Royal Hawaiian Orchards (NNUTU) 10-Q 2002 Q1 Quarterly report

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

FORM 10-Q

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

For the quarterly period ended March 31, 2002

or

o 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.)
26-238 Hawaii Belt Drive HILO, HAWAII (Address Of Principal Executive Offices)	96720 (Zip Code)

Registrant's Telephone Number, Including Area Code:808-969-8057

        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 ý    No o

        As of March 31, 2002, 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	11
	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, 2001
			2002		2001
			(unaudited)
Assets
Current assets
	Cash and cash equivalents		$	203	$	356	$	357
	Accounts receivable			4,807		2,490		6,486
	Inventory of farming supplies			166		159		157
	Annualized cost adjustment			684		337		—
	Other current assets			223		191		46
		Total current assets		6,083		3,533		7,046
Land, orchards and equipment, net				57,620		59,984		58,259
Intangible assets, net				23		26		24
	Total assets		$	63,726	$	63,543	$	65,329
Liabilities and partners' capital
Current liabilities
	Current portion of long-term debt		$	474	$	459	$	475
	Short-term borrowings			800		—		1,200
	Accounts payable			272		154		466
	Cash distributions payable			379		379		379
	Accrued payroll and benefits			635		729		859
	Other current liabilities			253		366		484
		Total current liabilities		2,813		2,087		3,863
Long-term debt				3,374		3,703		3,402
Deferred income tax liability				1,220		1,199		1,220
		Total liabilities		7,407		6,989		8,485
Commitments and contingencies
Partners' capital
	General partners			563		566		569
	Class A limited partners, no par or assigned value, 7,500 units issued and outstanding			55,756		55,988		56,275
	Total partners' capital			56,319		56,554		56,844
	Total liabilities and partners' capital		$	63,726	$	63,543	$	65,329

See accompanying notes to financial statements.

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

			Three months ended March 31,
			2002			2001
Macadamia nut sales			$	1,634		$	1,740
Contract farming revenue				975			1,277
	Total revenues			2,609			3,017
Cost of goods and services sold
	Costs expensed for farming and services			1,842			2,312
	Depreciation and amortization			385			382
	Other			90			71
		Total cost of goods and services sold		2,317			2,765
		Gross income		292			252
General and administrative expenses
	Costs expensed under management contract with related party			61			61
	Other			289			492
		Total general and administrative expenses		350			553
		Operating loss		(58	)		(301	)
Interest expense				(97	)		(113	)
Interest income				19			7
		Income (loss) before tax		(136	)		(407	)
Income tax expense				10			9
		Net income (loss)	$	(146	)	$	(416	)
Net cash flow (deficit)
	(as defined in the Partnership Agreement)		$	210		$	(47	)
Net income (loss) per Class A Unit			$	(0.02	)	$	(0.05	)
Net cash flow (deficit) per Class A Unit			$	0.03		$	(0.01	)
Cash distributions per Class A Unit			$	0.05		$	0.05
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,
		2002			2001
Partners' capital at beginning of period:
	General partners	$	569		$	574
	Class A limited partners		56,275			56,775
			56,844			57,349
Allocation of net income (loss):
	General partners		(2	)		(4	)
	Class A limited partners		(144	)		(412	)
			(146	)		(416	)
Cash distributions:
	General partners		4			4
	Class A limited partners		375			375
			379			379
Partners' capital at end of period:
	General partners		563			566
	Class A limited partners		55,756			55,988
		$	56,319		$	56,554

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,
			2002			2001
Cash flows from operating activities:
	Cash received from good and services		$	4,489		$	5,098
	Cash paid to suppliers and employees			(3,829	)		(3,328	)
	Interest received			—			7
Net cash provided by operating activities				660			1,777
Cash flows from investing activities
	Acquisition of capital equipment			(6	)		—
Net cash used in investing activities				(6	)		—
Cash flows from financing activities:
	Proceeds from drawings on line of credit			1,500			800
	Repayment of line of credit			(1,900	)		(1,700	)
	Capital lease payments			(29	)		(13	)
	Cash distributions paid			(379	)		(682	)
Net cash used in financing activities				(808	)		(1,595	)
Net increase (decrease) in cash				(154	)		182
Cash at beginning of period				357			174
Cash at end of period			$	203		$	356
Reconciliation of net income (loss) to net cash provided by operating activities:
	Net income (loss)		$	(146	)	$	(416	)
	Adjustments to reconcile net income (loss) to cash provided by operating activities:
		Depreciation and amortization		385			382
		Decrease in accounts receivable		1,679			2,104
		Decrease (increase) in inventories		(9	)		9
		Increase in annualized cost adjustment		(424	)		(65	)
		Increase in other current assets		(178	)		(167	)
		Decrease in accounts payable		(193	)		(78	)
		Decrease in accrued payroll and benefits		(224	)		(165	)
		Decrease (increase) in other current liabilities		(230	)		173
	Total adjustments			806			2,193
Net cash provided by operating activities			$	660		$	1,777

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, 2002, March 31, 2001 and December 31, 2001 and the results of operations, changes in partners' capital and cash flows for the periods ended March 31, 2002 and 2001. The results of operations for the period ended March 31, 2002 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 2001 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 periods ended March 31, 2002 and March 31, 2001.

Segment Reporting for the Three Months ended March 31, 2002
(in thousands)

	Owned Orchards			Contract Farming		Intersegment elimination			Total
Revenues	$	1,634		$	2,340	$	(1,365	)	$	2,609
Composition of intersegment revenues		—			1,365		—			1,365
Operating income (loss)		(140	)		82		—			(58	)
Depreciation expense		323			68		—			385
Segment assets		56,535			7,191		—			63,726
Expenditures for property and equipment		—			6		—			6

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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.

(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)

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.

(5)

CASH DISTRIBUTIONS

        On March 7, 2002, a first quarter cash distribution was declared in the amount of five cents ($0.05) per Class A Unit, payable on May 15, 2002 to unitholders of record as of the close of business on March 29, 2002.

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

Results of Operations

        For the first quarter 2002, ML Macadamia Orchards recorded a net loss of $146,000 or $0.02 per Class A Unit, compared to a net loss of $416,000, or $0.05 per Class A Unit, for the first quarter 2001. Total revenues for the first quarter 2002 were $2.6 million, which included $975,000 of farming service revenue. First quarter 2001 revenue was $3.0 million, which included $1.3 million of farming service revenue.

Owned-orchard Segment

        For the three months ending March 31, 2002 and 2001, nut production, nut prices and nut revenues are summarized below:

	For the Three Months Ended March 31,
	2002		2001		Change
Nut harvested (000's pounds WIS @25%)		3,385		3,513	-4	%
Nut price (per pound)	$	0.4823	$	0.4953	-3	%
Net nut sales ($000's)		1,634		1,740	-6	%

        Production for the three-month period ending March 31, 2002 was 3.4 million pounds, 4% less than for the first quarter 2001, and equal to the Partnership's 10-year average of 3.4 million pounds for first quarter production. In 2001 an additional 266,000 pounds of nuts were also delivered 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. A settlement was reached with Mauna Loa and payment was received for all previously unpaid production in October of 2001.

        Average nut prices received for the first quarter of 2002 were 48¢ per pound compared to an average of 50¢ per pound for the first quarter of 2001. 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 4%. The Mauna Loa portion of the current year's nut price is currently estimated to be the same as 2001. 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 2001, the actual average nut price received by the Partnership was 48¢ per pound.

        Cost of goods sold (owned-orchard segment) for the first quarter 2002 was $1.4 million, or 42¢ per pound, compared to $1.5 million, or 41¢ per pound, for the first quarter 2001. Production costs are based on annualized standard unit costs for interim reporting periods. The first quarter 2002 is estimated to be about the same as the first quarter 2001.

Farming Segment

        Farming service revenue was $975,000 for the first quarter 2002 compared with $1.3 million for the first quarter 2001. The cost of services sold was $894,000 in 2002 and $1.2 million in 2001, which included $68,000 and $139,000 of depreciation expense, respectively. During 2001 work was done to repair damage caused by the November 2000 storm. Revenue during the first quarter of 2001 related to the repair work was $69,000. Also, because of the November 2000 storm harvesting that would have

9

been performed in the fourth quarter of 2000 was performed in the first quarter of 2001. An additional 210,000 pounds of nuts were harvested in the first quarter of 2001 compared to the first quarter 2002. The revenue related to the additional harvesting in the first quarter of 2001 was $95,000. Lastly, as a result of the decrease in the nut price a more conservative approach to farming was implemented during the later part of 2001 and continued in the first quarter of 2002.

General and Administrative Expenses

        General and administrative expenses are lower for the first quarter 2002 by $203,000 compared to the same period in 2001. The Partnership incurred $159,000 in legal expenses related to the lawsuit with Mauna Loa in the first quarter 2001. Additionally, the Honolulu office was operating in the 1^st quarter 2001. Its operations were consolidated with the office in Hilo resulting in employee reduction therein reducing costs in the 1^st quarter of 2002 by $22,000.

Other Income and Expenses

        The Partnership recorded interest expense of $97,000 for the first quarter 2002 and $113,000 for the first quarter of 2001. This was due to (1) the long-term loan used to acquire the farming operations, (2) capitalized equipment leases, and (3) interest expense on the revolving line of credit.

        Interest income was $19,000 for the first quarter of 2002 and $7,000 for the first quarter of 2001.

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, 2002 the Partnership had a cash balance of $203,000 and $800,000 in short-term borrowings. 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, 2002, the Partnership had $3.8 million in outstanding long-term debt representing a $3.6 million ten-year note under its Credit Agreement and $248,000 of capital leases. This compares to $4.2 million long-term debt at March 31, 2001, represented by $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, 2002 the Partnership's working capital was $3.3 million and its current ratio was 2.16 to 1, up from $1.4 million and 1.69 to 1 on March 31, 2001. The higher working capital for 2002 is due to the settlement of the dispute with Mauna Loa Macadamia Nut Corporation and profitable operations in 2001. The Partnership's Credit Agreement requires a working capital minimum of $2.5 million and a minimum current ratio of 1.50 to 1. The Partnership is in compliance with the credit terms of its Credit Agreement.

        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.

10

        On January 30, 2002, the Partnership received a payment of $2.4 million from Mauna Loa on a total receivable of $5.4 million and issued a notice of nonperformance to Mauna Loa, providing 30 days to remedy the nonperformance. Since January, six additional payments were received totaling $1.6 million, leaving an unpaid past due balance of approximately $1.4 million. On March 11, Mauna Loa was provided with a Notice of Default. Additionally, the $1.8 million payment for nuts delivered in the first quarter of 2002 has not been received, which was due on April 30, 2002.

        The Partnership believes that the receivables from Mauna Loa will be collected over the next several months and has not established an allowance for this account. The Partnership is assessing various alternatives on the defaulted contracts and may file suit for collection.

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, a dispute arose with Mauna Loa regarding the payment for nuts delivered by the Partnership during the year. In violation of the nut purchase contracts and past practice, Mauna Loa deducted $908,000 for certain substandard nuts related to the 1983 and 1986 contracts. A demand letter was sent, litigation ensued and a motion for summary judgment was entered on June 4, 2001 against Mauna Loa awarding principal, interest and attorneys fees to the Partnership.

        Settlement discussions followed the judgment in order to avoid an appeal and further litigation. The Partnership agreed to accept principal, interest and portion of its legal fees along with a complete release by both parties.

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 $36,000.

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).

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5.

Maximum ratio of funded debt to capitalization of 20%.

6.

Minimum debt coverage ratio of 2.5 to 1.

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.

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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 13, 2002	By	/s/  DENNIS J. SIMONIS      Dennis J. Simonis President and Chief Operating Officer (and Duly Authorized Officer)
	By	/s/  WAYNE W. ROUMAGOUX      Wayne W. Roumagoux Principal Accounting Officer

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QuickLinks

ML MACADAMIA ORCHARDS, L.P. INDEX
ML Macadamia Orchards, L.P. Balance Sheets (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