<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
---------------------
FOR FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NO. 1-8859
------------------------
IP TIMBERLANDS, LTD.
(EXACT NAME OF COMPANY AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
TEXAS 13-3259241
<S> <C>
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
TWO MANHATTANVILLE ROAD, PURCHASE, N.Y. 10577
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 914-397-1500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<S> <C>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
- -------------------------------------------------------- --------------------------------------------------------
Class A Depositary Units New York Stock Exchange
</TABLE>
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405, of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The Aggregate market value of the Class A Depositary Unit of the Registrant
as of March 21, 1997, held by non-affiliates of the Registrant was $91,243,750,
calculated on the basis of the closing price on the Composite Tape on March 21,
1997. For this computation, the Registrant has excluded the market value of all
Class A Depositary Units beneficially owned by International Paper Company, its
subsidiaries, and all executive officers and directors of any of them and their
associates as a group. Such exclusion is not to signify in any way that members
of this group are "affiliates" of the Registrant.
The number of shares outstanding of the Registrant, Class A Depositary Units
as of March 21, 1997:
<TABLE>
<S> <C>
OUTSTANDING IN TREASURY
- -------------------------------------------------------- --------------------------------------------------------
46,445,729 -0-
</TABLE>
The following documents are incorporated by reference into the parts of this
report indicated below:
1996 ANNUAL REPORT TO UNITHOLDERS
(THE INSIDE FRONT COVER, PAGES 1 AND 7 THROUGH 18) PARTS I, II, III AND IV
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
IP Timberlands, Ltd. (the "Registrant") is a Texas limited partnership
formed by International Paper Company ("International Paper") to succeed to
substantially all of International Paper's forest resources business. The
Registrant's forest resources business includes the marketing and sale of forest
products for use as sawlogs, poles and pulpwood. In addition, the Registrant may
sell or exchange portions of its forestlands and may acquire additional
properties for cash, additional units or other consideration.
The Registrant operates through IP Timberlands Operating Company, Ltd., a
Texas limited partnership ("IPTO"), in which the Registrant holds a 99% limited
partner's interest. IP Forest Resources Company ("IPFR"), a wholly owned
subsidiary of International Paper, is the managing general partner of the
Registrant and IPTO, and International Paper is the special general partner of
both. A further discussion of the Registrant's organization appears on the
inside front cover and page 13 of the Annual Report to Unitholders (the "Annual
Report"), which information is incorporated herein by reference.
DESCRIPTION OF PRINCIPAL PRODUCTS
The Registrant's forestlands include merchantable forest products inventory,
approximately 60% of which consists of commercial softwoods, principally
southern pine in the South, and spruce and fir in the Northeast. A variety of
hardwoods account for the remaining 40% of the inventory.
The Registrant sells forest products to International Paper for use in its
pulp mills and wood products plants and to third party customers.
A discussion of the Registrant's harvest plan is presented on page 7 of the
Annual Report, which information is incorporated herein by reference.
COMPETITION AND COSTS
Log and wood fiber consuming facilities tend to purchase raw materials
within relatively small geographic areas, generally within a 100-mile radius.
Competitive factors within a market area generally include price, species, grade
and proximity to wood-consuming facilities. The Registrant competes in the log
and wood fiber market with numerous private industrial and non-industrial
forestland owners as well as with the U.S. government, principally the U.S.
Forest Service. Litigation involving endangered species and environmental
concerns has caused a decline in government forest products sales volumes and
market share in recent years and has resulted in additional demand and higher
prices for private forestland owners.
Many factors influence the Registrant's competitive position, including
costs, prices, product quality and services.
MARKETING
Consistent with International Paper's experience prior to the contribution
of its forestlands to the Registrant, the Registrant has annually sold forest
products from its lands to more than 500 purchasers other than International
Paper. No unaffiliated customer accounted for more than 10% of annual revenues
for the years 1996 and 1995.
During 1996, 1995, and 1994, International Paper's facilities consumed
approximately 29%, 31% and 30%, respectively, of the logs and wood fiber
harvested from the Registrant's forestlands, which represented approximately 9%,
11% and 10%, respectively, of its manufacturing facilities' requirements during
such periods. International Paper does not anticipate any change in its policy
of relying on the Registrant's forestlands as an important source of raw
material for its manufacturing facilities, although it is unable to predict what
portion of its requirements will be purchased from the Registrant in the future.
In addition to sales to International Paper for use in its manufacturing
facilities, the Registrant sells trees to International Paper that are harvested
and resold by International Paper to unaffiliated purchasers as logs, poles or
pulpwood.
<PAGE>
Additional information on marketing activities, including related parties
and major customers, appears on pages 7, 13 and 14 of the Annual Report, which
information is incorporated herein by reference.
ENVIRONMENTAL PROTECTION AND SUSTAINABLE FOREST MANAGEMENT
Management of the Registrant's forestlands to protect the environment and
maintain the health of its forestlands is a continuing commitment of the
Registrant. The Registrant expends considerable efforts to comply with
regulatory requirements and applicable best management practices regarding the
use of pesticides, protection of wetlands, protection of wildlife and
biodiversity and minimization of stream sedimentation and soil erosion. From
time to time the Registrant volunteers to, or may be required to, clean up
certain solid waste sites on its forestlands, created by the general public.
Forests are managed in accordance with the Registrant's and International
Paper's Sustainable Forestry Guidelines which were developed in 1995, based on
the American Forest and Paper Association's Sustainable Forestry Principles,
which were adopted by International Paper and the Registrant in 1994.
Environmental protection and forest management costs and capital expenditures
have not been significant and are not expected to be significant in the future.
EMPLOYEES
The Registrant does not have officers or directors. Instead, officers and
directors of IPFR perform all management functions for the Registrant. In most
respects, the Registrant conducts the business formerly conducted by the
Forestlands Division of International Paper. Consequently, the employees of
International Paper or its subsidiaries formerly assigned to such division
continue to carry out the activities of the Registrant. These employees continue
to be employees of International Paper and in some cases are employed solely for
the conduct of the Registrant's business.
ITEM 2. PROPERTIES
FORESTLANDS
Forestlands include approximately 5,034,000 acres owned in fee (excluding
any interest in underlying minerals) and approximately 532,000 acres held under
long-term deeds and leases (terms of three years or longer). These forestlands
are located in 12 states in two major regions of the United States. In the
southern and southeastern United States, forestlands are located in seven
states, including approximately 3,571,000 acres owned in fee and approximately
531,000 acres held under long-term deeds and leases. In the Northeast,
forestlands are located in Maine, New York, Pennsylvania, Vermont and New
Hampshire, including approximately 1,463,000 acres owned in fee and
approximately 1,400 acres held under long-term deeds and leases. The deeds and
leases held by the Registrant do not include deeds and leases with terms of less
than three years which are managed by International Paper in connection with
short-term wood procurement for its manufacturing facilities.
In March 1996, the Registrant sold a 98% general partnership interest in a
subsidiary partnership owning all of Registrant's Western region assets.
Additional information on the sale of the Western assets appears on pages 7, 9
and 14 of the Annual Report, which information is incorporated herein by
reference.
CAPITAL INVESTMENTS
Discussion of the Registrant's capital investments can be found on pages 8
and 9 of the Annual Report, which information is incorporated herein by
reference.
ITEM 3. LEGAL PROCEEDINGS
The Registrant is involved in various legal proceedings incidental to its
business. While any proceeding or litigation has an element of uncertainty, the
Registrant believes that the outcome of any lawsuit or
2
<PAGE>
claim that is pending or threatened, or all of them combined, will not have a
material adverse effect on its consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The market and cash distribution data on the Registrant's Class A Depositary
Units are set forth below and on the inside front cover and page 17 of the
Annual Report and are incorporated herein by reference.
As of March 21, 1997, there were 2837 holders of record of the Registrant's
Class A Depositary Units.
Set forth below are the market price ranges for each quarter of 1996 and
1995 for the Class A Depositary Units on the New York Stock Exchange Composite
Index.
<TABLE>
<CAPTION>
QUARTER 1996 1995
- -------------------------------------------------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
HIGH LOW HIGH LOW
--------- --------- --------- ---------
1st........................................................... 24 7/8 20 1/2 26 1/2 21 7/8
2nd........................................................... 25 7/8 12 1/2 23 1/4 19 1/4
3rd........................................................... 13 7/8 12 5/8 23 1/2 21 3/8
4th........................................................... 14 11 7/8 23 3/4 20
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for 1996, 1995 and 1994 is set forth on page 1 of
the Annual Report and is incorporated herein by reference. Selected financial
data for 1993 and 1992 is as follows (in thousands, except per unit data):
<TABLE>
<CAPTION>
1993 1992
------------ ------------
<S> <C> <C>
Total Revenues.................................................... $ 426,034 $ 297,023
Net Partnership Earnings.......................................... 322,850 206,318
Earnings per Class A Unit......................................... 5.94 3.42
Distributions per Class A Unit.................................... 6.88 2.88
Total Assets...................................................... $ 1,094,033 $ 1,115,678
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's review and comments on the consolidated financial statements
are set forth on pages 7 through 9 of the Annual Report and are incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Registrant's consolidated financial statements, the notes thereto and
the report of independent public accountants are set forth on pages 10 through
16 and 18 of the Annual Report and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
FORWARD-LOOKING INFORMATION
THIS 1996 ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS CONCERNING REGISTRANT'S BUSINESS PROSPECTS, POSSIBLE DECLINES
3
<PAGE>
IN DISTRIBUTIONS AND THE PRICE OF THE CLASS A UNITS. OVERALL MARKET CONDITIONS
COULD INFLUENCE THE EXPECTED PRICE DECLINE OF THE CLASS A UNITS AND THE
POSSIBILITY OF A DECLINE IN THE DISTRIBUTIONS TO CLASS A UNITHOLDERS.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of IPFR(1) and their business
experiences are as set forth below(2):
John T. Dillon, 58, Chairman and Chief Executive Officer of IPFR since 1996.
He became Chairman and Chief Executive Officer of International Paper in 1996.
Prior to that he was executive vice president - packaging from 1987 to 1995 when
he assumed the position of president and chief operating officer of
International Paper. He is also a director of Caterpillar Inc., and he is
Chairman of the Board of The National Council on Economic Education.
DIRECTOR SINCE MARCH 31, 1996
**Thomas C. Graham, 70, Consultant. Retired Chairman of the Board of AK Steel
Corporation. Previously, he was Chairman and Chief Executive Officer, elected to
those posts concurrent with the formation of AK Steel, a publicly held
corporation which emerged from the privately-held Armco Steel Company, L.P. in
April of 1994. He had been named president and chief executive officer of Armco
Steel in June 1992. He was formerly chairman and chief executive officer of
Washington Steel Corporation until 1992. He is a director of Hershey Foods
Corporation and International Paper Company.
DIRECTOR SINCE APRIL 12, 1994
**Jane C. Pfeiffer, 64, Management Consultant. She is a director of Ashland,
Inc., International Paper Company, J.C. Penney Company, Inc., and The Mutual
Life Insurance Company of New York. She is a trustee of the Conference Board,
the University of Notre Dame and the Overseas Development Council and a member
of The Council on Foreign Relations.
DIRECTOR SINCE FEBRUARY 1, 1990
**Roger B. Smith, 71, Retired Chairman and Chief Executive Officer of General
Motors Corporation from 1981 to 1990. He is a director of International Paper
Company and Johnson & Johnson. He is a member of The Business Council and is a
trustee of the Michigan Colleges Foundation, Inc. and the Sloan Foundation.(3)
DIRECTOR SINCE APRIL 12, 1994
- ------------------------
(1) Managing Partner of the Registrant
(2) Arthur G. Hansen, a director of IPFR since Feb. 1, 1990 retired on February
11, 1997.
(3) Roger B. Smith, a director of IPFR since April 12, 1994 will retire from the
Board on July 12, 1997.
** Member of the Audit Committee of IPFR. The Audit Committee reviews policies
and practices of the Registrant dealing with various matters (including
accounting and financial practices) as to which conflicts of interest with
the special general partner may arise. The Audit Committee consists of
nonemployee directors of IPFR.
4
<PAGE>
EXECUTIVE OFFICERS
AS OF MARCH 31, 1997
INCLUDING NAME, AGE, OFFICES AND POSITIONS HELD*,
AND BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS
EDWARD J. KOBACKER, 58, president since August 1992. He was general manager
and group executive of the kraft paper group of International Paper from 1987 to
1992, when he assumed his current position and was elected vice president and
general manager-forestlands division of International Paper.
FREDERICK L. BLEIER, 48, treasurer and controller since July 1993;
controller from 1991. He has been sector controller-forest products of
International Paper since July 1993. He was director-corporate accounting of
International Paper from 1990 to 1993. He joined International Paper as
manager-financial reporting in 1988.
ITEM 11. EXECUTIVE COMPENSATION
The three nonemployee directors of IPFR receive a retainer of $7,000 per
year plus a fee of $1,200 for each IPFR Board and committee meeting attended.
These fees are paid by IPFR. The Registrant has no employees. All management and
services are performed by International Paper on behalf of the Registrant.
International Paper pays the personnel used in the Registrant's business, with
certain expenses reimbursed to it by the Registrant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Registrant knows of no one owning beneficially more than five percent
(5%) of the Registrant's Class A Depositary Units except International Paper,
which owns approximately eight-four percent (84%). The following table shows, as
of March 21, 1997, the number of Class A Depositary Units in the Registrant that
were beneficially owned (as defined by the Securities and Exchange Commission)
or otherwise claimed by current IPFR directors and by all IPFR directors and
executive officers as a group.
<TABLE>
<CAPTION>
UNITS
BENEFICIALLY PERCENT OF TOTAL CLASS A
NAME OF INDIVIDUAL OR GROUP OWNED (1) DEPOSITARY UNITS OUTSTANDING
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
J.C. Pfeiffer.............................................. 300 No director or officer owns as
All directors and executive officers as a group............ 300 much as 1/10 of 1%
</TABLE>
The certificate of incorporation of IPFR ("IPFR Charter") provides for two
classes of common stock: Class A Common Stock and Class B Common Stock, of which
International Paper is the sole owner. The Class B Common Stock possesses
exclusive voting rights and the holder or holders thereof are entitled to
cumulative voting for the election of directors of IPFR. Except with respect to
voting rights, the Class B Common Stock of IPFR is equal in all other respects
to the Class A Common Stock of IPFR. However, the Class B Common Stock
represents only .00005 of 1% of the total authorized Common Stock of IPFR, all
of which has been issued and is outstanding.
- ------------------------
(1) Ownership shown includes securities over which the individual has or shares,
directly or indirectly, voting or investment powers, including units owned
by a spouse or relatives and ownership by trusts for the benefit of such
relatives, as required to be reported by the Securities and Exchange
Commission. Certain individuals may disclaim beneficial ownership of some of
these units, but they are included for the purpose of computing the holdings
and the percentages of Class A Depositary Units owned.
* Officers of IPFR are elected to hold office until the next annual meeting of
the board of directors and until election of successors, subject to removal
by the board.
5
<PAGE>
The IPFR Charter further provides that in the event International Paper
owns, or as a result of certain events would own, less than 50% of either the
outstanding Class A Depositary Units or Class B Depositary Units, then (i)
International Paper must sell all of the shares of Class B Common Stock to the
directors of IPFR, on a pro rata basis, at a price equal to $100.00 per share in
cash; (ii) any director who does not purchase his pro rata shares of Class B
Common Stock must resign; and (iii) the directors of IPFR are then required, as
soon as practicable but not later than the next annual meeting of stockholders
of IPFR, to vote or cause their shares of Class B Common Stock to be voted to
elect a Board of Directors of IPFR comprised entirely of persons who are not
employees, officers, directors or affiliates of International Paper or of any
affiliate of International Paper (other than IPFR). Each director of IPFR is
further required to execute a voting trust agreement, pursuant to which transfer
of ownership in the Class B Common Stock is restricted to persons who are
directors of IPFR. In order to maintain the independence of IPFR's Board of
Directors, the IPFR Charter further provides that (i) each director, upon
resigning as a director of IPFR, must sell his shares of Class B Common Stock to
IPFR, and (ii) each subsequent director elected to replace any director so
resigning must similarly purchase shares of Class B Common Stock and enter into
the voting trust agreement and stockholders' agreement described above.
International Paper believes that the foregoing arrangement for the possible
ownership of the Class B Common Stock of IPFR assists in reducing the potential
for conflicts of interests should International Paper's ownership of units
decrease significantly.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A description of certain relationships and related transactions is set forth
on pages 13 through 16 of the Annual Report and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
EXHIBITS
- -----------
<C> <S>
(13) 1996 Annual Report to Unitholders of the Registrant
(24) Power of Attorney
(27) Financial Data Schedule
</TABLE>
REPORTS ON FORM 8-K
None.
FINANCIAL STATEMENT SCHEDULES
The consolidated balance sheets as of December 31, 1996 and 1995, and the
related consolidated statements of earnings and cash flows for each of the three
years in the period ended December 31, 1996, together with the report thereon of
Arthur Andersen LLP, dated February 7, 1997, appearing on pages 10 through 16
and 18 of the Annual Report, are incorporated herein by reference. With the
exception of the aforementioned information and the information incorporated by
reference in Items 1, 2, 5 through 8 and 13, the Annual Report is not to be
deemed filed as part of this report.
6
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IP TIMBERLANDS, LTD.
By: IP Forest Resources Company
(as managing general partner)
By: JAMES W. GUEDRY
-----------------------------------------
James W. Guedry,
VICE PRESIDENT & SECRETARY
March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
JOHN T. DILLON Chairman of the Board
- ------------------------------ Chief Executive March 28, 1997
(John T. Dillon) Officer and Director
THOMAS C. GRAHAM*
- ------------------------------ Director March 28, 1997
(Thomas C. Graham)
JANE C. PFEIFFER*
- ------------------------------ Director March 28, 1997
(Jane C. Pfeiffer)
ROGER B. SMITH*
- ------------------------------ Director March 28, 1997
(Roger B. Smith)
FREDERICK L. BLEIER Treasurer & Controller and
- ------------------------------ Chief Financial and March 28, 1997
(Frederick L. Bleier) Accounting Officer
*By: JAMES W. GUEDRY
-------------------------
(James W. Guedry,
ATTORNEY-IN-FACT)
7
<PAGE>
[LOGO]
PRINTED ON HAMMERMILL PAPERS, ACCENT OPAQUE, 50 LBS.
HAMMERMILL PAPERS IS A DIVISION OF INTERNATIONAL PAPER
<PAGE>
[LOGO] IP Timberlands, Ltd.
[IMAGE OF PINE CONE]
[LOGO]
1996 ANNUAL REPORT
<PAGE>
ABOUT IP TIMBERLANDS, LTD.
BACKGROUND OF THE PARTNERSHIP
IP Timberlands, Ltd. (IPT) began operations in 1985 as a publicly traded limited
partnership to succeed to substantially all of International Paper's forest
resources business. International Paper contributed 6.3 million acres of
forestlands it owned or held under long-term leases to IPT.
The Partnership has two types of securities: Class A and Class B Depositary
Units. Presently, 16% of the Class A Units are publicly traded. The remainder of
the Class A Units and all the Class B Units are owned by International Paper.
DESCRIPTION OF THE CLASS A DEPOSITARY UNITS
IP Timberlands, Ltd. Class A Units trade on the New York Stock Exchange under
the symbol "IPT." During 1996, the units traded in a range of 11 7/8 to 25 7/8.
The Class A Unit generally entitles the holder to share in 95% of the net cash
flow and earnings generated from the sale of trees harvested during the Initial
Term, the first 15 years of the Partnership (1985-1999). Thereafter, the
majority of the benefit goes to the Class B unitholders, with the Class A
unitholders' share reduced to 4% of total Partnership activities, which include
reforestation and land management costs as well as stumpage sales. The general
partners' share is 1%.
Less than three years remain in the Initial Term of the Partnership. Because of
this, and due to the decrease in their share of earnings from 95% to 4% when the
Initial Term of the Partnership expires, Class A unitholders should expect the
market price of Class A Units to begin to decrease well before December 31,
1999.
At that time, Class A unitholders will be entitled to 95% of any cash remaining
in the Primary Account. Some or all of this amount may be distributed prior to
the end of the Initial Term, depending on future cash flows and requirements,
and the Partnership's distribution policy. Net liquid assets attributable to
Class A Units in that account totaled $3.51 per unit at December 31, 1996.
TAX CONSEQUENCES OF IPT
Under the Partnership tax structure, all income and expenses flow directly to
the unitholder. Unitholders are liable for taxes on their share of Partnership
taxable earnings. The quarterly cash distributions paid by the Partnership
represent a tax-free return of capital until a unitholder's cost basis equals
zero. No tax is paid on cash distributions until that time.
The unitholder's original cost basis is the price paid for the unit when
purchased. This cost basis is adjusted upward by the unitholder's share of
Partnership taxable earnings and downward by cash distributions received. When
the unit is sold, the taxable gain or loss is the difference between the sales
price and the readjusted cost basis.
During 1996, the Partnership declared regular per unit distributions to Class A
unitholders of $.50 per quarter or $2.00 for the year. In addition, a special
distribution of $9.75 per Class A Unit was paid on May 15, 1996.
Foreign investors in IPT are subject to U.S. withholding tax on their
distributions.
Each year, IPT prepares customized tax information for each unitholder. See
Unitholder Tax Information (page 20) for details.
(cover) PINE CONES FROM SUPERIOR TREES PROVIDE SEEDS THAT ARE GROWN INTO
SEEDLINGS USED TO REPLANT HARVESTED LAND.
<PAGE>
Financial Highlights
Years ended December 31
---------------------------------
In millions, except per unit data 1996 1995 1994
Total Revenues $ 277 $ 360 $ 369
Gains on Sales of Partnership Interests 669
Operating Earnings(1) 845 249 259
Net Partnership Earnings 845 261 274
Earnings Allocated to Class A Limited
Partners 408 255 255
Per Class A Unit
Earnings 8.78 5.50 5.49
Distributions 11.75(2) 6.88(3) 2.88
Operating Cash Flow Attributable to
Class A Units 224 271 280
Total Class A Unit Distributions Declared $ 546(2) $ 320(3) $ 134
Weighted Average Class A Units Outstanding 46 46 46
- ------------------------------------------------------------------------------
Years ended December 31
--------------------------------
1996 1995 1994
Working Capital $ 271 $ 398 $ 439
Forestlands and Roads 686 772 775
Long-Term Debt 450 750
Total Assets $ 976 $ 1,187 $1,227
- ------------------------------------------------------------------------------
(1) Operating earnings equal total revenues less operating costs and expenses.
Operating earnings may be lower than net Partnership earnings because
operating earnings exclude interest income and expense.
(2) Includes a special distribution of $453 million ($9.75 per Class A Unit)
paid on May 15, 1996.
(3) Includes a special distribution of $186 million ($4.00 per Class A Unit)
paid on March 31, 1995.
Inside This Report
1 Financial Highlights
2 To Our Unitholders
4 Commonly Asked Questions About IPT
6 Sustainable Forestry Initiative
7 Management's Discussion and Analysis
10 Financial Statements
19 Directors and Managers
20 Unitholder Tax Information
20 Partnership Information
<PAGE>
TO OUR UNITHOLDERS
IP Timberlands, Ltd. posted favorable operating results in 1996 despite
slightly lower prices and sales volumes, primarily from the March 1996 sale of
substantially all of our interests in our Western operations. Stumpage sales
decreased to $251 million in 1996, down 21% from 1995 levels. Net Partnership
earnings, which included gains of $669 million from sales of partnership
interests, increased to $845 million from $261 million in 1995.
In March 1996, we took advantage of high West Coast stumpage prices to
complete the sale of a 98% general partnership interest in a subsidiary that
included all of the Partnership's Western forestlands. This resulted in a gain
of $638 million, of which $203 million ($4.37 per Class A Unit) was allocated
to the Class A Units. These Western assets had contributed about one-third of
Partnership earnings in 1995 and 1994. Following the sale, Partnership operating
results for the last three quarters of 1996 no longer included any significant
contributions from the West, thus accounting for a large portion of the decline
in volumes and revenues.
In our Southern region (approximately 90% of stumpage sales), high inventory
levels at lumber and pulp mills for most of the year led to a decline in
stumpage prices. Prices remained below prior-year levels until December, when
prices rose as strong construction markets led lumber producers to build log
inventories. Although average prices were slightly lower, stumpage sales
revenues in the South were about the same as in 1995, as higher volumes offset
the lower prices.
In the Northeast (approximately 10% of stumpage sales), stronger than
expected lumber markets increased demand for spruce, pine and fir sawlogs as the
year progressed, allowing stumpage prices to recover and finish the year
slightly ahead of 1995 average prices. However, harvest volumes were lower than
in the prior year, pushing stumpage revenues about 10% below 1995 totals.
The outlook for 1997 is mixed. Although housing starts are expected to ease
slightly in 1997, they will still be strong at 1.35 million units. We expect
pulpwood prices to strengthen with a recovery in demand in domestic and export
paper and packaging markets. Furthermore, as demand in the South for pulpwood
and small-diameter sawlogs increases with the recent addition of several new
oriented strand board plants, prices in the South, where the Partnership has
most of its forestlands, should hold up better than in other regions. Harvest
volumes from IPT lands in 1997,
2
<PAGE>
however, should be slightly lower than in 1996.
In recent years, public and private concerns about the environment have had an
increasing impact on forestland operations. Proposals such as the Maine
referendum, which sought to severely curtail harvest practices in that state,
would limit the alternatives available to manage our forestlands. Environmental
concerns across the U.S. have increased, despite the significant progress made
in improving the condition of forestlands in recent decades. For example, the
average timber volume across the U.S. today is about one-third greater than in
the early 1950s, nearly doubling in the eastern U.S. Since the 1940s, growth has
exceeded the harvest in U.S. forests, with the margins generally increasing in
each succeeding decade. As a result, the U.S. has more acres of forestlands
today than 100 years ago.
Despite these facts, pressure still exists to place more limitations on the
ability of private landowners to manage their forestlands. Unfortunately, this
has increased the costs to maintain and harvest our forestlands. Since we all
use products made from renewable forest resources every day, it is important for
us to continue to promote better public understanding of the environmental
effects of modern forestry techniques to help prevent additional costly and
burdensome regulations based on uninformed beliefs. These techniques are
exemplified by the Sustainable Forestry Initiative discussed on page 6 of this
report.
As we approach the end of the Partnership's Initial Term (December 31, 1999),
when Class A unitholders' share of future earnings and cash flows declines from
the current 95% to 4%, we expect that the market value of Class A Units will
decline. We encourage our unitholders to read the information contained in this
report, to ensure that they understand these changes and the possible effect on
future unit values.
/s/ John T. Dillon
John T. Dillon
Chairman and Chief Executive Officer
/s/ Edward J. Kobacker
Edward J. Kobacker
President
March 15, 1997
3
<PAGE>
COMMONLY ASKED QUESTIONS ABOUT IPT
CASH DISTRIBUTIONS
HOW DOES IP FOREST RESOURCES COMPANY (IPFR) DETERMINE THE AMOUNT OF QUARTERLY
DISTRIBUTIONS?
IPT makes quarterly cash distributions to Class A unitholders based on the
amount of cash available from operations after provisions for working capital
needs, possible asset acquisitions and such other reserves as are deemed
appropriate by IPFR, the managing general partner of IPT.
WHAT HAPPENS TO ANY EXCESS OF CASH FLOW GENERATED OVER THE AMOUNT DISTRIBUTED IN
A GIVEN QUARTER?
Any cash from operations that is retained for working capital, asset
acquisitions and reserves is loaned to International Paper until the funds are
needed by the Partnership. These loans, which are due on demand, earn interest
at market rates.
WHEN WILL ANY UNDISTRIBUTED CASH BE PAID TO THE UNITHOLDERS?
At December 31, 1999, the end of the Initial Term, the Primary Account will be
closed and any undistributed Primary Account cash will be distributed to
unitholders in accordance with their respective Primary Account percentage
interests. Class A unitholders will receive approximately 95% of these
distributions. At December 31, 1996, Primary Account liquid assets totaled $3.51
per Class A Unit, of which $.50 per unit was used to pay the February 1997
quarterly distribution.
Any undistributed Secondary Account cash will remain in the Partnership until
it is terminated, if not paid out through periodic distributions after the
Initial Term. Class A unitholders' share of any such distributions declines to
4% after December 31, 1999.
PARTNERSHIP UNITS
WHAT HAPPENS AT THE END OF THE INITIAL TERM?
At the end of the Initial Term, the Primary Account will be closed and all
remaining Primary Account cash will be distributed. Class A unitholders will
receive 95% of this distribution, the same as their interest in the Partnership
during the Initial Term. After this date, Class A unitholders' participation
falls to 4% of all activities of the Partnership, including reforestation and
land management costs.
WHY IS THE VALUE OF CLASS A UNITS EXPECTED TO DECLINE AS THE END OF THE
INITIAL TERM APPROACHES?
The value of a unitholder's investment in Class A Units is based on the
expected level of future cash distributions. Class A unitholders' participation
in any distributions after the end of the Initial Term declines to 4% from 95%,
or a small fraction of current distribution levels. Thus, it is expected that
the market price of Class A Units will decline substantially by December 31,
1999.
WHAT IS THE VALUE OF A CLASS A UNIT TODAY?
There are a number of approaches to estimating what a Class A Unit is worth
today, and different analysts have suggested different values. One approach to
valuing the units would be to look at a unit's expected future cash flows. As
discussed above, all cash existing in the Primary Account must be distributed
to the Class A unitholders by the end of the Initial Term. At December 31,
1996, the Primary Account contained liquid assets totaling $3.51 per unit.
In addition, Class A unitholders have approximately a 30% share in the
preferred interest retained in the sale of the 98% West Coast partnership
interest in March 1996, equal to approximately $.90 per unit.
Unitholders also will receive the Class A Unit cash flow generated through
the end of the Initial Term, either through quarterly distributions or a final
Primary Account distribution. Currently, the regular quarterly distribution is
$.50 per unit. Earnings per Class A Unit for the fourth quarter were $.91. Of
course, future earnings and cash flows will depend upon stumpage prices, harvest
volumes and other factors.
Finally, the Class A Units will have a 4% share of total Partnership earnings
and cash flows from 2000 through the end of the Partnership in 2035, unless it
is terminated earlier under the terms of the Partnership Agreement. While the
earnings and cash flows for this period are hard to predict, a $1.50 to $2.00
residual value at December 31, 1999 would appear to be a reasonable estimate of
the present value of these future cash flows.
The current value of all of the above cash flows, discounted at an investor's
rate of return on investment, would yield one estimate of a Class A Unit's
current value, although other factors, including market expectations, could
yield different values for different investors.
4
<PAGE>
WHY DO THE SHARING PERCENTAGES CHANGE AFTER 1999?
While Class A unitholders are principally benefiting from the sale of trees cut
during the first 15 years of the Partnership (1985-1999), Class B unitholders
fund the land management and reforestation costs. Since the trees grown under
the reforestation program will mature after the end of the Initial Term, the
benefits from sales of such trees will accrue to the Class B unitholders.
HOW ARE PARTNERSHIP EARNINGS AND CASH FLOWS ALLOCATED BETWEEN CLASS A AND CLASS
B UNITS?
Class A unitholders are generally entitled to 95%, and Class B unitholders to
4%, of net earnings and cash flows associated with the harvest and sale of trees
during the Initial Term (ending December 31, 1999). Subsequently, Class A
unitholders' participation drops to 4% of total Partnership net earnings and
cash flows including reforestation and land management costs, with Class B
unitholders sharing in 95% of such net earnings and cash flows. The general
partners of IPT receive 1% of Partnership net earnings and cash flows throughout
the life of the Partnership.
HARVEST ACTIVITY
WHAT IS THE PARTNERSHIP'S HARVEST TO DATE AND WHAT IS THE PROJECTED HARVEST
THROUGH 1999?
At the Partnership's inception, it was estimated that approximately 44 to 54
million cunits would be harvested during the Initial Term. Through 1996,
approximately 41 million cunits have been harvested. The harvest has averaged
about 3.4 million cunits for each of the last three years; however, a lower
annual harvest is expected for the remainder of the Initial Term due principally
to the recent Western forestlands transaction. In addition, the age class
distribution of the Partnership's southern pine plantations will lead to some
reduction in harvest volume.
WILL THE PARTNERSHIP'S COMMITMENT TO FOLLOW THE AMERICAN FOREST AND PAPER
ASSOCIATION'S SUSTAINABLE FORESTRY PRINCIPLES SIGNIFICANTLY AFFECT FUTURE
HARVESTS?
The Partnership has long been committed to ensure that healthy, productive
forests are sustained for the use and enjoyment of future generations, and has
managed its forestlands for many years to maximize their value for both economic
and public interests. Accordingly, we anticipate little adverse economic effects
from our application of these principles.
INCOME TAX CONSEQUENCES
HOW ARE PARTNERSHIP EARNINGS TAXED?
Under the Partnership tax structure, all income and expenses flow directly to
the unitholders, who are responsible for taxes on their share of Partnership
taxable earnings. Customized tax information concerning current-year earnings
and distributions is provided to unitholders in late February.
ARE CLASS A UNIT DISTRIBUTIONS TAXABLE?
Class A unitholders pay taxes on their annual share of IPT's taxable earnings,
as noted above. Quarterly cash distributions represent a tax-free return of
capital until a unitholder's cost basis equals zero. No tax is payable on cash
distributions until that time. Foreign investors in IPT are subject to U.S.
withholding tax on their distributions.
HOW IS A UNITHOLDER'S COST BASIS CALCULATED?
A unitholder's cost basis is the original cost of the units adjusted upward by
the unitholder's annual share of IPT's taxable earnings attributable to the
units and adjusted downward by the unitholder's share of cash distributions
attributable to the units. IPT annually provides the information needed to make
these calculations.
HOW IS THE SALE OF CLASS A UNITS TAXED?
Sales proceeds are compared with a unitholder's cost basis in the units. If the
result is a gain, the unitholder will be taxed at the existing capital gains
rate. If the result is a loss, the unitholder will be allowed to offset the loss
against other capital gains.
5
<PAGE>
SUSTAINABLE FORESTRY INITIATIVE
In 1995, the members of the American Forest and Paper Association committed to
follow the Sustainable Forestry Initiative's (SFISM) Principles and Guidelines.
The objective of SFI is to raise the level of environmental performance across
the forest products industry.
SFI has been successfully implemented across IPT's forestlands through the
Partnership's Sustainable Forestry Guidelines. Where economically, ecologically
and operationally possible, our guidelines have been designed to go beyond the
minimum requirements under SFI. For example, SFI requires that all harvested
land be reforested within a two-year period. In 1996, over 40% of Partnership
lands were reforested within one year. Secondly, SFI specifies a maximum average
clearcut size of 120 acres. In each of the last two years, the Partnership's
average clearcut size has been significantly below 100 acres. Furthermore, the
Partnership has worked to improve the visual quality of harvested areas by
designing the size and layout of each harvest to blend with natural and man-made
boundaries.
Our efforts have not gone unnoticed. In 1996, the Partnership's management was
recognized as "Forest Conservationist of the Year" by the Alabama Wildlife
Federation, in recognition of its efforts to enhance the values of forest
stewardship and as a national and state leader in the development and
implementation of sustainable forestry practices. We were also awarded The
Nature Conservancy of Texas's "Corporate Conservation Leadership Award" for
setting an outstanding example in the area of land conservation. These awards
represent an affirmation of the Partnership's ongoing commitment to protect
water quality, wildlife habitat, unique areas and other resources.
The adoption and implementation of the SFI Principles, shown on the right, serve
as another example of our determination to provide a healthy, productive forest
environment for the use and enjoyment of future generations. We recognize that
the future of our industry is totally dependent on the health of our forests. We
remain convinced that adherence to environmentally sound, scientifically based
forestry principles will maximize the benefits to be realized from our forests
by both economic and public interests in the years to come.
THE AMERICAN FOREST AND PAPER ASSOCIATION'S SUSTAINABLE FORESTRY PRINCIPLES
I. To practice sustainable forestry to meet the needs of the present without
compromising the ability of future generations to meet their own needs by
practicing a land stewardship ethic that integrates the reforestation, managing,
growing, nurturing and harvesting of trees for useful products with the
conservation of soil, air and water quality, wildlife and fish habitats, and
aesthetics.
II. To use in its own forests, and promote among other forest landowners,
sustainable forestry practices that are economically and environmentally
responsible.
III. To protect forests from wildfire, pests, diseases and other damaging agents
in order to maintain and improve long-term forest health and productivity.
IV. To manage its forests and lands of special significance (e.g., biologically,
geologically or historically significant) in a manner that takes into account
their unique qualities.
V. To continuously improve the practice of forest management and also to
monitor, measure and report the performance of our members in achieving our
commitment to sustainable forestry.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Stumpage sales for the year ended December 31, 1996 totaled $251 million, down
21% from sales of $316 million in 1995 due principally to the loss of revenues
from the Partnership's Western operations. Stumpage sales in 1994 were $286
million. Similarly, total revenues of $277 million were 23% below the $360
million recorded in 1995. Total revenues in 1994 were $369 million. Net
Partnership earnings, however, increased to $845 million in 1996, up from $261
million in 1995 and $274 million in 1994. Earnings in 1996 included $669 million
from the sales of subsidiary partnership interests.
In March 1996, a subsidiary partnership holding essentially all of IP
Timberlands, Ltd.'s Western forestlands sold a 98% general partnership interest
to a third party. This resulted in a gain of $638 million. Approximately $203
million or $4.37 per unit of the gain was allocated to the Class A Units. After
the sale, no significant earnings were generated from the Western region in
1996.
In addition, in June and December 1996, the Partnership sold special partnership
interests in certain pine plantations in the South, recording gains totaling $31
million. Since these sales related principally to plantations that would be
harvested well after the end of the Initial Term, only approximately 11% of this
total gain was attributable to the Class A Units.
In our Southern region, which generates about 90% of Partnership stumpage sales,
total stumpage sales for 1996 were about equal to 1995 sales, as a slight
increase in harvest volumes offset a 3% decline in average prices. High wood
inventories at pulpmills and sawmills early in the year led to lower demand and
prices for Partnership stumpage, compared with the first quarter of 1995. As the
year progressed, favorable harvesting conditions put downward pressure on
pricing, although Partnership harvest levels increased. Prices remained below
prior-year levels until December, when strong lumber markets and occasional
weather-related harvest interruptions led to sawlog shortages at many lumber
mills, pushing stumpage prices sharply higher as the year ended.
Stumpage sales in the Northeast region, which produces about 10% of Partnership
sales, finished the year about 10% lower than 1995 totals. Strong customer
inventory positions as the year began initially pushed both prices and harvest
volumes well below 1995 levels. As the year progressed, stronger than expected
lumber markets enabled prices to recover, finishing the year slightly ahead of
1995 average prices. Harvest volumes, however, remained well below 1995 totals.
Forestland sales, which occur when market prices for selected tracts exceed the
values expected from future operations, declined to $9 million in 1996 from $30
million in 1995 and $71 million in 1994.
The outlook for 1997 and beyond is mixed. Panel markets are expected to soften
further in 1997, due to recent industry-wide capacity additions, pushing sawlog
prices lower. The effect on stumpage prices in the South is expected to be more
moderate than in other regions of the country, as a number of new oriented
strand board plants compete for fiber resources. In addition, Southern pulpwood
prices are expected to rise as operating rates at Southern pulpmills increase
with a recovery in paper demand and pricing. With the expected pressure on
sawlog prices and a slight projected decline in the 1997 harvest, Partnership
revenues and earnings are expected to decline in 1997.
The following table presents major earnings statement revenue categories
attributable to the Primary and Secondary Accounts:
- --------------------------------------------------------------------------
In thousands 1996 1995 1994
- --------------------------------------------------------------------------
Stumpage sales
Primary Account $242,789 $293,742 $285,792
Secondary Account 7,789 22,519
- --------------------------------------------------------------------------
$250,578 $316,261 $285,792
- --------------------------------------------------------------------------
Forestland sales
Primary Account $ 1,559 $ 9,286 $ 27,621
Secondary Account 6,973 20,807 42,980
- --------------------------------------------------------------------------
$ 8,532 $ 30,093 $ 70,601
- --------------------------------------------------------------------------
Volumes related to stumpage sales were:
- --------------------------------------------------------------------------
In thousand cunits 1996 1995 1994
- --------------------------------------------------------------------------
Used in International Paper
facilities 1,024 1,149 985
Resold by International Paper 365 583 609
Sales to unaffiliated parties 2,120 1,941 1,582
- --------------------------------------------------------------------------
3,509 3,673 3,176
- --------------------------------------------------------------------------
7
<PAGE>
OPERATING COSTS AND EXPENSES
Operating costs and expenses attributable to the Primary and Secondary Accounts
were as follows:
- --------------------------------------------------------------------------
In thousands 1996 1995 1994
- --------------------------------------------------------------------------
Primary Account $ 54,472 $ 58,436 $ 64,108
Secondary Account 46,435 52,618 46,666
- --------------------------------------------------------------------------
$100,907 $111,054 $110,774
- --------------------------------------------------------------------------
Depletion and the cost of forestlands sold are generally attributed to the
Primary and Secondary Accounts in the same proportion as revenues from stumpage
sales and forestland sales, respectively. Road amortization is fully attributed
to the Secondary Account.
Costs related to land and forest management and administration of IPT are
associated to some extent with both the Primary Account and the Secondary
Account because the benefits derived from such expenditures will be realized
both during and after the Initial Term. Forest operating costs and general and
administrative expenses are allocated between the Primary and Secondary Accounts
based on the timing of the estimated future benefits. This allocation is
reviewed annually by IPFR to determine that it is fair and reasonable. General
and administrative expenses are a combination of direct costs charged to IPT
plus indirect overhead costs that are allocated to IPT by International Paper.
Additional reforestation and fertilization costs were incurred in 1996 and 1995
to increase future forest productivity. These expenses were principally charged
to the Secondary Account. Total operating costs and expenses decreased in 1996
due mainly to the absence of costs from the Western region following the March
1996 sale of a subsidiary partnership interest.
IMPACT OF INFLATION
Prices for stumpage may be subject to sharp cyclical fluctuations due to market
or other economic conditions and generally do not directly follow inflationary
trends. Costs of forest management and operations generally tend to reflect
inflationary trends.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, IP Timberlands, Ltd. had cash and temporary investments of
$8 million, an intercompany account receivable from International Paper of $15
million, and notes receivable from International Paper of $259 million, totaling
$282 million in liquid assets. Cash is either invested in temporary investments
or loaned to International Paper at market rates.
- --------------------------------------------------------------------------
In thousands, except per unit data 1996 1995
- --------------------------------------------------------------------------
Cash, temporary investments and intercompany
accounts and notes receivable
Primary Account $ 171,508 $310,083
Secondary Account 110,757 80,487
- --------------------------------------------------------------------------
$282,265 $390,570
- --------------------------------------------------------------------------
Total per Class A Unit $ 3.61 $ 6.41
- --------------------------------------------------------------------------
Cash flows from operations and existing liquid assets are expected to be
adequate to meet anticipated future cash requirements of the Primary Account.
Costs charged to the Secondary Account, which include reforestation costs, road
construction and a significant portion of forest management expenses, may exceed
revenues credited to such account. To the extent that future Secondary Account
cash flows and existing cash balances do not cover cash costs charged to such
account, IPT will fund such shortfalls through the sale of additional units
(principally Class B Units) to International Paper, borrowings from
International Paper or unaffiliated parties, or other financing alternatives.
In contrast to other depletable natural resources such as oil and gas, forest
resources are managed to regenerate over a period of time generally ranging from
25 to 55 years. IPT believes that the size and diversity of its forest resource
base should provide recurring annual revenues without the need for a major
reinvestment of cash to acquire additional resources. However, future
investments in forestlands and roads, which include expenditures for
reforestation, road construction and capitalized leases, may exceed current-year
expenditures as the Partnership takes advantage of favorable market
opportunities.
In November 1996, the Partnership borrowed $450 million from a group of banks.
The borrowing and proceeds were allocated to the Secondary Account, which will
be respon-
8
<PAGE>
sible for the repayment of the loan. Repayment is guaranteed by International
Paper. Approximately $119 million of the proceeds was retained by the Secondary
Account to fund ongoing operations, while $145 million was used to repay a loan
from International Paper. The remaining $186 million was distributed from the
Secondary Account to unitholders in November 1996, with approximately $7 million
(or $.16 per unit) paid to the Class A unitholders as part of the $.50 per Class
A Unit quarterly distribution, $177 million paid to Class B unitholders, and $2
million paid to the general partners. In November 1995, the Secondary Account of
the Partnership had borrowed $750 million from a consortium of banks and
distributed the proceeds to its general and limited partners. The distribution,
paid in November 1995 from the Secondary Account, included approximately $30
million (or $.64 per unit) paid to Class A unitholders as part of the regular
$.72 per Class A Unit quarterly distribution, $705 million to Class B
unitholders, and $15 million to the general partners. This debt was subsequently
included in the net assets of the subsidiary partnership interest sold by IPT in
its Western forestlands.
It is IPT's policy to make quarterly cash distributions from the Primary Account
based on the amount of cash available from operations after provisions for
working capital, asset acquisitions and such reserves as IPFR, the managing
general partner of IPT, deems appropriate. The distribution rate also balances
any large nonrecurring inflows from forestland sales in the current year against
expected future cash flows based on IPT's projected harvest plan. The partners
participate in distributions in the same ratio in which they share revenues and
costs. In the case of the Primary Account, the Class A Units receive 95% of the
total IPT distributions, with the Class B Units and general partners receiving
4% and 1%, respectively. Class A Units' participation in distributions will
decline significantly to 4%, and Class B Units' participation will increase to
95%, after the end of the Initial Term.
In 1995 and 1994, and in the first quarter of 1996, IPT paid regular quarterly
distributions to Class A unitholders of $.72 per quarter. In May 1996, following
the sale of the subsidiary partnership interest that included the Partnership's
Western assets, the regular distribution was decreased to $.50 per Class A Unit,
which was also paid in the remaining quarters of 1996.
In May 1996, the Partnership paid a special distribution of $9.75 per Class A
Unit. In March 1995, a special distribution of $4.00 per Class A Unit was
paid. These special distributions were paid because management believed that
existing cash balances plus projected future cash flows would be adequate for
capital expenditures, working capital and regular quarterly distributions
during the remainder of the Initial Term.
The following table presents cash flows from operations, after provision for
capital expenditures, attributable to Class A Units. It also shows cash
distributions declared for Class A Units for the same period, including the
$9.75 per unit special distribution paid in 1996 and the $4.00 per unit special
distribution paid in 1995.
- ------------------------------------------------------------------------------
Primary Secondary IPT
In thousands Account Account Total
- ------------------------------------------------------------------------------
Year Ended December 31, 1996
- ------------------------------------------------------------------------------
Cash provided by operations $242,079 $ (6,984) $235,095
Investment in forestlands and roads (2,232) (30,828) (33,060)
IPTO general partners' interest in above (2,398) 378 (2,020)
- ------------------------------------------------------------------------------
Cash flow after capital expenditures 237,449 (37,434) 200,015
Class A Unit allocation factor 95% 4%
Cash flow attributable to Class A Units $225,577 $ (1,497) $224,080
- ------------------------------------------------------------------------------
Distributions declared for Class A Units $538,306 $ 7,431 $545,737
- ------------------------------------------------------------------------------
Year Ended December 31, 1995
- ------------------------------------------------------------------------------
Cash provided by operations $295,759 $(14,169) $281,590
Investment in forestlands and roads (5,925) (22,272) (28,197)
IPTO general partners' interest in above (2,898) 364 (2,534)
- ------------------------------------------------------------------------------
Cash flow after capital expenditures 286,936 (36,077) 250,859
Class A Unit allocation factor 95% 4%
Cash flow attributable to Class A Units $272,589 $ (1,443) $271,146
- ------------------------------------------------------------------------------
Distributions declared for Class A Units $289,847 $ 29,700 $319,547
- ------------------------------------------------------------------------------
Year Ended December 31, 1994
- ------------------------------------------------------------------------------
Cash provided by operations $318,165 $ 17,197 $335,362
Investment in forestlands and roads (20,752) (17,243) (37,995)
IPTO general partners' interest in above (2,974) (2,974)
- ------------------------------------------------------------------------------
Cash flow after capital expenditures 294,439 (46) 294,393
Class A Unit allocation factor 95% 4%
Cash flow attributable to Class A Units $279,717 $ (2) $ 279,715
- ------------------------------------------------------------------------------
Distributions declared for Class A Units $133,764 $ 133,764
- ------------------------------------------------------------------------------
At the end of the Initial Term, the Primary Account will be closed and all cash
remaining after payment of borrowings and liabilities will be distributed. Class
A unitholders will receive 95% of this cash distribution. As of December 31,
1996, 95% of Primary Account liquid assets was $163 million or $3.51 per Class A
Unit.
9
<PAGE>
CONSOLIDATED STATEMENT OF EARNINGS
Years ended December 31
-------------------------------------
IN THOUSANDS, EXCEPT PER UNIT DATA 1996 1995 1994
REVENUES
Stumpage sales
International Paper $ 116,811 $194,294 $172,083
Unaffiliated parties 133,767 121,967 113,709
Forestland sales 8,532 30,093 70,601
Other income, net 18,163 13,600 12,950
- -------------------------------------------------------------------------------
TOTAL REVENUES 277,273 359,954 369,343
- -------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Depletion
International Paper 8,756 12,375 10,553
Unaffiliated parties 15,383 14,812 11,522
Cost of forestlands sold 651 2,465 10,093
Amortization of roads 1,807 2,154 2,119
Forest operations 42,754 43,813 40,689
General and administrative 18,651 20,542 19,497
Property and severance taxes 12,905 14,893 16,301
- -------------------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 100,907 111,054 110,774
- -------------------------------------------------------------------------------
176,366 248,900 258,569
Gains on sales of partnership
interests 669,056
- -------------------------------------------------------------------------------
OPERATING EARNINGS 845,422 248,900 258,569
- -------------------------------------------------------------------------------
Interest income 20,939 20,868 17,946
Interest expense (19,006) (6,069)
General partners' interest in IPTO (2,033) (2,637) (2,765)
- -------------------------------------------------------------------------------
NET PARTNERSHIP EARNINGS $845,322 $261,062 $273,750
- -------------------------------------------------------------------------------
EARNINGS PER CLASS A UNIT (NOTE 5) $ 8.78 $ 5.50 $ 5.49
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
CONSOLIDATED BALANCE SHEET
December 31
-----------------------
IN THOUSANDS 1996 1995
ASSETS
Current Assets
Cash and temporary investments, at cost, which
approximates market $ 7,843 $ 11,899
Notes receivable-International Paper 259,351 371,378
Due from International Paper 15,071 7,293
Accounts and notes receivable 8,228 23,558
- -------------------------------------------------------------------------------
Total current assets 290,493 414,128
Notes Receivable 42 1,027
Forestlands 660,369 734,200
Roads, net of accumulated amortization of $31,994
(1996) and $49,618 (1995) 25,144 38,026
- -------------------------------------------------------------------------------
TOTAL ASSETS $976,048 $1,187,381
- -------------------------------------------------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Accounts payable and accrued liabilities $ 6,719 $ 372
Accrued interest 3,541 5,983
Accrued property and severance taxes 5,550 6,286
Customer advance payments 3,266 3,797
- -------------------------------------------------------------------------------
Total current liabilities 19,076 16,438
Long-Term Debt 450,000 750,000
Lease Obligations 1,241 1,231
General Partners' Interest in IPTO 30,536 26,662
Partners' Capital
General partners 26,607 25,786
Limited partners 448,588 367,264
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $976,048 $1,187,381
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these nancial statements.
11
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31
--------------------------------------
IN THOUSANDS 1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Partnership earnings $ 845,322 $ 261,062 $ 273,750
Noncash items
Depletion 24,139 27,187 22,075
Cost of forestlands sold 651 2,465 10,093
Amortization of roads 1,807 2,154 2,119
Gain on sale of partnership interest (638,205)
Other, net 10,489 2,036 3,193
Changes in current assets and liabilities
Accounts and notes receivable 16,315 (14,695) 29,261
Due from International Paper (7,778) (3,965) (7,153)
Accrued interest (2,442) 5,983
Customer advance payments (531) (861) 1,933
Payment of partnership interest sale expenses (11,448)
Other, net (3,224) 224 91
- --------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATIONS 235,095 281,590 335,362
- --------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Investment in forestlands and roads (33,060) (28,197) (37,995)
Loans to International Paper (1,130,281) (257,608) (345,744)
Loan repayments by International Paper 1,242,308 316,376 191,744
- --------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) INVESTMENT ACTIVITIES 78,967 30,571 (191,995)
- --------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of long-term debt 450,000 750,000
Distributions to partners of IPT and IPTO (768,118) (1,058,184) (142,227)
- --------------------------------------------------------------------------------------------
CASH USED FOR FINANCING ACTIVITIES (318,118) (308,184) (142,227)
- --------------------------------------------------------------------------------------------
CHANGE IN CASH AND TEMPORARY INVESTMENTS (4,056) 3,977 1,140
CASH AND TEMPORARY INVESTMENTS
Beginning of the year 11,899 7,922 6,782
- --------------------------------------------------------------------------------------------
End of the year $ 7,843 $ 11,899 $ 7,922
- --------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
IP Timberlands, Ltd. (IPT), a Texas limited partnership, was formed to succeed
to substantially all of the forest resources business of International Paper.
IP Forest Resources Company (IPFR), a wholly owned subsidiary of International
Paper, is the managing general partner of IPT, and International Paper is the
special general partner.
International Paper received IPT Class A Depositary Units (Class A Units) and
IPT Class B Depositary Units (Class B Units) in exchange for the contribution of
approximately 6.3 million acres of forestlands owned in fee or held under
long-term leases as well as certain deeds and other assets. IPT operates through
IP Timberlands Operating Company, Ltd. (IPTO), a Texas limited partnership, in
which IPT holds a 99% limited partners' interest. IPFR is also the managing
general partner of IPTO, and International Paper is the special general partner.
The Partnerships have no officers, directors or employees. The officers,
directors and employees of International Paper and IPFR perform all management
and business activities for the Partnerships.
IPT manages its forestlands principally for the sale of sawlogs, used for lumber
and plywood production, and pulpwood, used in the manufacture of paper. It
operates mainly in the southern United States, with another region located in
the Northeast.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of IPT and IPTO. All
significant intercompany items and transactions have been eliminated.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles that require the use of management
estimates and will not be the basis for reporting taxable income to unitholders.
TEMPORARY INVESTMENTS
Temporary investments with an original maturity of three months or less are
stated at cost. Temporary investments at December 31, 1996 and 1995 were $6.9
million and $6.5 million, respectively.
INCOME TAXES
IPT is not a taxable entity for federal, state or local income tax purposes. Any
taxable earnings or losses and certain other items are reported by the partners
on their own tax returns in accordance with their Partnership Agreement.
FORESTLANDS
Forestlands, including capitalized harvesting rights, are stated at cost. IPT
capitalizes cutting contracts where the total price to be paid is fixed and the
term is in excess of one year. The portion of the costs of forestlands
attributed to the trees is charged against earnings as the trees are cut, at
rates determined annually based on the relationship of unamortized costs to the
estimated recoverable harvest volumes.
ROADS
Roads are stated at cost, less accumulated amortization. The depreciable portion
of the cost is amortized over the economic lives of the roads using the
straight-line method (eight to 20 years).
REVENUE RECOGNITION
Stumpage sales are recognized when legal ownership and the risk of loss pass to
the purchaser and the quantity sold is determined. This generally occurs when
the purchaser severs the trees and measures the volumes. Bulk sales, included in
stumpage sales in the accompanying statement of earnings, represent the sale of
standing timber. Revenues from bulk sales and forestland sales are recognized
when legal ownership and the risk of loss pass, normally at the time of sale.
3. TRANSACTIONS WITH INTERNATIONAL PAPER AND MAJOR CUSTOMERS
IPT is a major source of fiber and wood used in International Paper's pulp,
paper, lumber and panel manufacturing facilities. The cost associated with sales
to International Paper was $8.8 million (1996), $12.4 million (1995) and $10.6
million (1994).
13
<PAGE>
IPT does not compensate IPFR or International Paper for services as general
partners. However, IPT does reimburse them for direct costs and expenses
(included in forest operations and general and administrative expenses)
associated with the management and operations of the Partnerships and indirect
costs, principally general and administrative expenses, allocated to the
Partnerships. Charges for indirect expenses were $9.6 million (1996) and $9.3
million (1995 and 1994). In the opinion of IPFR management, the allocation
methods and amounts are reasonable.
Notes with International Paper bear interest at market rates. Interest income
from notes with International Paper was $13.1 million (1996), $20.1 million
(1995) and $16.6 million (1994).
No unaffiliated customer accounted for sales in excess of 10% of total revenues
in 1996, 1995 or 1994.
4. GAINS ON SALES OF PARTNERSHIP INTERESTS
On March 29, 1996, a subsidiary partnership of IPT completed the sale of a 98%
general partnership interest to R-H Timber Co. Included in the net assets of the
partnership interest sold were approximately $83 million of forestlands, $19
million of roads and $750 million of long-term debt. Approximately $17.8 million
of expenses was accrued in connection with the sale. As a result of this
transaction, IPT recognized a book gain of approximately $638 million,
approximately $203 million or $4.37 per unit of which was allocated to the Class
A Units. IPT retained a 1% interest in the partnership as well as a preferred
interest. Class A unitholders have approximately a 30% share of the retained
preferred interest, equal to about $.90 per Class A Unit.
In June 1996, the Partnership completed the sale of a special partnership
interest relating to 20,000 acres of pine plantations in the South. As a result
of this sale, IPT recognized a gain of approximately $18 million. Essentially
all of the earnings from this transaction were attributable to the Secondary
Account.
In December 1996, the Partnership completed the sale of a special partnership
interest in approximately 12,700 acres of pine plantations in the South. As a
result of this sale, IPT recognized a gain of approximately $13 million.
Approximately 15% of the earnings from this sale were attributed to the Primary
Account.
5. COMPUTATION OF EARNINGS PER CLASS A UNIT
Holders of Class A Units participate principally in the revenues and costs
associated with IPT's stumpage sales through December 31, 1999 (the Initial
Term), and to a significantly lesser extent in such revenues and costs after the
Initial Term.
Holders of the Class B Units participate principally in revenues and costs
associated with IPT's stumpage sales after the Initial Term, and to a
significantly lesser extent in such revenues and costs during the Initial Term.
In order to implement the sharing of revenues and costs between the Class A
Units and the Class B Units, the Partnership Agreement of IPT created two
accounting units-the Primary Account and the Secondary Account. The Primary
Account is credited with all revenues and costs associated with the sale of
trees harvested during the Initial Term. For forestland sales or bulk sales, the
proceeds and costs associated with such sales are allocated by the managing
general partner between the Primary Account and the Secondary Account based on
the relative asset values of the forestlands and trees and the projected
harvest schedule during and after the Initial Term. Other revenues not
associated with the harvesting and sale of trees, such as revenues from permits,
leases, easements and similar items, generally are credited to the Primary
Account. Interest income on the short-term investment of proceeds from stumpage
sales is treated in the same manner as revenues and costs associated with the
harvesting and sale of trees.
The Class A Units are credited with 95% of the revenues and costs of the Primary
Account and 4% of the revenues and costs of the Secondary Account. The Class B
Units are credited with 95% of the revenues and costs of the Secondary Account
and 4% of the revenues and costs of the Primary Account. International Paper and
IPFR are credited with 1% in the aggregate of the revenues and costs of the
Primary Account and the Secondary Account.
14
<PAGE>
The following table presents the computation of earnings per Class A Unit.
- -------------------------------------------------------------------------------
Years Ended December 31
- -------------------------------------------------------------------------------
In thousands, except per unit data 1996 1995 1994
- -------------------------------------------------------------------------------
Allocation to Primary Account $411,048 $269,225 $268,273
Allocation to Secondary Account 434,274 (8,163) 5,477
- -------------------------------------------------------------------------------
Net Partnership Earnings $845,322 $261,062 $273,750
- -------------------------------------------------------------------------------
95% of the Primary Account(1) $390,496 $255,763 $254,860
4% of the Secondary Account(1) 17,371 (326) 219
- -------------------------------------------------------------------------------
Earnings Allocated to
Class A Limited Partners 407,867 255,437 255,079
Weighted Average Class A Units
Outstanding 46,446 46,446 46,446
- -------------------------------------------------------------------------------
Earnings per Class A Unit $ 8.78 $ 5.50 $ 5.49
- -------------------------------------------------------------------------------
(1) Class B Units are allocated 4% of Primary Account and 95% of Secondary
Account earnings. The general partners are allocated 1% of each account.
The increase in the earnings allocation to the Secondary Account in 1996
reflects the gains on sales of partnership interests.
6. RECEIVABLES
The major components of Accounts and Notes Receivable are presented
below. No allowance for doubtful accounts was required in either year.
- -------------------------------------------------------------------------------
In thousands at December 31 1996 1995
- -------------------------------------------------------------------------------
Notes receivable-trade $2,763 $ 22,730
Accounts receivable-trade 965 275
Accrued interest and other receivables 4,500 553
- -------------------------------------------------------------------------------
$8,228 $23,558
- -------------------------------------------------------------------------------
Notes receivable-trade at December 31, 1995 included $18.5 million from a 1995
fourth-quarter bulk sale that was collected in 1996.
7. LONG-TERM DEBT
On November 15, 1996, IPT borrowed $450 million under a three-year credit
agreement with 13 banks. The proceeds from this borrowing were used to repay a
loan and accrued interest from International Paper ($145 million) and to fund
current and projected Secondary Account operating deficits ($119 million), with
the remainder ($186 million) distributed to unitholders as part of the $.50 per
Class A Unit distribution in November 1996. In addition, interest rate swap
agreements were executed for the entire $450 million principal amount that have
the effect of converting the floating rate borrowing under the credit agreement
to a fixed rate borrowing at 6.23%. While the borrowing under the credit
agreement may be repaid at any time, payments under the interest rate swap
agreements, which are expensed, continue through November 1999. As the
counterparties to the swap agreements are major financial institutions,
management does not expect nonperformance by the counterparties.
On November 15, 1995, the Partnership borrowed $750 million under a credit
agreement with a consortium of banks. The proceeds were then distributed to
unitholders. This debt was included in the net assets of the subsidiary
partnership interest sold on March 29, 1996.
Cash payments for interest were $11.7 million in 1996.
8. PARTNERS' CAPITAL
The following table presents the activity in the Partners' Capital accounts.
- -------------------------------------------------------------------------------
General Limited
In thousands Partners Partners Total
- -------------------------------------------------------------------------------
Balance-January 1, 1994 $32,321 $1,014,323 $1,046,644
Net earnings for the period 2,738 271,012 273,750
Partner distributions (1,408) (139,397) (140,805)
- -------------------------------------------------------------------------------
Balance-December 31, 1994 33,651 1,145,938 1,179,589
Net earnings for the period 2,611 258,451 261,062
Partner distributions (10,476) (1,037,125) (1,047,601)
- -------------------------------------------------------------------------------
Balance-December 31, 1995 25,786 367,264 393,050
Net earnings for the period 8,453 836,869 845,322
Partner distributions (7,632) (755,545) (763,177)
- -------------------------------------------------------------------------------
Balance-December 31, 1996 $26,607 $ 448,588 $ 475,195
- -------------------------------------------------------------------------------
Distributions in 1996 include a special distribution of $453 million ($9.75 per
Class A Unit) and $186 million paid from the Secondary Account, of which $7.4
million or $.16 per Class A Unit was paid to Class A unitholders as part of the
regular $.50 fourth-quarter distribution.
Distributions in 1995 include a special distribution of $186 million ($4.00 per
Class A Unit) and $743 million paid from the Partnership's Secondary Account, of
which $29.7 million or $.64 per Class A Unit was paid to Class A unitholders as
part of the regular $.72 fourth-quarter distribution.
The authorized and outstanding Class A and Class B Units
15
<PAGE>
at December 31, 1996, 1995 and 1994, which represent the limited partnership
interests of IPT, are presented below. The Class B Units are 100% owned by
International Paper and affiliates.
Class A Depositary Units
-----------------------------------------
International Unaffiliated Class B
Paper and Third Depositary
Affiliates Parties Total Units
- -------------------------------------------------------------------------------
Number of units 39,146,229 7,299,500 46,445,729 50,976,480
- -------------------------------------------------------------------------------
Percentage of total 84% 16% 100% 100%
- -------------------------------------------------------------------------------
Under the terms of the Partnership Agreement, International Paper has the right
to purchase, at any time, all outstanding Class A Units at a price equal to 133%
of the market price at that time.
9. COMMITMENTS AND CONTINGENT LIABILITIES
IPT is involved in various legal proceedings incidental to its business. While
any proceeding or litigation has an element of uncertainty, IPT believes that
the outcome of any lawsuit or claim that is pending or threatened, or all of
them combined, will not have a material adverse effect on its consolidated
financial position or results of operations.
16
<PAGE>
<TABLE>
<CAPTION>
INTERIM FINANCIAL RESULTS (UNAUDITED)
Quarter
------------------------------------------------------
IN THOUSANDS, EXCEPT PER UNIT DATA FIRST SECOND THIRD FOURTH
1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 81,108 $ 56,799 $ 83,299(1) $ 56,067
Operating earnings 692,283(2) 51,214 56,947 44,978
Net Partnership earnings 686,300(2) 56,393 57,414 45,215
Per Class A Unit
Earnings $ 5.66(2) $ .98 $ 1.23 $ .91
Distributions declared 10.25(3) .50 .50 .50
- ------------------------------------------------------------------------------------------------
1995
- ------------------------------------------------------------------------------------------------
Total revenues $ 82,267 $72,932 $ 82,237 $ 122,518(4)
Operating earnings 56,752 46,833 54,375 90,940
Net Partnership earnings 63,120 50,563 58,227 89,152
Per Class A Unit
Earnings $ 1.36 $ 1.27 $ 1.33 $ 1.54
Distributions declared 4.72(5) .72 .72 .72
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes $21.5 million of bulk sales in the third quarter.
(2) Includes $638.2 million ($4.37 per Class A Unit) from the sale of a
subsidiary partnership interest.
(3) Distribution for the first quarter of 1996 includes a special
distribution of $9.75 per Class A Unit.
(4) Includes $51.3 million of forestland and bulk sales in the fourth
quarter.
(5) Distributions for the first quarter of 1995 include a special
distribution of $4.00 per Class A Unit.
17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of IP Timberlands, Ltd.:
We have audited the accompanying consolidated balance sheets of IP Timberlands,
Ltd. (a Texas limited partnership) and subsidiary as of December 31, 1996 and
1995, and the related consolidated statements of earnings and cash flows for
each of the three years ended December 31, 1996. These financial statements are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the financial position of IP Timberlands, Ltd. and
subsidiary as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years ended December 31, 1996 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
New York, N.Y.
February 7, 1997
RESPONSIBILITY FOR FINANCIAL STATEMENTS
IP Timberlands, Ltd., through the participation of IP Forest Resources Company,
"IPFR," (the managing general partner) and International Paper Company (the
special general partner), is responsible for the fair presentation of the
information contained in the financial statements in this annual report. The
statements were prepared in accordance with generally accepted accounting
principles and reflect management's best judgment as to the Partnership's
financial position, results of operations and cash flows.
A system of internal accounting controls is maintained and designed to provide
reasonable assurance that transactions are properly recorded and summarized so
that reliable financial records and reports can be prepared and assets can be
safeguarded. An important part of the internal controls system is the
involvement of the general partners, who provide all required services to ensure
the adequacy of internal controls. Procedures are also in place to assess
compliance with the terms of the Partnership Agreement and identify and resolve
any business issues arising between the Partnership and the general partners.
Compliance with the internal controls system is monitored by internal audit with
management follow-up. The independent public accountants provide an objective,
independent review of management's discharge of its responsibility for the
fairness of the Partnership's financial statements. They review the internal
accounting controls and conduct tests of procedures and accounting records to
enable them to form the opinion set forth in their report.
The Board of Directors of IPFR monitors management's administration of the
Partnership's financial policies and practices and the preparation of financial
reports. The Audit Committee, consisting of nonemployee directors, meets
regularly with representatives of management, the independent public accountants
and the Internal Auditor to review their activities. The independent public
accountants and the Internal Auditor both have free access to the Audit
Committee, with and without management representatives in attendance.
/s/ Frederick L. Bleier
Frederick L. Bleier
Treasurer and Controller
18
<PAGE>
DIRECTORS
JOHN T. DILLON
Chairman and Chief Executive Officer
International Paper
THOMAS C. GRAHAM*
Retired Chairman of the Board
AK Steel Corporation
ARTHUR G. HANSEN*
Educational Consultant
JANE C. PFEIFFER*
Management Consultant
ROGER B. SMITH*
Retired Chairman and Chief Executive Officer
General Motors Corporation
* Member of the Audit Committee
Directors of IP Forest Resources Company,
Managing General Partner of IP Timberlands, Ltd.
MANAGERS
JOHN T. DILLON
Chairman and Chief Executive Officer
EDWARD J. KOBACKER
President
JOHN A. CURETON
Vice President
JAMES W. GUEDRY
Vice President and Secretary
ROBERT W. HINTZE
Vice President
ROBERT A. KRISCUNAS
Vice President and General Counsel
JOHN A. NUGENT
Vice President
DAVID R. TITZER
Vice President
FREDERICK L. BLEIER
Treasurer and Controller
CARL Q. CARTER
Chief Tax Officer
DENNIS G. SCHROEDER
Auditor
Managers of IP Forest Resources Company,
Managing General Partner of IP Timberlands, Ltd.
19
<PAGE>
UNITHOLDER TAX INFORMATION
Each year IPT prepares a customized tax package for each unitholder showing the
unitholder's share of the Partnership's capital gain, ordinary income (or loss)
and other information required for the unitholder's federal income tax return.
The package also includes information regarding state tax reporting requirements
for those states in which the Partnership has operations. Unitholders should
discuss the requirement for state tax reporting with their tax advisers.
IPT makes available upon request a generalized tax package providing detailed
instructions for determining the capital gain, ordinary income (or loss) and
other tax results on a per unit basis.
Tax packages for 1996 were mailed to unitholders in late February 1997.
Information pertaining to customized or generalized tax packages may be obtained
by calling 1-800-942-4555.
THIS 1996 ANNUAL REPORT TO UNITHOLDERS CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS CONCERNING IPT'S BUSINESS PROSPECTS, POSSIBLE DECLINES IN
DISTRIBUTIONS AND THE PRICE OF THE CLASS A UNITS. OVERALL MARKET CONDITIONS
COULD INFLUENCE THE EXPECTED PRICE DECLINE OF THE CLASS A UNITS AND THE
POSSIBILITY OF A DECLINE IN THE DISTRIBUTION TO CLASS A UNITHOLDERS.
PARTNERSHIP INFORMATION
PARTNERSHIP HEADQUARTERS
IP Timberlands, Ltd.
Two Manhattanville Road
Purchase, N.Y. 10577
1-800-634-8050
STOCK TRANSFER AGENT AND REGISTRAR
For questions concerning change of address, lost certicates or cash distribution
checks, or change in registered ownership, write or call:
ChaseMellon Shareholder Services, L.L.C.
85 Challenger Road
Overpeck Centre
Ridgefield Park, N.J. 07660
Within the U.S., call 1-800-851-9677.
Outside the U.S., call collect 0-212-613-7427.
INVESTOR SERVICES
For questions concerning your units other than those noted directly above,
contact the Investor Relations Department at 1-800-634-8050.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
1345 Avenue of the Americas
New York, N.Y. 10105
REPORTS AND PUBLICATIONS
For additional copies of this annual report, or copies of SEC filings, or to
have your name added to our mailing list, call 1-800-634-8050 or write to the
Investor Relations Department at Partnership headquarters.
20
<PAGE>
PAPER USED IN THIS ANNUAL REPORT:
STRATHMORE ELEMENTS, bright white, lines, 80 lb. cover and 80 lb. text.
Copyright 1997 IP Timberlands, Ltd. All rights reserved.
<PAGE>
[LOGO] IP TIMBERLANDS, LTD.
IP Timberlands, Ltd.
Two Manhattanville Road
Purchase, N.Y. 10577
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
Know all Men By These Presents, that the undersigned hereby constitutes and
appoints JAMES W. GUEDRY, WILLIAM B. LYTTON and JAMES P. MELICAN and each of
them (with full power to each of them to act alone) their true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for them on their behalf and in their name, place and stead, in
any and all capacities, to sign, execute and affix their seal thereto and file
the Annual Report of IP Timberlands, Ltd. on Form 10-K (or any other
appropriate form), under the Securities Exchange Act of 1934, as amended,
together with any and all amendments to such Annual Report and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities Exchange Commission, granting unto said attorneys-in-fact,
and each of them, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises in order
to effectuate the same, for all intents and purposes, and that the undersigned
hereby ratify and confirm all that said attorneys-in-fact and agents, or any of
them, may lawfully do or cause to be done by virtue hereof.
Executed on this 11th day of March, 1997, at Purchase, New York.
<PAGE>
NAME TITLE
/s/ Thomas C. Graham
------------------------------------- Director
(Thomas C. Graham)
/s/ Jane C. Pfeiffer
------------------------------------- Director
(Jane C. Pfeiffer)
/s/ Roger B. Smith
------------------------------------- Director
(Roger B. Smith)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Earnings and the Consolidated Balance Sheet of IP
Timberlands, Ltd. and is qualified in its entirety to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,843
<SECURITIES> 0
<RECEIVABLES> 282,650
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 290,493
<PP&E> 685,513
<DEPRECIATION> 0
<TOTAL-ASSETS> 976,048
<CURRENT-LIABILITIES> 19,076
<BONDS> 0
0
0
<COMMON> 475,195
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 976,048
<SALES> 259,110
<TOTAL-REVENUES> 277,273
<CGS> 0
<TOTAL-COSTS> 100,907
<OTHER-EXPENSES> 2,033
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,933)
<INCOME-PRETAX> 845,322
<INCOME-TAX> 0
<INCOME-CONTINUING> 845,322
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 845,322
<EPS-PRIMARY> 8.78
<EPS-DILUTED> 8.78
</TABLE>
