Royal Hawaiian Orchards (NNUTU) 10-Q 2001 Q3 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 September 30, 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.)
P.O. Box 130 PAHALA, HAWAII (Address Of Principal Executive Offices)	96777 (Zip Code)

Registrant's Telephone Number, Including Area Code:808-928-3034

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 September 30, 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	3-9
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	10-12
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	12
Part II—Other Information
	Item 2. Changes in Securities	13
	Item 6. Exhibits and Reports on Form 8-K	13
	Signatures	14

2

ML Macadamia Orchards, L.P.
Balance Sheets (unaudited)
(in thousands)

			September 30,
							December 31, 2000
			2001		2000
Assets
Current assets
	Cash and cash equivalents		$	140	$	248	$	174
	Accounts receivable			5,813		5,357		4,594
	Inventory of farming supplies			145		126		168
	Annualized cost adjustment			1,684		1,892		—
	Other current assets			107		99		24
		Total current assets		7,889		7,722		4,960
Land, orchards and equipment, net				58,728		61,248		60,638
Intangible assets, net				25		30		27
	Total assets		$	66,642	$	69,000	$	65,625
Liabilities and partners' capital
Current liabilities
	Current portion of long-term debt		$	456	$	431	$	459
	Short-term borrowing			3,000		1,500		900
	Accounts payable			307		370		200
	Accounts payable to related party			28		51		32
	Cash distributions payable			379		947		682
	Accrued payroll and benefits			649		933		869
	Other current liabilities			363		278		219
		Total current liabilities		5,182		4,510		3,361
Long-term debt				3,277		3,757		3,716
Deferred income tax liability				1,199		1,249		1,199
		Total liabilities		9,658		9,516		8,276
Commitments and Contingencies
Partners' capital
	General partners			569		595		574
	Class A limited partners, no par or assigned value, 7,500 units issued and outstanding			56,415		58,889		56,775
		Total partners' capital		56,984		59,484		57,349
		Total liabilities and partners' capital	$	66,642	$	69,000	$	65,625

See accompanying notes to financial statements.

3

ML Macadamia Orchards, L.P.
Income Statements (unaudited)
(in thousands, except per unit data)

			Three months ended September 30,						Nine months ended September 30,
			2001			2000			2001			2000
Macadamia nut sales to related party			$	3,632		$	4,392		$	6,838		$	6,635
Contract farming revenue				1,135			1,569			3,108			2,052
	Total revenues			4,767			5,961			9,946			8,687
Cost of goods and services
	Costs expensed for farming and services			3,631			3,683			6,796			5,535
	Depreciation and amortization			632			822			1,160			1,233
		Total cost of goods sold		4,263			4,505			7,956			6,768
		Gross income		504			1,456			1,990			1,919
General and administrative expenses
	Costs expensed under management contract with related party			35			90			193			309
	Other			77			279			909			632
		Total general and administrative expenses		112			369			1,102			941
		Operating income		392			1,087			888			978
Interest expense				(115	)		(115	)		(325	)		(192	)
Interest income				17			7			64			233
Other income				207			—			207			104
		Income before tax		501			979			834			1,123
Income tax expense				16			50			63			67
		Net income	$	485		$	929		$	771		$	1,056
Net cash flow (as defined in the Partnership Agreement)			$	1,103		$	1,740		$	1,489		$	2,270
Net income per Class A Unit			$	0.06		$	0.12		$	0.10		$	0.14
Net cash flow per Class A Unit			$	0.15		$	0.23		$	0.20		$	0.30
Cash distributions per Class A Unit			$	0.05		$	0.125		$	0.15		$	0.375
Class A Units outstanding				7,500			7,500			7,500			7,500

See accompanying notes to financial statements.

4

ML Macadamia Orchards, L.P.
Statements of Partners' Capital (unaudited)
(in thousands)

		Three months ended September 30,				Nine months ended September 30,
		2001		2000		2001		2000
Partners' capital at beginning of period:
	General partners	$	569	$	595	$	574	$	613
	Class A limited partners		56,309		58,908		56,775		60,657
			56,878		59,503		57,349		61,270
Allocation of net income
	General partners		4		10		7		11
	Class A limited partners		481		919		764		1,045
			485		929		771		1,056
Cash distributions:
	General partners		4		10		12		29
	Class A limited partners		375		938		1,125		2,813
			379		948		1,137		2,842
Partners' capital at end of period:
	General partners		569		595		569		595
	Class A limited partners		56,415		58,889		56,415		58,889
		$	56,984	$	59,484	$	56,984	$	59,484

See accompanying notes to financial statements.

5

ML Macadamia Orchards, L.P.
Statements of Cash Flows (unaudited)
(in thousands)

			Three months ended September 30,						Nine months ended September 30,
			2001			2000			2001			2000
Cash flows from operating activities:
	Cash received from goods and services		$	1,183		$	1,702		$	9,170		$	10,937
	Cash paid to suppliers and employees			(3,030	)		(3,552	)		(9,370	)		(10,148	)
	Interest received			—			7			7			233
Net cash provided by (used in) operating activities				(1,847	)		(1,843	)		(193	)		1,022
Cash flows from investing activities:
	Acquisition of orchards and farming business			(39	)		—			(59	)		(8,928	)
Net cash used in investing activities				(39	)		—			(59	)		(8,928	)
Cash flows from financing activities:
	Proceeds from line of credit			2,500			1,500			3,900			5,500
	Payment of line of credit			(100	)		—			(1,800	)		—
	Proceeds (payments) from long term borrowing			—			—			(400	)		—
	Capital lease payments			(14	)		(11	)		(42	)		(19	)
	Cash distributions paid			(379	)		(947	)		(1,440	)		(2,652	)
Net cash provided by financing activities				2,007			542			218			2,829
Net increase (decrease) in cash				121			(1,301	)		(34	)		(5,077	)
Cash at beginning of period				19			1,549			174			5,325
Cash at end of period			$	140		$	248		$	140		$	248
Reconciliation of net income to net cash provided by (used in) operating activities:
	Net income		$	485		$	929		$	771		$	1,056
	Adjustments to reconcile net income to cash provided by (used in) operating activities:
		Depreciation and amortization		632			822			1,160			1,233
		Decrease (increase) in accounts receivable		(3,891	)		(4,038	)		(1,220	)		2,330
		Decrease (increase) in inventories		(2	)		5			23			53
		Decrease (increase) in annualized cost adjustment		683			343			(797	)		(1,206	)
		Decrease (increase) in other current assets		43			(100	)		(82	)		(571	)
		Increase (decrease) in accounts payable		163			(319	)		103			(2,398	)
		Increase (decrease) in accrued payroll		63			505			(233	)		39
		Increase (decrease) in other current liabilities		(23	)		10			82			486
	Total adjustments			(2,332	)		(2,772	)		(964	)		(34	)
Net cash provided by (used in) operating activities			$	(1,847	)	$	(1,843	)	$	(193	)	$	1,022

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 September 30, 2001, September 30, 2000 and December 31, 2000 and the results of operations, changes in partners' capital and cash flows for the periods ended September 30, 2001 and 2000. The results of operations for the period ended September 30, 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 inter segment sales and transfers at cost. Such inter segment 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.

7

    The following is a summary of each reportable segment's operating income and the segment's assets as of, and for the three and nine month periods, ended September 30, 2001 and 2000.

		Three months ended September 30,						Nine months ended September 30,
		2001			2000			2001			2000
Revenues:
	Owned orchards	$	3,632		$	4,392		$	6,838		$	6,635
	Contract farming		1,561			3,764			5,266			5,178
	Intersegment elimination (all contract farming)		(426	)		(2,195	)		(2,158	)		(3,126	)
	Total	$	4,767		$	5,961		$	9,946		$	8,687
Operating income:
	Owned orchards	$	278		$	1,061		$	550		$	968
	Contract farming		114			26			338			10
	Total	$	392		$	1,087		$	888		$	978
Depreciation:
	Owned orchards	$	476		$	606		$	870		$	912
	Contract farming		156			216			290			321
	Total	$	632		$	822		$	1,160		$	1,233
Expenditures for property and equipment:
	Owned orchards	$	39		$	—		$	59		$	2,533
	Contract farming		—			—			—			6,395
	Total	$	39		$	—		$	59		$	8,928
Segment assets:
	Owned orchards							$	60,392		$	59,815
	Contract farming								6,250			9,185
	Total							$	66,642		$	69,000

    All revenues are from sources within the United States.

(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 CREDIT

    Revolving Credit Loan.  On May 2, 2000, the Partnership entered into a credit agreement with Pacific Farm Credit Services, under which it will have available a $5 million revolving credit facility through April 30, 2004. There was $3,000,000 in borrowings outstanding under this credit facility as of September 30, 2001.

    Borrowings under this agreement bear interest at the prime-lending rate. 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.

8

    Term Debt.  As of September 30, 2001, the Partnership owed $3.6 million on a $4 million promissory note, 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 6.45 percent to 9.16 percent. Principal payments of $400,000 are due on May 1 of each year through 2010.

(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 August 17, 2001, a third quarter cash distribution was declared in the amount of five cents ($0.05) per Class A Unit, payable on November 15, 2001 to unit holders of record as of the close of business on September 28, 2001.

(7) LEGAL PROCEEDINGS

    On June 4, 2001, the Partnership was granted a motion for summary judgment against Mauna Loa Macadamia Nut Corporation ("Mauna Loa"), its exclusive purchaser, in a complaint filed on December 26, 2000. The judgment ordered that Mauna Loa make payment for all nuts delivered by the Partnership, as required by the 1983 and 1986 nut purchase contracts. Mauna Loa did not pay for certain nuts delivered in 2000 and 2001, which they had deemed to be substandard. The disputed nut revenue was recorded in the second quarter of 2001 as a result of the favorable judgment. A final settlement was reached with Mauna Loa and payment was received during the month of October of this year. The settlement included a reimbursement of $200,000 for legal fees and associated costs, which was recorded as other income during the third quarter of 2001.

9

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

    On May 1, 2000, the Partnership completed the purchase of the macadamia farming operations from four subsidiaries of C. Brewer and Company, Ltd. The acquired assets consist of 142 acres of macadamia orchards, farming contracts, farming equipment, vehicles, a husking plant, irrigation well, office buildings, garages and warehouses, office furniture and equipment and material inventories related to macadamia farming. All the assets and operations are located on the island of Hawaii. Effective with the acquisition, the Partnership now performs all the farming operations for its own 4,169 acres and for approximately 3,000 additional acres owned by other growers.

Results of Operations

    ML Macadamia Orchards' net income for the third quarter of 2001 was $485,000, as compared to the $929,000 recorded in same period in 2000. Net income per Class A Unit was $0.06 compared to last year's net income of $0.12. Net cash flow per Class A Unit decreased to $0.15 from $0.23.

    Total revenues for the third quarter 2001 were $4.8 million, of which $3.6 million was nut revenue and $1.1 million farming revenue. This compared to last year's third quarter revenues of $6.0 million, of which $4.4 million was nut revenue and $1.6 million was farming revenue.

    Net income for the nine months ended September 30, 2001 was $771,000, compared to $1,056,000 recorded in the first nine months of 2000. Net income for the first three quarters of the prior year was based on an estimated nut price from Mauna Loa, which was ultimately adjusted downward in the fourth quarter. Net income per Class A Unit was $0.10 compared to $0.14 last year and net cash flow per Class A Unit was $0.20 compared to $0.30.

    Revenues for the first nine months of 2001 were $9.9 million, 14% higher than the $8.7 million recorded in the first nine months of 2000. The current year includes approximately $1 million in revenue from the favorable outcome of litigation and nine months of farming activities against only five months in the prior year.

Owned-orchard Segment

    For the three months and the nine months ending September 30, 2001 and 2000, nut production, nut prices and revenues are summarized below:

	For the Three Months Ended September 30,
	2001		2000		Change
Nut harvested (000's pounds WIS)		7,389		8,617	-14	%
Nut price (per pound)	$	0.4915	$	0.5097	-4	%
Total nut sales ($000's)	$	3,632	$	4,392	-17	%

10

	For the Nine Months Ended September 30,
	2001		2000		Change
Nut harvested (000's pounds WIS)		11,998		12,465	-4	%
Nut price (per pound)	$	0.4942	$	0.5323	-7	%
Net nut sales ($000's)		5,930		6,635
Litigation Revenues ($000's)		908		—
Total nut sales ($000's)	$	6,838	$	6,635	+3	%

    Production for the three-month period ending September 30, 2001 was 14% lower than the three-month period ending September 30, 2000. The nine-month period ending September 30, 2001 was 4% lower than the same period in 2000. The production for the third quarter 2001 was 20% above the historical average for this period. The production for the nine month period ending September 30, 2001 was 14% higher the historical average for this period due to the flood in November of 2000 that resulted in part of the winter crop being carried over to the first quarter of 2001.

    The average nut price received for the third quarter 2001 was $0.4915, a 4% decline from the third quarter 2000. This price is based on Mauna Loa's latest estimate and may be different from the price that is ultimately paid. For the nine-month period, nut prices declined by 7% compared to the same period in 2000. The Partnership's nut price is determined by a formula which is weighted 50% on the two-year trailing average of USDA reported prices and 50% on the current year processing and marketing results of Mauna Loa Macadamia Nut Corporation ("Mauna Loa"), our exclusive purchaser. The USDA portion of the current year's nut price will be 6% lower than the previous year, and the Mauna Loa portion of the current year's nut price is estimated to be flat (to the prior full year actual). It is expected that Mauna Loa's business may be adversely affected by the recent terrorist attacks, which have negatively impacted Hawaii tourism. However, the final nut price for the year is not 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 $0.5126.

    Prior to the 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. Total production costs for the owned-orchards were lower for the three-month period in 2001 compared to the same period in 2000 due to lower production. For the nine-month period, farming costs for the current year were higher due to the costs related to the repairs required because of the November 2000 flood.

Farming Segment

    The Partnership has been involved in farming activities since the May 1, 2000 acquisition of the assets of Ka'u Agribusiness discussed above. Revenue generated from the farming of macadamia orchards owned by other growers was $1,135,000 for the third quarter 2001, or 28% lower than the three months ended September 30, 2000. Farming expenses for the quarter ended September 30, 2001 were $1,065,000, which included $156,000 of depreciation expense. Farming revenues for the first nine months of 2001 were $3,108,000 compared to the five months in 2000 of $2,052,000, which included $164,000 in service fees earned by the farming operations accounting office for accounting and data processing services provided to the previous owner during a period of transition.

Other Income and Expenses

    The Partnership recorded interest expense of $115,000 for the third quarter 2001, which was equivalent to the same period in 2000. For the nine months ended September 30, 2001 and 2000, interest expense was $325,000 and $192,000, respectively. The interest results from borrowings required to acquire the farming operations and the increase is the result of the timing of the acquisition, and the cost of funding payments withheld by Mauna Loa.

11

    Interest income increased by $10,000 for the quarter and decreased $169,000 for the first nine months of 2001 compared to 2000 for the same reasons as discussed above.

    Other income of $207,000 was recorded in the third quarter of 2001 as a result of legal fees reimbursed under the settlement agreement with Mauna Loa. Other income is $207,000 and $104,000 for the nine months ended September 30, 2001 and 2000, respectively.

Liquidity and Capital Resources

    For the nine months ended September 30, 2001, cash used in operations of $200,000 was derived principally from an increase in accounts receivable, an increase in the annualized cost adjustment and a decrease in accounts payable. Cash provided by operations was used to pay distributions to Unit holders of $1.4 million. During the nine-month period the Partnership has borrowed $2,100,000 net on its revolving line of credit.

    At September 30, 2001, the Partnership had $3.7 million in outstanding long-term debt representing a $3.6 million ten-year note under a new Credit Agreement and $100,000 of assumed capital leases. The Credit Agreement contains certain restrictions, which are discussed in Part II—Item 2 below.

    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 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 Partnership had a cash balance of $140,000 at September 30, 2001 and there was $3,000,000 drawn on the line of credit. The Partnership has repaid the line of credit prior to the end of October 2001 and anticipates borrowing from the revolving line of credit during the last two months of the year to fund working capital needs arising from the normal seasonal requirements of macadamia nut farming.

    It is the opinion of management that the Partnership has adequate borrowing capacity available to meet anticipated working capital needs.

Other Developments

    For the third consecutive year, the Ka'u region is suffering from drought conditions, receiving nineteen inches of rainfall for the first nine months of the year. One-third of the acres in Ka'u have irrigation, but normal production on the remaining acres may not be sustained, and a continuing drought could have a negative impact on the region's production for the forthcoming 2001-2002 crop year.

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 September 30, 2001, a one percent increase or decrease in the applicable rate under the Credit agreement will result in an interest expense fluctuation of approximately $36,000.

12

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.

    The Partnership is in compliance with all covenants of the Credit Agreement with Pacific Coast Farm Credit Services as of September 30, 2001 other than the minimum debt coverage ratio. The bank has provided a one-time waiver for this covenant, in consideration of the overall financial state of the company. The debt coverage ratio is expected to be met in upcoming periods.

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	16

    (b) Reports on Form 8-K:

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

13

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: November 12, 2001	By	/s/ Dennis J. SimonisDennis J. Simonis President and Chief Operating Officer
	By	/s/ Wayne W. RoumagouxWayne W. Roumagoux Principal Accounting Officer

14

EXHIBIT INDEX

Number	Description of Exhibits	Page No.
11.1	Statement re Computation of Net Income per Class A Unit	16

15

QuickLinks

ML MACADAMIA ORCHARDS, L.P. INDEX
ML Macadamia Orchards, L.P. Balance Sheets (unaudited) (in thousands)
ML Macadamia Orchards, L.P. 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
Part II—Other Information
SIGNATURE
EXHIBIT INDEX