Farming
SegmentFarming Service Revenue
As a result of the
acquisition of the farming operation in 2000, the Partnership acquired
approximately twenty farming contracts (now seventeen contracts) to farm
macadamia orchards owned by other growers. These contracts cover macadamia
orchards in the same three locations on the island of Hawaii where the
Partnership owns orchards. The farming contracts provide the Partnership to be
reimbursed for all direct farming costs (cultivation, irrigation and
harvesting), collect a pro-rata share of indirect costs and overheads, and
charge a management fee or fixed fee. The management fee is based on the number
of acres farmed or on a percentage of total costs billed. Revenues from farming
services were $3.8 million in 2006, $4.7 million in 2005, and $4.3 million in
2004. The 2006 farming service revenues were less than 2005 because of the
termination of three farming contracts, the purchase of the macadamia orchard
which previously had been farmed under contract and the timing of the harvest
at the end of the year which resulted is harvesting occurring in the spring of
2007 for some of the orchards under contract. The 2005 farming service revenues
were less than anticipated because of a windstorm which destroyed a large percentage
of trees in three contract orchards. The 2004 farming service revenues were
less than expected because of the late drop of nuts in the fall crop. Three
farming service contracts terminated on December 31, 2005 which reduces
the number of farming service contracts to about seventeen totaling about 2,039
acres. The farming service revenue in 2005 for these three contracts was about
$492,000 with management fees of about $70,000. Additionally, the Partnership
purchased about 21 acres which was under farming contract bringing the total
acres under farming contract to about 2,008. Approximately 150 acres are
year-to-year contracts, approximately 635 acres expire March 31, 2009,
approximately 70 acres expire June 30, 2013, approximately 410 acres
expire July 31, 2029, approximately 280 acres expire June 30, 2033
and approximately 470 acres expire September 30, 2080.
Farming
SegmentCost of Services Sold
The cost of services sold
relating to the farming contracts was $3.5 million in 2006, $4.3 million in
2005 and $3.9 million in 2004. These costs were all reimbursed to the
Partnership.
General and
Administrative Costs
General and administrative expenses are comprised of
accounting and reporting costs, reimbursements to the General Partner for
directors fees, office expenses and liability insurance. In addition, general
and administrative costs are also incurred in connection with the farming
operations. Previous to the May 2000 acquisition, general and
administration costs relating to the Partnerships orchards were included in
the Partnerships farming expenses.
General and administrative costs for 2006 were
$247,000 higher than for 2005 which is attributed to increased legal costs and
proxy statement for the 2006 special meeting, legal costs related to the potential
acquisition of Mac Farms and higher costs associated with Sarbanes Oxley
implementation. General and administrative costs for 2005 were $48,000 lower
than for 2004, which is attributed to lower legal costs, offset by higher costs
associated with Sarbanes Oxley preparation and accounting. In 2004 legal costs
of $464,000 were related to the lawsuit, initiated and settled, to prevent
Mauna Loa from acquiring Mac Farms.
A management fee based on
Partnership cash flow is payable annually to the General Partner. The amount
paid was $9,000 in 2004. There was no management fee in 2006 and 2005 as the
Partnership acquired MLR, the general partner, and the fees are eliminated in
consolidation.
37
Interest Income and
Expense
The Partnership recorded interest expense of $204,000
in 2006, $237,000 in 2005, and $182,000 in 2004. This was due to (1) the
long-term loan used to acquire the farming operations, (2) the assumption
of several capitalized equipment leases, and (3) interest expense on a
revolving line of credit.
The Partnership funds its working capital needs
through funds on hand and, when needed, from short-term borrowings, generating
interest expense in the process. Net interest income or expense, therefore, is
partly a function of any balance carried over from the prior year, the amount
and timing of cash generated and distributions paid to investors in the current
year, as well as the current level of interest rates. Interest was earned in
the amount of $17,000 in 2006, $5,000 in 2005 and $11,000 in 2004.
Other income of $206,000
was recorded in 2006 of which $169,000 was from crop insurance. Other income of
$151,000 was recorded in 2005 of which $147,000 was from crop insurance. Other
income of $32,000 was recorded in 2004 from crop insurance.
Inflation and Taxes
In general, prices paid to macadamia nut farmers
fluctuate independently from inflation. Macadamia nut prices are influenced
strongly by prices for finished macadamia products, which depend on competition
and consumer acceptance. Farming costs, particularly labor and materials, and
general and administrative costs do generally reflect inflationary trends.
The Partnership is subject
to a gross income tax as a result of its election to continue to be taxed as a
partnership rather than to be taxed as a corporation, as allowed by the
Taxpayer Relief Act of 1997. This tax is calculated at 3.5% on partnership
gross income (net revenues less cost of goods sold) beginning in 1998. The
gross income tax was $100,000 in 2006, $129,000 in 2005, and $5,000 in 2004.
Liquidity and
Capital Resources
Net cash provided by operations was $8.2 million in
2006 compared to $1.9 million in 2005. The significant increase of $6.3 million
is a result of the payment terms of the nut purchase contracts changing from
quarterly to 30 days from date of delivery. Net cash provided by operations was
$1.9 million in 2005, an increase of approximately $1.6 million compared to
2004. Net cash provided by operations in 2004 was $368,000.
At December 31, 2006 the Partnerships working
capital was $3.9 million and its current ratio was 2.54 to 1, compared to
$3.4 million and 1.59 to 1 in 2005. In 2005 the Partnerships working capital
was $3.4 million and its current ratio 1.59 to 1, compared to $2.9 million
and 1.63 to 1 in 2004. In 2004 the Partnerships working capital was $2.9
million and its current ratio was 1.63 to 1, compared to $4.2 million and 2.55
to 1 in 2003. In 2006 the increase in working capital compared to 2005 was the
result of lower cost of goods sold, interest expense, income taxes, higher
interest income and other income offset by higher general and administrative
costs. In 2005 the increase in working capital compared to 2004 was result of
higher revenue and lower general and administrative costs. In 2004 the decrease
in working capital compared to 2003 was a result of lower revenue and higher
general and administrative costs.
The Partnership was in compliance with the terms and
conditions of the Credit Agreement at December 31, 2006 and December 31,
2005.
Capital expenditures in 2006, 2005 and 2004 were
$509,000, $83,000, and $172,000, respectively. The increase in 2006 was
attributed to the purchase of 21 tree acres of macadamia orchards for $440,000,
computers, a vehicle and upgrades to operating machinery. The decrease in 2005
was the result of fewer computer purchases and modifications to farming
equipment than 2004. Capital expenditures in 2004 were
38
the result of purchases of
expiring leases. Capital expenditures planned for 2007 are about $500,000 and
are expected to be financed by way of new equipment leases, either capital or
operating leases.
Macadamia nut farming is seasonal, with production
peaking late in the fall. However, farming operations continue year round. As a
result, additional working capital is required for much of the year. The
Partnership meets its working capital needs with cash on hand, and when
necessary, through short-term borrowings under a $5.0 million revolving
line of credit. The line of credit was obtained on May 2, 2000 and expires
May 1, 2008. At December 31, 2006 the Partnership had a cash balance
of $3,351,000 and no line of credit drawings outstanding. At December 31,
2005 the Partnership had a cash balance of $378,000 and line of credit drawings
outstanding of $2,900,000. The cash balance was $196,000 at the end of 2004,
and the line of credit drawings were $2,200,000 at December 31, 2004.
As a Limited Partnership, the Partnership expects to
pay regular cash distributions to the Partnerships unit holders if the cash
flow from operations, as defined in the Management Agreement, exceeds the
operating and capital resource needs of the Partnership, as determined by
management. These cash distributions are expected to be paid from operating
cash flow and / or other resources. The Partnership has declared and paid cash
distributions for 83 consecutive quarters. The Partnership paid cash
distributions for the fourth quarter and for the first and second quarter of
2007 of $0.05 per Class A unit (a total of $375,000) per quarter.
It is the opinion of management
that the Partnership has adequate cash on hand and borrowing capacity available
to meet anticipated working capital needs for operations as presently
conducted. The nut purchase contracts require the buyers to make nut payments
30 days after the delivery of the nuts to 15 days after the end of the
month in which the nuts were delivered. During certain parts of the year, if
payments are not received, as the contracts require, available cash resources
could be depleted.
Critical Accounting
Policies and Estimates
Management has identified the following critical
accounting policies that affect the Partnerships more significant judgments
and estimates used in the preparation of the Partnerships financial statements.
The preparation of the Partnerships financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the Partnerships management to make estimates and judgments that
affect the reported amounts of assets and liabilities, revenues and expenses,
and related disclosures of contingent assets and liabilities. On an on-going
basis, management evaluates those estimates, including those related to asset
impairment, accruals for self-insurance, compensation and related benefits,
revenue recognition, allowance for doubtful accounts, contingencies and
litigation. The Partnership states these accounting policies in the notes to
the financial statements and in relevant sections in this discussion and
analysis. These estimates are based on the information that is currently
available to the Partnership and on various other assumptions that management
believes to be reasonable under the circumstances. Actual results could vary
from those estimates.
The Partnership believes that the following critical accounting
policies affect significant judgments and estimates used in the preparation of
it financial statements:
The Partnership maintains an accrual for workers
compensation claims to the extent that the Partnerships current insurance
policies will not cover such claims. This accrual is included in other accrued
liabilities in the accompanying balance sheet. Management determines the
adequacy of the accrual by periodically evaluating the historical experience
and projected trends related to outstanding and potential workers compensation
claims. If such information indicates that the accrual is over or understated,
the Partnership will adjust the assumptions utilized in the methodologies and
reduce or provide for additional accrual as appropriate.
39
Retirement and Severance Benefits: The Partnership
sponsors a non-contributory defined benefit pension plan for regular union
employees and a severance plan for intermittent union employees. Several
statistical and other factors which attempt to anticipate future events are
used in calculating the expense and liabilities related to this plan. These
factors include assumptions about the discount rate, expected return on plan
assets, withdrawal and mortality rates and the rate of increase in compensation
levels. The actuarial assumptions used by the Partnership may differ materially
from actual results due to changing market and economic conditions, higher or
lower withdrawal rates or longer or shorter mortality of participants. These
differences may impact the amount of retirement and severance benefit expense
recorded by the Partnership in future periods.
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 assets carrying amount to determine if an impairment
charge is required. All long-lived assets for which management has committed to
a plan of disposal are reported at the lower of carrying amount or fair value. Changes
in projected cash flows generated by an asset based on new events or
circumstances may indicate a change in fair value and require a new evaluation
of recoverability of the asset.
The Partnership has replaced three of the nut purchase
contracts it had with Mauna Loa with two contracts signed June 1,
2006, effective January 1, 2006. The first of the contracts is a fixed
price contract at $0.75 per pound at WIS 20% moisture and 30% SK/DIS,
terminating December 31, 2006, and accounts for about 15 million pounds of
nuts. The second contract is a fixed price contract at $0.74 per pound a WIS 20%
moisture and 30% SK/DIS, terminating December 31, 2011, and accounts for
about 6 million pounds of nuts. The second contract increases by $0.01 per
pound each year except 2008 until it reaches $0.78 per pound in 2011.
The Partnership recognizes
revenue under all of its fixed price contracts using the best information
available to the Partnership at the time it files its quarterly and annual
financial statements. Additional information can be found in section (c) under
the heading Nut Purchase Contracts on page 3.
Interim Periods
Results of
Operations
In general, the macadamia nut crop season runs from July to
June with harvesting activity from August through April. The second
quarter normally accounts for less than 4% of the fiscal years total harvest
and farming revenues. However, cool night temperatures that extended the
flower/pollination season into the summer of 2006 and adequate distribution of
rainfall in the last two quarters of 2006 led to better than expected nut
production in the spring of 2007.
The Partnerships financial results are principally
driven by nut production, which is seasonal and highly contingent upon Hawaiis
climactic conditions, and nut prices which are either fixed or market based. In
general, nut production is highest during the third and fourth quarters of the
fiscal year, with very low production in the first and second quarters.
The Partnership generated a net loss of $356,000 for
the second quarter of 2007 on revenues of $1.2 million. Net loss for the
second quarter of 2006 was $27,000 from revenues of $1.3 million, including a positive
price adjustment of $343,000 paid in June 2006. Net loss per Class A
Unit for the second quarters of 2007 and 2006 amounted to $0.05 and $0.00,
respectively. Net cash flow per Class A Unit for the second quarters of
2007 and 2006, as defined in the Partnership Agreement, was ($0.09) and
($0.04), respectively.
Net loss for the six-month
period ended June 30, 2007 was $10,000 from revenues of $4.6 million. Net
loss for the six-month period ended June 30, 2006 was $127,000 from
revenues of $2.8 million. Net loss per
40
Class A
Unit for the six-month periods ended June 30, 2007 and 2006 amounted to
$0.00 and $0.02, respectively. Net cash flow per class A unit for the six-month
periods ended June 30, 2007 and 2006 amounted to $0.01 and $(0.04),
respectively.
Owned-orchard
Segment
For
the three months and the six months ended June 30, 2007 and 2006, nut
production, nut prices and nut revenues based upon the contract terms with
moisture at 20% (WIS @ 20%) and recovery at 30% (SK/DIS @ 30%) were as follows:
|
|
For the Three Months
Ended June 30,
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Nuts harvested
(000s pounds @ WIS 20% and SK/DIS @ 30%)
|
|
|
771
|
|
|
|
558
|
|
|
|
38
|
%
|
|
Nut price (per
pound)
|
|
|
0.7769
|
|
|
|
0.7313
|
|
|
|
6
|
%
|
|
Net nut sales
($000s)
|
|
|
599
|
|
|
|
408
|
|
|
|
47
|
%
|
|
2005 nut price
adjustment
|
|
|
0
|
|
|
|
343
|
|
|
|
|
|
|
1st quarter 2006
price adjustment
|
|
|
0
|
|
|
|
(16
|
)
|
|
|
|
|
|
Total nut sales ($000s)
|
|
|
599
|
|
|
|
735
|
|
|
|
-
19
|
%
|
|
|
|
For the Six Months
Ended June 30,
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Nuts harvested
(000s pounds @ WIS 20% and SK/DIS @ 30%)
|
|
|
4,070
|
|
|
|
1,344
|
|
|
|
203
|
%
|
|
Nut price (per
pound)
|
|
|
0.7182
|
|
|
|
0.7378
|
|
|
|
-
3
|
%
|
|
Net nut sales
($000s)
|
|
|
2,923
|
|
|
|
992
|
|
|
|
195
|
%
|
|
2005 nut price
adjustment
|
|
|
0
|
|
|
|
343
|
|
|
|
|
|
|
Total nut sales ($000s)
|
|
|
2,923
|
|
|
|
1,335
|
|
|
|
119
|
%
|
|
Contract pounds delivered for the second quarter of
2007 were 38% greater than 2006 compared at WIS @ 20% and SK/DIS @ 30%. Contract
pounds delivered for the six-month period ended June 30, 2007 were 203%
greater than 2006 compared at WIS @ 20% and SK/DIS @ 30%. The increase was
primarily attributable to the timing of nuts falling from trees. Between March and
December 2005 the rainfall was approximately 54% of historical averages,
which adversely affected the spring 2006 nut production. The cool night
temperatures extended the flower/pollination season into the summer of 2006 and
adequate distribution of rainfall in the last two quarters of 2006 led to
spring 2007 production of 4.1 million pounds as compared to 1.3 million pounds
in the spring of 2006.
The average nut price received for the second quarter
of 2007 was $0.78 per pound compared to $0.73 in 2006 based on WIS @ 20% and
SK/DIS @ 30%. The average nut price received for the six-month period ended June 30,
2007 was $0.72 compared to $0.74 in 2006 based on WIS @ 20% and SK/DIS @ 30%.
The increase in the second quarter 2007 was primarily attributable to the
effect of the pricing of the new contracts and selling kernel processed by
Hamakua Macadamia Nut Corporation (HMNC) as compared to the all nuts being
sold in 2006 to Mauna Loa under their new contracts. The decrease in the
average nut price for the six-month period ended June 30, 2007 compared to
the same period ended June 30, 2006 was primarily attributable to the
effect of the pricing of the new contracts. The market price contracts with Mac
Farms and Island Princess were at $0.608 per pound based on WIS @ 20%
and SK/DIS @ 30%.
Production costs are based on annualized standard unit
costs, using field pounds, for interim reporting purposes, however the
additional cost of processing the nut to kernel by HMNC is included in the cost
of goods sold in the three-month period ended June 30, 2007. Before kernel
processing costs, costs of good sold (owned-orchards segment) was $0.42 per
pound for the three-month period ended June 30, 2007 as
41
compared to $0.40 per
pound in 2006. After kernel processing costs, cost of goods sold for the
three-month period ended June 30, 2007 was $552,000 or $0.72 per pound. The
increase in costs is the result of secondary processing of nuts to saleable
kernel by HMNC as well as higher expected annual costs per pound resulting from
normal cost increases for labor, benefits and materials. For the six-month
period ended June 30, 2007, costs of good sold before the kernel
processing costs was $0.43 per pound (owned-orchards segment) as compared to
$0.41 per pound in 2006. Total cost of goods sold after kernel processing costs
was $2.2 million, or $0.53 per pound for the six-month period ended June 30,
2007. The increase in costs is a result of secondary processing of nuts to
saleable kernel by HMNC as well as higher expected annual costs per pound
resulting from normal cost increases for labor, benefits and materials and a
determination by management to shorten the interval between harvest rounds to
improve the quality of the nuts delivered to the buyers.
The spring nut production
quality is historically lower than the annual average because of the
seasonality of the nut drop and longer related harvest intervals. As a greater
quantity of nuts fall, the harvest intervals are shortened, improving the
quality of the nuts harvested.
Crop Year
Production Results
Macadamia nut production for the 2006-2007 crop
year (July 1 to June 30) totaled 24.3 million pounds, which was 5.5
million pounds more that the 2005-2006 crop year. The Keaau and Mauna Kea
regions experienced cooler temperature conditions that extended the
flower/pollination season into the summer of 2006 and combined with adequate
rainfall during the nut development period resulted in above average production
levels. The Kau region experienced distribution of normal rainfall throughout
the calendar year 2006. This condition combined with an extended flower season
contributed to a nut production that surpassed expectations.
Comparative
crop year results by orchard area are shown below (in thousands of pounds):
|
|
For the Crop Year
|
|
2007
|
|
2006
|
|
|
|
Ended June 30,
|
|
Over
|
|
Over
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Keaau
|
|
8,932
|
|
6,478
|
|
6,629
|
|
+38
|
%
|
|
-2
|
%
|
|
Kau
|
|
13,634
|
|
10,832
|
|
12,736
|
|
+26
|
%
|
|
-15
|
%
|
|
Mauna Kea
|
|
1,731
|
|
1,500
|
|
1,557
|
|
+15
|
%
|
|
-4
|
%
|
|
Total Production
|
|
24,297
|
|
18,810
|
|
20,922
|
|
+29
|
%
|
|
-10
|
%
|
|
A review of the orchards
by the Partnerships operations personnel indicates that the annual nut production
for calendar year 2007 should be near historical levels of 20 to 21 million
pounds. The changes in weather have resulted in a maturation pattern that has
affected nut production such that the annual production should approximate
historical trends even though the spring production is greater than normal.
Farming Segment
Revenue generated from the
farming of macadamia orchards owned by other growers was $626,000 for the
second quarter 2007, 13% greater than 2006. Farming expenses for the second quarter
of 2007 were $573,000, which included $34,000 of depreciation expense. Farming
revenues for the first half of 2007 amounted to $1.7 million, 13% greater than
2006. Farming expenses for the first half of 2007 were $1.5 million, including
$68,000 in depreciation. The increase in farming revenues was primarily
attributable to higher production during the first half of 2007 compared to
2006.
42
G
eneral and
Administrative Expense
General and administrative
expense amounted to $443,000 for the second quarter 2007, compared to $405,000
in 2006. General and administrative expense for the six-month period ended June 30,
2007 was $870,000 compared to $734,000 in 2006. The increase in general and
administrative expense is mainly attributable to professional fees and other
costs related to the Partnerships potential acquisition of Mac Farms of
Hawaii, LLC.
Other Income and
Expenses
Interest expense for the second quarter of 2007 was
$28,000 compared to $45,000 in 2006. For the six month period ended June 30,
2007 interest expense was $61,000 compared to $105,000 in 2006. The decrease in
interest expense is primarily due to less debt and no borrowing on the
revolving line of credit.
Interest income for the second quarter of 2007 was
$19,000 compared to $2,000 in 2006. Interest income for the six-month period
ended June 30, 2007 was $49,000 compared to $13,000 in 2006, primarily due
to higher interest rates and higher cash balances.
Other income for the first
and second quarters of 2007 and 2006 was primarily attributable to cash
distributions received from American AgCredit, PCA in the amount of $14,000 and
$15,000, respectively.
Liquidity and
Capital Resources
Macadamia nut farming is seasonal, with production
normally peaking in the fall and winter, however, farming operations continue
year round. In general, a significant amount of working capital is required for
much of the harvesting season.
The Partnership has a master Credit Agreement with
American AgCredit, PCA comprised of a $5 million revolving line of credit
and a 10-year, $4 million term loan. The Credit Agreement contains
certain restrictions, which are discussed in Part IIItem 2 below.
At June 30, 2007, the Partnership had a cash
balance of $495,000 with no borrowings on its line of credit. At June 30,
2006, the Partnership had a cash balance of $909,000 and $1 million outstanding
on the line of credit. For the six-month period ended June 30, 2007, cash
used by operating activities was $1.6 million, which were used to pay
distributions to unit holders, acquire capital assets and repay debt. For the
six-month period ended June 30, 2006, cash flows from operating activities
totaled $4.0 million, which were used to pay distributions to unit holders,
purchase a macadamia nut orchard of approximately 20 acres and repay debt. At June 30,
2007 the Partnerships working capital was $3.6 million and its current ratio
3.48 to 1, compared to $2.7 million and 2.09 to 1 at June 30,
2006, primarily due to a decrease in cash, increase in accounts receivable, and
a decrease in line-of-credit borrowing.
For the three months ended June 30, 2007 net cash
used by operations was $2.3 million compared to net cash used by operations for
the three months ended June 30, 2006 of $356,000. For the six months ended
June 30, 2007 net cash used by operations was $1.6 million compared to
$4.0 million at June 30, 2006.
At June 30, 2007, the Partnership had $1.2
million in outstanding debt, comprised of $1.2 million under the 10-year
term loan with no drawings on the revolving line of credit.
The Partnership
anticipates borrowing from the revolving line of credit as necessary to fund
working capital needs arising from the normal seasonal requirements of
macadamia nut farming. 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. However, the
Partnerships nut purchase contracts require all purchasers to make nut
payments 30 days after the date of delivery. During
43
certain
parts of the year, if payments are not received as the contracts require,
available cash resources could be depleted.
QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership is exposed to market risks resulting
from changes in interest rates. The Partnership has market risk exposure on its
Credit Agreement due to its variable rate pricing that is based on rates based
on LIBOR, the Farm Credit Discount Note Rate and the Farm Credit Medium Term
Note Rate. As of June 30, 2007, a one percentage point increase or
decrease in the applicable rate under the Credit agreement will result in an
annual interest expense fluctuation of approximately $12,000.
The Partnership is exposed
to market risks resulting from changes in the market price of macadamia kernel.
Pricing for two of its nut purchase contracts is adjusted every six months
based upon the prevailing market price of macadamia kernel from Australia and
Hawaii. During the first half of 2007 there has been a decrease in global
macadamia prices. A $0.25 increase or decrease in the kernel price would affect
the price received by the Partnership by $0.038 per pound at 20% WIS and 30%
SK/DIS. The market price nut purchase contracts for the second half of 2007
will reflect a decrease in kernel price of $0.75, resulting in a price decrease
of $0.114 per pound on deliveries under these contracts.
CHANGES IN
REGISTRANTS CERTIFYING ACCOUNTANT
On April 16, 2007 PricewaterhouseCoopers LLP (PwC)
completed their services related to the financial statements of the Partnership
as of and for the year ended December 31, 2006 and the Partnerships Form 10-K
for the year ended December 31, 2006, and PwCs termination as the
independent registered public accounting firm for the Partnership was finalized
(see the Partnerships Item 4.01 Form 8-K dated March 23,
2007 for additional information). PwCs reports on the Partnerships financial
statements as of and for the fiscal years ended December 31, 2005 and 2006
did not contain an adverse opinion or a disclaimer of opinion, and were not
qualified or modified as to uncertainty, audit scope, or accounting principle.
During the fiscal years ended December 31, 2005
and 2006 and through April 16, 2007, there were no disagreements with PwC
on any matters of accounting principles or practices, financial statement
disclosure or auditing scope or procedure which, if not resolved to the
satisfaction of PwC, would have caused PwC to make a reference thereto in
connection with its reports on the financial statements for such years. During
the fiscal years ended December 31, 2005 and 2006 and through April 16,
2007, there were no reportable events as defined in Item 304(a)(1)(v) of
Regulation S-K.
The Partnership requested
that PwC furnish it with a letter indicating whether or not PwC agreed with the
above disclosures. A copy of such letter was attached as Exhibit 16.1 to
the Partnerships Form 10-K for the year ended December 31,
2006 filed with the Commission on April 16, 2007.
INFORMATION ABOUT
MAC FARMS
Description of Business
Overview
Mac Farms owns or leases
and operates a 3,998-acre macadamia nut orchard and a processing
facility, located in the South Kona district on the west coast of the Big
Island of Hawaii. Mac Farms is engaged in the production, processing and marketing
of macadamia nuts for the retail and industrial markets.
44
History
The original orchard was planted during the 1960s by
Honomalino Agricultural Co., Ltd., while Mac Farms processing plant was
built in 1980. In 1988 and thereafter, the orchard was expanded with the
acquisition of neighboring orchards, which increased the total land area
controlled by Mac Farms to its current size.
During its development
years, the business had a succession of owners. In 2000, Blue Diamond Growers
acquired the orchards and processing plant from Campbell Soup Company. Blue
Diamond subsequently sold the business to Mac Farms in June 2003.
Business
Mac Farms leases from Kapua and operates a 3,998-acre
macadamia nut orchard. In 2006, the orchard produced approximately 13.6 million
WIS pounds of macadamia nuts. Mac Farms also purchases macadamia nuts from
selected other Hawaiian growers and macadamia kernels from processors in
Australia and Costa Rica. Mac Farms generally sells foreign-purchased kernel
solely in the mainland United States.
Mac Farms processing plant uses proprietary
technology to enhance the production of high-quality kernels to meet the
specifications of its customers. The plant currently has the capacity to
process approximately 18.0 million WIS pounds annually.
Mac Farms produces roasted
and salted macadamia nuts, chocolate covered macadamia nuts, macadamia nut
cookies and roast-salted products. In the industrial market, Mac Farms offers
graded and sized wholes, pieces and diced macadamia nuts for ice cream, baked
goods and confectionery manufacturing.
Ownership,
Dividends and Other Information
MFH Investors, LLC and
Greater Pacific Food Holdings, LLC own 67% and 33%, respectively, of each of
Mac Farms which owns the processing facility and the underlying land and
manages the business, and Kapua which owns the land, water rights and macadamia
trees. There is no established public trading market for the securities of Mac
Farms or Kapua. On February 10, 2005, Mac Farms paid a total dividend of
$322,985 to MFH Investors, LLC and Greater Pacific Food Holdings, LLC on a pro
rata basis. Since February 10, 2005, Kapua has paid no dividends to its
members. There are no securities of Mac Farms or Kapua authorized for issuance
under equity compensation plans of those entities.
45
SELECTED FINANCIAL
DATA OF MAC FARMS OF HAWAII, LLC
Set
forth below is Selected Financial Data of Mac Farms for 2005 and 2006. Mac
Farms did not commence operations until June 2003 and prior to December 31,
2004, as a closely held, privately owned company, did not maintain its
financial statements in accordance with generally accepted accounting
principles. Accordingly, comparable related financial data for 2003 and 2004 is
not available and has not been presented.
|
|
2006
|
|
2005
|
|
|
|
(In thousands except per
pound and per unit data)
|
|
Financial:
|
|
|
|
|
|
Total revenue
|
|
$
|
21,312
|
|
$
|
28,231
|
|
Net cash provided by operating activities
|
|
1,036
|
|
736
|
|
Income (loss) before taxes
|
|
(1,916
|
)
|
1,185
|
|
Net income (loss)
|
|
(1,916
|
)
|
1,185
|
|
Distributions Paid
|
|
0
|
|
295
|
|
Total working capital
|
|
8,155
|
|
10,399
|
|
Total assets
|
|
14,454
|
|
16,487
|
|
Long-term debt, non current
|
|
10,748
|
|
9,974
|
|
Total members capital
|
|
1,027
|
|
2,943
|
|
Net cash flow
|
|
2
|
|
31
|
|
Operations:
|
|
|
|
|
|
Macadamia nut kernel pounds sold
|
|
3,248,041
|
|
4,264,424
|
|
Net average price
$/lb
|
|
$
|
6.56
|
|
$
|
6.62
|
|
Supplemental Financial Information
|
|
2005
|
|
2006
|
|
2007
|
|
Quarter
|
|
|
|
1
st
|
|
2
nd
|
|
3
rd
|
|
4
th
|
|
1
st
|
|
2
nd
|
|
3
rd
|
|
4
th
|
|
1
st
|
|
2
nd
|
|
Net sales
|
|
$
|
7,989
|
|
$
|
6,768
|
|
$
|
5,573
|
|
$
|
7,901
|
|
$
|
5,709
|
|
$
|
4,713
|
|
$
|
5,498
|
|
$
|
5,393
|
|
$
|
3,724
|
|
$
|
3,039
|
|
Gross profit
|
|
1,753
|
|
1,485
|
|
1,223
|
|
1,733
|
|
762
|
|
629
|
|
924
|
|
906
|
|
1,199
|
|
979
|
|
Income (loss)
|
|
335
|
|
284
|
|
234
|
|
332
|
|
(604
|
)
|
(498
|
)
|
(411
|
)
|
(403
|
)
|
(108
|
)
|
(89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual results have been audited for the years ended December 31,
2005 and 2006. Comparative financial statements have been prepared for the
periods ended June 30, 2006 and June 30, 2007. Post closing
adjustments have been allocated to quarterly results on a pro-rata basis.
46
INDEX
TO FINANCIAL STATEMENTS
|
|
Page
|
|
Financial Statements of the
Partnership
|
|
|
|
Audited
Financial Statements
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-2
|
|
Consolidated
Balance Sheets, December 31, 2006 and 2005
|
|
F-3
|
|
Consolidated
Income Statements, for the Years Ended December 31, 2006, 2005 and 2004
|
|
F-4
|
|
Consolidated
Statements of Partners Capital, for the Years Ended December 31, 2006,
2005
and 2004
|
|
F-5
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and
2004
|
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
|
F-7
|
|
Unaudited
Interim Financial Statements
|
|
|
|
Consolidated
Balance Sheet June 30, 2007
|
|
F-22
|
|
Consolidated
Income Statements for the Six Months Ended June 30, 2007 and 2006
|
|
F-23
|
|
Consolidated
Statements of Partners Capital for the Six Months Ended June 30, 2007
and 2006
|
|
F-24
|
|
Consolidated
Statements of Cash Flow for the Six Months Ended June 30, 2007 and 2006
|
|
F-25
|
|
Notes to Consolidated Financial Statements
|
|
F-26
|
|
Financial
Statements of Mac Farms
|
|
|
|
Audited
Financial Statements
|
|
|
|
Report of Independent Registered Public Accounting
Firm
|
|
F-29
|
|
Balance Sheets,
December 31, 2006 and 2005
|
|
F-30
|
|
Statements
of Operations for the Years Ended December 31, 2006 and 2005
|
|
F-31
|
|
Statements
of Members Equity, for the Years Ended December 31, 2006 and 2005
|
|
F-32
|
|
Statements
of Cash Flows for the Years Ended December 31, 2006 and 2005
|
|
F-33
|
|
Notes
to Financial Statements
|
|
F-34
|
|
Unaudited
Interim Financial Statements
|
|
|
|
Balance Sheet June 30, 2007
|
|
F-40
|
|
Statements of Operations and Members Equity for the
Six Months Ended June 30, 2007
and 2006
|
|
F-41
|
|
Statements
of Cash Flow for the Six Months Ended June 30, 2007 and 2006
|
|
F-42
|
|
Notes to Financial Statements
|
|
F-43
|
|
F-
1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners
ML Macadamia Orchards, L.P.
In
our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, partners capital, and cash flows, present fairly,
in all material respects, the financial position of ML Macadamia Orchards, L.P.
and its subsidiary at December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2006 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Partnerships management. Our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Honolulu, Hawaii
April 16, 2007
F-
2
ML Macadamia Orchards, L.P.
Consolidated Balance Sheets
(in thousands)
|
|
December 31,
|
|
|
|
2006
|
|
2005
|
|
Assets
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,351
|
|
$
|
378
|
|
Accounts receivable
|
|
2,688
|
|
8,433
|
|
Inventory of farming supplies
|
|
272
|
|
270
|
|
Other current assets
|
|
98
|
|
178
|
|
Total current assets
|
|
6,409
|
|
9,259
|
|
Land, orchards and equipment, net
|
|
47,232
|
|
48,722
|
|
Goodwill
|
|
306
|
|
|
|
Intangible assets, net
|
|
16
|
|
65
|
|
Total assets
|
|
$
|
53,963
|
|
$
|
58,046
|
|
Liabilities and partners capital
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
Current portion of long-term
debt
|
|
$
|
400
|
|
$
|
434
|
|
Short-term borrowings
|
|
|
|
2,900
|
|
Accounts payable
|
|
406
|
|
770
|
|
Cash distributions payable
|
|
375
|
|
375
|
|
Accrued payroll and benefits
|
|
858
|
|
935
|
|
Other current liabilities
|
|
488
|
|
416
|
|
Total current liabilities
|
|
2,527
|
|
5,830
|
|
Non-current benefits
|
|
405
|
|
|
|
Long-term debt
|
|
1,200
|
|
1,600
|
|
Deferred income tax liability
|
|
1,208
|
|
1,227
|
|
Total liabilities
|
|
5,340
|
|
8,657
|
|
Commitments
and contingencies
|
|
|
|
|
|
Partners
capital
|
|
|
|
|
|
General partner
|
|
81
|
|
81
|
|
Class A limited partners,
no par or assigned value, 7,500 units issued and outstanding
|
|
48,612
|
|
49,308
|
|
Accumulated other
comprehensive loss
|
|
(70
|
)
|
|
|
Total partners capital
|
|
48,623
|
|
49,389
|
|
Total liabilities and partners capital
|
|
$
|
53,963
|
|
$
|
58,046
|
|
See accompanying notes to consolidated financial statements.
F-
3
ML Macadamia Orchards, L.P.
Consolidated Income Statements
(in thousands, except per unit data)
|
|
2006
|
|
2005
|
|
2004
|
|
Macadamia nut sales
|
|
$
|
13,256
|
|
$
|
12,684
|
|
$
|
9,414
|
|
Contract farming revenue
|
|
3,816
|
|
4,694
|
|
4,251
|
|
Total revenues
|
|
17,072
|
|
17,378
|
|
13,665
|
|
Cost
of goods and services sold
|
|
|
|
|
|
|
|
Costs of macadamia nut sales
|
|
10,871
|
|
10,202
|
|
9,667
|
|
Costs of contract farming
services
|
|
3,474
|
|
4,274
|
|
3,860
|
|
Total cost of goods and
services sold
|
|
14,345
|
|
14,476
|
|
13,527
|
|
Gross income
|
|
2,727
|
|
2,902
|
|
138
|
|
General
and administrative expenses
|
|
|
|
|
|
|
|
Costs expensed under
management agreement with related party
|
|
|
|
|
|
177
|
|
Legal feesrelated party
|
|
196
|
|
32
|
|
495
|
|
Other
|
|
1,646
|
|
1,563
|
|
971
|
|
Total general and
administrative expenses
|
|
1,842
|
|
1,595
|
|
1,643
|
|
Extinguishment of management agreement
|
|
|
|
(326
|
)
|
|
|
Operating income (loss)
|
|
885
|
|
981
|
|
(1,505
|
)
|
Interest expense
|
|
(204
|
)
|
(237
|
)
|
(182
|
)
|
Interest income
|
|
17
|
|
5
|
|
11
|
|
Other income
|
|
206
|
|
151
|
|
32
|
|
Income (loss) before tax
|
|
904
|
|
900
|
|
(1,644
|
)
|
Income tax expense
|
|
(100
|
)
|
(129
|
)
|
(5
|
)
|
Net income (loss)
|
|
$
|
804
|
|
$
|
771
|
|
$
|
(1,649
|
)
|
Net cash flow (as defined in
the Partnership Agreement)
|
|
$
|
2,323
|
|
$
|
2,501
|
|
$
|
466
|
|
Net income (loss) per
Class A Unit
|
|
$
|
0.11
|
|
$
|
0.10
|
|
$
|
(0.22
|
)
|
Net cash flow per Class A
Unit (as defined in the Partnership Agreement)
|
|
$
|
0.31
|
|
$
|
0.33
|
|
$
|
0.06
|
|
Cash distributions per
Class A Unit
|
|
$
|
0.20
|
|
$
|
0.20
|
|
$
|
0.20
|
|
Class A Units outstanding
|
|
7,500
|
|
7,500
|
|
7,500
|
|
See accompanying notes to consolidated financial statements.
F-
4
ML Macadamia Orchards, L.P.
Consolidated Statements of Partners Capital
(in thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Partners
capital at beginning of period:
|
|
|
|
|
|
|
|
General partner
|
|
$
|
81
|
|
$
|
505
|
|
$
|
537
|
|
Class A limited partners
|
|
49,308
|
|
50,037
|
|
53,169
|
|
|
|
49,389
|
|
50,542
|
|
53,706
|
|
Acquisition of ML
Resources, Inc.
|
|
|
|
(424
|
)
|
|
|
|
|
|
|
(424
|
)
|
|
|
Allocation of net income (loss):
|
|
|
|
|
|
|
|
General partner
|
|
|
|
|
|
(17
|
)
|
Class A limited partners
|
|
804
|
|
771
|
|
(1,632
|
)
|
|
|
804
|
|
771
|
|
(1,649
|
)
|
Cash distributions paid and / or declared:
|
|
|
|
|
|
|
|
General partner
|
|
|
|
|
|
15
|
|
Class A limited partners
|
|
1,500
|
|
1,500
|
|
1,500
|
|
|
|
1,500
|
|
1,500
|
|
1,515
|
|
Partners capital at end of period:
|
|
|
|
|
|
|
|
General partner
|
|
81
|
|
81
|
|
505
|
|
Class A limited partners
|
|
48,612
|
|
49,308
|
|
50,037
|
|
Accumulated other
comprehensive loss
|
|
|
|
|
|
|
|
Change in pension and
severance obligations
|
|
(70
|
)
|
|
|
|
|
|
|
$
|
48,623
|
|
$
|
49,389
|
|
$
|
50,542
|
|
See accompanying notes to consolidated financial statements.
F-5
ML Macadamia Orchards, L.P.
Consolidated Statements of Cash Flows
(in thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
Cash
received for goods and services
|
|
$
|
23,001
|
|
$
|
16,795
|
|
$
|
13,947
|
|
Cash
paid to suppliers and employees
|
|
(14,463
|
)
|
(14,568
|
)
|
(13,393
|
)
|
Income
tax paid
|
|
(118
|
)
|
(82
|
)
|
(15
|
)
|
Interest
received
|
|
17
|
|
5
|
|
11
|
|
Interest
paid
|
|
(196
|
)
|
(237
|
)
|
(182
|
)
|
Net
cash provided by operating activities
|
|
8,241
|
|
1,913
|
|
368
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
Proceeds
from sale of equipment
|
|
75
|
|
14
|
|
|
|
Capital
expenditures
|
|
(509
|
)
|
(83
|
)
|
(172
|
)
|
Net
cash used in investing activities
|
|
(434
|
)
|
(69
|
)
|
(172
|
)
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
Proceeds
from drawings on line of credit
|
|
5,800
|
|
8,800
|
|
5,400
|
|
Repayment
of long term debt
|
|
(400
|
)
|
(400
|
)
|
(400
|
)
|
Repayment
of line of credit
|
|
(8,700
|
)
|
(8,100
|
)
|
(3,600
|
)
|
Loan
cost
|
|
|
|
|
|
(20
|
)
|
Acquisition
of general partners units
|
|
|
|
(424
|
)
|
|
|
Capital
lease payments
|
|
(34
|
)
|
(35
|
)
|
(52
|
)
|
Cash
distributions paid
|
|
(1,500
|
)
|
(1,503
|
)
|
(1,364
|
)
|
Net
cash provided by (used in) financing activities
|
|
(4,834
|
)
|
(1,662
|
)
|
(36
|
)
|
Net
increase in cash
|
|
2,973
|
|
182
|
|
160
|
|
Cash
and cash equivalents at beginning of period
|
|
378
|
|
196
|
|
36
|
|
Cash
and cash equivalents at end of period
|
|
$
|
3,351
|
|
$
|
378
|
|
$
|
196
|
|
Reconciliation of net income
(loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
804
|
|
$
|
771
|
|
$
|
(1,649
|
)
|
Adjustments to reconcile net
income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
1,953
|
|
2,165
|
|
2,571
|
|
Gain
on sale of capital assets
|
|
(21
|
)
|
|
|
|
|
(Increase)
decrease in accounts receivable
|
|
5,745
|
|
(1,341
|
)
|
(566
|
)
|
Deferred
income tax expense (credit)
|
|
(19
|
)
|
20
|
|
(7
|
)
|
Increase
in inventories
|
|
(2
|
)
|
(125
|
)
|
(4
|
)
|
(Increase)
decrease in other current assets
|
|
80
|
|
(25
|
)
|
(10
|
)
|
Increase
in other assets
|
|
|
|
(32
|
)
|
(7
|
)
|
Increase
(decrease) in accounts payable
|
|
(364
|
)
|
32
|
|
245
|
|
Increase
(decrease) in accrued payroll
|
|
(106
|
)
|
62
|
|
26
|
|
Increase
(decrease) in current liabilities
|
|
72
|
|
386
|
|
(231
|
)
|
Increase
in non-current benefits payable
|
|
(99
|
)
|
|
|
|
|
Total
adjustments
|
|
7,437
|
|
1,142
|
|
2,017
|
|
Net
cash provided by operating activities
|
|
$
|
8,241
|
|
$
|
1,913
|
|
$
|
368
|
|
Supplemental schedule of
noncash financing activities
|
|
|
|
|
|
|
|
Distributions declared but not
paid
|
|
$
|
375
|
|
$
|
375
|
|
$
|
379
|
|
See accompanying notes to consolidated financial statements.
F-
6
ML Macadamia Orchards, L.P.
Notes to Consolidated Financial Statements
(1) OPERATIONS
AND OWNERSHIP
ML Macadamia Orchards, L.P. (the Partnership) owns
and farms 4,190 tree acres of macadamia orchards on the island of Hawaii. Once
the nuts are harvested, the Partnership sells them to another entity, which
processes and markets the finished products. The Partnership farms
approximately 2,008 additional acres of macadamia orchards on Hawaii for other
orchard owners.
The Partnership is owned 99% by limited partners and
1% by the managing general partner, ML Resources, Inc. (MLR). On January 6,
2005, the stock of ML Resources, Inc. was purchased by the Partnership for
$750,000 in cash. The transaction was accounted for as an asset purchase as
opposed to a business combination since MLR had no substantive operations and
its principal purpose was to own and hold 75,757 general partner units of the
Partnership. The acquisition of the general partner units held by MLR results
in the Class A limited partners effectively owning 100% of the
Partnership.
The purchase price was allocated between the acquired
general partner units and the extinguishment of the management contract between
MLR and the Partnership. The fair value of the general partner units at the
date of acquisition was determined to be $424,000 which was recorded as a
reduction in partners capital. The fair value of the general partner units was
determined based on the quoted market value of Class A limited partner
units. No discounts for lack of marketability or premiums for control
preferences were applied in determining the fair value of the general partner
units. The remaining $326,000 representing the extinguishment of the management
contract was charged to expense.
As a result of the transaction, MLRs operations have
been included in the Partnerships consolidated financial statements beginning
with the first quarter of 2005.
Limited partner interests
are represented by Class A Units, which are evidenced by depositary
receipts that trade publicly and are listed on the New York Stock Exchange.
(2) SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash
and Cash Equivalents.
Cash
and cash equivalents include unrestricted demand deposits with banks and all
highly liquid deposits with an original maturity of less than three months. The
cash equivalents are not protected by federal deposit insurance.
(b) Financial
Instruments.
The fair
value of the line of credit and a portion of the long-term financial
instruments is approximately the carrying value as they have variable interest
rates. The remaining portion of the long-term financial instrument has a fixed
rate and the fair value compared to carrying value is disclosed.
(c) Consolidation.
The consolidated financial statements include the
accounts of the Partnership, and from 2005, ML Resources, Inc. All significant
intercompany balances and transactions, including management fees and
distributions, have been eliminated.
(d) Farming
Costs.
The Partnership considers each orchard to
be a separate cost center, which includes the depreciation/amortization of capitalized
costs associated with each orchards 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.
F-
7
However, the timing and manner in which farming costs
are recognized in the Partnerships 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 orchards standard cost by actual production from that orchard. The
difference between actual farming costs incurred and the amount of farming
costs recognized as expense is recorded as either an increase or decrease in
deferred farming costs, which is reported as an asset in the balance sheet. Deferred
farming costs accumulate throughout the year, typically peaking mid-way through
the third quarter, since nut production is lowest during the first and second
quarters of the year. Deferred farming costs are expensed over the remainder of
the year since nut production is highest at the end of the third quarter
through year end.
Management evaluates the validity of each orchards
standard cost on a monthly basis based on actual production and farming costs
incurred, as well as any known events that might significantly affect forecasted
annual production and farming costs for the remainder of the year.
(e) Inventory.
Supplies inventory is relieved on an average cost
basis to cost of farming expense as used.
(f) Land,
Orchards and Equipment.
Land,
orchards and equipment are reported at cost, net of accumulated depreciation
and amortization. Net farming costs for any developing orchards are
capitalized on the balance sheet until revenues from that orchard exceed
expenses for that orchard (or nine years after planting, if earlier). Developing
orchards historically do not reach commercial viability until about 12 years of
age.
Depreciation of orchards and other equipment is
reported on a straight-line basis over the estimated useful lives of the assets
(40 years for orchards and between 5 and 12 years for other equipment). A 5%
residual value is assumed for orchards. The macadamia orchards acquired in 1986
situated on leased land are being amortized on a straight-line basis over the
terms of the leases (approximately 33 years from the inception of the
Partnership) with no residual value assumed. The macadamia orchards acquired in
1989 situated on leased land are being amortized on a straight-line basis over
a 40 year period (the terms of these leases exceed 40 years) with no residual
value assumed. For income tax reporting, depreciation is calculated under the
straight line and declining balance methods over Alternative Depreciation
System recovery periods.
Repairs and maintenance costs are expensed unless they
exceed $5,000 and extend the useful life beyond the depreciable life.
The Partnership reviews long-lived assets held and
used, or held for sale for impairment whenever events or circumstances indicate
that the carrying amount of an asset may not be recoverable. If an evaluation
is required, the estimated undiscounted future cash flows associated with the
asset are compared to the assets 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.
(g) Goodwill and
Other Intangible Assets
Under
SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142),
goodwill and other indefinite-lived intangible assets are not amortized but are
reviewed for impairment at least annually and if
F-
8
a triggering event were to occur in an interim period.
The Partnerships annual impairment testing is performed in the 4
th
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 Partnerships 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 units goodwill with the book value of the
goodwill. If the book value of the reporting units goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess. The implied fair value of goodwill is determined
in the same manner as the amount of goodwill recognized in a business
combination.
(h) Income Taxes.
The accompanying income statements do not include a
provision for corporate income taxes, as the income of the Partnership is not
taxed directly; rather, the Partnerships tax attributes are included in the
individual tax returns of its partners. Neither the Partnerships financial
reporting income nor the cash distributions to unit holders can be used as a
substitute for the detailed tax calculations which the Partnership must perform
annually for its partners.
The
Partnership is subject to a gross income tax as a result of its election to
continue to be taxed as a partnership rather than to be taxed as a corporation,
as allowed by the Taxpayer Relief Act of 1997. This tax is calculated at 3.5%
on partnership gross income (net revenues less cost of goods sold) beginning in
1998.
Deferred
tax liabilities are recognized for the future tax consequences attributable to
differences between the financial reporting and tax reporting basis of assets
and liabilities.
(i) Revenue.
Macadamia nut sales are recognized when nuts are
delivered to the buyer. Contract farming revenue and administrative services
revenues are recognized in the period that such services are completed, that is
upon the incurrence of direct labor or equipment hours incurred on behalf of an
orchard owner. The Partnership is paid for its services based upon a time and
materials basis plus a percentage fee or fixed fee based upon each farming
contracts terms. Contract farming includes the regular maintenance of the
owners orchards as well as harvesting of their nuts. The Partnership provides
these services on a continuing basis throughout the year.
(j) Pension Benefit
and Intermittent Severance Costs.
The
actuarial method used for financial accounting purposes is the projected unit credit
method.
(k) Estimates.
The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(l) Net Income Per Class A
Unit.
In 2006
and 2005 net income per Class A Unit is calculated by dividing 100% of
Partnership net income by the average number of Class A Units outstanding
for the period. In 2004 net income per Class A Unit is calculated by
dividing 99% of the Partnership net income by the average number of Class A
Units outstanding for the period.
(m) Accumulated
Comprehensive Income.
Accumulated
comprehensive income represents the change in Partners capital from
transactions and other events and circumstances arising from non-unitholder
sources. Accumulated comprehensive income consists of deferred pension and
intermittent severance gains or losses. As of December 31, 2006, our
Consolidated Balance Sheet reflected Accumulated Other Comprehensive Loss in
the amount of $70,000 in deferred pension and intermittent severance loss.
F-
9
(n) Recent
Accounting Pronouncements.
In
September 2006, the FASB issued Statement No. 157. This statement
provides a single definition of fair value, a framework for measuring fair
value, and expanded disclosures concerning fair value. Previously, different
definitions of fair value were contained in various accounting pronouncements
creating inconsistencies in measurement and disclosures. Statement No. 157
applies under those previously issued pronouncements that prescribe fair value
as the relevant measure of value. This pronouncement is effective for fiscal
years beginning after November 15, 2007. We do not expect the adoption of
Statement No. 157 to have a material impact on our financial position,
results of operations, or cash flows.
In September 2006,
the FASB issued Statement No. 158,
Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans,
(an
amendment of FASB Statements No. 87, 88, 106. and 132R (Statement No. 158),
that requires an employer to recognize in its statement of financial position an
asset for a plans over funded status or a liability for a plans under funded
status, measure a plans asset and its obligations that determine it funded
status as of the end of the employers fiscal year (with limited exceptions),
and recognize changes in the funded status of a defined benefit postretirement
plan in the year in which the changes occur. We adopted the recognition
provisions of Statement No. 158 in our December 31, 2006 financial
statements. The incremental affects of applying Statement No. 158 related
to Partnerships defined pension plan and intermittent severance plan as of December 31,
2006, were as follows:
Increase in
pension obligation
|
|
$
|
68,000
|
|
Increase in
intermittent severance obligation
|
|
18,000
|
|
Decrease in
prepaid pension obligation
|
|
7,000
|
|
|
|
$
|
93,000
|
|
The adoption on SFAS No. 158
had no effect on the net income or cash flows of the Partnership.
(3) SEGMENT
INFORMATION
The Partnership
has two reportable segments, the owned-orchard segment and the farming segment,
which are organized on the basis of revenues and assets. The owned-orchard
segment derives its revenues from the sale of macadamia nuts grown in orchards
owned or leased by the Partnership. The farming segment derives its revenues
from the farming of macadamia orchards owned by other growers. It also farms
those orchards owned by the Partnership.
Management
evaluates the performance of each segment on the basis of operating income. The
Partnership accounts for intersegment sales and transfers at cost and such transactions
are eliminated in consolidation.
The
Partnerships 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 is a party to two nut purchase contracts signed June 1, 2006,
with an effective date of January 1, 2006, with Mauna Loa which were negotiated
in 2006. The two contracts cover all nuts produced by the orchards acquired in
June 1986, December 1986, and October 1989. Of the two contracts, one for
approximately 15 million pounds expired December 31, 2006 and has a nut
purchase price for 2006 of $0.75 per pound wet-in-shell (WIS) at 20% moisture
and 30% saleable kernel recovery (SK) to dry-in-shell (DIS). Two other
contracts, of approximately 1 million pounds, also expired December 31, 2006,
one with a nut purchase price of $0.60 per pound WIS 25% adjusted for trash and
the other with a nut purchase price based on a two-year trailing average USDA
price at WIS 25%. The last contract for about 5 million pounds expires December
31, 2011 and has a nut purchase price for 2006 of $0.74 per pound WIS at 20%
moisture and 30% SK/DIS. The purchase price
F-
10
increases by $0.01 each year except 2008 until it
reaches $0.78 per pound in 2011. The purchase contract for the macadamia nut
orchard purchased in April 2006 is with Mac Farms and accounts for about
100,000 pounds and has a nut purchase price of $0.98 per pound WIS 20% moisture
and 30% SK/DIS.
On
December 16, 2004, a new nut purchase contract was signed with Hamakua for the
annual delivery of six million WIS pounds, starting January 1, 2007. The
contract provides for a minimum price of 75 cents per pounds and a maximum
price of 95 cents per pound. The pricing formula includes a fixed component of
85 cents and a second component based on Hamakuas average selling price for
bulk kernel. In February 2007, the Partnership negotiated an amendment to the
contract which provides the Partnership an option to have nut-in-shell
processed into kernel for a fee in lieu of selling the nuts to Hamakua.
On January 5,
2006, a new nut purchase contract was signed with Island Princess for the
annual delivery of approximately two million WIS pounds, effective January 1,
2007. The nut price will be determined every six months by mutual agreement
based on prevailing market price for kernel from Hawaii and Australia. The
effective price for January June 2007 is $0.608 at 20% moisture and 30%
SK/DIS recovery.
On January 6,
2006, a new nut purchase contract was signed with MacFarms for the annual
delivery of between four and one-half million and five and one-half million WIS
pounds, effective January 1, 2007. The nut price will be determined every
six months by mutual agreement based on prevailing market price for kernel from
Hawaii and Australia. The effective price for January June 2007 is
$0.608 at 20% moisture and 30% SK/DIS recovery.
(b) Husking
Activities
Husking
activities for the Keaau and Mauna Kea orchards are performed at Mauna Loas
Keaau facility. Operation of the Keaau husking facility which had been
performed by the Partnership was transferred to Mauna Loa in July of 2006.
Payments or reimbursements made to Mauna Loa were $440,000 in 2004, $603,000 in
2005, and $559,000 in 2006 for husking as the contracts agree that the
Partnership will deliver husked nuts.
(c) Stabilization
Payments.
In December 1986,
the Partnership acquired a 266-acre orchard that was several years
younger than its other orchards. Because of the relative immaturity of the
newer orchard, its productivity (and therefore its cash flow) was expected to
be correspondingly lower for the first several years than for the other older
orchards.
Accordingly,
the seller of this orchard (KACI) agreed to make cash stabilization payments to
the Partnership for each year through 1993 in which the cash flow (as defined)
from this orchard fell short of a target cash flow level of $507,000. Stabilization
payments for a given year were limited to the lesser of the amount of the
shortfall or a maximum payment amount.
The
Partnership accounted for the $1.2 million in stabilization payments (net of
general excise tax) as a reduction in the cost basis of this orchard. As a
result, the payments will be reflected in the Partnerships net income ratably
through 2019 as a reduction to depreciation for this orchard.
In
return, the Partnership is obligated to pay KACI 100% of any years 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 KACI 50% of this orchards cash flow in excess
of the target cash flow as additional incentive rent. Additional rent of
$62,000 was due for 2006 and no additional rent was due in 2004, or 2005.
(d) Cash Flow
Warranty Payments.
In October 1989, the
Partnership acquired 1,040 acres of orchards that were several years younger on
average than the Partnerships other orchards. Their productivity (and
therefore their cash flow) was expected to be lower for the first several years
than for the Partnerships 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
F-
11
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 Partnerships net income ratably through 2030
as reductions to depreciation for these orchards.
(2) The
farming segments 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 segments operating income and the
segments assets as of and for the period ended December 31, 2006, 2005
and 2004.
Segment
Reporting for the Year ended December 31, 2006 (in thousands)
|
|
Owned
Orchards
|
|
Contract
Farming
|
|
Intersegment
Elimination
|
|
Total
|
|
Revenues
|
|
|
$
|
13,256
|
|
|
$
|
14,533
|
|
|
$
|
(10,717
|
)
|
|
$
|
17,072
|
|
Composition of Intersegment
revenues
|
|
|
|
|
|
10,717
|
|
|
|
|
|
10,717
|
|
Operating income (loss)
|
|
|
222
|
|
|
663
|
|
|
|
|
|
885
|
|
Depreciation expense
|
|
|
1,737
|
|
|
216
|
|
|
|
|
|
1,953
|
|
Segment assets
|
|
|
48,731
|
|
|
5,232
|
|
|
|
|
|
53,963
|
|
Expenditures
for property and equipment
|
|
|
479
|
|
|
30
|
|
|
|
|
|
509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Reporting for the Year ended December 31,
2005 (in thousands)
|
|
Owned
Orchards
|
|
Contract
Farming
|
|
Intersegment
Elimination
|
|
Total
|
|
Revenues
|
|
|
$
|
12,684
|
|
|
$
|
12,131
|
|
|
$
|
(7,437
|
)
|
|
$
|
17,378
|
|
Composition of Intersegment
revenues
|
|
|
|
|
|
7,437
|
|
|
|
|
|
7,437
|
|
Operating income (loss)
|
|
|
377
|
|
|
604
|
|
|
|
|
|
981
|
|
Depreciation expense
|
|
|
1,949
|
|
|
216
|
|
|
|
|
|
2,165
|
|
Segment assets
|
|
|
52,206
|
|
|
5,840
|
|
|
|
|
|
58,046
|
|
Expenditures
for property and equipment
|
|
|
51
|
|
|
32
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Reporting for the Year ended December 31,
2004 (in thousands)
|
|
Owned
Orchards
|
|
Contract
Farming
|
|
Intersegment
Elimination
|
|
Total
|
|
Revenues
|
|
|
$
|
9,414
|
|
|
|
$
|
9,502
|
|
|
|
$
|
(5,251
|
)
|
|
$
|
13,665
|
|
Composition of Intersegment
revenues
|
|
|
|
|
|
|
5,251
|
|
|
|
|
|
|
5,251
|
|
Operating income (loss)
|
|
|
(1,684
|
)
|
|
|
179
|
|
|
|
|
|
|
(1,505
|
)
|
Depreciation expense
|
|
|
1,671
|
|
|
|
900
|
|
|
|
|
|
|
2,571
|
|
Segment assets
|
|
|
52,984
|
|
|
|
5,454
|
|
|
|
|
|
|
58,438
|
|
Expenditures
for property and equipment
|
|
|
76
|
|
|
|
96
|
|
|
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-
12
(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, MLRs operations have been included in the Partnerships
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 Partnerships
operating cash flow (as defined) in 2004. The management fee is eliminated in
consolidation in 2005 and 2006. Those reimbursable costs totaled $168,000 in
2004. The managing general partner earned a management fee of $9,000 in 2004.
In addition to a
management fee, the managing general partner is entitled, under the existing
Partnership Agreement, to receive an annual incentive fee equal to 0.5% of the
aggregate fair market value (as defined) of the Class A Units for the
preceding calendar year provided that net cash flow (as defined) for the
preceding calendar year exceeds specified levels. No incentive fee was earned
in 2006, 2005 and 2004.
(b) Legal
Services.
The Partnership paid $196,000, $134,000, and
$495,000 in legal fees in 2006, 2005 and 2004, respectively. A former Director
of the Partnership is a former partner and currently of counsel to one of the
law firms used by the Partnership. The Partnership paid said law firm $196,000
in 2006, $32,000 of the $134,000 in 2005 and $495,000 in 2004.
(c) Management
Services Contract.
The Partnership provides
administrative services to D. Buyers Enterprises, LLC (DBE) for which it was
compensated $104,000 in 2004 and, $102,000 in 2005. DBE owned the stock of the
Partnerships general partner until January 2005.
(d) Office Lease.
Since
September 2001, the Partnership has leased approximately 4000 square feet
of office space in Hilo for its accounting staff from DBE, which was the owner
of the General Partner until January 2005.
The lease amount was $90,000 in 2005 and 2004.
(5)
CASH
FLOW PERFORMANCE
Cash
flow performance (based on definitions used in the Partnership Agreement) for
the past three years is shown below (000s):
|
|
2006
|
|
2005
|
|
2004
|
|
Gross revenues (including interest and other income)
|
|
$ 17,295
|
|
$ 17,534
|
|
$ 13,708
|
|
Less:
|
|
|
|
|
|
|
|
Farming costs
|
|
12,391
|
|
12,311
|
|
10,951
|
|
Administrative costs
|
|
1,842
|
|
1,595
|
|
1,643
|
|
Extinguishment of management agreement
|
|
|
|
326
|
|
|
|
Income tax expense
|
|
100
|
|
129
|
|
5
|
|
Payments of principal and
interest
|
|
639
|
|
672
|
|
634
|
|
Operating cash flow
|
|
2,323
|
|
2,501
|
|
475
|
|
Less:
|
|
|
|
|
|
|
|
Management fee
|
|
0
|
|
0
|
|
9
|
|
Net
cash flow (as defined in the Partnership Agreement)
|
|
$ 2,323
|
|
$ 2,501
|
|
$ 466
|
|
All of net cash flow in
2006 and 2005, and $451,000 in 2004 was allocated to Class A Units. This
cash flow measure is used to determine the management fee paid annually to the
general partner and forms the basis of distributable cash per unit. No
management fee is recorded in 2006 and 2005 as the Partnership
F-
13
purchased
the stock of the managing partner MLR in January 2005 and the management
fee is eliminated in consolidation.
(6)
LAND,
ORCHARDS AND EQUIPMENT
Land,
orchards and equipment, stated at cost, consisted of the following at
December 31, 2006 and 2005 (000s):
|
|
2006
|
|
2005
|
|
Land
|
|
$ 8,255
|
|
$ 8,168
|
|
Improvements
|
|
1,850
|
|
1,929
|
|
Machinery and
equipment
|
|
4,266
|
|
4,252
|
|
Irrigation well
and equipment
|
|
1,184
|
|
1,155
|
|
Producing
orchards
|
|
67,631
|
|
67,267
|
|
Capital leases
|
|
161
|
|
161
|
|
Land, orchards and equipment (gross)
|
|
83,347
|
|
82,932
|
|
Less accumulated depreciation and amortization
|
|
36,115
|
|
34,210
|
|
Land, orchards
and equipment (net)
|
|
$ 47,232
|
|
$ 48,722
|
|
The Partnerships interest
in trees situated on certain leased macadamia orchard properties are subject to
repurchase at the option of the lessors. Such repurchase options grant the
lessors the right to purchase all or a portion of these trees after
June 30, 2019, at fair market value, as defined in the respective farming
lease agreements. If the repurchase options are not exercised prior to
expiration of the lease agreements and the lessors do not offer to extend the
lease agreements at the then current market lease rates, the lessors are
required to repurchase these trees at fair market value at lease expiration.
The lessors will be released from their repurchase obligation in the event that
the Partnership declines to accept an extension offer from the lessors at fair
market lease rates.
(7)
SHORT-TERM
AND LONG-TERM CREDIT
At
December 31, 2006 and 2005, the Partnerships long-term debt comprises
(000s):
|
|
2006
|
|
2005
|
|
Term debt
|
|
$ 1,600
|
|
$ 2,000
|
|
Other
|
|
|
|
34
|
|
|
|
1,600
|
|
2,034
|
|
Current portion
|
|
400
|
|
434
|
|
|
|
$ 1,200
|
|
$ 1,600
|
|
On May 2, 2000 the Partnership entered into a
credit agreement with Pacific Coast Farm Credit Services, ACA (currently
American AgCredit Capital Markets) comprised of a $5 million revolving line of
credit and a $4 million promissory note.
The line of credit expires on May 1, 2008.
Drawings on the line of credit bear interest at the prime lending rate. From
and after the first anniversary date, the Partnership is required to pay a
facility fee of 0.30% to 0.375% per annum, depending on certain financial
ratios on the daily unused portion of credit. The Partnership, at its option,
may make prepayments without penalty.
There were no drawings outstanding on the line of
credit at December 31, 2006 and drawings outstanding at December 31,
2005 amounted to $2,900,000, with interest at 7.50%.
F-
14
At December 31, 2006, the outstanding balance on
the promissory note amounted to $1.6 million. The note is scheduled to mature
in 2010 and bears interest at rates ranging from 6.37% to 7.50%. Principal
payments are due annually on May 2 in the amount of $400,000.
The estimated fair values of the Partnerships
financial instrument has been determined by estimated market price of 6.75% in
2005 and 7.00% in 2006 using a life equal to that remaining on the current
financial instrument. The Partnership has not considered the lender fees in
determining the estimated fair value.
The
estimated fair values of the Partnerships financial instrument are as follows
(000s):
|
|
2006
|
|
2005
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
Long-term debt
|
|
|
$ 1,600
|
|
|
$ 1,312
|
|
|
$ 1,150
|
|
|
$ 1,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the total $1.6 million in 2006 the long-term debt
of $680,000 has a fixed interest rate for one and one-third years. Of the total
$2.0 million in 2005 the long-term debt of $850,000 has short-term fixed
rates that approximate fair value. The $920,000 and $1,150,000 in 2006 and
2005, respectively, have interest rates that are fixed over the remaining life
of the debt.
Both the revolving
credit loan and the term debt are collateralized by all personal property
assets of the Partnership. The credit agreement contains certain restrictions
associated with partner distributions, further indebtedness, sales of assets,
and maintenance of certain financial minimums. Significant restrictive
financial covenants consist of the following:
1.
Minimum working
capital of $2.5 million.
2.
Minimum current
ratio of 1.5 to 1.
3.
Cumulative cash
distributions beginning January 1, 2000 cannot exceed the total of
cumulative net cash flow beginning January 1, 2004 plus a base amount of
$3.3 million.
4.
Minimum tangible
net worth of $49.9 million (reduced by the amount of allowed cash distributions
over net income).
5.
Maximum ratio of
funded debt to capitalization of 20%.
6.
Minimum debt
coverage ratio of 2.5 to 1.
At December 31, 2006, the Partnerships working
capital was $3.9 million and its current ratio 2.54 to 1. The Partnership
was in compliance with all covenants of the Credit Agreement at
December 31, 2006 and December 31, 2005
Capital
and Operating Leases.
The
Partnership has no capital leases as of December 31, 2006 and had $34,000
in capital leases as of December 31, 2005. The Partnership has operating
leases for equipment and operating leases for land. The operating leases for
equipment are four to five year leases.
Land
Leases.
The
partnership leases the land underlying 1,948 acres of its orchards under
long-term operating leases which expire through dates ending 2045. Operating
leases provide for changes in minimum rent based on fair value at certain points
in time. Each of the land leases provides for additional lease payments based
on USDA-reported macadamia nut price levels. Those contingent lease payments
totaled $18,000 in 2004, $19,000 in 2005, and $115,000 in 2006. Total lease
rent for all land operating leases was $150,000 in 2004, $147,000 in 2005, and
$256,000 in 2006.
F-
15
Equipment
Operating Leases.
The
Partnership leases equipment for the farming operation to include vehicles,
blower sweepers and harvester. The operating lease cost was $206,000, $249,000
and $285,000 in 2006, 2005 and 2004, respectively.
Contractual
obligations for the year ended December 31, 2006 for the Partnership are
detailed in the following (000s):
Contractual Obligations
|
|
|
|
Total
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
Remaining
|
|
Long-Term Debt
and Interest
|
|
$ 1,792
|
|
$ 487
|
|
$ 461
|
|
$ 435
|
|
$ 409
|
|
$
|
|
|
$
|
|
|
Operating Leases
|
|
3,453
|
|
337
|
|
275
|
|
191
|
|
146
|
|
126
|
|
|
2,378
|
|
|
Total
|
|
$ 5,245
|
|
$ 824
|
|
$ 736
|
|
$ 626
|
|
$ 555
|
|
$ 126
|
|
|
$ 2,378
|
|
|
(8)
INCOME
TAXES
The
components of income tax expense for the years ended December 31, 2006,
2005 and 2004 were as follows (000s):
|
|
2006
|
|
2005
|
|
2004
|
|
Currently payable
|
|
$ 119
|
|
$ 109
|
|
|
$ 12
|
|
|
Deferred
|
|
(19
|
)
|
20
|
|
|
(7
|
)
|
|
|
|
$ 100
|
|
$ 129
|
|
|
$ 5
|
|
|
The provision for income taxes equates to the 3.5%
federal tax rate applied to gross income (net revenues less cost of goods sold)
for the years ended December 31, 2006, 2005 and 2004.
The
components of the net deferred tax liability reported on the balance sheet as
of December 31, 2006 and 2005 are as follows (000s):
|
|
2006
|
|
2005
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Financial statement bases of
land, orchards, inventory and equipment is greater than tax bases
|
|
$ 719
|
|
$ 717
|
|
Financial statement bases of
capitalized leases, long-term debt on capitalized leases and interest
expense on capitalized leases is greater than tax bases
|
|
(4
|
)
|
(4
|
)
|
Excess of tax depreciation
over financial statement depreciation
|
|
493
|
|
514
|
|
|
|
$ 1,208
|
|
$ 1,227
|
|
(9)
PENSION
PLAN
The Company established a defined benefit pension plan
in conjunction with the acquisition of farming operations on May 1, 2000.
The plan covers employees that are members of a union bargaining unit. The
projected benefit obligation includes the obligation for the employees of their
previous employer that became Company employees.
F-
16
The
following reconciles the changes in the pension benefit obligation and plan
assets for the years ended December 31, 2006, 2005, 2004 to the funded
status of the plan and the amounts recognized in the balance sheets at
December 31, 2006, 2005, 2004 (000s).
|
|
2006
|
|
2005
|
|
2004
|
|
Change in
projected benefit obligation:
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$ 518
|
|
$ 411
|
|
$ 357
|
|
Service cost
|
|
59
|
|
57
|
|
56
|
|
Interest cost
|
|
28
|
|
23
|
|
21
|
|
Actuarial (gain) loss
|
|
(80
|
)
|
35
|
|
(12
|
)
|
Benefits paid
|
|
(35
|
)
|
(8
|
)
|
(11
|
)
|
Projected benefit obligation at end of year
|
|
490
|
|
518
|
|
411
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
258
|
|
205
|
|
169
|
|
Actual return on plan assets
|
|
31
|
|
10
|
|
3
|
|
Employer contribution
|
|
168
|
|
51
|
|
44
|
|
Benefits paid
|
|
(35
|
)
|
(8
|
)
|
(11
|
)
|
Fair value of plan assets at end of year
|
|
422
|
|
258
|
|
20
|
|
Funded status
|
|
(68
|
)
|
(261
|
)
|
(206
|
)
|
Unrecognized prior service cost
|
|
|
|
62
|
|
69
|
|
Unrecognized net actuarial loss (gain)
|
|
|
|
89
|
|
44
|
|
Amount recognized in balance sheet
|
|
$ (68
|
)
|
$ (110
|
)
|
$ (93
|
)
|
Amounts recognized in the balance sheets consist of:
|
|
|
|
|
|
|
|
Accrued pension liability (current)
|
|
(68
|
)
|
(152
|
)
|
(103
|
)
|
Intangible asset
|
|
|
|
42
|
|
10
|
|
Net amount
recognized
|
|
$ (68
|
)
|
$ (110
|
)
|
$ (93
|
)
|
The amounts recognized in accumulated other
comprehensive loss at December 31, 2006 was as follows:
|
|
2006
|
|
Net actuarial
gain
|
|
|
$ (4
|
)
|
|
Prior service
cost
|
|
|
56
|
|
|
|
|
|
$ 52
|
|
|
The estimated net actuarial gain and prior service
cost that will be amortized from accumulated other comprehensive loss into net
periodic benefit cost for the year ending December 31, 2007 is $7,000.
Prior to the adoption of Statement No. 158, the
plan was over funded by $7,000.
The computation of the
prepaid pension obligation at December 31, 2006 and required minimum
liability and additional minimum liability at December 31, 2005 are shown
below:
|
|
2006
|
|
2005
|
|
Accumulated
benefit obligation
|
|
$ (415
|
)
|
$ (410
|
)
|
Fair value of
plan assets
|
|
422
|
|
258
|
|
Required prepaid
pension obligation (minimum liability)
|
|
$ 7
|
|
$ (152
|
)
|
Liability
recognized for accrued benefit costs
|
|
|
|
110
|
|
Prepaid pension
obligation (additional minimum liability)
|
|
$ 7
|
|
$ (42
|
)
|
F-
17
The components of net periodic pension cost for the
years ended December 31, 2006, December 31, 2005 and
December 31, 2004 were as follows:
|
|
2006
|
|
2005
|
|
2004
|
|
Service cost
|
|
$ 59
|
|
$ 57
|
|
$ 56
|
|
Interest cost
|
|
28
|
|
23
|
|
21
|
|
Expected return
on plan assets
|
|
(23
|
)
|
(19
|
)
|
(15
|
)
|
Amortization of
net actuarial loss and prior service cost
|
|
9
|
|
7
|
|
7
|
|
Net periodic pension
cost
|
|
$ 73
|
|
$ 68
|
|
$ 69
|
|
The weighted average actuarial assumptions used to
determine the pension benefit obligations at December 31, 2006, 2005 and
2004 and the net periodic pension cost for the years then ended are as follows:
|
|
2006
|
|
2005
|
|
2004
|
|
Pension benefit obligation:
|
|
|
|
|
|
|
|
Discount rate
|
|
5.90
|
%
|
5.50
|
%
|
5.75
|
%
|
Compensation increases
|
|
2.00
|
%
|
2.00
|
%
|
2.00
|
%
|
Net
periodic pension cost:
|
|
|
|
|
|
|
|
Discount rate
|
|
5.90
|
%
|
5.75
|
%
|
6.00
|
%
|
Compensation increases
|
|
2.00
|
%
|
2.00
|
%
|
2.00
|
%
|
Return on assets
for the year
|
|
8.50
|
%
|
8.50
|
%
|
8.50
|
%
|
The expected long-term rate of return on plan assets
was based primarily on historical returns as adjusted for the plans current
investment allocation strategy.
The Partnership employs an investment strategy whereby
the assets in our portfolio are evaluated to maintain the desired target asset
mix. The funds are invested in stock mutual funds, fixed income mutual funds
and money market funds. Evaluation of the actual asset mix is evaluated on a
quarterly basis and adjusted if required to maintain the desired target mix.
Therefore, the actual asset allocation does not vary significantly from the
targeted asset allocation.
The
plans asset allocation percentages at December 31, 2006 and 2005 were as
follows:
|
|
2006
|
|
2005
|
|
Pooled fixed
income funds
|
|
23.00
|
%
|
21.00
|
%
|
Money market
funds
|
|
10.00
|
%
|
16.00
|
%
|
Stock mutual
funds
|
|
67.00
|
%
|
63.00
|
%
|
Total
|
|
100.00
|
%
|
100.00
|
%
|
The Partnership expects to contribute approximately $100,000
to the plan in 2007.
The
following pension benefit payments, which reflect expected future services, as
appropriate, are expected to be paid:
Years Ending December 31,
|
|
|
|
|
|
2007
|
|
$ 8,372
|
|
2008
|
|
11,073
|
|
2009
|
|
12,168
|
|
2010
|
|
17,546
|
|
2011
|
|
17,201
|
|
2012-2016
|
|
145,551
|
|
F-
18
(10) UNION
BARGAINING UNIT INTERMITTENT EMPLOYEES SEVERANCE PLAN
The Partnership provides a severance plan, since the
acquisition of the farming operations on May 1, 2000, that covers union members
that are not part of the defined benefit pension plan and are classified as
intermittent employees per the bargaining union agreement. The severance plan provides for the payment
of 8 days of pay for each year worked (upon the completion of 3 years of
continuous serve) if the employee becomes physically or mentally incapacitated,
is part of a Partnership mass layoff, or reaches the age of 60 and is
terminated or voluntarily terminates.
The Partnership accounts for the benefit by determining the present
value of the future benefits based upon an actuarial analysis. The projected
benefit obligation includes the obligation for the employees of their previous
employer that became Company employees.
The
following reconciles the changes in the severance benefit obligation and plan
assets for the years ended December 31, 2006, 2005, 2004 to the funded status
of the plan and the amounts recognized in the balance sheets at December 31,
2006, 2005, 2004 (000s).
Change in Severance Obligation
|
|
2006
|
|
2005
|
|
2004
|
|
Severance
obligation at beginning of year
|
|
$
|
376
|
|
$
|
384
|
|
$
|
363
|
|
Service cost
|
|
23
|
|
24
|
|
24
|
|
Interest cost
|
|
20
|
|
21
|
|
21
|
|
Actuarial (gain)
loss
|
|
(36
|
)
|
(14
|
)
|
9
|
|
Benefits paid
|
|
(48
|
)
|
(39
|
)
|
(33
|
)
|
Severance
obligation at end of year
|
|
$
|
335
|
|
$
|
376
|
|
$
|
384
|
|
Change in Plan Assets
|
|
2006
|
|
2005
|
|
2004
|
|
Fair value of
plan assets at of year
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Employer
contributions
|
|
48
|
|
39
|
|
33
|
|
Benefits paid
|
|
(
48
|
)
|
(39
|
)
|
(33
|
)
|
Fair value of
plan assets at end of year
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Funded Status
Benefit
obligation
|
|
$
|
(335
|
)
|
$
|
(376
|
)
|
$
|
(384
|
)
|
Unrecognized net
actuarial loss
|
|
18
|
|
55
|
|
72
|
|
Prepaid (accrued)
benefit cost
|
|
$
|
(317
|
)
|
$
|
(321
|
)
|
$
|
(312
|
)
|
As of December 31, 2006,
the accrued benefit cost of $317,000 was recorded in accrued liabilitiescurrent
portion $27,000, representing amounts to be paid in 2007, non-current
liabilities $290,000 and the unrecognized actuarial gain of $18,000 was
recorded in accumulated other comprehensive income. On adoption of SFAS 158 the
Partnership recorded an adjustment to other comprehensive income of $18,000 for
the under funded status of the severance benefit plan at December 31, 2006.
Components of Net
Periodic Cost
Service cost
|
|
$
|
23
|
|
$
|
24
|
|
$
|
24
|
|
Interest cost
|
|
20
|
|
21
|
|
21
|
|
Recognized net (gain)
loss
|
|
1
|
|
3
|
|
2
|
|
Net periodic cost
(credit)
|
|
$
|
44
|
|
$
|
48
|
|
$
|
47
|
|
F-
19
Reconciliation of Severance Liability
(a) Accrued
severance beginning of year
|
|
$
|
(321
|
)
|
$
|
(312
|
)
|
$
|
(298
|
)
|
(b) Contributions
during fiscal year
|
|
48
|
|
39
|
|
33
|
|
(c) Net periodic
pension cost
|
|
(44
|
)
|
(48
|
)
|
(47
|
)
|
(d) Accrued
severance cost at end of year
|
|
$
|
(317
|
)
|
$
|
(321
|
)
|
$
|
(312
|
)
|
Weighted
Average Assumptions
Discount rate
|
|
5.87
|
%
|
5.78
|
%
|
5.74
|
%
|
Expected return
on plan assets
|
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
Rate of compensation
increase
|
|
1.65
|
%
|
1.65
|
%
|
1.65
|
%
|
As discussed in Note 14,
the Partnership initially recorded its liability for the severance plan in 2006
following its determination that such obligation had not properly been
accounted for as part of prior year purchase price allocations. The Partnership has provided disclosures for
those years for comparative purposes. As
disclosed above, benefit costs in 2004 and 2005 did not differ materially form
contribution amounts expensed in such years.
(11) EMPLOYEES
SAVINGS PLAN
The Partnership sponsors a
401(k) plan, which allows participating employees to contribute up to 25% of
their salary, subject to annual limits.
The plan provides for the Partnership to make matching contributions up
to 50% of the first 4% of salary deferred by employees. During the years ended
December 31, 2006, 2005 and 2004, Partnership matching contributions were $32,000,
$29,000 and $27,000,
respectively.
(12) SALARIED
DEFINED CONTRIBUTION PLAN
The Partnership sponsors a
defined contribution plan for its non-bargaining unit employees. This plan
provides for the Partnership to make annual contributions to the 401(k) plan on
behalf of participating employees.
Contributions are based upon age, length of service, and other criteria
on an annual basis, subject to annual limits.
During the years ended December 31, 2006, 2005, and 2004 Partnership contributions
were $106,000,
$96,000
and $98,000, respectively.
F-
20
(13) QUARTERLY
OPERATING RESULTS (Unaudited)
The
following chart summarizes unaudited quarterly operating results for the years
ended December 31, 2006, 2005, and 2004 (000's omitted except per unit
data):
|
|
|
|
Gross Income
|
|
Net Income
|
|
Net Income (Loss)
|
|
|
|
Revenues
|
|
(Loss)
|
|
(Loss)
|
|
per Class A Unit
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
st
Quarter
|
|
|
$
|
1,523
|
|
|
|
$
|
272
|
|
|
|
$
|
(100
|
)
|
|
|
$
|
(0.01
|
)
|
|
2
nd
Quarter
|
|
|
1,288
|
|
|
|
444
|
|
|
|
(27
|
)
|
|
|
0.00
|
|
|
3
rd
Quarter
|
|
|
5,487
|
|
|
|
437
|
|
|
|
85
|
|
|
|
0.01
|
|
|
4
th
Quarter
|
|
|
8,774
|
|
|
|
1,574
|
|
|
|
846
|
|
|
|
0.11
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
st
Quarter
|
|
|
$
|
3,056
|
|
|
|
$
|
627
|
|
|
|
$
|
(27
|
)
|
|
|
$
|
0.00
|
|
|
2
nd
Quarter
|
|
|
1,501
|
|
|
|
218
|
|
|
|
26
|
|
|
|
0.00
|
|
|
3
rd
Quarter
|
|
|
3,737
|
|
|
|
608
|
|
|
|
118
|
|
|
|
0.02
|
|
|
4
th
Quarter
|
|
|
9,084
|
|
|
|
1,449
|
|
|
|
654
|
|
|
|
0.09
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
st
Quarter
|
|
|
$
|
2,052
|
|
|
|
$
|
208
|
|
|
|
$
|
(95
|
)
|
|
|
$
|
(0.01
|
)
|
|
2
nd
Quarter
|
|
|
787
|
|
|
|
140
|
|
|
|
(161
|
)
|
|
|
(0.02
|
)
|
|
3
rd
Quarter
|
|
|
3,275
|
|
|
|
(67
|
)
|
|
|
(817
|
)
|
|
|
(0.11
|
)
|
|
4
th
Quarter
|
|
|
7,551
|
|
|
|
(143
|
)
|
|
|
(576
|
)
|
|
|
(0.08
|
)
|
|
(14) CBCL
ACQUISITION ADJUSTMENTS
During 2006, the Partnership concluded it should have
recorded certain employee severance and vacation benefits in connection with
its allocation of the purchase price of the macadamia farming operation from CBCL
on May 1, 2000. The Partnership has
re-evaluated and revised the original purchase price allocation and accordingly
has recorded in 2006, goodwill of $306,000 and a corresponding liability for
the fair value of such benefits as of the acquisition date. The changes in the liability for the period
from May 1, 2000 to December 31, 2005 of $159,000 have been included in the
2006 Consolidated Statement of Income.
Prior year financial statements were not materially impacted by this
matter.
F-
21
ML Macadamia Orchards, L.P.
Consolidated Balance Sheets
(in thousands)
|
|
June 30,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
2006
|
|
|
|
(unaudited)
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
$
|
495
|
|
|
$
|
909
|
|
|
$
|
3,351
|
|
|
Accounts receivable
|
|
|
997
|
|
|
706
|
|
|
2,688
|
|
|
Inventory
|
|
|
|
|
|
|
|
|
|
|
|
Supplies
|
|
|
295
|
|
|
302
|
|
|
272
|
|
|
Deferred farming costs
|
|
|
2,894
|
|
|
2,990
|
|
|
|
|
|
Other current assets
|
|
|
306
|
|
|
221
|
|
|
98
|
|
|
Total current assets
|
|
|
4,987
|
|
|
5,128
|
|
|
6,409
|
|
|
Land, orchards and equipment, net
|
|
|
46,406
|
|
|
48,200
|
|
|
47,232
|
|
|
Goodwill
|
|
|
306
|
|
|
|
|
|
306
|
|
|
Intangible assets, net
|
|
|
12
|
|
|
62
|
|
|
16
|
|
|
Total assets
|
|
|
$
|
51,711
|
|
|
$
|
53,390
|
|
|
$
|
53,963
|
|
|
Liabilities and partners capital
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
$
|
400
|
|
|
$
|
416
|
|
|
$
|
400
|
|
|
Short-term borrowing
|
|
|
|
|
|
1,000
|
|
|
|
|
|
Accounts payable
|
|
|
41
|
|
|
16
|
|
|
406
|
|
|
Cash distributions payable
|
|
|
375
|
|
|
375
|
|
|
375
|
|
|
Accrued payroll and benefits
|
|
|
562
|
|
|
614
|
|
|
858
|
|
|
Other current liabilities
|
|
|
56
|
|
|
30
|
|
|
488
|
|
|
Total current liabilities
|
|
|
1,434
|
|
|
2,451
|
|
|
2,527
|
|
|
Non-current accrued benefits
|
|
|
406
|
|
|
|
|
|
405
|
|
|
Long-term debt
|
|
|
800
|
|
|
1,200
|
|
|
1,200
|
|
|
Deferred income tax liability
|
|
|
1,208
|
|
|
1,227
|
|
|
1,208
|
|
|
Total liabilities
|
|
|
3,848
|
|
|
4,878
|
|
|
5,340
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Partners
capital
|
|
|
|
|
|
|
|
|
|
|
|
General partner
|
|
|
81
|
|
|
81
|
|
|
81
|
|
|
Class A limited partners,
no par or assigned value, 7,500 units issued and outstanding
|
|
|
47,852
|
|
|
48,431
|
|
|
48,612
|
|
|
Accumulated other comprehensive loss
|
|
|
(70
|
)
|
|
|
|
|
(70
|
)
|
|
Total partners capital
|
|
|
47,863
|
|
|
48,512
|
|
|
48,623
|
|
|
Total liabilities and
partners capital
|
|
|
$
|
51,711
|
|
|
$
|
53,390
|
|
|
$
|
53,963
|
|
|
See accompanying notes to financial statements.
F-
22
ML Macadamia Orchards, L.P.
Consolidated Income Statements (unaudited)
(in thousands, except per unit data)
|
|
Three months
|
|
Six months
|
|
|
|
ended June 30,
|
|
ended June 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Macadamia nut sales
|
|
$
|
599
|
|
$
|
735
|
|
$
|
2,923
|
|
$
|
1,335
|
|
Contract farming revenue
|
|
626
|
|
553
|
|
1,667
|
|
1,476
|
|
Total revenues
|
|
1,225
|
|
1,288
|
|
4,590
|
|
2,811
|
|
Cost
of goods and services
|
|
|
|
|
|
|
|
|
|
Costs of macadamia nut sales
|
|
552
|
|
322
|
|
2,174
|
|
735
|
|
Costs of contract farming
services
|
|
573
|
|
522
|
|
1,526
|
|
1,360
|
|
Total cost of goods sold
|
|
1,125
|
|
844
|
|
3,700
|
|
2,095
|
|
Gross income
|
|
100
|
|
444
|
|
890
|
|
716
|
|
General
and administrative expenses
|
|
|
|
|
|
|
|
|
|
Legal feesrelated party
|
|
|
|
41
|
|
|
|
76
|
|
Other
|
|
443
|
|
364
|
|
870
|
|
658
|
|
Total general and
administrative expenses
|
|
443
|
|
405
|
|
870
|
|
734
|
|
Operating income (loss)
|
|
(343
|
)
|
39
|
|
20
|
|
(18
|
)
|
Other income (expense)
|
|
(1
|
)
|
(7
|
)
|
13
|
|
8
|
|
Interest expense
|
|
(28
|
)
|
(45
|
)
|
(61
|
)
|
(105
|
)
|
Interest income
|
|
19
|
|
2
|
|
49
|
|
13
|
|
Income (loss) before tax
|
|
(353
|
)
|
(11
|
)
|
21
|
|
(102
|
)
|
Income tax expense
|
|
3
|
|
16
|
|
31
|
|
25
|
|
Net loss
|
|
$
|
(356
|
)
|
$
|
(27
|
)
|
$
|
(10
|
)
|
$
|
(127
|
)
|
Net cash flow (as defined in
the Partnership Agreement)
|
|
$
|
(693
|
)
|
$
|
(306
|
)
|
$
|
59
|
|
$
|
(313
|
)
|
Net loss per Class A Unit
|
|
$
|
(0.05
|
)
|
$
|
(0.00
|
)
|
$
|
(0.00
|
)
|
$
|
(0.02
|
)
|
Net cash flow per Class A
Unit
|
|
$
|
(0.09
|
)
|
$
|
(0.04
|
)
|
$
|
0.01
|
|
$
|
(0.04
|
)
|
Cash distributions per
Class A Unit
|
|
$
|
0.05
|
|
$
|
0.05
|
|
$
|
0.10
|
|
$
|
0.10
|
|
Class A Units outstanding
|
|
7,500
|
|
7,500
|
|
7,500
|
|
7,500
|
|
See accompanying notes to financial statements.
F-23
ML Macadamia Orchards, L.P.
Consolidated Statements of Partners
Capital (unaudited)
(in thousands)
|
|
Three months
|
|
Six months
|
|
|
|
ended June 30,
|
|
ended June 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Partners
capital at beginning of period:
|
|
|
|
|
|
|
|
|
|
General partner
|
|
$
|
81
|
|
$
|
81
|
|
$
|
81
|
|
$
|
81
|
|
Class A limited partners
|
|
48,583
|
|
48,833
|
|
48,612
|
|
49,308
|
|
Accumulated other
comprehensive loss
|
|
(70
|
)
|
|
|
(70
|
)
|
|
|
|
|
48,594
|
|
48,914
|
|
48,623
|
|
49,389
|
|
Allocation of net loss
Class A limited partners
|
|
(356
|
)
|
(27
|
)
|
(10
|
)
|
(127
|
)
|
|
|
(356
|
)
|
(27
|
)
|
(10
|
)
|
(127
|
)
|
Cash distributions:
|
|
|
|
|
|
|
|
|
|
Class A limited partners
|
|
375
|
|
375
|
|
750
|
|
750
|
|
|
|
375
|
|
375
|
|
750
|
|
750
|
|
Partners capital at end of period:
|
|
|
|
|
|
|
|
|
|
General partner
|
|
81
|
|
81
|
|
81
|
|
81
|
|
Class A limited partners
|
|
47,852
|
|
48,431
|
|
47,852
|
|
48,431
|
|
Accumulated other
comprehensive loss
|
|
(70
|
)
|
|
|
(70
|
)
|
|
|
|
|
$
|
47,863
|
|
$
|
48,512
|
|
$
|
47,863
|
|
$
|
48,512
|
|
See accompanying notes to financial statements.
F-
24
ML Macadamia Orchards, L.P.
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
|
|
Three months
|
|
Six months
|
|
|
|
ended June 30,
|
|
ended June 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Cash received from goods and
services
|
|
$
|
1,418
|
|
$
|
2,667
|
|
$
|
6,441
|
|
$
|
10,860
|
|
Cash paid to suppliers and
employees
|
|
(3,716
|
)
|
(2,980
|
)
|
(8,005
|
)
|
(6,719
|
)
|
Interest paid
|
|
(28
|
)
|
(45
|
)
|
(61
|
)
|
(105
|
)
|
Interest received
|
|
19
|
|
2
|
|
49
|
|
13
|
|
Net cash provided by (used in) operating activities
|
|
(2,307
|
)
|
(356
|
)
|
(1,576
|
)
|
4,049
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Disposal (acquisition) of
capital equipment
|
|
(45
|
)
|
(442
|
)
|
(130
|
)
|
(450
|
)
|
Net cash used in investing activities
|
|
(45
|
)
|
(442
|
)
|
(130
|
)
|
(450
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from line of credit
|
|
|
|
1,000
|
|
|
|
1,700
|
|
Payments on line of credit
|
|
|
|
|
|
|
|
(3,600
|
)
|
Payments on long term
borrowings
|
|
(400
|
)
|
(400
|
)
|
(400
|
)
|
(400
|
)
|
Capital lease payments
|
|
|
|
(9
|
)
|
|
|
(18
|
)
|
Cash distributions paid
|
|
(375
|
)
|
(375
|
)
|
(750
|
)
|
(750
|
)
|
Net cash provided by (used in) financing activities
|
|
(775
|
)
|
216
|
|
(1,150
|
)
|
(3,068
|
)
|
Net increase (decrease) in
cash
|
|
(3,127
|
)
|
(582
|
)
|
(2,856
|
)
|
531
|
|
Cash at beginning of period
|
|
3,622
|
|
1,491
|
|
3,351
|
|
378
|
|
Cash at end of period
|
|
$
|
495
|
|
$
|
909
|
|
$
|
495
|
|
$
|
909
|
|
Reconciliation of net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(356
|
)
|
$
|
(27
|
)
|
$
|
(10
|
)
|
$
|
(127
|
)
|
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
63
|
|
129
|
|
468
|
|
232
|
|
Decrease in accounts
receivable
|
|
100
|
|
1,135
|
|
1,691
|
|
7,727
|
|
Decrease (increase) in
inventories
|
|
248
|
|
(37
|
)
|
(23
|
)
|
(32
|
)
|
Increase in deferred farming
costs
|
|
(1,920
|
)
|
(1,230
|
)
|
(2,401
|
)
|
(2,247
|
)
|
Increase in other current
assets
|
|
(46
|
)
|
(22
|
)
|
(208
|
)
|
(43
|
)
|
Decrease in accounts payable
|
|
(66
|
)
|
(177
|
)
|
(365
|
)
|
(754
|
)
|
Decrease in accrued payroll
and benefits
|
|
(252
|
)
|
(84
|
)
|
(296
|
)
|
(321
|
)
|
Decrease in other current
liabilities
|
|
(78
|
)
|
(43
|
)
|
(432
|
)
|
(386
|
)
|
Total adjustments
|
|
(1,951
|
)
|
(329
|
)
|
(1,566
|
)
|
4,176
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(2,307
|
)
|
$
|
(356
|
)
|
$
|
(1,576
|
)
|
$
|
4,049
|
|
Supplemental schedule of non cash financing activities
|
|
|
|
|
|
|
|
|
|
Distributions declared not paid
|
|
$
|
375
|
|
$
|
375
|
|
$
|
375
|
|
$
|
375
|
|
See accompanying notes to financial statements.
F-
25
ML MACADAMIA ORCHARDS, L.P.
Notes to Consolidated Financial
Statements
(1)
BASIS
OF PRESENTATION
In the opinion of management, the accompanying
unaudited consolidated financial statements of ML Macadamia Orchards, L.P.
and its subsidiary (the Partnership) include all adjustments, consisting only
of normal recurring adjustments, necessary to present fairly its financial
position as of June 30, 2007, June 30, 2006 and December 31,
2006 and the results of operations, changes in partners capital and cash flows
for the three and six-month periods ended June 30, 2007 and 2006. The
results of operations for the period ended June 30, 2007 are not
necessarily indicative of the results to be expected for the full year or for
any future period.
The year-end condensed
balance sheet data was derived from audited financial statements, but does not
include all disclosures required by accounting principles generally accepted in
the United States of America. These interim consolidated financial statements
should be read in conjunction with the Consolidated Financial Statements and
the Notes to Consolidated Financial Statements filed with the Securities and
Exchange Commission in the Partnerships 2006 Annual Report on Form 10-K.
(2)
CONSOLIDATION
The consolidated financial
statements include the accounts of the Partnership and ML Resources, Inc.
(MLR), its General Partner. All significant intercompany balances and
transactions, including management fees and distributions, have been
eliminated.
(3)
SIGNIFICANT
ACCOUNTING POLICY
The Partnership reports
revenues net of sales and general excise taxes remitted to government
authorities that are collected from or passed on to it customers.
(4)
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 and orchards owned or leased by the Partnership.
Management evaluates the performance of each segment
on the basis of operating income. The Partnership accounts for inter segment
sales and transfers at cost. Such inter segment sales and transfers are
eliminated in consolidation.
The Partnerships reportable segments are distinct
business enterprises that offer different products or services. 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 prices paid under its
various nut contracts. The farming segments 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.
F-
26
The
following tables summarize each reportable segments operating income and
assets as of, and for the three and six-month periods ended, June 30, 2007
and 2006 (000s).
|
|
Three months
|
|
Six months
|
|
|
|
ended June 30,
|
|
ended June 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Owned orchards
|
|
$
|
599
|
|
$
|
735
|
|
$
|
2,923
|
|
$
|
1,335
|
|
Contract farming
|
|
2,436
|
|
1,385
|
|
5,123
|
|
3,597
|
|
Intersegment elimination
(all contract farming)
|
|
(1,810
|
)
|
(832
|
)
|
(3,456
|
)
|
(2,121
|
)
|
Total
|
|
$
|
1,225
|
|
$
|
1,288
|
|
$
|
4,590
|
|
$
|
2,811
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
Owned orchards
|
|
$
|
(396
|
)
|
$
|
40
|
|
$
|
(121
|
)
|
$
|
(53
|
)
|
Contract farming
|
|
53
|
|
(1
|
)
|
141
|
|
35
|
|
Total
|
|
$
|
(343
|
)
|
$
|
39
|
|
$
|
20
|
|
$
|
(18
|
)
|
Depreciation:
|
|
|
|
|
|
|
|
|
|
Owned orchards
|
|
$
|
27
|
|
$
|
55
|
|
$
|
396
|
|
$
|
124
|
|
Contract farming
|
|
34
|
|
74
|
|
68
|
|
108
|
|
Total
|
|
$
|
61
|
|
$
|
129
|
|
$
|
464
|
|
$
|
232
|
|
Expenditures for property and equipment:
|
|
|
|
|
|
|
|
|
|
Owned orchards
|
|
$
|
45
|
|
$
|
|
|
$
|
130
|
|
$
|
440
|
|
Contract farming
|
|
|
|
|
|
|
|
10
|
|
Total
|
|
$
|
45
|
|
$
|
|
|
$
|
130
|
|
$
|
450
|
|
Segment assets:
|
|
|
|
|
|
|
|
|
|
Owned orchards
|
|
|
|
|
|
$
|
44,928
|
|
$
|
47,121
|
|
Contract farming
|
|
|
|
|
|
6,783
|
|
6,269
|
|
Total
|
|
|
|
|
|
$
|
51,711
|
|
$
|
53,390
|
|
All revenues are from
sources within the United States.
(5)
DEFERRED
FARMING COSTS
Orchard costs (e.g.
irrigation, fertilizer, pruning, etc.) are annualized for interim reporting
purposes, with the difference between costs incurred-to-date and costs
expensed-to-date (based on projected annual cost per nut harvested) being
reported on the balance sheet as deferred farming costs, which amounted to $2.9
million and $3.0 million at June 30, 2007 and 2006, respectively. Management
anticipates a decrease in production during the remainder of 2007 compared to
2006 due to current weather patterns. However, even with the anticipated
decrease in production for the remainder of 2007 the full year forecast remains
consistent with the overall annual production plan.
(6)
LONG-TERM
DEBT
The Partnership has a $5 million revolving credit
facility with American AgCredit, PCA, which expires on May 1, 2008. Amounts
drawn on the line bear interest at the prime lending rate. There was no
outstanding drawing on the line at June 30, 2007 and $1.0 million at June 30,
2006.
In addition to the revolving credit facility, the
Partnership has a $4 million promissory note payable to American AgCredit, PCA,
which is scheduled to mature in 2010. Amounts outstanding under the promissory
note agreement bear interest at rates from 6.37 percent to 7.77 percent. At June 30,
2007 and 2006, the outstanding balance under the promissory note agreement
amounted to $1.2 million and $1.6 million, respectively
F-
27
The credit agreements with American AgCredit, PCA,
contain various financial covenants. The Partnership was in compliance with all
debt covenants at June 30, 2006. At June 30, 2007 the Partnership was
in compliance with all debt covenants except for minimum tangible net worth. The
Partnership was less than 0.4% below the required amount. The lender has
provided a waiver to the loan covenant for the quarter ended June 30, 2007.
Had the lender not waived this violation, the Partnership would have been
restricted in its ability to pay distributions to the limited partners.
The Partnership had no
capital lease obligations related to leased equipment at June 30, 2007 and
$16,000 at June 30, 2006.
(7)
PARTNERS
CAPITAL
Net income (loss) per Class A
Unit is calculated by dividing 100% of Partnership net income by the average
number of Class A Units outstanding for the period.
(8)
CASH
DISTRIBUTIONS
On June 14, 2007, a
second quarter cash distribution was declared in the amount of five cents
($0.05) per Class A Unit, payable on August 15, 2007 to unit holders
of record as of the close of business on June 29, 2007.
(9)
PENSION
PLAN
The Partnership sponsors a
defined benefit pension plan covering employees that are members of a union
bargaining unit. The Partnerships funding policy is to contribute an amount to
the plan sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974.
COMPONENTS
OF NET PERIODIC BENEFIT COST
|
|
Pension Benefits
|
|
Pension Benefits
|
|
|
|
3 months ended
|
|
6 months ended
|
|
|
|
6/30/07
|
|
6/30/06
|
|
6/30/07
|
|
6/30/06
|
|
Service Cost
|
|
$
|
15,003
|
|
$
|
14,817
|
|
$
|
30,006
|
|
$
|
29,634
|
|
Interest Cost
|
|
7,116
|
|
7,042
|
|
14,232
|
|
14,084
|
|
Expected Return on
Assets
|
|
(9,880
|
)
|
(4,742
|
)
|
(19,760
|
)
|
(9,484
|
)
|
Amortization of
Unrecognized Prior Service Costs
|
|
1,661
|
|
1,661
|
|
3,322
|
|
3,322
|
|
Amortization of Unrecognized
Actuarial Loss
|
|
|
|
740
|
|
|
|
1,481
|
|
Net Periodic Pension Cost
|
|
$
|
13,900
|
|
$
|
19,518
|
|
$
|
27,800
|
|
$
|
39,037
|
|
(10)
INTERMITTENT SEVERANCE PLAN
The Partnership sponsors a
defined intermittent severance benefit plan covering employees that are members
of a union bargaining unit and not covered by the defined pension plan. Payment
of the severance benefits is made when covered employees cease employment with
the Partnership under certain terms and conditions as defined in the union
bargaining agreement.
COMPONENTS
OF NET PERIODIC BENEFIT COST
|
|
Intermittent Severance
Benefits
|
|
|
|
3 months ended
|
|
6 months ended
|
|
|
|
3/31/07
|
|
6/30/07
|
|
Service cost
|
|
|
$
|
4,624
|
|
|
|
$
|
9,248
|
|
|
Interest cost
|
|
|
4,740
|
|
|
|
9,479
|
|
|
Net periodic intermittent severance cost
|
|
|
$
|
9,364
|
|
|
|
$
|
18,727
|
|
|
F-
28
Report of
Independent Auditors
To the Board of Directors and Members
of MacFarms of Hawaii, LLC
In our opinion, the
accompanying balance sheets and the related statements of operations, members
equity and cash flows present fairly, in all material respects, the financial
position of MacFarms of Hawaii, LLC (the Company) at December 31, 2006
and 2005, and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
Accuity, LLP
Honolulu, Hawaii
August 24, 2007
F-
29
MacFarms of Hawaii, LLC
Balance Sheets
December 31, 2006 and 2005
|
|
2006
|
|
2005
|
|
Assets
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
42,810
|
|
$
|
41,185
|
|
Accounts receivable, net of allowance for doubtful accounts
of $95,567 in 2006 and $253,067 in 2005
|
|
2,611,826
|
|
4,158,517
|
|
Inventory
|
|
7,747,593
|
|
9,521,880
|
|
Other assets
|
|
432,204
|
|
247,628
|
|
Total current assets
|
|
10,834,433
|
|
13,969,210
|
|
Property and
equipment, net
|
|
3,587,793
|
|
2,515,915
|
|
Other assets
|
|
31,873
|
|
1,749
|
|
Total assets
|
|
$
|
14,454,099
|
|
$
|
16,486,874
|
|
Liabilities
and Members Equity
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
Bank overdraft
|
|
$
|
121,113
|
|
$
|
621,258
|
|
Accounts payable
|
|
1,847,034
|
|
2,392,122
|
|
Accrued commissions to affiliate
|
|
173,776
|
|
134,447
|
|
Accrued liabilities
|
|
400,026
|
|
344,163
|
|
Notes payable
|
|
136,835
|
|
78,400
|
|
Total current liabilities
|
|
2,678,784
|
|
3,570,390
|
|
Notes payable
|
|
1,169,641
|
|
1,303,868
|
|
Revolving
line-of-credit
|
|
5,945,000
|
|
5,005,000
|
|
Due to affiliate,
net
|
|
3,633,781
|
|
3,664,883
|
|
Total liabilities
|
|
13,427,206
|
|
13,544,141
|
|
Commitments and
contingencies
|
|
|
|
|
|
Members equity
|
|
1,026,893
|
|
2,942,733
|
|
Total liabilities
and members equity
|
|
$
|
14,454,099
|
|
$
|
16,486,874
|
|
The accompanying notes are an integral part of the financial statements.
F-
30
MacFarms of Hawaii, LLC
Statements of Operations
Years Ended December 31,
2006 and 2005
|
|
2006
|
|
2005
|
|
Sales, net
|
|
$
|
21,311,627
|
|
$
|
28,230,662
|
|
Cost of sales
|
|
(18,090,167
|
)
|
(22,037,385
|
)
|
Gross profit
|
|
3,221,460
|
|
6,193,277
|
|
Operating
expenses
|
|
|
|
|
|
Commissions to
affiliate
|
|
1,424,009
|
|
1,511,276
|
|
General and
administrative
|
|
1,414,628
|
|
1,351,004
|
|
Selling
|
|
1,364,322
|
|
1,310,261
|
|
Management and
consulting fees to members
|
|
400,000
|
|
400,000
|
|
|
|
4,602,959
|
|
4,572,541
|
|
Income (loss) from operations
|
|
(1,381,499
|
)
|
1,620,736
|
|
Other
income (expense)
|
|
|
|
|
|
Other income
|
|
9,707
|
|
51,911
|
|
Interest expense
|
|
(491,771
|
)
|
(222,636
|
)
|
Other expense
|
|
(52,277
|
)
|
(265,375
|
)
|
Total other expenses
|
|
(534,341
|
)
|
(436,100
|
)
|
Net income (loss)
|
|
$
|
(1,915,840
|
)
|
$
|
1,184,636
|
|
The accompanying notes are an integral part of the financial statements.
F-
31
MacFarms of Hawaii, LLC
Statements of Members Equity
Years Ended December 31,
2006 and 2005
|
|
2006
|
|
2005
|
|
Balance at
beginning of year
|
|
$
|
2,942,733
|
|
$
|
2,089,883
|
|
Net income (loss)
|
|
(1,915,840
|
)
|
1,184,636
|
|
Change in unrealized gain
|
|
|
|
(36,189
|
)
|
Distribution to members
|
|
|
|
(295,597
|
)
|
Balance at end of
year
|
|
$
|
1,026,893
|
|
$
|
2,942,733
|
|
The accompanying notes are an integral part of the financial statements.
F-
32
MacFarms of Hawaii, LLC
Statements of Cash Flows
Years Ended December 31, 2006 and 2005
|
|
2006
|
|
2005
|
|
Cash flows from operating
activities
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,915,840
|
)
|
$
|
1,184,636
|
|
Adjustments to reconcile
net income (loss) to net cash provided by operating activities
|
|
|
|
|
|
Depreciation
|
|
299,247
|
|
256,451
|
|
Bad debt expense (recoveries)
|
|
23,945
|
|
(6,831
|
)
|
Gain on sale of property and equipment
|
|
(3,939
|
)
|
(4,503
|
)
|
Gain on sale of investments
|
|
|
|
(44,479
|
)
|
Changes in
|
|
|
|
|
|
Accounts receivable, net
|
|
1,522,746
|
|
(1,601,964
|
)
|
Inventory
|
|
1,774,287
|
|
341,804
|
|
Other assets
|
|
(214,700
|
)
|
(25,892
|
)
|
Accounts payable
|
|
(545,088
|
)
|
553,881
|
|
Accrued commissions to affiliate
|
|
39,329
|
|
81,456
|
|
Accrued liabilities
|
|
55,863
|
|
1,485
|
|
Net cash provided by operating activities
|
|
1,035,850
|
|
736,044
|
|
Cash
flows from investing activities
|
|
|
|
|
|
Purchases of
property and equipment
|
|
(1,371,886
|
)
|
(862,709
|
)
|
Proceeds from
sale of property and equipment
|
|
4,700
|
|
5,352
|
|
Proceeds from
sale of investments
|
|
|
|
142,763
|
|
Net cash used in investing activities
|
|
(1,367,186
|
)
|
(714,594
|
)
|
Cash
flows from financing activities
|
|
|
|
|
|
Bank overdraft
|
|
(500,145
|
)
|
(101,010
|
)
|
Borrowings under
revolving line-of-credit
|
|
2,980,000
|
|
6,955,000
|
|
Repayments under
revolving line-of-credit
|
|
(2,040,000
|
)
|
(5,425,000
|
)
|
Repayments of
notes payable
|
|
(75,792
|
)
|
(86,413
|
)
|
Distribution to
members
|
|
|
|
(295,597
|
)
|
Due to affiliate,
net
|
|
(31,102
|
)
|
(1,037,821
|
)
|
Net cash provided by financing activities
|
|
332,961
|
|
9,159
|
|
Net increase in cash
|
|
1,625
|
|
30,609
|
|
Cash
and cash equivalents
|
|
|
|
|
|
Beginning of year
|
|
41,185
|
|
10,576
|
|
End of year
|
|
$
|
42,810
|
|
$
|
41,185
|
|
Supplemental
cash flow information
|
|
|
|
|
|
Interest paid
|
|
$
|
456,562
|
|
$
|
223,560
|
|
The accompanying notes are an integral part of the financial statements.
F-
33
MacFarms of Hawaii, LLC
Notes to Financial Statements
December 31, 2006 and 2005
1.
Organization
and Nature of Operations
MacFarms of Hawaii, LLC (the Company) was formed in March 2003
as a Delaware limited liability company. The Company is engaged in macadamia
nut farming and processing on land owned by Kapua Orchard Estates, LLC (KOE),
an affiliate, in Captain Cook, Hawaii. The Company also manufactures and
distributes macadamia nut related products. The Companys products are marketed
and sold to retailers, wholesalers, and food processors through Pan Pacific
Foods (PPF), an affiliate.
Profits
and losses are allocated to members based on their respective ownership
interests as follows:
Member
|
|
|
|
Ownership
|
|
MFH Investors,
LLC (MFH)
|
|
|
67
|
%
|
|
Greater Pacific
Foods Holding, LLC (GPFH)
|
|
|
33
|
%
|
|
|
|
|
100
|
%
|
|
2.
Summary
of Significant Accounting Policies
Use of Estimates in
Financial Statements
The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change relate to the
determination of the useful lives of property and equipment, the allowance for
doubtful accounts and the allowance for excess and obsolete inventory. The
Company believes that such estimates have been appropriately determined in
accordance with accounting principles generally accepted in the
United States of America.
Concentrations of
Credit Risk
Financial instruments that potentially subject the Company
to concentrations of credit risk consist primarily of cash and accounts
receivable. The Companys cash is primarily held in financial institutions
located in Hawaii and California. At times, cash balances maintained are in
excess of federal depository insurance limits.
For the years ended December 31,
2006 and 2005, two customers accounted for approximately 43% and 40%,
respectively, of total sales. The same two customers accounted for
approximately 44% and 66% of net accounts receivable at December 31, 2006
and 2005, respectively.
Cash and Cash
Equivalents
The Company considers all
highly liquid investments with an original maturity of three months or less at
the date of purchase to be cash equivalents.
F-
34
MacFarms of Hawaii, LLC
Notes to Financial Statements (Continued)
December 31, 2006 and 2005
Allowance for
Doubtful Accounts
The Company maintains an allowance for doubtful
accounts to reduce receivables to their estimated collectible amount. Management
estimates the allowance for doubtful accounts based on a specific review of
individual customer accounts as well as the overall aging of accounts,
historical collection experience and current economic and business conditions.
The allowance for doubtful
accounts represents managements best estimate of potential uncollectible
receivables. However, because of the uncertainties inherent in assessing the
collectibility of receivables, it is at least reasonably possible that there
will be near-term changes in managements estimate due to actual losses
and other factors.
Inventory and Cost
of Sales
Inventories are stated at the lower of cost or market.
Cost is computed using an average cost method, which approximates the first-in,
first-out method; market is based on the Companys most recent sale amounts. Costs
included in inventory primarily consist of the macadamia nuts, farming and
harvesting, labor, materials, warehousing, shipping and handling, and overhead.
The reserve for excess and
obsolete inventory represents inventory in excess of demand. This inventory is
written-off once it nears the end of its life-cycle. Changes to this reserve
are charged to cost of goods sold in the period that the excess is identified.
Property and
Equipment
Property and equipment are reported at cost less
accumulated depreciation. Major improvements and replacements are capitalized,
while repairs and maintenance that do not materially add to the value of
property or appreciably prolong its useful life are charged to expense as
incurred. Gains and losses on disposal of property and equipment are included
in the results of operations.
Depreciation
is computed using the straight-line method based upon the following useful
lives:
|
|
Years
|
|
Machinery and
equipment
|
|
3 10
|
|
Land improvements
|
|
15 35
|
|
Impairment of
Long-Lived Assets
Long-lived assets,
including fixed assets, are continually monitored and are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of any such asset may not be recoverable. The determination of recoverability
is based on an estimate of undiscounted cash flows expected to result from
the use of an asset and its eventual disposition. If the sum of the
undiscounted cash flows (excluding interest) is less then the carrying value,
an impairment loss will be recognized, measured as the amount by which the
carrying value exceeds the fair value of the asset. Management has evaluated
the Companys long-lived assets and determined that no impairment existed as of
December 31, 2006 or 2005.
F-
35
MacFarms of Hawaii, LLC
Notes to Financial Statements (Continued)
December 31, 2006 and 2005
Revenue Recognition
Revenues from the sale of
macadamia nuts and related products are recognized upon delivery. Reserves for
sales returns and allowances are recorded in the same period as the related
sale.
Advertising
Advertising costs are
charged to expense as incurred. Such costs are paid for by PPF under the
management services agreement discussed in Note 8.
Income Taxes
The
Company is considered to be a flow through entity for federal and state income
tax purposes. Income or loss for tax purposes accrues to the members and
accordingly, no provision or credit for income taxes is reflected in the
Companys financial statements.
3.
Inventory
Inventory
consisted of the following at December 31, 2006 and 2005:
|
|
2006
|
|
2005
|
|
Work-in-progress
|
|
$
|
2,334,402
|
|
$
|
2,030,786
|
|
Finished goods
|
|
5,038,668
|
|
7,064,474
|
|
Supplies
|
|
890,177
|
|
772,304
|
|
|
|
8,263,247
|
|
9,867,564
|
|
Less: Allowance
for excess and obsolete inventory
|
|
(515,654
|
)
|
(345,684
|
)
|
|
|
$
|
7,747,593
|
|
$
|
9,521,880
|
|
4.
Property
and Equipment
Property
and equipment consisted of the following at December 31, 2006 and 2005:
|
|
2006
|
|
2005
|
|
Machinery and
equipment
|
|
$
|
4,297,442
|
|
$
|
2,856,357
|
|
Land improvements
|
|
151,610
|
|
120,250
|
|
|
|
4,449,052
|
|
2,976,607
|
|
Less: Accumulated
depreciation
|
|
(886,020
|
)
|
(595,148
|
)
|
|
|
3,563,032
|
|
2,381,459
|
|
Construction in
progress
|
|
24,761
|
|
134,456
|
|
|
|
$
|
3,587,793
|
|
$
|
2,515,915
|
|
Depreciation expense was $299,247
and $256,451 of which $279,504 and $245,945 were capitalized to inventory for
the years ended December 31, 2006 and 2005, respectively.
F-
36
MacFarms of Hawaii, LLC
Notes to Financial Statements (Continued)
December 31, 2006 and 2005
5.
Notes
Payable
Notes payable consisted of
the following at December 31, 2006 and 2005:
|
|
2006
|
|
2005
|
|
Note payable to
RaboBank, N.A., with interest at 4.54% at December 31, 2006 and 2005,
due May 2013 and collateralized by real property
|
|
$
|
693,000
|
|
$
|
735,000
|
|
Revolving note payable to RaboBank, N.A., with
interest at 7.32% and 3.78% at December 31, 2006 and 2005, respectively,
due June 2008 and collateralized by processing facilities and
equipment
|
|
352,800
|
|
364,000
|
|
Note payable to RaboBank, N.A., with interest at
3.78% at December 31, 2006 and 2005, due May 2013 and
collateralized by real property
|
|
231,000
|
|
245,000
|
|
Two auto loans with Ford Motor Credit Company, both with
interest at 6.99% at December 31, 2006 and 2005, due January 2010
and collateralized by the vehicles
|
|
29,676
|
|
38,268
|
|
|
|
1,306,476
|
|
1,382,268
|
|
Less: Current
portion
|
|
136,835
|
|
78,400
|
|
Long-term portion
|
|
$
|
1,169,641
|
|
$
|
1,303,868
|
|
In June 2003, the Company and KOE jointly entered
into the three debt agreements with RaboBank, N.A. discussed above. Under
terms of the agreements, the Company and KOE are jointly liable for the
principal amounts and have pledged substantially all of their combined assets
as collateral. All of the RaboBank debt agreements are cross collateralized and
have cross default provisions. The debt amounts allocated to the Company and
KOE were based on the carrying value of the underlying collateral owned by each
entity at the time of borrowing.
The Company had additional amounts outstanding under a
$8,000,000 revolving line of credit with RaboBank, N.A., totaling
$5,945,000 and $5,005,000, at December 31, 2006 and 2005, respectively. The
payment terms under this line require monthly interest-only payments of 7.75%
and 6.75% at December 31, 2006 and 2005, respectively. This credit
agreement was renewed in April 2007 and expires in June 2008. Amounts
outstanding are collateralized by the Companys crops, inventory and accounts
receivable.
In April 2007, the Company received a $1,050,000
loan from RBS Sparks Holding, LP, a member of MFH, for the benefit of KOE and
collateralized by a portion of KOEs property. Interest on the loan (at prime
rate) is due monthly and the principal is due upon demand.
F-
37
MacFarms of Hawaii, LLC
Notes to Financial Statements (Continued)
December 31, 2006 and 2005
Future
maturities of long-term debt at December 31, 2006 are as follows:
Years ending December 31,
|
|
|
|
|
|
2007
|
|
$
|
136,835
|
|
2008
|
|
6,440,960
|
|
2009
|
|
149,786
|
|
2010
|
|
145,374
|
|
2011
|
|
151,825
|
|
Thereafter
|
|
226,696
|
|
|
|
$
|
7,251,476
|
|
The
Companys various debt agreements with RaboBank, N.A., contain certain
restrictive covenants. Management has asserted that the Company is in
compliance with debt covenants applicable to its allocated portion of debt. However,
as KOEs compliance for its allocated portion of debt cannot be verified, the
Company received a waiver of these covenants for the years ended December 31,
2006 and 2005.
6.
Leases
The Company leases land from KOE under an agricultural
lease agreement for $500,000 per year. This lease is subject to termination by
either party at any time.
The Company leases equipment under an operating lease
which expires in 2007. The future minimum lease payments under this lease at December 31,
2006 are $24,073.
Total rent expense for the
years ended December 31, 2006 and 2005 amounted to $569,046 and $553,120,
respectively, which were capitalized to inventory.
7.
Employee
Retirement Plan
The Company sponsors the
MacFarms of Hawaii, LLC 401(k) Profit Sharing Plan, covering all employees
who have worked at least 1,000 hours during the plan year. The Company
contributes an amount equal to 100% of the amount contributed by its employees
up to 4% of the employees compensation. Employer contributions approximated
$145,000 and $133,000 for the years ended December 31, 2006 and 2005,
respectively.
F-
38
MacFarms of Hawaii, LLC
Notes to Financial Statements (Continued)
December 31, 2006 and 2005
8.
Related Party
Transactions
The
due to affiliate balance consisted of the following at December 31, 2006
and 2005:
|
|
2006
|
|
2005
|
|
Payments made on behalf of KOE
|
|
|
|
|
|
Real property purchased
|
|
$
|
1,054,138
|
|
$
|
1,054,138
|
|
Principal on debt paid
|
|
374,400
|
|
201,600
|
|
Interest on debt paid
|
|
313,146
|
|
152,754
|
|
Property taxes paid
|
|
138,177
|
|
69,524
|
|
Land planning costs paid
|
|
113,539
|
|
8,294
|
|
Capital assets purchased
|
|
84,539
|
|
84,539
|
|
Distributions to members
|
|
56,273
|
|
56,273
|
|
Other
|
|
14,890
|
|
1,785
|
|
|
|
2,149,102
|
|
1,628,907
|
|
Owed to
KOE
|
|
|
|
|
|
Assets received during
formation
|
|
(4,780,750
|
)
|
(4,780,750
|
)
|
Land lease owed
|
|
(1,000,000
|
)
|
(500,000
|
)
|
Other
|
|
(2,133
|
)
|
(13,040
|
)
|
|
|
(5,782,883
|
)
|
(5,293,790
|
)
|
Due to affiliate, net
|
|
$
|
(3,633,781
|
)
|
$
|
(3,664,883
|
)
|
PPF, which is owned by
GPFH, functions as the Companys sales department and manages the sales,
distribution and marketing of the Companys products under a marketing services
agreement. This agreement is effective as long as MFH and GPFH are members of
the Company. For its marketing services, PPF earns a commission based on net
sales. Commission expense recognized under these agreements approximated
$1,424,000 and $1,511,000 for the years ended December 31, 2006 and 2005,
respectively. Additionally, accrued commissions payable for these services
approximated $174,000 and $134,000 at December 31, 2006 and 2005,
respectively.
GPFH
and Sparks Corporation, the owner of MFH, provide management and consulting
services to the Company. The Company paid GPFH and Sparks Corporation
$200,000 each for these services in each of the years ended December 31,
2006 and 2005.
9.
Purchase
Commitments
In 2005, the Company
entered into agreements to purchase the output of certain orchards of various
macadamia nut growers at prices approximating current market value or at a
stipulated price per wet-in-shell (WIS) pound. Purchases under
these commitments for the years ended December 31, 2006 and 2005 amounted
to $810,507 and $1,702,675, respectively, for 1,096,782 and 2,080,970 WIS
pounds, respectively. All nut purchase agreements are scheduled to expire at
various dates through December 31, 2011.
10.
Subsequent
Event
In May 2007, the Company entered into a
definitive acquisition agreement with an unrelated party to sell substantially
all of the assets of the Company, lease its processing facilities, and assign
its lease with KOE to the acquiring entity. The acquisition is expected to be
completed in 2007.
F-
39
MacFarms
of Hawaii, LLC
Balance Sheet (Unaudited)
June 30, 2007
Assets
|
|
|
|
Current assets
|
|
|
|
Cash and cash equivalents
|
|
$
|
43,485
|
|
Accounts receivable, net of allowance for doubtful accounts
of $110,799 at
June 30, 2007
|
|
1,591,614
|
|
Inventory
|
|
10,454,751
|
|
Deferred farming costs
|
|
1,065,053
|
|
Other assets
|
|
306,933
|
|
Total current assets
|
|
13,461,836
|
|
Property and equipment, net
|
|
3,414,244
|
|
Other assets
|
|
21,279
|
|
Total assets
|
|
$
|
16,897,359
|
|
Liabilities and members equity
|
|
|
|
Current liabilities
|
|
|
|
Bank overdraft
|
|
$
|
647,513
|
|
Accounts payable
|
|
1,549,258
|
|
Accrued commissions to affiliate
|
|
62,051
|
|
Accrued liabilities
|
|
233,724
|
|
Notes payable to member
|
|
1,050,000
|
|
Notes payable
|
|
494,280
|
|
Revolving line-of-credit
|
|
7,660,000
|
|
Total current liabilities
|
|
11,696,826
|
|
Notes payable
|
|
746,071
|
|
Due to affiliate,
net
|
|
3,625,048
|
|
Total liabilities
|
|
16,067,945
|
|
Commitments and
contingencies
|
|
|
|
Members equity
|
|
829,414
|
|
Total liabilities
and members equity
|
|
$
|
16,897,359
|
|
The accompanying notes are an integral part of the financial statements.
F-
40
MacFarms
of Hawaii, LLC
Statements of Operations and
Members Equity (Unaudited)
Six-Month Periods Ended
June 30, 2007 and 2006
|
|
2007
|
|
2006
|
|
Sales,
net
|
|
$
|
6,762,603
|
|
$
|
10,421,437
|
|
Cost of
sales
|
|
(4,584,974
|
)
|
(9,030,367
|
)
|
Gross profit
|
|
2,177,629
|
|
1,391,070
|
|
Operating
expenses
|
|
|
|
|
|
Commissions to
affiliate
|
|
443,734
|
|
656,867
|
|
General and
administrative
|
|
674,642
|
|
707,724
|
|
Selling
|
|
513,081
|
|
670,622
|
|
Management and
consulting fees to members
|
|
200,000
|
|
200,000
|
|
|
|
1,831,457
|
|
2,235,213
|
|
Income (loss) from operations
|
|
346,172
|
|
(844,143
|
)
|
Other
income (expense)
|
|
|
|
|
|
Other income
|
|
2,669
|
|
2,100
|
|
Interest expense
|
|
(335,052
|
)
|
(230,568
|
)
|
Other expense
|
|
(211,268
|
)
|
(29,479
|
)
|
Total other expenses
|
|
(543,651
|
)
|
(257,947
|
)
|
Net loss
|
|
(197,479
|
)
|
(1,102,090
|
)
|
Members
Equity
|
|
|
|
|
|
Beginning of
period
|
|
1,026,893
|
|
2,942,733
|
|
End of period
|
|
$
|
829,414
|
|
$
|
1,840,643
|
|
The accompanying notes are an integral part of the financial statements.
F-
41
MacFarms
of Hawaii, LLC
Statements of Cash Flows
(Unaudited)
Six Month Periods Ended June 30, 2007 and 2006
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities
|
|
|
|
|
|
Net loss
|
|
$
|
(197,479
|
)
|
$
|
(1,102,090
|
)
|
Adjustments to reconcile
net loss to net cash provided by (used in) operating activities
|
|
|
|
|
|
Depreciation
|
|
193,328
|
|
138,380
|
|
Bad debt expense
|
|
12,000
|
|
11,945
|
|
Changes in
|
|
|
|
|
|
Accounts receivable, net
|
|
1,008,212
|
|
1,817,912
|
|
Inventory
|
|
(2,707,158
|
)
|
1,389,647
|
|
Deferred farming costs
|
|
(1,065,053
|
)
|
(452,866
|
)
|
Other assets
|
|
135,865
|
|
100,561
|
|
Accounts payable
|
|
(297,776
|
)
|
(1,661,581
|
)
|
Accrued commissions to affiliate
|
|
(111,725
|
)
|
(31,879
|
)
|
Accrued liabilities
|
|
(166,302
|
)
|
(14,904
|
)
|
Net cash provided by (used in) operating activities
|
|
(3,196,088
|
)
|
195,125
|
|
Cash
flows from investing activities
|
|
|
|
|
|
Purchases of
property and equipment
|
|
(19,779
|
)
|
(1,002,200
|
)
|
Net cash used in investing activities
|
|
(19,779
|
)
|
(1,002,200
|
)
|
Cash
flows from financing activities
|
|
|
|
|
|
Bank overdraft
|
|
526,400
|
|
(162,643
|
)
|
Borrowings under
revolving line-of-credit
|
|
2,765,000
|
|
1,995,000
|
|
Repayments under
revolving line-of-credit
|
|
(1,050,000
|
)
|
(1,000,000
|
)
|
Repayments of
notes payable
|
|
(66,125
|
)
|
(77,468
|
)
|
Due to affiliate,
net
|
|
1,041,267
|
|
19,973
|
|
Net cash provided by financing activities
|
|
3,216,542
|
|
774,862
|
|
Net increase (decrease) in cash
|
|
675
|
|
(32,213
|
)
|
Cash
and cash equivalents
|
|
|
|
|
|
Beginning of
period
|
|
42,810
|
|
41,185
|
|
End of period
|
|
$
|
43,485
|
|
$
|
8,972
|
|
Supplemental
cash flow information
|
|
|
|
|
|
Interest paid
|
|
$
|
371,144
|
|
$
|
233,201
|
|
The accompanying notes are an integral part of the financial statements.
F-
42
MacFarms of Hawaii, LLC
Notes to Financial Statements (Unaudited)
June 30, 2007
1.
Organization
and Nature of Operations
MacFarms of Hawaii, LLC (the Company) was formed in March 2003
as a Delaware limited liability company. The Company is engaged in macadamia
nut farming and processing on land owned by Kapua Orchard Estates, LLC (KOE),
an affiliate, in Captain Cook, Hawaii. The Company also manufactures and
distributes macadamia nut related products. The Companys products are marketed
and sold to retailers, wholesalers, and food processors through Pan Pacific
Foods (PPF), an affiliate.
Profits
and losses are allocated to members based on their respective ownership
interests as follows:
Member
|
|
|
|
Ownership
|
|
MFH Investors,
LLC (MFH)
|
|
|
67
|
%
|
|
Greater Pacific
Foods Holding, LLC (GPFH)
|
|
|
33
|
%
|
|
|
|
|
100
|
%
|
|
In May 2007, the Company
entered into a definitive acquisition agreement with an unrelated party to sell
substantially all of the assets of the Company, lease its processing
facilities, and assign its lease with KOE to the acquiring entity. The
acquisition is expected to be completed in 2007.
2.
Basis
of Presentation
In the opinion of
management, the accompanying unaudited financial statements of the Company
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly its financial position as of June 30, 2007,
and the results of operations, changes in members equity and cash flows for
the six-month periods ended June 30, 2007 and 2006. The results of
operations for the period ended June 30, 2007 are not necessarily
indicative of the results to be expected for the full year or for any future
period. These interim financial statements do not include all disclosures
required by accounting principles generally accepted in the United States of
America, and should be read in conjunction with the Companys audited financial
statements and notes to financial statements as of and for the year ended December 31,
2006.
3.
Summary
of Significant Accounting Policies
Use of Estimates in
Financial Statements
The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change relate to the
determination of the useful lives of property and equipment, the allowance for
doubtful accounts and the allowance for excess and obsolete inventory. The
Company believes that such estimates have been appropriately determined in
accordance with accounting principles generally accepted in the
United States of America.
F-
43
MacFarms of Hawaii, LLC
Notes to Financial Statements (Unaudited)
June 30, 2007
Concentrations of
Credit Risk
Financial instruments that potentially subject the
Company to concentrations of credit risk consist primarily of cash and accounts
receivable. The Companys cash is primarily held in financial institutions
located in Hawaii and California. At times, cash balances maintained are in
excess of federal depository insurance limits.
For the six-month periods
ended June 30, 2007 and 2006, two customers accounted for approximately
39% and 47%, respectively, of total sales. The same two customers accounted for
approximately 51% of net accounts receivable at June 30, 2007.
Cash and Cash
Equivalents
The Company considers all
highly liquid investments with an original maturity of three months or less at
the date of purchase to be cash equivalents.
Allowance for
Doubtful Accounts
The Company maintains an allowance for doubtful
accounts to reduce receivables to their estimated collectible amount. Management
estimates the allowance for doubtful accounts based on a specific review of
individual customer accounts as well as the overall aging of accounts,
historical collection experience and current economic and business conditions.
The allowance for doubtful
accounts represents managements best estimate of potential uncollectible
receivables. However, because of the uncertainties inherent in assessing the
collectibility of receivables, it is at least reasonably possible that there
will be near-term changes in managements estimate due to actual losses
and other factors.
Inventory and Cost
of Sales
Inventories are stated at the lower of cost or market.
Cost is computed using an average cost method, which approximates the first-in,
first-out method; market is based on the Companys most recent sale amounts. Costs
included in inventory primarily consist of the macadamia nuts, farming and
harvesting, labor, materials, warehousing, shipping and handling, and overhead.
The reserve for excess and
obsolete inventory represents inventory in excess of demand. This inventory is
written-off once it nears the end of its life-cycle. Changes to this reserve
are charged to cost of goods sold in the period that the excess is identified.
Deferred Farming
Costs
Orchard costs are
annualized for interim reporting purposes, with the difference between costs
incurred-to-date and costs expensed-to-date (based on projected annual cost per
nut harvested) being reported on the balance sheet as deferred farming costs,
which was $1,065,053 at June 30, 2007.
Property and
Equipment
Property and equipment are reported at cost less
accumulated depreciation. Major improvements and replacements are capitalized,
while repairs and maintenance that do not materially add to the value of
F-
44
MacFarms of Hawaii, LLC
Notes to Financial Statements (Unaudited)
June 30, 2007
property or appreciably
prolong its useful life are charged to expense as incurred. Gains and losses on
disposal of property and equipment are included in the results of operations.
Depreciation
is computed using the straight-line method based upon the following useful
lives:
|
|
Years
|
|
Machinery and
equipment
|
|
3 10
|
|
Land improvements
|
|
15 35
|
|
Impairment of
Long-Lived Assets
Long-lived assets,
including fixed assets, are continually monitored and are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying
amount of any such asset may not be recoverable. The determination of
recoverability is based on an estimate of undiscounted cash flows expected
to result from the use of an asset and its eventual disposition. If the
sum of the undiscounted cash flows (excluding interest) is less then the
carrying value, an impairment loss will be recognized, measured as the amount
by which the carrying value exceeds the fair value of the asset. Management has
evaluated the Companys long-lived assets and determined that no impairment
existed as of June 30, 2007.
Revenue Recognition
Revenues from the sale of
macadamia nuts and related products are recognized upon delivery. Reserves for
sales returns and allowances are recorded in the same period as the related
sale.
Advertising
Advertising costs are
charged to expense as incurred. Such costs are paid for by PPF under the
management services agreement discussed in Note 8.
Income Taxes
The Company is considered
to be a flow through entity for federal and state income tax purposes. Income
or loss for tax purposes accrues to the members and accordingly, no provision
or credit for income taxes is reflected in the Companys financial statements.
4.
Inventory
Inventory
consisted of the following at June 30, 2007:
Work-in-process
|
|
$
|
359,313
|
|
Finished goods
|
|
9,733,467
|
|
Supplies
|
|
877,535
|
|
|
|
10,970,315
|
|
Less: allowance
for excess and obsolete inventory
|
|
(515,564
|
)
|
|
|
$
|
10,454,751
|
|
F-
45
MacFarms of Hawaii, LLC
Notes to Financial Statements (Unaudited)
June 30, 2007
5.
Property
and Equipment
Property
and equipment consisted of the following at June 30, 2007:
Machinery and
equipment
|
|
$
|
4,342,315
|
|
Land improvements
|
|
151,610
|
|
|
|
4,493,925
|
|
Less accumulated
depreciation
|
|
(1,079,681
|
)
|
|
|
$
|
3,414,244
|
|
Depreciation expense was
$193,328 and $138,380 of which $185,251 and $124,655 were capitalized to inventory
for the six-month periods ended June 30, 2007 and 2006, respectively.
6.
Notes
Payable
Notes
payable consisted of the following at June 30, 2007:
Note payable to
Rabobank, N.A., with interest at 4.54% at June 30, 2007, due
May 2013 and collateralized by real property
|
|
$
|
663,300
|
|
Revolving note payable to Rabobank, N.A., with
interest at 3.78% at June 30, 2007, due June 2008 and collateralized
by processing facilities and equipment
|
|
326,275
|
|
Note payable to Rabobank, N.A., with interest at
3.78% at June 30, 2007, due May 2013 and collateralized
by real property
|
|
221,100
|
|
Auto loans
|
|
29,676
|
|
|
|
1,240,351
|
|
Less current portion
|
|
(494,280
|
)
|
Long-term portion
|
|
$
|
746,071
|
|
In June 2003, the Company and KOE jointly entered
into the three debt agreements with RaboBank, N.A. discussed above. Under terms
of the agreements, the Company and KOE are jointly liable for the principal
amounts and have pledged substantially all of their combined assets as
collateral. All of the RaboBank debt agreements are cross collateralized and
have cross default provisions. The debt amounts allocated to the Company and
KOE were based on the carrying value of the underlying collateral owned by each
entity at the time of borrowing.
The Company had additional amounts outstanding under a
$8,000,000 revolving line of credit with RaboBank, N.A., totaling
$7,660,000 at June 30, 2007. The payment terms under this line require
monthly interest-only payments at the annual percentage rate of 7.75% at June 30,
2007. This credit agreement was renewed in April 2007 and expires in June 2008.
Amounts outstanding are collateralized by the Companys crops, inventory and
accounts receivable.
In April 2007, the Company received a $1,050,000
loan from RBS Sparks Holding, LP, a member of MFH, for the benefit of KOE and
collateralized by a portion of KOEs property. The payment terms under
F-
46
MacFarms of Hawaii, LLC
Notes to Financial Statements (Unaudited)
June 30, 2007
this line require monthly
interest-only payments at the annual percentage rate of 8.25% at June 30,
2007. Principal is due upon demand.
Future
maturities of long-term debt at June 30, 2007 are as follows:
Period
ending June 30:
|
|
|
|
2008
|
|
$
|
9,204,280
|
|
2009
|
|
146,435
|
|
2010
|
|
147,638
|
|
2011
|
|
148,564
|
|
2012
|
|
155,159
|
|
Thereafter
|
|
148,275
|
|
|
|
$
|
9,950,351
|
|
The Companys various debt
agreements with RaboBank, N.A., contain certain restrictive covenants. Management
has asserted that the Company is in compliance with debt covenants applicable
to its allocated portion of debt.
7.
Leases
The Company leases land from KOE under an agricultural
lease agreement for $500,000 per year. This lease is subject to termination by
either party at any time.
Total rent expense for the
six-month periods ended June 30, 2007 and 2006, amounted to $293,177 and
$297,201, respectively, which were capitalized to inventory.
8.
Employee
Retirement Plan
The Company sponsors the
MacFarms of Hawaii, LLC 401(k) Profit Sharing Plan, covering all employees
who have worked at least 1,000 hours during the plan year. The Company
contributes an amount equal to 100% of the amount contributed by its employees
up to 4% of the employees compensation. Employer contributions approximated
$161,000 and $143,000 for the six-month periods ended June 30, 2007
and 2006, respectively.
F-
47
MacFarms of Hawaii, LLC
Notes to Financial Statements (Unaudited)
June 30, 2007
9.
Related
Party Transactions
The
due to affiliate balance consisted of the following at June 30, 2007:
Payments made on behalf of KOE:
|
|
|
|
Real property
purchased
|
|
$
|
1,054,138
|
|
Principal on debt
paid
|
|
532,800
|
|
Interest on debt
paid
|
|
385,029
|
|
Property taxes
paid
|
|
165,848
|
|
Land planning
costs paid
|
|
134,392
|
|
Capital assets
purchased
|
|
84,539
|
|
Distributions to
members
|
|
56,273
|
|
Other
|
|
28,148
|
|
|
|
2,441,167
|
|
Owed to KOE:
|
|
|
|
Assets received
during formation
|
|
(4,780,750
|
)
|
Land lease owed
|
|
(1,251,000
|
)
|
Other
|
|
(34,465
|
)
|
|
|
(6,066,215
|
)
|
|
|
$
|
(3,625,048
|
)
|
PPF, which is owned by GPFH, functions as the Companys
sales department and manages the sales, distribution and marketing of the
Companys products under a marketing services agreement. This agreement is
effective as long as MFH and GPFH are members of the Company. For its marketing
services, PPF earns a commission based on net sales. Commission expense
recognized under these agreements approximated $443,734 and $656,867 for the
six-month periods ended June 30, 2007 and 2006, respectively. Additionally,
accrued commissions payable for these services approximated $62,051 at June 30,
2007.
GPFH and Sparks
Corporation, the owner of MFH, provide management and consulting services
to the Company. The Company paid GPFH and Sparks Corporation $100,000 each
for these services in each of the six-month periods ended June 30, 2007
and 2006.
10.
Purchase
Commitments
The Company entered into
agreements to purchase the output of certain orchards of various macadamia nut
growers at prices approximating current market value or at a stipulated price
per wet-in-shell (WIS) pound. Purchases under these commitments
for the six-month period ended June 30, 2007 amounted to $478,973, for
772,349 pounds. Purchases under these commitments for the six-month period
ended June 30, 2006 amounted to $167,559, for 218,906 pounds.
F-
48
APPENDIX A
ACQUISTION
AGREEMENT
Dated May 24,
2007 and
FIRST AMENDMENT TO
ACQUISTION AGREEMENT
Dated July 19,
2007
ACQUISITION
AGREEMENT
between
ML
MACADAMIA ORCHARDS, L.P.
a Delaware limited partnership,
Buyer
and
MAC
FARMS OF HAWAII, LLC,
a Delaware limited liability company,
and
KAPUA
ORCHARD ESTATES, LLC,
a Delaware limited liability company
(both
collectively,
Seller
)
Effective as of May 24,
2007
Table
of Contents
|
|
|
|
|
Page
|
|
|
ARTICLE I.
|
|
DEFINITIONS
|
|
|
A-1
|
|
|
ARTICLE II.
|
|
THE ACQUISITION
|
|
|
A-6
|
|
|
2.1
|
|
Basic Transaction
|
|
|
A-6
|
|
|
2.2
|
|
Leased Assets
|
|
|
A-7
|
|
|
2.3
|
|
Terms of Purchase and
Sale
|
|
|
A-8
|
|
|
2.4
|
|
Excluded Assets,
Accounts Receivable, and Assumed Liabilities
|
|
|
A-9
|
|
|
2.5
|
|
Assumed Liabilities
|
|
|
A-10
|
|
|
2.6
|
|
Closing
|
|
|
A-10
|
|
|
2.7
|
|
Sales and Transfer
Taxes; Property Taxes
|
|
|
A-11
|
|
|
2.8
|
|
Assignment and
Assumption
|
|
|
A-11
|
|
|
ARTICLE III.
|
|
REPRESENTATIONS AND
WARRANTIES RELATING TO
SELLER
|
|
|
A-12
|
|
|
3.1
|
|
Organization and
Qualification
|
|
|
A-12
|
|
|
3.2
|
|
Noncontravention
|
|
|
A-12
|
|
|
3.3
|
|
Authorization of
Transaction
|
|
|
A-12
|
|
|
3.4
|
|
Subsidiaries
|
|
|
A-13
|
|
|
3.5
|
|
Financial Statements
|
|
|
A-13
|
|
|
3.6
|
|
Reserved
|
|
|
A-13
|
|
|
3.7
|
|
Inventory; Nuts; Product
Liability
|
|
|
A-13
|
|
|
3.8
|
|
Absence of Change
|
|
|
A-13
|
|
|
3.9
|
|
Debts, Obligations and
Liabilities
|
|
|
A-13
|
|
|
3.10
|
|
Reserved
|
|
|
A-14
|
|
|
3.11
|
|
Tax Matters
|
|
|
A-14
|
|
|
3.12
|
|
Purchased Assets and
Leased Assets
|
|
|
A-15
|
|
|
3.13
|
|
Real Property
|
|
|
A-15
|
|
|
3.14
|
|
Contracts
|
|
|
A-15
|
|
|
3.15
|
|
Permits
|
|
|
A-15
|
|
|
3.16
|
|
Intellectual Property
|
|
|
A-16
|
|
|
3.17
|
|
Title to Assets
|
|
|
A-16
|
|
|
3.18
|
|
Customers and Sales
|
|
|
A-16
|
|
|
3.19
|
|
Insurance
|
|
|
A-17
|
|
|
3.20
|
|
Litigation
|
|
|
A-17
|
|
|
3.21
|
|
Environmental Matters
|
|
|
A-17
|
|
|
3.22
|
|
Legal Compliance
|
|
|
A-17
|
|
|
3.23
|
|
Employees
|
|
|
A-18
|
|
|
3.24
|
|
Employee Benefit Plans
|
|
|
A-18
|
|
|
A-
i
3.25
|
|
Labor Matters
|
|
|
A-20
|
|
|
3.26
|
|
Motor Vehicles
|
|
|
A-21
|
|
|
3.27
|
|
Reserved
|
|
|
A-21
|
|
|
3.28
|
|
Transactions with
Affiliates
|
|
|
A-21
|
|
|
3.29
|
|
Fraudulent Conveyance
|
|
|
A-21
|
|
|
3.30
|
|
Brokers Fees
|
|
|
A-21
|
|
|
3.31
|
|
Investment Status
|
|
|
A-21
|
|
|
3.32
|
|
Disclosure
|
|
|
A-21
|
|
|
ARTICLE IV.
|
|
REPRESENTATIONS AND
WARRANTIES OF BUYER
|
|
|
A-22
|
|
|
4.1
|
|
Organization and
Qualification
|
|
|
A-22
|
|
|
4.2
|
|
Noncontravention
|
|
|
A-22
|
|
|
4.3
|
|
Authorization of
Transaction
|
|
|
A-22
|
|
|
4.4
|
|
Brokers Fees
|
|
|
A-23
|
|
|
4.5
|
|
Capitalization;
Partnership Units
|
|
|
A-23
|
|
|
4.6
|
|
SEC Filings; Financial
Statements; No Changes
|
|
|
A-23
|
|
|
4.7
|
|
Vote Required
|
|
|
A-24
|
|
|
4.8
|
|
Disclosure Documents
|
|
|
A-24
|
|
|
4.9
|
|
Disclosure
|
|
|
A-24
|
|
|
ARTICLE V.
|
|
PRE-CLOSING COVENANTS
|
|
|
A-24
|
|
|
5.1
|
|
Generally
|
|
|
A-24
|
|
|
5.2
|
|
Notices and Consents
|
|
|
A-24
|
|
|
5.3
|
|
Operation of Business
Before the Closing
|
|
|
A-25
|
|
|
5.4
|
|
Preservation of Business
|
|
|
A-26
|
|
|
5.5
|
|
Access
|
|
|
A-26
|
|
|
5.6
|
|
Notice of Developments
|
|
|
A-27
|
|
|
5.7
|
|
Exclusivity
|
|
|
A-27
|
|
|
5.8
|
|
Employee Matters
|
|
|
A-28
|
|
|
5.9
|
|
Certain Filings with the
SEC
|
|
|
A-28
|
|
|
ARTICLE VI.
|
|
POST-CLOSING COVENANTS
|
|
|
A-29
|
|
|
6.1
|
|
Post-Closing Cooperation
|
|
|
A-29
|
|
|
6.2
|
|
Post-Closing
Confidentiality Obligation of Seller
|
|
|
A-30
|
|
|
6.3
|
|
Post-Closing Litigation
Support
|
|
|
A-30
|
|
|
6.4
|
|
Post-Closing Adjustments
|
|
|
A-30
|
|
|
ARTICLE VII.
|
|
CONDITIONS TO
OBLIGATIONS TO CLOSE
|
|
|
A-30
|
|
|
7.1
|
|
Buyers Conditions
|
|
|
A-30
|
|
|
7.2
|
|
Sellers Conditions
|
|
|
A-33
|
|
|
A-
ii
ARTICLE VIII.
|
|
SURVIVAL AND INDEMNIFICATION
|
|
|
A-34
|
|
|
8.1
|
|
Survival
|
|
|
A-34
|
|
|
8.2
|
|
Mutual Indemnification
|
|
|
A-35
|
|
|
8.3
|
|
Procedure for
Indemnification
|
|
|
A-36
|
|
|
ARTICLE IX.
|
|
TERMINATION
|
|
|
A-39
|
|
|
9.1
|
|
Termination of Agreement
|
|
|
A-39
|
|
|
9.2
|
|
No Effect on
Indemnification Rights
|
|
|
A-39
|
|
|
ARTICLE X.
|
|
MISCELLANEOUS PROVISIONS
|
|
|
A-40
|
|
|
10.1
|
|
Press Releases and
Announcements
|
|
|
A-40
|
|
|
10.2
|
|
Notices
|
|
|
A-40
|
|
|
10.3
|
|
Specific Performance
|
|
|
A-41
|
|
|
10.4
|
|
Remedies Not Exclusive
|
|
|
A-41
|
|
|
10.5
|
|
Exercise of Remedies
|
|
|
A-41
|
|
|
10.6
|
|
Costs and Expenses
|
|
|
A-41
|
|
|
10.7
|
|
Waiver
|
|
|
A-41
|
|
|
10.8
|
|
Attorneys Fees and
Disbursements
|
|
|
A-41
|
|
|
10.9
|
|
Further Assurances
|
|
|
A-42
|
|
|
10.10
|
|
Confidentiality
|
|
|
A-42
|
|
|
10.11
|
|
Entire Agreement
|
|
|
A-42
|
|
|
10.12
|
|
Modification
|
|
|
A-42
|
|
|
10.13
|
|
Governing Law
|
|
|
A-42
|
|
|
10.14
|
|
Construction
|
|
|
A-42
|
|
|
10.15
|
|
Partial Invalidity
|
|
|
A-43
|
|
|
10.16
|
|
Binding Effect
|
|
|
A-43
|
|
|
10.17
|
|
Assignment
|
|
|
A-43
|
|
|
10.18
|
|
Time of the Essence
|
|
|
A-44
|
|
|
10.19
|
|
Counterparts/Facsimiles
|
|
|
A-44
|
|
|
10.20
|
|
Waiver of Right to Jury
Trial
|
|
|
A-44
|
|
|
10.21
|
|
Dispute Resolution
|
|
|
A-44
|
|
|
10.22
|
|
Effective Date
|
|
|
A-44
|
|
|
10.23
|
|
Reserved
|
|
|
A-45
|
|
|
10.24
|
|
Retention of, and Access
to, Books and Records and Return of
Documents
|
|
|
A-45
|
|
|
10.25
|
|
Limitation of Liability
|
|
|
A-45
|
|
|
A-
iii
ACQUISITION
AGREEMENT
This Acquisition Agreement (the
Agreement
),
effective as of May 24, 2007, is between Mac Farms of Hawaii, LLC, a
Delaware limited liability company (
Mac Farms
)
and Kapua Orchard Estates, LLC, a Delaware limited liability company (
Kapua
), (both collectively
sometimes called
Seller
in this Agreement),
and ML Macadamia Orchards, L.P. (
MLP
or
Buyer
), a Delaware limited
partnership, with reference to the following facts:
Seller is engaged in the farming and harvesting of
macadamia nuts on approximately 3,998 acres of land owned by Seller and located
at Kapua on the Island of Hawaii, State of Hawaii. It owns macadamia orchards
on said land and also owns various equipment and other assets used in the
farming of the orchards.
Seller also owns in fee simple the processing
facilities located on approximately 14.955 acres of land at Kapua on the Island
of Hawaii, State of Hawaii (the
Processing Plant
).
It also owns rolling stock and other equipment used in the processing
operations. Furthermore, it owns trademarks, customer lists, and other
intellectual property used in the marketing of products processed from the nuts
grown by Seller and also acquired from independent growers.
Buyer is interested in acquiring from Seller those
personal property assets, and subleasing, leasing, or otherwise acquiring
rights of use from Seller for those real property assets, used by Seller in its
macadamia nut operations, as set forth in this Agreement.
Seller is willing to sell to Buyer those personal property
assets, and sublease, lease, or otherwise transfer rights of use to Buyer for
those real property assets, used by Seller in its macadamia nut operations, as
set forth in this Agreement.
The Parties therefore
agree as follows:
ARTICLE I
.
DEFINITIONS
Acquired Contract
has the meaning set forth in
Section 2.1(c)
.
ADR
Provisions
has the
meaning set forth in
Exhibit E
.
Agreement
has the meaning assigned in the preamble to this Agreement.
Assumed Liabilities
has the meaning set forth in
Section 2.5
.
Basis
means any past or present fact, situation, circumstance, status, condition,
activity, practice, plan, occurrence, event, incident, action, failure to act,
or transaction that forms the reasonable basis for any specified consequence.
Books
and Records
has the meaning set forth in
Section 2.1(o)
.
Book Value
as used in Exhibit I shall mean the balances
as shown on Sellers general ledger, after reconciliation and audit or
verification by Buyers independent certified public accountants.
Business Day
means any day other than (i) a Saturday or a Sunday or (ii) a day on
which banking and savings and loan institutions are authorized or required by
Law to be closed.
Buyer
means MLP and one or more subsidiaries which may be formed by, on
behalf of, or for the ultimate benefit of, MLP to consummate this
transaction. Such subsidiaries may be corporations, limited liability
companies, or other types of entities.
Buyer Financial Statements
has the meaning set forth in
Section 4.6
.
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Buyer Indemnitees
has the meaning set forth in
Section 8.2(a)
.
Buyer SEC Filings
has the meaning set forth in
Section 4.6
.
Cash Payment
has the meaning set forth in
Section 2.3(a)(1)
.
Claim
means any civil, criminal or administrative claim, demand, cause of action, suit,
proceeding, arbitration, hearing, or investigation.
Claim Notice
has the meaning set forth in
Section 8.3(a)
.
Closing
has the meaning set forth in
Section 2.6
.
Closing Date
has the meaning set forth in
Section 2.6
.
Code
means
the Internal Revenue Code of 1986, as amended.
Contract
means any written contract, mortgage, deed of trust, bond, indenture, lease,
license, note, franchise, certificate, option, warrant, right, or other
instrument, document, obligation or agreement, and any oral obligation, right,
or agreement.
Disclosure Schedule
means the collective schedules relating to Seller as attached hereto.
Disputes
has the meaning set forth in
Exhibit E
.
Employee Benefit Plan
means (a) all employee benefit plans (as defined in Section 3(3) of
ERISA), whether or not subject to ERISA and (b) all other employment,
bonus, stock option, stock purchase or other equity-based, benefit, incentive
compensation, profit sharing, savings, retirement (including early retirement
and supplemental retirement), disability, insurance, vacation, incentive,
deferred compensation, supplemental retirement (including termination
indemnities and seniority payments), severance, termination, retention, change
of control, indemnification and other similar fringe, welfare or other employee
benefit plans, programs, agreement, contracts, policies or arrangements
(whether or not in writing), (i) sponsored, maintained or contributed to
by Seller or an ERISA Affiliate or to which Seller or an ERISA Affiliate is a
party, (ii) covering or benefiting any current or former officer,
employee, agent, director or independent contractor of Seller or an ERISA
Affiliate (or any dependent or beneficiary of any such individual), or (iii) with
respect to which Seller or an ERISA Affiliate has (or could have) any
obligation or liability
.
Employees
means all of the employees of Seller engaged in the Mac Nut Business.
Environmental Laws
means all federal, state, and local laws (whether under statute, ordinance,
rule, regulation, or otherwise), orders, decrees, judgments and other
requirements of Governmental Authorities, relating to the protection of human
health, safety, natural resources, or the environment.
Environmental Report
has the meaning set forth in
Section 3.21
.
ERISA
means
the Employee Retirement Income Security Act of 1974, as amended.
ERISA Affiliate
means any Person that, together with Seller, is treated as a single employer
under Section 414(b), (c), (m) or (o) of the Code.
Escrow Agent
means Title Guaranty Escrow Services, Inc., 235 Queen Street, Honolulu,
Hawaii 96813.
Exchange Act
means the Securities Exchange Act of 1934, as amended.
Excluded Assets
has the meaning set forth in
Section 2.4
.
Financial Statements
has the meaning set forth in
Section 3.5
.
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Fundamental
Representations
has the meaning set forth in
Section 8.1(a)
.
GAAP
means
the accounting principles generally accepted in the United States of America,
applied on a consistent basis.
Governmental Authority
means the United States of America, any state, commonwealth, territory or
possession thereof and any political subdivision or quasi-governmental
authority of any of the same, including any authority with the power to impose
or collect taxes, courts, tribunals, departments, commissions, boards, bureaus,
agencies, counties, municipalities, provinces, parishes and other
instrumentalities.
Hazardous Materials
means all chemicals, materials, substances, or wastes that are regulated,
designated, defined or included in any definition under any Environmental Law
as hazardous, radioactive or toxic or as a pollutant or contaminant, including
asbestos or asbestos-containing materials, petroleum or petroleum products,
polychlorinated biphenyls, and urea formaldehyde.
Indemnified Party
has the meaning set forth in
Section 8.3(a)
.
Indemnifying Party
has the meaning set forth in
Section 8.3(a)
.
Intellectual Property
means, as it relates to the Mac Nut Business, (i) trademarks and service
marks, including common law marks, registered, and/or applied-for marks, trade
names, trade dress, label designs, and logos; (ii) copyright rights and
certificates of registrations and applications for registration thereof; (iii) computer
software (other than off-the-shelf software), data, and documentation; (iv) trade
secrets and confidential business information (including formulas,
compositions, inventions whether patentable or unpatentable and whether or not
reduced to practice, know-how, manufacturing and production processes and
techniques, research and development information, drawings, specifications,
designs, plans, proposals, technical data, copyrightable works, financial,
marketing, and business data, pricing and cost information, business and
marketing plans, and customer and supplier lists and information); (v) patents,
patent applications and patent rights; (vi) other technology or
intellectual property rights of any kind or nature; and (vii) copies and
tangible embodiments thereof (in whatever form or medium).
Inventory
means the inventory described in Section 2.1(a) hereof. The
value of the inventory shall be as recorded on the books of Seller at the lower
of cost or market value, using an appropriate unit cost methodology.
Knowledge
means the actual knowledge of the managing members, directors, or officers of a
Party.
Laws
has the meaning set forth in
Section 3.22
.
Leases
means the Orchard Lease
Agreement and the Processing Plant Lease Agreement.
Leased Assets
has the meaning set forth in
Section 2.2
.
Liability
means any liability, debt, obligation, amount or sum due, or other claim of any
description (whether known or unknown, whether absolute or contingent, whether
liquidated or unliquidated, and whether due or to become due) including any
liability for Taxes;
provided, however,
that it does not include those items excepted from the definition of Security
Interest.
Licenses
has the meaning set forth in
Section 3.15
.
Loss
means
any loss, damage, deficiency, cost, levy, fine, out-of-pocket payment, or other
expense (including reasonable legal expenses and costs of defense of third
party claims, including interest and penalties).
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Mac Nut Business
means all of Sellers macadamia nut-related operations and business activities,
including Sellers macadamia nut planting, watering, growing, pruning, farming,
cultivating, and harvesting; and the processing, storage, transportation,
marketing and sales operations.
Majority Interest of the
Partnership
means those Unitholders who, in the aggregate, hold
a majority of the units of MLP that all Unitholders hold, excluding the units
of MLP held by MLPs general partner.
Material Adverse Effect
means any condition, event, circumstance, change or effect that, individually
or in the aggregate, has had or could reasonably be expected to have a material
adverse effect on the business, assets, properties, results of operation or
financial condition or prospects of the Mac Nut Business, the Purchased Assets,
or the Leased Assets;
provided that
,
without limiting the generality of the foregoing, the following occurrences are
to be deemed to result in a Material Adverse Effect, to the extent the
circumstances leading to such occurrences were not disclosed by Seller to Buyer
before the date hereof: (i) destruction of or material damage to greater
than 20% of the macadamia nut trees on the Seller Land; (ii) destruction
of or material damage to any water delivery system that provides water to the
Seller Land; (iii) destruction of or material damage to the Processing
Plant; (iv) the loss of major customers; or (v) issuance by any
Governmental Authority responsible for regulation of the Mac Nut Business or
court having jurisdiction that provides announcement, notice, or order that
could reasonably be expected to result in the prohibition, material delay, or
material curtailment of the operations currently conducted or as contemplated
to be conducted as described in this Agreement.
Material Contracts
has the meaning set forth in
Section 3.14
.
NewCo1
has
the meaning set forth in
Section 2.3(c)
.
NewCo2
has
the meaning set forth in
Section 2.3(c)
.
Orchard Lease Agreement
has the meaning set forth in
Section 7.1(c)
,
and which is attached hereto as
Exhibit A-1.
Ordinary Course of
Business
means the ordinary course of business consistent with
past custom and practice (including with respect to quantity and frequency).
Party
refers to either Buyer or Seller, as applicable, and
Parties
refers to both Buyer and Seller.
PBGC
means
the Pension Benefit Guaranty Corporation.
Permit
means any permit, license, approval, certification, endorsement, or
qualification of any Governmental Authority or any other Person.
Person
means an individual, a partnership (whether general or limited), a corporation,
a limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization or a governmental entity (or any
department, agency or political subdivision thereof).
Proceeding
has the meaning set forth in
Section 3.20
.
Processing Plant
means the macadamia nut processing facilities owned and or controlled by Mac Farms
located at Kapua, Island of Hawaii, State of Hawaii.
Processing Plant Lease
Agreement
has the meaning set forth in
Section 7.1(c)
.
Pro-Rated Items
has the meaning set forth in
Section 2.7(c)
.
Proxy Statement
has the meaning set forth in
Section 4.8
.
Purchase Consideration
has the meaning set forth in
Section 2.3
.
Purchased Assets
has the meaning set forth in
Section 2.1
.
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Reconciliation and Review
means a process, whereby an auditor shall (i) verify the counts from the
physical inventory and reconcile it to book quantities, (ii) identify
obsolete, damaged, slow-moving, or otherwise unusable inventory for write-off
by Seller, and (iii) calculate the value of the Inventory at the lower of
cost or market, in accordance with GAAP.
Registration Statement
has the meaning set forth in
Section 4.8
.
Registration Rights
Agreement
means the
Registration Rights Agreement, substantially in the form attached as Exhibit G,
under which Buyer shall register, at its expense, the Units under the
Securities Act.
Related Agreements
means the agreements to be entered into in connection with this Agreement
between the Parties, including the agreements listed in
Article VII
.
Release
means releasing, spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, migrating, disposing, or dumping.
Required Consents
means all franchises, licenses, authorizations, approvals and consents required
under Seller Permits, Acquired Contracts or otherwise listed in
Exhibit F
.
Restricted Asset
has the meaning set forth in
Section 2.8
.
Schedule
refers to the Disclosure Schedules that are part of and attached to this
Agreement.
SEC
means
the U.S. Securities and Exchange Commission.
SEC Preliminary Approval
means the approval by the SEC of the Request for Substitution of Abbreviated
Financial Information to be submitted to the SEC by the Buyer, a copy of which
has been furnished to the Seller.
Securities Act
has the meaning set forth in
Section 3.31
.
Security Interest
means any financing statement, mortgage, pledge, trust deed, encumbrance,
charge, or other lien, other than (i) mechanics, materialmens, carriers,
workmens, repairmens and similar liens, (ii) liens for Taxes, assessments
and government charges or levies not yet due and payable (or for Taxes that the
taxpayer is contesting in good faith through appropriate Proceedings, which
Proceedings are set forth on the Disclosure Schedules), (iii) pledges,
deposits or liens arising under workers compensation, unemployment insurance,
social security, retirement, and similar legislation, (iv) liens arising
in connection with sales of foreign receivables, (v) liens on goods in
transit incurred under documentary letters of credit, and (vi) deposits to
secure the performance of bids, trade contracts (other than for borrowed
money), leased statutory obligations, surety and appeal bonds, performance
bonds and other obligations of a like nature incurred in the Ordinary Course of
Business.
Seller
has
the meaning set forth in the preamble to this Agreement.
Seller Indemnitees
has the meaning set forth in
Section 8.2(b)
.
Seller Land
means the lands demised by any of the Orchard Lease Agreement, Processing Plant
Lease Agreement, or which is occupied as of the date of this Agreement by
Seller under any Seller Permit.
Seller Permits
has the meaning set forth in
Section 2.1(d)
.
Subsidiary
means any corporation or other entity with respect to which another specified
corporation or other entity has the power to vote or direct the voting of
sufficient securities to elect a majority of the directors or other equivalent
management.
Tax
means
any (a) federal, state, local or foreign income, gross receipts, license,
payroll, employment, excise, severance, stamp, occupation, premium, windfall
profits, environmental, customs duties, capital stock, franchise, profits,
withholding, social security (or similar), unemployment, disability,
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real property, personal
property, sales, use, transfer, registration, value added, alternative or
add-on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty or addition thereto; (b) liability for the payment of
any amounts of the type described in clause (a) arising as a result of
being (or ceasing to be) a member of any affiliated group as defined in Section 1504
of the Code (or any similar combined, consolidated or unitary group defined
under any Tax Law) (or being included (or required to be included) in any Tax
Return relating thereto); (c) liability under state or local escheat or
unclaimed property Laws (including liabilities relating to breakage); and (d) liability
for the payment of any amounts of the type described in clause (a), (b) or
(c) as a result of any express or implied obligation to indemnify or
otherwise assume or succeed to the liability of any person.
Tax Return
means any federal, foreign, state, or local governmental tax return,
declaration, report, claim for refund, or information return or statement relating
to Taxes, including any schedule or attachment thereto, and including any
amendment thereof.
Third Party Claim
has the meaning set forth in
Section 8.3(a)
.
Title Company
has the meaning set forth in
Section 7.1(f)
.
Transferred Employees
has the meaning set forth in
Section 5.8
.
Unitholders
means all Persons holding units in MLP.
Units
has
the meaning set forth in
Section 2.3(a)(2)
.
Webpage
means Sellers web page located at the uniform recourse locator address
http://www.macfarms.com, and any e-mail address used by Seller having the
suffix @macfarms.com.
ARTICLE II.
THE ACQUISITION
2.1
Basic
Transaction
On and subject to
the terms and conditions of this Agreement, at the Closing Buyer agrees to
purchase from Seller, and Seller agrees to sell, transfer, convey, assign and
deliver to Buyer, all right, title to and interest in, the assets and
properties related to the Mac Nut Business that are not Excluded Assets or
Leased Assets, whether tangible or intangible, wherever located and whether held
by Seller or third parties, and free and clear from any Liability or Security
Interest (collectively, the
Purchased Assets
),
including the following:
(a)
All of the inventory as of the Closing Date (the
Inventory
), including the
macadamia nuts, finished goods, packaging materials and supplies described on
Schedule 2.1(a)
.
(b)
All of the nursery tree inventory, fertilizer,
pesticides, herbicides, and all similar products, including the items described
on
Schedule 2.1(b)
.
(c)
All rights under all Contracts (other than the
Personal Property Leases and the Seller Permits) described on
Schedule 2.1(c)
(the
Acquired Contracts
).
(d)
All franchises, authorizations, Permits, Licenses,
easements, registrations, leases, variances and similar rights obtained from
any Governmental Authority or any other Person (the
Seller Permits
), including the Seller Permits
described on
Schedule 2.1(d)
.
(e)
All tools, machinery and equipment, including the
items listed on
Schedule 2.1(e)
.
(f)
All vehicles owned by Seller and all rights in
vehicle leases to which Seller is a party, in either case that are used by
Seller in the Mac Nut Business (the
Owned and
Leased Vehicles
), including the Owned and Leased
Vehicles listed on
Schedule 2.1(f)
.
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(g)
All other personal property, equipment, tools,
(including all miscellaneous inventory used in the Mac Nut Business, such as
replacement belts, motors, switches, parts, and similar items) office
equipment, furnishings, computers, telephone systems, stationery, supplies, and
similar items and other tangible personal property (the
Personal Property
), including the Personal
Property listed on
Schedule 2.1(g)
.
(h)
All rights in leases of personal property to which
Seller is a party (the
Personal Property Leases
), including the Personal Property Leases listed on
Schedule 2.1(h)
.
(i)
All customer lists of Seller that relate to the Mac
Nut Business, including the customer lists provided on
Schedule 2.1(i)
.
(j)
All Intellectual Property, except the Kapua service
mark applications in Classes 37 and 41, as set forth in
Schedule 2.4
,
and the Kapua trademarks described in, and which will be licensed pursuant to,
the License Agreement between Kapua and Buyer attached hereto as
Exhibit H, including the
Intellectual Property described on
Schedule 2.1(j)
.
(k)
Reserved.
(l)
Reserved.
(m)
All claims, choses-in-action, rights in action, rights
to tender claims or demands to Sellers insurance companies, rights to any
insurance proceeds, and other similar claims, including the claims listed on
Schedule 2.1(m)
, other than insurance proceeds relating
to (i) third-party claims against Seller, and (ii) Purchased Assets
that constitute current assets under GAAP and were destroyed before the
Closing.
(n)
All performance and other bonds, security and other
deposits, advance payments, prepaid credits and deferred charges, including the
items listed on
Schedule 2.1(n)
.
(o)
All books, files, papers, agreements, correspondence,
databases, information systems, programs, software, documents, and records on
whatever medium used by Seller in the Mac Nut Business (the
Books and Records
).
(p)
All goodwill generated by or associated with the Mac
Nut Business.
(q)
Sellers Webpage.
(r)
Any disaster grant aid from the federal government
relating to events that took place in calendar year 2006, including the
earthquake on October 15, 2006, whether received before or after the
Closing Date.
(s)
All of the other assets necessary
for, or used, held for use or intended to be used in, the conduct of the Mac
Nut Business as presently conducted and as presently proposed to be conducted
as of the Closing Date not set forth in
Sections 2.1(a) through
2.1(r)
, except any Excluded Assets or Leased Assets.
2.2
Leased
Assets
(a)
Seller must (through Mac Farms or Kapua) lease to
Buyer, and Buyer must lease from Seller, those assets and properties used, held
for use or intended to be used in the conduct of the Mac Nut Business set forth
on
Schedule 2.2(a)
(the
Leased Assets
), upon and subject to
the terms and conditions of the Leases. As used in this
Section 2.2(a)
,
Lease means and includes sublease as to any Leased Assets.
(b)
Notwithstanding anything herein
to the contrary, the term
Purchased Assets
does not include the Leased Assets.
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2.3
Terms of
Purchase and Sale
(a)
Purchase Consideration. As full consideration for the
sale, transfer, conveyance, assignment and delivery to Buyer of the Purchased
Assets, Buyer must, subject to the terms of this Agreement, deliver to Seller
on the Closing Date the following (the
Purchase Consideration
):
(1)
Cash Payment
. Good
and immediately-available funds (delivered by wire transfer to an account
designated by Seller) in the amount of the net value of Sellers current assets
as of the Closing Date (other than Sellers cash, accounts receivable and the
associated reserve for doubtful accounts, which are Excluded Assets pursuant
to Section 2.4 hereof), less all current liabilities as of the Closing
Date, other than Sellers revolving credit line, Sellers short-term debt,
including any loans made to Seller by its
affiliates, such as RBS Sparks Holdings, LP, provisions for
income tax liabilities, interest payable, employee benefits-related
liabilities, and any inter-company balances, all as identified in Exhibit I
(the
Working Capital
or the
Cash Payment
); provided, however,
notwithstanding the foregoing,
the parties hereto agree that five percent (5%) of the Cash Payment shall be
remitted by Buyer to the Escrow Agent to be held in the Escrow Agents trust
account (the
Holdback Amount
). The Escrow
Agent shall retain the Holdback Amount in its trust account (the
Escrow Account
), pending the
outcome of the True-Up (as defined herein). Upon completion of the True-Up, the
Escrow Agent shall remit the Holdback Amount, as directed in the joint written instructions of Seller and Buyer. The
details of the foregoing escrow arrangement shall be memorialized in an escrow
agreement by and among Seller, Buyer, and the Escrow Agent, in form and
substance acceptable to Seller and Buyer. Both current assets and
current liabilities shall be determined in the form and manner as set forth in Exhibit I.
The Parties will use the unaudited balance sheets of Seller as of the last day
of the month preceding the Closing Date to determine the estimated amount of
the Cash Payment to be paid by Buyer to Seller on the Closing Date, using the
methodology set forth in Exhibit I.
Thereafter, commencing immediately after the Closing
Date, Buyer will reconcile and review the financial statements of Seller,
NewCo1 and NewCo2 using its regular auditors, Accuity, LLP. In
connection with such Reconciliation
and Review, Buyer shall provide to Seller at least five (5) days prior
written notice of any inventory count, and Seller shall have the right to have
a representative present to observe and participate in any such inventory count.
Within thirty (30) days after the Closing Date, Buyer will deliver to Seller
the results of such Reconciliation and Review. The Parties will determine the
actual amount of the Cash Payment, based upon the reconciled and reviewed
balance sheets of Seller, NewCo1 and NewCo2, as of the Closing Date, using the
methodology set forth in Exhibit I and as reconciled and reviewed by
Accuity, LLP (the
True-Up
). If the True-Up is
greater than ninety-five percent (95%) of the Working Capital, as shown on the
unaudited balance sheets of Seller, as of the last day of the month preceding
the Closing Date (the
Base Payment
),
then to the extent the True-Up value exceeds the Base Payment, such amount
shall be paid to Seller from the Hold-Back Amount held in the Escrow Account. If
there are any funds left in the Escrow Account, after such payment, such funds
shall be remitted to Buyer; provided, however, for the avoidance of doubt, if the True-Up value exceeds the Hold-Back
Amount, then, in any such event, Buyer shall pay such excess to Seller from
Buyers funds. In the event the True-Up value is less than the Base Payment,
then all funds in the Escrow Account shall be paid to Buyer. In addition,
Seller shall pay to Buyer, from Sellers funds, the amount by which the True-Up
value is less than the Base Payment. The foregoing payments, based
upon the Reconciliation and Review, shall be made within forty-five
(45) days after the Closing Date.
If Seller disagrees with the Reconciliation and Review
prepared by Accuity, LLP, Seller shall have the right to resort to the ADR
procedures set forth in Exhibit E herein.
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(2)
Units
. Six
Hundred Fifty Thousand (650,000) Class A limited partnership units in MLP
(
Units
). The Units will be issued as
a Private Placement under Regulation D of the Securities Act based upon the
representations of Seller contained in
Section 3.31
.
Pursuant to and in accordance with the terms and conditions of this Agreement
and the Registration Rights Agreement, and at Buyers sole expense, Buyer will
file with the SEC the Registration Statement (as herein defined) to register
the Units with the SEC.
(3)
Reserved.
(4)
Assumption
of Liabilities
. Assumption of the Liabilities as set forth in
Section 2.5
.
(b)
Allocation of the Purchase Consideration. Buyer and
Seller agree to allocate the Purchase Consideration, as adjusted, in accordance
with the principles set forth in
Schedule 2.3(b)
,
which schedule is based upon the unaudited balance sheets of Seller as of December 31,
2006. After the Closing Date such schedule will be updated to conform to the
unaudited balance sheets of Seller, NewCo1 and NewCo2 as of the Closing Date.
Thereafter, the Parties will make consistent use of the allocation for all tax
purposes and in all filings, declarations, and reports to the IRS in respect
thereof, including the reports required to be filed under Section 1060 of
the Code, and to be filed with the State of Hawaii Department of Taxation,
including the Bulk Sales Report (Form G-8A). Buyer will prepare and
deliver IRS Form 8594 to Seller within forty-five (45) days after the
Closing Date to be filed with the IRS, which shall be subject to Sellers
approval, prior to submission thereof by Buyer to the IRS. In any litigation
related to the determination of any tax, Buyer and Seller must not contend that
such allocation is not a correct allocation.
(c)
Determination of Which Entity Takes Purchased Assets.
Buyer will determine, in Buyers sole discretion, which of two entities to be
formed for such purpose (
NewCo1
or
NewCo2
), will take possession of
the Purchased Assets upon the Closing;
provided
,
however
, that the fact that either NewCo1 or NewCo2 takes
possession of the Purchased Assets shall in no way reduce or diminish MLPs
obligations or liabilities to Seller under this Agreement or the Related
Agreements. Generally, Buyer intends that any Purchased Assets whose use would
be consistent with MLPs permissible operations (i.e., farming macadamia nuts)
will be taken by NewCo1, and any Purchased Assets whose use would be
inconsistent with MLPs permissible operations (i.e., processing macadamia
nuts) will be taken by NewCo2.
(d)
Buyer will, at its sole expense, form NewCo1 and
NewCo2 as subsidiaries of Seller, immediately prior to Closing. Buyer will
draft mutually-acceptable transfer documents, so that the proper assets are
transferred to the appropriate subsidiary of Seller. The
foregoing asset transfers and the
transfer of all of the stock and membership interests of such subsidiaries from
Seller to Buyer shall occur and be effective at Closing.
(e)
Seller will advise Buyer of the
entity (i.e., Mac Farms or Kapua) that will receive the relevant elements of
the Purchase Consideration consistent with
Section 2.3(b)
.
2.4
Excluded
Assets, Accounts Receivable, and Assumed Liabilities
The Parties acknowledge, understand, and agree that
Seller owns certain assets that are not part of the Purchased Assets or Leased
Assets. Notwithstanding anything herein to the contrary, Seller retains and
does not transfer, convey, assign, or deliver to Buyer, and Buyer does not
acquire any right, title, or interest in or to the assets listed on
Schedule 2.4
, including Sellers (i) cash, and (ii) Accounts
Receivable, and associated reserve for doubtful accounts, which shall be
retained by Seller, and which shall be collected by Buyer for the benefit of
Seller and remitted by Buyer to Seller as provided herein (the
Excluded Assets
); provided, further,
notwithstanding
anything
to the contrary herein, Seller may sell the Excluded Assets and the
Seller Land to any Person without Buyers consent or approval (the
Third-Party Sales
).
To the extent Buyer receives any payments from
customers for work performed or goods sold by Seller, prior to the Closing
Date, and if Buyer has not performed any work for such
customers or sold any
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goods to such
customers, prior to the receipt of
payment, then Buyer shall immediately remit such funds to Seller.
In the event Buyer should
receive payments from customers after the Closing Date, and such customers owe
accounts payable to both Buyer and Seller, then such payments shall be applied
in accordance with the
written
instructions or contract number references accompanying the payment. If no such
instructions or references accompany the payment, the payment shall be applied
first to accounts receivable accrued and owed to Seller prior to the Closing
Date and thereafter to accounts receivable accrued and owed to Buyer after the
Closing Date.
2.5
Assumed
Liabilities
(a)
As of the Closing Date, Buyer will assume, accept and
undertake those liabilities, duties, obligations, and responsibilities of
Seller for the following liabilities (the
Assumed Liabilities
):
(i) all liability relating to ordinary course trade payables as of the
Closing Date; (ii) all liabilities with respect to capital leases and
installment purchases or any agreement with respect thereto; (iii) all
other liabilities that constitute current liabilities of Seller in accordance
with GAAP accrued as of the Closing Date; (iv) all liabilities related to,
or arising from, the operation of the Mac Nut Business or ownership of the
Purchased Assets and the Leased Assets after the Closing Date, including,
without limitation, any and all roll-back or deferred real
property taxes and penalties and
interest thereon assessed with respect to the Leased Assets, even if assessed
for tax years (or parts thereof) before the Closing Date, as provided in the
Leases; (v) all conveyance tax liabilities which arise as a result of the
Leases; and (v) all liabilities relating to the Acquired Contracts
from and after Closing. Except for the Assumed Liabilities, Buyer does
not assume any other liabilities or obligations of any kind of Seller (whether
known or unknown, contingent or fixed, and whether at law or in equity or
however arising), and Seller remains solely responsible for and must pay and
discharge such liabilities and obligations and hold Buyer harmless with respect
thereto as contemplated in
Article VIII
.
(b)
Without limiting the generality
of the foregoing, Buyer has no liability for the following, which are not
included in the definition of
Assumed Liabilities
:
except as set forth in
Section 2.5 (a)
,
(i) principal, interest, fees, expenses and other obligations in respect
of borrowed money or any agreement with respect thereto; (ii) obligations
of Seller for or relating to Taxes (including state and local sales, use,
transfer, excise and other similar Taxes arising in connection with the
consummation of the transactions contemplated by this Agreement); (iii) obligations
and expenses of Seller under this Agreement or any agreement entered into in
connection with the transactions contemplated by this Agreement; (iv) liabilities
or obligations with respect to any Employee Benefit Plan; (v) liabilities
of Seller with respect to any Proceedings pending or threatened against Seller;
(vi) any liabilities arising out of any pre-Closing Date breach by Seller
of any Contract, whether or not the obligations under such Contract would be an
Assumed Liability; and (vii) liabilities or obligations of Seller related
to or arising from the operation of the Mac Nut Business or ownership of the
Purchased Assets and the Leased Assets before the Closing Date, including any
liability or obligation relating to or arising from (A) macadamia nut
products grown, manufactured, processed, treated, stored, sold, or distributed
by Seller before the Closing Date or (B) injury to any Person or property
before the Closing Date.
2.6
Closing
The closing of the
transactions contemplated by this Agreement (the
Closing
)
will take place at the offices of Carlsmith Ball, ASB Tower, Suite 2200,
1001 Bishop Street, Honolulu, Hawaii, 96813, on, or before, September 30,
2007, or such other date or place as Buyer and Seller may mutually determine
(the
Closing Date
). The Closing
Date may be postponed by either party provided that the Closing Date shall not
be later than October 31, 2007, without the approval, in writing, of both
Parties.
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2.7
Sales and
Transfer Taxes; Property Taxes
(a)
Seller must pay all conveyance taxes, Hawaii State
general excise taxes, and any other transfer tax, sales tax, use tax, or
similar state, county, or federal tax that may arise as a result of this
transaction, except Buyer shall pay all conveyance taxes which arise as a
result of the Leases.
(b)
Seller and Buyer shall each pay one-half (½) of the
aggregate premium for a
standard
owners title policy for Buyers lessee interest under the Leases (excluding
any endorsements). Buyer shall pay all of the costs of any survey Buyer
obtains, the cost of the recording fees for the Leases, any mortgage recording
fees, the additional cost for an ALTA title policy over the cost of a standard owners title policy, and
the cost of any endorsements obtained by Buyer under the title policy.
(c)
Any and all real property taxes, assessments,
utilities, rentals, fuel, and other charges (
Pro-Rated
Items
) applicable to the Purchased Assets or the Leased Assets
which are payable in the year which includes the Closing Date are to be
pro-rated to the Closing Date based on the percentage of the year before the
Closing Date; provided, however, that Buyer shall be responsible for payment of
any and all roll-back or deferred real property taxes and penalties and
interest thereon assessed with respect to the Leased Assets, even if assessed
for tax years (or parts thereof) before the Closing Date, as provided in the
Leases. Each of Seller and Buyer is responsible for their respective shares of
those Pro-Rated Items.
(d)
Seller shall be
entitled to any credits or refunds of
any Tax paid by Seller or accruing prior to the Closing Date, including,
without limitation, the Hawaii Goods Excise Tax Credit and the Hawaii Fuel Tax,
and not indemnified by Buyer, and any interest thereon. Buyer shall be entitled to any credits or refunds of
any Tax paid by Buyer after the Closing Date and not indemnified by Seller, and
any interest thereon.
2.8
Assignment
and Assumption
(a)
Notwithstanding anything herein to the contrary, if an
attempted sale, assignment, transfer, or delivery of any Purchased Asset would
be ineffective without the consent of any third party, or if such an act would
violate the rights of any third party in the Purchased Assets or otherwise
affect adversely the rights of Buyer in the Purchased Assets, and the
applicable Required Consent has not been obtained on or before the Closing
Date, this Agreement does not constitute an actual or attempted sale,
assignment, transfer, or delivery of that Purchased Asset (each, a
Restricted Asset
). Unless and until
any such Consent is obtained, such Restricted Asset does not constitute a
Purchased Asset, and any associated Liability does not constitute an Assumed
Liability for any purpose hereunder.
(b)
In any such case, if the Closing has occurred, Seller
must use its best efforts to obtain, as soon as practicable, such Required
Consent, as to any Purchased Asset material to this transaction. Buyer must
cooperate reasonably with Seller in obtaining such Required Consent,
provided
, that Buyer is not required to pay any cash
consideration therefor or give or allow to remain in effect any guaranty,
letter of credit, performance bond, or other financial assurance.
(c)
Until such Required Consent is obtained, as to any
Purchased Asset material to this transaction, Seller must at its expense effect
an alternate arrangement, in the form of a license, sublease, operating
agreement or other arrangement, in any case reasonably satisfactory to Buyer,
which results in Buyer receiving all the benefits and bearing all the ordinary
course costs, liabilities and other obligations with respect to each Restricted
Asset.
(d)
If such Required Consents cannot
be obtained by September 30, 2007, as to any Purchased Asset material to
this transaction, then, but only in such event, Buyer has the option of
extending the Closing Date to a date not later than October 31, 2007, or
waiving the requirement and closing the transaction.
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11
ARTICLE III.
REPRESENTATIONS AND WARRANTIES RELATING TO SELLER
Seller represents and
warrants to Buyer that, (i) subject to the specific qualifications and
limitations set forth herein and (ii) except as otherwise set forth in the
Disclosure Schedules, incorporated into and made a part of this Agreement, the
statements contained in this
Article III
are correct and complete as of the date of this Agreement.
3.1
Organization
and Qualification
Mac Farms and Kapua are
duly authorized to conduct business and are limited liability companies validly
existing and in good standing under the Laws of the State of Delaware, and are
qualified to do business in Hawaii and in every other jurisdiction in which the
nature of their business requires such qualification.
3.2
Noncontravention
None of the execution and
delivery of this Agreement, the Related Agreements, or the consummation of the
transactions contemplated hereby or thereby, will, with or without lapse of
time, (i) violate any statute, regulation, rule, judgment, order, decree,
stipulation, injunction, charge, or other restriction of any Governmental
Authority to which Seller is subject or any provision of the certificate of
formation or limited liability company agreement of Seller, or (ii) conflict
with, result in a material breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate,
modify, or cancel, or require any notice under any Contract or other
arrangement to which Seller is a party or by which it is bound or to which any
of its assets is subject (or result in the imposition of any Security Interest
upon any of its assets). Except as set forth on
Schedule 3.2
,
Seller does not need to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any Governmental Authority or other
Person in order for the Parties to consummate the transactions contemplated by
this Agreement and the Related Agreements.
3.3
Authorization
of Transaction
Seller has full power and
authority to execute and deliver this Agreement and the Related Agreements and
to perform its obligations hereunder and thereunder. The execution and delivery
of this Agreement and the Related Agreements and the consummation by Seller of
the transaction contemplated hereby have been duly and validly authorized by
all requisite action and no other proceedings on the part of Seller are
necessary to authorize this Agreement and the Related Agreements or to
consummate the transactions contemplated hereby and thereby. This Agreement and
the Related Agreements have been duly executed and delivered by Seller and
constitute the valid and legally binding obligation of Seller, enforceable in
accordance with their respective terms and conditions, subject to applicable
bankruptcy, insolvency, and similar laws affecting the enforcement of creditors
rights generally and to
general
principles of equity.
3.4
Subsidiaries
None of the assets
relating to the Mac Nut Business are owned by any Subsidiary of Mac Farms or
Kapua.
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3.5
Financial
Statements
Seller has
delivered to Buyer copies of:
(a)
unaudited balance sheets of Mac Farms and Kapua,
related statements of operations, members equity and comprehensive income
(loss) for and as of the years ended December 31, 2006, December 31,
2005, December 31, 2004, and for the six month period ended December 31,
2003;
(b)
the interim unaudited balance sheets of Mac Farms and
Kapua, related statements of operations, members equity and comprehensive
income (loss) for and as of the periods ended December 31, 2005, and December 31,
2006;
(c)
the interim unaudited end-of-the month statements for
the end of each month since December 31, 2006; and
The unaudited financial statements referred in the
previous sub-paragraphs are collectively referred to as the
Financial Statements
.
On the Closing Date, the
estimated Working Capital calculations set forth in
Exhibit I will be, to the best
of Sellers knowledge, accurate in all material respects.
3.6
Reserved
3.7
Inventory;
Nuts; Product Liability
Except for defects,
spoilage and damage as would customarily be expected in the industry, all of
Sellers Inventory is of good and merchantable quality, fit for the purpose for
which it is intended, and saleable and useable in the Ordinary Course of
Business, free of defects, spoilage and damage. All of the items in Sellers
Inventory meet Sellers current standards and specifications for quality, and
such Inventory is recorded on the books of Seller at the lower of cost or
market value. Upon Sellers agreement with the results of the Reconciliation
and Review, Seller will adjust its financial statements to conform with the
results of such Reconciliation and Review. Other than described in
Schedule 3.7
, Seller has not, for the past three years,
recalled any products made, distributed or sold by Seller and it is not now nor
has it ever been under any such obligation to do so, and there is no Basis for
any such recall. Other than as described in
Schedule 3.7
,
Seller has not had nor does Seller have any
liability arising out of any injury to individuals or property as a result of
the ownership, possession or use of any of the Inventory manufactured, sold or
delivered by Seller.
3.8
Absence of
Change
Since December 31,
2006, (i) Seller has conducted the Mac Nut Business in the Ordinary Course
of Business; and (ii) no event or circumstance has occurred that has had
or is reasonably likely to have a Material Adverse Effect.
3.9
Debts,
Obligations, and Liabilities
Schedule 3.9
contains a complete and accurate list and
description of all of the outstanding Liabilities, Security Interests, debts or
other pecuniary obligations of Seller related to the Mac Nut Business as of the
date of this Agreement. Seller does not have, and on the Closing Date will not
have, any debts, Liabilities or obligations of any nature, whether accrued,
absolute, contingent or otherwise, and whether due or to become due, that are
not set forth in
Schedule 3.9
.
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3.10
Reserved
3.11
Tax Matters
(a)
Seller has timely filed all Tax Returns that it was
required to file, and all such Tax Returns were correct and complete in all
respects. All Taxes owed by Seller (whether or not shown on any Tax Return),
other than any Taxes arising since December 31, 2005, have been paid or
accrued on Sellers Financial Statements. Seller currently is not a party to
any extension of time within which to file any Tax Return. To Sellers
Knowledge, no material claim has ever been made by any taxing authority in a
jurisdiction where Seller does not file Tax Returns that it is or may be
subject to taxation by that jurisdiction. There are no Security Interests or
liens on any of the Purchased Assets or Leased Assets for Taxes, other than for
Taxes that are not yet due.
(b)
Seller has withheld and paid all Taxes required to
have been withheld and paid in connection with amounts paid or owing to any
employee, creditor, independent contractor, or other Person, and Seller has
properly reflected the status of all employees and independent contractors in
connection therewith as required by applicable Tax Law.
(c)
Seller has not received any notice that any
Governmental Authority intends to assess any additional Taxes for any period
for which Tax Returns have been filed, and no director or officer of Seller
with responsibility for Tax matters has Knowledge of any basis upon which a
claim for such additional Taxes could be made. There is no dispute or claim
concerning any Tax Liability of Seller either (i) to Sellers Knowledge
claimed or raised by any Governmental Authority in writing or (ii) as to
which Seller or the officers of Seller or employees responsible for Tax matters
of Seller has Knowledge based upon personal contact with any agent of such
authority. Seller has not waived any statute of limitations in respect of Taxes
which waiver is currently in effect. Seller has made available to Buyer correct
and complete copies of all Tax Returns, examination reports, and statements of
deficiencies assessed or agreed to by Seller filed or received since June 1,
2003.
(d)
None of the Assumed Liabilities is an agreement, contract,
obligation, arrangement or Plan (including any Employee Benefit Plan) that
would give rise to additional tax or interest under Section 409A of the
Code. Seller is not a party to any Tax allocation or sharing agreement. Seller
has never been (nor has any Liability for unpaid Taxes because it once was) a
member of an ERISA Affiliate filing a consolidated federal income Tax Return
and has never incurred any Liability for the Taxes of any Person under Treasury
Regulation Section 1.1502-6 (or any similar provision of any Law). Seller
has never incurred any Liability for the Taxes of any Person as a transferee or
successor, by contract, or otherwise.
(e)
The book value and the federal income tax basis of
each of the Purchased Assets is as set forth on
Schedule
3.11(e)
as of December 31, 2006. Seller will prepare a
revised
Schedule 3.11(e)
ten (10) days
prior to the Closing Date, as of the most recent practicable date, as
determined by Seller, ending on the last day of the month.
(f)
Seller agrees to notify Buyer of any adjustment to
the federal income tax basis of the Purchased Assets as a result of the
transactions contemplated by this Agreement and the Related Agreements.
(g)
Seller intends to treat each of the Orchard Lease
Agreement and the Processing Plant Lease Agreement as a lease for federal
income tax purposes. Seller intends to include in gross income all amounts
received under the Leases as rental income for the Leased Assets. Gross amounts
will not represent any profit arrangement between Buyer and Seller or any
interest in Buyer.
(h)
Seller intends to treat the
purchase in part as an exchange of the Purchased Assets for an interest in
Buyer qualifying under Section 721 of the Code in which Buyer will assume
the Assumed Liabilities.
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3.12
Purchased Assets
and Leased Assets
The Purchased Assets and
Leased Assets have been maintained in accordance with Sellers normal practices
and are in workable operating condition.
3.13
Real Property
Schedule 3.13
sets forth a correct and complete list of all real property used in
the Mac Nut Business, including the Tax Map Key of each parcel or premises (to
the extent applicable), and indicating whether such real property is owned,
leased, licensed, subleased, sublicensed, or otherwise related to Seller.
3.14
Contracts
Schedule 3.14
correctly and completely lists and describes all
Material Contracts (as herein defined) to which Seller is a party or is bound.
All Material Contracts to which Seller is a party or is bound are in full force
and binding upon the parties thereto. No default by Seller has occurred
thereunder and, to Sellers Knowledge, no default by the other contracting
parties has occurred thereunder. Seller has not waived any of its rights under
its Material Contracts. No event, occurrence or condition exists which, with
the lapse of time, the giving of notice, or both, or the happening of any
further event or condition, would become a default by Seller thereunder.
Complete and accurate copies of all written Material Contracts (including any
amendments or supplements thereto) and true and complete written summaries of
all oral Material Contracts have previously been delivered to Buyer.
Material Contracts
means
any of the following Contracts that relate to the Mac Nut Business: purchase
orders and purchase contracts in excess of $25,000 each; contracts for capital
expenditures in excess of $50,000 each; material agreements or arrangements
regarding confidentiality; agreements or arrangements regarding
non-competition; loan agreements; notes; security agreements; employment and
employment-related agreements; collective bargaining agreements; leases and
subleases of real estate where the annual payments thereunder exceed $10,000
leases and subleases of personal property where the annual payments thereunder
exceed $10,000 or which cannot be canceled by Seller without payment or penalty
upon notice of sixty (60) days or less; material license agreements; joint
venture, partnership or cooperative arrangements; any contract with a
Governmental Authority; and all other Contracts to which Seller is a party or
by which Seller or any of its Purchased Assets is bound and which have a notice
for termination period of more than six (6) months or obligate any party
thereto to make total payments of more than $25,000 during the term of such
agreement or arrangement.
3.15
Permits
Schedule 2.1(d)
contains a complete listing and summary
description of all Permits of Governmental Authorities or other similar rights
owned or possessed by Seller or used in or required for the lawful operation of
the Mac Nut Business (collectively, the
Licenses
). No other License is required in the conduct of
the Mac Nut Business as currently conducted or in the ownership or use of the
Purchased Assets and the Leased Assets. Seller has in full force and effect all
Licenses it is required to have with respect to its operation of the Mac Nut
Business. Except as indicated on
Schedule 3.15
, Seller owns or possesses all right, title, and
interest in and to all of the Licenses required for the Mac Nut Business, and
has at all times complied in all material respects with the terms and
conditions of such Licenses. Except as set forth on
Schedule 3.15
, no loss or expiration of, nor any noncompliance
with, any License is pending or currently expected (including as a result of
the transactions contemplated hereby) other than expiration in accordance with
the terms thereof. Except as set forth on
Schedule 3.15
, no consent, permit, approval or authorization of,
or declaration to or filing with, any Governmental Authority is required to be
obtained by Seller or Buyer under the Licenses, applicable Law or otherwise in
connection with its execution, delivery, and performance of this Agreement or
the Related Agreements or the consummation of any other
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15
transaction
contemplated hereby or thereby. Except as set forth on
Schedule 3.15
, each of the Licenses is freely transferable to
Buyer. Seller agrees to cooperate with Buyer to arrange for new Licenses or
Permits where those Licenses or Permits are not transferable to Buyer.
3.16
Intellectual
Property
To the Knowledge of
Seller, the Intellectual Property may be used by Buyer without the need for any
License or consent from any Person. Further, to the Knowledge of Seller, the
operation of the Mac Nut Business up to the Closing does not infringe on or
misappropriate any Intellectual Property rights of any Person, violate any
right of any Person, under any applicable Law, and no Person has asserted or
threatened to assert against Seller any claim of infringement or misappropriation
of Intellectual Property rights, or unfair competition or trade practices.
Seller owns and has the right to fully assign, convey, sell or otherwise
transfer to Buyer all of Sellers Intellectual Property. Seller has not granted
to any Person any outstanding Licenses or other right to any of the Purchased
Assets or Leased Assets, except as set forth in the License Agreement between
Kapua and Buyer. Seller is not liable, nor has it made any contract or
arrangement by which it may become liable, to any other Person for any royalty,
fee, or other compensation for the ownership, use, license, sale, distribution,
or reproduction of any of the Purchased Assets or Leased Assets.
3.17
Title to Assets
(a)
Except as set forth on
Schedule 3.17
and except as to the Seller Land, Seller has good and marketable
title to (or in the case of assets identified as leased in the Books and
Records, a valid leasehold interest in) all of the Purchased Assets and Leased
Assets free and clear of all Liabilities (other than Liabilities to Sellers
Lessor(s) in accordance with the terms of any applicable leases between
Seller and its Lessor(s) and Security Interests as to the Leased Assets).
Upon Closing, Buyer will be entitled to the continued possession and use of all
Purchased Assets and Leased Assets subject to, as to the Leased Assets, the
terms of the Leases between Seller and Buyer.
(b)
To the Knowledge of Seller, there is no pending or
anticipated change in any applicable building, zoning, subdivision, health and
safety and other land use statutes, Laws, rules, regulations or other legal
requirements affecting the real property described on
Schedule
3.13
that will have, taken as a whole, a Material Adverse Effect.
(c)
Neither the whole nor any portion
of the Leased Assets is subject to any order to be sold or is being condemned,
expropriated or otherwise taken by any Governmental Authority with or without
payment of compensation therefor, nor, to the Knowledge of Seller, has any such
condemnation, expropriation or taking been proposed.
3.18
Customers and
Sales
Schedule 2.1(i)
is a correct and current list of all customers
with respect to the Mac Nut Business. In addition, Seller has provided to Buyer
(i) summaries of the sales made to each such customer during the
12 months preceding the Closing Date, and (ii) copies of all written
purchase orders or contracts with any such customer for delivery of macadamia
nuts or related items after the Closing Date. Seller is not obligated to any
such customer under any macadamia nut by-products rebates, trade allowance or
similar reimbursements. To the Knowledge of Seller, none of these customers
intend to cease doing business with Seller or materially alter the amount of
business such customer is presently doing with Seller.
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3.19
Insurance
Schedule 3.19
is a description of all insurance policies held by
Seller that provide coverage to Seller for the operation of its Mac Nut
Business. Seller is not in default with respect to payment of premiums on any
such policy, and except as otherwise disclosed, there are no premiums due or to
become due between the date of this Agreement and the Closing Date. Each policy
is in full force and effect and provides Seller with coverage as stated in the
respective policies. Seller has not received any written notice of any
revocation or cancellation of any such policy. Except as described in
Schedule
3.19
, no claim is pending under any such
policy.
3.20
Litigation
Schedule
3.20
sets forth each instance in which Seller or an Employee
Benefit Plan (i) is subject to any unsatisfied judgment, order, decree,
stipulation, injunction, or charge or (ii) is a party or, to the Knowledge
of Seller, is threatened to be made a party to any civil, criminal or
administrative claim, charge, complaint, demand, cause of action, suit,
proceeding, arbitration, hearing or investigation (collectively,
Proceeding
), in any court or
quasi-judicial or administrative agency of any federal, state, local, or
foreign jurisdiction or before any arbitrator. Without limiting the generality
of the foregoing, there is no pending or, to the Knowledge of Seller,
threatened Proceeding affecting the Leased Assets or the Purchased Assets,
except as set forth on
Schedule 3.20
.
To the Knowledge of Seller, no event has occurred, and no condition or
circumstance exists, that might be reasonably expected to directly give rise to
the commencement of any such Proceeding. Except as described on
Schedule 3.20
, no matter listed thereon could reasonably be
expected, individually or in the aggregate, to result in a Material Adverse
Effect to Seller or any Employee Benefit Plan. Except as described on
Schedule 3.20
, neither Seller nor, to the Knowledge of
Seller, any Employee Benefit Plan, intends to file or institute any Proceeding
against any other Person.
3.21
Environmental
Matters
Buyer acknowledges
receiving a copy of the Phase I Site Assessment, dated June 13, 2003,
completed by URS Corporation (the
Environmental Report
).
To the Knowledge of Seller and except as described in the Environmental Reports
or on
Schedule 3.21
:
(a)
The Seller Land and all improvements thereon and the
operations of the Mac Nut Business have since June 1, 2003, been and are
in material compliance with all Environmental Laws;
(b)
There are no pending or, to Sellers Knowledge,
threatened Proceedings involving Seller or the Seller Land that allege or
assert (i) a violation of any Environmental Law or (ii) that Seller
is required to clean up, remove or take remedial or other responsive action due
to a Release of Hazardous Materials; and
(c)
Seller has provided Buyer with complete and correct
copies of all available studies, reports, surveys, assessments, audits,
correspondence, investigations, analysis, tests, and other documents (whether
in hard copy or electronic form) in Sellers possession relating to the
presence or alleged presence of Hazardous Substances at, on, or affecting the
Seller Land.
Buyer will arrange for a
current Phase I Site Assessment, prepared, at Buyers expense, by a consultant
secured by Buyer, and furnish a copy of such Phase I Site Assessment to Seller.
3.22
Legal Compliance
In conducting the Mac Nut
Business, Seller has complied in all material respects with all federal, state,
and local statutes, ordinances, rules, orders, decrees, judgments, laws or regulations,
including zoning ordinances (collectively,
Laws
).
Except as disclosed in
Schedule 3.22
,
Seller has not received any written
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notice
asserting any violation of any Law in the five (5) years immediately
preceding the date of this Agreement.
3.23
Employees
Schedule 3.23
is a list of the names and addresses of all full-time Employees, along with the
rates of compensation payable to each. To Sellers Knowledge, no Employee (i) has
any plans to resign or retire from existing employment before September 30,
2007, except by way of retirement at or following the age of retirement set
forth in Sellers employee manual to which Seller is a party, (ii) has
been encouraged or induced by Seller to terminate employment or (iii) has
any reason related to Seller or the Mac Nut Business to terminate employment or
cease performing in their current role. Furthermore, the consummation of this
transaction will not result in the violation of the Worker Adjustment and
Retraining Notification Act (WARN), the Hawaii Dislocated Workers Act (Haw.
Rev. Stat. ch. 394B) or any similar statue, rule or regulation.
3.24
Employee Benefit
Plans
(a)
Schedule 3.24(a)
contains a
complete and accurate list of all Employee Benefit Plans. There has been
no amendment, interpretation or other announcement (written or oral) by Seller,
any ERISA Affiliate, or any representative thereof, relating to a change in
participation or coverage under any Employee Benefit Plan that, either alone or
together with other such items or events, would materially increase the expense
of maintaining such Employee Benefit Plan (or the Employee Benefit Plans taken
as a whole) above the level of expense incurred with respect thereto for the
most recent fiscal year included in the Financial Statements. Neither Seller
nor any ERISA Affiliate has any agreement to create, enter into or contribute
to any additional Employee Benefit Plan, or to modify or amend any existing
Employee Benefit Plan. There has been no amendment, interpretation or
other announcement (written or oral) by Seller, any ERISA Affiliate or any
other Person relating to, or change in participation or coverage under, any
Employee Benefit Plan that, either alone or together with other such items or
events, would materially increase the expense of maintaining such Employee
Benefit Plan (or the Employee Benefit Plans taken as a whole) above the level
of expense incurred with respect thereto for the most recent fiscal year
included in the Financial Statements. Except as set forth on
Schedule
3.24(a)
, there are no material unfunded liabilities in
respect of any Employee Benefit Plan.
(b)
Seller has delivered or made
available to Buyer true, correct and complete copies (or, in the case of
unwritten Employee Benefit Plans, descriptions) of all Employee Benefit Plans
(and all amendments thereto), along with, to the extent applicable to the
particular Employee Benefit Plan, copies of the following: (i) the last
three Annual Reports (Form 5500 series) filed with respect to such
Employee Benefit Plan; (ii) the most recent summary plan description, and
all summaries of material modifications related thereto, distributed with
respect to such Employee Benefit Plan; (iii)
all trust
agreements, annuity contracts, insurance contracts and other funding
arrangements related to such Employee Benefit Plan; (iv) the most
recent determination letter issued by the IRS with respect to such Employee
Benefit Plan; (v) the most recent annual actuarial valuation prepared for
such Employee Benefit Plan; (vi) all written communications during the
last three years relating to the amendment, creation or termination of such
Employee Benefit Plan, or an increase or decrease in benefits, acceleration of
payments or vesting or other events that could result in any material liability
to the Company or any ERISA Affiliate; and (vii) all material
correspondence to or from any Governmental Authority relating to such Employee
Benefit Plan.
(c)
Except as disclosed on
Schedule
3.24(c)
, to the Knowledge of Seller and its ERISA Affiliates, with
respect to each Employee Benefit Plan: (i) such Employee Benefit Plan was
properly and legally established; (ii) such Employee Benefit Plan is, and
at all times since inception has been, maintained, administered, operated and
funded in all material respects in accordance with its terms and in compliance
with all applicable requirements of all applicable Laws, including ERISA and
the Code;
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(iii) Seller, each ERISA Affiliate and
all other Persons have, at all times, properly performed all of their duties
and obligations (whether arising by operation of law or by contract) under or
with respect to each Employee Benefit Plan;
(iv) all returns,
reports (including all Form 5500 series Annual Reports, together with all
schedules and audit reports required with respect thereto), notices, statements
and other disclosures relating to such
Employee Benefit Plan required to be
filed with any Governmental Authority or distributed to any Employee Benefit Plan participant have been properly prepared and duly
filed or distributed in a timely manner; (v) none of Seller, any
ERISA Affiliate or any fiduciary of such Employee Benefit Plan has engaged in
any transaction or acted or failed to act in a manner that violates the
fiduciary requirements of ERISA or any other applicable Law; (vi) no
transaction or event has occurred or is threatened or about to occur (including
any of the transactions contemplated in or by this Agreement) that constitutes
or could constitute a prohibited transaction under Section 406 or 407 of
ERISA or under Section 4975 of the Code for which an exemption is not
available; (vii) neither Seller nor any ERISA Affiliate has incurred, and there exists no
condition or set of circumstances in connection with which Seller, any ERISA
Affiliate or Buyer would incur, directly or indirectly, any material liability
or expense (except for routine contributions and benefit payments) under any
applicable Law, or under any indemnification or similar agreement, with respect
to any Employee Benefit Plan.
(d)
Each Employee Benefit Plan that is intended
to be qualified under Section 401(a) of the Code is maintained under
a volume submitter plan document for which the remedial amendment period is
open. Except as disclosed in
Schedule 3.24(c)
,
to the Knowledge of Seller or any ERISA Affiliate, nothing has occurred that
would adversely affect the qualification or exemption of any such Employee
Benefit Plan or its related trust or group annuity contract.
(e)
All contributions, premiums, and other payments due or
required to be paid to (or with respect to) each Employee Benefit Plan have
been correctly computed and have been timely paid, or, if not yet due, have
been accrued as a liability on the Financial Statements. All income taxes and
wage taxes required by Law to be withheld from benefits derived under those
Employee Benefit Plans have been properly withheld and remitted to the proper
depository.
(f)
There are no actions, suits or
claims (other than routine claims for benefits) pending or, to the Knowledge of
Seller, threatened with respect to (or against the assets of) any Employee
Benefit Plan, nor, to the Knowledge of Seller, is there a Basis for any such
action, suit or claim. Except as disclosed in
Schedule
3.24(f)
, to the Knowledge of Seller no Employee Benefit Plan is
currently under investigation, audit or review, directly or indirectly, by any
Governmental Authority, and no such action is contemplated or under
consideration by any Governmental Authority.
(g)
Except as disclosed in
Schedule
3.24(g)
, neither Seller nor any ERISA Affiliate sponsors, maintains
or contributes to, or has ever sponsored, maintained or contributed to (or been
obligated to sponsor, maintain or contribute to), (i) a multiemployer plan
as defined in Section 3(37) or Section 4001(a)(3) of ERISA, (ii) a
multiple employer plan within the meaning of Section 4063 or 4064 of ERISA
or Section 413(c) of the Code, (iii) an employee benefit plan,
fund, program, contract or arrangement that is subject to Section 412 of
the Code, Section 302 of ERISA or Title IV of ERISA, or (iv) a
multiple employer welfare arrangement as defined in Section 3(40) of
ERISA.
(h)
Neither Seller nor any ERISA Affiliate has
incurred any liability under Title IV of ERISA.
(i)
The consummation of the transactions
contemplated by this Agreement and the Related Agreements will
not constitute or involve a nonexempt prohibited transaction within the
meaning of Section 406 of ERISA or Section 4975 of the Code.
(j)
No Employee Benefit Plan that is subject to Section 409A
of the Code has been materially modified (as defined under Section 409A of
the Code) since October 3, 2004 and all such non-qualified deferred
compensation plans or arrangements have been operated and administered in good
faith
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compliance with Section 409A of the
Code from the period beginning December 31, 2004 through the date hereof.
(k)
None of the execution or delivery of this
Agreement, the Related Agreements or the consummation of the transactions
contemplated In this Agreement will, either alone or in conjunction with any
other event, (i) result in any payment or benefit becoming due or payable,
or required to be provided, to any director, Employee or independent contractor
of Seller, or (ii) result in any amount to fail to be deductible by reason
of Section 280G of the Code.
(l)
Schedule
3.24
contains a complete and accurate list all individuals who have
elected (or who are eligible to elect) to continue their coverage under Sellers
medical, dental or other health plan in accordance with Sections 601
et. seq
. of ERISA, Section 4980(f) of the Code or
similar state law, together with the beginning and ending date of the period of
continuation coverage for which each such individual is eligible.
3.25
Labor Matters
Except as set forth on
Schedule 3.25, Part 1
,
there are no disputes,
arbitrations, administrative complaints, civil
actions
, material employee grievances or material disciplinary actions pending
or, to the Knowledge of Seller, threatened between Seller and any Employee or relating
to labor or employment matters. Seller has not suffered or sustained any work
stoppage and no such work stoppage, to the Knowledge of Seller, is
threatened. Seller, with respect to the Employees, has complied in all material
respects with all provisions of all Laws relating to the employment of labor
and has no liability for any arrearages of wages or Taxes or penalties for
failure to comply with any such Laws. Seller has no Knowledge of any
organizational efforts presently being made or threatened by or on behalf of
any labor union with respect to any Employee.
Except as set forth
on
Schedule 3.14
or
Schedule
3.25, Part 2
, Seller, with respect to the Employees, is not a
party to any:
(a)
management, employment or other contract
providing for the employment or rendition of executive services;
(b)
employment contract that is not terminable
without penalty by Seller on 30-days notice;
(c)
bonus, incentive, deferred compensation,
severance pay, pension, profit-sharing, retirement, stock purchase, stock
option, Employee Benefit, or similar Plan, agreement or arrangement;
(d)
collective bargaining agreement or other
agreement with any labor union or other employee organization (and no such
agreement is currently being requested by, or is under discussion by management
of Seller with, any group of Employees or others); or
(e)
other employment contract or other
compensation agreement or arrangement, oral and written, affecting or relating
to current or former Employees of the Mac Nut Business, including loan
agreements, advancements of expenses and similar arrangements.
All such contracts and other agreements and arrangements set forth on
Schedule 3.25
.
Parts 1 and 2
are valid, and in full force and effect. Seller has performed all material
obligations imposed on it thereunder, and there are not under any of such contracts,
agreements or arrangements, any defaults or events of default by Seller or, to
its Knowledge, any other party thereto that would have a Material Adverse
Effect.
From June 1, 2003, to and including the
Closing Date, Seller has not made any loans to any officer or Employee of
Seller employed in the Mac Nut Business, except as set forth on
Schedule 3.25, Parts 1 and 2
.
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3.26
Motor Vehicles
Schedule 3.26
sets forth an accurate and complete list of all Owned and Leased Vehicles. All
such Owned and Leased Vehicles are (a) properly licensed and registered in
accordance with applicable Law; (b) insured as set forth in the Disclosure
Schedule; (c) in good operating condition and repair (reasonable wear and
tear excepted); and (d) not subject to any Security Interest except as set
forth on
Schedule 3.26
.
3.27
Reserved
3.28
Transactions with
Affiliates
Except
as disclosed on
Schedules
3.25 Part 1,
3.25 Part 2 or
3.28
, there are no existing contracts,
transactions, indebtedness or other arrangements, or any related series
thereof, between Seller, on the one hand, and any of the directors, officers,
beneficial owners or other affiliates of Seller, on the other hand.
3.29
Fraudulent
Conveyance
Seller is not entering
into this Agreement with the intent to hinder, delay or defraud any Person to
which it is, or may become, indebted. Sellers assets, at a fair valuation,
exceed its liabilities, and Seller is able, and will continue to be able after
the Closing Date, to meet its debts as they mature and will not become insolvent
as a result of the Closing. After the Closing, Seller will have sufficient
capital and property remaining to conduct the business in which it will
thereafter be engaged.
3.30
Brokers Fees
Except as provided in
Schedule 3.30
, Seller does not have any Liability or
obligation to pay any fees or commissions to any broker, finder, or similar
representative with respect to the transactions contemplated by this Agreement
or the Related Agreements.
3.31
Investment Status
Seller is an accredited
investor within the meaning of Rule 501 of Regulation D promulgated
under the Securities Act of 1933, as amended (the
Securities
Act
). In addition, Seller: (a) is acquiring the Units for
its own account for investment and not with a view to the sale or distribution
of all or any part of such Units; and (b) is aware of Buyers business
affairs and financial condition and has acquired sufficient information about
Buyer to reach an informed and knowledgeable decision to acquire the Units.
3.32
Disclosure
The representations and warranties contained in this
Article III
do not contain any untrue statements of a
fact or omit to state any material fact necessary to make the statements in
Article III
not misleading.
EXCEPT AS OTHERWISE
SPECIFICALLY SET FORTH IN THIS AGREEMENT, SELLER HEREBY EXPRESSLY DISCLAIMS ALL
REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE
PURCHASED ASSETS AND THE LEASED ASSETS OR ANY LIABILITIES OR
OPERATIONS RELATING THERETO, INCLUDING ANY
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, AND SUCH OTHER
REPRESENTATIONS OR WARRANTIES ARE EXPRESSLY DISCLAIMED. EXCEPT AS OTHERWISE
SPECIFICALLY SET FORTH IN THIS AGREEMENT, THE PURCHASED ASSETS ARE BEING SOLD,
AND THE LEASED ASSETS ARE BEING CONVEYED, WITHOUT RECOURSE, AS-IS AND WHERE-IS.
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ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer
represents and warrants to Seller that the statements contained in this
Article IV
are correct and complete as of the date of
this Agreement:
4.1
Organization
and Qualification
Buyer is duly authorized
to conduct business and is a limited partnership validly existing and in good
standing under the Laws of the State of Delaware, and is qualified to do
business in Hawaii and in every other jurisdiction in which the nature of its
business requires such qualification. NewCo1, if formed, will either be a
Hawaii corporation or will be a limited liability company formed under the laws
of the State of Hawaii, will be duly authorized to conduct business, will be
validly existing and in good standing under the Laws of the State of Hawaii and
will be qualified to do business in Hawaii and in every other jurisdiction in
which the nature of its business requires such qualification. NewCo2, if
formed, will be a corporation formed under the laws of the State of Hawaii,
will be duly authorized to conduct business, will be validly existing and in
good standing under the Laws of the State of Hawaii and will be qualified to do
business in Hawaii and in every other jurisdiction in which the nature of its
business requires such qualification.
4.2
Noncontravention
The execution and delivery
of this Agreement and the Related Agreements, and the
consummation of the transactions
contemplated hereby and thereby, will not (i) violate any statute,
regulation, rule, judgment, order, decree, stipulation, injunction, charge, or
other restriction of any government, governmental agency, or court to which
Buyer is subject or any provision of the certificate of limited partnership or
partnership agreement of Buyer, or (ii) conflict with, result in a
material breach of, constitute a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify, or cancel, or
require any notice under any contract, lease, sublease, license, sublicense,
franchise, permit, indenture, agreement or mortgage for borrowed money,
instrument of indebtedness, security interest, or other arrangement to which
Buyer is a party or by which it is bound or to which any of its assets is
subject (or result in the imposition of any security interest upon any of its
assets). Buyer does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order for the Parties to consummate the transactions
contemplated by this Agreement or the Related Agreements.
4.3
Authorization
of Transaction
Buyer has full power and
authority (including full limited partnership power and authority) to execute
and deliver this Agreement and the Related Agreements and to perform its
obligations hereunder and thereunder (including, without limitation, the
issuance of the Units and the registration of the Units pursuant to the
Registration Statement). The execution and delivery of this Agreement and the
Related Agreements will have been, prior to the Closing Date, duly and validly
authorized by all requisite action. This Agreement and the Related Agreements
have been duly executed and delivered by Buyer and constitute the valid and
legally binding obligations of Buyer, enforceable in accordance with their
terms and conditions, subject to applicable bankruptcy, insolvency, and similar
laws affecting the enforcement of creditors rights generally and to
general principles of equity.
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4.4
Brokers
Fees
Buyer has no Liability or
obligation to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement and the Related
Agreements for which Seller could become liable or obligated.
4.5
Capitalization;
Partnership Units
The authorized capital
stock of Buyer consists of 7,575,757 Class A limited partnership units. As
of the date of this Agreement, 7,575,757 Class A limited partnership units
were issued and outstanding. Of this amount, 75,757 Units are owned by the
Buyer, and 7,500,000 Units are owned by limited partners. As of the date of
this Agreement, there are, and as of the Closing Date there will be, no
options, warrants or other rights to purchase Class A limited partnership units
of Buyer, or securities convertible into or exchangeable for Class A
limited partnership units or obligating Buyer to issue or sell any Class A
limited partnership units, or securities convertible into or exchangeable for
such Class A limited partnership units, except as provided herein. The
Units to be issued under the terms of this Agreement will at Closing have been
adequately reserved and will, when issued, be validly issued, fully paid and
non-assessable and will not be issued in violation of any preemptive rights. As
of the effective date of this Agreement, the equity ownership of those partners
of Buyer who had more than a 5% partnership interest in Buyer was as set forth
on
Schedule 4.5
.
4.6
SEC
Filings; Financial Statements; No Changes
Buyer has timely filed or
furnished all registration statements, prospectuses, forms, reports and
documents required to be filed or furnished by it under the Securities Act or
the Exchange Act, as the case may be, since December 31, 2003
(collectively, the
Buyer SEC Filings
). Each
Buyer SEC Filing (i) as of its date complied in all material respects with
the requirements of the Securities Act or the Exchange Act, as the case may be,
and (ii) except to the extent superseded by a later filed Buyer SEC
Filing, does not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements made therein, in the light of the circumstances under which they
were made, not misleading. Each of the consolidated financial statements
(including, in each case, any notes thereto) contained in the Buyer SEC Filings
(the
Buyer Financial Statements
)
was prepared in accordance with GAAP applied (except as may be indicated in the
notes thereto and, in the case of unaudited quarterly financial statements, as
permitted by Form 10-Q under the Exchange Act) on a consistent basis
throughout the periods indicated (except as may be indicated in the notes
thereto), and each presented fairly the consolidated financial position,
results of operations and cash flows of Buyer as of the respective dates
thereof and for the respective periods indicated therein. The Books and Records
of Buyer have been, and are being, maintained in accordance with applicable
legal and accounting requirements, and the Buyer Financial Statements are
consistent with the Books and Records. Since December 31, 2005, except as
contemplated by, or as disclosed in, this Agreement or in the Buyer SEC
Filings, Buyer has conducted its businesses in the ordinary course consistent
with past practice and, since such date, there has not been (a) any
condition, event, circumstance, change or effect that, individually or in the
aggregate, has had or could reasonably be expected to have a material adverse
effect on the business, assets, properties, results of operation or financial
condition or prospects of Buyer or any event or development that would,
individually or in the aggregate, reasonably be expected to have such a
condition, event, circumstance, change or effect, or (b) any event or
development that would, individually or in the aggregate, reasonably be
expected to prevent or materially delay the performance of this Agreement or
the Related Agreements by Buyer.
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23
4.7
Vote
Required
Other than the affirmative
vote of a Majority Interest of the Partnership, which is necessary to approve
this Agreement, the Related Agreements, and the transactions contemplated
hereby, there is no other vote of the holders of any class or series of
partnership interests which is necessary to approve this Agreement and the
Related Agreements and the transactions contemplated hereby and thereby.
4.8
Disclosure
Documents
The registration statement
on Form S-3, any amendments or supplements thereto filed by Buyer
pursuant to which the Units will be registered with the SEC (including any
filings under the Securities Act or Exchange Act incorporated by reference
therein, collectively, the
Registration Statement
)
filed by Buyer pursuant to and in accordance with the terms and conditions of
this Agreement and the Registration Rights Agreement, at the time the
Registration Statement is declared effective, will comply as to form in all
material respects with the applicable requirements of the Securities Act and
other applicable Law, and the Registration Statement does not, and will not, at
the time the Registration Statement is declared effective, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements made therein, in light of
the circumstances under which they were made, not misleading. The proxy
statement, any amendments or supplements thereto (collectively, the
Proxy Statement
) submitted by Buyer
in connection with seeking approval by a Majority Interest of the Partnership
of this Agreement, the Related Agreements, and the transactions contemplated
hereby and thereby, at the time the Proxy Statement is first mailed to the
Unitholders, will comply as to form in all material respects with the applicable
requirements of the Exchange Act and other applicable Law, and the Proxy
Statement does not, and at the time the Proxy Statement is first mailed to the
Unitholders will not, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements made therein, in light of the circumstances under which they
were made, not misleading.
4.9
Disclosure
The representations and
warranties contained in this
Article IV
do not contain any untrue statement of a fact or omit to state any material
fact necessary to make the statements in
Article IV
not misleading.
ARTICLE V.
PRE-CLOSING COVENANTS
The Parties agree as
follows with respect to the period between the execution of this Agreement and
the Closing Date or the earlier termination of this Agreement:
5.1
Generally
Each Party must use its
reasonable efforts to take all action and to do all things necessary, proper,
or advisable to consummate and make effective the transactions contemplated by
this Agreement (including satisfying the closing conditions set forth in
Article VII
).
5.2
Notices and
Consents
Seller must give any
notices to third parties and must use reasonable commercial efforts to obtain
such consents as the other Party may reasonably request in connection with the
consummation of the transactions contemplated by this Agreement and the Related
Agreements, including the Required Consents. At the request of Seller, Buyer
must provide Seller with such assistance and information as is reasonably
requested by Seller to obtain the Required Consents. Any costs incurred in
obtaining the such Required Consents must be borne by Seller. Seller must
provide written notice to Sellers employees and
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24
the
director of the Department of Labor and Industrial Relations of the State of
Hawaii 60 days before the Closing Date, as required under the Hawaii Dislocated
Workers Act. Seller agrees that it will be responsible for all liability, back
pay, or penalties for any violations of Hawaiis Dislocated Workers Act arising
out of termination of Sellers employees by Seller on, or prior to, the Closing
Date. Notwithstanding anything in this Agreement to the contrary, this
Agreement shall not constitute an agreement to assign any Purchased Asset or
any claim or right or any benefit arising under or resulting from such
Purchased Asset if an attempted assignment thereof, without the consent of a
third party, would constitute a breach, default, violation or other
contravention of the rights of such third party, would be ineffective with
respect to any party to an agreement concerning such Purchased Asset, claim or
right, or would in any way adversely affect the rights of Seller or, upon
transfer, Buyer under such Purchased Asset, claim or right. If any transfer or
assignment by Seller to Buyer, or any assumption by Buyer of, any interest in,
or liability, obligation or commitment under, any Purchased Asset, claim or
right requires the consent of a third party, then such transfer or assignment
or assumption shall be made subject to such consent being obtained. If any such
consent is not obtained before the Closing, and the Closing shall nonetheless
take place on the terms set forth herein, thereafter, Seller shall use its best
efforts to secure such consent as promptly as practicable after the Closing.
Seller shall cooperate with Buyer in any lawful and commercially reasonable
arrangement reasonably proposed by Buyer under which (i) Buyer shall
obtain (without infringing upon the legal rights of such third party or
violating any applicable Law) the economic claims, rights and benefits under
the Purchased Asset, claim or right with respect to which the consent has not
been obtained in accordance with this Agreement, and (ii) Buyer shall
assume any related economic burden with respect to the Purchased Asset, claim
or right with respect to which the consent has not been obtained in accordance
with this Agreement. For the avoidance of doubt, subject only to
Section 7.1(b)
, the terms of this
Section 5.2
do not constitute conditions precedent to Closing, but rather represent the
means for facilitating the assignment to Buyer of certain of the Purchased
Assets and the assumption by Buyer of any obligations relating thereto, that
Buyer has agreed to assume, under the terms of this Agreement.
5.3
Operation
of Business Before the Closing
Seller must not,
during the period from the date hereof to the Closing Date, engage in any
practice, take any action, embark on any course of action, or enter into any
transaction with respect to the Mac Nut Business that is outside the Ordinary
Course of Business. Seller must (a) promptly notify Buyer of any event or
occurrence not in the Ordinary Course of Business, (b) confer with Buyer
before implementing any operational decisions of a material nature, (c) report
periodically to Buyer concerning the status of the Mac Nut Business, operations
and finances, and (d) cooperate with Buyer and assist Buyer in identifying
the Licenses required by Buyer to operate the Mac Nut Business from and after
Closing and either transferring existing Licenses of Seller to Buyer or
assisting Buyer in obtaining new Licenses for Buyer. Without limiting the
generality of the foregoing, with respect to the Mac Nut Business, other than
in the Ordinary Course of Business, Seller shall not (without the prior consent
of Buyer):
(a)
sell, lease, dispose of, or otherwise transfer any
interest in any Purchased Assets or Leased Assets, except any sale or
disposition of the Seller Land in accordance with the terms hereof;
(b)
alter in any material respect its historical practices
and policies relating to the payment of accounts payable, including any delay
in paying accounts payable;
(c)
fail to pay or otherwise satisfy its monetary
obligations as they become due, except such as are being contested in good
faith;
(d)
create, assume or suffer to be incurred any Liability
or Security Interest on the Purchased Assets;
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25
(e)
incur any indebtedness for borrowed money or guarantee
any such indebtedness or issue or sell any debt securities or guarantee any
debt securities of others;
(f)
terminate (other than allowing a contract or license
to terminate by its terms), amend, supplement or modify any Material Contract
or License related to the Mac Nut Business;
(g)
declare or pay any dividends on or make other
distributions in respect of any of its equity interests, or set aside funds
therefor, except for distributions of profits;
(h)
make any loans to, or distribute any cash to, any
Employee, equity holder or other individual;
(i)
terminate any Employee or grant severance or
termination pay to any director, officer, Employee or consultant;
(j)
adopt, amend, or terminate (other than allowing a
plans, program, policy or other arrangement to terminate by its terms) any
Employee Benefit Plans, programs, policies or other arrangements, or enter into
any employment contract, pay any special bonus or special remuneration to any
director, Employee or consultant, or increase the salaries or wage rates of its
Employees;
(k)
engage in any transaction other than (i) one
contemplated by this Agreement or any Related Agreement, or (ii) that
certain co-pack agreement with Hawaiian Host, including the loan of certain co-packing
equipment to Hawaiian Host, as more particularly described on
Schedule 5.3(k)
hereof, or (iii) any Third-Party
Sales valued or with a potential value in excess of $75,000, even if in the
Ordinary Course of Business, without first advising Buyer;
(l)
enter into any transaction (other than one
contemplated by this Agreement or any Related Agreement) with its managers,
officers, or members or their affiliates;
(m)
cancel, materially amend, or renew any insurance policy;
or
(n)
enter into any contract or agree,
in writing or otherwise, to take any of the actions described above in clauses (a) through
(m) of this
Section 5.3
.
5.4
Preservation
of Business
Seller must use reasonable
commercial efforts, consistent with past practices, to keep its business and
properties substantially intact, including Sellers respective present
operations, physical facilities, working conditions, and relationships with
lessors, licensers, suppliers, customers and Employees.
5.5
Access
(a)
Seller shall permit Buyer or Buyers representatives
full access at reasonable times, and in manner so as not to unreasonably interfere
with the normal business operations of Seller, to the headquarters and
properties of Seller and to such Books and Records, contracts, Tax records, and
documents of or pertaining to the Mac Nut Business as are reasonably necessary
for Buyers performance of due diligence under this Agreement. In conducting
its due diligence, Buyer will (i) obtain prior written permission from
Seller before contacting any customer, suppliers or Employees of Seller (other
than the following Employees, manager, or consultant: Mark Crawford, John
Sullivan, David Rietow, and Hilary Brown, whom Buyer may contact
directly), (ii) use reasonable efforts to limit the number and duration of
such contacts with customers, suppliers or Employees so as not to disturb or
alarm Sellers customers, suppliers or Employees, and (iii) use reasonable
efforts not to disrupt Sellers business operations in conducting its due
diligence.
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(b)
Buyer shall proceed to arrange with Seller a mutually
agreeable time and place at which Buyer may conduct interviews with such
Employees or customers of Seller (other than the individuals listed in
Section 5.5(a)
) as are mutually agreed to by Buyer and
Sellers representatives.
(c)
Seller shall, upon reasonable notice, furnish to Buyer
such additional financial and operating data and other information regarding
Seller and the Mac Nut Business (including current information regarding Sellers
prospects, assets, contracts, rights, Liabilities and obligations) that Buyer
may from time to time reasonably request.
(d)
Seller shall grant Buyer and its agents and employees
the right to enter the Seller Land at reasonable times and with reasonable
notice before the Closing for the purpose of inspecting the Seller Land and the
Purchased Assets, making such surveys or performing such tests, studies or
other activities as are reasonably appropriate in connection with the
consummation of transactions contemplated by this Agreement and the Related
Agreements;
provided, however
, that (i) all
such activities are at Buyers sole cost, expense, and risk without right of
reimbursement from Seller, and (ii) Buyer must use reasonable efforts to
not unreasonably interfere with Sellers existing activities on the Seller Land
or the Mac Nut Business.
(e)
Seller shall use reasonable efforts
to assist and cooperate with Buyer in the development of transition plans for
implementation by Buyer following the Closing.
5.6
Notice of
Developments
Seller shall give prompt written notice to Buyer of (i) any
development affecting the ability of Seller to consummate the transactions
contemplated by this Agreement and the Related Agreements, (ii) any
material loss of any equipment, supplier, customer, contract or right relating
to the Mac Nut Business, or (iii) any breach of or other variance (or circumstance
or occurrence that could reasonably be expected to result in breach or variance
or failure of a closing condition) from the representations and warranties of
Seller contained in
Article III
,
or any breach of or noncompliance (or circumstance or occurrence that could
reasonably be expected to result in a breach or noncompliance of failure of a
closing condition) with any covenant hereunder by Seller. If any fact or
circumstance requires any change to the Disclosure Schedules, then Seller promptly
shall deliver to Buyer a supplement to the Disclosure Schedules specifying such
change. No disclosure under this
Section 5.6
is to be deemed to amend or supplement the Disclosure Schedules or to prevent
or cure any misrepresentation, breach of warranty, or breach of covenant.
Buyer shall give prompt
written notice to Seller of (i) any development affecting the ability of
Buyer to consummate the transactions contemplated by this Agreement and the
Related Agreements, or (ii) any breach of or other variance (or
circumstance or occurrence that could reasonably be expected to result in
breach or variance or failure of a closing condition) from the representations
and warranties of Buyer contained in
Article IV
,
or any breach of or noncompliance (or circumstance or occurrence that could
reasonably be expected to result in a breach or noncompliance of failure of a
closing condition) with any covenant hereunder by Buyer.
5.7
Exclusivity
Seller shall not solicit, entertain or encourage
(including by way of furnishing to any third party information regarding the
Mac Nut Business or the Leased Assets or Purchased Assets or Assumed
Liabilities for such purpose) the submission of, or any proposal or offer from
any Person other than Buyer relating to any acquisition of Sellers membership
interests, or its assets or business operations related to the Mac Nut
Business, whether through direct purchase, merger, consolidation or other
business combination, other than the sale of inventory in the Ordinary Course
of Business.
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Notwithstanding the
foregoing paragraph, but without limiting the generality thereof, Seller may
engage in discussions with third parties for the purpose of
consummating (and may consummate) any
Third-Party Sales;
provided
,
however
, that the buyer, in connection with any such Third-Party Sales, except as otherwise
set forth on
Schedule 5.7
attached hereto,
agrees to purchase the Seller Land and/or the Excluded Assets subject to the
terms of this Agreement.
5.8
Employee
Matters
(a)
Attached as
Schedule 5.8
,
is a list of employees that Buyer wishes to hire (collectively the
Transferred Employees
). Subject to
applicable Law and the receipt of any employee consents requested by Seller,
Buyer will have full access to the Books and Records (including performance appraisals
and disciplinary actions) of Seller for the purpose of preparing for and
conducting employment interviews with all Transferred Employees. Seller agrees
to terminate the employment of all the hired Transferred Employees effective
immediately before the Closing. Before the Closing, Seller and Buyer shall
jointly prepare and approve a notice to be sent to the Transferred Employees on
or before the Closing Date, advising such Transferred Employees of the sale of
the Mac Nut Business, their termination as Sellers Employees and Buyers offer
of employment. Buyer will hire the Transferred Employees who accept Buyers
offer of employment on mutually agreeable terms and conditions as between
Buyer, and such Employees and Seller will not have any obligation or
responsibilities in connection with Buyers post-Closing employment of the
Transferred Employees;
provided, however
,
Seller must retain and comply with obligations and responsibilities as may be
imposed on Seller under the Hawaii Dislocated Workers Act or the federal Worker
Adjustment Retraining Notification Act. In the event any Transferred Employee
fails to accept Buyers offer of employment, such Employee must remain an
Employee of Seller, subject to Sellers usual and customary practices, policies
and procedures regarding employment, and Seller must be solely responsible for
any and all obligations or liability with respect to the employment, or
termination of employment, of any such Employee. Buyers expressed intention to
extend offers of employment as set forth in this
Section 5.8
does not constitute any commitment (express or implied) of any obligation on
the part of Buyer to a post-Closing employment relationship of any fixed term
or duration or upon an terms or conditions other than those that Buyer may
establish under individual offers of employment. Nothing in this Agreement
restricts any right of Buyer to terminate any Transferred Employee or to amend
or terminate Employee benefits after the Closing Date to the extent permitted
under applicable Law.
(b)
Buyer will set its own initial terms and conditions of
employment for the Transferred Employees and others it may hire, including work
rules, benefits and salary and wage structure, all as permitted by Law. Seller
is solely liable for any severance payment required to be made to its Employees
due to the transaction contemplated by this Agreement. Seller has advised Buyer
that there are no collective bargaining agreements in force.
(c)
Buyer must grant or cause to be
granted full credit to the Transferred Employees that accept employment with
Buyer for carry-over to employment with Buyer of unused vacation and other paid
time-off balances under the Employee Benefit Plan and Employee policies
of Seller before the Closing Date.
5.9
Certain
Filings with the SEC
(a)
As promptly as practicable after the execution of this
Agreement, Buyer shall seek from the SEC preliminary approval (
SEC Preliminary Approval
) to file
the Proxy Statement using the abbreviated financial information as set forth in
Buyers Request for Substitution of Abbreviated Financial Information to the
SEC. Buyer will use all reasonable best efforts to obtain the SEC Preliminary
Approval within fourteen (14) Business Days after the date of this Agreement.
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(b)
Either party in its sole discretion may determine
whether it is satisfied with the approvals and/or conditions granted or
required by the SEC in the SEC Preliminary Approval. At such time as such party
makes such determination, it may give written notice to the other party that it
is satisfied with the SEC Preliminary Approval and waives its right to
terminate the Agreement as provided for in
Section 9.1(f)
.
(c)
Either party may terminate this Agreement as provided
for in
Section 9.1(f)
at any time
after the expiration of fourteen (14) Business Days from the effective date of
this Agreement, and no later than five (5) Business Days after the date on
which the other party has given such terminating party the written notice
provided for in
Section 5.9(b)
.
(d)
As promptly as practicable after the giving of the
written notice provided for in
Section 5.9 (b)
,
Buyer shall prepare and file with the SEC a proposed Proxy Statement. Each of
Buyer and Seller shall prepare and file with the SEC any other filings as and
when required or requested by the SEC. Each of Buyer and Seller will use all
reasonable best efforts (i) to respond to any comments made by the SEC
with respect to the Proxy Statement and (ii) to have the Proxy Statement
cleared by the SEC. Seller shall cooperate with the Buyer and the SEC and
furnish reasonable information requested by the Buyer and the SEC;
provided, however
, that Seller shall not be required to
provide to the SEC (or permit Buyer to provide to the SEC) any additional
information that may be requested by the SEC in order to prepare audited
financial statements of Seller or to include other financial data of Seller in
Buyers Request for Substitution of Abbreviated Financial Information to the
SEC or in the Proxy Statement even if such additional information, audited
financial statements or other financial data is required by the SEC to grant
the SEC Preliminary Approval and/or to clear the Proxy Statement. As promptly
as practicable after clearing all SEC comments to the Proxy Statement, Buyer
shall mail the Proxy Statement to its holders of partnership interests. The
Proxy Statement shall include the recommendation of the Board of Directors of
Seller that adoption of this Agreement and the transactions contemplated hereby
by Buyers Unitholders are advisable and in the best interests of Buyer. No
amendment or supplement to the Proxy Statement will be made by Buyer without
the approval of Seller (which approval shall not be unreasonably withheld,
conditioned, or delayed)
.
(e)
The information supplied by
Seller for inclusion in the Proxy Statement shall not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements contained therein not
misleading. The information supplied by Buyer for inclusion in the Proxy
Statement shall not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements contained therein not misleading. All documents that Buyer is
responsible for filing with the SEC in connection with the transactions
contemplated herein will comply as to form and substance in all material
respects with the applicable requirements of the Securities Act and the rules and
regulations thereunder, the Exchange Act and the rules and regulations
thereunder, and other applicable Law.
ARTICLE VI.
POST-CLOSING COVENANTS
6.1
Post-Closing
Cooperation
If at any time after the
Closing any further action is reasonably necessary or desirable to carry out
the purposes of this Agreement and the Related Agreements, each Party must take
such further action (including the execution and delivery of such further
instruments and documents) as any other Party reasonably may request, all at
the sole cost and expense of the requesting Party, except in
connection with the Registration
Rights Agreement as to requests made by Seller, without right of reimbursement
from any other Party (unless the requesting Party is entitled to
indemnification therefor under
Article VIII
).
The covenants contained in this
Article VI
shall survive the Closing.
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6.2
Post-Closing
Confidentiality Obligation of Seller
Seller must treat all
information that was in its possession before the Closing Date with respect to
the Mac Nut Business (whether or not reduced to writing and whether or not
patentable or protected by copyright) as confidential for a period of five
(5) years from the Closing Date;
provided that
the foregoing information does not include information that (i) was or
becomes generally available to the public other than as a result of an
unauthorized disclosure by Seller, (ii) was or becomes available to Seller
on a non-confidential basis without breach of this Agreement,
provided that
such source is not known to Seller, after
reasonably inquiry, to be bound by a confidentiality agreement or otherwise
prohibited from transmitting the information to Seller by a contractual, legal
or fiduciary obligation known to Seller, after reasonably inquiry,
(iii) which is required to be and actually is disclosed, under applicable
Law,
provided that
Seller will use reasonable
efforts under the circumstances to notify Buyer of such requirement and
cooperate with Buyer so as to provide Buyer the opportunity to obtain such
protective orders or other relief, at Buyers expense, as the compelling court
or other entity may grant, or (iv) such disclosures as are necessary in
order for Seller to enforce the terms of this Agreement.
6.3
Post-Closing
Litigation Support
In the event and for so
long as any Party actively is contesting or defending against any Proceeding in
connection with (i) any transaction contemplated under this Agreement or
any Related Agreement or (ii) any fact situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act or transaction on or before the Closing Date involving a Party,
the other Party must provide reasonable cooperation to the contesting or
defending Party and its counsel in the contest or defense, make its personnel
reasonably available, and provide such testimony and access to its books and
records as is reasonably necessary in connection with the contest or defense,
all at the sole cost and expense of the contesting or defending Party (unless
the contesting or defending Party is entitled to indemnification therefore
under
Article VIII
).
6.4
Post-Closing
Adjustments
Both Parties will exercise
due diligence in cooperating and making all post-closing adjustments, such as
preparing a balance sheet as of the Closing Date, adjusting prorations, and
preparing a schedule of book values and tax basis values as of the Closing
Date, all of which shall be accomplished no later than thirty (30) days after
the Closing Date.
ARTICLE
VII.
CONDITIONS TO OBLIGATIONS TO CLOSE
7.1
Buyers Conditions
The
obligation of Buyer to consummate the transactions to be performed by it in
connection with the Closing is subject to satisfaction or waiver of the
following conditions, provided that Buyer may waive any condition specified in
this
Section 7.1
only if Buyer executes
a writing so stating at or before the Closing:
(a)
Covenants, Representations and
Warranties
The respective
representations and warranties of Seller set forth in
Article III
must be true and correct in all material respects (except for those
representations and warranties that contain an express materiality
qualification, which must be true and correct in all respects) on the date made
and at and as of the Closing Date, and Seller must have performed and complied
with all of its covenants hereunder in all material respects through the
Closing Date, and Buyer must have received a certificate in form and substance
satisfactory to Buyer dated as of the Closing Date on behalf of Seller by the
president of Seller or an equivalent officer to such effect.
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(b)
Consents
Seller must have
procured all Required Consents and must have provided evidence of such Required
Consents and notices in form and substance reasonably satisfactory to Buyer.
Buyer must have received all Governmental Authorizations as are necessary to
allow Buyer to operate the Mac Nut Business and the Leased Assets and Purchased
Assets from and after the Closing Date.
(c)
Documents to Be Delivered By Seller
The following
documents, in form and substance satisfactory to Buyer, must be delivered to
Buyer at Closing by Seller:
(1)
bill of sale, duly executed by
Seller;
(2)
assignment and assumption
agreements, duly executed by Seller, in a form mutually agreeable to both
parties;
(3)
assignment of Sellers
Intellectual Property described in
Schedule 2.1(j)
,
in due form for recordation with the appropriate Governmental Authority and the
License Agreement, each duly executed by Seller;
(4)
vehicle titles and assignments
sufficient to transfer title to the Owned and Leased Vehicles to Buyer;
(5)
orchard lease agreement in the
form of
Exhibit A-1
hereto (the
Orchard Lease Agreement
), duly
executed by Seller;
(6)
memorandum of the Orchard Lease
Agreement in the form of
Exhibit A-2
hereto (the
Memorandum of Lease
), duly
executed by Seller;
(7)
processing plant lease agreement
in the form of
Exhibit B-1
hereto (the
Processing Plant Lease Agreement
),
duly executed by Seller;
(8)
memorandum of the Processing
Plant Lease Agreement in the form of
Exhibit B-2
hereto (the
Memorandum of Plant Lease
),
duly executed by Seller;
(9)
the Registration Rights Agreement
duly executed by Seller;
(10)
reserved;
(11)
originals (to the extent available)
or copies of the Acquired Contracts and Seller Permits;
(12)
if applicable, executed non-foreign
certificates in accordance with Section 1445 of the Code and the
regulations issued thereunder;
(13)
State of Hawaii Department of
Taxation Form G-8A, Report of Bulk Sale or Transfer, duly executed by
Seller, together with the attached certificate of the Director of Taxation of
the State of Hawaii, bearing an issuance date no earlier than ten
(10) days before Closing;
(14)
Tax Clearance Certificate
(Form A-6) issued by the Hawaii State Department of Taxation no earlier
than fifteen (15) days before Closing;
(15)
Hawaii State Tax Form N-289,
duly executed by Seller;
(16)
Conveyance Tax Certificates relating
to the Orchard Lease Agreement and Processing Plant Lease Agreement, duly
executed by Seller;
(17)
the Required Consents (as listed in
Exhibit F
);
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(18)
payoff and release letters relating
to liens on the Purchased Assets;
(19)
the Books and Records;
(20)
certificate of Secretary of Seller
duly executed by Seller;
(21)
originals of lien releases,
including Uniform Commercial Code Termination Statements, executed by Rabobank
in
connection with any
Security Interests on the Purchased Assets in favor of Rabobank;
(22) stock
powers and assignment of membership interests, as applicable, relating to
NewCo1 and NewCo2, duly-executed by Seller; and
(23) such
other certificates, instruments of sale, transfer, conveyance, and assignment
or other documents reasonably requested by Buyer and as otherwise necessary or
appropriate to transfer the Purchased Assets and Assumed Liabilities, or as
Buyer may reasonably request to consummate the transactions contemplated by
this Agreement and the Related Agreements and to vest in Buyer full and
complete title to the Purchased Assets, free and clear of all encumbrances.
(d)
Financial Condition
Each of the
following must be true and complete as of the Closing Date:
(1)
All respective Security Interests
securing debts of Seller relating to the Purchased Assets shall be paid in full
before, or at, the Closing; and
(2)
No unsatisfied liens for the
failure to pay Taxes (except for liens for any current real and personal
property taxes and all non-delinquent installments of assessments or bonds) of
any nature whatsoever exist concerning the Mac Nut Business.
(e)
No Material Adverse Change
No Material Adverse
Effect shall have occurred at any time since December 31, 2005.
(f)
Title to Seller Land
Title Guaranty of
Hawaii, Incorporated or such other title company as is acceptable to Buyer (
Title Company
) must have issued to
Buyer and Buyers lenders an irrevocable commitment to issue to Buyer an ALTA leasehold
title insurance policy, in the amount of $5,000,000, insuring that immediately
upon Closing Buyer will be the owner of the leasehold interest in the Seller
Land, subject only to matters reasonably acceptable to Buyer. Buyer, at Buyers
discretion, may secure issuance of two different policies, one for the Orchard
Lease and one for the Processing Plant Lease.
(g)
Employment Relationships
Buyer must have
received from those persons enumerated in
Schedule 7.1(g)
assurances
satisfactory to Buyer with respect to each of the foregoing persons intentions
to enter the employ of Buyer immediately after the Closing, which assurances
may include executed offer letters or employments agreements.
(h)
Legal Proceedings
There must be no legal requirement in effect, and no
judgment or order must have been entered and not vacated by any Governmental
Authority of competent jurisdiction in any Proceeding or arising therefrom,
which unduly delays, enjoins, restrains, makes illegal, or prohibits
consummation of the transactions contemplated by this Agreement or by the
Related Agreements, and there must be no Proceeding pending or threatened
seeking, or which if successful would have the effect of, any of the foregoing.
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(i)
Partnership Approval
Buyer must have received approval
of a Majority Interest of the Partnership to close this transaction.
7.2
Sellers
Conditions
The obligation of
Seller to consummate the transactions to be performed by it in connection with
the Closing is subject to satisfaction or waiver of the following conditions,
provided that Seller may waive any condition specified in this
Section 7.2
if it executes a writing so stating at or
before the Closing Date:
(a)
Covenants, Representations and Warranties
The respective
representations and warranties of Buyer set forth in
Article IV
must be true and correct in all material respects (except for those
representations and warranties that contain an express materiality
qualification, which must be true and correct in all respects) on the date made
and at and as of the Closing Date, and Buyer must have performed and complied
with all of its covenants hereunder in all material respects through the
Closing, and Seller must have received a certificate dated the Closing Date on
behalf of Buyer by the president of Buyer or equivalent officer to such effect.
(b)
Documents to Be Delivered by Buyer
The following
documents, in form and substance satisfactory to Seller, must be delivered to
Seller at Closing by Buyer:
(1)
unit certificate representing the
Units;
(2)
assignment and assumption
agreement in a form mutually agreeable to both parties;
(3)
the Orchard Lease Agreement, duly
executed by Buyer;
(4)
the Memorandum of Lease, duly
executed by Buyer;
(5)
the Processing Plant Lease
Agreement, duly executed by Buyer;
(6)
the Memorandum of Plant Lease,
duly executed Buyer;
(7)
the Registration Rights Agreement
duly executed by Buyer;
(8)
reserved;
(9) the
License Agreement duly-executed by Buyer;
(10) certificate
of Secretary of Buyer duly executed by Buyer;
(11) reserved;
(12) County
of Hawaii Affidavit for Continuation of Agricultural Dedication (RP Form 19-60(g))
duly-executed by Buyer and notarized; and
(13) such
other certificates, instruments of sale, transfer, conveyance, and assignment
or other documents reasonably requested by Seller and as otherwise necessary or
appropriate to the transfer of the Purchased Assets and Assumed Liabilities, or
as Seller may reasonably request to consummate the transactions contemplated by
this Agreement and the Related Agreements.
(c)
Legal Proceedings
There must be no
legal requirement in effect, and no judgment or order must have been entered
and not vacated by any Governmental Authority of competent jurisdiction in any
Proceeding or arising therefrom, which unduly delays, enjoins, restrains, makes
illegal, or prohibits consummation of the
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transactions
contemplated hereby or by the Related Agreements, and there must be no
Proceeding pending or threatened seeking, or which if successful would have the
effect of, any of the foregoing.
(d)
Approvals by All Members of Seller
Seller shall have received
the approvals of all members of Mac Farms and Kapua.
ARTICLE VIII.
SURVIVAL AND INDEMNIFICATION
8.1
Survival
Regardless of any
investigation made by the Parties in connection with this Agreement or by the
Related Agreements, any notice to Buyer under
Section 5.6
,
or any waiver of any closing condition set forth in
Article VII
:
(a)
all representations and warranties set forth in this
Agreement or in the Related Agreements (including any certificate delivered at
Closing or otherwise in connection with this Agreement and the Related
Agreements) shall survive the Closing Date and the consummation of the
transactions contemplated hereby for a period of 12 months and will not be
affected in any way by any examination made for or on behalf of either Party,
the knowledge of any of its respective officers, directors, members, employees
or agents, or the acceptance of any certificate or other closing document;
provided, however
, that the Parties respective
representations and warranties set forth in
Section 3.1
(Organization and Qualification),
Section 3.3
(Authorization of Transaction),
Section 3.11
(Tax Matters),
Section 3.17
(Title to
Assets),
Section 3.24
(Employee Benefit
Plans),
Section 4.1
(Organization and
Qualification) and
Section 4.3
(Authorization of Transaction) will survive the Closing Date for a period
ending thirty (30) days after the expiration of the applicable statute of
limitations for all Claims that could be asserted by any third party, including
Governmental Authorities, with respect to matters addressed in such Sections
(all representations and warranties by Buyer and Seller that survive for longer
than 12 months are referred to herein as the
Fundamental
Representations
);
(b)
all obligations of the Parties under the covenants and
agreements contained in this Agreement shall survive the Closing, until all
such obligations have been fully performed in accordance with their terms; and
(c)
any written claim for indemnification provided under
Section 8.3
based upon a breach of a representation or
warranty asserted before the applicable survival period set forth in subsection
(a) above, shall survive until final resolution of such Claim.
All certificates delivered by Seller in connection
with this Agreement, any Related Agreement or the Closing are deemed to be
representations and warranties of Seller for this
Article VIII
,
subject to the same survival period as is set forth in
Section 8.1
;
provided
,
however
,
that to the extent such certificates relate to Fundamental Representations, the
longer survival period applicable thereto as provided in
Section 8.1
applies on a comparable Basis to that certificate. For this
Article VIII
, no such certificate will be deemed to
modify any representation or warranty made under this Agreement or the Related
Agreements without Buyers prior written consent. No notice to Buyer, after the
date hereof but before Closing, of any breach of any representation, warranty,
or covenant shall affect or impair any rights to be indemnified as provided
herein.
All certificates delivered
by Buyer in connection with this Agreement, any Related Agreement or the
Closing are deemed to be representations and warranties of Buyer for this
Article VIII
, subject to the same survival period as is
set forth in
Section 8.1
;
provided
,
however
, that
to the extent such certificates relate to Fundamental Representations, the
longer survival period applicable thereto as provided in
Section 8.1
applies on a comparable Basis to that certificate. For this
Article VIII
, no such certificate shall
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be
deemed to modify any representation or warranty made under this Agreement or
the Related Agreements without Sellers prior written consent. No notice to
Seller, after the date hereof but before Closing, of any breach of any
representation, warranty, or covenant shall affect or impair any rights to be
indemnified as provided herein.
8.2
Mutual
Indemnification
(a)
The Seller shall indemnify, hold
harmless, and defend Buyer and each of Buyers partners, subsidiaries,
affiliates, officers, employees, and agents and their respective successors and
assigns (collectively, the
Buyer Indemnitees
),
from and against any and all Losses which any Buyer Indemnitee may suffer,
sustain or become subject to, as a result of or relating to (including by
virtue of any third partys allegation of):
(1)
the
breach (or third party allegation that, if true, would constitute a breach) by
Seller of any representation or warranty made by Seller in this Agreement or
any Related Agreement or any certificate delivered by Seller in connection with
this Agreement or any Related Agreement or the Closing;
(2)
the
breach (or third party allegation that, if true, would constitute a breach) by
Seller of any covenant or agreement made by Seller in this Agreement or any
Related Agreement or any certificate delivered by Seller in connection with
this Agreement or any Related Agreement or the Closing;
(3)
any
obligation or liability of any kind associated in any way with or attributable to
Seller that is not an Assumed Liability, including any and all obligations or
Liabilities related to or arising from the operation of the Mac Nut Business or
the ownership of the Purchased Assets and the Leases Assets before the Closing
(including Liabilities or obligations relating to environmental and worker
health and safety compliance matters occurring before the Closing Date);
(4)
any
obligation or Liability of any kind arising from or related to noncompliance
with applicable fraudulent transfer legal requirements in connection with the
transactions contemplated by this Agreement and the Related Agreements, or the
Closing; and
(5)
any
obligation or Liability of any kind arising under the Worker Adjustment and
Retraining Notification Act (WARN), the Hawaii Dislocated Workers Act (Haw. Rev. Stat. Chapter
394B) or any similar statue, rule or regulation as a result of Sellers
termination of its Employees;
provided, however,
that Seller
shall not be obligated to indemnify, hold harmless, and defend Buyer or any
Buyer Indemnitees, unless the aggregate of all Losses of all Buyer Indemnitees
subject to indemnification hereunder exceeds One Hundred Thousand Dollars
($100,000), in which case Buyer Indemnitees shall be entitled to recover all
Losses in excess of such amount, subject to the terms of the last paragraph of
Section 8.3
hereof. The foregoing limitation does not
apply to any Seller indemnification obligation arising out of, relating to or
resulting from fraud or intentional misrepresentation by Buyer.
(b)
Buyer shall indemnify,
hold harmless, and defend Seller and
each of Sellers members, subsidiaries, affiliates, officers, directors,
employees, and agents and their respective successors and assigns
(collectively, the
Seller Indemnitees
), from
and against any and all Losses which any Seller Indemnitee may suffer, sustain
or become subject to, as a result of or relating to (including by virtue of any
third partys allegation of):
(1)
the breach (or third party
allegation that, if true, would constitute a breach) by Buyer of any
representation or warranty made by Buyer in this Agreement or any Related
Agreement or any certificate delivered by Buyer in connection with this
Agreement or any Related Agreement or the Closing;
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(2)
the breach (or third party allegation
that, if true, would constitute a breach) by Buyer of any covenant or agreement
made by Buyer in this Agreement or any Related Agreement or any certificate
delivered by Buyer in connection with this Agreement or any Related Agreement
or the Closing;
(3)
any obligation or liability of
any kind associated in any way with or attributable to Buyer that is an Assumed
Liability, including any and all obligations or Liabilities related to or
arising from the operation of the Mac Nut Business or the ownership of the
Purchased Assets and the Leased Assets from and after the Closing (including
Liabilities or obligations relating to environmental and worker health and
safety compliance matters occurring on or after the Closing Date);
provided,
however,
that Buyer is not be obligated to indemnify Seller
or any Seller Indemnitees unless the aggregate of all Losses of all Seller
Indemnitees under such clauses exceed One Hundred Thousand Dollars ($100,000),
in which case Seller Indemnitees are entitled to recover all Losses in excess
of such amount, subject to the terms of the last paragraph of
Section 8.3
hereof. The foregoing limitation does not
apply to any Buyer indemnification obligation arising out of, relating to or
resulting from fraud or intentional misrepresentation by Seller.
(c)
Seller shall be liable to a Buyer Indemnitee
concerning Claims referred to in
Section 8.2(a)
only
if such Buyer Indemnitee gives written notice thereof under
Sections 8.3(a) and 10.2
to Seller before the
expiration of the survival period, as set forth in
Section 8.1
,
applicable to such Claim.
(d)
The Buyer shall only liable to a
Seller Indemnitee concerning Claims referred to in
Section 8.2(b)
only
if such Seller Indemnitee gives written notice thereof under
Sections 8.3(a) and 10.2
to Buyer before the
expiration of the survival period, as set forth in
Section 8.1
,
applicable to such Claim.
8.3
Procedure
for Indemnification
(a)
If any Seller Indemnitee or Buyer Indemnitee seeks
indemnification under
Section 8.2
,
such party (the
Indemnified Party
) must give
written notice to Buyer or Seller, as applicable (the
Indemnifying
Party
), of the facts and circumstances giving rise to the Claim
(a
Claim Notice
)
, as promptly as
practicable, but in any event (1) before the expiration of the survival
period for such Claim as provided in
Section 8.1
and (2) if such Claim relates to the assertion against an Indemnified
Party of any Claim or dispute by a third party (a
Third
Party Claim
), within 30 days after receipt by the
Indemnified Party of written notice of a legal process relating to such Third
Party Claim;
provided, however
, that, with
respect to the time limits set forth in the foregoing clause (2), no delay
on the part of the Indemnified Party in notifying the Indemnifying Party shall relieve the Indemnifying Party of
any obligation under this
Article VIII
except to the extent that the Indemnifying
Party is materially and adversely affected thereby. Any such Claim
Notice must describe the nature of the Claim in reasonable detail to the extent
known to the Indemnified Party, the amount thereof if then ascertainable, and
the provision or provisions of this Agreement or any Related Agreements on
which the Claim is based.
(b)
Unless the Claim described in the Claim Notice is
contested by the
Indemnifying
Party by written notice to the Indemnified Party, given within
20 days of the receipt of the Claim Notice, the Indemnified Party is
conclusively deemed to be entitled to indemnity for such Claim under this
Article VIII
. If, within that 20-day period, the Indemnifying Party
contests the Claim in writing to the Indemnified Party, then the Indemnified
Party and Indemnifying Party, acting in good faith, must attempt to reach
agreement with respect to such Claim. If that agreement cannot be reached, then
that Claim must be resolved by a court of competent jurisdiction unless earlier
settled by the Parties. If the Parties reach agreement on such Claim, a
memorandum setting forth such agreement must be prepared and signed by the
Parties, and the amount of such settlement must be paid as provided therein.
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(c)
(i) Subject to
Section 8.3(d)
,
an
Indemnifying
Party has the right, upon written notice given to the Indemnified Party
within 15 days after receipt of a Claim Notice relating to a Third Party
Claim, to assume the defense or handling of such Third Party Claim, at the Indemnifying Partys sole
expense, in which case the provisions of
Section 8.3(c)(ii)
govern.
(ii) The
Indemnifying Party
must select counsel to conduct the defense or handling of such Third Party
Claim reasonably satisfactory to the Indemnified Party. The Indemnifying Party
must defend or handle such Third Party Claim in consultation with the
Indemnified Party and in such manner as is reasonable under the circumstances
and must keep the Indemnified Party timely apprised of the status of such Third
Party Claim. The Indemnifying
Party must not, without the prior written consent of the Indemnified
Party, agree to a settlement of any Third Party Claim, unless (A) the
settlement (I) is for monetary damages only, (II) is contained in a
written agreement, and (III) provides an unconditional release and
discharge of the Indemnified Party and the Indemnified Party has no reasonable,
good faith objection to the form or substance of such discharge and release,
and (B) the Indemnified Party must not have reasonably objected to any
such settlement on the ground that the circumstances surrounding the settlement
could adversely impact the business, operations, assets, liabilities (absolute,
accrued, contingent or otherwise), condition (financial or otherwise) or
prospects of the Indemnified Party (which, with respect to Buyer, shall include
the prospects of the Mac Nut Business or the Leased Assets or Purchased Assets)
or could establish or contribute to a precedential custom or practice which
could have a material adverse effect on the continuing business interests of
the Indemnified Party (which, with respect to Buyer, shall include the
prospects of the Mac Nut Business or the Purchased Assets);
provided, however
, that if the Indemnified Party objects under the
foregoing clause (B) to a proposed settlement that is bona fide and
contained in writing and that would, but for such objection, have been final,
valid and binding on the party or parties asserting such Third Party Claim,
then the maximum liability of the Indemnifying
Party for indemnification in respect of such Third Party Claim
(notwithstanding the amount of any later settlement or resolution thereof) is
limited to the dollar amount of such proposed settlement. Notwithstanding any
other provision of this Agreement, under no circumstances does the Indemnifying
Party have any authority to settle any Third Party Claim if such settlement
would require any payment by or other obligation of the Indemnified Party. If
the Indemnifying Party defends or handles such Third Party Claim, the
Indemnified Party must cooperate with the Indemnifying Party. The Indemnified Party is
entitled to participate in the defense or handling of such Third Party Claim
with its own counsel and at its own expense. The Indemnified Party must not,
without the prior written consent of the Indemnifying Party (which consent must not be
unreasonably withheld or delayed), agree to a settlement of any Third Party
Claim that is being defended and handled by the Indemnifying Party under this
Section 8.3(c)(ii)
.
(d)
(i) If (A) the
Indemnifying Party does
not give written notice to the Indemnified Party, within 15 days after
receipt of the notice from the Indemnified Party of a Third Party Claim,
stating that (1) the Indemnifying
Party has elected to assume the defense or handling of such Third Party
Claim and (2) the Indemnifying
Party acknowledges that any Losses or other obligations incurred by the
Indemnified Party that may arise from such Third Party Claim constitute Losses
for which the Indemnifying
Party is obligated to indemnify the Indemnified Party hereunder (subject
to the limitations in
Section 8.2
);
(B) at any time the Indemnifying
Party fails to carry out such defense or handling diligently and in such
manner as is reasonable under the circumstances; (C) the Third Party Claim
involves other than only money damages; (D) the circumstances surrounding
the matter could, in the good faith judgment of the Indemnified Party, result
in a material adverse impact on the business, operations, assets, liabilities
(absolute, accrued, contingent or otherwise), condition (financial or
otherwise) or prospects of any of the Indemnified Party (which, with respect to
Buyer, shall include the prospects of the Mac Nut Business or the Leased Assets
or Purchased Assets); (E) the matter involves or affects any Taxes or Tax
Return of the Indemnified Party or an affiliated group of which the Indemnified
Party is a member; or (F) the
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Indemnified Party has reasonably
determined, upon advice of counsel, that having common counsel with the
Indemnifying Party
would present such counsel with a conflict of interest or that, upon advice of
counsel, there may be legal defenses available to such Indemnified Party which are
different from or in addition to those available to the Indemnifying Party, then the provisions of
Section 8.3(d)(ii)
govern.
(ii) The
Indemnified Party may, at the
Indemnifying Partys expense, select counsel
reasonably satisfactory to the Indemnifying
Party to defend or handle such Third Party Claim in a manner that is
reasonable under the circumstances;
provided, however
,
that the Indemnified Party must keep the Indemnifying Party timely apprised of the status of
such Third Party Claim. The Indemnified Party must not settle such Third Party
Claim without the prior written consent of the Indemnifying Party (which consent must not be
unreasonably withheld or delayed). If the Indemnified Party defends or handles
such Third Party Claim, the Indemnifying
Party must cooperate with the Indemnified Party, at the Indemnifying
Partys expense. The Indemnified Party is entitled to participate in the
defense or handling of such Third Party Claim with its own counsel and at the Indemnifying Partys expense.
In addition, in the event that the Indemnifying
Party is not permitted to assume the defense of a Third Party Claim
solely by virtue of clause (C) or (D) of paragraph (d)(i) above,
then the Indemnifying
Party is permitted to pursue, at its own expense, settlement discussions
directly with any other parties involved in such Third Party Claim.
Notwithstanding the preceding sentence, the Indemnifying Party must not, without the prior
written consent of the Indemnified Party, agree to a settlement of any Third
Party Claim, unless (A) the settlement is for monetary damages only, and
with respect to Claims by any Indemnified Party provides an unconditional
release and discharge of the Indemnified Party and the Indemnified Party has no
reasonable good faith objection to the form or substance of such discharge and
release and (B) the Indemnified Party must not have reasonably objected to
any such settlement on the ground that the circumstances surrounding the
settlement could adversely impact the business, operations, assets, liabilities
(absolute, accrued, contingent or otherwise), condition (financial or
otherwise) or prospects of the Indemnified Party (which, with respect to Buyer,
shall include the prospects of the Mac Nut Business or the Leased Assets or
Purchased Assets) or could establish or contribute to a precedential custom or
practice which could have a Material Adverse Effect on the continuing business
interests of the Indemnified Party (which, with respect to Buyer, shall include
the interests of the Mac Nut Business or the Purchased Assets);
provided, however
, that if the Indemnified Party objects
under the foregoing clause (B) to a proposed settlement that is bona fide
and contained in writing and that would, but for such objection, have been
final, valid and binding on the party or parties asserting such Third Party
Claim, then the maximum liability of the Indemnifying Party for indemnification in respect of
such Third Party Claim (notwithstanding the amount of any later settlement or
resolution thereof) is limited to the dollar amount of such proposed
settlement. Notwithstanding any other provision of this Agreement, if such
Losses are subject to the terms of the last paragraph of
Section 8.2(a) or
(b)
, as applicable, under no circumstances does the Indemnifying
Party have any authority to settle any Third Party Claim without the prior
written consent of the Indemnified Party if such settlement would require any
payment by or other obligation of the Indemnified Party or any other party.
(iii) The
aggregate maximum of all Losses of Buyer Indemnitees and Seller Indemnitees,
respectively, shall not exceed Two Million Dollars ($2,000,000), unless such
Losses arise out of, relate to or result from (i) fraud or intentional
misrepresentation by Seller or Buyer, respectively, (ii) Assumed
Liabilities, (iii) Excluded Assets, (iv) the calculation, payment or
issuance of any consideration payable to Seller under this Agreement or any
Related Agreement (including cash or the Units), or (v) the failure by
Seller to deliver to Buyer possession or ownership, as applicable, of any or all
of the Purchased Assets.
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ARTICLE IX.
TERMINATION
9.1
Termination
of Agreement
This Agreement may
or must, as applicable, terminate as follows:
(a)
Buyer and Seller may terminate this Agreement by
mutual written consent at any time before the Closing;
(b)
Buyer may terminate this Agreement by giving written
notice to Seller at any time before the Closing in the event Seller is in
breach of any representation, warranty, or covenant contained in this Agreement
or any Related Agreement in any material respect and such breach has not been
cured within fifteen (15) calendar days after receipt of written notice
thereof;
(c)
Seller may terminate this Agreement by giving written
notice to Buyer at any time before the Closing in the event Buyer is in breach
of any representation, warranty, or covenant contained in this Agreement in any
material respect and such breach has not been cured within fifteen
(15) days calendar days after receipt of written notice thereof;
(d)
by either Buyer or Seller if satisfaction of a closing
condition of the terminating Party is impossible;
provided,
however
, that a Party does not have the right to terminate this
Agreement under this
Section 9.1(d)
if
such Partys breach of any obligation under this Agreement or any Related
Agreement has been the primary cause of the failure of the Closing to occur on
or before the Closing Date; and
(e)
Buyer or Seller may terminate this Agreement if the
Closing does not occur by October 31, 2007;
provided,
however
, that a Party does not have the right to terminate this
Agreement under this
Section 9.1(e)
if
such Partys breach of any obligation under this Agreement has been the primary
cause of the failure of the Closing to occur on or before the aforementioned
date.
(f)
Either party may terminate this Agreement in its sole
discretion at any time after the date which is fourteen (14) Business Days
after the date of this Agreement, and which is no later than five (5) Business
Days after the date on which the other party has given the written notice
provided for in
Section 5.9(b)
that its
has waived its rights to terminate the Agreement, without any liability or
obligation hereunder or otherwise,
whatsoever.
(g)
Either party may terminate this
Agreement without any liability or
obligation hereunder or otherwise, in its sole discretion, at any
time, if (i) Seller elects
not to provide to the SEC (or permit Buyer to provide to the SEC) any
additional information that may be requested by the SEC in order to prepare
audited financial statements of Seller or to include other financial data of
Seller in Buyers Request for Substitution of Abbreviated Financial
Information to the SEC or in the Proxy Statement pursuant to the proviso
contained in the fourth sentence of
Section 5.9(d)
and
(ii) such additional information, audited financial statements or other
financial data is required by the SEC to grant the SEC Preliminary Approval
and/or to clear the Proxy Statement.
9.2
No Effect
on Indemnification Rights
No termination of this
Agreement or any Related Agreement alters, affects, modifies, or restricts any
Partys rights to rely on or seek indemnification for a breach of any of the
representations and warranties or conditions or covenants of any of the Parties
contained in this Agreement or any Related Agreement before such termination.
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ARTICLE X.
MISCELLANEOUS PROVISIONS
10.1
Press Releases and
Announcements
Buyer may be required by
law to disclose the existence and material terms of this Agreement by filing a Form 8-K
or other filing with the SEC. Seller acknowledges and agrees that Buyer may
file a copy of this Agreement in such Form 8-K or other filing with
the SEC. Thereafter, unless required by the SEC, neither Party shall issue any
other press release or public announcement or disclosure of the existence or
terms of this Agreement or the Related Agreements, amendments, or the
transactions contemplated hereby or thereby, without the prior written approval
of the other Party, which written approval must not be unreasonably withheld,
conditioned, or delayed.
10.2
Notices
All
notices, demands, and requests required or permitted to be given under the
provisions of this Agreement shall be in writing and shall be deemed given (i) when
personally delivered to the party to be given such notice or other
communication; (ii) on the business day that such notice or other
communication is sent by facsimile, email or similar electronic means, fully
prepaid, which facsimile or similar electronic communication shall promptly be
confirmed by written notice; (iii) on the third business day following the
date of deposit in the United States mail if such notice or other communication
is sent by certified or registered mail with return receipt requested and
postage thereon fully prepaid; or (iv) on the business day following the
day such notice or other communication is sent prepaid by reputable overnight
courier, to the following:
Buyer:
|
ML Macadamia Orchards, L.P.
26-238 Hawaii Belt Road,
Hilo, Hawaii 96720
|
|
Phone:
|
(808)-969-8052
|
|
Fax:
|
(808)-969-5152
|
|
Attention:
|
Dennis J. Simonis
|
w/copy to:
|
Carlsmith Ball LLP
1001 Bishop Street, Suite 2200
Honolulu, Hawaii 96813
|
|
Phone:
|
(808) 523-2501
|
|
Fax:
|
(808) 523-0842
|
|
Attention:
|
James H. Case, Esq.
|
Seller:
|
Mac Farms of Hawaii,
LLC/
Kapua Orchard Estates, LLC
c/o Sparks Corp.
775 Ridge Lake Boulevard, Suite 450
Memphis, Tennessee 38120
|
|
Phone:
|
(901) 766-4412
|
|
Fax:
|
(901) 328-2777
|
|
Attention:
|
Robert D. Sparks
|
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w/copy to:
|
Baker, Donelson,
Bearman, Caldwell & Berkowitz, PC
165 Madison Avenue, Suite 2000
Memphis, Tennessee 38103
|
|
Phone:
|
(901) 577-2306 or
(901) 577-2274
|
|
Fax:
|
(901) 577-0853 or
(901) 577-4203
|
|
Attention:
|
John E.
Kruger, Esq.
Mark A. B. Carlson, Esq.
|
Any Party may change its
address for this
Section 10.2
by giving
written notice to the other Party, under the terms hereof.
10.3
Specific
Performance
Each Party acknowledges
and agrees that the other Party would be damaged irreparably in the event any
of the provisions of this Agreement or any Related Agreement are not performed
in accordance with their specific terms or otherwise are breached. Accordingly,
each Party agrees that the other Party is entitled to an injunction or
injunctions to prevent breaches of the provisions of this Agreement and to
enforce specifically this Agreement and the terms and provisions hereof in any
action instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter, in addition to any other remedy
to which they may be entitled, at law or in equity.
10.4
Remedies Not
Exclusive
Except as otherwise provided
in
Article VIII
, any Partys use of
any remedy specified herein for the enforcement of this Agreement or any
Related Agreement is not exclusive and does not deprive such Party of, or limit
the application of, any other remedy provided by law, at equity or otherwise.
10.5
Exercise of
Remedies
The exercise of any right
or remedy by either Party under this Agreement or any Related Agreement does
not in any way constitute a cure or waiver of any default hereunder, invalidate
any act done under any notice of default, or prejudice either Party in the
exercise of any of their respective rights under this Agreement or any Related
Agreement.
10.6
Costs and Expenses
Except as otherwise
provided herein, each Party must bear its own costs and expenses (including legal
fees and disbursements) incurred in connection with this Agreement or any
Related Agreement and the transactions contemplated hereby.
10.7
Waiver
No waiver of any of the
provisions of this Agreement or any Related Agreement is to be deemed to
constitute a waiver of any other provision, whether or not similar, nor does
any waiver constitute a continuing waiver. No waiver is binding unless executed
in writing by the Party making the waiver.
10.8
Attorneys Fees
and Disbursements
Each Party must bear its
own attorneys fees and disbursements arising out of or in any way related to
this Agreement or any Related Agreement incurred on or before the effective
date of this Agreement, except as otherwise provided herein. Further, if,
however, after the effective date of this Agreement, a
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Party or
Parties bring(s) an action to enforce or interpret it, whether in tort,
contract or otherwise, the prevailing Party or Parties in that action is
entitled to recover from the unsuccessful Party or Parties reasonable attorneys
fees and disbursements incurred in the prosecution or defense of said
litigation as determined by a court of competent jurisdiction.
10.9
Further Assurances
Each Party must execute
and deliver any and all additional assurances, documents, and other papers, and
must do any and all acts and things reasonably necessary in connection with the
performance of its duties, obligations and responsibilities under this
Agreement or any Related Agreement and to carry out the intent of the Parties.
10.10
Confidentiality
Except as otherwise
provided in
Section 10.1
of this
Agreement or any Related Agreement, the conditions, covenants, provisions and
terms of this Agreement must be kept in strict confidence by Parties and
neither Party is to disclose to a Person the circumstances, details and facts
of this Agreement or any Related Agreement unless required by any federal or
state Law,
including, but not
limited to, in connection with
any state or federal inquiry or investigation, or in the event of litigation
between the Parties, or with third parties, but only to the extent necessary to
comply with such Law or to conduct such litigation, and subject to all
reasonable, available restrictions upon further disclosure.
10.11
Entire Agreement
This Agreement, including
the Disclosure Schedules and the exhibits and annexes to this Agreement
constitute the entire agreement, contract and understanding of the Parties with
respect of the subject matter hereof and any and all prior negotiations,
agreements, contracts, covenants, promises, representations, understandings or
warranties, whether oral or written, express or implied, are hereby terminated
and canceled in their entirety and are of no further force or effect.
10.12
Modification
No amendment or
modification of this Agreement or any Related Agreement is valid unless in
writing and signed by the Parties.
10.13
Governing Law
All questions concerning
the construction, validity and interpretation of this Agreement will be
governed by and construed in accordance with the Laws of the State of Hawaii
without giving effect to any choice of law or conflict of law provision or rule that
would cause the application of the Laws of any jurisdiction other than the
State of Hawaii.
10.14
Construction
(a)
The Parties have negotiated this Agreement as Persons
of equal sophistication and equal bargaining power; the rule of
interpreting ambiguities against the drafter therefore is inapplicable. This
Agreement is to be fairly and equitably construed as the joint product of the
Parties.
(b)
In this Agreement, the masculine, feminine, or neuter
gender and the singular or plural number is deemed to include the other
whenever the context so requires, and
shall
,
must
and
agrees
are
mandatory, and
may
is permissive.
(c)
The captions appearing at the commencement of the
provisions of this Agreement are descriptive only and for convenience in
reference. If there is any conflict between any such caption and the
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provision at the head of
which it appears, then the provision, and not the caption, controls and governs
in the construction of this Agreement.
(d)
The Parties acknowledge, understand, and agree that
their respective agents and representatives executing this Agreement on behalf
of each of Parties are learned and conversant in the English language, and that
the English language controls the construction, enforcement, governance,
interpretation, and performance of this Agreement.
(e)
Unless otherwise indicated herein, with respect to any
reference made in this Agreement to a Section (or Article, Subsection,
Paragraph, Subparagraph, or Clause), Annex, Exhibit, or Schedule, such
reference is a section (or article, subsection, paragraph, subparagraph, or
clause) of, or an annex, exhibit, or schedule to, this Agreement.
(f)
Whenever the words
include,
includes
or
including
are
used in this Agreement, they are deemed, as the context indicates, to be
followed by the words but (is/are) not limited to. Whenever the conjunction
or
is used in this Agreement, it is deemed, as the context
indicates, to be inclusive (
i.e
., A
or B means A, B, or A and B) and not exclusive (
i.e
.,
A or B means A or B, but not A and B), thereby avoiding the use of and/or
to show the intended inclusiveness.
(g)
Where specific language is used to clarify or
illustrate by example a general statement contained herein, such specific
language is not deemed to modify, limit, or restrict the construction of the
general statement that is being clarified or illustrated.
(h)
All Schedules and Exhibits, if
any, described in this Agreement and attached hereto are by this reference
incorporated fully herein; the words
this Agreement
must be considered to include all such Schedules and Exhibits, if any.
10.15
Partial Invalidity
If any provision of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remaining provisions nevertheless continue in full force
without being impaired or invalidated in any way.
10.16
Binding Effect
This Agreement inures to,
and for the benefit of, and is binding upon, each Partys respective parent,
subsidiary, agents, assignees, directors, employees, joint venturers, members,
officers, partners, predecessors, representatives, servants, shareholders,
successors, and all others acting for, under, or in concert with it, past,
present, and future.
10.17
Assignment
Neither Buyer nor Seller
may assign any of its rights or obligations hereunder without the prior written
consent of the other Party. Notwithstanding the foregoing, Buyer may pledge its
rights and obligations under this Agreement to its lenders in
connection with financing
arrangements pertaining to this transaction, subject to Sellers prior written
approval, which approval shall not be unreasonably
withheld, delayed, denied, or conditioned. Further, notwithstanding the foregoing, Seller may assign its
rights and obligations under this Agreement with respect to the Leased Assets
to any third party to whom it sells all or part of the Seller Land;
provided
,
however
, that
the buyer of the Seller Land, in whole or in part, agrees to purchase such
Seller Land subject to the terms of this Agreement.
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10.18
Time of the Essence
Time is of the essence to
this Agreement with respect to the performance by each Party of its duties,
obligations and responsibilities under this Agreement, and also each and every
condition, covenant, provision and term of this Agreement.
10.19
Counterparts/Facsimiles
This Agreement may be
executed in counterparts, each of which is deemed an original, and such
counterparts constitute one and the same instrument, which may be sufficiently
evidenced by a counterpart. A facsimile, telecopy, PDF, or other reproduction
of this Agreement may be executed by one or more Parties, and an executed copy
of this Agreement may be delivered by one or more Parties by facsimile, PDF
e-mail, or similar instantaneous electronic transmission device under which the
signature of or on behalf of such Party can be seen, and such execution and
delivery is to be considered valid, binding and effective for all purposes. At
the request of any Party, the Parties agree to execute an original of this
Agreement as well as any facsimile, telecopy or other reproduction hereof.
10.20
Waiver of Right to Jury
Trial
EACH OF THE PARTIES HERETO
IRREVOCABLY WAIVES AS AGAINST THE OTHER PARTY HERETO ANY RIGHTS IT MAY HAVE
TO A JURY TRIAL IN THE UNITED STATES OF AMERICA IN RESPECT OF ANY CIVIL ACTION
ARISING UNDER THIS AGREEMENT. EACH PARTY MAY FILE AN ORIGINAL COUNTERPART OR
A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT
OF THE OTHER PARTY TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY.
10.21
Dispute Resolution
(a)
Pre-Closing Disputes.
If
there is any Dispute asserted by either Party before the Closing Date, then, to
the extent permitted by Law, the Parties agree that all actions or Proceedings
arising in connection with that Dispute must be tried and litigated only in the
state and federal courts located in the State of Hawaii. That choice of venue
is mandatory and not permissive in nature, thereby precluding the possibility
of jurisdiction or venue other than specified in this
Section 10.21(b)
.
To the extent permitted by law, (a) the Parties hereby waive any right
each may have to assert the doctrine of
forum non conveniens
or to object to venue for any Proceeding brought in accordance with this
Section 10.21(b)
; and (b) the Parties stipulate
that the state and federal courts located in the State of Hawaii will have
in personam
jurisdiction and venue over the Parties for the
litigation of any Dispute arising out of or related to this Agreement asserted
by either Party before the Closing Date. Service of process sufficient for
personal jurisdiction in any action against any Party hereto may be made by
registered or certified mail, to its address indicated herein. Each Party
agrees that any final judgment rendered against it in any action or proceeding
will be conclusive as to the subject of such final judgment, and it may be
enforced in other jurisdictions in any manner provided by law.
(b)
Post-Closing
Disputes.
If there is any Dispute (as defined in Section B
of
Exhibit E
) asserted by either
Party after the Closing Date, that Dispute must be resolved in accordance with
the ADR Provisions set forth in
Exhibit E
.
Each Party agrees that the ADR Provisions set forth in
Exhibit E
constitute the sole method of seeking redress against the other Party after the
Closing Date.
10.22
Effective Date
This Agreement becomes
effective upon the date first written above immediately after its execution by
all Parties.
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44
10.23
Reserved
10.24
Retention of, and Access
to, Books and Records and Return of Documents
After the Closing Date, Buyer shall retain, for a period
of five (5) years, those Books and Records of Seller delivered to Buyer. Buyer
shall also provide Seller and its representatives reasonable access thereto for
a period of five (5) years after Closing, during normal
business hours and on at least two (2) days
prior written notice, to enable Seller to prepare financial statements or tax
returns or deal with tax audits or other business matters relating to the pre-closing business of Seller, including, but not limited to, compliance with Sellers indemnity obligations hereunder.
In the event that the
transactions contemplated by this Agreement do not close, then, in any such
event, Buyer hereby agrees to promptly return to Seller all documents furnished
by Seller to Buyer, for review by Buyer,
including, but not limited to, the draft schedules 2.1(a) - 7.1(g) and
the reports referenced therein.
10.25
Limitation of Liability
NOTWITHSTANDING
ANYTHING TO THE CONTRARY HEREIN, EACH
PARTY HERETO HEREBY IRREVOCABLY WAIVES ANY CLAIM AGAINST THE OTHER PARTY FOR PUNITIVE,
SPECIAL, INCIDENTAL, EXEMPLARY, AND CONSEQUENTIAL DAMAGES.
The signature page directly
follows; the remainder of this page is intentional left blank.
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45
The
Parties are signing this Acquisition Agreement on the dates written below, but
effective as of the date indicated in the introductory paragraph.
|
BUYER:
|
|
ML
MACADAMIA ORCHARDS, L.P.,
a Delaware limited partnership
|
|
By:
|
|
Dated:
,
2007
|
Name: Dennis J.
Simonis
|
|
Title:
President
|
|
SELLER:
|
|
MAC
FARMS OF HAWAII, LLC,
a Delaware limited liability company
|
Dated:
,
2007
|
By:
|
|
|
Name: Robert D. Sparks
|
|
Title:
Chairman of the Board
|
|
KAPUA
ORCHARD ESTATES, LLC,
a Delaware limited liability company
|
|
By:
|
MFH Investors, LLC, its
manager
|
|
By:
|
|
|
Name: Jeff Gilbrech
|
|
Title:
Vice-President
|
|
|
|
|
|
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46
FIRST AMENDMENT TO
ACQUISITION AGREEMENT
This First Amendment to Acquisition Agreement (the
Amendment
)
is
executed as of July 19, 2007, by Mac Farms of Hawaii, LLC, a Delaware
limited liability company (
Mac Farms
)
and Kapua Orchard Estates,
LLC, a Delaware limited liability company (
Kapua
),
(both collectively sometimes
called
Seller
),
and ML Macadamia Orchards, L.P. (
MLP
or
Buyer
),
a
Delaware limited partnership, with reference to the following facts:
A.
Effective as of May 24, 2007, Mac Farms, Kapua and
Buyer executed an Acquisition Agreement (the
Agreement
)
providing for the acquisition
by Buyer of certain personal property assets and the subleasing, leasing or
otherwise acquiring rights of use from Seller for those real property assets
used by Seller in connection with its macadamia nut
operations, all as more particularly set forth in the Agreement. Unless
otherwise defined
herein, the
capitalized terms in this Amendment shall have the same meaning as set forth in
the
Agreement.
B.
Section 5.9(a) of the
Agreement required Buyer to seek SEC Preliminary
Approval to permit the filing of certain abbreviated financial
information in the Proxy
Statement,
which would be sent to Unitholders, and the Form 8-K, which would be
required to
be filed with the SEC by
Buyer upon consummation of the acquisition under the Agreement
(the
Form 8-K
).
Section 5.9(c) and Section 9.1(f) of
the Agreement contained rights to
terminate
the Agreement in the event the SEC Preliminary Approval was not timely
obtained.
C.
Although
Buyer timely sought the SEC Preliminary Approval, it obtained relief
from
the SEC only with respect to the financial information to be included in the
Proxy
Statement, but did not obtain any
relief from the SEC with respect to the financial information to be included in
the Form 8-K. In light of the failure to obtain the SEC Preliminary
Approval,
the Parties have determined not to terminate the Agreement and
to attempt to provide audited financial statements in the Proxy Statement and
the Form 8-K.
D.
In order to prepare the necessary financial statements and
to obtain an audit
thereon, the Parties have
agreed to extend the time for closing the transaction, to take such
other
actions as set forth in this Amendment and to amend the Agreement as set forth
in this Amendment.
NOW, THEREFORE, the Parties have agreed as follows:
1. Article 1
of the Agreement is amended to add the following new definitions:
Average Closing Price
means the average closing price
per unit of the units of MLP
on the New
York Stock Exchange for the ten (10) trading days immediately preceding
the date upon which approval of this transaction by a Majority Interest of the
Partnership is obtained.
Buyer Material Adverse
Effect
means any condition, event,
circumstance, change,
or effect, which,
since March 31, 2007, individually or in the aggregate, has had, or could
reasonably be expected to have a material adverse
effect on the business, assets, properties,
results of operation or
financial condition or prospects of Buyer. However, neither (i) a
decrease in the market price of the units of MLP
by itself, nor (ii) a decrease in the Spot Price,
as defined herein, by itself, or the effects
resulting from either of these events shall be deemed a
Buyer Material
Adverse Effect. Notwithstanding the foregoing, the cause of a decrease in the
market price of units of MLP could be a Buyer
Material Adverse Effect, if it otherwise meets the definition thereof. For
example, if a portion of Buyers nut trees are destroyed and the
market price of units of MLP dropped as a result
thereof, then the mere drop in the market price
would not be a Buyer Material Adverse Effect, but the destruction of the
trees (i.e., the cause
of the price reduction) could be a Buyer
Material Adverse Effect.
Floor Price
means
U.S. $4.72 per unit of MLP.
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47
Spot Price
shall mean the average of the spot price per pound
for bulk premium
(Hawaiian and Australian)
Style II Raw Macadamia Nuts (FOB West Coast) for a container
load and
the spot price per pound for bulk premium (Hawaiian and Australian) Style II
Raw Macadamia Nuts (FOB West Coast) for a pallet load.
Spot Price Adjustment
shall be the difference between
the $3.25 and the Spot Price
on the
Closing Date times the number of pounds of marketable bulk premium (Hawaiian
and Australian) Style II Raw or Roasted Macadamia Nuts in Sellers inventory on
the Closing Date.
Unit Price Adjustment
shall
mean the difference between the Floor Price and the Average Closing Price times
650,000.
2.
Section 2.6
of the Agreement is amended to read as follows:
2.6
Closing.
The closing of the transactions
contemplated by this Agreement (the
Closing
)
will
take place at the offices of Carlsmith Ball, ASB Tower, Suite 2200,
1001 Bishop Street,
Honolulu, Hawaii, 96813,
ten (10) Business Days, after Buyer receives the approval of a
Majority
Interest of the Partnership to close this transaction or at such other date or
place as
Buyer and Seller may mutually
determine (the
Closing
Date
).
The Closing Date may be
postponed by either Party provided that the Closing
Date shall not be later than December 31,
2007, without the
approval, in writing, of both Parties.
3.
Section 2.8(d) of the Agreement is amended to
change the date September 30, 2007 to the Closing Date and to change the
date October 31, 2007 to December 31, 2007.
4. Section 2.9
of the Agreement is added and shall read as follows:
2.9 Unit Price Adjustment
In the event that the Average Closing Price is less
than the Floor Price, Seller shall also
have
a right to terminate this Agreement by complying with the provisions of this
Section,
subject, however, to Buyers
further rights as set forth in this Section. In the event Seller
wishes
to terminate this Agreement under this Section, then Seller must give written
notice to
Buyer of its election to
terminate the Agreement on or before 3:00 p.m. Honolulu time on the
second
Business Day after Sellers receipt of written notice from Buyer of the
approval of a
Majority Interest of the
Partnership having been obtained at a Unitholders meeting. In the
event
Seller elects to terminate this Agreement, then the Buyer shall have a right to
elect to
avoid termination by agreeing to
pay to Seller the Unit Price Adjustment, which will be payable
in cash
in addition to but as a part of the Cash Payment on the Closing Date. Buyer
must give
written notice of its election to
avoid Sellers termination under this Section on, or before, three (3) Business
Days after receipt by Buyer of Sellers written notice of termination. If Buyer
provides such notification, then
Buyer shall be obligated to pay the Unit Price Adjustment. For
example,
if the Average Closing Price is $4.75 and the Floor Price is $4.80 then Buyer
would
pay an additional $32,500 in cash as
the Unit Price Adjustment ($.05 times 650,000) on the
Closing Date.
5. Section 2.10
of the Agreement is added and shall read as follows:
2.10
Spot
Price Adjustment
If on the day immediately preceding the day which
Buyer obtains approval of this transaction by a Majority Interest of the
Partnership at a Unitholders meeting, the Spot Price shall be less than U.S.
$3.25 per pound, then Seller shall also have a right to terminate this
Agreement by complying with the provisions of this Section, subject, however,
to the Buyers further rights as set forth in this Section. In the event Seller
wishes to terminate this Agreement
under
this Section, Seller must provide written notice to Buyer of its election to
terminate this
Agreement on or before
3:00 p.m. Honolulu-time on the second Business Day, after Sellers
receipt of written notification from Buyer of the
approval of a Majority Interest of the
A-
48
Partnership having been
obtained at a Unitholders meeting. Such notice shall also contain
backup information justifying the claimed Spot
Price. In the event Seller elects to terminate this Agreement under this
Section, then the Buyer shall have a right to elect to avoid termination by
agreeing to pay to Seller the Spot Price Adjustment, if any. In the event Buyer
elects to avoid
termination, then
Buyer must notify Seller on, or before, three (3) Business Days after
receipt
by Buyer of Sellers written notice of termination, that Buyer
elects to avoid termination and
agrees to
pay the Spot Price Adjustment, if any, and the termination shall not occur. An
election
by Buyer to avoid the alleged termination by Seller under this Section shall
not be
deemed an agreement by Buyer that
Seller has a right to terminate or that the Spot Price claimed by Seller is
accurate. The Spot Price and the Spot Price Adjustment shall be
determined as of the Closing Date as part of the
True-Up process under Section 2.3(a)(1) of this
Agreement and
shall be paid in cash to Seller in addition to, and as part of, the payments,
which may otherwise be required as part of the True-Up. For example, in the
event the Spot Price on
the Closing Date is
$3.00 and there is 20,000 pounds of marketable inventory of bulk premium
(Hawaiian and Australian) Style II Raw and Roasted
Macadamia Nuts on the Closing Date,
then
the Spot Price Adjustment would be $.25 per pound ($3.25 less $3.00) times
20,000
pounds or $5,000. No
adjustment or payment under this Section shall be made relating to or on
account
of any other item or category of inventory other than bulk premium (Hawaiian
and Australian) Style II Raw or Roasted Macadamia Nuts.
6. Section 5.9
of the Agreement is amended to read as follows:
5.9 SEC Compliance.
(a)
On or before the execution of this Amendment, Mac Farms
shall engage Grant Thornton LLP or another qualified independent accounting
firm reasonably approved by
Buyer
(
Sellers Accountants
)
to assist Mac Farms to prepare the SEC Financial
Statements
(as defined herein). The
term
SEC Financial Statements
shall refer to the consolidated
balance sheets of Mac Farms as at December 31, 2006, and December 31,
2005, and the consolidated statements of income and cash flows for Mac Farms
for the fiscal years ended
December 31,
2006, and December 31, 2005, all prepared in accordance with GAAP and the
rules and
regulations of the SEC, and with such notes, statements and schedules as may be
required thereby. For the avoidance of doubt,
the term Financial Statements in the
Agreement does not include the
SEC Financial Statements.
(b)
Upon completion of the SEC
Financial Statements, Seller shall deliver
the SEC Financial Statements
to Buyer and on or before such date, Buyer shall engage Accuity LLP (or another
qualified independent accounting firm selected by Buyer)
(
Buyers Accountants
)
to audit the SEC Financial Statements. Seller
shall use its reasonable efforts to
deliver
the SEC Financial Statements to Buyer on or before July 24, 2007;
provided, however,
that
notwithstanding any other provision in this Amendment or the Agreement, so long
as
Seller reasonably cooperates with
Buyers Accountants as provided in this
Section 5.9(b)
and
uses its reasonable efforts to deliver the SEC Financial Statements to
Buyer as provided in this
Section 5.9(b),
Seller shall have no liability whatsoever to Buyer and shall not be
in breach of
any representation, warranty, or
covenant in this Amendment or the Agreement, in the event
that Seller is unable to deliver the SEC
Financial Statements to Buyer by July 24, 2007, or ever.
From the
date of this Amendment and until the delivery by Buyers Accountants of their
audit report, Seller shall cooperate with Buyers Accountants in providing
access to and copies of its books, records and other documents and to answer
questions and provide information in connection with Buyers Accountants
audit. Seller shall request its counsel to respond to such
customary audit inquiries as may be reasonably
requested by Buyers Accountants concerning
contingencies and shall cause its counsel to promptly respond to such
inquiries. Seller shall
also provide
to Buyers Accountants such other information, material or statements,
including a
customary executed management representation letter, as
Buyers Accountants shall reasonably
request
in connection with their audit. Notwithstanding the foregoing, Buyer shall not
knowingly request and Seller shall not be required
to make false or misleading statements in
the management representation letter. Seller shall also provide to Buyers
Accountants, during
the audit, responses to reasonable
A-
49
inquiries relating to
Sellers compliance with the financial covenants contained in Sellers loan
agreement. Seller shall also provide to Buyer such interim financial
information as may be may be reasonably requested and required to be produced
for
purposes of the Proxy Statement or Form 8-K.
Notwithstanding any other provision in this
Amendment or the Agreement, Seller shall not be required to provide to
Buyer (or permit
Buyer to provide to the Buyers Accountants or the SEC)
any additional information relating to
Seller
without Sellers express agreement or consent (which it shall not unreasonably
withhold),
even if such additional information is required by the SEC to
clear the Proxy Statement.
(c)
Buyer
shall (i) reimburse Seller, within ten (10) days after receipt of a
reimbursement
request from Seller, accompanied by the relevant invoices of the Sellers
Accountants, for all payments of all fees and
expenses paid to the Sellers Accountants by
Seller, and (ii) pay all fees and expenses of Buyers Accountants in
connection with their
assistance in preparing the SEC Financial
Statements and the audit by Buyers Accountants,
provided that Buyer shall have the right to review in advance the budget
for fees and costs for
such work which shall be provided at the time
when the accountants are engaged.
(d)
As promptly as practicable after the
receipt of the SEC Financial Statements and an unqualified audit report issued
by Buyers Accountants thereon, Buyer shall
prepare
and file with the SEC a proposed Proxy Statement. Each of Buyer and Seller
shall
prepare and file with the SEC any other filings as and when
required or requested by the SEC. Each of Buyer and Seller will use all
reasonable best efforts (i) to respond to any comments
made by the SEC with respect to the Proxy Statement
and (ii) to have the Proxy Statement
cleared by the SEC. Seller
shall cooperate with Buyer and the SEC and furnish reasonable
information requested by Buyer and the SEC. As
promptly as practicable after clearing all SEC
comments to the Proxy Statement, Buyer shall mail the Proxy Statement to
Buyers
Unitholders. The Proxy
Statement shall include the recommendation of the Board of Directors
of Seller that adoption of this Agreement and the
transactions contemplated hereby by Buyers
Unitholders are advisable and in the best interests of Buyer. No
amendment or supplement to
the Proxy
Statement will be made by Buyer without the approval of Seller (which approval
shall
not be unreasonably withheld, conditioned, or delayed).
(e) The information supplied by Seller for inclusion in the Proxy
Statement
shall not contain any untrue statement of a material fact or
omit to state any material fact
required to
be stated therein or necessary to make the statements contained therein not
misleading.
The information supplied by Buyer for inclusion in the Proxy Statement shall
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
contained therein not misleading. All
documents
that Buyer is responsible for filing with the SEC in connection with the
transactions
contemplated herein will comply as to form and substance in
all material respects with the applicable requirements of the Securities Act
and the rules and regulations thereunder, the Exchange Act and the rules and
regulations thereunder, and other applicable Law.
7.
Subsection 7.1(j) is added to the Agreement and shall
read as follows:
(j)
Receipt of Audited SEC Financial Statements
.
Buyer shall have received the SEC
Financial Statements and an
unqualified audit report issued by Buyers
Accountants thereon as well as a consent issued by Buyers Accountants
permitting use of its audit report on the SEC Financial Statements in the Proxy
Statement and the Form 8-K.
8.
Subsection 7.2(e) is added to the Agreement and shall
read as follows:
7.2(e)
No Material Adverse
Change.
No Buyer Material Adverse Effect shall have occurred,
nor shall any termination by Seller, pursuant to Section 2.9 and/or 2.10
hereof,
have occurred, which Buyer has not
elected to avoid, pursuant to the terms and conditions of
either or both
of those sections, as applicable.
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50
9. Section 9.1(e) is
amended to read as follows:
(e) Buyer or Seller may
terminate this Agreement if the Closing does not
occur by December 31,
2007;
provided, however,
that a
Party does not have the right to
terminate
this Agreement under this
Section 9.1(e)
if
such Partys breach of any obligation
under this Agreement has been the
primary cause of the failure of the Closing to occur on or before the
aforementioned date.
10. Section 9.1(f) is
amended to read as follows:
(f) Either Party may
terminate this Agreement in its sole discretion at any
time after October 31,
2007, if the SEC Financial Statements and Buyers Accountants audit
report relating thereto are not delivered to Buyer
by October 31, 2007, without any liability or
obligation hereunder
or otherwise, whatsoever.
11.
Section 9.1(g) is deleted from the Agreement.
12.
All questions concerning the construction, validity and
interpretation of this Amendment will be governed by and construed in
accordance with the Laws of the State of
Hawaii
without giving effect to any choice of law or conflict of law provision or rule that
would cause the application of the
Laws of any jurisdiction other than the State of Hawaii. This Amendment may be
executed in counterparts, each of which is deemed an original, and such
counterparts constitute one and the same instrument, which may be sufficiently
evidenced by a
counterpart. A facsimile, telecopy, PDF, or other
reproduction of this Amendment may be
executed
by one or more Parties, and an executed copy of this Amendment may be delivered
by
one or more Parties by facsimile, PDF e-mail, or similar
instantaneous electronic transmission
device
under which the signature of or on behalf of such Party can be seen, and such
execution
and delivery is to be considered valid, binding and effective
for all purposes. At the request of any Party, the Parties agree to execute an
original of this Amendment as well as any facsimile, telecopy or other reproduction
hereof. No amendment or modification of this Amendment is valid unless in
writing and signed by the Parties.
13.
Seller hereby confirms,
that the condition precedent set forth in Section 7.2(d) of
the
Agreement has been satisfied. However, notwithstanding anything to the contrary
herein or
in the Agreement, for the
avoidance of doubt, the Parties expressly acknowledge, that all other
conditions
precedent set forth in Sections 7.1 and 7.2 of the Agreement, as amended,
remain unfulfilled conditions precedent, which must be satisfied or waived
prior to Closing.
14.
Except as expressly modified above, all terms and conditions
of the Agreement shall remain in full force and effect.
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51
IN
WITNESS WHEREOF, the Parties are signing this First Amendment to Acquisition
Agreement as of the date first above written, but effective as of May 24,
2007.
|
|
BUYER:
|
|
|
ML MACADAMIA ORCHARDS
, L.P.
|
|
By:
|
|
|
|
DENNIS J.
SIMONIS,
President
|
|
|
SELLER:
|
|
|
MAC FARMS OF HAWAII
, LLC
|
|
By:
|
|
|
|
ROBERT D. SPARKS,
Chairman of the Board
|
|
|
KAPUA ORCHARD ESTATES
, LLC
|
|
By:
|
MFH Investors,
LLC, its manager
|
|
By:
|
|
|
|
JEFF GILBRECH,
Vice-President
|
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52
APPENDIX B
Existing Section 2.3
2.3
Business
and Purpose of the Partnership.
The business and
purpose of the Partnership shall be, and shall be limited to, the acquisition,
ownership, management, operation, development, leasing and disposition of
macadamia nut orchard properties; the carrying on of any business and the doing
of any act relating to or arising from the acquisition, ownership, management,
operation, leasing and disposition of macadamia nut orchard properties that a
limited partnership organized under the Delaware Act may carry on; the
ownership of stock in any corporation or the entering into any partnership,
joint venture or other similar arrangement, to engage in any of the foregoing;
and anything incidental to the foregoing.
Section 2.3 as
Revised by Proposal (1)
2.3
Business and Purpose of the Partnership
.
The business and purpose
of the Partnership shall be, and shall be limited to, the acquisition,
ownership, management, operation, development, leasing and disposition of
macadamia nut orchard properties; the carrying on of any business and the doing
of any act relating to or arising from the acquisition, ownership, management,
operation, leasing and disposition of macadamia nut orchard properties that a
limited partnership organized under the Delaware Act may carry on; the processing
and marketing of macadamia nuts; the carrying on of any business and the doing
of any act relating to or arising from the processing and marketing of
macadamia nuts; the ownership of stock in any corporation or a membership
interest in any limited liability company, or the entering into any
partnership, joint venture or other similar arrangement, to engage in any of
the foregoing; and anything incidental to the foregoing.
New Sections 6.14
and 6.15
6.14
Annual Meetings
Annual Meetings of the Limited
Partners shall be held on such day during the second quarter following the end
of the fiscal year of the Partnership as the Managing General Partner may
determine, or if no such day is designated by the end of the third (3rd) month,
the annual meeting shall be held on the fourth (4th) Thursday of the sixth
(6th) month following the close of the fiscal year. Any and all business that
may properly be conducted by Limited Partners may be conducted at the annual
meeting. The election of the Board of Directors of the Managing General Partner
shall be conducted at the annual meeting. The annual meeting for 2008 may be
held in the third quarter of 2008 if the Managing General partner is not able
to set the date of the meeting prior to the end of March, 2008.
Directors to be
elected at the meeting shall be chosen as follows: Each Unitholder present in
person or represented by proxy at the meeting shall have a number of votes
equal to the number of Class A Units owned by the Unitholder and may cast
those votes for each Director Position to be filled. However, Unitholders shall
not be entitled to cumulate votes. No Unitholder may cast more votes for a
given Director Position than that Unitholder owns Class A Units. The
nominees receiving the highest number of votes on the foregoing basis, up to
the total number of Directors to be elected at the meeting, shall be the
successful nominees.
6.15
Board of Directors of Managing General Partner.
So
long as the Partnership owns all or any portion of the issued and outstanding
capital stock of the Managing General Partner:
(A) The
Managing General Partner shall be a corporation organized and existing under
the laws of the State of Hawaii.
(B) Unless
otherwise approved by a Majority Interest, the Managing General Partner shall
have only one class of capital stock issued and outstanding at any time and
only one class of directors.
B-
1
(C) The
management and operations of the Managing General Partner shall be under the
direction and supervision of its Board of Directors, the size of which shall be
determined in accordance with the By-Laws of the Managing General Partner;
provided however that such board shall have a minimum of three directors.
(D) The
Board of Directors shall be entitled to delegate, to the full extent permitted
by the laws of the State of Hawaii applicable to corporations organized and
existing under such laws, management and operations to officers and employees
of the Managing General Partner.
(E) The
Board of Directors shall be composed of individuals specified by the
Partnership to the extent provided in this Section 6.15, and the Managing
General Partner will cause such specified individuals to be elected to the
Board of Directors:
(1) So
long as all of the issued and outstanding capital stock of the Managing General
Partner is owned by the Partnership, the entirety of the Board of Directors
shall be composed of individuals specified by the Partnership in the manner
contemplated by this Section 6.15.
(2) If
less than all, but a minimum of fifty percent of the issued and outstanding
capital stock of the Managing General Partner is owned by the Partnership, at
least a majority of the Board of Directors shall be composed of individuals
specified by the Partnership (the exact number of directors which the
Partnership shall be entitled to specify shall be determined by multiplying the
Partnerships percentage ownership of the issued and outstanding capital stock
by the number of members of the Board of Directors, and then rounding up to the
next whole number), and the balance of the members of the Board of Directors
will be elected by the majority vote of the issued and outstanding capital
stock not owned by the Partnership.
(3) If
less than fifty percent of the issued and outstanding capital stock is owned by
the Partnership, the Managing General Partner shall not be obligated to compose
all or any portion of the Board of Directors with individuals specified by the
Partnership (except to the extent elected as such by vote of the holders of the
issued and outstanding shares of capital stock of the Managing General
Partner).
(4) Individuals
specified by the Partnership in accordance with this Section 6.15 may only
be removed if specified for removal by vote of a Majority Interest and
simultaneous replacements are specified by the Partnership at the time of such
vote.
(5) Individuals
specified by the Partnership shall be determined by a Majority Interest at a
meeting of Unitholders called for the purpose of specifying individuals as
Directors, which meeting the Partnership shall hold, and the Managing General
Partner shall cause the Partnership to hold, on at least an annual basis within
the time frame that would otherwise apply if the Partnership was subject to the
provisions of the Exchange Act and the rules and regulations of the
applicable National Securities Exchange applicable to the election of
directors.
(6) The
slate of individuals to be considered by the Unitholders at a meeting of
Unitholders for the purpose of specification to the Managing General Partner
shall be determined by a Nominating Committee of the Board of Directors of the
Managing General Partner, which slate must be approved by a vote of the
majority of Directors that were previously specified by the Partnership
pursuant to this Section 3.2.
(7) The
Managing General Partner shall cause the Partnership to collect information
from the individuals identified on such slate, shall communicate to all
Unitholders information regarding such individuals, their identification as
individuals to be considered by the Unitholders and the meeting at which such
individuals are to be considered for specification, and may solicit, or engage
a proxy solicitation firm to solicit, votes in connection with such
consideration for
B-
2
specification, all in accordance
with the provisions of the Exchange Act and the rules and regulations of
the National Securities Exchange that would otherwise be applicable in
connection with such activates by an entity subject to such provisions, rules and
regulations and in the process of electing a board of directors.
(8) In
connection with any meeting of Unitholders for the purpose of specification of
individuals as Directors, Unitholders shall have the right to propose
alternative names for consideration by Unitholders and to solicit proxies in
connection therewith, provided that such Unit holders proposing alternative
names or soliciting proxies in connection therewith shall comply with the
provisions of the Exchange Act and the rules and regulations of the appropriate
National Securities Exchange that would otherwise be applicable in connection
with such activities by an entity subject to such provisions, rules and
regulations and in the process of electing a board of directors.
(F) The
Articles of Incorporation and By-Laws of the Managing General Partner shall
provide that decisions of the Board of Directors shall be determined by a
majority of a quorum of directors.
B-
3
ML
MACADAMIA ORCHARDS, L.P.
26-238 Hawaii Belt Road
Hilo, Hawaii 96720
Special
Meeting of Unitholders Proxy Card
PROXY SOLICITED ON BEHALF OF THE
GENERAL PARTNER OF THE PARTNERSHIP
The undersigned hereby
appoints the Board of Directors of ML Resources, Inc., the General Partner of
ML Macadamia Orchards, L.P., proxy with full power of substitution, to vote as
designated on the reverse side, on behalf of the undersigned all Units that the
undersigned may be entitled to vote at the Meeting of Unitholders of ML
MACADAMIA ORCHARDS, L.P. on December , 2007, and
any adjournments thereof, with all powers that the undersigned would possess if
personally present. In their discretion, the proxies are hereby authorized to
vote upon such other business as may properly come before the meeting and any
adjournments or postponements thereof.
THIS PROXY WILL BE VOTED IN
ACCORDANCE WITH SPECIFICATIONS MADE. IF
NO CHOICES ARE INDICATED, THIS PROXY WILL BE VOTED FOR THE ACQUISITION PROPOSAL
AND THE AMENDMENT PROPOSAL AND IN ACCORDANCE WITH THE RECOMMENDATIONS OF THE
GENERAL PARTNER.
Please
sign, date and mail your proxy card in the envelope provided as soon as
possible.
Please mark your vote as
indicated in this example.
x
THE GENERAL PARTNER RECOMMENDS A VOTE
FOR ADOPTION OF THE ACQUISITION PROPOSAL AND FOR ADOPTION OF THE AMENDMENT
PROPOSAL.
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For
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Against
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Abstain
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o
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o
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o
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1 To approve the Acquisition Proposal which would
amend the Partnership Agreement of the Partnership to permit it to engage in
the business of processing and marketing macadamia nuts.
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For
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Against
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Abstain
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o
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o
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o
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2 To approve the Amendment Proposal that
would amend the Partnership Agreement to provide procedures for the election
of the directors of the General Partner directly by the Unitholders, and
certain other matters.
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If you plan on attending the
meeting, please mark the box to the right with an
X.
o
Authorized Signatures - Sign Here -
This section must be completed for your instructions to be executed.
NOTE: Please sign your
name(s) EXACTLY as your name(s) appear(s) on this proxy. All joint holders must sign. When signing as attorney, trustee, executor,
administrator, guardian, or corporate officer, please give your FULL title.
Signature 1 -
Please keep signature within
the box
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Signature 2 -
Please
keep signature
within the box
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Date
(mm/dd/yyyy)
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