** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

### **FORM 10-K**

### ** **

| **x**      | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE**                |
|------------|------------------------------------------------------------------------------------|
|       | **SECURITIES EXCHANGE ACT OF 1934**                                                |
|       |                                                                               |
|       | **For the  Fiscal Year Ended     December 31, 2007** |
|       |                                                                               |
|       | **OR**                                                                             |
|       |                                                                               |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE**            |
| ** ** | **SECURITIES EXCHANGE ACT OF 1934**                                                |

 

**Commission File Number    1-9145**

 

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

(Exact Name of registrantas specified in its charter)

 

| **DELAWARE**                                                    | ** ** | **99-0248088**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

| **26-238  Hawaii Belt Road, HILO, HAWAII** | ** ** | **96720**  |
|--------------------------------------------|------------|------------|
| (Address of  principal executive offices)  |       | (Zip Code) |

 
| Registrant’s  telephone number, including area code: | ** ** | **(808) 969-8057**      |
|-----------------------------------------------------------|------------|-------------------------|
| Registrant’s  website:                               |       | **www.mlmacadamia.com** |

 

SECURITIES REGISTEREDPURSUANT TO SECTION 12(b) OF THE ACT:

 

| **Title of  Each Class**                       | ** ** | **Name of  Each Exchange on Which Registered** |
|------------------------------------------------|------------|------------------------------------------------|
| Depositary Units  Representing                 |       | New York Stock  Exchange                       |
| Class A  Limited Partners’ Interests |       |                                           |

 

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

 

Indicate by check mark if the registrant is a well-known seasoned issueras defined in Rule 405 of the Securities Act

Yes o  No x

 

Indicate by check mark if the registrant is not required to file reportspursuant to Section 13 of 15(d) of the Act.

Yes o  No x

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding twelve months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.   Yes x   No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 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 informationstatements incorporated by reference in Part III of this 10-K or anyamendment to this 10-K.  x

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer,”and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer x                        |   | Smaller reporting company o |
|---------------------------|--------|---------------------|--------|------------------------------------------------|--------|-----------------------------|
|                      |   |                |   | (Do not check if a smaller  reporting company) |   |                        |

 

Indicate by check mark whether the Registrant is a shell company as definedby Rule 12b-2 of the Securities Exchange Act of 1934.  Yes o  No x

 

As of March 19, 2008, 7,500,000 shares of the registrant’s Class AUnits were outstanding, and the aggregate market value of such Units held bynon-affiliates was $24,150,000 (based on the closing price on that date of$3.22 per Unit).

 

----

** **

**PART I**

** **

**Item1.  BUSINESS OF THE PARTNERSHIP**

** **

**(a) GeneralDescription of the Business**

** **

ML Macadamia Orchards,L.P. (the “Partnership”) is a publicly traded partnership, organized under thelaws of the State of Delaware, and engaged in the business of growing andfarming macadamia nuts in the State of Hawaii. The Partnership believes that it is one of the world’s largest growersof macadamia nuts.  The Partnership ownsor leases approximately 4,190 tree acres of macadamia nut orchards in threelocations within a 50-mile radius on the island of Hawaii.  (“Tree acres” are acres of the Partnership’sowned or leased lands utilized for macadamia nut orchards.  “Gross acres” includes areas not utilized fororchards.)

 

During 2006 thePartnership sold all of its macadamia nut production to Mauna Loa Macadamia NutCorporation (“Mauna Loa”) under four nut purchase contracts.  Three of these nut purchase contractsrepresenting approximately 16 million field pounds, expired on December 31,2006 and the other contract representing approximately 6.3 million field poundsexpires December 31, 2011. In lieu of renegotiating the expired nutpurchase contracts with Mauna Loa, the Partnership executed nut purchasecontracts with three other processors; Hamakua Macadamia Nut Company, Inc.(“Hamakua”), MacFarms of Hawaii, LLC (“MacFarms”) and Purdyco International,Ltd. dba Island Princess (“Island Princess”) beginning January 1,2007.  The details of these contracts arediscussed in Item 1 (c), *Owned Orchard Segment*onpage 3.

 

The Partnership farms itsown orchards and approximately 2,008 additional acres of macadamia orchards forother orchard owners.  The Partnership ismanaged by its general partner, ML Resources, Inc. (“MLR” or the “ManagingPartner”).  On August 1, 2001, allof the stock of the Managing Partner was purchased by D. Buyers Enterprises,LLC (“DBE”) from C. Brewer and Company, Ltd (“CBCL”).  On January 6, 2005, the stock of MLResources, Inc. was purchased from DBE by the Partnership for $750,000.

 

Ownershipof Class A Units confers no direct or indirect interest in CBCL, DBE orany of their affiliated entities, or in Mauna Loa, or Hamakua, MacFarms orIsland Princess.

 

The Partnership commenced operations in June 1986,following its acquisition of interests in approximately 2,423 tree acres ofmacadamia nut orchards from subsidiaries of CBCL.  In December 1986 and October 1989,respectively, the Partnership acquired from subsidiaries of CBCL interests inapproximately 266 and 1,260 additional tree acres of macadamia orchards.  In September 1991 the Partnershipacquired approximately 78 tree acres of producing macadamia orchards from C.Brewer and Company, Ltd (“CBCL”).  In April 2006the Partnership acquired approximately 21 tree acres of producing macadamiaorchards from J.W. A. Buyers.

 

On May 1, 2000, the Partnership purchased 142acres of macadamia orchards and the macadamia farming operations fromsubsidiaries of CBCL.  The farmingoperations consist of farming contracts, farming equipment, vehicles, a huskingplant, irrigation well, office buildings, garages and warehouses, officefurniture and equipment and material inventories related to macadamiafarming.  All the assets and operationsare located on the island of Hawaii.

 

As reported on Form 8-Kfiled October 20, 2006, the Partnership signed a non-binding letter ofintent to purchase substantially all of the assets of MacFarms and lease the3,912 acre macadamia orchard owned by Kapua Orchard Estates, LLC (“Kapua”), anaffiliate of MacFarms.  Subsequently, asreported on Form 8-K’s filed May 31, 2007, July 24, 2007 and November 24,2007 the Partnership signed and amended an agreement to purchase substantiallyall of the assets of MacFarms and lease the 3,912 acre macadamia orchard ownedby Kapua.  As reported on Form 8-Kfiled December 14, 2007, the Partnership and MacFarms signed acancellation agreement that terminated the “Purchase Agreement”.

 

2

----

 

**(b) FinancialInformation about Industry Segments**

 

The response to thissection of Item 1 incorporates by reference Note 3 of the Notes to theConsolidated Financial Statements.

 

**(c) NarrativeDescription of the Business**

 

**Owned-OrchardSegment**

 

In 2007 the Partnershipsold macadamia nuts from its orchards to Mauna Loa, MacFarms and IslandPrincess under nut purchase contracts. The Partnership delivered macadamia nuts from its orchards to Hamakua tobe processed into kernel for the Partnership to sell in the wholesalemarket.  The 2007 nut purchase contractsand processing contract have terms that would result in approximately 19.0million to 20.0 million field pounds being either purchased or processed.  The Partnership’s average annual nutproduction is between 20.5 million and 22.0 million pounds.  The Partnership has to find buyers or aprocessor to purchase or process nut production not committed under nutpurchase and processing contracts.

 

The Partnershipsold all of the macadamia nuts from its orchards to Mauna Loa under four nutpurchase contracts in 2006.  Mauna Loaprocesses and markets the nuts under the **Mauna Loa****â** brand name and is believed to be one of the largestprocessors and marketers of macadamia nuts in the world.  The Partnership was Mauna Loa’s largestsingle supplier of macadamia nuts in 2006

 

# ***Nut Purchase Contracts.***  The Partnershiphas four nut purchase contracts with: Mauna Loa, MacFarms, Hamakua and IslandPrincess, as detailed in the following paragraphs.

# *** ***

# ***On June 1,2006, the Partnership executed a contract with Mauna Loa for the annualdelivery of approximately 6.3 million field pounds, effective January 1,2006 and expiring December 31, 2011. The contract provides for a nut price of $0.74 per wet-in-shell (“WIS”)pound in 2006 and $0.75 per WIS pound in 2007 at 20% moisture and 30% saleablekernel (“SK”)/dry-in-shell (“DIS”).  Thepurchase price will increase annually by $0.01 per WIS pound, except 2008,until it reaches $0.78 per WIS pound in 2011.***

# *** ***

# ***On December 16,2004, a nut purchase contract with Hamakua for the annual delivery of 6.0million field pounds, effective January 1, 2007, and  with 2.0 million field pounds expiring December 31,2008, December 31, 2010, and December 31, 2012, respectively. Thecontract provides for a minimum price of $0.75 per WIS pound and a maximumprice of $0.95 per WIS pound at 20% moisture and 30% SK/DIS. The pricingformula included a fixed component of $0.85 per WIS pound and a secondcomponent based on Hamakua’s average selling price for bulk kernel.  In February 2007, the contract wasamended to allow the Partnership, at its option, to have Hamakua processnuts-in-shell into kernel for a fee in lieu of selling the nuts toHamakua.  The Partnership exercised thisoption solely for the calendar year 2007. The contract continues to require that Hamakua purchase approximately6.0 million field pounds of nuts in 2008, approximately 4.0 million fieldpounds of nuts in the years 2009-2010, and 2.0 million field pounds of nuts inthe years 2011-2012.***

# *** ***

On January 5, 2006,the Partnership executed a contract was signed with Island Princess for theannual delivery of approximately 2.0 million field pounds, effective January 1,2007 and expiring on December 31, 2011. The nut price is determined every six months by mutual agreement basedon prevailing market price for kernel from Hawaii and Australia.  The effective price for January — June 2007was $0.608 and July — December 2007 was $0.494 per WIS pound at 20%moisture and 30% SK/DIS recovery.  Theeffective price for January — June 2008 is $0.494 and July — December 2008is $0.55, at 20% moisture and 30% SK/DIS recovery.

 

3

----

 

On January 6, 2006,the Partnership executed a contract with MacFarms for the annual delivery ofbetween 5.0 and 6.0 million field pounds, effective January 1, 2007.  The nut price will be determined every sixmonths by mutual agreement based on prevailing market price for kernel fromHawaii and Australia.  The effectiveprice for January — June 2007 was $0.608 and July — December 2007was $0.494, at 20% moisture and 30% SK/DIS recovery.  The effective price for January — June 2008is $0.494 and July — December 2008 is $0.55, at 20% moisture and 30%SK/DIS recovery.  In connection with theorchard purchased from J.W.A. Buyers in April 2006, the Partnership agreedto sell approximately 100,000 field pounds harvested from the orchard toMacFarms for $0.98 per WIS pound at 20% moisture and 30% SK/DIS recovery.  This agreement expired on January 6, 2007.

 

**Competition.** In addition to the State of Hawaii, mature macadamia nut orchards arelocated in Australia, Africa, and Central/South America.  For the 2007 crop, Hawaii supplied 14% of theworld crop, and Australia, the world’s largest producer, supplied 43%.

 

# ***MacadamiaFarming Segment***

# *** ***

The Partnershipfarms its own 4,190 acres of macadamia orchards and macadamia orchards owned byother growers (approximately 2,008 acres during 2007 and 2,029 acres during2006) under long-term farming contracts.

 

All the orchardsare located in three separate regions on the island of Hawaii (“Keaau”, “Ka’u”and “Mauna Kea”).  Because each regionhas different terrain and weather conditions, farming methods vary somewhatamong the three locations.

 

***FarmingContracts. ***The Partnership currently performs underapproximately seventeen farming contracts which were assigned to thePartnership with the May 2000 acquisition. Services under these contracts include cultivation, weed and pestcontrol, fertilization, pruning and hedging, replanting, harvesting, andhusking.  The Partnership earns a fee forthese services, either as a fixed fee per acre farmed, or as a percent ofreimbursed costs, ranging from 5% to 20%. Approximately 150 acres are farmed under year-to-year contracts,contracts for approximately 635 acres expire March 31, 2009, contracts forapproximately 70 acres expire June 30, 2013, contracts for approximately410 acres expire July 31, 2029, contracts for approximately 280 acresexpire June 30, 2033 and contracts for approximately 470 acres expire September 30,2080.

 

***OrchardMaintenance***.  Maintenance of an orchard is essential tomacadamia nut farming.  Pruning andhedging of trees is necessary to allow space for mechanical harvesting andcultivating equipment to operate safely and efficiently and to remove deadbranches.  Where mechanical equipment isused, the orchard floor must be maintained in a condition that will permit itsoperation.  Soil and gravel are used torepair mud holes and other surface irregularities caused by soil erosion fromheavy rain and by farming equipment. Pruning and surface maintenance are usually performed between harvestseasons.

 

Orchard managementalso 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 wildpigs, if not controlled, can cause losses to nut production.

 

***Harvesting*****.**  The harvestperiod begins in the late summer and runs through the following spring.  Mature nuts fall from the trees and areharvested using mechanized harvesting equipment when the orchard floor is levelenough to permit its use.  Nuts areharvested by hand when the orchard floor is too uneven to permit mechanicalharvesting, when the nut drop is very light and when nuts remain on the groundafter mechanical harvesting.  At Keaau,Ka’u and Mauna Kea, seasonal labor for hand harvesting and other operations isgenerally available from nearby Hilo, adjacent communities and foreign laborsources.

 

Mechanicalharvesting is less costly than hand harvesting, however mechanical harvestingis 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 mechanically harvested.  The remaining acres are too uneven formechanical harvesting and must be harvested by hand.

 

4

----

 

During the harvestseason, the nuts are collected every six to ten weeks.  Nut quality deteriorates if they remain onthe ground too long.  The harvested nutsare then transported to husking facilities, which are located in Ka’u andKeaau.  The Keaau husking facility isowned and operated by Mauna Loa, and the Ka’u husking facility is owned and operatedby the Partnership.  Nuts harvested inthe Mauna Kea region are transported to the husking facility in Keaau.  At the husking facility, the outer husk isremoved and the nuts, still in their shell, are weighed and sampled todetermine moisture content.  Kernelquality is determined from samples taken. Title to the nuts husked in Keaau passes to buyer after weighing.  Title to the nuts husked at Ka’u pass tobuyer after delivery to the buyer’s processing plant.  The nuts are then moved to a drying facility.

 

***Processing*****.**  The nutspurchased by Mauna Loa from the Partnership and other orchards farmed by thePartnership are primarily processed at Mauna Loa’s processing plant locatedadjacent to the orchards located in the Keaau area.  The plant was built in 1966 and is presentlycapable of handling approximately 210,000 pounds of 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 ownedby the Partnership.

 

At Mauna Loa’splant in Keaau, the harvested nuts pass by conveyors over metal screens,blowers and rock separators that remove extraneous material from the in-husknuts. The husks are then split and removed by pressing the nuts between steelroller bars and a rubber pad.  At thisstage, the nut kernels are still encased in their hard round shells and roughly20% of their weight is attributable to moisture content.  At this point, the nuts are referred to asWIS.  The WIS weight of the nuts is usedto determine payments to be made by Mauna Loa under the nut purchase contracts.  Approximately 20% of the WIS weight of thenuts will become dry salable kernels at the time processing is completed.

 

After the nuts areweighed, the moisture content of the nuts is reduced by blowing warm air overthem, which produces DIS nuts. Metal rollers are used to crack the nuts andremove the shell.  Mechanical and opticalequipment, as well as hand sorting, are used to separate the salable kernelsfrom unusable nuts and pieces of broken shell.

 

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

 

#### ***StabilizationPayments***

#### *** ***

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

 

Accordingly, theseller of this orchard Ka’u Agribusiness Company, Inc. (“KACI”), agreed tomake cash stabilization payments to the Partnership for each year through 1993in which the cash flow (as defined) from this orchard fell short of the targetcash flow level, which approximated $507,000. Stabilization payments for any given year were limited to the lesser ofthe amount of the shortfall or a maximum payment amount.  For the years from 1987 through 1993,inclusive, the Partnership received a total of $1,628,000 (including a 4%Hawaii general excise tax) in stabilization payments under this agreement.

 

5

----

 

The Partnership accounted for stabilization payments(net of the 4% Hawaii general excise tax) as a reduction in the cost basis ofthe orchards acquired.  As such, thesepayments are being reflected in the Partnership’s net income ratably through2019 as a reduction to the depreciation expense reported for this orchard.

 

In return, the Partnership is obligated to pay theseller (the Olson Trust who purchased KACI’s interest) 100% of any year’s cashflow from this orchard in excess of the target cash flow as additionalpercentage rent until the aggregate amount of the additional percentage rentpaid equals 150% of the total amount of stabilization payments previouslyreceived. Thereafter, the Partnership is obligated to pay the seller 50% ofthis orchard’s cash flow in excess of the target cash flow as additionalincentive rent.  No additional rent wasdue in 2007.  Additional rent of $62,000was paid in 2006 and no additional rent was due in 2005.

 

#### ***Item 1A.  Risks Involved in Operating MacadamiaOrchards***

#### *** ***

Before deciding to purchase, hold or sell our units,you should carefully consider the risks described below in addition to theother cautionary statements and risks described elsewhere, and the otherinformation contained, in this Annual Report on Form 10-K.  The risks and uncertainties described beloware not the only ones we face. Additional risks and uncertainties not presently known to us or that wecurrently deem immaterial may also affect our business.  If any of these known or unknown risks oruncertainties actually occurs with material adverse effects on the Partnership,our business, financial condition and results of operations could be seriouslyharmed.

 

Macadamia nut trees are subject to damage ordestruction from diseases, pests, floods, droughts, windstorms, hurricanes,volcanic activity and other natural causes. Partnership tree replacements forall orchards from all causes were 0.4% in 2007, 0.5% in 2006 and 0.2% in 2005.Both crop and tree insurance are in place to protect the Partnership againstmaterial losses.

 

***Diseases and Pests***. The Partnership’s Keaau orchards experienced tree replacements of 1.1%in 2007, 1.0% in 2006 and 0.6% in 2005. Other macadamia growers in the vicinity have also experienced losses dueto a problem known as “Macadamia Quick Decline” (“MQD”).  Based upon research by the University ofHawaii and other experts, it is believed that the situation is due to fungiassociated with high moisture conditions and poor drainage conditions.  It is also believed that a particular varietyof macadamia nut tree (cv. HAES 333) is most susceptible to MQD.  Approximately 9% of the trees in thePartnership’s orchards have the variety HAES 333 with most of these treeslocated at the drier Ka’u region where the incidence of MQD is benign.  Another tree variety (cv. HAES 344) has alsobeen identified as being somewhat more susceptible to MQD than other commercialvarieties and this cultivar represents approximately 45% of the trees in thePartnership’s orchards.  Both the Keaauand Mauna Kea orchards are areas with high moisture conditions, and may be moresusceptible to the MQD problem. Afflicted trees in these regions are replaced with cultivars that aretolerant to MQD.

 

There are also two types of fungal diseases, which canaffect nut production but are not fatal to the trees themselves.  One of these is Phytophthora, which affectsthe macadamia flowers and developing nuts, and the other, Botrytis cinerea,causes senescence of the macadamia blossom before pollination iscompleted.  These types of fungal diseaseare generally controllable with fungicides. Historically, these fungi have attacked the orchards located in Keaauduring periods of persistent inclement weather. A light infestation of Phytophthora occurred in late January-early February 2001and a light-moderate infestation occurred in March 2006.

 

***Rainstorms and Floods. ***The Partnership’s orchards are located in areas on theisland of Hawaii that are susceptible to heavy rainstorms.  In November 2000 the Ka’u region wasaffected by flooding.  This floodingresulted in expected 2000 harvesting being done in 2001.  Since the flood in 2000 heavy rain in the Ka’uregion has not produced flooding of any consequence.

 

 

6

----

 

***Windstorms***.  Some of the Partnership’s orchards are locatedin areas on the island of Hawaii that are susceptible to windstorms.  Twenty-five major windstorms have occurred onthe island of Hawaii since 1961, and four of those caused material losses to Partnershiporchards.  Most of the Partnership’sorchards are surrounded by windbreak trees, which provide limitedprotection.  Younger trees that have notdeveloped extensive root systems are particularly vulnerable to windstorms.

 

***Insurance. ***The Partnership secures tree insurance each year undera federally subsidized program.  The treeinsurance for 2008 provides coverage up to a maximum of approximately $19.7million against loss of trees due to wind, fire or volcanic activity.  Crop insurance was purchased for the 2007-2008crop year and provides coverage up to a maximum of approximately $12.0 millionagainst loss of nuts due to wind, fire, volcanic activity, earthquake, adverseweather, wildlife damage and failure of irrigation water supplies.

 

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

 

***Rainfall*****.**  Theproductivity of orchards depends in large part on moisture conditions.  Inadequate rainfall can reduce nut yieldssignificantly, while excessive rain without adequate drainage can fosterdisease and hamper harvesting operations. While rainfall at the orchards located in the Keaau and Mauna Kea areashas generally been adequate, the orchards located in the Ka’u area generallyreceive less rainfall and, as a result, a portion of the Ka’u orchards ispresently irrigated.  Irrigation canmitigate the effects of a drought, but it cannot completely protect a macadamianut crop from the effect of a drought. Recorded rainfall at each of the three locations of the Partnership’sorchards for the past five years is shown below:

 
| **Year** | ** ** | **Ka’u** | ** ** | **Keaau**   | ** ** | **Mauna Kea** |
|----------|------------|---------------|------------|-------------|------------|---------------|
| 2003     |       | 22.8”    |       | 94.8”  |       | 117.4”   |
| 2004     |       | 54.9”    |       | 142.7” |       | 151.5”   |
| 2005     |       | 34.7”    |       | 133.8” |       | 171.8”   |
| 2006     |       | 70.9”    |       | 138.7” |       | 178.3”   |
| 2007     |       | 37.8”    |       | 126.7” |       | 158.3”   |

 

During 2007 the Ka’u, Keaau and Mauna Kea areas recorded 85%, 95% and107%, respectively, of the normal average annual rainfall in their area of theisland.

 

***Water Supply for Irrigation.***  Withthe May 2000 acquisition, the Partnership acquired an irrigation well (the“Sisal Well”), which supplies water to the Partnership’s orchards in Ka’u whichwere purchased in June 1986 and 1989. The Sisal Well is situated on land owned by Mauna Kea AgribusinessCompany, Inc. (“MKACI”).  On May 1,2000 the Partnership entered into a license agreement with MKACI, which allowsthe Partnership necessary access to maintain and operate the Sisal Well, aswell as the use of roads to access, maintain and operate the Partnership’smacadamia orchards.  Annual rent for thelicense agreement is One Dollar.  Thelicense agreement terminates on the earlier of the termination of the May 1,2000 lease between Partnership and KACI, or June 30, 2045.

 

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

 

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

 

 

7

----

 

On a historical basis, the quantity of water availablefrom the Sisal Well has been generally sufficient to irrigate these orchards inaccordance with prudent farming practices. The irrigated portion of the Ka’u II Orchards is expected to needgreater quantities of water as the orchards mature.  The Partnership anticipates that the amountof water available from the Sisal well will be generally sufficient, assuming averagelevels of rainfall, to irrigate the irrigated orchards in accordance withprudent farming practices for the next several years.  If no irrigation water is available to theIrrigated Orchards, then, based on historical average rainfall levels, diminishedyields of macadamia nut production can be expected.

 

***Market and customers.***** **A declinein worldwide macadamia nut prices would adversely affect the price paid underthe nut purchase contracts with Mac Farms and Island Princess, as the contractprice is determined based upon the prevailing world market price of macadamianut kernel for each six-month period January through June, and July toDecember throughout the contract term. Even though the Partnership increased it customers from one to four in2007 there are a limited number of customers available to purchase thePartnership’s nut production.  If ourcustomers are unable to perform under their contracts or if their purchase ofproduct should change from Hawaii-based to foreign sourced kernel, it wouldhave a material adverse impact on our business as there are virtually noreplacement customers for the Partnership’s production.  If the market for the Partnership’s inventorywere to decline the Partnership would have to sell at a price lower than the currentmarket price.  If no buyers wereavailable the inventory could become unsalable and have to be deposed.

 

***Nut Purchase Agreements.*** The Partnership had four contracts beginning January 1, 2007.  The terms of the contracts vary from two tosix years, contain fixed and market determined prices and 30-day paymentterms.  The Partnership relies upon thefinancial ability of the buyers of the Partnership’s nuts to abide by thepayment terms of the nut purchase agreements. If any or all of the buyers were unable to pay for the macadamia nutsdelivered by the Partnership to them it could result in the Partnership’savailable cash resources being depleted. If any or all buyers were late in payment the Partnership would stop thedelivery of macadamia nuts to the buyer. The Partnership would need to negotiate a nut purchase agreement withanother buyer which might not be at the same terms or price.  It is also possible that the Partnershipmight not be able to find a buyer for the nuts. There were a significant number of Hawaii macadamia growers that wereunable to find a processor to purchase and process their crop in 2007 due tothe currently depressed market.

 

***Employees.*** As of December 31,2007, the Partnership employed 213 people, of which 131 were seasonalemployees.  Of the total, 21 are infarming supervision and management, 178 in production, maintenance andagricultural operations, and 14 in accounting and administration.

 

With the May 2000 acquisition, the Partnershipagreed to the assumption of two bargaining agreements with the ILWU Local142.  These agreements cover allproduction, maintenance and agricultural employees of the Ka’u OrchardDivision, the Keaau Orchard Division and the Mauna Kea Orchard Division.  These labor contracts became effective May 1,1997 and expired on April 30, 2002, but were extended until April 30,2005.  The parties agreed to a three-yearcontract, which will expire on April 30, 2008. Although, the Partnershipbelieves that relations with its employees and the ILWU are generally verygood, there is uncertainty with respect to the ultimate outcome of thebargaining unit negotiations when the current agreement expires.

 

The Partnership employs foreign contract labor tosupplement hand harvesters during the peak harvesting season.  If the Partnership was unable to employcontract laborers it might have to lengthen the time between harvest roundswhich could result in a lower quality of nuts produced and a lower effectiveprice.

 

 

8

----

 

Certain key personnel are critical to ourbusiness.  Our future operating resultsdepend substantially upon the continued service of our key personnel who arenot bound by employment or non-competition agreements.  Our future operating results also depend insignificant part upon our ability to attract and retain qualified management,technical and support personnel.  Wecannot ensure success in attracting or retaining qualified personnel.  There may be only a limited number of personswith the requisite skills and relevant industry experience to serve in thosepositions and it may become increasingly difficult for us to hire personnelover time.  Our business, financialcondition and results of operations could be materially adversely affected bythe loss of any of our key employees, by the failure of any key employee toperform in his or her current position, or by our inability to attract andretain skilled employees.

 

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

 

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

 

**ITEM 2.  PROPERTIES**

 

***Location.*** The Partnership owns or leases approximately 4,190 tree acres ofmacadamia 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 ofthe island about fifty miles from Hilo. The Keaau area is located six miles south of Hilo on the east side ofthe island, and the Mauna Kea area is located three miles north of Hilo on theeast side of the island.

 

 

The majority of macadamia nut trees grown in the Stateof Hawaii are grown on the island of Hawaii in volcanic soil that permitsdrainage during heavy rainfall.  Whilethe orchards are located approximately within a 50-mile radius, the climate andother conditions that affect the growing of macadamia nuts are different.  These differences are the result ofprevailing wind patterns and island topography, which produce a variety ofmicroclimates throughout the island.

 

 

9

----

 

***Age and Density*****.**  Theproductivity of macadamia nut orchards depends on several factors including,among others, the age of the trees, the number of trees planted per acre, soilcondition, climate, rainfall and/or irrigation. Assuming adequate moisture, the most significant characteristicaffecting yields is maturity.  The treesin a macadamia nut orchard generally begin to produce nuts at a commerciallyacceptable level at around nine years of age. Thereafter, nut yields increase gradually until the trees reach maturityat approximately 15 years of age, after which the nut yield remains relativelyconstant except for variances produced by rainfall, cultivation practices, pestinfestation and disease.

 

Macadamia orchards normally reach peak production after fifteento eighteen years of age.  All of the4,190 tree acres of macadamia orchards owned or leased by the Partnership areover twenty years of age.  About 2% oftrees are lost to various causes each year and are replaced.

 

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

 

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

 

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

 
| ** **             | ** ** | ** **      | ** ** | **Tree**  | ** ** | ** **  | ** ** | **Lease**      | ** ** | **Min. Rent** | ** ** |
|------------------------|------------|-----------------|------------|-----------|------------|-------------|------------|----------------|------------|---------------|------------|
| **Orchard**            | ** ** | **Acquired**    | ** ** | **Acres** | ** ** | **Tenure**  | ** ** | **Expiration** | ** ** | **per Annum** | ** ** |
|                   |       |            |       |      |       |        |       |           |       |          |       |
| Keaau I                |       | June 1986  |       | 1,467     |       | Fee  simple |       |           |       |          |       |
| Ka’u I            |       | June 1986  |       | 456       |       | Fee  simple |       |           |       |          |       |
| “                 |       | June 1986  |       | 500       |       | Leasehold   | (1)        | 2019           |       | $             | 25,000     |   |
| Ka’u Green Shoe I |       | Dec. 1986  |       | 266       |       | Leasehold   | (1)        | 2019           |       | $             | 5,586      |   |
| Keaau II               |       | Oct. 1989  |       | 220       |       | Fee  simple |       |           |       |          |       |
| Ka’u II           |       | Oct. 1989  |       | 327       |       | Leasehold   | (2)        | 2034           |       | $             | 23,544     |   |
| “                 |       | Oct. 1989  |       | 175       |       | Leasehold   | (1)        | 2028           |       | $             | 17,314     |   |
| “                 |       | Oct. 1989  |       | 26        |       | Leasehold   | (3)        | 2029           |       | $             | 2,041      |   |
| “                 |       | Oct. 1989  |       | 186       |       | Leasehold   | (1)        | 2031           |       | $             | 18,585     |   |
| Mauna Kea              |       | Oct. 1989  |       | 326       |       | Leasehold   | (2)        | 2034           |       | $             | 23,508     |   |
| Keaau Lot 10           |       | Sept.  1991     |       | 78        |       | Fee  simple |       |           |       |          |       |
| Ka’u O            |       | May 2000   |       | 142       |       | Leasehold   | (1)        | 2045           |       | $             | 10,224     |   |
| Ka’u 715/716      |       | April 2006 |       | 21        |       | Fee  Simple |       |           |       |          |       |
| Total acres            |       |            |       | 4,190     |       |        |       |           |       |          |       |

----

(1)                                  Lease of land only; trees may be removedat termination of lease.

(2)                                  Lease of land only; lessor may purchasetrees from lessee at any time after June 30, 2019.

(3)                                  Lease of land; trees revert to lessorupon termination of lease.

 

 

10

----

 

Forcertain additional information concerning farming leases, see Item 13, page 61.

 

Inaddition to the minimum annual lease payment amount, all the leases require thePartnership to pay various expenses with respect to the leased premises as wellas an additional rental payment based on the USDA farm price per pound ofmacadamia nuts sold in Hawaii.

 

Withrespect to the Ka’u Green Shoe I Orchard, the lease requires the Partnership topay the Olson Trust, the seller and lessor, additional rent equal to 100% ofany 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 ofthe stabilization payments previously received by the Partnership.  Thereafter, the Partnership is required, withrespect to any year prior to the expiration of the lease, to pay as additionalrent, 50% of the cash flow generated by such orchard for such year in excess ofa target level of $507,000 of cash flow. For additional information, see “Stabilization Payments” on page 5.

 

**ITEM3.  LEGAL PROCEEDINGS AND SETTLEMENT**

 

On November 1, 2007,the Partnership received two “Notice of Charge of Discrimination from the U.S.Equal Employment Opportunity Commission” (EEOC) for charge of discriminationfiled by two H-2A workers who were employed by Global Horizons, Inc., anunrelated third party labor contractor used by the Partnership.  The charge alleges that the claimants hadbeen harassed, subjected to different terms and conditions of employment andintimidated in all aspects of employment with Global Horizons, Inc., dueto their national origin.  The chargedoes not indicate the Partnership’s involvement in the discrimination.  It is management’s opinion, based uponconsultation with counsel that the charge is without merit.  On December 28, 2007, the Partnershipresponded to the EEOC with a written request to dismiss the charges.  As of March 19, 2008, the Partnershiphad not received a response to the Partnership’s request for dismissal.  The Partnership had contracted with GlobalHorizons, Inc., to provide temporary alien agricultural workers tosupplement hand harvesters during the peak harvest season.  Global Horizons, Inc. provided contractworkers for two harvest seasons, during the periods from November 1, 2005through January 24, 2006 and September 26, 2006 through February 28,2007.

 

On January 30, 2008,the Partnership filed a complaint in the Circuit Court for the Third Circuit,State of Hawaii against Hamakua, alleging breach of its nut purchase contractwhich provided for the annual sale of approximately 6.0 million WIS pounds ofmacadamia nuts to Hamakua from 2007 through 2008, 4.0 million WIS pounds from2009 through 2010, and 2.0 million WIS pounds from 2011 through 2012,inclusive.  The suit alleges that Hamakuafailed to process approximately 3 million WIS pounds in 2007 and seeks damagesin excess of $1.2 million dollars as a result of such 2007 breach.  The suit further alleges that Hamakua failedto deliver the entire kernel it was supposed to deliver from nuts thePartnership delivered to Hamakua. Lastly, the suit alleges that Hamakua has refused to purchase nuts inthe years 2008 through 2012 as required by the Nut Purchase Contract andrequests the Court to compel Hamakua to perform the contract and purchase thePartnership’s nuts delivered pursuant to the contract or, in the alternative,pay damages according to evidence to be submitted to the court.

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

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

 

 

11

----

 

### **PART II**

 

**ITEM5.  MARKET FOR REGISTRANT’S CLASS AUNITS AND**

**                                               ****  RELATED UNITHOLDERMATTERS**

 

The Partnership’s Class ADepositary Units are listed for trading on the New York Stock Exchange (symbol= NUT).  There were 5,336 registeredholders of Class A Depositary Units on December 31, 2007.

 

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

 
| ** ** | ** ** | ** **  | ** ** | **Distribution** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------|------------|-------------|------------|------------------|------------|----------|------------|---------|------------|
|       |       |        |       |             |       |     |       |    |       |
| **2007:**  |       | 4th Quarter |       | $                | 0.030      |     | 4.88       |    | 3.47       |   |
|       |       | 3rd Quarter |       | 0.050            |       | 5.15     |       | 4.50    |       |
|       |       | 2nd Quarter |       | 0.050            |       | 5.60     |       | 5.02    |       |
|       |       | 1st Quarter |       | 0.050            |       | 6.20     |       | 5.53    |       |
|       |       |        |       |             |       |     |       |    |       |
| **2006:**  |       | 4th Quarter |       | $                | 0.050      |     | 6.55       |    | 5.35       |   |
|       |       | 3rd Quarter |       | 0.050            |       | 5.61     |       | 5.25    |       |
|       |       | 2nd Quarter |       | 0.050            |       | 5.99     |       | 5.30    |       |
|       |       | 1st Quarter |       | 0.050            |       | 6.00     |       | 5.65    |       |

 

**Restrictions on Cash Distributions**

 

In connection with the Partnership’s CreditAgreement with American AgCredit Capital Markets, cash distributions topartners are restricted unless the Partnership is in compliance with specifiedterms and conditions of the Credit Agreement, including restrictions on furtherindebtedness, sales of assets, and maintenance of certain financialratios.  The credit agreements with AmericanAgCredit, PCA, contain various financial covenants.  The Partnership was in compliance with theterms and conditions of the Credit Agreement at December 31, 2006 exceptfor minimum tangible net worth.  On July 5,2007, the lender provided a waiver to the loan covenant for the year ended December 31,2006 and retroactively amended the minimum tangible net worth covenant.  Had the lender not waived this violation thePartnership would have been restricted in its ability to pay distributions tothe Class A unit holders and all obligations and indebtedness, at thelender’s option, could have been accelerated and become due and payable.  The Partnership was in compliance with theterms and conditions of the Credit Agreement at December 31, 2007, exceptfor the restricted payment covenant, minimum tangible net worth covenant, andthe debt coverage ratio covenant.  On March 14,2008, the lender provided a waiver and amendment to the loan covenants for theyear ended December 2007.  EffectiveMarch 14, 2008 the amended agreement reduces the maximum borrowing on therevolving line of credit from $5.0 million to $4.5 million, establishes aquarterly covenant based upon EBITDA, allows for no restricted declaration andrelated payments in 2008, establishes a minimum tangible net worth of $39.0million beginning December 31, 2008 and requires the Partnership toprovide additional security in the form of a mortgage or deed of trust on realproperty.

 

12

----

 

**ITEM6.  SELECTED FINANCIAL DATA**

                                                  (In thousands, except perpound and per unit data)

 

 
| ** **                                                | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Financial:                                                |       |     |       |     |       |     |       |     |       |     |       |
| Total revenue                                             |       | $        | 11,330     |     | $          | 17,072   |       | $        | 17,378     |     | $          | 13,665 |   | $ | 15,426 |   |
| Net cash provided (used) by operating activities (1)      |       | (3,942   | )          | 8,241    |       | 1,913    |       | 368      |       | 2,262    |       |
| Income (loss) before taxes                                |       | (4,008   | )          | 904      |       | 900      |       | (1,644   | )          | 111      |       |
| Net income (loss)                                         |       | (3,965   | )          | 804      |       | 771      |       | (1,649   | )          | 69       |       |
| Distributions declared                                    |       | 1,350    |       | 1,500    |       | 1,500    |       | 1,515    |       | 1,212    |       |
| Total working capital                                     |       | (199     | )          | 3,882    |       | 3,429    |       | 2,931    |       | 4,165    |       |
| Total assets                                              |       | 50,788   |       | 53,963   |       | 58,046   |       | 58,438   |       | 60,069   |       |
| Long-term debt, non current                               |       | 800      |       | 1,200    |       | 1,600    |       | 2,034    |       | 2,468    |       |
| Total partners’ capital                              |       | 43,312   |       | 48,623   |       | 49,389   |       | 50,542   |       | 53,706   |       |
| Cass A limited partners’ capital                |       | 43,297   |       | 48,612   |       | 49,308   |       | 50,037   |       | 53,169   |       |
| Net cash flow as defined in the partnership agreement (2) |       | (2,437   | )          | 2,323    |       | 2,501    |       | 466      |       | 2,157    |       |
|                                                      |       |     |       |     |       |     |       |     |       |     |       |
| Operations:                                               |       |     |       |     |       |     |       |     |       |     |       |
| Acres harvested                                           |       | 4,190    |       | 4,190    |       | 4,169    |       | 4,169    |       | 4,169    |       |
| Macadamia nuts harvested (lbs.) (3)                       |       | 19,894   |       | 21,194   |       | 21,707   |       | 18,933   |       | 21,196   |       |
| Net price $/lb. (3)(4)                                    |       | $        | 0.4868     |     | $          | 0.6093   |       | $        | 0.5550     |     | $          | 0.4972 |   | $ | 0.4857 |   |
|                                                      |       |     |       |     |       |     |       |     |       |     |       |
| Per Class A Unit (5):                                |       |     |       |     |       |     |       |     |       |     |       |
| Net income (loss)                                         |       | (0.53    | )          | 0.11     |       | 0.10     |       | (0.22    | )          | 0.01     |       |
| Net cash flow as defined in the partnership agreement (2) |       | (0.32    | )          | 0.31     |       | 0.33     |       | 0.06     |       | 0.28     |       |
| Distributions                                             |       | 0.18     |       | 0.20     |       | 0.20     |       | 0.20     |       | 0.16     |       |
| Partners’ capital                                    |       | 5.77     |       | 6.48     |       | 6.57     |       | 6.67     |       | 7.09     |       |

 

----

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

(2)          See Footnote 5 in the notes toconsolidated financial statements for method of calculation.

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

(4)          Weighted average for all orchards fornuts sold (14.31 million pounds for the year ended December 31, 2007 weresold under the nut purchase agreements).

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

 

13

----

 

Contractual obligationsas of December 31, 2007 for the Partnership are detailed in the following:

 

                                                                                                                

 

 
| ** **                  | ** ** | ** ** | ** ** | **Payments  Due by Period** | ** ** |
|-----------------------------|------------|------------|------------|-----------------------------|------------|
| **Contractual obligations** | ** ** | **Total**  | ** ** | **Less Than 1 Year**        | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More Than 5 Years** | ** ** |
| Line-of-credit              |       | $          | 3,000,000  |                        | $          | 3,000,000 |   | $ | — |   | $ | — |   | $ | — |   |
| Long-term debt and interest |       | 1,310,000  |       | 464,000                     |       | 846,000 |   | — |   | — |   |
| Operating leases            |       | 3,125,000  |       | 277,000                     |       | 344,000 |   | 252,000 |   | 2,252,000 |   |
| Total                       |       | $          | 7,435,000  |                        | $          | 3,741,000 |   | $ | 1,190,000 |   | $ | 252,000 |   | $ | 2,252,000 |   |

 

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

**                                               ****  CONDITION AND RESULTSOF OPERATIONS**

 

This discussion should beread in conjunction with the consolidated financial statements and the relatednotes included elsewhere in this report.

 

# ***Results of operations — 2007, 2006and 2005***

# *** ***

## ***Owned-Orchard Segment - Production and Yields***

## ** **

Production and yield data for the nine orchards are summarized below(expressed in WIS pounds at 25% moisture):

 
| ** **                  | ** ** | ** **      | ** ** | ** **  | ** ** | **2007**       | ** ** | **Average Yield per Acre** |
|-----------------------------|------------|-----------------|------------|-------------|------------|----------------|------------|----------------------------|
| **Orchard**                 | ** ** | **Acquired**    | ** ** | **Acreage** | ** ** | **Production** | ** ** | **2007**                   | ** ** | **2006** | ** ** | **2005** |
| Keaau I                     |       | June 1986  |       | 1,467       |       | 5,308,632      |       | 3,619                      |   | 4,530 |   | 3,953 |
| Keaau II                    |       | Oct. 1989  |       | 220         |       | 574,523        |       | 2,611                      |   | 2,856 |   | 2,758 |
| Keaau Lot 10                |       | Sept.  1991     |       | 78          |       | 194,127        |       | 2,489                      |   | 3,589 |   | 3,168 |
| Ka’u I                 |       | June 1986  |       | 956         |       | 5,464,841      |       | 5,716                      |   | 5,590 |   | 7,948 |
| Ka’u Green Shoe I      |       | Dec. 1986  |       | 266         |       | 1,901,545      |       | 7,149                      |   | 7,461 |   | 6,399 |
| Ka’u II                |       | Oct. 1989  |       | 714         |       | 4,163,501      |       | 5,831                      |   | 5,487 |   | 4,957 |
| Ka’u O                 |       | May 2000   |       | 142         |       | 807,589        |       | 5,687                      |   | 4,958 |   | 5,655 |
| Ka’u 715/716           |       | April 2006 |       | 21          |       | 129,054        |       | 6,145                      |   | 5,138 |   | — |
| Mauna Kea                   |       | Oct. 1989  |       | 326         |       | 1,350,278      |       | 4,142                      |   | 4,852 |   | 4,327 |
|  Totals (except yields |       |            |       |        |       |           |       |                       |   |   |   |   |
| which are averages)         |       |            |       | 4,190       |       | 19,894,090     |       | 4,748                      |   | 5,058 |   | 5,207 |

 

The Partnership reportson a calendar year basis, though the natural crop year generally begins in August andruns through April.

 

Production in 2007 was6.1% lower than 2006 and 8.8% lower than 2005. Production in 2006 was 1.6% lower than 2005. Significant factors affectingthe crop were as follows:

 

1.  The Ka’u region recorded above averagerainfall in 2004.  The rainfallreplenished the soil moisture and improved yields in the region for the springof 2005.

 

2.  The maturation of the crop was delayed by theweather conditions which resulted in less production in the fall of 2004 andimproved yields in the spring of 2005.

 

14

----

 

3.  The Ka’u region recorded below averagerainfall in 2005.  The shortfall duringthe early spring to fall of 2005 reduced yields in the spring of 2006.  Above average rainfall from November 2005through February 2006 contributed a positive effect on the fall 2006production.

 

4.  Adequate rainfall during the spring andsummer of 2006 provided for a return to normal production in the spring of2007.  Good rainfall distribution betweenOctober 2006 and April 2007 had a positive effect on the fall 2007nut production.

 

5.  A late and abbreviated flower season in theKeaau and Mauna Kea regions resulted in lower production in the fall of 2005and the spring of 2006.  Cool nighttemperatures from November 2005 through May 2006 contributed to anearly and extended flower/nut set season that had a positive effect on the fall2006 production despite the occurrence of a light-moderate flower disease in March 2006.  The extended flowering period alsocontributed to above average production in the spring of 2007 at Keaau.  Flowers that normally bloom in mid-to-late December didnot develop until early February 2007. This late development had a negative impact on the fall 2007 nutproduction and will also affect the production in the spring of 2008.

 

6.  Nut delivery restrictions by Hamakua underagreement to contract process nut production into roasted kernels for thePartnership contributed to reduced harvesting activity and lower than expectednut production in the fall of 2007.

 

The Ka’u Green Shoe Iorchard and the Mauna Kea orchard are fully mature.  As a result, the yields from these orchardsare expected to produce on average with the Partnership’s mature orchards.  At full maturity under favorable growingconditions, a macadamia orchard can produce between 4,500 and 7,500 WIS poundsof macadamia nuts per acre each year at Ka’u and between 2,500 and 6,000 WISpounds of macadamia nuts per acre each year at Keaau and Mauna Kea.

 

15

----

 

## ***Owned-Orchard Segment - Nut Revenue***

## ** **

Macadamia nut revenuesdepend on the number of producing acres, yield per acre and the nut purchaseprice.  The following table presents thecomparison of revenues for the years ended December 31, 2007 and 2006 (in000’s except per pound information):

For the year

Ended December 31,2007 and 2006

 
|                           | **Actual  Contracts** | ** ** | ** **        | ** ** | ** **    | ** ** |
|--------------------------------|-----------------------|------------|-------------------|------------|---------------|------------|
|                           | **WIS @  20%**        | ** ** | **WIS @  20%**    | ** ** | **2007-2006** | ** ** |
|                           | **SK/DIS @  30%**     | ** ** | **SK/DIS @  30%** | ** ** | **Change**    | ** ** |
|                           | **2007**              | ** ** | **2006**          | ** ** | ** **    | ** ** |
| Field pounds delivered         | 19,894                |       | 21,362            |       | -7            | %          |
| Pounds contract processed      | (5,584                | )          | —            |       |          | —     |   |
| Trash adjustment               | (688                  | )          | (785)             |       | +11           | %          |
| Quality adjustment SK/DIS      | (2,235                | )          | (2,642)           |       | +15           | %          |
| Moisture adjustment WIS        | (243                  | )          | (563)             |       | +57           | %          |
| Contract pounds delivered      | 11,144                |       | 17,372            |       | -36           | %          |
| Nut price ($/per pound)        | $                     | 0.6251     |              | $          | 0.7433        |       | -16 | % |
| Net nut sales                  | $                     | 6,966      |              | $          | 12,913        |       | -46 | % |
| 2006/2005 nut price adjustment | 8                     |       | 343               |       |          |       |   |
| Kernel sales                   | 577                   |       | —            |       |          |       |   |
| Total nut sales                | $                     | 7,551      |              | $          | 13,256        |       | -47 | % |

 

Thefollowing table presents the comparison of information to derive theOwned-Orchard Segment nut revenue using the 2005 contracts for all informationtherefore implied for 2007 and 2006 and actual for 2005.  The implied 2007 and 2006 is used so that thecomparisons are presented on an equivalent basis (in 000’s except for per poundinformation):

 
| ** **                        | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------|------------|-------------|------------|-------------|------------|------------|------------|----------|------------|----------|------------|
| ** **                        | ** ** | **Implied** | ** ** | **Implied** | ** ** | **Actual** | ** ** | **vs**   | ** ** | **vs**   | ** ** |
| ** **                        | ** ** | **2007**    | ** ** | **2006**    | ** ** | **2005**   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Trees acres harvested             |       | 4,190       |       | 4,190       |       | 4,169      |       | —   |       | +1       | %          |
| Average yield (WIS lbs./acre)     |       | 4,748       |       | 5,058       |       | 5,207      |       | -6       | %          | -3       | %          |
| Nuts harvested (WIS lbs.)         |       | 19,894      |       | 21,194      |       | 21,707     |       | -7       | %          | -2       | %          |
| Nuts contract processed           |       | (5,584      | )          | —      |       | —     |       | —   |       |     | —     |   |
| Nuts per nut purchase  agreements |       | 14,310      |       | 21,194      |       | 21,707     |       | -33      | %          | -2       | %          |
| Nut price ($/WIS lbs. @ 25%)      |       | 0.4868      |       | 0.6093      |       | 0.5550     |       | -20      | %          | +10      | %          |
| Gross nut sales                   |       | $           | 6,966      |        | $          | 12,913     |       | $        | 12,048     |     | -46        | % | +7 | % |
| Prior year nut price  settlement  |       | 8           |       | 343         |       | 576        |       | —   |       |     |       |
| Kernel sales                      |       | 577         |       | —      |       | —     |       |     |       |     |       |
| 2004 Mac Farms settlement         |       | —      |       | —      |       | 60         |       |     |       |     |       |
| Recorded nut sales                |       | $           | 7,551      |        | $          | 13,256     |       | $        | 12,684     |     |       |   |   |   |
|                                   |            |             |            |             |            |            |            |          |            |          |            |  |  |  |  |

 

16

----

 

For comparison purposes2007 and 2006 nuts per nut purchase agreements are shown in a manner thatequates to the 2005 nut purchase agreements. Thus, the pounds per the nut purchase agreements and the nut prices for2007 and 2006 are not based upon the current nut purchase agreements but arebased upon the 2005 nut purchase agreements criteria.  The 2007 and 2006 gross nut sales, prior yearprice settlement, kernel sales and recorded nut sales, are actual results.

 

The following table sets forth the manner in which the nut purchaseprice per pound was determined for 2005 ($/lb.).  This table does not include 2007 and 2006 asthe contracts were renegotiated in 2006 and there is no available net-backcomponent:

 
| ** **                                         | ** ** | **2005** | ** ** |
|----------------------------------------------------|------------|----------|------------|
| USDA price - two years prior  (a)                  |       | 0.5391   |       |
| USDA price — one year prior  (a)              |       | 0.5769   |       |
| USDA price — two year trailing  average       |       | 0.5580   |       |
|                                               |       |     |       |
| Gross revenues                                     |       | 2.1093   |       |
| Less allocable processing,  packaging,             |       |     |       |
|  marketing, sales and advertising costs       |       | 1.4268   |       |
| Less 20% capital charge                            |       | 0.1365   |       |
| Net-back component                                 |       | 0.5460   |       |
|                                               |       |     |       |
| USDA price — two year trailing  average       |       | 0.5580   |       |
| Net-back component                                 |       | 0.5460   |       |
| Average of USDA two year  trailing                 |       |     |       |
|  average price and net-back component         |       | 0.5520   |       |
| Plus Hawaii general excise tax  (0.5%)             |       | 0.0028   |       |
| Net purchase price  (b) (c) (d) (e) |       | 0.5548   |       |

 

----

(a)          Mauna Loa’s own purchases comprise asubstantial portion of nut purchases reported to the USDA.  Therefore, the USDA price component of thepurchase price is, to a substantial degree, the average price that Mauna Loahas paid to purchase macadamia nuts from the Partnership and from third partiesduring the previous two years.

 

(b)         The nut purchase price for the 1986 and1989 orchards was the same for 1999 and all previous years.  With the change of ownership of Mauna Loa in2000, a quality conversion factor in the nut purchase contracts wasinitiated.  The effect was to cause aslightly different price of $0.5542 in 2005.

 

(c)          The nut purchase contract covering nutproduction from the 78 acre Keaau Lot 10 orchard acquired in September 1991defines the “two-year trailing average” provision slightly differently from the1986 and 1989 nut purchase contracts, and thus results in a different nutprice.  This was in effect for the firstsix months of 2003.  A new contract wasnegotiated with a fixed price for all nuts with unusables in a range of 10% to13%.  The nut price for this orchard was$0.6000 in 2006 and 2005. This orchard accounts for less than 2% of thePartnership’s macadamia nut production.

 

(d)         The nut purchase contract for the Ka’u Oorchards purchased in May 2000 uses only the two-year trailing USDAaverage to determine its nut price, which was $0.6912 in 2006 and $0.5610 in2005.

 

(e)          Mauna Loa provided the final 2004 auditednut price to the Partnership resulting in an additional $576,000 paid in 2005.

 

(f)            Mauna Loa provided the final 2005 auditednut price to the Partnership resulting in an additional $343,000 paid in 2006.

 

17

----

 

In 2006 five contracts were in place:  1) the 1986 contracts were replaced with afixed price contract - $0.75 per pound at WIS 20% moisture and 30% SK/DIS;  2) the 1989 contracts were replaced with afixed price contract - $0.74 per pound at WIS 20% moisture and 30% SK/DIS;  3)  theLot 10Z contract remained effective - $0.60 @ WIS 25% adjusted for trash;  4)  theKa’u “O” contract remained effective which uses a two-year trailing averageUSDA price which was $0.6912 and; 5)  the macadamia nut orchardpurchased April 2006 has a fixed price contract of $0.98 per pound at WIS20% moisture and 30% SK/DIS.

 

***Owned-Orchard Segment - Cost ofGoods Sold***

 

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

 

The Partnership’s unit costs (expressed in dollars per WIS pound at 25%moisture) are calculated by dividing all agricultural costs for each orchard(including lease rent, property tax, tree insurance and depreciation) by thenumber of pounds of macadamia nuts produced by that orchard and are summarizedbelow ($/lb.):

 
| ** **             | ** ** | ** **      | ** ** | **Cost per pound** | ** ** | ** ** | ** ** |
|------------------------|------------|-----------------|------------|--------------------|------------|------------|------------|
| **Orchard**            | ** ** | **Acquired**    | ** ** | **2007**           | ** ** | **2006**   | ** ** | **2005** | ** ** |
| Keaau I                |       | June 1986  |       | 0.6383             |       | 0.5646     |       | 0.5866 |   |
| Keaau II               |       | Oct. 1989  |       | 0.7136             |       | 0.6985     |       | 0.6501 |   |
| Keaau Lot 10           |       | Sept.  1991     |       | 0.5276             |       | 0.4095     |       | 0.3836 |   |
| Ka’u I            |       | June 1986  |       | 0.5969             |       | 0.5193     |       | 0.4289 |   |
| Ka’u Green Shoe I |       | Dec. 1986  |       | 0.3192             |       | 0.3278     |       | 0.2769 |   |
| Ka’u II           |       | Oct. 1989  |       | 0.3872             |       | 0.4420     |       | 0.4112 |   |
| Ka’u O            |       | May 2000   |       | 0.3867             |       | 0.4829     |       | 0.4226 |   |
| Ka’u 715/716      |       | April 2006 |       | 0.2825             |       | 0.2952     |       | — |   |
| Mauna Kea              |       | Oct. 1989  |       | 0.6262             |       | 0.5649     |       | 0.7119 |   |
|                   |       |            |       |               |       |       |       |   |   |
| All Orchards           |       |            |       | 0.5316             |       | 0.5130     |       | 0.5062 |   |

 

Cost of goods sold was $1.6 million lower in 2007 than 2006, and costof goods sold was $669,000 higher in 2006 than 2005 and $535,000 higher in 2005than in 2004.  The cost per pound in 2007was 3.6% higher than 2006, and the cost per pound in 2006 was 1.3% higher than2005 and 10.5% higher in 2005 than 2004. The lower production costs are not indicative of the actual productioncosts as 5.9 million field pounds were processed into kernel that was sold orowned by the Partnership, or owned by the Partnership as nut-in-shell.  Additionally, 1.3 million fewer field poundswere harvested in 2007 compared to 2006. The absolute farming costs for 2007 were $294,000 lower (not includingthe cost of processing related to kernel production from WIS nuts) whencompared to 2006 which was a result of lower cultivation, harvesting, rent anddepreciation offset by higher crop and tree insurance costs.  The kernel and nut-in-shell are included asinventory at December 31, 2007.  Thelower cost of goods in 2007 is a result fewer sold macadamia nuts compared to2006.  The higher cost per pound in 2007is a result of lower production, lower recovery under the terms of the nutpurchase contracts and the write down to market of the inventory of kernel andnut-in-shell owned by the Partnership at December 31, 2007.  The inventory write down to the lower of costor market was $945,000.  The higherproduction costs in 2006 were the results of higher harvesting costs,cultivation costs, land lease costs, and higher insurance costs offset by lowerdepreciation.  The higher productioncosts in 2005 were the results of higher harvesting and husking costs becauseof more pounds handled.  The lowerproduction costs in 2004 compared to 2005 and 2006 were the result of lowerharvesting costs, cultivation costs, land lease costs and insurance costs.

 

18

----

 

 

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

### ** **

As a result of theacquisition of the farming operation in 2000, the Partnership acquiredapproximately twenty farming contracts (now seventeen contracts) to farmmacadamia orchards owned by other growers. These contracts cover macadamiaorchards in the same three locations on the island of Hawaii where thePartnership owns orchards.  The farmingcontracts provide the Partnership to be reimbursed for all direct farming costs(cultivation, irrigation and harvesting), collect a pro-rata share of indirectcosts and overheads, and charge a management fee or fixed fee.  The management fee is based on the number ofacres farmed or on a percentage of total costs billed.  Revenues from farming services were $3.8million in 2007, $3.8 million in 2006, and $4.7 million in 2005. The 2007farming service revenues were equivalent to 2006.  The 2006 farming service revenues were lessthan 2005 because of the termination of three farming contracts, the purchaseof the macadamia orchard which previously had been farmed under contract andthe timing of the harvest at the end of the year which resulted is harvestingoccurring in the spring of 2007 for some of the orchards under contract. The2005 farming service revenues were less than anticipated because of a windstormwhich destroyed a large percentage of trees in three contract orchards.  Three farming service contracts terminated onDecember 31, 2005 which reduces the number of farming service contracts toabout seventeen totaling about 2,039 acres. The farming service revenue in 2005 for these three contracts was about$492,000 with management fees of about $70,000. Additionally, the Partnership purchased about 21 acres which was underfarming contract bringing the total acres under farming contract to about2,008.  Approximately 150 acres of areyear-to-year contracts, approximately 635 acres expire March 31, 2009,approximately 70 acres expire June 30, 2013, approximately 410 acresexpire July 31, 2029, approximately 280 acres expire June 30, 2033and approximately 470 acres expire September 30, 2080.

 

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

 

The cost of services sold relating to the farmingcontracts was $3.4 million in 2007, $3.5 million in 2006 and $4.3 million in2005.  These costs were all reimbursed tothe Partnership.

 

## ***General and Administrative Costs***

## ** **

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

 

General andadministrative costs for 2007 were $719,000 higher than for 2006 which isattributed to increased legal and accounting costs related to the Partnership’seffort to acquire MacFarms, higher actuarial costs for intermittent pensioncosts, offset by lower Sarbanes-Oxley implementation costs.  General and administrative costs for 2006were $247,000 higher than for 2005 which is attributed to increased legal costsattributable to the proxy statement for the 2006 special meeting and thepotential acquisition of MacFarms and higher costs associated withSarbanes-Oxley implementation.

 

19

----

 

## ** **

## ***InterestIncome and Expense***

## ** **

The Partnership recorded interest expense of $179,000in 2007, $204,000 in 2006, and $237,000 in 2005.  This was due to (1) the long-term loanused to acquire the farming operations, (2) the assumption of severalcapitalized equipment leases, and (3) interest expense on a revolving lineof credit.

 

The Partnership funds its working capital needsthrough funds on hand and, when needed, from short-term borrowings, generatinginterest expense in the process.  Netinterest income or expense, therefore, is partly a function of any balancecarried over from the prior year, the amount and timing of cash generated anddistributions paid to investors in the current year, as well as the currentlevel of interest rates.  Interest wasearned in the amount of $49,000 in 2007, $17,000 in 2006 and $5,000 in 2005.

 

Other income of $13,000 was recorded in 2007 for adistribution from American AgCredit. Other income of $206,000 was recorded in 2006 of which $169,000 was fromcrop insurance.  Other income of $151,000was recorded in 2005 of which $147,000 was from crop insurance.

 

***Inflation and Taxes***

 

In general, prices paid to macadamia nut farmersfluctuate independently of inflation. Macadamia nut prices are influenced strongly by prices for finishedmacadamia products, which depend on competition and consumer acceptance.  Farming costs, particularly labor andmaterials, and general and administrative costs do generally reflectinflationary trends.

 

The Partnership issubject to a gross income tax as a result of its election to continue to betaxed as a partnership rather than to be taxed as a corporation, as allowed bythe Taxpayer Relief Act of 1997.  Thistax is calculated at 3.5% on partnership gross income (net revenues less costof goods sold) beginning in 1998.  Thegross income tax (credit) expense was ($43,000) in 2007, $100,000 in 2006, and$129,000 in 2005.

 

# ***Liquidity and CapitalResources***

# *** ***

The Partnershipincurred a net loss of $4.0 million and had negative cash flows from operationsof $3.9 million during 2007 and had a working capital deficit of approximately$199,000 at December 31, 2007.  Netcash used by operations was $3.9 million in 2007 compared to net cash providedby operations of $8.2 million in 2006. The significant decrease of $12.1 million is a result of the fewerpounds of nuts sold, a lower selling price per pound for the nuts sold,processing related to the production of kernel from WIS nuts, increase ininventory of kernel and nut-in-shell and associated costs, and costs for theattempted acquisition of MacFarms.  Netcash provided by operations was $8.2 million in 2006, an increase ofapproximately $6.3 million compared to 2005 which was a result of the paymentterms of the nut purchase contracts changing from quarterly to 30 days fromdate of delivery.  Net cash provided byoperations in 2005 was $1.9 million.

 

At December 31, 2007the Partnership’s working capital was a negative $199,000 and its current ratiowas 0.96 to 1, compared to $3.9 million and 2.54 to 1 in 2006.  In 2006 the Partnership’s working capital was$3.9 million and its current ratio 2.54 to 1, compared to $3.4 million and 1.59to 1 in 2005.  In 2005 the Partnership’sworking capital was $3.4 million and its current ratio was 1.59 to 1, comparedto $2.9 million and 1.63 to 1 in 2004. In 2007 the decrease in working capital compared to 2006 was the resultof higher costs of goods, lower revenue, higher general and administrativecosts, and lower other income offset by higher interest income, and lower incometax.  In 2006 the increase in workingcapital compared to 2005 was the result of lower cost of goods sold, interestexpense, income taxes, higher interest income and other income offset by highergeneral and administrative costs.  In2005 the increase in working capital compared to 2004 was result of higherrevenue and lower general and administrative costs.  The Partnership was in compliance with theterms and conditions of the Credit Agreement at December 31, 2006 exceptfor minimum tangible net worth.  On July 5,2007, the lender provided a waiver to the loan 

 

 

20

----

 

covenant for the year ended December 31,2006 and retroactively amended the minimum tangible net worth covenant.  Had the lender not waived this violation thePartnership would have been restricted in its ability to pay distributions tothe limited partners and all obligations and indebtedness, at the lender’soption, could have been accelerated and become due and payable.  The Partnership was in compliance with theterms and conditions of the Credit Agreement at December 31, 2007 exceptfor the restricted payment covenant, minimum tangible net worth covenant, andthe debt coverage ratio covenant.  On March 14,2008, the lender provided a waiver and amendment to the loan covenants for theyear ended December 2007.  EffectiveMarch 14, 2008 the amended agreement reduces the maximum borrowing on therevolving line of credit from $5.0 million to $4.5 million, establishes aquarterly covenant based upon EBITDA, prohibits declaration and payment offurther restricted payments in 2008, establishes a minimum tangible net worthof $39.0 million effective December 31, 2008 and requires the Partnershipto provide additional security in the form of a mortgage or deed of trust onreal property.

 

Capitalexpenditures in 2007, 2006 and 2005 were $226,000, $509,000, and $83,000,respectively.  The decrease in 2007 wasattributed to the increase in farming equipment, computers and roofs offset byno land purchase in 2007.  The increasein 2006 was attributed to the purchase of 21 tree acres of macadamia orchardsfor $440,000, computers, a vehicle and upgrades to operating machinery.  The decrease in 2005 was the result of fewercomputer purchases and modifications to farming equipment than 2004.  Capital expenditures planned for 2008 areabout $500,000 and are expected to be financed by way of new equipment leases,either capital or operating leases.

 

Macadamia nut farming is seasonal, with productionpeaking late in the fall.  However,farming operations continue year round. As a result, additional working capitalis required for much of the year. The Partnership meets its working capitalneeds with cash on hand, and when necessary, through short-term borrowingsunder a $5.0 million revolving line of credit. The line of credit was obtainedon May 2, 2000 and expires May 1, 2008.  At December 31, 2007 the Partnership hada cash balance of $283,000 and line of credit drawings outstanding of $3.0million.  At December 31, 2006 thePartnership had a cash balance of $3,351,000 and no line of credit drawingsoutstanding.  At December 31, 2005the Partnership had a cash balance of $378,000 and line of credit drawingsoutstanding of $2,900,000.

 

As a Limited Partnership, we expect to pay regularcash distributions to the Partnership’s unit holders if the cash flow fromoperations, as defined in the Management Agreement, exceeds the operating andcapital resource needs of the Partnership, as determined by management.  These cash distributions are expected to bepaid from operating cash flow and / or other resources.  The Partnership has declared and paid cashdistributions for 87 consecutive quarters. In December, 2007, the Partnership declared a distribution of $0.03 per Class Aunit (a total of $225,000), which was paid February 15, 2008 to the unitholders of record as of December 31, 2007. The March 14, 2008 amended and restated credit agreement prohibitsthe Partnership from declaring and paying further distributions in 2008.

 

It is the opinionof management that the Partnership has adequate cash on hand and borrowingcapacity available to meet anticipated working capital needs for operations aspresently conducted. The nut purchase contracts require the buyers to make nutpayments 30 days after the delivery of the nuts to 15 days after the end of themonth in which the nuts were delivered. During certain parts of the year, if payments are not received, as thecontracts require, available cash resources could be depleted.

 

***Critical Accounting Policies and Estimates***

 

Management hasidentified the following critical accounting policies that affect thePartnership’s more significant judgments and estimates used in the preparationof the Partnership’s consolidated financial statements.  The preparation of the Partnership’sconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires the Partnership’smanagement to make estimates and judgments that affect the reported amounts ofassets and liabilities, revenues and expenses, and related disclosures ofcontingent assets and liabilities.  On anon-going basis, 

 

 

21

----

 

managementevaluates those estimates, including those related to asset impairment,accruals for self-insurance, compensation and related benefits, revenuerecognition, allowance for doubtful accounts, contingencies andlitigation.  The Partnership states theseaccounting policies in the notes to the consolidated financial statements andin relevant sections in this discussion and analysis.  These estimates are based on the informationthat is currently available to the Partnership and on various other assumptionsthat management believes to be reasonable under the circumstances.  Actual results could materially differ fromthose estimates.

 

The Partnershipbelieves that the following critical accounting policies affect significantjudgments and estimates used in the preparation of it consolidated financialstatements:

 

The Partnershipmaintains an accrual for workers’ compensation claims to the extent that thePartnership’s current insurance policies will not cover such claims.  This accrual is included in other accruedliabilities in the accompanying consolidated balance sheets.  Management determines the adequacy of theaccrual by periodically evaluating the historical experience and projectedtrends related to outstanding and potential workers’ compensation claims.  If such information indicates that theaccrual is over or understated, the Partnership will adjust the assumptionsutilized in the methodologies and reduce or provide for additional accrual asappropriate.

 

Retirement andSeverance Benefits:  The Partnershipsponsors a non-contributory defined benefit pension plan for regular unionemployees and a severance plan for intermittent union employees.  Several statistical and other factors whichattempt to anticipate future events are used in calculating the expense andliabilities related to this plan.  Thesefactors include assumptions about the discount rate, expected return on planassets, withdrawal and mortality rates and the rate of increase in compensationlevels.  The actuarial assumptions usedby the Partnership may differ materially from actual results due to changingmarket and economic conditions, higher or lower withdrawal rates or longer orshorter mortality of participants.  Thesedifferences may impact the amount of retirement and severance benefit expenserecorded by the Partnership in future periods.

 

The Partnershipreviews long-lived assets held and used, or held for sale for impairmentwhenever events or circumstances indicate that the carrying amount of an assetmay not be recoverable.  If an evaluationis required, the estimated undiscounted future cash flows associated with theasset are compared to the asset’s carrying amount to determine if an impairmentcharge is required.  All long-livedassets for which management has committed to a plan of disposal are reported atthe lower of carrying amount or fair value. Changes in projected cash flows generated by an asset based on newevents or circumstances may indicate a change in fair value and require a newevaluation of recoverability of the asset.

 

The Partnershiphas replaced three of the nut purchase contracts it had with Mauna Loa with twocontracts signed June 1, 2006, effective January 1, 2006.  The first of the contracts is a fixed pricecontract at $0.75 per pound at WIS 20% moisture and 30% SK/DIS, terminating December 31,2006, and accounts for about 15 million pounds of nuts.  The second contract is a fixed price contractat $0.74 per pound a WIS 20% moisture and 30% SK/DIS, terminating December 31,2011, and accounts for about 6 million pounds of nuts.  The second contract increases by $0.01 perpound each year except 2008 until it reaches $0.78 per pound in 2011.

 

The Partnershipreviews the inventory held at year end and values it based the lower of averagecost or market, which resulted in a write down of inventory of $945,000 in 2007which was charged to cost of goods sold. Inventory was not written down in 2006 and 2005.

 

The Partnershiprecognizes revenue under all of its fixed price contracts using the bestinformation available to the Partnership at the time it files its quarterly andannual consolidated financial statements. Additional information can be found in section (c) under theheading Nut Purchase Contracts on page 3.

 

 

22

----

 

**LegalProceedings**

 

On November 1, 2007,the Partnership received two “Notice of Charge of Discrimination from the U.S.Equal Employment Opportunity Commission” (EEOC) for charge of discriminationfiled by two H-2A workers who were employed by Global Horizons, Inc., anunrelated third party labor contractor used by the Partnership.  The charge alleges that the claimants hadbeen harassed, subjected to different terms and conditions of employment andintimidated in all aspects of employment with Global Horizons, Inc., dueto their national origin.  The chargedoes not indicate the Partnership’s involvement in the discrimination.  It is management’s opinion, based uponconsultation with counsel that the charge is without merit.  On December 28, 2007, the Partnershipresponded to the EEOC with a written request to dismiss the charges.  As of March 19, 2008, the Partnershiphad not received a response to the Partnership’s request for dismissal.  The Partnership had contracted with GlobalHorizons, Inc., to provide temporary alien agricultural workers tosupplement hand harvesters during the peak harvest season.  Global Horizons, Inc. provided contractworkers for two harvest seasons, during the periods from November 1, 2005through January 24, 2006 and September 26, 2006 through February 28,2007.

 

On January 30, 2008,the Partnership filed a complaint in the Circuit Court for the Third Circuit,State of Hawaii against Hamakua, alleging breach of its nut purchase contractwhich provided for the annual sale of approximately 6.0 million WIS pounds ofmacadamia nuts to Hamakua from 2007 through 2008, 4.0 million WIS pounds from2009 through 2010, and 2.0 million WIS pounds from 2011 through 2012,inclusive.  The suit alleges that Hamakuafailed to process approximately 3 million WIS pounds in 2007 and seeks damagesin excess of $1.2 million dollars as a result of such 2007 breach.  The suit further alleges that Hamakua failedto deliver the entire kernel it was supposed to deliver from nuts thePartnership delivered to Hamakua. Lastly, the suit alleges that Hamakua has refused to purchase nuts inthe years 2008 through 2012 as required by the Nut Purchase Contract andrequests the Court to compel Hamakua to perform the contract and purchase thePartnership’s nuts delivered pursuant to the contract or, in the alternative,pay damages according to evidence to be submitted to the court.

 

**ITEM7A.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

The Partnership is exposed to market risks resultingfrom changes in interest rates.  The interestrates on the Partnership’s Credit Agreement, which are based on LIBOR (FarmCredit Discount Note Rate and the Farm Credit Medium Term Note Rate), areadjusted periodically based on the Partnership’s election to fix interest ratesfor periods ranging from between three months and five years.  As of December 31, 2007, a one percentincrease or decrease in the applicable rate under the Credit agreement willresult in an interest expense fluctuation of approximately $8,000.

 

The Partnership is exposed to market risks resultingfrom changes in the market price of macadamia kernel.  Pricing for two of its nut purchase contractsis adjusted every six months based upon the prevailing market price ofmacadamia kernel from Australia and Hawaii. During the first half of 2007 therewas a decrease in global macadamia prices. A $0.25 increase or decrease in thekernel price would affect the price received by the Partnership by $0.038 perpound at 20% WIS and 30% SK/DIS.  The marketprice nut purchase contracts for the second half of 2007 reflected a decreasein kernel price of $0.75, resulting in a price decrease of $0.114 per WIS poundon deliveries under these contracts.

 

 

23

----

 

**ITEM8.  CONSOLIDATED FINANCIAL STATEMENTS**

 

**Index to Consolidated Financial Statements**

** **
|                                                                               |   | **Page**   |
|------------------------------------------------------------------------------------|--------|------------|
|                                                                               |   | **Number** |
|                                                                               |   |       |
| Report  of Independent Registered Public Accounting Firm                           |   | 25         |
|                                                                               |   |       |
| Report  of Prior Independent Registered Public Accounting Firm                     |   | 26         |
|                                                                               |   |       |
| Consolidated  Balance Sheets, December 31, 2007 and 2006                      |   | 27         |
|                                                                               |   |       |
| Consolidated Income  Statements, for the Years Ended December 31, 2007,       |   |       |
| 2006 and 2005                                                                      |   | 28         |
|                                                                               |   |       |
| Consolidated  Statements of Partners’ Capital, for the Years Ended            |   |       |
| December 31,  2007, 2006 and 2005                                             |   | 29         |
|                                                                               |   |       |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2007, |   |       |
| 2006 and 2005                                                                      |   | 30         |
|                                                                               |   |       |
| Notes to Consolidated Financial Statements                                         |   | 31         |

 

 

24

----

 

**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

 

To thePartners

MLMacadamia Orchards, L.P.

 

Inour opinion, the accompanying consolidated balance sheet and the relatedconsolidated statements of income, partners’ capital, and cash flows, presentfairly, in all material respects, the financial position of ML MacadamiaOrchards, L.P. and its subsidiary (the “Partnership”) at December 31,2007, and the results of their operations and their cash flows for each of theyear then ended in conformity with accounting principles generally accepted inthe United States of America.  Theseconsolidated financial statements are the responsibility of the Partnership’smanagement.  Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudit.  We conducted our audit of thesestatements in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe consolidated financial statements, assessing the accounting principles usedand significant estimates made by management, and evaluating the overallconsolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

Theconsolidated balance sheet of the Partnership as of December 31, 2006 andthe related consolidated statements of income, partners’ capital and cash flowsfor each of the two years then ended were audited by another independentregistered public accounting firm, whose report dated April 16, 2007,except as to the disclosure regarding the Partnership’s debt covenant violationand waiver included in Note 7, which is as of November 9, 2007, expressedan unqualified opinion on those statements.

 

/s/ Accuity LLP

 

Honolulu,Hawaii

March 20,2008

 

 

25

----

 

**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

 

To thePartners

MLMacadamia Orchards, L.P.

 

In ouropinion, the accompanying consolidated balance sheet and the relatedconsolidated statements of income, partners’ capital, and cash flows, presentfairly, in all material respects, the financial position of ML MacadamiaOrchards, L.P. and its subsidiary (the “Partnership”) at December 31,2006, and the results of their operations and their cash flows for each of theyear then ended in conformity with accounting principles generally accepted inthe United States of America.  Theseconsolidated financial statements are the responsibility of the Partnership’smanagement.  Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudit.  We conducted our audit of thesestatements in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe consolidated financial statements, assessing the accounting principles usedand significant estimates made by management, and evaluating the overallconsolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

** **

/s/ PricewaterhouseCoopers LLP

 

Honolulu,Hawaii

April 16, 2007, exceptas to the disclosure regarding the Partnership’s debt covenant violation andwaiver included in Note 7, which is as of November 9, 2007

 

 

26

----

 

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

**ConsolidatedBalance Sheets**

(in thousands)

 
| ** **                                                                                               | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                               | ** ** | **2007**              | ** ** | **2006** | ** ** |
| **Assets**                                                                                               | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current  assets                                                                                          |       |                  |       |   |   |
| Cash and cash equivalents                                                                                |       | $                     | 283        |   | $ | 3,351 |   |
| Accounts receivable                                                                                      |       | 2,275                 |       | 2,688 |   |
| Inventory of kernel                                                                                      |       | 1,024                 |       | — |   |
| Inventory of nuts                                                                                        |       | 946                   |       | — |   |
| Inventory of farming supplies                                                                            |       | 234                   |       | 272 |   |
| Other current assets                                                                                     |       | 172                   |       | 98 |   |
| Total current assets                                                                                     |       | 4,934                 |       | 6,409 |   |
| Land,  orchards and equipment, net                                                                       |       | 45,540                |       | 47,232 |   |
| Goodwill                                                                                                 |       | 306                   |       | 306 |   |
| Intangible  assets, net                                                                                  |       | 8                     |       | 16 |   |
| Total assets                                                                                             |       | $                     | 50,788     |   | $ | 53,963 |   |
|                                                                                                     |       |                  |       |   |   |
| **Liabilities  and partners’ capital**                                                              | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current  liabilities                                                                                     |       |                  |       |   |   |
| Current portion of long-term debt                                                                        |       | $                     | 400        |   | $ | 400 |   |
| Short-term borrowings                                                                                    |       | 3,000                 |       | — |   |
| Accounts payable                                                                                         |       | 631                   |       | 406 |   |
| Cash distributions payable                                                                               |       | 225                   |       | 375 |   |
| Accrued payroll and benefits                                                                             |       | 804                   |       | 858 |   |
| Other current liabilities                                                                                |       | 73                    |       | 488 |   |
| Total current liabilities                                                                                |       | 5,133                 |       | 2,527 |   |
| Non-current  benefits                                                                                    |       | 374                   |       | 405 |   |
| Long-term  debt                                                                                          |       | 800                   |       | 1,200 |   |
| Deferred  income tax liability                                                                           |       | 1,169                 |       | 1,208 |   |
| Total liabilities                                                                                        |       | 7,476                 |       | 5,340 |   |
| Commitments  and contingencies                                                                           |       |                  |       |   |   |
| Partners’  capital                                                                                  |       |                  |       |   |   |
| General partner                                                                                          |       | 81                    |       | 81 |   |
| Class A limited partners, no par or  assigned value, 7,500 units authorized, issued and outstanding |       | 43,297                |       | 48,612 |   |
| Accumulated other comprehensive loss                                                                     |       | (66                   | )          | (70 | ) |
| Total partners’ capital                                                                             |       | 43,312                |       | 48,623 |   |
| Total liabilities and partners’ capital                                                             |       | $                     | 50,788     |   | $ | 53,963 |   |

 

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

 

27

----

 

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

**Consolidated Income Statements**

(in thousands, except per unit data)

 
| ** **                                                                     | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Macadamia  nut sales                                                           |       | $        | 7,551      |     | $          | 13,256   |       | $ | 12,684 |   |
| Contract  farming revenue                                                      |       | 3,779    |       | 3,816    |       | 4,694    |       |
| Total revenues                                                                 |       | 11,330   |       | 17,072   |       | 17,378   |       |
| Cost  of goods and services sold                                               |       |     |       |     |       |     |       |
| Costs of macadamia nut sales                                                   |       | 9,231    |       | 10,871   |       | 10,202   |       |
| Costs of contract farming services                                             |       | 3,429    |       | 3,474    |       | 4,274    |       |
| Total cost of goods and services sold                                          |       | 12,660   |       | 14,345   |       | 14,476   |       |
| Gross income (loss)                                                            |       | (1,330   | )          | 2,727    |       | 2,902    |       |
| General  and administrative expenses                                           |       |     |       |     |       |     |       |
| Legal fees - related party                                                     |       | —   |       | 196      |       | 32       |       |
| Other                                                                          |       | 2,561    |       | 1,646    |       | 1,563    |       |
| Total general and administrative expenses                                      |       | 2,561    |       | 1,842    |       | 1,595    |       |
| Extinguishment  of management agreement                                        |       | —   |       | —   |       | (326     | )          |
| Operating income (loss)                                                        |       | (3,891   | )          | 885      |       | 981      |       |
| Interest  expense                                                              |       | (179     | )          | (204     | )          | (237     | )          |
| Interest  income                                                               |       | 49       |       | 17       |       | 5        |       |
| Other  income                                                                  |       | 13       |       | 206      |       | 151      |       |
| Income (loss) before tax                                                       |       | (4,008   | )          | 904      |       | 900      |       |
| Income  tax credit (expense)                                                   |       | 43       |       | (100     | )          | (129     | )          |
| Net income (loss)                                                              |       | $        | (3,965     | )        | $          | 804      |       | $ | 771 |   |
|                                                                           |       |     |       |     |       |     |       |
| Net  cash flow (as defined in the Partnership Agreement)                       |       | $        | (2,437     | )        | $          | 2,323    |       | $ | 2,501 |   |
|                                                                           |       |     |       |     |       |     |       |
| Net  income (loss) per Class A Unit                                       |       | $        | (0.53      | )        | $          | 0.11     |       | $ | 0.10 |   |
|                                                                           |       |     |       |     |       |     |       |
| Net cash flow per Class A Unit (as defined  in the Partnership Agreement) |       | $        | (0.32      | )        | $          | 0.31     |       | $ | 0.33 |   |
|                                                                           |       |     |       |     |       |     |       |
| Cash  distributions per Class A Unit                                      |       | $        | 0.18       |     | $          | 0.20     |       | $ | 0.20 |   |
|                                                                           |       |     |       |     |       |     |       |
| Class A  Units outstanding                                                |       | 7,500    |       | 7,500    |       | 7,500    |       |

 

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

 

28

----

 

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

**ConsolidatedStatements of Partners’ Capital**

(in thousands)

 
| ** **                                      | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                            |       |     |       |     |       |     |       |
| Partners’  capital at beginning of period: |       |     |       |     |       |     |       |
| General partner                                 |       | $        | 81         |     | $          | 81       |       | $ | 505 |   |
| Class A limited partners                   |       | 48,612   |       | 49,308   |       | 50,037   |       |
| Accumulated other comprehensive loss            |       |     |       |     |       |     |       |
| Change in pension and severance obligations     |       | (70      | )          | —   |       | —   |       |
|                                            |       | 48,623   |       | 49,389   |       | 50,542   |       |
|                                            |       |     |       |     |       |     |       |
| Acquisition  of ML Resources, Inc.         |       | —   |       | —   |       | (424     | )          |
|                                            |       | —   |       | —   |       | (424     | )          |
|                                            |       |     |       |     |       |     |       |
| Allocation  of net income (loss):               |       |     |       |     |       |     |       |
| General partner                                 |       | —   |       | —   |       | —   |       |
| Class A limited partners                   |       | (3,965   | )          | 804      |       | 771      |       |
|                                            |       | (3,965   | )          | 804      |       | 771      |       |
|                                            |       |     |       |     |       |     |       |
| Cash  distributions paid and / or declared:     |       |     |       |     |       |     |       |
| General partner                                 |       | —   |       | —   |       | —   |       |
| Class A limited partners                   |       | 1,350    |       | 1,500    |       | 1,500    |       |
|                                            |       | 1,350    |       | 1,500    |       | 1,500    |       |
|                                            |       |     |       |     |       |     |       |
| Accumulated  other comprehensive loss           |       |     |       |     |       |     |       |
| Pension and severance obligations               |       | 4        |       | (70      | )          | —   |       |
|                                            |       | 4        |       | (70      | )          | —   |       |
|                                            |       |     |       |     |       |     |       |
| Partners’  capital at end of period:       |       |     |       |     |       |     |       |
| General partner                                 |       | 81       |       | 81       |       | 81       |       |
| Class A limited partners                   |       | 43,297   |       | 48,612   |       | 49,308   |       |
| Accumulated other comprehensive loss            |       | (66      | )          | (70      | )          | —   |       |
|                                            |       | $        | 43,312     |     | $          | 48,623   |       | $ | 49,389 |   |

 

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

 

29

----

 

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

**ConsolidatedStatements of Cash Flows**

(in thousands)

 
| ** **                                                                                          | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash  flows from operating activities:                                                              |       |     |       |     |       |     |       |
| Cash received for goods and services                                                                |       | $        | 11,756     |     | $          | 23,001   |       | $ | 16,795 |   |
| Cash paid to suppliers and employees                                                                |       | (15,580  | )          | (14,463  | )          | (14,568  | )          |
| Income tax paid                                                                                     |       | 4        |       | (118     | )          | (82      | )          |
| Interest received                                                                                   |       | 49       |       | 17       |       | 5        |       |
| Interest paid                                                                                       |       | (171     | )          | (196     | )          | (237     | )          |
| Net  cash provided by (used in) operating activities                                                |       | (3,942   | )          | 8,241    |       | 1,913    |       |
|                                                                                                |       |     |       |     |       |     |       |
| Cash  flows from investing activities:                                                              |       |     |       |     |       |     |       |
| Proceeds from sale of equipment                                                                     |       | —   |       | 75       |       | 14       |       |
| Capital expenditures                                                                                |       | (226     | )          | (509     | )          | (83      | )          |
| Net  cash used in investing activities                                                              |       | (226     | )          | (434     | )          | (69      | )          |
|                                                                                                |       |     |       |     |       |     |       |
| Cash  flows from financing activities:                                                              |       |     |       |     |       |     |       |
| Proceeds from drawings on line of credit                                                            |       | 4,000    |       | 5,800    |       | 8,800    |       |
| Repayment of long term debt                                                                         |       | (400     | )          | (400     | )          | (400     | )          |
| Repayment of line of credit                                                                         |       | (1,000   | )          | (8,700   | )          | (8,100   | )          |
| Acquisition of general partner’s units                                                         |       | —   |       | —   |       | (424     | )          |
| Capital lease payments                                                                              |       | —   |       | (34      | )          | (35      | )          |
| Cash distributions paid                                                                             |       | (1,500   | )          | (1,500   | )          | (1,503   | )          |
| Net  cash provided by (used in) financing activities                                                |       | 1,100    |       | (4,834   | )          | (1,662   | )          |
|                                                                                                |       |     |       |     |       |     |       |
| Net  increase (decrease) in cash                                                                    |       | (3,068   | )          | 2,973    |       | 182      |       |
| Cash  and cash equivalents at beginning of period                                                   |       | 3,351    |       | 378      |       | 196      |       |
| Cash  and cash equivalents at end of period                                                         |       | $        | 283        |     | $          | 3,351    |       | $ | 378 |   |
|                                                                                                |       |     |       |     |       |     |       |
| Reconciliation  of net income (loss) to net cash                                                    |       |     |       |     |       |     |       |
| Provided by (used in) operating activities:                                                         |       |     |       |     |       |     |       |
| Net income (loss)                                                                                   |       | $        | (3,965     | )        | $          | 804      |       | $ | 771 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |       |     |       |     |       |     |       |
| Depreciation and amortization                                                                       |       | 1,926    |       | 1,953    |       | 2,165    |       |
| Inventory write-off                                                                                 |       | 945      |       | —   |       | —   |       |
| Gain on sale of capital assets                                                                      |       | —   |       | (21      | )          | —   |       |
| (Increase) decrease in accounts receivable                                                          |       | 413      |       | 5,745    |       | (1,341   | )          |
| Deferred income tax expense (credit)                                                                |       | (39      | )          | (19      | )          | 20       |       |
| Increase in inventories                                                                             |       | (2,877   | )          | (2       | )          | (125     | )          |
| (Increase) decrease in other current assets                                                         |       | (74      | )          | 80       |       | (25      | )          |
| Increase in other assets                                                                            |       | —   |       | —   |       | (32      | )          |
| Increase (decrease) in accounts payable                                                             |       | 225      |       | (364     | )          | 32       |       |
| Increase (decrease) in accrued payroll                                                              |       | (50      | )          | (106     | )          | 62       |       |
| Increase (decrease) in current liabilities                                                          |       | (415     | )          | 72       |       | 386      |       |
| Increase (decrease) in non-current benefits  payable                                                |       | (31      | )          | 99       |       | —   |       |
| Total adjustments                                                                                   |       | 23       |       | 7,437    |       | 1,142    |       |
| Net  cash provided by (used in) operating activities                                                |       | $        | (3,942     | )        | $          | 8,241    |       | $ | 1,913 |   |
|                                                                                                |       |     |       |     |       |     |       |
| Supplemental schedule of noncash financing  activities Distributions declared but not paid          |       | $        | 225        |     | $          | 375      |       | $ | 375 |   |

 

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

 

 

30

----

** **

**MLMacadamia Orchards, L.P.**

 

# ***Notes to Consolidated FinancialStatements***

# *** ***

**(1) OPERATIONSAND OWNERSHIP**

 

MLMacadamia Orchards,L.P. (the “Partnership”) owns and farms 4,190 tree acres of macadamia orchardson the island of Hawaii. Once the nuts are harvested, the Partnership sellsthem to other entities in Hawaii, which process the nuts and market thefinished products.  The Partnership farmsapproximately 2,008 acres of macadamia orchards in Hawaii for other orchard ownersin exchange for a fee.

 

The Partnership is owned 99% by limitedpartners and 1% by the managing general partner, ML Resources, Inc. (“MLR”).  On January 6, 2005, the stock of MLResources, Inc. was purchased by the Partnership for $750,000 incash.  The transaction was accounted foras an asset purchase as opposed to a business combination since MLR had nosubstantive operations and its principal purpose was to own and hold 75,757general partner units of the Partnership. The acquisition of the general partner units held by MLR results in the Class Alimited partners effectively owning 100% of the Partnership.

 

As a result of thetransaction, MLR’s operations have been included in the Partnership’sconsolidated financial statements beginning with the first quarter of 2005.

 

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

 

**Liquidity. **The Partnership incurred a net loss of$4.0 million and had negative cash flows from operations of $3.9 million during2007 and had a working capital deficit of approximately $199,000 at December 31,2007.  The adverse financial results for2007 were due to a significant decrease in market prices for macadamia nuts inHawaii, nonperformance by a customer on a nut purchase contract, andacquisition costs related to the attempted acquisition of Mac Farms of HawaiiLLC.  Management believes that the eventsthat transpired during 2007 were anomalies and has taken steps to implementvarious initiatives, including plans to vertically integrate the business,suspension of cash distributions to the unit holder, pursuit of legal actionrelated to non-performing contracts, and cost-cutting measures to improve thePartnership’s financial condition and operations going forward.  The Partnership has access to working capitalthrough its line of credit and other borrowing opportunities, ifnecessary.  However, management feelsthat the Partnership will be able to generate sufficient cash flows fromoperations to meet current obligations and debt service requirements.  The Partnership is working with its lender ona new credit facility and believes that with the collateral available a newcredit facility can be arranged.

 

**(2) SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

**(a) Cash and Cash Equivalents. **Cash and cash equivalents includeunrestricted demand deposits with banks and all highly liquid deposits with anoriginal maturity of less than three months. The cash equivalents are not protected by federal deposit insurance.

 

**(b) Allowance for Doubtful Accounts. **The Partnership reviews the accountsreceivable to determine the adequacy of this allowance by regularly reviewingspecific account payment history and circumstances, the accounts receivableaging, and historical write-off rates. If customer payment timeframes were to deteriorate, allowances fordoubtful accounts would be required. There were no allowance for doubtful accounts at December 31, 2007and 2006.

 

**(c) Financial Instruments. **The fair value of the line of credit anda portion of the long-term financial instruments is approximately the carryingvalue as they have variable interest rates. The remaining portion of the long-term financial instrument has a fixedrate and the fair value compared to carrying value is disclosed.

 

31

----

 

 

**(d) Consolidation.**  The consolidated financial statements includethe accounts of the Partnership and ML Resources, Inc.  All significant intercompany balances and transactions,including management fees and distributions, have been eliminated.

 

**(e) Farming Costs.** The Partnership considers each orchardto be a separate cost center, which includes the depreciation/amortization ofcapitalized costs associated with each orchard’s acquisition and /ordevelopment and maintenance and harvesting costs directly attributable to eachorchard.  In accordance with industrypractice in Hawaii, orchard maintenance and harvesting costs for commerciallyproducing macadamia orchards are charged against earnings in the year that thecosts are incurred.

 

However, the timing andmanner in which farming costs are recognized in the Partnership’s consolidatedfinancial statements over the course of the year is based on a standard costsystem.  For interim financial reportingpurposes, farming costs are recognized as expense based on a standard cost toproduce a pound of macadamia nuts. Management calculates a standard cost per pound for each orchard basedon the estimated annual costs to farm each orchard and anticipated annualproduction from each orchard.  The amountof farming costs recognized as expense throughout the year is calculated bymultiplying each orchard’s standard cost by actual production from thatorchard.  The difference between actualfarming costs incurred and the amount of farming costs recognized as expense isrecorded as either an increase or decrease in deferred farming costs, which isreported as an asset in the consolidated balance sheets.  Deferred farming costs accumulate throughoutthe year, typically peaking mid-way through the third quarter, since nutproduction is lowest during the first and second quarters of the year.  Deferred farming costs are expensed over theremainder of the year since nut production is highest at the end of the thirdquarter through year end.

 

Management evaluates thevalidity of each orchard’s standard cost on a monthly basis based on actualproduction and farming costs incurred, as well as any known events that mightsignificantly affect forecasted annual production and farming costs for theremainder of the year.

 

**(f) Inventory**

 

**      Supply Inventory.** Supplies inventory is relieved on an average cost basis to cost offarming expense as used.

 

**      Nut and Kernel Inventory. **Nut and kernel inventory is relieved on an averagecost basis to cost of goods sold as the product is sold.  Nut and kernel inventory is recorded at thelower of cost or market, valued at December 31, 2007 at $946,000 and$1,024,000, respectively.  There was nonut or kernel inventory in 2006 or 2005. Inventory was written down to market in 2007 in the amount of$945,000.  This amount is reflected incosts of goods sold.  If the market forthe Partnership’s inventory was to decline the Partnership would have to sell ata price lower than the current market price and if no buyers were available theinventory could become unsalable and have to be disposed.

 

**(g) Land, Orchards and Equipment. **Land, orchards and equipment are reportedat cost, net of accumulated depreciation and amortization.  Net farming costs for any “developing”orchards are capitalized on the consolidated balance sheets until revenues fromthat orchard exceed expenses for that orchard (or nine years after planting, ifearlier).  Developing orchards historicallydo not reach commercial viability until about 12 years of age.

 

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

 

32

----

 

 

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

 

The Partnershipreviews long-lived assets held and used, or held for sale for impairmentwhenever events or circumstances indicate that the carrying amount of an assetmay not be recoverable.  If an evaluationis required, the estimated undiscounted future cash flows associated with theasset are compared to the asset’s carrying amount to determine if an impairmentcharge is required.  If an impairmentcharge is required the Partnership would write the assets down to fairvalue.  All long-lived assets for whichmanagement has committed to a plan of disposal are reported at the lower ofcarrying amount or fair value as determined by quoted market price or a presentvalue technique.  Changes in projectedcash flows generated by an asset based on new events or circumstances mayindicate a change in fair value and require a new evaluation of recoverabilityof the asset.

 

**(h) **Goodwill and Other Intangible Assets

** **

Under SFAS No. 142,Goodwill and Other Intangible Assets (“SFAS No. 142”), goodwill and otherindefinite-lived intangible assets are not amortized but are reviewed forimpairment at least annually and if a triggering event were to occur in aninterim period.  The Partnership’s annualimpairment testing is performed in the 4th quarter each year.  The goodwill is allocated to the farmingreporting unit.  Goodwill impairment isdetermined using a two-step process for each reporting unit.  The first step of the impairment test is usedto identify potential impairment by comparing the fair value of a reportingunit to the book value, including goodwill. This evaluation utilizes a discounted cash flow analysis and multipleanalyses of the historical and forecasted operating results of the Partnership’sreporting unit.  If the fair value of areporting unit exceeds its book value, goodwill of the reporting unit is notconsidered impaired, and the second step of the impairment test is notrequired.  If the book value of areporting unit exceeds its fair value, the second step of the impairment testis performed to measure the amount of impairment loss, if any.  The second step of the impairment testcompares the implied fair value of the reporting unit’s goodwill with the bookvalue of the goodwill.  If the book valueof the reporting unit’s goodwill exceeds the implied fair value of thatgoodwill, an impairment loss is recognized in an amount equal to thatexcess.  The implied fair value ofgoodwill is determined in the same manner as the amount of goodwill recognizedin a business combination.

 

**(i)  General ExciseTaxes. **The Partnership records Hawaii general excise taxeswhen goods and services are sold on a gross basis as components of revenues andexpenses.  For the years ended December 31,2007, 2006 and 2005, Hawaii general excise taxes charged or passed on tocustomers and reflected in revenues and expenses amounted to $72,000, $88,000and $21,000, respectively.

 

**(j) IncomeTaxes.**  The accompanying income statements do notinclude a provision for corporate income taxes, as the income of thePartnership is not taxed directly; rather, the Partnership’s tax attributes areincluded in the individual tax returns of its partners.  Neither the Partnership’s financial reportingincome nor the cash distributions to unit holders can be used as a substitutefor the detailed tax calculations which the Partnership must perform annuallyfor its partners.

 

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

 

33

----

 

 

Deferred tax liabilitiesare recognized for the future tax consequences attributable to differencesbetween the financial reporting and tax reporting basis of assets andliabilities.

 

**(k) Revenue. **Macadamianut sales are recognized when nuts are delivered to the buyer.  Contract           farming revenue and administrativeservices revenues are recognized in the period that such services are completed,that is upon the incurrence of direct labor or equipment hours incurred onbehalf of an orchard owner.  ThePartnership is paid for its services based upon a “time and materials” basisplus a percentage fee or fixed fee based upon each farming contract’s terms.Contract farming includes the regular maintenance of the owners’ orchards aswell as harvesting of their nuts.  ThePartnership provides these services on a continuing basis throughout the year.

 

**(l)  Pension Benefit and IntermittentSeverance Costs.**  The actuarial method used for financialaccounting purposes is the projected unit credit method.

 

**(m)  Estimates. **The preparation of consolidated financial statementsin conformity with generally accepted accounting principles requires managementto make estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could materially differ from those estimates.

 

**(n) Net Consolidated Income (Loss) Per Class AUnit.**  In 2007, 2006 and 2005 consolidated netincome (loss) per Class A Unit is calculated by dividing 100% ofPartnership’s consolidated net income (loss) by the average number of Class AUnits outstanding for the period.

 

**(o)  Accumulated Other ComprehensiveLoss. **Accumulated other comprehensive loss represents thechange in Partners’ capital from transactions and other events andcircumstances arising from non-unitholder sources.  Accumulated other comprehensive loss consistsof deferred pension and intermittent severance gains or losses.  At December 31, 2007 and 2006, ourConsolidated Balance Sheets reflected Accumulated Other Comprehensive Loss inthe amount of $66,000 and $70,000, respectively, in deferred pension andintermittent severance loss.

 

**(p)  Reclassifications.** Certain balances have been reclassified to conform to the current yearpresentation.  These reclassificationshad no impact on net income previously reported.

 

**(q)  Recent Accounting Pronouncements. **In September 2006, the Financial AccountingStandards Board (“FASB”) issued Statements of Financial Accounting Standards (“SFAS”)No. 157, Fair Value Measurements. This statement provides a single definition of fair value, a framework formeasuring fair value, and expanded disclosures concerning fair value.  Previously, different definitions of fairvalue were contained in various accounting pronouncements creatinginconsistencies in measurement and disclosures. SFAS No. 157 applies under those previously issued pronouncementsthat prescribe fair value as the relevant measure of value.  This pronouncement is effective for fiscalyears beginning after November 15, 2008 and is required to be adopted bythe Partnership in its first quarter of fiscal 2009.  The Partnership has not determined theimpact, if any, the adoption of SFAS No. 157, will have on its financialposition and results of operations, but does not believe that the impact willbe material.

 

**(3) SEGMENT INFORMATION**

 

The Partnership has two reportable segments, the owned-orchard segmentand the farming segment, which are organized on the basis of revenues andassets.  The owned-orchard segmentderives its revenues from the sale of macadamia nuts grown in orchards owned orleased by the Partnership.  The farmingsegment derives its revenues from the farming of macadamia orchards owned byother growers.  It also farms thoseorchards owned by the Partnership.

 

34

----

 

 

Managementevaluates the performance of each segment on the basis of operatingincome.  The Partnership accounts forintersegment sales and transfers at cost and such transactions are eliminatedin consolidation.

 

The Partnership’sreportable segments are distinct business enterprises that offer differentproducts or services.

 

**(1) Revenues from the owned-orchard segment** are subject to long-term nut purchase contracts andtend to vary from year to year due to changes in the calculated nut price perpound and pounds produced.

 

**(a) Nut Purchase Contracts.** The Partnership has four nut purchase contracts with: Mauna Loa,MacFarms, Hamakua and Island Princess, as detailed in the following paragraphs.

 

# ***On June 1, 2006, the Partnership executed a contractwith Mauna Loa for the annual delivery of approximately 6.3 million fieldpounds, effective January 1, 2006 and expiring December 31,2011.  The contract provides for a nutprice of $0.74 per wet-in-shell (“WIS”) pound in 2006 and $0.75 per WIS poundin 2007 at 20% moisture and 30% saleable kernel (“SK”)/dry-in-shell (“DIS”).  The purchase price will increase annually by$0.01 per WIS pound, except 2008, until it reaches $0.78 per WIS pound in 2011.***

# *** ***

# ***On December 16, 2004, a nut purchase contract withHamakua for the annual delivery of 6.0 million field pounds, effective January 1,2007, and  with 2.0 million field poundsexpiring December 31, 2008, December 31, 2010, and December 31,2012, respectively. The contract provides for a minimum price of $0.75 per WISpound and a maximum price of $0.95 per WIS pound at 20% moisture and 30%SK/DIS. The pricing formula included a fixed component of $0.85 per WIS poundand a second component based on Hamakua’s average selling price for bulkkernel.  In February 2007, thecontract was amended to allow the Partnership, at its option, to have Hamakuaprocess nuts-in-shell into kernel for a fee in lieu of selling the nuts toHamakua.  The Partnership exercised thisoption solely for the calendar year 2007. The contract continues to require that Hamakua purchase approximately6.0 million field pounds of nuts in 2008, approximately 4.0 million fieldpounds of nuts in the years 2009-2010, and 2.0 million field pounds of nuts inthe years 2011-2012.***

# *** ***

On January 5, 2006,the Partnership executed a contract with Island Princess for the annualdelivery of approximately 2.2 million field pounds, effective January 1,2007 and expiring on December 31, 2011. The nut price is determined every six months by mutual agreement basedon prevailing market price for kernel from Hawaii and Australia.  The effective price for January — June 2007was $0.608 and July — December 2007 was $0.494 per WIS pound at 20%moisture and 30% SK/DIS recovery.  Theeffective price for January — June 2008 is $0.494 and July — December 2008is $0.55, at 20% moisture and 30% SK/DIS recovery.

 

On January 6, 2006,the Partnership executed a contract with MacFarms for the annual delivery ofbetween 5.0 and 6.0 million field pounds, effective January 1, 2007.  The nut price will be determined every sixmonths by mutual agreement based on prevailing market price for kernel fromHawaii and Australia.  The effectiveprice for January — June 2007 was $0.608 and July — December 2007was $0.494, at 20% moisture and 30% SK/DIS recovery.  The effective price for January — June 2008is $0.494 and July — December 2008 is $0.55, at 20% moisture and 30%SK/DIS recovery.  In connection with theorchard purchased from J.W.A. Buyers in April 2006, the Partnership agreedto sell approximately 100,000 field pounds harvested from the orchard toMacFarms for $0.98 per WIS pound at 20% moisture and 30% SK/DIS recovery.  This agreement expired on January 6,2007.

 

35

----

** **

**(b) Husking Activities  **Husking activities for the Keaau andMauna Kea orchards are performed at Mauna Loa’s Keaau facility.  Operation of the Keaau husking facility whichhad been performed by the Partnership was transferred to Mauna Loa in July of2006.  Payments or reimbursements made toMauna Loa were $453,000 in 2007, $559,000 in 2006 and $603,000 in 2005 forhusking as the contracts agree that the Partnership will deliver husked nuts.

 

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

 

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

 

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

 

In return, the Partnership is obligated to pay KACI100% of any year’s cash flow from this orchard in excess of the target cashflow as additional percentage rent until the aggregate amount of additionalpercentage rent equals 150% of the total amount of stabilization paymentspreviously received.  Thereafter, thePartnership is obligated to pay KACI 50% of this orchard’s cash flow in excessof the target cash flow as additional incentive rent.  No additional rent was due for 2007.  Additional rent of $62,000 was due for 2006and no additional rent was due in 2005.

 

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

 

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

 

The Partnership accounted for the $13.8 millionreceived in cash flow warranty payments as reductions in the cost basis of theorchards.  As a result, these paymentswill be reflected in the Partnership’s net consolidated income (loss) ratablythrough 2030 as reductions to depreciation for these orchards.

 

36

----

** **

**(2)  The farming segment’srevenues** arebased on long-term farming contracts which generate a farming profit based on apercentage of farming cost or based on a fixed fee per acre and tend to be lessvariable than revenues from the owned-orchard segment.

 

The following is asummary of each reportable segment’s operating income and the segment’s assetsas of and for the years ended December 31, 2007, 2006 and 2005.

 

Segment Reporting for the Year ended December 31,2007 (in thousands)

 

| ** **                              | ** ** | **Owned**    | ** ** | **Contract** | ** ** | **Intersegment** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|--------------|------------|--------------|------------|------------------|------------|------------|------------|
| ** **                              | ** ** | **Orchards** | ** ** | **Farming**  | ** ** | **Elimination**  | ** ** | **Total**  | ** ** |
| Revenues                                |       | $            | 7,551      |         | $          | 10,492           |       | $          | (6,713     | ) | $ | 11,330 |   |
| Composition of Intersegment revenues    |       | —       |       | 6,713        |       | —           |       | 6,713      |       |
| Operating income (loss)                 |       | (4,407       | )          | 516          |       | —           |       | (3,891     | )          |
| Depreciation expense                    |       | 1,801        |       | 119          |       | —           |       | 1,920      |       |
| Segment assets                          |       | 44,306       |       | 6,482        |       | —           |       | 50,788     |       |
| Expenditures for property and equipment |       | 152          |       | 74           |       | —           |       | 226        |       |
|                                         |            |              |            |              |            |                  |            |            |            |  |  |  |  |

 

Segment Reporting for the Year ended December 31,2006 (in thousands)

 

 

| ** **                              | ** ** | **Owned**    | ** ** | **Contract** | ** ** | **Intersegment** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|--------------|------------|--------------|------------|------------------|------------|------------|------------|
| ** **                              | ** ** | **Orchards** | ** ** | **Farming**  | ** ** | **Elimination**  | ** ** | **Total**  | ** ** |
| Revenues                                |       | $            | 13,256     |         | $          | 14,533           |       | $          | (10,717    | ) | $ | 17,072 |   |
| Composition of Intersegment revenues    |       | —       |       | 10,717       |       | —           |       | 10,717     |       |
| Operating income                        |       | 222          |       | 663          |       | —           |       | 885        |       |
| Depreciation expense                    |       | 1,737        |       | 216          |       | —           |       | 1,953      |       |
| Segment assets                          |       | 48,731       |       | 5,232        |       | —           |       | 53,963     |       |
| Expenditures for property and equipment |       | 479          |       | 30           |       | —           |       | 509        |       |
|                                         |            |              |            |              |            |                  |            |            |            |  |  |  |  |

 

37

----

 

Segment Reporting for the Year ended December 31,2005 (in thousands)

 

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

 

**(4) RELATEDPARTY TRANSACTIONS**

 

**(a) ManagementCosts and Fee.**  On January 6, 2005 the Partnershippurchased the stock of its managing partner, MLR. As a result of thetransaction, MLR’s operations have been included in the Partnership’sconsolidated financial statements beginning with the first quarter of2005.  The Partnership Agreement providesthe managing general partner reimbursement of administrative costs (whichconsist primarily of compensation costs, board of directors fees, insurancecosts and office expenses) incurred under the agreement as well as a managementfee equal to two percent of the Partnership’s operating cash flow (asdefined).  The management fee waseliminated in consolidation in 2007, 2006 and 2005.

 

In addition to a management fee, the managing generalpartner is entitled, under the existing Partnership Agreement, to receive anannual incentive fee equal to 0.5% of the aggregate fair market value (asdefined) of the Class A Units for the preceding calendar year providedthat net cash flow (as defined) for the preceding calendar year exceedsspecified levels.  No incentive fee wasearned in 2007, 2006 and 2005.

 

**(b) Legal Services. **The Partnership paid$442,000, $196,000, and $134,000 in legal fees in 2007, 2006 and 2005,respectively.  A former Director of thePartnership is a former partner and currently of counsel to one of the lawfirms used by the Partnership.  The Partnershippaid said law firm $196,000 in 2006 and $32,000 of the $134,000 in 2005.

 

**(c) Management Services Contract. **The Partnership provides administrative services to D.Buyers Enterprises, LLC (“DBE”) for which it was compensated $100,000, $103,000and $102,000 in 2007, 2006 and 2005, respectively.  DBE owned the stock of the Partnership’sgeneral partner until January 2005.

 

**(d) Office Lease. **Since September 2001, the Partnership has leasedapproximately 4000 square feet of office space in Hilo for its accounting stafffrom DBE, which was the owner of the General Partner until January 2005.   The lease amount was $90,000 in 2007, 2006and 2005.

 

38

----

 

**(5) CASH FLOW PERFORMANCE**

 

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

 

| ** **                                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Gross revenues (including interest and other income)    |       | $        | 11,392     |     | $          | 17,295   |       | $ | 17,534 |   |
| Less:                                                   |       |     |       |     |       |     |       |
| Farming costs                                           |       | 10,740   |       | 12,391   |       | 12,311   |       |
| Administrative costs                                    |       | 2,553    |       | 1,842    |       | 1,595    |       |
| Extinguishment of management agreement                  |       | —   |       | —   |       | 326      |       |
| Income tax (credit) expense                             |       | (43      | )          | 100      |       | 129      |       |
| Payments of principal and interest                      |       | 579      |       | 639      |       | 672      |       |
| Net cash flow (as defined in the Partnership Agreement) |       | $        | (2,437     | )        | $          | 2,323    |       | $ | 2,501 |   |

 

All of net cashflow in 2007, 2006 and 2005 was allocated to Class A Units. This cash flowmeasure is used to determine the management fee paid annually to the generalpartner and forms the basis of distributable cash per unit.  No management fee was recorded in 2007, 2006and 2005 as the Partnership purchased the stock of the managing partner MLR in January 2005and the management fee was eliminated in consolidation.

 

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

 

Land, orchards andequipment, stated at cost, consisted of the following at December 31, 2007and 2006 (000’s):

 

| ** **                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Land                                            |       | $        | 8,255      |     | $          | 8,255 |   |
| Improvements                                    |       | 1,953    |       | 1,850    |       |
| Machinery and equipment                         |       | 4,361    |       | 4,266    |       |
| Irrigation well and equipment                   |       | 1,184    |       | 1,184    |       |
| Producing orchards                              |       | 67,631   |       | 67,631   |       |
| Capital leases                                  |       | 161      |       | 161      |       |
| Land, orchards and equipment (gross)            |       | 83,545   |       | 83,347   |       |
| Less accumulated  depreciation and amortization |       | 38,005   |       | 36,115   |       |
| Land, orchards and equipment (net)              |       | $        | 45,540     |     | $          | 47,232 |   |

 

Deprecation expense was recorded for $1.9 million, $2.0 million and$2.2 million for 2007, 2006 and 2005, respectively. The Partnership’s interestin trees situated on certain leased macadamia orchard properties are subject torepurchase at the option of the lessors. Such repurchase options grant the lessors the right to purchase all or aportion of these trees after June 30, 2019, at fair market value, asdefined in the respective farming lease agreements.  If the repurchase options are not exercisedprior to expiration of the lease agreements and the lessors do not offer toextend the lease agreements at the then current market lease rates, the lessorsare required to repurchase these trees at fair market value at leaseexpiration.  The lessors will be releasedfrom their repurchase obligation in the event that the Partnership declines toaccept an extension offer from the lessors at fair market lease rates.

 

39

----

 

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

 

AtDecember 31, 2007 and 2006, the Partnership’s long-term debt comprises(000’s):

 
| ** **      | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Term debt       |       | $        | 1,200      |     | $          | 1,600 |   |
|            |       |     |       |     |       |
| Current portion |       | 400      |       | 400      |       |
|            |       |     |       |     |       |
| Long-term debt  |       | $        | 800        |     | $          | 1,200 |   |

 

On May 2,2000 the Partnership entered into a credit agreement with Pacific Coast FarmCredit Services, ACA (currently American AgCredit Capital Markets) comprised ofa $5 million revolving line of credit and a $4 million promissory note.

 

The line of creditexpires on May 1, 2008.  Drawings onthe line of credit bear interest at the prime lending rate.  From and after the first anniversary date,the Partnership is required to pay a facility fee of 0.30% to 0.375% per annum,depending on certain financial ratios on the daily unused portion ofcredit.  The Partnership, at its option,may make prepayments without penalty.

 

There were $3.0million in drawings on the line of credit as of December 31, 2007, withinterest at 7.25% and no drawings outstanding at December 31, 2006.

 

At December 31,2007, the outstanding balance on the promissory note amounted to $1.2million.  The note is scheduled to maturein 2010 and bears interest at rates ranging from 6.37% to 7.50%.  Principal payments are due annually on May 2in the amount of $400,000.

 

The estimated fairvalues of the Partnership’s financial instrument has been determined byestimated market price of 7.00% in 2006 and 7.00% in 2007 using a life equal tothat remaining on the current financial instrument.  The Partnership has not considered the lenderfees in determining the estimated fair value.

 

The estimated fairvalues of the Partnership’s financial instrument are as follows (000’s):

 
| ** **     | ** ** | **2007**     | ** ** | **2006**  | ** ** |
|----------------|------------|--------------|------------|-----------|------------|
| ** **     | ** ** | **Carrying** | ** ** | **Fair**  | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **     | ** ** | **Amount**   | ** ** | **Value** | ** ** | **Amount** | ** ** | **Value** | ** ** |
| Long-term debt |       | $            | 1,200      |      | $          | 1,119 |   | $ | 1,600 |   | $ | 1,312 |   |
|                |            |              |            |           |            |  |  |  |  |  |  |  |  |

 

 

Of the total $1.2million in 2007 the long-term debt of $510,000 has a fixed interest rate forone-third of a year.  The $690,000 and$920,000 in 2007 and 2006, respectively, have interest rates that are fixedover the remaining life of the debt.

 

Both the revolvingcredit loan and the term debt are collateralized by all personal propertyassets of the Partnership.  The creditagreement contains certain restrictions associated with partner distributions,further indebtedness, sales of assets, and maintenance of certain financialminimums.  Significant restrictivefinancial covenants consist of the following:

 

1.               Minimum working capital of $2.5 million.

2.               Minimum current ratio of 1.5 to 1.

 

40

----

 

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

4.               Minimum tangible net worth of $49.9 million (reducedby the amount of allowed cash distributions over net consolidated income(loss)).

5.               Maximum ratio of funded debt to capitalization of 20%.

6.               Minimum debt coverage ratio of 2.5 to 1.

 

At December 31, 2007, the Partnership’s working capital wasnegative $199,000 and its current ratio was 0.96 to 1.  At December 31, 2006, the Partnership’sworking capital was $3.9 million and its current ratio 2.54 to 1.  The Partnership was incompliance with the terms and conditions of the Credit Agreement at December 31,2006 except for minimum tangible net worth. On July 5, 2007, the lender provided a waiver to the loan covenantfor the year ended December 31, 2006 and retroactively amended the minimumtangible net worth covenant.  Had thelender not waived this violation the Partnership would have been restricted inits ability to pay distributions to the limited partners and all obligationsand indebtedness, at the lender’s option, could have been accelerated andbecome due and payable.  The Partnershipwas in compliance with the terms and conditions of the Credit Agreement at December 31,2007 except for the restricted payment covenant, minimum tangible net worthcovenant, and the debt coverage ratio covenant. On March 14, 2008, the lender provided a waiver and amendment tothe loan covenants for the year ended December 2007.  Effective March 14, 2008 the amendedagreement reduces the maximum borrowing on the revolving line of credit from$5.0 million to $4.5 million, establishes a quarterly covenant based uponEBITDA, prohibits the declaration and paying of further restricted payments in2008, establishes a minimum tangible net worth of $39.0 million effective December 31,2008 and requires the Partnership to provide additional security in the form ofa mortgage or deed of trust on real property.

 

**Capitaland Operating Leases.**The Partnership had no capital leases as of December 31, 2007 and December 31,2006. The Partnership has operating leases for equipment and land.

 

**LandLeases.**Thepartnership leases the land underlying 1,948 acres of its orchards underlong-term operating leases which expire through dates ending 2045.  Operating leases provide for changes inminimum rent based on fair value at certain points in time.  Each of the land leases provides foradditional lease payments based on USDA-reported macadamia nut pricelevels.  Those contingent lease paymentstotaled $24,000 in 2007, $115,000 in 2006 and $19,000 in 2005.  Total lease rent for all land operatingleases was $161,000 in 2007, $256,000 in 2006 and $147,000 in 2005.

 

**EquipmentOperating Leases. **The Partnership leases equipment for thefarming operation to include vehicles, blower sweepers and harvester.  The operating lease terms range from three tofive years.  The operating lease cost was$217,000, $206,000 and $249,000 in 2007, 2006 and 2005, respectively.

 

Contractual obligationsas of December 31, 2007 for the Partnership are detailed in the followingtable (000’s):

 
| **Contractual Obligations** | ** ** | **Total** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Remaining** | ** ** |
|-----------------------------|------------|-----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|---------------|------------|
| Line-of-credit              |       | $         | 3,000      |     | $          | 3,000    |       | $        | —     |     | $          | —   |       | $             | —     |   | $ | — |   | $ | — |   |
| Long-term debt and interest |       | 1,310     |       | 464      |       | 437      |       | 409      |       | —   |       | —   |       | —        |       |
| Operating leases            |       | 3,125     |       | 277      |       | 191      |       | 153      |       | 126      |       | 126      |       | 2,252         |       |
| Total                       |       | $         | 7,435      |     | $          | 3,741    |       | $        | 628        |     | $          | 562      |       | $             | 126        |   | $ | 126 |   | $ | 2,252 |   |

 

41

----

 

**(8) GROSSINCOME TAXES**

 

The components of grossincome tax expense (credit) for the years ended December 31, 2007, 2006and 2005 were as follows (000’s):

 

| ** **        | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------|------------|----------|------------|----------|------------|----------|------------|
| Currently payable |       | $        | (5         | )        | $          | 119      |       | $ | 109 |   |
| Deferred          |       | (38      | )          | (19      | )          | 20       |       |
|              |       | $        | (43        | )        | $          | 100      |       | $ | 129 |   |

 

The provision (credit)for income taxes equates to the 3.5% federal tax rate applied to gross income(net revenues less cost of goods sold) for the years ended December 31,2007, 2006 and 2005.

 

The components of the netdeferred tax liability reported on the consolidated balance sheets as of December 31,2007 and 2006 are as follows (000’s):

 

 

| ** **                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:           |       |     |       |     |       |
| Intangible assets              |       | $        | 115        |     | $          | 115 |   |
| Inventory                      |       | 27       |       | 26       |       |
| Gross deferred tax assets      |       | 142      |       | 141      |       |
| Deferred tax liabilities:      |       |     |       |     |       |
| Land, orchards, and equipment  |       | (1,304   | )          | (1,345   | )          |
| Other                          |       | (7       | )          | (4       | )          |
| Gross deferred tax liabilities |       | (1,311   | )          | (1,349   | )          |
| Net deferred tax liabilities   |       | $        | (1,169     | )        | $          | (1,208 | ) |

 

**(9) PENSIONPLAN**

 

The Partnershipestablished a defined benefit pension plan in conjunction with the acquisitionof farming operations on May 1, 2000. The plan covers employees that are members of a union bargainingunit.  The projected benefit obligationincludes the obligation for the employees of their previous employer thatbecame Partnership employees.

 

The followingreconciles the changes in the pension benefit obligation and plan assets forthe years ended December 31, 2007, 2006, 2005 to the funded status of theplan and the amounts recognized in the consolidated balance sheets at December 31,2007, 2006, 2005 (000’s):

 
| ** **                                         | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Change in projected benefit obligation:            |       | ** ** |       |     |       |     |       |
| Projected  benefit obligation at beginning of year |       | $          | 490        |     | $          | 518      |       | $ | 411 |   |
| Service cost                                       |       | 60         |       | 59       |       | 57       |       |
| Interest cost                                      |       | 28         |       | 28       |       | 23       |       |
| Actuarial (gain)  loss                             |       | (33        | )          | (80      | )          | 35       |       |
| Benefits paid                                      |       | (16        | )          | (35      | )          | (8       | )          |
|                                               |       |       |       |     |       |     |       |
| Projected  benefit obligation at end of year       |       | 529        |       | 490      |       | 518      |       |
|                                                    |            |            |            |          |            |          |            |  |  |  |

 

42

----

 

 
| Change in plan assets:                            |   |   |   |   |   |   |   |
|---------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Fair value of  plan assets at beginning of year   |   | 422    |   | 258    |   | 205    |   |
| Actual return  (loss) on plan assets              |   | (1     | )      | 31     |   | 10     |   |
| Employer  contribution                            |   | 100    |   | 168    |   | 51     |   |
| Benefits paid                                     |   | (16    | )      | (35    | )      | (8     | )      |
| Fair value of  plan assets at end of year         |   | 505    |   | 422    |   | 258    |   |
| Funded status                                     |   | (24    | )      | (68    | )      | (261   | )      |
| Unrecognized  prior service cost                  |   | — |   | — |   | 62     |   |
| Unrecognized net  actuarial loss                  |   | — |   | — |   | 89     |   |
| Amount  recognized in consolidated balance sheets |   | $      | (24    | )      | $      | (68    | )      | $ | (110 | ) |
|                                                   |        |        |        |        |        |        |        |  |  |  |

 

Amounts recognized in the consolidated balance sheets consist of:

 
| Accrued pension  liability (current) |   | (24    | )      | (68    | )      | (152 | )      |
|--------------------------------------|--------|--------|--------|--------|--------|------|--------|
| Intangible asset                     |   | — |   | — |   | 42   |   |
| Net amount  recognized               |   | $      | (24    | )      | $      | (68  | )      | $ | (110 | ) |
|                                      |        |        |        |        |        |      |        |  |  |  |

 

The amountsrecognized in accumulated other comprehensive loss at December 31, 2007and 2006 were as follows (000’s):

 
| ** **                | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
| Net actuarial (gain) loss |       | $        | 4          |     | $          | (4 | ) |
| Prior service cost        |       | 49       |       | 56       |       |
|                      |       | $        | 53         |     | $          | 52 |   |

 

The estimated netactuarial gain and prior service cost that will be amortized from accumulatedother comprehensive loss into net periodic benefit cost for the year ending December 31,2008 is $8,000.

 

Prior to theadoption of SFAS No. 158, Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans — An Amendment of FASB Statements No. 87,88, 106, and 132R, the plan was over funded by $7,000.

 

The computation ofthe prepaid pension obligation at December 31, 2007 and required minimumliability and additional minimum liability at December 31, 2006 are shownbelow (000’s):

 
| ** **                                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
| Accumulated benefit obligation                             |       | $        | (489       | )        | $          | (415 | ) |
| Fair value of plan assets                                  |       | 505      |       | 422      |       |
| Required prepaid pension obligation (minimum  liability)   |       | $        | 16         |     | $          | 7 |   |
| Liability recognized for accrued benefit costs             |       | —   |       | —   |       |
| Prepaid pension obligation (additional minimum  liability) |       | $        | 16         |     | $          | 7 |   |

 

The components of net periodic pension cost for theyears ended December 31, 2007, 2006 and 2005 were as follows (000’s):

 
| ** **                                                 | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost                                               |       | $        | 60         |     | $          | 59       |       | $ | 57 |   |
| Interest cost                                              |       | 28       |       | 28       |       | 23       |       |
| Expected return on plan assets                             |       | (40      | )          | (23      | )          | (19      | )          |
| Amortization of net actuarial loss and prior service  cost |       | 7        |       | 9        |       | 7        |       |
| Net periodic pension cost                                  |       | $        | 55         |     | $          | 73       |       | $ | 68 |   |

 

 

43

----

 

 

The weightedaverage actuarial assumptions used to determine the pension benefit obligationsat December 31, 2007, 2006 and 2005 and the net periodic pension cost forthe years then ended are as follows:

 
| ** **                     | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Pension benefit obligation:    |       |     |       |     |       |     |       |
| Discount rate                  |       | 6.00     | %          | 5.90     | %          | 5.50     | %          |
| Compensation  increases        |       | 2.00     | %          | 2.00     | %          | 2.00     | %          |
|                           |       |     |       |     |       |     |       |
| Net periodic pension cost:     |       |     |       |     |       |     |       |
| Discount rate                  |       | 6.00     | %          | 5.90     | %          | 5.75     | %          |
| Compensation  increases        |       | 2.00     | %          | 2.00     | %          | 2.00     | %          |
| Return on assets  for the year |       | 8.50     | %          | 8.50     | %          | 8.50     | %          |

 

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

 

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

 

The plan’s assetallocation percentages at December 31, 2007 and 2006 were as follows:

 
| ** **                | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
| Pooled fixed income funds |       | 21.00    | %          | 23.00    | %          |
| Money market funds        |       | 18.00    | %          | 10.00    | %          |
| Stock mutual funds        |       | 61.00    | %          | 67.00    | %          |
| Total                     |       | 100.00   | %          | 100.00   | %          |

 

The Partnershipexpects to contribute approximately $100,000 to the plan in 2008.

 

The followingpension benefit payments, which reflect expected future services, asappropriate, are expected to be paid:

 
| **Years Ending December 31,** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|
|                               |       |       |       |
| 2008                               |       | $          | 12,809     |   |
| 2009                               |       | 13,803     |       |
| 2010                               |       | 19,115     |       |
| 2011                               |       | 19,519     |       |
| 2012                               |       | 27,833     |       |
| 2013-2017                          |       | 199,882    |       |
|                                    |            |            |            |  |

 

 

44

----

 

 

**(10) UNION BARGAINING UNIT INTERMITTENT EMPLOYEES SEVERANCE PLAN**

 

The Partnershipprovides a severance plan, since the acquisition of the farming operations on May 1,2000, that covers union members that are not part of the defined benefitpension plan and are classified as intermittent employees per the bargaining unionagreement.  The severance plan providesfor the payment of 8 days of pay for each year worked (upon the completion of 3years of continuous serve) if the employee becomes physically or mentallyincapacitated, is part of a Partnership mass layoff, or reaches the age of 60and is terminated or voluntarily terminates. The Partnership accounts for the benefit by determining the presentvalue of the future benefits based upon an actuarial analysis. The projectedbenefit obligation includes the obligation for the employees of their previousemployer that became Partnership employees.

 

The followingreconciles the changes in the severance benefit obligation and plan assets forthe years ended December 31, 2007, 2006 and 2005 to the funded status ofthe plan and the amounts recognized in the consolidated balance sheets at December 31,2007, 2006 and 2005 (000’s).

 
| **Change in Severance Obligation**         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                       |       |     |       |     |       |     |       |
| Severance  obligation at beginning of year |       | $        | 335        |     | $          | 376      |       | $ | 384 |   |
| Service cost                               |       | 18       |       | 23       |       | 24       |       |
| Interest cost                              |       | 19       |       | 20       |       | 21       |       |
| Actuarial gain                             |       | (5       | )          | (36      | )          | (14      | )          |
| Benefits paid                              |       | (62      | )          | (48      | )          | (39      | )          |
| Severance  obligation at end of year       |       | $        | 305        |     | $          | 335      |       | $ | 376 |   |

 
| **Change in Plan Assets**                       | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                            |       |     |       |     |       |     |       |
| Fair value of  plan assets at beginning of year |       | $        | 0          |     | $          | 0        |       | $ | 0 |   |
| Employer  contributions                         |       | 62       |       | 48       |       | 39       |       |
| Benefits paid                                   |       | (62      | )          | (48      | )          | (39      | )          |
| Fair value of  plan assets at end of year       |       | $        | 0          |     | $          | 0        |       | $ | 0 |   |
|                                            |       |     |       |     |       |     |       |
| Funded Status                                   |       |     |       |     |       |     |       |
|                                            |       |     |       |     |       |     |       |
| Benefit  obligation                             |       | ($305    | )          | ($335    | )          | ($376    | )          |
| Unrecognized net  actuarial gain                |       | 13       |       | 18       |       | 55       |       |
| Accrued benefit  cost                           |       | ($292    | )          | ($317    | )          | ($321    | )          |
|                                            |       |     |       |     |       |     |       |
| Components of Net Periodic Cost                 |       |     |       |     |       |     |       |
|                                            |       |     |       |     |       |     |       |
| Service cost                                    |       | $        | 18         |     | $          | 23       |       | $ | 24 |   |
| Interest cost                                   |       | 19       |       | 20       |       | 21       |       |
| Recognized net  loss                            |       | —   |       | 1        |       | 3        |       |
| Net periodic  cost                              |       | $        | 37         |     | $          | 44       |       | $ | 48 |   |

 

 

45

----

 

 
| Reconciliation of Severance Liability           |   |   |   |   |   |   |   |
|-------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
|                                            |   |   |   |   |   |   |   |
| (a) Accrued  severance beginning of year   |   | ($317  | )      | ($321  | )      | ($312  | )      |
| (b) Contributions  during fiscal year      |   | 62     |   | 48     |   | 39     |   |
| (c) Net  periodic pension cost             |   | (37    | )      | (44    | )      | (48    | )      |
| (d) Accrued  severance cost at end of year |   | ($292  | )      | ($317  | )      | ($321  | )      |
|                                            |   |   |   |   |   |   |   |
| Weighted Average Assumptions                    |   |   |   |   |   |   |   |
|                                            |   |   |   |   |   |   |   |
| Discount rate                                   |   | 6.53   | %      | 5.87   | %      | 5.78   | %      |
| Expected return  on plan assets                 |   | 0.00   | %      | 0.00   | %      | 0.00   | %      |
| Rate of  compensation increase                  |   | 1.65   | %      | 1.65   | %      | 1.65   | %      |

 

The amountsrecognized in accumulated other comprehensive loss at December 31, 2007and 2006 were as follows (000’s):

 
| ** **         | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Net actuarial loss |       | $        | 13         |     | $          | 18 |   |
|                    |            |          |            |          |            |  |  |

 

There will be noestimated net actuarial loss that will be amortized from accumulated othercomprehensive loss into net periodic benefit cost for the year ending December 31,2008.

 

As discussed inNote 14, the Partnership initially recorded its liability for the severanceplan in 2006 following its determination that such obligation had not properlybeen accounted for as part of prior purchase price allocations.  The Partnership has provided disclosures forthose years for comparative purposes.  Asdisclosed above, benefit costs in 2004 and 2005 did not differ materially formcontribution amounts expensed in such years.

 

**(11)  EMPLOYEES SAVINGS PLAN**

 

The Partnershipsponsors a 401(k) plan, which allows participating employees to contributeup an amount not to exceed the employee’s covered compensation for the planyear reduced by required withholdings, subject to annual limits.  The plan provides for the Partnership to makematching contributions up to 50% of the first 4% of salary deferred byemployees.  During the years ended December 31,2007, 2006 and 2005, Partnership matching contributions were $34,000, $32,000and $29,000, respectively.

 

**(12)  SALARIED DEFINED CONTRIBUTION PLAN**

 

The Partnershipsponsors a defined contribution plan for its non-bargaining unit employees.This plan provides for the Partnership to make annual contributions to the 401(k) planon behalf of participating employees. Contributions are based upon age, length of service, and other criteriaon an annual basis, subject to annual limits. During the years ended December 31, 2007, 2006, and 2005Partnership contributions were $115,000, $106,000 and $96,000, respectively.

 

 

46

----

 

 

**(13)QUARTERLY OPERATING RESULTS (Unaudited)**

 

The followingchart summarizes unaudited quarterly operating results for the years ended December 31,2007, 2006, and 2005 (000’s omitted except per unit data):

 
| ** **  | ** ** | ** **   | ** ** | **Gross Income** | ** ** | **Net Income** | ** ** | **Net Income (Loss)**     | ** ** |
|-------------|------------|--------------|------------|------------------|------------|----------------|------------|---------------------------|------------|
| ** **  | ** ** | **Revenues** | ** ** | **(Loss)**       | ** ** | **(Loss)**     | ** ** | **per Class A Unit** | ** ** |
| 2007        |       |         |       |             |       |           |       |                      |       |
| 1st Quarter |       | $            | 3,365      |             | $          | 790            |       | $                         | 346        |   | $ | 0.05 |   |
| 2nd Quarter |       | 1,225        |       | 100              |       | (356           | )          | (0.05                     | )          |
| 3rd Quarter |       | 2,776        |       | 499              |       | (436           | )          | (0.06                     | )          |
| 4th Quarter |       | 3,964        |       | (2,719           | )          | (3,519         | )          | (0.47                     | )          |
|        |       |         |       |             |       |           |       |                      |       |
| 2006        |       |         |       |             |       |           |       |                      |       |
| 1st Quarter |       | $            | 1,523      |             | $          | 272            |       | $                         | (100       | ) | $ | (0.01 | ) |
| 2nd Quarter |       | 1,288        |       | 444              |       | (27            | )          | 0.00                      |       |
| 3rd Quarter |       | 5,487        |       | 437              |       | 85             |       | 0.01                      |       |
| 4th Quarter |       | 8,774        |       | 1,574            |       | 846            |       | 0.11                      |       |
|        |       |         |       |             |       |           |       |                      |       |
| 2005        |       |         |       |             |       |           |       |                      |       |
| 1st Quarter |       | $            | 3,056      |             | $          | 627            |       | $                         | (27        | ) | $ | 0.00 |   |
| 2nd Quarter |       | 1,501        |       | 218              |       | 26             |       | 0.00                      |       |
| 3rd Quarter |       | 3,737        |       | 608              |       | 118            |       | 0.02                      |       |
| 4th Quarter |       | 9,084        |       | 1,449            |       | 654            |       | 0.09                      |       |

** **

**(14)  CBCL ACQUISITIONADJUSTMENTS**

** **

During 2006, thePartnership concluded it should have recorded certain employee severance andvacation benefits in connection with its allocation of the purchase price ofthe macadamia farming operation from CBCL on May 1, 2000.  The Partnership has re-evaluated and revisedthe original purchase price allocation and accordingly has recorded in 2006,goodwill of $306,000 and a corresponding liability for the fair value of suchbenefits as of the acquisition date.  Thechanges in the liability for the period from May 1, 2000 to December 31,2005 of $159,000 have been included in the 2006 consolidated statement ofincome.  Prior year consolidatedfinancial statements were not materially impacted by this matter.

 

**(15)****         ****CONCENTRATION RISKS**

 

**Marketand customers. **A decline in worldwide macadamia nutprices would adversely affect the price paid under the nut purchase contractswith Mac Farms and Island Princess, as the contract price is determined basedupon the prevailing world market price of macadamia nut kernel for eachsix-month period January through June, and July to December throughoutthe contract term.  Even though the

 

 

47

----

 

Partnership increased itcustomers from one to four in 2007 there are a limited number of customersavailable to purchase the Partnership’s nut production.  If our customers are unable to perform undertheir contracts or if their purchase of product should change from Hawaii-basedto foreign sourced kernel, it would have a material adverse impact on ourbusiness as there are virtually no replacement customers for the Partnership’sproduction.  If the market for thePartnership’s inventory was to decline the Partnership would have to sell at aprice lower than the current market price and if no buyers were available theinventory could become unsalable and have to be disposed.

 

**Nut Purchase Agreements.** The Partnership had four contracts beginning January 1, 2007.  The terms of the contracts vary from two tosix years, contain fixed and market determined prices and 30-day paymentterms.  The Partnership relies upon thefinancial ability of the buyers of the Partnership’s nuts to abide by thepayment terms of the nut purchase agreements. If any or all of the buyers were unable to pay for the macadamia nutsdelivered by the Partnership to them it could result in the Partnership’savailable cash resources being depleted. If any or all buyers were late in payment the Partnership would stop thedelivery of macadamia nuts to the buyer. The Partnership would need to negotiate a nut purchase agreement withanother buyer which might not be at the same terms or price.  It is also possible that the Partnershipmight not be able to find a buyer for the nuts. There were a significant number of Hawaii macadamia growers that wereunable to find a processor to purchase and process their crop in 2007 due tothe currently depressed market.

 

# ***Employees.***As of December 31, 2007, the Partnershipemployed 213 people, of which 131 were seasonal employees.  Of the total, 21 are in farming supervisionand management, 178 in production, maintenance and agricultural operations, and14 in accounting and administration.

# *** ***

With the May 2000 acquisition, the Partnershipagreed to the assumption of two bargaining agreements with the ILWU Local142.  These agreements cover allproduction, maintenance and agricultural employees of the Ka’u OrchardDivision, the Keaau Orchard Division and the Mauna Kea Orchard Division.  These labor contracts became effective May 1,1997 and expired on April 30, 2002, but were extended until April 30,2005.  The parties agreed to a three-yearcontract, which will expire on April 30, 2008. Although, the Partnershipbelieves that relations with its employees and the ILWU are generally verygood, there is uncertainty with respect to the ultimate outcome of thebargaining unit negotiations when the current agreement expires.

 

The Partnership employs foreign contract labor tosupplement hand harvesters during the peak harvesting season.  If the Partnership was unable to employcontract laborers it might have to lengthen the time between harvest roundswhich could result in a lower quality of nuts produced and a lower effectiveprice.

 

**Diseases and Pests.**  ThePartnership’s Keaau orchards experienced tree replacements of 1.1% in 2007,1.0% in 2006 and 0.6% in 2005.  Othermacadamia growers in the vicinity have also experienced losses due to a problemknown as “Macadamia Quick Decline” (“MQD”). Based upon research by the University of Hawaii and other experts, it isbelieved that the situation is due to fungi associated with high moistureconditions and poor drainage conditions. It is also believed that a particular variety of macadamia nut tree (cv.HAES 333) is most susceptible to MQD. Approximately 9% of the trees in the Partnership’s orchards have thevariety HAES 333 with most of these trees located at the drier Ka’u regionwhere the incidence of MQD is benign. Another tree variety (cv. HAES 344) has also been identified as beingsomewhat more susceptible to MQD than other commercial varieties and thiscultivar represents approximately 45% of the trees in the Partnership’sorchards.  Both the Keaau and Mauna Keaorchards are areas with high moisture conditions, and may be more susceptibleto the MQD problem.  Afflicted trees inthese regions are replaced with cultivars that are tolerant to MQD.

 

 

48

----

 

There are also twotypes of fungal diseases, which can affect nut production but are not fatal tothe trees themselves.  One of these isPhytophthora, which affects the macadamia flowers and developing nuts, and theother, Botrytis cinerea, causes senescence of the macadamia blossom beforepollination is completed.  These types offungal disease are generally controllable with fungicides.  Historically, these fungi have attacked theorchards located in Keaau during periods of persistent inclement weather.  A light infestation of Phytophthora occurredin late January-early February 2001 and a light-moderate infestationoccurred in March 2006.

 

**Rainstorms and Floods.***** ***The Partnership’s orchards are located in areas on theisland of Hawaii that are susceptible to heavy rainstorms.  In November 2000 the Ka’u region wasaffected by flooding.  This floodingresulted in expected 2000 harvesting being done in 2001.  Since the flood in 2000 heavy rain in the Ka’uregion has not produced flooding of any consequence.

 

**Windstorms.**  Some of thePartnership’s orchards are located in areas on the island of Hawaii that aresusceptible to windstorms.  Twenty-fivemajor windstorms have occurred on the island of Hawaii since 1961, and four ofthose caused material losses to Partnership orchards.  Most of the Partnership’s orchards aresurrounded by windbreak trees, which provide limited protection.  Younger trees that have not developedextensive root systems are particularly vulnerable to windstorms.

 

**Insurance.***** ***The Partnership secures tree insurance each year undera federally subsidized program.  The treeinsurance for 2008 provides coverage up to a maximum of approximately $19.7million against loss of trees due to wind, fire or volcanic activity.  Crop insurance was purchased for the 2007-2008crop year and provides coverage up to a maximum of approximately $12.0 millionagainst loss of nuts due to wind, fire, volcanic activity, earthquake, adverseweather, wildlife damage and failure of irrigation water supplies.

 

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

 

**Rainfall.** Theproductivity of orchards depends in large part on moisture conditions.  Inadequate rainfall can reduce nut yieldssignificantly, while excessive rain without adequate drainage can fosterdisease and hamper harvesting operations. While rainfall at the orchards located in the Keaau and Mauna Kea areashas generally been adequate, the orchards located in the Ka’u area generallyreceive less rainfall and, as a result, a portion of the Ka’u orchards ispresently irrigated.  Irrigation canmitigate the effects of a drought, but it cannot completely protect a macadamianut crop from the effect of a drought. Recorded rainfall at each of the three locations of the Partnership’sorchards for the past five years is shown below:

 
| Year |   | Ka’u  |   | Keaau       |   | Mauna Kea   |   |
|------|--------|------------|--------|-------------|--------|-------------|--------|
| 2003 |   | 22.8” |   | 94.8”  |   | 117.4” |   |
| 2004 |   | 54.9” |   | 142.7” |   | 151.5” |   |
| 2005 |   | 34.7” |   | 133.8” |   | 171.8” |   |
| 2006 |   | 70.9” |   | 138.7” |   | 178.3” |   |
| 2007 |   | 37.8” |   | 126.7” |   | 158.3” |   |

 

During 2007 the Ka’u, Keaau and Mauna Kea areasrecorded 85%, 95% and 107%, respectively, of the normal average annual rainfallin their area of the island.

 

**Water Supply for Irrigation.**With the May 2000 acquisition, thePartnership acquired an irrigation well (the “Sisal Well”), which supplieswater to the Partnership’s orchards in Ka’u which were purchased in June 1986and 1989.  The Sisal Well is situated onland owned by Mauna Kea Agribusiness Company, Inc. (“MKACI”).  On May 1, 2000 the Partnership enteredinto a license agreement with MKACI, which allows the Partnership necessaryaccess to maintain and operate the Sisal Well, as well as the use of roads toaccess, maintain 

 

49

----

 

and operate the Partnership’s macadamia orchards.  Annual rent for the license agreement is OneDollar.  The license agreement terminateson the earlier of the termination of the May 1, 2000 lease betweenPartnership and KACI, or June 30, 2045.

 

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

 

If the amount of water provided by the Sisal Wellbecomes insufficient to irrigate the above named orchards, the Partnership mayconsider increasing the capacity of the Sisal Well, drilling an alternativewell into the historical source which provides water to the Sisal Well orobtaining water from other sources.

 

On a historical basis, the quantity of water availablefrom the Sisal Well has been generally sufficient to irrigate these orchards inaccordance with prudent farming practices. The irrigated portion of the Ka’u II Orchards is expected to needgreater quantities of water as the orchards mature.  The Partnership anticipates that the amountof water available from the Sisal well will be generally sufficient, assuming averagelevels of rainfall, to irrigate the irrigated orchards in accordance withprudent farming practices for the next several years.  If no irrigation water is available to theIrrigated Orchards, then, based on historical average rainfall levels, diminishedyields of macadamia nut production can be expected.

 

**ITEM 9. CHANGES INAND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

** **

On March 23, 2007,the Audit Committee of ML Macadamia Orchards, L. P. (the “Partnership”)recommended and the Board of Directors approved the appointment of Accuity LLP(“Accuity”) as the independent registered public accounting firm for thePartnership, effective upon the completion of the services ofPricewaterhouseCoopers LLP (“PwC”) related to the Partnership’s consolidatedfinancial statements as of and for the year ended December 31, 2006 andthe Partnership’s Form 10-K for the year ended December 31,2006.  Such procedures were completed on April 16,2007 and PwC’s dismissal became effective on such date.

 

PwC’s report on thePartnership’s consolidated financial statements as of and for the fiscal yearended December 31, 2006 did not contain an adverse opinion or a disclaimerof opinion, and were not qualified or modified as to uncertainty, audit scope,or accounting principle.

 

Accuity’s report on thePartnership’s consolidated financial statements as of and for the fiscal yearsended December 31, 2007 did not contain an adverse opinion or a disclaimerof opinion, and were not qualified or modified as to uncertainty, audit scope,or accounting principle.

 

During the fiscal yearsended December 31, 2005 and 2006 and through April 16, 2007, therewere no disagreements with PwC on any matters of accounting principles orpractices, financial statement disclosure or auditing scope or procedure which,if not resolved to the satisfaction of PwC, would have caused PwC to make areference thereto in connection with its reports on the financial statementsfor such years.

 

During the fiscal yearsended December 31, 2005 and 2006 and through April 16, 2007, thePartnership did not consult with Accuity regarding either (1) theapplication of accounting principles to a specified transaction, eithercompleted or proposed, or the type of audit opinion that might be rendered onthe Partnership’s consolidated financial statements or (2) the subjectmatter of the disagreement or reportable event as defined in Item 304(a)(1)(iv) and(v).

 

During the fiscal yearsended December 31, 2006 and 2007 and through March 20, 2008, therewere no reportable events as defined in Item 304(a)(1)(v) of RegulationS-K.

 

 

50

----

 

**ITEM9A.  CONTROLS AND PROCEDURES**

 

**(a)****                           ****Evaluationof disclosure Controls and Procedures**

 

The Partnership’s management has evaluated, underthe supervision and with the participation of the Partnership’s Chief ExecutiveOfficer and the Chief Financial Officer, the effectiveness of the design andoperation of the Partnership’s disclosure controls and procedures (as definedin Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended(the “Exchange Act”)), as of the end of the period covered by this annualreport.  Based upon that evaluation, theChief Executive Officer and Chief Financial Officer have concluded that, as ofthe Evaluation Date, the Partnership’s disclosure controls and procedures wereeffective as of the end of the period covered by this annual report.

 

**(b)****                           ****Management’sAnnual Report on Internal Control Over Financial Reporting**

 

The Partnership’s management is responsible forestablishing and maintaining an adequate system of internal control overfinancial reporting.  Internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation ofconsolidated financial statements for external purposes in accordance withgenerally accepted accounting principles. A partnership’s internal control over financial reporting includes thosepolicies and procedures that (i) pertain to the maintenance of recordsthat, in reasonable detail , accurately and fairly reflect the transactions anddispositions of the assets of the partnership; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation ofconsolidated financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the partnershipare being made only in accordance with authorizations of management anddirectors of the partnership; and (iii) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the partnership’s assets that could have a material effect onthe consolidated financial statements.

 

Because of its inherent limitations, a system ofinternal control over financial reporting can provide only reasonable assuranceand may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provideonly reasonable assurance with respect to consolidated financial statementpreparation and presentation.  Further,because of changes in conditions, effectiveness of internal control overfinancial reporting may vary over time.

 

Management of the Partnership conducted anevaluation of the effectiveness of the Partnership’s internal control overfinancial reporting base on the *InternalControl-Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on that evaluation, the Partnership’s management concluded thatits internal control over financial reporting was effective as of December 31,2007.

 

This annual report does not include an attestationreport of the Partnership’s registered public accounting firm regardinginternal control over financial reporting. Management’s report was not subject to attestation by the Partnership’sregistered public accounting firm pursuant to temporary rules of theSecurities and Exchange Commission that permit the Partnership to provide onlymanagement’s report in this annual report.

 

 

51

----

 

**(c)****                                 ****Changesin Internal Control Over Financial Reporting**

 

There have been no significant changes to thePartnership’s internal control over financial reporting during the fourthquarter of 2007 that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

**ITEM9B.  OTHER EVENTS**

 

The Partnership filed aproxy statement with the SEC on February 13, 2008 asking the unit holdersto approve an amendment to the Partnership Agreement which would broaden thebusiness purpose of the Partnership****to includemacadamia processing and marketing.  Theproposal was voted on by the unit holders at a Special Meeting held on March 10,2008.  The amendment to the PartnershipAgreement was approved by the unit holders.

 

** **

52

----

** **

**PART III**

** **

**ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATEGOVERNANCE**

** **

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

 

## **A.**            Identificationof Directors

## ** **

*John K. Kai. *42 years old; director ofthe Managing Partner since June 2004; member of the Audit, Nominating,Compensation and Corporate Governance Committees since March 2005;president of Pinnacle Investment Group, LLC; president of Pinnacle Media Group,LLC; branch manager and investment representative of Commonwealth FinancialNetwork.

 

*James S. Kendrick.  60* years old; director ofManaging Partner since June 2005; Executive at Mauna Loa Macadamia NutCorporation from 1991 to 1998.

 

*E. Alan Kennett. *64 years old; director ofManaging Partner since June 2005; member of the Audit, Nominating,Compensation and Corporate Governance Committees of Managing Partner: Presidentand CEO of Gay and Robinson Sugar Company, Inc.

 

*Jeffrey M. Kissel. *58 years old; director ofManaging Partner since June 2005; member of the Audit Committee since June 2005and chairman since March 2006; member of the Nominating, compensation andCorporate Governance Committees of the Managing Partner; President of The GasCompany, LLC since December 2007; President and CEO of Safe RenewablesCorporation from October 2006 until December 2007; from 2003 to 2005was CFO for Earth Tech, Inc.; held various positions during 1997 until2003 with URS Corporation including vice president of budgeting and planningand CFO.

 

*David McClain.*  61 years old;director since September 2000 and member of the Audit, Nominating,Compensation and Corporate Governance Committees of Managing Partner; Presidentof the 10-campus University of Hawai’i System (UH) since March 2006;  served as Interim President from August 2004and Vice President of Academic Affairs of UH from July 2003.

 

*Dennis J. Simonis.* 51 years old;director of Managing Partner since August 2002; President and ChiefOperating Officer of Managing Partner from August 2001 until December 2004,Chief Financial Officer from June 2001 to August 2001, and ChiefExecutive Officer since December 2004. Chief Financial Officer of DBE fromAugust 2001, and President of DBE from October, 2005.

 

*Scott C. Wallace.*  52 yearsold:  director of Managing Partner since June 2007;Global Vice President, Sales and Marketing of SVP Worldwide since July 2006.  Chairman, President and Chief ExecutiveOfficer of Gardenburger, Inc from January 2001 to July 2006.

 

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

 

*Dennis J. Simonis. 51* yearsold; president of Managing Partner since August 2001; and chief executiveofficer since December 2004; president of D. Buyers Enterprises, LLC.Formerly executive vice president and chief operating officer of Mauna Loa.

 

*Randolph H. Cabral. 55*yearsold; senior vice president and orchard manager of Managing Partner since May 2000.Formerly senior vice president and orchard manager of KACI.

 

*Wayne W. Roumagoux*.  61 years old;chief financial officer of Managing Partner since August 2001; controllerof DBE.

 

 

53

----

 

 

 

**C.****           ****Identification of CertainSignificant Employees**

 

Not applicable

 

# ***D.  Family Relationships***

# *** ***

Not applicable

 

**E.  BusinessExperience of Current Directors and Executive Officers**

 

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

 

*John K. Kai.*  Mr. Kai has served as a director since June 2004.  Mr. Kai is president of PinnacleInvestment Group, LLC and Pinnacle Media Group, LLC, and branch manager andinvestment representative of Commonwealth Financial Network.  Mr. Kai was the resident manager of theHilo office of Paine Webber, Inc. and was with Merrill Lynch prior toPaine Webber, Inc.  Mr. Kai isa graduate of Sacramento City College and attended the University of thePacific from 1983 to 1985.  Mr. Kaiserved on the Board of Regents of the University of Hawaii and was a directorof the Research Corporation of the University of Hawaii, the Hawaii IslandPortuguese Chamber of Commerce and has served on several nonprofit boards inHawaii.  He resides in Hilo, Hawaii.

 

*James S. Kendrick. *Mr. Kendrickhas over 36 years of experience in the food processing industry and iscurrently a consultant to various food companies.  Mr. Kendrick held executive positions atMauna Loa Macadamia Nut Corporation from 1991 to 1998, including Executive VicePresident of Operations and President. Between 1978 and 1983, he was the Manager of the Honolulu Dole Pineapplecannery.  Mr. Kendrick worked forKraft Foods as an engineer.  He is agraduate of Northern Illinois University and Cornell’s Executive DevelopmentProgram.  He has been active in theHawaii Macadamia Nut Association and currently resides in Naples, Florida.

 

*E. Alan Kennett. *Mr. Kennetthas worked in various executive capacities in the agriculture sector for over40 years and currently is the President and Chief Executive Officer of Gay andRobinson Sugar Company, Inc. on Kauai, Hawaii.  He held various positions in the Hawaii sugarindustry with C. Brewer and Co., Ltd. Between 1976 and 1994.  Prior to 1976, Mr. Kennett managed sugaroperations in Africa, the United Kingdom and the West Indies.  He is a graduate of Walton Technical Collegeand the Liverpool College of Technology and Completed Cornell’s ExecutiveDevelopment Program.  Mr. Kennetthas been active in numerous Hawaii non-profit organizations and written severaltechnical papers.  He currently residesin Kaumakani, Kauai, Hawaii.

 

*Jeffrey M. Kissel. *Mr. Kisselis the President of The Gas Company, since December 2007. He was the Presidentand Chief Executive Officer of Safe Renewables Corporation, an establishedmarketer and producer of “Biodiesel” or “B100”, a substitute for conventionalpetroleum diesel, located in Houston, Texas. He was the Chief Financial Officer for Earth Tech Inc. from 2003 to2005, a $1.5 billion global engineering and construction company specializingin water treatment, and has held various financial executive positions inpublicly traded companies since 1974. From 1997 to 2003, Mr. Kissel was employed by URS Corporation as avice president of planning and budgeting, and served as Chief Financial Officerfor several URS Corporation divisions.  Mr. Kisselwas President and principal shareholder of Hawaiian Communications between 1992and 1997.  Prior to 1992 he worked withTesoro,  AON and Challenger Petroleumin the energy industry.  He has a B.B.A.and M.B.A. from the University of Hawaii and currently resides in Californiaand Hawaii.

 

 

54

----

 

*DavidMcClain.* Dr. McClainwas appointed as the President of the 10-campus University of Hawai’i Systemeffective March 2006, having served as Interim President from August 15,2004, and Vice President for Academic Affairs of the UH System from July 1,2003.  From 2000 until 2003 he was theDean of the College of Business Administration at the University of Hawaii at Mnoa, as well as First Hawaiian BankDistinguished Professor of Leadership and Management; he was also Interim VicePresident for Research of the University of Hawaii System from February toSeptember 2003.  Dr. McClainwas Dean and First Hawaiian Bank Professor of Leadership and Management atUniversity of Hawaii’s Shidler College of Business from 2000 until 2003.  Dr. McClain joined the University of Hawaiiat Manoa in 1991 as the Henry A. Walker, Jr. Distinguished Professor ofBusiness Enterprise and Professor of Financial Economics and Institutions.   Dr. McClain is a director of FirstInsurance Company, and serves as a member of several nonprofit boards inHawaii. He earned a Ph.D. in Economics from the Massachusetts Institute ofTechnology in 1974 and a BA in Economics and Mathematics from the University ofKansas in 1968.  Dr. McClain hastaught at Massachusetts Institute of Technology’s Sloan School of Managementand at Boston University, where he chaired the Department of Finance andEconomics. He also served as Senior Staff Economist, Council of EconomicAdvisors to President Jimmy Carter, and headed international economicinformation services for Data Resources, Inc.  He resides in Honolulu, Hawaii.

 

*Dennis J. Simonis*.  Mr. Simonishas served as a director since August 2002, president of the ManagingPartner since August 2001, chief executive officer since December 2004,and was formerly the executive vice president and chief financial officer. From1993 to 2001, Mr. Simonis served in various capacities at Mauna Loa,including executive vice president and chief operating officer.  He serves as an officer of the HawaiiMacadamia Nut Association and has served on several nonprofit boards in Hawaii.He served from 1985-1993 as a vice president of Theo H. Davies & Co.,Ltd. and worked as a senior auditor for Price Waterhouse between 1979 and 1985.Mr. Simonis graduated magna cum laude with a B.S. in Accounting fromCarroll College in Waukesha, Wisconsin and earned his C.P.A. certificate in1983. He resides in Hilo, Hawaii.

 

*Scott C. Wallace.*  Mr. Wallacehas served as a director since June 2007. He is currently Global Vice President, Sales and Marketing of SVPWorldwide Since July 2006.  SVPWorldwide is the world’s largest sewing machine manufacturer and marketer, ownsthe Singer, Husqvarna, Viking and Pfaff brands and operates in 190countries.  Mr. Wallace has beeninvolved with consumer products, general management, marketing, sales,processing, manufacturing, and distribution for his entire career.  Mr. Wallace has spent over 25 years inprogressively more senior management positions in the consumer goodsindustry.  Prior to joining SVPWorldwide, he was Chairman, President and Chief Executive Officer ofGardenburger, Inc. until taking the company private in 2006.  Previously, he was president and ChiefExecutive Officer of Mauna Loa Macadamia Nut Corporation until selling thebusiness in 2000.  He has also served inmanagement capacities with Jacobs Suchard (1988 through 1994), Eastman KodakCompany (1985 through 1988) and Procter & Gamble (1978 through1985).  Mr. Wallace received hisBachelor of Arts in International Business Management and Marketing from SanFrancisco State University.

 

***Executive Officers Who Do Not Serve as Directors.***

 

*Randolph H. Cabral. *Mr. Cabralhas served as senior vice president and orchard manager of the Managing Partnersince May 2000.  Mr. Cabral waspreviously employed at Ka’u Agribusiness Company, Inc., from 1989 untilthe Partnership’s acquisition of Ka’u Agribusiness’ macadamia business in2000.  He served as senior vice presidentfrom 1998 to 2000, as vice president from 1996 to 1998, and as orchard managerfrom 1989.  From 1983 to 1989, Mr. Cabralserved as orchard manager with Mauna Loa Macadamia Nut Corporation.  Mr. Cabral has an AS in GeneralAgriculture from the University of Hawaii. He resides in Hilo, Hawaii.

 

 

55

----

 

*Wayne W. Roumagoux.*   Mr. Roumagoux has served as chieffinancial officer of the Managing Partner since August 2001.  Mr. Roumagoux has been controller of thePartnership since May 2001.  From1989 to 2001 Mr. Roumagoux was controller for Inlet Fisheries, Inc.  He was controller for NBI, Inc’s Alaskaoperation and for Sheffield Hotels, Inc. during the late 1970’s and 1980’s.  Mr. Roumagoux worked as a senior auditorfor KPMG between 1976 and 1978.  He has aM.S. in accounting from Eastern Washington State University in Cheney,Washington.  He resides in Volcano,Hawaii.

 

**Executive Session. **The executive session, ameeting of non-management directors, is presided over by David McClain who canbe communicated with by e-mail at dmcclain46@aol.com.

 

**Audit Committee. **Effective March 2,2006, Jeffrey Kissel was appointed chairman of the Audit Committee.  At the May 5, 2006 Board of Directorsmeeting Alan Kennett was appointed a member of the Audit Committee.  At the June 12, 2006 Board of Directorsmeeting Mr. James Case resigned as a Director and Mr. Russell Casewas appointed a Director.  At the November 30,2006 Board of Directors meeting Mr. Russell Case resigned as aDirector.  The members of the AuditCommittee and Corporate Governance Committee are Dr. David McClain,Jeffrey Kissel, Alan Kennett and John Kai. The Board of Directors has determined that each member of the AuditCommittee is independent in accordance with SEC Rule 10-A-3 and New YorkStock Exchange independence standards, and each member is financially literate,and Mr. Kissel qualifies as a financial expert.  The Partnership has adopted standards forindependence and said standards are in the Partnership’s Corporate GovernanceGuidelines at the Partnership’s website www.mlmacadamia.com.  The Audit Committee met four times in 2006 toreview and approve accounting, internal control and reporting issues, relatedparty transactions and other matters that could involve a conflict ofinterest.  All members were in attendanceat each quarterly meeting.

 

The Audit Committee has discussed with theindependent registered public accountants, Accuity, the matters required to bediscussed by Statement on Auditing Standards No. 61 (Communication withAudit Committees), as may be modified or supplemented, as amended and asrequired by S-X Rule 2-07.

 

The Audit Committee has discussed withAccuity, their independence and whether Accuity’s provision on non-auditrelated services is compatible with maintaining the Accuity’s independence frommanagement and the Partnership and has received from Accuity the writtendisclosures and the letter required by the Independence Standards BoardStandard No. 1, as may be modified or supplemented, including writtenmaterials addressing the internal quality control procedures of Accuity.

 

During the fiscal 2007, the Audit Committeehad four meetings to discuss amongst other things the quarterly results of thePartnership.  The meetings were conductedso as to encourage communication among the members of the Audit Committee, management,and the Partnership’s independent auditors. Among other things, the Audit Committee discusses with the Partnership’sindependent auditors the overall scope and plans for their respective audits,and the results of such audits.  TheAudit Committee separately met with Accuity’s representatives, with and withoutmanagement present.

 

The Audit Committee has reviewed anddiscussed the audited financial statements for the year ended December 31,2007 with management and the independent auditors of the Partnership.  Based upon the above-mentions reviews anddiscussions the Audit Committee has recommended to the Board that the auditedfinancial statements be included in the Partnership’s Annual Report on Form 10-Kfor the year ended December 31, 2007.

 

**Audit Committee Charter.  **The Audit Committee Charteris available by request or on the Partnership’s website at www.mlmacadamia.com..

 

 

56

----

 

**Audit Committee Pre-Approval Policy.  **The Audit CommitteePre-Approval Policy is available by request or on the Partnership’s website.

 

**Ethics. **The “Code ofBusiness Conduct and Ethics” is available by request or on the Partnership’swebsite.

 

**Corporate Governance Guidelines.**  The Corporate Governance Guidelines areavailable by request or on the Partnership’s website.

 

**NominatingCommittee. **The Partnership formeda Nominating Committee and the charter was adopted in May 2005.  The members of the Nominating Committee areindependent under Section 15A(a) of the Exchange Act.  Unit Holders may recommend candidates for theBoard of Directors by submitting such recommendation in writing toPartnership.  The minimum qualificationsrequired for a Director of the Partnership, whether submitted by the NominatingCommittee or a Unit Holder, are (1) professional qualification, (2) numberof other boards on which the candidate serves, (3) other business andprofessional commitments, (4) the need of the Board of Directors forhaving certain skills and experience, and (5) the diversity of thedirectors then comprising the Board.  TheNominating Committee shall evaluate a candidate based upon the qualificationsdescribed above, based upon a written resume and then the CEO and NominatingCommittee will interview the candidate. The Nominating Committee shall determine whether or not to recommend thecandidate to the Board of Directors.  TheNominating Committee Charter is available by request or on the Partnership’swebsite.

** **

**CompensationCommittee. **The Partnership formeda Compensation Committee and the charter was adopted in May 2005.  The members of the Compensation Committee areindependent under Section 15A(a) of the Exchange Act. TheCompensation Committee Charter is available by request or on the Partnership’swebsite.

** **

**F.**              Section 16Disclosure

** **

Under Section 16 ofthe Securities Exchange Act of 1934, as amended (the “Exchange Act”), eachdirector and certain officers of ML Resources, Inc., the managing generalpartner of Registrant (a “Reporting Person”), are required to report theirownership and changes in ownership of Class A Depositary Units to theSecurities and Exchange commission, the New York Stock Exchange andRegistrant.  Based on reporting formssubmitted to Registrant, no Reporting Person has failed to file on a timelybasis reports required by Section 16(a) of the Exchange Act during2007.

 

**ITEM 11.  EXECUTIVE COMPENSATION**

 

**A.****           ****Summary Compensation Table**

 

The Partnership ismanaged by the managing general partner. All costs of managing the Partnership are reimbursed by the Partnership,as provided in Section 4.5 of the Partnership Agreement.  The following table reflects the aggregatecompensation for services in all capacities paid by the Managing Partner to itsexecutive officers for the years ended December 31, 2007, 2006 and, 2005.There were no long-term compensation awards, stock awards, option awards, orother payouts during those years.

 

Overview of CompensationPhilosophy and Programs

 

Our executivecompensation programs are designed and administered by the Board of Directorsof the Partnership.  Through theexecution of its charter, our Compensation Committee recommends, to the Boardof Director, all of the forms of compensation for our named executive officers,including base salary, bonus plan and defined contribution plan and relatedgoals.

 

The executive bonus planis performance based.  The programprovides for incentives based upon net consolidated income (loss) and cash flow(as defined by the Partnership Agreement), which are approved by the Board ofDirectors based upon operating plan for the year, with guideline ratesestablished between 20% and 35%.  Thebonus is limited to a maximum of 200% of the guideline not to exceed 15% ofPartnership’s cash flow.  The bonuscompensation level and related payment requires Board of Director approval.

 

 

57

----

 

The defined contributionplan is provided in lieu of a retirement plan and is based upon standardguidelines for all employees including executives.  The defined contribution and the relatedpayment, requires annual approval by the Board of Directors.

 

The Partnership iscommitted to maximizing unit holder value, and dedicated to attracting andretaining the necessary talent to accomplish this objective.  The compensation philosophy is designed todirectly align the interests of unit holders and employees through compensationprograms that will reward employees for performance that builds long-term unitholder value.

 
| ** **                      | ** ** | **Annual Compensation** | ** ** |
|---------------------------------|------------|-------------------------|------------|
| ** **                      | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | **Board** | ** ** | **Defined** | ** ** | **Other** | ** ** | ** ** | ** ** |
| **Name and Principal Position** | ** ** | **Year**                | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Fees** | ** ** | **Contribution** | ** ** | **(a)** | ** ** | **Total** | ** ** |
| Dennis J. Simonis               |       | 2007                    |       | 260,000 |   | — |   | 19,000 |   | 12,100 |   | 4,900 |   | 296,000 |   |
| President and chief             |       | 2006                    |       | 237,000 |   | 125,600 |   | 21,000 |   | 12,100 |   | 4,900 |   | 400,600 |   |
| executive officer               |       | 2005                    |       | 225,000 |   | 134,800 |   | 19,000 |   | 11,500 |   | 4,500 |   | 394,800 |   |
|                            |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Randolph H. Cabral              |       | 2007                    |       | 137,000 |   | — |   | — |   | 16,800 |   | 5,600 |   | 175,200 |   |
| Senior vice president           |       | 2006                    |       | 132,000 |   | 50,000 |   | — |   | 16,800 |   | 4,200 |   | 203,000 |   |
|                            |       | 2005                    |       | 125,000 |   | 53,500 |   | — |   | 13,400 |   | 4,200 |   | 196,100 |   |
|                            |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Wayne Roumagoux                 |       | 2007                    |       | 120,000 |   | — |   | — |   | 7,500 |   | 3,900 |   | 131,400 |   |
| Chief financial officer         |       | 2006                    |       | 116,000 |   | 35,100 |   | — |   | 7,500 |   | 3,900 |   | 162,500 |   |
|                            |       | 2005                    |       | 110,000 |   | 37,700 |   | — |   | 5,200 |   | 1,800 |   | 154,700 |   |

 

----

(a)  The amount inthis column is the cost for an automobile provided by the Partnership.

 

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

 

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

 

**C.  NoEmployment Contracts or Termination Agreements**

** **

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

 

**D. Compensation of Executive Officers**

 

Executive compensation is reviewed and determined bythe Compensation Committee and recommended to the Board of Directors which hasapproval responsibility.  Mr. Simonishas served as its chief executive officer and president since December 2004,president since August 2001 and chief financial officer from May 2001until August of 2001; Mr. Cabral, who has served as senior vicepresident and orchard manager since May 2000 and Mr. Roumagoux, whohas served as chief financial officer since August of 2001.  These officers’ salary and guideline bonuspercentage are administered under the salary policies 

 

 

58

----

 

established and approved by the Board.  Any bonus payments are approved by theManaging Partner’s Board of Directors annually, based on the overallperformance of the Partnership as evidenced by its net consolidated income(loss) and cash flow for the year. Performance in both categories is measured relative to the originalPartnership operating budget approved by the Managing Partner’s Board ofDirectors at the beginning of each year.

 

**E.  Director Compensation**

 

Directors of the Managing Partner presently receive a quarterlyretainer of $3,750 and a meeting fee of $1,000 per meeting.  Members of the Managing Partner’s Audit andConflicts Committee receive a meeting fee of $1,000 per meeting with thechairman of the Audit Committee receiving an additional $750 per meeting.  There are no other agreements orarrangements, including no stock or stock option plans, between the ManagingPartner and its directors.

 
| ** **                   | ** ** | **Annual Compensation**  | ** ** |
|------------------------------|------------|--------------------------|------------|
| **Name of Director**         | ** ** | **Year**                 | ** ** | **Fees** | ** ** | **Meeting** | ** ** | **Audit  Chair** | ** ** | **Total** | ** ** |
| John K. Kai                  |       | 2007                     |       | 15,000 |   | 8,000 |   | — |   | 23,000 |   |
| James S. Kendrick            |       | 2007                     |       | 15,000 |   | 4,000 |   | — |   | 19,000 |   |
| E. Alan Kennett              |       | 2007                     |       | 15,000 |   | 8,000 |   | — |   | 23,000 |   |
| Jeffrey M. Kissel (Chairman) |       | 2007                     |       | 15,000 |   | 8,000 |   | 3,000 |   | 26,000 |   |
| David McClain                |       | 2007                     |       | 15,000 |   | 8,000 |   | — |   | 23,000 |   |
| Dennis J. Simonis            |       | 2007                     |       | 15,000 |   | 4,000 |   | — |   | 19,000 |   |
| Scott C. Wallace             |       | 2007                     |       | 11,250 |   | 3,000 |   | — |   | 14,250 |   |
|                         |       |                     |       |   |   |   |   |   |   |   |   |
| ** **                   | ** ** | **Annual  Compensation** | ** ** |
| **Name of Director**         | ** ** | **Year**                 | ** ** | **Fees** | ** ** | **Meeting** | ** ** | **Audit  Chair** | ** ** | **Total** | ** ** |
| John K. Kai                  |       | 2006                     |       | 15,000 |   | 10,000 |   | — |   | 25,000 |   |
| James S. Kendrick            |       | 2006                     |       | 15,000 |   | 6,000 |   | — |   | 21,000 |   |
| E. Alan Kennett              |       | 2006                     |       | 15,000 |   | 8,000 |   | — |   | 23,000 |   |
| Jeffrey M. Kissel (Chairman) |       | 2006                     |       | 15,000 |   | 10,000 |   | 1,500 |   | 26,500 |   |
| David McClain                |       | 2006                     |       | 15,000 |   | 10,000 |   | 1,500 |   | 26,500 |   |
| Dennis J. Simonis            |       | 2006                     |       | 15,000 |   | 6,000 |   | — |   | 21,000 |   |
| James Case*                  |       | 2006                     |       | 7,500 |   | 4,000 |   | — |   | 11,500 |   |
| Russell Case**               |       | 2006                     |       | 7,500 |   | 1,000 |   | — |   | 8,500 |   |

 

----

*    James Case resigned as aDirector effective June 12, 2006.

 

**  Russell Case resigned as aDirector effective November 30, 2006.

 

 

59

----

 

**F.  Stock PerformanceChart**

 

The following chart compares the Partnership’s total return to (i) theRussell 2000 (a small business index) and (ii) a peer group index composedof publicly traded limited partnerships with either similar capitalization orin commodity based markets (other than gas and oil) or both.

 

 
| **ITEM 12.** | **SECURITY OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT AND RELATED** |
|--------------|---------------------------------------------------------------------------------|
| ** **   | **UNIT HOLDER MATTERS**                                                         | ** ** | ** ** |

 

As of December 31, 2007, and subsequent to thatdate to the date of this report, (i) two persons (including any “group” asthat term is used in Section 13(d)(3) of the Securities Exchange Actof 1934) is known by the Partnership or the Managing Partner to be thebeneficial owner of more than 5% of the Class A Units; (ii) theManaging Partner did not own any Class A Units; and (iii) no directoror executive officer of the Managing Partner owned more than 1% of the Class AUnits.

 

 

60

----

 

The table below setsforth certain information as to the Class A Units beneficially owned bythe beneficial owner of more than 5% of the Class A Units as of December 31,2007.

 
| ** **                            | ** ** | ** **       | ** ** | **Percent**      | ** ** |
|---------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                            | ** ** | **Class A** | ** ** | **of**           | ** ** |
| **Name of**                           | ** ** | **Units**        | ** ** | **Class A** | ** ** |
| **Beneficial Owner**                  | ** ** | **Owned**        | ** ** | **Units**        | ** ** |
|                                  | ** ** |             | ** ** |             |       |
| Farhad Fred Ebrahimi                  | ** ** | 739,500          | ** ** | 9.9              | %          |
| Berggruen Holdings North America, Ltd | ** ** | 380,000          | ** ** | 5.1              | %          |

 

The table below setsforth certain information as to the Class A Units beneficially owned bythe directors of the Managing Partner, and all directors and executive officersof the Managing Partner as a group, as of December 31, 2007.

 
| ** **                                                   | ** ** |             | ** ** | **Percent**      | ** ** |
|--------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                   | ** ** | **Class A** | ** ** | **of**           | ** ** |
| **Name of**                                                  | ** ** | **Units**        | ** ** | **Class A** | ** ** |
| **Beneficial Owner**                                         | ** ** | **Owned**        | ** ** | **Units**        | ** ** |
|                                                         |       |             |       |             |       |
| Randolph H. Cabral                                           |       | 100              |       | *                |       |
| John K. Kai                                                  |       | 100              |       | *                |       |
| James S. Kendrick                                            |       | 1,500            |       | *                |       |
| E. Alan Kennett                                              |       | —           |       | *                |       |
| Jeffrey M. Kissel                                            |       | 3,212            |       | *                |       |
| David McClain                                                |       | —           |       | *                |       |
| Dennis J. Simonis                                            |       | —           |       | *                |       |
| Wayne W. Roumagoux                                           |       | —           |       | *                |       |
| All directors and executive officers as a group (8  persons) |       | 4,912            |       | 0.07             | %          |

 

----

*Less than 1%

 

**ITEM13.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

**1*.  General***

 

The ManagingPartner makes all decisions relating to the management of the Partnership.  The Managing Partner, as such, has the dutyto act in good faith and to manage the Partnership in a manner that is fair andreasonable to all unit holders.

 

**2.  *Farming Leases***

 

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

 

The Partnershipacquired its interests in the trees situated on such leased macadamia orchardproperties subject to repurchase options retained by the AgribusinessCompanies.  The repurchase options grantthe Agribusiness Companies the continuing right to repurchase all or anyportion of such trees after June 30, 2019 at a price equal to the thencurrent fair market value of the trees, according to their value as 

 

 

61

----

 

producingmacadamia nut trees, as determined by mutual agreement between the Partnership,on the one hand, and either KACI or MKACI, as the case may be, on the otherhand.  If mutual agreement cannot bereached, the then current fair market value will be determined by appraisal.  Whether determined by mutual agreement or byappraisal, the fair market value of such trees will be determined according totheir value as producing macadamia nut trees, assuming that the owner thereofhas rights to farm and harvest such trees and has ongoing arrangements withrespect to land leases, farming and nut purchases of the same type as thePartnership has immediately prior to such time.

 

At the end of the45-year lease terms of such leases, the Agribusiness Companies will be requiredto repurchase such trees at their then current fair market value as orchards ifsuch entities do not offer to extend such farming leases at the then currentfair market lease rates. The then current fair market lease rate and the thencurrent market value of the trees for such purposes will be determined throughmutual agreement between the Partnership, on the one hand, and either KACI orMKACI, as the case may be, on the other hand or, if mutual agreement cannot beobtained, by appraisal, in each case in the manner described above.  Such repurchase obligations will apply withrespect to the expiration of each extension of the lease terms of such leasesuntil such leases have been in effect for a total of 99 years, at which timethe leases will expire and the ownership interests in such trees will revertback to the Agribusiness Companies.

 

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

 

As describedabove, the farming leases provide for determinations of the fair market leaserate to be paid by the Partnership under the farming leases and the fair marketvalue of the Partnership’s trees situated on property covered by such leases bymutual agreement between the Partnership, on the one hand, and with KACI orMKACI, as the case may be, on the other hand, or, if mutual agreement cannot bereached, by appraisal.

 

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

# *** ***

# ***The Partnership has four nut purchase contracts with: MaunaLoa, MacFarms, Hamakua and Island Princess, as detailed in the followingparagraphs.***

# *** ***

# ***On June 1, 2006, the Partnership executed a contractwith Mauna Loa for the annual delivery of approximately 6.3 million fieldpounds, effective January 1, 2006 and expiring December 31,2011.  The contract provides for a nutprice of $0.74 per wet-in-shell (“WIS”) pound in 2006 and $0.75 per WIS poundin 2007 at 20% moisture and 30% saleable kernel (“SK”)/dry-in-shell (“DIS”).  The purchase price will increase annually by$0.01 per WIS pound, except 2008, until it reaches $0.78 per WIS pound in 2011.***

# *** ***

# ***On December 16, 2004, a nut purchase contract withHamakua for the annual delivery of 6.0 million field pounds, effective January 1,2007, and  with 2.0 million field poundsexpiring December 31, 2008, December 31, 2010, and December 31,2012, respectively. The contract provides for a minimum price of $0.75 per WISpound and a maximum price of $0.95 per WIS pound at 20% moisture and 30%SK/DIS. The pricing formula included a fixed component of $0.85 per WIS poundand a second component based on Hamakua’s average selling price for bulkkernel.  In February 2007, thecontract was amended to allow the Partnership, at its option, to have Hamakuaprocess nuts-in-shell into kernel for a fee in lieu of selling the nuts toHamakua.  The Partnership exercised thisoption solely for the calendar year 2007. The contract continues to require that Hamakua purchase approximately6.0 million field pounds of nuts in***

 

 

62

----

 

2008, approximately 4.0 million field pounds of nuts in the years2009-2010, and 2.0 million field pounds of nuts in the years 2011-2012.

 

On January 5, 2006,the Partnership executed a contract with Island Princess for the annualdelivery of approximately 2.0 million field pounds, effective January 1,2007 and expiring on December 31, 2011. The nut price is determined every six months by mutual agreement basedon prevailing market price for kernel from Hawaii and Australia.  The effective price for January – June 2007was $0.608 and July – December 2007 was $0.494 per WIS pound at 20%moisture and 30% SK/DIS recovery.  Theeffective price for January – June 2008 is $0.494 and July - December 2008is $0.55, at 20% moisture and 30% SK/DIS recovery.

 

On January 6, 2006,the Partnership executed a contract with MacFarms for the annual delivery ofbetween 5.0 and 6.0 million field pounds, effective January 1, 2007.  The nut price will be determined every sixmonths by mutual agreement based on prevailing market price for kernel fromHawaii and Australia.  The effectiveprice for January – June 2007 was $0.608 and July – December 2007 was$0.494, at 20% moisture and 30% SK/DIS recovery.  The effective price for January – June 2008is $0.494 and July – December 2008 is $0.55, at 20% moisture and 30% SK/DISrecovery.  In connection with the orchardpurchased from J.W.A. Buyers in April 2006, the Partnership agreed to sellapproximately 100,000 field pounds harvested from the orchard to MacFarms for$0.98 per WIS pound at 20% moisture and 30% SK/DIS recovery.  This agreement expired on January 6,2007.

 

**4.  *Farming Contracts***

 

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

 

The contracts provided the Agribusiness Companies withreimbursement of their direct and indirect costs incurred under thesecontracts.  Husking activities for theKeaau and Mauna Kea orchards are performed at Mauna Loa’s Keaau facility.  Payments and reimbursements made to Mauna Loawere $458,000 in 2007, $559,000 in 2006 and $603,000 in 2005.

 

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

 

The Partnership paid$442,000, $196,000 and $134,000 in legal fees in 2007, 2006 and 2005,respectively.  A former Director of thePartnership is a former partner and currently of counsel to one of the lawfirms used by the Partnership and said firm was paid $196,000 in legal fees in2006, and $32,000 in legal fees in 2005. The additional legal fees were for services related to the specialmeeting and Mac Farms of Hawaii, LLC potential acquisition in 2007 and 2006.

 

**6.  *Management Fee***

 

Under the terms of the Partnership Agreement, thePartnership reimburses the Managing Partner for all expenses incurred by it inthe conduct of Partnership business, including any expenses reasonablyallocated to the Managing Partner or to the Partnership as well as a managementfee equal to 2% of the Partnership’s operating cash flow (as defined in thePartnership Agreement).  There was nomanagement fee in 2007, 2006 or 2005 as it is eliminated in consolidation.

 

 

63

----

 

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

 

Since September 2001, the Partnership has leasedapproximately 4,000 s.f. of office space in Hilo for its executive andaccounting staff through the General Partner, which was owned by DBE until January 2005.The Partnership Agreement requires that the price and terms of any suchtransactions be no less favorable than those available in comparabletransactions between unrelated parties. The Partnership provides administrative services to DBE for which it wascompensated $100,000 in 2007, $103,000 in 2006 and $102,000 in 2005.

 

Mr. Simonis, President of ML Resources, Inc.,an officer of the Partnership, and a director of ML Resources, Inc., andis a stockholder of CBCL.

 

The Partnership performs farming for a DBEcompany.  This farming is treated in thesame manner as all other farming contracts. In 2007 the amount billed was $1,000 was paid in full at December 31,2007.  In 2006 the amount billed was$21,000 of which $3,000 was due at December 31, 2006.  In 2005 the amount billed was $16,000 ofwhich $3,000 was due at December 31, 2005.

 

**8.  *Director Independence***

 

The Board of Directors hasdetermined that each member of the Board of Directors is independent inaccordance with SEC Rule 10-A-3 and New York Stock Exchange independencestandards except for Dennis J. Simonis. The other members of the Board of Directors John K. Kai, James S.Kendrick, E. Alan Kennett, Jeffrey M. Kissel, and David McClain are independentunder the independence standards applicable to the registrant.

 

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

 

**Pre-Approval Policies and Procedures. **Under the Sarbanes-Oxley Act of 2002, all audit andnon-audit services performed by our auditors must be approved in advance by ourBoard to assure that such services do not impair the auditors’ independencefrom the Partnership.  In accordance withits policies and procedures, our Board pre-approved the audit and non-auditservice performed by our auditors for our consolidated financial statements asof and for the years ended December 31, 2007, 2006 and 2005.

 

**Audit Fees.**Fees paid to the Independent Registered PublicAccounting Firm (PwC) during 2007, 2006 and 2005 for the audit of thePartnership’s consolidated financial statements on Form 10-K, Form 10-K/Aand review of consolidated financial statements included on Form 10-Qamounted to $114,400, $68,000 and $94,000, respectively.  The audit fees for were approved byPartnership’s audit committee.

 

Fees paid to the Independent Registered PublicAccounting Firm (Accuity LLP) during 2007 for the audit of the Partnership’sconsolidated financial statements on Form 10-K and review of consolidatedfinancial statements included on Form 10-Q amounted to $27,000.  The audit fees for the audit of thePartnership’s annual consolidated financial statements and review ofconsolidated financial statements included in the Partnership’s Form 10-Qfor the year ended December 31, 2007, which were approved by thePartnership’s audit committee amounted to $70,000.

 

**Audit Related Fees.** Audit related fees paid to the IndependentRegistered Public Accounting Firm (PwC) during 2007, 2006 and 2005 amounted to$50,000, $18,000, and $23,000, respectively. PwC performed a review of the Partnership’s Proxy Statement in theattempted acquisition of MacFarms in 2007 and review of the Partnership’sresponse to SEC comments letters in 2005 and 2006.

 

Audit related fees paid to the Independent RegisteredPublic Accounting Firm (Accuity LLP) during 2007 amounted to $10,000, for workperformed related to the review of the Partnership’s Proxy Statement in theattempted acquisition of MacFarms.  Auditrelated fees were approved by the Partnership’s audit committee.

 

**Tax Fees. **The Partnership’s audit committee pre-approvesthe fees paid to its Independent Registered Public Accounting Firm for thepreparation of K-1’s for its unit holders and the Partnership’s taxreturns.  The fees paid to PwC, anIndependent Registered Public Accounting Firm, during 2007, 2006 and 2005 fortax preparation and related support services amounted to $264,000, $225,000 and$250,000, respectively.  The tax feeswere approved by the Partnership’s audit committee.

 

 

64

----

 

### **PART IV**

### ** **

**ITEM 15.  EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTSCHEDULES AND REPORTS ON FORM 8-K**

 

**A.****           ****List of Documents Filed as a Part ofthis Report**

 

1.               *Consolidated FinancialStatements. *See Index to Consolidated FinancialStatements at page 24 of this Form 10-K.

 

2.               *Consolidated Financial StatementSchedules*.  None required.

 

3.               *Exhibits*. See *Exhibit* Index at page 67 ofthis Form 10-K.

 

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

 

On November 14,2007, the Partnership filed a “Regulation FD Disclosure” on Form 8-K,which included a copy of a press release issued by the Partnership settingforth the results of operations for the quarter ended September 30, 2007.

 

On November 28,2007, the Partnership filed a “Regulation FD Disclosure” on Form 8-K,which included a copy of a press release issued by the Partnership settingforth the amended terms and conditions to the acquisition agreement between thePartnership, and Mac Farms of Hawaii, LLC and Kapua Orchard Estates, LLC.

 

On December 14,2007, the Partnership filed a “Regulation FD Disclosure” on Form 8-K,which included a copy of a press release issued by the Partnership settingforth the terms and conditions to the cancellation agreement between thePartnership, and Mac Farms of Hawaii, LLC and Kapua Orchard Estates, LLC whichcancels the acquisition agreement of May 2007 as amended.

 

 

65

----

** **

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

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

 

Dated :  March 20, 2008

 

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

 

**ML RESOURCES, INC.**

 
| **Signature**               | ** ** | **Title**                              |
|-----------------------------|------------|----------------------------------------|
|                        |       |                                   |
| s/s Dennis J. Simonis       |       | President and Chief  Executive Officer |
| Dennis  J. Simonis          |       | Principal Executive  Officer           |
|                        |       | Director                               |
|                        |       |                                   |
| s/s Wayne W. Roumagoux      |       | Chief Financial Officer                |
| Wayne  W. Roumagoux         |       |                                   |
|                        |       |                                   |
| s/s John Kai                |       | Director                               |
| John  Kai                   |       |                                   |
|                        |       |                                   |
| s/s James S. Kendrick       |       | Director                               |
| James  S. Kendrick          |       |                                   |
|                        |       |                                   |
| s/s E. Alan  Kennett        |       | Director                               |
| E.  Alan Kennett            |       |                                   |
|                        |       |                                   |
| s/s Jeffrey  M. Kissel      |       | Director                               |
| Jeffrey  M. Kissel          |       |                                   |
|                        |       |                                   |
| s/s Dr. David  McClain |       | Director                               |
| Dr. David  McClain     |       |                                   |
|                        |       |                                   |
| s/s Scott C. Wallace        |       | Director                               |
| Scott  C. Wallace           |       |                                   |

 

 

66

----

 

**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                         |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                                                                                                                                    |
| 2.1         |       | Amended and Restated  Agreement and Plan of Merger, effective as of December 18, 1997, between  Registrant and C. Brewer Homes, Inc. (a)                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 2.2         |       | Asset Purchase  Agreement including Exhibits dated March 14, 2000 (g)                                                                                                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 3.2         |       | Form of  Class A Certificate of Limited Partnership as filed with the Secretary  of State of Delaware. (c)                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 3.3         |       | Certificate of Limited  Partnership of Registrant as filed with the Secretary of State of Delaware.  (c)                                                                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 4.1         |       | Depositary Agreement  between Registrant, Manufacturers Hanover Trust Company as Depositary and  Mauna Loa Resources Inc. as attorney-in-fact of the limited partners of  Registrant. (c)                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 4.2         |       | Form of Depositary  Receipt. (c)                                                                                                                                                                                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 5.1         |       | Legal Opinion of Counsel  dated May 1, 2000 (g)                                                                                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.2        |       | Macadamia Nut Purchase  Contract between Mauna Loa and Registrant dated December 22, 1986. (b)                                                                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.3        |       | Macadamia Nut Purchase  Contract between Mauna Loa and Registrant dated as of October 1, 1989.  (b)                                                                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.4        |       | Contribution Agreement  among Mauna Loa Orchards, L.P. (“MLO”), Ka’u Agribusiness Co., Inc.  (“KACI”), Mauna Kea Agribusiness Co., Inc. (“MKACI”), Mauna Kea  Macadamia Orchards, Inc. (“MKMO”) and Mauna Loa dated as of July 1,  1989. (b) |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.5        |       | Lease between the Trustees  of the Estate of Bernice Pauahi Bishop (“Trustees of the Bishop Estate”) and  Mauna Loa. (c)                                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.6        |       | Lease between KACI and  Registrant. (d)                                                                                                                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.7        |       | MLO/MLMO Conveyance  Agreement between MLO and Registrant dated as of October 1, 1989. (b)                                                                                                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.8        |       | Butcher/MLMO  Contribution Agreement between Howard Butcher III (“Butcher”) and Registrant  dated as of October 1, 1989. (b)                                                                                                                                                                        |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.9        |       | Farming Lease between  KACI and MLO dated as of July 1, 1989. (b)                                                                                                                                                                                                                                             |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.11       |       | Farming Lease between  MKACI and MLO dated as of July 1, 1989. (b)                                                                                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.12       |       | Water Agreement, as  amended, between KACI and Registrant dated as of October 1, 1989. (b)                                                                                                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.13       |       | Cash Flow Warranty  Agreement among KACI, MKACI and Registrant dated as of July 1, 1989. (b)                                                                                                                                                                                                                  |

 

 

67

----

 
| 10.14  |   | Guarantee Agreement  between Mauna Loa and Registrant dated as of October 1, 1989. (b)                                                                                                                    |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                           |
| 10.15  |   | Agreement of  Indemnification between CBCL and each director of the Managing Partner. (b)                                                                                                                      |
|   |   |                                                                                                                                                                                                           |
| 10.16  |   | Indemnification  Agreement (Title) among Mauna Loa, KACI and MKACI in favor of Registrant. (b)                                                                                                                 |
|   |   |                                                                                                                                                                                                           |
| 10.17  |   | Indemnification  Agreement (Subdivision) among Mauna Loa, KACI and MKACI in favor of  Registrant. (b)                                                                                                          |
|   |   |                                                                                                                                                                                                           |
| 10.18  |   | Deed between MLO and  Registrant relating to 14% undivided interest in 220 tree acres of macadamia  orchard properties located in the Keaau area of the island of Hawaii (“Keaau  II Orchards”). (b) |
|   |   |                                                                                                                                                                                                           |
| 10.19  |   | Bill of Sale between  MLO and Registrant relating to 14% undivided interest in Keaau II Orchards.  (b)                                                                                                         |
|   |   |                                                                                                                                                                                                           |
| 10.20  |   | Deed between Butcher  and Registrant relating to 86% undivided interest in Keaau II Orchards. (b)                                                                                                              |
|   |   |                                                                                                                                                                                                           |
| 10.21  |   | Bill of Sale between  Butcher and Registrant relating to 86% undivided interest in Keaau II  Orchards. (b)                                                                                                     |
|   |   |                                                                                                                                                                                                           |
| 10.22  |   | Assignment of Partial  Interest in Lease No. 15,020 and consent from MLO to Registrant. (b)                                                                                                               |
|   |   |                                                                                                                                                                                                           |
| 10.23  |   | Assignment of Partial  Interest in Lease No. 16,859 and consent from MLO to Registrant. (b)                                                                                                               |
|   |   |                                                                                                                                                                                                           |
| 10.24  |   | Assignment of Partial  Interest in Lease No. 20,397 and consent from MLO to Registrant. (b)                                                                                                               |
|   |   |                                                                                                                                                                                                           |
| 10.25  |   | Assignment of Lease  from MLO to Registrant relating to Lease from the Trustees of the Bishop  Estate. (b)                                                                                                     |
|   |   |                                                                                                                                                                                                           |
| 10.26  |   | Assignment from MLO to  Registrant relating to certain orchards. (b)                                                                                                                                           |
|   |   |                                                                                                                                                                                                           |
| 10.27  |   | Lease from the Trustees  of the Bishop Estate to MLO. (b)                                                                                                                                                      |
|   |   |                                                                                                                                                                                                           |
| 10.28  |   | Lease No. 15,020  from the Trustees of the Bishop Estate to MLO. (b)                                                                                                                                      |
|   |   |                                                                                                                                                                                                           |
| 10.29  |   | Form of Amendments  to Lease No. 15,020 from the Trustees of the Bishop Estate. (b)                                                                                                                  |
|   |   |                                                                                                                                                                                                           |
| 10.30  |   | Lease No. 16,859  from the Trustees of the Bishop Estate to the Hawaiian Agricultural Company  (a predecessor of KACI). (b)                                                                               |
|   |   |                                                                                                                                                                                                           |
| 10.31  |   | Form of Amendments  to Lease No. 16,859 from the Trustees of the Bishop Estate. (b)                                                                                                                  |
|   |   |                                                                                                                                                                                                           |
| 10.32  |   | Lease No. 20,397  from the Trustees of the Bishop Estate to CBCL. (b)                                                                                                                                     |

 

 

68

----

 
| 10.33  |   | Form of Amendments  to Lease No. 20,397 from the Trustees of the Bishop Estate to CBCL. (b)                                                                   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                    |
| 10.34  |   | Lease from Richard L.  Hughes to Mauna Loa. (b)                                                                                                                         |
|   |   |                                                                                                                                                                    |
| 10.35  |   | Lease from the Trustees  of the Bishop Estate to Mauna Loa. (b)                                                                                                         |
|   |   |                                                                                                                                                                    |
| 10.36  |   | Co-ownership and  Partition Agreement between KACI and MLO. (b)                                                                                                         |
|   |   |                                                                                                                                                                    |
| 10.37  |   | Co-ownership and  Partition Agreement among Mauna Loa, KACI and MLO.(b)                                                                                                 |
|   |   |                                                                                                                                                                    |
| 10.38  |   | Co-ownership and  Partition Agreement between KACI and MLO relating to Lease Nos. 15,020 and  16,859. (b)                                                               |
|   |   |                                                                                                                                                                    |
| 10.39  |   | Co-ownership and  Partition Agreement between MKACI and MLO. (b)                                                                                                        |
|   |   |                                                                                                                                                                    |
| 10.40  |   | Macadamia Nut Purchase  Contract between Mauna Loa and Keaau Macadamia X Corporation (“Keaau Lot 10”)  dated September 15, 1983. (e)                     |
|   |   |                                                                                                                                                                    |
| 10.41  |   | Assignment of Owner’s  Interest in Macadamia Nut Purchase Contract and Farming Contract between  Keaau Lot 10 and Registrant. (e)                                  |
|   |   |                                                                                                                                                                    |
| 10.42  |   | Warranty Deed between  Keaau Lot 10 and Registrant. (e)                                                                                                                 |
|   |   |                                                                                                                                                                    |
| 10.43  |   | Amended and Restated  June 1986 Farming Contract, effective January 1, 1998, between  Registrant and KACI. (f)                                                |
|   |   |                                                                                                                                                                    |
| 10.44  |   | Amended and Restated  December 1986 Farming Contract, effective January 1, 1998, between  Registrant and KACI. (f)                                            |
|   |   |                                                                                                                                                                    |
| 10.45  |   | Amended and Restated  1989 Farming Contract, effective January 1, 1998, among Registrant, KACI  and MKACI. (f)                                                     |
|   |   |                                                                                                                                                                    |
| 10.46  |   | Amended and Restated  Farming Contract for the Keaau Lot 10 Orchard, effective January 1,  1998, between Registrant and KACI. (f)                             |
|   |   |                                                                                                                                                                    |
| 10.47  |   | Restated Kaiwiki  Orchards Farming lease between Registrant and MKACI dated February 26,  1997. (f)                                                                |
|   |   |                                                                                                                                                                    |
| 10.48  |   | Credit Agreement  between Registrant and Pacific Coast Farm Credit Services, PCA dated  May 1, 2000 (g)                                                            |
|   |   |                                                                                                                                                                    |
| 10.49  |   | Security Agreement  between Registrant and Pacific Coast Farm Credit Services, PCA dated  May 1, 2000 (g)                                                          |
|   |   |                                                                                                                                                                    |
| 10.50  |   | Orchards Farming Lease  between Registrant and Ka’u Agribusiness Co., Inc. (g)                                                                                |
|   |   |                                                                                                                                                                    |
| 10.51  |   | Macadamia Nut Purchase  Contract between Mauna Loa and the Partnership dated July 1, 2003 for  Keaau Lot X nuts. (h)                                               |
|   |   |                                                                                                                                                                    |
| 10.52  |   | Macadamia Nut Purchase  Contract between Hamakua Macadamia Nut Company, Inc. and the Partnership  dated December 16, 2004 effective January 1, 2007. (i) |
|   |   |                                                                                                                                                                    |
| 10.53  |   | Jim Case resignation  letter from Audit Committee dated March 7, 2005. (i)                                                                                         |

 

 

69

----

 
| 10.54  |   | Macadamia Nut Purchase  Contract between Purdyco International, Ltd. and the Partnership dated  January 5, 2006 effective January 1, 2007. (j)                   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                       |
| 10.55  |   | Macadamia Nut Purchase  Contract between Mac Farms of Hawaii, LLC and the Partnership dated  January 6, 2006 effective January 1, 2007. (j)                      |
|   |   |                                                                                                                                                                       |
| 10.56  |   | Macadamia Nut Purchase  Contracts between Mauna Loa Macadamia Nut Corporation and the Partnership  dated June 1, 2006 effective January 1, 2006. (k)             |
|   |   |                                                                                                                                                                       |
| 10.57  |   | Macadamia Nut Purchase  Contract between Mauna Loa Macadamia Nut Corporation and the Partnership  dated June 1, 2006 effective January 1, 2006. (k)              |
|   |   |                                                                                                                                                                       |
| 10.58  |   | Definite Acquisition  Agreement between ML Macadamia Orchards, L.P. and MacFarms of Hawaii, LLC and  Kupua Orchards Estates, LLC, dated May 24, 2007. (l)             |
|   |   |                                                                                                                                                                       |
| 10.59  |   | Termination of  Acquisition Agreement between ML Macadamia Orchards, L.P. and MacFarms of  Hawaii, LLC and Kupua Orchards Estates, LLC, dated December 11, 2007.  (m) |
|   |   |                                                                                                                                                                       |
| 11.1   |   | Statement re:  Computation of Net Income per Class A Unit.                                                                                                                 |
|   |   |                                                                                                                                                                       |
| 31.1   |   | Form of  Rule 13a-14(a) [Section 302] Certification — Chief Executive  Officer                                                                    |
|   |   |                                                                                                                                                                       |
| 31.2   |   | Form of  Rule 13a-14(a) [Section 302] Certification — Chief Financial  Officer                                                                    |
|   |   |                                                                                                                                                                       |
| 32.1   |   | Certification pursuant  to 18 U.S.C. Section 1350 As adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 — Chief Executive Officer           |
|   |   |                                                                                                                                                                       |
| 32.2   |   | Certification pursuant  to 18 U.S.C. Section 1350 As adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 — Chief Financial Officer           |

 

----

(a)          Incorporated by reference to Appendix A of Registrant’sRegistration Statement under the Securities Act on Form S-4, RegistrationStatement No. 333-46271, filed February 13, 1998.

 

(b)         Incorporated by reference to the corresponding Exhibit previouslyfiled as an Exhibit to Registrant’s Registration Statement under theSecurities Act on Form S-1, Registration Statement No. 33-30659,filed October 20, 1989.

 

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

 

(d)         Incorporated by reference to the corresponding Exhibit previouslyfiled as an Exhibit to Registrant’s Annual Report on Form 10-K,Commission filed No. 1-9145, for the year ended December 31, 1986,filed March 27, 1987.

 

(e)          Incorporated by reference to the corresponding Exhibit previouslyfiled as an Exhibit to Registrant’s Annual Report on Form 10-K,Commission filed No. 1-9145, for the year ended December 31, 1991,filed March 27, 1992.

 

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

 

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

 

 

70

----

 

(h)         Incorporated by reference to the corresponding Exhibit previouslyfiled as an Exhibit to Registrant’s Form 10-K, Commission filed No. 001-09145,filed March 17, 2004.

 

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

 

(j)             Incorporated by reference to the corresponding Exhibit previouslyfiled as an Exhibit to Registrant’s Form 8-K, Commission filed No. 001-09145,filed January 9, 2006.

 

(k)          Incorporated by reference to the corresponding Exhibit previouslyfiled as Exhibit to Registrant’s Form 8-K, Commission filed No. 001-09145,filed June 5, 2006.

 

(l)             Incorporated by reference to the corresponding Exhibit previouslyfiled as Exhibit to Registrant’s Form 8-K, Commission filed No. 001-09145,filed May 31, 2007.

 

(m)       Incorporated by reference to the corresponding Exhibit previouslyfiled as Exhibit to Registrant’s Form 8-K, Commission filed No. 001-09145,filed December 14, 2007.

 

 

71

----