<PAGE> 1
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 Third Quarter Ending September 30, 1997
OR
( ) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-9035
POPE RESOURCES, A DELAWARE
LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
DELAWARE 91-1313292
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
19245 10TH AVENUE NE, POULSBO, WA 98370
Telephone: (360) 697-6626
(Address of principal executive offices including zip code)
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
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P A R T I
ITEM 1
FINANCIAL STATEMENTS
2
<PAGE> 3
Pope Resources
September 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
(Thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 3,493 $ 3,741
Accounts receivable 1,582 517
Work in progress 9,767 10,522
Current portion of contracts receivable 1,027 1,251
Prepaid expenses and other 525 317
------- -------
Total current assets 16,394 16,348
------- -------
Properties and equipment at cost:
Land and land improvements 15,241 15,047
Roads and timber (net of
accumulated depletion) 11,067 11,030
Buildings and equipment (net of
accumulated depreciation) 11,316 9,600
------- -------
37,624 35,677
------- -------
Other assets:
Contracts receivable, net of current portion 1,717 1,561
Unallocated amenities and project costs 978 936
Loan fees and other 60 77
------- -------
2,755 2,574
------- -------
$56,773 $54,599
======= =======
Liabilities and Partners' Capital
Current liabilities:
Accounts payable $ 952 $ 692
Accrued liabilities 500 586
Current portion of long-term debt 344 325
Deposits 95 110
------- -------
Total current liabilities 1,891 1,713
------- -------
Deficit in investment in joint venture 206 316
Long-term debt, net of current portion 14,127 14,403
Other long-term liabilities 275 275
Deferred profit on contracts receivable 255 276
Partners' capital 40,019 37,616
------- -------
$56,773 $54,599
======= =======
</TABLE>
3
<PAGE> 4
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Pope Resources
Three Months and Nine Months Ended September 30, 1997 and 1996
(Thousands, except per unit data)
<TABLE>
<CAPTION>
Three Months Ended Sept. 30 Nine Months Ended Sept. 30
-------- -------- -------- --------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 8,591 $ 8,658 $ 23,198 $ 27,180
Cost of sales (3,828) (4,092) (9,665) (10,989)
Selling and administration expenses (2,746) (2,347) (8,384) (6,067)
-------- -------- -------- --------
Income from operations 2,017 2,219 5,149 10,124
-------- -------- -------- --------
Other income (expense):
Interest expense (376) (337) (1,077) (1,052)
Interest income 109 62 321 206
Equity in losses of joint venture 11 (28) (209) (259)
-------- -------- -------- --------
(256) (303) (965) (1,105)
-------- -------- -------- --------
Net income $ 1,761 $ 1,916 $ 4,184 $ 9,019
======== ======== ======== ========
Allocable to general partners $ 18 $ 19 $ 42 $ 90
Allocable to limited partners 1,743 1,897 4,142 8,929
-------- -------- -------- --------
$ 1,761 $ 1,916 $ 4,184 $ 9,019
======== ======== ======== ========
Net income per partnership unit $ 1.95 $ 2.12 $ 4.63 $ 9.98
======== ======== ======== ========
</TABLE>
4
<PAGE> 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Pope Resources
Nine Months Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
(Thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Net cash flows from operating activities $ 4,822 $ 10,684
Cash flows from investing activities:
Capital expenditures (2,733) (879)
Joint venture investment (318) (325)
-------- --------
Net cash used in investing activities (3,051) (1,204)
-------- --------
Cash flows from financing activities:
Cash distributions to unitholders (1,763) (2,124)
Repayment of long-term debt (256) (3,224)
-------- --------
Net cash used in financing activities (2,019) (5,348)
-------- --------
Net increase (decrease) in cash and cash equivalents (248) 4,132
Cash and cash equivalents at beginning of year 3,741 987
-------- --------
Cash and cash equivalents at end of the nine month period $ 3,493 $ 5,119
======== ========
</TABLE>
5
<PAGE> 6
POPE RESOURCES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1997
1. The consolidated financial statements have been prepared by the
Partnership without an audit and are subject to year-end adjustments.
Certain information and footnote disclosures in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
the rules and regulations of the Securities and Exchange Commission. In
the opinion of the Partnership, the accompanying consolidated balance
sheets as of September 30, 1997 and December 31, 1996 and the
consolidated statements of income for the three months and nine months
ending September 30, 1997 and 1996 and cash flows for the nine months
ending September 30, 1997 and 1996 contain all adjustments necessary to
present fairly the financial statements referred to above. The results of
operations for any interim period are not necessarily indicative of the
results to be expected for the full year.
2. The financial statements in the Partnership's 1996 annual report on Form
10-K include a summary of significant accounting policies of the
Partnership and should be read in conjunction with this Form 10-Q.
3. Net income per unit is based on 903,894 units.
4. Supplemental disclosure of cash flow information: Interest paid amounted
to approximately $1,065,000 and $1,080,000 for the nine months ended
September 30, 1997 and 1996, respectively.
5. Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per
Share," was recently issued and is effective for the Partnership's fiscal
year ending December 31, 1997. This statement requires a change in the
presentation of earnings per share. Early adoption of this statement is
not permitted. Management believes that the impact of the adoption of
this statement on the financial statements, taken as a whole, will not be
material.
SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information,"
were also recently issued and are effective for the Partnership's fiscal
year ending December 31, 1998. The Partnership is currently evaluating
the effects of these standards; however, management believes the impact
of adoption will not be material to the financial statements, taken as a
whole.
6
<PAGE> 7
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
September 30, 1997
This discussion should be read in conjunction with the Partnership's
consolidated financial statements included with this report.
RESULTS OF OPERATIONS
TIMBERLAND RESOURCES
The Partnership harvested the following timber:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Softwood Hardwood
Total Sawlogs Sawlogs Pulp Logs
- -----------------------------------------------------------------------------------------------------------------
Year MMBF $/MBF MMBF $/MBF MMBF $/MBF MMBF $/MBF
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Jan - Sept 1997 25.3 613 19.6 722 .8 446 4.9 208
- -----------------------------------------------------------------------------------------------------------------
Jan - Sept 1996 27.8 658 20.6 803 1.0 466 6.2 206
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Timber log sale revenues for the nine months ended September 30, 1997 and 1996
was $15,510,000 and $18,300,000, respectively.
During the first three quarters of 1997 the export log market experienced a
steady price decline. In response, the Partnership deferred a portion of its
anticipated first-half log production with the intent of balancing out the
annual harvest with increased production in the third and fourth quarters. While
third quarter production was accelerated, year-to-date log volumes still lag
1996 levels by 9%. The Partnership also shifted a significant amount of
production mix away from the highest-valued, large-diameter export market
segment to the lower-valued domestic and small-diameter export market segments.
This was intended to allow the excessive west coast export log inventories
within the large-diameter export market segment to draw down. This product mix
shift has resulted in a 24% decrease in export production and a 26% increase in
domestic production over 1996 year-to-date levels. The combination of the
decline in export prices, along with the lower year-to-date volumes and shifts
in product mix, account for the decrease in 1997 timber revenues.
Domestic log prices during the first three quarters of 1997 have remained
relatively fairly similar to the prior year, despite increases in the supply of
domestic logs entering this segment in reaction to the declining export market.
There has been a 37% increase in price of domestic Western Red Cedar over 1996
which has been a contributing factor in this trend, even though cedar is limited
to 7% of this year's domestic production to date. The average prices per MBF of
domestic logs realized were $633 and $619 for 1997 and 1996, respectively. Pulp
and hardwood log prices in 1997 are on average slightly higher than 1996 prices,
but 1997 prices experienced more volatility with first quarter declines being
offset by higher second and third quarter prices.
The Partnership sells its logs and trees in two major markets: export and
domestic markets. Indirect sales to the export market totaled 52% and 66% of
total timber revenues for the nine month periods ending September 30, 1997 and
1996, respectively. The export demand for logs is directly affected by the
demand from Asian countries. Since the Partnership's export logs are sold
primarily in the Japanese log market, the strength of the Japanese housing
industry and the relative strength of the United States dollar directly affect
the demand for export logs. The export market weakened in the first three
quarters due to high Japanese and west coast log inventory levels, a relatively
strong dollar and increased competition from lower-quality, lower-priced species
and an increase in the supply of sawed lumber versus logs into Japan.
7
<PAGE> 8
TIMBERLAND RESOURCES CONTINUED
The domestic demand for logs is directly affected by the level of new home
construction and repair and remodeling business activity. Changes in general
economic and demographic factors have historically caused fluctuations in
housing starts. This in turn affects demand for lumber and commodity wood prices
which drives the demand for logs. Throughout the U.S., lumber manufacturing
capacity continues to be rationalized and consolidated into larger facilities.
This trend holds true for the Partnership's operating region as the lumber
manufacturing capacity is rationalized and consolidated into larger facilities.
As the number of sawmills has declined, the Partnership has thus far been
successful in finding replacement outlets for its domestic logs. Since surviving
sawmills are larger in scale, the Partnership does not believe the decline in
the number of domestic sawmills will materially impact its near-term operations.
PROPERTY DEVELOPMENT
Property development revenues for the periods ended September 30, 1997 and 1996
were $7,627,000 and $8,385,000, respectively. Such revenues are derived from
residential development and income-producing properties. Residential development
consists of the sale of single-family homes, finished lots and undeveloped
acreage. Income-producing properties consist of providing water and sewer
services to properties in the Port Ludlow area; a marina, golf course,
commercial center and RV park operated by the Partnership; the Port Gamble
townsite and millsite; and a restaurant/lounge and related facilities leased to
Village Resorts, Inc. and operated by Derrig Hobart Enterprises, Inc..
Revenue from residential development totaled $3,766,000 and $4,739,000 through
the three quarters ended September 30, 1997 and 1996, respectively. Recognition
of deferred revenue of $544,000 related primarily to the pay off of a contract
on a large parcel, was included in the three quarters ended September 30, 1996.
The Partnership's largest development is in Port Ludlow, Washington. During the
first three quarters of 1997, the Partnership's development at Port Ludlow
generated revenues of $3,191,000 through the sale of 13 developed lots and 9
homes. This compares to the prior year's comparable period sales of $3,164,000
of 6 developed lots, and 10 homes. The revenue per sale depends on the quality
and size of the home, the subdivision, and the location of the lot. Current
year-to-date sales have been favorably affected by the continuing strength of
the Puget Sound economy and favorable interest rate environment.
The Port Ludlow Planning Forum process has continued to produce positive
results. The outstanding level of participation and enthusiasm among residents
of this special community was encouraging. In the next phase of the process, the
Partnership will seek to obtain the following approvals from residents:
- - Unify numerous homeowner associations under one newly-formed
self-governance entity
- - Consolidate association "clubhouse" amenities into one facility instead of
the current two
- - Define the future development in the key resort/commercial area.
The successful culmination of this process should position us to complete the
amenity infrastructure of Port Ludlow and thereby realize the vision of making
this a "hallmark development." Port Ludlow was selected as one of the top 20
retirement communities in the U.S. by New Choices, a magazine serving the
over-50 audience.
The Partnership's property development inventory includes a number of
residential subdivisions encompassing a broad spectrum of prices in several
locales. The Partnership continues to be in the planning and entitlement phases
for several developments located in the West Puget Sound region. The City of
Bremerton approved the Partnership's request for preliminary planned unit
development status on a 270 acre property, and increased the industrial portion
to 60 acres. Construction of the off-site sewer at this site is completed and
the Partnership is focusing on its marketing plan. With respect to other
properties, the Partnership continues to work with officials in Gig Harbor
regarding the possible development of its parcels in Gig Harbor. The Kingston
residential development, consisting of 750 acres and 765 units awaits
entitlements and sewage infrastructure. On September 8, 1997, the Growth
Management Act hearing board again invalidated Kitsap County's comprehensive
plan, where Bremerton and Kingston are located. The Partnership will participate
with other members of the County to revise the plan for resubmission to the
state hearing board.
8
<PAGE> 9
PROPERTY DEVELOPMENT CONTINUED
Revenue from income-producing properties totaled $3,861,000 and $3,646,000 for
the periods ending September 30, 1997 and 1996, respectively. Operations were
fairly consistent for the periods ending September 30, 1997 and 1996 and
management expects future revenues to continue to increase. As of January 1,
1996, the Partnership assumed responsibility for managing the Port Gamble
townsite from Pope & Talbot, Inc. Management is presently studying how to
capitalize on the values of Port Gamble's historic core and its attendant area
of approximately 4,000 acres.
OTHER
The Partnership is a 50% joint venture partner in a 36-room inn at Port Ludlow.
For the first three quarters of 1997 the inn showed an increase in occupancy
over the first three quarters of 1996, but nevertheless performed below
expectations. Management of the joint venture continues to focus on the
development of revenue-raising strategies. The Partnership's share of joint
venture losses were $209,000 and $259,000 for the first three quarters of 1997
and 1996, respectively.
On March 14, 1997, the Partnership's unitholders authorized the Partnership's
launch of a new strategic initiative called the Investor Portfolio Management
Business (IPMB). The vehicle for this initiative will be Olympic Resource
Management LLC (ORMLLC) which will seek investors interested in developing
risk-diversified portfolios of timber and land. This business venture is
expected to generate fee income through ORMLLC's services to large investors in
acquiring, managing, and disposing of timberland investments.
Selling, general and administrative expenses were $8,384,000 and $6,067,000 for
the nine months ending September 30, 1997 and 1996, respectively. The increase
in expenses is primarily due to the following: payroll and employee-related
costs such as education, insurance, travel and entertainment; professional
services related to computer technology to enhance our internal systems to
remain competitive; expenses related to the proxy statement and unitholder
holder vote held on March 14, 1997; and costs associated with the
above-mentioned strategic initiative.
The Partnership remains focused on pursuing timberland acquisition opportunities
through our newly-formed investment portfolio management business. ORMLLC
participated in recent timberland offerings in each of the three major
geographic regions of the U.S., the northwest, southeast, and northeast.
Although not successful in these bids, we are encouraged by a number of factors.
The Partnership is making great strides in streamlining our process for
assessing potential timberland acquisitions. Olympic Resource Management is
starting to make a name for itself among competing timberland investment
management organizations (TIMO's) through our collective experience, acquisition
discipline, and stewardship values. As a result, more major landowners are
approaching ORMLLC with investment opportunities.
On October 9, 1997, Pope Resources authorized the first-ever split of its
partnership units. Unitholders of record as of October 31, 1997 will receive an
additional 4 units for each unit then held. The split is intended to bring the
units to a price level where they can be more easily traded in the marketplace,
and to meet new Nasdaq listing requirements.
LIQUIDITY AND CAPITAL RESOURCES
Funds generated internally through operations and externally through financing
will provide the required resources for the Partnership's real estate
development and capital expenditures. Management considers its capital resources
to be adequate for its real estate development plans, both in the near-term and
on a long-term basis. At September 30, 1997, the Partnership had available an
unused $20 million bank loan commitment.
Management has considerable discretion to increase or decrease the level of logs
cut and thereby may increase or decrease net income and cash flow assuming, of
course, log prices and demand remain stable. Management's current plan is to
harvest approximately 32 million board feet of timber in 1997 which compares to
32 million board feet in 1996. Since harvest plans are based on demand, price
and cash needs, actual harvesting may vary subject to management's on-going
review.
9
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES CONTINUED
Cash provided by operating activities generated $4,822,000 for the three
quarters of 1997, and overall cash and cash equivalents decreased by $248,000.
The cash generated was primarily used for repayments of long-term debt of
$256,000 and capital expenditures of $2,733,000, related to roads,
reforestation, infrastructure, and equipment.
The Partnership declared a quarterly cash distribution of $.55 per unit payable
on September 26, 1997 to unitholders of record as of September 15, 1997. The
practice of the Partnership has been to make cash distributions only for the
purpose of defraying estimated federal and state tax liability of unitholders on
their flow-through share of the Partnership's net income and as approved from
time to time by management. The recently enacted reduction in the federal
capital gains rate factored into the third quarter distribution. Thus far in
1997, the Partnership has made three cash distributions totaling $1.95 per unit,
coinciding with tax payment due dates.
10
<PAGE> 11
PART II
Items 1 through 6 are not applicable.
EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 Financial Data Schedule
11
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POPE RESOURCES
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POPE RESOURCES,
A Delaware Limited Partnership
Registrant
Date: November 13, 1997 By: POPE MGP, Inc.
Managing General Partner
Date: November 13, 1997 By:
----------------------------------
Gary F. Tucker
President and Chief Executive Officer
Date: November 13, 1997 By:
----------------------------------
Thomas M. Ringo
Sr. Vice President-Finance & Client Relations
(Principal Financial Officer)
Date: November 14, 1997 By:
----------------------------------
Meredith R. Green
Treasurer/Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,493
<SECURITIES> 0
<RECEIVABLES> 1,582
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,394
<PP&E> 57,020
<DEPRECIATION> 19,396
<TOTAL-ASSETS> 56,773
<CURRENT-LIABILITIES> 1,891
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 40,019
<TOTAL-LIABILITY-AND-EQUITY> 56,773
<SALES> 23,198
<TOTAL-REVENUES> 23,198
<CGS> 9,665
<TOTAL-COSTS> 9,665
<OTHER-EXPENSES> 8,384
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,077
<INCOME-PRETAX> 4,072
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,184
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,184
<EPS-PRIMARY> 4.63
<EPS-DILUTED> 4.63
</TABLE>
