<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 1 0 - K
(Mark One)
( x ) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the year ended December 31, 1996
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from . . . . . . . to . . . . . . . .
Commission File Number 1-8997
RAYONIER TIMBERLANDS, L.P.
A Delaware Limited Partnership
I.R.S. Employer Identification No. 06-1148227
1177 SUMMER STREET, STAMFORD, CT 06905-5529
(Principal Executive Office)
Telephone Number: (203) 348-7000
Securities registered pursuant to Section 12(b) of the Act:
Class A Depositary Units . . . . Registered on the New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months 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 the Form 10-K or any amendment to this
Form 10-K. (x)
The aggregate market value of the Class A Units held by non-affiliates of the
Registrant as of March 10, 1997 was approximately $79,063,000. (For the purposes
of determining the above stated amount only, all directors and officers of the
Special General Partner and the Managing General Partner of the Registrant are
presumed to be affiliates.)
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TABLE OF CONTENTS
ITEM PAGE
PART I
1. Business 1
2. Properties 10
3. Legal Proceedings 10
4. Submission of Matters to a Vote of Security Holders 10
PART II
5. Market for the Registrant's Common Equity and Related
Stockholder Matters 11
6. Selected Financial Data 11
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
8. Financial Statements and Supplementary Data 16
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 16
PART III
10. Directors and Executive Officers of the Registrant 17
11. Executive Compensation 19
12. Security Ownership of Certain Beneficial Owners and Management 19
13. Certain Relationships and Related Transactions 19
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 19
i
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INDEX TO FINANCIAL STATEMENTS
Report of Management F-1
Report of Independent Public Accountants F-2
Statements of Income for the Three Years
Ended December 31, 1996 F-3
Balance Sheets as of December 31, 1996 and 1995 F-4
Statements of Cash Flows for the Three Years
Ended December 31, 1996 F-5
Statements of Partners' Capital for the Three Years
Ended December 31, 1996 F-6
Notes to Financial Statements F-7 - F-15
INDEX TO FINANCIAL STATEMENT SCHEDULES
Financial statement schedules have been omitted because they are not
applicable, the required matter is not present, the amounts are
insignificant or immaterial, or the information has been otherwise
supplied in the financial statements or the notes thereto.
Signatures A
Exhibit Index B - C
ii
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Rayonier Timberlands, L.P. (the Partnership or RTLP) is a Delaware limited
partnership formed by Rayonier Inc. (Rayonier) in October 1985 to succeed to
substantially all of Rayonier's U.S. timberlands business. Rayonier Forest
Resources Company (RFR or Managing General Partner), a wholly owned subsidiary
of Rayonier formed in September 1985, is the Managing General Partner of the
Partnership and Rayonier is the Special General Partner.
On November 19, 1985, Rayonier contributed approximately 1.19 million acres
of its timberlands owned in fee or held under long-term leases (the Timberlands)
to the Partnership in exchange for 20,000,000 Class A Depositary Units (Class A
Units) representing Class A limited partners' interests in the Partnership and
20,000,000 Class B Depositary Units (Class B Units) representing Class B limited
partners' interests in the Partnership. Also on such date, in a registered
public offering, Rayonier offered and sold 5,060,000 Class A Units. Therefore,
at all times after such date to and including December 31, 1996, Rayonier has
held 74.7 percent of the Partnership's issued and outstanding Class A Units and
100 percent of the Partnership's issued and outstanding Class B Units.
DESCRIPTION OF BUSINESS
The Partnership is engaged in the timberlands business, which includes forestry
management, reforestation, timber thinning and the marketing and sale of
standing timber and logs from the Timberlands. The Partnership will occasionally
purchase, for short term resale, standing timber from third parties. The
Partnership's business plan is to operate the Timberlands for sustained
long-term harvest and to satisfy the Partnership's need to generate regular cash
flow to fund its cash distribution policy, as determined from time to time by
the Managing General Partner's Board of Directors.
The Partnership operates through Rayonier Timberlands Operating Company, L.P.
(the Operating Partnership or RTOC), a Delaware limited partnership formed by
Rayonier in October 1985, in which the Partnership holds a 99 percent limited
partner's interest. RFR is the Managing General Partner of the Partnership and
the Operating Partnership, and Rayonier is the Special General Partner of both
partnerships. As general partners, Rayonier and RFR hold an aggregate 1 percent
interest in each partnership and, therefore, have an aggregate 1.99 percent
interest in the Partnership and the Operating Partnership on a combined basis.
Unless the context otherwise requires, all references in this Form 10-K to the
Partnership are also references to the Operating Partnership.
The Partnership negotiates and contracts for the sale of standing timber
(stumpage) at fixed prices with buyers who generally cut and pay for the trees
during the contract period. Current contracts usually entail a 20 percent
deposit and/or performance bond and generally have a 12- to 24-month life. The
Partnership also conducts, or contracts for third parties to conduct, harvesting
operations and sells the logs harvested if the Managing General Partner believes
that the timber cannot be sold as profitably as stumpage or that the tract in
question is particularly environmentally sensitive. In addition, the Partnership
may sell or exchange portions of the Timberlands and acquire additional timber
properties for cash, additional units or other consideration.
Partnership sales to Rayonier, for use in Rayonier's specialty pulp products
and timber and wood products businesses, were 10 percent, 17 percent and 13
percent of total timber sales in 1996, 1995 and 1994, respectively. See Timber
Markets and Sales; Affiliated Party Transaction for further information. Copies
of Rayonier's Annual Report and Form 10-K (without exhibits) as filed with the
Securities and Exchange Commission are available without charge, upon request
from the Corporate Secretary, Rayonier Inc., 1177 Summer Street, Stamford, CT
06905-5529. Telephone: 203-348-7000.
Three customers under common ownership (not affiliated with the Partnership)
accounted for approximately 9 percent, 10 percent and 18 percent of total timber
sales in 1996, 1995 and 1994, respectively. In addition, one unrelated customer
represented approximately 10 percent of timber sales in 1996. See Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations.
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The Partnership and the Operating Partnership have no officers, directors or
employees; in addition, RFR has no employees. Officers of RFR and officers and
employees of Rayonier perform all management functions for the Partnership. As
of December 31, 1996, Rayonier had approximately 2,700 employees of which
approximately 160 are active in its U.S. Timberlands Management business.
FORESTRY OPERATIONS
The Partnership's forest management operations and harvesting schedules are
based on biological information, environmental issues and other data concerning
species, site index, classification of soils, estimates of timber inventory and
the types, size and age classification of the timber base. From this
information, the Partnership routinely refines its long-term harvest schedule
based on existing and anticipated economic and market conditions, with a view
toward maximizing the value of its timber and timberland assets.
Particular forestry practices vary by geographic region and depend upon
factors such as soil productivity, tree size, age and stocking. Forest stands
may be thinned periodically to improve stand quality until they are harvested.
Different areas within a forest may be planted or seeded in successive years to
provide a distribution of age classes within the forest. A distribution of age
classes will tend to provide a regular source of cash flow as the various timber
stands reach harvestable age. The Partnership's forest management practices
include thinning of timber stands, controlled burning, fertilization of timber
plantations, disease and insect control and reforestation. Reforestation
activities include intensive land preparation and planting. The Partnership has
a fully established tree improvement program in the Southeast which, in
conjunction with its seed orchards and seedling nursery, supplies up to 100
percent of the annual planting requirements with first and second generation
genetically improved planting stock. The Partnership also maintains a genetics
program in the Northwest, but it cannot yet fully supply that region's seedling
needs.
The Partnership's activities include the maintenance and building of roads as
necessary for timber access within the Timberlands. In the Northwest, either the
Partnership or the timber purchaser will build and maintain roads, depending on
contract requirements. In the Southeast, it is typically the obligation of the
landowner. Each of the major regions within the Timberlands has well established
road systems that permit access to substantially the entire area throughout the
year. The Timberlands contain over 4,000 miles of roads that, together with
public roads and roads built by other private landowners, provide such access.
The timing of harvest of merchantable timber depends in part on the maturing
cycles of timber and on economic conditions. Timber on the Partnership's 369,000
acres of timberlands in the state of Washington (the Northwestern Timberlands)
consists predominantly of conifer species, is currently thinned at approximately
15 years of age and is harvested after attaining approximately 45-50 years of
age. The Partnership's policy is to maintain a sustainable annual harvest level
in the Northwest in the range of 160 to 170 million board feet per year, as
compared to an average of 187 million board feet harvested during the last three
years.
Timber on the Partnership's 778,000 acres of timberland in Georgia, Florida
and South Carolina (the Southeastern Timberlands) typically has a shorter
maturity cycle than timber in the Northwestern United States. Pine plantations
in the Southeastern Timberlands are typically harvested on average after they
reach approximately 20-25 years of age. Due to intensive forest and land
management as well as silvicultural investment, pine volume per acre available
for harvest in the future on the Southeastern Timberlands is expected to
increase. See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations. By the year 2000,
the annual pine harvest rate in this region is now expected to be approximately
4 percent greater than the 1996 harvest.
See Federal and State Regulation for a description of issues that may impact
Partnership's timber harvest rates.
DESCRIPTION OF TIMBERLANDS
The Timberlands consist of approximately 1.15 million acres, as of December 31,
1996, located in the state of Washington, primarily on the Olympic Peninsula,
and in Georgia, Florida and South Carolina. Approximately 1.02 million acres are
owned in fee, while approximately 126,000 acres are held under long-term lease.
Each of these regions contains tracts of timber located within the operating
radius of a number of pulp and paper mills, sawmills, plywood mills and wood
treating plants.
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ACREAGE. The following table sets forth, as of December 31, 1996, the
location and type of ownership that the Partnership has with respect to the
Timberlands.
HELD UNDER
OWNED LONG-TERM
IN FEE LEASE(1) TOTAL
----- ----- -----
(Thousands of acres)
Northwestern Timberlands
Olympic Peninsula of Washington 369 -- 369
----- ----- -----
Southeastern Timberlands
Georgia 487 47 534
Florida 164 79 243
South Carolina 1 -- 1
----- ----- -----
Total Southeastern 652 126 778
----- ----- -----
Total Timberlands 1,021 126 1,147
===== ===== =====
(1) The long-term leases permit the Partnership as lessee to manage and harvest
timberlands throughout the term of the lease. These leases typically have
initial terms of approximately 30 to 65 years, with renewal provisions in
some cases. The remaining portions of the initial terms of these leases
averaged 20 years as of December 31, 1996. Annual rentals are paid to the
lessor and, in some cases, the leases provide for payment of a percentage of
stumpage values to the lessor as timber is cut. In addition, the leases
impose certain duties on the lessee regarding management and reforestation
of the leased acres. In general, leased acreage has less value than the same
acreage would have if owned in fee because of the obligations imposed upon
the lessee under the terms of the lease.
TIMBER INVENTORY. The Timberlands owned in fee or held under long-term leases
include, as of December 31, 1996, total estimated merchantable timber inventory
of approximately 9.4 million cunits of wood, of which approximately 77 percent
is softwood. See Glossary of Forestry Terms - Merchantable Timber. A cunit
represents 100 cubic feet of fiber and is the customary common unit of measure
to consolidate regional information based on local commercial measurements such
as board feet or tons. The following table sets forth the estimated volumes of
merchantable timber on the Timberlands by location and type, as of December 31,
1996.
<TABLE>
<CAPTION>
ESTIMATED MERCHANTABLE TIMBER INVENTORY(1)
------------------------------------------
REGION SOFTWOOD HARDWOOD TOTAL
- ------ -------- -------- -----
<S> <C> <C> <C>
Northwestern Timberlands, in million board feet 2,149 210 2,359
Southeastern Timberlands, in thousands of
short green tons 8,873 6,346 15,219
Total, in thousands of cunits 7,278 2,153 9,431
</TABLE>
(1) The merchantable timber inventory volumes represent an estimate of the
amount of standing timber at its earliest age that could, under varying
economic conditions, be harvested. Estimates by the Partnership for
management purposes are based on its continuing inventory system, which
involves periodic statistical sampling of the Timberlands, with updating
adjustments made on the basis of growth estimates, harvest information and
market conditions. The estimated merchantable timber inventory is not a
reflection of the amount of timber that will be available to be cut in any
specific period of time, nor is future growth predicted. See Forestry
Operations.
THE NORTHWESTERN TIMBERLANDS. The Northwestern Timberlands are located in
Washington, primarily on the Olympic Peninsula. All of these Timberlands are
owned in fee. The Northwestern Timberlands include approximately 315,000 acres
of conifer (softwood) stands, approximately 72 percent of which is stocked with
hemlock and the remainder of which is stocked with Douglas fir, western red
cedar and white fir. The Northwestern Timberlands also include approximately
18,000 acres of hardwood timber stands consisting principally of alder and
maple, with lesser amounts of conifers. The remaining 36,000 acres are
classified as non-forest lands.
Rain, site and soil conditions typically cause softwood timber in the
Northwest, particularly hemlock, to maintain a relatively high growth rate for a
longer period of time in comparison with softwood timber in other parts of the
United States,
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resulting in longer rotation cycles. Site indices for conifer lands in the
Northwestern United States generally range from 90 to 145, and average
approximately 105. The site indices of the conifer lands in the Northwestern
Timberlands also range from 90 to 145 and average approximately 110.
The Northwestern Timberlands are near ocean ports and are well-positioned to
serve the Pacific Rim export market. More than half of the timber sold from the
Northwestern Timberlands is of export quality. Rayonier operated a pulp mill at
Port Angeles, Washington, until its closure on February 28, 1997. There are
still eight other pulp and paper mills and numerous sawmills, plywood plants and
other wood converting facilities in the region.
THE SOUTHEASTERN TIMBERLANDS. The Southeastern Timberlands are located in
Georgia, Florida and South Carolina and include approximately 652,000 acres of
timberlands owned in fee and approximately 126,000 acres held under long-term
leases. The Southeastern Timberlands include approximately 502,000 acres of pine
(softwood) lands, approximately 262,000 acres of hardwood lands and
approximately 14,000 non-forest acres.
The predominant pine species are loblolly and slash. Site indices for pine
lands in the Southeastern United States generally range from 55 to 65 and
average approximately 60. The pine lands included in the Southeastern
Timberlands have an average site index of 60. Hardwood lands included in the
Southeastern Timberlands are principally bottomlands. Principal hardwood species
are red oak, sweet gum, black gum, red maple, cypress and green ash.
The Southeastern region is generally recognized as being the most competitive
timberlands area in the United States. There are 19 pulp and paper mills and
numerous sawmills, plywood plants and treating plants for poles and pilings
located in the area of the Southeastern Timberlands. Rayonier operates two
sawmills and two pulp mills in this region.
STUMPAGE PRICES AND INDUSTRY CONDITIONS
Stumpage prices vary depending on the market for end-use products that rely on
timber and wood fiber as raw materials. Stumpage values tend to be higher for
larger diameter trees because of higher-value end uses. Larger diameter trees
are used as sawtimber, which is processed into lumber, plywood and poles, while
smaller diameter trees are used as pulpwood for the manufacture of paper and
pulp. Intermediate diameters can be used as chip 'n saw material producing less
lumber and more chips than sawlogs. International as well as domestic supply and
demand forces (including the value of the U.S. dollar in foreign exchange
markets) also affect regional stumpage prices in the U.S. Local stumpage prices
are dependent upon factors such as geographic location of the property,
proximity to a mill or export facility, logging conditions, accessibility of the
timber, size and quality of the timber, species composition of the stand and
timber volume per acre.
The Northwest and the Southeast represent major timber growing regions of the
United States. In both areas, timber markets are very competitive, but each
region has different types of timber, markets and competitive factors.
See Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations and Future Operations for further
information.
COMPETITION
The Partnership's timberlands are located in two major timber growing regions of
the United States (the Southeast and the Northwest) where timber markets are
fragmented and very competitive. In the Northwest, stumpage sold by John Hancock
Mutual Life Insurance Co. and from Washington state-owned public forests is the
most significant competition. In both the Northwest and Southeast, smaller
forest products companies and private land owners compete with the Partnership.
Price is the principal method of competition in this market.
TIMBER MARKETS AND SALES; AFFILIATED PARTY TRANSACTIONS
The Partnership sells timber provided by the Timberlands to Rayonier and to
unaffiliated domestic purchasers. See Stumpage Prices and Industry Conditions
for a discussion of end-use markets for the Partnership's timber.
Since the inception of the Partnership, 29 percent of its timber sales in the
Northwest and 12 percent of its timber sales in the Southeast have been to
Rayonier. The following table shows the volumes of timber sold by the
Partnership to Rayonier for the three years ended December 31, 1996. It also
shows the volumes of timber on the Timberlands that were sold to unaffiliated
purchasers for the periods indicated.
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TIMBER SOLD BY THE PARTNERSHIP TO RAYONIER
AND SALES TO UNAFFILIATED PURCHASERS
(Cunits)
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
Timber Sales to Timber Sales to Timber Sales to
Sold to Unaffiliated Sold to Unaffiliated Sold to Unaffiliated
Rayonier Purchasers Rayonier Purchasers Rayonier Purchasers
------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Northwest 53,158 387,221 72,280 327,987 83,752 363,471
Southeast 21,938 528,447 64,694 474,039 29,057 505,320
------- ------- ------- ------- -------- -------
Total 75,096 915,668 136,974 802,026 112,809 868,791
====== ======= ======= ======= ======= =======
</TABLE>
Rayonier continues to rely on the Timberlands as one of its sources of timber
for its pulp mills and sawmill facilities in the Southeast and its log trading
business in the Northwest, although to a lesser extent than previously. For
example, although Rayonier directly purchased only 4 percent of the
Partnership's 1996 Southeast harvest volume, the Partnership estimates that an
additional 11 percent of its timber sold in the Southeast in 1996 was purchased
by Rayonier on the open market from Partnership customers. See Conflicts of
Interest. Any shutdowns of plants or curtailments of sales by customers for
Partnership timber, including Rayonier, could adversely affect future volumes of
timber sales by the Partnership or the prices at which such sales are made.
Rayonier's Timberlands Management business is responsible for management of
the Timberlands for the benefit of the Partnership; its organization is separate
from Rayonier's log trading and wood procurement businesses, which are
responsible for timber procurement by Rayonier. In conducting the activities
described in the following paragraphs with respect to negotiations and other
relationships between the Partnership and Rayonier, employees of Rayonier's
Timberlands Management business act on behalf of the Partnership and employees
of Rayonier's log trading and wood procurement businesses act on behalf of
Rayonier.
The Partnership develops an annual sales plan identifying the specific tracts
to be sold and the specific tracts to be harvested by the Partnership. The
Partnership's strategy is to award stumpage sales contracts during those periods
of the year (typically the first and fourth quarters) in which it expects to
receive the best prices. However, under certain market conditions, the
Partnership will reduce the number of stumpage sales placed for bid at any one
time. In the Northwest, the Partnership has also increased its sale of logs from
stepped up commercial thinning activities as well as from Partnership harvesting
operations on tracts that are environmentally sensitive.
Before the Partnership offers a tract for sale, it determines whether the
highest price is likely to be achieved through public bid or direct negotiation.
The Partnership considers such factors as timber quality, unusual logging
conditions, number of potential bidders and general market activity. In 1996,
approximately 92 percent in the Northwest and 57 percent in the Southeast of all
contracts entered into by the Partnership were awarded through public bid; when
Rayonier submits a bid, it is treated no differently than bids from unaffiliated
parties. Occasionally, tract and market circumstances favor a negotiated sale to
a target buyer. Of the contracts awarded through direct negotiation in 1996,
none in the Northwest and 3 percent in the Southeast were purchased by Rayonier.
Typically, the Partnership attempts to structure sales contracts with
Rayonier and unaffiliated purchasers as transactions in which the Partnership
retains title to the timber until it is severed and the purchaser assumes
responsibility for delivery. In these cases, the Partnership recognizes income
for both financial statement and tax purposes when and as the timber is cut and
measured. Accordingly, there is a time lag between the signing of a sales
contract and the recognition by the Partnership of income therefrom.
The Partnership's contracts, whether with Rayonier or with unaffiliated
purchasers, generally provide for payment of a fixed price per unit (by species
and volume in the Northwest and by weight in the Southeast), cutting over
periods of up to 24 months in the Northwest and up to 18 months in the
Southeast, an initial deposit and utilization standards that the buyer must
satisfy when cutting and removing timber from the property. The Partnership's
contracts with unaffiliated purchasers may require a performance bond from the
buyer, whereas the Partnership does not require such a bond from Rayonier. All
contracts between Rayonier and the Partnership are subject to review by the
Conflicts Committee established by RFR's Board of Directors. See Conflicts of
Interest.
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See Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations for information as to timber sales
contracts in effect at December 31, 1996.
CONFLICTS OF INTEREST
Conflicts of interest can arise in selecting, pricing and scheduling timber sold
to Rayonier. Other conflicts of interest can arise in allocating revenues and
costs between the Class A Units and the Class B Units, in scheduling timber
sales to occur before or after the Initial Term expires and in setting the terms
of any loans between the Partnership and Rayonier. The Conflicts Committee of
the Board of Directors of RFR, comprising non-employee directors, reviews these
transactions and obtains opinions from outside consultants as to their fairness.
ENVIRONMENTAL PROTECTION
Managing the Timberlands in order to protect the environment is a continuing
concern of the Partnership. The Partnership expends considerable efforts to
comply with regulatory requirements for reforestation, protection of streams and
wildlife habitat, use of pesticides and minimization of stream sedimentation and
soil erosion. From time to time the Partnership volunteers to, or may be
required to, clean up certain dump sites created by the general public. The
Partnership also participates in cooperative projects with environmental
agencies, such as conducting watershed analysis in cooperation with federal and
state agencies to protect public resources (primarily salmon and steelhead);
implementing a Wildlife Plan developed in cooperation with the Washington state
Department of Fish and Wildlife to protect the northern spotted owl; several
joint studies (with federal and state wildlife agencies and universities) of
marbled murrelets, northern goshawks and northern spotted owls on the Olympic
Peninsula of Washington; a program with the Georgia Department of Natural
Resources to monitor hairy rattleweed, a threatened species; and an effort with
the U.S. Fish and Wildlife Service to develop an information base on whether
Bartram's ixia constitutes an endangered species. See Federal and State
Regulation.
While environmental restrictions may result in a reduction in the value of
the Partnership's harvestable timber, environmental protection is not expected
to result in significant out-of-pocket costs or capital expenditures.
FEDERAL AND STATE REGULATION
In the management and operation of the Timberlands, the Partnership is subject
to various state and federal laws regulating land use. To some degree, these
laws may operate as constraints on the manner in which portions of the
Timberlands are managed and operated and the markets into which the timber from
the Timberlands may be sold.
Regional timber availability continues to be restricted by legislation,
litigation and pressure from various preservationist groups. Over the past six
years, the harvest of timber from private lands in the state of Washington has
been restricted as a result of the listing of the northern spotted owl and the
marbled murrelet as threatened species under the Endangered Species Act (ESA).
These restrictions have caused the Partnership to restructure and reschedule
some of its harvest plans. In May of 1996, the Washington Forest Practices Board
adopted a permanent rule for the protection of the northern spotted owl which
included increased regulation within a "Special Emphasis Area" (SEA) on a
portion of the Partnership's lands on the Olympic Peninsula. As a result of the
Partnership's efforts in working cooperatively with the Washington state
Department of Fish and Wildlife, approximately half of the Partnership's lands
originally slated for inclusion in the SEA were placed in a separate area
covered by a voluntary Wildlife Plan. The management of the Partnership believes
this voluntary Wildlife Plan will allow more flexibility in planning and
conducting timber harvest activities, while at the same time providing more and
better habitat for the northern spotted owl over the long term than the
regulatory regime of the SEA would have done. The Washington state northern
spotted owl rule is not expected to have a significant impact on the harvest
activities of the Partnership as a whole. The U.S. Fish and Wildlife Service is
also in the process of developing a proposed rule under the ESA to redefine
protective measures for the northern spotted owl on private lands. It now
appears likely that this rule, if adopted, will not differ substantially from
the Washington state rule in its impacts on the Partnership's lands.
The Washington state Forest Practices Board is also in the process of
adopting a rule for the protection of the marbled murrelet. The Partnership is
unable at this time to predict the form in which this rule will finally be
adopted or the extent of the impact on the Partnership's operations.
The Partnership's operations are subject to laws restricting or regulating to
some extent development and/or logging activity near coastal shorelines. In
addition, land located in areas exposed to flood hazard is subject to
regulations specifying acceptable types of development. The federal government
regulates the use of "wetlands" pursuant to the Clean Water Act, the Rivers and
Harbors Act and the Federal Water Pollution Control Act. The Timberlands include
property
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designated as wetlands, and the Partnership is subject to permit procedures
imposed by both federal and state agencies in connection with any logging or
developmental activity on such land. In addition, activity is regulated on lands
adjacent to scenic rivers designated under federal and state Wild and Scenic
Rivers Acts. Reforestation by independent contractor crews is regulated by the
federal Migrant and Seasonal Worker Protection Act, which imposes upon the
landowner the burden of insuring to the federal government regulatory compliance
by the contractor.
Portions of the Timberlands are located within or adjacent to National
Forests. Access to such parcels may be obtained generally through road-use
permits subject to the terms and conditions of applicable regulations. Access
across Forest Service land may be restricted where habitat of threatened or
endangered species is involved.
The state of Washington has enacted several laws that regulate or limit
forestry operations. The most comprehensive of these is the Forest Practices
Act, which addresses many growing, harvesting and processing activities on
forest lands. Among other requirements, the Forest Practices Act imposes certain
reforestation obligations on the owner of forest land. The Act restricts the
size of clear-cut harvests, restricts timber harvest to protect wildlife listed
as threatened or endangered and requires that timber be left standing in stream
buffers and wildlife management areas. Other Washington state laws regulate
timber slash burning, operations during fire hazard periods, logging activities
affecting or utilizing watercourses or in proximity to certain ocean and inland
shorelines and some grading and road construction activities.
The states of Georgia and Florida also regulate forestry operations.
Subsequent to July 1, 1993, Georgia statutory law mandates all timber sales to
be by tonnage or actual measured volume, prohibiting sales where payment is
based upon conversion factors from volume to tonnage or vice versa. Florida and
Georgia both regulate slash burns, control burns and logging activities within
streamside management zones. Florida law and regulation limit activities
allowable or permittable in wetlands, and the state continues to develop
integrated regulations under statutory mandate for ecosystem management.
The Partnership is complying and intends to comply with these federal and
state laws regulating its use of the Timberlands and does not expect them as
currently enacted to be materially burdensome. There can be no assurance,
however, that future legislative, regulatory or judicial decisions would not
adversely affect the Partnership or its ability to harvest the Timberlands in
the manner otherwise contemplated. In particular, although recently imposed
restrictions on the export of logs from the Northwest have only affected state
lands, political pressure to restrict log exports from the Northwest continues.
If, in the future, restrictions should be imposed on the export of logs from
private lands, the revenue and earnings of the Partnership could be adversely
affected.
PARTNERSHIP'S TITLE; CLAIMS AND INTERESTS OF OTHERS
Rayonier transferred record title of the Timberlands, excluding any oil, gas or
mineral interests, to the Partnership without warranty. The Partnership's title
to the Timberlands is subject to presently existing easements, rights of way,
flowage rights, servitudes, cemeteries, camp sites, hunting and other leases,
licenses, permits, undertakings and any other existing encumbrances or title
defects. Properties acquired by the Partnership in the future generally will be
acquired and held of record in the Partnership's name, but Rayonier will have
the right to purchase the underlying mineral interests.
The Partnership owns only the merchantable timber rights (except for 50 trees
per acre) on approximately 11,000 acres of real estate owned by Rayonier and
Rayland Company, Inc., a real estate subsidiary of Rayonier.
The state of Florida claims title to lands within Florida that were under
navigable waters in 1845 when Florida became a state. Affected lands include not
only those still under water but lands that are now uplands due to drainage,
fill or other past activity. The Partnership does not believe that the
encumbrances or defects to which its title is subject, or any possible
reclamation by the state of Florida, would have a material adverse impact on the
Timberlands as a whole.
DESCRIPTION OF PARTNERSHIP
ALLOCATIONS OF PARTNERSHIP INTEREST. The Partnership records all of its
activities in two accounts, the Primary Account and the Secondary Account.
Income and expenses are recorded in the Primary Account if they affect timber
that is expected to be harvested on or before December 31, 2000 (the Initial
Term) and in the Secondary Account if they relate to the Partnership's other
assets (including timber that is not planned to be harvested until after
December 31, 2000). During the Initial Term, the Secondary Account is
essentially an investment account to which the expenditures and debt related to
longer-term harvests are assigned.
-7-
<PAGE> 11
The Class A unitholders, the Class B unitholders and the General Partners all
participate in both accounts, but in different percentages. The participation of
the partners in the revenues and expenses of the Partnership is as follows:
Primary Secondary
Account Account
------- -------
Class A unitholders 95% 4%
Class B unitholders 4% 95%
General Partners 1% 1%
When the Partnership makes a sale of timberland that includes timber, the
proceeds are divided between the Primary and Secondary Accounts. Proceeds
arising from trees that would have been harvested prior to December 31, 2000 are
allocated to the Primary Account. The balance of the proceeds, which apply to
the underlying land and timber planned to be harvested beyond the year 2000, are
allocated to the Secondary Account.
TERMS OF THE PARTNERSHIP AGREEMENT. The Partnership Agreement provides for
the Partnership to continue in existence until December 31, 2035, but that the
Initial Term of the Partnership will end on December 31, 2000. At the end of the
Initial Term, the Primary Account, which is used to account for revenues,
expenses and cash flow for the first 15 years of the Partnership, will be
closed; any Primary Account debt will be paid; working capital will be
liquidated and any cash remaining will be distributed to partners. Class A
unitholders will receive approximately 95 percent of these distributions, which
are not expected to be significant. That percentage is the same as their
interest in the Partnership through the year 2000. After that date, Class A
unitholder interest in the Partnership cash flow will decline to 4 percent.
Class B unitholder interest, in turn, will increase to 95 percent.
The partners maintain their accounts throughout the life of the Partnership
(to the year 2035) and there will not be any return of the partners' capital
investment when the Initial Term ends. Only their respective interests in the
Partnership activity will change beginning January 1, 2001. After December 31,
2000, it is expected that Class A Units will not retain any significant value as
Class A unitholders will only have a 4 percent interest in the Partnership's
revenues, expenses and cash flow. On a pro forma basis, using 1996 results as an
example, cash flow allocable per Class A Unit would decline from $5.69 to
approximately $0.24. In addition, there will be substantial Secondary Account
debt that will mature on January 1, 2001. This debt (incurred to fund long-term
investment in such areas as reforestation and silvicultural activities including
accrued interest) is expected to exceed $350 million, more than three times
1996's net operating cash flow. In accordance with the Partnership Agreement,
all Secondary Account debt must be repaid before any distribution of Partnership
cash flow resumes. AS A RESULT, IT IS EXPECTED THAT THE MARKET PRICE OF CLASS A
UNITS SHOULD BE DECREASING SUBSTANTIALLY AS DECEMBER 31, 2000 APPROACHES.
DISTRIBUTIONS. The Board of Directors of the Managing General Partner
determines the amount of distributions made to Class A unitholders from cash
available from operations after provisions for working capital, capital
expenditures, asset acquisitions and other reserves as required. With the
Initial Term approaching its expiration date of December 31, 2000, the Managing
General Partner has determined that such cash provisions can be kept to minimum
levels. Therefore, distributions are intended to approximate actual Partnership
results each year. This will be accomplished by keeping the distribution
relatively constant in the second, third and fourth quarters and by making an
adjustment in the first quarter of the following year to bring the cumulative
distribution in line with Partnership results. Since actual Partnership results
vary each year, the level of total distributions in each year will also vary.
TAXES. Rayonier Timberlands, L.P. is a partnership and is not taxed as a
corporation. Each unitholder is responsible for taxes on his or her
proportionate share of the Partnership's income. Each year, the Managing General
Partner will provide unitholders with the necessary tax information based on the
unitholder's apportioned share of income and expense from the Partnership. The
income reported for each individual unitholder will vary substantially from the
income reported in the financial statements, as the unitholder's income is based
on his or her cost of acquisition (the market price of the unit at the time of
acquisition), and not on the Partnership's historical cost basis as reported in
the financial statements.
To the extent distributions exceed the income reported for a unitholder and
the unitholder has remaining tax basis in the units, such distributions are
treated as a return of capital and are not taxable. As such, the distributions
serve to reduce the unitholder's basis in the units.
Tax-exempt entities (including IRAs and other retirement plans) may be
required to report a portion of their income from the Partnership to the
Internal Revenue Service as unrelated business taxable income and pay taxes on
such income.
RIGHT OF RAYONIER TO CALL IN CLASS A UNITS. Rayonier has the option under the
Partnership Agreement to call in the Class A Units at 125 percent of the
then-current market price.
-8-
<PAGE> 12
GLOSSARY OF FORESTRY TERMS
The terms defined below relate to the timber industry in general.
BOARD FOOT (BF): A unit of measure for sawtimber as well as lumber that is 12
inches square and one inch thick.
BOTTOMLANDS: The flood plains of streams, creeks and rivers that generally
support quality hardwood stands.
CHIP `N SAW TIMBER: Intermediate diameter sawtimber that is suitable to produce
small dimension lumber and wood chips, which is the basic raw material for pulp.
CLEAR-CUT: Harvesting all trees in a stand of timber at the same time. Usually
done to prepare for establishing a plantation or for converting the land to
crop, pasture or other use.
CONTROLLED BURNING: Setting fire to the forest floor to reduce the accumulation
of logging debris, dead and fallen timber, weeds and underbrush that pose a
wildfire hazard or compete with the trees for water and nutrients.
CORD: A unit of measure equal to a stack of wood 4x4x8 feet, or 128 cubic feet
of wood, bark and air. A common unit of measure for pricing pulpwood.
CUNIT: A unit of measure for standing timber equal to 100 cubic feet of solid
wood. It is the customary common unit of measure to consolidate regional
information based on local commercial measurements such as board feet or tons.
The conversion ratios can vary by region, age class and species. The Partnership
has determined the total timber inventory utilizing cunit conversion factors of
approximately .43 MBF or 3.8 tons.
CUTTING CONTRACTS: A contractual right to cut certain described timber over a
specified period of time on a specified tract of property.
D.B.H.: The abbreviation means "diameter at breast height," a term frequently
used to describe a tree measurement taken 4 1/2 feet above the average ground
level.
HARDWOODS: Trees that usually have broad leaves and are deciduous (losing leaves
every year).
MBF: One thousand board feet. A common unit of measure for pricing standing
timber as well as lumber.
MERCHANTABLE TIMBER: Minimum size timber for which there might be a commercial
market. In the South, trees as small as five inches D.B.H. can be used by the
industry while in the Northwest trees must be much larger to be usable. The
Partnership currently follows the convention that timber older than 18 years in
the Southeast and 40 years in the Northwest is of minimum merchantable size.
The Partnership has revised its definition of merchantable timber in the
Southeast to better reflect its business operations and harvest practices. Such
revision is not expected to change the amount of timber to be cut during the
remainder of the Initial Term of the Partnership. It should be recognized that
timber of minimum merchantable size has not yet reached its optimum economic
value and the typical harvest cycle is on average 23 years in the Southeast and
50 years in the Northwest.
NATURAL REGENERATION: The process of a forest regenerating itself with seeds
from mature trees or sprouts from stumps or roots. Natural regeneration results
in new tree growth without regard to genetic quality of the trees.
NATURAL STAND: A forest stand resulting from natural regeneration.
NON-FOREST LANDS: Lands consisting of or containing roads, water or easements,
such as gas and electric transmission lines, timbered buffers not harvested due
to environmental concerns, currently non-commercially viable acreage and certain
wastelands.
PLANTATION: A timber stand established by planting seedlings after the land has
been prepared. Trees in a plantation are of the same age and size, which tends
to simplify harvesting.
POLES: Straight, tall trees suitable for manufacturing telephone poles, wharf
pilings or the like, typically at least eight inches in diameter at the base and
at least 25 feet tall. Trees suitable for use as poles generally command a
superior price.
PRE-MERCHANTABLE TIMBER: Usually young or small size timber for which no
commercial market exists. For example, in the Southeast, pine trees under five
inches D.B.H. and in the Northwest, timber stands less than 40 years of age.
-9-
<PAGE> 13
PULPWOOD: Wood used to produce pulp in the manufacture of paper and other
cellulose products; normally cut from trees that are approximately five to eight
inches D.B.H., or trees over eight inches D.B.H. that are either too small, of
inferior quality, or the wrong species to be used in the manufacture of lumber
or plywood.
SAWTIMBER: Trees containing logs of sufficient size and quality to be suitable
for conversion into lumber or plywood.
SEEDLINGS: Live trees less than one inch in diameter at ground level.
SILVICULTURE: The practice of cultivating forest crops based on the knowledge of
forestry; more particularly, controlling the establishment, composition and
growth of forests.
SITE INDEX: A measure of forest site quality, which takes into account
topography, soil fertility, moisture and other factors affecting forest growth
rates. A site index indicates the height (in feet) an average dominant tree of a
given species will attain on that site in a well-stocked stand in a given
period, generally 50 years in the Northwest and 25 years in the Southeast.
SOFTWOODS: Coniferous trees, usually evergreen and having needles or scale-like
leaves, such as Douglas fir, white pine, spruce and loblolly pine. In the
Pacific Northwest, softwood timber is commonly referred to as conifer.
STAND: An area of trees possessing sufficient uniformity of age, size and
composition to be distinguishable from adjacent areas so as to form a management
unit. The term is usually applied to forests of commercial value.
STOCKING: An indication of the number of trees in a stand as compared to the
desirable number for best growth and management, such as well-stocked,
over-stocked or partially stocked.
STUMPAGE VALUE: The value of standing timber (timber as it stands uncut in the
woods).
SUPERIOR SEEDLINGS: Seedlings that are the product of a genetic breeding
program. Superior seedlings produce trees that grow faster, are of higher
quality and are more disease resistant than their ordinary counterparts.
SUSTAINED YIELD: A method of forest management that implies a balance over time
between net growth and harvest.
THINNING: Removal of selected trees, usually to eliminate overcrowding, to
remove diseased trees and to promote more rapid growth of desired trees.
TIMBER DEED: An instrument conveying certain described timber on a specific
tract of property and providing a term during which the timber may be cut and
removed.
TIMBER INVENTORY: As defined under Description of Timberlands - Timber
Inventory.
WOOD FIBER: Generally refers to pulpwood or chips used in the manufacture of
pulp and paper.
ITEM 2. PROPERTIES
See Item 1 - Business.
ITEM 3. LEGAL PROCEEDINGS
The Partnership is a party to several legal proceedings incidental to its
business. Neither the Partnership nor its counsel believes that any liability or
costs related to such proceedings will have a material adverse effect on the
financial position or results of operations of the Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the period
covered by this report.
-10-
<PAGE> 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
<TABLE>
<CAPTION>
Class A Units - Market Price
----------------------------------
1996 1995
-------------- --------------
QUARTER ENDED High Low High Low
------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
March 31 $30.25 $19.25 $38.25 $32.13
June 30 25.13 16.75 35.63 33.00
September 30 20.25 15.13 36.00 33.25
December 31 18.00 14.00 35.88 24.88
</TABLE>
The above table reflects the range of market prices of RTLP Class A Units as
reported in the consolidated transaction reporting system of the New York Stock
Exchange, the principal market in which this security is traded, under the
trading symbol LOG.
During the two-month period ended February 28, 1997, the high and low market
prices of RTLP Class A Units were $18.75 and $14.63, respectively.
<TABLE>
<CAPTION>
Class A Units - Distributions
-----------------------------
QUARTER ENDED 1996 1995
------------- ---- ----
<S> <C> <C>
March 31 $1.43 $1.90
June 30 1.33 1.58
September 30 1.33 1.58
December 31 1.33 1.58
</TABLE>
On February 13, 1997, the Board of Directors of RFR declared a first quarter
1997 distribution of $1.70 per Class A Unit payable on March 31, 1997 to
unitholders of record on February 28, 1997. In keeping with the Board's
previously announced distribution policy, this distribution, when added to the
distributions previously paid in the second, third and fourth quarters of 1996,
makes the total of those four quarterly distributions equal to $5.69, the
Partnership's cash flow per Class A Unit for 1996. In announcing the first
quarter distribution, the Board indicated that Partnership results for 1997 are
not expected to be as strong as 1996. Accordingly, distributions to be paid in
the second, third and fourth quarters of 1997 and the first quarter of 1998,
which will be based on cash flow per Class A Unit for 1997, are expected to
total less than $5.69. See Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Cash Flow.
As of February 28, 1997, there were approximately 1,800 unitholders of record
of Class A Units.
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial information set forth below is derived from
the financial statements of Rayonier Timberlands, L.P. Such selected historical
financial information should be read in conjunction with such financial
statements and notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
For The Year Ended
-----------------------------------------
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATING DATA
(thousands of cunits(1))
Timber sold to Rayonier 75.1 137.0 112.8 127.6 145.3
Timber sold to unaffiliated purchasers 915.7 802.0 868.8 699.6 779.9
----- ----- ----- ----- -----
Timber sales volume 990.8 939.0 981.6 827.2 925.2
===== ===== ===== ===== =====
</TABLE>
-11-
<PAGE> 15
<TABLE>
<CAPTION>
For The Year Ended
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
REGIONAL OPERATING DATA
Northwest(2)
Timber sales
(thousands of dollars) $91,674 $95,168 $114,970 $70,625 $64,998
======== ======== ======== ======== ========
Stumpage (thousands of MBF) 123.8 117.1 140.8 108.8 168.8
Delivered logs
(thousands of MBF) 67.7 56.9 53.6 34.1 26.6
-------- -------- -------- -------- --------
Total Northwest 191.5 174.0 194.4 142.9 195.4
======== ======== ======== ======== ========
Southeast(3)
Timber sales
(thousands of dollars) $53,765 $58,929 $50,231 $44,312 $33,645
======== ======== ======== ======== ========
Pine (thousands of tons) 1,857.7 1,779.5 1,875.9 1,719.0 1,608.4
Hardwood
(thousands of tons) 233.8 267.7 154.7 175.2 199.6
-------- -------- -------- -------- --------
Total Southeast 2,091.5 2,047.2 2,030.6 1,894.2 1,808.0
======== ======== ======== ======== ========
INCOME DATA
(thousands of dollars)
Total sales $147,906 $160,268 $166,521 $116,047 $116,395
Total expenses, net 48,357 46,806 43,602 33,821 30,809
Partnership income 99,549 113,462 122,919 82,226 85,586
CLASS A UNIT DATA (dollars)
Income per publicly traded
Class A Unit(4) $5.43 $5.91 $6.41 $4.45 $4.49
Operating cash flow
allocable to a publicly
traded Class A Unit(4) 5.69 6.17 6.64 4.66 4.72
Cash distributions(5) 5.42 6.64 9.20 4.60 3.60
ASSET, LIABILITY AND CAPITAL DATA
(thousands of dollars)
Timber, timberlands and
logging roads, net $283,359 $276,094 $270,656 $265,769 $259,958
Total assets 350,647 336,480 337,814 387,457 377,413
Total liabilities 212,492 183,769 158,776 137,651 113,950
Total indebtedness 196,986 167,045 144,593 121,831 99,354
Partners' capital 138,155 152,711 179,038 249,806 263,463
</TABLE>
(1) The consolidated harvest activity is expressed in cunits, a unit of measure
for standing timber equal to 100 cubic feet of solid wood. A cunit is the
customary common unit of measure that is used to consolidate regional
information based on local commercial measurements such as thousand board
feet (MBF) or tons. A cunit equals approximately .43 MBF or 3.8 tons.
(2) The Northwestern Timberlands are in the state of Washington and consist of
approximately 369,000 acres owned in fee, and contain approximately 2.4
million MBF of wood, approximately 91 percent of which is softwood.
(3) The Southeastern Timberlands are in the states of Georgia, Florida and South
Carolina and consist of approximately 778,000 acres owned in fee or held
under long-term leases, and contain approximately 15.2 million tons of wood,
approximately 58 percent of which is pine.
(4) See Note 10 and Note 11 of the accompanying Notes to Financial Statements
for the calculations of Income per publicly traded Class A Unit and
Operating cash flow allocable to a publicly traded Class A Unit. Operating
cash flow allocable to Class A Units is calculated in accordance with the
Partnership agreement, should not be considered as contradictory to
information provided in the Statements of Cash Flows and is not intended as
an alternative to income per Class A Unit as an indication of performance.
(5) Cash distributions in 1994 include a $4.00 per Class A Unit special
distribution paid on March 31, 1994.
-12-
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
More than half of the timber harvested from Partnership lands in the Northwest
is resold by the Partnership's customers into log export markets, primarily in
Japan, Korea and China. The Partnership's contracts in this region generally
provide for payment of a fixed price per unit of volume or weight, by species,
with harvesting required to be completed within contract periods of up to 24
months. In the Southeast, pulpwood timber is sold by the Partnership's customers
for the production of pulp and paper with chip 'n saw and sawlog timber sold to
lumber and plywood manufacturers. The Partnership's contracts in this region
generally provide for payment of a fixed price per unit of weight, with
harvesting required to be completed within contract periods of up to 18 months.
The following table summarizes the sales, operating income, partnership
income and selected operating statistics of the Partnership, for the periods
indicated, by United States geographic region (thousands):
<TABLE>
<CAPTION>
For The Year Ended
-------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
TIMBER SALES
Northwest $91,674 $95,168 $114,970
Southeast 53,765 58,929 50,231
--------- --------- ---------
145,439 154,097 165,201
--------- --------- ---------
TIMBERLAND SALES
Northwest 17 -- 291
Southeast 2,450 6,171 1,029
--------- --------- ---------
2,467 6,171 1,320
--------- --------- ---------
TOTAL SALES $147,906 $160,268 $166,521
========= ========= =========
OPERATING INCOME
Northwest $68,083 $73,393 $94,576
Southeast 44,849 51,693 39,157
Corporate and other (1,715) (1,778) (1,724)
--------- --------- ---------
$111,217 $123,308 $132,009
========= ========= =========
PARTNERSHIP INCOME $99,549 $113,462 $122,919
========= ========= =========
SELECTED OPERATING STATISTICS
Northwest harvest volumes
Stumpage (thousands of MBF) 123.8 117.1 140.8
Delivered logs (thousands of MBF) 67.7 56.9 53.6
--------- --------- ---------
191.5 174.0 194.4
========= ========= =========
Southeast harvest volumes
Pine (thousands of tons) 1,857.7 1,779.5 1,875.9
Hardwood (thousands of tons) 233.8 267.7 154.7
--------- --------- ---------
2,091.5 2,047.2 2,030.6
========= ========= =========
</TABLE>
Timber and timberland sales in 1996 of $147.9 million were $12.4 million, or
8 percent, lower than 1995 sales, primarily due to reduced prices in both
regions, and as a result, Partnership income decreased $13.9 million, or 48
cents per Class A Unit, from the prior year. In 1995, sales of $160.3 million
decreased $6.3 million from 1994 due to weak export markets and Partnership
income of $113.5 million decreased $9.5 million, or 8 percent, from 1994, due to
lower pricing and increased logging costs.
Timber harvest sales in 1996 of $145.4 million represented a decrease of $8.7
million, or 6 percent, from 1995, following a 7 percent decline in 1995. Lower
1996 sales were caused by a decline in prices in the Northwest region due to
soft export markets and in the Southeast region due to weak demand in pulp and
paper markets. The decline in sales in
-13-
<PAGE> 17
1995 reflected weak North American export log markets that resulted in a decline
in contract prices and caused customers to delay harvesting timber under
contract in the Partnership's Northwest region.
In 1996, timber sales to Rayonier represented 10 percent of total timber
sales compared to 17 percent and 13 percent in 1995 and 1994, respectively.
Timber sales to three customers under common ownership (not affiliated with the
Partnership) accounted for approximately 9 percent, 10 percent and 18 percent of
total timber sales in 1996, 1995 and 1994, respectively. Also, one other
unrelated customer represented approximately 10 percent of total timber sales in
1996. See Note 4 of the accompanying Notes to Financial Statements for further
information. Timberland sales in 1996 were $2.5 million, a decrease of $3.7
million from 1995, which, in turn, were $4.9 million above 1994 levels.
Income per Class A Unit was $5.43 in 1996, 48 cents lower than 1995, with
results in 1995 50 cents lower than 1994. Operating cash flow allocable to Class
A unitholders, after capital expenditures and certain provisions for working
capital, was $113.9 million or $5.69 per unit in 1996, compared to $123.4
million or $6.17 per unit in 1995. Operating cash flow in 1995 was $9.4 million,
or 47 cents per unit, lower than 1994.
In the Northwest region, full year stumpage and delivered log volume was 10
percent higher than the prior year as customers expanded harvesting for both
export and domestic log markets. Also, unfavorable market conditions throughout
1995 caused many customers to defer harvesting until late 1995 and into 1996 and
the release of previously restricted environmentally sensitive tracts
temporarily allowed more volume to come to market. The volume increase was
offset by a 13 percent decline in prices from prior year levels due to weak
export and domestic log markets at the time the contracts were initiated. As a
result, sales decreased $3.5 million to $91.7 million and operating income
declined $5.3 million to $68.1 million. See Future Operations. In 1995, the
combined stumpage and delivered log volume decreased 10 percent to 174 million
board feet while prices decreased 7 percent from 1994 levels due to the North
American export log markets being generally weak throughout the year. As a
result, timber sales in 1995 declined $19.8 million, or 17 percent, to $95.2
million and operating income decreased $21.2 million, or 22 percent, to $73.4
million from the prior year.
In the Southeast region, sales for 1996 decreased $8.9 million to $56.2
million and operating income declined $6.8 million to $44.8 million from the
prior year. Realized pine prices declined 12 percent from the prior year due to
weak demand in pulp and paper markets. Overall harvest volume increased 2
percent as higher pine volume offset lower hardwood volume. Timberland sales
decreased $3.7 million. In 1995, timber sales were $58.9 million, $8.7 million
or 17 percent higher than 1994 and operating income increased $12.5 million, or
32 percent, to $51.7 million. Increased demand from the pulp and paper industry
for most of the year resulted in improved stumpage prices, with combined pine
and hardwood prices rising 16 percent from 1994. However, overall harvest volume
was relatively flat, with lower pine volume offset by higher hardwood volume.
Operating results in 1995 were also favorably impacted by increased timberland
sales of $5.1 million.
Corporate and other operating income primarily includes general and
administrative expenses not specifically attributable to either the Northwest or
Southeast regions. During 1996, corporate expenses decreased slightly to $1.7
million, following a minor increase in 1995.
Consistent with the recent historical cutting patterns, harvest activity was
slightly more concentrated in the first half of the year, with 53 percent of the
total 1996 harvest volume completed by June 30. Harvest activity in 1995 also
followed the historical cutting pattern with 52 percent of the harvest completed
by June 30. In 1994, harvest activity peaked in the first quarter due to the
carryover of 1993 harvest volume in the Northwest and again in the third quarter
due to the unusually wet weather in the Southeast. Overall in 1994, 49 percent
of the full-year harvest was cut by June 30.
In the Northwest, the 1997 harvest pattern is expected to return to a planned
decrease with a projected harvest volume approximately 11 percent lower than
1996 volume and realized prices continuing their declining trend before
flattening out later in the year. As of December 31, 1996, approximately 36
percent of the projected 1997 harvest volume was under contract at prices 16
percent below those realized overall in 1996. As of December 31, 1995,
outstanding contracts represented 46 percent of the actual 1996 harvest volume.
The Southeast 1997 harvest plan anticipates a volume increase of
approximately 2 percent from 1996 with pricing slightly favorable due to the
continuation of a strong lumber market. As of December 31, 1996, approximately
31 percent of the projected 1997 pine harvest volume was under contract, with
pricing approximating the 1996 average. As of December 31, 1995, outstanding
contracts represented 21 percent of the actual 1996 harvest volume.
-14-
<PAGE> 18
The Partnership held contracts at December 31, 1996 with Rayonier
representing approximately 4 percent and 3 percent of the uncut contracted
harvest volume in the Northwest and Southeast regions, respectively. In the
Southeast, one customer, not affiliated with the Partnership, accounted for
approximately 10 percent of the harvest volume under contract as of December 31,
1996. In the Northwest, three customers under common ownership held contracts
representing approximately 27 percent of the uncut volume under contract. In
addition, in the Northwest, three additional unrelated customers held contracts
representing from 9 percent to 17 percent, individually, and 41 percent in
total, of the uncut volume under contract. These six customers are not
affiliated with the Partnership.
Operating costs and expenses in 1996 and 1995 were $39.4 million. Cost of
timber sold rose $1.3 million in 1996 primarily due to additional logging costs
in the Northwest region resulting from increased contract logging and commercial
thinning activities and higher depletion costs resulting from higher Northwest
volume. However, the increase in cost of timber sold was offset by lower cost of
timberland sold of $1.2 million, as a result of reduced land sales in the
Southeast region. In 1995, operating costs and expenses increased $2.3 million
from 1994 due to higher cost of timberland sold of $1.3 million resulting from
increased land sales in the Southeast region. Cost of timber sold rose $0.7
million in 1995 primarily due to additional logging costs in the Northwest
region resulting from increased contract logging and commercial thinning
activities. The increase in costs and expenses was partially offset by lower
depletion costs and forest excise taxes resulting from reduced harvest volume in
the Northwest region.
Interest income, earned mainly from the Primary Account's investment notes of
Rayonier, decreased $0.4 million to $4.0 million in 1996 due to lower average
interest rates and a lower average balance of investment notes of Rayonier.
Interest expense on increased loans and advances to the Secondary Account by
Rayonier rose $1.5 million to $14.7 million.
FUTURE OPERATIONS
The Partnership's harvesting plans, and therefore its earnings and cash flow,
can be substantially affected by the cyclical nature of timber markets both in
general and on a geographical basis. In addition, various legislative
initiatives, such as major restrictions on timber clear-cutting, export
restrictions on logs sourced from privately owned properties, harvest
restrictions to protect threatened or endangered species and limitations on
timber harvesting on wetlands could adversely affect Partnership results.
Moreover, in certain economic situations, Partnership results can be adversely
affected by reductions in the rate at which stumpage is harvested as well as the
failure of buyers to fulfill their contractual obligations.
The Partnership's policy is to maintain a sustainable annual harvest level in
the Northwest in the range of 160 to 170 million board feet per year, as
compared to an average of 187 million board feet harvested during the last three
years. Due to intensive forest and land management as well as silvicultural
investment, pine volume per acre available for harvest in the future on the
Southeastern Timberlands is expected to increase. By the year 2000, the annual
pine harvest rate in this region is now expected to be approximately 4 percent
greater than the 1996 harvest. Actual harvest volumes may vary, up or down, due
to the factors mentioned in the preceding and following paragraphs.
Regional timber availability continues to be restricted by legislation,
litigation and pressure from various preservationist groups. Over the past six
years, the harvest of timber from private lands in the state of Washington has
been restricted as a result of the listing of the northern spotted owl and the
marbled murrelet as a threatened species under the Endangered Species Act (ESA).
These restrictions have caused the Partnership to restructure and reschedule
some of its harvest plans. In May of 1996, the Washington Forest Practices Board
adopted a permanent rule for the protection of the northern spotted owl which
included increased regulation within a "Special Emphasis Area" (SEA) on a
portion of the Partnership's lands on the Olympic Peninsula. As a result of the
Partnership's efforts in working cooperatively with the Washington state
Department of Fish and Wildlife, approximately half of the Partnership's lands
originally slated for inclusion in the SEA were placed in a separate area
covered by a voluntary Wildlife Plan. The management of the Partnership believes
this voluntary Wildlife Plan will allow more flexibility in planning and
conducting timber harvest activities, while at the same time providing more and
better habitat for the northern spotted owl over the long term than the
regulatory regime of the SEA would have done. The Washington State northern
spotted owl rule is not expected to have a significant impact on the harvest
activities of the Partnership as a whole. The U.S. Fish and Wildlife Service is
also in the process of developing a proposed rule under the ESA to redefine
protective measures for the northern spotted owl on private lands. It now
appears likely that this rule, if adopted, will not differ substantially from
the Washington state rule in its impacts on the Partnership's lands. The
Washington state Forest Practices Board is also in the process of adopting a
rule for the protection of the marbled murrelet. The Partnership is unable at
this time to predict the form in which this rule will finally be adopted or the
extent of the impact on the Partnership's operations.
-15-
<PAGE> 19
LIQUIDITY AND CASH FLOW
As of December 31, 1996, the Partnership was due trade and intercompany
receivables from Rayonier and affiliates of $4.2 million. In addition, the
Primary Account of the Partnership held $46.8 million of short-term investment
notes of Rayonier and an additional $5.0 million of long-term investment notes
of Rayonier resulting from the cumulative net cash flow, since inception, of the
Primary Account after distributions to unitholders. The Partnership may redeem
the investment notes at any time to fund Partnership working capital
requirements, capital expenditures and reserves. See Note 5 of the accompanying
Notes to Financial Statements for further information.
The Secondary Account of the Partnership had total outstanding debt of $197.0
million at December 31, 1996, including long-term notes payable to Rayonier of
$196.5 million that mainly represent the obligations incurred as a result of
Secondary Account advances by Rayonier. See Note 6 of the accompanying Notes to
Financial Statements for further information.
Capital expenditures for reforestation, capitalized lease payments, property
taxes and other improvements to the land and timber assets were $15.9 million,
$14.7 million and $13.1 million in 1996, 1995 and 1994, respectively. Capital
expenditures are expected to be approximately $17.1 million in 1997. Funding of
future capital requirements is expected to continue from Rayonier.
The Partnership made distributions of $108.4 million ($5.42 per Class A Unit)
in 1996; $132.8 million ($6.64 per Class A Unit) in 1995; regular distributions
of $104.0 million ($5.20 per Class A Unit) in 1994 as well as a special
distribution of $80.0 million ($4.00 per Class A Unit) to all outstanding Class
A unitholders. An additional $5.7 million in 1996, $7.0 million in 1995 and $9.7
million in 1994 was distributed in cash to the Class B unitholder and to the
General Partners.
On February 13, 1997, the Board of Directors of RFR declared a first quarter
1997 distribution of $1.70 per Class A Unit payable on March 31, 1997 to
unitholders of record on February 28, 1997. In keeping with the Board's
previously announced distribution policy, this distribution, when added to the
distributions previously paid in the second, third and fourth quarters of 1996,
makes the total of those four quarterly distributions equal to $5.69, the
Partnership's cash flow per Class A Unit for 1996. In announcing the first
quarter distribution, the Board indicated that Partnership results for 1997 are
not expected to be as strong as 1996. Accordingly, distributions to be paid in
the second, third and fourth quarters of 1997 and the first quarter of 1998,
which will be based on cash flow per Class A Unit for 1997, are expected to
total less than $5.69.
WHEN THE INITIAL TERM OF THE PARTNERSHIP ENDS ON DECEMBER 31, 2000, THE
PRIMARY ACCOUNT OF THE PARTNERSHIP WILL BE CLOSED BUT THE UNITHOLDERS WILL NOT
BE ENTITLED TO HAVE THEIR PARTNERSHIP CAPITAL ACCOUNTS REDEEMED UNTIL THE
PARTNERSHIP FORMALLY ENDS IN THE YEAR 2035. AFTER DECEMBER 31, 2000, THE
INTEREST OF CLASS A UNITHOLDERS IN THE PARTNERSHIP'S FUTURE REVENUES, EXPENSES
AND CASH FLOWS WILL DECREASE FROM 95 PERCENT TO 4 PERCENT. ON A PRO FORMA BASIS,
USING 1996 RESULTS AS AN EXAMPLE, CASH FLOW ALLOCABLE PER CLASS A UNIT WOULD
DECLINE FROM $5.69 TO APPROXIMATELY $0.24. IN ADDITION, THERE WILL BE
SUBSTANTIAL SECONDARY ACCOUNT DEBT THAT WILL MATURE ON JANUARY 1, 2001. THIS
DEBT (INCURRED TO FUND LONG-TERM INVESTMENT IN SUCH AREAS AS REFORESTATION AND
SILVICULTURAL ACTIVITIES INCLUDING ACCRUED INTEREST) IS EXPECTED TO EXCEED $350
MILLION, MORE THAN THREE TIMES 1996'S NET OPERATING CASH FLOW. IN ACCORDANCE
WITH THE PARTNERSHIP AGREEMENT, ALL SECONDARY ACCOUNT DEBT MUST BE REPAID BEFORE
ANY DISTRIBUTION OF PARTNERSHIP CASH FLOW RESUMES. AS A RESULT, IT IS EXPECTED
THAT THE MARKET PRICE OF CLASS A UNITS SHOULD BE DECREASING SUBSTANTIALLY AS
DECEMBER 31, 2000 APPROACHES.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements on page ii.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-16-
<PAGE> 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Neither the Partnership nor the Operating Partnership has any directors or
officers. Set forth below is certain information concerning directors and
executive officers of RFR. Presently, all directors and officers of RFR are
elected annually.
DIRECTORS AND EXECUTIVE OFFICERS
Served as
Director of
Name Position with RFR RFR Since
---- ----------------- -----------
Ronald M. Gross President and Director 1985
Macdonald Auguste Treasurer --
William S. Berry Senior Vice President --
John B. Canning Corporate Secretary --
Donald W. Griffin Director 1994
Kenneth P. Janette Vice President and --
Corporate Controller
Thomas W. Keesee, Jr.(1) Director 1994(2)
Wallace L. Nutter Director 1996
Gerald J. Pollack Senior Vice President and
Chief Financial Officer --
DeRoy C. Thomas(1) Director 1994(3)
(1) Member of the Conflicts and Audit Committees of RFR's Board of Directors
(2) Served as a Director of RFR from 1985 to 1991
(3) Served as a Director of RFR from 1987 to 1991
RONALD M. GROSS, 63, is Chairman of the Board and Chief Executive Officer of
Rayonier. After joining Rayonier in March 1978 as President and Chief Operating
Officer and a director, he was elected Chief Executive Officer in 1981 and
Chairman in 1984; he assumed his present position in July 1996. He is also a
director of Rayonier, Lukens Inc. and The Pittston Company.
MACDONALD AUGUSTE, 48, was elected Treasurer of Rayonier effective February
27, 1989 and Treasurer of RFR on March 6, 1989. From 1983 to February 1989, he
was Assistant Treasurer of Rayonier, which he joined in April 1975 as Cash and
Financial Planning Coordinator. Previously he was employed by St. Regis Paper
Company.
WILLIAM S. BERRY, 55, is Executive Vice President, Forest Resources and
Corporate Development of Rayonier. He was elected to his present position in
October 1996 after being elected Senior Vice President, Forest Resources and
Corporate Development, of Rayonier in January 1994. He was Senior Vice
President, Land and Forest Resources, of Rayonier from January 1986 to January
1994. From October 1981 to January 1986 he was Vice President and Director of
Forest Products Management. Mr. Berry joined Rayonier in 1980 as Director of
Wood Products Management. He also serves on the Executive Board of the Center
for Streamside Studies.
-17-
<PAGE> 21
JOHN B. CANNING, 53, has served as Corporate Secretary and Associate General
Counsel of Rayonier since February 1985 and as Corporate Secretary of RFR since
September 1985. Mr. Canning joined Rayonier in 1977 as Associate General Counsel
- - Financial. He is a member of the American Bar Association, the Corporate Bar
Association of Westchester and Fairfield, Inc. and the American Society of
Corporate Secretaries.
DONALD W. GRIFFIN, 60, is Chairman, President and Chief Executive Officer of
Olin Corporation (diversified manufacturing corporation). He joined Olin in 1961
and was elected an Executive Vice President in 1987, a director in 1990, Vice
Chairman of the Board for Operations in 1993, President and Chief Operating
Officer in 1994, President and Chief Executive Officer effective January 1, 1996
and Chairman, President and Chief Executive Officer effective April 25, 1996. He
is also a director of Rayonier, ACNielsen Corporation, the Chemical
Manufacturers Association, the National Shooting Sports Foundation, the Small
Arms and Ammunition Manufacturers Association and the Wildlife Management
Institute. He is a trustee of the Buffalo Bill Historical Center and the Olin
Charitable Trust. He is a member of the Business Roundtable, the American
Society of Metals, the Association of the U.S. Army and the American Defense
Preparedness Association. He is a life member of the Navy League of the United
States and the Surface Navy Association. He is a graduate of the University of
Evansville, Evansville, Indiana, and has completed the Graduate School for Sales
and Marketing Managers at Syracuse University, Syracuse, N.Y.
KENNETH P. JANETTE, 51, is Vice President and Corporate Controller of
Rayonier. He joined Rayonier in August 1994 and was elected Vice President and
Corporate Controller in October 1994. From 1992 to 1994 he was Vice President
and Corporate Controller of Sunkyong America, Inc., a Korean international
trading company, which he joined in 1990 as Corporate Controller. He was with
AMAX Inc. from 1977 to 1990, most recently as Assistant Corporate Controller and
Director of Auditing, and was with Arthur Andersen & Co. from 1968 to 1977.
THOMAS W. KEESEE, JR., 82, is a former Director, President and Chief
Executive Officer of Bessemer Securities Corporation and Bessemer Trust Company.
He is a Director Emeritus of ITT Corporation and of Duke University Asset
Management Co. and Trustee Emeritus of Duke University. Mr. Keesee is a former
director of the United States subsidiaries of Zurich Insurance Company and of
King Ranch, Inc. He was a director of National Audubon Society from 1972 to
1979, chairman of its Board of Directors from 1979 to 1983, and a director again
from 1994 to 1996. Mr. Keesee previously served on the Board of Directors of RFR
from 1985 to 1991.
WALLACE L. NUTTER, 53, is President and Chief Operating Officer of Rayonier.
He was elected to his current position on July 19, 1996, and was elected a
director of Rayonier on the same date. He joined Rayonier in 1967 in the
Northwest Forest Operations and was named Vice President and Director, Forest
Products Operations, in 1984, Senior Vice President, Operations, in 1985 and
Executive Vice President in 1987. Mr. Nutter is also a member of the Board of
Governors of the National Council for Air and Stream Improvement.
GERALD J. POLLACK, 55, is Senior Vice President and Chief Financial Officer
of Rayonier. He was elected to his present position in May 1992. From July 1986
to May 1992, he was Vice President and Chief Financial Officer. Mr. Pollack
joined Rayonier in June 1982 as Vice President and Controller. He is a member of
the New York Advisory Board of The Allendale Insurance Co., the financial
management committee of American Forest & Paper Association and the Financial
Executive Institute.
DEROY C. THOMAS, 71, was from 1991 through 1994 a partner in the law firm of
LeBoeuf, Lamb, Greene & MacRae, a law firm which Rayonier engages from time to
time for professional services unrelated to Partnership matters. He was
President, Chief Operating Officer and Director of ITT Corporation (now ITT
Industries, Inc.) from 1988 to 1991, and from 1983 to 1988 he was Vice Chairman
and Chief Operating Officer, ITT Diversified Services, and Chairman and Chief
Executive Officer of The Hartford Insurance Group. Mr. Thomas serves on the
board of directors of ITT Hartford Group, Inc., Houghton Mifflin Company,
Connecticut Natural Gas Corporation and Med. Span Inc. He is Chairman of the Old
State House Association and President of the Goodspeed Opera House. Mr. Thomas
previously served on the Board of Directors of RFR from 1987 to 1991.
-18-
<PAGE> 22
ITEM 11. EXECUTIVE COMPENSATION
Neither Rayonier nor RFR receive any compensation as general partners of the
Partnership and the Operating Partnership in the form of promotional interests,
management fees, acquisition fees, incentive compensation or otherwise. The
Partnership and the Operating Partnership reimburse Rayonier and RFR for all
direct costs incurred in organizing and managing such partnerships and indirect
costs (principally general and administrative and overhead costs) reasonably
allocable to such partnerships. The allocations of direct and indirect costs
incurred by Rayonier between the Partnership and Rayonier's other activities
will be made solely by Rayonier.
Neither the Partnership nor the Operating Partnership has any officers or
directors. No officers or directors of Rayonier or RFR are compensated by the
Partnership or the Operating Partnership. The allocable share of Rayonier's and
RFR's general and administrative overhead expenses charged to the Partnership
includes a portion of the compensation paid by Rayonier and RFR to their
officers and directors. The two directors of RFR who are not also directors or
employees of Rayonier receive an annual retainer of $12,000 and a $1,000 fee for
each Board or Committee meeting attended. The one director of RFR who is a
director but not an employee of Rayonier receives a $750 fee for each Board
meeting attended. These fees are paid by RFR and charged to the Partnership.
During 1996, the Partnership was charged for compensation paid to 13 officers
and directors of RFR in an amount totaling $216,000. The Partnership was not
charged for cash compensation to any officer or director of RFR in excess of
$100,000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All references to beneficial ownership in this Item 12 are as of March 15, 1997.
Name and address Number of Partnership Units and Percent
of beneficial owner nature of beneficial ownership of class
- ------------------- ------------------------------ --------
Rayonier Inc.
1177 Summer Street 14,940,000 Class A Units 74.7
Stamford, Connecticut 06905-5529 20,000,000 Class B Units 100.0
Directors and officers of RFR No Units --
who perform policymaking functions
for the Partnership (13)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 1 - Business for a description of transactions between the Partnership
and Rayonier. There are no other transactions or relationships to be reported in
response to this item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. See Index to Financial Statements on page ii for a list of the financial
statements filed as part of this report.
2. See Index to Financial Statement Schedules on page ii for a list of the
financial statement schedules filed as a part of this report.
3. See Exhibit Index on pages B and C for a list of the exhibits filed or
incorporated herein as a part of this report.
(b) No report on Form 8-K was filed by the registrant during the period covered
by this report.
-19-
<PAGE> 23
REPORT OF MANAGEMENT
Rayonier Timberlands, L.P. (RTLP), through the management of both Rayonier Inc.
(Rayonier) (the Special General Partner) and Rayonier Forest Resources Company
(RFR) (the Managing General Partner), is responsible for the preparation and
integrity of the information contained in the accompanying financial statements
and other sections of the Annual Report. The financial statements are prepared
in accordance with generally accepted accounting principles, and, where
necessary, include amounts that are based on management's informed judgments and
estimates. Other information in the Annual Report is consistent with the
financial statements.
RTLP's financial statements are audited by Arthur Andersen LLP, independent
public accountants. Management has made available to Arthur Andersen LLP RTLP's
financial records and related data and believes that the representations made to
the independent public accountants are valid and complete.
A system of internal controls is a major element in management's
responsibility for the fair presentation of the financial statements. These
internal controls, including accounting controls and the internal auditing
program, are designed to provide reasonable assurance that the assets are
safeguarded, that transactions are executed in accordance with management's
authorization and are properly recorded, and that fraudulent financial reporting
is prevented or detected. 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 also exist to assess
compliance with the terms of the Partnership Agreement and to identify and
resolve any business issues arising between the Partnership and the General
Partners.
Internal controls provide for the careful selection and training of personnel
and for appropriate division of responsibility. The controls are documented in
written codes of conduct, policies and procedures that are communicated to
employees of Rayonier and RFR. Management continually monitors the system of
internal controls for compliance. Internal auditors independently assess the
effectiveness of internal controls and make recommendations for improvement.
Arthur Andersen LLP also evaluate internal controls and perform tests of
procedures and accounting records to enable them to express their opinion on
RTLP's financial statements. They also make recommendations for improving
internal controls, policies and practices. Management takes appropriate action
in response to each recommendation from the internal auditors and the
independent public accountants.
The Board of Directors of RFR monitors management's administration of the
Partnership's financial and accounting policies and practices and the
preparation of financial reports.
The Audit Committee of the Board of Directors of RFR, comprising non-employee
directors, meets periodically with management and with the internal and external
auditors to evaluate the effectiveness of the work performed by them in
discharging their respective responsibilities and to assure their independent
and free access to the Committee.
Rayonier controls RFR and depends partially on the Partnership timberlands
for timber for use in Rayonier's mills and log trading business. Conflicts of
interest can arise in selecting, pricing and scheduling timber sold to Rayonier.
Other conflicts of interest can arise in allocating revenues and costs between
the Class A Units and the Class B Units, in scheduling timber sales to occur
before or after the Initial Term expires, and in setting the terms of any loans
between the Partnership and Rayonier. The Conflicts Committee of the Board of
Directors of RFR, comprising non-employee directors, reviews these transactions
and obtains opinions from outside consultants as to their fairness.
F-1
<PAGE> 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rayonier Timberlands, L.P.:
We have audited the accompanying balance sheets of Rayonier Timberlands, L.P. (a
Delaware limited partnership) as of December 31, 1996 and 1995, and the related
statements of income, cash flows, and partners' capital for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of Rayonier Timberlands, L.P. through the management of both
Rayonier Inc., the Special General Partner, and Rayonier Forest Resources
Company, the Managing General Partner of the Partnership. 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 Rayonier Timberlands, L.P. as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
January 21, 1997
F-2
<PAGE> 25
RAYONIER TIMBERLANDS, L.P.
STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31,
(Thousands of dollars, except per unit information)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
SALES
Timber sales
Unaffiliated parties $ 131,280 $ 127,895 $ 143,266
Rayonier 14,159 26,202 21,935
--------- --------- ---------
145,439 154,097 165,201
Timberland sales 2,467 6,171 1,320
--------- --------- ---------
147,906 160,268 166,521
--------- --------- ---------
COSTS AND EXPENSES
Cost of timber sold
Unaffiliated parties 23,965 21,005 21,460
Rayonier 2,755 4,402 3,223
--------- --------- ---------
26,720 25,407 24,683
Cost of timberland sold 470 1,673 363
Forest management, overhead and general
and administrative expenses 12,195 12,289 11,893
Commission expense paid to affiliate -- -- 86
--------- --------- ---------
39,385 39,369 37,025
--------- --------- ---------
OTHER OPERATING INCOME 2,696 2,409 2,513
--------- --------- ---------
OPERATING INCOME 111,217 123,308 132,009
--------- --------- ---------
OTHER INCOME AND DEDUCTIONS
Primary Account interest income from Rayonier 4,003 4,439 3,240
Secondary Account interest expense to Rayonier (14,666) (13,139) (11,088)
Minority interest of General Partners in RTOC (1,005) (1,146) (1,242)
--------- --------- ---------
(11,668) (9,846) (9,090)
--------- --------- ---------
PARTNERSHIP INCOME $ 99,549 $ 113,462 $ 122,919
========= ========= =========
INCOME PER PUBLICLY TRADED CLASS A UNIT $ 5.43 $ 5.91 $ 6.41
========= ========= =========
INCOME PER RAYONIER-OWNED CLASS A UNIT $ 5.43 $ 5.91 $ 6.40
========= ========= =========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
F-3
<PAGE> 26
RAYONIER TIMBERLANDS, L.P.
BALANCE SHEETS
AS OF DECEMBER 31,
(Thousands of dollars)
ASSETS
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
CURRENT ASSETS
Cash $ 88 $ 282
Receivables, net 5,304 10,739
Inventories 588 584
Prepaid logging roads 4,291 3,946
Primary Account short-term investment notes of Rayonier 46,800 33,300
Trade and intercompany receivables from Rayonier 4,172 4,278
-------- --------
Total current assets 61,243 53,129
LONG-TERM RECEIVABLES -- 1,333
PRIMARY ACCOUNT LONG-TERM INVESTMENT NOTES
OF RAYONIER 5,000 5,000
FIXED ASSETS, NET 1,045 924
TIMBER, TIMBERLANDS AND LOGGING ROADS,
LESS DEPLETION AND AMORTIZATION 283,359 276,094
-------- --------
$350,647 $336,480
======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Advance deposits $ 5,965 $ 6,420
Accounts payable 2,149 2,887
Accrued liabilities
Taxes 1,744 1,738
All other 663 569
Current timber obligations 149 159
Advances from Rayonier 98 75
-------- --------
Total current liabilities 10,768 11,848
SECONDARY ACCOUNT LONG-TERM NOTES
PAYABLE TO RAYONIER 196,500 166,400
LONG-TERM TIMBER OBLIGATIONS 337 486
MINORITY INTEREST OF GENERAL PARTNERS IN RTOC 4,887 5,035
PARTNERS' CAPITAL
General Partners 4,844 4,989
Limited Partners (20,000,000 Class A Depositary Units and
20,000,000 Class B Depositary Units issued and outstanding) 133,311 147,722
-------- --------
$350,647 $336,480
======== ========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
F-4
<PAGE> 27
RAYONIER TIMBERLANDS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
(Thousands of dollars)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Partnership income $ 99,549 $ 113,462 $ 122,919
Non-cash items included in income
Depletion, depreciation and amortization 8,033 7,800 7,922
Minority interest of General Partners in RTOC 1,005 1,146 1,242
Decrease (increase) in receivables 5,435 (797) (5,144)
(Increase) decrease in prepaid logging roads (345) (27) 141
(Decrease) increase in advance deposits (455) 1,359 (221)
(Decrease) increase in accounts payable and
accrued liabilities (638) 1,440 (694)
Other changes 125 (320) (32)
--------- --------- ---------
Cash provided by operating activities 112,709 124,063 126,133
--------- --------- ---------
INVESTING ACTIVITIES
Capital expenditures less sales and retirements of $475,
$1,433 and $394 in 1996, 1995 and 1994, respectively (15,419) (13,248) (12,740)
Increase in Primary Account investment notes
of Rayonier (163,100) (121,900) (54,600)
Settlement of Primary Account investment notes
of Rayonier 149,600 131,300 113,100
Decrease (increase) in long-term receivables 1,333 (1,333) 1,123
--------- --------- ---------
Cash (used for) provided by investing activities (27,586) (5,181) 46,883
--------- --------- ---------
FINANCING ACTIVITIES
Decrease in timber obligations (159) (148) (138)
Increase in Secondary Account long-term notes
payable to Rayonier 30,100 22,600 22,900
Partnership distributions (114,105) (139,789) (193,687)
Distributions to General Partners of RTOC (1,153) (1,413) (1,957)
--------- --------- ---------
Cash used for financing activities (85,317) (118,750) (172,882)
--------- --------- ---------
CASH
Net (decrease) increase in cash (194) 132 134
Balance, beginning of year 282 150 16
--------- --------- ---------
Balance, end of year $ 88 $ 282 $ 150
========= ========= =========
Supplemental disclosures of cash flow information
Cash received for interest - Primary Account $ 4,003 $ 4,439 $ 3,240
========= ========= =========
Cash paid for interest - Secondary Account $ 14,694 $ 13,139 $ 11,092
========= ========= =========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
F-5
<PAGE> 28
RAYONIER TIMBERLANDS, L.P.
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31,
(Thousands of dollars)
<TABLE>
<CAPTION>
Limited General
Partners Partners Total
--------- --------- ---------
<S> <C> <C> <C>
Balance, December 31, 1993 $ 243,844 $ 5,962 $ 249,806
Partnership income 121,690 1,229 122,919
Partnership distributions (191,749) (1,938) (193,687)
--------- --------- ---------
Balance, December 31, 1994 173,785 5,253 179,038
Partnership income 112,328 1,134 113,462
Partnership distributions (138,391) (1,398) (139,789)
--------- --------- ---------
Balance, December 31, 1995 147,722 4,989 152,711
Partnership income 98,554 995 99,549
Partnership distributions (112,965) (1,140) (114,105)
--------- --------- ---------
Balance, December 31, 1996 $ 133,311 $ 4,844 $ 138,155
========= ========= =========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
F-6
<PAGE> 29
RAYONIER TIMBERLANDS, L.P.
NOTES TO FINANCIAL STATEMENTS
(Thousands of dollars, except per unit information)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND CONTROL
Rayonier Timberlands, L.P. (RTLP), a Delaware limited partnership, began
operations on November 20, 1985 succeeding to substantially all of the U.S.
timberlands business (the Timberlands) of Rayonier Inc. (Rayonier). Rayonier
Forest Resources Company (RFR), a wholly owned subsidiary of Rayonier, is the
Managing General Partner of RTLP and Rayonier is the Special General Partner of
RTLP.
RTLP operates through Rayonier Timberlands Operating Company, L.P. (RTOC), a
Delaware limited partnership, in which RTLP holds a 99 percent limited partner
interest and RFR and Rayonier together hold a 1 percent general partner
interest. RFR is the Managing General Partner of RTOC and Rayonier is the
Special General Partner of RTOC.
In addition to its General Partners' interests, Rayonier is also a Limited
Partner and owns 74.7 percent of RTLP's issued and outstanding Class A Units and
100 percent of RTLP's issued and outstanding Class B Units.
The officers, directors and employees of Rayonier and RFR perform all
management and business activities for RTLP and RTOC. RTLP and RTOC have no
officers, directors or employees.
ALLOCATIONS OF PARTNERSHIP INTEREST
RTLP records all of its activities in two accounts, the Primary Account and the
Secondary Account. The Class A unitholders, the Class B unitholders and the
General Partners all participate in both accounts, but in different percentages.
The participation in the revenues and expenses of RTLP is as follows:
Primary Secondary
Account Account
------- -------
Class A unitholders 95% 4%
Class B unitholders 4% 95%
General Partners 1% 1%
--- ---
Total 100% 100%
=== ===
IN ACCORDANCE WITH RTLP'S PARTNERSHIP AGREEMENT, THE PRIMARY ACCOUNT WILL BE
CLOSED AT THE END OF THE INITIAL TERM ON DECEMBER 31, 2000. SUBSEQUENT TO THAT
DATE, THE CLASS A UNITHOLDERS WILL PARTICIPATE IN 4 PERCENT OF THE REVENUES AND
EXPENSES OF RTLP AND 4 PERCENT OF ITS CASH FLOW AFTER ALL SECONDARY ACCOUNT DEBT
HAS BEEN REPAID.
NATURE OF BUSINESS OPERATIONS
The Partnership is engaged in the timberlands business, which includes forestry
management, reforestation, timber thinning and the marketing and sale of
standing timber and logs from the Timberlands. The Partnership will occasionally
purchase, for short-term resale, standing timber from third parties. The
Partnership's business plan is to operate the Timberlands for sustained
long-range harvest and to satisfy the Partnership's need to generate regular
cash flow to fund its cash distribution policy, as determined from time to time
by the Managing General Partner's Board of Directors.
The Partnership negotiates and contracts for the sale of standing timber
(stumpage) at fixed prices with buyers who generally cut and pay for the trees
during the contract period. Current contracts usually entail a 20-percent
deposit and/or performance bond and generally have a 12- to 24- month life. The
Partnership also conducts, or contracts for third parties to conduct, harvesting
operations and sells logs harvested if the Managing General Partner believes
that the timber cannot be sold as profitably as stumpage or that the tract in
question is particularly environmentally sensitive. In addition, the Partnership
may sell or exchange portions of the Timberlands and acquire additional timber
properties for cash, additional Units or other consideration.
F-7
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INVESTING AND FINANCING ACTIVITIES
The excess of operating cash flow generated by the Primary Account over amounts
distributed to unitholders is invested with Rayonier in accordance with the
Partnership Agreement and is repayable on demand. Interest is due quarterly and
the stated interest rates are at least equivalent to the rate Rayonier would be
charged by an outside party for equivalent borrowings.
The Partnership has expenditures that relate primarily to timber that will be
harvested after the Initial Term, such as costs of site preparation, planting,
reforestation and pre-commercial thinning, all of which are allocated to the
Secondary Account of the Partnership. Rayonier funds these expenditures on
behalf of the Partnership and, in accordance with the Partnership Agreement,
RTLP incurs obligations to Rayonier that mature on January l, 2001.
Under the terms of the Partnership Agreement, cash credited to the Primary
Account may not be loaned or otherwise used for the benefit of the Secondary
Account. Accordingly, the Partnership is not permitted to use proceeds from the
Primary Account Investment Notes of Rayonier to repay the Secondary Account
Long-Term Notes Payable to Rayonier.
See Notes 5 and 6 for further information.
SPECIAL ALLOCATIONS
In 1989, the Partnership Agreements of RTLP and RTOC were amended to provide for
the special allocation of certain costs to Rayonier's and RFR's interests as
General Partners of both Partnerships and to Rayonier's interest as a Limited
Partner of RTLP. These costs reduced Rayonier's and RFR's income from RTLP and
RTOC and the cash flow attributed to their Partnership interests. The special
allocations did not impact the interest of publicly traded Class A Units nor
their cash distributions.
On January 1, 1989, RTOC entered into a sales agency agreement with a
Rayonier-affiliated foreign sales corporation. The affiliate, RayFor Foreign
Sales Corporation (FSC), acted as a commission agent in selling Rayonier's
interest in stumpage that was eventually exported from the United States. As a
result, Rayonier gained certain tax benefits that were only available to
tax-paying corporations.
Effective with the first quarter of 1989, a commission expense was paid by
RTOC to FSC. The Board of Directors of the Managing General Partner approved
amendments to the Partnership Agreements of both RTLP and RTOC that allowed for
the allocation of FSC commission expense and associated administrative expenses
only to Rayonier and RFR, as General Partners of RTOC and RTLP, and to Rayonier
as a Limited Partner of RTLP, and did not affect the earnings or cash flow of
publicly traded Class A Units.
Effective August 10, 1993, legislation was enacted eliminating tax benefits
related to log exports for foreign sales corporations. Accordingly, the
Partnership did not incur foreign sales commission expense for sales made after
August 10, 1993. However, during the second quarter of 1994, the Partnership
recorded commission expense of $86 to adjust its final accrual for commissions
on sales made prior to the legislation's effective date. Since the Partnership's
commission expense had been fully allocated to Rayonier and the General
Partners, the legislation did not impact the earnings or cash flows of publicly
traded Class A Units.
CONSOLIDATION
The financial statements consolidate the accounts of RTLP and RTOC. Intercompany
transactions have been eliminated. The Rayonier and RFR combined 1 percent
general partner interest in RTOC is presented as minority interest in these
financial statements.
Certain reclassifications have been made to prior years' financial statements
to conform to current year's presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of certain estimates by management (e.g.,
useful economic lives of assets) in determining the reported amount of assets
and
F-8
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could differ
from those estimates.
REVENUE RECOGNITION
Timber sales are generally recognized when legal ownership and the risk of loss
passes to the purchaser and the quantity sold is determinable. This generally
occurs when the purchaser severs and measures the timber.
Revenues are based on actual harvest volumes multiplied by contractually
agreed upon prices awarded in sealed-bid auctions or negotiated at arm's-length
with the purchasers, including Rayonier. These prices are periodically and
independently tested for reasonableness to market prices in comparable
geographic areas.
Bulk timber sales are generally recognized when legal ownership and the risk
of loss passes to the purchaser and the amount of profit is determinable.
Timberland and land sales are recognized when legal ownership passes, the amount
of profit is determinable and specified levels of down payment are received.
TIMBER AND TIMBERLANDS
The acquisition cost of land, timber, real estate taxes, lease payments, site
preparation and other costs relating to the planting and growing of timber are
capitalized. Such costs attributed to merchantable timber are charged against
revenue at the time the timber is harvested, based on the relationship of
harvested timber to the estimated volume of currently merchantable timber.
Timber and timberlands are stated at the lower of cost, net of timber cost
depletion, or market value. The timber originally contributed by Rayonier is
stated at Rayonier's historical cost.
LOGGING ROADS
Logging roads, including bridges, are stated at cost, less accumulated
amortization. The costs of roads developed for reforestation activities are
amortized using the straight-line method over their useful lives estimated at 40
years for roads and 20 years for bridges. Road costs associated with harvestable
timber access are charged to a prepaid account and amortized as the related
timber is sold, generally within two years.
PARTNERS' CAPITAL
The partners' capital accounts have been included on a historical cost basis as
determined by the cash and net book value of assets originally contributed to
RTLP by Rayonier and RFR. These accounts have been adjusted for the allocation
of revenues and costs in accordance with the Partnership Agreement, for
distributions made to partners, and for recontributions made by Rayonier and
RFR. Revenues and costs are allocated to Primary and Secondary Accounts based
upon their relationship to the harvest plan of the Initial Term (through
December 31, 2000) or to the harvest plan subsequently (2001 and thereafter).
The partners' capital accounts were adjusted for RTLP distributions as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Distributions to Limited Partners $112,965 $138,391 $191,749
Distributions to General Partners 1,140 1,398 1,938
-------- -------- --------
Total $114,105 $139,789 $193,687
======== ======== ========
</TABLE>
In addition to the RTLP distributions, RTOC distributed $1,153, $1,413 and
$1,957, in 1996, 1995 and 1994, respectively, to its General Partners.
F-9
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INCOME AND OTHER TAXES
RTLP is not a separate taxable entity for federal or state income tax purposes.
Any taxable income or loss is reported by the partners in accordance with the
Partnership Agreement. Accrued taxes relating to obligations of RTLP as of
December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Property taxes $1,004 $ 975
Excise taxes 740 763
------ ------
Total $1,744 $1,738
====== ======
</TABLE>
3. RELATED-PARTY TRANSACTIONS
RTLP is a supplier of timber to Rayonier for use in its log trading business and
pulp and lumber manufacturing facilities. Timber sales to Rayonier for the years
ended December 31, 1996, 1995 and 1994 totaled $14,159, $26,202 and $21,935,
respectively. RTLP's related-party revenues represent the fair market value of
timber sold to Rayonier.
RTLP engages in various transactions with Rayonier and its affiliates that
are characteristic of a consolidated group under common control. Receipts,
disbursements and net cash position are currently managed by Rayonier through an
RTLP centralized treasury system. Accordingly, cash generated by and cash
requirements of RTLP flow through intercompany accounts. Any loans to or
borrowings from Rayonier are made at an interest rate equivalent to that which
would be charged Rayonier by an unrelated third party for a comparable loan for
the same period.
Copies of Rayonier's Annual Report and Form 10-K (without exhibits) as filed
with the Securities and Exchange Commission are available without charge, from
the Corporate Secretary, Rayonier Inc., 1177 Summer Street, Stamford, CT
06905-5529. Telephone: 203-348-7000.
The balances in the current RTLP intercompany accounts with Rayonier as of
December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Primary Account receivable $ 4,172 $ 4,278
Secondary Account payable (98) (75)
------- -------
Total due from Rayonier $ 4,074 $ 4,203
======= =======
</TABLE>
Interest income received from Rayonier on the Primary Intercompany Account
balance was $244 and $258 in 1996 and 1995 on an average outstanding receivable
of $4,186 and $4,206, respectively. Interest expense paid to Rayonier on the
Secondary Intercompany Account was $716 and $550 in 1996 and 1995 on an average
outstanding payable of $16,051 and $11,917, respectively.
RTLP is charged by Rayonier with direct costs and expenses associated with
RTLP's operations. In addition, indirect costs were allocated to RTLP for forest
management, overhead and general and administrative expenses related to RTLP's
operations. Such allocated costs totaled $7,215, $6,865 and $6,799 in 1996, 1995
and 1994, respectively.
4. MAJOR UNAFFILIATED CUSTOMERS
Sales for 1996, 1995 and 1994 include timber stumpage sales of $13,590, $14,652
and $29,300, respectively, to three customers under common ownership (not
affiliated with the Partnership). Also, in 1996, timber stumpage sales of
$15,019, which accounted for approximately 10 percent of total timber sales,
were made to one unrelated customer.
F-10
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENT NOTES OF RAYONIER
Cash balances, including the excess of operating cash flow generated by the
Primary Account over amounts distributed to unitholders, are invested in
Rayonier as short-term and long-term investment notes. These funds are invested
in accordance with the Partnership Agreement and are repayable on demand.
Interest is due quarterly and the interest rates are at least equivalent to the
rate Rayonier would be charged by an outside party for equivalent borrowings. At
December 31, 1996 and 1995, the RTLP Primary Account included investment notes
of Rayonier of $51,800 and $38,300, respectively. The notes bear fixed interest
rates that ranged from 5.8 to 8.1 percent, as of December 31, 1996 and 1995.
The weighted average interest rate, based on the principal amount, was 6.0
percent as of December 31, 1996 and 6.5 percent as of December 31, 1995.
Interest income earned by the Primary Account on the investment notes of
Rayonier was $3,759, $4,181 and $3,043 in 1996, 1995 and 1994, respectively.
6. LONG-TERM NOTES PAYABLE TO RAYONIER
The Partnership has expenditures that relate primarily to timber that will be
harvested after the Initial Term, such as costs of site preparation, planting,
reforestation and pre-commercial thinning, all of which are allocated to the
Secondary Account of the Partnership. Rayonier funds these expenditures on
behalf of the Partnership and, in accordance with the Partnership Agreement,
RTLP incurs obligations to Rayonier that mature on January 1, 2001. Advances
made by Rayonier to the Secondary Account in any year bear interest through
December 31 of that year at the actual average rate of Rayonier's revolving
credit borrowings. On each such December 31, advances made in that year,
including interest, are converted into an interest bearing note maturing January
1, 2001. The fixed interest rate, which is determined as of that December 31, is
equal to an appropriate spread over the yield on U.S. Government Notes having a
maturity date in early 2001. Interest is due quarterly and all or any part of
the unpaid principal may be prepaid at any time without penalty or premium. The
long-term notes payable to Rayonier amounted to $196,500 and $166,400 as of
December 31, 1996 and 1995, respectively.
As of December 31, 1996 and 1995, interest rates on the individual notes
ranged from 6.2 to 10.6 percent, with a weighted average interest rate of 8.1
percent in 1996 and 8.4 percent in 1995. Interest expense incurred by the
Secondary Account on the notes payable to Rayonier was $13,950, $12,589 and
$10,596 in 1996, 1995 and 1994, respectively.
7. TIMBER OBLIGATIONS
As of December 31, 1996 and 1995, total timber obligations amounted to $486 and
$645, respectively. Interest rates ranged from 6.0 to 8.6 percent, with a
weighted average interest rate of 8.6 and 8.5 percent at December 31, 1996 and
1995, respectively.
The obligations are payable as follows: 1997 - $149; 1998 - $162; and 1999 -
$175.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1996 and 1995, the estimated fair values of the Partnership's
financial instruments were as follows:
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Cash $ 88 $ 88 $ 282 $ 282
Primary Account investment notes of Rayonier 51,800 51,938 38,300 38,590
Timber obligations 486 505 645 692
Secondary Account long-term notes
payable to Rayonier 196,500 205,578 166,400 181,800
</TABLE>
F-11
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Partnership uses the following methods and assumptions in estimating the
fair value of its financial instruments:
Cash
The carrying amount is equal to fair market value.
Primary Account Investment Notes of Rayonier
The Partnership's short-term investment notes of Rayonier approximate fair
value. The fair value of the long-term investment notes of Rayonier is based
upon market rates of Rayonier's publicly traded debt as of December 31, 1996 and
1995.
Timber Obligations
The fair value of the fixed-rate obligations is based upon market prices for
these or similar issues currently available to the Partnership for obligations
with similar terms and maturities.
Secondary Account Long-Term Notes Payable to Rayonier
The fair value of long-term notes is based on the spread over the current rates
of U.S. Government Notes having a maturity date in early 2001.
9. ENVIRONMENTAL MATTERS
Over the past six years, the harvest of timber from private lands in the state
of Washington has been restricted as a result of the listing of the northern
spotted owl and the marbled murrelet as a threatened species under the
Endangered Species Act (ESA). These restrictions have caused the Partnership to
restructure and reschedule some of its harvest plans. In May of 1996, the
Washington Forest Practices Board adopted a permanent rule for the protection of
the northern spotted owl which included increased regulation within a "Special
Emphasis Area" (SEA) on a portion of the Partnership's lands on the Olympic
Peninsula. As a result of the Partnership's efforts in working cooperatively
with the Washington state Department of Fish and Wildlife, approximately half of
the Partnership's lands originally slated for inclusion in the SEA were placed
in a separate area covered by a voluntary Wildlife Plan. The management of the
Partnership believes this voluntary Wildlife Plan will allow more flexibility in
planning and conducting timber harvest activities, while at the same time
providing more and better habitat for the northern spotted owl over the long
term than the regulatory regime of the SEA would have done. The Washington state
northern spotted owl rule is not expected to have a significant impact on the
harvest activities of the Partnership as a whole. The U.S. Fish and Wildlife
Service is also in the process of developing a proposed rule under the ESA to
redefine protective measures for the northern spotted owl on private lands. It
now appears likely that this rule, if adopted, will not differ substantially
from the Washington state rule in its impacts on the Partnership's lands.
The Washington state Forest Practices Board is also in the process of
adopting a rule for the protection of the marbled murrelet. The Partnership is
unable at this time to predict the form in which this rule will finally be
adopted or the extent of the impact on the Partnership's operations.
F-12
<PAGE> 35
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. COMPUTATION OF INCOME PER CLASS A UNIT
The Partnership Agreement provides for the allocation of Partnership income
among the General and Limited Partners. The following tables present the
computation of income per Class A Unit for the three years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ----------------------- -----------------------
Primary Secondary Primary Secondary Primary Secondary
Account Account Account Account Account Account
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Timber and
timberland sales $ 145,410 $ 2,496 $ 153,970 $ 6,298 $ 165,201 $ 1,320
Interest and other
income, net 5,947 (13,914) 6,320 (12,611) 5,105 (10,441)
Costs and expenses (35,251) (4,134) (34,159) (5,210) (33,533) (3,406)
Interest of General
Partners in RTOC (1,161) 156 (1,261) 115 (1,367) 125
--------- --------- --------- --------- --------- ---------
Partnership income
before commission
expense 114,945 (15,396) 124,870 (11,408) 135,406 (12,402)
Commission expense,
net of 1% General
Partner interest -- -- -- -- (85) --
--------- --------- --------- --------- --------- ---------
PARTNERSHIP INCOME $ 114,945 $ (15,396) $ 124,870 $ (11,408) $ 135,321 $ (12,402)
========= ========= ========= ========= ========= =========
<CAPTION>
Total for Total for Publicly Traded Rayonier Owned
All A Units All A Units A Units A Units
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income for Class A Units before
commission expense
95% of Primary Account $ 109,198 $ 118,627 $ 32,545 $ 96,091
4% of Secondary Account (616) (456) (125) (371)
------------ ------------ ------------ ------------
108,582 118,171 32,420 95,720
Commission expense -- -- -- (81)
------------ ------------ ------------ ------------
Total income for Class A Units $ 108,582 $ 118,171 $ 32,420 $ 95,639
============ ============ ============ ============
Units outstanding 20,000,000 20,000,000 5,060,000 14,940,000
============ ============ ============ ============
INCOME PER CLASS A UNIT $ 5.43 $ 5.91 $ 6.41 $ 6.40
============ ============ ============ ============
</TABLE>
F-13
<PAGE> 36
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. OPERATING CASH FLOW ALLOCABLE TO CLASS A UNITS
Operating cash flow allocable to Class A Units is calculated in accordance
with the Partnership agreement, should not be considered as contradictory to
information provided in the Statements of Cash Flows and is not intended as
an alternative to income per Class A Unit as an indication of performance.
Operating cash flow allocable to a Class A Unit is calculated by multiplying
99 percent (Limited Partners' interest in RTLP) of operating cash flow
allocated to the Primary and Secondary Accounts by the respective 95 percent
and 4 percent Class A Unit interest in those accounts. In determining
operating cash flow, Partnership results are adjusted for non-cash costs and
expenses without the effects of changes in working capital. The following
tables present the calculations of operating cash flow allocable to Class A
Units for the three years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------- ---------------------- ----------------------
Primary Secondary Primary Secondary Primary Secondary
Account Account Account Account Account Account
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Timber and timberland sales $ 145,410 $ 2,496 $ 153,970 $ 6,298 $ 165,201 $ 1,320
Interest and other income, net 5,947 (13,914) 6,320 (12,611) 5,105 (10,441)
Costs and expenses - other than non-cash
items, commissions and the General
Partners' interest in RTOC (27,446) (3,562) (26,577) (3,578) (25,798) (2,925)
Capital expenditures (1,577) (14,317) (1,549) (13,132) (2,240) (10,894)
General Partners' interest in RTOC (1,223) 293 (1,322) 230 (1,423) 229
--------- -------- --------- -------- --------- --------
Operating cash flow before
commission expense 121,111 (29,004) 130,842 (22,793) 140,845 (22,711)
Commission expense, net
of 1% General Partner interest -- -- -- -- (85) --
--------- -------- --------- -------- --------- --------
OPERATING CASH FLOW $ 121,111 $(29,004) $ 130,842 $(22,793) $ 140,760 $(22,711)
========= ======== ========= ======== ========= ========
<CAPTION>
Total for Total for Publicly Traded Rayonier Owned
All A Units All A Units A Units A Units
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Cash allocable to Class A Units
before commission expense
95% of Primary Account $ 115,055 $ 124,300 $ 33,852 $ 99,951
4% of Secondary Account (1,160) (912) (230) (678)
------------ ------------ ----------- ------------
113,895 123,388 33,622 99,273
Commission expense -- -- -- (81)
------------ ------------ ----------- ------------
OPERATING CASH FLOW ALLOCABLE TO
CLASS A UNITS $ 113,895 $ 123,388 $ 33,622 $ 99,192
============ ============ =========== ============
Units outstanding 20,000,000 20,000,000 5,060,000 14,940,000
============ ============ =========== ============
Primary Account cash flow per unit $ 5.75 $ 6.22 $ 6.69 $ 6.69
Secondary Account cash flow per unit (.06) (.05) (.05) (.05)
------------ ------------ ----------- ------------
OPERATING CASH FLOW PER
CLASS A UNIT $ 5.69 $ 6.17 $ 6.64 $ 6.64
============ ============ =========== ============
</TABLE>
F-14
<PAGE> 37
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. QUARTERLY RESULTS FOR 1996 AND 1995 (unaudited)
(Thousands, except per unit information)
<TABLE>
<CAPTION>
1996 Quarter Ended
- ---- ----------------------------------------------------
March June September December Total
31 30 30 31 Year
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Sales $ 46,842 $ 38,921 $ 27,010 $ 35,133 $ 147,906
Operating income 37,413 30,274 18,671 24,859 111,217
Partnership income 34,512 27,419 15,811 21,807 99,549
Income per Class A Unit 1.78 1.49 .94 1.22 5.43
Operating cash flow allocable
to a Class A Unit 1.83 1.56 1.01 1.29 5.69
Distributions per Class A Unit 1.43 1.33 1.33 1.33 5.42
<CAPTION>
1995 Quarter Ended
- ---- ----------------------------------------------------
March June September December Total
31 30 30 31 Year
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Sales $ 48,555 $ 36,865 $ 26,029 $ 48,819 $ 160,268
Operating income 39,104 28,794 18,078 37,332 123,308
Partnership income 36,820 26,522 15,645 34,475 113,462
Income per Class A Unit 1.84 1.44 .88 1.75 5.91
Operating cash flow allocable
to a Class A Unit 1.92 1.50 .93 1.82 6.17
Distributions per Class A Unit 1.90 1.58 1.58 1.58 6.64
</TABLE>
F-15
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 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.
RAYONIER TIMBERLANDS, L.P.
(A Delaware Limited Partnership)
By: RAYONIER FOREST RESOURCES COMPANY
Managing General Partner
By: KENNETH P. JANETTE
---------------------------------------
Kenneth P. Janette
Vice President and Corporate Controller
March 21, 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.
RAYONIER FOREST RESOURCES COMPANY
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* President and Director
------------------------
Ronald M. Gross
(Principal Executive Officer)
GERALD J. POLLACK Senior Vice President and March 21, 1997
------------------------ Chief Financial Officer
Gerald J. Pollack
(Principal Financial Officer)
KENNETH P. JANETTE Vice President and March 21, 1997
------------------------ Corporate Controller
Kenneth P. Janette
(Principal Accounting Officer)
* Director
------------------------
Donald W. Griffin
* Director
------------------------
Thomas W. Keesee, Jr.
* Director
------------------------
Wallace L. Nutter
* Director
------------------------
DeRoy C. Thomas
* By: GERALD J. POLLACK March 21, 1997
-------------------------
Attorney-in-fact
</TABLE>
-A-
<PAGE> 39
EXHIBIT INDEX
EXHIBIT DESCRIPTION LOCATION
NO. ----------- --------
- -------
2 Plan of acquisition, reorganization, None
arrangement, liquidation or succession
3(a) Partnership Agreement of the Incorporated by
Partnership reference to
Exhibit No. 3(a)
to Registrant's
Form 10-K for
1988
3(b) Forms of Class A Certificate Incorporated by
of Limited Partnership and Class B reference to
Certificate of Limited Partnership Exhibit No. 3.2 to
of the Partnership Registration State-
ment on Form S-l
(Reg. No. 33-587)
3(c) Partnership Agreement of Operating Incorporated by
Partnership reference to
Exhibit No. 3(c)
to Registrant's
Form 10-K for
1988
3(d) Forms of Class A Certificate Incorporated by
of Limited Partnership and Class B reference to
Certificate of Limited Partnership Exhibit No. 3.4 to
of the Operating Partnership Registration State-
ment on Form S-l
(Reg. No. 33-587)
4(a) Deposit Agreement among the Incorporated by
Partnership, Manufacturers Hanover reference to
Trust Co. (now known as ChaseMellon Exhibit No. 4.1 to
Shareholder Services) as Depositary, Registration State-
Rayonier Forest Resources Company ment on Form S-l
(RFR), as attorney-in-fact of (Reg. No. 33-587)
limited partners in the Partnership,
and all holders of Depositary Receipts
4(b) Specimen Class A Depositary Receipt Incorporated by
reference to
Exhibit No. 4.1 to
Registration State-
ment on Form S-l
(Reg. No. 33-587)
-B-
<PAGE> 40
EXHIBIT INDEX (CONTINUED)
EXHIBIT DESCRIPTION LOCATION
NO. ----------- --------
- -------
4(c) Specimen Secondary Account Incorporated by
Note Payable to Rayonier reference to
Exhibit No. 4(c) to
Registrant's Form
10-K for 1992
9 Voting Trust Agreement None
10 Conveyance Agreement among Incorporated by
Rayonier, RFR, the Partnership and reference to
the Operating Partnership Exhibit No.10.l to
Registration State-
ment on Form S-l
(Reg. No. 33-587)
11 Statement re computation of per Not applicable
share earnings
12 Statement re computation of ratios Not applicable
13 Annual Report to security holders, Not applicable
Form l0-Q or quarterly report to
security holders
16 Letter re change in certifying Not applicable
accountant
18 Letter re change in accounting Not applicable
principles
21 Subsidiaries of the registrant *
22 Published report regarding matters None
submitted to vote of security holders
23 Consents of experts and counsel None
24 Powers of attorney Filed herewith
27 Financial data schedule Filed herewith
28 Information from reports furnished Not applicable
to state insurance regulatory
authorities
99 Additional exhibits None
* Registrant's only subsidiary is Rayonier Timberlands Operating Company, L.P.,
a Delaware limited partnership in which Registrant holds a 99 percent limited
partner's interest. See Item 1 - Business - Description of Business.
-C-
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below
constitutes and appoints GERALD J. POLLACK and JOHN B. CANNING his or her true
and lawful attorneys-in-fact, with full power in each to act without the other
and with full power of substitution and resubstitution to sign in the name of
such person and in each of his or her offices and capacities in Rayonier Forest
Resources Company, the Managing General Partner of Rayonier Timberlands, L.P.
(the "Partnership") the Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 of the Partnership, and to file the same, and any amendments
thereto, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission.
Dated: March 21, 1997
RONALD M. GROSS President and Director
- ------------------------
Ronald M. Gross
DONALD W. GRIFFIN Director
- ------------------------
Donald W. Griffin
THOMAS W. KEESEE, JR. Director
- ------------------------
Thomas W. Keesee, Jr.
WALLACE L. NUTTER Director
- ------------------------
Wallace L. Nutter
DEROY C. THOMAS Director
- ------------------------
DeRoy C. Thomas
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
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0
0
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