<PAGE>
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 First Quarter Ending March 31, 1999
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
----- -----
<PAGE>
P A R T I
ITEM 1
FINANCIAL STATEMENTS
<PAGE>
CONSOLIDATED BALANCE SHEETS (Unaudited)
Pope Resources
March 31, 1999 and December 31, 1998
<TABLE>
<CAPTION>
(Thousands) 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 1,002 $ 2,666
Accounts receivable 2,200 639
Work in progress 12,298 11,199
Current portion of contracts receivable 592 611
Prepaid expenses and other 257 368
------- -------
Total current assets 16,349 15,483
------- -------
Properties and equipment at cost:
Land and land improvements 16,463 16,701
Roads and timber (net of
accumulated depletion) 12,340 11,272
Buildings and equipment (net of
accumulated depreciation) 16,046 16,028
------- -------
44,849 44,001
------- -------
Other assets:
Contracts receivable, net of current portion 1,786 1,780
Unallocated amenities and project costs 1,114 1,073
Other 356 369
------- -------
3,256 3,222
------- -------
$64,454 $62,706
------- -------
------- -------
Liabilities and Partners' Capital
Current liabilities:
Accounts payable $ 831 $ 777
Accrued liabilities 1,318 1,383
Current portion of long-term debt 390 382
Minority interest 68 256
------- -------
Total current liabilities 2,607 2,798
------- -------
Long-term debt, net of current portion 13,641 13,818
Deferred profit 194 194
Partners' capital 48,012 45,896
-------- -------
$64,454 $62,706
------- -------
------- -------
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Pope Resources
Three Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
(Thousands, except per unit data)
1999 1998
------- --------
<S> <C> <C>
Revenues $12,566 $ 9,948
Cost of sales (3,063) (2,729)
Operating expenses (4,244) (2,726)
Selling general and administrative (2,265) (1,702)
-------- -------
Income from operations 2,994 2,791
-------- -------
Other income (expense):
Interest expense (324) (358)
Interest income 30 150
Equity in earnings / (losses) of joint venture - (120)
-------- -------
(294) (328)
-------- -------
Income before income taxes and minority interest 2,700 2,463
Minority interest (17) (126)
-------- -------
Income before income taxes 2,683 2,337
Income tax provision (116) -
-------- -------
Net income $ 2,567 $ 2,337
-------- -------
-------- -------
Allocable to general partners $ 34 $ 31
Allocable to limited partners 2,533 2,306
-------- -------
$ 2,567 $ 2,337
-------- -------
-------- -------
Earnings per unit:
Basic $ 0.57 0.52
-------- -------
-------- -------
Fully diluted $ 0.57 $ 0.52
-------- -------
-------- -------
Weighted average units outstanding:
Basic 4,519 4,519
-------- -------
-------- -------
Fully diluted 4,536 4,528
-------- -------
-------- -------
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Pope Resources
Three Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
(Thousands) 1999 1998
-------- --------
<S> <C> <C>
Net cash flows from operating activities $ 1,116 $ 2,340
Cash flows from investing activities:
Capital expenditures (1,971) (1,196)
Joint venture investment - (125)
-------- --------
Net cash used in investing activities (1,971) (1,321)
-------- --------
Cash flows from financing activities:
Cash distributions to unitholders (452) (452)
Minority interest distribution (208)
Repayment of long-term debt (149) (82)
-------- --------
Net cash used in financing activities (809) (534)
-------- --------
Net increase (decrease) in cash and cash equivalents (1,664) 485
Cash and cash equivalents at beginning of period 2,666 3,950
-------- --------
Cash and cash equivalents at end of the period $ 1,002 $ 4,435
-------- --------
-------- --------
</TABLE>
<PAGE>
POPE RESOURCES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1999
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 March 31, 1999 and December 31, 1998
and the consolidated statements of income for the three months ended
March 31, 1999 and 1998 and cash flows for the three months ended March
31, 1999 and 1998 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 1998 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. Fully diluted earnings per unit include the dilutive impact of unit
options outstanding.
4. Supplemental disclosure of cash flow information: Interest paid
amounted to approximately $342,000 and $365,000 for the three months
ended March 31, 1999 and 1998, respectively.
5. Revenues and operating income by segment for the three months ending
March 31 is as follows:
<TABLE>
<CAPTION>
Timberland
(Thousands) Resources Real Estate Administrative Consolidated
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Revenues $10,476 $ 2,090 $ - $12,566
Income (loss) from operations 5,369 (443) (1,932) 2,994
1998
Revenues $ 7,642 $ 2,306 - $ 9,948
Income (loss) from operations 4,239 (12) $(1,436) 2,791
</TABLE>
6. Certain reclassifications have been made to 1998 amounts to conform to
1999 presentation.
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
March 31, 1999
This discussion should be read in conjunction with the Partnership's
consolidated financial statements included with this report.
RESULTS OF OPERATIONS
TIMBERLAND RESOURCES
Timberland Resources revenues were $10,476,000 and $7,642,000 for the three
months ended March 31, 1999 and 1998, respectively. The increase in revenues
resulted primarily from an increase in timber harvested from the Partnership's
tree farm and to a lesser extent revenues from the forestry consulting business
acquired in December 1998.
In December of 1998 the Partnership acquired the assets comprising Simons Reid
Collins, a division of H.A. Simons Ltd. of Vancouver, British Columbia.
Timberland Resources revenues were positively impacted by inclusion of these
revenues in 1999 results. The business, which now operates as ORM Resources
Canada Ltd, is expected to expand the Partnership's ability to market timberland
management and forestry consulting services globally to owners and managers of
timberlands.
The Hancock Timber Resource Group (HTRG) contract to provide timberland
management services currently covers over 500,000 acres in Washington, Oregon,
California, and British Columbia. Total acres under management for HTRG is
subject to change from time to time as HTRG's client portfolios are adjusted. As
such changes occur, Timberland Resources revenues will fluctuate with an
increase in acres bringing a positive impact and a decrease in acres producing
an adverse effect. An example of such a portfolio change occurred recently when
HTRG, on behalf of one of its pension fund clients, chose to sell 25,000 acres
of timberland in northern California.
Other changes can potentially occur if existing HTRG clients choose to select an
investment manager other than HTRG. An example of such a change occurred
recently when HTRG was notified of the State Teachers Retirement System of
Ohio's (STRSO) plan to change investment managers in the first half of 1999.
This will affect the Partnership inasmuch as the Timberland Resources business
segment has been managing 97,000 acres of STRSO's portfolio on behalf of the
current investment manager, HTRG. The decrease in acres under management is
expected to have an adverse effect on revenues in 1999.
The Partnership harvested and sold the following timber for the three months
ended March 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Year Softwood Hardwood
Sawlogs Pulp Logs and Other Totals
- -------------------------------------------------------------------------------------------------------------------
Volume Price Volume Price Volume Price Volume Price
MMBF $/MBF MMBF $/MBF MMBF $/MBF MMBF $/MBF
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 11.2 $615 2.1 $207 0.1 $528 13.4 $554
1998 7.9 $589 2.5 $283 0.2 $469 10.6 $516
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
MMBF = million board feet
MBF = thousand board feet
Log revenues from the Partnership's fee timberland ownership are significantly
affected by export log market conditions. The majority of the Partnership's
export log volume is sold to Japan. The Japanese export market showed some signs
of recovery in the first quarter of 1999. The average price of export logs sold
was $696 per MBF, which represented a 2% increase from the comparable period in
1998. More
<PAGE>
significantly, export log volumes increased. Export log volumes sold through
domestic intermediaries for the three months ended March 31, 1999 and 1998
were 4,826 MBF and 2,495 MBF, respectively. As a result, management has
accelerated the timing of planned 1999 log production into the first half of
the year and, to the extent possible, focused more heavily on timber stands
with a higher mix of export-suitable logs. The proportion of export logs to
total volume harvested has thus increased to 36% in 1999 from 23% in 1998.
As export log prices change, logs may be diverted to or from the domestic log
market. This can cause a shift in the domestic supply-demand balance, which in
turn impacts log prices. The average price of domestic logs sold were $553 and
$547 per MBF for the first three months of 1999 and 1998, respectively. Domestic
sawlog volumes for the three months ended March 31, 1999 and 1998 were 6,375 MBF
and 5,400 MBF, respectively. Domestic log demand is directly and indirectly
affected by the level of new home construction, repair and remodel expenditures,
weather, and market conditions in foreign markets (especially Asia). Interest
rate fluctuations, population demographics, and changes in general economic
conditions are factors that influence housing starts. The level of existing
homes sold, together with interest rate movements, heavily influence repair and
remodel expenditures. In combination these forces affect the demand for lumber
which in turn drives the demand for logs. All of these factors affect the price
the Partnership receives from the sale of its log production.
Pulp log volumes for the three months ended March 31, 1999 and 1998 were 2,092
MBF and 2,548 MBF, respectively. Pulp markets were relatively weak in the first
quarter of 1999. The average price of pulp logs sold were $207 and $283 per MBF
for the first three months of 1999 and 1998, respectively. As management shifted
log production to capitalize on the relatively strong export log market, the
proportion of the total harvest mix attributable to pulp log volume declined to
16% from 24% in 1998.
In January of 1999, the Partnership acquired 512 acres of timberland for
$1,300,000. The property acquired is contiguous to the Partnership's Hood Canal
tree farm and will be managed with the Partnership's other properties in western
Washington.
In the operation and management of its tree farm, the Partnership is subject to
federal, state and local laws that govern land use. Management's objective is to
be in compliance with such laws and regulations at all times. Management
anticipates that increasingly strict governmental requirements and a growing
social concern relating to environmental and endangered species issues may
result in additional restrictions on the timber operations of the Partnership.
The material risk of loss from fire, while possible on any timberland, is
minimized on Partnership lands by maintaining a well-developed road system, and
an established fire monitoring and suppression plan. The Washington State
Department of Natural Resources supplements all of management's activities and
is ultimately responsible for all fire suppression activities in the state.
REAL ESTATE
Real Estate 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 center around the Port
Ludlow resort community and consist of the 36-room Heron Beach Inn on Ludlow
Bay, a 27-hole championship golf course, a 300-slip saltwater marina, a
restaurant/lounge, commercial center, RV park, and water and sewer services
provided to Port Ludlow residents and businesses. Income-producing properties
also include properties in Port Gamble and Kingston. Real Estate revenues for
the three months ended March 31, 1999 and 1998 were $2,090,000 and $2,306,000,
respectively
Revenues from residential development for the three months ended March 31, 1999
and 1998 were $762,000 and $1,368,000, respectively. Management believes the
decrease in residential development revenue is primarily attributable to the
inclement weather experienced in western Washington during the first quarter of
1999.
The Partnership's largest development is in Port Ludlow, Washington. During the
three months ending March 31, 1999, the Partnership's development at Port Ludlow
generated revenues of $392,000 on 1 finished lot sale and 2 home sales. This
compares to the prior year's comparable period revenue of
<PAGE>
$908,000 on 6 finished lot sales and 2 home sales. Revenue realized per sale
depends on the quality and size of the home, the subdivision, and the
location of the lot.
Revenue from income-producing properties totaled $1,328,000 and $938,000 for the
three months ended March 31, 1999 and 1998, respectively. The increase resulted
from revenue earned by the Heron Beach Inn on Ludlow Bay. Prior to 1999 the
Partnership held a 50% interest in the joint venture that owned the Inn. In
December 1998, the Partnership increased its ownership interest in the Inn to
100% through a buyout of its partner. As a result of the acquisition, revenues
and expenses from the Inn are now included in the Partnership's operating
income.
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 a planned unit development
on a 260-acre property. The industrial portion of the Bremerton property is 60
acres. Construction of the off-site sewer 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 has two additional ongoing projects in Kitsap County, a
720-acre residential development in Kingston and a 200-acre residential
development in Hansville. Development of these sites was delayed pending
resolution of a lawsuit in which the Partnership was not a party. In April of
1999, the Washington State Court of Appeals rendered a favorable decision and
the Partnership is currently evaluating plans to move forward with development
of these projects.
Land holdings throughout Washington State are affected by the state's Growth
Management Act, which requires counties to submit comprehensive plans that
identify the future direction of growth and stipulate where population densities
are to be concentrated. In Jefferson County, in which Port Ludlow is located,
the State Hearings Board approved the County's Comprehensive Plan. In this plan
Port Ludlow was granted status as a Master Planned Resort thereby ensuring
future build-out and development of the resort. The Partnership is now working
with local residents and Jefferson County to adopt a zoning ordinance for Port
Ludlow. In Kitsap County, where Port Gamble is located, the State Hearings Board
rendered a decision in February of 1999 invalidating Port Gamble's designation
as an urban growth area and directed the County to re-designate Port Gamble with
an appropriate rural based zoning. The Partnership, in cooperation with the
County, is in the process of seeking approval to designate Port Gamble as an
area of more intensive rural development. The Partnership expects to complete
this process with the County in the fall of 1999.
OTHER
The following table sets forth expenses as a percentage of revenues for the
three months ending March 31:
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
Revenues 100% 100%
Cost of sales 24 27
Operating expenses 34 27
Selling, general and administrative expenses 18 17
------------- ------------
Operating income 24% 28%
------------- ------------
------------- ------------
</TABLE>
Cost of sales as a percentage of revenues declined due to a decrease in revenues
earned from residential development. Revenues from the sale of homes and lots
tend to include a relatively high cost-of-sales component. Operating expenses as
a percentage of revenues increased due to an increase in operating expenses
associated with timberland management. Prior-year costs reflect the build-up in
infrastructure at the inception of the HTRG contract and, accordingly, only
partially captured the normalized operating level shown in 1999's results.
Selling, general and administrative expenses increased slightly as a percentage
of revenues as a result of costs incurred to develop the infrastructure
necessary to administer the newly acquired forestry consulting business and
Heron Beach Inn, both of which were acquired in December of 1998.
<PAGE>
The income tax provision for the three months ended March 31, 1999 relates to
taxable income of the Partnership's corporate subsidiaries.
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 other capital expenditures. Management may also consider
increasing the Partnership's debt to total capitalization ratio to participate
in investments in real property, if the investments meet the Partnership's
requirements of return and provide a good fit with the Partnership's portfolio
of properties. Management considers its capital resources to be adequate for its
current plans. At March 31, 1999, 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 log
prices and demand remain stable. Management's current plan is to harvest
approximately 38 million board feet of timber in 1999. Since harvest plans are
based on demand and pricing, actual harvesting may vary subject to management's
ongoing review.
Cash provided by operating activities was $1,116,000 for the first three months
of 1999, and overall cash and cash equivalents decreased by $1,664,000 during
the three-month period. The cash generated from operations was primarily used
for capital expenditures of $1,971,000 and cash distributions to unitholders of
$452,000.
During the first quarter of 1999, Mr. Adolphus Andrews retired from the Board of
Directors of Pope MGP, the Partnership's General Partner. Mr. Joseph O. Tobin II
was selected to join Pope MGP's Board of Directors and his term expires on
December 31, 2000.
The first quarter 1999 cash distribution of $.10 per unit, payable to
unitholders of record on March 17, 1999, was paid on March 31, 1999.
YEAR 2000
The Partnership has hired consultants to help evaluate its exposure related to
year 2000 (Y2K) issues and to develop a plan to fix hardware or software that is
not Y2K compliant. Projected costs of identifying Y2K issues, fixing software
and hardware that is not Y2K compliant, and querying major vendors and customers
to determine their state of readiness are not expected to be greater than
$250,000. Costs incurred through March 31, 1999 total $180,000. Management has
completed the process of identifying the hardware, software, and related
equipment that must be modified, upgraded, or replaced to minimize the
possibility of a material disruption of its business. Management has essentially
achieved Y2K compliance for all of its critical internal systems, and expects to
complete this process for its remaining systems no later than the third quarter
of 1999. In addition to computer equipment, the Y2K consultants are currently
assessing the potential impact of Y2K compliance issues for other equipment with
embedded date-sensitive processors.
In addition, management has initiated communications with suppliers of major
hardware, software, and other related equipment used, operated, or maintained by
the Partnership, to identify and, to the extent possible, resolve issues
involving Y2K compliance. The Partnership has not received notification by these
suppliers of significant unresolved Y2K problems. However, there can be no
assurance that these suppliers will resolve all potential Y2K problems, whether
currently known or not, before the occurrence of a material disruption to the
business of the Partnership.
To date, the majority of suppliers and customers contacted have confirmed that
they will be Y2K compliant prior to January 1, 2000 or have indicated that the
status of their Y2K compliance has yet to be determined. However, management can
give no assurance that the Y2K issue will not materially affect its suppliers or
customers. In addition, management can give no assurance that failure by its
suppliers and customers to achieve Y2K compliance will not have a significant
impact on the Partnership's business.
<PAGE>
However, management intends to continue with follow-up communications until
all critical suppliers and customers have indicated their status and/or
compliance. In the event that a significant customer or vendor were not able
to operate after the year 2000, the resulting interruption in the
Partnership's business could lead to costs in excess of management's estimate
of expenses related to Y2K compliance.
A framework for developing contingency plans in the event of significant
interruptions of internal systems or our supplier's or customer's businesses is
currently being developed. Contingency plans are expected to be complete late in
1999. Management believes that the most reasonably likely worst case scenario
relating to Y2K compliance could relate to a potential disruption in cash
processing from failures of customers and/or financial institutions.
<PAGE>
PART II
Items 1 through 5 are not applicable.
6. EXHIBITS AND REPORTS ON FORM 8-K
None.
Exhibit 27. Financial Data Schedule
<PAGE>
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: May 10, 1999 By: POPE MGP, Inc.
Managing General Partner
Date: May 10, 1999 By:
-----------------------------------------
Gary F. Tucker
President and Chief Executive Officer
Date: May 10, 1999 By:
----------------------------------------
Thomas M. Ringo
Sr. Vice President Finance & Client Relations
(Principal Financial Officer)
Date: May 10, 1999 By:
----------------------------------------
Meredith R. Green
Vice President Finance and Treasurer
(Principal Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,002
<SECURITIES> 0
<RECEIVABLES> 2,200
<ALLOWANCES> 0
<INVENTORY> 12,298
<CURRENT-ASSETS> 16,349
<PP&E> 67,411
<DEPRECIATION> 22,562
<TOTAL-ASSETS> 64,454
<CURRENT-LIABILITIES> 2,607
<BONDS> 13,641
0
0
<COMMON> 0
<OTHER-SE> 48,012
<TOTAL-LIABILITY-AND-EQUITY> 64,454
<SALES> 8,184
<TOTAL-REVENUES> 12,566
<CGS> 3,063
<TOTAL-COSTS> 9,572
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 324
<INCOME-PRETAX> 0
<INCOME-TAX> 116
<INCOME-CONTINUING> 2,567
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,567
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.57
</TABLE>
