1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ........... TO ............ COMMISSION FILE NUMBER 1-8997 RAYONIER TIMBERLANDS, L.P. A Delaware Limited Partnership I.R.S. Employer Identification Number 06-1148227 1177 SUMMER STREET, STAMFORD, CONNECTICUT 06905-5529 (Principal Executive Office) Telephone Number: (203) 348-7000 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 [ ] As of November 1, 1996, there were 20,000,000 Class A Depositary Units of the Partnership outstanding, of which 14,940,000 Class A Depositary Units were owned by Rayonier. 2 RAYONIER TIMBERLANDS, L.P. TABLE OF CONTENTS PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements Statements of Income for the Three Months and Nine Months Ended September 30, 1996 and 1995 1 Balance Sheets as of September 30, 1996 and December 31, 1995 2 Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1995 3 Notes to Financial Statements 4 - 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 10 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 11 Signature 11 Exhibit Index 12 i 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The following unaudited financial statements reflect, in the opinion of Rayonier Forest Resources Company, the managing general partner of Rayonier Timberlands, L.P., all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the results of operations, the financial position, and the cash flows for the periods presented. For a full description of accounting policies, see Notes to Financial Statements in the 1995 Annual Report on Form 10-K. RAYONIER TIMBERLANDS, L.P. STATEMENTS OF INCOME (UNAUDITED) (THOUSANDS OF DOLLARS, EXCEPT PER UNIT INFORMATION) Three Months Nine Months Ended September 30, Ended September 30, -------------------------- -------------------------- 1996 1995 1996 1995 --------- --------- --------- --------- SALES Timber sales Unaffiliated parties $ 23,434 $ 18,430 $ 99,414 $ 85,479 Rayonier 3,375 6,284 11,709 22,101 --------- --------- --------- --------- 26,809 24,714 111,123 107,580 Timberland sales 201 1,315 1,650 3,869 --------- --------- --------- --------- 27,010 26,029 112,773 111,449 --------- --------- --------- --------- COSTS AND EXPENSES Cost of timber sold Unaffiliated parties 5,873 4,165 17,328 13,885 Rayonier 879 1,417 2,150 3,718 --------- --------- --------- --------- 6,752 5,582 19,478 17,603 Cost of timberland sold -- 368 413 1,048 Forest management, overhead, and general and administrative expenses 3,050 3,179 8,939 8,965 --------- --------- --------- --------- 9,802 9,129 28,830 27,616 --------- --------- --------- --------- OTHER OPERATING INCOME 1,463 1,178 2,415 2,143 --------- --------- --------- --------- OPERATING INCOME 18,671 18,078 86,358 85,976 --------- --------- --------- --------- OTHER INCOME AND DEDUCTIONS Primary Account interest income from Rayonier 1,010 1,043 2,987 3,496 Secondary Account interest expense to Rayonier (3,711) (3,318) (10,818) (9,687) Minority interest of General Partners in RTOC (159) (158) (785) (798) --------- --------- --------- --------- (2,860) (2,433) (8,616) (6,989) --------- --------- --------- --------- PARTNERSHIP INCOME $ 15,811 $ 15,645 $ 77,742 $ 78,987 ========= ========= ========= ========= INCOME PER CLASS A UNIT* $ 0.94 $ 0.88 $ 4.21 $ 4.16 ========= ========= ========= ========= * Refer to calculations on page 6. 1 4 RAYONIER TIMBERLANDS, L.P. BALANCE SHEETS (UNAUDITED) (THOUSANDS OF DOLLARS) ASSETS September 30, December 31, 1996 1995 -------- -------- CURRENT ASSETS Cash $ 260 $ 282 Receivables, net 10,857 10,739 Inventories 457 584 Prepaid logging roads 4,099 3,946 Primary Account short-term investment notes of Rayonier 41,300 33,300 Trade and intercompany receivables from Rayonier and affiliates 4,188 4,278 -------- -------- Total current assets 61,161 53,129 LONG-TERM RECEIVABLES -- 1,333 PRIMARY ACCOUNT LONG-TERM INVESTMENT NOTES OF RAYONIER 5,000 5,000 FIXED ASSETS, NET 1,071 924 TIMBER, TIMBERLANDS, AND LOGGING ROADS, NET OF DEPLETION AND AMORTIZATION 281,728 276,094 -------- -------- $348,960 $336,480 ======== ======== LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES Advance deposits $ 5,913 $ 6,420 Accounts payable 1,143 2,887 Accrued liabilities Taxes 3,558 1,738 All other 750 569 Current timber obligations 171 159 Advances from Rayonier 91 75 -------- -------- Total current liabilities 11,626 11,848 SECONDARY ACCOUNT LONG-TERM NOTES PAYABLE TO RAYONIER 187,700 166,400 LONG-TERM TIMBER OBLIGATIONS 337 486 MINORITY INTEREST OF GENERAL PARTNERS IN RTOC 4,950 5,035 PARTNERS' CAPITAL General Partners 4,905 4,989 Limited Partners (20,000,000 Class A Depositary Units and 20,000,000 Class B Depositary Units issued and outstanding) 139,442 147,722 -------- -------- $348,960 $336,480 ======== ======== 2 5 RAYONIER TIMBERLANDS, L.P. STATEMENTS OF CASH FLOWS (UNUDITED) (THOUSANDS OF DOLLARS) Nine Months Ended September 30, -------------------------- 1996 1995 --------- --------- OPERATING ACTIVITIES Partnership income $ 77,742 $ 78,987 Non-cash items included in income Depletion, depreciation and amortization 5,801 5,625 Minority interest of General Partners in RTOC 785 798 (Increase) decrease in receivables (118) 596 (Increase) decrease in prepaid logging roads (153) 106 (Decrease) increase in advance deposits (507) 2,798 Increase in accounts payable and accrued liabilities 257 1,293 Other changes 233 (72) --------- --------- Cash provided by operating activities 84,040 90,131 --------- --------- INVESTING ACTIVITIES Capital expenditures less sales and retirements of $305 and $937 in 1996 and 1995 (11,582) (9,313) Increase in Primary Account investment notes of Rayonier (116,300) (100,600) Settlement of Primary Account investment notes of Rayonier 108,300 111,700 Decrease in long-term receivables 1,333 -- --------- --------- Cash (used for) provided by investing activities (18,249) 1,787 --------- --------- FINANCING ACTIVITIES Decrease in timber obligations (137) (126) Increase in Secondary Account long-term notes payable to Rayonier 21,300 15,850 Partnership distributions (86,106) (106,526) Distributions to General Partners of RTOC (870) (1,077) --------- --------- Cash used for financing activities (65,813) (91,879) --------- --------- CASH (Decrease) increase during the period (22) 39 Balance, beginning of period 282 150 --------- --------- Balance, end of period $ 260 $ 189 ========= ========= Supplemental disclosures of cash flow information Cash received for interest - Primary Account $ 2,987 $ 3,496 ========= ========= Cash paid for interest - Secondary Account $ 10,851 $ 9,701 ========= ========= 3 6 RAYONIER TIMBERLANDS, L.P. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (THOUSANDS OF DOLLARS, EXCEPT PER UNIT INFORMATION) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES 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 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. 4 7 RAYONIER TIMBERLANDS, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (THOUSANDS OF DOLLARS, EXCEPT PER UNIT INFORMATION) 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. PARTNERS' CAPITAL An analysis of the activity in the Partners' Capital accounts of RTLP for the nine months ended September 30, 1996 and 1995 is as follows: Limited Partners General Partners Total Balance, January 1, 1996 $ 147,722 $ 4,989 $ 152,711 Partnership income 76,965 777 77,742 Partnership distributions (85,245) (861) (86,106) --------- --------- --------- Balance, September 30, 1996 $ 139,442 $ 4,905 $ 144,347 ========= ========= ========= Balance, January 1, 1995 $ 173,785 $ 5,253 $ 179,038 Partnership income 78,197 790 78,987 Partnership distributions (105,460) (1,066) (106,526) --------- --------- --------- Balance, September 30, 1995 $ 146,522 $ 4,977 $ 151,499 ========= ========= ========= In addition to the RTLP distributions, RTOC distributed $870 and $1,077 to its General Partners during the first nine months of 1996 and 1995, respectively. 5 8 RAYONIER TIMBERLANDS, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (THOUSANDS OF DOLLARS, EXCEPT PER UNIT INFORMATION) 2. 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 nine months ended September 30, 1996 and 1995: 1996 1995 -------------------------- -------------------------- Primary Secondary Primary Secondary Account Account Account Account --------- --------- --------- --------- Timber and timberland sales $ 111,094 $ 1,679 $ 107,580 $ 3,869 Interest and other income - net 4,761 (10,177) 5,219 (9,267) Costs and expenses (25,792) (3,038) (24,002) (3,614) Interest of General Partners in RTOC (900) 115 (888) 90 --------- --------- --------- --------- PARTNERSHIP INCOME $ 89,163 $ (11,421) $ 87,909 $ (8,922) ========= ========= ========= ========= Total for Total for All A Units All A Units ------------ ------------ Income for Class A Units 95% of Primary Account $ 84,704 $ 83,514 4% of Secondary Account (457) (357) ------------ ------------ Total income for Class A Units $ 84,247 $ 83,157 ============ ============ Units outstanding 20,000,000 20,000,000 ============ ============ INCOME PER CLASS A UNIT $ 4.21 $ 4.16 ============ ============ 6 9 RAYONIER TIMBERLANDS, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (THOUSANDS OF DOLLARS, EXCEPT PER UNIT INFORMATION) 3. 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 nine months ended September 30, 1996 and 1995: 1996 1995 -------------------------- -------------------------- Primary Secondary Primary Secondary Account Account Account Account --------- --------- --------- --------- Timber and timberland sales $ 111,094 $ 1,679 $ 107,580 $ 3,869 Interest and other income, net 4,761 (10,177) 5,219 (9,267) Costs and expenses - other than non-cash items and the General Partners' interest in RTOC (20,159) (2,565) (18,533) (2,543) Capital expenditures (1,126) (10,761) (1,135) (9,115) General Partners' interest in RTOC (946) 218 (931) 171 --------- --------- --------- --------- OPERATING CASH FLOW $ 93,624 $ (21,606) $ 92,200 $ (16,885) ========= ========= ========= ========= Total for Total for All A Units All A Units ------------ ------------ Cash allocable to Class A Units 95% of Primary Account $ 88,943 $ 87,590 4% of Secondary Account (864) (675) ------------ ------------ OPERATING CASH FLOW ALLOCABLE TO CLASS A UNITS $ 88,079 $ 86,915 ============ ============ Units outstanding 20,000,000 20,000,000 ============ ============ Primary Account cash flow per unit $ 4.44 $ 4.38 Secondary Account cash flow per unit (.04) (.03) ------------ ------------ OPERATING CASH FLOW PER CLASS A UNIT $ 4.40 $ 4.35 ============ ============ 7 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Most 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 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): Three Months Nine Months Ended September 30, Ended September 30, -------------------------- -------------------------- 1996 1995 1996 1995 --------- --------- --------- --------- TIMBER SALES Northwest $ 14,487 $ 14,670 $ 72,471 $ 64,069 Southeast 12,322 10,044 38,652 43,511 --------- --------- --------- --------- 26,809 24,714 111,123 107,580 --------- --------- --------- --------- TIMBERLAND SALES Northwest -- -- -- -- Southeast 201 1,315 1,650 3,869 --------- --------- --------- --------- 201 1,315 1,650 3,869 --------- --------- --------- --------- TOTAL SALES $ 27,010 $ 26,029 $ 112,773 $ 111,449 ========= ========= ========= ========= OPERATING INCOME Northwest $ 8,507 $ 9,382 $ 55,285 $ 49,185 Southeast 10,655 9,154 32,544 38,173 Corporate and other (491) (458) (1,471) (1,382) --------- --------- --------- --------- $ 18,671 $ 18,078 $ 86,358 $ 85,976 ========= ========= ========= ========= PARTNERSHIP INCOME $ 15,811 $ 15,645 $ 77,742 $ 78,987 ========= ========= ========= ========= SELECTED OPERATING STATISTICS Northwest harvest volumes Stumpage (thousands of MBF) 13.8 10.6 96.6 79.0 Delivered logs (thousands of MBF) 21.1 15.8 51.0 35.9 --------- --------- --------- --------- 34.9 26.4 147.6 114.9 ========= ========= ========= ========= Southeast harvest volumes Pine (thousands of tons) 431.9 303.4 1,325.2 1,304.5 Hardwoods (thousands of tons) 64.1 72.5 166.4 163.8 --------- --------- --------- --------- 496.0 375.9 1,491.6 1,468.3 ========= ========= ========= ========= Sales for the nine months ended September 30, 1996 were $112.8 million, $1.3 million or 1 percent higher than the first nine months of 1995. Timber sales were $111.1 million, up $3.5 million, or 3 percent, from the comparable 1995 period. Timberland sales of $1.7 million were $2.2 million lower than 1995. Partnership income for the nine month period was $77.7 million, a decrease of $1.2 million from 1995. However, the decrease was primarily due to higher Secondary Account interest expense, only 4 percent of which is charged to the Class A Unitholders. 8 11 Income per Class A Unit of $4.21 was up 5 cents per Class A Unit from 1995 and operating cash flow allocable per Class A Unit was $4.40, 5 cents higher than 1995. For the nine months ended September 30, 1996, the stumpage and delivered log volume in the Northwest was 28 percent higher than the prior year as customers expanded harvesting in recognition of stronger export and domestic log markets. Also, unfavorable market conditions throughout 1995 caused many customers to defer harvesting until late 1995 and into 1996. This increase was partially offset by a 12 percent decline in prices. As a result, sales increased $8.4 million, or 13 percent, to $72.5 million and operating income increased $6.1 million, or 12 percent, to $55.3 million. In the Southeast, sales for the nine months ended September 30, 1996 declined $7.1 million, or 15 percent, to $40.3 million from the prior year and operating income declined $5.6 million, or 15 percent, to $32.5 million. Harvest volume increased 2 percent, but was more than offset by a 13 percent decline in prices from 1995. The price decline resulted from softness in demand from the pulp and paper industry. Operating results in 1996 were also unfavorably impacted by reduced timberland sales of $2.2 million. Operating costs and expenses for the first nine months of 1996 were $28.8 million, up $1.2 million from 1995. The increase was primarily due to higher contract logging costs and commercial thinning activities in the Northwest and higher depletion resulting from increased harvest volumes in both regions. The cost of timberland sold was $0.4 million, down $0.6 million from the prior year due to reduced sales activity in the Southeast. Interest income, earned mainly from the Primary Account's investment notes of Rayonier, decreased $0.5 million to $3.0 million in 1996 due to a lower average balance and lower interest rates. Interest expense, on increased loans and advances to the Secondary Account by Rayonier, rose $1.1 million to $10.8 million. Sales for the third quarter were $27.0 million, $1.0 million higher than last year's third quarter. Partnership income was $15.8 million, or $0.94 per Class A Unit, $0.2 million, or 6 cents per Class A Unit, above the 1995 third quarter. Operating cash flow allocable to each Class A Unit was $1.01, 8 cents per Class A Unit higher than last year. For the third quarter of 1996, the stumpage and delivered log volume for the Northwest region was 32 percent higher than the prior year as customers expanded harvesting in recognition of stronger export and domestic log markets. The volume increase was offset by a 25 percent decline in prices from the prior year levels, reflective of weak export and domestic log markets at the time the contracts were initiated. As a result, third quarter sales decreased $0.2 million to $14.5 million and operating income declined $0.9 million to $8.5 million. Third quarter sales for the Southeast region increased $1.2 million to $12.5 million and operating income rose $1.5 million to $10.7 million from the prior year, reflecting higher volume partially offset by lower prices. The pine volume for the Southeast was 42 percent higher than the prior year as customers accelerated harvesting on expiring contracts. Also, dry weather in 1995 increased the regions available timber supply, causing customers to delay harvesting on typically drier higher priced Partnership timber tracts. However, pine prices declined 12 percent from the prior year due to contracts previously entered into during weak pulp and paper markets. FUTURE OPERATIONS For the first nine months of 1996, the harvest levels in the Northwest and the Southeast represented approximately 80 percent and 72 percent, respectively, of the current projection of the 1996 harvests whereas in the first nine months of 1995 the harvest levels in the Northwest and the Southeast were 66 percent and 72 percent, respectively, of the actual full year harvests. Contract terms allow customers to harvest their commitments over various time periods, and therefore, volume currently under contract may not be fully cut within this fiscal year. As of September 30, 1996, volume representing approximately 118 percent of the projected 1996 harvest had been cut or committed under contract, a level similar to that which existed at September 30, 1995. In the Northwest and Southeast regions, average prices on outstanding contracts as of September 30, 1996 were approximately 25 percent and 5 percent, respectively, below average prices realized during 1995. Therefore, the Partnership does not expect fourth quarter or full year 1996 earnings or cash flow from operations to be as strong as in the prior year on both an aggregate basis and on a per Class A Unit basis. The Partnership held contracts at September 30, 1996 with Rayonier representing approximately 3 percent and 7 percent of the uncut harvest volume in the Northwest and Southeast regions, respectively. In addition, three customers under common ownership held contracts representing approximately 27 percent of the uncut volume under contract in the Northwest. Four additional unrelated customers held contracts representing from 10 percent to 20 percent individually and 52 percent in total of the uncut Northwest volume under contract. These seven customers are not affiliated with the Partnership. 9 12 LIQUIDITY AND CASH FLOW As of September 30, 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 $41.3 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. The Secondary Account of the Partnership had total outstanding debt of $188.2 million at September 30, 1996, including long-term notes payable to Rayonier of $187.7 million. These notes primarily funded Secondary Account expenditures for costs such as site preparation, reforestation and pre-commercial thinning. Capital expenditures for the nine months ended September 30, 1996 and 1995 representing reforestation, capitalized lease payments, property taxes and other improvements to the land and timber assets were $11.9 million and $10.3 million, respectively. Funding of future capital requirements is expected to continue from Rayonier. On September 30, 1996 and 1995, the Partnership made quarterly distributions of $26.6 million ($1.33 per Unit) and $31.6 million ($1.58 per Unit), respectively, to all outstanding Class A unitholders. Quarterly distributions of $1.4 million and $1.7 million were also made to Class B unitholders and to the General Partners in the third quarter of 1996 and 1995, respectively. On October 18, 1996, the Board of Directors of the Managing General Partner announced a fourth quarter distribution of $1.33 per Class A Unit. The distribution will be paid on December 31, 1996 to unitholders of record on November 29, 1996. The Board determines the amount of quarterly distributions that are made to Class A unitholders from cash available from operations after provision for working capital, capital expenditures, asset acquisitions and other reserves. The Board intends to have distributions approximate actual Partnership results each year 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. Because the Partnership does not expect full year 1996 earnings or cash flow from operations to be as strong as in the prior year, distributions for the last three quarters of 1996 and the first quarter of 1997 are expected to total less than $6.17, which was the Partnership's cash flow per Class A Unit in 1995. WHEN THE INITIAL TERM ENDS ON DECEMBER 31, 2000, THE PRIMARY ACCOUNT OF THE PARTNERSHIP WILL BE CLOSED BUT UNITHOLDERS WILL NOT BE ENTITLED TO HAVE THEIR PARTNERSHIP CAPITAL ACCOUNTS REDEEMED UNTIL THE PARTNERSHIP FORMALLY ENDS IN THE YEAR 2035. THE INTEREST OF CLASS A UNITHOLDERS IN THE PARTNERSHIP'S FUTURE REVENUES, EXPENSES AND CASH FLOWS WILL THEN DECREASE FROM 95 PERCENT TO 4 PERCENT. ON A PRO FORMA BASIS, USING 1995 RESULTS AS AN EXAMPLE, CASH FLOW ALLOCABLE PER CLASS A UNIT WOULD DECLINE FROM $6.17 TO APPROXIMATELY 22 CENTS. 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 AMOUNT TO OVER $350 MILLION, MORE THAN THREE TIMES 1995'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. 10 13 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) See Exhibit Index (b) Rayonier Timberlands, L.P. did not file any Report on Form 8-K during the quarter covered by this report. SIGNATURE 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 (Chief Accounting Officer) November 13, 1996 11 14 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION LOCATION 2 Plan of acquisition, reorganization, arrangement, None liquidation, or succession 3(a) Partnership Agreement of the Partnership No amendments 3(b) Forms of Class A Certificate of Limited Partnership No amendments and Class B Certificate of Limited Partnership of the Partnership 3(c) Partnership Agreement of Operating Partnership No amendments 3(d) Forms of Class A Certificate of Limited Partnership No amendments and Class B Certificate of Limited Partnership of the Operating Partnership 4 Instruments defining the rights of security holders, None including indentures 10 Material contracts None 11 Statement re computation of per share earnings Not applicable 15 Letter re unaudited interim financial information None 18 Letter re change in accounting principles Not applicable 19 Report furnished to security holders None 22 Published report regarding matters submitted None to vote of security holders 23 Consents of experts and counsel None 24 Power of attorney None 27 Financial data schedule Filed herewith 99 Additional exhibits None 12