<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1997, or
Transition report pursuant to Section 13 or 15(d) of the
- ----- Securities Exchange Act of 1934 [No Fee Required]
For the transition period from ___________to ___________
Commission File No. 1-9035
POPE RESOURCES, A DELAWARE LIMITED PARTNERSHIP
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 91-1313292
- ----------------------- -----------------------
(State of Organization) (IRS Employer I.D. No.)
P.O. Box 1780, Poulsbo, WA 98370
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(Address of principal executive offices Zip Code)
Registrant's telephone number, including area code: (360) 697-6626
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
--------------------------- -----------------------------------------
Depositary Receipts (Units) Pacific Stock Exchange
Depositary Receipts (Units) NASDAQ National Market System
Securities registered pursuant to Section 12(g) of the Act:
None
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ X ]
Approximate aggregate market value of the voting stock held by
nonaffiliates of the registrant as of March 10, 1998 was $107,423,975.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE:
SEE ITEM 14
Exhibit Index Item IV.
<PAGE>
PART I
ITEM 1. BUSINESS.
Pope Resources, A Delaware Limited Partnership (the "Partnership"),
including two of its subsidiaries (Ludlow Water Company and Gamble Village Water
& Sewer Company) was organized in December, 1985 as a result of a spin-off by
Pope & Talbot, Inc. (P&T) of certain of its assets. The Partnership is a
successor to Pope & Talbot Development, Inc. and other P&T affiliates. P&T
acquired its first timberlands in the Puget Sound area in 1853. The Partnership
formed Ludlow Bay Realty in 1993, and ORM, Inc. and Olympic Resource Management
LLC in 1997 which are wholly owned subsidiaries of the Partnership.
FINANCIAL INFORMATION ABOUT SEGMENTS.
Segment financial information is presented in Note 11 to the Partnership's
Financial Statements included with this report.
NARRATIVE DESCRIPTION OF BUSINESS.
The Partnership operates in two primary industry segments, timberland
resources and real estate development. The Partnership's largest segment,
timberland resources, encompasses the growing and harvesting of timber. The
Partnership's other segment, real estate development, consists of residential
development and income-producing properties. All of the Partnership's
operations are conducted within a 50-mile radius of Seattle, Washington. The
following is a detailed description of each industry segment.
TIMBERLAND RESOURCES.
The Partnership's key asset is its tree farm of approximately 76,000 acres.
Its principal operations consist of the growing of timber to its optimal harvest
age, and the subsequent harvesting and marketing of timber and timber products
to both domestic and Pacific Rim markets. The segment produced 65%, 65% and 73%
of the Partnership's consolidated gross revenues in 1997, 1996 and 1995,
respectively.
The dominant timber species on the tree farm is Douglas fir. Douglas fir is
classified as a softwood species, though its strength, flexibility and other
physical characteristics make it generally preferable to other softwoods and
hardwoods for the production of construction grade lumber and plywood. As of
December 31, 1997, the Partnership estimates the tree farm's total merchantable
softwood inventory volume to be 457 million board feet. This compares to
inventory volumes of 470 and 486 million board feet at December 31, 1996 and
1995, respectively. Due to Washington State forest practice regulations that
provide for limited clear-cut size, riparian management zones, wildlife leave
trees, wetlands requirements and other harvest restrictions, the Partnership
estimates that between 7 and 10% of the aforementioned volume is not available
for harvest. The merchantable timber volume is accounted for by the
Partnership's standing timber inventory system, which involves periodic
statistical sampling of the timber (cruising) with annual adjustments made for
estimated growth and the depletion of areas harvested.
The Partnership views the tree farm as a core holding and is managing it
accordingly. As such, the Partnership's annual harvest policy is to operate at
harvest levels that are sustainable and consistent with growth. From year to
year, the policy allows for flexibility in response to the external environment.
For instance, when log markets are weak, annual harvest levels might be reduced
whereas in strong log markets, the annual levels may be above the average. The
Partnership's harvesting schedules are
<PAGE>
based on inventory data that include species, site index, classification of
soils, volume, size and age of the timber. From this information, the
Partnership develops its annual and long-term harvesting plans predicated on
existing and anticipated economic conditions with the objective of maximizing
the long-term returns.
Over the longer term, management anticipates that population and economic
pressures will contribute to the development of increasing portions of the tree
farm. To offset the resulting reductions in the timberland base, management is
actively seeking acquisitions and trades that enhance tree farm ownership.
The Partnership markets its timber in one of two ways. Generally speaking,
management engages independent logging contractors to harvest the standing
timber and manufacture it into logs which management then sells on the open
market. One of the principal markets served is the Pacific Rim. Logs going to
this destination are generally sold to brokers who in turn sell direct to
offshore destinations. Japan is by far the largest consumer of this segment,
though Korea and China are significant from time to time. The balance of the
logs produced are sold domestically to local sawmills and pulp and paper
operations.
The second method in which timber is sold is through stumpage sales, where
standing timber is sold on the stump to purchasers that in turn manage the
harvesting and marketing of the wood. These operations are governed by
provisions of the sales contract, and are closely monitored by management to
ensure compliance with all regulatory and logging requirements. Stumpage sales
are generally used in unique situations where returns can be improved through
the involvement of outside parties.
There are many competitors of the Partnership, most of whom are comparable
in size or larger. The principal areas of competition in the timber business
are pricing and the ability to satisfy volume demands for various types and
grades of timber to the competing market. Management believes that its
location, type and grade of timber will enable it to effectively compete in its
markets. However, the Partnership's products are subject to increasing
competition from a variety of non-wood and engineered wood products as well as
competition from foreign sources.
The Partnership's timber operations require forest management which
primarily consists of reforestation, thinning of the timber to achieve optimal
spacing after stands are established, and fertilization. During 1997, the
Partnership planted 902,000 seedlings on 2,073 acres. This compares to 1996 and
1995 in which the Partnership planted 658,000 and 518,000 seedlings on 1,440 and
1,350 acres, respectively. Management's policy is to stay current on its
reforestation program, returning all timberlands to productive status as soon as
economically feasible following harvest.
Risk of loss from fire, while possible on any timberland, is minimized on
Partnership lands for several reasons. First, the Partnership maintains a well
developed road system that allows access and quick response capability to any
fire that may occur. Next, management maintains a fire plan and program that
provides for increased monitoring activities and requires all operators to
maintain adequate fire suppression equipment during fire season. All of
management's activities are supplemented by the State of Washington's Department
of Natural resources, who are ultimately responsible for all fire suppression
activities in the State. Finally, in the unlikely event of a fire, the
Partnership's Douglas fir stands are less susceptible than other species to
economic loss from fire. Salvage operations can recover a substantial portion of
the green timber value from this species.
<PAGE>
In the operation and management of the tree farm, the Partnership is
subject to federal, state and local laws which govern land use. Management's
objective is to be in compliance with such laws and regulations at all times.
They anticipate that increasingly strict requirements relating to the
environment, natural resources, forestry operations, health and safety matters,
as well as increasing social concern over environmental issues may result in
additional restrictions on the timber operations of the Partnership. This will
in turn result in increased costs, additional capital expenditures and reduced
operating flexibility. Although the Partnership does not consider current laws
and regulations to be materially burdensome, there can be no assurance that
future legislative, governmental or judicial decisions will not adversely affect
the Partnership operations.
The tree farming activities are a year-round operation of the Partnership
and presently employ nine full-time salaried employees, none of which is a
member of a labor union.
REAL ESTATE DEVELOPMENT.
Real estate development consists of residential development and
income-producing properties. Residential development consists of the sale of
single-family homes, finished lots and undeveloped acreage. Income-producing
properties consists of providing water and sewer services to properties in
the Port Ludlow, Washington area; a marina, golf course, commercial shopping
center and RV park operated by the Partnership; certain parcels leased to
Pope & Talbot, Inc.; a restaurant/lounge and related facilities leased to
Village Resorts, Inc. and operated by Derrig Hobart Enterprises, Inc. The
golf, marina, resort and RV park business is seasonal, with the peak season
beginning in May and running through September of each year. The Partnership
holds a 50% interest in a joint venture partnership which completed construction
of a 36-room inn in 1994.
This segment produced 35% in 1997 and 1996 and 27% in 1996 of the
Partnership's consolidated gross revenues.
The principal activity of residential development consists of building
residential dwellings and developing lots in Port Ludlow. This division's key
asset is approximately 4,000 acres of land located in Western Washington, of
which the focus for development is Port Ludlow. Port Ludlow is an active adult
community on approximately 2,000 acres. Work is progressing on five remaining
subdivisions in the partnership's Port Ludlow development. Progress in being
made in activities ranging from permit approval to actual construction for the
final 300 lots in this development.
Other real estate development activities include Bremerton, Gig Harbor,
Kingston, and Hansville. The 260-acre Bremerton project is all located within
the city limits. About 60 acres will be devoted to an industrial park, while
the remaining 200 acres are slated for residential dwellings. Preliminary
project approval for the development was received in 1997 and marketing
activities for the industrial park will commence in 1998.
Gig Harbor, a suburb of Tacoma, is the site of a 320-acre mixed-use
development consisting of 200 acres for residential development; 120 acres for a
business park; and a site for a neighborhood commercial center. Preliminary
environmental studies were completed in 1997 and the goal in 1998 is the
installation of key infrastructure including water service and road
construction.
There are two on-going projects in Kitsap County, a 720-acre residential
development in Kingston and a 200-acre residential development in Hansville.
While significant progress has been made in the governmental entitlement
process, final approval is currently stalled pending the outcome of an unrelated
court case that will establish the appropriate zoning and development
regulations applicable to projects pending throughout the County.
The Partnership's land sales activities are closely associated with the
management of its timber properties. After logging its timberlands, the
Partnership has the option of reforesting the land, developing it for sale as
improved property, or selling it in developed or undeveloped acreage tracts.
Management continually evaluates timber properties in terms of their best
economic use (i.e., whether to continue growing timber or reclassifying the
properties for sale or development). As the Partnership reclassifies timber
properties for sale or development, the Partnership may replace such timber
properties with land purchases in more remote areas. Although the Partnership
believes it has adequate land inventory for future development, additional
properties may be purchased as they become available.
The Partnership competes for property sales with other timber companies
which are as large or larger than the Partnership and have substantial acreage
for sale and development. Management believes location, price and terms of sale
enable the Partnership to compete effectively in these markets.
<PAGE>
The real estate development segment's backlog of sales was approximately
$926,900 as of December 31, 1997, all of which are expected to be closed in
1998. This compares to sales backlogs of $1,089,000 and $2,184,000 as of
December 31, 1996 and 1995, respectively.
Real estate development presently employs 30 full-time salaried employees
and has in the past employed up to an additional 45 seasonal employees. No
employee is a member of a labor union.
Nonclassified assets and operations are composed of the Partnership's
administrative office.
The total number of employees not otherwise classified under a segment is
33, 26 of which are full-time salaried employees. No employee is a member of a
labor union.
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 is
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/or disposing of timberland investments.
ORMLLC participated in recent timberland offerings in each of the three
major geographic regions of the U.S., the northwest, southeast, and
northeast. In December of 1997 ORMLLC won a contract with Hancock Timber
Resource Group to manage over 500,000 acres of timber holdings in Washington,
Oregon, and California.
The amendment to the Limited Partnership Agreement allowing management
to pursue the IPMB limited cumulative net expenditures from pursuing the IPMB
to $5,000,000, including debt guarantees. As of December 31, 1997, the
Partnership has spent approximately $1,500,000 pursuing IPMB opportunities.
The amendment further specifies that income from the IPMB will be split using
a sliding scale allocation method, commencing with 80% to ORM Inc., a subsidiary
of Pope Resources and 20% to Pope MGP, Inc, the managing general partner of the
Partnership. The sliding scale allocation method will evenly divide income
between ORM Inc. and Pope MGP once income reaches $7,000,000 in a fiscal year
from the IPMB. As of December 31, 1997, the IPMB has generated no revenues.
ITEM 2. PROPERTIES.
See the discussion of each segment under "Item 1. Business."
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTER TO A
VOTE OF SECURITY HOLDERS .
No matters were submitted to a vote of the Partnership's unitholders during
the quarter ended December 31, 1997
<PAGE>
PART II
ITEM 5. MARKET FOR PARTNERSHIP'S UNITS
AND RELATED SECURITY HOLDER MATTERS.
The units are traded on both the Pacific Stock Exchange, Inc. and NASDAQ
National Market System. The Partnership's units trade under the ticker symbols
"PRP" (Pacific Stock Exchange) and "POPEZ" (NASDAQ). The following table sets
forth the 1997-1996 quarterly range of high and low prices for the Partnership's
units, as adjusted for the 5 for 1 unit split:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
High Low High Low
--------------------- ---------------------
<S> <C> <C> <C> <C>
First Quarter $ 21.60 $ 17.40 $ 23.40 $ 20.00
Second Quarter $ 23.60 $ 20.30 $ 23.00 $ 21.00
Third Quarter $ 27.20 $ 22.75 $ 23.00 $ 20.40
Fourth Quarter $ 31.00 $ 26.00 $ 21.40 $ 15.80
</TABLE>
The number of registered holders of record of the Partnership's units as of
January 31, 1998 was 437.
During 1997, cash distributions totaled $2,215,000, consisting of
quarterly distributions of $.14, $.14, $.11, and $.10 per unit. The fourth
quarter distribution of $.10 per unit was paid on January 15, 1998. During
1996, cash distributions totaled $3,706,000 consisting of two distributions of
$.47 and $.35 per unit. All cash distributions are at the discretion of the
Partnership's managing general partner, Pope MGP, Inc. The practice of the
Partnership has been to make cash distributions only for the purpose of
defraying the federal and state tax liability of unitholders on their
flow-through share of Partnership net income and as approved from time to
time by the managing general partner.
<PAGE>
Item 6. SELECTED FINANCIAL DATA.
The financial information set forth below for each of the years ending
December 31, 1993 through 1997 is derived from the Partnership's audited
financial statements. This information should be read in conjunction with the
financial statements and related notes included with this report and previously
filed with the Securities and Exchange Commission. Per unit amounts reflected
below have been restated for the 5 for 1 unit split completed in 1997.
<TABLE>
<CAPTION>
(Thousands, except per unit data)
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
--------- --------- --------- --------- ---------
TOTAL REVENUES $ 30,109 $ 33,013 $ 36,162 $ 30,085 $ 34,331
--------- --------- --------- --------- ---------
INCOME FROM
OPERATIONS $ 4,854 $ 9,818 $ 14,799 $ 10,572 $ 16,576
--------- --------- --------- --------- ---------
NET INCOME $ 3,509 $ 8,334 $ 13,090 $ 8,893 $ 14,825
--------- --------- --------- --------- ---------
NET INCOME PER
PARTNERSHIP UNIT $ .78 $ 1.84 $ 2.90 $ 1.93 $ 3.00
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 56,319 $ 54,599 $ 54,147 $ 52,759 $ 48,101
--------- --------- --------- --------- ---------
LONG-TERM DEBT $ 14,048 $ 14,403 $ 17,717 $ 25,451 $ 24,343
--------- --------- --------- --------- ---------
PARTNERS' CAPITAL $ 38,910 $ 37,616 $ 32,988 $ 24,824 $ 20,875
--------- --------- --------- --------- ---------
DISTRIBUTION PER
UNIT $ .49 $ .82 $ 1.06 $ .71 $ 1.13
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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>
- --------------------------------------------------------------------------------
Year Total Softwood Hardwood Pulp Stumpage
Sawlogs Sawlogs Logs
- --------------------------------------------------------------------------------
MMB $/MB MMB $/MB MMB $/MB MMB $/MB MMB $/MB
F F F F F F F F F F
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 33.2 583 24.7 701 1.3 456 7.2 219 - -
1996 31.6 664 23.4 808 1.3 477 6.9 209 - -
1995 38.0 682 26.2 848 .8 490 10.2 329 .8 551
- --------------------------------------------------------------------------------
</TABLE>
Timber log sale revenues totaled $19,486,000, $21,569,000, and $26,399,000 for
the years ended December 31, 1997, 1996, and 1995, respectively.
The Partnership sells its logs into the export and domestic markets. Indirect
sales to the export market totaled 10.3, 12.3, and 13.1 million board feet of
soft wood logs for 1997, 1996, and 1995, respectively.
Export demand for logs is directly affected by the demand from Asian countries.
As nearly all of the Partnership's export logs are sold to Japan, the strength
of the Japanese economy and the relative strength of the United States Dollar
directly affect the demand for export logs. The log export market weakened
through 1997 as the Japanese economy declined and the United States dollar
strengthened relative to the Japanese yen resulting in a decrease of export
sales in 1997. Sales to the export market totaled 42%, 57%, and 52% of total
timber revenues for 1997, 1996, and 1995, respectively. Management anticipates
that the weakness in the Japanese market will continue in the near term and that
this weakness will continue to dampen Japanese demand for export logs from the
U.S.
The Partnership's domestic demand for logs is directly affected by the level of
construction activity on the west coast of the United States. Changes in
general economic and demographic factors have historically caused fluctuations
in housing starts. This affects demand for lumber and commodity wood prices
which in turn drives the demand for logs. The average prices per MBF of domestic
logs realized were $617, $615, and $620 for 1997, 1996 and 1995, respectively.
Management anticipates that the U.S. economy may slow slightly in 1998 which is
expected to reduce demand and price for both lumber and logs. Domestic prices
may further weaken if the lowered export demand results in the diversion of log
volumes from offshore destinations to domestic processing facilities.
A trend of sawmill closures and consolidation of lumber manufacturing capacity
into larger facilities has prevailed throughout the U.S. for the last decade and
is expected to continue into the near future. This trend has held true for the
Partnership's operating region. The decline in log demand within the
Partnership's market has been less than the reduction in the number of mills,
and the Partnership has thus far been successful in finding replacement outlets
for its domestic logs. The Partnership does not believe the decline in the
number of domestic sawmills will materially impact its near-term operations.
REAL ESTATE DEVELOPMENT
<PAGE>
Real estate development revenues for the years ended December 31, 1997, 1996,
and 1995 were $10,623,000, $11,444,000 and $9,763,000, respectively. These
revenues were derived from residential development and income-producing
properties. Residential development consists of the sale of single-family
homes, developed lots and undeveloped acreage. Income-producing properties
consist of the water and sewer facilities providing service 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 $5,825,000, $6,914,000, and
$5,693,000 for the years ended December 31, 1997, 1996, and 1995, respectively.
Revenue in 1996 included the recognition of $544,000 of previously deferred
revenue. The revenue was recognized in 1996 when a contract on a large parcel
was paid. The Partnership's largest development is in Port Ludlow, Washington.
During 1997, the Partnership's development at Port Ludlow generated revenues
of $4,639,000 through the sale of 17 developed lots and 13 homes. This compares
to 1996 sales of $4,946,000 for 8 developed lots, and 17 homes and 1995 sales
of $4,163,000 for 26 developed lots and 14 homes. Revenue per sale depends on
the quality and size of the home, features of the subdivision, and the location
of the lot.
The Partnership's real estate development inventory includes a number of
residential subdivisions encompassing a broad spectrum of prices in several
locales. The Partnership continues to be in the planning and entitlement phases
for several developments located in the West Puget Sound region. In 1997, the
City of Bremerton approved the Partnership's request for preliminary planned
unit development status on a 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 development of a 320 acre mixed use project located within
the Gig Harbor city limits. The Partnership's proposed Kingston residential
development, consisting of 750 acres and 765 units awaits entitlements and
utility infrastructure. On September 8, 1997, the Growth Management Hearings
Board again invalidated Kitsap County's comprehensive plan, where Kingston is
located. The Partnership will participate with other stakeholders within Kitsap
County to revise the plan for resubmission to the State Hearings Board.
Revenue from income-producing properties totaled $4,798,000, $4,530,000, and
$4,070,000 for the years ending December 31, 1997, 1996 and 1995, respectively.
Management expects future revenues to continue to increase modestly. As of
January 1, 1996, the Partnership assumed responsibility for managing the Port
Gamble townsite which had been leased to Pope & Talbot, Inc. Management is
presently studying alternatives to add value to Port Gamble's historic core and
its upland property consisting of approximately 4,000 acres.
<PAGE>
OTHER
Cost of sales as a percentage of sales were 44%, 43%, and 37% during 1997, 1996,
and 1995, respectively. Cost of sales for the Partnership can fluctuate widely
due to the various methods for selling timber and the basis of the land the
Partnership sells.
Selling, general and administrative expenses were $11,942,000, $8,926,000 and
$7,926,000 for the years ending December 31, 1997, 1996, and 1995, 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 in order for us to remain competitive; expenses related to the proxy
statement and unitholder vote held on March 14, 1997; and costs associated with
the development of the investor portfolio management business.
Interest expense in 1997 is consistent with 1996 after a decline in the debt
balance from 1995 to 1996. Interest income in 1997 has increased as a result of
an increase in the balance of contracts receivable.
The Partnership is a 50% joint venture partner in a 36-room inn at Port Ludlow.
The Partnership's share of joint venture losses were $337,000, $378,000 and
$383,000 for the years of 1997, 1996, and 1995, respectively. Management is
working with the Inn to improve occupancy and profitability.
On October 9, 1997, Pope Resources authorized the first-ever split of its
partnership units. Unitholders of record as of October 31, 1997 received an
additional 4 units for each unit then held. The split was 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.
In June 1997, the FASB issued Statement of Financial Accounting Standard 131
"Disclosures about Segments of an Enterprise and Related Information," which
changes the way public companies report information about operating segments.
The Partnership will adopt Statement of Financial Accounting Standard 131 for
the year ended December 31, 1998. This statement is based on the management
approach to segment reporting. Management is in the process of evaluating the
impact of SFAS 131 on the Partnership's financial statements.
<PAGE>
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 December 31, 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 38 million board feet of timber in 1998. Since harvest
plans are based on demand, price and cash needs, actual harvesting may vary
subject to management's on-going review.
Cash provided by operating activities was $5,820,000 for the year ended December
31, 1997. Overall cash and cash equivalents increased by $209,000 in 1997. The
cash generated was primarily used for cash payments to unitholders of
$1,763,000, repayments of long-term debt of $333,000 and capital expenditures of
$3,023,000, related to roads, reforestation, infrastructure, and equipment. In
1996 cash provided by operating activities was $12,330,000 and was used
primarily for debt repayments of $3,289,000, unitholder distributions totaling
$3,706,000, and capital and land expenditures of $2,156,000. In 1995, cash
provided by operating activities generated $17,040,000 and was primarily used
for debt repayments of $7,663,000, capital expenditures of $3,424,000, and
unitholder distributions totaling $4,790,000.
The practice of the Partnership has been to make cash distributions only for the
purpose of defraying the federal and state tax liability of unitholders on their
flow-through share of Partnership net income and as approved from time to time
by the managing general partner. The partnership plans to continue making
quarterly partnership distributions during 1998.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
POPE RESOURCES
A DELAWARE LIMITED PARTNERSHIP
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<PAGE>
POPE RESOURCES, A DELAWARE LIMITED PARTNERSHIP
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
CONTENTS
Page
Independent auditors' report 15
Consolidated financial statements:
Balance sheets 16
Statements of income 17
Statements of cash flows 18
Notes to financial statements 19
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Unitholders
Pope Resources, A Delaware Limited Partnership
Poulsbo, Washington
We have audited the accompanying consolidated balance sheets of Pope Resources,
A Delaware Limited Partnership and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Pope Resources, A Delaware Limited
Partnership and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Seattle, Washington
January 30, 1998
<PAGE>
<TABLE>
<CAPTION>
POPE RESOURCES, A DELAWARE LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1997 AND 1996
(Thousands)
ASSETS
Current assets: 1997 1996
--------- ---------
<S> <C> <C>
Cash and cash equivalents $ 3,950 $ 3,741
Accounts receivable 680 517
Work in progress 10,072 10,522
Contracts and construction
loans receivable 1,433 1,251
Prepaid expenses and other 364 317
--------- ---------
Total current assets 16,499 16,348
Properties and equipment, at cost:
Land and land improvements 15,028 15,047
Roads and timber, net of
accumulated depletion of $8,090
and $7,528 11,067 11,030
Buildings and equipment, net of
accumulated depreciation
of $12,029 and $10,961 10,944 9,600
--------- ---------
37,039 35,677
Other assets:
Contracts receivable, net of
current portion, including related
party receivable of $271 in 1997
and $261 1996 1,877 1,561
Unallocated amenities and project costs 847 936
Other 57 77
--------- ---------
2,781 2,574
--------- ---------
$ 56,319 $ 54,599
--------- ---------
--------- ---------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 852 $ 692
Distribution payable 452
Accrued liabilities 947 586
Current portion of long-term debt 351 325
Deposits 82 110
--------- ---------
Total current liabilities 2,684 1,713
Deficit in investment in joint venture 160 316
Long-term debt, net of current portion 14,048 14,403
Other long-term liabilities 275 275
Deferred profit on contracts receivable 242 276
Commitments and contingencies (Notes 7 and 8)
Partners' capital:
General Partners' capital 519 506
Limited Partners' capital 38,391 37,110
--------- ---------
Total Partners' capital 38,910 37,616
--------- ---------
$ 56,319 $ 54,599
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
POPE RESOURCES, A DELAWARE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Thousands, except per unit data)
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Revenues $ 30,109 $ 33,013 $ 36,162
Cost of revenues (13,313) (14,269) (13,437)
Selling, general and administrative expenses (11,942) (8,926) (7,926)
---------------------------------------
Income from operations 4,854 9,818 14,799
---------------------------------------
Other income (expense):
Interest expense (1,421) (1,388) (1,712)
Interest income 413 282 386
Equity in losses of joint venture (337) (378) (383)
---------------------------------------
(1,345) (1,484) (1,709)
---------------------------------------
Net income $ 3,509 $ 8,334 $ 13,090
---------------------------------------
---------------------------------------
Net income:
Allocable to general partners $ 35 $ 83 $ 131
Allocable to limited partners 3,474 8,251 12,959
---------------------------------------
---------------------------------------
$ 3,509 $ 8,334 $ 13,090
---------------------------------------
---------------------------------------
Net income per partnership unit $ .78 $ 1.84 $ 2.90
---------------------------------------
---------------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
POPE RESOURCES, A DELAWARE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 29,371 $ 33,523 $ 37,422
Cash paid to suppliers and employees (22,575) (20,078) (19,061)
Interest received 428 302 399
Interest paid, net of amounts capitalized (1,404) (1,417) (1,720)
---------------------------------------
Net cash provided by operating activities 5,820 12,330 17,040
---------------------------------------
Cash flows from investing activities:
Capital expenditures (3,023) (2,156) (3,424)
Joint venture investment (492) (425) (140)
---------------------------------------
Net cash used in investing activities (3,515) (2,581) (3,564)
---------------------------------------
Cash flows from financing activities:
Cash distributions to unitholders (1,763) (3,706) (4,790)
Repayments of long-term debt (333) (3,289) (7,663)
Purchase of partnership units (136)
---------------------------------------
Net cash used in financing activities (2,096) (6,995) (12,589)
---------------------------------------
Net increase (decrease) in cash and cash
equivalents 209 2,754 887
Cash and cash equivalents:
Beginning of year 3,741 987 100
---------------------------------------
End of year $ 3,950 $ 3,741 $ 987
---------------------------------------
---------------------------------------
Reconciliation of net income to net
cash provided by operating activities:
Net income $ 3,509 $ 8,334 $ 13,090
Adjustments to reconcile net income to net cash
provided by operating activities:
Cost of land and timber sold 306 1,192 133
Land resale expenditures (288) (106) (461)
Depreciation and depletion 1,647 1,458 1,559
Loss on equity in joint venture 337 378 383
Deferred profit (34) (511) 27
Increase (decrease) in cash from changes in
operating accounts:
Accounts receivable (163) 530 125
Work in progress 539 912 575
Contracts receivable (498) 566 1,067
Accounts payable and accrued liabilities 521 (272) 261
Deposits (28) (56) 54
Other, net (28) (95) 227
---------------------------------------
Net cash provided by operating activities $ 5,820 $ 12,330 $ 17,040
---------------------------------------
---------------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
POPE RESOURCES, A DELAWARE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. Summary of significant accounting policies:
Nature of Operations:
Pope Resources, A Delaware Limited Partnership (the "Partnership"), is a
publicly-traded limited partnership engaged principally in tree farming
operations and real estate development in Western Washington. Tree farming
operations include the sale of logs, and the selling of standing timber
under cutting contracts or other arrangements. Real estate development
includes the sale of single-family homes, finished lots and undeveloped
acreage, and various commercial operations.
The partnership is currently developing an investment portfolio management
business (IPMB). The vehicle for this business is Olympic Resource
Management LLC (ORMLLC). The business is expected to acquire and/or manage
properties for third party land owners and institutional investors. The
amendment to the Limited Partnership Agreement allowing management to
pursue the IPMB limited cumulative net expenditures from pursuing the IPMB
to $5,000,000, including debt guarantees. As of December 31, 1997, the
Partnership has spent approximately $1,500,000 pursuing IPMB opportunities.
The amendment further specifies that net income from the IPMB will be split
using a sliding scale allocation method, commencing with 80% to ORM, Inc.,
a subsidiary of Pope Resources, and 20% to Pope MGP, Inc, the managing
general partner of the Partnership. The sliding scale allocation method
will allocate income evenly between ORM, Inc. and Pope MGP once net income
reaches $7,000,000 in a fiscal year from the IPMB. As of December 31,
1997, the IPMB has not generated revenues.
Principles of consolidation:
The consolidated financial statements include the accounts of the
Partnership and its wholly-owned subsidiaries, ORM, Inc., Olympic Resource
Management LLC, Ludlow Water Company, Ludlow Bay Realty and Gamble Village
Water and Sewer Company. Significant intercompany balances and transactions
have been eliminated in consolidation.
Use of estimates in financial statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Work in progress:
Work in progress consists of land and direct development costs, including
capitalized interest, of lots and dwellings which are completed or are
expected to be substantially completed and available for sale in the
upcoming year and are recorded at the lower of cost or net realizable
value.
Contracts receivable:
The Partnership sells land parcels under contracts requiring a minimum
cash down payment of twenty percent and having financing terms of up to
eight years at interest rates of ten percent. The Partnership reduces
credit risk on contracts through collateral on the underlying land and
down payment requirements.
<PAGE>
POPE RESOURCES, A DELAWARE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Summary of significant accounting policies (continued):
Principal payments on contracts receivable for the next five years are due
as follows:
<TABLE>
<CAPTION>
(Thousands)
-----------
<S> <C> <C>
1998 $155
1999 183
2000 146
2001 448
2002 125
</TABLE>
Unallocated amenities and project costs:
Unallocated amenities and project costs represent indirect development
costs for long-term real estate development projects. These costs are
expensed based on anticipated project sales of residential dwellings and
lots over the life of the project.
Properties and equipment:
Depreciation is provided using straight-line methods over the estimated
useful lives of the assets which range from 5 to 39 years. Depletion of
logging roads and costs of fee timber harvested are provided at rates based
on unrecovered costs and estimated recoverable volume of softwood timber.
When facts and circumstances indicate the carrying value of properties may
be impaired, an evaluation of recoverability is performed by comparing the
carrying value of the property to the projected future cash flows. Upon
indication that the carrying value of such assets may not be recoverable,
the Partnership would recognize an impairment loss by a charge against
current operations.
Revenue recognition:
Revenue on timber sales is recorded when title and risk of loss passes to
the buyer. Revenue on real estate sales is recorded on the date the sale
closes. The Partnership uses the installment method of accounting for real
estate sales transactions until 20% to 25% of the contract sales value has
been collected, at which time the full accrual method of accounting is
used.
Income per partnership unit:
Income per partnership unit is computed using the weighted average number
of units outstanding during each year (4,519,470 units in 1997 and 1996,
and 4,519,565 units in 1995). There were 4,519,470 units outstanding at
December 31, 1997 and 1996. All unit numbers were adjusted to reflect the
5 for 1 stock split to owners of record on October 31, 1997. The unit
options outstanding had no dilutive impact to net income per Partnership
unit.
<PAGE>
POPE RESOURCES, A DELAWARE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Summary of significant accounting policies (continued):
Statement of cash flows:
The Partnership considers all highly-liquid debt instruments with a
maturity of three months or less when purchased to be cash equivalents.
Non-cash investing activities include a transfer of $287,000 to work
in progress during 1995.
Reclassifications:
Certain reclassifications have been made to the prior years' financial
statements to conform with the current year's presentation.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 131 "Disclosures about Segments of an
Enterprise and Related Information," which changes the way public companies
report information about operating segments. The Partnership will adopt
SFAS 131 for the year ended December 31, 1998. This statement is based on
the management approach to segment reporting. Management is in the process
of evaluating the impact of SFAS 131 on the Partnership's financial
statements.
2. Income taxes:
The Partnership is not subject to income taxes. Instead, each partner is
taxed on their share of the Partnership's taxable income, whether or not
distributed.
The following schedule reconciles net income reported for financial statement
purposes to consolidated taxable income:
<TABLE>
<CAPTION>
(Thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income per financial statements $ 3,509 $ 8,334 $ 13,090
Difference in reporting depreciation (163) (37) (104)
Cost basis of land, timber and homes sold 29 175 269
Difference in reporting depletion (116) (27) (130)
Deferred profit from differences in the use of the
installment method (129) 326 315
Other, net 1 4 292
-------------------------------------------------
Consolidated taxable income $ 3,131 $ 8,775 $ 13,732
-------------------------------------------------
-------------------------------------------------
</TABLE>
<PAGE>
POPE RESOURCES, A DELAWARE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
3. Long-term debt:
Long-term debt at December 31 consisted of:
<TABLE>
<CAPTION>
(Thousands) 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage note payable to an insurance company
with interest at 9.65%,
collateralized by timberlands, with a
minimum monthly payment of $136,000,
maturing May 2022 $ 13,935 $ 14,212
Local improvement district assessments, with
interest ranging from 6.5% to 10%, due
through 2009 464 516
---------------------------------
14,399 14,728
Less current portion 351 325
---------------------------------
$ 14,048 $ 14,403
---------------------------------
---------------------------------
</TABLE>
The Partnership has a $20 million revolving term loan agreement. There was
no balance outstanding on the agreement as of December 31, 1997 and 1996.
The maximum available borrowings are reduced by $10 million on September
30, 2000 and the agreement expires on September 30, 2001.
The Partnership debt agreements contain certain financial statement ratio
covenants and have tangible net worth requirements for which the
Partnership is in compliance as of December 31, 1997. The minimum net worth
requirements for the bank and the insurance company notes were $32,975,000
as of December 31, 1997. The net worth requirements increase each year by
a percentage of the current year's net income. The mortgage note payable
also includes debt repayment provisions in the event of timber harvests in
excess of specified amounts.
Principal payments on long-term debt for the next five years are due as
follows:
<TABLE>
<CAPTION>
(Thousands)
---------
<S> <C> <C>
1998 $351
1999 382
2000 411
2001 448
2002 489
</TABLE>
4. Fair value of financial instruments:
The Partnership's financial instruments include cash and cash equivalents,
accounts receivable, contracts receivable, and variable rate debt, for
which the carrying amount of each approximates fair value. The fair value
of contracts receivable was determined based on current yields for similar
contracts. The fair value of fixed rate debt having a carrying value of
$14,399,000 and $14,728,000, has been estimated based on current interest
rates for similar financial instruments and totals $15,796,000 and
$15,350,000 as of December 31, 1997 and 1996, respectively.
5. Partners' capital:
The general partners of the Partnership are Pope MGP, Inc. and Pope EGP,
Inc. Allocations of partner distributions and net income are based on units
held.
<PAGE>
POPE RESOURCES, A DELAWARE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
5. Partners' capital: (Continued)
The following presents the partners' capital account activity for the three
years ended December 31, 1997:
<TABLE>
<CAPTION>
(Thousands)
General Limited
Partners Partners Total
----------------------------------------
<S> <C> <C> <C>
January 1, 1995 $ 392 $ 24,432 $ 24,824
Repurchase of 8,500 units (136) (136)
Distributions (63) (4,727) (4,790)
Net income 131 12,959 13,090
----------------------------------------
December 31, 1995 $ 460 $ 32,528 $ 32,988
Distributions (37) (3,669) (3,706)
Net income 83 8,251 8,334
----------------------------------------
December 31, 1996 $ 506 $ 37,110 $ 37,616
Distributions (22) (2,193) (2,215)
Net income 35 3,474 3,509
----------------------------------------
December 31, 1997 $ 519 $ 38,391 $ 38,910
----------------------------------------
----------------------------------------
</TABLE>
Distributions in 1997 include $.10 per Partnership unit paid January 15,
1998.
6. Unit Option Plan
The Partnership's 1997 Unit Option Plan authorized the granting of
nonqualified unit options to employees, officers, and directors of the
Partnership. A total of 300,000 units have been reserved for issuance
under the plan, of which 42,500 were granted during 1997 at a strike price
of $20 per unit. Unit options are granted at prices not less than the fair
value of the limited partnership units on the date of the grant. The
options generally become exercisable over a four year period and have a
maximum term of 10 years. No options were exercisable at December 31,
1997.
<PAGE>
POPE RESOURCES, A DELAWARE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
6. Unit Option Plan (continued)
The Partnership accounts for unit-based compensation in accordance with APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Accordingly,
compensation cost for unit options is measured as the excess, if any, of
the fair value of the Partnership's units at the date of grant over the
amount an employee must pay to acquire the unit. No compensation expense
has been recognized on original grants of unit options, which have all had
an exercise price not less than the fair value of the Partnership's unit
price on the date of the grant. Had compensation expense for unit option
grants been recognized based on the fair value at the grant date consistent
with the method described in SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, the Partnership's net income would not have been materially
affected.
7. Employee benefits:
Full-time salaried employees with one year of service are eligible to
receive benefits under a defined contribution plan. The Partnership is
required to contribute 3% of eligible employee compensation into the plan,
which amounted to $60,000, $49,000, $48,000 for December 31, 1997, 1996,
and 1995, respectively. The Partnership also accrued $181,000 in 1995
related to a supplemental retirement plan for a key employee.
8. Commitments:
In the ordinary course of business, and as part of the entitlement and
development process, the Partnership is required to provide performance
bonds and letters of credit to assure completion of certain public
facilities. The Partnership had performance bonds and letters of credit
outstanding totaling $712,000 and $1,821,000 at December 31, 1997 and 1996,
respectively.
9. Joint Venture
In 1994, the Partnership entered into a joint venture, as 50% owner, to
develop and manage a real estate investment property. The Partnership's
share of joint venture losses have been accounted for using the equity
method of accounting and, as of December 31, 1997 and 1996, exceed the
Partnership's capital investment. Such excess has been recorded as a
liability as the Partnership is a joint and several guarantor with its
partner of joint venture debt obligations, which amount to $5,182,000 and
$5,750,000 as of December 31, 1997 and 1996, respectively.
<PAGE>
POPE RESOURCES, A DELAWARE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
10. Related party and major customer transactions:
Pope MGP, Inc. is the managing general partner of the Partnership and
receives an annual fee of $150,000.
A director of Pope MGP, Inc. is also a director of Pope & Talbot, Inc.
(P&T). In 1997 the Partnership received lease payments of $75,000 from
P&T for lease of a log dump site at Port Gamble, Washington. Under an
agreement between P&T and the Partnership which expired on December 31,
1995, P&T managed the townsite of Port Gamble and a log dump at Port
Ludlow for an annual fee of $175,000.
A former director of Pope MGP, Inc. was a managing director of MRGC and
is its President and Chief Executive Officer and a director of Merrill &
Ring, Inc. MRGC was 50%-owned by Merrill & Ring, Inc. Such individual
served as a director of Pope MGP, Inc. during 1995. During the year
ended December 31, 1995, the Partnership paid $268,000 for fees and
commissions related to export timber sales through MRGC which totaled
$4,389,000.
In 1996, the Partnership sold one of its residential homes at Port
Ludlow, Washington to Gary F. Tucker, a Director, President, and CEO of
Pope MGP, Inc. in connection with his relocation and employment by Pope
MGP. The Partnership holds Mr. Tucker's promissory note for a portion
of the purchase price with a balance of $271,000 and $261,000 at
December 31, 1997 and 1996, respectively. The note bears interest at
6.48% and requires interest-only payments until maturity in 2001.
The partnership contracts with a company which is owned by a relative
of the President and Chief Executive Officer to direct the Partnership's
outreach acquisition program, including location of potential property
and negotiation of acquisition terms for property to be included in
investor portfolios. The partnership paid $102,000 to the company during
1997. The President and Chief Executive Officer has no ownership interest
in the Company.
The Partnership had a note receivable from an individual participating
with the Partnership in a joint venture to develop and manage real
estate. The balance of the note receivable was $224,000 and $106,000 at
December 31, 1997 and 1996, respectively
Major customers in 1997 include two customers with timber sales of
$4,475,000 and $2,663,000, respectively. Major customers in 1996
include two customers with timber sales of $6,312,000 and 3,723,000.
Sales to a major customer in 1995 were to a related party, as described
above.
<PAGE>
POPE RESOURCES, A DELAWARE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
11. Segment information:
The Partnership's operations are classified into two segments:
timberland resources and real estate development. Identifiable assets
are those used exclusively in the operations of each industry segment or
those allocated when used jointly. Non-allocable assets of the
Partnership include cash, accounts receivable, certain prepaid expenses
and the Partnership's administrative office. Details of the
Partnership's operations by business segment for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
(Thousands) Timberland Real Estate
Resources Development Administrative Consolidated
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Revenues $ 19,486 $ 10,623 $ 30,109
Income (loss) from operations 10,151 (727) $ (4,570) 4,854
Depreciation and depletion 573 763 311 1,647
Identifiable assets 16,015 33,515 6,789 56,319
Capital and land expenditures 719 769 1,884 3,372
1996
Revenues $ 21,569 $ 11,444 $ 33,013
Income (loss) from operations 13,650 (77) $ (3,755) 9,818
Depreciation and depletion 505 800 153 1,458
Identifiable assets 15,947 33,178 5,474 54,599
Capital and land expenditures 490 1,249 526 2,265
1995
Revenues $ 26,399 $ 9,763 $ 36,162
Income (loss) from operations 18,087 (904) $ (2,384) 14,799
Depreciation and depletion 592 842 125 1,559
Identifiable assets 17,414 32,648 4,085 54,147
Capital and land expenditures 2,555 1,265 70 3,890
</TABLE>
Sales to the export market which primarily are indirect were $8,200,
$12,300 and $13,700 for 1997, 1996, and 1995, respectively.
<PAGE>
POPE RESOURCES, A DELAWARE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
12. Quarterly financial information (unaudited):
<TABLE>
<CAPTION>
Income/(loss) Net Income/(loss)
(Thousands, except from Net Income per
per unit data) Revenues Operations /(loss) Partnership unit
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
First quarter $ 7,080 $ 2,045 $ 1,683 $ .37
Second quarter 7,526 1,086 739 .16
Third quarter 8,591 2,017 1,761 .39
Fourth quarter 6,912 (294) (674) (.14)
1996
First quarter $ 9,139 $ 4,344 $ 3,894 $ .86
Second quarter 9,282 3,560 3,209 .71
Third quarter 8,676 2,220 1,916 .42
Fourth quarter 5,916 (306) (685) (.15)
1995
First quarter $ 7,350 $ 2,818 $ 2,395 $ .53
Second quarter 11,437 5,609 5,289 1.17
Third quarter 8,053 3,029 2,722 .60
Fourth quarter 9,322 3,343 2,684 .60
</TABLE>
<PAGE>
Item 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Managing General Partner of the Partnership is Pope MGP, Inc. Its
address is the same as the address of the principal offices of the Partnership.
Pope MGP, Inc. receives $150,000 per year for acting as managing general partner
of the Partnership.
The following table identifies the directors of Pope MGP, Inc. as of
December 31, 1997. The Partnership has no directors. Officers of Pope MGP,
Inc. hold identical offices with the Partnership.
<TABLE>
<CAPTION>
Name Age Position and Background
- -------------------------------- --- ------------------------------------------------------------------------
<S> <C> <C>
Adolphus Andrews, Jr. (1), (2) 75 Director; President of Andrews Associates, Inc., 1981 to present.
Peter T. Pope (1), (2) 63 Director; President, CEO and Chairman of the Board of Pope & Talbot,
Inc., 1971 to present.
Gary F. Tucker (3)(4) 62 Director; President and CEO of Pope MGP, Inc. and the Partnership since
December 1995; President of Trees Inc., June 1989 to December 1995; Vice
President Resources of Plum Creek Timber Company, Inc., March 1984 to
May 1989.
Marco F. Vitulli (4) 63 Director; President, Vitulli Ventures Ltd., 1980 to present.
Douglas E. Norberg (2) 57 Director; President, Wright Runstad & Company, 1975 to present.
David Cunningham (3) 51 Vice President Public Affairs, since June 1996, Vice President Land Use
from December 1985 to June 1996 of Pope MGP, Inc. and the Partnership;
Planning Director, Pope & Talbot Development, Inc., July 1978 to
December 1985.
Thomas R. Gilkey (3) 51 Senior Vice President Timberland and Acquisitions since January 1997 of
Pope MGP, Inc. and the Partnership. Private consultant from January 1994
to December 1996. Executive Vice President, The Campbell Group 1987 to
1994. Timberland Division Manager of Crown Zellerbach 1974 to 1987.
Meredith R. Green (3) 38 Vice President Finance and Treasurer since December 1997, Controller and
Treasurer from January 1997 to December 1997 of Pope MGP, Inc. and the
Partnership. Controller of Trillium Corporation from October 1995 to
December 1996; Controller of Fiberchem/Hanna Resin Distribution from
December 1989 to October 1995; Emerging Business Consultant with Ernst
and Young from September 1986 to December 1989.
<PAGE>
Thomas A. Griffin (3) 40 Vice President Income Properties from June 1996, Treasurer and
Controller from November 1991 to June 1996, and Controller from March
1989 to October 1991, and Assistant Controller May 1988 to February 1989
of Pope MGP, Inc. and the Partnership; Property Manager of Wood
Associates, January 1986 to April 1988; Controller of Vestar, January
1984 to January 1986
Craig L. Jones (3) 43 Senior Vice President General Counsel and Secretary since September 1996
of Pope MGP, Inc. and the Partnership. Private law practice from 1981
to 1996.
Gregory M. McCarry (3) 48 Senior Vice President Real Estate since June 1996, Vice President
Development from November 1987 to June 1996 of Pope MGP, Inc. and the
Partnership; owner of Pace Builders, 1986 to November 1987; Treasurer of
Security Resources, Inc., from 1983 to 1986
Dave Nunes (3) 36 Vice President Portfolio Development since December 1997, Director of
Portfolio Development from April 1997 to December 1997 of Pope MGP,
Inc. and the Partnership; Strategic Planning Director of Weyerhaeuser
Company from June 1988 to April 1997.
Thomas M. Ringo (3) 44 Senior Vice President Finance and Client Relations since June 1996, Vice
President Finance from November 1991 to June 1996, and Treasurer from
March 1989 through October 1991 of Pope MGP, Inc. and the Partnership;
Tax Manager of Westin Hotel Company, 1985 to March 1989; Tax Consultant
for Price Waterhouse, 1981 to 1985
</TABLE>
(1) Mr. Pope is the first cousin of Emily T. Andrews, Mr. Andrews' wife.
(2) Terms expire December 31, 1998.
(3) Term as an officer expires December 31, 1998.
(4) Term as a director expires December 31, 1999.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth certain information concerning the cash
compensation paid to each of the five most highly compensated executive officers
of the Partnership.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------
Annual Compensation
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Name and Other All Other
Principal Salary Bonus Annual Compensation
Position Year ($) ($)(1) Compensation ($)(3)
($)(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gary F. Tucker
CEO & President 1997 252,000 100,000 4,800
1996 240,000 110,000
- --------------------------------------------------------------------------------
Greg McCarry 1997 144,581 44,400 4,800
Sr. V.P. Real 1996 136,048 50,000 4,363
Estate 1995 132,400 60,500 4,500
- --------------------------------------------------------------------------------
Craig Jones 1997 141,750 80,500 4,800
Sr. V.P. General 1996 45,000 20,000
Counsel(4)
- --------------------------------------------------------------------------------
Thomas M Ringo 1997 130,000 45,600 4,800
Sr. V.P. Finance 1996 107,925 50,000 3,960
and Client Relations 1995 100,850 21,000 3,510
- --------------------------------------------------------------------------------
Thomas Gilkey 1997 130,000 73,700 4,800
Sr. V.P. Timber
& Acquisitions
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) Amounts represent bonuses or commissions earned in the year shown but paid
in either the current or following years.
(2) Perquisites and other personal benefits paid to each named executive
officer in each instance aggregated less than 10% of the total annual
salary and bonus for each officer and accordingly were omitted from the
table as permitted by the rules of the Securities and Exchange
Commission (SEC).
(3) Amounts represent contributions to the Partnerships 401(k) plan.
(4) Mr. Jones was hired as the Partnership's Sr. V.P. General Counsel in
September, 1996.
<PAGE>
COMPENSATION PURSUANT TO UNIT OPTIONS
During 1997 unit options were issued at the unit market value as follows:
<TABLE>
<CAPTION>
Potential
Realizable Value at
Assumed Annual
Rates of Stock Price
Appreciation
For Option Term
- -----------------------------------------------------------------------------------------------------------------------------------
% of Total
Number Options Granted
Securities to Employees in
Underlying Fiscal Year Exercise Expiration Date
Name Options Price 5% 10%
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gary F. Tucker
CEO & President 15,000 (1) 35% 20 3/14/07 $150,000 $300,000
Greg McCarry
Sr. V.P. Real Estate 3,750 (1) 9% 20 3/14/07 37,500 75,000
Craig Jones
Sr. V.P. General Counsel 3,750 (1) 9% 20 3/14/07 37,500 75,000
Thomas M. Ringo
Sr. V.P. Finance 3,750 (1) 9% 20 3/14/07 37,500 75,000
and Client Relations
Thomas Gilkey
Sr. V.P. Timber & 3,750 (1) 9% 20 3/14/07 37,500 75,000
Acquisitions
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Options granted vest annually over four years. As of December 31,
1997, there were no vested unit options.
<PAGE>
COMPENSATION OF DIRECTORS.
Compensation of the directors of Pope MGP, Inc. consisted of a monthly fee
of $1,500 plus a $1,000 per day fee for each board meeting attended.
EMPLOYEE BENEFIT PLANS.
Full-time salaried employees with one year of service are eligible to
receive benefits under a defined contribution plan. The Partnership is required
to contribute 3% of eligible employee compensation into the plan, which amounted
to $60,000, $49,000, and $48,000 for each of the three years ended December 31,
1997. Employees become fully vested over a six year period in the Partnership's
contribution.
The Partnership has a supplemental retirement plan for a retired key
employee. The plan provides for a retirement income of 70% of the employee's
base salary at retirement after taking into account both 401(k) and social
security benefits. The Partnership accrued $181,000 for this benefit in 1995.
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL UNITHOLDERS.
As of December 31, 1997, the following persons were known or believed by
the Partnership to be the beneficial owners of more than five percent (5%) of
the outstanding Partnership units:
<TABLE>
<CAPTION>
Title of Name and Address of Amount and Nature of Percent
Class Beneficial Owner Beneficial Ownership (1) of Class
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Units Private Capital Management, Inc. 1,321,266 (2) 29.2
3003 Tamiami Trail North
Naples, FL 33940
Units Emily T. Andrews 557,100 (3) 12.3
600 Montgomery Street
35th Floor
San Francisco, CA 94111
Units Peter T. Pope 314,345 (4) 7.0
1500 S.W. 1st Avenue
Portland, OR 97201
</TABLE>
(1) Each beneficial owner has sole voting and investment power unless otherwise
indicated.
(2) Private Capital Management, Inc. is an investment adviser shown registered
under the Investors Advisers Act of 1940. Units are held in various accounts
managed by Private Capital Management, Inc. which shares dispositive powers as
to those units.
(3) Includes 1,090 units owned by her husband, Adolphus Andrews, Jr. as to
which she disclaims beneficial ownership. Also includes a total of 60,000 units
held by Pope MGP, Inc. and Pope EGP, Inc., as to which she shares voting and
investment power.
(4) Includes 53,420 units held in trust for his children. Also includes a
total of 60,000 units held by Pope MGP, Inc., and Pope EGP, Inc., as to which he
shares investment and voting power.
<PAGE>
MANAGEMENT.
As of December 31, 1997, the beneficial ownership of the Partnership units
of (I) the general partners, (II) the directors of the Partnership's general
partners, and (III) the Partnership's general partners, directors and officers
of the Partnership as a group was as follows:
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership Percent of Class
Name Position and Offices (1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Adolphus Andrews, Jr. Director, Pope MGP, Inc. and Pope EGP, 557,100 (2) 12.3
Inc. (3)
Peter T. Pope Director, Pope MGP, Inc. and Pope EGP, 314,345 (4) 7.0
Inc. (5)
Pope EGP, Inc. Equity General Partner 54,000 1.2
Pope MGP, Inc. Managing General Partner 6,000 *
Marco Vitulli Director, Pope MGP, Inc. 1,000 *
Douglas Norberg Director, Pope MGP, Inc. 2,250 *
Thomas M. Ringo Senior Vice President Finance, Pope MGP, 500 *
Inc. and the Partnership
All general partners, directors and officers of general partners, and 815,195 (6) 18.0
officers of the Partnership as a group (11 individuals and 2 partners)
</TABLE>
* Less than 1%
(1) Each beneficial owner has sole voting and investment power unless
otherwise indicated.
(2) Includes 499,510 units as to which he shares investment and voting power.
Also includes units owned by Pope MGP, Inc. or Pope EGP, Inc., as to all of
which he disclaims beneficial ownership. See footnote (3) under "Principal
Unitholders."
(3) Mr. Andrews is also Vice President of Pope EGP, Inc.
(4) See footnote (4) under "Principal Unitholders."
(5) Mr. Pope is also President of Pope EGP, Inc.
(6) For this computation, the 60,000 units held by Pope MGP, Inc. and Pope
EGP, Inc. are excluded from units beneficially owned by Mr. Pope and Mr.
Andrews. All of the outstanding stock of Pope MGP, Inc. and Pope EGP, Inc.
is owned by Mr. Pope and Mr. Andrews' wife, Emily T. Andrews.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Partnership Agreement provides that it is a complete defense to any
challenge to an agreement or transaction between the Partnership and a general
partner, or related person, due to a conflict of interest if, after full
disclosure of the material facts as to the agreement or transaction and the
interest of the general partner or related person, (1) the transaction is
authorized, approved or ratified by a majority of the disinterested directors of
the managing general partner, Pope MGP, Inc., or (2) the transaction is
authorized by partners of record holding more than fifty percent (50%) of the
units held by all partners.
In 1996, the Partnership sold one of its residential homes at Port
Ludlow, Washington to Gary F. Tucker, a Director, President, and CEO of Pope
MGP, Inc. in connection with his relocation and employment by Pope MGP, Inc.
The Partnership holds Mr. Tucker's promissory note for a portion of the
purchase price which has a principal balance of $271,000 bears interest at
6.48% per annum, requires interest-only payments and matures in 2001
The Partnership contracts with a company, which is owned by a relative of
Gary F. Tucker to direct the Partnership's outreach acquisition program,
including location of potential property and negotiation of acquisition terms
for property to be included in investor portfolios. During the last fiscal
year, the Partnership paid fees totaling $102,000 for services provided by
the company. Mr. Tucker has no ownership interest in the company.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS. Page
Financial Statements: . . . . . . . . . . . . . . . . . . .11
Independent auditor's report. . . . . . . . . . . . . . . .13
Consolidated Balance Sheets . . . . . . . . . . . . . . . .14
Consolidated Statements of Income . . . . . . . . . . . . .15
Consolidated Statements of Cash Flows . . . . . . . . . . .16
Notes to Consolidated
Financial Statements . . . . . . . . . . . . . . . . 17 - 24
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the last quarter of the
fiscal year ended December 31, 1997.
(c) EXHIBITS.
3.1 Partnership's Certificate of Limited Partnership. (1)
3.2 Partnership's Limited Partnership Agreement, dated as of
November 7, 1985.(1)
3.3 Amendment to Partnership's Limited Partnership Agreement dated
December 16, 1986.(2)
3.4 Amendment to Partnership's Limited Partnership Agreement
dated March 14, 1997. (4)
4.1 Specimen Depositary Receipt of Registrant. (1)
4.2 Partnership's Limited Partnership Agreement dated as of
November 7, 1985 and amended December 16, 1986 (see Exhibits
3.1 and 3.3).
9.1 Shareholders Agreement entered into by and among Pope MGP,
Inc., Pope EGP, Inc., Peter T. Pope, Emily T. Andrews, P&T,
present and future directors of Pope MGP, Inc. and the
Partnership, dated as of November 7, 1985 included as Appendix
C to the P&T Notice and Proxy Statement filed with the
Securities and Exchange Commission on November 12, 1985, a
copy of which was filed as Exhibit 28.1 to the Partnership's
registration on Form 10 identified in footnote (1) below. (1)
10.1 Transfer and Indemnity Agreement between the Partnership and
P&T dated as of December 5, 1985. (1)
10.2 Management Agreement between the Partnership and P&T dated as
of December 5, 1985. (1)
10.3 Ground Leases between the Partnership as Lessor and P&T as
Lessee dated December 3, 1985. (1)
22.1 Subsidiaries of the Partnership. (3) and (4)
28.1 Certificate of Incorporation of Pope MGP, Inc. (1)
<PAGE>
28.2 Amendment to Certificate of Incorporation of Pope MGP, Inc. 3)
28.3 Bylaws of Pope MGP, Inc. (1)
28.4 Certificate of Incorporation of Pope EGP, Inc. (1)
28.5 Amendment to Certificate of Incorporation of Pope EGP, Inc.
(3)
28.6 Bylaws of Pope EGP, Inc. (1)
- --------------------
(1) Incorporated by reference from the Partnership's registration
on Form 10 filed under File No. 1-9035 and declared effective
on December 5, 1985.
(2) Incorporated by reference from the Partnership's annual report
on Form 10-K for the fiscal year ended December 31, 1987.
(3) Incorporated by reference from the Partnership's annual report
on Form 10-K for the fiscal year ended December 31, 1988.
(4) Incorporated by reference from the Partnership's Proxy
Statement filed on February 14, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By POPE MGP, INC.
Managing General Partner
Date: March 27,1998 By
---------------------------------
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Date: March 27,1998 By
-------------------------------------
GARY F. TUCKER,
President, Chief Executive Officer
(principal executive officer),
Partnership and Pope MGP, Inc.;
Director, Pope MGP, Inc.
Date: March 27, 1998 By
-------------------------------------
THOMAS M. RINGO
Senior Vice President Finance and Client
Relations (principal financial officer),
Partnership and Pope MGP, Inc
Date: March 27,1998 By
-------------------------------------
MEREDITH R. GREEN
Vice President Finance and Treasurer
(principal accounting officer),
Partnership and Pope MGP, Inc.
<PAGE>
Date: March 27,1998 By
-------------------------------------
ADOLPHUS ANDREWS, JR.
Director, Pope MGP, Inc.
Date: March 27,1998 By
-------------------------------------
PETER T. POPE
Director, Pope MGP, Inc.
Date: March 27,1998 By
-------------------------------------
MARCO F. VITULLI
Director, Pope MGP, Inc.
Date: March 27,1998 By
-------------------------------------
DOUGLAS E. NORBERG
Director, Pope MGP, Inc.
