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, 2003
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Securities and Exchange Act of 1934).
Yes No X
--- ---
Partnership units outstanding at June 30, 2003: 4,518,095
Pope Resources
Index to Form 10-Q Filing
For the Three Months Ended June 30, 2003
- ---------------------------------------------------------------------------- ------ ----------------------------------
Description Page Number
- ---------------------------------------------------------------------------- ------ ----------------------------------
Part I. Financial Information
- ---------------------------------------------------------------------------- ------ ----------------------------------
- ---------------------------------------------------------------------------- ------ ----------------------------------
Item 1 Financial Statements
- ---------------------------------------------------------------------------- ------ ----------------------------------
Consolidated Balance Sheets 4
- ---------------------------------------------------------------------------- ------ ----------------------------------
Condensed Consolidated Statements of Operations 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 11-29
Results of Operations
- ---------------------------------------------------------------------------- ------ ----------------------------------
- ---------------------------------------------------------------------------- ------ ----------------------------------
Item 3. Quantitative and Qualitative Disclosures about Risk 30
- ---------------------------------------------------------------------------- ------ ----------------------------------
- ---------------------------------------------------------------------------- ------ ----------------------------------
Item 4. Controls and Procedures 30
- ---------------------------------------------------------------------------- ------ ----------------------------------
- ---------------------------------------------------------------------------- ------ ----------------------------------
Part II. Other Information 31
- ---------------------------------------------------------------------------- ------ ----------------------------------
- ---------------------------------------------------------------------------- ------ ----------------------------------
Item 1. Legal Proceedings 31
- ---------------------------------------------------------------------------- ------ ----------------------------------
- ---------------------------------------------------------------------------- ------ ----------------------------------
Item 2. Changes in Securities and Use of Proceeds 31
- ---------------------------------------------------------------------------- ------ ----------------------------------
- ---------------------------------------------------------------------------- ------ ----------------------------------
Item 3. Defaults Upon Senior Securities 31
- ---------------------------------------------------------------------------- ------ ----------------------------------
- ---------------------------------------------------------------------------- ------ ----------------------------------
Item 4. Submission of Matters to a Vote of Security Holders 31
- ---------------------------------------------------------------------------- ------ ----------------------------------
- ---------------------------------------------------------------------------- ------ ----------------------------------
Item 5. Other Information 31
- ---------------------------------------------------------------------------- ------ ----------------------------------
- ---------------------------------------------------------------------------- ------ ----------------------------------
Item 6. Exhibits and Reports on Form 8-K 31
- ---------------------------------------------------------------------------- ------ ----------------------------------
- ---------------------------------------------------------------------------- ------ ----------------------------------
CEO Certification 33
- ---------------------------------------------------------------------------- ------ ----------------------------------
- ---------------------------------------------------------------------------- ------ ----------------------------------
CFO Certification 34
- ---------------------------------------------------------------------------- ------ ----------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (Unaudited)
Pope Resources
June 30, 2003 and December 31, 2002
(Thousands)
2003 2002
- -----------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 7,602 $ 6,627
Accounts receivable 1,730 1,768
Work in progress - 175
Current portion of contracts
receivable 66 23
Prepaid expenses and other 296 325
-------------- -------------
Total current assets 9,694 8,918
-------------- -------------
Properties and equipment at cost:
Land and land improvements 20,240 20,179
Roads and timber (net of accumulated
depletion of $20,107 and
$18,453) 49,033 50,316
Buildings and equipment (net of accumulated
depreciation of $5,263 and
$4,990) 3,303 3,335
-------------- -------------
72,576 73,830
-------------- -------------
Other assets:
Contracts receivable, net of
current portion 1,886 2,721
Deferred tax asset and other 1,302 1,319
-------------- -------------
3,188 4,040
-------------- -------------
$ 85,458 $ 86,788
============== =============
Liabilities and Partners' Capital
Current liabilities:
Accounts payable $ 265 $ 546
Accrued liabilities 998 1,739
Restructuring - 466
Environmental remediation 100 430
Current portion of long-term
debt 1,569 1,574
Minority interest 42 203
Other current liabilities 218 168
-------------- -------------
Total current liabilities 3,192 5,126
Long-term debt, net of current
portion 36,057 37,665
Other long term liabilities 468 399
Partners' capital 45,741 43,598
-------------- -------------
$ 85,458 $ 86,788
============== =============
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Pope Resources
For the Three Months and Six Months Ended June 30, 2003 and 2002
(Thousands, except per unit data) Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
-------------- -------------- -------------- ---------------
Revenues $ 7,480 $ 9,935 $ 14,792 $ 15,772
Cost of sales (3,192) (3,789) (6,126) (5,515)
Operating expenses (1,566) (2,589) (3,213) (5,109)
Environmental Remediation - (730) - (730)
General and administrative expenses (723) (975) (1,455) (1,828)
-------------- -------------- -------------- ---------------
Income from operations 1,999 1,852 3,998 2,590
-------------- -------------- -------------- ---------------
Other income (expense):
Interest expense (769) (810) (1,560) (1,663)
Interest income 75 128 152 239
-------------- -------------- -------------- ---------------
(694) (682) (1,408) (1,424)
Income before income taxes and minority
interest 1,305 1,170 2,590 1,166
Income tax (provision)/benefit (9) 425 (3) 441
-------------- -------------- -------------- ---------------
Income before minority interest 1,296 1,595 2,587 1,607
Minority interest - (32) - (32)
-------------- -------------- -------------- ---------------
Net income $ 1,296 $ 1,563 $ 2,587 $ 1,575
============== ============== ============== ===============
Allocable to general partners $ 17 $ 21 $ 34 $ 21
Allocable to limited partners 1,279 1,542 2,553 1,554
-------------- -------------- -------------- ---------------
$ 1,296 $ 1,563 $ 2,587 $ 1,575
============== ============== ============== ===============
Earnings per unit:
Basic $ 0.29 $ 0.35 $ 0.57 $ 0.35
============== ============== ============== ===============
Diluted $ 0.29 $ 0.35 $ 0.57 $ 0.35
============== ============== ============== ===============
Weighted average units outstanding:
Basic 4,518 4,518 4,518 4,518
============== ============== ============== ===============
Diluted 4,519 4,520 4,519 4,520
============== ============== ============== ===============
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Pope Resources
Six Months Ended June 30, 2003 and 2002
(Thousands) 2003 2002
----------- -----------
Cash flows provided by operating activities
Net income $ 2,587 $ 1,575
Add back non-cash charges:
Deferred profit 29 49
Depletion 1,654 1,546
Depreciation and amortization 329 416
Cost of land sold - 245
Change in working capital accounts:
Accounts receivable 39 (1,319)
Contracts receivable 791 1,376
Work in process 175 254
Other current assets 29 174
Accounts payable (281) 856
Accrued liabilities (741) (863)
Environmental remediation (236) 231
Restructuring (466) (25)
Minority interest - 57
Other (2) 33
----------- -----------
Net cash flows provided by operating
activities 3,907 4,605
Cash flows from investing activities:
Capital expenditures (716) (1,141)
Proceeds from sale of building 10 425
----------- -----------
Net cash used in investing activities (706) (716)
----------- -----------
Cash flows from financing activities:
Minority interest distribution (161) (170)
Repayment of long-term debt (1,613) (1,057)
Unitholder distribution (452) -
----------- -----------
Net cash used in financing activities (2,226) (1,227)
----------- -----------
Net increase in cash and cash equivalents 975 2,662
Cash and cash equivalents at beginning of
year 6,627 1,047
----------- -----------
Cash and cash equivalents at end of the six-
month period $ 7,602 $ 3,709
=========== ===========
See accompanying notes to condensed consolidated financial statements.
POPE RESOURCES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2003
1. The condensed consolidated financial statements as of June 30, 2003 and for
the three-months and six months ended June 30, 2003 and June 30, 2002 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 financial information as of June 30,
2003 for the quarters and six month periods ended June 30, 2003 and 2002 is
unaudited, but, in the opinion of management, reflects 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, 2002, is derived from the Partnership's audited consolidated
financial statements and notes thereto for the year ended December 31,
2002, and should be read in conjunction with such financial statements. The
results of operations for the quarter and six month period ended June 30,
2003 are not necessarily indicative of the results of operations that may
be achieved for the entire fiscal year ending December 31, 2003.
2. The financial statements in the Partnership's 2002 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. 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.
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-------------- ------------- -------------- ----------------
-------------- ------------- -------------- ----------------
Weighted average units outstanding (in
thousands):
Basic 4,518 4,518 4,518 4,518
Dilutive effect of unit options 1 2 1 2
-------------- ------------- -------------- ----------------
-------------- ------------- -------------- ----------------
Diluted 4,519 4,520 4,519 4,520
============== ============= ============== ================
Options to purchase 349,000 units with strike prices ranging from $9.30 to
$27.88 were outstanding as of June 30, 2003. Options to purchase 348,000
units at prices ranging from $11.00 to $27.88 per unit were not included in
the computation of diluted earnings per unit because the option exercise
prices were greater than the weighted average market price for the three
months ended June 30, 2003. Options to purchase 348,000 units at prices
ranging from $10.40 to $27.88 were not included in the computation of
diluted earnings per unit because the option exercise prices were greater
than the average market price during the six-month period ended June 30,
2003.
Options to purchase 351,000 units at prices ranging from $12.51 to $27.88
per unit were outstanding as of June 30, 2002. Options to purchase 349,000
units at prices ranging from $12.75 to $27.88 were not included in the
computation of diluted earnings per unit because the option exercise prices
were greater than the average market prices of units during the three-month
period ended June 30, 2002. Options to purchase 349,000 units at prices
ranging from $12.75 to $27.88 were not included in the computation of
diluted earnings per unit because the option exercise prices were greater
than the average market prices of units during the six-month period ended
June 30, 2002.
4. The Partnership accounts for unit-based compensation in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees. Accordingly, compensation cost for unit options is
measured as the excess, if any, of the fair value of the Partnership's
units at the date of grant over the amount an employee must pay to acquire
the unit.
Unit options granted have an exercise price not less than the fair value of
the Partnership's unit price on the date of the grant. Had compensation
expense for unit option grants been recognized based on the fair value at
the grant date consistent with the Black-Scholes method described in
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, the Partnership's net income would have been
adjusted to the pro forma amounts indicated below:
Three months ended Six months ended
June 30, June 30,
(In thousands except per unit amounts) 2003 2002 2003 2002
----------- ---------- ---------- -----------
Net income as reported 1,296 1,563 2,587 $1,575
Add back employee unit based
Compensation expense recognized - - - -
Subtract proforma compensation
Expense under SFAS 123 (72) (78) (135) (155)
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
Proforma net income/loss
Under SFAS 123 1,224 1,485 2,452 $ 1,420
=========== ========== ========== ===========
=========== ========== ========== ===========
As reported:
Basic $ 0.29 $ 0.35 $ 0.57 $ 0.35
=========== ========== ========== ===========
=========== ========== ========== ===========
Diluted $ 0.29 $ 0.35 $ 0.57 $ 0.35
=========== ========== ========== ===========
=========== ========== ========== ===========
Proforma earnings per unit:
Basic $ 0.27 $ 0.33 $ 0.54 $ 0.31
=========== ========== ========== ===========
=========== ========== ========== ===========
Diluted $ 0.27 $ 0.33 $ 0.54 $ 0.31
=========== ========== ========== ===========
Options granted to employees during the six months ended June 30, 2003 and
2002 had fair values of $2.09 and $4.12, respectively. The fair value of
options was calculated using the Black-Scholes option-pricing model, with
the following assumptions:
2003 2002
Expected life 5 years 5 years
Risk-free interest rate 3.70% 4.04%
Dividend yield 1.9% 2.2
Volatility 44% 49%
5. Supplemental disclosure of cash flow information: Interest paid amounted to
approximately $776,000 and $817,000 for the three months ended June 30,
2003 and 2002, respectively. For the six months ended June 30, 2003 and
2002, interest paid amounted to $1,583,000 and $1,735,000, respectively.
6. On December 31, 2002 the contract to manage approximately 200,000 acres of
timberland for Hancock Timber Resource Group (HTRG) expired. This contract
represented $1.0 million of revenue for the three months and $2.0 million
for the six months ended June 30, 2002.
7. Revenues and operating income by segment for the three and six months ended
June 30, 2003 and 2002, respectively, are as follows:
Three Months Ended Fee Timberland
June 30, (Thousands) Timber Management & Real Estate Other Consolidated
Consulting
-----------------------------------------------------------------------------------------------------------------------------
2003
Revenue $ 6,366 $ 395 $ 852 $ - $ 7,613
Eliminations (28) (96) (9) (133)
------------- --------------------- ---------------- ------------ ------------------
Revenue 6,338 299 843 - 7,480
Cost of sales (2,975) - (217) - (3,192)
Operating expenses (789) (509) (399) (725) (2,422)
Eliminations 112 16 3 2 133
------------- --------------------- ---------------- ------------ ------------------
Operating expenses (677) (493) (396) (723) (2,289)
Income (loss) from operations 2,602 (114) 236 (725) 1,999
Eliminations 84 (80) (6) 2 -
------------- --------------------- ---------------- ------------
------------------
Income (loss) from operations $ 2,686 $ (194) $ 230 $ (723) $ 1,999
============= ===================== ================ ============ ==================
2002
Revenue $ 7,377 $ 2,272 $ 689 $ - $ 10,338
Eliminations (27) (350) (26) - (403)
------------- --------------------- ---------------- ------------ ------------------
Revenue 7,350 1,922 663 - 9,935
Cost of sales (3,378) - (411) - (3,789)
Operating expenses (727) (1,769) (1,226) (975) (4,697)
Eliminations 120 269 14 - 403
------------- --------------------- ---------------- ------------ ------------------
Operating expenses (607) 1,500 (1,212) (975) (4,294)
Income (loss) from operations 3,272 503 (948) (975) 1,852
Eliminations
93 (81) (12) - -
------------- --------------------- ---------------- ------------ ------------------
Income (loss) from operations $ 3,365 $ 422 $ (960) $ (975) $ 1,852
============= ===================== ================ ============ ==================
Six Months Ended Fee Timberland
June 30, (Thousands) Timber Management & Real Estate Other Consolidated
Consulting
-----------------------------------------------------------------------------------------------------------------------------
2003
Revenue $ 13,154 $ 931 $ 1,014 $ - $ 15,099
Eliminations (41) (248) (18) - (307)
------------- --------------------- ---------------- ------------ ------------------
Revenue 13,113 683 996 - 14,792
Cost of sales (5,903) - (223) - (6,126)
Operating expenses (1,623) (1,048) (844) (1,460) (4,975)
Eliminations 255 42 5 5 307
------------- --------------------- ---------------- ------------ ------------------
Operating expenses (1,368) (1,006) (839) (1,455) (4,668)
Income (loss) from operations 5,628 (117) (53) (1,460) 3,998
Eliminations 214 (206) (13) 5 -
------------- --------------------- ---------------- ------------
------------------
Income (loss) from operations $ 5,842 $ (323) $ (66) $ (1,455) $ 3,998
============= ===================== ================ ============ ==================
2002
Revenue $ 11,374 $ 4,188 $ 946 $ - $ 16,508
Eliminations (50) (646) (40) - (736)
------------- --------------------- ---------------- ------------ ------------------
Revenue 11,324 3,542 906 - 15,772
Cost of sales (5,016) - (499) - (5,515)
Operating expenses (1,516) (3,498) (1,561) (1,828) (8,403)
Eliminations 240 470 26 - 736
------------- --------------------- ---------------- ------------ ------------------
Operating expenses (1,276) (3,028) (1,535) (1,828) (7,667)
Income (loss) from operations
4,842 690 (1,114) (1,828) 2,590
Eliminations
190 (176) (14) - -
------------- --------------------- ---------------- ------------ ------------------
Income (loss) from operations $ 5,032 $ 514 $ (1,128) $ (1,828) $ 2,590
============= ===================== ================ ============ ==================
There have been no significant changes to segment
assets since December 31, 2002.
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 management's expectations about future developments. Statements about
expectations and future performance are "forward looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
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 our 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
"Risks and Uncertainties" below; and other factors are discussed in our annual
report on Form 10-K for the fiscal year ended December 31, 2002. Other issues
that may have an adverse and material impact on our business, operating results
and financial condition include those risks and uncertainties discussed in our
other filings with the Securities and Exchange Commission, as well as
environmental and land use regulations that limit our ability to harvest timber
and develop property and economic conditions that affect consumer demand for our
products and the prices we receive for them.
This discussion should be read in conjunction with the Partnership's
condensed consolidated financial statements and related notes included with this
report.
General
Pope Resources, A Delaware Limited Partnership (the "Partnership"), was
organized in October 1985 as a result of a spin-off by Pope & Talbot, Inc.
(P&T). The Partnership currently operates in three primary business segments:
(1) Fee Timber, (2) Timberland Management & Consulting, and (3) Real Estate.
Through our Fee Timber operations segment we grow and harvest timber from our
own tree farms. Timberland Management & Consulting encompasses providing
timberland management and forestry consulting services to third-party timberland
owners. We conduct this enterprise primarily through our wholly owned indirect
subsidiary, Olympic Resource Management LLC ("ORMLLC"). Until August 2001, our
Real Estate operations segment consisted primarily of residential development
and income-producing property operations in the resort community of Port Ludlow,
Washington. Following the sale of those operations in August 2001, our Real
Estate operations now consist of efforts to enhance the value of our land
investments by obtaining the entitlements necessary to permit further
development.
Quarter to Quarter Comparisons
- ------------------------------
The following table compares net income for the three months ended June
30, 2003 with both the three months ended June 30, 2002 and the three months
ended March 31, 2003 and provides a reconciliation of major items that comprise
the variances.
QUARTER TO QUARTER COMPARISONS
(Amounts in $000's except per unit data)
Q2 2003 vs. Q2 2002 Q2 2003 vs. Q1 2003
Total Per Unit Total Per Unit
---------------- ----------------- ------------------ -----------
Net income:
2nd Quarter 2003 $1,296 $0.29 $1,296 $0.29
1st Quarter 2003 1,291 0.29
2nd Quarter 2002 1,563 0.35
---------------- ----------------- ------------------ -----------
Variance $(267) $(0.06) $5 $0.00
---------------- ----------------- ------------------ -----------
Detail of earnings
variance:
Fee Timber
Log price
realizations (A) $(131) $(0.03) $(171) $(0.04)
Log volumes (B) (763) (0.17) (322) (0.07)
Timberland sale
income 40 0.01 40 0.01
Depletion 229 0.05 32 0.01
Other Fee Timber (54) (0.01) (49) (0.01)
Timberland Management &
Consulting
Management fee
changes (953) (0.21) (5) 0.00
Other Timberland Mgmnt &
Consulting 337 0.07 (60) (0.01)
Real Estate
Environmental remediation
reserve 730 0.16
Operating results from sold RE
op's 112 0.02
Other Real Estate 348 0.08 526 0.11
General & administrative costs 252 0.06 9 0.00
Interest expense 41 0.01 22 0.00
Other (taxes, minority int.,
interest inc.) (455) (0.10) (17) 0.00
---------------- ----------------- ------------------ -----------
Total change in
earnings $(267) $(0.06) $5 $(0.00)
---------------- ----------------- ------------------ -----------
(A) Price variance allocated based on changes in price using the higher period
volume.
(B) Volume variance allocated based on change in sales volume and the average
log sales price for higher margin less variance in log production costs.
Fee Timber
- ----------
Fee Timber revenue consists of the harvest and sale of logs from the
Partnership's 72,000-acre tree farm located in the Hood Canal area of Washington
and the 40,000-acre Columbia tree farm located in Southwest Washington. The
Columbia tree farm was purchased in March 2001. Fee Timber also includes
royalties from mineral and tower leases located on the Partnership's timber
properties.
When discussing the Partnership's Fee Timber operations, current
results are compared to both the last completed quarter and the comparable
quarter from 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 effect Fee Timber results of operations. Revenues and operating income for
the Fee Timber segment for the three-month periods ended June 30, 2003, March
31, 2003, and June 30, 2002 and the six-month periods ended June 30, 2003 and
2002 are as follows:
- --------------------------------------------------------------------------------
Mineral, Cell Total Fee
Three Months Ended: Tower Timber Operating
Timber & Other Revenue Income
- ------------------------------------------------------------------------------------------------------------------
June 30, 2003 $ 6.1 million $ 0.2 million $ 6.3 million $ 2.6 million
March 31, 2003 6.5 million 0.3 million 6.8 million 3.2 million
June 30, 2002 7.2 million 0.2 million 7.4 million 3.4 million
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Mineral, Cell Total Fee
Six Months Ended: Tower Timber Operating
Timber & Other Revenue Income
- ------------------------------------------------------------------------------------------------------------------
June 30, 2003 $ 12.6 million $ 0.5 million $ 13.1 million $ 5.8 million
June 30, 2002 10.9 million 0.4 million 11.3 million 5.0 million
- ------------------------------------------------------------------------------------------------------------------
Revenue and operating income for the three months ended June 30, 2003
were 6% and 19% lower, respectively, than the three-month period ended March 31,
2003. The decrease in revenue and operating income from the three-month period
ended March 31, 2003 resulted largely from a 491 thousand board feet ("MBF") (or
4%) decrease in log volume owing to management's decision to shift our planned
annual harvest schedule toward the earlier months of the year and to a lesser
extent a decline in weighted average price realized of $13 per MBF (or 3%).
Revenue and operating income for the three months ended June 30, 2003
were 14% and 21% lower, respectively, than the comparable period in 2002.
Revenue and operating income for the quarter were lower due to a decrease of 1.9
million board feet (MMBF) (or 13%) in log volume harvested from the comparable
period in 2002 combined with a decline in weighted average price realized of $9
per MBF (or 2%).
For the six months ended June 30, 2003 revenue and operating income
were both 16% higher than the comparable period in 2002. The increase in revenue
and operating income was due to an increase in timber harvested of 4.1 MMBF (or
19%) from the comparable period in 2002. This year-to-year comparison again was
influenced by the decision in 2003 to shift our planned annual harvest schedule
toward the first half of the year as discussed in more detail below.
The Partnership harvested the following timber and realized the
following average log prices from its fee timberlands for the three-month
periods ended June 30, 2003, March 31, 2003, and June 30, 2002:
Three months ended
30-June-03 31-March-03 30-June-02
------------------ ----------------- ----------------
Log sale volumes (per MBF*):
Export 1,203 1,430 1,406
Domestic 8,939 9,287 10,960
Pulp 2,069 1,679 1,904
Hardwoods 464 770 329
------------------ ----------------- ----------------
Total 12,675 13,166 14,599
================== ================= ================
Average price realizations (per MBF*):
Export $ 564 $ 592 $ 531
Domestic 532 524 544
Pulp 200 235 164
Hardwoods 563 531 459
Overall 482 495 491
* MBF=Thousand board feet
The Partnership harvested the following timber and realized the
following average log prices from its fee timberlands for the six-month period
ended June 30, 2003 and 2002:
30-June-03 30-June-02
------------------- ----------------
Log sale volumes (per MBF*):
Export 2,633 2,672
Domestic 18,226 15,442
Pulp 3,748 2,845
Hardwoods 1,234 778
------------------- ----------------
Total 25,841 21,737
=================== ================
Average price realizations (per MBF*):
Export $ 579 $ 541
Domestic 528 547
Pulp 216 167
Hardwoods 543 467
Overall 489 494
* MBF=Thousand board feet
The increase in log volume harvested in the first half of 2003 is due
to the Partnership's decision to front-end load planned 2003 log production
toward the first half of the year to mitigate against anticipated further
softening of log markets through the balance of the year. In the first six
months of this year we produced 58% of our planned log volume for the year,
while in the same period of 2002 we produced only 49% of our annual production.
The decision to shift production in this fashion is based upon management's
assessment that log prices have been soft, and management does not expect
recovery in those prices over the balance of the year. As a result, management
has planned to sell a greater proportion of our annual timber production in the
first half of this year in anticipation of potential further softening in the
market over the balance of 2003. Overall log prices realized have weakened
during the quarter ended June 30, 2003 as compared to the previous quarter and
the comparable period in 2002, which was consistent with management
expectations. The majority of our export log volume is sold through domestic
intermediaries into the Japanese market. Export prices decreased 5% to $564 per
MBF for the three months ended June 30, 2003 from $592 per MBF in the preceding
quarter and increased 6% from $531 per MBF for the comparable period in 2002.
Management attributes market price fluctuations between quarters to the impact
of changes in local export log inventories.
On a year-to-date basis export prices have increased 7% to $579 per MBF
as of June 30, 2003 from $541 per MBF for the comparable period in 2002. As
stated above, export prices realized are influenced by local export log market
inventories. Looking at a longer time horizon, the export market has declined
due to several factors including a poor Japanese economy, higher transportation
costs, and increased competition from logs supplied by lower cost regions.
Management expects that log price premiums from the Japanese market will remain
lower than historical levels because these market trends are likely to continue.
Domestic log prices for the three months ended June 30, 2003 increased
$8 per MBF (2%) from the quarter ended March 31, 2003, but declined $12 per MBF
(2%) from the three months ended June 30, 2002. The increase to domestic log
prices during the three months ended June 30, 2003 from the preceding quarter
resulted from the mix of logs sold. The Partnership harvested logs in the second
quarter of 2003 that were generally of a higher quality than the first quarter
resulting in the increase in price realized. The market for domestic logs has
weakened slightly in the second quarter despite the nominal increase in average
price realized. Domestic log prices for the six months ended June 30, 2002 were
impacted by supply that has shifted from the export market to the domestic
market. Adding to the supply that in previous years would have been absorbed by
the export market is additional supply imported from Canada. The Canadian trade
dispute has resulted in historically high levels of lumber imported into the
U.S. from Canada. Historically low interest rates have resulted in strong
housing starts but the additional log and lumber supply has resulted in
weakening domestic prices in 2003
Pulp log volumes were 2.1 MMBF, 1.7 MMBF, and 1.9 MMBF for the three
months ended June 30, 2003, March 31, 2003, and June 30, 2002, respectively. The
average price realized per MBF on pulp logs were $200, $235, and $164 for the
three months ended June 30, 2003, March 31, 2003, and June 30, 2002,
respectively. The decrease in pulp prices from the first quarter of 2003 is
attributed to an increase in pulp inventories in local mills.
Cost of Sales
Cost of sales for the Fee Timber segment consists of two components,
depletion expense and harvest costs. Depletion expense represents the
recognition of the cost of acquiring or growing the timber harvested and is
calculated using a depletion rate developed from an accumulation of the cost of
the timber, divided by the estimated volume of merchantable timber available for
harvest. The depletion rate is then applied to the volume harvested to calculate
depletion expense. Harvest costs represent the direct costs incurred to
manufacture trees into logs and deliver those logs to their point of sale.
Fee Timber cost of sales for the three months ended June 30, 2003,
March 31, 2003, and June 30, 2002 were:
- -------------------------------------------------------------------------------------------------------------
Three Months Ended: Depletion Harvest Costs Total
- -------------------------------------------------------------------------------------------------------------
June 30, 2003 $ 0.8 million $ 2.2 million $ 3.0 million
March 31, 2003 $ 0.8 million $ 2.1 million $ 2.9 million
June 30, 2002 1.0 million 2.4 million 3.4 million
- -------------------------------------------------------------------------------------------------------------
Fee Timber cost of sales for the six months ended June 30, 2003 June 30, 2002
were:
- -------------------------------------------------------------------------------------------------------------
Six Months Ended: Depletion Harvest Costs Total
- -------------------------------------------------------------------------------------------------------------
June 30, 2003 $ 1.6 million $ 4.3 million $ 5.9 million
June 30, 2002 1.5 million 3.5 million 5.0 million
- -------------------------------------------------------------------------------------------------------------
Depletion expense for the three months ended June 30, 2003 has
decreased $32,000 from the three-month period ended March 31, 2003 as a result
of a decrease in timber harvested in the second quarter relative to the first
quarter. Depletion expense decreased $229,000 from the three-month period ended
June 30, 2002 also due to decreased log production in the current quarter. The
variances in depletion expense are due to the Partnership's decision to front
load 2003 log production to the first half of the year. The decline in depletion
rate from 2002 is due to normal timber inventory adjustments.
- -----------------------------------------------------------------------------------------------------
Three Months Ended: Depletion
Costs per MBF Harvest Costs per MBF Total
- -----------------------------------------------------------------------------------------------------
June 30, 2003 $ 64 $ 171 $ 235
March 31, 2003 64 154 218
June 30, 2002 71 164 235
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Depletion
Six Months Ended: Costs per MBF Harvest Costs per MBF Total
- -----------------------------------------------------------------------------------------------------
June 30, 2003 $ 64 $ 164 $ 228
June 30, 2002 71 160 231
- -----------------------------------------------------------------------------------------------------
Harvest costs vary based upon the physical site characteristics of
acres harvested during the year. For example, sites that are not readily
accessible, or are located on a steep hillside are more expensive to harvest.
Further, haul costs vary based upon the distance between the harvest area and
the customer's location. Harvest costs increased in the second quarter of 2003
due to a higher mix of log volume taken from the Columbia tree farm which
generally incurs larger log production costs as the terrain is more sloped and
at a higher elevation than the Hood Canal tree farm.
Operating Expenses
Fee Timber operating expenses for the three months ended June 30, 2003,
March 31, 2003 and June 30, 2002 were $677,000, $691,000, and $607,000,
respectively. Operating expenses on a quarterly basis vary depending primarily
on the timing of road maintenance and silviculture projects. Fee Timber
operating expenses for the six months ended June 30, 2003 and June 30, 2002 were
$1.4 million and $1.3 million, respectively.
The modest increase in year-to-date operating expenses compared to last
year is due to two offsetting factors: an increase in the cost of road
maintenance following Washington State's new road maintenance and abandonment
rules offset by management's successful efforts to find more efficient ways of
managing the Partnership's two (Hood Canal and Columbia) tree farms. The new
road maintenance and abandonment rules are a result of the listing of Puget
Sound salmon as an endangered species and are expected to result in an increase
in road maintenance costs for the next two to three years.
Timberland Management & Consulting
Revenue and operating income (loss) for the Timberland Management &
Consulting segment for the three and six-month periods ended June 30, 2003 and
2002 were as follows:
- --------------------------------------------------------------------------------
Three Months Ended:
Revenues Operating Income (Loss)
- --------------------------------------------------------------------------------
June 30, 2003 $ 0.3 million $ (0.2) million
June 30, 2002 1.9 million 0.4 million
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Six Months Ended:
Revenues Operating Income (Loss)
- --------------------------------------------------------------------------------
June 30, 2003 $ 0.7 million $ (0.3) million
June 30, 2002 3.5 million 0.5 million
- --------------------------------------------------------------------------------
Timberland Management & Consulting revenue declined significantly for
both the three and six-month periods ended June 30, 2003 when compared to the
same periods in 2002. Two factors contributed to the decline in revenue: Hancock
Timber Resource Group's (HTRG) decision to not renew its timberland management
contract with ORMLLC in 2003 and the Partnership's decision to close its
timberland consulting offices in Canada. Segment operating income declined due
to the same two factors for both the three month and six month periods ended
June 30, 2003 when compared to the same periods in 2002. The reduction in 2003
operating income caused by the loss of the HTRG contract was only partially
offset by the closure of unprofitable forestry consulting offices in Canada.
ORMLLC became the manager of approximately 365,000 acres of industrial
timberland in Washington, Oregon, and California in late 1999. Approximately
123,000 acres were managed under this contract as of June 30, 2003 and that
acreage is expected to decline significantly during the remainder of 2003 as
managed properties are sold. These sales are expected to result in a reduction
to timberland management revenue more than offset by an additional non-recurring
asset disposition fee for ORMLLC.
Operating Expenses
Timberland Management & Consulting operating expenses for the three
months ended June 30, 2003 and 2002 were $493,000 and $1.5 million,
respectively. Operating expenses decreased in 2003 relative to 2002 as a result
of adjusting our operating expenses following the loss of the HTRG contract and
closing the forestry consulting offices in Canada. On a year-to-date basis,
operating expenses have declined to $1.0 million from $3.0 million for the six
months ended June 30, 2003 and 2002, respectively.
Restructuring Liability
Balances at the Charged to Costs Payments Balances at the
Beginning of the
Period and Expenses End of the Period
-------------------------------------------------------- ------------------
Year Ended December 31, 2002 $25,000 $ 673,000 $ 232,000 $ 466,000
Three month period ended March 31, 2003 466,000 - 419,000 47,000
Three month period ended June 30, 2003 47,000 - 47,000 -
During the fourth quarter ended December 31, 2002, the Partnership
recorded a $673,000 accrual that was related to the cost of closing offices and
reducing staff count. These office closures and staff reductions resulted from
the Partnership's decision to close its forestry consulting offices in Canada
and HTRG's decision to not renew the timberland management contract with ORMLLC.
No increments were added to the liability during the first six months of 2003
and actual spending against the accrual was $466,000 with the result that no
balance remained of this accrued liability at June 30, 2003. All restructuring
activities related to the Canadian office closures and HTRG contract were
completed as of June 30, 2003.
Investor Portfolio Management Business (IPMB)
An amendment to the Limited Partnership Agreement in 1997 allows the
Partnership to manage portfolio investments in timber subject to cumulative net
expenditure limits of $5,000,000, including debt guarantees. The 1997 amendment
to the Limited Partnership Agreement 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
managing general partner of the Partnership. The sliding scale allocation method
will divide IPMB income equally between ORM, Inc. and Pope MGP, Inc. once such
income reaches $7,000,000 in a given fiscal year.
The IPMB is currently conducted in the Timberland Management &
Consulting segment and to date has consisted primarily of providing timberland
management services to HTRG among others. With the loss of the HTRG contract the
Partnership is working to expand IPMB opportunities. The Partnership has
established and has begun offering partnership interests in ORM Timber Fund I,
LP. The Partnership is marketing the fund primarily to high net worth
individuals with Pope Resources investing up to $5 million of the total expected
equity value of $50 million. No investments in this fund have been made as June
30, 2003. If successful this fund would generate fee income for the Timberland
Management & Consulting segment.
Real Estate
- -----------
The Partnership's Real Estate segment consists primarily of residential
and commercial property rents and of revenue from the sale of land to developers
or investors. The Partnership's real estate holdings are located in Pierce,
Kitsap, and Jefferson Counties in Washington State.
Revenues and operating income for the Real Estate segment for the three
and six-month periods ended June 30, 2003 and 2002 are as follows:
- --------------------------------------------------------------------------------------------
Operating Income
Three Months Ended: Revenues (Loss)
- --------------------------------------------------------------------------------------------
June 30, 2003 $ 0.8 million $ 0.2 million
June 30, 2002* 0.7 million (1.0) million
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Six Months Ended: Revenues Operating Income
(Loss)
- --------------------------------------------------------------------------------------------
June 30, 2003 $ 1.0 million $ (0.1) million
June 30, 2002* 0.9 million (1.1) million
- --------------------------------------------------------------------------------------------
* Includes $730,000 environmental remediation charge and $165,000 Port Ludlow
home warranty charge. The environmental remediation charge was made necessary
following the discovery of contaminants in excess of the original estimate and
accrual made in December 2000. The home warranty charge was made necessary based
on actual and anticipated home warranty liabilities from homes sold by the
Partnership in Port Ludlow.
Real Estate revenues for the current period primarily represent
$591,000 in proceeds from the sale of a 6-acre parcel in Everett, Washington and
rent earned on residential and commercial leases at Port Gamble. Operating
income for the quarter includes $400,000 of gain from the Everett land sale.
Revenue for the three-month period ended June 30, 2002 includes $289,000 of
revenue from the sale of developed lots from the Seabeck and Grandridge plats in
addition to the rental revenue from Port Gamble. The Seabeck and Grandridge
plats were sold out in 2002.
For the six months ended June 30, 2003 our real estate revenue
increased $90,000 due to proceeds from the Everett land sale that exceeded
declines in revenues from the sellout of the remaining lots in our Seabeck and
Grandridge plats. The operating loss for the six months ended June 30, 2002
includes costs incurred while management pursues zoning and development
entitlements to maximize value from the Partnership's land investments.
The Everett land sale represents an example of the Partnership's
strategy for creating value in its Real Estate segment. During 2001, efforts
were made to market this six-acre property located thirty miles north of
Seattle. Those efforts were not successful due to uncertainties surrounding the
zoning possibilities on the property. In 2002 the Real Estate group worked to
secure preliminary plat approval on the Everett property and was successful
obtaining that approval in early 2003. On April 1, 2003 the 6 acres were sold
for $591,000. The Partnership has also successfully obtained preliminary plat
approval for 89 residential lots at its property in Hansville. The next step for
eventual realization of revenue on this project is marketing the project to real
estate developers.
The Real Estate segment currently is working with a portfolio of
approximately 2,500 acres of land that are classified by the Partnership as
development properties. A list of the larger properties in this portfolio, with
acreage of the properties noted in parentheses, includes the following: Port
Gamble townsite (400), Gig Harbor (320), Bremerton (233), Kingston-Arborwood
(720), and Hansville (248). The portfolio of development properties also
includes a number of projects that are many years away from reaching their full
development potential. The Gig Harbor property and possibly the Bremerton
property are expected to start producing revenue to the Partnership within the
next two to three years.
The Partnership's plan for Gig Harbor is to apply for a comprehensive
plan amendment that would change permitted use for a 35-acre portion of this
property from business park to retail/commercial uses. Such application, if
successful, would allow for the site to be rezoned and sold to a "big box
retailer" and, in addition, development of several commercial pads for smaller
retail stores. The Partnership has been competing with another developer at the
Gig Harbor property to secure a comprehensive plan amendment for this project.
The Gig Harbor City Council's final decision on this comprehensive plan
amendment is expected to be determined prior to the end of 2003. The YMCA of
Tacoma-Pierce County has signed a purchase and sale agreement to purchase a
portion of the Gig Harbor property. The sale to the YMCA is contingent upon the
Partnership achieving the aforementioned comprehensive plan amendment and
rezoning together with sales on two other adjoining properties.
On the Bremerton property the Partnership has secured preliminary plat
approval for 24 light industrial lots. The Real Estate group is seeking approval
from the City of Bremerton to allow us to begin construction on three of those
lots. That approval would allow the Partnership (or a purchaser) to ramp up
construction on the plat over the next few years.
Cost of Sales
Real Estate cost of sales for each of the three months ended June 30,
2003 and 2002 were $217,000 and $411,000, respectively. For the six months ended
June 30, 2003 and 2002 cost of sales were $223,000 and $499,000, respectively.
The decrease in cost of sales is due largely to the sales of the last of the
high-cost lots in the Seabeck and Grandridge plats in 2002. Cost of sales in the
Real Estate segment for the remainder of 2003 is expected to consist of costs
associated with a small land sale in Jefferson County that closed in July 2003.
Operating Expenses
Real Estate operating expenses for the three-month periods ended June
30, 2003 and 2002 were $396,000 and $317,000, respectively. For the six-month
period ended June 30, 2003 and 2002 operating expenses were $839,000 and
$640,000, respectively. The increase in operating expenses is due to expenses
associated with the rezoning applications pending for the Gig Harbor property.
Environmental Remediation
The Partnership has accrued liabilities for environmental cleanup of
$393,000 and $629,000 as of June 30, 2003 and December 31, 2002, respectively.
The environmental liability at June 30, 2003 includes $100,000 that the
Partnership expects to expend in the next 12 months and $293,000 thereafter. The
accrual represents estimated environmental remediation costs in and around the
townsite of Port Gamble. Port Gamble is a historic town that was owned by Pope &
Talbot (P&T) until 1985 when the townsite and other assets were spun off into
the Partnership. The townsite included an operating lumber mill that operated
until 1995 and was dismantled by the end of 1996. P&T continued to lease the
millsite until January 2002, when a settlement agreement was signed between the
Partnership and P&T that divided the responsibility for paying for environmental
remediation costs in Port Gamble.
The accrued reserve is expected to allow the Partnership to meet its
agreed-upon responsibility under the settlement agreement, which was initially
estimated at $1.9 million. The reserve was recorded in the fourth quarter of
2000 to reflect this expected cost. While the remediation activities were
progressing during 2002, contaminants in excess of those originally estimated to
be at the site were discovered during the quarter ended June 30, 2002. As a
result of this discovery, the Partnership requested its environmental consultant
to update the estimate of the cost to complete the environmental remediation
activities. The revised estimate increased the estimated total cost to complete
Pope Resources' portion of the remediation project by $730,000 and the
Partnership subsequently increased its reserve for environmental remediation
liability by this same $730,000 as of June 30, 2002.
Activity in the Environmental Remediation liability is detailed as
follows:
Balances at the
Beginning of the Charged to Costs Balances at the
Period and Expenses Payments End of the Period
---------------------------------------------------------------------------
Year Ended December 31, 2000 $120,000 $ 1,956,000 $ 206,000 $ 1,870,000
Year Ended December 31, 2001 1,870,000 461,000 1,409,000
-
Year Ended December 31, 2002 1,409,000 730,000 1,510,000 629,000
Period ended March 31, 2003 629,000 - 74,000 555,000
Period ended June 30, 2003 555,000 - 162,000 393,000
General and Administrative (G&A)
- --------------------------------
General and administrative expenses for the three months ended June 30,
2003 and 2002 were $723,000 and $975,000, respectively. For the six months ended
June 30, 2003 and 2002 general and administrative expenses were $1.5 million and
1.8 million, respectively. The decrease is largely the result of continued
efforts to decrease the size of the Partnership's administrative functions
following the loss of the HTRG contract and closing of the timberland consulting
offices in Canada. The majority of the decrease was from a reduction in
administrative staff to 10 employees at June 30, 2003 from 18 employees at June
30, 2002. The Partnership is projecting G&A expenses for 2003 to approximate
$3.0 million as compared to $3.9 million in 2002.
Interest Income and Expense
- ---------------------------
Interest income for the three-month period ended June 30, 2003 declined
to $75,000 from $128,000 at June 30, 2002. On a year-to-date basis interest
income declined to $152,000 as of June 30, 2003 from $239,000 at June 30, 2002.
The decline in interest income is due to the reduction in the balance of the
note receivable from the purchaser of Port Ludlow. This note is due in full in
August 2004 and has a balance of $1.5 million as of June 30, 2003.
Interest expense for the three-month period ended June 30, 2003 and
2002 was $769,000 and $810,000, respectively. On a year-to-date basis interest
expense was $1.6 million and $1.7 million as of June 30, 2003 and 2002,
respectively. The Partnership's debt consists primarily of mortgage debt with a
fixed interest rate. The decrease in interest expense is the result of our
annual principal payments on that debt that are due April 1st each year.
Income Tax
- ----------
Pope Resources is a limited partnership and is therefore not subject to
corporate 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 that are subject to income tax.
For the three months ended June 30, 2003 the Partnership recorded a
$9,000 tax provision as compared to a $425,000 tax benefit for the comparable
period in the prior year. On a year-to-date basis, the Partnership recorded a
$3,000 tax provision in 2003 and a tax benefit of $441,000 in 2002. The 2002 tax
benefit resulted from a loss recognized in connection with investment in our
Canadian subsidiary.
Supplemental Segment Information
- --------------------------------
The following table provides comparative operating information for the
Partnership's segments:
SEGMENT INFORMATION
(all amounts in $000's)
Three months ended June 30, Six months ended June 30,
2003 2002 2003 2002
Revenues:
Fee Timber $6,338 $7,350 $13,113 $11,324
Timberland Management & Consulting
(TM&C) 299 1,922 683 3,542
Real Estate 843 663 996 906
------------- ----------------- ----------------- ------------
Total 7,480 9,935 14,792 15,772
EBITDDA*:
Fee Timber 3,531 4,433 7,561 6,629
TM&C (180) 473 (289) 623
Real Estate 250 (946) (27) (1,099)
General & administrative (629) (900) (1,264) (1,633)
------------- ----------------- ----------------- ------------
Total 2,972 3,060 5,981 4,520
Depreciation, depletion and
amortization:
Fee Timber 845 1,068 1,719 1,597
TM&C 14 51 34 109
Real Estate 20 14 39 29
General & administrative 94 107 191 227
------------- ----------------- ----------------- ------------
Total 973 1,240 1,983 1,962
Operating income (loss):
Fee Timber 2,686 3,365 5,842 5,032
TM&C (194) 422 (323) 514
Real Estate 230 (960) (66) (1,128)
General & administrative (723) (975) (1,455) (1,828)
------------- ----------------- ----------------- ------------
Total $1,999 $1,852 $3,998 $2,590
============= ================= ================= ============
*EBITDDA= Earnings before interest, income tax, depletion, depreciation, and
amortization. The Company considers earnings (net income or loss) before
interest expense, income taxes, depreciation, depletion and amortization
(EBITDDA) to be a relevant and meaningful indicator of liquidity and earnings
performance commonly used by investors, financial analysts and others in
evaluating companies in its industry and, as such, has provided this information
in addition to the generally accepted accounting principle-based presentation of
net income or loss.
Analysis of Operating Income
- ----------------------------
The following table sets forth expenses as a percentage of revenues for
the three months and six months ended June 30, 2003 and 2002:
Three months ended June 30, Six months ended June 30,
-------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------
Revenues 100% 100% 100% 100%
Cost of sales 42 38 41 35
Operating expenses 21 33 22 37
General, and administrative expenses 10 10 10 12
-------------- -------------- ----------- --------------
Operating income 27% 19% 27% 16%
============== ============== =========== ==============
Cost of sales includes depletion on timber harvested and the cost of
purchasing and producing tangible goods for sale. Cost of sales for the
Partnership will fluctuate due to the mix of revenue between the sale of
tangible goods and revenue generated from providing services. Cost of sales as a
percentage of revenue increased 4% (to 42%) for the three months ended June 30,
2003 from 38% in the comparable period in 2002. For the six months ended June
30, 2003 cost of sales as a percentage of revenues increased 6% (to 41%) from
35% for the comparable period in 2002. The increase is attributable to the
increased proportion of total revenue derived from the sale of logs off the
Partnership's tree farms relative to service fees earned by providing timberland
management services (the latter generates no cost of sales to correlate with
reported revenues). For the three months ended June 30, 2003, Fee Timber revenue
represented 85% of total revenue versus 74% for the comparable period in 2002
and for the six months ended June 30, 2003 Fee Timber represented 89% of total
revenue versus 72% for the comparable period in 2002.
Operating expenses consist of salary and other costs directly
attributable to revenue-generating activity. As a percentage of revenue,
operating expenses have decreased 12% (to 21%) for the three months ended June
30, 2003 from 33% for the comparable period in 2002. For the six months ended
June 30, 2003 operating expenses as a percentage of revenue have decreased 15%
(to 22%) from 37% for the comparable period in 2002. The decrease in operating
expenses as a percentage of revenue is also due to the change in the
Partnership's mix of operating activities in 2003. Beginning January 1, 2003
ORMLLC is no longer providing timberland management services to HTRG and the
forestry consulting offices in Canada were closed. Operating expenses for both
of these activities were significant relative to revenue generated.
As a percent of revenue, G&A expenses were consistent at 10% of revenue
for both the three months ended June 30, 2003 and 2002. For the six months ended
June 30, 2003 G&A expenses as a percentage of revenue declined 2% (to 10%) from
12% for the comparable period in 2002. General and administrative expenses have
been managed down over the last couple years as the Partnership has exited less
profitable operations and commensurately pared back overhead costs.
Liquidity and Capital Resources
- -------------------------------
We ordinarily finance our operations using funds from operations and,
where appropriate in management's assessment, using bank lines of credit. Funds
generated internally from operations and externally through financing are
expected to provide the required resources for the Partnership's capital
expenditures. The Partnership's debt-to-total capitalization ratio was 45% at
June 30, 2003. Management considers its capital resources to be adequate for its
current plans and does not anticipate any significant changes in its
debt-to-total capitalization ratio over the next 12 months.
Management has discretion to increase or decrease the volume of logs
cut, which has a corresponding impact on net income and cash flow. Management's
current plan is to harvest approximately 19 MMBF of timber over the remaining
six months of 2003 for a total fiscal 2003 harvest of 45 million board feet.
Since harvest plans are based on demand and pricing, actual harvesting may vary
subject to management's ongoing review.
In the six months ended June 30, 2003, cash generated by operating
activities was $3.9 million and overall cash and cash equivalents increased
$975,000 from December 31, 2002. Cash used in investing activities for the three
months ended June 30, 2003 was $706,000 and consisted of reforestation
expenditures, capital improvements to buildings at the Port Gamble townsite, and
capitalized expenditures for the Gig Harbor property. Cash used in financing
activities included a mortgage principal payment of $1.6 million, two unitholder
distributions totalling $452,000 and a minority interest payment of $161,000.
Capital expenditures for the year 2003 are expected to be approximately $2.1
million.
In the first six months of 2002, cash generated by operating activities
was $4.6 million and overall cash and cash equivalents increased $2.7 million
from December 31, 2001. Cash used in investing activities for the six months
ended June 30, 2002 consisted of capital expenditures of $1.1 million netted
against proceeds from the sale of an office building acquired with the Columbia
tree farm in March 31, 2001 of $425,000. Capital expenditures for the six months
ended June 30, 2002 consist of reforestation, road building, and other
miscellaneous capital additions. Cash used in financing activities included a
mortgage principal payment of $1.1 million and a minority interest distribution
of $170,000.
Seasonality
- -----------
Fee Timber. The Partnership owns a total of 112,000 acres of timberland
in Washington State. Our timber acreage is concentrated in two tree farms: the
72,000 acre Hood Canal tree farm located in Kitsap, Jefferson, Mason Counties on
the eastern side of Washington's Olympic Peninsula, and the 40,000 acre Columbia
tree farm located in Cowlitz, Clark, Lewis, Skamania, and Pierce counties on the
western side of Washington's Cascade mountain range.
The Hood Canal tree farm is concentrated at low elevations, which
permits us to harvest trees year-round. Generally, we concentrate our harvests
from this farm in the winter and spring when supply, and thus competition, is
typically lower and, accordingly, when we can expect to receive higher prices.
We ordinarily reduce our harvest from the Hood Canal tree farm in the summer
months. In 2000 we acquired the Columbia tree farm as a means to use our
resources more efficiently and to improve our operating cash flow in the summer
and fall. Because the Columbia tree farm is less accessible in the winter
months, we plan to harvest from that tree farm primarily in the summer and early
fall. The result, management believes, will be a reduction in the seasonal
variations we have experienced from our fee timber operations in recent years.
Timberland Management & Consulting. Timberland Management & Consulting
operations are not significantly seasonal.
Real Estate. While Real Estate results are not expected to be seasonal,
the nature of the activities in this segment will likely result in large
non-recurring transactions that may have large positive or negative impacts on
revenue and operating income of the Partnership. Moreover, we expect to continue
to see some seasonal fluctuations in this segment because of the effects of
weather on Pacific Northwest development.
Risks and Uncertainties
- -----------------------
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. The Partnership competes against much
larger companies in each of its 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, 2002, and in our various other filings with the Securities and Exchange
Commission. You should review these risks in deciding whether to invest in
Partnership units, and you 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 selling to the export
market. The markets for these products 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. 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. Easy access to a strong market for logs is important
to the Partnership's profitability. To the extent that local mill closures
reduces competition for wood products in the Puget Sound region the
Partnership's profitability may be negatively affected.
The ability of the Partnership to grow and harvest timber can be
significantly impacted by legislation, regulations or court rulings that
restrict or stop forest practices. Restrictions to 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 majority of our Timberland Management & Consulting revenue is
generated through one client. The revenue generated from this client is expected
to taper off and end by the end of 2003. Management is working to expand our
customer base through market outreach efforts.
As a component of those efforts, we have renewed our focus on the
Investor Portfolio Management Business ("IPMB"), which is a component of our
Timberland Management & Consulting segment. However, unlike many 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
shareholder 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 the Partnership's 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 revenues from
our real estate investments. The Partnership's 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 the
Partnership's investments. Moreover, these investments often are highly illiquid
and thus may not generate cash flow if and when needed to support our other
operations.
Contractual Obligations, Commercial Commitments and Contingencies
- -----------------------------------------------------------------
The Partnership's commitments at June 30, 2003 consist of its revolving
term loan, performance bonds, and operating leases entered into in the normal
course of business.
- -------------------------------------------------------------------------------------------------------------------------
Payments Due By Period/ Commitment Expiration Period
- -------------------------------------------------------------------------------------------------------------------------
Obligation or Commitment
Total Less than 1 year 1-3 years 4-5 years After 5 years
- -------------------------------------------------------------------------------------------------------------------------
Total debt $37,626,000 $1,569,000 $3,219,000 $2,976,000 $29,862,000
- -------------------------------------------------------------------------------------------------------------------------
Performance bonds 100,000 - - - -
- -------------------------------------------------------------------------------------------------------------------------
Capital lease obligations - - - - -
- -------------------------------------------------------------------------------------------------------------------------
Operating Leases 216,000 103,000 107,000 6,000 -
- -------------------------------------------------------------------------------------------------------------------------
Unconditional purchase
obligations - - - - -
- -------------------------------------------------------------------------------------------------------------------------
Other long term obligations
468,000 100,000 40,000 40,000 288,000
- -------------------------------------------------------------------------------------------------------------------------
Total contractual obligations $38,410,000 $1,772,000 $3,366,000 $3,022,000 $30,150,000
- -------------------------------------------------------------------------------------------------------------------------
As described above, the Partnership has debt totaling $37.6 million as
of June 30, 2003. Other long-term obligations include the Partnership's $393,000
estimated liability as of June 30, 2003 for environmental remediation in and
around the Port Gamble townsite and a $175,000 liability for a supplemental
employment retirement plan. The Partnership expects to spend $123,000 in
connection with these liabilities over the next twelve months.
Capital Expenditures and Commitments
- ------------------------------------
Total capital expenditures in 2003 are currently expected to be
approximately $2.1 million, of which $716,000 has been expended through June 30,
2003; however, these expenditures could be increased or decreased as a
consequence of future economic conditions. The Partnership expects that the
funds for these expenditures will be generated internally through operations and
externally through financing.
Cost of Compliance with Government Regulation
- ---------------------------------------------
Compliance with laws, regulations and demands usually involves capital
expenditures as well as operating costs. The Partnership cannot easily quantify
future amounts of capital expenditures required to comply with these laws,
regulations and demands, or the effects on operating costs, because in some
instances compliance standards have not been developed or have not become final
or definitive. Accordingly, at this time the Partnership has not quantified any
future capital requirements to comply with any new regulations being developed
by the United States or Canadian regulatory agencies.
Litigation
- ----------
The Partnership may from time to time be a defendant in lawsuits
arising in the ordinary course of business. As of June 30, 2003 and as of the
date of this report, there was no litigation pending or, to the Partnership's
knowledge, threatened that, if determined adversely to the Partnership, would
have a material adverse effect on the Partnership's business, operating results
or financial condition.
ACCOUNTING MATTERS
Critical Accounting Policies and Estimates
- ------------------------------------------
The Partnership believes its most critical accounting policies and
estimates include those related to management's calculation of timber depletion
and liabilities related to 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 fair values. 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.
Depletion: 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 on January 1st of 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.
The cost of replanting acres harvested is initially capitalized to
pre-merchantable timber. After 40 years, such costs are reclassified from
pre-merchantable to merchantable timber and are then incorporated into the cost
base for purposes of calculating the depletion rate. The cost of acquiring the
Columbia tree farm was allocated to the age classes of timber purchased and are
incorporated into the merchantable timber inventory when those stands turn 40
years old.
Inventory volumes take into account the applicable state and federal
regulatory limits on timber harvests as applied to the Partnership's properties,
including the new 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. The timber inventory
volume is accounted for by the Partnership's standing timber inventory system,
which utilizes periodic statistical sampling of the timber (cruising) with
annual adjustments made for estimated growth and the depletion of areas
harvested. To calculate the depletion rate the Partnership has determined that a
combined pool representing costs and volume of both the Hood Canal and Columbia
tree farms is the most appropriate method to use.
The Partnership's decision to calculate a pooled rate representing both
tree farms (versus a separate rate for each tree farm) gave considerable weight
to a key reason for the Columbia tree farm acquisition: namely, to fill in an
age class gap on the Hood Canal tree farm. A combined pool approach is
consistent with the way in which the tree farms are managed as a single
investment. Given that the tree farms are managed as a single investment it was
deemed appropriate to apply one rate to both tree farms even though the cost
basis for each are different.
Fertilization costs: The Partnership fertilized stands in 2002 that it
expects to harvest within five to ten years. These costs are capitalized and
included in the depletion pool as the stands are harvested.
Road costs: The cost of building and significant resurfacing work on
permanently maintained roads is capitalized. Capitalized road costs are expensed
as timber is harvested by applying an amortization rate representing the
capitalized road costs divided by estimated merchantable inventory (as used in
the depletion calculation discussed above) to the volume of timber harvested
during the reporting period. The cost of building temporary roads and
maintaining roads is expensed as incurred.
Environmental remediation: The environmental remediation liability
represents estimated payments to be made to remedy and monitor certain areas in
and around the townsite of Port Gamble. Port Gamble is a historic town that was
operated by Pope & Talbot, Inc. (P&T), a related party, until 1985 when the
townsite and other assets were spun off to the Partnership. P&T leased the mill
site at Port Gamble through January 2002, when it signed an agreement with the
Partnership dividing the responsibility for environmental remediation of Port
Gamble between the two parties.
The environmental remediation liability is based upon an estimate of
the Partnership's portion of the clean-up costs under this agreement. During the
second quarter of 2002 the environmental liability increased $0.7 million as a
result of costs to complete the Partnership's share exceeding the original
estimate. While the majority of the Partnership's portion of the clean up
efforts are complete, there remains the possibility that the remaining
remediation or monitoring activities may exceed estimates resulting in an
additional environmental remediation charge.
Deferred tax assets: The Partnership has a United States subsidiary
corporation that has $1.3 million of deferred tax assets as of December 31,
2002. The majority of this balance represents net operating loss carryforwards
resulting from the liquidation of our subsidiary in Canada. The Partnership
forecasts that the United States subsidiary corporation will earn income over
the next five years resulting in the utilization of this tax asset.
Land development costs: Our Real Estate department is working to bring
properties to the point where physical construction of the properties' planned
end use can begin. The extent of such efforts varies from property to property
but the process for each discrete parcel has elements in common with other
parcels. We refer to these efforts as the "Entitlement Process." The Entitlement
Process may consist of one or more of the following steps: obtaining the
necessary amendments to a county's comprehensive plan, pursuing zoning
adjustments, developing site plans and a preliminary plat for the property,
ensuring adequate access to the property, and making available necessary access
to utilities (such as water, power and sewer).
For projects where changes to zoning or comprehensive plan ("Comp
Plan") provisions are required, costs incurred in the Entitlement Process prior
to securing such changes will be expensed. The rationale for this is that there
are too many uncertainties and contingencies attached to zoning and Comp Plan
changes. Where the zoning and/or Comp Plan is inconsistent with the planned
project, the probability of success is sufficiently low that expensing of costs
pursuant to such rezone or Comp Plan amendments is deemed appropriate. For
projects not requiring a rezone or change to a Comp Plan (or, once such changes
are secured if applicable), Entitlement Process costs for such projects will be
capitalized. Such capitalized costs will include salary costs to the extent that
an employee's efforts are primarily dedicated to furthering development of the
project.
Accounting for unit options: The Partnership accounts for employee
unit-based compensation in accordance with APB Opinion No. 25, Accounting for
Stock Issued to Employees. Accordingly, compensation cost for unit options is
measured as the excess, if any, of the fair value of the Partnership's units at
the date of grant over the amount an employee must pay to acquire the unit.
Unit options granted have an exercise price not less than the fair
value of the Partnership's unit price on the date of the grant. Had compensation
expense for unit option grants been recognized based on the fair value at the
grant date consistent with the Black-Scholes method described in SFAS No. 123,
Accounting for Stock-Based Compensation, the Partnership's net income would have
included a $72,000 expense for the cost of options vesting during the three
months ended June 30, 2003 and a $135,000 expense during the six months ended
June 30, 2003.
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Interest Rate Risk
- ------------------
As of June 30, 2003, the Partnership had $37.6 million of fixed rate
debt outstanding with a fair value of approximately $43.2 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 $2.4 million but would not affect our revenues or cash flows.
Item 4
CONTROLS AND PROCEDURES
The Partnership's management maintains an adequate system of internal
controls to promote the timely identification and reporting of material,
relevant information. Those controls include requiring executive management and
all managers in accounting roles to sign a Code of Ethics. The Partnership also
has implemented a system to provide for the confidential submission by employees
of concerns about accounting and financial matters. Additionally the
Partnership's senior management team meets regularly to discuss significant
transactions and events effecting the Partnership's operations. The
Partnership's President & CEO, and V.P. & CFO, lead these meetings and consider
whether topics discussed represent information that should be disclosed under
the rules of the SEC. The Board of Directors of the Partnership's general
partner includes an Audit Committee. The Audit Committee reviews our earnings
releases 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 three times each year.
The Partnership's President & CEO and V.P. & CFO are responsible for
establishing and maintaining disclosure controls and procedures. They have
designed such controls to ensure that all material information is made known to
them by others within the organization. Management regularly evaluates ways to
improve internal controls.
Our executive officers completed an evaluation of the disclosure
controls and procedures and has determined them to be functioning properly and
effectively as of June 30, 2003. They did not discover any significant
deficiencies or material weaknesses within the controls and procedures that
required modification.
Since the completion of that evaluation, there have been no significant
changes in internal controls or in other factors that are likely to
significantly affect internal controls.
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 will have,
individually or in the aggregate, a material adverse impact on its business,
prospects, financial condition or results of operations.
Item 2: Changes in Securities and Use of Proceeds
None
Item 3: Defaults upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Forms 8-K.
On July 21, 2003, the Partnership filed a report on Form 8-K reporting
earnings for the three-month period ended June 30, 2003.
On July 11, 2003 the Partnership filed a report on Form 8-K with a
Regulation FD disclosure of a presentation that subsequently was provided to
certain parties to answer questions about potential investments in Pope
Resources.
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 18 U.S.C.
Section 1350 (furnished with this report in accordance with
SEC Rel. No. 33-8238 (June 5, 2003).
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 (furnished with this report in accordance with
SEC Rel. No. 33-8238 (June 5, 2003).
99.1 Press Release of the Registrant dated July 21, 2003,
incorporated by reference to the Current Report on Form 8-K
filed by the Registrant on July 21, 2003
99.2 Presentation provided to prospective investors, incorporated
by reference to the Current Report on Form 8-K filed by the
registrant on July 11, 2003
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 8, 2003.
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)
LIST OF 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 18 U.S.C.
Section 1350 (furnished with this report in accordance with SEC Rel.
No. 33-8238 (June 5, 2003).
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 (furnished with this report in accordance with SEC Rel.
No. 33-8238 (June 5, 2003).
99.1 Press Release of the Registrant dated July 21, 2003, incorporated by
reference to the Current Report on Form 8-K filed by the Registrant
on July 21, 2003
99.2 Presentation provided to prospective investors, incorporated by
reference to the Current Report on Form 8-K filed by the registrant
on July 11, 2003