Attached files
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EX-31.2 - POPE RESOURCES LTD PARTNERSHIP | v176833_ex31-2.htm |
EX-32.1 - POPE RESOURCES LTD PARTNERSHIP | v176833_ex32-1.htm |
EX-23.1 - POPE RESOURCES LTD PARTNERSHIP | v176833_ex23-1.htm |
EX-31.1 - POPE RESOURCES LTD PARTNERSHIP | v176833_ex31-1.htm |
EX-32.2 - POPE RESOURCES LTD PARTNERSHIP | v176833_ex32-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
one)
x
|
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For the fiscal year ended December 31,
2009
or
¨
|
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. For the transition period from
to
|
Commission
File No. 1-9035
Pope Resources, A Delaware
Limited Partnership
(Exact
name of registrant as specified in its charter)
Delaware
|
91-1313292
|
|
(State
of Organization)
|
(IRS
Employer I.D. No.)
|
19245
Tenth Avenue NE, Poulsbo, WA 98370
(Address
of principal executive offices, Zip Code)
Registrant's
telephone number, including area code: (360) 697-6626
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
|
Name of each exchange on which
registered
|
|
Depositary
Receipts (Units)
|
NASDAQ
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
Yes ¨ No x
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 than 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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes ¨ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 in Rule 12b-2 of the
Exchange Act.
Large
Accelerated Filer ¨
|
Accelerated
Filer x
|
Non-Accelerated
Filer ¨ (Do
not check if a smaller reporting company)
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in rule
12b-2 of the Act).
Yes ¨ No x
At June
30, 2009, the aggregate market value of the non-voting equity units of the
registrant held by non-affiliates was approximately $80,474,000
The
number of the registrant’s limited partnership units outstanding as of February
19, 2010 was 4,598,903.
Documents
incorporated by reference: None
Pope Resources, A Delaware Limited
Partnership
Form 10-K
For the Fiscal Year Ended December 31,
2009
Index
|
Page
|
||
Part I | |||
Item 1.
|
Business.
|
3
|
|
Item 1A.
|
Risk
Factors
|
15
|
|
Item 1B.
|
Unresolved Staff
Comments
|
19
|
|
Item 2.
|
Properties
|
19
|
|
Item 3.
|
Legal
Proceedings
|
20
|
|
Item 4.
|
(RESERVED)
|
20
|
|
Part II
|
|||
Item 5.
|
Market for Registrant’s Units,
Related Security Holder
|
||
Matters and Issuer Purchases of
Equity Securities
|
21
|
||
Item 6.
|
Selected Financial
Data
|
24
|
|
Item 7.
|
Management’s Discussion and
Analysis of Financial Condition
|
||
and Results of
Operations
|
26
|
||
Item 7A.
|
Quantitative and Qualitative
Disclosures About Market Risk
|
50
|
|
Item 8.
|
Financial Statements and
Supplementary Data
|
51
|
|
Item 9.
|
Changes in and Disagreements with
Accountants on Accounting and
|
||
Financial
Disclosure
|
77
|
||
Item 9A.
|
Controls and
Procedures
|
77
|
|
Item 9B.
|
Other
Information
|
78
|
|
Part III
|
|||
Item 10.
|
Directors and Executive Officers
of the Registrant
|
79
|
|
Item 11.
|
Executive Compensation;
Compensation Discussion & Analysis
|
83
|
|
Item 12.
|
Security Ownership of Certain
Beneficial Owners and Management
|
||
and Related Security Holder
Matters
|
93
|
||
Item 13.
|
Certain Relationships and
Related Transactions
|
95
|
|
Item 14.
|
Principal Accountant Fees and
Services
|
96
|
|
Part IV
|
|||
Item 15.
|
Exhibits, Financial Statement
Schedule
|
96
|
|
Signatures
|
102
|
2
PART
I
Item 1.
|
BUSINESS
|
OVERVIEW
Pope Resources, A Delaware Limited
Partnership (the “Partnership”), was organized in 1985 as a result of a
spin-off by Pope & Talbot, Inc. (“P&T”), Pope & Talbot
Development, Inc. and other P&T affiliates, of certain of P&T’s
timberland and real estate development assets.
The Partnership currently operates in
three primary business segments: (1) Fee Timber, (2) Timberland Management &
Consulting and (3) Real Estate. Fee Timber operations consist
of growing and harvesting timber from our 114,000 acres of tree
farms. Timberland Management & Consulting, through our
subsidiary, Olympic Resource Management LLC (“ORMLLC”), provides timberland
management services to ORM Timber Fund I, LP (Fund I), which owns 24,000 acres
of timberlands in western Washington, and ORM Timber Fund II, Inc. (Fund II),
which owns 12,000 acres in western Oregon. ORMLLC also provides
timberland management and forestry consulting services to other third party
owners of timberlands and is currently engaged in identification and due
diligence for additional timberland investments by Fund II. Our total
equity investment in Fund I is $11.7 million, which represents a 20% interest in
Fund I’s total invested capital of $58.5 million. Our total equity
investment in Fund II is $6.9 million, which represents a 20% interest in Fund
II’s total invested capital of $34.9 million compared with total committed
capital of $84.4 million. The invested capital was used by Fund II to
complete the acquisition of two tree farms totaling 12,000 acres for $34.4
million, along with an additional $500,000 of working capital. The remaining
$9.9 million balance of our 20% co-investment in Fund II will be due upon the
successful completion of acquisitions for the fund. Real Estate
operations on our approximately 2,500 acres consist of efforts to enhance the
value of our land by obtaining the entitlements and, in some cases, building the
infrastructure necessary to make further development
possible. Further segment financial information is presented in Note
12 to our consolidated financial statements included in this
report. Copies of the Partnership’s Securities Exchange Act reports
and other information can also be found at www.poperesources.com. The
information contained in or connected to our web site is not incorporated by
reference into this Annual Report on Form 10-K and should not be considered part
of this or any other report filed with or furnished to the SEC.
DESCRIPTION OF BUSINESS
SEGMENTS
Fee
Timber
Operations. Our Fee Timber segment consists of
operations surrounding management of the Partnership’s core assets: the Hood
Canal tree farm, which consists of approximately 70,000 acres located in the
Hood Canal area of Washington, and the 44,000 acre Columbia tree farm located in
southwestern Washington State. Management views these two tree farms
as the Partnership’s core holdings and manages them as a single operating
unit. We have owned the Hood Canal tree farm, substantially as
currently comprised, since our formation, and we acquired the bulk of the
Columbia tree farm in 2001. Operations on the tree farms consist
primarily of growing, harvesting, and marketing timber and timber products to
both domestic and Pacific Rim markets. In addition, both tree farms
generate other revenues from sources such as cell tower, brush, and mineral
leases. Our Fee Timber segment produced 72%, 84%, and 68% of our
consolidated revenue in 2009, 2008, and 2007, respectively.
This segment also includes operations of
Fund I and Fund II, which are consolidated into our financial
statements. Fund I acquired 24,000 acres of timberland in the fourth
quarter of 2006. We harvested 5 million board feet (MMBF) from these
timberlands in 2008 but no volume in 2009. Harvest and other
operations of Fund I are not expected to contribute significantly to income as a
separate depletion pool with a higher depletion rate is applied to this harvest
volume. Under normal market conditions the depletion charge would be
expected to approximate net stumpage realized (delivered log price less
harvesting and transportation cost) from the harvest. ORMLLC is the
general partner of Fund I and earns management fees and incurs expenses
resulting from managing Fund I. Fund II acquired 12,000 acres of
timberland in the fourth quarter of 2009. No harvest activity took
place on Fund II land during 2009. ORMLLC is the manager of Fund II
and receives management fees from Fund II for providing these management
services. The fees generated from managing the Funds are eliminated in
consolidation of our financial results.
3
Inventory. In the discussion
below, inventory information for the Partnership’s Hood Canal and Columbia tree
farms is presented separately from timber inventory for the Funds.
We define “merchantable timber
inventory” to mean timber inventory in productive timber stands that are 35
years of age and older, which represents management’s estimate of when
merchantable value would be assigned to the timber in a timberland sale. As of
December 31, 2009, the tree farms’ total merchantable inventory volume was
estimated to be 342 MMBF, which compares to estimated merchantable timber
inventory volume of 338 MMBF at December 31,
2008. Merchantable
inventory of the Funds as of December 31, 2009 and 2008 was 155 MMBF and 49
MMBF, respectively.
Our Hood Canal tree farm, with nearly
21 MBF of merchantable timber inventory per productive acre, has a slightly
higher stocking level than our Columbia tree farm, which contains nearly 19 MBF
of merchantable timber inventory per productive acre. In 2009, total
inventory on our Hood Canal and Columbia tree farms increased 4 MMBF as a result
of the deferral of 12 MMBF of harvest volume from our sustainable
harvest. Total inventory for the Funds increased by 106 MMBF based on
the addition of the Fund II lands and harvest deferral of 8 MMBF from Fund I.
The Partnership’s merchantable inventory
is spread among five-year age classes as follows (volumes in
MMBF):
December
31,
|
||||||||||||||||
Age Class
|
2009
Pulpwood
|
2009
Sawtimber
|
2009
Total
|
2008
Total
|
||||||||||||
35 to 39
|
11 | 50 | 61 | 68 | ||||||||||||
40 to 44
|
15 | 84 | 99 | 79 | ||||||||||||
45 to 49
|
5 | 26 | 31 | 33 | ||||||||||||
50 to 54
|
2 | 10 | 12 | 7 | ||||||||||||
55 to 59
|
2 | 14 | 16 | 43 | ||||||||||||
60 to 64
|
5 | 42 | 47 | 48 | ||||||||||||
65+
|
9 | 67 | 76 | 60 | ||||||||||||
49 | 293 | 342 | 338 |
The Funds’ merchantable inventory is spread among age classes as follows
(volumes in MMBF):
December
31,
|
||||||||||||||||
Age Class
|
2009
Pulpwood
|
2009
Sawtimber
|
2009
Total
|
2008
Total (1)
|
||||||||||||
35 to 39
|
4 | 38 | 42 | 7 | ||||||||||||
40 to 44
|
5 | 44 | 49 | 8 | ||||||||||||
45 to 49
|
- | 12 | 12 | 1 | ||||||||||||
50 to 54
|
2 | 14 | 16 | 6 | ||||||||||||
55 to 59
|
2 | 13 | 15 | 13 | ||||||||||||
60 to 64
|
1 | 4 | 5 | 1 | ||||||||||||
65+
|
2 | 14 | 16 | 13 | ||||||||||||
16 | 139 | 155 | 49 |
4
(1) Inventory as of December 31, 2008 only
includes the 24,000 acres of timberland owned by Fund I, whereas inventory as of
December 31, 2009 also includes 12,000 acres acquired by Fund II in the fourth
quarter of 2009.
Timber inventory volume is estimated
using an annual statistical sampling of the timber (a process called
“cruising”), with adjustments made for estimated growth and depletion of areas
harvested. This process is monitored by comparing actual harvest
volume to the corresponding estimates for those stands in the Partnership’s
standing timber inventory system. This analysis looks at each harvest
unit and measures the variance between the actual cut and the projected
inventory volume, with specific harvest unit variances typically offsetting one
another to a small net aggregate variance. The difference between the
volume reflected in the inventory for a given year’s harvest units and the
amount of harvest volume actually removed from those stands is usually within
one to three percent of the volume harvested. Inventory volumes take
into account the applicable state and federal regulatory limits on timber
harvests as applied to our properties, including Washington State’s forest
practice regulations that provide for expanded riparian management zones,
wildlife habitat set-asides, and other harvest restrictions. The
Partnership annually cruises 15% to 20% of its productive timberland acres with
stand ages of at least 20 years.
The dominant timber species on the
Partnership’s tree farms is Douglas-fir. Douglas-fir 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. In addition to Douglas-fir, other species on the
Partnership’s tree farms include western hemlock, western red cedar, and red
alder. The merchantable timber inventory from the Funds consists of a
much heavier mix of whitewoods, including western hemlock and spruce (other
conifer).
The Partnership’s total merchantable
timber inventory as of December 31, 2009 is distributed among species as follows
(volumes in MMBF):
Species
|
2009 Volume
|
Percent of
total
|
||||||
Douglas-fir
|
250 | 73 | % | |||||
Western
hemlock
|
43 | 13 | % | |||||
Western red
cedar
|
14 | 4 | % | |||||
Other
conifer
|
12 | 3 | % | |||||
Red alder
|
19 | 6 | % | |||||
Other
hardwood
|
4 | 1 | % | |||||
Total
|
342 | 100 | % |
The Funds’ total merchantable timber
inventory as of December 31, 2009 is distributed among species as follows
(volumes in MMBF):
Species
|
2009 Volume
|
Percent of
total
|
||||||
Douglas-fir
|
62 | 40 | % | |||||
Western
hemlock
|
57 | 36 | % | |||||
Western red
cedar
|
2 | 1 | % | |||||
Other
conifer
|
26 | 17 | % | |||||
Red alder
|
8 | 6 | % | |||||
Total
|
155 | 100 | % |
The Partnership’s tree farms as of
December 31, 2009 approximate 114,000 acres excluding the Funds’ tree
farms. Of this total, approximately 96,000 acres are designated
productive acres. Fund I and II’s tree farms as of December 31, 2009
totaled nearly 36,000 acres, of which approximately 30,000 of those acres were
designated productive acres. Productive acres represent land that is
suitable for growing and harvesting timber and excludes acreage that is
unavailable for harvest because it is in protected wetlands or riparian
management zones (stream set-asides). Productive acres also reflect
deductions for roads and other land characteristics that inhibit suitability for
growing or harvesting timber. Readers will note in the acreage
table below that 34% of the Partnership’s acreage is in the 20-24 and 25-29 year
age classes, some of which will begin moving from premerchantable to
merchantable timber inventory over the next five years. As of December 31, 2009, total
productive acres are spread by timber age-class as
follows:
5
Age
Class
|
12/31/2009
Partnership Acres
|
%
|
12/31/2009
Fund I & II Acres
|
%
|
||||||||||||
Clear-cut
|
1,438 | 1 | % | - | 0 | % | ||||||||||
0 to 4
|
8,507 | 9 | % | 974 | 3 | % | ||||||||||
5 to 9
|
9,752 | 10 | % | 1,625 | 5 | % | ||||||||||
10 to 14
|
13,683 | 14 | % | 1,903 | 6 | % | ||||||||||
15 to 19
|
4,488 | 5 | % | 3,169 | 10 | % | ||||||||||
20 to 24
|
16,051 | 17 | % | 4,438 | 15 | % | ||||||||||
25 to 29
|
16,197 | 17 | % | 4,538 | 15 | % | ||||||||||
30 to 34
|
8,966 | 9 | % | 6,228 | 21 | % | ||||||||||
35 to 39
|
4,143 | 4 | % | 2,528 | 8 | % | ||||||||||
40 to 44
|
5,143 | 5 | % | 2,394 | 8 | % | ||||||||||
45 to 49
|
1,773 | 2 | % | 570 | 2 | % | ||||||||||
50 to 54
|
778 | 1 | % | 611 | 2 | % | ||||||||||
55 to 59
|
637 | 1 | % | 519 | 2 | % | ||||||||||
60 to 64
|
1,865 | 2 | % | 176 | 1 | % | ||||||||||
65+
|
2,785 | 3 | % | 570 | 2 | % | ||||||||||
96,206 | 30,243 |
Timberland
Acquisitions. We
made two timberland purchases in 2009 that added approximately 12,000 acres to
the Fund II tree farm inventory for a total purchase price of $34.4
million.
Long-term Harvest
Plan. The
Partnership’s
estimates of sustainable annual
harvest level is derived from a long-term harvest planning model that factors in
economic rotation ages of all stands, existing timber inventory levels, growth
and yield assumptions, and regulatory constraints associated with the Forest
Practice Rules of both Washington and Oregon. From this information,
management develops annual and long-term harvest plans predicated on their
assessment of existing and anticipated economic conditions with the objective of
maximizing long-term values. Management generally updates this plan
every other year, or more frequently as economic conditions require, to take into account changes in timber
inventory, including species mix, available acres, soil productivity
classifications, volume, size, and age of the timber. The long-term
harvest plan is calculated using a non-declining even-flow harvest constraint,
meaning that absent changes to available inventory or estimated growth rates,
future harvest levels will be as high as, or higher than, current
levels.
We last updated our long-term annual
harvest plan in 2008, resulting in estimated sustainable harvest levels
from the Hood Canal and Columbia tree farms at 44 MMBF. The estimated
sustainable harvest level for the Funds is 16 MMBF. As discussed below in greater detail, given the
relatively poor log markets experienced in 2009 that are also expected to
continue through 2010, we have decided to defer approximately 47% of our 2010
sustainable harvest. As a result, our planned harvest for 2010 is 32
MMBF, all on Partnership lands. The deferred harvest will be recouped
when log markets have recovered.
Marketing and
Markets. We
market timber using the manufactured log method, where we engage independent
logging contractors to harvest the standing timber and manufacture it into logs
that we then sell on the open market. We retain title to the logs
until delivery takes place, which normally occurs at a customer log
yard. We sell our logs both domestically and internationally through
log exporting intermediaries.
6
The export market for logs in the
Pacific Northwest has been migrating over the last couple years from a market
highly focused on Japan to a market that also includes Korea and
China. Sawlogs sold to Korea and China are not of the high quality
demanded by the Japanese market and, as a result, do not command the premium
pricing generally attributed to the Japanese market. However, this new source of
demand for sawlogs in the Pacific Northwest should support increased pricing to
some degree as domestic mills must now compete with this new and growing source
of demand for Pacific Northwest sawlogs. These new outlets for lower
quality logs will also help to diversify our customer mix away from domestic
mills that are more heavily dependent on the U.S. housing
market.
Logs sold to Japan, Korea, and China are
generally sold to U.S.-based brokers who in turn sell direct to offshore
customers. Over the last several years, the percentage of our annual
production sold into export markets has ranged from 6% to 16%. Factors that affect the
proportion of our sales to export markets include the relative strength of U.S.
and foreign building markets, currency exchange rates, and ocean transportation
costs.
Customers. The Partnership sells its logs
domestically to lumber mills and other wood fiber processors located throughout
western Washington and northwest Oregon. The Partnership’s logs are
also sold to export intermediaries located at the ports of Tacoma, Olympia, and
Longview, Washington. Whether destined for domestic or export
markets, the cost of transporting logs limits the destinations to which the
Partnership can profitably deliver and sell its logs.
Weyerhaeuser Company and Simpson Timber
Company were major customers for our Fee Timber segment in
2009 representing 22%, and 14%, respectively, of segment
revenue. Sawmills have lowered operating hours
and eliminated shifts in response to weak lumber markets, resulting in lower
utilization and reduced demand for logs. However, as the lumber markets improve we expect mills to increase operating hours and add back
shifts, thus increasing utilization rates and demand for logs. The Partnership delivered logs to over
38 separate customers during 2009 compared to 40
during 2008.
Competition. Most of our competitors are
comparable in size or larger. Log sellers compete on the basis of
quality, pricing, and the ability to satisfy volume demands for various types
and grades of logs to particular markets. Management believes that
the location, type, and grade of the Partnership’s timber will enable it to
compete effectively in these markets. However, our products are
subject to increasing competition from a variety of non-wood and engineered wood
products as well as competition from foreign-produced logs.
Forestry and
Stewardship Practices. The Partnership’s timberland operations
incorporate management activities that include reforestation, control of
competing brush in young stands,
thinning of the timber to achieve optimal spacing after stands are established,
fertilization, and road maintenance. During 2009, we planted 815,000
seedlings on 1,874 acres. This compares to the years 2008 and 2007 in
which the Partnership planted 792,000 and 1,197,000 seedlings on 1,821 and 2,751
acres, respectively. Seedlings are generally planted from December to
April depending on weather and soil conditions. Planting will vary
from year to year based upon harvest level, the timing of harvest, and seedling
mortality rates on stands planted in prior years. Management’s policy
is to stay current on its reforestation program, returning all timberlands to
productive status as soon as economically feasible following
harvest.
All harvest and road
construction activities are conducted under the Washington State Forest
Practices Act, a comprehensive set of rules and regulations governing how a
defined set of forest operations are allowed to go forward under State
permit. An application for harvest or road construction must
address soil stability and potential impact to public resources; in many cases
the consultation of scientifically based Watershed Analyses and third-party,
State-qualified, geo-technical consultants are utilized to ensure safety of
operations and compliance with regulations. Once harvest activities
commence on the newly acquired Oregon properties, the Partnership will also be
subject to the related rules and regulations within that
state.
7
In addition to new road construction,
the inventory of existing roads is maintained to the standards of the Forest
Practices Act in order to minimize siltation of nearby streams and avoid slope
failures. Beginning in 2000, all roads are required to be evaluated
for hazard and scheduled for upgrading or deconstruction (abandonment), if
needed, by the end of 2015. Our schedule was developed and accepted
by the State, and efforts are on track to complete all maintenance activities by
2015.
Sustainable Forestry
Initiative (SFI®). Since 2001, we have been a member
of the SFI forest certification
program, an independent environmental review and certification program that
promotes sustainable forest management, focusing on water quality, biodiversity,
wildlife habitat and species protection, and forests that have exceptional
conservation value. Beginning in 2003, in conjunction with
participation in this certification program, we have been
subject to independent
audits of the required standards for the program. Management views
this certification as an important indication of our commitment to manage our
lands in a sustainable manner and to look for ways to continually improve our
management practices. We believe this commitment is an important
business practice that contributes positively to our reputation and the
long-term value of the Partnership’s assets.
In order to maintain this certification,
management must document its timberland management policies against seven
discrete SFI objectives: Land Management, Procurement, Forestry Research Science
and Technology, Training and Education, Regulatory Compliance, Public and
Landowner Involvement in the Practice of Sustainable Forestry, and, finally,
Review and Continual Improvement.
Beginning in 2007, SFI third-party
audits increased in frequency from every three years to annually. We
were re-certified in 2009 which includes both the Partnership and the Funds
properties. Certification under SFI is currently a requirement for us
to sell logs to a number of our customers in the Partnership’s geographic
market. We believe this certification allows us to obtain the
broadest market penetration for our logs while protecting the core timberland
assets of the Partnership.
Fire
Management. Management has taken a number of steps
to mitigate risk of loss from fire, which is nonetheless possible on any
timberland property. First, management maintains a well-developed
road system that allows access and quick response to fires that do
occur. Second, management maintains a fire plan and program that
provides for increased monitoring activities and requires all operators to
maintain adequate fire suppression equipment during the summer fire
season.
Timberland
Management & Consulting
Background. In March 1997, our
unitholders authorized management to expand our timberland business into the
Investor Portfolio Management Business (IPMB). The IPMB has two
complementary business strategies: timberland investment management and
timberland management. In 1997, the Partnership formed two wholly
owned subsidiaries, ORM, Inc. and ORMLLC, to facilitate the IPMB
activities.
Operations. The Timberland Management
& Consulting segment’s key operation has been to provide various aspects of
timberland management services to third-party timberland owners as well as timberland
management services of the Funds. We
anticipate growth in this segment as ORMLLC continues its management of the
Funds, and any future funds successfully established by the Partnership.
The
Timberland Management & Consulting segment represents 3% of consolidated
revenue for each of the years ended
December 31, 2009, 2008, and 2007 after the elimination of the fees generated
from portfolio management of the Funds.
Timberland
Investment Management. The goal of our timberland investment
management program is to build and manage diversified timberland portfolios for
third-party investors and the Partnership. Management views this
objective as a means of increasing the Partnership’s total timberland base,
through our co-investment, while at the same time improving overall management
economies of scale, limiting acquisition costs, and generating fee
income. ORMLLC earns an asset management fee for managing this
capital once timber properties are acquired. The management fees
generated from managing the Funds is eliminated as a result of consolidation of
the Funds into the Partnership’s financial statements. The
elimination of these fees results in a decrease in the reported cost per acre of
managing the Funds’ tree farms under our Fee Timber segment as well as
eliminating the revenue generated from managing the Funds in the Timberland
Management & Consulting segment.
8
Fund I closed with $62 million of
committed capital in August 2005. Of this total, $58 million was
invested in two tree farms totaling 36,000 acres. Fund II closed with
$84.4 million of committed capital in March 2009. During the fourth
quarter, $34.4 million, or 41% of Fund II’s capital, was invested in two
acquisitions totaling 12,000 acres. Fund II’s two-year drawdown
period ends in March 2011, but can be extended an additional year by a vote of
the investors in Fund II. We continue to evaluate and pursue suitable
timberland for acquisition with the remaining $49.5 million of committed
capital. Fund II may also assume debt of up to 30% of the portfolio value,
increasing the total acquisition capacity to $120 million.
Timberland
Management. Our
timberland management activities provide forestland management, acquisition, and
disposition services to timber property owners. These services
generally take the form of a long-term contract where ORMLLC personnel provide
management expertise. Specialized consulting assignments are performed on an
ad-hoc basis. In July 2009, the timberland management assignment for Cascade
Timberlands LLC (“Cascade”) was terminated after over four years. The
Cascade contract began in January 2005 following an 18-month bankruptcy process
which culminated with the transfer of 522,000 acres formerly owned by Crown
Pacific LP to Cascade. On January 1, 2005 ORMLLC began managing those
timberlands for Cascade. Timberland sales by Cascade reduced acres
under management for Cascade to approximately 267,000 acres of Oregon timberland
when our contract was terminated.
Marketing. ORMLLC pursues third-party timberland
management opportunities in the western U.S. through direct marketing to
timberland owners. Marketing and business development efforts include regular contact with
forest products industry representatives, non-industry owners, and others who
provide key financial services to the timberland sector. ORMLLC’s
acquisition and disposition activities keep management informed of changes in
timberland ownership that can represent opportunities for us to market our
management and consulting services.
Customers. Timberland management
revenue in 2009 includes one client, Cascade, that represented nearly 88% of segment revenue.
Competition. ORMLLC and its subsidiaries compete
against both larger and comparably sized companies providing similar
services. There are approximately 20 established timberland
investment management organizations competing against us in the timberland
portfolio development business. However, our 20% co-investment is
considered unique among the competition. The companies in this group have access
to established sources of capital and, in some cases, increased economies of
scale that can put ORMLLC at a disadvantage. Smaller regional
companies compete effectively on price for limited scope consulting and land
management projects.
Investor Portfolio
Management Business (IPMB). IPMB operations include timberland
management and timberland investment management. Our activities on
behalf of the Funds include on-the-ground timberland management of the Funds’
tree farms and timberland investment management activities for the Funds’
portfolios.
Limitation
on Expenditures: The 1997 amendment to Pope
Resources’ Limited Partnership Agreement authorizing launch of the IPMB limits
our cumulative net expenditures incurred in connection with the IPMB to $5.0
million including debt guarantees. As of December 31, 2009 cumulative
expenditures incurred in pursuit of IPMB opportunities, including guarantees,
were less than cumulative income generated. Therefore, cumulative net
expenditures as of December 31, 2009 against the $5.0 million limit are
zero.
9
Allocation
of Income: The 1997 amendment to Pope
Resources’ 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 evenly divide IPMB income between ORM, Inc. and Pope MGP,
Inc. once such income reaches $7.0 million in any given fiscal
year.
Real
Estate
Background. The Partnership’s real estate activities are closely
associated with the management of its timberlands. Management
continually evaluates timberlands in terms of the best economic use, whether
this means continuing to grow and harvest timber or seeking a rezone of the
property for sale or development. After timberland has been logged,
management has a choice between four primary alternatives for the underlying
land: reforest and continue to use as timberland, sell as undeveloped property,
improve to various levels of development for sale as improved property, or hold
as property slated for later development or sale. Generally speaking, our
Real Estate segment’s activities consists of investing in and later
reselling improved properties, and holding properties for later development and
sale. As a result, revenue from this segment tends to fluctuate substantially, and
is characterized by relatively long
periods in which revenue is relatively low, while expenses incurred to increase the value of the
Partnership’s development properties may be
higher. When improved properties are sold, we recognize income in the
form of sale price net of acquisition and development costs.
Operations. Real Estate operations include
work considered by management necessary to maximize the value of the
Partnership’s portfolio of property that management believes has a
higher-and-better-use than
timberland or leasing residential and commercial properties in the Port Gamble
townsite. That portfolio currently consists of
approximately 2,500 acres. For our Real Estate projects, we generally seek to
secure the entitlements and/or infrastructure necessary to make development possible
and then sell the entitled property to a party who will construct
improvements. The Real Estate segment represents 25%, 13%, and 29% of
consolidated revenue in 2009, 2008, and 2007, respectively.
Development
Properties
Other Land
Investments. Management recognizes the significant
value represented by the Partnership’s real estate holdings and is focused on
adding to that value. The means and methods of adding value to our
real estate portfolio vary considerably depending on the specific location and
current zoning of each parcel. This range extends from land that has
commercial activity zoning where unit values are valued on a square foot basis
to large lots of recently cutover timberland where value is measured in per-acre
terms. In general, value-adding activities that allow for the highest
and best use of the properties include: working with communities and elected
officials to develop grass roots support for entitlement efforts, securing
favorable comprehensive plan designation and zoning, acquiring easements, and
obtaining final plat approvals.
Master planned communities in Gig
Harbor, Bremerton, Kingston, Port Ludlow, and Hansville, Washington make up
approximately 43% of the acres in our development property
portfolio. During 2009, no sales were generated from any of these
projects. Due to each property’s size, development complexity, and regulatory
environment, the projects are long-term in nature and require extensive time and
capital investments to maximize returns. An important activity within
the Real Estate segment is the development of the “Rural Lifestyles” program
through which rural residential lots are marketed both to those individuals
intent on owning rural residential lots and to builders interested in building
homes in rural locations.
Gig
Harbor. Gig Harbor, a suburb of Tacoma,
Washington, is the site of a mixed-use development that includes a 16-acre
retail/commercial site, 35 acres of business park lots, and 200 acres of land
with residential zoning. In December 2008, management completed a
preliminary plat submission for the 200-acre residential portion of this project
that called for 558 single-family and 265 multi-family lots. We
expect to have a final plat approved in 2010. In addition, an
application was submitted for entitlement of business park
lots. Entitlement efforts for the residential portion of the Gig
Harbor property continues, as development of the residential property is subject
to resolution of transportation and sewer treatment plant capacity issues with
the City of Gig Harbor. The retail/commercial and business park
parcels have transportation and sewer capacities reserved and are not subject to
resolution of either of these issues.
10
Bremerton. In 1999, the City of
Bremerton approved the Partnership’s request for a planned 264-acre mixed-use
development on property located within the Bremerton city limits. The
development plan included 61 acres zoned for industrial use and 203 acres zoned
for residential. In 2006, the Partnership completed the sale of the
203-acre residential land. As a condition of the sale, the
Partnership constructed infrastructure in 2006 and 2007 to serve the
property. The industrial park is being developed in two phases that
will result in a total of 24 lots, with 9 acres set aside for roads and other
common area improvements. Construction on the 9-lots that make up
phase I was completed in 2007 and resulted in the sale of 2 lots at the end of
2007. The timing for the construction of Phase II is dependent on the
absorption rate for the seven remaining Phase I lots.
Kingston. The Partnership prepared and submitted a
formal master plan and subdivision application in 2007 for the 356-acre Kingston
property named “Arborwood” that calls for the development of 663 single-family
and 88 multi-family lots. In 2008, a revised submittal was made in
response to the County’s comments and public hearings were held and the
preliminary plat was approved in 2009. Final approval of a
15-year Development Agreement was completed in February 2010. Further
development will not proceed until the market for residential lots
improves. The Partnership owns an additional 366 acres bordering this
project, which has zoning for 5-acre lots.
Hansville. The Partnership owns a 152-acre
residential development project in Hansville called Chatham. The
development is the result of a plat from 1913 that originally consisted of
10-acre lots that management has reestablished into 19 distinct parcels ranging
from 3-10 acres in size. Construction was completed in late 2007 and
the lots are currently being marketed for sale.
Port
Ludlow. Port
Ludlow represents a 268-acre property located just outside the Master Planned Resort
boundary of Port Ludlow, Washington. In December 2008, a submission for plat
approval was made to Jefferson County. The entitlement will allow for
up to 54 lots ranging from 1 to 1.5 acres each, with the balance of the property
designated as open space. We expect to have a final plat approved in
2010. Development beyond the point of plat approval will not commence until
demand for rural residential lots improves.
Rural
Residential. Management launched the Rural Lifestyles
program to sell rural residential lots to capitalize on higher-and-better-use
real estate values. These properties are typically non-contiguous
smaller lots generally ranging in size between 5 and 40 acres with zoning
ranging from one dwelling unit per 5 acres to one per 80
acres. Development and disposition strategies vary depending on the
property’s unique characteristics. Development efforts and costs
expended to ready these properties for sale include work to obtain development
entitlements that will increase the property’s value as residential property as
well as making improvements to existing logging roads, constructing new roads,
extending dry utilities, and sometimes establishing gated
entrances.
Consulting. In 2009 Management
began
leveraging its knowledge in
real estate by providing advice to banks on their troubled real estate assets,
primarily large plats in various stages of entitlement and
construction. While this consulting activity contributed only a small
amount to Real Estate revenue, it was very valuable in providing knowledge of
lot inventories and prices, and the health of homebuilders in the local market.
11
Commercial
Properties
Port
Gamble. The
Partnership currently owns and operates the town of Port Gamble, Washington,
north of Kingston on the Olympic Peninsula. Port Gamble was
designated a “Rural Historic Town” under Washington State’s Growth Management
Act in 1999. This designation allows for substantial new commercial,
industrial, and residential development using historic land use patterns and
densities while maintaining the town’s unique architectural
character. Operations at Port Gamble include commercial and
residential lease activities and the wedding and events
business.
P&T operated a sawmill at Port
Gamble, from 1853 to 1995 and since 2000 management has worked both directly and indirectly
through P&T to remedy
environmental contamination at the townsite and millsite and to
monitor results of the
cleanup efforts. After contamination was discovered at the townsite,
millsite, and in the adjacent bay, the Partnership entered into a settlement and
remediation agreement with P&T pursuant to which both parties allocated
responsibility for cleanup costs. Under Washington State law, both
Pope Resources and P&T were “potentially liable persons” based on historic ownership and/or
operation of the site. These laws provide for joint and several
liability among parties owning or operating property on which contamination
occurs, meaning that cleanup costs can be assessed against any or all such
parties.
Our agreement with P&T,
negotiated in 2002, was intended to apportion responsibility based on this
principle, with P&T bearing the larger share of responsibility due to their
role in operating the site and their relatively lengthy
ownership. This agreement resulted in the termination of a lease by
P&T to operate the millsite as well as the initiation of environmental
cleanup activities, the responsibility for which has been shared by the
Partnership and P&T. Under that agreement P&T took
responsibility for the landfills and cleanup of Port Gamble Bay while the
Partnership took responsibility for the millsite and townsite. At the
end of 2006, cleanup of the landfills and townsite were completed as both
received “No Further Action” letters from the Washington State Department of
Ecology. Efforts to cleanup the millsite and sediments in Port Gamble
Bay continued in 2007. However, following a series of actions under
the U.S. Bankruptcy Code that began in 2007, P&T has been liquidated,
leaving the Partnership as one of few potentially liable persons. See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Results of Operations – Real Estate – Environmental Remediation
Costs.”
Port
Ludlow Resort Community. In
2001, the Partnership sold a resort community and its water and sewer utilities
in the community of Port Ludlow. The buyer of the project believes
some remediation is required for contamination discovered on the site, and we
have agreed to participate in an investigation in 2010 regarding any liability
the Partnership may have or may be alleged to have. While we have not
concluded that we have an obligation to remediate, we recognized a $30,000
accrual as of December 31, 2009 which represents the maximum of the
Partnership’s agreed-upon investigative costs.
Marketing. Marketing activities in the Real Estate
segment during 2009 consisted of marketing residential and commercial real
estate for sale and lease.
Customers. Management typically markets its land
for sale to private individuals, residential contractors, and developers of
commercial property. Customers for rental space in the Port Gamble
townsite consist of both residential and commercial tenants.
Competition. Real Estate activities
consist primarily of adding value to current land holdings. Once
those properties are ready for development, management will in most instances
seek to market the property for sale, but in some instances may consider a
strategy that would involve another developer with building expertise as a joint
venture partner.
Transportation. Land values for the Real
Estate portfolio are strongly influenced by transportation options between the
Kitsap Peninsula and the Seattle-Tacoma corridor. Transportation
options between Seattle-Tacoma and Kitsap County include driving on the Tacoma
Narrows Bridge or taking one of several car/passenger ferries. In
2007, the Washington State Department of Transportation completed a multi-year
construction project to add a second span to the Tacoma Narrows Bridge
connecting Tacoma and Gig Harbor. Ferry transportation in our market
area currently utilizes vessels that carry both automobiles and passengers from
each of the communities of Kingston, Bremerton, and Bainbridge Island,
respectively, to and from Edmonds and Seattle.
12
Employees
As of December 31, 2009, the Partnership employed 41 full-time,
year-round salaried employees and 4 part-time and seasonal personnel, who are
distributed among the segments as follows:
Segment
|
Full-Time
|
Part-Time/
Seasonal
|
Total
|
|||||||||
Fee Timber
|
12 | - | 12 | |||||||||
Timberland Management &
Consulting
|
4 | - | 4 | |||||||||
Real Estate
|
14 | 4 | 18 | |||||||||
General &
Administrative
|
11 | - | 11 | |||||||||
Totals
|
41 | 4 | 45 |
None of our employees are subject to a
collective bargaining agreement and the Partnership has no knowledge that any
steps toward unionization are in progress. Management considers the
Partnership’s relations with its employees to be good.
Government
Regulation
In the operation and management of its
tree farms, the Partnership is subject to Federal and State law, including the
Washington State Forest Practices Act. In effect since 1974, and
augmented over time, including the 1999 passage of the Forest and Fish Law,
Washington State’s forest practice regulations are among the most rigorous in
the nation. In 2006, and in concert with the Forest and Fish Law,
Washington State received a Federal multi-species Habitat Conservation Plan
designation covering its forest regulations, meant to give timberland owners 50
years of regulatory stability. Management’s objective is to be in
compliance with state and Federal laws and regulations at all
times. New information based on scientific findings may result in
some new or modified regulations within the adaptive management features of the
Forest Practices Act, which may result in additional restrictions on timber operations of the
Partnership. This could in turn result in increased costs, additional
capital expenditures, and reduced operating flexibility. Management
believes that the Partnership’s operating practices, assets and properties are
in material compliance with all Federal, state and local laws, regulations and
ordinances applicable to its business. However, there can be no
assurance that future legislative, governmental, or judicial decisions will not
adversely affect the Partnership’s operations. In particular, recent
and well-publicized landslides and resulting property damage is being
studied to determine if it may be associated with existing forest management
practices. The results of these scientific studies
may cause Federal or state officials to impose more stringent requirements and
limitations on timberland management, which may have the effect of increasing
costs, reducing productive acres, or both.
Regulatory
Structure. Growing and harvesting of timber is
subject to numerous laws and government policies to protect public resources
such as wildlife, water quality, and other social values. Changes in
those laws and policies can significantly affect local or regional timber
harvest levels and market values of timber-based raw materials. Real
estate development activities are also subject to numerous state and local
regulations such as the Washington State Growth Management Act. In
addition, the Partnership is subject to Federal, state, and local pollution
controls (with regard to air, water and land), solid and hazardous waste
management, disposal and remediation laws, and regulations in each segment and
all geographic regions in which it has operations.
Washington State
Growth Management Act (GMA). Land holdings throughout Washington
State are affected by the GMA, which requires counties to submit comprehensive
plans that identify the future direction of growth and stipulate where
population densities are to be concentrated. The purposes of the GMA
include: (1) direction of population growth to population centers (Urban Growth
Areas), (2) reduction of “suburban sprawl”, and (3) protection of historical
sites. The Partnership works with local governments within the
framework of the GMA to develop its real estate holdings to their highest and
best use.
13
Forest Management
Practices. Forest practice regulations in some U.S.
states increasingly affect present or future harvest and forest management
activities. For example, in some states, these rules have one or more
of the following impacts: limiting the size of clear-cut harvest units;
requiring some timber to be left unharvested to protect water quality and fish
and wildlife habitat; regulating construction and maintenance of forest roads,
requiring reforestation following timber harvest; and providing for procedures
for state agencies to review and approve proposed forest practice
activities.
Each state in which the Partnership owns
or manages timberlands has developed “best management practices” to reduce the
effects of forest practices on water quality and aquatic
habitats. Additional, more stringent regulations may be adopted in
order to achieve the following: enhance water quality standards under the
Federal Clean Water Act, protect fish and wildlife habitat, or advance other
public policy objectives.
In the State of Washington, the Forests
and Fish Law became the basis for revised Forest Practices Rules and
Regulations. The Washington Forest Protection Association produced
the Forest and Fish Report through the collaborative efforts of Washington
State’s private landowners, Federal, state and county governments, and Native
American tribes. The goals of these revised rules are
to:
|
·
|
Provide compliance with the
Endangered Species Act (ESA) for aquatic and riparian dependent species on
private forest lands;
|
|
·
|
Restore and maintain riparian
habitat on private land to support a harvestable supply of
fish;
|
|
·
|
Meet the requirements of the Clean
Water Act for water quality on private forest lands;
and
|
|
·
|
Keep the timber industry
economically viable in the State of
Washington.
|
The proposed Water Quality Standards
that the Washington State Department of Ecology adopted in 2003 have undergone
Department of Ecology and public scrutiny. As such, these rules
should be sufficient to comply with the Anti-Degradation Implementation Plan as
described in the Clean Water Act. In June 2006, the U.S. Fish &
Wildlife Service and NOAA Fisheries signed a Forest Practices Habitat
Conservation Plan (HCP). This HCP is a statewide program protecting
60,000 miles of streams on 9.3 million acres of forestland, set in motion by the
Forests & Fish Law. It ensures landowners that practicing
forestry in Washington State meets the requirements for aquatic species
designated by the Federal Endangered Species Act.
The regulatory and non-regulatory forest
management programs described above have increased operating costs and resulted
in changes in the value of the Partnership’s timberlands. Management
does not expect the Partnership to be disproportionately affected by these
programs as compared with typical timberland owners. Likewise,
management does not expect that these programs will significantly disrupt its
planned operations over large areas or for extended periods.
Water
Quality. The
U.S. Environmental Protection Agency also promulgated regulations in 2000
requiring states to develop total maximum daily load (“TMDL”) allocations for
pollutants in water bodies that have been determined to be “water quality
impaired”. The TMDL requirements set limits on pollutants that may be
discharged to a body of water or set additional requirements, such as best
management practices for nonpoint sources, including timberland operations, to
reduce the amounts of pollutants in water quality impaired bodies of
water. These requirements have impacted tree farming principally
through rules requiring tree farms to better minimize siltation caused by roads,
harvest operations and other management activities from coming in contact with
water quality impaired bodies of water. TMDL targets will be
established for specific water bodies in the states where the Partnership
operates and these targets will be set so as to achieve water quality standards
within 10 years, when practicable. In Washington, the Road
Maintenance and Abandonment Planning section of the Forest Practices Rules and
Regulations has been in place since 2001, under which all sedimentation problems
associated with forest roads must be mitigated by 2015. The
Partnership is on schedule to complete the necessary work to meet the 2015
deadline, which will largely address the issue of non-point pollution consisting
of sedimentation originating from the Partnership’s forest
operations. It is not possible at this time to either estimate the
capital expenditures that may be required for the Partnership to stay below the
targets until a specific TMDL is promulgated or to determine whether these
expenditures will have a material impact on the Partnership’s financial
condition or results of operations.
14
Endangered Species
and Habitats. A
number of fish and wildlife species that inhabit geographic areas near or within
Partnership timberlands have been listed as threatened or endangered under the
Federal Endangered Species Act (ESA) or similar state laws in the United
States. Federal ESA listings include the northern spotted owl,
marbled murrelet, numerous salmon species, bull trout and steelhead trout in the
Pacific Northwest. Listings of additional species or populations may
result from pending or future citizen petitions or be initiated by Federal or
state agencies. Federal and state requirements to protect habitat for
threatened and endangered species have resulted in restrictions on timber
harvest on some timberlands, including some timberlands of the
Partnership. Additional listings of fish and wildlife species as
endangered, threatened, or sensitive under the ESA and similar state laws as
well as regulatory actions taken by Federal or state agencies to protect habitat
for these species may, in the future, result in the following: an increase in
operating costs; additional restrictions on timber harvests; impacts to forest
management practices or real estate development activities; and potential impact
on timber supply and prices.
Item 1A.
|
RISK
FACTORS
|
We have certain
environmental remediation liabilities
associated with our Port Gamble property,
and
those liabilities may increase. We own certain real estate at Port
Gamble on the Kitsap Peninsula in western Washington. We are in active discussions with the
Washington State Department of Ecology to promote protection of the environment,
optimize and appropriately allocate the remaining cleanup liabilities, and
maximize our control over the remediation process.
Management continues to monitor the Port
Gamble cleanup process closely. The $1.3 million remediation
liability balance as of December 31, 2009 represents our best current
estimate of the remaining cleanup
cost and most likely outcome to various contingencies within the overall
project. However this estimate balance is itself based upon a number
of estimates and judgments that are subject to change as the project
progresses.
We may incur losses as a result of
natural disasters that may occur, or that may be alleged to have occurred, on
our properties. Forests are
subject to a number of natural hazards, including damage by fire, hurricanes,
insects and disease, and during periods of unusually heavy rain and
snowmelt, flooding and landslides may damage homes and personal property. Changes in global climate conditions may
intensify these natural hazards. Severe weather conditions and other natural
disasters can also reduce the productivity of timberlands and disrupt the
harvesting and delivery of forest products. While damage from natural causes is
typically localized and would normally affect only a small portion of our
timberlands at any one time, these hazards are unpredictable and losses might
not be so limited. While management believes we follow sound forest
management and risk mitigation procedures, and all forest operations meet or
exceed the rules and regulations governing forest practices in the State of
Washington, we cannot be certain that we will not be the subject of claims based
on allegations that we acted improperly in managing our property. These claims
may take the form of individual or class action litigation, regulatory or
enforcement proceedings, or both. Any such claims could result in substantial
defense costs and divert management’s attention from the ongoing operation of
our business, and if any such claims were successful, may result in substantial
damage awards, fines or civil penalties. Consistent with the practices of other
large timber companies, we do not maintain insurance against loss of standing
timber on our timberlands due to natural disasters.
15
We compete with a
number of larger competitors that may be better able than we to absorb the
effects of price fluctuations, may be able to expend greater
resources on production, may
have greater access to capital, and may operate more efficiently than we
can. We compete
against much larger companies in each of our business segments. We
compete with these companies for management and line personnel, as well as for
purchases of relatively scarce capital assets such as land and standing timber
and for sales of our products. These larger competitors may have
access to larger amounts of capital and significantly greater economies of
scale, and they may be better able to absorb the risks of our line of
business. Moreover, the timber industry has experienced significant
consolidation in recent years and, as that consolidation occurs, our relative
market share decreases and the relative financial capacity of our competitors’
increases. While management believes the Partnership is at a
competitive advantage over some of these companies because of our lack of
vertical integration into forest products manufacturing, our advantageous tax
structure, and management’s attempts to diversify our asset base, we cannot
assure readers that competition will not have a material and adverse effect on
our results of operations or our financial condition.
Our business may be affected by
climate change initiatives. In recent months environmental
activists, global treaty organizations, the U.S. Congress, and numerous state
legislatures have intensified their scrutiny of environmentally significant
industries in response to well-publicized reports of the adverse impacts of
global greenhouse gas emissions, deforestation, and similar environmental
impacts upon the earth's climate. A broad range of proposals have been
considered by state and federal regulatory authorities, whose stated objectives
would be to mitigate potential climate change by reducing or eliminating
activities and business practices that are allegedly tied to global climate
change. A number of these proposals remain under active consideration. These
proposals include a number of restrictions and requirements which, if adopted,
would adversely affect the U.S. domestic timber industry generally, and our
business in particular. These include initiatives to reduce timber harvests (to
promote the natural recycling of carbon dioxide into oxygen and other
byproducts), which, if adopted and applied to our timberlands, would adversely
impact our fee timber income; initiatives to curb heavy equipment usage, which,
if adopted, would tend to increase transportation and harvest costs; substantial
increases in reporting and compliance, which, if adopted, would likely increase
our general and administrative expense and, potentially, our costs of sales; and
a variety of other components which may reduce our revenues or increase our
expenses, particularly as relates to our Fee Timber and our Timberland
Management & Consulting segments.
Consolidation of
sawmills in our geographic operating area may reduce competition among our
customers, which could adversely affect our log prices. In the past we have experienced, and may
continue to experience, consolidation of sawmills in the Pacific
Northwest. Because a portion of our cost of sales in our Fee Timber
segment consists of transportation costs for delivery of logs to domestic
sawmills, it becomes increasingly expensive to transport logs over longer
distances for sales in domestic markets. As a result, a reduction in
the number of sawmills, or in the number of sawmill operators, may reduce
competition for our logs, increase transportation costs, or
both. These consolidations thus may have a material adverse impact
upon our Fee Timber revenue or income and, as that segment has traditionally
represented our largest business unit, upon our results of operation and
financial condition as a whole.
We are sensitive to
demand and price issues relating to our sales of logs in both domestic and
foreign markets. We generate Fee Timber revenue primarily
by selling softwood logs to domestic mills and to third-party intermediaries who
resell them to the export market. The domestic market for logs in the
Puget Sound region of Washington State depends heavily on housing
starts. Recent economic events have dramatically slowed housing
starts, which has reduced demand for lumber. In addition, imported
lumber from Canada and increasing market acceptance of engineered wood products
have acted to hold down the price of lumber. These factors have had the effect
of concentrating mill ownership in larger, more efficient, mill operators and
decreasing the number of mills operating in the Puget Sound
region. These characteristics have resulted in a decrease in local
demand for logs, which in turn has decreased our profitability. To
the extent the housing crisis continues or deepens the negative impacts on our
operating results will continue. Over the past decade, we have seen
log prices erode in the Japanese market as competing logs and lumber from
regions outside of the United States and engineered wood products have gradually
gained market acceptance. These export markets for Pacific Northwest
logs are significantly affected by fluctuations in United States, Japanese and, increasingly, Chinese
and Korean economies, as well as by the foreign currency exchange rate between
these Asian currencies and the U.S. dollar, as well as ocean transportation
costs.
16
We are subject to
statutory and regulatory risks that currently limit, and may increasingly limit,
our ability to generate Fee Timber and Real Estate
income. Our
ability to grow and harvest timber can be significantly impacted by legislation,
regulations or court rulings that restrict or stop forest
practices. For example, recent storm events have brought increasing
public attention to stability of slopes during extreme weather
events. Additional regulations surrounding operating activities
conducted on and around slopes may make it more difficult for us to harvest
timber and may reduce the amount of harvestable timber on our
properties. These and other 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. These regulations are likely to have a similar effect on our
Timberland Management & Consulting operations. Moreover, the
value of our real estate investments, and our income from Real Estate
operations, are sensitive 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 the 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.
We and our customers
are dependent upon active credit markets to fund operations. We sell logs from our Fee
Timber segment to mills and log brokers that in most circumstances rely upon an
active credit market to fund their operations. Our Real Estate
sales are also often dependent upon credit markets in order to fund
acquisitions. To the extent the ongoing economic crisis exacerbates
existing borrowing restrictions that impact many of our customers, we expect
those customers to respond by reducing their expenditures, and those reductions
may have the effect of directly reducing our revenues and of indirectly reducing
the demand for our products. Any such outcomes could materially and adversely
impact our results of operations, cash flows, and financial
condition.
One of our two
timberland mortgages matures in 2011 and may be challenging to refinance.
The Partnership has a low
level of leverage relative to our asset base. We do, however, have a
timberland mortgage with a balance owed of $19.3 million at December 31,
2009. This mortgage matures in March 2011 with an expected amount due
of $18.6 million. During 2009 credit markets weakened considerably
which has had both direct and indirect impacts on our operations and to the
extent these circumstances continue our operating results will be adversely
affected and our ability to refinance our timberland mortgage in 2011 could be
impaired.
We are controlled by
our managing general partner. As a limited partnership, substantially
all of our day-to-day affairs are controlled by our managing general partner,
Pope MGP, Inc. The board of directors of Pope MGP, Inc. serves as our
board of directors, and by virtue of a stockholder agreement, the shareholders
of Pope MGP, Inc., Emily T. Andrews and Peter T. Pope, each have the ability to
designate one of our directors and to veto the selection of each of our other
directors, other than our chief executive officer, who serves as a director by
virtue of his executive position. Unitholders may remove the managing
general partner only in limited circumstances, including, among other things, a
vote of the holders of a two-thirds majority of the “qualified units,” which
means the units that have been owned by their respective holders for at least
five years prior to such vote. By virtue of the terms of our
agreement of limited partnership, as amended, or “partnership agreement”, our
managing general partner directly, and Mrs. Andrews and Mr. Pope indirectly,
have the ability to prevent or impede transactions that would result in a change
of control of the Partnership; to prevent or, upon the approval of limited
partners holding a majority of the units, to cause, the sale of the assets of
the Partnership; and to cause the Partnership to take or refrain from taking
certain other actions that you might otherwise perceive to be in the
Partnership’s best interest. Under our partnership agreement, we are
required to pay to Pope MGP, Inc. an annual management fee of $150,000, and to
reimburse Pope MGP, Inc. for certain expenses incurred in managing our
business. The managing general partner also receives a special
allocation of profits from our investor portfolio management business. No such
allocations were earned in 2009 and 2008. Reimbursements for expenses
totaled $2,000
in 2009 and $8,000 in
2008.
17
We benefit from
certain tax treatment accorded to master limited partnerships, and if that
status changes the holders of our units may realize less advantageous tax
consequences. The Partnership is a Master
Limited Partnership (MLP) and is therefore not generally subject to U.S. Federal
income taxes. If a change in tax law (or interpretation of current
tax law) caused the Partnership to become subject to income taxes, operating
results would be adversely affected. We also have two taxable
subsidiaries. The estimation of income tax expense and preparation of
income tax returns requires complex calculations and judgments. We
believe the estimates and calculations used in this process are proper and
reasonable but if a Federal or state taxing authority disagreed with the
positions we have taken, a material change in provision for income taxes, net
income, or cash flows could result.
18
Item 1B. UNRESOLVED
SECURITIES AND EXCHANGE COMMISSION COMMENTS
None
Item 2.
|
PROPERTIES
|
The following table reconciles acreage
owned as of December 31, 2009 to acreage owned as of December 31,
2008. As noted previously we own 20% of the Funds, and this table
excludes the 36,000 acres of timberland owned by Fund I and
II. Properties are typically transferred from Fee Timber to the Real
Estate segment at the point in time when the Real Estate segment takes over
responsibility for managing the properties with the goal of maximizing the
properties’ value upon disposition.
Description
|
2008 (1)
|
Transfers
|
Acquisitions
|
Sales
|
2009
|
|||||||||||||||
Timberland:
|
||||||||||||||||||||
Hood
Canal tree farm (2)
|
70,844 | (22 | ) | - | (34 | ) | 70,788 | |||||||||||||
Columbia
tree farm (3)
|
43,625 | - | - | - | 43,625 | |||||||||||||||
Total
Timberland
|
114,469 | (22 | ) | - | (34 | ) | 114,413 | |||||||||||||
Land
held for sale:
|
||||||||||||||||||||
Bremerton
- Wright Creek (4)
|
3 | (2 | ) | - | - | 1 | ||||||||||||||
Hansville
- Chatham
|
10 | - | - | - | 10 | |||||||||||||||
Oak
Bay
|
40 | (40 | ) | - | - | - | ||||||||||||||
Jefferson
County
|
- | 14 | - | - | 14 | |||||||||||||||
Everett
- East Crest Hills
|
- | 2 | 2 | |||||||||||||||||
Timberland
Ridge
|
40 | - | - | - | 40 | |||||||||||||||
Subtotal
land held for sale
|
93 | (26 | ) | - | - | 67 | ||||||||||||||
Land
held for development:
|
||||||||||||||||||||
Bremerton
- Wright Creek (4)
|
42 | 2 | - | - | 44 | |||||||||||||||
Gig
Harbor - Harbor Hill (5)
|
251 | - | - | - | 251 | |||||||||||||||
Homestead
|
39 | - | - | - | 39 | |||||||||||||||
Jefferson
County
|
84 | (14 | ) | - | - | 70 | ||||||||||||||
Kingston
- Arborwood
|
356 | - | - | - | 356 | |||||||||||||||
Kingston
- 5-Acre zoning
|
366 | - | - | - | 366 | |||||||||||||||
Nursery
Hansville
|
53 | 53 | - | - | 106 | |||||||||||||||
Oak
Bay
|
165 | 40 | - | - | 205 | |||||||||||||||
Hansville
- Chatham
|
142 | - | - | - | 142 | |||||||||||||||
Port
Gamble townsite
|
167 | - | - | - | 167 | |||||||||||||||
Shine
Canyon
|
69 | - | - | - | 69 | |||||||||||||||
Port
Ludlow - Tala Point
|
256 | - | - | - | 256 | |||||||||||||||
Tarboo
Easement
|
160 | (31 | ) | - | - | 129 | ||||||||||||||
Timberland
Ridge
|
95 | - | - | - | 95 | |||||||||||||||
Walden
|
120 | - | - | - | 120 | |||||||||||||||
Other
|
51 | (2 | ) | 8 | (16 | ) | 41 | |||||||||||||
Subtotal
land held for development
|
2,416 | 48 | 8 | (16 | ) | 2,456 | ||||||||||||||
Total
Real Estate Acres
|
2,509 | 22 | 8 | (16 | ) | 2,523 | ||||||||||||||
Grand
Total Acres
|
116,978 | - | 8 | (50 | ) | 116,936 |
(1)
Certain parcels in the prior year have been adjusted due to a GIS reconciliation
for Timberland ownership and legal acres for Development
properties.
(2) This
property is used as collateral for the Partnership's $19.3 million timberland
mortgage.
(3) A
subset of this property is used as collateral for the Partnership's $9.8 million
timberland mortgage.
(4) This
property is used as collateral for $155,000 of Local Improvement District
debt.
(5) This
property is used as collateral for $104,000 of Local Improvement District
debt.
19
The following table provides dwelling
unit (DU) per acre zoning for the Partnership’s owned timberland and development
properties as of December 31, 2009 and land sold during
2009:
Current Land Inventory
(acres)
|
2009 Land Sales
|
|||||||||||||||||||||||
Zoning Designation
|
Real Estate
|
Fee Timber
|
Totals
|
Acres
|
$/Acre
|
Total Sales
|
||||||||||||||||||
Urban
zoning
|
773 | - | 773 | - | $ | - | $ | - | ||||||||||||||||
1 DU per 5
acres
|
708 | 1,632 | 2,340 | - | - | - | ||||||||||||||||||
1 DU per 10
acres
|
131 | 713 | 844 | 16 | 12,500 | 200,000 | ||||||||||||||||||
1 DU per 20
acres
|
699 | 34,976 | 35,675 | 34 | 9,441 | 321,000 | ||||||||||||||||||
1 DU per 40
acres
|
45 | 2,219 | 2,264 | - | - | - | ||||||||||||||||||
1 DU per 80
acres
|
147 | 50,754 | 50,901 | - | - | - | ||||||||||||||||||
Forest Resource
Lands
|
- | 24,038 | 24,038 | - | - | - | ||||||||||||||||||
Open Space
|
20 | 81 | 101 | - | - | - | ||||||||||||||||||
Total
|
2,523 | 114,413 | 116,936 | 50 | $ | 10,420 | $ | 521,000 |
Item 3.
|
LEGAL
PROCEEDINGS
|
None.
Item 4.
|
(RESERVED)
|
20
PART
II
Item 5.
|
MARKET FOR REGISTRANT’S UNITS,
RELATED SECURITY HOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY
SECURITIES
|
Market
Information
Certain information respecting trades in
the Partnership’s equity securities is quoted on the
NASDAQ. In April 2008, our ticker symbol on the NASDAQ changed
to “POPE”. For many
years, the Partnership’s units traded under the ticker symbol
“POPEZ”. The following table sets forth the 2007 to 2009 quarterly
ranges of low and high prices, respectively, for the Partnership’s units together with per unit
distribution amounts by the period in which they were paid:
High
|
Low
|
Distributions
|
||||||||||
Year Ended December 31,
2007
|
||||||||||||
First
Quarter
|
$ | 50.01 | $ | 34.25 | $ | 0.28 | ||||||
Second
Quarter
|
49.41 | 36.41 | 0.28 | |||||||||
Third
Quarter
|
50.00 | 37.60 | 0.40 | |||||||||
Fourth
Quarter
|
48.00 | 38.17 | 0.40 | |||||||||
Year Ended December 31,
2008
|
||||||||||||
First
Quarter
|
$ | 38.50 | $ | 34.01 | $ | 0.40 | ||||||
Second
Quarter
|
37.50 | 32.01 | 0.40 | |||||||||
Third
Quarter
|
34.00 | 28.06 | 0.40 | |||||||||
Fourth
Quarter
|
28.48 | 15.00 | 0.40 | |||||||||
Year Ended December 31,
2009
|
||||||||||||
First
Quarter
|
$ | 22.89 | $ | 15.61 | $ | 0.20 | ||||||
Second
Quarter
|
28.98 | 18.52 | 0.20 | |||||||||
Third
Quarter
|
25.28 | 21.56 | 0.20 | |||||||||
Fourth
Quarter
|
25.25 | 22.32 | 0.10 |
Unitholders
As of January 31, 2010, there were
4,531,008 outstanding units and this represented 275 holders of
record. Units outstanding exclude 67,895 units granted to management
and the board of directors that are currently restricted from
trading. The trading restriction for these units is lifted as the
units vest. The vesting schedule is determined at the time of
grant. Restricted units granted to date are on either a four- or
two-year vesting schedule. Those grants that have a four-year vesting
schedule vest 50% on the third anniversary of the grant date and the remaining
50% upon reaching the fourth anniversary. Two-year grants vest 50%
upon reaching the first anniversary of the grant date and the remainder on the
second anniversary.
Distributions
All cash distributions are at the
discretion of the Partnership’s managing general partner, Pope MGP,
Inc. (the “Managing General Partner”). During 2009, the Partnership
made three quarterly distributions of 20 cents per unit and one of 10 cents per
unit, totaling $3.2 million in the aggregate. During 2008, the
Partnership made four quarterly distributions of 40 cents per unit each,
totaling $7.4 million in the aggregate.
In recognition of the current economic
environment, including extremely challenging log markets and the absence of an
active market for raw and developed land, the Partnership reduced its
distribution in the fourth quarter of 2009 to 10 cents per unit. The Managing
General Partner, in its discretion, determines the amount of the quarterly
distribution and plans to re-consider distribution levels quarterly during 2010.
The Partnership recognizes that current economic conditions warrant a heightened
sensitivity to the stewardship of cash balances. As such, the quarterly
determination of distribution amounts, if any, will reflect the expectations of
management and the Managing General Partner for the Partnership’s liquidity
needs given the reduction in anticipated harvest volume coupled with log prices
at historic lows and a stagnant market for our real
estate.
21
Equity
Compensation Plan Information
The Partnership maintains the Pope
Resources 2005 Unit Incentive Plan, which authorizes the granting of
nonqualified equity compensation in order to provide incentives to align the
interests of management with those of unitholders. Pursuant to the plan, the
Partnership issues restricted unit grants with vesting ranges between two and
four years on the anniversary of the grant. The terms of these grants
require that the grantee remain an employee as of the vesting
date. As of December 31, 2009 there were 56,195 unvested and
outstanding restricted units of which 17,722 units vest in 2010. Previously, the
Partnership maintained the Pope Resources 1997 Unit Option Plan pursuant to
which unit options were granted for purposes similar to the 2005 incentive plan.
Upon the adoption of the 2005 Unit Incentive Plan, the Partnership ceased making
further awards under the 1997 plan. As of December 31, 2009 there were fully
vested options outstanding for the purchase of 163,053 units with a weighted
average exercise price of $15.86.
Repurchase
of Equity Securities
In December 2008 we announced a unit
repurchase plan pursuant to which the Partnership was authorized to repurchase
limited partner units with an aggregate value of up to $2.5
million. Since that time, we have increased the aggregate value of
units authorized for repurchase to $5 million and extended the repurchase plan
to allow for repurchases through December 2010. As of December 31,
2009, there remained an unutilized authorization for unit repurchases of $2.9
million. Partnership unit repurchases under this 2008 plan through the end of
2009 are in the following tables:
2008
$2.5 million unit repurchase plan
|
||||||||||||||||||||||||
2008
|
2009
|
2009
|
2009
|
2009
|
2009
|
|||||||||||||||||||
Month
|
December
|
January
|
February
|
March
|
April
|
May
|
||||||||||||||||||
Total
number of units purchased
|
15,252 | 3,274 | 1,971 | 37,176 | 29,416 | 23,535 | ||||||||||||||||||
Average
price paid per unit
|
$ | 19.44 | $ | 20.20 | $ | 19.38 | $ | 18.23 | $ | 19.52 | $ | 19.80 | ||||||||||||
Total
number of units purchased as part of publicly announced plans or
programs
|
15,252 | 18,526 | 20,497 | 57,673 | 87,089 | 110,624 | ||||||||||||||||||
$2.5
million unit repurchase extension
|
- | - | - | - | - | 2,500 | ||||||||||||||||||
Approximate
dollar value remaining to purchase units under the announced plans or
programs ($000's) *
|
$ | 2,203 | $ | 2,137 | $ | 2,099 | $ | 1,421 | $ | 846 | $ | 2,880 |
* Total
amount of repurchase plan less cumulative repurchases
22
2008
$2.5 million unit repurchase plan, following May 2009
extension
|
||||||||||||||||||||||||||||
2009
|
2009
|
2009
|
2009
|
2009
|
2009
|
2009
|
||||||||||||||||||||||
Month
|
June
|
July
|
August
|
September
|
October
|
November
|
December
|
|||||||||||||||||||||
Total
number of units purchased
|
- | - | - | - | - | 671 | - | |||||||||||||||||||||
Average
price paid per unit
|
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 22.50 | $ | 0.00 | ||||||||||||||
Total
number of units purchased as part of publicly announced plans or
programs
|
110,624 | 110,624 | 110,624 | 110,624 | 110,624 | 111,295 | 111,295 | |||||||||||||||||||||
$2.5
million unit repurchase extension
|
- | - | - | - | - | - | - | |||||||||||||||||||||
Approximate
dollar value remaining to purchase units under the announced plans or
programs ($000's) *
|
$ | 2,880 | $ | 2,880 | $ | 2,880 | $ | 2,880 | $ | 2,880 | $ | 2,865 | $ | 2,865 |
* Total
amount of repurchase plan less cumulative repurchases
As of February 16, 2010 we had not made
any repurchases of units since year-end.
Performance Graph
The following graph shows a five-year
comparison of cumulative total unitholder returns for the Partnership, the
Standard and Poor’s Forest Products Index and the Wilshire 4500 for the five
years ended December 31, 2009. The total unitholder return assumes
$100 invested at the beginning of the period in the Partnership’s units, the
Standard and Poor’s Forest Products Index, and the Wilshire 4500. The
graph assumes distributions are reinvested.
23
12/04 | 12/05 | 12/06 | 12/07 | 12/08 | 12/09 | |||||||||||||||||||
Pope
Resources
|
100.00 | 127.07 | 145.15 | 186.81 | 92.45 | 117.39 | ||||||||||||||||||
S&P
500
|
100.00 | 104.91 | 121.48 | 128.16 | 80.74 | 102.11 | ||||||||||||||||||
S&P
Smallcap 600
|
100.00 | 107.68 | 123.96 | 123.59 | 85.19 | 106.97 | ||||||||||||||||||
S&P
Forest Products
|
100.00 | 102.05 | 107.60 | 116.02 | 50.53 | 72.51 | ||||||||||||||||||
Wilshire
5000
|
100.00 | 106.38 | 123.16 | 130.07 | 81.64 | 102.00 | ||||||||||||||||||
Wilshire
4500
|
100.00 | 110.03 | 126.84 | 133.69 | 81.51 | 104.60 |
Copyright©
2010 Standard & Poor's, a division of The McGraw-Hill Companies
Inc.
All
rights reserved. (www.researchdatagroup.com/S&P.htm)
Issuance of
Unregistered Securities
The Partnership did not conduct any
unregistered offering of its securities in 2007, 2008, or
2009.
Item 6.
|
SELECTED FINANCIAL
DATA
|
Actual
Results. The
financial information set forth below for each of the indicated years is derived
from the Partnership’s audited consolidated financial
statements. This information should be read in conjunction with the
consolidated financial statements and related notes included with this
report.
Free cash flow, a non-GAAP measure,
provides users of financial statements a benchmark for the amount of cash
available for distributions and investments after making debt payments and
recurring capital expenditures. Since this measure starts with cash
provided by operations, it does not include the increases or decreases resulting
from changes in working capital that are included in operating cash flow
presented on the Statement of Cash Flows. The Partnership has used
the method detailed below for calculating free cash flow. Management
recognizes that there are varying methods of calculating free cash flow and has
provided the calculation below to aid investors that are attempting to reconcile
between those different methods.
24
(Dollars
in thousands, except per unit data)
|
Year
Ended December 31,
|
|||||||||||||||||||
Statement
of operations data
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
Revenue:
|
||||||||||||||||||||
Fee
Timber
|
$ | 14,847 | $ | 23,551 | $ | 35,514 | $ | 35,260 | $ | 44,424 | ||||||||||
Timberland
Management & Consulting
|
601 | 944 | 1,344 | 3,670 | 7,764 | |||||||||||||||
Real
Estate
|
5,030 | 3,683 | 15,037 | 27,320 | 4,818 | |||||||||||||||
Total
revenue
|
20,478 | 28,178 | 51,895 | 66,250 | 57,006 | |||||||||||||||
Operating
income/(loss):
|
||||||||||||||||||||
Fee
Timber
|
3,724 | 6,294 | 15,215 | 14,592 | 16,320 | |||||||||||||||
Timberland
Management & Consulting
|
(375 | ) | (543 | ) | (883 | ) | 1,266 | 3,540 | ||||||||||||
Real
Estate (1)
|
1,663 | (1,111 | ) | 5,163 | 13,864 | 1,270 | ||||||||||||||
General
and Administrative
|
(3,733 | ) | (3,951 | ) | (4,782 | ) | (3,817 | ) | (3,651 | ) | ||||||||||
Total
operating income
|
1,279 | 689 | 14,713 | 25,905 | 17,479 | |||||||||||||||
Net
income (loss) attributable to unitholders
|
(272 | ) | 1,162 | 15,508 | 24,910 | 13,684 | ||||||||||||||
Earnings
(loss) per unit – diluted
|
$ | (0.07 | ) | $ | 0.23 | $ | 3.22 | $ | 5.22 | $ | 2.88 | |||||||||
Distributions
per unit
|
$ | 0.70 | $ | 1.60 | $ | 1.36 | $ | 1.06 | $ | 0.80 | ||||||||||
Balance
sheet data
|
||||||||||||||||||||
Total
assets
|
187,056 | 165,411 | 148,550 | 180,282 | 106,358 | |||||||||||||||
Long-term
debt, net of current portion
|
28,659 | 28,169 | 29,385 | 30,866 | 32,281 | |||||||||||||||
Partners’
capital
|
83,126 | 87,817 | 96,644 | 87,605 | 66,405 | |||||||||||||||
Debt
to total capitalization
|
26 | % | 25 | % | 24 | % | 27 | % | 34 | % | ||||||||||
Free cash flow
(2):
|
||||||||||||||||||||
Cash
provided by operations (3)
|
$ | 662 | $ | 3,952 | $ | 12,113 | $ | 33,114 | $ | 23,950 | ||||||||||
Plus:
|
||||||||||||||||||||
Net
income (loss) attributable to noncontrolling interests (4)
|
950 | 1,018 | 402 | 69 | (321 | ) | ||||||||||||||
Less:
|
||||||||||||||||||||
Principal
payments
|
(1,418 | ) | (1,342 | ) | (1,481 | ) | (1,675 | ) | (1,883 | ) | ||||||||||
Change
in operating accounts and non-cash charges (5)
|
(585 | ) | 44 | 2,528 | (4,004 | ) | (3,219 | ) | ||||||||||||
Capital
expenditures, excluding
|
||||||||||||||||||||
timberland
acquisitions (6)
|
(1,224 | ) | (1,715 | ) | (2,294 | ) | (1,720 | ) | (1,796 | ) | ||||||||||
Free
cash flow
|
(1,615 | ) | 1,957 | 11,268 | 25,784 | 16,731 | ||||||||||||||
Other
data
|
||||||||||||||||||||
Acres
owned/managed (thousands)
|
150 | 405 | 430 | 433 | 556 | |||||||||||||||
Fee
timber harvested (MMBF)
|
32 | 38 | 55 | 55 | 74 |
(1)
|
Real Estate operating income in
2007, 2006, and 2005 includes $1,878,000, $260,000 and $198,000,
respectively, of environmental remediation charges related to Port Gamble
and $30,000 in 2009 related to Port
Ludlow.
|
(2)
|
Management considers free cash
flow, a non-GAAP measure, 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 cash provided by operating
activities.
|
(3)
|
In
the third quarter of 2009, the Partnership changed its classification of
cash flows to
include real estate development capital expenditures within cash
flows from operating activities. Prior to the end of the third
quarter, these expenditures were reported within investing activities
within the Partnership’s statement of cash flows. Presentation
of prior periods has been revised for consistent treatment of these
expenditures for all periods
presented.
|
(4)
|
Backs out the impact of the Funds
and IPMB on Pope Resources’ free cash
flow.
|
(5)
|
Non-cash charges exclude cost of
land sold, depletion, depreciation and amortization, and capitalized
development activities.
|
(6)
|
Fund II acquired 12,000 acres of
timberland in 2009, the Partnership acquired 1,180 acres of timberland in
2008, and Fund I acquired 24,000 acres of timberland in
2006. The cost of these acquisitions was not included in the
calculation of free cash
flow.
|
25
Item 7.
|
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 management’s estimates based
upon our current goals, in light of management’s knowledge of existing
circumstances and expectations about future developments. Statements
about expectations and future performance are “forward looking statements” which
describe our goals, objectives and anticipated performance. These
statements 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 “Risk Factors” in Item 1A
above. Other issues that may have an adverse and material impact on
our business, operating results and financial condition include our ability to
accurately estimate the potential for environmental remediation costs at Port
Gamble; the impacts of climate change and natural disasters on our timberlands
and on surrounding areas; credit and economic conditions that affect demand for
our products; and environmental and land use regulations that limit our ability
to harvest timber and develop property. From time to time we identify other
risks and uncertainties in our other filings with the Securities and Exchange
Commission. 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.
This
discussion should be read in conjunction with the Partnership’s audited
consolidated financial statements 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. This
segment includes timberlands owned directly by the Partnership and operations of
Fund I and Fund II, (the “Funds”). Operations in this segment
consist of growing timber to be harvested as logs for sale to domestic
manufacturers and to a lesser extent export brokers. 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 by the selling of
larger parcels to buyers who will take the land further up the value chain,
either to home buyers or to operators and lessors of commercial
property. Since these land projects span multiple years, the Real
Estate segment may incur losses for multiple years while a project is developed
until that project is sold resulting in operating income. Our third
business is raising and investing capital from third parties for private equity
timber funds and managing the timberland owned by both these funds and
unaffiliated owners.
As of December 31, 2009, we owned
114,000 acres of timberland in western Washington State, 36,000 acres of
timberland for the Funds in Washington and Oregon, plus 2,500 acres of real
estate held for sale or development. Our third-party Timberland
Management & Consulting services have historically been conducted in
Washington, Oregon, and California.
Net loss attributable to unitholders for
the year ended December 31, 2009 totaled $272,000, or $0.07 per diluted
ownership unit, on revenues of $20.5 million. For the corresponding
period in 2008, net income attributable to unitholders totaled $1.2 million, or
$0.23 per diluted ownership unit, on revenues of $28.2 million. For
the year ended December 31, 2009, cash flow from operations was $662,000,
compared to $4.0 million in 2008. Net loss attributable to
unitholders for the quarter ended December 31, 2009 totaled $376,000, or $0.08
per diluted ownership unit, on revenues of $5.2 million. This
compares to net loss attributable to unitholders of $1.4 million, or $0.32 per
diluted ownership unit, on revenues of $3.2 million for the quarter ended
December 31, 2008.
26
Our
revenues, net income and cash flows are lower than in recent years owing largely
to the well-publicized macroeconomic factors that have resulted in a dramatic
reduction in housing starts in the United States. Credit markets also have a
significant impact on our business as our customers rely on those markets for
liquidity. Housing starts, interest rates, and credit markets reflect
or influence the health of the U.S. housing market. Currency exchange
rates influence the competitiveness of our domestic sawmill customers in
relation to imported lumber from Canada, Europe, or the Southern Hemisphere and
also the competitiveness of our logs in export markets in Asia. Our
export logs are sold to domestic intermediaries who then export the
logs. A favorable exchange rate can help these intermediaries compete
in Asian markets with logs that originate from Canada, Russia, or the Southern
Hemisphere, thus increasing the price that we are able to realize from these
export log sales.
As an owner and manager of timberland,
we focus keenly on three “product” markets: lumber, logs, and
timberland. Each of these markets has unique and distinct attributes
such that the respective product prices do not move up or down in lockstep with
each other. Generally, the lumber market is the most volatile as it
responds quickly (even daily) to changes in housing-driven demand and to changes
in lumber inventories. Log markets will in turn be affected by what
is happening in the spot lumber markets, but pricing shifts typically adjust
monthly rather than daily. Log price volatility is also moderated
because logs are used to produce products besides just lumber (especially
pulp). The market for timberland tends to be less volatile with
pricing that lags both lumber and log markets. This is a function of
the longer time horizons utilized by timberland investors where the short-swing
fluctuations of log or lumber prices are moderated in acquisition
modeling. We watch the lumber market because activity there can
presage log price changes. We are in the log market constantly as we
negotiate delivery prices to our customers. The timberland market is
important as we are constantly evaluating our own portfolio and its underlying
value as well as the opportunities to adjust that portfolio through either the
acquisition or disposition of such land.
Our
current strategy for adding timberland acreage is centered on our timber fund
business model. In March 2009, we completed the final closing for
Fund II with $84 million of committed capital including Pope Resources’ 20%
co-investment. In early October 2009, Fund II closed on its first two timberland
acquisitions representing 41% of its committed capital. Our 20%
co-investment in the Funds affords us a share of the Funds’ operations while
allowing us to earn asset management and timberland management fees. Management
also believes that this strategy allows us to maintain more sophisticated
expertise in timberland acquisition, valuation, and management than could be
cost-effectively maintained for the Partnership’s timberlands alone. Our Real
Estate challenges center around how and when to “harvest” a parcel of land and
capture the optimum value increment by selling the property.
Our consolidated revenue in 2009, 2008, and
2007, on a percentage basis by segment, was as follows:
Segment
|
2009
|
2008
|
2007
|
|||||||||
Fee Timber
|
72 | % | 84 | % | 68 | % | ||||||
Timberland Management &
Consulting
|
3 | % | 3 | % | 3 | % | ||||||
Real Estate
|
25 | % | 13 | % | 29 | % |
Further segment financial information is
presented in Note 12 to the Partnership’s Consolidated Financial Statements
included with this report.
27
Outlook
We expect
2010 performance to approximate 2009 due to an expected slow recovery of the new
home construction sector, given the well-publicized challenges of high
unemployment, growing inventory of foreclosed properties, and tight
credit. All of these economic factors impact the Fee Timber and Real
Estate segments. We believe that our strong balance sheet allows us
to defer timber harvest and land sales until these markets improve, and
management has announced an intention to take these actions again in
2010. We also plan to continue our search for additional
opportunities to acquire timberland through Fund II at favorable prices during
the current market weakness.
We plan
to harvest 32 MMBF in 2010 which represents a 47% decline from our estimated
sustainable harvest of 60 MMBF, which includes sustainable harvest of 16 MMBF
related to the Funds. The decision to defer harvest was made in
response to our expectation of continued weakness in log markets resulting from
the slowdown in housing starts that is associated with widely publicized
declines in the credit and housing markets. We plan to defer all
harvest from tree farms owned by the Funds in 2010 and, as such, the planned 32
MMBF harvest will come from the Hood Canal and Columbia tree farms owned
directly by the Partnership. Revenue generated by the Funds is
consolidated into the Partnership’s financial statements. On the
Statement of Operations, the 80% interest in the Funds owned by third-party
investors is reported beneath operating income and is labeled “Net loss
attributable to non controlling interests”. When speaking to
inventory, volumes are expressed in millions of board feet, or “MMBF”, while
elsewhere in the document, volumes harvested are expressed in thousands of board
feet, or “MBF”.
We are
also anticipating operating income results for our Real Estate segment will
remain weak in 2010, as the market for developable land is expected to remain at
extremely low levels in 2010. Until the market improves, we expect to
concentrate our Real Estate activities primarily on securing entitlements to our
properties while deferring spending on infrastructure improvements wherever
possible.
General
& Administrative costs in 2010 are expected to approximate 2009 as we
continue to exercise restraint in discretionary spending across our lines of
business in response to recessionary pressures.
RESULTS
OF OPERATIONS
The
following table reconciles net income (loss) attributable to unitholders for the
years ended December 31, 2009 to 2008 and 2008 to 2007. In addition
to the table’s numeric analysis, the explanatory text that follows describes
many of these changes by business segment.
28
YEAR TO
YEAR COMPARISONS
(Amounts
in $000's)
2009 vs. 2008
|
2008 vs. 2007
|
|||||||
Total
|
Total
|
|||||||
Net
income (loss) attributable to unitholders:
|
||||||||
Year
ended December 31, 2009
|
$ | (272 | ) | |||||
Year
ended December 31, 2008
|
1,162 | $ | 1,162 | |||||
Year
ended December 31, 2007
|
15,508 | |||||||
Variance
|
$ | (1,434 | ) | $ | (14,346 | ) | ||
Detail
of earnings variance:
|
||||||||
Fee
Timber
|
||||||||
Log
price realizations (A)
|
$ | (3,116 | ) | $ | (3,783 | ) | ||
Log
volumes (B)
|
(2,673 | ) | (10,600 | ) | ||||
Harvest
& haul
|
1,469 | 3,600 | ||||||
Depletion
|
1,439 | 1,355 | ||||||
Other
Fee Timber
|
311 | 474 | ||||||
Timberland
Management & Consulting
|
||||||||
Management
fee changes
|
(317 | ) | (176 | ) | ||||
Other
Timberland Management & Consulting
|
485 | 548 | ||||||
Real
Estate
|
||||||||
Development
property sales
|
1,433 | (7,510 | ) | |||||
Environmental
remediation
|
(30 | ) | 1,878 | |||||
Timber
depletion on HBU sale
|
478 | (478 | ) | |||||
Other
Real Estate
|
893 | (164 | ) | |||||
General
& Administrative costs
|
218 | 831 | ||||||
Net
interest expense
|
(782 | ) | 239 | |||||
Debt
extinguishment costs
|
(1,137 | ) | - | |||||
Other
(taxes, noncontrolling interests, impairment)
|
(105 | ) | (560 | ) | ||||
Total
variance
|
$ | (1,434 | ) | $ | (14,346 | ) |
(A) Price
variance allocated based on changes in price using the current period
volume.
(B)
Volume variance allocated based on change in sales volume and the average log
sales price for the prior period less variance in log production
costs.
29
Fee
Timber
Revenue
and Operating Income
Fee
Timber revenue is earned primarily from the harvest and sale of logs from the
Partnership’s 114,000 acres of fee timberland located in western Washington and,
to a lesser extent, from the lease of cellular communication towers together
with the sale of gravel and other forest products that result from timberland
operations. Revenue from the sale 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 and by the average
prices realized on log sales. In late 2006, Fund I acquired 24,000
acres of timberland with operating activities from these properties beginning in
2007 and results from those operations consolidated into this discussion of
operations. In the fourth quarter of 2009, Fund II acquired 12,000
acres in northwestern Oregon and its operating activities are also consolidated
into this discussion of operations.
Revenue
and operating income for the Fee Timber segment for each year in the three-year
period ended December 31, 2009, are as follows:
($ Million)
Year ended
|
Log Sale
Revenue
|
Mineral, Cell
Tower & Other
Revenue
|
Total Fee
Timber
Revenue
|
Operating
Income
(Loss)
|
Harvest
Volume
(MBF)
|
|||||||||||||||
Pope
Resources Timber
|
$ | 13.3 | $ | 1.5 | $ | 14.8 | $ | 4.0 | 32,461 | |||||||||||
Fund
I
|
- | - | - | (0.3 | ) | - | ||||||||||||||
Total
Fee Timber 2009
|
$ | 13.3 | $ | 1.5 | $ | 14.8 | $ | 3.7 | 32,461 | |||||||||||
Pope
Resources Timber
|
$ | 16.7 | $ | 2.0 | $ | 18.7 | $ | 6.7 | 32,455 | |||||||||||
Fund
I
|
2.4 | 2.4 | * | 4.8 | (0.4 | ) | 5,293 | |||||||||||||
Total
Fee Timber 2008
|
$ | 19.1 | $ | 4.4 | $ | 23.5 | $ | 6.3 | 37,748 | |||||||||||
Pope
Resources Timber
|
$ | 30.5 | $ | 2.0 | $ | 32.5 | $ | 14.8 | 49,825 | |||||||||||
Fund
I
|
3.0 | - | 3.0 | 0.4 | 5,336 | |||||||||||||||
Total
Fee Timber 2007
|
$ | 33.5 | $ | 2.0 | $ | 35.5 | $ | 15.2 | 55,161 |
*Conservation
easement sale revenue
Fiscal Year 2009 compared to 2008.
Revenue and
operating income decreased in 2009 from 2008 due to a 14% lower harvest volume
and a $96 per MBF, or 19%, decline in log prices. The decrease in
2009 harvest volume from 2008 is due to continuing weak log markets which have
caused us to reduce harvest levels in 2009 below our estimated long-term
sustainable harvest level. We originally planned to harvest 37 MMBF
in 2009 representing nearly a 30% volume deferral from our pre-Fund II long-term
sustainable harvest level. But as 2009 progressed and log markets
weakened below the levels that we had forecasted, we decided to defer additional
harvested volume resulting in the 38% harvest deferral in 2009.
Fiscal Year 2008 compared to
2007. Revenue and operating income decreased in 2008 from 2007
due to a combination of less harvest volume and lower log prices partially
offset by a $2.4 million conservation easement sale from Fund I. We
planned to decrease our harvest volume in 2008 from 2007 in response to weak log
markets. The decline in log prices is due to weak housing and credit
markets experienced in 2008. Harvest volume in 2008 decreased 32%
from 2007. Average log prices decreased $101 per MBF, or 17%, from
log prices realized in 2007. Operating income in 2008 attributed to
the Fee Timber segment decreased $8.9 million, or 59% from
2007.
30
The
conservation easement sale completed by Fund I in 2008 is accounted for in the
Fee Timber segment due to our policy of including all operations of the Funds in
the Fee Timber segment. Conservation easement sales and land sales
from the Hood Canal and Columbia tree farms made to buyers that plan to use the
land for purposes other than timber production are accounted for in the Real
Estate segment.
ORM Timber
Funds. Fund II acquired its first properties in October 2009
and, as a result, had minimal impact on the consolidated segment
performance. The Funds are consolidated into our financial statements
and the 80% of these Funds owned by third parties is reflected in our Statement
of Operations under the caption “Noncontrolling interest-ORM Timber Funds.” Fund
I generated $28,000 of revenue in 2009, compared with $4.8 million of revenue
generated in 2008 and $3.0 million of revenue in 2007. Fund II generated $3,000
of revenue in the fourth quarter of 2009.
Log
Volume
Log
volume sold for each year in the three-year period ended December 31, 2009 was
as follows:
Volume (in MBF)
|
2009
|
% Total
|
2008
|
% Total
|
2007
|
% Total
|
||||||||||||||||||
Sawlogs
|
||||||||||||||||||||||||
Douglas-fir
|
22,383 | 69 | % | 24,913 | 66 | % | 35,114 | 64 | % | |||||||||||||||
Whitewood
|
1,080 | 3 | % | 3,121 | 8 | % | 6,492 | 12 | % | |||||||||||||||
Cedar
|
827 | 2 | % | 795 | 2 | % | 2,238 | 4 | % | |||||||||||||||
Hardwoods
|
835 | 3 | % | 977 | 3 | % | 2,733 | 5 | % | |||||||||||||||
Pulp
|
||||||||||||||||||||||||
All
Species
|
7,336 | 23 | % | 7,942 | 21 | % | 8,584 | 15 | % | |||||||||||||||
Total
|
32,461 | 100 | % | 37,748 | 100 | % | 55,161 | 100 | % |
Log
volume decreased 14% in 2009 from the 2008 harvest as management sought to
further reduce volume and preserve our asset value while log, lumber, and
housing markets continued to decline throughout 2009. We would
generally expect the proportion of harvest going to pulp markets to average
between 10% and 15%. However, in 2009 and 2008 we concentrated our
harvest on lower quality timber stands to sell logs into pulp markets which have
not been as dramatically impacted as other log markets by the downturn in
housing. As such, pulp logs represented a relatively higher-than-normal
proportion of harvest volume for both 2009 and 2008. This shift in weighting of
our sort mix lowered the average realized price per MBF below what it might
otherwise have been, but we believe helps enhance asset value by allowing more
valuable stands to continue to grow.
Log
volume decreased 32% in 2008 from the 2007 harvest as management sought to
reduce volume and preserve our asset value while log, lumber, and housing
markets declined in 2008. Spot markets developed at times during the
year for pulp and export quality Douglas-fir and white woods. We took
advantage of these spot markets when available but most log markets were
extremely weak during the year. Pulp prices also weakened as 2008
progressed due in part to a surge of available supply of whitewood pulp logs
resulting from salvage logging of timber stands damaged in a December 2007 storm
event.
Log
Prices
We have
categorized our sawlog volume by species, which is a significant driver of price
realized as indicated by the table below. The average log price
realized by species for each year in the three-year period ended December 31,
2009 was as follows:
31
Price $/MBF
|
2009
|
% Change
|
2008
|
% Change
|
2007
|
|||||||||||||||
Sawlogs
|
||||||||||||||||||||
Douglas-fir
|
$ | 435 | -19 | % | $ | 537 | -14 | % | $ | 621 | ||||||||||
Whitewood
|
309 | -25 | % | 412 | -11 | % | 462 | |||||||||||||
Cedar
|
817 | -34 | % | 1,245 | -3 | % | 1,280 | |||||||||||||
Hardwoods
|
446 | -30 | % | 638 | -31 | % | 931 | |||||||||||||
Pulp
|
||||||||||||||||||||
All
Species
|
296 | -18 | % | 359 | -6 | % | 381 | |||||||||||||
Overall
|
||||||||||||||||||||
All
Species
|
$ | 410 | -19 | % | $ | 506 | -17 | % | $ | 607 |
Douglas-fir: Douglas-fir is
noted for its structural characteristics that make it preferable to other
softwoods and hardwoods for the production of construction grade lumber and
plywood. Demand and price for Douglas-fir sawlogs is very dependent upon the
level of new home construction. Housing starts appear to have bottomed and have
begun to show some signs of improvement as we ended the year. The
export market was only slightly stronger than the domestic market as the 2009
recession has resulted in a global economic slow-down which has impacted demand
for sawlogs in Asia as well as the U.S. We have experienced a
$102/MBF, or 19%, drop in Douglas-fir sawlog prices in 2009 from 2008 on top of
a 14% decline in 2008 from 2007.
Whitewood: “Whitewood” is a
term used to describe several softwood species, but for us primarily refers to
western hemlock. Whitewood is generally considered to have less
strength and thus a lower quality than Douglas-fir. Nonetheless,
these logs are also used for manufacturing construction grade lumber and
plywood. The going price for whitewood sawlogs was so low in 2009
that we actively avoided harvest units with a large component of this
product. As a result, the 25% drop in average price realized in 2009
versus 2008 is partially a mix statement as those whitewood sawlogs that were
harvested were generally of lower
quality.
Cedar: Cedar is a minor
component in most upland timber stands and is generally used for outdoor
applications such as fencing, siding and decking. Although there is a
link between demand for these products and housing starts, this link is not as
strong as with most other softwood species. Cedar prices have
decreased in 2009 versus 2008 by 34% compared to a modest 3% decrease in 2008
over 2007. The decline in 2009 reflects the decrease in home
remodeling activity in concert with weakened credit and real estate
markets.
Hardwood: “Hardwood”
can refer to many different species, but on our tree farms primarily consists of
red alder. The local mills that process alder sawlogs are using the
resource to manufacture lumber for use in furniture and cabinet
construction. In past years, the price realized from the sale of red
alder sawlogs increased in connection with relatively limited supply, coupled
with increased demand as a result of new mills focused on hardwood lumber
production in the Pacific Northwest. However, the demand for alder
lumber has been blunted as users have substituted other species in the face of
higher alder prices. The effect of this substitution, combined with
weakness in demand for end-use products has translated to lower prices and
explains why the year-over-year price realized for hardwood log prices decreased
30% from 2008 on top of a 31% decrease in 2008 from 2007. Hardwood
represents a relatively minor species in our sales and timber inventory mix and
produces a small impact on overall revenue and earnings.
32
Pulp: Pulp logs of
any species represent logs that are not suitable for lumber production due to a
defect that renders the log only fit for manufacture into wood
chips. These chips are used primarily to make a full range of pulp
and paper products from unbleached linerboard used in paper bags and cardboard
boxes to fine paper and specialty products. The price realized from
the sale of pulp logs is primarily driven by the supply of wood chips produced
as a by-product from lumber mills and the demand for wood chips from
manufacturers of market pulp, linerboard, and paper. Pulp log prices
in 2009 were down 18% from 2008 resulting from a drop in demand for the end
products in the face of overall economic weakness. Pulp log prices
decreased 6% in 2008 from 2007. Pulp log prices were volatile during
2008 as chip shortages caused by a decline in lumber mill activities resulted in
an increase in demand for pulp logs in early 2008 followed by a dramatic
increase in supply in the latter half of the year as salvage logging of coastal
timber stands brought to market logs damaged in a significant wind storm in
December 2007.
Customers
Annual harvest volume and average price
paid as of December 31 was as follows:
2009
|
2008
|
2007
|
||||||||||||||||||||||
Destination
|
Volume
|
Price/MBF
|
Volume
|
Price/MBF
|
Volume
|
Price/MBF
|
||||||||||||||||||
Domestic
mills
|
20,249 | $ | 410 | 24,191 | $ | 531 | 43,258 | $ | 652 | |||||||||||||||
Export
brokers
|
4,876 | 581 | 5,615 | 610 | 3,319 | 612 | ||||||||||||||||||
Pulp
|
7,336 | 296 | 7,942 | 359 | 8,584 | 382 | ||||||||||||||||||
Total
|
32,461 | $ | 410 | 37,748 | $ | 506 | 55,161 | $ | 607 |
Volumes
by destination showed little relative change in 2009 compared with
2008. Domestic mills purchased 62% of harvest volumes in 2009 versus
64% in 2008. Export brokers represent those log buyers that purchase
our logs and then resell them to customers in Japan, China, and
Korea. Export brokers purchased 15% of both our 2009 and 2008
harvest. Pulp mills purchased 23% of our harvest volume in 2009 as
compared to 21% of 2008.
The
export market for logs in the Pacific Northwest has been migrating over the last
couple years from a market highly focused on Japan to a market that includes
China and Korea, as well as Japan. This change in the export market
is expected to result in a decline in the premium earned from the sale of logs
to the export market while at the same time increasing export market demand for
logs sourced in the Pacific Northwest. Sawlogs sold to Korea and
China are not of the high quality demanded by the Japanese market and, as a
result, do not command the premium pricing generally attributed to the Japanese
market. However, this new source of demand for sawlogs in the Pacific Northwest
will impact pricing as domestic mills will now need to compete with this new and
growing offshore source of demand for Pacific Northwest
sawlogs. These new outlets for lower quality logs will also help to
diversify our customer mix away from domestic mills that are more heavily
dependent on the U.S. housing market.
Domestic
mills purchased 64% of our harvest in 2008 versus 78% in 2007. The
decline in the proportion of log volume sold to domestic mills resulted from an
increase in volume sold to export brokers and pulp mills. Export
brokers purchased 15% of our 2008 harvest, versus 6% in 2007. Pulp
mills purchased 21% of our harvest volume in 2008 as compared to 16% of
2007.
Harvest
Volumes and Seasonality
The
Partnership’s 114,000 acres of timberland consist of both the 70,000-acre Hood
Canal tree farm and the 44,000-acre Columbia tree farm. The Hood
Canal tree farm is located in the Hood Canal region of Washington
State. Most of this tree farm acreage is at a relatively low
elevation where harvest activities are possible year-round. As a
result of this competitive advantage, we are often able to harvest and sell a
greater portion of our annual harvest in the first and fourth quarters when the
log supply in the marketplace tends to be lower due to seasonal shutdowns of
higher elevation tree farms such as Columbia. Fund I owns 24,000
acres of timberland located at higher elevations in Washington State, similar to
those of Columbia. Fund II’s 12,000 acres of timberland in Northwest
Oregon, is at low elevations much like those seen on the Hood Canal tree
farm.
33
The
percentage of annual harvest volume by quarter for each year in the three-year
period ended December 31, 2009 was as follows:
Year ended
|
Q1 | Q2 | Q3 | Q4 | ||||||||||||
2009
|
27 | % | 22 | % | 20 | % | 31 | % | ||||||||
2008
|
25 | % | 38 | % | 31 | % | 6 | % | ||||||||
2007
|
18 | % | 41 | % | 28 | % | 13 | % |
In 2009, our harvest was weighted to
the first and fourth quarters to take advantage of higher seasonal
prices. For 2009, we pushed more than the usual amount of our harvest
into the fourth quarter to take advantage of an uptick in market demand and
increased prices driven by depleted inventories throughout the supply
chain. The absence of internal mills requiring volume and less
concern with quarterly earnings fluctuations allows us to maximize value by
making market timing adjustments. Furthermore, our practice of
permitting excess harvest units provides maximum flexibility to make changes to
harvest volumes.
Cost
of Sales
Cost of
sales for the Fee Timber segment consists of harvest costs and depletion
expense. Harvest costs represent the direct cost incurred to convert
trees into logs and deliver those logs to their point of sale and associated
state excise taxes owed on the harvest of logs. Depletion expense
represents the cost of acquiring or growing the timber harvested. Fee
Timber cost of sales for each year in the three-year period ended December 31,
2009 was as follows:
Cost of
|
||||||||||||||||
($ Million)
|
Harvest, Haul
|
Conservation
|
Total Cost
|
|||||||||||||
Year ended
|
and Other
|
Easement Sale
|
Depletion
|
of Sales
|
||||||||||||
2009
|
$ | 6.0 | - | $ | 2.0 | $ | 8.0 | |||||||||
2008
|
7.5 | 2.2 | 3.4 | 13.1 | ||||||||||||
2007
|
11.0 | - | 4.8 | 15.8 |
Fee Timber cost of sales decreased $5.1
million in 2009 from 2008 and decreased $2.7 million in 2008 from
2007. The 5.3 MMBF decline in harvest volume in 2009 from 2008 and
the non-recurring costs incurred in connection with the conservation easement
sale in 2008 were the primary reasons for the year-over-year decline in Fee
Timber cost of sales. The decrease in 2008 from 2007 is due to a
decline in volume harvested partially offset by land basis expensed with the
sale of a conservation easement by Fund I.
Fee
Timber cost of sales, expressed on a per MBF basis for each year in the
three-year period ended December 31, 2009, was as follows:
Year ended
|
Harvest, Haul and
Other
|
Depletion
|
Total Cost of
Sales *
|
|||||||||
2009
|
$ | 184 | $ | 62 | $ | 246 | ||||||
2008
|
198 | 91 | 289 | |||||||||
2007
|
200 | 87 | 287 | |||||||||
*
Total excludes cost of conservation easement
sale
|
Harvest costs vary based upon the
physical site characteristics of acreage harvested. Harvest units
that are difficult to access, or that are located on steep hillsides requiring
cable harvest systems, are more expensive to harvest. Haul costs vary
based upon the distance between the harvest site and the customer’s
location. Per MBF harvest and haul costs were lower in 2009 relative
to 2008 due to the selection of less expensive harvest units in the face of weak
log pricing. Harvest and haul costs per MBF remained flat between
2008 relative to 2007.
34
The
depletion rate is calculated by dividing the historical cost of the timber and
related capitalized road expenditures by merchantable timber
volume. That calculated rate is then applied to volume
harvested. We used one depletion rate in 2009 for volume harvested
from the Hood Canal and Columbia tree farms as we had no timber harvest from the
Fund I or II tree farms. In 2008 and 2007, we used two separate
depletion rates, with our primary pool used for volume harvested from the Hood
Canal and Columbia tree farms and the second pool for volume harvested from tree
farms owned by Fund I. Depletion expense is calculated by first
deriving a depletion rate as follows:
Depletion
rate =
|
Accumulated cost of timber and capitalized road expenditures
|
||
Estimated
volume of 35-year-and-older merchantable
timber
|
Each year, the depletion rate is
adjusted to account for “layers” of harvest volume exiting the pool and new
“layers” of 35-year old timber volume and cost entering the pool. The
depletion rate is then applied to future volume harvested to calculate depletion
expense. In 2008, we changed our definition of “merchantable” to
35-year-and-older timber from 40-year-and-older in previous
years.
We harvested a total of 32,461 MBF from
our pooled timberlands in 2009 compared with harvest of 37,748 MBF in 2008, with
5,293 MBF of the 2008 total attributable to the separate depletion pool created
for the Fund I timberlands. The separate depletion pool for Fund I
harvest is higher than the pooled rate used for the Partnership’s harvest due to
historical cost basis attributed to the respective timberlands. The
majority of the pooled lands have been owned for decades and carry relatively
low historical cost in comparison to the Fund I properties we purchased in late
2006. The depletion rate used in the Fund I separate pool under normal market
conditions would approximate the net stumpage value realized (delivered log
price less harvesting and transportation cost) on the sale of this particular
timber. When Fund II begins harvesting, we will use a separate pool
to calculate depletion expense.
Depletion
expense is generated from the harvest and sale of timber and periodically from
Real Estate sales when land is sold with standing timber. Depletion
expense generated from Real Estate sales, as was the case in 2008, is excluded
from the Fee Timber depletion analysis. Depletion expense resulting
from timber harvest for each year in the three-year period ended December 31,
2009 was made up of the following:
Year ended December 31, 2009
|
||||||||
|
Pooled
|
Total
|
||||||
Volume
harvested (MBF)
|
32,461 | 32,461 | ||||||
Rate/MBF
|
$ | 62 | $ | 62 | ||||
Depletion
expense (000's)
|
$ | 2,001 | $ | 2,001 |
|
Year ended December 31, 2008
|
|||||||||||
|
Pooled
|
Fund I
|
Total
|
|||||||||
Volume
harvested (MBF)
|
32,455 | 5,293 | 37,748 | |||||||||
Rate/MBF
|
$ | 65 | $ | 254 | $ | 91 | ||||||
Depletion
expense (000's)
|
$ | 2,094 | $ | 1,343 | $ | 3,437 |
|
Year ended December 31, 2007
|
|||||||||||
|
Pooled
|
Fund I
|
Total
|
|||||||||
Volume
harvested (MBF)
|
49,824 | 5,337 | 55,161 | |||||||||
Rate/MBF
|
$ | 70 | $ | 238 | $ | 87 | ||||||
Depletion
expense (000's)
|
$ | 3,503 | $ | 1,269 | $ | 4,772 |
35
Operating
Expenses
Fee
Timber operating expenses for each of the three years ended December 31, 2009,
2008, and 2007 were $3.1 million, $4.2 million, and $4.5 million,
respectively.
($ Million) Year
ended
|
2009
|
2008
|
2007
|
|||||||||
Operating
Expenses
|
$ | 3.1 | $ | 4.2 | $ | 4.5 | ||||||
Average
Acres
|
144,277 | 137,780 | 137,321 | |||||||||
$/Acre
|
$ | 22 | $ | 30 | $ | 33 |
Operating
expenses for Fee Timber include management, silviculture and the cost of both
maintaining existing roads and building temporary roads required for harvest
activities. Due to consolidation of the Funds into the Partnership’s financial
statements the fees generated from the management of these funds are eliminated
from the Fee Timber operating expenses. The portion of these fees
paid by noncontrolling interests was $699,000, $696,000, and $717,000 in 2009,
2008, and 2007, respectively. Operating costs declined in 2009
as a result of cost-cutting measures implemented in the first quarter of the
year. Operating expenses on a per-acre basis declined by a slightly
greater amount relative to the actual expenses due to the additional acres
acquired by Fund II. Operating costs remained relatively consistent
in 2007 and 2008 despite the addition of 24,000 acres owned by Fund
I. This is due primarily to the benefits of scale we enjoy as a
result of adding acreage to this segment.
Timberland Management &
Consulting
Revenue
and Operating Income
The
Timberland Management & Consulting segment generates revenue by providing
timberland management and forestry consulting services to timberland owners and
managers. An additional aspect of this segment’s activities is the
development of timberland property investment portfolios on behalf of
third-party clients and the Funds.
At the
close of 2009, the Timberland Management & Consulting segment was managing
36,000 acres for the Funds. For the years 2008 and 2007, we managed
approximately 267,000 and 292,000 acres, respectively, of timberland for Cascade
Timberlands LLC (Cascade) and an additional 24,000 acres for Fund I in each of
those years. Revenue and operating income for the Timberland
Management & Consulting segment for each year in the three-year period ended
December 31, 2009, were as follows (all dollar amounts in millions):
Year ended
|
Revenue
|
Operating loss
|
||||||
2009
|
$ | 0.6 | $ | (0.4 | ) | |||
2008
|
0.9 | (0.5 | ) | |||||
2007
|
1.3 | (0.9 | ) |
Fiscal Year 2009 compared to 2008.
Revenue and
operating loss for 2009 were $343,000 and $168,000 lower, respectively, than in
2008. The decrease in revenue is due to the elimination of the
Cascade contract in mid-2009. The reduction in operating loss is due
primarily to a reduction in expenses associated with formation of Fund II as
well as cost-cutting efforts within the segment.
36
Fiscal Year 2008 compared to
2007. Revenue and operating loss for 2008 were $400,000 and
$340,000 lower, respectively, than in 2007. The decrease in revenue
and operating loss is due primarily to the closure of our timberland consulting
office in McCloud, California in December 2007. Revenue also declined
due to a decline in acres under management for Cascade.
Operating
Expenses
Fiscal Year 2009 compared to 2008.
Timberland
Management & Consulting operating expenses decreased $511,000 in 2009 from
2008. This is attributed to elimination of costs following the
mid-2009 termination of our Cascade management contract and the aforementioned
reduction of expense associated with the formation of Fund II and cost-cutting
efforts within the segment.
Fiscal Year 2008 compared to
2007. Timberland Management & Consulting operating
expenses decreased $740,000 in 2008 from 2007. This is attributed to
a decrease in organization costs associated with Fund II as well as the closure
of the McCloud, California office in December 2007.
Real
Estate
Revenue
and Operating Income
The
Partnership’s Real Estate segment consists primarily of revenue from the sale of
land and sales of conservation easements (“CE”) from the Partnership’s tree
farms 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.
Results
from Real Estate operations are expected to vary significantly from year to year
as we make multi-year investments in entitlements and infrastructure prior to
selling entitled or developed land. Revenue and operating income for
the Real Estate segment for each year in the three-year period ended December
31, 2009 were as follows (all dollar amounts in millions):
Year ended
|
Revenue
|
Environmental
remediation expense
|
Operating income
(loss)
|
|||||||||
2009
|
$ | 5.0 | $ | - | $ | 1.7 | ||||||
2008
|
3.7 | - | (1.1 | ) | ||||||||
2007
|
15.0 | 1.9 | 5.2 |
Revenue
in the Real Estate segment is generated through the sale of land, the rental of
homes and commercial properties at the Port Gamble townsite, and the sale of
land development rights. Land sales include the sale of unimproved
land which generally consists of larger acreage sales rather than single lot
sales and are normally completed with very little capital investment prior to
sale. Rural Lifestyles lot sales generally require some capital
improvements such as zoning, road building, or utility access improvements prior
to completing the sale. Commercial and residential plat land sales
represent land sold after development rights have been obtained and are
generally sold with certain infrastructure improvements. Sales of
development rights can take different forms, but in 2009 reflected the sale of a
CE on 2,290 acres of the Hood Canal tree farm that precludes future real estate
development.
Real
Estate segment revenue for each year in the three-year period ended December 31,
2009 consisted of the following (all dollar amounts in
thousands):
37
Thousands
|
Per Acre Amounts
|
|||||||||||||||||||
Description
|
Revenue
|
Gross
Margin
|
Acres
Sold
|
Revenue
|
Gross Margin
|
|||||||||||||||
Conservation
Easement
|
$ | 3,298 | $ | 3,108 | 2,290 | $ | 1,440 | $ | 1,357 | |||||||||||
Rural
Residential
|
521 | 328 | 50 | 10,420 | 6,566 | |||||||||||||||
Rentals
|
1,154 | 1,153 |
NA
|
|||||||||||||||||
Other
|
57 | 49 |
NA
|
|||||||||||||||||
2009
Total
|
$ | 5,030 | $ | 4,638 | 2,340 | |||||||||||||||
Conservation
Easement
|
$ | 830 | $ | 418 | 126 | $ | 6,587 | $ | 3,318 | |||||||||||
Rural
Residential
|
1,626 | 1,058 | 216 | 7,545 | 4,910 | |||||||||||||||
Rentals
|
1,158 | 1,157 |
NA
|
|||||||||||||||||
Other
|
69 | 71 |
NA
|
|||||||||||||||||
2008
Total
|
$ | 3,683 | $ | 2,704 | 342 | |||||||||||||||
Commercial/Business
Park
|
$ | 11,124 | $ | 7,155 | 15 | $ | 742,000 | $ | 477,000 | |||||||||||
Revenue
Recognized on %
|
||||||||||||||||||||
Complete
for 2006 Closings
|
1,346 | 838 |
NA
|
|||||||||||||||||
Unimproved
Land
|
1,018 | 964 | 91 | 11,188 | 10,598 | |||||||||||||||
Rural
Residential
|
553 | 458 | 50 | 11,060 | 9,161 | |||||||||||||||
Rentals
|
982 | 982 |
NA
|
|||||||||||||||||
Other
|
14 | 15 |
NA
|
|||||||||||||||||
2007
Total
|
$ | 15,037 | $ | 10,412 | 156 |
Fiscal Year 2009 compared to 2008.
In 2009,
revenue for the Real Estate segment increased by $1.3 million and operating
income increased $2.8 million from 2008 results. The large increase in revenue
and operating results is attributed to a 2,290-acre CE sale on our Hood Canal
tree farm in the third quarter of 2009. The $3.3 million of
conservation easement revenue is reported in the Real Estate segment as it was
generated through the efforts of our Real Estate development segment. The CE
sale was funded by the Federal Forest Legacy program and represents the
culmination of five years of negotiation and discussions with Cascade Land
Conservancy and the Washington State Department of Natural
Resources. This CE will protect the land from development while
allowing for continued growing and harvesting of timber. Cost-cutting
measures in the Real Estate segment served to further increase operating income
in 2009 over 2008.
In
addition to the CE sale, there were 3 separate land transactions totaling 50
acres sold from the Rural Residential lot program. The Partnership’s Rural
Residential lot program typically produces lots from 5 to 80 acres in size,
based on underlying zoning densities. This type of program entails an
entitlement effort typically consisting of simple lot segregations and boundary
line adjustments. Development activities include minor road building,
surveying, and the extension of utilities. Demand for rural lots has
dropped significantly since 2007 commensurate with decreased housing demand.
Management
intends to offer a steady supply of rural residential lots to the market that
will result in an ongoing revenue stream for the Real Estate
segment. In normal markets we target 150 to 300 acres of rural
residential lot sales annually. The market for these types of land
sales is expected to remain extremely weak in 2010 and, as a result, we will
likely not meet this target in 2010.
Fiscal Year 2008 compared to
2007. In 2008, revenue for the Real Estate segment decreased
by $11.3 million and operating income decreased $6.3 million from 2007 results.
The large decrease in revenue and operating results is attributed to a decline
in relatively large commercial sales experienced in 2007 which were the direct
result of multi-year investments made during and prior to 2007, and $1.3 million
of non-recurring revenue recognized in 2007 related to sales closed in
2006.
38
Rural
Residential revenue in 2008 consisted of seven separate transactions totaling
216 acres. The $830,000 of conservation easement revenue is reported
in the Real Estate segment as it was generated from the sale of a conservation
easement on 126 acres of development property. The conservation
easement restricts us from harvesting 2,000 MBF of timber and does not allow
building on the property but does create value on neighboring parcels of
property that we own through the protected open space created by the
conservation easement.
Cost
of Sales
Real
Estate cost of sales for each of the three years ended December 31, 2009, 2008,
and 2007 was $392,000, $979,000, and $4.6 million, respectively. Cost
of sales during the periods presented result from the aforementioned land sales.
The decreases in cost of sale in 2009 relative to 2008, and in 2008
compared to 2007, were due primarily to a decline in acres sold.
Operating
Expenses
Real
Estate operating expenses for each of the three years ended December 31, 2009,
2008, and 2007 were $2.9 million, $3.8 million, and $3.4 million,
respectively. Operating expenses decreased $870,000 in 2009 compared
to 2008 due primarily to cost-cutting efforts that have been undertaken during
this prolonged downturn in the market for raw and developed land. Operating
expenses increased $444,000 in 2008 compared to 2007 due primarily to an
increase in professional costs incurred in the pursuit of entitlements for the
Port Gamble townsite.
Basis
in Real Estate Projects
“Land
Held for Development” on our Condensed Consolidated Balance Sheet represents the
Partnership’s cost basis in land that has been identified as having greater
value as development property rather than as timberland. Our Real
Estate segment personnel work with local officials to establish entitlements for
further development of these parcels. Costs clearly associated with
development or the construction of fully entitled projects are generally
capitalized, whereas costs associated with projects that are in the entitlement
phase are generally expensed. Those properties that are either for
sale, under contract or the Partnership has an expectation they will sell within
the next 12 months, are classified as a current asset under Land Held for
Sale.
When
facts and circumstances indicate that the carrying value of properties may be
impaired, an evaluation of recoverability is performed by comparing the carrying
value to the projected future undiscounted cash flows. If the
carrying value of such assets may not be fully recoverable, we would recognize
an impairment loss, adjusting for changes in estimated fair market value, and
would charge this amount against current operations. We have continuously owned
most of our land for decades. As a result, the land basis associated
with most of our development properties is well below even the weakened current
market values prevalent today. As such, we do not anticipate an asset impairment
charge on our development projects.
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 milltown that was
owned and operated by P&T until 1985 when the townsite and other assets were
spun off to form 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. Under applicable law, both Pope Resources and P&T are “potentially
liable persons” based on ownership and/or operation of the site. These laws
provide for joint and several liability among parties owning or operating
property on which contamination occurs, meaning that cleanup costs can be
assessed against any or all such parties.
39
Following
the bankruptcy of P&T in late 2007 and the pending liquidation of P&T’s
assets, we determined that P&T would no longer be able to meet any of its
obligations under our settlement and remediation agreement. Accordingly, in the
fourth quarter of 2007 we added $1.9 million to our remediation liability, based
on what management believed to be the best estimate of the remaining cleanup
cost and most likely outcome to various contingencies within the overall
project. The Monte-Carlo simulation model by which we estimate this liability
was updated at December 31, 2009 and indicated a range of potential liability
from $145,000 to $2.9 million which represents a two standard deviation range
from the mean of possible outcomes generated by the statistical modeling process
used to estimate this liability. The balance of our estimated remediation
liability as of December 31, 2009 is $1.3 million.
The
environmental liability at December 31, 2009 includes $200,000 that the
Partnership expects to expend in the next 12 months and $1.1 million thereafter.
Activities at the site during 2009 included the completion of upland soil and
groundwater sampling and analysis, gaining county approval of the aforementioned
test results, the removal of all remaining sparged materials, completion of
testing of the bay area, preparation of the final millsite remedial
investigation report, and progress toward draft millsite and bay-wide
feasibility study reports.
In 2001,
the Partnership sold a resort community and its water and sewer utilities in the
community of Port Ludlow. The buyer of the project believes some
remediation is required for contamination discovered on the site, and we have
agreed to participate in an investigation in 2010 regarding any liability the
Partnership may have or may be alleged to have. While we have not
concluded that we have an obligation to remediate, we recognized a $30,000
accrual as of December 31, 2009 which represents the maximum of the
Partnership’s agreed-upon investigative costs. Activity in the
environmental remediation liability is detailed as follows:
($ Thousands)
|
Balances at
|
Additions
|
Expenditures
|
|||||||||||||
Year ended
|
the Beginning
|
to
|
for
|
Balance at
|
||||||||||||
December 31,
|
of the Year
|
Accrual
|
Remediation
|
Year-end
|
||||||||||||
2007
|
$ | 242 | $ | 1,878 | $ | 126 | $ | 1,994 | ||||||||
2008
|
1,994 | - | 440 | 1,554 | ||||||||||||
2009
|
1,554 | 30 | 315 | 1,269 |
General & Administrative
(G&A)
Fiscal Year 2009 compared to 2008.
G&A
costs decreased $218,000, or 6%, to $3.7 million from $4.0 million in 2008.
The decrease in G&A expense is due to cost-cutting measures
implemented in response to weak log and real estate markets. This decrease
was offset by $248,000 of legal expenses incurred in connection with our October
2009 FINRA arbitration described further in Note 2 of our consolidated financial
statements. G&A costs represented 18% of revenue in 2009.
Fiscal Year 2008 compared to
2007. G&A costs decreased $831,000, or 17%, to $4.0
million from $4.8 million in 2007. The decrease in G&A expense is
due primarily to professional service fees incurred in 2007 to evaluate capital
structuring alternatives with management and the Board of Directors of the
General Partner that did not recur in 2008. G&A costs represented
14% of revenue in 2008.
40
Interest Income and
Expense
Interest
income for 2009 decreased to $219,000 from $965,000 in 2008 and $1.8 million in
2007. The decrease in interest income in 2009 is due primarily to a
decrease in cash investments coupled with a decrease in average interest
earned. During 2009, we have retained cash in excess of immediate
operating cash requirements in our demand deposit accounts. At year
end, we also had $1.9 million par value of student loan auction rate securities
(“SLARS”) with an estimated fair value of $1.5 million. SLARS are
collateralized long-term debt instruments that were designed to provide
liquidity through a Dutch auction process that reset the applicable interest
rate at pre-determined intervals, typically every 28 days. Beginning in
February 2008, auctions failed when sell orders exceeded buy orders. When
these auctions failed to clear, default interest rates went into
effect. The underlying assets of the SLARS we hold, including the
securities for which auctions have failed, are student loans which are
guaranteed by the U.S. Department of Education for 97% of the loan and interest
due. Further student loan auction rate securities information is
presented in “Liquidity and Capital Resources” below and in Note 2 to our
consolidated financial statements included in this report.
Interest
expense, net of interest capitalized to development projects, was $1.2 million
for 2009 and 2008, and $1.4 million for 2007. The decrease in
interest expense from 2007 to 2008 is attributable to regularly scheduled
principal payments due on our timberland mortgage. The static expense
from 2008 to 2009 was due to a decline in interest expense attributable to a
decrease in borrowing rates offset by a decline in interest capitalized as a
result of certain Real Estate projects no longer meeting interest capitalization
requirements, whereas in 2008, we experienced an increase in capitalized
interest related to increased basis on land projects under development.
The Partnership’s debt consists primarily of mortgage debt with fixed
interest rates.
Debt Extinguishment
Costs
In
September 2009, the Partnership incurred $1.1 million of costs in connection
with the early retirement of a timberland mortgage held with John Hancock Life
Insurance Company (JHLIC), which was scheduled to mature in April
2011. The decision to refinance was motivated by the opportunity to
reduce cash used for both principal and interest payments, lower borrowing costs
and mitigate future refinance risk. The early debt extinguishment costs were
funded using a new term loan from Northwest Farm Credit Services, PCA
(NWFCS).
Income
Taxes
Pope
Resources is a limited partnership and is, therefore, not subject to income
tax. Instead, taxable income/loss flows through and is reported to
unitholders each year on a Form K-1 for inclusion in each unitholder’s tax
return. Pope Resources does, however, have corporate subsidiaries
that are subject to income tax and this is why a line item for such tax appears
on the statements of operations. The corporate tax-paying entities
are utilized for our third-party service fee businesses.
Fiscal Year 2009 compared to 2008.
We have
recorded an income tax provision of $39,000 in 2009, whereas we recorded a
$61,000 tax benefit in 2008. The tax provision recorded in 2009
resulted from the decline in loss from ORMLLC.
Fiscal Year 2008 compared to
2007. We recorded an income tax benefit of $61,000 in 2008 and
a tax benefit of $69,000 in 2007. The tax benefits recorded in 2008
and 2007 resulted from losses incurred in ORMLLC as we worked on building the
private equity timber fund business while management fees generated from the
Cascade Timberlands management contract declined.
Noncontrolling interests-ORM
Timber Funds
Noncontrolling
interests-ORM Timber Funds represented the 80% portion of 2009 net loss of the
Funds attributable to third-party owners of the Funds. The decrease
in this amount from 2008 is due to the decrease in operating loss of the Funds
in 2009 as cost-saving measures were implemented in response to weak log markets
and the decision to defer all harvest.
41
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Flows
We
ordinarily finance our business activities using funds from operations and,
where appropriate in management’s assessment, commercial credit arrangements
with banks or other financial institutions. 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,
excluding noncontrolling interests, was 26% at December 31, 2009 versus 25% as
of December 31, 2008. The debt-to-total-capitalization ratio as of December 31,
2009 was impacted by an early extinguishment of debt cost of $1.1 million, which
was rolled into a new lower cost mortgage and increased the size of the
numerator, and expenditures of $1.8 million to repurchase our units in 2009
which reduced partners’ capital and the ratio’s denominator both of which serve
to drive the ratio marginally higher.
At
December 31, 2009, the Partnership held two Student Loan Auction Rate Securities
(“SLARS”) with a par value of $1.9 million and an estimated fair value, based on
the methodology described in the notes to the audited financial statements
included with this report, of $1.5 million. SLARS are collateralized long-term
debt instruments that are intended to provide liquidity through a Dutch auction
process that resets the applicable interest rate at pre-determined intervals,
typically every 28 days. Beginning in February 2008, auctions failed
for approximately $17 million in par value of SLARS we held because sell
orders exceeded buy orders.
Although
default interest rates for SLARS went into effect upon failure of the auctions,
the principal amount of the securities associated with failed auctions will not
be accessible until the issuer calls all or portions of the security, a
successful auction occurs, a buyer is found outside of the auction process, or
the security matures. During 2008, we successfully liquidated $26.8 million of
our SLARS portfolio at par. In 2009, we liquidated $1.8 million of
our SLARS portfolio at prices ranging from 85% to 100% of par. We
filed a claim with the Financial Industry Regulatory Authority (FINRA) in an
attempt to recover lost value with respect to these SLARS, but the hearing panel
rendered a decision in November 2009 that was unfavorable to us in that it
offered no settlement for our outstanding position. In January 2010,
we redeemed at par a small portion of one of the two remaining SLARS and within
a week sold the remainder of this security at 78% of par. We have classified
this particular SLARS as current on our balance sheet while the other SLARS we
hold is classified as a non-current asset.
On
September 25, 2009 the Partnership entered into a new $9.8 million term loan
agreement with NWFCS reducing the interest rate to 6.4% for a ten-year
term. This new term loan replaced a term loan from JHLIC with a
higher interest rate of 9.65% due in April 2011 and funded an early
extinguishment of debt charge of $1.1 million on retirement of that JHLIC
timberland mortgage. The decision to retire the JHLIC term loan was
made to reduce future refinancing risk and reduce our weighted average interest
expense.
In
connection with the new term loan, the limit on the Partnership’s revolving line
of credit with NFCS was reduced from $40 million to $35 million. Our unsecured
revolving loan agreement with NFCS matures in August 2011 and requires that we
not exceed a maximum debt-to-total capitalization ratio that the Partnership
currently satisfies. As of December 31, 2009, there were no amounts outstanding
on the line of credit. The Partnership is utilizing its cash balance to support
operations in order to avoid selling timber and land into extremely weak
markets. These actions are currently resulting in a draw-down of our cash
balances. Management believes that the cash we hold in
excess of our current operating needs together with the line of credit provide
adequate liquidity for our near-term operating needs.
We
reduced our 2009 harvest plan from the originally planned 37 MMBF due to log
prices which weakened from the already-depressed levels in effect at the end of
2008.
42
The
annual harvest target for 2010 is 32 MMBF which is consistent with our 2009
harvest. This represents a 47% reduction from our currently-estimated
sustainable harvest volume of 60 MMBF. The decision to defer harvest
was made in response to our expectation of continued weakness in the market for
sawlogs resulting from the slowdown in housing
starts. Consistent with 2009, we plan to defer all harvest from
the tree farms owned by both Funds in 2010. We believe these actions
will serve to increase the value of our Partnership units in the
long-term. Management believes that the Partnership’s working capital
and available borrowing capacity will be sufficient to meet cash
requirements.
During
the year ended December 31, 2009, overall cash and cash equivalents decreased
$10.8 million resulting primarily from the Fund II co-investment of $6.9 million
and unit repurchases of $1.8 million. During the year ended December
31, 2008, overall cash and cash equivalents increased by $15.8 million primarily
from the sale of short term investments.
Operating cash activities.
The table
below provides the components of operating cash flows for each annual period
ended December 31. Cash received from customers and paid to suppliers
and employees results from the harvest and sale of forest products from our tree
farms; timberland management, disposition, and consulting services provided to
timberland owners; and sales of development properties. Capitalized
development activities include investment in our Real Estate properties to build
infrastructure and acquire the entitlements necessary to make further
development of the properties possible.
Operating
cash activities (in thousands):
|
2009
|
2008
|
2007
|
|||||||||
Cash
received from customers
|
$ | 20,854 | $ | 29,071 | $ | 47,667 | ||||||
Cash
paid to suppliers and employees
|
(16,533 | ) | (21,281 | ) | (24,473 | ) | ||||||
Interest
received
|
280 | 1,025 | 1,712 | |||||||||
Interest
paid
|
(1,226 | ) | (1,401 | ) | (2,585 | ) | ||||||
Debt
extinguishment costs
|
(1,137 | ) | - | - | ||||||||
Capitalized
development activities, net of reimbursements
|
(1,639 | ) | (3,451 | ) | (9,868 | ) | ||||||
Income
taxes refunded (paid)
|
63 | (11 | ) | (340 | ) | |||||||
Cash
provided by operating activities
|
$ | 662 | $ | 3,952 | $ | 12,113 |
Cash
provided by operating activities decreased to $662,000 in 2009 from $4.0 million
in 2008. The decrease in cash provided by operating activities
resulted primarily from the decrease in timber harvest combined with a $745,000
reduction in interest received as a result of a decline in invested balances and
$1.1 million of non-recurring extinguishment of debt costs from the early
retirement of a timberland mortgage. These reductions to cash were
offset by a $1.8 million decline in capitalized development
activities. We incurred capital expenditures for development costs in
2009 for the following Real Estate properties: $238,000 at Gig Harbor, $122,000
at Kingston, $36,000 at Bremerton, $48,000 at Port Ludlow, $1.1 million of
capitalized interest related to the Gig Harbor, Kingston and Port Ludlow
projects, and $104,000 related to other miscellaneous
projects.
Cash
provided by operating activities decreased to $4.0 million in 2008 from $12.1
million in 2007. The decrease in cash provided by operating
activities resulted primarily from the decrease in timber harvest and reduced
land sales in response to weak markets for logs and land. These reductions are
offset by a decline in interest paid and a decline in capitalized development
activities. In 2008, we invested $3.5 million in development costs
for the following Real Estate properties: $777,000 at Gig Harbor, $521,000 at
Bremerton, $1.3 million of capitalized interest related to the Gig Harbor and
Bremerton projects, $300,000 at Port Ludlow, $312,000 at Kingston and $290,000
related to other miscellaneous projects.
Investing cash activities.
The table
below reflects the annual components of cash used by year in investing
activities for each annual period ended December 31. Recurring
investing activities consist primarily of tree planting, road building, and
activity within our SLARS portfolio.
43
Investing
activities (in thousands):
|
2009
|
2008
|
2007
|
|||||||||
Buildings
and equipment
|
$ | (617 | ) | $ | (555 | ) | $ | (793 | ) | |||
Timber
and roads
|
(607 | ) | (1,160 | ) | (1,501 | ) | ||||||
Timberland
acquisitions
|
(34,421 | ) | (904 | ) | - | |||||||
Redemption
(purchase) of short-term investments
|
1,815 | 26,775 | (5,775 | ) | ||||||||
Proceeds
from the sale of fixed assets
|
50 | 41 | 64 | |||||||||
Cash
provided by (used in) investing activities
|
$ | (33,780 | ) | $ | 24,197 | $ | (8,005 | ) |
Cash used
in investing activities was $33.8 million in 2009 compared with cash provided by
investing activities of $24.2 million in 2008. The decrease in 2009
from 2008 is due primarily to the acquisition of Fund II properties and a
decline in redemption of SLARS. In 2009, we liquidated $1.8 million
in SLARS versus 2008 when we liquidated $26.8 million in
SLARS. During 2009, we invested $607,000 in timber and roads and
approximately $617,000 in other capital
expenditures.
Cash
provided by investing activities increased to $24.2 million in 2008 from cash
used in investing activities of $8.0 million in 2007. The increase in
2008 from 2007 is due primarily to the redemption of SLARS. In 2008,
we liquidated $26.8 million in SLARS versus 2007 when we purchased $5.8 million
in SLARS. During 2008, we invested $1.2 million in timber and roads
and approximately $555,000 in other capital expenditures compared with $1.5
million invested in timber and roads and $793,000 in other capital expenditures
in 2007.
Financing activities. The table below
summarizes the components of cash used in financing activities for each year of
the three-year period ended December 31, 2009. Our financing
activities primarily reflect payments made on timber mortgages and other debt
plus unitholder distributions. These payments and outflows are
partially offset by cash received from the exercise of unit options issued to
employees and directors, and capital contributions by third-party investors in
the Funds.
Financing
activities (in thousands):
|
2009
|
2008
|
2007
|
|||||||||
Cash
distribution to unitholders
|
$ | (3,219 | ) | $ | (7,444 | ) | $ | (6,449 | ) | |||
ORM
Timber Fund II, Inc. capital call
|
27,527 | 370 | - | |||||||||
ORM
Timber Fund I, LP distributions
|
- | (800 | ) | (480 | ) | |||||||
Unit
repurchase
|
(1,838 | ) | (3,940 | ) | (1,374 | ) | ||||||
Mortgage/LID
payments
|
(1,418 | ) | (1,342 | ) | (1,481 | ) | ||||||
Extinguishment
of long-term debt
|
(8,478 | ) | - | - | ||||||||
Proceeds
from issuance of long-term debt
|
9,800 | - | - | |||||||||
Debt
issuance costs
|
(71 | ) | ||||||||||
Cash
received from unit option exercises
|
- | 644 | 730 | |||||||||
Excess
tax benefit from equity-based compensation
|
17 | 167 | - | |||||||||
Noncontrolling
interest distribution
|
- | - | (74 | ) | ||||||||
Cash
provided by (used in) financing activities
|
$ | 22,320 | $ | (12,345 | ) | $ | (9,128 | ) |
Cash
provided by financing activities was $22.3 million in 2009 as compared to cash
used in financing activities of $12.3 million in 2008. This change is
due primarily to the capital call of $27.5 million by Fund II investors for the
acquisition of timberland properties. This was in addition to the
$4.2 million reduction in cash distribution to unitholders and the $2.1 million
reduction in unit repurchases from 2008. Cash distributions went from
$1.60 per unit in 2008 to $0.70 per unit in 2009. The unit
repurchases made in 2009 were part of a program which was extended in May 2009
and concludes in December 2010.
44
Cash used
by financing activities was $12.3 million in 2008 as compared to $9.1 million
used by financing activities in 2007. This change is due primarily to
the use of $3.9 million to acquire Partnership units under two separate unit
repurchase plans. The first was announced in November 2007 and was
completed in April 2008 with purchases totaling $5.0 million in Partnership
units. The second plan was announced in December 2008 for the
purchase of $2.5 million and was still active as of December
2008. Cash distributions were $1.0 million higher in 2008 than 2007
due to the increase in the quarterly distribution rate from $0.28 per unit for
the first half of 2007 to $0.40 per unit for the remainder of 2007 and all of
2008.
Expected future changes to
cash flows
Operating activities. As discussed above, we
plan to maintain our harvest level in 2010 at 32 MMBF in 2010 representing a 47%
reduction from our estimated sustainable harvest. This reduction is
in response to expected flat log prices at historically depressed levels as the
decline in housing starts has curtailed demand for solid wood products. Capital
infrastructure expenditures for our Gig Harbor, Kingston and Port Ludlow
projects are expected to total $951,000, $163,000, and $92,000, respectively, in
2010. The majority of Gig Harbor capital expenditures in 2010
are expected to reflect work pursuant to the development agreement, capitalized
interest and infrastructure on the property. Capital expenditures on
the Kingston project are expected to be dominated by capitalized
interest. Activities include collaborating with the county in
procuring a grant and some infrastructure work. Capitalized interest will
make up more than half the expenditures on the Port Ludlow property in 2010
where activities will primarily relate to continuation of entitlement efforts
and planning for future construction.
Investing activities. Management is working on
identifying additional properties for acquisition by Fund II in
2010. We will have a 20% co-investment obligation in connection with
these transactions if successful.
Financing activities. Management is currently
projecting that cash on hand, availability of drawing on the operating line of
credit, and cash generated from operating activities will be sufficient to
bridge the front-loading of the capital needs for development properties and
co-investments in future timber funds. In July 2008, we secured a
3-year commitment for a $40 million line of credit from Northwest Farm Credit
Services, which was reduced to $35 million following the closing of a term loan
with Northwest Farm Credit Services.
Our
debt-to-total-capitalization ratio as of December 31, 2009, as measured by the
book and market value of our equity, was 26% and 21%,
respectively. Should a financing need arise, management is
comfortable that there is room to take on additional debt with the ratios at
these levels, since our most restrictive loan covenant which limits
debt-to-total-capitalization to 50% is measured against the lower of these two
calculations. Our new timberland mortgage uses a different set of
computations to limit debt-to-total-capitalization ratios that is more generous
than the foregoing. The Hood Canal and Columbia tree farms secure the
Partnership’s current timberland mortgages. To date, the
Partnership’s strong financial position has enabled fairly easy access to credit
at reasonable terms when needed.
Seasonality
Fee Timber. The Partnership owns
114,000 acres and Fund I owns 24,000 acres of timberland in Washington State.
Fund II owns 12,000 acres of timberland in northwestern
Oregon. Partnership timber acreage is concentrated in two
non-contiguous tree farms: the 70,000-acre Hood Canal tree farm located on the
eastern side of Washington’s Olympic Peninsula, and the 44,000-acre Columbia
tree farm located on the western side of Washington’s Cascade mountain range
between Seattle and Portland. Fund I’s 24,000 acres are similarly located on the
western side of the Cascade mountain range.
The Hood
Canal tree farm and the properties acquired by Fund II are concentrated at low
elevations, which permits us to conduct year-round harvest activities.
Generally, we concentrate our harvests from the Hood Canal 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. With the acquisition
of the Columbia tree farm in 2001, and the timberlands acquired by Fund I in
2006, management expected a decrease in the seasonality of Fee Timber operations
as the Columbia tree farm and timberlands owned by Fund I are at higher
elevations where harvest activities are not possible during the winter months
when snow precludes access to the lands.
45
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 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.
Contractual Obligations,
Commercial Commitments and Contingencies
Our
commitments at December 31, 2009 consist of operating leases, and purchase
obligations entered into in the normal course of business.
Payments Due By Period /Commitment Expiration Date
|
||||||||||||||||||||
Obligation or Commitment (in 000's)
|
Total
|
Less than 1
year
|
1-3 years
|
4-5 years
|
After 5 years
|
|||||||||||||||
Total
debt
|
$ | 29,490 | $ | 831 | $ | 18,856 | $ | 3 | $ | 9,800 | ||||||||||
Operating
leases
|
119 | 59 | 60 | - | - | |||||||||||||||
Interest
on debt
|
9,052 | 2,179 | 2,483 | 1,254 | 3,136 | |||||||||||||||
Environmental
remediation
|
1,269 | 200 | 1,069 | - | - | |||||||||||||||
Other
long-term obligations
|
205 | 25 | 50 | 50 | 80 | |||||||||||||||
Total
contractual obligations or commitments
|
$ | 40,135 | $ | 3,294 | $ | 22,518 | $ | 1,307 | $ | 13,016 |
Environmental
remediation represents our estimate of potential liability associated with
environmental contamination at Port Gamble. Other long-term
obligations consist of a $205,000 liability for a supplemental employment
retirement plan.
The
Partnership may from time to time be a defendant in lawsuits arising in the
ordinary course of business. Management believes that loss to the
Partnership, if any, will not have a material adverse effect on the
Partnership’s consolidated financial condition or results of
operations.
Off-Balance Sheet
Arrangements
The
Partnership is not a party to off-balance sheet arrangements and does not hold
any variable interests in unconsolidated entities.
Capital Expenditures and
Commitments
Projected
capital expenditures in 2010 are $2.4 million, of which $870,000 is capitalized
interest costs. Projected capital expenditures are currently expected to include
$951,000 for the Gig Harbor site and $163,000 for the Kingston site. These
expenditures could be increased or decreased as a consequence of future economic
conditions. Projected capital expenditures are subject to permitting timetables
and progress towards closing on specific land sale transactions. In addition, we
have $9.9 million of remaining co-investment capital commitment by the
Partnership in Fund II.
46
Government
Regulation
Compliance
with laws, regulations, and demands usually involves capital expenditures as
well as operating costs. We cannot easily quantify future amounts of
capital expenditures required to comply with 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 we have not included herein a
quantification of future capital requirements to comply with any new regulations
being developed by United States regulatory agencies.
Additionally,
many Federal and state environmental regulations, as well as local zoning and
land use ordinances, place limits upon various aspects of our
operations. These limits include restrictions on our harvest methods
and volumes, remediation requirements that may increase our post-harvest
reclamation costs, ESA limitations on our ability to harvest in certain areas,
zoning and development restrictions that impact our Real Estate segment, and a
wide range of other existing and pending statutes and
regulations. Various initiatives are presented from time to time that
seek further restrictions on timber and real estate development businesses, and
although management currently is not aware of any material noncompliance with
applicable law, we cannot assure readers that we ultimately will be successful
in complying with all such regulations or that additional regulations will not
ultimately have a material adverse impact upon our business.
ACCOUNTING
MATTERS
Accounting Standards Not Yet
Implemented
There are
no accounting standards not yet implemented that are expected to materially
impact the Partnership.
Critical Accounting Policies
and Estimates
Management
believes its most critical accounting policies and estimates relate to
calculations 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 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.
Purchased timberland cost allocation.
When the
Partnership acquires timberlands, a purchase price allocation is performed that
allocates cost between the categories of merchantable timber, pre-merchantable
timber, and land based upon the relative fair values pertaining to each of the
categories. When timberland is acquired the land is separately
evaluated for current value. Land value may include uses other than
timberland including potential conservation easement sales and development
opportunities.
Depletion. Depletion represents the
cost of timber harvested and the cost of the permanent road system 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 and the cost of
the permanent road system by the volume of merchantable timber. For
purposes of the depletion calculation in 2009, merchantable timber is defined as
timber that is equal to or greater than 35 years of age. Prior to
2008, we defined merchantable timber in our depletion calculation as equal to,
or older than 40 years of age.
47
To
calculate the depletion rate, the Partnership uses a combined pool when the
characteristics of the acquired timber are not significantly different from the
Partnership’s existing timberlands. The depletion cost on recently
acquired timber, such as timber harvested from Fund I timberland, under normal
market conditions would approximate the net stumpage realized on the sale,
however in current market conditions net stumpage realized is less than the
depletion rate resulting in a loss from timber harvest.
Timber
inventory volumes take into account the applicable state and Federal regulatory
limits on timber harvests as applied to the Partnership’s
properties. Washington State’s forest practice regulations provide
for expanded riparian management zones, wildlife leave trees, and other harvest
restrictions to protect various fish and other wildlife
species. Timber inventory volume is accounted for by the
Partnership’s standing timber inventory system, which utilizes annual
statistical sampling of the timber (cruising) together with adjustments made for
estimated annual growth and the depletion of areas harvested.
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 in the
standing inventory system at the time of the harvest. A “cruise”,
which utilizes statistical sampling techniques, 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 volume
captured in the standing inventory system. Only productive acres with
timber that is at least 20 years old are selected as subject to a
cruise. The Partnership cruises 15-20% of its productive acres with
20-year-old or greater timber annually. 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.
A
hypothetical 5% change in estimated timber inventory volume would have changed
2009 depletion expense by $101,000.
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 P&T, formerly a related party, 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. Under Washington law, both Pope
Resources and P&T are “potentially liable persons” based on ownership and/or
operation of the site. These laws provide for joint and several
liability among parties owning or operating property on which contamination
occurs, meaning that cleanup costs can be assessed against any or all such
parties. Our agreement with P&T was intended to apportion
responsibility based on this principle, with P&T bearing the larger share of
responsibility based upon their role in operating the site and upon their
relatively lengthy ownership.
Following
the bankruptcy of P&T in late 2007 and the pending liquidation of P&T’s
assets, we determined that P&T would no longer be able to meet any of its
obligations under our settlement and remediation agreement. Accordingly, in the
fourth quarter of 2007 we added $1.9 million to our remediation liability, based
on what management believed to be the best estimate of the remaining cleanup
cost and most likely outcome to various contingencies within the overall
project. The Monte-Carlo simulation model by which we estimate this liability
was updated at December 31, 2009 and indicated a range of potential liability
from $145,000 to $2.9 million which represents a two standard deviation range
from the mean of possible outcomes generated by the statistical modeling process
used to estimate this liability. These estimates are based upon a
number of assumptions and contingencies that may or may not come to
pass. As a result, the actual cost of this project may very
materially from our current estimates. As of December 31, 2009 the
balance in the liability account related to the Port Gamble remediation project
is $1.3 million which represents our best estimate of the remaining cost to
complete this project.
48
In 2001,
the Partnership sold a resort community and its water and sewer utilities in the
community of Port Ludlow. The buyer of the project believes some
remediation is required for contamination discovered on the site, and we have
agreed to participate in an investigation in 2010 regarding any liability the
Partnership may have or may be alleged to have. While we have not
concluded that we have an obligation to remediate, we recognized a $30,000
accrual as of December 31, 2009 which represents the maximum of the
Partnership’s agreed-upon investigative costs.
Property development
costs: The Partnership is developing several master planned
communities with the Gig Harbor, Kingston, and Port Ludlow projects being 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, capitalized interest and utility installation are accounted
for as operating activities on our statement of cash flows. During the
third quarter of 2009, the Partnership changed its classification of cash flows
to include real estate development capital expenditures within cash flows from
operating activities. Prior to the quarter ended September 30, 2009,
these expenditures were reported within investing activities within the
Partnership’s statement of cash flows. We concluded that this change
is preferable because the cash inflows and cash outflows associated with land
held for sale and land held for development should be classified in a consistent
manner and that classification within operating activities better reflects the
fact that these cash outflows are directly related to the Partnership’s
operations of developing and selling real estate. Furthermore, this
change makes our reporting consistent with that of other companies that
similarly conduct both timberland and real estate development
activities. Certain accounts in the prior year statement of cash
flows have been revised for comparative purposes to conform to the presentation
in the current year financial statements. 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.
Percentage of Completion Revenue
Recognition: The
partnership accounts for revenue recognized from development sales consistent
with the accounting standards relating to the 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
proportionately based on the remaining costs to complete the project.
Impairment of Long Lived Assets:
The Partnership evaluates its long lived assets for impairment in
accordance with accounting standards. The standards require recognition of an
impairment loss in connection with long-lived assets used in a business when the
carrying value exceeds the estimated future undiscounted cash flows attributable
to those assets over the expected useful life. The Partnership obtains annual
appraisals of its timberlands and compares the appraised value of those
properties to the carrying value to determine if an asset impairment is
necessary. The long-term holding period of timberland properties makes an asset
impairment unlikely as the undiscounted expected cash flows from a timberland
property would need to decrease very significantly to not total in excess of the
carrying value of a timber property. When facts and circumstances indicate the
carrying value of properties may be impaired, an evaluation of recoverability is
performed by comparing the carrying value of the property to the projected
future undiscounted cash flows. Upon indication that the carrying
value of such assets may not be recoverable, the Partnership would recognize an
impairment loss, determined on the basis of fair market value, and charge this
amount against current operations. The land basis
associated with most of our development properties is well below current market
value; therefore, an asset impairment charge on one of our development projects
is not likely.
49
Consolidation of ORM Timber Fund I,
LP (Fund I) and ORM Timber Fund II, Inc. (Fund II): Fund I and Fund II
are owned 19% by Pope Resources, A Delaware Limited Partnership, 1% by Olympic
Resource Management LLC (a wholly owned subsidiary of the Partnership), and 80%
by third-party investors. Olympic Resource Management LLC is the general partner
of Fund I and the manager of Fund II. Third-party investors do not have the
right to dissolve these Funds or otherwise remove the general partner/manager
without cause nor do they have substantive participating rights in major
decisions of Fund I or Fund II. Based upon this governance structure, Olympic
Resource Management LLC has presumptive control of Fund I and Fund II and, as a
result, under accounting rules Fund I and Fund II must be consolidated into the
Partnership’s financial statements.
Item 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Interest Rate
Risk
At
December 31, 2009, the Partnership had $29.5 million of fixed-rate debt
outstanding with a fair value of approximately $30.5 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 $933,000.
50
Item 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
POPE
RESOURCES
A
DELAWARE LIMITED PARTNERSHIP
YEARS
ENDED DECEMBER 31, 2009, 2008, AND 2007
51
POPE
RESOURCES, A DELAWARE LIMITED PARTNERSHIP
YEARS
ENDED DECEMBER 31, 2009, 2008, AND 2007
CONTENTS
Page
|
|
Reports
of independent registered public accounting firm
|
53
|
Financial
statements:
|
|
Consolidated
balance sheets
|
55
|
Consolidated
statements of operations
|
56
|
Consolidated
statements of partners’ capital and comprehensive income
(loss)
|
57
|
Consolidated
statements of cash flows
|
58
|
Notes
to consolidated financial statements
|
60
|
Financial
statement schedule
|
97
|
52
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Unitholders
Pope
Resources, A Delaware Limited Partnership:
We have
audited the accompanying consolidated balance sheets of Pope Resources, A
Delaware Limited Partnership, and subsidiaries (collectively, the Partnership)
as of December 31, 2009 and 2008, and the related consolidated statements
of operations, partners’ capital and comprehensive income (loss), and cash flows
for each of the years in the three-year period ended December 31, 2009. In
connection with our audits of the consolidated financial statements, we also
have audited financial statement schedule included in Item 15. These
consolidated financial statements and financial statement schedule are the
responsibility of the Partnership’s management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Pope Resources, A Delaware
Limited Partnership, and subsidiaries as of December 31, 2009 and 2008, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2009, in conformity with
U.S. generally accepted accounting principles. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As
discussed in Note 1 to the consolidated financial statements, the Partnership
adopted Financial Accounting Standards Board (FASB) Statement No. 160,
“Noncontrolling Interests in Consolidated Financial Statements, an Amendment of
ARB No. 51” (codified in ASC 810, Consolidation), and FASB Staff Position
EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities” (codified in ASC 260, Earnings Per
Share), effective January 1, 2009, and revised prior years to conform to
the new pronouncements.
As
discussed in Note 1 to the consolidated financial statements, during 2009, the
Partnership elected to change, on a retroactive basis, its method of classifying
cash outflows associated with real estate development activities consistent with
cash inflows from sales of real estate within cash flows from operating
activities.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Partnership’s internal control over
financial reporting as of December 31, 2009, based on criteria established
in Internal Control –
Integrated Framework issued by the Committee for Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated March 9, 2010 expressed
an unqualified opinion on the effectiveness of internal control over financial
reporting.
/s/ KPMG
LLP
Seattle,
Washington
March 9,
2010
53
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Unitholders
Pope
Resources, A Delaware Limited Partnership:
We have
audited Pope Resources, A Delaware Limited Partnership, internal control over
financial reporting as of December 31, 2009, based on criteria established
in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). The Partnership’s management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Pope Resources, A Delaware Limited Partnership, maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Pope
Resources, A Delaware Limited Partnership, and subsidiaries as of
December 31, 2009 and 2008, and the related consolidated statements of
operations, partners’ capital and comprehensive income (loss), and cash flows
for each of the years in the three-year period ended December 31, 2009, and
our report dated March 9, 2010, expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG
LLP
Seattle,
Washington
March 9,
2010
54
POPE
RESOURCES, A DELAWARE LIMITED PARTNERSHIP
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2009 AND 2008
(IN
THOUSANDS)
|
||||||||
2009
|
2008
|
|||||||
ASSETS | ||||||||
Current
assets:
|
||||||||
Pope
cash and cash equivalents
|
$ | 6,035 | $ | 15,931 | ||||
ORM
Timber Funds cash and cash equivalents
|
1,145 | 2,047 | ||||||
Cash
and cash equivalents
|
7,180 | 17,978 | ||||||
Student
loan auction rate securities, current
|
690 | - | ||||||
Accounts
receivable, net
|
261 | 500 | ||||||
Land
held for sale
|
367 | 596 | ||||||
Current
portion of contracts receivable
|
320 | 477 | ||||||
Prepaid
expenses and other
|
444 | 295 | ||||||
Total
current assets
|
9,262 | 19,846 | ||||||
Properties
and equipment, at cost:
|
||||||||
Land
held for development
|
25,872 | 23,931 | ||||||
Land
|
25,072 | 20,449 | ||||||
Roads
and timber, net of accumulated depletion of $54,743, and
$52,552
|
120,787 | 92,753 | ||||||
Buildings
and equipment, net of accumulated depreciation of $7,652, and
$7,360
|
3,637 | 3,565 | ||||||
Total
properties and equipment, at cost
|
175,368 | 140,698 | ||||||
Other
assets:
|
||||||||
Contracts
receivable, net of current portion
|
1,140 | 994 | ||||||
Student
loan auction rate securities, non-current
|
796 | 3,619 | ||||||
Other
|
490 | 254 | ||||||
Total
other assets
|
2,426 | 4,867 | ||||||
Total
assets
|
$ | 187,056 | $ | 165,411 | ||||
LIABILITIES
AND PARTNERS' CAPITAL
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable
|
$ | 586 | $ | 635 | ||||
Accrued
liabilities
|
784 | 863 | ||||||
Current
portion of environmental remediation
|
200 | 300 | ||||||
Current
portion of long-term debt
|
831 | 1,417 | ||||||
Deferred
revenue
|
469 | 205 | ||||||
Other
current liabilities
|
196 | 161 | ||||||
Total
current liabilities
|
3,066 | 3,581 | ||||||
Long-term
debt, net of current portion
|
28,659 | 28,169 | ||||||
Environmental
remediation, net of current portion
|
1,069 | 1,254 | ||||||
Other
long-term liabilities
|
205 | 236 | ||||||
Commitments
and contingencies
|
||||||||
Partners'
capital (units outstanding: 4,520 and 4,599)
|
83,126 | 87,817 | ||||||
Noncontrolling
interests
|
70,931 | 44,354 | ||||||
Total
partners' capital and noncontrolling interests
|
154,057 | 132,171 | ||||||
Total
liabilities, partners' capital, and noncontrolling
interests
|
$ | 187,056 | $ | 165,411 |
See
accompanying notes to consolidated financial statements.
55
POPE
RESOURCES, A DELAWARE LIMITED PARTNERSHIP
CONSOLIDATED
STATEMENTS OF OPERATIONS
YEARS
ENDED DECEMBER 31, 2009, 2008, AND 2007
(IN
THOUSANDS, EXCEPT PER UNIT INFORMATION)
2009
|
2008
|
2007
|
||||||||||
Revenue
|
||||||||||||
Fee
Timber
|
$ | 14,847 | $ | 23,551 | $ | 35,514 | ||||||
Timberland
Management & Consulting
|
601 | 944 | 1,344 | |||||||||
Real
Estate
|
5,030 | 3,683 | 15,037 | |||||||||
Total
revenue
|
20,478 | 28,178 | 51,895 | |||||||||
Costs
and expenses
|
||||||||||||
Cost
of sales:
|
||||||||||||
Fee
Timber
|
(7,980 | ) | (13,092 | ) | (15,837 | ) | ||||||
Real
Estate
|
(392 | ) | (979 | ) | (4,625 | ) | ||||||
Total
cost of sales
|
(8,372 | ) | (14,071 | ) | (20,462 | ) | ||||||
Operating
expenses:
|
||||||||||||
Fee
Timber
|
(3,143 | ) | (4,165 | ) | (4,462 | ) | ||||||
Timberland
Management & Consulting
|
(976 | ) | (1,487 | ) | (2,227 | ) | ||||||
Real
Estate
|
(2,945 | ) | (3,815 | ) | (3,371 | ) | ||||||
Real
Estate environmental remediation
|
(30 | ) | - | (1,878 | ) | |||||||
General
& Administrative (G&A)
|
(3,733 | ) | (3,951 | ) | (4,782 | ) | ||||||
Total
operating expenses
|
(10,827 | ) | (13,418 | ) | (16,720 | ) | ||||||
Operating
income (loss)
|
||||||||||||
Fee
Timber
|
3,724 | 6,294 | 15,215 | |||||||||
Timberland
Management & Consulting
|
(375 | ) | (543 | ) | (883 | ) | ||||||
Real
Estate
|
1,663 | (1,111 | ) | 5,163 | ||||||||
General
& Administrative (G&A)
|
(3,733 | ) | (3,951 | ) | (4,782 | ) | ||||||
Total
operating income
|
1,279 | 689 | 14,713 | |||||||||
Other
income (expense):
|
||||||||||||
Interest
expense
|
(2,317 | ) | (2,469 | ) | (2,574 | ) | ||||||
Interest
capitalized to development projects
|
1,091 | 1,279 | 1,145 | |||||||||
Interest
income
|
219 | 965 | 1,753 | |||||||||
Net
loss on student loan auction rate securities dispositions
|
(66 | ) | - | - | ||||||||
Impairment
of student loan auction rate securities
|
(252 | ) | (381 | ) | - | |||||||
Total
other income (expense)
|
(1,325 | ) | (606 | ) | 324 | |||||||
Debt
extinguishment costs
|
(1,137 | ) | - | - | ||||||||
Income
(loss) before income taxes
|
(1,183 | ) | 83 | 15,037 | ||||||||
Income
tax benefit (expense)
|
(39 | ) | 61 | 69 | ||||||||
Net
income (loss)
|
(1,222 | ) | 144 | 15,106 | ||||||||
Net
loss attributable to noncontrolling interests:
|
||||||||||||
ORM
Timber Funds
|
950 | 1,018 | 402 | |||||||||
Net
income (loss) attributable to unitholders
|
$ | (272 | ) | $ | 1,162 | $ | 15,508 | |||||
Allocable
to general partners
|
(4 | ) | 15 | 199 | ||||||||
Allocable
to limited partners
|
(268 | ) | 1,147 | 15,309 | ||||||||
Earnings
(loss) per unit attributable to unitholders:
|
||||||||||||
Basic
|
$ | (0.07 | ) | $ | 0.23 | $ | 3.28 | |||||
Diluted
|
$ | (0.07 | ) | $ | 0.23 | $ | 3.22 | |||||
Distributions
per unit
|
$ | 0.70 | $ | 1.60 | $ | 1.36 |
See
accompanying notes to consolidated financial statements.
56
POPE
RESOURCES, A DELAWARE LIMITED PARTNERSHIP
CONSOLIDATED
STATEMENTS OF PARTNERS’ CAPITAL
AND
COMPREHENSIVE INCOME (LOSS)
YEARS
ENDED DECEMBER 31, 2009, 2008, AND 2007
(IN
THOUSANDS)
Attributable to Pope Resources
|
||||||||||||||||
General
|
Limited
|
Noncontrolling
|
||||||||||||||
Partners
|
Partners
|
Interests
|
Total
|
|||||||||||||
December
31, 2006
|
$ | 1,386 | $ | 86,219 | $ | 46,685 | $ | 134,290 | ||||||||
Net
income and comprehensive income
|
199 | 15,309 | (402 | ) | 15,106 | |||||||||||
Distributions
|
(83 | ) | (6,366 | ) | (480 | ) | (6,929 | ) | ||||||||
Equity
based compensation
|
- | 624 | - | 624 | ||||||||||||
Unit
repurchases
|
- | (1,374 | ) | - | (1,374 | ) | ||||||||||
Proceeds
from option exercises
|
- | 730 | - | 730 | ||||||||||||
December
31, 2007
|
$ | 1,502 | $ | 95,142 | $ | 45,803 | $ | 142,447 | ||||||||
Net
income and comprehensive income
|
15 | 1,147 | (1,018 | ) | 144 | |||||||||||
Distributions
|
(97 | ) | (7,347 | ) | (800 | ) | (8,244 | ) | ||||||||
Capital
contributions
|
- | - | 369 | 369 | ||||||||||||
Excess
tax benefit from equity-based compensation
|
- | 167 | - | 167 | ||||||||||||
Equity
based compensation
|
- | 584 | - | 584 | ||||||||||||
Unit
repurchases
|
- | (3,940 | ) | - | (3,940 | ) | ||||||||||
Proceeds
from option exercises
|
- | 644 | - | 644 | ||||||||||||
December
31, 2008
|
$ | 1,420 | $ | 86,397 | $ | 44,354 | $ | 132,171 | ||||||||
Net
loss and comprehensive loss
|
(4 | ) | (268 | ) | (950 | ) | (1,222 | ) | ||||||||
Distributions
|
(43 | ) | (3,176 | ) | - | (3,219 | ) | |||||||||
Capital
contributions
|
- | - | 27,527 | 27,527 | ||||||||||||
Excess
tax benefit from equity-based compensation
|
- | 17 | - | 17 | ||||||||||||
Equity
based compensation
|
- | 621 | - | 621 | ||||||||||||
Unit
repurchases
|
- | (1,838 | ) | - | (1,838 | ) | ||||||||||
December
31, 2009
|
$ | 1,373 | $ | 81,753 | $ | 70,931 | $ | 154,057 | ||||||||
Weighted
average units outstanding :
|
12/31/2009
|
12/31/2008
|
12/31/2007
|
|||||||||||||
Basic
|
4,539 | 4,597 | 4,680 | |||||||||||||
Diluted
|
4,539 | 4,660 | 4,769 |
See
accompanying notes to consolidated financial statements.
57
POPE
RESOURCES, A DELAWARE LIMITED PARTNERSHIP
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS
ENDED DECEMBER 31, 2009, 2008, AND 2007
(IN THOUSANDS)
2009
|
2008
|
2007
|
||||||||||
(Revised)
|
(Revised)
|
|||||||||||
Cash
flows from operating activities:
|
|
|
||||||||||
Cash
received from customers
|
$ | 20,854 | $ | 29,071 | $ | 47,667 | ||||||
Cash
paid to suppliers and employees
|
(16,533 | ) | (21,281 | ) | (24,473 | ) | ||||||
Interest
received
|
280 | 1,025 | 1,712 | |||||||||
Interest
paid, net of amounts capitalized
|
(1,226 | ) | (1,401 | ) | (2,585 | ) | ||||||
Debt
extinguishment costs
|
(1,137 | ) | - | - | ||||||||
Capitalized
development activities
|
(1,639 | ) | (3,451 | ) | (9,868 | ) | ||||||
Income
taxes received (paid)
|
63 | (11 | ) | (340 | ) | |||||||
Net
cash provided by operating activities
|
662 | 3,952 | 12,113 | |||||||||
Cash
flows from investing activities:
|
||||||||||||
Capital
expenditures
|
(1,224 | ) | (1,715 | ) | (2,294 | ) | ||||||
Proceeds
from sale of fixed assets
|
50 | 41 | 64 | |||||||||
Redemption
(purchase) of short-term investments
|
1,815 | 26,775 | (5,775 | ) | ||||||||
Timberland
acquisition
|
(34,421 | ) | (904 | ) | - | |||||||
Net
cash provided by (used in) investing activities
|
(33,780 | ) | 24,197 | (8,005 | ) | |||||||
Cash
flows from financing activities:
|
||||||||||||
Cash
distributions to unitholders
|
(3,219 | ) | (7,444 | ) | (6,449 | ) | ||||||
ORM
Timber Fund II, Inc capital contributions
|
27,527 | 370 | - | |||||||||
ORM
Timber Fund I, LP distributions
|
- | (800 | ) | (480 | ) | |||||||
Unit
repurchases
|
(1,838 | ) | (3,940 | ) | (1,374 | ) | ||||||
Repayment
of long-term debt
|
(1,418 | ) | (1,342 | ) | (1,481 | ) | ||||||
Extinguishment
of long-term debt
|
(8,478 | ) | - | - | ||||||||
Proceeds
from issuance of long-term debt
|
9,800 | - | - | |||||||||
Debt
issuance costs
|
(71 | ) | - | - | ||||||||
Proceeds
from option exercises
|
- | 644 | 730 | |||||||||
Excess
tax benefit from equity-based compensation
|
17 | 167 | - | |||||||||
Noncontrolling
interests distribution
|
- | - | (74 | ) | ||||||||
Net
cash provided by (used in) financing activities
|
22,320 | (12,345 | ) | (9,128 | ) | |||||||
Net
increase (decrease) in cash and cash equivalents
|
(10,798 | ) | 15,804 | (5,020 | ) | |||||||
Cash
and cash equivalents:
|
||||||||||||
Beginning
of year
|
17,978 | 2,174 | 7,194 | |||||||||
End
of year
|
$ | 7,180 | $ | 17,978 | $ | 2,174 |
See
accompanying notes to consolidated financial statements.
58
POPE
RESOURCES, A DELAWARE LIMITED PARTNERSHIP
SCHEDULE
TO CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS
ENDED DECEMBER 31, 2009, 2008, AND 2007
(IN THOUSANDS)
2009
|
2008
|
2007
|
||||||||||
(Revised)
|
(Revised)
|
|||||||||||
Reconciliation
of net income (loss) to net cash provided by operating
activities:
|
|
|
||||||||||
Net
income (loss)
|
$ | (1,222 | ) | $ | 144 | $ | 15,106 | |||||
Depletion
|
2,001 | 3,915 | 4,772 | |||||||||
Equity
based compensation
|
621 | 584 | 624 | |||||||||
Excess
tax benefit from equity-based compensation
|
(17 | ) | (167 | ) | - | |||||||
Depreciation
and amortization
|
810 | 774 | 777 | |||||||||
Impairment
of student loan auction rate securities
|
252 | 381 | - | |||||||||
Net
loss on student loan auction rate securities dispositions
|
66 | - | - | |||||||||
Deferred
tax expense (benefit)
|
(222 | ) | (143 | ) | 13 | |||||||
Cost
of land sold
|
127 | 2,614 | 3,854 | |||||||||
Capitalized
development activities
|
(1,639 | ) | (3,451 | ) | (9,868 | ) | ||||||
Increase
(decrease) in cash from changes in operating accounts:
|
||||||||||||
Deferred
revenue
|
126 | (63 | ) | (8,570 | ) | |||||||
Accounts
receivable
|
239 | 385 | 676 | |||||||||
Contracts
receivable
|
11 | 571 | 3,666 | |||||||||
Prepaid
expenses and other current assets
|
(138 | ) | 5 | 247 | ||||||||
Accounts
payable and accrued liabilities
|
(45 | ) | (1,526 | ) | (551 | ) | ||||||
Other
current liabilities
|
35 | 53 | 20 | |||||||||
Environmental
remediation
|
(285 | ) | (440 | ) | 1,753 | |||||||
Other
long-term liabilities
|
(31 | ) | (62 | ) | (47 | ) | ||||||
Other
long-term assets
|
(6 | ) | 384 | (360 | ) | |||||||
Other,
net
|
(21 | ) | (6 | ) | 1 | |||||||
Net
cash provided by operating activities
|
$ | 662 | $ | 3,952 | $ | 12,113 |
See
accompanying notes to consolidated financial statements.
59
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of operations
Pope
Resources, A Delaware Limited Partnership (the “Partnership”) is a publicly
traded limited partnership engaged primarily in managing timber resources on its
own properties as well as those owned by others. Pope Resources’
active subsidiaries include ORM, Inc., which is responsible for managing Pope
Resources’ timber properties; Olympic Resource Management LLC, which provides
timberland management and consulting activities and is responsible for
developing the timber fund business; Olympic Property Group I, LLC, which
manages the Port Gamble townsite and millsite and land that is held as
development property; and OPG Properties LLC, which owns land that is held as
development property. These consolidated financial statements also
include the Funds. With respect to Fund I, Olympic Resource
Management LLC is the general partner and owns 1% while Pope Resources owns
19%. Olympic Resource Management LLC is the manager of Fund II and
owns 1% while Pope Resources owns 19%. The purpose of both Funds is
to invest in timberlands. See Note 3 for additional
information.
The
Partnership operates in three business segments: Fee Timber, Timberland
Management & Consulting, and Real Estate. Fee Timber represents
the growing and harvesting of trees from owned properties. Timberland
Management & Consulting represents management, acquisition, disposition, and
consulting services provided to third-party owners of timberland and provides
management services to Fund I and Fund II once timberland is
acquired. Real Estate consists of obtaining entitlements for
properties that have been identified as having value as developed residential or
commercial property and operating the Partnership’s existing commercial property
in Kitsap County, Washington.
Principles of
consolidation
The
consolidated financial statements include the accounts of the Partnership, its
subsidiaries, and the Funds. Intercompany balances and transactions
have been eliminated in consolidation.
General partner
The
Partnership has two general partners: Pope MGP, Inc. and Pope EGP, Inc. In
total, these two entities own 60,000 partnership units. The allocation of
distributions and income between the general and limited partners is pro rata
among all units outstanding. The managing general partner of the
Partnership is Pope MGP, Inc. and it receives an annual management fee of
$150,000 as compensation for performing its duties as managing general
partner.
Noncontrolling interests:
Noncontrolling
interests represents the 80% interest in Fund I and Fund II owned by third-party
investors. These Funds are consolidated into Pope Resources’
financial statements due to our control over these Funds (see Note
3).
Significant estimates and
concentrations in financial statements
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expense during
the reporting period. Actual results could differ from those
estimates.
60
Cost of sales
For
statement of operations presentation, cost of sales consists of the
Partnership’s cost basis in timber, real estate, and other inventory sold, and
direct costs incurred to make those assets saleable. Those direct
costs include the expenditures associated with the harvesting and transporting
of timber and closing costs incurred in land and lot sale
transactions.
Concentration
of credit risk
Financial
instruments that potentially subject the Partnership to concentrations of credit
risk consist principally of accounts and contracts receivable and student loan
auction rate securities (SLARS). The Partnership limits its credit
exposure by considering the creditworthiness of potential
customers. The Partnership’s allowance for doubtful accounts is
$8,779 and $257,094 at December 31, 2009 and 2008, respectively.
The
Partnership owned $1.9 million par value of SLARS as of December 31, 2009 with a
fair value of $1.5 million. These securities were designed to provide
liquidity through a monthly auction process. The auction process
stopped functioning in the first quarter of 2008 and as a result $690,000 of
this portfolio represents a current asset due to the redemption of this security
in January of 2010 for an amount that approximated the fair value as recorded at
December 31, 2009, while the remaining $796,000 is a non-current
asset. The Partnership is receiving monthly interest payments on
these securities but there is little market activity in the securities
themselves. See Note 2 for additional information.
Contracts
receivable
The
Partnership sells land parcels under contracts requiring minimum cash down
payments of 20% to 25% at interest rates between 7% and 8.75% per
annum. While one contract has a repayment term of 15 years, loans are
typically structured with repayments based on a 20-year amortization schedule
culminating in a balloon payment within 5 to 7 years. The Partnership
reduces credit risk on contracts through down payment requirements and utilizing
the underlying land as collateral.
At
December 31, 2009, minimum principal payments on contracts receivable for the
next five years and thereafter are due as follows (in thousands):
2010
|
$ | 320 | ||
2011
|
33 | |||
2012
|
423 | |||
2013
|
196 | |||
2014
|
311 | |||
Thereafter
|
177 | |||
Total
|
$ | 1,460 |
Income
taxes
Income
taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Operating loss and tax credit carryforwards are
also factored into the calculation of deferred tax assets and
liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates that are expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
61
Property,
equipment, and roads
Depreciation
is provided using the straight-line method over the estimated useful lives of
the assets, which range from 3 to 39 years. The Partnership
capitalizes the cost of building permanent roads on the tree farms and expenses
temporary roads and road maintenance. Capitalized roads are depleted
as timber is harvested. The road depletion rate is calculated by
dividing the cost of capitalized roads at the beginning of the year by
merchantable timber inventory. The resulting rate is applied to
timber harvested during the year to determine road depletion
expense.
When
facts and circumstances indicate the carrying value of properties may be
impaired, an evaluation of recoverability is performed by comparing the carrying
value of the property to the projected future undiscounted cash
flows. Upon indication that the carrying value of such assets may not
be recoverable, the Partnership would recognize an impairment loss, determined
on the basis of fair market value, and charge this amount against current
operations.
Buildings
and equipment consisted of the following as of December 31, 2009 and 2008 (in
thousands):
Description
|
12/31/2009
|
12/31/2008
|
||||||
Buildings
|
$ | 7,996 | $ | 7,444 | ||||
Equipment
|
2,676 | 2,880 | ||||||
Furniture
and fixtures
|
617 | 601 | ||||||
Total
|
$ | 11,289 | $ | 10,925 | ||||
Accumulated
depreciation
|
(7,652 | ) | (7,360 | ) | ||||
Net
buildings and equipment
|
$ | 3,637 | $ | 3,565 |
Timber
The
depletion rate is calculated by dividing estimated merchantable timber inventory
into the cost basis of merchantable inventory as of the beginning of the
year. To calculate the depletion rate the Partnership uses a combined
pool when the characteristics of the acquired timber are not significantly
different from the Partnership’s existing timberlands. Timber
harvested by the Funds is accounted for in separate depletion pools due to the
third-party owners in the Funds.
Land
held for development or sale
Land held
for development represents the Partnership’s cost basis in land that has been
identified as having greater value as development than timber
property. Our Real Estate segment works with these properties to
establish entitlements with city and county officials that allow for further
development. Project costs clearly associated with development or
construction of these properties are capitalized. Indirect costs that
do not clearly relate to projects under development or construction are expensed
as incurred. Those properties that are either under contract or the
Partnership has an expectation they will sell within the next 12 months are
classified as a current asset under Land Held for Sale.
Deferred
revenue
Deferred
revenue represents the unearned portion of revenue collected. The
balance at December 31, 2009 of $469,000 and December 31, 2008 of $205,000
primarily represents the unearned portion of the amounts received on cell tower
leases and to a lesser extent deferred revenue on land sales.
Revenue
recognition
Revenue
on timber sales is recorded when title and risk of loss passes to the
buyer. Revenue on real estate sales is recorded on the date the sale
closes, upon receipt of adequate down payment, and receipt of the buyer’s
obligation to make sufficient continuing payments towards the purchase of the
property. The Partnership normally does not sell real estate with
less than a 20% down payment. Management fees and consulting service
revenues are recognized as the related services are provided.
62
Land
and conservation easement sales
The
Partnership considers the sale of land and conservation easements to be part of
its normal operations and therefore recognizes revenue from such sales and cost
of sales for the Partnership’s basis in the property sold. Cash
generated from these sales is included in cash flow from operations on the
Partnership’s statements of cash flows. Similarly, investments to
acquire land to be held for sale or development, as well as costs incurred to
develop those properties, are also included in the cash flow from operations
within the statements of cash flows. Additional information
concerning the revised prior year presentation can be found at Note 1 under
Statements of cash flows.
Equity based compensation
The
Partnership issues restricted units to certain employees as part of their annual
compensation. Restricted units are valued on the grant date at the
market closing price of the partnership units on that date. The value
of the restricted units is amortized to compensation expense during the vesting
period which can range from two to four years.
On the
date of grant, these restricted units are owned by the employee subject to a
trading restriction that is in effect during the vesting period. As of December
31, 2009, total compensation expense related to non-vested awards not yet
recognized was $608,000 with a weighted average 16 months remaining to
vest.
Comprehensive
income (loss)
Comprehensive
income (loss) consists solely of net income (loss).
Income per partnership
unit
Basic net
earnings (loss) per unit is based on the weighted average number of units
outstanding during the period. Diluted net earnings per unit is calculated by
dividing net income (loss) attributable to unitholders, adjusted for
non-forfeitable distributions paid out to unvested restricted unitholders, by
the weighted average units outstanding during the year plus additional units
that would have been outstanding assuming the exercise of in-the-money unit
equivalents using the treasury stock method. Unit equivalents are
excluded from the computation if their effect is anti-dilutive, as is the case
when the company has a net loss for the period. When computing the
dilutive effect of unit options for the year ended December 31, 2009 there were
no unit equivalents included in the calculation of fully diluted units
outstanding compared with 64 and 89 unit equivalents included in the calculation
of fully diluted units outstanding for the years ended December 31, 2008, and
2007, respectively.
For 2009,
options to purchase 41,323 units at prices ranging from $21.35 to $37.73 were
not included in the calculation of earnings per partnership units as they were
anti-dilutive. This is compared with 2008, when options to purchase
4,869 units at prices ranging from $27.88 to $37.73 were not included in the
calculation of earnings per partnership units as they were anti-dilutive. In
2007 there were no anti-dilutive unit options outstanding.
63
Year Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Net
income (loss) attributable to Pope Resources' unitholders
|
$ | (272 | ) | $ | 1,162 | $ | 15,508 | |||||
Nonforfeitable
distributions paid to unvested restricted unitholders
|
(39 | ) | (99 | ) | (175 | ) | ||||||
Net
income (loss) attributable to outstanding unitholders
|
$ | (311 | ) | $ | 1,063 | $ | 15,333 | |||||
Weighted
average units outstanding (in thousands):
|
||||||||||||
Basic
|
4,539 | 4,597 | 4,680 | |||||||||
Dilutive
effect of unit equivalents
|
- | 64 | 89 | |||||||||
Diluted
|
4,539 | 4,661 | 4,769 | |||||||||
Earnings
(loss) per unit: Basic
|
$ | (0.07 | ) | $ | 0.23 | $ | 3.28 | |||||
Earnings
(loss) per unit: Diluted
|
$ | (0.07 | ) | $ | 0.23 | $ | 3.22 |
Statements of cash flows
The
Partnership considers all highly liquid debt instruments with maturity of three
months or less when purchased to be cash equivalents. Non-cash
investing and financing activities included the following:
|
·
|
$596,000
held in trust by an IRC Section 1031 exchange facilitator as of December
31, 2007 used to acquire timberlands as of March 31,
2008.
|
|
·
|
$443,000
reclassified to accounts receivable for a cost reimbursement related to a
2007 pond construction at the Bremerton
project.
|
|
·
|
$360,000
for capital improvements accrued in 2007 and paid in 2008. This amount is
partially offset by $70,000 of accrued investing activity in 2008 to be
paid in 2009.
|
|
·
|
$203,000
of long-term debt incurred in 2008 relating to a cost-share reimbursement
to the City of Tacoma for bridge construction ensuring continued access to
Fund I property.
|
During
the quarter ended September 30, 2009, the Partnership changed its classification
of cash flows to include real estate development capital expenditures within
cash flows from operating activities. Prior to the quarter ended September 30,
2009, these expenditures were reported as investing activities within the
Partnership’s statement of cash flows. We concluded that this change is
preferable because the cash inflows and cash outflows associated with land held
for sale and land held for development should be classified in a consistent
manner and that classification within operating activities better reflects the
fact that these cash outflows are directly related to the Partnership’s
operations of developing and selling real estate. Furthermore, this change makes
our reporting consistent with that of other companies that similarly conduct
both timberland and real estate development activities. Certain accounts in the
prior year statement of cash flows have been revised for comparative purposes to
conform to the presentation in the current year financial statements. The table
below details the changes made to the 2007 and 2008 statements of cash
flows.
64
2008
|
||||||||||||
As
Originally
|
||||||||||||
(Thousands)
|
Reported
|
Adjustments
|
As Revised
|
|||||||||
Cash
flows from operating activities:
|
||||||||||||
Capitalized
development activities
|
- | (3,451 | ) | (3,451 | ) | |||||||
Net
cash provided by operating activities
|
7,403 | (3,451 | ) | 3,952 | ||||||||
Cash
flows from investing activities:
|
||||||||||||
Capitalized
development activities
|
(3,451 | ) | 3,451 | - | ||||||||
Net
cash provided by investing activities
|
20,746 | 3,451 | 24,197 | |||||||||
2007
|
||||||||||||
As
Originally
|
||||||||||||
(Thousands)
|
Reported
|
Adjustments
|
As Revised
|
|||||||||
Cash
flows from operating activities:
|
||||||||||||
Capitalized
development activities
|
- | (9,868 | ) | (9,868 | ) | |||||||
Net
cash provided by operating activities
|
21,981 | (9,868 | ) | 12,113 | ||||||||
Cash
flows from investing activities:
|
||||||||||||
Capitalized
development activities
|
(9,868 | ) | 9,868 | - | ||||||||
Net
cash provided by investing activities
|
(17,873 | ) | 9,868 | (8,005 | ) |
Accounting
pronouncements adopted in 2009
In
December 2007, the Financial Accounting Standards Board (FASB) issued new
guidance on noncontrolling interests which requires noncontrolling interests
(previously referred to as
minority interests) in consolidated subsidiaries to be reported as a component
of equity, which changes the accounting for transactions
involving a noncontrolling interest. In the balance sheet, noncontrolling
interests for all periods presented are now classified in the equity section,
below Partners’ Capital. In the statement of operations, net income (loss) is
presented excluding the impact of net loss attributable to noncontrolling
interests to arrive at net income (loss) attributable to the Partnership’s
unitholders. The Partnership adopted the standard in the first
quarter of 2009.
In June
2008, the FASB issued a staff position providing additional guidance in
determining whether share-based payments are participating securities for
earnings-per-share calculations. The guidance, adopted by the
Partnership in the first quarter of 2009, requires unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents
to be considered participating securities. Earnings (loss) per unit for all
prior periods presented have been revised to the extent necessary based on this
new guidance.
In April
2009, the FASB issued a staff position which requires disclosures about fair
value of financial instruments for interim reporting periods as well as in
annual financial statements. This standard is effective for interim reporting
periods ending after June 15, 2009. The Partnership adopted this standard
in the second quarter of 2009. The implementation of the standard did not have a
material impact on the Partnership’s financial position or results of
operations.
In April 2009, the FASB issued a
staff position which amends the other-than-temporary impairment guidance for
debt securities to make the guidance more operational and to improve the
presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements. This guidance is effective for
interim reporting periods ending after June 15, 2009. The Partnership
adopted this standard in the second quarter of 2009. The adoption of the
standard did not have a material impact on the Company’s financial position or
results of operations.
65
Also in
April 2009, the FASB issued a staff position providing additional guidance
for estimating fair value when the volume and level of activity for the asset or
liability have significantly decreased. This standard also includes guidance on
identifying circumstances that indicate a transaction is not orderly. This
standard is effective for reporting periods ending after June 15, 2009. The
Partnership adopted this standard in the second quarter of 2009, which did not
have a material impact on the Company’s financial position or results of
operations.
In June
2009, the FASB Accounting Standards Codification (Codification) was issued. The
pronouncement establishes the Codification as the source of authoritative
guidance for non-governmental entities on U.S. generally accepted accounting
principles. The third
quarter 2009 adoption of the pronouncement did not have a material impact on the
Company’s financial position or results of operations.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the 2009
presentation.
2.
|
CASH,
CASH EQUIVALENTS, AND INVESTMENTS
|
Cash,
cash equivalents, and investments held at December 31, 2009 and 2008 were as
follows:
December 31, 2009
|
||||||||||||
Gross
|
||||||||||||
Amortized
|
Unrealized
|
Estimated
|
||||||||||
Cost
|
Loss
|
Fair Value
|
||||||||||
Cash
and cash equivalents
|
$ | 7,180 | $ | - | $ | 7,180 | ||||||
Securities
maturing after ten years:
|
||||||||||||
Auction
rate securities, current
|
925 | (235 | ) | 690 | ||||||||
Auction
rate securities, non-current
|
1,000 | (204 | ) | 796 | ||||||||
December 31, 2008
|
||||||||||||
Gross
|
||||||||||||
Amortized
|
Unrealized
|
Estimated
|
||||||||||
Cost
|
Loss
|
Fair Value
|
||||||||||
Cash
and cash equivalents
|
$ | 17,978 | $ | - | $ | 17,978 | ||||||
Securities
maturing after ten years:
|
||||||||||||
Auction
rate securities, non-current
|
4,000 | (381 | ) | 3,619 |
There was
a realized net loss of $66,000 in 2009 compared with no realized gain or loss
for the comparable period in 2008.
At
December 31, 2009, Pope Resources held SLARS with a par value of $1.9 million
and an estimated fair value of $1.5 million. SLARS are collateralized long-term
debt instruments that were designed to provide liquidity through a Dutch auction
process that reset the applicable interest rate at pre-determined intervals,
typically every 28 days. Beginning in February 2008, auctions failed
when sell orders exceeded buy orders. When these auctions failed to clear,
default interest rates went into effect. The underlying assets of the
SLARS we hold, including the securities for which auctions have failed, are
student loans which are guaranteed by the U.S. Department of Education for 97%
of the loan and interest due. We filed a claim with the Financial Industry
Regulatory Authority (FINRA) in an attempt to recover lost value with respect to
these SLARS, but the hearing panel rendered a decision in November 2009 that was
unfavorable to us in that it offered no settlement for our outstanding
position.
66
ASC 820
Fair Value Measurements and
Disclosures was followed to determine the fair value of the Partnership’s
investments. ASC 820 defines a hierarchy of three levels of evidence used to
determine fair value:
·
|
Level
1 - quoted prices for identical assets/liabilities in active
markets
|
·
|
Level
2 - quoted prices in a less active market, quoted prices for similar but
not identical assets/liabilities, observable inputs other than quoted
prices
|
·
|
Level
3 - significant unobservable inputs including the Partnership’s own
assumptions in determining the fair value of
investments
|
Under
current credit market conditions, there is limited market data for SLARS, thus
available Level 1 inputs for use in determining a market value are not
available. Specific securities under the general description of SLARS are unique
and there are no actively traded markets that one can observe to determine a
value for a specific security unless a transaction is identified for the
security held within our portfolio. We sold one security during the
fourth quarter of 2009 and used that transaction as a Level 2 indicator of value
for the rest of the portfolio. The following table provides the fair value
measurements of applicable Partnership financial assets according to the levels
defined in ASC 820 as of December 31, 2009 and 2008:
December 31, 2009
|
||||||||||||||||
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
Cash
and cash equivalents
|
$ | 7,180 | $ | - | $ | - | $ | 7,180 | ||||||||
Auction
rate securities, current
|
- | 690 | - | 690 | ||||||||||||
Auction
rate securities, non-current
|
- | 796 | - | 796 | ||||||||||||
Total
financial assets at fair value
|
$ | 7,180 | $ | 1,486 | $ | - | $ | 8,666 | ||||||||
December 31, 2008
|
||||||||||||||||
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
Cash
and cash equivalents
|
$ | 17,978 | $ | - | $ | - | $ | 17,978 | ||||||||
Auction
rate securities, non-current
|
- | - | 3,619 | 3,619 | ||||||||||||
Total
financial assets at fair value
|
$ | 17,978 | $ | - | $ | 3,619 | $ | 21,597 |
In 2008,
we identified market interest rates for similar securities, performed a
discounted cash flow calculation using these alternative interest rates and
considered the impact of illiquidity as well as the “invitation to offer” on the
value of the securities. This method represented a Level 3 input, and was the
best evidence we had to indicate value under market conditions as of December
31, 2008. The table below summarizes the change in the consolidated
balance sheet carrying value associated with Level 3 financial assets for the
annual period ended December 31, 2009:
67
Activity for Securities Valued Using Level 3 Inputs
|
2009
|
2008
|
||||||
Balance
at beginning of period
|
$ | 3,619 | $ | - | ||||
Transfers
into Level 3
|
- | 15,850 | ||||||
Transfers
out of Level 3
|
(1,486 | ) | - | |||||
Dispositions
|
(1,815 | ) | (11,850 | ) | ||||
Unrealized
losses
|
(252 | ) | (381 | ) | ||||
Realized
losses on dispositions
|
(66 | ) | - | |||||
Balance
at end of period
|
$ | - | $ | 3,619 |
3.
|
ORM TIMBER FUND I, LP (FUND I)
AND ORM TIMBER FUND II, INC. (FUND
II)
|
The Funds
were formed by Olympic Resource Management LLC (ORMLLC) for the purpose of
attracting investor capital to purchase timberlands. The objective of
these Funds is to generate a return on investments through the acquisition,
management, value enhancement and sale of timberland properties. Both
Funds will operate for a term of ten years from the end of the drawdown
period. The drawdown period for Fund I ended on August 1, 2007 and
the drawdown period for Fund II will end in March 2011 or after Fund II is fully
invested, whichever occurs sooner.
Pope
Resources and ORMLLC together own 20% of each Fund and both are consolidated
into the Partnership’s financial statements. The Funds’ statements of
operations for the years ended December 31, 2009, 2008, and 2007 reflect losses
of $1.2 million, $1.3 million, and $516,000, respectively. These
losses include management fees paid to ORMLLC of $891,000, $869,000, and
$896,000 for 2009, 2008, and 2007, respectively, which are eliminated in
consolidation.
As of
December 31, 2009 Fund II has $49.5 million of capital commitments remaining,
including Pope Resources’ 19% and ORMLLC’s 1% commitments.
The Partnership’s consolidated
financial statements included Fund I and Fund II assets and liabilities at
December 31, 2009 and 2008 which were as follows:
2009
|
2008
|
|||||||
Cash
|
$ | 1,145 | $ | 2,047 | ||||
Current
assets
|
38 | - | ||||||
Timber,
land, and roads (net of $2,612 accumulated depletion in 2008 and
2009)
|
88,342 | 53,789 | ||||||
Other
long term assets
|
6 | - | ||||||
Total
assets
|
$ | 89,531 | $ | 55,836 | ||||
Current
liabilities
|
$ | 741 | $ | 191 | ||||
Current
portion of long-term debt
|
29 | 76 | ||||||
Total
current liabilities
|
770 | 267 | ||||||
Long-term
debt
|
98 | 127 | ||||||
Funds'
equity
|
88,663 | 55,442 | ||||||
Total
liabilities and equity
|
$ | 89,531 | $ | 55,836 |
68
4.
|
LONG-TERM
DEBT
|
Long-term debt at December 31 consisted of (in thousands):
|
2009
|
2008
|
||||||
Mortgage
payable to Northwest Farm Credit Services (NWFCS), interest at 6.4%,
collateralized by timberlands with monthly interest-only payments. Matures
in September 2019.
|
$ | 9,800 | $ | - | ||||
Mortgage
payable to John Hancock Life Insurance Company (JHLIC), interest at 9.65%,
collateralized by timberlands with monthly interest payments and annual
principal payments. Repaid in 2009.
|
- | 9,019 | ||||||
Mortgage
payable to JHLIC, interest at 7.63%, collateralized by timberlands with
monthly interest payments and annual principal payments. Matures in April
2011.
|
19,303 | 20,053 | ||||||
Local
improvement district assessments, with interest ranging from 5.03% to
6.5%, due through 2013
|
260 | 312 | ||||||
Fund
I note payable to the City of Tacoma, with interest at
4.5%, with monthly principal and interest payments maturing
January 2014.
|
127 | 202 | ||||||
29,490 | 29,586 | |||||||
Less
current portion
|
(831 | ) | (1,417 | ) | ||||
$ | 28,659 | $ | 28,169 |
The
Partnership’s debt agreements contain a covenant which requires the Partnership
not to exceed a maximum debt–to-market-capitalization ratio. The
Partnership is in compliance with this covenant as of December 31,
2009. One of the consequences of our planned reduction in harvest is
that we have fallen below the minimum threshold for our cash flow
covenant. We alerted our mortgage lender to this and in October 2008
we received a waiver of the cash flow coverage ratio beginning with the fourth
quarter of 2008, through and including the fourth quarter of 2010.
At
December 31, 2009, principal payments on long-term debt for the next five years
and thereafter are due as follows (in thousands):
2010
|
$ | 831 | ||
2011
|
18,635 | |||
2012
|
188 | |||
2013
|
33 | |||
2014
|
3 | |||
Thereafter
|
9,800 |
The
Partnership entered into a $40 million revolving line of credit with NWFCS in
July 2008. On September 25, 2009 the Partnership entered into a new $9.8 million
term loan agreement with NWFCS. This new term loan was used to retire a term
loan from JHLIC due in April 2011 and fund an early extinguishment of debt
charge of $1.1 million on retirement of that timberland mortgage. In connection
with the new term loan, the limit on the Partnership’s revolving line of credit
with Northwest Farm Credit Services was reduced from $40 million to $35 million.
This unsecured revolving loan agreement matures in August 2011 and imposes
maintenance of a maximum debt-to-total capitalization ratio that the Partnership
passes at December 31, 2009. At December 31, 2009 there were no amounts owed
under this credit facility. The interest rate under this credit facility uses
LIBOR as a benchmark. The spread above the benchmark rate is variable depending
on the interest coverage ratio but ranges from 125 to 165 basis
points.
69
5.
|
FAIR
VALUE OF FINANCIAL
INSTRUMENTS
|
The
Partnership’s financial instruments include cash and cash equivalents,
short-term investments, accounts receivable, and contracts receivable, for which
the carrying amount of each represents fair value based on current market
interest rates or their short-term nature. The fair value of fixed
rate debt having a carrying value of $29.1 million and $29.6 million has been
estimated based on current interest rates for similar financial instruments to
be approximately $30.5 million and $31.4 million as of December 31, 2009 and
2008, respectively.
6.
|
INCOME
TAXES
|
The
Partnership is not subject to income taxes. Instead, partners are
taxed on their share of the Partnership’s taxable income, whether or not cash
distributions are paid. However, the Partnership’s taxable
subsidiaries are subject to income taxes. The following tables
provide information on the impact of income taxes in those taxable
subsidiaries. Consolidated Partnership earnings are reconciled to
earnings before income taxes in taxable subsidiaries for the years ended
December 31 as follows:
2009
|
2008
|
2007
|
||||||||||
Income
(loss) before income taxes
|
$ | (1,183 | ) | $ | 83 | $ | 15,037 | |||||
Less:
Income/(loss) earned in entities that pass-through pre-tax earnings to the
partners
|
(1,263 | ) | 144 | 15,465 | ||||||||
Income
(loss) subject to income taxes
|
$ | 80 | $ | (61 | ) | $ | (428 | ) |
The
provision for income taxes relating to taxable subsidiaries of the Partnership
consist of the following income tax benefit (expense) for the years ended
December 31:
2009
|
2008
|
2007
|
||||||||||
Current
|
$ | (200 | ) | $ | (249 | ) | $ | 82 | ||||
Deferred
|
222 | 143 | (13 | ) | ||||||||
Paid
in capital
|
17 | 167 | 0 | |||||||||
Total
|
$ | (39 | ) | $ | 61 | $ | 69 |
A
reconciliation between the federal statutory tax rate and the Partnership’s
effective tax rate is as follows for the years ended December 31:
2009
|
2008
|
2007
|
||||||||||
Statutory
tax on income
|
34 | % | 34 | % | 34 | % | ||||||
Income
earned in entities that pass-through pre-tax earnings to the
partners
|
(37 | )% | (107 | )% | (34 | )% | ||||||
Effective
income tax rate
|
(3 | )% | (73 | )% | - | % |
The net
deferred income tax assets include the following components as of December
31:
70
2009
|
2008
|
|||||||
Current
(included in prepaid expenses and other)
|
$ | 111 | $ | 100 | ||||
373 | 162 | |||||||
Total
|
$ | 484 | $ | 262 |
The
deferred tax assets are comprised of the following:
2009
|
2008
|
|||||||
Employee-related
accruals
|
$ | 403 | $ | 205 | ||||
Depreciation
|
25 | 7 | ||||||
Other
|
56 | 50 | ||||||
Total
|
$ | 484 | $ | 262 |
The
Partnership has concluded that it is more likely than not that its deferred tax
assets will be realizable and thus no valuation allowance has been recorded as
of December 31, 2009. This conclusion is based on anticipated
future taxable income and tax planning strategies to generate taxable income, if
needed. The partnership will continue to reassess the need for a valuation
allowance during each future reporting period.
7.
|
UNIT
INCENTIVE PLAN
|
The
Partnership’s 2005 Unit Incentive Plan (the Plan) authorized the granting of
nonqualified equity compensation to employees, officers, and directors of the
Partnership. A total of 1,105,815 units have been reserved for
issuance under the the Plan of which there are 1,028,744 units authorized but
unissued as of December 31, 2009. The Partnership issued 11,695
restricted units in three grants under the Plan in 2009. Two of
the 2009 unit grants vest over four years with 50% vesting on the third
anniversary and the remaining 50% vesting on the fourth, provided the grantee
remains an employee as of the vesting date. One of the 2009 unit
grants vests over two years with 50% vesting after one year and the remaining
50% vesting after the second year from the grant date provided the grantee is
still an employee as of the vesting date. The 2008 unit grants vest
over four years with 50% vesting on the third anniversary and the remaining 50%
vesting on the fourth, again provided the grantee remains an employee as of the
vesting date. The grantee may not transfer restricted units until the
holder fulfills the vesting requirements.
Restricted
Units
The Human
Resources Committee makes awards of restricted units to directors and senior
managers of the Partnership and its subsidiaries. The restricted unit
grants vest over two to four years and are compensatory in
nature. Restricted unit awards entitle the recipient to full
distribution rights during the vesting period but are restricted from
disposition and may be forfeited until the units vest. The fair
value, which equals the market price at date of grant, is charged to income on a
straight line basis over the vesting period.
Restricted
unit activity for the three years ended December 31, 2009 was as
follows:
71
Weighted Avg
|
||||||||
Grant Date
|
||||||||
Units
|
Fair Value ($)
|
|||||||
Outstanding
December 31, 2007
|
53,250 | 37.27 | ||||||
Grants
|
19,500 | 32.99 | ||||||
Delivered
|
(8,896 | ) | 33.87 | |||||
Surrendered
for withholding taxes
|
(479 | ) | 37.13 | |||||
Forefeited
|
(1,500 | ) | 37.15 | |||||
Outstanding
December 31, 2008
|
61,875 | 36.42 | ||||||
Grants
|
11,695 | 20.52 | ||||||
Delivered
|
(16,196 | ) | 34.32 | |||||
Surrendered
for withholding taxes
|
(1,179 | ) | 33.98 | |||||
Outstanding
December 31, 2009
|
56,195 | 33.76 |
Unit
Options
There
were 1,028,744, 1,037,918, and 1,055,439 units available for issuance under the
2005 Unit Incentive Plan as of December 31, 2009, 2008, and 2007 respectively.
Unit options have not been granted since December 2005. Units options
granted prior to January 1, 2005 were non-qualified options granted at an
exercise price not less than 100% of the fair value on the grant
date. Unit options granted to employees vested over four or five
years. Board members had the option of receiving their annual
retainer in the form of unit options and those options vested immediately as
they were granted monthly for services rendered during the
month. Options granted have a life of ten years.
Exercise
|
||||||||
Options
|
Price ($)
|
|||||||
Vested
December 31, 2007
|
199,856 | 15.97 | ||||||
Unvested
December 31, 2007
|
6,200 | 15.96 | ||||||
Outstanding
December 31, 2007
|
206,056 | 15.97 | ||||||
Exercised
|
(40,003 | ) | 16.08 | |||||
Vested
|
6,200 | 15.96 | ||||||
Outstanding
and Vested December 31, 2008
|
166,053 | 16.08 | ||||||
Expired
|
(3,000 | ) | 27.88 | |||||
Outstanding
and Vested December 31, 2009
|
163,053 | 15.86 |
There are no unvested unit options at
December 31, 2009.
The
aggregate spread between the option exercise price and unit market price
(intrinsic value) of all options outstanding with a positive intrinsic value at
December 31, 2009 was $925,000. There were no options exercised during
2009. The weighted average remaining contractual term for all
outstanding and exercisable options at December 31, 2009 was 2.3
years.
8.
|
PARTNERSHIP
UNIT REPURCHASE PLANS
|
The
Partnership adopted a unit repurchase plan in December 2008 pursuant to which
was authorized to repurchase limited partner units with an aggregate value of up
to $2.5 million. Since that time, we have increased the aggregate
value of units authorized for repurchase to $5 million and extended the
repurchase plan to allow for repurchases through December 2010. As of
December 31, 2009, there remained an unutilized authorization for unit
repurchases of $2.9 million.
72
9.
|
EMPLOYEE
BENEFITS
|
As of
December 31, 2009 all employees of the Partnership and its subsidiaries are
eligible to receive benefits under a defined contribution
plan. During the years 2007 through 2009 the Partnership matched 50%
of employees’ contributions up to 8% of an individual’s
compensation. The Partnership’s contributions to the plan amounted to
$131,000, $150,000, $151,000, for the years ended December 31, 2009, 2008, and
2007 respectively.
10.
|
COMMITMENTS
AND CONTINGENCIES
|
Environmental
remediation
The
Partnership has an accrual for estimated environmental remediation costs of $1.3
million and $1.6 million as of December 31, 2009 and 2008,
respectively. 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 P&T until 1985 when the
townsite and other assets were spun off to form 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. Under applicable law, both Pope Resources and
P&T are “potentially liable persons” based on ownership and/or operation of
the site. These laws provide for joint and several liability among parties
owning or operating property on which contamination occurs, meaning that cleanup
costs can be assessed against any or all such parties.
Following
the bankruptcy of P&T in late 2007 and the pending liquidation of P&T’s
assets, we determined that P&T would no longer be able to meet any of its
obligations under our settlement and remediation agreement. Accordingly, in the
fourth quarter of 2007 we added $1.9 million to our remediation liability, based
on what management believed to be the best estimate of the remaining cleanup
cost and most likely outcome to various contingencies within the overall
project. It is the Partnership’s policy to include legal costs in the estimate
of the environmental liability. The Monte-Carlo simulation model by
which we estimate this liability indicated a range of potential liability from
$816,000 to $4.5 million which represents a two standard deviation range from
the mean of possible outcomes generated by the statistical modeling process used
to estimate this liability as of December 31, 2009. The balance is
based upon a number of estimates and judgments that may change as the project
progresses.
In 2001,
the Partnership sold a resort community and its water and sewer utilities in the
community of Port Ludlow. The buyer of the project believes some
remediation is required for contamination discovered on the site, and we have
agreed to participate in an investigation in 2010 regarding any liability the
Partnership may have or may be alleged to have. While we have not
concluded that we have an obligation to remediate, we recognized a $30,000
accrual as of December 31, 2009 which represents the maximum of the
Partnership’s agreed-upon investigative costs.
Performance
bonds
In the
ordinary course of business, and as part of the entitlement and development
process, the Partnership is required to provide performance bonds to ensure
completion of certain public facilities. The Partnership had
performance bonds of $428,000 and $1,067,000 outstanding at December 31, 2009
and 2008, respectively.
Operating leases
The
Partnership has non-cancelable operating leases for automobiles, office space,
and computer equipment. The lease terms are from 12 to 48
months. Rent expense under the operating leases totaled $105,000,
$127,000, and $124,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.
73
At
December 31, 2009 future annual minimum rental payments under non-cancelable
operating leases were as follows:
Year
|
Amount
|
|||
2010
|
59,000 | |||
2011
|
45,000 | |||
2012
|
15,000 | |||
2013
|
- |
Supplemental Employee Retirement
Plan
The
Partnership has a supplemental employee retirement plan for a retired key
employee. The plan provides for a retirement income of 70% of his
base salary at retirement after taking into account both 401(k) and Social
Security benefits with a fixed payment set at $25,013 annually. The
Partnership accrued $43,000 and $7,000 in 2009 and 2008, respectively, for this
benefit based on an approximation of the cost of purchasing a life annuity
paying the aforementioned benefit amount. The balance of the
projected liability as of December 31, 2009 and 2008 was $205,000 and $186,000,
respectively.
Contingencies
The
Partnership may from time to time be a defendant in various lawsuits arising in
the ordinary course of business. Management believes Partnership
losses related to such lawsuits, if any, will not have a material adverse effect
to the Partnership’s consolidated financial condition or results of operations
or cash flows.
11.
|
RELATED
PARTY TRANSACTIONS AND NONCONTROLLING
INTEREST
|
Pope MGP,
Inc. is the managing general partner of the Partnership and receives an annual
management fee of $150,000.
12.
|
SEGMENT
AND MAJOR CUSTOMER INFORMATION
|
The
Partnership’s operations are classified into three segments: Fee Timber,
Timberland Management & Consulting, and Real Estate. The Fee
Timber segment consists of the harvest and sale of timber from the Partnership’s
114,000 acres of fee timberland in Washington State.
The
Timberland Management & Consulting segment provides management, disposition,
and technical forestry services in connection with 24,000 acres for Fund I and
12,000 acres for Fund II.
The Real
Estate segment’s operations consist of management of development properties and
the rental of residential and commercial properties in Port Gamble and Kingston,
Washington. Real Estate is working with approximately 2,500 acres of
early stage development properties as of December 31, 2009. All of
the Partnership’s real estate activities are in Washington State.
For the
year ended December 31, 2009, the Partnership had two customers that represented
22% and 14% of consolidated revenue, or $3.3 million and $2.1 million,
respectively. The revenues from both customers were generated by the
Fee Timber Segment. For the year ended December 31, 2008,
the Partnership had no major customers that represented 10% or more of
consolidated revenue.
Identifiable
assets are those used exclusively in the operations of each industry segment or
those allocated when used jointly. The Partnership does not allocate
cash, accounts receivable, certain prepaid expenses, or the cost basis of the
Partnership’s administrative office for purposes of evaluating segment
performance. Intersegment transactions are valued at prices that
approximate the price that would be charged to a major third-party
customer. Details of the Partnership’s operations by business segment
for the years ended December 31 were as follows (in thousands):
74
2009
|
2008
|
2007
|
||||||||||
Revenue
|
||||||||||||
Pope
Resources Fee Timber
|
14,977 | 19,282 | 32,678 | |||||||||
Timber
Fund
|
31 | 4,845 | 3,008 | |||||||||
Total
Fee Timber
|
15,008 | 24,127 | 35,686 | |||||||||
Timberland
Management & Consulting
|
1,509 | 1,890 | 2,260 | |||||||||
Real
Estate
|
5,078 | 3,723 | 15,076 | |||||||||
Total
Revenue (Internal)
|
21,595 | 29,740 | 53,022 | |||||||||
Elimination
of Intersegment Revenue
|
(1,117 | ) | (1,562 | ) | (1,127 | ) | ||||||
Total
Revenue (External)
|
20,478 | 28,178 | 51,895 | |||||||||
Intersegment
Revenue or Transfers
|
||||||||||||
Pope
Resources Fee Timber
|
(161 | ) | (577 | ) | (172 | ) | ||||||
Timber
Fund
|
- | - | - | |||||||||
Total
Fee Timber
|
(161 | ) | (577 | ) | (172 | ) | ||||||
Timberland
Management & Consulting
|
(908 | ) | (946 | ) | (916 | ) | ||||||
Real
Estate
|
(48 | ) | (39 | ) | (39 | ) | ||||||
(1,117 | ) | (1,562 | ) | (1,127 | ) | |||||||
Operating
Income (Loss)
|
||||||||||||
Pope
Resources Fee Timber
|
4,131 | 7,217 | 14,957 | |||||||||
Timber
Fund
|
(1,185 | ) | (1,278 | ) | (490 | ) | ||||||
Total
Fee Timber
|
2,946 | 5,939 | 14,467 | |||||||||
Timberland
Management & Consulting
|
355 | 138 | (174 | ) | ||||||||
Real
Estate
|
1,711 | (1,437 | ) | 5,202 | ||||||||
G&A
|
(3,733 | ) | (3,951 | ) | (4,782 | ) | ||||||
Total
Operating Income (Internal)
|
1,279 | 689 | 14,713 | |||||||||
Intersegment
Charges or Transfers
|
||||||||||||
Pope
Resources Fee Timber
|
(113 | ) | (538 | ) | (133 | ) | ||||||
Timber
Fund
|
891 | 893 | 882 | |||||||||
Total
Fee Timber
|
778 | 355 | 749 | |||||||||
Timberland
Management & Consulting
|
(730 | ) | (681 | ) | (787 | ) | ||||||
Real
Estate
|
(48 | ) | 326 | 39 | ||||||||
G&A
|
- | - | (1 | ) | ||||||||
- | - | - | ||||||||||
Total
Operating Income (External)
|
1,279 | 689 | 14,713 |
75
2009
|
2008
|
2007
|
||||||||||
Depreciation,
Amortization and Depletion
|
||||||||||||
Pope
Resources Fee Timber
|
2,413 | 2,381 | 3,835 | |||||||||
Timber
Fund
|
- | 1,341 | 1,269 | |||||||||
Total
Fee Timber
|
2,413 | 3,722 | 5,104 | |||||||||
Timberland
Management & Consulting
|
17 | 127 | 81 | |||||||||
Real
Estate
|
190 | 684 | 201 | |||||||||
G&A
|
191 | 156 | 185 | |||||||||
Total
|
2,811 | 4,689 | 5,571 | |||||||||
Assets
|
||||||||||||
Pope
Resources Fee Timber
|
57,982 | 59,911 | 60,597 | |||||||||
Timber
Fund I LP
|
54,716 | 55,380 | 57,412 | |||||||||
Timber
Fund II Inc
|
34,791 | 456 | - | |||||||||
Total
Fee Timber
|
147,489 | 115,747 | 118,009 | |||||||||
Timberland
Management & Consulting
|
38 | 54 | 189 | |||||||||
Real
Estate
|
30,604 | 28,752 | 26,375 | |||||||||
G&A
|
8,925 | 20,858 | 34,752 | |||||||||
Total
|
187,056 | 165,411 | 179,325 | |||||||||
Capital
and Land Expenditures
|
||||||||||||
Pope
Resources Fee Timber
|
532 | 1,795 | 1,172 | |||||||||
Timber
Fund
|
34,553 | 269 | 329 | |||||||||
Total
Fee Timber
|
35,085 | 2,064 | 1,501 | |||||||||
Timberland
Management & Consulting
|
- | 3 | 105 | |||||||||
Real
Estate-development activities
|
1,639 | 3,451 | 9,868 | |||||||||
Real
Estate-other
|
537 | - | 296 | |||||||||
G&A
|
23 | 552 | 392 | |||||||||
Total
|
37,284 | 6,070 | 12,162 | |||||||||
Revenue
by product/service
|
||||||||||||
Domestic
forest products
|
12,016 | 15,691 | 31,908 | |||||||||
Export
forest products, indirect
|
2,831 | 3,427 | 1,584 | |||||||||
Conservation
easements
|
3,298 | 3,257 | - | |||||||||
Fees
for service
|
632 | 4,108 | 4,348 | |||||||||
Homes,
lots, and undeveloped acreage
|
1,701 | 1,695 | 14,055 | |||||||||
Total
|
20,478 | 28,178 | 51,895 |
76
13.
|
QUARTERLY
FINANCIAL INFORMATION (UNAUDITED)
|
(in thousands except
per unit amounts)
|
Revenue
|
Income (loss)
from operations
|
Net income (loss)
attributable to
unitholders
|
partnership unit:
Basic
|
partnership unit:
Diluted
|
|||||||||||||||
2009
|
||||||||||||||||||||
First
quarter
|
$ | 4,979 | $ | (41 | ) | $ | (123 | ) | $ | (0.03 | ) | $ | (0.03 | ) | ||||||
Second
quarter
|
3,666 | (724 | ) | (693 | ) | (0.16 | ) | (0.16 | ) | |||||||||||
Third
quarter
|
6,615 | 2,118 | 920 | 0.20 | 0.20 | |||||||||||||||
Fourth
quarter
|
5,218 | (74 | ) | (376 | ) | (0.08 | ) | (0.08 | ) | |||||||||||
2008
|
||||||||||||||||||||
First
quarter
|
$ | 6,340 | $ | 705 | $ | 941 | $ | 0.20 | $ | 0.19 | ||||||||||
Second
quarter
|
11,252 | 1,615 | 1,683 | 0.36 | 0.36 | |||||||||||||||
Third
quarter
|
7,436 | (289 | ) | (23 | ) | (0.01 | ) | (0.01 | ) | |||||||||||
Fourth
quarter
|
3,150 | (1,342 | ) | (1,439 | ) | (0.32 | ) | (0.32 | ) |
Item 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None
Item
9A.
|
CONTROLS
AND PROCEDURES.
|
Conclusion
Regarding the Effectiveness of Disclosure 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 (See Exhibit 99.4 to this report). Additionally the
Partnership’s senior management team meets regularly to discuss significant
transactions and events affecting the Partnership’s operations. The
Partnership’s 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 managing general partner includes an Audit
Committee that is comprised solely of independent directors who meet the
financial literacy requirements imposed by the Securities Exchange Act and the
Nasdaq Stock Market. At least one member of our Audit Committee is a
“financial expert” within the meaning of applicable Nasdaq rules. The
Audit Committee reviews quarterly earnings releases and all reports on Form 10-Q
and Form 10-K prior to their filing. The Audit Committee is
responsible for hiring and overseeing the Partnership’s external auditors and
meets with those auditors at least four times each year.
The Partnership’s executive officers
are responsible for establishing and maintaining disclosure controls and
procedures. They have designed such controls to ensure that others
make known to them all material information within the
organization. Management regularly evaluates ways to improve internal
controls. As of the end of the period covered by the annual report on
Form 10-K our executive officers completed an evaluation of the disclosure
controls and procedures and have determined them to be functioning
effectively.
Management’s
Report on Internal Control Over Financial Reporting
Our management is responsible for
establishing and maintaining adequate internal control over financial reporting
for the Partnership. Internal control over financial reporting, as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, is
a process designed by, or under the supervision of, the Partnership’s chief
executive officer and chief financial officer, or persons performing similar
functions, and effected by the Partnership’s board of directors, management and
other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles. The Partnership’s management, with the participation of
the Partnership’s chief executive officer and chief financial officer, has
established and maintained policies and procedures designed to maintain the
adequacy of the Partnership’s internal control over financial reporting, and
includes those policies and procedures that:
77
|
1)
|
Pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Partnership;
|
|
2)
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
Partnership are being made only in accordance with authorizations of
management of the Partnership; and
|
|
3)
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Partnership’s assets
that could have a material effect on the financial
statements.
|
Management has evaluated the
effectiveness of the Partnership’s internal control over financial reporting as
of December 31, 2009 based on the control criteria established in a report
entitled Internal
Control—Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our assessment and
those criteria, the Partnership’s management has concluded that the
Partnership’s internal control over financial reporting is effective as of
December 31, 2009.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect all errors or misstatements and all
fraud. Therefore, even those systems determined to be effective can
provide only reasonable, not absolute, assurance that the objectives of the
policies and procedures are met. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
The registered independent public
accounting firm of KPMG LLP, auditors of the Partnership’s consolidated
financial statements, has issued an attestation report on the Partnership’s
internal control over financial reporting. This report appears on
page 54 of this annual report on Form 10-K.
Changes
in Internal Control over Financial Reporting
There were no changes in the
Partnership’s internal control over financial reporting that occurred during the
most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Partnership’s internal control over financial
reporting.
9B. OTHER
INFORMATION.
None
78
PART III
Item
10.
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE
REGISTRANT
|
General
Partner
The Partnership has no
directors. Instead, the Board of Directors of its managing general
partner, Pope MGP, Inc. (the “Managing General Partner”), serves in that
capacity. The Managing General Partner’s address is the same as
the address of the principal offices of the Partnership. Pope MGP,
Inc. receives $150,000 per year for serving as managing general partner of the
Partnership.
The following table identifies the
executive officers and directors of the Managing General Partner as of February
16, 2010. Officers of the Managing General Partner hold identical
offices with the Partnership.
Name
|
Age
|
Position, Background, and Qualifications to
Serve
|
||
David
L. Nunes (2)
|
48
|
President
and Chief Executive Officer, and Director, from January 2002 to
present. President and Chief Operating Officer from September
2000 to January 2002. Senior Vice President Acquisitions &
Portfolio Development from November 1998 to August 2000. Vice
President Portfolio Development from December 1997 to October
1998. Director of Portfolio Development from April 1997 to
December 1997 of Pope MGP, Inc. and the Partnership. Held
numerous positions with the Weyerhaeuser Company from 1988 to 1997, the
last of which was Strategic Planning Director. Mr. Nunes, as
the Partnership's CEO, serves as the only management representative on the
board of directors, and is an ex officio member in that regard.
Additionally, Mr. Nunes' operational experience and his hands-on knowledge
of the Partnership's business and executive team allows him to provide a
perspective on the execution of the Partnership's business plans and
strategies not available to the non-management
directors.
|
||
Thomas
M. Ringo
|
|
56
|
|
Vice
President and CFO from December 2000 to present. Senior Vice
President Finance and Client Relations from June 1996 to December
2000. Vice President Finance from November 1991 to June
1996. Treasurer from March 1989 through October 1991 of Pope
MGP, Inc. and the Partnership. Tax Manager of Westin Hotel
Company, 1985 to March 1989. Tax Consultant for Price
Waterhouse, 1981 to
1985.
|
79
John
E. Conlin (2),
(3), (4)
|
51
|
Director;
Co-President and COO, NWQ Investment Management, 2006 to present; Member,
Corporate Advisory Board, University of Michigan, Ross School
of Business, 2006 to present; Member, University of Rochester Endowment
Committee, 2006 to present; Director, Cannell Capital Management 2002 to
2006; CEO, Robertson Stephens, Inc, from 2001 to 2003; COO, Robertson
Stephens, Inc, from 1999 to 2000. Held numerous positions with
Credit Suisse from 1983 to 1999, the last of which was Managing
Director. Mr. Conlin's background in corporate finance,
capital-raising and financial analysis bring the Partnership a perspective
that is unique among our directors. Moreover, Mr. Conlin offers an ability
to assess capital needs, structures and returns relating to the
performance and operation of the Partnership, the Funds, and our strategic
goals and objectives.
|
||
Douglas
E. Norberg (1),
(3),(4) , (5)
|
69
|
Director;
Vice Chairman, Wright Runstad & Company, 2000 to 2007; President,
Wright Runstad & Company, 1975 until 2000. Wright Runstad
& Company is in the business of real estate investing, development,
and management. Mr. Norberg has extensive knowledge of real
estate development, marketing and management, and consults regularly with
management regarding the Partnership's real property portfolio. Mr.
Norberg also brings years of experience evaluating strategic alternatives
for various real property opportunities.
|
||
Peter
T. Pope (1),
(4)
|
75
|
Director;
Director, Pope & Talbot, Inc. 1971 to 2007; Chairman of the Board and
CEO of Pope & Talbot, Inc., 1971 to 1999. Mr. Pope retired
as CEO of Pope & Talbot, Inc. in 1999. Mr. Pope is also a
director and President of Pope EGP, Inc. Mr. Pope has been a
director since the formation of the Partnership and brings an historical
perspective on the Partnership's assets and business that we believe is
critical to the Partnership's recent successes. Moreover, Mr. Pope has
more than 50 years' experience in the operation and management of all
aspects of the timber industry, which affords him the ability, not only to
assess and advise regarding the Partnership's own lines of business, but
also on those of the companies with which the Partnership serves as a
supplier, advisor, manager, customer and client. Finally, Mr. Pope's
experience offers a perspective which spans multiple business cycles that
we believe is critical as management faces the current economic downturn,
affording us an improved ability to tailor the Partnership's strategic and
tactical responses to changing market conditions.
|
||
J.
Thurston Roach (1),
(3), (4)
|
|
68
|
|
Director;
private investor; Director, Deltic Timber Corporation, December 2000 to
present; Director, CellFor Inc. from November 2002 to May 2009; Director,
NBBJ Design, LLP, from November 2007 to present; Director, The Liberty
Corporation May 1994 to January 2006; President and CEO, HaloSource
Corporation, October 2000 to November 2001; Director, HaloSource
Corporation, October 2000 to February 2002; Senior Vice President and CFO,
Owens Corning, January 1999 to April 2000; Senior Vice President and
President of Owens Corning’s North American Building Materials Systems
Business, February 1998 to December 1998; Vice Chairman, Simpson
Investment Company, July 1997 to February 1998; President, Simpson Timber
Company, January 1996 to June 1997; Senior Vice President and Chief
Financial Officer and Secretary, Simpson Investment Company, August 1984
to December 1995. Mr. Roach's experience as a senior executive
and director at other timber and resource companies offer the Partnership
insight into the practical issues facing public companies, and his
specific knowledge of the timber and timberland markets, both in the
Pacific Northwest and elsewhere, allow him to provide extensive input on
both strategic and tactical business decisions confronting the
board. His specific experience as Audit Committee chair for
another public company has been leveraged effectively into a similar role
at the
Partnership.
|
___________________________
|
1)
|
Class
A Director
|
|
2)
|
Class
B Director
|
|
3)
|
Member
of the Audit Committee
|
|
4)
|
Member
of the Human Resources Committee
|
5) Designated
financial expert for the Board of Directors Audit Committee
80
Board of Directors of the
Managing General Partner
Board
Composition. The Managing General Partner’s Articles of
Incorporation provide that directors are divided into two classes, each class
serving a period of two years. The Managing General Partner’s
shareholders elect approximately one-half of the members of the Board of
Directors annually. The terms of the Class A directors expire on
December 31, 2010, and the terms of the Class B directors expires on December
31, 2011. The directors’ election to the Managing General Partner’s
Board of Directors is subject to a voting agreement between the Managing General
Partner’s two shareholders, Mr. Peter T. Pope and Mrs. Emily T.
Andrews. Mr. Pope serves as his own appointee, and J. Thurston Roach
serves as Mrs. Andrews’ appointee to the Board of Directors. The
Managing General Partner’s Board of Directors met six times in 2009 with five of
the meetings in person to discuss Partnership matters. The
composition of our Board of Directors is established by the Limited Partnership
Agreement and accordingly, as permitted by NASDAQ Rules IM-5065-7 and
5615(a)(4), board nominations are not made or approved by a separate nominating
committee or by a majority of the independent directors.
Past
Directorships. During the period 2005 through 2009, none of
the members of the managing general partner’s Board of Directors served on the
Board of another public company, other than Messrs. Pope and Roach, as outlined
in the following table.
Individual’s Name
|
Name of Public Company
|
Term of Directorship
|
||
Peter
T. Pope
|
Pope
& Talbot, Inc. (NYSE:POP)
|
1971
- 2007
|
||
Peter
T. Pope
|
Newhall
Land and Farming (NYSE:NHL)
|
1992
- 2005
|
||
J.
Thurston Roach
|
The
Liberty Corporation (NYSE:LC)
|
1994
- 2006
|
||
J.
Thurston Roach
|
Deltic
Timber Company (NYSE:DEL)
|
2000
- present
|
||
John
E. Conlin
|
|
ACME
Communications (NASDAQ:ACME)
|
|
2005
- 2008
|
Board Leadership
Structure. The Board of the Managing General Partner does not
utilize a Chairman. The CEO generally calls meetings of the Board and sets
schedules and agendas for such meetings. The CEO regularly communicates with all
directors on key issues and concerns outside of Board meetings and endeavors to
ensure that information provided to the Board is sufficiently timely and
complete to facilitate Board member fulfillment of responsibilities. As the
individual with primary responsibility for managing the Partnership’s day-to-day
operations, the CEO is best positioned to chair regular Board meetings where key
business and strategic issues are discussed. The Board utilizes Mr. Norberg as a
“lead director” and Mr. Norberg’s chief responsibility in this regard is to
chair executive sessions of the independent directors which are conducted as a
part of nearly every Board meeting.
81
Board’s Role in the Risk Oversight
Process. Given the size of the managing general partner’s
Board, management of the Partnership’s material risks is administered through
the whole Board in concert with executive and senior operating personnel. Risk
is an integral part of Board and committee deliberations throughout the year
with regular discussion of risks related to the company’s business strategies at
each meeting. Periodically, the Audit Committee and Board review Management’s
assessment of the primary operational and regulatory risks facing the
Partnership, their relative magnitude and management’s plan for mitigating these
risks. The Audit Committee considers risk issues associated with the
Partnership’s overall financial reporting and disclosure process and legal
compliance. At each of its regularly scheduled meetings, the Audit Committee
meets in executive session and meets with the independent auditor outside the
presence of management.
Diversity Policy.
As noted above, the Partnership's board is established pursuant to the
Partnership Agreement and a stockholders' agreement among the shareholders of
Pope MGP, Inc., the Partnership's managing general partner. The stockholders'
agreement, in particular, establishes the rights of the managing general
partner's stockholders to designate the Partnership's directors. Neither the
Partnership Agreement nor the managing general partner's stockholders' agreement
establishes a diversity party, nor does any such policy otherwise
exist.
Audit
Committee. The Audit Committee of the Managing General
Partner’s Board of Directors is comprised of three outside directors who comply
with the Securities Exchange Act and NASDAQ’s qualification requirements for
Audit Committee members. The Audit Committee met to discuss the
Partnership eight times during 2009. The Audit Committee’s Chairman
is J. Thurston Roach and its designated financial expert is Douglas E.
Norberg. See report of the Audit Committee on financial statements
below.
Human Resources
Committee. The Human Resources Committee is responsible for
(1) establishing compensation programs for executive officers and senior
management of the Partnership designed to attract, motivate, and retain key
executives responsible for the success of the Partnership as a whole; (2)
administering and maintaining such programs in a manner that will benefit the
long-term interests of the Partnership and its unitholders; and (3) determining
the salary, bonus, unit option and other compensation of the Partnership's
executive officers and senior management. The Human Resources
Committee met five times during 2009. Mr. John E. Conlin served as
Chairman of the Human Resources Committee in 2009. See report of the
Human Resources Committee on executive compensation below.
Beneficial Ownership and
Section 16(a) Reporting Compliance
The Partnership is a reporting company
pursuant to Section 12 of the Securities Exchange Act of 1934 (“Exchange
Act”). Under Section 16(a) of the Exchange Act, and the rules
promulgated hereunder, directors, officers, greater than 10% shareholders, and
certain other key personnel (the “Reporting Persons”) are required to report
their ownership and any change in ownership of Partnership units to the
Securities and Exchange Commission. The Partnership believes that the
Reporting Persons have complied with all Section 16(a) filing requirements
applicable to them. In making the foregoing statement, the
Partnership has relied solely upon oral or written representations of the
Reporting Persons, and copies of the reports that the Reporting Persons have
filed with the SEC.
Code
of Ethics
The Partnership maintains a Code of
Ethics that is applicable to all executive officers, directors, and certain
other employees. A copy of the Code of Ethics is available on the Investor
Relations section of the Partnership's website.
82
Item
11.
|
EXECUTIVE
COMPENSATION; COMPENSATION DISCUSSION &
ANALYSIS
|
Overview
Objectives
of our Executive Compensation Program
The
objective of our executive compensation program is to pay for performance and to
attract, motivate, and retain those employees who embrace a culture of
achievement with a long-term perspective.
The
Role of the Human Resources Committee and Executive Officers in Compensation
Decisions
The
Board’s Human Resources Committee has responsibility for establishing our
compensation objectives and approving all compensation for the CEO and his
immediate subordinates. The committee’s primary role is to build a
fair compensation culture, and monitor that it is executed properly.
The
components of total compensation paid to executive management are reviewed
annually by the committee, with the method for determining compensation varying
from case to case based on a discretionary and subjective determination of what
is appropriate at the time.
When
establishing salaries, bonus levels and restricted unit awards for executive
officers, the committee considers:
|
o
|
the
Partnership's performance during the past year and recent quarters in
meeting its financial and other performance
goals;
|
|
o
|
the
individual's performance (including the Partnership’s performance as to
aspects within the individual’s purview) during the past year and recent
quarters; and
|
|
o
|
with
respect to senior managers other than the Chief Executive Officer, the
committee also takes into consideration the recommendations of the Chief
Executive Officer.
|
The
committee has in the past engaged compensation consultants to assist the
committee in assessing the market for top executives. Historically,
these consultants have provided a limited scope of services on behalf of the
committee and perform no other services for the Partnership or its subsidiaries
or management. Amounts paid to such consultants on an annual basis
have ranged between $10,000 and $20,000. We did not engage such a consultant in
2009.
We are
committed to compensating our executives fairly. The perception of
fairness should be recognized both internally to the organization and externally
to unitholders and other stakeholders. We are searching for the right balance of
base salary and benefits with bonus and equity-based compensation awards that
will provide our executives with a competitive, predictable cash compensation
stream, coupled with short and long-term incentive programs that utilize both
cash and equity grants to reward prior performance while promoting future
success.
Elements
of Compensation
Our
executive compensation program is designed to be consistent with the objectives
and guidelines set forth above. A discussion of each of the key elements of the
program follows below.
Base Salary. In establishing
base salary levels for executives and other members of the management team, the
committee has used compensation consultant data, taking into account such
factors as competitive industry salaries, general and regional economic
conditions, and the size and geographic differences of “peer” companies against
which the Partnership is compared. Using that data, the committee attempts to
harmonize our executives’ base compensation while considering our executives’
scope of responsibilities, individual performance, and contribution to our
organization. Adjustments in base salary are usually made effective March 1 of
each year, unless circumstances (such as a promotion) warrant otherwise. During
2009, the base salaries for the Partnership’s executives were not increased in
recognition of the market stresses impacting our businesses. Executive salaries
for 2010 are also expected to be held flat at 2008 levels.
83
Annual Bonus. The
committee established an aggregate cash bonus pool of $350,000 to reward
management accomplishments during the unusually tough 2009. The committee’s
judgment was that even though bottom line results for 2009 were poor, management
accomplished meaningful successes pursuing the Partnership’s strategies,
including the closing of ORM Timber Fund II, Inc., securing key entitlements to
create value-adding opportunities in our real estate portfolio, improving
productivity and cost-effective management following a major cost-cutting
initiative, and minimizing self-inflicted losses that flowed from the decision
to significantly defer harvests, and securing the sale of a significant
conservation easement. Accordingly, the committee considered, in addition to the
Partnership's overall economic performance in 2009, both the short- and
long-term impacts expected to result from our decisions to defer harvest volume;
leadership and morale issues that affect the Partnership's employees;
management's relationships with investors, both in the Partnership directly and
in the Funds; the success and the known risks associated with raising and
managing the Funds; and management's ability to anticipate and contain costs in
order to mitigate the adverse impacts of declining revenues.
Once the
overall bonus pool size was determined, the Chief Executive Officer made
individual bonus recommendations to the committee, within the limits of the
pool, for eligible employees (other than himself) based upon an evaluation of
their individual performance and contribution to the Partnership's overall
performance. Based on those factors, the committee made the final
determination of the bonus pool split and the bonus award to be paid to the
executive officers.
Equity Based
Compensation. During 2005, the committee adopted the Pope
Resources 2005 Unit Incentive Plan in order to include restricted unit grants as
the primary element of unit-based compensation, substituting for options that
had previously served that role. The committee believes that
equity-based compensation promotes the alignment of management employees’
objectives with those of our other unitholders by conveying an incentive that
will grow over time based on the long-term success of the
Partnership.
Past
practice has been to integrate long-term incentive award grant opportunities in
the form of equity with other elements of our executive compensation program
such that total direct compensation levels are at or near the median of market
pay levels for businesses that are comparable in size and industry to the
Partnership and taking into account the Partnership’s specific
circumstances. Again, aiming at the median is deemed to best balance
the objective to retain valued executive talent with recognition that we are a
relatively small business enterprise. From 2005 to 2009, the
committee made unit-based compensation grants to eligible employees once a year
at a regularly scheduled first quarter meeting. Exceptions to this
once-a-year grant are made rarely and are usually confined to grants coincident
with hiring of a new employee.
84
Restricted unit awards provide
recipients with ownership units in the Partnership upon lapse of award
restrictions. In the past, these restricted unit awards were
structured to vest on the basis of continued service to the Partnership, with
50% vesting upon completion of three years of service after grant and the other
50% vesting upon completion of four years of post-grant service, in each case
conditioned upon continuation of employment as of that date. Grantees
of restricted units are entitled to receive cash distributions declared and paid
by the Partnership during the vesting period. Such distributions are
taxable income to recipients during the vesting period, although the taxing
event for the grant itself coincides with the lapse of the
restrictions.
In March
2009, the committee opted to grant 7,250 restricted units valued at $136,000 in
lieu of paying additional cash bonus for 2008 performance. In January
2010, the committee granted 20,200 restricted units valued at $499,000 based on
its assessment of management’s performance in 2009 with respect to forwarding
the Partnership’s strategic objectives.
This 2010
restricted unit grant was spread across the participant pool in rough proportion
to past awards of restricted units. In this instance, because the
unit awards were based more on an assessment of prior year performance, the
vesting period was set at two years with 50% vesting at the one-year anniversary
of grant and the balance at the second annual anniversary.
IPMB Award. The
IPMB awards are paid from Pope MGP’s share of earnings from the
IPMB. Awards are paid in a lump sum following the year in which the
award was earned, and represent a pool of up to three-quarters of the managing
general partner’s share of IPMB pre-tax profit, depending on overall
performance. No IPMB awards were paid in 2009 as the Partnership had
no IPMB pre-tax profit.
Perquisites and Other Personal
Benefits. We do not provide perquisites or other personal
benefits to our executive officers or senior employees, such as company cars,
country club or social club memberships, reserved parking spaces, separate
dining facilities, or company-funded use of personal financial/tax
consultants. We do not own or lease aircraft for our executives’
personal use. Our health care and medical insurance programs, as well
as our retirement benefit plan (401(k)) are the same for all salaried employees,
including officers.
Defined Benefit Pension Plans. Other than
the supplemental retirement plan discussed below, none of our named executive
officers participate in or have account balances in qualified or non-qualified
defined benefit plans sponsored by us.
Defined Contribution Retirement
Savings Plan. As of December 31, 2009 all our employees are
eligible to receive benefits under a defined contribution
plan. During 2009 and 2008 the Partnership matched 50% of the
employees’ contribution up to 8% of compensation. Partnership
contributions to the plan amounted to $131,000, $150,000 and, $150,000, for each
of the years ended December 31, 2009, 2008 and 2007,
respectively. Employees become fully vested over a six-year period in
the Partnership's contribution.
Supplemental Retirement
Plan. We have a
supplemental retirement plan for George H. Folquet, a retired
executive. The plan provides for a retirement income of 70% of his
base salary at retirement after taking into account both 401(k) and Social
Security benefits and makes an annual fixed-amount payment of
$25,013. The Partnership accrued an additional $43,355 in 2009 for
this benefit based on an updated approximation of the cost of purchasing a life
annuity paying the aforementioned benefit amount. The balance of the
liability as of December 31, 2009 was $204,820.
Agreements
Between the Partnership and Executive Officers
Each
employee is employed at the will of the Partnership and does not have a term of
guaranteed employment. We do not have any employment agreements with
executive officers. We do have in place, however, change in control
agreements with the executive officers (see discussion below).
85
Severance
and Other Termination Benefits
The
committee recognizes the possibility that, as with all publicly traded entities,
a change in control of Pope Resources or its Managing General Partner may occur
and that the uncertainty created by this potential event could result in the
loss or distraction of executives, with a resulting detriment to
unitholders. To that end, Pope Resources has entered into change in
control agreements with Messrs. Nunes and Ringo that are intended to align
executive and unitholder interests by enabling these executives to consider
entity-level transactions that may be in the best interests of unitholders
without undue concern for personal circumstances.
Upon the
involuntary termination of an executive’s employment (other than “for cause,”
and including resignation for certain specified reasons) within eighteen months
after a change in control event occurs, the following benefits would be
provided:
|
-
|
cash
payments equal to two times the executive’s base salary, plus the
executive’s target bonus for the year in which the change in control
occurred;
|
|
-
|
immediate
vesting of all outstanding unit option awards consistent with the terms of
the 2005 Plan; and
|
|
-
|
continued
coverage for the executive and dependents under Pope Resources’ health and
welfare plan for up to 18 months after
termination.
|
The following table summarizes the cash
payments that would have been due Pope Resources’ executive officers if a change
in control event had occurred on December 31, 2009.
Name
|
Two times base salary
|
Target
bonus
|
Total cash
payments
|
|||||||||
David
L. Nunes, President & CEO
|
$ | 636,540 | $ | 159,135 | $ | 795,675 | ||||||
Thomas
M. Ringo, Vice President & CFO
|
$ | 413,752 | $ | 82,750 | $ | 496,502 |
No trusts
are maintained to protect benefits payable to executives covered under these
change in control agreements with any funding, as applicable, to come from the
general assets of Pope Resources.
Policy
With Respect to $1 Million Deduction Limit
It is not
anticipated that the limitations on deductibility, under Internal Revenue Code
Section 162(m), of compensation to any one executive that exceeds $1,000,000 in
a single year will apply to the Partnership or its subsidiaries in the
foreseeable future because this provision applies only to corporations and not
to partnerships. In the event that the Partnership were to determine
that such limitations would apply in a given scenario, the committee will
analyze the circumstances presented and act in a manner that, in its judgment,
is in the best interests of the Partnership. This may or may not
involve actions to preserve deductibility.
Officer
Unit Ownership Guidelines
We do not
have a formal unit ownership guideline for executive officers, but note that as
of February 15, 2010 Mr. Nunes owns units of Pope Resources that had a value of
4.0 times his 2009 base salary. Similarly, Mr. Ringo owns Pope
Resources units as of February 15, 2010 that had a value of 2.8 times his 2009
base salary. Of these owned unit positions, Mr. Nunes acquired 53% of
his through open-market purchases, 30% through exercises of unit
options, and another 17% through vesting of restricted units while Mr.
Ringo acquired 15% of his through open-market purchases, 57% through exercises
of unit options, and another 28% through vesting of restricted units. Messrs.
Nunes and Ringo have an additional 19,150 and 5,900 unvested restricted units,
respectively, that are not included in the ownership totals above. Mr. Nunes’
unvested restricted units had a value on February 15, 2010 of $471,000, or 1.5
times 2009 base salary. On February 15, 2010 Mr. Ringo’s unvested restricted
units had a value of $145,000, or 0.7 times 2009 base salary. Combining both the
fully owned and the unvested positions, the value of the year-end positions in
POPE for Messrs. Nunes and Ringo were 5.5 and 3.5 times their respective 2009
base salaries.
86
Summary
Compensation Table
The
following table sets forth information regarding compensation earned by our
named executive officers for the years 2007 through 2009:
Name and
Principal Position
|
Year
|
Salary
($)
|
Bonus
($) (1)
|
Unit Awards
($) (2)
|
Non-equity Incentive
Plan Compensation
($)
|
All Other
Compensation
($) (3)
|
Total
($)
|
|||||||||||||||||||
David
L. Nunes
President
and CEO
|
2009
|
318,270 | 87,500 | 197,600 | - | 18,550 | 621,920 | |||||||||||||||||||
2008
|
316,725 | 113,758 | 188,811 | - | 34,750 | 654,044 | ||||||||||||||||||||
2007
|
307,500 | 260,487 | 194,625 | - | 26,091 | 788,703 | ||||||||||||||||||||
Thomas
M Ringo
V.P.and
CFO
|
2009
|
206,876 | 45,188 | 65,455 | - | 15,375 | 332,894 | |||||||||||||||||||
2008
|
205,872 | 47,250 | 99,368 | - | 24,200 | 376,690 | ||||||||||||||||||||
2007
|
199,875 | 135,453 | 108,125 | - | 19,200 | 462,653 | ||||||||||||||||||||
(1)
|
Amounts
represent bonuses earned in the year indicated but paid in the subsequent
year.
|
(2)
|
The
amount for 2009 represents the market value on the date of grant of
restricted units received in January 2010. The January 2010 grant
represents compensation for 2009 performance, however, expense will be
recognized over the two-year vesting period with 50% vesting after one
year and the balance upon the second anniversary of the grant. The amount
for 2008 represents two grants – one in March 2009 and one in August 2008.
The March 2009 grant represents compensation for 2008 performance. On the
other hand, the August 2008 grant was based on the historical practice of
awarding a set number of units per year with the number of units granted
based on the executive’s management position. Units granted under these
two awards are subject to a trading restriction until the units vest over
four years with 50% vesting after three years and the remaining 50%
vesting on the fourth anniversary of the grant date. The 2007 amounts
represent the market value on the data of grant for restricted units
received in each that calendar year with four-year vesting of those
units.
|
(3)
|
Amounts
represent matching contributions to the Partnership’s 401(k) plan made by
the Partnership on behalf of the executive, and distributions received by
the executive on restricted Partnership units (the value of the restricted
units is described under footnote (2) above and not repeated
here.)
|
Grants
of Plan Based Awards Table
The
committee approved awards under the Partnership’s 2005 Unit Incentive Plan to
our named executives in 2009 and in January 2010 with respect to 2009
performance. Set forth below is information regarding these two
awards of restricted units. The March 2009 grant was primarily
awarded with reference to 2008 performance and similarly, the January 2010 grant
was primarily awarded with reference to 2009 performance.
87
Name
|
Grant Date
|
All Other
Unit Awards:
Number of
Shares of
Unit or Units
(#)
|
All Other
Options
Awards:
Number of
Securities
Underlying
Options (#)
|
Unit Awards
|
Option
Awards
|
Closing Price on
Grant Date ($/sh)
|
||||||||||||||||
David
L. Nunes President and
CEO
|
March
17, 2009
|
2,150 | - | - | - | 18.77 | ||||||||||||||||
David
L. Nunes President and
CEO
|
January
12, 2010
|
8,000 | - | - | - | 24.70 | ||||||||||||||||
Thomas
M Ringo V.P.
and CFO
|
March
17, 2009
|
900 | - | - | - | 18.77 | ||||||||||||||||
Thomas
M Ringo V.P.
and CFO
|
January
12, 2010
|
2,650 | - | - | - | 24.70 |
Unit
Incentive Plan
In 2005 the Board of
Directors of Pope MGP, Inc. adopted the Pope Resources 2005 Unit Incentive Plan
(the Plan) and terminated future awards under the Partnership’s 1997 Unit Option
Plan. The Plan is administered by the Human Resources
Committee. The purpose of the change to the Plan was to allow the
committee to award restricted units to employees and directors which the
committee believes provides a better alignment of interest with current
unitholders than the unit option grants under the 1997 plan.
Units
Available for Issuance
There are 1,105,815 units authorized
under the Plan. As of December 31, 2009 there were 1,028,744
authorized but not issued units in the Plan. The units issued or
issuable under the Plan have been registered on a Form S-8 registration
statement.
Term
of Unit Options
The term
of each option is ten years from the date of grant, unless the plan
administrator establishes a shorter or longer period of time as evidence in the
award agreement.
Vesting
Schedule
The
restricted units granted under the Plan have historically had a four-year
vesting period with 50% vesting after three years and the remaining 50% vesting
after the fourth year. The most recent January 2010 grant, however, had a
two-year vesting period with 50% vesting after one year and the remaining 50%
vesting after the second year. The shortening of the vesting period in the most
recent grant reflected the fact that this incentive compensation element was
viewed by the committee as part of the bonus award for 2009
performance. Expense will be recognized over the two-year vesting
period. Given its association with the past, a foreshortened vesting period was
deemed appropriate. The March 2009 grant was also explicitly awarded for past
(2008) performance but the notion of shortening the vesting period had not yet
evolved. Prior grants of restricted units were awarded primarily with a view
toward future performance and retention of the executive’s
services.
Unit
Appreciation Rights
In
addition to Unit grants, the administrator of the Plan may grant unit
appreciation rights. Unit appreciation rights represent a right to
receive the appreciation in value, if any, of the Partnership’s units over the
base value of the unit appreciation right. As of the date of this
report no unit appreciation rights have been granted under the
plan.
Adjustments,
Changes in Our Capital Structure
The
number and kind of units available for grant under the Plan and any outstanding
options under the 1997 plan, as well as the exercise price of outstanding
options, will be subject to adjustment by the committee in the event of any
merger or consolidation.
88
Administration
The
committee has full discretionary authority to determine all matters relating to
units granted under the Plan.
The
committee has the authority to determine the persons eligible to receive
options, the number of units subject to each option, the exercise price of each
option, any vesting schedules, and any acceleration on the vesting schedules and
any extension of the exercise period.
Amendment
and Termination
The board
of directors has the exclusive authority to amend or terminate the Plan, except
as would adversely affect participants’ rights to outstanding awards without
their consent. As the plan administrator, the committee has the
authority to interpret the plan and options granted under the Plan and to make
all other determination necessary or advisable for plan
administration. In addition, as administrator of the Plan the
committee may modify or amend outstanding awards, except as would adversely
affect participants’ rights to outstanding awards without their
consent.
Outstanding
Equity Awards At Fiscal Year-End; Option Exercise and Units Vested
The following table summarizes the
outstanding equity award holdings held by our named executive
officers:
Option
Awards
|
Unit
Awards
|
||||||||||||||||||||||||||||||||
Name
|
Number
of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
|
Number
of
Securities
Underlying
Unexercised
Options
Unexercisable
(#)
|
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number of Units
That
Have Not
Vested
(#)
|
Market
Value
of
Units
That
Have
Not
Vested
($)
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested
(#)
|
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested
($)
|
||||||||||||||||||||||||
David L. Nunes
|
31,000 | - | - | 12.51 |
3/20/12
|
13,400 | 329,640 | - | 10,300 | ||||||||||||||||||||||||
President and CEO | 10,000 | - | 22.00 |
2/14/11
|
|||||||||||||||||||||||||||||
Thomas
M Ringo
V.P. and
CFO
|
8,100 | - | - | 12.51 |
3/20/12
|
7,150 | 175,890 | - | 5,575 |
89
OPTION EXERCISES AND UNITS VESTED
|
||||||||||||||||
Option Awards
|
Unit Awards
|
|||||||||||||||
Name
|
Number of Units Acquired on
Exercise
(#)
|
Value Realized on Exercise
($)
|
Number of Units Acquired on
Vesting
(#) (1)
|
Value Realized on Vesting
($)
|
||||||||||||
David
L. Nunes
President
and
CEO
|
- | - | 4,500 | 88,740 | ||||||||||||
Thomas
M Ringo
V.P.
and CFO
|
- | - | 2,500 | 49,300 |
(1) Of the 2,500 units acquired upon vesting in 2009 by
Mr. Ringo, he tendered back 738 of those units with a value of $14,315 to the
Partnership in lieu of paying cash for payroll taxes due on the
vesting. As such, Mr. Ringo retained a net position of 1,762 of these
units. Mr. Nunes did not tender back any units in connection with his
vesting and satisfied his payroll tax obligations with a cash payment to the
Partnership.
Director
Compensation
The
following table sets forth a summary of the compensation we paid to our
non-employee directors in 2009:
Name
|
Year
|
Fees
Earned
or Paid
in Cash
($)
|
Unit
Awards
($) (1)
|
Option
Awards
($) (2)
|
Non-
Equity
Incentive
Plan
Compensation
($)
|
Change in
Pension
Value and
Non-qualified
Deferred
Compensation
Earnings
|
All Other
Compensation
($) (3)
|
Total
($)
|
||||||||||||||||||||||
John
E. Conlin
|
2009
|
32,125 | 17,520 | - | - | - | 1,613 | 51,258 | ||||||||||||||||||||||
Douglas
E. Norberg
|
2009
|
28,000 | 17,520 | - | - | - | 1,763 | 47,283 | ||||||||||||||||||||||
Peter
T. Pope
|
2009
|
25,000 | 17,520 | - | - | - | 1.763 | 44,283 | ||||||||||||||||||||||
J.
Thurston Roach
|
2009
|
35,000 | 17,520 | - | - | - | 1,763 | 54,283 |
(1)
|
Amounts
represent the market value on the date of grant of restricted units
received during the year. These units are subject to a trading
restriction until the units vest. Units ordinarily vest over
four years with 50% vesting after three years and the remaining 50%
vesting on the fourth anniversary of the grant date. For each
of Messrs. Norberg, Pope, and Roach a
total of 375 restricted units granted during fiscal year 2005 vested and
became eligible for trading on September 6, 2009 and an additional 375
restricted units granted during fiscal year 2006 vested and became
eligible for trading on March 8,
2009.
|
(2)
|
No
options were awarded in 2009.
|
(3)
|
Amounts
represent distributions received on unvested restricted Partnership
units and the value realized upon vesting of prior grants of
restricted units.
|
Compensation
of the outside directors of Pope MGP, Inc. consists of a monthly retainer of
$1,500 plus a $1,000 per day fee for each board meeting attended and $500
for participation in a board meeting via telephone. The Chairman of
the Audit Committee receives an additional annual retainer amount of $3,000 that
is paid in a monthly pro rata fashion. The Chairman of the Human
Resources Committee receives an additional annual retainer of $1,500, also paid
pro rata on a monthly basis. Both the Chairman of the Audit and Human Resources
Committees receive an additional $500 fee per committee meeting.
90
Report of the Human
Resources Committee on Executive Compensation
The Human
Resources Committee of the General Partner’s Board of Directors (the
“Committee”) has reviewed and discussed the contents of this Compensation
Discussion and Analysis, required by Item 402(b) of SEC Regulation S-K, with the
Partnership’s management and executive officers and, based on such review and
discussions, recommended to the General Partner’s Board of Directors that it be
included in this Form 10-K.
The
committee’s report is also intended to describe in general terms the process the
committee undertakes and the matters it considers in determining the appropriate
compensation for the Partnership's executive officers, Mr. Nunes and Mr.
Ringo.
Responsibilities
and Composition of the Committee
The committee is responsible for (1)
establishing compensation programs for executive officers of the Partnership
designed to attract, motivate, and retain key executives responsible for the
success of the Partnership as a whole; (2) administering and maintaining such
programs in a manner that will benefit the long-term interests of the
Partnership and its unitholders; and (3) determining the salary, bonus, unit
option, and other compensation of the Partnership's executive
officers.
The committee is currently comprised of
Douglas E. Norberg, Peter T. Pope, J. Thurston Roach, and John
Conlin. Mr. Conlin served as Committee Chair during
2009. None of the members are officers or employees of the
Partnership or the General Partner.
Conclusion
The HR
Committee believes that for 2009 the compensation terms for Mr. Nunes, as well
as for the other executive officers, were clearly related to the realization of
the goals and strategies established by the Partnership.
John E.
Conlin, Chairman
Douglas
E. Norberg
Peter T.
Pope
J.
Thurston Roach
Audit Committee Report on
Financial Statements
The Audit
Committee of the General Partner’s Board of Directors has furnished the report
set forth in the following section entitled “Responsibilities and Composition of
the Audit Committee” on the Partnership’s year-end financial statements and
audit for fiscal year 2009. The Audit Committee’s report is intended
to identify the members of the Audit Committee and describe in general terms the
responsibilities the Audit Committee assumes, the process it undertakes, and the
matters it considers in reviewing the Partnership’s financial statements and
monitoring the work of the Partnership’s external auditors.
Responsibilities
and Composition of the Audit Committee
The Audit
Committee is responsible for (1) hiring the Partnership’s external auditors and
overseeing their performance of the audit functions assigned to them, (2)
approving any non-audit services to be provided by the external auditors, and
(3) approving all fees paid to the external auditor. Additionally,
the Audit Committee reviews the Partnership’s quarterly and year-end financial
statements with management and the external auditors. The Board of
Directors has adopted an Audit Committee Charter included in Exhibit 10.4 to
this Annual Report on form 10-K.
91
The Audit
Committee is currently comprised of J. Thurston Roach, John E. Conlin, and
Douglas E. Norberg. Mr. Roach serves as Audit Committee
Chair. All members of the Audit Committee are independent as defined
under NASDAQ Rule 4200(a) (15), and all are financially literate. Mr.
Norberg is designated as a “financial expert” as defined under Section 10A (m)
of the Securities Exchange Act of 1934 and NASDAQ Rule 4350(d).
During
the year, the Audit Committee reviewed with the Partnership’s management and
with its independent public accountants the scope and results of the
Partnership’s internal and external audit activities and the effectiveness of
the Partnership’s internal control over financial reporting. The
Audit Committee also reviewed current and emerging accounting and reporting
requirements and practices affecting the Partnership. The Audit
Committee discussed certain matters with the Partnership’s external auditors and
received certain disclosures from the external auditors regarding their
independence. All fees paid during the year to the Partnership’s
external auditor were reviewed and pre-approved by the Audit
Committee. The Audit Committee has also made available to employees
of the Partnership and its subsidiaries a confidential method of communicating
financial or accounting concerns to the Audit Committee and periodically reminds
the employees of the availability of this communication system to report those
concerns.
Conclusion
Based on this review, the Audit
Committee recommends to the Partnership’s Board of Directors that the
Partnership’s audited financial statements be included in the Partnership’s
report on Form 10-K.
J.
Thurston Roach, Chairman
John E.
Conlin
Douglas
E. Norberg
92
Item
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SECURITY
HOLDER MATTERS
|
Principal
Unitholders
As of February 16, 2010, the following
persons were known or believed by the Partnership to be the beneficial owners of
more than 5% of the outstanding Partnership units:
Name and Address of
Beneficial Owner
|
Number of
Units(1)
|
Percent
of Class
|
||||||
Emily
T. Andrews
|
557,100 |
(2)
|
11.7 | |||||
600
Montgomery Street
|
||||||||
35th
Floor
|
||||||||
San
Francisco, CA 94111
|
||||||||
Peter
T. Pope
|
342,042 |
(3)
|
7.2 | |||||
1500
S.W. 1st Avenue
|
||||||||
Portland,
OR 97201
|
||||||||
Stafford
Timberland V Investment Nominee Ltd
|
335,940 |
(4)
|
7.1 | |||||
49/50
Eagle Wharf Road
|
||||||||
London
N17ED
|
||||||||
United
Kingdom
|
||||||||
Private
Capital Management, Inc.
|
292,758 |
(5)
|
6.2 | |||||
8889
Pelican Bay Blvd
|
||||||||
Suite
500
|
||||||||
Naples,
FL 34108-7512
|
(1)
|
Each
beneficial owner has sole voting and investment power unless otherwise
indicated. Includes unit options exercisable within 60 days but
excludes those options where the exercise price renders them
anti-dilutive. Also includes restricted units that are both vested and
unvested since beneficial owner receives distributions on all such
restricted units.
|
(2)
|
Includes
1,090 units owned by her husband, Adolphus Andrews, Jr. as to which she
disclaims beneficial ownership. Also includes a total of 60,000
units held by Pope MGP, Inc. and Pope EGP, Inc., as to which she shares
voting and investment power.
|
(3)
|
Includes
(a) 200,925 units held by a limited liability company controlled by Mr.
Pope; (b) 25,420 units owned by Mr. Pope; (c) 44,600 units held in trust
for his children; (d) 60,000 units held by Pope MGP, Inc. and Pope EGP,
Inc., as to which he shares investment and voting power; (e) currently
exercisable options to purchase 8,847 units; and (f) 2,250 unvested
restricted units.
|
(4)
|
Stafford
Timberland V Investment Nominee Ltd is the nominee of Stafford
International Timberland V Fund Limited Partnership and Stafford
International Timberland V Trust, investment vehicles that collectively
comprise the Stafford International Timberland V Fund. The nominee has
sole power to vote or direct the vote of units held or dispose or direct
the disposition of said units.
|
(5)
|
Private
Capital Management, Inc. is an investment adviser shown registered under
the Investment Advisers Act of 1940. Units are held in various
accounts managed by Private Capital Management, Inc. which shares
dispositive powers as to those
units.
|
93
Management
As of
February 16, 2010, the beneficial ownership of the Partnership units of (1) the
named executives (2) the directors of the Partnership's general partners, (3)
the general partners of the Partnership, and (4) the Partnership's officers,
directors and general partners as a group, was as follows. **
Name
|
Position and Offices
|
Number
of Units(1)
|
Percent
of
Class
|
|||||||
David
L. Nunes
|
Chief
Executive Officer and President,
|
110,900 |
(2)
|
2.3 | ||||||
Pope
MGP, Inc. and the Partnership;
|
||||||||||
Director,
Pope MGP, Inc.
|
||||||||||
Thomas
M. Ringo
|
Vice
President and CFO, Pope MGP,
|
37,384 |
(3)
|
* | ||||||
Inc. and
the Partnership
|
||||||||||
John
E. Conlin
|
Director,
Pope MGP, Inc.
|
17,145 |
(4)
|
* | ||||||
Douglas
E. Norberg
|
Director,
Pope MGP, Inc.
|
67,563 |
(5)
|
1.4 | ||||||
Peter
T. Pope
|
Director,
Pope MGP, Inc. and Pope
|
342,042 |
(6)
|
7.2 | ||||||
EGP,
Inc.; President, Pope EGP, Inc.
|
||||||||||
J. Thurston
Roach
|
Director,
Pope MGP, Inc.
|
9,750 |
(7)
|
* | ||||||
Pope
EGP, Inc.
|
Equity
General Partner of the
|
54,000 | 1.1 | |||||||
Partnership
|
||||||||||
Pope
MGP, Inc.
|
Managing
General Partner of the
|
6,000 | * | |||||||
Partnership
|
||||||||||
All
general partners, directors and officers of general partners, and officers
of the
|
584,784 |
(8)
|
12.3 | |||||||
Partnership
as a group (6 individuals and 2 entities)
|
* Less
than 1%
** The
address of each of these parties is c/o Pope Resources, 19245 Tenth Avenue NE,
Poulsbo, WA 98370.
(1)
|
Each
beneficial owner has sole voting and investment power unless otherwise
indicated. Includes unit options that are exercisable within 60
days but excludes those options where the exercise price renders them
anti-dilutive. Also includes restricted units that are both vested and
unvested since beneficial owner receives distributions on all such
restricted units.
|
(2)
|
Units
shown for Mr. Nunes include 50,750 owned units, 19,150 of unvested
restricted units, and options to purchase 41,000 units that are
exercisable within 60 days.
|
(3)
|
Units
shown for Mr. Ringo include 20,734 owned units, 8,550 unvested restricted
units, and options to purchase 8,100 units that are exercisable within 60
days.
|
(4)
|
Includes
2,250 unvested restricted units issued to Mr.
Conlin.
|
(5)
|
Units
shown for Mr. Norberg include 22,803 owned units, currently exercisable
options to purchase 42,510 units, and 2,250 unvested restricted
units. Excludes
a total of 2,096 options because their exercise price renders them
anti-dilutive.
|
(6)
|
Includes
(a) 200,925 units held by a limited liability company controlled by Mr.
Pope; (b) 25,420 units owned by Mr. Pope; (c) 44,600 units held in trust
for his children; (d) 60,000 units held by Pope MGP, Inc. and Pope EGP,
Inc., as to which he shares investment and voting power; (e) currently
exercisable options to purchase 8,847 units; and (f) 2,250 unvested
restricted units.
|
94
(7)
|
Includes
1,500 owned units, currently exercisable options to purchase 6,000 units
issued to Mr. Roach, and 2,250 unvested restricted
units.
|
(8)
|
For
this computation, the 60,000 units held by Pope MGP, Inc. and Pope EGP,
Inc. are excluded from units beneficially owned by Mr.
Pope. Mr. Pope and Emily T. Andrews, own all of the outstanding
stock of Pope MGP, Inc. and Pope EGP, Inc. Includes currently
exercisable options to purchase 106,457 units and 36,700 unvested
restricted units. Excludes
a total of 2,096 options because their exercise price renders them
anti-dilutive.
|
Equity Compensation Plan
Information
The following table presents certain
information with respect to the Partnership’s equity compensation plans and
awards thereunder on December 31, 2009.
Plan category
|
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
|
|||||||||
Equity
compensation plans approved by security holders
|
163,053 | $ | 15.86 | 1,028,744 | ||||||||
Equity
compensation plans not approved by security holders
|
- | - | - | |||||||||
Total
|
163,053 | $ | 15.86 | 1,028,744 |
Item
13.
|
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS
|
The
Partnership Agreement provides that it is a complete defense to any challenge to
an agreement or transaction between the Partnership and a general partner, or
related person, due to a conflict of interest if, after full disclosure of the
material facts as to the agreement or transaction and the interest of the
general partner or related person, (1) the transaction is authorized, approved
or ratified by a majority of the disinterested directors of the General Partner,
or (2) the transaction is authorized by partners of record holding more than 50%
of the units held by all partners.
General Partner Fee. Pope MGP, Inc. receives
an annual fee of $150,000, and reimbursement of administrative costs for its
services as managing general partner of the Partnership, as stipulated in the
Partnership Agreement.
Noncontrolling Interest Payments.
The
noncontrolling interest represents Pope MGP, Inc.’s profit-sharing interest in
the IPMB. Net income from the IPMB is paid 80% to ORM, Inc. and 20%
to Pope MGP, Inc. until net income from the IPMB reaches $7.0 million in a
fiscal year, at which time income will be allocated evenly between ORM, Inc. and
Pope MGP, Inc.
95
ORM Timber Fund I, LP (“Fund I”).
Pope
Resources, A Delaware Limited Partnership owns 19% and Olympic Resource
Management LLC owns 1% and is the general partner of Fund I. David L.
Nunes and Thomas M. Ringo have committed to invest less than 1% of the committed
capital in Fund I. The majority of this commitment was paid in the
fourth quarter of 2006 when Fund I acquired timberland.
Item
14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The
following table summarizes fees related to the Partnership’s principal
accountants, KPMG LLP, during 2009 and 2008.
Description
of services
|
2009
|
%
|
2008
|
%
|
||||||||||||
Audit
(1)
|
$ | 325,000 | 79 | % | $ | 356,000 | 81 | % | ||||||||
Audit
related (2)
|
40,000 | 10 | % | 39,000 | 9 | % | ||||||||||
Tax
(3):
|
||||||||||||||||
Tax
return preparation
|
9,200 | 2 | % | 33,000 | 8 | % | ||||||||||
General
tax consultation
|
35,000 | 9 | % | 8,000 | 2 | % | ||||||||||
Total
|
$ | 409,200 | 100 | % | $ | 436,000 | 100 | % |
(1) Fees
represent the arranged fees for the years presented, including the annual audit
of internal controls as mandated under Sarbanes-Oxley section 404, and
out-of-pocket expenses reimbursed during the years presented.
(2) Fees
consist of fees paid in connection with the audits of Olympic Resource
Management LLC and ORM Timber Fund I LP.
(3) Fees
paid for professional services in connection with tax consulting and tax return
preparation.
Prior to
hiring KPMG LLP to provide services to the Partnership, anticipated fees and a
description of the services are presented to the Audit Committee. The
Audit Committee then either agrees to hire KPMG LLP to provide the services or
directs management to find a different service provider.
PART
IV
Item
15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULE
|
Financial Statements
|
Page
|
|
Reports
of Independent Registered Public Accounting Firm
|
53
|
|
Consolidated
Balance Sheets
|
55
|
|
Consolidated
Statements of Operations
|
56
|
|
Consolidated
Statements of Partners’ Capital and Comprehensive Income
(loss)
|
57
|
|
Consolidated
Statements of Cash Flows
|
58
|
|
Notes
to Consolidated Financial Statements
|
60
|
|
Financial
Statement Schedule
|
97
|
96
Financial Statement
Schedule
Environmental Remediation Liability
|
||||||||||||||||
Balances at the
Beginning of the
Period
|
Additions to
Accrual
|
Expenditures
for
Remediation
|
Balances at
the End of the
Period
|
|||||||||||||
Year
Ended December 31, 2007
|
$ | 242,000 | $ | 1,878,000 | $ | 126,000 | $ | 1,994,000 | ||||||||
Year
Ended December 31, 2008
|
1,994,000 | - | 440,000 | 1,554,000 | ||||||||||||
Year
Ended December 31, 2009
|
1,554,000 | 30,000 | 315,000 | 1,269,000 |
97
Exhibits.
No.
|
Document
|
|
3.1
|
Certificate
of Limited Partnership. (1)
|
|
3.2
|
Limited
Partnership Agreement, dated as of November 7,
1985. (1)
|
|
3.3
|
Amendment
to Limited Partnership Agreement dated December 16,
1986. (2)
|
|
3.4
|
Amendment
to Limited Partnership Agreement dated March 14,
1997. (4)
|
|
3.5
|
Certificate
of Incorporation of Pope MGP, Inc. (1)
|
|
3.6
|
Amendment
to Certificate of Incorporation of Pope MGP,
Inc. (3)
|
|
3.7
|
Bylaws
of Pope MGP, Inc. (1)
|
|
3.8
|
Certificate
of Incorporation of Pope EGP, Inc. (1)
|
|
3.9
|
Amendment
to Certificate of Incorporation of Pope EGP,
Inc. (3)
|
|
3.10
|
Bylaws
of Pope EGP, Inc. (1)
|
|
3.11
|
Amendment
to Limited Partnership Agreement dated October 30, 2007.
(12)
|
|
4.1
|
Specimen
Depositary Receipt of Registrant. (1)
|
|
4.2
|
Limited
Partnership Agreement dated as of November 7, 1985, as amended December
16, 1986 and March 14, 1997 (see Exhibits 3.2, 3.3
and 3.4).
|
|
9.1
|
Shareholders
Agreement entered into by and among Pope MGP, Inc., Pope EGP, Inc., Peter
T. Pope, Emily T. Andrews, P&T, present and future directors of Pope
MGP, Inc. and the Partnership, dated as of November 7, 1985 included as
Appendix C to the P&T Notice and Proxy Statement filed with the
Securities and Exchange Commission on November 12, 1985, a copy of which
was filed as Exhibit 28.1 to the Partnership’s registration on Form 10
identified in footnote (1) below. (1)
|
|
10.1
|
Transfer
and Indemnity Agreement between the Partnership and P&T dated as of
December 5, 1985. (1)
|
|
10.2
|
Environmental
Remediation Agreement. (7)
|
|
10.3
|
1997
Unit Option Plan Summary. (5)
|
|
10.4
|
Audit
Committee Charter. (10)
|
|
10.5
|
Timberland
Deed of Trust and Security Agreement with Assignment of Rents between Pope
Resources, Jefferson Title Company and John Hancock Mutual Life Insurance
Company dated April 29, 1992. (6)
|
|
10.6
|
Amendment
to Timberland Deed of Trust and Security Agreement with Assignment of
Rents between Pope Resources, Jefferson Title Company and John Hancock
Mutual Life Insurance Company dated May 13,
1992. (6)
|
98
10.7
|
Second
Amendment to Timberland Deed of Trust and Security Agreement with
Assignment of Rents between Pope Resources, Jefferson Title Company and
John Hancock Mutual Life Insurance Company, dated May 25
1993. (6)
|
|
10.8
|
Third
Amendment to Timberland Deed of Trust and Security Agreement with
Assignment of Rents between Pope Resources, Jefferson Title Company and
John Hancock Mutual Life Insurance Company dated December 19,
1995. (6)
|
|
10.9
|
Fourth
Amendment to Timberland Deed of Trust and Security Agreement with
Assignment of Rents between Pope Resources, Jefferson Title Company and
John Hancock Mutual Life Insurance Company dated December 20,
1999. (6)
|
|
10.10
|
Amended
and Restated Timberland Deed of Trust and Security Agreement with
Assignment of Rents and Fixture Filing between Pope Resources and John
Hancock Life Insurance Company dated March 29,
2001. (6)
|
|
10.11
|
Promissory
Note from Pope Resources to John Hancock Mutual Life Insurance Company
dated April 29, 1992. (6)
|
|
10.12
|
Amendment
to Promissory Note from Pope Resources to John Hancock Mutual Life
Insurance Company dated May 25, 1993. (6)
|
|
10.13
|
Second
Amendment to Promissory Note from Pope Resources to John Hancock Mutual
Life Insurance Company, dated December 19,
1995. (6)
|
|
10.14
|
Third
Amendment to Promissory Note from Pope Resources to John Hancock Mutual
Life Insurance Company dated December 20,
1999. (6)
|
|
10.15
|
Fourth
Amendment to Promissory Note from Pope Resources to John Hancock Mutual
Life Insurance Company dated March 29,
2001. (6)
|
|
10.16
|
Note
Purchase Agreement between Pope Resources, John Hancock Life Insurance
Company and John Hancock Variable Life Insurance Company, dated March 29,
2001. (6)
|
|
10.17
|
Class
A Fixed Rate Senior Secured Note from Pope Resources to John Hancock Life
Insurance Company dated March 29, 2001, in the principal amount of
$23,500,000. (6)
|
|
10.18
|
Class
A Fixed Rate Senior Secured Note from Pope Resources to John Hancock Life
Insurance Company dated March 29, 2001 in the principal amount of
$4,500,000. (6)
|
|
10.19
|
Class
A Fixed Rate Senior Secured Note from Pope Resources to John Hancock
Variable Life Insurance Company dated March 29, 2001, in the principal
amount of $2,000,000. (6)
|
|
10.20
|
Timberland
Deed of Trust and Security Agreement With Assignment of Rents and Fixture
Filing between Pope Resources, Jefferson Title Company and John Hancock
Life Insurance Company, dated March 29,
2001. (6)
|
|
10.21
|
Purchase
and sale agreement with Costco Wholesale Corp dated December 22, 2003.
(8)
|
|
10.23
|
Form
of Change of control agreement. (10)
|
|
10.25
|
Purchase
and sales agreement for Quilcene Timberlands dated September 28, 2004.
(9)
|
99
10.26
|
Long
term management agreement with Cascade Timberlands LLC dated December 31,
2004. (9)
|
|
10.29
|
First
amendment to Note purchase agreement with John Hancock Life Insurance
Company. (10)
|
|
10.30
|
Second
amendment to Note purchase agreement with John Hancock Life Insurance
Company. (10)
|
|
10.31
|
Third
amendment to Note purchase agreement with John Hancock Life Insurance
Company. (10)
|
|
10.32
|
Fourth
amendment to Note purchase agreement with John Hancock Life Insurance
Company. (10)
|
|
10.33
|
Pope
Resources 2005 Unit Incentive Plan. (11)
|
|
10.34
|
Master
Loan Agreement between Pope Resources and Northwest Farm Credit Services,
PCA dated July 31, 2008. (15)
|
|
10.35
|
Revolving
Operating Note from Pope Resources to Northwest Farm Credit Services, PCA
dated July 31, 2008. (15)
|
|
10.36
|
Master
Loan Agreement between Pope Resources and Northwest Farm Credit Services,
PCA dated September 25, 2009. (16)
|
|
10.37
|
Term
Note from Pope Resources to Northwest Farm Credit Services, PCA dated
September 25, 2009. (16)
|
|
10.38
|
First
amendment to revolving operating note with Northwest Farm Credit Services,
PCA dated September 25, 2009. (16)
|
|
10.39
|
Mortgage
to Northwest Farm Credit Services, PCA, dated September 25, 2009.
(16)
|
|
18.1
|
Letter
from Independent Registered Public Accounting Firm related to change in
accounting principle. (16)
|
|
23.1
|
Consent
of Registered Independent Public Accounting Firm. (13)
|
|
31.1
|
Certificate
of Chief Executive Officer. (13)
|
|
31.2
|
Certificate
of Chief Financial Officer. (13)
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(13)
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(13)
|
|
99.1
|
Press
Release of the Registrant dated February 12, 2010
(14)
|
100
(1)
|
Incorporated
by reference from the Partnership’s registration on Form 10 filed under
File No. 1-9035 and declared effective on December 5,
1985.
|
(2)
|
Incorporated
by reference from the Partnership’s annual report on Form 10-K for the
fiscal year ended December 31,
1987.
|
(3)
|
Incorporated
by reference from the Partnership’s annual report on Form 10-K for the
fiscal year ended December 31, 1988.
|
(4)
|
Incorporated
by reference from the Partnership’s Proxy Statement filed on February 14,
1997.
|
(5)
|
Incorporated
by reference to the Company’s Form S-8 Registration Statement (SEC file
number 333-46091) filed with the Commission on February 11,
1998.
|
(6)
|
Incorporated
by reference to the Partnership’s annual report on Form 10-K for the
fiscal year ended December 31,
2001.
|
(7)
|
Incorporated
by reference to the Partnership’s annual report on Form 10-K for the
fiscal year ended December 31,
2002.
|
(8)
|
Incorporated
by reference to the Partnership’s annual report on Form 10-K for the
fiscal year ended December 31,
2003.
|
(9)
|
Incorporated
by reference to the Partnership’s annual report on Form 10-K for the
fiscal year ended December 31,
2004.
|
(10)
|
Incorporated
by reference to the Partnership’s annual report on Form 10-K for the
fiscal year ended December 31,
2005.
|
(11)
|
Filed
with Form S-8 on September 9, 2005.
|
(12)
|
Incorporated
by reference to the Partnership’s annual report on Form 10-K for the
fiscal year ended December 31,
2007.
|
(13)
|
Filed
with this annual report for the fiscal year ended December 31,
2009.
|
(14)
|
Incorporated
by reference to the Current Report on Form 8-K filed by the Registrant on
February 12, 2010.
|
(15)
|
Incorporated
by reference to the Current Report on Form 10-Q filed by the Registrant on
August 6, 2008.
|
(16)
|
Incorporated
by reference to the Current Report on Form 10-Q filed by the Registrant
November 5, 2009.
|
101
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Partnership has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
POPE
RESOURCES, A Delaware
|
||
Limited
Partnership
|
||
By
POPE MGP, INC.
|
||
Managing
General Partner
|
Date:
March 10, 2010
|
By
/s/ David L. Nunes
|
|
President
and
|
||
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Partnership and in the
capacities and on the date indicated.
Date:
March 10, 2010
|
By /s/
David L. Nunes
|
|
David
L. Nunes,
|
||
President
and Chief Executive Officer (principal executive officer), Partnership and
Pope MGP, Inc.; Director, Pope MGP, Inc.
|
||
Date:
March 10, 2010
|
By /s/
Thomas M. Ringo
|
|
Thomas
M. Ringo
|
||
Vice
President & CFO (principal financial and accounting officer),
Partnership and Pope MGP, Inc.
|
||
Date:
March 10, 2010
|
By /s/
John E. Conlin
|
|
John
E. Conlin
|
||
Director,
Pope MGP, Inc.
|
||
Date:
March 10, 2010
|
By /s/
Douglas E. Norberg
|
|
Douglas
E. Norberg
|
||
Director,
Pope MGP, Inc.
|
||
Date:
March 10, 2010
|
By /s/
Peter T. Pope
|
|
Peter
T. Pope
|
||
Director,
Pope MGP, Inc.
|
||
Date:
March 10, 2010
|
By /s/
J. Thurston Roach
|
|
J.
Thurston Roach
|
||
Director,
Pope MGP,
Inc.
|