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Royal Hawaiian Orchards, L.P. – ‘10-K’ for 12/31/01

On:  Thursday, 3/28/02   ·   For:  12/31/01   ·   Accession #:  912057-2-12255   ·   File #:  1-09145

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 3/28/02  Royal Hawaiian Orchards, L.P.     10-K       12/31/01    2:449K                                   Merrill Corp/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                       HTML    397K 
 2: EX-11.1     Statement re: Computation of Earnings Per Share     HTML     10K 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

For the Fiscal Year Ended December 31, 2001

OR

Commission File Number 1-9145

ML MACADAMIA ORCHARDS, L.P.
(Exact Name of registrant as specified in its charter)

Registrant's telephone number, including area code: (808) 969-8057

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this 10-K or any amendment to this 10-K. o

        As of March 15, 2002, 7,500,000 shares of the registrant's Class A Units were outstanding, and the aggregate market value of such Units held by non-affiliates was $28,050,000 (based on the closing price on that date of $3.74 per Unit).

PART I

ITEM 1. BUSINESS OF THE PARTNERSHIP

(a) General Description of the Business

        ML Macadamia Orchards, L.P. (the "Partnership") is a publicly traded partnership, organized under the laws of the State of Delaware, and engaged in the business of growing and farming macadamia nuts in Hawaii. It believes that it is one of the world's largest growers of macadamia nuts. The Partnership owns or leases approximately 4,169 tree acres of macadamia nut orchards in three locations within a 50-mile radius on the island of Hawaii. ("Tree acres" are acres of the Partnership's owned or leased lands utilized for macadamia nut orchards. "Gross acres" includes areas not utilized for orchards.) The Partnership sells all of its macadamia nut production to Mauna Loa Macadamia Nut Corporation ("Mauna Loa") under long-term nut purchases contracts. The Partnership farms its own orchards and approximately 2,800 additional acres of macadamia orchards for other orchard owners. The Partnership is managed by its general partner, ML Resources, Inc. ("MLR" or the "Managing Partner"). Until July 31, 2001, the Managing Partner was a wholly owned subsidiary of C. Brewer and Company, Limited ("CBCL"), which in turn is wholly owned by Buyco, Inc. ("Buyco"). On August 1, 2001, all of the stock of the Managing Partner was purchased by D. Buyers Enterprises, LLC ("DBE"). J.W.A. Buyers is the sole owner and Member of DBE and the Chairman of the Board of C. Brewer and Buyco.

        Ownership of Class A Units confers no direct or indirect interest in Buyco, CBCL, DBE or any of their affiliated entities, or in Mauna Loa.

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

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

(b) Financial Information about Industry Segments

        The response to this section of Item 1 is incorporated by reference to Note 4 of the Notes to the Consolidated Financial Statements.

(c) Narrative Description of the Business

Owned-orchard Segment

        The Partnership currently sells all of the macadamia nuts from its orchards to Mauna Loa under long-term nut purchase contracts. Mauna Loa processes and markets the nuts under the Mauna Loa® brand name and is believed to be the largest processor and marketer of macadamia nuts in the world. The Partnership is Mauna Loa's largest single supplier of macadamia nuts. Mauna Loa was a subsidiary of CBCL until its sale in September 2000 to The Shansby Group. On May 1, 2000, the Partnership began farming its own macadamia orchards. Prior to that date, subsidiaries of CBCL performed the farming activities for the Partnership under long-term farming contracts.

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        Nut Purchase Contracts.    The Partnership is a party to five nut purchase contracts with Mauna Loa. They cover all nuts produced by the orchards acquired in June 1986, December 1986, October 1989, September 1991 and May 2000, respectively. The 1986 contracts expire in 2006, while the 1989 contract expires in 2019 and also provides for the exclusion of unusable nuts from those purchased by Mauna Loa. The first three contracts are identical in all other material respects. The fourth contract was acquired by assignment with the orchard purchase in September 1991 and expires in 2003. The fourth contract is similar to the 1986 contracts, but the nut price is calculated on a crop year (July 1 through June 30) rather than a calendar year basis, which results in a slightly different nut price. All four contracts use a pricing formula based 50% on a two-year trailing average of the macadamia nut price published annually by the United States Department of Agriculture and 50% on Mauna Loa's "netback component." The netback component is calculated by subtracting Mauna Loa's processing and marketing costs per pound and a "capital charge" of 20% from its nut revenues per pound. The fifth contract expires in 2006. Its pricing formula is based 100% on the two-year trailing average of USDA reported prices. The first three nut purchase contracts may be terminated by Mauna Loa upon thirty days' notice if the Managing Partner is involuntarily removed as the managing general partner and replaced by a person or entity not affiliated with Mauna Loa. The fourth nut purchase contract may be terminated at any time by mutual agreement in writing, or it may be terminated by the Partnership as of the end of any calendar year by giving Mauna Loa at least twelve months advance notice of its intention to terminate. The fifth contract may be terminated at any time by mutual agreement in writing.

        Competition.    Because the Partnership's revenues from nut sales are tied to a formula dependent in large part upon Mauna Loa's market performance, the Partnership bears certain risks associated with Mauna Loa's marketing of the nuts, including the likelihood of increased future competition. Subsequent to the sale of Mauna Loa to the Shansby Group in September 2000, the Partnership no longer has access to the operational and marketing strategies and financial results of Mauna Loa, as it is no longer a related entity.

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

        Mauna Loa sells macadamia nuts as "retail" nuts and "commercial" nuts and produces and sells various macadamia nut products. These include pristine salted and unsalted roasted macadamia nuts, packages of diced macadamia nuts and macadamia oil (for cooking and baking), value-added products such as candy-glazed macadamia nuts, chocolate-covered macadamia nuts, chocolate macadamia nut candy bars, honey-roasted macadamia nuts and macadamia nut brittle.

        Macadamia nuts comprised less than 5% of the sales of branded premium nuts sold through mass merchandisers, drug and grocery stores on the U.S. mainland. Cashews and mixed nuts represent the bulk of the dollar sales in this segment, followed by pistachios. Macadamia nuts are the highest priced of all premium nuts, and, therefore, they may be sensitive to price competition from other nuts.

        The primary market for the Mauna Loa® brand is the U.S. mainland, where Mauna Loa sells its products through brokers to food stores, club stores, drug store chains, mass merchandisers and commercial customers.

        A strong secondary market for the Mauna Loa® brand is the state of Hawaii, where Mauna Loa sells through its own direct sales force primarily to retailers. Substantial portions of the macadamia nut products sold are purchased by visitors for gifts and souvenirs. Mauna Loa believes that it is the largest seller of macadamia products in the State of Hawaii.

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

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

        In addition to the State of Hawaii, mature macadamia nut orchards are located in Australia, Africa, and Central America. For the 2002 crop, Hawaii was expected to supply 27% of the world crop, and Australia, the world's largest producer, was expected to supply 39%.

        A general decline in nut prices would adversely affect the prices which Mauna Loa could charge for its macadamia nut products and could have a negative effect on its profitability. Since the purchase price for the Partnership's nuts under all of its nut purchase contracts is based in part on nut prices reported by the industry and in part on the marketing success of Mauna Loa, a general decline in macadamia nut prices could also adversely affect the Partnership's revenues.

Macadamia Farming Segment

        Since the May 2000 purchase of the macadamia farming operations, the Partnership farms its own 4,169 acres of macadamia orchards and approximately 2,800 additional acres of macadamia orchards owned by other growers. Prior to May 2000, the Partnership's orchards were farmed by two subsidiaries of CBCL under four long-term farming contracts.

        All the orchards are located in three separate regions on the island of Hawaii ("Keaau", "Ka'u" and "Mauna Kea"). Because each region has different terrain and weather conditions, farming methods vary somewhat among the three locations.

        Farming Contracts.    The Partnership was a party to four farming contracts with two affiliates of CBCL, Ka'u Agribusiness Company, Inc. ("KACI") and Mauna Kea Agribusiness Company, Inc. ("MKACI"). Services under these contracts included cultivation, weed and pest control, fertilization, pruning and hedging, replanting, harvesting, husking and related services for the Partnership's orchards. In return, the Partnership reimbursed KACI and MKACI for direct and indirect costs incurred in providing such services, including an equipment utilization charge and an annual farming fee. The contracts were terminated May 1, 2000 when the Partnership acquired all the farming assets from KACI and MKACI.

        KACI and MKACI were also a party to approximately twenty additional farming contracts, which have been assigned to the Partnership with the May 2000 acquisition. Services provided and reimbursements for costs under these contracts are identical to those listed above. These contracts also provide a management fee to the Partnership, which is based as either 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 and hedging of trees is necessary to allow space for mechanical harvesting and cultivating equipment to operate safely and efficiently and to remove dead branches. Where mechanical equipment is used, the orchard floor must be maintained in a condition that will permit its operation. Soil and gravel are used to repair mud holes and other surface irregularities caused by soil erosion from heavy rain and by farming equipment. Pruning and surface maintenance are usually performed after the harvest season.

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

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

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        Mechanical harvesting is less costly than hand harvesting, but mechanical harvesting is possible only where the orchard floor is relatively flat. Approximately 70% of the orchards in Ka'u, 59% in Keaau and 94% in Mauna Kea are currently mechanically harvested. The remaining acres are too uneven for mechanical harvesting and must be harvested by hand.

        During the harvest season, the nuts are collected every six to ten weeks. Nuts suffer loss in quality if they remain on the ground too long. The harvested nuts are then transported to the husking facilities, which are located 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 in the Mauna Kea region are transported to the husking facility in Keaau. At the husking facility, the outer husk is removed and the nuts, still in their shell, are weighed and sampled to determine moisture content and kernel quality. Title to the nuts husked in Keaau passes to Mauna Loa after weighing. Title to the nuts husked at Ka'u pass to Mauna Loa after delivery to the Mauna Loa processing plant in Keaau. The nuts are then moved to a drying facility.

        Processing.    The nuts purchased by Mauna Loa from the Partnership and from the other orchards farmed by the Partnership are primarily processed at Mauna Loa's processing plant located adjacent to the orchards located in the Keaau area. The plant was built in 1966 and is presently capable of handling approximately 210,000 pounds of dry-in-shell (commonly abbreviated "DIS") nuts per day. Processing at the plant includes drying, cracking, roasting, inspecting and limited packaging. The plant also includes separate warehouses, a machine shop, storage facilities, husking facilities, nut drying facilities, a generator and a 10,000 square foot chocolate processing plant. None of these processing facilities are owned by the Partnership.

        At Mauna Loa's plant in Keaau, the harvested nuts pass by conveyors over metal screens, blowers and rock separators that remove extraneous material from the in-husk nuts. The husks are then split and removed by pressing the nuts between steel roller bars and a rubber pad. At this stage, the nut kernels are still encased in their hard round shells and roughly 20% of their weight is attributable to moisture content. At this point, the nuts are referred to as wet-in-shell (commonly abbreviated "WIS"). The WIS weight of the nuts is used to determine payments to be made by Mauna Loa under the Nut Purchase Contracts. Approximately 20% of the WIS weight of the nuts will become dry salable kernels when all further processing is completed.

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

        The dry nut kernels are roasted and then sorted into retail and commercial grades. At this stage, some of the nuts are bulk-packed and sent to various co-packers on the U.S. mainland for packaging. At Mauna Loa's plant in Keaau the nuts may be salted, or covered with chocolate or one of several coatings, and finally packaged, labeled and readied for shipment.

Stabilization Payments

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

        Accordingly, the seller of this orchard (KACI) agreed to make cash stabilization payments to the Partnership for each year through 1993 in which the cash flow (as defined) from this orchard fell short of the target cash flow level, which equaled $507,000. Stabilization payments for any given year were limited to the lesser of the amount of the shortfall or a maximum payment amount. For the years from

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1987 through 1993, inclusive, the Partnership received a total of $1,628,000 (including a 4% Hawaii general excise tax) in stabilization payments under this agreement.

        The Partnership accounted for stabilization payments (net of the 4% Hawaii general excise tax) as a reduction in the cost basis of the orchard. As such, these payments are being reflected in the Partnership's net income ratably through 2019 as a reduction to the depreciation expense reported for this orchard.

        In return, the Partnership is obligated to pay the seller 100% of any year's cash flow from this orchard in excess of the target cash flow as additional percentage rent until the aggregate amount of the additional percentage rent paid equals 150% of the total amount of stabilization payments previously received. Thereafter, the Partnership is obligated to pay the seller 50% of this orchard's cash flow in excess of the target cash flow as additional incentive rent. No additional rent was due in 1999, 2000, or 2001.

Risks Involved in Operating Macadamia Orchards

        Macadamia nut trees are subject to damage or destruction from diseases, pests, floods, droughts, windstorms, hurricanes, volcanic activity and other natural causes. Partnership tree replacements for all orchards from all causes were 0.7% in 1999, 0.9% in 2000, and 0.8% in 2001. Both crop and tree insurance are in place to protect the Partnership against material losses.

        Diseases and Pests.    The Partnership's Keaau orchards have experienced tree replacements of 1.5% in 1999, 2.0% in 2000, and 2.0% in 2001. Other macadamia growers in the vicinity have also experienced higher than normal tree losses due to a problem known as "Macadamia Quick Decline" ("MQD"). Based upon research by the University of Hawaii and other experts, it is believed that the situation is due to fungi associated with high moisture conditions. It is also believed that a particular variety of macadamia nut tree (variety 333) is most susceptible to MQD. 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% are variety 344. Both the Keaau and Mauna Kea orchards are areas with high moisture conditions, and may be more susceptible to the MQD problem. MQD is present in the Ka'u orchards, but tree losses to date have been less than 1% in the Ka'u area.

        There are also two types of fungal diseases, which can affect nut production but are not fatal to the trees themselves. One of these is Phytophthora, which affects the macadamia flowers and nutlets, and the other is Botrytis cinerea. These types of fungal disease were generally controllable with fungicides, but many of these fungicides are no longer available. Historically, these fungi have attacked the orchards located in Keaau every three to four years. There was a Phytophthora occurrence in the Keaau and Mauna Kea orchards from February to mid-March in 1999, which slightly affected the 1999-2000 crop year production for these orchards. A moderate infestation of Phytophthora occurred in January 2000, and a light infestation has occurred in late January-early February 2001.

        Rainstorms and Floods.    The Partnership's orchards are located in areas on the island of Hawaii that are susceptible to heavy rainstorms. On November 2, 2000, over 30 inches of rain fell in twenty-four hours in East Hawaii. The orchards in the Ka'u region were in the middle of fall/winter harvesting and an estimated 2.5 million pounds of nuts were washed away. Orchard roads, bridges, and irrigation systems were damaged throughout the area, as well as the state highway. The Partnership sustained damage to approximately 81 acres of orchards. Cleanup and irrigation repair cost was approximately $200,000. Fortunately, only six macadamia trees were washed away. Some of the orchards owned by others and farmed by the Partnership were more heavily damaged. Approximately 300 acres of other owners' orchards were affected by rocks, debris and washouts, including 3,500 trees that were washed away.

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        Windstorms.    The Partnership's orchards are located in areas on the island of Hawaii that are susceptible to windstorms. Twenty-four major windstorms have occurred on the island of Hawaii since 1961, and four of those caused material losses to Partnership orchards. Several of the Partnership's orchards are surrounded by windbreak trees, which provide limited protection. Younger trees that have not developed extensive root systems are particularly vulnerable to windstorms.

        Insurance.    The Partnership secures tree insurance each year under a federally subsidized program. The tree insurance for 2001 provides coverage up to a maximum of approximately $22 million against loss of trees due to wind, fire or volcanic activity. Crop insurance was purchased for the 2001-2002 crop year and provides coverage up to a maximum of approximately $9.1 million against loss of nuts due to wind, fire, volcanic activity, earthquake, adverse weather, wildlife damage and failure of irrigation water supplies.

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

        Rainfall.    The productivity of orchards depends in large part on moisture conditions. Inadequate rainfall can reduce nut yields significantly, while excessive rain without adequate drainage can foster disease and hamper harvesting operations. While rainfall at the orchards located in the Keaau and Mauna Kea areas has generally been adequate, the orchards located in the Ka'u area generally receive less rainfall and, as a result, a portion of the Ka'u orchards is presently irrigated. Irrigation can mitigate the effects of a drought, but it cannot completely protect a macadamia nut crop from the effect of a drought. Recorded rainfall at each of the three locations of the Partnership's orchards for the past five years is shown below:

        In, 1998, an El Nino related drought affected all of Hawaii for the first three months and continued to affect Ka'u for the full year. The Ka'u region recorded the lowest rainfall in the Partnership's history, with less than nine inches of rain. The 1998-99 Ka'u crop year was reduced by over 30% due to the lack of rainfall. The Keaau and Mauna Kea regions, which normally receive substantial rainfall, benefited from the lack of rainfall during the first three months of the year. During this period, flowering and pollination were highly successful in these orchards, resulting in the largest macadamia crops ever produced in these two regions.

        The drought continued in Ka'u until the fall of 1999. However, twelve inches of rain fell in the beginning of 1999, which allowed the Ka'u orchards to flower and produce a crop that was just less than normal.

        Drought continued for the third year in Ka'u in 2000, with only 10 inches of rain falling from January to July. After the November rainstorm, when the Ka'u region received over 30 inches of rainfall in twenty-four hours, essentially no rain was received again until February 2001, when 13 inches was recorded.

Water Supply for Irrigation

        With the May 2000 acquisition, the Partnership acquired an irrigation well (the "Sisal Well"), which supplies water to the Partnership's orchards in Ka'u which were purchased in June 1986 and 1989. The Sisal Well is situated on land owned by MKACI. On May 1, 2000 the Partnership entered

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into a license agreement with MKACI, which allows the Partnership necessary access to maintain and operate the Sisal Well, as well as the use of roads to access, maintain and operate the Partnership's macadamia orchards. Annual rent for the license agreement is one dollar. The license agreement terminates on the earlier of June 30, 2045, or at the termination of the May 1, 2000 lease between Partnership and KACI.

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

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

        On a historical basis, the quantity of water available from the Sisal Well has been generally sufficient to irrigate these orchards in accordance with prudent farming practices. The irrigated portion of the Ka'u II Orchards is expected to need greater quantities of water as the orchards mature. The Managing Partner anticipates that the amount of water available from the Sisal well will be generally sufficient, assuming average levels of rainfall, to irrigate the Irrigated Orchards in accordance with prudent farming practices for the next several years. If no irrigation water is available to the Irrigated Orchards, then, based on historical average rainfall levels, diminished yields of macadamia nut production can be expected.

Employees

        As of December 31, 2001, the Partnership employed 331 people, of which 33 were seasonal employees. Of the total, 22 are in farming supervision and management, 261 in production, maintenance and agricultural operations, and 15 in accounting and administration.

        With the May 2000 acquisition, the Partnership agreed to the assumption of three bargaining agreements with the ILWU Local 142. These agreements cover all production, maintenance and agricultural employees of the Ka'u Orchard Division, of the Keaau Orchard Division and of the Mauna Kea Orchard Division. These labor contracts became effective May 1, 1997 and are due to expire on April 30, 2002. The parties have recently agreed to a new three-year contract, which will expire on April 30, 2005. The Partnership believes that relations with its employees are very good.

ITEM 2. PROPERTIES

        Location.    The Partnership owns or leases approximately 4,169 tree acres of macadamia orchards on the island of Hawaii. The orchards are located in three areas: Ka'u, Keaau and Mauna Kea. The Ka'u area is located in the south part of the island about fifty miles from Hilo. The Keaau area is located six miles south of Hilo on the east side of the island, and the Mauna Kea area is located three miles north of Hilo on the east side of the island.

        The majority of macadamia nut trees grown in the State of Hawaii are grown on the island of Hawaii in volcanic soil that permits drainage during heavy rainfall. While the orchards are located approximately within a 50-mile radius, the climate and other conditions that affect the growing of macadamia nuts are different. These differences are the result of prevailing wind patterns and island topography, which produce a variety of microclimates throughout the island.

        Age and Density.    The productivity of macadamia nut orchards depends on several factors including, among others, the age of the trees, the number of trees planted per acre, soil condition, climate, rainfall and/or irrigation. The most significant characteristic affecting yields is maturity. The trees in a macadamia nut orchard generally begin to produce nuts at a commercially acceptable level at

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around nine years of age. Thereafter, nut yields increase gradually until the trees reach maturity, after which the nut yield remains relatively constant except for variances produced by rainfall, cultivation practices, pest infestation and disease.

        Macadamia orchards normally reach peak production after fifteen to eighteen years of age. Of the 4,169 tree acres of macadamia orchards owned or leased by the Partnership, 3,270 tree acres are over eighteen years of age and roughly 899 tree acres are under eighteen years of age. Around 2% of trees are lost to various causes each year and are replaced.

[MAP]

        Rainfall.    Macadamia trees grow best in climates with substantial and evenly distributed rainfall (or equivalent irrigation) and in soil that provides good drainage. Inadequate rainfall can significantly reduce nut yields, while excessive rain without adequate drainage can impede healthy tree growth, promote the growth of harmful fungal diseases and produce mud holes that require repair of the orchard floor.

        At Keaau, normal rainfall is adequate without irrigation, and the volcanic soil provides good drainage. However, short droughts and occasional flooding have occurred. At Mauna Kea, normal rainfall is adequate without irrigation and the volcanic soil provides adequate drainage. In the event of a very long drought, production at Keaau and Mauna Kea might be affected. At Ka'u, located on the drier side of the island, the rainfall averages are substantially less than at Keaau, particularly at the lower elevations. Approximately 652 acres at the lower elevations of Ka'u are irrigated to provide for additional water when required. Under extremely dry conditions at Ka'u, such as a prolonged drought, irrigation is not sufficient, and production will be adversely affected.

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        Orchards.    The following table lists each of the orchards, the year acquired, tree acres, tenure, and lease rents:

(1)

Lease of land only; trees may be removed at termination of lease.

(2)

Lease of land only; lessor may purchase trees from lessee at any time after June 30, 2019.

(3)

Lease of land; trees revert to lessor upon termination of lease.

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

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

        With respect to the Ka'u Green Shoe I Orchard, the lease requires the Partnership to pay KACI, the seller and lessor, additional rent equal to 100% of any year's cash flow generated by such orchard in excess of a target level of $507,000 until the aggregate amount paid equals 150% of the aggregate amount of the stabilization payments previously received by the Partnership. Thereafter, the Partnership is required, with respect to any year prior to the expiration of the lease, to pay as additional rent, 50% of the cash flow generated by such orchard for such year in excess of a target level of $507,000 of cash flow. For additional information, see "Stabilization Payments" on page 5.

ITEM 3. LEGAL PROCEEDINGS AND SETTLEMENT

        Mauna Loa.    The Partnership is a party to five macadamia nut purchase contracts with Mauna Loa. Three of these contracts, one written in 1983 and two in 1986, require Mauna Loa to pay for all nuts delivered. Since the inception of these three contracts, Mauna Loa has always paid for all nuts delivered. The other two nut purchase contracts were written in 1989 and 1999 and allow for the deduction of unusable nuts in calculating payment due.

        On October 31, 2000, a dispute arose with Mauna Loa regarding the payment for nuts delivered by the Partnership during the year. In violation of the nut purchase contracts and past practice, Mauna Loa deducted $908,000 for certain substandard nuts related to the 1983 and 1986 contracts. A demand letter was sent, litigation ensued and a motion for summary judgment was entered on June 4, 2001 against Mauna Loa awarding principal, interest and attorneys fees to the Partnership.

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        Settlement discussions followed the judgment in order to avoid an appeal and further litigation. The Partnership agreed to accept principal, interest and portion of its legal fees along with a complete release by both parties.

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

        No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders.

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PART II

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

        The Partnership's Class A Depositary Units are listed for trading on the New York Stock Exchange (symbol = NUT). There were 1,437 registered holders of Class A Depositary Units on December 31, 2001.

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

Restrictions on Cash Distributions

        On May 2, 2000, the Partnership entered into a new Credit Agreement with Pacific Coast Farm Credit Services, ACA, under which it borrowed $4 million on a ten-year promissory note and will have available a $5 million revolving line of credit facility through May 1, 2004.

        In connection with the Credit Agreement certain restrictions are placed on the Partnership in regard to indebtedness, sales of assets and maintenance of certain financial minimums. The Partnership's cash distributions will be restricted unless all requirements of these covenants are met and the effects of any cash distributions do not breach any of the financial covenants. The restrictive covenants consist of the following:

1.

Minimum working capital of $2.5 million.

2.

Minimum current ratio of 1.5 to 1.

3.

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

4.

Minimum tangible net worth of $57.5 million (reduced by the amount of allowed cash distributions over net income).

5.

Maximum ratio of funded debt to capitalization of 20%.

6.

Minimum debt coverage ratio of 2.5 to 1.

        On December 31, 2001 the Partnership's working capital was $3.2 million and its current ratio was 1.82 to 1. The Partnership is in compliance with all covenants of the Credit Agreement at December 31, 2001.

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ITEM 6. SELECTED FINANCIAL DATA

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

(1)

See "Statement of Cash Flows" in the financial statements for method of calculation.

(2)

See Footnote 6 in the notes to financial statements for method of calculation.

(3)

Wet-in-shell at 25% moisture.

(4)

Weighted average for all orchards.

(5)

7,500,000 Class A Units were issued and outstanding for all periods presented.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

        On May 1, 2000, the Partnership completed the purchase of the macadamia farming operations from four subsidiaries of C. Brewer and Company, Ltd. The acquired assets consisted of 142 acres of macadamia orchards, farming contracts, farming equipment, vehicles, a husking plant, irrigation well, office buildings, garages and warehouses, office furniture and equipment and material inventories related to macadamia farming. All the assets and operations are located on the island of Hawaii. Effective with the acquisition, the Partnership began performing all the farming operations for its own 4,169 acres and for approximately 3,000 additional acres owned by other growers.

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Results of operations—2001, 2000, 1999

Owned-Orchard Segment—Production and Yields

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

        Production for the orchards purchased in 1989 and 2000 is net of unusable nuts, as stated in their respective nut purchase agreements. Production for the orchards purchased in 1986 and 1991 includes all nuts delivered. The nut purchase contracts for the 1986 and 1991 orchards require the purchaser, Mauna Loa Macadamia Nut Corporation ("Mauna Loa"), to purchase all of the nuts delivered from these orchards. The Partnership reports on a calendar year basis, though the natural crop year generally begins in August and runs through April.

        Production in 2001 was 9.4% higher than 2000, but 10% lower than the record harvest in 1999. Significant factors affecting the crop were as follows:

1.

The Ka'u region was affected by a rainstorm and flood in November of 2000 that resulted in a net loss of approximately 700,000 WIS pounds. Rainfall from the storm replenished the soil moisture and improved the yields in this region for 2001.

2.

Production in the Ka'u region was hindered by a third consecutive year of drought before the November rainstorm. Rainfall through October was only 22 inches compared to the region's ten-year average of 38 inches of rain. Modest improvements in rainfall occurred throughout 2001.

3.

The record crop in 1999 was mainly the result of an exceptionally strong Spring crop from the 1998-1999 crop year and a heavy Fall harvest from the 1999-2000 crop in all regions.

        The Ka'u Green Shoe I orchard and the Mauna Kea orchard are not yet fully mature. As a result, the yields from these orchards are expected to be lower on average over the next few years than for the Partnership's mature orchards. At full maturity under favorable growing conditions, a macadamia orchard can produce between 5,500 and 7,500 WIS pounds of macadamia nuts per acre each year at Ka'u and between 4,000 and 6,000 WIS pounds of macadamia nuts per acre each year at Keaau. No trees have reached full maturity in the Mauna Kea area, but it is expected that production at maturity at the Mauna Kea orchard will approximate Keaau levels.

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Owned-Orchard Segment—Nut Revenue

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

        Under the nut purchase contracts with Mauna Loa, the price for nuts delivered is based 50% on the two-year trailing average of USDA published macadamia nut prices and 50% on a "netback component". The netback component is determined by subtracting from Mauna Loa's gross revenues from the sale of macadamia products (i) allocable processing, packaging, marketing, selling and advertising costs and (ii) a 20% capital charge on the difference between those aggregate gross revenues and aggregate allocable costs.

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        The following table sets forth the manner in which the nut purchase price per pound was determined for 2001, 2000 and 1999 ($/lb.):

(a)

Mauna Loa's own purchases comprise a substantial portion of nut purchases reported to the USDA. Therefore, the USDA price component of the purchase price is, to a substantial degree, the average price that Mauna Loa has paid to purchase macadamia nuts from the Partnership and from third parties during the previous two years.

(b)

The nut purchase price for the 1986 and 1989 orchards was the same for 1999 and all previous years. With the change of ownership of Mauna Loa in 2000, a quality conversion factor in the nut purchase contracts was initiated. The effect was to cause a slightly different price of $0.5078 for the 1989 orchards in 2000 and $0.4750 in 2001.

(c)

The nut purchase contract covering nut production from the 78 acre Keaau Lot 10 orchard acquired in September 1991 defines the "two-year trailing average" provision slightly differently from the 1986 and 1989 nut purchase contracts, and thus, results in a different nut price. The nut price for this orchard was $0.5119 in 2001, $0.5339 in 2000, and $0.6671 in 1999. This orchard accounts for less than 2% of the Partnership's macadamia nut production.

(d)

The nut purchase contract for the Ka'u O orchards purchased in May 2000 uses only the two-year trailing USDA average to determine its nut price, which was $0.6222 in 2001 and $0.6602 in 2000.

        The 2001 average nut price from all orchards declined 6% from 2000. The 2000 average nut price from all orchards declined 18% from 1999. The USDA portion fell 6% in 2001 and 7% in 2000, representing a general decline in worldwide macadamia prices caused by increased production, primarily in Australia. The netback component fell 5% in 2001 compared to 2000 and 34% in 2000 compared to 1999. Mauna Loa sold an unusually large amount of its nuts as lower valued ingredient nuts in 2000, which reduced their average revenue per pound in 2000.

        The USDA published price for the 2000-01 crop year was $0.5601 per pound (WIS at 25% moisture), which is 10% lower than the 1999-2000 price of $0.6227 and 9% lower than the 1998-99 price of $0.6155. The USDA two-year trailing average, which affects the Partnership's 2001 nut price, will be $0.5914, a 4% decrease over the 2000 two-year average.

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Owned-Orchard Segment—Cost of Goods Sold

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

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

        As a result of the farming operations acquisition, the Partnership now farms its own orchards, and some costs previously charged as farming expenses by KACI and MKACI were eliminated. These are the Hawaii general excise tax, capital recovery costs and the farming fee. The Partnership saved approximately $118,000 in Hawaii general excise taxes for 2001 and $113,000 for the last eight months of 2000. Hawaii general excise taxes were $128,000 in 1999. The capital recovery savings in 2001 were $24,000 and in 2000 were $18,000. Capital recovery costs were $61,000 in 1999. The elimination of the farming fee in 2000 saved the Partnership $128,000 in 2001 and $69,000 in 2000. The farming fee was $195,000 in 1999. The general and administrative expense in 2001 was $408,000. In addition, the general and administrative expenses incurred in the farming operation, which were previously billed and expensed as farming costs, have been classified for the May to December 2000 period as general and administration expenses. This amounted to $335,000 in 2000.

        Cost of goods sold was $404,000 higher in 2001 than in 2000 and $1.2 million less in 2000 than in 1999, but the cost per pound was 4.6% less in 2001 than 2000 and 6.4% higher in 2000 than 1999. The higher production costs in 2001 were the result of a larger harvest. Lower production costs in 2000 were due to the savings mentioned above and to a much smaller harvest in 2000.

Farming Segment—Farming Service Revenue

        In connection with the acquisition, the Partnership acquired approximately 20 farming contracts to farm macadamia orchards owned by other growers. These contracts cover macadamia orchards in the same three locations on the island of Hawaii where the Partnership owns orchards. The farming contracts provide the Partnership to be reimbursed for all direct farming costs (cultivation, irrigation and harvesting), collect a pro-rata share of indirect costs and overheads, and charge a management fee. The management fee is based on the number of acres farmed or on a percentage of total costs billed. Revenues from farming services were $4.9 million for 2001 and for May to December 2000 were $3.7 million. The 2001 farming services revenue was less than anticipated due to the abandonment of 200 acres by one of the growers and less repairs required. The total in 2000 was less than expected by the Partnership due to the November rainstorm and flood, which prohibited harvesting in some of the orchards under contract in the Ka'u region due to damage and debris in the orchards.

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Farming Segment—Cost of Services Sold

        The cost of services sold relating to the farming contracts was $4.4 million for 2001 and $3.5 million for the May to December period of 2000. These costs were all reimbursed to the Partnership.

General and Administrative Costs

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

        Total general and administrative costs for 2001 were $174,000 higher than in 2000. All of this increase was due to $408,000 in legal costs associated with the dispute related to the nut purchase contract with Mauna Loa.

        In 2000, general and administrative costs were $305,000 higher than in 1999. All of this increase was due to costs that were previously charged as farming expenses. With the acquisition, the Partnership also assumed providing certain accounting services to subsidiaries of CBCL. These services generated income of $130,000 in 2000. The Partnership does not expect to provide any accounting services after 2000.

        A management fee based on Partnership cash flow is payable annually to the Managing Partner. The amount paid was $65,000 for 2001, $32,000 for 2000, and $137,000 for 1999.

Interest Income and Expense

        The Partnership recorded interest expense of $433,000 in 2001 and $325,000 in 2000. This was due to (1) the long-term loan used to acquire the farming operations, (2) the assumption of several capitalized equipment leases, and (3) interest expense on a new revolving line of credit. There was no interest expense in 1999 or 1998.

        The Partnership funds its working capital needs through funds on hand and, when needed, from short-term borrowings, generating interest expense in the process. Net interest income or expense, therefore, is partly a function of any balance carried over from the prior year, the amount and timing of cash generated and distributions paid to investors in the current year, as well as the current level of interest rates. Interest was earned in the amount of $80,000 in 2001, primarily from the settlement with Mauna Loa. During 2000 interest income was earned in the amount of $244,000. Throughout 1999 the Partnership had cash on hand, earned $266,000 in interest income (net of line of credit fees), and incurred no interest expense.

        Other income of $207,000 was recorded in 2001 due mainly to the settlement agreement with Mauna Loa. $104,000 was recorded in 2000 due to a claim received on a crop insurance policy for the 1999-2000 crop. Production in some fields in the Ka'u region were lower than their ten-year average by more than a 25% deductible in 2000 due to the drought in that region.

Inflation and Taxes

        In general, prices paid to macadamia nut farmers fluctuate independently of inflation. Macadamia nut prices are influenced strongly by prices for finished macadamia products, which depend on competition and consumer acceptance. Farming costs, particularly labor and materials, and general and administrative costs do generally reflect inflationary trends.

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        The Partnership is subject to a gross income tax as a result of its election to continue to be taxed as a partnership rather than to be taxed as a corporation, as allowed by the Taxpayer Relief Act of 1997. This tax is calculated at 3.5% on partnership gross income (net revenues less cost of goods sold) beginning in 1998. The gross income tax was $102,000 in 2001, $38,000 in 2000, and $202,000 in 1999.

Liquidity and Capital Resources

        Net cash provided by operations was $2.2 million in 2001 compared with $2.5 million in 2000 and $3.8 million in 1999.

        On December 31, 2001 the Partnership's working capital was $3.2 million and its current ratio was 1.82 to 1, up from $1.6 million and 1.48 to 1 in 2000. The higher working capital for 2001 is due to the settlement with Mauna Loa and cost controls. The Partnership is in compliance with the Credit Agreement covenants.

        Capital expenditures in 2001 were $75,000. In 2000 capital expenditure were $8.9 million, all due to the orchards and farming operations acquisition. There were no capital expenditures in 1999 or 1998. Capital expenditures planned for 2002 are less than $500,000 and are expected to be financed by way of new equipment leases.

        Macadamia nut farming is seasonal, with production peaking late in the fall. However, farming operations continue year round. As a result, additional working capital is required for much of the year. The Partnership meets its working capital needs with cash on hand, and when necessary, through short-term borrowings under a $5.0 million revolving line of credit. The line of credit was obtained on May 2, 2000 and expires May 1, 2004. At December 31, 2001 the Partnership had a cash balance of $357,000 and line of credit drawings outstanding of $1,200,000. The cash balance was $174,000 at the end of 2000, and the line of credit drawings were $900,000 at December 31, 2000.

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

        In January 2002, Mauna Loa notified the Partnership that it would not be able to pay the Partnership in full on the due date for fourth quarter deliveries. On January 30, 2002, the Partnership received a payment of $2.4 million on a total receivable of $5.3 million and issued a notice of nonperformance to Mauna Loa, providing 30 days to remedy the nonperformance. In February and March, additional payments were received totaling $986,000, leaving an unpaid past due balance of approximately $2 million. On March 11, Mauna Loa was provided with a Notice of Default. Additionally, nuts deliveries have continued in the first quarter of 2002 amounting to $1.5 million, which will be due on April 30, 2002.

        Mauna Loa has represented to Partnership management that it is willing and able to pay the past due balance plus contractual interest over the next 60 days. As such, management believes that the receivable is collectible and has not established an allowance for this account. The Partnership is assessing various alternatives on the defaulted contracts.

Legal Proceedings

        Mauna Loa.    The Partnership is a party to five macadamia nut purchase contracts with Mauna Loa. Three of these contracts, one written in 1983 and two in 1986, require Mauna Loa to pay for all nuts delivered. Since the inception of these three contracts, Mauna Loa has always paid for all nuts

19

delivered. The other two nut purchase contracts were written in 1989 and 1999 and allow for the deduction of unusable nuts in calculating payment due.

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

        Settlement discussions followed the judgment in order to avoid an appeal and further litigation. The Partnership agreed to accept principal, interest and portion of its legal fees along with a complete release by both parties.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The Partnership is exposed to market risks resulting from changes in interest rates. The Partnership has market risk exposure on its Credit Agreement due to its variable rate pricing that is based on rates based on LIBOR, the Farm Credit Discount Note Rate and the Farm Credit Medium Term Note Rate. As of December 31, 2001, a one percent increase or decrease in the applicable rate under the Credit agreement will result in an interest expense fluctuation of approximately $36,000.

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ITEM 8. FINANCIAL STATEMENTS, SUPPLEMENTARY DATA AND SCHEDULES

Index to Financial Statements

21

REPORT OF INDEPENDENT ACCOUNTANTS

Limited Partners
ML Macadamia Orchards, L.P.

        In our opinion, the accompanying balance sheets and the related income statements, statements of partners' capital and statements of cash flows present fairly, in all material respects, the financial position of ML Macadamia Orchards, L.P. at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Honolulu, Hawaii
March 12, 2002

22

ML Macadamia Orchards, L.P.
Balance Sheets
(in thousands)

See accompanying notes to financial statements.

23

ML Macadamia Orchards, L.P.
Income Statements
(in thousands, except per unit data)

See accompanying notes to financial statements.

24

ML Macadamia Orchards, L.P.
Statements of Partners' Capital
(in thousands)

See accompanying notes to financial statements.

25

ML Macadamia Orchards, L.P.
Statement of Cash Flows
(in thousands)

See accompanying notes to financial statements.

26

ML Macadamia Orchards, L.P.

Notes to Financial Statements

(1) OPERATIONS AND OWNERSHIP

        ML Macadamia Orchards, L.P. (the "Partnership") owns and farms 4,169 tree acres of macadamia orchards on the island of Hawaii. Once the nuts are harvested, the Partnership sells them to another entity, which processes and markets the finished products. The Partnership farms approximately 2,800 additional acres of macadamia orchards on Hawaii for other orchard owners.

        The Partnership is owned 99% by limited partners and 1% by the managing general partner, ML Resources, Inc. ("MLR"). Until July 31, 2001, MLR was a wholly-owned subsidiary of C. Brewer and Company, Limited ("CBCL"), whose parent company is Buyco, Inc. ("Buyco"). On August 1, 2001, all of the stock of MLR was sold to D. Buyers Enterprises, LLC ("DBE"), an entity solely owned by J.W.A. Buyers, who also serves as the chairman of the board of CBCL and Buyco.

        Limited partner interests are represented by Class A Units, which are evidenced by depositary receipts that trade publicly and are listed on the New York Stock Exchange. Mauna Loa Orchards, L.P., an affiliate of the general partner, held 30,000 Class A Units at December 31, 2001 and 2000.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)

Cash and Cash Equivalents.    Cash and cash equivalents include unrestricted demand deposits with banks and all highly liquid deposits with an original maturity of less than three months. The cash equivalents are not protected by federal deposit insurance.

(b)

Financial Instruments.    The fair value of all financial instruments approximates the carrying value, as the majority of the financial instruments have fairly short durations until maturity, or the market and risk factors associated with the instruments have not changed.

(c)

Farming Costs.    In accordance with industry practice in Hawaii, orchard maintenance and harvesting costs for commercially producing macadamia orchards are charged against earnings in the year that the costs are incurred.

(d)

Land, Orchards and Equipment.    Land, orchards and equipment are reported at cost, net of accumulated depreciation and amortization. Net farming costs for any "developing" orchards are capitalized on the balance sheet until revenues from that orchard exceed expenses for that orchard (or nine years after planting, if earlier).

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

(e)

Income Taxes.    The accompanying statements of operations do not include a provision for corporate income taxes, as the income of the Partnership is not taxed directly; rather, the Partnership's tax attributes are included in the individual tax returns of its partners. Neither the Partnership's financial reporting income nor the cash distributions to unitholders can be used as a

27

substitute for the detailed tax calculations which the Partnership must perform annually for its partners.

The Partnership is subject to a gross income tax as a result of its election to continue to be taxed as a partnership rather than to be taxed as a corporation, as allowed by the Taxpayer Relief Act of 1997. This tax is calculated at 3.5% on partnership gross income (net revenues less cost of goods sold) beginning in 1998.

Deferred tax liabilities are recognized for the future tax consequences attributable to differences between the projected financial reporting and tax reporting basis of assets and liabilities.

(f)

Revenue.    Macadamia nut sales are recognized when nuts are harvested and delivered to the buyer. Contract farming revenue and administrative services revenues are recognized in the period that such services are provided.

(g)

Pension Benefit Costs.    The actuarial method used for financial accounting purposes is the projected unit credit method.

(h)

Estimates.    The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(i)

Net Income Per Class A Unit.    Net income per Class A Unit is calculated by dividing 99% of Partnership net income by the average number of Class A Units outstanding for the period.

(3) ACQUISITION

        On May 1, 2000, the Partnership purchased 142 acres of mature macadamia trees and substantially all of the assets used in the macadamia farming business from Ka'u Agribusiness Company, Inc., Ka'u Sugar, Inc., Mauna Kea Macadamia Orchards, Inc., and Mauna Kea Agribusiness Company, Inc., all related entities. The farming assets consist of the farming equipment, vehicles, a husking plant, irrigation well, leasehold improvements, office furniture and equipment and inventories related to macadamia farming. The purchase price was $8.9 million dollars and was paid using $4.9 million in cash and a loan from Pacific Coast Farm Credit of $4 million.

        The initial purchase price has been allocated to assets acquired based on estimated fair value. The allocated fair value of assets acquired is summarized as follows (000's):

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(4) SEGMENT INFORMATION

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

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

        The Partnership's reportable segments are distinct business enterprises that offer different products or services. Revenues from the owned-orchard segment are subject to long-term nut purchase contracts and tend to vary from year to year due to changes in the calculated nut price per pound and pounds produced. The farming segment's revenues are based on long-term farming contracts which generate a farming profit based on a percentage of farming cost or based on a fixed fee per acre and tend to be less variable than revenues from the owned-orchard segment.

        The following is a summary of each reportable segment's operating income and the segment's assets as of and for the period ended December 31, 2001 and for the period May 1, 2000 (date of acquisiton) through December 31, 2000.

Segment Reporting for the Twelve Months ended December 31, 2001
(in thousands)

Segment Reporting for the Twelve Months ended December 31, 2000
(in thousands)

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(5) RELATED PARTY TRANSACTIONS

(a)

Nut Purchase Contracts.    The Partnership is a party to five nut purchase contracts with Mauna Loa Macadamia Nut Corporation ("Mauna Loa"). Mauna Loa was a wholly-owned subsidiary of C. Brewer and Company, Ltd. ("CBCL") until its sale on September 29, 2000 to the Shansby Group, an unrelated party. CBCL was the sole owner of ML Resources, Inc, the Partnership's general partner until August 1, 2001. The five nut purchase contracts cover all nuts produced by the orchards acquired in June 1986, December 1986, October 1989, September 1991, and May 2000 respectively. The first two contracts run for 20 years, while the third contract runs for 30 years and also provides for the exclusion of unusable nuts from those purchased by Mauna Loa. The first three contracts are identical in all other material respects. The fourth contract was acquired by assignment with the purchase of the September 1991 orchard and expires in 2003. The fourth contract is similar to the first three contracts, but the nut price is calculated on a crop year (July 1 through June 30) rather than calendar year basis, which results in a slightly different nut price. The fifth contract was acquired by assignment with the purchase of the May 2000 orchards and expires in 2006. The fifth contract is similar to the first three contracts and also provides for the exclusion of unusable nuts. The first four contracts use a pricing formula based 50% on a two-year trailing average of the macadamia nut price published annually by the U.S. Department of Agriculture ("USDA") and 50% on Mauna Loa's "netback component". The netback component is calculated by subtracting Mauna Loa's processing and marketing costs per pound and a "capital charge" of 20% from its nut revenues per pound. The fifth contract uses only the USDA two-year trailing average to determine its nut price. The nut price paid to the Partnership under the first two contracts was $0.6230 for 1999, $0.5086 for 2000 and $0.4795 in 2001. The average nut price paid to the Partnership under the third contract was $0.6230 for 1999, $0.5078 for 2000 and $0.4750 in 2001. The average nut price paid to the Partnership under the fourth nut price contract was $0.6682 for 1999, $0.5339 for 2000 and $0.5119 for 2001. The nut price paid to the Partnership under the fifth contract was $0.6609 for 2000 and $0.6222 for 2001.

(b)

Farming Contracts. Prior to the Partnership's acquisition of the macadamia farming operations on May 1, 2000, the Partnership was a party to four farming contracts with Ka'u Agribusiness Company, Inc. ("KACI") and Mauna Kea Agribusiness Company, Inc. ("MKACI"), that together covered all farming, harvesting and husking activities for the orchards acquired in June 1986, December 1986, October 1989 and September 1991, respectively. On May 1, 2000, the Partnership acquired the macadamia farming operations from KACI and MKACI.

The contracts provided KACI and MKACI with reimbursement of their direct and indirect costs incurred under these contracts. The reimbursements paid to the two farm managers were $7.4 million for 1999 and $2.1 million for the first four months of 2000. Husking activities for the Keaau and Mauna Kea orchards are performed at Mauna Loa's Keaau facility. Reimbursements made to Mauna Loa were $595,000 in 1999, $453,000 in 2000 and $443,000 in 2001.

Each of the farming contracts provided a farming fee equal to two and one-half percent of the Partnership's gross profits from farming operations. The Partnership paid the two farm managers, KACI and MKACI, total farming fees of $195,000 in 1999. Due to the acquisition, no farming fee was paid for 2000 and 2001.

(c)

Management Costs and Fee.    The Partnership Agreement provides the managing general partner reimbursement of administrative costs (which consist primarily of compensation costs prior to May 2000, board of directors fees, insurance costs and office expenses) incurred under the

30

agreement as well as a management fee equal to two percent of the Partnership's operating cash flow (as defined). Those reimbursable costs totaled $525,000 in 1999, $320,000 in 2000 and $247,000 in 2001. The managing general partner earned a management fee of $137,000 in 1999, $32,000 in 2000 and $65,000 in 2001.

In addition to a management fee, the managing general partner is entitled, under the existing Partnership Agreement, to receive an annual incentive fee equal to 0.5% of the aggregate fair market value (as defined) of the Class A Units for the preceding calendar year provided that net cash flow (as defined) for the preceding calendar year exceeds specified levels. No incentive fee was earned in 1999, 2000 or 2001.

(d)

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

Accordingly, the seller of this orchard (KACI) agreed to make cash stabilization payments to the Partnership for each year through 1993 in which the cash flow (as defined) from this orchard fell short of a target cash flow level of $507,000. Stabilization payments for a given year were limited to the lesser of the amount of the shortfall or a maximum payment amount.

The Partnership accounted for stabilization payments (net of general excise tax) as a reduction in the cost basis of this orchard. As a result, the payments will be reflected in the Partnership's net income ratably through 2019 as a reduction to depreciation for this orchard.

In return, the Partnership is obligated to pay KACI 100% of any year's cash flow from this orchard in excess of the target cash flow as additional percentage rent until the aggregate amount of additional percentage rent equals 150% of the total amount of stabilization payments previously received. Thereafter, the Partnership is obligated to pay KACI 50% of this orchard's cash flow in excess of the target cash flow as additional incentive rent. No additional rent was due in 1999, 2000, or 2001.

(e)

Cash Flow Warranty Payments.    In October 1989, the Partnership acquired 1,040 acres of orchards that were several years younger on average than the Partnership's other orchards. Their productivity (and therefore their cash flow) was expected to be lower for the first several years than for the Partnership's older orchards.

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

The Partnership accounted for cash flow warranty payments as reductions in the cost basis of the orchards. As a result, these payments will be reflected in the Partnership's net income ratably through 2030 as reductions to depreciation for these orchards.

(f)

Acquisition of Ka'u Orchards and Macadamia Farming Business.    On May 1, 2000, the Partnership purchased 142 acres of mature macadamia trees and substantially all of the assets used in the macadamia farming business from KACI, MKACI, Mauna Kea Macadamia Orchards, Inc. and Ka'u Sugar, Inc., all affiliates of CBCL. The farming assets consist of the farming equipment,

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vehicles, a husking plant, an irrigation well, leasehold improvements, office furniture and equipment and inventories related to macadamia farming. The purchase price was $8.9 million. As the sellers and the general partner of the Partnership were each a direct wholly-owned subsidiary of CBCL, this acquisition involved the general partner in a conflict of interest. The Conflicts Committee negotiated the proposed terms of this acquisition, reached the conclusion that this acquisition would be in the best interest of the Partnership and the holders of the Class A Units, approved this acquisition and reported to the Board of the Directors of the general partner its recommendation that this acquisition should be approved by that Board. The Board of Directors of the general partner unanimously approved such acquisition.

(g)

Management Services Contract.    The Partnership entered into a management services contract with CBCL effective May 2000, wherein CBCL provides insurance and risk management, labor agreement advice, workers' compensation case assistance, consultation with CBCL executive staff and other areas of management to the Partnership. This contract replaced previous contracts between CBCL and the Managing Partner and CBCL and KACI and MKACI. The contract provides for a fee payable to CBCL of $100,000 per year. CBCL was paid a fee of $67,000 in 2000 and $75,000 in 2001. The contract was terminated after the purchase of the stock by DBE August 1, 2001.

(6) CASH FLOW PERFORMANCE

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