**UNITED STATES**

**SECURITIES 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, 2005** |
|                                                  |       |                                                                                                     |
| **OR**                                                |
|                                                  |       |                                                                                                     |
| **o**                                                 | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**CommissionFile Number 1-9145**

 

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

(Exact Name of registrant asspecified in its charter)

 

| **DELAWARE**                                                                 | ** ** | **99-0248088**                        |
|------------------------------------------------------------------------------|------------|---------------------------------------|
| (State or  other jurisdiction of incorporation or organization)              |       | (I.R.S.  Employer Identification No.) |
|                                                                         |       |                                  |
| **26-238  Hawaii Belt Road, 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 PURSUANTTO 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 PURSUANTTO SECTION 12(g) OF THE ACT: **NONE**

 

Indicateby check mark if the registrant is a well-known seasoned issuer as defined in Rule 405of the Securities Act

Yes  o    No  ý

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13of 15(d) of the Act.

Yes  o    No  ý

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding twelve months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. 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. ý

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer (as defined in Rule 12b-2 of the Act). Largeaccelerated filer o  Acceleratedfiler o  Non-accelerated filer  ý

 

Indicate by check markwhether the Registrant is a shell company as defined by Rule 12b-2 of theSecurities Exchange Act of 1934. Yes  o    No  ý

 

As of March 14, 2006,7,500,000 shares of the registrant’s Class A Units were outstanding, andthe aggregate market value of such Units held by non-affiliates was $44,025,000(based on the closing price on that date of $5.87 per Unit).

 

 

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**PART I**

** **

**ITEM 1. BUSINESSOF THE PARTNERSHIP**

 

**(a) GeneralDescription of the Business**

 

ML Macadamia Orchards, L.P. (the “Partnership”) is apublicly traded partnership, organized under the laws of the State of Delaware,and engaged in the business of growing and farming macadamia nuts in Hawaii. ThePartnership believes that it is one of the world’s largest growers of macadamianuts. The Partnership owns or leases approximately 4,169 tree acres ofmacadamia nut orchards in three locations within a 50-mile radius on the islandof Hawaii. (“Tree acres” are acres of the Partnership’s owned or leased landsutilized for macadamia nut orchards. “Gross acres” includes areas not utilizedfor orchards.)  The Partnership sells allof its macadamia nut production to Mauna Loa Macadamia Nut Corporation (“MaunaLoa”) under five nut purchase contracts. Four of the nut purchase contractswith Mauna Loa, totaling approximately 15 million pounds, expire December 31,2006 and the fifth contract totaling approximately 5 million pounds expires June 30,2019. The Partnership has reached nut purchase agreements with HamakuaMacadamia Nut Company, Inc.(“Hamakua”), Mac Farms of Hawaii, LLC (“MacFarms”) and Purdyco International, Ltd. dba Island Princess (“Island Princess”)beginning January 1, 2007. The contracts call for Hamakua to purchaseabout 6 million field pounds, Mac Farms to purchase about 5.0 to 6.0 millionfield pounds, and Island Princess to purchase about 2.2 million field pounds. Additionalinformation can be found in section (c) under the heading NutPurchase Contracts on page 3.

 

The Partnership farms its own orchards andapproximately 2,505 additional acres of macadamia orchards for other orchardowners. The Partnership is managed by its general partner, ML Resources, Inc.(“MLR” or the “Managing Partner”). On August 1, 2001, all of the stock ofthe Managing Partner was purchased by D. Buyers Enterprises, LLC (“DBE”) from C.Brewer and Company, Ltd (“CBCL”). J.W.A. Buyers is the majority owner andmanaging member of DBE and the Chairman of the Board of CBCL. On January 6,2005, the stock of ML Resources, Inc. was purchased from DBE by thePartnership for $750,000.

 

Ownership of Class AUnits confers no direct or indirect interest in CBCL, DBE or any of theiraffiliated entities, or in Mauna Loa.

 

The Partnership commenced operations in June 1986,following its acquisition of interests in approximately 2,423 tree acres ofmacadamia nut orchards from subsidiaries of CBCL. In December 1986 and October 1989,respectively, the Partnership acquired from subsidiaries of CBCL interests inapproximately 266 and 1,260 additional tree acres of macadamia orchards. In September 1991the Partnership acquired approximately 78 tree acres of producing macadamiaorchards.

 

On May 1, 2000, the Partnership purchased 142acres of macadamia orchards and the macadamia farming operations fromsubsidiaries of CBCL. The farming operations consist of farming contracts,farming equipment, vehicles, a husking plant, irrigation well, officebuildings, garages and warehouses, office furniture and equipment and materialinventories related to macadamia farming. All the assets and operations arelocated on the island of Hawaii.

 

**(b) Financial Information about IndustrySegments**

 

The response to this section ofItem 1 incorporates by reference Note 4 of the Notes to the FinancialStatements.

 

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**(c) Narrative Description of theBusiness**

 

**Owned-orchard Segment**

 

The Partnership currently sells all of the macadamia nuts from itsorchards to Mauna Loa under long-term nut purchase contracts. Mauna Loaprocesses and 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. The Partnership is Mauna Loa’s largest singlesupplier of macadamia nuts. Mauna Loa was a subsidiary of CBCL until its salein September 2000 to The Shansby Group. In December 2004 Mauna Loawas purchased by Hershey Food Corporation. On May 1, 2000, the Partnershipbegan farming its own macadamia orchards. Prior to that date, subsidiaries ofCBCL performed the farming activities for the Partnership under long-term farmingcontracts.

 

# ***Nut Purchase Contracts.***The Partnership is a party to fivenut purchase contracts with Mauna Loa. They cover all nuts produced by theorchards acquired in June 1986, December 1986, October 1989, September 1991and May 2000, respectively. The 1986 contracts expire December 31,2006, while the 1989 contract expires June 30, 2019 and also provides forthe exclusion of unusable nuts from those purchased by Mauna Loa. The firstthree contracts are identical in all other material respects. The fourthcontract was acquired by assignment with the orchard purchase in September 1991and expired on June 30, 2003. Effective July 1, 2003 the fourthcontract was renegotiated with an expiration date of December 31, 2006.The fourth contract is a set price contract ($0.60 cents per pound atwet-in-shell moisture (“WIS”) of 25%) with an adjustment for trash and spoilageoutside 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 pricepublished annually by the United States Department of Agriculture and 50% onMauna Loa’s “netback component.”  Thenetback 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 expires in 2006. Its pricing formula is based100% on the two-year trailing average of USDA reported prices. The fifthcontract may be terminated at any time by mutual agreement in writing.

 

# ***On December 16,2004, a new nut purchase contract was signed with Hamakua Macadamia Nut Company(“Hamakua”) for the annual delivery of six million WIS pounds, starting January 1,2007. The contract provides for a minimum price of 79 cents per pounds and amaximum price of 99 cents per pound. The pricing formula includes a fixedcomponent of 85 cents and a second component based on Hamakua’s average sellingprice for bulk kernel. Refer to Exhibit 10.52 on page 57.***

 

On January 5, 2006, a new nut purchase contract was signed withPurdyco International, Ltd. dba Island Princess for the annual delivery ofapproximately two million WIS pounds, effective January 1, 2007. The nutprice will be determined every six months by mutual agreement based onprevailing market price for kernel from Hawaii and Australia. Refer to Exhibit 10.55on page 57.

 

On January 6, 2006, a new nut purchase contract was signed withMac Farms of Hawaii, LLC for the annual delivery of between four and one-halfmillion and five and one-half million WIS pounds, effective January 1,2007. The nut price will be determined every six months by mutual agreementbased on prevailing market price for kernel from Hawaii and Australia. Refer toExhibit 10.54 on page 57.

 

#### ***Competition.***Becausethe Partnership’s revenues from nut sales are tied to a formula dependent inlarge part upon Mauna Loa’s market performance, the Partnership bearscertain risks 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 primary competition to be other premium nutproducts, except in Hawaii where its products compete with those of othermacadamia nut producers and other food and non-food tourist items. As a premiumnut, macadamia nuts compete with cashews, almonds and pistachios.

 

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Mauna Loa sells macadamia nuts as “retail” nuts and “commercial”nuts and produces and sells various macadamia nut products. These includepristine salted and unsalted roasted macadamia nuts, packages of dicedmacadamia nuts and macadamia oil (for cooking and baking), value-added productssuch as candy-glazed macadamia nuts, chocolate-covered macadamia nuts,chocolate macadamia nut candy bars, honey-roasted macadamia nuts and macadamianut brittle.

 

Macadamia nuts comprise less than 5% of the sales of branded premiumnuts sold through mass merchandisers, drug and grocery stores on the U.S.mainland, based upon published industry statistics. Cashews and mixed nutsrepresent the bulk of the dollar sales in this segment, followed by pistachios.Macadamia nuts are the highest priced of all premium nuts, and, therefore, theymay be sensitive 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 for the**Mauna Loa****â**brand is the state of Hawaii, where Mauna Loa sells through its own directsales force primarily to retailers. Substantial portions of the macadamia nutproducts sold in Hawaii are purchased by visitors as gifts and souvenirs. MaunaLoa believes that it is one of the largest sellers of macadamia products in theState of Hawaii.

 

Mauna Loa also sells macadamia products as ingredient nuts, through itsvisitor centers and mail order sales.

 

In addition to the Stateof Hawaii, mature macadamia nut orchards are located in Australia, Africa, andCentral America. For the 2005 crop, Hawaii was expected to supply 24% of theworld crop, and Australia, the world’s largest producer, was expected to supply41%.

 

A general decline in nut prices would adversely affect the prices whichMauna Loa could charge for its macadamia nut products and could have a negativeeffect on its profitability. Since the purchase price for the Partnership’snuts under all but one of its nut purchase contracts is based in part onnut prices reported by the industry and in part on the marketing successof Mauna Loa, a general decline in macadamia nut prices could also adverselyaffect the Partnership’s revenues.

 

# ***MacadamiaFarming Segment***

 

Since the May 2000 purchase of the macadamia farming operations,the Partnership farms its own 4,169 acres of macadamia orchards andapproximately 2,505 additional acres of macadamia orchards owned by othergrowers. Three of the farming contracts terminated December 31, 2005,covering approximately 465 acres making the total acres covered by farmingcontracts for 2006 to be 2,040.

 

All the orchards are located in three separate regions on the island ofHawaii (“Keaau”, “Ka’u” and “Mauna Kea”). Because each region has differentterrain and weather conditions, farming methods vary somewhat among the threelocations.

 

***Farming Contracts.***ThePartnership currently services approximately seventeen farming contracts whichwere assigned to the Partnership with the May 2000 acquisition. Servicesunder these contracts include cultivation, weed and pest control,fertilization, pruning and hedging, replanting, harvesting, and husking. Thesecontracts also provide a management fee to the Partnership, which is based aseither a fixed fee per acre farmed, or as a percent of reimbursed costs,ranging from 5% to 20%.

 

***Orchard Maintenance***.Maintenance of an orchard is essential to macadamia nut farming. Pruning andhedging of trees is necessary to allow space for mechanical harvesting andcultivating equipment to operate safely and efficiently and to remove deadbranches. Where mechanical equipment is used, the orchard floor must bemaintained in a condition that will permit its operation. Soil and gravel areused to

 

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repair mud holes and other surface irregularities caused by soilerosion from heavy rain and by farming equipment. Pruning and surfacemaintenance are usually performed between harvest seasons.

 

Orchard management also requires the proper selection and applicationof fertilizers, pesticides (to control rodents, insects and fungi) andherbicides (to control weeds). Insects, rodents and fungi, as well as wildpigs, if not controlled, can cause losses to nut production.

 

***Harvesting*.**Theharvest period begins in the late summer and runs through the following spring.Mature nuts fall from the trees and are harvested using mechanized harvestequipment when the orchard floor is level enough to permit its use. Nuts areharvested by hand when the orchard floor is too uneven to permit mechanicalharvesting, when the nut drop is very light and when nuts remain after harvesting.At Keaau, Ka’u and Mauna Kea, seasonal labor for hand harvesting and otheroperations is generally available from nearby Hilo and adjacent communities.

 

Mechanical harvesting is less costly than hand harvesting, butmechanical harvesting is possible only where the orchard floor is relativelyflat. Approximately 70% of the orchards in Ka’u, 59% in Keaau and 94% in MaunaKea are currently mechanically harvested. The remaining acres are too unevenfor mechanical harvesting and must be harvested by hand.

 

During the harvest season, the nuts are collected every six to tenweeks. Nuts suffer loss in quality if they remain on the ground too long. Theharvested nuts are then transported to the husking facilities, which arelocated in Ka’u and Keaau. The Keaau husking facility is owned by Mauna Loa,and the Ka’u husking facility is owned by the Partnership. Nuts harvested inthe Mauna Kea region are transported to the husking facility in Keaau. At thehusking facility, the outer husk is removed and the nuts, still in their shell,are weighed and sampled to determine moisture content and kernel quality. Titleto the nuts husked in Keaau passes to Mauna Loa after weighing. Title to thenuts husked at Ka’u pass to Mauna Loa after delivery to the Mauna Loa processingplant in Keaau. The nuts are then moved to a drying facility.

 

***Processing*.**Thenuts purchased by Mauna Loa from the Partnership and from the other orchardsfarmed by the Partnership are primarily processed at Mauna Loa’s processingplant located adjacent to the orchards located in the Keaau area. The plant wasbuilt in 1966 and is presently capable of handling approximately 210,000 poundsof dry-in-shell (commonly abbreviated “DIS”) nuts per day. Processing at theplant includes drying, cracking, roasting, inspecting and limited packaging. Theplant also includes separate warehouses, a machine shop, storage facilities,husking facilities, nut drying facilities, a generator and a 10,000 square footchocolate processing plant. None of these processing facilities are owned bythe Partnership.

 

At Mauna Loa’s plant in Keaau, the harvested nuts pass by conveyorsover metal screens, blowers and rock separators that remove extraneous materialfrom the in-husk nuts. The husks are then split and removed by pressing thenuts between steel roller bars and a rubber pad. At this stage, the nut kernelsare still encased in their hard round shells and roughly 20% of their weight isattributable to moisture content. At this point, the nuts are referred to aswet-in-shell (commonly abbreviated “WIS”). The WIS weight of the nuts is usedto determine payments to be made by Mauna Loa under the Nut Purchase Contracts.Approximately 20% of the WIS weight of the nuts will become dry salable kernelswhen all further processing is completed.

 

After the nuts are weighed, the moisture content of the nuts is reducedby blowing warm air over them, which produces DIS nuts. Metal rollers are usedto crack the nuts and remove the shell. Mechanical and optical equipment, aswell as hand sorting, are used to separate the salable kernels from unusablenuts and pieces of broken shell.

 

The dry nut kernels are roasted and then sorted into retail andcommercial 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

 

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Loa’s plant in Keaau the nuts may be salted, or covered withchocolate or one of several coatings, and finally packaged, labeled and readiedfor shipment.

 

#### ***Stabilization Payments***

 

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 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 seller of this orchard Ka’uAgribusiness Company, Inc. (“KACI”) agreed to make cash stabilizationpayments to the Partnership for each year through 1993 in which the cash flow(as defined) from this orchard fell short of the target cash flow level, whichequaled $507,000. Stabilization payments for any given year were limited to thelesser of the amount of the shortfall or a maximum payment amount. For theyears from 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 accounted for stabilization payments(net of the 4% Hawaii general excise tax) as a reduction in the cost basis ofthe orchard. As such, these payments are being reflected in the Partnership’snet income ratably through 2019 as a reduction to the depreciation expensereported for this orchard.

 

In return, the Partnership is obligated to pay theseller 100% of any year’s cash flow from this orchard in excess of the targetcash flow as additional percentage rent until the aggregate amount of theadditional percentage rent paid equals 150% of the total amount ofstabilization payments previously received. Thereafter, the Partnership isobligated to pay the seller 50% of this orchard’s cash flow in excess of thetarget cash flow as additional incentive rent. No additional rent was due in2003, 2004, or 2005.

 

#### ***Item 1A. Risks Involved in OperatingMacadamia Orchards***

 

Macadamia nut trees are subject to damage or destruction from diseases,pests, floods, droughts, windstorms, hurricanes, volcanic activity and othernatural causes. Partnership tree replacements for all orchards from all causeswere 0.6% in 2003, 0.6% in 2004, and 0.2% in 2005. Both crop and tree insuranceare in place to protect the Partnership against material losses.

 

***Diseases and Pests***.The Partnership’s Keaau orchards experienced tree replacements of 1.3% in 2003,1.4% in 2004, and 0.6% in 2005. Other macadamia growers in the vicinity havealso experienced losses due to a problem known as “Macadamia Quick Decline” (“MQD”).Based upon research by the University of Hawaii and other experts, it isbelieved that the situation is due to fungi associated with high moistureconditions. 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 being more susceptible to MQD than other varieties.Approximately 9% of the Partnership’s orchards are variety 333 and 45% arevariety 344. Both the Keaau and Mauna Kea orchards are areas with high moistureconditions, and may be more susceptible to the MQD problem. MQD is presentin the Ka’u orchards, but tree losses to date have been less than 2% per yearin the Ka’u area.

 

There are also two types of fungal diseases, which canaffect nut production but are not fatal to the trees themselves. One of theseis Phytophthora, which affects the macadamia flowers and nutlets, and the otheris Botrytis cinerea. These types of fungal disease are generally controllablewith fungicides. Historically, these fungi have attacked the orchards locatedin Keaau during periods of persistent inclement weather. A light infestation ofPhytophthora occurred in late January-early February 2001.

 

***Rainstorms and Floods.***ThePartnership’s orchards are located in areas on the island of Hawaii that aresusceptible to heavy rainstorms. In November 2000 the Ka’u region wasaffected by flooding. This flooding resulted in expected 2000 harvesting beingdone in 2001. Since the flood in 2000 heavy rain in the Ka’u region has notproduced flooding of any consequence.

 

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***Windstorms***. ThePartnership’s orchards are located in areas on the island of Hawaii that aresusceptible to windstorms. Twenty-five major windstorms have occurred on theisland of Hawaii since 1961, and four of those caused material losses toPartnership orchards. Several of the Partnership’s orchards are surrounded bywindbreak trees, which provide limited protection. Younger trees that have notdeveloped extensive root systems are particularly vulnerable to windstorms.

 

***Insurance.***ThePartnership secures tree insurance each year under a federally subsidizedprogram. The tree insurance for 2005 provides coverage up to a maximum ofapproximately $22.8 million against loss of trees due to wind, fire or volcanicactivity. Crop insurance was purchased for the 2004-2005 crop year and providescoverage up to a maximum of approximately $8.6 million against loss of nuts dueto wind, fire, volcanic activity, earthquake, adverse weather, wildlife damageand failure of irrigation water supplies.

 

***Volcanoes*.**Theorchards are located on the island of Hawaii, where there are two activevolcanoes. To date, no lava flows from either volcano have affected orthreatened the orchards.

 

***Rainfall*.**Theproductivity of orchards depends in large part on moisture conditions. Inadequaterainfall can reduce nut yields significantly, while excessive rain withoutadequate drainage can foster disease and hamper harvesting operations. Whilerainfall at the orchards located in the Keaau and Mauna Kea areas has generallybeen adequate, the orchards located in the Ka’u area generally receive lessrainfall and, as a result, a portion of the Ka’u orchards is presentlyirrigated. Irrigation can mitigate the effects of a drought, but it cannotcompletely protect a macadamia nut crop from the effect of a drought. Recordedrainfall at each of the three locations of the Partnership’s orchards for thepast five years is shown below:

 
| **Year** | ** ** | **Ka’u** | ** ** | **Keaau**   | ** ** | **Mauna Kea** | ** ** |
|----------|------------|---------------|------------|-------------|------------|---------------|------------|
| 2001     |       | 46.0”    |       | 124.0” |       | 133.4”   |       |
| 2002     |       | 58.5”    |       | 139.4” |       | 156.1”   |       |
| 2003     |       | 22.8”    |       | 94.8”  |       | 117.4”   |       |
| 2004     |       | 54.9”    |       | 142.7” |       | 151.5”   |       |
| 2005     |       | 34.7”    |       | 133.8” |       | 171.8”   |       |

 

During 2005 the Ka’u,Keaau and Mauna Kea areas recorded 84%, 99% and 116% of the normal averageannual rainfall in their area of the island, respectively.

 

#### ***Water Supply for Irrigation***

 

With the May 2000 acquisition, the Partnership acquired anirrigation well (the “Sisal Well”), which supplies water to the Partnership’sorchards in Ka’u which were purchased in June 1986 and 1989. The SisalWell is situated on land owned by Mauna Kea Agribusiness Company, Inc. (“MKACI”).On May 1, 2000 the Partnership entered into a license agreement withMKACI, which allows the Partnership necessary access to maintain and operatethe Sisal Well, as well as the use of roads to access, maintain and operate thePartnership’s macadamia orchards. Annual rent for the license agreement is OneDollar. The license agreement terminates on the earlier of June 30, 2045,or at the termination of the May 1, 2000 lease between Partnership andKACI.

 

Prior to the May 2000acquisition, the Partnership and KACI were parties to a water agreement towhich KACI agreed to supply water to those portions of the June 1986Orchards and October 1986 Orchards located at Ka’u and which had beenirrigated historically.

 

If the amount of waterprovided by the Sisal Well becomes insufficient to irrigate the above namedorchards, 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.

 

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On a historical basis, the quantity of water available from the SisalWell has been generally sufficient to irrigate these orchards in accordancewith prudent farming practices. The irrigated portion of the Ka’u II Orchardsis expected to need greater quantities of water as the orchards mature. ThePartnership anticipates that the amount of water available from the Sisal wellwill be generally sufficient, assuming average levels of rainfall, to irrigatethe irrigated orchards in accordance with prudent farming practices for thenext several years. If no irrigation water is available to the IrrigatedOrchards, then, based on historical average rainfall levels, diminished yieldsof macadamia nut production can be expected.

 

# ***Employees***

 

As of December 31, 2005, the Partnership employed 249 people, ofwhich 164 were seasonal employees. Of the total, 23 are in farming supervisionand management, 212 in production, maintenance and agricultural operations, and14 in accounting and administration.

 

With the May 2000 acquisition, the Partnership agreed to theassumption of three bargaining agreements with the ILWU Local 142. Theseagreements cover all production, maintenance and agricultural employees of theKa’u Orchard Division, of the Keaau Orchard Division and of the Mauna KeaOrchard Division. These labor contracts became effective May 1, 1997 andexpired on April 30, 2002. The parties have recently agreed to a newthree-year contract, which will expire on April 30, 2008. The Partnershipbelieves that relations with its employees and the ILWU are generally verygood.

 

**Item 1B. Unresolved staff comments.**None

 

**Available Information.**ThePartnership files annual, quarterly and current reports and other informationwith the Commission. These filings are available free of charge through itsInternet website at www.mlmacadamia.com as soon as reasonably practicable afterthe Partnership electronically files such material with, or furnishes it to,the Commission. Any unit holder, who so requests may obtain a printed copyof these documents from the Partnership, by contacting the Partnership at808-969-8057, or in writing at 26-238 Hawaii Belt Road, Hilo, Hawaii 96720.

 

**ITEM 2. PROPERTIES**

 

***Location.***ThePartnership owns or leases approximately 4,169 tree acres of macadamia orchardson the island of Hawaii. The orchards are located in three areas: Ka’u, Keaauand Mauna Kea. The Ka’u area is located in the south part of the islandabout fifty miles from Hilo. The Keaau area is located six miles south of Hiloon the east side of the island, and the Mauna Kea area is located three milesnorth of Hilo on the east side of the island.

 

The majority of macadamia nut trees grown in the State of Hawaii aregrown on the island of Hawaii in volcanic soil that permits drainage duringheavy rainfall. While the orchards are located approximately within a 50-mileradius, the climate and other conditions that affect the growing of macadamianuts are different. These differences are the result of prevailing windpatterns and island topography, which produce a variety of microclimatesthroughout the island.

 

***Age and Density*.**Theproductivity of macadamia nut orchards depends on several factors including,among others, the age of the trees, the number of trees planted per acre, soilcondition, climate, rainfall and/or irrigation. The most significantcharacteristic affecting yields is maturity. The trees in a macadamia nut orchardgenerally begin to produce nuts at a commercially acceptable level at aroundnine years of age. Thereafter, nut yields increase gradually until the treesreach maturity at approximately 15 years of age, after which the nut yieldremains relatively constant except for variances produced by rainfall,cultivation practices, pest infestation and disease.

 

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Macadamia orchards normally reach peak productionafter fifteen to eighteen years of age. All of the 4,169 tree acres ofmacadamia orchards owned or leased by the Partnership are over twenty years ofage. About 2% of trees are lost to various causes each year and are replaced.

 

 

***Rainfall*****.**Macadamia treesgrow best in climates with substantial and evenly distributed rainfall (orequivalent irrigation) and in soil that provides good drainage. Inadequaterainfall can significantly reduce nut yields, while excessive rain withoutadequate drainage can impede healthy tree growth, promote the growth of harmfulfungal diseases and produce mud holes that require repair of the orchard floor.

 

AtKeaau, normal rainfall is adequate without irrigation, and the volcanic soilprovides good drainage. However, short droughts and occasional flooding haveoccurred. At Mauna Kea, normal rainfall is adequate without irrigation and thevolcanic soil provides adequate drainage. In the event of a very long drought,production at Keaau and Mauna Kea might be affected. At Ka’u, located on thedrier side of the island, the rainfall averages are substantially less than atKeaau, particularly at the lower elevations. Approximately 652 acres at thelower elevations of Ka’u are irrigated to provide for additional water whenrequired. 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.***Thefollowing table lists each of the orchards, the year acquired, tree acres,tenure, and lease rents:

 
| ** **             | ** ** | ** **     | ** ** | **Tree**  | ** ** | ** ** | ** ** | **Lease**      | ** ** | **Min. Rent** | ** ** |
|------------------------|------------|----------------|------------|-----------|------------|------------|------------|----------------|------------|---------------|------------|
| **Orchard**            | ** ** | **Acquired**   | ** ** | **Acres** | ** ** | **Tenure** | ** ** | **Expiration** | ** ** | **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 additional information concerning farmingleases, see Item 13, page 47.

 

In addition to the minimum annual lease paymentamount, all the leases require the Partnership to pay various expenses withrespect to the leased premises as well as an additional rental payment based onthe market price per pound of macadamia nuts sold in Hawaii.

 

With respect to the Ka’u Green Shoe I Orchard, thelease requires the Partnership to pay KACI, the seller and lessor, additionalrent equal to 100% of any year’s cash flow generated by such orchard in excessof a target level of $507,000 until the aggregate amount paid equals 150% ofthe aggregate amount of the stabilization payments previously received by thePartnership. 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 additional information, see “StabilizationPayments” on page 5.

 

**ITEM 3. LEGAL PROCEEDINGS AND SETTLEMENT**

 

Asreported on August 13, 2004, in the Quarterly Report on Form 10-Q ofML Macadamia Orchards, L.P. (the “Partnership”) for its fiscal quarter ended June 30,2004, the Partnership and several independent growers filed suit against MaunaLoa Macadamia Nut Corporation in the Circuit Court of the Third JudicialCircuit of the State of Hawaii in Hilo, alleging that the proposed acquisitionby Mauna Loa Macadamia Nut Corporation (“Mauna Loa”) of the assets of Mauna Loa’smajor competitor, Mac Farms of Hawaii, LLC (“Mac Farms”), would give Mauna Loaa monopoly over the supply and processing of wet-in-shell macadamia nuts on theIsland of Hawaii, which in turn would give Mauna Loa monopoly power over thegrowers and other processors on the Island of Hawaii and consumers of macadamianuts in Hawaii and on the mainland United States. Hamakua Macadamia Nut Company, Inc.(“Hamakua”)

 

10

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subsequently filed itsown lawsuit against Mauna Loa, which was then consolidated with the Partnership’scase.

 

OnOctober 1, 2004, the Partnership, the independent growers and Hamakuaentered into an agreement with Mauna Loa whereby Mauna Loa terminated its agreementto acquire the assets of Mac Farms, and the Partnership, the independentgrowers and Hamakua caused their lawsuits to be dismissed.

 

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

 

No matters were submittedduring the fourth quarter of the fiscal year covered by this report to a voteof security holders.

 

11

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### **PART II**

 

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

 

The Partnership’s Class ADepositary Units are listed for trading on the New York Stock Exchange (symbol= NUT). There were 1,096 registered holders of Class A Depositary Units onDecember 31, 2005.

 

Distributions declared and high and low sales prices of the Class ADepositary Units, based on New York Stock Exchange daily compositetransactions, are shown in the table below:

 
| ** ** | ** **  | **Distribution** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------|-------------|------------------|------------|----------|------------|---------|------------|
|       |        |             |       |     |       |    |       |
| **2005:**  | 4th Quarter |             | $          | 0.050    |       | 6.09    |       | 5.60 |   |
|       | 3rd Quarter |             | 0.050      |     | 6.19       |    | 5.30       |   |
|       | 2nd Quarter |             | 0.050      |     | 6.19       |    | 5.45       |   |
|       | 1st Quarter |             | 0.050      |     | 6.26       |    | 5.45       |   |
|       |        |             |       |     |       |    |       |
| **2004:**  | 4th Quarter |             | $          | 0.050    |       | 6.00    |       | 3.80 |   |
|       | 3rd Quarter |             | 0.050      |     | 4.39       |    | 3.80       |   |
|       | 2nd Quarter |             | 0.050      |     | 4.77       |    | 3.85       |   |
|       | 1st Quarter |             | 0.050      |     | 4.75       |    | 3.51       |   |

 

**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 withthe terms and conditions of the Credit Agreement at December 31, 2004except for its debt coverage ratio. The lender has provided a waiver to theloan covenants for this ratio for the fourth quarter 2004. Had the lender notwaived the restriction the Partnership would have been restricted in itsability to pay distributions to the limited partners. The Partnership was incompliance with the terms and conditions of the Credit Agreement at December 31,2005.

 

12

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**ITEM 6. SELECTED FINANCIAL DATA**

(In thousands, except per pound and per unitdata)

 
| ** **                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Financial:                                    |       |     |       |     |       |     |       |     |       |     |       |
| Total revenue                                 |       | $        | 17,378     |     | $          | 13,665   |       | $        | 15,426     |     | $          | 14,556 |   | $ | 16,893 |   |
| Net cash provided by operating activities (1) |       | 1,913    |       | 368      |       | 2,262    |       | 2,166    |       | 2,237    |       |
| Income (loss) before taxes                    |       | 900      |       | (1,644   | )          | 111      |       | (447     | )          | 1,112    |       |
| Net income (loss)                             |       | 771      |       | (1,649   | )          | 69       |       | (480     | )          | 1,010    |       |
| Distributions declared                        |       | 1,500    |       | 1,515    |       | 1,212    |       | 1,515    |       | 1,515    |       |
| Total working capital                         |       | 3,429    |       | 2,931    |       | 4,165    |       | 3,220    |       | 3,183    |       |
| Total assets                                  |       | 58,046   |       | 58,438   |       | 60,069   |       | 61,803   |       | 65,329   |       |
| Long-term debt, non current                   |       | 1,600    |       | 2,034    |       | 2,468    |       | 2,920    |       | 3,402    |       |
| Total partners’ capital                  |       | 49,389   |       | 50,542   |       | 53,706   |       | 54,849   |       | 56,844   |       |
| Class A limited partners’ capital   |       | 49,308   |       | 50,037   |       | 53,169   |       | 54,300   |       | 56,275   |       |
| Net cash flow (2)                             |       | 2,501    |       | 466      |       | 2,157    |       | 1,592    |       | 3,093    |       |
|                                          |       |     |       |     |       |     |       |     |       |     |       |
| Operations:                                   |       |     |       |     |       |     |       |     |       |     |       |
| Acres harvested                               |       | 4,169    |       | 4,169    |       | 4,169    |       | 4,169    |       | 4,169    |       |
| Macadamia nuts harvested (lbs.) (3)           |       | 21,707   |       | 18,933   |       | 21,196   |       | 21,404   |       | 23,013   |       |
| Net price $/lb. (3)(4)                        |       | $        | 0.5550     |     | $          | 0.4972   |       | $        | 0.4857     |     | $          | 0.4748 |   | $ | 0.4830 |   |
|                                          |       |     |       |     |       |     |       |     |       |     |       |
| Per Class A Unit (5):                    |       |     |       |     |       |     |       |     |       |     |       |
| Net income (loss)                             |       | 0.10     |       | (0.22    | )          | 0.01     |       | (0.06    | )          | 0.13     |       |
| Net cash flow (2)                             |       | 0.33     |       | 0.06     |       | 0.28     |       | 0.21     |       | 0.41     |       |
| Distributions                                 |       | 0.20     |       | 0.20     |       | 0.16     |       | 0.20     |       | 0.20     |       |
| Partners’ capital                        |       | 6.57     |       | 6.67     |       | 7.09     |       | 7.24     |       | 7.50     |       |

 

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(1)          See “Statements of CashFlows” in the financial statements for method of calculation.

(2)          See Footnote 5 in thenotes to financial statements for method of calculation.

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

(4)          Weighted average for allorchards.

(5)          7,500,000 Class AUnits were issued and outstanding for all periods presented.

 

13

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Contractual obligations for the Partnership are detailed in thefollowing:

 
| ** **                                                                      | ** ** | ** ** | ** ** | **Payments**          | ** ** | ** **            | ** ** | ** **            | ** ** | ** **             | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|------------------------|------------|
| **Contractual Obligations**                                                     | ** ** | **Total**  | ** ** | **Less Than 1  Year** | ** ** | **Due by  1-3 Years** | ** ** | **Period  3-5 Years** | ** ** | **More Than 5  Years** | ** ** |
| Long-Term  Debt                                                                 |       | $          | 2,000,000  |                  | $          | 400,000               |       | $                     | 800,000    |                   | $          | 800,000 |   | $ | — |   |
| Capital  Lease Obligations                                                      |       | 34,000     |       | 34,000                |       | —                |       | —                |       | —                 |       |
| Operating  Leases                                                               |       | 3,809,000  |       | 375,000               |       | 601,000               |       | 330,000               |       | 2,503,000              |       |
| Purchase  Obligations                                                           |       | —     |       | —                |       | —                |       | —                |       | —                 |       |
| Other  Long-Term Liabilities off The Registrant’s Balance Sheet under GAAP |       | —     |       | —                |       | —                |       | —                |       | —                 |       |
| Total                                                                           |       | $          | 5,843,000  |                  | $          | 809,000               |       | $                     | 1,401,000  |                   | $          | 1,130,000 |   | $ | 2,503,000 |   |

 
| **ITEM 7.** | ** ** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL**  **CONDITION AND RESULTS OF  OPERATIONS** |
|-------------|------------|------------------------------------------------------------------------------------------------------------|

 

This discussion should be read in conjunction with the financialstatements and the related notes included elsewhere in this report.

 

# ***Resultsof operations – 2005, 2004, 2003***

 

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

 

Production and yield data for the eight orchards aresummarized below (expressed in wet-in-shell pounds at 25% moisture):

 
| ** **                                | ** ** | ** **     | ** ** | ** **  | ** ** | **2005**       | ** ** | **Average  Yield per Acre** | ** ** |
|-------------------------------------------|------------|----------------|------------|-------------|------------|----------------|------------|-----------------------------|------------|
| **Orchard**                               | ** ** | **Acquired**   | ** ** | **Acreage** | ** ** | **Production** | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Keaau I                                   |       | June 1986 |       | 1,467       |       | 5,799,491      |       | 3,953                       |       | 3,880 |   | 4,271 |   |
| Keaau II                                  |       | Oct. 1989 |       | 220         |       | 606,790        |       | 2,758                       |       | 2,729 |   | 2,862 |   |
| Keaau Lot 10                              |       | Sept. 1991     |       | 78          |       | 247,110        |       | 3,168                       |       | 3,221 |   | 3,255 |   |
| Ka’u I                               |       | June 1986 |       | 956         |       | 7,598,092      |       | 7,948                       |       | 5,353 |   | 5,886 |   |
| Ka’u Green Shoe I                    |       | Dec. 1986 |       | 266         |       | 1,702,137      |       | 6,399                       |       | 6,632 |   | 7,619 |   |
| Ka’u II                              |       | Oct. 1989 |       | 714         |       | 3,539,295      |       | 4,957                       |       | 5,067 |   | 5,504 |   |
| Ka’u O                               |       | May 2000  |       | 142         |       | 803,036        |       | 5,655                       |       | 4,464 |   | 5,252 |   |
| Mauna Kea                                 |       | Oct. 1989 |       | 326         |       | 1,410,597      |       | 4,327                       |       | 3,851 |   | 5,271 |   |
| Totals (except yields which are averages) |       |           |       | 4,169       |       | 21,706,548     |       | 5,207                       |       | 4,541 |   | 5,084 |   |

 

Productionfor the orchards purchased in 1989 and 2000 is net of unusable nuts, as statedin their respective nut purchase agreements. Production for the orchardspurchased in 1986 and 1991 includes all nuts delivered. The nut purchasecontracts for 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 pricewithin a range of unusable of 10% to 13%. The Partnership reports on a calendaryear basis, though the natural crop year generally begins in August andruns through April.

 

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Productionin 2005 was 14.6% greater than 2004 and 2.4% greater than 2003. Production in2004 was 10.7% lower than 2003 and 11.5% lower than 2002. Significant factorsaffecting the crop were as follows:

 

1. The drought in the Ka’u orchards in 2003 affectedthe nut set, development and production for the spring of 2004.

 

2. The above average rainfall in the Keaau and MaunaKea orchards negatively impacted the pollination and nut set in 2004.

 

3. The Ka’u region recorded above average rainfall in2004. The rainfall replenished the soil moisture and improved yields in theregion for the spring of 2005.

 

4. The maturation of the crop was delayed by theweather conditions which resulted in less production in the fall of 2004 and improvedyields in the spring of 2005.

 

5. The Ka’u region recorded below average rainfall in2005. The shortfall during the early spring to fall is expected to reduceyields in the spring of 2006. Above average rainfall November 2005 to February 2006is expected to have a positive effect on the fall 2006 production.

 

6. A late and abbreviated flower season in the Keaauand Mauna Kea regions resulted in lower production in the fall of 2005. Thespring 2006 production is expected to be comparable to the production in thespring of 2005.

 

The Ka’u Green Shoe I orchard and the Mauna Keaorchard are fully mature. As a result, the yields from these orchards areexpected to produce on average with the Partnership’s mature orchards. At fullmaturity under favorable growing conditions, a macadamia orchard can producebetween 4,500 and 7,500 WIS pounds of macadamia nuts per acre each year at Ka’uand between 2,500 and 6,000 WIS pounds of macadamia nuts per acre each year atKeaau. All the trees have reached full maturity in the Mauna Kea area and it isexpected that production will approximate Keaau levels.

 

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

 

Macadamia nut revenues depend on the number of producing acres, yieldsper acre and the nut purchase price. The impact of these factors is summarizedin the following table:

 
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------|------------|----------|------------|
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **vs**   | ** ** | **vs**   | ** ** |
| ** **                           | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Trees acres harvested                |       | 4,169      |       | 4,169      |       | 4,169      |       | —   |       | —   |       |
| Average yield (WIS lbs./acre)        |       | 5,207      |       | 4,541      |       | 5,084      |       | +15      | %          | -11      | %          |
| Nuts harvested (000’s WIS lbs.) |       | 21,707     |       | 18,933     |       | 21,196     |       | +15      | %          | -11      | %          |
| Nut price ($/WIS lbs. @ 25%)         |       | 0.5550     |       | 0.4972     |       | 0.4857     |       | +12      | %          | +2       | %          |
| Gross nut sales ($000)               |       | $          | 12,048     |       | $          | 9,414      |       | $        | 10,295     |     | +28        | % | -9 | % |
| Prior year nut price settlement      |       | 576        |       | —     |       | 14         |       |     |       |     |       |
| 2003 early harvest settlement        |       | —     |       | —     |       | 150        |       |     |       |     |       |
| 2004 Mac Farms settlement            |       | 60         |       | —     |       | —     |       |     |       |     |       |
| Recorded nut sales ($000s)           |       | $          | 12,684     |       | $          | 9,414      |       | $        | 10,459     |     |       |   |   |   |

 

Under three of the nut purchase contracts with Mauna Loa, the price fornuts delivered is based 50% on the two-year trailing average of USDA publishedmacadamia nut prices and 50% on a “netback component”. The netback component isdetermined by subtracting from Mauna Loa’s gross revenues

 

15

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from the sale of macadamia products (i) allocable processing,packaging, marketing, selling and advertising costs and (ii) a 20% capitalcharge on the difference between those aggregate gross revenues and aggregateallocable costs.

 

In mid-December 2004,Mauna Loa notified the Partnership that it would be unable to accept deliveriesover a five-day period during the height of the harvest season. The Partnershipadvised Mauna Loa that this was unacceptable for both financial and operationalreasons and arrangements would be made to deliver the nuts to anotherprocessor. After alternative deliveries had been committed to, Mauna Loanotified the Partnership that it was willing to accept delivery. As a result ofthe alternative commitment, the Partnership delivered approximately 240,000pounds of nuts to Mac Farms of Hawaii at a price of 93 cents per pound over atwo-day period. In late December, Mauna Loa notified the Partnership that itintended to deduct $118,000 from future nut payments as damages. The Partnershipnotified Mauna Loa that the deduction was a violation of our various contractsand the Partnership would consider termination of the contracts if suchdeduction were made. Mauna Loa has since withdrawn their notice of deduction,but the Partnership reserved $118,000 in 2004. A settlement was reached withMauna Loa whereby the Partnership paid Mauna Loa approximately $58,000. As aresult the Partnership recorded $60,000 of nut revenue in 2005 from the 2004reserve.

 

The following table setsforth the manner in which the nut purchase price per pound was determined for2005, 2004 and 2003 ($/lb.):

 
| ** **                                                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| USDA price - two years prior (a)                                              |       | 0.5391   |       | 0.5666   |       | 0.5601   |       |
| USDA price - one year prior (a)                                               |       | 0.5769   |       | 0.5391   |       | 0.5666   |       |
| USDA price - two year trailing average                                        |       | 0.5580   |       | 0.5528   |       | 0.5634   |       |
|                                                                          |       |     |       |     |       |     |       |
| Gross revenues                                                                |       | 2.1093   |       | 1.3929   |       | 1.4346   |       |
| Less allocable processing, packaging, marketing, sales and  advertising costs |       | 1.4268   |       | 0.8515   |       | 0.9400   |       |
| Less 20% capital charge                                                       |       | 0.1365   |       | 0.1083   |       | 0.0996   |       |
| Net-back component                                                            |       | 0.5460   |       | 0.4331   |       | 0.3950   |       |
|                                                                          |       |     |       |     |       |     |       |
| USDA price - two year trailing average                                        |       | 0.5580   |       | 0.5528   |       | 0.5634   |       |
| Net-back component                                                            |       | 0.5460   |       | 0.4331   |       | 0.3950   |       |
| Average of USDA two year trailing average price and net-back  component       |       | 0.5520   |       | 0.4929   |       | 0.4792   |       |
| Plus Hawaii general excise tax (0.5%)                                         |       | 0.0028   |       | 0.0025   |       | 0.0024   |       |
| Net purchase price (b) (c) (d) (e)                             |       | 0.5548   |       | 0.4954   |       | 0.4816   |       |

 

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(a)          Mauna Loa’s ownpurchases comprise a substantial portion of nut purchases reported to the USDA.Therefore, the USDA price component of the purchase price is, to a substantialdegree, the average price that Mauna Loa has paid to purchase macadamia nutsfrom the Partnership and from third parties during the previous two years.

 

(b)         The nut purchase pricefor the 1986 and 1989 orchards was the same for 1999 and all previous years. Withthe change of ownership of Mauna Loa in 2000, a quality conversion factor inthe nut purchase contracts was initiated. The effect was to cause a slightlydifferent price of $0.4808 for the 1989 orchards in 2003, $0.4951 in 2004 and$0.5542 in 2005. An early harvest round was requested by

 

16

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Mauna Loa in 2003 resulting in a payment of$150,000 over the contract price. With this payment the 2003 price was $0.4883.

 

(c)          The nut purchasecontract covering nut production from the 78 acre Keaau Lot 10 orchard acquiredin September 1991 defines the “two-year trailing average” provisionslightly differently from the 1986 and 1989 nut purchase contracts, and thusresults in a different nut price. This was in affect for the first six monthsof 2003. A new contract was negotiated with a fixed price for all nuts withunusables in a range of 10% to 13%. The nut price for this orchard was $0.6000in 2005, $0.6000 in 2004, and $0.5923 in 2003. This orchard accounts for lessthan 2% of the Partnership’s macadamia nut production.

 

(d)         The nut purchase contractfor the Ka’u O orchards purchased in May 2000 uses only the two-yeartrailing USDA average to determine its nut price, which was $0.5610 in 2005,$0.5560 in 2004 and $0.5660 in 2003.

 

(e)          Mauna Loa has providedthe final 2004 audited nut price to the Partnership resulting in an additional$576,000 paid in 2005.

 

(f)            Mauna Loa has not providedthe final 2005 audited nut price to the Partnership. The Partnership has notcompleted its internal review of the nut price calculation.

 

The 2005 average nut price from all orchards increased12% from 2004 before 2004 adjustments realized in 2005. If the 2004 nut pricewas adjusted by those adjustments the average nut price increase for 2005compared to 2004 would be 5%. The 2004 average nut price from all orchardsincreased 3% from 2003. The USDA portion increased 1% in 2005, decreased 2% in2004 and decreased 5% in 2003. The netback increased 26% in 2005 compared to2004 and increased 10% in 2004 compared to 2003. The current netback pricereflects the operating performance of Mauna Loa.

 

The USDA published pricefor the 2004-2005 crop year was $0.7018 per pound (WIS at 25% moisture), whichis 22% higher than the 2003-2004 crop year of $0.5769, and 30% higher than the2002-2003 price of $0.5391. The USDA two-year trailing average, which affectsthe Partnership’s 2006 nut price, will be $0.6394, a 15% increase over the 2005two-year average.

 

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

 

Agricultural unit costs depend on the operating expenses required tomaintain the orchards and to harvest the crop as well as on the quantity ofnuts actually harvested.

 

The Partnership’s unit costs (expressed in dollars perwet-in-shell pound at 25% moisture) are calculated by dividing all agriculturalcosts for each orchard (including lease rent, property tax, tree insurance anddepreciation) by the number of pounds of macadamia nuts produced by thatorchard and are summarized below ($/lb.):

 
| ** **             | ** ** | ** **     | ** ** | **Cost per  pound** | ** ** |
|------------------------|------------|----------------|------------|---------------------|------------|
| **Orchard**            | ** ** | **Acquired**   | ** ** | **2005**            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Keaau I                |       | June 1986 |       | 0.5866              |       | 0.5767 |   | 0.5453 |   |
| Keaau II               |       | Oct. 1989 |       | 0.6501              |       | 0.5545 |   | 0.6179 |   |
| Keaau Lot 10           |       | Sept. 1991     |       | 0.3836              |       | 0.4491 |   | 0.3461 |   |
| Ka’u I            |       | June 1986 |       | 0.4289              |       | 0.5211 |   | 0.4611 |   |
| Ka’u Green Shoe I |       | Dec. 1986 |       | 0.2769              |       | 0.3409 |   | 0.2533 |   |
| Ka’u II           |       | Oct. 1989 |       | 0.4112              |       | 0.3938 |   | 0.3822 |   |
| Ka’u O            |       | May 2000  |       | 0.3507              |       | 0.4226 |   | 0.3403 |   |
| Mauna Kea              |       | Oct. 1989 |       | 0.5984              |       | 0.7119 |   | 0.4976 |   |
|                   |       |           |       |                |       |   |   |   |   |
| All Orchards           |       |           |       | 0.4700              |       | 0.5062 |   | 0.4582 |   |

 

17

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Cost of goods sold was $535,000 higher in 2005 than in2004, and $255,000 lower in 2004 than in 2003, but the cost per pound was 7.2%lower in 2005 than 2004 and 2004 was 10.4% higher than 2003. The higherproduction costs in 2005 were the results of higher harvesting and huskingcosts because of more pounds handled. The lower production costs in 2004 were aresult of lower harvesting and husking costs because of fewer pounds handled. Thelower production costs in 2003 were the result of lower production costs in Ka’uand Mauna Kea.

 

### ***Farming Segment - Farming ServiceRevenue***

 

As a result of theacquisition of the farming operation in 2000, the Partnership acquiredapproximately 20 farming contracts to farm macadamia orchards owned by othergrowers. These contracts cover macadamia orchards in the same three locationson the island of Hawaii where the Partnership 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 basedon the number of acres farmed or on a percentage of total costs billed. Revenuesfrom farming services were $4.7 million in 2005, $4.3 million in 2004, and $5.0million for 2003. The 2005 farming service revenues were less than anticipatedbecause of a windstorm which destroyed a large percentage of trees in threecontract orchards. The 2004 farming service revenues were less that expectedbecause of the late drop of nuts in the fall crop. The 2003 farming servicerevenues were greater than anticipated because of the timing of harvesting. Threefarming service contracts terminated on December 31, 2005 which reducesthe number of farming service contracts to about seventeen totaling about 2,040acres. The farming service revenue in 2005 for these three contracts was about$492,000 with management fees of about $70,000.

 

***Farming Segment - Cost of Services Sold***

 

The cost of services soldrelating to the farming contracts was $4.3 million in 2005, $3.9 million in2004 and $4.5 million for 2003. These costs were all reimbursed to thePartnership.

 

## ***Generaland Administrative Costs***

 

General and administrative expenses are comprised ofaccounting and reporting costs, reimbursements to the Managing Partner fordirectors’ fees, office expenses and liability insurance, and the managementfee. In addition, general and administrative costs are also incurred inconnection with the farming operations. Previous to the May 2000acquisition, general and administration costs relating to the Partnership’sorchards were included in the Partnership’s farming expenses.

 

General and administrative costs for 2005 were $48,000lower than for 2004, which is attributed to lower legal costs, offset by highercosts associated with Sarbanes Oxley preparation, accounting and orchard operations.Total general and administrative costs for 2004 were $482,000 higher than 2003,which is attributed to higher legal costs. In 2004 legal costs of $464,000 wererelated to the lawsuit, initiated and settled, to prevent Mauna Loa fromacquiring MacFarms of Hawaii, LLC.

 

A management fee based on Partnership cash flow ispayable annually to the Managing Partner. The amount paid was $9,000 in 2004,$44,000 in 2003. There was no management fee in 2005 as the Partnershipacquired MLR, the managing partner and the fees are eliminated inconsolidation.

 

## ***InterestIncome and Expense***

 

The Partnership recordedinterest expense of $237,000 in 2005, $182,000 in 2004, and $203,000 in 2003. Thiswas due to (1) the long-term loan used to acquire the farming operations, (2) theassumption of several capitalized equipment leases, and (3) interestexpense on a revolving line of credit.

 

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The Partnership funds its working capital needsthrough funds on hand and, when needed, from short-term borrowings, generatinginterest expense in the process. Net interest income or expense, therefore, ispartly a function of any balance carried over from the prior year, the amountand timing of cash generated and distributions paid to investors in the currentyear, as well as the current level of interest rates. Interest was earned inthe amount of $5,000 in 2005, $11,000 in 2004 and $12,000 in 2003.

 

Other income of $151,000 was recorded in 2005 of which$147,000 was from crop insurance. Other income of $32,000 was recorded in 2004from crop insurance. Other income of $260,000 was recorded in 2003 with$206,000 from crop insurance and $40,000 from the settlement of a written offreceivable.

 

***Inflation and Taxes***

 

In general, prices paid to macadamia nut farmersfluctuate independently of inflation. Macadamia nut prices are influencedstrongly by prices for finished macadamia products, which depend on competitionand consumer acceptance. Farming costs, particularly labor and materials, andgeneral and administrative costs do generally reflect inflationary trends.

 

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. Thistax is calculated at 3.5% on partnership gross income (net revenues less costof goods sold) beginning in 1998. The gross income tax was $129,000 in 2005,$5,000 in 2004, and $42,000 in 2003.

 

# ***Liquidity and Capital Resources***

 

Net cash provided by operations was $1.9 million in 2005 an increase ofapproximately $1.6 million compared to 2004. Net cash provided by operationswas $368,000 in 2004 a decrease of approximately $2.0 million compared to 2003.Net cash provided by operations was $2.3 million in 2003.

 

At December 31, 2005the Partnership’s working capital was $3.4 million and it current ratio was1.59 to 1, compared to $2.9 million and 1.63 to 1 in 2004. In 2004 thePartnership’s working capital was $2.9 million and its current ratio was 1.63to 1, compared to $4.2 million and 2.55 to 1 in 2003. In 2005 the increase inworking capital compared to 2004 was result of higher revenue and lower generaland administrative costs. In 2004 the decrease in working capital compared to2003 was a result of lower revenue and higher general and administrative costs.In 2003 the increase in working capital compared to 2002 was a result of higherrevenue, higher interest and other income, lower general and administrativecosts, and lower interest costs.

 

The Partnership was incompliance with the terms and conditions of the Credit Agreement at December 31,2004 except for its Debt Coverage Ratio. The lender has provided a waiver tothe loan covenants for the fourth quarter 2004. The Partnership was incompliance with the terms and conditions of the Credit Agreement at December 31,2005.

 

Capital expenditures in2005, 2004 and 2003 were $83,000, $172,000 and $20,000, respectively. Theincrease in 2005 was the result of computer purchases and modifications tofarming equipment. The increase in 2004 was the result of purchases by thePartnership of expiring leases. Capital expenditures planned for 2006 are lessthan $500,000 and are expected to be financed by way of new equipment leases,either capital or operating leases.

 

Macadamia nut farming isseasonal, with production peaking late in the fall. However, farming operationscontinue year round. As a result, additional working capital is required formuch of the year. The Partnership meets its working capital needs with cash onhand, and when necessary, through short-term borrowings under a $5.0 millionrevolving line of credit. The line of credit was obtained on May 2, 2000and expires May 1, 2008. At December 31, 2005 the Partnership had acash

 

19

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balance of $378,000 andline of credit drawings outstanding of $2,900,000. At December 31, 2004the Partnership had a cash balance of $196,000 and line of credit drawingsoutstanding of $2,200,000. The cash balance was $36,000 at the end of 2003, andthe line of credit drawings were $400,000 at December 31, 2003.

 

It is the opinion of management that the Partnership has adequate cashon hand and borrowing capacity available to meet anticipated working capitalneeds for operations as presently conducted. However, with the September 2000sale of Mauna Loa, the managing partner no longer has control over the timingof nut payments to the Partnership. The nut purchase contracts require MaunaLoa to make nut payments 30 days after the end of each quarter. During certainparts of the year, if payments are not received, as the contracts require,available cash resources could be depleted.

 

***Critical AccountingPolicies and Estimates***

 

Management has identifiedthe following critical accounting policies that affect the Partnership’s moresignificant judgments and estimates used in the preparation of the Partnership’sfinancial statements. The preparation of the Partnership’s financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America requires the Partnership’s management to make estimates andjudgments that affect the reported amounts of assets and liabilities, revenuesand expenses, and related disclosures of contingent assets and liabilities. Onan on-going basis, management evaluates those estimates, including thoserelated to asset impairment, accruals for self-insurance, compensation andrelated benefits, revenue recognition, allowance for doubtful accounts, contingenciesand litigation. The Partnership states these accounting policies in the notesto the financial statements and in relevant sections in this discussion andanalysis. These estimates are based on the information that is currentlyavailable to the Partnership and on various other assumptions that managementbelieves to be reasonable under the circumstances. Actual results could varyfrom those estimates.

 

The Partnership believes that the following critical accountingpolicies affect significant judgments and estimates used in the preparation ofit financial statements:

 

The Partnership maintains an allowance for doubtful accounts forestimated losses resulting from the failure of its customers to make requiredpayments, which results in bad debt expense. 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 financial condition of customers were todeteriorate, or if a customer refuses to pay or disputes any such payment,additional allowances may be required.

 

The Partnership maintains an accrual for workers compensation claims tothe extent that the Partnership’s current insurance policies will not coversuch claims. This accrual is included in other accrued liabilities in theaccompanying balance sheet. Management determines the adequacy of the accrualby periodically evaluating the historical experience and projected trendsrelated to outstanding and potential workers compensation claims. If suchinformation indicates that the accrual is over or understated, the Partnershipwill adjust the assumptions utilized in the methodologies and reduce or providefor additional accrual as appropriate.

 

Retirement Benefits:  ThePartnership sponsors a non-contributory defined benefit pension plan for unionemployees. Several statistical and other factors which attempt to anticipatefuture events are used in calculating the expense and liabilities related tothis plan. These factors include assumptions about the discount rate, expectedreturn on plan assets, withdrawal and mortality rates and the rate of increasein compensation levels. The actuarial assumptions used by the Partnership may differmaterially from actual results due to changing market and economic conditions,higher or lower withdrawal rates or longer or shorter mortality of participants.These differences may impact the amount of retirement benefit expenserecorded by the Partnership in future periods.

 

20

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The Partnership reviews long-lived assets held and used, or held forsale for impairment annually or whenever events or circumstances indicate thatthe carrying amount of an asset may not be recoverable. If an evaluationis required, the estimated undiscounted future cash flows associated with theasset are compared to the asset’s carrying amount to determine if an impairmentcharge is required. All long-lived assets for which management has committed toa plan of disposal are reported at the lower of carrying amount or fair value. Changesin projected cash flows generated by an asset based on new events orcircumstances may indicate a change in fair value and require a newevaluation of recoverability of the asset.

 

 **LegalProceedings**

 

Asreported on August 13, 2004, in the Quarterly Report on Form 10-Q ofML Macadamia Orchards, L.P. (the “Partnership”) for its fiscal quarter ended June 30,2004, the Partnership and several independent growers filed suit against MaunaLoa Macadamia Nut Corporation in the Circuit Court of the Third JudicialCircuit of the State of Hawaii in Hilo, alleging that the proposed acquisitionby Mauna Loa Macadamia Nut Corporation (“Mauna Loa”) of the assets of Mauna Loa’smajor competitor, Mac Farms of Hawaii, LLC (“Mac Farms”), would give Mauna Loaa monopoly over the supply and processing of wet-in-shell macadamia nuts on theIsland of Hawaii, which in turn would give Mauna Loa monopoly power over thegrowers and other processors on the Island of Hawaii and consumers of macadamianuts in Hawaii and on the mainland United States. Hamakua Macadamia Nut Company, Inc.(“Hamakua”) subsequently filed its own lawsuit against Mauna Loa, which wasthen consolidated with the Partnership’s case.

 

On October 1, 2004, the Partnership, the independent growers andHamakua entered into an agreement with Mauna Loa whereby Mauna Loa terminatedits agreement to acquire the assets of Mac Farms, and the Partnership, theindependent growers and Hamakua caused their lawsuits to be dismissed.

 

**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

The Partnership is exposed to market risks resultingfrom changes in interest rates. The interest rates on the Partnership’s CreditAgreement, which are based on LIBOR (Farm Credit Discount Note Rate and theFarm 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 of December 31, 2005, a one percentincrease or decrease in the applicable rate under the Credit agreement willresult in an interest expense fluctuation of approximately $16,000.

 

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**ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS**

 

**Index to Consolidated Financial Statements**

 
| Report of Independent Registered Public Accounting Firm                                                       |   |
|---------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                          |   |
| Consolidated Balance Sheets, December 31, 2005 and 2004                                                  |   |
|                                                                                                          |   |
| Consolidated Income Statements, for the Years Ended December 31,  2005, 2004 and 2003                    |   |
|                                                                                                          |   |
| Consolidated Statements of Partners’ Capital, for the Years Ended December 31,  2005, 2004 and 2003 |   |
|                                                                                                          |   |
| Consolidated Statements of Cash Flows for the Years Ended December 31,  2005, 2004 and 2003              |   |
|                                                                                                          |   |
| Notes to Consolidated Financial Statements                                                                    |   |

 

22

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Partners

ML Macadamia Orchards, L.P.

 

Inour opinion, the accompanying consolidated balance sheets and the relatedconsolidated statements of income, partners’ capital, and cash flows, presentfairly, in all material respects, the financial position of ML Macadamia Orchards,L.P. and its subsidiary at December 31, 2005 and 2004, and the results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2005 in conformity with accounting principles generallyaccepted 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. Weconducted our audits of these statements in accordance with the standards ofthe Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

PricewaterhouseCoopersLLP

 

Honolulu, Hawaii

March 10, 2006

 

23

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

**Consolidated Balance Sheets**

(in thousands)

 
| ** **                                                                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                   | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **Assets**                                                                                   |       |                  |       |   |   |
| Current assets                                                                               |       |                  |       |   |   |
| Cash and cash equivalents                                                                    |       | $                     | 378        |   | $ | 196 |   |
| Accounts receivable                                                                          |       | 8,433                 |       | 7,092 |   |
| Inventory of farming supplies                                                                |       | 270                   |       | 145 |   |
| Other current assets                                                                         |       | 178                   |       | 153 |   |
| Total current assets                                                                         |       | 9,259                 |       | 7,586 |   |
| Land, orchards and equipment, net                                                            |       | 48,722                |       | 50,810 |   |
| Intangible assets, net                                                                       |       | 65                    |       | 42 |   |
| Total assets                                                                                 |       | $                     | 58,046     |   | $ | 58,438 |   |
|                                                                                         |       |                  |       |   |   |
| **Liabilities and partners’ capital**                                                   |       |                  |       |   |   |
| Current liabilities                                                                          |       |                  |       |   |   |
| Current portion of long-term debt                                                            |       | $                     | 434        |   | $ | 435 |   |
| Short-term borrowings                                                                        |       | 2,900                 |       | 2,200 |   |
| Accounts payable                                                                             |       | 770                   |       | 738 |   |
| Cash distributions payable                                                                   |       | 375                   |       | 379 |   |
| Accrued payroll and benefits                                                                 |       | 935                   |       | 873 |   |
| Other current liabilities                                                                    |       | 416                   |       | 30 |   |
| Total current liabilities                                                                    |       | 5,830                 |       | 4,655 |   |
| Long-term debt                                                                               |       | 1,600                 |       | 2,034 |   |
| Deferred income tax liability                                                                |       | 1,227                 |       | 1,207 |   |
| Total liabilities                                                                            |       | 8,657                 |       | 7,896 |   |
| Commitments and contingencies                                                                |       |                  |       |   |   |
| Partners’ capital                                                                       |       |                  |       |   |   |
| General partner                                                                              |       | 81                    |       | 505 |   |
| Class A limited partners, no par or assigned value, 7,500 units  issued and outstanding |       | 49,308                |       | 50,037 |   |
| Total partners’ capital                                                                 |       | 49,389                |       | 50,542 |   |
| Total liabilities and partners’ capital                                                 |       | $                     | 58,046     |   | $ | 58,438 |   |

 

***See accompanying notes to consolidated financial statements.***

 

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

**Consolidated Income Statements**

(inthousands, except per unit data)

 
| ** **                                                                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Macadamia nut sales                                                            |       | $        | 12,684     |     | $          | 9,414    |       | $ | 10,459 |   |
| Contract farming revenue                                                       |       | 4,694    |       | 4,251    |       | 4,967    |       |
| Total revenues                                                                 |       | 17,378   |       | 13,665   |       | 15,426   |       |
| Cost of goods and services sold                                                |       |     |       |     |       |     |       |
| Costs of macadamia nut sales                                                   |       | 10,202   |       | 9,667    |       | 9,712    |       |
| Costs of contract farming services                                             |       | 4,274    |       | 3,860    |       | 4,511    |       |
| Total cost of goods and  services sold                                         |       | 14,476   |       | 13,527   |       | 14,223   |       |
| Gross income                                                                   |       | 2,902    |       | 138      |       | 1,203    |       |
| General and administrative expenses                                            |       |     |       |     |       |     |       |
| Costs expensed under management agreement with related party                   |       | —   |       | 177      |       | 204      |       |
| Legal fees paid to related party                                               |       | 32       |       | 495      |       | 33       |       |
| Other                                                                          |       | 1,563    |       | 971      |       | 924      |       |
| Total general and administrative expenses                                      |       | 1,595    |       | 1,643    |       | 1,161    |       |
| Extinguishment of management agreement                                         |       | (326     | )          | —   |       | —   |       |
| Operating income (loss)                                                        |       | 981      |       | (1,505   | )          | 42       |       |
| Interest expense                                                               |       | (237     | )          | (182     | )          | (203     | )          |
| Interest income                                                                |       | 5        |       | 11       |       | 12       |       |
| Other income                                                                   |       | 151      |       | 32       |       | 260      |       |
| Income (loss) before tax                                                       |       | 900      |       | (1,644   | )          | 111      |       |
| Income tax expense                                                             |       | (129     | )          | (5       | )          | (42      | )          |
| Net income (loss)                                                              |       | $        | 771        |     | $          | (1,649   | )          | $ | 69 |   |
|                                                                           |       |     |       |     |       |     |       |
| Net cash flow (as defined in the Partnership Agreement)                        |       | $        | 2,501      |     | $          | 466      |       | $ | 2,157 |   |
|                                                                           |       |     |       |     |       |     |       |
| Net income (loss) per Class A Unit                                        |       | $        | 0.10       |     | $          | (0.22    | )          | $ | 0.01 |   |
|                                                                           |       |     |       |     |       |     |       |
| Net cash flow per Class A Unit (as defined in the Partnership  Agreement) |       | $        | 0.33       |     | $          | 0.06     |       | $ | 0.28 |   |
|                                                                           |       |     |       |     |       |     |       |
| Cash distributions per Class A Unit                                       |       | $        | 0.20       |     | $          | 0.20     |       | $ | 0.16 |   |
|                                                                           |       |     |       |     |       |     |       |
| Class A Units outstanding                                                 |       | 7,500    |       | 7,500    |       | 7,500    |       |

 

***See accompanying notes toconsolidated financial statements.***

 

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

**Consolidated Statements of Partners’ Capital**

(inthousands)

 
| ** **                                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                           |       |     |       |     |       |     |       |
| Partners’ capital at beginning of period: |       |     |       |     |       |     |       |
| General partner                                |       | $        | 505        |     | $          | 537      |       | $ | 549 |   |
| Class A limited partners                  |       | 50,037   |       | 53,169   |       | 54,300   |       |
|                                           |       | 50,542   |       | 53,706   |       | 54,849   |       |
|                                           |       |     |       |     |       |     |       |
| Acquisition of ML Resources, Inc.         |       | (424     | )          | —   |       | —   |       |
|                                           |       | (424     | )          | 53,706   |       | 54,849   |       |
|                                           |       |     |       |     |       |     |       |
| Allocation of net income (loss):               |       |     |       |     |       |     |       |
| General partner                                |       | —   |       | (17      | )          | 1        |       |
| Class A limited partners                  |       | 771      |       | (1,632   | )          | 68       |       |
|                                           |       | 771      |       | (1,649   | )          | 69       |       |
|                                           |       |     |       |     |       |     |       |
| Cash distributions:                            |       |     |       |     |       |     |       |
| General partner                                |       | —   |       | 15       |       | 13       |       |
| Class A limited partners                  |       | 1,500    |       | 1,500    |       | 1,199    |       |
|                                           |       | 1,500    |       | 1,515    |       | 1,212    |       |
|                                           |       |     |       |     |       |     |       |
| Partners’ capital at end of period:       |       |     |       |     |       |     |       |
| General partner                                |       | 81       |       | 505      |       | 537      |       |
| Class A limited partners                  |       | 49,308   |       | 50,037   |       | 53,169   |       |
|                                           |       | $        | 49,389     |     | $          | 50,542   |       | $ | 53,706 |   |

 

***See accompanying notes toconsolidated financial statements.***

 

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

**Consolidated Statements of Cash Flows**

(inthousands)

 
| ** **                                                                                | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash flows from operating activities:                                                     |       |     |       |     |       |     |       |
| Cash received for goods and services                                                      |       | $        | 16,795     |     | $          | 13,947   |       | $ | 15,433 |   |
| Cash paid to suppliers and employees                                                      |       | (14,568  | )          | (13,393  | )          | (12,973  | )          |
| Income tax paid                                                                           |       | (82      | )          | (15      | )          | —   |       |
| Interest received                                                                         |       | 5        |       | 11       |       | 5        |       |
| Interest paid                                                                             |       | (237     | )          | (182     | )          | (203     | )          |
| Net cash provided by operating activities                                                 |       | 1,913    |       | 368      |       | 2,262    |       |
|                                                                                      |       |     |       |     |       |     |       |
| Cash flows from investing activities:                                                     |       |     |       |     |       |     |       |
| Proceeds from sale of equipment                                                           |       | 14       |       | —   |       | —   |       |
| Capital expenditures                                                                      |       | (83      | )          | (172     | )          | (20      | )          |
| Net cash used in investing activities                                                     |       | (69      | )          | (20      | )          | (20      | )          |
|                                                                                      |       |     |       |     |       |     |       |
| Cash flows from financing activities:                                                     |       |     |       |     |       |     |       |
| Proceeds from drawings on line of credit                                                  |       | 8,800    |       | 5,400    |       | 3,800    |       |
| Repayment of long term debt                                                               |       | (400     | )          | (400     | )          | (400     | )          |
| Repayment of line of credit                                                               |       | (8,100   | )          | (3,600   | )          | (4,200   | )          |
| Loan cost                                                                                 |       | —   |       | (20      | )          | —   |       |
| Acquisition of general partner’s units                                               |       | (424     | )          | —   |       | —   |       |
| Capital lease payments                                                                    |       | (35      | )          | (52      | )          | (73      | )          |
| Cash distributions paid                                                                   |       | (1,503   | )          | (1,364   | )          | (1,364   | )          |
| Net cash provided by (used in) financing activities                                       |       | (1,662   | )          | (36      | )          | (2,237   | )          |
|                                                                                      |       |     |       |     |       |     |       |
| Net increase (decrease) in cash                                                           |       | 182      |       | 160      |       | 5        |       |
| Cash at beginning of period                                                               |       | 196      |       | 36       |       | 31       |       |
| Cash at end of period                                                                     |       | $        | 378        |     | $          | 196      |       | $ | 36 |   |
|                                                                                      |       |     |       |     |       |     |       |
| Reconciliation of net income (loss) to net cash provided by operating  activities:        |       |     |       |     |       |     |       |
| Net income (loss)                                                                         |       | $        | 771        |     | $          | (1,649   | )          | $ | 69 |   |
| Adjustments to reconcile net income (loss) to net cash provided by  operating activities: |       |     |       |     |       |     |       |
| Depreciation and amortization                                                             |       | 2,165    |       | 2,571    |       | 2,563    |       |
| Increase in accounts receivable                                                           |       | (1,341   | )          | (566     | )          | (869     | )          |
| (Increase) decrease in inventories                                                        |       | (125     | )          | (4       | )          | 17       |       |
| (Increase) decrease in other current assets                                               |       | (25      | )          | (10      | )          | 48       |       |
| Increase in other assets                                                                  |       | (32      | )          | (7       | )          | —   |       |
| Increase in accounts payable                                                              |       | 32       |       | 245      |       | 93       |       |
| Increase in accrued payroll                                                               |       | 62       |       | 26       |       | 105      |       |
| Increase (decrease) in current liabilities                                                |       | 386      |       | (231     | )          | 240      |       |
| Deferred income tax expense (credit)                                                      |       | 20       |       | (7       | )          | (4       | )          |
| Total adjustments                                                                         |       | 1,142    |       | 2,017    |       | 2,193    |       |
| Net cash provided by operating activities                                                 |       | $        | 1,913      |     | $          | 368      |       | $ | 2,262 |   |
|                                                                                      |       |     |       |     |       |     |       |
| Supplemental schedule of noncash financing activities                                |       |     |       |     |       |     |       |
| Distributions declared but not paid                                                       |       | $        | 375        |     | $          | 379      |       | $ | 227 |   |

 

***See accompanying notes toconsolidated financial statements.***

 

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

 

# ***Notesto Financial Statements***

 

**(1) OPERATIONS AND OWNERSHIP**

 

ML Macadamia Orchards, L.P. (the “Partnership”) ownsand farms 4,169 tree acres of macadamia orchards on the island of Hawaii. Oncethe nuts are harvested, the Partnership sells them to another entity, whichprocesses and markets the finished products. The Partnership farmsapproximately 2,505 additional acres of macadamia orchards on Hawaii for otherorchard owners.

 

The Partnership is owned 99%by limited partners and 1% by the managing general partner, ML Resources, Inc.(“MLR”). On January 6, 2005, the stock of ML Resources, Inc. was purchased bythe Partnership for $750,000 in cash. The transaction was accounted for as anasset purchase as opposed to a business combination since MLR had nosubstantive operations and its principal purpose was to own and hold 75,757general partner units of the Partnership. The acquisition of the generalpartner units held by MLR results in the Class A limited partners effectivelyowning 100% of the Partnership.

 

Thepurchase price was allocated between the acquired general partner units and theextinguishment of the management contract between MLR and the Partnership. Thefair value of the general partner units at the date of acquisition wasdetermined to be $424,000 which was recorded as a reduction in partners’capital. The fair value of the general partner units was determined based onthe quoted market value of Class A limited partner units. No discounts for lackof marketability or premiums for control preferences were applied indetermining the fair value of the general partner units. The remaining $326,000representing the extinguishment of the management contract was charged toexpense.

 

As a result of the transaction, MLR’s operations have been included inthe Partnership’s consolidated financial statements beginning with the firstquarter of 2005.

 

Limited partner interests are represented by Class AUnits, which are evidenced by depositary receipts that trade publicly and arelisted on the New York Stock Exchange.

 

**(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**(a)****                 Cash and CashEquivalents.**Cash and cash equivalents include unrestricted demand depositswith banks and all highly liquid deposits with an original maturity of lessthan three months. The cash equivalents are not protected by federal depositinsurance.

 

**(b)****                 FinancialInstruments.       **The fair value ofthe line of credit and a portion of the long-term financial instruments isapproximately the carrying value as they have variable interest rates. Theremaining portion of the long-term financial instrument has a fixed rate andthe fair value compared to carrying value is disclosed.

 

**(c)****                 Consolidation.**Theconsolidated financial statements include the accounts of the Partnership andfor 2005, ML Resources, Inc. All significant intercompany balances andtransactions, including management fees and distributions, have beeneliminated.

 

**(d)****                 Farming Costs.**In accordance with industry practice in Hawaii, orchard maintenance and harvestingcosts for commercially producing macadamia orchards are charged againstearnings in the year that the costs are incurred.

 

**(e)****                 Inventory.**Suppliesinventory is relieved on an average cost basis to cost of farming expense asused.

 

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**(f)****                   Land, Orchardsand Equipment.**Land, orchards and equipment are reported at cost, net ofaccumulated depreciation and amortization. Net farming costs for any “developing”orchards are capitalized on the balance sheet until revenues from that orchardexceed expenses for that orchard (or nine years after planting, if earlier).

 

Depreciation of orchards and other equipment is reported on astraight-line basis over the estimated useful lives of the assets (40 years fororchards and between 5 and 12 years for other equipment). A 5% residual valueis assumed for orchards. The macadamia orchards acquired in 1986 situated onleased land are being amortized on a straight-line basis over the terms of theleases (approximately 33 years from the inception of the Partnership) with noresidual value assumed. The macadamia orchards acquired in 1989 situated onleased land are being amortized on a straight-line basis over a 40 year period(the terms of these leases exceed 40 years) with no residual value assumed. Forincome tax reporting, depreciation is calculated under the straight line methodover Alternative Depreciation System recovery periods.

 

Repairs and maintenance costs are expensed unless they exceed$5,000 and extend the useful life beyond the depreciable life.

 

**(g)****                Income Taxes.**Theaccompanying income statements do not include a provision for corporate incometaxes, as the income of the Partnership is not taxed directly; rather, thePartnership’s tax attributes are included in the individual tax returns of itspartners. Neither the Partnership’s financial reporting income nor the cashdistributions to unit holders can be used as a substitute for the detailed taxcalculations which the Partnership must perform 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. Thistax is calculated at 3.5% on partnership gross income (net revenues less costof goods sold) beginning in 1998.

 

Deferred tax liabilities are recognized forthe future tax consequences attributable to differences between the financialreporting and tax reporting basis of assets and liabilities.

 

**(f)****                   Revenue.**Macadamia nut sales are recognized when nuts are delivered to the buyer. Contractfarming revenue and administrative services revenues are recognized in theperiod that such services are provided.

 

**(g)****                PensionBenefit Costs.**The actuarial method used for financial accounting purposesis the projected unit credit method.

 

**(h)****                Estimates.**The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates.

 

**(i)****                   NetIncome Per Class A Unit.**Net income per Class A Unit is calculated bydividing 100% of Partnership net income by the average number of Class A Unitsoutstanding for the period.

 

**(3) SEGMENT INFORMATION**

 

The Partnership has two reportable segments, theowned-orchard segment and the farming segment, which are organized on the basisof revenues and assets. The owned-orchard segment derives its revenues from thesale of macadamia nuts grown in orchards owned or leased by the Partnership. Thefarming segment derives its revenues from the farming of macadamia orchardsowned by other growers. It also farms those orchards owned by the Partnership.

 

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Management evaluates the performance of each segment on the basis ofoperating income. The Partnership accounts for intersegment sales and transfersat cost and are eliminated in consolidation.

 

The Partnership’s reportable segments are distinct business enterprisesthat offer different products or services.

 

**(1)  Revenues from theowned-orchard segment** are subject to long-term nutpurchase contracts and tend to vary from year to year due to changes in thecalculated nut price per pound and pounds produced.

 

**(a)  Nut Purchase Contracts.**ThePartnership is a party to five nut purchase contracts with Mauna Loa MacadamiaNut Corporation (“Mauna Loa”). The five nut purchase contracts cover all nutsproduced by the orchards acquired in June 1986, December 1986, October 1989,September 1991, and May 2000 respectively. The first two contracts terminateDecember 31, 2006, while the third contract terminates June 30, 2019 and alsoprovides for the exclusion of unusable nuts from those purchased by Mauna Loa. Thefirst three contracts are identical in all other material respects. The fourthcontract was acquired by assignment with the purchase of the September 1991orchard and expired June 30, 2003. A new contract was negotiated and replacesthe fourth contract with a termination date of December 31, 2006. The newfourth contract has a fixed nut price of $0.60 per wet in shell (WIS) @25%pound with adjustment if usable nuts deduction is less than 10% or greater than13%. The fifth contract was acquired by assignment with the purchase of the May2000 orchards and terminates December 31, 2006. The fifth contract is similarto the first three contracts and also provides for the exclusion of unusablenuts. 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 price paid to the Partnership under the firsttwo contracts was $0.4816 in 2003, $0.4954 in 2004, and $0.5548 in 2005. Theaverage nut price paid to the Partnership under the third contract was $0.4789in 2003, $0.4945 in 2004, and $0.5525 in 2005. The average nut price paid tothe Partnership under the fourth nut price contract was $0.6000 for 2003,$0.6000 in 2004, and $0.6000 in 2005. The nut price paid to the Partnershipunder the fifth contract was $0.5660 for 2003, $0.5560 in 2004, and $0.5610 in2005.

 

In 2005 the Partnership received payment for the difference between the2004 audited nut price and estimated 2004 nut price in the amount of $576,000. MaunaLoa and the Partnership reached agreement of the nuts the Partnership deliveredto Mac Farms of Hawaii in 2004, which was reserved for in 2004 in the amount of$118,000. The Partnership recorded $60,000 of nut revenue in 2005 from the 2004reserve.

 

On December 16, 2004, a new nut purchase contract was signed withHamakua Macadamia Nut Company (“Hamakua”) for the delivery of six millionpounds, effective January 1, 2007. The contract provides for a minimum price of79 cents per pounds and a maximum of 99 cents per pound. The pricing formulaincludes a fixed component of 85 cents and a second component based on Hamakua’saverage selling price for bulk kernel. Refer to Exhibit 10.52 on page 57.

 

On January 5, 2006, a new nut purchase contract was signed with PurdycoInternational, Ltd. dba Island Princess for the delivery of approximately twomillion WIS pounds, effective January 1, 2007. The nut price will be determinedevery six months by mutual agreement based on prevailing market price forkernel from Hawaii and Australia. Refer to Exhibit 10.55 on page 57.

 

On January 6, 2006, a new nut purchase contract was signed with MacFarms of Hawaii, LLC for the delivery of between four and one-half million andfive and one-half million WIS pounds, effective

 

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January 1, 2007. The nut price will be determined every six months bymutual agreement based on prevailing market price for kernel from Hawaii andAustralia. Refer to Exhibit 10.54 on page 57.

 

**(b)  Husking Activities  **Husking activitiesfor the Keaau and Mauna Kea orchards are performed at Mauna Loa’s Keaaufacility. The Partnership has exercised its option to continue leasing thehusking facility from Mauna Loa through December 31, 2006. Reimbursements madeto Mauna Loa were $522,000 in 2003, $440,000 in 2004, and $603,000 in 2005.

 

**(c)  Stabilization Payments.   **In December 1986,the Partnership acquired a 266-acre orchard that was several years younger thanits other orchards. Because of the relative immaturity of the newer orchard,its productivity (and therefore its cash flow) was expected to becorrespondingly lower for the first several years than for the other olderorchards.

 

Accordingly, the seller of this orchard (KACI) agreedto make cash stabilization payments to the Partnership for each year through1993 in which the cash flow (as defined) from this orchard fell short of atarget cash flow level of $507,000. Stabilization payments for a given yearwere limited to the lesser of the amount of the shortfall or a maximum paymentamount.

 

The Partnership accounted for the $1.2 million instabilization payments (net of general excise tax) as a reduction in the costbasis of this orchard. As a result, the payments will be reflected in thePartnership’s net income ratably through 2019 as a reduction to depreciationfor this orchard.

 

In return, the Partnership is obligated to pay KACI100% of any year’s cash flow from this orchard in excess of the target cashflow as additional percentage rent until the aggregate amount of additionalpercentage rent equals 150% of the total amount of stabilization paymentspreviously received. Thereafter, the Partnership is obligated to pay KACI 50%of this orchard’s cash flow in excess of the target cash flow as additionalincentive rent. No additional rent was due in 2003, 2004, or 2005.

 

**(d)  Cash Flow Warranty Payments**.In October 1989, the Partnership acquired 1,040 acres of orchards that wereseveral years younger on average than the Partnership’s other orchards. Theirproductivity (and therefore their cash flow) was expected to be lower for thefirst several years than for the Partnership’s older orchards.

 

Accordingly, the sellers of these orchards(subsidiaries of CBCL) agreed to make cash flow warranty payments to thePartnership for each year through 1994 in which the cash flow (as defined) fromthese orchards fell short of a cash flow target level. Warranty payments forany year were limited to the lesser of the amount of the shortfall or a maximumpayment amount.

 

The Partnership accounted for the $13.8 millionreceived in cash flow warranty payments as reductions in the cost basis of theorchards. As a result, these payments will be reflected in the Partnership’snet income ratably through 2030 as reductions to depreciation for theseorchards.

 

**(2)  The farming segment’srevenues** are based on long-term farming contractswhich generate a farming profit based on a percentage of farming cost or basedon a fixed fee per acre and tend to be less variable than revenues from theowned-orchard segment.

 

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The following is a summary of each reportable segment’s operatingincome and the segment’s assets as of and for the period ended December 31,2005, 2004 and 2003.

 

Segment Reporting for the Year ended December31, 2005 (in thousands)

 
| ** **                               | ** ** | **Owned  Orchards** | ** ** | **Contract  Farming** | ** ** | **Intersegment  Elimination** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|---------------------|------------|-----------------------|------------|-------------------------------|------------|-----------|------------|
|                                     |       |                |       |                  |       |                          |       |      |       |
| Revenues                                 |       | $                   | 12,684     |                  | $          | 12,131                        |       | $         | (7,437     | ) | $ | 17,378 |   |
| Composition of Intersegment  revenues    |       | —              |       | 7,437                 |       | —                        |       | 7,437     |       |
| Operating income (loss)                  |       | 377                 |       | 604                   |       | —                        |       | 981       |       |
| Depreciation expense                     |       | 1,949               |       | 216                   |       | —                        |       | 2,165     |       |
| Segment assets                           |       | 52,206              |       | 5,840                 |       | —                        |       | 58,046    |       |
| Expenditures for property and  equipment |       | 51                  |       | 32                    |       | —                        |       | 83        |       |
|                                          |            |                     |            |                       |            |                               |            |           |            |  |  |  |  |

 

Segment Reporting for the Year ended December31, 2004 (in thousands)

 
| ** **                               | ** ** | **Owned  Orchards** | ** ** | **Contract  Farming** | ** ** | **Intersegment  Elimination** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|---------------------|------------|-----------------------|------------|-------------------------------|------------|-----------|------------|
|                                     |       |                |       |                  |       |                          |       |      |       |
| Revenues                                 |       | $                   | 9,414      |                  | $          | 9,502                         |       | $         | (5,251     | ) | $ | 13,665 |   |
| Composition of Intersegment  revenues    |       | —              |       | 5,251                 |       | —                        |       | 5,251     |       |
| Operating income (loss)                  |       | (1,684              | )          | 179                   |       | —                        |       | (1,505    | )          |
| Depreciation expense                     |       | 1,671               |       | 900                   |       | —                        |       | 2,571     |       |
| Segment assets                           |       | 52,984              |       | 5,454                 |       | —                        |       | 58,438    |       |
| Expenditures for property and  equipment |       | 76                  |       | 96                    |       | —                        |       | 172       |       |
|                                          |            |                     |            |                       |            |                               |            |           |            |  |  |  |  |

 

Segment Reporting for the Year ended December31, 2003 (in thousands)

 
| ** **                               | ** ** | **Owned  Orchards** | ** ** | **Contract  Farming** | ** ** | **Intersegment  Elimination** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|---------------------|------------|-----------------------|------------|-------------------------------|------------|-----------|------------|
|                                     |       |                |       |                  |       |                          |       |      |       |
| Revenues                                 |       | $                   | 10,459     |                  | $          | 10,778                        |       | $         | (5,811     | ) | $ | 15,426 |   |
| Composition of Intersegment  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        |       |
|                                          |            |                     |            |                       |            |                               |            |           |            |  |  |  |  |

 

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**(4) RELATED PARTY TRANSACTIONS**

 

**(a) Management Costs and Fee.**On January 6,2005 the Partnership purchased the stock of the managing partner MLR. As aresult of the transaction, MLR’s operations have been included in thePartnership’s consolidated financial statements beginning with the firstquarter of 2005. The Partnership Agreement provides the managing generalpartner reimbursement of administrative costs (which consist primarily ofcompensation costs, board of directors fees, insurance costs and officeexpenses) incurred under the agreement as well as a management fee equal to twopercent of the Partnership’s operating cash flow (as defined) in 2003 and 2004.The management fee is eliminated in consolidation in 2005. Those reimbursablecosts totaled $160,000 in 2003 and $168,000 in 2004. The managing generalpartner earned a management fee of $44,000 in 2003 and $9,000 in 2004.

 

In addition to a management fee, the managing generalpartner is entitled, under the existing Partnership Agreement, to receive anannual incentive fee equal to 0.5% of the aggregate fair market value (asdefined) of the Class A Units for the preceding calendar year provided that netcash flow (as defined) for the preceding calendar year exceeds specified levels.The incentive fee would be eliminated in consolidation in 2005. No incentivefee was earned in 2003, 2004 or 2005.

 

**(b) Legal Services.**The Partnership paid $134,000, $495,000 and$33,000 in legal fees in 2005, 2004 and 2003, respectively. A Director of thePartnership is a former partner and currently of counsel to one of the lawfirms used by the Partnership. The Partnership paid said law firm $32,000 ofthe $134,000 in 2005, $495,000 in 2004 and $33,000 in 2003.

 

**(c) Management Services Contract.**ThePartnership provides administrative services to D. Buyers Enterprises, LLC (“DBE”)for which it was compensated $98,000 in 2003, $104,000 in 2004 and $102,000 in2005. DBE owned the stock of the Partnership’s general partner until January2005.

 

**(d) Office Lease.**SinceSeptember 2001, the Partnership has leased approximately 4000 square feet ofoffice space in Hilo for its accounting staff from DBE, which was the owner ofthe General Partner until January 2005. The lease amount was $90,000 in 2005,2004 and 2003.

 

**(5) CASH FLOW PERFORMANCE**

 

Cash flow performance (based on definitions used inthe Partnership Agreement) for the past three years is shown below (000’s):

 
| ** **                                               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Gross revenues                                           |       | $        | 17,534     |     | $          | 13,708   |       | $ | 15,698 |   |
| Less:                                                    |       |     |       |     |       |     |       |
| Farming costs                                            |       | 12,311   |       | 10,951   |       | 11,618   |       |
| Administrative costs                                     |       | 1,595    |       | 1,643    |       | 1,161    |       |
| Extinguishment of management agreement                   |       | 326      |       | —   |       | —   |       |
| Income tax                                               |       | 129      |       | 5        |       | 42       |       |
| Payments of principal and  interest                      |       | 672      |       | 634      |       | 676      |       |
| Operating cash flow                                      |       | 2,501    |       | 475      |       | 2,201    |       |
| Less:                                                    |       |     |       |     |       |     |       |
| Management fee                                           |       | 0        |       | 9        |       | 44       |       |
| Net cash flow (as defined in  the Partnership Agreement) |       | $        | 2,501      |     | $          | 466      |       | $ | 2,157 |   |

 

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This cash flow measure is used to determine the management fee paidannually to the general partner and forms the basis of distributable cash perunit. No management fee is recorded in 2005 as the Partnership purchased thestock of the managing partner MLR in January 2005 and the management fee iseliminated in consolidation.

 

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

 

Land, orchards and equipment, stated at cost,consisted of the following at December 31, 2005 and 2004 (000’s):

 
| ** **                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Land                                            |       | $        | 8,168      |     | $          | 8,168 |   |
| Improvements                                    |       | 1,074    |       | 1,074    |       |
| Machinery and equipment                         |       | 5,107    |       | 5,156    |       |
| Irrigation well and equipment                   |       | 1,155    |       | 1,155    |       |
| Producing orchards                              |       | 67,267   |       | 67,267   |       |
| Capital leases                                  |       | 161      |       | 161      |       |
| Land, orchards and equipment (gross)            |       | 82,932   |       | 82,981   |       |
| Less accumulated depreciation and  amortization |       | 34,210   |       | 32,171   |       |
|                                            |       |     |       |     |       |
| Land, orchards and equipment (net)              |       | $        | 48,722     |     | $          | 50,810 |   |

 

ThePartnership’s interest in trees situated on certain leased macadamia orchardproperties are subject to repurchase at the option of the lessors. Suchrepurchase options grant the lessors the right to purchase all or a portion ofthese trees after June 30, 2019, at fair market value, as defined in therespective farming lease agreements. If the repurchase options are notexercised prior to expiration of the lease agreements and the lessors do notoffer to extend the lease agreements at the then current market lease rates,the lessors are required to repurchase these trees at fair market value atlease expiration. The lessors will be released from their repurchase obligationin the event that the Partnership declines to accept an extension offer fromthe lessors at fair market lease rates.

 

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

 

AtDecember 31, 2005 and 2004, the Partnership’s long-term debt comprises (000’s):

 
| ** **      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Term debt       |       | $        | 2,000      |     | $          | 2,400 |   |
| Other           |       | 34       |       | 69       |       |
|            |       | 2,034    |       | 2,469    |       |
| Current portion |       | 434      |       | 435      |       |
|            |       | $        | 1,600      |     | $          | 2,034 |   |

 

On May 2, 2000 the Partnership entered into a new credit agreement withPacific Coast Farm Credit Services, ACA (currently American AgCredit CapitalMarkets) comprised of a $5 million revolving line of credit and a $4 millionpromissory note.

 

The line of credit expires on May 1, 2008. Drawings on the line ofcredit bear interest at the prime lending rate. From and after the firstanniversary date, the Partnership is required to pay a facility fee of

 

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0.30% to 0.375% per annum, depending on certain financial ratios on thedaily unused portion of credit. The Partnership, at its option, may makeprepayments without penalty.

 

Drawings outstanding on the line of credit at December 31, 2005amounted to $2,900,000, with interest at 7.50% and drawings outstanding atDecember 31, 2004 amounted to $2,200,000, with interest at 5.25%.

 

At December 31, 2005, the outstanding balance on the promissory noteamounted to $2.0 million. The note is scheduled to mature in 2010 and bearsinterest at rates ranging from 6.37% to 7.77%. Principal payments are dueannually on May 2 in the amount of $400,000.

 

The estimated fair values of the Partnership’s financial instrument hasbeen determined by estimated market price of 6.75% using a life equal to thatremaining on the current financial instrument. The Partnership has notconsidered the lender fees in determining the estimated fair value.

 

The estimated fair values of the Partnership’s financial instrument areas follows (000’s):

 
| ** **     | ** ** | **2005**             | ** ** | **2004**        | ** ** |
|----------------|------------|----------------------|------------|-----------------|------------|
| ** **     | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| Long-term debt |       | $                    | 1,150      |            | $          | 1,004 |   | $ | 1,350 |   | $ | 1,127 |   |
|                |            |                      |            |                 |            |  |  |  |  |  |  |  |  |

 

Of the total $2.0 million in 2005 and $2.4 million in 2004 thelong–term debt of $850,000 and $1,050,000 in 2005 and 2004, respectively haveshort - term fixed rates that approximate fair value. The $1,150,000 and$1,350,000 in 2005 and 2004, respectively, have interest rates that are fixed overthe remaining life of the debt.

 

Both the revolving credit loan and the term debt are collateralized byall personal property assets of the Partnership. The credit agreement containscertain restrictions associated with partner distributions, further indebtedness,sales of assets, and maintenance of certain financial minimums. Significantrestrictive financial covenants consist of the following:

 

1.               Minimum working capital of $2.5 million.

2.               Minimum current ratio of 1.5 to 1.

3.               Cumulative cash distributions beginningJanuary 1, 2000 cannot exceed the total of cumulative net cash flow beginningJanuary 1, 2004 plus a base amount of $3.3 million.

4.               Minimum tangible net worth of $49.9million (reduced by the amount of allowed cash distributions over net income).

5.               Maximum ratio of funded debt tocapitalization of 20%.

6.               Minimum debt coverage ratio of 2.5 to 1.

 

At December 31, 2005, the Partnership’s working capital was $3.4million and its current ratio 1.59 to 1. The Partnership was in compliance withall covenants of the Credit Agreement at December 31, 2004 except the debtcoverage ratio which was waived by the lender for the fourth quarter 2004. Hadthe lender not waived the restriction the Partnership would have beenrestricted in its ability to pay distributions to the limited partners. ThePartnership was in compliance with all covenants of the Credit Agreement atDecember 31, 2005.

 

**Capital and Operating Leases.**The Partnershiphas capital and operating leases for equipment and operating leases for land. Thecapital and operating leases for equipment are four to five year leases.

 

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**Land Leases.**The partnership leases the landunderlying 1,948 acres of its orchards under long-term operating leases whichexpire through dates ending 2045. Operating leases provide for changes inminimum rent based on fair value at certain points in time. Each of the landleases provides for additional lease payments based on USDA-reported macadamianut price levels. Those contingent lease payments totaled $14,000 in 2003,$18,000 in 2004, and $19,000 in 2005. Total lease rent for all operating leaseswas $157,000 in 2003, $150,000 in 2004, and $147,000 in 2005.

 

**Equipment Operating Leases.**The Partnershipleases equipment for the farming operation to include vehicles, blower sweepersand harvester. The operating lease cost was $249,000, $285,000 and $214,000 in2005, 2004 and 2003, respectively.

 

Contractual obligations for the Partnership are detailed in thefollowing(000’s):

 
| ** **                                                                      | ** ** | **Total**  | ** ** | **2006**   | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **Remaining** | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|---------------|------------|
| Contractual Obligations                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **    | ** ** |
| Long-Term Debt                                                                  |       | $          | 2,000      |       | $          | 400        |       | $          | 400        |       | $          | 400        |       | $             | 400        |   | $ | 400 |   | $ | — |   |
| Capital Lease Obligations                                                       |       | 34         |       | 34         |       | —     |       | —     |       | —     |       | —     |       | —        |       |
| Operating Leases                                                                |       | 3,809      |       | 375        |       | 331        |       | 270        |       | 184        |       | 146        |       | 2,503         |       |
| LOC Debt                                                                        |       | 2,900      |       | 2,900      |       |       |       |       |       |       |       |       |       |          |       |
| Purchase Obligations                                                            |       | —     |       | —     |       | —     |       | —     |       | —     |       | —     |       | —        |       |
| Other Long-Term Liabilities off The  Registrant’s Balance Sheet under GAAP |       | —     |       | —     |       | —     |       | —     |       | —     |       | —     |       | —        |       |
| Total                                                                           |       | $          | 8,743      |       | $          | 3,709      |       | $          | 731        |       | $          | 670        |       | $             | 584        |   | $ | 546 |   | $ | 2,503 |   |

 

**(8) INCOME TAXES**

 

The components of income tax expense for the yearsended December 31, 2005, 2004 and 2003 were as follows (000’s):

 
| ** **        | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------|------------|----------|------------|----------|------------|----------|------------|
| Currently payable |       | $        | 109        |     | $          | 12       |       | $ | 46 |   |
| Deferred          |       | 20       |       | (7       | )          | (4       | )          |
|              |       | $        | 129        |     | $          | 5        |       | $ | 42 |   |

 

The provision for income taxes equates to the 3.5%federal tax rate applied to gross income for the years ended December 31, 2005,2004 and 2003.

 

The components of the net deferred tax liabilityreported on the balance sheet as of December 31, 2005 and 2004 are as follows(000’s):

 
| ** **                                                                                                                                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax liabilities:                                                                                                                                     |       |     |       |     |       |
| Financial statement bases of  land, orchards, inventory and equipment is greater than tax bases                                                               |       | $        | 717        |     | $          | 658 |   |
| Financial statement bases of  capitalized leases, long- term debt on capitalized leases and interest  expense on capitalized leases is greater than tax bases |       | (4       | )          | 38       |       |
| Excess of tax depreciation over  financial statement depreciation                                                                                             |       | 514      |       | 511      |       |
|                                                                                                                                                          |       | $        | 1,227      |     | $          | 1,207 |   |

 

36

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**(9) PENSION PLAN**

 

The Company established a defined benefit pension plan in conjunctionwith the acquisition of farming operations on May 1, 2000. The plan coversemployees that are members of a union bargaining unit. The projected benefitobligation includes the obligation for the employees of their previous employerthat became Company employees.

 

The Company’s funding policy is to contribute an amount to the plansufficient to meet the minimum funding requirements set forth by the EmployeeRetirement Income Security Act of 1974.

 

The components of net pension cost for the years ended December 31,2005, 2004, and 2003 were as follows (000’s):

 
| ** **                                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost                                                 |       | $        | 57         |     | $          | 56       |       | $ | 61 |   |
| Interest cost                                                |       | 23       |       | 21       |       | 16       |       |
| Expected return on assets                                    |       | (19      | )          | (15      | )          | (12      | )          |
| Amortization of unrecognized losses and  prior service costs |       | 7        |       | 7        |       | 7        |       |
|                                                         |       | $        | 68         |     | $          | 69       |       | $ | 72 |   |

 

The following reconciles the changes in the pension benefit obligationand plan assets for the years ended December 31, 2005, 2004, 2003 to the fundedstatus of the plan and the amounts recognized in the balance sheets at December31, 2005, 2004, 2003.

 
| ** **                                            | ** ** | **(000’s)** | ** ** |
|-------------------------------------------------------|------------|------------------|------------|
| ** **                                            | ** ** | **2005**         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Change in projected benefit obligation:               |       |             |       |   |   |   |   |
| Projected benefit obligation at beginning  of year    |       | $                | 411        |   | $ | 357 |   | $ | 277 |   |
| Service cost                                          |       | 57               |       | 56 |   | 61 |   |
| Interest cost                                         |       | 23               |       | 21 |   | 16 |   |
| Actuarial (gain) or loss                              |       | 35               |       | (12 | ) | 11 |   |
| Benefits paid                                         |       | (8               | )          | (11 | ) | (8 | ) |
| Projected benefit obligation at end of year           |       | 518              |       | 411 |   | 357 |   |
|                                                  |       |             |       |   |   |   |   |
| Change in plan assets:                                |       |             |       |   |   |   |   |
| Fair value of plan assets at beginning of  year       |       | 205              |       | 169 |   | 122 |   |
| Actual return on plan assets                          |       | 10               |       | 3 |   | 13 |   |
| Employer contribution                                 |       | 51               |       | 44 |   | 42 |   |
| Benefits paid                                         |       | (8               | )          | (11 | ) | (8 | ) |
| Fair value of plan assets at end of year              |       | 258              |       | 205 |   | 169 |   |
|                                                  |       |             |       |   |   |   |   |
| Funded status                                         |       | (261             | )          | (206 | ) | (188 | ) |
| Unrecognized prior service cost                       |       | 62               |       | 69 |   | 75 |   |
| Unrecognized net loss                                 |       | 89               |       | 44 |   | 45 |   |
| Net amount recognized                                 |       | $                | (110       | ) | $ | (93 | ) | $ | (68 | ) |
|                                                  |       |             |       |   |   |   |   |
| Amounts recognized in the balance sheets  consist of: |       |             |       |   |   |   |   |
|                                                  |       |             |       |   |   |   |   |
| Accrued pension liability                             |       | (152             | )          | (103 | ) | (72 | ) |
| Intangible asset                                      |       | 42               |       | 10 |   | 4 |   |
| Net amount recognized                                 |       | $                | (110       | ) | $ | (93 | ) | $ | (68 | ) |

 

37

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Theaccumulated benefit obligation at December 31, 2005, 2004, and 2003 amounted to$410,000, $308,000 and $241,000, respectively. During 2005, theprojected benefit obligation increased by $107,000 and the accumulated benefitobligation increased by $102,000. At December 31, 2005 the accumulated benefitobligation related to the Partnership’s pension plan exceeded the fair value ofthe pension plan assets by $152,000.

 

U.S.pension accounting standards require the recognition of a minimum liabilityequal to the excess, if any, of the accumulated benefit obligation over planassets. The computation of the required minimum liability and the additionalminimum liability at December 31, 2005 and 2004 is shown below:

 
| ** **                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
|                                           |       |     |       |     |       |
| Accumulated benefit obligation                 |       | $        | 410        |     | $          | 308 |   |
| Fair value of plan assets                      |       | 258      |       | 205      |       |
| Required minimum liability                     |       | 152      |       | 103      |       |
| Liability  recognized for accrued benefit cost |       | (110     | )          | 93       |       |
| Additional minimum liability                   |       | $        | 42         |     | $          | 10 |   |

 

Theadditional minimum liability at December 31, 2005 and December 31, 2004 was$42,000 and $10,000, respectively. The additional minimum liability wasrecognized by the establishment of an intangible asset.

 

Experiencegains and losses are amortized over the average future service period ofemployees.

 

The weighted average actuarial assumptions used todetermine the pension benefit obligations at December 31, 2005, 2004 and 2003and the net periodic pension cost for the years then ended are as follows:

 
| ** **                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Pension benefit obligation:   |       |     |       |     |       |     |       |
| Discount rate                 |       | 5.50     | %          | 5.75     | %          | 6.00     | %          |
| Compensation increases        |       | 2.00     | %          | 2.00     | %          | 2.00     | %          |
|                          |       |     |       |     |       |     |       |
| Net periodic pension cost:    |       |     |       |     |       |     |       |
| Discount rate                 |       | 5.75     | %          | 6.00     | %          | 6.50     | %          |
| Compensation increases        |       | 2.00     | %          | 2.00     | %          | 2.00     | %          |
| Return on assets for the year |       | 8.50     | %          | 8.50     | %          | 8.50     | %          |

 

The expected long-term rate of return on plan assetswas based primarily on historical returns as adjusted for the plan’s currentinvestment allocation strategy.

 

The Partnership employs an investment strategy whereby the assets inour portfolio are evaluated to maintain the desired target asset mix. The fundsare invested in stock mutual funds, fixed income mutual funds and money marketfunds. Evaluation of the actual asset mix is evaluated on a quarterly basis andadjusted if required to maintain the desired target mix. Therefore, the actualasset allocation does not vary significantly from the targeted asset allocation.

 

38

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The plan’s asset allocation percentages at December 31, 2005 and 2004 wereas follows:

 
| ** **                | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
| Pooled fixed income funds |       | 21.00    | %          | 20.00    | %          |
| Money market funds        |       | 16.00    | %          | 20.00    | %          |
| Stock mutual funds        |       | 63.00    | %          | 60.00    | %          |
| Total                     |       | 100.00   | %          | 100.00   | %          |

 

The Partnership expects to contribute approximately$49,000 to the plan in 2006.

 

The following pension benefit payments, which reflectexpected future services, as appropriate, are expected to be paid:

 

Years Ending December 31,

 
| 2006      |   | $       | 5,400  |   |
|-----------|--------|---------|--------|--------|
| 2007      |   | 8,156   |   |
| 2008      |   | 8,020   |   |
| 2009      |   | 11,130  |   |
| 2010      |   | 16,461  |   |
| 2011-2015 |   | 113,235 |   |

 

**(10) EMPLOYEES SAVINGS PLAN**

 

The Partnership sponsors a 401(k) plan, which allowsparticipating employees to contribute up to 25% of their salary, subject toannual limits. The plan provides for the Partnership to make matchingcontributions up to 50% of the first 4% of salary deferred by employees. Duringthe years ended December 31, 2005, 2004 and 2003, Partnership matchingcontributions were $29,000, $27,000 and $26,000, respectively.

 

**(11) SALARIED DEFINED CONTRIBUTION PLAN**

 

The Partnership sponsors a defined contribution planfor its non-bargaining unit employees. This plan provides for the Partnershipto make annual contributions to the 401(k) plan on behalf of participatingemployees. Contributions are based upon age, length of service, and other criteriaon an annual basis, subject to annual limits. During the years ended December31, 2005, 2004, and 2003 defined contributions were $96,000, $98,000 and$77,000, respectively.

 

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

 

The following chart summarizes unaudited quarterlyoperating results for the years ended December 31, 2005, 2004, and 2003 (000’somitted except per unit data):

 
| ** **  | ** ** | **Revenues** | ** ** | **Gross Income  (Loss)** | ** ** | **Net Income  (Loss)** | ** ** | **Net Income (Loss)  per Class A Unit** | ** ** |
|-------------|------------|--------------|------------|-------------------------------|------------|-----------------------------|------------|------------------------------------------------------------------|------------|
| 2005        |       |         |       |                          |       |                        |       |                                                             |       |
| 1st Quarter |       | $            | 3,056      |                          | $          | 627                         |       | $                                                                | (27        | ) | $ | (0.00 | ) |
| 2nd Quarter |       | 1,501        |       | 218                           |       | 26                          |       | 0.00                                                             |       |
| 3rd Quarter |       | 3,737        |       | 608                           |       | 118                         |       | 0.02                                                             |       |
| 4th Quarter |       | 9,084        |       | 1,449                         |       | 654                         |       | 0.09                                                             |       |
| 2004        |       |         |       |                          |       |                        |       |                                                             |       |
| 1st Quarter |       | $            | 2,052      |                          | $          | 208                         |       | $                                                                | (95        | ) | $ | (0.01 | ) |
| 2nd Quarter |       | 787          |       | 140                           |       | (161                        | )          | (0.02                                                            | )          |
| 3rd Quarter |       | 3,275        |       | (67                           | )          | (817                        | )          | (0.11                                                            | )          |
| 4th Quarter |       | 7,551        |       | (143                          | )          | (576                        | )          | (0.08                                                            | )          |
|        |       |         |       |                          |       |                        |       |                                                             |       |
| 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                                                             |       |

 

39

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**ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None

 

**ITEM 9A. CONTROLS AND PROCEDURES**

 

(a)As of the end of the period covered by this Annual Report on Form 10-K, wecarried out the evaluation required by paragraph (b) of Rules 13a-15 or 15d-15of the Securities Exchange Act of 1934, as amended. The Partnership’smanagement, with the participation of ourprincipal executive officer and principal financial officer, has evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined under Rule 13a-15(e)) under the Securities Exchange Actof 1934, as amended (the “Exchange Act”), as of the end of the period coveredby this annual report on Form 10-K. Based on that evaluation, our principalexecutive officer and principal financial officer concluded that thePartnership’s disclosure controls and procedures are effective and designed toensure that the information required to be disclosed in our reports filed orsubmitted under the Securities and Exchange Act of 1934, as amended, isrecorded, processed, summarized and reported within the requisite time periodsspecified in the rules and forms of the Securities and Exchange Commission.

 

(b)  There have been nosignificant changes (including corrective actions with regard to significantdeficiencies or material weaknesses) in our internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof the evaluation referenced in paragraph (a) above.

 

40

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**PARTIII**

** **

**ITEM 10. DIRECTORS ANDEXECUTIVE OFFICERS OF REGISTRANT**

** **

The Partnership presently has no officers ordirectors. Instead, the officers and directors of the Managing Partner performall management functions for the Partnership. Each director of the ManagingPartner is appointed for a term of one year and until his successor is dulyappointed and qualified. Each officer of the Managing Partner is elected by theBoard of Directors of the Managing Partner and is subject to removal by thatboard at any time.

 

## **A.**            Identification of Directors

## ** **

*James H. Case.*85 years old; director of ManagingPartner since 1986; member of the Audit Committee until March 2005; member ofNominating, Compensation and Corporate Governance Committees since March 2005;of counsel to the law firm of Carlsmith Ball; not an employee, officer, ordirector of any CBCL or DBE affiliate.

 

*John K.Kai. 40* years old;director of the Managing Partner since June 2004; member of the Audit,Nominating, Compensation and Corporate Governance Committees since March 2005;president of Pinnacle Investment Group, LLC; president of Pinnacle Media Group,LLC; branch manager and investment representative of Linsco / Private Ledger;not an employee, officer, or director of any CBCL or DBE affiliate.

 

*JamesS. Kendrick.*58 yearsold; director of Managing Partner since June 2005; Executive at Mauna LoaMacadamia Nut Corporation from 1991 to 1998.

 

*E. AlanKennett.*62 yearsold; director of Managing Partner since June 2005; President and CEO of Gay andRobinson Sugar Company, Inc.

 

*JeffreyM. Kissel.*56 yearsold; director of Managing Partner since June 2005; member of the AuditCommittee since June 2005; CFO for Earth Tech, Inc.; held various positionsduring 1997 until 2003 with URS Corporation including vice president ofbudgeting and planning and CFO.

 

*David McClain.*59 years old; director sinceSeptember 2000 and member of the Audit, Nominating, Compensation and CorporateGovernance Committees of Managing Partner; chairman of the Audit Committeesince March 2005; not an employee, officer, or director of any CBCL or DBEaffiliate.

 

*Dennis J. Simonis.*49 years old; director ofManaging Partner since August 2002; President and Chief Operating Officer ofManaging Partner from August 2001 until December 2004, Chief Financial Officerfrom June 2001 to August 2001, and Chief Executive Officer since December 2004.Chief Financial Officer of DBE from August 2001, and President of DBE fromOctober, 2005.

 

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

 

*Dennis J. Simonis.*49 years old; president ofManaging Partner since August 2001; and chief executive officer since December2004; president of D. Buyers Enterprises, LLC; not otherwise an employee,officer, or director of any CBCL affiliate. Formerly executive vice presidentand chief operating officer of Mauna Loa.

 

*Randolph H. Cabral. 53* years old; senior vicepresident and orchard manager of Managing Partner since May 2000; not otherwisean employee, officer, or director of any CBCL affiliate. Formerly senior vicepresident and orchard manager of KACI.

 

*Wayne W. Roumagoux*. 59 years old; chieffinancial officer of Managing Partner since August 2001; controller of DBE; nototherwise an employee, officer, or director of any CBCL affiliate.

 

41

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**C.****            Identification ofCertain Significant Employees**

 

Not applicable

 

# ***D. FamilyRelationships***

# *** ***

Not applicable

 

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

 

***Current Directors of the Managing Partner.***

 

*James H. Case*. Mr. Case is of counsel to theHawaii law firm of Carlsmith Ball. Mr. Case graduated with an A.B. fromWilliams College and received a J.D. from Harvard Law School. He becameassociated with the Carlsmith law firm in 1951 and became a partner in 1959. Hehas served on the boards of directors of Hamakua Sugar Company, Inc.,InterIsland Resorts, Ltd., Pacific Club, Central Union Church, HanahauoliSchool, and Arcadia Retirement Residence. He resides in Honolulu, Hawaii.

 

*John K.Kai.*Mr. Kai hasserved as a director since June 2004. Mr. Kai is president of PinnacleInvestment Group, LLC and Pinnacle Media Group, LLC, and branch manager andinvestment representative of Linsco / Private Ledger. Mr. Kai was the residentmanager of the Hilo office of Paine Webber, Inc. and was with Merrill Lynchprior. Mr. Kai is a graduate of Sacramento City College and attended theUniversity of the Pacific from 1983 to 1985. Mr. Kai served on the Board ofRegents of the University of Hawaii and was a director of the ResearchCorporation of the University of Hawaii, the Hawaii Island Portuguese Chamberof Commerce and has served on several nonprofit boards in Hawaii. He resides inHilo, Hawaii.

 

*JamesS. Kendrick.*Mr.Kendrick has over 36 years of experience in the food processing industry and iscurrently a consultant to various food companies. Mr. Kendrick held executivepositions at Mauna Loa Macadamia Nut Corporation from 1991 to 1998, includingExecutive Vice President of Operations and President. Between 1978 and 1983, hewas the Manager of the Honolulu Dole Pineapple cannery. Mr. Kendrick worked forKraft Foods as an engineer. He is a graduate of Northern Illinois Universityand Cornell’s Executive Development Program. He has been active in the HawaiiMacadamia Nut Association and currently resides in Naples, Florida.

 

*E. AlanKennett.*Mr. Kennetthas worked in various executive capacities in the agriculture sector for over40 years and currently is the President and Chief Executive Officer of Gay andRobinson Sugar Company, Inc. on Kauai, Hawaii. He held various positions in theHawaii sugar industry with C. Brewer and Co., Ltd. Between 1976 and 1994. Priorto 1976, Mr. Kennett managed sugar operations in Africa, the United Kingdom andthe West Indies. He is a graduate of Walton Technical College and the LiverpoolCollege of Technology and Completed Cornell’s Executive Development Program. Mr.Kennett has been active in numerous Hawaii non-profit organizations and writtenseveral technical papers. He currently resides in Kaumakani, Kauai, Hawaii.

 

*JeffreyM. Kissel.*Mr. Kisselis the Vice Chairman and Chief Strategy Officer of Primoris Corporation, a $350million specialty contractor. He was the Chief Financial Officer for Earth TechInc. from 2003 to 2005, a $1.5 billion global engineering and constructioncompany specializing in water treatment, and has held various financialexecutive positions in publicly traded companies since 1974. From 1997 to 2003,Mr. Kissel was employed by URS Corporation as a vice president of planning andbudgeting, and served as Chief Financial Officer for several URS Corporationdivisions. Mr. Kissel was President and principal shareholder of HawaiianCommunications between 1992 and 1997. Prior to 1992 he worked with Tesoro, AONand Challenger Petroleum in the energy industry. He has a B.B.A. and M.B.A.from the University of Hawaii and currently resides in California and Hawaii.

 

42

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*David McClain.* Dr. McClain was appointed asthe President of the 10-campus University of Hawai’i System effective March2006, having served as Interim President from August 15, 2004, and VicePresident for Academic Affairs of the UH System from July 1, 2003. From 2000until 2003 he was the Dean of the College of Business Administration at theUniversity of Hawaii at Mnoa,as well as First Hawaiian Bank Distinguished Professor of Leadership andManagement; he was also Interim Vice President for Research of the Universityof Hawaii System from February to September 2003. Dr. McClain joined theUniversity of Hawaii at Manoa in 1991 as the Henry A. Walker, Jr. DistinguishedProfessor of Business Enterprise and Professor of Financial Economics andInstitutions. Dr. McClain is a director of First Insurance Company, and servesas a member of several nonprofit boards in Hawaii. He earned a Ph.D. inEconomics from the Massachusetts Institute of Technology in 1974 and a BA inEconomics and Mathematics from the University of Kansas in 1968. Dr. McClainhas taught at Massachusetts Institute of Technology’s Sloan School ofManagement and at Boston University, where he chaired the Department of Financeand Economics. He also served as Senior Staff Economist, Council of EconomicAdvisors to President Jimmy Carter, and headed international economicinformation services for Data Resources, Inc. He resides in Honolulu, Hawaii.

 

*Dennis J. Simonis*. Mr. Simonis has served as adirector since August 2002, president of the Managing Partner since August2001, chief executive officer since December 2004, and was formerly theexecutive vice president and chief financial officer. From 1993 to 2001, Mr.Simonis served in various capacities at Mauna Loa, including executive vicepresident and chief operating officer. He serves as an officer of the HawaiiMacadamia Nut Association and has served on several nonprofit boards in Hawaii.He served from 1985-1993 as a vice president of Theo H. Davies & Co., Ltd.and worked as a senior auditor for Price Waterhouse between 1979 and 1985. Mr.Simonis graduated magna cum laude with a B.S. in Accounting from Carroll Collegein Waukesha, Wisconsin and earned his C.P.A. certificate in 1983. He resides inHilo, Hawaii.

 

***Executive Officers Who Do Not Serve asDirectors.***

 

*Randolph H. Cabral.*Mr. Cabral has served assenior vice president and orchard manager of the Managing Partner since May2000. Mr. Cabral was previously employed at Ka’u Agribusiness Company, Inc.,from 1989 until the Partnership’s acquisition of Ka’u Agribusiness’ macadamiabusiness in 2000. He served as senior vice president from 1998 to 2000, as vicepresident from 1996 to 1998, and as orchard manager from 1989. From 1983 to1989, Mr. Cabral served as orchard manager with Mauna Loa Macadamia NutCorporation. Mr. Cabral has an AS in General Agriculture from the University ofHawaii. He resides in Hilo, Hawaii.

 

*WayneW. Roumagoux.*Mr.Roumagoux has served as chief financial officer of the Managing Partner sinceAugust 2001. Mr. Roumagoux has been controller of the Partnership since May2001. From 1989 to 2001 Mr. Roumagoux was controller for Inlet Fisheries, Inc. Hewas controller for NBI, Inc’s Alaska operation and for Sheffield Hotels, Inc.during the late 1970’s and 1980’s. Mr. Roumagoux worked as a senior auditor forKPMG between 1976 and 1978. He has a M.S. in accounting from Eastern WashingtonState University in Cheney, Washington. He resides in Volcano, Hawaii.

 

**ExecutiveSession.**Theexecutive session, a meeting of non-management directors, is presided over byJames Case who can be communicated with by e-mail at jcase@carlsmith.com.

 

**AuditCommittee.**EffectiveMarch 7, 2005, James Case resigned from the Audit Committee. At the March 9,2005 Board of Directors meeting Dr. David McClain was appointed chairman andJohn Kai was appointed a member of the Audit Committee. At the June 5, 2005Board of Directors meeting Mr. Jeffrey Kissel was appointed to the AuditCommittee and replaced Dr. Hook. The Audit Committee of ML Resources, Inc. iscurrently comprised of three members, Chairman Dr. David McClain, JeffreyKissel and John Kai. The members of the Compensation Committee, NominatingCommittee and Corporate

 

43

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GovernanceCommittee are James Case, Dr. David McClain, Jeffrey Kissel and John Kai. TheBoard of Directors has determined that each member of the Audit Committee isindependent in accordance with SEC Rule 10-A-3 and New York Stock Exchangeindependence standards, and each member is financially literate, and Mr. Kisselqualifies as a financial expert. The Audit Committee met four times in 2005 toreview and approve accounting, internal control and reporting issues, relatedparty transactions and other matters that could involve a conflict of interest.All members were in attendance at each quarterly meeting.

 

**AuditCommittee Charter.**TheAudit Committee Charter is available by request or on the Partnership’s websiteat www.mlmacadamia.com .

 

**AuditCommittee Pre-Approval Policy.**The Audit Committee Pre-Approval Policy is available by request or onthe Partnership’s website.

 

**Ethics.**The “Code of BusinessConduct and Ethics” is available by request or on the Partnership’s website.

 

**Corporate Governance Guidelines.** The CorporateGovernance Guidelines are available by request or on the Partnership’s website.

 

**NominatingCommittee.**The Partnershipformed a Nominating Committee and the charter was adopted in May 2005. Themembers of the Nominating Committee are independent under Section 15A(a) of theExchange Act. Unit Holders may recommend candidates for the Board of Directorsby submitting such recommendation in writing to Partnership. The minimumqualifications required for a Director of the Partnership, whether submitted bythe Nominating Committee or a Unit Holder, are (1) professional qualification,(2) number of other boards on which the candidate serves, (3) other businessand professional commitments, (4) the need of the Board of Directors for havingcertain skills and experience, and (5) the diversity of the directors thencomprising the Board. The Nominating Committee shall evaluate a candidate basedupon the qualifications described above, based upon a written resume and thenthe CEO and Nominating Committee will interview the candidate. The NominatingCommittee shall determine whether or not to recommend the candidate to theBoard of Directors. The Nominating Committee Charter is available by request oron the Partnership’s website.

** **

**CompensationCommittee.**The Partnershipformed a Compensation Committee and the charter was adopted in May 2005. TheCompensation Committee Charter is available by request or on the Partnership’swebsite.

** **

**F.**              Section 16 Disclosure

** **

Under Section 16 of the Securities Exchange Act of1934, as amended (the “Exchange Act”), each director and certain officers of MLResources, Inc., the managing general partner of Registrant (a “ReportingPerson”), are required to report their ownership and changes in ownership ofClass A Depositary Units to the Securities and Exchange commission, the NewYork Stock Exchange and Registrant. Based on reporting forms submitted toRegistrant, no Reporting Person has failed to file on a timely basis reportsrequired by Section 16(a) of the Exchange Act during 2005.

 

**ITEM 11. EXECUTIVE COMPENSATION**

 

**A.****            Summary CompensationTable**

 

The Partnership is managed by the managing generalpartner. All costs of managing the Partnership are reimbursed by thePartnership, as provided in Section 4.5 of the Partnership Agreement. Thefollowing table reflects the aggregate compensation for services in allcapacities paid by the Managing Partner to its executive officers for the yearsended December 31, 2005, 2004 and, 2003. There were no long- term compensationawards or payouts during those years.

 

44

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| **Name and Principal Position** | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|
| ** **                                     | ** ** | **Year**   | ** ** | **Salary**                   | ** ** | **Bonus**  | ** ** | **Other** | ** ** |
| Dennis J. Simonis                              |       | 2005       |       | 225,000                      |       | 134,800    |       | 19,000 |   |
| President and chief executive officer          |       | 2004       |       | 171,000                      |       | —     |       | 15,750 |   |
|                                           |       | 2003       |       | 164,000                      |       | 91,400     |       | 15,000 |   |
|                                           |       |       |       |                         |       |       |       |   |   |
| Randolph H. Cabral                             |       | 2005       |       | 125,000                      |       | 53,500     |       | — |   |
| Senior vice president                          |       | 2004       |       | 111,000                      |       | —     |       | — |   |
|                                           |       | 2003       |       | 106,250                      |       | 42,300     |       | — |   |
|                                           |       |       |       |                         |       |       |       |   |   |
| Wayne W. Roumagoux                             |       | 2005       |       | 110,000                      |       | 37,700     |       | — |   |
| Chief financial officer                        |       | 2004       |       | 92,000                       |       | —     |       | — |   |
|                                           |       | 2003       |       | 82,000                       |       | 26,100     |       | — |   |

 

**B. No Option, SAR, Long-term Incentive or Pension Plans**

 

Neither the Managing Partnernor the Partnership presently has option plans, SAR plans, or long-termincentive plans. All salaried employees participate in defined contributionplan and other benefit plans administered by the Partnership. The officers ofthe Managing 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. No EmploymentContracts or Termination Agreements**

** **

The Managing Partner does not have any employment orseverance agreements with any of its present executive officers. The presidentof the Partnership has an agreement, which provides for twelve months ofseverance pay in the event of termination without just cause.

 

**D. Compensation of Executive Officers**

 

Executive compensation is reviewed and determined bythe Compensation Committee and recommended to the Board of Directors which hasapproval responsibility. Mr. Simonis has served as its chief executive officerand president since December 2004, president since August 2001 and chieffinancial officer from May 2001 until August of 2001; Mr. Cabral, who hasserved as senior vice president and orchard manager since May 2000 and Mr.Roumagoux, who has served as chief financial officer since August of 2001. Theseofficers’ salary and guideline bonus percentage are administered under thesalary policies established and approved by the Board. Any bonus payments areapproved by the Managing Partner’s Board of Directors annually, based on theoverall performance of the Partnership as evidenced by its net income and cashflow for the year. Performance in both categories is measured relative to theoriginal Partnership operating budget approved by the Managing Partner’s Boardof Directors at the beginning of each year.

 

**E. Director Compensation**

 

Directors of the Managing Partner presently receive aquarterly retainer of $3,750 and a meeting fee of $1,000 per meeting. Membersof the Managing Partner’s Audit and Conflicts Committee receive a meeting feeof $1,000 per meeting with the chairman of the Audit Committee receiving anadditional $750 per meeting. There are no other agreements or arrangementsbetween the Managing Partner and its directors.

 

45

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**F. Stock Performance Chart**

 

The following chart compares the Partnership’s totalreturn to (i) the Russell 2000 (a small business index) and (ii) a peer groupindex composed of publicly traded limited partnerships with either similarcapitalization or in commodity based markets (other than gas and oil) or both.

 

**CUMULATIVE TOTAL RETURNBased upon an initial Investment of $100 on December 31, 2000with dividends reinvested**

 

 

**ITEM 12. SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT**

 

As of December 31, 2005, and subsequent to that dateto the date of this report, (i) one person (including

 

any “group” as that term is used in Section 13(d)(3)of the Securities Exchange Act of 1934) is known by the Partnership or theManaging Partner to be the beneficial owner of more than 5% of the Class AUnits; (ii) the Managing Partner did not own any Class A Units; and (iii) nodirector or executive officer of the Managing Partner owned more than 1% of theClass A Units.

 

The table below sets forth certain information as to the Class A Unitsbeneficially owned by the beneficial owner of more than 5% of the Class A Unitsas of December 31, 2005.

 
| **Name of  Beneficial Owner** | ** ** | **Class A  Units  Owned** | ** ** | **Percent  of  Class A  Units** | ** ** |
|-----------------------------------------|------------|--------------------------------|------------|--------------------------------------|------------|
|                                    |       |                           |       |                                 |       |
| Ebrahimi Family Group                   |       | 918,200                        |       | 12                                   | %          |

 

46

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The table below sets forth certain information as to the Class A Unitsbeneficially owned by the directors of the Managing Partner, and all directorsand executive officers of the Managing Partner as a group, as of December 31,2005.

 
| **Name of  Beneficial Owner**                      | ** ** | **Class A  Units  Owned** | ** ** | **Percent  of  Class A  Units** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------------|------------|
|                                                         |       |                           |       |                                 |       |
| Randolph H. Cabral                                           |       | 100                            |       | *                                    |       |
| James H. Case (1)                                            |       | 8,000                          |       | *                                    |       |
| John K. Kai                                                  |       | 100                            |       | *                                    |       |
| James S. Kendrick                                            |       | —                         |       | *                                    |       |
| E. Alan Kennett                                              |       | —                         |       | *                                    |       |
| Jeffrey M. Kissel                                            |       | 1,016                          |       | *                                    |       |
| David McClain                                                |       | —                         |       | *                                    |       |
| Dennis J. Simonis                                            |       | —                         |       | *                                    |       |
| Wayne W. Roumagoux                                           |       | —                         |       | *                                    |       |
| All directors and executive officers as a  group (9 persons) |       | 9,216                          |       | 0.1                                  | %          |

 

----

*Less than 1%

 

(1)                    Beneficially owned by James H. Casepursuant to a self-directed retirement plan sponsored by Carlsmith Ball, a lawfirm in which Mr. Case is of counsel, and administered by Bank of HawaiiTrust.

 

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

 

**1*. General***

 

The Managing Partner makes all decisions relating to the management ofthe Partnership. The Managing Partner, as such, has the duty to act in goodfaith and to manage the Partnership in a manner that is fair and reasonable toall unit holders. CBCL owned all of the capital stock of the Managing Partneruntil August 1, 2001, at which point the stock was sold to D. BuyersEnterprises, LLC (DBE). The Partnership purchased the Managing Partner interestfrom DBE in January, 2005.

 

**2. *Farming Leases***

 

At the time of the Partnership’s acquisition of the interests in theOctober 1989 Orchards, MLO assigned to the Partnership all of MLO’s rights andobligations under three 45-year farming leases relating to 327 tree acres ofthe Ka’u II Orchards and all of the Mauna Kea Orchards. The farming leasespermit the Partnership to conduct macadamia nut farming operations on suchmacadamia orchard properties. The farming leases provide for fixed minimumannual lease payments to be paid to either KACI or MKACI (collectively, the “AgribusinessCompanies”), as the case may be. Such annual rental payments are subject toincrease after ten years, twenty years and thirty years based on then currentfair market lease rates. The then current fair market lease rate will bedetermined 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. Whether determined by mutual agreement or byappraisal, the then current fair market lease rate will be determined as a fairmarket lease rate for use of such premises as macadamia orchards.

 

47

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The Partnership acquired its interests in the trees situated on suchleased macadamia orchard properties subject to repurchase options retained bythe Agribusiness Companies. The repurchase options grant the AgribusinessCompanies the continuing right to repurchase all or any portion of such treesafter June 30, 2019 at a price equal to the then current fair market value ofthe trees, according to their value as producing macadamia nut trees, asdetermined 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 value will bedetermined 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 lease terms of such leases, the AgribusinessCompanies will be required to repurchase such trees at their then current fairmarket value as orchards if such entities do not offer to extend such farmingleases at the then current fair market lease 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. Such repurchase obligations will apply with respectto the expiration of each extension of the lease terms of such leases untilsuch leases have been in effect for a total of 99 years, at which time theleases will expire and the ownership interests in such trees will revert backto the Agribusiness Companies.

 

In the event that the Partnership decides not to accept an offer toextend the leases at the then current fair lease rates upon the expiration ofthe leases or any extension thereof (or does not assign the leases to a thirdparty who elects to accept such offer), the leases will expire, theAgribusiness Companies will not be required to repurchase the trees coveredthereby and ownership of such trees will revert back to the AgribusinessCompanies (and in any event ownership of such trees will revert back to theAgribusiness Companies after 99 years).

 

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

 

**3.*****Nut Purchase Contracts***

 

The Partnership is a party to five nut purchase contracts with MaunaLoa Macadamia Nut Corporation (“Mauna Loa”). The five nut purchase contractscover all nuts produced by the orchards acquired in June 1986, December 1986,October 1989, September 1991, and May 2000 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 Mauna Loa. Thefirst three contracts are identical in all other material respects. The fourthcontract was acquired by assignment with the purchase of the September 1991orchard and expired in June 2003. The fourth contract was renegotiated with afixed price adjusted for unusables outside the range of 10% to 13%. The fourthcontract expires December 31, 2006. The fifth contract was acquired byassignment with the purchase of the May 2000 orchards and expires in 2006. Thefifth contract is similar to the first three contracts and also provides forthe exclusion of unusable nuts. The first four contracts use a pricing formulabased 50% on a two-year trailing average of the macadamia nut price publishedannually by the U.S. Department of Agriculture (“USDA”) and 50% on Mauna Loa’s “netbackcomponent”. The netback component is calculated by subtracting Mauna Loa’sprocessing and marketing costs per pound and a “capital charge” of 20% from itsnut revenues per pound.

 

48

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The fifth contract uses only the USDA two-year trailing average todetermine its nut price. The nut price paid to the Partnership under the firsttwo contracts was $0.4816 for 2003, $0.4954 in 2004, and $0.5548 in 2005. Theaverage nut price paid to the Partnership under the third contract was $0.4789for 2003, $0.4945 in 2004 and $0.5525 in 2005. The average nut price paid tothe Partnership under the fourth nut price contract was $0.5923 for 2003,$0.6000 in 2004, and was $0.6000 in 2005. The nut price paid to the Partnershipunder the fifth contract was $0.5660 for 2003, $0.5560 in 2004, and was $0.5610in 2005.

 

On December 16, 2004, a new nut purchase contract was signed withHamakua Macadamia Nut Company (“Hamakua”) for the delivery of six millionpounds, effective January 1, 2007. The contract provides for a minimum price of79 cents per pounds and a maximum of 99 cents per pound. The pricing formulaincludes a fixed component of 85 cents and a second component based on Hamakua’saverage selling price for bulk kernel. Refer to Exhibit 10.52 on page 57.

 

On January 5, 2006, a new nut purchase contract was signed with PurdycoInternational, Ltd. dba Island Princess for the delivery of approximately twomillion WIS pounds, effective January 1, 2007. The nut price will be determinedevery six months by mutual agreement based on prevailing market price forkernel from Hawaii and Australia. Refer to Exhibit 10.55 on page 57.

 

On January 6, 2006, a new nut purchase contract was signed with MacFarms of Hawaii, LLC for the delivery of between four and one-half million andfive and one-half million WIS pounds, effective January 1, 2007. The nut pricewill be determined every six months by mutual agreement based on prevailingmarket price for kernel from Hawaii and Australia. Refer to Exhibit 10.54 onpage 57.

 

**4. *Farming Contracts***

 

Prior to the Partnership’s acquisition of themacadamia farming operations on May 1, 2000, the Partnership was a party tofour farming contracts with the Ka’u and Mauna Kea Agribusiness Companies (“AgribusinessCompanies”), that together covered all farming, harvesting and huskingactivities for the orchards acquired in June 1986, December 1986, October 1989and September 1991, respectively. On May 1, 2000, the Partnership acquired themacadamia farming operations from the Agribusiness Companies.

 

The contracts provided the Agribusiness Companies withreimbursement of their direct and indirect costs incurred under these contracts.Husking activities for the Keaau and Mauna Kea orchards are performed at MaunaLoa’s Keaau facility. Reimbursements made to Mauna Loa were $522,000 in 2003,$440,000 in 2004, and $603,000 in 2005.

 

***5*.*****Legal******Fees***

 

The Partnership paid$134,000, $495,000 and $33,000 in legal fees in 2005, 2004 and 2003,respectively. A Director of the Partnership is a former partner and currentlyof counsel to one of the law firms used by the Partnership and said firm waspaid $32,000 in legal fees in 2005, $495,000 in 2004 and $33,000 in 2003. Theadditional legal fees were for services related to the legal suit to preventMauna Loa from acquiring the assets of MacFarms of Hawaii, LLC.

 

**6. *Management Fee***

 

Under the terms of the Partnership Agreement, thePartnership reimburses the Managing Partner for all expenses incurred by it inthe conduct of Partnership business, including any expenses reasonablyallocated to the Managing Partner or to the Partnership as well as a managementfee equal to 2% of the Partnership’s operating cash flow (as defined in thePartnership Agreement). Management cost reimbursements under the PartnershipAgreement were $160,000 in 2003, and $168,000 in 2004. The

 

49

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management fee was $44,000 in 2003, and $9,000 in 2004.There was no management fee in 2005 as it is eliminated in consolidation.

 

***7. Relationships with CBCL and DBE***

 

Since September 2001, the Partnership has leasedapproximately 4,000 s.f. of office space in Hilo for its executive andaccounting staff through the General Partner, which was owned by DBE untilJanuary 2005. The Partnership Agreement requires that the price and terms ofany such transactions be no less favorable than those available in comparabletransactions between unrelated parties. The Partnership provides administrativeservices to DBE for which it was compensated $98,000 in 2003, $104,000 in 2004,and $102,000 in 2005.

 

Mr. Case performs legal work for CBCL, and some of itssubsidiaries. He is also a director of ML Resources, Inc. and performs legalwork for the Partnership.

 

Mr. Simonis, President of ML Resources, Inc., anofficer of the Partnership, and a director of ML Resources, Inc., and is astockholder of CBCL.

 

The Partnership performs farming for a DBE company. Thisfarming is treated in the same manner as all other farming contracts. In 2004 theamount billed was $15,000 of which $9,000 was due at December 31, 2004. In 2005the amount billed was $16,000 of which $3,000 was due at December 31, 2005.

 

**ITEM 14. INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM FEES AND SERVICES**

 

**Audit Fees.**Fees paid to theIndependent Registered Public Accounting Firm during 2005, 2004 and 2003 forthe audit of the Partnership’s annual financial statements and review offinancial statements included in the Partnership’s Form 10-Q amounted to$64,000, $68,000 and $56,000, respectively. The audit fees for the audit of thePartnership’s annual financial statements and review of financial statementsincluded in the Partnership’s Form 10-Q for the years ended December 31, 2005,2004 and 2003, which were approved by Partnership’s audit committee amounted to$65,200, $61,000 and $58,000, respectively.

 

**Audit Related Fees.**Auditrelated fees paid to the Independent Registered Public Accounting Firm during2005, 2004 and 2003 amounted to $10,000, $11,000 and $6,000, respectively.

 

**Tax Fees.**Fees paid to theIndependent Registered Public Accounting Firm during 2005, 2004 and 2003 fortax preparation and related support services amounted to $250,000, $256,000 and$229,000, respectively.

 

**All Other Fees.**MLR acquisitioncosts of $13,000 and 10-K/A review costs of $30,000.

 

50

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### **PART IV**

### ** **

**ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM8-K**

 

**A.****            List of DocumentsFiled as a Part of this Report**

 

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

 

2.               *Financial Statement Schedules*. None required.

 

3.               *Exhibits*. See Exhibit Index at page 53 of this Form 10-K.

 

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

 

On October 20, 2000, thePartnership filed a report on Form 8-K announcing that on September 29, 2000,CBCL had sold all its stock in Mauna Loa Macadamia Nut Corporation to TheShansby Group, a San Francisco based equity partnership.

 

On May 13, 2003, the Partnership filed a “Regulation FD Disclosure” onForm 8-K, which included a copy of a press release issued by the Partnershipsetting forth the results of operations for the quarter ended March 31, 2003.

 

On February 17, 2004, the Partnership filed a “Regulation FD Disclosure”on Form 8-K, which included a copy of a press release issued by the Partnershipsetting forth the results of operations for the quarter and six months endedJune 30, 2003.

 

On February 17, 2004, the Partnership filed a “Regulation FD Disclosure”on Form 8-K, which included a copy of a press release issued by the Partnershipsetting forth the results of operations for the quarter and nine months endedSeptember 30, 2003.

 

On March 9, 2004, the Partnership filed a “Regulation FD Disclosure” onForm 8-K, which included a copy of a press release issued by the Partnershipsetting forth the results of operations for the year ended December 31, 2003.

 

On May 11, 2004, the Partnership filed a “Regulation FD Disclosure” onForm 8-K, which included a copy of a press release issued by the Partnershipsetting forth the results of operations for the quarter ended March 31, 2004.

 

On June 7, 2004, the Partnership filed a “Regulation FD Disclosure” onForm 8-K, which included a copy of a press release issued by the Partnershipsetting forth the second quarter distribution and appointment of John Kai asDirector.

 

On August 11, 2004, the Partnership filed a “Regulation FD Disclosure”on Form 8-K, which included a copy of a press release issued by the Partnershipsetting forth the results of operations for the quarter and six months endedJune 30, 2004

 

On August 12, 2004, the Partnership filed a “Regulation FD Disclosure”on Form 8-K, which included a copy of a press release issued by the Partnershipsetting forth the results of operations for the quarter and six months endedJune 30, 2004 and the potential of a lawsuit against Mauna Loa Macadamia NutCorporation and MacFarms of Hawaii, LLC.

 

51

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On October 7, 2004, the Partnership filed a “Regulation FD Disclosure”on Form 8-K, which included a copy of a press release issued by the Partnershipannouncing the settlement of the lawsuit against Mauna Loa Macadamia NutCorporation and MacFarms of Hawaii, LLC.

 

On November 10, 2004, the Partnership filed a “Regulation FD Disclosure”on Form 8-K, which included a copy of a press release issued by the Partnershipsetting forth the results of operations for the quarter and nine months endedSeptember 30, 2004.

 

On December 20, 2004, the Partnership filed a “Regulation FD Disclosure”on Form 8-K, which included a copy of a press release issued by the Partnershipannouncing the resignation of Mr. John W. A. Buyers as Chief Executive Officerof the general partner of the Partnership, ML Resources, Inc.;  the agreement by the Partnership to purchaseML Resources, Inc.; the appointment of Dennis J. Simonis as Chief ExecutiveOfficer of the general partner of the Partnership; and the agreement withHamakua Macadamia Nut Company, Inc. with the Partnership to purchase 6,000,000 poundsof nuts per year starting in 2007 and ending in 2012.

 

On March 16, 2005, the Partnership filed a “Regulation FD Disclosure”on Form 8-K, which included a copy of a press release issued by the Partnershipsetting forth the 1st quarter 2005 distribution.

 

On March 16, 2005, the Partnership filed a “Regulation FD Disclosure”on Form 8-K/A, which included a copy of a press release issued by thePartnership setting forth the corrections to the press release for the 1stquarter distribution.

 

On May 6, 2005, the Partnership filed a “Regulation FD Disclosure” onForm 8-K, which included a copy of a press release issued by the Partnershipsetting forth the results of operations for the 1st quarter endedMarch 31, 2005.

 

On August 10, 2005, the Partnership filed a “Regulation FD Disclosure”on Form 8-K, which included a copy of a press release issued by the Partnershipsetting forth the results of operations for the quarter and six months endedJune 30, 2005.

 

On November 7, 2005, the Partnership filed a “Regulation FD Disclosure”on Form 8-K, which included a copy of a press release issued by the Partnershipsetting forth the results of operations for the quarter and nine months endedSeptember 30, 2005.

 

52

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|                   | **ML MACADAMIA ORCHARDS, L.P.**          |
|------------------------|------------------------------------------|
|                   |                                     |   | (Registrant) |
|                   |                                     |   |
|                   | By:                                      | **ML RESOURCES, INC.** |
|                   |                                     |   | (Managing General Partner) |
|                   |                                     |   |
|                   | By:                                      | /s/ Dennis J. Simonis |   |
|                   |                                     | Dennis J. Simonis |
|                   |    Principal Executive Officer |
|                   |                                     |
| Dated : March 14, 2006 |                                     |
|                        |                                          |  |  |  |  |  |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities indicated and on thedate set forth above.

 

**ML RESOURCES, INC.**

 
| **Signature** | ** **         | **Title** | ** **                     |
|---------------|--------------------|-----------|--------------------------------|
|          |               |      |
| s/s           | Dennis J. Simonis  |      |                           | President and Chief Executive Officer |
|          | Dennis J. Simonis  |      | Principal Executive Officer    |
|          |               | Director  |
|          |               |      |
| s/s           | Wayne W. Roumagoux |      |                           | Chief Financial Officer |
|          | Wayne W. Roumagoux |      | (Principal Accounting Officer) |
|          |               |      |
| s/s           | James H. Case      |      |                           | Director |
|          | James H. Case      |      |                           |
|          |               |      |
| s/s           | John Kai           |      |                           | Director |
|          | John Kai           |      |                           |
|          |               |      |
| s/s           | James S. Kendrick  |      |                           | Director |
|          | James S. Kendrick  |      |                           |
|          |               |      |
| s/s           | E. Alan Kennett    |      |                           | Director |
|          | E. Alan Kennett    |      |                           |
|          |               |      |
| s/s           | Jeffrey M. Kissel  |      |                           | Director |
|          | Jeffrey M. Kissel  |      |                           |
|          |               |      |
| s/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. (h)                           |

 

56

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| **Exhibit  Number** | ** ** | **Description**                                                                                                                                          |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.52               |       | Macadamia Nut Purchase Contract between Hamakua Macadamia Nut  Company, Inc. and the Partnership dated December 16, 2004 effective January  1, 2007. (i) |
|                |       |                                                                                                                                                     |
| 10.53               |       | Jim Case resignation letter from Audit Committee dated March 7, 2005.  (i)                                                                               |
|                |       |                                                                                                                                                     |
| 10.54               |       | Macadamia Nut Purchase Contract between Purdyco International, Ltd.  and the Partnership dated January 5, 2006 effective January 1, 2007. (j)            |
|                |       |                                                                                                                                                     |
| 10.55               |       | Macadamia Nut Purchase Contract between Mac Farms of Hawaii, LLC and  the Partnership dated January 6, 2006 effective January 1, 2007. (j)               |
|                |       |                                                                                                                                                     |
| 11.1                |       | Statement re: Computation of Net Income per Class A Unit.                                                                                                |
|                |       |                                                                                                                                                     |
| 31.1                |       | Form of Rule 13a-14(a) [Section 302] Certification – Chief Executive  Officer                                                                       |
|                |       |                                                                                                                                                     |
| 31.2                |       | Form of Rule 13a-14(a) [Section 302] Certification – Chief Financial  Officer                                                                       |
|                |       |                                                                                                                                                     |
| 32.1                |       | Certification pursuant to 18 U.S.C. Section 1350 As adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Executive Officer    |
|                |       |                                                                                                                                                     |
| 32.2                |       | Certification pursuant to 18 U.S.C. Section 1350 As adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Financial Officer    |

 

----

(a)          Incorporated byreference to Appendix A of Registrant’s Registration Statement under theSecurities Act on Form S-4, Registration Statement No. 333-46271, filedFebruary 13, 1998.

 

(b)         Incorporated by referenceto the corresponding Exhibit previously filed as an Exhibit to Registrant’sRegistration Statement under the Securities Act on Form S-1, RegistrationStatement No. 33-30659, filed October 20, 1989.

 

(c)          Incorporated by referenceto the corresponding Exhibit previously filed as an Exhibit to Registrant’sRegistration Statement under the Securities Act on Form S-1, RegistrationStatement No. 33-4903, filed June 5, 1986.

 

(d)         Incorporated by referenceto the corresponding Exhibit previously filed as an Exhibit to Registrant’sAnnual Report on Form10-K, Commission filed No. 1-9145, for the year ended December 31, 1986, filedMarch 27, 1987.

 

(e)          Incorporated byreference to the corresponding Exhibit previously filed as an Exhibit toRegistrant’s Annual Report on Form10-K, Commission filed No. 1-9145, for the year ended December 31, 1991, filedMarch 27, 1992.

 

(f)            Incorporated byreference to the corresponding Exhibit previously filed as an Exhibit toRegistrant’s Registration Statement under the Securities Act on Form S-4,Registration Statement No. 333-46271, filed February 13, 1998.

 

(g)         Incorporated by referenceto the corresponding Exhibit previously filed as an Exhibit to Registrant’sForm 8-K, Commission filed No. 001-09145, filed May 8, 2000.

 

(h)         Incorporated by referenceto the corresponding Exhibit previously filed as an Exhibit to Registrant’sForm 10-K, Commission filed No. 001-09145, filed March 17, 2004.

 

(i)             Incorporated byreference to the corresponding Exhibit previously filed as an Exhibit toRegistrant’s Form 10-K/A, Commission filed No. 001-9145, filed June 1, 2005.

 

(j)             Incorporated byreference to the corresponding Exhibit previously filed as an Exhibit toRegistrant’s Form 8-K, Commission filed No. 0011-09145, filed January 9, 2006.

 

57

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