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 Second Quarter Ending June 30, 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
---- ----
1
P A R T I
ITEM 1
FINANCIAL STATEMENTS
2
CONSOLIDATED BALANCE SHEETS (Unaudited)
Pope Resources
June 30, 1998 and December 31, 1997
(Thousands) 1998 1997
- ---------------------------------------------------------------------------
Assets
Current assets:
Cash $ 5,054 $ 3,950
Accounts receivable 1,456 680
Work in progress 10,581 10,072
Current portion of contracts receivable 981 1,433
Prepaid expenses and other 355 364
------- -------
Total current assets 18,427 16,499
------- -------
Properties and equipment at cost:
Land and land improvements 14,436 15,028
Roads and timber (net of
accumulated depletion) 11,195 11,067
Buildings and equipment (net of
accumulated depreciation) 11,434 10,944
------- -------
37,065 37,039
------- -------
Other assets:
Deposit for property acquisition 2,666 -
Contracts receivable, net of current portion 2,041 1,877
Unallocated amenities and project costs 973 847
Loan fees and other 55 57
------- -------
5,735 2,781
------- -------
$61,227 $56,319
------- -------
------- -------
Liabilities and Partners' Capital
Current liabilities:
Accounts payable $ 847 $ 852
Accrued liabilities 509 947
Distribution payable - 452
Current portion of long-term debt 364 351
Deposits and IPMB income allocation 307 82
------- -------
Total current liabilities 2,027 2,684
------- -------
Deficit in investment in joint venture 31 160
Long-term debt, net of current portion 13,869 14,048
Other long-term liabilities 200 275
Deferred profit on contracts receivable 209 242
Partners' capital 44,891 38,910
------- -------
$61,227 $56,319
------- -------
------- -------
3
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Pope Resources
Three Months and Six Months Ended June 30, 1998 and 1997
(Thousands, except per unit data) Three Months ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
-------- ------- -------- -------
Revenues $14,313 $7,527 $24,261 $14,607
Cost of sales (4,033) (2,681) (6,727) (4,618)
Operating expenses (3,113) (2,089) (5,798) (3,662)
Selling and administration expenses (2,156) (1,670) (3,934) (3,195)
-------- ------- -------- -------
Income from operations 5,011 1,087 7,802 3,132
-------- ------- -------- -------
Other income (expense):
Interest expense (366) (375) (724) (701)
Interest income 138 144 288 211
Equity in losses of joint venture (51) (117) (171) (220)
IPMB income allocation (54) - (180) -
-------- ------- -------- -------
(333) (348) (787) (710)
-------- ------- -------- -------
Income before income taxes 4,678 739 7,015 2,422
Income tax provision (131) - (131) -
-------- ------- -------- -------
Net income $ 4,547 $ 739 $ 6,884 $ 2,422
-------- ------- -------- -------
-------- ------- -------- -------
Allocable to general partners $ 45 $ 7 $ 69 $ 24
Allocable to limited partners 4,502 732 6,815 2,398
-------- ------- -------- -------
$ 4,547 $ 739 $ 6,884 $ 2,422
-------- ------- -------- -------
-------- ------- -------- -------
Net income per partnership unit $ 1.01 $ 0.16 1.52 $ 0.54
-------- ------- -------- -------
-------- ------- -------- -------
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Pope Resources
Six Months Ended June 30, 1998 and 1997
Six Months Ended June 30,
(Thousands) 1998 1997
-------- -------
Net cash flows from operating activities $ 4,608 $ 3,348
Cash flows from investing activities:
Capital expenditures (1,686) (2,020)
Joint venture investment (300) (163)
-------- -------
Net cash used in investing activities (1,986) (2,183)
-------- -------
Cash flows from financing activities:
Cash distributions to unitholders (1,356) (1,265)
Repayment of long-term debt (162) (158)
-------- -------
Net cash used in financing activities (1,518) (1,423)
-------- -------
Net increase (decrease) in cash and cash equivalents 1,104 (258)
Cash and cash equivalents at beginning of year 3,950 3,741
-------- -------
Cash and cash equivalents at end of the six month period $ 5,054 $ 3,483
-------- -------
-------- -------
5
POPE RESOURCES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 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 June
30, 1998 and December 31, 1997 and the consolidated statements of income
for the three months and six months ending June 30, 1998 and 1997 and cash
flows for the six months ending June 30, 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 $699,000 and $676,000 for the six months ended June 30, 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 reporting impact of
this SFAS on the Partnership's financial statements.
6. IPMB income allocation represents Pope MGP, Inc.'s distributive share of
net income from the Investor Portfolio Management Business (IPMB) of
Olympic Resource Management LLC (ORMLLC), a Washington limited liability
company in which the Partnership and Pope MGP, Inc. are the only members.
The Partnership's consolidated financial statements include ORMLLC but not
Pope MGP, Inc. Accordingly, Pope MGP, Inc.'s distributive share of net
income of ORMLLC is reflected as an expense and liability of the
Partnership. A description of the IPMB income allocation method is
included in the Partnership's Proxy Statement filed with the Securities and
Exchange Commission on February 14, 1997.
7. Certain reclassifications have been made to 1997 amounts to conform with
1998 presentation.
6
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
June 30, 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
Timberland resource and management revenues for the three months ended June 30,
1998 and 1997 were $8,600,000 and $4,931,000, respectively. On a year to date
basis, timberland resource and management revenues as of June 30, 1998 and 1997
were $16,242,000 and $10,013,000, respectively. The Partnership's increase in
revenues resulted primarily from management fees associated with the Investor
Portfolio Management Business (IPMB). To a lesser extent, these increased
revenues are the result of higher log harvest volumes on timberlands owned by
the Partnership. The Partnership accelerated the timing of scheduled 1998 log
harvesting to the forefront of the year to take advantage of better than
expected log markets. Log harvest volumes for the first six months of 1998 are
not necessarily indicative of volumes to be expected in the future, which are
affected by domestic and export log markets.
Effective January 1, 1998 Olympic Resource Management LLC (ORMLLC), a limited
liability company in which the Partnership and Pope MGP, Inc. are the only
members, became the U.S. 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 Investor Portfolio Management Business ("IPMB"), approved by the
Partnership's unitholders in a special proxy vote in March 1997, has two
complementary business strategies: portfolio development and property
management. 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 thus far from the IPMB during the first half of 1998 to Pope MGP, Inc.
under the unitholder-approved formula. The IPMB income allocation to Pope MGP,
Inc. was $180,000 for the six months ending June 30, 1998.
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 jointly market timberland management, forestry consulting and
acquisition/disposition services to large-scale owners of timberlands
worldwide. We expect our joint marketing efforts to produce synergies that
will benefit both organizations as well as add value to the timberland
holdings of our clients.
The Partnership harvested the following timber and received prices reflected
below during the six months ended June 30, 1998 and 1997:
- -------------------------------------------------------------
Year Softwood Sawlogs Pulp Logs
- -------------------------------------------------------------
Volume Price Volume Price
- -------------------------------------------------------------
MMBF $/MBF MMBF $/MBF
- -------------------------------------------------------------
Jan - June 1998 17.5 581 5.7 259
- -------------------------------------------------------------
Jan - June 1997 12.5 743 2.6 201
- -------------------------------------------------------------
MMBF = Million board feet
MBF = Thousand board feet
7
TIMBERLAND RESOURCES AND MANAGEMENT (CONTINUED)
Log revenues from the Partnership's fee timberland ownership are significantly
affected by export log market conditions. The majority of the Partnership's
export log volume is sold to Japan. The export market remained weak through the
second quarter of 1998. The average price of export logs sold in the first half
of 1998 was $661, which represented a 23% decline from the comparable 1997
period. This decline in price reflects a weak Asian economy and strong U.S.
dollar in 1998 and favorable prices during the first half of 1997. Export log
volumes sold through domestic intermediaries for the six months ending June 30,
1998 and 1997 were 4,414 MBF and 5,687 MBF, respectively. Continued downward
trends in export prices have resulted in some export-quality logs being diverted
to the domestic markets.
Pricing in the domestic log market has been negatively affected by weak export
markets, but nevertheless has shown more relative price stability than the
export market. Average domestic log prices were $554 and $642 for the first six
months of 1998 and 1997, respectively, representing a 14% decline. The decline
in domestic log prices is due in part to increased supply associated with the
diversion of export log volumes to the domestic log market. Domestic sawlog
volumes for the six months ended June 30, 1998 and 1997 were 13,064 MBF and
6,785 MBF, respectively. Management anticipates the downward trend in prices to
continue for the balance of the year.
Domestic log demand is directly and indirectly affected by the level of new
home construction, repair and remodel expenditures, and market conditions in
foreign markets, such as Asia which indirectly influence the demand and supply
of domestic 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 affect the price the Partnership can
obtain from the sale of its log production.
Pulp log volumes for the six months ended June 30, 1998 and 1997 were 5,666 MBF
and 2,561 MBF, respectively. The increase in pulp log volume is due to the
increase in timber harvested and the Partnership's harvest of a higher relative
percentage of tree stands that have not been thinned. These stands generally
contain a higher pulp content than thinned stands. Certain tree stands have not
been thinned due to topographic or other local conditions which caused the cost
of timber thinning to exceed the anticipated benefit. Revenues benefited from a
29% increase in pulp log prices for the first half of 1998 as compared to the
same period in 1997.
REAL ESTATE DEVELOPMENT
Real estate development revenues for the three months ended June 30, 1998 and
1997 were $5,713,000 and $2,596,000, respectively. On a year to date basis, as
of June 30, 1998 and 1997, real estate development revenues were $8,019,000 and
$4,594,000, respectively. Real estate 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 a resort operator.
Revenues from residential development for the three months ended June 30, 1998
and 1997 were $4,427,000 and $1,336,000, respectively. Residential development
revenues on a year to date basis totaled $5,795,000 and $2,408,000 as of June
30, 1998 and 1997, respectively. The increase in residential development
revenues resulted primarily from undeveloped acreage sales, which totaled
$3,442,000 and $70,000 for the first six months of 1998 and 1997, respectively.
The increase in
8
REAL ESTATE DEVELOPMENT (CONTINUED)
undeveloped acreage sales is primarily attributable to the sale of the
Crescent Lake property for $2,800,000, which closed during the second quarter
of 1998. The Partnership is planning to use a portion of the proceeds from
this sale to purchase replacement properties pursuant to a tax-free exchange.
The Partnership's largest development is in Port Ludlow, Washington. During the
three months ending June 30, 1998, the Partnership's development at Port Ludlow
generated revenues of $1,359,000 on 4 finished lot sales and 2 home sales. This
compares to the prior year's comparable period sales of $1,464,000 on 7 finished
lot sales and 4 home sales. During the first half of 1998 the Partnership's
development at Port Ludlow generated revenues of $2,258,000 on 10 finished lot
sales and 4 home sales. This compares to the prior year's comparable period
sales of $2,153,000 on 13 finished lot sales, and 5 home sales. Revenue
realized per sale depends on the quality and size of the home, the subdivision,
and the location of the lot.
Revenues from income-producing properties totaled $1,286,000 and $1,260,000 for
the three months ending June 30, 1998 and 1997, respectively. On a year to date
basis revenues were $2,224,000 and $2,186,000 for the periods ending June 30,
1998 and 1997, respectively. Operations were fairly consistent for the periods
ending June 30, 1998 and 1997.
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. The industrial portion of the
Bremerton property is 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, Peacock
Hill, 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 state.
Land holdings throughout Washington state are affected by the 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 compliance with the Growth Management Act is
scheduled to be resolved in early 1999 by a state hearings board. Jefferson
County, in which Port Ludlow is located, is in the process of developing its
Comprehensive Plan for review by the state.
On May 1, 1998 the Partnership announced a reorganization of its real estate
development segment into new subsidiary 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.
Changes in the local and national economies as well as changes in the regulatory
environment affect revenues from real estate development. 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 the 36-room Heron Beach Inn at
Ludlow Bay. The Partnership's share of joint venture losses was $51,000 and
$117,000 for the three months ending June 30, 1998 and 1997, respectively. Year
to date losses were $171,000 and $220,000 as of June 30, 1998 and 1997,
respectively.
Operating expenses for the Partnership were $3,113,000 and $2,089,000 for the
three months ending
9
OTHER (CONTINUED)
June 30, 1998 and 1997, respectively. On a year to date basis operating
expenses were $5,798,000 and $3,662,000 for the periods ending June 30, 1998
and 1997. The increase in operating expenses is due to an increase in payroll
and facility expenses associated with the IPMB.
Selling and administrative expenses were $2,156,000 and $1,670,000 for the three
months ending June 30, 1998 and 1997, respectively. On a year to date basis
selling and administrative expenses were $3,934,000 and $3,195,000 for the
period ending June 30, 1998 and 1997, respectively. The increase in expenses is
primarily due to payroll, information technology and other costs associated with
continuing enhancement of the Partnership's internal systems.
Included in the consolidated financial statements of the Partnership are
three wholly owned subsidiary corporations that are taxable. The taxable
entities are ORM, Inc. (ORMI), Olympic Real Estate and Development, Inc.
(OREDI), and Olympic Water and Sewer, Inc. (OWSI). OREDI and OWSI have not
incurred income tax expense as of June 30, 1998 and are not expected to incur
income tax expense during 1998. As of June 30, 1998, ORM, Inc. has incurred
$131,000 in income tax expense and is projected to continue to generate
taxable income through 1998.
The Partnership's depositary receipts (units) are currently quoted on the Nasdaq
national market system. In the second quarter of 1998, the Partnership
requested and received permission from the Pacific Exchange and the U.S.
Securities and Exchange Commission to de-list from the Pacific Exchange.
The Partnership has hired a consulting firm to help evaluate the
Partnership's exposure to year 2000 (Y2K) issues and to develop a plan to fix
hardware or software identified that is not Y2K compliant. In addition to
evaluating internal risks, management is working with customers and vendors
to determine the potential exposure resulting from third parties not
adequately addressing Y2K issues. Projected 1998 costs of identifying Y2K
issues and beginning to fix software and hardware that is not Y2K compliant
are $130,000. The Partnership is in the process of evaluating all business
processes that may be affected by Y2K and is expected to have an estimate of
total Y2K costs by December 31, 1998. The Y2K project is proceeding as
planned and is expected to be complete by mid 1999.
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.
At June 30, 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. 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 $4,608,000 for the first six months of
1998, and overall cash and cash equivalents increased by $1,104,000 during the
six month period. The cash generated in this period was primarily used for
capital expenditures of $1,686,000 and cash distributions to unitholders of
$1,356,000.
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. The second 1998 cash
distribution of $.10 per unit, payable to unitholders of record on June 1, 1998
was paid on June 15, 1998.
10
PART II
Items 1 through 6 are not applicable.
EXHIBITS AND REPORTS ON FORM 8-K
None.
11
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: August 11, 1998 By: POPE MGP, Inc.
Managing General Partner
Date: August 11, 1998 By:
----------------------------------------
Gary F. Tucker
President and Chief Executive Officer
Date: August 11, 1998 By:
----------------------------------------
Thomas M. Ringo
Sr. Vice President Finance & Client Relations
(Principal Financial Officer)
Date: August 11, 1998 By:
----------------------------------------
Meredith R. Green
Vice President Finance and Treasurer
(Principal Accounting Officer)
12
5
3-MOS 6-MOS
DEC-31-1998 DEC-31-1998
APR-01-1998 JAN-01-1998
JUN-30-1998 JUN-30-1998
5,054 5,054
0 0
1,456 1,456
0 0
10,581 10,581
18,427 18,427
58,280 58,280
21,215 21,215
61,227 61,227
2,027 2,027
13,869 13,869
0 0
0 0
0 0
44,891 44,891
61,227 61,227
24,261 14,313
24,261 14,313
6,727 4,033
16,459 9,302
351 105
0 0
724 366
7,015 4,678
131 131
6,884 4,547
0 0
0 0
0 0
6,884 4,547
1.52 1.01
1.52 1.01
