UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-9035
POPE RESOURCES, A DELAWARE
LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 91-1313292
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
19245 10th Avenue NE, Poulsbo, WA 98370
Telephone: (360) 697-6626
(Address of principal executive offices including zip code)
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
required to file such reports), and (2) has been subject to such filing
registrant was requirements for the past 90 days.
Yes _X_ No_____
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in rule 12b-2 of the Securities and Exchange
Act of 1934).
Large Accelerated Filer _____ Accelerated Filer _X_ Non Accelerated Filer _____
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12-2 of the Exchange Act Yes _____ No_X_
Partnership units outstanding at August 1, 2007: 4,686,777
Pope Resources
Index to Form 10-Q Filing
For the Quarter Ended June 30, 2007
Description Page Number
Part I. Financial Information
Item 1 Financial Statements (unaudited)
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Earnings 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 30
Item 3. Quantitative and Qualitative Disclosures about Risk 30
Item 4. Controls and Procedures 30
Part II. Other Information
Item 1. Legal Proceedings 31
Item 1A. Risk Factors 31
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 33
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 5. Other Information 33
Item 6. Exhibits 33
Signatures 34
P A R T I - FINANCIAL INFORMATION
ITEM 1
3
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
Pope Resources
June 30, 2007 and December 31, 2006
(Thousands)
2007 2006
- --------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 6,146$ 7,194
Short-term investments 25,000 25,000
Accounts receivable 2,882 1,074
Land held for sale at cost 2,903 2,813
Current portion of contracts receivable 4,534 4,547
Prepaid expenses and other 386 499
------------------ -------------------
Total current assets 41,851 41,127
================== ===================
Properties and equipment at cost:
Land held for development 16,215 13,294
Land and land improvements 22,327 22,327
Roads and timber (net of accumulated
depletion of $46,304 and $43,461) 95,814 98,110
Buildings and equipment (net of accumulated
depreciation of $6,945 and $6,748) 3,665 3,405
------------------ -------------------
138,021 137,136
------------------ -------------------
Other assets:
Contracts receivable, net of current portion 1,237 1,161
Other 253 858
------------------ -------------------
1,490 2,019
------------------ -------------------
Total assets $ 181,362$ 180,282
================== ===================
Liabilities and Partners' Capital
Current liabilities:
Accounts payable $ 1,495$ 1,114
Accrued liabilities 1,299 3,083
Current portion of long-term debt 1,342 1,342
Deferred revenue 8,915 8,838
Environmental remediation 189 236
Minority interest - IPMB 3 77
Other current liabilities 98 85
------------------ -------------------
Total current liabilities 13,341 14,775
Long-term debt, net of current portion 29,543 30,866
Other long term liabilities 281 351
Minority interest - ORM Timber Fund I, LP 46,586 46,685
Partners' capital (units outstanding 4,687 and 4,647) 91,611 87,605
------------------ -------------------
Total liabilities and partners' capital $ 181,362$ 180,282
================== ===================
See accompanying notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
Pope Resources
For the Three Months and Six Months Ended June 30, 2007 and 2006
(Thousands, except per unit data) Three Months Ended June 30, Six Months Ended June 30,
2007 2006 2007 2006
-------------- ---------- ---------- --------------
Revenues $ 15,326 $ 15,610 $ 22,113 $ 31,693
Cost of timber and land sold (6,294) (8,414) (9,131) (14,839)
Operating expenses (2,374) (2,559) (4,611) (5,028)
General and administrative expenses (1,706) (902) (2,731) (1,906)
-------------- ---------- ---------- --------------
Income from operations 4,952 3,735 5,640 9,920
-------------- ---------- ---------- --------------
Other income (expense):
Interest expense (637) (664) (1,302) (1,358)
Capitalized interest 264 195 518 361
Interest income 391 252 811 471
-------------- ---------- ---------- --------------
18 (217) 27 (526)
Income before income taxes and minority interest 4,970 3,518 5,667 9,394
Income tax benefit (provision) (10) 8 (17) (437)
-------------- ---------- ---------- --------------
Income before minority interest 4,960 3,526 5,650 8,957
Minority interest - IPMB - 14 - (119)
Minority interest - ORM Timber Fund I, LP (145) - 19 -
-------------- ---------- ---------- --------------
Net income $ 4,815 $ 3,540 $ 5,669 $ 8,838
============== ========== ========== ==============
Allocable to general partners $ 62 $ 46 $ 74 $ 116
Allocable to limited partners 4,753 3,494 5,595 8,722
Earnings per unit:
Basic $ 1.03 $ 0.76 $ 1.21 $ 1.91
============== ========== ========== ==============
Diluted $ 1.00 $ 0.74 $ 1.18 $ 1.86
============== ========== ========== ==============
Weighted average units outstanding:
Basic 4,685 4,641 4,675 4,638
============== ========== ========== ==============
Diluted 4,829 4,753 4,817 4,750
============== ========== ========== ==============
See accompanying notes to condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Pope Resources
Six Months Ended June 30, 2007 and 2006
(Thousands) 2007 2006
------------- --------------
Cash flows provided by operating activities
Net income $ 5,669$ 8,838
Add back (deduct) non-cash charges (credits):
Deferred revenue 77 941
Depletion 2,749 4,692
Equity based compensation 361 195
Depreciation and amortization 399 359
Deferred taxes (47) (19)
Minority interest (18) 119
Cost of land sold 46 2,869
Change in working capital accounts:
Accounts receivable (1,808) (2,756)
Contracts receivable (63) (474)
Other current assets 113 129
Accounts payable 381 113
Accrued liabilities (1,477) (1,039)
Deposits 13 15
Environmental remediation (47) (105)
Other long term liabilities (70) 103
Other long term assets 633 16
Other (5) (15)
------------- --------------
Net cash flows provided by operating activities 6,906 13,981
Cash flows from investing activities:
Capital expenditures (4,452) (5,816)
Purchase of short-term investments - (5,000)
------------- --------------
Net cash used in investing activities (4,452) (10,816)
------------- --------------
Cash flows from financing activities:
Option exercises 630 248
Excess tax benefit from equity based compensation - 34
Minority interest distribution (155) (167)
Repayment of long-term debt (1,323) (1,623)
Unitholder distribution (2,654) (2,339)
------------- --------------
Net cash used in financing activities (3,502) (3,847)
------------- --------------
Net increase (decrease) in cash and cash equivalents (1,048) (682)
Cash and cash equivalents at beginning of year 7,194 3,361
------------- --------------
Cash and cash equivalents at end of the six-month period $ 6,146$ 2,679
============= ==============
See accompanying notes to condensed consolidated financial statements.
6
POPE RESOURCES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2007
1. The condensed consolidated financial statements as of June 30, 2007 and
December 31, 2006 and for the three months (quarter) and six-month periods
ended June 30, 2007 and June 30, 2006 have been prepared by Pope Resources,
A Delaware Limited Partnership ("the Partnership") pursuant to the rules
and regulations of the Securities and Exchange Commission (the "SEC"). The
condensed consolidated financial statements are unaudited, but, in the
opinion of management, reflect all adjustments (consisting only of normal
recurring adjustments and accruals) necessary for a fair presentation of
the financial position, results of operations and cash flows for the
interim periods. The financial information as of December 31, 2006, is
derived from the Partnership's audited consolidated financial statements
and notes thereto for the year ended December 31, 2006, and should be read
in conjunction with such financial statements. The results of operations
for the interim periods are not necessarily indicative of the results of
operations that may be achieved for the entire fiscal year ending December
31, 2007.
2. The financial statements in the Partnership's 2006 Annual Report on Form
10-K include a summary of significant accounting policies of the
Partnership and should be read in conjunction with this Quarterly Report on
Form 10-Q.
3. Basic net earnings per unit are based on the weighted average number of
units outstanding during the period. Diluted net earnings per unit are
based on the weighted average number of units and dilutive unit options
outstanding at the end of the period.
Quarter Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
------------- ------------- -------------- ------------
Weighted average units
outstanding (in
thousands):
Basic 4,685 4,641 4,675 4,638
Dilutive effect of
unit options 144 112 142 112
------------- ------------- -------------- ------------
Diluted 4,829 4,753 4,817 4,750
============= ============= ============== ============
Options to purchase 214,000 units at prices ranging from $9.30 to $37.73
per unit were outstanding as of June 30, 2007. For computing the dilutive
effect of unit options for the quarter and six months ended June 30, 2007,
no options were excluded from the calculation.
Options to purchase 258,000 units at prices ranging from $9.30 to $37.73
per unit were outstanding as of June 30, 2006. For computing the dilutive
effect of unit options for the quarter and six months ended June 30, 2006,
options to purchase 1,100 units at prices ranging from $33.15 to $37.73
were not included in the calculation as they were anti-dilutive.
7
4. In 2005, we adopted the 2005 Unit Incentive Plan. Following adoption of
this new plan the Board of Directors began issuing restricted units instead
of unit options as its primary method of granting equity based
compensation.
Restricted Units The Partnership issues new units to those exercising
partnership unit options and when granting partnership restricted units. As
of June 30, 2007, total compensation expense related to non-vested
restricted unit awards not yet recognized was $1.4 million with a weighted
average 34 months remaining to vest.
Restricted units Outstanding
- ---------------------------------- -----------
Number outstanding 55,750
Aggregate intrinsic value $2,712,795
Unit Options Unit options have not been granted since December 2005. Units
options granted prior to January 1, 2006 were non-qualified options granted
at an exercise price not less than 100% of the fair value on the grant
date. Unit options granted to employees vested over four or five years.
Board members had the option of receiving their annual retainer in the form
of unit options and those options vested immediately as they were granted
monthly for services rendered during the month. Options granted have a life
of ten years. As of June 30, 2007 there was $26,000 of unrecognized
compensation cost related to unit options granted.
5. The Partnership maintains a liability on its balance sheet to reflect our
estimate of remaining costs to complete the environmental remediation at
the Port Gamble townsite. The clean up activities at this site have been
shared with Pope & Talbot, Inc. under a contribution agreement. On August
6, 2007 P&T announced that it had entered into a forbearance agreement with
its senior lenders.
Following this announcement management believes there is a possibility that
all or some portion of P&T's liability under the contribution agreement
will not be fulfilled which could have a material impact on our estimated
liability. Management does not currently have enough information to
estimate the amount of this liability.
6. Supplemental disclosure of cash flow information: For the six months ended
June 30, 2007 and 2006, interest paid net of amounts capitalized amounted
to $994,000 and $1.2 million, respectively. Income taxes paid for the six
months ended June 30, 2007 and 2006 amounted to $9,000 and $182,000,
respectively.
7. Revenue, operating income, and EBITDDA, which management uses as a measure
of segment profit or loss, for the quarters and six-month periods ended
June 30, 2007 and 2006, by segment are as follows:
8
Timberland
Three Months Ended Fee Management & Real
June 30 (Thousands) Timber Consulting Estate Other Consolidated
- ------------------------ ------------ ----------- ------------ ----------- --------------
2007
Revenue internal $ 14,653 # $ 607 $ 366 $ - $ 15,626
Eliminations (39) (251) (10) - (300)
------------ ----------- ------------ ----------- --------------
Revenue external 14,614 356 356 - 15,326
Cost of sales (6,274) - (20) - (6,294)
Operating expenses
internal (1,317) (564) (793) (1,706) (4,380)
Eliminations 266 39 (5) - 300
------------ ----------- ------------ ----------- --------------
Operating expenses
external (1,051) (525) (798) (1,706) (4,080)
Income (loss) from
operations internal 7,062 43 (447) (1,706) 4,952
Eliminations 227 (212) (15) - -
------------------------------------------------- --------------
Income (loss) from
operations external $ 7,289 $ (169) $ (462) $ (1,706) $ 4,952
------------------------------------------------- --------------
EBITDDA reconciliation:
Minority interest (145) - - - (145)
Depletion 2,038 - - 2,038
Depreciation and
amortization 84 20 43 50 197
------------------------------------------------- --------------
EBITDDA $ 9,266 $ (149) $ (419) $ (1,656) $ 7,042
============ =========== ============ =========== ==============
2006
Revenue internal $ 10,451 $ 546 $ 4,626 $ - $ 15,623
Eliminations (2) (2) (9) - (13)
------------ ----------- ------------ ----------- --------------
Revenue external 10,449 544 4,617 - 15,610
Cost of sales (5,368) - (3,046) (8,414)
Operating expenses
internal (1,069) (519) (984) (902) (3,474)
Eliminations 2 12 (1) - 13
------------ ----------- ------------ ----------- --------------
Operating expenses
external (1,067) (507) (985) (902) (3,461)
Income (loss) from
operations internal 4,014 27 596 (902) 3,735
Eliminations - 10 (10) - -
------------ ----------- ------------ ----------- --------------
Income (loss) from
operations external $ 4,014 $ 37 $ 586 $ (902) $ 3,735
------------ ----------- ------------ ----------- --------------
EBITDDA reconciliation:
Minority interest - 14 - - 14
Depletion 2,119 - - - 2,119
Depreciation and
amortization 62 20 43 50 175
------------ ----------- ------------ ----------- --------------
EBITDDA $ 6,195 $ 71 $ 629 $ (852) $ 6,043
============ =========== ============ =========== ==============
9
Timberland
Six Months Ended Fee Management & Real
June 30 (Thousands) Timber Consulting Estate Other Consolidated
- ------------------------ ------------ ------------ ----------- ----------- --------------
2007
Revenue internal $ 20,888 $ 1,151 $ 619 $ - $ 22,658
Eliminations (82) (443) (20) - (545)
------------ ------------ ----------- ----------- --------------
Revenue external 20,806 708 599 22,113
Cost of sales (9,078) - (53) - (9,131)
Operating expenses
internal (2,501) (1,090) (1,565) (2,731) (7,887)
Eliminations 467 82 (4) - 545
------------ ------------ ----------- ----------- --------------
Operating expenses
external (2,034) (1,008) (1,569) (2,731) (7,342)
Income (loss) from
operations internal 9,309 61 (999) (2,731) 5,640
Eliminations 385 (361) (24) - -
------------ ------------ ----------- ----------- --------------
Income (loss) from
operations external $ 9,694 $ (300) $ (1,023) $ (2,731) $ 5,640
------------ ------------ ----------- ----------- --------------
EBITDDA reconciliation:
Minority interest 19 - - - 19
Depletion 2,749 - - 2,749
Depreciation and
amortization 167 41 87 104 399
------------ ------------ ----------- ----------- --------------
EBITDDA $ 12,629 $ (259) $ (936) $ (2,627) $ 8,807
============ ============ =========== =========== ==============
2006
Revenue internal $ 24,175 $ 2,587 $ 4,970 $ - $ 31,732
Eliminations (2) (19) (18) - (39)
------------ ------------ ----------- ----------- --------------
Revenue external 24,173 2,568 4,952 - 31,693
Cost of sales (11,778) - (3,061) - (14,839)
Operating expenses
internal (2,165) (1,257) (1,645) (1,906) (6,973)
Eliminations 16 22 1 - 39
------------ ------------ ----------- ----------- --------------
Operating expenses
external (2,149) (1,235) (1,644) (1,906) (6,934)
Income (loss) from
operations internal 10,232 1,330 264 (1,906) 9,920
Eliminations 14 3 (17) - -
------------ ------------ ----------- ----------- --------------
Income (loss) from
operations external $ 10,246 $ 1,333 $ 247 $ (1,906) $ 9,920
------------ ------------ ----------- ----------- --------------
EBITDDA reconciliation:
Minority interest - (119) - - (119)
Depletion 4,692 - - - 4,692
Depreciation and
amortization 133 36 77 113 359
------------ ------------ ----------- ----------- --------------
EBITDDA $ 15,071 $ 1,250 $ 324 $ (1,793) $ 14,852
============ ============ =========== =========== ==============
10
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains a number of projections and statements about our expected
financial condition, operating results, and business plans and objectives. These
statements reflect our management's estimates based on our current goals, in
light of currently known circumstances and management's expectations about
future developments. Statements about expectations and future performance are
"forward looking statements" within the meaning of federal and state securities
laws. Because these statements describe our goals, objectives and anticipated
performance, they are inherently uncertain, and some or all of these statements
may not come to pass. Accordingly, you should not interpret these statements as
promises that we will perform at a given level or that we will take any or all
of the actions we currently expect to take. Our future actions, as well as our
actual performance, will vary from our current expectations, and under various
circumstances these variations may be material and adverse. Some of the factors
that may cause our actual operating results and financial condition to fall
short of our expectations are set forth in the part of this report entitled
"Item 1A: Risk Factors " below and other factors discussed elsewhere in this
report or in our annual report on Form 10-K for the fiscal year ended December
31, 2006. The forward-looking statements in this report reflect our estimates as
of the date of the report, and we cannot undertake to update these statements as
our business operations and environment change. References in this report to
first-person pronouns such as "we," "our," and "us" refer to the Partnership or,
when used to express intentions or expectations, to the Partnership's management
and managing general partner.
This discussion should be read in conjunction with the financial statements
and related notes included with this report.
EXECUTIVE OVERVIEW
Pope Resources, A Delaware Limited Partnership ("we" or the "Partnership"),
was organized in late 1985 as a result of a spin-off by Pope & Talbot, Inc.
("P&T"). We are engaged in three primary businesses. The first, and by far most
significant, segment in terms of owned assets and operations is the Fee Timber
segment. Operations in this segment consist of growing timber to be harvested as
logs for sale to domestic and to a lesser extent export manufacturers. The
second most significant business in terms of total assets owned is the
development and sale of real estate. Real Estate activities primarily take the
form of securing permits, entitlements and, in some cases, installing
infrastructure for raw land development, and then realizing that land's value
through the sale of larger parcels to buyers who may take the land further up
the value chain, either to home buyers or residential developers or to
developers, operators and lessors of commercial property. Since these land
projects ordinarily span multiple years, the Real Estate segment may incur
losses for multiple years while a project is developed until that project is
sold, which results in operating income to the extent the sale proceeds exceed
our basis in the project. Our third business is providing timberland-related
services to third parties and raising investment capital from third parties for
private equity timber funds like ORM Timber Fund I, LP (the "Fund").
In late 2006 the Fund purchased 24,000 acres of timberland in two
transactions using 95% of the Fund's committed capital of $61.8 million. As a
result of these acquisitions, the Timberland Management & Consulting segment
expects to generate fees associated with management of the Fund. The Fund is
consolidated into our financial statements with the 80% third-party Fund
interest reported as minority interest. The fees associated with management of
the Fund are eliminated in consolidation.
11
Management's major opportunity and challenge is to profitably grow our
revenue base. For our Fee Timber and Timberland Management & Consulting
segments, the revenue base is typically thought of in terms of acres owned or
under management. Our Real Estate opportunities and challenges center on
identifying properties in our portfolio of owned assets with potential
development value. Once identified, we attempt to maximize that value through
securing entitlements and, in some cases installing infrastructure, prior to
selling the property.
RESULTS OF OPERATIONS
The following table reconciles and compares key revenue and cost elements
that impact our net income for each of the quarter and six-month periods ended
June 30, 2007 and June 30, 2006. In addition to the table's detailed numeric
analysis, the explanatory text that follows the table describes many of these
changes by business segment:
12
QUARTER AND YEAR TO DATE VARIANCE
ANALYSIS
(Amounts in $000's except per unit data)
Quarter ended Six months ended
June 30, 2007 and 2006 June 30, 2007 and 2006
Net income:
2007 period $ 4,815 $ 5,669
2006 period 3,540 8,838
----------- --------------
Variance $ 1,275 $ (3,169)
Detail of earnings variance:
Fee Timber
Log price realizations (A) $ 520 $ 163
Log volumes (B) 3,592 (3,658)
Depletion 81 1,940
Production costs (989) 758
Other Fee Timber 68 241
Timberland Management & Consulting
Management fee changes (77) (378)
Disposition fee changes - (1,343)
Other Timberland Management & Consulting (129) 88
Real Estate
Land sales (1,370) (1,466)
Other Real Estate 326 200
General and administrative expenses (804) (825)
Interest expense, net of amounts
capitalized 96 213
Interest income 137 340
Minority interest (158) 138
Income taxes (18) 420
----------- --------------
Total change in earnings $ 1,275 $ (3,169)
=========== ==============
(A) Price variance calculated by extending the change in average realized price
by current period volume.
(B) Volume variance calculated by extending change in sales volume by the
average log sales price for the comparison period
Fee Timber
- ----------
Fee Timber revenue is earned primarily from the harvest and sale of logs
from the Partnership's nearly 114,000 acres of fee timberland located in western
Washington. We also recognize Fee Timber revenue from sales of timber harvested
from the 24,000 acres of timberland owned by the Fund. Other revenue also
includes leases of our timberland to sand and gravel pit operators and cellular
communication tower purveyors. Revenue from the sales of timberland tracts will
also appear periodically in results for this segment. Our Fee Timber revenue is
driven primarily by the volume of timber harvested, which we ordinarily express
in terms of millions of board feet, or "MMBF", and by the average prices
realized on log sales, which we express in dollars per thousand board feet, or
"MBF".
13
The Fund harvested 2.5 MMBF and 2.6 MMBF during the three and six month
periods ended June 30, 2007, respectively, with an average price realized of
$602/MBF for both periods . We plan to harvest a total of 5.4 MMBF from the
Fund's timberlands in 2007. The Fund is consolidated into our financial
statements and as a result the Fund's harvest is included in the Fee Timber
discussion.
When discussing our Fee Timber operations, we compare current results to
both the previous quarter and the corresponding quarter of the prior year. Both
of these comparisons are made to help the reader gain an understanding of the
trends in market price and harvest volumes that affect Fee Timber results of
operations. Revenue and operating income for the Fee Timber segment for the
quarters ended June 30, 2007, March 31, 2007 and June 30, 2006 are as follows:
--------------------------------------------------------------------------------------------------
($ Million) Log Sale Mineral, Cell Total Fee Operating Harvest
Tower & Other Timber volume
Quarter Ended: Revenue Revenue Revenue Income (MMBF)
--------------------------------------------------------------------------------------------------
June 30, 2007 14.1 0.5 14.6 7.3 22.6
March 31, 2007 5.8 0.4 6.2 2.4 10.0
June 30, 2006 10.0 0.4 10.4 4.0 16.7
--------------------------------------------------------------------------------------------------
The increase in revenue and operating income for the current quarter
relative to the first quarter of 2007 is primarily attributable to a 12.6 MMBF
increase in harvest volume combined with a $48/MBF increase in average price
realized. Fee Timber revenue in the current quarter is $4.1 million higher than
the comparable period in 2006 due to a 5.9 MMBF increase in harvest volume and
$23/MBF increase in average price realized. Harvest volume has increased in the
current quarter due to our harvest schedule that includes a higher proportion of
the Columbia tree farm's annual harvest and 2.5 MMBF of Fund volume not
available for harvest in 2006. In 2006, our harvest plan was more front-loaded
than it is in the current year.
Revenue and operating income for the Fee Timber segment for the six-month
periods ended June 30, 2007 and 2006 were as follows:
--------------------------------------------------------------------------------------------------
($Million) Log Sale Mineral, Cell Total Fee Operating Harvest
Tower & Other Timber volume
Six months Ended: Revenue Revenue Revenue Income (MMBF)
--------------------------------------------------------------------------------------------------
June 30, 2007 19.9 0.9 20.8 9.7 32.6
June 30, 2006 23.4 0.8 24.2 10.2 38.7
--------------------------------------------------------------------------------------------------
The decrease in revenue and operating income in 2007 relative to 2006 is
due primarily to a 6.1 MMBF decrease in volume harvested, partially offset by a
$5/MBF increase in average price realizations. Our timber harvest was more
frontloaded in the first half of 2006 when we harvested 71% of our full-year
plan. Through the first six months of 2007, we have harvested approximately 60%
of our expected annual volume. Harvest volume during the first six months of
2007 includes 2.6 MMBF of volume from ORM Timber Fund I, LP.
14
Log Volume
The Partnership harvested the following log volumes by species from its
timberlands for the quarters ended June 30, 2007, March 31, 2007, and June 30,
2006 and the six-month periods ended June 30, 2007 and 2006:
Log volumes (MBF): Quarter Ended
Sawlogs June-07 % Total March-07 % Total June-06 %
Total
----------- ------- ------------ ------- ------------ ------
Douglas-fir 15,991 71% 7,116 71% 11,842 71%
Whitewood 2,922 13% 791 8% 1,149 7%
Cedar 575 2% 60 1% 227 1%
Hardwood 878 4% 129 1% 1,144 7%
Pulp
All Species 2,241 10% 1,944 19% 2,288 14%
----------- ------- ------------ ------- ------------ ------
Total 22,607 100% 10,040 100% 16,650 100%
=========== ======= ============ ======= ============ ======
Log volumes (MBF): Six Months Ended
Sawlogs June-07 % Total June-06 % Total
--------- ---------- ------------- ------------
Douglas-fir 23,106 71% 28,282 73%
Whitewood 3,713 11% 3,145 8%
Cedar 635 2% 586 2%
Hardwood 1,007 3% 1,706 4%
Pulp
All Species 4,185 13% 4,964 13%
--------- ---------- ------------- ------------
Total 32,646 100% 38,683 100%
========= ========== ============= ============
Through June 30, 2007, we have harvested 60% of our targeted 55 MMBF annual
harvest for this year. In 2007, we have moderated the front loading of our
annual harvest and as a result more of our annual harvest will be completed
during the second half of the year when compared to the 2006 harvest. We plan to
concentrate a higher proportion of our second half harvest on cedar and hardwood
products where prices have remained relatively strong.
Log Prices
While harvest volume is largely within management's control, one additional
factor that impacts our Fee Timber income is the price we realize upon selling
our logs into the market. As noted above, we try to maximize Fee Timber revenue
by adjusting the timing and mix of our harvest to take advantage of current
market conditions where possible. However, log prices are a result of a broader
range of economic and political factors and are largely beyond our ability to
control, except at the margins. We realized the following log prices from our
fee timberlands for the quarters ended June 30, 2007, March 31, 2007 and June
30, 2006 and the six-month periods ended June 30, 2007 and 2006:
15
Quarter Ended
30-Jun-07 31-Mar-07 30-Jun-06
------------- ---------- ----------
Average price realizations (per MBF):
Sawlogs
Douglas-
fir $638 $611 $665
Whitewood 477 492 452
Cedar 1,333 1,193 1,182
Hardwood 945 671 670
------------- ---------- ----------
Pulp
All
Species 398 467 260
------------- ---------- ----------
Overall 626 578 603
------------- ---------- ----------
T
Six Months Ended
30-Jun-07 30-Jun-06
--------------- ----------
Average price realizations (per
MBF):
Sawlogs
Douglas-
fir $ 630 $ 675
Whitewood 480 443
Cedar 1,320 993
Hardwood 910 646
--------------- ----------
Pulp
All
Species 430 255
--------------- ----------
Overall 611 606
--------------- ----------
Douglas-fir: Douglas-fir represents the primary tree species growing on our
timberlands. This species is noted for its structural characteristics that make
it generally preferable to other softwoods and hardwoods for the production of
construction grade lumber and plywood. The price realized on Douglas-fir logs
increased 4% for the current quarter versus the first quarter of 2007, but
dropped 4% from the comparable quarter in 2006. The modest increase in
Douglas-fir log price realized in the second quarter of 2007 compared to the
first quarter of 2007 was made possible by locking in prices in March 2007 for
logs delivered during the second quarter. We noted a significant softening of
the Douglas-fir market as the second quarter progressed. The weakness in
Douglas-fir prices noted as the second quarter progressed and price weakness
relative to the comparable period in prior year is due to the decline in
domestic housing starts. On a year-to-date basis Douglas-fir prices fell 7%
compared to the first half of 2006.
Whitewood: "Whitewood" is a term used to describe several softwood species,
but for us primarily refers to western hemlock. Though generally considered to
be of a lower quality than Douglas-fir, these logs are also used for
manufacturing construction grade lumber and plywood. The average price realized
on whitewood decreased 3% for the current quarter in 2007 versus the first
quarter of 2007, but increased 6% from the comparable quarter in 2006. A strong
market for export quality whitewood sawlogs developed in the first quarter of
2007 as a favorable exchange rate and attractive ocean shipping rates to Korea
impacted our local log markets. This market lost some of its strength in the
second quarter of 2007 resulting in the unfavorable comparison to the first
quarter of 2007 but still a favorable comparison to the prior year. Management
expects that whitewood prices for third quarter 2007 will be lower than the
first half of 2007.
16
Cedar: Cedar prices increased 12% in the current quarter versus the first
quarter of 2007 and 13% from the comparable quarter in prior year. Cedar prices
typically weaken in the winter months as demand declines, largely because cedar
lumber is used primarily as fencing and siding material. Peak demand for this
product is in the summer months, with corresponding lower demand and log prices
at the beginning and end of the calendar year. On a year-to-date basis, our
realized cedar price has increased 33% from the prior year. The strong price
realized in both the current quarter and for the first six months of 2007
reflects a general decline in cedar volume available in the Puget Sound area.
Bids received for third quarter 2007 cedar volume have strengthened slightly
from second quarter price levels, but the overall impact on revenue and earnings
is expected to be relatively small given the small amount of cedar in our sales
mix.
Hardwood: "Hardwood" can refer to many different species, but on our tree
farms primarily represents red alder and, to a lesser extent, big leaf maple.
The price realized from the sale of red alder sawlogs has increased steadily
over the last couple years as new red alder mills have opened to take advantage
of strong lumber pricing attributable to the growing acceptance of solid sawn
red alder lumber products. These mills manufacture lumber for use in furniture
construction. Hardwood log prices increased 41% in the current quarter relative
to both the first quarter of 2007 and the second quarter of 2006. This increase
is also due to an increase in the quality of hardwood logs sold in the current
year. Bids received for third quarter 2007 hardwood volume have increased
slightly from the current quarter.
Pulp: Pulp refers to a lower quality log of any species that is
manufactured into wood chips. These chips are used to manufacture many products
including kraft linerboard for bag and cardboard box production and to a lesser
extent bleached pulp for paper production. The price realized from the sale of
pulp logs is primarily driven by local wood chip inventories. Pulp prices in the
current quarter decreased 15% from the first quarter of 2007 but increased by
53% from the comparable period in prior year. On a year-to-date basis pulp
prices are up 69% over the level realized during the first six months of 2006.
The increases in pulp prices result from a decline in sawmill production. Strong
log prices combined with a weakening market for lumber has resulted in an
increase in sawmill downtime which has in turn reduced the supply of wood chips
available to the Puget Sound market. Based on bids for pulp logs to be delivered
during the third quarter of 2007 management expects pulp prices in the third
quarter to be largely consistent with the second quarter of 2007.
Customers The table below categorizes logs sold by customer type for the
quarters ended June 30, 2007, March 31, 2007 and June 30, 2006 and for the
six-month periods ended June 30, 2007 and 2006:
Q2 2007 Q1 2007 Q2 2006
Destination Volume* Price^ Volume* Price^ Volume* Price^
- --------------------------- ------- --------------- ---------- -----------
Domestic mills 18.6 656 7.0 $ 590 12.7 $ 651
Export brokers 1.8 612 1.1 699 1.7 706
Pulp 2.2 400 1.9 467 2.3 260
--------- -------- ----------
Total 22.6 $ 626 10.0 $ 578 16.7 $ 603
* Volume in MMBF
^ Price per MBF
17
Six Months Ended
30-Jun-07 30-Jun-06
Destination Volume* Price^ Volume* Price^
- ---------------------------- -------- ------------ ---------------
Domestic mills 25.6 640 31.6 $655
Export brokers 2.8 626 2.1 701
Pulp 4.2 430 5.0 255
---------- ------------
Total 32.6 $611 38.7 $606
* Volume in MMBF
^ Price per MBF
Over the last several years, a strong domestic market for high-quality
"peeler" logs used for producing a range of products requiring veneer components
has emerged that has shifted log volume away from an already diminished export
market. Volume sold to domestic lumber mills represents 86% of volume sold in
the second quarter of 2007, versus 70% in the first quarter and 76% for the
second quarter of 2006. The increase in the proportion of log volume sold to
domestic mills in the second quarter of 2007 relative to the first quarter of
2007 is due to the aforementioned export market for whitewood sawlogs that
strengthened in the first quarter of 2007 and a decline in the proportion of
harvest sold as pulp. The proportion of log volume sold to export brokers
increased from 5% to 9% when comparing year-to-date results in 2006 and 2007.
Cost of Sales
Cost of sales for the Fee Timber segment consists of harvest and haul costs
and depletion expense. Harvest and haul costs represent the direct cost incurred
to convert standing timber into logs and deliver those logs to their point of
sale. Depletion expense represents the estimated cost of acquiring and growing
the harvested timber. The applicable depletion rate is derived by dividing the
aggregate cost of timber and capitalized road expenditures by the estimated
volume of merchantable timber available for harvest at the beginning of that
year. The depletion rate is then applied to the volume harvested in a given
period to calculate depletion expense for that period. Fee Timber cost of sales
for the quarters ended June 30, 2007, March 31, 2007, and June 30, 2006 and the
six-month periods ended June 30, 2007 and 2006 are as follows:
---------------------------------------------------------------------------------------
($ Million) Harvest
Harvest, Haul Total Cost volume
Quarter Ended: and Other Depletion of Sales (MMBF)
---------------------------------------------------------------------------------------
June 30, 2007 4.3 2.0 6.3 22.6
March 31, 2007 2.1 0.7 2.8 10.0
June 30, 2006 3.3 2.1 5.4 16.7
---------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
($Million) Harvest
Harvest, Haul Total Cost of volume
Six months Ended: and Other Depletion Sales (MMBF)
- ----------------------------------------------------------------------------------------
June 30, 2007 6.4 2.7 9.1 32.6
June 30, 2006 7.1 4.7 11.8 38.7
- ----------------------------------------------------------------------------------------
18
Per MBF
Total Cost of
Quarter Ended: Harvest and Haul Depletion Sales
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
June 30, 2007 $188 $90 $278
March 31, 2007 208 71 279
June 30, 2006 195 127 322
- ----------------------------------------------------------------------------------------------
Per MBF
Total Cost of
Six Months Ended: Harvest and Haul Depletion Sales
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
June 30, 2007 $194 $84 $278
June 30, 2006 184 121 305
- -----------------------------------------------------------------------------------------------
Cost of sales increased in the second quarter of 2007 versus the first
quarter of 2007 and the comparable period in the prior year due to increased
harvest volume. Unit costs were comparable between the first and second
quarters, as lower cash costs for harvest and hauling were offset by a higher
depletion rate due to harvest volume from ORM Timber Fund I, LP timberlands
which have a separate depletion pool. On a year-to-date basis, unit costs of
$278 per MBF were significantly lower than 2006 due to a lower depletion rate
partially offset by higher harvest and haul costs. The depletion rate in 2006
was impacted by harvest volume from timberland acquired during the fourth
quarter of 2004 that had a separate depletion pool with a higher depletion rate.
Harvest and haul costs per MBF have decreased in the second quarter of 2007
from both the first quarter of 2007 and 2006's comparable period. Harvest costs
vary based upon the physical site characteristics of the specific acres
harvested during the period. For example, difficult-to-access sites or those
located on steep hillsides are more expensive to harvest. Furthermore, haul
costs vary based upon the distance between the harvest area and the mill
customer's location. Harvest and haul costs decreased from the first quarter of
2007 due to a decrease in harvest units located on more difficult to access
property. Harvest and haul costs per MBF have decreased from the comparable
quarter in the prior year due to fewer difficult-to-access harvest units. On a
year-to-date basis, per MBF harvest and haul costs have increased $10/MBF due
primarily to an increase in haul costs caused by a recent increase in the rate
paid to our log-haul contractors.
Depletion expense for the quarters ended June 30, 2007, March 31, 2007, and
June 30, 2006 was calculated as follows:
19
Quarter ended June 30, 2007
Pooled Separate Combined
---------------------- ----------------- --------------------
Volume harvested (MBF) 20,072 2,535 22,607
Rate/MBF $ 70 $ 247 $ 90
---------------------- ----------------- --------------------
Depletion expense ($ 000) $ 1,411 $ 627 $ 2,038
====================== ================= ====================
Quarter ended March 31, 2007
Pooled Separate Combined
---------------------- ----------------- --------------------
Volume harvested (MBF) 10,010 30 10,040
Rate/MBF $ 70 $ 233 $ 71
---------------------- ----------------- --------------------
Depletion expense ($ 000) $ 704 $ 7 $ 711
====================== ================= ====================
Quarter ended June 30, 2006
Pooled Separate Combined
---------------------- ----------------- --------------------
Volume harvested (MBF) 13,685 2,965 16,650
Rate/MBF $ 69 $ 397 $ 127
---------------------- ----------------- --------------------
Depletion expense ($ 000) $ 942 $ 1,177 $ 2,119
====================== ================= ====================
Six Months Ended June 30, 2007
Pooled Separate Combined
---------------------- ----------------- --------------------
Volume harvested (MBF) 30,081 2,565 32,646
Rate/MBF $ 70 $ 247 $ 84
---------------------- ----------------- --------------------
Depletion expense ($ 000) $ 2,115 $ 634 $ 2,749
====================== ================= ====================
Six Months Ended June 30, 2006
Pooled Separate Combined
---------------------- ----------------- --------------------
Volume harvested (MBF) 32,505 6,178 38,683
Rate/MBF $ 69 $ 397 $ 121
---------------------- ----------------- --------------------
Depletion expense ($ 000) $ 2,242 $ 2,450 $ 4,692
====================== ================= ====================
The separate depletion pool for 2007 harvest volume represents harvest from
timberlands owned by the Fund. The separate depletion pool used for 2006 was due
to a separate depletion pool created for a fourth quarter of 2004 timberland
acquisition. These separate depletion pools carry higher depletion rates than
our combined pool as they include timber volume and associated cost of more
recently acquired timber.
Operating Expenses
Fee Timber operating expenses were $1.1 million $1.0 million, and $1.1
million for the quarters ended June 30, 2007, March 31, 2007, and June 30, 2006,
respectively. Operating expenses for the six-month periods ended June 30, 2007
and June 30, 2006 were $2.0 and $2.1 million, respectively. Operating expenses
include management, silviculture and the cost of both maintaining existing roads
and building temporary roads required for harvest activities.
20
Timberland Management & Consulting
Revenue and operating income for the Timberland Management & Consulting
segment for the quarters and six-month periods ended June 30, 2007 and 2006 were
as follows:
- -------------------------------------------------------------------------------
($ Million)
Quarter Ended: Revenue Operating Income/(Loss)
- -------------------------------------------------------------------------------
June 30, 2007 $0.4 ($0.2)
June 30, 2006 0.5 -
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
($ Million)
Six Months Ended: Revenue Operating Income/(Loss)
- -------------------------------------------------------------------------------
June 30, 2007 $0.7 ($0.3)
June 30, 2006 2.6 1.3
- -------------------------------------------------------------------------------
The segment posted revenue of $356,000 and an operating loss of $169,000
for the quarter ended June 30, 2007, which represents respective $188,000 and
$206,000 declines from the comparable period in 2006. The decrease in revenue
and operating income is due to a decline in acres under management for our
primary timberland management client. On a year-to-date basis, revenue and
operating income declined $1.9 million and $1.6 million, respectively, between
2006 and 2007. This decline is also due to a drop in acres under management for
our primary timberland management client, and a disposition fee earned in the
first quarter of 2006 that did not recur in 2007.
The capital commitment for ORM Timber Fund I, LP expired on August 1, 2007.
We placed $58.5 million of the $61.8 million commitment. Pope Resources' capital
co-investment in this fund totaled $11.7 million or 20% of the Fund. We are now
organizing our second timber fund that we expect will total $100 million of
equity capital with our co-investment commitment at the same 20% level as in the
first fund. As with the first fund, we will not be required to contribute the
majority of this capital until suitable timber properties are identified.
Operating Expenses
Timberland Management & Consulting operating expenses for the quarters
ended June 30, 2007 and 2006 were $525,000 and $507,000, respectively. The
increase in operating expenses for the quarter ended June 30, 2007 relative to
the comparable period in the prior year is due to costs incurred to organize ORM
Timber Fund II partially offset by a reduction in expenses resulting from fewer
acres under management. Operating expenses for the six-month periods ended June
30, 2007 and 2006 were $1.0 million and $1.2 million, respectively. The decrease
in operating expenses is attributable to the reduction in acres we manage for
our primary client as a result of timberland sales and a reduction in operating
expenses associated with the Fund.
Real Estate
The Partnership's Real Estate segment consists primarily of revenue from
the sale of land together with residential and commercial property rents. The
Partnership's real estate holdings are located primarily in Pierce, Kitsap, and
Jefferson Counties in Washington State.
21
Revenue and operating income for the Real Estate segment for the quarter
and six-month periods ended June 30, 2007 and 2006 were as follows:
- -------------------------------------------------------------------------------
($ Million) Revenue
Quarter Ended: Operating Income/(Loss)
- -------------------------------------------------------------------------------
June 30, 2007 $0.4 ($0.5)
June 30, 2006 4.6 0.6
- -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
($ Million) Revenue
Six Months Ended: Operating Income/(Loss)
- ------------------------------------------------------------------------------
June 30, 2007 $0.6 ($1.0)
June 30, 2006 5.0 0.2
- ------------------------------------------------------------------------------
Real Estate revenue is generated through the sale of land and rural
residential lots, and to a lesser extent from real property rents, most of which
are earned at the Port Gamble townsite. Leases of cellular tower sites and
gravel and other mineral rights on our timberlands are accounted for in the Fee
Timber segment. Raw land sales are generally made for something other than
residential or commercial use and are normally completed with very little
capital investment prior to sale. Rural residential and commercial use
properties normally involve capital improvements for zoning, road building, or
utility access improvements prior to completing the sale.
Real Estate revenue for the quarter and six-month periods ended June 30,
2007 and 2006 consist of the following:
For the three months ended:
Description Revenue Gross Margin Acres Sold Revenue/Acre Gross
Margin/
Acre
- ------------------------------------------ ---------------- -------------- ----------- ------------- ------------
Rural Residential $ 106,000 $ 86,000 12 $ 8,833 $ 7,167
Rentals 250,000 250,000 NA NA NA
---------------- -------------- ----------- ------------- ------------
June 30, 2007 Total $ 356,000 $ 336,000 12 $ 8,833 $ 7,167
================ ============== =========== ============= ============
Rural Residential $ 935,000 $ 776,000 240 $ 3,896 $ 3,233
Commercial 3,427,000 540,000 21 161,651 25,472
Rentals 255,000 255,000 NA NA NA
---------------- -------------- ----------- ------------- ------------
June 30, 2006 Total $ 4,617,000 $ 1,571,000 261 $ 16,700 $ 5,038
================ ============== =========== ============= ============
For the six months ended:
Description Revenue Gross Margin Acres Sold Revenue/Acre Gross
Margin/
Acre
- ------------------------------------------ ---------------- -------------- ----------- ------------- ------------
Rural Residential $ 106,000 $ 86,000 12 $ 8,833 $ 7,167
Rentals 461,000 461,000 NA NA NA
Other 32,000 -1,000 NA NA NA
---------------- -------------- ----------- ------------- ------------
June 30, 2007 Total $ 599,000 $ 546,000 12 $ 8,833 $ 7,167
================ ============== =========== ============= ============
Rural Residential $ 990,000 $ 827,000 250 $ 3,960 $ 3,308
Commercial 3,483,000 585,000 21 164,292 27,594
Rentals 479,000 479,000 NA NA NA
---------------- -------------- ----------- ------------- ------------
June 30, 2006 Total $ 4,952,000 $ 1,891,000 271 $ 16,493 $ 5,206
================ ============== =========== ============= ============
22
Revenue and operating income for the Real Estate segment were lower in the
second quarter of 2007 compared to second quarter 2006 due to a reduction in
land sales. We are projecting a significant decrease in revenue from land sales
in 2007 relative to 2006. We do, however, expect to generate over $8.5 million
of revenue in 2007 due to the recognition of deferred revenue on two 2006
transactions. Our Real Estate segment had several large transactions in 2006
that are not expected to recur in 2007. This is consistent with our expected
future performance in the Real Estate segment: we will recognize periods of
limited or no revenues, even during periods when we incur expenses, and will
from time to time record large revenue items upon sales of property or, where
appropriate, when all contingencies and closing conditions have been satisfied
or waived.
At our property in Gig Harbor, Washington, we closed on the sale of nearly
6 acres of retail pad sites to Northwest Capital Investors ("NCI") in late 2006.
Our agreement with NCI includes a rescission clause that can be exercised by NCI
if we do not complete the installation of utilities and grading. As a result of
this rescission clause, all of the revenue on the transaction was deferred in
2006. We expect to complete this work in 2007 and recognize the $7.2 million of
revenue with gross profit of approximately $4.5 million. In addition, we have
deferred $1.3 million of revenue on the Bremerton residential plat sale that
also closed in late 2006. This revenue is being recognized as remaining
commitments to install a storm water system and other infrastructure is
completed. We also expect this revenue will be recognized during 2007 along with
estimated gross profit of $0.7 million.
Our rural residential lot program produces lots up to 80 acres in size,
based on underlying zoning densities. This type of program typically entails an
entitlement effort more modest in scale, usually involving simple lot
segregations and boundary line adjustments. Development activities include minor
road building, surveying, and the extension of utilities. We have a target of
selling 150 to 300 acres annually from this program but we have exceeded that
target range for the last few years as a result of a strong market for this type
of land in our marketplace. We expect 2007 rural residential sales to end up at
the low end of this targeted range due to softening in our local markets for
rural residential land.
Cost of Sales
Real Estate cost of sales for the quarters ended June 30, 2007 and 2006
were $20,000 and $3.0 million, respectively. On a year-to-date basis, cost of
sales was $53,000 and $3.1 million for the six-month periods ended June 30, 2007
and 2006, respectively. Cost of sales in 2007 represents the cost basis in 2
rural residential lots sold. Cost of sales in 2006 represents the cost basis of
the YMCA and Poulsbo land sales as well as two rural residential land sales.
Operating Expenses
Real Estate operating expenses for the quarters ended June 30, 2007 and
2006 were $798,000 and $985,000, respectively. The decline in operating expenses
in the quarter ended June 30, 2007 relative to the comparable period in the
prior year is due to timing of project costs. For the six-month periods ended
June 30, 2007 and 2006 operating expenses were essentially unchanged at $1.6
million.
Environmental Remediation
The Partnership has accrued liabilities for environmental cleanup of
$195,000 and $242,000 as of June 30, 2007 and December 31, 2006, respectively.
This accrual represents our estimated share of the liability for environmental
clean up activities in and around the Port Gamble townsite following a
negotiated settlement with Pope & Talbot in 2002. Current activities at the site
include monitoring to determine if prior clean up activities were effective.
Activity in the environmental remediation liability is detailed as follows:
23
Balances at Expenditures
the for
Beginning Additions Monitoring Balances at the
of the to and End of the
Period Accrual Remediation Period
---------------------------------- ---------------
Year Ended December 31, 2006 $158,000 $260,000 $176,000 $242,000
Quarter ended March 31, 2007 242,000 - 11,000 231,000
Quarter ended June 30, 2007 231,000 - 36,000 195,000
The environmental remediation liability on the Partnership's books is based
upon an estimate of the Partnership's agreed upon portion of the cleanup costs.
While the majority of the Partnership's portion of the cleanup efforts is
complete, there remains the possibility that the remaining remediation or
monitoring activities may exceed estimates, resulting in an additional
environmental remediation charge. Management will continue to monitor the
remaining liability against estimates to complete to determine if an adjustment
to the environmental remediation liability is necessary to accurately represent
management's estimate of remaining cost to complete the project.
General and Administrative (G&A)
- --------------------------------
G&A expenses for the quarters ended June 30, 2007 and 2006 were $1.7
million and $902,000, respectively. For the six months ended June 30, 2007 and
2006 G&A expenses were $2.7 million and $1.9 million, respectively. The increase
in G&A expenses in 2007 is due primarily to professional service fees incurred
to evaluate capital structuring alternatives with management and the Board of
Directors of the General Partner. This work has largely been completed. G&A
expenses for the remainder of 2007 are not expected to vary significantly from
G&A expenses incurred during the last half of 2006.
Interest Income and Expense
- ---------------------------
Interest income for the quarter ended June 30, 2007 increased to $391,000
from $252,000 for the corresponding period of 2006. On a year-to-date basis,
interest income increased to $811,000 from $471,000 for the corresponding period
in 2006. The increase in interest income is due to higher cash and short-term
investments balances.
Interest expense prior to the reduction for capitalized interest declined
from $664,000 for the three-month period ended June 30, 2006 to $637,000 for the
comparable period in 2007. Capitalized interest for the three-month periods
ended June 30, increased from $195,000 in 2006 to $264,000 in 2007. On a
year-to-date basis, interest expense prior to the reduction for capitalized
interest decreased to $1.3 million from $1.4 million for the corresponding
period in 2006. Capitalized interest for the six months ended June 30 increased
from $361,000 in 2006 to $518,000 in 2007. The decrease in interest expense is
attributable to regularly scheduled annual principal payments due on our
timberland mortgage while the increase in capitalized interest expense relates
to the increase in basis on land projects that are currently under development.
The Partnership's debt consists primarily of mortgage debt with a fixed interest
rate.
Income Tax
- ----------
Pope Resources is a limited partnership and is, therefore, not subject to
federal income tax. Taxable income/loss is reported to unitholders each year on
a Form K-1 for inclusion in each unitholder's tax return. Pope Resources does
have corporate subsidiaries, however, that are subject to income tax.
For the quarter ended June 30, 2007 the Partnership recorded tax expense of
$10,000, as compared to a tax benefit of $8,000 for the corresponding period in
2006. Our taxable subsidiaries incurred losses in the second quarter of 2006 as
we were adjusting our expense structure to fewer acres under management. On a
year-to-date basis, income tax expense was $17,000 and $437,000 for the periods
ended June 30, 2007 and 2006, respectively. The decline in income tax expense on
a year-to-date basis is due to income tax expenses incurred in the first quarter
of 2006 in connection with an asset disposition fee that did not recur in 2007.
24
Minority Interest - IPMB
- ------------------------
"Minority interest - IPMB" represents that share of income earned from the
Investor Portfolio Management Business (IPMB) attributable to Pope MGP, Inc.,
the managing general partner of the Partnership. The amendment to the Limited
Partnership Agreement authorizing the Partnership to pursue the IPMB further
specifies that income from the IPMB will be split using a sliding scale
allocation method beginning at 80% to the Partnership's wholly-owned subsidiary,
ORM, Inc., and 20% to Pope MGP, Inc. The sliding scale allocation method evenly
divides IPMB income between ORM, Inc. and Pope MGP, Inc. once such income
reaches $7,000,000 in a given fiscal year.
Current activities of the IPMB are contained in the Timberland Management &
Consulting segment, which includes timberland consulting, management, and
expenses associated with the launch of our second private equity timber fund.
The minority interest-IPMB allocation of income in the second quarter of 2007
was zero and was a benefit of $14,000 in the comparable quarter in 2006.
Minority interest-IPMB allocation in 2007 reflects the reduction in acres under
management and expenses associated with launching our second timber fund. In
2006 the benefit resulted from losses incurred in these businesses as we
adjusted to a reduction in acres under management.
Minority Interest-ORM Timber Fund I, LP
- ---------------------------------------
"Minority Interest-ORM Timber Fund I, LP" represents that portion of the
Fund's income or loss attributed to the 80% of the Fund owned by third-party
investors. The increase in this amount in both the first quarter and first six
months of 2007 from the comparable periods in prior year is due to the increase
in operating activities of the Fund given its acquisition of timberland in late
2006.
Off Balance Sheet Arrangements
- ------------------------------
We do not have any off balance sheet arrangements.
25
Liquidity and Capital Resources
- -------------------------------
We ordinarily finance our business activities using funds from operations
and, where appropriate in management's assessment, bank lines of credit. Funds
generated internally from operations and externally through financing are
expected to provide the required resources for the Partnership's future capital
expenditures. The Partnership's debt-to-total-capitalization ratio as measured
by the book value of equity was 25% at June 30, 2007 versus 27% as of December
31, 2006. The Partnership's debt consists primarily of a timberland mortgage
with a fixed amortization schedule and loan term, which includes a prepayment
penalty. We currently operate without an operating line of credit due to the
cash we hold in excess of our current operating needs. We will continue to
monitor and forecast our expected cash requirements and may re-establish a line
of credit if a need for additional liquidity should arise.
Over the remaining six months of 2007, management plans to harvest
approximately 22 MMBF of timber, 19 MMBF of which will come from the Hood Canal
and Columbia tree farms and 3 MMBF from the Fund's tree farms, for a total
fiscal 2007 harvest of 55 MMBF. Since harvest plans are based on demand and
pricing, actual harvesting may vary subject to management's ongoing review.
For the six months ended June 30, 2007, overall cash and cash equivalents
decreased $1.0 million versus a decrease of $682,000 for the corresponding
period in the prior year. Cash generated by operating activities was $6.9
million for the six months ended June 30, 2007 versus $14.0 million of cash
generated by operating activities for the corresponding period in 2006. The
decrease in cash generated by operating activities primarily results from a
decrease in timber volume harvested and a decrease in Real Estate sales.
Cash used for investing activities decreased to $4.5 million for the six
months ended June 30, 2007 from $10.8 million for the corresponding period in
2006. The change in cash used in investing activities is primarily the result of
a decrease in cash invested in auction rate securities combined with a decrease
in capital expenditures at our project in Gig Harbor. Investing activities in
the first half of 2007 included the following: $1.6 million for a development
property acquisition adjacent to the Port Gamble townsite; development
expenditures of $502,000 related to the Gig Harbor project and $322,000 related
to our project in Bremerton; capitalized interest of $518,000; and $369,000 of
other capitalized development costs. Other capital expenditures consisted of
reforestation and roads costs of $539,000, vehicle replacement costs of
$217,000, capitalized improvement costs at the Port Gamble townsite of $172,000,
and $213,000 for various other building and equipment items
Investing activities in 2006 consisted of the purchase of $5.0 million of
auction rate securities and $5.8 million of capital expenditures. Year-to-date
capital expenditures in 2006 consisted of the following: $4.2 million of
capitalized development costs at the Gig Harbor site; $362,000 of interest
capitalized to the Gig Harbor project, $339,000 of capitalized development costs
on the Partnership's other development properties; $521,000 of reforestation and
road building costs on the owned timberlands; $283,000 of capital improvements
at the Port Gamble townsite; and $96,000 of other miscellaneous capital
expenditures.
Seasonality
- -----------
Fee Timber. The Partnership owns 114,000 acres of timberland in Washington
State. Our timber acreage is concentrated in two non-contiguous tree farms: the
70,000-acre Hood Canal tree farm located in Kitsap, Jefferson, and Mason
Counties on the eastern side of Washington's Olympic Peninsula, and the
44,000-acre Columbia tree farm located in Cowlitz, Clark, Lewis, Skamania, and
Pierce counties on the western side of Washington's Cascade mountain range. The
Fund owns 24,000 acres of timberland, two-thirds of which is in eastern King
County with the remainder in Lewis County.
26
The Hood Canal tree farm is concentrated at low elevations, which permits
us to harvest trees year-round. Generally, we concentrate our harvests from this
tree farm in the winter and spring when supply, and thus competition, is
typically lower and, accordingly, when we can expect to receive higher prices.
However, in late 2006, log prices softened as lumber prices declined on news of
the slowdown in residential real estate sales. As a result, in 2007, we have
chosen not to front load our 2007 harvest.
With the acquisition of the Columbia tree farm in 2001, management expected
a decrease in the seasonality of Fee Timber operations as the Columbia tree farm
is at higher elevations where harvest activities are generally possible only in
the late spring and summer months. In practice, over the last several years our
harvest has tended to be more front-loaded, as log prices have been relatively
strong in the first half of the year enabling management to front-load the
harvest plan. As noted above this trend has been broken in 2007. The timberlands
owned by the Fund are at elevations consistent with the Columbia tree farm. In
future periods, management expects quarterly harvest volume to be affected by
both local market conditions for logs and weather conditions.
Timberland Management & Consulting. In broad terms, Timberland Management &
Consulting operations are not currently seasonal. Our timberland consulting
operations at McCloud, California are, however, concentrated primarily in the
summer months.
Real Estate. While Real Estate results are not expected to be seasonal, the
nature of the activities in this segment will likely result in periodic large
transactions that will have significant positive impacts on both revenue and
operating income of the Partnership in periods in which these transactions
close, and relatively limited revenue and income in other periods. While the
"lumpiness" of these results is not primarily a function of seasonal weather
patterns, we do expect to see some seasonal fluctuations in this segment because
of the general effects of weather on Pacific Northwest development activities.
Capital Expenditures and Commitments
- ------------------------------------
We are currently working on raising committed capital for ORM Timber Fund
II ("Fund II"). Our current plans for this second fund are to raise $100 million
of equity capital, with Pope Resources investing 20% of this amount, or $20
million. The majority of this capital will not be called until Fund II has
located suitable timber properties to acquire. Meanwhile, the outstanding
commitment for ORM Timber Fund I, LP of $642,000 expired unused on August 1,
2007.
Total capital expenditures in 2007, excluding the planned investment in the
timber funds, are expected to approximate $9.4 million, of which $4.5 million
has been expended through June 30, 2007. The anticipated capital expenditures
for the balance of 2007 include $2.7 million related to the Real Estate project
at Gig Harbor, Washington and $1.6 million for the Bremerton West Hills
property. Remaining planned capital expenditures are related to various property
development projects, capitalized reforestation costs, and capital improvements
at the Port Gamble townsite. The Partnership expects that the source of capital
for these expenditures will be primarily funds generated internally through
operations supplemented by external financing as necessary.
ACCOUNTING MATTERS
Critical Accounting Policies and Estimates
- ------------------------------------------
Management believes its most critical accounting policies and estimates
relate to management's calculation of timber depletion and liabilities for
matters such as environmental remediation, and potential asset impairments. In
relation to liabilities, potential impairments and other estimated charges, it
is management's policy to conduct ongoing reviews of significant accounting
policies and assumptions used in the preparation of the financial results of the
Partnership. The assumptions used are tested against available and relevant
information and reviewed with subject-matter experts for consistency and
reliability. During the preparation of financial results, tests are conducted to
ascertain that the net book carrying values of assets are not in excess of
estimated future cash flows. These tests use current market information, if
available, or other generally accepted valuation methods, such as future cash
flows. When the use of estimates is necessary, an exact answer is unlikely, and
therefore, the reporting within a range of likely outcomes is used in the
preparation of the financial statements. Tests are also applied in order to be
reasonably assured that liabilities are properly reflected on the records of the
Partnership and that the notes to the financial statements are prepared in a
fashion that informs readers of possible outcomes and risks associated with the
conduct of business.
27
Consolidation of ORM Timber Fund I, LP (the Fund): The Fund is owned 19%
by Pope Resources, A Delaware Limited Partnership, 1% by Olympic Resource
Management LLC and 80% by third-party investors. Olympic Resource Management LLC
is the general partner of the Fund and earns management fees for managing the
Fund and its properties. Transactions between the Fund and Pope Resources and
its subsidiaries are eliminated in consolidation. The portion of loss attributed
to the 80% of the Fund not owned by us is reported as Minority Interest-ORM
Timber Fund I, LP.
Purchased Timberlands Allocation: When the Partnership acquires
timberlands, a purchase price allocation is performed that allocates the
acquisition cost between the categories of merchantable timber, premerchantable
timber, and land based upon the relative fair values pertaining to each of the
categories. When timberland is acquired the land is evaluated for current value.
To the extent the land has value under current market conditions as something
other than timberland, generally referred to as HBU (or
"higher-and-better-use"), we assign a value greater than that typically
associated with timberland.
Depletion-Cost Pools: Depletion represents the cost of timber harvested
and is charged to operations by applying a depletion rate to volume harvested
during the period. The depletion rate is calculated in January each year by
dividing the Partnership's cost of merchantable timber by the volume of
merchantable timber. Merchantable timber is defined as timber that is equal to
or greater than 40 years of age.
To calculate the depletion rate, the Partnership combines all properties
with similar characteristics and uses one depletion rate for all volume
harvested from that timberland cost pool. Each timberland acquisition is
evaluated for consistency with the already established timberland portfolio
using the following five characteristics:
1. Management-Will the acquisition be managed as part of the existing cost
pool?
2. Location-Is the tree farm in the same geography as the existing timberland
cost pool?
3. Products-Will the products harvested from the acquisition be substantially
similar to those harvested from the existing cost pool?
4. Customers/Markets-Will the harvest from the acquisition be sold to the same
customers/markets as logs harvested from the existing cost pool?
5. Stocking-Are the acres in the acquisition of a similar age class
distribution to the existing cost pool? (If the premerchantable timberland
acres in the acquisition are less than 50% of total acres, stocking on the
acquisition will be deemed sufficiently different and strongly indicate
that a separate pool is appropriate.)
Depletion-Estimated Volume: Inventory volumes take into account the
applicable state and federal regulatory limits on timber harvests as applied to
the Partnership's properties, including the Forests and Fish law that
supplements Washington State's forest practice regulations to provide for
expanded riparian management zones, wildlife leave trees, and other harvest
restrictions. Timber inventory volume is tracked by the Partnership's standing
timber inventory system, which utilizes annual statistical sampling of the
timber (cruising) with annual adjustments made for estimated growth and the
depletion of areas harvested.
28
The standing inventory system is subject to two processes each year to
monitor accuracy. The first is the annual cruise process and the second is a
comparison of (a) volume actually extracted by harvest, to (b) inventory for the
corresponding stands of harvested timber in the standing inventory system at the
time of the harvest. A "cruise" represents a physical measurement of timber on a
specific set of acres. The cruise process is completed when the physical
measurement totals are compared to the inventory in the standing inventory
system. The standing inventory system is then updated for the results of the
cruise. Only productive acres with timber that is at least 20 years old are
selected to cruise. We plan to cruise 20% of such acres in 2007 and each year
thereafter. Specific acres are first selected for cruising with a bias towards
those acres that have gone the longest without a cruise and, second, with a bias
towards those acres that have been growing the longest. As the cruise is being
performed, only those trees with a breast-height diameter (approximately 4.5
feet from the ground) of at least 6 inches are measured for inclusion in the
inventory.
Environmental Remediation: The environmental remediation liability
represents estimated payments to be made to monitor (and remedy if necessary)
certain areas in and around the townsite and millsite of Port Gamble,
Washington. Port Gamble is a historic town that was owned and operated by Pope &
Talbot, Inc. ("P&T") until 1985 when the townsite and other assets were spun off
to the Partnership. P&T continued to operate the townsite until 1996 and leased
the millsite at Port Gamble through January 2002, at which point P&T signed an
agreement with the Partnership dividing the responsibility for environmental
remediation of Port Gamble between the two parties.
The environmental remediation liability on the Partnership's books is based
upon an estimate of the Partnership's portion of the clean-up costs under this
agreement with P&T. While the majority of the Partnership's portion of the clean
up efforts is complete, there remains the possibility that the remaining
remediation or monitoring activities may exceed estimates, resulting in an
additional environmental remediation charge. Management will continue to monitor
the remaining liability against estimates to complete to determine if an
adjustment to the environmental remediation liability is necessary to accurately
represent management's estimate of remaining cost to complete the project.
Property development costs: The Partnership is developing several master
planned communities with the Gig Harbor and Bremerton projects the most notable
currently. Costs of development, including interest, are capitalized for these
projects and allocated to individual lots based upon their relative
preconstruction value. This allocation of basis supports, in turn, the
computation of those amounts reported as a current vs. long-term asset ("Land
Held for Sale" and "Land Held for Development", respectively). As lot sales
occur, the allocation of these costs becomes part of cost of sales attributed to
individual lot sales. Costs associated with land including acquisition, project
design, architectural costs, road construction, and utility installation are
accounted for as investment activities (as opposed to an operating activity) on
our statement of cash flows. These investments are often made for a number of
years prior to the realization of revenue from the disposition of these
properties. Cash generated from the sale of these properties is classified as an
operating activity on our cash flow statement as the sale of these properties is
the main operating activity of our Real Estate segment.
29
Percentage of Completion Revenue Recognition: The Partnership accounts for
revenue recognized from development sales consistent with Statement of Financial
Accounting Standards No. 66 Accounting for Sales of Real Estate. When a real
estate transaction is closed with significant outstanding obligations to
complete infrastructure or other construction, revenue is recognized on a
percentage of completion method by calculating a ratio of costs incurred to
total costs expected. Revenue is deferred by the ratio of remaining costs to
complete. As a result of this accounting, the Partnership has deferred $1.3
million of revenue related to the Bremerton West Hills closing. An additional
$7.2 million of revenue related to the Gig Harbor retail pad closing has been
deferred due to a rescission clause in the purchase and sale agreement that can
be exercised by the buyer if we do not complete certain infrastructure
improvements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Interest Rate Risk
- ------------------
As of June 30, 2007, 2007, the Partnership had $30.8 million of fixed-rate
debt outstanding with a fair value of approximately $32.0 million based on the
current interest rates for similar financial instruments. A change in the
interest rate on fixed-rate debt will affect the fair value of the debt, whereas
a change in the interest rate on variable-rate debt will affect interest expense
and cash flows. A hypothetical 1% change in prevailing interest rates would
change the fair value of the Partnership's fixed-rate long-term debt obligations
by $1.0 million.
ITEM 4. CONTROLS AND PROCEDURES
The Partnership's management maintains a system of internal controls, which
management views as adequate to promote the timely identification and reporting
of material, relevant information. Those controls include (1) requiring
executive management and all managers in accounting roles to sign and adhere to
a Code of Conduct and (2) implementation of a confidential hotline for employees
to contact the Audit Committee directly with financial reporting concerns.
Additionally, the Partnership's senior management team meets regularly to
discuss significant transactions and events affecting the Partnership's
operations. The Partnership's President & Chief Executive Officer and Vice
President & Chief Financial Officer ("Executive Officers") lead these meetings
and consider whether topics discussed represent information that should be
disclosed under generally accepted accounting principles and the rules of the
SEC. The Board of Directors of the Partnership's general partner includes an
Audit Committee. The Audit Committee reviews the earnings release and all
reports on Form 10-Q and 10-K prior to their filing. The Audit Committee is
responsible for hiring the Partnership's external auditors and meets with those
auditors at least eight times each year.
Our Executive Officers are responsible for establishing and maintaining
disclosure controls and procedures. They have designed such controls to ensure
that others make all material information known to them within the organization.
Management regularly evaluates ways to improve internal controls.
As of the end of the period covered by this quarterly report on Form 10-Q
our Executive Officers completed an evaluation of the disclosure controls and
procedures and have determined them to be effective. There have been no changes
to internal controls over financial reporting that materially affected, or that
are reasonably likely to materially affect, our internal control over financial
reporting.
30
PART II
- -------
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Partnership may be subject to legal proceedings and
claims that may have a material adverse impact on its business. Management is
not aware of any current legal proceedings or claims that are expected to have,
individually or in the aggregate, a material adverse impact on its business,
prospects, financial condition or results of operations.
ITEM 1A. RISK FACTORS
Our business is subject to a number of risks and uncertainties, any one or
more of which could impact our operating results and financial condition
materially and adversely. Some of these risks are discussed in greater detail
below, arranged according to business segment. In addition, we face a number of
risks that affect our business generally. We compete against much larger
companies in each of our business segments. These larger competitors may have
access to larger amounts of capital and significantly greater economies of
scale. Land ownership carries with it the risk of incurring liabilities due to
accidents that take place on the land and previously undiscovered environmental
contamination. The Partnership endeavors to maintain adequate accruals to
reflect the cost of remediating known environmental contamination and other
liabilities resulting from land ownership. However these estimates may prove to
be inadequate as additional information is discovered. A more thorough
discussion of the risks and uncertainties that may affect our business is
contained in the Annual Report on Form 10-K for the fiscal year ended December
31, 2006, and in our various other filings with the Securities and Exchange
Commission. Readers should review these risks in deciding whether to invest in
Partnership units, and should recognize that those factors are not an exhaustive
list of risks that could cause us to deviate from management's expectations.
Readers also are cautioned that, in reviewing these risk factors, the factors
contained in this report and in our other SEC filings are effective as of the
date the filing was made, and we cannot undertake to update those disclosures.
Fee Timber
Fee Timber revenue is generated primarily through the sale of softwood logs
to both domestic mills and third-party intermediaries that resell to the export
market. The domestic market for logs in the Puget Sound region of Washington
State has been impacted by imported lumber from Canada and decreased demand for
lumber as engineered wood products have gained market acceptance in the U.S.
These factors have had the effect of concentrating mill ownership with larger
mill operators and decreasing the number of mills operating in the Puget Sound
region. If this trend continues, decreases in local demand for logs may decrease
our profitability. Recent strengthening of the Canadian dollar has decreased the
volume of lumber and logs exported from Canada into the U.S. To the extent this
trend was to reverse, log supplies in the U.S. may increase, resulting in a
decrease in log prices.
Moreover, housing construction starts domestically and abroad tend to
correlate positively with the demand for timber and timber products. During
periods in which housing starts decline, timber companies, including the
Partnership, often experience decreases in log prices and, where such declines
are protracted or severe, price declines can have a material adverse impact upon
Fee Timber revenues. Among the factors currently affecting U.S. domestic housing
demand are increasing interest rates and a growing economic uncertainty fueled,
among other things, by a perceived increased risk in mortgage markets. These
factors are expected to continue for the remainder of 2007 or longer and are
likely to create further downward pressure on log prices. As a result, we expect
the trend of lower log prices to continue or worsen, and if these circumstances
become protracted, we may experience adverse impacts upon our Fee Timber income
which may have a material adverse effect upon our results of operations.
31
Additionally, over the last few years the Partnership has seen the price of
logs erode in the Japanese market as competing logs and lumber from regions
outside of the U.S. and engineered wood products have gradually gained market
acceptance. These export markets for Pacific Northwest logs are significantly
affected by fluctuations in U.S. and Japanese economies, as well as by the
foreign currency exchange rate between the Japanese yen and the U.S. dollar.
Our ability to grow and harvest timber can be significantly impacted by
legislation, regulations or court rulings that restrict or stop forest
practices. Restrictions on logging, planting, road building, fertilizing,
managing competing vegetation and other activities can significantly increase
the cost or reduce available inventory thereby reducing income.
Timberland Management & Consulting
The Timberland Management & Consulting (TM&C) segment is currently
operating with one major timberland management client. Management is working to
expand our fee-for-service business in part through the launch of the timber
fund business. The TM&C segment will be paid management fees from the Fee Timber
segment where the Fund's primary activities are reported. To date we have
launched ORM Timber Fund I, LP and we are working on obtaining capital
commitments for ORM Timber Fund II, our second timber fund. Unlike other
components of our business, which relate solely or primarily to real estate and
timber operations, this line of business carries risks relating to the offer and
sale of securities, and to the management of investment operations, including
potential liability to investors if we are determined to have made material
misstatements or omissions to those investors, potential accusations that we
have breached fiduciary duties to other limited partners, and similar types of
investor action. Moreover, litigation of shareholder-related matters can be
expensive and time consuming, and if brought, would likely distract management
from their focus on ordinary operating activities.
Real Estate
The value of our real estate investments is subject to changes in the
economic and regulatory environment, as well as various land use regulations and
development risks, including the ability to obtain the necessary permits and
zoning variances that would allow us to maximize our revenue from our real
estate investments. Our real estate investments are long-term in nature, which
raises the risk that unforeseen changes in the economy or laws surrounding
development activities may have an adverse affect on our investments. Moreover,
these investments often are highly illiquid and thus may not generate cash flow
if and when needed to support our other operations.
Environmental Remediation
We maintain on our balance sheet a liability reflecting our estimate of
the Partnership's liabilities for environmental remediation for the Port Gamble
townsite. That liability is shared with Pope & Talbot, Inc. ("P&T"), under a
contribution agreement. The contribution agreement, however, does not completely
limit the Partnership's liability for environmental damages at Port Gamble.
Among other things, the Partnership may have liability for remediation costs in
excess of the estimated amounts if and to the extent P&T fails to satisfy its
obligations under the contribution agreement. On August 6, 2007 P&T announced
that it had entered into a forbearance agreement with its senior lenders. One of
the provisions of this forbearance agreement is a covenant requiring efforts to
solicit offers to purchase all or substantially all of P&T's assets or equity
interests. P&T previously has made public announcements of matters that raise
questions about the firm's solvency, and the forbearance agreement and other
similar announcements raise questions surrounding P&T's ability to continue as a
going concern and its ability to contribute financially to the environmental
remediation of Port Gamble. Were P&T to fail to satisfy its obligations under
the contribution agreement, whether because of its solvency issues or otherwise,
the Partnership's liability for Port Gamble remediation costs may increase, and
those increases may be material to the Partnership. Moreover, to the extent
there arises substantial doubt about P&T's ability to satisfy its liabilities,
the Partnership may be required to increase its liability for its estimates for
environmental remediation, which would be reflected in a charge to earnings
during the period in which the estimated liability is increased. We are still
assessing the potential implications of this new information about P&T for the
sharing of remediation costs at Port Gamble.
32
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) - (e) None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
(a) None
(b) There have been no material changes in the procedures for shareholders
of the Partnership's general partner to nominate directors to the
board.
ITEM 6. Exhibits
Exhibits.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
32.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b)
and 18 U.S.C. Section 1350 (furnished with this report in accordance
with SEC Rel. No. 33-8238.
32.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b)
and 18 U.S.C. Section 1350 (furnished with this report in accordance
with SEC Rel. No. 33-8238.
99.1 Press release announcing quarterly financial results, incorporated by
reference to the registrant's Current Report on Form 8-K filed on
August 2, 2007.
33
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on August 9, 2007.
POPE RESOURCES,
A Delaware Limited Partnership
By: POPE MGP, Inc.
Managing General Partner
By: /s/ David L. Nunes
--------------------------------
David L. Nunes
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Thomas M. Ringo
---------------------------
Thomas M. Ringo
Vice President and CFO
(Principal Accounting and Financial
Officer)
34