Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2010

 

OR

 

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

 

Commission file number 001-06510

 

MAUI LAND & PINEAPPLE COMPANY, INC.

(Exact name of registrant as specified in its charter)

 

HAWAII

 

99-0107542

(State or other jurisdiction

 

(IRS Employer

of incorporation or organization)

 

Identification No.)

 

870 HALIIMAILE ROAD, MAKAWAO, MAUI, HAWAII 96768-9768

(Address of principal executive offices)

 

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

 

NONE

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

 

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

 

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

 

Class

 

Outstanding at November 1, 2010

Common Stock, no par value

 

18,757,196 shares

 

 

 



Table of Contents

 

MAUI LAND & PINEAPPLE COMPANY, INC.

AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

3

 

 

Item 1. Financial Statements (unaudited)

3

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), Three Months Ended September 30, 2010 and 2009

3

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), Nine Months Ended September 30, 2010 and 2009

4

 

 

Condensed Consolidated Balance Sheets, September 30, 2010 and December 31, 2009

5

 

 

Condensed Consolidated Statements of Stockholders’ Equity (Deficiency), Nine Months Ended September 30, 2010 and 2009

6

 

 

Condensed Consolidated Statements of Cash Flows, Nine Months Ended September 30, 2010 and 2009

7

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

Forward-Looking Statements and Risks

29

 

 

Item 4. Controls and Procedures

30

 

 

PART II. OTHER INFORMATION

31

 

 

Item 6. Exhibits

31

 

 

Signature

32

 

 

EXHIBIT INDEX

33

 

 

Exhibit 10.1

 

Exhibit 10.2

 

Exhibit 10.3

 

Exhibit 10.4

 

Exhibit 31.1

 

Exhibit 31.2

 

Exhibit 32.1

 

 

2



Table of Contents

 

PART I FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

 

(UNAUDITED)

 

 

 

Three Months Ended,

 

 

 

9/30/2010

 

9/30/2009

 

 

 

(in thousands except

 

 

 

share amounts)

 

 

 

 

 

 

 

OPERATING REVENUES

 

 

 

 

 

Product revenues

 

$

2,895

 

$

13,174

 

Service revenues

 

5,340

 

  6,897

 

 

 

 

 

 

 

Total Operating Revenues

 

8,235

 

20,071

 

 

 

 

 

 

 

OPERATING COSTS AND EXPENSES

 

 

 

 

 

Cost of product revenues

 

949

 

  3,458

 

Cost of service revenues

 

6,938

 

  9,608

 

Selling and marketing

 

446

 

  704

 

General and administrative

 

3,317

 

  3,139

 

(Gain) loss on asset disposals (Note 10)

 

(25,736

)

  784

 

 

 

 

 

 

 

Total Operating Costs and Expenses

 

(14,086

)

17,693

 

 

 

 

 

 

 

Operating Income

 

 22,321

 

  2,378

 

 

 

 

 

 

 

Equity in losses of affiliates (Note 11)

 

  —

 

 (22,784

)

Interest expense

 

  (2,364

)

(2,749

)

Interest income

 

 9

 

  107

 

 

 

 

 

 

 

Income (Loss) from Continuing Operations Before Income Taxes

 

 19,966

 

 (23,048

)

Income Tax Benefit

 

  (261

)

(1,007

)

 

 

 

 

 

 

Income (Loss) from Continuing Operations

 

 20,227

 

 (22,041

)

 

 

 

 

 

 

Loss from Discontinued Operations (Note 7) net of income taxes of $0

 

  (200

)

(3,445

)

 

 

 

 

 

 

NET INCOME (LOSS)

 

$

 20,027

 

$

 (25,486

)

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)

 

$

 20,027

 

$

 (25,486

)

 

 

 

 

 

 

INCOME (LOSS) PER COMMON SHARE

 

 

 

 

 

—BASIC AND DILUTED

 

 

 

 

 

Continuing Operations

 

$

  1.36

 

$

  (2.74

)

Discontinued Operations

 

 (0.01

)

  (0.43

)

Net Income (Loss)

 

$

  1.35

 

$

  (3.17

)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

 

(UNAUDITED)

 

 

 

Nine Months Ended,

 

 

 

9/30/2010

 

9/30/2009

 

 

 

(in thousands except

 

 

 

share amounts)

 

 

 

 

 

 

 

OPERATING REVENUES

 

 

 

 

 

Product revenues

 

$

10,461

 

$

19,965

 

Service revenues

 

16,807

 

19,563

 

 

 

 

 

 

 

Total Operating Revenues

 

27,268

 

39,528

 

 

 

 

 

 

 

OPERATING COSTS AND EXPENSES

 

 

 

 

 

Cost of product revenues

 

2,997

 

6,030

 

Cost of service revenues

 

21,727

 

28,494

 

Selling and marketing

 

1,976

 

3,108

 

General and administrative

 

7,560

 

15,818

 

(Gain) loss on disposal of assets (Note 10)

 

(26,724

)

784

 

Impairment charges (Note 8)

 

 

14,286

 

 

 

 

 

 

 

Total Operating Costs and Expenses

 

7,536

 

68,520

 

 

 

 

 

 

 

Operating Income (Loss)

 

19,732

 

(28,992

)

 

 

 

 

 

 

Equity in losses of affiliates (Note 11)

 

 

(47,187

)

Interest expense

 

(8,250

)

(7,292

)

Interest income

 

34

 

485

 

 

 

 

 

 

 

Income (Loss) from Continuing Operations Before Income Taxes

 

11,516

 

(82,986

)

Income Tax Benefit

 

(176

)

(207

)

 

 

 

 

 

 

Income (Loss) from Continuing Operations

 

11,692

 

(82,779

)

 

 

 

 

 

 

Income (Loss) from Discontinued Operations (Note 7) net of income taxes of $0

 

1,043

 

(10,149

)

 

 

 

 

 

 

NET INCOME (LOSS)

 

12,735

 

(92,928

)

Pension Benefit Adjustment net of income taxes of $0

 

615

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)

 

$

13,350

 

$

(92,928

)

 

 

 

 

 

 

EARNINGS (LOSS) PER COMMON SHARE

 

 

 

 

 

—BASIC AND DILUTED

 

 

 

 

 

Continuing Operations

 

$

1.13

 

$

(10.31

)

Discontinued Operations

 

0.10

 

(1.26

)

Net Income (Loss)

 

$

1.23

 

$

(11.57

)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(UNAUDITED)

 

 

 

9/30/2010

 

12/31/2009

 

 

 

(in thousands)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

1,812

 

$

1,881

 

Accounts receivable, less allowance of $482 and $452 for doubtful accounts

 

2,106

 

3,684

 

Refundable income taxes

 

436

 

4,331

 

Inventories

 

3,157

 

3,387

 

Prepaid expenses and other assets

 

738

 

377

 

Assets held for sale

 

13,201

 

15,227

 

Total Current Assets

 

21,450

 

28,887

 

 

 

 

 

 

 

PROPERTY

 

113,129

 

144,903

 

Accumulated depreciation

 

(47,811

)

(60,189

)

Net Property

 

65,318

 

84,714

 

 

 

 

 

 

 

OTHER ASSETS

 

12,623

 

14,447

 

 

 

 

 

 

 

TOTAL

 

$

99,391

 

$

128,048

 

 

 

 

 

 

 

LIABILITIES & STOCKHOLDERS’ DEFICIENCY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Current portion of long-term debt and capital lease obligations

 

$

43,224

 

$

1,817

 

Trade accounts payable

 

4,787

 

6,581

 

Payroll and employee benefits

 

3,058

 

4,947

 

Income taxes payable

 

4,091

 

2,626

 

Golf course deferred credits (Note 10)

 

24,796

 

 

Other accrued liabilities

 

12,140

 

12,072

 

Total Current Liabilities

 

92,096

 

28,043

 

 

 

 

 

 

 

LONG-TERM LIABILITIES

 

 

 

 

 

Long-term debt and capital lease obligations

 

85

 

94,824

 

Accrued retirement benefits

 

23,972

 

28,076

 

Plantation Golf Course (PGC) deferred credit (Note 10)

 

 

46,338

 

Other noncurrent liabilities

 

6,781

 

7,708

 

Total Long-Term Liabilities

 

30,838

 

176,946

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 17)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ DEFICIENCY

 

 

 

 

 

Common stock—no par value, 43,000,000 shares authorized, 18,510,968 and 8,087,334 shares issued and outstanding

 

75,371

 

35,437

 

Additional paid in capital

 

9,133

 

9,019

 

Accumulated deficit

 

(103,988

)

(116,723

)

Accumulated other comprehensive loss

 

(4,059

)

(4,674

)

Stockholders’ Deficiency

 

(23,543

)

(76,941

)

TOTAL

 

$

99,391

 

$

128,048

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)

 

(UNAUDITED)

 

For the Nine Months Ended September 30, 2010 and 2009

 

(in thousands)

 

 

 

 

 

 

 

 

 

Retained

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

Earnings

 

Other

 

 

 

 

 

Common Stock

 

Paid in

 

(Accumulated

 

Comprehensive

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Deficit)

 

Income (Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2010

 

8,087

 

$

35,437

 

$

9,019

 

$

(116,723

)

$

(4,674

)

$

(76,941

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of stock, net of costs (Note 6)

 

10,390

 

39,565

 

 

 

 

 

 

 

39,565

 

Pension benefits adjustment (Note 13)

 

 

 

 

 

 

 

 

 

615

 

615

 

Share-based compensation expense

 

 

 

 

 

585

 

 

 

 

 

585

 

Vested restricted stock issued

 

58

 

471

 

(471

)

 

 

 

 

 

Shares cancelled to pay tax liability

 

(24

)

(102

)

 

 

 

 

 

 

(102

)

Net income

 

 

 

 

 

 

 

12,735

 

 

 

12,735

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2010

 

18,511

 

$

75,371

 

$

9,133

 

$

(103,988

)

$

(4,059

)

$

(23,543

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2009

 

8,021

 

$

34,791

 

$

8,363

 

$

6,558

 

$

(18,024

)

$

31,688

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 

 

1,239

 

 

 

 

 

1,239

 

Vested restricted stock issued

 

61

 

631

 

(631

)

 

 

 

 

 

Shares cancelled to pay tax liability

 

(19

)

(146

)

 

 

 

 

 

 

(146

)

Net loss

 

 

 

 

 

 

 

(92,928

)

 

 

(92,928

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2009

 

8,063

 

$

35,276

 

$

8,971

 

$

(86,370

)

$

(18,024

)

$

(60,147

)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

6



Table of Contents

 

MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(UNAUDITED)

 

 

 

Nine Months Ended

 

 

 

9/30/10

 

9/30/09

 

 

 

(in thousands)

 

 

 

 

 

 

 

NET CASH USED IN OPERATING ACTIVITIES

 

$

(5,834

)

$

(9,748

)

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Purchases of property

 

(3,396

)

(1,063

)

Proceeds from disposals of property

 

3,629

 

1,831

 

Other

 

(217

)

1,313

 

 

 

 

 

 

 

NET CASH PROVIDED BY INVESTING ACTIVITIES

 

16

 

2,081

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Payments of long-term debt and capital lease obligations

 

(70,381

)

(64,407

)

Proceeds from long-term debt

 

15,300

 

13,500

 

Issuance of common stock (Note 6)

 

40,000

 

 

Net proceeds from golf course sales (Note 10)

 

22,828

 

48,520

 

Reduction of Plantation Golf Course deferred credit

 

(1,405

)

(1,521

)

Debt and common stock issuance cost and other

 

(593

)

(1,238

)

 

 

 

 

 

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

5,749

 

(5,146

)

 

 

 

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(69

)

(12,813

)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

1,881

 

13,668

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

1,812

 

$

855

 

 

Supplemental Disclosures of Cash Flow Information—Interest (net of amounts capitalized) of $6,202,000 and $7,034,000 was paid during the nine months ended September 30, 2010 and 2009, respectively. Income taxes of $5,536,000 and $4,143,000 were refunded during the nine months ended September 30, 2010 and 2009, respectively.

 

Supplemental Non-Cash Investing and Financing Activities—

 

·                  Property acquired under capital leases was $698,000 during the nine months ended September 30, 2009.

·                  A capital lease obligation of $289,000 and the related asset acquired there under were transferred to a third party during the nine months ended September 30, 2010.

·                  Amounts included in trade accounts payable for additions to property and for other investing activities totaled $709,000 and $1,398,000 at September 30, 2010 and 2009, respectively.

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

7



Table of Contents

 

MAUI LAND & PINEAPPLE COMPANY, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(UNAUDITED)

 

1.                                      Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared by Maui Land & Pineapple Company, Inc. (together with its subsidiaries, the “Company”) in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information that are consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, and pursuant to the instructions to Form 10-Q and Article 8 promulgated by Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes to financial statements required by GAAP for complete financial statements. In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to fairly present the Company’s financial position, results of operations and cash flows for the interim periods ended September 30, 2010 and 2009. The financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2009.

 

LIQUIDITY

 

At September 30, 2010, the Company had $1.8 million in cash and cash equivalents.  The Company had negative cash flows from operations of $5.8 million for the nine months ended September 30, 2010. Reflected in the negative cash flow from operations was $5.5 million of income taxes refunded in the quarter ended March 31, 2010. The Company had an excess of current liabilities over current assets of $70.6 million and had a stockholders’ deficiency of $23.5 million at September 30, 2010.

 

Current liabilities at September 30, 2010 include $42.8 million of revolving lines of credit under two agreements that expire in March 2011. Both of the revolving lines of credit have financial covenants requiring among other things, a minimum of $8 million in liquidity and a limitation on new indebtedness.  Failure to satisfy the minimum liquidity covenants or to otherwise default under one credit agreement could result in a default under both credit agreements resulting in all outstanding borrowings becoming immediately due and payable.  The Company has pledged a significant portion of its real estate holdings as security for borrowings under these credit facilities.

 

The Company’s cash outlook for the next twelve months and its ability to make the required debt repayments in March 2011 and to continue to meet its financial covenants is highly dependent on selling certain real estate assets in a difficult market and refinancing its existing debt. If the Company is unable to meet its financial covenants resulting in the borrowings becoming immediately due, or is unable to restructure its credit agreements to extend the maturity date beyond March 2011, the Company would not have sufficient liquidity to repay such outstanding borrowings. In addition, the Company is subject to several commitments and contingencies that could negatively impact its future cash flows, including commitments related to its investment in Kapalua Bay Holdings, LLC (Bay Holdings), its ongoing dispute with the Ladies Professional Golf Association (LPGA), a legal dispute with a former grower and an U.S. Equal Employment Opportunity Commission (EEOC) matter related to the Company’s discontinued agricultural operations, and funding requirements related to the Company’s defined benefit pension plans.  These matters are further described in Notes 13 and 17.

 

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

 

In response to these circumstances, the Company continues to undertake several financial and strategic initiatives to reduce cash commitments, to generate cash flow from a variety of sources and to further reduce its debt, including the sale of several real estate assets.  The Company is actively working with its lenders to extend the maturity dates and modify other terms of its credit agreements.

 

In July 2010, the Company concluded a shareholder rights offering of 10,389,610 shares of common stock, pursuant to which it received gross proceeds of $40 million.  On August 3, 2010, the Company completed the repurchase of all $40 million of its outstanding senior secured convertible notes for $35.2 million, utilizing proceeds from the rights offering (see Note 6).

 

8



Table of Contents

 

On September 30, 2010, the Company sold the Kapalua Bay Golf Course (Bay Course) and the adjacent maintenance facility for $24.1 million in cash.  The Company utilized the proceeds from the sale to pay down its revolving credit facilities by $20 million (see Notes 5 and 10).

 

In the first nine months of 2010, the Company also concluded the sales of a 128-acre parcel and a two-acre parcel that included its former administrative office building, resulting in total cash proceeds, net of selling costs, of $3.3 million.

 

2.                                      Use of Estimates

 

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

 

3.                                      Inventories

 

Inventories as of September 30, 2010 and December 31, 2009 were as follows:

 

 

 

9/30/10

 

12/31/09

 

 

 

(in thousands)

 

Real estate

 

$

1,721

 

$

1,721

 

Merchandise, materials and supplies

 

1,436

 

1,666

 

Total Inventories

 

$

3,157

 

$

3,387

 

 

4.                                      Average Common Shares Outstanding Used to Compute Earnings Per Share

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

14,882,010

 

8,047,228

 

10,376,333

 

8,034,045

 

Potentially dilutive

 

423,272

 

1,336,052

 

423,272

 

1,333,333

 

 

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

 

Potentially dilutive shares arise from non-qualified stock options to purchase common stock, non-vested restricted stock, and for the three and nine months ended September 30, 2009, common stock issuable upon assumed conversion of convertible debt. The treasury stock method is applied to determine the number of potentially dilutive shares for non-vested restricted stock and stock options assuming that the shares of non-vested restricted stock are issued for an amount based on the grant date market price of the shares and that the outstanding stock options are exercised. Convertible debt was assumed to be converted by applying the if-converted method. These amounts were excluded for all periods presented because the effect would be anti-dilutive.

 

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5.                                      Financing Arrangements

 

Long-term debt and capital lease obligations at September 30, 2010 and December 31, 2009 consisted of the following:

 

 

 

9/30/2010

 

12/31/2009

 

 

 

(in thousands)

 

Revolving loans, 5.5%

 

$

42,800

 

$

59,900

 

Senior Secured Convertible Notes, 5.875%

 

 

34,324

 

Capital lease obligations

 

509

 

2,417

 

Total

 

43,309

 

96,641

 

Less current portion

 

43,224

 

1,817

 

Long-term debt and capital lease obligations

 

$

85

 

$

94,824

 

 

In November 2007, the Company entered into a $90 million revolving line of credit with Wells Fargo Bank secured by approximately 1,437 acres of the Company’s West Maui land. All outstanding principal and accrued interest was scheduled to be due on November 13, 2009. In March 2009, the Company sold the Plantation Golf Course (PGC) for $50 million (see Note 10), which was included in the collateral securing the line of credit agreement. In consideration for release of the PGC from the collateral, $45 million of the sales proceeds were applied to partially repay outstanding borrowings and the credit limit under this facility was reduced to $45 million. In conjunction with the PGC sale, the line of credit agreement was amended to extend the maturity date to March 13, 2010.

 

In October 2009, the line of credit agreement was amended and restated. The agreement principally increased the secured revolving line of credit from $45 million to $50 million, extended the maturity date of the credit agreement from March 2010 to March 2011, and re-set financial covenants. As amended, the agreement provided that interest on loan draws accrue interest based on the LIBOR market index or applicable LIBOR rate, plus 4.25%, subject to a minimum interest rate of 5.5%. The financial covenants include a minimum liquidity, as defined in the agreement, of $8 million and maximum total liabilities of $240 million. There are no commitment fees on the unused portion of the revolving facility and interest is due monthly. The line of credit agreement contains various representations, warranties, affirmative, negative and financial covenants and events of default customary for financings of this type.

 

In September 2010, the Company sold the Bay Course (see Note 10), which was included in the collateral securing the line of credit.  On September 30, 2010, the Company utilized $20 million of proceeds from the sale to pay down the line of credit and reduce the facility commitment to $30 million.  As of September 30, 2010, the Company had $17.8 million outstanding or encumbered to secure letters of credit, and $11.1 million available under this line.

 

The Company also has a $25 million revolving loan that is secured by certain parcels of the Company’s real property on Maui that matures in March 2011 (as amended). Commitment fees of 0.40% are payable on the unused portion of the revolving facility.  The revolving loan was fully drawn at September 30, 2010 and December 31, 2009.  The financial covenants include a minimum liquidity (as defined in the agreement) of $8 million, maximum total liabilities of $240 million, and limitations on capital expenditures. As amended, the agreement provides that interest on loan draws accrue interest based on the LIBOR market index or applicable LIBOR rate, plus 4.25%, subject to a minimum interest rate of 5.5%.

 

On July 28, 2008, the Company concluded a securities purchase agreement with certain institutional accredited investors and issued an aggregate of $40 million in principal amount of senior secured convertible notes (the “convertible notes”), bearing 5.875% interest per annum payable quarterly in cash in arrears.  The convertible notes were convertible, at any time following their issuance, into shares of common stock of the Company at an initial conversion price of $33.50 per share, which was equal to an initial conversion rate of 29.8507 shares per $1,000 principal amount of the convertible notes. On the third anniversary of the closing, each holder of the convertible notes had the right to require the Company to redeem all or any portion of such convertible note at a redemption price equal to 100% of the principal amount of the convertible note being redeemed, plus accrued and unpaid interest thereon.

 

On August 3, 2010, the Company redeemed of all of the convertible notes for $35.2 million (see Note 6).  The Company’s carrying value of the convertible notes at the time of the redemption was $36.3 million.  Including lock-up fees paid to the holders, legal fees and other costs, the Company recorded a net loss of $617,000 on redemption of the convertible notes that is included in general and administrative expenses for the quarter ended September 30, 2010.

 

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6.                                      Rights Offering

 

In June 2010, the Company initiated a shareholder rights offering for up to $40 million of its common stock with the intent to utilize the proceeds from the offering to repurchase up to all of its $40 million of outstanding senior secured convertible notes. In accordance with the terms of the offering, each shareholder received one non-transferable subscription right for each share of common stock owned as of the close of business on July 7, 2010, the record date for the rights offering. Each subscription right entitled the shareholder to purchase approximately 1.23 shares of common stock at a subscription price of $3.85 per share. Shareholders who fully exercised all of their initial subscription rights were entitled to purchase any unsubscribed shares at the same subscription price per share, on a pro rata basis, subject to the terms of the rights offering.

 

In conjunction with the rights offering, the Company entered into agreements with holders of all of the convertible notes to repurchase their notes at 88% of face value. The Company paid to these note holders a lock-up fee of 2% of face value in exchange for their agreement not to transfer their Notes for a 47-day period.

 

The rights offering concluded on July 29, 2010 and the Company received gross proceeds of $40 million and issued 10,389,610 shares of common stock. On August 3, 2010, the Company completed the repurchase of all $40 million of its outstanding senior secured convertible notes for $35.2 million.

 

7.                                      Discontinued Operations

 

The Company ceased all operations in its Agriculture segment as of the end of 2009. The Company’s Agriculture segment operating results and the loss on sale of the assets are reported as discontinued operations and prior period operating results have been reclassified for comparability.  Income from discontinued operations for the nine months ended September 30, 2010 includes a credit of $2.3 million representing the gain from settlement of the Company’s post-retirement life insurance plans (Note 13).  Revenues and income (loss) before income taxes from discontinued operations were as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(in thousands)

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

 

$

4,939

 

$

 

$

14,353

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) from Discontinued Operations

 

$

(200

)

$

(3,445

)

$

1,043

 

$

(10,149

)

 

8.                                      Impairment Charges

 

In June 2009, the Company wrote off $14.2 million of deferred development costs. Due to changing market conditions, several project development plans were written off because the projects as designed were no longer feasible. In addition, projects that were no longer compatible with the Company’s future real estate development expectations were abandoned and all related predevelopment costs were written off.  Also in June 2009, the Company recorded a charge of $1.9 million representing the adjustment of its real estate held for sale to its estimated fair value less cost to sell. The impairment charge, which related to the Company’s Kahului property on which improvements for the fresh fruit processing plant were constructed was reflected in discontinued operations.

 

9.                                      Recently Issued Accounting Pronouncements

 

In June 2009, the Financial Accounting Standards Board (FASB) issued guidance to revise the approach to determine when a variable interest entity (VIE) should be consolidated.  The new consolidation model for VIEs considers whether the Company has the power to direct the activities that most significantly impact the VIE’s economic performance and shares in the significant risks and rewards of the entity.  The guidance requires companies to continually reassess VIEs to determine if consolidation is appropriate and provide additional disclosures.  The guidance was effective for the Company beginning January 1, 2010.  The adoption of this standard did not have a material effect on the Company’s consolidated financial statements as the Company does not currently have any variable interest in VIEs.

 

In January 2010, the FASB issued guidance to improve disclosures about fair value measurements.  The Company must provide additional disclosures regarding transfers in and out of levels 1 and 2, and activity in level 3 fair value measurements.  The guidance also provides clarification regarding levels of disaggregation and disclosures about inputs and valuation techniques for both recurring and nonrecurring fair value measurements that fall in either level 2 or level 3.  The additional disclosure requirements were effective for the Company beginning January 1, 2010, except for the additional disclosures regarding the roll forward of activity in Level 3 fair value measurements, which will be effective January 1, 2011.

 

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10.                               Assets Held for Sale and Real Estate Sales

 

At September 30, 2010, assets held for sale included the Company’s property in Kahului, Maui (25 acres).  These assets include the site of the Company’s former corporate office and the former agriculture processing facilities.  In April 2010, the Company sold the land and building that was previously its administrative offices in Kahului, Maui and recognized a $1.0 million gain on disposal of assets.

 

On September 30, 2010, the Company sold the land, improvements, structures and fixtures comprising the Bay Course and the adjacent maintenance facility for a total of $24.1 million in cash.  Concurrent with the sale the Company entered into an agreement to lease back the assets through March 31, 2011 (Lease), and due to certain construction work required by the leaseback arrangement and other continuing involvement, the sale has been accounted for as a financing transaction. Accordingly, the net proceeds received have been reflected as a current liability and no gain will be recognized until expiration of the Lease in March 2011.  Concurrent with the Bay Course sale transaction, the Company entered into an agreement (Golf Academy Lease) to lease to the buyer the property known as the Kapalua Golf Academy.  Under terms of the Golf Academy Lease the buyer will lease the Golf Academy training facility for an initial term of 10 years and be granted an easement for the approximately 25 acres adjacent to the training facility.

 

In March 2009, the Company sold the land, improvements, structures and fixtures comprising the PGC for $50 million in cash. Concurrent with the closing of the sale, the Company entered into an agreement (Ground Lease) to leaseback the PGC for an initial period of two years for an annual net rental payment of $4 million, payable monthly in advance. The Ground Lease required the Company to replace the irrigation system at the PGC at its own cost and expense, subject to a cap of $5 million. Because of the Company’s continuing involvement associated with the obligation to replace the irrigation system, the sale and leaseback of the PGC was accounted for as a financing transaction and, accordingly, the net proceeds received were recorded as a non-current liability in the condensed consolidated balance sheets.

 

In August 2010, the irrigation system was substantially complete and the Company recognized $25.7 million of the deferred gain resulting from the PGC sale.  The remaining $2.0 million deferred gain (included in current liabilities) will be recognized ratably through the expiration of the Ground Lease in March 2011.

 

In March 2010, the Company sold approximately 128 acres of Upcountry Maui Land and recognized revenues of $1.7 million and pre-tax profit of $1.5 million.

 

In September 2009, the Company sold approximately 125 acres of land which included a portion of the master-planned Kapalua Mauka project and recognized revenues of $10.0 million and a pre-tax profit of $7.3 million.

 

11.                               Investments in Affiliates

 

As a result of the 2009 losses incurred by Bay Holdings, the Company’s carrying value of its investment in Bay Holdings and its $3.6 million loan due from Bay Holdings were written down to zero in 2009. The Company does not expect to recover any amounts from its investment in Bay Holdings, has recorded its estimated share of its completion and recourse guarantees for its potential estimated liability and it has no further obligation to fund losses. The Company will not recognize any additional equity in the earnings (losses) of Bay Holdings until the Company’s income attributable to Bay Holdings exceeds its accumulated losses.  The Company had made cash contributions to Bay Holdings of $53.2 million and an uncollateralized loan of $3.6 million that accrued interest at 16%.

 

In June 2009, the Company recorded an impairment charge of $21.3 million to reflect what management believed to be an impairment in the carrying value of its investment in Bay Holdings.  In September 2009, Bay Holdings recorded impairment charges totaling $208.8 million to reflect an impairment of the carrying value of its real estate inventories (whole and fractional condominium units) held for sale; and for the year 2009, Bay Holdings incurred total losses of $256.2 million.  The impairment charges reflected higher default rates on actual whole and fractional unit closings than were anticipated once construction was completed in June 2009, and also reflect a change in forecasted sales revenue on the unsold whole and fractional units that substantially reduces expected margins for those remaining units.

 

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Table of Contents

 

Construction of the six residential buildings comprised of 146 residences was complete by year-end 2009, however, the Company’s and the other members’ completion guaranty to the lenders will remain in place.  The Company has no funding commitments relating to Bay Holdings beyond this amount.

 

Pursuant to previous agreements, the Company has a commitment to purchase the spa, beach club improvements and the sundry store (the “Amenities”) from Bay Holdings at actual construction costs of approximately $35 million.  The Company is in discussions with the other members of Bay Holdings to negotiate the terms of the purchase agreement including the purchase price and payment terms, and is discussing whether the Company will even be required to purchase the Amenities.

 

In July 2006, Bay Holdings entered into a syndicated construction loan agreement with Lehman Brothers Holdings Inc. (Lehman) for the lesser of $370 million or 61.6% of the total projected cost of the project. Lehman’s commitment under the loan agreement was approximately 78% of the total. The loan was collateralized by the project assets, including the fee simple interest in the land owned by Bay Holdings, the adjacent spa parcel owned by the Company, and all of the sales contracts. On September 15, 2008, Lehman filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court, and on February 11, 2009, Bay Holdings, Lehman, other lenders under the loan agreement, Swedbank and MH Kapalua Venture, LLC, an affiliate of Marriott, entered into an Amended and Restated Construction Loan Agreement. Pursuant to the amended loan agreement, the aggregate amount that Bay Holdings could borrow, including amounts previously funded under the amended loan agreement was approximately $354.5 million. In December 2009, Bay Holdings further amended the amended loan agreement to extend the maturity date of the principal payment of $45.7 million that was previously due in February 2010 to December 2010. Bay Holdings’ failure to repay amounts when due could result in all of its outstanding borrowings under the amended loan agreement becoming immediately due and payable. Bay Holdings’ ability to make the December 2010 debt payment as scheduled is dependent on its ability to generate sufficient cash flows from fractional and whole unit closings. Bay Holdings is currently in negotiations with the lenders to restructure the terms of the amended loan agreement to provide available funding until the project is completely sold out.

 

Summarized operating information for Bay Holdings for the three months and nine months ended September 30, 2010 and 2009 is as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

2,921

 

$

(10,969

)

$

10,189

 

$

(20,076

)

 

 

 

 

 

 

 

 

 

 

Expenses

 

14,581

 

(77

)

34,898

 

(3,411

)

 

 

 

 

 

 

 

 

 

 

Impairment loss

 

 

208,768

 

 

208,768

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

$

(11,660

)

$

(219,660

)

$

(24,709

)

$

(225,433

)

 

Negative revenues and expenses in 2009 resulted from increasing the allowance for defaults, as sales of the pre-sold units were previously recognized on the percentage-of-completion method.

 

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Table of Contents

 

12.                               Share-Based Compensation

 

The total compensation expense recognized for share-based compensation was $585,000 and $1,239,000 for the nine months ended September 30, 2010 and 2009, respectively, and $157,000 and $270,000 for the three months ended September 30, 2010 and 2009, respectively. There was no tax benefit or expense related thereto for each period presented.  Subsequent to issuance of the condensed consolidated financial statements for the quarter ended September 30, 2009, management determined that the $97,000 and $445,000 previously disclosed as the total tax benefit related to share-based compensation for the three and nine month periods ended September 30, 2009 were incorrect.  This had no impact on previously reported tax benefit or expense or net loss. Accordingly, the total tax benefit has been restated to $-0- for these periods. Recognized stock compensation was reduced for estimated forfeitures prior to vesting primarily based on historical annual forfeiture rates of approximately 4.1% and 4.0%, as of September 30, 2010 and 2009, respectively. Estimated forfeitures will be reassessed in subsequent periods and may change based on new facts and circumstances.

 

Stock Options

 

A summary of stock option award activity as of and for the nine months ended September 30, 2010 is presented below:

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Weighted

 

Average

 

Aggregate

 

 

 

 

 

Average

 

Average

 

Remaining

 

Intrinsic

 

 

 

 

 

Exercise

 

Grant-Date

 

Contractual

 

Value

 

 

 

Shares

 

Price

 

Fair Value

 

Term (years)

 

$(000)(1)

 

Outstanding at December 31, 2009

 

266,500

 

$

29.20

 

 

 

 

 

 

 

Granted

 

 

$

 

$

 

 

 

 

 

Exercised

 

 

$

 

$

 

 

 

 

 

Forfeited or Cancelled

 

(100,000

)

$

30.03

 

$

11.15

 

 

 

 

 

Outstanding at September 30, 2010

 

166,500

 

$

27.46

 

$

10.32

 

4.6

 

$

 

Exercisable at September 30, 2010

 

113,000

 

$

30.93

 

$

11.30

 

3.6

 

$

 

Expected to Vest at September 30, 2010 (2)

 

38,622

 

$

20.12

 

$

8.23

 

6.5

 

$

 

 


(1)                                 For in-the-money options

(2)                                 Options expected to vest reflect estimated forfeitures

 

Additional stock option information for the nine months ended September 30, 2010 and 2009 is as follows:

 

 

 

2010

 

2009

 

Weighted Average Grant-Date Fair Value For Options Granted During the Period

 

$

 

$

3.11

 

Intrinsic Value of Options Exercised $(000)

 

 

 

Cash Received From Option Exercises $(000)

 

 

 

Tax Benefit From Option Exercises $(000)

 

 

 

Fair Value of Shares Vested During the Period $(000)

 

190

 

1,125

 

 

For the nine months ended September 30, 2009, the fair value of the Company’s stock options awarded was estimated using the Black-Scholes option pricing model and the following weighted average assumptions (there were no stock option awards granted in the first nine months of 2010):

 

 

 

2009

 

Expected Life of Options in Years

 

6.5

 

Expected Volatility

 

46.1

%

Risk-free interest rate

 

2.4

%

Expected dividend yield

 

 

 

As of September 30, 2010, there was $227,000 of total unrecognized compensation expense for awards granted under the stock option plans that is expected to be recognized over a weighted average period of 1.5 years.

 

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Table of Contents

 

Restricted Stock

 

In the first nine months of 2010, 3,000 shares of restricted stock that vest as service requirements are met were granted to certain directors; and 37,553 shares (net of shares withheld for payment of income taxes) of restricted stock vested as directors’ and management service requirements were met.

 

A summary of the activity for restricted stock awards as of and for the nine months ended September 30, 2010 is presented below:

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

 

 

Grant-Date

 

 

 

Shares

 

Fair Value

 

Nonvested balance at December 31, 2009

 

448,301

 

$

8.25

 

Granted

 

3,000

 

$

4.98

 

Vested

 

(37,553

)

$

8.30

 

Forfeited or Cancelled

 

(156,976

)

$

7.47

 

Nonvested balance at September 30, 2010

 

256,772

 

$

3.79

 

 

13.                               Components of Net Periodic Benefit Cost

 

The net periodic benefit costs for pension and other post-retirement benefits for the three months and nine months ended September 30, 2010 and 2009 were as follows:

 

 

 

Three Months

 

Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(in thousands)

 

Pension Benefits

 

 

 

 

 

 

 

 

 

Service cost

 

$

31

 

$

127

 

$

91

 

$

883

 

Interest cost

 

884

 

821

 

2,629

 

2,632

 

Expected return on plan assets

 

(699

)

(593

)

(2,109

)

(1,838

)

Amortization of prior service cost

 

1

 

12

 

3

 

34

 

Amortization of transition liability

 

1

 

4

 

5

 

12

 

Recognized actuarial loss

 

207

 

351

 

574

 

1,319

 

 

 

 

 

 

 

 

 

 

 

Net expense

 

$

425

 

$

722

 

$

1,193

 

$

3,042

 

 

 

 

 

 

 

 

 

 

 

Other Benefits

 

 

 

 

 

 

 

 

 

Service cost

 

$

 

$

45

 

$

33

 

$

154

 

Interest cost

 

33

 

145

 

98

 

544

 

Amortization of prior service cost

 

(20

)

 

(59

)

 

Recognized actuarial gain

 

(213

)

(162

)

(637

)

(403

)

Recognized gain due to curtailment

 

 

 

(576

)

 

Recognized gain due to settlement

 

 

 

(2,683

)

 

 

 

 

 

 

 

 

 

 

 

Net expense (credit)

 

$

(200

)

$

28

 

$

(3,824

)

$

295

 

 

In January 2010, the Company terminated its postretirement life insurance plan and in February 2010, the Company terminated its postretirement medical coverage for non-bargaining retirees.  The curtailment and settlement gain from these events totaled $3,259,000 of which $2,334,000 is recorded in discontinued operations and $925,000 is included in general and administrative expense.

 

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Table of Contents

 

In 2010, minimum required contributions to the Company’s defined benefit pension plans are expected to be $2.0 million which have been fully paid. On June 25, 2010, the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (the “2010 Relief Act”) was signed into law.  The Company’s plan contributions in 2010 include the deferral of pension plan contributions provided for by the 2010 Relief Act with regard to plan years 2009 and 2010.  The Company will be required to pay interest to the pension plans for all contributions that have been deferred. The Company expects to contribute $190,000 to its other post-retirement benefit plans in 2010.

 

In September 2010, the Company was advised by the Pension Benefits Guaranty Corporation (PBGC) that the cessation of its pineapple operations and the corresponding reduction in the active participant count for its Pension Plan for Bargaining Unit and Hourly Employees (Plan) has triggered the requirement that the Company provide security to the PBGC of approximately $5.2 million to support unfunded liabilities of the Plan or to make contributions to the Plan in excess of the minimum required amounts. Management is currently working with the PBGC to reach an agreement as to the amount of contributions that will be made or the form and amount of collateral that will be provided.

 

14.                               Fair Value Measurements

 

In its ongoing business operations, the Company’s primary market risk exposure with regard to financial instruments is due to changes in interest rates. The Company manages this risk by monitoring interest rates and future cash requirements and evaluating opportunities to refinance borrowings at various maturities and interest rates. The Company also utilizes interest rate swaps or other derivatives to reduce risks associated with changes in interest rates.

 

GAAP requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

 

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

 

Level 3: Unobservable inputs that are not corroborated by market data.

 

In July 2008, the Company issued $40 million in senior secured notes that were convertible into the Company’s common stock. The conversion features related to the notes gave rise to a derivative liability carried at fair value, with changes in fair value recognized currently in interest expense.  In August 2010, the convertible notes were fully repaid (see Note 5).

 

In January 2008, the Company entered into interest rate swap agreements to reduce future cash flow variability for approximately two years on $55 million of variable rate debt. The effect of the agreements was to convert variable-rate interest, which was previously tied to 1-, 2-, 3- and 6-month LIBOR terms, to an average fixed-rate interest of approximately 2.9%, before applicable interest rate spreads. The transactions were not designated as hedges, and, accordingly, the gains and losses resulting from the change in fair value from these interest rate swaps were recognized currently in interest expense. The interest rate swap agreements expired in January 2010.

 

Information regarding assets and liabilities measured at fair value on a recurring basis is as follows:

 

 

 

 

 

Fair Value(1) of Liability
Derivatives as of

 

Derivatives not designated as hedges:

 

Balance Sheet Location

 

9/30/10

 

12/31/09

 

 

 

 

 

(in thousands)

 

Interest rate swap agreements

 

Other current liabilities

 

$

 

$

63

 

Derivative liability related to convertible debt

 

Other current liabilities

 

 

489

 

 


(1)                                 Fair value measurements derived using Level 2 inputs.

 

 

 

Location of gain or

 

Amount of gain or (loss)
recognized on derivative

 

Amount of gain or (loss)
recognized on derivative

 

 

 

(loss) recognized in

 

Three Months Ended

 

Nine Months Ended

 

Derivatives not designated as hedges:

 

statement of operations

 

9/30/10

 

9/30/09

 

9/30/10

 

9/30/09

 

 

 

 

 

(in thousands)

 

(in thousands)

 

Interest rate swap agreements

 

Interest expense

 

$

 

$

322

 

$

63

 

$

810

 

Derivative liability related to convertible debt

 

Interest expense

 

12

 

540

 

489

 

1,965

 

 

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Table of Contents

 

Except as indicated below, the carrying amount of the Company’s other financial instruments approximates fair value.

 

Long-Term Debt:

 

The fair value of long-term debt was estimated based on rates currently available to the Company for debt with similar terms and remaining maturities. The carrying amount of long-term debt (including current portion) at September 30, 2010 was $42,800,000, which approximated fair value.  The carrying amount of long-term debt at December 31, 2009 was $94,224,000 and the fair value was $94,312,000.

 

15.                               Income Taxes

 

The effective tax rate for 2010 and 2009 reflects the recognition of expected federal alternative minimum tax liabilities and interim period tax benefits and changes to the tax valuation allowance.

 

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

 

At September 30, 2010, the Company had a liability of $984,000 for unrecognized tax benefits and interest thereon of $1.7 million. At September 30, 2010, $13.6 million of unrecognized tax benefits represented taxes on revenues for which the timing of the taxability is uncertain and the liability for such taxes has been recognized as deferred tax liabilities. The acceleration of the recognition of such income would not affect the estimated annual effective tax rate, but would accelerate the payment of income taxes to earlier periods and would result in additional interest expense.

 

16.                               Operating Segment Information

 

 

 

Three Months

 

Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(in thousands)

 

Operating Revenues

 

 

 

 

 

 

 

 

 

Community Development

 

$

2,632

 

$

12,133

 

$

9,260

 

$

15,920

 

Resort

 

5,601

 

7,602

 

17,904

 

22,935

 

Other

 

2

 

336

 

104

 

673

 

Total Operating Revenues

 

$

8,235

 

$

20,071

 

$

27,268

 

$

39,528

 

 

 

 

 

 

 

 

 

 

 

Operating Profit (Loss)

 

 

 

 

 

 

 

 

 

Community Development (1)

 

$

(499

)

$

(16,162

)

$

237

 

$

(60,377

)

Resort (2)

 

23,520

 

(3,448

)

18,342

 

(12,216

)

Other

 

(700

)

(796

)

1,153

 

(3,586

)

Total Operating Profit (Loss)

 

22,321

 

(20,406

)

19,732

 

(76,179

)

Interest Expense, net

 

(2,355

)

(2,642

)

(8,216

)

(6,807

)

Income Tax Benefit

 

261

 

1,007

 

176

 

207

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) from Continuing Operations

 

20,227

 

(22,041

)

11,692

 

(82,779

)

 

 

 

 

 

 

 

 

 

 

Income (Loss) from Discontinued Operations

 

(200

)

(3,445

)

1,043

 

(10,149

)

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

20,027

 

$

(25,486

)

$

12,735

 

$

(92,928

)

 


The amounts in the table above give effect to the correction discussed in Note 18.

 

(1)           Operating loss for the Community Development segment for the three months and nine months ended September 30, 2009 include losses from the Company’s equity interest in Bay Holdings of $22.8 million and $47.2 million, respectively.

 

(2)           Operating profit for the Resort segment for the three months and nine months ended September 30, 2010 include $25.7 million of the gain from March 2009 sale of the Plantation Golf Course.

 

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17.                           Commitments and Contingencies

 

LPGA

 

The Company had a contractual obligation to the LPGA to sponsor an annual golf tournament for five years beginning in October 2008. The cost of such a tournament, including the production and the purse is significant and the Company was seeking a title sponsor to defray part of the cost. In June 2009, the Company announced that due to a lack of a title sponsor, it was unable to hold the 2009 LPGA event that was scheduled for October. This has resulted in a dispute with the LPGA, which can be resolved by mediation and if necessary by binding arbitration. By agreement between the parties, mediation has been suspended through November 2010 and, in March 2010 the Company paid $700,000 to the LPGA of which 50% will be applied towards sponsorship of an event if the parties are able to structure a future event. The Company is not able to estimate the losses that may be incurred if the Company is not able to further perform under the agreement and, accordingly, no additional provision for losses relating to this dispute has been recorded in the condensed consolidated financial statements. An unfavorable judgment against the Company could have a material negative impact on the Company’s financial condition, including its ability to comply with its debt covenants.

 

Discontinued Operations

 

The Company has various unsettled contractual obligations with regard to its now terminated Agriculture segment operations and has recorded its best estimate of the potential loss of $3.5 million, which is included in other accrued liabilities in the condensed consolidated balance sheet at September 30, 2010.

 

On September 1, 2009, M. Yamamura and Sons, Inc. (Yamamura) filed a lawsuit against the Company, which alleged that the Company materially breached its planting agreement with Yamamura by not providing a planting schedule for 2009 and by asking Yamamura to cease planting pineapple for the Company until further notice. The lawsuit further alleged that the Company unilaterally restricted and impaired the value of Yamamura’s benefits under the Planting Agreement.  The Company is currently in settlement discussions with Yamamura and management has recorded a liability based on the expected settlement.

 

The Company is involved in a legal dispute with the EEOC concerning former Thai workers in the Company’s discontinued agriculture operations under a labor contact agreement with Global Horizons, Inc.  The Company is currently engaged in the initial stages of a conciliation process with the EEOC, and is presently unable to reasonably estimate the amount of probable liability, if any, related to this matter and, accordingly, has made no provision in the accompanying condensed consolidated financial statements.

 

Pursuant to a 1999 settlement agreement with the County of Maui, the Company and several chemical manufacturers have agreed that until December 1, 2039, they will pay for 90% of the capital cost to install filtration systems in any future water wells, if the presence of a nematocide commonly known as DBCP exceeds specified levels, and for the ongoing maintenance and operating cost for filtration systems on existing and future wells. The Company estimated its share of the cost to operate and maintain the filtration systems for the existing wells and its share of the cost of a letter of credit used to secure its obligations, and recorded a liability of $250,000 in 1999. The Company recognized an additional liability and expense of $262,000 since 1999; and paid $368,000 for its share of the cost of the letter of credit securing its obligation and the capital costs to install a filtration system for an existing well. In March 2010, the Company was advised by the County of Maui that it intends to drill an exploratory water well on State of Hawaii lands that are directly above property that the Company previously used to plant pineapple.  Management believes that the potential for contamination is low because the proposed well site is above the land where agricultural chemicals were used.  Accordingly, a reserve for costs relating to the future well has not been recorded because the Company is not able to reasonably estimate the amount of its potential liability, if any.

 

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Investments in Affiliates

 

Pursuant to a previous agreement, the Company was committed to purchase from Bay Holdings certain Amenities (see Note 11) upon their completion in 2009 at the actual construction cost of approximately $35 million. The Company is currently in discussions with the other members of Bay Holdings to negotiate the terms of the purchase agreement including the purchase and payment terms, and is discussing whether the Company will even be required to purchase the Amenities.

 

Pursuant to loan agreements of certain equity investments, the Company and the other members of the respective joint ventures have guaranteed to lenders each investor’s pro rata share of costs and losses that may be incurred by the lender as a result of the occurrence of specified triggering events. These guarantees do not include full payment of the loans. At September 30, 2010, the Company has recognized a liability for the estimated fair value of its obligations under these agreements; such amounts are not material.

 

Other

 

In connection with a Honolua Ridge Phase II lot sale in 2007, the Company deferred the recognition of $4.3 million of revenues because of contingencies that could result in the Company becoming obligated to repurchase the lot from the buyer. The buy-back provision will expire in November 2010.

 

In February 2010, the Company received notification from the Internal Revenue Service proposing changes to the Company’s employment tax withholdings. The Company currently does not expect the impact of the ultimate resolution of the matter to be material and has recorded an immaterial amount as the low end of the range of its estimated potential exposure.

 

In addition to the matters noted above, there are various other claims and legal actions pending against the Company. In the opinion of management, after consultation with legal counsel, the resolution of these other matters is not expected to have a material adverse effect on the Company’s financial position or results of operations. The Company, as an investor in various affiliates (partnerships, limited liability companies), may under specific circumstances be called upon to make additional capital contributions.

 

18.                               Correction of Previously Issued Financial Statements

 

Subsequent to the issuance of the Company’s condensed consolidated financial statements for the quarter ended September 30, 2009, the Company concluded that the net gain or loss from sale of real estate that had been used in its operations should have been reflected as gain or loss on disposal of assets in the operating cost and expense section of the statement of operations rather than as product revenues and cost of product revenues.  Also subsequent to the issuance of such financial statements, the Company concluded that cash flows from the sale of undeveloped land should have been reflected within the operating activities section of the cash flow statement rather than within the investing activities section because the sale of undeveloped land is considered a principal business activity of the Community Development segment. As a result, the accompanying condensed consolidated statement of operations for the three and nine months ended September 30, 2009 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2009 have been corrected.  In addition, as discussed in Note 7, the condensed consolidated statements of operations for the three and nine months ended September 30, 2009 have been retrospectively adjusted to reclassify the operating results and loss on sale of assets of the discontinued Agriculture operations.

 

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The following is a summary of the impact of the correction and discontinued operations adjustments on the condensed consolidated statements of operations for the three and nine months ended September 30, 2009:

 

 

 

 

 

Adjustments

 

 

 

 

 

As

 

Discontinued

 

 

 

As

 

 

 

Previously

 

Operations

 

Correction

 

Reclassified

 

 

 

Reported

 

(Note 7)

 

of Error

 

& Corrected

 

 

 

(in thousands)

 

Three Months Ended September 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING REVENUES

 

 

 

 

 

 

 

 

 

Product revenues

 

$

19,605

 

$

(4,781

)

$

(1,650

)

$

13,174

 

Total Operating Revenues

 

26,660

 

(4,939

)

(1,650

)

20,071

 

OPERATING COSTS AND EXPENSE

 

 

 

 

 

 

 

 

 

Cost of product revenues

 

11,602

 

(5,710

)

(2,434

)

3,458

 

(Gain) loss on property disposals

 

 

 

784

 

784

 

Total Operating Costs and Expenses

 

27,717

 

(8,374

)

(1,650

)

17,693

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING REVENUES

 

 

 

 

 

 

 

 

 

Product revenues

 

$

35,423

 

$

(13,808

)

$

(1,650

)

$

19,965

 

Total Operating Revenues

 

55,531

 

(14,353

)

(1,650

)

39,528

 

OPERATING COSTS AND EXPENSE

 

 

 

 

 

 

 

 

 

Cost of product revenues

 

23,539

 

(15,075

)

(2,434

)

6,030

 

(Gain) loss on property disposals

 

 

 

784

 

784

 

Total Operating Costs and Expenses

 

94,672

 

(24,502

)

(1,650

)

68,520

 

 

These corrections and adjustments had no impact on previously reported net loss or net loss per share.

 

The following is a summary of the impact of the correction on the condensed consolidated statement of cash flows for the nine months ended September 30, 2009:

 

 

 

As

 

Adjustments

 

 

 

 

 

Previously

 

Correction

 

As

 

 

 

Reported

 

of Error

 

Corrected

 

 

 

(in thousands)

 

Nine months ended September 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Cash Used in Operating Activities

 

$

(19,626

)

$

9,878

 

$

(9,748

)

Investing Activities

 

 

 

 

 

 

 

Proceeds from disposal of property

 

11,709

 

(9,878

)

1,831

 

Net Cash Provided by Investing Activities

 

11,959

 

(9,878

)

2,081

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2009 and the unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q. The following discussion and analysis also gives effect to the correction discussed in Note 18 to the unaudited condensed financial statements. Depending upon the context, the terms the “Company,” “we,” “our,” and “us,” refers to either Maui Land & Pineapple Company, Inc. alone, or the Company and its subsidiaries.

 

Overview of the Company

 

Maui Land & Pineapple Company, Inc. is a Hawaii corporation and the successor to a business organized in 1909. We are a landholding company.  Our principal subsidiary is Kapalua Land Company, Ltd., the operator and developer of Kapalua Resort, a master-planned community in West Maui. Our reportable operating segments are Resort and Community Development.  In December 2009, all of our Agriculture segment operations were ceased and the segment is reported as discontinued operations.

 

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Resort

 

The Kapalua Resort is part of approximately 21,800 acres owned by us in West Maui, most of which remains as open space. The Kapalua Resort borders the ocean with five white sand beaches and includes The Ritz-Carlton, Kapalua hotel, the Ritz-Carlton Club and Residences at Kapalua Bay, the Kapalua Spa, eight residential subdivisions, two championship golf courses (The Bay and The Plantation), a ten-court tennis facility, several restaurants, and over 800 condominiums, single-family homes and residential lots. We operate Kapalua Resort’s two golf courses, the tennis facility, and several retail shops. Prior to mid-December 2009, our Resort operations also included a vacation rental program (The Kapalua Villas) and Kapalua Adventures, which is comprised of zip-lines stretching over scenic ravines in the West Maui mountains, a high ropes challenge course, a climbing wall and other activities. In December 2009, we entered into agreements to transfer the operations of The Kapalua Villas and Kapalua Adventures operations to third parties, from which we receive lease and license income.  In March 2009 we sold The Plantation and in September 2010 we sold The Bay golf courses.  We currently operate both courses under leaseback agreements with terms that expire at the end of March 2011.

 

Community Development

 

The Community Development segment includes our real estate entitlement, development, construction, sales, leasing, and conservation activities. Our projects are focused primarily on the luxury real estate market in and surrounding the Kapalua Resort and affordable and moderately priced residential and mixed use projects in West Maui and Upcountry Maui. This segment also includes the operations of Kapalua Realty Company, our general brokerage real estate company located within the Resort, and Kapalua Water Company and Kapalua Waste Treatment Company, our Public Utilities Commission-regulated water and sewage operations that service the Kapalua Resort and adjacent communities.

 

The Community Development segment also includes our 51% equity interest in Bay Holdings, the limited liability company that purchased the Kapalua Bay Hotel in August 2004 (Note 11 to condensed consolidated financial statements). Bay Holdings demolished the Kapalua Bay Hotel and the adjacent shops in order to develop new whole and fractional residential units, an ocean-side spa, and a beach club at that location. Construction was substantially complete in June 2009 and includes 84 whole ownership units and 744 fractional units of which 24 whole ownership and 144 fractional units closed escrow through the end of the third quarter of 2010.

 

We have approximately 1,600 acres of land in Maui that are at various stages in the land entitlement process. We must obtain appropriate entitlements for land that we intend to develop or use for construction. Securing proper land entitlements is a process that requires obtaining county, state and federal approvals, which can take several years to complete, if completed at all, and entails a variety of risks.

 

At the end of 2008, we postponed the start of construction of new development projects until economic conditions improve. However, we expect to continue engaging in planning, permitting and entitlement activities for our development projects, and we intend to proceed with construction and sales of the following projects, among others, when internal and external factors permit:

 

·                  Kapalua Mauka:  As presently planned, this project is comprised of 640 single and multi-family residential units and commercial components, five acres of commercial space and up to 27 holes of golf on a total of 800 acres.

 

·                  The Village at Kapalua:  This is the commercial component of the central area of the Kapalua Resort. It is planned to be built in two phases and will add approximately 30,000 square feet of new commercial/retail space to the Kapalua Resort. The Village will also include apartments, condominiums and other resort-related facilities. The first phase of the commercial component opened in 2006, which included approximately 12,000 square feet of commercial/retail space.

 

·                  Pulelehua:  This project is designed to be a new traditional community for working families in West Maui. It encompasses 312 acres and is currently planned to include 13 acres for an elementary school, 882 dwelling units, 91 acres of usable open space, and a traditional village center with a mix of residential and neighborhood-serving commercial uses. We are currently in the process of securing a hearing for the project with the Maui County Council Land Use Committee.

 

·                  Hali`imaile Town:  This project is contemplated to be a new town in Upcountry Maui, a holistic traditional community with agriculture, education, and sustainability as core design elements. Community design workshops were held to involve the Maui community in determining the vision for this community. The public approval process for any plan to develop this area is expected to take several years and will be subject to urban growth boundary determination by the County of Maui as it updates the County General Plan over the next year.

 

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Table of Contents

 

Discontinued Operations

 

The Agriculture segment primarily included growing, packing, and marketing of fresh pineapple. Our pineapple was sold under the brand names Maui Gold® and Hawaiian Gold™.  We also grew and marketed fresh organic pineapple. On December 31, 2009, we ceased all agriculture operations and we entered into agreements with an unrelated party that began to grow and market Maui Gold® pineapple as of January 1, 2010. We receive royalty payments based upon sales volume from such third party.

 

Current Developments

 

In the third quarter of 2010, our debt was reduced by $60 million as we accomplished the key initiatives that are further described below.  For the third quarter of 2010, we reported net income of $20.0 million and for the first nine months of 2010, we reported net income of $12.7 million; compared to net losses of $25.5 million and $92.9 million, for the same periods in 2009.  Cash used in operating activities for the first nine months of 2010 was $5.8 million.  In addition, these results reflect improved operating performance and overhead cost reductions, and $3.3 million of gains due to the termination of certain post-retirement benefits.

 

·                    In July 2010, our rights offering concluded and we received $40 million in gross subscription proceeds and issued 10,389,610 shares of common stock.

·                    In August 2010, we purchased all $40 million of our outstanding senior secured convertible notes for $35.2 million utilizing proceeds from the rights offering.

·                    In August 2010, our obligation to complete the irrigation system on the Plantation Golf Course was substantially complete and we recognized $25.7 million of the deferred gain from the March 2009 sale of this asset (Note 10 to condensed consolidated financial statements).

·                    In September 2010, we sold the Bay Course and adjacent maintenance facility for $24.1 million in cash.  In connection with this transaction we repaid $20 million on our revolving line of credit agreement.

 

Critical Accounting Policies and Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of accounting estimates. Changes in these estimates and assumptions are considered reasonably possible and may have a material effect on the consolidated financial statements and thus actual results could differ from the amounts reported and disclosed herein. Our critical accounting policies that require the use of estimates and assumptions were discussed in detail in our most recently filed Form 10-K. There have been no significant changes in our critical accounting policies during the first nine months of 2010.

 

There are no accounting pronouncements or interpretations that have been issued but not yet applied by us that we believe will have a material impact on our consolidated financial statements.

 

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RESULTS OF OPERATIONS

 

Three Months Ended September 30, 2010 compared to Three Months Ended September 30, 2009; and Nine Months Ended September 30, 2010 compared to Nine Months Ended September 30, 2009

 

CONSOLIDATED

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(in millions, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

Consolidated Revenues

 

$

8.2

 

$

20.1

 

$

27.3

 

$

39.5

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) From Continuing Operations

 

$

20.2

 

$

(22.0

)

$

11.7

 

$

(82.8

)

 

 

 

 

 

 

 

 

 

 

Income (Loss) From Discontinued Operations

 

$

(0.2

)

$

(3.5

)

$

1.0

 

$

(10.1

)

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

20.0

 

$

(25.5

)

$

12.7

 

$

(92.9

)

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) Per Common Share

 

$

1.35

 

$

(3.17

)

$

1.23

 

$

(11.57

)

 

Consolidated revenues were $8.2 million for the third quarter of 2010 compared to $20.1 million for the third quarter of 2009; and $27.3 million for the first nine months of 2010 compared to $39.5 million for the first nine months of 2009.  Lower revenues for 2010 were primarily due to lower sales of real estate inventories and the absence of revenues from The Kapalua Villas and Kapalua Adventures as these operations were leased to third parties to operate in December 2009.

 

We reported net income of $20.0 million ($1.35 per share) for the third quarter of 2010 compared to a net loss of $25.5 million ($3.17 per share) for the third quarter of 2009. Net income for the third quarter of 2010 was primarily due to recognition of $25.7 million of the deferred gain from the March 2009 sale of the Plantation Golf Course (Note 10 to condensed consolidated financial statements).  The net loss for the third quarter of 2009 included $22.8 million equity in losses from our investment in Bay Holdings.  We ceased recording further losses from this investment in September 2009 after the carrying value of our investment including our $3.6 million unsecured loan was reduced to zero and our estimated liability under the completion and recourse guarantees were recorded.

 

For the first nine months of 2010, we reported net income of $12.7 million ($1.23 per share) compared to a net loss of $92.9 million ($11.57 per share) for the first nine months of 2009.  In addition to the gain from the PGC sale mentioned above, net income for the first nine months of 2010 includes a credit of $3.3 million representing the gain recognized from the curtailment of our postretirement medical plan and settlement of our postretirement life insurance plan (Note 13 to condensed consolidated financial statements) and pre-tax profits of $2.5 million from the sale of real estate inventory and our former administrative offices in Kahului. The first nine months of 2009 includes charges totaling $47.2 million related to our investment in Bay Holdings. Our losses for the first nine months of 2009 also includes charges of $14.2 million for the write off of development plans that were no longer considered feasible due to changes in market conditions; and a charge of $1.9 million representing an adjustment to estimated fair value less cost to sell of certain real estate that we have classified as held for sale (included in loss from discontinued operations).

 

General and Administrative

 

Consolidated general and administrative expenses were $3.3 million for the third quarter of 2010 compared to $3.1 million for the third quarter of 2009; and $7.6 million for the first nine months of 2010 compared to $15.8 million for the first nine months of 2009.

 

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Table of Contents

 

The major components of the difference in general and administrative expenses were as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(in millions)

 

Pension and other post retirement expense

 

$

0.2

 

$

0.8

 

$

(0.3

)

$

3.3

 

Salaries, wages and stock compensation

 

0.7

 

1.0

 

2.7

 

4.1

 

Employee severance expense

 

0.2

 

0.1

 

0.3

 

1.6

 

Professional and other services

 

0.4

 

0.7

 

1.4

 

2.1

 

Contract settlements

 

0.8

 

 

0.8

 

1.9

 

Other

 

1.0

 

0.5

 

2.7

 

2.8

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

3.3

 

$

3.1

 

$

7.6

 

$

15.8

 

 

The decrease in pension and other post retirement expense in 2010 is due to the termination of our postretirement life insurance plan for all retirees in January 2010 and elimination of retiree medical insurance benefits for non-bargaining retirees in February 2010.  These actions resulted in curtailment and settlement gains totaling $3.3 million of which $2.3 million was credited to discontinued operations. In addition, our non-bargaining pension plan was frozen as of January 1, 2010, so there was no service cost accrued for this plan in 2010 (Note 13 to condensed consolidated financial statements).

 

The decrease in salaries, wages, and stock compensation expense in 2010 reflect staffing reductions and attrition in all operating segments and in corporate services.  Staff reductions took place throughout 2009, and further attrition continued in 2010.  As of September 30, 2010, we had 203 employees compared to 623 employees as of September 2009.  Severance expense in the first nine months of 2009 includes amounts related to the termination of our former President and Chief Executive Officer in May 2009.

 

Contract settlements for 2010 include a $617,000 net loss from the extinguishment of $40 million senior secured convertible notes in August 2010 (Note 5 to condensed consolidated financial statements).  In the first nine months of 2009, contract settlements included $1.9 million for the deposit forfeiture and settlement payment under which we were obligated to purchase certain real estate at Kapalua Resort.

 

The decrease in professional and other services in 2010 reflects reductions in our utilization of outside professional services.

 

General and administrative expenses are incurred at the corporate level and at the operating segment level. All general and administrative expenses incurred at the corporate level are allocated to our operating segments. Such allocations are made on the basis of our evaluation of the level of services provided to the operating segments.

 

Interest Expense

 

Interest expense was $2.4 million for the third quarter of 2010 compared to $2.7 million for the third quarter of 2009.  Included in interest expense for the third quarter of 2010 are charges of $280,000 representing accretion of the carrying value of $40 million of convertible notes.  Included in interest expense for the third quarter of 2009 are net credits of $63,000 representing the change in the estimated fair value of the derivative liability that was bifurcated from the $40 million of convertible notes, plus the change in fair value of certain interest swap agreements, and accretion on the carrying value of the convertible notes. The swap agreements expired in January 2010 and the convertible notes were repaid in August 2010. In the third quarter of 2010 our average borrowings were approximately $5.4 million lower than the third quarter of 2009. Our effective interest rate on borrowings was 5.6% in the third quarter of 2010 compared to 6.4% in the third quarter of 2009.

 

Interest expense was $8.3 million for the first nine months of 2010 compared to $7.3 million for the first nine months of 2009.  Included in interest expense for the first nine months of 2010 and 2009 are net charges (credits) of $1,439,000 and $(431,000), respectively, representing the accretion of and change in the estimated fair value of the derivative liability and swap agreements described above.  In the first nine months of 2010 our average borrowings were approximately $15.2 million lower than the first nine months of 2009. Our effective interest rate on borrowings was 5.7% in the first nine months of 2010 compared to 5.8% in the first nine months of 2009.

 

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Table of Contents

 

RESORT

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Revenues