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POPE RESOURCES 10-Q
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 the quarterly period ended March 31, 2006

OR

( )
TRANSITION 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 ___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in rule 12b-2 of the Securities and Exchange Act of 1934).
 Large Accelerated Filer___ 
 Accelerated Filer   X 
  
None Accelerated Filer___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-2 of the Exchange Act Yes  No__X_


Partnership units outstanding at May 1, 2006: 4,679,071
 
 
Pope Resources
Index to Form 10-Q Filing
For the Quarter Ended March 31, 2006

Description
  
Page Number
   
     
   
 
 
 
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
    
 
     
 
     
 


Table of Contents

P A R T I - FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS


3
Table of Contents


         
           
Pope Resources
          
March 31, 2006 and December 31, 2005
          
           
(Thousands)
          
   
2006
 
2005
 
           
Assets
          
Current assets:
          
Cash and cash equivalents
  
$
2,182
  
$
3,361
  
Short-term investments
    
16,500
   
15,000
 
Accounts receivable
    
2,281
   
1,049
 
Land held for sale
    
4,778
   
4,371
 
Current portion of contracts receivable
    
16
   
14
 
Prepaid expenses and other
    
257
   
336
 
               
Total current assets
    
26,014
   
24,131
 
               
Properties and equipment at cost:
              
Land held for development
    
10,224
   
9,661
 
Land and land improvements
    
15,542
   
15,542
 
Roads and timber (net of accumulated
              
depletion of $39,635 and $37,030)
    
50,721
   
53,019
 
Buildings and equipment (net of accumulated
              
depreciation of $6,466 and $6,488)
    
3,340
   
3,340
 
               
     
79,827
   
81,562
 
               
Other assets:
              
Contracts receivable, net of current portion
    
426
   
483
 
Other
   
174
   
182
 
               
     
600
   
665
 
               
Total assets
  
$
106,441
  
$
106,358
  
               
Liabilities and Partners' Capital
              
Current liabilities:
              
Accounts payable
  
$
1,020
  
$
1,147
  
Accrued liabilities
    
1,271
   
3,865
 
Environmental remediation
    
83
   
152
 
Current portion of long-term debt
    
1,602
   
1,602
 
Minority interest
    
49
   
325
 
Deferred profit
    
580
   
304
 
Other current liabilities
    
70
   
59
 
               
Total current liabilities
    
4,675
   
7,454
 
               
Long-term debt, net of current portion
    
30,741
   
32,281
 
Other long term liabilities
    
193
   
218
 
               
Partners' capital (units outstanding 4,676 and 4,646)
    
70,832
   
66,405
 
               
Total liabilities and partners' capital
  
$
106,441
  
$
106,358
  
               
See accompanying notes to condensed consolidated financial statements.


4
Table of Contents

         
           
For the Three Months Ended March 31, 2006 and 2005
          
           
           
(Thousands, except per unit data)
          
   
2006
 
2005
 
           
Revenues
  
$
16,083
  
$
16,656
  
Cost of timber and land sold
    
(6,425
)
  
(7,804
)
Operating expenses
    
(2,474
)
  
(2,333
)
General and administrative expenses
    
(1,004
)
  
(848
)
Income from operations
    
6,180
   
5,671
 
               
               
Other income (expense):
              
Investment income
    
5
   
-
 
Interest expense
    
(528
)
  
(736
)
Interest income
    
219
   
19
 
     
(304
)
  
(717
)
               
Income before income taxes and minority interest
    
5,876
   
4,954
 
 
              
Income tax expense
    
(445
)
  
(247
)
Income before minority interest
    
5,431
   
4,707
 
               
Minority interest
    
(133
)
  
(101
)
               
Net income
  
$
5,298
  
$
4,606
  
               
Allocable to general partners
  
$
69
  
$
61
  
Allocable to limited partners
    
5,229
   
4,545
 
               
   
$
5,298
  
$
4,606
  
               
Earnings per unit:
              
Basic
  
$
1.14
  
$
1.01
  
Diluted
  
$
1.11
  
$
0.97
  
               
Weighted average units outstanding:
              
Basic
    
4,635
   
4,561
 
Diluted
    
4,753
   
4,730
 
 
              
See accompanying notes to condensed consolidated financial statements.


5
Table of Contents


         
           
Pope Resources
          
Three Months Ended March 31, 2006 and 2005
          
           
           
(Thousands)
  
2006
  
2005
  
 
          
Net income
  
$
5,298
  
$
4,606
  
Add back non-cash charges:
              
Deferred profit
    
275
   
152
 
Depletion
    
2,573
   
3,843
 
Depreciation and amortization
    
185
   
152
 
Unit based compensation
    
149
   
-
 
Deferred taxes
    
17
   
247
 
Minority interest
    
133
   
101
 
Cost of land sold
    
13
   
134
 
Change in working capital accounts:
              
Accounts receivable
    
(1,232
)
  
(1,729
)
Contracts receivable
    
55
   
(190
)
Other current assets
    
62
   
61
 
Accounts payable
    
(127
)
  
312
 
Accrued liabilities
    
(2,594
)
  
(444
)
Environmental remediation
    
(69
)
  
(320
)
Other
    
(13
)
  
(32
)
Net cash flows provided by operating activities
    
4,725
   
6,893
 
 
              
Cash flows used in investing activities:
              
Purchase of short-term investments
    
(1,500
)
  
-
 
Reforestation and roads
    
(307
)
  
(357
)
Capitalized development activities
    
(982
)
  
(227
)
Other capital expenditures
    
(146
)
  
(363
)
 
              
Net cash used in investing activities
    
(2,935
)
  
(947
)
 
              
Cash flows used in financing activities:
              
Minority interest distribution
    
(409
)
  
(26
)
Repayment of long-term debt
    
(1,540
)
  
(1,660
)
Repayment of line of credit
    
-
   
(758
)
Option exercise
    
149
   
901
 
Unitholder distribution
    
(1,169
)
  
(688
)
 
              
Net cash used in financing activities
    
(2,969
)
  
(2,231
)
               
               
Net increase (decrease) in cash and cash equivalents
    
(1,179
)
  
3,715
 
Cash and cash equivalents at beginning of period
    
3,361
   
757
 
               
Cash and cash equivalents at end of the three-month period
  
$
2,182
  
$
4,472
  
               
See accompanying notes to condensed consolidated financial statements.
 
6
Table of Contents

POPE RESOURCES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2006

1.
 
The condensed consolidated financial statements as of March 31, 2006 and December 31, 2005 and for the three months (quarter) ended March 31, 2006 and March 31, 2005 have been prepared by Pope Resources, A Delaware Limited Partnership (“the Partnership”) pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). The financial information for the quarters ended March 31, 2006 and 2005 is unaudited, but, in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments and accruals) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 2005, is derived from the Partnership’s audited consolidated financial statements and notes thereto for the year ended December 31, 2005, and should be read in conjunction with such financial statements. The results of operations for the quarter ended March 31, 2006 is not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending December 31, 2006.
 
2.
 
The financial statements in the Partnership's 2005 annual report on Form 10-K include a summary of significant accounting policies of the Partnership and should be read in conjunction with this Quarterly Report on Form 10-Q.
 
3.
Basic net earnings per unit are based on the weighted average number of units outstanding during the period. Diluted net earnings per unit are based on the weighted average number of units and dilutive unit options outstanding at the end of the period.

 
   
Quarter Ended
March 31,
  
   
2006
  
2005
  
Weighted average units outstanding (in thousands):
          
Basic
    
4,635
    
4,561
  
Dilutive effect of unit options
    
118
    
169
  
Diluted
    
4,753
    
4,730
  
 
 
 
Options to purchase 261,000 units at prices ranging from $9.30 to $37.73 per unit were outstanding as of March 31, 2006. For the computation of dilutive effect of unit options for the quarter ended March 31, 2006, options to purchase 1,100 units at prices ranging from $33.15 to $37.73 were not included in the calculation because the option exercise prices were greater than the average market prices of units during the period.
 
 
Options to purchase 317,773 units at prices ranging from $9.30 to $37.73 were outstanding during the quarter ended March 31, 2005. Options to purchase 148 units at an exercise price of $37.73 were not included in the computation of diluted earnings per unit because the option exercise prices were greater than the average market prices of units during the period.
 
 
 
7
Table of Contents
 

4.
Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004) Share Based Payment (SFAS No. 123R) using the modified prospective approach and accordingly have not restated prior period results. SFAS 123R established the accounting for equity instruments exchanged for employee services. Under SFAS 123R, share-based compensation cost is measured at the grant date based on the calculated fair value of the award. We have also changed our accounting for equity-based compensation awarded to retirement eligible directors and employees to expense the award over the lesser of vesting period or the period between the grant date and eligibility for retirement. The impact of the adoption of SFAS 123R on our earnings was $149,000 or $.04 per diluted unit which includes $70,000 of expense related to the treatment of the 2006 restricted unit grant to retirement eligible employees and board members.
   
 
The following table presents the impact of our adoption of SFAS 123R on selected line items from our condensed consolidated statement of earnings for the three months ended March 31, 2006 (in thousands, except per unit amounts):
 

   
Following
 
If Reported
  
   
FAS 123R
  
Following APB 25
  
Condensed statement of earnings:
          
Operating profit
  
$
6,180
  
$
6,329
  
               
Income before income taxes
              
and minority interest
    
5,876
   
6,025
 
               
Net income
  
$
5,298
  
$
5,447
  
 
              
Earnings per unit:
              
Basic
  
$
1.14
  
$
1.18
  
Diluted
  
$
1.11
  
$
1.15
  
               
 


 

 
In 2005, we adopted the 2005 Unit Incentive Plan. Following adoption of this new plan the Board of Directors began issuing restricted units instead of unit options as its primary method of granting equity based compensation. Units issued as a result of option exercises and restricted unit grants are funded through the issuance of new units. As of March 31, 2006, total compensation expense related to non-vested awards not yet recognized was $1.1 million with a weighted average 33 months remaining to vest.
   
 
Prior to the adoption of SFAS No. 123R, we accounted for equity based compensation granted to employees in accordance with Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to Employees, and related interpretations. We also provided the disclosures required under SFAS No. 123, Accounting for Stock Based Compensation (SFAS No. 123) as amended by SFAS No. 148, Accounting for Stock Based Compensation - Transition and Disclosures. As a result, no expense was reflected in our net income for the period ended March 31, 2005 for unit options, as all options granted had an exercise price equal to the market value of the underlying units on the grant date.
   
 
The table below reflects our proforma net income per share for the period shown had compensation for unit options been determined based on the fair value at the grant date, consistent with the methodology prescribed under SFAS No. 123:

8
Table of Contents


   
Quarter ended
  
   
March 31,
  
(In thousands except per unit amounts)
  
2005
  
       
Net income as reported
  
$
4,606
  
         
Compensation expense recognized
    
-
 
         
Subtract proforma compensation
        
expense under SFAS 123
    
(35
)
         
Proforma net income under SFAS 123
  
$
4,571
  
         
Earnings per unit as reported:
        
Basic
  
$
1.01
  
Diluted
  
$
0.97
  
         
Proforma earnings per unit:
        
Basic
  
$
1.00
  
Diluted
  
$
0.97
  
         

 
The fair value of options was calculated using the Black-Scholes option-pricing model, with the following assumptions during the first three months of 2005:
 
 
2005
Expected life
5 years
Risk free interest rate
4.22% - 4.36%
Dividend yield
1.2% - 1.5%
Volatility
20.0% - 26.2%
Weighted average value
$8.00

 
The expected life was determined using our experience, the volatility was determined using the historical average volatility of the Partnership’s units and the risk free interest rate represents the yield on a ten year treasury note.
   
 
Restricted units:
 
Pope Resources changed the primary form of equity compensation from unit options to restricted units upon adoption of the 2005 Unit Incentive Plan. The Human Resources Committee makes awards of restricted units to directors and senior managers of the Partnership and its subsidiaries. The restricted unit grants vest over four years and are compensatory in nature. Restricted unit awards entitle the recipient to full distribution rights during the vesting period but are restricted from disposition and may be forfeited until the units vest. The fair value, as calculated using the intrinsic value method, is charged to income over the vesting period.
   
 
Restricted unit activity for the first quarter of 2006 was as follows:

9
Table of Contents


         
Weighted Average
 
         
Grant date
 
     
Units
 
Fair Value ($)
 
 
Outstanding at December 31, 2005
    
20,000
   
33.44
 
 
Grants
    
19,000
   
34.75
 
 
Forfeited
    
(1,500
)
  
33.44
 
 
Outstanding at March 31, 2006
    
37,500
   
34.10
 
                 
 
 
Unit Options:
 
Unit options have not been granted since December 2005. Units options granted prior to January 1, 2006 were non-qualified options granted at an exercise price not less than 100% of the fair value on the grant date. Unit options granted to employees vested over four or five years. Board members had the option of receiving their annual retainer in the form of unit options and those options vested immediately as they were granted monthly for services rendered during the month. Options granted had a life of 10 years.
   
 
Unit option activity for the first quarter of 2006 was as follows:
 

     
Options
  
Price ($)
  
 
Unvested at December 31, 2005
    
77,500
   
13.02
 
 
Vested at December 31, 2005
    
200,500
   
16.57
 
 
Outstanding at December 31, 2005
    
278,000
   
15.58
 
 
Forfeitures
    
(4,800
)
  
12.00
 
 
Exercises
    
(12,000
)
  
12.44
 
 
Oustanding at March 31, 2006
    
261,200
   
15.79
 
 
Vested at March 31, 2006
    
221,512
   
16.28
 
 
Unvested at March 31, 2006
    
39,688
   
13.06
 
 
Vesting during the current quarter
    
33,012
   
13.12
 
                 

 
The aggregate intrinsic value of all options outstanding at March 31, 2006 was $4.1 million. The aggregate intrinsic value of all exercisable options at March 31, 2006 was $3.3 million. The total intrinsic value of options exercised in the first three months of 2006 was $259,000. The weighted average remaining contractual term for all outstanding options at March 31, 2006 was 5.9 years. The weighted average remaining contractual term for all exercisable options at March 31, 2006 was 6.0 years.
   
 
The total fair value of shares vested as of March 31, 2006 was $933,000. There were 1,085,815 and 1,073,115 units available for issuance under the 2005 Unit Incentive Plan as of December 31, 2005 and March 31, 2006, respectively.

5.
 
Supplemental disclosure of cash flow information: Interest paid amounted to approximately $919,000 and $743,000 for the quarters ended March 31, 2006 and 2005, respectively. Income taxes paid amounted to approximately $117,000 and zero for the quarters ended March 31, 2006, and 2005, respectively.
 
6.
 
Revenue and operating income by segment for the quarters ended March 31, 2006 and 2005, are as follows:
 
 
10
Table of Contents



       
Timberland
             
Three Months Ended
  
Fee
 
Management &
  
Real
         
March 31, (Thousands)
  
Timber
  
Consulting
  
Estate
  
Other
  
Consolidated
  
2006
                      
Revenue internal
  
$
13,724
  
$
2,041
  
$
344
  
$
-
  
$
16,109
  
Eliminations
    
-
   
(17
)
  
(9
)
  
-
   
(26
)
Revenue external
    
13,724
   
2,024
   
335
   
-
   
16,083
 
                                 
Cost of timber and land sold
    
(6,410
)
  
-
   
(15
)
  
-
   
(6,425
)
                                 
Operating expenses internal
    
(1,097
)
  
(743
)
  
(660
)
  
(1,004
)
  
(3,504
)
Eliminations
    
15
   
10
   
1
   
-
   
26
 
Operating expenses external
    
(1,082
)
  
(733
)
  
(659
)
  
(1,004
)
  
(3,478
)
                                 
Income (loss) from operations internal
    
6,217
   
1,298
   
(331
)
  
(1,004
)
  
6,180
 
Eliminations
    
15
   
(7
)
  
(8
)
  
-
   
-
 
Income (loss) from operations external
  
 
6,232
  
 
1,291
  
 
(339
)
 
(1,004
)
 
6,180
  
                                 
EBITDDA reconciliation:
                                
Minority interest and investment income
    
-
   
(128
)
  
-
   
-
   
(128
)
Depletion
    
2,573
   
-
   
-
   
-
   
2,573
 
Depreciation and amortization
    
72
   
16
   
34
   
63
   
185
 
EBITDDA
 
$
8,877
  
$
1,179
  
$
(305
)
$
(941
)
$
8,810
  
                                 
2005
                                
Revenue internal
  
$
13,663
  
$
1,615
  
$
1,388
  
$
-
  
$
16,666
  
Eliminations
    
-
   
(1
)
  
(9
)
  
-
   
(10
)
Revenue external
    
13,663
   
1,614
   
1,379
   
-
   
16,656
 
                                 
Cost of timber and land sold
    
(7,533
)
  
-
   
(271
)
  
-
   
(7,804
)
                                 
Operating expenses internal
    
(1,097
)
  
(772
)
  
(474
)
  
(848
)
  
(3,191
)
Eliminations
    
9
   
-
   
1
   
-
   
10
 
Operating expenses external
    
(1,088
)
  
(772
)
  
(473
)
  
(848
)
  
(3,181
)
                                 
Income (loss) from operations internal
    
5,033
   
843
   
643
   
(848
)
  
5,671
 
Eliminations
    
9
   
(1
)
  
(8
)
  
-
   
-
 
Income (loss) from operations external
  
 
5,042
  
 
842
  
 
635
  
 
(848
)
 
5,671
  
                                 
EBITDDA reconciliation:
                                
Minority interest
   
-
   
(101
)
  
-
   
-
   
(101
)
Depletion
    
3,843
   
-
   
-
   
-
   
3,843
 
Depreciation and amortization
    
26
   
21
   
36
   
69
   
152
 
EBITDDA
 
$
8,911
  
$
762
  
$
671
  
$
(779
)
$
9,565
  
                                 


11
Table of Contents

 
ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains a number of projections and statements about our expected financial condition, operating results, and business plans and objectives. These statements reflect our management's estimates based on our current goals, in light of currently known circumstances and management's expectations about future developments. Statements about expectations and future performance are “forward looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Because these statements describe our goals, objectives and anticipated performance, they are inherently uncertain, and some or all of these statements may not come to pass. Accordingly, you should not interpret these statements as promises that we will perform at a given level or that we will take any or all of the actions we currently expect to take. Our future actions, as well as our actual performance, will vary from our current expectations, and under various circumstances these variations may be material and adverse. Some of the factors that may cause our actual operating results and financial condition to fall short of our expectations are set forth in the part of this report entitled “Item 1A: Risk Factors ” below and other factors discussed elsewhere in this report or in our annual report on Form 10-K for the fiscal year ended December 31, 2005. Other issues that may have an adverse and material impact on our business, operating results and financial condition include environmental and land use regulations that limit our ability to harvest timber and develop property; economic conditions that affect consumer demand for our products and the prices we receive for them; and other risks and uncertainties which are discussed in our other filings with the Securities and Exchange Commission. The forward-looking statements in this report reflect our estimates as of the date of the report, and we cannot undertake to update these statements as our business operations and environment change.

This discussion should be read in conjunction with the condensed consolidated financial statements and related notes included with this report.
 
EXECUTIVE OVERVIEW

Pope Resources, A Delaware Limited Partnership (“we” or the ”Partnership”), was organized in October 1985 as a result of a spin-off by Pope & Talbot, Inc. (“P&T”). The Partnership is engaged in three primary businesses. The first, and by far most significant, segment in terms of owned assets and operations is the Fee Timber segment. Operations in this segment consist of growing timber to be harvested as logs for sale to export and domestic manufacturers. The second most significant business in terms of total assets owned is the development and sale of real estate. Real Estate activities primarily take the form of securing permits and entitlements, and, in some cases, installing infrastructure for raw land development and then realizing that land’s value by selling parcels to buyers who will take the land further up the value chain, either to home buyers or commercial property operators or lessors. Since these land projects span multiple years, the Real Estate segment may incur losses for multiple years until a major project is sold, which then results in operating income. Our third business is providing timberland-related services to third parties. These services may take the form of large-scale timberland management, forestry consulting, or acquisition or disposition services.

Management’s major opportunity and challenge is to profitably grow our revenue base. We have added over 44,000 acres to our timberland portfolio over the last five years. Our real estate challenges center around how and when to “harvest” a parcel of land and capture the optimum value by selling the property.
 
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Regarding our third-party timberland services, we are currently managing nearly 300,000 acres of timberlands in Oregon for Cascade Timberlands LLC. Additionally, now that we have closed ORM Timber Fund I, LP, we are seeking to add to our timberland ownership, albeit indirectly, through the Partnership’s co-investment in the fund. Successful acquisitions by the fund will also result in additional management fees for the Timberland Management & Consulting segment.

RESULTS OF OPERATIONS
 
The following table reconciles and compares key revenue and cost elements that impact our net income for each of the three-month periods ended March 31, 2006 and March 31, 2005. In addition to the table’s detailed numeric analysis, the explanatory text that follows the table describes many of these changes by business segment.


QUARTER TO QUARTER COMPARISONS
  
(Amounts in $000's)
  
       
   
Q1 2006 vs. Q1 2005
  
   
Total
  
       
Net income:
      
1st Quarter 2006
  
$
5,298
  
1st Quarter 2005
    
4,606
 
Variance
  
$
692
  
         
Detail of earnings variance:
        
Fee Timber:
        
Log price realizations (A)
  
$
617
  
Log volumes (B)
    
(561
)
Production costs
    
(148
)
Depletion
    
1,270
 
Other Fee Timber
    
11
 
Timberland Management & Consulting:
        
Management fee changes
    
(738
)
Disposition fees
    
1,343
 
Other Timberland Mgmnt & Consulting
    
(156
)
Real Estate:
        
Land sales
    
(808
)
Other
    
(166
)
General & administrative costs
    
(156
)
Interest expense
    
208
 
Other (taxes, minority int., interest inc.)
    
(24
)
Total change in net income
  
$
692
  
         

(A) Price variance allocated based on changes in price using current period volume.
(B) Volume variance allocated based on change in sales volume and the average log sales price for the current period.
 
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Fee Timber
 
Fee Timber revenue is earned primarily from the harvest and sale of logs from the Partnership’s nearly 115,000 acres of fee timberland located in western Washington and, to a lesser extent, from the lease of cellular communication towers and the sale of gravel from our timberland. Revenue from the sales of timberland tracts will also appear periodically in results for this segment. Our Fee Timber revenue is driven primarily by the volume of timber harvested, which we ordinarily express in terms of millions of board feet, or “MMBF”, and by the average prices realized on log sales, which we express in dollars per thousand board feet, or “MBF”.
 
When discussing our Fee Timber operations, we compare current results to both the previous quarter and the corresponding quarter of the prior year. Both of these comparisons are made to help the reader gain an understanding of the trends in market price and harvest volumes that affect Fee Timber results of operations. Revenue and operating income for the Fee Timber segment for the quarters ended March 31, 2006, December 31, 2005 and March 31, 2005 are as follows:
 
                   
Quarter Ended:
  
Log Sale Revenue
  
Mineral, Cell
Tower & Other
Revenue
  
Total Fee Timber
Revenue
  
Operating Income
  
March 31, 2006
  
$
13.4 million
  
$
0.3 million
  
$
13.7 million
  
$
6.2 million
  
December 31, 2005
    
4.6 million
    
0.6 million
    
5.2 million
    
1.6 million
  
March 31, 2005
    
13.3 million
    
0.4 million
    
13.7 million
    
5.0 million
  

The increase in revenue and operating income for the current quarter relative to the fourth quarter of 2005 is primarily attributable to a 13.7 MMBF increase in harvest volume. The increase in first quarter harvest volume reflects a continuing practice of front-loading our harvest activities because of management’s expectation that this strategy can optimize our Fee Timber revenue through concentrating harvest volume when log supplies are restricted. As a result, our first quarter harvest volumes in 2005 and 2006 were proportionally higher than those totals in Q4 2005. Fee Timber revenue for the current quarter is consistent with the comparable period in 2005 despite a 4% decline in log volume due to an offsetting 5% increase in price realized. Operating income from the Fee Timber segment increased by $1.2 million to $6.2 million due primarily to a $1.3 million decrease in depletion expense. This decrease in depletion cost results from our having harvested relatively less volume from a separate depletion pool that carries a higher per-unit depletion charge than the rest of our timber.
 
Log Volume
 
The Partnership harvested the following log volumes from its timberlands for the quarters ended March 31, 2006, December 31, 2005, and March 31, 2005:
 
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Log sale volumes (MBF):
  
Quarter Ended
  
Sawlogs
  
March-06
  
% Total
  
December-05
  
% Total
  
March-05
  
% Total
  
Douglas-fir
    
16,440
    
75
%
  
4,929
    
59
%
  
13,682
    
59
%
Whitewood
    
1,997
    
9
%
  
1,170
    
14
%
  
3,415
    
15
%
Cedar
    
359
    
2
%
  
230
    
3
%
  
1,478
    
6
%
Hardwoods
    
562
    
2
%
  
678
    
8
%
  
1,488
    
7
%
Pulp
                                      
All Species
    
2,675
    
12
%
  
1,333
    
16
%
  
2,937
    
13
%
Total
    
22,033
    
100
%
  
8,340
    
100
%
  
23,000
    
100
%
                                       
 
 
Through March 31, 2006, we have harvested 38% of our targeted annual harvest for this year of 58 MMBF (versus 31% of 74 MMBF during the first quarter of 2005). Our Hood Canal tree farm is located at relatively low elevations where harvest activities can be completed year around, allowing us to take advantage of a slight premium on our log sales when other tree farms cannot be harvested due to adverse weather conditions. As we did in early 2005, we took advantage of attractive log prices in the first quarter of 2006, by increasing the proportion of our total annual harvest volume taken early in the year. Accordingly, our first-quarter harvest volume in 2006 is nearly identical to the first quarter of 2005 and significantly higher than in the fourth quarter of 2005. Our harvest mix in the first quarter of 2006 consisted more predominantly of Douglas-fir, whereas in both the first and fourth quarters of 2005 we harvested more hardwoods and lower-grade softwoods.
 
Log Prices
 
While harvest volume is largely within management’s control, one additional factor that impacts our Fee Timber income is log prices realized by selling our logs into the market. As noted above, we try to maximize Fee Timber revenues by accelerating harvest volumes during times of attractive log markets. However, log prices are a result of a broader range of economic and political factors and are largely beyond our control. We realized the following log prices from our fee timberlands for the quarters ended March 31, 2006, December 31, 2005 and March 31, 2005:
 

   
Quarter Ended
  
   
31-Mar-06
  
31-Dec-05
  
31-Mar-05
  
Average price realizations (per MBF):
              
Sawlogs
              
Douglas-fir
  
$
681
  
$
651
  
$
633
  
Whitewood
    
439
   
447
   
471
 
Cedar
    
873
   
904
   
899
 
Hardwoods
    
598
   
560
   
627
 
Pulp
                    
All Species
    
251
   
223
   
273
 
                     
Overall
    
608
   
554
   
580
 
                     
 
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Douglas-fir: Douglas-fir is noted for its structural characteristics that make it generally preferable to other softwoods and hardwoods for the production of construction grade lumber and plywood. The price realized on Douglas-fir logs has increased 8% for the current quarter in 2006 versus the comparable period in 2005 and 5% relative to the fourth quarter of 2005. The increase in price realized in 2006 is attributable to a combination of a decline in log supply available to mills in the Puget Sound area of Washington due to adverse weather conditions and additional Douglas-fir milling capacity in the Puget Sound area. This increase in prices has led management to continue our strategy of front-loading our harvest volume. We have noted a small decline in Douglas-fir bid prices for the second quarter of 2006.

Whitewood: “Whitewood” is a term used to describe several softwood species, but for us primarily refers to western hemlock. Though generally considered to be of a lower quality than Douglas-fir, these logs are also used for manufacturing construction grade lumber and plywood. The average price realized on whitewood decreased 7% for the current quarter in 2006 versus the comparable period in 2005 and 2% from the quarter ended December 31, 2005. This follows an increase in whitewood prices in 2005 and appears to be due to an increase in local mill inventories resulting in a decline in whitewood prices. Whitewood bids for second quarter 2006 have increased slightly from the first quarter of 2006.

Cedar: Cedar prices have declined 3% in the first quarter of 2006 from both the comparable quarter in prior year and the fourth quarter of 2005. Cedar prices typically weaken in the winter months as demand declines. Cedar lumber is used primarily as fencing and roofing material. Peak demand for these products is in the summer months, with corresponding lower demand and log price at the beginning and end of the calendar year. We have noted a strengthening of bid prices for Cedar delivered during the second quarter of 2006.

Hardwood: “Hardwood” can refer to many different species, but on our tree farms primarily represents red alder and some large leaf maple. The price realized from the sale of red alder sawlogs has increased steadily over the last couple years as new red alder mills have opened to take advantage of strong lumber pricing attributed to the growing acceptance of solid sawn red alder lumber products. These mills manufacture lumber for use in furniture construction. The 5% decline in Hardwood price realized in the current quarter relative to the comparable period in prior year is due to lower quality maple log volume sold in the current quarter causing a decline in average hardwood log price. The relatively low price realized for hardwoods in the fourth quarter of 2005 was also due to a lower quality mix of hardwood logs sold during the period.

Pulp: Pulp is a lower quality log of any species that is manufactured into wood chips. These chips are used to manufacture many products including bleached and unbleached pulp for paper production and unbleached pulp for paper production and unbleached kraft linerboard for bag and cardboard box markets. The price realized from the sale of pulp logs is primarily driven by local pulp log inventories. Pulp prices in the beginning of 2006 strengthened slightly from the fourth quarter of 2005 but were lower than the comparable period in 2005. Bids received on pulp logs for the second quarter of 2006 indicate a continued strengthening of this market.

Customers
The table below categorizes timber sold by customer type for the quarters ended March 31, 2006, December 31, 2005 and March 31, 2005:
 
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Q1 2006
  
Q4 2005
  
Q1 2005
  
Destination
  
Volume*
  
Price
  
Volume*
  
Price
  
Volume*
  
Price
  
Domestic mills
    
18.8
  
$
657
    
5.8
  
$
614
    
18.5
    
623
  
Export brokers
    
0.5
    
684
    
1.2
    
630
    
1.6
    
647
  
Pulp
    
2.7
    
251
    
1.3
    
223
    
2.9
    
273
  
Total
    
22.0
  
$
608
    
8.3
  
$
554
    
23.0
    
580
  
* Volume in MMBF
                                      

 
Volume sold to domestic lumber mills represents 85% of volume sold in the first quarter of 2006 versus 70% for the fourth quarter of 2005 and 80% for the comparable quarter in prior year. The increase in the proportion of log volume sold to domestic mills in the first quarter of 2006 relative to the comparable quarter in prior year is due to a decline in volume sold to export log brokers. This is a trend that we have noted in recent years as a strong peeler market for high quality logs has developed at domestic mills, shifting log volume away from the export market.

Cost of Sales
 
Cost of sales for the Fee Timber segment consists of harvest costs and depletion expense. Harvest costs represent the direct cost incurred to convert trees into logs and deliver those logs to their point of sale. Depletion expense represents the cost of acquiring or growing the timber harvested and is calculated using a depletion rate developed from an accumulation of the cost of the timber and capitalized road cost, divided by the estimated volume of merchantable timber available for harvest. The depletion rate is then applied to the volume harvested to calculate depletion expense. Fee Timber cost of sales for the quarters ended March 31, 2006, December 31, 2005, and March 31, 2005, respectively:
 
 
 
Quarter Ended:
  
 
Harvest, Haul and Other
 
 
Depletion
 
 
Total Cost of Sales
  
March 31, 2006
  
$
3.8 million
  
$
2.6 million
  
$
6.4 million
  
December 31, 2005
    
1.7 million
    
0.9 million
    
2.6 million
  
March 31, 2005
    
3.7 million
    
3.8 million
    
7.5 million
  
 
 
Quarter Ended:
  
 
Harvest and Haul per MBF
  
 
Depletion per MBF
  
 
Total Cost of Sales
  
March 31, 2006
  
$
174
  
$
117
  
$
291
  
December 31, 2005
    
198
    
110
    
308
  
March 31, 2005
    
161
    
167
    
328
  
 
Cost of sales has increased in the first quarter of 2006 relative to the fourth quarter of 2005 due to an increase in harvest volume. Harvest volume has increased to 22.0 MMBF in the first quarter of 2006 from 8.3 MMBF in the fourth quarter of 2005. The $1.1 million decrease in cost of sales from the comparable quarter in prior year is due to a decline in depletion expense, which in turn is due to a decline in harvest from the separate depletion pool with higher per unit costs. The separate depletion pool was created following a fourth quarter 2004 timberland acquisition.
 
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Table of Contents
 
Harvest and haul costs per MBF have decreased from the fourth quarter of 2005 due to the mix of units harvested during the period. Harvest costs vary based upon the physical site characteristics of the specific acres harvested during the period. For example, difficult-to-access sites or those located on steep hillsides are more expensive to harvest. Furthermore, haul costs vary based upon the distance between the harvest area and the mill customer’s location. Harvest and haul costs per MBF have increased from the comparable quarter in prior year due to an increase in fuel costs. Fuel costs impact both the cost of hauling logs to customers and the cost of operating the equipment used to harvest and manufacture logs.
 
Depletion expense for the quarters ended March 31, 2006, December 31, 2005, and March 31, 2005 was calculated as follows:
 
           
Quarter ended
  
   
Pooled
  
Separate
  
March-06
  
Volume harvested (MBF)
    
18,820
    
3,213
    
22,033
  
Rate/MBF
  
$
69
  
$
397
  
$
117
  
Depletion expense
  
$
1,299,000
  
$
1,274,000
  
$
2,573,000
  
                     
 
                
Quarter ended 
  
 
    
Pooled 
    
Separate
    
December-05
  
Volume harvested (MBF)
    
7,397
    
943
    
8,340
  
Rate/MBF
  
$
74
  
$
387
  
$
110
  
Depletion expense
  
$
551,000
  
$
365,000
  
$
916,000
  
                     
 
                
Quarter ended 
  
 
    
Pooled 
    
Separate
    
March-05
  
Volume harvested (MBF)
    
15,681
    
7,319
    
23,000
  
Rate/MBF
  
$
72
  
$
370
  
$
167
  
Depletion expense
  
$
1,135,000
  
$
2,708,000
  
$
3,843,000
  
                     
 
 
We created a separate depletion pool in the fourth quarter of 2004 for a timberland acquisition. This separate depletion pool carries a higher depletion rate than our combined pool. The calculations outlined above point out the significant role that the separate depletion pool for timber acquired in late-2004 plays in defining the aggregate rate for each period described above. As relative harvest volume from the separate depletion pool declined in the first quarter of 2006 relative to the comparable quarter of 2005, the average depletion rate declined to $117 per MBF from $167 per MBF in the prior year. The depletion rate applied to volume harvested from the Quilcene acquisition increased in the first quarter of 2006 to $397 per MBF from $370 per MBF in the first quarter of 2005 and $387 per MBF in the fourth quarter of 2005. These increases in the depletion rate are due to changes in the estimate of timber volume available from this separate depletion pool.
 
Operating Expenses
 
Fee Timber operating expenses for the quarters ended March 31, 2006, December 31, 2005, and March 31, 2005 were $1.1 million, $1.0 million, and $1.1 million, respectively. Operating expenses include management, silviculture and the cost of both maintaining existing roads and building temporary roads required for harvest activities. Operating expenses are consistent for each of the quarters presented.
 
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Timberland Management & Consulting
 
Revenue and operating income for the Timberland Management & Consulting segment for the quarters ended March 31, 2006 and 2005 were as follows:
 
Quarter Ended:
  
 
Revenue
  
 
Operating Income
  
March 31, 2006
  
$
2.0 million
  
$
1.3 million
  
March 31, 2005
    
1.6 million
    
0.8 million
  


Revenue and operating income for the quarter ended March 31, 2006 were $410,000 and $449,000 higher, respectively, than those amounts for the corresponding period in 2005. The increase in revenue and operating income is primarily due to a $1.3 million disposition fee earned on a timberland sale for our timberland management client. This disposition will translate to reduced management fees for the remainder of 2006. Revenue and operating income in 2005 were generated through providing timberland management and consulting services to this same timberland management client.
 
On August 1, 2005, we announced that management had obtained capital commitments of $61.8 million, of which the Partnership has committed $12.4 million, for the launch of a private equity timber fund. Olympic Resource Management LLC is the general partner for the fund and the Partnership is a limited partner. We are now actively searching for timber properties for the fund to acquire.
 
Operating Expenses
 
Timberland Management & Consulting operating expenses for the quarters ended March 31, 2006 and 2005 were $733,000 and $772,000, respectively. The decrease in operating expenses is attributable to the decrease in acres we manage for our primary client due to timberland sales.
 
Real Estate
 
The Partnership’s Real Estate segment consists primarily of revenue from the sale of land together with residential and commercial property rents. The Partnership’s real estate holdings are located primarily in Pierce, Kitsap, and Jefferson Counties in Washington State.
 
Revenue and operating income (loss) for the Real Estate segment for the quarters ended March 31, 2006 and 2005 were as follows:
 
 
 
Quarter Ended:
  
Revenue
  
Operating Income/ (Loss)
 
March 31, 2006
  
$
0.3 million
  
$
 (0.3) million
  
March 31, 2005
    
1.4 million
    
0.6 million
  


Real Estate revenue is generated through the sale of land and rural residential lots, and to a lesser extent from real property rents, most of which are earned at the Port Gamble townsite. Raw land sales are generally made for something other than residential or commercial use and are normally completed with very little capital investment prior to sale. Rural residential lot sales are made to developers or individuals where the lot is expected to be used for a residential dwelling with a general requirement to undertake some capital improvements such as zoning, road building, or utility access improvements prior to completing the sale.
 
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Real Estate revenue for the quarters ended March 31, 2006 and 2005 consist of the following:
 
Description
  
Revenue
  
Gross Margin
  
Acres Sold
  
Revenue/Acre
  
Gross Margin/ Acre
  
Rural Residential
  
$
55,000
  
$
51,000
    
10
  
$
5,500
  
$
5,100
  
Non-residential land*
    
55,000
    
44,000
    
0.1
    
550,000
    
440,000
  
Rentals
    
225,000
    
225,000
    
NA
    
NA
    
NA
  
March 31, 2006 Total
  
$
335,000
  
$
320,000
    
10.1
  
$
10,891
  
$
9,406
  
                                 
Rural Residential
  
$
1,169,000
  
$
898,000
    
146.5
  
$
7,980
  
$
6,130
  
Rentals
    
203,000
    
203,000
    
NA
    
NA
    
NA
  
Other
    
7,000
    
7,000
   
NA
    
NA
    
NA
  
March 31, 2005 Total
  
$
1,379,000
  
$
1,108,000
    
146.5
  
$
7,980
  
$
6,130
  
                                 


*
There was one transaction in the first quarter of 2006 classified as non-residential land. This was a small portion of a property in Poulsbo, Washington, zoned commercial, that was sold to the Washington State Department of Transportation as part of a road construction project.
   
Revenue and operating income for the Real Estate segment were lower in the first quarter of 2006 compared to first quarter 2005 due to the timing of land sales. Our rural residential properties represent timber properties that are converted to development properties. The buyers of these properties are looking for rural property for a retirement or second home. We closed a number of these rural residential properties in the first quarter of 2005 and no similar set of sales occurred in the current quarter. We have a number of land transactions scheduled to close over the remainder of the year pending the satisfaction of the various closing conditions applicable to each such sale.
 
At our development property in Gig Harbor, Washington, Costco Wholesale Corporation, Northwest Capital Investors (“NCI”), and a subsidiary of the Partnership, Olympic Property Group (“OPG”) submitted detailed applications with the City of Gig Harbor for a 25-acre retail shopping center on OPG’s Harbor Hill project. The applications submitted to the City of Gig Harbor are for site plan review and a site plan for a proposed Costco store, along with more than five acres of additional multi-tenant retail space. We expect our first closings on this 25-acre retail site during 2006 to be with Costco Wholesale Corporation for 17 acres and NCI for 2.5 acres. We also expect to close during 2006 on the sale of 11 acres of land zoned for business park use to the YMCA of Pierce County.
 
Our rural residential lot program, rural residential, produces lots from 5 to 80 acres in size, based on underlying zoning densities. This type of program typically entails an entitlement effort more modest in scale, usually involving simple lot segregations and boundary line adjustments. Development activities include minor road building, surveying, and the extension of utilities. We anticipate selling approximately 250 acres annually in this program. We exceeded this 250-acre figure in 2005 due to the strong market for land in the markets in which we operate.

Our 263-acre planned development in the City of Bremerton, Washington includes 60 acres of industrial and 203 acres of residential uses. We are currently under contract to sell the 203-acre residential portion of this property with an anticipated closing during the fourth quarter of 2006. A condition of closing this sale is to build a road providing access to the property. This road will additionally provide access and increase the value of the industrial portion of the property.
 
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Table of Contents

Cost of Sales
 
Real Estate cost of sales for the quarters ended March 31, 2006 and 2005 were $15,000 and $271,000, respectively. Cost of sales in 2006 represents the cost basis of two small land sales. Cost of sales during 2005 related to sales of rural residential lots.
 
Operating Expenses
 
Real Estate operating expenses for the quarters ended March 31, 2006 and 2005 were $659,000 and $473,000, respectively. Higher operating expenses in the Real Estate segment are due to an increase in personnel costs as activities surrounding our development properties have increased over the last year due to accelerated market interest in developable land.
 
Environmental Remediation
 
The Partnership has accrued liabilities for environmental cleanup of $89,000 and $158,000 as of March 31, 2006 and December 31, 2005, respectively. This liability represents our share of the liability for environmental clean up activities in and around the Port Gamble townsite following a negotiated settlement with Pope & Talbot in 2002. Current activities at the site include monitoring to determine if prior clean up activities were effective. Activity in the environmental remediation liability is detailed as follows:
 
   
Balances at the
Beginning of the
Period
  
Additions to
Accrual
  
Expenditures for Monitoring and Remediation
  
 Balances at the
End of the
Period
  
Year Ended December 31, 2005
  
$
474,000
  
$
198,000
   $ 514,000   $ 158,000  
Quarter ended March 31, 2006
    
158,000
    
-
     69,000     89,000  

We believe that the current reserves are adequate to meet our share of the anticipated costs of remediation; however, we have, from time to time in the past, discovered additional facts that have led us to take charges against operating income in order to increase this reserve, and if we discover new facts in the future we may be required to take similar charges in future periods.

General and Administrative (G&A) 
 
General and administrative expenses for the quarters ended March 31, 2006 and 2005 were $1.0 million and $848,000, respectively. The increase in general and administrative expenses experienced in 2006 is due to a charge of $114,000 reflecting the estimated value of certain equity based compensation arrangements recognized following our adoption of SFAS No. 123R and additional audit costs associated with the internal control assessment and reporting requirements mandated by the Sarbanes Oxley Act.
 
Interest Income and Expense
 
Interest income for the quarter ended March 31, 2006 increased to $219,000 from $19,000 for the corresponding period of 2005. The increase in interest income is due to higher cash and short-term investments balances and, to a lesser extent, an increase in interest rates earned on these short-term investments.
 
Interest expense for the three-month periods ended March 31, 2006 and 2005 was $528,000 and $736,000, respectively. The Partnership’s debt consists primarily of mortgage debt with a fixed interest rate. The decrease in interest expense is due to the capitalization of $166,000 of interest expense to the long-term development project at Gig Harbor as development activities have increase on this project.
 
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Income Tax
 
Pope Resources is a limited partnership and is, therefore, not subject to federal income tax. Taxable income/loss is reported to unitholders each year on a Form K-1 for inclusion in each unitholder’s tax return. Pope Resources does have corporate subsidiaries, however, that are subject to income tax.
 
For the quarter ended March 31, 2006 the Partnership recorded $445,000 of income tax expense relating to the Partnership’s taxable subsidiaries, as compared to $247,000 of tax expense for the corresponding period in 2005. The increase in tax expense is due primarily to the disposition fee generated in the first quarter of 2006 as a result of Timberland Management & Consulting’s work on behalf of its principal client where no counterpart to this particular fee was earned in the prior year’s comparable period.
 
Minority Interest
 
Minority interest represents that share of income earned from the Investor Portfolio Management Business (IPMB) attributable to Pope MGP, Inc., the managing general partner of the Partnership. The amendment to the Limited Partnership Agreement authorizing the Partnership to pursue the IPMB further specifies that income from the IPMB will be split using a sliding scale allocation method beginning at 80% to the Partnership’s wholly-owned subsidiary, ORM, Inc., and 20% to Pope MGP, Inc. The sliding scale allocation method evenly divides IPMB income between ORM, Inc. and Pope MGP, Inc. once such income reaches $7,000,000 in a given fiscal year.
 
Current activities of the IPMB are contained in the Timberland Management & Consulting segment, which includes timberland consulting, management, and expenses associate with the launch of a private equity timber fund. Minority interest allocation of income increased from $101,000 for the first quarter of 2005 to $133,000 in the first quarter of 2006. The increase in minority interest allocation is due to the aforementioned disposition fee generated by Timberland Management & Consulting.
 
Analysis of Operating Income
 
The following table sets forth expenses as a percentage of revenue for the quarters ended March 31, 2006 and 2005:
 
     
Quarter ended March 31,
  
     
2006
  
2005
  
 
Revenues
    
100
%
  
100
%
 
Cost of sales
    
40
    
47
  
 
Operating expenses
    
15
    
14
  
 
General and administrative expenses
    
6
    
5
  
 
Operating income
    
39
%
  
34
%


Cost of sales includes the cost of purchasing and producing tangible goods for sale. In addition to depletion associated with timber production levels, cost of sales for the Partnership will fluctuate due to the mix of revenue between the sale of tangible goods and revenue generated from providing services. Cost of sales as a percentage of revenue decreased 7 percentage points from 47% in the first quarter of 2005 to 40% for the first quarter of 2006. The decrease in cost of sales as a percentage of revenue is primarily attributable to the decrease in depletion expense resulting from the decline in timber harvested from the Partnership’s separate depletion pool, which carries a higher per unit depletion rate.
 
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Operating expenses consist of salary and other costs directly attributable to revenue-generating activity. As a percentage of revenue, operating expenses increased for the quarter ended March 31, 2006 by 1 percentage point when compared to the comparable period in 2005. The increase in operating expenses as a percentage of revenue is primarily due to a decline in revenue generated by the Real Estate segment without a corresponding decline in operating expense.
 
General and administrative expenses as a percentage of revenue for the quarter ended March 31, 2006 increased by 1 percentage point to 6% from the corresponding period in 2005. On a raw dollar basis, general and administrative expenses increased $156,000 from the comparable period in prior year due to recognition of $114,000 of equity compensation following implementation of SFAS No. 123R and an increase in audit costs associated with the Sarbanes Oxley Act.
 
Off Balance Sheet Arrangements
 
We do not have any off balance sheet arrangements.
 
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Liquidity and Capital Resources
 
We ordinarily finance our business activities using funds from operations and, where appropriate in management’s assessment, bank lines of credit. Funds generated internally from operations and externally through financing are expected to provide the required resources for the Partnership's future capital expenditures. The Partnership’s debt-to-total-capitalization ratio as measured by the book value of equity was 31% at March 31, 2006 versus 36% as of March 31, 2005. Management considers capital resources to be adequate for its current plans and does not have specific plans that would trigger a significant change in its debt-to-total-capitalization ratio over the next 12 months. The Partnership’s debt consists primarily of a timberland mortgage with a fixed amortization schedule and loan term, which includes a prepayment penalty. In view of a cash and short-term investment balance of almost $19 million at March 31, 2006, we have elected not to renew a $10 million line of credit, which expired in 2005. We will continue to monitor and forecast our expected cash requirements and re-establish a line of credit if the need for the additional liquidity should arise. In addition, in August 2005 we announced an increase in our quarterly unitholder distribution; the increase in this distribution resulted in an increase in cash used in financing activities from $688,000, or $0.15 per diluted ownership unit, to $1.2 million, or $0.25 per diluted ownership unit.
 
On August 1, 2005 we announced the closing of ORM Timber Fund I, LP (the “Fund”), with a committed equity balance of $61.8 million, of which Pope Resources has committed to invest $12.4 million. Now that the Fund is fully subscribed we are actively searching for suitable timber properties for the Fund to acquire. Pope Resources and the other limited partners in the Fund are required to contribute committed capital as properties are purchased by the Fund. If we are successful in locating suitable properties for the Fund, we will be required to contribute all or a portion of our investment commitment, which would have a corresponding impact on our available cash.
 
Over the remaining nine months of 2006, management plans to harvest approximately 36 MMBF of timber for a total fiscal 2006 harvest of 58 MMBF. Since harvest plans are based on demand and pricing, actual harvesting may vary subject to management's ongoing review. The planned decrease in harvest volume in 2006, relative to the 74 MMBF harvested in 2005, will result in a decline in Fee Timber revenue. We expect this decline to be offset on a consolidated basis through planned Real Estate sales, particularly on the Gig Harbor and Bremerton projects.
 
For the three months ended March 31, 2006, overall cash and cash equivalents decreased $1.2 million versus an increase of $3.7 million for the corresponding period in the prior year. Cash generated by operating activities decreased to $4.7 million for the first three months of 2006 from $6.9 million for the corresponding period in 2005. The decrease in cash generated by operating activities primarily results from a paydown of accrued liabilities.
 
Cash used for investing activities increased to $2.9 million for the first three months of 2006 from $947,000 for the comparable period in 2005. In addition to the increase in unitholder distribution mentioned above, investing activities in 2006 consist of the purchase of $1.5 million of auction rate securities and $1.4 million of capital expenditures. Capital expenditures year-to-date in 2006 consist of the following: $723,000 of capitalized development costs at the Gig Harbor site, $259,000 of capitalized development costs on the Partnership’s other development properties; $307,000 of reforestation and road building costs on the owned timberlands; $134,000 of capital improvements at the Port Gamble townsite; and $12,000 of other miscellaneous capital expenditures. Cash used in investing activities for the first three months in 2005 totaled $947,000 and consist the following: $152,000 of capitalized development costs at the Gig Harbor site, $75,000 of capitalized development costs on the Partnership’s other development properties; $357,000 of reforestation and road building costs on the owned timberlands; $86,000 of capital improvements at the Port Gamble townsite; $217,000 of new trucks purchased for use by our foresters, and $60,000 of other miscellaneous capital expenditures.
 
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Cash used in financing activities increased to $3.0 million from $2.2 million. This increase is due primarily to an increase in unitholder distributions and a decrease in cash generated by options exercises. Distributions increased from $0.10 per unit to $0.25 per unit in the third quarter of 2005.
 
Seasonality
 
Fee Timber. The Partnership owns 115,000 acres of timberland in Washington State. Our timber acreage is concentrated in two non-contiguous tree farms: the 71,000-acre Hood Canal tree farm located in Kitsap, Jefferson, and Mason Counties on the eastern side of Washington’s Olympic Peninsula, and the 44,000-acre Columbia tree farm located in Cowlitz, Clark, Lewis, Skamania, and Pierce counties on the western side of Washington’s Cascade mountain range.
 
The Hood Canal tree farm is concentrated at low elevations, which permits us to harvest trees year-round. Generally, we concentrate our harvests from this tree farm in the winter and spring when supply, and thus competition, is typically lower and, accordingly, when we can expect to receive higher prices. With the acquisition of the Columbia tree farm in 2001, management expected a decrease in the seasonality of Fee Timber operations as the Columbia tree farm is at higher elevations where harvest activities are generally possible only in the late spring and summer months. In practice, over the last two years our harvest has tended to be more front-loaded, as log prices have been relatively strong in the first half of the year enabling management to front-load the harvest plan. In future periods, management expects quarterly harvest volume to be affected by both local market conditions for logs and weather conditions.
 
Timberland Management & Consulting. In broad terms, Timberland Management & Consulting operations are not currently seasonal. Our timberland consulting operations at McCloud, California are, however, concentrated primarily in the summer months. The relative importance of this operation will increase as timberland management revenue declines for the remainder of 2006.
 
Real Estate. While Real Estate results are not expected to be seasonal, the nature of the activities in this segment will likely result in periodic large transactions that will have significant positive impacts on both revenue and operating income of the Partnership in periods in which these transactions close, and relatively limited revenue and income in other periods. While the “lumpiness” of these results is not primarily a function of seasonal weather patterns, we do expect to see some seasonal fluctuations in this segment because of the general effects of weather on Pacific Northwest development activities.
 
Capital Expenditures and Commitments
 
Total capital expenditures in 2006, excluding the planned investment in ORM Timber Fund I, LP, are expected to approximate $13.8 million, of which $1.4 million has been expended through March 31, 2006. These expected capital expenditures include $6.3 million related to the Real Estate project at Gig Harbor, Washington for roads, a community water tank, and water and sewer connections to the property and $3.0 million for the Bremerton West Hills property to construct a road which is a condition of closing for the residential portion of this property. Remaining planned capital expenditures are related to various property development projects, capitalized reforestation costs, and capital improvements at the Port Gamble townsite. The actual pace of the Gig Harbor and Bremerton expenditures will depend on how quickly we are able get approvals for our planned improvements at the sites. The Partnership expects that the source of capital for these expenditures will be primarily funds generated internally through operations with external financing supplementing as necessary.
 
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ACCOUNTING MATTERS
 
Critical Accounting Policies and Estimates
 
Management believes its most critical accounting policies and estimates relate to management’s calculation of timber depletion and liabilities for matters such as environmental remediation, and potential asset impairments. In relation to liabilities, potential impairments and other estimated charges, it is management’s policy to conduct ongoing reviews of significant accounting policies and assumptions used in the preparation of the financial results of the Partnership. The assumptions used are tested against available and relevant information and reviewed with subject-matter experts for consistency and reliability. During the preparation of financial results, tests are conducted to ascertain that the net book carrying values of assets are not in excess of estimated future cash flows. These tests use current market information, if available, or other generally accepted valuation methods, such as future cash flows. When the use of estimates is necessary, an exact answer is unlikely, and therefore, the reporting within a range of likely outcomes is used in the preparation of the financial statements. Tests are also applied in order to be reasonably assured that liabilities are properly reflected on the records of the Partnership and that the notes to the financial statements are prepared in a fashion that informs readers of possible outcomes and risks associated with the conduct of business.

Purchased Timberlands Allocation: When the Partnership acquires timberlands, a purchase price allocation is performed that allocates cost between the categories of merchantable timber, premerchantable timber, and land based upon the relative fair values pertaining to each of the categories. When timberland is acquired the land is evaluated for current value. To the extent the land has value under current market conditions as something other than timberland, generally referred to as HBU, we assign a value greater than that typically associated with timberland.
 
Depletion-Cost Pools: Depletion represents the cost of timber harvested and is charged to operations by applying a depletion rate to volume harvested during the period. The depletion rate is calculated in January each year by dividing the Partnership’s cost of merchantable timber by the volume of merchantable timber. Merchantable timber is defined as timber that is equal to or greater than 40 years of age.

To calculate the depletion rate, the Partnership combines all properties with similar characteristics and uses one depletion rate for all volume harvested from that timberland asset pool. Each timberland acquisition is evaluated for consistency with the already established timberland portfolio using the following five characteristics:

1.
Management-Will the acquisition be managed as part of the existing cost pool?
2.
Location-Is the tree farm in the same geography as the existing timberland cost pool?
3.
Products-Will the products harvested from the acquisition be substantially similar to those harvested from the existing cost pool?
4.
Customers/Markets-Will the harvest from the acquisition be sold to the same customers/markets as logs harvested from the existing cost pool?
5.
Stocking-Are the acres in the acquisition of a similar age class distribution to the existing cost pool? (If the premerchantable timberland acres in the acquisition are less than 50% of total acres, stocking on the acquisition will be deemed sufficiently different and strongly indicate that a separate pool is appropriate.)

In October 2004 we acquired 1,339 acres of timberland that are substantially all merchantable timber. We created a separate pool for this acquisition with an initial depletion rate of $370 per MBF that is applied to timber harvested from these recently acquired acres. In January 2006, we adjusted this depletion rate to reflect the latest estimate of timber volume available for harvest on this property. As a result of this evaluation the depletion rate was increased to $397 per MBF.
 
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Table of Contents
 
 
Depletion-Estimated Volume: Inventory volumes take into account the applicable state and federal regulatory limits on timber harvests as applied to the Partnership’s properties, including the Forests and Fish law that supplements Washington State’s forest practice regulations to provide for expanded riparian management zones, wildlife leave trees, and other harvest restrictions. Timber inventory volume is accounted for by the Partnership's standing timber inventory system, which utilizes annual statistical sampling of the timber (cruising) with annual adjustments made for estimated growth and the depletion of areas harvested.

The standing inventory system is subject to two processes each year to monitor accuracy. The first is the annual cruise process and the second is a comparison of (a) volume actually extracted by harvest, to (b) inventory for the corresponding stands of harvested timber in the standing inventory system at the time of the harvest. A “cruise” represents a physical measurement of timber on a specific set of acres. The cruise process is completed when the physical measurement totals are compared to the inventory in the standing inventory system. The standing inventory system is then updated for the results of the cruise. Only productive acres with timber that is at least 20 years old are selected to cruise. The Partnership cruised 20% of its productive acres with 20 year old or greater timber in 2004 and 17% in 2005. We plan to cruise 20% in 2006 and thereafter. Specific acres are first selected for cruising with a bias towards those acres that have gone the longest without a cruise and, second, with a bias towards those acres that have been growing the longest. As the cruise is being performed, only those trees with a breast-height diameter (approximately 4.5 feet from the ground) of at least 6 inches are measured for inclusion in the inventory.

Environmental Remediation: The environmental remediation liability represents estimated payments to be made to monitor (and remedy if necessary) certain areas in and around the townsite and millsite of Port Gamble, Washington. Port Gamble is a historic town that was owned and operated by P&T, a related party, until 1985 when the townsite and other assets were spun off to the Partnership. P&T continued to operate the townsite until 1996 and leased the millsite at Port Gamble through January 2002, at which point P&T signed an agreement with the Partnership dividing the responsibility for environmental remediation of Port Gamble between the two parties.

The environmental remediation liability on the Partnership’s books is based upon an estimate of the Partnership’s portion of the clean-up costs under this agreement with P&T. While the majority of the Partnership’s portion of the clean up efforts is complete, there remains the possibility that the remaining remediation or monitoring activities may exceed estimates, resulting in an additional environmental remediation charge. Management will continue to monitor the remaining liability against estimates to complete to determine if an adjustment to the environmental remediation liability is necessary to accurately represent management’s estimate of remaining cost to complete the project.

Property Development Costs: The Partnership is developing several master planned communities with the Gig Harbor and Bremerton projects being the most notable currently. The cost of development is capitalized to these projects and allocated to individual lots based upon their relative value. This accounting currently results in the segregation between those project costs reported as a current versus long-term assets. As these lots are sold, this segregation of costs will be used to calculate the cost of sales associated with individual lots.
 
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Table of Contents
 
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
 
ABOUT MARKET RISK
 
Interest Rate Risk
 
As of March 31, 2006, the Partnership had $32.3 million of fixed-rate debt outstanding with a fair value of approximately $38 million based on the current interest rates for similar financial instruments. A change in the interest rate on fixed-rate debt will affect the fair value of the debt, whereas a change in the interest rate on variable-rate debt will affect interest expense and cash flows. A hypothetical 1% change in prevailing interest rates would change the fair value of the Partnership's fixed-rate long-term debt obligations by $1.9 million.
 
ITEM 4. CONTROLS AND PROCEDURES
 
The Partnership’s management maintains a system of internal controls, which management views as adequate to promote the timely identification and reporting of material, relevant information. Those controls include (1) requiring executive management and all managers in accounting roles to sign and adhere to a Code of Conduct and (2) implementation of a confidential hotline for employees to contact the Audit Committee directly with financial reporting concerns. Additionally, the Partnership’s senior management team meets regularly to discuss significant transactions and events affecting the Partnership’s operations. The Partnership’s President & CEO and V.P. & CFO (“Executive Officers”) lead these meetings and consider whether topics discussed represent information that should be disclosed under generally accepted accounting principles and the rules of the SEC. The Board of Directors of the Partnership’s general partner includes an Audit Committee. The Audit Committee reviews the earnings release and all reports on Form 10-Q and 10-K prior to their filing. The Audit Committee is responsible for hiring the Partnership’s external auditors and meets with those auditors at least eight times each year.

Our Executive Officers are responsible for establishing and maintaining disclosure controls and procedures. They have designed such controls to ensure that others make all material information known to them within the organization. Management regularly evaluates ways to improve internal controls.

As of the end of the period covered by this quarterly report on Form 10-Q our Executive Officers completed an evaluation of the disclosure controls and procedures and have determined them to be functioning properly and effectively. We have made no changes to internal controls over financial reporting that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

 
PART II
 
ITEM 1. LEGAL PROCEEDINGS
 
From time to time, the Partnership may be subject to legal proceedings and claims that may have a material adverse impact on its business. Management is not aware of any current legal proceedings or claims that will have, individually or in the aggregate, a material adverse impact on its business, prospects, financial condition or results of operations.
 
ITEM 1A. RISK FACTORS
 
Our business is subject to a number of risks and uncertainties, any one or more of which could impact our operating results and financial condition materially and adversely. Some of these risks are discussed in greater detail below, arranged according to business segment. In addition, we face a number of risks that affect our business generally. We compete against much larger companies in each of our business segments. These larger competitors may have access to larger amounts of capital and significantly greater economies of scale. Land ownership carries with it the risk of incurring liabilities due to accidents that take place on the land and previously undiscovered environmental contamination. The Partnership endeavors to maintain adequate accruals to reflect the cost of remediating known environmental contamination
 
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Table of Contents
 
 
and other liabilities resulting from land ownership. However these estimates may prove to be inadequate as additional information is discovered. A more thorough discussion of the risks and uncertainties that may affect our business is contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2005, and in our various other filings with the Securities and Exchange Commission. Readers should review these risks in deciding whether to invest in Partnership units, and should recognize that those factors are not an exhaustive list of risks that could cause us to deviate from management’s expectations. Readers also are cautioned that, in reviewing these risk factors, the factors contained in this report and in our other SEC filings are effective as of the date the filing was made, and we cannot undertake to update those disclosures.
 
Fee Timber
 
Fee Timber revenue is generated primarily through the sale of softwood logs to both domestic mills and third-party intermediaries that resell to the export market. The domestic market for logs in the Puget Sound region of Washington State has been impacted by imported lumber from Canada and decreased demand for lumber as engineered wood products have gained market acceptance in the U.S. These factors have had the effect of concentrating mill ownership with larger mill operators and decreasing the number of mills operating in the Puget Sound region. If this trend continues, decreases in local demand for logs may decrease our profitability. Over the last few years the Partnership has seen the price of logs erode in the Japanese market as competing logs and lumber from regions outside of the U.S. and engineered wood products have gradually gained market acceptance. These export markets for Pacific Northwest logs are significantly affected by fluctuations in U.S. and Japanese economies, as well as by the foreign currency exchange rate between the Japanese yen and the U.S. dollar.
 
Our ability to grow and harvest timber can be significantly impacted by legislation, regulations or court rulings that restrict or stop forest practices. Restrictions on logging, planting, road building, fertilizing, managing competing vegetation and other activities can significantly increase the cost or reduce available inventory thereby reducing income.
 
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Table of Contents
 
 
Timberland Management & Consulting
 
The Timberland Management & Consulting segment is currently operating with one major timberland management client. Management is working to expand our fee-for-service business by the launch of our timber fund, also a component of our Timberland Management & Consulting segment. Unlike other components of our business, which relate solely or primarily to real estate and timber operations, this line of business carries risks relating to the offer and sale of securities, and to the management of investment operations, including potential liability to investors if we are determined to have made material misstatements or omissions to those investors, potential accusations that we have breached fiduciary duties to other limited partners, and similar types of investor action. Moreover, litigation of shareholder-related matters can be expensive and time consuming, and if brought, would likely distract management from their focus on ordinary operating activities.
 
Real Estate
 
The value of our real estate investments is subject to changes in the economic and regulatory environment, as well as various land use regulations and development risks, including the ability to obtain the necessary permits and zoning variances that would allow us to maximize our revenue from our real estate investments. Our real estate investments are long-term in nature, which raises the risk that unforeseen changes in the economy or laws surrounding development activities may have an adverse affect on our investments. Moreover, these investments often are highly illiquid and thus may not generate cash flow if and when needed to support our other operations.
 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
(a) - (e) None
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None
 
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ITEM 5. OTHER INFORMATION
 
 
(a)
 
None
 
 
(b)
 
There have been no material changes in the procedures for shareholders of the Partnership’s general partner to nominate directors to the board.
 
 
ITEM 6. Exhibits
 
 
Exhibits.
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
 
 
32.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350 (furnished with this report in accordance with SEC Rel. No. 33-8238.
 
 
32.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350 (furnished with this report in accordance with SEC Rel. No. 33-8238.
 
 
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Table of Contents
 
 
SIGNATURES
 
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, on May 8, 2006.
 
 
 
 
POPE RESOURCES,
 
A Delaware Limited Partnership 
     
  By: POPE MGP, Inc.
    Managing General Partner 
     
     
    By: /s/ David L. Nunes                              
   
David L. Nunes
   
President and Chief Executive Officer
   
(Principal Executive Officer)
     
     
    By: /s/ Thomas M. Ringo                           
    Thomas M. Ringo
    Vice President and CFO
    (Principal Accounting and Financial Officer)

 
32
 


 
 



Exhibit 31.1

Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
 
I, David L. Nunes, certify that:
 
1.
 
I have reviewed this quarterly report on Form 10-Q of Pope Resources;
 
2.
 
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
 
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)
 
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)
 
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)
 
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)
 
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
 
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
(a)
 
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)
 
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
Date: May 8, 2006  /s/ David L. Nunes
 
David L. Nunes
 
Chief Executive Officer
 
  
 

 
Exhibit 31.2
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
 
I, Thomas M. Ringo, certify that:
 
1.
 
I have reviewed this quarterly report on Form 10-Q of Pope Resources;
 
2.
 
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
 
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)
 
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)
 
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)
 
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)
 
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
 
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
(a)
 
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)
 
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
Date: May 8, 2006 /s/ Thomas M. Ringo
 
Thomas M. Ringo
 
Chief Financial Officer
 

 
        
Exhibit 32.1
Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Quarterly Report of Pope Resources (the “Company”) on Form 10-Q for the period ended March 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David L. Nunes, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
   
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company as of, and for, the periods presented in the Report.

This certification is being furnished solely to comply with the requirements of 18 U.S.C. Section 1350, and shall not be incorporated by reference into any of the Company’s filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, or otherwise be deemed to be filed as part of the Report or under such Acts.
 
 
/s/ David L. Nunes
David L. Nunes
Chief Executive Officer

May 8, 2006

Exhibit 32.2
Exhibit 32.2


CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Quarterly Report of Pope Resources (the “Company”) on Form 10-Q for the period ended March 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas M. Ringo, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
   
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company as of, and for, the periods presented in the Report.

This certification is being furnished solely to comply with the requirements of 18 U.S.C. Section 1350, and shall not be incorporated by reference into any of the Company’s filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, or otherwise be deemed to be filed as part of the Report or under such Acts.
 
 
By: /s/ Thomas M. Ringo   
Thomas M. Ringo
Chief Financial Officer


May 8, 2006