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 June 30, 1999
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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
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ML MACADAMIA ORCHARDS, L.P.
---------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 99-0248088
------------------------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
828 FORT STREET, HONOLULU, HAWAII 96813
- ---------------------------------------- -----
(Address Of Principal Executive Offices) (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 June 30, 1999, Registrant had 7,500,000 Class A Units issued and
outstanding.
1
ML MACADAMIA ORCHARDS, L.P.
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signature 11
2
ML MACADAMIA ORCHARDS, L.P.
BALANCE SHEETS
(in thousands)
JUNE 30,
------------------------ DECEMBER 31,
1999 1998 1998
------------------------ ------------
(unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 3,063 $ 5,280 $ 4,317
Accounts receivable, primarily from related parties 4,153 93 5,435
Annualized cost adjustment 748 1,163 -
Other current assets 23 128 -
------- ------- -------
Total current assets 7,987 6,664 9,752
Land, orchards and equipment, net 54,289 55,891 55,090
------- ------- -------
Total assets $62,276 $62,555 $64,842
------- ------- -------
------- ------- -------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable to related parties $ 1,193 $ 838 $ 3,021
Cash distributions payable 758 568 568
Other current liabilities 408 646 378
------- ------- -------
Total current liabilities 2,359 2,052 3,967
Deferred income tax liability 1,220 1,232 1,220
------- ------- -------
Total liabilities 3,579 3,284 5,187
------- ------- -------
Commitments and contingencies
Partners' capital
General partners 587 593 597
Class A limited partners, no par or assigned value,
7,500 units issued and outstanding 58,110 58,678 59,058
------- ------- -------
Total partners' capital 58,697 59,271 59,655
------- ------- -------
Total liabilities and partners' capital $62,276 $62,555 $64,842
------- ------- -------
------- ------- -------
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SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
3
ML MACADAMIA ORCHARDS, L.P.
INCOME STATEMENTS (UNAUDITED)
(in thousands, except per unit data)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
------- ------- ------- -------
Macadamia nut sales to related party $ 614 $ 93 $ 4,060 $ 3,548
Cost of goods sold
Costs expensed under farming contracts
with related parties 376 82 2,417 2,154
Depreciation and amortization 77 32 512 362
Other 21 11 124 106
------- ------- ------- -------
Total cost of goods sold 474 125 3,053 2,622
------- ------- ------- -------
Gross income (loss) 140 (32) 1,007 926
------- ------- ------- -------
General and administrative expenses
Costs expensed under management contract
with related party 136 102 299 227
Other 66 51 260 242
------- ------- ------- -------
------- ------- ------- -------
Total general and administrative expenses 202 153 559 469
------- ------- ------- -------
Operating income (loss) (62) (185) 448 457
Merger transaction costs - (1,119) - (1,119)
Interest income 83 76 144 136
------- ------- ------- -------
Income (loss) before gross income tax 21 (1,228) 592 (526)
Gross income tax (benefit) 5 (1) 35 32
------- ------- ------- -------
Net income (loss) $ 16 $(1,227) $ 557 $ (558)
------- ------- ------- -------
------- ------- ------- -------
- ---------------------------------------------------------------------------------------------------------------------
Net cash flow (deficit)
(as defined in the Partnership Agreement) $ 93 $(1,195) $ 1,069 $ (196)
------- ------- ------- -------
------- ------- ------- -------
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) per Class A Unit $ - $ (0.16) $ 0.07 $ (0.07)
------- ------- ------- -------
------- ------- ------- -------
Net cash flow (deficit) per Class A Unit $ 0.01 $ (0.16) $ 0.14 $ (0.03)
------- ------- ------- -------
------- ------- ------- -------
Cash distributions per Class A Unit $ 0.10 $ 0.075 $ 0.20 $ 0.15
------- ------- ------- -------
------- ------- ------- -------
Class A Units outstanding 7,500 7,500 7,500 7,500
------- ------- ------- -------
------- ------- ------- -------
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SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
4
ML MACADAMIA ORCHARDS, L.P.
STATEMENTS OF PARTNERS' CAPITAL (UNAUDITED)
(in thousands)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ---------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Partners' capital at beginning of period:
General partners $ 594 $ 611 $ 597 $ 610
Class A limited partners 58,844 60,455 59,058 60,355
-------- -------- -------- --------
59,438 61,066 59,655 60,965
-------- -------- -------- --------
Allocation of net income (loss):
General partners - (12) 5 (6)
Class A limited partners 16 (1,215) 552 (552)
-------- -------- -------- --------
16 (1,227) 557 (558)
-------- -------- -------- --------
Cash distributions:
General partners 7 6 15 11
Class A limited partners 750 562 1,500 1,125
-------- -------- -------- --------
757 568 1,515 1,136
-------- -------- -------- --------
Partners' capital at end of period:
General partners 587 593 587 593
Class A limited partners 58,110 58,678 58,110 58,678
-------- -------- -------- --------
$ 58,697 $ 59,271 $ 58,697 $ 59,271
-------- -------- -------- --------
-------- -------- -------- --------
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
ML MACADAMIA ORCHARDS, L.P.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ---------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Cash flows from operating activities:
Cash received primarily from macadamia nut sales $ - $ 3,455 $ 5,384 $ 10,264
Cash paid under farming and management contracts (1,905) (2,554) (4,931) (5,554)
Cash paid to other suppliers (217) (230) (492) (1,345)
Interest received 46 91 111 137
-------- -------- -------- --------
Net cash provided by (used in) operating activities (2,076) 762 72 3,502
-------- -------- -------- --------
Cash flows from financing activities:
Cash distributions paid (758) (568) (1,326) (1,136)
-------- -------- -------- --------
Net cash used in financing activities (758) (568) (1,326) (1,136)
-------- -------- -------- --------
Net increase (decrease) in cash (2,834) 194 (1,254) 2,366
Cash at beginning of period 5,897 5,086 4,317 2,914
-------- -------- -------- --------
Cash at end of period $ 3,063 $ 5,280 $ 3,063 $ 5,280
-------- -------- -------- --------
-------- -------- -------- --------
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities:
Net income (loss) $ 16 $ (1,227) $ 557 $ (558)
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities:
Depreciation and amortization 77 32 512 362
Decrease (increase) in accounts receivable
from related parties (650) 3,362 1,282 6,716
Increase in annualized cost adjustment (425) (678) (459) (723)
Decrease (increase) in other current assets 32 57 (23) (108)
Decrease in accounts payable (953) (1,775) (1,828) (2,843)
Decrease in prepaid merger costs - 678 - 292
Decrease in annualized cost adjustment liability (96) - - -
Increase (decrease) in other current liabilities (77) 313 31 364
-------- -------- -------- --------
Total adjustments (2,092) 1,989 (485) 4,060
-------- -------- -------- --------
Net cash provided by (used in) operating activities $ (2,076) $ 762 $ 72 $ 3,502
-------- -------- -------- --------
-------- -------- -------- --------
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SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
ML MACADAMIA ORCHARDS, L.P.
NOTES TO FINANCIAL STATEMENTS
(1) 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 June 30, 1999, June 30, 1998
and December 31, 1998 and the results of operations, changes in partners'
capital and cash flows for the periods ended June 30, 1999 and 1998. The
results of operations for the period ended June 30, 1999 are not
necessarily indicative of the results to be expected for the full year or
for any future period.
(2) 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 1998 Annual Report
on Form 10-K.
(3) 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) 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) On June 4, 1999, the second quarter cash distribution was declared in the
amount of ten cents ($0.10) per Class A Unit, payable on August 16, 1999 to
unitholders of record as of the close of business on June 30, 1999.
7
ML MACADAMIA ORCHARDS, L.P.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
OPERATING RESULTS -- FOR THE QUARTERS ENDED JUNE 30, 1999 AND 1998
For the three months and the six months ending June 30, 1999 and 1998, nut
production, nut prices and revenues are summarized below:
For the Three Months
Ended June 30, Change
------------------------ ---------
1999 1998
-------- --------
Nut harvested (000's pounds WIS) 965 152 + 535%
Nut price (per pound) $ 0.6357 $ 0.6116 + 4%
-------- --------
Net nut sales ($000's) 614 93 + 560%
-------- --------
-------- --------
For the Six Months
Ended June 30, Change
------------------------ ---------
1999 1998
-------- --------
Nut harvested (000's pounds WIS) 6,369 5,801 + 10%
Nut price (per pound) $ 0.6375 $ 0.6117 + 4%
-------- --------
Net nut sales ($000's) 4,060 3,548 + 14%
-------- --------
-------- --------
Excellent harvests were recorded for both the three-months and the six
months ending June 30, 1999. In comparison, the three months ending June 30,
1998 recorded the lowest production for this period in the Partnership's
thirteen-year history. This was due to the drought last year in the Ka'u region,
which normally contributes all the production during this three-month period.
For the six months ended June 30, 1999, the highest production in the
Partnership's history was recorded due the exceptionally large harvest in Keaau.
The Keaau orchards, which usually receive substantial rainfall, benefited from
dryer weather at the beginning of the 1998-99 growing cycle.
Production costs for interim reporting periods are based on annualized
standard unit costs. Total production costs were higher for both the three-month
and six-month periods in 1999 compared to the same periods in 1998 due to the
larger harvests.
General and administrative costs were higher by $49,000 and $90,000 for
the three-month and six-month periods in 1999. Until 1998, the general partner
and Partnership offices were located in the corporate offices of C. Brewer and
Company, Limited ("CBCL"), and the costs of rent and related office costs were
absorbed by CBCL. CBCL moved their headquarters in 1998 and these office costs
are now being incurred by the Partnership.
A net profit of $16,000 was recorded for the three-month period ending June
30, 1999 compared to a net loss of $1.2 million for the three-month period in
1998. A net profit of $557,000 was earned for the six-month period in 1999
compared to net loss of $558,000 in 1998. The losses recorded in the 1998
periods were the result of a $1.1 million write off of costs related to a
cancelled merger.
8
CROP YEAR PRODUCTION RESULTS
Macadamia nut production for the 1998-99 crop year (July 1 to June 30)
totaled 20.0 million pounds, 11% less than the 1997-98 crop year, which was the
largest in the Partnership's thirteen-year history. The Keaau and Mauna Kea
regions, as mentioned above, benefited from dryer weather early in the growing
season. Keaau production increased by 47%, and the Mauna Kea crop increased by
24%. Production in the Ka'u region suffered from a year-long drought and
decreased by 44%. Comparative crop year results by orchard area are shown below
(in thousands of pounds):
For the Crop Year
Ended June 30, 1999 1998
------------------------------------ Over Over
1999 1998 1997 1998 1997
------ ------ ------ ----- -----
Keaau 10,884 7,427 7,744 + 47% - 4%
Ka'u 7,807 13,951 13,023 - 44% + 7%
Mauna Kea 1,340 1,077 1,312 + 24% - 18%
------ ------ ------ ----- -----
Total Production 20,031 22,455 22,079 - 11% + 2%
------ ------ ------ ----- -----
------ ------ ------ ----- -----
NUT PRICES
The USDA recently reported that the macadamia nut prices for the 1998-99
crop year declined by approximately 13% to an 18-year low. They reported that
"growers and processors point to increased world production, weakness in the
Asian economy, and more aggressive marketing of foreign nuts in the U.S. as
reasons for the lower returns."
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 1998-99 USDA price will
become part of our two-year trailing average beginning in the calendar year
2000. For the current year, the USDA portion of our total price increased by 1%.
For the year 2000, the USDA portion will decline by approximately 7%. However,
the final nut price for each year is not known until the completion of each
year, when Mauna Loa's books have been closed and audited and that portion of
the nut price is determined.
OTHER DEVELOPMENTS
For the second consecutive year the Ka'u region is suffering from drought
conditions, receiving less than three inches of rainfall in the last four
months. One-third of the acres in Ka'u have irrigation, but normal production on
the remaining acres cannot be sustained, and a continuing drought will have a
negative impact on the region's production for the forthcoming 1999-2000 crop
year.
C. Brewer and Company, Limited, the owner of Mauna Loa, recently announced
that it is looking for a buyer for Mauna Loa. Mauna Loa is the largest macadamia
nut processor and distributor in the world, and is the exclusive purchaser of
all of the Partnership's macadamia nuts. In the event of Mauna Loa's sale, the
long-term nut purchase contracts now in effect between Mauna Loa and the
Partnership would continue. However, since Mauna Loa's performance partly
9
determines the price that the Partnership receives for its macadamia nuts, the
Partnership has no way of knowing whether a change in Mauna Loa's ownership
would enhance or diminish Mauna Loa's performance, and thus, affect the
Partnership's returns.
SEASONALITY, CAPITAL RESOURCES AND LIQUIDITY
Macadamia nut farming is seasonal, with production peaking late in the
fall. However, farming operations continue year round. As a result, additional
working capital is required for much of the year. The Partnership meets its
working capital needs with cash on hand, and when necessary, through short-term
borrowings under a $4.0 million revolving line of credit. The Partnership had a
cash balance of $3.1 million at June 30, 1999, and there were no line of credit
drawings outstanding. It is the opinion of management that the Partnership has
adequate cash on hand to meet anticipated working capital needs.
ASSESSMENT OF YEAR 2000
The issue of Year 2000 concerns the situation that many computer systems
may not be able to distinguish the year 2000 from the year 1900 unless
modifications are made. The Partnership is in the process of assessing the issue
of Year 2000 to determine its state of readiness and if adverse consequences
will have a material effect on business, results of operations, or financial
condition.
The Partnership has determined that it has no internal information
technology ("IT") or non-IT systems that could have adverse consequences if not
modified. There are, however, numerous third parties having a material
relationship with the Partnership, and the assessment of the Year 2000 readiness
of these third parties is still in process. The key third parties to be assessed
are the managing partner, the contract farmers, the exclusive customer, the CPA
firm doing tax accounting and tax returns, the stock exchange, stockbrokers and
their agents, and our transfer agent. Most of these third parties have announced
their readiness or their schedules of Year 2000 testing and dates of
modification for IT systems applicable to the Partnership.
The cost to the Partnership to address Year 2000 issues is not anticipated
to be material. If some third party suppliers have not become Year 2000
compliant, the reporting of buy and sell transactions from stockbrokers or
reporting agencies could be inaccurate or incomplete. Any delay in the
completion of this task could delay the completion of our Year 2000 tax return
and related K-1 schedules to unitholders.
LEGAL PROCEEDINGS
On November 6, 1997, the Partnership announced a proposed merger with
Hawaii Land & Farming (formerly C. Brewer Homes, Inc.). Waterside Partners, a
limited partner who owned 1,000 units at the time, filed a derivative complaint
in the Delaware Chancery Court on January 5, 1998, asking for (1) an injunction
enjoining the proposed merger; (2) a rescission of the merger if it was
consummated; (3) an accounting to the Partnership for any damages sustained by
the Partnership; and (4) an award to plaintiff for its attorney's fees and
costs. The Plaintiff did not obtain an injunction, but commenced a letter and
telephone campaign for the purpose of persuading unitholders to vote against the
proposed merger at the unitholders' meeting. The meeting took place as scheduled
on June 26, 1998, and the proposed merger failed to secure the necessary
favorable vote of a majority of the unitholders. The lawsuit was dismissed on
July 14, 1998. The plaintiff filed a motion on July 13, 1998 asking that it be
awarded its costs and expenses, for prosecution of
10
the lawsuit and the proxy contest. Plaintiff claimed $450,000 in attorney's
fees, representing approximately triple the amount of its claimed attorney's
time of $146,905, plus expenses of $79,277. Exhibits to the Plaintiff's motion
indicate that the great majority of the time spent by attorneys and more than
90% of the costs related to the proxy contest rather than the litigation. A
hearing was held on the Motion for attorney's fees and expenses on January 29,
1999, and the court has ruled that the Plaintiff is not entitled to any attorney
fees or expenses. On April 6, 1999, the Plaintiff filed an appeal to the Supreme
Court of the State of Delaware. All parties have completed briefing and are
awaiting a date for oral argument.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
Exhibit Page
Number Description Number
------ ----------- ------
11.1 Statement re Computation of Net Income
per Class A Unit 12
27 Financial Data Schedule (filed only
electronically with the SEC) --
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the second quarter of 1999.
11
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: July 31, 1999 By /s/ Gregory A. Sprecher
--------------------------
GREGORY A. SPRECHER
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
12
EXHIBIT INDEX
Number Description of Exhibits Page No.
------ ----------------------- --------
11.1 Statement re Computation of Net Income 12
per Class A Unit
27 Financial Data Schedule (filed only
electronically with the SEC) --
13