**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

### ** **

| ý | **ANNUAL REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |   |
|--------|-----------------------------------------------------------------------------------------------|--------|
|   |                                                                                          |   |
|   | **For the Fiscal Year Ended December 31, 2003**                                               |   |
|   |                                                                                          |   |
|   | **OR**                                                                                        |   |
|   |                                                                                          |   |
| o      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |   |
|   |                                                                                          |   |
|   | **Commission File Number 1-9145**                                                             |   |

 

**ML MACADAMIA ORCHARDS, L.P.**

(Exact Name of registrant as specified in its charter)

 
| **DELAWARE**                                                   |                                                      | **99-0248088**                       |
|----------------------------------------------------------------|-----------------------------------------------------------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization) |                                                      | (I.R.S. Employer Identification No.) |
|                                                           |
| **26-238 Hawaii Belt Drive HILO, HAWAII**                      |                                                      | **96720**                            |
| (Address of principal executive offices)                       |                                                      | (Zip Code)                           |
|                                                           |
|                                                           | Registrant’s  telephone number, including area code: | **(808) 969-8057**                   |
|                                                           | Registrant’s  website:                               | **www.mlmacadamia.com**              |
|                                                                |                                                           |                                      |  |  |

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 
| **Title of Each Class**                  |   | **Name of Each Exchange on Which Registered** |
|------------------------------------------|--------|-----------------------------------------------|
| 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 whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(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 suchreports), and (2) has been subject to such filing requirements for the past 90days.   Yes  ý   No  o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this 10-K or any amendment to this 10-K.  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theAct).  Yes  o   No  ý

 

As of March 11, 2004, 7,500,000shares of the registrant’s Class A Units were outstanding, and the aggregatemarket value of such Units held by non-affiliates was $32,925,000 (based on theclosing price on that date of $4.39 per Unit).

 

 

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**PART I**

** **

**ITEM1.  BUSINESS OF THE PARTNERSHIP**

** **

**(a) General Description of the Business**

** **

ML Macadamia Orchards, L.P.(the “Partnership”) is a publicly traded partnership, organized under the lawsof the State of Delaware, and engaged in the business of growing and farmingmacadamia nuts in Hawaii.  ThePartnership believes that it is one of the world’s largest growers of macadamianuts.  The Partnership owns or leases approximately4,169 tree acres of macadamia nut orchards in three locations within a 50-mileradius on the island of Hawaii.  (“Treeacres” are acres of the Partnership’s owned or leased lands utilized formacadamia nut orchards.  “Gross acres”includes areas not utilized for orchards.) The Partnership sells all of its macadamia nut production to Mauna LoaMacadamia Nut Corporation (“Mauna Loa”) under long-term nut purchasecontracts.  The Partnership farms itsown orchards and approximately 2,645 additional acres of macadamia orchards forother orchard owners.  The Partnershipis managed by its general partner, ML Resources, Inc. (“MLR” or the “ManagingPartner”).  Until July 31, 2001, theManaging Partner was a wholly owned subsidiary of C. Brewer and Company,Limited (“CBCL”), which in turn is wholly owned by Buyco, Inc. (“Buyco”).  On August 1, 2001, all of the stock of theManaging Partner was purchased by D. Buyers Enterprises, LLC (“DBE”).  J.W.A. Buyers is the majority owner andMember of DBE and the Chairman of the Board of CBCL.

 

Ownership of Class A Unitsconfers no direct or indirect interest in Buyco, CBCL, DBE or any of theiraffiliated entities, or in Mauna Loa.

 

The Partnershipcommenced operations in June 1986, following its acquisition of interests inapproximately 2,423 tree acres of macadamia nut orchards from subsidiaries ofCBCL.  In December 1986 and October1989, respectively, the Partnership acquired from subsidiaries of CBCLinterests in approximately 266 and 1,260 additional tree acres of macadamiaorchards.  In September 1991 thePartnership acquired approximately 78 tree acres of producing macadamiaorchards.

 

On May 1, 2000,the Partnership purchased 142 acres of macadamia orchards and the macadamiafarming operations from subsidiaries of CBCL. The farming operations consist of farming contracts, farming equipment,vehicles, a husking plant, irrigation well, office buildings, garages andwarehouses, office furniture and equipment and material inventories related tomacadamia farming.  All the assets andoperations are located on the island of Hawaii.

 

**(b) Financial Information about IndustrySegments**

 

The response tothis section of Item 1 incorporates by reference Note 4 of the Notes to theFinancial Statements.

 

**(c) Narrative Description of the Business**

 

**Owned-orchard Segment**

** **

The Partnership currently sellsall of the macadamia nuts from its orchards to Mauna Loa under long-term nutpurchase contracts.  Mauna Loa processesand markets the nuts under the **Mauna Loa****â**brand name and is believed to be one of the largest processors and marketers ofmacadamia nuts in the world.  ThePartnership is Mauna Loa’s largest single supplier of macadamia nuts.  Mauna Loa was a subsidiary of CBCL until itssale in September 2000 to The Shansby Group. On May 1, 2000, the Partnership began farming its own macadamiaorchards.  Prior to that date,subsidiaries of CBCL performed the farming activities for the Partnership underlong-term farming contracts.

 

# ***Nut Purchase Contracts.***  The Partnershipis a party to five nut purchase contracts with Mauna Loa.  They cover all nuts produced by the orchardsacquired in June 1986, December 1986, October 1989,

 

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# ***September 1991and May 2000, respectively.  The 1986contracts expire in 2006, while the 1989 contract expires in 2019 and alsoprovides for the exclusion of unusable nuts from those purchased by MaunaLoa.  The first three contracts areidentical in all other material respects. The fourth contract was acquired by assignment with the orchard purchasein September 1991 and expired on June 30, 2003. Effective July 1, 2003 thefourth contract was renegotiated with an expiration date of December 31, 2006.The fourth contract is a set price contract ($0.60 cents per pound at WIS 25%)with an adjustment for trash and spoilage outside the range of 10% to 13%.  The first three contracts use a pricingformula based 50% on a two-year trailing average of the macadamia nut price publishedannually by the United States Department of Agriculture and 50% on Mauna Loa’s“netback component.”  The netbackcomponent is calculated by subtracting Mauna Loa’s processing and marketingcosts per pound and a “capital charge” of 20% from its nut revenues perpound.  The fifth contract expires in2006.  Its pricing formula is based 100%on the two-year trailing average of USDA reported prices.  The first three nut purchase contracts maybe terminated by Mauna Loa upon thirty days’ notice if the Managing Partner isinvoluntarily removed as the managing general partner and replaced by a personor entity not affiliated with Mauna Loa. The fifth contract may be terminated at any time by mutual agreement inwriting.***

# *** ***

#### ***Competition. ***Becausethe Partnership’s revenues from nut sales are tied to a formula dependent inlarge part upon Mauna Loa’s market performance, the Partnership bears certainrisks associated with Mauna Loa’s marketing of the nuts, including thepossibility of increased future competition. Subsequent to the sale of MaunaLoa to The Shansby Group in September 2000, the Partnership no longer hasaccess to the operational and marketing strategies and financial results ofMauna Loa, as it is no longer a related entity.

#### *** ***

Mauna Loa considers its primarycompetition to be other premium nut products, except in Hawaii where itsproducts compete with those of other macadamia nut producers and other food andnon-food tourist items.  As a premiumnut, macadamia nuts compete with cashews, almonds and pistachios.

 

Mauna Loa sells macadamianuts as “retail” nuts and “commercial” nuts and produces and sells variousmacadamia nut products. These include pristine salted and unsalted roastedmacadamia nuts, packages of diced macadamia nuts and macadamia oil (for cookingand 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 lessthan 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 thissegment, followed by pistachios.  Macadamianuts are the highest priced of all premium nuts, and, therefore, they may besensitive to price competition from other nuts.

 

The primary market for the **Mauna Loa****â**brand is the U.S. mainland, where Mauna Loa sells its products through brokersto food stores, club stores, drug store chains, mass merchandisers andcommercial customers.

 

A strong secondary market forthe**MaunaLoa****â** brand is the state of Hawaii, where MaunaLoa sells through its own direct sales force primarily to retailers.  Substantial portions of the macadamia nutproducts sold are purchased by visitors for gifts and souvenirs. Mauna Loabelieves that it is one of the largest sellers of macadamia products in theState of Hawaii.

 

Outside the United States,Mauna Loa’s other major market for branded products is Japan and the Far Eastwith some limited distribution in other regions.

 

The remaining sales arecomprised of ingredient nuts, visitor center sales, and mail order sales.

 

In addition to theState of Hawaii, mature macadamia nut orchards are located in Australia,Africa, and Central America.  For the2004 crop, Hawaii was expected to supply 27% of the world crop, and Australia,the world’s largest producer, was expected to supply 42%.

 

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A general decline in nut priceswould adversely affect the prices which Mauna Loa could charge for itsmacadamia nut products and could have a negative effect on itsprofitability.  Since the purchase pricefor the Partnership’s nuts under all of its nut purchase contracts is based inpart on nut prices reported by the industry and in part on the marketingsuccess of Mauna Loa, a general decline in macadamia nut prices could alsoadversely affect the Partnership’s revenues.

 

# ***MacadamiaFarming Segment***

# *** ***

Since the May 2000 purchase ofthe macadamia farming operations, the Partnership farms its own 4,169 acres ofmacadamia orchards and approximately 2,645 additional acres of macadamiaorchards owned by other growers.

 

All the orchards are located inthree separate regions on the island of Hawaii (“Keaau”, “Ka’u” and “MaunaKea”).  Because each region hasdifferent terrain and weather conditions, farming methods vary somewhat amongthe three locations.

 

***FarmingContracts. ***ThePartnership was 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 thesecontracts included cultivation, weed and pest control, fertilization, pruningand hedging, replanting, harvesting, husking and related services for thePartnership’s orchards.  In return, thePartnership reimbursed KACI and MKACI for direct and indirect costs incurred inproviding such services, including an equipment utilization charge and anannual farming fee.  The contracts wereterminated May 1, 2000 when the Partnership acquired all the farming assetsfrom KACI and MKACI.

 

The Partnership currentlyservices approximately twenty additional farming contracts, which were assignedto the Partnership with the May 2000 acquisition.  Services under these contracts, include cultivation, weed andpest control, fertilization, pruning and hedging, replanting, harvesting, andhusking.  These contracts also provide amanagement fee to the Partnership, which is based as either a fixed fee per acrefarmed, or as a percent of reimbursed costs, ranging from 5% to 20%.

 

***OrchardMaintenance***. Maintenance of an orchard is essential to macadamia nut farming.  Pruning and hedging of trees is necessary toallow space for mechanical harvesting and cultivating equipment to operatesafely and efficiently and to remove dead branches.  Where mechanical equipment is used, the orchard floor must bemaintained in a condition that will permit its operation.  Soil and gravel are used to repair mud holesand other surface irregularities caused by soil erosion from heavy rain and byfarming equipment.  Pruning and surfacemaintenance are usually performed between harvest seasons.

 

Orchard management alsorequires the proper selection and application of fertilizers, pesticides (tocontrol rodents, insects and fungi) and herbicides (to control weeds).  Insects, rodents and fungi, as well as wildpigs, if not controlled, can cause losses to nut production.

 

***Harvesting*.**  The harvest period begins in the late summerand runs through the following spring. Mature nuts fall from the trees and are harvested using mechanizedharvest equipment when the orchard floor is level enough to permit itsuse.  Nuts are harvested by hand whenthe orchard floor is too uneven to permit mechanical harvesting, when the nutdrop is very light and when nuts remain after harvesting.  At Keaau, Ka’u and Mauna Kea, seasonal laborfor hand harvesting and other operations is generally available from nearbyHilo and adjacent communities.

 

Mechanical harvesting is lesscostly than hand harvesting, but mechanical harvesting is possible only wherethe orchard floor is relatively flat. Approximately 70% of the orchards in Ka’u, 59% in Keaau and 94% in MaunaKea are currently mechanically harvested. The remaining acres are too uneven for mechanical harvesting and must beharvested by hand.

 

During the harvest season, thenuts 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 tothe husking facilities, which

 

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are located in Ka’u andKeaau.  The Keaau husking facility isowned by Mauna Loa, and the Ka’u husking facility is owned by thePartnership.  Nuts harvested in theMauna Kea region are transported to the husking facility in Keaau.  At the husking facility, the outer husk isremoved and the nuts, still in their shell, are weighed and sampled todetermine moisture content and kernel quality. Title to the nuts husked in Keaau passes to Mauna Loa after weighing.  Title to the nuts husked at Ka’u pass toMauna Loa after delivery to the Mauna Loa processing plant in Keaau.  The nuts are then moved to a dryingfacility.

 

***Processing*.**  The nuts purchased by Mauna Loa from thePartnership and from the other orchards farmed by the Partnership are primarilyprocessed at Mauna Loa’s processing plant located adjacent to the orchardslocated in the Keaau area.  The plantwas built in 1966 and is presently capable of handling approximately 210,000pounds of dry-in-shell (commonly abbreviated “DIS”) nuts per day.  Processing at the plant includes drying,cracking, roasting, inspecting and limited packaging.  The plant also includes separate warehouses, a machine shop,storage facilities, husking facilities, nut drying facilities, a generator anda 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 pass by conveyors over metal screens, blowers and rockseparators that remove extraneous material from the in-husk nuts. The husks arethen split and removed by pressing the nuts between steel roller bars and arubber pad.  At this stage, the nutkernels are still encased in their hard round shells and roughly 20% of theirweight is attributable to moisture content. At this point, the nuts are referred to as wet-in-shell (commonlyabbreviated “WIS”).  The WIS weight ofthe nuts is used to determine payments to be made by Mauna Loa under the NutPurchase Contracts.  Approximately 20%of the WIS weight of the nuts will become dry salable kernels when all furtherprocessing is completed.

 

After the nuts are weighed, themoisture content of the nuts is reduced by blowing warm air over them, whichproduces DIS nuts. Metal rollers are used to crack the nuts and remove theshell.  Mechanical and opticalequipment, as well as hand sorting, are used to separate the salable kernelsfrom unusable nuts and pieces of broken shell.

 

The dry nut kernels are roastedand then sorted into retail and commercial grades.  At this stage, some of the nuts are bulk-packed and sent tovarious co-packers on the U.S. mainland for packaging.  At Mauna Loa’s plant in Keaau the nuts maybe salted, or covered with chocolate or one of several coatings, and finallypackaged, labeled and readied for shipment.

 

#### ***StabilizationPayments***

#### *** ***

In December 1986,the Partnership acquired a 266-acre orchard that was several years younger thanother orchards of the Partnership. Because of the relative immaturity of the newer orchard, itsproductivity (and therefore its cash flow) was expected to be correspondinglylower for the first several years than for the other older orchards.

 

Accordingly, the sellerof this orchard (KACI) agreed to make cash stabilization payments to thePartnership for each year through 1993 in which the cash flow (as defined) fromthis orchard fell short of the target cash flow level, which equaled$507,000.  Stabilization payments forany given year were limited to the lesser of the amount of the shortfall or amaximum payment amount.  For the yearsfrom 1987 through 1993, inclusive, the Partnership received a total of$1,628,000 (including a 4% Hawaii general excise tax) in stabilization paymentsunder this agreement.

 

The Partnership accountedfor stabilization payments (net of the 4% Hawaii general excise tax) as areduction in the cost basis of the orchard. As such, these payments are being reflected in the Partnership’s netincome ratably through 2019 as a reduction to the depreciation expense reportedfor this orchard.

 

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In return, thePartnership is obligated to pay the seller 100% of any year’s cash flow fromthis orchard in excess of the target cash flow as additional percentage rent untilthe aggregate amount of the additional percentage rent paid equals 150% of thetotal amount of stabilization payments previously received. Thereafter, thePartnership is obligated to pay the seller 50% of this orchard’s cash flow inexcess of the target cash flow as additional incentive rent.  No additional rent was due in 2001, 2002, or2003.

 

#### ***RisksInvolved in Operating Macadamia Orchards***

#### *** ***

Macadamia nut trees are subjectto damage or destruction from diseases, pests, floods, droughts, windstorms,hurricanes, volcanic activity and other natural causes. Partnership treereplacements for all orchards from all causes were 0.8% in 2001, 0.9% in 2002,and 0.6% in 2003. Both crop and tree insurance are in place to protect thePartnership against material losses.

 

***Diseasesand Pests***. The Partnership’s Keaau orchards experienced tree replacements of 2.0%in 2001, 1.5% in 2002, and 1.3% in 2003. Other macadamia growers in the vicinity have also experienced losses dueto a problem known as “Macadamia Quick Decline” (“MQD”).  Based upon research by the University ofHawaii and other experts, it is believed that the situation is due to fungiassociated with high moisture conditions. It is also believed that a particular variety of macadamia nut tree(variety 333) is most susceptible to MQD. Another tree variety (variety 344) has also been identified as beingmore susceptible to MQD than other varieties. Approximately 9% of the Partnership’s orchards are variety 333 and 45%are variety 344.  Both the Keaau and MaunaKea orchards are areas with high moisture conditions, and may be moresusceptible to the MQD problem.  MQD ispresent in the Ka’u orchards, but tree losses to date have been less than 1% inthe Ka’u area.

 

There are also two typesof fungal diseases, which can affect nut production but are not fatal to thetrees themselves.  One of these isPhytophthora, which affects the macadamia flowers and nutlets, and the other isBotrytis cinerea.  These types of fungaldisease are generally controllable with fungicides.  Historically, these fungi have attacked the orchards located inKeaau during periods of persistent inclement weather.  A light infestation of Phytophthora occurred in lateJanuary-early February 2001.

 

***Rainstormsand Floods. ***ThePartnership’s orchards are located in areas on the island of Hawaii that aresusceptible to heavy rainstorms.  InNovember 2000 the Ka’u region was affected by flooding.  This flooding resulted in expected 2000harvesting being done in 2001.  Sincethe flood in 2000 heavy rain in the Ka’u region has not produced flooding ofany consequence.

 

***Windstorms***.  The Partnership’s orchards are located inareas on the island of Hawaii that are susceptible to windstorms.  Twenty-four major windstorms have occurredon the island of Hawaii since 1961, and four of those caused material losses toPartnership orchards.  Several of thePartnership’s orchards are surrounded by windbreak trees, which provide limitedprotection.  Younger trees that have notdeveloped extensive root systems are particularly vulnerable to windstorms.

 

***Insurance. ***The Partnership secures tree insuranceeach year under a federally subsidized program.  The tree insurance for 2003 provides coverage up to a maximum ofapproximately $22 million against loss of trees due to wind, fire or volcanicactivity. Crop insurance was purchased for the 2003-2004 crop year and providescoverage up to a maximum of approximately $8.5 million against loss of nuts dueto wind, fire, volcanic activity, earthquake, adverse weather, wildlife damageand failure of irrigation water supplies.

 

***Volcanoes*.**  The orchards are located on the island ofHawaii, where there are two active volcanoes. To date, no lava flows from either volcano have affected or threatenedthe orchards.

 

***Rainfall*.**  The productivity of orchards depends inlarge part on moisture conditions. Inadequate rainfall can reduce nut yields significantly, while excessiverain without adequate drainage can foster disease and hamper harvestingoperations.  While rainfall at the orchardslocated in the Keaau and Mauna Kea areas has generally been adequate, theorchards located in the Ka’u area generally receive less rainfall and, as a

 

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result, a portion of the Ka’uorchards is presently irrigated. Irrigation can mitigate the effects of a drought, but it cannotcompletely protect a macadamia nut crop from the effect of a drought.  Recorded rainfall at each of the threelocations of the Partnership’s orchards for the past five years is shown below:

 
| **Year** |   | **Ka’u** |   | **Keaau**   |   | **Mauna Kea** |   |
|----------|--------|---------------|--------|-------------|--------|---------------|--------|
| 1999     |   | 30.5”    |   | 132.3” |   | 130.0”   |   |
| 2000     |   | 47.1”    |   | 147.9” |   | 158.0”   |   |
| 2001     |   | 46.0”    |   | 124.0” |   | 133.4”   |   |
| 2002     |   | 58.5”    |   | 139.4” |   | 156.1”   |   |
| 2003     |   | 22.3”    |   | 94.8”  |   | 117.4”   |   |

 

Below average rainfall occurred in 2003.  The Ka’u, Keaau and Mauna Kea areas recorded 58%, 71% and 80% ofthe normal average annual rainfall in their area of the island, respectively.

 

#### ***WaterSupply for Irrigation***

 

With the May 2000 acquisition,the Partnership acquired an irrigation well (the “Sisal Well”), which supplieswater to the Partnership’s orchards in Ka’u which were purchased in June 1986and 1989.  The Sisal Well is situated onland owned by MKACI.  On May 1, 2000 thePartnership entered into a license agreement with MKACI, which allows thePartnership necessary access to maintain and operate the Sisal Well, as well asthe use of roads to access, maintain and operate the Partnership’s macadamiaorchards.  Annual rent for the licenseagreement is one dollar.  The licenseagreement terminates on the earlier of June 30, 2045, or at the termination ofthe May 1, 2000 lease between Partnership and KACI.

 

Prior to the May2000 acquisition, the Partnership and KACI were parties to a water agreement towhich KACI agreed to supply water to those portions of the June 1986 Orchardsand October 1986 Orchards located at Ka’u and which had been irrigatedhistorically.

 

If the amount ofwater provided by the Sisal Well becomes insufficient to irrigate the abovenamed orchards, the Partnership may consider increasing the capacity of theSisal Well, drilling an alternative well into the historical source whichprovides water to the Sisal Well or obtaining water from other sources.

 

On a historical basis, thequantity of water available from the Sisal Well has been generally sufficientto irrigate these orchards in accordance with prudent farming practices.  The irrigated portion of the Ka’u IIOrchards is expected to need greater quantities of water as the orchardsmature.  The Managing Partneranticipates that the amount of water available from the Sisal well will begenerally sufficient, assuming average levels of rainfall, to irrigate theirrigated orchards in accordance with prudent farming practices for the nextseveral years.  If no irrigation wateris available to the Irrigated Orchards, then, based on historical averagerainfall levels, diminished yields of macadamia nut production can be expected.

 

# ***Employees***

# *** ***

As of December 31, 2003, thePartnership employed 295 people, of which 199 were seasonal employees.  Of the total, 23 are in farming supervisionand management, 259 in production, maintenance and agricultural operations, and13 in accounting and administration.

 

With the May 2000 acquisition,the Partnership agreed to the assumption of three bargaining agreements withthe ILWU Local 142.  These agreementscover all production, maintenance and agricultural employees of the Ka’uOrchard Division, of the Keaau Orchard Division and of the Mauna Kea OrchardDivision.  These labor contracts becameeffective May 1, 1997 and expired on April 30, 2002.  The parties have recently agreed to a new three-year contract,which will expire on April 30, 2005. The Partnership believes that relationswith its employees are very good.

 

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**Available Information. **The Partnershipfiles annual, quarterly and current reports and other information with theCommission.  These filings are availablefree of charge through its Internet website at www.mlmacadamia.com as soon asreasonably practicable after the Partnership electronically files such materialwith, or furnishes it to, the Commission. Any Unit holder who so requests, may obtain a printed copy of thesedocuments from the Partnership, by contacting the Partnership at 808-969-8057,or in writing at 26-238 Hawaii Belt Road, Hilo, Hawaii 96720.

 

**ITEM 2. PROPERTIES**

 

***Location.***  The Partnership owns or leases approximately4,169 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’uarea is located in the south part of the island about fifty miles fromHilo.  The Keaau area is located sixmiles south of Hilo on the east side of the island, and the Mauna Kea area islocated three miles north of Hilo on the east side of the island.

 

The majority of macadamia nuttrees grown in the State of Hawaii are grown on the island of Hawaii involcanic soil that permits drainage during heavy rainfall.  While the orchards are located approximatelywithin a 50-mile radius, the climate and other conditions that affect thegrowing of macadamia nuts are different. These differences are the result of prevailing wind patterns and islandtopography, which produce a variety of microclimates throughout the island.

 

***Ageand Density*.** The productivity of macadamia nut orchards depends on several factorsincluding, among others, the age of the trees, the number of trees planted peracre, soil condition, climate, rainfall and/or irrigation.  The most significant characteristicaffecting yields is maturity.  The treesin a macadamia nut orchard generally begin to produce nuts at a commerciallyacceptable level at around nine years of age. Thereafter, nut yields increase gradually until the trees reachmaturity, after which the nut yield remains relatively constant except forvariances produced by rainfall, cultivation practices, pest infestation anddisease.

 

Macadamia orchardsnormally reach peak production after fifteen to eighteen years of age.  All of the 4,169 tree acres of macadamia orchardsowned or leased by the Partnership are over eighteen years of age.  About 2% of trees are lost to various causeseach year and are replaced.

 

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***Rainfall*.**  Macadamia trees grow best in climates withsubstantial and evenly distributed rainfall (or equivalent irrigation) and insoil that provides good drainage. Inadequate rainfall can significantly reduce nut yields, while excessiverain without adequate drainage can impede healthy tree growth, promote thegrowth of harmful fungal diseases and produce mud holes that require repair ofthe orchard floor.

 

At Keaau, normal rainfall isadequate without irrigation, and the volcanic soil provides good drainage.  However, short droughts and occasionalflooding have occurred.  At Mauna Kea,normal rainfall is adequate without irrigation and the volcanic soil providesadequate drainage.  In the event of avery long drought, production at Keaau and Mauna Kea might be affected.  At Ka’u, located on the drier side of theisland, the rainfall averages are substantially less than at Keaau,particularly at the lower elevations. Approximately 652 acres at the lower elevations of Ka’u are irrigated toprovide 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 adversely affected.

 

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***Orchards. ***The followingtable lists each of the orchards, the year acquired, tree acres, tenure, andlease rents:

 
| **Orchard**            |   | **Acquired** |   | **Tree  Acres** |   | **Tenure**    |   | **Lease  Expiration** |   | **Min. Rent  per Annum** |   |
|------------------------|--------|--------------|--------|-----------------|--------|---------------|--------|-----------------------|--------|--------------------------|--------|
|                   |   |         |   |            |   |          |   |                  |   |                     |   |
| Keaau I                |   | June 1986    |   | 1467            |   | Fee simple    |   |                  |   |                     |   |
| Ka’u I            |   | June 1986    |   | 456             |   | Fee simple    |   |                  |   |                     |   |
| “                 |   | June 1986    |   | 500             |   | Leasehold (1) |   | 2019                  |   | $                        | 25,000 |   |
| Ka’u Green Shoe I |   | Dec. 1986    |   | 266             |   | Leasehold (1) |   | 2019                  |   | $                        | 5,586  |   |
| Keaau II               |   | Oct. 1989    |   | 220             |   | Fee simple    |   |                  |   |                     |   |
| Ka’u II           |   | Oct. 1989    |   | 327             |   | Leasehold (2) |   | 2034                  |   | $                        | 23,544 |   |
| “                 |   | Oct. 1989    |   | 175             |   | Leasehold (1) |   | 2028                  |   | $                        | 17,314 |   |
| “                 |   | Oct. 1989    |   | 26              |   | Leasehold (3) |   | 2029                  |   | $                        | 2,041  |   |
| “                 |   | Oct. 1989    |   | 186             |   | Leasehold (1) |   | 2031                  |   | $                        | 18,585 |   |
| Mauna Kea              |   | Oct. 1989    |   | 326             |   | Leasehold (2) |   | 2034                  |   | $                        | 23,508 |   |
| Keaau Lot 10           |   | Sept. 1991   |   | 78              |   | Fee simple    |   |                  |   |                     |   |
| Ka’u O            |   | May 2000     |   | 142             |   | Leasehold (1) |   | 2045                  |   | $                        | 10,224 |   |
| Total acres            |   |         |   | 4169            |   |          |   |                  |   |                     |   |

 

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(1)                                  Leaseof land only; trees may be removed at termination of lease.

(2)                                  Leaseof land only; lessor may purchase trees from lessee at any time after June 30,2019.

(3)                                  Leaseof land; trees revert to lessor upon termination of lease.

 

For certain additionalinformation concerning farming leases, see Item 13, page 43.

 

In addition to theminimum annual lease payment amount, all the leases require the Partnership topay various expenses with respect to the leased premises as well as anadditional rental payment based on the market price per pound of macadamia nutssold in Hawaii.

 

With respect to the Ka’uGreen Shoe I Orchard, the lease requires the Partnership to pay KACI, theseller and lessor, additional rent equal to 100% of any year’s cash flowgenerated by such orchard in excess of a target level of $507,000 until theaggregate amount paid equals 150% of the aggregate amount of the stabilizationpayments previously received by the Partnership.  Thereafter, the Partnership is required, with respect to any yearprior to the expiration of the lease, to pay as additional rent, 50% of thecash flow generated by such orchard for such year in excess of a target levelof $507,000 of cash flow.  For additionalinformation, see “Stabilization Payments” on page 5.

 

**ITEM 3. LEGAL PROCEEDINGS AND SETTLEMENT**

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

No matters weresubmitted during the fourth quarter of the fiscal year covered by this reportto a vote of security holders.

 

10

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### **PART II**

### ** **

**ITEM 5. MARKET FOR REGISTRANT’S CLASS A UNITS AND RELATED UNITHOLDER MATTERS**

 

The Partnership’s Class ADepositary Units are listed for trading on the New York Stock Exchange (symbol= NUT).  There were 1,270 registeredholders of Class A Depositary Units on December 31, 2003.

 

Distributions declared and highand low sales prices of the Class A Depositary Units, based on New York StockExchange daily composite transactions, are shown in the table below:

 
|                               |   | **Distribution** |   | **High** |   | **Low** |   |
|------------------------------------|--------|------------------|--------|----------|--------|---------|--------|
| **2003**:   4th  Quarter |   | $                | 0.030  |     | 3.70   |    | 3.28   |   |
| 3rd Quarter                        |   | 0.030            |   | 3.75     |   | 3.39    |   |
| 2nd Quarter                        |   | 0.050            |   | 3.50     |   | 3.16    |   |
| 1st Quarter                        |   | 0.050            |   | 3.52     |   | 3.20    |   |
|                               |   |             |   |     |   |    |   |
| **2002**:   4th  Quarter |   | $                | 0.050  |     | 3.50   |    | 3.21   |   |
| 3rd Quarter                        |   | 0.050            |   | 3.70     |   | 3.26    |   |
| 2nd Quarter                        |   | 0.050            |   | 3.85     |   | 3.58    |   |
| 1st Quarter                        |   | 0.050            |   | 3.83     |   | 3.18    |   |

 

**Restrictions on Cash Distributions**

 

In connection with thePartnership’s Credit Agreement with American AgCredit Capital Markets, cashdistributions to partners are restricted unless the Partnership is incompliance with specified terms and conditions of the Credit Agreement,including restrictions on further indebtedness, sales of assets, andmaintenance of certain financial ratios. The Partnership was in compliance with the terms and conditions of theCredit Agreement at December 31, 2003.

 

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**ITEM 6. SELECTED FINANCIAL DATA**

(In thousands,except per pound and per unit data)

 
|                                           |   | **2003** |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
| Financial:                                     |   |     |   |     |   |     |   |     |   |     |   |
| Total revenue                                  |   | $        | 15,426 |     | $      | 14,556   |   | $        | 16,893 |     | $      | 13,758 |   | $ | 15,950 |   |
| Net cash provided by operating  activities (1) |   | 2,262    |   | 2,166    |   | 2,237    |   | 2,507    |   | 3,849    |   |
| Income (loss) before taxes                     |   | 111      |   | (447     | )      | 1,112    |   | (360     | )      | 4,847    |   |
| Net income (loss)                              |   | 69       |   | (480     | )      | 1,010    |   | (398     | )      | 4,645    |   |
| Distributions declared                         |   | 1,212    |   | 1,515    |   | 1,515    |   | 3,523    |   | 3,030    |   |
| Total working capital                          |   | 4,165    |   | 3,220    |   | 3,183    |   | 1,599    |   | 9,031    |   |
| Total assets                                   |   | 60,069   |   | 61,803   |   | 65,329   |   | 65,625   |   | 66,503   |   |
| Long-term debt                                 |   | 2,468    |   | 2,920    |   | 3,402    |   | 3,716    |   | —   |   |
| Total partners’ capital                   |   | 53,706   |   | 54,849   |   | 56,844   |   | 57,349   |   | 61,270   |   |
| Class A limited partners’  capital        |   | 53,169   |   | 54,300   |   | 56,275   |   | 56,775   |   | 60,657   |   |
| Net cash flow (2)                              |   | 2,157    |   | 1,592    |   | 3,093    |   | 1,824    |   | 6,247    |   |
|                                           |   |     |   |     |   |     |   |     |   |     |   |
| Operations:                                    |   |     |   |     |   |     |   |     |   |     |   |
| Acres harvested                                |   | 4,169    |   | 4,169    |   | 4,169    |   | 4,169    |   | 4,027    |   |
| Macadamia nuts harvested (lbs.)  (3)           |   | 21,196   |   | 21,404   |   | 23,013   |   | 19,255   |   | 25,569   |   |
| Net price $/lb. (3)(4)                         |   | $        | 0.4857 |     | $      | 0.4748   |   | $        | 0.4830 |     | $      | 0.5125 |   | $ | 0.6238 |   |
|                                           |   |     |   |     |   |     |   |     |   |     |   |
| Per Class A Unit (5):                          |   |     |   |     |   |     |   |     |   |     |   |
| Income (loss) before taxes                     |   | $        | 0.01   |     | $      | (0.06    | )      | $        | 0.15   |     | $      | (0.05 | ) | $ | 0.64 |   |
| Net income (loss)                              |   | 0.01     |   | (0.06    | )      | 0.13     |   | (0.05    | )      | 0.61     |   |
| Net cash flow (2)                              |   | 0.28     |   | 0.21     |   | 0.41     |   | 0.24     |   | 0.82     |   |
| Distributions                                  |   | 0.16     |   | 0.20     |   | 0.20     |   | 0.465    |   | 0.40     |   |
| Partners’ capital                         |   | 7.09     |   | 7.24     |   | 7.50     |   | 7.57     |   | 8.09     |   |

 

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(1)          See “Statements of Cash Flows” in thefinancial statements for method of calculation.

(2)          See Footnote 5 in the notes to financialstatements for method of calculation.

(3)          Wet-in-shell at 25% moisture.

(4)          Weighted average for all orchards.

(5)          7,500,000 Class A Units were issued andoutstanding for all periods presented.

 

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**ITEM 7.****       ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS**

 

This discussion should be readin conjunction with the financial statements and the related notes includedelsewhere in this report.

 

# ***Resultsof operations – 2003, 2002, 2001***

 

## ***Owned-OrchardSegment - Production and Yields***

 

Production and yield data forthe eight orchards are summarized below (expressed in wet-in-shell pounds at25% moisture):

 
|                                       |   |         |   |        |   | **2003**       |   | **Average Yield per Acre** |   |
|--------------------------------------------|--------|--------------|--------|-------------|--------|----------------|--------|----------------------------|--------|
| **Orchard**                                |   | **Acquired** |   | **Acreage** |   | **Production** |   | **2003**                   |   | **2002** |   | **2001** |   |
| Keaau I                                    |   | June 1986    |   | 1,467       |   | 6,265,179      |   | 4,271                      |   | 4,272 |   | 5,186 |   |
| Keaau II                                   |   | Oct. 1989    |   | 220         |   | 629,657        |   | 2,862                      |   | 2,966 |   | 3,177 |   |
| Keaau Lot 10                               |   | Sept. 1991   |   | 78          |   | 253,881        |   | 3,255                      |   | 3,850 |   | 3,198 |   |
| Ka’u I                                |   | June 1986    |   | 956         |   | 5,626,705      |   | 5,886                      |   | 6,933 |   | 6,997 |   |
| Ka’u Green Shoe I                     |   | Dec. 1986    |   | 266         |   | 2,026,648      |   | 7,619                      |   | 6,659 |   | 6,354 |   |
| Ka’u II                               |   | Oct. 1989    |   | 714         |   | 3,930,001      |   | 5,504                      |   | 5,214 |   | 5,354 |   |
| Ka’u O                                |   | May 2000     |   | 142         |   | 745,743        |   | 5,252                      |   | 5,880 |   | 4,934 |   |
| Mauna Kea                                  |   | Oct. 1989    |   | 326         |   | 1,718,229      |   | 5,271                      |   | 3,762 |   | 4,765 |   |
| Totals (except yields which are  averages) |   |         |   | 4,169       |   | 21,196,043     |   | 5,084                      |   | 5,134 |   | 5,520 |   |

 

Production for the orchardspurchased in 1989 and 2000 is net of unusable nuts, as stated in theirrespective nut purchase agreements. Production for the orchards purchased in 1986 and 1991 includes all nutsdelivered.  The nut purchase contractsfor the 1986 orchards require the purchaser, Mauna Loa Macadamia NutCorporation (“Mauna Loa”), to purchase all of the nuts delivered from theseorchards.  The 1991 contract,renegotiated this year, allows for a set price within a range of unusable of10% to 13%.  The Partnership reports ona calendar year basis, though the natural crop year generally begins in Augustand runs through April.

 

Production in 2003 was 1.0%lower than 2002 and 7.9% lower than 2001. Production in 2002 was 7.0% lowerthan 2001 and 1.8% higher than 2000. Significant factors affecting the cropwere as follows:

 

1. The drought in the Ka’u orchards in 2003 affected the nut set anddevelopment.

 

2. The below average rainfall in the Keaau and Mauna Kea orchardsnegatively impacted the nut development in Keaau.  Mauna Kea’s nut production was not affected due to good soilmoisture retention.

 

3. The Ka’u region was affected by a rainstorm and flood in November of2000.  Rainfall from the stormreplenished the soil moisture and improved the yields in this region for 2001.

 

The Ka’u Green Shoe I orchardand the Mauna Kea orchard are fully mature. As a result, the yields from these orchards are expected to produce onaverage with the Partnership’s mature orchards.  At full maturity under favorable growing conditions, a macadamiaorchard can produce between 5,500 and 7,500 WIS pounds of macadamia nuts peracre each year at Ka’u and between 4,000 and 6,000 WIS pounds of macadamia nutsper acre each year at Keaau.  All thetrees have reached full maturity in the Mauna Kea area and it is expected thatproduction will approximate Keaau levels.

 

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## ***Owned-OrchardSegment - Nut Revenue***

 

Macadamia nut revenues dependon the number of producing acres, yields per acre and the nut purchaseprice.  The impact of these factors issummarized in the following table:

 
|                                 |   | **2003** |   | **2002** |   | **2001** |   | **2003  Over  2002** |   | **2002  Over  2001** |   |
|--------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------------------|--------|----------------------|--------|
| Trees acres harvested                |   | 4,169    |   | 4,169    |   | 4,169    |   | —               |   | —               |   |
| Average yield (WIS lbs./acre)        |   | 5,084    |   | 5,134    |   | 5,520    |   | - 1                  | %      | - 7                  | %      |
| Nuts harvested (000’s WIS lbs.) |   | 21,196   |   | 21,404   |   | 23,013   |   | - 1                  | %      | - 7                  | %      |
| Nut price ($/WIS lbs. @ 25%)         |   | 0.4857   |   | 0.4748   |   | 0.4830   |   | + 2                  | %      | - 2                  | %      |
| Gross nut sales ($000s)              |   | 10,295   |   | 10,162   |   | 11,115   |   | + 1                  | %      | - 9                  | %      |
| Litigation Adjustment                |   | —   |   | —   |   | 908      |   |                 |   |                 |   |
| 2001 nut price settlement            |   | —   |   | 174      |   | —   |   |                 |   |                 |   |
| 2002 nut price settlement            |   | 14       |   |     |   |     |   |                 |   |                 |   |
| 2003 early harvest agreement         |   | 150      |   |     |   |     |   |                 |   |                 |   |
| Recorded nut sales ($000s)           |   | 10,459   |   | 10,336   |   | 12,023   |   |                 |   |                 |   |

 

Under three of the nut purchasecontracts with Mauna Loa, the price for nuts delivered is based 50% on thetwo-year trailing average of USDA published macadamia nut prices and 50% on a“netback component”.  The netbackcomponent is determined by subtracting from Mauna Loa’s gross revenues from thesale of macadamia products (i) allocable processing, packaging, marketing,selling and advertising costs and (ii) a 20% capital charge on the differencebetween those aggregate gross revenues and aggregate allocable costs.

 

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The following table sets forththe manner in which the nut purchase price per pound was determined for 2003,2002 and 2001 ($/lb.):

 
|                                                                          |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| USDA price - two years prior  (a)                                             |   | 0.5601   |   | 0.6227   |   | 0.6155   |   |
| USDA price - one year prior (a)                                               |   | 0.5666   |   | 0.5601   |   | 0.6227   |   |
| USDA price - two year trailing  average                                       |   | 0.5634   |   | 0.5914   |   | 0.6191   |   |
|                                                                          |   |     |   |     |   |     |   |
| Gross revenues                                                                |   | 1.4346   |   | 1.5049   |   | 1.5024   |   |
| Less allocable processing,  packaging, marketing, sales and advertising costs |   | 0.9400   |   | 1.0868   |   | 1.0834   |   |
| Less 20% capital charge                                                       |   | 0.0996   |   | 0.0828   |   | 0.0838   |   |
| Net-back component                                                            |   | 0.3950   |   | 0.3353   |   | 0.3352   |   |
|                                                                          |   |     |   |     |   |     |   |
| USDA price - two year trailing  average                                       |   | 0.5634   |   | 0.5914   |   | 0.6191   |   |
| Net-back component                                                            |   | 0.3950   |   | 0.3353   |   | 0.3352   |   |
| Average of USDA two year  trailing average price and net-back component       |   | 0.4792   |   | 0.4634   |   | 0.4771   |   |
| Plus Hawaii general excise tax  (0.5%)                                        |   | 0.0024   |   | 0.0019   |   | 0.0024   |   |
| Net purchase price (b) (c) (d)  (e)                                           |   | 0.4816   |   | 0.4653   |   | 0.4795   |   |

 

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(a)          MaunaLoa’s own purchases comprise a substantial portion of nut purchases reported tothe USDA.  Therefore, the USDA pricecomponent of the purchase price is, to a substantial degree, the average pricethat Mauna Loa has paid to purchase macadamia nuts from the Partnership andfrom third parties during the previous two years.

 

(b)         Thenut purchase price for the 1986 and 1989 orchards was the same for 1999 and allprevious years.  With the change ofownership of Mauna Loa in 2000, a quality conversion factor in the nut purchasecontracts was initiated.  The effect wasto cause a slightly different price of $0.4750 for the 1989 orchards in 2001,$0.4644 in 2002 and $0.4808 in 2003.  Anearly harvest round was requested by Mauna Loa resulting in a payment of$150,000 over the contract price.  Withthis payment the 2003 price was $0.4883.

 

(c)          Thenut purchase contract covering nut production from the 78 acre Keaau Lot 10orchard acquired in September 1991 defines the “two-year trailing average”provision slightly differently from the 1986 and 1989 nut purchase contracts,and thus, results in a different nut price. This was in affect for the first six months of 2003.  A new contract was negotiated with a fixedprice for all nuts with unusables in a range of 10% to 13%.  The nut price for this orchard was $0.5923in 2003, $0.4920 in 2002, and $0.5119 in 2001. This orchard accounts for less than 2% of the Partnership’s macadamianut production.

 

(d)         Thenut purchase contract for the Ka’u O orchards purchased in May 2000 uses onlythe two-year trailing USDA average to determine its nut price, which was$0.5660 in 2003, $0.5940 in 2002 and $0.6222 in 2001.

 

(e)          MaunaLoa has recently provided the final 2003 audited nut price to thePartnership.  The result of the auditednut price was to increase the nut sales by $352,000 in the fourth quarter fornuts sold in the first three quarters of 2003. The increase by quarter was $80,000 related to the first quarter,$26,000 related to the second quarter and $246,000 related to the thirdquarter.

 

15

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The 2003 average nut price fromall orchards increased 2% from 2002. The 2002 average nut price from all orchards declined 2% from 2001.  The USDA portion fell 5% in 2003 and 4% in2002. The netback increased 18% in 2003 compared to 2002 and was flat in 2002compared to 2001. The current netback price reflects the operating performanceof Mauna Loa.

 

The USDA published price forthe 2002-03 crop year was $0.5391 per pound (WIS at 25% moisture), which is 5%lower than the 2001-2002 price of $0.5666 and 4% lower than the 2000-2001 priceof $0.5601.  The USDA two-year trailingaverage, which affects the Partnership’s 2003 nut price, will be $0.5528, a 2%decrease over the 2002 two-year average.

 

## ***Owned-OrchardSegment - Cost of Goods Sold***

 

Agricultural unit costs dependon the operating expenses required to maintain the orchards and to harvest thecrop as well as on the quantity of nuts actually harvested.

 

The Partnership’s unitcosts (expressed in dollars per wet-in-shell pound at 25% moisture) arecalculated by dividing all agricultural costs for each orchard (including leaserent, property tax, tree insurance and depreciation) by the number of pounds ofmacadamia nuts produced by that orchard and are summarized below ($/lb.):

 
|                   |   |         |   | **Cost per pound** |   |
|------------------------|--------|--------------|--------|--------------------|--------|
| **Orchard**            |   | **Acquired** |   | **2003**           |   | **2002** |   | **2001** |   |
| Keaau I                |   | June 1986    |   | 0.5453             |   | 0.5097 |   | 0.4442 |   |
| Keaau II               |   | Oct. 1989    |   | 0.6179             |   | 0.5601 |   | 0.4380 |   |
| Keaau Lot 10           |   | Sept. 1991   |   | 0.3461             |   | 0.3745 |   | 0.3132 |   |
| Ka’u I            |   | June 1986    |   | 0.4611             |   | 0.4397 |   | 0.4466 |   |
| Ka’u Green Shoe I |   | Dec. 1986    |   | 0.2533             |   | 0.2817 |   | 0.2582 |   |
| Ka’u II           |   | Oct. 1989    |   | 0.3822             |   | 0.3915 |   | 0.2683 |   |
| Ka’u O            |   | May 2000     |   | 0.3403             |   | 0.3344 |   | 0.3077 |   |
| Mauna Kea              |   | Oct. 1989    |   | 0.4976             |   | 0.7601 |   | 0.6050 |   |
|                   |   |         |   |               |   |   |   |   |   |
| All Orchards           |   |         |   | 0.4582             |   | 0.4559 |   | 0.4071 |   |

 

As a result of thefarming operations acquisition, the Partnership now farms its own orchards, andsome costs previously charged as farming expenses by KACI and MKACI wereeliminated. These are the Hawaii general excise tax, capital recovery costs andthe farming fee. The Partnership saved approximately $152,000 in Hawaii generalexcise taxes for 2003, $155,000 in 2002 and $170,000 in 2001.  The capital recovery savings in 2003 were$24,000, in 2002 were $26,000 and in 2001 were $24,000.  The elimination of the farming fee in 2000saved the Partnership $115,000 in 2003, $116,000 in 2002 and $128,000 in2001.  The general and administrativeexpense in 2002 was $1,030,000 and in 2001 was $1,348,000.  In addition, the general and administrativeexpenses incurred in the farming operation, which were previously billed andexpensed as farming costs, have been classified as general and administrationexpenses. This amounted to $370,000 in 2003, $400,000 in 2002 and $408,000 in2001.

 

Cost of goods sold was$128,000 higher in 2003 than in 2002, and $374,000 lower in 2002 than in 2001,but the cost per pound was the same in 2003 than 2002 and 12.0% higher in 2002than 2001.  The higher production costsin 2003 were the result of higher husking costs in Keaau and Mauna Kea, higherfield land lease costs in Ka’u and higher benefit costs.  The lower costs in 2002 were the result oflower

 

16

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production.  The increase in cost per pound in 2002compared to 2001 was a result of increases in service costs such as insuranceand employee benefits.

 

### ***FarmingSegment - Farming Service Revenue***

 

In connection withthe acquisition, the Partnership acquired approximately 20 farming contracts tofarm macadamia orchards owned by other growers. These contracts cover macadamiaorchards in the same three locations on the island of Hawaii where thePartnership owns orchards.  The farmingcontracts provide the Partnership to be reimbursed for all direct farming costs(cultivation, irrigation and harvesting), collect a pro-rata share of indirectcosts and overheads, and charge a management fee.  The management fee is based on the number of acres farmed or on apercentage of total costs billed. Revenues from farming services were $5.0 million in 2003, $4.2 millionin 2002, and $4.9 million for 2001. The 2003 farming service revenues weregreater than anticipated because of the timing of harvesting. The 2002 farmingservice revenues were less than anticipated in part as a result of acontroversy surrounding the sale by C. Brewer & Co., Ltd. (CBCL) ofapproximately 155 tree acres to third parties. CBCL reported to the Partnership that the buyers of the orchards did notwish to assume the farming contracts, therefore, CBCL was terminating thecontracts.  The Partnership believes thecontracts are not terminable at will and is currently negotiating a settlementwith CBCL.  Also, in 2002 one of themajor farming contracts requested longer harvest intervals for theirorchards.  The 2001 farming servicesrevenue was less than anticipated due to the abandonment of 200 acres by one ofthe growers and less repairs required.

 

***FarmingSegment - Cost of Services Sold***

 

The cost ofservices sold relating to the farming contracts was $4.5 million in 2003, $3.8million in 2002 and $4.4 million for 2001. These costs were all reimbursed to the Partnership.

 

## ***Generaland Administrative Costs***

 

General andadministrative expenses are comprised of accounting and reporting costs,reimbursements to the Managing Partner for directors’ fees, office expenses andliability insurance, and the management fee. In addition, general and administrative costs are also incurred inconnection with the farming operations. Previous to the May 2000 acquisition, general and administration costsrelating to the Partnership’s orchards were included in the Partnership’sfarming expenses.

 

Total general andadministrative costs for 2003 were $85,000 lower than 2002, which is attributedto lower service costs and orchard management costs.  General and administrative costs for 2002 were $409,000 lower thanin 2001.  All of the 2002 decrease wasdue to $408,000 in legal costs associated with the dispute related to the nutpurchase contract with Mauna Loa in 2001.

 

A management fee based onPartnership cash flow is payable annually to the Managing Partner.  The amount paid was $44,000 in 2003, $32,000in 2002, and $65,000 for 2001.

 

## ***InterestIncome and Expense***

 

The Partnership recorded interest expense of $203,000 in 2003, $307,000in 2002, and $433,000 in 2001.  This wasdue to (1) the long-term loan used to acquire the farming operations, (2) theassumption of several capitalized equipment leases, and (3) interest expense ona revolving line of credit.

 

The Partnership funds itsworking capital needs through funds on hand and, when needed, from short-termborrowings, generating interest expense in the process.  Net interest income or expense, therefore,is partly a function of any balance carried over from the prior year, theamount and timing of cash generated and distributions paid to investors in thecurrent year, as well as the current level of interest rates.  Interest

 

17

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was earned in the amountof $12,000 in 2003, $46,000 in 2002 and $80,000 in 2001 primarily from chargesto Mauna Loa for late payment in 2003.

 

Other income of $260,000was recorded in 2003 with $206,000 from crop insurance and $40,000 from thesettlement of a written off receivable. $109,000 was recorded in 2002 primarilyfrom the early termination of a land and garage lease with CBCL.  Other income of $207,000 was recorded in2001 due mainly to the settlement agreement with Mauna Loa.

 

***Inflation and Taxes***

 

In general, prices paidto macadamia nut farmers fluctuate independently of inflation.  Macadamia nut prices are influenced stronglyby prices for finished macadamia products, which depend on competition andconsumer acceptance.  Farming costs,particularly labor and materials, and general and administrative costs dogenerally reflect inflationary trends.

 

The Partnership issubject to a gross income tax as a result of its election to continue to betaxed as a partnership rather than to be taxed as a corporation, as allowed bythe Taxpayer Relief Act of 1997.  Thistax is calculated at 3.5% on partnership gross income (net revenues less costof goods sold) beginning in 1998.  Thegross income tax was $42,000 in 2003, $33,000 in 2002, and $102,000 in 2001.

 

# ***Liquidity and Capital Resources***

 

Net cash provided by operationswas $2.3 million in 2003 an increase of approximately $100,000 over 2002.  Net cash provided by operations was $2.2million in 2002 and 2001.

 

At December 31, 2003 thePartnership’s working capital was $4.2 million and its current ratio was 2.55to 1, compared to $3.2 million and 2.14 to 1 in 2002 and was $3.2 million and1.82 to 1 in 2001.  In 2003 the increasein working capital compared to 2002 was a result of a higher revenue, higherinterest and other income, lower general and administrative costs, and lowerinterest costs.  In 2002 payment byMauna Loa resulted in liabilities being paid without incurring short termdebt.  The Partnership is in compliancewith the Credit Agreement covenants.

 

Capitalexpenditures in 2003, 2002 and 2001 were $20,000, $93,000 and $75,000,respectively.  Capital expendituresplanned for 2004 are less than $500,000 and are expected to be financed by wayof new equipment leases, either capital or operating leases.

 

Macadamia nut farming isseasonal, with production peaking late in the fall.  However, farming operations continue year round. As a result, additionalworking capital is required for much of the year. The Partnership meets itsworking capital needs with cash on hand, and when necessary, through short-termborrowings under a $5.0 million revolving line of credit. The line of creditwas obtained on May 2, 2000 and expires May 1, 2004.  The lender has agreed to extend the line of credit undercomparable terms through 2008 or 2009. At December 31, 2003 the Partnership had a cash balance of $36,000 andline of credit drawings outstanding of $400,000.  At December 31, 2002 the Partnership had a cash balance of $31,000and line of credit drawings outstanding of $800,000.  The cash balance was $357,000 at the end of 2001, and the line ofcredit drawings were $1,200,000 at December 31, 2001.

 

It is the opinion of managementthat the Partnership has adequate cash on hand and borrowing capacity availableto meet anticipated working capital needs for operations as presentlyconducted.  However, with the September2000 sale of Mauna Loa, the managing partner no longer has control over thetiming of nut payments to the Partnership. The nut purchase contracts requireMauna Loa to make nut payments 30 days after the end of each quarter.  During certain parts of the year, if paymentsare not received, as the contracts require, available cash resources could bedepleted.

 

18

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***Critical Accounting Policies and Estimates***

 

Management hasidentified the following critical accounting policies that affect thePartnership’s more significant judgments and estimates used in the preparationof the Partnership’s financial statements. The preparation of the Partnership’s financial statements in conformitywith accounting principles generally accepted in the United States of America requiresthe Partnership’s management to make estimates and judgments that affect thereported amounts of assets and liabilities, revenues and expenses, and relateddisclosures of contingent assets and liabilities.  On an on-going basis, management evaluates those estimates,including those related to asset impairment, accruals for self-insurance,compensation and related benefits, revenue recognition, allowance for doubtfulaccounts, contingencies and litigation. The Partnership states these accounting policies in the notes to thefinancial statements and in relevant sections in this discussion andanalysis.  These estimates are based onthe information that is currently available to the Partnership and on various otherassumptions that management believes to be reasonable under thecircumstances.  Actual results couldvary from those estimates.

 

The Partnership believes thatthe following critical accounting policies affect significant judgments andestimates used in the preparation of it financial statements:

 

The Partnership maintains anallowance for doubtful accounts for estimated losses resulting from the failureof its customers to make required payments, which results in bad debtexpense.  Management determines the adequacyof this allowance by continually evaluating individual customer receivables,considering the customer’s financial condition, credit history and currenteconomic conditions.  If the financialcondition of customers were to deteriorate, or if a customer refuses to pay ordisputes any such payment, additional allowances may be required.

 

The Partnership maintains anaccrual for workers compensation claims to the extent that the Partnership’scurrent insurance policies will not cover such claims.  This accrual is included in other accruedliabilities in the accompanying balance sheet. Management determines the adequacy of the accrual by periodicallyevaluating the historical experience and projected trends related tooutstanding and potential workers compensation claims.  If such information indicates that theaccrual is over or understated, the Partnership will adjust the assumptionsutilized in the methodologies and reduce or provide for additional accrual asappropriate.

 

Retirement Benefits:  The Partnership sponsors a non-contributorydefined benefit pension plan for union employees.  Several statistical and other factors which attempt to anticipatefuture events are used in calculating the expense and liabilities related tothis plan.  These factors includeassumptions about the discount rate, expected return on plan assets, withdrawaland mortality rates and the rate of increase in compensation levels.  The actuarial assumptions used by thePartnership may differ materially from actual results due to changing marketand economic conditions, higher or lower withdrawal rates or longer or shortermortality of participants.  Thesedifferences may impact the amount of retirement benefit expense recorded by thePartnership in future periods.

 

The Partnership reviewslong-lived assets held and used, or held for sale for impairment annually orwhenever events or circumstances indicate that the carrying amount of an assetmay not be recoverable.  If anevaluation is required, the estimated undiscounted future cash flows associatedwith the asset are compared to the asset’s carrying amount to determine if animpairment charge is required.  Alllong-lived assets for which management has committed to a plan of disposal arereported at the lower of carrying amount or fair value.  Changes in projected cash flows generated byan asset based on new events or circumstances may indicate a change in fairvalue and require a new evaluation of recoverability of the asset.

 

19

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**Recently Issued Accounting Pronouncement**

 

The Partnership has applied therevised disclosure provisions of SFAS No. 132, “Employers’ Disclosure aboutPensions and other Postretirement Benefits”. The revisions to SFAS No. 132 were issued in December 2003, and requireadditional disclosures about the assets, obligations, cash flows and netperiodic benefit cost of defined benefit pension plans and other definedbenefit postretirement plans.  Thedisclosures that are required by SFAS No. 132 are included in Note (9).

 

**Legal Proceedings**

 

***MaunaLoa. ***ThePartnership is a party to five macadamia nut purchase contracts with Mauna Loa.Three of these contracts, one written in 1983 and two in 1986, require MaunaLoa to pay for all nuts delivered. Since the inception of these three contracts, Mauna Loa had always paidfor all nuts delivered. The other two nut purchase contracts were written in1989 and 1999 and allow for the deduction of unusable nuts in calculatingpayment due.

 

On October 31, 2000, a disputearose with Mauna Loa regarding the payment for nuts delivered by thePartnership during the year. In violation of the nut purchase contracts andpast practice, Mauna Loa deducted $908,000 for certain substandard nuts relatedto the 1983 and 1986 contracts. A demand letter was sent, litigation ensued anda motion for summary judgment was entered in May 2001 against Mauna Loa,awarding principal, interest and attorneys fees to the Partnership.

 

Settlement discussions followed thejudgment in order to avoid an appeal and further litigation. The Partnershipagreed to accept principal, interest and a portion of its legal fees along witha complete release by both parties.

 

**ITEM 7A.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The Partnership isexposed to market risks resulting from changes in interest rates.  The interest rates on the Partnership’sCredit Agreement, which are based on LIBOR (Farm Credit Discount Note Rate andthe Farm Credit Medium Term Note Rate), are adjusted periodically based on thePartnership’s election to fix interest rates for periods ranging from betweenthree months and five years.  As ofDecember 31, 2003, a one percent increase or decrease in the applicable rateunder the Credit agreement will result in an interest expense fluctuation ofapproximately $24,000.

 

**ITEM 7B.  CONTROLS AND PROCEDURES**

 

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

 

(b)  There have been no significant changes (including correctiveactions with regard to significant deficiencies or material weaknesses) in ourinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of the evaluation referenced in paragraph (a)above.

 

20

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**ITEM 8. FINANCIAL STATEMENTS**

 

**Index to Financial Statements**

 
| Report of Independent Auditors                                                              |   |   |
|---------------------------------------------------------------------------------------------|--------|--------|
|                                                                                        |   |   |
| Balance  Sheets, December 31, 2003 and 2002                                                 |   |   |
|                                                                                        |   |   |
| Income  Statements, for the Years Ended December 31, 2003, 2002, and 2001                   |   |   |
|                                                                                        |   |   |
| Statements of Partners’ Capital, for the Years Ended December 31,  2003, 2002 and 2001 |   |   |
|                                                                                        |   |   |
| Statements of Cash Flows for the Years Ended December 31, 2003, 2002  and 2001              |   |   |
|                                                                                        |   |   |
| Notes to Financial Statements                                                               |   |   |

 

21

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**REPORT OF INDEPENDENT AUDITORS**

 

To the Partners

ML Macadamia Orchards, L.P.

 

In our opinion, theaccompanying balance sheets and the related income statements, statements ofpartners’ capital and statements of cash flows present fairly, in all materialrespects, the financial position of ML Macadamia Orchards, L.P. at December 31,2003 and 2002, and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2003, in conformity withaccounting principles generally accepted in the United States of America.  These financial statements are theresponsibility of the Partnership’s management; our responsibility is toexpress an opinion on these financial statements based on our audits.  We conducted our audits in accordance withauditing standards generally accepted in the United States of America whichrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether 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,assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

**PricewaterhouseCoopers LLP**

 

Honolulu, Hawaii

February 27, 2004

 

22

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**MLMacadamia Orchards, L.P.**

**Balance Sheets**

(in thousands)

 
|                                                                                    |   | **December 31,** |   |
|-----------------------------------------------------------------------------------------|--------|------------------|--------|
|                                                                                    |   | **2003**         |   | **2002** |   |
| **Assets**                                                                              |   |             |   |   |   |
| Current assets                                                                          |   |             |   |   |   |
| Cash and cash equivalents                                                               |   | $                | 36     |   | $ | 31 |   |
| Accounts receivable                                                                     |   | 6,526            |   | 5,656 |   |
| Inventory of farming supplies                                                           |   | 141              |   | 158 |   |
| Other current assets                                                                    |   | 143              |   | 191 |   |
| Total current assets                                                                    |   | 6,846            |   | 6,036 |   |
| Land, orchards and equipment,  net                                                      |   | 53,201           |   | 55,746 |   |
| Intangible assets, net                                                                  |   | 22               |   | 21 |   |
| Total assets                                                                            |   | $                | 60,069 |   | $ | 61,803 |   |
|                                                                                    |   |             |   |   |   |
| **Liabilities  and partners’ capital**                                             |   |             |   |   |   |
| Current liabilities                                                                     |   |             |   |   |   |
| Current portion of long-term  debt                                                      |   | $                | 453    |   | $ | 473 |   |
| Short-term borrowings                                                                   |   | 400              |   | 800 |   |
| Accounts payable                                                                        |   | 493              |   | 400 |   |
| Cash distributions payable                                                              |   | 227              |   | 379 |   |
| Accrued payroll and benefits                                                            |   | 847              |   | 742 |   |
| Other current liabilities                                                               |   | 261              |   | 22 |   |
| Total current liabilities                                                               |   | 2,681            |   | 2,816 |   |
| Long-term debt                                                                          |   | 2,468            |   | 2,920 |   |
| Deferred income tax liability                                                           |   | 1,214            |   | 1,218 |   |
| Total liabilities                                                                       |   | 6,363            |   | 6,954 |   |
| Commitments and contingencies                                                           |   |             |   |   |   |
| Partners’ capital General  partner                                                 |   | 537              |   | 549 |   |
| Class A limited partners, no  par or assigned value, 7,500 units issued and outstanding |   | 53,169           |   | 54,300 |   |
| Total partners’ capital                                                            |   | 53,706           |   | 54,849 |   |
| Total liabilities and partners’  capital                                           |   | $                | 60,069 |   | $ | 61,803 |   |

 

*See accompanyingnotes to financial statements.*

 

23

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**MLMacadamia Orchards, L.P.**

**IncomeStatements**

(in thousands, except per unit data)

 
|                                                         |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Macadamia nut sales                                          |   | $        | 10,459 |     | $      | 10,336   |   | $ | 12,023 |   |
| Contract farming revenue                                     |   | 4,967    |   | 4,220    |   | 4,870    |   |
| Total revenues                                               |   | 15,426   |   | 14,556   |   | 16,893   |   |
| Cost of goods and services sold                              |   |     |   |     |   |     |   |
| Costs expensed for farming and  services                     |   | 11,660   |   | 11,048   |   | 11,427   |   |
| Depreciation and amortization                                |   | 2,563    |   | 2,556    |   | 2,547    |   |
| Other                                                        |   | —   |   | —   |   | 5        |   |
| Total cost of goods and  services sold                       |   | 14,223   |   | 13,604   |   | 13,979   |   |
| Gross income                                                 |   | 1,203    |   | 952      |   | 2,914    |   |
| General and administrative expenses                          |   |     |   |     |   |     |   |
| Costs expensed under management  contract with related party |   | 204      |   | 217      |   | 308      |   |
| Other                                                        |   | 957      |   | 1,030    |   | 1,348    |   |
| Total general and  administrative expenses                   |   | 1,161    |   | 1,247    |   | 1,656    |   |
| Operating income (loss)                                      |   | 42       |   | (295     | )      | 1,258    |   |
| Interest expense                                             |   | (203     | )      | (307     | )      | (433     | )      |
| Interest income                                              |   | 12       |   | 46       |   | 80       |   |
| Other income                                                 |   | 260      |   | 109      |   | 207      |   |
| Income (loss) before tax                                     |   | 111      |   | (447     | )      | 1,112    |   |
| Income tax expense                                           |   | (42      | )      | (33      | )      | (102     | )      |
| Net income (loss)                                            |   | $        | 69     |     | $      | (480     | )      | $ | 1,010 |   |
|                                                         |   |     |   |     |   |     |   |
| Net cash flow (as defined in  the Partnership Agreement)     |   | $        | 2,157  |     | $      | 1,592    |   | $ | 3,093 |   |
|                                                         |   |     |   |     |   |     |   |
| Net income (loss) per Class A  Unit                          |   | $        | 0.01   |     | $      | (0.06    | )      | $ | 0.13 |   |
|                                                         |   |     |   |     |   |     |   |
| Net cash flow per Class A Unit                               |   | $        | 0.28   |     | $      | 0.21     |   | $ | 0.41 |   |
|                                                         |   |     |   |     |   |     |   |
| Cash distributions per Class A  Unit                         |   | $        | 0.16   |     | $      | 0.20     |   | $ | 0.20 |   |
|                                                         |   |     |   |     |   |     |   |
| Class A Units outstanding                                    |   | 7,500    |   | 7,500    |   | 7,500    |   |

 

***Seeaccompanying notes to financial statements.***

 

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**MLMacadamia Orchards, L.P.**

**Statements ofPartners’ Capital**

(in thousands)

 
|                                            |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                            |   |     |   |     |   |     |   |
| Partners’ capital at beginning  of period: |   |     |   |     |   |     |   |
| General partner                                 |   | $        | 549    |     | $      | 569      |   | $ | 574 |   |
| Class A limited partners                        |   | 54,300   |   | 56,275   |   | 56,775   |   |
|                                            |   | 54,849   |   | 56,844   |   | 57,349   |   |
|                                            |   |     |   |     |   |     |   |
| Allocation of net income  (loss):               |   |     |   |     |   |     |   |
| General partner                                 |   | 1        |   | (5       | )      | 10       |   |
| Class A limited partners                        |   | 68       |   | (475     | )      | 1,000    |   |
|                                            |   | 69       |   | (480     | )      | 1,010    |   |
|                                            |   |     |   |     |   |     |   |
| Cash distributions:                             |   |     |   |     |   |     |   |
| General partner                                 |   | 13       |   | 15       |   | 15       |   |
| Class A limited partners                        |   | 1,199    |   | 1,500    |   | 1,500    |   |
|                                            |   | 1,212    |   | 1,515    |   | 1,515    |   |
|                                            |   |     |   |     |   |     |   |
| Partners’ capital at end of  period:       |   |     |   |     |   |     |   |
| General partner                                 |   | 537      |   | 549      |   | 569      |   |
| Class A limited partners                        |   | 53,169   |   | 54,300   |   | 56,275   |   |
|                                            |   | $        | 53,706 |     | $      | 54,849   |   | $ | 56,844 |   |

 

***Seeaccompanying notes to financial statements.***

 

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**MLMacadamia Orchards, L.P.**

**Statements ofCash Flows**

(in thousands)

 
|                                                                                      |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Cash flows from operating  activities:                                                    |   |     |   |     |   |     |   |
| Cash received for goods and  services                                                     |   | $        | 15,433 |     | $      | 15,841   |   | $ | 15,854 |   |
| Cash paid to suppliers and  employees                                                     |   | (12,973  | )      | (13,414  | )      | (13,264  | )      |
| Interest received                                                                         |   | 5        |   | 46       |   | 80       |   |
| Interest paid                                                                             |   | (203     | )      | (307     | )      | (433     | )      |
| Net cash provided by operating  activities                                                |   | 2,262    |   | 2,166    |   | 2,237    |   |
|                                                                                      |   |     |   |     |   |     |   |
| Cash flows from investing  activities:                                                    |   |     |   |     |   |     |   |
| Capital expenditures                                                                      |   | (20      | )      | (93      | )      | (75      | )      |
| Net cash used in investing  activities                                                    |   | (20      | )      | (93      | )      | (75      | )      |
|                                                                                      |   |     |   |     |   |     |   |
| Cash flows from financing  activities:                                                    |   |     |   |     |   |     |   |
| Proceeds from drawings on line  of credit                                                 |   | 3,800    |   | 8,200    |   | 6,700    |   |
| Repayment of long term debt                                                               |   | (400     | )      | (400     | )      | (400     | )      |
| Repayment of line of credit                                                               |   | (4,200   | )      | (8,600   | )      | (6,400   | )      |
| Capital lease payments                                                                    |   | (73      | )      | (84      | )      | (61      | )      |
| Cash distributions paid                                                                   |   | (1,364   | )      | (1,515   | )      | (1,818   | )      |
| Net cash provided by (used in)  financing activities                                      |   | (2,237   | )      | (2,399   | )      | (1,979   | )      |
|                                                                                      |   |     |   |     |   |     |   |
| Net increase (decrease) in cash                                                           |   | 5        |   | (326     | )      | 183      |   |
| Cash at beginning of period                                                               |   | 31       |   | 357      |   | 174      |   |
| Cash at end of period                                                                     |   | $        | 36     |     | $      | 31       |   | $ | 357 |   |
|                                                                                      |   |     |   |     |   |     |   |
| Reconciliation of net income  (loss) to net cash provided by operating activities:        |   |     |   |     |   |     |   |
| Net income (loss)                                                                         |   | $        | 69     |     | $      | (480     | )      | $ | 1,010 |   |
| Adjustments to reconcile net  income (loss) to net cash provided by operating activities: |   |     |   |     |   |     |   |
| Depreciation and amortization                                                             |   | 2,563    |   | 2,556    |   | 2,547    |   |
| (Increase) decrease in accounts  receivable                                               |   | (869     | )      | 830      |   | (1,892   | )      |
| Decrease in inventories                                                                   |   | 17       |   | —   |   | 11       |   |
| Increase in other current  assets                                                         |   | 48       |   | (142     | )      | (21      | )      |
| (Increase) decrease in other  assets                                                      |   | —   |   | 48       |   | 70       |   |
| Increase (decrease) in accounts  payable                                                  |   | 93       |   | (66      | )      | 235      |   |
| Increase (decrease) in accrued  payroll                                                   |   | 105      |   | (117     | )      | (35      | )      |
| Increase (decrease) in current  liabilities                                               |   | 240      |   | (465     | )      | 292      |   |
| Deferred income tax expense  (credit)                                                     |   | (4       | )      | 2        |   | 20       |   |
| Total adjustments                                                                         |   | 2,193    |   | 2,646    |   | 1,227    |   |
| Net cash provided by operating  activities                                                |   | $        | 2,262  |     | $      | 2,166    |   | $ | 2,237 |   |

 

***Seeaccompanying notes to financial statements.***

 

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 **ML Macadamia Orchards, L.P.**

 

# ***Notesto Financial Statements***

 

**(1) OPERATIONS AND OWNERSHIP**

 

ML MacadamiaOrchards, L.P. (the “Partnership”) owns and farms 4,169 tree acres of macadamiaorchards on the island of Hawaii. Once the nuts are harvested, the Partnershipsells them to another entity, which processes and markets the finishedproducts.  The Partnership farms approximately2,645 additional acres of macadamia orchards on Hawaii for other orchardowners.

 

The Partnership is owned99% by limited partners and 1% by the managing general partner, ML Resources,Inc. (“MLR”).  Until July 31, 2001, MLRwas a wholly-owned subsidiary of C. Brewer and Company, Limited (“CBCL”), whoseparent company is Buyco, Inc. (“Buyco”). On August 1, 2001, all of the stock ofMLR was sold to D. Buyers Enterprises, LLC (“DBE”), an entity whose majorityowner is J.W.A. Buyers, who also serves as the chairman of the board of CBCLand Buyco.

 

Limited partner interestsare represented by Class A Units, which are evidenced by depositary receiptsthat trade publicly and are listed on the New York Stock Exchange.  Mauna Loa Orchards, L.P., an affiliate ofthe general partner until August of 2001, held 30,000 Class A Units at December31, 2001 and sold these units in May and June of 2002.

 

**(2) SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

**(a)****                 Cashand Cash Equivalents. **Cash and cashequivalents include unrestricted demand deposits with banks and all highlyliquid deposits with an original maturity of less than three months.  The cash equivalents are not protected byfederal deposit insurance.

 

**(b)****                 FinancialInstruments.  **The fair value of allfinancial instruments approximates the carrying value, as the majority of thefinancial instruments have fairly short durations until maturity, or the marketand risk factors associated with the instruments have not changed.

 

**(c)****                 FarmingCosts.** In accordance with industry practice in Hawaii, orchard maintenanceand harvesting costs for commercially producing macadamia orchards are chargedagainst 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 depreciationand amortization.  Net farming costs forany “developing” orchards are capitalized on the balance sheet until revenuesfrom that orchard exceed expenses for that orchard (or nine years afterplanting, if earlier).

 

Depreciationof orchards and other equipment is reported on a straight-line basis over theestimated useful lives of the assets (40 years for orchards and between 5 and12 years for other equipment).  A 5%residual value is assumed for orchards. The macadamia orchards acquired in 1986 situated on leased land arebeing amortized on a straight-line basis over the terms of the leases(approximately 33 years from the inception of the Partnership) with no residualvalue assumed.  The macadamia orchardsacquired in 1989 situated on leased land are being amortized on a straight-linebasis over a 40 year period (the terms of these leases exceed 40 years) with noresidual value assumed.  For income taxreporting, depreciation is calculated under the straight line method overAlternative Depreciation System recovery periods.

 

**(e)****                 IncomeTaxes.**  The accompanying incomestatements do not include a provision for corporate income taxes, as the incomeof the Partnership is not taxed directly; rather, the Partnership’s taxattributes are included in the individual tax returns of its partners.  Neither the Partnership’s financial

 

27

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reporting income nor the cash distributions to unit holders can be usedas a substitute for the detailed tax calculations which the Partnership mustperform annually for its partners.

 

The Partnership is subject to a gross income tax as aresult of its election to continue to be taxed as a partnership rather than tobe taxed as a corporation, as allowed by the Taxpayer Relief Act of 1997.  This tax is calculated at 3.5% onpartnership gross income (net revenues less cost of goods sold) beginning in1998.

 

Deferred taxliabilities are recognized for the future tax consequences attributable todifferences between the financial reporting and tax reporting basis of assetsand liabilities.

 

**(f)****           ****Revenue. **Macadamia nut sales are recognized whennuts are harvested and delivered to the buyer. Contract farming revenue and administrative services revenues arerecognized in the period that such services are provided.

 

**(g)****        ****Pension Benefit Costs.**  The actuarialmethod used for financial accounting purposes is the projected unit creditmethod.

 

**(h)****        ****Estimates. **The preparation of financial statementsin conformity with generally accepted accounting principles requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates.

 

**(i)****           ****Net Income Per Class A Unit.**  Net incomeper Class A Unit is calculated by dividing 99% of Partnership net income by theaverage number of Class A Units outstanding for the period.

 

**(3) SEGMENT INFORMATION**

 

The Partnership has tworeportable segments, the owned-orchard segment and the farming segment, whichare organized on the basis of revenues and assets.  The owned-orchard segment derives its revenues from the sale ofmacadamia nuts grown in orchards owned or leased by the Partnership.  The farming segment derives its revenuesfrom the farming of macadamia orchards owned by other growers.  It also farms those orchards owned by thePartnership.

 

Management evaluates theperformance of each segment on the basis of operating income.  The Partnership accounts for inter segmentsales and transfers at cost.  Such intersegment sales and transfers are eliminated in consolidation.

 

The Partnership’s reportablesegments are distinct business enterprises that offer different products orservices.  Revenues from theowned-orchard segment are subject to long-term nut purchase contracts and tendto vary from year to year due to changes in the calculated nut price per poundand pounds produced.  The farmingsegment’s revenues are based on long-term farming contracts which generate afarming profit based on a percentage of farming cost or based on a fixed feeper acre and tend to be less variable than revenues from the owned-orchardsegment.

 

28

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The following is a summary ofeach reportable segment’s operating income and the segment’s assets as of andfor the period ended December 31, 2003, 2002 and 2001.

 

Segment Reporting for the Year ended December 31, 2003

(in thousands)

 

|                                     |   | **Owned  Orchards** |   | **Contract  Farming** |   | **Inter segment  Elimination** |   | **Total** |   |
|------------------------------------------|--------|---------------------|--------|-----------------------|--------|--------------------------------|--------|-----------|--------|
|                                     |   |                |   |                  |   |                           |   |      |   |
| Revenues                                 |   | $                   | 10,459 |                  | $      | 10,778                         |   | $         | (5,811 | ) | $ | 15,426 |   |
| Composition of Inter-segment  revenues   |   | —              |   | 5,811                 |   | —                         |   | 5,811     |   |
| Operating income (loss)                  |   | (156                | )      | 198                   |   | —                         |   | 42        |   |
| Depreciation expense                     |   | 1,644               |   | 919                   |   | —                         |   | 2,563     |   |
| Segment assets                           |   | 55,070              |   | 4,999                 |   | —                         |   | 60,069    |   |
| Expenditures for property and  equipment |   | —              |   | 20                    |   | —                         |   | 20        |   |
|                                          |        |                     |        |                       |        |                                |        |           |        |  |  |  |  |

 

Segment Reporting for the Year ended December 31, 2002

(in thousands)

 

|                                     |   | **Owned  Orchards** |   | **Contract  Farming** |   | **Inter segment  Elimination** |   | **Total** |   |
|------------------------------------------|--------|---------------------|--------|-----------------------|--------|--------------------------------|--------|-----------|--------|
|                                     |   |                |   |                  |   |                           |   |      |   |
| Revenues                                 |   | $                   | 10,336 |                  | $      | 9,948                          |   | $         | (5,728 | ) | $ | 14,556 |   |
| Composition of Inter-segment  revenues   |   | —              |   | 5,728                 |   | —                         |   | 5,728     |   |
| Operating income (loss)                  |   | (254                | )      | (41                   | )      | —                         |   | (295      | )      |
| Depreciation expense                     |   | 1,644               |   | 912                   |   | —                         |   | 2,556     |   |
| Segment assets                           |   | 56,972              |   | 4,831                 |   | —                         |   | 61,803    |   |
| Expenditures for property and  equipment |   | —              |   | 93                    |   | —                         |   | 93        |   |
|                                          |        |                     |        |                       |        |                                |        |           |        |  |  |  |  |

 

29

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Segment Reporting for the Year ended December 31, 2001

(in thousands)

 

|                                     |   | **Owned  Orchards** |   | **Contract  Farming** |   | **Inter segment  elimination** |   | **Total** |   |
|------------------------------------------|--------|---------------------|--------|-----------------------|--------|--------------------------------|--------|-----------|--------|
|                                     |   |                |   |                  |   |                           |   |      |   |
| Revenues                                 |   | $                   | 12,023 |                  | $      | 11,744                         |   | $         | (6,874 | ) | $ | 16,893 |   |
| Composition of Inter segment  revenues   |   | —              |   | 6,874                 |   | —                         |   | 6,874     |   |
| Operating income (loss)                  |   | 1,064               |   | 194                   |   | —                         |   | 1,258     |   |
| Depreciation expense                     |   | 1,644               |   | 903                   |   | —                         |   | 2,547     |   |
| Segment assets                           |   | 58,040              |   | 7,289                 |   | —                         |   | 65,329    |   |
| Expenditures for property and  equipment |   | 75                  |   | —                |   | —                         |   | 75        |   |
|                                          |        |                     |        |                       |        |                                |        |           |        |  |  |  |  |

 

**(4) RELATED PARTY TRANSACTIONS**

 

**(a) Nut Purchase Contracts.**  The Partnership is a party to five nutpurchase contracts with Mauna Loa Macadamia Nut Corporation (“Mauna Loa”).  Mauna Loa was a wholly-owned subsidiary ofC. Brewer and Company, Ltd. (“CBCL”) until its sale on September 29, 2000 tothe Shansby Group, an unrelated party. CBCL was the sole owner of ML Resources, Inc, the Partnership’s generalpartner until August 1, 2001. The five nut purchase contracts cover all nuts producedby the orchards acquired in June 1986, December 1986, October 1989, September1991, and May 2000 respectively.  Thefirst two contracts run for 20 years, while the third contract runs for 30years and also provides for the exclusion of unusable nuts from those purchasedby Mauna Loa.  The first three contractsare identical in all other material respects. The fourth contract was acquired by assignment with the purchase of theSeptember 1991 orchard and expired June 30, 2003.  A new contract was negotiated and replaces the fourth contract.  The new fourth contract has a fixed nut priceof $0.60 per wet in shell (WIS) @25% pound with adjustment if usable nutsdeduction is less than 10% or greater than 13%.  The fifth contract was acquired by assignment with the purchaseof the May 2000 orchards and expires in 2006. The fifth contract is similar to the first three contracts and alsoprovides for the exclusion of unusable nuts. The first three contracts use a pricing formula based 50% on a two-yeartrailing average of the macadamia nut price published annually by the U.S.Department of Agriculture (“USDA”) and 50% on Mauna Loa’s “netback component”.The netback component is calculated by subtracting Mauna Loa’s processing andmarketing costs per pound and a “capital charge” of 20% from its nut revenuesper pound. The fifth contract uses only the USDA two-year trailing average todetermine its nut price.  The nut pricepaid to the Partnership under the first two contracts was $0.4795 for 2001,$0.4655 in 2002, and $0.4816 in 2003. The average nut price paid to the Partnership under the third contractwas $0.4750 for 2001, $0.4610 in 2002, and $0.4789 in 2003. The average nutprice paid to the Partnership under the fourth nut price contract was $0.5119for 2001, $0.4920 for 2002, and $0.6000 in 2003.  The nut price paid to the Partnership under the fifth contractwas $0.6222 in 2001, $0.5940 for 2002, and $0.5660 in 2003.

 

**(b) Husking Activities**Huskingactivities for the Keaau and Mauna Kea orchards are performed at Mauna Loa’sKeaau facility.  The Partnership hasexercised its option to continue leasing the husking facility from Mauna Loathrough December 31, 2006. Reimbursements made to Mauna Loa were $443,000 in 2001, $531,000 in2002, and $522,000 in 2003.

 

30

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**(c) Management Costs and Fee.**  The Partnership Agreement provides themanaging general partner reimbursement of administrative costs (which consistprimarily of compensation costs, board of directors fees, insurance costs andoffice expenses) incurred under the agreement as well as a management fee equalto two percent of the Partnership’s operating cash flow (as defined).   Those reimbursable costs totaled $247,000in 2001, $180,000 in 2002, and $160,000 in 2003.  The managing general partner earned a management fee of $65,000in 2001, $32,000 in 2002, and $44,000 in 2003.

 

In addition to amanagement fee, the managing general partner is entitled, under the existingPartnership Agreement, to receive an annual incentive fee equal to 0.5% of theaggregate fair market value (as defined) of the Class A Units for the precedingcalendar year provided that net cash flow (as defined) for the precedingcalendar year exceeds specified levels. No incentive fee was earned in 2001, 2002 or 2003.

 

**(d) Stabilization Payments.**  In December 1986, the Partnership acquired a266-acre orchard that was several years younger than its other orchards.  Because of the relative immaturity of thenewer orchard, its productivity (and therefore its cash flow) was expected tobe correspondingly lower for the first several years than for the other olderorchards.

 

Accordingly, the sellerof this orchard (KACI) agreed to make cash stabilization payments to thePartnership for each year through 1993 in which the cash flow (as defined) fromthis orchard fell short of a target cash flow level of $507,000.  Stabilization payments for a given year werelimited to the lesser of the amount of the shortfall or a maximum paymentamount.

 

The Partnership accountedfor stabilization payments (net of general excise tax) as a reduction in thecost basis of this orchard.  As aresult, the payments will be reflected in the Partnership’s net income ratablythrough 2019 as a reduction to depreciation for this orchard.

 

In return, the Partnershipis obligated to pay KACI 100% of any year’s cash flow from this orchard inexcess of the target cash flow as additional percentage rent until theaggregate amount of additional percentage rent equals 150% of the total amountof stabilization payments previously received. Thereafter, the Partnership is obligated to pay KACI 50% of thisorchard’s cash flow in excess of the target cash flow as additional incentiverent.  No additional rent was due in2001, 2002, or 2003.

 

**(e) Cash Flow Warranty Payments**. In October 1989, the Partnershipacquired 1,040 acres of orchards that were several years younger on averagethan the Partnership’s other orchards. Their productivity (and therefore their cash flow) was expected to belower for the first several years than for the Partnership’s older orchards.

 

Accordingly, the sellersof these orchards (subsidiaries of CBCL) agreed to make cash flow warrantypayments to the Partnership for each year 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 limitedto the lesser of the amount of the shortfall or a maximum payment amount.

 

The Partnership accountedfor cash flow warranty payments as reductions in the cost basis of the orchards.  As a result, these payments will bereflected in the Partnership’s net income ratably through 2030 as reductions todepreciation for these orchards.

 

**(f) Management Services Contract. **ThePartnership entered into a management services contract with CBCL effective May2000, wherein CBCL provided insurance and risk management, labor agreementadvice, workers’ compensation case assistance, consultation with CBCL executivestaff and other areas of management to the Partnership.  This contract replaced previous contractsbetween CBCL and the

 

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Managing Partner and CBCLand KACI and MKACI.  The contractprovided for a fee payable to CBCL of $100,000 per year.  CBCL was paid a fee of $75,000 in 2001.  The contract was terminated after thepurchase of the stock of MLR by DBE on August 1, 2001.  The Partnership provides administrativeservices to DBE for which it was compensated $94,000 in 2002 and $98,000 in2003.

 

**(g) Office Lease. **Since September 2001, the Partnership hasleased approximately 4000 square feet of office space in Hilo for itsaccounting staff through the General Partner, which is owned by DBE.

 

**(5) CASH FLOW PERFORMANCE**

 

Cash flowperformance (based on definitions used in the Partnership Agreement) for thepast three years is shown below (000’s):

 
|                                |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Gross revenues                      |   | $        | 15,698 |     | $      | 14,711   |   | $ | 17,180 |   |
| Less:                               |   |     |   |     |   |     |   |
| Farming costs                       |   | 11,660   |   | 11,048   |   | 11,435   |   |
| Administrative costs                |   | 1,161    |   | 1,248    |   | 1,656    |   |
| Payments of principal and  interest |   | 676      |   | 791      |   | 894      |   |
| Other                               |   | —   |   | —   |   | 36       |   |
| Operating cash flow                 |   | 2,201    |   | 1,624    |   | 3,159    |   |
| Less:                               |   |     |   |     |   |     |   |
| Management fee                      |   | 44       |   | 32       |   | 66       |   |
| Net cash flow                       |   | $        | 2,157  |     | $      | 1,592    |   | $ | 3,093 |   |

 

**(6) LAND, ORCHARDS AND EQUIPMENT**

 

Land, orchards andequipment, stated at cost, consisted of the following at December 31, 2003 and2002 (000’s):

 
|                                            |   | **2003** |   | **2002** |   |
|-------------------------------------------------|--------|----------|--------|----------|--------|
| Land                                            |   | $        | 8,168  |     | $      | 8,168 |   |
| Improvements                                    |   | 1,074    |   | 1,074    |   |
| Machinery and equipment                         |   | 4,878    |   | 4,779    |   |
| Irrigation well and equipment                   |   | 1,155    |   | 1,155    |   |
| Producing orchards                              |   | 67,267   |   | 67,267   |   |
| Capital leases                                  |   | 286      |   | 367      |   |
|                                            |   |     |   |     |   |
| Land, orchards and equipment (gross)            |   | 82,828   |   | 82,810   |   |
|                                            |   |     |   |     |   |
| Less accumulated depreciation and  amortization |   | 29,627   |   | 27,064   |   |
|                                            |   |     |   |     |   |
| Land, orchards and equipment (net)              |   | $        | 53,201 |     | $      | 55,746 |   |

 

The Partnership’s interest in trees situatedon certain leased macadamia orchard properties are subject to repurchase at theoption of the lessors.  Such repurchaseoptions grant the lessors the right to purchase all or a portion of these treesafter June 30, 2019, at fair market value, as defined in the respective farminglease agreements.  If the repurchaseoptions are not exercised prior to expiration of the lease agreements and thelessors do not offer to extend the lease agreements at the then current marketlease rates, the lessors are required to repurchase these trees at fair marketvalue at lease expiration.  The lessorswill be released from their repurchase obligation in the event that the Partnershipdeclines to accept an extension offer from the lessors at fair market leaserates.

 

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**(7) SHORT-TERM AND LONG-TERM CREDIT**

 

At December 31, 2003 and 2002, thePartnership’s long-term debt comprises (000’s):

 
|            |   | **2003** |   | **2002** |   |
|-----------------|--------|----------|--------|----------|--------|
|            |   |     |   |     |   |
| Term debt       |   | $        | 2,800  |     | $      | 3,200 |   |
|            |   |     |   |     |   |
| Other           |   | 121      |   | 193      |   |
|            |   |     |   |     |   |
|            |   | 2,921    |   | 3,393    |   |
|            |   |     |   |     |   |
| Current portion |   | 453      |   | 473      |   |
|            |   |     |   |     |   |
|            |   | $        | 2,468  |     | $      | 2,920 |   |

 

**Credit Agreement.** On May 2, 2000 the Partnership entered into anew credit agreement with Pacific Coast Farm Credit Services, ACA (currentlyAmerican AgCredit Capital Markets) comprised of a $5 million revolving line ofcredit and a $4 million promissory note.

 

The line of credit expires onMay 1, 2004, however, the lender has agreed to extend the line of creditagreement under comparable terms through 2008 or 2009.  Drawings on the line of credit bear interestat the prime lending rate.  From andafter the first anniversary date, the Partnership is required to pay a facilityfee of 0.175% to 0.25% per annum, depending on certain financial rations on thedaily unused portion of credit.  ThePartnership, at its option, may make prepayments without penalty.

 

Drawings outstanding on theline of credit at December 31, 2003 amounted to $400,000, with interest at4.25%.  Drawings outstanding at December31, 2002 amounted to $800,000, with interest at 4.25% and at December 31, 2001amounted to $1.2 million with interest at 5.0%.

 

At December 31, 2003, theoutstanding balance on the promissory note amounted to $2.8 million.  The note is scheduled to mature in 2010 andbears interest at rates ranging from 3.23% to 7.77%.  Principal payments are due annually on May 2 in the amount of$400,000.

 

Both the revolving credit loanand the term debt are collateralized by all personal property assets of thePartnership.  The credit agreementcontains certain restrictions associated with partner distributions, furtherindebtedness, sales of assets, and maintenance of certain financialminimums.  Significant restrictivefinancial covenants consist of the following:

1.               Minimumworking capital of $2.5 million.

2.               Minimumcurrent ration of 1.5 to 1.

3.               Cumulativecash distributions beginning January 1, 2000 cannot exceed the total ofcumulative net cash flow beginning January 1, 2000 plus a base amount of $3million.

4.               Minimumtangible net worth of $57.5 million (reduced by the amount of allowed cashdistributions over net income).

5.               Maximumration of funded debt to capitalization of 20%.

6.               Minimumdebt coverage ration of 2.5 to 1.

 

At December 31, 2003, thePartnership’s working capital was $4.8 million and its current ration 2.14 to1.  The Partnership was in compliancewith all covenants of the Credit Agreement at December 31, 2003

 

**Capital and Operating Leases.**ThePartnership has capital and operating leases for equipment and operating leasesfor land.  The capital and operating leasesfor equipment are four to five year leases. Operating leases have been entered into by the Partnership during thelast two years for equipment to allow the Partnership the ability to ensure ithas the most technologically current equipment available.

 

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**Land Leases.**Thepartnership leases the land underlying 1,948 acres of its orchards underlong-term operating leases.  Each of theland leases provides for additional lease payments based on USDA-reportedmacadamia nut price levels.  Thosecontingent lease payments totaled $11,000 in 2001, $16,000 in 2002, and $14,000in 2003.  Total lease rent for alloperating leases was $143,000 in 2001, $142,000 in 2002, and $157,000 in 2003.

 
| **Contractual Obligations**                                                     |   | **Total** |   | **Payments  Less Than 1 Year** |   | **Due by  1-3 Years** |   | **Period  3-5 Years** |   | **More Than  5  Years** |   |
|---------------------------------------------------------------------------------|--------|-----------|--------|--------------------------------|--------|-----------------------|--------|-----------------------|--------|-------------------------|--------|
| Long-Term Debt                                                                  |   | 2,800,000 |   | 400,000                        |   | 800,000               |   | 800,000               |   | 800,000                 |   |
| Capital Lease Obligations                                                       |   | 121,000   |   | 53,000                         |   | 68,000                |   | —                |   | —                  |   |
| Operating Leases                                                                |   | 4,172,000 |   | 308,000                        |   | 575,000               |   | 535,000               |   | 2,754,000               |   |
| Purchase Obligations                                                            |   | —    |   | —                         |   | —                |   | —                |   | —                  |   |
| Other Long-Term Liabilities off The  Registrant’s Balance Sheet under GAAP |   | —    |   | —                         |   | —                |   | —                |   | —                  |   |
| Total                                                                           |   | 7,093,000 |   | 761,000                        |   | 1,443,000             |   | 1,335,000             |   | 3,554,000               |   |

 

**(8) INCOME TAXES**

 

The components ofincome tax expense for the years ended December 31, 2003, 2002 and 2001 were asfollows (000’s):

 

|              |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------|--------|----------|--------|----------|--------|----------|--------|
| Currently payable |   | $        | 46     |     | $      | 35       |   | $ | 82 |   |
| Deferred          |   | (4       | )      | (2       | )      | 20       |   |
|              |   | $        | 42     |     | $      | 33       |   | $ | 102 |   |

 

The provision forincome taxes equates to the 3.5% federal tax rate applied to gross income forthe years ended December 31, 2003, 2002 and 2001:

 

The components ofthe net deferred tax liability reported on the balance sheet as of December 31,2003 and 2002 are as follows (000’s):

 

|                                                                                                                                                          |   | **2003** |   | **2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Deferred tax liabilities:                                                                                                                                     |   |     |   |     |   |
| Financial statement bases of  land, orchards, inventory and equipment is greater than tax bases                                                               |   | $        | 671    |     | $      | 677 |   |
| Financial statement bases of  capitalized leases, long- term debt on capitalized leases and interest  expense on capitalized leases is greater than tax bases |   | 21       |   | 25       |   |
| Excess of tax depreciation over  financial statement depreciation                                                                                             |   | 522      |   | 516      |   |
|                                                                                                                                                          |   | $        | 1,214  |     | $      | 1,218 |   |

 

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**(9) PENSION PLAN**

 

The Company established apension plan in conjunction with the acquisition of farming operations on May1, 2000.  The plan covers employees thatare members of a union bargaining unit and the projected benefit obligation wasassumed from the previous employer.

 

The Company’s funding policy isto contribute an amount to the plan sufficient to meet the minimum fundingrequirements set forth in the Employee Retirement Income Security Act of 1974.

 

The components of net pensioncost for the years ended December 31, 2003, 2002, and 2001 were as follows(000’s):

 
|                                                    |   | **2003** |   | **2002** |   | **2001** |   |
|---------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Service cost                                            |   | $        | 61     |     | $      | 52       |   | $ | 50 |   |
| Interest cost                                           |   | 16       |   | 13       |   | 11       |   |
| Expected return on assets                               |   | (12      | )      | (6       | )      | (3       | )      |
| Recognition of net loss or (gain) from  earlier periods |   | —   |   | —   |   | 1        |   |
| Amortization of unrecognized prior service  cost        |   | 7        |   | 7        |   | 7        |   |
|                                                    |   |     |   |     |   |     |   |
|                                                    |   | $        | 72     |     | $      | 66       |   | $ | 66 |   |

 

The following reconciles thechanges in the pension benefit obligation and plan assets for the years endedDecember 31, 2003, 2002, 2001 to the funded status of the plan and the amountsrecognized in the balance sheets at December 31, 2003, 2002, 2001. (000’s)

 
|                                                 |   | **2003** |   | **2002** |   | **2001** |   |
|------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Change in projected benefit  obligation:             |   |     |   |     |   |     |   |
| Projected benefit obligation at beginning  of year   |   | $        | 277    |     | $      | 191      |   | $ | 153 |   |
| Service cost                                         |   | 60       |   | 52       |   | 50       |   |
| Interest cost                                        |   | 17       |   | 14       |   | 11       |   |
| Actuarial (gain) or loss                             |   | 11       |   | 27       |   | (20      | )      |
| Benefits paid                                        |   | (8       | )      | (7       | )      | (3       | )      |
|                                                 |   |     |   |     |   |     |   |
| Projected benefit obligation at end of year          |   | 357      |   | 277      |   | 191      |   |
|                                                 |   |     |   |     |   |     |   |
| Change in plan assets:                               |   |     |   |     |   |     |   |
| Fair value of plan assets at beginning of  year      |   | 122      |   | 31       |   | 30       |   |
| Actual return on plan assets                         |   | 13       |   | 4        |   | 1        |   |
| Employer contribution                                |   | 42       |   | 94       |   | 3        |   |
| Benefits paid                                        |   | (8       | )      | (7       | )      | (3       | )      |
|                                                 |   |     |   |     |   |     |   |
| Fair value of plan assets at end of year             |   | 169      |   | 122      |   | 31       |   |
|                                                 |   |     |   |     |   |     |   |
| Funded status                                        |   | (188     | )      | (155     | )      | (160     | )      |
| Unrecognized prior service cost                      |   | 75       |   | 82       |   | 89       |   |
| Unrecognized net loss                                |   | 45       |   | 34       |   | 5        |   |
|                                                 |   |     |   |     |   |     |   |
| Net amount recognized                                |   | $        | (68    | )        | $      | (39      | )      | $ | (66 | ) |
|                                                 |   |     |   |     |   |     |   |
| Amounts recognized in the balance sheets consist of: |   |     |   |     |   |     |   |
|                                                 |   |     |   |     |   |     |   |
| Accrued pension liability                            |   | (72      | )      | (39      | )      | (66      | )      |
| Intangible asset                                     |   | 4        |   | —   |   | —   |   |
|                                                 |   |     |   |     |   |     |   |
| Net amount recognized                                |   | $        | (68    | )        | $      | (39      | )      | $ | (66 | ) |

 

35

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The accumulated benefit obligation at December31, 2003, 2002, and 2001 amounted to $241,000, $153,000 and $87,000,respectively.  During 2003, theprojected benefit obligation increased by $80,000 and the accumulated benefitobligation increased by $88,000.  AtDecember 31, 2003 the accumulated benefit obligation related to thePartnership’s pension plan exceeded the fair value of the pension plan assetsby $72,000.

 

U.S. pension accounting standards require therecognition of a minimum liability equal to the excess, if any, of theaccumulated benefit obligation over plan assets.  At December 31, 2003, the Partnership recognized an additionalminimum liability of $4,000 because the liability recognized for accruedpension cost was less than the minimum liability.  The computation of the required minimum liability and theadditional minimum liability at December 31, 2003 is shown below:

 
|                                          |   | **2003** |   |
|-----------------------------------------------|--------|----------|--------|
|                                          |   |     |   |
| Accumulated benefit obligation                |   | $        | 241    |   |
| Fair value of plan assets                     |   | 169      |   |
| Required minimum liability                    |   | 72       |   |
| Liability recognized for accrued benefit cost |   | 68       |   |
|                                          |   |     |   |
| Additional minimum liability                  |   | $        | 4      |   |

 

There was no additional minimum liability atDecember 31, 2002 or 2001 because the liability recognized for accrued benefitcost exceeded the required minimum liability.

 

Experience gains and losses are amortizedover the average future service period of employees.

 

The weightedaverage actuarial assumptions used to determine the pension benefit obligationsat December 31, 2003, 2002 and 2001 and the net periodic pension cost for theyears then ended are as follows:

 
|                          |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Pension benefit obligation:   |   |     |   |     |   |     |   |
| Discount rate                 |   | 6.00     | %      | 6.50     | %      | 7.25     | %      |
| Compensation increases        |   | 2.00     | %      | 2.00     | %      | 2.00     | %      |
|                          |   |     |   |     |   |     |   |
| Net periodic pension cost:    |   |     |   |     |   |     |   |
| Discount rate                 |   | 6.50     | %      | 7.25     | %      | 7.25     | %      |
| Compensation increases        |   | 2.00     | %      | 2.00     | %      | 2.00     | %      |
| Return on assets for the year |   | 8.50     | %      | 9.00     | %      | 9.00     | %      |

 

The expectedlong-term rate of return on plan assets was based primarily on historicalreturns as adjusted for the plan’s current investment allocation strategy.

 

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The Partnership employs aninvestment strategy whereby the assets in our portfolio are evaluated tomaintain the desired target asset mix. The funds are invested in stock mutual funds, fixed income mutual fundsand money market funds.  Evaluation ofthe actual asset mix is evaluated on a quarterly basis and adjusted if requiredto maintain the desired target mix. Therefore, the actual asset allocation does not vary significantly fromthe targeted asset allocation

 

The plan’s asset allocationpercentages at December 31, 2003 and 2002 were as follows:

 
|                      |   | **2003** |   | **2002** |   |
|---------------------------|--------|----------|--------|----------|--------|
| Pooled fixed income funds |   | 87.81    | %      | 67.21    | %      |
| Money market funds        |   | 12.20    | %      | 0.00     | %      |
| Cash and equivalents      |   | 0.00     | %      | 32.79    | %      |
| Total                     |   | 100.00   | %      | 100.00   | %      |

 

The Partnershipexpects to contribute approximately $18,000 to the plan for the year endedDecember 31, 2003 in 2004.

 

**(10) EMPLOYEES SAVINGS PLAN**

 

The Partnershipsponsors a 401(k) plan, which allows participating employees to contribute upto 25% of their salary, subject to annual limits.  The plan provides for the Partnership to make matchingcontributions up to 50% of the first 4% of salary deferred by employees.  During the years ended December 31, 2003,2002 and 2001, Partnership matching contributions were $26,000, $28,000 and$26,000, respectively.

 

**(11) SALARIED BASIC CONTRIBUTION PLAN**

 

The Partnershipsponsors a basic contribution plan for its non-bargaining unit employees. Thisplan provides for the Partnership to make annual contributions to the 401(k)plan on behalf of participating employees. Contributions are based upon age, length of service, and other criteriaon an annual basis, subject to annual limits. During the years ended December 31, 2003, 2002, and 2001 basiccontributions were $77,000, $68,000 and $66,000, respectively.

 

**(12) QUARTERLY OPERATING RESULTS (Unaudited)**

 

The following chartsummarizes unaudited quarterly operating results for the years ended December31, 2003,  2002, and 2001 (000’s, exceptper unit data):

 

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|        |   | **Net  Sales** |   | **Gross Income  (Loss)** |   | **Net Income  (Loss)** |   | **Net Income (Loss)  per Class A Unit** |   |
|-------------|--------|----------------|--------|--------------------------|--------|------------------------|--------|-----------------------------------------|--------|
| 2003        |   |           |   |                     |   |                   |   |                                    |   |
| 1st Quarter |   | $              | 2,305  |                     | $      | 215                    |   | $                                       | (143   | ) | $ | (0.02 | ) |
| 2nd Quarter |   | 1,108          |   | 68                       |   | (185                   | )      | (0.02                                   | )      |
| 3rd Quarter |   | 5,176          |   | 100                      |   | (9                     | )      | 0.00                                    |   |
| 4th Quarter |   | 6,837          |   | 820                      |   | 406                    |   | 0.05                                    |   |
|        |   |           |   |                     |   |                   |   |                                    |   |
| 2002        |   |           |   |                     |   |                   |   |                                    |   |
| 1st Quarter |   | $              | 2,609  |                     | $      | 292                    |   | $                                       | (146   | ) | $ | (0.02 | ) |
| 2nd Quarter |   | 662            |   | 130                      |   | (241                   | )      | (0.03                                   | )      |
| 3rd Quarter |   | 5,089          |   | 542                      |   | 43                     |   | 0.01                                    |   |
| 4th Quarter |   | 6,196          |   | (13                      | )      | (136                   | )      | (0.02                                   | )      |
|        |   |           |   |                     |   |                   |   |                                    |   |
| 2001        |   |           |   |                     |   |                   |   |                                    |   |
| 1st Quarter |   | $              | 3,017  |                     | $      | 252                    |   | $                                       | (416   | ) | $ | (0.05 | ) |
| 2nd Quarter |   | 2,162          |   | 1,233                    |   | 702                    |   | 0.09                                    |   |
| 3rd Quarter |   | 4,767          |   | 504                      |   | 485                    |   | 0.06                                    |   |
| 4th Quarter |   | 6,947          |   | 924                      |   | 239                    |   | 0.03                                    |   |

** **

**ITEM9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE**

** **

None

 

**ITEM 9A. CONTROLS AND PROCEDURES**

 

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

 

(b)  There have been no significant changes (including correctiveactions with regard to significant deficiencies or material weaknesses) in ourinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of the evaluation referenced in paragraph (a)above.

 

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**PART III**

** **

**ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT**

** **

The Partnership presentlyhas no officers or directors. Instead, the officers and directors of theManaging Partner perform all management functions for the Partnership.  Each director of the Managing Partner isappointed for a term of one year and until his successor is duly appointed andqualified.  Each officer of the ManagingPartner is elected by the Board of Directors of the Managing Partner and issubject to removal by that board at any time.

 

## **A.  Identification of Directors**

## ** **

*John W. A. Buyers.*  75 years old; owner of Managing Partnersince August 2001, chairman since 1989 and director of Managing Partner since1986; chairman of C. Brewer and Company, Limited; chairman of Buyco andmajority owner of D. Buyers Enterprises, LLC (“DBE”).

 

*James H. Case.*  83 years old; director and member of Auditand Conflicts Committee of Managing Partner since 1986; senior partner of thelaw firm of Carlsmith Ball; not an employee, officer, or director of any CBCLor DBE affiliate other than the Managing Partner.

 

*Ralph C. Hook, Jr.*  80 years old; director and member of Auditand Conflicts Committee of Managing Partner since 1986; not an employee,officer, or director of any CBCL or DBE affiliate other than the ManagingPartner.

 

*David McClain.*  57 years old; director and member of theAudit and Conflicts Committee of Managing Partner since September 2000; not anemployee, officer, or director of any CBCL or DBE affiliate other than theManaging Partner.

 

*Dennis J. Simonis.* 47 years old; director of Managing Partnersince August 2002; President and Chief Operating Officer of Managing Partnersince August 2001 and Chief Financial Officer since June 2001. Executive VicePresident and Chief Financial Officer of DBE since August 2001.

 

**B. Identification of Executive Officers of the Managing Partner**

 

*John W. A. Buyers*.  75 years old; chairman and chief executiveofficer of Managing Partner since 1989.

 

*Dennis J. Simonis. *47 years old; president of ManagingPartner since August 2001; chief financial officer of D. Buyers Enterprises,LLC; not otherwise an employee, officer, or director of any CBCL affiliate.Formerly executive vice president and chief operating officer of Mauna Loa.

 

*Randolph H. Cabral.  51* years old; senior vice president andorchard manager of Managing Partner since May 2000; not otherwise an employee,officer, or director of any CBCL affiliate. Formerly senior vice president andorchard manager of KACI.

 

*Wayne W. Roumagoux*.  57 years old; chief financial officer ofManaging Partner since August 2001; controller of DBE; not otherwise anemployee, officer, or director of any CBCL affiliate.

 

**C.  Identification of Certain SignificantEmployees**

 

Not applicable

 

# ***D.  Family Relationships***

# *** ***

Not applicable

 

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**E. Business Experience of Current Directors and Executive Officers**

 

***CurrentDirectors of the Managing Partner.***

 

*John W. A. Buyers.*****Mr.Buyers has been chairman of ML Resources since July 1992.  He has been chairman of the board of CBCLsince 1982.  He is the past presidentand chief executive officer of CBCL with services from 1982 to 2002.  After service in the U.S. Marine Corps, Mr.Buyers attended Princeton University where he graduated *cum laude* in 1952.  He later received an M.A. in IndustrialManagement from the Massachusetts Institute of Technology as a SloanFellow.  He is a director of FirstHawaiian Bank, BancWest, Inc., and Outrigger Enterprises, Inc.  He is also a director of John B. Sanfilippo& Sons, Inc., a nut and marketing company located in Elk Grove Village,Illinois and the Hawaii Island Economic Development Board.  He is a member of the U.S. Chamber ofCommerce Committee on Food and Agriculture in Washington, D.C.  He resides in Hakalau, Hawaii.

 

*James H. Case*.  Mr. Case is senior partner in the Hawaii lawfirm of Carlsmith Ball.  Mr. Casegraduated with an A.B. from Williams College and received a J.D. from HarvardLaw School. He became associated with the Carlsmith law firm in 1951 and becamea partner in 1959.  He has served on theboards 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 joined the faculty of the Collegeof Business Administration at the University of Hawaii in 1968 as Dean of theCollege of Business Administration.  In1974, he returned to teaching as Professor of Marketing in the College ofBusiness Administration.  He became aProfessor Emeritus of Marketing in June 1995. Dr. Hook received a bachelor’s and master’s degrees from the Universityof Missouri at Columbia and a Ph.D. in Marketing from the University of Texasat Austin.  He has been a member of theboard of Hook Brothers Corporation since 1983. He resides in Honolulu, Hawaii.

 

*David McClain.* Dr.McClain has served as Vice President for Academic Affairs of the 10 campusUniversity of Hawaii system since July 1, 2003.  From 2000 until 2003 he served as the Dean of the College ofBusiness Administration at the University of Hawaii at Manoa, the FirstHawaiian Bank Distinguished Professor of Leadership and Management, and wasalso appointed Interim Vice President for Research of the University of HawaiiSystem where he served from February to September 2003.  Dr. McClain joined the University of Hawaiiat Manoa in 1991 as the Henry A. Walker, Jr. Distinguished Professor ofBusiness Enterprise and Professor of Financial Economics and Institutions aswell as serving as a director of First Insurance Company. Dr. McClain chairsthe board of Hawaii Literacy, and serves as a member of several nonprofitboards in Hawaii. Dr. McClain earned a Ph.D. in Economics from theMassachusetts Institute of Technology in 1974 and a BA in Economics andMathematics from the University of Kansas in 1968.  He has taught at Massachusetts Institute of Technology’s SloanSchool of Management and at Boston University, where he chaired the Departmentof Finance and Economics. He also served as Senior Staff Economist, Council ofEconomic Advisors to President Jimmy Carter. He resides in Honolulu, Hawaii.

 

*Dennis J. Simonis*.  Mr. Simonis has served as a director sinceAugust 2002, president of the Managing Partner since August 2001 and wasformerly the executive vice president and chief financial officer. From 1993 to2001, Mr. Simonis served in various capacities at Mauna Loa, includingexecutive vice president and chief operating officer.  He serves as an officer of the Hawaii Macadamia Nut Associationand has served on several nonprofit boards in Hawaii. He served from 1985-1993as a vice president of Theo H. Davies & Co., Ltd. and worked as a seniorauditor for Price Waterhouse between 1979 and 1985. 

 

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Mr. Simonis graduated magna cumlaude with a B.S. in Accounting from Carroll College in Waukesha, Wisconsin andearned his C.P.A. certificate in 1983. He resides in Hilo, Hawaii.

 

***ExecutiveOfficers Who Do Not Serve as Directors.***

 

*Randolph H. Cabral. *Mr. Cabral has served as senior vicepresident and orchard manager of the Managing Partner since May 2000.  Mr. Cabral was previously employed at Ka’uAgribusiness Company, Inc., from 1989 until the Partnership’s acquisition ofKa’u Agribusiness’ macadamia business in 2000. He served as senior vice president from 1998 to 2000, as vice presidentfrom 1996 to 1998, and as orchard manager from 1989.  From 1983 to 1989, Mr. Cabral served as orchard manager withMauna Loa Macadamia Nut Corporation. Mr. Cabral has an AS in General Agriculture from the University ofHawaii.  He resides in Hilo, Hawaii.

 

*Wayne W. Roumagoux.*   Mr. Roumagoux has served aschief financial officer of the Managing Partner since August 2001.  Mr. Roumagoux has been controller of thePartnership since May 2001.  From 1989to 2001 Mr. Roumagoux was controller for Inlet Fisheries, Inc.  He was controller for NBI, Inc’s Alaskaoperation and for Sheffield Hotels, Inc. during the late 1970’s and1980’s.  Mr. Roumagoux worked as asenior auditor for KPMG between 1976 and 1978. He has a M.S. in accounting from Eastern Washington State University inCheney, Washington.  He resides inVolcano, Hawaii.

 

**Audit Committee. **The Audit Committee of ML Resources, Inc. iscomprised of three members, Chairman James Case, Dr. Ralph Hook and Dr. DavidMcClain.  The Board of Directors hasdetermined that each member of the committee is independent in accordance withSEC Rule 10-A-3 and each member is financially literate, though none qualifiesas a financial expert.  The company hasattempted to attract a financial expert to serve on the committee, but has beenunable to retain a qualified individual due to professional and geographiclimitations.  The Audit Committee metfour times in 2003 to review and approve accounting, internal control andreporting issues, related party transactions and other matters that could involvea conflict of interest.  All memberswere in attendance at each quarterly meeting.

 

**Audit Committee Charter.**

 

## **I.  Purpose.  The Audit Committee shall, in the manner set forth in this Charter,assist the Board of Directors of ML Resources, Inc. (“Resources”) in fulfillingits financial oversight of the integrity of the financial statements of MLMacadamia Orchards, L.P. (“MLP”), compliance with legal and regulatoryrequirements, the independent auditors’ qualifications and independence, andthe performance of the independent auditors, and to prepare the SEC-requiredannual Audit Committee report for MLP. The primary responsibility of the Board of Directors of Resources is toexercise its responsibilities as general partner of MLP.  The term Corporation when used herein shallmean either or both of Resources and MLP as may be applicable or appropriate.**

## ** **

While the Audit Committee has the responsibilities and authority setforth in this Charter, it is not the responsibility of the Audit Committee toplan or conduct audits or to determine that the Corporation’s financialstatements are complete and accurate and are in accordance with generallyaccepted accounting principles.  This isthe responsibility of management and the independent auditors.

 

In carrying out its responsibilities, the Audit Committee’s policiesand procedures shall remain flexible in order to best react to changingconditions and environments.

 

## **II.  Composition.  The Audit Committee shall be comprised of three or moredirectors, as determined by the Board of Directors.  Audit Committee members shall have no relationship with theCorporation that, in the business judgment of the Board of Directors, mayinterfere with the exercise of their independence from management and theCorporation. The members of the Audit Committee shall also satisfy other**

## ** **

41

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## **applicableindependence requirements under the rules of the New York Stock Exchange andSecurities and Exchange Commission. Each member of the Audit Committee shall be financially literate (as theBoard of Directors interprets such requirement in its business judgment), orshall become financially literate within a reasonable time after his or herappointment to the Audit Committee. Preferably, at least one member of the Audit Committee shall haveaccounting or related financial management experience, as the Board ofDirectors interprets such requirement in its business judgment. If no member ofthe Audit Committee qualifies as a “financial expert”, as defined bySarbanes-Oxley, the reason(s) for not having an expert shall be disclosed inthe Corporation’s Form 10-K filing.**

## ** **

The members of the Audit Committee shall be elected by the Board ofDirectors at the first annual meeting of the Board of Directors and shall serveuntil their resignation or removal or until their successors have been dulyelected.  Audit Committee members shallserve at the pleasure of the Board of Directors.

 

## **III.   MEETINGS. The Audit Committee shall meet at least once quarterly, or morefrequently as circumstances dictate. To the extent deemed appropriate ornecessary by the Audit Committee to carry out its duties it shall periodicallymeet separately with management and the independent auditors to discuss anymatters that the Audit Committee or either of these groups believes should bediscussed privately.**

## ** **

## **IV.   RESPONSIBILITIES AND AUTHORITY.  The Audit Committee shall:**

## ** **

### **ReviewProcedures.  Review and reassess theadequacy of this Charter at least annually. Submit the Charter to the Board of Directors for approval once everythree years or more frequently as circumstances dictate.  Include the Charter in the Corporation’sannual Report of Form 10-K.**

### ** **

Review and discuss with management and theindependent auditors the Corporation’s annual audited financial statementsincluded in its reports on Form 10-K and the Corporation’s quarterly financialreports included in its reports on Form 10-Q, including the Corporation’sdisclosures under “Management Discussion and Analysis of Financial Conditionand Results of Operations” prior to their filing. The Audit Committee shallexplicitly approve the content of the company’s forms 10-Q and 10-K prior totheir issuance.

 

Review significant findings prepared by theindependent auditors, together with management’s responses.

 

Discuss with the independent auditors anysignificant changes to the Corporation’s accounting principles and any itemsrequired to be communicated by the independent auditors in accordance withStatement of Auditing Standards No. 61 (“SAS 61”), “Communications with AuditCommittees.”

 

### **IndependentAuditors.** Select, appoint, retain, compensate and oversee independent accountantsengaged for the purpose of preparing or issuing an audit report or performingother audit, review or attest services for the Corporation (“Audit Services”),and approve service proposals and fees for audit, tax and other materialservices performed.

### ** **

Review the independence and performance ofthe independent auditors. The Audit Committee has the ultimate authority andresponsibility to select, evaluate, and where appropriate replace theindependent auditors. The independent auditors are ultimately accountable tothe Audit Committee for such auditors’ review of the financial statements andcontrols of the Corporation, and must report directly to the Audit Committee.

 

Obtain from the independent auditors andreview, at least annually, a formal written statement describing the firm’sinternal quality control procedures; any material issues raised by their mostrecent internal 

 

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quality control review (or peer review) ofthe firm, or by any governmental or professional inquiry within the past fiveyears, respecting one or more independent audits by the firm, and any stepstaken to deal with any such issues; and all relationships between theindependent auditors and the Corporation, including without limitation thosethat would be required to be disclosed under Independence Standards BoardStandard 1 (“ISB No. 1”).

 

Review and discuss, on an annual basis, withthe independent auditors all significant relationships that they have with theCorporation that could impair their objectivity and independence as independentauditors.  Engage in a dialog with theindependent auditors with respect to any disclosed relationships or servicesthat may impact the objectivity and independence of the independent auditors,and recommend that the Board of Directors take appropriate action in responseto the independent auditors’ report of such relationships to satisfy itself ofthe independent auditors’ independence.

 

Review the independent auditors’ audit plan –discuss scope, staffing, locations, and reliance upon management and internalaudit personnel, if any.

 

### **FinancialReporting Process.**  Review the integrity of the Corporation’s reporting processes,both internal and external, and its control over financial reporting, byconsulting with management and the independent auditors.

### ** **

Consider and approve, if appropriate, majorchanges to the Corporation’s auditing and accounting principles and practicesas suggested by the independent auditors or management.

 

Establish regular systems of reporting to theAudit Committee by each of management and the independent auditors regardingany significant judgments or estimates made in management’s preparation of thefinancial statements and any significant difficulties encountered during thecourse of the review or audit, including any restrictions on the scope of workor access to required information.

 

Review with the independent auditor any auditproblems or difficulties and management’s response, and then mediate anysignificant disagreement between management and the independent auditors inconnection with the preparation of the financial statements.

 

General.  Review with the Corporation’s general counsel any legal mattersthat, in the Audit Committee’s business judgment, could have a significantimpact on the Corporation’s financial statements.

 

To the extent deemed appropriate by the AuditCommittee in the exercise of its business judgment, investigate any matterbrought to the Audit Committee’s attention within the scope of itsresponsibilities.

 

The Audit Committee shall have the authorityto engage independent counsel and other advisors, as the Audit Committeedetermines necessary to carry out its duties.

 

Prepare an annual report to stockholders tothe extent required by the Securities and Exchange Commission. The reportshould delineate that the Audit Committee has (1) reviewed and discussed theaudited financial statements with management; (2) discussed with theindependent auditors the matters required to be discussed by SAS 61; (3)received from the independent auditors the written disclosures and the letterrequired by ISB No. 1, and discussed the independence of the independentauditors with them and; (4) based on such review and discussions, recommendedto the Board of Directors that the Corporation’s audited financial statementsbe included in the Corporation’s Annual Report on Form 10-K.

 

Ensure that the Corporation has establishedan appropriate Code of Ethics applicable to directors, management andemployees.  Take steps to ensure thatthe Code is acknowledged and in effect.

 

43

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Establish procedures for the receipt,retention, and treatment of complaints received by the Corporation regardingaccounting, internal accounting controls, or auditing matters, and theconfidential, anonymous submission by employees of the Corporation of concernsregarding questionable accounting or auditing matters; namely, a confidential“whistle-blower” process ensuring that employees can report possibleinappropriate actions directly to the Audit Committee.

 

Discuss the Corporation’s earnings pressreleases, as well as financial information and earnings guidance provided toanalysts and rating agencies.

 

Have appropriate funding, as determined bythe Audit Committee, in its capacity as a committee of the Board of Directorsof Resources as the general partner of MLP, for payment of compensation to anyindependent accountants engaged for the purpose of providing audit services,for payment of compensation to any advisors employed by the Audit Committee,and for payment of ordinary administrative expenses of the Audit Committee thatare necessary or appropriate in carrying out its duties.

 

Discuss policies with respect to riskassessment and management.

 

Set clear hiring policies for the hiring ofemployees or former employees of the independent auditors.

 

Maintain minutes or other records of meetingsand activities of the Audit Committee and submit such minutes to the Board ofDirectors of Resources for review, and otherwise report regularly to the Boardof Directors of Resources.

 

Make an annual performance evaluation of theAudit Committee.

 

The Audit Committee Charter is available byrequest or on the Partnership’s website at www.mlmacadamia.com .

 

**Audit Committee Pre-Approval Policy.**

 

I. Statement of Principles.  TheAudit Committee is required to pre-approve the audit and non-audit servicesperformed by the independent auditor in order to assure that the provision ofsuch services does not impair the auditor’s independence.  Unless a type of service to be provided bythe independent auditor has received general pre-approval, it will requirespecific pre-approval by the Audit Committee. Any proposed services exceeding pre-approved cost levels will requirespecific pre-approval by the Audit Committee. The term of any pre-approval is 12 months from the date of pre-approval,unless the Audit Committee specifically provides for a different period.  The Audit Committee will periodically revisethe list of pre-approved services based on subsequent determinations.

 

II. Delegation.  The Audit Committeemay delegate pre-approval authority to one or more of its members.  The member or members to whom such authorityis delegated shall report any pre-approval decisions to the Audit Committee atits next scheduled meeting.  The AuditCommittee does not delegate its responsibilities to pre-approve servicesperformed by the independent auditor to management.

 

III. Audit Services.  The annual Auditservices engagement terms and fees will be subject to the specific pre-approvalof the Audit Committee.  The AuditCommittee will approve, if necessary, any changes in terms, conditions and feesresulting from changes in audit scope, Partnership structure or other matters.

 

In addition to the annual Audit servicesengagement approved by the Audit Committee, the Audit Committee may grantpre-approval for other Audit services, which are those services that only theindependent auditor reasonably can provide.

 

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IV. Audit-Related Services. Audit-related services are assurance and related services that arereasonably related to the performance of the audit or review of thePartnership’s financial statements and that are traditionally performed by theindependent auditor.  The AuditCommittee believes that the provision of Audit-related services does not impairthe independence of the auditor.

 

V. Tax Services.  The AuditCommittee believes that the independent auditor can provide Tax services to thePartnership such as tax compliance, tax planning and tax advice withoutimpairing the auditor’s independence. However, the Audit Committee will not permit the retention of theindependent auditor in connection with a transaction initially recommended bythe independent auditor, the purpose of which may be tax avoidance and the taxtreatment of which may not be supported in the Internal Revenue Code andrelated regulations.

 

VI. All Other Services.  The AuditCommittee may grant pre-approval to those permissible non-audit servicesclassified as All Other services that it believes are routine and recurringservices, and would not impair the independence of the auditor.

 

VII. Pre-Approval Fee Levels. Pre-approval fee levels for all services to be provided by theindependent auditor will be established periodically by the AuditCommittee.  Any proposed servicesexceeding these levels will require specific pre-approval by the AuditCommittee.

 

VIII. Supporting Documentation.  Withrespect to each proposed pre-approved service, the independent auditor willprovide detailed back-up documentation, which will be provided to the AuditCommittee, regarding the specific services to be provided.

 

IX. Procedures.  Requests orapplications to provide services that require separate approval by the AuditCommittee will be submitted to the Audit Committee by both the independentauditor and the Chief Financial Officer, and must include a joint statement asto whether, in their view, the request or application is consistent with theSEC’s rules on auditor independence.

 

The Audit Committee Pre-Approval Policy isavailable by request or on the Partnership’s website at www.mlmacadamia.com .

 

**Code of Ethics.  T**he Partnership’s Board of Directors is in theprocess of developing a “Code of Business Conduct and Ethics” for all of thePartnership’s employees, including the principal executive officer, principalfinancial officer and principal accounting officer.  The “Code of Business Conduct and Ethics” will be available onthe Partnership’s website before the annual meeting of the general partner anda copy will be made available upon request.

 

**F.  Section 16 Disclosure**

 

Under Section 16 of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), each directorand certain officers of ML Resources, Inc., the managing general partner of Registrant(a “Reporting Person”), are required to report their ownership and changes inownership of Class A Depositary Units to the Securities and Exchangecommission, 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 bySection 16(a) of the Exchange Act during 2000, except that Randolph Cabral, whobecame senior vice president on May 1, 2000, and who owns 100 Class A Units,did not file a Form 3 until October 4, 2000; and Wayne Roumagoux, who became principal accounting officer on August1, 2001, and owns no shares, did not file a Form 3 until February 4, 2002.

 

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**ITEM11.  EXECUTIVE COMPENSATION**

 

**A.****            SummaryCompensation Table**

 

The Partnership is managed bythe Managing Partner.  Compensation paidby the Managing Partner to its chief executive officer and other executiveofficers is reimbursed by the Partnership, as provided in Section 4.5 of thePartnership Agreement.  The followingtable reflects the aggregate compensation for services in all capacities paidby the Managing Partner to its executive officers for the years ended December31, 2003, 2002 and, 2001. There were no long- term compensation awards orpayouts during those years.

 
|                                   |   | **Annual  Compensation** |   |
|----------------------------------------|--------|--------------------------|--------|
| **Name and Principal Position**        |   | **Year**                 |   | **Salary** |   | **Bonus** |   | **Other** |   |
| John W. W. Buyers                      |   | 2003                     |   | $ | 50,000 |   | $ | — |   | $ | 15,000 |   |
| Chief executive officer                |   | 2002                     |   | 27,500 |   | — |   | 15,000 |   |
|                                   |   | 2001                     |   | — |   | — |   | 15,750 |   |
|                                   |   |                     |   |   |   |   |   |   |   |
| Dennis J. Simonis                      |   | 2003                     |   | 164,000 |   | 91,400 |   | 15,000 |   |
| President  and chief operating officer |   | 2002                     |   | 158,600 |   | — |   | 7,500 |   |
|                                   | 2001   |                     | 92,700 |   | 34,500 |   | — |   |
|                                   |   |                     |   |   |   |   |   |   |   |
| Randolph H. Cabral                     |   | 2003                     |   | 106,250 |   | 42,300 |   | — |   |
| Senior vice president                  |   | 2002                     |   | 97,000 |   | — |   | — |   |
|                                   |   | 2001                     |   | 97,000 |   | 30,100 |   | — |   |
|                                   |   |                     |   |   |   |   |   |   |   |
| Wayne W. Roumagoux                     |   | 2003                     |   | 82,000 |   | 26,100 |   | — |   |
| Chief financial officer                |   | 2002                     |   | 80,900 |   | — |   | — |   |
|                                   |   | 2001                     |   | 39,700 |   | 9,600 |   | — |   |
|                                        |        |                          |        |  |  |  |  |  |  |  |  |  |

 

**B.****            NoOption, SAR, Long-term Incentive or Pension Plans**

 

Neither the ManagingPartner nor the Partnership presently has option plans, SAR plans, or long-termincentive plans.  All salaried employeesparticipate in defined contribution plan and other benefit plans, which wereadministered by CBCL for part of the year and are now administered directly bythe Partnership.  The officers of theManaging Partner are employees of the Partnership, which does not have adefined benefit plan for non-bargaining employees. As such, neither theManaging Partner nor the Partnership are responsible for making any payments onthe retirement of any of its present executive officers.

 

**C.  NoEmployment Contracts or Termination Agreements**

** **

The Managing Partner doesnot have any employment or severance agreements with any of its presentexecutive officers. The president of the Partnership has an agreement, whichprovides for twelve months of severance pay in the event of termination withoutjust cause.

 

**D.  Compensation ofExecutive Officers**

 

The Managing Partner doesnot have a compensation committee.  Theonly executive officers of the Managing Partner (employed by the Partnership)are Mr. Buyers, who has been compensated since June of 2002, Mr. Simonis, whohas served as its president since August 2001 and chief financial officer fromMay 2001 until August of 2001, Mr. Cabral, who has served as senior vicepresident and orchard manager since May 2000 and Mr. Roumagoux, who has servedas chief financial officer since August of 2001.  These officers’ salary and guideline bonus percentage areadministered under the salary policies of DBE 

 

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and approved by theBoard.  Any bonus payments are approvedby the Managing Partner’s Board of Directors annually, based on the overallperformance of the Partnership as evidenced by its net income and cash flow forthe year.  Performance in bothcategories is measured relative to the original Partnership operating budgetapproved by the Managing Partner’s Board of Directors at the beginning of eachyear.

 

**E. Director Compensation**

 

Directors of the ManagingPartner presently receive a quarterly retainer of $3,000 and a meeting fee of$750 per meeting.  Members of theManaging Partner’s Audit and Conflicts Committee receive a meeting fee of $750per meeting.  There are no otheragreements or arrangements between the Managing Partner and its directors.

 

**F.  Stock PerformanceChart**

 

The following chartcompares the Partnership’s total return to (i) the Russell 2001 (a smallbusiness index) and (ii) a peer group index composed of publicly traded limitedpartnerships with either similar capitalization or in commodity based markets(other than gas and oil) or both.

 

 
|                              |   | **Dec-98** |   | **Dec-99** |   | **Dec-00** |   | **Dec-01** |   | **Dec-02** |   | **Dec-03** |   |
|-----------------------------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|
| ML Macadamia Orchards - LP        |   | $          | 100    |       | $      | 131        |   | $          | 152    |       | $      | 129        |   | $ | 143 |   | $ | 166 |   |
| Russell 2000 Index                |   | $          | 100    |       | $      | 121        |   | $          | 118    |       | $      | 121        |   | $ | 96 |   | $ | 141 |   |
| Custom Composite Index (7 Stocks) |   | $          | 100    |       | $      | 85         |   | $          | 88     |       | $      | 110        |   | $ | 102 |   | $ | 137 |   |

 

**The 7-StockCustom Composite Index consists of:**

 
| BCU   | Borden Chemicals &  Plastics LP |
|-------|-------------------------------------|
| BOS   | Henley LP (fka Boston  Celtics LP)  |
| FUN   | Cedar Fair                          |
| PCL   | Plum Creek Timber Co.               |
| POPEZ | Pope Resources LP                   |
| TNH   | Terra Nitrogen LP                   |
| USV   | US Restaraunt Properties            |

 

47

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**ITEM12.  SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT**

 

As of December 31, 2003,and subsequent to that date to the date of this report, (i) one person(including any “group” as that term is used in Section 13(d)(3) of theSecurities Exchange Act of 1934) is known by the Partnership or the ManagingPartner 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 orexecutive officer of the Managing Partner owned more than 1% of the Class AUnits.

 

The table below sets forthcertain information as to the Class A Units beneficially owned by thebeneficial owner of more than 5% of the Class A Units as of December 31, 2003.

 
| **Name of  Beneficial Owner** |   | **Class A  Units  Owned** |   | **Percent  of  Class A  Units** |   |
|-------------------------------|--------|---------------------------|--------|---------------------------------|--------|
|                          |   |                      |   |                            |   |
| Ebrahimi Family Group         |   | 904,600                   |   | 12                              | %      |

 

The table below sets forthcertain information as to the Class A Units beneficially owned by the directorsof the Managing Partner, and all directors and executive officers of theManaging Partner as a group, as of December 31, 2003.

 
| **Name of  Beneficial Owner**                                |   | **Class A  Units  Owned** |   | **Percent  of  Class A  Units** |   |
|--------------------------------------------------------------|--------|---------------------------|--------|---------------------------------|--------|
|                                                         |   |                      |   |                            |   |
| John W. A. Buyers                                            |   | 4,176                     |   | *                               |   |
| Randolph H. Cabral                                           |   | 100                       |   | *                               |   |
| James H. Case (1)                                            |   | 8,000                     |   | *                               |   |
| Ralph C. Hook (2)                                            |   | 4,000                     |   | *                               |   |
| David McClain                                                |   | —                    |   | *                               |   |
| Dennis J. Simonis                                            |   | —                    |   | *                               |   |
| Wayne W. Roumagoux                                           |   | —                    |   | *                               |   |
| All directors and executive officers  as a group (7 persons) |   | 16,276                    |   | 0.2                             | %      |

 

----

*Less than 1%

 

(1)                    Beneficiallyowned by James H. Case pursuant to a self-directed retirement plan sponsored byCarlsmith Ball, a law firm in which Mr. Case is a partner, andadministered by Bank of Hawaii Trust.

(2)                    Beneficiallyowned by Ralph C. Hook pursuant to the Ralph C. Hook Revocable LivingTrust dated March 1, 1993.

 

In addition, Mauna LoaOrchards L.P. (“MLO”), a limited partnership whose partners are CBCL andcertain direct or indirect wholly-owned subsidiaries of CBCL, owned 30,000Class A Units until May of 2002. The units were sold in May and June 2002 atmarket prices.

 

48

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**ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

**1*.  General***

 

The Managing Partner makes alldecisions relating to the management of the Partnership.  The Managing Partner, as such, has the dutyto act in good faith and to manage the Partnership in a manner that is fair andreasonable to all unit holders. CBCL owned all of the capital stock of theManaging Partner until August 1, 2001, at which point the stock was sold to D.Buyers Enterprises, LLC. Certain officers and directors of CBCL who areex-officers and ex-directors of the Managing Partner are substantialshareholders of Buyco, Inc., the parent company of CBCL. The majority owner ofDBE is also the chairman of Buyco, Inc. As a result of these relationships, certain conflicts of interest couldarise with respect to the administration of and allocation of costs under thePartnership Agreement and in situations described below, among others.

 

A committee of theManaging Partner’s Board of Directors composed of three persons who areindependent of CBCL, DBE and their affiliates (the “Audit and ConflictsCommittee”) reviews, on an annual basis, or more frequently as such committeemay deem appropriate, the Managing Partner’s management of the Partnership andany conflicts of interest that may have arisen or may arise as a result of therelationships among CBCL or DBE and their affiliates, the Managing Partner andthe Partnership.  The PartnershipAgreement states that, except for one initial member of the ConflictsCommittee, no member of the Conflicts Committee may be an officer, director,employee or shareholder of the Managing Partner or any of their affiliates.

 

**2.  *FarmingLeases***

 

At the time of thePartnership’s acquisition of the interests in the October 1989 Orchards, MLOassigned to the Partnership all of MLO’s rights and obligations under three45-year farming leases relating to 327 tree acres of the Ka’u II Orchards andall of the Mauna Kea Orchards.  Thefarming leases permit the Partnership to conduct macadamia nut farmingoperations on such macadamia orchard properties.  The farming leases provide for fixed minimum annual leasepayments to be paid to either KACI or MKACI (collectively, the “AgribusinessCompanies”), as the case may be.  Such annualrental payments are subject to increase after ten years, twenty years andthirty years based on then current fair market lease rates.  The then current fair market lease rate willbe determined by mutual agreement between the Partnership, on the one hand, andeither KACI or MKACI, as the case may be, on the other hand. If mutualagreement cannot be reached, the then current fair market lease rate will bedetermined by appraisal.  Whetherdetermined by mutual agreement or by appraisal, the then current fair marketlease rate will be determined as a fair market lease rate for use of suchpremises as macadamia orchards.

 

The Partnership acquired itsinterests in the trees situated on such leased macadamia orchard propertiessubject to repurchase options retained by the Agribusiness Companies.  The repurchase options grant theAgribusiness Companies the continuing right to repurchase all or any portion ofsuch trees after June 30, 2019 at a price equal to the then current fair marketvalue of the trees, according to their value as producing macadamia nut trees,as determined by mutual agreement between the Partnership, on the one hand, andeither KACI or MKACI, as the case may be, on the other hand.  If mutual agreement cannot be reached, thethen current fair market value will be determined by appraisal.  Whether determined by mutual agreement or byappraisal, the fair market value of such trees will be determined according totheir value as producing macadamia nut trees, assuming that the owner thereofhas rights to farm and harvest such trees and has ongoing arrangements withrespect to land leases, farming and nut purchases of the same type as thePartnership has immediately prior to such time.

 

At the end of the 45-year leaseterms of such leases, the Agribusiness Companies will be required to repurchasesuch trees at their then current fair market value as orchards if such entitiesdo not offer to extend such farming leases at the then current fair marketlease 

 

49

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rates. The then current fairmarket lease rate and the then current market value of the trees for suchpurposes 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 otherhand or, if mutual agreement cannot be obtained, by appraisal, in each case inthe manner described above.  Suchrepurchase obligations will apply with respect to the expiration of eachextension of the lease terms of such leases until such leases have been ineffect for a total of 99 years, at which time the leases will expire and theownership interests in such trees will revert back to the AgribusinessCompanies.

 

In the event that thePartnership decides not to accept an offer to extend the leases at the thencurrent fair lease rates upon the expiration of the leases or any extensionthereof (or does not assign the leases to a third party who elects to acceptsuch offer), the leases will expire, the Agribusiness Companies will not berequired to repurchase the trees covered thereby and ownership of such treeswill revert back to the Agribusiness Companies (and in any event ownership ofsuch trees will revert back to the Agribusiness Companies after 99 years).

 

As described above, the farmingleases provide for determinations of the fair market lease rate to be paid bythe Partnership under the farming leases and the fair market value of thePartnership’s trees situated on property covered by such leases by mutualagreement between the Partnership, on the one hand, and with KACI or MKACI, asthe case may be, on the other hand, or, if mutual agreement cannot be reached,by appraisal.

 

**3.  *Nut PurchaseContracts***

 

The Partnership isa party to five nut purchase contracts with Mauna Loa Macadamia Nut Corporation(“Mauna Loa”).  Mauna Loa was awholly-owned subsidiary of CBCL until its sale on September 29, 2000 to anunrelated party.  CBCL was also the soleowner of ML Resources, Inc, the Partnership’s general partner until August 1,2001, at which point it was sold to DBE. The five nut purchase contracts cover all nuts produced by the orchardsacquired in June 1986, December 1986, October 1989, September 1991, and May2000 respectively.  The first twocontracts run for 20 years, while the third contract runs for 30 years and alsoprovides for the exclusion of unusable nuts from those purchased by MaunaLoa.  The first three contracts areidentical in all other material respects. The fourth contract was acquired by assignment with the purchase of theSeptember 1991 orchard and expired in June 2003.  The fourth contract was renegotiated with a fixed price adjustedfor unusables outside the range of 10% to 13%. The fourth contract expires December 31, 2006.  The fifth contract was acquired by assignment with the purchaseof the May 2000 orchards and expires in 2006. The fifth contract is similar to the first three contracts and alsoprovides for the exclusion of unusable nuts. The first four contracts use a pricing formula based 50% on a two-yeartrailing average of the macadamia nut price published annually by the U.S.Department of Agriculture (“USDA”) and 50% on Mauna Loa’s “netback component”.The netback component is calculated by subtracting Mauna Loa’s processing andmarketing costs per pound and a “capital charge” of 20% from its nut revenuesper pound. The fifth contract uses only the USDA two-year trailing average todetermine its nut price.  The nut pricepaid to the Partnership under the first two contracts was $0.4795 for 2001,$0.4655 for 2002, and $0.4816 in 2003. The average nut price paid to the Partnership under the third contractwas $0.4750 for 2001, $0.4610 for 2002, and $0.4789 in 2003. The average nutprice paid to the Partnership under the fourth nut price contract was $0.5119for 2001, $0.4920 for 2002, and $0.5923 in 2003.  The nut price paid to the Partnership under the fifth contractwas $0.6222 for 2001, and $0.5940 for 2002, and $0.5660 in 2003.

 

**4. *FarmingContracts***

 

Prior to thePartnership’s acquisition of the macadamia farming operations on May 1, 2000,the Partnership was a party to four farming contracts with the AgribusinessCompanies, that together covered all farming, harvesting and husking activitiesfor the orchards acquired in June 1986, December 1986, 

 

50

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October 1989 and September1991, respectively. On May 1, 2000, the Partnership acquired the macadamiafarming operations from the Agribusiness Companies.

 

The contracts provided theAgribusiness Companies with reimbursement of their direct and indirect costsincurred under these contracts.  Huskingactivities for the Keaau and Mauna Kea orchards are performed at Mauna Loa’sKeaau facility.  Reimbursements made toMauna Loa were $443,000 in 2001, $531,000 in 2002, and $522,000 in 2003.             .

 

**5.  *ManagementFee***

 

Under the terms ofthe Partnership Agreement, the Partnership reimburses the Managing Partner forall expenses incurred by it in the conduct of Partnership business, includingany expenses reasonably allocated to the Managing Partner or to the Partnershipas well as a management fee equal to 2% of the Partnership’s operating cashflow (as defined in the Partnership Agreement).  Certain conflicts may arise in connection with the allocation ofsuch expenses among the Managing Partner, the Partnership, DBE and itsaffiliates.  Management costreimbursements under the Partnership Agreement were $247,000 in 2001, $180,000in 2002, and $160,000 in 2003.  Themanagement fee was $65,000 in 2001, $32,000 in 2002, and $44,000 in 2003.

 

**6*. Relationships with CBCL and DBE***

 

Since the Partnershipbegan operations in June 1986, the Partnership has purchased substantially allof its fertilizer and certain transportation services from former subsidiariesof CBCL. Transportation services purchased consist of transportation of rawnuts from the orchards in the Mauna Kea and Ka’u areas to the processingplant.  For 2001, 2000, and 1999,fertilizer, herbicide, pesticide and transportation services purchased by thePartnership from former CBCL subsidiaries totaled $0.9 million, $0.9 million,and $0.4 million, respectively.  CBCLsold its fertilizer and transportation businesses to unrelated third parties.Since September 2001, the Partnership has leased approximately 4,000 s.f. ofoffice space in Hilo for it’s executive and accounting staff through theGeneral Partner, which is owned by DBE. The Partnership Agreement requires thatthe price and terms of any such transactions be no less favorable than thoseavailable in comparable transactions between unrelated parties.  The Partnership provides administrativeservices to DBE for which it was compensated $94,000 in 2002 and $98,000 in2003.

 

With respect to thecontroversy outlined on Page 17, there are various relationships and conflicts betweenthe Partnership and CBCL.  Mr. J. AlanKugle is Chief Executive Officer – Real Estate of Buyco, Inc. (Buyco), solestockholder of CBCL.  He is responsiblefor all land sales on the island of Hawaii by CBCL and its subsidiaries.  Mr. Kugle was a director of ML Resources,Inc., general and managing partner of the Partnership until March 2003.

 

Mr. Case performs legalwork for Buyco, CBCL, and some of its subsidiaries.  He is also a director of ML Resources, Inc. and performs legalwork for the Partnership.

 

Mr. Buyers, Chairman ofthe Board of Directors of Resources, an officer of the Partnership, and adirector of ML Resources, Inc., is also Chairman of the Board and is thelargest stockholder of Buyco.

 

Mr. Simonis, President ofML Resources, Inc., an officer of the Partnership, and a director of MLResources, Inc., is a stockholder of Buyco.

 

As a result of theseconflicts, the Board of Directors of ML Resources, Inc. appointed a committeeof outside directors, namely, David McClain and Ralph Hook, to represent thePartnership in discussions with CBCL. CBCL’s representative in the discussions is Mr. Kent T. Lucien, ChiefExecutive Officer - Operations of Buyco. Mr. Lucien was formerly an officer and director of ML Resources, Inc.,but no longer holds any position with ML Resources, Inc. or the Partnership.

 

51

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**ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

**Audit Fees.**Fees paid to the Principal Accountant during 2003 and2002 for the audit of the Partnership’s annual financial statements and reviewof financial statements included in the Partnership’s Form 10-Q amounted to$56,000 and $54,500, respectively.  Theaudit fees for the audit of the Partnership’s annual financial statements andreview of financial statements included in the Partnership’s Form 10-Q for theyears ended December 31, 2003 and 2002, which were approved by Partnership’saudit committee amounted to $58,000 and $56,000, respectively.

 

**Audit Related Fees.** Audit relatedfees paid to the Principal Accountant during 2003 and 2002 amounted to $6,000and $20,500, respectively.

 

**Tax Fees. **Fees paid to the Principal Accountantduring 2003 and 2002 for tax preparation and related support services amountedto $229,000 and $208,000, respectively.

 

**All Other Fees. **None

 

### **PART IV**

### ** **

**ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K**

 

**A.  List of Documents Filed as a Part of thisReport**

 

1.  *Financial Statements. *See Index to Financial Statementsat page 21 of this Form 10-K.

 

2.  *Financial Statement Schedules*.  None required.

 

3.  *Exhibits*. See Exhibit Index at page 51 of this Form 10-K.

 

**B. Reports on Form 8-K**

 

On October 20, 2000, the Partnership filed a report onForm 8-K announcing that on September 29, 2000, CBCL had sold all its stock inMauna Loa Macadamia Nut Corporation to The Shansby Group, a San Francisco basedequity partnership.

 

On May 13, 2003, thePartnership filed a “Regulation FD Disclosure” on Form 8-K, which included acopy of a press release issued by the Partnership setting forth the results ofoperations for the quarter ended March 31, 2003.

 

On February 17, 2004, thePartnership filed a “Regulation FD Disclosure” on Form 8-K, which included acopy of a press release issued by the Partnership setting forth the results ofoperations for the quarter and six months ended June 30, 2003.

 

On February 17, 2004, thePartnership filed a “Regulation FD Disclosure” on Form 8-K, which included acopy of a press release issued by the Partnership setting forth the results ofoperations for the quarter and nine months ended September 30, 2003.

 

52

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|   | **ML MACADAMIA ORCHARDS, L.P.** |
|--------|---------------------------------|
|   | (Registrant)                    |
|   |                            |   |
|   | By:                             | **ML RESOURCES, INC.** |
|   |                            | (Managing  General Partner) |
|   |                            |   |
|   | By:                             | /s/  J. W. A. Buyers |   |
|   |                            | J. W. A.  Buyers |
|   |                            | Chairman of  the Board and |
|   |                            | Principal  Executive Officer |
|        |                                 |  |  |  |  |

 

Dated :  March 12, 2004

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities indicated and on the date set forth above.

 

**ML RESOURCES, INC.**

 
| **Signature** |                    | **Title** |
|---------------|-------------------------|-----------|
|          |                    |      |   |
| /s/           | J. W. A.  Buyers        |      | Chairman of  the Board and Principal Executive Officer Director |
|          | J. W. A.  Buyers        |      |   |
|          |                    |      |   |
| /s/           | Dennis J.  Simonis      |      | President  and Chief Operating Officer Director |
|          | Dennis J.  Simonis      |      |   |
|          |                    |      |   |
| /s/           | Wayne W.  Roumagoux     |      | Chief  Financial Officer |
|          | Wayne W.  Roumagoux     |      | (Principal  Accounting Officer) |
|          |                    |      |   |
| /s/           | James H.  Case          |      | Director |
|          | James H.  Case          |      |   |
|          |                    |      |   |
| /s/           | Dr. Ralph C.  Hook, Jr. |      | Director |
|          | Dr. Ralph C.  Hook, Jr. |      |   |
|          |                    |      |   |
| /s/           | Dr. David  McClain      |      | Director |
|          | Dr. David  McClain      |      |   |

 

53

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**EXHIBIT INDEX**

** **
| **Exhibit   Number** |   | **Description**                                                                                                                                                                                                                                                                               |
|----------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |   |                                                                                                                                                                                                                                                                                          |
| 2.1                  |   | Amended and  Restated Agreement and Plan of Merger, effective as of December 18, 1997,  between Registrant and C. Brewer Homes, Inc. (a)                                                                                                                                                      |
|                 |   |                                                                                                                                                                                                                                                                                          |
| 2.2                  |   | Asset Purchase  Agreement including Exhibits dated March 14, 2000 (g)                                                                                                                                                                                                                         |
|                 |   |                                                                                                                                                                                                                                                                                          |
| 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)                                                                                                                                                                                                                                                               |
|                 |   |                                                                                                                                                                                                                                                                                          |
| 5.1                  |   | Legal Opinion of Counsel dated May 1, 2000 (g)                                                                                                                                                                                                                                                |
|                 |   |                                                                                                                                                                                                                                                                                          |
| 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/MLMO Conveyance Agreement between MLO and Registrant dated as of  October 1, 1989. (b)                                                                                                                                                                                                    |
|                 |   |                                                                                                                                                                                                                                                                                          |
| 10.8                 |   | Butcher/MLMO 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)                                                                                                                                                                                                                            |
|                 |   |                                                                                                                                                                                                                                                                                          |
| 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)                                                                                                                                                                                                    |

 

54

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| **Exhibit   Number** |   | **Description**                                                                                                                                                                                               |
|----------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |   |                                                                                                                                                                                                          |
| 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 Keaau II Orchards. (b)                                                                                                         |
|                 |   |                                                                                                                                                                                                          |
| 10.20                |   | Deed between Butcher and Registrant relating to 86% undivided  interest in Keaau II Orchards. (b)                                                                                                             |
|                 |   |                                                                                                                                                                                                          |
| 10.21                |   | Bill of Sale between Butcher and Registrant relating to 86% undivided  interest in Keaau II 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)                                                                                                                                           |
|                 |   |                                                                                                                                                                                                          |
| 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)                                                                                    |

 

55

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| **Exhibit   Number** |   | **Description**                                                                                                                               |
|----------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|                 |   |                                                                                                                                          |
| 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)                                                                       |
|                 |   |                                                                                                                                          |
| 10.38                |   | Co-ownership and Partition Agreement between KACI and MLO relating to  Lease Nos. 15,020 and 16,859. (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 Lot 10”) dated September 15, 1983. (e) |
|                 |   |                                                                                                                                          |
| 10.41                |   | Assignment of Owner’s Interest in Macadamia Nut Purchase Contract and  Farming Contract between Keaau Lot 10 and Registrant. (e)         |
|                 |   |                                                                                                                                          |
| 10.42                |   | Warranty Deed between Keaau Lot 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, 1998, between Registrant and KACI. (f)                        |
|                 |   |                                                                                                                                          |
| 10.45                |   | Amended and Restated 1989 Farming Contract, effective January 1,  1998, among Registrant, KACI and MKACI. (f)                            |
|                 |   |                                                                                                                                          |
| 10.46                |   | Amended and Restated Farming Contract for the Keaau Lot 10  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)                                       |
|                 |   |                                                                                                                                          |
| 10.48                |   | Credit Agreement between Registrant and Pacific Coast Farm Credit  Services, PCA dated May 1, 2000 (g)                                        |
|                 |   |                                                                                                                                          |
| 10.49                |   | Security Agreement between Registrant and Pacific Coast Farm Credit  Services, PCA dated May 1, 2000 (g)                                      |
|                 |   |                                                                                                                                          |
| 10.50                |   | Orchards Farming Lease between Registrant and Ka’u Agribusiness Co.,  Inc. (g)                                                           |
|                 |   |                                                                                                                                          |
| 10.51                |   | Macadamia Nut Purchase Contract between Mauna Loa and the Partnership  dated July 1, 2003 for Keaau Lot X nuts.   Page 58                |

 

56

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| **Exhibit   Number** |   | **Description**                                                                                                        |
|----------------------|--------|------------------------------------------------------------------------------------------------------------------------|
|                 |   |                                                                                                                   |
| 11.1                 |   | Statement re: Computation of Net Income per Class A Unit.                                                              |
|                 |   |                                                                                                                   |
| 31.1                 |   | Form of Rule 13a-14(a) [Section 302] Certifications                                                                    |
|                 |   |                                                                                                                   |
| 32.1                 |   | Certification pursuant to 18 U.S.C. Section 1350 As adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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(a)          Incorporated by reference to Appendix A ofRegistrant’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 Exhibitpreviously filed as an Exhibit to Registrant’s Registration Statement under theSecurities Act on Form S-1, Registration Statement No. 33-30659, filed October20, 1989.

 

(c)          Incorporated by reference to the corresponding Exhibitpreviously filed as an Exhibit to Registrant’s Registration Statement under theSecurities Act on Form S-1, Registration Statement No. 33-4903, filed June 5,1986.

 

(d)         Incorporated by reference to the corresponding Exhibitpreviously 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 March27, 1987.

 

(e)          Incorporated by reference to the corresponding Exhibitpreviously 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 March27, 1992.

 

(f)            Incorporated by reference to the corresponding Exhibitpreviously filed as an Exhibit to Registrant’s Registration Statement under theSecurities Act on Form S-4, Registration Statement No. 333-46271, filedFebruary 13, 1998.

 

(g)         Incorporated by reference to the corresponding Exhibitpreviously filed as an Exhibit to Registrant’s Form 8-K, Commission filed No.001-09145, filed May 8, 2000.

 

57

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