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 tree farms. Timberland
Management & Consulting, through our subsidiary, Olympic Resource Management
LLC (“ORMLLC”), provides timberland management and forestry consulting services
to owners of timberlands as well as providing general partner and timberland
management services on behalf of ORM Timber Fund I, LP (the “Fund”), which owned
24,000 acres of timberlands in western Washington as of December 31,
2007. Our total equity investment in the Fund is $11.7 million, which
represents a 20% interest in the Fund’s total invested capital of $58.0
million. Real Estate operations consist of efforts to enhance the
value of our land investments 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
11 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.orm.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 70,000
acres located in the Hood Canal area of Washington, and the 43,000-acre
Columbia tree farm
located in southwestern Washington State. The Partnership views its
two tree farms as 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 of
the growing of timber and the subsequent harvesting and marketing of timber and
timber products to both domestic and Pacific Rim markets. Our Fee
Timber segment produced 68%, 53%, and 78% of our consolidated revenue in 2007,
2006, and 2005, respectively.
Beginning in 2007 this segment also
includes operations of the Fund, which is consolidated into our financial
statements. The Fund acquired 24,000 acres of timberland in the
fourth quarter of 2006. We harvested 5 million board feet (MMBF) from
these timberlands in 2007. Harvest and other operations of the
Fund are not expected to contribute significantly to income as a separate
depletion pool is applied to this harvest volume. The depletion
charge is expected to approximate net stumpage realized (delivered log price
less harvesting and transportation cost) from the harvest. Olympic
Resource Management LLC is the Fund’s general partner and earns management fees
and incurs expenses resulting from managing the Fund. These fees are
eliminated in consolidation of our financial results.
Inventory
. Inventory
information presented below includes only the Hood Canal and Columbia tree
farms. The Fund tree farms are broken out and discussed
separately.
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, 2007, the tree farms’ total
merchantable inventory volume was estimated to be 356 MMBF, which compares to
estimated merchantable timber inventory volume of 392 MMBF at December 31,
2006. The decline in merchantable inventory from 2006 to 2007 results
primarily from harvest of merchantable stands, less the growth of remaining
stands of timber. The Fund’s merchantable inventory as of December
31, 2007 was 50 MMBF.
The
Partnership’s merchantable inventory is spread among five-year age classes as
follows:
|
|
|
December
31,
|
|
Age
Class
|
|
|
2007
Volume
(in
MMBF)
|
|
|
2006
Volume
(in
MMBF)
|
|
35
to 39
|
|
|
|
68
|
|
|
|
79
|
|
40
to 44
|
|
|
|
73
|
|
|
|
67
|
|
45
to 49
|
|
|
|
32
|
|
|
|
31
|
|
50
to 54
|
|
|
|
11
|
|
|
|
18
|
|
55
to 59
|
|
|
|
47
|
|
|
|
57
|
|
60
to 64
|
|
|
|
64
|
|
|
|
75
|
|
65
+
|
|
|
61
|
|
|
|
65
|
|
|
|
|
|
|
356
|
|
|
|
392
|
|
The Fund’s
merchantable inventory is spread among age classes as follows:
|
|
December
31,
|
Age
Class
|
|
2007
Volume
(in
MMBF)
|
35
to 39
|
|
5
|
40
to 44
|
|
9
|
45
to 49
|
|
1
|
50
to 54
|
|
14
|
55
to 59
|
|
7
|
60
to 64
|
|
1
|
65+
|
|
13
|
|
|
50
|
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, and other harvest
restrictions. The Partnership annually cruises about 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, inventory species on the Partnership’s tree farms include western
hemlock, western red cedar, and red alder.
The
Partnership’s total merchantable timber inventory as of December 31, 2007 is
distributed among species as follows:
Species
|
|
Volume
(in
MMBF)
|
|
|
Percent
of total
|
|
Douglas-fir
|
|
|
264
|
|
|
|
74
|
%
|
Western
hemlock
|
|
|
45
|
|
|
|
13
|
%
|
Western
red cedar
|
|
|
11
|
|
|
|
3
|
%
|
Other
conifer
|
|
|
12
|
|
|
|
3
|
%
|
Red
alder
|
|
|
20
|
|
|
|
6
|
%
|
Other
hardwood
|
|
|
4
|
|
|
|
1
|
%
|
Total
|
|
|
356
|
|
|
|
100
|
%
|
The Fund’s
total merchantable timber inventory as of December 31, 2007 is distributed among
species as follows:
Species
|
|
Volume
(in
MMBF)
|
|
|
Percent
of total
|
|
Douglas-fir
|
|
|
20
|
|
|
|
40
|
%
|
Western
hemlock
|
|
|
17
|
|
|
|
34
|
%
|
Western
red cedar
|
|
|
1
|
|
|
|
2
|
%
|
Other
conifer
|
|
|
9
|
|
|
|
18
|
%
|
Red
alder
|
|
|
2
|
|
|
|
4
|
%
|
Other
hardwood
|
|
|
1
|
|
|
|
2
|
%
|
Total
|
|
|
50
|
|
|
|
100
|
%
|
The Hood
Canal tree farm has significant acreage with mature timber and even more acreage
with relatively immature trees, which results in what we call a “bimodal” age
class pattern that management believes is common among western U.S. timberland
owners. This bimodal pattern can be dealt with in three primary ways:
(1) delay harvests of mature acres to backfill what would otherwise be smaller
harvest years until the immature trees become merchantable; (2) harvest the
mature acres at a rate that more closely approximates rotation age and allow
later harvest cash flows to decline for some period while the younger stands
mature; or (3) acquire timberland properties with age-class characteristics that
fill in the trough in the bimodal pattern. The acquisition of the
Columbia tree farm in 2001 is an example of a strategic timberland acquisition
where the Partnership acquired a tree farm with age-class characteristics that
helped to fill in age classes where the Hood Canal tree farm was
deficient. Management believes it not only made a sound value
investment on its own merits in acquiring the Columbia tree farm, but also made
significant progress toward smoothing the age-class distribution of the
Partnership’s timberland holdings.
The
Partnership’s tree farms as of December 31, 2007 total 113,000 acres excluding
the Fund’s tree farms. Of this total, approximately 96,000 acres are
designated productive acres. The Fund’s tree farms as of December 31,
2007 totaled nearly 24,000 acres, of which approximately 20,000 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. As of December 31, 2007, total
productive acres are spread by timber age class as follows:
Age
Class
|
|
12/31/2007
Partnership
Acres
|
|
|
%
|
|
|
12/31/2007
Fund
Acres
|
|
|
%
|
|
Clear-cut
|
|
|
1,800
|
|
|
|
2
|
%
|
|
|
154
|
|
|
|
1
|
%
|
0 to
4
|
|
|
9,474
|
|
|
|
10
|
%
|
|
|
590
|
|
|
|
3
|
%
|
5 to
9
|
|
|
9,997
|
|
|
|
10
|
%
|
|
|
1,432
|
|
|
|
7
|
%
|
10
to 14
|
|
|
9,734
|
|
|
|
10
|
%
|
|
|
1,797
|
|
|
|
9
|
%
|
15
to 19
|
|
|
8,712
|
|
|
|
9
|
%
|
|
|
3,191
|
|
|
|
16
|
%
|
20
to 24
|
|
|
17,297
|
|
|
|
18
|
%
|
|
|
4,195
|
|
|
|
21
|
%
|
25
to 29
|
|
|
14,921
|
|
|
|
16
|
%
|
|
|
2,714
|
|
|
|
13
|
%
|
30
to 34
|
|
|
5,698
|
|
|
|
6
|
%
|
|
|
3,529
|
|
|
|
18
|
%
|
35
to 39
|
|
|
4,888
|
|
|
|
5
|
%
|
|
|
463
|
|
|
|
2
|
%
|
40
to 44
|
|
|
4,033
|
|
|
|
4
|
%
|
|
|
518
|
|
|
|
3
|
%
|
45
to 49
|
|
|
1,822
|
|
|
|
2
|
%
|
|
|
84
|
|
|
|
0
|
%
|
50
to 54
|
|
|
542
|
|
|
|
1
|
%
|
|
|
660
|
|
|
|
3
|
%
|
55
to 59
|
|
|
1,987
|
|
|
|
2
|
%
|
|
|
267
|
|
|
|
1
|
%
|
60
to 64
|
|
|
2,675
|
|
|
|
3
|
%
|
|
|
34
|
|
|
|
0
|
%
|
65+
|
|
|
2,315
|
|
|
|
2
|
%
|
|
|
535
|
|
|
|
3
|
%
|
|
|
|
95,895
|
|
|
|
100
|
%
|
|
|
20,163
|
|
|
|
100
|
%
|
The
Partnership's 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 Washington State Forest Practices Act. 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 updates this
plan periodically to take into account changes in timber inventory, including
species mix, 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. Recent
timberland acquisitions stocked primarily with merchantable timber have been
harvested over the last two years resulting in incremental harvest volume in
excess of our expected long term harvest levels. These incremental
harvests are now complete, and management expects a return to relatively
consistent annual long-term harvest volume of approximately 49 MMBF for our tree
farms and 8 MMBF for the Fund. However, as discussed below in greater
detail, given the relatively poor log markets experienced in late 2007 and
expected to continue at least through 2008, we have decided to defer
approximately 36% of our sustainable harvest. As a result our planned
harvest for 2008 is 32 MMBF on fee lands and 5 MMBF on the Fund
lands. The deferred harvest will be harvested 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. Our principal
international market is the Pacific Rim. Logs going to this
destination are generally sold to U.S.-based brokers who in turn sell direct to
offshore customers. Japan is by far the largest buyer of logs in the
Pacific Rim market, though Korea and China represent secondary export markets
that our customers sell to from time to time. 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.
We had two
major customers in our Fee Timber segment in 2007: Simpson Timber Company and
Interfor, which represented 13% and 12%, respectively, of segment
revenue. Similarly, in 2006 the Fee Timber segment had two major
customers, Simpson Timber Company and Weyerhaeuser Company, which represented
29% and 19%, respectively, of segment revenue. Mill competition for
available log supply is an important factor in the harvest and sale of
logs. For a number of years beginning in the mid-1990’s, we observed
in our operating areas a trend toward lumber mill ownership consolidation and
mill closure. This trend has eased over the last several years with
the actual and announced openings of several new mills in the Puget Sound
region. Management believes that the current weak markets for logs
and lumber may renew the trend towards consolidation in mill ownership and/or
mill closure over the coming years. These factors could cause a
decline in prices realized for the Partnership’s logs. The
Partnership delivered logs to over 40 separate customers during
2007.
Competition
. Many
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, and fertilization. During 2007, the Partnership planted
1,197,000 seedlings on 2,751 acres. This compares to the years 2006
and 2005 in which the Partnership planted 1,119,000 and 950,000 seedlings on
2,649 and 2,290 acres, respectively. Seedlings are generally planted
from December to April depending on weather and soil conditions. The
number of acres and seedlings planted 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.
Sustainable Forestry Initiative
(SFI®).
Since 2001, we have been a member of the SFI forest
certification program. Beginning in 2003, in conjunction with
participation in the 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 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 from every three years to annually. We were
re-certified in 2007, including the newly acquired Fund
lands. 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 best
price 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.
To
date, the Timberland Management & Consulting segment’s key operation has
been to provide various aspects of timberland management services to third-party
timberland owners. The Timberland Management & Consulting segment
represents 3%, 5% and 14% of consolidated revenue for the years ended December
31, 2007, 2006, and 2005, respectively.
Timberland
Investment Management.
The goal of our timberland investment
management program is to build and manage diversified timberland portfolios for
investors. Progress toward this goal includes the 2005 closing of the
ORM Timber Fund I, LP (the “Fund”) with equity capital commitments of $61.8
million. The two-year drawdown period for the Fund ended on August 1,
2007, during which time the Fund had invested $58.5 million of its capital
commitment and released investors from the remaining $3.2 million of equity
capital commitment. The $58.5 million of invested capital was used to
acquire two separate tree farms in Washington State totaling approximately
24,000 acres. These tree farms represent relatively young properties
that are expected to result in a low cash-on-cash yield during the ten-year
investment term. Most of the anticipated investment return for the
Fund will be generated upon disposition when a large portion of the Fund’s
acreage currently stocked with pre-merchantable timber will grow into
higher-value merchantable timber stands. ORMLLC earns an asset
management fee for serving as general partner of the Fund. In
addition to serving as general partner of the Fund, ORMLLC earns a management
fee for providing timberland management services to the Fund.
In 2007, we began marketing ORM Timber
Fund II, Inc. (Fund II), which we expect to close in the first half of 2008 with
capital commitments in excess of $100 million. Capital committed to
each of these funds includes a 20% co-investment by the
Partnership. Once a fund is closed, the drawdown period begins,
during which time we seek suitable properties to acquire on behalf of the
fund. The drawdown period is typically two years, but can be extended
an additional year by a vote of the investors in the Fund. Investors
fulfill their capital commitment as timberland properties are
acquired.
Timberland
Management.
As the name suggests, 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. In December 2004, following an 18-month bankruptcy
process, a court-approved liquidation plan transferred the ownership of 522,000
acres formerly owned by Crown Pacific LP to Cascade Timberlands LLC
(“Cascade”). On January 1, 2005 ORMLLC began managing those
timberlands for Cascade. Timberland sales by Cascade in 2005 to 2007
have reduced the current acres under management for Cascade to approximately
292,000 acres of Oregon timberland. In 2007, Cascade was the
Timberland Management & Consulting segment’s major customer, accounting for
67% of segment revenue. At the end of 2006, ORM and Cascade entered
into a three-year management agreement for the Oregon timberlands that expires
in 2009 or upon the earlier sale of the managed property. It is the
goal of Cascade to ultimately dispose of these assets.
Forestry
Consulting.
In addition to its timberland management
activities, ORMLLC also earns nominal revenue by providing forestry-consulting
services to third-party owners and managers of timberland assets in Washington,
Oregon, and California. In the last three years, the majority of the
field services were provided by our McCloud, California field office and
staff. We elected to close this office effective December 31, 2007 in
order to focus our attention more squarely on timberland management
activities.
Marketing.
ORMLLC
pursues third-party timberland management opportunities in the U.S. West
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 2007 includes one client that represented 67% of segment
revenue.
Competition.
ORMLLC
and its subsidiaries compete against both larger and smaller companies providing
similar services. There are approximately 19 established timberland
investment management organizations competing against us in the timberland
portfolio development business. 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
Fund and Fund II are examples of timberland investment management
activities. Now that Fund I has acquired timberland properties, both
timberland management and asset management fees are earned from administering
the Fund. These activities are, as well as the development and
marketing costs associated with Fund I and Fund II, part of the
IPMB.
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 $5,000,000, including debt
guarantees. As of December 31, 2007 cumulative expenditures incurred
in pursuit of IPMB opportunities, including guarantees, were less than
cumulative income generated. Therefore, cumulative net expenditures
as of December 31, 2007 against the $5,000,000 limit are zero.
Allocation of
Income
:
In addition, 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 our timberlands
in terms of best economic use, whether this means continuing to grow and harvest
timber or seeking a rezone of the property for sale or
development. After logging our timberlands, management has four
primary options for what to do next with the land: reforest it; sell it as
undeveloped property; improve it to various levels of development for sale as
improved property; or to hold it as property slated for later development or
sale.
Operations.
Real
Estate operations include work considered by management necessary to maximize
the value of the Partnership’s approximately 2,600-acre portfolio of property
that management believes has a higher-and-better-use other than timberland, and
leasing residential and commercial properties in the Port Gamble town
site. The former objective is generally obtained by securing the
entitlements and/or physical improvements necessary to make development
possible. The Real Estate segment represents 29%, 42%, and 8% of
consolidated revenue in 2007, 2006, and 2005, 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 measured by the square foot to
large lots of recently cutover timberland where value is measured in per acre
terms. In general, value-adding activities include securing favorable
zoning and obtaining final plat approvals to allow for the highest and best use
of the properties.
We are
working on master planned communities in Gig Harbor, Bremerton, Kingston
and Hansville, Washington. Due to each respective 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 aimed at a particular portion of the
value-spectrum is the development of our “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 originally
comprising 327 acres. After 2007 sales, the Partnership has a
property inventory including a 16-acre retail/commercial site, 32-acres of
business park lots, and 203-acres of land with residential
zoning. During 2007, we fulfilled our obligations relating to road
and utility infrastructure improvements, allowing revenue from the 2006
sale of 6 acres zoned for retail/commercial use to be recognized. A 6
acre business park lot sale to a local church was also completed, and we entered
into a purchase contract for the remaining 16-acre retail/commercial
parcel. We are currently planning for the residential portion of this
property, 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.
Bremerton
. In
1999 the City of Bremerton approved our request for a planned 264-acre mixed-use
development on our property located within the Bremerton city
limits. The development plan included 64 acres zoned for industrial
use and 200 acres zoned for residential. In 2006, the Partnership
completed the sale of the 200-acre residential land. As a condition
of the sale, the Partnership constructed infrastructure in 2006 and 2007 to
serve the property. The remaining 64 acres of property zoned as
industrial park is being developed in two phases with a total of 24 lots with 9
acres set aside for roads and other common area improvements. The
construction for the 9-lot Phase I was completed in 2007 and this set the stage
for the sale of 2 lots at the end of the year. The timing for the
construction of Phase II will be dependent on the absorption rate for remaining
Phase I lots.
Kingston
.
In
2005, management successfully championed the inclusion of the Partnership’s
356-acre primarily residential development project inside the Kingston Urban
Growth Area, which thereby increased the property’s potential development
density and value. After a lengthy appeals process, the Central Puget
Sound Growth Management Hearings Board validated the expansion of the Urban
Growth Area in 2006 to include this property with vested Urban Cluster
Residential zoning. The Partnership prepared and submitted a formal
master plan and subdivision application in 2007 that calls for the development
of 750 residential units. The Partnership owns an additional 366
acres bordering this project for which Kitsap County has an option expiring
in 2008 to purchase and expand the existing county park. This
neighboring property can be subdivided into 5-acre lots if the County does not
exercise its option.
Hansville.
The Partnership has a 152-acre residential development project in Hansville
called Chatham. The development is the result of a plat from 1913
that consisted of 10-acre lots that management has reestablished creating a
total of 19 lots. Construction of 2,300 feet of road, utilities, and
a gated front entrance was completed in 2007 and marketing is underway to sell
the lots.
Rural
Residential.
Management has launched the Rural Lifestyles
program to sell rural residential lots after harvest is completed or with
properties that have marginal timber value or are encumbered by extended logging
moratoriums. 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.
Commercial
Properties
Port
Gamble.
We currently own and operate 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 (GMA) 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.
P&T operated a sawmill at Port
Gamble, from 1853 to 1995 and for the last seven years we have been working with
P&T to remedy environmental contamination at the town and mill sites and to
monitor results of the cleanup efforts. After contamination was
discovered at the town site, millsite, and in the adjacent bay, we entered into
a settlement and remediation agreement with P&T pursuant to which both
parties allocated responsibility for cleanup costs. Under Washington
law, both Pope Resources and P&T are "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 based upon
their role in operating the site and upon their relatively lengthy
ownership. The P&T agreement resulted in the termination of a
lease by P&T to operate the mill site as well as providing for the
initiation of environmental cleanup activities, the responsibility for which has
been shared by us and P&T. Under that agreement P&T took
responsibility for the landfills and cleanup of Port Gamble Bay and the
Partnership took responsibility of 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, P&T sought bankruptcy protection
under Canadian law in October 2007 and filed a petition under Chapter 11 of the
U.S. Bankruptcy Code in Delaware in November 2007. These
events involving P&T raise substantial doubt in management's view as to
whether P&T will satisfy all or any portion of its remaining obligations
under our settlement and remediation agreement. Accordingly, we have
increased our remediation liability by $1.9 million to reflect our current
estimate of the remediation costs. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Results of
Operations – Real Estate – Environmental Remediation Costs.”
Marketing.
Marketing
activities in the Real Estate segment during 2007 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 individual and
commercial tenants.
Competition
. Our
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 our Real Estate portfolio are strongly influenced by transportation
limitations 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
ferries. In 2007, the Washington State Department of Transportation
completed a multi-year construction project to complete a new 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.
Employees.
As of December 31, 2007
,
the Partnership employed 49
full-time, year-round salaried employees and 6 part-time and seasonal personnel,
who are distributed among the segments as follows:
Segment
|
|
Full-Time
|
|
Part-Time/
Seasonal
|
|
Total
|
Fee
Timber
|
|
17
|
|
3
|
|
20
|
Timberland
Management & Consulting
|
|
7
|
|
1
|
|
8
|
Real
Estate
|
|
15
|
|
2
|
|
17
|
General
& Administrative
|
|
10
|
|
0
|
|
10
|
Totals
|
|
49
|
|
6
|
|
55
|
We closed our office in McCloud,
California at the end of 2007. The employees in that operation are
not reflected in the table above. 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 Washington State land
use and environmental laws. Management's objective is to be in
compliance with such laws and regulations at all times. We anticipate
that increasingly strict requirements relating to the environment, threatened
and endangered species, natural resources, forestry operations, and health and
safety matters, as well as increasing social concern over environmental issues
may result in additional restrictions on the timber operations of the
Partnership. This will in turn result in increased costs, additional
capital expenditures, and reduced operating flexibility. Management
believes that the Partnership’s operating practices, assets and properties are
in material compliance with all applicable 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.
Regulatory
Structure.
The
g
rowing and harvesting of timber are subject to numerous laws and
government policies to protect the environment, non-timber resources such as
wildlife and water, 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.
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, a number of 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.
Forestry Management
Practices.
Forest practice acts 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. Federal, state, and local regulations protecting wetlands
could affect future harvest and forest management practices on some of the
Partnership’s timberlands.
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 Forest
and Fish Report became the basis for revised Forest Practices Rules and
Regulations that were adopted in 1999 and finalized in 2001. 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.
|
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 the Forest Practices Habitat Conservation Plan
(HCP). The 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 timber and
logs from the Partnership’s timberlands. These kinds of programs also
can make it more difficult to respond to rapid changes in markets, extreme
weather or other unexpected circumstances. One additional effect may
be further reductions in usage of (and some substitution of other products for)
lumber and plywood. Management does not believe that these kinds of
programs have had a significant effect on the Partnership’s total timber
harvest, although they may have such an effect in the
future. Further, 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 silt caused by roads,
harvest units 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. 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.
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.
Item
1A.
RISK
FACTORS
We have certain environmental
remediation liabilities, and those liabilities may
increase.
We own certain real estate at the Historic Port
Gamble townsite on the Kitsap Peninsula in western Washington. We are
party to an agreement with P&T, pursuant to which we and P&T allocated
responsibility for cleanup costs. 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. We maintain on our balance sheet an
accrual that represents our estimated share of the remediation costs, and we
adjust that accrual periodically based on such factors as test results, cleanup
cost estimates, and related factors.
We
increase the recorded liability if our current estimates of those costs exceed
the previously established accrual, and we recognize an expense in the period
reflecting the adjustment. If our estimates are inaccurate, or if new
or previously unknown facts are discovered that increase our share of these
costs, we may experience adverse impacts upon our results of operations and
financial condition. In that vein, P&T’s financial condition has
declined markedly in recent years, with P&T first disclosing questions about
its ability to continue as a going concern in its Annual Report on Form 10-K for
the fiscal year ended December 31, 2006. Since that time we have
closely monitored P&T’s financial disclosures, including its repeated
attempts to restructure its credit arrangements throughout the second and third
quarters of 2007 and culminating in a late October 2007 bankruptcy filing in
Canada, followed in November 2007 by a Chapter 11 bankruptcy filing in the
United States. Since then, P&T has undertaken to sell
substantially all of its assets. These actions raised substantial
doubt in management’s views as to whether P&T can meet all or any portion of
its obligations under our settlement and remediation agreement.
Because of
the joint and several liability that attends to the cleanup obligation,
management has taken a number of steps to address our own
exposure. As such, our results for the fourth quarter and fiscal year
2007 reflect a $1.9 million charge to earnings to increase our environmental
remediation liability for Port Gamble. Second, because we have
increased our estimate of the potential costs on several occasions in the past,
we have revised our methodology for assessing this liability, shifting to a
“Monte Carlo simulation” analysis which we hope will improve our ability to
predict the actual liability for the remaining cleanup. Third, 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. Finally, we are monitoring the P&T bankruptcy action as
an unsecured creditor in an effort to maximize any potential recovery from
P&T’s remaining assets, although we have substantial doubt as to whether we
will recoup any material portion of those assets because substantially all of
P&T’s assets are subject to the security interests of its
lenders.
Management continues to monitor
closely both the Port Gamble cleanup process and the P&T bankruptcy
proceeding; however, in light of current circumstances our addition of $1.9
million to the remediation liability reflects what management believes to be the
best estimate of the remaining cleanup cost based upon an estimation method that
represents the most likely outcome.
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.
Consolidation of sawmills in our
geographic operating area may reduce competition among our customers, which
could adversely affect our log prices.
We have experienced in
the past, 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, may increase our 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 has been impacted by imported lumber from
Canada and decreased demand for lumber as engineered wood products have gained
market acceptance in the United States. These factors have had the
effect of concentrating mill ownership with larger, more efficient, mill
operators and decreasing the number of mills operating in the Puget Sound
region. This characteristic may result in a decrease in local demand
for logs, which in turn may decrease our profitability. In addition,
the settlement of a dispute under the North American Free Trade Agreement,
alleging unfair trade practices related to sales of Canadian softwoods into the
United States, may result in an increase in the volume of timber available in
domestic log markets, which could adversely impact log prices and, derivatively,
our fee timber revenues. Over the past decade, we have seen log
prices erode in the Japanese market as competing logs and lumber from regions
outside of the U.S. and engineered wood products have gradually
gained market acceptance. These export markets for Pacific Northwest
logs are significantly affected by fluctuations in U.S. and Japanese economies,
as well as by the foreign currency exchange rate between the Japanese yen and
the U.S. dollar, and ocean transportation costs.
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 amendments to federal wildlife habitat
preservation laws, intended to afford additional protections to the threatened
northern spotted owl, 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 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. Among other things, 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 for 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,
which allocations earned in 2007 and 2006 were $0 and $77,000,
respectively. Reimbursements for expenses totaled $21,000 in 2007 and
$6,000 in 2006.
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 that changed due to a change in tax law (or interpretation
of current tax law) such that the Partnership became 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.
Item
4.
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters
were submitted to a vote of the Partnership’s limited partners during the fourth
quarter of 2007. Pope Resources Limited Partnership Agreement was
amended by the General Partner of the Partnership to bring the Partnership into
compliance with a new NASDAQ requirement that requires companies listed with it
to make its securities eligible for issuance in uncertificated
form. This approval, which was purely ministerial in nature, was
effected by the Partnership’s managing general partner under the authority
convened by the Limited Partnership Agreement.
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 Global Select
Market. For many years, the Partnership's units have traded under the
ticker symbol "POPEZ". Beginning in April 2008, our ticker symbol on
the Nasdaq Global Select Market will change to “POPE”. The following
table sets forth the 2005 to 2007 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, 2005
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
56.85
|
|
|
$
|
19.35
|
|
|
$
|
0.15
|
|
Second
Quarter
|
|
|
37.68
|
|
|
|
31.10
|
|
|
|
0.15
|
|
Third
Quarter
|
|
|
37.00
|
|
|
|
31.30
|
|
|
|
0.25
|
|
Fourth
Quarter
|
|
|
32.22
|
|
|
|
27.85
|
|
|
|
0.25
|
|
Year
Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
36.00
|
|
|
|
30.00
|
|
|
|
0.25
|
|
Second
Quarter
|
|
|
34.70
|
|
|
|
30.10
|
|
|
|
0.25
|
|
Third
Quarter
|
|
|
33.10
|
|
|
|
30.04
|
|
|
|
0.28
|
|
Fourth
Quarter
|
|
|
35.59
|
|
|
|
31.54
|
|
|
|
0.28
|
|
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
|
|
Unitholders
As of February 19, 2008, there were 334
holders of record for 4,658,870 outstanding units. Units outstanding
exclude 53,250 units granted to management that are currently restricted from
trading. This restriction will be lifted upon vesting over the next
four years.
Distributions
All cash
distributions are at the discretion of the Partnership's managing general
partner, Pope MGP, Inc. (the “Managing General
Partner”). During 2007, the Partnership made two quarterly
distributions of twenty-eight cents per unit and two quarterly distributions of
forty cents per unit, reflecting aggregate distributions totaling $6.4
million. During 2006, the Partnership made two quarterly
distributions of twenty-five cents per unit and two quarterly distributions of
twenty-eight cents per unit, with the four distributions totaling $5.0
million. Management intends to continue to pay quarterly
distributions in 2008 of forty cents per unit so long as the Managing General
Partner, in its discretion, determines this amount to be
appropriate. Management will periodically examine distribution levels
to ensure it meets the long-term objective of maximizing Partnership
value. These determinations will reflect, among other things, the
expectations of management and the Managing General Partner for the
Partnership’s liquidity needs given the reduction in anticipated harvest volume,
and the accompanying decline in anticipated fee timber income, during the
current period of relatively reduced log prices.
Repurchase of Equity
Securities
The Partnership adopted a unit
repurchase plan in the fourth quarter of 2007. Under the plan, the
Partnership may repurchase limited partner units having an aggregate value of
not more than $5 million. The unit repurchase period commenced on
November 1, 2007 and is to continue for up to one year. Partnership
unit repurchases in the fourth quarter of fiscal year 2007 were as
follows:
Total
number of units purchased
|
|
|
31,656
|
|
Average
price paid per unit
|
|
$
|
43.41
|
|
Total
number of units purchased as part of publicly announced plans or
programs
|
|
|
31,656
|
|
Approximate
dollar value of units that may be purchased under the announced plans or
programs ($000’s)
|
|
$
|
3,625
|
|
As of February 29, 2008 we had
repurchased nearly 115,000 units for a total of approximately $4.5
million.
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, 2007. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/02
|
|
12/03
|
|
12/04
|
|
12/05
|
|
12/06
|
|
12/07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pope
resources
|
|
100.00
|
|
155.54
|
|
257.08
|
|
326.68
|
|
373.16
|
|
480.25
|
S&P
500
|
|
100.00
|
|
128.68
|
|
142.69
|
|
149.70
|
|
173.34
|
|
182.87
|
S&P
Smallcap 600
|
|
100.00
|
|
138.79
|
|
170.22
|
|
183.30
|
|
211.01
|
|
210.38
|
S&P
Forest Products
|
|
100.00
|
|
140.50
|
|
158.73
|
|
161.99
|
|
170.79
|
|
184.15
|
Dow
Jones Wilshire 5000
|
|
100.00
|
|
131.64
|
|
148.26
|
|
157.64
|
|
182.66
|
|
193.13
|
Dow
Jones Wilshire 4500
|
|
100.00
|
|
143.84
|
|
170.55
|
|
188.07
|
|
218.29
|
|
230.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copyright
© 2008 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.
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.
The measure of free cash flow 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 net income, not cash
flow from 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.
(Dollars
in thousands, except per unit data)
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Statement
of operations data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee
Timber (1)
|
|
$
|
35,514
|
|
|
$
|
35,260
|
|
|
$
|
44,424
|
|
|
$
|
33,571
|
|
|
$
|
22,916
|
|
Timberland
Management & Consulting
|
|
|
1,344
|
|
|
|
3,670
|
|
|
|
7,764
|
|
|
|
1,601
|
|
|
|
2,386
|
|
Real
Estate
|
|
|
15,037
|
|
|
|
27,320
|
|
|
|
4,818
|
|
|
|
4,476
|
|
|
|
1,734
|
|
Total
revenue
|
|
|
51,895
|
|
|
|
66,250
|
|
|
|
57,006
|
|
|
|
39,648
|
|
|
|
27,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee
Timber (1)
|
|
|
15,215
|
|
|
|
14,592
|
|
|
|
16,320
|
|
|
|
15,126
|
|
|
|
9,669
|
|
Timberland
Management & Consulting
|
|
|
(883
|
)
|
|
|
1,266
|
|
|
|
3,540
|
|
|
|
(598
|
)
|
|
|
272
|
|
Real
Estate (2)
|
|
|
5,163
|
|
|
|
13,864
|
|
|
|
1,270
|
|
|
|
1,586
|
|
|
|
(476
|
)
|
General
and Administrative
|
|
|
(4,782
|
)
|
|
|
(3,817
|
)
|
|
|
(3,651
|
)
|
|
|
(2,986
|
)
|
|
|
(2,842
|
)
|
Total
operating income/(loss)
|
|
|
14,713
|
|
|
|
25,905
|
|
|
|
17,479
|
|
|
|
13,128
|
|
|
|
6,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
15,508
|
|
|
|
24,910
|
|
|
|
13,684
|
|
|
|
10,176
|
|
|
|
3,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per unit – diluted
|
|
$
|
3.21
|
|
|
$
|
5.23
|
|
|
$
|
2.88
|
|
|
$
|
2.22
|
|
|
$
|
0.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
15,508
|
|
|
|
24,910
|
|
|
|
13,684
|
|
|
|
10,176
|
|
|
|
3,528
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
depletion, and amortization (4)
|
|
|
5,549
|
|
|
|
7,204
|
|
|
|
11,252
|
|
|
|
5,752
|
|
|
|
3,546
|
|
Cost
of land sold
|
|
|
3,854
|
|
|
|
7,818
|
|
|
|
434
|
|
|
|
209
|
|
|
|
200
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
payments
|
|
|
1,481
|
|
|
|
1,675
|
|
|
|
1,883
|
|
|
|
1,979
|
|
|
|
1,662
|
|
Capital
expenditures, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
timberland
acquisitions(1)
|
|
|
12,162
|
|
|
|
12,177
|
|
|
|
6,756
|
|
|
|
3,260
|
|
|
|
2,017
|
|
Free
cash flow
|
|
|
11,268
|
|
|
|
26,080
|
|
|
|
16,731
|
|
|
|
10,898
|
|
|
|
3,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from operations
|
|
|
21,983
|
|
|
|
43,571
|
|
|
|
28,909
|
|
|
|
17,854
|
|
|
|
8,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
179,325
|
|
|
|
180,282
|
|
|
|
106,358
|
|
|
|
94,868
|
|
|
|
86,308
|
|
Long-term
debt
|
|
|
29,385
|
|
|
|
30,866
|
|
|
|
32,281
|
|
|
|
34,164
|
|
|
|
36,114
|
|
Partners’
capital
|
|
|
96,644
|
|
|
|
87,605
|
|
|
|
66,405
|
|
|
|
54,533
|
|
|
|
46,036
|
|
Debt
to total capitalization
|
|
|
24
|
%
|
|
|
27
|
%
|
|
|
34
|
%
|
|
|
40
|
%
|
|
|
45
|
%
|
Other
data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acres
owned/managed (thousands)
|
|
|
430
|
|
|
|
433
|
|
|
|
556
|
|
|
|
121
|
|
|
|
114
|
|
Fee
timber harvested (MMBF)
|
|
|
55
|
|
|
|
55
|
|
|
|
74
|
|
|
|
60
|
|
|
|
45
|
|
(1)
|
The
Fund acquired 24,000 acres of timberland in 2006 and we acquired 4,700
acres of timberland in 2004. The cost of these acquisitions was
not included in the calculation of free cash
flow.
|
(2)
|
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 the Port Gamble
townsite.
|
(3)
|
Management
considers free cash flow to be a relevant and meaningful indicator of
liquidity and earnings performance commonly used by investors, financial
analysts and others in evaluating companies in its industry and, as such,
has provided this information in addition to the generally accepted
accounting principle-based presentation of net income or
loss.
|
(4)
|
Depreciation,
depletion, and amortization in 2007 included $1.3 million of depletion
expense resulting from the separate depletion pool used to account for the
harvest of timber from the ORM Timber Fund I, LP
timberlands. Depreciation, depletion, and amortization in 2006
included $2.7 million of depletion expense resulting from the separate
depletion pool used to account for the harvest of timber from the Quilcene
timberland acquisition.
|
Item 7.
|
MANAG
EMENT'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 environmental
and land use regulations that limit our ability to harvest timber and develop
property and economic conditions that affect consumer demand for our products
and the prices we receive for them, and other risks and uncertainties which are
discussed 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
ORM Timber Fund I, LP (the “Fund”). Operations in this segment
consist of growing timber to be harvested as logs for sale to domestic and to a
lesser extent export manufacturers. The second most significant
business in terms of total assets owned is the development and sale of real
estate. Real Estate activities primarily take the form of securing
permits, entitlements, and, in some cases, installing infrastructure for raw
land development and then realizing that land’s value 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 or 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 providing
timberland-related services to third-party timberland owners and raising
investment capital from third parties for private equity timber funds like the
Fund.
As of
December 31, 2007, we owned 113,000 acres of timberland in western Washington
State plus 2,600 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 income
for the year ended December 31, 2007 totaled $15.5 million, or $3.21 per diluted
ownership unit, on revenues of $51.9 million. For the corresponding
period in 2006, net income totaled $24.9 million, or $5.23 per diluted ownership
unit, on revenues of $66.3 million. The $15.5 million net income
amount for 2007 reflects a $1.9 million fourth-quarter charge to earnings to
adjust our reserve for environmental remediation liabilities as described in
more detail below. For the year ended December 31, 2007, cash
flow from operations was $22.0 million, compared to $43.6 million in
2006. Net income for the quarter ended December 31, 2007 totaled $6.3
million, or $1.30 per diluted ownership unit, on revenues of $17.6
million. This compares to net income of $7.8 million, or $1.63 per
diluted ownership unit, on revenues of $16.5 million for the quarter ended
December 31, 2006.
Macroeconomic
factors that have a significant bearing on our business include housing starts
in the U.S., and to a lesser degree in Japan; interest rates; and currency
exchange rates, particularly those between the U.S. and Canada, Japan, and
Europe. The first two of these factors reflect or influence the
health of the U.S. housing market. Currency exchange rates influence
the competitiveness of our domestic sawmill customers as it relates to imported
lumber from Canada, Europe, or the Southern Hemisphere as well as with the
competitiveness of our logs in export markets in Asia. Our export
logs are sold to domestic intermediaries who then export the logs. A
favorable US$/yen exchange rate can help these intermediaries compete in the
Japanese market with logs that originate from Canada, Russia, or the
Southern Hemisphere, thus increasing the price that we are able to realize from
the sale of this export-quality log volume.
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 market factors so that they 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 lumber spot 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 become stabilized 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.
Management’s
major opportunity and challenge is to grow our revenue base
profitably. Our current strategy for adding timberland acreage is
centered on our timber fund business model. For example, the Fund
acquired 24,000 acres of timberland in late 2006 of which we own 20% and earn
both an asset management and on-the-ground timberland management fee from
managing these timberlands. 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 2007, 2006,
and 2005, on a percentage basis by segment, are as follows:
Segment
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Fee
Timber
|
|
|
68
|
%
|
|
|
53
|
%
|
|
|
78
|
%
|
Timberland
Management & Consulting
|
|
|
3
|
%
|
|
|
5
|
%
|
|
|
14
|
%
|
Real
Estate
|
|
|
29
|
%
|
|
|
42
|
%
|
|
|
8
|
%
|
Further segment financial information
is presented in Note 11 to the Partnership's Consolidated Financial Statements
included with this report.
Outlook
We expect
2008 revenue and income to decline from 2007 due to weakness in the real estate
and credit markets which impacts both the Fee Timber and Real Estate
segments. Over the last few years we have significantly strengthened
our balance sheet by reducing our debt-to-capitalization ratio and increasing
our cash and short-term investments. Our strong balance sheet
provides us the opportunity to defer timber harvest and land sales until these
markets improve, and management has announced an intention to take that action,
reducing our forecast timber harvest for 2008 by 36% from what we consider to be
our sustainable harvest level. We also plan to look for opportunities
to acquire timberland through ORM Timber Fund II, Inc. at favorable prices
during the current market weakness.
Timber
harvest volume in 2008 is expected to decline to 37 MMBF from 55.1 MMBF in
2007. This represents a 33% reduction from prior year and a 36%
reduction from our sustainable harvest level of 57 MMBF. 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. In
addition to the planned 32 MMBF harvest from our own lands, we plan to harvest 5
MMBF from the Fund’s tree farms in 2008. This represents a 40%
reduction from the Fund’s sustainable harvest level of 8
MMBF. Revenue generated by the Fund is consolidated into the
Partnership’s financial statements but does contribute commensurately to
operating income as the timberlands owned by this fund have a separate depletion
pool and depletion charges are expected to offset the majority of the net
stumpage value realized upon harvest (delivered log price less harvesting and
transportation cost). The 80% interest in the Fund owned by
third-parties is reported beneath operating income and is labeled Minority
Interest-ORM Timber Fund I, LP.
We are
also anticipating a decrease in Real Estate operating income, as the market for
developable land has weakened in the Pacific Northwest. Until the
market improves, we expect to concentrate our Real Estate activities primarily
on preparing properties for sale through obtaining valuable entitlements and
completing infrastructure improvements. Revenue generated by the
Timberland Management & Consulting segment is expected to decrease as a
result of the closure of our McCloud consulting office, while we expect to see a
slight increase in income from this segment due a reduction in costs related to
the same office closure. The reduction in harvest levels from the
Fund’s properties also is expected to reduce our Timberland Management &
Consulting income.
General
& Administrative costs in 2008 are expected to decline from
2007. The primary source of this decline will be the capital
structure planning costs expensed in 2007 that are not expected to recur in
2008.
RESULTS
OF OPERATIONS
The
following table reconciles net income for the years ended December 31, 2007 to
2006 and 2006 to 2005. In addition to the table’s numeric analysis,
the explanatory text that follows describes many of these changes by business
segment.
YEAR
TO YEAR COMPARISONS
|
|
(Amounts
in $000's except per unit data)
|
|
|
|
|
|
|
|
|
|
|
2007
vs. 2006
|
|
|
2006
vs. 2005
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Total
|
|
Net
income:
|
|
|
|
|
|
|
Year
ended December 31, 2007
|
|
$
|
15,508
|
|
|
|
|
Year
ended December 31, 2006
|
|
|
24,910
|
|
|
$
|
24,910
|
|
Year
ended December 31, 2005
|
|
|
|
|
|
|
13,684
|
|
Variance
|
|
$
|
(9,402
|
)
|
|
$
|
11,226
|
|
|
|
|
|
|
|
|
|
|
Detail
of earnings variance:
|
|
|
|
|
|
|
|
|
Fee
Timber
|
|
|
|
|
|
|
|
|
Log
price realizations (A)
|
|
$
|
(219
|
)
|
|
$
|
1,813
|
|
Log
volumes (B)
|
|
|
440
|
|
|
|
(11,295
|
)
|
Harvest
& haul
|
|
|
(1,203
|
)
|
|
|
4,583
|
|
Depletion
|
|
|
1,580
|
|
|
|
2,993
|
|
Other
Fee Timber
|
|
|
19
|
|
|
|
173
|
|
Timberland
Management & Consulting
|
|
|
|
|
|
|
|
|
Management
fee changes
|
|
|
(433
|
)
|
|
|
(2,707
|
)
|
Disposition
fees
|
|
|
(1,343
|
)
|
|
|
(45
|
)
|
Other
Timberland Mgmnt & Consulting
|
|
|
(373
|
)
|
|
|
478
|
|
Real
Estate
|
|
|
|
|
|
|
|
|
Development
property sales
|
|
|
(7,409
|
)
|
|
|
14,436
|
|
Environmental
remediation
|
|
|
(1,618
|
)
|
|
|
46
|
|
Other
Real Estate
|
|
|
330
|
|
|
|
(1,889
|
)
|
General
& Administrative costs
|
|
|
(965
|
)
|
|
|
(166
|
)
|
Interest
expense
|
|
|
470
|
|
|
|
1,100
|
|
Other
(taxes, minority int., interest inc.)
|
|
|
1,322
|
|
|
|
1,706
|
|
Total
change in earnings
|
|
$
|
(9,402
|
)
|
|
$
|
11,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
|
Fee
Timber
Revenue
and Operating Income
Fee Timber
revenue is earned primarily from the harvest and sale of logs from the
Partnership’s 113,000 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, which we
ordinarily express in terms of millions of board feet, or “MMBF”, and by the
average prices realized on log sales, which we express in dollars per thousand
board feet, or “MBF”. In late 2006, the Fund acquired 24,000 acres of
timberland with harvest activities from these properties beginning in 2007 and
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, 2007, are as follows (all amounts in $ millions,
except as noted).
|
|
|
|
|
|
|
|
Year
ended
|
Timber
revenue
|
Mineral, cell
tower,
and
other revenue
|
Total
segment revenue
|
|
Operating
income
|
|
Harvest
volume (MMBF)
|
2007
|
$33.5
|
$2.0
|
$35.5
|
|
$15.2
|
|
55.1
|
2006
|
33.3
|
2.0
|
35.3
|
|
14.6
|
|
54.5
|
2005
|
42.7
|
1.7
|
44.4
|
|
16.3
|
|
74.2
|
Fiscal Year 2007 compared to
2006.
Revenue and operating income increased modestly in 2007
from 2006. The increase in revenue was due to an increase in harvest
volume partially offset by a decline in average price
realized. Harvest volume in 2007 increased 1% from 2006 and includes
5.3 MMBF harvested by the Fund. The increase in harvest volume was
offset in part by a decline in average log prices of $4 per MBF, representing a
1% decrease from log prices realized in 2006. Operating income in
2007 attributed to the Fee Timber segment increased $623,000, or 4% from
2006. This increase was due primarily to a decline in depletion
expense in 2007 from 2006. Harvest volume in 2006 included 6.6 MMBF
from a separate depletion pool that carried a higher depletion rate than our
other depletion pools.
Fiscal Year 2006 compared to
2005.
Harvest volume declined 27% from 2005 to
2006. This decrease was due to an elevated harvest in 2005 owing
primarily to our harvest of two tracts acquired in 2004. Average log
prices in 2006 were up $35 per MBF, representing a 6% increase over 2005’s log
prices. The $301,000 increase in other revenue is due primarily to an
increase in gravel royalties due to increased residential and commercial
construction activity in our local markets in 2006. The decrease in
harvest volume, offset somewhat by stronger prices and increased gravel
royalties, resulted in the $9.1 million, or 20%, decrease in Fee Timber revenue
for 2006 versus 2005.
Operating income in 2006 attributed to
the Fee Timber segment decreased $1.7 million, or 10% from
2005. Harvest volume from one of the 2004 acquisitions has a separate
depletion pool because the property has characteristics that are different from
the pooled property. Specifically, the timber on this property at the
time of acquisition was almost completely merchantable. As a result
of accounting for harvests from this particular acreage using the separate
depletion pool and its correspondingly high per MBF depletion charge, the
incremental harvest from this acquisition generated significant cash flow but
had much less impact on operating income. The cash generated through
2005 and into 2006 related to the timber harvested from this particular fourth
quarter 2004 acquisition has served to recoup effectively its entire purchase
price.
Log
Volume
Log volume
sold for each year in the three-year period ended December 31, 2007 is as
follows:
|
|
|
|
|
|
|
Volume
(in MMBF)
|
2007
|
%
Total
|
2006
|
%
Total
|
2005
|
%
Total
|
Sawlogs
|
|
|
|
|
|
|
Douglas-fir
|
35.1
|
64%
|
38.9
|
71%
|
43.7
|
59%
|
Whitewood
|
6.5
|
12%
|
3.8
|
7%
|
11.0
|
15%
|
Cedar
|
2.2
|
4%
|
1.1
|
2%
|
4.5
|
6%
|
Hardwoods
|
2.7
|
5%
|
3.6
|
7%
|
5.1
|
7%
|
Pulp
|
|
|
|
|
|
|
All
Species
|
8.6
|
16%
|
7.1
|
13%
|
9.9
|
13%
|
|
|
|
|
|
|
|
Total
|
55.1
|
100%
|
54.5
|
100%
|
74.2
|
100%
|
Log volume increased 1% in 2007 from
the 2006 harvest. With the weakened market for Douglas-fir sawlogs, a
direct result of the soft housing market, we focused on harvest units with less
Douglas-fir volume and more whitewood, cedar, and pulp. This allowed
us to take advantage of those selected log markets that remained relatively
strong. The export markets for high quality whitewood sawlogs
strengthened as log exporters were able to identify low cost opportunities to
ship logs to Korea. The market for pulp and cedar strengthened as
supplies declined. This is a common occurrence during weak log and
lumber markets. Wood chips used to manufacture pulp are a by-product
of lumber manufacturing so when mills reduce production, fewer wood chips are
created thus increasing demand for pulp logs. Similarly cedar sawlogs
can be thought of as a by-product resulting from the harvest of Douglas-fir and
whitewood timber stands. When harvest activities decline, production
of cedar sawlogs also decline while demand for this type of log is not as
tightly tied to housing starts.
Log volume decreased 27% in 2006 from
the elevated harvest in 2005 related to the 2004 timberland
acquisitions. The 2004 timberland acquisitions were largely harvested
in 2005 and contained a relatively high volume of cedar and red alder
sawlogs. Pulp log volume as a percentage of total volume remained at
13% in 2006 when compared to 2005.
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,
2007, is as follows:
|
|
|
|
|
|
Price
$/MBF
|
2007
|
%
Change
|
2006
|
%
Change
|
2005
|
Sawlogs
|
|
|
|
|
|
Douglas-fir
|
$621
|
-7%
|
$669
|
4%
|
$644
|
Whitewood
|
462
|
4%
|
445
|
-6%
|
472
|
Cedar
|
1,280
|
17%
|
1,093
|
16%
|
942
|
Hardwoods
|
931
|
37%
|
681
|
13%
|
605
|
Pulp
|
|
|
|
|
|
All
Species
|
381
|
42%
|
268
|
26%
|
213
|
Overall
|
|
|
|
|
|
All
Species
|
607
|
-1%
|
611
|
6%
|
576
|
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. Demand and price for Douglas-fir sawlogs is very
dependent upon the level of new construction. As construction starts
have declined significantly, we have experienced a 7% decline in Douglas-fir log
price realized in 2007 from 2006, a trend that led us to front-load our harvest
into the earlier parts of 2007 as we have done in prior years. The
price realized on Douglas-fir logs increased 4% in 2006 from 2005 due to
stronger housing starts in 2006 in the United States. Additional
lumber mills opened during 2006 in the Puget Sound area of Washington, thus
creating some additional demand and upward price pressure on logs.
Whitewood
: “Whitewood” is a
term used to describe several softwood species, but for us primarily refers to
western hemlock. Though generally considered to be of a lower quality
than Douglas-fir, these logs are also used for manufacturing construction grade
lumber and plywood. The average price realized on whitewood increased
4% in 2007 from 2006, and decreased 6% in 2006 from 2005. As
mentioned above, the whitewood export market strengthened in
2007. Conversely, there was a decline in whitewood market prices
during 2006, with this result attributable to harvesting lower quality logs in
2006 versus 2005. Whitewood harvest volume in 2005 included a large
component of high quality whitewood sawlogs from one of the 2004 timberland
acquisitions which increased our average price realization in the prior
year.
Cedar
: Cedar is generally
used for outdoor applications for fencing a decking. Demand for these
products is not as tightly linked to housing starts as our other soft wood
sawlogs. Cedar prices have increased in both 2007 from 2006 and in
2006 from 2005. The strong price realized for 2007 and 2006 reflects
a general decline in cedar volume available in the Puget Sound area with
resultant upward pressure on price due to continuing demand for such
logs.
Hardwood
: “Hardwood”
can refer to many different species, but on our tree farms primarily consists of
red alder. The price realized from the sale of red alder sawlogs has
increased steadily over the last two years with limited supply and increased
demand as a result of new mills focused on hardwood lumber production in the
Pacific Northwest. The local mills that process alder sawlogs are
using the resource to manufacture lumber for use in furniture
construction. Hardwood log prices increased 37% due to an increase in
hardwood mill capacity in the Puget Sound area that has increased demand for
hardwood sawlogs. Notwithstanding this favorable price trend,
hardwood represents a relatively minor species in our sales and timber inventory
mix and this only produces a small impact on overall revenue and
earnings.
Pulp
: Pulp is a
lower quality log of any species that is manufactured into wood
chips. These chips are used primarily to manufacture unbleached
linerboard used in paper bags and cardboard boxes. The price realized
from the sale of pulp logs is primarily driven by local pulp log
inventories. Pulp prices in 2007 were up 42% over
2006. The increases in pulp log prices results from a decline in
sawmill production and a corresponding reduction in the inventory of residual
chips from lumber manufacturing.
Customers
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Destination
|
|
Volume*
|
|
|
Price
|
|
|
Volume*
|
|
|
Price
|
|
|
Volume*
|
|
|
Price
|
|
Domestic
mills
|
|
|
44.0
|
|
|
$
|
652
|
|
|
|
44.3
|
|
|
$
|
659
|
|
|
|
59.0
|
|
|
$
|
632
|
|
Export
brokers
|
|
|
2.5
|
|
|
|
612
|
|
|
|
3.1
|
|
|
|
700
|
|
|
|
5.3
|
|
|
|
629
|
|
Pulp
|
|
|
8.6
|
|
|
|
382
|
|
|
|
7.1
|
|
|
|
268
|
|
|
|
9.9
|
|
|
|
213
|
|
Total
|
|
|
55.1
|
|
|
$
|
607
|
|
|
|
54.5
|
|
|
$
|
611
|
|
|
|
74.2
|
|
|
$
|
576
|
|
*
Volume in MMBF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
mills purchased 78% of our harvest in 2007 versus 81% in 2006. The
decline in the proportion of log volume sold to domestic mills was offset by an
increase in volume sold to pulp mills, where prices were 42% higher in 2007 than
2006. Export brokers represent those log buyers that purchase our
logs and then resell them primarily to the export market. While
export brokers purchased roughly the same volume, prices were 13% lower in 2007
than 2006, due to a shift from selling Douglas-fir to whitewood in the export
market. Whitewood has a lower average value than
Douglas-fir.
Domestic
mills purchased 81% of our harvest volume sold in 2006, and average price
realizations were 4% higher than the price realized in 2005. The
increase in price realized is due to the strong housing market experienced in
2006. A factor in the increase in average price is the lower valued
log mix in 2005 compared to 2006. Harvest volume in 2005 included a
large component of whitewood which carries a lower market value than Douglas-fir
logs. Volume sold to pulp log customers represented 13% of total
volume sold for both 2006 and 2005.
Harvest
Volumes and Seasonality
The Partnership’s 113,000 acres of
timberland consist of both the 70,000-acre Hood Canal tree farm and the
43,000-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 half of the year when the log supply in the marketplace
tends to be lower. In 2007 our harvest was less concentrated in the
first quarter of the year due in part to a lower harvest from the
Hood Canal tree farm and an uncertain market for logs that led us to a more
even-flow harvest schedule in 2007 versus prior years.
The percentage of annual harvest volume
by quarter for each year in the three-year period ended December 31, 2007 is as
follows:
|
|
|
|
|
|
|
|
|
Year
ended
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
2007
|
|
18%
|
|
41%
|
|
28%
|
|
13%
|
2006
|
|
40%
|
|
31%
|
|
22%
|
|
7%
|
2005
|
|
31%
|
|
30%
|
|
28%
|
|
11%
|
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. We are using two separate depletion
rates in 2007, 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 ORM Timber Fund I, LP. In 2006 and 2005 we
also harvested from two separate depletion pools consisting of our primary pool
and the pool used for timber harvested from the timberland acquired in the
fourth quarter of 2004. 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 40-year-old merchantable timber available for
harvest
|
The
depletion rate is then applied to volume harvested to calculate depletion
expense. In 2008 we are changing our definition of “merchantable” to
35-year and older timber.
Fee Timber cost of sales, expressed on
a per MBF basis for each year in the three-year period ended December 31, 2007,
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harvest,haul,
|
|
|
Total
cost
|
|
|
|
Depletion
cost
|
|
|
and
other costs
|
|
|
of
sales
|
|
Year
Ended
|
|
per
MBF
|
|
|
per
MBF
|
|
|
per
MBF
|
|
2007
|
|
$
|
87
|
|
|
$
|
200
|
|
|
$
|
287
|
|
2006
|
|
|
110
|
|
|
|
187
|
|
|
|
297
|
|
2005
|
|
|
142
|
|
|
|
179
|
|
|
|
321
|
|
As described above, 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 harvested a
total of 55 MMBF in 2007, with 5 MMBF attributable to the separate depletion
pool created for the ORM Timber Fund I, LP Timberlands. The depletion
rate used in these separate pools approximates the net stumpage value (delivered
log price less harvesting and transportation cost) realized on the sale of this
particular timber. As such, the incremental harvest from these
timberlands results in negligible net income impact even as it generates
operating cash flow.
Depletion expense is generated from the
harvest and sale of timber and some de minimis amount of depletion results from
Real Estate sales when land is sold with standing timber. Depletion
expense resulting from timber harvest for each year in the three-year period
ended December 31, 2007 was made up of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2007
|
|
|
|
Pooled
|
|
|
Timber
Fund
|
|
|
Total
|
|
Volume
harvested (MBF)
|
|
|
49,824
|
|
|
|
5,337
|
|
|
|
55,161
|
|
Rate/MBF
|
|
$
|
70.31
|
|
|
$
|
237.77
|
|
|
$
|
86.51
|
|
Depletion
expense ($ 000's)
|
|
$
|
3,503
|
|
|
$
|
1,269
|
|
|
$
|
4,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2006
|
|
|
|
Pooled
|
|
|
Quilcene
|
|
|
Total
|
|
Volume
harvested (MBF)
|
|
|
47,682
|
|
|
|
6,851
|
|
|
|
54,533
|
|
Rate/MBF
|
|
$
|
68.97
|
|
|
$
|
396.63
|
|
|
$
|
110.13
|
|
Depletion
expense ($ 000's)
|
|
$
|
3,288
|
|
|
$
|
2,717
|
|
|
$
|
6,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2005
|
|
|
|
Pooled
|
|
|
Quilcene
|
|
|
Total
|
|
Volume
harvested (MBF)
|
|
|
57,194
|
|
|
|
17,051
|
|
|
|
74,245
|
|
Rate/MBF
|
|
$
|
73.29
|
|
|
$
|
374.46
|
|
|
$
|
142.46
|
|
Depletion
expense ($ 000's)
|
|
$
|
4,192
|
|
|
$
|
6,385
|
|
|
$
|
10,577
|
|
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 increased in 2007 relative
to 2006 primarily due to the location of the harvest units, where logs harvested
in 2007 compared to 2006 were hauled a greater distance to customer
locations. Increased fuel costs further contributed to the increase
in haul costs in 2007 over 2006. The increase in harvest and haul
costs in 2006 relative to 2005 is due to increased costs from having harvested
timber from harvest units located on hillsides rather than harvest units located
on relatively flat ground.
Fee Timber cost of sales for each year
in the three-year period ended December 31, 2007 is as follows (all dollar
amounts in millions):
Year
ended
|
|
Depletion
|
|
|
Harvest,
haul and other
|
|
|
Total
cost of sales
|
|
2007
|
|
$
|
4.8
|
|
|
$
|
11.0
|
|
|
$
|
15.8
|
|
2006
|
|
|
6.0
|
|
|
|
10.2
|
|
|
|
16.2
|
|
2005
|
|
|
10.6
|
|
|
|
13.2
|
|
|
|
23.8
|
|
Fee Timber
cost of sales decreased $384,000 in 2007 from 2006 and decreased $7.6 million in
2006 from 2005. The decrease in 2007 from 2006 is due to a decrease
in the average depletion rate used on timber harvested offset by increased
harvest costs. The decrease in 2006 from 2005 is due to a reduction
in harvest from both our pooled and separate depletion pool harvest
units.
Operating
Expenses
Fee Timber operating expenses for each
of the three years ended December 31, 2007, 2006, and 2005 were $4.5 million,
$4.4 million, and $4.3 million, respectively. Operating expenses
include management, silviculture and the cost of both maintaining existing roads
and building temporary roads required for harvest
activities. Operating costs remained relatively consistent in all
three years despite the addition of 24,000 acres owned by the
Fund. 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 that segment’s activities is the development of timberland
property investment portfolios on behalf of third-party clients and the Timber
Fund.
The Timberland Management &
Consulting segment is currently managing more than 290,000 acres of
timberland for Cascade Timberlands LLC and an additional 24,000 acres for the
Fund. The Cascade project includes management, consulting, and
disposition services. Revenue and operating income for the Timberland
Management & Consulting segment for each year in the three-year period ended
December 31, 2007, are as follows (all dollar amounts in millions):
Year
ended
|
|
Revenue
|
|
|
Operating
income (loss)
|
|
2007
|
|
$
|
1.3
|
|
|
$
|
(0.9
|
)
|
2006
|
|
|
3.7
|
|
|
|
1.3
|
|
2005
|
|
|
7.8
|
|
|
|
3.5
|
|
Fiscal Year 2007 compared to
2006.
Revenue and operating income for 2007 were $2.4 million
and $2.2 million lower, respectively, than in 2006. The decrease in
2007 is due to a decline in acres under management due to additional sales of
Cascade’s timberlands and $1.3 million in non-recurring timberland disposition
fees earned in 2006.
The Fund
was formed by Olympic Resource Management LLC (ORMLLC) for the purpose of
attracting investor capital to purchase timberlands. The Fund had a
$61.8 million capital commitment and we placed $58.5 million of this commitment
in late 2006. Pope Resources’ co-investment totaled $11.7 million, or
20% of the Fund. The Fund is treated as a consolidated subsidiary
whose results are reported under the Fee Timber segment. Operating
results attributed to the 80% third-party interest in the Fund are reported
under Minority Interest-ORM Timber Fund I, LP below operating
income.
We are now organizing our second timber
fund that we expect will total over $100 million of equity capital, with our
co-investment at the same 20% level as in the first fund. As with ORM
Timber Fund I, LP we will not be required to contribute the majority of this
capital until suitable timber properties are identified and
acquired.
Fiscal Year 2006 compared to
2005.
Revenue and operating income for 2006 was $4.1 million
and $2.2 million lower, respectively, than for 2005. These decreases
are due to a decline in acres under management partially offset by timberland
disposition fees earned by providing such services to our primary timberland
management client, Cascade Timberlands LLC. Cascade’s sale of
portions of its holdings resulted in a disposition fee earned in the first
quarter of 2006 followed by a reduction in timberland management
fees. We have entered into an agreement to continue managing
Cascade’s timberland from 2007 through 2009.
Operating
Expenses
Fiscal Year 2007 compared to
2006.
Timberland Management & Consulting operating
expenses decreased $177,000 in 2007 from 2006. This is attributable
to decreased activities associated with Cascade timberlands netted against an
increase in organization costs associated with ORM Timber Fund II.
Fiscal Year 2006 compared to
2005.
Timberland Management & Consulting operating
expenses decreased $1.8 million in 2006 from 2005. The decrease in
operating expenses resulted from the closing of two offices that were used for
managing timberlands formerly owned by Cascade, and a decrease in activities
surrounding capital-raising for the Fund. Following the sale of two
of Cascade’s tree farms we closed our forestry field offices in Port Angeles,
Washington in late 2005 and in Sedro-Woolley, Washington in early
2006. The Timberland Management & Consulting segment was not
engaged in raising capital in 2006 but was working to locate suitable timber
properties for the Fund. This shift in activities resulted in a
decline in operating expense.
Real
Estate
Revenue
and Operating Income
The
Partnership’s Real Estate segment consists primarily of revenue from the sale of
land together with residential and commercial property rents. The
Partnership’s real estate holdings are located primarily in Pierce, Kitsap, and
Jefferson Counties in Washington State.
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, and from time to time we have described
these results as “lumpy” in terms of their impacts on our revenues and operating
cash flows. Revenue and operating income for the Real Estate segment
for each year in the three-year period ended December 31, 2007, are as follows
(all dollar amounts in millions):
Year
ended
|
|
Revenue
|
|
|
Environmental
remediation expense
|
|
|
Operating
income
|
|
2007
|
|
$
|
15.0
|
|
|
$
|
1.9
|
|
|
$
|
5.2
|
|
2006
|
|
|
27.3
|
|
|
|
0.3
|
|
|
|
13.9
|
|
2005
|
|
|
4.8
|
|
|
|
0.2
|
|
|
|
1.3
|
|
Revenue in
the Real Estate segment is generated through the sale of land and the rental of
homes and commercial properties at the Port Gamble townsite. Land
sales include the sale of raw 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.
Real
Estate segment revenue for each year in the three year period ended December 31,
2007 consists of the following (all dollar amounts in thousands):
Description
|
|
Revenue
|
|
|
Gross
Margin
|
|
|
Acres
Sold
|
|
|
Revenue/Acre
|
|
|
Gross
Margin/ Acre
|
|
Commercial/Business
Park
|
|
$
|
11,124
|
|
|
$
|
7,155
|
|
|
|
15
|
|
|
$
|
719.1
|
|
|
$
|
463
|
|
Revenue
Recognized on % Complete for 2006 Closings
|
|
Complete
for 2006 Closings
|
|
|
1,346
|
|
|
|
838
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
Other
Land Sale
|
|
|
1,018
|
|
|
|
964
|
|
|
|
91
|
|
|
$
|
11.2
|
|
|
$
|
11
|
|
Rural
Residential
|
|
|
553
|
|
|
|
458
|
|
|
|
50
|
|
|
$
|
11.1
|
|
|
$
|
9
|
|
Rentals
|
|
|
982
|
|
|
|
982
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
Other
|
|
|
14
|
|
|
|
15
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
2007
Total
|
|
$
|
15,037
|
|
|
$
|
10,412
|
|
|
|
156
|
|
|
$
|
81.1
|
|
|
$
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial/Business
Park
|
|
$
|
11,637
|
|
|
$
|
6,184
|
|
|
|
37
|
|
|
$
|
314.5
|
|
|
$
|
167
|
|
Residential
Plat
|
|
|
10,673
|
|
|
|
7,715
|
|
|
|
200
|
|
|
$
|
53.4
|
|
|
$
|
39
|
|
Rural
Residential
|
|
|
2,596
|
|
|
|
1,872
|
|
|
|
527
|
|
|
$
|
4.9
|
|
|
$
|
4
|
|
Other
Land Sale
|
|
|
1,400
|
|
|
|
1,003
|
|
|
|
401
|
|
|
$
|
3.5
|
|
|
$
|
3
|
|
Rentals
|
|
|
1,002
|
|
|
|
1,002
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
Other
|
|
|
12
|
|
|
|
12
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
2006
Total
|
|
$
|
27,320
|
|
|
$
|
17,788
|
|
|
|
1,165
|
|
|
$
|
22.6
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rural
Residential
|
|
$
|
2,967
|
|
|
$
|
2,276
|
|
|
|
524
|
|
|
$
|
5.7
|
|
|
$
|
4
|
|
Other
Land Sale
|
|
|
890
|
|
|
|
848
|
|
|
|
390
|
|
|
$
|
2.3
|
|
|
$
|
2
|
|
Rentals
|
|
|
914
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
Other
|
|
|
47
|
|
|
|
34
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
2005
Total
|
|
$
|
4,818
|
|
|
$
|
3,158
|
|
|
|
914
|
|
|
$
|
3.4
|
|
|
$
|
3
|
|
Fiscal Year 2007 compared to
2006.
In 2007, revenue and operating income for the Real
Estate segment decreased by $12.3 million and $8.7 million, respectively, over
2006 amounts. The large revenue decrease can be attributed to a
decline in the real estate market in 2007 coupled with the unrepeated milestone
transactions occurring in 2006. Notwithstanding the decrease from
2006, the results achieved in 2007 still represent the upside of cyclical
trends.
Commercial/business
park transactions in 2007 included sales from our Gig Harbor and Bremerton
projects and a single acre of property located in Poulsbo,
Washington. In Gig Harbor we sold a total of 12 acres resulting in
$9.9 million of revenue and $6.6 million of gross margin. These Gig
Harbor transactions included a 6-acre sale for $7.2 million that was closed in
2006 but due to a right of rescission the revenue was not recognized until 2007
when this right of rescission terminated after we completed required
infrastructure improvements. At our Bremerton West Hills project we
sold two industrial lots representing over 2 acres resulting in $1.0 million of
revenue and $0.4 million of gross margin. The remaining
commercial/business park property sale was a 1-acre parcel near our headquarters
in Poulsbo that was sold for $230,000 resulting in gross margin of
$166,000.
Revenue
recognized using the percentage completion method primarily related to the 2006
sale of a 200-acre, residential plat from our Bremerton West Hills
project. Certain obligations under the purchase and sale agreement
were not completed as of December 31, 2006 and, as a result, 2007 results
include $1.3 million in revenue and $838,000 of gross margin from this
sale.
The
91-acre, $1.0 million “Other Land Sale” in the preceding table represents a sale
to Kitsap County Parks. This land will be used as part of a public
trail system that we expect to add value to the community and our development
properties in North Kitsap County.
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. Rural Residential revenue in 2007 consisted of 3 separate
transactions totaling 50 acres and represented a 91% decrease in acres sold
compared to 2006. Demand for rural lots has dropped significantly in
2007 commensurate with decreased demand for housing.
Management
intends to build on the success of these disposition efforts and offer a steady
supply of rural residential lots to the market that will result in an ongoing
revenue stream for the Real Estate segment. We have a target of
selling 150 to 300 acres annually from this. We expect 2008 rural
residential sales to end up at the low end of this targeted range due to
softening in our local markets for rural residential land.
Fiscal Year 2006 compared to
2005.
In 2006, revenue and operating income for the Real
Estate segment increased by $22.5 million and $12.6 million, respectively, over
2005 amounts. Results in 2006 epitomized the upside of this reality
as we sold properties from two projects following multiple years of
investment.
At our
development project in Gig Harbor, Washington we sold a total of nearly 29 acres
of those portions of the property zoned as either commercial or business-park
resulting in $9.5 million of revenue and $5.9 million of gross
margin. These transactions represent the culmination of a number of
years of investment and work with community and political leaders to build
support for the project. The remaining commercial/business park
property sale recognized as revenue in 2006 was for 8 acres of property
contiguous to our headquarters building in Poulsbo, Washington.
The
200-acre, $10.7 million residential plat sale identified in the preceding table
was from our Bremerton West Hills project. The 401-acre, $1.4 million
“Other Land Sale” in the preceding table represents environmentally sensitive
property sold to the Nisqually Land Trust. This transaction is an
excellent example of private industry working with environmental interests to
promote a win-win outcome for various public and private
interests. The Nisqually Land Trust’s acquisition protects a forested
parcel near the entrance to Mount Rainier National Park while allowing us to
redeploy the capital to other timberland or real estate
opportunities.
Rural
Residential revenue in 2006 consisted of 13 separate transactions totaling 527
acres. Prices per acre realized from these sales are affected by
whether the property is sold with legal access. In 2006 Rural
Residential acreage sales included 78 acres sold without first obtaining legal
access. These sales grossed an average of $3,943 per acre, while the
remaining 444 acres that were sold with legal access grossed an average of
$5,097 per acre.
Cost
of Sales
Real
Estate cost of sales for each of the three years ended December 31, 2007, 2006,
and 2005 were $4.6 million, $9.5 million, and $748,000,
respectively. Cost of sales during the periods presented result from
the aforementioned land sales. The decrease in cost of sales in 2007
relative to 2006 was due primarily to a decrease in acres sold.
Operating
Expenses
Real
Estate operating expenses for each of the three years ended December 31, 2007,
2006, and 2005 were $3.4 million, $3.7 million, and $2.6 million,
respectively. Operating expenses decreased $293,000 in 2007 compared
to 2006. Lower operating expenses in the Real Estate segment are due
to project-related expenditures incurred in connection with a number of
projects, particularly at Gig Harbor, Bremerton, Kingston, and Port
Gamble.
Environmental
Remediation
The
Partnership has accrued liabilities for environmental cleanup of $2.0 million
and $242,000 as of December 31, 2007 and 2006, respectively, for estimated
environmental remediation charges in and around the townsite of Port
Gamble. Port Gamble is a historic town that was owned by P&T for
decades until 1985 when the townsite and other assets were spun off to the
Partnership. P&T continued to operate the townsite through 1995
and leased the millsite at Port Gamble until January 2002 when a settlement
agreement was signed between the Partnership and P&T. This
settlement agreement set forth how the two companies would apportion the costs
and responsibility for environmental remediation in Port Gamble. The
“millsite” is referred to as such because a lumber mill operated on that portion
of the property for more than one hundred years until 1995, before it was
dismantled by the end of 1996.
Our
results for fourth quarter and fiscal year 2007 reflect a $1.9 million charge to
earnings to increase our environmental remediation liability. This
amount reflects our estimate of potential liability associated with
environmental contamination at Port Gamble. This contamination is
believed to have occurred during the years P&T operated a mill at Port
Gamble, from 1853 to 1995. At the time Pope Resources was spun off
from P&T, Port Gamble was included in our assets, and after contamination
was discovered at the town site, mill site, and in the adjacent bay, we entered
into a settlement and remediation agreement with P&T pursuant to which we
and P&T allocated responsibility for cleanup costs. 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.
However,
P&T's financial condition has declined markedly in recent years, having
first disclosed questions about its ability to continue as a going concern in
its Annual Report on Form 10-K for the fiscal year ended December 31,
2006. Since that time we have closely monitored P&T's financial
disclosures, including its repeated attempts to restructure its credit
arrangements throughout the second and third quarters of 2007 and culminating in
a late October 2007 bankruptcy filing in Canada, followed in November 2007 by a
Chapter 11 bankruptcy filing in the United States. Since then,
P&T has undertaken to sell substantially all of its assets. These
events raised substantial doubt in management's views as to whether P&T can
meet all or any portion of its obligations under our settlement and remediation
agreement.
Because of
the joint and several liability that attends to the cleanup obligation,
management has taken a number of steps to address our own exposure as
follows:
·
|
As
noted above, we have increased our remediation estimate by $1.9 million to
reflect our current estimate of the remediation
costs.
|
·
|
In
the fourth quarter of 2006 we revised our methodology for assessing this
liability, shifting to a “Monte Carlo simulation” analysis which we hope
will improve our ability to predict the actual liability for the remaining
cleanup. We believe that a Monte Carlo simulation model is a
useful tool for estimating the costs of a complex project where many
different activities may have a wide variety of possible
outcomes. A Monte Carlo simulation model allows the user to
establish high, medium, and low cost estimates for discrete tasks within
the project, and then to assign probability estimates for specific
outcomes. Using these inputs, the simulation ultimately
generates a data set of 3,000 randomly generated outcomes with related
costs and provides the capability to map these on a histogram with the
axes defining “frequency” and “total cost”. Additionally, the
simulation produces a range of costs with probability-of-outcome
percentiles attached to each. Our new methodology adopts the
practice of accruing to the dollar amount that corresponds to the 50
th
percentile, such that there is a 50% probability that costs will not
exceed such amount based on the simulation exercise, as we believe this is
the best available estimate.
|
·
|
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.
|
·
|
We
are participating actively in the P&T bankruptcy action as an
unsecured creditor in an effort to maximize any potential recovery from
P&T's remaining assets, although we have substantial doubt as to
whether we will recoup any material portion of those assets because
substantially all of P&T’s assets are subject to the security
interests of its lenders.
|
Although
management continues to monitor closely both the Port Gamble cleanup process and
the P&T bankruptcy proceeding, our addition of $1.9 million to the
remediation liability reflects what management believes to be the best estimate
of the remaining cleanup cost based upon an estimation method that represents
the most likely outcome.
The
environmental liability at December 31, 2007 includes $250,000 that the
Partnership expects to expend in the next 12 months and $1.75 million
thereafter. Current activities at the site include dismantling a
sparge area of dredged materials on the millsite itself and costs for developing
a clean up plan for the site as a whole. Activity in the
environmental remediation liability is detailed as follows:
Year ended December 31,
|
|
Balances
at the
Beginning of the
Year
|
|
|
Additions
to
Accrual
|
|
|
Expenditures
for
Remediation
|
|
|
Balances
at the End of the
Year
|
|
2005
|
|
|
474,000
|
|
|
|
198,000
|
|
|
|
514,000
|
|
|
|
158,000
|
|
2006
|
|
|
158,000
|
|
|
|
260,000
|
|
|
|
176,000
|
|
|
|
242,000
|
|
2007
|
|
|
242,000
|
|
|
|
1,878,000
|
|
|
|
126,000
|
|
|
|
1,994,000
|
|
General & Administrative
(G&A)
Fiscal Year 2007 compared to
2006.
G&A costs increased $965,000, or 25%, to $4.8
million from $3.8 million in 2006. The increase in general and
administrative expenses is due primarily to professional service fees incurred
to evaluate capital structuring alternatives with management and the Board of
Directors of the General Partner. G&A costs represented 9% of
revenue in 2007.
Fiscal Year 2006 compared to
2005.
G&A costs increased $166,000, or 5%, to $3.8 million
from $3.7 million in 2005. The increase in general and administrative
expenses experienced in 2006 is due to an increase in costs associated with new
internal control reporting and related audit requirements under the Sarbanes
Oxley Act. G&A costs represented 6% of revenue in 2006 and
2005.
Interest Income and
Expense
Interest
income for 2007 increased to $1.8 million in 2007 from $1.2 in 2006 and $402,000
in 2005. The increase in interest income is due to higher average
cash and short-term investment balances. Our combined cash and
short-term investments balance in 2007 grew from $32.2 million at December 31,
2006 to $32.9 million at December 31, 2007. We have invested cash in
excess of immediate operating cash requirements in auction rate securities,
which in our case are currently student loans backed with the highest credit
rating of Aaa/AAA. The maturities on these securities are long-term
while the interest rate resets every 28 days.
Interest
expense net of interest capitalized to development projects was $1.4 million for
2007, $1.8 million for 2006 and $2.9 million in 2005. The decrease in
interest expense from 2006 to 2007 is attributable to regularly scheduled
principal payments due on our timberland mortgage and an increase in capitalized
interest related to increased basis on land projects under
development. The Partnership’s debt consists primarily of mortgage
debt with a fixed interest rate and amortization schedule. The
outstanding debt has not been reduced with available cash and short-term
investment balances because the terms of the timberland mortgages include a
“make whole” premium paid to the lender for unscheduled principal
payments.
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 2007 compared to
2006.
We have recorded an income tax benefit of $69,000 in
2007, whereas we had recorded a provision for income taxes of $439,000 in
2006. The tax benefit results from the operating loss generated by
our Timberland Management & Consulting segment and increased costs
associated with launching our second timber fund as previously
described.
Fiscal Year 2006 compared to
2005.
We recorded a provision for income taxes of $439,000 in
2006 and $1.0 million in 2005. The decrease in tax expense is due to
the decline in income generated by our Timberland Management & Consulting
segment that tracks with the decline in acres under management as previously
described.
Minority Interest-ORM Timber
Fund I, LP
Minority
Interest-ORM Timber Fund I, LP represents the 80% portion of 2007 net loss of
the Fund attributed to third-party owners of the Fund. The increase
in this amount from prior year is due to the increase in operating activities of
the Fund given its acquisition of timberland in late 2006.
Minority
Interest-IPMB
Minority
Interest-IPMB represents that share of income earned from the Investor Portfolio
Management Business (IPMB) allocated to Pope MGP, Inc., the Managing General
Partner of the Partnership. The 1997 amendment to the Limited
Partnership Agreement authorizing the Partnership to pursue the IPMB further
specifies that income from the IPMB will be split using a sliding scale
allocation method beginning at 80% to the Partnership’s wholly-owned subsidiary,
ORM, Inc., and 20% to Pope MGP, Inc. The sliding scale allocation
method evenly divides IPMB income between ORM, Inc. and Pope MGP, Inc. once such
income reaches $7,000,000 in a given fiscal year. The share of IPMB
allocated to Pope MGP is further split between Pope MGP and a management
incentive plan. In 2007, Pope MGP’s share of the IPMB was
$0.
Current activities of the IPMB are
contained in the Timberland Management & Consulting segment, which include
timberland consulting, management and disposition services, and expenses
associated with the launch of a second private equity timber fund.
Fiscal Year 2007 compared to
2006.
The charge or expense that is the allocation of income
to a minority interest decreased to zero in 2007 from $77,000 in
2006. The decrease in minority interest allocation is due to the
reduction in the per-acre management fee rate for our primary timberland
management client and expenses associated with launching our second timber
fund.
Fiscal Year 2006 compared to
2005.
The charge or expense that is the allocation of income
to a minority interest decreased to $77,000 in 2006 from $321,000 in
2005. The decrease in minority interest allocation is due to the
decline in Timberland Management & Consulting results resulting from the
decrease in acres under management for Cascade.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Flows
We
ordinarily finance our business activities using funds from operations and,
where appropriate in management’s assessment, bank lines of
credit. We generate operating cash flow through the sale of timber
products; by providing timberland management, disposition, and consulting
services; by developing timberland investment portfolios for third-parties; and
by selling land for development. Significant recurring uses of cash
include the following: replanting and fertilizing trees; maintaining an adequate
road system on our tree farms; investing in our development properties; funding
annual debt payments on timber mortgages and local improvement district debt;
funding quarterly cash distributions; and funding general and administrative
expenses.
Funds
generated internally from operations and externally through financing are
expected to provide the required resources for the Partnership's future capital
expenditures. The Partnership’s debt-to-total-capitalization ratio as
measured by the book value of equity was 24% at December 31, 2007 versus 27% at
December 31, 2006. The Partnership’s debt consists primarily of
timberland mortgages with fixed amortization schedules and loan terms that
include a prepayment penalty. We currently operate without an
operating line of credit due to the cash we hold in excess of our current
operating needs. We will continue to monitor and forecast our
expected cash requirements and re-establish a line of credit if a need for
additional liquidity should arise.
Now that
ORM Timber Fund I, LP is invested we are working on raising capital for a
second, follow-on fund. Management anticipates that this second fund
will be sized at approximately $100 million and that we will co-invest at the
same 20% level ($20 million in this case), as was done for the first
fund.
The annual
harvest target for 2008 is expected to be approximately 37 MMBF as compared to
55 MMBF in 2007. This represents a 33% reduction from prior year and
a 36% reduction from our sustainable harvest level of 57 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. We plan to harvest 5 MMBF from the tree farms owned by
the Fund in 2008. This represents a 40% reduction from the Fund’s
sustainable harvest level of 8 MMBF.
During the
year ended December 31, 2007, overall cash and cash equivalents decreased $5.0
million while we invested an additional $5.8 million in short-term
investments. This compares to the year ended December 31, 2006 when
we experienced an increase in cash and cash equivalents of $3.8 million and
invested $10.0 million in short-term investments.
Operating cash
activities.
The table below provides the components of
operating cash flows for each year of the three year periods ended December 31,
2007. 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 finally, the sale of our development
properties.
Operating
cash activities (in thousands):
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash
received from customers
|
|
$
|
47,667
|
|
|
$
|
69,548
|
|
|
$
|
56,730
|
|
Cash
paid to suppliers and employees
|
|
|
(24,473
|
)
|
|
|
(25,030
|
)
|
|
|
(25,232
|
)
|
Interest
received
|
|
|
1,712
|
|
|
|
1,095
|
|
|
|
377
|
|
Interest
paid
|
|
|
(2,585
|
)
|
|
|
(1,795
|
)
|
|
|
(2,892
|
)
|
Income
taxes paid
|
|
|
(340
|
)
|
|
|
(247
|
)
|
|
|
(74
|
)
|
Total
|
|
$
|
21,981
|
|
|
$
|
43,571
|
|
|
$
|
28,909
|
|
Cash
generated by operating activities decreased to $22.0 million in 2007 from $43.6
million in 2006. The decrease in cash generated by operating
activities resulted primarily from two major non-recurring land sales in 2006
that resulted in nearly $20.0 million of cash flow.
Cash
generated by operating activities increased to $43.6 million in 2006 from $28.9
million in 2005. The increase in cash generated by operating
activities resulted primarily from two major land sales that resulted in nearly
$20.0 million of cash flow.
Cash used in investing
activities.
The table below represents the annual components
of cash used by year in investing activities for each of the three-year periods
ended December 31, 2007. Recurring investing activities consist
primarily of tree planting, road building and investment in our development
properties to build infrastructure and acquire the entitlements necessary to
make further development of the properties possible.
Investing
activities (in thousands):
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Buildings
and equipment
|
|
$
|
793
|
|
|
$
|
622
|
|
|
$
|
784
|
|
Development
properties
|
|
|
9,868
|
|
|
|
10,458
|
|
|
|
4,960
|
|
Timber
and roads
|
|
|
1,501
|
|
|
|
1,098
|
|
|
|
1,012
|
|
Timberland
acquisitions
|
|
|
-
|
|
|
|
57,805
|
|
|
|
-
|
|
Purchase
of short-term investments
|
|
|
5,775
|
|
|
|
10,000
|
|
|
|
15,000
|
|
Proceeds
from the sale of fixed assets
|
|
|
(64
|
)
|
|
|
-
|
|
|
|
(6
|
)
|
Cash
used in investing activities
|
|
$
|
17,873
|
|
|
$
|
79,983
|
|
|
$
|
21,750
|
|
Cash used
in investing activities decreased to $17.9 million in 2007 from $80.0 million in
2006. The decrease in 2007 from 2006 is due primarily to the Fund’s
2006 $57.8 million acquisition of two timber properties. In 2007 we
invested $5.8 million in short term investments and $793,000 of other capital
expenditures. Cash used to purchase short-term investments represents
the acquisition of auction rate securities that are being used as a vehicle for
investing cash balances in excess of cash required for immediate operating
needs. We incurred capital expenditures for development costs in 2007
for the following Real Estate properties: $2.9 million at Gig Harbor, $2.6
million at Bremerton, $1.6 million for a land acquisition that is contiguous to
the Port Gamble townsite, $1.1 million of capitalized interest related to the
Gig Harbor and Bremerton projects, $828,000 at Hansville, $610,000 at Arborwood
and $23,000 related to other miscellaneous projects.
Cash used
in investing activities increased to $80.0 million in 2006 from $21.8 million in
2005. Investing activities in 2006 consisted primarily of the Fund’s
$57.8 million acquisition of two timber properties. Eighty-percent of
the cash used by the Fund to purchase this timberland was sourced from $46.8
million of third-party investor capital contributions. Additional
investing activities of the Partnership consisted of $10.0 million of auction
rate securities and $12.2 million of capital expenditures. We
incurred capital expenditures for development costs in 2006 for the following
Real Estate properties: $8.7 million at Gig Harbor; $1.4 million at Bremerton;
and $398,000 on the Partnership’s other development
properties. Other capital expenditures included $1.1 million of
reforestation and road building costs on our owned timberlands; and $622,000 of
buildings and equipment expenditures, with nearly three-fourths of this total
related to the Port Gamble townsite.
Cash provided by (used in) financing
activities.
The table below represents the components of cash
used in financing activities for each year of the three-year period ended
December 31, 2007. Our financing activities primarily reflect
payments made on timber mortgages and other debt, unitholder distributions,
capital contributions by third-party investors in the timber funds, and payments
to the Managing General Partner, Pope MGP, for its minority interest allocation
of IPMB income. These payments and outflows are partially offset by
cash received from the exercise of unit options issued to employees and
directors.
Financing
activities (in thousands):
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Mortgage/LID
payments
|
|
$
|
(1,481
|
)
|
|
$
|
(1,675
|
)
|
|
$
|
(1,883
|
)
|
Net
(paydown) draw on line of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
(758
|
)
|
ORM
Timber Fund I, LP Capital Contributions
|
|
|
-
|
|
|
|
46,831
|
|
|
|
-
|
|
Cash
distribution to unitholders
|
|
|
(6,929
|
)
|
|
|
(4,961
|
)
|
|
|
(3,701
|
)
|
Unit
repurchase
|
|
|
(1,374
|
)
|
|
|
-
|
|
|
|
-
|
|
Cash
received from unit option exercises
|
|
|
730
|
|
|
|
254
|
|
|
|
1,813
|
|
Minority
interest distribution
|
|
|
(75
|
)
|
|
|
(204
|
)
|
|
|
(26
|
)
|
Cash
provided (used) by financing activities
|
|
$
|
(9,129
|
)
|
|
$
|
40,245
|
|
|
$
|
(4,555
|
)
|
Cash used
by financing activities was $9.1 million in 2007 as compared to $40.2 million
provided by financing activities in 2006. This change is due
primarily to $46.8 million of capital contributions received by third-party
investors to the ORM Timber Fund I. Cash of $1.4 million was used to
acquire Partnership units pursuant to a unit repurchase plan authorizing the
acquisition of up to $5.0 million of Partnership units commencing November 1,
2007 and continuing for up to one year. Cash distributions were $2.0
million higher in 2007 than 2006 due to an increase in our per unit quarterly
distributions from $0.28 to $0.40 per unit in the third quarter of
2007.
Cash
generated from financing activities increased to $40.2 million for 2006 from
$4.6 million used in 2005. Cash generated by financing activities in
2006 consisted of $46.8 million of capital contributions to the Fund by
third-party investors, and $254,000 received from the exercise of unit options,
which is partially offset by the following: unitholder distributions totaling
$5.0 million, $1.7 million of payments on long-term debt, and $204,000 in
minority interest distributions. In the third quarter of 2006 we
increased our quarterly distribution from $0.25 to $0.28 per unit.
Expected future changes to
cash flows
Operating activities
.
As discussed
above, we plan to decrease the Partnership’s annual harvest volume from 55 MMBF
in 2007 to 37 MMBF in 2008. As announced, this reduction is in
response to expected soft prices for logs as the slowdown in housing starts has
curtailed demand for solid wood products. The decreased harvest level
will translate to lower cash flow from Fee Timber operations in
2008. Cash generated by Real Estate transactions is also expected to
decline in 2008 from 2007.
Investing
activities.
Management is now working on securing capital
commitments for a second fund. The level of co-investment in the
second fund is expected to be the same 20% as was the case in the first fund,
but the size of the second fund is expected to exceed $100
million. In addition to these co-investment obligations, capital
infrastructure expenditures for our Gig Harbor and Bremerton projects are
expected to total $2.2 million and $508,000, respectively, in
2008. The majority of Gig Harbor capital expenditures in 2008
are expected to reflect work on the residential plat entitlement, utility
connections, capitalized interest and infrastructure on the
property. Capital expenditures on the Bremerton property in 2008 will
primarily relate to road and utility extension.
Financing
activities.
Management is currently projecting that cash on
hand, short-term investments, 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. This point of
view reflects management’s rationale for not renewing our bank line of credit,
which has been utilized by the Partnership at various times in its
history. We may incur debt in the future to either co-invest in
future timber funds or to fund significant capital improvements on our
development properties if management determines operating cash flows or cash
reserves are not sufficient to cover these expenditures.
Our
debt-to-total-capitalization ratio as of December 31, 2007, as measured by the
book and market value of our equity, was 24% and 13%,
respectively. Should a financing need arise, management is
comfortable that there is room to take on some debt with the ratios at these
levels, since our loan covenant which limits debt-to-total-capitalization to 50%
is measured against the lower of these two calculations. The Hood
Canal tree farm secures the Partnership’s current timberland mortgages while the
Columbia tree farm is not currently used as collateral for any debt
obligations. 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 113,000 acres of timberland in Washington State. Our
timber acreage is concentrated in two non-contiguous tree farms: the 70,000-acre
Hood Canal tree farm located in Kitsap, Jefferson, and Mason Counties on the
eastern side of Washington’s Olympic Peninsula, and the 43,000-acre Columbia
tree farm located in Cowlitz, Clark, Lewis, and Skamania counties on the western
side of Washington’s Cascade mountain range.
The Hood
Canal tree farm is concentrated at low elevations, which permits us to harvest
trees year-round. Generally, we concentrate our harvests from this
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 the Fund in 2006, management expected a decrease in
the seasonality of Fee Timber operations as the Columbia tree farm and
timberlands owned by the Fund are at higher elevations where harvest activities
are generally possible only in the late spring and summer months. In
practice, over the last two years our harvest has tended to be more
front-loaded, as log prices have been relatively strong in the first half of the
year and winter weather has been relatively benign, enabling management to
front-load the harvest plan. In future periods, management expects
quarterly harvest volume to be affected by both local market conditions for logs
and weather conditions. The weak log markets we are currently
experiencing will lead to a relatively low harvest in the first quarter of
2008.
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, with the 2006 year a classic
case-in-point. 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, 2007 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
|
|
$
|
30,727
|
|
|
$
|
1,342
|
|
|
$
|
2,684
|
|
|
$
|
26,701
|
|
|
$
|
-
|
|
Operating
leases
|
|
|
81
|
|
|
|
67
|
|
|
|
12
|
|
|
|
2
|
|
|
|
-
|
|
Interest
on debt
|
|
|
9,851
|
|
|
|
2,456
|
|
|
|
4,576
|
|
|
|
2,819
|
|
|
|
-
|
|
Unconditional
purchase obligations
|
|
|
145
|
|
|
|
145
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Environmental
remediation
|
|
|
1,994
|
|
|
|
250
|
|
|
|
1,744
|
|
|
|
-
|
|
|
|
-
|
|
Other
long term obligations
|
|
|
297
|
|
|
|
75
|
|
|
|
92
|
|
|
|
50
|
|
|
|
80
|
|
Total
contractual obligations
|
|
$
|
43,095
|
|
|
$
|
4,335
|
|
|
$
|
9,108
|
|
|
$
|
29,572
|
|
|
$
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconditional
purchase obligations represent contracted infrastructure construction at the
Bremerton property. Environmental remediation represents our estimate
of potential liability associated with environmental contamination at Port
Gamble. Other long-term obligations consist of a $204,000 liability
for a supplemental employment retirement plan and a $93,000 contribution
commitment to the YMCA of Pierce County’s fund for building a new facility at
Gig Harbor. This commitment was made as part of the sale of business
park property at the Gig Harbor project to the YMCA.
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 to 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 2008 are $6.7 million, excluding any potential
co-investment by the Partnership in ORM Timber Fund II,
Inc. Projected capital expenditures are currently expected to include
$2.2 million for the Gig Harbor site and $0.5 million for the Bremerton
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.
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
In
December 2007, the FASB issued SFAS No. 141R,
Business
Combinations
,
and SFAS No. 160,
Noncontrolling Interests in
Consolidated Financial Statements
. These
standards were issued jointly and will
require most identifiable assets,
liabilities, noncontrolling interests, and goodwill acquired in a business
combination
to be recorded at full fair value and will require noncontrolling interests
(previously referred
to as
minority interests) to be reported as a component of equity, which changes the
accounting for
transactions
with noncontrolling interest holders. Both statements are effective
for fiscal years beginning
on or after
December 15, 2008. SFAS No. 141R will be applied only to acquisitions
subsequent to the
effective
date. SFAS No. 160 will be applied prospectively to all
noncontrolling interests, including any
that arose
before the effective date, except that the presentation and disclosure
requirements will be applied retrospectively.
Although
management is currently in the process of evaluating the impact of these
standards on the Partnership’s consolidated financial statements, management
expects the impact to include reclassification of the minority interests to
equity.
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, premerchantable 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.
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 2007,
merchantable timber is defined as timber that is equal to or greater than 40
years of age. Beginning in 2008 we have defined merchantable timber
in our depletion calculation as equal to or older than 35 years of
age. Dropping from the 40-year-old to the 35-year-old threshold would
have decreased 2007 depletion expense by approximately $262,000.
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 ORM Timber Fund I, LP timberland,
is expected to approximate the net stumpage realized on the sale, which will
result in relatively little net income impact from the harvest but will generate
operating cash flow.
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
2007 depletion expense by $184,000.
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.
However,
P&T's financial condition has declined markedly in recent years, having
first disclosed questions about its ability to continue as a going concern in
its Annual Report on Form 10-K for the fiscal year ended December 31,
2006. Since that time we have closely monitored P&T's financial
disclosures, including its repeated attempts to restructure its credit
arrangements throughout the second and third quarters of 2007 and culminating in
a late October 2007 bankruptcy filing in Canada, followed in November 2007 by a
Chapter 11 bankruptcy filing in the United States. Since then,
P&T has undertaken to sell substantially all of its assets. These
actions raised substantial doubt in management's views as to whether P&T can
meet all or any portion of its obligations under our settlement and remediation
agreement.
Because of
the joint and several liability that attends to the cleanup obligation,
management has taken a number of steps to address our own
exposure. First, as noted above, we have increased our remediation
estimate by $1.9 million to reflect our current estimate of the remediation
costs. Second, because we have increased our estimate of the
potential costs on several occasions in the past, we have revised our
methodology for assessing this liability, shifting to a “Monte Carlo simulation”
analysis which we hope will improve our ability to predict the actual liability
for the remaining cleanup. Third, 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. Finally, we are monitoring the P&T bankruptcy action as
an unsecured creditor in an effort to maximize any potential recovery from
P&T's remaining assets, although we have substantial doubt as to whether we
will recoup any material portion of those assets because substantially all of
P&T’s assets are subject to the security interests of its
lenders.
Management
continues to monitor closely both the Port Gamble cleanup process and the
P&T bankruptcy proceeding; however, in light of current circumstances our
addition of $1.9 million to the remediation liability reflects what management
believes to be the best estimate of the remaining cleanup cost based upon an
estimation method that represents the most likely outcome.
Property development
costs:
The Partnership is developing several master planned
communities with the Gig Harbor and Bremerton 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 investment activities (as opposed to an
operating activity) on our statement of cash flows. These investments
are often made for a number of years prior to the realization of revenue from
the disposition of these properties. Cash generated from the sale of
these properties is classified as an operating activity on our cash flow
statement as the sale of these properties is the main operating activity of our
Real Estate segment.
Percentage of Completion Revenue
Recognition:
The
partnership accounts for revenue recognized from development sales consistent
with Statement of Financial Accounting Standards No. 66, Accounting for Sales of
Real Estate. When a real estate transaction is closed
with significant outstanding obligations to complete infrastructure or other
construction, revenue is recognized on a percentage of completion method by
calculating a ratio of costs incurred to total costs
expected. Revenue is deferred proportionately based on the remaining
costs to complete the project.
Item
7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate
Risk
At
December 31, 2007, the Partnership had $30.7 million of fixed-rate debt
outstanding with a fair value of approximately $32.5 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 $1.0 million.
Item
8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
POPE
RESOURCES
A
DELAWARE LIMITED PARTNERSHIP
YEARS
ENDED DECEMBER 31, 2007, 2006, AND 2005
POPE
RESOURCES, A DELAWARE LIMITED PARTNERSHIP
YEARS
ENDED DECEMBER 31, 2007, 2006, AND 2005
CONTENTS
|
Page
|
|
|
Reports
of Independent Registered Public Accounting Firm
|
50-51
|
|
|
Financial
statements:
|
|
|
|
Consolidated
balance sheets
|
52
|
|
|
Consolidated
statements of operations
|
53
|
|
|
Consolidated
statements of partners’
|
|
capital
and comprehensive income
|
54
|
|
|
Consolidated
statements of cash flows
|
55
|
|
|
Notes
to consolidated financial statements
|
56-70
|
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, 2007 and 2006, and the related consolidated statements of
operations, partners’ capital and comprehensive income, and cash flows for each
of the years in the three-year period ended December 31, 2007. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule listed in the index at 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, 2007 and 2006, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2007, 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.
Effective
January 1, 2006, the Partnership adopted Statement of Financial Accounting
Standards No. 123(R), “Share-Based Payment” and Securities and Exchange
Commission Staff Accounting Bulletin No. 108, “Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in the Current Year Financial
Statements.”
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Partnership’s internal
control over financial reporting as of December 31, 2007, 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 5,
2008 expressed an unqualified opinion on the effectiveness of internal control
over financial reporting.
/s/ KPMG
LLP
Seattle,
Washington
March 5,
2008
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, 2007, 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 Partnership’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, 2007, 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,
2007 and 2006, and the related consolidated statements of operations, partners’
capital and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2007, and our report dated March 5,
2008
expressed an
unqualified opinion on those consolidated financial statement
s.
/s/
KPMG LLP
Seattle,
Washington
March 5,
2008
POPE
RESOURCES, A DELAWARE LIMITED PARTNERSHIP
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2007 AND 2006
(IN
THOUSANDS)
ASSETS
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,174
|
|
|
$
|
7,194
|
|
Short-term
investments
|
|
|
30,775
|
|
|
|
25,000
|
|
Accounts
receivable
|
|
|
442
|
|
|
|
1,074
|
|
Land
held for sale
|
|
|
780
|
|
|
|
2,813
|
|
Current
portion of contracts receivable
|
|
|
622
|
|
|
|
4,547
|
|
Prepaid
expenses and other
|
|
|
252
|
|
|
|
499
|
|
Total
current assets
|
|
|
35,045
|
|
|
|
41,127
|
|
|
|
|
|
|
|
|
|
|
Properties
and equipment, at cost:
|
|
|
|
|
|
|
|
|
Land
held for development
|
|
|
21,159
|
|
|
|
13,294
|
|
Land
|
|
|
22,318
|
|
|
|
22,327
|
|
Roads
and timber, net of accumulated depletion
|
|
|
|
|
|
|
|
|
of
$48,418 and $43,461
|
|
|
94,635
|
|
|
|
98,110
|
|
Buildings
and equipment, net of accumulated
|
|
|
|
|
|
|
|
|
depreciation
of $7,017 and $6,748
|
|
|
3,577
|
|
|
|
3,405
|
|
Total
properties and equipment, at cost
|
|
|
141,689
|
|
|
|
137,136
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
Contracts
receivable, net of current portion
|
|
|
1,420
|
|
|
|
1,161
|
|
Other
|
|
|
1,171
|
|
|
|
858
|
|
Total
other assets
|
|
|
2,591
|
|
|
|
2,019
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
179,325
|
|
|
$
|
180,282
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND PARTNERS' CAPITAL
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,371
|
|
|
$
|
1,114
|
|
Accrued
liabilities
|
|
|
2,112
|
|
|
|
3,083
|
|
Current
portion of environmental remediation
|
|
|
250
|
|
|
|
236
|
|
Current
portion of long-term debt
|
|
|
1,342
|
|
|
|
1,342
|
|
Minority
interest - IPMB
|
|
|
3
|
|
|
|
77
|
|
Deposits
|
|
|
105
|
|
|
|
85
|
|
Deferred
revenue
|
|
|
268
|
|
|
|
8,838
|
|
Total
current liabilities
|
|
|
5,451
|
|
|
|
14,775
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
29,385
|
|
|
|
30,866
|
|
Minority
interest - ORM Timber Fund I, LP
|
|
|
45,803
|
|
|
|
46,685
|
|
Environmental
remediation
|
|
|
1,744
|
|
|
|
6
|
|
Other
long-term liabilities
|
|
|
298
|
|
|
|
345
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners'
capital (units outstanding: 4,663 and 4,647)
|
|
|
96,644
|
|
|
|
87,605
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and partners' capital
|
|
$
|
179,325
|
|
|
$
|
180,282
|
|
See
accompanying notes to consolidated financial statements.
POPE
RESOURCES, A DELAWARE LIMITED PARTNERSHIP
CONSOLIDATED
STATEMENTS OF OPERATIONS
YEARS
ENDED DECEMBER 31, 2007, 2006, AND 2005
(IN
THOUSANDS, EXCEPT PER UNIT INFORMATION)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Fee
Timber
|
|
$
|
35,514
|
|
|
$
|
35,260
|
|
|
$
|
44,424
|
|
Timberland
Management & Consulting
|
|
|
1,344
|
|
|
|
3,670
|
|
|
|
7,764
|
|
Real
Estate
|
|
|
15,037
|
|
|
|
27,320
|
|
|
|
4,818
|
|
Total
revenues
|
|
|
51,895
|
|
|
|
66,250
|
|
|
|
57,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee
Timber
|
|
|
(15,837
|
)
|
|
|
(16,221
|
)
|
|
|
(23,847
|
)
|
Real
Estate
|
|
|
(4,625
|
)
|
|
|
(9,532
|
)
|
|
|
(748
|
)
|
Total
cost of sales
|
|
|
(20,462
|
)
|
|
|
(25,753
|
)
|
|
|
(24,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee
Timber
|
|
|
(4,462
|
)
|
|
|
(4,447
|
)
|
|
|
(4,257
|
)
|
Timberland
Management & Consulting (TM&C)
|
|
|
(2,227
|
)
|
|
|
(2,404
|
)
|
|
|
(4,224
|
)
|
Real
Estate
|
|
|
(3,371
|
)
|
|
|
(3,664
|
)
|
|
|
(2,602
|
)
|
Real
Estate environmental remediation
|
|
|
(1,878
|
)
|
|
|
(260
|
)
|
|
|
(198
|
)
|
General
& Administrative (G&A)
|
|
|
(4,782
|
)
|
|
|
(3,817
|
)
|
|
|
(3,651
|
)
|
Total
operating expenses
|
|
|
(16,720
|
)
|
|
|
(14,592
|
)
|
|
|
(14,932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee
Timber
|
|
|
15,215
|
|
|
|
14,592
|
|
|
|
16,320
|
|
Timberland
Management & Consulting
|
|
|
(883
|
)
|
|
|
1,266
|
|
|
|
3,540
|
|
Real
Estate
|
|
|
5,163
|
|
|
|
13,864
|
|
|
|
1,270
|
|
Unallocated
G&A
|
|
|
(4,782
|
)
|
|
|
(3,817
|
)
|
|
|
(3,651
|
)
|
Total
operating income
|
|
|
14,713
|
|
|
|
25,905
|
|
|
|
17,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(2,574
|
)
|
|
|
(2,691
|
)
|
|
|
(2,879
|
)
|
Interest
capitalized to development projects
|
|
|
1,145
|
|
|
|
912
|
|
|
|
-
|
|
Interest
income
|
|
|
1,753
|
|
|
|
1,154
|
|
|
|
402
|
|
Total
other income (expense)
|
|
|
324
|
|
|
|
(625
|
)
|
|
|
(2,477
|
)
|
Income
before income taxes and minority interest
|
|
|
15,037
|
|
|
|
25,280
|
|
|
|
15,002
|
|
Income
tax benefit (expense)
|
|
|
69
|
|
|
|
(439
|
)
|
|
|
(997
|
)
|
Income
before minority interest
|
|
|
15,106
|
|
|
|
24,841
|
|
|
|
14,005
|
|
Minority
interest-ORM Timber Fund I, LP
|
|
|
402
|
|
|
|
146
|
|
|
|
-
|
|
Minority
interest - IPMB
|
|
|
-
|
|
|
|
(77
|
)
|
|
|
(321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
15,508
|
|
|
$
|
24,910
|
|
|
$
|
13,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.31
|
|
|
$
|
5.37
|
|
|
$
|
2.97
|
|
Diluted
|
|
$
|
3.21
|
|
|
$
|
5.23
|
|
|
$
|
2.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
per unit
|
|
$
|
1.36
|
|
|
$
|
1.06
|
|
|
$
|
0.80
|
|
See
accompanying notes to consolidated financial statements.
POPE
RESOURCES, A DELAWARE LIMITED PARTNERSHIP
CONSOLIDATED
STATEMENTS OF PARTNERS’ CAPITAL
AND
COMPREHENSIVE INCOME
YEARS
ENDED DECEMBER 31, 2007, 2006, AND 2005
(IN
THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
General
|
|
|
Limited
|
|
|
|
|
|
|
Partners
|
|
|
Partners
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2004
|
|
|
991
|
|
|
|
53,542
|
|
|
|
54,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income and comprehensive income
|
|
|
178
|
|
|
|
13,506
|
|
|
|
13,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
(48
|
)
|
|
|
(3,653
|
)
|
|
|
(3,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
based compensation
|
|
|
-
|
|
|
|
76
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from option exercises
|
|
|
-
|
|
|
|
1,813
|
|
|
|
1,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
$
|
1,121
|
|
|
$
|
65,284
|
|
|
$
|
66,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SAB
108 Adjustment
|
|
|
7
|
|
|
|
546
|
|
|
|
553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
January 1, 2006
|
|
$
|
1,128
|
|
|
$
|
65,830
|
|
|
$
|
66,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income and comprehensive income
|
|
|
322
|
|
|
|
24,588
|
|
|
|
24,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
(64
|
)
|
|
|
(4,897
|
)
|
|
|
(4,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
based compensation
|
|
|
-
|
|
|
|
444
|
|
|
|
444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from option exercises
|
|
|
-
|
|
|
|
254
|
|
|
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
$
|
1,386
|
|
|
$
|
86,219
|
|
|
$
|
87,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income and comprehensive income
|
|
|
199
|
|
|
|
15,309
|
|
|
|
15,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
(83
|
)
|
|
|
(6,366
|
)
|
|
|
(6,449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
based compensation
|
|
|
-
|
|
|
|
624
|
|
|
|
624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit
repurchase
|
|
|
-
|
|
|
|
(1,374
|
)
|
|
|
(1,374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from option exercises
|
|
|
-
|
|
|
|
730
|
|
|
|
730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
$
|
1,502
|
|
|
$
|
95,142
|
|
|
$
|
96,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average units outstanding :
|
|
12/31/2007
|
|
|
12/31/2006
|
|
|
12/31/2005
|
|
Basic
|
|
|
4,680
|
|
|
|
4,642
|
|
|
|
4,605
|
|
Diluted
|
|
|
4,825
|
|
|
|
4,762
|
|
|
|
4,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
POPE
RESOURCES, A DELAWARE LIMITED PARTNERSHIP
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS
ENDED DECEMBER 31, 2007, 2006, AND 2005
(IN
THOUSANDS)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Cash
received from customers
|
|
$
|
47,667
|
|
|
$
|
69,548
|
|
|
$
|
56,730
|
|
Cash
paid to suppliers and employees
|
|
|
(24,473
|
)
|
|
|
(25,030
|
)
|
|
|
(25,232
|
)
|
Interest
received
|
|
|
1,712
|
|
|
|
1,095
|
|
|
|
377
|
|
Interest
paid
|
|
|
(2,585
|
)
|
|
|
(1,795
|
)
|
|
|
(2,892
|
)
|
Income
taxes paid
|
|
|
(340
|
)
|
|
|
(247
|
)
|
|
|
(74
|
)
|
Net
cash provided by operating activities
|
|
|
21,981
|
|
|
|
43,571
|
|
|
|
28,909
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(12,162
|
)
|
|
|
(12,177
|
)
|
|
|
(6,756
|
)
|
Proceeds
from sale of fixed assets
|
|
|
64
|
|
|
|
-
|
|
|
|
6
|
|
Purchase
of short-term investments
|
|
|
(5,775
|
)
|
|
|
(10,000
|
)
|
|
|
(15,000
|
)
|
Timberland
acquisition
|
|
|
-
|
|
|
|
(57,806
|
)
|
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(17,873
|
)
|
|
|
(79,983
|
)
|
|
|
(21,750
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
distributions to unitholders
|
|
|
(6,449
|
)
|
|
|
(4,961
|
)
|
|
|
(3,701
|
)
|
Net
draw (repayment) on line of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
(758
|
)
|
ORM
Timber Fund I, LP capital contributions
|
|
|
-
|
|
|
|
46,831
|
|
|
|
-
|
|
ORM
Timber Fund I, LP distributions
|
|
|
(480
|
)
|
|
|
-
|
|
|
|
-
|
|
Unit
repurchase
|
|
|
(1,374
|
)
|
|
|
-
|
|
|
|
-
|
|
Repayment
of long-term debt
|
|
|
(1,481
|
)
|
|
|
(1,675
|
)
|
|
|
(1,883
|
)
|
Proceeds
from option exercises
|
|
|
730
|
|
|
|
254
|
|
|
|
1,813
|
|
Minority
interest distribution
|
|
|
(74
|
)
|
|
|
(204
|
)
|
|
|
(26
|
)
|
Net
cash provibed by (used in) financing activities
|
|
|
(9,128
|
)
|
|
|
40,245
|
|
|
|
(4,555
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(5,020
|
)
|
|
|
3,833
|
|
|
|
2,604
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
|
7,194
|
|
|
|
3,361
|
|
|
|
757
|
|
End
of year
|
|
$
|
2,174
|
|
|
$
|
7,194
|
|
|
$
|
3,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net income to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
15,508
|
|
|
$
|
24,910
|
|
|
$
|
13,684
|
|
Cost
of land sold
|
|
|
3,854
|
|
|
|
7,709
|
|
|
|
434
|
|
Minority
interest-IPMB
|
|
|
-
|
|
|
|
77
|
|
|
|
321
|
|
Minority
interest-ORM Timber Fund I, LP
|
|
|
(402
|
)
|
|
|
(146
|
)
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
777
|
|
|
|
712
|
|
|
|
640
|
|
Depletion
|
|
|
4,772
|
|
|
|
6,305
|
|
|
|
10,612
|
|
Deferred
tax expense (benefit)
|
|
|
13
|
|
|
|
(16
|
)
|
|
|
890
|
|
Equity
based compensation
|
|
|
624
|
|
|
|
444
|
|
|
|
76
|
|
Increase
(decrease) in cash from changes in
|
|
|
|
|
|
|
|
|
|
|
|
|
operating
accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
676
|
|
|
|
(25
|
)
|
|
|
71
|
|
Contracts
receivable
|
|
|
3,666
|
|
|
|
(5,211
|
)
|
|
|
267
|
|
Other
current assets
|
|
|
247
|
|
|
|
(220
|
)
|
|
|
(141
|
)
|
Accounts
payable and accrued liabilities
|
|
|
(551
|
)
|
|
|
890
|
|
|
|
2,923
|
|
Environmental
remediation
|
|
|
1,753
|
|
|
|
84
|
|
|
|
(316
|
)
|
Deposits
|
|
|
20
|
|
|
|
27
|
|
|
|
81
|
|
Deferred
revenue
|
|
|
(8,570
|
)
|
|
|
8,534
|
|
|
|
(614
|
)
|
Other
long-term liabilities
|
|
|
(47
|
)
|
|
|
133
|
|
|
|
(18
|
)
|
Other
long term assets
|
|
|
(360
|
)
|
|
|
(636
|
)
|
|
|
-
|
|
Other,
net
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
Net
cash provided by operating activities
|
|
$
|
21,979
|
|
|
$
|
43,571
|
|
|
$
|
28,909
|
|
See
accompanying 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 town and millsites and land that is classified as
development property; and OPG Properties LLC, which owns land that is held as
development property. These consolidated financial statements also
include ORM Timber Fund I, LP (the Fund). With respect to the Fund,
Olympic Resource Management LLC is the general partner and owns 1% while Pope
Resources owns 19%. The Fund’s purpose is to invest in
timberlands. See Note 2 for additional information.
The
managing general partner of the Partnership is Pope MGP, Inc. 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 timberlands and provides
management service to the Fund. 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 and residential properties in Kitsap and Pierce Counties,
Washington.
Principles of
consolidation:
The
consolidated financial statements include the accounts of the Partnership and
its subsidiaries. Intercompany balances and transactions have been
eliminated in consolidation.
Minority interests:
Minority
Interest – ORM Timber Fund I, LP represents the 80% interest in the Fund owned
by third-party investors. The Fund is consolidated into Pope
Resources’ financial statements due to Olympic Resource Management LLC’s role as
General Partner of the Fund (see Note 2.) Minority interest-IPMB represents Pope
MGP, Inc.’s interest in the Investor Portfolio Management Business (IPMB) (see
Note 10) and has been classified as a current liability since the minority
interest’s share in income is generally distributed on an annual
basis.
Use of estimates 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.
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. The Partnership limits its credit exposure by
considering the creditworthiness of potential
customers. The Partnership does not maintain an allowance for
doubtful accounts, as losses from accounts receivable have historically been
minimal.
Contracts
receivable:
The
Partnership sells land parcels under contracts requiring a minimum cash down
payment of 20% and having financing terms of up to 15 years at interest rates
between zero and 10% per annum. The Partnership reduces credit risk
on contracts through down payment requirements and utilizing the underlying land
as collateral.
At
December 31, 2007, minimum principal payments on contracts receivable for the
next five years and thereafter are due as follows (in thousands):
2008
|
$622
|
|
2009
|
35
|
|
2010
|
302
|
|
2011
|
32
|
|
2012
|
187
|
|
Thereafter
|
864
|
|
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.
Property, equipment, and
roads:
Depreciation
is provided using the straight-line method over the estimated useful lives of
the assets, which range from 5 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 consist of the following as of December 31, 2007 and 2006 (in
thousands):
Description
|
|
12/31/2007
|
|
|
12/31/2006
|
|
Buildings
|
|
$
|
7,257
|
|
|
$
|
6,825
|
|
Equipment
|
|
|
2,763
|
|
|
|
2,750
|
|
Furniture
and fixtures
|
|
|
574
|
|
|
|
578
|
|
Total
|
|
|
10,594
|
|
|
|
10,153
|
|
Accumulated
depreciation
|
|
|
(7,017
|
)
|
|
|
(6,748
|
)
|
Net
buildings and equipment
|
|
$
|
3,577
|
|
|
$
|
3,405
|
|
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 ORM Timber Fund I, LP is accounted for in a separate depletion pool
due to the third-party owners in this Fund.
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 where
the Partnership is planning to 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, 2007 of $268,000 represents the unearned portion of the
amounts received on cell tower leases. The balance at December 31,
2006 includes $8.6 million for two real estate transactions. The
Partnership deferred $7.2 million for one transaction due to the buyer’s
rescission clause surrounding the Partnership’s obligation to complete certain
infrastructure improvements which was fulfilled in 2007. An
additional transaction in 2006 required deferral of $1.3 million of total
revenue of $12.0 million since infrastructure improvement obligations under the
sale agreement were not complete until December 31, 2007. The
remainder of the balance at December 31, 2006 represents the unearned portion of
the amounts received for cell tower leases.
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 does not currently sell real estate with
less than a 20% down payment. Management fees and consulting service
revenue is recognized as the related services are provided.
Land
sales:
The
Partnership considers the sale of land to be part of its normal operations and
therefore recognizes revenue from the sale and cost of sales for the
Partnership’s basis in the property sold. Cash generated from these
sales are included in cash flow from operations on the Partnership’s statements
of cash flows. Investments to acquire timberlands, from which the
sale of land with a higher or better use is made, and the costs incurred to
develop those properties are reported in investing activities. These
cash outflows are often made years prior to realization through sale of the
property and, in many cases, the acquisition of the timberlands occurred prior
to the requirement to include cash flow statements.
Equity based compensation:
Effective
January 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards No. 123 (revised 2004),
Share Based Payment
(SFAS No.
123R) using the modified prospective approach and accordingly have not restated
prior period results. SFAS 123R established the accounting for equity
instruments exchanged for employee services. Under SFAS 123R,
share-based compensation cost is measured at the grant date based on the
calculated fair value of the award. We have also changed our
accounting for equity-based compensation awarded to retirement eligible
directors and employees to amortize the expense of the award on a straight line
basis over the lesser of the vesting period or the period between the grant date
and eligibility for retirement.
Prior to
the adoption of SFAS No. 123R, we accounted for equity based compensation
granted to employees in accordance with Accounting Principles Board (APB) No.
25,
Accounting for Stock
Issued to Employees
, and related interpretations. In 2005, we
adopted the 2005 Unit Incentive Plan. Following adoption of this new
plan the Board of Directors began issuing restricted units instead of unit
options as its primary method of granting equity based
compensation. Units issued as a result of option exercises and
restricted unit grants are funded through the issuance of new
units. As of December 31, 2007, total compensation expense related to
non-vested awards not yet recognized was $980,000 with a weighted average 28
months remaining to vest.
In
addition to accounting and disclosure presented in accordance with APB
No. 25, we also provided the disclosures required under SFAS No. 123,
Accounting for Stock Based
Compensation
(SFAS No. 123) as amended by SFAS No. 148,
Accounting for Stock Based
Compensation – Transition and Disclosures
. As a result,
no expense was reflected in our net income for the period ended December 31,
2005 for unit options, as all options granted had an exercise price equal to the
market value of the underlying units on the grant date.
The table
below reflects our proforma net income per unit for 2005 had compensation for
unit options been determined based on the fair value at the grant date,
consistent with the methodology prescribed under SFAS
No. 123:
|
|
Year
Ended December 31,
|
|
(In
thousands except per unit data)
|
|
2005
|
|
Net
income as reported
|
|
$
|
13,684
|
|
|
|
|
|
|
Add
back employee units based
|
|
|
|
|
compensation
expense recognized
|
|
|
76
|
|
|
|
|
|
|
Subtract
proforma compensation
|
|
|
|
|
expense
under SFAS No. 123
|
|
|
(218
|
)
|
|
|
|
|
|
Proforma
net income
|
|
|
|
|
under
SFAS No. 123
|
|
$
|
13,542
|
|
|
|
|
|
|
Earnings
per unit as reported:
|
|
|
|
|
Basic
|
|
$
|
2.97
|
|
Diluted
|
|
$
|
2.88
|
|
|
|
|
|
|
Proforma:
|
|
|
|
|
Basic
|
|
$
|
2.94
|
|
Diluted
|
|
$
|
2.85
|
|
|
|
|
|
|
No unit
options were granted in 2007 or 2006. For unit options granted in
2005, grant date fair values were determined based upon the
following:
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
|
|
Expected
life
|
|
5
years
|
|
|
|
Risk
free interest rate
|
|
4.00%
- 4.56%
|
|
|
|
Dividend
yield
|
|
1.2%
- 2.3%
|
|
|
|
Volatility
|
|
25.0%
- 31.7%
|
|
|
|
Weighted
average value
|
|
$8.59
|
|
|
|
Comprehensive
income:
Comprehensive
income consists of net income. The Consolidated Statements of
Partners’ Capital and Comprehensive Income contain the disclosure and
calculation of comprehensive income.
Income per partnership
unit:
Basic
income per partnership unit is computed using the weighted average number of
units outstanding during each year. Diluted income per unit is
calculated using the weighted average units outstanding during the year, plus
the dilutive impact of unit options outstanding. Unit options are
excluded from the computation if their effect is anti-dilutive. There
were no anti-dilutive unit options in 2007. In 2006 and 2005 1,100
unit options outstanding were not included in the calculation of earnings per
partnership units as they were anti-dilutive.
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Weighted
average units outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,680
|
|
|
|
4,642
|
|
|
|
4,605
|
|
Dilutive
effect of unit options
|
|
|
145
|
|
|
|
120
|
|
|
|
148
|
|
Diluted
|
|
|
4,825
|
|
|
|
4,762
|
|
|
|
4,753
|
|
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.
2.
|
ORM
TIMBER FUND I, LP (the Fund)
|
ORM Timber
Fund I, LP (the Fund) was formed by Olympic Resource Management LLC
(ORMLLC) for the purpose of attracting investor capital to purchase
timberlands. The Fund was organized as a limited partnership where
the general partner is ORMLLC. The objective of the Fund is to
generate a return on investments through the acquisition, management, value
enhancement and sale of timberland properties. The Fund will operate
for a term of ten years from the end of the drawdown period which ended on
August 1, 2007.
Pope
Resources and ORMLLC own 20% of the Fund which is consolidated into the
Partnership’s financial statements. The Fund’s statement of
operations for the years ended December 31, 2007 and 2006 consist of a loss of
$516,000 and $169,000, respectively. These losses include management
fees paid to ORMLLC of $896,000 and $117,000 for 2007 and 2006, respectively,
which are eliminated in consolidation. Operating income of the Fund
is generated primarily through the sale of logs and other forest
products. The Fund commenced harvest activities in March 2007 and
harvested 5.3 MMBF during 2007.
The Partnership’s consolidated financial
statements include the Fund’s assets and liabilities at December 31, 2007 and
2006 which are as follows:
|
|
2007
|
|
|
2006
|
|
Current
assets
|
|
|
550
|
|
|
|
778
|
|
Timber,
land, and roads (net of $1,269
|
|
|
|
|
|
|
|
|
and
$- accumulated depletion)
|
|
|
56,863
|
|
|
|
57,803
|
|
Total
assets
|
|
$
|
57,413
|
|
|
$
|
58,581
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
159
|
|
|
$
|
224
|
|
Members'
capital
|
|
|
57,254
|
|
|
|
58,357
|
|
Total
liabilities and members' capital
|
|
$
|
57,413
|
|
|
$
|
58,581
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt at December 31 consists of (in thousands):
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Mortgage
note payable to an insurance company, with interest at 9.65%,
collateralized by timberlands, with monthly interest payments and annual
principal payments maturing April 2011
|
|
$
|
9,559
|
|
|
$
|
10,099
|
|
|
|
|
|
|
|
|
|
|
Mortgage
note payable to an insurance company, with interest at 7.63%,
collateralized by timberlands, with monthly interest payments and annual
principal payments maturing April 2011
|
|
|
20,804
|
|
|
|
21,555
|
|
|
|
|
|
|
|
|
|
|
Local
improvement district assessments, with interest ranging from 5.03% to
6.5%, due through 2013
|
|
|
364
|
|
|
|
554
|
|
|
|
|
30,727
|
|
|
|
32,208
|
|
Less
current portion
|
|
|
(1,342
|
)
|
|
|
(1,342
|
)
|
Total
long-term debt
|
|
$
|
29,385
|
|
|
$
|
30,866
|
|
The
Partnership’s debt agreements contain covenants which require the Partnership to
maintain a required debt service coverage ratio and a debt to market
capitalization ratio. As of December 31, 2007, the Partnership was in
compliance with its debt covenants.
At
December 31, 2007, principal payments on long-term debt for the next five years
and thereafter are due as follows (in thousands):
2008
|
$ 1,342
|
|
2009
|
1,342
|
|
2010
|
1,342
|
|
2011
|
26,546
|
|
2012
|
155
|
|
Thereafter
|
0
|
|
4.
|
FAIR
VALUE OF FINANCIAL
INSTRUMENTS
|
The
Partnership's financial instruments include cash and cash equivalents,
short-term investments, accounts receivable, contracts receivable, accounts
payable, and accrued liabilities, for which the carrying amount of each
approximates 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 $30.7 million and $32.2 million has been estimated based on
current interest rates for similar financial instruments to be approximately
$32.5 million and $33.7 million as of December 31, 2007 and 2006,
respectively.
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:
(000’s)
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Consolidated
Partnership income before income taxes (less minority
interest)
|
|
|
$
|
15,439
|
|
|
$
|
25,349
|
|
|
$
|
14,681
|
|
Less:
Income earned in entities that pass-through pre-tax earnings to the
partners
|
|
|
|
15,867
|
|
|
|
24,134
|
|
|
|
12,006
|
|
Income
(loss) subject to income taxes
|
|
|
$
|
(428
|
)
|
|
$
|
1,215
|
|
|
$
|
2,675
|
|
The
provision for income taxes relating to taxable subsidiaries of the Partnership
consists of the following income tax benefit (expense) for the years ended
December 31:
(000’s)
|
|
2007
|
|
2006
|
|
|
2005
|
|
Current
|
|
$
|
82
|
|
$
|
(455
|
)
|
|
$
|
(107
|
)
|
Deferred
|
|
|
(13
|
)
|
|
16
|
|
|
|
(890
|
)
|
Total
|
|
$
|
69
|
|
$
|
(439
|
)
|
|
$
|
(997
|
)
|
A
reconciliation between the federal statutory tax rate and the Partnership’s
effective tax rate is as follows for the years ended December 31:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Statutory
tax on income
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
Income
(loss) earned in entities that pass-through pre-tax earnings to the
partners
|
|
|
(34
|
%)
|
|
|
(32
|
%)
|
|
|
(27
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
-
|
%
|
|
|
2
|
%
|
|
|
7
|
%
|
The net
deferred income tax assets include the following components as of December
31:
|
|
2007
|
|
|
2006
|
|
Current
(included in prepaid expenses and other)
|
|
$
|
52
|
|
|
$
|
50
|
|
Non
current (included in other assets)
|
|
|
67
|
|
|
|
82
|
|
Total
|
|
$
|
119
|
|
|
$
|
132
|
|
The
deferred tax assets are comprised of the following:
(000's)
|
|
2007
|
|
|
2006
|
|
Employee-related
accruals
|
|
$
|
17
|
|
|
$
|
50
|
|
Depreciation
|
|
|
67
|
|
|
|
17
|
|
Other
|
|
|
35
|
|
|
|
65
|
|
|
|
$
|
119
|
|
|
$
|
132
|
|
The
Partnership’s 2005 Unit Incentive Plan (New 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 New Plan of which there are 1,056,167 units authorized but
unissued as of December 31, 2007. The Partnership issued 19,500
restricted units under the New Plan in 2007. These units vest
over four years with 50% vesting after three years and the remaining 50% vesting
after the fourth year from date of grant provided the grantee is still an
employee as of the vesting date. The grantee may not transfer
restricted units until the holder fulfills the vesting requirements, which last
for four years.
Restricted
Units:
Pope
Resources changed the primary form of equity compensation from unit options to
restricted units upon adoption of the New Plan. The Human Resources
Committee makes awards of restricted units to directors and senior managers of
the Partnership and its subsidiaries. The restricted unit grants
ordinarily vest over 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, 2007 was as
follows:
|
|
|
|
Weighted
Average
|
|
|
|
|
Grant
Date
|
|
|
Units
|
|
Fair
Value ($)
|
Outstanding
at December 31, 2005
|
|
20,000
|
|
33.44
|
Grants
|
|
19,000
|
|
34.75
|
Delivered
|
|
(750)
|
|
33.44
|
Forfeited
|
|
(1,500)
|
|
33.44
|
Outstanding
at December 31, 2006
|
|
36,750
|
|
34.10
|
Grants
|
|
19,500
|
|
43.20
|
Delivered
|
|
(448)
|
|
35.69
|
Surrendered
for payment of tax withholding
|
|
(188)
|
|
35.69
|
Forfeited
|
|
(2,364)
|
|
37.54
|
Outstanding
at December 31, 2007
|
|
53,250
|
|
37.27
|
Unit
Options:
Unit
options have not been granted since December 2005. Units options
granted prior to January 1, 2006 were non-qualified options granted at an
exercise price not less than 100% of the fair value on the grant
date. Unit options granted to employees vested over four or five
years. Board members had the option of receiving their annual
retainer in the form of unit options and those options vested immediately as
they were granted monthly for services rendered during the
month. Options granted have a life of ten years.
|
|
Options
|
|
Price
($)
|
Vested
at December 31, 2004
|
|
233,441
|
|
15.65
|
Unvested
at December 31, 2004
|
|
130,250
|
|
18.61
|
Outstanding
at December 31, 2004
|
|
363,691
|
|
16.71
|
Exercised
|
|
(87,779)
|
|
20.66
|
Granted
|
|
2,100
|
|
32.51
|
Vested
|
|
56,820
|
|
27.28
|
Vested
at December 31, 2005
|
|
200,482
|
|
16.57
|
Unvested
at December 31, 2005
|
|
77,530
|
|
13.02
|
Outstanding
at December 31, 2005
|
|
278,012
|
|
15.58
|
Forfeitures
|
|
(4,800)
|
|
12.00
|
Exercised
|
|
(19,750)
|
|
12.86
|
Vested
|
|
33,012
|
|
13.12
|
Vested
at December 31, 2006
|
|
213,744
|
|
16.38
|
Unvested
at December 31, 2006
|
|
39,718
|
|
13.06
|
Outstanding
at December 31, 2006
|
|
253,462
|
|
15.86
|
Exercised
|
|
(47,406)
|
|
15.40
|
Vested
|
|
33,518
|
|
12.52
|
Vested
at December 31, 2007
|
|
199,856
|
|
15.97
|
Unvested
at December 31, 2007
|
|
6,200
|
|
15.96
|
Outstanding
at December 31, 2007
|
|
206,056
|
|
15.97
|
The
aggregate spread between the option exercise price and unit market price
(intrinsic value) of all options outstanding at December 31, 2007 was $5.5
million. The aggregate intrinsic value of all exercisable options at
December 31, 2007 was $5.3 million. The total intrinsic value of
options exercised during 2007 was $1,305,000. The weighted average
remaining contractual term for all outstanding and exercisable options at
December 31, 2007 was 4.2 years.
There were
1,085,815, 1,073,115 and 1,056,167 units available for issuance under the 2005
Unit Incentive Plan as of December 31, 2005, December 31, 2006, and December 31,
2007 respectively.
7.
|
PARTNERSHIP
UNIT REPURCHASE PLAN
|
The
Partnership adopted a unit repurchase plan in October 2007. Under the
plan the Partnership may repurchase limited partner units having an aggregate
value of not more than $5,000,000. The unit repurchase period
commenced November 1, 2007 and may continue for up to one year. In
the fourth quarter of 2007 we purchased 31,656 units for an average cost per
unit of $43.41 per unit.
As of
December 31, 2007 all employees of the Partnership and its subsidiaries are
eligible to receive benefits under a defined contribution
plan. During the years 2005 through 2007 the Partnership matched 50%
of employees’ contributions up to 8% of an individual’s
compensation. The Partnership’s contributions to the plan amounted to
$151,000, $130,000, $116,000, for the years ended December 31, 2007, 2006, and
2005 respectively.
9.
|
COMMITMENTS
AND CONTINGENCIES
|
Environmental
remediation:
The
Partnership has an accrual for estimated environmental remediation costs of
$1,994,000 and $242,000 as of December 31, 2007 and 2006,
respectively. This accrual represents estimated
payments to be made to remedy
environmental contamination at the historic Port Gamble, Washington, town
and mill site and to monitor results of the cleanup efforts. This
contamination is believed to have occurred during the years P&T operated a
mill at Port Gamble, from 1853 to 1995. At the time Pope Resources
was spun off from P&T, Port Gamble was included in our assets, and after
contamination was discovered at the town site, mill site, and in the adjacent
bay, we entered into a settlement and remediation agreement with P&T
pursuant to which we and P&T allocated responsibility for cleanup
costs. 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.
P&T's
financial condition has declined markedly in recent years, having first
disclosed questions about its ability to continue as a going concern in its
Annual Report on Form 10-K for the fiscal year ended December 31,
2006. Since that time we have closely monitored P&T's financial
disclosures, including its repeated attempts to restructure its credit
arrangements throughout the second and third quarters of 2007 and culminating in
a late October 2007 bankruptcy filing in Canada, followed in November 2007 by a
Chapter 11 bankruptcy filing in the United States. Since then,
P&T has undertaken to sell substantially all of its assets. These
actions raised substantial doubt in management's views as to whether P&T can
meet all or any portion of its obligations under our settlement and remediation
agreement. Because of the joint and several liability that attends to
the cleanup obligation, management has taken a number of steps to address our
own exposure. First, as noted above, we have increased our
remediation estimate by $1.9 million to reflect our current estimate of the
remediation costs. Second, because we have increased our estimate of
the potential costs on several occasions in the past, we have revised our
methodology for assessing this liability, shifting to a “Monte Carlo simulation”
analysis which we hope will improve our ability to predict the actual liability
for the remaining cleanup. Third, 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. Finally, we are monitoring the P&T bankruptcy action as
an unsecured creditor in an effort to maximize any potential recovery from
P&T's remaining assets, although we have substantial doubt as to whether we
will recoup any material portion of those assets because substantially all of
P&T’s assets are subject to the security interests of its
lenders.
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 $4,995,000 and $6,266,000 outstanding at December 31, 2007
and 2006, 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 $124,000,
$115,000, and $111,000 for the years ended December 31, 2007, 2006 and 2005,
respectively.
At
December 31, 2007 future annual minimum rental payments under non-cancelable
operating leases are as follows:
Year
|
Amount
|
2008
|
$67,000
|
2009
|
9,000
|
2010
|
3,000
|
2011
|
2,000
|
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 $19,000 and $23,000 in 2007 and 2006, 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, 2007 and 2006 was $204,000 and $210,000,
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.
10.
|
RELATED
PARTY TRANSACTIONS AND MINORITY
INTEREST
|
Pope MGP,
Inc. is the managing general partner of the Partnership and receives an annual
management fee of $150,000.
The
minority interest-IPMB represents Pope MGP, Inc.’s profit-sharing interest in
the IPMB. The 1997 amendment to the Limited Partnership Agreement
authorizing management to pursue the IPMB specifies that annual net income from
the IPMB will be split using a sliding scale allocation method, commencing with
80% to ORM, Inc., a subsidiary of Pope Resources, and 20% to Pope MGP,
Inc. The sliding scale allocation method will allocate income
evenly between ORM, Inc. and Pope MGP, Inc. once net income from the IPMB
reaches $7.0 million in a fiscal year. The share of IPMB allocated to
Pope MGP is further split between Pope MGP and a management incentive plan
referred to as the Long-term Incentive Plan. This portion of Pope
MGP’s share of the IPMB is $0 in 2007 and $77,000 in 2006 and is included in
Timberland Management & Consulting operating expenses. The
aforementioned amendment authorizing pursuit of the IPMB limits cumulative net
expenditures to $5.0 million. As of December 31, 2007, cumulative
revenue from the IPMB exceeds cumulative IPMB expenditures.
11.
|
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
113,000 acres of fee timberland in Washington State.
The
Timberland Management & Consulting segment began providing management,
disposition, and technical forestry services to a client owning approximately
292,000 acres of timberland for this client and an additional 24,000 acres for
the Fund.
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 nearly 2,600 acres of early
stage development properties as of December 31, 2007. All of the
Partnership’s real estate activities are in Washington State.
For the
year ended December 31, 2007, the Partnership had one major customer that
represented 14% of consolidated revenue. For the year ended December
31, 2006, the Partnership had three major customers that represented 16%, 16%
and 12% of consolidated revenue, respectively.
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. Inter-segment 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):
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Pope
Resources Fee Timber
|
|
|
32,678
|
|
|
|
35,905
|
|
|
|
44,427
|
|
Timber
Fund
|
|
|
3,008
|
|
|
|
-
|
|
|
|
-
|
|
Total
Fee Timber
|
|
|
35,686
|
|
|
|
35,905
|
|
|
|
44,427
|
|
Timberland
Management & Consulting
|
|
|
2,260
|
|
|
|
3,860
|
|
|
|
7,786
|
|
Real
Estate
|
|
|
15,076
|
|
|
|
27,356
|
|
|
|
4,854
|
|
Total
Revenue (Internal)
|
|
|
53,022
|
|
|
|
67,121
|
|
|
|
57,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elimination
of Intersegment Revenue
|
|
|
(1,127
|
)
|
|
|
(871
|
)
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenue (External)
|
|
|
51,895
|
|
|
|
66,250
|
|
|
|
57,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment
Revenue or Transfers
|
|
|
|
|
|
|
|
|
|
|
|
|
Pope
Resources Fee Timber
|
|
|
(172
|
)
|
|
|
(645
|
)
|
|
|
(3
|
)
|
Timber
Fund
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
Fee Timber
|
|
|
(172
|
)
|
|
|
(645
|
)
|
|
|
(3
|
)
|
Timberland
Management & Consulting
|
|
|
(916
|
)
|
|
|
(190
|
)
|
|
|
(22
|
)
|
Real
Estate
|
|
|
(39
|
)
|
|
|
(36
|
)
|
|
|
(36
|
)
|
|
|
|
(1,127
|
)
|
|
|
(871
|
)
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Pope
Resources Fee Timber
|
|
|
14,957
|
|
|
|
15,230
|
|
|
|
16,290
|
|
Timber
Fund
|
|
|
(490
|
)
|
|
|
(183
|
)
|
|
|
-
|
|
Total
Fee Timber
|
|
|
14,467
|
|
|
|
15,047
|
|
|
|
16,290
|
|
Timberland
Management & Consulting
|
|
|
(174
|
)
|
|
|
1,419
|
|
|
|
3,538
|
|
Real
Estate
|
|
|
5,202
|
|
|
|
13,255
|
|
|
|
1,302
|
|
G&A
|
|
|
(4,782
|
)
|
|
|
(3,816
|
)
|
|
|
(3,651
|
)
|
Total
Operating Income
|
|
|
14,713
|
|
|
|
25,905
|
|
|
|
17,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Income (External)
|
|
|
14,713
|
|
|
|
25,905
|
|
|
|
17,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment
Charges or Transfers
|
|
|
|
|
|
|
|
|
|
|
|
|
Pope
Resources Fee Timber
|
|
|
(133
|
)
|
|
|
(585
|
)
|
|
|
30
|
|
Timber
Fund
|
|
|
882
|
|
|
|
130
|
|
|
|
-
|
|
Total
Fee Timber
|
|
|
749
|
|
|
|
(455
|
)
|
|
|
30
|
|
Timberland
Management & Consulting
|
|
|
(787
|
)
|
|
|
(153
|
)
|
|
|
2
|
|
Real
Estate
|
|
|
39
|
|
|
|
609
|
|
|
|
(32
|
)
|
G&A
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Depreciation,
Amortization and Depletion
|
|
|
|
|
|
|
|
|
|
Pope
Resources Fee Timber
|
|
|
3,835
|
|
|
|
6,266
|
|
|
|
10,714
|
|
Timber
Fund
|
|
|
1,269
|
|
|
|
-
|
|
|
|
-
|
|
Total
Fee Timber
|
|
|
5,104
|
|
|
|
6,266
|
|
|
|
10,714
|
|
Timberland
Management & Consulting
|
|
|
81
|
|
|
|
73
|
|
|
|
97
|
|
Real
Estate
|
|
|
201
|
|
|
|
647
|
|
|
|
178
|
|
G&A
|
|
|
185
|
|
|
|
218
|
|
|
|
263
|
|
Total
|
|
|
5,571
|
|
|
|
7,204
|
|
|
|
11,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Pope
Resources Fee Timber
|
|
|
63,759
|
|
|
|
65,304
|
|
|
|
73,024
|
|
Timber
Fund
|
|
|
57,412
|
|
|
|
58,581
|
|
|
|
-
|
|
Total
Fee Timber
|
|
|
121,171
|
|
|
|
123,885
|
|
|
|
73,024
|
|
Timberland
Management & Consulting
|
|
|
669
|
|
|
|
690
|
|
|
|
174
|
|
Real
Estate
|
|
|
21,940
|
|
|
|
16,107
|
|
|
|
14,031
|
|
G&A
|
|
|
35,725
|
|
|
|
39,600
|
|
|
|
19,129
|
|
Total
|
|
|
179,505
|
|
|
|
180,282
|
|
|
|
106,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
and Land Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Pope
Resources Fee Timber
|
|
|
1,172
|
|
|
|
1,138
|
|
|
|
1,159
|
|
Timber
Fund
|
|
|
329
|
|
|
|
57,806
|
|
|
|
-
|
|
Total
Fee Timber
|
|
|
1,501
|
|
|
|
58,944
|
|
|
|
1,159
|
|
Timberland
Management & Consulting
|
|
|
105
|
|
|
|
2
|
|
|
|
133
|
|
Real
Estate
|
|
|
10,164
|
|
|
|
10,919
|
|
|
|
5,400
|
|
G&A
|
|
|
392
|
|
|
|
118
|
|
|
|
64
|
|
Total
|
|
|
12,162
|
|
|
|
69,983
|
|
|
|
6,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
of forest products
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
forest products
|
|
|
31,908
|
|
|
|
31,486
|
|
|
|
38,972
|
|
Export
forest products, indirect
|
|
|
1,584
|
|
|
|
1,808
|
|
|
|
3,784
|
|
Fees
for service
|
|
|
4,348
|
|
|
|
6,638
|
|
|
|
10,352
|
|
Homes,
lots, and undeveloped acreage
|
|
|
14,055
|
|
|
|
26,318
|
|
|
|
3,898
|
|
Total
Revenue
|
|
|
51,895
|
|
|
|
66,250
|
|
|
|
57,006
|
|
12.
|
QUARTERLY
FINANCIAL INFORMATION (UNAUDITED)
|
(in
thousands except per unit amounts)
|
|
Revenue
|
|
|
Income
From
Operations
|
|
|
Net
Income
|
|
|
Earnings Per
Partnership Unit Basic
|
|
|
Earnings Per
Partnership Unit Diluted
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
$
|
6,787
|
|
|
$
|
688
|
|
|
$
|
854
|
|
|
$
|
0.18
|
|
|
$
|
0.18
|
|
Second
quarter
|
|
|
15,326
|
|
|
|
4,952
|
|
|
|
4,815
|
|
|
|
1.03
|
|
|
|
1.00
|
|
Third
quarter
|
|
|
12,171
|
|
|
|
3,228
|
|
|
|
3,551
|
|
|
|
0.76
|
|
|
|
0.74
|
|
Fourth
quarter
|
|
|
17,611
|
|
|
|
5,845
|
|
|
|
6,288
|
|
|
|
1.34
|
|
|
|
1.30
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
$
|
16,083
|
|
|
$
|
6,180
|
|
|
$
|
5,298
|
|
|
$
|
1.14
|
|
|
$
|
1.11
|
|
Second
quarter
|
|
|
15,610
|
|
|
|
3,740
|
|
|
|
3,540
|
|
|
|
0.77
|
|
|
|
0.75
|
|
Third
quarter
|
|
|
18,024
|
|
|
|
8,403
|
|
|
|
8,279
|
|
|
|
1.78
|
|
|
|
1.74
|
|
Fourth
quarter
|
|
|
16,533
|
|
|
|
7,582
|
|
|
|
7,793
|
|
|
|
1.68
|
|
|
|
1.63
|
|
The
Partnership has historically invested cash that is not required to fund
immediate cash needs in a combination of money market accounts and AAA-rated
student loan auction rate securities (SLARS). These SLARS are private
placement securities with nominal long-term maturities for which the interest
rates are reset every 28 days through a Dutch auction. Prior to each reset date,
holders of the security have a choice to either liquidate their interest in the
security or retain the security and obtain the new interest rate set by the
auction. The Partnership invests in SLARS that are almost exclusively originated
under the Federal Family Education Loan Program (FFELP) because FFELP loans are
reinsured by the U.S. Department of Education for at least 97% of defaulted
principal and interest.
In
February 2008, auctions for these SLARS began to fail, with auction failure
occurring when the level of bidders for the security is insufficient to provide
liquidity for those investors that want to exit the investment. The
interest rate paid when an auction fails is referred to as the default rate and
is set by the underlying finance documents agreed to by the debt
issuer.
As of
February 29, 2008, the Partnership currently holds $17 million in SLARS and all
of these securities have been through at least one successful reset in 2008. As
we have moved deeper into the first quarter of 2008, however, $16 million of
these securities have now been through one reset date with a failed auction
result and are now paying interest at a default interest rate. The
default interest rate is set according to terms of the SLARS legal documents and
is typically a spread to LIBOR, or a Treasury index. However, the default rate
can also be a fixed number or a state regulated cap. Where the SLARS
in our portfolio have been through an auction failure, the vast majority have
default rates pegged to 150 basis points over LIBOR. One is pegged to Treasuries
and the one with a double-digit rate is governed by a state regulated
cap. The following table provides a listing of our SLARS portfolio by
issuer, interest rate, and maturity, with the latter ranging between 24 and 38
years. Management recognizes the need to evaluate at its next
quarterly balance sheet date whether the failed auctions indicate impairment in
value based on the facts available at that time.
Issuer
of Security
|
Rate
(1)
|
Reset
Date
(2)
|
Maturity
|
Position
(millions)
|
|
|
|
|
|
Pennsylvania
State Higher Education Assistance
|
4.600%
|
3/10/2008
|
12/1/2045
|
$
1.00
|
Pennsylvania
State Higher Education Assistance
|
10.530%
|
3/18/2008
|
5/1/2046
|
1.00
|
Federated
Student Finance Corporation
|
4.618%
|
3/19/2008
|
6/1/2041
|
1.00
|
Brazos
Higher Education Authority, Inc.
|
4.635%
|
3/20/2008
|
12/1/2042
|
1.00
|
Connecticut
Student Loan Foundation
|
4.624%
|
3/24/2008
|
6/1/2034
|
1.00
|
Brazos
Higher Education Authority, Inc.
|
4.625%
|
3/25/2008
|
6/25/2042
|
1.00
|
Brazos
Student Finance Corporation
|
4.625%
|
3/25/2008
|
7/16/2038
|
1.00
|
Brazos
Student Finance Corporation
|
4.619%
|
3/27/2008
|
4/2/2040
|
0.95
|
Collegiate
Funding Services Education Loan
|
4.619%
|
3/27/2008
|
12/28/2043
|
1.00
|
Missouri
Higher Education Loan Authority
|
3.880%
|
3/27/2008
|
9/1/2043
|
1.00
|
NELNET
Education Loan Funding
|
4.619%
|
3/27/2008
|
7/25/2043
|
1.00
|
Student
Loan Marketing Association
|
4.619%
|
3/27/2008
|
3/15/2028
|
1.00
|
Student
Loan Marketing Association
|
4.611%
|
3/28/2008
|
1/25/2042
|
1.00
|
Brazos
Higher Education Authority, Inc.
|
4.580%
|
4/1/2008
|
12/1/2042
|
1.00
|
Missouri
Higher Ed Loan
|
1.915%
|
4/1/2008
|
5/1/2044
|
1.00
|
North
Carolina State Education Assistance Authority
|
5.105%
|
4/1/2008
|
7/1/2032
|
1.00
|
Panhandle
Plains Texas Higher Education Authority
|
4.575%
|
4/2/2008
|
6/1/2036
|
1.00
|
Total
|
|
|
|
$16.95
|
(1)
|
With
the exception of the security issued by Pennsylvania State Higher
Education Assistance with a reset date of 3/10/2008, all these rates are
default rates set as a result of failed
auctions.
|
(2)
|
Reset
dates shown are the date of the next auction for each
security.
|
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:
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, 2007 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, 2007.
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 53 of this annual report on Form 10-K.
Changes
in Internal Controls
There were no changes in the
Partnership’s internal controls 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
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 General Partner as of February 19,
2008. Officers of the Managing General Partner hold identical offices
with the Partnership.
Name
|
Age
|
|
|
|
|
David
L. Nunes
(2)
|
46
|
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.
|
|
|
|
Thomas
M. Ringo
|
54
|
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.
|
|
|
|
John
E. Conlin
(2),
(3),
(4)
|
49
|
Director;
President and COO, NWQ Investment Management, 2006 to present; Co-Founder
of Education Partners from 2004 to present; Member, Corporate Advisory
Board, University of Michigan, 2006 to present; Member,
University of Rochester Endowment Committee, 2006 to present; Director,
ACME Communications, 2005 to present; Director, Montgomery & Company,
2003 to 2007; 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.
|
|
|
|
Douglas
E. Norberg
(1),
(3),(4) , (5)
|
67
|
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.
|
|
|
|
Peter
T. Pope
(1),
(4)
|
73
|
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.
|
|
|
|
J.
Thurston Roach
(1),
(3),
(4)
|
66
|
Director;
private investor; Director, Deltic Timber Corporation, December 2000 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.
|
|
3)
|
Member
of the Audit Committee
|
|
4)
|
Member
of the Human Resources Committee
|
5) Designated
financial expert for the Board of Directors Audit Committee
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, 2008, and the terms of the Class B directors
expires on December 31, 2009. 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 2007 with all 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 NASD Rules
4360(c) and 4350(c)(4), board nominations are not made or approved by a separate
nominating committee or by a majority of the independent directors.
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 the Nasdaq’s qualification requirements for
Audit Committee members. The Audit Committee met to discuss the
Partnership seven times during 2007. 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 four times during 2007. Mr. Peter T. Pope is the
Chairman of the Human Resources Committee. 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.
Item
11.
EXECUTIVE
COMPENSATION; COMPENSATION DISCUSSION & ANALYSIS
Overview
Compensation
Philosophy and Objectives
We have
designed our compensation programs to:
|
-
|
Attract
and retain well-qualified employees. We use compensation
packages that approximate those provided to executives in companies of
similar size, in our industry and other industries comparable to ours, and
similarly positioned public companies. We are unique in that we
are the only public company that is a partnership focused on the timber
industry, so the committee reviews the programs of similar companies for
which information is available and considers the relevant similarities and
differences.
|
|
-
|
Promote
our strategic and financial objectives. Management works with
our board to determine our business and financial goals and, once
developed, our Human Resources Committee establishes, monitors and revises
compensation programs and individual targets that reward satisfaction of
those goals. The committee strives to distinguish and balance
short-and-long-term performance goals and treats incentives accordingly,
recognizing the executives’ relative levels of success both on an
individualized and a company-wide
basis.
|
|
-
|
Treat
our executives fairly and sustain their long-term allegiance to the
Partnership. We believe that a compensation system is, above
all, a human resources tool, and like all employees, our executives
perform best when they believe they are paid fairly. By
balancing base salary and benefits with bonus and equity-based
compensation awards, our executives have a competitive, predictable cash
compensation stream, coupled with a cash bonus program that rewards recent
performance and an equity-based system of restricted unit grants that
rewards prior performance while promoting tenure and future
success. In limited instances we also provide special
incentives relating to specific aspects of our business, such as
direct-participation awards based on the success of our investor portfolio
management business, or IPMB.
|
|
-
|
Align
executives’ financial interests with those of other
unitholders. Our restricted unit grant program, which is a
continuation of our former unit option program, involves a progressively
vesting series of equity grants. These grants ordinarily are
made annually or, in limited circumstances, upon achievement of various
milestones, and reflect both past success and an incentive toward future
performance. We believe that these grants promote the other
compensation goals outlined above while tying the executives’ success to
increasing long-term unitholder
value.
|
The
Role of the Human Resources Committee and Executive Officers in Compensation
Decisions
The Human
Resources Committee of the board of directors has responsibility for
determining our compensation philosophy and approving all compensation for the
CEO and his immediate subordinates. Annually in February the
committee reviews each component of the total compensation paid to these
individuals. The method for determining compensation varies 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
|
the
salaries of executive officers in similar positions with companies of
comparable size, maturity and pursuing similar objectives, and other
companies within the timber
industry.
|
|
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 consults annually with Towers Perrin, a nationally recognized
compensation-consulting firm to assist the committee in assessing the market for
top executives. Towers Perrin is engaged by the committee and
performs no other services for the Partnership or its subsidiaries or
management. The firm performs an annual market analysis known as the
Towers Perrin Executive Compensation Market Review, which looks to general
industry organizations of similar size using published compensation survey
sources and data from public company proxy statements, and based upon other
published surveys including the Watson Wyatt, Milliman, and Towers Perrin
proprietary studies. The data includes more than 300 companies with
annual revenues between $25 million and $500 million and focuses on companies
with annual revenues between $25 million and $100 million. In
addition, for certain positions, this general data is supplemented by Towers
Perrin proprietary survey data from the forest products and real estate
industries. This data is integral to the committee’s deliberations
and conclusions regarding appropriate levels of executive
compensation.
Elements
of Compensation
The
committee believes that the multi-part approach to compensation outlined above
best serves the interests of the Partnership and our unitholders, enabling us to
meet the requirements of the highly competitive environment in which we operate
while ensuring that our executive officers are compensated in a way that
advances the unitholders’ short- and long-term interests.
Base Salary.
In
establishing base salary levels for executives and other members of the
management team, the committee targets market median pay levels among
individuals in comparable positions for similar-in-size general industry
organizations with appropriate reference to comparable positions in the forest
products and real estate industries. We do not necessarily treat the
midpoint of this range as a benchmark or ideal goal, and as noted above, we do
not have a publicly traded peer group. However, we do consider median
pay levels as a part of the balance between staying competitive so as to retain
valuable talent, while recognizing that we are a small organization when
compared to most publicly traded enterprises and particularly those in our
geographic region and market sector. Using the Towers Perrin data,
the committee takes into account such factors as competitive industry salaries,
as well as general and regional economic conditions and the size and geographic
differences of the identified companies. 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 2007, the base salaries for the
Partnership’s executives were increased by 3% to recognize the impact of annual
cost-of-living increases.
Annual
Bonus.
Executive officers have an annual incentive (bonus)
opportunity with awards based on the overall performance of the Partnership and
on specific individual performance targets. The overall performance
targets are primarily based (with a 70% weighting) upon an assessment of the
Partnership's performance as compared to budgeted fiscal year performance
expressed in terms of net income and free cash flow. Of this 70%
component, 75% is weighted toward measurement against the budgeted net income
target and 25% against the budgeted free cash flow target. A 30%
performance weighting is allocated to performance measured against goals aimed
at one or more of the following criteria: successfully pursuing the
Partnership’s growth strategies, securing key entitlements to create
value-adding opportunities in our real estate portfolio, improving productivity,
and increasing earnings and return on equity.
The
structure of the annual bonus award program attaches to each executive and
member of management a target bonus opportunity expressed in terms of
percent-of-base-salary. This target bonus opportunity is established
by the committee after reviewing the Towers Perrin market data for executive and
management positions in our peer group, adjusted to reflect certain unique
attributes of the Partnership such as relative size, industry, location, and
specific management duties. Further, the program contemplates payout
opportunities at threshold, target, and maximum levels that are calibrated with
corresponding levels of our financial performance versus budget. For
example, if performance is at the threshold level (75% of budget), bonuses are
paid at 50% of the individual’s target, and if maximum performance is achieved
(140% of budget), bonuses are paid at 200% of target.
Sizing of
the bonus pool is a two-step process. The first step is to determine
the extent to which the Partnership achieved its overall goals to derive an
overall measure of actual versus target performance expressed as a
percentage. If this overall percentage is below 75%, there is no
bonus award for that performance year. Assuming the performance
target of 75% is met, step two is to multiply the award factor (between 50% and
200%) that corresponds to the performance level achieved times the base salary
of each of the pool participants and sum up these products. Once the
overall bonus pool size is determined, the Chief Executive Officer makes
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. The committee makes the final determination of the bonus
pool split and the bonus award to be paid to the executive
officers.
The table
below shows the threshold, target and maximum bonus opportunities for the
Partnership’s executives represented as a percentage of base salary effective as
of the end of 2007 at corresponding levels of financial performance results
versus plan.
Name
|
<75%
of goals achieved
|
75%
of goals achieved
|
100%
of goals achieved
|
≥140%
of goals achieved
|
David
L. Nunes, President & CEO
|
No
bonus paid
|
25%
of salary
|
50%
of salary
|
100%
of salary
|
Thomas
M. Ringo, Vice President & CFO
|
No
bonus paid
|
20%
of salary
|
40%
of salary
|
80%
of salary
|
The
committee believes this element of compensation is important to focus management
efforts on and provide rewards for annual financial and strategic results that
are aligned with creating value for our unitholders.
Equity Based
Compensation.
The committee follows a compensation philosophy
that includes unit-based compensation as a long-term incentive program for
management. The committee adopted the Pope Resources 2005 Unit
Incentive Plan during 2005 in order to include restricted unit grants as the
primary element of unit-based compensation, substituting for options that had
previously served that role. Equity-based compensation promotes three
primary goals:
|
o
|
Promoting
employee loyalty by giving those employees an ownership stake in the
Partnership.
|
|
o
|
Aligning
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.
|
|
o
|
Optimizing
the cash flow consequences that result from base salary and cash bonuses,
reducing the Partnership’s operating cash outflows while providing a
predictable base salary.
|
As with
other elements of our executive compensation program, long-term incentive award
grant opportunities are adjusted, with the assistance of Towers Perrin, such
that long-term incentive grants result in total direct compensation levels 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. The committee generally
makes unit-based compensation grants to eligible employees on a single date each
year, normally at its regularly scheduled meeting in late January or early
February to reflect prior-year performance. In 2007, restricted unit
awards were made at the late January meeting. Exceptions are made
rarely and are usually confined to grants coincident with hiring of a new
employee.
Restricted unit awards provide
recipients with ownership units in the Partnership upon lapse of award
restrictions. These restricted unit awards vest on the basis of
continued service to the Partnership. These awards vest 50% upon
completion of three years of service after grant and the other 50% vests 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.
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. The IPMB award was reduced in 2007 as the Partnership’s
IPMB revenues and pre-tax profit have declined.
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, 2007 all our employees are
eligible to receive benefits under a defined contribution
plan. During 2007 and 2006 the Partnership matched 50% of the
employees’ contribution up to 8% of compensation. Partnership
contributions to the plan amounted to $150,000, $130,000 and, $116,000, for each
of the years ended December 31, 2007, 2006 and 2005,
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 $19,000 in 2007 for this benefit
based on an approximation of the cost of purchasing a life annuity paying the
aforementioned benefit amount. The balance of the liability as of
December 31, 2007 was $204,114.
Agreements
Between the Partnership and Executive Officers
Each employee is employed at the will
of the Partnership and does not have a term of guarantied
employment. No manager or other person, other than the President/CEO
of the Company, has the authority to make any commitment to an employee
guaranteeing a position at the Company for any particular length of
time. 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).
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. Furthermore, the committee view is that retention of our
executive talent is to be encouraged and that the fostering of executives’
continual attention and dedication to duty is important, notwithstanding the
possibility, threat, rumor, or occurrence of a change in control event for the
Partnership. 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, 2007.
Name
|
|
Two
times base salary
|
|
|
Target
bonus
|
|
|
Total
cash payments
|
|
David
L. Nunes, President & CEO
|
|
$
|
618,000
|
|
|
$
|
154,500
|
|
|
$
|
772,500
|
|
Thomas
M. Ringo, Vice President & CFO
|
|
$
|
401,700
|
|
|
$
|
80,340
|
|
|
$
|
482,040
|
|
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 $1,000,000 in
a single year will apply to the Partnership or its subsidiaries in the
foreseeable future because this provision applies only to corporations and not
to partnerships. In the event that the Partnership were to determine
that such limitations would apply in a given scenario, the committee will
analyze the circumstances presented and act in a manner that, in its judgment,
is in the best interests of the Partnership. This may or may not
involve actions to preserve deductibility.
Officer
Unit Ownership Guidelines
We do not have a formal unit ownership
guideline for executive officers, but note that Mr. Nunes owns units of Pope
Resources that, as of year-end 2007, had a value of more than seven times his
2007 base salary. Similarly, Mr. Ringo owns units of Pope Resources
that, as of year-end 2007, had a value of more than five times his 2007 base
salary. Of these owned unit positions, Mr. Nunes acquired 48% of his
through open-market purchases and another 26% through exercises of unit options
while Mr. Ringo acquired 14% of his through open-market purchases and another
55% through exercises of unit options.
Summary
Compensation Table
The
following table sets forth information regarding compensation earned by our
named executive officers for the years 2005 through 2007:
Name
and
Principal
Position
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
(1)
|
|
|
Unit
Awards
($)
(2)
|
|
|
Non-equity
Incentive Plan Compensation ($) (3)
|
|
|
All
Other Compensation
($)
(4)
|
|
|
Total
($)
|
|
David
L. Nunes
President
and CEO
|
2007
|
|
|
307,500
|
|
|
|
260,487
|
|
|
|
194,625
|
|
|
|
-
|
|
|
|
26,091
|
|
|
|
788,783
|
|
|
2006
|
|
|
297,500
|
|
|
|
250,800
|
|
|
|
156,375
|
|
|
|
18,695
|
|
|
|
17,040
|
|
|
|
740,410
|
|
|
2005
|
|
|
280,096
|
|
|
|
285,000
|
|
|
|
150,480
|
|
|
|
40,859
|
|
|
|
9,250
|
|
|
|
765,685
|
|
Thomas
M Ringo
V.P.and
CFO
|
2007
|
|
|
199,875
|
|
|
|
135,453
|
|
|
|
108,125
|
|
|
|
-
|
|
|
|
19,200
|
|
|
|
462,653
|
|
|
2006
|
|
|
193,333
|
|
|
|
134,816
|
|
|
|
86,875
|
|
|
|
11,217
|
|
|
|
14,100
|
|
|
|
440,341
|
|
|
2005
|
|
|
182,058
|
|
|
|
148,000
|
|
|
|
83,600
|
|
|
|
25,537
|
|
|
|
10,250
|
|
|
|
449,445
|
|
(1)
|
Amounts
represent bonuses earned in the year indicated but paid in the subsequent
year.
|
(2)
|
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 vest over four years
with 50% vesting after three years and the remaining 50% vesting on the
fourth anniversary of the grant
date.
|
(3)
|
Amounts
represent cash payment awards based upon performance of the Investor
Portfolio Management Business (IPMB) during the award year and are
contingent upon the officer’s employment with the Partnership on the last
day of the award year. These payments are made from Pope MGP’s
share of IPMB income, earned in the year indicated and paid in the
subsequent year.
|
(4)
|
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 2007. Set forth below is information
regarding awards of restricted units granted during 2007:
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
|
January
31, 2007
|
|
|
4,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
43.25
|
|
Thomas
M Ringo
V.P.
and CFO
|
January
31, 2007
|
|
|
2,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
43.25
|
|
Unit
Incentive Plan
In 2005 the Board of
Directors of Pope MGP, Inc. adopted the Pope Resources 2005 Unit Incentive Plan
(New Plan) and terminated future awards under the Partnership’s 1997 Unit Option
Plan. The New Plan is administered by the committee. The
purpose of the change to the New 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 New Plan. As of December 31, 2007 there were 1,056,167
authorized but not issued units in the New Plan. The units issued or
issuable under the New 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 New Plan ordinarily vest over a four-year
period with 50% vesting after three years and the remaining 50% vesting after
the fourth year.
Unit
Appreciation Rights
In
addition to Unit grants, the administrator of the New 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 New Plan and any outstanding
options under the 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.
Administration
The
committee has full discretionary authority to determine all matters relating to
units granted under the plan.