Royal Hawaiian Orchards (NNUTU) 10-Q 2001 Q1 Quarterly report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2001

OR

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

For the transition period from              to              

Commission File Number 1-9145

ML MACADAMIA ORCHARDS, L.P.
(Exact name of registrant as specified in its charter)

DELAWARE (State or other jurisdiction of incorporation or organization)	99-0248088 (I.R.S. Employer Identification No.)
828 FORT STREET, HONOLULU, HAWAII (Address Of Principal Executive Offices)	96813 (Zip Code)

Registrant's Telephone Number, Including Area Code:808-532-4130

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

    As of March 31, 2001, Registrant had 7,500,000 Class A Units issued and outstanding.

ML MACADAMIA ORCHARDS, L.P.
INDEX

			Page
Part I—Financial Information
	Item 1.	Financial Statements	3-8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	9-11
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	11
Part II—Other Information
	Item 2.	Changes in Securities	12
	Item 6.	Exhibits and Reports on Form 8-K	12
	Signature		13

2

ML Macadamia Orchards, L.P.

Balance Sheets

(in thousands)

		March 31,
						December 31, 2000
		2001		2000
		(unaudited)
Assets
Current assets
Cash and cash equivalents		$	356	$	1,470	$	174
Accounts receivable			2,490		9,293		4,594
Inventory of farming supplies			159		—		168
Annualized cost adjustment			337		936		—
Other current assets			191		83		24
	Total current assets		3,533		11,782		4,960
Land, orchards and equipment, net			59,984		53,088		60,638
Intangible assets, net			26		—		27
	Total assets	$	63,543	$	64,870	$	65,625
Liabilities and partners' capital
Current liabilities
Current portion of long-term debt		$	459	$	—	$	459
Short-term borrowings			—		—		900
Accounts payable			154		1,821		232
Cash distributions payable			379		947		682
Accrued payroll and benefits			729		—		894
Other current liabilities			366		465		194
	Total current liabilities		2,087		3,233		3,361
Long-term debt			3,703		—		3,716
Deferred income tax liability			1,199		1,249		1,199
	Total liabilities		6,989		4,482		8,276
Commitments and contingencies
Partners' capital
General partners			566		604		574
Class A limited partners, no par or assigned value, 7,500 units issued and outstanding			55,988		59,784		56,775
	Total partners' capital		56,554		60,388		57,349
	Total liabilities and partners' capital	$	63,543	$	64,870	$	65,625

See accompanying notes to financial statements.

3

Income Statements (unaudited)

(in thousands, except per unit data)

			Three months ended March 31,
			2001			2000
Macadamia nut sales			$	1,740		$	1,492
Contract farming revenue				1,277			—
		Total revenues		3,017			1,492
Cost of goods and services sold
	Costs expensed for farming and services			2,312			999
	Depreciation and amortization			382			181
	Other			71			48
		Total cost of goods and services sold		2,765			1,228
		Gross income		252			264
General and administrative expenses
	Costs expensed under management contract with related party			61			142
	Other			492			196
		Total general and administrative expenses		553			338
		Operating loss		(301	)		(74	)
Interest expense				(113	)		—
Interest income				7			148
		Income (loss) before tax		(407	)		74
Income tax expense				9			9
		Net income (loss)	$	(416	)	$	65
Net cash flow (deficit) (as defined in the Partnership Agreement)			$	(47	)	$	246
Net income (loss) per Class A Unit			$	(0.05	)	$	0.01
Net cash flow (deficit) per Class A Unit			$	(0.01	)	$	0.03
Cash distributions per Class A Unit			$	0.05		$	0.125
Class A Units outstanding				7,500			7,500

See accompanying notes to financial statements.

4

ML Macadamia Orchards, L.P.

Statements of Partners' Capital (unaudited)

(in thousands)

	For the quarters ended March 31,
	2001			2000
Partners' capital at beginning of period:
General partners	$	574		$	613
Class A limited partners		56,775			60,657
		57,349			61,270
Allocation of net income (loss):
General partners		(4	)		—
Class A limited partners		(412	)		65
		(416	)		65
Cash distributions:
General partners		4			9
Class A limited partners		375			938
		379			947
Partners' capital at end of period:
General partners		566			604
Class A limited partners		55,988			59,784
	$	56,554		$	60,388

See accompanying notes to financial statements.

5

ML Macadamia Orchards, L.P.

Statements of Cash Flows (unaudited)

(in thousands)

		For the quarters ended March 31,
		2001			2000
Cash flows from operating activities:
Cash received from good and services		$	5,098		$	—
Cash paid to suppliers and employees			(3,328	)		(3,134	)
Interest received			7			37
Net cash provided by (used in) operating activities			1,777			(3,097	)
Cash flows from financing activities:
Proceeds from drawings on line of credit			800			—
Repayment of line of credit			(1,700	)		—
Capital lease payments			(13	)		—
Cash distributions paid			(682	)		(758	)
Net cash used in financing activities			(1,595	)		(758	)
Net increase (decrease) in cash			182			(3,855	)
Cash at beginning of period			174			5,325
Cash at end of period		$	356		$	1,470
Reconciliation of net income (loss) to net cash provided by (used in) operating activities:
Net income (loss)		$	(416	)	$	65
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
	Depreciation and amortization		382			181
	Decrease (increase) in accounts receivable		2,104			(1,606	)
	Decrease in inventories		9			—
	Increase in annualized cost adjustment		(65	)		(717	)
	Increase in other current assets		(167	)		(80	)
	Decrease in accounts payable		(78	)		(998	)
	Decrease in accrued payroll and benefits		(165	)		—
	Increase in other current liabilities		173			58
Total adjustments			2,193			(3,162	)
Net cash provided by (used in) operating activities		$	1,777		$	(3,097	)

See accompanying notes to financial statements.

6

ML MACADAMIA ORCHARDS, L.P.

Notes to Financial Statements

(1) BASIS OF PRESENTATION

    In the opinion of management, the accompanying unaudited financial statements of ML Macadamia Orchards, L.P. ("the Partnership") include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly its financial position as of March 31, 2001, March 31, 2000 and December 31, 2000 and the results of operations, changes in partners' capital and cash flows for the periods ended March 31, 2001 and 2000. The results of operations for the period ended March 31, 2001 are not necessarily indicative of the results to be expected for the full year or for any future period.

    These interim financial statements should be read in conjunction with the Financial Statements and the Notes to Financial Statements filed with the Securities and Exchange Commission in the Partnership's 2000 Annual Report on Form 10-K.

(2) 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. Such intersegment sales and transfers are eliminated in consolidation.

    The Partnership's 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 calculated nut price per pound. The farming segment's revenues are based on long-term farming contracts which generate a farming profit based on a percentage of farming cost or based on a fixed fee per acre and tend to be less variable than revenues from the owned-orchard segment.

    The following is a summary of each reportable segment's operating income and the segment's assets as of and for the period ended March 31, 2001.

Segment Reporting for the Three Months ended March 31, 2001
(in thousands)

	Owned Orchards			Contract Farming		Intersegment elimination			Total
Revenues	$	1,740		$	2,525	$	(1,248	)	$	3,017
Composition of intersegment revenues		—			1,248		—			1,248
Operating income (loss)		(353	)		52		—			(301	)
Depreciation expense		310			72		—			382
Segment assets		57,248			6,295		—			63,543
Expenditures for property and equipment		—			—		—			—

    All revenues are from sources within the United States. The Partnership operated in only the owned-orchard segment during the three months ended March 31, 2000.

7

(3) INTERIM REPORTING

    All production costs are annualized for interim reporting purposes, with the difference between costs incurred to date and costs expensed to date being reported on the balance sheet as an annualized cost adjustment.

(4) LONG-TERM DEBT

    Revolving Credit Loan.  On May 2, 2000 the Partnership entered into a new credit agreement with Pacific Coast Farm Credit Services under which it will have available a $5 million revolving credit facility through April 30, 2004. There were no borrowings under this credit facility as of March 31, 2001.

    Borrowings under this agreement bear interest at the prime lending rate. From and after the first anniversary date, the Partnership is required to pay a facility fee of 0.175% to 0.25% per annum, depending on certain financial ratios, on the daily unused portion of the credit. The Partnership, at its option, may make prepayments without penalty.

    Term Debt.  As of March 31, 2001, the Partnership had a $4 million promissory note outstanding, which was issued on May 2, 2000 in conjunction with the credit agreement discussed above. The note is scheduled to mature in 2010 and bears interest at rates from 8.53 percent to 9.16 percent. Principal payments of $400,000 are due on May 1 each year beginning 2001.

(5) PARTNERS' CAPITAL

    All capital allocations reflect the general partner's 1% equity interest and the limited partners' 99% percent equity interest. Net income per Class A Unit is calculated by dividing 99% of Partnership net income by the average number of Class A Units outstanding for the period.

(6) CASH DISTRIBUTIONS

    On March 9, 2001, a first quarter cash distribution was declared in the amount of five cents ($0.05) per Class A Unit, payable on May 15, 2001 to unitholders of record as of the close of business on March 30, 2001.

8

ML MACADAMIA ORCHARDS, L.P.
Management's Discussion and Analysis of
Financial Condition and Results of Operations

Results of Operations

    For the first quarter 2001, ML Macadamia Orchards recorded a net loss of $416,000 or $0.05 per Class A Unit, compared to net income of $65,000, or $0.01 per Class A Unit, for the first quarter 2000. Total revenues for the first quarter 2001 were $3.0 million, which included $1.3 million of farming service revenue. First quarter 2000 revenue was $1.5 million, which was all nut revenue.

Owned-orchard Segment

    For the three months ending March 31, 2001 and 2000, nut production, nut prices and nut revenues are summarized below:

	For the Three Months Ended March 31,
	2001		2000		Change
Nut harvested (000's pounds WIS @25%)		3,513		2,558	+37	%
Nut price (per pound)	$	0.4953	$	0.5833	–15	%
Net nut sales ($000's)		1,740		1,492	+17	%

    Production for the three-month period ending March 31, 2001 was 3.5 million pounds, 37% higher than for the first quarter 2000, and slightly higher than the Partnership's 10-year average of 3.4 million pounds for first quarter production. An additional 266,000 pounds of nuts deemed were also delivered during this period but not recorded as revenue due to a dispute with Mauna Loa Macadamia Nut Corporation ("Mauna Loa"), the exclusive purchaser of all the Partnership's nut production. Mauna Loa is required by contract to purchase all of the nuts delivered from the Partnership's orchards, which had been the case from 1986 to 1999. In 2000, Mauna Loa was sold to new owners, and Mauna Loa did not pay for 1.8 million pounds of nuts delivered in calendar year 2000. The Partnership has filed a lawsuit to collect payment.

    Average nut prices received for the first quarter of 2001 were 51¢ per pound compared to an average of 58¢ per pound for the first quarter of 2000. The price that the Partnership receives for its nuts is based 50% on the current year processing and marketing results of Mauna Loa and 50% on USDA-reported macadamia nut prices for the two preceding years. The USDA portion for the current year will be lower than the previous year by 6%. The Mauna Loa portion of the current year's nut price is currently estimated to be the same as 2000. However, the final nut price for the year will not be known until the completion of the year, when Mauna Loa's books have been closed and audited and that portion of the nut price is determined. For the full year 2000, the actual average nut price received by the Partnership was 51¢ per pound.

    Cost of goods sold (owned-orchard segment) for the first quarter 2001 was $1.5 million, or 41¢ per pound, compared to $1.2 million, or 48¢ per pound, for the first quarter 2000. Prior to the Partnership's acquisition of the macadamia farming operations on May 1, 2000, all production activities were performed under long-term farming contracts. Production costs both before and after the acquisition are based on annualized standard unit costs for interim reporting periods. The first quarter 2001 is estimated to be lower than the first quarter 2000. This is partly due to the savings incurred by the Partnership performing its own farming and partly due to a shift of the general and administrative expenses, which were previously incurred by the farming contractors and included in the farming costs. These costs are now classified as general and administrative expenses.

9

Farming Segment

    Farming service revenue was $1.3 million for the first quarter 2001. The cost of services sold was $1.2 million, which included $139,000 of depreciation expense. The Partnership was not engaged in this activity in 2000 until the second quarter.

General and Administrative Expenses

    General and administrative expenses are higher for the first quarter 2001 by $215,000 compared to the same period in 2000. Prior to the farming operations acquisition, general and administrative expenses incurred by the farming contractors were included in their farming invoices and recorded by the Partnership as cost of goods sold. These same costs are now incurred directly by the Partnership and are recorded as general and administrative expenses. These costs amounted to $131,000 for the first quarter 2001. The Partnership also incurred $159,000 in legal expenses related to the lawsuit with Mauna Loa in the first quarter 2001.

Other Income and Expenses

    The Partnership recorded interest expense of $113,000 for the first quarter of 2001. 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 the revolving line of credit. There was no interest expense for the first quarter of 2000.

    Interest income was $7,000 for the first quarter of 2001 compared to $148,000 in the first quarter of 2000. In the first quarter 2000, the Partnership was earning interest on its cash on hand, which was held in anticipation of the May 2000 acquisition.

Liquidity and Capital Resources

    Macadamia nut farming is seasonal, with production peaking in the fall and winter. However, farming operations continue year round. As a result, additional working capital is required for much of the harvesting season.

    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. On March 31, 2001 the Partnership had a cash balance of $356,000 and no short-term borrowings outstanding. The Partnership anticipates borrowing from the revolving line of credit to fund working capital needs arising from the normal seasonal requirements of macadamia nut farming, usually from the beginning of harvesting operation in June or July to the following January.

    On March 31, 2001, the Partnership had $4.2 million in outstanding long-term debt representing a $4.0 million ten-year note under its Credit Agreement and $162,000 of capital leases. The Credit Agreement contains certain restrictions, which are discussed in Part II—Item 2 below.

    On March 31, 2001 the Partnership's working capital was $1.4 million and its current ratio was 1.69 to 1, down from $8.5 million and 3.64 to 1 on March 31, 2000. The lower working capital for 2001 is due to the $9 million expenditure on orchards and farming operations and lower nut revenues in the year 2000. The Partnership's Credit Agreement requires a working capital minimum of $2.5 million and a minimum current ratio of 1.50 to 1. Since the financial results of the year 2000 and the first quarter 2001 were partially the result of the dispute with Mauna Loa, an event that was not controllable by the Partnership, the Partnership requested an amendment to its Credit Agreement to cure these violations. Pacific Coast Farm Credit Services agreed to amend the Credit Agreement to allow the amount of the Mauna Loa disputed revenue to be added to current assets for the purpose of these two financial calculations. The amendment is temporary and will be rescinded at the earlier of a favorable outcome of the Mauna Loa dispute or on March 31, 2002.

10

    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, with the September 2000 sale of Mauna Loa, the managing partner no longer has control over the timing of nut payments to the Partnership. The nut purchase contracts require Mauna Loa to make nut payments 30 days after the end of each quarter. During certain parts of the year, if payments are not received as the contracts require, available cash resources could be depleted.

Legal Proceedings

    The Partnership is a party to five macadamia nut purchase contracts with Mauna Loa. Three of these contracts, one written in 1983 and two in 1986, require Mauna Loa to pay for all nuts delivered. Since the inception of these three contracts, Mauna Loa has always paid for all nuts delivered. The other two nut purchase contracts were written in 1989 and 1999 and allow for the deduction of unusable nuts in calculating the payment due.

    On October 31, 2000, Mauna Loa made payment to the Partnership for nuts delivered during the third quarter 2000, but deducted from its payment the value of 1,129,000 pounds delivered by the Partnership from January 1 to September 30, 2000 on the 1983 and 1986 nut purchase contracts. This deduction amounted to $600,000. On January 31, 2001, Mauna Loa made its payment to the Partnership for fourth quarter nut deliveries. Mauna Loa again deducted from its payment the value of 679,000 pounds on the 1983 and 1986 contracts. The cumulative amount of disputed income and interest as of December 31, 2000 was $931,000. An additional $130,000 of disputed income has been generated in the first quarter of 2001.

    The Partnership's legal counsel advised that Mauna Loa is required to pay for all nuts delivered. The Partnership filed suit for collection on December 26, 2000, and filed a motion for summary judgment. The court heard the motion for summary judgment on February 15, 2001. The Partnership's motion was neither granted nor declined, but rather, the court allowed a 90-day discovery period before making its decision. The motion for summary judgment is now scheduled for May 18, 2001.

Item 3. 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 March 31, 2001, a one percent increase or decrease in the applicable rate under the Credit agreement will result in an interest expense fluctuation of approximately $40,000.

11

Part II—Other Information

Item 2. Changes in Securities

    In connection with the Credit Agreement with Pacific Coast Farm Credit Services, certain restrictions are placed on the Partnership in regard to indebtedness, sales of assets and maintenance of certain financial minimums. The Partnership's cash distributions will be restricted unless all requirements of these covenants are met and the effects of any cash distributions do not breach any of the financial covenants. The restrictive 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, 2000 plus a base amount of $3 million.



4.

Minimum tangible net worth of $57.5 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.

Pacific Coast Farm Credit Services agreed to amend the Credit Agreement to allow the amount of the Mauna Loa disputed revenue to be added to current assets for the purpose of these financial calculations. The amendment is temporary and will be rescinded at the earlier of a favorable outcome of the Mauna Loa dispute or on March 31, 2002.

Item 6. Exhibits and Reports on Form 8-K

(a)

The following documents are filed as part of this report:

Exhibit Number	Description	Page Number
11.1	Statement re Computation of Net Income per Class A Unit	14

(b)

Reports on Form 8-K:



No reports on Form 8-K were filed during the first quarter of 2001.

12

SIGNATURE

    Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		ML MACADAMIA ORCHARDS, L.P. (Registrant)
	By	ML Resources, Inc. Managing General Partner
Date: May 11, 2001	By	/s/ GREGORY A. SPRECHER   Gregory A. Sprecher Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer)

13

QuickLinks

ML Macadamia Orchards, L.P. Balance Sheets (in thousands)
Income Statements (unaudited) (in thousands, except per unit data)
ML Macadamia Orchards, L.P. Statements of Partners' Capital (unaudited) (in thousands)
ML Macadamia Orchards, L.P. Statements of Cash Flows (unaudited) (in thousands)
ML MACADAMIA ORCHARDS, L.P. Notes to Financial Statements
ML MACADAMIA ORCHARDS, L.P. Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Part II—Other Information

Item 2. Changes in Securities