Item 1. BUSINESS OF THE PARTNERSHIP
(a) General Description of the Business
ML Macadamia Orchards, L.P. (the “Partnership”) is a master limited partnership, organized under the laws of the State of Delaware in 1986. The Partnership is engaged in the business of growing and farming macadamia nuts in the State of 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.) In addition, the Partnership farms approximately 1,980 tree acres of macadamia nut orchards for other orchard owners under farming contracts.
The Partnership commenced operations in June 1986, following its acquisition of 2,423 tree acres of macadamia nut orchards from subsidiaries of C. Brewer and Company, Ltd. (“CBCL”). In December 1986 and October 1989, the Partnership acquired 266 and 1,260 additional tree acres of macadamia nut orchards from subsidiaries of CBCL. In September 1991 the Partnership acquired 78 tree acres of macadamia nut orchards from CBCL. On May 1, 2000, the Partnership acquired 142 tree acres of macadamia nut orchards and its macadamia farming operations from subsidiaries of CBCL. In April 2006, the Partnership acquired approximately 21 tree acres of macadamia nut orchards from J. W. A. Buyers. 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. The Partnership’s assets and operations are located on the island of Hawaii.
The Partnership is managed by its general partner, ML Resources, Inc. (“MLR” or the “Managing Partner”), which is a wholly owned subsidiary of the Partnership.
During 2006 the Partnership sold all of its macadamia nut production to Mauna Loa Macadamia Nut Corporation (“Mauna Loa”) under four nut purchase contracts. Three of these nut purchase contracts representing approximately 16 million field pounds per annum, expired on December 31, 2006 and the fourth contract representing approximately 6.3 million field pounds per annum expires on December 31, 2011. In lieu of renegotiating the expired nut purchase contracts with Mauna Loa, the Partnership executed nut purchase contracts with three other processors; 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 nut purchase contracts with Island Princess, Hamakua and MacFarms were terminated on October 31, 2008, June 10, 2009 and December 22, 2009, respectively. The details of the Partnership’s nut purchase contracts are discussed in Item 1 (c), Owned Orchard Segment on page 3.
On December 22, 2009, the Partnership and Mauna Loa executed an addendum to the June 1, 2006 nut purchase contract which provides that all of the macadamia nuts harvested by the Partnership will be sold to Mauna Loa in 2010 and 2011 at a nut purchase price of $0.73 per pound on a WIS SK/DIS basis. As Mauna Loa will be sole customer for the Partnership’s production additional risks are inherent. Refer to Item 1A.
Item 1A. Risk Factors
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.
As discussed below, 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 0.4% in 2009, 0.1% in 2008, and 0.4% in 2007. Both crop and tree insurance are in place to help protect the Partnership against significant and catastrophic losses.
Diseases and Pests. Macadamia trees are susceptible to various diseases and pests which can affect the health of the trees and resultant nut production. There are several types of fungal diseases, which can affect flower and nut development. One of these is Phytophthora capsici, which affects the macadamia flowers and developing nuts, and another, 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 infested the reproductive plant parts at orchards located in Keaau and Mauna Kea during periods of persistent inclement weather.
Tree losses may occur due to a problem known as “Macadamia Quick Decline” (“MQD”). Research at the University of Hawaii indicates that this affliction is due to Phytophthora capsici which is associated with high moisture and poor drainage conditions. 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 intolerant to MQD. The Partnership’s Keaau orchards experienced tree replacement of 0.9% in 2009, 0.2% in 2008 and 1.1% in 2007.
Macadamia trees and production may also be affected by insects and other pests. The Southern Green Stink Bug disfigures the mature kernel and contributes to a historical loss of nuts of 1.2%. Two natural enemies, a wasp and a fly, effectively keep nut losses at acceptable levels. An insect known as the Koa Seed Worm (“KSW”) causes fully sized nuts to fall that have not completed kernel development. The affect of the KSW contribute to an average loss of nuts of 4.0%. The Tropical Nut Borer Beetle (“TNB”) bores through the mature macadamia shell and feeds on the kernel. Nut damage caused by the TNB resulted in about 0.2% loss in 2009. Damages caused by each insect may fluctuate when unfavorable environmental conditions affect the natural enemy population.
Natural enemies are relied upon to manage insects that contribute to nut loss. Without these natural enemies, greater losses are possible. Pesticides may be available to manage these economic insect pests when treatment costs and nut loss justify its use, and when its use does not disrupt the natural enemy population.
Honey bees are placed in the orchards to supplement other insect pollinators during the flower season. In late 2008, the Hawaii Department of Agriculture identified the Varroa mite on feral honey bees near the port of Hilo, Hawaii. This mite is an ectoparasite that attaches to the body of honey bees and weakens it which can result in destroying bee hives and colonies. The apiaries that place hives in the macadamia nut orchards must manage this pest with miticide to maintain healthy bee colonies and avoid the development of pest resistance to the miticide.
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 some nut loss and expected 2000 harvesting being deferred to 2001. Since the flood in 2000 heavy rain in the Ka’u region has not produced flooding of any consequence.
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 obtains tree insurance each year under a federally subsidized program. The tree insurance for 2010 provides coverage up to a maximum of approximately $12.3 million against catastrophic loss of trees due to wind, fire or volcanic activity. Crop insurance was purchased for the 2009-2010 crop year and provides coverage up to a maximum of approximately $9.3 million against loss of nuts due to wind, fire, volcanic activity, earthquake, adverse weather, wildlife damage and failure of irrigation water supplies.
Volcanoes. The Partnership’s 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:
During 2009, the Ka’u, Keaau and Mauna Kea areas recorded 100%, 110% and 120%, respectively, of the normal average annual rainfall in their area of the island.
Water Supply for Irrigation. With the May 2000 acquisition of the farming business, 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.
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.
Employees. Our farming operations require a large number of workers, many on a seasonal basis. The labor market on the island of Hawaii is very competitive and most of our employees are unionized under contracts which expire in May 2011. In previous years, we have obtained the services of foreign workers, which we have not continued. In the event that we are not able to obtain and retain both permanent and seasonal workers to conduct our farming operations, or in the event that we are not able to maintain satisfactory relationships with our unionized workers, our financial results could be negatively impacted.
Key Personnel. Certain key personnel are critical to our business. Our future operating results depend substantially upon the continued service of our key personnel. 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 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.
Environmental. Various federal, state, and local environmental laws, ordinances and regulations regulate our properties and our farming operations and could make us liable for costs of removing or cleaning up hazardous or toxic substances on, under, or in property that we currently own, lease or that we previously owned or leased or upon which we currently or previously conducted farming operations. These laws could impose liabilities without regard to whether we knew of, or were responsible for, the presence of hazardous or toxic substances. The presence of hazardous or toxic substances, or the failure to properly clean up such substances when present, could jeopardize our ability to use or sell certain real property, use it as collateral or result in fines or clean up costs. Future environmental laws could impact our farming operations or increase our cost of goods.
Market and customers. A decline in worldwide macadamia nut prices may adversely affect the price the Partnership may be able to obtain under future nut purchase contracts. There are a limited number of customers available to purchase the Partnership’s nut production. As of December 22, 2009, the Partnership has one nut purchase contract calling for the purchase of all of its production, approximately 19 to 21 million wet-in-shell pounds during calendar years 2010 and 2011. If the Partnership’s customer is unable to perform under the 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. As the Partnership has a sole customer for all of its production, that customer has the ability to negatively impact the financial condition of the Partnership if it did not pay or negotiate an extension or new contract at the termination of the current contract. From the Partnership’s inception in 1986 through 2006 Mauna Loa was the Partnership’s sole customer. The nut purchase contract requires the buyer to make nut payments in accordance with Hershey’s standard payment terms. During certain parts of the year, if payments are not received, as the contract require, available cash resources could be depleted.
Nut Purchase Agreements. The Partnership had three contracts in 2009. The terms of the contracts varied from two to six years, contained fixed 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.
In 2008 and 2009 Hamakua refused to accept delivery of macadamia nuts from the Partnership as required by the nut purchase agreement. The Hamakua nut purchase contract was terminated in connection with the settlement of litigation brought by the Partnership against Hamakua which resulted in the Partnership receiving a settlement payment of $324,000 in the first quarter of 2009. The nut purchase agreement was terminated on June 10, 2009.
The Partnership terminated its nut purchase contract with MacFarms on December 22, 2009 due to the failure of MacFarms to perform its obligations under the Agreement.
On July 9, 2008, the Partnership and Mauna Loa agreed to an addendum to their nut purchase agreement where Mauna Loa agreed to purchase an additional 9.0 million to 12.0 million field pounds of macadamia nuts during the period July 21, 2008 through June 30, 2009. The Partnership and Mauna Loa agreed to an addendum to their nut purchase agreement where Mauna Loa agreed to purchase an additional 9.0 to 15.0 million field pounds of macadamia nuts during the period July 1, 2009 through June 30, 2010. On December 22, 2009 the Partnership and Mauna Loa executed an addendum to the June 1, 2006 nut purchase contract which provides that all of the macadamia nuts harvested by the Partnership, estimated to be between 19 to 21 million wet-in-shell pounds, in 2010 and 2011 will be sold to Mauna Loa.
As of December 31, 2009 the Partnership had only one nut purchase contract under which it will sell it’s entire production for the calendar years 2010 and 2011. The agreement is a fixed price contract. Fixed price contracts can be disadvantageous because the Partnership may not be able to pass on unexpected cost increases as they arise but, they provide protection against adverse decline in market prices.
The Partnership’s ability to renew its credit agreements is highly dependent upon the existence of its nut purchase agreements with Mauna Loa. Accordingly, the cancellation of the nut purchase agreement with Mauna Loa in the future would significantly affect the Partnership’s ability to secure the necessary funds to finance its current working capital needs.
Loan Agreement Restrictions. The Partnership relies on external loan financing, currently being provided by a Credit Agreement with American Ag Credit Capital Markets through a revolving line of credit and a term note. This loan contains various terms and conditions, including financial ratios, covenants and is secured by all of the real personal property of the Partnership and fee property assets. The term loan was scheduled to mature in May 2010; however, the Partnership paid off the loan on January 15, 2010. The revolving line of credit matures on June 29, 2010. This Credit Agreement prohibits distributions to partners without prior consent of the lender. On multiple occasions during the last several years, the Partnership has failed to comply with various covenants or financial ratios under its loan agreements, but has been able to obtain waivers or modifications of the agreement to avoid a default. If the Partnership is unable to meet the terms and conditions of its lending arrangements or is unable to obtain waivers or modifications of such lending arrangements, it could be in default of its loan agreements and in which event the lenders would be able to accelerate the obligations and realize on the collateral securing the indebtedness. There is no assurance that the Partnership will be able to comply with or obtain waivers of covenants and conditions in the future. Furthermore, Partners will not receive distributions while they are prohibited by the Partnership’s borrowing arrangements unless approved by the lender.
Significant influence over our affairs may be exercised by principal Class “A” unit holders. As of March 11, 2010, the significant Class “A” unit holders are Fred and Mary Wilkie Ebrahimi (approximately 38.5% beneficial ownership). Effective October 1, 2009 Bradford C. Nelson was elected as a director of the Partnership. Mr. Nelson has been Chief Financial Officer of Seemorgh Investments, Inc., a company owned by Mr. Fred Ebrahimi, since January 2007 and has served as an officer and director of a group of companies in the United States of American, Europe and Asia owned by the Ebrahimi family since 2002.
Holders of Class “A” units of the Partnership have limited voting rights. Our unit holders have limited voting rights on matter affecting the Partnership’s business, which may have a negative effect on the price at which the Partnership’s units trade. In particular, the unit holders did not elect the directors of the general partner. Furthermore, if unit holders are not satisfied with the performance of the directors they may find it difficult to remove any or all of the directors as the Partnership Agreement requires a vote of at least 66 2/3% of the outstanding units to remove the General Partner.
Tax risks to Class “A” unit holders. The anticipated after-tax benefit of an investment in the Partnership’s units depends largely on the treatment of the Partnership as a partnership for federal income tax purposes, as well as the Partnership not being subject to a material amount of entity-level taxation by individual states. If the Partnership were to be treated as a corporation for federal income tax purposes or become subject to additional amounts of entity-level taxation for state tax purposes, then the Partnership’s cash available for distribution to unit holders could materially decline.
The tax liability of unit holders could exceed their distributions or proceeds from sales of Class “A” units. Because the unit holders will generally be treated as partners to whom the Partnership will allocate taxable income, which can differ in amount than the cash distributed, the unit holders will be required to pay any federal income tax and, in some cases, state and local income taxes on their allocable share of the Partnership’s income.
Tax gain or loss on the disposition of the Partnership’s Class “A” units could be more or less than expected. If a unit holder disposes of his units, the unit holder will recognize a gain or loss equal to the difference between the amount realized and the unit holder’s tax basis. Because distributions in excess of a unit holder’s allocable share of the Partnership’s net taxable income decrease the unit holder’s tax basis in the unit holder’s units, the amount, if any, of such prior excess distributions with respect to the units sold will, in effect, become taxable income, if the units sold are at a price greater than the unit holder’s tax basis, even if the price received is less than the unit holder’s original cost.
As a result of investing in the Partnership’s Class “A” units, a unit holder may become subject to state and local taxes and return filing requirements in the states where the Partnership owns property and conducts business.
Ownership of the Partnership’s Class “A” units raises issues for tax-exempt entities and other investors.
Item 1B.
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. The Partnership’s corporate governance guidelines, board committee charters and code of conduct are also available on the website, free of charge. 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.
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.
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. Up to 2% of trees are lost to various causes each year and are replaced as determined by management.
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:
(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 for fair market value. The minimum lease payments will be adjusted to a fair market lease rate in 2019 and 2029. At the end of the lease term, the lessor will be required to repurchase the trees at fair market value if they do not offer to extend the leases at the then current fair market lease rate. If the Partnership does not accept the offer to extend the lease, the lease will expire and the lessor will not be required to repurchase the trees which will then revert to them. In all circumstances, the ownership of trees will revert to the lessor after 99 years.
(3) Lease of land; trees revert to lessor upon termination of lease.
(4) Additional rental payment if USDA farm price for nuts is greater than $0.50 per pound ($521 for each $0.01)
(5) Additional rental payment if USDA farm price for nuts is greater than $0.20 per pound ($291 for each $0.01)
(6) Additional rental payment if USDA farm price for nuts is greater than $0.65 per pound ($376 for each $0.01)
(7) Additional rental payment if USDA farm price for nuts is greater than $0.70 per pound ($30 to $265 for each $0.01)
(8) Additional rental payment if USDA farm price for nuts is greater than $0.72 per pound ($265 for each $0.01)
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 6.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS AND SETTLEMENT
Certain claims have been filed against the Partnership arising out of our business actions. In the opinion of management such claims would not have a material adverse effect upon our results of operations or financial position.
ITEM 4.
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.
PART II
ITEM 5.
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 OTC (symbol = NNUT). There were 3,616 registered holders of Class A Depositary Units on December 31, 2009.
Distributions declared and high and low sales prices of the Class A Depositary Units, based on New York Stock Exchange (“NYSE”) daily composite transactions through November 24, 2008, are shown. Distributions declared and high and low bid prices on the OTC on and after November 25, 2008, are shown in the table below:
The bid quotations on the over-the-counter market reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
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.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among ML Macadamia Orchards, LP., The Russell 2000 Index
And A Peer Group
* $100 invested on 12/31/04 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
The peer group index is composed of the following issuers Cedar Fair LP, Plum Creek Timber Company, Pope Resources Depositary Receipts of Limited Partner Units, and Terra Nitrogen Company LP.
Restrictions on Cash Distributions
Cash distributions to partners are prohibited under the Partnership’s Credit Agreement with American AgCredit Capital Markets, unless approved by the lender.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per pound and per unit data)
(1) See “Statements of Cash Flows” in the consolidated financial statements for method of calculation.
(2) See Footnote 5 in the notes to consolidated financial statements for method of calculation.
(3) 7,500,000 Class A Units were authorized, issued and outstanding for all periods presented.
In 2007, the Partnership was unable to sell all of its production which materially affects the comparability of the financial data for 2007 with the other years as set forth in the table above. Refer to Item 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this report.
Results of operations - 2009, 2008 and 2007
Owned-Orchard Segment - Production and Yields
Production and yield data for the nine orchards are summarized below (expressed in field pounds):
The Partnership reports on a calendar year basis, though the natural crop year generally begins in August and runs through April.
Production in 2009 was 4.8% lower than 2008 and 3.8% higher than 2007. Production in 2008 was 8.8% higher than 2007 and 2% higher than 2006. Significant factors affecting the crop were as follows:
1. Adequate rainfall during the spring and summer of 2006 provided for a return to normal production in the spring of 2007. Good rainfall distribution between October 2006 and April 2007 had a positive effect on the fall 2007 nut production.
2. Adequate moisture distributed in the summer and fall of 2007 supported the late nut-sets in June and July of 2007 that lead to a normal spring 2008 production. Cool night temperatures in the fall of 2007 stimulated early flower and nut-set development that continued through mid-summer 2008. This event was supported by equally good rainfall distribution, soil moisture and nut production.
3. An extended flowering period in the late spring and early summer of 2006 contributed to above average production in the spring of 2007 at Keaau. Flowers that normally bloom in mid-to-late December did not develop until early February 2007. This late development had a negative impact on the fall 2007 nut production and affected the production in the spring 2008. This late flower development and nut-set contributed to above normal production in spring 2008. Heavy rains from late January to mid-February 2008 affected flower pollination and nut-set. This combined with a flower season that ended early in April 2008 contributed to lower than expected nut production in the fall of 2008.
4. Nut delivery limitations by Hamakua, which was under agreement to contract process nut production into roasted kernels for the Partnership, contributed to reduced harvesting activity and lower than expected nut production in the fall of 2007.
5. The abbreviated flower season in 2008 substantially reduced nut production in spring 2009. Inclement weather at Keaau in February 2009 to April 2009 contributed to poor pollination and nut-set that resulted in a fall of 2009 production that was 4% less than the fall of 2008 production, and is expected to impact the spring 2010 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, yield per acre and the nut purchase price. The following table presents the comparison of revenues for the years ended December 31, 2009, 2008 and 2007 (in 000’s except per pound information):
Macadamia Nut Sales For the year
Ended December 31, 2009, 2008 and 2007
The information in the foregoing chart for 2007 is not directly comparable in all circumstances to the information for 2008 and 2009. To prevent its unsold production from deteriorating, in 2007, the Partnership engaged a processor to process approximately 5,584,000 pounds of nuts so that these nuts could be maintained in inventory by the Partnership for subsequent sale. In 2008, approximately $2,000,000 of these nuts were sold. Thus, although the production of field pounds in 2007 was only approximately 9% less than 2008, this event significantly reduced total nut sales in 2007 and increased the total nut sales in 2008. In previous years, the Partnership sold all of its nuts to processors in the year in which they were produced. Approximately 453,000 pounds of kernel inventory were sold in 2008 compared to 116,000 pounds in 2007. In 2009, approximately 72,500 pounds of kernel inventory were sold and approximately 52,000 pounds of kernel inventory were determined to be unsalable and were written off.
Owned-Orchard Segment - Cost of Goods Sold
Agricultural unit costs depend on the operating expenses required to maintain the orchards and to harvest the crop as well as on the quantity of nuts actually harvested.
The Partnership’s unit costs (expressed in dollars per WIS SK/DIS pound) are calculated by dividing all agricultural costs for each orchard (including lease rent, property tax, tree insurance and depreciation) by the number of pounds of macadamia nuts produced by that orchard and are summarized below ($/lb.):
Cost of goods sold was $159,000 lower in 2009 than 2008. Cost of goods sold was $1.4 million higher in 2008 than 2007 and cost of goods sold was $1.6 million lower in 2007 than 2006. The cost per pound in 2009 was 4.0% higher than 2008. The cost per pound in 2008 was 18.0% lower than 2007, and the cost per pound in 2007 was 10.8% higher than 2006. The lower cost of goods sold in 2009 compared to 2008 is the result of lower production and no nut-in-shell cost of sale in 2009. The higher cost of goods sold in 2008 as compared to 2007 are primarily the result of the Partnership selling all of the 2008 production compared to 2007 when 5.9 million field pounds were processed into kernel; the increase in production by 1.8 million field pounds and the $104,000 write off of tree inventory in 2008 compared to no tree inventory write off in 2007. The lower cost of goods sold in 2007 was not indicative of the actual production costs as 5.9 million field pounds were processed into kernel that was sold or inventoried by the Partnership as nut-in-shell. The kernel and nut-in-shell were included as inventory at December 31, 2007. Additionally, 1.3 million fewer field pounds were produced in 2007 compared to 2006. The absolute farming costs for 2007 were $294,000 lower (not including the additional cost of processing related to kernel production from WIS nuts) when compared to 2006 which was a result of lower cultivation, harvesting, rent and depreciation offset by higher crop and tree insurance costs. The lower cost per pound in 2008 is a result of higher production and higher recovery under the terms of the nut purchase agreements. The lower cost of goods in 2007 is a result fewer sold macadamia nuts compared to 2006. The higher cost per pound in 2007 is a result of lower production, lower recovery under the terms of the nut purchase contracts and the write down to market of the inventory of kernel and nut-in-shell owned by the Partnership at December 31, 2007. The inventory write down to the lower of cost or market was $945,000 in 2007.
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 fifteen 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 for 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 $4.3 million in 2009, $4.1 million in 2008, and $3.8 million in 2007. The 2009 farming service revenues were $100,000 higher compared to 2008. The 2008 farming service revenues were $300,000 higher compared to 2007. The Partnership farms approximately 1,980 acres under farming contracts. Approximately 115 acres are year-to-year contracts, contracts for approximately 70 acres expire June 30, 2013, contracts for approximately 635 acres expire June 30, 2016, contracts for approximately 410 acres expire July 31, 2029, contracts for approximately 280 acres expire June 30, 2033, and contracts for approximately 470 acres expire September 30, 2080.
Farming Segment - Cost of Services Sold
The cost of services sold relating to the farming contracts was $3.8 million in 2009, $3.8 million in 2008, and $3.4 million in 2007. These costs were all reimbursed to the Partnership under the terms of the farming contracts.
General and Administrative Costs
General and administrative expenses are comprised of pro-rata management costs, accounting and reporting costs, directors’ fees, office expenses, legal expenses and liability insurance.
General and administrative costs for 2009 were $17,000 higher than 2008. General and administrative costs for 2008 were $653,000 lower than for 2007 which is attributed to lower legal and accounting costs related to the termination of the effort to acquire MacFarms.
Interest Income and Expense
The Partnership recorded interest expense of $98,000 in 2009, $289,000 in 2008, and $179,000 in 2007. The interest relates to (1) the long-term loan used to acquire the farming operations, (2) capitalized equipment leases, (3) an equipment financing loan, (4) interest expense on a revolving line of credit and (5) insurance financing costs. The decrease in interest expense in 2009 compared with 2008 is attributable to lower outstanding balance on the revolving line of credit in 2009.
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 $5,000 in 2009, $14,000 in 2008, and $49,000 in 2007.
Other Income
Other income of $498,000 was recorded in 2009 and includes $157,000 in crop insurance proceeds, $317,000, net of general excise tax, in proceeds from the settlement with Hamakua Macadamia Nut Company, Inc., $17,000 in distributions from American AgCredit, PCA and $7,000 from the gain on sale of farm equipment. Other income of $896,000 was recorded in 2008 of which $883,000 was from crop insurance and $13,000 from a distribution from American AgCredit. Other income of $13,000 was recorded in 2007 for a distribution from American AgCredit.
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 expense (benefit) was $62,000 in 2009, $49,000 in 2008 and ($43,000) in 2007.
Liquidity and Capital Resources
The Partnership recorded net income of $195,000 and had cash flows from operations of $2.6 million during 2009 and had working capital of $2.6 million at December 31, 2009. Net cash provided by operations was $2.6 million in 2009 compared to net cash provided by operations of $2.8 million in 2008. The decrease of $200,000 is the net result of less crop insurance proceeds, less interest paid and the settlement proceeds received from Hamakua Macadamia Nut Company, Inc. in 2009. The Partnership recorded net income of $68,000 and had cash flows from operations of $2.8 million during 2008 and had working capital of $1.1 million at December 31, 2008. Net cash provided by operations was $2.8 million in 2008 compared to $3.9 million net cash used in 2007. The significant increase of $6.5 million is a result of more pounds of nuts sold, a higher selling price per pound for the nuts sold, fewer pounds of nuts processed into kernel from WIS nuts, sales of the nut-in-shell inventory and sales of a majority of the kernel inventory.
At December 31, 2009 the Partnership’s working capital was $2.6 million and its current ratio was 2.45 to 1, compared to working capital of $1.1 million and a current ratio of 1.44 to 1 at December 31, 2008 and negative working capital of $199,000 and a current ratio of 0.96 to 1 at December 31, 2007.
In 2009, the increase in working capital compared to 2008 was primarily due to the reduction of short-term borrowing, crop insurance receipt and the settlement received from Hamakua Macadamia Nut Corporation. In 2008, the increase in working capital compared to 2007 was the result of higher revenue, lower general and administrative costs, and higher other income offset by higher costs of goods sold, higher interest cost and higher income tax. The Partnership was in compliance with the terms and conditions of the Credit Agreement at December 31, 2007 except for the restricted payment covenant, minimum tangible net worth covenant, and the debt coverage ratio covenant. On March 14, 2008, the lender provided a waiver and amendment to the loan covenants for the year ended December 2007. Effective March 14, 2008, the amended agreement reduced the maximum borrowing on the revolving line of credit from $5.0 million to $4.5 million, established a quarterly covenant based upon EBITDA, prohibited declaration and payment of further restricted payments in 2008, established a minimum tangible net worth of $41.0 million effective December 31, 2008 and required the Partnership to provide additional security in the form of a mortgage or deed of trust on real property. On July 8, 2008, the Partnership executed a Second Amended and Restated Credit Agreement with American AgCredit Capital Markets. The Second Amended and Restated Credit Agreement increased the maximum borrowing on the revolving line of credit from $4.5 million to $6.0 million, and allowed no payments of distributions to partners through June 30, 2009. On June 30, 2009, the Partnership executed a Third Amended and Restated Credit Agreement with American AgCredit, PCA which replaced the prior credit agreement and provides the Partnership with a $5.0 million revolving line of credit. The new Agreement continues the terms and conditions of the Second Amended and Restated Credit Agreement with the exception of changes to the minimum tangible net worth and minimum consolidated EBITDA financial covenants. The minimum tangible net worth amount is required to be $41,068,000 and shall be increased dollar for dollar by the amounts of positive consolidated net income of the Partnership beginning the first day of fiscal year 2009 and thereafter. The Partnership is required to have consolidated EBITDA of not less than $1.5 million at the end of each quarter on a rolling four quarter period commencing as of September 30, 2009.
On March 11, 2010, the Partnership executed a commitment letter with American AgCredit, PCA (“Lender”) agreeing to an extension and amendment of the Revolving Line of Credit Facility (“Line-of-Credit”). The extension of the LOC will be effect June 29, 2010 for a two-year period in the amount of $3.5 million. The commitment by Lender may be withdrawn if (i) a condition described in the commitment letter cannot be satisfied, (ii) the Partnership fails to perform any material obligations under the commitment letter, (iii) there is filed against the Partnership or any member thereof, a petition in bankruptcy or insolvency or for reorganization or the appointment of a receiver, trustee or liquidator, (iv) a change that has occurred that has a Material Adverse Effect on the financial condition of the Partnership, or (v) the macadamia orchards owned by the Partnership have suffered any material damage or destruction and the same is not restored to the satisfaction of Lender prior to Closing Date, and that lender has terminated its commitment hereunder by reason thereof. The Partnership is required to provide year end and interim financial information, pro-forma financial information, all public filings and disclosures evidence of receipt of all necessary government approvals, required certifications and such legal opinions as may be reasonably required by Lender. The Partnership will be required to maintain a four quarter EBITDA of not less that $1.5 million for the four quarters ended June 30, 2010 and thereafter, and to maintain a minimum tangible net worth amount of $41.0 million that shall be increased dollar for dollar by the amount of positive consolidated net income achieved by the Partnership, beginning January 1, 2009 and thereafter. The Partnership believes that it will be able to satisfy all of the conditions set forth by Lender. For further information see “Description of Business” “Loan Agreement”.
Capital expenditures in 2009, 2008 and 2007 were $694,000, $125,000, and $226,000, respectively. The increase in 2009 was attributed to the acquisition of more farming equipment and vehicles than 2008. The decrease in 2008 was attributed to the acquisition of less farming equipment, vehicles and computers than 2007. Capital expenditures planned for 2010 are about $350,000 for normal replacement of farming equipment, and are expected to be financed internally.
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 June 29, 2010. At December 31, 2009, the Partnership had a cash balance of $1.2 million and no drawings on the line of credit. At December 31, 2008, the Partnership had a cash balance of $207,000 and line of credit drawings outstanding of $900,000.
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 and the terms of our borrowing agreements permit us to do so. Cash distributions would be paid from operating cash flow and / or other resources. In December 2007, the Partnership declared a distribution of $0.03 per Class A unit (a total of $225,000), which was paid February 15, 2008 to the unit holders of record as of December 31, 2007. No subsequent distributions have been made because of borrowing agreement restrictions.
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.
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 consolidated financial statements. The preparation of the Partnership’s consolidated 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 consolidated 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 materially differ from those estimates.
The Partnership believes that the following critical accounting policies affect significant judgments and estimates used in the preparation of the consolidated 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 consolidated balance sheets. 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 these plans. 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.
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 reviews the inventory held at year end and values it based on the lower of average cost or market.
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 consolidated financial statements. Additional information can be found in section (c) under the heading Nut Purchase Contracts on page 3.
ITEM 7A.
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, 2009, a one percent increase or decrease in the applicable rate under the Credit agreement would result in an interest expense fluctuation of approximately $1,000 per annum. The exposure to the interest rate market risk was eliminated on January 15, 2010 when the Partnership paid off the debt.
From time to time, the Partnership is exposed to market risks resulting from changes in the market price of macadamia kernel if it does not have nut purchase contracts or if those contracts set the purchase price based upon a market rate. The exposure to the market price risk was eliminated on December 22, 2009 (for the period January 1, 2010 through December 31, 2011) when the Partnership executed an amendment to its Nut Purchase Agreement with Mauna Loa, whereby all the Partnership’s nuts will be sold to Mauna Loa for the calendar years 2010 and 2011 at a fixed price.
ITEM 8.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Page
Number
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets, December 31, 2009 and 2008
Consolidated Income Statements, for the Years Ended December 31, 2009, 2008 and 2007
Consolidated Statements of Partners’ Capital, for the Years Ended December 31, 2009, 2008 and 2007
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and
Notes to Consolidated Financial Statements
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 (the “Partnership”) at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. These consolidated financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these consolidated 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as, evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ Accuity LLP
Honolulu, Hawaii
March 16, 2010
ML Macadamia Orchards, L.P.
Consolidated Balance Sheets
(in thousands)
See accompanying notes to consolidated financial statements.
ML Macadamia Orchards, L.P.
Consolidated Income Statements
(in thousands, except per unit data)
See accompanying notes to consolidated financial statements.
ML Macadamia Orchards, L.P.
Consolidated Statements of Partners’ Capital
(in thousands)
See accompanying notes to consolidated financial statements.
ML Macadamia Orchards, L.P.
Consolidated Statements of Cash Flows
(in thousands)
See accompanying notes to consolidated financial statements.
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 other entities in Hawaii, which process the nuts and market the finished products. The Partnership farms approximately 1,980 acres of macadamia orchards in Hawaii for other orchard owners in exchange for a fee.
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 MLR 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.
Limited partner interests are represented by Class A Units, which are evidenced by depositary receipts that trade publicly on the OTCQX platform.
Liquidity. The Partnership recorded net income of $195,000, generated operating cash flow of $2.6 million during 2009 and had working capital of $2.6 million at December 31, 2009. The financial results for 2009 were due to the Partnership selling all of the macadamia nut production at higher prices, the sale of kernel inventory, lower cost of goods sold, lower interest expense, crop insurance proceeds and proceeds from the settlement with Hamakua Macadamia Nut Company, Inc (“Hamakua”). The crop insurance proceeds and settlement proceeds from Hamakua are reflected as cash received for goods and services in the consolidated statement of cash flows, and was used to service the Partnership’s line of credit. The Partnership recorded net income of $68,000 generated operating cash flow of $2.8 million during 2008 and had working capital of $1.1 million at December 31, 2008. The financial results for 2008 were due to the Partnership selling all of macadamia nut production at higher prices, the selling of a large portion of the kernel inventory and all of the nut-in-shell inventory, lower cost of goods sold on a per pound of production and crop insurance proceeds. The Partnership has access to working capital through its line of credit and other borrowing opportunities, if necessary. However, management feels that the Partnership will be able to generate sufficient cash flows from operations to meet current obligations and debt service requirements.
(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) Allowance for Doubtful Accounts. The Partnership reviews the accounts receivable to determine the adequacy of this allowance by regularly reviewing specific account payment history and circumstances, the accounts receivable aging, and historical write-off rates. If customer payment timeframes were to deteriorate, allowances for doubtful accounts would be required. There was no allowance for doubtful accounts at December 31, 2009 or 2008.
(c) Financial Instruments. The fair value of the line of credit and a portion of the long-term financial instruments approximates 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.
(d) Consolidation. The consolidated financial statements include the accounts of the Partnership and MLR. All significant intercompany balances and transactions, including management fees and distributions, have been eliminated.
(e) 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.
However, the timing and manner in which farming costs are recognized in the Partnership’s consolidated 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 consolidated balance sheets. 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.
(f) Inventory.
Supply Inventory. Supplies inventory is relieved on an average cost basis to cost of farming expense as used. There was no write down of supplies inventory in 2009. In 2008, the Partnership wrote off $104,000 of tree inventory as some trees in the nursery had grown too large to be used in the orchard operations.
Nut and Kernel Inventory. Nut and kernel inventory is recorded at the lower of cost or market, and is relieved on an average cost basis to cost of goods sold as the product is sold. The Partnership had no nut and kernel inventory at December 31, 2009. At December 31, 2008 kernel inventory was valued at $335,000. At December 31, 2007 nut and kernel inventory was valued at $946,000 and $1,024,000, respectively. In 2009, kernel inventory was written off for spoilage in the amount of $136,000. Inventory was written down to market and written off for spoilage in 2008 in the amount of $68,000. Inventory was written down to market in 2007 in the amount of $945,000. The inventory amounts written off and written down were reflected in costs of goods sold in the respective year.
(g) 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 consolidated balance sheets 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.
(h) Goodwill and Other Intangible Assets.
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.
(i) General Excise Taxes. The Partnership records Hawaii general excise taxes when goods and services are sold on a gross basis as components of revenues and expenses. For the years ended December 31, 2009, 2008 and 2007, Hawaii general excise taxes charged or passed on to customers and reflected in revenues and expenses amounted to $90,000, $79,000, and $72,000, respectively.
(j) 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.
The Partnership evaluates uncertain income tax positions utilizing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. At December 31, 2009, management believes there were no uncertain income tax positions. The five tax years in the period ended December 31, 2009 remain open for federal purposes.
(k) 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.
(l) Pension Benefit and Intermittent Severance Costs. The funded status of the Partnership’s defined benefit pension plan and intermittent severance plan is recognized in the consolidated balance sheets. The funded status is measured as the difference between fair value of the plan assets and the benefit obligation at December 31, the measurement date. The benefit obligation represents the actuarial present value of benefits expected to be paid upon termination based on estimated future compensation levels. An overfunded plan, with the fair value of plan assets exceeding the benefit obligation, is recorded as a prepaid pension asset equal to this excess. An underfunded plan, with the benefit obligation exceeding the fair value of plan assets, is recorded as a retirement benefit obligation equal to this excess. The actuarial method used for financial accounting purposes is the projected unit credit method.
(m) Estimates. The preparation of consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
(n) Net Consolidated Income (Loss) Per Class A Unit. In 2009, 2008 and 2007 consolidated net income (loss) per Class A Unit was calculated by dividing 100% of Partnership’s consolidated net income (loss) by the average number of Class A Units outstanding for the period.
(o) Accumulated Other Comprehensive Loss. Accumulated other comprehensive loss represents the change in Partners’ capital from transactions and other events and circumstances arising from non-unit holder sources. Accumulated other comprehensive loss consists of deferred pension and intermittent severance gains or losses. At December 31, 2009 and 2008, our Consolidated Balance Sheets reflected Accumulated Other Comprehensive Loss in the amount of $115,000 and $267,000, respectively, in deferred pension and intermittent severance loss.
(p) Reclassifications. Certain balances have been reclassified to conform to the current and prior year presentation. These reclassifications had no impact on net income (loss) previously reported.
(q) Adoption of New Accounting Standards. In December 2008, the Financial Accounting Standards Board (“FASB”) issued a staff position that requires the disclosure of more information about investment allocation decisions, major categories of plan assets, including concentrations of risk and fair value measurements, and the fair value techniques and inputs used to measure plan assets. This staff position was adopted during the fourth quarter of 2009, and did not have a material impact on the consolidated financial statements.
In August 2009, the FASB issued an accounting standard update, which provides additional guidance on the measurement of liabilities at fair value. In the absence of a quoted price in an active market for an identical liability at the measurement date companies are required to apply approaches that use the quoted price of an investment in the identical liability or similar liabilities traded as assets or other valuation techniques consistent with the fair-value measurement principles issued by the FASB. This accounting standard update was adopted during the fourth quarter of 2009, and did not have a material impact on the consolidated financial statements.
(r) Recently Issued Accounting Standards. In January 2010, the FASB issued an accounting standard update that requires (1) a reporting entity must disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; (2) in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements, and (3) a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. These disclosure requirements are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We do not believe the adoption of this accounting standard will have a material impact on the consolidated financial statements.
(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.
(a) Nut Purchase Contracts. The Partnership had three nut purchase contracts in 2009 with: Mauna Loa, Hamakua (terminated June 10, 2009), and MacFarms (terminated December 22, 2009), as detailed in the following paragraphs.
On June 1, 2006, the Partnership executed a contract with Mauna Loa for the annual delivery of approximately 6.3 million field pounds, effective January 1, 2006 and expiring December 31, 2011. The contract provides for a nut price of $0.74 per WIS SK/DIS pound in 2006 and $0.75 per WIS SK/DIS pound in 2007. The purchase price will increase annually by $0.01 per WIS pound, except 2008, until it reaches $0.78 per WIS SK/DIS pound in 2011. On July 9, 2008 an addendum to the June 1, 2006 nut purchase contract was executed with Mauna Loa for the delivery of an additional 9.0 million pounds of WIS nuts during the period July 21, 2008 through June 30, 2009 at a purchase price of $0.60 per pound on WIS SK/DIS basis. The addendum provided for an additional 3.0 million pounds to be delivered if mutually agreed on the same basis as the additional 9.0 million pounds. On November 3, 2008, it was agreed that any additional pounds over the 9.0 million pounds delivered until December 31, 2008 would
have a nut purchase price of $0.63 instead of $0.60 per pound on a WIS SK/DIS basis. On March 23, 2009, the parties executed an amendment to the June 1, 2006 for the delivery of an additional 9.0 to 15.0 million pounds at a purchase price of $0.63 per pound on a WIS SK/DIS basis. On December 22, 2009, the Partnership and Mauna Loa executed an addendum to the June 1, 2006 nut purchase contract which provides that all of the macadamia nuts harvested by the Partnership, estimated to be between 19 to 21 million wet-in-shell pounds, in calendar years 2010 and 2011 will be sold to Mauna Loa at a nut purchase price of $0.73 per pound on a WIS SK/DIS basis.
On December 16, 2004, a nut purchase contract with Hamakua for the annual delivery of 6.0 million field pounds, effective January 1, 2007, and with 2.0 million field pounds expiring December 31, 2008, December 31, 2010, and December 31, 2012, respectively. The contract provides for a minimum price of $0.75 per WIS SK/DIS pound and a maximum price of $0.95 per WIS SK/DIS pound. The pricing formula included a fixed component of $0.85 per WIS pound and a second component based on Hamakua’s average selling price for bulk kernel. In February 2007, the contract was amended to allow the Partnership, at its option, to have Hamakua process nuts-in-shell into kernel for a fee in lieu of selling the nuts to Hamakua. The Partnership exercised this option solely for the calendar year 2007. The contract continues to require that Hamakua purchase approximately 6.0 million field pounds of nuts in 2008, approximately 4.0 million field pounds of nuts in the years 2009-2010, and 2.0 million field pounds of nuts in the years 2011-2012. Hamakua refused to accept any nut deliveries in 2008 and 2009. The nut purchase agreement was terminated on June 10, 2009.
On January 6, 2006, the Partnership executed a contract with MacFarms for the annual delivery of between 5.0 and 6.0 million field 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 2009 was $0.615 per WIS SK/DIS pound and July - December 2009 was $0.63 per WIS SK/DIS pound. The effective price for January - June 2008 was $0.494 per WIS SK/DIS pound and July - December 2008 was $0.55 per WIS SK/DIS pound. The effective price for January - June 2007 was $0.608 per WIS SK/DIS pound and July -December 2007 was $0.494 per WIS SK/DIS pound. The Partnership terminated this nut purchase contract on December 22, 2009 due to the failure of MacFarms to perform its obligations under the agreement.
(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 $488,000 in 2009, $528,000 in 2008, and $453,000 in 2007 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 consolidated income (loss) ratably through 2019 as a reduction to depreciation for this orchard.
In return, the Partnership is obligated to pay the owner 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.
Thereafter, the Partnership is obligated to pay the owner 50% of this orchard’s cash flow in excess of the target cash flow as additional incentive rent. No additional rent was due for 2009, 2008 or 2007.
(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 consolidated income (loss) 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 years ended December 31, 2009, 2008 and 2007.
Segment Reporting for the Year ended December 31, 2009 (in thousands)
Segment Reporting for the Year ended December 31, 2008 (in thousands)
Segment Reporting for the Year ended December 31, 2007 (in thousands)
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 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 2009, 2008, or 2007.
(b) Management Services Contract. The Partnership provides administrative services to D. Buyers Enterprises, LLC (“DBE”) for which it was compensated $19,000, $73,000, and $100,000 in 2009, 2008 and 2007, respectively.
(c) 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 $60,000 in 2009, $80,000 in 2008 and $90,000 in 2007.
(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):
All of net cash flow in 2009, 2008 and 2007 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 was recorded in 2009, 2008 and 2007 as the Partnership purchased the stock of the managing partner MLR in January 2005 and the management fee was eliminated in consolidation.
(6) LAND, ORCHARDS AND EQUIPMENT
Land, orchards and equipment, stated at cost, consisted of the following at December 31, 2009 and 2008 (000’s):
Depreciation expense was recorded for $2.0 million, $1.9 million, and $1.9 million in 2009, 2008 and 2007, respectively. 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, 2009 and 2008, the Partnership’s long-term debt comprises (000’s):
On May 2, 2000, the Partnership entered into a credit agreement with Pacific Coast Farm Credit Services, ACA (currently American AgCredit, PCA) comprised of a $5 million revolving line of credit and a $4 million promissory note. On June 30, 2009, the Partnership executed a term loan promissory note for $600,000 with American AgCredit, PCA.
The line of credit expires on June 29, 2010. 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 as of December 31, 2009. There was $900,000 in drawings on the line of credit as of December 31, 2008, with interest at 4.00%.
At December 31, 2009, the outstanding balance on the $4 million promissory note amounted to $400,000. The note was scheduled to mature in 2010 and bears interest at rates ranging from 3.0% to 6.87%. The Partnership paid off the balance of the promissory note on January 15, 2010.
At December 31, 2009, the outstanding balance on the $600,000 term loan was $525,000. The term loan bears fixed interest as 7.5% per annum and was scheduled to mature on July 1, 2013. The Partnership paid off the balance of the term loan on January 15, 2010.
The estimated fair values of the Partnership’s financial instruments has been determined using an estimated market rate of 6.00% in 2009 and 2008 with similar terms and remaining maturities to that of the current financial instruments. 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):
Of the total $925,000 outstanding at December 31, 2009, $170,000 has a variable interest rate. The remaining $755,000 and $460,000 outstanding at December 31, 2009 and 2008, 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 and real 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. No restricted payments shall be declared or made through June 30, 2010 without prior lender approval.
2. Minimum tangible net worth as of December 31, 2009 shall not be below $41,068,000 and shall be increased dollar for dollar by the amount of positive Consolidated Net Income achieved by the Partnership, beginning January 1, 2009 and thereafter.
3. The minimum quarterly consolidated EBITDA amount shall not be less than $1,500,000 for each rolling four-quarter period beginning with the four quarters ended September 30, 2009 and each rolling four-quarter period thereafter.
4. The Addendum to Nut Purchase Agreement with Mauna Loa shall not be terminated prior to June 30, 2010 without written consent of Lender.
At December 31, 2009, the Partnership’s working capital was $2.6 million and its current ratio was 2.45 to 1. At December 31, 2008, the Partnership’s working capital was $1.1 million and its current ratio was 1.42 to 1. At December 31, 2007, the Partnership’s working capital was negative $199,000 and its current ratio was 0.96 to 1. The Partnership was in compliance with the terms and conditions of the Credit Agreement at December 31, 2007 except for the restricted payment covenant, minimum tangible net worth covenant, and the debt coverage ratio covenant. On March 14, 2008, the lender provided a waiver and amendment to the loan covenants for the year ended December 31, 2007. Effective March 14, 2008, the amended agreement reduced the maximum borrowing on the revolving line of credit from $5.0
million to $4.5 million, established a quarterly covenant based upon EBITDA, prohibits the declaration and paying of further restricted payments in 2008, established a minimum tangible net worth of $39.0 million effective December 31, 2008 and required the Partnership to provide additional security in the form of a mortgage or deed of trust on real property. On July 8, 2008, the Partnership executed a Second Amended and Restated Credit Agreement with American AgCredit Capital Markets. The Second Amended and Restated Credit Agreement increased the maximum borrowing on the revolving line of credit from $4.5 million to $6.0 million, allowed no declaration and related payments of cash distributions to partners through June 30, 2009 and provided restrictive covenants as shown above. The Partnership was in compliance with the terms and conditions of the Second Amended and Restated Credit Agreement at December 31, 2008. On March 25, 2009, American AgCredit Capital Markets provided the Partnership with a commitment to amend the current credit agreement, which would extend the revolving line of credit for an additional year. The commitment would reduce the revolving line of credit from $6.0 million to $5.0 million, increase the interest rate by 25 basis points per annum, increase the fixed rate by 50 basis points per annum and maintain all other terms and conditions. On June 30, 2009, the Partnership executed a Third Amended and Restated Credit Agreement with American AgCredit, PCA which replaced the prior credit agreement and provides the Partnership with a $5.0 million revolving line of credit. The new Agreement continues the terms and conditions of the Second Amended and Restated Credit Agreement with the exception of changes to the minimum tangible net worth and minimum EBITDA financial covenants. The minimum tangible net worth amount is required to be $41.068 million and shall be increased dollar for dollar by the amounts of positive consolidated net income of the Partnership beginning the first day of the fiscal year 2009 and thereafter. The Partnership is required to have consolidated EBITDA of not less than $1.5 million at the end of each quarter on a rolling four quarter period commencing as of September 30, 2009. The Partnership was in compliance with the terms and conditions of the Third Amended and Restated Credit Agreement at December 31, 2009.
Capital and Operating Leases. The Partnership had no capital leases as of December 31, 2009. The Partnership had capital leases of $21,000 as of December 31, 2008. The Partnership has operating leases for equipment and land.
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 $23,000 in 2009, $15,000 in 2008, and $24,000 in 2007. Total lease rent for all land operating leases was $165,000 in 2009, $136,000 in 2008, and $161,000 in 2007.
Equipment Operating Leases. The Partnership leases equipment for the farming operation to include vehicles, blower sweepers and harvester. The operating lease terms range from three to five years. The operating lease cost was $104,000, $151,000, and $217,000 in 2009, 2008 and 2007, respectively.
Contractual obligations as of December 31, 2009 for the Partnership are detailed in the following table (000’s):
(8) GROSS INCOME TAXES
The components of gross income tax expense (credit) for the years ended December 31, 2009, 2008 and 2007 were as follows (000’s):
The provision (credit) 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, 2009, 2008 and 2007.
The components of the net deferred tax liability reported on the consolidated balance sheets as of December 31, 2009 and 2008 are as follows (000’s):
(9) PENSION PLAN
The Partnership 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 Partnership employees.
The following reconciles the changes in the pension benefit obligation and plan assets for the years ended December 31, 2009, 2008, and 2007 to the funded status of the plan and the amounts recognized in the consolidated balance sheets at December 31, 2009, 2008, and 2007 (000’s):
The amounts recognized in accumulated other comprehensive loss at December 31, 2009 and 2008 were as follows (000’s):
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, 2010 is $7,000.
The accumulated benefit obligation of the pension plan as of December 31, 2009 and 2008 was approximately $614,000 and $568,000, respectively.
The components of net periodic pension cost for the years ended December 31, 2009, 2008 and 2007 were as follows (000’s):
The amounts recognized in accumulated other comprehensive loss for the years ended December 31, 2009, 2008 and 2007 were as follows (000’s):
The weighted average actuarial assumptions used to determine the pension benefit obligations at December 31, 2009, 2008 and 2007 and the net periodic pension cost for the years then ended are as follows:
The discount rate was determined based on an analysis of future cash flow projections of pension plans with similar characteristics and provisions.
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. Stock mutual funds primarily include investments in large-cap, mid-cap and small-cap companies primarily located in the United States. Fixed income securities include bonds, debentures and other fixed income securities. 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.
The plan’s asset allocation percentages at December 31, 2009 and 2008 were as follows:
The fair values of the Partnership’s pension plan assets at December 31, 2009, by asset category are as follows:
The Partnership expects to contribute approximately $100,000 to the plan in 2010.
The following pension benefit payments, which reflect expected future services, as appropriate, are expected to be paid:
(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 service) 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 Partnership employees.
The following reconciles the changes in the severance benefit obligation and plan assets for the years ended December 31, 2009, 2008 and 2007 to the funded status of the plan and the amounts recognized in the consolidated balance sheets at December 31, 2009, 2008 and 2007 (000’s).
The discount rate was determined based on an analysis of interest rates for high-quality, long-term corporate debt. This analysis created a yield curve of annualized individual discount rates for period from one to thirty years. The discount rate used to determine the severance benefit obligation as of the balance sheet date is the rate in effect at the measurement date. The same rate is also used to determine the net periodic cost for the fiscal year.
The amounts recognized in accumulated other comprehensive loss at December 31, 2009 and 2008 were as follows (000’s):
There will be no estimated net actuarial loss that will be amortized from accumulated other comprehensive loss into net periodic benefit cost for the year ending December 31, 2010.
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 purchase price allocations.
(11) EMPLOYEES SAVINGS PLAN
The Partnership sponsors a 401(k) plan, which allows participating employees to contribute up to an amount not to exceed the employee’s covered compensation for the plan year reduced by required withholdings, 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, 2009, 2008 and 2007, Partnership matching contributions were $33,000, $33,000, and $34,000, 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, 2009, 2008, and 2007 Partnership contributions were $112,000, $106,000, and $115,000, respectively.
(13) QUARTERLY OPERATING RESULTS (Unaudited)
The following chart summarizes unaudited quarterly operating results for the years ended December 31, 2009, 2008, and 2007 (000’s omitted except per unit data):
(14) CONCENTRATION RISKS
Market and customers. There are a limited number of customers available to purchase the Partnership’s nut production. If our customers are unable to perform under their contracts 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. If the market for the Partnership’s inventory was to decline the Partnership would have to sell at a price lower than the current market price and if no buyers were available the inventory could become unsalable and have to be disposed.
Nut Purchase Agreements. The Partnership had four contracts beginning January 1, 2007. One of those contracts terminated in 2008 and two were terminated in 2009. The terms of the contracts varied from two to six years, contained fixed 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 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 were a significant number of Hawaii macadamia growers that were unable to find a processor to purchase and process their crop in 2007 due to the depressed market.
The Partnership has one nut purchase contract with Mauna Loa for calendar years 2010 and 2011. The agreement is a fixed price contract. Fixed price contracts can be disadvantageous because the Partnership may not be able to pass on unexpected cost increases as they arise.
The Partnership’s ability to renew its credit agreements is highly dependent upon the existence of its nut purchase agreements with Mauna Loa. Accordingly, the cancellation of the nut purchase agreement with Mauna Loa in the future would significantly affect the Partnership’s ability to secure the necessary funds to finance its current working capital needs.
Employees. As of December 31, 2009, the Partnership employed 249 people, of which 170 were seasonal employees. Of the total, 21 are in farming supervision and management, 214 in production, maintenance and agricultural operations, and 14 in accounting and administration.
With the May 2000 acquisition, the Partnership agreed to the assumption of two bargaining agreements with the ILWU Local 142. These agreements cover all production, maintenance and agricultural employees of the Ka’u Orchard Division, the Keaau Orchard Division and 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 agreed to a three-year contract, which expired on April 30,
2008 and was extended for a 60-day period. On June 30, 2008, the parties agreed to a one-year contract and on May 27, 2009, the parties agreed to a two-year contract which is effective May 27, 2009 through May 31, 2011. Although, the Partnership believes that relations with its employees and the ILWU are generally very good, there is uncertainty with respect to the ultimate outcome of the bargaining unit negotiations when the current agreement expires.
Subsequent Events
Debt retirement
On January 15, 2010, the Partnership paid off the remaining debt owed to American AgCredit, PCA. As of December 31, 2009, the Partnership owed $925,000 of which $550,000 was current and $375,000 was long-term. The Partnership has a revolving line-of-credit agreement with American AgCredit, PCA through June 29, 2010 for $5.0 million and a commitment for a two year amendment to the agreement through June 29, 2012 in the amount of $3.5 million.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the fiscal years ended December 31, 2007, 2008, and 2009, there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Partnership’s management has evaluated, under the supervision and with the participation of the Partnership’s Chief Executive Officer and the Chief Financial Officer, 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”)), as of the end of the period covered by this annual report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the evaluation date, the Partnership’s disclosure controls and procedures were effective as of the end of the period covered by this annual report.
(b) Management’s Annual Report on Internal Control Over Financial Reporting
The Partnership’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A partnership’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail , accurately and fairly reflect the transactions and dispositions of the assets of the partnership; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the partnership are being made only in accordance with authorizations of management and directors of the partnership; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the partnership’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to consolidated financial statement preparation and presentation. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time.
Management of the Partnership conducted an evaluation of the effectiveness of the Partnership’s internal control over financial reporting based on the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, the Partnership’s management concluded that its internal control over financial reporting was effective as of December 31, 2009.
This annual report does not include an attestation report of the Partnership’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Partnership’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Partnership to provide only management’s report in this annual report.
(c) Changes in Internal Control Over Financial Reporting
There have been no significant changes to the Partnership’s internal control over financial reporting during the fourth quarter of 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The Partnership 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. The Board of Directors has no Chairman but the Chairman of the Audit Committee is designated as the Lead Independent Director. The Lead Independent Director has the qualifications of being independent, financially literate and is a financial expert. Additionally, the Lead Independent Director has the business leadership experience that allows him to work with all the Board members to provide direction, control and evaluation of the operations of the Partnership.
The Board of Directors is comprised of members whose skill sets provide various knowledge of business in general (local, state and global), management of business, specialized knowledge of the Partnership’s business, knowledge and relationships within the local political arena and the ability to make a constructive contribution to the guidance of the direction of the Partnership. The Board of Directors administers its risk oversight function through the Audit Committee. The Audit Committee meets quarterly with management and the Partnership’s independent auditors where the financial, environmental, legal and operational risks are presented and discussed. The Audit Committee submits its report to the Board of Directors on a quarterly basis for full Board review. 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. 44 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. 62 years old; director of Managing Partner since June 2005; Executive at Mauna Loa Macadamia Nut Corporation from 1991 to 1998.
E. Alan Kennett. 66 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. 60 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 of The Gas Company, LLC since December 2007; President and CEO of Safe Renewables Corporation from October 2006 until December 2007; 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.
Bradford C. Nelson. 43 years old; director of the Managing Partner since October 2009; Chief Financial Officer and a Director of Seemorgh Investments, Inc.
Dennis J. Simonis. 53 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 through April 2009.
Scott C. Wallace. 54 years old; director of Managing Partner since June 2007; President and CEO of Fruit Patch since July 2009. Global Vice President, Sales and Marketing of SVP Worldwide from July 2006 to July 2009. Chairman, President and Chief Executive Officer of Gardenburger, Inc from January 2001 to July 2006.
B. Identification of Executive Officers of the Managing Partner
Dennis J. Simonis. 53 years old; president of Managing Partner since August 2001; and chief executive officer since December 2004. Formerly executive vice president and chief operating officer of Mauna Loa and Chief Financial Officer and President of DBE.
Randolph H. Cabral. 57 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. 63 years old; chief financial officer of Managing Partner since August 2001.
C. Identification of Certain Significant Employees
Not applicable
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. Mr. Kai has experience and knowledge of global economics, equity markets, securities, financial instruments and is active in local and state government issues. 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. Mr. Kendrick provides a high degree of general manufacturing acumen and extensive macadamia growing, processing and marketing experience and expertise to the Partnership. He 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 has written several technical papers. He possesses an in-depth knowledge of agricultural practices and management, particularly those in the state of Hawaii. He currently resides in Kaumakani, Kauai, Hawaii.
Jeffrey M. Kissel. Mr. Kissel has been the President of The Gas Company, since December 2007. He was 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. Mr. Kissel possesses a broad range of general management experience in both private and public companies and has a high level of financial expertise. He has a B.B.A. and M.B.A. from the University of Hawaii and currently resides in Honolulu, Hawaii.
Bradford C. Nelson. Mr. Nelson has served as a Director of the Managing Partner since October of 2009. He is the Chief Financial Officer and a Director of Seemorgh Investments, Inc., an entity owned by Mr. Fred Ebrahimi, the Partnership’s largest unitholder currently owning about 38.4% of the Partnership’s Class A units. Seemorgh manages all aspects of Mr. Ebrahimi’s finance and real estate holdings, including a large project in India called QuarkCity. Mr. Nelson is a CPA and has served as an officer of other private and public companies in Colorado from 1994 until 2001, when he joined Mr. Ebrahimi’s companies. He received his BSBA in Finance in 1989 and his Masters in Accountancy in 1991 from the University of Denver. Mr. Nelson contributes global financial management experience and expertise and provides direct representation for the unit holders as he is an employee of the Partnership’s largest unit holder. He resides in Thornton, Colorado.
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 has over 15 years of executive management experience within the Hawaii macadamia industry and possesses financial expertise and experience. 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.
Scott C. Wallace. Mr. Wallace has served as a director since June 2007. He has been President and CEO of Fruit Patch since July 2009. Fruit Patch is one of the largest processor/marketers of fresh fruit in the United States specializing in peaches, plums, nectarines, grapes, and specialty fruits. Mr. Wallace has been involved with consumer products, general management, marketing, sales, processing, manufacturing, and distribution for his entire career. Mr. Wallace has spent over 25 years in progressively more senior management positions in the consumer goods industry. Prior to joining SVP Worldwide, he was Chairman, President and Chief Executive Officer of Gardenburger, Inc. until taking the company private in 2006. Previously, he was president and Chief Executive Officer of Mauna Loa Macadamia Nut Corporation until 2000. He has also served in management capacities with SVP Worldwide (2006 through 2009), Jacobs Suchard (1988 through 1994), Eastman Kodak Company (1985 through 1988) and Procter & Gamble (1978 through 1985). Mr. Wallace provides the Board of Directors broad general management and executive level sales and marketing expertise. Mr. Wallace received his Bachelor of Arts in International Business Management and Marketing from San Francisco State University.
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 A.S. 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.
Board Meetings and Committees; Special Meeting Attendance. During 2009, four meetings of the Board of Directors were held. Each director attended at least 75% of the meetings of the Board and of all committees of the Board on which he served during 2009. The Partnership does not have a policy with respect to Board members attendance at special meetings of partners.
Executive Session. The executive session, a meeting of non-management directors, is presided over by Jeffrey Kissel who can be communicated with by e-mail at jeffreykissel@gmail.com.
Audit Committee. Effective March 2, 2006, Jeffrey Kissel was appointed chairman of the Audit Committee. The members of the Audit Committee and Corporate Governance Committee in 2009 were Jeffrey Kissel, Alan Kennett, John Kai and David McClain (resigned from the Board June 30, 2009). The Board of Directors has determined that each member of the Audit Committee is independent in accordance with NYSE rules 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 2009 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.
The Audit Committee has discussed with the independent registered public accountants, Accuity, the matters required to be discussed by Statement on Auditing Standards No. 114 (The Auditor’s Communication With Those Charged With Governance), as may be modified or supplemented, as amended and as required by S-X Rule 2-07.
The Audit Committee has discussed with Accuity their independence and whether Accuity’s provision on non-audit related services is compatible with maintaining the Accuity’s independence from management and the Partnership and has received from Accuity 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 Accuity.
Audit Committee 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 Accuity’s representatives, with and without management present.
The Audit Committee has reviewed and discussed the audited financial statements for the year ended December 31, 2009 with management and the independent auditors of the Partnership. Based upon the above-mentioned 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, 2009.
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”, which applies to principal executive officers, principal financial officer, principal accounting officer or controller or persons performing similar functions and all employees of the Partnership, 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 members of the Nominating Committee are Mr. John Kai, Mr. Jeffrey Kissel and Mr. E. Alan Kennett. 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.
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. The members of the Compensation Committee are Mr. John Kai, Mr. Jeffrey Kissel and Mr. E. Alan Kennett. The Compensation Committee determines the executive and director compensation based upon the Partnership’s financial performance, the executive’s performance and the market conditions. The Compensation Committee recommends the level of compensation for the executive officers to the Board of Directors for its determination. The Compensation Committee is solely responsible for the recommendation of executive officers salary, bonus and benefit compensation. The Compensation Committee has not utilized compensation consultants in determining or recommending the amount or form of executive or director compensation. The CEO/President provides recommendations to the Compensation Committee for those executive officers which report directly to him.
Compensation Committee Interlocks and Insider Participation. The members of the Compensation Committee during 2009 were Messrs. McClain (resigned June 30, 2009), Kai, Kissel and Kennett. No member of the Compensation Committee was an officer or employee or former officer for the Partnership or the General Partner or had any relationship requiring disclosure under Item 404 of Regulation S-K.
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, 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 2009.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
A. Compensation Discussion and Analysis
As a publicly traded limited partnership we operate under our limited partnership agreement. ML Resources, Inc., as our general partner, directs, controls and manages all of our activities. The general partner is a wholly owned subsidiary of the Partnership and has no employees and receives no fees from the partnership. All costs of managing the Partnership are reimbursed by the Partnership, as provided in Section 4.5 of the Partnership Agreement. The board of directors of the general partner has a compensation committee comprised of independent directors and sets the compensation philosophy and structure for executive officers of the Partnership. Compensation arrangements, including salaries, incentives and other benefits are recommended by the compensation committee and approved by the board of directors of the general partner. Executive officers are:
Dennis J. Simonis - President and Chief Executive Officer
Randolph H. Cabral - Senior Vice President Operations
Wayne W. Roumagoux - Vice President and Chief Financial Officer
Overview of Compensation Philosophy and Programs
Our executive compensation programs are designed and administered by the Board of Directors of the Managing Partner. Through the execution of its charter, our Compensation Committee recommends to the Board of Directors, all of the forms of compensation for our named executive officers, including base salary, bonus plan and defined contribution plan and related goals. Executive compensation is determined by the Compensation Committee and approved by the Board of Directors based upon the Partnership’s financial performance, the personal performance of the executive and by market conditions. It is the Compensation Committee’s intention to set totals for the executive officers for cash compensation sufficiently high enough to attract and retain a strong motivated leadership team. The Board of Directors has the discretion to terminate or modify incentive plans and adjust or disapprove executive bonus payouts. The Board of Directors can approve discretionary incentives based upon individual performance in their area of responsibility.
Elements of Compensation
The Partnership has a pay for performance philosophy and programs that are designed to be aligned with the interests of the business as well as its unit holders. A significant portion of total direct compensation of senior management is dependent on actual performance measured against short term goals which are approved annually by the Board of Directors. The Partnership offers no stock-options nor equity-based incentives of long-term deferred compensation.
The elements of total compensation for executive officers include:
Base compensation - to provide a fixed level of compensation for performing day-to-day responsibilities, competency, and for attraction and retention when combined with the Partnership’s short-term incentive program.
Short-term incentive - to provide a competitive, performance based cash award based on pre-determined Partnership goals that measure the execution of the business strategy over a one-year period.
Benefits - to provide security pertaining to health and welfare risks in a flexible manner to meet individual needs.
Savings plan - to provide the opportunity to save additional funds for retirement or other financial goals by way of a Partnership sponsored 401-K plan.
Defined contribution plan - to provide a competitive retirement benefit.
Employment agreements - to provide specific total compensation terms in situations of involuntary termination or change in control.
Base Salary
Base salaries for executive officers reflect a balance of market conditions, role, individual competency and attraction and retention considerations. Increases in base pay for executive officers are based primarily on individual performance and competitive considerations.
Short-term Incentive Plan
The short-term executive incentive plan is performance based. The program provides for incentives based upon net consolidated income (loss) and cash flow (as defined by the Partnership Agreement) from the operating plan, which are approved by the Board of Directors, with guideline rates established between 20% and 35% of the employee’s base salary. No bonus will be earned if the Partnership performance is below 75% of the required net income (loss) and cash flow (as defined by the Partnership Agreement). If the bonus performance measures are exceeded then the percentage increase is determined and the bonus is increased by that percentage. The bonus is limited to a maximum of 200% of the target bonus and bonuses to all executives and non-executives cannot exceed 15% of Partnership’s cash flow. The bonus compensation level and related payment requires Board of Director approval.
The short-term non-executive incentive plan is performance based. The program provides for incentives based upon net consolidated income (loss) and cash flow (as defined by the Partnership Agreement) from the operating plan, which are approved by the Board of Directors, with guideline rates established between 3% and 6% of the employee’s base salary. No bonus will be earned if the Partnership performance is below 75% of the required net income (loss) and cash flow (as defined by the Partnership Agreement). If the bonus performance measures are exceeded then the percentage increase is determined and the bonus is increased by that percentage. The bonus is limited to a maximum of 200% of the target bonus and bonuses to all executives and non-executives cannot exceed 15% of Partnership’s cash flow. The bonus compensation level and related payment requires Board of Director approval.
Savings Plan
The Partnership sponsors a 401(k) plan, which allows employees, except employees who are included in a unit of employees covered by a collective bargaining agreement, to contribute up to an amount not to exceed the employee’s covered compensation for the plan year reduced by required withholdings, subject to annual limitations. The plan provides for the Partnership to make matching contributions up to 50% of the first 4% of salary deferred by employees.
Defined Contribution Plan
The defined contribution plan is provided in lieu of a retirement plan and is based upon standard guidelines for all employees, except employees who are included in a unit of employees covered by a collective bargaining agreement. The defined contribution and the related payment, requires annual approval by the Board of Directors.
Employment and Severance Agreements
The agreements provide that the Partnership shall employ each individual for a minimum term of twenty-four (24) months (principal executive officer) or eighteen (18) months (principal financial officer and named executive officer) on a rolling basis. Thus, the employment agreements shall always have twenty-four (24) or eighteen (18) months to run based upon the employee. Either the Partnership or the employee has the right to terminate the employment agreement such that the employment agreement shall terminate at the end of either twenty-four (24) or eighteen (18) months based upon which employment agreement is terminated. All current benefits provided by the Partnership shall remain in effect. The employment agreement provides for severance should the employees be terminated Without Cause or if they should resign for Good Reason as defined in the agreements. The agreements include limited covenants for not to compete and for non-disclosure of confidential information.
The total severance which would be payable under the agreements is the equivalent of 24 months of base pay or $490,000 for Dennis J. Simonis, President and CEO, and 18 months of base pay or $274,000 for Randolph H. Cabral, Senior Vice President Operations and $240,000 for Wayne W. Roumagoux, Vice President and Chief Financial Officer.
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.
Summary Compensation Table
(a) The amount in this column is the cost for an automobile provided by the Partnership.
(b) 2008 bonus was earned but waived by executive management.
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 a 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. Employment Contracts and Termination Agreements
The Managing Partner has employment agreements with its executive officers. Refer to Item 11A Executive Compensation, Employment and Severance Agreements.
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. The executive officers are: Mr. Simonis, who 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, has served as senior vice president and orchard manager since May 2000 and Mr. Roumagoux, 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 consolidated income (loss) 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. The Board of Directors can approve discretionary incentives.
E. Risk Associated with Compensation Practices
ML Macadamia Orchards, L. P. employs all persons necessary for the operation of our business, and in our opinion, our compensation policies and practices for all persons necessary for the operation of our business do not create risks that are reasonably likely to have a material adverse effect on our business, financial position, results of operations or cash flow.
Compensation Committee Report
The Compensation Committee, during fiscal 2009, was comprised of four directors, Mr. Kissel, Mr. Kai, Mr. Kennett and Dr. McClain (resigned June 30, 2009), each of whom the Board of Directors has determined meets the criteria for independence under MLR’s governance guidelines and the New York Stock Exchange rules.
The Compensation Committee has discussed the above Compensation Discussion and Analysis for the fiscal year 2009 with management. Based on this review and discussion, the Compensation Committee recommended to its Board of Directors that this Compensation Discussion and Analysis be included in this annual report on Form 10-K for the fiscal year 2009.
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.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED UNIT HOLDER MATTERS
As of December 31, 2009, and subsequent to that date to the date of this report, the Managing Partner did not own any Class A Units; and 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 concerning those persons known by the Partnership or the Managing Partner to be the beneficial owner of more than 5% of the Class A Units as of March 11, 2010.
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, 2009.
*Less than 1%
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
(a) General
Set forth below are transactions after January 1, 2009 and any currently proposed transactions, in which the Partnership was or is to be a participant where the amount involved exceeds $120,000, and in which any related person had or will have a direct or indirect material interest:
Relationships with DBE
Since September 2001, the Partnership has leased approximately 4,000 s.f. of office space in Hilo on a month-to-month basis for its executive and accounting staff from DBE and paid $60,000 in 2009 and is required to pay $60,000 in future years. The Partnership provides administrative services to DBE for which it was compensated $19,000 in 2009, $73,000 in 2008, and $100,000 in 2007. Mr. Simonis is President and a Director of ML Resources, Inc. and was President of DBE from August 21, 2006 through April 15 2009, but has no direct or indirect ownership interest in such company and receives no economic benefit from these transactions.
(b) Review, Approval or Ratification of Transactions with Related Persons.
The Partnership has no written policy or procedures for the review and approval of transactions with related persons. However, its internal procedures require that transactions with related persons are disclosed to the Audit Committee. The Audit Committee reviews each transaction to ensure that it is arms-length and then makes a decision on the transaction’s appropriateness.
Director Independence
The Board of Directors has determined that each member of the Board of Directors is independent in accordance with NYSE rules 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, Scott C. Wallace and Brad Nelson are independent under the NYSE independence standards.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Pre-Approval Policies and Procedures. Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our auditors must be approved in advance by our Board to assure that such services do not impair the auditors’ independence from the Partnership. In accordance with its policies and procedures, our Board pre-approved the audit and non-audit service performed by our auditors for our consolidated financial statements as of and for the years ended December 31, 2009, 2008 and 2007.
Audit Fees. Fees billed by the Independent Registered Public Accounting Firm (Accuity LLP) during 2009 and 2008 for the audit of the Partnership’s consolidated financial statements included on Form 10-K and review of consolidated financial statements included on Form 10-Q amounted to $112,000 and $86,000, respectively. The audit fees for the audit of the Partnership’s annual consolidated financial statements and review of consolidated financial statements included in the Partnership’s Form 10-K for the year ended December 31, 2009, were approved by the Partnership’s audit committee.
Audit Related Fees. Audit related fees billed by the Independent Registered Public Accounting Firm (Accuity LLP) during 2007 amounted to $10,000, for work performed related to the review of the Partnership’s Proxy Statement in the attempted acquisition of MacFarms. There were no audit related fees for 2008. Audit related fees billed during 2009 for work performed related to the review of the Partnership’s internal control testing amounted to $34,000. Audit related fees were approved by the Partnership’s audit committee.
Tax Fees. The Partnership’s audit committee pre-approves the fees paid to its Independent Registered Public Accounting Firm for the preparation of K-1’s for its unit holders and the Partnership’s tax returns. The fees paid to PWC, an Independent Registered Public Accounting Firm, during 2009, 2008 and 2007 for tax preparation and related support services amounted to $219,000, $274,000, and $264,000, respectively. The tax fees were approved by the Partnership’s audit committee.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
A. List of Documents Filed as a Part of this Report
1. Consolidated Financial Statements. See Index to Consolidated Financial Statements at page 26 of this Form 10-K.
2. Consolidated Financial Statement Schedules. None required.
3. Exhibits
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)
Exhibit
Number
Description
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)
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)
Exhibit
Number
Description
10.31
Form of Amendments to Lease No. 16,859 from the Trustees of the Bishop Estate. (b)
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)
Exhibit
Number
Description
10.52
Macadamia Nut Purchase Contract between Hamakua Macadamia Nut Company, Inc. and the Partnership dated December 16, 2004 effective January 1, 2007. (i)
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)
10.58
Definitive Acquisition Agreement between ML Macadamia Orchards, L.P. and Mac Farms of Hawaii, LLC and Kupua Orchards Estates, LLC, dated May 24, 2007. (l)
10.59
Termination of Acquisition Agreement between ML Macadamia Orchards, L.P. and Mac Farms of Hawaii, LLC and Kupua Orchards Estates, LLC, dated December 11, 2007. (m)
10.60
Amended and Restated Credit Agreement dated March 10, 2008. (n)
10.61
Fourth Amendment and Restated Credit Agreement dated March 14, 2008. (o)
10.62
Fifth Amendment and Restated Credit Agreement dated May 1, 2008. (p)
10.63
Second Amended and Restated Credit Agreement dated July 8, 2008. (q)
10.64
Addendum to Mauna Loa Macadamia Nut Purchase Agreement dated July 9, 2008. (r)
10.65
Addendum to Mauna Loa Macadamia Nut Purchase Agreement dated March 23, 2009. (s)
10.66
Commitment Letter to extend Revolving Line of Credit Maturity Date dated March 25, 2009 (t)
10.67
First Amendment to Revolving Loan Promissory Note dated June 30, 2009 (u)
10.68
Term Loan Promissory Note dated June 30, 2009 (v)
10.69
Third Amended and Restated Credit Agreement dated June 30, 2009 (w)
10.70
Third Supplemental Security Agreement dated June 30, 2009 (x)
10.71
Addendum to Mauna Loa Macadamia Nut Purchase Agreement dated December 22, 3009 (y)
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.
(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.
(l)
Incorporated by reference to the corresponding Exhibit previously filed as Exhibit to Registrant’s Form 8-K, Commission filed No. 001-09145, filed May 31, 2007.
(m)
Incorporated by reference to the corresponding Exhibit previously filed as Exhibit to Registrant’s Form 8-K, Commission filed No. 001-09145, filed December 14, 2007.
(n)
Incorporated by reference to the corresponding Exhibit previously filed as Exhibit to Registrant’s Form 8-K, Commission filed No. 001-09145, filed March 17, 2008.
(o)
Incorporated by reference to the corresponding Exhibit previously filed as Exhibit to Registrant’s Form 8-K, Commission filed No. 001-09124, filed March 20, 2008.
(p)
Incorporated by reference to the corresponding Exhibit previously filed as Exhibit to Registrant’s Form 8-K, Commission filed No. 001-09145, filed May 1, 2008.
(q)
Incorporated by reference to the corresponding Exhibit previously filed as Exhibit to Registrant’s Form 8-K, Commission filed No. 001-09145, filed July 9, 2008.
(r)
Incorporated by reference to the corresponding Exhibit previously filed as Exhibit to Registrant’s Form 8-K, commission filed No. 001-09145, filed July 9, 2008.
(s)
Incorporated by reference to the corresponding Exhibit previously filed as Exhibit to Registrant’s Form 8-K, Commission filed No. 001-09145, filed March 30, 2009.
(t)
Incorporated by reference to the corresponding Exhibit previously filed as Exhibit to Registrant’s Form 8-K, commission filed No. 001-09145, filed March 30, 2009.
(u)
Incorporated by reference to the corresponding Exhibit previously filed as Exhibit to Registrant’s Form 8-K, Commission filed No. 001-09145, filed July10, 2009.
(v)
Incorporated by reference to the corresponding Exhibit previously filed as Exhibit to Registrant’s Form 8-K, commission filed No. 001-09145, filed July 10, 2009.
(w)
Incorporated by reference to the corresponding Exhibit previously filed as Exhibit to Registrant’s Form 8-K, Commission filed No. 001-09145, filed July10, 2009.
(x)
Incorporated by reference to the corresponding Exhibit previously filed as Exhibit to Registrant’s Form 8-K, commission filed No. 001-09145, filed July 10, 2009.
(y)
Incorporated by reference to the corresponding Exhibit previously filed as Exhibit to Registrant’s Form 8-K, commission filed No. 001-09145, filed December 24, 2009.
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.
Dated : March 15, 2010
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.
EXHIBIT INDEX
Exhibit
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