UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| | SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2006
OR
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| | SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-9145
ML MACADAMIA ORCHARDS, L.P.
(Exact Name of registrant as specified in its charter)
DELAWARE | | 99-0248088 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
26-238 Hawaii Belt Road, HILO, HAWAII | | 96720 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (808) 969-8057
Registrant’s website: | | www.mlmacadamia.com |
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class | | Name of Each Exchange on Which Registered |
Depositary Units Representing | | |
Class A Limited Partners’ Interests | | New York Stock Exchange |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of 15(d) of the Act. Yes o No x
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 twelve 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this 10-K or any amendment to this 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Act). Large accelerated filer o Accelerated filer o Non-accelerated filer x
Indicate by check mark whether the Registrant is a shell company as defined by Rule 12b-2 of the Securities Exchange Act of 1934. Yes o No x
As of April 11, 2007, 7,500,000 shares of the registrant’s Class A Units were outstanding, and the aggregate market value of such Units held by non-affiliates was $41,925,000 (based on the closing price on that date of $5.59 per Unit).
PART I
Item 1. BUSINESS OF THE PARTNERSHIP
(a) General Description of the Business
ML Macadamia Orchards, L.P. (the “Partnership”) is a publicly traded partnership, organized under the laws of the State of Delaware, and engaged in the business of growing and farming macadamia nuts in Hawaii. The Partnership believes that it is one of the world’s largest growers of macadamia nuts. The Partnership owns or leases approximately 4,190 tree acres of macadamia nut orchards in three locations within a 50-mile radius on the island of Hawaii. (“Tree acres” are acres of the Partnership’s owned or leased lands utilized for macadamia nut orchards. “Gross acres” includes areas not utilized for orchards.) The Partnership sold all of its macadamia nut production to Mauna Loa Macadamia Nut Corporation (“Mauna Loa”) under four nut purchase contracts. Three of the nut purchase contracts with Mauna Loa, totaling approximately 16 million pounds, expired December 31, 2006 and the other contract totaling approximately 5 million pounds expires December 31, 2011.
The Partnership has executed nut purchase agreements with Hamakua Macadamia Nut Company, Inc. (“Hamakua”), MacFarms of Hawaii, LLC (“MacFarms”) and Purdyco International, Ltd. dba Island Princess (“Island Princess”) beginning January 1, 2007. The contracts call for Hamakua to purchase about 6 million field pounds, Mac Farms to purchase about 5.0 to 6.0 million field pounds, and Island Princess to purchase about 2.2 million field pounds. Additional information can be found in section (c) under the heading Nut Purchase Contracts on page 3.
The Partnership farms its own orchards and approximately 2,008 additional acres of macadamia orchards for other orchard owners. The Partnership is managed by its general partner, ML Resources, Inc. (“MLR” or the “Managing Partner”). On August 1, 2001, all of the stock of the Managing Partner was purchased by D. Buyers Enterprises, LLC (“DBE”) from C. Brewer and Company, Ltd (“CBCL”). On January 6, 2005, the stock of ML Resources, Inc. was purchased from DBE by the Partnership for $750,000.
Ownership of Class A Units confers no direct or indirect interest in CBCL, DBE or any of their affiliated entities, or in Mauna Loa, or Hamakua, MacFarms, or Island Princess.
The Partnership commenced operations in June 1986, following its acquisition of interests in approximately 2,423 tree acres of macadamia nut orchards from subsidiaries of CBCL. In December 1986 and October 1989, respectively, the Partnership acquired from subsidiaries of CBCL interests in approximately 266 and 1,260 additional tree acres of macadamia orchards. In September 1991 the Partnership acquired approximately 78 tree acres of producing macadamia orchards. In April 2006 the Partnership acquired approximately 21 tree acres of producing macadamia orchards.
On May 1, 2000, the Partnership purchased 142 acres of macadamia orchards and the macadamia farming operations from subsidiaries of CBCL. The farming operations consist of farming contracts, farming equipment, vehicles, a husking plant, irrigation well, office buildings, garages and warehouses, office furniture and equipment and material inventories related to macadamia farming. All the assets and operations are located on the island of Hawaii.
As reported on Form 8-K filed October 20, 2006, the Partnership signed a non-binding letter of intent to purchase substantially all of the assets of MacFarms of Hawaii, LLC (“MacFarms”) and lease the 3,912 acre macadamia orchard owned by Kapua Orchard Estates, LLC (“Kapua”), an affiliate of MacFarms. The transaction will require approval by a majority of units and, if approved, is expected to close approximately July 31, 2007. The proxy statement is expected to be mailed to unit holders in May of this year.
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MacFarms owns the second largest macadamia nut processing facility in Hawaii and markets macadamia nuts but industrially and under the brand names MacFarms®, Kona Select® and Hula Princess®. Kapua owns the largest contiguous macadamia orchard in the world.
(b) Financial Information about Industry Segments
The response to this section of Item 1 incorporates by reference Note 4 of the Notes to the Financial Statements.
(c) Narrative Description of the Business
Owned-orchard Segment
The Partnership sold all of the macadamia nuts from its orchards to Mauna Loa under four nut purchase contracts in 2006. Mauna Loa processes and markets the nuts under the Mauna Loaâ brand name and is believed to be one of the largest processors and marketers of macadamia nuts in the world. The Partnership was Mauna Loa’s largest single supplier of macadamia nuts in 2006. Mauna Loa was a subsidiary of CBCL until its sale in September 2000 to The Shansby Group. In December 2004 Mauna Loa was purchased from the Shansby Group by The Hershey Company. On May 1, 2000, the Partnership began farming its own macadamia orchards. Prior to that date, subsidiaries of CBCL performed the farming activities for the Partnership under long-term farming contracts.
Nut Purchase Contracts. The Partnership is a party to two nut purchase contracts signed June 1, 2006, with an effective date of January 1, 2006, with Mauna Loa which were negotiated in 2006. The two contracts cover all nuts produced by the orchards acquired in June 1986, December 1986, and October 1989. Of the two contracts, one for approximately 15 million pounds expired December 31, 2006 and has a nut purchase price for 2006 of $0.75 per pound wet-in-shell (WIS) at 20% moisture and 30% saleable kernel recovery (SK) to dry-in-shell (DIS). Two other contracts, of approximately 1 million pounds, also expired December 31, 2006, one with a nut purchase price of $0.60 per pound WIS 25% adjusted for trash and the other with a nut purchase price based on a two-year trailing average USDA price at WIS 25%. The last contract for about 5 million pounds expires December 31, 2011 and has a nut purchase price for 2006 of $0.74 per pound WIS at 20% moisture and 30% SK/DIS. The purchase price increases by $0.01 each year except 2008 until it reaches $0.78 per pound in 2011. The purchase contract for the macadamia nut orchard purchased in April 2006 is with MacFarms of Hawaii, LLC and accounts for about 100,000 pounds; has a nut purchase price of $0.98 per pound WIS 20% moisture and 30% SK/DIS and expires January 6, 2007.
On December 16, 2004, a new nut purchase contract was signed with Hamakua Macadamia Nut Company (“Hamakua”) for the annual delivery of six million WIS pounds, starting January 1, 2007. The contract provides for a minimum price of $0.75 per pounds and a maximum price of $0.95 per pound. The pricing formula includes a fixed component of $0.85 and a second component based on Hamakua’s average selling price for bulk kernel. In February 2007, the Partnership negotiated an amendment to the contract which provides the Partnership an option to have the nut-in-shell processed into kernel for a fee in lieu of selling the nuts to Hamakua.
On January 5, 2006, a new nut purchase contract was signed with Purdyco International, Ltd. dba Island Princess (“Island Princess”) for the annual delivery of approximately two million WIS pounds, effective January 1, 2007. The nut price will be determined every six months by mutual agreement based on prevailing market price for kernel from Hawaii and Australia. The effective price for January – June 2007 is $0.608 at 20% moisture and 30% SK/DIS recovery.
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On January 6, 2006, a new nut purchase contract was signed with MacFarms of Hawaii, LLC (“MacFarms”) for the annual delivery of between four and one-half million and five and one-half million WIS pounds, effective January 1, 2007. The nut price will be determined every six months by mutual agreement based on prevailing market price for kernel from Hawaii and Australia. The effective price for January – June 2007 is $0.608 at 20% moisture and 30% SK/DIS recovery.
Competition. In addition to the State of Hawaii, mature macadamia nut orchards are located in Australia, Africa, and Central America. For the 2006 crop, Hawaii was expected to supply 22% of the world crop, and Australia, the world’s largest producer, was expected to supply 39%. A general decline in macadamia nut prices could also adversely affect the Partnership’s revenues.
Macadamia Farming Segment
Since the May 2000 purchase of the macadamia farming operations, the Partnership farms its own 4,190 acres of macadamia orchards and approximately 2,008 additional acres of macadamia orchards owned by other growers. Three of the farming contracts comprising approximately 465 acres terminated December 31, 2005 reducing the total acres covered by farming contracts for 2006 to 2,029 acres. In April of 2006 the Partnership purchased a 21-acre macadamia orchard that was previously farmed under contract by the Partnership, thereby reducing the total acres covered by farming contracts to about 2,008 acres.
All the orchards are located in three separate regions on the island of Hawaii (“Keaau”, “Ka’u” and “Mauna Kea”). Because each region has different terrain and weather conditions, farming methods vary somewhat among the three locations.
Farming Contracts. The Partnership currently services approximately seventeen farming contracts which were assigned to the Partnership with the May 2000 acquisition. Services under these contracts include cultivation, weed and pest control, fertilization, pruning and hedging, replanting, harvesting, and husking. These contracts also provide a management fee to the Partnership, which is based as either a fixed fee per acre farmed, or as a percent of reimbursed costs, ranging from 5% to 20%. Approximately 150 acres are year-to-year contracts, approximately 635 acres expire March 31, 2009, approximately 70 acres expire June 30, 2013, approximately 410 acres expire July 31, 2029, approximately 280 acres expire June 30, 2033 and approximately 470 acres expire September 30, 2080.
Orchard Maintenance. Maintenance of an orchard is essential to macadamia nut farming. Pruning and hedging of trees is necessary to allow space for mechanical harvesting and cultivating equipment to operate safely and efficiently and to remove dead branches. Where mechanical equipment is used, the orchard floor must be maintained in a condition that will permit its operation. Soil and gravel are used to repair mud holes and other surface irregularities caused by soil erosion from heavy rain and by farming equipment. Pruning and surface maintenance are usually performed between harvest seasons.
Orchard management also requires the proper selection and application of fertilizers, pesticides (to control rodents, insects and fungi) and herbicides (to control weeds). Insects, rodents and fungi, as well as wild pigs, if not controlled, can cause losses to nut production.
Harvesting. The harvest period begins in the late summer and runs through the following spring. Mature nuts fall from the trees and are harvested using mechanized harvest equipment when the orchard floor is level enough to permit its use. Nuts are harvested by hand when the orchard floor is too uneven to permit mechanical harvesting, when the nut drop is very light and when nuts remain after harvesting. At Keaau, Ka’u and Mauna Kea, seasonal labor for hand harvesting and other operations is generally available from nearby Hilo, adjacent communities and foreign labor sources.
Mechanical harvesting is less costly than hand harvesting, but mechanical harvesting is possible only where the orchard floor is relatively flat. Approximately 70% of the orchards in Ka’u, 59% in Keaau and 94% in Mauna Kea are currently mechanically harvested. The remaining acres are too uneven for mechanical harvesting and must be harvested by hand.
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During the harvest season, the nuts are collected every six to ten weeks. Nuts suffer loss in quality if they remain on the ground too long. The harvested nuts are then transported to the husking facilities, which are located in Ka’u and Keaau. The Keaau husking facility is owned and operated by Mauna Loa, and the Ka’u husking facility is owned and operated by the Partnership. Nuts harvested in the Mauna Kea region are transported to the husking facility in Keaau. At the husking facility, the outer husk is removed and the nuts, still in their shell, are weighed and sampled to determine moisture content. Kernel quality is determined from samples taken. Title to the nuts husked in Keaau passes to buyer after weighing. Title to the nuts husked at Ka’u pass to buyer after delivery to the buyer’s processing plant. The nuts are then moved to a drying facility.
Processing. The nuts purchased by Mauna Loa from the Partnership and from the other orchards farmed by the Partnership are primarily processed at Mauna Loa’s processing plant located adjacent to the orchards located in the Keaau area. The plant was built in 1966 and is presently capable of handling approximately 210,000 pounds of dry-in-shell (commonly abbreviated “DIS”) nuts per day. Processing at the plant includes drying, cracking, roasting, inspecting and limited packaging. The plant also includes separate warehouses, a machine shop, storage facilities, husking facilities, nut drying facilities, a generator and a 10,000 square foot chocolate processing plant. None of these processing facilities are owned by the Partnership.
At Mauna Loa’s plant in Keaau, the harvested nuts pass by conveyors over metal screens, blowers and rock separators that remove extraneous material from the in-husk nuts. The husks are then split and removed by pressing the nuts between steel roller bars and a rubber pad. At this stage, the nut kernels are still encased in their hard round shells and roughly 20% of their weight is attributable to moisture content. At this point, the nuts are referred to as wet-in-shell (commonly abbreviated “WIS”). The WIS weight of the nuts is used to determine payments to be made by Mauna Loa under the Nut Purchase Contracts. Approximately 20% of the WIS weight of the nuts will become dry salable kernels when all further processing is completed.
After the nuts are weighed, the moisture content of the nuts is reduced by blowing warm air over them, which produces dry-in-shell (“DIS”) nuts. Metal rollers are used to crack the nuts and remove the shell. Mechanical and optical equipment, as well as hand sorting, are used to separate the salable kernels from unusable nuts and pieces of broken shell.
The dry nut kernels are roasted and then sorted into retail and commercial grades. At this stage, some of the nuts are bulk-packed and sent to various co-packers on the U.S. mainland for packaging. At Mauna Loa’s plant in Keaau the nuts may be salted, or covered with chocolate or one of several coatings, and finally packaged, labeled and readied for shipment.
Stabilization Payments
In December 1986, the Partnership acquired a 266-acre orchard that was several years younger than other orchards of the Partnership. Because of the relative immaturity of the newer orchard, its productivity (and therefore its cash flow) was expected to be correspondingly lower for the first several years than for the other older orchards.
Accordingly, the seller of this orchard Ka’u Agribusiness Company, Inc. (“KACI”) agreed to make cash stabilization payments to the Partnership for each year through 1993 in which the cash flow (as defined) from this orchard fell short of the target cash flow level, which equaled $507,000. Stabilization payments for any given year were limited to the lesser of the amount of the shortfall or a maximum payment amount. For the years from 1987 through 1993, inclusive, the Partnership received a total of $1,628,000 (including a 4% Hawaii general excise tax) in stabilization payments under this agreement.
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The Partnership accounted for stabilization payments (net of the 4% Hawaii general excise tax) as a reduction in the cost basis of the orchard. As such, these payments are being reflected in the Partnership’s net income ratably through 2019 as a reduction to the depreciation expense reported for this orchard.
In return, the Partnership is obligated to pay the seller (the Olson Trust who purchased KACI’s interest) 100% of any year’s cash flow from this orchard in excess of the target cash flow as additional percentage rent until the aggregate amount of the additional percentage rent paid equals 150% of the total amount of stabilization payments previously received. Thereafter, the Partnership is obligated to pay the seller 50% of this orchard’s cash flow in excess of the target cash flow as additional incentive rent. Additional rent of $62,000 was paid in 2006. No additional rent was due in 2004 or 2005.
Item 1A. Risks Involved in Operating Macadamia Orchards
Before deciding to purchase, hold or sell our units, you should carefully consider the risks described below in addition to the other cautionary statements and risks described elsewhere, and the other information contained, in this Annual Report on Form 10-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on the Partnership, our business, financial condition and results of operations could be seriously harmed.
Macadamia nut trees are subject to damage or destruction from diseases, pests, floods, droughts, windstorms, hurricanes, volcanic activity and other natural causes. Partnership tree replacements for all orchards from all causes were 0.6% in 2004, 0.2% in 2005, and 0.5% in 2006. Both crop and tree insurance are in place to protect the Partnership against material losses.
Diseases and Pests. The Partnership’s Keaau orchards experienced tree replacements of 1.4% in 2004, 0.6% in 2005, and 1.0% in 2006. Other macadamia growers in the vicinity have also experienced losses due to a problem known as “Macadamia Quick Decline” (“MQD”). Based upon research by the University of Hawaii and other experts, it is believed that the situation is due to fungi associated with high moisture conditions and poor drainage conditions. It is also believed that a particular variety of macadamia nut tree (cv. HAES 333) is most susceptible to MQD. Approximately 9% of the trees in the Partnership’s orchards have the variety HAES 333 with most of these trees located at the drier Ka’u region where the incidence of MQD is benign. Another tree variety (cv. HAES 344) has also been identified as being somewhat more susceptible to MQD than other commercial varieties and this cultivar represents approximately 45% of the trees in the Partnership’s orchards. Both the Keaau and Mauna Kea orchards are areas with high moisture conditions, and may be more susceptible to the MQD problem. Afflicted trees in these regions are replaced with cultivars that are tolerant to MQD.
There are also two types of fungal diseases, which can affect nut production but are not fatal to the trees themselves. One of these is Phytophthora, which affects the macadamia flowers and developing nuts, and the other, Botrytis cinerea, causes senescence of the macadamia blossom before pollination is completed. These types of fungal disease are generally controllable with fungicides. Historically, these fungi have attacked the orchards located in Keaau during periods of persistent inclement weather. A light infestation of Phytophthora occurred in late January-early February 2001 and a light-moderate infestation occurred in March 2006.
Rainstorms and Floods. The Partnership’s orchards are located in areas on the island of Hawaii that are susceptible to heavy rainstorms. In November 2000 the Ka’u region was affected by flooding. This flooding resulted in expected 2000 harvesting being done in 2001. Since the flood in 2000 heavy rain in the Ka’u region has not produced flooding of any consequence.
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Windstorms. Some of the Partnership’s orchards are located in areas on the island of Hawaii that are susceptible to windstorms. Twenty-five major windstorms have occurred on the island of Hawaii since 1961, and four of those caused material losses to Partnership orchards. Most of the Partnership’s orchards are surrounded by windbreak trees, which provide limited protection. Younger trees that have not developed extensive root systems are particularly vulnerable to windstorms.
Insurance. The Partnership secures tree insurance each year under a federally subsidized program. The tree insurance for 2007 provides coverage up to a maximum of approximately $19.8 million against loss of trees due to wind, fire or volcanic activity. Crop insurance was purchased for the 2006-2007 crop year and provides coverage up to a maximum of approximately $11.0 million against loss of nuts due to wind, fire, volcanic activity, earthquake, adverse weather, wildlife damage and failure of irrigation water supplies.
Volcanoes. The orchards are located on the island of Hawaii, where there are two active volcanoes. To date, no lava flows from either volcano have affected or threatened the orchards.
Rainfall. The productivity of orchards depends in large part on moisture conditions. Inadequate rainfall can reduce nut yields significantly, while excessive rain without adequate drainage can foster disease and hamper harvesting operations. While rainfall at the orchards located in the Keaau and Mauna Kea areas has generally been adequate, the orchards located in the Ka’u area generally receive less rainfall and, as a result, a portion of the Ka’u orchards is presently irrigated. Irrigation can mitigate the effects of a drought, but it cannot completely protect a macadamia nut crop from the effect of a drought. Recorded rainfall at each of the three locations of the Partnership’s orchards for the past five years is shown below:
Year | | Ka’u | | Keaau | | Mauna Kea | |
2002 | | 58.5” | | 139.4” | | 156.1” | |
2003 | | 22.8” | | 94.8” | | 117.4” | |
2004 | | 54.9” | | 142.7” | | 151.5” | |
2005 | | 34.7” | | 133.8” | | 171.8” | |
2006 | | 70.9” | | 138.7” | | 178.3” | |
During 2006 the Ka’u, Keaau and Mauna Kea areas recorded 156%, 102% and 120% of the normal average annual rainfall in their area of the island, respectively.
Water Supply for Irrigation
With the May 2000 acquisition, the Partnership acquired an irrigation well (the “Sisal Well”), which supplies water to the Partnership’s orchards in Ka’u which were purchased in June 1986 and 1989. The Sisal Well is situated on land owned by Mauna Kea Agribusiness Company, Inc. (“MKACI”). On May 1, 2000 the Partnership entered into a license agreement with MKACI, which allows the Partnership necessary access to maintain and operate the Sisal Well, as well as the use of roads to access, maintain and operate the Partnership’s macadamia orchards. Annual rent for the license agreement is One Dollar. The license agreement terminates on the earlier of the termination of the May 1, 2000 lease between Partnership and KACI, or June 30, 2045.
Prior to the May 2000 acquisition, the Partnership and KACI were parties to a water agreement to which KACI agreed to supply water to those portions of the June 1986 Orchards and October 1986 Orchards located at Ka’u and which had been irrigated historically.
If the amount of water provided by the Sisal Well becomes insufficient to irrigate the above named orchards, the Partnership may consider increasing the capacity of the Sisal Well, drilling an alternative well into the historical source which provides water to the Sisal Well or obtaining water from other sources.
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On a historical basis, the quantity of water available from the Sisal Well has been generally sufficient to irrigate these orchards in accordance with prudent farming practices. The irrigated portion of the Ka’u II Orchards is expected to need greater quantities of water as the orchards mature. The Partnership anticipates that the amount of water available from the Sisal well will be generally sufficient, assuming average levels of rainfall, to irrigate the irrigated orchards in accordance with prudent farming practices for the next several years. If no irrigation water is available to the Irrigated Orchards, then, based on historical average rainfall levels, diminished yields of macadamia nut production can be expected.
Market and customers. A general decline in world macadamia nut prices would adversely affect the price paid under the nut purchase contracts with Mac Farms and Island Princess, as the contract price is determined based upon the prevailing world market price of macadamia nut kernel for each six-month period January through June and July to December throughout the contract term. Even though the Partnership will increase it customers from one to four in 2007 there are a limited number of customers available to purchase the Partnership’s nut production. If our customers’ were to be unable to perform under their contract or if their purchase of product should change from Hawaii-based to foreign sourced kernel, it would have a material adverse impact on our business as there are virtually no replacement customers for the Partnership’s production.
Nut Purchase Agreements. The Partnership has four contracts beginning January 1, 2007. The terms of the contracts vary from two to six years, fixed prices and market determined prices and 30 day payment terms. The Partnership relies upon the financial ability of the buyers of the Partnership’s nuts to abide by the payment terms of the nut purchase agreements. If any or all of the buyers were unable to pay for the macadamia nuts delivered by the Partnership to them it could result in the Partnership’s available cash resources being depleted. If any or all buyers were late in payment the Partnership would stop the delivery of macadamia nuts to the buyer. The Partnership would need to negotiate a nut purchase agreement with another buyer which might not be at the same terms or price. It is also possible that the Partnership might not be able to find a buyer for the nuts. There are a significant number of Hawaii macadamia growers that were unable to find a processor to purchase and process their crop in 2006 due to the currently depressed market.
Employees
As of December 31, 2006, the Partnership employed 215 people, of which 136 were seasonal employees. Of the total, 20 are in farming supervision and management, 182 in production, maintenance and agricultural operations, and 13 in accounting and administration.
With the May 2000 acquisition, the Partnership agreed to the assumption of three bargaining agreements with the ILWU Local 142. These agreements cover all production, maintenance and agricultural employees of the Ka’u Orchard Division, of the Keaau Orchard Division and of the Mauna Kea Orchard Division. These labor contracts became effective May 1, 1997 and expired on April 30, 2002, but were extended until April 30, 2005. The parties have agreed to a three-year contract, which will expire on April 30, 2008. The Partnership believes that relations with its employees and the ILWU are generally very good.
The Partnership employs foreign contract labor to supplement hand harvesters during the peak harvesting season. If the Partnership was unable to employ contract laborers it might have to lengthen the time between harvest rounds which could result in a lower quality of nuts produced and a lower effective price.
Certain key personnel are critical to our business. Our future operating results depend substantially upon the continued service of our key personnel who are not bound by employment or non-competition agreements. Our future operating results also depend in significant part upon our ability to attract and retain qualified management, technical and support personnel. We cannot ensure success in attracting or retaining qualified personnel. There may be only a limited number of persons with the requisite skills and relevant industry experience to serve in those positions and it may become increasingly difficult for us to
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hire personnel over time. Our business, financial condition and results of operations could be materially adversely affected by the loss of any of our key employees, by the failure of any key employee to perform in his or her current position, or by our inability to attract and retain skilled employees.
Item 1B. Unresolved staff comments. None
Available Information. The Partnership files annual, quarterly and current reports and other information with the Commission. These filings are available free of charge through the Partnership’s Internet website at www.mlmacadamia.com as soon as reasonably practicable after the Partnership electronically files such material with, or furnishes it to, the Commission. Any unit holder, who so requests may obtain a printed copy of these documents from the Partnership, by contacting the Partnership at 808-969-8057, or in writing at 26-238 Hawaii Belt Road, Hilo, Hawaii 96720.
ITEM 2. PROPERTIES
Location. The Partnership owns or leases approximately 4,190 tree acres of macadamia orchards on the island of Hawaii. The orchards are located in three areas: Ka’u, Keaau and Mauna Kea. The Ka’u area is located in the south part of the island about fifty miles from Hilo. The Keaau area is located six miles south of Hilo on the east side of the island, and the Mauna Kea area is located three miles north of Hilo on the east side of the island.
The majority of macadamia nut trees grown in the State of Hawaii are grown on the island of Hawaii in volcanic soil that permits drainage during heavy rainfall. While the orchards are located approximately within a 50-mile radius, the climate and other conditions that affect the growing of macadamia nuts are different. These differences are the result of prevailing wind patterns and island topography, which produce a variety of microclimates throughout the island.
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Age and Density. The productivity of macadamia nut orchards depends on several factors including, among others, the age of the trees, the number of trees planted per acre, soil condition, climate, rainfall and/or irrigation. Assuming adequate moisture, the most significant characteristic affecting yields is maturity. The trees in a macadamia nut orchard generally begin to produce nuts at a commercially acceptable level at around nine years of age. Thereafter, nut yields increase gradually until the trees reach maturity at approximately 15 years of age, after which the nut yield remains relatively constant except for variances produced by rainfall, cultivation practices, pest infestation and disease.
Macadamia orchards normally reach peak production after fifteen to eighteen years of age. All of the 4,190 tree acres of macadamia orchards owned or leased by the Partnership are over twenty years of age. About 2% of trees are lost to various causes each year and are replaced.
Rainfall. Macadamia trees grow best in climates with substantial and evenly distributed rainfall (or equivalent irrigation) and in soil that provides good drainage. Inadequate rainfall can significantly reduce nut yields, while excessive rain without adequate drainage can impede healthy tree growth, promote the growth of harmful fungal diseases and produce mud holes that require repair of the orchard floor. At Keaau, normal rainfall is adequate without irrigation, and the volcanic soil provides good drainage. However, short droughts and occasional flooding have occurred. At Mauna Kea, normal rainfall is adequate without irrigation and the volcanic soil provides adequate drainage. In the event of a very long drought, production at Keaau and Mauna Kea might be affected. At Ka’u, located on the drier side of the island, the rainfall averages are substantially less than at Keaau, particularly at the lower elevations. Approximately 652 acres at the lower elevations of Ka’u are irrigated to provide for additional water when required. Under extremely dry conditions at Ka’u, such as a prolonged drought, irrigation is not sufficient, and production will be adversely affected.
Orchards. The following table lists each of the orchards, the year acquired, tree acres, tenure, and lease rents:
| | | | Tree | | | | Lease | | Min. Rent | |
Orchard | | Acquired | | Acres | | Tenure | | Expiration | | per Annum | |
| | | | | | | | | | | |
Keaau I | | June 1986 | | 1,467 | | Fee simple | | | | | |
Ka’u I | | June 1986 | | 456 | | Fee simple | | | | | |
“ | | June 1986 | | 500 | | Leasehold (1) | | 2019 | | $ | 25,000 | |
Ka’u Green Shoe I | | Dec. 1986 | | 266 | | Leasehold (1) | | 2019 | | $ | 5,586 | |
Keaau II | | Oct. 1989 | | 220 | | Fee simple | | | | | |
Ka’u II | | Oct. 1989 | | 327 | | Leasehold (2) | | 2034 | | $ | 23,544 | |
“ | | Oct. 1989 | | 175 | | Leasehold (1) | | 2028 | | $ | 17,314 | |
“ | | Oct. 1989 | | 26 | | Leasehold (3) | | 2029 | | $ | 2,041 | |
“ | | Oct. 1989 | | 186 | | Leasehold (1) | | 2031 | | $ | 18,585 | |
Mauna Kea | | Oct. 1989 | | 326 | | Leasehold (2) | | 2034 | | $ | 23,508 | |
Keaau Lot 10 | | Sept. 1991 | | 78 | | Fee simple | | | | | |
Ka’u O | | May 2000 | | 142 | | Leasehold (1) | | 2045 | | $ | 10,224 | |
Ka’u 715/716 | | April 2006 | | 21 | | Fee Simple | | | | | |
Total acres | | | | 4,190 | | | | | | | |
(1) Lease of land only; trees may be removed at termination of lease.
(2) Lease of land only; lessor may purchase trees from lessee at any time after June 30, 2019.
(3) Lease of land; trees revert to lessor upon termination of lease.
For certain additional information concerning farming leases, see Item 13, page 54.
10
In addition to the minimum annual lease payment amount, all the leases require the Partnership to pay various expenses with respect to the leased premises as well as an additional rental payment based on the USDA farm price per pound of macadamia nuts sold in Hawaii.
With respect to the Ka’u Green Shoe I Orchard, the lease requires the Partnership to pay the Olson Trust, the seller and lessor, additional rent equal to 100% of any year’s cash flow generated by such orchard in excess of a target level of $507,000 until the aggregate amount paid equals 150% of the aggregate amount of the stabilization payments previously received by the Partnership. Thereafter, the Partnership is required, with respect to any year prior to the expiration of the lease, to pay as additional rent, 50% of the cash flow generated by such orchard for such year in excess of a target level of $507,000 of cash flow. For additional information, see “Stabilization Payments” on page 5.
ITEM 3. LEGAL PROCEEDINGS AND SETTLEMENT
In 2004 the Partnership and several independent growers filed suit against Mauna Loa Macadamia Nut Corporation alleging that the proposed acquisition by Mauna Loa Macadamia Nut Corporation (“Mauna Loa”) of the assets of Mauna Loa’s major competitor, MacFarms would give Mauna Loa a monopoly over the supply and processing of wet-in-shell macadamia nuts on the Island of Hawaii. An agreement was reached, October 1, 2004, whereby Mauna Loa terminated its agreement to acquire the assets of MacFarms and the Partnership and all others caused their lawsuits to be dismissed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders.
11
PART II
ITEM 5. MARKET FOR REGISTRANT’S CLASS A UNITS AND RELATED UNITHOLDER MATTERS
The Partnership’s Class A Depositary Units are listed for trading on the New York Stock Exchange (symbol = NUT). There were 1,010 registered holders of Class A Depositary Units on December 31, 2006.
Distributions declared and high and low sales prices of the Class A Depositary Units, based on New York Stock Exchange daily composite transactions, are shown in the table below:
| | | | Distribution | | High | | Low | |
2006: | | 4th Quarter | | $ | 0.050 | | 6.55 | | 5.35 | |
| | 3rd Quarter | | 0.050 | | 5.61 | | 5.25 | |
| | 2nd Quarter | | 0.050 | | 5.99 | | 5.30 | |
| | 1st Quarter | | 0.050 | | 6.00 | | 5.65 | |
| | | | | | | | | |
2005: | | 4th Quarter | | $ | 0.050 | | 6.09 | | 5.60 | |
| | 3rd Quarter | | 0.050 | | 6.19 | | 5.30 | |
| | 2nd Quarter | | 0.050 | | 6.19 | | 5.45 | |
| | 1st Quarter | | 0.050 | | 6.26 | | 5.45 | |
Restrictions on Cash Distributions
In connection with the Partnership’s Credit Agreement with American AgCredit Capital Markets, cash distributions to partners are restricted unless the Partnership is in compliance with specified terms and conditions of the Credit Agreement, including restrictions on further indebtedness, sales of assets, and maintenance of certain financial ratios. The Partnership was in compliance with the terms and conditions of the Credit Agreement at December 31, 2006 and December 31, 2005.
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ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per pound and per unit data)
| | 2006 | | 2005 | | 2004 | | 2003 | | 2002 | |
Financial: | | | | | | | | | | | |
Total revenue | | $ | 17,072 | | $ | 17,378 | | $ | 13,665 | | $ | 15,426 | | $ | 14,556 | |
Net cash provided by operating activities (1) | | 8,241 | | 1,913 | | 368 | | 2,262 | | 2,166 | |
Income (loss) before taxes | | 904 | | 900 | | (1,644 | ) | 111 | | (447 | ) |
Net income (loss) | | 804 | | 771 | | (1,649 | ) | 69 | | (480 | ) |
Distributions declared | | 1,500 | | 1,500 | | 1,515 | | 1,212 | | 1,515 | |
Total working capital | | 3,882 | | 3,429 | | 2,931 | | 4,165 | | 3,220 | |
Total assets | | 53,963 | | 58,046 | | 58,438 | | 60,069 | | 61,803 | |
Long-term debt, non current | | 1,200 | | 1,600 | | 2,034 | | 2,468 | | 2,920 | |
Total partners’ capital | | 48,623 | | 49,389 | | 50,542 | | 53,706 | | 54,849 | |
Class A limited partners’ capital | | 48,612 | | 49,308 | | 50,037 | | 53,169 | | 54,300 | |
Net cash flow as defined in the partnership agreement (2) | | 2,323 | | 2,501 | | 466 | | 2,157 | | 1,592 | |
| | | | | | | | | | | |
Operations: | | | | | | | | | | | |
Acres harvested | | 4,190 | | 4,169 | | 4,169 | | 4,169 | | 4,169 | |
Macadamia nuts harvested (lbs.) (3) | | 21,194 | | 21,707 | | 18,933 | | 21,196 | | 21,404 | |
Net price $/lb. (3)(4) | | $ | 0.6093 | | $ | 0.5550 | | $ | 0.4972 | | $ | 0.4857 | | $ | 0.4748 | |
| | | | | | | | | | | |
Per Class A Unit (5): | | | | | | | | | | | |
Net income (loss) | | 0.11 | | 0.10 | | (0.22 | ) | 0.01 | | (0.06 | ) |
Net cash flow as defined in the partnership agreement (2) | | 0.31 | | 0.33 | | 0.06 | | 0.28 | | 0.21 | |
Distributions | | 0.20 | | 0.20 | | 0.20 | | 0.16 | | 0.20 | |
Partners’ capital | | 6.48 | | 6.57 | | 6.67 | | 7.09 | | 7.24 | |
(1) See “Statements of Cash Flows” in the financial statements for method of calculation.
(2) See Footnote 5 in the notes to financial statements for method of calculation.
(3) Wet-in-shell at 25% moisture.
(4) Weighted average for all orchards.
(5) 7,500,000 Class A Units were issued and outstanding for all periods presented.
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Contractual obligations as of December 31, 2006 for the Partnership are detailed in the following:
| | | | Payments | | Due by | | Period | | | |
Contractual Obligations | | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years | |
Long-Term Debt and Interest | | $ | 1,792,000 | | $ | 487,000 | | $ | 896,000 | | $ | 409,000 | | $ | — | |
Operating Leases | | 3,453,000 | | 337,000 | | 466,000 | | 272,000 | | 2,378,000 | |
Total | | $ | 5,245,000 | | $ | 824,000 | | $ | 1,362,000 | | $ | 681,000 | | $ | 2,378,000 | |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the financial statements and the related notes included elsewhere in this report.
Results of operations – 2006, 2005, 2004
Owned-Orchard Segment - Production and Yields
Production and yield data for the eight orchards are summarized below (expressed in wet-in-shell pounds at 25% moisture):
| | | | | | 2006 | | Average Yield per Acre | |
Orchard | | Acquired | | Acreage | | Production | | 2006 | | 2005 | | 2004 | |
Keaau I | | June 1986 | | 1,467 | | 6,645,746 | | 4,530 | | 3,953 | | 3,880 | |
Keaau II | | Oct. 1989 | | 220 | | 628,416 | | 2,856 | | 2,758 | | 2,729 | |
Keaau Lot 10 | | Sept. 1991 | | 78 | | 279,961 | | 3,589 | | 3,168 | | 3,221 | |
Ka’u I | | June 1986 | | 956 | | 5,343,929 | | 5,590 | | 7,948 | | 5,353 | |
Ka’u Green Shoe I | | Dec. 1986 | | 266 | | 1,984,649 | | 7,461 | | 6,399 | | 6,632 | |
Ka’u II | | Oct. 1989 | | 714 | | 3,917,556 | | 5,487 | | 4,957 | | 5,067 | |
Ka’u O | | May 2000 | | 142 | | 703,974 | | 4,958 | | 5,655 | | 4,464 | |
Ka’u 715/716 | | April 2006 | | 21 | | 107,904 | | 5,138 | | | | | |
Mauna Kea | | Oct. 1989 | | 326 | | 1,581,635 | | 4,852 | | 4,327 | | 3,851 | |
Totals (except yields which are averages) | | | | 4,190 | | 21,193,770 | | 5,058 | | 5,207 | | 4,541 | |
The Partnership reports on a calendar year basis, though the natural crop year generally begins in August and runs through April. 2006 production is reported on the 2005 contract basis for comparative purposes. On page 15, production for 2006 is reported under the contracts effective for 2006 and compared to 2005 and 2004 production.
Production in 2006 was 1.6% lower than 2005 and 11.6% greater than 2004. Production in 2005 was 14.6% greater than 2004 and 2.4% greater than 2003. Production in 2004 was 10.7% lower than 2003 and 11.5% lower than 2002. Significant factors affecting the crop were as follows:
1. The drought in the Ka’u orchards in 2003 affected the nut set, development and production for the spring of 2004.
2. The above average rainfall in the Keaau and Mauna Kea orchards negatively impacted the pollination and nut set in 2004.
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3. The Ka’u region recorded above average rainfall in 2004. The rainfall replenished the soil moisture and improved yields in the region for the spring of 2005.
4. The maturation of the crop was delayed by the weather conditions which resulted in less production in the fall of 2004 and improved yields in the spring of 2005.
5. The Ka’u region recorded below average rainfall in 2005. The shortfall during the early spring to fall of 2005 reduced yields in the spring of 2006. Above average rainfall from November 2005 through February 2006 contributed a positive effect on the fall 2006 production.
6. A late and abbreviated flower season in the Keaau and Mauna Kea regions resulted in lower production in the fall of 2005 and the spring of 2006. Cool night temperatures from November 2005 through May 2006 contributed to an early and extended flower/nut set season that had a positive effect on the fall 2006 production despite the occurrence of a light-moderate flower disease in March 2006. The extended flowering period will also have a positive effect on the spring 2007 nut production
The Ka’u Green Shoe I orchard and the Mauna Kea orchard are fully mature. As a result, the yields from these orchards are expected to produce on average with the Partnership’s mature orchards. At full maturity under favorable growing conditions, a macadamia orchard can produce between 4,500 and 7,500 WIS pounds of macadamia nuts per acre each year at Ka’u and between 2,500 and 6,000 WIS pounds of macadamia nuts per acre each year at Keaau and Mauna Kea.
Owned-Orchard Segment - Nut Revenue
Macadamia nut revenues depend on the number of producing acres, yields per acre and the nut purchase price. The impact of these factors is summarized in the following table using 2006 actual contracts and implied as if using old contracts for 2006 compared to actual for 2005. The implied 2006 is presented for the purpose of comparing the new contracts on equivalent terms with prior year, such that contract pounds delivered and nut price are on an equal basis:
For the twelve months
Ended December 31, 2006
| | Actual Contracts | | | | | | | |
| | WIS @ 20% | | Implied | | Actual | | 2006-2005 | |
| | SK/DIS @ 30% | | WIS @ 25% | | WIS @ 25% | | Change | |
| | 2006 | | 2006 | | 2005 | | WIS @ 25% | |
Field pounds delivered (000’s) | | 21,362 | | 21,362 | | 21,636 | | -1 | % |
Trash adjustment (000’s) | | (785 | ) | 68 | | (276 | ) | + 125 | % |
Quality adjustment SK/DIS (000’s) | | (2,642 | ) | (804 | ) | (644 | ) | -25 | % |
Moisture adjustment WIS (000’s) | | (563 | ) | 568 | | 991 | | -43 | % |
Contract pounds delivered (000’s) | | 17,372 | | 21,194 | | 21,707 | | -2 | % |
Nut price ($/per pound) | | $ | 0.7433 | | $ | 0.6093 | | $ | 0.5550 | | +10 | % |
Net nut sales ($000’s) | | $ | 12,913 | | $ | 12,913 | | $ | 12,048 | | +7 | % |
2004/2005 nut price adjustment ($000’s) | | $ | 343 | | $ | 343 | | $ | 636 | | | |
Total nut sales ($000’s) | | $ | 13,256 | | $ | 13,256 | | $ | 12,684 | | +5 | % |
15
The following table presents the comparison of information to derive the Owned-Orchard Segment nut revenue using the 2005 contracts for all information therefore implied for 2006 and actual for 2005 and 2004. The implied 2006 is used so that the comparisons are presented on an equivalent basis.
| | | | | | | | 2006 | | 2005 | |
| | Implied | | Actual | | Actual | | vs | | vs | |
| | 2006 | | 2005 | | 2004 | | 2005 | | 2004 | |
Trees acres harvested | | 4,190 | | 4,169 | | 4,169 | | +01 | % | — | |
Average yield (WIS lbs./acre) | | 5,058 | | 5,207 | | 4,541 | | -03 | % | + 15 | % |
Nuts harvested (000’s WIS lbs.) | | 21,194 | | 21,707 | | 18,933 | | -02 | % | + 15 | % |
Nut price ($/WIS lbs. @ 25%) | | 0.6093 | | 0.5550 | | 0.4972 | | +10 | % | + 12 | % |
Gross nut sales ($000) | | $ | 12,913 | | $ | 12,048 | | $ | 9,414 | | +07 | % | + 28 | % |
Prior year nut price settlement | | 343 | | 576 | | — | | | | | |
2003 early harvest settlement | | — | | — | | — | | | | | |
2004 Mac Farms settlement | | — | | 60 | | — | | | | | |
Recorded nut sales ($000s) | | $ | 13,256 | | $ | 12,684 | | $ | 9,414 | | | | | |
The 2006 analysis of average yields, nuts harvested and nut price is based upon the contracts which were in effect prior to January 1, 2006 and therefore are implied results. The 2006 gross nut sales, prior year price settlement and recorded nut sales are actual results. Based upon the 2005 and earlier contracts the following would apply. Under three of the nut purchase contracts with Mauna Loa, the price for nuts delivered is based 50% on the two-year trailing average of USDA published macadamia nut prices and 50% on a “netback component”. The netback component is determined by subtracting from Mauna Loa’s gross revenues from the sale of macadamia products (i) allocable processing, packaging, marketing, selling and advertising costs and (ii) a 20% capital charge on the difference between those aggregate gross revenues and aggregate allocable costs.
In mid-December 2004, Mauna Loa notified the Partnership that it would be unable to accept deliveries over a five-day period during the height of the harvest season. The Partnership advised Mauna Loa that this was unacceptable for both financial and operational reasons and arrangements would be made to deliver the nuts to another processor. After alternative deliveries had been committed to, Mauna Loa notified the Partnership that it was willing to accept delivery. As a result of the alternative commitment, the Partnership delivered approximately 240,000 pounds of nuts to Mac Farms of Hawaii at a price of 93 cents per pound over a two-day period. In late December, Mauna Loa notified the Partnership that it intended to deduct $118,000 from future nut payments as damages. The Partnership notified Mauna Loa that the deduction was a violation of our various contracts and the Partnership would consider termination of the contracts if such deduction were made. Mauna Loa has since withdrawn their notice of deduction, but the Partnership reserved $118,000 in 2004. A settlement was reached with Mauna Loa whereby the Partnership paid Mauna Loa approximately $58,000. As a result the Partnership recorded $60,000 of nut revenue in 2005 from the 2004 reserve.
In 2005 and 2004 the net-back component of the nut purchase price was not determined in a timely manner by Mauna Loa. The Partnership used information provided by Mauna Loa to determine the nut purchase price for each of the years. After Mauna Loa provided the final net-back component the Partnership determine the final nut purchase price and recognized the additional revenue at the time it became known.
16
The following table sets forth the manner in which the nut purchase price per pound was determined for 2005 and 2004 ($/lb.). This table does not include 2006 as the contracts were renegotiated in 2006 and there is no available net-back component:
| | 2005 | | 2004 | |
USDA price - two years prior (a) | | 0.5391 | | 0.5666 | |
USDA price – one year prior (a) | | 0.5769 | | 0.5391 | |
USDA price – two year trailing average | | 0.5580 | | 0.5528 | |
| | | | | |
Gross revenues | | 2.1093 | | 1.3929 | |
Less allocable processing, packaging, marketing, sales and advertising costs | | 1.4268 | | 0.8515 | |
Less 20% capital charge | | 0.1365 | | 0.1083 | |
Net-back component | | 0.5460 | | 0.4331 | |
| | | | | |
USDA price – two year trailing average | | 0.5580 | | 0.5528 | |
Net-back component | | 0.5460 | | 0.4331 | |
Average of USDA two year trailing average price and net-back component | | 0.5520 | | 0.4929 | |
Plus Hawaii general excise tax (0.5%) | | 0.0028 | | 0.0025 | |
Net purchase price (b) (c) (d) (e) | | 0.5548 | | 0.4954 | |
(a) Mauna Loa’s own purchases comprise a substantial portion of nut purchases reported to the USDA. Therefore, the USDA price component of the purchase price is, to a substantial degree, the average price that Mauna Loa has paid to purchase macadamia nuts from the Partnership and from third parties during the previous two years.
(b) The nut purchase price for the 1986 and 1989 orchards was the same for 1999 and all previous years. With the change of ownership of Mauna Loa in 2000, a quality conversion factor in the nut purchase contracts was initiated. The effect was to cause a slightly different price of $0.4951 for the 1989 orchards in 2004, and $0.5542 in 2005.
(c) The nut purchase contract covering nut production from the 78 acre Keaau Lot 10 orchard acquired in September 1991 defines the “two-year trailing average” provision slightly differently from the 1986 and 1989 nut purchase contracts, and thus results in a different nut price. This was in effect for the first six months of 2003. A new contract was negotiated with a fixed price for all nuts with unusables in a range of 10% to 13%. The nut price for this orchard was $0.6000 in 2006, 2005 and 2004. This orchard accounts for less than 2% of the Partnership’s macadamia nut production.
(d) The nut purchase contract for the Ka’u O orchards purchased in May 2000 uses only the two-year trailing USDA average to determine its nut price, which was $0.6912 in 2006, $0.5610 in 2005 and $0.5560 in 2004.
(e) Mauna Loa has provided the final 2004 audited nut price to the Partnership resulting in an additional $576,000 paid in 2005.
(f) Mauna Loa has provided the final 2005 audited nut price to the Partnership resulting in an additional $343,000 paid in 2006.
17
The 2005 average nut price from all orchards increased 12% from 2004 before 2004 adjustments realized in 2005. If the 2004 nut price was adjusted by those adjustments the average nut price increase for 2005 compared to 2004 would be 5%. The USDA portion increased 1% in 2005 and decreased 2% in 2004. The netback increased 26% in 2005 compared to 2004 and increased 10% in 2004 compared to 2003. The current netback price reflects the operating performance of Mauna Loa.
The USDA published price for the 2004-2005 crop year was $0.7018 per pound (WIS at 25% moisture), which is 22% higher than the 2003-2004 crop year of $0.5769.
In 2006 five contracts were in place: 1) the 1986 contracts were replaced with a fixed price contract - $0.75 per pound at WIS 20% moisture and 30% SK/DIS; 2) the 1989 contracts were replaced with a fixed price contract - $0.74 per pound at WIS 20% moisture and 30% SK/DIS; 3) the Lot 10Z contract remained effective - $0.60 @ WIS 25% adjusted for trash; 4) the Ka’u “O” contract remained effective which uses a two-year trailing average USDA price which was $0.6912 and; 5) the macadamia nut orchard purchased April 2006 has a fixed price contract of $0.98 per pound at WIS 20% moisture and 30% SK/DIS.
Owned-Orchard Segment - Cost of Goods Sold
Agricultural unit costs depend on the operating expenses required to maintain the orchards and to harvest the crop as well as on the quantity of nuts actually harvested.
The Partnership’s unit costs (expressed in dollars per wet-in-shell pound at 25% moisture) are calculated by dividing all agricultural costs for each orchard (including lease rent, property tax, tree insurance and depreciation) by the number of pounds of macadamia nuts produced by that orchard and are summarized below ($/lb.):
| | | | Cost per pound | | | |
Orchard | | Acquired | | 2006 | | 2005 | | 2004 | |
Keaau I | | June 1986 | | 0.5646 | | 0.5866 | | 0.5767 | |
Keaau II | | Oct. 1989 | | 0.6985 | | 0.6501 | | 0.5545 | |
Keaau Lot 10 | | Sept. 1991 | | 0.4095 | | 0.3836 | | 0.4491 | |
Ka’u I | | June 1986 | | 0.5193 | | 0.4289 | | 0.5211 | |
Ka’u Green Shoe I | | Dec. 1986 | | 0.3278 | | 0.2769 | | 0.3409 | |
Ka’u II | | Oct. 1989 | | 0.4420 | | 0.4112 | | 0.3938 | |
Ka’u O | | May 2000 | | 0.4829 | | 0.4226 | | 0.4226 | |
Ka’u 715/716 | | April 2006 | | 0.2952 | | — | | — | |
Mauna Kea | | Oct. 1989 | | 0.5649 | | 0.7119 | | 0.4976 | |
| | | | | | | | | |
All Orchards | | | | 0.5130 | | 0.5062 | | 0.4582 | |
Cost of goods sold was $669,000 higher in 2006 than 2005 and $535,000 higher in 2005 than in 2004. The cost per pound in 2006 was 1.3% higher than 2005 and 10.5% higher in 2005 than 2004. The higher production costs in 2006 were the results of higher harvesting costs, cultivation costs, land lease costs, and higher insurance costs offset by lower depreciation. The higher production costs in 2005 were the results of higher harvesting and husking costs because of more pounds handled. The lower production costs in 2004 compared to 2005 and 2006 were the result of lower harvesting costs, cultivation costs, land lease costs and insurance costs.
18
Farming Segment - Farming Service Revenue
As a result of the acquisition of the farming operation in 2000, the Partnership acquired approximately twenty farming contracts (now seventeen contracts) to farm macadamia orchards owned by other growers. These contracts cover macadamia orchards in the same three locations on the island of Hawaii where the Partnership owns orchards. The farming contracts provide the Partnership to be reimbursed for all direct farming costs (cultivation, irrigation and harvesting), collect a pro-rata share of indirect costs and overheads, and charge a management fee or fixed fee. The management fee is based on the number of acres farmed or on a percentage of total costs billed. Revenues from farming services were $3.8 million in 2006, $4.7 million in 2005, and $4.3 million in 2004. The 2006 farming service revenues were less than 2005 because of the termination of three farming contracts, the purchase of the macadamia orchard which previously had been farmed under contract and the timing of the harvest at the end of the year which resulted is harvesting occurring in the spring of 2007 for some of the orchards under contract. The 2005 farming service revenues were less than anticipated because of a windstorm which destroyed a large percentage of trees in three contract orchards. The 2004 farming service revenues were less than expected because of the late drop of nuts in the fall crop. Three farming service contracts terminated on December 31, 2005 which reduces the number of farming service contracts to about seventeen totaling about 2,039 acres. The farming service revenue in 2005 for these three contracts was about $492,000 with management fees of about $70,000. Additionally, the Partnership purchased about 21 acres which was under farming contract bringing the total acres under farming contract to about 2,008. Approximately 150 acres of are year-to-year contracts, approximately 635 acres expire March 31, 2009, approximately 70 acres expire June 30, 2013, approximately 410 acres expire July 31, 2029, approximately 280 acres expire June 30, 2033 and approximately 470 acres expire September 30, 2080.
Farming Segment - Cost of Services Sold
The cost of services sold relating to the farming contracts was $3.5 million in 2006, $4.3 million in 2005 and $3.9 million in 2004. These costs were all reimbursed to the Partnership.
General and Administrative Costs
General and administrative expenses are comprised of accounting and reporting costs, reimbursements to the Managing Partner for directors’ fees, office expenses and liability insurance. In addition, general and administrative costs are also incurred in connection with the farming operations. Previous to the May 2000 acquisition, general and administration costs relating to the Partnership’s orchards were included in the Partnership’s farming expenses.
General and administrative costs for 2006 were $247,000 higher than for 2005 which is attributed to increased legal costs and proxy statement for the 2006 special meeting, legal costs related to the potential acquisition of Mac Farms of Hawaii, LLC and higher costs associated with Sarbanes Oxley implementation. General and administrative costs for 2005 were $48,000 lower than for 2004, which is attributed to lower legal costs, offset by higher costs associated with Sarbanes Oxley preparation and accounting. In 2004 legal costs of $464,000 were related to the lawsuit, initiated and settled, to prevent Mauna Loa from acquiring MacFarms of Hawaii, LLC.
A management fee based on Partnership cash flow is payable annually to the Managing Partner. The amount paid was $9,000 in 2004. There was no management fee in 2006 and 2005 as the Partnership acquired MLR, the managing partner and the fees are eliminated in consolidation.
Interest Income and Expense
The Partnership recorded interest expense of $204,000 in 2006, $237,000 in 2005, and $182,000 in 2004. This was due to (1) the long-term loan used to acquire the farming operations, (2) the assumption of several capitalized equipment leases, and (3) interest expense on a revolving line of credit.
The Partnership funds its working capital needs through funds on hand and, when needed, from short-term borrowings, generating interest expense in the process. Net interest income or expense, therefore, is partly a function of any balance carried over from the prior year, the amount and timing of cash generated and distributions paid to investors in the current year, as well as the current level of interest rates. Interest was earned in the amount of $17,000 in 2006, $5,000 in 2005 and $11,000 in 2004.
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Other income of $206,000 was recorded in 2006 of which $169,000 was from crop insurance. Other income of $151,000 was recorded in 2005 of which $147,000 was from crop insurance. Other income of $32,000 was recorded in 2004 from crop insurance.
Inflation and Taxes
In general, prices paid to macadamia nut farmers fluctuate independently of inflation. Macadamia nut prices are influenced strongly by prices for finished macadamia products, which depend on competition and consumer acceptance. Farming costs, particularly labor and materials, and general and administrative costs do generally reflect inflationary trends.
The Partnership is subject to a gross income tax as a result of its election to continue to be taxed as a partnership rather than to be taxed as a corporation, as allowed by the Taxpayer Relief Act of 1997. This tax is calculated at 3.5% on partnership gross income (net revenues less cost of goods sold) beginning in 1998. The gross income tax was $100,000 in 2006, $129,000 in 2005, and $5,000 in 2004.
Liquidity and Capital Resources
Net cash provided by operations was $8.2 million in 2006 compared to $1.9 million in 2005. The significant increase of $6.3 million is a result of the payment terms of the nut purchase contracts changing from quarterly to 30 days from date of delivery. Net cash provided by operations was $1.9 million in 2005, an increase of approximately $1.6 million compared to 2004. Net cash provided by operations in 2004 was $368,000.
At December 31, 2006 the Partnership’s working capital was $3.9 million and its current ratio was 2.54 to 1, compared to $3.4 million and 1.59 to 1 in 2005. In 2005 the Partnership’s working capital was $3.4 million and its current ratio 1.59 to 1, compared to $2.9 million and 1.63 to 1 in 2004. In 2004 the Partnership’s working capital was $2.9 million and its current ratio was 1.63 to 1, compared to $4.2 million and 2.55 to 1 in 2003. In 2006 the increase in working capital compared to 2005 was the result of lower cost of goods sold, interest expense, income taxes, higher interest income and other income offset by higher general and administrative costs. In 2005 the increase in working capital compared to 2004 was result of higher revenue and lower general and administrative costs. In 2004 the decrease in working capital compared to 2003 was a result of lower revenue and higher general and administrative costs.
The Partnership was in compliance with the terms and conditions of the Credit Agreement at December 31, 2006 and December 31, 2005.
Capital expenditures in 2006, 2005 and 2004 were $509,000, $83,000, and $172,000, respectively. The increase in 2006 was attributed to the purchase of 21 tree acres of macadamia orchards for $440,000, computers, a vehicle and upgrades to operating machinery. The decrease in 2005 was the result of fewer computer purchases and modifications to farming equipment than 2004. Capital expenditures in 2004 were the result of purchases of expiring leases. Capital expenditures planned for 2007 are about $500,000 and are expected to be financed by way of new equipment leases, either capital or operating leases.
Macadamia nut farming is seasonal, with production peaking late in the fall. However, farming operations continue year round. As a result, additional working capital is required for much of the year. The Partnership meets its working capital needs with cash on hand, and when necessary, through short-term borrowings under a $5.0 million revolving line of credit. The line of credit was obtained on May 2, 2000 and expires May 1, 2008. At December 31, 2006 the Partnership had a cash balance of $3,351,000 and no line of credit drawings outstanding. At December 31, 2005 the Partnership had a cash balance of $378,000 and line of credit drawings outstanding of $2,900,000. The cash balance was $196,000 at the end of 2004, and the line of credit drawings were $2,200,000 at December 31, 2004.
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As a Limited Partnership, we expect to pay regular cash distributions to the Partnership’s unit holders if the cash flow from operations, as defined in the Management Agreement, exceeds the operating and capital resource needs of the Partnership, as determined by management. These cash distributions are expected to be paid from operating cash flow and / or other resources. The Partnership has declared and paid cash distributions for 83 consecutive quarters. In December, 2006, the Partnership declared a distribution of $0.05 per Class A unit (a total of $375,000), which was paid February 15, 2007 to the unit holders of record as of December 29, 2006.
It is the opinion of management that the Partnership has adequate cash on hand and borrowing capacity available to meet anticipated working capital needs for operations as presently conducted. The nut purchase contracts require the buyers to make nut payments 30 days after the delivery of the nuts to 15 days after the end of the month in which the nuts were delivered. During certain parts of the year, if payments are not received, as the contracts require, available cash resources could be depleted.
Critical Accounting Policies and Estimates
Management has identified the following critical accounting policies that affect the Partnership’s more significant judgments and estimates used in the preparation of the Partnership’s financial statements. The preparation of the Partnership’s financial statements in conformity with accounting principles generally accepted in the United States of America requires the Partnership’s management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, management evaluates those estimates, including those related to asset impairment, accruals for self-insurance, compensation and related benefits, revenue recognition, allowance for doubtful accounts, contingencies and litigation. The Partnership states these accounting policies in the notes to the financial statements and in relevant sections in this discussion and analysis. These estimates are based on the information that is currently available to the Partnership and on various other assumptions that management believes to be reasonable under the circumstances. Actual results could vary from those estimates.
The Partnership believes that the following critical accounting policies affect significant judgments and estimates used in the preparation of it financial statements:
The Partnership maintains an accrual for workers compensation claims to the extent that the Partnership’s current insurance policies will not cover such claims. This accrual is included in other accrued liabilities in the accompanying balance sheet. Management determines the adequacy of the accrual by periodically evaluating the historical experience and projected trends related to outstanding and potential workers compensation claims. If such information indicates that the accrual is over or understated, the Partnership will adjust the assumptions utilized in the methodologies and reduce or provide for additional accrual as appropriate.
Retirement and Severance Benefits: The Partnership sponsors a non-contributory defined benefit pension plan for regular union employees and a severance plan for intermittent union employees. Several statistical and other factors which attempt to anticipate future events are used in calculating the expense and liabilities related to this plan. These factors include assumptions about the discount rate, expected return on plan assets, withdrawal and mortality rates and the rate of increase in compensation levels. The actuarial assumptions used by the Partnership may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter mortality of participants. These differences may impact the amount of retirement and severance benefit expense recorded by the Partnership in future periods.
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The Partnership reviews long-lived assets held and used, or held for sale for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If an evaluation is required, the estimated undiscounted future cash flows associated with the asset are compared to the asset’s carrying amount to determine if an impairment charge is required. All long-lived assets for which management has committed to a plan of disposal are reported at the lower of carrying amount or fair value. Changes in projected cash flows generated by an asset based on new events or circumstances may indicate a change in fair value and require a new evaluation of recoverability of the asset.
The Partnership has replaced three of the nut purchase contracts it had with Mauna Loa with two contracts signed June 1, 2006, effective January 1, 2006. The first of the contracts is a fixed price contract at $0.75 per pound at WIS 20% moisture and 30% SK/DIS, terminating December 31, 2006, and accounts for about 15 million pounds of nuts. The second contract is a fixed price contract at $0.74 per pound a WIS 20% moisture and 30% SK/DIS, terminating December 31, 2011, and accounts for about 6 million pounds of nuts. The second contract increases by $0.01 per pound each year except 2008 until it reaches $0.78 per pound in 2011.
The Partnership recognizes revenue under all of its fixed price contracts using the best information available to the Partnership at the time it files its quarterly and annual financial statements. Additional information can be found in section (c) under the heading Nut Purchase Contracts on page 3.
Legal Proceedings
In 2004 the Partnership and several independent growers filed suit against Mauna Loa alleging that the proposed acquisition by Mauna Loa of the assets of Mauna Loa’s major competitor, MacFarms, would give Mauna Loa a monopoly over the supply and processing of wet-in-shell macadamia nuts on the Island of Hawaii. An agreement was reached October 1, 2004, whereby Mauna Loa terminated its agreement to acquire the assets of MacFarms and the Partnership and all others caused their lawsuits to be dismissed.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership is exposed to market risks resulting from changes in interest rates. The interest rates on the Partnership’s Credit Agreement, which are based on LIBOR (Farm Credit Discount Note Rate and the Farm Credit Medium Term Note Rate), are adjusted periodically based on the Partnership’s election to fix interest rates for periods ranging from between three months and five years. As of December 31, 2006, a one percent increase or decrease in the applicable rate under the Credit agreement will result in an interest expense fluctuation of approximately $12,000.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm | | |
| | |
Consolidated Balance Sheets, December 31, 2006 and 2005 | | |
| | |
Consolidated Income Statements, for the Years Ended December 31, 2006, 2005 and 2004 | | |
| | |
Consolidated Statements of Partners’ Capital, for the Years Ended December 31, 2006, 2005 and 2004 | | |
| | |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004 | | |
| | |
Notes to Consolidated Financial Statements | | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners
ML Macadamia Orchards, L.P.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, partners’ capital, and cash flows, present fairly, in all material respects, the financial position of ML Macadamia Orchards, L.P. and its subsidiary at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Honolulu, Hawaii
April 16, 2007
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ML Macadamia Orchards, L.P.
Consolidated Balance Sheets
(in thousands)
| | December 31, | |
| | 2006 | | 2005 | |
Assets | | | | | |
Current assets | | | | | |
Cash and cash equivalents | | $ | 3,351 | | $ | 378 | |
Accounts receivable | | 2,688 | | 8,433 | |
Inventory of farming supplies | | 272 | | 270 | |
Other current assets | | 98 | | 178 | |
Total current assets | | 6,409 | | 9,259 | |
Land, orchards and equipment, net | | 47,232 | | 48,722 | |
Goodwill | | 306 | | — | |
Intangible assets, net | | 16 | | 65 | |
Total assets | | $ | 53,963 | | $ | 58,046 | |
| | | | | |
Liabilities and partners’ capital | | | | | |
Current liabilities | | | | | |
Current portion of long-term debt | | $ | 400 | | $ | 434 | |
Short-term borrowings | | — | | 2,900 | |
Accounts payable | | 406 | | 770 | |
Cash distributions payable | | 375 | | 375 | |
Accrued payroll and benefits | | 858 | | 935 | |
Other current liabilities | | 488 | | 416 | |
Total current liabilities | | 2,527 | | 5,830 | |
Non-current benefits | | 405 | | — | |
Long-term debt | | 1,200 | | 1,600 | |
Deferred income tax liability | | 1,208 | | 1,227 | |
Total liabilities | | 5,340 | | 8,657 | |
Commitments and contingencies | | | | | |
Partners’ capital | | | | | |
General partner | | 81 | | 81 | |
Class A limited partners, no par or assigned value, 7,500 units issued and outstanding | | 48,612 | | 49,308 | |
Accumulated other comprehensive loss | | (70 | ) | — | |
Total partners’ capital | | 48,623 | | 49,389 | |
Total liabilities and partners’ capital | | $ | 53,963 | | $ | 58,046 | |
See accompanying notes to consolidated financial statements.
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ML Macadamia Orchards, L.P.
Consolidated Income Statements
(in thousands, except per unit data)
| | 2006 | | 2005 | | 2004 | |
Macadamia nut sales | | $ | 13,256 | | $ | 12,684 | | $ | 9,414 | |
Contract farming revenue | | 3,816 | | 4,694 | | 4,251 | |
Total revenues | | 17,072 | | 17,378 | | 13,665 | |
Cost of goods and services sold | | | | | | | |
Costs of macadamia nut sales | | 10,871 | | 10,202 | | 9,667 | |
Costs of contract farming services | | 3,474 | | 4,274 | | 3,860 | |
Total cost of goods and services sold | | 14,345 | | 14,476 | | 13,527 | |
Gross income | | 2,727 | | 2,902 | | 138 | |
General and administrative expenses | | | | | | | |
Costs expensed under management agreement with related party | | — | | — | | 177 | |
Legal fees - related party | | 196 | | 32 | | 495 | |
Other | | 1,646 | | 1,563 | | 971 | |
Total general and administrative expenses | | 1,842 | | 1,595 | | 1,643 | |
Extinguishment of management agreement | | — | | (326 | ) | — | |
Operating income (loss) | | 885 | | 981 | | (1,505 | ) |
Interest expense | | (204 | ) | (237 | ) | (182 | ) |
Interest income | | 17 | | 5 | | 11 | |
Other income | | 206 | | 151 | | 32 | |
Income (loss) before tax | | 904 | | 900 | | (1,644 | ) |
Income tax expense | | (100 | ) | (129 | ) | (5 | ) |
Net income (loss) | | $ | 804 | | $ | 771 | | $ | (1,649 | ) |
| | | | | | | |
Net cash flow (as defined in the Partnership Agreement) | | $ | 2,323 | | $ | 2,501 | | $ | 466 | |
| | | | | | | |
Net income (loss) per Class A Unit | | $ | 0.11 | | $ | 0.10 | | $ | (0.22 | ) |
| | | | | | | |
Net cash flow per Class A Unit (as defined in the Partnership Agreement) | | $ | 0.31 | | $ | 0.33 | | $ | 0.06 | |
| | | | | | | |
Cash distributions per Class A Unit | | $ | 0.20 | | $ | 0.20 | | $ | 0.20 | |
| | | | | | | |
Class A Units outstanding | | 7,500 | | 7,500 | | 7,500 | |
See accompanying notes to consolidated financial statements.
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ML Macadamia Orchards, L.P.
Consolidated Statements of Partners’ Capital
(in thousands)
| | 2006 | | 2005 | | 2004 | |
| | | | | | | |
Partners’ capital at beginning of period: | | | | | | | |
General partner | | $ | 81 | | $ | 505 | | $ | 537 | |
Class A limited partners | | 49,308 | | 50,037 | | 53,169 | |
| | 49,389 | | 50,542 | | 53,706 | |
| | | | | | | |
Acquisition of ML Resources, Inc. | | — | | (424 | ) | — | |
| | — | | (424 | ) | — | |
| | | | | | | |
Allocation of net income (loss): | | | | | | | |
General partner | | — | | — | | (17 | ) |
Class A limited partners | | 804 | | 771 | | (1,632 | ) |
| | 804 | | 771 | | (1,649 | ) |
| | | | | | | |
Cash distributions paid and / or declared: | | | | | | | |
General partner | | — | | — | | 15 | |
Class A limited partners | | 1,500 | | 1,500 | | 1,500 | |
| | 1,500 | | 1,500 | | 1,515 | |
| | | | | | | |
Partners’ capital at end of period: | | | | | | | |
General partner | | 81 | | 81 | | 505 | |
Class A limited partners | | 48,612 | | 49,308 | | 50,037 | |
Accumulated other comprehensive loss Change in pension and severance obligations | | (70 | ) | — | | — | |
| | $ | 48,623 | | $ | 49,389 | | $ | 50,542 | |
See accompanying notes to consolidated financial statements.
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ML Macadamia Orchards, L.P.
Consolidated Statements of Cash Flows
(in thousands)
| | 2006 | | 2005 | | 2004 | |
Cash flows from operating activities: | | | | | | | |
Cash received for goods and services | | $ | 23,001 | | $ | 16,795 | | $ | 13,947 | |
Cash paid to suppliers and employees | | (14,463 | ) | (14,568 | ) | (13,393 | ) |
Income tax paid | | (118 | ) | (82 | ) | (15 | ) |
Interest received | | 17 | | 5 | | 11 | |
Interest paid | | (196 | ) | (237 | ) | (182 | ) |
Net cash provided by operating activities | | 8,241 | | 1,913 | | 368 | |
| | | | | | | |
Cash flows from investing activities: | | | | | | | |
Proceeds from sale of equipment | | 75 | | 14 | | — | |
Capital expenditures | | (509 | ) | (83 | ) | (172 | ) |
Net cash used in investing activities | | (434 | ) | (69 | ) | (172 | ) |
| | | | | | | |
Cash flows from financing activities: | | | | | | | |
Proceeds from drawings on line of credit | | 5,800 | | 8,800 | | 5,400 | |
Repayment of long term debt | | (400 | ) | (400 | ) | (400 | ) |
Repayment of line of credit | | (8,700 | ) | (8,100 | ) | (3,600 | ) |
Loan cost | | — | | — | | (20 | ) |
Acquisition of general partner’s units | | — | | (424 | ) | — | |
Capital lease payments | | (34 | ) | (35 | ) | (52 | ) |
Cash distributions paid | | (1,500 | ) | (1,503 | ) | (1,364 | ) |
Net cash provided by (used in) financing activities | | (4,834 | ) | (1,662 | ) | (36 | ) |
| | | | | | | |
Net increase in cash | | 2,973 | | 182 | | 160 | |
Cash and cash equivalents at beginning of period | | 378 | | 196 | | 36 | |
Cash and cash equivalents at end of period | | $ | 3,351 | | $ | 378 | | $ | 196 | |
| | | | | | | |
Reconciliation of net income (loss) to net cash provided by operating activities: | | | | | | | |
Net income (loss) | | $ | 804 | | $ | 771 | | $ | (1,649 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | |
Depreciation and amortization | | 1,953 | | 2,165 | | 2,571 | |
Gain on sale of capital assets | | (21 | ) | — | | — | |
(Increase) decrease in accounts receivable | | 5,745 | | (1,341 | ) | (566 | ) |
Deferred income tax expense (credit) | | (19 | ) | 20 | | (7 | ) |
Increase in inventories | | (2 | ) | (125 | ) | (4 | ) |
(Increase) decrease in other current assets | | 80 | | (25 | ) | (10 | ) |
Increase in other assets | | — | | (32 | ) | (7 | ) |
Increase (decrease) in accounts payable | | (364 | ) | 32 | | 245 | |
Increase (decrease) in accrued payroll | | (106 | ) | 62 | | 26 | |
Increase (decrease) in current liabilities | | 72 | | 386 | | (231 | ) |
Increase in non-current benefits payable | | 99 | | — | | — | |
Total adjustments | | 7,437 | | 1,142 | | 2,017 | |
Net cash provided by operating activities | | $ | 8,241 | | $ | 1,913 | | $ | 368 | |
| | | | | | | |
Supplemental schedule of noncash financing activities Distributions declared but not paid | | $ | 375 | | $ | 375 | | $ | 379 | |
See accompanying notes to consolidated financial statements.
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ML Macadamia Orchards, L.P.
Notes to Consolidated Financial Statements
(1) OPERATIONS AND OWNERSHIP
ML Macadamia Orchards, L.P. (the “Partnership”) owns and farms 4,190 tree acres of macadamia orchards on the island of Hawaii. Once the nuts are harvested, the Partnership sells them to another entity, which processes and markets the finished products. The Partnership farms approximately 2,008 additional acres of macadamia orchards on Hawaii for other orchard owners.
The Partnership is owned 99% by limited partners and 1% by the managing general partner, ML Resources, Inc. (“MLR”). On January 6, 2005, the stock of ML Resources, Inc. was purchased by the Partnership for $750,000 in cash. The transaction was accounted for as an asset purchase as opposed to a business combination since MLR had no substantive operations and its principal purpose was to own and hold 75,757 general partner units of the Partnership. The acquisition of the general partner units held by MLR results in the Class A limited partners effectively owning 100% of the Partnership.
The purchase price was allocated between the acquired general partner units and the extinguishment of the management contract between MLR and the Partnership. The fair value of the general partner units at the date of acquisition was determined to be $424,000 which was recorded as a reduction in partners’ capital. The fair value of the general partner units was determined based on the quoted market value of Class A limited partner units. No discounts for lack of marketability or premiums for control preferences were applied in determining the fair value of the general partner units. The remaining $326,000 representing the extinguishment of the management contract was charged to expense.
As a result of the transaction, MLR’s operations have been included in the Partnership’s consolidated financial statements beginning with the first quarter of 2005.
Limited partner interests are represented by Class A Units, which are evidenced by depositary receipts that trade publicly and are listed on the New York Stock Exchange.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash and Cash Equivalents. Cash and cash equivalents include unrestricted demand deposits with banks and all highly liquid deposits with an original maturity of less than three months. The cash equivalents are not protected by federal deposit insurance.
(b) Financial Instruments. The fair value of the line of credit and a portion of the long-term financial instruments is approximately the carrying value as they have variable interest rates. The remaining portion of the long-term financial instrument has a fixed rate and the fair value compared to carrying value is disclosed.
(c) Consolidation. The consolidated financial statements include the accounts of the Partnership, and from 2005, ML Resources, Inc. All significant intercompany balances and transactions, including management fees and distributions, have been eliminated.
(d) Farming Costs. The Partnership considers each orchard to be a separate cost center, which includes the depreciation/amortization of capitalized costs associated with each orchard’s acquisition and /or development and maintenance and harvesting costs directly attributable to each orchard. In accordance with industry practice in Hawaii, orchard maintenance and harvesting costs for commercially producing macadamia orchards are charged against earnings in the year that the costs are incurred.
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However, the timing and manner in which farming costs are recognized in the Partnership’s financial statements over the course of the year is based on a standard cost system. For interim financial reporting purposes, farming costs are recognized as expense based on a standard cost to produce a pound of macadamia nuts. Management calculates a standard cost per pound for each orchard based on the estimated annual costs to farm each orchard and anticipated annual production from each orchard. The amount of farming costs recognized as expense throughout the year is calculated by multiplying each orchard’s standard cost by actual production from that orchard. The difference between actual farming costs incurred and the amount of farming costs recognized as expense is recorded as either an increase or decrease in deferred farming costs, which is reported as an asset in the balance sheet. Deferred farming costs accumulate throughout the year, typically peaking mid-way through the third quarter, since nut production is lowest during the first and second quarters of the year. Deferred farming costs are expensed over the remainder of the year since nut production is highest at the end of the third quarter through year end.
Management evaluates the validity of each orchard’s standard cost on a monthly basis based on actual production and farming costs incurred, as well as any known events that might significantly affect forecasted annual production and farming costs for the remainder of the year.
(e) Inventory. Supplies inventory is relieved on an average cost basis to cost of farming expense as used.
(f) Land, Orchards and Equipment. Land, orchards and equipment are reported at cost, net of accumulated depreciation and amortization. Net farming costs for any “developing” orchards are capitalized on the balance sheet until revenues from that orchard exceed expenses for that orchard (or nine years after planting, if earlier). Developing orchards historically do not reach commercial viability until about 12 years of age.
Depreciation of orchards and other equipment is reported on a straight-line basis over the estimated useful lives of the assets (40 years for orchards and between 5 and 12 years for other equipment). A 5% residual value is assumed for orchards. The macadamia orchards acquired in 1986 situated on leased land are being amortized on a straight-line basis over the terms of the leases (approximately 33 years from the inception of the Partnership) with no residual value assumed. The macadamia orchards acquired in 1989 situated on leased land are being amortized on a straight-line basis over a 40 year period (the terms of these leases exceed 40 years) with no residual value assumed. For income tax reporting, depreciation is calculated under the straight line and declining balance methods over Alternative Depreciation System recovery periods.
Repairs and maintenance costs are expensed unless they exceed $5,000 and extend the useful life beyond the depreciable life.
The Partnership reviews long-lived assets held and used, or held for sale for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If an evaluation is required, the estimated undiscounted future cash flows associated with the asset are compared to the asset’s carrying amount to determine if an impairment charge is required. If an impairment charge is required the Partnership would write the assets down to fair value. All long-lived assets for which management has committed to a plan of disposal are reported at the lower of carrying amount or fair value as determined by quoted market price or a present value technique. Changes in projected cash flows generated by an asset based on new events or circumstances may indicate a change in fair value and require a new evaluation of recoverability of the asset.
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(g) Goodwill and Other Intangible Assets
Under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), goodwill and other indefinite-lived intangible assets are not amortized but are reviewed for impairment at least annually and if a triggering event were to occur in an interim period. The Partnership’s annual impairment testing is performed in the 4th quarter each year. The goodwill is allocated to the farming reporting unit. Goodwill impairment is determined using a two-step process for each reporting unit. The first step of the impairment test is used to identify potential impairment by comparing the fair value of a reporting unit to the book value, including goodwill. This evaluation utilizes a discounted cash flow analysis and multiple analyses of the historical and forecasted operating results of the Partnership’s reporting unit. If the fair value of a reporting unit exceeds its book value, goodwill of the reporting unit is not considered impaired, and the second step of the impairment test is not required. If the book value of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step of the impairment test compares the implied fair value of the reporting unit’s goodwill with the book value of the goodwill. If the book value of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination.
(h) Income Taxes. The accompanying income statements do not include a provision for corporate income taxes, as the income of the Partnership is not taxed directly; rather, the Partnership’s tax attributes are included in the individual tax returns of its partners. Neither the Partnership’s financial reporting income nor the cash distributions to unit holders can be used as a substitute for the detailed tax calculations which the Partnership must perform annually for its partners.
The Partnership is subject to a gross income tax as a result of its election to continue to be taxed as a partnership rather than to be taxed as a corporation, as allowed by the Taxpayer Relief Act of 1997. This tax is calculated at 3.5% on partnership gross income (net revenues less cost of goods sold) beginning in 1998.
Deferred tax liabilities are recognized for the future tax consequences attributable to differences between the financial reporting and tax reporting basis of assets and liabilities.
(i) Revenue. Macadamia nut sales are recognized when nuts are delivered to the buyer. Contract farming revenue and administrative services revenues are recognized in the period that such services are completed, that is upon the incurrence of direct labor or equipment hours incurred on behalf of an orchard owner. The Partnership is paid for its services based upon a “time and materials” basis plus a percentage fee or fixed fee based upon each farming contract’s terms. Contract farming includes the regular maintenance of the owners’ orchards as well as harvesting of their nuts. The Partnership provides these services on a continuing basis throughout the year.
(j) Pension Benefit and Intermittent Severance Costs. The actuarial method used for financial accounting purposes is the projected unit credit method.
(k) Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(l) Net Income Per Class A Unit. In 2006 and 2005 net income per Class A Unit is calculated by dividing 100% of Partnership net income by the average number of Class A Units outstanding for the period. In 2004 net income per Class A Unit is calculated by dividing 99% of the Partnership net income by the average number of Class A Units outstanding for the period.
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(m) Accumulated Comprehensive Income. Accumulated comprehensive income represents the change in Partners’ capital from transactions and other events and circumstances arising from non-unitholder sources. Accumulated comprehensive income consists of deferred pension and intermittent severance gains or losses. As of December 31, 2006, our Consolidated Balance Sheet reflected Accumulated Other Comprehensive Loss in the amount of $70,000 in deferred pension and intermittent severance loss.
(n) Recent Accounting Pronouncements. In September 2006, the FASB issued Statement No. 157. This statement provides a single definition of fair value, a framework for measuring fair value, and expanded disclosures concerning fair value. Previously, different definitions of fair value were contained in various accounting pronouncements creating inconsistencies in measurement and disclosures. Statement No. 157 applies under those previously issued pronouncements that prescribe fair value as the relevant measure of value. This pronouncement is effective for fiscal years beginning after November 15, 2007. We do not expect the adoption of Statement No. 157 to have a material impact on our financial position, results of operations, or cash flows.
In September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, (an amendment of FASB Statements No. 87, 88, 106. and 132R (“Statement No. 158”), that requires an employer to recognize in its statement of financial position an asset for a plan’s over funded status or a liability for a plan’s under funded status, measure a plan’s asset and its obligations that determine it funded status as of the end of the employer’s fiscal year (with limited exceptions), and recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. We adopted the recognition provisions of Statement No. 158 in our December 31, 2006 financial statements. The incremental affects of applying Statement No. 158 related to Partnership’s defined pension plan and intermittent severance plan as of December 31, 2006, were as follows:
Increase in pension obligation | | $ | 68,000 | |
Increase in intermittent severance obligation | | 18,000 | |
Decrease in prepaid pension obligation | | 7,000 | |
| | $ | 93,000 | |
The adoption on SFAS No. 158 had no effect on the net income or cash flows of the Partnership.
(3) SEGMENT INFORMATION
The Partnership has two reportable segments, the owned-orchard segment and the farming segment, which are organized on the basis of revenues and assets. The owned-orchard segment derives its revenues from the sale of macadamia nuts grown in orchards owned or leased by the Partnership. The farming segment derives its revenues from the farming of macadamia orchards owned by other growers. It also farms those orchards owned by the Partnership.
Management evaluates the performance of each segment on the basis of operating income. The Partnership accounts for intersegment sales and transfers at cost and such transactions are eliminated in consolidation.
The Partnership’s reportable segments are distinct business enterprises that offer different products or services.
(1) Revenues from the owned-orchard segment are subject to long-term nut purchase contracts and tend to vary from year to year due to changes in the calculated nut price per pound and pounds produced.
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(a) Nut Purchase Contracts. The Partnership is a party to two nut purchase contracts signed June 1, 2006, with an effective date of January 1, 2006, with Mauna Loa which were negotiated in 2006. The two contracts cover all nuts produced by the orchards acquired in June 1986, December 1986, and October 1989. Of the two contracts, one for approximately 15 million pounds expired December 31, 2006 and has a nut purchase price for 2006 of $0.75 per pound wet-in-shell (WIS) at 20% moisture and 30% saleable kernel recovery (SK) to dry-in-shell (DIS). Two other contracts, of approximately 1 million pounds, also expired December 31, 2006, one with a nut purchase price of $0.60 per pound WIS 25% adjusted for trash and the other with a nut purchase price based on a two-year trailing average USDA price at WIS 25%. The last contract for about 5 million pounds expires December 31, 2011 and has a nut purchase price for 2006 of $0.74 per pound WIS at 20% moisture and 30% SK/DIS. The purchase price increases by $0.01 each year except 2008 until it reaches $0.78 per pound in 2011. The purchase contract for the macadamia nut orchard purchased in April 2006 is with Mac Farms and accounts for about 100,000 pounds and has a nut purchase price of $0.98 per pound WIS 20% moisture and 30% SK/DIS.
On December 16, 2004, a new nut purchase contract was signed with Hamakua for the annual delivery of six million WIS pounds, starting January 1, 2007. The contract provides for a minimum price of 75 cents per pounds and a maximum price of 95 cents per pound. The pricing formula includes a fixed component of 85 cents and a second component based on Hamakua’s average selling price for bulk kernel. In February 2007, the Partnership negotiated an amendment to the contract which provides the Partnership an option to have nut-in-shell processed into kernel for a fee in lieu of selling the nuts to Hamakua.
On January 5, 2006, a new nut purchase contract was signed with Island Princess for the annual delivery of approximately two million WIS pounds, effective January 1, 2007. The nut price will be determined every six months by mutual agreement based on prevailing market price for kernel from Hawaii and Australia. The effective price for January — June 2007 is $0.608 at 20% moisture and 30% SK/DIS recovery.
On January 6, 2006, a new nut purchase contract was signed with MacFarms for the annual delivery of between four and one-half million and five and one-half million WIS pounds, effective January 1, 2007. The nut price will be determined every six months by mutual agreement based on prevailing market price for kernel from Hawaii and Australia. The effective price for January — June 2007 is $0.608 at 20% moisture and 30% SK/DIS recovery.
(b) Husking Activities Husking activities for the Keaau and Mauna Kea orchards are performed at Mauna Loa’s Keaau facility. Operation of the Keaau husking facility which had been performed by the Partnership was transferred to Mauna Loa in July of 2006. Payments or reimbursements made to Mauna Loa were $440,000 in 2004, $603,000 in 2005, and $559,000 in 2006 for husking as the contracts agree that the Partnership will deliver husked nuts.
(c) Stabilization Payments. In December 1986, the Partnership acquired a 266-acre orchard that was several years younger than its other orchards. Because of the relative immaturity of the newer orchard, its productivity (and therefore its cash flow) was expected to be correspondingly lower for the first several years than for the other older orchards.
Accordingly, the seller of this orchard (KACI) agreed to make cash stabilization payments to the Partnership for each year through 1993 in which the cash flow (as defined) from this orchard fell short of a target cash flow level of $507,000. Stabilization payments for a given year were limited to the lesser of the amount of the shortfall or a maximum payment amount.
The Partnership accounted for the $1.2 million in stabilization payments (net of general excise tax) as a reduction in the cost basis of this orchard. As a result, the payments will be reflected in the Partnership’s net income ratably through 2019 as a reduction to depreciation for this orchard.
In return, the Partnership is obligated to pay KACI 100% of any year’s cash flow from this orchard in excess of the target cash flow as additional percentage rent until the aggregate amount of additional percentage rent equals 150% of the total amount of stabilization payments previously received.
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Thereafter, the Partnership is obligated to pay KACI 50% of this orchard’s cash flow in excess of the target cash flow as additional incentive rent. Additional rent of $62,000 was due for 2006 and no additional rent was due in 2004, or 2005.
(d) Cash Flow Warranty Payments. In October 1989, the Partnership acquired 1,040 acres of orchards that were several years younger on average than the Partnership’s other orchards. Their productivity (and therefore their cash flow) was expected to be lower for the first several years than for the Partnership’s older orchards.
Accordingly, the sellers of these orchards (subsidiaries of CBCL) agreed to make cash flow warranty payments to the Partnership for each year through 1994 in which the cash flow (as defined) from these orchards fell short of a cash flow target level. Warranty payments for any year were limited to the lesser of the amount of the shortfall or a maximum payment amount.
The Partnership accounted for the $13.8 million received in cash flow warranty payments as reductions in the cost basis of the orchards. As a result, these payments will be reflected in the Partnership’s net income ratably through 2030 as reductions to depreciation for these orchards.
(2) The farming segment’s revenues are based on long-term farming contracts which generate a farming profit based on a percentage of farming cost or based on a fixed fee per acre and tend to be less variable than revenues from the owned-orchard segment.
The following is a summary of each reportable segment’s operating income and the segment’s assets as of and for the period ended December 31, 2006, 2005 and 2004.
Segment Reporting for the Year ended December 31, 2006 (in thousands)
| | Owned | | Contract | | Intersegment | | | |
| | Orchards | | Farming | | Elimination | | Total | |
Revenues | | $ | 13,256 | | $ | 14,533 | | $ | (10,717 | ) | $ | 17,072 | |
Composition of Intersegment revenues | | — | | 10,717 | | — | | 10,717 | |
Operating income (loss) | | 222 | | 663 | | — | | 885 | |
Depreciation expense | | 1,737 | | 216 | | — | | 1,953 | |
Segment assets | | 48,731 | | 5,232 | | — | | 53,963 | |
Expenditures for property and equipment | | 479 | | 30 | | — | | 509 | |
| | | | | | | | | | | | | |
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Segment Reporting for the Year ended December 31, 2005 (in thousands)
| | Owned | | Contract | | Intersegment | | | |
| | Orchards | | Farming | | Elimination | | Total | |
| | | | | | | | | |
Revenues | | $ | 12,684 | | $ | 12,131 | | $ | (7,437 | ) | $ | 17,378 | |
Composition of Intersegment revenues | | — | | 7,437 | | — | | 7,437 | |
Operating income (loss) | | 377 | | 604 | | — | | 981 | |
Depreciation expense | | 1,949 | | 216 | | — | | 2,165 | |
Segment assets | | 52,206 | | 5,840 | | — | | 58,046 | |
Expenditures for property and equipment | | 51 | | 32 | | — | | 83 | |
| | | | | | | | | | | | | |
Segment Reporting for the Year ended December 31, 2004 (in thousands)
| | Owned | | Contract | | Intersegment | | | |
| | Orchards | | Farming | | Elimination | | Total | |
| | | | | | | | | |
Revenues | | $ | 9,414 | | $ | 9,502 | | $ | (5,251 | ) | $ | 13,665 | |
Composition of Intersegment revenues | | — | | 5,251 | | — | | 5,251 | |
Operating income (loss) | | (1,684 | ) | 179 | | — | | (1,505 | ) |
Depreciation expense | | 1,671 | | 900 | | — | | 2,571 | |
Segment assets | | 52,984 | | 5,454 | | — | | 58,438 | |
Expenditures for property and equipment | | 76 | | 96 | | — | | 172 | |
| | | | | | | | | | | | | |
(4) RELATED PARTY TRANSACTIONS
(a) Management Costs and Fee. On January 6, 2005 the Partnership purchased the stock of its managing partner, MLR. As a result of the transaction, MLR’s operations have been included in the Partnership’s consolidated financial statements beginning with the first quarter of 2005. The Partnership Agreement provides the managing general partner reimbursement of administrative costs (which consist primarily of compensation costs, board of directors fees, insurance costs and office expenses) incurred under the agreement as well as a management fee equal to two percent of the Partnership’s operating cash flow (as defined) in 2004. The management fee is eliminated in consolidation in 2005 and 2006. Those reimbursable costs totaled $168,000 in 2004. The managing general partner earned a management fee of $9,000 in 2004.
In addition to a management fee, the managing general partner is entitled, under the existing Partnership Agreement, to receive an annual incentive fee equal to 0.5% of the aggregate fair market value (as defined) of the Class A Units for the preceding calendar year provided that net cash flow (as defined) for the preceding calendar year exceeds specified levels. No incentive fee was earned in 2006, 2005 and 2004.
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(b) Legal Services. The Partnership paid $196,000, $134,000, and $495,000 in legal fees in 2006, 2005 and 2004, respectively. A former Director of the Partnership is a former partner and currently of counsel to one of the law firms used by the Partnership. The Partnership paid said law firm $196,000 in 2006, $32,000 of the $134,000 in 2005 and $495,000 in 2004.
(c) Management Services Contract. The Partnership provides administrative services to D. Buyers Enterprises, LLC (“DBE”) for which it was compensated $104,000 in 2004 and, $102,000 in 2005. DBE owned the stock of the Partnership’s general partner until January 2005.
(d) Office Lease. Since September 2001, the Partnership has leased approximately 4000 square feet of office space in Hilo for its accounting staff from DBE, which was the owner of the General Partner until January 2005. The lease amount was $90,000 in 2005 and 2004.
(5) CASH FLOW PERFORMANCE
Cash flow performance (based on definitions used in the Partnership Agreement) for the past three years is shown below (000’s):
| | 2006 | | 2005 | | 2004 | |
Gross revenues (including interest and other income) | | $ | 17,295 | | $ | 17,534 | | $ | 13,708 | |
Less: | | | | | | | |
Farming costs | | 12,391 | | 12,311 | | 10,951 | |
Administrative costs | | 1,842 | | 1,595 | | 1,643 | |
Extinguishment of management agreement | | - | | 326 | | - | |
Income tax expense | | 100 | | 129 | | 5 | |
Payments of principal and interest | | 639 | | 672 | | 634 | |
Operating cash flow | | 2,323 | | 2,501 | | 475 | |
Less: | | | | | | | |
Management fee | | 0 | | 0 | | 9 | |
Net cash flow (as defined in the Partnership Agreement) | | $ | 2,323 | | $ | 2,501 | | $ | 466 | |
All of net cash flow in 2006 and 2005, and $451,000 in 2004 was allocated to Class A Units. This cash flow measure is used to determine the management fee paid annually to the general partner and forms the basis of distributable cash per unit. No management fee is recorded in 2006 and 2005 as the Partnership purchased the stock of the managing partner MLR in January 2005 and the management fee is eliminated in consolidation.
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(6) LAND, ORCHARDS AND EQUIPMENT
Land, orchards and equipment, stated at cost, consisted of the following at December 31, 2006 and 2005 (000’s):
| | 2006 | | 2005 | |
Land | | $ | 8,255 | | $ | 8,168 | |
Improvements | | 1,850 | | 1,929 | |
Machinery and equipment | | 4,266 | | 4,252 | |
Irrigation well and equipment | | 1,184 | | 1,155 | |
Producing orchards | | 67,631 | | 67,267 | |
Capital leases | | 161 | | 161 | |
Land, orchards and equipment (gross) | | 83,347 | | 82,932 | |
Less accumulated depreciation and amortization | | 36,115 | | 34,210 | |
Land, orchards and equipment (net) | | $ | 47,232 | | $ | 48,722 | |
The Partnership’s interest in trees situated on certain leased macadamia orchard properties are subject to repurchase at the option of the lessors. Such repurchase options grant the lessors the right to purchase all or a portion of these trees after June 30, 2019, at fair market value, as defined in the respective farming lease agreements. If the repurchase options are not exercised prior to expiration of the lease agreements and the lessors do not offer to extend the lease agreements at the then current market lease rates, the lessors are required to repurchase these trees at fair market value at lease expiration. The lessors will be released from their repurchase obligation in the event that the Partnership declines to accept an extension offer from the lessors at fair market lease rates.
(7) SHORT-TERM AND LONG-TERM CREDIT
At December 31, 2006 and 2005, the Partnership’s long-term debt comprises (000’s):
| | 2006 | | 2005 | |
Term debt | | $ | 1,600 | | $ | 2,000 | |
Other | | — | | 34 | |
| | 1,600 | | 2,034 | |
Current portion | | 400 | | 434 | |
| | $ | 1,200 | | $ | 1,600 | |
On May 2, 2000 the Partnership entered into a credit agreement with Pacific Coast Farm Credit Services, ACA (currently American AgCredit Capital Markets) comprised of a $5 million revolving line of credit and a $4 million promissory note.
The line of credit expires on May 1, 2008. Drawings on the line of credit bear interest at the prime lending rate. From and after the first anniversary date, the Partnership is required to pay a facility fee of 0.30% to 0.375% per annum, depending on certain financial ratios on the daily unused portion of credit. The Partnership, at its option, may make prepayments without penalty.
There were no drawings outstanding on the line of credit at December 31, 2006 and drawings outstanding at December 31, 2005 amounted to $2,900,000, with interest at 7.50%.
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At December 31, 2006, the outstanding balance on the promissory note amounted to $1.6 million. The note is scheduled to mature in 2010 and bears interest at rates ranging from 6.37% to 7.50%. Principal payments are due annually on May 2 in the amount of $400,000.
The estimated fair values of the Partnership’s financial instrument has been determined by estimated market price of 6.75% in 2005 and 7.00% in 2006 using a life equal to that remaining on the current financial instrument. The Partnership has not considered the lender fees in determining the estimated fair value.
The estimated fair values of the Partnership’s financial instrument are as follows (000’s):
| | 2006 | | 2005 | |
| | Carrying | | Fair | | Carrying | | Fair | |
| | Amount | | Value | | Amount | | Value | |
Long-term debt | | $ | 1,600 | | $ | 1,312 | | $ | 1,150 | | $ | 1,004 | |
| | | | | | | | | | | | | |
Of the total $1.6 million in 2006 the long-term debt of $680,000 has a fixed interest rate for one and one-third years. Of the total $2.0 million in 2005 the long—term debt of $850,000 has short-term fixed rates that approximate fair value. The $920,000 and $1,150,000 in 2006 and 2005, respectively, have interest rates that are fixed over the remaining life of the debt.
Both the revolving credit loan and the term debt are collateralized by all personal property assets of the Partnership. The credit agreement contains certain restrictions associated with partner distributions, further indebtedness, sales of assets, and maintenance of certain financial minimums. Significant restrictive financial covenants consist of the following:
1. Minimum working capital of $2.5 million.
2. Minimum current ratio of 1.5 to 1.
3. Cumulative cash distributions beginning January 1, 2000 cannot exceed the total of cumulative net cash flow beginning January 1, 2004 plus a base amount of $3.3 million.
4. Minimum tangible net worth of $49.9 million (reduced by the amount of allowed cash distributions over net income).
5. Maximum ratio of funded debt to capitalization of 20%.
6. Minimum debt coverage ratio of 2.5 to 1.
At December 31, 2006, the Partnership’s working capital was $3.9 million and its current ratio 2.54 to 1. The Partnership was in compliance with all covenants of the Credit Agreement at December 31, 2006 and December 31, 2005
Capital and Operating Leases. The Partnership has no capital leases as of December 31, 2006 and had $34,000 in capital leases as of December 31, 2005. The Partnership has operating leases for equipment and operating leases for land. The operating leases for equipment are four to five year leases.
Land Leases. The partnership leases the land underlying 1,948 acres of its orchards under long-term operating leases which expire through dates ending 2045. Operating leases provide for changes in minimum rent based on fair value at certain points in time. Each of the land leases provides for additional lease payments based on USDA-reported macadamia nut price levels. Those contingent lease payments totaled $18,000 in 2004, $19,000 in 2005, and $115,000 in 2006. Total lease rent for all land operating leases was $150,000 in 2004, $147,000 in 2005, and $256,000 in 2006.
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Equipment Operating Leases. The Partnership leases equipment for the farming operation to include vehicles, blower sweepers and harvester. The operating lease cost was $206,000, $249,000 and $285,000 in 2006, 2005 and 2004, respectively.
Contractual obligations for the year ended December 31, 2006 for the Partnership are detailed in the following (000’s):
| | Total | | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | | Remaining | |
Contractual Obligations | | | | | | | | | | | | | | | |
Long-Term Debt and Interest | | $ | 1,792 | | $ | 487 | | $ | 461 | | $ | 435 | | $ | 409 | | $ | — | | $ | — | |
Operating Leases | | 3,453 | | 337 | | 275 | | 191 | | 146 | | 126 | | 2,378 | |
Total | | $ | 5,245 | | $ | 824 | | $ | 736 | | $ | 626 | | $ | 555 | | $ | 126 | | $ | 2,378 | |
(8) INCOME TAXES
The components of income tax expense for the years ended December 31, 2006, 2005 and 2004 were as follows (000’s):
| | 2006 | | 2005 | | 2004 | |
Currently payable | | $ | 119 | | $ | 109 | | $ | 12 | |
Deferred | | (19 | ) | 20 | | (7 | ) |
| | $ | 100 | | $ | 129 | | $ | 5 | |
The provision for income taxes equates to the 3.5% federal tax rate applied to gross income (net revenues less cost of goods sold) for the years ended December 31, 2006, 2005 and 2004.
The components of the net deferred tax liability reported on the balance sheet as of December 31, 2006 and 2005 are as follows (000’s):
| | 2006 | | 2005 | |
Deferred tax liabilities: | | | | | |
Financial statement bases of land, orchards, inventory and equipment is greater than tax bases | | $ | 719 | | $ | 717 | |
Financial statement bases of capitalized leases, long- term debt on capitalized leases and interest expense on capitalized leases is greater than tax bases | | (4 | ) | (4 | ) |
Excess of tax depreciation over financial statement depreciation | | 493 | | 514 | |
| | $ | 1,208 | | $ | 1,227 | |
(9) PENSION PLAN
The Company established a defined benefit pension plan in conjunction with the acquisition of farming operations on May 1, 2000. The plan covers employees that are members of a union bargaining unit. The projected benefit obligation includes the obligation for the employees of their previous employer that became Company employees.
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The following reconciles the changes in the pension benefit obligation and plan assets for the years ended December 31, 2006, 2005, 2004 to the funded status of the plan and the amounts recognized in the balance sheets at December 31, 2006, 2005, 2004 (000’s).
| | 2006 | | 2005 | | 2004 | |
Change in projected benefit obligation: | | | | | | | |
Projected benefit obligation at beginning of year | | $ | 518 | | $ | 411 | | $ | 357 | |
Service cost | | 59 | | 57 | | 56 | |
Interest cost | | 28 | | 23 | | 21 | |
Actuarial (gain) loss | | (80 | ) | 35 | | (12 | ) |
Benefits paid | | (35 | ) | (8 | ) | (11 | ) |
| | | | | | | |
Projected benefit obligation at end of year | | 490 | | 518 | | 411 | |
Change in plan assets: | | | | | | | |
Fair value of plan assets at beginning of year | | 258 | | 205 | | 169 | |
Actual return on plan assets | | 31 | | 10 | | 3 | |
Employer contribution | | 168 | | 51 | | 44 | |
Benefits paid | | (35 | ) | (8 | ) | (11 | ) |
| | | | | | | |
Fair value of plan assets at end of year | | 422 | | 258 | | 205 | |
Funded status | | (68 | ) | (261 | ) | (206 | ) |
Unrecognized prior service cost | | — | | 62 | | 69 | |
Unrecognized net actuarial loss (gain) | | — | | 89 | | 44 | |
| | | | | | | |
Amount recognized in balance sheet | | $ | (68 | ) | $ | (110 | ) | $ | (93 | ) |
Amounts recognized in the balance sheets consist of: | | | | | | | |
Accrued pension liability (current) | | (68 | ) | (152 | ) | (103 | ) |
Intangible asset | | — | | 42 | | 10 | |
| | | | | | | |
Net amount recognized | | $ | (68 | ) | $ | (110 | ) | $ | (93 | ) |
The amounts recognized in accumulated other comprehensive loss at December 31, 2006 was as follows:
| | 2006 | |
Net actuarial gain | | $ | (4 | ) |
Prior service cost | | 56 | |
| | $ | 52 | |
The estimated net actuarial gain and prior service cost that will be amortized from accumulated other comprehensive loss into net periodic benefit cost for the year ending December 31, 2007 is $7,000.
Prior to the adoption of Statement No. 158, the plan was over funded by $7,000.
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The computation of the prepaid pension obligation at December 31, 2006 and required minimum liability and additional minimum liability at December 31, 2005 are shown below:
| | 2006 | | 2005 | |
Accumulated benefit obligation | | $ | (415 | ) | $ | (410 | ) |
Fair value of plan assets | | 422 | | 258 | |
Required prepaid pension obligation (minimum liability) | | $ | 7 | | $ | (152 | ) |
Liability recognized for accrued benefit costs | | — | | 110 | |
Prepaid pension obligation (additional minimum liability) | | $ | 7 | | $ | (42 | ) |
The components of net periodic pension cost for the years ended December 31, 2006, December 31, 2005 and December 31, 2004 were as follows:
| | 2006 | | 2005 | | 2004 | |
Service cost | | $ | 59 | | $ | 57 | | $ | 56 | |
Interest cost | | 28 | | 23 | | 21 | |
Expected return on plan assets | | (23 | ) | (19 | ) | (15 | ) |
Amortization of net actuarial loss and prior service cost | | 9 | | 7 | | 7 | |
Net periodic pension cost | | $ | 73 | | $ | 68 | | $ | 69 | |
The weighted average actuarial assumptions used to determine the pension benefit obligations at December 31, 2006, 2005 and 2004 and the net periodic pension cost for the years then ended are as follows:
| | 2006 | | 2005 | | 2004 | |
Pension benefit obligation: | | | | | | | |
Discount rate | | 5.90 | % | 5.50 | % | 5.75 | % |
Compensation increases | | 2.00 | % | 2.00 | % | 2.00 | % |
Net periodic pension cost: | | | | | | | |
Discount rate | | 5.90 | % | 5.75 | % | 6.00 | % |
Compensation increases | | 2.00 | % | 2.00 | % | 2.00 | % |
Return on assets for the year | | 8.50 | % | 8.50 | % | 8.50 | % |
The expected long-term rate of return on plan assets was based primarily on historical returns as adjusted for the plan’s current investment allocation strategy.
The Partnership employs an investment strategy whereby the assets in our portfolio are evaluated to maintain the desired target asset mix. The funds are invested in stock mutual funds, fixed income mutual funds and money market funds. Evaluation of the actual asset mix is evaluated on a quarterly basis and adjusted if required to maintain the desired target mix. Therefore, the actual asset allocation does not vary significantly from the targeted asset allocation.
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The plan’s asset allocation percentages at December 31, 2006 and 2005 were as follows:
| | 2006 | | 2005 | |
Pooled fixed income funds | | 23.00 | % | 21.00 | % |
Money market funds | | 10.00 | % | 16.00 | % |
Stock mutual funds | | 67.00 | % | 63.00 | % |
Total | | 100.00 | % | 100.00 | % |
The Partnership expects to contribute approximately $100,000 to the plan in 2007.
The following pension benefit payments, which reflect expected future services, as appropriate, are expected to be paid:
Years Ending December 31, | | | |
2007 | | $ | 8,372 | |
2008 | | 11,073 | |
2009 | | 12,168 | |
2010 | | 17,546 | |
2011 | | 17,201 | |
2012-2016 | | 145,551 | |
| | | | |
(10) UNION BARGAINING UNIT INTERMITTENT EMPLOYEES SEVERANCE PLAN
The Partnership provides a severance plan, since the acquisition of the farming operations on May 1, 2000, that covers union members that are not part of the defined benefit pension plan and are classified as intermittent employees per the bargaining union agreement. The severance plan provides for the payment of 8 days of pay for each year worked (upon the completion of 3 years of continuous serve) if the employee becomes physically or mentally incapacitated, is part of a Partnership mass layoff, or reaches the age of 60 and is terminated or voluntarily terminates. The Partnership accounts for the benefit by determining the present value of the future benefits based upon an actuarial analysis. The projected benefit obligation includes the obligation for the employees of their previous employer that became Company employees.
The following reconciles the changes in the severance benefit obligation and plan assets for the years ended December 31, 2006, 2005, 2004 to the funded status of the plan and the amounts recognized in the balance sheets at December 31, 2006, 2005, 2004 (000’s).
Change in Severance Obligation | | 2006 | | 2005 | | 2004 | |
| | | | | | | |
Severance obligation at beginning of year | | $ | 376 | | $ | 384 | | $ | 363 | |
Service cost | | 23 | | 24 | | 24 | |
Interest cost | | 20 | | 21 | | 21 | |
Actuarial (gain) loss | | (36 | ) | (14 | ) | 9 | |
Benefits paid | | (48 | ) | (39 | ) | (33 | ) |
Severance obligation at end of year | | $ | 335 | | $ | 376 | | $ | 384 | |
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Change in Plan Assets | | 2006 | | 2005 | | 2004 | |
| | | | | | | |
Fair value of plan assets at of year | | $ | 0 | | $ | 0 | | $ | 0 | |
Employer contributions | | 48 | | 39 | | 33 | |
Benefits paid | | (48 | ) | (39 | ) | (33 | ) |
Fair value of plan assets at end of year | | $ | 0 | | $ | 0 | | $ | 0 | |
Funded Status | | | | | | | |
| | | | | | | |
Benefit obligation | | ($335 | ) | ($376 | ) | ($384 | ) |
Unrecognized net actuarial loss | | 18 | | 55 | | 72 | |
Prepaid (accrued) benefit cost | | ($317 | ) | ($321 | ) | ($312 | ) |
As of December 31, 2006, the accrued benefit cost of $317,000 was recorded in accrued liabilities - current portion $27,000, representing amounts to be paid in 2007, non-current liabilities $290,000 and the unrecognized actuarial gain of $18,000 was recorded in accumulated other comprehensive income. On adoption of SFAS 158 the Partnership recorded an adjustment to other comprehensive income of $18,000 for the under funded status of the severance benefit plan at December 31, 2006.
Components of Net Periodic Cost | | | | | | | |
| | | | | | | |
Service cost | | $ | 23 | | $ | 24 | | $ | 24 | |
Interest cost | | 20 | | 21 | | 21 | |
Recognized net (gain) loss | | 1 | | 3 | | 2 | |
Net periodic cost (credit) | | $ | 44 | | $ | 48 | | $ | 47 | |
Reconciliation of Severance Liability | | | | | | | |
| | | | | | | |
(a) Accrued severance beginning of year | | ($321 | ) | ($312 | ) | ($298 | ) |
(b) Contributions during fiscal year | | 48 | | 39 | | 33 | |
(c) Net periodic pension cost | | (44 | ) | (48 | ) | (47 | ) |
(d) Accrued severance cost at end of year | | ($317 | ) | ($321 | ) | ($312 | ) |
Weighted Average Assumptions | | | | | | | |
| | | | | | | |
Discount rate | | 5.87 | % | 5.78 | % | 5.74 | % |
Expected return on plan assets | | 0.00 | % | 0.00 | % | 0.00 | % |
Rate of compensation increase | | 1.65 | % | 1.65 | % | 1.65 | % |
As discussed in Note 14, the Partnership initially recorded its liability for the severance plan in 2006 following its determination that such obligation had not properly been accounted for as part of prior year purchase price allocation. The Partnership has provided disclosures for those years for comparative purposes. As disclosed above, benefit costs in 2004 and 2005 did not differ materially from contribution amounts expensed in such years.
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(11) EMPLOYEES SAVINGS PLAN
The Partnership sponsors a 401(k) plan, which allows participating employees to contribute up to 25% of their salary, subject to annual limits. The plan provides for the Partnership to make matching contributions up to 50% of the first 4% of salary deferred by employees. During the years ended December 31, 2006, 2005 and 2004, Partnership matching contributions were $32,000, $29,000 and $27,000, respectively.
(12) SALARIED DEFINED CONTRIBUTION PLAN
The Partnership sponsors a defined contribution plan for its non-bargaining unit employees. This plan provides for the Partnership to make annual contributions to the 401(k) plan on behalf of participating employees. Contributions are based upon age, length of service, and other criteria on an annual basis, subject to annual limits. During the years ended December 31, 2006, 2005, and 2004 Partnership contributions were $106,000, $96,000 and $98,000, respectively.
(13) QUARTERLY OPERATING RESULTS (Unaudited)
The following chart summarizes unaudited quarterly operating results for the years ended December 31, 2006, 2005, and 2004 (000’s omitted except per unit data):
| | | | Gross Income | | Net Income | | Net Income (Loss) | |
| | Revenues | | (Loss) | | (Loss) | | per Class A Unit | |
2006 | | | | | | | | | |
1st Quarter | | $ | 1,523 | | $ | 272 | | $ | (100 | ) | $ | (0.01 | ) |
2nd Quarter | | 1,288 | | 444 | | (27 | ) | 0.00 | |
3rd Quarter | | 5,487 | | 437 | | 85 | | 0.01 | |
4th Quarter | | 8,774 | | 1,574 | | 846 | | 0.11 | |
| | | | | | | | | |
2005 | | | | | | | | | |
1st Quarter | | $ | 3,056 | | $ | 627 | | $ | (27 | ) | $ | 0.00 | |
2nd Quarter | | 1,501 | | 218 | | 26 | | 0.00 | |
3rd Quarter | | 3,737 | | 608 | | 118 | | 0.02 | |
4th Quarter | | 9,084 | | 1,449 | | 654 | | 0.09 | |
| | | | | | | | | |
2004 | | | | | | | | | |
1st Quarter | | $ | 2,052 | | $ | 208 | | $ | (95 | ) | $ | (0.01 | ) |
2nd Quarter | | 787 | | 140 | | (161 | ) | (0.02 | ) |
3rd Quarter | | 3,275 | | (67 | ) | (817 | ) | (0.11 | ) |
4th Quarter | | 7,551 | | (143 | ) | (576 | ) | (0.08 | ) |
(14) CBCL ACQUISITION ADJUSTMENTS
During 2006, the Partnership concluded it should have recorded certain employee severance and vacation benefits in connection with its allocation of the purchase price of the macadamia farming operation from CBCL on May 1, 2000. The Partnership has re-evaluated and revised the original purchase price allocation and accordingly has recorded in 2006, goodwill of $306,000 and a corresponding liability for the fair value of such benefits as of the acquisition date. The changes in the liability for the period from May 1, 2000 to December 31, 2005 of $159,000 have been included in the 2006 Consolidated Statement of Income. Prior year financial statements were not materially impacted by this matter.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On March 23, 2007, the Audit Committee of ML Macadamia Orchards, L. P. (“Partnership”) recommended and the Board of Directors approved the appointment of Accuity LLP (“Accuity”) as the independent registered public accounting firm for the Partnership, effective upon the completion of the services of PricewaterhouseCoopers LLP (“PwC”) related to the Partnership’s financial statements as of and for the year ended December 31, 2006 and the Partnership’s Form 10-K for the year ended December 31, 2006. Such procedures were completed on April 16, 2007 and PwC’s dismissal became effective on such date.
PwC’s reports on the Partnership’s financial statements as of and for the fiscal years ended December 31, 2005, and 2006 did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or accounting principle.
During the fiscal years ended December 31, 2005, and 2006 and through April 16, 2007, there were no disagreements with PwC on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of PwC, would have caused PwC to make a reference thereto in connection with its reports on the financial statements for such years.
During the fiscal years ended December 31, 2005 and 2006 and through April 16, 2007, there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
(a) As of the end of the period covered by this report (the “Evaluation Date”), the Partnership carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Partnership’s disclosure controls and procedures were effective. The Partnership’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Partnership in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the applicable SEC’s rules and forms, and (ii) accumulated and communicated to the Partnership’s management, including the Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure.
ITEM 9B. OTHER EVENTS
None
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The Partnership presently has no officers or directors. Instead, the officers and directors of the Managing Partner perform all management functions for the Partnership. Each director of the Managing Partner is appointed for a term of one year and until his successor is duly appointed and qualified. Each officer of the Managing Partner is elected by the Board of Directors of the Managing Partner and is subject to removal by that board at any time.
A. Identification of Directors
John K. Kai. 41 years old; director of the Managing Partner since June 2004; member of the Audit, Nominating, Compensation and Corporate Governance Committees since March 2005; president of Pinnacle Investment Group, LLC; president of Pinnacle Media Group, LLC; branch manager and investment representative of Commonwealth Financial Network.
James S. Kendrick. 59 years old; director of Managing Partner since June 2005; Executive at Mauna Loa Macadamia Nut Corporation from 1991 to 1998.
E. Alan Kennett. 63 years old; director of Managing Partner since June 2005; member of the Audit, Nominating, Compensation and Corporate Governance Committees of Managing Partner: President and CEO of Gay and Robinson Sugar Company, Inc.
Jeffrey M. Kissel. 57 years old; director of Managing Partner since June 2005; member of the Audit Committee since June 2005 and chairman since March 2006; member of the Nominating, compensation and Corporate Governance Committees of the Managing Partner: President and CEO of Safe Renewables Corporation: from 2003 to 2005 was CFO for Earth Tech, Inc.; held various positions during 1997 until 2003 with URS Corporation including vice president of budgeting and planning and CFO.
David McClain. 60 years old; director since September 2000 and member of the Audit, Nominating, Compensation and Corporate Governance Committees of Managing Partner; President of the 10-campus University of Hawai’i System (UH) since March 2006; served as Interim President from August 2004 and Vice President of Academic Affairs of UH from July 2003.
Dennis J. Simonis. 50 years old; director of Managing Partner since August 2002; President and Chief Operating Officer of Managing Partner from August 2001 until December 2004, Chief Financial Officer from June 2001 to August 2001, and Chief Executive Officer since December 2004. Chief Financial Officer of DBE from August 2001, and President of DBE from October, 2005.
B. Identification of Executive Officers of the Managing Partner
Dennis J. Simonis. 50 years old; president of Managing Partner since August 2001; and chief executive officer since December 2004; president of D. Buyers Enterprises, LLC. Formerly executive vice president and chief operating officer of Mauna Loa.
Randolph H. Cabral. 54 years old; senior vice president and orchard manager of Managing Partner since May 2000. Formerly senior vice president and orchard manager of KACI.
Wayne W. Roumagoux. 60 years old; chief financial officer of Managing Partner since August 2001; controller of DBE.
C. Identification of Certain Significant Employees
Not applicable
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D. Family Relationships
Not applicable
E. Business Experience of Current Directors and Executive Officers
Current Directors of the Managing Partner.
John K. Kai. Mr. Kai has served as a director since June 2004. Mr. Kai is president of Pinnacle Investment Group, LLC and Pinnacle Media Group, LLC, and branch manager and investment representative of Commonwealth Financial Network. Mr. Kai was the resident manager of the Hilo office of Paine Webber, Inc. and was with Merrill Lynch prior to Paine Webber, Inc. Mr. Kai is a graduate of Sacramento City College and attended the University of the Pacific from 1983 to 1985. Mr. Kai served on the Board of Regents of the University of Hawaii and was a director of the Research Corporation of the University of Hawaii, the Hawaii Island Portuguese Chamber of Commerce and has served on several nonprofit boards in Hawaii. He resides in Hilo, Hawaii.
James S. Kendrick. Mr. Kendrick has over 36 years of experience in the food processing industry and is currently a consultant to various food companies. Mr. Kendrick held executive positions at Mauna Loa Macadamia Nut Corporation from 1991 to 1998, including Executive Vice President of Operations and President. Between 1978 and 1983, he was the Manager of the Honolulu Dole Pineapple cannery. Mr. Kendrick worked for Kraft Foods as an engineer. He is a graduate of Northern Illinois University and Cornell’s Executive Development Program. He has been active in the Hawaii Macadamia Nut Association and currently resides in Naples, Florida.
E. Alan Kennett. Mr. Kennett has worked in various executive capacities in the agriculture sector for over 40 years and currently is the President and Chief Executive Officer of Gay and Robinson Sugar Company, Inc. on Kauai, Hawaii. He held various positions in the Hawaii sugar industry with C. Brewer and Co., Ltd. Between 1976 and 1994. Prior to 1976, Mr. Kennett managed sugar operations in Africa, the United Kingdom and the West Indies. He is a graduate of Walton Technical College and the Liverpool College of Technology and Completed Cornell’s Executive Development Program. Mr. Kennett has been active in numerous Hawaii non-profit organizations and written several technical papers. He currently resides in Kaumakani, Kauai, Hawaii.
Jeffrey M. Kissel. Mr. Kissel is the President and Chief Executive Officer of Safe Renewables Corporation, an established marketer and producer of “Biodiesel” or “B100”, a substitute for conventional petroleum diesel, located in Houston, Texas. He was the Chief Financial Officer for Earth Tech Inc. from 2003 to 2005, a $1.5 billion global engineering and construction company specializing in water treatment, and has held various financial executive positions in publicly traded companies since 1974. From 1997 to 2003, Mr. Kissel was employed by URS Corporation as a vice president of planning and budgeting, and served as Chief Financial Officer for several URS Corporation divisions. Mr. Kissel was President and principal shareholder of Hawaiian Communications between 1992 and 1997. Prior to 1992 he worked with Tesoro, AON and Challenger Petroleum in the energy industry. He has a B.B.A. and M.B.A. from the University of Hawaii and currently resides in California and Hawaii.
David McClain. Dr. McClain was appointed as the President of the 10-campus University of Hawai’i System effective March 2006, having served as Interim President from August 15, 2004, and Vice President for Academic Affairs of the UH System from July 1, 2003. From 2000 until 2003 he was the Dean of the College of Business Administration at the University of Hawaii at Mnoa, as well as First Hawaiian Bank Distinguished Professor of Leadership and Management; he was also Interim Vice President for Research of the University of Hawaii System from February to September 2003. Dr. McClain joined the University of Hawaii at Manoa in 1991 as the Henry A. Walker, Jr. Distinguished Professor of Business Enterprise and Professor of Financial Economics and Institutions. Dr. McClain is a director of First Insurance Company, and serves as a member of several nonprofit boards in Hawaii. He
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earned a Ph.D. in Economics from the Massachusetts Institute of Technology in 1974 and a BA in Economics and Mathematics from the University of Kansas in 1968. Dr. McClain has taught at Massachusetts Institute of Technology’s Sloan School of Management and at Boston University, where he chaired the Department of Finance and Economics. He also served as Senior Staff Economist, Council of Economic Advisors to President Jimmy Carter, and headed international economic information services for Data Resources, Inc. He resides in Honolulu, Hawaii.
Dennis J. Simonis. Mr. Simonis has served as a director since August 2002, president of the Managing Partner since August 2001, chief executive officer since December 2004, and was formerly the executive vice president and chief financial officer. From 1993 to 2001, Mr. Simonis served in various capacities at Mauna Loa, including executive vice president and chief operating officer. He serves as an officer of the Hawaii Macadamia Nut Association and has served on several nonprofit boards in Hawaii. He served from 1985-1993 as a vice president of Theo H. Davies & Co., Ltd. and worked as a senior auditor for Price Waterhouse between 1979 and 1985. Mr. Simonis graduated magna cum laude with a B.S. in Accounting from Carroll College in Waukesha, Wisconsin and earned his C.P.A. certificate in 1983. He resides in Hilo, Hawaii.
Executive Officers Who Do Not Serve as Directors.
Randolph H. Cabral. Mr. Cabral has served as senior vice president and orchard manager of the Managing Partner since May 2000. Mr. Cabral was previously employed at Ka’u Agribusiness Company, Inc., from 1989 until the Partnership’s acquisition of Ka’u Agribusiness’ macadamia business in 2000. He served as senior vice president from 1998 to 2000, as vice president from 1996 to 1998, and as orchard manager from 1989. From 1983 to 1989, Mr. Cabral served as orchard manager with Mauna Loa Macadamia Nut Corporation. Mr. Cabral has an AS in General Agriculture from the University of Hawaii. He resides in Hilo, Hawaii.
Wayne W. Roumagoux. Mr. Roumagoux has served as chief financial officer of the Managing Partner since August 2001. Mr. Roumagoux has been controller of the Partnership since May 2001. From 1989 to 2001 Mr. Roumagoux was controller for Inlet Fisheries, Inc. He was controller for NBI, Inc’s Alaska operation and for Sheffield Hotels, Inc. during the late 1970’s and 1980’s. Mr. Roumagoux worked as a senior auditor for KPMG between 1976 and 1978. He has a M.S. in accounting from Eastern Washington State University in Cheney, Washington. He resides in Volcano, Hawaii.
Executive Session. The executive session, a meeting of non-management directors, is presided over by David McClain who can be communicated with by e-mail at dmcclain46@aol.com.
Audit Committee. Effective March 2, 2006, Jeffrey Kissel was appointed chairman of the Audit Committee. At the May 5, 2006 Board of Directors meeting Alan Kennett was appointed a member of the Audit Committee. At the June 12, 2006 Board of Directors meeting Mr. James Case resigned as a Director and Mr. Russell Case was appointed a Director. At the November 30, 2006 Board of Directors meeting Mr. Russell Case resigned as a Director. The members of the Audit Committee and Corporate Governance Committee are Dr. David McClain, Jeffrey Kissel, Alan Kennett and John Kai. The Board of Directors has determined that each member of the Audit Committee is independent in accordance with SEC Rule 10-A-3 and New York Stock Exchange independence standards, and each member is financially literate, and Mr. Kissel qualifies as a financial expert. The Partnership has adopted standards for independence and said standards are in the Partnership’s Corporate Governance Guidelines at the Partnership’s website www.mlmacadamia.com. The Audit Committee met four times in 2006 to review and approve accounting, internal control and reporting issues, related party transactions and other matters that could involve a conflict of interest. All members were in attendance at each quarterly meeting.
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The Audit Committee has discussed with the independent registered public accountants, PricewaterhouseCoopers (“PwC”), the matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees), as may be modified or supplemented, as amended and as required by S-X Rule 2-07.
The Audit Committee has discussed with PwC, their independence and whether the Pwc’s provision on non-audit related services is compatible with maintaining the PwC’s independence from management and the Partnership and has received from PwC the written disclosures and the letter required by the Independence Standards Board Standard No. 1, as may be modified or supplemented, including written materials addressing the internal quality control procedures of PwC.
During the fiscal 2006, the Audit Committee had four meetings to discuss amongst other things the quarterly results of the Partnership. The meetings were conducted so as to encourage communication among the members of the Audit Committee, management, and the Partnership’s independent auditors. Among other things, the Audit Committee discusses with the Partnership’s independent auditors the overall scope and plans for their respective audits, and the results of such audits. The Audit Committee separately met with PricewaterhouseCoopers representatives, with and without management present.
The Audit Committee has reviewed and discussed the audited financial statements for the year ended December 31, 2006 with management and the independent auditors of the Partnership. Based upon the above-mentions reviews and discussions the Audit Committee has recommended to the Board that the audited financial statements be included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2006.
Audit Committee Charter. The Audit Committee Charter is available by request or on the Partnership’s website at www.mlmacadamia.com .
Audit Committee Pre-Approval Policy. The Audit Committee Pre-Approval Policy is available by request or on the Partnership’s website.
Ethics. The “Code of Business Conduct and Ethics” is available by request or on the Partnership’s website.
Corporate Governance Guidelines. The Corporate Governance Guidelines are available by request or on the Partnership’s website.
Nominating Committee. The Partnership formed a Nominating Committee and the charter was adopted in May 2005. The members of the Nominating Committee are independent under Section 15A(a) of the Exchange Act. Unit Holders may recommend candidates for the Board of Directors by submitting such recommendation in writing to Partnership. The minimum qualifications required for a Director of the Partnership, whether submitted by the Nominating Committee or a Unit Holder, are (1) professional qualification, (2) number of other boards on which the candidate serves, (3) other business and professional commitments, (4) the need of the Board of Directors for having certain skills and experience, and (5) the diversity of the directors then comprising the Board. The Nominating Committee shall evaluate a candidate based upon the qualifications described above, based upon a written resume and then the CEO and Nominating Committee will interview the candidate. The Nominating Committee shall determine whether or not to recommend the candidate to the Board of Directors. The Nominating Committee Charter is available by request or on the Partnership’s website.
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Compensation Committee. The Partnership formed a Compensation Committee and the charter was adopted in May 2005. The members of the Compensation Committee are independent under Section 15A(a) of the Exchange Act. The Compensation Committee Charter is available by request or on the Partnership’s website.
F. Section 16 Disclosure
Under Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), each director and certain officers of ML Resources, Inc., the managing general partner of Registrant (a “Reporting Person”), are required to report their ownership and changes in ownership of Class A Depositary Units to the Securities and Exchange commission, the New York Stock Exchange and Registrant. Based on reporting forms submitted to Registrant, no Reporting Person has failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during 2006.
ITEM 11. EXECUTIVE COMPENSATION
A. Summary Compensation Table
The Partnership is managed by the managing general partner. All costs of managing the Partnership are reimbursed by the Partnership, as provided in Section 4.5 of the Partnership Agreement. The following table reflects the aggregate compensation for services in all capacities paid by the Managing Partner to its executive officers for the years ended December 31, 2006, 2005 and, 2004. There were no long- term compensation awards, stock awards, option awards, or other payouts during those years.
Overview of Compensation Philosophy and Programs
Our executive compensation programs are designed and administered by the Board of Directors of the Partnership. Through the execution of its charter, our Compensation Committee recommends, to the Board of Director, all of the forms of compensation for our named executive officers, including base salary, bonus plan and defined contribution plan and related goals.
The executive bonus plan is performance based. The program provides for incentives based upon net income and cash flow (as defined by the Partnership Agreement), which are approved by the Board of Directors based upon operating plan for the year, with guideline rates established between 20% and 35%. The bonus is limited to a maximum of 200% of the guideline not to exceed 15% of Partnership’s cash flow. The bonus compensation level and related payment requires Board of Director approval.
The defined contribution plan is provided in lieu of a retirement plan and is based upon standard guidelines for all employees including executives. The defined contribution and the related payment, requires annual approval by the Board of Directors.
The Partnership is committed to maximizing unit holder value, and dedicated to attracting and retaining the necessary talent to accomplish this objective. The compensation philosophy is designed to directly align the interests of unit holders and employees through compensation programs that will reward employees for performance that builds long-term unit holder value.
Name and Principal Position | | | | Annual Compensation | | | | | | | |
| | | | | | | | Board | | Defined | | Other | | | |
| | Year | | Salary | | Bonus | | Fees | | Contribution | | (a) | | Total | |
Dennis J. Simonis | | | | | | | | | | | | | | | |
President and chief | | 2006 | | 237,000 | | 125,600 | | 21,000 | | 12,100 | | 4,900 | | 400,600 | |
executive officer | | 2005 | | 225,000 | | 134,800 | | 19,000 | | 11,500 | | 4,500 | | 394,800 | |
| | 2004 | | 171,000 | | - | | 15,750 | | 12,300 | | 3,700 | | 202,750 | |
| | | | | | | | | | | | | | | |
Randolph H. Cabral | | 2006 | | 132,000 | | 50,000 | | - | | 16,800 | | 4,200 | | 203,000 | |
Senior vice president | | 2005 | | 125,000 | | 53,500 | | - | | 13,400 | | 4,200 | | 196,100 | |
| | 2004 | | 111,000 | | - | | - | | 12,600 | | 4,400 | | 128,000 | |
| | | | | | | | | | | | | | | |
Wayne Roumagoux | | 2006 | | 116,000 | | 35,100 | | - | | 7,500 | | 3,900 | | 162,500 | |
Chief financial officer | | 2005 | | 110,000 | | 37,700 | | - | | 5,200 | | 1,800 | | 154,700 | |
| | 2004 | | 92,000 | | - | | - | | 5,200 | | - | | 97,200 | |
(a) The amount in this column is the cost for an automobile provided by the Partnership.
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B. No Option, SAR, Long-term Incentive or Pension Plans
Neither the Managing Partner nor the Partnership presently has option plans, SAR plans, or long-term incentive plans. All salaried employees participate in defined contribution plan and other benefit plans administered by the Partnership. The officers of the Managing Partner are employees of the Partnership, which does not have a defined benefit plan for non-bargaining employees. As such, neither the Managing Partner nor the Partnership are responsible for making any payments on the retirement of any of its present executive officers.
C. No Employment Contracts or Termination Agreements
The Managing Partner does not have any employment or severance agreements with any of its present executive officers. The president of the Partnership has an agreement, which provides for twelve months of severance pay in the event of termination without just cause.
D. Compensation of Executive Officers
Executive compensation is reviewed and determined by the Compensation Committee and recommended to the Board of Directors which has approval responsibility. Mr. Simonis has served as its chief executive officer and president since December 2004, president since August 2001 and chief financial officer from May 2001 until August of 2001; Mr. Cabral, who has served as senior vice president and orchard manager since May 2000 and Mr. Roumagoux, who has served as chief financial officer since August of 2001. These officers’ salary and guideline bonus percentage are administered under the salary policies established and approved by the Board. Any bonus payments are approved by the Managing Partner’s Board of Directors annually, based on the overall performance of the Partnership as evidenced by its net income and cash flow for the year. Performance in both categories is measured relative to the original Partnership operating budget approved by the Managing Partner’s Board of Directors at the beginning of each year.
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E. Director Compensation
Directors of the Managing Partner presently receive a quarterly retainer of $3,750 and a meeting fee of $1,000 per meeting. Members of the Managing Partner’s Audit and Conflicts Committee receive a meeting fee of $1,000 per meeting with the chairman of the Audit Committee receiving an additional $750 per meeting. There are no other agreements or arrangements, including no stock or stock option plans, between the Managing Partner and its directors.
Name of Director | | | | Annual Compensation | | | | | |
| | Year | | Fees | | Meeting | | Audit
Chair | | Total | |
John K. Kai | | 2006 | | 15,000 | | 10,000 | | | | 25,000 | |
James S. Kendrick | | 2006 | | 15,000 | | 6,000 | | | | 21,000 | |
E. Alan Kennett | | 2006 | | 15,000 | | 8,000 | | | | 23,000 | |
Jeffrey M. Kissel (Chairman) | | 2006 | | 15,000 | | 10,000 | | 1,500 | | 26,500 | |
David McClain | | 2006 | | 15,000 | | 10,000 | | 1,500 | | 26,500 | |
Dennis J. Simonis | | 2006 | | 15,000 | | 6,000 | | | | 21,000 | |
James Case* | | 2006 | | 7,500 | | 4,000 | | | | 11,500 | |
Russell Case** | | 2006 | | 7,500 | | 1,000 | | | | 8,500 | |
* James Case resigned as a Director effective June 12, 2006.
** Russell Case resigned as a Director effective November 30, 2006.
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F. Stock Performance Chart
The following chart compares the Partnership’s total return to (i) the Russell 2000 (a small business index) and (ii) a peer group index composed of publicly traded limited partnerships with either similar capitalization or in commodity based markets (other than gas and oil) or both.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED UNIT HOLDER MATTERS
As of December 31, 2006, and subsequent to that date to the date of this report, (i) two persons (including any “group” as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) is known by the Partnership or the Managing Partner to be the beneficial owner of more than 5% of the Class A Units; (ii) the Managing Partner did not own any Class A Units; and (iii) no director or executive officer of the Managing Partner owned more than 1% of the Class A Units.
The table below sets forth certain information as to the Class A Units beneficially owned by the beneficial owner of more than 5% of the Class A Units as of December 31, 2006.
| | | | Percent | |
| | Class A | | of | |
Name of | | Units | | Class A | |
Beneficial Owner | | Owned | | Units | |
Ebrahimi Family Group | | 686,400 | | 9.2 | % |
Berggruen Holdings North America, Ltd | | 380,000 | | 5.1 | % |
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The table below sets forth certain information as to the Class A Units beneficially owned by the directors of the Managing Partner, and all directors and executive officers of the Managing Partner as a group, as of December 31, 2006.
| | | | Percent | |
| | Class A | | of | |
Name of | | Units | | Class A | |
Beneficial Owner | | Owned | | Units | |
Randolph H. Cabral | | 100 | | * | |
John K. Kai | | 100 | | * | |
James S. Kendrick | | 1,500 | | * | |
E. Alan Kennett | | — | | * | |
Jeffrey M. Kissel | | 2,020 | | * | |
David McClain | | — | | * | |
Dennis J. Simonis | | — | | * | |
Wayne W. Roumagoux | | — | | * | |
All directors and executive officers as a group (8 persons) | | 3,720 | | 0.05 | % |
*Less than 1%
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
1. General
The Managing Partner makes all decisions relating to the management of the Partnership. The Managing Partner, as such, has the duty to act in good faith and to manage the Partnership in a manner that is fair and reasonable to all unit holders. CBCL owned all of the capital stock of the Managing Partner until August 1, 2001, at which point the stock was sold to D. Buyers Enterprises, LLC (DBE). The Partnership purchased the Managing Partner interest from DBE in January, 2005.
2. Farming Leases
At the time of the Partnership’s acquisition of the interests in the October 1989 Orchards, MLO assigned to the Partnership all of MLO’s rights and obligations under three 45-year farming leases relating to 327 tree acres of the Ka’u II Orchards and all of the Mauna Kea Orchards. The farming leases permit the Partnership to conduct macadamia nut farming operations on such macadamia orchard properties. The farming leases provide for fixed minimum annual lease payments to be paid to either KACI or MKACI (collectively, the “Agribusiness Companies”), as the case may be. Such annual rental payments are subject to increase after ten years, twenty years and thirty years based on then current fair market lease rates. The then current fair market lease rate will be determined by mutual agreement between the Partnership, on the one hand, and either KACI or MKACI, as the case may be, on the other hand. If mutual agreement cannot be reached, the then current fair market lease rate will be determined by appraisal. Whether determined by mutual agreement or by appraisal, the then current fair market lease rate will be determined as a fair market lease rate for use of such premises as macadamia orchards.
The Partnership acquired its interests in the trees situated on such leased macadamia orchard properties subject to repurchase options retained by the Agribusiness Companies. The repurchase options grant the Agribusiness Companies the continuing right to repurchase all or any portion of such trees after June 30, 2019 at a price equal to the then current fair market value of the trees, according to their value as producing macadamia nut trees, as determined by mutual agreement between the Partnership, on the one hand, and either KACI or MKACI, as the case may be, on the other hand. If mutual agreement cannot be
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reached, the then current fair market value will be determined by appraisal. Whether determined by mutual agreement or by appraisal, the fair market value of such trees will be determined according to their value as producing macadamia nut trees, assuming that the owner thereof has rights to farm and harvest such trees and has ongoing arrangements with respect to land leases, farming and nut purchases of the same type as the Partnership has immediately prior to such time.
At the end of the 45-year lease terms of such leases, the Agribusiness Companies will be required to repurchase such trees at their then current fair market value as orchards if such entities do not offer to extend such farming leases at the then current fair market lease rates. The then current fair market lease rate and the then current market value of the trees for such purposes will be determined through mutual agreement between the Partnership, on the one hand, and either KACI or MKACI, as the case may be, on the other hand or, if mutual agreement cannot be obtained, by appraisal, in each case in the manner described above. Such repurchase obligations will apply with respect to the expiration of each extension of the lease terms of such leases until such leases have been in effect for a total of 99 years, at which time the leases will expire and the ownership interests in such trees will revert back to the Agribusiness Companies.
In the event that the Partnership decides not to accept an offer to extend the leases at the then current fair lease rates upon the expiration of the leases or any extension thereof (or does not assign the leases to a third party who elects to accept such offer), the leases will expire, the Agribusiness Companies will not be required to repurchase the trees covered thereby and ownership of such trees will revert back to the Agribusiness Companies (and in any event ownership of such trees will revert back to the Agribusiness Companies after 99 years).
As described above, the farming leases provide for determinations of the fair market lease rate to be paid by the Partnership under the farming leases and the fair market value of the Partnership’s trees situated on property covered by such leases by mutual agreement between the Partnership, on the one hand, and with KACI or MKACI, as the case may be, on the other hand, or, if mutual agreement cannot be reached, by appraisal.
3. Nut Purchase Contracts
The Partnership is a party to two nut purchase contracts signed June 1, 2006, with an effective date of January 1, 2006, with Mauna Loa which were negotiated in 2006. The two contracts cover all nuts produced by the orchards acquired in June 1986, December 1986, and October 1989. Of the two contracts, one for approximately 15 million pounds expired December 31, 2006 and has a nut purchase price for 2006 of $0.75 per pound wet-in-shell (WIS) at 20% moisture and 30% saleable kernel recovery (SK) to dry-in-shell (DIS). Two other contracts, of approximately 1 million pounds, also expired December 31, 2006, one with a nut purchase price of $0.60 per pound WIS 25% adjusted for trash and the other with a nut purchase price based on a two-year trailing average USDA price at WIS 25%. The last contract for about 5 million pounds expires December 31, 2011 and has a nut purchase price for 2006 of $0.74 per pound WIS at 20% moisture and 30% SK/DIS. The purchase price increases by $0.01 each year except 2008 until it reaches $0.78 per pound in 2011. The purchase contract for the macadamia nut orchard purchased in April 2006 is with Mac Farms and accounts for about 100,000 pounds and has a nut purchase price of $0.98 per pound WIS 20% moisture and 30% SK/DIS.
On December 16, 2004, a new nut purchase contract was signed with Hamakua for the annual delivery of six million WIS pounds, starting January 1, 2007. The contract provides for a minimum price of 75 cents per pounds and a maximum price of 95 cents per pound. The pricing formula includes a fixed component of 85 cents and a second component based on Hamakua’s average selling price for bulk kernel. In February 2007, the Partnership negotiated an amendment to the contract which provides the Partnership an option to have nut-in-shell processed in kernel for a fee in lieu of selling the nuts to Hamakua.
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On January 5, 2006, a new nut purchase contract was signed with dba Island Princess for the annual delivery of approximately two million WIS pounds, effective January 1, 2007. The nut price will be determined every six months by mutual agreement based on prevailing market price for kernel from Hawaii and Australia. The effective price for January – June 2007 is $0.608 at 20% moisture and 30% SK/DIS recovery.
On January 6, 2006, a new nut purchase contract was signed with MacFarms for the annual delivery of between four and one-half million and five and one-half million WIS pounds, effective January 1, 2007. The nut price will be determined every six months by mutual agreement based on prevailing market price for kernel from Hawaii and Australia. The effective price for January – June 2007 is $0.608 at 20% moisture and 30% SK/DIS recovery.
4. Farming Contracts
Prior to the Partnership’s acquisition of the macadamia farming operations on May 1, 2000, the Partnership was a party to four farming contracts with the Ka’u and Mauna Kea Agribusiness Companies (“Agribusiness Companies”), that together covered all farming, harvesting and husking activities for the orchards acquired in June 1986, December 1986, October 1989 and September 1991, respectively. On May 1, 2000, the Partnership acquired the macadamia farming operations from the Agribusiness Companies.
The contracts provided the Agribusiness Companies with reimbursement of their direct and indirect costs incurred under these contracts. Husking activities for the Keaau and Mauna Kea orchards are performed at Mauna Loa’s Keaau facility. Payments and reimbursements made to Mauna Loa were $440,000 in 2004, $603,000 in 2005, and $559,000 in 2006.
5. Legal Fees
The Partnership paid $196,000, $134,000, and $495,000 in legal fees in 2006, 2005 and 2004, respectively. A former Director of the Partnership is a former partner and currently of counsel to one of the law firms used by the Partnership and said firm was paid $196,000 in legal fees in 2006, $32,000 in legal fees in 2005, and $495,000 in 2004 in 2003. The additional legal fees were for services related to the special meeting and Mac Farms of Hawaii, LLC potential acquisition in 2006 and legal suit to prevent Mauna Loa from acquiring the assets of MacFarms of Hawaii, LLC in 2004.
6. Management Fee
Under the terms of the Partnership Agreement, the Partnership reimburses the Managing Partner for all expenses incurred by it in the conduct of Partnership business, including any expenses reasonably allocated to the Managing Partner or to the Partnership as well as a management fee equal to 2% of the Partnership’s operating cash flow (as defined in the Partnership Agreement). Management cost reimbursements under the Partnership Agreement were $168,000 in 2004. The management fee was $9,000 in 2004. There was no management fee in 2006 or 2005 as it is eliminated in consolidation.
7. Relationships with CBCL and DBE
Since September 2001, the Partnership has leased approximately 4,000 s.f. of office space in Hilo for its executive and accounting staff through the General Partner, which was owned by DBE until January 2005. The Partnership Agreement requires that the price and terms of any such transactions be no less favorable than those available in comparable transactions between unrelated parties. The Partnership provides administrative services to DBE for which it was compensated $104,000 in 2004, $102,000 in 2005, and $103,000 in 2006.
Mr. Simonis, President of ML Resources, Inc., an officer of the Partnership, and a director of ML Resources, Inc., and is a stockholder of CBCL.
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The Partnership performs farming for a DBE company. This farming is treated in the same manner as all other farming contracts. In 2004 the amount billed was $15,000 of which $9,000 was due at December 31, 2004. In 2005 the amount billed was $16,000 of which $3,000 was due at December 31, 2005. In 2006 the amount billed was $21,000 of which $3,000 was due at December 31, 2006.
8. Director Independence
The Board of Directors has determined that each member of the Board of Directors is independent in accordance with SEC Rule 10-A-3 and New York Stock Exchange independence standards except for Dennis J. Simonis. The other members of the Board of Directors John K. Kai, James S. Kendrick, E. Alan Kennett, Jeffrey M. Kissel, and David McClain are independent under the independence standards applicable to the registrant.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees. Fees paid to the Independent Registered Public Accounting Firm during 2006, 2005 and 2004 for the audit of the Partnership’s annual financial statements and review of financial statements included in the Partnership’s Form 10-Q amounted to $68,000, $94,000, and $68,000, respectively. The audit fees for the audit of the Partnership’s annual financial statements and review of financial statements included in the Partnership’s Form 10-Q for the years ended December 31, 2006, 2005 and 2004, which were approved by Partnership’s audit committee amounted to $68,000, $65,200 and $61,000, respectively.
Audit Related Fees. Audit related fees paid to the Independent Registered Public Accounting Firm during 2006, 2005 and 2004 amounted to $18,000, $23,000, and $11,000, respectively.
Tax Fees. Fees paid to the Independent Registered Public Accounting Firm during 2006, 2005 and 2004 for tax preparation and related support services amounted to $225,000, $250,000, and $256,000, respectively.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. List of Documents Filed as a Part of this Report
1. Financial Statements. See Index to Financial Statements at page 23 of this Form 10-K.
2. Financial Statement Schedules. None required.
3. Exhibits. See Exhibit Index at page 62 of this Form 10-K.
B. Reports on Form 8-K
On October 20, 2000, the Partnership filed a report on Form 8-K announcing that on September 29, 2000, CBCL had sold all its stock in Mauna Loa Macadamia Nut Corporation to The Shansby Group, a San Francisco based equity partnership.
On May 13, 2003, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership setting forth the results of operations for the quarter ended March 31, 2003.
On February 17, 2004, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership setting forth the results of operations for the quarter and six months ended June 30, 2003.
On February 17, 2004, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership setting forth the results of operations for the quarter and nine months ended September 30, 2003.
On March 9, 2004, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership setting forth the results of operations for the year ended December 31, 2003.
On May 11, 2004, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership setting forth the results of operations for the quarter ended March 31, 2004.
On June 7, 2004, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership setting forth the second quarter distribution and appointment of John Kai as Director.
On August 11, 2004, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership setting forth the results of operations for the quarter and six months ended June 30, 2004
On August 12, 2004, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership setting forth the results of operations for the quarter and six months ended June 30, 2004 and the potential of a lawsuit against Mauna Loa Macadamia Nut Corporation and MacFarms of Hawaii, LLC.
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On October 7, 2004, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership announcing the settlement of the lawsuit against Mauna Loa Macadamia Nut Corporation and MacFarms of Hawaii, LLC.
On November 10, 2004, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership setting forth the results of operations for the quarter and nine months ended September 30, 2004.
On December 20, 2004, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership announcing the resignation of Mr. John W. A. Buyers as Chief Executive Officer of the general partner of the Partnership, ML Resources, Inc.; the agreement by the Partnership to purchase ML Resources, Inc.; the appointment of Dennis J. Simonis as Chief Executive Officer of the general partner of the Partnership; and the agreement with Hamakua Macadamia Nut Company, Inc. with the Partnership to purchase 6,000,000 pounds of nuts per year starting in 2007 and ending in 2012.
On March 16, 2005, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership setting forth the 1st quarter 2005 distribution.
On March 16, 2005, the Partnership filed a “Regulation FD Disclosure” on Form 8-K/A, which included a copy of a press release issued by the Partnership setting forth the corrections to the press release for the 1st quarter distribution.
On May 6, 2005, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership setting forth the results of operations for the 1st quarter ended March 31, 2005.
On August 10, 2005, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership setting forth the results of operations for the quarter and six months ended June 30, 2005.
On November 7, 2005, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership setting forth the results of operations for the quarter and nine months ended September 30, 2005.
On January 9, 2006, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release and nut purchase agreements with Mac Farms of Hawaii, LLC and Purdyco International, Ltd..
On March 10, 2006, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership setting forth the results of operations for the year ended December 31, 2005 and the 1st quarter 2006 distribution.
On May 9, 2006, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership setting forth the results of operations for the quarter ended March 31, 2006.
On June 5, 2006, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release and nut purchase agreements with Mauna Loa Macadamia Nut Corporation.
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On June 15, 2006, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership setting forth the resignation of James Case as a Director, the appointment of Russell Case as a Director and the 2nd quarter 2006 distribution.
On August 9, 2006, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership setting forth the results for the quarter and six-months ended June 30, 2006.
On October 20, 2006, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership setting forth the non-binding Letter of Intent to purchase Mac Farms of Hawaii, LLC and lease 3,912 acres of macadamia orchards from Kapua Orchards Estates, LLC an associate of Mac Farms of Hawaii, LLC.
On November 7, 2006, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership setting forth the results for the quarter and nine-months ended September 30, 2006.
On December 6, 2006, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership setting forth the resignation of Russell Case as a Director and the 4th quarter distribution.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | ML MACADAMIA ORCHARDS, L.P. | | |
| | (Registrant) | | |
| | | | |
| | By: ML RESOURCES, INC. | | |
| | (Managing General Partner) | | |
| | | | |
| | By: | /s/ Dennis J. Simonis | | |
| | | Dennis J. Simonis | | |
| | | Principal Executive Officer | | |
Dated : April 12, 2007 | | | | |
| | | | | | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the date set forth above.
ML RESOURCES, INC.
Signature | | Title |
| | | | |
/s/ | Dennis J. Simonis | | | President and Chief Executive Officer |
| Dennis J. Simonis | | Principal Executive Officer |
| | | Director |
| | | |
/s/ | Wayne W. Roumagoux | | | Chief Financial Officer |
| Wayne W. Roumagoux | | (Principal Accounting Officer) |
| | | |
/s/ | John Kai | | | Director |
| John Kai | | |
| | | |
/s/ | James S. Kendrick | | | Director |
| James S. Kendrick | | |
| | | |
/s/ | E. Alan Kennett | | | Director |
| E. Alan Kennett | | |
| | | |
/s/ | Jeffrey M. Kissel | | | Director |
| Jeffrey M. Kissel | | |
| | | |
/s/ | Dr. David McClain | | | Director |
| Dr. David McClain | | | |
| | | | | | | |
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EXHIBIT INDEX
Exhibit
Number | | Description |
| | |
2.1 | | Amended and Restated Agreement and Plan of Merger, effective as of December 18, 1997, between Registrant and C. Brewer Homes, Inc. (a) |
| | |
2.2 | | Asset Purchase Agreement including Exhibits dated March 14, 2000 (g) |
| | |
3.2 | | Form of Class A Certificate of Limited Partnership as filed with the Secretary of State of Delaware. (c) |
| | |
3.3 | | Certificate of Limited Partnership of Registrant as filed with the Secretary of State of Delaware. (c) |
| | |
4.1 | | Depositary Agreement between Registrant, Manufacturers Hanover Trust Company as Depositary and Mauna Loa Resources Inc. as attorney-in-fact of the limited partners of Registrant. (c) |
| | |
4.2 | | Form of Depositary Receipt. (c) |
| | |
5.1 | | Legal Opinion of Counsel dated May 1, 2000 (g) |
| | |
10.2 | | Macadamia Nut Purchase Contract between Mauna Loa and Registrant dated December 22, 1986. (b) |
| | |
10.3 | | Macadamia Nut Purchase Contract between Mauna Loa and Registrant dated as of October 1, 1989. (b) |
| | |
10.4 | | Contribution Agreement among Mauna Loa Orchards, L.P. (“MLO”), Ka’u Agribusiness Co., Inc. (“KACI”), Mauna Kea Agribusiness Co., Inc. (“MKACI”), Mauna Kea Macadamia Orchards, Inc. (“MKMO”) and Mauna Loa dated as of July 1, 1989. (b) |
| | |
10.5 | | Lease between the Trustees of the Estate of Bernice Pauahi Bishop (“Trustees of the Bishop Estate”) and Mauna Loa. (c) |
| | |
10.6 | | Lease between KACI and Registrant. (d) |
| | |
10.7 | | MLO/MLMO Conveyance Agreement between MLO and Registrant dated as of October 1, 1989. (b) |
| | |
10.8 | | Butcher/MLMO Contribution Agreement between Howard Butcher III (“Butcher”) and Registrant dated as of October 1, 1989. (b) |
| | |
10.9 | | Farming Lease between KACI and MLO dated as of July 1, 1989. (b) |
| | |
10.11 | | Farming Lease between MKACI and MLO dated as of July 1, 1989. (b) |
| | |
10.12 | | Water Agreement, as amended, between KACI and Registrant dated as of October 1, 1989. (b) |
| | |
10.13 | | Cash Flow Warranty Agreement among KACI, MKACI and Registrant dated as of July 1, 1989. (b) |
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Exhibit
Number | | Description |
| | |
10.14 | | Guarantee Agreement between Mauna Loa and Registrant dated as of October 1, 1989. (b) |
| | |
10.15 | | Agreement of Indemnification between CBCL and each director of the Managing Partner. (b) |
| | |
10.16 | | Indemnification Agreement (Title) among Mauna Loa, KACI and MKACI in favor of Registrant. (b) |
| | |
10.17 | | Indemnification Agreement (Subdivision) among Mauna Loa, KACI and MKACI in favor of Registrant. (b) |
| | |
10.18 | | Deed between MLO and Registrant relating to 14% undivided interest in 220 tree acres of macadamia orchard properties located in the Keaau area of the island of Hawaii (“Keaau II Orchards”). (b) |
| | |
10.19 | | Bill of Sale between MLO and Registrant relating to 14% undivided interest in Keaau II Orchards. (b) |
| | |
10.20 | | Deed between Butcher and Registrant relating to 86% undivided interest in Keaau II Orchards. (b) |
| | |
10.21 | | Bill of Sale between Butcher and Registrant relating to 86% undivided interest in Keaau II Orchards. (b) |
| | |
10.22 | | Assignment of Partial Interest in Lease No. 15,020 and consent from MLO to Registrant. (b) |
| | |
10.23 | | Assignment of Partial Interest in Lease No. 16,859 and consent from MLO to Registrant. (b) |
| | |
10.24 | | Assignment of Partial Interest in Lease No. 20,397 and consent from MLO to Registrant. (b) |
| | |
10.25 | | Assignment of Lease from MLO to Registrant relating to Lease from the Trustees of the Bishop Estate. (b) |
| | |
10.26 | | Assignment from MLO to Registrant relating to certain orchards. (b) |
| | |
10.27 | | Lease from the Trustees of the Bishop Estate to MLO. (b) |
| | |
10.28 | | Lease No. 15,020 from the Trustees of the Bishop Estate to MLO. (b) |
| | |
10.29 | | Form of Amendments to Lease No. 15,020 from the Trustees of the Bishop Estate. (b) |
| | |
10.30 | | Lease No. 16,859 from the Trustees of the Bishop Estate to the Hawaiian Agricultural Company (a predecessor of KACI). (b) |
| | |
10.31 | | Form of Amendments to Lease No. 16,859 from the Trustees of the Bishop Estate. (b) |
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Exhibit
Number | | Description |
| | |
10.32 | | Lease No. 20,397 from the Trustees of the Bishop Estate to CBCL. (b) |
| | |
10.33 | | Form of Amendments to Lease No. 20,397 from the Trustees of the Bishop Estate to CBCL. (b) |
| | |
10.34 | | Lease from Richard L. Hughes to Mauna Loa. (b) |
| | |
10.35 | | Lease from the Trustees of the Bishop Estate to Mauna Loa. (b) |
| | |
10.36 | | Co-ownership and Partition Agreement between KACI and MLO. (b) |
| | |
10.37 | | Co-ownership and Partition Agreement among Mauna Loa, KACI and MLO.(b) |
| | |
10.38 | | Co-ownership and Partition Agreement between KACI and MLO relating to Lease Nos. 15,020 and 16,859. (b) |
| | |
10.39 | | Co-ownership and Partition Agreement between MKACI and MLO. (b) |
| | |
10.40 | | Macadamia Nut Purchase Contract between Mauna Loa and Keaau Macadamia X Corporation (“Keaau Lot 10”) dated September 15, 1983. (e) |
| | |
10.41 | | Assignment of Owner’s Interest in Macadamia Nut Purchase Contract and Farming Contract between Keaau Lot 10 and Registrant. (e) |
| | |
10.42 | | Warranty Deed between Keaau Lot 10 and Registrant. (e) |
| | |
10.43 | | Amended and Restated June 1986 Farming Contract, effective January 1, 1998, between Registrant and KACI. (f) |
| | |
10.44 | | Amended and Restated December 1986 Farming Contract, effective January 1, 1998, between Registrant and KACI. (f) |
| | |
10.45 | | Amended and Restated 1989 Farming Contract, effective January 1, 1998, among Registrant, KACI and MKACI. (f) |
| | |
10.46 | | Amended and Restated Farming Contract for the Keaau Lot 10 Orchard, effective January 1, 1998, between Registrant and KACI. (f) |
| | |
10.47 | | Restated Kaiwiki Orchards Farming lease between Registrant and MKACI dated February 26, 1997. (f) |
| | |
10.48 | | Credit Agreement between Registrant and Pacific Coast Farm Credit Services, PCA dated May 1, 2000 (g) |
| | |
10.49 | | Security Agreement between Registrant and Pacific Coast Farm Credit Services, PCA dated May 1, 2000 (g) |
| | |
10.50 | | Orchards Farming Lease between Registrant and Ka’u Agribusiness Co., Inc. (g) |
| | |
10.51 | | Macadamia Nut Purchase Contract between Mauna Loa and the Partnership dated July 1, 2003 for Keaau Lot X nuts. (h) |
| | |
10.52 | | Macadamia Nut Purchase Contract between Hamakua Macadamia Nut Company, Inc. and the Partnership dated December 16, 2004 effective January 1, 2007. (i) |
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Exhibit
Number | | Description |
| | |
10.53 | | Jim Case resignation letter from Audit Committee dated March 7, 2005. (i) |
| | |
10.54 | | Macadamia Nut Purchase Contract between Purdyco International, Ltd. and the Partnership dated January 5, 2006 effective January 1, 2007. (j) |
| | |
10.55 | | Macadamia Nut Purchase Contract between Mac Farms of Hawaii, LLC and the Partnership dated January 6, 2006 effective January 1, 2007. (j) |
| | |
10.56 | | Macadamia Nut Purchase Contracts between Mauna Loa Macadamia Nut Corporation and the Partnership dated June 1, 2006 effective January 1, 2006. (k) |
| | |
10.57 | | Macadamia Nut Purchase Contract between Mauna Loa Macadamia Nut Corporation and the Partnership dated June 1, 2006 effective January 1, 2006. (k) |
| | |
11.1 | | Statement re: Computation of Net Income per Class A Unit. |
| | |
31.1 | | Form of Rule 13a-14(a) [Section 302] Certification – Chief Executive Officer |
| | |
31.2 | | Form of Rule 13a-14(a) [Section 302] Certification – Chief Financial Officer |
| | |
32.1 | | Certification pursuant to 18 U.S.C. Section 1350 As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — Chief Executive Officer |
| | |
32.2 | | Certification pursuant to 18 U.S.C. Section 1350 As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Financial Officer |
(a) Incorporated by reference to Appendix A of Registrant’s Registration Statement under the Securities Act on Form S-4, Registration Statement No. 333-46271, filed February 13, 1998.
(b) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant’s Registration Statement under the Securities Act on Form S-1, Registration Statement No. 33-30659, filed October 20, 1989.
(c) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant’s Registration Statement under the Securities Act on Form S-1, Registration Statement No. 33-4903, filed June 5, 1986.
(d) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant’s Annual Report on Form 10-K, Commission filed No. 1-9145, for the year ended December 31, 1986, filed March 27, 1987.
(e) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant’s Annual Report on Form 10-K, Commission filed No. 1-9145, for the year ended December 31, 1991, filed March 27, 1992.
(f) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant’s Registration Statement under the Securities Act on Form S-4, Registration Statement No. 333-46271, filed February 13, 1998.
(g) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant’s Form 8-K, Commission filed No. 001-09145, filed May 8, 2000.
(h) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant’s Form 10-K, Commission filed No. 001-09145, filed March 17, 2004.
(i) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant’s Form 10-K/A, Commission filed No. 001-9145, filed June 1, 2005.
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(j) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant’s Form 8-K, Commission filed No. 001-09145, filed January 9, 2006.
(k) Incorporated by reference to the corresponding Exhibit previously filed as Exhibit to Registrant’s Form 8-K, Commission filed No. 001-09145, filed June 5, 2006.
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