UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For First Quarter Ending March 31, 1998
OR
( ) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-9035
POPE RESOURCES, A DELAWARE
LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
DELAWARE 91-1313292
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
19245 10TH AVENUE NE, POULSBO, WA 98370
Telephone: (360) 697-6626
(Address of principal executive offices including zip code)
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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PART I
ITEM 1
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (Unaudited)
Pope Resources
March 31, 1998 and December 31, 1997
(Thousands) 1998 1997
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash $ 4,435 $ 3,950
Accounts receivable 1,058 680
Work in progress 10,390 10,072
Current portion of contracts receivable 819 1,433
Prepaid expenses and other 318 364
---------- ----------
Total current assets 17,020 16,499
---------- ----------
Properties and equipment at cost:
Land and land improvements 14,827 15,028
Roads and timber (net of
accumulated depletion) 11,169 11,067
Buildings and equipment (net of
accumulated depreciation) 11,573 10,944
---------- ----------
37,569 37,039
---------- ----------
Other assets:
Contracts receivable, net of current portion 2,213 1,877
Unallocated amenities and project costs 903 847
Loan fees and other 57 57
---------- ----------
3,173 2,781
---------- ----------
$ 57,762 $ 56,319
---------- ----------
---------- ----------
Liabilities and Partners' Capital
Current liabilities:
Accounts payable $ 1,014 $ 852
Accrued liabilities 394 947
Distribution payable 452 452
Current portion of long-term debt 364 351
Deposits and IPMB income allocation 223 82
---------- ----------
Total current liabilities 2,447 2,684
---------- ----------
Deficit in investment in joint venture 155 160
Long-term debt, net of current portion 13,954 14,048
Other long-term liabilities 200 275
Deferred profit on contracts receivable 211 242
Partners' capital 40,795 38,910
---------- ----------
$ 57,762 $ 56,319
---------- ----------
---------- ----------
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Pope Resources
Three Months Ended March 31, 1998 and 1997
(Thousands, except per unit data) 1998 1997
- --------------------------------------------------------------------------------
Revenues $ 9,948 $ 7,080
Cost of sales (3,177) (2,472)
Selling and administration expenses (3,980) (2,563)
---------- ----------
Income from operations 2,791 2,045
---------- ----------
Other income (expense):
Interest expense (358) (326)
Interest income 150 67
Equity in losses of joint venture (120) (103)
IPMB income allocation (126) -
---------- ----------
(454) (362)
---------- ----------
Net income $ 2,337 $ 1,683
---------- ----------
---------- ----------
Allocable to general partners $ 23 $ 17
Allocable to limited partners 2,314 1,666
---------- ----------
---------- ----------
$ 2,337 $ 1,683
---------- ----------
---------- ----------
Net income per partnership unit $ 0.52 $ 0.37
---------- ----------
---------- ----------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Pope Resources
Three Months Ended March 31, 1998 and 1997
(Thousands) 1998 1997
- --------------------------------------------------------------------------------
Net cash flows from operating activities $ 2,340 $ 2,741
Cash flows from investing activities:
Capital expenditures (1,196) (825)
Joint venture investment (125) (25)
---------- ----------
Net cash used in investing activities (1,321) (850)
---------- ----------
Cash flows from financing activities:
Cash distributions to unitholders (452) -
Repayment of long-term debt (82) (67)
---------- ----------
Net cash used in financing activities (534) (67)
---------- ----------
Net increase (decrease) in cash and cash equivalents 485 1,824
Cash and cash equivalents at beginning of year 3,950 3,741
---------- ----------
Cash and cash equivalents at end of the three month
period $ 4,435 $ 5,565
---------- ----------
---------- ----------
POPE RESOURCES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1998
1. The consolidated financial statements have been prepared by the
Partnership without an audit and are subject to year-end adjustments.
Certain information and footnote disclosures in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of the Partnership, the
accompanying consolidated balance sheets as of March 31, 1998 and
December 31, 1997 and the consolidated statements of income for the
three months ending March 31, 1998 and 1997 and cash flows for the
three months ending March 31, 1998 and 1997 contain all adjustments
necessary to present fairly the financial statements referred to
above. The results of operations for any interim period are not
necessarily indicative of the results to be expected for the full
year.
2. The financial statements in the Partnership's 1997 annual report on
Form 10-K include a summary of significant accounting policies of the
Partnership and should be read in conjunction with this Form 10-Q.
3. Net income per unit is based on 4,519,470 units.
4. Supplemental disclosure of cash flow information: Interest paid
amounted to approximately $365,000 and $273,000 for the three months
ended March 31, 1998 and 1997, respectively.
5. Statement of Financial Accounting Standard (SFAS) No. 131, "Disclosure
about Segments of an Enterprise and Related Information," was recently
issued and is effective for the Partnership's fiscal year ending
December 31, 1998. The Partnership is currently evaluating the
effects of this standard on the Partnership's financial statements.
6. IPMB (investor portfolio management business) income allocation
represents Pope MGP, Inc.'s share of income from Olympic Resource
Management LLC (ORMLLC). The Partnership consolidates ORMLLC and
reflects Pope MGP, Inc.'s share of income as an expense and liability,
as Pope MGP, Inc. is not one of the entities consolidated into these
consolidated financial statements. A description of the income
allocation method is included in the Partnership's Proxy Statement
filed with the Securities and Exchange Commission on February 14,
1997.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
March 31, 1998
This discussion should be read in conjunction with the Partnership's
consolidated financial statements included with this report.
RESULTS OF OPERATIONS
TIMBERLAND RESOURCES AND MANAGEMENT
The Partnership harvested the following timber during the quarter ended March
31, 1998:
----------------------------------------------------------------------
Softwood
Year Sawings Pulp Logs
----------------------------------------------------------------------
----------------------------------------------------------------------
MMBF $/MBF MMBF $/MBF
----------------------------------------------------------------------
Jan - March 1998 7.9 589 2.5 283
----------------------------------------------------------------------
Jan - March 1997 6.4 757 1.0 205
----------------------------------------------------------------------
MMBF = Million board feet
MBF = Thousand board feet
Timberland resource and management revenues for the three months ended March 31,
1998 and 1997 were $7,642,000 and $5,082,000, respectively. The Partnership's
increase in revenues resulted from management fees associated with the
management of timberlands owned by others under the Investor Portfolio
Management Business (IPMB) and higher log revenues from the Partnership's fee
timberland ownership due to an increase in timber volume harvested.
Log revenues from the Partnership's fee timberland ownership are significantly
impacted by export log market conditions. The export market remained weak
through the first quarter of 1998. The average price of export logs sold was
$682 which represented a 25% reduction from the first quarter of 1997. This
relative pricing weakness was driven by a weak Asian economy and strong U.S.
dollar in 1998 and healthy pricing in the first quarter of 1997. Export log
volumes for the three months ending March 31, 1998 and 1997 were 2,495 MBF and
2,950 MBF, respectively. This volume reduction is a result of increased
export-quality log volumes being diverted to the domestic market. The majority
of the Partnership's export log volume is sold to Japan. Continued economic
malaise in Japan coupled with a strong U.S. dollar are expected to keep export
log prices soft for the balance of the year.
Pricing in the domestic log market has been negatively impacted by weak export
markets, but nevertheless has shown more relative price stability than the
export market. Average domestic log prices were $544 and $620 for the first
three months of 1998 and 1997, respectively, representing a 12% decline. The
decline in domestic log prices is due in large part to increased supply
associated with export log volumes being diverted to the domestic log market.
Domestic sawlog volumes for the three months ended March 31, 1998 and 1997 were
5,598 MBF and 3,626 MBF, respectively. Even though domestic log prices have
declined from 1997 levels, management believes further declines for the
remainder of 1998 are possible.
Domestic log demand is directly and indirectly impacted by the level of new home
construction, repair and remodel expenditures, and market conditions in Asia
which impact the demand for export logs. Housing starts are driven by interest
rate fluctuations, population demographics, and changes in general economic
conditions. Repair and remodel expenditures are heavily influenced by the level
of sales of existing homes as well as interest rate movements. In combination
these forces affect the demand for lumber which in turn drives the demand for
logs. Additionally, as export log prices change, logs may be diverted to or
from the export log market. This may cause a shift in the domestic
supply-demand balance which in turn impacts log prices. All these factors have a
direct effect on the price the Partnership can obtain from the sale of its log
production.
TIMBERLAND RESOURCES AND MANAGEMENT (CONTINUED)
Pulp log volumes for the three months ended March 31, 1998 and 1997 were
2,500 MBF and 1,000 MBF, respectively. The increase in pulp log volume is
due to the Partnership's harvest of a higher relative percentage of unmanaged
timber stands. These stands contain a higher pulp component than managed
stands. Revenues for the quarter benefited from a 38% increase in pulp log
prices for the first quarter of 1998 when compared to the same period in 1997.
Effective January 1, 1998 Olympic Resource Management LLC (ORMLLC), a wholly
owned subsidiary of the Partnership, became the western region timberland
manager for the Hancock Timber Resource Group (HTRG). This contract covers
timber management services for 535,000 acres in Washington, Oregon, and northern
California. The first quarter of 1998 marked the initial receipt of earned
revenues from the IPMB for Pope Resources.
The IPMB, approved by unitholders in a special proxy vote in March 1997, has two
aspects: portfolio development and property management which expand the
Partnership's expertise in timberland resources. Portfolio development's goal is
to build and manage diversified portfolios of timberlands for third-party
investors, sometimes acting exclusively as a portfolio manager, while at other
times co-investing as a partner on behalf of Pope Resources. Property
management's mandate is to provide a full range of management services to
third-party owners of timberlands.
Consistent with the Amendment to the Partnership Agreement authorizing
management to pursue the IPMB, the Partnership has allocated 20% of income
earned from the IPMB during the first quarter of 1998 to Pope MGP, Inc. Future
results from the IPMB are dependent on management's ability to execute its plan
for developing the IPMB business.
In May 1998, ORMLLC entered into a joint marketing agreement with Simons Reid
Collins, a division of privately held H.A. Simons Ltd. of Vancouver, British
Columbia to compete for timberland management services, contracts, acquisitions,
and dispositions worldwide. It is anticipated that the joint marketing efforts
will produce synergies which will benefit both organizations.
REAL ESTATE DEVELOPMENT
Real estate development revenues for the periods ended March 31, 1998 and 1997,
were $2,306,000 and $1,998,000, respectively. Property development consists of
residential development and income-producing properties. Residential
development consists of the sale of single-family homes, finished lots and
undeveloped acreage. Income-producing properties consist of providing water and
sewer services to properties in the Port Ludlow area; a marina, golf course,
commercial center and RV park operated by the Partnership; certain Port Gamble
parcels leased to businesses and individuals; and a restaurant/lounge and
related facilities leased to Village Resorts, Inc. and operated by Derrig Hobart
Enterprises, Inc.
Revenues from residential development totaled $1,368,000 and $1,072,000 for the
quarter ended March 31, 1998 and 1997, respectively. The Partnership's largest
development is in Port Ludlow, Washington. During the first quarter of 1998 the
Partnership's development at Port Ludlow generated revenues of $899,000 on 6
finished lot sales and 2 home sales. This compares to the prior year's
comparable period sales of $689,000 on 6 finished lot sales, and 1 home sale.
The revenue per sale depends on the quality and size of the home, the
subdivision, and the location of the lot.
The Partnership's residential development inventory includes a number of
residential subdivisions encompassing a broad spectrum of prices in several
locales. The Partnership continues to be in the planning and entitlement phases
for several developments located in the West Puget Sound region. In 1997, the
City of Bremerton approved the Partnership's request for preliminary planned
unit development status on a 260 acre property, and increased the industrial
portion to 60 acres. Construction of the off-site sewer at this site is
completed and the Partnership is focusing on its marketing plan. With respect
to other properties, the Partnership continues to work with officials in Gig
Harbor regarding the development of a 320 acre mixed use project located within
the Gig Harbor city limits. The Partnership has two additional ongoing projects
in Kitsap County, a 720 acre residential development in Kingston and a 200-acre
residential development in Hansville. While significant progress has been made
in the governmental entitlement process, final approval is currently stalled
pending the outcome of an unrelated court case that will establish the
appropriate zoning and development regulations applicable to projects pending
throughout the county.
REAL ESTATE DEVELOPMENT (CONTINUED)
Land holdings throughout the state are impacted by state's Growth Management
Act, which requires counties to submit comprehensive plans that spell out the
future direction of growth and stipulate where population densities are to be
concentrated. Kitsap County's Comprehensive plan, which has been invalidated
twice by the state's Growth Management hearings board, is in the process of
being re-drafted for consideration. Jefferson County, in which Port Ludlow is
located, is also in the process of developing its comprehensive plan for review
by the state.
Revenues from income-producing properties totaled $938,000 and $926,000 for the
periods ending March 31, 1998 and 1997, respectively. Operations were fairly
consistent for the periods ending March 31, 1998 and 1997.
On May 1, 1998 the Partnership announced a reorganization of its real estate
development segment into new, subsidiary corporate entities. This action is
expected to enhance the Partnership's ability to measure the financial
performance of this operation and provide flexibility for future growth plans.
Revenues from real estate development are affected by changes in the local and
national economies as well as changes in the regulatory environment. There can
be no assurance that the Partnership will be successful in receiving the
necessary regulatory approvals that make its real estate development activities
possible.
OTHER
The Partnership is a 50% joint venture partner in a 36-room inn at Port Ludlow.
The Partnership's share of joint venture losses were $120,000 and $103,000 for
the first quarter of 1998 and 1997, respectively.
Selling, general and administrative expenses were $3,980,000 and $2,563,000 for
the three months ending March 31, 1998 and 1997, respectively. The increase in
expenses is primarily due to payroll, information technology and other costs
associated with timberland resource management, together with continuing
enhancement of the Partnership's internal systems.
Through the creation of subsidiary corporations in Real Estate Development and
the IPMB, the Partnership is expected to incur income tax expense beginning in
the second quarter of 1998. Based upon current operations of Real Estate
Development and IPMB, income tax expense for the year is not expected to be
material to the Partnership's consolidated financial statements.
The Partnership's depository receipts (units) are currently trading on both
the NASDAQ, national market system and Pacific Exchange. However, the
Partnership has requested and received permission from the Equity Listing
Committee of the Pacific Exchange to be removed from listing and registration
on the Pacific Exchange. An application for delisting is currently pending
with the U.S. Securities and Exchange Commission.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership depends upon funds generated internally through operations and
external financing to provide the required resources for the Partnership's
timber operations, real estate development, capital expenditures and business
development activities. The Partnership considers its capital resources to be
adequate for its real estate development and other business development plans,
both in the near-term and on a long-term basis. At March 31, 1998, the
Partnership had available an unused $20 million bank loan commitment.
Management has considerable discretion to increase or decrease the level of logs
cut and thereby may increase or decrease net income and cash flow assuming, of
course, log prices and demand remain stable. The Partnership's current plan is
to harvest approximately 38 million board feet of timber in 1998. Since harvest
plans are based on demand, price and cash needs, actual harvesting may vary
subject to management's on-going review.
Cash provided by operating activities was $2,340,000 for the first three months
of 1998, and overall cash and cash equivalents increased by $485,000. The cash
generated was primarily used for capital expenditures of $1,196,000 and cash
distributions to unitholders of $452,000.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The fourth quarter 1997 cash distribution of $.10 per unit, payable to
unitholders of record on December 30, 1997, was paid on January 15, 1998. The
first 1998 cash distribution of $.10 per unit, payable to unitholders of record
on March 31, 1998, was paid on April 15, 1998.
PART II
Items 1 through 6 are not applicable.
EXHIBITS AND REPORTS ON FORM 8-K
None.
POPE RESOURCES
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POPE RESOURCES,
A Delaware Limited Partnership
Registrant
Date: May 12, 1998 By: POPE MGP, Inc.
Managing General Partner
Date: May 12, 1998 By:
------------------------------------
Gary F. Tucker
President and Chief Executive Officer
Date: May 12, 1998 By:
------------------------------------
Thomas M. Ringo
Sr. Vice President Finance & Client Relations
(Principal Financial Officer)
Date: May 12, 1998 By:
------------------------------------
Meredith R. Green
Vice President Finance and Treasurer
(Principal Accounting Officer)
5
1,000
3-MOS
DEC-31-1998
JAN-01-1998
MAR-31-1998
4,435
0
1,058
0
10,390
17,020
49,900
12,331
57,762
2,447
13,954
0
0
0
40,795
57,762
9,948
9,948
3,177
7,157
246
0
358
2,337
0
2,337
0
0
0
2,337
.52
.52
