**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

### **FORM 10-K/A**

### ** **

| **x** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------------------------------------------------------------------------------------------|

 

**(Amendment No. 2)**

 

**For theFiscal Year Ended  December 31, 2006**

 

**OR**

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

 

**CommissionFile Number  1-9145**

 

**MLMACADAMIA ORCHARDS, L.P.**

(Exact Name ofregistrant as specified in its charter)

 

| **DELAWARE**                                                    | ** ** | **99-0248088**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **26-238  Hawaii Belt Road, HILO, HAWAII**                      | ** ** | **96720**                             |
| (Address of principal  executive offices)                       |       | (Zip Code)                            |

 

Registrant’s telephonenumber, 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**

 

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

Yes o   No x

 

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

Yes o   No x

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding twelve months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x   No o

 

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

 

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

 

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

 

As of April 11, 2007,7,500,000 shares of the registrant’s Class A Units were outstanding, and theaggregate market value of such Units held by non-affiliates was $41,925,000(based on the closing price on that date of $5.59 per Unit).

 

 

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**EXPLANATORY NOTE**

** **

This Amendment No. 2 onForm 10-K/A to the Partnership’s Annual Report in Form 10-K for the year endedDecember 31, 2006 filed with the Securities and Exchange Commission on April16, 2007 is filed to amend and revise the disclosure relating to thePartnership’s covenant compliance with the Credit Agreement with AmericanAgCredit Capital Markets.

 

In connection with theissuance of the Form 10-K, dated April 16, 2007, the Partnership determined itwas in compliance with the covenants at December 31, 2006. Subsequently, thePartnership determined that it was in compliance with all debt covenants exceptfor minimum tangible net worth. The Partnership was less than 0.4% below therequired amount. On July 5, 2007, the lender provided a waiver to the loancovenant for the year ended December 31, 2006 and retroactively amended theminimum 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. The Partnership on receiving the waiver filed an amendedForm 10-K/A dated August 16, 2007, amending the notes to the 2006 financialstatements, to disclose the non-compliance and receipt of the waiver withoutthe consent of its independent registered public accounting firm. This Form10-K/A (Amendment No. 2) reflects the revised disclosure for the covenantviolation and subsequent waiver and the filing of the revised consolidatedfinancial statements of the Partnership.

 

This Form 10-K/A(Amendment No.2) has not been updated except as required to reflect the effectsdescribed above. This amendment includes changes to Part II, Items 5, 7, and 8as indicated below. Except as identified in the prior sentence, no other itemsincluded in the original Form 10-K have been amended, and as such items remainin effect as of the filing date of the original Form 10-K. Additionally, thisForm 10-K/A (Amendment No.2) does not purport to provide an update or adiscussion of any other developments at the Partnership subsequent to theoriginal filing.

 

Part II, Item 5. Marketfor Registrant’s Class A Units and Related Unitholder Matters

 

Restrictions on Cash Distribution is revised from:

 

In connection with thePartnership’s Credit Agreement with American AgCredit Capital Markets, cashdistributions to partners are restricted unless the Partnership is incompliance with specified terms and conditions of the Credit Agreement,including restrictions on further indebtedness, sales of assets, andmaintenance of certain financial ratios. The Partnership was in compliance withthe terms and conditions of the Credit Agreement at December 31, 2006 andDecember 31, 2005.

 

To:

 

In connection with thePartnership’s Credit Agreement with American AgCredit Capital Markets, cashdistributions to partners are restricted unless the Partnership is incompliance with specified terms and conditions of the Credit Agreement,including restrictions on further indebtedness, sales of assets, andmaintenance of certain financial ratios. The credit agreements with American AgCredit, PCA,contain various financial covenants. The Partnership was in compliance with alldebt covenants at December 31, 2005. In connection with the issuance of thefinancials included in the 10-K dated April 16, 2007, the Partnershipdetermined it was in compliance with the covenants at December 31, 2006. Subsequently,the Partnership determined that it was in compliance with all debt covenantsexcept for minimum tangible net worth. The Partnership was less that 0.4% belowthe required amount. On July 5, 2007, the lender provided a waiver to the loancovenant for the year ended December 31, 2006 and retroactively amended theminimum tangible net worth covenant. Had the lender not waived this violationthe Partnership

 

2

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would have been restricted in its ability to paydistributions to the limited partners and all obligations and indebtedness, atthe lender’s option, would be accelerated and become immediately due andpayable.

 

Part II, Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations

 

Liquidity and CapitalResources the third paragraph is revised from:

 

The Partnership was incompliance with the terms and conditions of the Credit Agreement at December31, 2006 and December 31, 2005.

 

To:

 

The Partnership was in compliance with all debtcovenants at December 31, 2005. In connection with the issuance of thefinancials included in the 10-K, dated April 16, 2007, the Partnershipdetermined it was in compliance with the covenants at December 31, 2006. Subsequently,the Partnership determined that it was in compliance with all debt covenants exceptfor minimum tangible net worth. The Partnership was less that 0.4% below therequired amount. On July 5, 2007, the lender provided a waiver to the loancovenant for the year ended December 31, 2006 and retroactively amended theminimum tangible net worth covenant. Had the lender not waived this violationthe Partnership would have been restricted in its ability to pay distributionsto the limited partners and all obligations and indebtedness, at the lender’soption, would be accelerated and become immediately due and payable.

 

Notes to ConsolidatedFinancial Statements (7) Short-Term and Long-Term Credit the last paragraphlast sentence is revised from:

 

The Partnership was incompliance with all covenants of the Credit Agreement at December 31, 2006 andDecember 31, 2005.

 

To:

 

The Partnership was in compliance with all debtcovenants at December 31, 2005. In connection with the issuance of thefinancials included in the 10-K, dated April 16, 2007, the Partnershipdetermined it was in compliance with the covenants at December 31, 2006. Subsequently,the Partnership determined that it was in compliance with all debt covenantsexcept for minimum tangible net worth. The Partnership was less that 0.4% belowthe required amount. On July 5, 2007, the lender provided a waiver to the loancovenant for the year ended December 31, 2006 and retroactively amended theminimum tangible net worth covenant. Had the lender not waived this violationthe Partnership would have been restricted in its ability to pay distributionsto the limited partners and all obligations and indebtedness, at the lender’soption, would be accelerated and become immediately due and payable.

 

In order to preserve thenature and character of the disclosures as originally filed, except to make therevisions described above, no attempt has been made in this Amendment to modifyor update disclosures as presented in the Partnership’s Annual Report forevents that occurred subsequent to its original filing on April 16, 2007. Accordingly,this Amendment should be read in conjunction with the Partnership’s subsequentfilings with the Commission.

### ** **

3

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### **PART II**

### ** **

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

 

The Partnership’s Class A Depositary Units are listedfor trading on the New York Stock Exchange (symbol = NUT). There were 1,010registered holders of Class A Depositary Units on December 31, 2006.

 

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

 
| ** ** | ** **  | **Distribution** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------|-------------|------------------|------------|----------|------------|---------|------------|
| **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       |   |
|       |        |             |       |     |       |    |       |
| **2005:**  | 4th Quarter |             | $          | 0.050    |       | 6.09    |       | 5.60 |   |
|       | 3rd Quarter |             | 0.050      |     | 6.19       |    | 5.30       |   |
|       | 2nd Quarter |             | 0.050      |     | 6.19       |    | 5.45       |   |
|       | 1st Quarter |             | 0.050      |     | 6.26       |    | 5.45       |   |

 

**Restrictions on Cash Distributions**

 

In connection with the Partnership’sCredit Agreement 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 financial ratios. Inconnection with the Partnership’s Credit Agreement with American AgCreditCapital Markets, cash distributions to partners are restricted unless thePartnership is in compliance with specified terms and conditions of the CreditAgreement, including restrictions on further indebtedness, sales of assets, andmaintenance of certain financial ratios. The credit agreements with American AgCredit, PCA,contain various financial covenants. The Partnership was in compliance with alldebt covenants at December 31, 2005. In connection with the issuance of thefinancials included in the 10-K, dated April 16, 2007, the Partnershipdetermined it was in compliance with the covenants at December 31, 2006. Subsequently,the Partnership determined that it was in compliance with all debt covenantsexcept for minimum tangible net worth. The Partnership was less that 0.4% belowthe required amount. 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 the lender not waived this violation thePartnership would have been restricted in its ability to pay distributions tothe limited partners and all obligations indebtedness, at the lender’s option,would be accelerated and become immediately due and payable.

 

4

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**ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

This discussion should beread in conjunction with the financial statements and the related notesincluded elsewhere in this report.

 

# ***Resultsof operations – 2006, 2005, 2004***

# *** ***

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

## ** **

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

 
| ** **                                | ** ** | ** **   | ** ** | ** **  | ** ** | **2006**       | ** ** | **Average Yield per Acre** | ** ** |
|-------------------------------------------|------------|--------------|------------|-------------|------------|----------------|------------|-------------------------------------------|------------|
| **Orchard**                               | ** ** | **Acquired** | ** ** | **Acreage** | ** ** | **Production** | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Keaau I                                   |       | June 1986    |       | 1,467       |       | 6,645,746      |       | 4,530                                     |       | 3,953 |   | 3,880 |   |
| Keaau II                                  |       | Oct. 1989    |       | 220         |       | 628,416        |       | 2,856                                     |       | 2,758 |   | 2,729 |   |
| Keaau Lot 10                              |       | Sept. 1991   |       | 78          |       | 279,961        |       | 3,589                                     |       | 3,168 |   | 3,221 |   |
| Ka’u I                               |       | June 1986    |       | 956         |       | 5,343,929      |       | 5,590                                     |       | 7,948 |   | 5,353 |   |
| Ka’u Green Shoe I                    |       | Dec. 1986    |       | 266         |       | 1,984,649      |       | 7,461                                     |       | 6,399 |   | 6,632 |   |
| Ka’u II                              |       | Oct. 1989    |       | 714         |       | 3,917,556      |       | 5,487                                     |       | 4,957 |   | 5,067 |   |
| Ka’u O                               |       | May 2000     |       | 142         |       | 703,974        |       | 4,958                                     |       | 5,655 |   | 4,464 |   |
| Ka’u 715/716                         |       | April 2006   |       | 21          |       | 107,904        |       | 5,138                                     |       |   |   |   |   |
| Mauna Kea                                 |       | Oct. 1989    |       | 326         |       | 1,581,635      |       | 4,852                                     |       | 4,327 |   | 3,851 |   |
| Totals (except yields which are averages) |       |         |       | 4,190       |       | 21,193,770     |       | 5,058                                     |       | 5,207 |   | 4,541 |   |

 

The Partnership reportson a calendar year basis, though the natural crop year generally begins inAugust and runs through April. 2006 production is reported on the 2005 contractbasis for comparative purposes. On page 15, production for 2006 is reportedunder the contracts effective for 2006 and compared to 2005 and 2004production.

 

Production in 2006 was1.6% lower than 2005 and 11.6% greater than 2004. Production in 2005 was 14.6%greater than 2004 and 2.4% greater than 2003. Production in 2004 was 10.7%lower than 2003 and 11.5% lower than 2002. Significant factors affecting thecrop were as follows:

 

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

 

2. The aboveaverage rainfall in the Keaau and Mauna Kea orchards negatively impacted thepollination and nut set in 2004.

 

3. The Ka’u regionrecorded above average rainfall in 2004. The rainfall replenished the soilmoisture and improved yields in the region for the spring of 2005.

 

4. The maturationof the crop was delayed by the weather conditions which resulted in lessproduction in the fall of 2004 and improved yields in the spring of 2005.

 

5. The Ka’u regionrecorded below average rainfall in 2005. The shortfall during the early springto fall of 2005 reduced yields in the spring of 2006. Above average rainfallfrom November 2005 through February 2006 contributed a positive effect on thefall 2006 production.

 

6. A late andabbreviated flower season in the Keaau and Mauna Kea regions resulted in lowerproduction in the fall of 2005 and the spring of 2006. Cool night temperaturesfrom November 2005 

 

5

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through May 2006contributed to an early and extended flower/nut set season that had a positiveeffect on the fall 2006 production despite the occurrence of a light-moderateflower disease in March 2006. The extended flowering period will also have apositive effect on the spring 2007 nut production

 

The Ka’u Green Shoe I orchard and the Mauna Keaorchard are fully mature. As a result, the yields from these orchards areexpected to produce on average with the Partnership’s mature orchards. At fullmaturity under favorable growing conditions, a macadamia orchard can producebetween 4,500 and 7,500 WIS pounds of macadamia nuts per acre each year at Ka’uand between 2,500 and 6,000 WIS pounds of macadamia nuts per acre each year atKeaau and Mauna Kea.

 

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

## ** **

Macadamia nut revenuesdepend on the number of producing acres, yields per acre and the nut purchaseprice. The impact of these factors is summarized in the following table using2006 actual contracts and implied as if using old contracts for 2006 comparedto actual for 2005. The implied 2006 is presented for the purpose of comparingthe new contracts on equivalent terms with prior year, such that contractpounds delivered and nut price are on an equal basis:

 

For the twelvemonths

 

Ended December 31,2006

 
| ** **                                    | ** ** | **Actual Contracts**  | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                    | ** ** | **WIS @ 20%**    | ** ** | **Implied**             | ** ** | **Actual**              | ** ** | **2006-2005**           | ** ** |
| ** **                                    | ** ** | **SK/DIS @ 30%** | ** ** | **WIS @ 25%** | ** ** | **WIS @ 25%** | ** ** | **Change**              | ** ** |
| ** **                                    | ** ** | **2006**                   | ** ** | **2006**                | ** ** | **2005**                | ** ** | **WIS @ 25%** | ** ** |
| Field pounds  delivered (000’s)          |       | 21,362                     |       | 21,362                  |       | 21,636                  |       | - 1                     | %          |
| Trash adjustment  (000’s)                |       | (785                       | )          | 68                      |       | (276                    | )          | + 125                   | %          |
| Quality  adjustment SK/DIS (000’s)       |       | (2,642                     | )          | (804                    | )          | (644                    | )          | - 25                    | %          |
| Moisture  adjustment WIS (000’s)         |       | (563                       | )          | 568                     |       | 991                     |       | - 43                    | %          |
| Contract pounds  delivered (000’s)       |       | 17,372                     |       | 21,194                  |       | 21,707                  |       | - 2                     | %          |
| Nut price ($/per  pound)                      |       | $                          | 0.7433     |                    | $          | 0.6093                  |       | $                       | 0.5550     |   | + 10 | % |
| Net nut sales  ($000’s)                  |       | $                          | 12,913     |                    | $          | 12,913                  |       | $                       | 12,048     |   | + 7 | % |
| 2004/2005 nut  price adjustment ($000’s) |       | $                          | 343        |                    | $          | 343                     |       | $                       | 636        |   |   |   |
| Total nut sales  ($000’s)                |       | $                          | 13,256     |                    | $          | 13,256                  |       | $                       | 12,684     |   | + 5 | % |

 

6

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Thefollowing table presents the comparison of information to derive theOwned-Orchard Segment nut revenue using the 2005 contracts for all informationtherefore implied for 2006 and actual for 2005 and 2004. The implied 2006 isused so that the comparisons are presented on an equivalent basis.

 
| ** **                           | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------|------------|-------------|------------|------------|------------|------------|------------|----------|------------|----------|------------|
| ** **                           | ** ** | **Implied** | ** ** | **Actual** | ** ** | **Actual** | ** ** | **vs**   | ** ** | **vs**   | ** ** |
| ** **                           | ** ** | **2006**    | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Trees acres harvested                |       | 4,190       |       | 4,169      |       | 4,169      |       | +  01    | %          | —   |       |
| Average yield (WIS lbs./acre)        |       | 5,058       |       | 5,207      |       | 4,541      |       | -  03    | %          | +  15    | %          |
| Nuts harvested (000’s WIS lbs.) |       | 21,194      |       | 21,707     |       | 18,933     |       | -  02    | %          | +  15    | %          |
| Nut price ($/WIS lbs. @ 25%)         |       | 0.6093      |       | 0.5550     |       | 0.4972     |       | +  10    | %          | +  12    | %          |
| Gross nut sales ($000)               |       | $           | 12,913     |       | $          | 12,048     |       | $        | 9,414      |     | +  07      | % | +  28 | % |
| Prior year nut price settlement      |       | 343         |       | 576        |       | —     |       |     |       |     |       |
| 2003 early harvest settlement        |       | —      |       | —     |       | —     |       |     |       |     |       |
| 2004 Mac Farms settlement            |       | —      |       | 60         |       | —     |       |     |       |     |       |
| Recorded nut sales ($000s)           |       | $           | 13,256     |       | $          | 12,684     |       | $        | 9,414      |     |       |   |   |   |

 

The 2006 analysis ofaverage yields, nuts harvested and nut price is based upon the contracts whichwere in effect prior to January 1, 2006 and therefore are implied results. The2006 gross nut sales, prior year price settlement and recorded nut sales areactual results. Based upon the 2005 and earlier contracts the following wouldapply. Under three of the nut purchase contracts with Mauna Loa, the price fornuts delivered is based 50% on the two-year trailing average of USDA publishedmacadamia nut prices and 50% on a “netback component”. The netback component isdetermined by subtracting from Mauna Loa’s gross revenues from the sale ofmacadamia products (i) allocable processing, packaging, marketing, selling andadvertising costs and (ii) a 20% capital charge on the difference between thoseaggregate gross revenues and aggregate allocable costs.

 

In mid-December 2004, Mauna Loa notified thePartnership that it would be unable to accept deliveries over a five-day periodduring the height of the harvest season. The Partnership advised Mauna Loa thatthis was unacceptable for both financial and operational reasons andarrangements would be made to deliver the nuts to another processor. Afteralternative deliveries had been committed to, Mauna Loa notified the Partnershipthat it was willing to accept delivery. As a result of the alternativecommitment, the Partnership delivered approximately 240,000 pounds of nuts toMac Farms of Hawaii at a price of 93 cents per pound over a two-day period. Inlate December, Mauna Loa notified the Partnership that it intended to deduct$118,000 from future nut payments as damages. The Partnership notified MaunaLoa that the deduction was a violation of our various contracts and thePartnership would consider termination of the contracts if such deduction weremade. Mauna Loa has since withdrawn their notice of deduction, but thePartnership reserved $118,000 in 2004. A settlement was reached with Mauna Loawhereby the Partnership paid Mauna Loa approximately $58,000. As a result thePartnership recorded $60,000 of nut revenue in 2005 from the 2004 reserve.

 

In 2005 and 2004 the net-back component of the nutpurchase price was not determined in a timely manner by Mauna Loa. ThePartnership used information provided by Mauna Loa to determine the nutpurchase price for each of the years. After Mauna Loa provided the finalnet-back component the Partnership determine the final nut purchase price andrecognized the additional revenue at the time it became known.

 

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The following table sets forth the manner in which thenut purchase price per pound was determined for 2005 and 2004 ($/lb.). Thistable does not include 2006 as the contracts were renegotiated in 2006 andthere is no available net-back component:

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

 

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

 

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

 

(c)          The nut purchasecontract covering nut production from the 78 acre Keaau Lot 10 orchard acquiredin September 1991 defines the “two-year trailing average” provision slightlydifferently from the 1986 and 1989 nut purchase contracts, and thus results ina different nut price. This was in effect for the first six months of 2003. Anew contract was negotiated with a fixed price for all nuts with unusables in arange of 10% to 13%. The nut price for this orchard was $0.6000 in 2006, 2005and 2004. This orchard accounts for less than 2% of the Partnership’s macadamianut production.

 

(d)         The nut purchase contractfor the Ka’u O orchards purchased in May 2000 uses only the two-year trailingUSDA average to determine its nut price, which was $0.6912 in 2006, $0.5610 in2005 and $0.5560 in 2004.

 

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

 

(f)            Mauna Loa has providedthe final 2005 audited nut price to the Partnership resulting in an additional$343,000 paid in 2006.

 

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The 2005 average nut price from all orchards increased12% from 2004 before 2004 adjustments realized in 2005. If the 2004 nut pricewas adjusted by those adjustments the average nut price increase for 2005compared to 2004 would be 5%. The USDA portion increased 1% in 2005 anddecreased 2% in 2004. The netback increased 26% in 2005 compared to 2004 andincreased 10% in 2004 compared to 2003. The current netback price reflects theoperating performance of Mauna Loa.

 

The USDA published price for the 2004-2005 crop yearwas $0.7018 per pound (WIS at 25% moisture), which is 22% higher than the2003-2004 crop year of $0.5769.

 

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 WIS 20%moisture and 30% SK/DIS.

 

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

## ** **

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

 

 
| ** **             | ** ** | ** **   | ** ** | **Cost per pound** | ** ** |
|------------------------|------------|--------------|------------|------------------------------|------------|
| **Orchard**            | ** ** | **Acquired** | ** ** | **2006**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| Keaau I                |       | June 1986    |       | 0.5646                       |       | 0.5866 |   | 0.5767 |   |
| Keaau II               |       | Oct. 1989    |       | 0.6985                       |       | 0.6501 |   | 0.5545 |   |
| Keaau Lot 10           |       | Sept. 1991   |       | 0.4095                       |       | 0.3836 |   | 0.4491 |   |
| Ka’u I            |       | June 1986    |       | 0.5193                       |       | 0.4289 |   | 0.5211 |   |
| Ka’u Green Shoe I |       | Dec. 1986    |       | 0.3278                       |       | 0.2769 |   | 0.3409 |   |
| Ka’u II           |       | Oct. 1989    |       | 0.4420                       |       | 0.4112 |   | 0.3938 |   |
| Ka’u O            |       | May 2000     |       | 0.4829                       |       | 0.4226 |   | 0.4226 |   |
| Ka’u 715/716      |       | April 2006   |       | 0.2952                       |       | — |   | — |   |
| Mauna Kea              |       | Oct. 1989    |       | 0.5649                       |       | 0.7119 |   | 0.4976 |   |
|                   |       |         |       |                         |       |   |   |   |   |
| All Orchards           |       |         |       | 0.5130                       |       | 0.5062 |   | 0.4582 |   |

 

Cost of goods sold was $669,000 higher in 2006 than2005 and $535,000 higher in 2005 than in 2004. The cost per pound in 2006 was1.3% higher than 2005 and 10.5% higher in 2005 than 2004. The higher productioncosts in 2006 were the results of higher harvesting costs, cultivation costs,land lease costs,  and higher insurancecosts offset by lower depreciation. The higher production costs in 2005 werethe results of higher harvesting and husking costs because of more poundshandled. The lower production costs in 2004 compared to 2005 and 2006 were theresult of lower harvesting costs, cultivation costs, land lease costs andinsurance costs.

 

### ***Farming Segment - Farming Service Revenue***

### ** **

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. 

 

9

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These contracts covermacadamia orchards in the same three locations on the island of Hawaii wherethe Partnership owns orchards. The farming contracts provide the Partnership tobe reimbursed for all direct farming costs (cultivation, irrigation andharvesting), collect a pro-rata share of indirect costs and overheads, andcharge a management fee or fixed fee. The management fee is based on the numberof acres farmed or on a percentage of total costs billed. Revenues from farmingservices were $3.8 million in 2006, $4.7 million in 2005, and $4.3 million in2004. The 2006 farming service revenues were less than 2005 because of thetermination of three farming contracts, the purchase of the macadamia orchardwhich previously had been farmed under contract and the timing of the harvestat the end of the year which resulted is harvesting occurring in the spring of2007 for some of the orchards under contract. The 2005 farming service revenueswere less than anticipated because of a windstorm which destroyed a largepercentage of trees in three contract orchards. The 2004 farming servicerevenues were less than expected because of the late drop of nuts in the fallcrop. Three farming service contracts terminated on December 31, 2005 whichreduces the number of farming service contracts to about seventeen totalingabout 2,039 acres. The farming service revenue in 2005 for these threecontracts was about $492,000 with management fees of about $70,000. Additionally,the Partnership purchased about 21 acres which was under farming contractbringing the total acres under farming contract to about 2,008. Approximately150 acres of are year-to-year contracts, approximately 635 acres expire March31, 2009, approximately 70 acres expire June 30, 2013, approximately 410 acresexpire July 31, 2029, approximately 280 acres expire June 30, 2033 andapproximately 470 acres expire September 30, 2080.

 

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

 

The cost of services sold relating to the farmingcontracts was $3.5 million in 2006, $4.3 million in 2005 and $3.9 million in2004. These costs were all reimbursed to the Partnership.

 

## ***Generaland Administrative Costs***

## ** **

General and administrative expenses are comprised ofaccounting and reporting costs, reimbursements to the Managing Partner fordirectors’ fees, office expenses and liability insurance. In addition, generaland administrative costs are also incurred in connection with the farmingoperations. Previous to the May 2000 acquisition, general and administrationcosts relating to the Partnership’s orchards were included in the Partnership’sfarming expenses.

 

General and administrative costs for 2006 were$247,000 higher than for 2005 which is attributed to increased legal costs andproxy statement for the 2006 special meeting, legal costs related to thepotential  acquisition of Mac Farms of Hawaii,LLC and higher costs associated with Sarbanes Oxley implementation. General andadministrative costs for 2005 were $48,000 lower than for 2004, which isattributed to lower legal costs, offset by higher costs associated withSarbanes Oxley preparation and accounting. In 2004 legal costs of $464,000 wererelated to the lawsuit, initiated and settled, to prevent Mauna Loa fromacquiring MacFarms of Hawaii, LLC.

 

A management fee based on Partnership cash flow ispayable annually to the Managing Partner. The amount paid was $9,000 in 2004. Therewas no management fee in 2006 and 2005 as the Partnership acquired MLR, themanaging partner and the fees are eliminated in consolidation.

 

## ***InterestIncome and Expense***

## ** **

The Partnership recorded interest expense of $204,000in 2006, $237,000 in 2005, and $182,000 in 2004. This was due to (1) thelong-term loan used to acquire the farming operations, (2) the assumption ofseveral capitalized equipment leases, and (3) interest expense on a revolvingline of credit.

 

The Partnership funds its working capital needsthrough funds on hand and, when needed, from short-term borrowings, generatinginterest expense in the process. Net interest income or expense, therefore, ispartly a function of any balance carried over from the prior year, the amountand timing of cash generated 

 

10

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and distributions paid to investors in the currentyear, as well as the current level of interest rates. Interest was earned inthe amount of $17,000 in 2006, $5,000 in 2005 and $11,000 in 2004.

 

Other income of $206,000 was recorded in 2006 of which$169,000 was from crop insurance. Other income of $151,000 was recorded in 2005of which $147,000 was from crop insurance. Other income of $32,000 was recordedin 2004 from crop insurance.

 

***Inflation and Taxes***

 

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

 

The Partnership is subject to a gross income tax as aresult of its election to continue to be taxed as a partnership rather than tobe taxed as a corporation, as allowed by the Taxpayer Relief Act of 1997. Thistax is calculated at 3.5% on partnership gross income (net revenues less costof goods sold) beginning in 1998. The gross income tax was $100,000 in 2006,$129,000 in 2005, and $5,000 in 2004.

 

# ***Liquidity and Capital Resources***

# *** ***

Net cash provided byoperations was $8.2 million in 2006 compared to $1.9 million in 2005. Thesignificant increase of $6.3 million is a result of the payment terms of thenut purchase contracts changing from quarterly to 30 days from date of delivery.Net cash provided by operations was $1.9 million in 2005, an increase ofapproximately $1.6 million compared to 2004. Net cash provided by operations in2004 was $368,000.

 

At December 31, 2006 thePartnership’s working capital was $3.9 million and its current ratio was 2.54to 1, compared to $3.4 million and 1.59 to 1 in 2005. In 2005 the Partnership’sworking capital was $3.4 million and its current ratio 1.59 to 1, compared to$2.9 million and 1.63 to 1 in 2004. In 2004 the Partnership’s working capitalwas $2.9 million and its current ratio was 1.63 to 1, compared to $4.2 millionand 2.55 to 1 in 2003. In 2006 the increase in working capital compared to 2005was the result of lower cost of goods sold, interest expense, income taxes,higher interest income and other income offset by higher general andadministrative costs. In 2005 the increase in working capital compared to 2004was result of higher revenue and lower general and administrative costs. In2004 the decrease in working capital compared to 2003 was a result of lowerrevenue and higher general and administrative costs.

 

The Partnership was incompliance with the terms and conditions of the Credit Agreement at December31, 2005. Inconnection with the issuance of the financials included in the 10-K, datedApril 16, 2007, the Partnership determined they were in compliance with thecovenants at December 31, 2006. Subsequently, the Partnership determined thatit was in compliance with all debt covenants except for minimum tangible networth. The Partnership was less that 0.4% below the required amount. On July 5,2007, the lender provided a waiver to the loan covenant for the year endedDecember 31, 2006 and retroactively amended the minimum tangible net worthcovenant. Had the lender not waived this violation the Partnership would havebeen restricted in its ability to pay distributions to the limited partners andall obligations and indebtedness, at the lender’s option, would be acceleratedand become immediately due and payable.

 

Capital expenditures in 2006, 2005 and 2004 were$509,000, $83,000, and $172,000, respectively. The increase in 2006 wasattributed to the purchase of 21 tree acres of macadamia orchards for $440,000,computers, a vehicle and upgrades to operating machinery. The decrease in 2005was the result of fewer computer purchases and modifications to farmingequipment than 2004. Capital expenditures in 2004 were the result of purchasesof expiring leases. Capital expenditures planned for 2007 are about $500,000and are expected to be financed by way of new equipment leases, either capitalor operating leases.

 

11

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Macadamia nut farming is seasonal, with productionpeaking late in the fall. However, farming operations continue year round. As aresult, additional working capital is required for much of the year. ThePartnership meets its working capital needs with cash on hand, and whennecessary, through short-term borrowings under a $5.0 million revolving line ofcredit. The line of credit was obtained on May 2, 2000 and expires May 1, 2008.At December 31, 2006 the Partnership had a cash balance of $3,351,000 and noline of credit drawings outstanding. At December 31, 2005 the Partnership had acash balance of $378,000 and line of credit drawings outstanding of $2,900,000.The cash balance was $196,000 at the end of 2004, and the line of creditdrawings were $2,200,000 at December 31, 2004.

 

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. Thesecash distributions are expected to be paid from operating cash flow and / orother resources. The Partnership has declared and paid cash distributions for83 consecutive quarters. In December, 2006, the Partnership declared adistribution of $0.05 per Class A unit (a total of $375,000), which was paidFebruary 15, 2007 to the unit holders of record as of December 29, 2006.

 

It is the opinion ofmanagement 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, ifpayments are not received, as the contracts require, available cash resourcescould be depleted.

 

***Critical Accounting Policies and Estimates***

 

Management has identified the following criticalaccounting policies that affect the Partnership’s more significant judgmentsand estimates used in the preparation of the Partnership’s financial statements.The preparation of the Partnership’s financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires the Partnership’s management to make estimates and judgments thataffect the reported amounts of assets and liabilities, revenues and expenses,and related disclosures of contingent assets and liabilities. On an on-goingbasis, management evaluates those estimates, including those related to assetimpairment, accruals for self-insurance, compensation and related benefits,revenue recognition, allowance for doubtful accounts, contingencies andlitigation. The Partnership states these accounting policies in the notes tothe financial statements and in relevant sections in this discussion andanalysis. These estimates are based on the information that is currentlyavailable to the Partnership and on various other assumptions that managementbelieves to be reasonable under the circumstances. Actual results could varyfrom those estimates.

 

The Partnership believesthat the following critical accounting policies affect significant judgmentsand estimates used in the preparation of it financial statements:

 

The Partnership maintainsan accrual for workers compensation claims to the extent that the Partnership’scurrent insurance policies will not cover such claims. This accrual is includedin other accrued liabilities in the accompanying balance sheet. Managementdetermines the adequacy of the accrual by periodically evaluating thehistorical experience and projected trends related to outstanding and potentialworkers compensation claims. If such information indicates that the accrual isover or understated, the Partnership will adjust the assumptions utilized inthe methodologies and reduce or provide for additional accrual as appropriate.

 

Retirement and SeveranceBenefits:  The Partnership sponsors anon-contributory defined benefit pension plan for regular union employees and aseverance plan for intermittent union employees. Several statistical and otherfactors which attempt to anticipate future events are used in calculating theexpense

 

12

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and liabilities relatedto this plan. These factors include assumptions about the discount rate,expected return on plan assets, withdrawal and mortality rates and the rate ofincrease in compensation levels. The actuarial assumptions used by the Partnershipmay differ materially from actual results due to changing market and economicconditions, higher or lower withdrawal rates or longer or shorter mortality ofparticipants. These differences may impact the amount of retirement andseverance benefit expense recorded by the Partnership in future periods.

 

The Partnership reviewslong-lived assets held and used, or held for sale for impairment wheneverevents or circumstances indicate that the carrying amount of an asset may notbe recoverable. If an evaluation is required, the estimated undiscounted futurecash flows associated with the asset are compared to the asset’s carryingamount to determine if an impairment charge is required. All long-lived assetsfor which management has committed to a plan of disposal are reported at thelower of carrying amount or fair value. Changes in projected cash flowsgenerated by an asset based on new events or circumstances may indicate achange in fair value and require a new evaluation of recoverability of theasset.

 

The Partnership hasreplaced three of the nut purchase contracts it had with Mauna Loa with twocontracts signed June 1, 2006, effective January 1, 2006. The first of thecontracts is a fixed price contract at $0.75 per pound at WIS 20% moisture and30% SK/DIS, terminating December 31, 2006, and accounts for about 15 millionpounds of nuts. The second contract is a fixed price contract at $0.74 perpound a WIS 20% moisture and 30% SK/DIS, terminating December 31, 2011, andaccounts for about 6 million pounds of nuts. The second contract increases by$0.01 per pound each year except 2008 until it reaches $0.78 per pound in 2011.

 

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 financial statements. Additional information can be found in section (c)under the heading Nut Purchase Contracts on page 3.

 

**Legal Proceedings**

 

In 2004 the Partnershipand several independent growers filed suit against Mauna Loa alleging that theproposed acquisition by Mauna Loa of the assets of Mauna Loa’s majorcompetitor, MacFarms, would give Mauna Loa a monopoly over the supply andprocessing of wet-in-shell macadamia nuts on the Island of Hawaii. An agreementwas reached October 1, 2004, whereby Mauna Loa terminated its agreement toacquire the assets of MacFarms and the Partnership and all others caused theirlawsuits to be dismissed.

 

13

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**ITEM 8. CONSOLIDATED FINANCIALSTATEMENTS**

 

**Indexto Consolidated Financial Statements**

 
| Report of Independent Registered Public Accounting  Firm                                                 |   |
|----------------------------------------------------------------------------------------------------------|--------|
|                                                                                                     |   |
| Consolidated Balance Sheets, December 31, 2006 and  2005                                                 |   |
|                                                                                                     |   |
| Consolidated Income Statements, for the Years Ended  December 31, 2006, 2005 and 2004                    |   |
|                                                                                                     |   |
| Consolidated Statements of Partners’ Capital, for the  Years Ended December 31, 2006, 2005 and 2004 |   |
|                                                                                                     |   |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2006, 2005 and 2004              |   |
|                                                                                                     |   |
| Notes to Consolidated Financial Statements                                                               |   |

 

14

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To the Partners

ML Macadamia Orchards,L.P.

 

Inour opinion, the accompanying consolidated balance sheets and the relatedconsolidated statements of income, partners’ capital, and cash flows, presentfairly, in all material respects, the financial position of ML MacadamiaOrchards, L.P. and its subsidiary at December 31, 2006 and 2005, and theresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2006 in conformity with accounting principlesgenerally accepted in the United States of America. These financial statementsare the responsibility of the Partnership’s management. Our responsibility isto express an opinion on these financial statements based on our audits. Weconducted our audits of these statements in accordance with the standards ofthe Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

PricewaterhouseCoopersLLP

Orange County, California

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

 

15

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

**Consolidated Balance Sheets**

(in thousands)

 
| ** **                                                                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                              | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **Assets**                                                                              |       |                  |       |   |   |
| Current assets                                                                          |       |                  |       |   |   |
| Cash and cash equivalents                                                               |       | $                     | 3,351      |   | $ | 378 |   |
| Accounts receivable                                                                     |       | 2,688                 |       | 8,433 |   |
| Inventory of farming supplies                                                           |       | 272                   |       | 270 |   |
| Other current assets                                                                    |       | 98                    |       | 178 |   |
| Total current assets                                                                    |       | 6,409                 |       | 9,259 |   |
| Land, orchards and equipment, net                                                       |       | 47,232                |       | 48,722 |   |
| Goodwill                                                                                |       | 306                   |       | — |   |
| Intangible assets, net                                                                  |       | 16                    |       | 65 |   |
| Total assets                                                                            |       | $                     | 53,963     |   | $ | 58,046 |   |
|                                                                                    |       |                  |       |   |   |
| **Liabilities and partners’ capital**                                              |       |                  |       |   |   |
| Current liabilities                                                                     |       |                  |       |   |   |
| Current portion of long-term debt                                                       |       | $                     | 400        |   | $ | 434 |   |
| Short-term borrowings                                                                   |       | —                |       | 2,900 |   |
| Accounts payable                                                                        |       | 406                   |       | 770 |   |
| Cash distributions payable                                                              |       | 375                   |       | 375 |   |
| Accrued payroll and benefits                                                            |       | 858                   |       | 935 |   |
| Other current liabilities                                                               |       | 488                   |       | 416 |   |
| Total current liabilities                                                               |       | 2,527                 |       | 5,830 |   |
| Non-current benefits                                                                    |       | 405                   |       | — |   |
| Long-term debt                                                                          |       | 1,200                 |       | 1,600 |   |
| Deferred income tax liability                                                           |       | 1,208                 |       | 1,227 |   |
| Total liabilities                                                                       |       | 5,340                 |       | 8,657 |   |
| Commitments and contingencies                                                           |       |                  |       |   |   |
| Partners’ capital                                                                  |       |                  |       |   |   |
| General partner                                                                         |       | 81                    |       | 81 |   |
| Class A limited partners, no par or assigned value, 7,500 units issued  and outstanding |       | 48,612                |       | 49,308 |   |
| Accumulated other comprehensive loss                                                    |       | (70                   | )          | — |   |
| Total partners’ capital                                                            |       | 48,623                |       | 49,389 |   |
| Total liabilities and partners’ capital                                            |       | $                     | 53,963     |   | $ | 58,046 |   |

 

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

 

16

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

**Consolidated Income Statements**

(in thousands, except per unit data)

 
| ** **                                                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Macadamia nut sales                                                       |       | $        | 13,256     |     | $          | 12,684   |       | $ | 9,414 |   |
| Contract farming revenue                                                  |       | 3,816    |       | 4,694    |       | 4,251    |       |
| Total revenues                                                            |       | 17,072   |       | 17,378   |       | 13,665   |       |
| Cost of goods and services sold                                           |       |     |       |     |       |     |       |
| Costs of macadamia nut sales                                              |       | 10,871   |       | 10,202   |       | 9,667    |       |
| Costs of contract farming services                                        |       | 3,474    |       | 4,274    |       | 3,860    |       |
| Total cost of goods and services sold                                     |       | 14,345   |       | 14,476   |       | 13,527   |       |
| Gross income                                                              |       | 2,727    |       | 2,902    |       | 138      |       |
| General and administrative expenses                                       |       |     |       |     |       |     |       |
| Costs expensed under management agreement with related party              |       | —   |       | —   |       | 177      |       |
| Legal fees - related party                                                |       | 196      |       | 32       |       | 495      |       |
| Other                                                                     |       | 1,646    |       | 1,563    |       | 971      |       |
| Total general and administrative expenses                                 |       | 1,842    |       | 1,595    |       | 1,643    |       |
| Extinguishment of management agreement                                    |       | —   |       | (326     | )          | —   |       |
| Operating income (loss)                                                   |       | 885      |       | 981      |       | (1,505   | )          |
| Interest expense                                                          |       | (204     | )          | (237     | )          | (182     | )          |
| Interest income                                                           |       | 17       |       | 5        |       | 11       |       |
| Other income                                                              |       | 206      |       | 151      |       | 32       |       |
| Income (loss) before tax                                                  |       | 904      |       | 900      |       | (1,644   | )          |
| Income tax expense                                                        |       | (100     | )          | (129     | )          | (5       | )          |
| Net income (loss)                                                         |       | $        | 804        |     | $          | 771      |       | $ | (1,649 | ) |
|                                                                      |       |     |       |     |       |     |       |
| Net cash flow (as defined in the Partnership Agreement)                   |       | $        | 2,323      |     | $          | 2,501    |       | $ | 466 |   |
|                                                                      |       |     |       |     |       |     |       |
| Net income (loss) per Class A Unit                                        |       | $        | 0.11       |     | $          | 0.10     |       | $ | (0.22 | ) |
|                                                                      |       |     |       |     |       |     |       |
| Net cash flow per Class A Unit (as defined in the Partnership  Agreement) |       | $        | 0.31       |     | $          | 0.33     |       | $ | 0.06 |   |
|                                                                      |       |     |       |     |       |     |       |
| Cash distributions per Class A Unit                                       |       | $        | 0.20       |     | $          | 0.20     |       | $ | 0.20 |   |
|                                                                      |       |     |       |     |       |     |       |
| Class A Units outstanding                                                 |       | 7,500    |       | 7,500    |       | 7,500    |       |

 

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

 

17

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

**Consolidated Statements ofPartners’ Capital**

(in thousands)

 
| ** **                                                                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                              |       |     |       |     |       |     |       |
| Partners’ capital at beginning of period:                                    |       |     |       |     |       |     |       |
| General partner                                                                   |       | $        | 81         |     | $          | 505      |       | $ | 537 |   |
| Class A limited partners                                                          |       | 49,308   |       | 50,037   |       | 53,169   |       |
|                                                                              |       | 49,389   |       | 50,542   |       | 53,706   |       |
|                                                                              |       |     |       |     |       |     |       |
| Acquisition of ML Resources, Inc.                                                 |       | —   |       | (424     | )          | —   |       |
|                                                                              |       | —   |       | (424     | )          | —   |       |
|                                                                              |       |     |       |     |       |     |       |
| Allocation of net income (loss):                                                  |       |     |       |     |       |     |       |
| General partner                                                                   |       | —   |       | —   |       | (17      | )          |
| Class A limited partners                                                          |       | 804      |       | 771      |       | (1,632   | )          |
|                                                                              |       | 804      |       | 771      |       | (1,649   | )          |
|                                                                              |       |     |       |     |       |     |       |
| Cash distributions paid and / or declared:                                        |       |     |       |     |       |     |       |
| General partner                                                                   |       | —   |       | —   |       | 15       |       |
| Class A limited partners                                                          |       | 1,500    |       | 1,500    |       | 1,500    |       |
|                                                                              |       | 1,500    |       | 1,500    |       | 1,515    |       |
|                                                                              |       |     |       |     |       |     |       |
| Partners’ capital at end 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 |   |

 

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

 

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

**Consolidated Statements of CashFlows**

(in thousands)

 
| ** **                                                                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash flows from operating activities:                                                      |       |     |       |     |       |     |       |
| Cash received for goods and services                                                       |       | $        | 23,001     |     | $          | 16,795   |       | $ | 13,947 |   |
| Cash paid to suppliers and employees                                                       |       | (14,463  | )          | (14,568  | )          | (13,393  | )          |
| Income tax paid                                                                            |       | (118     | )          | (82      | )          | (15      | )          |
| Interest received                                                                          |       | 17       |       | 5        |       | 11       |       |
| Interest paid                                                                              |       | (196     | )          | (237     | )          | (182     | )          |
| Net cash provided by operating activities                                                  |       | 8,241    |       | 1,913    |       | 368      |       |
|                                                                                       |       |     |       |     |       |     |       |
| Cash flows from investing activities:                                                      |       |     |       |     |       |     |       |
| Proceeds from sale of equipment                                                            |       | 75       |       | 14       |       | —   |       |
| Capital expenditures                                                                       |       | (509     | )          | (83      | )          | (172     | )          |
| Net cash used in investing activities                                                      |       | (434     | )          | (69      | )          | (172     | )          |
|                                                                                       |       |     |       |     |       |     |       |
| Cash flows from financing activities:                                                      |       |     |       |     |       |     |       |
| Proceeds from drawings on line of credit                                                   |       | 5,800    |       | 8,800    |       | 5,400    |       |
| Repayment of long term debt                                                                |       | (400     | )          | (400     | )          | (400     | )          |
| Repayment of line of credit                                                                |       | (8,700   | )          | (8,100   | )          | (3,600   | )          |
| Loan cost                                                                                  |       | —   |       | —   |       | (20      | )          |
| Acquisition of general partner’s units                                                |       | —   |       | (424     | )          | —   |       |
| Capital lease payments                                                                     |       | (34      | )          | (35      | )          | (52      | )          |
| Cash distributions paid                                                                    |       | (1,500   | )          | (1,503   | )          | (1,364   | )          |
| Net cash provided by (used in) financing activities                                        |       | (4,834   | )          | (1,662   | )          | (36      | )          |
|                                                                                       |       |     |       |     |       |     |       |
| Net increase in cash                                                                       |       | 2,973    |       | 182      |       | 160      |       |
| Cash and cash equivalents at beginning of period                                           |       | 378      |       | 196      |       | 36       |       |
| Cash and cash equivalents at end of period                                                 |       | $        | 3,351      |     | $          | 378      |       | $ | 196 |   |
|                                                                                       |       |     |       |     |       |     |       |
| Reconciliation of net income (loss) to net cash provided by operating  activities:         |       |     |       |     |       |     |       |
| Net income (loss)                                                                          |       | $        | 804        |     | $          | 771      |       | $ | (1,649 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by  operating activities:  |       |     |       |     |       |     |       |
| Depreciation and amortization                                                              |       | 1,953    |       | 2,165    |       | 2,571    |       |
| Gain on sale of capital assets                                                             |       | (21      | )          | —   |       | —   |       |
| (Increase) decrease in accounts receivable                                                 |       | 5,745    |       | (1,341   | )          | (566     | )          |
| Deferred income tax expense (credit)                                                       |       | (19      | )          | 20       |       | (7       | )          |
| Increase in inventories                                                                    |       | (2       | )          | (125     | )          | (4       | )          |
| (Increase) decrease in other current assets                                                |       | 80       |       | (25      | )          | (10      | )          |
| Increase in other assets                                                                   |       | —   |       | (32      | )          | (7       | )          |
| Increase (decrease) in accounts payable                                                    |       | (364     | )          | 32       |       | 245      |       |
| Increase (decrease) in accrued payroll                                                     |       | (106     | )          | 62       |       | 26       |       |
| Increase (decrease) in current liabilities                                                 |       | 72       |       | 386      |       | (231     | )          |
| Increase in non-current benefits payable                                                   |       | 99       |       | —   |       | —   |       |
| Total adjustments                                                                          |       | 7,437    |       | 1,142    |       | 2,017    |       |
| Net cash provided by operating activities                                                  |       | $        | 8,241      |     | $          | 1,913    |       | $ | 368 |   |
|                                                                                       |       |     |       |     |       |     |       |
| Supplemental schedule of noncash financing activities  Distributions declared but not paid |       | $        | 375        |     | $          | 375      |       | $ | 379 |   |

 

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

 

19

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**MLMacadamia Orchards, L.P.**

 

# ***Notesto Consolidated Financial Statements***

 

**(1) OPERATIONS AND OWNERSHIP**

 

ML MacadamiaOrchards, L.P. (the “Partnership”) owns and farms 4,190 tree acres of macadamiaorchards on the island of Hawaii. Once the nuts are harvested, the Partnershipsells them to another entity, which processes and markets the finished products.The Partnership farms approximately 2,008 additional acres of macadamiaorchards on Hawaii for other orchard owners.

 

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

 

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

 

As a result of 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.

 

**(2) SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

**(a)  Cash and Cash Equivalents.  **Cash and cash equivalentsinclude unrestricted demand deposits with banks and all highly liquid depositswith an original maturity of less than three months. The cash equivalents arenot protected by federal deposit insurance.

 

**(b)  Financial Instruments.  **The fair value of the lineof credit and a portion of the long-term financial instruments is approximatelythe carrying value as they have variable interest rates. The remaining portionof the long-term financial instrument has a fixed rate and the fair valuecompared to carrying value is disclosed.

 

**(c)  Consolidation.  **The consolidated financialstatements include the accounts of the Partnership, and from 2005, MLResources, Inc. All significant intercompany balances and transactions,including management fees and distributions, have been eliminated.

 

**(d) 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 industry practice in Hawaii, orchard maintenanceand harvesting costs for commercially producing macadamia orchards are chargedagainst earnings in the year that the costs are incurred.

 

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However, the timing andmanner in which farming costs are recognized in the Partnership’s financialstatements over the course of the year is based on a standard cost system. Forinterim financial reporting purposes, farming costs are recognized as expensebased on a standard cost to produce a pound of macadamia nuts. Managementcalculates a standard cost per pound for each orchard based on the estimatedannual costs to farm each orchard and anticipated annual production from eachorchard. The amount of farming costs recognized as expense throughout the yearis calculated by multiplying each orchard’s standard cost by actual productionfrom that orchard. The difference between actual farming costs incurred and theamount of farming costs recognized as expense is recorded as either an increaseor decrease in deferred farming costs, which is reported as an asset in thebalance sheet. Deferred farming costs accumulate throughout the year, typicallypeaking mid-way through the third quarter, since nut production is lowestduring the first and second quarters of the year. Deferred farming costs areexpensed over the remainder of the year since nut production is highest at theend of the third quarter 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.

 

**(e)  Inventory.  **Supplies inventory isrelieved on an average cost basis to cost of farming expense as used.

 

**(f)  Land, Orchards and Equipment.  **Land, orchards and equipmentare reported at cost, net of accumulated depreciation and amortization. Netfarming costs for any “developing” orchards are capitalized on the balancesheet until revenues from that orchard exceed expenses for that orchard (ornine years after planting, if earlier). Developing orchards historically do notreach commercial viability until about 12 years of age.

 

Depreciationof orchards and other equipment is reported on a straight-line basis over theestimated useful lives of the assets (40 years for orchards and between 5 and12 years for other equipment). A 5% residual value is assumed for orchards. Themacadamia orchards acquired in 1986 situated on leased land are being amortizedon a straight-line basis over the terms of the leases (approximately 33 yearsfrom the inception of the Partnership) with no residual value assumed. Themacadamia orchards acquired in 1989 situated on leased land are being amortizedon a straight-line basis over a 40 year period (the terms of these leasesexceed 40 years) with no residual value assumed. For income tax reporting,depreciation is calculated under the straight line and declining balancemethods over Alternative Depreciation System recovery periods.

 

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

 

The Partnership reviewslong-lived assets held and used, or held for sale for impairment wheneverevents or circumstances indicate that the carrying amount of an asset may notbe recoverable. If an evaluation is required, the estimated undiscounted futurecash flows associated with the asset are compared to the asset’s carryingamount to determine if an impairment charge is required. If an impairmentcharge is required the Partnership would write the assets down to fair value. Alllong-lived assets for which management has committed to a plan of disposal arereported at the lower of carrying amount or fair value as determined by quotedmarket price or a present value technique. Changes in projected cash flowsgenerated by an asset based on new events or circumstances may indicate achange in fair value and require a new evaluation of recoverability of theasset.

 

21

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**(g) **Goodwill and OtherIntangible 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 annual impairment testing is performed in the4th quarter each year. The goodwill is allocated to the farmingreporting unit. Goodwill impairment is determined using a two-step process foreach reporting unit. The first step of the impairment test is used to identifypotential impairment by comparing the fair value of a reporting unit to thebook value, including goodwill. This evaluation utilizes a discounted cash flowanalysis and multiple analyses of the historical and forecasted operatingresults of the Partnership’s reporting unit. If the fair value of a reportingunit exceeds its book value, goodwill of the reporting unit is not consideredimpaired, and the second step of the impairment test is not required. If thebook value of a reporting unit exceeds its fair value, the second step of theimpairment test is performed to measure the amount of impairment loss, if any. Thesecond step of the impairment test compares the implied fair value of thereporting unit’s goodwill with the book value of the goodwill. If the bookvalue of the reporting unit’s goodwill exceeds the implied fair value of thatgoodwill, an impairment loss is recognized in an amount equal to that excess. Theimplied fair value of goodwill is determined in the same manner as the amountof goodwill recognized in a business combination.

 

**(h) Income Taxes.  **The accompanying incomestatements do not include a provision for corporate income taxes, as the incomeof the Partnership is not taxed directly; rather, the Partnership’s taxattributes are included in the individual tax returns of its partners. Neitherthe Partnership’s financial reporting income nor the cash distributions to unitholders can be used as a substitute for the detailed tax calculations which thePartnership must perform annually for its partners.

 

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. This tax is calculated at 3.5% on partnershipgross income (net revenues less cost of goods sold) beginning in 1998.

 

Deferred tax liabilitiesare recognized for the future tax consequences attributable to differences betweenthe financial reporting and tax reporting basis of assets and liabilities.

 

**(i) Revenue.  **Macadamia nut sales are recognized when nuts aredelivered to the buyer. Contract          farming revenue and administrative services revenues are recognized inthe period that such services are completed, that is upon the incurrence ofdirect labor or equipment hours incurred on behalf 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. The Partnership provides these services on acontinuing basis throughout the year.

 

**(j)  PensionBenefit and Intermittent Severance Costs.  **The actuarial method used for financial accountingpurposes is the projected unit credit method.

 

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

 

**(l) Net Income Per Class A Unit.  **In 2006 and 2005 net income per Class A Unit iscalculated by dividing 100% of Partnership net income by the average number ofClass A Units outstanding for the period. In 2004 net income per Class A Unitis calculated by dividing 99% of the Partnership net income by the averagenumber of Class A Units outstanding for the period.

 

22

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**(m)  AccumulatedComprehensive Income.  **Accumulated comprehensive incomerepresents the change in Partners’ capital from transactions and other eventsand circumstances arising from non-unitholder sources. Accumulatedcomprehensive income consists of deferred pension and intermittent severancegains or losses. As of December 31, 2006, our Consolidated Balance Sheetreflected Accumulated Other Comprehensive Loss in the amount of $70,000 indeferred pension and intermittent severance loss.

 

**(n)  RecentAccounting Pronouncements.  **In September 2006, the FASB issuedStatement No. 157. This statement provides a single definition of fair value, aframework for measuring fair value, and expanded disclosures concerning fairvalue. Previously, different definitions of fair value were contained invarious accounting pronouncements creating inconsistencies in measurement anddisclosures. Statement No. 157 applies under those previously issuedpronouncements that prescribe fair value as the relevant measure of value. Thispronouncement is effective for fiscal years beginning after November 15, 2007. Wedo not expect the adoption of Statement No. 157 to have a material impact onour financial position, results of operations, or cash flows.

 

In September 2006, the FASB issued Statement No. 158, *Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans,* (an amendment of FASB Statements No. 87, 88,106. and 132R (“Statement No. 158”), that requires an employer to recognize inits statement of financial position an asset for a plan’s over funded status ora liability for a plan’s under funded status, measure a plan’s asset and itsobligations that determine it funded status as of the end of the employer’sfiscal year (with limited exceptions), and recognize changes in the fundedstatus of a defined benefit postretirement plan in the year in which thechanges occur. We adopted the recognition provisions of Statement No. 158 inour December 31, 2006 financial statements. The incremental affects of applyingStatement No. 158 related to Partnership’s defined pension plan andintermittent severance plan as of December 31, 2006, were as follows:

 
| Increase in  pension obligation                |   | $      | 68,000 |   |
|------------------------------------------------|--------|--------|--------|--------|
| Increase in  intermittent severance obligation |   | 18,000 |   |
| Decrease in  prepaid pension obligation        |   | 7,000  |   |
|                                           |   | $      | 93,000 |   |

 

The adoption on SFAS No.158 had no effect on the net income or cash flows of the Partnership.

 

**(3) SEGMENT INFORMATION**

 

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

 

Management evaluates theperformance of each segment on the basis of operating income. The Partnershipaccounts for intersegment sales and transfers at cost and such transactions areeliminated in 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 and tend to vary from year toyear due to changes in the calculated nut price per pound and pounds produced.

 

# ***(a)  Nut Purchase Contracts.  ***The Partnershipis a party to two nut purchase contracts signed June 1, 2006, with an effectivedate of January 1, 2006, with Mauna Loa which were negotiated in 2006. The 

# *** ***

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# ***two contracts cover all nuts produced bythe orchards acquired in June 1986, December 1986, and October 1989. Of the twocontracts, one for approximately 15 million pounds expired December 31, 2006and has a nut purchase price for 2006 of $0.75 per pound wet-in-shell (WIS) at20% moisture and 30% saleable kernel recovery (SK) to dry-in-shell (DIS). Twoother contracts, of approximately 1 million pounds, also expired December 31,2006, one with a nut purchase price of $0.60 per pound WIS 25% adjusted fortrash and the other with a nut purchase price based on a two-year trailingaverage USDA price at WIS 25%. The last contract for about 5 million poundsexpires December 31, 2011 and has a nut purchase price for 2006 of $0.74 perpound WIS at 20% moisture and 30% SK/DIS. The purchase price increases by $0.01each year except 2008 until it reaches $0.78 per pound in 2011. The purchasecontract for the macadamia nut orchard purchased in April 2006 is with MacFarms and accounts for about 100,000 pounds and has a nut purchase price of$0.98 per pound WIS 20% moisture and 30% SK/DIS.***

# *** ***

# ***On December 16, 2004, a new nut purchasecontract was signed with Hamakua for the annual delivery of six million WISpounds, starting January 1, 2007. The contract provides for a minimum price of75 cents per pounds and a maximum price of 95 cents per pound. The pricingformula includes a fixed component of 85 cents and a second component based onHamakua’s average selling price for bulk kernel. In February 2007, thePartnership negotiated an amendment to the contract which provides thePartnership an option to have nut-in-shell processed into kernel for a fee inlieu of selling the nuts to Hamakua.***

# *** ***

On January 5, 2006, a newnut purchase contract was signed with Island Princess for the annual deliveryof approximately two million WIS pounds, effective January 1, 2007. The nutprice will be determined every six months by mutual agreement based onprevailing market price for kernel from Hawaii and Australia. The effectiveprice for January – June 2007 is $0.608 at 20% moisture and 30% SK/DISrecovery.

 

On January 6, 2006, a newnut purchase contract was signed with MacFarms for the annual delivery ofbetween four and one-half million and five and one-half million WIS pounds,effective January 1, 2007. The nut price will be determined every six months bymutual agreement based on prevailing market price for kernel from Hawaii andAustralia. The effective price for January – June 2007 is $0.608 at 20%moisture and 30% SK/DIS recovery.

 

**(b)  Husking Activities  **Husking activities for theKeaau and Mauna Kea orchards are performed at Mauna Loa’s Keaau facility. Operationof the Keaau husking facility which had been performed by the Partnership wastransferred to Mauna Loa in July of 2006. Payments or reimbursements made toMauna Loa were $440,000 in 2004, $603,000 in 2005, and $559,000 in 2006 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 relative immaturity of the newer orchard, itsproductivity (and therefore its cash flow) was expected to be correspondinglylower for the first several years than for the other older orchards.

 

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

 

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

 

In return, the Partnership is obligated to pay KACI100% of any year’s cash flow from this orchard in excess of the target cashflow as additional percentage rent until the aggregate amount of additionalpercentage rent equals 150% of the total amount of stabilization paymentspreviously received. 

 

24

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Thereafter, the Partnership is obligated to pay KACI50% of this orchard’s cash flow in excess of the target cash flow as additionalincentive rent. Additional rent of $62,000 was due for 2006 and no additionalrent was due in 2004, or 2005.

 

**(d)  Cash Flow Warranty Payments**. In October 1989, the Partnershipacquired 1,040 acres of orchards that were several years younger on averagethan the Partnership’s other orchards. Their productivity (and therefore theircash flow) 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 forany year were limited to the lesser of the amount of the shortfall or a maximumpayment amount.

 

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

 

**(2)  The farming segment’s revenues**are based on long-term farming contracts which generate a farming profit basedon a percentage of farming cost or based on a fixed fee per acre and tend to beless variable 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 period ended December 31, 2006, 2005 and 2004.

 

Segment Reportingfor 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 (loss)                 |       | 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        |       |
|                                         |            |              |            |              |            |                  |            |            |            |  |  |  |  |

 

25

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Segment Reportingfor 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 (loss)                 |       | 377          |       | 604          |       | —           |       | 981        |       |
| Depreciation expense                    |       | 1,949        |       | 216          |       | —           |       | 2,165      |       |
| Segment assets                          |       | 52,206       |       | 5,840        |       | —           |       | 58,046     |       |
| Expenditures for property and equipment |       | 51           |       | 32           |       | —           |       | 83         |       |
|                                         |            |              |            |              |            |                  |            |            |            |  |  |  |  |

 

Segment Reportingfor the Year ended December 31, 2004 (in thousands)

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

 

**(4) RELATED PARTY TRANSACTIONS**

 

**(a) Management Costs and Fee.**OnJanuary 6, 2005 the Partnership purchased the stock of its managing partner,MLR. As a result of the transaction, MLR’s operations have been included in thePartnership’s consolidated financial statements beginning with the firstquarter of 2005. The Partnership Agreement provides the managing generalpartner reimbursement of administrative costs (which consist primarily ofcompensation costs, board of directors fees, insurance costs and officeexpenses) incurred under the agreement as well as a management fee equal to twopercent of the Partnership’s operating cash flow (as defined) in 2004. Themanagement fee is eliminated in consolidation in 2005 and 2006. Thosereimbursable costs totaled $168,000 in 2004. The managing general partnerearned a management fee of $9,000 in 2004.

 

In addition to a management fee, the managing generalpartner is entitled, under the existing Partnership Agreement, to receive anannual incentive fee equal to 0.5% of the aggregate fair market value (asdefined) of the Class A Units for the preceding calendar year provided that netcash flow (as defined) for the preceding calendar year exceeds specified levels.No incentive fee was earned in 2006, 2005 and 2004.

 

26

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**(b) Legal Services. **The Partnership paid$196,000, $134,000, and $495,000 in legal fees in 2006, 2005 and 2004,respectively. A former Director of the Partnership is a former partner andcurrently of counsel to one of the law firms used by the Partnership. ThePartnership paid said law firm $196,000 in 2006, $32,000 of the $134,000 in2005 and $495,000 in 2004.

 

**(c) Management Services Contract.  **The Partnership provides administrative services to D.Buyers Enterprises, LLC (“DBE”) for which it was compensated $104,000 in 2004and, $102,000 in 2005. DBE owned the stock of the Partnership’s general partneruntil 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. Thelease amount was $90,000 in 2005 and 2004.

 

**(5) CASH FLOW PERFORMANCE**

 

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

 
| ** **                                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Gross revenues (including interest and other income)    |       | $        | 17,295     |     | $          | 17,534   |       | $ | 13,708 |   |
| Less:                                                   |       |     |       |     |       |     |       |
| Farming costs                                           |       | 12,391   |       | 12,311   |       | 10,951   |       |
| Administrative costs                                    |       | 1,842    |       | 1,595    |       | 1,643    |       |
| Extinguishment of management agreement                  |       | —   |       | 326      |       | —   |       |
| Income tax expense                                      |       | 100      |       | 129      |       | 5        |       |
| Payments of principal and interest                      |       | 639      |       | 672      |       | 634      |       |
| Operating cash flow                                     |       | 2,323    |       | 2,501    |       | 475      |       |
| Less:                                                   |       |     |       |     |       |     |       |
| Management fee                                          |       | 0        |       | 0        |       | 9        |       |
| Net cash flow (as defined in the Partnership Agreement) |       | $        | 2,323      |     | $          | 2,501    |       | $ | 466 |   |

 

All of net cash flow in2006 and 2005, and $451,000 in 2004 was allocated to Class A Units. This cashflow measure is used to determine the management fee paid annually to thegeneral partner and forms the basis of distributable cash per unit. Nomanagement fee is recorded in 2006 and 2005 as the Partnership purchased thestock of the managing partner MLR in January 2005 and the management fee iseliminated in consolidation.

 

27

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

 

Land, orchards and equipment, stated at cost,consisted of the following at December 31, 2006 and 2005 (000’s):

 
| ** **                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
|                                            |       |     |       |     |       |
| Land                                            |       | $        | 8,255      |     | $          | 8,168 |   |
| Improvements                                    |       | 1,850    |       | 1,929    |       |
| Machinery and  equipment                        |       | 4,266    |       | 4,252    |       |
| Irrigation well  and equipment                  |       | 1,184    |       | 1,155    |       |
| Producing  orchards                             |       | 67,631   |       | 67,267   |       |
| Capital leases                                  |       | 161      |       | 161      |       |
|                                            |       |     |       |     |       |
| Land, orchards  and equipment (gross)           |       | 83,347   |       | 82,932   |       |
|                                            |       |     |       |     |       |
| Less accumulated  depreciation and amortization |       | 36,115   |       | 34,210   |       |
|                                            |       |     |       |     |       |
| Land, orchards  and equipment (net)             |       | $        | 47,232     |     | $          | 48,722 |   |

 

ThePartnership’s interest in trees situated on certain leased macadamia orchardproperties are subject to repurchase at the option of the lessors. Suchrepurchase options grant the lessors the right to purchase all or a portion ofthese trees after June 30, 2019, at fair market value, as defined in therespective farming lease agreements. If the repurchase options are 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 lease expiration.The lessors will be released from their repurchase obligation in the event thatthe Partnership declines to accept an extension offer from the lessors at fairmarket lease rates.

 

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

 

AtDecember 31, 2006 and 2005, the Partnership’s long-term debt comprises (000’s):

 
| ** **      | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
|            |       |     |       |     |       |
| Term debt       |       | $        | 1,600      |     | $          | 2,000 |   |
| Other           |       | —   |       | 34       |       |
|            |       | 1,600    |       | 2,034    |       |
|            |       |     |       |     |       |
| Current portion |       | 400      |       | 434      |       |
|            |       | $        | 1,200      |     | $          | 1,600 |   |

 

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

 

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

 

There were no drawingsoutstanding on the line of credit at December 31, 2006 and drawings outstandingat December 31, 2005 amounted to $2,900,000, with interest at 7.50%.

 

28

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** **

At December 31, 2006, theoutstanding balance on the promissory note amounted to $1.6 million. The noteis scheduled to mature in 2010 and bears interest at rates ranging from 6.37%to 7.50%. Principal payments are due annually on May 2 in the amount of $400,000.

 

The estimated fair valuesof the Partnership’s financial instrument has been determined by estimatedmarket price of 6.75% in 2005 and 7.00% in 2006 using a life equal to thatremaining on the current financial instrument. The Partnership has notconsidered the lender fees in determining the estimated fair value.

 

The estimated fair valuesof the Partnership’s financial instrument are as follows (000’s):

 
| ** **     | ** ** | **2006**     | ** ** | **2005**  | ** ** |
|----------------|------------|--------------|------------|-----------|------------|
| ** **     | ** ** | **Carrying** | ** ** | **Fair**  | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **     | ** ** | **Amount**   | ** ** | **Value** | ** ** | **Amount** | ** ** | **Value** | ** ** |
| Long-term debt |       | $            | 1,600      |      | $          | 1,312 |   | $ | 1,150 |   | $ | 1,004 |   |
|                |            |              |            |           |            |  |  |  |  |  |  |  |  |

 

Of the total $1.6 millionin 2006 the long-term debt of $680,000 has a fixed interest rate for one andone-third years. Of the total $2.0 million in 2005 the long–term debt of$850,000 has short-term fixed rates that approximate fair value. The $920,000and $1,150,000 in 2006 and 2005, respectively, have interest rates that arefixed over the remaining life of the debt.

 

Both the revolving creditloan and the term debt are collateralized by all personal property assets ofthe Partnership. The credit agreement contains certain restrictions associatedwith partner distributions, further indebtedness, sales of assets, andmaintenance of certain financial minimums. Significant restrictive financialcovenants consist of the following:

 

1.     Minimum working capital of$2.5 million.

2.     Minimum current ratio of 1.5to 1.

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

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

5.     Maximum ratio of funded debtto capitalization of 20%.

6.     Minimum debt coverage ratioof 2.5 to 1.

 

At December 31, 2006, the Partnership’s workingcapital was $3.9 million and its current ratio 2.54 to 1. The Partnership wasin compliance with all covenants of the Credit Agreement at December 31, 2005. Inconnection with the issuance of the financials included in the 10-K, datedApril 16, 2007, the Partnership determined they were in compliance with thecovenants at December 31, 2006. Subsequently, the Partnership determined thatit was in compliance with all debt covenants except for minimum tangible networth. The Partnership was less that 0.4% below the required amount. On July 5,2007, the lender provided a waiver to the loan covenant for the year endedDecember 31, 2006 and retroactively amended the minimum tangible net worthcovenant. Had the lender not waived this violation the Partnership would havebeen restricted in its ability to pay distributions to the limited partners andall obligations and indebtedness, at the lender’s option, would be acceleratedand become immediately due and payable.

 

**Capital and Operating Leases.**ThePartnership has no capital leases as of December 31, 2006 and had $34,000 incapital leases as of December 31, 2005. The Partnership has operating leasesfor equipment and operating leases for land. The operating leases for equipmentare four to five year leases.

 

29

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**Land Leases.  **The partnership leases theland underlying 1,948 acres of its orchards under long-term operating leaseswhich expire through dates ending 2045. Operating leases provide for changes inminimum rent based on fair value at certain points in time. Each of the landleases provides for additional lease payments based on USDA-reported macadamianut price levels. Those contingent lease payments totaled $18,000 in 2004, $19,000in 2005, and $115,000 in 2006. Total lease rent for all land operating leaseswas $150,000 in 2004, $147,000 in 2005, and $256,000 in 2006.

 

**Equipment Operating Leases.  **The Partnership leasesequipment for the farming operation to include vehicles, blower sweepers andharvester. The operating lease cost was $206,000, $249,000 and $285,000 in2006, 2005 and 2004, respectively.

 

Contractual obligationsfor the year ended December 31, 2006 for the Partnership are detailed in thefollowing (000’s):

 
| ** **                   | ** ** | **Total** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Remaining** | ** ** |
|------------------------------|------------|-----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|---------------|------------|
| Contractual  Obligations     |       |      |       |     |       |     |       |     |       |     |       |     |       |          |       |
| Long-Term Debt  and Interest |       | $         | 1,792      |     | $          | 487      |       | $        | 461        |     | $          | 435      |       | $             | 409        |   | $ | — |   | $ | — |   |
| Operating Leases             |       | 3,453     |       | 337      |       | 275      |       | 191      |       | 146      |       | 126      |       | 2,378         |       |
| Total                        |       | $         | 5,245      |     | $          | 824      |       | $        | 736        |     | $          | 626      |       | $             | 555        |   | $ | 126 |   | $ | 2,378 |   |

 

**(8) INCOME TAXES**

 

The components of income tax expense for the yearsended December 31, 2006, 2005 and 2004 were as follows (000’s):

 
| ** **        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------|------------|----------|------------|----------|------------|----------|------------|
| Currently payable |       | $        | 119        |     | $          | 109      |       | $ | 12 |   |
| Deferred          |       | (19      | )          | 20       |       | (7       | )          |
|              |       | $        | 100        |     | $          | 129      |       | $ | 5 |   |

 

The provision 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, 2006, 2005 and 2004.

 

The components of the net deferred tax liabilityreported on the balance sheet as of December 31, 2006 and 2005 are as follows(000’s):

 
| ** **                                                                                                                                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax liabilities:                                                                                                                                     |       |     |       |     |       |
| Financial statement bases of land, orchards, inventory and equipment is  greater than tax bases                                                               |       | $        | 719        |     | $          | 717 |   |
| Financial statement bases of capitalized leases, long- term debt on  capitalized leases and interest expense on capitalized leases is greater than  tax bases |       | (4       | )          | (4       | )          |
| Excess of tax depreciation over financial statement depreciation                                                                                              |       | 493      |       | 514      |       |
|                                                                                                                                                          |       | $        | 1,208      |     | $          | 1,227 |   |

 

30

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**(9) PENSION PLAN**

 

The Company established adefined benefit pension plan in conjunction with the acquisition of farmingoperations on May 1, 2000. The plan covers employees that are members of aunion bargaining unit. The projected benefit obligation includes the obligationfor the employees of their previous employer that became Company employees.

 

The following reconcilesthe changes in the pension benefit obligation and plan assets for the yearsended December 31, 2006, 2005, 2004 to the funded status of the plan and theamounts recognized in the balance sheets at December 31, 2006, 2005, 2004 (000’s).

 
| ** **                                            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Change in  projected benefit obligation:              |       |     |       |     |       |     |       |
| Projected  benefit obligation at beginning of year    |       | $        | 518        |     | $          | 411      |       | $ | 357 |   |
| Service cost                                          |       | 59       |       | 57       |       | 56       |       |
| Interest cost                                         |       | 28       |       | 23       |       | 21       |       |
| Actuarial (gain)  loss                                |       | (80      | )          | 35       |       | (12      | )          |
| Benefits paid                                         |       | (35      | )          | (8       | )          | (11      | )          |
| Projected  benefit obligation at end of year          |       | 490      |       | 518      |       | 411      |       |
|                                                  |       |     |       |     |       |     |       |
| Change in plan  assets:                               |       |     |       |     |       |     |       |
| Fair value of  plan assets at beginning of year       |       | 258      |       | 205      |       | 169      |       |
| Actual return on  plan assets                         |       | 31       |       | 10       |       | 3        |       |
| Employer  contribution                                |       | 168      |       | 51       |       | 44       |       |
| Benefits paid                                         |       | (35      | )          | (8       | )          | (11      | )          |
| Fair value of  plan assets at end of year             |       | 422      |       | 258      |       | 205      |       |
|                                                  |       |     |       |     |       |     |       |
| Funded status                                         |       | (68      | )          | (261     | )          | (206     | )          |
| Unrecognized  prior service cost                      |       | —   |       | 62       |       | 69       |       |
| Unrecognized net  actuarial loss (gain)               |       | —   |       | 89       |       | 44       |       |
| Amount  recognized in balance sheet                   |       | $        | (68        | )        | $          | (110     | )          | $ | (93 | ) |
|                                                  |       |     |       |     |       |     |       |
| Amounts  recognized in the balance sheets consist of: |       |     |       |     |       |     |       |
|                                                  |       |     |       |     |       |     |       |
| Accrued pension  liability (current)                  |       | (68      | )          | (152     | )          | (103     | )          |
| Intangible asset                                      |       | —   |       | 42       |       | 10       |       |
| Net amount  recognized                                |       | $        | (68        | )        | $          | (110     | )          | $ | (93 | ) |

 

The amounts recognized inaccumulated other comprehensive loss at December 31, 2006 was as follows:

 
| ** **          | ** ** | **2006** | ** ** |
|---------------------|------------|----------|------------|
|                |       |     |       |
| Net actuarial  gain |       | $        | (4         | ) |
| Prior service  cost |       | 56       |       |
|                |       | $        | 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 endingDecember 31, 2007 is $7,000.

 

Prior to the adoption of Statement No. 158, the planwas over funded by $7,000.

 

31

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The computation of the prepaid pension obligation atDecember 31, 2006 and required minimum liability and additional minimumliability at December 31, 2005 are shown below:

 
| ** **                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                       |       |     |       |     |       |
| Accumulated  benefit obligation                            |       | $        | (415       | )        | $          | (410 | ) |
| Fair value of  plan assets                                 |       | 422      |       | 258      |       |
| Required prepaid  pension obligation (minimum liability)   |       | $        | 7          |     | $          | (152 | ) |
| Liability  recognized for accrued benefit costs            |       | —   |       | 110      |       |
|                                                       |       |     |       |     |       |
| Prepaid pension  obligation (additional minimum liability) |       | $        | 7          |     | $          | (42 | ) |

 

The components of net periodic pension cost for theyears ended December 31, 2006, December 31, 2005 and December 31, 2004 were asfollows:

 
| ** **                                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                       |       |     |       |     |       |     |       |
| Service cost                                               |       | $        | 59         |     | $          | 57       |       | $ | 56 |   |
| Interest cost                                              |       | 28       |       | 23       |       | 21       |       |
| Expected return  on plan assets                            |       | (23      | )          | (19      | )          | (15      | )          |
| Amortization of  net actuarial loss and prior service cost |       | 9        |       | 7        |       | 7        |       |
|                                                       |       |     |       |     |       |     |       |
| Net periodic  pension cost                                 |       | $        | 73         |     | $          | 68       |       | $ | 69 |   |

 

The weighted average actuarial assumptions used todetermine the pension benefit obligations at December 31, 2006, 2005 and 2004and the net periodic pension cost for the years then ended are as follows:

 
| ** **                     | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |     |       |
| Pension benefit  obligation:   |       |     |       |     |       |     |       |
| Discount rate                  |       | 5.90     | %          | 5.50     | %          | 5.75     | %          |
| Compensation  increases        |       | 2.00     | %          | 2.00     | %          | 2.00     | %          |
|                           |       |     |       |     |       |     |       |
| Net periodic  pension cost:    |       |     |       |     |       |     |       |
| Discount rate                  |       | 5.90     | %          | 5.75     | %          | 6.00     | %          |
| Compensation  increases        |       | 2.00     | %          | 2.00     | %          | 2.00     | %          |
| Return on assets  for the year |       | 8.50     | %          | 8.50     | %          | 8.50     | %          |

 

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

 

The Partnership employsan investment strategy whereby the assets in our portfolio are evaluated tomaintain the desired target asset mix. The funds are invested in stock mutualfunds, fixed income mutual funds and money market funds. Evaluation of theactual asset mix is evaluated on a quarterly basis and adjusted if required tomaintain the desired target mix. Therefore, the actual asset allocation doesnot vary significantly from the targeted asset allocation.

 

32

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The plan’s assetallocation percentages at December 31, 2006 and 2005 were as follows:

 
| ** **                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
|                       |       |     |       |     |       |
| Pooled fixed  income funds |       | 23.00    | %          | 21.00    | %          |
| Money market  funds        |       | 10.00    | %          | 16.00    | %          |
| Stock mutual  funds        |       | 67.00    | %          | 63.00    | %          |
| Total                      |       | 100.00   | %          | 100.00   | %          |

 

The Partnership expects to contribute approximately$100,000 to the plan in 2007.

 

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

 

Years Ending December 31,

 
| 2007      |   | $       | 8,372  |   |
|-----------|--------|---------|--------|--------|
| 2008      |   | 11,073  |   |
| 2009      |   | 12,168  |   |
| 2010      |   | 17,546  |   |
| 2011      |   | 17,201  |   |
| 2012-2016 |   | 145,551 |   |

 

**(10) UNION BARGAINING UNIT INTERMITTENT EMPLOYEESSEVERANCE PLAN**

 

The Partnership providesa 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 bargainingunion agreement. The severance plan provides for the payment of 8 days of payfor each year worked (upon the completion of 3 years of continuous serve) ifthe employee becomes physically or mentally incapacitated, is part of aPartnership mass layoff, or reaches the age of 60 and is terminated orvoluntarily terminates. The Partnership accounts for the benefit by determiningthe present value of the future benefits based upon an actuarial analysis. Theprojected benefit obligation includes the obligation for the employees of theirprevious employer that became Company employees.

 

The following reconciles the changes in the severancebenefit obligation and plan assets for the years ended December 31, 2006, 2005,2004 to the funded status of the plan and the amounts recognized in the balancesheets at December 31, 2006, 2005, 2004 (000’s).

 

**Change in Severance Obligation**

 
| ** **                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                       |       |     |       |     |       |     |       |
| Severance  obligation at beginning of year |       | $        | 376        |     | $          | 384      |       | $ | 363 |   |
| Service cost                               |       | 23       |       | 24       |       | 24       |       |
| Interest cost                              |       | 20       |       | 21       |       | 21       |       |
| Actuarial (gain)  loss                     |       | (36      | )          | (14      | )          | 9        |       |
| Benefits paid                              |       | (48      | )          | (39      | )          | (33      | )          |
| Severance  obligation at end of year       |       | $        | 335        |     | $          | 376      |       | $ | 384 |   |

 

33

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**Changein Plan Assets**

 
| ** **                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                      |       |     |       |     |       |     |       |
| Fair value of  plan assets at of year     |       | $        | 0          |     | $          | 0        |       | $ | 0 |   |
| Employer  contributions                   |       | 48       |       | 39       |       | 33       |       |
| Benefits paid                             |       | (48      | )          | (39      | )          | (33      | )          |
| Fair value of  plan assets at end of year |       | $        | 0          |     | $          | 0        |       | $ | 0 |   |

 

**Funded Status**

 
| Benefit  obligation              |   | $  | (335   | )  | $      | (376 | )      | $ | (384 | ) |
|----------------------------------|--------|----|--------|----|--------|------|--------|---|------|---|
| Unrecognized net  actuarial loss |   | 18 |   | 55 |   | 72   |   |
| Prepaid  (accrued) benefit cost  |   | $  | (317   | )  | $      | (321 | )      | $ | (312 | ) |

 

As of December 31, 2006,the accrued benefit cost of $317,000 was recorded in accrued liabilities - currentportion $27,000, representing amounts to be paid in 2007, non-currentliabilities $290,000 and the unrecognized actuarial gain of $18,000 wasrecorded in accumulated other comprehensive income. On adoption of SFAS 158 thePartnership recorded an adjustment to other comprehensive income of $18,000 forthe under funded status of the severance benefit plan at December 31, 2006.

 

**Componentsof Net Periodic Cost**

 
| Service cost                |   | $  | 23     |   | $      | 24 |   | $ | 24 |   |
|-----------------------------|--------|----|--------|--------|--------|----|--------|---|----|--------|
| Interest cost               |   | 20 |   | 21     |   | 21 |   |
| Recognized net  (gain) loss |   | 1  |   | 3      |   | 2  |   |
| Net periodic  cost (credit) |   | $  | 44     |   | $      | 48 |   | $ | 47 |   |

 

**Reconciliation of Severance Liability**

 
| (a) Accrued  severance beginning of year   |   | $   | (321   | )   | $      | (312 | )      | $ | (298 | ) |
|--------------------------------------------|--------|-----|--------|-----|--------|------|--------|---|------|---|
| (b)  Contributions during fiscal year      |   | 48  |   | 39  |   | 33   |   |
| (c) Net periodic  pension cost             |   | (44 | )      | (48 | )      | (47  | )      |
| (d) Accrued  severance cost at end of year |   | $   | (317   | )   | $      | (321 | )      | $ | (312 | ) |

 

**WeightedAverage Assumptions**

 
| Discount rate                   |   | 5.87 | % | 5.78 | % | 5.74 | % |
|---------------------------------|--------|------|---|------|---|------|---|
| Expected return  on plan assets |   | 0.00 | % | 0.00 | % | 0.00 | % |
| Rate of  compensation increase  |   | 1.65 | % | 1.65 | % | 1.65 | % |

 

As discussed in Note 14, the Partnership initiallyrecorded its liability for the severance plan in 2006 following itsdetermination that such obligation had not properly been accounted for as partof prior year purchase price allocations. The Partnership has provideddisclosures for those years for comparative purposes. As disclosed above,benefit costs in 2004 and 2005 did not differ materially form contributionamounts expensed in such years.

 

34

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**(11) EMPLOYEES SAVINGS PLAN**

 

The Partnership sponsors a 401(k) plan, which allowsparticipating employees to contribute up to 25% of their salary, subject toannual limits. The plan provides for the Partnership to make matchingcontributions up to 50% of the first 4% of salary deferred by employees. Duringthe years ended December 31, 2006, 2005 and 2004, Partnership matchingcontributions were $32,000, $29,000 and $27,000, respectively.

 

**(12) SALARIED DEFINED CONTRIBUTION PLAN**

 

The Partnership sponsors a defined contribution planfor its non-bargaining unit employees. This plan provides for the Partnershipto make annual contributions to the 401(k) plan on behalf of participatingemployees. Contributions are based upon age, length of service, and othercriteria on an annual basis, subject to annual limits. During the years endedDecember 31, 2006, 2005, and 2004 Partnership contributions were $106,000,$96,000 and $98,000, respectively.

 

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

 

The following chart summarizes unaudited quarterlyoperating results for the years ended December 31, 2006, 2005, and 2004 (000’somitted except per unit data):

 
| ** **  | ** ** | ** **   | ** ** | **Gross Income** | ** ** | **Net Income** | ** ** | **Net Income (Loss)**     | ** ** |
|-------------|------------|--------------|------------|-----------------------|------------|---------------------|------------|-------------------------------------|------------|
| ** **  | ** ** | **Revenues** | ** ** | **(Loss)**            | ** ** | **(Loss)**          | ** ** | **per Class A Unit** | ** ** |
| 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                                |       |
|        |       |         |       |                  |       |                |       |                                |       |
| 2004        |       |         |       |                  |       |                |       |                                |       |
| 1st Quarter |       | $            | 2,052      |                  | $          | 208                 |       | $                                   | (95        | ) | $ | (0.01 | ) |
| 2nd Quarter |       | 787          |       | 140                   |       | (161                | )          | (0.02                               | )          |
| 3rd Quarter |       | 3,275        |       | (67                   | )          | (817                | )          | (0.11                               | )          |
| 4th Quarter |       | 7,551        |       | (143                  | )          | (576                | )          | (0.08                               | )          |

 

35

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**(14) CBCL ACQUISITION ADJUSTMENTS**

** **

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 hasre-evaluated and revised the original purchase price allocation and accordinglyhas recorded in 2006, goodwill of $306,000 and a corresponding liability forthe fair value of such benefits as of the acquisition date. The changes in theliability for the period from May 1, 2000 to December 31, 2005 of $159,000 havebeen included in the 2006 Consolidated Statement of Income. Prior yearfinancial statements were not materially impacted by this matter.

 

36

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**SIGNATURES**

 

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

 
|                       | **ML MACADAMIA ORCHARDS, L.P.**                  |                   |
|----------------------------|--------------------------------------------------|------------------------|
|                       | (Registrant)                                     |                   |
|                       |                                             |                   |
|                       | By:                                              | **ML RESOURCES, INC.** |   |
|                       |    (Managing  General Partner)    |                   |
|                       |                                             |                   |
|                       | By:                                              | /s/ Dennis J. Simonis  |   |
|                       | Dennis J.  Simonis      |                   |
|                       | Principal Executive  Officer           |                   |
| Dated  : November 13, 2007 |                                             |                   |

 

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

 

**MLRESOURCES, INC.**

 

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

 

37

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**EXHIBITINDEX**

** **
| **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)                                                                                                                                                                                                  |

 

38

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| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                           |
| 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)                                                                                                                                          |

 

39

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| **Exhibit  Number** | ** ** | **Description**                                                                                                                                          |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                     |
| 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)                                                                               |

 

40

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| **Exhibit  Number** | ** ** | **Description**                                                                                                                                        |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                   |
| 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)    |
|                |       |                                                                                                                                                   |
| 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 Exhibitpreviously filed as an Exhibit to Registrant’s Registration Statement under theSecurities Act on Form S-1, Registration Statement No. 33-30659, filed October20, 1989.

 

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

 

(d)   Incorporated by reference to the corresponding Exhibitpreviously filed as an Exhibit to Registrant’s Annual Report on Form 10-K,Commission filed No. 1-9145, for the year ended December 31, 1986, filed March27, 1987.

 

(e)   Incorporated by reference to the corresponding Exhibitpreviously filed as an Exhibit to Registrant’s Annual Report on Form 10-K,Commission filed No. 1-9145, for the year ended December 31, 1991, filed March27, 1992.

 

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

 

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

 

(h)   Incorporated by reference to the corresponding Exhibitpreviously filed 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 Exhibitpreviously filed as an Exhibit to Registrant’s Form 10-K/A, Commission filedNo. 001-9145, filed June 1, 2005.

 

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

 

41

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