PART I

As part of its current short-term supply agreements with Mauna Loa, the Partnership holds an option to require Mauna Loa to use commercially reasonable efforts to process the Partnership’s production covered by a contract at a fee equal to Mauna Loa’s cost for a period of two years after a contract terminates. This alternative, although currently short-term in nature, would require no capital investment by the Partnership. Alternatively, other Hawaii processors have open capacity to process a portion of the Partnership’s production and their capacity could potentially be expanded if that option was selected. A third option which is under evaluation is to husk and dry the Partnership’s nuts in Hawaii and then send the dried nuts offshore for processing. This option would require an estimated investment of between $1.5 and $2.0 million over three years for husking facility improvements and drying and storage facilities. Contract processing is an attractive solution in the short-term since no investment of capital would be required (other than the investment relating to husking and drying the nuts in Hawaii before sending the dried nuts offshore for processing) and the responsibility for managing the processing facility would be borne by third parties. Contract processing would also provide the Partnership the necessary time to acquire or construct its own nut processing facility should it decide to do so.

There are presently no macadamia processing facilities in Hawaii that are available for sale. The current Mauna Loa facility is best suited to accommodate the Partnership’s production since it has the necessary capacity and is most effective in dealing with the Partnership’s mechanically harvested production. We believe that the efficiency of the Mauna Loa plant could be adversely affected if the Partnership diverted a significant portion of its production to another facility in Hawaii or offshore. There are several smaller processing facilities in Hawaii, but they are not presently available for sale and would require additional investment of approximately $3-5 million to expand their nut processing capacity. Management estimates that the cost to build a new facility to process the Partnership’s production would be between $10 and $12 million and would take approximately three years to construct. If this option is selected, the Partnership might seek to fund the construction or acquisition of its own processing facility with a combination of equity and long-term debt in order to retain sufficient proceeds to utilize for the other initiatives outlined below.

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As discussed below, Management of the Partnership is in the process of developing a comprehensive sales strategy to directly market its nut production as it becomes available from expiring contracts.  Demand for macadamia nuts is strong at the present time and global supply is constrained resulting in macadamia nut prices which are at historically high levels and substantially exceed those being paid by Mauna Loa under the nut contracts.  The Partnership believes that given the current market prices for macadamia nuts it will be able to sell or find replacement buyers for any nut production that ceases to continue to be subject to a nut purchase contract with Mauna Loa.

Until recently, the Partnership Agreement only permitted the Partnership to farm and sell nuts from its own macadamia orchards, as well as to farm orchards owned by others.  An Amendment to the Partnership Agreement adopted in March 2008 now permits the Partnership to process as well as market its macadamia nuts for sale to third parties.

Development of Branded Product

Historically, the Partnership has been in the business of the agricultural production of macadamia nuts but not their processing and marketing.  It has been subject to the risk of the market price for macadamia nuts except to the extent that it has been able to mitigate that risk by entering into fixed price contracts, such as three of the existing contracts with Mauna Loa.  In periods of declining prices these fixed price contracts can provide protection.  However, in times when market prices are rising or are high, as is the current case, these contracts can potentially deprive the Partnership of additional potential revenue that it might be able to obtain if it were to sell its nuts at current spot market prices.  In order to mitigate the risk of fluctuating market prices of macadamia nuts and at the same time expand its business activities into processing and marketing macadamia nut products for ultimate sale at retail, the Partnership is pursuing a vertical integration strategy.  One part of that strategy is determining how it will process or contract for the processing of wet-in-shell macadamia nuts, as discussed above. A second part of that strategy is to pursue the development and marketing of branded macadamia nut products, which will require the Partnership to expend monies for product development, marketing, advertising, shelf space allocation and other costs.  At this time management believes that there are few companies who are farming macadamia nuts and who also market and sell a branded product utilizing their nuts in the United States.  Most processors and manufactures of macadamia nut products purchase their nuts directly from other growers and then process and incorporate them into their products.  At this time, there is a limited selection of macadamia nut branded products with wide retail distribution in the United States.  The Partnership believes that there is a market opportunity where the Partnership could not only

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grow nuts but also process and incorporate those nuts into macadamia nut products for ultimate sale at retail to consumers or to sell the nuts in kernel form to others for incorporation into their products. As part of this strategy, the Partnership intends to build a line of macadamia-based foods to be sold under the brand name “Royal Hawaiian Orchards.” The Partnership intends to pursue this strategy over the next several years subject to the availability of funds and the measure of success that it experiences.

Historically, as market prices for nuts have varied, the price the processor pays to the farmer for nuts has also fluctuated.  The market price that is paid for nuts at any given time may or may not cover the costs of the farmer to farm and maintain his orchards.  Because macadamia nut trees, once they are mature, produce over a long-term basis, trees still must be maintained so they do not succumb to disease, pests or other maladies even in the event that production costs in any one year are not covered by the market price.  Accordingly, farmers are subject to market price fluctuations with potential losses in low price environments.  On the other hand, companies who produce macadamia nut products that are ultimately sold at retail generally have been able to maintain their margins passing on the price increases or reductions to the farmer or the consumer.  By pursuing a branded product strategy and continuing to farm macadamia nuts, the Partnership believes that it may have a pricing advantage since it is able to produce nuts from its own orchards and does not have to compete to purchase nuts from third parties.  Furthermore, the Partnership believes that even if market prices for macadamia nuts were to decline below the Partnership’s actual production costs, if it was able to successfully develop its branded strategy it would be able to sell the nuts as branded products on a profitable basis.  This mitigates the Partnership’s exposure to fluctuating market prices.  The Partnership has never previously before pursued sales of kernels or macadamia nut products on this basis and this will be a new business for it.  The Partnership intends to recruit employees with experience in the area in addition to its new Vice President of Marketing, and intends, subject to the availability of funds, to invest in development and marketing in order to pursue this strategy.  There is no assurance that this effort will be successful or that the Partnership will receive a return on its investment.

As a separate part of its branded product strategy, Royal Hawaiian Macadamia Nut, Inc., a subsidiary of the Partnership (“Royal”), in conjunction with a marketing company, also developed a small line of retail products which is currently being presented to distributors and retailers for distribution in Europe under the “Ono Ono” brand (the “Branded Product”). Royal is required to obtain the macadamia nuts and arrange for the manufacturing of the Branded Products and the marketing company will purchase the Branded Products from Royal and be responsible for the sales and marketing of the Branded Product on an exclusive worldwide basis.  Royal will own 20% and the marketing company will own 80% of the “Ono Ono” brand. Royal has purchased macadamia kernels and packaging materials for the manufacture of the new product line by a co-packer in California.

In order to pursue its marketing strategies, the Partnership has hired an executive vice president of sales and marketing effective January 1, 2012.  If these sales efforts are successful, the partnership will eventually be able to provide its nuts for the Royal Hawaiian Orchards line as well as to Royal for the Ono Ono line.

Subject to approval by the board of directors of the managing partner, the Partnership intends to seek to raise capital to implement its plans to process and market macadamia nuts and to expand and improve its orchard operations.

Financial Information about Industry Segments

Information concerning industry segments is set forth in Note 3 to the Notes to Consolidated Financial Statements filed herewith.

Owned-Orchard Segment

The Partnership grows and farms macadamia nuts on 5,070 tree acres of orchards it owns and leases.  The Partnership currently sells all of the macadamia nuts from its orchards to Mauna Loa under various forms of nut purchase contracts (including leases and licenses).  Production from its existing orchards (non-IASCO), is estimated to be between 19 and 21 million pounds wet-in-shell each year.  Production from the IASCO orchards in 2011 was 5.9 million pounds wet-in-shell.

In 2009, the Partnership sold macadamia nuts from its orchards to Mauna Loa and MacFarms of Hawaii, LLC (“MacFarms”) under nut purchase contracts and related addendums which provided for the sale of approximately 21 million field pounds and which have since terminated.

Nut Purchase Contracts .  In 2011 and 2010 the Partnership sold its entire macadamia nut production to Mauna Loa under an Addendum to the 2006 nut purchase agreement executed in December 2009 (the “Addendum”) and two lease agreements and one license agreement which it acquired in the August 1, 2010 acquisition of the IASCO orchards.  Nut purchase contracts require the buyer to purchase and a seller to sell a quantity of macadamia nuts.  Transfer of ownership for the nuts from the Partnership to Mauna Loa is at the time of delivery to Mauna Loa’s processing plant.  Nuts from the field are weighed after they are husked, which leaves the nut still in its hard shell, referred to as wet-in-shell (“WIS”).  Orchard to orchard and year to year, WIS nuts have varying moisture and saleable kernel contents.  The Addendum requires adjustments to a standard wet-in-shell moisture of 20% and a standard saleable kernel / dry-in-shell ratio of 30% (“WIS SK/DIS”) to the delivered field pounds to determine the pounds for

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which the Partnership is paid.  If the moisture content is above the 20% standard, then the pounds of nuts paid for will be less than the pounds actually delivered.  Conversely, if the moisture content is below the 20% standard, then the pounds of nuts paid for will be greater than the pounds of nuts actually delivered.  If the saleable kernel / dry-in-shell recovery is above the 30% standard, then the number of pounds paid for will be greater than the actual pounds delivered.  Conversely, if the saleable kernel / dry-in-shell recovery is below the 30% standard, then the number of pounds paid for will be less than the actual pounds delivered.  For nuts sold to Mauna Loa in 2011 under this contract, the average moisture content was 21.7% and saleable kernel/dry-in-shell was 24.8%.

On June 1, 2006, the Partnership executed a contract with Mauna Loa for the annual delivery of approximately 6.3 million pounds of wet-in-shell nuts, effective January 1, 2006 and expiring December 31, 2011.  The contract provided for a nut price of $0.74 per WIS SK/DIS pound in 2006 and $0.75 per WIS SK/DIS pound in 2007.  The purchase price increased annually by $0.01 per WIS SK/DIS pound, except 2008, until it reached $0.78 per WIS SK/DIS pound in 2011.  On July 9, 2008 an addendum to the June 1, 2006 nut purchase contract was executed with Mauna Loa for the delivery of an additional 9.0 million WIS pounds of nuts during the period July 21, 2008 through June 30, 2009 at a purchase price of $0.60 per pound on a WIS SK/DIS basis.  The addendum provided for an additional 3.0 million pounds to be delivered if mutually agreed on the same basis as the additional 9.0 million pounds.  On November 3, 2008 it was agreed that any additional pounds over the 9.0 million pounds delivered until December 31, 2008, would have a nut purchase price of $0.63 instead of $0.60 per pound on a WIS SK/DIS basis.  On March 23, 2009, the parties executed an amendment to the June 1, 2006 contract for the delivery of an additional 9.0 to 15.0 million wet-in-shell pounds at a purchase price of $0.63 per pound on a WIS SK/DIS basis for nuts delivered through December 31, 2009. On December 22, 2009, the Partnership and Mauna Loa executed the Addendum which provided that all of the macadamia nuts harvested by the Partnership, estimated to be between 19 to 21 million wet-in-shell pounds, in 2010 and 2011 would be sold to Mauna Loa at a nut purchase price of $0.73 per pound on a WIS SK/DIS basis.  In the first quarter 2011 Mauna Loa agreed to an incremental $0.10 per pound WIS SK/DIS for nuts produced, up to 600,000 wet-in-shell pounds, from certain orchards in Keaau and Ka’u with lower nut densities.  The additional $0.10 per pound helped offset additional harvest costs incurred for nuts harvested from orchards with lower nut densities.  In the first quarter 2011, 273,000 wet-in-shell pounds harvested from the orchards subject to this additional payment produced 203,000 contract pounds at a nut purchase price of $0.83 per adjusted WIS pound.  The additional $0.10 per pound resulted in $20,300 additional revenue above the revenue generated by the standard contract purchase price.

On January 31, 2011, the Partnership entered into three nut purchase contracts with Mauna Loa, each effective January 1, 2012.  These contracts replace the Addendum which expired on December 31, 2011.  The new contracts are identical except for the terms, which are one, two and three years, respectively.  Each contract requires that Mauna Loa purchase and the Partnership sell 1/3 of all macadamia nut production of the Partnership (or approximately 6.5 million pounds of wet-in-shell nuts annually) excluding production from the IASCO orchards.  The nut purchase price under each of the contracts will be $0.77 per adjusted pound on a WIS SK/DIS basis.  To the extent the Partnership delivers wet in husk nuts, a $0.055 per wet-in-shell pound husking charge will be made by Mauna Loa.  At this time, the Partnership does not intend to renew the nut purchase contract expiring December 31, 2012.  However, Mauna Loa is obligated, at the Partnership’s option, to use commercially reasonable efforts to convert the nuts which would have been covered by such contract into kernel, for a period of two years after a contract is terminated, at a cost equal to Mauna Loa’s average nut processing cost.

Effective August 1, 2010, in connection with the purchase of the real property, orchards and farming assets from IASCO, the Partnership acquired two lease agreements and one license agreement under which all macadamia nuts produced in the acquired orchards must be sold to and are required to be purchased by Mauna Loa.  The license agreement expires in 2029 and the two lease agreements expire in 2078 and 2080, respectively.  Under these agreements, the Partnership is paid based on wet-in-shell pounds, at a price which is derived annually from a formula which factors in the Mauna Loa wholesale price of the highest year-to-date volume fancy and choice products sold in Hawaii, and the USDA

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reported price of WIS Hawaii macadamia nuts.  To the extent that the Final USDA Report for the year contains a price or moisture that varies from that used in the formula price calculations for nuts delivered during the year, then an adjustment is made between the parties.  In 2011 the Partnership recorded additional nut revenue of $58,000 on the production from the IASCO orchards delivered in 2010.  Including the additional revenue recorded in 2011, the average nut price received by the Partnership for nuts produced from the IASCO orchards for the five-month period beginning August 1, 2010, the date of the Partnership’s acquisition of those orchards, was $0.66 per pound. The average price received by the Partnership for WIS nuts produced from the IASCO orchards in 2011 was $0.75 per wet-in-shell pound.

On December 16, 2004, the Partnership executed a nut purchase contract with Hamakua. The contract required Hamakua to purchase approximately 6.0 million field pounds of nuts during 2008, approximately 4.0 million field pounds of nuts per annum in the years 2009-2010, and 2.0 million field pounds of nuts per annum in the years 2011-2012. The contract provided for a minimum price of $0.75 per WIS pound and a maximum price of $0.95 per WIS SK/DIS. The pricing formula included a fixed component of $0.85 per WIS pound and a second component based on Hamakua’s average selling price for bulk kernel.  In February 2007, the contract was amended to allow the Partnership, at its option, to have Hamakua process macadamia nuts into kernel for a fee in lieu of selling the nuts to Hamakua.  The Partnership exercised this option solely for the calendar year 2007.  Hamakua refused to accept delivery of any macadamia nuts during 2008 and 2009.  The Hamakua nut purchase contract was terminated in connection with the settlement of litigation brought by the Partnership against Hamakua which resulted in the Partnership receiving a settlement payment of $324,000 during the first quarter of 2009.  This nut purchase agreement was terminated on June 10, 2009.

On January 5, 2006, the Partnership executed a nut purchase contract with Island Princess for the annual delivery of approximately 2.0 million field pounds, effective January 1, 2007 and expiring on December 31, 2011.  The nut price was determined every six months by mutual agreement based on the prevailing market price for kernel from Hawaii and Australia.  This nut purchase agreement was terminated October 31, 2008 by mutual agreement.

On January 6, 2006, the Partnership executed a nut purchase contract with MacFarms for the annual delivery of 5.0 to 6.0 million field pounds per annum, effective January 1, 2007 and expiring on December 31, 2011.  The nut price was determined every six months by mutual agreement based on the prevailing market price for kernel from Hawaii and Australia. The Partnership terminated this nut purchase contract on December 22, 2009 due to the failure of MacFarms to perform its obligations under the Agreement.

Competition.   In addition to the State of Hawaii, mature macadamia nut orchards are located in Australia, Africa, and Central/South America.  For the 2011 crop, Hawaii supplied 16% of the world crop, and Australia, the world’s largest producer, supplied 30%.  In 2011, the Partnership supplied about 53% of the Hawaii crop from orchards it owns or leases and the orchards it farms for others supplied about 8% of the Hawaii crop to processors on Hawaii.  All of the Partnership’s production has historically only been sold to Hawaii processors as shipping the crop to processors outside of Hawaii has not been required.  The processors have the ability to purchase nuts from other local farmers and kernel from local and foreign processors to satisfy their requirements.  Nuts that are not purchased by the local processors would need to be processed into kernel for future sale or sold to a foreign buyer

Macadamia Farming Segment

The Partnership farms 5,070 tree acres of macadamia orchards, which it owns or leases, as well as macadamia orchards owned by other growers (approximately 1,100 acres after August 1, 2010, and 1,980 acres prior to July 31, 2010) under farming contracts.

All 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.

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Farming Contracts.  The Partnership currently provides services under eleven farming contracts.  Services under these contracts include cultivation, weed and pest control, fertilization, pruning and hedging, replanting, harvesting, and husking.  The farming contracts provide for the Partnership to be reimbursed for all direct farming costs, collect a pro-rata share of indirect costs and overheads, and charge a fee for these services, either as a fixed fee per acre farmed, or as a percent of reimbursed costs, ranging from 5% to 20%.  Approximately 115 acres are farmed under year-to-year contracts, contracts for approximately 70 acres expire June 30, 2013, contracts for approximately 635 acres expire June 30, 2016, and contracts for approximately 280 acres expire June 30, 2033.  Each owner is responsible for the sale of the nuts from their orchards and the Partnership will arrange for the nuts to be delivered to the purchaser of the nuts at the owner’s cost.

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 between harvest seasons.

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 harvesting 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 on the ground after mechanical harvesting.  At Keaau, Ka’u and Mauna Kea, seasonal labor for hand harvesting and other operations is generally available from nearby Hilo and adjacent communities.

Mechanical harvesting is less costly than hand harvesting; however, mechanical harvesting is possible only where the orchard floor is relatively flat.  Approximately 70% of the orchards in Ka’u, 59% in Keaau and 100% in Mauna Kea are 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 depending upon conditions.  Nut quality deteriorates if they remain on the ground too long.  The harvested nuts are then transported to husking facilities, which are located in Ka’u and Keaau.  The Keaau husking facility is owned and operated by Mauna Loa and the Ka’u husking facility is owned and operated 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.  Kernel quality is determined from samples taken.  The final adjustments under the nut purchase contracts are made to determine the appropriate payment for the nuts.  Title to the nuts passes to the buyer after delivery to the buyer’s processing plant.  Further processing of the nuts is done by the buyers at this time.

Loan Agreement

On August 4, 2010 the Partnership and the General Partner entered into a Fourth Amended and Restated Credit Agreement with American AgCredit, PCA (as amended, the “Credit Agreement”).  The Credit Agreement originally provided a revolving credit facility of $5.0 million until July 15, 2011 and $4.0 million from July 16, 2011 to July 13, 2012.  On March 7, 2011, the Credit Agreement was amended to maintain the revolving credit facility at $5.0 million through July 13, 2012.  The management of the Partnership has discussed with American AgCredit, PCA the extension of the revolving credit facility if necessary. The Partnership had $2.4 million and $3.2 million outstanding on the revolving credit facility as of December 31, 2011 and 2010, respectively.  As of the end of February 2012, the Partnership paid off the outstanding balance of $2.4 million.  The Partnership intends to utilize the revolving credit facility as

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required. Advances under the revolving credit facility bear interest at the base rate of 4.0% or the prime rate as published in the Wall Street Journal plus 1%, whichever is higher, unless the Partnership elects to convert the rate to a fixed rate in accordance with the provisions of the Credit Agreement.  The Partnership is also required to pay a facility fee of 0.30% to 0.375% per annum, depending upon certain financial ratios on the daily unused portion of its credit.  At December 31, 2011 and 2010, interest at the base rate on revolving advances was 4.25% per annum.

The Credit Agreement also provided the Partnership a 10-year $10.5 million term loan.  The term loan matures on July 1, 2020, requires equal monthly payments over the term and bears fixed interest at 6.5% per annum.  The proceeds of this loan were used by the Partnership on August 6, 2010 for the acquisition of the real property and assets used in connection with the macadamia nut farming operations of IASCO.  (see Note 15 Acquisition on page 52 and BUSINESS OF THE PARTNERSHIP, Acquisition of IASCO Orchards).  The Partnership had $8.9 million and $10.0 million outstanding on the term loan as of December 31, 2011 and 2010, respectively.

The revolving credit facility and the $10.5 million term loan are secured by all personal and real property owned by the Partnership.  Subject to certain exceptions, the Credit Agreement restricts the Partnership’s ability to change its capital structure, to make certain investments, loans or advances, to incur indebtedness, create liens, sell assets, or take certain other actions.  The Partnership is also prohibited from making any payments or other distributions in respect of any Partnership interest in the Partnership or to acquire a Partnership interest or to make any payments or contributions to any partner except in exchange for reasonably equivalent value.  The Partnership’s minimum tangible net worth is required to be $41.0 million increased dollar for dollar by the amount of positive consolidated net income of the Partnership after January 1, 2010.  The Partnership is required to have consolidated trailing twelve month EBITDA of not less than $1.5 million at the end of each quarter commencing as of June 30, 2010. The Partnership was in compliance with the terms and conditions of the Credit Agreement at December 31, 2011. The Partnership was also in compliance with the terms and conditions of the Credit Agreement at December 31, 2010 except for the minimum consolidated EBITDA covenant.  On March 7, 2011, the lender provided a waiver to the loan covenant for the quarter ending December 31, 2010.  Had the lender not waived this violation, all obligations and indebtedness, at the lender’s option, could have been accelerated and become due and payable.

Acquisition of IASCO Orchards

Effective August 1, 2010, the Partnership acquired from IASCO, a major farming contract customer, certain real property and assets used in connection with the macadamia nut farming operations on the property, for $12.5 million.  The real property consists of approximately 4,843 acres of land in the Ka’u district which includes approximately 1,100 acres of macadamia nut tree orchards, of which 880 acres are actively farmed, approximately 2,750 acres of undeveloped lava rock land and other miscellaneous property.  The purchase also includes a well site, related pumps and engines, and in-field irrigation system for approximately 80% of the macadamia orchards.  As a result of the purchase, the Partnership acquired two lease agreements and one license agreement under which all macadamia nuts produced in the orchards must be sold to and are required to be purchased by Mauna Loa Macadamia Nut Corporation. The agreements are long term agreements which expire in various dates through 2080.  Prior to the acquisition of the orchards from IASCO, the Partnership provided farming services for these orchards under standard nut farming agreements. The annual farming services provided to IASCO generated approximately 50% to 55% of the Partnership’s total annual contract farming revenue.

The asset purchase agreement with IASCO includes a three year option allowing IASCO to reacquire the 2,750 acres of undeveloped lava rock land for $1.0 million.  If the parcel is reacquired and sold by IASCO the first $500,000 in excess of $1.0 million exercise price will be retained by IASCO, with any amount in excess of $1.5 million being split equally between IASCO and the Partnership.  If the option is sold by IASCO, it will receive the first $500,000 from such sale and the balance will be split equally between IASCO and the Partnership.  If the option is not exercised within a three year period it will expire.

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Employees

As of December 31, 2011, the Partnership employed 290 people, 248 of which were seasonal employees.  Of the total, 22 are in farming supervision and management, 255 in production, maintenance and agricultural operations, and 13 in accounting and administration.

The Partnership is a party to two bargaining agreements with the ILWU Local 142.  These agreements cover all production, maintenance and agricultural employees of the Ka’u Orchard Division, the Keaau Orchard Division and the Mauna Kea Orchard Division.  These labor contracts expire on May 31, 2013. Although, the Partnership believes that relations with its employees and the ILWU are good, there is no assurance that the Partnership will be able to extend these agreements on terms satisfactory to it when they expire.

Replacement Buyers . The Partnership does not intend to renew its nut purchase contract expiring on December 31, 2012, entered into with Mauna Loa on January 31, 2011.  Accordingly, the Partnership will have to obtain replacement buyers for approximately 6.5 million pounds of wet-in-shell (“WIS”) nuts in 2013, approximately 13 million WIS pounds in 2014, and approximately 19.5 million WIS pounds in 2015. The Partnership intends to sell the nuts to other buyers and/or engage third parties to process the nuts for the Partnership, for its sale after processing, including kernels sales and sales of finished products. The Partnership believes that given the current market prices for macadamia nuts it will be able to sell or find replacement buyers for any nut production that ceases to continue to be subject to a nut purchase contract.  However, there is no assurance of the creditworthiness of new customers and their ability to pay for nuts delivered.  Also, if the replacement buyers require shipment of nuts outside of Hawaii, the Partnership would incur transportation costs which could increase cost of sales, and adversely affect the Partnership’s profitability. If the Partnership is unable to secure buyers for the nuts from the expiring contracts, sales would decrease and adversely impact the Partnership’s results of operation and financial condition.

Alternative Processor .  The Partnership has the option to require Mauna Loa to use reasonable commercial efforts to process the Partnership’s production covered by a contract at Mauna Loa’s cost for a period of two years after the date of termination of a non-IASCO nut purchase contract.  This is only a short term solution for nut processing.  The Partnership believes it will be able to engage other third parties to process its nuts.  However, there is no assurance that the Partnership will be able to contract for the timely processing of nuts with an acceptable quality and cost.

Lease Agreements.   The Partnership leases approximately 1,922 tree acres of land for its orchard operations.  One of these leases, approximately 266 tree acres, has produced an average of 1.5 million WIS pounds over the past 5 years and terminates in 2019.  Two of these leases terminate in 2034, but allow the lessor to purchase the trees from the Partnership at fair market value in the year 2019.  The two leases account for 653 tree acres which have produced an average of 3 million WIS pounds over the past 5 years.  The Partnership believes that this landlord may exercise his rights to take back these orchards in 2019.  As such, the Partnership would lose approximately 919 tree acres or 17% of its production which could have a material adverse effect on the Partnership’s operations.  From time to time the Partnership has disagreements with persons who lease orchards to it regarding the Partnership’s performance under the lease agreement.  At this time a landlord who owns 356 tree acres that have been leased to the Partnership and produced approximately 1,000,000 field pounds last year, has claimed that the Partnership has breached the lease and therefore the landlord has a right to terminate.  The Partnership has denied these allegations.  If the landlord is successful in pursuing this claim, the Partnership would lose this acreage and its nut production.  This 356 tree acre lease is included in the 653 tree acre leases mentioned above.

Product Development and Marketing .  The Partnership is in the process of developing several lines of retail macadamia nut products, one of which is currently being presented to distributors and retailers in Europe and Asia for consideration.  The Partnership also intends to establish a national premier branded macadamia product line which will be targeted toward consumers in the U.S. mainland.  The development of the retail product lines and its launch involves considerable costs and the Partnership expects that this new line of business will incur significant operating losses until the products generate sufficient revenue to cover the expenses, which is not expected to occur until at least the third year of establishing this new line of business.  Furthermore, if the Partnership’s new products are not favorably received, or if the products do not receive preferred shelf space at retail, the desired sales volume would not be generated and the Partnership’s revenues, profitability and financial condition would be adversely affected.

Co-packer and Distribution .  The Partnership will rely on co-packers to produce its product line.  If the co-packer does not complete the production timely and of acceptable quality or if the products are not delivered in a timely manner, the Partnership’s customers may cancel orders or refuse the products, which would adversely affect sales and profitability.

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Market Risks.   When the Partnership actively commences activity as a branded consumer snack food marketer, we will operate in a highly competitive environment. In general, competition is based on product quality, price, brand recognition and brand loyalty. Our products will compete against food and snack products sold by many regional and national companies, some of which are substantially larger and have greater resources than we have. We will also compete for presence on the shelf space of retail grocers, convenience stores, drug stores, mass merchandisers and club stores. As these retailers consolidate, the number of customers and potential customers declines and the purchasing power and logistics requirements of the consolidated retailers increases. Our competitors with greater resources than us may be in a better position than we are to meet these requirements. If we cannot develop and improve our distribution and service capabilities, we might not be able to compete effectively and may not generate or attain an acceptable level of sales.

Macadamia nut prices may not always exceed cost of goods sold. During 2011, under the contracts the Partnership has with Mauna Loa for the sale of its macadamia nuts, the Partnership received between 73.14 and 74.6 cents per contract pound ( as such is defined in the relevant contract).  During 2011, costs of goods sold of the Partnership to farm and produce these macadamia nuts, including depreciation of the trees, varied between 36 cents and $1.05 per contract pound or an average of approximately 61 cents per contract pound.  At this time, in some orchards the cost of goods sold exceeded the price that the Partnership sold the nuts for while in other orchards, the cost of goods sold was substantially lower than the price the Partnership sold the nuts for.  As contracts with Mauna Loa expire and are not renewed, the Partnership will no longer have its price set for production and therefore will be subject to the risk of market pricing.  Macadamia orchards are required to be cultivated and farmed in order to maintain the trees even in years where the price at which the macadamia nuts could be sold do not cover the cost of goods sold in this specific orchard. In such event the Partnership could suffer losses from certain orchards and its financial performance could be adversely affected.  There is no assurance that the prices of macadamia nuts in the future will exceed the costs of goods sold.

At this time, we do not have the ability to dry or process our nut production, which prevents us from being able to ship our nuts outside of Hawaii for processing. Macadamia nuts are harvested wet-in-shell and will rapidly deteriorate if they are not promptly dried. Once the nuts are husked and dried, they can be shipped to customers or processors who are not on the island of Hawaii. At this time the Partnership does not have the facilities to dry its nut production. However, as part of its vertical integration strategy, if it elects to provide husking and drying facilities to enable it to sell its nuts outside of Hawaii the Partnership would need to build drying and storage facilities and upgrade its husking facility over the next 1-3 years in stages that will allow it to dry nuts that are harvested that were subject to contracts with Mauna Loa that will not be renewed. This will permit the Partnership the flexibility to consider purchasers for its nuts both on and off of the island of Hawaii. If the Partnership does not construct such facilities in a timely manner, it will need to seek to have Mauna Loa process its nuts before sale to the ultimate customer or would have to seek another processor on the island of Hawaii to process or purchase its nuts. Mauna Loa is required to use its reasonable commercial efforts to do so for two years after the relevant contract expires. Limiting its ability to deal only with Mauna Loa to process the nuts or to other Hawaii processors to process or buy nuts could have a material adverse impact on the prices that the Partnership may be able to obtain for its nuts elsewhere had it been able to ship the nuts from Hawaii. This could also subject it to the risk that there may be no financially responsible processors or buyers for its nuts in Hawaii, which is similar to what occurred in 2007 when the Partnership was not able to sell it entire production.

Additional regulation could increase our costs of production adversely affecting our business. As an agricultural company, we are subject to extensive government regulation, including regulation of the manner in which we cultivate and fertilize as well as process our macadamia nuts.  Furthermore, as we endeavor to move toward processing and selling our branded product we will be subject to additional regulation regarding the manufacturing, distribution, and labeling of our products.  There may be changes to the legal or regulatory environment, and governmental agencies and jurisdictions where we operate may impose new manufacturing, importation, processing, packaging, storage, distribution, labeling or other restrictions, which could increase our costs and affect our financial performance.

Increased costs associated with producing our product such as water, electricity, fertilizer and cultivation costs could increase our expenses and impact our financial performance. We purchase water, electricity, natural gas and fuel, fertilizer, pesticides, equipment and other products in order to conduct our farming operations to produce macadamia nuts.  Transportation costs, including fuel and labor, also represent a significant portion of the cost of our nuts.  These costs fluctuate significantly over time due to factors that may be out of our control, including increasing fuel prices, adverse weather conditions or natural disasters, employee strikes, increased export and import restrictions and other factors.  At this time, we are not able to pass on the increased costs of production or transportation to our sole customer.  Our business and financial performance could be negatively impacted if there are material increases in the costs incurred by us.

We are subject to the risk of product liability claims. The growing and sale of food products for human consumption involves the risk of injury to consumers. This risk increases as we move from primarily a farming operation into the marketing and sale of branded products. While we believe we have implemented practices and procedures in our operations to promote high-quality and safe food products, we cannot be sure that consumption of our products will not cause a health-related illness or injury in the future or that we will not be subject to claims or lawsuits relating to such matters. Although we maintain product liability insurance in an amount which we believe to be adequate, claims or liabilities of this nature might not be covered by our insurance or by any rights of indemnity or contribution that we may have against others or they might exceed the amount of our insurance coverage.

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Currency Exchange.   Over the past 24 months, the U.S. dollar has weakened against the currencies of other major growing regions, primarily Australia and South Africa, which has led to decreased competition in the U.S. markets and a price advantage when exporting macadamias from the U.S.  As the company implements its vertical integration strategy over the next several years, there are no assurances that the recent improvements in currency exchange rates will not reverse.  The Partnership may be exposed to losses from sales agreements or service contracts in foreign regions.

Seasonality. Because we experience seasonal fluctuations in production from our orchards and thus our  sales, our quarterly results fluctuate and our annual performance depends largely on results from two quarters. Our business is highly seasonal, reflecting the general pattern of peak production and consumer demand for nut products during the months of October, November and December. Typically, a substantial portion of our revenues occur during our third and fourth quarters. We generally experience lower revenues during our first and second quarters and may incur losses in these quarters.

Diseases and Pests.   As discussed below, 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 0.5% in 2011, 0.3% in 2010, and 0.4% in 2009. Diseases and pests can affect the health of the trees and resultant nut production.  There are several types of fungal diseases, which can affect flower and nut development.  One of these is Phytophthora capsici, which affects the macadamia flowers and developing nuts, and another, Botrytis cinerea, causes senescence of the macadamia blossom before pollination is completed.  These types of fungal disease are generally controllable with fungicides.  Historically, these fungi have infested the reproductive plant parts at orchards located in Keaau and Mauna Kea during periods of persistent inclement weather.

Tree losses may occur due to a problem known as “Macadamia Quick Decline” (“MQD”).  Research at the University of Hawaii indicates that this affliction is due to Phytophthora capsici which is associated with high moisture and poor drainage conditions.  Both the Keaau and Mauna Kea Orchards are areas with high moisture conditions, and may be more susceptible to the MQD problem.  Afflicted trees in these regions are replaced with cultivars that are intolerant to MQD.  The Partnership’s Keaau orchards experienced tree replacement of 1.4% in 2011, 0.7% in 2010, and 0.9% in 2009.

Macadamia trees and production may also be affected by insects and other pests.  The Southern Green Stink Bug disfigures the mature kernel and contributes to a historical loss of nuts of 1.5%.  Two natural enemies, a wasp and a fly, effectively keep nut losses at acceptable levels.  An insect known as the Koa Seed Worm (“KSW”) causes fully sized nuts to fall that have not completed kernel development.  The affect of the KSW contribute to an average loss of nuts of 2.9%.  The Tropical Nut Borer Beetle (“TNB”) bores through the mature macadamia shell and feeds on the kernel.  Nut damage caused by the TNB is not recorded as a defect by the current processor.  However, field surveys indicate that nut losses attributed to TNB was less than 1% in 2011.  Damages caused by each insect may fluctuate when unfavorable environmental conditions affect the natural enemy population.

Natural enemies are relied upon to manage insects that contribute to nut loss.  Without these natural enemies, greater losses are possible.  Pesticides may be available to manage these economic insect pests when treatment costs and nut loss justify its use, and when its use does not disrupt the natural enemy population.

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Honey bees are placed in the orchards to supplement other insect pollinators during the flower season.  In late 2008, the Hawaii Department of Agriculture identified the Varroa mite on feral honey bees near the port of Hilo, Hawaii.  This mite is an ectoparasite that attaches to the body of honey bees and weakens it which can result in destroying bee hives and colonies.  The apiaries that place hives in the macadamia nut orchards must manage this pest with miticide to maintain healthy bee colonies and avoid the development of pest resistance to the miticide.

Rainstorms and Floods.  The Partnership’s orchards are located in areas on the island of Hawaii that are susceptible to heavy rainstorms.  In November 2000, the Ka’u region was affected by flooding.  This flooding resulted in some nut loss and expected 2000 harvesting being deferred to 2001.  Since the flood in 2000 heavy rain in the Ka’u region has not produced flooding of any consequence.

Windstorms .  Some of the Partnership’s orchards are located in areas on the island of Hawaii that are susceptible to windstorms.  Twenty-five major windstorms have occurred on the island of Hawaii since 1961, and four of those caused material losses to Partnership orchards.  Most 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 obtains tree insurance each year under a federally subsidized program.  The tree insurance for 2012 provides coverage up to a maximum of approximately $16.5 million against catastrophic loss of trees due to wind, fire or volcanic activity.  Crop insurance was purchased for the 2011-2012 crop year and provides coverage up to a maximum of approximately $13.3 million against loss of nuts due to wind, fire, volcanic activity, earthquake, adverse weather, wildlife damage and failure of irrigation water supplies. There is no assurance that such insurance will cover all losses incurred by the Partnership or that such insurance will be available or purchased in the same amount in future periods.

Volcanoes .   The Partnership’s 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.

During 2011, the Ka’u, Keaau and Mauna Kea areas recorded 65%, 88% and 107%, respectively, of the normal average annual rainfall in their area of the island.

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Water Supply for Irrigation .  With the May 2000 acquisition of the farming business, 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.  On May 1, 2000, the Partnership entered into a license agreement with Mauna Kea Agribusiness Company, Inc. (“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 June 30, 2045 or earlier if the May 1, 2000 lease between Partnership and Olson Trust is terminated by mutual consent.

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 Partnership 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 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.

In August 2010 the company purchased the macadamia nut orchards, land and assets used in connection with macadamia nut farming operation from IASCO.  Included in the assets is an irrigation well (the “Palima Well”) that supplies water for the IASCO orchards, orchards owned by New Hawaii Macadamia Nut Co. (“NHMNC”), and trees owned by the Partnership on leased land from the State of Hawaii.  Under a prior agreement with IASCO, NHMNC received a portion of the water pumped out of the Palima Well and the Partnership, as the new owner of this well, is obligated to continue this service.  The well provides supplemental irrigation and is generally sufficient, assuming average levels of rainfall, to sustain nut production at historical norms.

If insufficient irrigation water is available to the irrigated orchards, then, based on historical average rainfall levels, diminished yields of macadamia nut production can be expected.

Environmental.   We use herbicides, fertilizers and pesticides, some of which may be considered hazardous or toxic substances. Various federal, state, and local environmental laws, ordinances and regulations regulate our properties and our farming operations and could make us liable for costs of removing or cleaning up hazardous or toxic substances on, under, or in property that we currently own, lease or that we previously owned or leased or upon which we currently or previously conducted farming operations.  These laws could impose liabilities without regard to whether we knew of, or were responsible for, the presence of hazardous or toxic substances.  The presence of hazardous or toxic substances, or the failure to properly clean up such substances when present, could jeopardize our ability to use or sell certain real property, use it as collateral or result in fines or clean up costs.  Future environmental laws could impact our farming operations or increase our cost of goods.

Employees.   Our farming operations require a large number of workers, many on a seasonal basis.  The labor market on the island of Hawaii is very competitive and most of our employees are unionized under contracts which expire in May 2013.  In previous years, we have obtained the services of foreign workers, which we have not continued.  In the event that we are not able to obtain and retain both permanent and seasonal workers to conduct our farming operations, or in the event that we are not able to maintain satisfactory relationships with our unionized workers, our financial results could be negatively impacted.

Key Personnel .  Certain key personnel are critical to our business.  Our future operating results depend substantially upon the continued service of our key personnel.  Our future operating results also depend in significant part upon our ability to attract and retain qualified management, technical and support personnel.  We cannot ensure success in attracting or retaining qualified personnel.  There may be only a limited number of persons with the requisite skills and relevant industry experience to serve in those positions and it may become increasingly difficult for us to hire personnel over time.  Our business, financial condition and results of operations could be materially adversely affected by the loss of any of our key employees, by the failure of any key employee to perform in his or her current position, or by our inability to attract and retain skilled employees.

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Loan Agreement Restrictions.   The Partnership relies on external loan financing, currently being provided by a Credit Agreement with American Ag Credit, PCA through a revolving credit facility and a term note.  This loan contains various terms and conditions, including financial ratios, covenants and is secured by all of the real and personal property of the Partnership.  The term loan matures on July 1, 2020.  The revolving credit facility matures on July 13, 2012.  This Credit Agreement prohibits distributions to partners without the prior consent of the lender.  On multiple occasions during the last several years and as recently as the end of 2010, the Partnership has failed to comply with various covenants or financial ratios under its loan agreements, but has been able to obtain waivers or modifications of the agreement to avoid a default. If the Partnership is unable to meet the terms and conditions of its lending arrangements or is unable to obtain waivers or modifications of such lending arrangements, it could be in default of its loan agreements and the lender would be able to accelerate the obligations and realize on the collateral securing the indebtedness.  There is no assurance that the Partnership will be able to comply with its loan facilities or obtain waivers or modifications in the future to avoid a default. For further information see “BUSINESS OF THE PARTNERSHIP, Loan Agreement.”

Significant influence over our affairs may be exercised by substantial Class “A” unit holders.  As of March 21, 2012, the Class “A” unit holders holding more than 5% of the units are Fred and Mary Wilkie Ebrahimi (approximately 42.1% beneficial ownership), Barry W. Blank Living Trust (approximately 7.8% beneficial ownership) and Leap Tide Capital Management, Inc. (approximately 8.1% beneficial ownership).  Fred and Mary Wilkie Ebrahimi or the principal unit holders if they acted in concert would have the ability to control or block approvals that may be sought from unit holders, including modifications to the Partnership Agreement.  Also, the significant concentration of shareholding may deter persons desiring to make bids to acquire the company, since they may not be able to do so without the cooperation of these principal shareholders.  In addition, if the Ebrahimi’s or other large unitholders were to sell a large number of our units, the market price of our units could decline significantly.  Furthermore, the perception in the public market that the Ebrahimi’s or other large unitholders might sell our units could depress the market price of our units, regardless of their actual plans.  Effective October 1, 2009 Bradford C. Nelson was elected as a director of the Partnership.  Mr. Nelson has been Chief Financial Officer of Seemorgh Investments, Inc., a company owned by Mr. Fred Ebrahimi, since January 2007 and has served as an officer and director of a group of companies in the United States of America, Europe and Asia owned by the Ebrahimi family since 2002.

Holders of Class “A” units of the Partnership have limited voting rights.   Our unit holders have limited voting rights on matters affecting the Partnership’s business, which may have a negative effect on the price at which the Partnership’s units trade.  In particular, the unit holders do not elect the directors of the general partner.  Furthermore, if unit holders are not satisfied with the performance of the directors they may find it difficult to remove any or all of the directors as the Partnership Agreement requires a vote of at least 66 2/3% of the outstanding units to remove the General Partner.

Tax risks to Class “A” unit holders.   The anticipated after-tax benefit of an investment in the Partnership’s units depends largely on the treatment of the Partnership as a partnership for federal income tax purposes, as well as the Partnership not being subject to a material amount of entity-level taxation by individual states.  If the Partnership were to be treated as a corporation for federal income tax purposes or become subject to additional amounts of entity-level taxation for state tax purposes, then the Partnership’s cash available for distribution to unit holders could materially decline.

The tax liability of unit holders could exceed their distributions or proceeds from sales of Class “A” units.  Because the unit holders will generally be treated as partners to whom the Partnership will allocate taxable income, which can differ in amount than the cash distributed, the unit holders will be required to pay any federal income tax and, in some cases, state and local income taxes on their allocable share of the Partnership’s income.

Tax gain or loss on the disposition of the Partnership’s Class “A” units could be more or less than expected.  If a unit holder disposes of his units, the unit holder will recognize a gain or loss equal to the difference between the amount realized and the unit holder’s tax basis.  Because distributions in excess of a unit holder’s allocable share of the Partnership’s net taxable income decrease the unit holder’s tax basis in the unit holder’s units, the amount, if any, of such prior excess distributions with respect to the units sold will, in effect, become taxable income, if the units sold are at a price greater than the unit holder’s tax basis, even if the price received is less than the unit holder’s original cost.

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The book and tax treatment of the units have changed over the years and at this time for tax purposes the unit holder will experience higher earnings or lower loss compared to the income determined under GAAP.

As a result of investing in the Partnership’s Class “A” units, a unit holder may become subject to state and local taxes and return filing requirements in the states where the Partnership owns property and conducts business.

Ownership of the Partnership’s Class “A” units raises issues for tax-exempt entities and other investors.

Available Information.  The Partnership files annual, quarterly and current reports and other information with the Commission.  These filings are available free of charge through the Partnership’s Internet website at www.mlmacadamia.com as soon as reasonably practicable after the Partnership electronically files such material with, or furnishes it to, the Commission.  The Partnership’s corporate governance guidelines, board committee charters and code of conduct are also available on the website, free of charge.  Any unit holder, who so requests may obtain a printed copy of these documents from the Partnership, by contacting the Partnership at 808-969-8057, or in writing at 26-238 Hawaii Belt Road, Hilo, Hawaii 96720.

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.  Assuming adequate moisture, the most significant characteristic affecting yields is maturity.  The trees in a macadamia nut orchard generally begin to produce nuts at a commercially acceptable level at around nine years of age.  Thereafter, nut yields increase gradually until the trees reach maturity at approximately 15 years of age, 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.  All of the 5,070 tree acres of macadamia orchards owned or leased by the Partnership are over twenty years of age.  Up to 1% of trees is lost to various causes each year and are replaced as determined by management.

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 672 acres at the lower elevations of Ka’u are irrigated from the Sisal Well which provides additional water when required.  The Palima Well provides irrigation for approximately 679 tree acres of IASCO orchards which are located in Ka’u. Under extremely dry conditions at Ka’u, such as a prolonged drought, irrigation is not sufficient, and production and quality will be adversely affected.

Orchards.  The following table lists each of the orchards, the year acquired, tree acres, tenure, and minimum 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 for fair market value.  The minimum lease payments will be adjusted to a fair market lease rate in 2019 and 2029.  At the end of the lease term, the lessor will be required to repurchase the trees at fair

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market value if they do not offer to extend the leases at the then current fair market lease rate.  If the Partnership does not accept the offer to extend the lease, the lease will expire and the lessor will not be required to repurchase the trees which will then revert to them.  In all circumstances, the ownership of trees will revert to the lessor after 99 years.

(3)           Additional rental payment if USDA farm price for nuts is greater than $0.50 per pound ($521 for each $0.01)

(4)           Additional rental payment if USDA farm price for nuts is greater than $0.20 per pound ($291 for each $0.01)

(5)           Additional rental payment if USDA farm price for nuts is greater than $0.65 per pound ($376 for each $0.01)

(6)           Additional rental payment if USDA farm price for nuts is greater than $0.70 per pound ($30 to $265 for each $0.01)

(7)           Additional rental payment if USDA farm price for nuts is greater than $0.72 per pound ($265 for each $0.01)

In addition to the minimum rent, additional rental payments resulting from the USDA farm price for nuts were made to lessors in the aggregate amount of $40,000, $29,000 and $23,000 in 2011, 2010 and 2009, respectively. All the leases also require the Partnership to pay various expenses with respect to the leased premises.

With respect to the Ka’u Green Shoe I Orchard, the lease requires the Partnership to pay the Olson Trust, the 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,” Footnote 3(1)(c) to the Consolidated Financial Statements filed herewith.