(4) SEGMENT INFORMATION

The Partnership has three reportable segments, the owned-orchard segment, the farming segment and the branded products segment, added in 2012, which are organized on the basis of revenues and assets. The owned-orchard segment derives its revenues from the sale of macadamia nuts grown in orchards owned or leased by the Partnership. The farming segment derives its revenues from the farming of macadamia orchards owned by other growers. It also farms those orchards owned by the Partnership. The branded products segment derives its revenues from the sale of branded macadamia nut products reported under Royal.

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

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

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

(a) Nut Purchase Contracts.The Partnership had two lease agreements, one license agreement, and three nut purchase contracts with Mauna Loa in 2012. The two lease agreements and one license agreement acquired by the Partnership with the purchase of the IASCO orchards on August 1, 2010, require that all macadamia nuts produced in the acquired orchards must be sold to and be purchased by Mauna Loa. The agreements are long term agreements expiring in 2029, 2078 and 2080. Under these agreements, the Partnership is paid based on wet-in-shell pounds, adjusted for the Mauna Loa wholesale price of the highest year-to-date volume fancy and choice products sold in Hawaii, and adjusted for moisture annually based upon the United States Department of Agriculture (“USDA”) report. Under the two lease agreements, the price per pound is determined based on two elements: (1) 60% of the price is computed at 37% of Mauna Loa’s year-to-date (“YTD”) price of the highest YTD volume fancy and choice products. This wholesale price is adjusted to convert kernel price to a wet-in-shell basis; and (2) 40% of the price is computed at the actual price paid as quoted in Hawaii Macadamia Nuts Annual Summary published by the USDA, for the most current crop year listed. When the USDA price for the just-completed crop year is released, Mauna Loa adjusts the payment for that crop year retrospectively. The price per pound under the license agreement is determined in a similar manner as the lease agreements, with the exception of the percent of the two components so that 50% of the price is computed at 37% of Mauna Loa’s YTD price of the highest YTD volume fancy and choice products, and 50% of the price is computed at the USDA price. The average nut price received by the Partnership for nuts produced from the IASCO orchards in the calendar year 2012 was $0.79 per pound.

On January 31, 2011, the Partnership entered into three nut purchase contracts with Mauna Loa, each effective January 1, 2012. These contracts replace the addendum to the 2006 nut purchase contract executed in December 2009, which expired on December 31, 2011. The new contracts are identical except for the terms, which are one, two and three years, respectively. Each contract requires that Mauna Loa purchase and the Partnership sell 1/3 of all macadamia nut production of the Partnership (or approximately 6.5 million pounds of wet-in-shell nuts annually) excluding production from the IASCO orchards. The nut purchase price under each of the contracts will be $0.77 per adjusted pound on a WIS SK/DIS basis. To the extent the Partnership delivers wet in husk nuts, a $0.055 per wet-in-shell pound husking charge will be made by Mauna Loa. The Partnership has not renewed the one year contract, thus it expired on December 31, 2012. The Partnership will have the related production processed into kernel in 2013 to be marketed by the Partnership in branded and bulk forms. Under the three short-term contracts, it is the Partnership’s position that Mauna Loa is obligated, at the Partnership’s option, to use commercially reasonable efforts to process the Partnership’s available production covered by such contract at a fee equal to Mauna Loa’s cost for a period of two years after a contract is not renewed. Mauna Loa has refused to process the Partnership’s nuts into kernel under this provision of the agreements.

In order to mitigate any damages and to provide for the processing of nuts covered by the contract that expired on December 31, 2012, on July 11, 2012, the Partnership entered into a nut processing agreement with MacFarms, under which MacFarms will process between 1.5 and 7.0 million pounds of WIS nuts into kernel for the Partnership during 2013. Under the Agreement with MacFarms, the Partnership will pay MacFarms a processing fee of $1.30 per kernel pound for the first 300,000 pounds of kernel produced and $1.20 per kernel pound for all additional pounds of kernel produced. MacFarms will provide processing services only with the Partnership retaining ownership of the nuts for future sale.

(b) Husking Activities. Husking activities for the Keaau and Mauna Kea orchards are performed at Mauna Loa’s Keaau facility. Operation of the Keaau husking facility which had been performed by the Partnership was transferred to Mauna Loa in July of 2006. Payments or reimbursements made to Mauna Loa were $405,000 in 2012, $532,000 in 2011, $451,000 in 2010 for husking as the contracts require that the Partnership will deliver husked nuts. Husking for the Ka’u orchards are performed at the Partnership’s husking plant in Ka’u.

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

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

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

In return, the Partnership is obligated to pay the owner 100% of any year’s cash flow from this orchard in excess of the target cash flow as additional percentage rent until the aggregate amount of additional percentage rent equals 150% of the total amount of stabilization payments previously received. Thereafter, the Partnership is obligated to pay the owner 50% of this orchard’s cash flow in excess of the target cash flow as additional incentive rent. No additional rent was due for 2012, 2011 or 2010.

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

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

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

(2) The farming segment’s revenues are based on long-term farming contracts which generate a farming profit based on a percentage of farming cost or based on a fixed fee per acre and tend to be less variable than revenues from the owned-orchard segment.

The following is a summary of each reportable segment’s operating income and the segment’s assets as of and for the years ended December 31, 2012, 2011 and 2010.

Segment Reporting for the Year ended December 31, 2012 (in thousands)

	Owned				Branded			Intersegment
	Orchards		Farming		Products			Elimination			Total
Revenues	$	18,978	$	16,867	$	91		$	(15,829	)	$	20,107
Composition of Intersegment revenues	935		14,894		—						15,829
Operating income (loss)	914		132		(1,000		)				46
Depreciation expense	2,015		418		3						2,436
Segment assets	48,258		6,696		1,387						56,341
Expenditures for property and equipment	8		405		129						542

Segment Reporting for the Year ended December 31, 2011 (in thousands)

	Owned				Intersegment
	Orchards		Farming		Elimination			Total
Revenues	$	16,125	$	13,654	$	(11,785	)	$	17,994
Composition of Intersegment revenues	—		11,785		—			11,785
Operating income	875		131		—			1,006
Depreciation expense	2,032		392		—			2,424
Segment assets	50,099		6,944		—			57,043
Expenditures for property and equipment	48		26		—			74

Segment Reporting for the Year ended December 31, 2010 (in thousands)

	Owned					Intersegment
	Orchards			Farming		Elimination			Total

Revenues	$	12,228		$	13,074	$	(10,002	)	$	15,300
Composition of Intersegment revenues	—			10,002		—			10,002
Operating income (loss)	(1,442		)	221		—			(1,221		)
Depreciation expense	1,880			293		—			2,173
Segment assets	51,453			6,706		—			58,159
Expenditures for property and equipment	10,260			1,807		—			12,067

(3) Revenues for the branded product segment commenced in the fourth quarter 2012. Royal’s sale of its savory macadamia nuts and nut and dried fruit clusters resulted in $91,000 of revenue. Its cost of sale was $84,000. The branded products segment incurred an operating loss of $1.0 million mainly due to $587,000 in general and administrative costs and $419,000 in selling and marketing expenses related to brand and product development.