SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
February 13, 1998
-------------------------------------------------------
Date of Report (Date of Earliest Event Reported)
IP TIMBERLANDS, LTD.
(Exact name of Registrant as specified in its charter)
Texas 1-8859 13-3259241
- ------------- ----------- ----------------------
(State of (Commission (IRS Employer
Incorporation) File) Identification Number)
Two Manhattanville Road, Purchase, NY 10577
-------------------------------------------
(Address of Principal executive offices)
914-397-1500
---------------
(Telephone No.)
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ITEM 1. CHANGES IN CONTROL OF REGISTRANT
N/A
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
N/A
ITEM 3. BANKRUPTCY OR RECEIVERSHIP
N/A
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
N/A
ITEM 5. OTHER EVENTS
N/A
ITEM 6. RESIGNATIONS OF REGISTRANT'S DIRECTORS
N/A
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
Audited Financial Statement, Management's Discussions and Analysis of
Financial Condition and Results of Operations for the year ended
December 31, 1997 are being filed as Exhibit 99.
(b) Pro Forma Financial Information:
N/A
<PAGE>
(c) Exhibits:
(99) Selected Financial Data
Management's Discussion and Analysis of Financial
Condition and Results of Operations for year ended
December 31, 1997
Audited Financial Statements
Report of Independent Public Accountants
ITEM 8. CHANGES IN FISCAL YEAR
N/A
Signature
Pursuant to the requirements 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
(Managing General Partner)
(Registrant)
Date: February 13, 1998 /s/ CAROL M. SAMALIN
Purchase, NY --------------------
Carol M. Samalin
Assistant Secretary
Financial Highlights
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Years Ended December 31
- --------------------------------------------------------------------------------
In millions, except per unit data 1997(1) 1996 1995
- --------------------------------------------------------------------------------
Total Revenues $ 343 $277 $ 360
Gains on Sales of Partnership Interests 90 669
Gain on Redemption of Preferred Interest 120
Operating Earnings(1) 424 845 249
Net Partnership Earnings 413 845 261
Earnings Allocated to Class A Limited Partners 289 408 255
Per Class A Unit
Earnings 6.23 8.78 5.50
Distributions 2.00 11.75(2) 6.88(3)
Operating Cash Flow Attributable to Class A Units 279 224 271
Total Class A Unit Distributions Declared $ 93 $546(2) $ 320(3)
Weighted Average Class A Units Outstanding 46 46 46
December 31
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Working Capital $ 484 $271 $ 398
Forestlands and Roads 798 686 772
Long-Term Debt 450 450 750
Total Assets $1,428 $976 $1,187
================================================================================
(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.
(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.
<PAGE>
Management's Discussion and Analysis
Results of Operations
Stumpage sales for the year ended December 31, 1997 were $314 million, an
increase of 25% from 1996 sales of $251 million that included $25 million from
the Western region forestlands that were involved in a partnership interest sale
in March 1996. Stumpage sales in 1995 totaled $316 million, including $90
million from the Western region. The increase in sales in 1997 reflects both
higher average stumpage prices and higher harvest volumes. Total revenues were
$343 million in 1997 compared to $277 million in 1996 and $360 million in 1995.
Net Partnership earnings totaled $413 million in 1997, including a gain of $120
million on the redemption of IPT's remaining preferred and limited partnership
interests in West Coast Forest Resources LP (WCFR) and $90 million of gains on
sales of other subsidiary partnership interests. Earnings in 1996 were $845
million, including $669 million of gains from sales of partnership interests,
principally a $638 million gain from the sale of a 98% general partnership
interest in WCFR, the subsidiary partnership that held all of IPT's Western
forestland assets. Net Partnership earnings in 1995 were $261 million.
In December 1997, WCFR redeemed the Partnership's preferred and 1% limited
partnership interests for cash and a $120.2 million note from International
Paper Company, resulting in a net gain to IPT of $120 million. Class A
unitholders were credited with approximately $39 million of this gain, or $.84
per Class A Unit, based on their interests in the Western forestland assets that
were contributed to WCFR in 1996. This transaction concluded the disposition of
the Partnership's forestland interests in the west.
In addition, in February, September and December 1997, the Partnership recorded
gains totaling $90 million from the sales of subsidiary partnership interests,
including the first two in a series of planned transactions involving
approximately 175,000 acres of forestlands in New York and Pennsylvania.
Approximately $9.5 million of these gains, or $.21 per Class A Unit, were
allocated to the Class A unitholders. Further partnership interest sales
involving approximately 112,000 acres of forestlands are anticipated in 1998,
with the Class A unitholders' sharing in approximately 10% of any gains from
these future transactions.
In March 1996, a subsidiary partnership holding essentially all of the
Partnership's Western forestland assets (WCFR) sold a 98% general partnership
interest to a third party, resulting in a gain of $638 million. Approximately
$203 million, or $4.37 per unit, of the gain was allocated to the Class A Units.
Operating results in 1997 benefited from strong demand and pricing for
Partnership stumpage. In our Southern region, which generates about 90% of
Partnership stumpage sales, total sales increased 44% compared to 1996, driven
by a 17% increase in average stumpage prices and a 23% increase in harvest
volumes. Demand for both sawtimber and pulpwood was strong throughout the year,
driven by low mill wood inventories early in the year and active construction
markets. Fourth quarter operations were especially strong as favorable
harvesting conditions, combined with strong demand for both sawtimber and
pulpwood as mills moved to build winter inventory levels, supported a high
harvest level at favorable prices.
In the Northeast region, which produces about 10% of Partnership stumpage sales,
revenues were only slightly higher than in 1996 as a 6% increase in average
prices was offset in part by a 2% decline in harvest volumes. Revenues and
earnings in this region were reduced somewhat in 1997 by the lost contribution
from the high-value forestlands in Pennsylvania and New York that were included
in the partnership interest sales in 1997.
Forestland sales totaled $13 million in 1997, up from $9 million in 1996, but
lower than the $30 million recorded in 1995. These sales, which occur when
market prices for selected tracts exceed the values expected from future
operations, may vary significantly from year to year.
The outlook for Partnership operations in 1998 is mixed. Prices for Partnership
stumpage enter the year at or near all time highs. In addition, U.S.
construction activity is projected to remain strong in 1998, which would support
continued strong demand for Partnership stumpage. We also expect to complete
partnership interest sales involving approximately 112,000 acres of forestland
in Pennsylvania and New York in 1998. Harvest volumes, however, are expected to
decline somewhat below 1997s record levels for the next few years due to a
younger average age class for the Partnership's timber. Furthermore, the recent
economic downturn in Asia could adversely affect demand for stumpage in the U.S.
in 1998.
<PAGE>
The following table presents major earnings statement revenue categories
attributable to the Primary and Secondary Accounts:
In thousands 1997 1996 1995
- --------------------------------------------------------------------------------
Stumpage sales
Primary Account $314,129 $242,789 $293,742
Secondary Account 17 7,789 22,519
- --------------------------------------------------------------------------------
$314,146 $250,578 $316,261
================================================================================
Forestland sales
Primary Account $ 2,288 $ 1,559 $ 9,286
Secondary Account 10,401 6,973 20,807
- --------------------------------------------------------------------------------
$ 12,689 $ 8,532 $ 30,093
================================================================================
Volumes related to stumpage sales were:
In thousand cunits 1997 1996 1995
- --------------------------------------------------------------------------------
Used in International Paper facilities 1,486 1,024 1,149
Resold by International Paper 364 365 583
Sales to unaffiliated parties 2,254 2,120 1,941
- --------------------------------------------------------------------------------
4,104 3,509 3,673
================================================================================
Operating Costs and Expenses
Operating costs and expenses attributable to the Primary and Secondary Accounts
were as follows:
In thousands 1997 1996 1995
- --------------------------------------------------------------------------------
Primary Account $ 82,109 $ 54,472 $ 58,436
Secondary Account 47,038 46,435 52,618
- --------------------------------------------------------------------------------
$129,147 $100,907 $111,054
================================================================================
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. Depletion increased to 15% of stumpage sales in 1997
from 10% in 1996 due to sales of higher cost timber acquired from Federal Paper
Board Company in March 1997.
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 IP Forest Resources Company (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. Forest operations expenses increased in 1997 due to
higher fertilization and silvicultural costs and additional expenses to manage
the timber acquired from Federal Paper Board Company.
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.
<PAGE>
Liquidity and Capital Resources
At December 31, 1997, IP Timberlands, Ltd. had cash and temporary investments of
$13.5 million, an intercompany account receivable from International Paper of
$4.0 million, and notes receivable from International Paper of $459.5 million,
totaling $477.0 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 1997 1996
- --------------------------------------------------------------------------------
Cash, temporary investments and intercompany accounts
and notes receivable
Primary Account $367,673 $171,508
Secondary Account 109,368 110,757
- --------------------------------------------------------------------------------
$477,041 $282,265
- --------------------------------------------------------------------------------
Total per Class A Unit $ 7.61 $ 3.61
================================================================================
The $7.61 per Class A Unit shown above includes $7.52 in the Primary Account and
$.09 in the Secondary Account. After deducting $2.67 that is required for
redemption of the Partnership's Series A Preference units, and the regular and
special distributions totaling $3.85 per Class A Unit that were paid on February
13, 1998, Primary Account liquid assets of $1.00 per Class A Unit remain for
future operating requirements. The Primary Account also has a $36.5 million
interest, or $.75 per Class A Unit, in the $120.2 million note received in the
redemption of the Partnership's interest in WCFR. At the end of the Initial Term
(December 31, 1999), any undistributed Primary Account liquid assets must be
paid to unitholders in accordance with their Primary Account percentage
interests.
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 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 March 1997, IPTO issued Series A Preference Units with a value of $130.7
million to Federal Paper Board Company, a wholly-owned subsidiary of
International Paper, in connection with the acquisition of a timber deed
covering approximately 116,000 acres. These units, which may be redeemed by IPTO
at any time, require quarterly preferred return distributions at an annual rate
of 7.5%. Preferred return distributions of $7.8 million were made in 1997.
Redemption costs for these units will be paid by the Primary Account since the
associated timber is expected to be harvested prior to the end of the Initial
Term.
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 responsible for the repayment of the loan. Repayment of the borrowing is
guaranteed by International Paper. Approximately $119 million of the proceeds
were 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.
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.
<PAGE>
In 1995 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 and 1997. In addition,
special distributions of $3.35, $9.75, and $4.00 per Class A Unit were paid in
February 1998, May 1996, and March 1995, respectively. These special
distributions were paid because management believed that existing cash balances
plus projected future cash flows would be adequate for capital expenditure,
working capital and regular quarterly distributions during the remainder of the
Initial Term.
The following table presents cash flow from operations, attributable to Class A
Units, after provision for capital expenditures. It also shows cash
distributions declared for Class A Units relating to the applicable period,
including special distributions of $9.75 per unit paid in May 1996 and $4.00 per
unit paid in March 1995.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Primary Secondary IPT Per Class
In thousands Account Account Total A Unit
- ---------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash provided by operations $ 296,948 $ 43,009 $ 339,957
Investment in forestlands and roads (564) (34,815) (35,379)
IPTO general partners' interest in above (2,964) (82) (3,046)
- ---------------------------------------------------------------------------------------------------------
Cash flow after capital expenditures 293,420 8,112 301,532
Class A Unit allocation factor 95% 4%
Cash flow attributable to Class A Units $ 278,749 $ 324 $ 279,073 $ 6.01
=========================================================================================================
Distributions declared for Class A Units $ 92,891 $ $ 92,891 $ 2.00
=========================================================================================================
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 $ 4.82
=========================================================================================================
Distributions declared for Class A Units $ 538,306 $ 7,431 $ 545,737 $11.75
=========================================================================================================
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 $ 5.84
=========================================================================================================
Distributions declared for Class A Units $ 289,847 $ 29,700 $ 319,547 $ 6.88
=========================================================================================================
</TABLE>
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.
<PAGE>
Consolidated Statement of Earnings
- --------------------------------------------------------------------------------
In thousands, except per unit data Years Ended December 31,
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Revenues
Stumpage sales
International Paper $151,946 $ 116,811 $194,294
Unaffiliated parties 162,200 133,767 121,967
Forestland sales 12,689 8,532 30,093
Other income, net 16,298 18,163 13,600
- --------------------------------------------------------------------------------
Total Revenues 343,133 277,273 359,954
- --------------------------------------------------------------------------------
Operating Costs and Expenses
Depletion
International Paper 17,822 8,756 12,375
Unaffiliated parties 28,580 15,383 14,812
Cost of forestlands sold 1,475 651 2,465
Amortization of roads 1,704 1,807 2,154
Forest operations 48,167 42,754 43,813
General and administrative 18,651 18,651 20,542
Property and severance taxes 12,748 12,905 14,893
- --------------------------------------------------------------------------------
Total Operating Costs and Expenses 129,147 100,907 111,054
- --------------------------------------------------------------------------------
213,986 176,366 248,900
Gains on sales of partnership interests 89,636 669,056
Gain on redemption of preferred interest 120,000
- --------------------------------------------------------------------------------
Operating Earnings 423,622 845,422 248,900
Interest Income 28,617 20,939 20,868
Interest Expense (28,202) (19,006) (6,069)
Preferred Return on Series A Preference Units (7,764)
General Partners' Interest in IPTO (3,143) (2,033) (2,637)
- --------------------------------------------------------------------------------
Net Partnership Earnings $413,130 $ 845,322 $261,062
================================================================================
Earnings per Class A Unit (Note 6) $ 6.23 $ 8.78 $ 5.50
================================================================================
The accompanying notes are an integral part of these financial statements.
<PAGE>
Consolidated Balance Sheet
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
In thousands 1997 1996
- --------------------------------------------------------------------------------
Assets
Current Assets
Cash and temporary investments, at cost, which
approximates market $ 13,467 $ 7,843
Notes receivable - International Paper 459,537 259,351
Due from International Paper 4,037 15,071
Accounts and notes receivable 29,248 8,228
- --------------------------------------------------------------------------------
Total current assets 506,289 290,493
Forestlands 768,956 660,369
Roads, net of accumulated amortization of
$33,413 (1997) and $31,994 (1996) 28,875 25,144
Notes Receivable
International Paper 120,158
Other 3,570 42
- --------------------------------------------------------------------------------
Total Assets $1,427,848 $976,048
================================================================================
Liabilities and Partners' Capital
Current Liabilities
Accounts payable and accrued liabilities $ 3,575 $ 6,719
Accrued interest 6,212 3,541
Accrued property and severance taxes 6,215 5,550
Customer advance payments 6,691 3,266
- --------------------------------------------------------------------------------
Total current liabilities 22,693 19,076
Long-Term Debt 450,000 450,000
Lease Obligations 1,175 1,241
Series A Preference Units in IPTO 130,744
General Partners' Interest in IPTO 32,691 30,536
Partners' Capital
General partners 29,760 26,607
Limited partners 760,785 448,588
- --------------------------------------------------------------------------------
Total Liabilities and Partners' Capital $1,427,848 $976,048
================================================================================
The accompanying notes are an integral part of these financial statements.
<PAGE>
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Years Ended December 31,
- -------------------------------------------------------------------------------------------
In thousands 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net Partnership earnings $ 413,130 $ 845,322 $ 261,062
Noncash items
Depletion 46,402 24,139 27,187
Cost of forestlands sold 1,475 651 2,465
Amortization of roads 1,704 1,807 2,154
Gain on sale of partnership interest (638,205)
Noncash portion of preferred interest redemption (120,158)
Other, net 7,367 10,489 2,036
Changes in current assets and liabilities
Accounts and notes receivable (24,548) 16,315 (14,695)
Due from International Paper 11,034 (7,778) (3,965)
Accrued interest 2,671 (2,442) 5,983
Customer advance payments 3,425 (531) (861)
Payment of partnership interest sale expenses (11,448)
Other, net (2,545) (3,224) 224
- -------------------------------------------------------------------------------------------
Cash Provided By Operations 339,957 235,095 281,590
- -------------------------------------------------------------------------------------------
Investment Activities
Investment in forestlands and roads (35,379) (33,060) (28,197)
Loans to International Paper (411,478) (1,130,281) (257,608)
Loan repayments by International Paper 211,292 1,242,308 316,376
- -------------------------------------------------------------------------------------------
Cash Provided By (Used For) Investment Activities (235,565) 78,967 30,571
- -------------------------------------------------------------------------------------------
Financing Activities
Issuance of long-term debt 450,000 750,000
Distributions to partners of IPT and IPTO (98,768) (768,118) (1,058,184)
- -------------------------------------------------------------------------------------------
Cash Used For Financing Activities (98,768) (318,118) (308,184)
- -------------------------------------------------------------------------------------------
Change in Cash and Temporary Investments 5,624 (4,056) 3,977
Cash and Temporary Investments
Beginning of the year 7,843 11,899 7,922
- -------------------------------------------------------------------------------------------
End of the year $ 13,467 $ 7,843 $ 11,899
===========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<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, 1997
and 1996 were $7.2 million and $6.9 million, respectively.
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.)
Financial Instruments. The Partnership uses interest rate swap agreements to
hedge its exposure to interest rate risk on $450 million of debt. Amounts paid
or received as interest under these swap agreements are recognized over the life
of the agreements as adjustments to interest expense. If the agreements were
terminated early, any gain or loss would be deferred and amortized over the
remaining life of the related debt.
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 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.
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.
<PAGE>
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 $17.8 million (1997), $8.8 million (1996) and $12.4
million (1995).
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 $9.3 million (1997), $9.6
million (1996) and $9.3 million ( 1995). 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 $19.5 million (1997), $13.1 million
(1996) and $20.1 million (1995).
No unaffiliated customer accounted for sales in excess of 10% of total revenues
in 1997, 1996 or 1995.
4. Gains on Sales of Partnership Interests
In August 1997, the Partnership entered into an agreement for the sale of
certain partnership interests, including a general partnership interest in a
subsidiary partnership that will control approximately 175,000 acres of
forestlands in Pennsylvania and New York. The sale will be completed through a
series of transactions in 1997 and 1998 and will generate total proceeds of
approximately $200 million. Based on the projected harvest schedule of the
timber on these forestlands, IPT's Class A Units will be credited with
approximately 10% of the earnings from these transactions. The initial
transaction, completed in September 1997, resulted in proceeds of approximately
$39.6 million and a gain of approximately $37.0 million, or $.08 per Class A
Unit. A second transaction, completed in December 1997, resulted in proceeds of
approximately $39.7 million and a gain of approximately $37.6 million, or $.08
per Class A Unit.
In February 1997, the Partnership completed the sale of a special partnership
interest relating to approximately 14,500 acres of pine plantations in the
South. As a result of this sale, IPT recognized a gain of approximately $15
million. Approximately 14% of the earnings from this sale were credited to the
Class A Units.
In December and June 1996, the Partnership completed sales of special
partnership interests relating to 32,700 acres of pine plantations in the South.
As a result of these sales, IPT recognized gains totaling approximately $31
million. Approximately 11% of the earnings from these transactions were credited
to the Class A Units.
On March 29, 1996, a subsidiary partnership of IPT completed the sale of a 98%
general partnership interest to R-H Timber Co. 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 credited to the Class A Units. IPT
retained a 1% limited partnership interest and a preferred interest in the new
partnership, West Coast Forest Resources LP (WCFR).
5. Gain on Redemption of Preferred Interest
On December 30, 1997, WCFR redeemed IPT's preferred and 1% limited partnership
interests in WCFR. Proceeds of the redemption included $3.9 million in cash and
a $120.2 million note receivable from International Paper that is payable on
December 10, 2002, with interest payable annually at 7.5%. As a result of these
redemptions, IPT recorded a gain of approximately $120 million. Approximately
$38.9 million of this gain, or $.84 per unit, was allocated to the Class A Units
based on their share of the Western region partnership interest sold in March
1996.
6. 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, bulk sales, and
sales of partnership interests, 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.
<PAGE>
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.
The following table presents the computation of earnings per Class A Unit.
- --------------------------------------------------------------------------------
Years Ended December 31,
- --------------------------------------------------------------------------------
In thousands, except per unit data 1997 1996 1995
- --------------------------------------------------------------------------------
Allocation to Primary Account $299,812 $411,048 $ 269,225
Allocation to Secondary Account 113,318 434,274 (8,163)
- --------------------------------------------------------------------------------
Net Partnership Earnings $413,130 $845,322 $ 261,062
- --------------------------------------------------------------------------------
95% of the Primary Account(1) $284,821 $390,496 $ 255,763
4% of the Secondary Account(1) 4,533 17,371 (326)
- --------------------------------------------------------------------------------
Earnings Allocated to Class A Limited Partners 289,354 407,867 255,437
Weighted Average Class A Units Outstanding 46,446 46,446 46,446
- --------------------------------------------------------------------------------
Earnings per Class A Unit $ 6.23 $ 8.78 $ 5.50
================================================================================
(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.
7. 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 1997 1996
- --------------------------------------------------------------------------------
Notes receivable - trade $16,192 $2,763
Accounts receivable - trade 2,573 965
Accrued interest and other receivables 10,483 4,500
- --------------------------------------------------------------------------------
$29,248 $8,228
================================================================================
Notes receivable - noncurrent at December 31, 1997 includes $120.2 million from
International Paper that is payable on December 10, 2002 with interest payable
annually at 7.5%.
8. Long-Term Debt
On November 15, 1996, the Partnership's Secondary Account borrowed $450 million
under a three-year credit agreement with 13 banks. The proceeds from this
borrowing were used to repay a loan and 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 signed 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 mature in November 1999. As the counterparties to the swap
agreements are major financial institutions, management does not expect
nonperformance by the counterparties.
Cash payments for interest were $28.0 million in 1997 and $11.7 million in 1996.
9. Series A Preference Units
In March 1997, IPTO issued 13,074 Series A Preference Units with an agreed value
of $130.7 million to Federal Paper Board Company ("Federal"), a wholly owned
subsidiary of International Paper, in connection with the acquisition from
Federal of a timber deed covering approximately 116,000 acres. These units,
which may be redeemed by IPTO at any time, require quarterly preferred return
distributions, based on an annual rate of 7.5% of the agreed value, that must be
made before distributions can be made to the Partnership's Class A or Class B
unitholders. Preferred return distributions of $7.8 million were made from the
Primary Account in 1997.
Since it is expected that all of the acres under the timber deed will be
harvested prior to the end of the Initial Term, payment of the $130.7 million
redemption (or $2.67 per Class A Unit) will be made from the Primary Account.
<PAGE>
10. Partners' Capital
The following table presents the activity in the Partners' Capital accounts.
General Limited
In thousands Partners Partners Total
- --------------------------------------------------------------------------------
Balance - January 1, 1995 $ 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
Net earnings for the period 4,131 408,999 413,130
Partner distributions (978) (96,802) (97,780)
- --------------------------------------------------------------------------------
Balance - December 31, 1997 $ 29,760 $ 760,785 $ 790,545
================================================================================
Distributions in 1996 include a special distribution of $453 million ($9.75 per
Class A Unit), and a distribution of $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 distribution paid in the fourth-quarter.
Distributions in 1995 include a special distribution of $186 million ($4.00 per
Class A Unit), and a distribution of $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 distribution paid in the
fourth-quarter.
The authorized and outstanding Class A and Class B Units at December 31, 1997,
1996 and 1995, 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 market price. The market price would be equal to the average of the Class A
Unit closing price for the five business days preceding the tenth day prior to
the date of notice of repurchase.
11. 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.
<PAGE>
Interim Financial Results (unaudited)
<TABLE>
<CAPTION>
Quarter
------------------------------------------------------
In thousands, except per unit data First Second Third Fourth
- ------------------------------------------------------------------------------------------
1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 77,368 $55,786 $ 95,188 $114,791
Operating earnings 61,825(1) 28,277 100,393(2) 233,127(3),(4)
Net Partnership earnings 60,069(1) 25,399 97,260(2) 230,402(3),(4)
Per Class A Unit
Earnings $ 1.26(1) $ 0.80 $ 1.61(2) $ 2.56(3),(4)
Distributions 0.50 0.50 0.50 0.50
1996
- ------------------------------------------------------------------------------------------
Total revenues $ 81,108 $56,799 $ 83,299(5) $ 56,067
Operating earnings 692,283(6) 51,214 56,947 44,978
Net Partnership earnings 686,300(6) 56,393 57,414 45,215
Per Class A Unit
Earnings $ 5.66(6) $ .98 $ 1.23 $ .91
Distributions 10.25(7) .50 .50 .50
==========================================================================================
</TABLE>
(1) Includes $15.0 million ($.05 per Class A Unit) from the sale of a
subsidiary partnership interest.
(2) Includes $37.0 million ($.08 per Class A Unit) from the sale of a
subsidiary partnership interest.
(3) Includes $37.6 million ($.08 per Class A Unit) from the sale of a
subsidiary partnership interest.
(4) Includes $120.0 million ($.84 per Class A Unit) from a preferred interest
redemption in West Coast Forest Resources.
(5) Includes $21.5 million of bulk sales in the third quarter.
(6) Includes $638.2 million ($4.37 per Class A Unit) from the sale of a
subsidiary partnership interest.
(7) Distributions for the first quarter of 1996 include a special distribution
of $9.75 per Class A Unit.
FORWARD-LOOKING INFORMATION
THIS REPORT ON FORM 8-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS CONCERNING
PROJECTED STRONG CONSTRUCTION ACTIVITY AND DECLINING HARVEST VOLUME IN 1998.
ACTUAL ACTIVITY OR VOLUME MAY DIFFER BASED ON THE U.S. ECONOMY AND WEATHER
CONDITIONS IN OUR TIMBERLANDS.
<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, 1997 and
1996, and the related consolidated statements of earnings and cash flows for
each of the three years ended December 31, 1997. 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years ended December 31, 1997 in
conformity with generally accepted accounting principles.
New York, N.Y.
February 5, 1998
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, the results of its 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.
Frederick L. Bleier
Treasurer and Controller
