UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

 

ML MACADAMIA ORCHARDS, L.P.

(Exact name of registrant as specified in its charter)

 

 

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 September 30, 2003 Registrant had 7,500,000 Class A Units issued and outstanding.

 

 

ML MACADAMIA ORCHARDS, L.P.

 

INDEX

 

Part  I - Financial Information
	Item 1.	Financial Statements
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk
	Item 4.	Controls and Procedures
Part II - Other Information
	Item 2.	Changes in Securities
	Item 6.	Exhibits and Reports on Form 8-K
	Signatures

 

2

 

ML Macadamia Orchards, L.P.

Balance Sheets (unaudited)

(in thousands)

 

		September 30,						December 31, 2002
		2003			2002
Assets
Current assets
Cash and cash equivalents		$	215		$	54		$	31
Accounts receivable		5,301			5,045			5,656
Inventory of farming supplies		146			156			158
Deferred farming costs		1,325			1,629			—
Other current assets		241			173			191
Total current assets		7,228			7,057			6,036
Land, orchards and equipment, net		53,841			56,388			55,746
Intangible assets, net		19			22			21
Total assets		$	61,088		$	63,467		$	61,803
Liabilities and partners’ capital
Current liabilities
Current portion of long-term debt		$	460		$	458		$	473
Short-term borrowing		2,100			1,900			800
Accounts payable		319			317			400
Accounts payable to related party		26			28			—
Cash distributions payable		227			379			379
Accrued payroll and benefits		671			686			742
Other current liabilities		59			163			22
Total current liabilities		3,862			3,931			2,816
Long-term debt		2,481			2,952			2,920
Deferred income tax liability		1,218			1,220			1,218
Total liabilities		7,561			8,103			6,954
Commitments and Contingencies
Partners’ capital
General partners		535			554			549
Class A limited partners, no par or assigned value, 7,500 units issued and outstanding		52,992			54,810			54,300
Total partners’ capital		53,527			55,364			54,849
Total liabilities and partners’ capital		$	61,088		$	63,467		$	61,803

 

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,
		2003			2002			2003			2002
Macadamia nut sales		$	3,784		$	3,953		$	5,187		$	5,675
Contract farming revenue		1,392			1,136			3,402			2,685
Total revenues		5,176			5,089			8,589			8,360
Cost of goods and services
Costs expensed for farming and services		4,112			3,903			6,825			6,271
Depreciation and amortization		964			644			1,381			1,125
Total cost of goods sold		5,076			4,547			8,206			7,396
Gross income		100			542			383			964
General and administrative expenses
Costs expensed under management contract with related party		41			55			136			158
Other		224			462			635			1,016
Total general and administrative expenses		265			517			771			1,174
Operating income (loss)		(165		)	25			(388		)	(210		)
Interest expense		(47		)	(66		)	(150		)	(241		)
Interest income		—			3			8			41
Other income		206			96			206			96
Income (loss) before tax		(6		)	58			(324		)	(314		)
Income tax expense		3			15			13			30
Net income (loss)		$	(9	)	$	43		$	(337	)	$	(344	)
Net cash flow (as defined in the Partnership Agreement)		$	939		$	673		$	591		$	315
Net income (loss) per Class A Unit		$	0.00		$	0.01		$	(0.04	)	$	(0.05	)
Net cash flow per Class A Unit		$	0.13		$	0.09		$	0.08		$	0.04
Cash distributions per Class A Unit		$	0.03		$	0.05		$	0.13		$	0.15
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,
		2003			2002			2003			2002
Partners’ capital at beginning of period:
General partners		$	537		$	557		$	549		$	569
Class A limited partners		53,226			55,142			54,300			56,275
		53,763			55,699			54,849			56,844
Allocation of net income (loss)
General partners		—			—			(4		)	(3		)
Class A limited partners		(9		)	43			(333		)	(341		)
		(9		)	43			(337		)	(344		)
Cash distributions:
General partners		2			3			10			12
Class A limited partners		225			375			975			1,125
		227			378			985			1,137
Partners’ capital at end of period:
General partners		535			554			535			554
Class A limited partners		52,992			54,810			52,992			54,810
		$	53,527		$	55,364		$	53,527		$	55,364

 

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,
		2003			2002			2003			2002
Cash flows from operating activities:
Cash received from goods and services		$	1,200		$	1,905		$	9,469		$	9,817
Cash paid to suppliers and employees		(3,058		)	(2,818		)	(8,977		)	(9,159		)
Net cash provided by (used in) operating activities		(1,858		)	(913		)	492			658
Cash flows from investing activities:
Capital expenditures		(11		)	(46		)	(19		)	(59		)
Net cash used in investing activities		(11		)	(46		)	(19		)	(59		)
Cash flows from financing activities:
Proceeds from line of credit		2,100			2,100			2,800			5,600
Payment of line of credit		—			(700		)	(1,500		)	(4,900		)
Payments on long term borrowing		—			—			(400		)	(400		)
Capital lease payments		(16		)	(14		)	(52		)	(66		)
Cash distributions paid		(379		)	(378		)	(1,137		)	(1,136		)
Net cash provided by (used in) financing activities		1,705			1,008			(289		)	(902		)
Net increase (decrease) in cash		(164		)	49			184			(303		)
Cash at beginning of period		379			5			31			357
Cash at end of period		$	215		$	54		$	215		$	54
Reconciliation of net income (loss) to net cash provided by (used in) operating activities:
Net income (loss)		$	(9	)	$	43		$	(337	)	$	(344	)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
Depreciation and amortization		964			644			1,381			1,125
Decrease (increase) in accounts receivable		(4,359		)	(3,048		)	356			1,442
Decrease (increase) in inventories		23			(13		)	13			2
Decrease (increase) in deferred farming costs		981			983			(786		)	(827		)
Decrease (increase) in other current assets		98			71			(50		)	(125		)
Increase (decrease) in accounts payable		262			191			(54		)	(121		)
Increase (decrease) in accrued payroll		157			197			(72		)	(173		)
Increase (decrease) in other current liabilities		25			19			41			(321		)
Total adjustments		(1,849		)	(956		)	829			1,002
Net cash provided by (used in) operating activities		$	(1,858	)	$	(913	)	$	492		$	658

 

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, 2003, September 30, 2002 and December 31, 2002 and the results of operations, changes in partners’ capital and cash flows for the periods ended September 30, 2003 and 2002.  The results of operations for the period ended September 30, 2003 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 2002 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 (loss) and each segment’s assets as of, and for the three and nine month periods, ended September 30, 2003 and 2002 (000’s).  Due to seasonality of crop patterns, interim results are not necessarily indicative of annual performance.

 

		Three months ended September 30,						Nine months ended September 30,
		2003			2002			2003			2002
Revenues:
Owned orchards		$	3,784		$	3,953		$	5,187		$	5,675
Contract farming		1,997			2,278			5,180			4,551
Intersegment elimination (all contract farming)		(605		)	(1,142		)	(1,778		)	(1,866		)
Total		$	5,176		$	5,089		$	8,589		$	8,360
Operating income:
Owned orchards		$	(343	)	$	(71	)	$	(693	)	$	(451	)
Contract farming		$	178		$	96		$	305		$	241
Total		$	(165	)	$	25		$	(388	)	$	(210	)
Depreciation:
Owned orchards		$	890		$	557		$	1,157		$	918
Contract farming		74			87			224			207
Total		$	964		$	644		$	1,381		$	1,125
Expenditures for property and equipment:
Owned orchards		$	11		$	46		$	19		$	59
Contract farming		—			—			—			—
Total		$	11		$	46		$	19		$	59
Segment assets:
Owned orchards								$	55,474		$	57,820
Contract farming								5,614			5,647
Total								$	61,088		$	63,467

 

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 deferred farming costs.

 

(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 $2,100,000 in borrowings outstanding under this credit facility as of September 30, 2003.

 

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, 2003, the Partnership owed $2.8 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 3.26 percent to 7.77 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 (loss) per Class A Unit is calculated by dividing 99% of Partnership net income (loss) by the average number of Class A Units outstanding for the period.

 

(6)          CASH DISTRIBUTIONS

 

On September 19, 2003 a third quarter cash distribution was declared in the amount of three cents ($0.03) per Class A Unit, payable on November 14, 2003 to unit holders of record as of the close of business on September 30, 2003.

 

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, annualized production 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 Financial Statements.

 

Results of Operations

 

ML Macadamia Orchards’ net loss for the third quarter of 2003 was $9,000, as compared to the $43,000 net income recorded in same period in 2002.  Net loss per Class A Unit was $0.00 compared to last year’s net income of $0.01.  Net cash flow per Class A Unit increased to $0.13 from $0.09.

 

Total revenues for the third quarter 2003 were $5.2 million, of which $3.8 million was nut revenue and $1.4 million farming revenue. This compared to last year’s third quarter revenues of $5.1 million, of which $4.0 million was nut revenue and $1.1 million was farming revenue.

 

Net loss for the nine months ended September 30, 2003 was $337,000, compared to net loss of $344,000 recorded in the first nine months of 2002.  Revenue from owned orchards for the first three quarters of the both years is based on an estimated nut price from Mauna Loa, which will be actualized in the fourth quarter results. Net loss per Class A Unit was $0.04 compared to net loss of $0.05 last year and net cash flow per Class A Unit was $0.08 compared to $0.04.

 

Revenues for the first nine months of 2003 were $8.6 million, 2% higher than the $8.4 million recorded in the first nine months of 2002.

 

10

 

Owned-orchard Segment

 

For the three months and the nine months ending September 30, 2003 and 2002, nut production wet-in-shell (WIS), nut prices and revenues are summarized below:

 

		For the Three Months Ended September 30,						Change
		2003			2002
Nut harvested (000’s pounds WIS)		8,044			8,438			-5	%
Nut price (per pound)		$	0.4704		$	0.4685		+0	%
Total nut sales ($000’s)		$	3,784		$	3,953		-4	%
		For the Nine Months Ended September 30,						Change
		2003			2002
Nut harvested (000’s pounds WIS)		11,128			12,090			-8	%
Nut price (per pound)		$	0.4661		$	0.4694		-1	%
Total nut sales ($000’s)		5,187			5,675			-9	%

 

Production for the three-month period ending September 30, 2003 was 5% lower than the three-month period ending September 30, 2002, but 31% above the historical average for this period.  For the nine months ended September 30, 2003, production was 8% lower than the same period in 2002, but 6% higher than the historical average for this period.

 

The average nut price received for the third quarter 2003 was $0.4704, slightly higher than the third quarter 2002.  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, estimated nut prices declined by 1% compared to the same period in 2002.  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 5% 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).  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 2002, the actual average nut price received by the Partnership was $0.4748.

 

Production costs are based on annualized standard unit costs for interim reporting periods.  Total production costs for the owned-orchards for the three-months ended September 30, 2003 were equal to the same period in 2002 even though 2003 had 5% lower production.  The Partnership performed early harvesting for its customer of approximately 1.0 million pounds for an additional $0.15 per pound.  For the nine-month period, farming costs for the current year were $150,000 higher than in 2002.  This cost increase is the result of extra harvesting and a higher standard unit cost.

 

11

 

Farming Segment

 

Revenue generated from the farming of macadamia orchards that are owned by other growers was $1,392,000 for the third quarter 2003, or $256,000 higher than the three months ended September 30, 2002.  Farming expenses for the quarter ended September 30, 2003 were $1,290,000, which included $224,000 of depreciation expense.  Farming revenues for the first nine months of 2003 were $3,402,000 compared to the nine months in 2002 of $2,685,000.

 

Other Income and Expenses

 

The Partnership recorded interest expense of $47,000 for the third quarter 2003, which was $19,000 less than the same period in 2002. For the nine months ended September 30, 2003 and 2002, interest expense was $150,000 and $241,000, respectively. The interest results from borrowings required to acquire the farming operations and provide working capital for off-season farming operations. The decrease is the result of lower balances on the line of credit and long-term debt and lower interest rates.

 

Interest income decreased by $3,000 for the quarter and decreased $33,000 for the first nine months of 2003 compared to 2002.

 

Other income of $206,000 was recorded in the third quarter of 2003 as a result of the settlement of an insurance claim under the Partnership’s crop insurance policy. Other income of $96,000 was recorded in the third quarter 2002 as the result of early termination of certain lease rights held by the Partnership.  Other income is $206,000 and $96,000 for the nine months ended September 30, 2003 and 2002, respectively.

 

Liquidity and Capital Resources

 

For the nine months ended September 30, 2003, cash provided by operations of $492,000 was derived principally from a decrease in accounts receivable, an increase in the deferred farming costs and a decrease in liabilities.  Cash provided by operations was used to pay distributions to Unit holders of $985,000.  During the nine-month period the Partnership has borrowed $1.3 million net on its revolving line of credit, approximately $500,000 more than net borrowings in the first nine months of the prior year.

 

At September 30, 2003, the Partnership had $2.9 million in outstanding long-term debt representing a $2.8 million ten-year note under a Credit Agreement and $141,000 of 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 $215,000 at September 30, 2003 and there was $2.1 million drawn on the line of credit.  The Partnership has repaid the line of credit as of October 31, 2003 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.

 

12

 

Other Developments

 

In September of 2002, the Partnership reached agreement to purchase approximately 1,774 acres of land currently under long-term leases with C. Brewer and Company, Limited.  The transaction has been withdrawn by the seller and is not expected to materialize.  The Partnership will continue to lease the orchards until the respective termination dates of the leases, ranging from December 31, 2019 to June 30, 2045.

 

The Ka’u region suffered drought conditions in 2003 receiving 15 inches of rain in the first nine months of 2003.  This is less than the 10-year annual average of 39 inches, the nine months 10-year average of 27 inches and the nine month period of 2002 which was 56 inches of rain.  The drier than average conditions may have a negative effect on nut production in the Ka’u region.

 

The Partnership’s largest unit holder, the Farhad Ebrahimi group, has increased its stake in the Partnership to 888,400 units or 11.8% of the outstanding units as of October 22, 2003.  The group has indicated in their SEC filings that they have no intention of gaining control or becoming involved with the management of the Partnership at this time.

 

In late 2002, a controversy arose surrounding the sale by C. Brewer & Company, Limited (CBCL) of approximately 155 tree acres to third parties.  CBCL reported to the Partnership that the buyers of the orchards did not want to assume the farming contracts, therefore, CBCL was terminating the contracts.  The Partnership believes the contracts are not terminable at will and is currently negotiating a settlement with CBCL.  The Partnership ceased farming the 155 tree acres in 2001 and 2002.

 

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, 2003, a one percent increase or decrease in the applicable rate under the Credit agreement will result in an interest expense fluctuation of approximately $28,000.

 

Item 4.  Controls and Procedures

 

(a)  Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), within 90 days of the filing date of this report.  Based on their evaluation, our principal executive officer and principal financial officer concluded that the Partnership’s disclosure controls and procedures are effective.

 

(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.

 

13

 

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 $54.5 million (reduced by the amount of allowed cash distributions since January 1, 2002 exceeds tangible net worth plus positive annual net income beginning January 1, 2002).

 

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, 2003.

 

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
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:

 

June 30, 2003 FORM 10-Q

 

September 30, 2003 FORM 10-Q

 

14

 

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, 2003				By		/s/ Dennis J. Simonis
				Dennis J. Simonis
				President and Chief Operating Officer
				By	/s/ Wayne W. Roumagoux
				Wayne W. Roumagoux
				Principal Accounting Officer

 

15

 

EXHIBIT INDEX

 

Number		Description of Exhibits
11.1		Statement re Computation of Net Income (loss) per Class A Unit
31.1		Form of Rule 13a-14(a) [Section 302] Certifications
32.1		Certification of Officers pursuant to 18 U.S.C.Section 1350

 

16