a6497485.htm
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 September 30, 2010

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer” “accelerated filer” and “smaller reporting company” in rule 12b-2 of the Exchange Act. (check one)
 
Large Accelerated Filer o
Accelerated Filer x
 
Non-accelerated Filer o
Smaller Reporting Company o

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

Partnership units outstanding at November 3, 2010: 4,635,076

 
 

 
 
Pope Resources
Index to Form 10-Q Filing
For the Quarter Ended September 30, 2010

Description
 
Page Number
Part I. Financial Information
   
     
Item 1. Financial Statements (unaudited)
   
 
4
 
5
 
6
 
7
     
 
17
     
 
40
     
 
41
     
Part II. Other Information
   
     
 
41
     
 
41
     
 
43
     
 
43
     
 
43
     
 
43
     
 
43
     
 
44
 
 
 

 
 
P A R T I – FINANCIAL INFORMATION

ITEM 1


FINANCIAL STATEMENTS



 
3

 
 
Pope Resources, a Delaware Limited Partnership
September 30, 2010 and December 31, 2009
(Thousands)
   
2010
   
2009
 
ASSETS
           
Current assets:
           
Pope cash and cash equivalents
  $ 412     $ 6,035  
ORM Timber Funds cash and cash equivalents
    3,082       1,145  
Cash and cash equivalents
    3,494       7,180  
Student loan auction rate securities, current
    -       690  
Accounts receivable, net
    969       261  
Land held for sale
    3       367  
Current portion of contracts receivable
    31       320  
Prepaid expenses and other
    603       444  
Total current assets
    5,100       9,262  
Properties and equipment, at cost:
               
Land held for development
    26,990       25,872  
Land
    33,979       25,072  
Roads and timber, net of accumulated depletion
               
  of $58,751, and $54,743
    166,011       120,457  
Buildings and equipment, net of accumulated                
  depreciation of $7,649, and $7,321
    3,842       3,967  
Total properties and equipment, at cost
    230,822       175,368  
Other assets:
               
Contracts receivable, net of current portion
    1,272       1,140  
Student loan auction rate securities, non-current
    -       796  
Other
    645       490  
Total other assets
    1,917       2,426  
Total assets
  $ 237,839     $ 187,056  
LIABILITIES AND PARTNERS' CAPITAL
       
Current liabilities:
               
Accounts payable
  $ 1,024     $ 586  
Accrued liabilities
    1,980       784  
Current portion of environmental remediation
    119       200  
Current portion of long-term debt
    30       831  
Deferred revenue
    529       469  
Other current liabilities
    216       196  
Total current liabilities
    3,898       3,066  
Long-term liabilities:
               
Long-term debt, net of current portion
    40,875       28,659  
Environmental remediation, net of current portion
    1,528       1,069  
Other long-term liabilities
    180       205  
Partners' capital and noncontrolling interests:    
 
         
Partners' capital:
               
General partners' capital (units outstanding 60 and 60)
    1,081       1,103  
Limited partners' capital (units outstanding 4,508 and 4,460)
    81,229       82,023  
Noncontrolling interests
    109,048       70,931  
Total partners' capital and noncontrolling interests
    191,358       154,057  
Total liabilities, partners' capital, and noncontrolling interests
  $ 237,839     $ 187,056  
 
See accompanying notes to condensed consolidated financial statements.
 
 
4

 
 
 
Pope Resources, a Delaware Limited Partnership
For the Three Months and Nine Months Ended September 30, 2010 and 2009
(Thousands, except per unit data)
                         
    Three Months Ended September 30,     Nine Months Ended September 30,  
   
2010
   
2009
   
2010
   
2009
 
                         
Revenue
  $ 8,591     $ 6,615     $ 22,646     $ 15,260  
Cost of timber and land sold
    (4,566 )     (1,946 )     (10,997 )     (6,026 )
Operating expenses
    (2,127 )     (1,761 )     (6,092 )     (5,346 )
Real estate environmental remediation
    (5 )     -       (568 )     -  
General and administrative expenses
    (1,004 )     (790 )     (3,397 )     (2,535 )
Income from operations
    889       2,118       1,592       1,353  
                                 
Other income (expense):
                               
Interest expense
    (493 )     (555 )     (1,355 )     (1,765 )
Capitalized interest
    142       235       460       853  
Debt extinguishment costs
    -       (1,137 )     (1,250 )     (1,137 )
Interest income
    30       35       91       167  
Realized gain on investments
    -       -       11       3  
Unrealized loss on investments
    -       (15 )     -       (75 )
Total other expense
    (321 )     (1,437 )     (2,043 )     (1,954 )
                                 
Income (loss) before income taxes
    568       681       (451 )     (601 )
Income tax benefit (expense)
    37       (1 )     25       (6 )
Net income (loss)
    605       680       (426 )     (607 )
                                 
Net loss attributable to noncontrolling interests:
                               
ORM Timber Funds
    445       240       801       711  
Net income attributable to unitholders
  $ 1,050     $ 920     $ 375     $ 104  
                                 
Allocable to general partners
  $ 14     $ 12     $ 5     $ 1  
Allocable to limited partners
    1,036       908       370       103  
 Net income attributable to unitholders
  $ 1,050     $ 920     $ 375     $ 104  
                                 
Income per unit attributable to unitholders:
                               
Basic
  $ 0.23     $ 0.20     $ 0.07     $ 0.02  
Diluted
  $ 0.22     $ 0.20     $ 0.07     $ 0.02  
                                 
Weighted average units outstanding:
                               
Basic
    4,567       4,515       4,546       4,545  
Diluted
    4,603       4,566       4,583       4,585  
                                 
Distributions per unit
  $ 0.25     $ 0.20     $ 0.45     $ 0.60  
 
See accompanying notes to condensed consolidated financial statements.
 
 
5

 
 
Pope Resources, a Delaware Limited Partnership
Nine Months Ended September 30, 2010 and 2009
(Thousands)
   
2010
   
2009
 
Net loss
  $ (426 )   $ (607 )
Adjustments to reconcile net loss to net cash provided by (used in)                 
operating activities:                
Depletion
    3,909       1,449  
Capitalized development activities, net of reimbursements
    (743 )     (1,225 )
Equity-based compensation
    568       467  
Excess tax benefit from equity-based compensation
    (104 )     -  
Depreciation and amortization
    485       615  
(Gain) loss on investments
    (11 )     72  
Deferred taxes
    (183 )     (140 )
Cost of land sold
    67       119  
Write-off of debt issuance costs
    32       -  
Gain on fixed asset sales
    -       (19 )
Increase (decrease) in cash from changes in operating accounts:
         
Deferred revenue
    60       90  
Accounts receivable, net
    (708 )     (312 )
Contracts receivable
    157       61  
Prepaid expenses and other current assets
    89       (87 )
Accounts payable and accrued liabilities
    1,742       (204 )
Other current liabilities
    20       (145 )
Environmental remediation
    378       (251 )
Other long-term liabilities
    (25 )     (74 )
Other, net
    (1 )     -  
Net cash provided by (used in) operating activities
    5,306       (191 )
                 
Cash flows from investing activities:
               
Redemption of investments
    1,497       25  
Reforestation and roads
    (339 )     (395 )
Other capital expenditures
    (235 )     (571 )
Proceeds from fixed asset sale
    -       50  
Timberland acquisitions
    (58,206 )     -  
Acquisition deposit
    -       (1,927 )
Net cash used in investing activities
    (57,283 )     (2,818 )
                 
Cash flows from financing activities:
               
Repayment of long-term debt
    (1,031 )     (1,410 )
Extinguishment of long-term debt
    (18,554 )     (8,479 )
Proceeds from issuance of long-term debt
    31,000       9,800  
Debt issuance costs
    (283 )     (48 )
Unit repurchases
    (355 )     (1,824 )
Proceeds from option exercises
    573       -  
Cash distributions to unitholders
    (2,080 )     (2,761 )
Excess tax benefit from equity-based compensation
    104       -  
Capital call- ORM Timber Fund II, Inc.
    38,800       27,445  
Preferred stock issuance- ORM Timber Fund II, Inc.
    125       -  
Preferred stock distribution- ORM Timber Fund II, Inc.
    (8 )     -  
Net cash provided by financing activities
    48,291       22,723  
                 
Net increase (decrease) in cash and cash equivalents
    (3,686 )     19,714  
Cash and cash equivalents at beginning of period
    7,180       17,978  
                 
Cash and cash equivalents at the end of the nine-month period
  $ 3,494     $ 37,692  
 
See accompanying notes to condensed consolidated financial statements.
 
 
6

 
 
 POPE RESOURCES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2010

1.
The condensed consolidated financial statements as of September 30, 2010 and December 31, 2009 and for the three-month periods (quarters) and nine-month periods ended September 30, 2010 and 2009 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 condensed consolidated financial statements are unaudited, but, in the opinion of management, reflect 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, 2009, is derived from the Partnership’s audited consolidated financial statements and notes thereto for the year ended December 31, 2009, and should be read in conjunct ion with such financial statements. The results of operations for the interim periods are not indicative of the results of operations that may be achieved for the entire fiscal year ending December 31, 2010.
 
2.
The financial statements in the Partnership's 2009 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 calculated by dividing net income attributable to unitholders, adjusted for non-forfeitable distributions paid out to unvested restricted unitholders, by the weighted average units outstanding during the year plus additional units that would have been outstanding assuming the exercise of in-the-money unit equivalents using the treasury stock method.
 
The table below displays how we arrived at options used to calculate dilutive unit equivalents and subsequent treatment of dilutive unit equivalents based on net income for the period:
 
 
7

 
 
   
Quarter Ended
September 30,
   
Nine months ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Average trading price
  $ 25.75     $ 23.58     $ 26.13     $ 20.54  
Total options outstanding
    102,810       163,053       102,810       163,053  
Less: options with strike price above average trading price (not in-the-money)
    (1,869 )     (11,056 )     (1,869 )     (42,469 )
Options used in calculation of dilutive unit equivalents
    100,941       151,997       100,941       120,584  
Net income attributable to Pope Resources’ unitholders
  $ 1,050     $ 920     $ 375     $ 104  
Dilutive unit equivalents
    36,487       50,835       37,250       39,896  
Less: unit equivalents considered anti-dilutive due to net loss in period
    -       -       -       -  
 Dilutive unit equivalents used to calculate dilutive EPS
    36,487       50,835       37,250       39,896  
 
The following table shows how we arrived at basic and diluted income per unit:
 
   
Quarter Ended
September 30,
   
Nine months ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net income attributable to Pope Resources’ unitholders
  $ 1,050     $ 920     $ 375     $ 104  
Nonforfeitable distributions paid to unvested restricted unitholders
    (16 )     (11 )     (29 )     (34 )
Preferred dividends paid to Fund II preferred shareholders
    (4 )     -       (8 )     -  
Adjusted net income attributable to unitholders
  $ 1,030     $ 909     $ 338     $ 70  
Weighted average units outstanding (in thousands):
                               
Basic
    4,567       4,515       4,546       4,545  
Dilutive effect of unit equivalents
    36       51       37       40  
Diluted
    4,603       4,566       4,583       4,585  
                                 
Income per unit: Basic
  $ 0.23     $ 0.20     $ 0.07     $ 0.02  
                                 
Income per unit: Diluted
  $ 0.22     $ 0.20     $ 0.07     $ 0.02  
 
Options to purchase 102,810 and 163,053 units at prices ranging from $9.30 to $37.73 per unit were outstanding as of September 30, 2010 and 2009, respectively.
 
4.  
In 2005, we adopted the 2005 Unit Incentive Plan. Following adoption of this plan the Human Resources Committee of the Board of Directors began issuing restricted units instead of unit options as its primary method of granting equity based compensation. However, the plan also permits the issuance of unit options, unit appreciation rights and other equity compensation at the discretion of the Human Resources Committee.

 
8

 
 
Restricted Units
As of September 30, 2010, total compensation expense not yet recognized related to non-vested restricted unit awards was $660,000 with a weighted average 14 months remaining to vest.

Restricted units
September 30, 2010
Number outstanding
                   64,673
Aggregate value
$1,753,000

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 have a life of ten years.

Options Outstanding and Exercisable
September 30, 2010
Number outstanding
                 102,810
Weighted average exercise price
$15.93
Aggregate intrinsic value
$1,160,000
Weighted average remaining contractual term (yrs)
                      1.90

5.  
Supplemental disclosure of cash flow information: interest paid, net of amounts capitalized, totaled $898,000 and $912,000 for the nine months ended September 30, 2010 and 2009, respectively.   Neither of these interest paid amounts include debt extinguishment costs.  Income taxes paid in the first nine months of 2010 was $5,000 compared to an income tax refund received of $63,000, net of income taxes paid of $7,000 in the first nine months of 2009.

6.  
The fair values of cash and cash equivalents and investments held at September 30, 2010 and December 31, 2009 were as follows (in thousands):
 
   
September 30, 2010
 
         
Gross
       
   
Amortized
   
Unrealized
   
Estimated
 
   
Cost
   
Loss
   
Fair Value
 
Cash and cash equivalents
  $ 3,494     $ -     $ 3,494  
                         
   
December 31, 2009
 
         
Gross
       
   
Amortized
   
Unrealized
   
Estimated
 
   
Cost
   
Loss
   
Fair Value
 
Cash and cash equivalents
  $ 7,180     $ -     $ 7,180  
Securities maturing after ten years:
                       
  Auction rate securities, current
    925       (235 )     690  
  Auction rate securities, non-current
    1,000       (204 )     796  
 
During the nine-month period ended September 30, 2010, we liquidated the remaining $1.5 million of auction rate securities held as of December 31, 2009 resulting in a realized gain of $11,000.  This realized gain resulted from the following three transactions:

 
9

 
 
                     
Date
Description
 
Proceeds
   
Basis
   
Gain/(Loss)
 
Jan 21st
Pennsylvania Higher Education
  $ 25,000     $ 18,653     $ 6,347  
Jan 28th
Pennsylvania Higher Education
    702,000       671,490       30,510  
Mar 5th
Brazos
    770,000       796,100       (26,100 )
 
Total
  $ 1,497,000     $ 1,486,243     $ 10,757  

For the same period in 2009, we reported an unrealized loss of $75,000 offset by a $3,000 realized gain.  The realized gain for the nine-month period ended September 30, 2009 resulted from a redemption at par for a $25,000 portion of one of the auction rate securities during the second quarter of 2009.  The gain represents the amount by which the redemption proceeds exceeded the basis, as adjusted for previous impairments.

7.  
ASC 820 Fair Value Measurements and Disclosures (FASB Statement No. 157 Fair Value Measurement (SFAS No. 157) was followed to determine the fair value of the Partnership’s investments. ASC 820 defines a hierarchy of three levels of evidence used to determine fair value:
·
Level 1 - quoted prices for identical assets/liabilities in active markets
·
Level 2 - quoted prices in a less active market, quoted prices for similar but not identical assets/liabilities, inputs other than quoted prices
·
Level 3 - significant unobservable inputs including the Partnership’s own assumptions in determining the fair value of investments

The following table provides the fair value measurements of applicable Partnership financial assets according to the levels defined in ASC 820 as of September 30, 2010 and December 31, 2009:

   
September 30, 2010
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Cash and cash equivalents
  $ 3,494     $ -     $ -     $ 3,494  
                                 
   
December 31, 2009
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Cash and cash equivalents
  $ 7,180     $ -     $ -     $ 7,180  
Auction rate securities, current
    -       690       -       690  
Auction rate securities, non-current
    -       796       -       796  
Total financial assets at fair value
  $ 7,180     $ 1,486     $ -     $ 8,666  
 
8.  
Total comprehensive income for the three- and nine-month periods ended September 30, 2010 is $1.1 million and $375,000, respectively, which is solely net income for the periods presented.  Total comprehensive income for the three-month period ended September 30, 2009 was $648,000 which includes net income for the quarter offset by an unrealized loss of $32,000 on auction rate securities.  Total comprehensive loss for the nine-month period ended September 30, 2009 was $498,000 which consists of net loss of $607,000 offset by an unrealized gain of $109,000 on auction rate securities.

9.  
The Partnership has two general partners: Pope MGP, Inc. and Pope EGP, Inc. In total, these two entities own 60,000 partnership units. The allocation of distributions and loss between the general and limited partners is pro rata among all units outstanding.
 
 
10

 
 
10.  
In the presentation of the Partnership’s revenue and operating income (loss) by segment all intersegment revenue and expense is eliminated to determine externally reported operating income (loss) by business segment. The tables that follow reconcile internally reported income (loss) from operations to externally reported income (loss) from operations by business segment, for the quarters and nine-month periods ended September 30, 2010 and 2009:
 
    Fee Timber    
Timberland
                   
    Pope                 Management                    
Three Months Ended
 
Resources
   
Timber
   
Total
   
&
   
Real
   
General &
       
September 30, (Thousands)
 
Timber
   
Funds
   
Fee Timber
   
Consulting
   
Estate
   
Adminstrative
   
Consolidated
 
2010
                                         
Revenue internal
  $ 6,581     $ 1,721     $ 8,302     $ 412     $ 340     $ -     $ 9,054  
Eliminations
    (54 )     -       (54 )     (397 )     (12 )     -       (463 )
Revenue external
    6,527       1,721       8,248       15       328       -       8,591  
                                                         
Cost of timber and land sold
    (2,915 )     (1,648 )     (4,563 )     -       (3 )     -       (4,566 )
                                                         
Operating, general and
                                                       
  administrative expenses
  internal
    (845 )     (566 )     (1,411 )     (361 )     (823 )     (1,004 )     (3,599 )
Eliminations
    12       394       406       57       -       -       463  
Operating, general and
                                                       
  administrative expenses
  external
    (833 )     (172 )     (1,005 )     (304 )     (823 )     (1,004 )     (3,136 )
                                                         
Income (loss) from operations
                                                       
  internal
    2,821       (493 )     2,328       51       (486 )     (1,004 )     889  
Eliminations
    (42 )     394       352       (340 )     (12 )     -       -  
Income (loss) from operations
                                                       
  external
  $ 2,779     $ (99 )   $ 2,680     $ (289 )   $ (498 )   $ (1,004 )   $ 889  
                                                         
2009
                                                       
Revenue internal
  $ 2,905     $ 3     $ 2,908     $ 269     $ 3,726     $ -     $ 6,903  
Eliminations
    (46 )     -       (46 )     (230 )     (12 )     -       (288 )
Revenue external
    2,859       3       2,862       39       3,714       -       6,615  
                                                         
Cost of timber and land sold external
    (1,752 )     -       (1,752 )     -       (194 )     -       (1,946 )
                                                         
Operating, general and
                                                       
  administrative expenses internal
    (689 )     (302 )     (991 )     (252 )     (806 )     (790 )     (2,839 )
Eliminations
    12       221       233       55       -       -       288  
Operating, general and
                                                       
  administrative expenses external
    (677 )     (81 )     (758 )     (197 )     (806 )     (790 )     (2,551 )
                                                         
Income (loss) from operations
                                                       
  internal
    464       (299 )     165       17       2,726       (790 )     2,118  
Eliminations
    (34 )     221       187       (175 )     (12 )     -       -  
Income (loss) from operations
                                                       
  external
  $ 430     $ (78 )   $ 352     $ (158 )   $ 2,714     $ (790 )   $ 2,118  
 
 
11

 
 
    Fee Timber    
Timberland
                   
    Pope                 Management                    
Nine Months Ended
 
Resources
   
Timber
   
Total
    &    
Real
   
General &
       
September 30, (Thousands)
 
Timber
   
Funds
    Fee Timber    
Consulting
   
Estate
    Adminstrative    
Consolidated
 
2010
                                         
Revenue internal
  $ 18,504     $ 3,427     $ 21,931     $ 1,002     $ 844     $ -     $ 23,777  
Eliminations
    (108 )     -       (108 )     (987 )     (36 )     -       (1,131 )
Revenue external
    18,396       3,427       21,823       15       808       -       22,646  
                                                         
Cost of timber and land sold
    (8,014 )     (2,977 )     (10,991 )     -       (6 )     -       (10,997 )
                                                         
Operating, general and
                                                       
  administrative expenses
  internal
    (2,443 )     (1,385 )     (3,828 )     (1,041 )     (2,922 )     (3,397 )     (11,188 )
Eliminations
    39       971       1,010       121       -       -       1,131  
Operating, general and
                                                       
  administrative expenses
  external
    (2,404 )     (414 )     (2,818 )     (920 )     (2,922 )  *     (3,397 )     (10,057 )
                                                         
Income (loss) from operations
                                                       
  internal
    8,047       (935 )     7,112       (39 )     (2,084 )     (3,397 )     1,592  
Eliminations
    (69 )     971       902       (866 )     (36 )     -       -  
Income (loss) from operations
                                                       
  external
  $ 7,978     $ 36     $ 8,014     $ (905 )   $ (2,120 )   $ (3,397 )   $ 1,592  
*Includes $563,000 of non-recurring environmental remediation expense
                         
                                                         
2009
                                                       
Revenue internal
  $ 10,254     $ 4     $ 10,258     $ 1,182     $ 4,609     $ -     $ 16,049  
Eliminations
    (121 )     -       (121 )     (632 )     (36 )     -       (789 )
Revenue external
    10,133       4       10,137       550       4,573       -       15,260  
                                                         
Cost of timber and land sold external
    (5,672 )     -       (5,672 )     -       (354 )     -       (6,026 )
                                                         
Operating, general and
                                                       
  administrative expenses internal
    (2,203 )     (891 )     (3,094 )     (883 )     (2,158 )     (2,535 )     (8,670 )
Eliminations
    36       623       659       130       -       -       789  
Operating, general and
                                                       
  administrative expenses external
    (2,167 )     (268 )     (2,435 )     (753 )     (2,158 )     (2,535 )     (7,881 )
                                                         
Income (loss) from operations
                                                       
  internal
    2,379       (887 )     1,492       299       2,097       (2,535 )     1,353  
Eliminations
    (85 )     623       538       (502 )     (36 )     -       -  
Income (loss) from operations
                                                       
  external
  $ 2,294     $ (264 )   $ 2,030     $ (203 )   $ 2,061     $ (2,535 )   $ 1,353  
 
 
12

 
 
11.  
On June 10, 2010, the Partnership entered into a new $20.0 million term loan agreement with Northwest Farm Credit Services (NWFCS). Proceeds from this new term loan were used to retire a term loan from John Hancock Life Insurance Company (JHLIC) due in April 2011 and fund a make-whole premium of $1.2 million due on retirement of that timberland mortgage. On September 1, 2010, ORM Timber Fund II (Fund II) entered into an $11.0 million term loan agreement with Metropolitan Life Insurance Company (MetLife) due in August 2020.  Proceeds from this loan were used to acquire 25,000 acres of timberlands on behalf of Fund II during the third quarter of 2010.  The MetLife loan has a maximum loan to value ratio of 40%, measured as of December 31st of each year.&# 160; Following funding of the new term loans and retirement of the final JHLIC term loan, the Partnership had the following long-term debt outstanding as of September 30, 2010 with staggered maturity dates as follows:
 
(Amounts in thousands:)
 
Sep-10
   
Dec-09
 
Pope Resources debt:
           
Mortgage payable to NWFCS, collateralized by timberlands, comprised of three tranches as follows:            
  Five-year tranche, interest at 4.10% with monthly interest-only
           
  payments. Matures in July 2015.
  $ 5,000     $ -  
                 
  Seven-year tranche, interest at 4.85% with monthly interest-
               
  only payments. Matures in July 2017.
    5,000       -  
                 
  Fifteen-year tranche, interest at 6.05% with monthly interest-
               
  only payments. Matures in July 2025.
    10,000       -  
      20,000       -  
                 
Mortgage payable to NWFCS, interest at 6.4%, collateralized by timberlands with monthly
interest-only payments. Matures in September 2019.
    9,800       9,800  
                 
Mortgage payable to JHLIC, interest at 7.63%, collateralized by timberlands with monthly
interest payments and annual principal payments. Matures in April 2011.
    -       19,303  
                 
Local improvement district assessments, with interest ranging from 5.03% to 6.5%.
    -       260  
  Total Partnership debt
    29,800       29,363  
                 
ORM Timber Funds debt:
               
Fund I note payable to the City of Tacoma, with interest at 4.5%,  with monthly principal and
interest payments maturing January 2014.
    105       127  
                 
Fund II mortgage payable to MetLife, interest at 4.85%, collateralized by Fund II timberlands
with quarterly interest payments maturing August 2020.
    11,000       -  
  Total ORM Timber Funds debt
    11,105       127  
Consolidated debt
  $ 40,905     $ 29,490  
 
The Partnership's long-term debt is not actively traded and, as such, fair values were estimated using discounted cash flow analyses, based on the Partnership’s current estimated incremental borrowing rates for similar types of borrowing arrangements, which are considered level 3 inputs.  As of September 30, 2010 and December 31, 2009, consolidated fixed-rate debt outstanding had a fair value of approximately $44.3 million and $30.5 million, respectively.

 
13

 
 
In connection with the new term loan, the Partnership’s revolving line of credit with NWFCS was extended from August 2011 to August 2013 and reduced from $35 million to $20 million.  Unamortized loan fees of approximately $32,000 were written off in connection with the second quarter mortgage refinancing.

12.  
The Partnership has an accrual for estimated environmental remediation costs of $1.6 million and $1.3 million as of September 30, 2010 and December 31, 2009, respectively.  The environmental remediation liability represents estimated payments to be made to monitor and remedy certain areas in and around the townsite and millsite of Port Gamble, Washington.  A draft Sawmill Site Feasibility Study Report was completed during the quarter ended June 30, 2010 that suggested changes in remediation alternatives such that we considered an increase in our accrual for estimated remediation costs necessary.  As such, during the quarter ended June 30, 2010 we modified the cost assumptions used in the statistical modeling process resulting in an increase in the reserve for environmental remediation of $563,000.  The Monte-C arlo simulation model by which we estimate this liability indicated a range of potential liability from $463,000 to $3.3 million compared to a range of $145,000 to $2.9 million the last time we ran this model at December 31, 2009.  This represents a two-standard-deviation range from the mean of possible outcomes generated by the modeling process used to estimate this liability.  Review of the draft Sawmill Site Feasibility Study Report by the Washington State Department of Ecology (Ecology) and certain other stakeholders was delayed during the third quarter of 2010. We estimate this delay will further defer the Cleanup Action Process by at least a quarter.

In addition, approximately $6,000 of the environmental remediation accrual represents the maximum portion of the agreed-upon investigative costs yet to be paid by the Partnership in connection with the Port Ludlow Resort Community. While we have not concluded that we have an obligation to remediate, the investigation is intended to inform our evaluation of the buyer’s belief that remediation is necessary for contamination found on the site and whether or not the Partnership has liability.

13.  
ORM Timber Fund II, Inc. (Fund II), acquired 25,000 acres of timberland in two separate transactions during the third quarter of 2010 for $58.2 million.  These acquisitions were funded with $47.2 million of equity capital and an $11 million timberland mortgage from MetLife.  The Partnership’s co-investment in these acquisitions was approximately $9.7 million which includes 20% of the equity capital called to fund the acquisitions plus working capital.

14.  
On January 4, 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements (ASU 2010-06). ASU 2010-06 requires additional disclosure within the roll forward activity for assets and liabilities measured at fair value on a recurring basis, including transfers of assets and liabilities between Level 1 and Level 2 of the fair value hierarchy and the separate presentation of purchases, sales, issuances and settlements of assets and liabilities within Level 3 of the fair value hierarchy. In addition, ASU 2010-06 requires enhanced disclosures of the valuation techniques and inputs used in the fair value measurements within Level 2 and Level 3. ASU 2010-06 was adopted for the Partnership’s f irst quarter ending June 30, 2010, except for the disclosure of purchases, sales, issuances and settlements of Level 3 measurements, for which disclosures are not required until the Partnership’s first quarter of fiscal 2011. During the third quarter of fiscal 2010, the Partnership did not have any transfers of assets or liabilities between Level 1 and Level 2 of the fair value hierarchy. The adoption of the additional disclosures for Level 1 and Level 2 fair value measurements did not have an impact on the Partnership’s financial position, results of operations or cash flows. The Partnership is currently evaluating the potential impact of the disclosures regarding Level 3 fair value measurements.

 
14

 
 
Recently, the FASB has issued a number of proposed Accounting Standards Updates (ASUs). Those proposed ASUs are as follows:

Proposed ASU – Comprehensive Income – was issued in May 2010 and will change the way comprehensive income is reported in the financial statements. The new standard will require a continuous statement of comprehensive income be reported combining the Company’s current statement of operations with comprehensive income. Comprehensive income or loss will be removed from the statement of shareholder’s equity.
 
• Proposed ASU – Revenue Recognition – was issued in June 2010. This proposed standard will completely replace all existing revenue recognition accounting literature. Generally, the proposed standard would require an entity to identify separate performance obligations under a contract, determine the transaction price, allocate that price to the separate components based on relative fair value, and recognize revenue when each performance obligation is satisfied. Management believes this standard may have an impact on the Company’s results of operations and disclosures, although the significance of that impact cannot be estimated at this time.
 
• Proposed ASU – Fair Value Measurements and Disclosures – was issued in June 2010. This proposed standard changes how fair value is determined for certain assets and liabilities and requires additional disclosures about fair value instruments. Management is currently evaluating the impact of this new standard on the Company’s financial position, results of operations, cash flows, and disclosures.
 
• Proposed ASU – Disclosure of Certain Loss Contingencies – was issued in July 2010. This proposed standard enhances financial statement disclosure surrounding certain loss contingencies such as legal disputes, environmental remediation liabilities, self-insurance liabilities, among others. The proposed standard primarily focuses on asserted claims and assessments and will require more robust disclosure of amounts, court or agency where legal proceedings are pending, principal parties, and other details not historically required. As the proposed standard impacts disclosure only, management does not expect this proposed standard to impact the Company’s financial position or results of operations.
 
These proposed ASUs are currently in comment period and are subject to change. There are no effective dates assigned to these proposals.
 
In July 2010, the FASB also issued an initial draft of new financial statement presentation requirements. These new requirements, as currently drafted, would substantially change the way financial statements are presented by disaggregating information in financial statements to explain the components of its financial position and financial performance. These changes will impact the presentation of the financial statements only and are not expected to impact the Company’s overall financial position, results of operations, or cash flows.

15.  
In 2010, the Human Resources Committee adopted a new incentive compensation program to reward selected management employees who provide services to the Partnership that builds long-term unitholder value. The Committee believes this new program offers enhanced transparency, simplified administration, and improved alignment with unitholders compared to the program it replaced.  The program has two components – the Performance Restricted Unit (“PRU”) plan and the Long-Term Incentive Plan (“LTIP”). Both components have a long-term emphasis, with the PRU plan focused on annual decision making and performance, and the LTIP focused on 3-year performance of the Partnership’s publicly traded units relative to a group of peer companies. For the three- and nine- month periods ended September 30, 2010, we accrued $234,000 and $948,000, respectively, which represent estimates of the cash payout component of the program as of the end of 2010’s third quarter.  Compensation expense relating to the performance restricted units will be recognized over the four year future service period.  No equity grants pursuant to this new program have yet been made and, as such, no equity compensation expense related to this program has been recognized in 2010.  A program summary has been filed as part of this Form 10-Q (Exhibit 32.3).

 
15

 
 
The new incentive compensation program does not affect the existence or availability of the 2005 Unit Incentive Plan (See Note 4) or change its terms.  The 2005 Unit Incentive Plan provides a one-way linkage to the new program because it (2005 Plan) has already established the formal framework by which unit grants, options, etc., can be issued.  More specifically, the 2005 Plan has an impact on the mechanics of how that portion of the new program that awards equity is implemented.
 

 
 
16

 
 
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 and present intentions based on our current goals, in light of currently known circumstances and management's expectations about future developments. Statements about expectations, plans and future performance are “forward looking statements” within the meaning of applicable securities laws. 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 ac tions 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, 2009. Some of the issues that may have an adverse and material impact on our business, operating results and financial condition include economic conditions that affect consumer demand for our products and the prices we receive for them; the implications of significant indirect sales to overseas customers, including currency translation, regulatory and tax matters; the effect of financial market conditions on our investment portfolio and related liquidity; environmen tal and land use regulations that limit our ability to harvest timber and develop property; access to debt financing by our customers as well as ourselves; risks associated with our credit refinancing plans and objectives and the attendant potential for impacts on our liquidity; 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 late 1985 as a result of a spin-off by Pope & Talbot, Inc. (“P&T”). We are engaged in three primary businesses. The first, and by far most significant segment in terms of owned assets, revenues, income and operations, is the Fee Timber segment. This segment includes timberlands owned directly by the Partnership and operations of both ORM Timber Fund I, LP (“Fund I”) and ORM Timber Fund II, Inc. (“Fund II” and collectively the “Funds”). Operations in this segment consist of growing timber to be harvested as logs for sale to domestic manufacturers and export brokers. 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, entitlements, and, in some cases, installing infrastructure for raw land development and then realizing that land’s value through the sale of larger parcels to buyers who will take the land further up the value chain, either to home buyers or to operators and lessors of commercial property. Since these land projects span multiple years, the Real Estate segment may incur losses for multiple years while a project is developed until that project is sold resulting in operating income. Our third business segment, Timberland Management & Consulting, consists of raising investment capital from third parties for investment in timberland through private equity investment vehicles like the Funds. An additional aspect of this segment’s activities is the provision of timberland management and related services for a fee to both the Funds and other third-party owners of timberland.
 
 
17

 
 
Our current strategy for adding timberland acreage is centered on our private equity timber fund business model, which consists of raising investment capital from third-party investors and investing that capital in timberland for a fee. We have raised two timber funds and have $150 million in assets under management.  Our 20% co-investment in the Funds, which totals $28 million, affords us a share of the Funds’ operating cash flows while allowing us to earn annual asset management and timberland management fees as well as incentive fees based upon the overall success of each fund. Management also believes that this strategy allows us to maintain more sophisticated expertise in timberland acquisition, valuation, and management than could be cost-effectively maintained for the Partnership’s timberlands alone.

During periods in which the U.S. and, to a much lesser extent, Asian residential real estate markets perform poorly, we tend to experience diminishing financial performance in both our Fee Timber and Real Estate segments. In Fee Timber, declines in building construction affect log prices and volumes directly.  As discussed below in greater detail, we may choose to reduce our harvest during these periods so as to avoid liquidating our timber assets at low prices, an opportunity afforded to us by our relatively low leverage and our relatively low-cost operating model.

Land held for sale in western Washington by our Real Estate segment is suitable primarily for residential and commercial building sites. The markets for these products have recently suffered along with regional and national markets, producing a decline in our sales. Our Real Estate challenges center around how and when to “harvest” a parcel of land and capture the optimum value increment by selling the property, balancing the long-term risks of carrying and developing a property against the potential for income and positive cash flows upon sale.

We have a unit repurchase program which permits repurchases through December 2010.  As of September 30, 2010, we have repurchased approximately 125,000 units with a weighted average unit purchase price of $19.98 and we have an unutilized authorization for unit repurchases of $2.5 million.

RESULTS OF OPERATIONS

The following table reconciles and compares key revenue and cost elements that impacted our net income for the respective quarter and year-to-date periods ended September 30, 2010 and September 30, 2009. In addition to the table’s numerical analysis, the explanatory text that follows the table describes certain of these changes by business segment.

 
18

 

   
Quarter Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
Total
   
Total
 
             
Net income attributable to unitholders:
           
2010 period
  $ 1,050     $ 375  
2009 period
    920       104  
   Variance
  $ 130     $ 271  
                 
Detail of earnings variance:
               
Fee Timber
               
Log price realizations (A)
  $ 1,666     $ 3,354  
Log volumes (B)
    3,676       8,001  
Depletion
    (1,304 )     (2,460 )
Production costs
    (1,507 )     (2,860 )
Other Fee Timber
    (203 )     (51 )
Timberland Management & Consulting
               
Management fee changes
    (20 )     (531 )
Other Timberland Management & Consulting
    (111 )     (171 )
Real Estate
               
Environmental remediation liability
    (5 )     (568 )
Land sales
    (3,120 )     (3,262 )
Other Real Estate
    (87 )     (351 )
General & administrative costs
    (214 )     (862 )
Net interest expense
    1,101       1,078  
Debt extinguishment costs
    -       (1,250 )
Other (taxes, noncontrolling interest, unrealized loss)
    258       204  
Total variance
  $ 130     $ 271  
 
(A) Price variance calculated by extending the change in average realized price by current period volume.
(B)  Volume variance calculated by extending change in sales volume by the average log sales price for the comparison period.
 
Fee Timber
 
Fee Timber results include operations from 114,000 acres of timberland owned by the Partnership and 61,000 acres of timberland owned by the Funds.  Fee Timber revenue is earned primarily from the harvest and sale of logs from these timberlands which are located in western Washington and northwestern Oregon and, to a lesser extent, from leasing cellular communication towers and selling gravel and other resources from our timberlands. Revenue from the sale of timberland tracts will also appear in this segment’s results on the relatively infrequent occasions when those transactions occur. Our Fee Timber revenue is driven primarily by the volume of timber harvested which is generally expressed in thousand board feet (MBF) or million board feet (MMBF). Fee Timber expenses, which consist predominantly of depletion, harvest and transportation costs, vary directly and roughly proportionately with harvest volume and the resulting revenues.  Revenue and costs related to harvest activities on timberland owned by the Funds are consolidated into this discussion of operations.
 
 
19

 
 
Planned Harvest for 2010.  We began 2010 with a plan to harvest 32 MMBF, representing a 47% harvest volume deferral from our estimate of long-term sustainable harvest of 60 MMBF, as calculated prior to the recent Fund II acquisitions. As the first quarter progressed, we responded to improved domestic and export market conditions by moving more of our planned harvest volume forward and, given the improvement in log markets, we have harvested more volume in the first nine months of 2010 than originally planned for the entire year.  Our harvest volume for the year is now expected to total approximately 53 MMBF.  While this constitutes a significant increase over the harvest volume for 2009, it will still be considerably less than our sustainable harvest le vel following the recent additions to the Fund II portfolio.
 
When discussing our Fee Timber operations, we compare current results to both the previous quarter and the corresponding quarter of the prior year. These comparisons offer an understanding of trends in market price and patterns of harvest volumes that affect Fee Timber operating results. Revenue and operating income for the Fee Timber segment for the quarters ended September 30, 2010, June 30, 2010 and September 30, 2009 were as follows:
 
                               
($ Million)
Quarter Ended
 
Log Sale
Revenue
   
Mineral, Cell
Tower &
Other
Revenue
   
Total Fee
Timber
Revenue
   
Operating
Income/(loss)
   
Harvest
Volume
(MBF)
 
Pope Resources Timber
  $ 6.1     $ 0.4     $ 6.5     $ 2.8       12,226  
Timber Funds
    1.7       0.0       1.7       (0.1 )     3,645  
Total Fee Timber September 30, 2010
  $ 7.8     $ 0.4     $ 8.2     $ 2.7       15,871  
                                         
Pope Resources Timber
  $ 6.1     $ 0.3     $ 6.4     $ 3.0       11,654  
Timber Funds
    1.4       -       1.4       0.1       2,803  
Total Fee Timber June 30, 2010
  $ 7.5     $ 0.3     $ 7.8     $ 3.1       14,457  
                                         
Pope Resources Timber
  $ 2.5     $ 0.4     $ 2.9     $ 0.4       6,396  
Timber Funds