<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-9145
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MAUNA LOA MACADAMIA PARTNERS, L.P.
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(Exact Name of registrant as specified in its charter)
DELAWARE 99-0248088
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
828 FORT STREET, HONOLULU, HAWAII 96813
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (808) 532-4130
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
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Depositary Units Representing
Class A Limited Partners' Interests New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendment to this
10-K. [ ]
As of March 6, 1998, 7,500,000 shares of the registrant's Class A Units were
outstanding, and the aggregate market value of such Units held by
non-affiliates was $29,062,500 (based on the closing price on that date of
$3.875 per Unit).
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PART I
ITEM 1. BUSINESS OF THE PARTNERSHIP
GENERAL DESCRIPTION OF THE BUSINESS
Mauna Loa Macadamia Partners, L.P. (the "Partnership"), is a publicly-traded
partnership, organized under the laws of the State of Delaware, engaged in
the business of growing macadamia nuts in Hawaii. It is one of the world's
largest growers of macadamia nuts. The Partnership owns or leases
approximately 4,027 tree acres of macadamia nut orchards in three locations
within a 50-mile radius on the island of Hawaii, where macadamia nut yields
are among the world's highest. ("Tree acres" are acres of the Partnership's
owned or leased lands utilized for macadamia nut orchards. "Gross acres"
includes areas not utilized for orchards.) The Partnership is managed by its
sole general partner, Mauna Loa Resources Inc. ("Resources" or the "Managing
Partner"). The Managing Partner is owned by Mauna Loa Macadamia Nut
Corporation ("Mauna Loa"). Mauna Loa is a wholly owned subsidiary of
C. Brewer Company, Limited ("CBCL"), which in turn is wholly owned by
Buyco, Inc. ("Buyco").
Mauna Loa was the Partnership's special general partner until December 1997,
when it assigned its interest as a general partner to Resources and withdrew
as a special general partner. Although Mauna Loa and certain of its
affiliates formerly held Class B Units in the Partnership, all Class B Units
were cancelled in November 1997 for nominal consideration. Ownership of
Class A Units confers no direct or indirect interest in Buyco, CBCL, Mauna Loa
or any of their affiliated corporations.
The Partnership commenced operations in June 1986, following its acquisition
of interests in approximately 2,423 tree acres of macadamia nut orchards from
Mauna Loa and one of Mauna Loa's affiliates. In December 1986 and October
1989, respectively, the Partnership acquired from affiliates of Mauna Loa
interests in approximately 266 and 1,260 additional tree acres of macadamia
orchards. In September 1991 the Partnership acquired approximately 78 tree
acres of producing macadamia orchards.
NARRATIVE DESCRIPTION OF THE BUSINESS
The Partnership sells all of its macadamia nuts to Mauna Loa, under four
long-term nut purchase contracts. Mauna Loa processes and markets the nuts
under the MAUNA LOA-REGISTERED TRADEMARK- brand name and is the largest
processor and marketer of macadamia nuts in the world. The Partnership is
Mauna Loa's largest single supplier of macadamia nuts. All farming
activities are performed for the Partnership by CBCL subsidiaries under
long-term farming contracts.
NUT PURCHASE CONTRACTS.
The Partnership is a party to four nut purchase contracts with Mauna Loa.
They cover all nuts produced by the orchards acquired in June 1986, December
1986, October 1989, and September 1991, respectively. The first two
contracts expire in 2006, while the third contract expires in 2019 and also
provides for the exclusion of unusable nuts from those purchased by Mauna Loa.
The first three contracts are identical in all other material respects. The
fourth contract was
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acquired by assignment with the purchase in September 1991 of the Lot 10
orchard and expires in 2003. The fourth contract is similar to the first
three contracts, but the nut price is calculated on a crop year (July 1
through June 30) rather than calendar year basis, which results in a slightly
different nut price. All four contracts use a pricing formula based 50% on a
two-year trailing average of the macadamia nut price published annually by
the United States Department of Agriculture and 50% on Mauna Loa's "netback
component." The netback component is calculated by subtracting Mauna Loa's
processing and marketing costs per pound and a "capital charge" of 20% from
its nut revenues per pound. The first three nut purchase contracts may be
terminated by Mauna Loa upon thirty days' notice if the Managing Partner is
involuntarily removed as the managing general partner and replaced by a
person or entity not affiliated with Mauna Loa. The fourth nut purchase
contract may be terminated at any time by mutual agreement in writing, or it
may be terminated by the Partnership as of the end of any calendar year by
giving Mauna Loa at least twelve months advance notice of its intention to
terminate.
COMPETITION
Because the Partnership's revenues from nut sales (and therefore its overall
financial results) are tied to a formula dependent in large part upon
Mauna Loa's market performance, the Partnership bears certain risks associated
with Mauna Loa's marketing of the nuts, including the likelihood of increased
future competition.
Mauna Loa considers its primary competition to be other premium nut products,
except in Hawaii where its products compete with those of other macadamia nut
producers and other food and non-food tourist items. As a premium nut,
macadamia nuts compete with cashews, almonds and pistachios.
Mauna Loa sells macadamia nuts as "retail" nuts and "commercial" nuts and
produces and sells various macadamia nut products. These include pristine
salted and unsalted roasted macadamia nuts, packages of diced macadamia nuts
and macadamia oil (for cooking and baking), value-added products such as
candy-glazed macadamia nuts, chocolate-covered macadamia nuts, chocolate
macadamia nut candy bars, honey-roasted macadamia nuts and macadamia nut
brittle.
Macadamia nuts comprised less than 5% of the sales of branded premium nuts
sold through mass merchandisers, drug and grocery stores on the U.S.
mainland. Cashews and mixed nuts represent the bulk of the dollar sales in
this segment, followed by pistachios. Macadamia nuts are the highest priced
of all premium nuts, and, therefore, they may be sensitive to price
competition from other nuts.
Approximately one-third of sales of the MAUNA LOA-REGISTERED TRADEMARK- brand
are made in the U.S. mainland, where Mauna Loa sells its products through
brokers to food stores, club stores, drug store chains, mass merchandisers
and commercial customers.
Approximately one-third of sales of the MAUNA LOA-REGISTERED TRADEMARK- brand
are made in Hawaii where Mauna Loa sells through its own direct sales force
primarily to retailers. Substantial portions of the macadamia nut products
sold are purchased by visitors as gifts and souvenirs. Mauna Loa believes
that it is the largest seller of macadamia products in the State of Hawaii.
Outside the United States, Mauna Loa's other major market is Japan and the
Far East. Approximately 20% of sales of the MAUNA LOA-REGISTERED TRADEMARK-
brand are made in Japan and the Far East.
The remaining sales are comprised of ingredient nuts, visitor center sales,
and mail order sales.
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In addition to the State of Hawaii, mature macadamia nut orchards are located
in Australia, Africa, and Central America. While Hawaii supplied 38% of the
world crop in the 1996/97 crop year, Australia became the largest macadamia
producer in the world, at 40% of the world crop. Australia is expected to
experience growth through the end of the decade. The world supply of
macadamia nuts has increased substantially during the last several years and
is projected to increase an average of 10% per year for each of the next four
years.
A general decline in nut prices would adversely affect the prices which
Mauna Loa could charge for its macadamia nut products and could have a
negative effect on its profitability. Since the purchase price for the
Partnership's nuts under all of its nut purchase contracts is based in part
on nut prices reported by the industry and in part on the marketing success
of Mauna Loa, a general decline in macadamia nut prices could also adversely
affect the Partnership's revenues.
FARMING CONTRACTS
All of the Partnership's orchards are farmed by two subsidiaries of CBCL
under four long-term farming contracts. The orchards are located at three
separate locations on the island of Hawaii ("Keaau", "Ka'u" and "Mauna Kea").
Because each area has different terrain and weather conditions, farming
methods vary somewhat among the three locations.
FARMING CONTRACTS. The Partnership is a party to four farming contracts with
two affiliates of CBCL, Ka'u Agribusiness Company, Inc. ("KACI") and Mauna Kea
Agribusiness Company, Inc. ("MKACI"). Services under these contracts include
cultivation, weed and pest control, fertilization, pruning and hedging,
replanting, harvesting, husking and related services for the Partnership's
orchards. In return, the Partnership reimburses KACI and MKACI for their
direct and indirect costs incurred in providing such services, including an
equipment utilization charge and an annual farming fee. The first two
contracts (the "1986 contracts") expire in 2006, while the third contract
(the "1989 contract") expires in 2019. The fourth contract (the "Lot 10
contract") was acquired with the purchase of the Lot 10 orchard in 1991 and
expires in 2006. The four contracts are identical in all other material
respects. The contracts are terminable if the Managing Partner is
involuntarily removed and replaced by a person or entity not affiliated with
Mauna Loa.
Each of the farming contracts was amended effective January 1, 1998 to
provide that farming fees would equal 2 1/2% of the Partnership's gross
profits from farming operations, rather than 3% of the Partnership's
operating cash flow, attributable to the relevant orchard.
ORCHARD MAINTENANCE. Maintenance of an orchard is essential to macadamia nut
farming. Pruning and hedging of trees is necessary to allow space for
mechanical harvesting and cultivating equipment to safely and efficiently
operate and to remove dead branches. Where mechanical equipment is used, the
orchard floor must be maintained in a condition that will permit its
operation. Soil and gravel are used to repair mud holes and other surface
irregularities caused by soil erosion from heavy rain and by farming
equipment, though this operation is not performed as frequently due to
current cost controls. Pruning and surface maintenance are usually performed
after the harvest season.
Orchard management also requires the proper selection and application of
fertilizers, pesticides (to control rodents, insects and fungi) and
herbicides (to control weeds). Insects, rodents and fungi, as well as wild
pigs, if not controlled can cause losses to nut production.
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HARVESTING. The harvest period begins in the late summer and runs through
the spring. Mature nuts fall from the trees and are harvested using
mechanized harvest equipment when the orchard floor is level enough to permit
its use. Nuts are harvested by hand when the orchard floor is too uneven to
permit mechanical harvesting, when the nut drop is very light and when nuts
remain after harvesting. At Keaau, Ka'u and Mauna Kea, seasonal labor for
hand harvesting and other operations is generally available from nearby Hilo
and adjacent communities.
Mechanical harvesting is less costly than hand harvesting, but mechanical
harvesting is possible only where the orchard floor is relatively flat.
Approximately 56% of the orchards acquired in 19861, 81% of the orchards
acquired in 1989 and all of the orchard acquired in September 1991 are
currently mechanically harvested. The balance of the acreage at these
orchards is too uneven for mechanical harvesting and must be harvested by
hand.
During the harvest season, the nuts are collected every six to ten weeks.
Nuts suffer loss in quality if they remain on the ground too long. The
harvested nuts are then transported to the husking facility. The Keaau and
Ka'u areas have husking facilities, which are not owned by the Partnership.
Nuts harvested in the Mauna Kea area are transported to the husking facility
in the Keaau area. At the husking facility, the outer husk is removed and
the nuts, still in their shell, are weighed and sampled to determine moisture
content and kernel quality. Title to the nuts passes to Mauna Loa after
weighing, and the nuts are moved to a drying facility.
PROCESSING. The nuts purchased from the Partnership by Mauna Loa are
primarily processed at Mauna Loa's processing plant located adjacent to the
orchards located in the Keaau area. The plant was built in 1966 and is
presently capable of handling approximately 210,000 pounds of dry-in-shell
(commonly abbreviated "DIS") nuts per day. Processing at the plant includes
drying, cracking, roasting, inspecting and packaging. The plant also
includes separate warehouses, a machine shop, storage facilities, husking
facilities, nut drying facilities, a generator and a 10,000 square foot
chocolate processing plant. None of these processing facilities are owned by
the Partnership.
At Mauna Loa's plant in Keaau, the harvested nuts are passed by conveyors
over metal screens, blowers and rock separators that remove everything but
the in-husk nuts. The husks are then split and removed by pressing the nuts
between steel roller bars and a rubber pad. At this stage, the nut kernels
are still encased in their hard round shells and roughly 20% of their weight
is attributable to moisture content. At this point, the nuts are referred to
as wet-in-shell (commonly abbreviated "WIS"). The WIS weight of the nuts is
used to determine payments to be made by Mauna Loa under the Nut Purchase
Contracts. Approximately 20% of the WIS weight of the nuts will become dry
salable kernels when all further processing is completed.
After the nuts are weighed the moisture content is reduced by blowing warm
air over them, producing DIS nuts. The nuts are then cracked by metal
rollers to remove the shell. Mechanical and optical equipment, as well as
hand sorting, are used to separate the nut kernels from pieces of broken
shell.
The dry nut kernels are roasted and then sorted into retail and commercial
grades. At this stage, less than half of the nuts are bulk-packed and sent
to four co-packers on the U.S. mainland for packaging. At Mauna Loa's plant
in Keaau the nuts may be salted, or covered with chocolate or one of several
candy glazes, and finally packaged, labeled and readied for shipment.
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STABILIZATION PAYMENTS
In December 1986, the Partnership acquired a 266 acre orchard (the "December
1986 Orchard") that was several years younger than other orchards of the
Partnership. Because of the relative immaturity of the newer orchard, its
productivity (and therefore cash flow) was expected to be correspondingly
lower for the first several years than for the other older orchards.
Accordingly, the seller of this orchard (KACI) agreed to make cash
stabilization payments to the Partnership for each year through 1993 in which
the cash flow (as defined) from this orchard fell short of the target cash
flow level, which equaled $507,000. Stabilization payments for any given
year were limited to the lesser of the amount of the shortfall or a maximum
payment amount. For the years from 1987 through 1993, inclusive, the
Partnership received a total of $1,628,000 (including a 4% Hawaii general
excise tax) in stabilization payments under this agreement.
The Partnership accounted for stabilization payments (net of the 4% Hawaii
general excise tax) as a reduction in the cost basis of the orchard. As
such, these payments are being reflected in the Partnership's net income
ratably through 2019 as a reduction to the depreciation expense reported for
this orchard.
In return, the Partnership is obligated to pay the seller 100% of any year's
cash flow from this orchard in excess of the target cash flow as additional
percentage rent until the aggregate amount of the additional percentage rent
paid equals 150% of the total amount of stabilization payments previously
received. Thereafter, the Partnership is obligated to pay the seller 50% of
this orchard's cash flow in excess of the target cash flow as additional
incentive rent. The Partnership paid KACI $54,000 under these provisions for
1996 and will pay $297,000 for 1997. No amounts were payable with respect to
prior years.
RISKS INVOLVED IN OPERATING MACADAMIA ORCHARDS
Macadamia nut trees are subject to damage or destruction from diseases,
pests, floods, droughts, windstorms, hurricanes, volcanic activity and other
natural causes. Partnership tree replacements for all orchards from all
causes were 1.3% in 1995, 1.3% in 1996 and 2.0% in 1997.
DISEASES AND PESTS. The Partnership's Keaau orchards have experienced tree
replacements of 2.2% in 1995, 2.2% in 1996 and 1.9% in 1997. Other macadamia
growers in the vicinity have also experienced higher than normal tree losses
due to a problem known as "Macadamia Quick Decline" ("MQD"). Based upon
research by the University of Hawaii and other experts, it is believed that
the situation is due to fungi associated with high moisture conditions. It
is also believed that a particular variety of macadamia nut tree (variety 333)
is most susceptible to MQD problem. Another tree variety (variety 344) has
recently also been identified as being more susceptible to MQD than other
varieties. Based on the latest research, Mauna Loa and the University of
Hawaii are working to identify the specific causes of the problem and
potentially to develop feasible control measures. There is no assurance,
however, that a feasible control measure can be developed. Approximately 9%
of the Partnership's orchards are variety 333 and 46% are variety 344. Both
the Keaau and Mauna Kea orchards are areas with high moisture conditions, and
may be more susceptible to the MQD problem. MQD is present in the Ka'u
orchards, but tree losses to date have been less than 1% in the Ka'u area.
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In addition, there are also two types of controllable fungal diseases which
can affect nut production, but are not fatal to the trees themselves. One of
these is Phytopthora which affects the macadamia flowers and nutlets. These
types of fungal disease were generally controllable with fungicides, but many
of these fungicides are no longer available. Historically, these fungi have
attacked the orchards located in Keaau every three or four years. These
fungi occurred in 1990 and required application of a fungicide at a cost of
$292,000. There was a Phytopthora occurrence in the Keaau and Mauna Kea
orchards in the spring of 1994 and, as there are currently no feasible
methods available to treat Phytopthora, the 1995-96 crop year production for
these orchards was affected.
WINDSTORMS AND INSURANCE. The Partnership's orchards are located in areas on
the island of Hawaii which are susceptible to windstorms. Twenty-two major
windstorms have occurred on the island of Hawaii since 1961, and four of
those caused material losses to Partnership orchards. Several of the
Partnership's orchards are surrounded by windbreak trees which provide
limited protection. Younger trees that have not developed extensive root
systems are particularly vulnerable to windstorms.
For 1998, the Partnership secured tree and crop insurance coverage under a
federally subsidized program. The tree insurance provides coverage up to a
maximum of approximately $20 million against loss of trees due to wind, fire
or volcanic activity. The crop insurance provides coverage up to a maximum
of approximately $5 million against loss of nuts due to wind, fire, volcanic
activity, earthquake, adverse weather, wildlife damage and failure of
irrigation water supplies.
On February 24, 1997, high winds hit the Hilo side of the island of Hawaii,
resulting in the loss of 5,381 trees (about 1.5% of all of the Partnership's
trees) in the Mauna Kea and Keaau orchards. Clean-up and replanting costs
were approximately $275,000. There was no insurance recovery because losses
were below the deductible amount. Production during the 1997-98 crop year
will be adversely impacted due to the loss of these trees.
VOLCANOES. The orchards are located on the island of Hawaii, where there are
two active volcanoes. To date, no lava flows from either volcano have
affected or threatened the orchards.
RAINFALL. The productivity of orchards depends in large part on moisture
conditions. Inadequate rainfall can reduce nut yields significantly, while
excessive rain without adequate drainage can foster disease and hamper
harvesting operations. While rainfall at the orchards located in the Keaau
and Mauna Kea areas has generally been adequate, the orchards located in the
Ka'u area generally receive less rainfall and, as a result, a portion of the
Ka'u orchards is presently irrigated. Irrigation can mitigate the effects of
a drought, but it cannot completely protect a macadamia nut crop from the
effect of a drought. Recorded rainfall at each of the three locations of the
Partnership's orchards for the past five years is shown below:
<TABLE>
<CAPTION>
Year Ka'u Keaau Mauna Kea
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<S> <C> <C> <C>
1993 27.3" 109.0" 142.7"
1994 68.7" 173.3" 249.7"
1995 27.0" 88.6" 123.1"
1996 69.3" 125.2" 146.6"
1997 54.9" 142.3" 157.5"
</TABLE>
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For the first four months of 1993 and the first eleven months of 1995, very
dry conditions prevailed in the Partnership's orchards, with the Ka'u area
being particularly affected. Though the rainfall returned to more normal
levels in the second half of 1993 as well as in 1996 and 1997, the
Partnership's 1993-94 and 1995-96 crop year production were adversely
affected by these droughts.
The heavy rainfall experienced in January and February 1994 in the Keaau
orchards (forty inches compared to a historical average of twenty-one)
induced flower disease and limited pollination. The 1994-95 crop year
production for the Keaau orchards was adversely impacted by these unusual wet
conditions.
Currently the island of Hawaii is experiencing a severe drought. Experts
attribute this condition to the effects of the El Nino weather pattern. The
National Weather Service has informed Hawaii county officials that normal
weather may not return to the island of Hawaii until April or May. Rainfall
in the Keaau area for January and February totaled 1.8 inches, less than 10%
of normal, and rainfall in Ka'u for the same two months has been less than
0.5 inches, which is 5% of normal. While it is impossible to predict at this
time, a prolonged drought could have a negative impact on the 1998 and 1999
production volumes.
WATER SUPPLY FOR IRRIGATION
In June 1986, the Partnership and KACI entered into an agreement (the "Water
Agreement") pursuant to which KACI agreed to supply water to that portion of
the June 1986 Orchards located at Ka'u ("Ka'u I") which had been irrigated
historically. In 1989, the Water Agreement was amended to supply water to
that portion of the October 1989 Orchards at Ka'u ("Ka'u II") which had been
irrigated historically. The Water Agreement, as amended, provides that KACI
will supply water to such portion of the Ka'u I Orchards and the Ka'u II
Orchards (the "Irrigated Orchards") from a well (the "Sisal Well") located on
property owned by KACI as requested by the Partnership from time to time in
an amount equal to, at the time of request, the lesser of (i) the amount
necessary to irrigate the Irrigated Orchards in accordance with prudent
farming practices or (ii) 95% of the Sisal Well's present operating capacity
of 1,700 gallons per minute, provided that the amount of water required to be
provided under clause (ii) will not exceed approximately 643 million gallons
of water per year. The cost to the Partnership for receiving such water is a
pro rata share of the cost incurred by KACI in providing such water.
If the amount of water provided to the Irrigated Orchards by the Sisal Well
becomes insufficient to irrigate the Irrigated Orchards in accordance with
prudent farming practices as determined by the Partnership in good faith, KACI
will be obligated, at the request of the Partnership, to use reasonable efforts
to increase the capacity of the Sisal Well, to drill an alternative well into
the historical source which provides water to the Sisal Well or to obtain water
from other sources in order to provide such amount of water. If KACI incurs
capital costs in connection with any such actions, the Partnership will be
required to pay its pro rata shares of such costs. If water is not supplied to
the Partnership as required under the Water Agreement, the Partnership will be
entitled to drill for water on the portion of the Ka'u I Orchards which is held
in fee by the Partnership. The Water Agreement also provides that, if KACI
sells or otherwise transfers all or any portion of the retained water rights
beneath the Irrigated Orchards or the property containing
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the Sisal Well, the right of the Partnership to receive water under the Water
Agreement will be reasonably provided for.
On a historical basis, the quantity of water available under the Water
Agreement to the irrigated portion of the Ka'u I Orchards has been generally
sufficient to irrigate these orchards in accordance with prudent farming
practices. The irrigated portion of the Ka'u II Orchards is expected to need
greater quantities of water as the orchards mature. The Managing Partner
anticipates that the amount of water available under the Water Agreement, as
amended, will be generally sufficient, assuming average levels of rainfall,
to irrigate the Irrigated Orchards in accordance with prudent farming
practices for the next several years. If no irrigation water is available to
the Irrigated Orchards, then, based on historical average rainfall levels,
diminished yields of macadamia nut production can be expected.
EMPLOYEES
The Partnership presently has no employees. Instead, the employees, officers
and directors of the Managing Partner perform all management functions for
the Partnership. As of December 31, 1997, the Managing Partner employed
three people.
ITEM 2. PROPERTIES.
LOCATION. The Partnership owns or leases approximately 4,027 tree acres of
macadamia orchards on the island of Hawaii. The orchards are located in
three areas: Ka'u, Keaau and Mauna Kea. The Ka'u area is located in the
south part of the island about fifty miles from Hilo. The Keaau area is
located six miles south of Hilo on the east side of the island, and the
Mauna Kea area is located three miles north of Hilo on the east side of the
island.
The majority of macadamia nut trees grown in the State of Hawaii are grown on
the island of Hawaii in volcanic soil that permits drainage during heavy
rainfall. While the orchards are located approximately within a 50-mile
radius, the climate and other conditions which affect the growing of
macadamia nuts are different. These differences are the result of prevailing
wind patterns and island topography which produce a variety of microclimates
throughout the island.
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[Map of STATE OF HAWAII]
AGE AND DENSITY. The productivity of macadamia nut orchards depends on
several factors including, among others, the age of the trees, the number of
trees planted per acre, soil condition, climate, rainfall and/or irrigation.
The most significant characteristic affecting yields is maturity. The trees
in a macadamia nut orchard generally begin to produce nuts at a commercially
acceptable level at around nine years of age. Thereafter, nut yields
increase gradually until the trees reach maturity, after which the nut yield
remains relatively constant except for variances produced by rainfall,
cultivation practices, pest infestation and disease.
Macadamia orchards normally reach peak production after fifteen to eighteen
years of age. Of the 4,027 tree acres of macadamia orchards owned or leased
by the Partnership, 2,721 tree acres are over eighteen years of age and
roughly 1,306 tree acres are under eighteen years of age. Around 2% of trees
are lost to various causes each year and are replaced.
RAINFALL. Macadamia trees grow best in climates with substantial and evenly
distributed rainfall (or equivalent irrigation) and in soil that provides
good drainage. Inadequate rainfall can significantly reduce nut yields,
while excessive rain without adequate drainage can impede healthy tree
growth, promote the growth of harmful fungal diseases and produce mudholes
that require repair of the orchard floor.
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At Keaau, normal rainfall is adequate without irrigation, and the volcanic
soil provides good drainage. However, short droughts and occasional flooding
have occurred. At Mauna Kea, normal rainfall is adequate without irrigation
and the volcanic soil provides adequate drainage. In the event of a very
long drought, production at Keaau and Mauna Kea might be affected. At Ka'u,
located on the drier side of the island, the rainfall averages substantially
less than at Keaau, particularly at the lower elevations. Approximately 652
acres at the lower elevations of Ka'u are irrigated to provide for additional
water when required. Under extremely dry conditions at Ka'u, such as a
prolonged drought, irrigation is not sufficient, and production will be
affected negatively.
At the time of the conveyance of these orchards to the Partnership, Mauna Loa
and KACI reserved the water rights to the land underlying the orchards. To
supply water to that portion of the orchards located at Ka'u which had been
irrigated historically, KACI and the Partnership entered into a water
agreement whereby KACI agreed to supply water to the Partnership from a well
which is on property retained by KACI to irrigate this property. The water
agreement has been amended to provide for water to be supplied for irrigation
purposes to the portion of the October 1989 Ka'u Orchards which have
historically been irrigated.
ORCHARDS. The following table lists each of the orchards, the year acquired,
gross and tree acres, tenure, and lease rents:
<TABLE>
<CAPTION>
GROSS TREE LEASE MIN. RENT
ORCHARD ACQUIRED ACRES ACRES TENURE EXPIRATION PER ANNUM
- --------------------- ---------- -------- -------- --------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Keaau I June 1986 1688 1467 Fee simple
Ka'u I June 1986 579 456 Fee simple
" June 1986 700 500 Leasehold (1) 2019 $ 10,500
Ka'u Green Shoe I Dec. 1986 546 266 Leasehold (1) 2019 $ 5,586
Keaau II Oct. 1989 251 220 Fee simple
Ka'u II Oct. 1989 528 327 Leasehold (2) 2034 $ 32,702
" Oct. 1989 271 175 Leasehold (1) 2028 $ 35,898
" Oct. 1989 30 26 Leasehold (3) 2029 $ 1,020
" Oct. 1989 205 137 Leasehold (1)(4) 1995 $ 12,757
" Oct. 1989 390 49 Leasehold (1)(4) 1999 $ 5,828
Mauna Kea Oct. 1989 528 326 Leasehold (2) 2034 $ 32,560
Keaau Lot 10 Sept. 1991 88 78 Fee simple
------- -------
Total acres 5804 4027
</TABLE>
(1) Lease of land only; trees may be removed at termination of lease.
(2) Lease of land only; lessor may purchase trees from lessee at any time after
June 30, 2019.
(3) Lease of land; trees revert to lessor upon termination of lease.
(4) The lease terms provide for renewal options of 36 years and 32 years for the
leases expiring in 1995 and in 1999, respectively, subject to completion
of a preliminary county subdivision approval of such leased property prior
to July 1, 1992. Mauna Loa and KACI met this deadline and received final
subdivision approval in January 1995. The lessor is now completing the
documentation for the lease renewal.
11
<PAGE>
For certain additional information concerning farming leases, see Item 13,
page 40.
In addition to the minimum annual lease payment amount, all the leases
require the Partnership to pay various expenses with respect to the leased
premises as well as an additional rental payment based on the market price
per pound of macadamia nuts sold in Hawaii.
With respect to the Ka'u Green Shoe I Orchard, the lease requires the
Partnership to pay KACI, the seller and lessor, additional rent equal to 100%
of any year's cash flow generated by such orchard in excess of a target level
of $507,000 until the aggregate amount paid equals 150% of the aggregate
amount of the stabilization payments previously received by the Partnership.
Thereafter, the Partnership is required, with respect to any year prior to
the expiration of the lease, to pay as additional rent, 50% of the cash flow
generated by such orchard for such year in excess of a target level of
$507,000 of cash flow.
CERTAIN INFORMATION REGARDING LEASES. The 715 tree acres comprising the Ka'u
II Orchards are situated on approximately 1,424 actual acres of land. Such
1,424 acres of land are located on larger tracts of land which cover an
aggregate of approximately 10,358 acres. Under a Hawaii county subdivision
ordinance, in order to transfer or lease a discrete portion of a tract if the
entire tract is not being transferred or leased, certain government approvals
must be obtained. Because such approvals were not obtained prior to the
consummation of the acquisition of the Ka'u II Orchards in 1989 with respect
to the transfer to the Partnership of leasehold interests relating to only a
portion of such tracts containing the Ka'u II Orchards, the Partnership
acquired (i) a lease of an undivided interest in the larger tracts of land
within which the property relating to the Ka'u II Orchards are located, (ii)
an undivided interest in the entire leasehold estate relating to the larger
tracts of land within which a portion of the property relating to the Ka'u II
Orchards are located and (iii) the entire leasehold estate of the remaining
portion of the property relating to the Ka'u II Orchards Leasehold Interest.
The acquisition of such interests by the Partnership did not require any
government approvals. Mauna Loa and the KACI agreed that they would use all
reasonable efforts to obtain preliminary county subdivision approval for the
larger tracts of land prior to July 1, 1992. Mauna Loa and KACI met this
deadline and received final subdivision approval in January 1995. Upon
obtaining all necessary approvals to partition such larger tracts, the
Partnership will be required to revest in Mauna Loa and KACI the
Partnership's undivided leasehold interest in the 8,934 additional acres not
related to the land upon which the Ka'u II Orchards are located, at which
time the Partnership's undivided leasehold interest in the remaining portions
of such larger tracts will be converted to a leasehold interest of the
entirety of such remaining portions. That work is proceeding.
ITEM 3. LEGAL PROCEEDINGS.
On November 6, 1997, the Partnership announced a proposed merger with C.
Brewer Homes, Inc. ("Homes"). Waterside Partners, a limited partner of the
Partnership, filed a complaint on January 5, 1998 in the Delaware Chancery
Court asking for an injunction forbidding the merger from proceeding (C.A.
No. 16121-NC). The suit was brought against the Partnership, Resources,
Homes, CBCL, and the five directors of Resources. The complaint seeks an
injunction, damages, and attorneys' fees and alleges, among other things,
that the directors of Resources breached their fiduciary duties in approving
the merger because their primary motive allegedly was to salvage investments
in Homes by stockholders of Buyco rather than to advance the
12
<PAGE>
interest of unitholders in the Partnership, and that Homes aided and abetted
such violations of fiduciary duties by entering into the merger agreement.
The complaint also alleges that the exchange ratio is unfair to the
Partnership. The Partnership and Homes believe that the suit in entirely
without merit, and will vigorously defend it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S CLASS A UNITS AND RELATED UNITHOLDER MATTERS.
The Partnership's Class A Depositary Units are listed for trading on the New
York Stock Exchange (symbol = NUT). There were 1925 registered holders Class
A Depositary Units on December 31, 1997.
Distributions declared and high and low sales prices of the Class A
Depositary Units, based on New York Stock Exchange daily composite
transactions, are shown in the table below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Distribution High Low
- --------------------------------------------------------------
<S> <C> <C> <C>
1997: 4th Quarter $0.0750 4 3/8 3 1/2
3rd Quarter 0.0750 4 1/4 3 11/16
2nd Quarter 0.0750 4 1/8 3 5/8
1st Quarter 0.0750 4 5/8 3 1/8
1996: 4th Quarter $0.0500 4 1/8 2 3/4
3rd Quarter 0.0500 3 2 1/2
2nd Quarter 0.0500 2 7/8 2 1/2
1st Quarter 0.0500 2 3/4 2 3/8
</TABLE>
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
(In thousands, except per pound and per unit data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Financial:
Total revenue $ 12,128 $ 13,216 $ 10,590 $ 10,107 $ 10,247
Net cash provided by
operating activities (1) 4,613 2,062 3,370 1,568 2,705
Net income 15,581 3,033 1,192 486 1,512
Distributions declared 2,273 1,515 1,515 2,273 3,030
Total working capital 5,213 4,342 1,235 219 (660)
Total assets 66,727 65,953 64,455 67,544 70,536
Long-term debt - - - 264 321
Total partners' capital 60,965 47,656 46,138 46,461 48,248
Class A limited partners' capital 60,355 47,179 45,676 45,996 47,765
Net cash flow (2) 3,435 4,635 2,793 3,206 4,392
Operations (3):
Macadamia nuts harvested (lbs.) (4) 20,315 22,110 18,820 18,943 17,914
Net price $/lb. (4)(5) $ 0.5970 $ 0.5977 $ 0.5627 $ 0.5363 $ 0.5932
Per Class A Unit (6):
Net income before tax credit $ 0.24 $ 0.40 $ 0.16 $ 0.02 $ 0.13
Net income 2.06 0.40 0.16 0.06 0.20
Net cash flow 0.45 0.61 0.37 0.42 0.58
Distributions 0.30 0.20 0.20 0.30 0.40
Partners' capital 8.05 6.29 6.09 6.13 6.37
</TABLE>
(1) See "Statement of Cash Flows" in the financial statements for method of
calculation.
(2) See Footnote 5 in the notes to financial statements for method of
calculation.
(3) During all periods presented there were 4,027 acres of trees harvested.
(4) Wet-in-shell at 25% moisture.
(5) Weighted average for all orchards.
(6) 7,500,000 Class A Units were issued and outstanding for all periods
presented.
14
<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the financial statements
and the related notes included elsewhere in this report.
RESULTS OF OPERATIONS -- 1997, 1996 AND 1995
PRODUCTION AND YIELDS
Production and yield data for the seven orchards are summarized below
(expressed in wet-in-shell pounds at 25% moisture):
<TABLE>
<CAPTION>
Average Yield per Acre
1997 ---------------------------
Orchard Acquired Acreage Production 1997 1996 1995
- ------------------------ -------- ------- ----------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Keaau I June 1986 1,467 6,179,000 4,212 5,104 4,013
Keaau II Oct. 1989 220 591,000 2,686 3,513 2,959
Keaau Lot 10 Sept. 1991 78 277,000 3,551 3,884 3,449
Ka'u I June 1986 956 5,897,000 6,168 7,029 6,960
Ka'u Green Shoe I Dec. 1986 266 2,292,000 8,617 6,063 5,229
Ka'u II Oct. 1989 714 4,103,000 5,746 4,829 4,410
Mauna Kea Oct. 1989 326 976,000 2,994 5,420 2,503
------ ----------
Totals (except yields
which are averages) 4,027 20,315,000 5,045 5,490 4,673
------ ----------
------ ----------
</TABLE>
For 1997, yields were down 18% for the combined Keaau orchards and down 55%
for Mauna Kea compared to 1996. This was partly the result of high winds
that hit the Hilo side of the island of Hawaii in February 1997 causing a
loss of 5,381 trees, resulting in reduced production. Clean-up and
replanting expenses were approximately $275,000. There was no insurance
recovery because losses were not in excess of the deductible. The high yields
at Ka'u Green Shoe I and Ka'u II for 1997 are the result of a carryover of
the 1996 fall/winter crop into January 1997, along with the fall/winter crop
harvested at the end of 1997. Although from two different natural crop years
(the natural crop year being from July 1 to June 30), the production is
reported in the same calendar year for accounting purposes.
Yields in 1996 were much higher than in 1995 at all locations due to
unusually good weather in 1996, which saw very good rainfall levels at Ka'u
but without excessive rainfall at the normally much wetter Keaau and Mauna
Kea locations. The high yield at Mauna Kea for 1996 is partly the result of a
late winter crop harvested at the beginning of 1996 and the fall crop of 1996
being completed before the end of the calendar year. Again, two production
seasons occurred in the same calendar year.
The Ka'u Green Shoe I orchard and the Mauna Kea orchard are not yet fully
mature. As a result, the yields from these orchards are expected to be lower
on average over the next few years than for the Partnership's mature
orchards. At full maturity under favorable growing conditions, a macadamia
orchard can produce between 5,500 and 7,500 WIS pounds of macadamia nuts per
acre each year at Ka'u and between 4,000 and 6,000 WIS pounds of macadamia
nuts per acre
15
<PAGE>
each year at Keaau. No trees have reached full maturity in the Mauna Kea
area, but we expect that production at maturity at the Mauna Kea orchard will
approximate Keaau levels.
REVENUE
Macadamia nut revenues depend on the number of producing acres, yields per
acre and the nut purchase price. The impact of these factors is summarized
in the following table:
<TABLE>
<CAPTION>
1997 1996
over over
1997 1996 1995 1996 1995
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Trees acres harvested 4,027 4,027 4,027 - -
Average yield (WIS lbs./acre) 5,045 5,490 4,673 - 8% + 17%
------- ------- ------
Nuts harvested (000's WIS lbs.) 20,315 22,110 18,820 - 8% + 17%
Nut price ($/WIS lbs. @ 25%) 0.5970 0.5977 0.5627 - + 6%
------- ------- ------
Gross nut sales ($000's) 12,128 13,216 10,590 - 8% + 25%
------- ------- ------
------- ------- ------
</TABLE>
All of the Partnership nut production is sold under long-term contracts to
Mauna Loa Macadamia Nut Corporation ("Mauna Loa"). The price for these nuts
is based 50% on the two-year trailing average of USDA published macadamia nut
prices and 50% on a "netback component". The netback component is determined
by subtracting from Mauna Loa's gross revenues from the sale of macadamia
products (i) allocable processing, packaging, marketing, selling and
advertising costs and (ii) a 20% capital charge on the difference between
those aggregate gross revenues and aggregate allocable costs.
The following table sets forth the manner in which the nut purchase price per
pound was determined for 1997, 1996 and 1995 ($/lb.):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
USDA price - two years prior (a) 0.6413 0.6391 0.6399
USDA price - one year prior (a) 0.6886 0.6413 0.6391
------- ------- -------
USDA price - two year trailing average 0.6650 0.6402 0.6395
------- ------- -------
------- ------- -------
Gross revenues 2.1673 2.0544 2.2057
Less allocable processing, packaging,
marketing, sales and advertising costs 1.5150 1.3692 1.6063
Less 20% capital charge 0.1305 0.1370 0.1199
------- ------- -------
Net-back component 0.5218 0.5482 0.4795
------- ------- -------
------- ------- -------
USDA price - two year trailing average 0.6650 0.6402 0.6395
Net-back component 0.5218 0.5482 0.4795
------- ------- -------
Average of USDA two year trailing
average price and net-back component 0.5934 0.5942 0.5595
Plus Hawaii general excise tax (0.5%) 0.0030 0.0030 0.0028
------- ------- -------
Net purchase price (b) 0.5964 0.5972 0.5623
------- ------- -------
------- ------- -------
</TABLE>
16
<PAGE>
(a) Mauna Loa's own purchases comprise a substantial portion of nut purchases
reported to the USDA. Therefore, the USDA price component of the
purchase price is, to a substantial degree, the average price that Mauna
Loa has paid to purchase macadamia nuts from the Partnership and from
third parties during the previous two years.
(b) The nut purchase contract covering nut production from the 78 acre Keaau
Lot 10 orchard acquired in September 1991 defines the "two-year trailing
average" provision slightly differently from the other nut purchase
contracts, and thus, results in a slightly different nut price. This
orchard accounts for less than 2% of the Partnership's nut production.
The USDA published price for the 1996-97 crop year was $0.7125 per pound (WIS
at 25% moisture), which is 3.5% higher than in 1995-96 and 11.1% higher than
in 1994-95. The USDA has estimated that the 1997-98 crop year price will be
the same at $0.7125 per pound (WIS at 25% moisture). The two-year trailing
average USDA component of the Partnership's 1998 nut price formula will
increase by 5.4% to $0.7006 per pound.
The 1997 average nut price of $.5970 per pound was nearly the same as the price
for 1996. Although the USDA trailing average increased by $.0248, the netback
component decreased by $.0264. This decrease is attributable to a 10% increase
in Mauna Loa's processing costs and a 13% increase in marketing costs. Mauna
Loa's revenues increased by 6%, but not enough to offset the higher expenses.
The average 1996 nut price of $0.5977 per pound was $0.0350 higher than in 1995
as a result of an improved netback component. That improvement primarily
resulted from an increase in pounds processed, labor savings from factory
capital improvements and changes in sales mix.
COST OF GOODS SOLD
Agricultural unit costs depend on the operating expenses required to maintain
the orchards and to harvest the crop as well as on the quantity of nuts
actually harvested.
The Partnership's unit costs (expressed in dollars per wet-in-shell pound at
25% moisture), which are calculated by dividing all agricultural costs for each
orchard (including lease rent, property tax and tree insurance) by the number
of pounds of macadamia nuts produced by that orchard, are summarized below
($/lb.):
<TABLE>
<CAPTION>
Cost per pound
---------------------------------------
Orchard Acquired 1997 1996 1995
- ------------------- -------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Keaau I June 1986 0.4972 0.4374 0.4859
Keaau II Oct. 1989 0.6385 0.5170 0.5968
Keaau Lot 10 Sept. 1991 0.3145 0.2662 0.3318
Ka'u I June 1986 0.4429 0.3992 0.3720
Ka'u Green Shoe I Dec. 1986 0.3881 0.3115 0.3104
Ka'u II Oct. 1989 0.3819 0.4089 0.4294
Mauna Kea Oct. 1989 0.8059 0.5468 1.1091
All Orchards 0.4623 0.4192 0.4519
</TABLE>
17
<PAGE>
Total production costs charged to the income statement increased by $238,000
in 1997 and by 10% in cost per pound. The higher production costs in 1997
are partly due to the additional percentage rent of $297,000 incurred on the
Ka'u Green Shoe I lease. The 1997 cost per pound of $0.4623 is 2% below the
average cost for the past five years. Production costs in 1996 were higher
than 1995 by $763,000 due primarily to increased production, which increases
harvesting and husking costs, and to wetter weather in 1996. The higher 1996
volume also reduced the 1996 cost per pound by 7% compared to 1995.
GENERAL AND ADMINISTRATIVE COSTS
General and administrative expenses are comprised of reimbursements to the
Managing Partner (primarily for compensation, directors' fees and liability
insurance), accounting and reporting costs and the management fee. These
costs in 1997 were $47,000 higher than in 1996 mostly due to the timing of
tax and accounting services billed before year-end. The management fee was
$75,000 for 1997, $113,000 for 1996 and none for 1995. General and
administrative costs were lower in 1995 due primarily to the absence of the
management fee.
INTEREST INCOME AND EXPENSE
The Partnership funds its working capital need through funds on hand and,
when needed, from short-term borrowings, generating interest expense in the
process. Net interest income or expense, therefore, is partly a function of
any balances carried over from the prior year, the amounts and timing of cash
generated and distributions paid to investors in the current years, as well
as the current level of interest rates. Throughout 1997 the Partnership had
cash on hand, earned $171,000 in interest income (net of line of credit
fees), and incurred no interest expense. Interest income was $33,000 in
1996, which was offset by interest expense and line of credit fees totaling
$33,000. In 1995, net interest expense was $31,000.
INFLATION AND TAXES
In general, prices paid to macadamia nut farmers fluctuate independently of
inflation. Macadamia nut prices are influenced strongly by prices for
finished macadamia products, which depend on competition and consumer
acceptance. Farming costs, particularly labor and materials, and general and
administrative costs do generally reflect inflationary trends.
In July 1997, Congress passed the Taxpayer Relief Act of 1997, which enables
the Partnership to permanently extend its partnership tax status, subject to
a 3.5% tax on gross income beginning in 1998. This new tax on gross income
will have a slight negative impact upon the Partnership's profit and cash
flow compared to current and past years, but will have a positive impact
compared to being taxed as a corporation. As a result of the Partnership's
decision to elect continued partnership tax status, the Partnership
eliminated most of its deferred tax liability account and recognized a
deferred tax credit of $13.8 million in the third quarter of 1997.
FOURTH QUARTER 1997 COMPARED TO FOURTH QUARTER 1996
Production in the fourth quarter 1997 was 8% higher than the fourth quarter
1996, and the final nut price for both years was nearly the same. However,
revenue was 2% lower in 1997. This variation occurred because the final
price to be paid for the entire year's production is not known until early in
the following year after Mauna Loa's books have been closed and audited. For
18
<PAGE>
interim payment and reporting purposes the Partnership and Mauna Loa estimate
this nut price based on Mauna Loa's current processing and marketing plan.
When Mauna Loa's books have been closed and audited, the final price is
applied to the Partnership's fourth quarter sales, and an adjustment is made
in the fourth quarter to apply the revised final price to all nuts sold
earlier in that year as well. Although the nut purchase price changed less
than 1% from 1996 to 1997, the estimated nut purchase price for the first
nine months of 1997 was over-estimated at $0.6115, and for the first nine
months of 1996 it was under-estimated at $0.5564. Therefore, in the fourth
quarter 1997, revenues were adjusted downward by $129,000, and in the fourth
quarter 1996 revenues were adjusted upward by $471,000.
In addition, the cost of goods for the fourth quarter 1997 was 35% higher
than the fourth quarter 1996 on similar production. There are two main
reasons for this variation:
1. The lease at Ka'u Green Shoe I required additional percentage rent to be
paid based on excess cash flow from that orchard. The additional rent
was $297,000 for 1997 and $53,000 for 1996. The 1997 winter production
from this orchard surpassed our estimates, and 35% of the year's production
occurred in December.
2. Production costs, like revenues, are also estimated for interim reporting
purposes. The 1997 farming costs were estimated fairly accurately. The
estimates for 1996 were high, and a $422,000 credit to farming costs was
recorded in the fourth quarter 1996 to correct the first nine months'
costs.
PROPOSED MERGER
In December 1997, the Partnership entered into a merger agreement with C.
Brewer Homes, Inc. ("Homes") (Nasdaq: CBHI). The Partnership filed with the
Securities and Exchange Commission on February 13, 1998, a registration
statement in connection with this merger. The merger is subject to approval
by the unitholders of the Partnership and the shareholders of Homes. In
addition, the unitholders of the Partnership will vote on certain proposed
changes to the Agreement of Limited Partnership of Mauna Loa Macadamia
Partners, L.P. (the "Partnership Agreement"). Effectuation of the merger and
related changes to the Partnership Agreement would significantly expand the
Partnership's operations and result in changes affecting (among other things)
management fees, incentive fees, and distribution policies.
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 line
was extended for one year on June 1, 1996, again on June 1, 1997, and may be
extended for additional one-year intervals upon the payment of extension
fees. If the Partnership should merge with another company, this facility
will expire and all outstanding principal and interest shall be due and
payable at the time of the merger.
The Partnership had a cash balance of $2.9 million at year-end 1997, and
there were no line of credit drawings during 1997. Line of credit borrowings
were $430,000 in 1996 and $825,000 in 1997. It is the opinion of management
that the Partnership has adequate cash on hand and
19
<PAGE>
borrowing capacity available to meet anticipated working capital needs for
operations as presently conducted.
RECENT DEVELOPMENTS
Currently the island of Hawaii is experiencing a severe drought. Experts
attribute this condition to the effects of the El Nino weather pattern. The
National Weather Service has informed Hawaii county officials that normal
weather may not return to the island of Hawaii until April or May. Rainfall
in the Keaau area for January and February totaled 1.8 inches, less than 10%
of normal, and rainfall in Ka'u for the same two months has been less than
0.5 inches, which is 5% of normal. While it is impossible to predict at this
time, a prolonged drought could have a negative impact on the 1998 and 1999
production volumes.
NEW ACCOUNTING STANDARDS
REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME,
the provisions of which are effective for fiscal periods beginning after
December 15, 1997. The Statement requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. Adoption of this pronouncement is
not expected to have a material effect on the Partnership's presentation of
its results of operations.
SEGMENT INFORMATION
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, the provisions of which are effective for
fiscal years beginning after December 15, 1997. This Statement establishes
standards for reporting information about operating segments in annual
financial statements and requires selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Partnership has not determined the
impact that the adoption of this new accounting standard will have on its
financial statement disclosures.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS, SUPPLEMENTARY DATA AND SCHEDULES.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Report of Independent Accountants 22
Balance Sheets, December 31, 1997 and 1996 23
Income Statements, for the Years Ended December 31, 1997, 1996 and 1995 24
Statements of Partners' Capital, for the Years Ended December 31, 1997,
1996 and 1995 25
Statements of Cash Flows for the Years Ended December 31, 1997,
1996 and 1995 26
Notes to Financial Statements, Including Supplementary Data 27
</TABLE>
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Limited Partners
Mauna Loa Macadamia Partners, L.P.
We have audited the accompanying balance sheets of Mauna Loa Macadamia
Partners, L.P. as of December 31, 1997 and 1996 and the related statements of
income, partners' capital and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mauna Loa Macadamia
Partners, L.P. as of December 31, 1997 and 1996 and the results of operations
and its cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Honolulu, Hawaii
February 12, 1998
22
<PAGE>
MAUNA LOA MACADAMIA PARTNERS, L.P.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
------- -------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 2,914 $ 676
Accounts receivable from related party 6,809 6,899
Prepaid expenses and other assets 20 82
-------- --------
Total current assets 9,743 7,657
Land, orchards and equipment (net) 56,692 58,296
Capitalized acquisition costs 292 -
-------- --------
Total assets $ 66,727 $ 65,953
-------- --------
-------- --------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable to related parties $ 3,681 $ 2,623
Distribution payable 568 379
Other current and accrued liabilities 281 313
-------- --------
Total current liabilities 4,530 3,315
Deferred income tax expense 1,232 14,982
Commitments
Partners' capital
General partners 610 477
Limited partners
Class A (11,625 units authorized and 7,500 units
issued and outstanding; no par or assigned value) 60,355 47,179
-------- --------
Total partners' capital 60,965 47,656
-------- --------
Total liabilities and partners' capital $ 66,727 $ 65,953
-------- --------
-------- --------
</TABLE>
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
MAUNA LOA MACADAMIA PARTNERS, L.P.
INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Macadamia nut sales to related party $ 12,128 $ 13,216 $ 10,590
Cost of goods sold
Costs expensed under farming contracts with related parties 7,301 7,316 6,675
Depreciation 1,604 1,602 1,601
Other 602 351 230
--------- --------- ---------
Total cost of goods sold 9,507 9,269 8,506
--------- --------- ---------
Gross profit 2,621 3,947 2,084
General and administrative expenses
Costs expensed under management contract
with related party 503 493 424
Other 458 421 437
--------- --------- ---------
Operating income 1,660 3,033 1,223
Interest income (expense) 171 - (31)
--------- --------- ---------
Income before deferred tax credit 1,831 3,033 1,192
Deferred tax credit 13,750 - -
--------- --------- ---------
Net income $ 15,581 $ 3,033 $ 1,192
--------- --------- ---------
--------- --------- ---------
- --------------------------------------------------------------------------------------------------------
Net cash flow (as defined in the Partnership Agreement) $ 3,435 $ 4,635 $ 2,793
--------- --------- ---------
--------- --------- ---------
- --------------------------------------------------------------------------------------------------------
Net income per Class A Unit $ 2.06 $ 0.40 $ 0.16
--------- --------- ---------
--------- --------- ---------
Net cash flow per Class A Unit $ 0.45 $ 0.61 $ 0.37
--------- --------- ---------
--------- --------- ---------
Cash distributions per Class A Unit $ 0.30 $ 0.20 $ 0.20
--------- --------- ---------
--------- --------- ---------
Class A Units outstanding 7,500 7,500 7,500
--------- --------- ---------
--------- --------- ---------
- --------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
MAUNA LOA MACADAMIA PARTNERS, L.P.
STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Partners' capital at beginning of period:
General partners $ 477 $ 462 $ 465
Class A limited partners 47,179 45,676 45,996
--------- -------- ---------
47,656 46,138 46,461
--------- -------- ---------
Allocation of net income:
General partners 156 30 12
Class A limited partners 15,426 3,003 1,180
--------- -------- ---------
15,582 3,033 1,192
--------- -------- ---------
Cash distributions:
General partners 23 15 15
Class A limited partners 2,250 1,500 1,500
--------- -------- ---------
2,273 1,515 1,515
--------- -------- ---------
Partners' capital at end of period:
General partners 610 477 462
Class A limited partners 60,355 47,179 45,676
--------- -------- ---------
$ 60,965 $ 47,656 $ 46,138
--------- -------- ---------
--------- -------- ---------
</TABLE>
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
MAUNA LOA MACADAMIA PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from macadamia nut sales $ 12,218 10,412 12,490
Cash paid under farming and management contracts (6,746) (7,641) (8,428)
Cash paid to other suppliers (1,030) (704) (655)
Interest received (paid), net 171 (5) (37)
------- ------- -------
Net cash provided by operating activities 4,613 2,062 3,370
------- ------- -------
Cash flows from investing activities:
Capital acquisition costs expenditures (292) - -
Capital expenditures - (23) -
------- ------- -------
Net cash used in investing activities (292) (23) -
------- ------- -------
Cash flows from financing activities:
Line of credit repayments - - (1,407)
Principal payments of mortgage note - (265) (59)
Distributions paid (2,083) (1,519) (1,511)
Other - - (9)
------- ------- -------
Net cash used in financing activities (2,083) (1,784) (2,986)
------- ------- -------
Net increase in cash 2,238 255 384
Cash at beginning of period 676 421 37
------- ------- -------
Cash at end of period $ 2,914 676 421
------- ------- -------
------- ------- -------
Reconciliation of net income to net cash
provided by operating activities:
Net income $ 15,581 3,033 1,192
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 1,604 1,602 1,612
Deferred income tax credit (13,750) - -
(Increase) decrease in accounts receivable 90 (2,804) 1,900
Increase (decrease) in accounts payable 1,058 168 (1,329)
Other 30 63 (5)
------- ------- -------
Total adjustments (10,968) (971) 2,178
------- ------- -------
Net cash provided by operating activities $ 4,613 2,062 3,370
------- ------- -------
------- ------- -------
</TABLE>
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
MAUNA LOA MACADAMIA PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
(1) OPERATIONS AND OWNERSHIP
Mauna Loa Macadamia Partners, L.P. (the "Partnership") owns 4,027 tree
acres of macadamia orchards on the Island of Hawaii. Once the nuts are
harvested, the Partnership sells them to another entity which processes and
markets the finished products.
The Partnership is owned 99% by limited partners and 1% by the managing
general partner, Mauna Loa Resources Inc. ("Resources"). Resources is a
subsidiary of Mauna Loa Macadamia Nut Corporation ("Mauna Loa"), which in
turn is a subsidiary of C. Brewer and Company, Limited ("CBCL"), whose parent
company is Buyco, Inc. ("Buyco"). Mauna Loa was the Partnership's special
general partner, with a .01% ownership interest, until December 1997, when it
assigned its interest as a general partner to Resources and withdrew as a
special general partner.
Limited partner interests are represented by Class A Units, which are
evidenced by depositary receipts that trade publicly and are listed on the
New York Stock Exchange. Mauna Loa Orchards, L.P., an affiliate of the general
partner, held 30,000 Class A Units at December 31, 1996 and 1997.
Although Mauna Loa and certain of its affiliates formerly
held Class B Units in the Partnership, all Class B Units were cancelled in
November 1997 for nominal consideration. Ownership of Class A Units confers
no direct or indirect interest in CBCL, Mauna Loa or any of their affiliated
corporations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CASH AND CASH EQUIVALENTS. Cash and cash equivalents include
unrestricted demand deposits with banks and all highly liquid deposits with
an original maturity of less than three months. The cash equivalents are not
protected by federal deposit insurance.
(b) FINANCIAL INSTRUMENTS. The fair value of all financial
instruments approximates the carrying value as the majority of the financial
instruments have fairly short durations until maturity or the market and risk
factors associated with the instruments have not changed.
(c) FARMING COSTS. In accordance with industry practice in Hawaii,
orchard maintenance and harvesting costs for commercially producing macadamia
orchards are charged against earnings in the year that the costs are incurred.
(d) LAND, ORCHARDS AND EQUIPMENT. Land, orchards and equipment are
reported at cost, net of accumulated depreciation and amortization. Net
farming costs for any "developing" orchards are capitalized on the balance
sheet until revenues from that orchard exceed expenses for that orchard (or
nine years after planting, if earlier).
Depreciation of orchards and other equipment is reported on a
straight-line basis over the estimated useful lives of the assets (40 years
for orchards and between 5 and 12 years for other equipment). A 5% residual
value is assumed for orchards. The macadamia orchards acquired in 1986
situated on leased land are being amortized on a straight-line basis over the
terms of the
27
<PAGE>
leases (approximately 33 years from the inception of the Partnership) with no
residual value assumed. The macadamia orchards acquired in 1989 situated on
leased land are being amortized on a straight-line basis over a 40 year
period (as the terms of these leases exceeds 40 years) with no residual value
assumed. For income tax reporting, depreciation is calculated under
accelerated methods.
(e) INCOME TAXES. As the Partnership is not a taxable entity, no
amounts have been provided for current income taxes. Rather, the
Partnership's tax attributes are includable in the tax returns of the
Partners. Neither the Partnership's financial reporting income nor the
distributions to Partners can be used as a substitute for the detailed tax
calculations which the Partnership mails to each Partner prior to the end of
March each year for the preceding tax year.
The Partnership has elected to continue to be taxed as a partnership
rather than to be taxed as a corporation, subject to a 3.5% tax on gross
income beginning January 1, 1998. This election is allowed by the Taxpayer
Relief Act of 1997, which modifies the Omnibus Budget Reconciliation Act of
1987 ("OBRA"). OBRA provided that some publicly traded limited partnerships
were to be taxed as corporations beginning in 1998. With this election, the
deferred tax liability was reduced in the third quarter 1997 from $14,982,000
to $1,232,000, creating a deferred tax credit of $13,750,000. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the projected financial reporting and tax
reporting basis of assets and liabilities at December 31, 1997.
(f) ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(g) NET INCOME PER CLASS A UNIT. The Partnership computed net income per
Class A Unit for all periods presented under the provisions of Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE, which was
required to be implemented for financial statements for periods ending after
December 15, 1997. The adoption of this statement had no impact on the
Partnership's reported net income per Class A Unit. 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.
(3) RELATED PARTY TRANSACTIONS
(a) NUT PURCHASE CONTRACTS. The Partnership is a party to four nut
purchase contracts with Mauna Loa. They cover all nuts produced by the
orchards acquired in June 1986, December 1986, October 1989 and September
1991, respectively. The first two contracts run for 20 years, while the
third contract runs for 30 years and also provides for the exclusion of
unusable nuts from those purchased by Mauna Loa. The first three contracts
are identical in all other material respects. The fourth contract was
acquired by assignment with the purchase of the September 1991 orchard and
expires in 2003. The fourth contract is similar to the first three
contracts, but the nut price is calculated on a crop year (July 1 through
June 30) rather than calendar year basis, which results in a slightly
different nut price. All four contracts use a pricing formula based 50% on a
two-year trailing average of the macadamia nut price published annually by
the U. S.
28
<PAGE>
Department of Agriculture and 50% on Mauna Loa's "netback component". The
netback component is calculated by subtracting Mauna Loa's processing and
marketing costs per pound and a "capital charge" of 20% from its nut revenues
per pound. The nut price paid to the Partnership under the first three nut
purchase contracts was $0.5623 for 1995, $0.5972 for 1996 and $0.5964 for
1997. The average nut price paid to the Partnership under the fourth nut
price contract was $0.5901 for 1995, $0.6353 for 1996, and $0.6434 for 1997.
(b) FARMING CONTRACTS. The Partnership is a party to four farming
contracts with two subsidiaries of CBCL, Ka'u Agribusiness Company, Inc.
("KACI") and Mauna Kea Agribusiness Company, Inc. ("MKACI"), that together
cover all farming, harvesting and husking activities for the orchards
acquired in June 1986, December 1986, October 1989 and September 1991,
respectively. The first two contracts run for 20 years, while the third
contract runs for 30 years. The first three contracts are identical in all
other material respects. The fourth contract was acquired with the purchase
of the September 1991 orchard and expires in 2006.
The first three contracts provided KACI and MKACI with reimbursement of
their direct and indirect costs incurred under these contracts as well as a
farming fee equal to 3% of the Partnership's operating cash flow (as
defined). The fourth contract was similar to the first three contracts, but
did not provide the farm manager reimbursement for husking costs, a "capital
recovery charge" and a farming fee. The reimbursements paid to the two
farm managers were $6.8 million for 1995, $7.2 million for 1996 and $7.2
million for 1997. The two farm managers earned a farming fee of $153,000 in
1996 and $113,000 in 1997. No farming fee was earned in 1995.
Each of the farming contracts was amended effective January 1, 1998 to
provide that farming fees would equal two and one-half percent of the
Partnership's gross profits from farming operations, rather than three percent
of the Partnership's operating cash flow attributable to the relevant orchard.
These amendments were made in recognition of the fact that operating cash flow
of the Partnership will change appreciably if a proposed merger is approved
(see Note 10) because its financial results will include the real estate
operations of the acquired company.
The Partnership is also a party to a water agreement with KACI
under which KACI agreed to supply water to the Partnership from a well on
KACI's property for use on the Partnership's irrigated Ka'u orchards. The
Partnership's allocated share of the costs of that well totaled $114,000 in
1995, $79,000 in 1996 and $47,000 in 1997.
(c) MANAGEMENT COSTS AND FEE. The Partnership Agreement provides the
managing general partner reimbursement of administrative costs (which consist
primarily of compensation costs, board of directors fees and insurance costs)
incurred under the agreement as well as a management fee equal to two percent
of the Partnership's operating cash flow (as defined). Those reimbursable
costs totaled $424,000 in 1995, $391,000 in 1996 and $428,000 in 1997. The
managing general partner earned a management fee of $102,000 in 1996 and
$75,000 in 1997. No management fee was earned in 1995.
In addition to a management fee, the managing general partner is entitled,
under the existing Partnership Agreement, to receive an annual incentive fee
equal to 0.5% of the aggregate fair market value (as defined) of the Class A
Units for the preceding calendar year provided that net cash flow (as defined)
for the preceding calendar year exceeds specified levels. No incentive fee was
earned in 1995, 1996 or 1997. The incentive fee will be eliminated if a
proposed merger is consummated (see Note 10).
29
<PAGE>
(d) STABILIZATION PAYMENTS. In December 1986, the Partnership acquired a
266 acre orchard that was several years younger than its other orchards.
Because of the relative immaturity of the newer orchard, its productivity
(and therefore its cash flow) was expected to be correspondingly lower for
the first several years than for the other older orchards.
Accordingly, the seller of this orchard (KACI) agreed to make cash
stabilization payments to the Partnership for each year through 1993 in which
the cash flow (as defined) from this orchard fell short of a target cash flow
level of $507,000. Stabilization payments for a given year were limited to the
lesser of the amount of the shortfall or a maximum payment amount.
The Partnership accounted for stabilization payments (net of general
excise tax) as a reduction in the cost basis of this orchard. As a result,
the payments will be reflected in the Partnership's net income ratably through
2019 as a reduction to amortization for this orchard.
In return, the Partnership is obligated to pay KACI 100% of any year's cash
flow from this orchard in excess of the target cash flow as additional
percentage rent until the aggregate amount of additional percentage rent
equals 150% of the total amount of stabilization payments previously received.
Thereafter, the Partnership is obligated to pay KACI 50% of this orchard's cash
flow in excess of the target cash flow as additional incentive rent. Such
additional percentage rent totaled $54,000 in 1996 and $297,000 for 1997.
No additional percentage rent was payable for 1995.
(e) CASH FLOW WARRANTY PAYMENTS. In October 1989, the Partnership acquired
1,040 acres of orchards that were several years younger on average than the
Partnership's other orchards. Their productivity (and therefore their cash
flow) was expected to be lower for the first several years than for the
Partnership's older orchards.
Accordingly, the sellers of these orchards (affiliates of Mauna Loa)
agreed to make cash flow warranty payments to the Partnership for through
1994 in which the cash flow (as defined) from these orchards fell short of a
cash flow target level. Warranty payments for any year were limited to the
lesser of the amount of the shortfall or a maximum payment amount.
The Partnership accounted for cash flow warranty payments as reductions in
the cost basis of the orchards. As a result, these payments will be reflected
in the Partnership's net income ratably through 2030 as reductions to
depreciation for these orchards.
In addition, this agreement provided that Mauna Loa and its affiliates
forego the 1995 farming and management fees to the extent which the cash flow
(as defined) for 1995 from the Ka'u and Mauna Kea orchards acquired in 1989
fell short of a predetermined target level. As a result of this provision,
no farming or management fee was earned in 1995.
(4) INDICATED DISTRIBUTIONS
As it is impossible to anticipate every future circumstance, there can be no
assurance that Partnership performance will be sufficient to fund distributions
at historical levels. Distributions are paid approximately forty-five days
after the end of each quarter to investors of record as of the last business
day of that quarter.
Because macadamia nut farming is highly seasonal, distributions are
smoothed to provide a more level payout rate. The managing general partner
receives cash distributions in proportion to its ownership percentage in the
Partnership.
30
<PAGE>
(5) CASH FLOW PERFORMANCE
Cash flow performance (based on definitions used in the Partnership
Agreement) for the past three years is shown below (000's):
<TABLE>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Gross revenues $ 12,300 $ 13,216 $ 10,590
Less:
Farming costs 7,790 7,514 6,905
Administrative costs 886 812 861
Other - - 31
-------- -------- --------
Operating cash flow 3,624 4,890 2,793
Less:
Farming fee 113 153 -
Management fee 76 102 -
-------- -------- --------
Net cash flow $ 3,435 $ 4,635 $ 2,793
-------- -------- --------
-------- -------- --------
</TABLE>
(6) LAND, ORCHARDS AND EQUIPMENT
Land, orchards and equipment, stated at cost, consisted of the following at
December 31, 1996 and 1997 (000's):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Land $ 8,168 $ 8,168
Producing orchards 64,711 64,711
Other 335 335
------- -------
Land, orchards and equipment (gross) 73,214 73,214
Less accumulated depreciation
and amortization 16,522 14,918
------- -------
Land, orchards and equipment (net) $56,692 $58,296
------- -------
------- -------
</TABLE>
(7) SHORT-TERM AND LONG-TERM CREDIT
The Partnership had a $4.0 million revolving line of credit at December
31, 1995 for working capital purposes. The line was extended for one year on
June 1, 1996, again on June 1, 1997 and may be extended for additional
one-year intervals upon the payment of extension fees. If the Partnership
should merge with another company, this facility will expire and all
outstanding principal and interest shall be due and payable at the time of
the merger. Annual extension fees of $8,000 were paid in June 1995, June
1996 and June 1997. A commitment fee of 3/8 of one percent of the unused
portion is required and borrowings are charged interest at either the bank's
"base rate" or at the one, two or three month "LIBOR" rate (plus 175 to 200
basis points) at the Partnership's option. The line of credit currently
requires minimum net cash flow (as defined in the Partnership Agreement) of
$1.6 million per year and minimum net worth levels (before non-cash
adjustments due to implementation of FAS No. 109) of $40 million. In
31
<PAGE>
addition, the line of credit requires a "clean-up" period of at least thirty
consecutive days during each year.
The maximum amount borrowed on the line of credit for 1996 was $470,000
with a weighted average interest rate of 8.23%. There were no drawings
outstanding at December 31, 1996. No amounts were borrowed during 1997.
In September 1991, the Partnership borrowed $0.5 million under an eight-year
mortgage loan to acquire a 78 acre macadamia orchard in Keaau. In February
1996, the Partnership paid off the remaining balance of this mortgage loan in
full. The amount of that payment was $252,000 (including accrued interest).
(8) INCOME TAXES
The components of the net deferred tax liability reported on the balance
sheet as of December 31, 1997 and 1996 are as follows (000's):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Financial statement bases of land, orchards
and equipment is greater than tax bases $ 698 $ 9,183
Excess of tax depreciation over
financial statement depreciation 534 5,799
-------- --------
$ 1,232 $ 14,982
-------- --------
-------- --------
</TABLE>
As there is no relationship between income before taxes and the deferred income
tax provisions, no reconciliation between statutory tax expense and total
income tax expense is provided.
(9) LEASES
The Partnership leases the land underlying 1,806 acres of its orchards
under long-term operating leases. Future minimum lease payments under non-
cancelable leases (exclusive of renewal options) as of December 31, 1997 were
as follows (000's):
<TABLE>
<S> <C>
1998 $ 137
1999 137
2000 137
2001 137
2002 137
Later Years 3,862
--------
$ 4,547
--------
--------
</TABLE>
Each of the above leases also provides for additional lease payments based
on USDA-reported macadamia nut price levels. Those contingent lease payments
totaled $46,000 in 1995, $52,000 in 1996 and $62,000 in 1997.
Total lease rent for all operating leases was $165,000 in 1995, $229,000 in
1996 and $487,000 in 1997.
32
<PAGE>
(10) MERGER PROPOSAL
In December 1997, the Partnership entered into a merger agreement with C.
Brewer Homes, Inc. ("Homes"). The Partnership filed with the Securities and
Exchange Commission on February 13, 1998, a registration statement in
connection with this merger. Under the terms of the merger agreement,
shareholders of Homes would receive .667 shares of Mauna Loa Macadamia
Partners, L.P. for each share of Homes. The merger is expected to result in
the issuance of approximately 5.56 million limited partner units. The merger
agreement is subject to approval by unitholders of the Partnership and the
shareholders of Homes. The merger agreement contemplates that the combined
Company will be renamed "Hawaii Land and Farming Company, L.P." and will
continue as a master limited partnership, trading on the New York Stock
Exchange.
(11) QUARTERLY OPERATING RESULTS (UNAUDITED)
The following chart summarizes unaudited quarterly operating results for
the years ended December 31, 1997 and 1996 (000's, except per unit data):
<TABLE>
<CAPTION>
Net Sales Gross Profit Net Income Net Income (Loss)
(Loss) per Class A Unit
--------- ------------ ---------- ----------------
<S> <C> <C> <C> <C>
1997:
1st Quarter $ 1,763 $ 521 $ 226 $ 0.03
2nd Quarter 476 155 43 0.01
3rd Quarter 3,081 506 14,099 1.86
4th Quarter 6,809 1,440 1,214 0.16
1996:
1st Quarter $ 1,542 $ 189 $ (118) $ (0.02)
2nd Quarter 519 118 (56) (0.01)
3rd Quarter 4,255 713 527 0.07
4th Quarter 6,900 2,927 2,680 0.35
</TABLE>
The macadamia nut drop and therefore macadamia harvesting is highly
seasonal with most production occurring between August and January each year.
As a result, revenues and profits also fluctuate significantly between
quarters.
Due to these irregular seasons, all farming costs are annualized for
interim reporting purposes. This method has the effect of matching income to
expense by spreading crop costs equally over estimated production, to provide
more meaningful results.
33
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Partnership presently has no officers or directors. Instead, the
officers and directors of the Managing Partner perform all management functions
for the Partnership. Each director of the Managing Partner is elected for a
term of one year and until his successor is duly elected and qualified. Each
officer of the Managing Partner is elected by the Board of Directors of the
Managing Partner and is subject to removal by that board at any time.
A. IDENTIFICATION OF DIRECTORS
JAMES S. ANDRASICK. 53 years old; director of Managing Partner since 1986;
president and director of Mauna Loa; president of CBCL since September 1992.
JOHN W. A. BUYERS. 69 years old; chairman since 1989 and director of
Managing Partner since 1986; chairman of Mauna Loa since August 1992; chairman
and chief executive officer of CBCL; chairman and president of Buyco.
JAMES H. CASE. 77 years old; director and member of Conflicts Committee of
Managing Partner since 1986; senior partner of the law firm of Carlsmith Ball
Wichman Case & Ichiki; not an employee, officer, or director of any CBCL
affiliate other than the Managing Partner.
RALPH C. HOOK, JR. 74 years old; director and member of Conflicts Committee
of Managing Partner since 1986; not an employee, officer, or director of any
CBCL affiliate other than the Managing Partner.
KENT T. LUCIEN. 44 years old; president and director of Managing Partner
since September 1995; vice president of Mauna Loa; executive vice president and
chief financial officer of CBCL.
B. IDENTIFICATION OF EXECUTIVE OFFICERS OF THE MANAGING PARTNER
JOHN W. A. BUYERS. 69 years old; chairman and chief executive officer of
Managing Partner since 1989.
J. ALAN KUGLE. 60 years old; secretary of Managing Partner since December
1997.
KENT T. LUCIEN. 44 years old; president of Managing Partner since September
1995.
GREGORY A. SPRECHER. 50 years old; senior vice president and chief
financial officer of Managing Partner since June 1997; not otherwise an
employee, officer, or director of any CBCL affiliate.
C. IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES
Not applicable
D. FAMILY RELATIONSHIPS
Not applicable
34
<PAGE>
E. BUSINESS EXPERIENCE OF CURRENT DIRECTORS AND EXECUTIVE OFFICERS
CURRENT DIRECTORS OF THE MANAGING PARTNER.
JAMES S. ANDRASICK. Mr. Andrasick was promoted to president and chief
operating officer of CBCL in September 1992, and is one of its directors. From
1989 until September 1992, he was executive vice president in charge of the
sugar, distribution and Central America operations. From 1983 to 1988 he
served as executive vice president, finance and administration and chief
financial officer with responsibilities for finance and administration as well
as spice and guava operations. He joined CBCL in 1978 as vice president and
controller after serving three years on the IU International Corporation
corporate development staff. In 1980 he became senior vice president and chief
financial officer of CBCL. Previously, he had been employed by the Ford Motor
Company at its world headquarters and product development groups in various
supervisory positions in finance. Mr. Andrasick received his bachelor's degree
from the U.S. Coast Guard Academy and his master's degree from the
Massachusetts Institute of Technology. Mr. Andrasick is also a director of
Olokele Sugar Company (a subsidiary of CBCL), Honolulu, Hawaii, and Wailuku
Agribusiness Co., Inc. (a subsidiary of CBCL), Wailuku, Hawaii. In addition,
Mr. Andrasick is a trustee of the Hawaii Maritime Center and the U.S. Coast
Guard Foundation, a director of the American Red Cross, Hawaii State Chapter,
and chairman of the board of governors of the Hawaii Employers Council. He
resides in Honolulu, Hawaii.
JOHN W. A. BUYERS. Mr. Buyers was elected chairman of the Managing Partner
in 1988 and has been chairman of Mauna Loa since July 1992. He has been
chairman of the board and chief executive officer of CBCL since 1992. From
1982 to 1992, he was chairman and president of CBCL. He has been chairman and
a director of Homes since 1992, and chairman and president of Buyco since 1986.
From 1975 to 1982, he was president and chief executive officer of CBCL. From
1971 to 1975, Mr. Buyers was president and chief executive officer of General
Waterworks Company in Philadelphia, Pennsylvania. After service in the U.S.
Marine Corps, Mr. Buyers graduated CUM LAUDE from Princeton University in 1952
and later received an M.A. in Industrial Management from the Massachusetts
Institute of Technology as a Sloan Fellow. He is also a director of First
Hawaiian Bank, Honolulu, Hawaii, First Hawaiian Inc., Honolulu, Hawaii, John B.
Sanfilippo & Sons, Inc. (a commercial nut company), and several CBCL affiliated
companies. He is a member of the U.S. Chamber of Commerce Committee on Food
and Agriculture in Washington, D.C., and is vice chairman and a director of
Pacific International Center for High Technology in Honolulu, Hawaii. He
resides in Honolulu, Hawaii.
JAMES H. CASE. Mr. Case is senior partner in the Hawaii law firm of
Carlsmith Ball Wichman Case & Ichiki. Mr. Case graduated with an A.B. from
Williams College and received a J.D. from Harvard Law School. He became
associated with the Carlsmith law firm in 1951 and became a partner in 1959.
He has served on the boards of directors of Hamakua Sugar Company, Inc.,
Paauilo, Hawaii, InterIsland Resorts, Ltd., Honolulu, Hawaii, Pacific Club,
Honolulu, Hawaii, Central Union Church, Honolulu, Hawaii, Hanahauoli School,
Honolulu, Hawaii, and Arcadia Retirement Residence, Honolulu, Hawaii. He
resides in Honolulu, Hawaii.
RALPH C. HOOK, JR. Dr. Hook is director of the Family Business Center of
Hawaii, which is part of the College of Business Administration at the
University of Hawaii. He joined the faculty of the University of Hawaii in
1968 as Dean of the College of Business Administration. In 1974, he returned
to teaching as Professor of Marketing in the College of Business
Administration. He
35
<PAGE>
became a Professor Emeritus of Marketing in June 1995. Dr. Hook received a
bachelor's and master's degrees from the University of Missouri at Columbia
and a Ph.D. in Marketing from the University of Texas at Austin. He has been
a member of the board of Pan Pacific Institute of Ocean Science since 1974
and of Hook Brothers Corporation since 1983. He was appointed a Trustee of
Tokai University, Honolulu Center in 1988. He resides in Honolulu, Hawaii.
KENT T. LUCIEN. Mr. Lucien currently serves as president of the Managing
Partner and has been executive vice president and the chief financial
officer of CBCL since 1991. Previously he served as a vice president and as
an executive vice president of the Managing Partner. He joined CBCL as a
senior analyst in 1980. Mr. Lucien is an honors graduate of Occidental
College and received an M.B.A. from Stanford University. He resides in
Honolulu, Hawaii.
EXECUTIVE OFFICERS WHO DO NOT SERVE AS DIRECTORS.
J. ALAN KUGLE. Mr. Kugle was the President of the Managing Partner from
1986 to 1992 and was the Chairman and president of Mauna Loa from 1983 to 1991.
He has been executive vice president and general counsel of CBCL since 1980
with responsibility for various operations. He began his CBCL career in 1976
as vice president and general counsel and became senior vice president and
general counsel in 1978. Previously, he was executive vice president and
general counsel of Gino's, Inc., and was a partner in the Philadelphia law firm
of Drinker Biddle & Reath. Mr. Kugle graduated with an A.B. from Franklin and
Marshall College and a J.D. from the New York University School of Law.
Mr. Kugle is also a director of various CBCL subsidiaries. He resides in
Honolulu, Hawaii.
GREGORY A. SPRECHER. Mr. Sprecher has served as senior vice president and
chief financial officer of the Managing Partner since June 1997. From 1974 to
1990 Mr. Sprecher served as treasurer and controller for Enivel, Inc., d.b.a.
Young Laundry & Dry Cleaning, in Honolulu. He served as Enivel's chief
financial officer and treasurer from 1990 to 1994. In 1994, the company was
sold to American Linen, and Mr. Sprecher served there as project manager until
1995. Mr. Sprecher has served as managing general partner in several general
partnerships in Honolulu from 1980 to the present. Mr. Sprecher has a B.S. in
Finance from California State College at Long Beach. He resides in Honolulu,
Hawaii.
F. SECTION 16 DISCLOSURE
Under Section 16 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), each director and certain officers of Mauna Loa Resources
Inc., the managing general partner of Registrant (a "Reporting Person"), are
required to report their ownership and changes in ownership of Class A
Depositary Units to the Securities and Exchange commission, the New York Stock
Exchange and Registrant. Based on reporting forms submitted to Registrant, no
Reporting Person has failed to file on a timely basis reports required by
Section 16(a) of the Exchange Act during 1997, except that Gregory A. Sprecher,
who became the chief financial officer on June 1, 1997, and who does not own
any Class A Units, did not file a Form 3 until July 1, 1997.
36
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
A. SUMMARY COMPENSATION TABLE
The Partnership is managed by the Managing Partner. Compensation paid by the
Managing Partner to its chief executive officer and other executive officers
is reimbursed by the Partnership, as provided in Section 4.5 of the
Partnership Agreement. The following table reflects the aggregate
compensation for services in all capacities paid by the Managing Partner to
its chief executive officer for the years ended December 31, 1997, 1996 and
1995. For calendar year 1997, there were no executive officers who received
more than $100,000 in compensation. There were no long-term compensation
awards or payouts during those years.
<TABLE>
<CAPTION>
Name and Principal Position Annual Compensation
--------------------------- -------------------
Year Salary Bonus Other
---- ------ ----- -----
<S> <C> <C> <C> <C>
John W. A. Buyers, 1997 $ - $ - $9,600
chief executive officer 1996 - - 8,400
1995 - - 8,400
</TABLE>
B. NO OPTION, SAR, LONG-TERM INCENTIVE OR PENSION PLANS. The Managing
Partner does not presently have an option plan, SAR plan, or long-term
incentive plan. The present executive officers of the Managing Partner are
included in the pension plan and other benefits plans of its parent company,
CBCL. As such, the Managing Partner is not responsible for making any
payments on the retirement of any of its present executive officers.
C. NO EMPLOYMENT CONTRACTS OR TERMINATION AGREEMENTS
The Managing Partner does not have any employment or severance agreements
with any of its present executive officers.
D. COMPENSATION OF EXECUTIVE OFFICERS
The Managing Partner does not have a compensation committee since the chief
executive officer of the Managing Partner is not compensated for serving in
that position. The only executive officer of the Managing Partner employed
by it is Mr. Sprecher, who has served as its chief financial officer since
June 1997. Mr. Sprecher's salary (which is currently $100,000 per year) and
guideline bonus percentage are administered under the salary policies of
CBCL. Any bonus payments are approved by the Managing Partner's Board of
Directors annually, based on the overall performance of the Partnership (as
evidenced by its net income for the year) and on general and administrative
cost control performance. Performance in both categories is measured
relative to the original Partnership operating budget approved by the
Managing Partner's Board of Directors at the beginning of each year.
F. DIRECTOR COMPENSATION
Directors of the Managing Partner presently receive a quarterly retainer of
$1,500 and a meeting fee of $600 per meeting. Members of the Managing
Partner's conflicts committee receive a
37
<PAGE>
meeting fee of $600 per meeting. There are no other agreements or
arrangements between the Managing Partner and its directors.
E. STOCK PERFORMANCE CHART
The following chart compares the Partnership's total return to (i) the
Russell 2000 (a small business index) and (ii) a peer group index composed of
publicly traded limited partnerships with either similar capitalization or in
commodity based markets (other than gas and oil) or both.
[GRAPH]
<TABLE>
<CAPTION>
12/31/92 12/31/93 12/30/94 12/29/95 12/31/96 12/31/97
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nut 100 89.41 60.908 55.948 95.398 110.482
- ------------------------------------------------------------------------------
Russel 2000 100 118.879 116.711 149.915 174.644 213.7
- ------------------------------------------------------------------------------
Peer Group 100 135.207 144.236 167.248 181.005 217.884
- ------------------------------------------------------------------------------
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 1997, and subsequent to that date to the date of this
report, (i) no person (including any "group" as that term is used in Section
13(d)(3) of the Securities Exchange Act of 1934) is known by the Partnership
or the Managing Partner to be the beneficial owner of more than 5% of the
Class A Units; (ii) the Managing Partner did not own any Class A Units; and
(iii) no director or executive officer of the Managing Partner owned more
than 1% of the Class A Units.
38
<PAGE>
The table below sets forth certain information as to the Class A Units
beneficially owned by the directors of the Managing Partner, and all
directors and executive officers of the Managing Partner as a group, as of
December 31, 1997.
<TABLE>
<CAPTION>
Percent
Class A of
Name of Units Class A
Beneficial Owner Owned Units
------------------ ----- -------
<S> <C> <C>
James S. Andrasick - *
John W.A. Buyers 4,176 *
James H. Case (1) 8,000 *
Ralph C. Hook (2) 4,000 *
Kent T. Lucien 7,500 *
All directors and executive
officers as a group
(7 persons) 24,876 0.3%
</TABLE>
*Less than 1%
(1) Beneficially owned by James H. Case pursuant to a self-directed
retirement plan sponsored by Carlsmith Ball Wichman Case & Ichiki,
a law firm in which Mr. Case is a partner, and administered by Pacific
Century Trust.
(2) Beneficially owned by Ralph C. Hook pursuant to the Ralph C. Hook
Revocable Living Trust dated March 1, 1993.
In addition, Mauna Loa Orchards L.P., a limited partnership whose partners are
CBCL and certain direct or indirect wholly-owned subsidiaries of CBCL, owns
30,000 Class A Units.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
1. GENERAL
The Managing Partner makes all decisions relating to the management of the
Partnership. The Managing Partner, as such, has the duty to act in good
faith and to manage the Partnership in a manner that is fair and reasonable
to all unitholders. Mauna Loa owns all of the capital stock of the Managing
Partner. Certain officers and directors of CBCL and/or its affiliates also
act as officers and directors of the Managing Partner and certain directors
of the Managing Partner are substantial shareholders of Buyco, Inc., the
parent company of CBCL. Disputes that might otherwise develop between the
Managing Partner and CBCL or its affiliates may not develop because the
parties representing the entities are identical. As a result of these
relationships, certain conflicts of interest could arise with respect the
administration of and allocation of costs under the Partnership Agreement and
in situations described below, among others.
A committee of the Managing Partner's Board of Directors composed of two
persons who are independent of CBCL and its affiliates (the "Conflicts
Committee") reviews, on an annual basis,
39
<PAGE>
or more frequently as such committee may deem appropriate, the Managing
Partner's management of the Partnership and any conflicts of interest that
may have arisen or may arise as a result of the relationships among CBCL and
its affiliates, the Managing Partner and the Partnership. The Partnership
Agreement states that, except for one initial member of the Conflicts
Committee, no member of the Conflicts Committee may be an officer, director,
employee or shareholder of the Managing Partner, Mauna Loa or any of their
affiliates. The Conflicts Committee presently consists of two individuals
who are not affiliated with CBCL.
2. FARMING LEASES.
At the time of the Partnership's acquisition of the interests in the October
1989 Orchards, MLO assigned to the Partnership all of MLO's rights and
obligations under three 45-year farming leases relating to 327 tree acres of
the Ka'u II Orchards and all of the Mauna Kea Orchards. The farming leases
permit the Partnership to conduct macadamia nut farming operations on such
macadamia orchard properties. The farming leases provide for fixed minimum
annual lease payments to be paid to either KACI or MKACI (collectively, the
"Agribusiness Companies"), as the case may be. Such annual rental payments
are subject to increase after ten years, twenty years and thirty years based
on then current fair market lease rates. The then current fair market lease
rate will be determined by mutual agreement between the Partnership, on the
one hand, and either KACI or MKACI, as the case may be, on the other hand. If
mutual agreement cannot be reached, the then current fair market lease rate
will be determined by appraisal. Whether determined by mutual agreement or
by appraisal, the then current fair market lease rate will be determined as a
fair market lease rate for use of such premises as macadamia orchards.
The Partnership acquired its interests in the trees situated on such leased
macadamia orchard properties subject to repurchase options retained by the
Agribusiness Companies. The repurchase options grant the Agribusiness
Companies the continuing right to repurchase all or any portion of such trees
after June 30, 2019 at a price equal to the then current fair market value of
the trees, according to their value as producing macadamia nut trees, as
determined by mutual agreement between the Partnership, on the one hand, and
either KACI or MKACI, as the case may be, on the other hand. If mutual
agreement cannot be reached, the then current fair market value will be
determined by appraisal. Whether determined by mutual agreement or by
appraisal, the fair market value of such trees will be determined according
to their value as producing macadamia nut trees, assuming that the owner
thereof has rights to farm and harvest such trees and has ongoing
arrangements with respect to land leases, farming and nut purchases of the
same type as the Partnership has immediately prior to such time.
At the end of the 45-year lease terms of such leases, the Agribusiness
Companies will be required to repurchase such trees at their then current
fair market value as orchards if such entities do not offer to extend such
farming leases at the then current fair market lease rates. The then current
fair market lease rate and the then current market value of the trees for
such purposes will be determined through mutual agreement between the
Partnership, on the one hand, and either KACI or MKACI, as the case may be,
on the other hand or, if mutual agreement cannot be obtained, by appraisal,
in each case in the manner described above. Such repurchase obligations will
apply with respect to the expiration of each extension of the lease terms of
such leases until such leases have been in effect for a total of 99 years, at
which time the leases will expire and the ownership interests in such trees
will revert back to the Agribusiness Companies.
40
<PAGE>
In the event that the Partnership decides not to accept an offer to extend
the leases at the then current fair lease rates upon the expiration of the
leases or any extension thereof (or does not assign the leases to a third
party who elects to accept such offer), the leases will expire, the
Agribusiness Companies will not be required to repurchase the trees covered
thereby and ownership of such trees will revert back to the Agribusiness
Companies (and in any event ownership of such trees will revert back to the
Agribusiness Companies after 99 years). As the Managing Partner and the
Agribusiness Companies are each direct or indirect wholly owned subsidiaries
of CBCL, a decision to renew the farming leases will involve the Managing
Partner in a conflict of interest.
As described above, the farming leases provide for determinations of the fair
market lease rate to be paid by the Partnership under the farming leases and
the fair market value of the Partnership's trees situated on property covered
by such leases by mutual agreement between the Partnership, on the one hand,
and with KACI or MKACI, as the case may be, on the other hand, or, if mutual
agreement cannot be reached, by appraisal. As any determination by the
Partnership with respect to any such mutual agreement will be made by the
Managing Partner and as the Managing Partner and the Agribusiness Companies
are each direct or indirect wholly owned subsidiaries of CBCL, such
determination on behalf of the Partnership will involve the Managing Partner
in a conflict of interest. Accordingly, the Conflicts Committee of the Board
of Directors of the Managing Partner will review any such determinations made
by mutual agreement.
3. NUT PURCHASE CONTRACTS AND FARMING CONTRACTS.
Mauna Loa purchases from the Partnership all of the macadamia nut production
from the orchards acquired in 1986 pursuant to the 1986 nut purchase
contracts, all of the macadamia nut production from the orchards acquired in
1989 (excluding "unusable nuts") under the 1989 nut purchase contract and all
of the macadamia nut production from the Lot 10 orchard under the Lot 10 nut
purchase contract. In addition, KACI farms the orchards acquired in 1986 for
the Partnership pursuant to the 1986 orchards farming contracts and, along
with MKACI, farms the orchards acquired in 1989 for the Partnership pursuant
to the 1989 farming contract. KACI also farms the Lot 10 Orchard for the
Partnership pursuant to the Lot 10 farming contract. Various conflicts of
interest exist or may arise with respect to the Partnership's sale and Mauna
Loa's purchase of nuts under the nut purchase contracts, the allocation of
costs reimbursed by the Partnership under the farming contracts for purposes
of determining the netback component of the purchase price for nuts under the
nut purchase contracts and the allocation of personnel and resources with
respect to services provided by KACI and MKACI under the farming contracts.
For example, the purchase price under the nut purchase contracts will depend
on Mauna Loa's processing, packaging, marketing, sales and advertising
expenses and nonagricultural overhead costs, all of which are controlled and
allocated by Mauna Loa. Mauna Loa also has complete control over the
identification and weighing of nuts at its processing plants.
Under the terms of the farming contracts, KACI and MKACI are required to
provide certain reports to the Partnership, including an annual report
describing in reasonable detail the conduct of farming and harvesting
operations at the orchards, and they also are required to provide a
statement, certified by its independent accountants, which reflects its
allocation of direct costs and overhead for the relevant year. The reports
submitted to the Managing Partner are reviewed
41
<PAGE>
by the Conflicts Committee. The Managing Partner has the right to object to
the information set forth in such annual reports relating to the calculation
of the nut purchase price and/or farming costs and to engage a certified
public accounting firm of its own selection to verify and confirm such
information. The Managing Partner on behalf of the Partnership has the right
to assert claims against Mauna Loa based on such independent review, and, if
any such review and assertion results in an adjustment favorable to the
Partnership in the nut purchase price or farming cost figures by an amount in
excess of 5% of the amount initially calculated by Mauna Loa, Mauna Loa will
be required to reimburse the Partnership for the expenses incurred in
engaging the accounting firm and asserting such claims. Cost reimbursements
under the farming contracts totaled $7.2 million in 1997, $7.2 million in
1996, and $6.7 million in 1995. Farming fees totaled $113,000 in 1997 and
$153,000 in 1996. No farming fees were paid for 1995.
4. MANAGEMENT FEE.
Under the terms of the Partnership Agreement, the Partnership reimburses the
Managing Partner for all expenses incurred by it in the conduct of
Partnership business, including any expenses reasonably allocated to the
Managing Partner or to the Partnership as well as a management fee equal to
2% of the Partnership's operating cash flow (as defined in the Partnership
Agreement). Certain conflicts may arise in connection with the allocation of
such expenses among the Managing Partner, the Partnership, CBCL and its
affiliates. Management cost reimbursements under the Partnership Agreement
were $428,000 in 1997, $391,000 in 1996, and $424,000 in 1995. The
management fee was $75,000 in 1997 and $102,000 in 1996. There was no
management fee for 1995.
5. RELATIONSHIPS WITH CBCL.
Since the Partnership began operations in June 1986, the Partnership has
purchased substantially all of its fertilizer and certain transportation
services from subsidiaries of CBCL. Transportation services purchased
consist of transportation of raw nuts from the orchards in the Mauna Kea and
Ka'u areas to the processing plant. For 1997, 1996 and 1995, fertilizer,
herbicide, pesticide and transportation services purchased by the Partnership
from CBCL subsidiaries totaled $0.8 million, $0.8 million and $0.7 million,
respectively. It is expected that the Partnership will continue to purchase
its fertilizer and transportation needs from CBCL subsidiaries as long as,
and to the extent that, such purchases can be made on a basis at least as
favorable as that available from third parties. The Partnership Agreement
requires that the price and terms of any such transactions be no less
favorable than those available in comparable transactions between unrelated
parties.
The stock and assets of the general partner is significant to both CBCL and
Buyco. In making decisions regarding financial matters concerning CBCL and
Buyco, Buyco may be required to make choices which could impact the business
and financial condition of the general partner. Any such impact could affect
the Partnership.
42
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. LIST OF DOCUMENTS FILED AS A PART OF THIS REPORT.
1. FINANCIAL STATEMENTS. See Index to Financial Statements at page 21 of this
Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES. None required.
3. EXHIBITS. See Exhibit Index at page 45 of this Form 10-K.
B. REPORTS ON FORM 8-K.
1. On November 10, 1997 the Partnership filed a report on Form 8-K announcing
that the Partnership and C. Brewer Homes, Inc. had reached an agreement in
principal to merge the two companies.
2. On December 19, 1997 the Partnership filed a report on Form 8-K announcing
that the Partnership and C. Brewer Homes, Inc. had executed a definitive
merger agreement pursuant to which Homes will be merged into the
Partnership.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MAUNA LOA MACADAMIA PARTNERS, L.P.
(Registrant)
By: MAUNA LOA RESOURCES INC.
(Managing General Partner)
DATED: March 20, 1998 By: /s/ J. W. A. Buyers
----------------------- -------------------------------
J. W. A. Buyers
Chairman of the Board and
Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been executed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
MAUNA LOA RESOURCES INC.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ J. W. A. Buyers Chairman of the Board March 20, 1998
----------------------------- (Principal Executive Officer) --------------
J. W. A. Buyers Director
/s/ Kent T. Lucien President, Director March 20, 1998
----------------------------- --------------
Kent T. Lucien
/s/ Gregory A. Sprecher Senior Vice President March 20, 1998
----------------------------- (Principal Financial Officer --------------
Gregory A. Sprecher and Principal Accounting Officer)
/s/ James S. Andrasick Director March 20, 1998
----------------------------- --------------
James S. Andrasick
/s/ James H. Case Director March 20, 1998
----------------------------- --------------
James H. Case
/s/ Dr. Ralph C. Hook, Jr. Director March 20, 1998
----------------------------- --------------
Dr. Ralph C. Hook, Jr.
</TABLE>
44
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
2.1 Amended and Restated Agreement and Plan of Merger, effective as
of December 18, 1997, between Registrant and C. Brewer Homes,
Inc. (a)
3.1 Agreement of Limited Partnership of Registrant. (b)
3.2 Form of Class A Certificate of Limited Partnership as filed with
the Secretary of State of Delaware. (c)
3.3 Certificate of Limited Partnership of Registrant as filed with
the Secretary of State of Delaware. (c)
4.1 Depositary Agreement between Registrant, Manufacturers Hanover
Trust Company as Depositary and Mauna Loa Resources Inc. as
attorney-in-fact of the limited partners of Registrant. (c)
4.2 Form of Depositary Receipt. (c)
10.1 Macadamia Nut Purchase Contract between Mauna Loa Macadamia Nut
Corporation ("Mauna Loa") and Registrant dated June 12, 1986. (b)
10.2 Macadamia Nut Purchase Contract between Mauna Loa and Registrant
dated December 22, 1986. (b)
10.3 Macadamia Nut Purchase Contract between Mauna Loa and Registrant
dated as of October 1, 1989. (b)
10.4 Contribution Agreement among Mauna Loa Orchards, L.P. ("MLO"), Ka'u
Agribusiness Co., Inc. ("KACI"), Mauna Kea Agribusiness Co., Inc.
("MKACI"), Mauna Kea Macadamia Orchards, Inc. ("MKMO") and Mauna Loa
dated as of July 1, 1989. (b)
10.5 Lease between the Trustees of the Estate of Bernice Pauahi Bishop
("Trustees of the Bishop Estate") and Mauna Loa. (c)
10.6 Lease between KACI and Registrant. (d)
10.7 MLO/MLMP Conveyance Agreement between MLO and Registrant dated as
of October 1, 1989. (b)
10.8 Butcher/MLMP Contribution Agreement between Howard Butcher III
("Butcher") and Registrant dated as of October 1, 1989. (b)
10.9 Farming Lease between KACI and MLO dated as of July 1, 1989. (b)
10.10 Farming Lease between MKACI and MKMO dated as of July 1, 1989. (b)
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
10.11 Farming Lease between MKACI and MLO dated as of July 1, 1989. (b)
10.12 Water Agreement, as amended, between KACI and Registrant dated as
of October 1, 1989. (b)
10.13 Cash Flow Warranty Agreement among KACI, MKACI and Registrant
dated as of July 1, 1989. (b)
10.14 Guarantee Agreement between Mauna Loa and Registrant dated as of
October 1, 1989. (b)
10.15 Agreement of Indemnification between CBCL and each director of
the Managing Partner. (b)
10.16 Indemnification Agreement (Title) among Mauna Loa, KACI and
MKACI in favor of Registrant. (b)
10.17 Indemnification Agreement (Subdivision) among Mauna Loa, KACI
and MKACI in favor of Registrant. (b)
10.18 Deed between MLO and Registrant relating to 14% undivided
interest in 220 tree acres of macadamia orchard properties
located in the Keaau area of the island of Hawaii ("Keaau II
Orchards"). (b)
10.19 Bill of Sale between MLO and Registrant relating to 14% undivided
interest in New Keaau Orchards. (b)
10.20 Deed between Butcher and Registrant relating to 86% undivided
interest in New Keaau Orchards. (b)
10.21 Bill of Sale between Butcher and Registrant relating to 86%
undivided interest in New Keaau Orchards. (b)
10.22 Assignment of Partial Interest in Lease No. 15,020 and consent
from MLO to Registrant. (b)
10.23 Assignment of Partial Interest in Lease No. 16,859 and consent
from MLO to Registrant. (b)
10.24 Assignment of Partial Interest in Lease No. 20,397 and consent
from MLO to Registrant. (b)
10.25 Assignment of Lease from MLO to Registrant relating to Lease from
the Trustees of the Bishop Estate. (b)
10.26 Assignment from MLO to Registrant relating to certain orchards. (b)
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
10.27 Lease from the Trustees of the Bishop Estate to MLO. (b)
10.28 Lease No. 15,020 from the Trustees of the Bishop Estate to MLO. (b)
10.29 Form of Amendments to Lease No. 15,020 from the Trustees of the
Bishop Estate. (b)
10.30 Lease No. 16,859 from the Trustees of the Bishop Estate to the
Hawaiian Agricultural Company (a predecessor of KACI). (b)
10.31 Form of Amendments to Lease No. 16,859 from the Trustees of the
Bishop Estate. (b)
10.32 Lease No. 20,397 from the Trustees of the Bishop Estate to CBCL. (b)
10.33 Form of Amendments to Lease No. 20,397 from the Trustees of the
Bishop Estate to CBCL. (b)
10.34 Lease from Richard L. Hughes to Mauna Loa. (b)
10.35 Lease from the Trustees of the Bishop Estate to Mauna Loa. (b)
10.36 Co-ownership and Partition Agreement between KACI and MLO. (b)
10.37 Co-ownership and Partition Agreement among Mauna Loa, KACI and
MLO.(b)
10.39 Co-ownership and Partition Agreement between MKACI and MLO. (b)
10.40 Macadamia Nut Purchase Contract between Mauna Loa and Keaau
Macadamia X Corporation ("Keaau 10") dated September 15, 1983. (e)
10.41 Assignment of Owner's Interest in Macadamia Nut Purchase Contract
and Farming Contract between Keaau 10 and Registrant. (e)
10.42 Warranty Deed between Keaau 10 and Registrant. (e)
10.43 Amended and Restated June 1986 Farming Contract, effective
January 1, 1998, between Registrant and KACI. (f)
10.44 Amended and Restated December 1986 Farming Contract, effective
January 1, 1988, between Registrant and KACI. (f)
10.45 Amended and Restated 1989 Farming Contract, effective January 1,
1998, among Registrant, KACI and MKACI. (f)
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
10.46 Amended and Restated Farming Contract for the Lot X Orchard,
effective January 1, 1998, between Registrant and KACI. (f)
10.47 Restated Kaiwiki Orchards Farming lease between Registrant and
MKACI dated February 26, 1997. (f)
11.1 Statement re: Computation of Net Income per Class A Unit.
27 Financial Data Schedule.
</TABLE>
(a) Incorporated by reference to Appendix A of Registrant's Registration
Statement under the Securities Act on Form S-4, Registration
Statement No. 333-46271, filed February 13, 1998.
(b) Incorporated by reference to the corresponding Exhibit previously filed
as an Exhibit to Registrant's Registration Statement under the
Securities Act on Form S-1, Registration Statement No. 33-30659, filed
October 20, 1989.
(c) Incorporated by reference to the corresponding Exhibit previously filed
as an Exhibit to Registrant's Registration Statement under the
Securities Act on Form S-1, Registration Statement No. 33-4903, filed
June 5, 1986.
(d) Incorporated by reference to the corresponding Exhibit previously filed
as an Exhibit to Registrant's Annual Report on Form 10-K, Commission
filed No. 1-9145, for the year ended December 31, 1986, filed March 27,
1987.
(e) Incorporated by reference to the corresponding Exhibit previously filed
as an Exhibit to Registrant's Annual Report on Form 10-K, Commission
filed No. 1-9145, for the year ended December 31, 1991, filed March 27,
1992.
(f) Incorporated by reference to the corresponding Exhibit previously filed
as an Exhibit to Registrant's Registration Statement under the
Securities Act on Form S-4, Registration Statement No. 333-46271, filed
February 13, 1998.
48
<PAGE>
EXHIBIT 11.1
MAUNA LOA MACADAMIA PARTNERS, L.P.
COMPUTATION OF NET INCOME PER CLASS A UNIT
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Net income $ 15,581 $ 3,033 $ 1,192
-------- ------- -------
-------- ------- -------
Class A Unitholders' percentage of ownership 99% 99% 99%
-------- ------- -------
Net income allocable to Class A Unitholders $ 15,425 $ 3,003 $ 1,180
-------- ------- -------
-------- ------- -------
Class A Units outstanding 7,500 7,500 7,500
-------- ------- -------
-------- ------- -------
Net income per Class A Unit $ 2.06 $ 0.40 $ 0.16
-------- ------- -------
-------- ------- -------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,914
<SECURITIES> 0
<RECEIVABLES> 6,809
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,743
<PP&E> 73,214
<DEPRECIATION> 16,522
<TOTAL-ASSETS> 66,727
<CURRENT-LIABILITIES> 4,530
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 60,965
<TOTAL-LIABILITY-AND-EQUITY> 66,727
<SALES> 12,128
<TOTAL-REVENUES> 12,128
<CGS> 9,507
<TOTAL-COSTS> 9,507
<OTHER-EXPENSES> 961
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,831
<INCOME-TAX> (13,750)
<INCOME-CONTINUING> 15,581
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,581
<EPS-PRIMARY> 2.06
<EPS-DILUTED> 2.06
</TABLE>
