A Shares either outstanding or which the Company's distribution agent has been authorized to distribute, , all of which were for distribution issued to various creditors of the Debtors under the Plan , (it is expected that approximately 19,000 additional Class A Shares of those that remain reserved for issuance under the Plan will be distributed) and there were 1,631,513 Class B Shares outstanding. It is expected that approximately 19,000 additional Class A Shares of those that remain reserved for issuance under the Plan will be distributed. So long as there is a Class A Representative (as described below), any common shares issued to or acquired by Pacific Trail or its affiliates are issued as Class B Shares. Kaanapali Land may issue additional membership interests in one or more classes, or one or more series of any such class, with such designations, preferences and relative, participating, optional or other special rights, powers and duties, including rights, powers and duties which may be senior to the Class A Shares and Class B Shares, all as shall be determined by Pacific Trail, including without limitation, with respect to (i) the rights of each class or series of shares to participate in distributions and (ii) the rights of each class or series of shares upon dissolution and liquidation of Kaanapali Land. All Class A Shares and Class B Shares are fully paid and nonassessable. Class A Shares and Class B Shares are identical in all respects (including with respect to voting and such distributions, if any, as may be declared by Pacific Trail as the manager, including liquidating distributions) except for certain entity governance provisions in the Kaanapali Land Company Agreement for the benefit of the Class A Shares, as described below. After the termination of the position of the Class A Representative, Class A Shares and Class B Shares shall become one class. No shareholder is entitled to any preemptive, preferential or other similar right with respect to additional capital contributions or loans to Kaanapali Land or issuance of any membership interests in Kaanapali Land, except as otherwise specified in the Kaanapali Land Company Agreement. No shareholder is entitled to resign as a member or withdraw its capital from Kaanapali Land. Each Class A Share is entitled to one vote on all matters on which holders of membership interests are entitled to vote generally. To the extent any consent, decision, approval or other right is vested solely in holders of Class A Shares, such consent, decision, approval or other right will be decided upon by holders of a majority of the Class A Shares issued and outstanding. MANAGEMENT OF KAANAPALI LAND. Pacific Trail is the manager of Kaanapali Land and has the exclusive power and authority under the Kaanapali Land Company Agreement to manage and conduct the business of Kaanapali Land, subject to those rights and covenants relating to the Class A Representative described below. Pacific Trail is not entitled to receive any compensation for serving as manager of Kaanapali Land, but Kaanapali Land bears all of its operating and administrative expenses, including reimbursements to the manager for such expenses incurred by the manager and its affiliates in performing its services (including a share of salary and employment related expenses of the individuals providing these services). CLASS A REPRESENTATIVE. Under the terms of the Kaanapali Land Company Agreement, an institution will be appointed as the Class A Representative. The initial Class A Representative is American Express Tax and Business Services, Inc. Kaanapali Land is required to deliver to the Class A Representative copies of all reports filed by Kaanapali Land with the Securities and Exchange Commission (including, without limitation, its annual and quarterly financial reports). The Class A Representative is entitled to reasonable access to the books and records of Kaanapali Land and to an annual meeting with manager of Kaanapali Land and its executive team to review the operations of Kaanapali Land. The position of the Class A Representative will terminate on the earlier of the fifth anniversary of the effective date of the Plan (November 13, 2007) or at such time as the number of outstanding Class A Shares represents less than 5% of the total number of shares of Kaanapali Land outstanding as of the effective date of the Plan. All reasonable fees and expenses of the Class A Representative will be paid by Kaanapali Land. In the event of the resignation of the Class A Representative, Pacific Trail is required to appoint a new Class A Representative which must be reasonably acceptable to the resigning Class A Representative. In the event of the removal of the Class A Representative, which may occur if the Class A Representative has dissolved or is adjudged bankrupt or insolvent, a receiver takes charge of the Class A Representative, or the Class A Representative willfully refuses to act in such capacity, PTH is required to promptly appoint a new Class A Representative, which appointment shall be effective subject to the reasonable objection of a majority of the Class A shareholders within 10 business days of notice of such appointment. COVENANTS RELATING TO CLASS A REPRESENTATIVE. Without the consent of the Class A Representative, Kaanapali Land may not incur any indebtedness owing to the Class B shareholders or their affiliates if, immediately after giving effect to the incurrence of such indebtedness and the application of the proceeds thereof, there would be in excess of $25 million in aggregate principal indebtedness from the Class B shareholders or their affiliates, if and so long as there is a Class A Representative. Any such indebtedness will bear interest at the "prime rate" as announced from time to time by Bank One N.A. and may be secured by property of Kaanapali Land and its subsidiaries. Kaanapali Land is required to deliver a certificate to the Class A Representative, in connection with the delivery of the annual report, to the effect that all transactions entered into between Kaanapali Land and any of the Class B shareholders or their affiliates during that fiscal year are described in the annual report in all material respects and, except as otherwise provided in the Kaanapali Land Company Agreement or as provided in any contract or agreement existing prior to the date of the Kaanapali Land Company Agreement which has been assumed by Kaanapali Land pursuant to the Plan, are on terms no less favorable, at the time of entering into the transaction, than those which are available from unaffiliated third parties for similar transactions in the same geographical area. TRANSFERABILITY OF SHARES OF KAANAPALI LAND. Class A Shares are freely transferable. Ownership of Class A Shares is reflected on the shareholder register of Kaanapali Land as maintained by its registered transfer agent, Wells Fargo Bank Minnesota, N.A., Corporate Trust Services, Sixth and Marquette; N9303-120, Minneapolis, Minnesota 55479. Kaanapali Land is under no obligation to cause the Class A Shares to be listed for trading on any securities exchange or quoted on any automated quotation system. Under the terms of the Kaanapali Land Company Agreement, the Class B shareholders may not sell or transfer any of their shares in Kaanapali Land, other than to their affiliates, unless such transaction provides for all holders of Class A Shares to have the right to sell or transfer of all of their Class A Shares on the same terms and conditions. In the event of any sale of the Class B Shares, the Class A shareholders will be required, without any further vote or consent, to sell their Class A Shares in such transaction. LIMITED LIABILITY OF KAANAPALI LAND SHAREHOLDERS. Under Delaware law and the Kaanapali Land Company Agreement, no shareholder of Kaanapali Land will be obligated personally for any debt, obligation or liability of Kaanapali Land solely by reason of being a member of Kaanapali Land. AMENDMENTS. The Kaanapali Land Company Agreement may be amended only upon the approval of members holding a majority of the total of the Class A Shares and Class B Shares. ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICER Section 10.3 of the LLC Agreement provides as follows with respect to the indemnification of PTH, as the manager, any member of Kaanapali Land or the Class A Representative, and any affiliated person of any of the manager, any member or the Class A Representative (collectively, the "Covered Persons" and individually a "Covered Person"): (a) The Company shall indemnify, to the fullest extent permitted by applicable law, each Covered Person and each Covered Person's Affiliates, directors, trustees, members, managers, shareholders, officers, partners, controlling persons, employees and agents (including any individual who serves at their request as director, officer, partner, trustee or the like of another corporation, including the Company) and/or the legal representatives and controlling persons of any of them (each of the foregoing being an "Indemnitee") against any liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees and expenses reasonably incurred by such Indemnitee in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or investigative body, in which such Indemnitee may be or may have been threatened, while acting for, or on behalf of the Company or in furtherance of the Company's business except to the extent (and only to the extent) it is established (i) by final judgment adverse to such Indemnitee that the actions (or failure to act) were (was) material to the matter giving rise to the proceeding and were (was) the result of active and deliberate dishonesty; (ii) the Indemnitee actually received an improper personal benefit in money, property or services; or (iii) in the case of a criminal proceeding, that such Indemnitee had reasonable cause to believe that the act or omission was unlawful. Any indemnification made pursuant to this Section 10.3 shall be made only out of assets of the Company, including errors' and omissions' insurance for such purpose. The following sections of the LLC Agreement provide as follows with respect to the limitation of liability of the Covered Persons: SECTION 10.1 LIABILITY. Except as otherwise provided by the Act, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and no Covered Person shall be obligated personally for any such debt, obligation or liability of the Company or any other Covered Person solely by reason of being a Covered Person. SECTION 10.2 DUTIES OF COVERED PERSONS; EXCULPATION. To the extent that, at law or in equity, a Covered Person has duties (including fiduciary duties) under applicable law and liabilities relating thereto to the Company or to any other Covered Person, a Covered Person acting under this Agreement shall not be liable to the Company or to any other Covered Person for its good faith reliance on the provisions of this Agreement, and in no event shall any Covered Person be liable to the Company or to any other Covered Person for any act or omission if such Covered Person acted in good faith and in a manner reasonably believed to be in the best interests of the Company or, if the Class A Representative is the Covered Person, in a manner reasonably believed to be in the best interests of the Class A Members. The provisions of this Agreement, to the extent that they limit the duties and liabilities of a Covered Person otherwise existing at law or in equity, are agreed by the parties hereto to replace such other duties and liabilities of such Covered Person. ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA KAANAPALI LAND, LLC INDEX Report of Independent Auditors Consolidated Balance Sheets, December 31, 2002 and 2001 Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000 Consolidated Statements of Stockholder's Equity (Deficit) for the years ended December 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements Schedules not filed: All schedules have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Kaanapali Land, LLC We have audited the accompanying consolidated balance sheets of Kaanapali Land, LLC (and the predecessors thereof as defined in Note 1) as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kaanapali Land, LLC (and the predecessors thereof as defined in Note 1) at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Chicago, Illinois April 25, 2003 KAANAPALI LAND, LLC Consolidated Balance Sheets December 31, 2002 and 2001 (Dollars in Thousands, except share data) A S S E T S ----------- 2002 2001 -------- -------- Cash and cash equivalents . . . . . . . $ 15,848 19,988 Receivables, net. . . . . . . . . . . . 1,959 2,166 Inventories . . . . . . . . . . . . . . 159 444 Property, net . . . . . . . . . . . . . 142,832 158,099 Amounts due from affiliates, net. . . . 19 1,523 Deferred costs and expenses, net. . . . 213 4,621 Prepaid pension costs . . . . . . . . . 25,905 23,610 Other assets. . . . . . . . . . . . . . 2,691 13,177 -------- -------- $189,626 223,628 ======== ======== L I A B I L I T I E S --------------------- Accounts payable and accrued expenses . $ 10,202 16,206 Deferred income taxes . . . . . . . . . 9,143 53,971 Accumulated postretirement benefit obligation. . . . . . . . . . . . . . 23,560 33,118 Other liabilities . . . . . . . . . . . 51,705 57,941 Mortgage and other notes payable. . . . 11,248 125,032 -------- -------- Total liabilities . . . . . . . 105,858 286,268 Commitments and contingencies Investment in unconsolidated entities, at equity . . . . . . . . . . . . . . 61,273 61,006 S T O C K H O L D E R S' E Q U I T Y (D E F I C I T ) ------------------------------------------------------ Common stock, at 12/31/02 non par value (shares authorized - 4,500,000; shares issued 1,863,213.49 and at 12/31/01 $20.00 par value (shares authorized - 5,000; shares issued - 3,990.9483) . . . . . . . . . . . . . -- 81 Additional paid-in capital. . . . . . . 5,357 91,845 Accumulated earnings (deficit). . . . . 17,138 (211,791) -------- -------- 22,495 (119,865) Less: Treasury stock (72.9459 shares at 12/31/01). . . . . . . . . . . . . -- (3,781) -------- -------- Total stockholders' equity (deficit) . . . . . . . . . . 22,495 (123,646) -------- -------- $189,626 223,628 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. KAANAPALI LAND, LLC Consolidated Statements of Operations Years ended December 31, 2002, 2001 and 2000 (Dollars in Thousands Except Per Share Amounts) 2002 2001 2000 -------- -------- -------- Revenues: Sales . . . . . . . . . . . . . $ 11,085 59,079 75,123 Interest and other income . . . 27 12,162 4,124 Extinguishment of debt. . . . . -- 10,653 -- -------- -------- -------- 11,112 81,894 79,247 -------- -------- -------- Cost and expenses: Cost of sales . . . . . . . . . (4,344) 50,796 83,593 Selling, general and administrative. . . . . . . . 12,505 15,652 18,265 Interest. . . . . . . . . . . . 2,395 11,387 18,227 Depreciation and amortization . 2,994 3,621 5,865 Reduction to carrying value of investments. . . . . . . . 13,717 18,109 37,853 -------- -------- -------- 27,267 99,565 163,803 -------- -------- -------- Operating loss. . . . . . . . . . (16,155) (17,671) (84,556) Equity in income (loss) from unconsolidated investments. . 5,180 (12,967) 2,162 -------- -------- -------- Loss from continuing operations before income taxes, discon- tinued operations and extra- ordinary gain on reorganiza- tion. . . . . . . . . . . . . (10,975) (30,638) (82,394) Income tax benefit. . . . . . . 15,141 3,462 29,570 -------- -------- -------- Income (loss) from continuing operations. . . . . . . . . . 4,166 (27,176) (52,824) Income (loss) from discontinued operations, net of applicable income taxes. . . . . . . . . -- 10,094 7,117 Extraordinary gain on reorganization, net . . . . . 136,618 -- -- -------- -------- -------- Net income (loss) . . . . $140,784 (17,082) (45,707) ======== ======== ======== Earnings per share: Income (loss) from continuing operations. . . . . . . . . . (a) (6,794) (13,206) ======== ======== ======== Net income (loss) . . . . . . . (a) (4,270) (11,427) ======== ======== ======== (a) The income from continuing operations per share and the net income per share for the period prior to the Plan Effective Date is $3,235 and $37,389, respectively. The loss from continuing operations per share and the net loss per share for the period after the Plan Effective Date is $5 and $5, respectively. The accompanying notes are an integral part of the consolidated financial statements. KAANAPALI LAND, LLC Consolidated Statements of Stockholders' Equity (Deficit) Years ended December 31, 2002, 2001 and 2000 (Dollars in Thousands)
Total Stock- Additional Accumu- holders' Common Paid-In lated Treasury Equity Stock Capital Deficit Stock (Deficit) -------- --------- -------- -------- -------- Balance at January 1, 2000. $ 81 91,845 (118,722) (3,781) (30,577) Net loss. . . . . . . . . . -- -- (45,707) -- (45,707) Spinoff of subsidiary . . . -- -- 4,350 -- 4,350 -------- -------- -------- -------- -------- Balance at December 31, 2000 81 91,845 (160,079) (3,781) (71,934) Net loss. . . . . . . . . . -- -- (17,082) -- (17,082) Distribution of uncon- solidated investment. . . -- -- (312) -- (312) Spinoff of subsidiary . . . -- -- (34,318) -- (34,318) -------- -------- -------- -------- -------- Balance at December 31, 2001 81 91,845 (211,791) (3,781) (123,646) Net income. . . . . . . . . -- -- 140,784 -- 140,784 Effect of reorganization. . (81) (86,488) 88,145 3,781 5,357 -------- -------- -------- -------- -------- Balance at December 31, 2002 $ -- 5,357 17,138 -- 22,495 ======== ======== ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements.
KAANAPALI LAND, LLC Consolidated Statements of Cash Flows Years ended December 31, 2002, 2001 and 2000 (Dollars in Thousands) 2002 2001 2000 -------- -------- -------- Cash flows from operating activities: Net income (loss) . . . . . . . $140,784 (17,082) (45,707) Adjustments to reconcile net income (loss) to net cash provided by (used in) continuing operations: Income from discontinued operations, net . . . . . . -- (10,094) (7,117) Extraordinary gain on reorganization, net . . . . (136,618) -- -- Restructuring costs . . . . . (3,042) -- -- Depreciation and amortization 2,994 3,621 5,865 Equity in loss (income) from unconsolidated investments. (5,180) 12,967 (2,162) Reduction to carrying value of investments. . . . . . . 13,717 18,109 37,853 Interest deferred on long-term debt. . . . . . . . . . . . -- (167) 165 Extinguishment of debt. . . . -- (10,717) -- Changes in operating assets and liabilities: Receivables, net. . . . . . . 207 568 2,232 Inventories . . . . . . . . . 285 (1,249) 13,743 Accounts payable, accrued expenses and other. . . . . (9,947) 18,719 17,039 Deferred income taxes . . . . (15,141) (3,462) (26,299) -------- -------- -------- Net cash provided by (used in) continuing operating activities (11,941) 11,213 (4,388) Net cash provided by discon- tinued operating activities . . -- -- 27,538 -------- -------- -------- Net cash provided by (used in) operating activities. . . . . . (11,941) 11,213 23,150 Cash flows from investing activities: Property additions. . . . . . . (178) (532) (3,023) Property additions, discontinued operations. . . . . . . . . . -- -- (5,629) Property sales, disposals and retirements, net. . . . . . . 457 3,191 1,061 Property sales, disposals, net, discontinued operations . . . -- -- 188 Deferred contract cost additions, discontinued operations . . . -- -- (4,817) Distributions from investments in unconsolidated entities, at equity . . . . . . . . . . 10,475 381 215 -------- -------- -------- Net cash provided by (used in) investing activities. . . . . . 10,754 3,040 (12,005) KAANAPALI LAND, LLC Consolidated Statements of Cash Flows - Continued 2002 2001 2000 -------- -------- -------- Cash flows from financing activities: Loan proceeds . . . . . . . . . -- 8,500 -- Net repayments of debt. . . . . (103) (19,027) (261) Net repayments of debt, discontinued operations . . . -- -- (11,800) Amounts due to affiliates . . . -- -- Loan acquisition costs. . . . . -- (23) (35) Settlement payments pursuant to the Plan . . . . . . . . . (2,850) -- -- -------- -------- -------- Net cash provided by (used in) financing activities. . . . . . . (2,953) (10,550) (12,096) -------- -------- -------- Net increase (decrease) in cash and cash equivalents (4,140) 3,703 (951) Cash and cash equivalents at beginning of year. . 19,988 16,285 17,236 -------- -------- -------- Cash and cash equivalents at end of year. . . . . $ 15,848 19,988 16,285 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid for interest from continuing operations . . . . $ 916 7,083 12,826 Cash paid for interest from discontinued operations . . . -- -- 11,222 -------- -------- -------- $ 916 7,083 24,048 ======== ======== ======== Cash received (paid) for income taxes. . . . . . . $ 8 -- 144 ======== ======== ======== KAANAPALI LAND, LLC Consolidated Statements of Cash Flows - Continued 2002 2001 2000 -------- -------- -------- Activity due to spinoff of subsidiary: Reduction in current assets . . $ -- -- (728) Reduction in property, plant and equipment . . . . . . . . -- -- (45,557) Reduction in current liabilities -- -- 1,952 Reduction in debt in default. . -- -- 75,322 Reduction in deferred tax liability . . . . . . . . . . -- -- 14,876 Reduction in other assets/ liabilities . . . . . . . . . -- -- 421 Establishment of investment in unconsolidated entity, at equity . . . . . . . . . . -- -- (41,936) -------- -------- -------- Net contribution due to spinoff . $ -- -- 4,350 ======== ======== ======== Extraordinary gain on reorganization: Reduction in other notes payable - COLAs . . . . . . . $111,195 -- -- Reduction in deferred taxes . . 29,688 -- -- Reduction in accrued expenses . 3,059 -- -- Reduction in other assets/ liabilities . . . . . . . . . 1,075 -- -- Payments of restructuring costs (3,042) -- -- Additional paid in capital - stock issuance. . . . . . . . (5,357) -- -- -------- -------- -------- Extraordinary gain on reorganization. . . . . . . . $136,618 -- -- ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements. KAANAPALI LAND, LLC Notes to Consolidated Financial Statements (Dollars in Thousands) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BASIS OF ACCOUNTING Kaanapali Land, LLC ("Kaanapali Land"), a Delaware limited liability company is the reorganized entity resulting from the Joint Plan of Reorganization of Amfac Hawaii, LLC ("AHI"), Certain of Its Subsidiaries (together with AHI, the "AHI Debtors") and FHT Corporation ( " FHTC " and, together with the AHI Debtors, the "Debtors") under Chapter 11 of the Bankruptcy Code, dated June 11, 2002 (as amended, the "Plan"). The Plan was filed jointly by all Debtors to consolidate each case for joint administration in the Bankruptcy Court in order to (a) permit the petitioners to present a joint reorganization plan that recognized, among other things, the common indebtedness of the debtors (i.e. the COLAs and Senior Indebtedness) and (b) facilitate the overall administration of the bankruptcy proceedings. As indicated in the Plan, Kaanapali Land has elected to be taxable as a corporation. The Debtors had filed their petition for reorganization under Chapter 11 on February 27, 2002 (the "Petition Date") in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the "Bankruptcy Court") which petitions were consolidated into a single joint proceeding by the Bankruptcy Court (the "Reorganization Case"). The principal goal of the Plan was to address the Debtors' debt burdens so that the Debtors could emerge from Chapter 11 with a viable capital structure and with the resources necessary to operate their businesses and improve the value of their land holdings. The Plan achieved this goal by converting certain indebtedness and other liabilities of the Debtors into new equity of Kaanapali Land (to the extent such creditors did not elect an available cash distribution option). Another goal of the Plan was to secure additional liquidity for the Debtors to help fund future operations. The Plan achieved this goal through the Merger of FHTC with Northbrook Corporation ("Northbrook"), which made the assets and liquidity of Northbrook available to the Debtors to help fund their land development business. FHTC was the surviving entity in such merger, and shortly thereafter was in turn merged into Kaanapali Land pursuant to the Plan. The Plan was confirmed by the Bankruptcy Court by orders dated July 29, 2002 and October 30, 2002 (collectively, the "Order") and became effective November 13, 2002 (the "Plan Effective Date"). Kaanapali Land continues to work toward completion of the various requirements of the Plan and to implement the restructuring transactions that are contemplated to be effected under the Plan, including, among other things, the resolution of all outstanding claims and distributions on all claims that are allowed under the Plan. In accordance with the Plan, approximately 1,863,000 shares of Kaanapali Land were issued during 2002. As a consequence of the merger of Northbrook into FHTC on November 8, 2002, and the subsequent merger of FHTC into Kaanapali Land on November 14, 2002, each pursuant to the Plan, the The assets and liabilities of Kaanapali Land are essentially the same as those of Northbrook and its subsidiaries and, thus, Northbrook is considered to be the predecessor entity of Kaanapali Land for 2000, 2001, and the portion of 2002 prior to the Plan Effective Date was used and accordingly there was no effect on the consolidated financial statements of the Company as a result of these mergers . As greater than 85% of the shareholders in Kaanapali Land were shareholders or affiliates of shareholders in Northbrook, the assets and liabilities of Northbrook and FHTC Kaanapali Land were merged into Kaanapali Land recorded at their the historical cost. Subject to the foregoing, the occurrence of the Plan Effective Date did not result in a change in the Company's basis of accounting. Instead, its principal effect on the Company's 2002 financial statements was to (i) cease recording interest expense on the COLAs subsequent to the Petition Date and (ii) recognize an extraordinary gain on reorganization upon the confirmation of the Plan, net of restructuring costs. carry-over basis of Northbrook. The accompanying consolidated financial statements include the accounts of Kaanapali Land and all of its subsidiaries and its predecessor (collectively, the "Company"), which include AHI and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Discontinued operations represent the resorts business (collectively "Resorts") and include Xanterra Parks & Resorts, L.L.C. and its wholly-owned subsidiaries, Xanterra, Inc. and its wholly-owned subsidiary Xanterra Parks & Resorts, Inc. (See Note 9). The Resorts entities were spun-off by Northbrook to its sole shareholder on December 31, 2001. The Company's continuing operations are in three business segments agriculture, property and golf. The Golf segment includes that of Amfac Property Investment Corp. ("APIC"), an equity investee. Though APIC continues to own the Royal Kaanapali Golf Courses, a receiver was appointed to operate them on March 19, 2002 and it is anticipated that APIC will no longer have title to such golf courses after consummation of the settlement with the Employees' Retirement System of the State of Hawaii ("ERS"), as described in Note 3. The Agriculture segment grew and processed sugar cane (prior to the shutdown of its remaining sugar operations in November, 2000) and grew, processed and marketed coffee (prior to the shutdown of operations in September 2001) and continues to grow seed corn under contract. The Property segment primarily develops land for sale and negotiates bulk sales of undeveloped land. The Golf segment is responsible for the management and operation of the Waikele Golf Course. The Property, Agriculture and Golf segments operate exclusively in the State of Hawaii. For further information on the Company's business segments see Note 10. STATEMENT OF CASH FLOWS The Company considers as cash equivalents all amounts of U.S. government obligations and certificates of deposit held with maturities of three months or less when purchased and all money market funds. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 ("SFAS No. 107"), "Disclosures about Fair Value of Financial Instruments", requires entities to disclose the SFAS No. 107 value of certain on and off balance sheet financial instruments for which it is practicable to estimate. Value is defined in SFAS No. 107 as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Except as noted below, the Company believes the carrying amounts of its financial instruments on its balance sheet approximate SFAS No. 107 value due to the relatively short maturity of these instruments. Except for the Certificates of Land Appreciation Notes ("COLAs") (which were discharged by the Bankruptcy Court on the Effective Date), the Company believes the carrying value of its debt (see Note 3) approximates fair value. INVENTORY CAPITALIZATION The Company capitalizes all of the expenditures incurred in bringing crops to their existing condition and location. Inventory reflected in the accompanying consolidated balance sheets at December 31, 2002 and 2001 is not in excess of its estimated net realizable value. RECEIVABLES The allowance for doubtful receivables was $452 and $454 at December 31, 2002 and 2001, respectively. INVESTMENTS Investments in certain partnerships and related entities over which the Company exercises significant influence are accounted for by the equity method. To the extent any subsidiary of Kaanapali Land engages in such activities as general partner, such subsidiary may be contingently liable for the obligations of its partnership and joint venture investments. LAND DEVELOPMENT Project costs associated with the acquisition, development and construction of real estate projects are capitalized and classified as Property. Such capitalized costs are not in excess of the projects' estimated fair value as reviewed periodically or as considered necessary. In addition, interest is capitalized to qualifying assets during the period that such assets are undergoing activities necessary to prepare them for their intended use. No interest has been capitalized for the periods presented. RECOGNITION OF PROFIT FROM REAL PROPERTY SALES For real property sales, profit is recognized in full when the collectibility of the sales price is reasonably assured and the earnings process is virtually complete. When the sale does not meet the requirements for full profit recognition, a portion of the profit is deferred until such requirements are met. PROPERTY Property is stated at cost. Depreciation is based on the straight- line method over the estimated economic lives of 15 20 -40 years for the Company's depreciable land improvements, 3-18 years for machinery and equipment, or the lease term if less. At December 31, 2002, the Company held approximately $1.9 million of non-depreciable land improvements and approximately $3.3 million of depreciable land improvements, relating principally to the Waikele Golf Course, which are being depreciated over their estimated 15-year useful life. The Company's land improvements relating to its former sugar operations that have been shut down were previously depreciated over longer periods. Maintenance and repairs are charged to operations as incurred. Significant betterments and improvements are capitalized and depreciated over their estimated useful lives. In 2002, 2001 and 2000, the Company recognized impairment losses of $13,717, $18,109 and $37,853. The 2002 impairment loss was primarily to reduce the carrying value of certain land parcels that are not considered to be part of future development plans. Such land parcels are not part of the Company's Kaanapali 2020 development plan and are currently neither in use nor being marketed for sale. The 2001 impairment loss represented $13,725 to reduce the carrying value of certain land parcels and $4,384 related to assets used in the agricultural operations. The 2000 impairment loss represented $15,853 to reduce the carrying value of certain land parcels and $22,000 related to assets used in the agricultural operations. Provisions for impairment losses related to long-lived assets, if any, are recognized when expected future cash flows are less than the carrying values of the assets. If indicators of impairment are present, the Company evaluates the carrying value of the related long-lived assets in relationship to the future undiscounted cash flows of the underlying operations or anticipated sales proceeds. The Company adjusts the net book value of property to fair value if the sum of the expected future cash flow or sales proceeds is less than book value. 2002 2001 -------- -------- Property, net: Land and land improvements. . . . . . $130,479 138,410 Land. . . . . . . . . . . . . . . . . $127,135 135,114 Land improvements . . . . . . . . . . 3,344 3,296 Buildings . . . . . . . . . . . . . . 21,586 26,703 Machinery and equipment . . . . . . . 25,929 26,717 -------- -------- 177,994 191,830 Accumulated depreciation. . . . . . . (35,162) (33,731) -------- -------- Property, net . . . . . . . . . . . . $142,832 158,099 ======== ======== Land held for sale of approximately $11,000 and $4,900 , none of which has any current operations, is included in Property in the consolidated balance sheets at December 31, 2002 and 2001 and is carried at the lower of cost or fair value less cost to sell. Further, a portion of the land held for sale, the Oahu Sugar Mill Site (carrying value of approximately $2.6 million at December 31, 2002) is subject to a foreclosure proceeding that may result in disposition other than by sale. No land is currently in use except for the land associated with the Waikele Golf Course (carrying value of approximately $26 million at December 31, 2002) and an approximate 800 acres of Kaanapali 2020 land that has been set aside for the Company's seed corn operations. The Company's principal land holdings are on the island of Maui and have a carrying value of approximately $110 million. In addition, the Company's material land holdings on the island of Oahu have a carrying value of approximately $29 million. The Company has determined, based on its current projections for the development and/or disposition of its land holdings, that the land holdings are not currently recorded in an amount in excess of proceeds that the Company expects that it will ultimately obtain from the disposition thereof. DEFERRED COSTS AND EXPENSES Deferred costs and expenses consist primarily of financing costs related to various debt instruments. Such costs are being amortized on an effective interest or a straight-line basis over the terms of the related debt and the contracts. Accumulated amortization was $27 and $836 at December 31, 2002 and 2001, respectively. OTHER LIABILITIES Other liabilities includes project completion costs on land sold in prior years, reserves for losses on divested segments, reserves for workmen's compensation and general liability claims, and reserves for commitments and contingencies as discussed in Note 8, including potential tax liabilities. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In October 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FASB Statement No. 144) which supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of. FASB Statement No. 144 provides more guidance on estimating cash flows when performing a recoverability test, requires that a long-lived asset to be disposed of other than by sale (e.g. abandoned) be classified as "held and used" until it is disposed of, and establishes more restrictive criteria to classify an asset as "held for sale". The Company has presented separately as discontinued operations in all periods the results of operations for all assets disposed of on or after January 1, 2002 (the date of adoption of SFAS No. 144) and for all assets classified as real estate held for disposition as of December 31, 2002. In addition, discontinued operations in accordance with APB 30 for 2001 and 2000 have been classified as discontinued operations in the accompanying consolidated statements of operations. In April 2002, the FASB issued Statement No. 145 which, among other things, rescinds the requirement that gains and losses on extinguishments of debt be classified as extraordinary items. The Company adopted Statement No. 145 effective January 1, 2002, which requires reclassifications of prior extraordinary gains on extinguishment of debt. RECLASSIFICATIONS Certain amounts in the 2001 and 2000 consolidated financial statements have been reclassified to conform to the 2002 presentation. (2) INVESTMENTS The Company's investments in unconsolidated entities at December 31, 2002 and 2001 consist of the following: Ownership Percentage Carrying Value -------------------- -------------------- Description 2002 2001 2002 2001 - ----------- -------- -------- -------- -------- Amfac Finance Limited Partnership (including its 83.33% investment in APIC) . . . . . . 0% 85.38% $(49,521) (49,837) Amfac Property Invest- ment Corp. . . . . . 16.67% 16.67% (11,752) (11,168) Real estate partner- ships. . . . . . . . Various -- (1) -------- -------- $(61,273) (61,006) ======== ======== The Company does not control Amfac Finance Limited Partnership ("AFLP") and, accordingly, AFLP is accounted for on the equity method. All intercompany amounts have been eliminated in the accompanying consolidated financial statements. Effective December 28, 2000, AF Investors, LLC ("AF Investors"), a subsidiary of AFLP, made a capital contribution to APIC in return for 83.33% of the shares of APIC. Immediately prior to AF Investors' capital contribution, APIC was a wholly-owned subsidiary of AHI. The $4,350 increase in consolidated stockholders' equity as of December 31, 2000, represents the net deficit of APIC that has been allocated to that portion of APIC no longer attributable to the Company's ownership interests. APIC owns and operates the Royal Kaanapali Golf Courses ("RKGC"). The net losses related to the golf course operations (including related interest charges) of $2,332 for the year ended December 31, 2000 is included in the net loss in the consolidated statements of operations. In 2001, AFLP redeemed an approximately 4% limited partnership interest held by the Company in exchange for distribution of a portion of debt from a consolidated subsidiary of the Company. In 2002 and 2001, the ownership interest in APIC's operations is reflected on the equity method of accounting. The accompanying 2002 and 2001 consolidated statement of operations reflects a net after-tax loss of $3,068 and $18,582, respectively, representing the Company's share of the net losses related to the golf course operations (including related interest charges) and the impairment loss recorded by APIC in 2001 to adjust the carrying value of the golf courses to their estimated market value. As of December 31, 2001, AF Investors was a 99.52% owned subsidiary of Amfac Finance and Amfac Finance was 85.38% owned by Northbrook which held a limited partnership interest therein. In December 2002, AFLP redeemed the interest held by Kaanapali Land (as successor to Northbrook) for approximately $60. Kaanapali Land however remains obligated under certain circumstances to fund costs related to, among other things, golf course improvements required under the settlement agreement with the ERS described below. These funding obligations are currently estimated to be approximately $1,300, of which a portion is anticipated to be reimbursed by AFLP under the Funding Agreement entered into by Kaanapali Land, AFLP and certain other affiliated entities in October 2002. An additional approximate $1,200 is expected to be paid or distributed to former bargaining unit and non-bargaining unit employees should the foreclosure be consummated. The Company continues to record its investment in unconsolidated entities due to its potential funding obligations and because the Company is awaiting final consumption of the ERS settlement agreement, which is subject to court approval. Upon resolution of these matters, the Company expects to record a gain on disposition of its investment for financial reporting purposes to the extent of its investment in unconsolidated entities. See Footnote 8 for additional discussion. In addition, equity in income (loss) from unconsolidated investments includes the gain from the 2002 sale of an interest in a hotel and the Company's share of the results of operations of the hotel prior to the sale of the Company's interest. (3) MORTGAGE AND OTHER NOTES PAYABLE Each component of the Company's mortgage and other notes payable was entered into by the separate operating subsidiaries of the Company and generally places certain specified restrictions on the transfer of an individual subsidiary's assets, as well as on the use of proceeds generated from operations and the sales of such assets. A summary and description of the Company's mortgage and other notes payable as of December 31, 2002 and 2001 is as follows: 2002 2001 -------- -------- COLAs (A) . . . . . . . . . . . . $ -- 113,682 Waikele Golf Course (B) . . . . . 8,398 8,500 Oahu Sugar mill site (C). . . . . 2,850 2,850 -------- -------- $ 11,248 125,032 ======== ======== (A) The COLA's and the Senior Indebtedness referred to below were discharged as to the Debtors and restructured effective on the Plan Effective Date pursuant to the emergence of the Debtors from bankruptcy in 2002 and the restructuring transactions contemplated by the Plan. Such restructuring caused the remaining unsatisfied COLA indebtedness to be assigned to Kaanapali Land and entitled the previous holders thereof as of the distribution record date under the Plan who made timely cash elections under the Plan to receive cash in the amount of $35 per $500 principal amount of COLAs. All other holders of COLAs as of the distribution record date under the Plan are entitled to receive 1 Class A Share of Kaanapali Land per $500 principal amount of COLAs in conversion of their COLAs. It is expected that the restructuring of the COLAs under the Plan will ultimately result in distributions of cash respecting approximately 25.5% of the COLAs, anticipated to total approximately $2.49 million with the remainder converted into Class A Shares of Kaanapali Land (or Class B Shares of Kaanapali Land as described below). Although a significant portion of such distributions were made in 2002, they are not anticipated to be substantially completed until the fourth quarter of 2004 and the Company accrued approximately $700 related to such amounts as of December 31, 2002. All of the Senior Indebtedness, COLA note claims and claims held by entities and individuals affiliated with the Company against the Debtors were converted into Class B shares of Kaanapali Land. The COLAs were unsecured debt obligations of AHI, and were subordinated in priority to all "Senior Indebtedness" (as defined in the Indenture governing the COLAs). Senior Debt payable to Northbrook and its affiliates (including deferred interest) totaled approximately $188,000 and $186,108 at the Petition Date and December 31, 2001, respectively, and has been eliminated in the accompanying consolidated financial statements. The COLAs were issued in 1989, were scheduled to mature on December 31, 2008, and bore interest payable semiannually at 10% per annum ("Base Interest") of the outstanding principal balance on a cumulative, non-compounded basis, of which 6% per annum is contingent ("Contingent Base Interest") and payable, only to the extent of Net Cash Flow or Maturity Market Value (as defined in the Indenture). AHI did not generate a sufficient level of Net Cash Flow to pay Contingent Base Interest on the COLAs from 1990 through the Petition Date, and any remaining obligation to do so was discharged on the Plan Effective Date. Therefore, no cumulative deferred Contingent Base Interest related to the period from August 31, 1989 (Final Issuance Date) through the Petition Date has been paid or accrued in the accompanying consolidated financial statements. For financial reporting purposes, interest had been accrued on the COLAs using the effective interest method. Accordingly, the consolidated financial statements include Base Interest at 4% per annum ("Mandatory Base Interest") for the period January 1, 2002 to the Petition Date and the year ended December 31, 2001. No interest was accrued after the Petition Date in accordance with the Plan. Pursuant to the Plan, the COLAs were discharged as to the Debtors and restructured effective as of the Plan Effective Date in return for the distributions mentioned in item (A) above. Extraordinary gain on reorganization, net is primarily represented by conversion or retirement by cash payment of the COLAs. The estimated value of settlement of claims by the COLA holders under the Plan as confirmed by the Bankruptcy Court was 7% of the outstanding principal balance on such COLAs. In addition, general unsecured creditors with allowed claims that elected (or were deemed to have elected) to receive shares were entitled to shares having an estimated value of approximately 7% of the allowed claim amount. Accordingly, 7% of the allowed claims (including the COLAs) converting to shares was considered a capital contribution and 93% of all allowed claims (including the COLAs) was considered extraordinary gain on reorganization, net. Creditors, including COLA Holders, electing cash receive payment on their claims funded through the $2.85 million reflected as "Settlement payments pursuant to the Plan" in the Consolidated Statements of Cash Flows. Such settlement payments represent approximately 7% of the outstanding principal amount of the allowed claims for those COLA holders receiving cash, and 15% of the allowed claims of general unsecured creditors receiving cash. The non-affiliated COLAs Holders and general unsecured creditors are to receive Class A shares. Claims of affiliated creditors (including general unsecured claims, COLA claims and claims on the Senior Indebtedness of such affiliates) are to receive Class B shares. As both classes of shares represent membership interests that have no par value, common shares in the Consolidated Balance Sheets and the Consolidated Statements of Stockholders' Equity (Deficit) at December 31, 2002 is reflected at zero. The Consolidated Statement of Stockholders' Equity for 2002 reflects the above as Effect of Reorganization with the Consolidated Balance Sheet at December 31, 2002 reflecting the fair market value of the settlement as additional paid-in capital. As disclosed in the consolidated statements of cash flows, approximately $111 million of extraordinary gain on restructuring was recognized due to reduction in the carrying amounts of COLAs in accordance with paragraph 15 of SFAS 15. The disclosure has been revised to reflect this fact in the footnotes, and that the gain represents the excess of the settlement value in reorganization over the carrying amount of the COLAs. No gain was recognized for financial reporting purposes on the discharge of Senior Indebtedness. The Senior Indebtedness was between entities consolidated and eliminated in the predecessor financial statements. (B) The Waikele Golf Course debt, secured by the Waikele Golf Course, had an original principal balance of $8,500, an interest rate of LIBOR plus 3.75%, principal amortization based on a 25-year amortization schedule and a maturity date of December 1, 2006. The loan has certain cash flow and other financial covenants. (C) In December 1996, Oahu MS, a wholly-owned subsidiary of Kaanapali Land, obtained a $10,000 loan facility from City Bank. The loan, which had been extended through December 1, 2000 with certain modifications, is secured by a mortgage on certain property at the Oahu Sugar mill-site (the sugar plantation was closed in 1995). Such extended loan bore interest at the bank's base rate plus 1.25%. In January 2001, Oahu MS reached an agreement with the Bank for an extension until December 1, 2001 with a principal payment of $150 upon execution of the agreement leaving a remaining outstanding principal balance of $2,850. On December 1, 2001, Oahu MS reached an agreement with the bank for an additional extension until March 1, 2002. On June 28, 2002, City Bank and Oahu MS entered into an agreement extending the loan for an additional nine months to December 1, 2002 at City Bank's base rate plus 2%. On the maturity date, Oahu MS did not pay the balance due. On January 2, 2003, City Bank filed a complaint for foreclosure. In January 2003, Oahu MS and City Bank commenced settlement discussions and the parties subsequently reached a tentative agreement involving extension of the maturity date of the loan. City Bank terminated negotiations regarding the form of the Loan Modification and Extension Agreement on March 10, 2003. Oahu MS does not have the funds necessary to pay the remaining balance of the loan without sale of the remaining mill site land. If such loan cannot be further extended, it would likely result in Oahu MS no longer having an ownership interest in the property. Without regard to any offsetting claims asserted by Oahu MS as described above, as this mortgage loan is a recourse obligation of Oahu MS, any deficiency remaining on such loan upon consummation of a foreclosure would continue to be a liability of Oahu MS. The outstanding balance has been reflected as maturing in 2003 in the schedule of annual principal payments. The net book value of the mill site land securing the loan is less than the outstanding balance of the indebtedness. Scheduled annual principal maturities on the Company's mortgage and other notes payable are as follows: 2003 . . . . . . $ 2,959 2004 . . . . . . 119 2005 . . . . . . 129 2006 . . . . . . 8,041 2007 . . . . . . -- Thereafter . . . -- ------- Total. . . . . . $11,248 ======= (4) RENTAL ARRANGEMENTS The Company has rented, as lessee, various land, facilities and equipment under operating leases. Most land leases provided for renewal options and minimum rentals plus contingent payments based on revenues or profits. Included as rent expense in selling, general and administrative expense are minimum rentals and contingent payments for operating leases in the following amounts: 2002 2001 2000 ------- ------- ------- Minimum and fixed rents . . . . . . $ 1,381 1,475 1,723 Contingent payments . . . . . . . . 124 559 1,163 Property taxes, insurance and other charges . . . . . . . . 655 669 1,182 ------- ------- ------- $ 2,160 2,703 4,068 ======= ======= ======= Future minimum lease payments under noncancelable operating leases aggregate approximately $351 and are due as follows: $196, $139 and $16 for 2003, 2004 and 2005, respectively. Certain leases where Debtors were the lessee were rejected pursuant to the Plan, which reduced any pre-Petition Date and prospective liability of the Company for them to claims that were allowed under the Plan, if entitled to distributions of cash or Class A Shares of Kaanapali Land as provided in the Plan. (5) EMPLOYEE BENEFIT PLANS (a) PENSION PLANS As of December 31, 2002, the Company participates in a defined benefit pension plan that covers substantially all its eligible employees. The Plan is sponsored and maintained by Kaanapali Land in conjunction with other plans providing benefits to employees of Kaanapali Land and its affiliates. The Pension Plan for Bargaining Unit Employees of Amfac Plantations (the "Pension Plan") provides benefits based primarily on length of service and career-average compensation levels. Accordingly, there is no difference between the accumulated benefit obligation and the projected benefit obligation. Kaanapali Land's policy is to fund pension costs in accordance with the minimum funding requirements under provisions of the Employee Retirement Income Security Act ("ERISA"). Under such guidelines, amounts funded may be more or less than the pension expense or credit recognized for financial reporting purposes. The following tables summarize the components of the funded status of the Company's defined benefit pension plan at December 31, 2002 and 2001, the net pension credit for 2002, 2001 and 2000, and major assumptions used to determine these amounts. 2002 2001 ------- ------- Benefit obligation at beginning of year . . . . $37,762 40,182 Service cost. . . . . . . . . . . . . . . . . . 49 128 Interest cost . . . . . . . . . . . . . . . . . 3,041 2,897 Actuarial loss. . . . . . . . . . . . . . . . . 6,112 2,328 Benefits paid . . . . . . . . . . . . . . . . . (4,233) (7,773) ------- ------- Benefit obligation at end of year . . . . . . . 42,731 37,762 ------- ------- Fair value of plan assets at beginning of year. 74,687 83,107 Actual return on plan assets. . . . . . . . . . (8,986) 455 Benefits paid . . . . . . . . . . . . . . . . . (5,186) (8,875) ------- ------- Fair value of plan assets at end of year. . . . 60,515 74,687 ------- ------- Funded status . . . . . . . . . . . . . . . . . 17,784 36,925 Unrecognized net actuarial (gain) loss. . . . . 8,121 (13,304) Unrecognized prior service cost . . . . . . . . -- (11) ------- ------- Prepaid pension cost. . . . . . . . . . . . . . $25,905 23,610 ======= ======= Unrecognized net gains or losses are amortized over a ten year period. At December 31, 2002, approximately 73% of the plan's assets are invested in equity securities, 10% in an annuity contract, and 17% in fixed income funds. The components of the net periodic pension benefit (credit) for the years ended December 31, 2002, 2001 and 2000 (which are reflected as other income in the consolidated statements of operations) are as follows: 2002 2001 2000 ------- ------- ------- Service cost. . . . . . . . . . . . . $ 49 128 367 Interest cost . . . . . . . . . . . . 3,041 2,897 2,864 Expected return on plan assets. . . . (5,462) (5,753) (5,855) Recognized net actuarial gain . . . . (865) (1,787) (1,513) Amortization of prior service cost. . (11) (52) (52) Special termination benefit . . . . . 953 1,102 7,227 ------- ------- ------- Net periodic pension benefit (credit) $(2,295) (3,465) 3,038 ======= ======= ======= Benefit plan assumptions: Discount rate . . . . . . . . . . . . 7.0% 7.5% 7.5% ======= ======= ======= Expected long-term rate of return on assets . . . . . . . . . . . . . 7.5% 7.5% 7.5% ======= ======= ======= A comparison of the market value of the Pension Plan's net assets with the present value of the benefit obligations indicates the Company's ability at a point in time to pay future benefits. The fair value of the Pension Plan's assets available for benefits will fluctuate and certain future obligations of the Pension Plan may be subject to bargaining unit agreements. (b) RETIREE HEALTH AND LIFE INSURANCE BENEFITS In addition to providing pension benefits, AHI and certain of its affiliates currently provide certain healthcare and life insurance benefits to certain eligible retired employees. Where such benefits are offered, substantially all employees may become eligible for such benefits if they reach a specified retirement age while employed by AHI (or the applicable affiliate) and if they meet a certain length of service criteria. The postretirement healthcare plan is contributory and contains cost-sharing features such as deductibles and copayments. However, these features, as they apply to bargaining unit retirees, are subject to collective bargaining provisions of a labor contract between each such entity and the International Longshoremen's & Warehousemen's Union as they may have been amended or settled through agreements or memoranda executed with the union at about the time each operating facility was closed. The postretirement life insurance plan is non-contributory. Each relevant entity continues to fund benefit costs for both plans on a pay-as-you-go basis, and each entity expects to continue funding its post-retirement health care obligations until the end of 2004, which is a date on or after the date when its legal "Maintenance of Effort" obligation relative to the health care portion expires. These entities believe that they generally have no obligation to continue the post-retirement life insurance benefits, and most intend to terminate such benefits effective at the end of 2003. Kaanapali Land has not assumed any obligation to fund the cost of these benefits on behalf of any of its affiliates. For measuring the expected postretirement benefit obligation, an 11% annual rate of increase in the per capita claims cost was assumed through 2004. The healthcare cost trend rate assumption has a significant effect on the amount of the obligation and periodic cost reported. An increase and (decrease) in the assumed healthcare trend rate by 1% in 2002 would increase and (decrease) the medical plans' accumulated postretirement benefit obligation as of December 31, 2002 by $299 and $(255), respectively, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $16 and $(14), respectively. Net periodic postretirement benefit cost (credit) for 2002, 2001 and 2000 (which is primarily reflected in agricultural cost of sales on the consolidated statements of operations) includes the following components: 2002 2001 2000 Total Total Total ------- ------- ------- Service cost. . . . . . . . . . . . $ 1 34 277 Interest cost . . . . . . . . . . . 622 887 1,698 Amortization of net (gain) loss . . (7,879) (6,327) (2,421) Recognized curtailment (gain) loss. (233) (859) (3,965) ------- ------- ------- Net periodic postretirement benefit cost (credit) . . . . . . $(7,489) (6,265) (4,411) ======= ======= ======= The following table sets forth the plans' change in benefit obligation and benefit cost as of December 31, 2002 and 2001 as follows: December 31, December 31, 2002 2001 ------------ ------------ Benefit obligation at beginning of year $ 9,615 13,006 Service cost. . . . . . . . . . . . . 1 34 Interest cost . . . . . . . . . . . . 622 887 Actuarial losses. . . . . . . . . . . 746 304 Employer contribution . . . . . . . . (2,075) (2,191) Curtailment . . . . . . . . . . . . . (9) (2,381) Maintenance of Effort obligation. . . -- (184) Special termination benefit . . . . . 6 140 ------- ------- Benefit obligation at end of year . . 8,906 9,615 Unrecognized net actuarial gain . . . 14,654 23,503 ------- ------- Accumulated postretirement benefit cost $23,560 33,118 ======= ======= Decreases in the Maintenance of Effort obligation recognize that the requirement to maintain an average level of certain retiree health care benefits expires in 2004. Such obligations are principally related to collectively bargained contractual obligations of Lihue Plantation, Pioneer Mill and Oahu Sugar. These entities currently amortize unrecognized gains over the shorter of ten years or the average life expectancy of the inactive participants since almost all of the Plans' participants are inactive. The portion of the unrecognized net actuarial gain represented by the decrease in the Maintenance of Effort obligation is being amortized over four years, commencing in 2001. In addition, due to the significant total amount of unrecognized gain at December 31, 2002 and 2001, which is included in the financial statements as a liability, and the disproportionate relationship between the unrecognized gain and accumulated postretirement benefit obligation at December 31, 2002, these entities may, in the future, change their amortization policy to accelerate the recognition of the unrecognized gain. In considering such change, they would need to determine whether significant changes in the accumulated postretirement benefit obligation and unrecognized gain may occur in the future as a result of changes in actuarial assumptions, experience and other factors. Any future change to accelerate the amortization of the unrecognized gain would have no effect on cash flows, but could have a significant effect on an entity's statement of operations. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7% as of December 31, 2002 and 7.25% as of December 31, 2001. (6) INCOME TAXES Income tax expense (benefit) attributable to income from continuing operations for the years ended December 31, 2002, 2001 and 2000 consists of: Current Deferred Total -------- -------- -------- Year ended December 31, 2002: U.S. federal . . . . . . . $ -- (13,588) (13,588) State. . . . . . . . . . . -- (1,553) (1,553) -------- -------- -------- $ -- (15,141) (15,141) ======== ======== ======== Year ended December 31, 2001: U.S. federal . . . . . . . $ -- (3,107) (3,107) State. . . . . . . . . . . -- (355) (355) -------- -------- -------- $ -- (3,462) (3,462) ======== ======== ======== Year ended December 31, 2000: U.S. federal . . . . . . . $ -- (26,537) (26,537) State. . . . . . . . . . . -- (3,033) (3,033) -------- -------- -------- $ -- (29,570) (29,570) ======== ======== ======== Income tax benefit attributable to income from continuing operations differs from the amounts computed by applying the U.S. federal income tax rate of 35 percent to pretax loss from operations as a result of the following: 2002 2001 2000 -------- -------- -------- Computed "expected" tax provision (benefit). . . . . . . . . . . . $ (3,842) (10,723) (28,838) Reduction in income taxes resulting from: Net loss from unconsolidated investment. . . . . . . . . . 1,197 7,247 -- Reduction in valuation allowance (12,766) -- -- Other, net. . . . . . . . . . . 270 14 (732) -------- -------- -------- Total . . . . . . . . . . . $(15,141) (3,462) (29,570) ======== ======== ======== Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The deferred tax effects of temporary differences at December 31, 2002 and 2001 are as follows: 2002 2001 -------- -------- Deferred tax assets: Post retirement benefits. . . . . . . . $ (9,188) (12,916) Reserves related primarily to losses on divestitures . . . . . . . . . . . (12,880) (11,775) Loss carryforwards. . . . . . . . . . . (3,870) (15,294) Tax credit carryforwards. . . . . . . . (4,258) (6,114) Other, net. . . . . . . . . . . . . . . (753) (5,447) -------- -------- Total deferred tax assets . . . . . . (30,949) (51,546) Less - valuation allowance. . . . . . 4,175 16,941 -------- -------- Net deferred tax assets . . . . . . . (26,774) (34,605) -------- -------- 2002 2001 -------- -------- Deferred tax liabilities: Property, plant and equipment, principally due to depreciation, net of impairment charges and purchase accounting adjustments . . . 25,814 41,790 Prepaid pension and core retirement award costs . . . . . . . . . . . . . 10,103 9,188 Basis difference in partnership interests . . . . . . . . . . . . . . -- 37,598 -------- -------- Total deferred tax liabilities. . . 35,917 88,576 -------- -------- Net deferred tax liability. . . . . $ 9,143 53,971 ======== ======== The net deferred tax liability was reduced by approximately $30,000 due to the restructuring and has been reflected as a component of the Extraordinary gain on reorganization in 2002. At December 31, 2002, the Company has net operating loss carryforwards ("NOLs") for federal income tax purposes of approximately $4 million and approximately $56 million for state income tax purposes which can be used to offset taxable income, if any, in future years. The federal NOLs begin to expire in 2016. The reduction in the valuation allowance is primarily due to the expected utilization of NOLs in 2002 that had been previously reserved for financial reporting purposes. The state NOLs, primarily in the state of Hawaii, have significant expiration dates commencing in 2005. NOLs have generally been reserved because utilization is dependent on future events that cannot be reasonably predicted. The Company also has available alternative minimum tax credits which can be used to offset future federal income taxes, if any. The alternative minimum tax credits aggregated approximately $4 million as of December 31, 2002 and can be utilized over an indefinite period. U.S. Federal tax return examinations have been completed for years through 1997. The Company believes adequate provisions for income tax have been recorded for all years. The Company's Federal tax returns for the periods 1998-2000 are currently being examined. The statutes of limitations with respect to the Company's tax returns for 1998 through 2002 remain open. (7) TRANSACTIONS WITH AFFILIATES An affiliated insurance agency , JMB Insurance Agency, Inc., earns insurance brokerage commissions in connection with providing the placement of insurance coverage for certain of the properties and operations of the Company. Such commissions are comparable to those that would be paid to such affiliate insurance agency in similar dealings with unaffiliated third parties, and are generally paid by the insurance carriers that the agency represents out of the premiums paid by the Company for such coverage. The total of such commissions for the years ended December 31, 2002, 2001 and 2000 (including amounts related to discontinued operations in 2001 and 2000) was approximately $75 thousand, $1.1 million and $1.3 million, respectively, not all of which was paid as of December 31, 2002. The Company pays a non-accountable reimbursement of approximately $30 thousand per month to JMB Realty Corporation an affiliate in respect of general overhead expense, all of which was paid as of December 31, 2002. The Company reimburses their affiliates for direct expenses incurred on its behalf, including salaries and salary-related expenses incurred in connection with the management of the Company's operations. Generally, the entity that employs the person providing the services receives the reimbursement. Substantially all of such reimbursable amounts were incurred by JMB Realty Corporation or its affiliate, Management Services, LLC, during 2002. The total costs for the years ended 2002, 2001 and 2000 was approximately $2.0 million, $1.1 million and $2.8 million, respectively, of which approximately $.5 million was unpaid as of December 31, 2002. Employees of certain of the Company's unconsolidated affiliates are entitled to participate in the Company's defined contribution pension plan. Pursuant to an agreement through December 31, 2001 Northbrook was entitled to receive a reimbursement from such affiliates in an amount equal to the service cost related to these employees. The amount of the reimbursement for 2002, 2001 and 2000 was $0, $1.2 million and $1.5 million, respectively, all of which was paid as of December 31, 2002. The Company had other amounts due from affiliates of $19 thousand and $.3 million at December 31, 2002 and 2001, respectively. Such amounts relate primarily to amounts due from former affiliates and do not relate to ongoing transactions. (8) COMMITMENTS AND CONTINGENCIES Material legal proceedings of the Company are described below. Unless otherwise noted, the parties adverse to the Company in the legal proceedings described below have not made a claim for damages in a liquidated amount and/or the Company believes that it would be speculative to attempt to determine the Company's exposure relative thereto, and as a consequence believes that an estimate of the range of potential loss cannot be made. In proceedings filed prior to the Petition Date where a Debtor is a defendant, such proceedings were stayed as against such Debtor by the filing of the Reorganization Case. Those proceedings may now continue since the Plan Effective Date has occurred so long as the plaintiffs therein filed timely claims under the Plan. However, any judgments rendered therein would be subject to the distribution provisions of the Plan, which would in most cases result in the entitlement of such claims to proceeds that are substantially less than the face amount of such judgments. Any claims that were not filed on a timely basis under the Plan have been discharged by the Bankruptcy Court and thus the underlying legal proceedings should not result in any liability to the Debtors. Proceedings against subsidiaries or affiliates of Kaanapali Land that are not Debtors were not stayed by the Plan and may proceed. APIC, which is not a Debtor and is owned approximately 16.7% by the Company, is the primary borrower under a $66 million loan made by the ERS in 1991. The loan, which has a balance as of December 31, 2002 of approximately $81 million, is secured by the RKGC (and certain adjacent lands). All of APIC's assets are subject to the loan. The loan matured in June 2001 and has not been extended, despite efforts of the borrowers to obtain such an extension as described below. Due to insufficient cash flow generated by the RKGC and because of disagreements with the lender over, among other things, lender's failure (i) to consent to a grant of required easements in order for the Company to develop and market its adjoining properties and (ii) to release adjacent lands that are not related to the golf course operations from the mortgage, as required under the loan documents, APIC and the other borrowers under the loan did not pay the required interest payments due in 2000 on the loan secured by these golf courses. ERS then issued a default notice and instituted a foreclosure action in August 2000 (Employees' Retirement System of the State of Hawaii v. Amfac/JMB Hawaii, L.L.C., et. al., Civil No. 00-1-2597-08, First Circuit Court, State of Hawaii). Pursuant to an agreement between the lender and the borrowers, the borrowers paid approximately $3.8 million in September 2000 to the ERS for a portion of the past due interest amounts and the ERS agreed to temporarily suspend its action to realize upon its security while the parties attempted to negotiate a definitive agreement to extend the loan beyond its June 30, 2001 maturity date. Efforts of the borrowers to negotiate such an agreement broke down in December 2001, only after Northbrook (an affiliate of APIC that had no obligations under the loan) had funded certain minimum interest payments (together with the ERS' legal fees and other related costs). In January 2002, ERS recommenced its foreclosure action, which the borrowers are contesting. The borrowers have also brought counterclaims against ERS relative to the lender's defaults described above, which defaults have caused APIC and the Company substantial damages relating to its efforts to sell either the unrelated parcels that the ERS refused to release from the mortgage or other land parcels that required easements and other rights to which the ERS was required to consent. The borrowers' counterclaims against the ERS in such litigation assert, among other things, that because of the refusal of the ERS to perform in accordance with the loan documents and grant the required consents and releases, dating back to the inception of the loan, the Company suffered damages over time relating to various development projects and sale transactions that APIC and/or the Company consummated or attempted to consummate since 1991. Also alleged is that these refusals and the interference of the ERS with APIC's and the Company's legitimate development efforts was intended by ERS to give the ERS leverage over APIC and the Company's development and land sale activities to the benefit of ERS, not to protect the ERS' bargained for security for its loan on the RKGC. Some projects allegedly were substantially delayed by the ERS' defaults and significant land sales were allegedly either substantially delayed or failed altogether. Income from sales allegedly was also adversely affected in addition to the expenses of development caused by the ERS' delays and refusals. In addition, APIC and the Company allegedly suffered significant damages relative to the costs of attorneys and other professionals that the Company was forced to pay (including those of ERS' attorneys and professionals) in its failed attempt to obtain the consents and releases. Failure to obtain the necessary easements promised by ERS allegedly could allegedly subject APIC and/or the Company to damages claims from landowners on parcels previously sold by the Company and, particu- larly, could allegedly significantly negatively impact the value and marketability of its remaining land parcels in Kaanapali Golf Estates, which requires such easements for access and to ensure that the parcel enjoys necessary water and drainage rights. As a consequence of the ERS' alleged actions, the borrowers' counterclaims allege, among other things, that the ERS breached its duties under the contract, breached the ERS' implied covenant of good faith and fair dealing, fraudulently induced the borrowers to enter into the loan, acted in a fraudulent manner respecting its fiduciary relationship with the borrowers and/or acted in bad faith. The counterclaim seeks, among other things, damages, attorneys' fees and costs, and an order directing the ERS to provide the releases and consents required by the loan documents. There can be no assurance that defendants will prevail in the counterclaim or in the defense of ERS's attempt to realize on its security. On March 19, 2002, the court entered an order appointing a receiver for the property that is security for the loan, as well as for the golf course operations related thereto. The receiver has taken over the golf course operations from APIC and hired most of APIC's former employees. APIC's former employees are seeking from APIC payment of severance and certain benefits, among other things. The borrowers have been engaged in settlement negotiations with ERS since 2000, which negotiations have resulted in the execution of the ERS Settlement Agreement in March 2003. Although the borrowers believe that the transactions contemplated by the ERS Settlement Agreement will be consummated during the third quarter of 2003, the ERS Settlement Agreement is subject to contingencies including approval by the state court which has authority over the underlying litigation. Such approval is anticipated in the second quarter of 2003. As a consequence of such contingencies, there can be no assurance as to the consummation of such settlement agreement. Consummation of the ERS Settlement Agreement and the transactions contemplated therein would provide the Company with easements and other rights that it considers adequate for the development or sale of Parcel 22/23, but would also result in the Company having no further interest in the RKGC. In October 2002, in anticipation of the finalization of the ERS Settlement Agreement, Kaanapali Land, AHI and certain related entities entered into a Funding Agreement (the "Funding Agreement") with APIC, AFI and AFI's parent, Amfac Finance Limited Partnership ("AFLP") that specifies how amounts paid by Kaanapali Land as "Funding Entity" under such settlement agreement will be treated. Kaanapali Land was willing to enter into the Funding Agreement because, among other things, the ERS had threatened to file a significant claim (in an amount that has not been specified by ERS) in the Reorganization Case against the borrowers who are Debtors, which claim, if allowed in whole or significant part would likely cause a material adverse impact on the Company and its prospects for successfully implementing the Plan. Although the Debtors believe that any such claim would be without merit, either in whole or substantial part there could be no assurance that it would not ultimately be allowed in a significant amount. The existence of the Funding Agreement made it possible to enter into the ERS Settlement Agreement, which in turn has significantly reduced, if not eliminated, the risk that any such claim will be filed by ERS under the Plan. Generally, 1/6 of the funded amounts shall be treated as capital contributions to AHI and Pioneer Mill and then to APIC, on account of AHI's stock ownership in APIC. The remaining 5/6 of such amounts shall be treated as a loan by Kaanapali Land to AFLP, which will then be treated as having been contributed by AFLP, through AFI, to APIC on account of AFI's stock ownership in APIC. The ability of AFLP to reimburse Kaanapali Land for such loan amounts depends on the recovery by AFLP of a judgment it has obtained in certain litigation that is unrelated to the Company. There can be no assurance that AFLP will ultimately realize on such judgment or that it will obtain proceeds relative thereto or otherwise in an amount sufficient to satisfy the loan from Kaanapali Land. Concurrently with the execution of the ERS Settlement Agreement, APIC entered into a settlement agreement with the union representing the bargaining unit employees employed by APIC at the time the receivership commenced. Such settlement shall, upon consummation of the ERS Settlement Agreement, result in certain amounts being paid or distributed to such employees in return for releases by each of them and the union in favor of APIC and the Company. APIC intends to handle its former non-bargaining unit employees employed at the RKGC at such time in substantially the same manner. However, there can be no assurance that such settlement will be consummated, nor that all eligible former employees will take advantage of it. The total amount estimated to be paid to APIC's former employees as a consequence of such settlement is approximately $1.24 million. In connection with the Reorganization Case, the ERS, the Debtors and APIC, during the third quarter of 2002, entered into a Stipulation approved by the Bankruptcy Court, which as amended from time to time and approved by the Bankruptcy Court since originally entered, among other things, currently (i) provides for an extension of the bar date by which the ERS must file any claims it may have against any of the Debtors until five (5) business days after written notice from the Debtors and (ii) reserves the rights of the ERS and the Debtors with respect to objections that the ERS may have to the treatment of its claims under the Plan and further provides that such objections, if asserted, will be resolved by the Bankruptcy Court following confirmation of the Plan in the manner as set forth in the Stipulation. The consummation of the ERS Settlement Agreement would result in the release and waiver of any claims that the ERS might have against the Debtors in the Reorganization Case. On September 20, 1996, Oahu Sugar Company, LLC, successor by merger to Oahu Sugar Company, Limited ("Oahu Sugar") and a subsidiary of Kaanapali Land, filed a lawsuit, Oahu Sugar v. Walter Arakaki and Steve Swift, Case No. 96-3880-09, in the Circuit Court of the First Circuit, State of Hawaii. In the lawsuit, Oahu Sugar, which is a Non-Debtor AHI Subsidiary, alleged that it entered into an agreement to sell to defendants certain sugar cane processing equipment at Oahu Sugar's sugar cane mill in Waipahu. Oahu Sugar alleged that defendants failed to timely dismantle and remove the equipment, as required by the agreement, and that defendants were obligated to pay Oahu Sugar rent for the area occupied by the equipment beyond the time provided for by the parties. Oahu Sugar further alleged that it provided notice to defendants that Oahu Sugar was entitled to treat the equipment as abandoned property and to sell the equipment, because the equipment had not been removed from the property in a timely fashion, as required by the parties' agreement. In its complaint, Oahu Sugar sought, among other things, declaratory relief that it was entitled to treat the equipment as abandoned, damages for breach of contract, and rent under an unjust enrichment theory. Defendants filed an answer, as amended, denying the substantive allegations of Oahu Sugar's complaint and asserting various affirmative defenses. In addition, the defendants filed a seven-count counterclaim against Oahu Sugar. In the counterclaim, defendants alleged, among other things, that Oahu Sugar failed to make the equipment available for removal on a timely basis, and that Oahu Sugar otherwise improperly interfered with defendants' plans for the removal and subsequent sale of the equipment. In the counterclaim, defendants sought, among other things, general, special and punitive damages, attorneys' fees, costs, and such other relief as the Court may have deemed appropriate. Oahu Sugar's declaratory relief claim was settled in advance of trial. Oahu Sugar obtained dismissals and directed verdicts on six of defendants' claims. The remaining portions of the complaint and counterclaim proceeded to a jury trial and verdict. On December 2, 1999, the jury denied Oahu Sugar relief on its remaining claims and awarded the defendants approximately $2.6 million in damages on their counterclaim. On March 2, 2000, the trial court entered a judgment against Oahu Sugar for the $2.6 million in damages awarded by the jury. In addition, the trial court awarded counterclaimants $751 thousand in attorneys' fees, $28 thousand in costs and $866 thousand in prejudgment interest. Oahu Sugar's post trial motions for judgment as a matter of law and for a new trial were denied. Oahu Sugar filed a notice of appeal. The defendants began efforts to collect the amounts awarded to them. Defendants caused garnishee summons to be issued to various affiliated and unaffiliated entities. The defendants scheduled a debtor's examination for August 23, 2000 which was not concluded. The Hawaii Supreme Court scheduled the case for an appellate conference and mediation that was unsuccessful. Then, on January 3, 2001, the Hawaii Supreme Court entered an order dismissing the appeal. The Supreme Court held that it lacked jurisdiction over the appeal because the judgment entered on March 2, 2000 was legally defective in that it did not identify the claim for which judgment was entered or dismiss all of the other claims and counterclaims of the parties. In light of the order of the Hawaii Supreme Court, the parties filed legal briefs before the trial court to have the court determine, among other things, whether a corrected judgment consistent with the jury verdict may be entered as of March 2, 2000 or a new judgment order is required. After hearing the arguments of the parties, on March 19, 2001, the trial court ruled that it would not enter a corrected judgment as of March 2, 2000 and that a new judgment order will be required. On April 12, 2001, the court entered the new judgment order on the counterclaims providing for the payment of approximately $2.6 million in damages, $730 thousand in attorneys' fees, $28 thousand in costs, $867 thousand in prejudgment interest, and additional prejudgment interest from January 20, 2000 through April 12, 2001. From and after entry of the order, post-judgment interest will accrue on the unpaid balance at the statutory rate of ten percent per annum until paid in full. Oahu Sugar is pursuing an appeal and the opposing side has filed a cross appeal seeking further relief on any potential retrial of the matter. The case is fully briefed and awaits a decision by the Hawaii Supreme Court. Oahu Sugar continues to believe that it is entitled to affirmative relief on its complaint and that it has meritorious defenses to the counterclaim that it has pursued on appeal. The Company, however, can provide no assurances that it will be successful in obtaining affirmative relief or overturning the verdict against Oahu Sugar. This verdict, if upheld, could have a material adverse effect on the Oahu Sugar's financial condition. On or about December 15, 2000, Oahu Sugar and Oahu MS Development Corp. ("Oahu MS", f/k/a Amfac Property Development Corp.), subsidiaries of Kaanapali Land, among others, were named in a lawsuit entitled Walter Arakaki and Steve Swift v. Oahu Sugar Company, Limited et al., Civil No. 00-1-3817-12, and filed in the Circuit Court of the First Circuit of Hawaii. In the complaint, as amended, plaintiffs seek a declaration that certain conveyances of real estate made by Oahu Sugar or Oahu MS, since December 1996, were allegedly fraudulent transfers made in violation of the common law, the Hawaii fraudulent transfer act, and rights which they claim arose in connection with the claims they filed in Oahu Sugar v. Walter Arakaki and Steve Swift, Case No. 96-3880-09, discussed above (hereinafter, "underlying matter"). Plaintiffs seek, among other things, injunctive and declaratory relief, compensatory damages, punitive damages, orders of attachment against sales proceeds, voidance of certain transfers, foreclosure and other remedies in connection with various transfers of real estate made by Oahu Sugar to Oahu MS the Young Men's Christian Association of Honolulu ("YMCA"), and the Filipino Community Center, Inc. ("FCC"), among others, all over the years 1996-2000. Although the amount of damages sought in this case are unspecified, the case arises in connection with the plaintiffs' efforts to realize on their judgment in the earlier action against Oahu Sugar described above. The YMCA and FCC have also been named defendants in this action and have filed cross-claims for relief against Oahu Sugar and Oahu MS for alleged breach of warranty of title, indemnity and contribution in connection with their respective transactions, and seeking, among other things, damages, attorneys' fees, costs, and prejudgment interest. Oahu Sugar and Oahu MS have filed answers to the complaint, as amended, and the cross-claims. On May 3, 2001, plaintiffs filed an amended complaint dropping the remedy of foreclosure in connection with certain property transferred to the YMCA and adding various allegations including, without limitation, allegations regarding the final judgment entered in the underlying matter. The case is proceeding and is set for mediation in July 2003 and for trial in April 2004. Oahu Sugar and Oahu MS believe they have meritorious defenses and intend to pursue their defenses vigorously. However, there can be no assurances that this case, when once adjudicated, will not have a material adverse effect on the financial condition of Oahu Sugar or Oahu MS. The Company believes that Oahu Sugar has meritorious defenses to the above referenced pending lawsuits that continue to be pending and Oahu Sugar will defend itself vigorously. However, as Oahu Sugar is substantially without assets to satisfy any material existing or future judgment, there can be no assurances that these cases (or any of them), if adjudicated in a manner adverse to Oahu Sugar, will not have a material adverse effect on the financial condition of Oahu Sugar. On October 23, 2002, Oahu MS was named in a civil action entitled City Bank v. Amfac Property Development Corp., et. al. pending in the Circuit Court of the First Circuit, State of Hawaii, Civil No. 02-2494-10. In this case, plaintiff seeks injunctive relief and declaratory relief to cease actions preventing City Bank and its consultants from gaining access to the mortgaged property for environmental testing. In addition, the complaint seeks unspecified damages as may be shown at trial, costs, interest and reasonable attorneys' fees, and such other further relief as the Court award. Although plaintiff filed a Motion for Preliminary Injunction, no hearing has been set on the motion. On January 2, 2003, Oahu MS was named in a civil action entitled City Bank v. Amfac Property Development Corp., et. al. pending in the Circuit Court of the First Circuit, State of Hawaii, Civil No. 03-1-0005-01. In this case, plaintiff seeks foreclosure of property owned by Oahu and encumbered by a mortgage in favor of Plaintiff. City Bank made a $10.0 million loan to APDC under a loan agreement dated December 18, 1996. City Bank claims that as a result of alleged defaults, the entire amount of the presently unpaid obligations under the loan documents is due and remains due and payable. It alleges that the amount due as of December 2, 2002 is $2,872,862.66 plus a per diem charge of $1,405.47 accruing on the unpaid principal, until payment is made and/or interest changes, plus advances and expenses incurred in connection with the action. In its complaint, City Bank seeks all amounts allegedly due and owing to City Bank, together with legal interest thereafter to accrue thereon and all advances, costs and attorneys' fees; a foreclosure decree and sale; the appointment of a receiver to conduct an environmental audit on a specified portion of the secured property and to collect rents being paid on a portion of the mortgaged properties; the entry of an order of deficiency against APDC to the extent such exists after sale with execution to follow thereon; and such other relief as the court may deem proper. Together with the Complaint, City Bank filed a Motion for Appointment of Receiver alleging that it is entitled to have a receiver appointed for an environmental audit on the mortgaged property and collection of all net rental income assigned to City Bank. This motion was granted. On or about February 23, 2001 Kekaha Sugar Co., Ltd., a subsidiary of Kaanapali Land, received a letter from the Hawaii Department of Health ("HDOH") assigning the Kekaha Sugar Co., Ltd. site a high priority status based on HDOH's review of available environmental data. In the letter, HDOH identified five major areas of potential environmental concern including the former wood treatment plant, the herbicide mixing plant, the seed dipping plant, the settling pond, and the Kekaha Sugar Mill. While setting forth specific concerns, the HDOH reserved the right to designate still further areas of potential concern which might require further investigation and possible remediation. HDOH further reserved the right to modify its prioritization of the site should conditions warrant. The assignment of the high priority status will likely result in a high degree of oversight by the HDOH as the issues raised are studied and addressed. Kekaha Sugar Co., Ltd. has responded to the letter. The United States Environmental Protection Agency has performed a visual inspection of the property and indicated there will be some testing performed. Kekaha Sugar Co., Ltd. is substantially without assets and further pursuit of this matter by HDOH could have a materially adverse effect on the financial condition of Kekaha Sugar Co., Ltd. On or about February 23, 2001, Lihue Plantation received a similar letter from the HDOH assigning the LPCo site a high priority status based on HDOH's review of available environmental data. In the letter, HDOH identified four major areas of potential environmental concerning including the Lihue Plantation herbicide mixing plant, the seed dipping plant, the settling pond and the Lihue Sugar Mill. While setting forth specific concerns, the HDOH reserved the right to designate still further areas of potential concern which might require further investigation and possible remediation. HDOH further reserved the right to modify its prioritization of the site should conditions warrant. As noted above, the high priority assignment will likely result in a high degree of oversight by the HDOH as the issues raised are studied and addressed. Oahu MS has discovered chlorinated solvents in the groundwater at the former Oahu Sugar Waipahu Sugar Mill site. The contamination does not appear in high concentrations. Oahu MS' recommendation for remediation using hydrogen-releasing compounds has been rejected by the HDOH. Oahu MS may have to do further work at the site. At this point, Oahu MS is unable to identify with certainty the treatment options, if any, that the HDOH may require or approve for the site, or the costs of same. Pioneer Mill is engaged in an ongoing cleanup arising out of the discovery of petroleum contamination found at the Pioneer Mill site. The Pioneer Mill site has been assigned a high priority and the HDOH has shown an interest in the environmental conditions relating to or arising out of the former operations of Pioneer Mill. These issues will have to be addressed as they are raised. Currently, Pioneer Mill is awaiting a report on the results of environmental testing conducted on the site by the United States Environmental Protection Agency. As a result of an administrative order issued to Oahu Sugar by the Hawaii Department of Health, Order No. CH 98-001, dated January 27, 1998, Oahu Sugar is currently engaged in environmental site assessment of lands it leased from the U.S. Navy and located on the Waipio Peninsula. Sampling is underway and the investigation is otherwise still in its preliminary stages. Oahu Sugar has submitted a Remedial Investigation Report to the HDOH. The HDOH has provided comments which indicate additional testing may be required. In addition, the IRS filed a claim in the bankruptcy proceedings in the aggregate amount of approximately $20,600,000 for taxes, interest and penalties related to the years 1998-2000. The Company has contacted the IRS to request that it withdraw its claim due to the fact that the Plan leaves the IRS unimpaired relative to any taxes that may be due. Although the Company is optimistic that the IRS will withdraw such claim, it has not yet done so and there can be no assurance that it will. In any event, the IRS audit of the period covered by the claim is in its preliminary stages and no deficiencies in taxes have been proposed by the auditors. The Company intends to dispute vigorously any IRS claim for additional taxes, whether asserted by means of the claim filed in the bankruptcy proceeding, arising in the pending audit, or in future audits. However, there can be no assurance that the Company will be successful in such defense and, although the Company has reserved for potential tax liabilities on its financial statement,s to the extent that the Company is unsuccessful in defending against any such claims, either in the bankruptcy court or in connection with the IRS audits, the amount for which the Company could be liable could have a material adverse effect on the Company, given its relatively modest cash position. EC Managers, Inc., a subsidiary of Kaanapali Land, and general partner of EC Partners, L.P., formerly known as Arvida/JMB Partners, L.P.-II (the "Partnership"), has been named a defendant in a lawsuit filed on January 11, 1996 in the Circuit Court in and for the Eighteenth Judicial Circuit, Seminole County, Florida entitled Land Investment I, Ltd., Heathrow Land & Development Corporation, Heathrow Shopping Center Associates and Paulucci Investments v. Arvida/JMB Managers-II, Inc., Arvida/JMB Partners, L.P.-II, Arvida Company and JMB Realty Corporation, Case No. 96-62-CA-15E. The complaint, as amended, includes counts for breach of the management agreement, fraud in the inducement and conspiracy to commit fraud in the inducement, breach of the Heathrow partnership agreement and constructive trust in connection with the purchase and management of the Heathrow development. Plaintiffs seek, among other things, unspecified compensatory damages, punitive damages, prejudgment interest, attorneys' fees, costs, and such other relief as the Court deems appropriate. Substantial fact discovery has been conducted to date and the defendants expect further substantial discovery, both of fact and expert witnesses, to take place. On June 24, 1999, the Court granted partial summary judgment in favor of the plaintiffs against Arvida Company, finding that Arvida Company owed plaintiffs a fiduciary duty as a broker and advisor under the management agreement. The ruling did not reach the issue of the statute of limitations defense nor whether any such duties were owed in connection with the Partnership's acquisition of an interest in the Heathrow development through the Heathrow partnership. No discovery cut-off date or trial date has been set, although the court has indicated a desire to try this case in November, 2003. Kaanapali Land, as successor by merger, and D/C Distribution, a subsidiary of Kaanapali Land, have been named as defendants in personal injury actions allegedly based on exposure to asbestos. There are approximately 110 cases against such subsidiary that are pending on the mainland and are alleged based on such subsidiary's prior business operations. Each company believes that it has meritorious defenses against these actions, but can give no assurances as to the ultimate outcome of these cases. In the case of the subsidiary, there can be no certainty that such subsidiary will be able to satisfy all of its liabilities for these cases. As the subsidiary is without assets to satisfy any material existing or future judgments, there can be no assurances that these cases (or any of them), if adjudicated in a manner adverse to the subsidiary, will not have a material adverse effect on the financial condition of such subsidiary. Kaanapali Land does not believe that it has liability, directly or indirectly, for such subsidiary's obligations. Other than as described above and the Reorganization Case as described above, the Company is not involved in any material pending legal proceedings, other than ordinary routine litigation incidental to its business. The Company and/or certain of its affiliates have been named as defendants in several pending lawsuits. While it is impossible to predict the outcome of such routine litigation that is now pending (or threatened) and for which the potential liability is not covered by insurance, the Company is of the opinion that the ultimate liability from any of this litigation will not materially adversely affect the Company's consolidated results of operations or its financial condition. (9) DISCONTINUED OPERATIONS In December 2001, the Company consummated a non-taxable spin-off of Resorts to its shareholders. Accordingly, Resorts is no longer a subsidiary of Kaanapali Land and is classified as a discontinued operation. Resorts' income statement information for 2001 and 2000 was as follows: 2001 2000 -------- -------- Revenues: Sales . . . . . . . . . . . . . . . . . . . $229,524 242,692 Other income. . . . . . . . . . . . . . . . 4,082 5,477 -------- -------- 233,606 248,169 -------- -------- Costs and expenses: Cost of sales . . . . . . . . . . . . . . . 150,123 158,421 Selling, general and administrative . . . . 51,083 47,877 Interest. . . . . . . . . . . . . . . . . . 8,133 10,976 Depreciation and amortization . . . . . . . 18,710 18,608 -------- -------- 228,049 235,882 Income from discontinued operations before income taxes . . . . . . . . . . . . 5,557 12,287 Income tax benefit (provision). . . . . . . . 4,537 (5,170) -------- -------- Income from discontinued operations . . . . . $ 10,094 7,117 ======== ======== (10) BUSINESS SEGMENT INFORMATION As described in Note 1, the Company operates in three business segments. Total revenues, operating profit, identifiable assets, capital expenditures, and depreciation and amortization by business segment are presented in the tables below. Total revenues by business segment includes primarily (i) sales, all of which are from unaffiliated customers and (ii) interest income that is earned from outside sources on assets which are included in the individual industry segment's identifiable assets. Operating profit is comprised of total revenue less operating expenses. In computing operating profit, none of the following items have been added or deducted: general corporate revenues and expenses, interest expense, income taxes, equity in income (loss) from unconsolidated investments and gain from the extinguishment of debt. Identifiable assets by business segment are those assets that are used in the Company's operations in each industry. Corporate assets consist principally of cash and cash equivalents, prepaid pension costs and receivables related to previously divested businesses. Investments in net assets of unconsolidated investments are related to ownership interests held by the Company primarily in various real estate related entities. 2002 2001 2000 -------- -------- -------- Revenues: Property. . . . . . . . . . . . $ 4,753 50,636 37,850 Agriculture . . . . . . . . . . 1,972 4,252 22,283 Golf. . . . . . . . . . . . . . 4,360 4,175 14,990 Corporate . . . . . . . . . . . 27 22,831 4,124 -------- -------- -------- $ 11,112 81,894 79,247 ======== ======== ======== Operating Profit (loss): Property. . . . . . . . . . . . $ 1,323 (17,806) (18,845) Agriculture . . . . . . . . . . (8,028) (3,742) (44,425) Golf. . . . . . . . . . . . . . 764 120 3,884 -------- -------- -------- Operating loss. . . . . . . . . . (5,941) (21,428) (59,386) Corporate . . . . . . . . . . . . (7,819) 15,144 (6,943) Interest expense. . . . . . . . . (2,395) (11,387) (18,227) Equity in income (loss) from unconsolidated investments. . . 5,180 (12,967) 2,162 -------- -------- -------- Loss from continuing operations before income taxes . . . . . . $(10,975) (30,638) (82,394) ======== ======== ======== Identifiable Assets: Property. . . . . . . . . . . . $ 55,970 67,410 Agriculture . . . . . . . . . . 51,419 64,760 Golf. . . . . . . . . . . . . . 29,076 29,441 -------- -------- 136,465 161,611 Corporate . . . . . . . . . . . . 53,161 62,017 -------- -------- $189,626 223,628 ======== ======== Agricultural identified assets include land classified as agricultural or conservation for State and County purposes. 2002 2001 2000 -------- -------- -------- Capital Expenditures: Property. . . . . . . . . . . . $ -- 13 129 Agriculture . . . . . . . . . . -- 20 2,642 Golf. . . . . . . . . . . . . . 163 499 239 Corporate . . . . . . . . . . . 15 -- 13 -------- -------- -------- $ 178 532 3,023 ======== ======== ======== Depreciation and Amortization: Property. . . . . . . . . . . . $ 90 86 339 Agriculture . . . . . . . . . . 1,417 1,924 2,931 Golf. . . . . . . . . . . . . . 552 839 1,318 Corporate . . . . . . . . . . . 935 772 1,277 -------- -------- -------- Total . . . . . . . . . . . . . . $ 2,994 3,621 5,865 ======== ======== ======== (11) CALCULATION OF NET INCOME PER SHARE The following tables set forth the computation of net income (loss) per share - basis and diluted: For the For the Period Period January 1, November 14, Years Ended 2002 through 2002 through December 31, November 13, December 31,---------------------- 2002 2002 2001 2000 ------------ ------------ --------- ---------- (Amounts in thousands except per share amounts) NUMERATOR: Operating loss. . . . $ (2,117) (14,038) (17,671) (84,556) ========== ======== ========= ========== Equity in income (loss) from unconsolidated investments . . . . 5,525 (345) (12,967) 2,162 ========== ======== ========= ========== Income from continuing operations. . . . . 12,939 (8,773) (27,176) (52,824) Income from discon- tinued operations . -- -- 10,094 7,117 Extraordinary gain. . 136,618 -- -- -- ---------- -------- --------- ---------- Net income (loss) . . $ 149,557 (8,773) (17,082) (45,707) ========== ======== ========= ========== DENOMINATOR: Denominator for net income (loss) per share - basic and diluted. . . . . . . $ 4 1,863 4 4 ========== ======== ========= ========== Net income (loss) per share - basic and diluted. . . . . 37,389.34 (4.71) (4,270.50) (11,426.75) ========== ======== ========= ========== Net income per share - basic: Income (loss) from continuing opera- tions . . . . . . . $ 3,234.84 (4.71) (6,794.00) (13,206.00) Income from discon- tinued operations . -- -- 2,523.50 1,779.25 Extraordinary gain. . 34,154.50 -- -- -- ---------- -------- --------- ---------- Net income per share basic and diluted. . $37,389.34 (4.71) (4,270.50) (11,426.75) ========== ======== ========= ========== As of December 31, 2002, the Company had issued approximately 1,863,000 shares of Class B, non par value stock and approximately 231,700 of Class A, non par value stock. The LLC Agreement provides for two classes of membership interests, Class A Shares and Class B Shares, which have substantially identical rights and economic value under the LLC Agreement; except that holders of Class A Shares are represented by a "Class A Representative" who must approve certain transactions proposed by Kaanapali Land before they can be undertaken. Class B Shares are held by Pacific Trail and various entities and individuals that are affiliated with Pacific Trail. Class A Shares were issued under the Plan to claimants who had no such affiliation. (12) SUBSEQUENT EVENTS On January 31, 2003, an option to purchase an approximate 11.5 acre site was exercised. A non-refundable payment was made for $2 million (before closing costs and prorations). The remainder of the purchase price is secured by a note due March 31, 2004 for approximately $14.4 million, a portion of which is subject to refund based on the number of hotel room units approved for construction on the site. An approximate 40 acre site has been offered for sale and is currently under contract. There are certain contingencies to the contract and there is no assurance that the transaction will be consummated under its existing or any other terms. ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with the accountants during the fiscal years 2002 and 2001. ITEM 15. FINANCIAL STATEMENT AND EXHIBITS (a) The following documents are filed as part of this report: (1) Financial Statements See Index to Financial Statements and Supplementary Data filed with this report. (2) Exhibits See Index to Exhibits, which is incorporated herein by reference. (b) Exhibits: The Exhibits required by Item 601 of Regulation S-K are listed in the Index to Exhibits, which is incorporated herein by reference. All other schedules have been omitted since the required information is presented in the financial statements and the related notes or is not applicable. SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KAANAPALI LAND, LLC By: Gailen J. Hull Senior Vice President Date: April 30, 2003 EXHIBIT INDEX Exhibit No. Exhibit - ----------- ------- 2.1 Order Confirming Second Amendment Joint Plan of Reorganization Dated June 11, 2002, including as an exhibit thereto, the Second Amended Joint Plan of Reorganization of Amfac Hawaii, LLC, Certain of its Subsidiaries and FHT Corporation Under Chapter 11 of the Bankruptcy Code incorporated herein by reference the Amfac Hawaii, LLC Current Report on Form 8-K for July 29, 2002 dated August 13, 2002 (File No. 33-24180). 2.2 Second Amended Disclosure Statement with Respect to Joint Plan of Reorganization of Amfac Hawaii, LLC, Certain of its Subsidiaries and FHT Corporation Under Chapter 11 of the Bankruptcy Code, incorporated herein by reference from the Amfac Hawaii, LLC Current Report on Form 8-K for July 29, 2002 dated August 13, 2002 (File No. 33-24180). 3.1 Amended and Restated Limited Liability Company Agreement of Kaanapali Land, LLC dated November 14, 2002 is filed herewith. 10.1 $10,000,000 loan agreement between Amfac Property Development Corp. and City Bank at December 18, 1996 filed as an exhibit to Amfac Hawaii, LLC's Form 10-K report for December 31, 1996 under the Securities Act of 1934 (File No. 33-24180) filed March 21, 1997 and hereby incorporated by reference. 10.2 General Lease S-3821, dated July 8, 1964, by and between the State of Hawaii and East Kauai Water Company, Ltd. (1) 10.3 Amended and Restated Power Purchase Agreement, dated as of June 15, 1992, by and between The Lihue Plantation Company, Limited and Citizens Utilities Company. (1) 10.4 U.S. Navy Waipio Peninsula Agricultural Lease, dated May 26, 1964, between The United States of America (as represented by the U.S. Navy) and Oahu Sugar Company, Ltd. (1) 10.5 Amendment to the Robinson Estate Hoaeae Lease, dated May 15, 1967, by and between various Robinsons, heirs of Robinsons, Trustees and Executors, etc. and Oahu Sugar Company, Limited amending and restating the previous lease. (1) 10.6 Amendment to the Campbell Estate Lease, dated April 16, 1970, between Trustees under the Will and of the Estate of James Campbell, Deceased, and Oahu Sugar Company, Limited amending and restating the previous lease. (1) 10.7 Bishop Estate Lease No. 24,878, dated June 17, 1977, by and between the Trustees of the Estate of Bernice Pauahi Bishop and Pioneer Mill Company, Limited. (1) 10.8 General Lease S-4229, dated February 25, 1969, by and between the State of Hawaii, by its Board of Land and Natural Resources and Pioneer Mill Company, Limited. (1) 10.9 Honokohau Water License, dated December 22, 1980, between Maui Pineapple Company Ltd. and Pioneer Mill Company, Limited. (1) 10.10 Water Licensing Agreement, dated September 22, 1980, by and between Maui Land & Pineapple Company, Inc. and Amfac, Inc. (1) 10.11 Funding Agreement dated October 29, 2002 between Kaanapali Land and certain affiliates is filed herewith. 10.12 Service Agreement, dated November 18, 1988, between Amfac/JMB Hawaii, Inc., and Amfac Property Development Corp.; Amfac Property Investment Corp.; Amfac Sugar and Agribusiness, Inc.; Kaanapali Water Corporation; Amfac Agribusiness, Inc.; Kekaha Sugar Company, Limited; The Lihue Plantation Company; Oahu Sugar Company, Limited; Pioneer Mill Company, Limited; Puna Sugar Company, Limited; H. Hackfeld & Co., Ltd.; and Waiahole Irrigation Company, Limited and JMB Realty Corporation, incorporated herein by reference to the Amfac Hawaii, LLC Annual Report on Form 10-K filed on March 22, 1989 (File No. 33-24180) for the year ended December 31, 1988. (1) Previously filed as exhibits to Amfac Hawaii, LLC's Registration Statement on Form S-1 (as amended) under the Securities Act of 1933 (File No. 33-24180) and hereby incorporated by reference. EX-3.1 3 kaa_31.txt EXHIBIT 3.1 - ----------- KAANAPALI LAND, LLC (a Delaware limited liability company) Amended and Restated Limited Liability Company Agreement TABLE OF CONTENTS ARTICLE 1 DEFINITIONS. . . . . . . . . . . . . . . . . . . . 2 ARTICLE 2 ORGANIZATIONAL MATTERS . . . . . . . . . . . . . . 5 Section 2.1 Formation and Continuation. . . . . . . . 5 Section 2.2 Name. . . . . . . . . . . . . . . . . . . 5 Section 2.3 Registered Office and Agent, Principal Office. . . . . . . . . . . . . 5 Section 2.4 Purposes. . . . . . . . . . . . . . . . . 5 Section 2.5 Powers. . . . . . . . . . . . . . . . . . 5 ARTICLE 3 AUTHORIZED CAPITAL OF THE COMPANY. . . . . . . . . 7 Section 3.1 Admission of Members. . . . . . . . . . . 7 Section 3.2 Class A Shares. . . . . . . . . . . . . . 8 Section 3.3 Class B Shares. . . . . . . . . . . . . . 8 Section 3.4 No Further Capital/Loans; No Preemptive Rights. . . . . . . . . . . 9 Section 3.5 Recoupment for Contributions; Withdrawal and Resignation . . . . . . . . . . . . . 9 Section 3.6 Limited Liability; No Right of Management or Authority to Act. . . . . . . . . . . . . 9 Section 3.7 No Cessation of Membership upon Bankruptcy, Etc . . . . . . . . . . . . . . . . . . . 9 ARTICLE 4 MANAGEMENT . . . . . . . . . . . . . . . . . . . . 10 Section 4.1 Manager . . . . . . . . . . . . . . . . . 10 Section 4.2 Delegation of Duties. . . . . . . . . . . 11 Section 4.3 Officers; Agents. . . . . . . . . . . . . 11 Section 4.4 Compensation; Expenses. . . . . . . . . . 11 Section 4.5 Class A Representative. . . . . . . . . . 11 Section 4.6 Other Activities of Manager and its Affiliates. . . . . . . . . . . . . . 14 Section 4.7 No Obligation to Consider Separate Interests of Members. . . . . . . . . . . 14 Section 4.8 Resignation; Replacement; Removal . . . . 14 Section 4.9 Transactions with Affiliates. . . . . . . 14 Section 4.10 Outside Businesses. . . . . . . . . . . . 15 ARTICLE 5 DISTRIBUTIONS. . . . . . . . . . . . . . . . . . . 15 Section 5.1 Distributions . . . . . . . . . . . . . . 15 Section 5.2 Withdrawal of Capital . . . . . . . . . . 15 Section 5.3 Withholding . . . . . . . . . . . . . . . 15 ARTICLE 6 TRANSFERS. . . . . . . . . . . . . . . . . . . . . 16 Section 6.1 Class A Shares. . . . . . . . . . . . . . 16 Section 6.2 Class B Shares. . . . . . . . . . . . . . 16 Section 6.3 Other Classes . . . . . . . . . . . . . . 16 Section 6.4 No Obligation to List . . . . . . . . . . 16 ARTICLE 7 RECORDS AND REPORTS. . . . . . . . . . . . . . . . 16 Section 7.1 Books and Records . . . . . . . . . . . . 16 Section 7.2 Reports . . . . . . . . . . . . . . . . . 17 ARTICLE 8 DISSOLUTION, LIQUIDATION AND TERMINATION . . . . . 17 Section 8.1 Dissolution . . . . . . . . . . . . . . . 17 Section 8.2 Death, Legal Incapacity, Etc. . . . . . . 17 Section 8.3 Treatment of Company. . . . . . . . . . . 17 Section 8.4 Liquidation of Company Interests Upon Dissolution. . . . . . . . . . . . . 17 ARTICLE 9 AMENDMENTS; MEETINGS . . . . . . . . . . . . . . . 18 Section 9.1 Amendments in General . . . . . . . . . . 18 Section 9.2 Meetings of the Members . . . . . . . . . 19 ARTICLE 10 LIABILITY, EXCULPATION, INDEMNIFICATION AND INSURANCE 20 Section 10.1 Liability . . . . . . . . . . . . . . . . 20 Section 10.2 Duties of Covered Persons; Exculpation. . 20 Section 10.3 Indemnification . . . . . . . . . . . . . 20 Section 10.4 Expenses. . . . . . . . . . . . . . . . . 21 Section 10.5 Severability. . . . . . . . . . . . . . . 21 Section 10.6 Insurance . . . . . . . . . . . . . . . . 22 Section 10.7 Reliance on Documents and Advisers. . . . 22 ARTICLE 11 GENERAL PROVISIONS. . . . . . . . . . . . . . . . 22 Section 11.1 Notices . . . . . . . . . . . . . . . . . 22 Section 11.2 Further Assurances. . . . . . . . . . . . 22 Section 11.3 Binding Effect. . . . . . . . . . . . . . 22 Section 11.4 Waiver of Partition . . . . . . . . . . . 23 Section 11.5 Governing Law . . . . . . . . . . . . . . 23 Section 11.6 Gender and Number . . . . . . . . . . . . 23 Section 11.7 Facsimile Signature . . . . . . . . . . . 23 Section 11.8 Severability. . . . . . . . . . . . . . . 23 Section 11.9 Integration . . . . . . . . . . . . . . . 23 Section 11.10 Captions. . . . . . . . . . . . . . . . . 23 Section 11.11 Indulgences, Etc. . . . . . . . . . . . . 24 Section 11.12 Limitation of Liability . . . . . . . . . 24 Section 11.13 Third Parties . . . . . . . . . . . . . . 24 Section 11.14 Time Periods. . . . . . . . . . . . . . . 24 Section 11.15 Counterparts. . . . . . . . . . . . . . . 24 Exhibit A Subsidiaries of the Company Exhibit B Notice Addresses AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF KAANAPALI LAND, LLC THIS AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT of KAANAPALI LAND, LLC (the "Company"), made as of the 14th day of November, 2002 (this "Agreement"), by and among Pacific Trail Holdings, LLC, a Delaware limited liability company ("Pacific Holdings") and the other Persons who have been admitted, and in the future are admitted, as members as reflected in the records of the Company (together with Pacific Holdings, the "Members" and individually, a "Member"). Pacific Holdings shall also serve as the Manager of the Company. W I T N E S S E T H: ------------------- WHEREAS, the Company was formed pursuant to the filing of its Certificate of Formation (as the same may be amended and/or restated from time to time, the "Certificate") with the Secretary of State of the State of Delaware on May 30, 2002; WHEREAS, in connection with the formation of the Company, FHT Corporation, an Arizona corporation ("FHT") and the sole member of the Company, entered into a Limited Liability Company Agreement, dated as of May 30, 2002 (the "Original Limited Liability Company Agreement"); WHEREAS, pursuant to an Agreement and Plan of Merger, dated as of June 11, 2002, Northbrook Corporation merged with and into FHT effective as of November 8, 2002, with FHT being the survivor (the "Northbrook Merger"), and following the Northbrook Merger and pursuant to an Agreement and Plan of Merger, dated as of June 11, 2002, FHT merged with and into the Company effective as of November 14, 2002, with the Company being the survivor (the "Company Merger"); WHEREAS, prior to the Effective Date of the Plan (as defined herein), FHT issued certain shares of common stock, designated as "Class B" shares, pursuant to the terms of the Northbrook Merger; WHEREAS, on the Effective Date of the Plan, FHT (i) issued certain shares of common stock designated as "Class A" shares to creditors entitled to receive such shares pursuant to the Plan (and became obligated to issue additional Class A shares in the case of creditors whose entitlement to such shares had not yet been established) and (ii) issued certain shares of common stock designated as "Class B" shares to creditors entitled to receive such shares pursuant to the Plan; WHEREAS, the Company intends to be taxed as a corporation, and not as a partnership for Federal and state income tax purposes; and WHEREAS, concurrently with the Company Merger, the Members desire to enter into this Agreement to amend and restate the Original Limited Liability Company Agreement, in its entirety, to more fully set forth their rights and obligations with respect to the Company. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties do hereby mutually covenant and agree as follows: ARTICLE 1 DEFINITIONS The defined terms used in this Agreement shall have the meanings specified below: "Accountant(s)" means Ernst & Young LLP or such other firm of independent certified public accountants as may be engaged from time to time by the Company at the direction of the Manager. "Act" means the Delaware Limited Liability Company Act, as the same may hereafter be amended. "Affiliate" means, in respect of a specified Person, any other Person that directly or indirectly through one or more intermediaries controls, is controlled by or is under common control with the Person specified. For this purpose, "control," "controlled by" and "under common control with" mean, in respect of any Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "Affiliated Person" means, in respect of a specified Person: (i) such Person or a member of such Person's Immediate Family; (ii) the legal representative, successor or assignee of, or any trustee of a trust for the benefit of, such Person or an Immediate Family member of such Person; (iii) any entity of which a majority of the voting or economic interest is owned by one or more of the Persons referred to in the preceding clauses; (iv) any Person who is an officer, director, trustee, governor, advisory board member, trustee, employee, stockholder (10% or more), partner or member (other than with respect to the Company) of any Person referred to in the preceding clauses; and (v) any Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, any Person referred to in any of the preceding clauses. "AHI" means Amfac Hawaii, LLC, a Hawaii limited liability company. "Available Cash" with respect to any period for which such calculation is being made, (a) All cash revenues and funds received by the Company from whatever source plus the amount of any reduction (including, without limitation, a reduction resulting because the Manager determines such amounts are no longer necessary) in reserves of the Company, which reserves are referred to in clause (b)(iv) below; (b) less the sum of the following: (i) all interest, principal and other debt payments made during such period by the Company, (ii) all cash expenditures (including capital expenditures) made by the Company during such period, (iii) investments in any entity (including loans made thereto) to the extent that such investments are not otherwise described in clauses (b)(i) or (ii), and (iv) the amount of any increase in reserves during such period which the Manager determines are necessary or appropriate in its sole and absolute discretion. "Business Day" means any day other than a Saturday, Sunday or other day that is a legal holiday under the laws of the State of Illinois or is a day on which banking institutions located in such state are authorized or required by law or other governmental action to close. "Capital Contributions" means the total amount of cash or other property contributed (or deemed contributed) to the Company, or services rendered to the Company, by a Member, as reflected on the books and records of the Company. Any future capital contributions of property or services (or obligations to do so) shall be valued at fair market value as determined by the Company, net of any liabilities assumed by the Company to which the contributed property is subject. "Certificate" has the meaning set forth in the recitals hereto. "Class" means the classes of Shares into which membership interests in the Company may be classified or divided from time to time pursuant to the terms, membership, conditions and provisions of this Agreement. "Class A Representative" means, initially, American Express Tax and Business Services, Inc. or any other Person selected pursuant to SECTION 4.5 hereof and who shall serve as a successor Class A Representative. "Class A Member" means any Member holding Class A Shares. "Class A Shares" shall be the class of membership interest defined in SECTION 3.2 hereof. "Class B Member" shall mean Pacific Holdings or any Affiliate thereof or any permitted transferee under SECTION 6.2 hereof. "Class B Shares" shall be the class of membership interest defined in SECTION 3.3 hereof. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Company" has the meaning set forth in the preamble hereto. "Company Merger" has the meaning set forth in the recitals hereto. "Common Shares" shall be a class of membership interest entitled to distributions and other rights as specified in this Agreement and include the Class A Shares and the Class B Shares and any additional series of membership interests created pursuant to SECTION 3.1 on a parity with the Class A Shares and Class B Shares. Each Common Share shall be entitled to one vote on all matters on which Members are entitled to vote "Consent" means the written consent or approval of a proposed action by Members entitled to vote thereon. "Covered Person" means the Manager, any Member or the Class A Representative and any Affiliated Persons of the Manager, any Member or the Class A Representative. "Effective Date" means the Business Day on which the Plan became effective. "Fiscal Year" means the calendar year, except that the initial Fiscal Year shall commence on the date hereof and the final Fiscal Year shall end on the date on which the Company is terminated under ARTICLE 8 hereof. "Immediate Family" means, with respect to any individual, his or her spouse, parents, brothers, sisters, children (natural or adopted), stepchildren, grandchildren, grandparents, parents-in-law, brothers-in-law, sisters-in-law, nephews and nieces. "Indemnitee" has the meaning set forth in SECTION 10.3 hereof. "Indenture" means that certain Indenture, dated as of March 14, 1989, as it may have been amended from time to time, pursuant to which AHI issued the Certificate of Land Appreciation Notes due 2008. "Indenture Trustee" means Bank One Trust Company, N.A., as successor trustee under the Indenture. "Manager" shall mean Pacific Holdings and any replacement as appointed pursuant to SECTION 4.8. "Member" means any Person admitted as a member of the Company as provided in ARTICLE 3 hereof. "Pacific Holdings" means Pacific Trail Holdings, LLC, a Delaware limited liability company. "Person" means any individual, general partnership, limited partnership, corporation, joint venture, trust, limited liability company, business trust, cooperative, association or other business organization. "Plan" means that certain Second Amended Joint Plan of Reorganization of AHI, certain of its Subsidiaries and FHT in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division, Case no. 02- 07637. "Record Date" means the record date established by the Manager for the distribution of Available Cash pursuant to SECTION 5.1 or for taking any vote or Consent of Members, which date shall not be prior to the close of business on the date the record date is fixed. In the absence of a Manager, the record date shall be the close of business on the date any action is otherwise properly proposed by Members hereunder. "Shares" shall mean shares of the Company which represent membership interests in the Company. Such Shares may be Common Shares, including Class A Shares and Class B Shares, or preferred shares, or any other designated class of shares, as provided in SECTION 3.1. "Subsidiary" means any corporation or other Person more than fifty percent (50%) of the outstanding voting securities of which shall, at the time of determination, be owned directly, or indirectly through one or more intermediaries, by the Company. The initial Subsidiaries of the Company are listed on EXHIBIT A attached hereto and which may be amended from time to time. ARTICLE 2 ORGANIZATIONAL MATTERS SECTION 2.1 FORMATION AND CONTINUATION. The Company was formed pursuant to the Act upon the filing of the Certificate with the Secretary of State of Delaware and shall continue in perpetuity unless and until the occurrence of an event described in SECTION 8.1 hereof. The Members do hereby continue the Company as a limited liability company in accordance with the Act and shall have the rights, duties and liabilities as provided in the Act, except as otherwise provided herein. Subject to the terms of this Agreement, the Members shall take all actions which may be reasonably necessary or appropriate for the formation and continuation of the Company as a limited liability company under the laws of the State of Delaware. SECTION 2.2 NAME. The name of the Company is Kaanapali Land, LLC. The Company's business may be conducted under any other name or names deemed advisable by the Manager. The words "Limited Liability Company", "LLC", "Ltd." or similar words or letters shall be included in the Company's name where necessary for the purposes of complying with the laws of any jurisdiction that so requires. The Company in its sole and absolute discretion may change the name of the Company at any time and from time to time and shall notify the Members of such change in the next regular communication to the Members, provided that the name of the Company may not be changed to include the name of any Member without the written consent of that Member. SECTION 2.3 REGISTERED OFFICE AND AGENT, PRINCIPAL OFFICE. The principal office of the Company is located at 900 North Michigan Avenue, Suite 1900, Chicago, Illinois 60611, or such other place as the Manager may from time to time designate. The address of the registered office of the Company in the State of Delaware is located at Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801, or at such other place as the Manager and the registered agent for service of process on the Company in the State of Delaware is The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801. The Company may maintain offices at such other place or places within or outside the State of Delaware as the Manager deems advisable. SECTION 2.4 PURPOSES. The purposes of the Company are to engage in all lawful acts or activities for which limited liability companies may be organized under the Act. SECTION 2.5 POWERS. In furtherance of its purposes, but otherwise subject to the other provisions of this Agreement, the Company shall have the power and is authorized to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishments of the purposes and business described herein and for the protection and benefit of the Company, including without limitation: (a) to acquire and exercise all rights, privileges and other incidents of ownership or possession (including the right to dispose of same) with respect to properties or interests therein, with the power to designate one or more Persons to exercise any of said rights, powers and privileges; (b) to open, maintain and close bank accounts and draw checks and other orders for the payment of money; (c) to engage attorneys, accountants, consultants or such other Persons as may be necessary or advisable to counsel and advise as to the conduct of the business and affairs of the Company and pay reasonable compensation for such services; (d) to establish, have, maintain or close one or more offices, and in connection therewith to rent or acquire office space, engage personnel and do such other acts as may be advisable or necessary in connection with such offices and personnel; (e) to acquire by purchase, exchange, lease or otherwise, and to sell, convey or otherwise dispose of any real or personal property or any interest therein which may be necessary, convenient or incidental to the accomplishment of the purposes of the Company; (f) to borrow money, on a secured or unsecured basis, or otherwise obtain or guaranty credit, in furtherance of the purposes of the Company, to refinance any Company indebtedness, issue evidences of indebtedness to evidence such borrowings, and secure the same by mortgage, pledge or other lien on any property of the Company, subject to SECTION 4.5(b) hereof; (g) to prepay, in whole or in part, and refinance, recast, increase (subject to SECTION 4.5(b) hereof), modify or extend any indebtedness; (h) to pay closing costs and other expenses of the Company incurred in the acquisition or disposition of any property; (i) to enter into, perform and carry out contracts incident to the foregoing which may be lawfully carried out or performed by a limited liability company under the laws of the State of Delaware; (j) to invest and reinvest cash of the Company in money-market or other short-term investments; (k) to form or cause to be formed and to own the stock of one or more Subsidiaries, and to form or cause to be formed and to participate in and own equity interests in partnerships, joint ventures and limited liability companies; (l) to sue, prosecute, settle or compromise all claims against third parties; to compromise, settle or accept judgment of claims against the Company; and to execute all documents and make all representations, admissions and waivers in connection therewith; (m) to distribute, subject to the terms of this Agreement, at any time and from time to time to Members cash or investments or other property of the Company; and (n) to engage in any and all other acts which now or hereafter may be lawfully done and which are incidental or appurtenant to or arising from or connected with the purposes of the Company. ARTICLE 3 AUTHORIZED CAPITAL OF THE COMPANY SECTION 3.1 ADMISSION OF MEMBERS. (a) A Person shall be admitted as a Member as provided in this Agreement and as reflected in the records of the Company. The Members shall own membership interests in the amounts and in the Classes, and shall be obligated to make Capital Contributions to the Company in respect thereof, as reflected in the records of the Company, which shall be adjusted from time to time by the Manager to the extent necessary to reflect accurately transfers, redemptions, conversions, Capital Contributions, the issuance of additional membership interests or similar events. (b) The Manager is hereby authorized to cause the Company to issue an unlimited number of membership interests for any Company purpose at any time or from time to time, to Persons for such consideration and on such terms and conditions as shall be established by the Manager in its sole and absolute discretion, all without the approval of any Members except to the extent provided herein. The membership interests may be issued as Shares in one or more classes, or one or more series of any of such classes, with such designations, preferences and relative, including the Class A Shares and Class B Shares as designated in this ARTICLE 3, participating, optional and other special rights, powers and duties, including rights, powers and duties senior to the Class A Shares and Class B Shares, all as shall be determined by the Manager, including without limitation, with respect to (i) the rights of each class or series of shares to participate in distributions and (ii) the rights of each class or series of Shares upon dissolution and liquidation of the Company. The Company may not issue nonvoting equity securities to the extent required by Section 1123(a) of title 11 of the United States Code. Notwithstanding the forgoing, no Class of Common Shares may be authorized or issued which has more than one vote per Share on any matter or superior distribution rights per Share than the Class A Shares and Class B Shares. Shares may be issued by the Company in exchange for cash, securities, property, or services. The Shares may be certificated at the election of the Manager, but there is no requirement that Shares be certificated. (c) All membership interests shall be personal property entitling the Members only to those rights provided in this Agreement. The legal ownership of the property of the Company and the right to conduct the business of the Company are vested exclusively in the Company; the Members shall have no interest therein other than beneficial interest in the Company conferred by their Shares. The death of a Member shall not terminate the Company or give his or her legal representative any rights against other Members, the Manager or the Company property. (d) The Company may repurchase or otherwise acquire its own Shares at such price or prices as may be determined by the Manager, and for this purpose the Company may create and maintain such reserves as are deemed necessary and proper; provided however that the Company may not repurchase any Class B Shares unless such repurchase is part of an offer to repurchase all of the outstanding Class A Shares on the same terms and conditions. Shares issued hereunder and repurchased or otherwise acquired for the account of the Company shall not, so long as they belong to the Company, either receive dividends or distributions or be voted at any meeting of the Members. Such Shares may, in the discretion of the Manager, be held in the treasury and be disposed of by the Manager at such time or times, to such party or parties and for such consideration as the Manager may deem appropriate or may be returned to the status of authorized but unissued Shares in the Company. (e) The Company may, without the consent or approval of any Member, issue fractional Shares and, except as provided in the Plan, eliminate a fraction of a Share by rounding up or down to a full Share or pay cash for the fair value of a fraction of a Share. (f) Subject to an express provision to the contrary in the terms of any Class or series of membership interest hereafter authorized, the Manager shall have the power to divide or combine the outstanding Shares without a vote of Members; provided, however, that no such division or combination shall change the relative rights of the Class A Shares and the Class B Shares with respect to voting or distributions. SECTION 3.2 CLASS A SHARES. A Class of Shares designated as Class A Common Shares (the "Class A Shares") is hereby established. The number of authorized Class A Shares shall be unlimited. (a) Holders of Class A Shares shall be entitled to receive distributions as and when provided in SECTION 5.1 hereof. (b) Upon the liquidation, dissolution or winding-up of the Company, distributions on the Class A Shares shall be made in accordance with the provisions of ARTICLE 8 hereof. (c) Each Class A Share shall be entitled to one vote on all matters on which holders of Common Shares are entitled to vote, except as specifically provided herein. (d) The holders of the Class A Shares shall not have any rights to convert such Class A Shares into any other securities of, or interest in, the Company; provided, however, that: (i) any Class A Shares held or acquired by a Class B Member shall automatically convert into Class B Shares; and (ii) all Class A Shares shall be automatically redesignated (along with all Class B Shares) as regular Common Shares upon the earlier of (A) the fifth anniversary of the date of this Agreement and (B) the date on which the number of Class A Shares outstanding represents less than five percent (5%) of the total number of outstanding Shares of the Company as of the Effective Date. (e) Upon the effectiveness of the Company Merger, each outstanding class A share of FHT shall be converted into one (1) Class A Share and the holder thereof shall be admitted as a Member with respect to such Class A Share and reflected as such on the books and records of the Company. Thereafter, each Person that becomes entitled to receive Class A Shares pursuant to the Plan shall be issued Class A Shares and shall be admitted as a Member with respect to such Class A Shares and reflected as such on the books and records of the Company. No additional consideration is required of any holder of Class A Shares issued pursuant to the Plan. (f) To the extent any Consent, decision, approval or other right is vested in, or proposed to be taken by, solely the holders of Class A Shares hereunder, such Consent, decision, approval or other right shall be decided upon by the holders of a majority of the Class A Shares issued and outstanding. Such Consent, decision, approval or other right may be made or taken in the manner as provided in Article 9. SECTION 3.3 CLASS B SHARES. A Class of Shares designated as the Class B Common Shares (the "Class B Shares") is hereby established. The number of authorized Class B Shares shall be unlimited. (a) Any Class A Shares held by a Class B Member shall be automatically designated as Class B Shares (subject to clause (e) of this SECTION 3.3). (b) Holders of Class B Shares shall be entitled to receive distributions as and when provided in SECTION 5.1 hereof. (c) Upon the liquidation, dissolution or winding-up of the Company, distributions on the Class B Shares shall be made in accordance with the provisions of ARTICLE 8 hereof. (d) Each Class B Share shall be entitled to one vote on all matters on which holders of Common Shares are entitled to vote, except as specifically provided herein. (e) The holders of the Class B Shares shall not have any rights to convert such Shares into any other securities of, or interest in, the Company; provided, however, that all Class B Shares shall be automatically redesignated (along with all Class A Shares) as regular Common Shares upon the earlier of (i) the fifth anniversary of the date of this Agreement and (ii) the date on which the number of Class A Shares outstanding represents less than five percent (5%) of the total number of outstanding Shares of the Company as of the Effective Date. (f) Upon the effectiveness of the Company Merger each outstanding Class B share of FHT shall be converted into one (1) Class B Share and the holder thereof shall be admitted as a Member with respect to such Class B Share and reflected as such on the books and records of the Company. No additional consideration is required of any holder of Class B Shares issued pursuant to the Plan. SECTION 3.4 NO FURTHER CAPITAL/LOANS; NO PREEMPTIVE RIGHTS. Except as expressly provided in this Article 3 or as may be provided by separate agreement, no Member shall be required or entitled to contribute (or obtain a credit for) any other or further capital contribution to the Company, nor shall any Member be required or entitled to loan any funds to the Company. Except as specifically provided in this Agreement, no Person shall have any preemptive, preferential or other similar right with respect to (a) additional Capital Contributions or loans to the Company; or (b) issuance or sale of any membership interests. SECTION 3.5 RECOUPMENT FOR CONTRIBUTIONS; WITHDRAWAL AND RESIGNATION. (a) No Member shall receive any recoupment or payment on account of or with respect to the Capital Contributions made by it pursuant to this Agreement except as and to the extent expressly provided in this Agreement. Except as expressly provided herein, no Member shall be entitled to interest on or with respect to any such Capital Contribution. No Member shall be entitled to withdraw as a Member or to withdraw any part of such Member's Capital Contributions. Furthermore, no Member shall be entitled to receive any distributions from the Company, except as provided in this Agreement. (b) A Member may not withdraw or resign as a Member and shall not be entitled to any distribution from the Company in the event of any withdrawal or resignation in violation hereof. SECTION 3.6 LIMITED LIABILITY; NO RIGHT OF MANAGEMENT OR AUTHORITY TO ACT. The liability of each Member for the debts or losses of the Company shall be limited to the amount of such Member's uncontributed obligation for a Capital Contribution by such Member, if any. No Member shall be responsible for the debts or losses of any other Member. No Member (other than the Manager or any officer, director, employee, partner, agent or trustee of the Manager, or the Company, in their capacity as such) shall take part in the operation, management or control (within the meaning of the Act) of the Company's business, transact any business in the Company's name or have the power to sign documents for or otherwise bind the Company, except as may be explicitly provided herein. SECTION 3.7 NO CESSATION OF MEMBERSHIP UPON BANKRUPTCY, ETC. A Person shall not cease to be a Member of the Company upon the happening, with respect to such Person, of any of the events specified in Section 18- 304 of the Act. Upon the occurrence of any such event specified in Section 18-304 of the Act, the business of the Company shall be continued without dissolution. ARTICLE 4 MANAGEMENT SECTION 4.1 MANAGER. The Members hereby delegate to the Manager the exclusive responsibility for the management of the Company's business and affairs, except as provided in Section 4.5 or as otherwise explicitly provided herein. The Manager shall devote such time and effort to the Company as it deems reasonably necessary for the conduct of the Company's business. In addition to the powers now or hereafter granted a manager of a limited liability company under the Act or which are granted to the Manager under any other provision of this Agreement, the Manager shall have full power and authority to do all things deemed necessary or desirable by it to conduct the business of the Company, to exercise all powers set forth in SECTION 2.5 hereof and to effectuate the purposes set forth in SECTION 2.4 hereof, including, without limitation, the following, all of which shall be at the Company's expense: (a) Pay any and all necessary or appropriate expenses associated with the operation of the Company, including expenses incurred by the Manager in its capacity as Manager of the Company. (b) Operate the Company with a profit motive. (c) Perform and discharge all of the Company's duties and obligations with respect to the formation and organization of any Subsidiaries of the Company, the contribution of any property to such Subsidiaries, and the execution and delivery of any and all documents and instruments in connection therewith. (d) Subject to the terms and conditions of this Agreement, engage in any kind of activity and perform and carry out contracts of any kind necessary or incidental to or in connection with the accomplishment of the purposes of the Company as may be lawfully carried out or performed by a limited liability company under the laws of each state in which the Company is then formed or registered or qualified to do business. (e) Prepare or cause to be prepared for execution by the Company all forms, reports and returns, if any, required to be filed by the Company under applicable Federal, state or local laws and any other requirements relating to the employment of personnel. (f) Apply for, obtain, and maintain, in the name of the Company, all licenses and permits (including deposits and bonds) required of the Company in connection with the operation of the Company. (g) Acquire and enter into any contract of insurance, which the Manager deems necessary or appropriate for the protection of the Company, for the conservation of its assets or for any purpose convenient or beneficial to the Company. (h) Acquire, dispose, convey, mortgage, pledge, encumber, hypothecate or exchange any assets of the Company or merge, consolidate or otherwise combine the Company with or into another entity. (i) Employ, where and if required, such accountants, agents and attorneys as the Manager may from time to time determine to be necessary. (j) Make any tax elections on behalf of the Company. (k) Undertake any transactions to simplify the structure of the Company and the Subsidiaries. (l) Subject to the terms and conditions of this Agreement, execute any and all agreements, contracts, documents, certifications and instruments necessary or convenient in connection with the operation of the Company. In respect of matters delegated to the Manager pursuant to this SECTION 4.1, any Person dealing with the Manager with respect to the conduct of the affairs of the Company shall not be obligated to ascertain that the terms of this Agreement have been complied with, or be obligated to inquire into the necessity or expediency, of any action of the Manager. SECTION 4.2 DELEGATION OF DUTIES. The Manager may delegate certain of its responsibilities for administration of the business of the Company to any Person. SECTION 4.3 OFFICERS; AGENTS. The Company may, but is not obligated to, appoint officers who are responsible for the administration of the business of the Company. Such officers may be given any title and shall have the same authority to act for the Company as a corresponding officer of a Delaware corporation would have to act for a Delaware corporation in the absence of a specific delegation of authority, unless the authority of such officer is limited by the Company. The Company may ratify any act previously taken by an officer, employee or agent acting on behalf of the Company, subject to Section 4.5 hereof. SECTION 4.4 COMPENSATION; EXPENSES. (a) The Company shall not compensate the Manager for the performance of the Manager's duties under this Agreement; provided, however, that nothing in this SECTION 4.4 shall limit distributions by the Company to the Manager as a Member holding Shares pursuant to Article 5 hereunder. (b) The Company and its Subsidiaries shall pay all costs and expenses incurred in connection with their business and affairs, including such costs and expenses as rent and all other overhead expenses; salaries and bonuses of their management and other employees; all expenses of acquiring, owning, operating and disposing of their real or personal property; insurance premiums, claims, fees and other amounts with respect to insurance-related services; fees of legal counsel, accountants, appraisers, real estate brokers, and for architectural or engineering or any other studies of proposed or existing operations of the Company and its Subsidiaries and travel expenses incurred in connection with the evaluation, negotiation, acquisition, operation, financing or sale of proposed or existing operations of the Company and its Subsidiaries. The Company and its Subsidiaries may reimburse Affiliates of the Company for direct expenses incurred on behalf of the Company and its Subsidiaries, including salaries and employment-related expenses incurred in connection with the management of the Company's or its Subsidiaries' operations. In addition, the Company and its Subsidiaries may reimburse Affiliates for expenses, including salary and employment-related expenses, in respect of services which could be performed directly for the Company or a Subsidiary by independent parties, such as legal, accounting, data processing, duplicating and other services; provided that the amounts charged to the Company or a Subsidiary for such services do not exceed the amount the Company or a Subsidiary would be required to pay to independent parties for comparable services. None of the foregoing restrictions shall apply to reimbursements from the Company or a Subsidiary to the Company or a wholly- owned Subsidiary. SECTION 4.5 CLASS A REPRESENTATIVE. (a) The position of the Class A Representative is established as of the date of this Agreement and shall terminate on the earlier of the (i) fifth anniversary of the date of this Agreement and (ii) date on which the number of Class A Shares outstanding represents less than five percent (5%) of the total number of outstanding Shares of the Company as of the Effective Date. The provisions set forth in this Section 4.5 shall continue in effect until the position of the Class A Representative is terminated. The Class A Representative shall be entitled to act to enforce the terms of this Agreement as it deems appropriate on behalf of the Class A Members; provided however, that prior to undertaking any action to enforce the Agreement following any breach of this Agreement, the Class A Representative shall provide written notice of such breach of this Agreement to the Manager and allow the Manager and the Company a reasonable opportunity (but in no event less than thirty (30) days) to cure such breach. The Class A Representative shall not be deemed to know of any breach of this Agreement unless the Class A Representative is notified of such breach in writing. The Class A Representative shall be under no obligation to exercise any of the rights or powers vested in it by this Agreement unless (x) Class A Members holding a majority of the outstanding Class A Shares direct the Class A Representative in writing to act, and (y) such Class A Members holding a majority of the outstanding Class A Shares have offered to the Class A Representative reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby. (b) The Company shall not incur any indebtedness from a Class B Member or an Affiliate of a Class B Member if, immediately after giving effect to the incurrence of such indebtedness and the application of the proceeds thereof, there would be in excess of $25 million in aggregate principal indebtedness from a Class B Member or its Affiliates without obtaining the prior written consent of the Class A Representative. Any loan to the Company from a Class B Member or one of its Affiliates shall bear interest at the "prime rate" as announced from time to time by Bank One, N.A., which loan may be secured by property of the Company and its Subsidiaries. (c) The Company shall pay all reasonable fees and expenses (including reasonable attorneys' fees) incurred by the Class A Representative in its capacity as the Class A Representative. (d) The Class A Representative may resign by so notifying the Company in writing at least thirty (30) days prior to such resignation. Prior to the effective date of such resignation, the Manager shall be obligated to appoint a successor Class A Representative, which successor must be reasonably acceptable to the resigning Class A Representative. The Manager shall provide written notice of the identity of the successor Class A Representative, and the resigning Class A Representative shall have ten (10) Business Days in which to approve or reject such successor Class A Representative in a written notice to the Manager. If the resigning Class A Representative rejects the successor Class A Representative appointed by the Manager, the resigning Class A Representative must provide its reasons in writing to the Manager. If the resigning Class A Representative fails to deliver such a notice to the Manager, the resigning Class A Representative shall be deemed to have approved of the successor Class A Representative appointed by the Manager. If the resigning Class A Representative does timely and reasonably withhold its acceptance of the successor Class A Representative, the Manager and the resigning Class A Representative shall promptly meet and work in good faith to select and appoint a successor Class A Representative. The successor Class A Representative shall deliver a written acceptance of its appointment to the Company and to the Manager. Upon receipt of such acceptance, the resignation of the former Class A Representative shall become effective and the former Class A Representative shall have no further rights or obligations under this Agreement except rights to reimbursement under this Agreement and rights arising under Article 10 hereof, and the successor Class A Representative shall have all the rights, powers and duties of the Class A Representative under this Agreement. The successor Class A Representative shall promptly notify all Class A Members of its succession to the position. (e) The Company may remove the Class A Representative if (i) the Class A Representative has dissolved or is adjudged bankrupt or insolvent, (ii) a receiver or other public officer takes charge of the Class A Representative or its property, or (iii) the Class A Representative becomes legally incapable of acting or willfully refuses to act in accordance with the provisions of this Agreement. If the Class A Representative is removed as provided in this Section 4.5(e) or if a vacancy exists in the position of Class A Representative for any reason (other than the termination of the position pursuant to Section 4.5(a) hereof or the resignation of the Class A Representative pursuant to SECTION 4.5(d) hereof), the Manager shall promptly appoint a successor Class A Representative, which successor must not be an Affiliate or an Affiliated Person of the Manager. The Manager shall provide written notice of the identity of the successor Class A Representative to the Class A Members, and the Class A Members shall have ten (10) Business Days in which to object to the appointment of such successor Class A Representative in a written notice to the Manager executed by Class A Members holding a majority of the outstanding Class A Shares. Such an objection must be based on reasonable factors that are set forth in reasonable detail in the written notice. If the Class A Members fail to deliver such a notice to the Manager, the successor Class A Representative shall be deemed to have been approved. If a reasonable objection to the successor Class A Representative is timely and reasonably made by a majority of the Class A Members, the Manager shall promptly appoint another successor Class A Representative in accordance with the terms of this SECTION 4.5(e). The successor Class A Representative shall deliver a written acceptance of its appointment to the former Class A Representative, the Company and to the Manager. Upon receipt of such acceptance, the removal of the former Class A Representative shall become effective and the former Class A Representative shall have no further rights or obligations under this Agreement, and the successor Class A Representative shall have all the rights, powers and duties of the Class A Representative under this Agreement. The successor Class A Representative shall promptly notify all Class A Members of its succession to the position. If, at any time prior to an appointment of a successor Class A Representative by the Manager as contemplated by this Section 4.5(e), the Manager shall receive from Class A Members holding a majority of the outstanding Class A Shares a joint written instruction to appoint a particular successor Class A Representative, and such designee is reasonably acceptable to the Manager, then the Manager shall appoint such designee as the successor Class A Representative. (f) The Manager and its executive officers shall meet with the Class A Representative annually to review the operations of the Company. The Manager shall notify, in writing, the Class A Representative of the date, time, and location of such meeting. Such notice shall be delivered to the Class A Representative at least twenty (20) calendar days but no more than sixty (60) calendar days before the date of such meeting. The Members are not entitled to a meeting with the Manager or the Class A Representative. (g) Neither the Class A Representative, nor any director, officer, affiliate, employee, employer, professional, agent or representative of the Class A Representative shall be personally liable in connection with this Agreement to any Member, except for such of the Class A Representative's acts or omissions as shall constitute fraud, willful misconduct or gross negligence. (h) The Class A Representative may rely, and shall be protected from liability for acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order or other paper or document reasonably believed by the Class A Representative to be genuine and to be presented by an authorized party. Also, the Class A Representative shall not be liable if it acts based on a mistake of fact before having actual knowledge of such fact. The Class A Representative shall not be liable for any act taken or suffered by the Class A Representative reasonably relying upon the advice of counsel or other professionals engaged by the Class A Representative. (i) Upon the Manager having actual knowledge of any breach of this Agreement which has not been cured and is not reasonably likely to be cured within thirty (30) days of the Manager's receipt of such actual knowledge, the Manager shall provide written notice to the Class A Representative with reasonable promptness describing such breach in reasonable detail. SECTION 4.6 OTHER ACTIVITIES OF MANAGER AND ITS AFFILIATES. Subject to restrictions set forth in this Agreement and any other agreements related to the formation and operation of the Company, the Manager and its Affiliates shall be free to engage in, to conduct or to participate in any business or activity whatsoever, without any accountability, liability or obligation whatsoever to the Company, any Member or to any other Person, even if such business or activity competes with or is enhanced by the business of the Company. SECTION 4.7 NO OBLIGATION TO CONSIDER SEPARATE INTERESTS OF MEMBERS. The Members expressly acknowledge that the Manager is acting on behalf of the Company, and that except to the extent set forth in another Section of this Agreement or as specifically set forth in a written agreement entered into by the Manager or the Company and any individual or group of Members on or after the effectiveness of the Company Merger, the Manager is under no obligation to consider the separate interests of the Members (including, without limitation, the tax consequences to Members) in deciding whether to cause the Company to take (or decline to take) any actions which the Manager has undertaken in good faith on behalf of the Company, and that the Manager shall not be liable, for monetary damages or otherwise, for losses sustained, liabilities incurred, or benefits not derived by Members in connection with such decisions. SECTION 4.8 RESIGNATION; REPLACEMENT; REMOVAL. (a) The Manager may determine that an Affiliate of the Manager shall replace the Manager as manager of the Company, in which event the Manager shall notify all Members within 30 days of the effective date of such replacement. (b) The Manager may resign in its capacity as manager of the Company by giving written notice to all of the Members at least 30 days in advance of the effective date of such resignation. In the event of such resignation, and an Affiliate of the Manager has not been appointed at such time as Manager as provided in the preceding clause, a new Manager may be elected by the affirmative vote or Consent of holders of majority of the outstanding Common Shares. (c) The Manager may not be removed for any reason except in the event: (i) the Manager has dissolved; or (ii) the Manager becomes legally incapable of acting or willfully refuses to act as Manager in accordance with the provisions of this Agreement. SECTION 4.9 TRANSACTIONS WITH AFFILIATES. Without limiting the types of services which Affiliates of the Company may perform for the Company or its Subsidiaries, it is expressly understood that, subject to the provisions set forth below, Affiliates of the Company may (i) maintain or enter into arrangements or agreements to provide services to the Company or its Subsidiaries with respect to real estate development, real estate management, real estate brokerage, self-insurance, insurance, reinsurance, claims administration and insurance brokerage, mortgage brokerage and mortgage financing, (ii) acquire additional Shares issued pursuant to SECTION 3.1 hereof, and (iii) subject to Section 4.5(b) hereof, make loans to the Company or any Subsidiary which may constitute senior indebtedness. Except as otherwise provided in this Agreement or as provided in any contract or agreement existing prior to the date of the Agreement which is assumed by the Company pursuant to the Plan, neither the Manager nor any Affiliate of the Manager shall enter into any transaction (including any acquisition of additional Shares) with the Company unless the terms of the transaction are no less favorable, at the time of entering into the transaction, than those which are available from unaffiliated third-parties for similar transactions in the same geographical area. Notwithstanding the foregoing, any other transaction between the Company and the Manager or any Affiliate of the Manager which is approved in advance by the holders of a majority of the outstanding Common Shares held by Members who do not have a financial interest in such transaction (other than as Members) shall be deemed fair and shall be permitted hereunder. SECTION 4.10 OUTSIDE BUSINESSES. The Members, the Manager, and any Affiliated Person of the foregoing Persons may engage in or possess an interest in other business ventures of any nature or description, independently or with others, similar or dissimilar to the business of the Company, and the Company and the Members shall have no rights by virtue of this Agreement in and to such independent ventures or the income or profits derived therefrom, and the pursuit of any such venture, even if competitive with the business of the Company, shall not be deemed wrongful or improper. None of the Members, the Manager or any Affiliated Person of the foregoing Persons shall be obligated to present any particular investment opportunity to the Company even if such opportunity is of a character that, if presented to the Company, could be taken by the Company, and any Member, the Manager or Affiliated Person of the foregoing Persons shall have the right to take for its own account (individually or as a partner or fiduciary) or to recommend to others any such particular investment opportunity. ARTICLE 5 DISTRIBUTIONS SECTION 5.1 DISTRIBUTIONS. Distributions of Available Cash shall be made at the election of, and in an aggregate amount determined by, the Manager on a Record Date set for such purpose (i) first, with respect to any Class or Classes of membership interests issued pursuant to Section 3.1 which are entitled to a preference over Common Shares on the distribution of Available Cash (and within and among such Classes, in order of the preferences designated therein and pro rata among any such Classes to the holders thereof on such Record Date), and (ii) thereafter to the holders of Common Shares, pro rata with respect to each outstanding Common Share on such Record Date. SECTION 5.2 WITHDRAWAL OF CAPITAL. No Member shall have the right to any distribution except as provided in Section 5.1 hereof. No Member shall have the right to withdraw from the Company all or any part of its Capital Contribution. SECTION 5.3 WITHHOLDING. The Company is authorized to withhold from distributions made to a Member, and to pay over to a Federal, state or local government, any amounts required to be withheld pursuant to the Code or any provisions of any other Federal, state or local law. Any amounts so withheld shall be treated as distributed to such Member pursuant to this Article 5 for all purposes of this Agreement and shall be offset against the net amounts otherwise distributable to such Member. The Company may also withhold from distributions that would otherwise be made to a Member, and apply to the obligations of such Member, any amounts that such Member owes to the Company. In addition, any tax imposed on the Company resulting from the interest in the Company of any Member shall be treated as a distribution to such Member and shall reduce future distributions to such Member. ARTICLE 6 TRANSFERS SECTION 6.1 CLASS A SHARES. The Class A Shares shall be freely transferable (subject to requirements under any applicable Federal or state securities laws). Notice of any proposed transfer must be provided to the Manager, or any person designated by the Manager, at least three (3) Business Days prior to the consummation of the transfer. Any subsequent transferee shall be bound by and entitled to the benefits of this Agreement. SECTION 6.2 CLASS B SHARES. A Class B Member shall not sell or transfer any of the Class B Shares, except (a) to an Affiliate or Affiliated Person of a Class B Member transferring such Class B Shares; provided that the Affiliate or Affiliated Person transferee enters into an agreement whereby such Affiliate or Affiliated Person shall agree to be bound by and entitled to the benefits of this Agreement, or (b) if such transfer provides for all holders of Class A Shares to have the right to sell or transfer to the transferee all outstanding Class A Shares on the same terms and conditions (including, without limitation, the form, amount and timing of receipt of any consideration per Share). In event of any sale of the Class B Shares, the holders of Class A Shares shall be required without any further vote or Consent, and hereby agree, to sell or transfer their Class A Shares as part of such transaction. SECTION 6.3 OTHER CLASSES. The Manager may determine the form and manner of restrictions, if any, on the transferability of any Class of Shares, other than the Class A Shares and Class B Shares, at the time of issuance of such Shares in accordance with SECTION 3.1 hereof. SECTION 6.4 NO OBLIGATION TO LIST. The Company and the Manager shall be under no obligation to cause all or any Class of Shares to be listed for trading on any securities exchange or quoted on any automated quotation system. ARTICLE 7 RECORDS AND REPORTS SECTION 7.1 BOOKS AND RECORDS. The Manager shall maintain or cause to be maintained books of account, kept on the accrual method of accounting and in accordance with generally accepted accounting principles in which shall be entered fully and accurately the transactions of the Company. Such books of account, together with an executed copy of this Agreement and a certified copy of the Certificate, shall at all times be maintained at the principal office of the Company and shall be open to inspection at any reasonable time by the Class A Representative, if any, for any purpose reasonably related to the Class A Members' interest in the Company. The Members shall have no right to inspect the books and records of the Company, other than as required under the Act. SECTION 7.2 REPORTS. While the Company is a reporting company under the Securities Exchange Act of 1934, as amended, the Company shall deliver to the Class A Representative, if any, copies of all reports filed by the Company with the Securities and Exchange Commission, including, without limitation, its annual and quarterly financial reports. The annual financial reports shall set forth the amounts reimbursed by the Company to the Manager or its Affiliates pursuant to SECTION 4.4(b) hereof for services, including without limitation legal, accounting, transfer agent, data processing and duplicating services. The annual financial report of the Company delivered to the Class A Representative, if any, shall be accompanied by a certificate from the Manager that certifies that all transactions entered into during such Fiscal Year between the Company and a Class B Member (or any Affiliates of a Class B Member) are described, in all material respects, in the annual report and comply with SECTION 4.9 hereof. ARTICLE 8 DISSOLUTION, LIQUIDATION AND TERMINATION SECTION 8.1 DISSOLUTION. Except as otherwise provided herein, the Company shall be dissolved upon the first to occur of the following events: (a) the affirmative vote or Consent of the holders of a majority of the outstanding Common Shares to dissolve the Company; or (b) the entry of a decree of judicial dissolution of the Company under Section 18-802 of the Act. SECTION 8.2 DEATH, LEGAL INCAPACITY, ETC. The death, bankruptcy, dissolution, insanity, incompetency, other legal incapacity of a Member or Manager or the occurrence of any other event that causes a Member to cease to be a Member of the Company, shall not cause the dissolution or termination of the Company, and the Company, notwithstanding such event, shall continue without dissolution upon the terms and conditions provided in this Agreement, and each Member, including, without limitation, each substituted Member, by executing this Agreement, agrees to such continuation of the Company without dissolution. SECTION 8.3 TREATMENT OF COMPANY. The Members intend that the Company be treated as a corporation, and not as a partnership, for Federal income tax purposes. In furtherance of the foregoing: (a) the Manager shall timely file an election on IRS Form 8832 of the Company to treat the Company as a corporation for Federal income tax purposes to be effective the date of formation of the Company; and (b) no Person, other than the Manager, shall be authorized to make any election by or on behalf of the Company to treat the Company as a partnership for Federal income tax purposes. SECTION 8.4 LIQUIDATION OF COMPANY INTERESTS UPON DISSOLUTION. (a) Upon dissolution, the Company shall be liquidated in an orderly manner in accordance with the provisions of this Section 8.4. The Manager shall appoint one or more liquidators to act as the liquidator(s) in effecting such liquidation. The liquidator(s) are authorized to sell, exchange or otherwise dispose of the property and assets of the Company, or to distribute Company assets in kind, as the liquidator(s) shall determine to be in the best interests of the Members. The reasonable out-of-pocket expenses incurred by the liquidator(s) in connection with winding up the Company, all other liabilities or losses of the Company or the liquidator(s) incurred in accordance with the terms of this Agreement and reasonable compensation for the services of the liquidator(s) shall be borne by the Company. The liquidator(s) shall not be liable to any Member or the Company for any loss attributable to any act or omission of the liquidator(s) taken in good faith in connection with the winding up of the Company and the distribution of Company assets. The liquidator(s) may consult with counsel and the Accountants with respect to winding up the Company and distributing its assets and shall be justified in acting or omitting to act in accordance with the advice or opinion of such counsel or Accountants, provided that the liquidator(s) shall have used reasonable care in selecting such counsel or Accountants. Except as otherwise set forth in this Agreement, the Company shall not be liable for the return or repayment of the Capital Contribution of any Member. (b) Upon termination of the Company, its liabilities and obligations to creditors shall be paid from cash on hand or from the liquidation of Company assets, and, after payment or provision for payment of all debts of the Company, the following provisions shall govern with respect to the distribution of the remaining assets to the Members: (i) The liquidator(s) shall determine which of the assets of the Company shall be liquidated and which shall be distributed to the Members in kind. (ii) After the liquidation of all Company assets other than assets, which the liquidator(s) shall have determined to distribute in kind, the Company net worth shall be determined. (iii) All Company assets remaining after provision for liquidation expenses (including the excess or deficiency of the amount reserved to cover contingent liabilities and the expenses of liquidation and winding up) shall then be distributed to the Members in cash or in kind in accordance with Article 5 hereof. All Members shall be furnished a written report accounting for the manner of all such distributions. (c) For purposes of this ARTICLE 8, neither the sale of all or substantially all the property or business of the Company nor the merger or consolidation of the Company into or with any other entity or the merger or consolidation of any other entity into or with the Company shall be deemed be to a voluntary dissolution, liquidation or winding up of the Company. ARTICLE 9 AMENDMENTS; MEETINGS SECTION 9.1 AMENDMENTS IN GENERAL. (a) Except as otherwise provided in this Agreement, this Agreement may be amended only upon the proposal of the Manager and with the affirmative Consent of the holders of a majority of the outstanding Common Shares as of the Record Date set for such purpose; provided, however, that, until Class A Shares have been redesignated as Common Shares in accordance with SECTION 3.2(d), (x) no amendment adversely affecting the rights of the Class A Members on a per Share basis differently than the rights of a Class B Member on a per Share basis, and (y) no amendment to any of SECTION 3.2, SECTION 4.4, SECTION 4.5, SECTION 4.9, SECTION 6.1, SECTION 7.1, SECTION 7.2, this SECTION 9.1(a) and any other Section providing for any rights or obligations of the Class A Representative, may be made without (i) the affirmative vote or Consent of holders of a majority of the outstanding Class A Shares entitled to vote on the matter and (ii) the Consent of the Manager. To the extent Consent is required of any Members for an amendment of this Agreement, the Manager may submit any proposed amendment to the Members entitled to vote in the manner described in SECTION 11.1 and seek the Consent of the Members as contemplated by SECTION 9.2(b) or call a meeting of the Members as contemplated by SECTION 9.2(a) to vote thereon and to transact any other business that it may deem appropriate. For purposes of obtaining a Consent, the Manager may require a response within a reasonable specified time, but not less than fifteen (15) days. (b) Notwithstanding SECTION 9.1(a), the Manager shall have the power, without the consent of the Members, to amend this Agreement as may be required to facilitate or implement any of the following purposes: (i) to add to the obligations of the Manager or surrender any right or power granted to the Manager or any Affiliate of the Manager for the benefit of the Members; (ii) to reflect the admission, substitution, termination, or resignation of Members in accordance with this Agreement; (iii) to set forth the rights, powers, duties, and preferences of the holders of any additional Membership interests, whether designated as Shares or otherwise, issued pursuant to SECTION 3.1 hereof; (iv) to reflect a change that is of an inconsequential nature and does not adversely affect the Members in any material respect, or to cure any ambiguity, correct or supplement any provision in this Agreement not inconsistent with law or with material rights of the Members pursuant to the provisions of this Agreement, or make other changes with respect to matters arising under this Agreement that will not be inconsistent with law or with the material rights of the Members pursuant to the provisions of this Agreement; and (v) to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a Federal or state agency or contained in Federal or state law. The Manager will provide copies of any amendments under this SECTION 9.1(b) to the Members within 30 days after the adoption of such amendments. SECTION 9.2 MEETINGS OF THE MEMBERS. (a) Meetings of the Members may be called by the Manager (or, if there is not a Manager at such time, by holders owing 10% or more of the Shares of any Class or series). The call shall be in writing in accordance with Section 11.1 and shall state the nature of the business to be transacted. Notice of any such meeting shall be given to all Members and the Class A Representative not less than seven days nor more than 30 days prior to the date of such meeting. Members may vote in person or by proxy at such meeting. Except as otherwise expressly provided in this Agreement, the Consent of holders of the outstanding Common Shares as of the Record Date set for such purpose shall control. Whenever the vote or Consent of Members is permitted or required under this Agreement, such vote or Consent may be given at a meeting of Members or may be given in accordance with the procedure prescribed in SECTION 9.2(b) hereof; provided that such procedures may also be utilized with respect to any vote or Consent affecting only a specific Class of membership interests (in which event such matters shall be approved by the affirmative vote or Consent of holders of such Class of membership interests holding a majority of the outstanding Shares of that Class (unless otherwise specified in the designation of such Class of membership interest) as of the Record Date set for such purpose). (b) Any action required or permitted to be taken at a meeting of the Members may be taken without a meeting if a written Consent setting forth the action so taken is signed by Members holding a majority of the Common Shares so required for such action. Such Consent may be in one instrument or in several instruments, and shall have the same force and effect as a vote of Members holding a majority of the Common Shares so required for such action (or such other vote as may be required for approval of any action). An action so taken shall be deemed to have been taken on the effective date so certified by the Manager. (c) Each Member may authorize any Person or Persons to act for him by proxy on all matters in which such Member is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Member or his attorney-in-fact. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Member executing it. (d) Each meeting of Members shall be conducted by the Manager or such other Person as the Manager may appoint pursuant to such rules for the conduct of the meeting as the Manager or such other Person deems appropriate. ARTICLE 10 LIABILITY, EXCULPATION, INDEMNIFICATION AND INSURANCE SECTION 10.1 LIABILITY. Except as otherwise provided by the Act, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and no Covered Person shall be obligated personally for any such debt, obligation or liability of the Company or any other Covered Person solely by reason of being a Covered Person. SECTION 10.2 DUTIES OF COVERED PERSONS; EXCULPATION. To the extent that, at law or in equity, a Covered Person has duties (including fiduciary duties) under applicable law and liabilities relating thereto to the Company or to any other Covered Person, a Covered Person acting under this Agreement shall not be liable to the Company or to any other Covered Person for its good faith reliance on the provisions of this Agreement, and in no event shall any Covered Person be liable to the Company or to any other Covered Person for any act or omission if such Covered Person acted in good faith and in a manner reasonably believed to be in the best interests of the Company or, if the Class A Representative is the Covered Person, in a manner reasonably believed to be in the best interests of the Class A Members. The provisions of this Agreement, to the extent that they limit the duties and liabilities of a Covered Person otherwise existing at law or in equity, are agreed by the parties hereto to replace such other duties and liabilities of such Covered Person. SECTION 10.3 INDEMNIFICATION. (a) The Company shall indemnify, to the fullest extent permitted by applicable law, each Covered Person and each Covered Person's Affiliates, directors, trustees, members, managers, shareholders, officers, partners, controlling persons, employees and agents (including any individual who serves at their request as director, officer, partner, trustee or the like of another corporation, including the Company) and/or the legal representatives and controlling persons of any of them (each of the foregoing being an "Indemnitee") against any liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees and expenses reasonably incurred by such Indemnitee in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or investigative body, in which such Indemnitee may be or may have been threatened, while acting for, or on behalf of the Company or in furtherance of the Company's business except to the extent (and only to the extent) it is established (i) by final judgment adverse to such Indemnitee that the actions (or failure to act) were (was) material to the matter giving rise to the proceeding and were (was) the result of active and deliberate dishonesty; (ii) the Indemnitee actually received an improper personal benefit in money, property or services; or (iii) in the case of a criminal proceeding, that such Indemnitee had reasonable cause to believe that the act or omission was unlawful. Any indemnification made pursuant to this SECTION 10.3 shall be made only out of assets of the Company, including errors' and omissions' insurance for such purpose. (b) The termination of any proceeding by judgment, order of settlement does not create a presumption that the Indemnitee did not meet the requisite standard of conduct set forth in this SECTION 10.3 The termination of any proceeding by conviction or upon a plea of nolo contendere or its equivalent, or an entry of an order of probation prior to judgment, creates a rebuttable presumption that the Indemnitee acted in manner contrary to that specified in this SECTION 10.3. (c) The indemnification provided by this SECTION 10.3 shall be in addition to any other rights to which an Indemnitee or any other Person may be entitled under any agreement, pursuant to any vote of the Members, as a matter of law or otherwise, and shall continue as to an Indemnitee who has ceased to serve in such capacity. (d) For purposes of this SECTION 10.3, the Company shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by it of its duties to the Company also imposes duties on, or otherwise involves services by, it to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute fines within the meaning of SECTION 10.3; and actions taken or omitted by the Indemnitee with respect to an employee benefit plan in the performance of its duties for a purpose reasonably believed by it to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Company. (e) An Indemnitee shall not be denied indemnification in whole or in part under this SECTION 10.3 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement. (f) The provisions of this SECTION 10.3 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons. SECTION 10.4 EXPENSES. To the fullest extent permitted by applicable law, expenses (including legal fees) incurred by an Indemnitee in defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by the Company prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the Company of an undertaking by or on behalf of the Indemnitee to repay such amount if it shall be determined that the Indemnitee is not entitled to be indemnified as authorized in SECTION 10.3 hereof. SECTION 10.5 SEVERABILITY. To the fullest extent permitted by applicable law, if any portion of this ARTICLE 10 shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify each Member and the Manager and may indemnify each employee or agent of the Company as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Company, to the fullest extent permitted by any applicable portion of this ARTICLE 10 that shall not have been invalidated. SECTION 10.6 INSURANCE. The Company may purchase and maintain insurance, to the extent and in such amounts as the Manager shall, in its sole discretion, deem reasonable, on behalf of some or all of the Covered Persons and such other Persons as the Manager shall determine, against any liability that may be asserted against or expenses that may be incurred by any such Person in connection with the activities of the Company or such indemnities, regardless of whether the Company would have the power to indemnify such Person against such liability under the provisions of this Agreement. The Company may enter into indemnity contracts with Covered Persons and such other Persons as the Manager shall determine and adopt written procedures pursuant to which arrangements are made for the advancement of expenses and the funding of obligations under SECTION 10.4 hereof and containing such other procedures regarding indemnification as are appropriate. SECTION 10.7 RELIANCE ON DOCUMENTS AND ADVISERS. A Covered Person shall be fully protected in relying in good faith upon the records of the Company and upon such information, opinions, reports or statements presented to the Company by any Person (including, without limitation, legal counsel, accountants, appraisers, investment bankers and other consultants and advisers) as to matters the Covered Person believes are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Company or by or on behalf of the Class A Representative, including information, opinions, reports or statements as to the value and amount of the property, liabilities, profits or losses or any other facts pertinent to the existence and amount of the property or assets of the Company from which distributions to Members might properly be paid. ARTICLE 11 GENERAL PROVISIONS SECTION 11.1 NOTICES. Except as specifically provided elsewhere in this Agreement, all notices, requests, consents and statements shall be deemed to have been properly given if mailed from within the United States by first class mail, postage prepaid, or if sent by prepaid courier, addressed, if to the Company, the Manager, or the Class A Representative, to the address set forth in EXHIBIT B attached hereto, and if to any Member, to the address maintained in the books and records of the Company or, in any case, to such other address or addresses as may be specified by written notice to the other parties hereto. Any notice, request, consent or statement given to any Class A Member shall also be given to the Class A Representative, if any, pursuant to this SECTION 11.1. Except as specifically provided elsewhere in this Agreement, notice by courier shall be deemed effective upon receipt and notice by first class mail shall be deemed effective three (3) Business Days after being deposited in the United States mail. Any Member may designate a different address to which notices and documents shall thereafter be directed by written notice given in the same manner and directed to the Company at its offices. SECTION 11.2 FURTHER ASSURANCES. Each Member hereby agrees to execute all certificates, counterparts, amendments, instruments or documents (a) that may be required by the laws of the various states in which the Company does business, governing limited liability companies or (b) that may otherwise be necessary or appropriate in order to effect the purposes of the Company as set forth in this Agreement. SECTION 11.3 BINDING EFFECT. This Agreement and all of the terms and provisions hereof shall be binding upon, and shall inure to the benefit of, the Members, the Class A Representative and the Manager, and their respective legal representatives, heirs, successors and permitted assigns, except as expressly noted otherwise herein and except that no Member nor the Manager may assign or transfer his or its rights or obligations under this Agreement in any manner other than as provided herein. SECTION 11.4 WAIVER OF PARTITION. The Members hereby agree that the Company properties are not and will not be suitable for partition. Accordingly, each of the Members hereby irrevocable waives any and all rights (if any) to maintain any action for partition of all or any of the Company properties. SECTION 11.5 GOVERNING LAW. This Agreement and all questions relating to its validity, interpretation, performance and enforcement shall be governed by and construed in accordance with the Act and the laws of the State of Delaware, without regard to its conflict of law rules. In the event of any conflict between any provisions of this Agreement and any non- mandatory provision of the Act, the provisions of this Agreement shall control and take precedence. It is agreed that the parties hereto intend to form and continue a limited liability company hereby, but in the event that the Company shall fail to substantially comply with the requirements for the formation and continuation of a limited liability company under the laws of the State of Delaware, the Company shall be administered pursuant to the provisions of the Act as if it were a limited liability company. SECTION 11.6 GENDER AND NUMBER. Where the context so permits, reference in this Agreement: (a) to any particular gender shall be deemed to denote any other gender; (b) to the singular shall be deemed to denote the plural; and (c) to the plural shall be deemed to denote the singular. SECTION 11.7 FACSIMILE SIGNATURE. For all purposes under this Agreement, a signature tendered by facsimile is as effective as an executed original signature. SECTION 11.8 SEVERABILITY. If any provision of this Agreement shall be held or deemed to be, or shall in fact be, invalid, inoperative or unenforceable as applied to any particular case in any jurisdiction or jurisdictions, or in all jurisdictions or in all cases, because of the conflicting of any provision with any constitution or statute or rule of public policy or for any other reason, such circumstance shall not have the effect of rendering the provision or provisions in question invalid, inoperative or unenforceable in any other jurisdiction or in any other case or circumstance or, of rendering any other provision or provisions herein contained invalid, inoperative or unenforceable to the extent that such other provision or provisions are not themselves actually in conflict with such constitution, statute or rule of public policy, but this Agreement shall be reformed and construed in any such jurisdiction or case as if such invalid, inoperative or unenforceable provision had never been contained herein and such provision reformed so that it would be valid, operative and enforceable to the maximum extent permitted in such jurisdiction or in such case. SECTION 11.9 INTEGRATION. This Agreement contains the entire understanding among the Members and supersedes any prior understandings, term sheets, inducements or conditions, expressed or implied, written or oral, among them respecting the subject matter contained herein. There are no representations, agreements, arrangements or understandings, oral or written, between and among the parties hereto relating to the subject matter of this Agreement which are not fully expressed herein. The express terms hereof control and supersede any course of performance or usage of the trade inconsistent with any of the terms hereof. SECTION 11.10 CAPTIONS. Captions contained in this Agreement are inserted only as a matter of convenience and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. Except as specifically provided herein, references to "Articles" and "Sections" are to Articles and Sections of this Agreement, and references to "herein" and "hereof" are to the entire Agreement. SECTION 11.11 INDULGENCES, ETC. Neither the failure nor any delay on the part of any party hereto to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. SECTION 11.12 LIMITATION OF LIABILITY. Any obligation or liability whatsoever of any Member or the Manager which may arise at any time under this Agreement or any obligation or liability which may be incurred by it pursuant to any other instrument, transaction or undertaking contemplated hereby may be satisfied only out of such Member's or the Manager's assets, as applicable. No such obligation or liability shall be personally binding upon, nor shall resort for the enforcement thereof be had to, the property of any of its shareholders, trustees, officers, employees or agents, regardless of whether such obligation or liability is in the nature of contract, tort or otherwise. SECTION 11.13 THIRD PARTIES. The Class A Representative is a third party beneficiary of this Agreement with respect to those provisions affecting its rights and obligations hereunder, including, without limitation, its entitlement under SECTION 4.5(a) to act to enforce the terms of this Agreement. Nothing in this Agreement, whether express or implied, shall be construed to give any Person other than a Member, the Class A Representative, the Manager or the Company any legal or beneficial or other equitable right, remedy or claim under or in respect of this Agreement, any covenant, condition, provision or agreement contained herein or the property of the Company. None of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by any creditor of the Company. SECTION 11.14 TIME PERIODS. In applying any provision of this Agreement which requires that an act be done in or not done in a specified number of days prior to an event or that an act be done during a period of a specified number of days, calendar days shall be used unless otherwise specified, the day of the doing of the act shall be excluded, and the day of the event shall be included. SECTION 11.15 COUNTERPARTS. This Agreement or any amendment thereto may be signed in any number of counterparts, each of which shall be an original, but all of which taken together shall constitute one Agreement (or amendment, as the case may be). [SIGNATURES ON NEXT PAGE] IN WITNESS WHEREOF, the undersigned have executed this Agreement, as of the date first above written. KAANAPALI LAND, LLC By: Pacific Trail Holdings, LLC, its manager By: ---------------------------------------- Name: ---------------------------------------- Title: ---------------------------------------- PACIFIC TRAIL HOLDINGS, LLC, Manager and Member By: ---------------------------------------- Name: ---------------------------------------- Title: ---------------------------------------- EXHIBIT A Subsidiaries of the Company AMF Energy, Inc. AMF Foods, LLC AMF Merchandising Corporation Amfac Hawaii, LLC Amfac Holdings Corp. Amfac Land Company, Limited Amfac Property Development Corp. D/C Distribution Corporation EC Managers, Inc. H. Hackfeld & Co., Ltd. Kaanapali Development Corp. Kaanapali Estate Coffee, Inc. Kekaha Sugar Company, Limited KDCW, Inc. Northrail Corporation Oahu Distribution, Inc. Oahu Sugar Company, Limited Pioneer Mill Company, Limited Puna Sugar Company, Limited The Lihue Plantation Company, Limited Waikele Golf, LLC Waikele Golf Manager, LLC Waikele Golf Club, Inc. EXHIBIT B Addresses for Notice The Company: c/o Pacific Trail Holdings, LLC 900 N. Michigan Avenue Chicago, Illinois 60611 Attention: Gary Nickele Telephone: (312) 440-4800 The Manager: Pacific Trail Holdings, LLC 900 N. Michigan Avenue Chicago, Illinois 60611 Attention: Gary Nickele Telephone: (312) 440-4800 The Class A Representative: American Express Tax and Business Services, Inc. One South Wacker, Suite 800 Chicago, Illinois 60606 Attention: Scott P. Peltz Telephone: (312) 214-0300 EX-10.11 4 kaa_1011.txt EXHIBIT 10.11 - ------------- FUNDING AGREEMENT THIS FUNDING AGREEMENT (this "Agreement") is entered into as of the 29th day of October, 2002, by and among Kaanapali Land, LLC, a Delaware limited liability company ("Kaanapali Land"), Amfac Finance Limited Partnership, an Illinois limited partnership ("AFLP"), AF Investors, LLC, a Delaware limited liability company ("AFI"), Amfac Hawaii, LLC, a Hawaii limited liability company ("AHI"), Pioneer Mill Company, Limited, a Hawaii corporation ("PMCo") and Amfac Property Investment Corp., a Hawaii corporation ("APIC"). W I T N E S S E T H: WHEREAS, FHT Corporation, an Arizona corporation ("FHTC"), together with certain other affiliates (collectively with FHTC, the "Debtors") filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the "Bankruptcy Court"); and, WHEREAS, the Second Amended Joint Plan of Reorganization of the Debtors, a copy of which has been provided to this Company (the "Plan") has been confirmed by the Bankruptcy Court and the Plan is expected to become effective on or about November 12, 2002 (the "Plan Effective Date"); and, WHEREAS, among the Debtors are AHI and PMCo; and, WHEREAS, in consummation of the Plan, prior to the Plan Effective Date, Northbrook Corporation, a Delaware corporation ("Northbrook"), the current parent of Kaanapali Land, which is a significant limited partner of AFLP, will merge with and into FHTC (the "Northbrook Merger"), with FHTC as the surviving corporation (FHTC, from and after the time of the Northbrook Merger, being referred to herein as "New FHTC"); and, WHEREAS, further in consummation of the Plan, after the Plan Effective Date, New FHTC will merge into and with Kaanapali Land (the "Kaanapali Land Merger"), and as a consequence thereof, Kaanapali Land will succeed to Northbrook's interest in AFLP; and, WHEREAS, APIC owns two 18-hole golf courses, known collectively as the "Royal Kaanapali Golf Courses" (and individually referred to as the "North Course" and the "South Course"), located at Kaanapali, Maui, Hawaii, together with a club house, various other improvements, personal property related thereto (the "Golf Courses"), and two improved or partially improved parcels adjacent or nearly adjacent to the Golf Courses; and, WHEREAS, on June 25, 1991, the Employees' Retirement System of the State of Hawaii, a governmental agency of the State of Hawaii (the "ERS") made a loan to APIC, PMCo, and Amfac/JMB Hawaii, Inc. (now AHI) (as used herein, the term "Borrowers" shall both mean and include APIC, PMCo, and AHI (and shall include, as applicable, AHI's predecessor and AHI under its current and former names)) in the amount of $66,000,000 (the "Loan"); and, WHEREAS, the Borrowers and certain other parties related to the Borrowers and ERS wish to settle all matters concerning the Loan and have negotiated and are expected to shortly enter into a certain Settlement Agreement (the "Settlement Agreement") whereby, among other things, the ERS will be permitted to foreclose on its security for the Loan, the Borrowers (and certain affiliates) and ERS will each enter into a variety of ancillary agreements (the "Ancillary Agreements") whereby each party grants certain property rights (and various other rights and remedies) to other parties under the Agreement, and each party will, upon the Closing under the Settlement Agreement, release any and all existing claims against the other parties relating to the Loan; and, WHEREAS, as a material inducement to consummating the Settlement Agreement, APIC has agreed to execute and deliver a certain Guaranty (the "Guaranty") to ERS, which guaranties the payment and performance of all obligations of APIC under the Loan to ERS; and, WHEREAS, in satisfaction of certain of APIC's obligations under the Guaranty, the Settlement Agreement provides that the ERS will receive certain cash payments and the conveyance of certain non-mortgaged parcels of land from APIC, which cash payments will be placed in escrow upon court approval of the Settlement Agreement and paid to ERS upon the Closing thereunder, and which amounts include, among other things (1) a payment of $250,000, (2) the funding of a "Construction Escrow Deposit" of $585,750 to fund certain construction costs relating to the reconfiguration of the 9th hole of the South Course, (3) the deposit of $445,033.94 into escrow for the payment of certain pre-receivership creditor claims as specified in the Settlement Agreement, and (4) certain other fees and other ancillary amounts; and, WHEREAS, ERS has required as a condition to the Settlement Agreement that the certain of APIC's obligations under the Settlement Agreement and the Guaranty be paid by an entity other than APIC; and, WHEREAS, Kaanapali Land, which upon consummation of the Kaanapali Land Merger will also become the direct or indirect parent of AHI and PMCo and certain other entities and, as a consequence thereof and by virtue of succeeding to the interest of Northbrook in AFLP, has an interest in settling claims against such entities and in maximizing the value of the properties owned by such entities in the vicinity of the Golf Courses, which value is expected to be enhanced by the various property and contract rights that such entities will obtain under the Settlement Agreement; and, WHEREAS, pursuant to the foregoing, Kaanapali Land has a real and substantial interest in the consummation of the Settlement Agreement and the has agreed to act as the "Funding Entity" under the Settlement Agreement in order to induce ERS to execute and deliver same, and pay all amounts that the Funding Entity expressly agrees to pay under the Settlement Agreement, which amounts are paid on behalf of APIC in partial satisfaction of APIC's obligations under the Guaranty (collectively, all such cash payments being referred to herein as the "APIC Guaranty Payments"); and, WHEREAS, AFLP is the non-managing partner of AFI, which in turn owns approximately 83.33% of the issued and outstanding shares of APIC (the "APIC Shares"), with approximately 8.33% of the APIC Shares being owned by AHI and approximately 8.33% of the APIC Shares being owned by PMCo; and, WHEREAS, in order to induce Kaanapali Land to act as Funding Agent with respect to the APIC Guaranty Payments, APIC, AHI, PMCo, AFLP and AFI have agreed to enter into this Agreement to reflect their respective undertakings with respect to same; and, WHEREAS, this Agreement shall be contingent upon the occurrence of the Plan Effective Date. NOW, THEREFORE, in consideration of the premises and the covenants of the parties set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby mutually acknowledged, the parties hereto agree as follows: 1. COMMITMENTS BY KAANAPALI LAND, AHI AND PMCO. A. FUNDING ENTITY OBLIGATIONS. Kaanapali Land hereby agrees that it will enter into the Settlement Agreement for the limited purpose of being the Funding Entity and undertaking the other agreements and obligations of Kaanapali Land that are expressly set forth in the Settlement Agreement, including payment of the APIC Guaranty Payments at such times as such payments are required under the Settlement Agreement or any Ancillary Agreement. Any amounts to be funded by Kaanapali Land pursuant to the Settlement Agreement shall be funded directly by Kaanapali Land to the ERS (or such other third parties as may be entitled to such payment thereunder), notwithstanding that such payments shall be considered as having been made in accordance with the provisions of this Section 1 as set forth below. No cash shall be paid by Kaanapali Land to APIC, AHI, PMCo or any of their affiliates on account of this Agreement. B. CAPITAL CONTRIBUTIONS TO AHI AND PMCo, AND THEN APIC. With respect to the prorata portion of the APIC Guaranty Payments (respectively, the "AHI Portion" and the "PMCo Portion") that are attributable to the APIC Shares owned by AHI and PMCo, AHI and PMCo shall immediately reimburse Kaanapali Land for the AHI Portion and the PMCo Portion as and when funded by Kaanapali Land pursuant to the Settlement Agreement. To the extent that AHI and PMCo have insufficient funds to effect such reimbursements (or insufficient amounts to fund the loans set forth in Section 1.C. below), Kaanapali Land shall cause the amounts not so reimbursed to be reflected on the books and records of the applicable entities as capital contributions one-half each to AHI and PMCo (or their successors by merger or otherwise), as applicable, with the amount so contributed to PMCo to be contributed through successive capital contributions through subsidiaries until contributed to PMCo. Kaanapali Land shall then cause AHI and PMCo, and APIC shall itself cause, the AHI Portion and the PMCo Portion, respectively, of the APIC Guaranty Payments (whether reimbursed to Kaanapali Land and/or contributed to AHI and PMCo by Kaanapali Land as set forth above) to be reflected on their books and records as a pro-rata capital contribution on account and based upon the number of the APIC Shares owned by each of AHI and PMCo relative to the total number of APIC Shares outstanding. C. LOANS TO AFLP. With respect to the prorata portion of the APIC Guaranty Payments (the "AFLP Portion") that is attributable to the APIC Shares owned by AFLP through its interest in AFI, AFI and AFLP shall in the first instance use all available cash to reimburse Kaanapali Land in satisfaction of as much of the AFLP Portion as practicable. To the extent that additional amounts are needed to reimburse Kaanapali Land for the AFLP Portion, AHI and PMCo hereby agree to each lend AFLP one-half of such amount. AFLP shall execute and deliver to each of AHI and PMCo on the date of first funding thereunder, promissory notes (the "Notes") in the form of EXHIBIT A attached hereto and made a part hereof, each such Note to be in a principal amount equal to the respective liquidated amount of the AFLP Portion of the APIC Guaranty Payments loaned by AHI or PMCo, as applicable, to AFLP from time to time as set forth on Schedule 1 thereof. The parties hereto hereby acknowledge and agree that the AFLP Portion of any payments made by Kaanapali Land, as Funding Agent or otherwise, under the Settlement Agreement or any other agreement executed in connection therewith, to the extent required to be funded by AHI and PMCo as additional loans hereunder, shall be considered further advances under the Notes, shall be added to the principal balance thereof and that AFLP shall be authorized to annotate Schedule 1 of the Notes to reflect such additional advances, accrued interest under the Notes and any payments made thereon. 2. CAPITAL CONTRIBUTIONS BY AFLP AND AFI. With respect to the AFLP Portion of the APIC Guaranty Payments either reimbursed to Kaanapali Land by AFI or funded through loans to AFLP as set forth above, AFLP and AFI shall cause such amounts to be reflected on their books and records as, to the extent of the loans to AFLP, capital contributions by AFLP to AFI, and AFI and APIC shall then cause the entire amount of the AFLP Portion to be reflected on their books and records as capital contributions by AFI to APIC as a pro-rata capital contribution based upon the number of APIC Shares owned by AFI relative to the total number of APIC shares outstanding. 3. INDEMNIFICATION BY AFLP AND APIC. APIC and AFLP each hereby further covenants and agrees to indemnify, defend and hold Kaanapali Land harmless from the AFLP Portion of any claims, demands, liabilities, judgments, damages, costs, or expenses (including, without limitation, reasonable attorney's fees and costs of litigation) in connection with or arising out of or relating to any breach of any representation, warranty or other provision of this Agreement or the Settlement Agreement by APIC or AFLP, or otherwise relating to any act or omission of APIC or AFLP arising out of the Settlement Agreement, including, without limitation, any claims for any amounts whatsoever that ERS or its affiliates may claim against Kaanapali Land that are (i) not required to be funded by Kaanapali Land under the Settlement Agreement or the documents executed by the parties in connections therewith, or (ii) whether or not required to be so funded, have not be previously paid or, if previously paid, have not been reflected as an additional advances under the Notes. For purposes of the immediately preceding sentence, the term "Kaanapali Land" shall include Kaanapali Land and its direct and indirect members, and their respective officers, directors, shareholders, trustees, beneficiaries, employees, agents, contractors, affiliates, successors and assigns. 4. RELEASE. A. For and in consideration of this Agreement (including the indemnity provided in Section 3 hereof), and for other good and valuable consideration as hereinabove expressed, the adequacy, sufficiency, and receipt of which is hereby acknowledged, APIC, on behalf of itself and itself and its successors and assigns, does hereby release, remise, quitclaim and forever discharge Kaanapali Land, AFLP, AHI, PMCo and the Debtors, and their respective officers, directors, shareholders, partners, members, managers, trustees, beneficiaries, employees, agents and contractors (collectively, the "Released Parties"), from any and all rights, claims, demands, debts, dues, sums of money, accounts, promises, trespasses, judgments, executions, actions and causes of action of any nature whatsoever, cognizable at law or in equity, which APIC now has or claims, or might hereafter have or claim, against any or all of them. B. This release shall be deemed to apply to all claims and other things remised, released and discharged pursuant to this Section 4 regardless of whether or not any such claim or other thing shall have been known to or anticipated by APIC on the date of this Agreement, it being the intention of the parties that the Released Parties shall not have any liability or obligation of any kind or character whatsoever to APIC by reason of any agreement made, any duty owed, or any act or failure to act occurring on or prior to the date of this Agreement, except as otherwise expressly provided herein. This Agreement shall not impair or affect any claims that any of the Released Parties may have against APIC. C. It is the intention of APIC in executing this Agreement that it shall be effective as a bar to each and every claim, demand, and cause of action hereinabove mentioned or implied in this Section 4; and APIC hereby knowingly and voluntarily waives any and all rights and benefits except as expressly provided for in this Agreement. APIC acknowledges and agrees that this waiver is an essential and material term of this Agreement and without such waiver this Agreement would not have been entered into. D. APIC understands and agrees that this Agreement is not intended to be and shall not be deemed, construed, or treated in any respect as an admission of liability by any person or entity for any purpose. 5. GOVERNING LAW. This Agreement shall be governed by and interpreted in accordance with the internal laws of the State of Illinois. 6. COUNTERPARTS; AMENDMENTS. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which taken together shall constitute one and the same instrument. This Agreement may only be amended by an instrument in writing signed and delivered by all of the parties hereto. 7. SUCCESSORS. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto, and their respective legal representatives, heirs, administrators, executors, successors and assigns. Without limitation of the foregoing, this Agreement shall be binding on entities succeeding to the assets and liabilities of any party hereto, whether by merger, consolidation or otherwise. No person or entity shall in any respect be deemed to be a third party beneficiary with respect to this Agreement. 8. CAPTIONS. Captions contained in this Agreement are inserted only as a matter of convenience and in no way define, limit or extend the scope of this Agreement or any provision hereof. 9. CONTINGENCY. The parties understand and agree that the effectiveness of this agreement is contingent upon the occurrence of the Plan Effective Date. In the event that the Plan Effective Date has not occurred by the time that the first amounts must be funded by Kaanapali Land under the Settlement Agreement, the parties hereto agree to seek approval of the Bankruptcy Court for this Agreement and AHI and PMCo agree to diligently pursue such approval; provided however, that in the event that the Bankruptcy Court denies the motion of the Debtors for approval of this Agreement, no party hereto shall be under any obligation to seek a rehearing or appeal such decision. In the event that an order of the Bankruptcy Court denying approval of this Agreement becomes a final and non-appealable order, or if otherwise agreed in writing by all of the parties hereto prior to such time, this Agreement shall thereupon become null and void and of no further force or effect. 10. NO THIRD PARTY BENEFICIARIES. The parties hereto do not intent that any other person or entity other than the parties hereto shall be, nor is any such person or entity, a third party beneficiary of this Agreement. IN WITNESS WHEREOF, the undersigned have executed and delivered this Agreement as of the date and year first above written. KAANAPALI LAND: KAANAPALI LAND, LLC, a Delaware limited liability company, By: ------------------------------ Its: ------------------------------ APIC: AMFAC PROPERTY INVESTMENT CORP., a Hawaii corporation, By: ------------------------------ Its: ------------------------------ AFI: AF INVESTORS, LLC, a Delaware limited liability company, By: ------------------------------ Its: ------------------------------ AFLP: AMFAC FINANCE LIMITED PARTNERSHIP, an Illinois limited partnership By: AF MANAGERS, INC., a Delaware corporation, General Partner By: ------------------------------ Its: ------------------------------ AHI: AMFAC HAWAII, LLC, a Delaware limited liability company, By: ------------------------------ Its: ------------------------------ PMCo: PIONEER MILL COMPANY, LIMITED, a Hawaii corporation, By: ------------------------------ Its: ------------------------------ EXHIBIT A PROMISSORY NOTE ____________________, 200____ FOR VALUE RECEIVED, the undersigned, AMFAC FINANCE LIMITED PARTNERSHIP ("Borrower"), an Illinois limited partnership, hereby promises to pay to ____________________, a ___________ ("Payee"), the aggregate unpaid principal amount as shown either on SCHEDULE 1 attached hereto (and any continuation thereof) or in the records of the Payee (the "Principal"), ON DEMAND (the date of such demand being the "Maturity Date"). The unpaid Principal amount on any from time to time outstanding hereunder shall bear interest ("Interest") from the date any such Principal is loaned hereunder through the Maturity Date at 3.43% per annum, compounded semi-annually on December 31 and June 30 of each calendar year (the "Interest Rate"), and payable on the Maturity Date. If Borrower does not make payment of the Interest then accrued at the end of any semi-annual interest period, the accrued Interest shall be added to Principal on the last day of the applicable interest period. Notwithstanding the foregoing, if Borrower shall fail to pay the unpaid balance of the Principal on the Maturity Date as provided herein, then Interest shall accrue on such unpaid amount at the Interest Rate, plus 4% PER ANNUM, until the date upon which such unpaid amount is paid in full; provided, that whenever any payment to be made hereunder shall be due on a day other than a day when commercial banks are open for normal business in Chicago, Illinois, such payment shall be made on the next succeeding day when such banks shall be open (and such extension of time shall be included in the computation of Interest due on such day). Payments of Principal and Interest on this Note are to be made in lawful money of the United States of America at the principal office of Payee in Chicago, Illinois, and payable to the order of the Payee in same day funds on the day when due. The unpaid principal amount of this Promissory Note may be prepaid in whole or in part at any time by the Borrower without premium, penalty or costs whatsoever, provided that all accrued and unpaid interest on the principal amount so prepaid is paid at such time. In addition, this Note shall be subject to mandatory prepayment in accordance with the provisions set forth below. THIS NOTE IS GIVEN PURSUANT TO THAT CERTAIN FUNDING AGREEMENT, DATED AS OF OCTOBER 19, 2002, BY AND AMONG BORROWER, AF INVESTORS, LLC, AMFAC PROPERTY INVESTMENT CORP., KAANAPALI LAND, LLC, AMFAC HAWAII, LLC, PIONEER MILL COMPANY, LIMITED AND PAYEE (THE "FUNDING AGREEMENT"). Borrower and Payee acknowledge that Borrower is issuing this Note to Payee in consideration for the advances made, or which may hereafter be made, available by Payee to Borrower pursuant to the Funding Agreement. Notwithstanding the foregoing, Payee shall not at any time be under any obligation to make additional advances under this Note, except to the extent specifically provided under the Funding Agreement. Notwithstanding anything to the contrary contained in this Note, no director, officer, shareholder or employee of the Borrower shall have any personal liability of any kind or nature directly or indirectly in connection with this Note. Borrower hereby waives presentment for payment, demand, protest and notice of dishonor and hereby assents to any extension of the time of payment, forbearance or other indulgence that may be granted by the Payee, without notice. The terms of this Promissory Note may not be modified or terminated orally, but only by an agreement in writing signed by the party to be charged. This Note shall be governed by and construed in accordance with the laws of the State of Illinois applicable to contracts made and to be wholly performed in said State, including, but not limited to, the legality of interest rate. AMFAC FINANCE LIMITED PARTNERSHIP, an Illinois limited partnership By: AF MANAGERS, INC., a Delaware corporation, General Partner By: ------------------------------ Its: ------------------------------ SCHEDULE 1 Attached to Promissory Note dated _______________, 200____ of Amfac Finance Limited Partnership, payable to the order of _____________________________. 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