These contracts cover
macadamia orchards in the same three locations on the island of Hawaii where
the Partnership owns orchards. The farming contracts provide the Partnership to
be reimbursed for all direct farming costs (cultivation, irrigation and
harvesting), collect a pro-rata share of indirect costs and overheads, and
charge a management fee or fixed fee. The management fee is based on the number
of acres farmed or on a percentage of total costs billed. Revenues from farming
services were $3.8 million in 2006, $4.7 million in 2005, and $4.3 million in
2004. The 2006 farming service revenues were less than 2005 because of the
termination of three farming contracts, the purchase of the macadamia orchard
which previously had been farmed under contract and the timing of the harvest
at the end of the year which resulted is harvesting occurring in the spring of
2007 for some of the orchards under contract. The 2005 farming service revenues
were less than anticipated because of a windstorm which destroyed a large
percentage of trees in three contract orchards. The 2004 farming service
revenues were less than expected because of the late drop of nuts in the fall
crop. Three farming service contracts terminated on December 31, 2005 which
reduces the number of farming service contracts to about seventeen totaling
about 2,039 acres. The farming service revenue in 2005 for these three
contracts was about $492,000 with management fees of about $70,000. Additionally,
the Partnership purchased about 21 acres which was under farming contract
bringing the total acres under farming contract to about 2,008. Approximately
150 acres of are year-to-year contracts, approximately 635 acres expire March
31, 2009, approximately 70 acres expire June 30, 2013, approximately 410 acres
expire July 31, 2029, approximately 280 acres expire June 30, 2033 and
approximately 470 acres expire September 30, 2080.
Farming
Segment - Cost of Services Sold
The cost of services sold relating to the farming
contracts was $3.5 million in 2006, $4.3 million in 2005 and $3.9 million in
2004. These costs were all reimbursed to the Partnership.
General
and Administrative Costs
General and administrative expenses are comprised of
accounting and reporting costs, reimbursements to the Managing Partner for
directors fees, office expenses and liability insurance. In addition, general
and administrative costs are also incurred in connection with the farming
operations. Previous to the May 2000 acquisition, general and administration
costs relating to the 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 of Hawaii,
LLC and higher costs associated with Sarbanes Oxley implementation. General and
administrative costs for 2005 were $48,000 lower than for 2004, which is
attributed to lower legal costs, offset by higher costs associated with
Sarbanes Oxley preparation and accounting. In 2004 legal costs of $464,000 were
related to the lawsuit, initiated and settled, to prevent Mauna Loa from
acquiring MacFarms of Hawaii, LLC.
A management fee based on Partnership cash flow is
payable annually to the Managing Partner. The amount paid was $9,000 in 2004. There
was no management fee in 2006 and 2005 as the Partnership acquired MLR, the
managing partner and the fees are eliminated in consolidation.
Interest
Income and Expense
The Partnership recorded interest expense of $204,000
in 2006, $237,000 in 2005, and $182,000 in 2004. This was due to (1) the
long-term loan used to acquire the farming operations, (2) the assumption of
several capitalized equipment leases, and (3) interest expense on a revolving
line of credit.
The Partnership funds its working capital needs
through funds on hand and, when needed, from short-term borrowings, generating
interest expense in the process. Net interest income or expense, therefore, is
partly a function of any balance carried over from the prior year, the amount
and timing of cash generated
10
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 of inflation. Macadamia nut prices are influenced
strongly by prices for finished macadamia products, which depend on competition
and consumer acceptance. Farming costs, particularly labor and materials, and
general and administrative costs do generally reflect inflationary trends.
The Partnership is subject to a gross income tax as a
result of its election to continue to be taxed as a partnership rather than to
be taxed as a corporation, as allowed by the Taxpayer Relief Act of 1997. This
tax is calculated at 3.5% on partnership gross income (net revenues less cost
of goods sold) beginning in 1998. The gross income tax was $100,000 in 2006,
$129,000 in 2005, and $5,000 in 2004.
Liquidity and Capital Resources
Net cash provided by
operations was $8.2 million in 2006 compared to $1.9 million in 2005. The
significant increase of $6.3 million is a result of the payment terms of the
nut purchase contracts changing from quarterly to 30 days from date of delivery.
Net cash provided by operations was $1.9 million in 2005, an increase of
approximately $1.6 million compared to 2004. Net cash provided by operations in
2004 was $368,000.
At December 31, 2006 the
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, 2005.
In
connection with the issuance of the financials included in the 10-K, dated
April 16, 2007, the Partnership determined they were in compliance with the
covenants at December 31, 2006. Subsequently, the Partnership determined that
it was in compliance with all debt covenants except for minimum tangible net
worth. The Partnership was less that 0.4% below the required amount. On July 5,
2007, the lender provided a waiver to the loan covenant for the year ended
December 31, 2006 and retroactively amended the minimum tangible net worth
covenant. Had the lender not waived this violation the Partnership would have
been restricted in its ability to pay distributions to the limited partners and
all obligations and indebtedness, at the lenders option, would be accelerated
and become immediately due and payable.
Capital expenditures in 2006, 2005 and 2004 were
$509,000, $83,000, and $172,000, respectively. The increase in 2006 was
attributed to the purchase of 21 tree acres of macadamia orchards for $440,000,
computers, a vehicle and upgrades to operating machinery. The decrease in 2005
was the result of fewer computer purchases and modifications to farming
equipment than 2004. Capital expenditures in 2004 were the result of purchases
of expiring leases. Capital expenditures planned for 2007 are about $500,000
and are expected to be financed by way of new equipment leases, either capital
or operating leases.
11
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, we expect 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. In December, 2006, the Partnership declared a
distribution of $0.05 per Class A unit (a total of $375,000), which was paid
February 15, 2007 to the unit holders of record as of December 29, 2006.
It is the opinion of
management that the Partnership has adequate cash on hand and borrowing
capacity available to meet anticipated working capital needs for operations as
presently conducted. The nut purchase contracts require the buyers to make nut
payments 30 days after the delivery of the nuts to 15 days after the end of the
month in which the nuts were delivered. During certain parts of the year, if
payments are not received, as the contracts require, available cash resources
could be depleted.
Critical Accounting Policies and Estimates
Management has identified the following critical
accounting policies that affect the 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.
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
12
ITEM 8. CONSOLIDATED FINANCIAL
STATEMENTS
Index
to Consolidated Financial Statements
Report of Independent Registered Public Accounting
Firm
|
|
|
|
Consolidated Balance Sheets, December 31, 2006 and
2005
|
|
|
|
Consolidated Income Statements, for the Years Ended
December 31, 2006, 2005 and 2004
|
|
|
|
Consolidated Statements of Partners Capital, for the
Years Ended December 31, 2006, 2005 and 2004
|
|
|
|
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2006, 2005 and 2004
|
|
|
|
Notes to Consolidated Financial Statements
|
|
14
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
Orange County, California
April 16, 2007, except as
to the disclosure regarding the Partnerships debt covenant violation and
waiver included in Note 7 which is as of November 9, 2007
15
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.
16
ML Macadamia Orchards, L.P.
Consolidated Income Statements
(in thousands, except per unit data)
|
|
2006
|
|
2005
|
|
2004
|
|
Macadamia nut sales
|
|
$
|
13,256
|
|
$
|
12,684
|
|
$
|
9,414
|
|
Contract farming revenue
|
|
3,816
|
|
4,694
|
|
4,251
|
|
Total revenues
|
|
17,072
|
|
17,378
|
|
13,665
|
|
Cost of goods and services sold
|
|
|
|
|
|
|
|
Costs of macadamia nut sales
|
|
10,871
|
|
10,202
|
|
9,667
|
|
Costs of contract farming services
|
|
3,474
|
|
4,274
|
|
3,860
|
|
Total cost of goods and services sold
|
|
14,345
|
|
14,476
|
|
13,527
|
|
Gross income
|
|
2,727
|
|
2,902
|
|
138
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
Costs expensed under management agreement with related party
|
|
|
|
|
|
177
|
|
Legal fees - related party
|
|
196
|
|
32
|
|
495
|
|
Other
|
|
1,646
|
|
1,563
|
|
971
|
|
Total general and administrative expenses
|
|
1,842
|
|
1,595
|
|
1,643
|
|
Extinguishment of management agreement
|
|
|
|
(326
|
)
|
|
|
Operating income (loss)
|
|
885
|
|
981
|
|
(1,505
|
)
|
Interest expense
|
|
(204
|
)
|
(237
|
)
|
(182
|
)
|
Interest income
|
|
17
|
|
5
|
|
11
|
|
Other income
|
|
206
|
|
151
|
|
32
|
|
Income (loss) before tax
|
|
904
|
|
900
|
|
(1,644
|
)
|
Income tax expense
|
|
(100
|
)
|
(129
|
)
|
(5
|
)
|
Net income (loss)
|
|
$
|
804
|
|
$
|
771
|
|
$
|
(1,649
|
)
|
|
|
|
|
|
|
|
|
Net cash flow (as defined in the Partnership Agreement)
|
|
$
|
2,323
|
|
$
|
2,501
|
|
$
|
466
|
|
|
|
|
|
|
|
|
|
Net income (loss) per Class A Unit
|
|
$
|
0.11
|
|
$
|
0.10
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
Net cash flow per Class A Unit (as defined in the Partnership
Agreement)
|
|
$
|
0.31
|
|
$
|
0.33
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
Cash distributions per Class A Unit
|
|
$
|
0.20
|
|
$
|
0.20
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
Class A Units outstanding
|
|
7,500
|
|
7,500
|
|
7,500
|
|
See accompanying notes to consolidated financial statements.
17
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.
18
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.
19
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.
20
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.
21
(g)
Goodwill and Other
Intangible Assets
Under SFAS No. 142,
Goodwill and Other Intangible Assets (SFAS No. 142), goodwill and other
indefinite-lived intangible assets are not amortized but are reviewed for
impairment at least annually and if a triggering event were to occur in an
interim period. The 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.
22
(m) Accumulated
Comprehensive Income.
Accumulated comprehensive income
represents the change in Partners capital from transactions and other events
and circumstances arising from non-unitholder sources. Accumulated
comprehensive income consists of deferred pension and intermittent severance
gains or losses. As of December 31, 2006, our Consolidated Balance Sheet
reflected Accumulated Other Comprehensive Loss in the amount of $70,000 in
deferred pension and intermittent severance loss.
(n) Recent
Accounting Pronouncements.
In September 2006, the FASB issued
Statement No. 157. This statement provides a single definition of fair value, a
framework for measuring fair value, and expanded disclosures concerning fair
value. Previously, different definitions of fair value were contained in
various accounting pronouncements creating inconsistencies in measurement and
disclosures. Statement No. 157 applies under those previously issued
pronouncements that prescribe fair value as the relevant measure of value. This
pronouncement is effective for fiscal years beginning after November 15, 2007. We
do not expect the adoption of Statement No. 157 to have a material impact on
our financial position, results of operations, or cash flows.
In September 2006, the FASB issued Statement No. 158,
Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans,
(an amendment of FASB Statements No. 87, 88,
106. and 132R (Statement No. 158), that requires an employer to recognize in
its statement of financial position an asset for a 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
23
two contracts cover all nuts produced by
the orchards acquired in June 1986, December 1986, and October 1989. Of the two
contracts, one for approximately 15 million pounds expired December 31, 2006
and has a nut purchase price for 2006 of $0.75 per pound wet-in-shell (WIS) at
20% moisture and 30% saleable kernel recovery (SK) to dry-in-shell (DIS). Two
other contracts, of approximately 1 million pounds, also expired December 31,
2006, one with a nut purchase price of $0.60 per pound WIS 25% adjusted for
trash and the other with a nut purchase price based on a two-year trailing
average USDA price at WIS 25%. The last contract for about 5 million pounds
expires December 31, 2011 and has a nut purchase price for 2006 of $0.74 per
pound WIS at 20% moisture and 30% SK/DIS. The purchase price increases by $0.01
each year except 2008 until it reaches $0.78 per pound in 2011. The purchase
contract for the macadamia nut orchard purchased in April 2006 is with Mac
Farms and accounts for about 100,000 pounds and has a nut purchase price of
$0.98 per pound WIS 20% moisture and 30% SK/DIS.
On December 16, 2004, a new nut purchase
contract was signed with Hamakua for the annual delivery of six million WIS
pounds, starting January 1, 2007. The contract provides for a minimum price of
75 cents per pounds and a maximum price of 95 cents per pound. The pricing
formula includes a fixed component of 85 cents and a second component based on
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.
24
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 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
|
|
Contract
|
|
Intersegment
|
|
|
|
|
|
Orchards
|
|
Farming
|
|
Elimination
|
|
Total
|
|
Revenues
|
|
$
|
13,256
|
|
$
|
14,533
|
|
$
|
(10,717
|
)
|
$
|
17,072
|
|
Composition of Intersegment revenues
|
|
|
|
10,717
|
|
|
|
10,717
|
|
Operating income (loss)
|
|
222
|
|
663
|
|
|
|
885
|
|
Depreciation expense
|
|
1,737
|
|
216
|
|
|
|
1,953
|
|
Segment assets
|
|
48,731
|
|
5,232
|
|
|
|
53,963
|
|
Expenditures for property and equipment
|
|
479
|
|
30
|
|
|
|
509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
Segment Reporting
for the Year ended December 31, 2005 (in thousands)
|
|
Owned
|
|
Contract
|
|
Intersegment
|
|
|
|
|
|
Orchards
|
|
Farming
|
|
Elimination
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
12,684
|
|
$
|
12,131
|
|
$
|
(7,437
|
)
|
$
|
17,378
|
|
Composition of Intersegment revenues
|
|
|
|
7,437
|
|
|
|
7,437
|
|
Operating income (loss)
|
|
377
|
|
604
|
|
|
|
981
|
|
Depreciation expense
|
|
1,949
|
|
216
|
|
|
|
2,165
|
|
Segment assets
|
|
52,206
|
|
5,840
|
|
|
|
58,046
|
|
Expenditures for property and equipment
|
|
51
|
|
32
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Reporting
for the Year ended December 31, 2004 (in thousands)
|
|
Owned
|
|
Contract
|
|
Intersegment
|
|
|
|
|
|
Orchards
|
|
Farming
|
|
Elimination
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
9,414
|
|
$
|
9,502
|
|
$
|
(5,251
|
)
|
$
|
13,665
|
|
Composition of Intersegment revenues
|
|
|
|
5,251
|
|
|
|
5,251
|
|
Operating income (loss)
|
|
(1,684
|
)
|
179
|
|
|
|
(1,505
|
)
|
Depreciation expense
|
|
1,671
|
|
900
|
|
|
|
2,571
|
|
Segment assets
|
|
52,984
|
|
5,454
|
|
|
|
58,438
|
|
Expenditures for property and equipment
|
|
76
|
|
96
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) RELATED PARTY TRANSACTIONS
(a) Management Costs and Fee.
On
January 6, 2005 the Partnership purchased the stock of its managing partner,
MLR. As a result of the transaction, 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.
26
(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 purchased the
stock of the managing partner MLR in January 2005 and the management fee is
eliminated in consolidation.
27
(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%.
28
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 longterm 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, 2005. In
connection with the issuance of the financials included in the 10-K, dated
April 16, 2007, the Partnership determined they were in compliance with the
covenants at December 31, 2006. Subsequently, the Partnership determined that
it was in compliance with all debt covenants except for minimum tangible net
worth. The Partnership was less that 0.4% below the required amount. On July 5,
2007, the lender provided a waiver to the loan covenant for the year ended
December 31, 2006 and retroactively amended the minimum tangible net worth
covenant. Had the lender not waived this violation the Partnership would have
been restricted in its ability to pay distributions to the limited partners and
all obligations and indebtedness, at the lenders option, would be accelerated
and become immediately due and payable.
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.
29
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.
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):
|
|
Total
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
Remaining
|
|
Contractual
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt
and Interest
|
|
$
|
1,792
|
|
$
|
487
|
|
$
|
461
|
|
$
|
435
|
|
$
|
409
|
|
$
|
|
|
$
|
|
|
Operating Leases
|
|
3,453
|
|
337
|
|
275
|
|
191
|
|
146
|
|
126
|
|
2,378
|
|
Total
|
|
$
|
5,245
|
|
$
|
824
|
|
$
|
736
|
|
$
|
626
|
|
$
|
555
|
|
$
|
126
|
|
$
|
2,378
|
|
(8) INCOME TAXES
The components of income tax expense for the years
ended December 31, 2006, 2005 and 2004 were as follows (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
|
|
30
(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.
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
|
|
205
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
(68
|
)
|
(261
|
)
|
(206
|
)
|
Unrecognized
prior service cost
|
|
|
|
62
|
|
69
|
|
Unrecognized net
actuarial loss (gain)
|
|
|
|
89
|
|
44
|
|
Amount
recognized in balance sheet
|
|
$
|
(68
|
)
|
$
|
(110
|
)
|
$
|
(93
|
)
|
|
|
|
|
|
|
|
|
Amounts
recognized in the balance sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued pension
liability (current)
|
|
(68
|
)
|
(152
|
)
|
(103
|
)
|
Intangible asset
|
|
|
|
42
|
|
10
|
|
Net amount
recognized
|
|
$
|
(68
|
)
|
$
|
(110
|
)
|
$
|
(93
|
)
|
The amounts recognized in
accumulated other comprehensive loss at December 31, 2006 was as follows:
|
|
2006
|
|
|
|
|
|
Net actuarial
gain
|
|
$
|
(4
|
)
|
Prior service
cost
|
|
56
|
|
|
|
$
|
52
|
|
The estimated net
actuarial gain and prior service cost that will be amortized from accumulated
other comprehensive loss into net periodic benefit cost for the year ending
December 31, 2007 is $7,000.
Prior to the adoption of Statement No. 158, the plan
was over funded by $7,000.
31
The computation of the prepaid pension obligation at
December 31, 2006 and required minimum liability and additional minimum
liability at December 31, 2005 are shown below:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Accumulated
benefit obligation
|
|
$
|
(415
|
)
|
$
|
(410
|
)
|
Fair value of
plan assets
|
|
422
|
|
258
|
|
Required prepaid
pension obligation (minimum liability)
|
|
$
|
7
|
|
$
|
(152
|
)
|
Liability
recognized for accrued benefit costs
|
|
|
|
110
|
|
|
|
|
|
|
|
Prepaid pension
obligation (additional minimum liability)
|
|
$
|
7
|
|
$
|
(42
|
)
|
The components of net periodic pension cost for the
years ended December 31, 2006, December 31, 2005 and December 31, 2004 were as
follows:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
59
|
|
$
|
57
|
|
$
|
56
|
|
Interest cost
|
|
28
|
|
23
|
|
21
|
|
Expected return
on plan assets
|
|
(23
|
)
|
(19
|
)
|
(15
|
)
|
Amortization of
net actuarial loss and prior service cost
|
|
9
|
|
7
|
|
7
|
|
|
|
|
|
|
|
|
|
Net periodic
pension cost
|
|
$
|
73
|
|
$
|
68
|
|
$
|
69
|
|
The weighted average actuarial assumptions used to
determine the pension benefit obligations at December 31, 2006, 2005 and 2004
and the net periodic pension cost for the years then ended are as follows:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Pension benefit
obligation:
|
|
|
|
|
|
|
|
Discount rate
|
|
5.90
|
%
|
5.50
|
%
|
5.75
|
%
|
Compensation
increases
|
|
2.00
|
%
|
2.00
|
%
|
2.00
|
%
|
|
|
|
|
|
|
|
|
Net periodic
pension cost:
|
|
|
|
|
|
|
|
Discount rate
|
|
5.90
|
%
|
5.75
|
%
|
6.00
|
%
|
Compensation
increases
|
|
2.00
|
%
|
2.00
|
%
|
2.00
|
%
|
Return on assets
for the year
|
|
8.50
|
%
|
8.50
|
%
|
8.50
|
%
|
The expected long-term rate of return on plan assets
was based primarily on historical returns as adjusted for the 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.
32
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
|
|
(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
|
|
33
Change
in Plan Assets
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Fair value of
plan assets at of year
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Employer
contributions
|
|
48
|
|
39
|
|
33
|
|
Benefits paid
|
|
(48
|
)
|
(39
|
)
|
(33
|
)
|
Fair value of
plan assets at end of year
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Funded Status
Benefit
obligation
|
|
$
|
(335
|
)
|
$
|
(376
|
)
|
$
|
(384
|
)
|
Unrecognized net
actuarial loss
|
|
18
|
|
55
|
|
72
|
|
Prepaid
(accrued) benefit cost
|
|
$
|
(317
|
)
|
$
|
(321
|
)
|
$
|
(312
|
)
|
As of December 31, 2006,
the accrued benefit cost of $317,000 was recorded in accrued liabilities - current
portion $27,000, representing amounts to be paid in 2007, non-current
liabilities $290,000 and the unrecognized actuarial gain of $18,000 was
recorded in accumulated other comprehensive income. On adoption of SFAS 158 the
Partnership recorded an adjustment to other comprehensive income of $18,000 for
the under funded status of the severance benefit plan at December 31, 2006.
Components
of Net Periodic Cost
Service cost
|
|
$
|
23
|
|
$
|
24
|
|
$
|
24
|
|
Interest cost
|
|
20
|
|
21
|
|
21
|
|
Recognized net
(gain) loss
|
|
1
|
|
3
|
|
2
|
|
Net periodic
cost (credit)
|
|
$
|
44
|
|
$
|
48
|
|
$
|
47
|
|
Reconciliation of Severance Liability
(a) Accrued
severance beginning of year
|
|
$
|
(321
|
)
|
$
|
(312
|
)
|
$
|
(298
|
)
|
(b)
Contributions during fiscal year
|
|
48
|
|
39
|
|
33
|
|
(c) Net periodic
pension cost
|
|
(44
|
)
|
(48
|
)
|
(47
|
)
|
(d) Accrued
severance cost at end of year
|
|
$
|
(317
|
)
|
$
|
(321
|
)
|
$
|
(312
|
)
|
Weighted
Average Assumptions
Discount rate
|
|
5.87
|
%
|
5.78
|
%
|
5.74
|
%
|
Expected return
on plan assets
|
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
Rate of
compensation increase
|
|
1.65
|
%
|
1.65
|
%
|
1.65
|
%
|
As discussed in Note 14, the Partnership initially
recorded its liability for the severance plan in 2006 following its
determination that such obligation had not properly been accounted for as part
of prior year purchase price 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.
34
(11) EMPLOYEES SAVINGS PLAN
The Partnership sponsors a 401(k) plan, which allows
participating employees to contribute up to 25% of their salary, subject to
annual limits. The plan provides for the Partnership to make matching
contributions up to 50% of the first 4% of salary deferred by employees. During
the years ended December 31, 2006, 2005 and 2004, Partnership matching
contributions were $32,000, $29,000 and $27,000, respectively.
(12) SALARIED DEFINED CONTRIBUTION PLAN
The Partnership sponsors a defined contribution plan
for its non-bargaining unit employees. This plan provides for the Partnership
to make annual contributions to the 401(k) plan on behalf of participating
employees. Contributions are based upon age, length of service, and other
criteria on an annual basis, subject to annual limits. During the years ended
December 31, 2006, 2005, and 2004 Partnership contributions were $106,000,
$96,000 and $98,000, respectively.
(13) QUARTERLY OPERATING RESULTS
(Unaudited)
The following chart summarizes unaudited quarterly
operating results for the years ended December 31, 2006, 2005, and 2004 (000s
omitted except per unit data):
|
|
|
|
Gross Income
|
|
Net Income
|
|
Net Income (Loss)
|
|
|
|
Revenues
|
|
(Loss)
|
|
(Loss)
|
|
per Class A Unit
|
|
2006
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
1,523
|
|
$
|
272
|
|
$
|
(100
|
)
|
$
|
(0.01
|
)
|
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
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
3,056
|
|
$
|
627
|
|
$
|
(27
|
)
|
$
|
0.00
|
|
2nd Quarter
|
|
1,501
|
|
218
|
|
26
|
|
0.00
|
|
3rd Quarter
|
|
3,737
|
|
608
|
|
118
|
|
0.02
|
|
4th Quarter
|
|
9,084
|
|
1,449
|
|
654
|
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
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
|
)
|
35
(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.
36