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 June 30, 2005 |
| | |
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 | | 99-0248088 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
| | |
26-238 Hawaii Belt Drive HILO, HAWAII | | 96720 |
(Address Of Principal Executive Offices) | | (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
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No ý
As of June 30, 2005 Registrant had 7,500,000 Class A Units issued and outstanding.
ML MACADAMIA ORCHARDS, L.P.
INDEX
2
ML Macadamia Orchards, L.P.
Consolidated Balance Sheets
(in thousands)
| | June 30, | | December 31, | |
| | 2005 | | 2004 | | 2004 | |
| | (unaudited) | | | |
Assets | | | | | | | |
Current assets | | | | | | | |
Cash and cash equivalents | | $ | 94 | | $ | 1,057 | | $ | 196 | |
Accounts receivable | | 1,453 | | 749 | | 7,092 | |
Inventory of farming supplies | | 195 | | 152 | | 145 | |
Deferred farming costs | | 2,219 | | 3,087 | | — | |
Other current assets | | 242 | | 223 | | 153 | |
Total current assets | | 4,203 | | 5,268 | | 7,586 | |
Land, orchards and equipment, net | | 49,645 | | 52,026 | | 50,810 | |
Intangible assets, net | | 38 | | 39 | | 42 | |
Total assets | | $ | 53,886 | | $ | 57,333 | | $ | 58,438 | |
| | | | | | | |
Liabilities and partners’ capital | | | | | | | |
Current liabilities | | | | | | | |
Current portion of long-term debt | | $ | 435 | | $ | 444 | | $ | 435 | |
Short-term borrowing | | 200 | | — | | 2,200 | |
Accounts payable | | 106 | | 35 | | 738 | |
Cash distributions payable | | 375 | | 379 | | 379 | |
Accrued payroll and benefits | | 563 | | 517 | | 873 | |
Other current liabilities | | 17 | | 9 | | 30 | |
Total current liabilities | | 1,696 | | 1,388 | | 4,655 | |
Long-term debt | | 1,617 | | 2,043 | | 2,034 | |
Deferred income tax liability | | 1,207 | | 1,214 | | 1,207 | |
Total liabilities | | 4,519 | | 4,641 | | 7,896 | |
Commitments and contingencies | | | | | | | |
Partners’ capital | | | | | | | |
General partner | | 81 | | 527 | | 505 | |
Class A limited partners, no par or assigned value, 7,500 units issued and outstanding | | 49,285 | | 52,165 | | 50,037 | |
Total partners’ capital | | 49,366 | | 52,692 | | 50,542 | |
Total liabilities and partners’ capital | | $ | 53,886 | | $ | 57,333 | | $ | 58,438 | |
See accompanying notes to financial statements.
3
ML Macadamia Orchards, L.P.
Consolidated Income Statements (unaudited)
(in thousands, except per unit data)
| | Three months | | Six months | |
| | ended June 30, | | ended June 30, | |
| | 2005 | | 2004 | | 2005 | | 2004 | |
| | | | | | | | | |
Macadamia nut sales | | $ | 456 | | $ | 153 | | $ | 2,624 | | $ | 1,309 | |
Contract farming revenue | | 1,045 | | 634 | | 1,933 | | 1,530 | |
Total revenues | | 1,501 | | 787 | | 4,557 | | 2,839 | |
Cost of goods and services | | | | | | | | | |
Costs of macadamia nut sales | | 296 | | 78 | | 1,924 | | 1,114 | |
Costs of contract farming services | | 987 | | 569 | | 1,788 | | 1,377 | |
Total cost of goods sold | | 1,283 | | 647 | | 3,712 | | 2,491 | |
Gross income | | 218 | | 140 | | 845 | | 348 | |
General and administrative expenses | | | | | | | | | |
Costs expensed under management contract with related party | | 68 | | 42 | | 109 | | 80 | |
Legal fees paid to related party | | 8 | | 8 | | 16 | | 18 | |
Other | | 212 | | 211 | | 421 | | 419 | |
Total general and administrative expenses | | 288 | | 261 | | 546 | | 517 | |
Extinguishment of management agreement | | — | | — | | (326 | ) | — | |
Operating loss | | (70 | ) | (121 | ) | (27 | ) | (169 | ) |
Other income | | 147 | | — | | 147 | | — | |
Interest expense | | (44 | ) | (38 | ) | (94 | ) | (82 | ) |
Interest income | | 1 | | 3 | | 3 | | 7 | |
Income (loss) before tax | | 34 | | (156 | ) | 29 | | (244 | ) |
Income tax expense | | 8 | | 5 | | 30 | | 12 | |
Net income (loss) | | $ | 26 | | $ | (161 | ) | $ | (1 | ) | $ | (256 | ) |
| | | | | | | | | |
Net cash flow (as defined in the Partnership Agreement) | | $ | (262 | ) | $ | (486 | ) | $ | 66 | | $ | (341 | ) |
| | | | | | | | | |
Net loss per Class A Unit | | $ | (0.00 | ) | $ | (0.02 | ) | $ | (0.00 | ) | $ | (0.03 | ) |
| | | | | | | | | |
Net cash flow per Class A Unit | | $ | (0.03 | ) | $ | (0.06 | ) | $ | 0.01 | | $ | (0.05 | ) |
| | | | | | | | | |
Cash distributions per Class A Unit | | $ | 0.05 | | $ | 0.05 | | $ | 0.10 | | $ | 0.10 | |
| | | | | | | | | |
Class A Units outstanding | | 7,500 | | 7,500 | | 7,500 | | 7,500 | |
See accompanying notes to financial statements.
4
ML Macadamia Orchards, L.P.
Consolidated Statements of Partners’ Capital (unaudited)
(in thousands)
| | Three months | | Six months | |
| | ended June 30, | | ended June 30, | |
| | 2005 | | 2004 | | 2005 | | 2004 | |
| | | | | | | | | |
Partners’ capital at beginning of period: | | | | | | | | | |
General partner | | $ | 81 | | $ | 532 | | $ | 505 | | $ | 537 | |
Class A limited partners | | 49,635 | | 52,700 | | 50,037 | | 53,169 | |
| | 49,716 | | 53,232 | | 50,542 | | 53,706 | |
| | | | | | | | | |
Acquisition of ML Resources, Inc. | | — | | — | | (424 | ) | — | |
| | — | | — | | (424 | ) | — | |
| | | | | | | | | |
Allocation of net loss | | | | | | | | | |
General partner | | — | | (1 | ) | — | | (2 | ) |
Class A limited partners | | 26 | | (160 | ) | (1 | ) | (254 | ) |
| | 26 | | (161 | ) | (1 | ) | (256 | ) |
| | | | | | | | | |
Cash distributions: | | | | | | | | | |
General partner | | — | | 4 | | — | | 8 | |
Class A limited partners | | 375 | | 375 | | 750 | | 750 | |
| | 375 | | 379 | | 750 | | 758 | |
| | | | | | | | | |
Partners’ capital at end of period: | | | | | | | | | |
General partner | | 81 | | 527 | | 81 | | 527 | |
Class A limited partners | | 49,285 | | 52,165 | | 49,285 | | 52,165 | |
| | $ | 49,366 | | $ | 52,692 | | $ | 49,366 | | $ | 52,692 | |
See accompanying notes to financial statements.
5
ML Macadamia Orchards, L.P.
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
| | Three months | | Six months | |
| | ended June 30, | | ended June 30, | |
| | 2005 | | 2004 | | 2005 | | 2004 | |
Cash flows from operating activities: | | | | | | | | | |
Cash received from goods and services | | $ | 3,667 | | $ | 2,269 | | $ | 10,805 | | $ | 8,929 | |
Cash paid to suppliers and employees | | (3,007 | ) | (2,524 | ) | (7,314 | ) | (6,369 | ) |
Interest received | | 1 | | 4 | | 3 | | 7 | |
Net cash provided by (used in) operating activities | | 661 | | (251 | ) | 3,494 | | 2,567 | |
| | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | |
Disposal (acquisition) of capital equipment | | 6 | | (86 | ) | (1 | ) | (106 | ) |
Net cash used from (in) investing activities | | 6 | | (86 | ) | (1 | ) | (106 | ) |
| | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | |
Proceeds from line of credit | | 1,900 | | — | | 3,300 | | 800 | |
Payments on line of credit | | (1,900 | ) | — | | (5,300 | ) | (1,200 | ) |
Payments on long term borrowings | | (400 | ) | (400 | ) | (400 | ) | (400 | ) |
Acquisition of general partner’s units | | — | | — | | (424 | ) | — | |
Capital lease payments | | (9 | ) | (15 | ) | (17 | ) | (34 | ) |
Cash distributions paid | | (375 | ) | (379 | ) | (754 | ) | (606 | ) |
Net cash used in financing activities | | (784 | ) | (794 | ) | (3,595 | ) | (1,440 | ) |
| | | | | | | | | |
Net increase (decrease) in cash | | (117 | ) | (1,131 | ) | (102 | ) | 1,021 | |
Cash at beginning of period | | 211 | | 2,188 | | 196 | | 36 | |
Cash at end of period | | $ | 94 | | $ | 1,057 | | $ | 94 | | $ | 1,057 | |
| | | | | | | | | |
Reconciliation of net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | |
Net income (loss) | | $ | 26 | | $ | (161 | ) | $ | (1 | ) | $ | (256 | ) |
Adjustments to reconcile net loss to cash provided by (used in) operating activities: | | | | | | | | | |
Depreciation and amortization | | 122 | | 90 | | 484 | | 349 | |
Decrease in accounts receivable | | 1,779 | | 1,393 | | 5,411 | | 5,778 | |
Increase in inventories | | (8 | ) | (2 | ) | (50 | ) | (11 | ) |
Increase in deferred farming costs | | (1,262 | ) | (1,327 | ) | (1,529 | ) | (2,173 | ) |
Decrease (increase) in other current assets | | 36 | | (3 | ) | (89 | ) | (80 | ) |
Increase (decrease) in accounts payable | | 111 | | (86 | ) | (406 | ) | (456 | ) |
Decrease in accrued payroll and benefits | | (73 | ) | (93 | ) | (310 | ) | (331 | ) |
Decrease in other current liabilities | | (70 | ) | (62 | ) | (16 | ) | (253 | ) |
Total adjustments | | 635 | | (95 | ) | 3,495 | | 2,818 | |
Net cash provided by (used in) operating activities | | $ | 661 | | $ | (251 | ) | $ | 3,494 | | $ | 2,567 | |
See accompanying notes to financial statements.
6
ML MACADAMIA ORCHARDS, L.P.
Notes to Consolidated Financial Statements
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated financial statements of ML Macadamia Orchards, L.P. (“the Partnership”) include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly its financial position as of June 30, 2005, June 30, 2004 and December 31, 2004 and the results of operations, changes in partners’ capital and cash flows for the three and six-month periods ended June 30, 2005 and 2004. The results of operations for the period ended June 30, 2005 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 2004 Annual Report on Form 10-K/A.
(2) ACQUISTION OF ML RESOURCES, INC.
On January 6, 2005 the Partnership acquired all of the common stock of ML Resources, Inc. (“MLR”) 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 resulted 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, MLR’s operations have been included in the Partnership’s consolidated financial statements beginning with the first quarter of 2005.
(3) CONSOLIDATION
The consolidated financial statements include the accounts of the Partnership and for 2005, MLR. All significant intercompany balances and transactions, including management fees and distributions, have been eliminated.
(4) SEGMENT INFORMATION
The Partnership has two reportable segments, the owned-orchard segment and the farming segment, which are organized on the basis of revenues and assets. The owned-orchard segment derives its revenues from the sale of macadamia nuts grown in orchards owned or leased by the Partnership. The farming segment derives its revenues from the farming of macadamia orchards owned by other growers as well as those orchards owned by the Partnership.
7
Management evaluates the performance of each segment on the basis of operating income. The Partnership accounts for intersegment sales and transfers at cost, which are eliminated during 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 tables summarize each reportable segment’s operating income and assets as of, and for the three and six-month periods ended, June 30, 2005 and 2004 (000’s).
| | Three months | | Six months | |
| | ended June 30, | | ended June 30, | |
| | 2005 | | 2004 | | 2005 | | 2004 | |
Revenues: | | | | | | | | | |
Owned orchards | | $ | 456 | | $ | 153 | | $ | 2,624 | | $ | 1,309 | |
Contract farming | | 1,825 | | 993 | | 4,155 | | 2,525 | |
Intersegment elimination (all contract farming) | | (780 | ) | (359 | ) | (2,222 | ) | (995 | ) |
Total | | $ | 1,501 | | $ | 787 | | $ | 4,557 | | $ | 2,839 | |
| | | | | | | | | |
Operating income (loss): | | | | | | | | | |
Owned orchards | | $ | (111 | ) | $ | (167 | ) | $ | (98 | ) | $ | (287 | ) |
Contract farming | | 41 | | 46 | | 71 | | 118 | |
Total | | $ | (70 | ) | $ | (121 | ) | $ | (27 | ) | $ | (169 | ) |
| | | | | | | | | |
Depreciation: | | | | | | | | | |
Owned orchards | | $ | 68 | | $ | 15 | | $ | 376 | | $ | 199 | |
Contract farming | | 54 | | 75 | | 108 | | 150 | |
Total | | $ | 122 | | $ | 90 | | $ | 484 | | $ | 349 | |
| | | | | | | | | |
Expenditures for property and equipment: | | | | | | | | | |
Owned orchards | | $ | — | | $ | 37 | | $ | — | | $ | 57 | |
Contract farming | | — | | 49 | | 7 | | 49 | |
Total | | $ | — | | $ | 86 | | $ | 7 | | $ | 106 | |
| | | | | | | | | |
Segment assets: | | | | | | | | | |
Owned orchards | | | | | | $ | 47,445 | | $ | 50,849 | |
Contract farming | | | | | | 6,441 | | 6,484 | |
Total | | | | | | $ | 53,886 | | $ | 57,333 | |
All revenues are from sources within the United States.
(5) DEFERRED FARMING COSTS
Orchard costs (e.g. irrigation, fertilizer pruning, etc.) are annualized for interim reporting purposes, with the difference between costs incurred-to-date and costs expensed-to-date (based on projected annual cost per nut harvested) being reported on the balance sheet as deferred farming costs, which amounted to $2.2 million and $3.1 million at June 30, 2005 and June 30, 2004, respectively. The decrease in deferred farming costs was primarily attributable to greater than expected production during the first half of 2005 compared to 2004.
8
(6) LONG-TERM CREDIT
Revolving Credit Loan. On May 1, 2004, the Partnership entered into an amended credit agreement with American AgCredit, PCA, under which it will have available a $5 million revolving credit facility through May 1, 2008. Amounts drawn bear interest at the prime lending rate. The Partnership is required to pay a facility fee of 0.175% to 0.25% per annum on the daily unused portion of the credit, depending on certain financial ratios. The Partnership, at its option, may make prepayments without penalty. At June 30, 2005, there was $200,000 drawn on the credit facility. There were no borrowings on the credit facility at June 30, 2004.
Term Debt. On May 2, 2000, the Partnership entered into a $4 million promissory note in connection with the credit agreement discussed above. The note is scheduled to mature in 2010 and bears interest at rates from 6.37 percent to 7.77 percent. Principal payments of $400,000 are due on May 1 of each year through 2010. At June 30, 2005 and 2004, the outstanding principal balance on the promissory note amounted to $2.0 million and $2.4 million, respectively.
(7) PARTNERS’ CAPITAL
Net income (loss) per Class A Unit is calculated by dividing 100% of Partnership net income by the average number of Class A Units outstanding for the period.
(8) CASH DISTRIBUTIONS
On June 2, 2005, a second quarter cash distribution was declared in the amount of five cents ($0.05) per Class A Unit, payable on August 15, 2005 to unit holders of record as of the close of business on June 30, 2005.
(9) PENSION PLAN
The Partnership sponsors a defined benefit pension plan covering employees that are members of a union bargaining unit. The Partnership’s funding policy is to contribute an amount to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974.
COMPONENTS OF NET PERIODIC BENEFIT COST
| | Pension Benefits | | Pension Benefits | |
| | 3 months ended | | 6 months ended | |
| | 6/30/05 | | 6/30/04 | | 6/30/05 | | 6/30/04 | |
Service Cost | | $ | 14,239 | | $ | 13,862 | | $ | 28,477 | | $ | 27,724 | |
Interest Cost | | 5,822 | | 5,298 | | 11,644 | | 10,598 | |
Expected Return on Assets | | (4,823 | ) | (5,699 | ) | (9,645 | ) | (7,399 | ) |
Amortization of Unrecognized Prior Service Costs | | 1,661 | | 1,661 | | 3,322 | | 2,322 | |
Amortization of Unrecognized Actuarial Loss | | 51 | | 159 | | 102 | | 319 | |
Net Periodic Pension Cost | | $ | 16,950 | | $ | 17,281 | | $ | 33,900 | | $ | 34,563 | |
9
ML MACADAMIA ORCHARDS, L.P.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Significant Accounting Policies and Estimates
The Partnership prepares its Financial Statements in conformity with accounting principles generally accepted in the United States of America. Certain of our accounting policies, including the estimated lives assigned to our assets, determination of bad debt, estimated nut price, deferred farming costs, asset impairment and self-insurance reserves and the calculation of our income tax liabilities, require that we apply significant judgment in defining the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. Our judgments are based on our historical experience, terms of existing contracts, our observance of trends in the industry and crop, information provided by our customers and information available from outside sources, as appropriate. There can be no assurance that the actual results will not differ from our estimates. To provide an understanding of the methodology we apply, our significant accounting policies are discussed where appropriate in this discussion and analysis and in the Notes to Consolidated Financial Statements.
Results of Operations
In general, the macadamia nut crop season runs from July to June. The second quarter normally accounts for less than 4% of the fiscal year’s total harvest and farming revenues. However, significant rainfall during late 2004 delayed nuts falling from trees yielding significantly higher production during the second quarter of 2005 in comparison to 2004
Net income for the second quarter of 2005 was $26,000 from revenues of $1.5 million. Net loss for the second quarter of 2004 was $161,000 from revenues of $787,000. Net income (loss) per Class A Unit for the second quarters of 2005 and 2004 amounted to $0.00 and ($0.02), respectively. Net cash flow per Class A Unit for the second quarters of 2005 and 2004, as defined in the Partnership Agreement, was ($0.03) and ($0.06), respectively.
Net loss for the six-month period ended June 30, 2005 was $1,000 from revenues of $4.6 million. Net loss for the six-month period ended June 30, 2004 was $256,000 from revenues of $2.8 million. Net loss per Class A Unit for the six-month periods ended June 30, 2005 and 2004 amounted to $0.00 and $0.03, respectively. Net cash flow per class A unit for the six-month periods ended June 30, 2005 and 2004 amounted to $0.01 and ($0.05), respectively.
10
Owned-orchard Segment
For the three months and the six months ended June 30, 2005 and 2004, nut production (wet in shell (WIS)), nut prices and revenues were as follows:
| | For the Three Months | | | |
| | Ended June 30, | | | |
| | 2005 | | 2004 | | Change | |
Nut harvested (000’s pounds WIS) | | 851 | | 280 | | 204 | % |
Nut price (per pound) | | $ | 0.5354 | | $ | 0.4964 | | 8 | % |
Net nut sales ($000’s) | | 456 | | 139 | | 228 | % |
1st quarter price adjustment | | — | | 14 | | | |
Total nut sales ($000’s) | | 456 | | 153 | | 198 | % |
| | | | | | | | | |
| | For the Six Months | | | |
| | Ended June 30, | | | |
| | 2005 | | 2004 | | Change | |
Nut harvested (000’s pounds WIS) | | 4,738 | | 2,650 | | 79 | % |
Nut price (per pound) | | $ | 0.5537 | | $ | 0.4940 | | 12 | % |
Total nut sales ($000’s) | | 2,624 | | 1,309 | | 100 | % |
| | | | | | | | | |
Production for the second quarter of 2005 was 204% greater than 2004. Production for the six-month period ended June 30, 2005 was 79% greater than 2004. The increase was primarily attributable to the timing of nuts falling from trees. Due to unusually high rainfall in 2004, nuts that historically would have fallen during the fourth quarter of 2004 did not fall until the first and second quarters of 2005.
The average nut price received for the second quarter of 2005 was $0.54 per pound compared to $0.50 in 2004. The average nut price received for the six-month period ended June 30, 2005 was $0.55 compared to $0.49 in 2004. The increase was primarily attributable to an increase in the price estimate from Mauna Loa Macadamia Nut Corporation (“Mauna Loa”) for 2005.
The price that the Partnership receives for a majority of its nuts is determined by a formula based 50% on the current year processing and marketing results of Mauna Loa and 50% on the two-year trailing average of USDA reported prices. The USDA portion for the current year will be higher than the previous year by approximately 1%. The Mauna Loa portion for the current year is currently estimated to be slightly higher than 2004. 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 2004, the actual average nut price received by the Partnership was $0.50.
Production costs are based on annualized standard unit costs for interim reporting purposes. Cost of goods sold (owned-orchards segment) for the second quarter of 2005 was $296,000, or $0.35 per pound compared to $78,000, or $0.28 per pound in 2004. Cost of goods sold (owned-orchards segment) for the six-month period ended June 30, 2005 was $1.9 million, or $0.41 per pound compared to $1.1 million, or $0.42 per pound in 2004.
11
Crop Year Production Results
Macadamia nut production for the 2004-2005 crop year (July 1 to June 30) totaled 20.9 million pounds, which was comparable to the 2003-2004 crop year. The Keaau and Mauna Kea regions experienced drier than normal weather conditions during the nut development period which negatively affected production. Modest rainfall in the Ka’u region kept production at historical levels.
Comparative crop year results by orchard area are shown below (in thousands of pounds):
| | For the Crop Year | | 2005 | | 2004 | |
| | Ended June 30, | | Over | | Over | |
| | 2005 | | 2004 | | 2003 | | 2004 | | 2003 | |
Keaau | | 6,629 | | 7,291 | | 6,959 | | -9 | % | + 5 | % |
Ka’u | | 12,736 | | 12,279 | | 12,188 | | +4 | % | + 1 | % |
Mauna Kea | | 1,557 | | 1,374 | | 1,763 | | +13 | % | - 22 | % |
Total Production | | 20,922 | | 20,944 | | 20,910 | | — | | — | |
Farming Segment
Revenue generated from the farming of macadamia orchards owned by other growers was $1.0 million for the second quarter 2005, 65% higher than 2004. Farming expenses for the second quarter of 2005 were $987,000, which included $54,000 of depreciation expense. Farming revenues for the first half of 2005 amounted to $1.9 million, 26% higher than 2004. Farming expenses for the first half of 2005 were $1.8 million, including $108,000 in depreciation. The increase in farming revenues was primarily attributable to higher production during the first half of 2005 compared to 2004.
Other Income and Expenses
Interest expense amounted to $44,000 for the second quarter of 2005, compared to $38,000 in 2004. Interest expense for the six-month period ended June 30, 2005 was $94,000 compared to $82,000 in 2004. Interest expense is attributable to (1) long-term debt used to acquire the farming operations (2) capitalized equipment leases, and (3) drawings on the revolving line of credit. The increase in interest expense resulted from higher market interest rates and higher line of credit debt levels during the three and six-month periods ended June 30, 2005 compared to 2004.
During the second quarter of 2005, the Partnership received $147,000 attributable to a crop insurance claim for the Keaau region nut production shortfall for the crop year 2004-2005. There were no insurance recoveries during the first half of 2004.
12
Liquidity and Capital Resources
Macadamia nut farming is seasonal, with production normally peaking in the fall and winter, however, farming operations continue year round. In general, a significant amount of working capital is required for much of the harvesting season.
The Partnership has a master Credit Agreement with American AgCredit, PCA comprised of a $5 million revolving line of credit and a 10-year, $4 million term loan. The Credit Agreement contains certain restrictions, which are discussed in Part II – Item 2 below.
At June 30, 2005, the Partnership had a cash balance of $94,000. For the six-month period ended June 30, 2005, cash flows from operating activities totaled $3.5 million, which were used to pay distributions to unit holders and repay debt. At June 30, 2005 the Partnership’s working capital was $2.5 million and its current ratio 2.48 to 1, down from $3.9 million and 3.81 to 1 at June 30, 2004, primarily due to a decrease in cash and deferred farming costs.
At June 30, 2005, the Partnership had $2.3 million in outstanding debt, comprised of $2.0 million under the 10-year term loan, $200,000 in drawings on the revolving line of credit and $52,000 related to capital lease obligations.
The Partnership anticipates borrowing from the revolving line of credit as necessary to fund working capital needs arising from the normal seasonal requirements of macadamia nut farming. It is the opinion of management that the Partnership has adequate cash on hand and borrowing capacity available to meet anticipated working capital needs for operations as presently conducted. However, the Partnership’s nut purchase contracts with Mauna Loa 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.
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 June 30, 2005, a one percentage point increase or decrease in the applicable rate under the Credit agreement will result in an annual interest expense fluctuation of approximately $20,000.
Item 4. Controls and Procedures
(a) As of the end of the period covered by this Quarterly Report on Form 10-Q we carried out the evaluation required by paragraph (b) of Rules 13a-15 or 15d-15 of the Securities Exchange Act of 1934, as amended. The Partnership’s management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Rule 13a-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this quarterly report on Form 10-Q. Based on that evaluation, our principal executive officer and principal financial officer concluded that the Partnership’s disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the requisite time periods specified in the rules and forms of the Securities and Exchange Commission.
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(b) There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above.
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, 2004 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 $51.8 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 1.4 to 1.
The Partnership is in compliance with all debt covenants as of June 30, 2005.
Item 5. Other Information
On April 22, 2005 the Partnership received a comment letter from the Securities and Exchange Commission questioning the Partnership’s accounting for stabilization payments received between 1987 and 1993 and advising the Partnership to consider or explain certain other disclosures.
The Partnership responded to the comment letter on May 6, 2005 by supporting its accounting treatment of the stabilization payments and offering to file a 2004 Form 10-K/A to amend the other disclosure items. The SEC acknowledged that the Partnership’s accounting treatment was appropriate under the circumstances and accepted the Form 10-K/A, which was filed on June 1, 2005.
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Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as part of this report:
Exhibit
Number | | Description |
11.1 | | Statement re Computation of Net Income (loss) per Class A Unit |
31.1 | | Form of Rule 13a-14(a) [Section 302] Certifications |
31.2 | | Form of Rule 13a-14(a) [Section 302] Certifications |
32.1 | | Certification pursuant to 18 U.S.C Section 1350 As adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 |
32.1 | | Certification pursuant to 18 U.S.C Section 1350 As adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 |
(b) Reports on Form 8-K:
On May 9, 2005, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership setting forth the results of operations for the quarter ended March 31, 2005.
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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: August 11, 2005 | | By | /s/ Dennis J. Simonis | |
| | Dennis J. Simonis |
| | President and |
| | Chief Operations Officer |
| | (and Duly Authorized Officer) |
| |
| By | /s/ Wayne W. Roumagoux | |
| | Wayne W. Roumagoux | |
| | Principal Accounting Officer | |
| | | | | | | |
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