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 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, 1994, 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.
On February 28, 1994, ITT Corporation (ITT), Rayonier's sole shareholder, distributed all the Common Shares of Rayonier to ITT's shareholders. In connection with the distribution, Rayonier changed its name from ITT Rayonier Incorporated to Rayonier Inc. and became a publicly traded company listed on the New York Stock Exchange under the symbol RYN. RTLP will continue to be listed separately and trade under the symbol LOG. Class A unitholders' financial interests have not been affected in any manner by ITT's distribution of Rayonier to its shareholders.
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 from the Timberlands. The Partnership will occasionally purchase, for short term resale, standing timber from other ownerships. 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 in light of 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) 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 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 are an important contributor to Partnership results. For further information, see Timber Markets and Sales; Affiliated Party Transactions.
Sales to Rayonier were 13 percent, 17 percent, and 15 percent of total sales in 1994, 1993, and 1992, respectively. Three customers, under common ownership (not affiliated with the Partnership), accounted for approximately 18 percent, 15 percent, and 34 percent of total revenues in 1994, 1993, and 1992, respectively. See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations.
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, 1994, Rayonier had approximately 2,700 employees of which approximately 150 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), consisting 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 long standing policy has been to reach a sustainable annual harvest level in the Northwest by gradually reducing its harvest volume each year. The projected annual harvest in this region will continue to trend down, with the harvest in the year 2000 approaching 80 percent of the 1994 actual harvest.
Timber on the Partnership's 793,000 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 harvested after they reach approximately 20-25 years of age. Due to intensive forest and land management as well as silvicultural investment, pine volume available for harvest on the Southeastern Timberlands is expected to increase approximately 2 percent annually. 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 nearly 7 percent greater than the 1994 harvest.
See Federal and State Regulation for a description of issues which may impact Partnership's timber harvest rates.
DESCRIPTION OF TIMBERLANDS
The Timberlands consist of approximately 1.16 million acres, as of December 31, 1994, located in the state of Washington, primarily on the Olympic Peninsula, and in Georgia, Florida, and South Carolina. Approximately 1.03 million acres are owned in fee, while approximately 137,000 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.
ACREAGE. The following table sets forth, as of December 31, 1994, the location and type of ownership that the Partnership has with respect to the Timberlands.
(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 22 years as of December 31, 1994. 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, 1994, total estimated merchantable timber inventory of approximately 10.3 million cunits of wood, of which approximately 79 percent is softwood. See definition of 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 volumes of merchantable timber on the Timberlands by location and type, as of December 31, 1994.
(1) The merchantable timber inventory volumes represent estimates by the Partnership for management purposes based on its continuing inventory system, which involves periodic statistical sampling of the Timberlands, with updating adjustments made on the basis of growth estimates and harvest information. It is not a reflection of the amount of timber that will be available to cut in any specific period of time as future growth is not 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 314,000 acres of conifer (softwood) stands, approximately 74 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 37,000 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, 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 average site index of the conifer lands in the Northwestern Timberlands is also 90 to 145 and averages approximately 110.
The Northwestern Timberlands are near ocean ports and are well-positioned to serve the Pacific Rim export market. Approximately 70 percent of the timber sold from the Northwestern Timberlands has been of export quality. Rayonier operates a pulp mill at Port Angeles. There are also eight 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 656,000 acres of timberlands owned in fee and approximately 137,000 acres held under long-term leases. The Southeastern Timberlands include approximately 510,000 acres of pine (softwood) lands, approximately 268,000 acres of hardwood lands, and approximately 15,000 non-forest acres.
The predominant pine species are loblolly and slash pine. 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. International as well as domestic supply and demand forces (including the value of the U.S. dollar in foreign exchange markets) also affect U.S. regional stumpage prices. 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 the 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.
For further information see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations and Future Operations.
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 Hancock Insurance Company 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, 34 percent of its timber sales in the Northwest and 14 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, 1994. It also shows the volumes of timber on the Timberlands that were sold to unaffiliated purchasers for the periods indicated.
Rayonier continues to rely on the Timberlands as one of its sources of timber for its pulp mills, sawmill facilities, and its log trading business. For example, although Rayonier directly purchased only 5 percent of the Partnership's 1994 Southeast harvest volume, the Partnership estimates that an additional 13 percent of its pulpwood timber sold in the Southeast in 1994 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. The Partnership's strategy is to award contracts during those periods of the year (typically the first and fourth quarters) in which it expects to receive the best prices. However, under current market conditions, the Partnership is placing fewer sales out for bid at one time. See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations.
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 1994, approximately 91 percent in the Northwest and 74 percent in the Southeast of the total contract value of 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 contract value awarded through direct negotiation in 1994, approximately 3 percent in the Northwest and 7 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.
For information as to timber sales contracts in effect at December 31, 1994, see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations.
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, which is comprised of non-employee directors, reviews these transactions and obtains opinions from outside consultants as to their fairness.
ENVIRONMENTAL PROTECTION
Management of the Timberlands 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 a program with the Georgia Department of Natural Resources to monitor hairy rattleweed, a threatened species, and another 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.
The costs of environmental compliance by the Partnership have not been significant and are not expected to be significant in the future. The Partnership does not project any significant capital expenditures for environmental protection.
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 four 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 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. The U.S. Fish and Wildlife Service has developed a proposed rule under the ESA to redefine protective measures for the northern spotted owl on private lands. This rule, as currently drafted, would reduce the harvest restrictions on private lands except within specified special emphasis areas, where restrictions would be increased. One proposed special emphasis area is on the Olympic Peninsula, where a significant portion of the Partnership's Washington timberlands is located. Separately, the state of Washington Forest Practices Board is in the process of adopting new harvest regulations to protect the northern spotted owl and the marbled murrelet (also recently listed as a threatened species). The State Department of Natural Resources draft of this rule also provides for a special emphasis area to protect the northern spotted owl on the Olympic Peninsula, which would increase harvest restrictions on the Partnership's lands. The Partnership is unable at this time to predict the form in which the federal or state rules will eventually be adopted. However, if either rule is adopted in the form proposed by the respective agencies, the result will be some reduction in the volume of Partnership timber available for harvest.
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 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 on 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 17,000 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.
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:
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 that the Partnership continues 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, there will be no distributions of the partners' capital accounts, but the Primary Account will be closed following distribution of any cash remaining in that account (after the repayment of all Partnership borrowings attributed to the Primary Account) concurrently to all partners in accordance with their respective Primary Account percentage interests as indicated in the above table. The Managing General Partner expects that most of the cash credited to the Primary Account (and not used to repay borrowings) will have been distributed prior to the end of the Initial Term. Therefore, unitholders should not expect to receive a return of their original investment or any substantial amount of cash as a result of the end of the Initial Term on December 31, 2000. After 2000, all unitholders and General Partners will only participate in the Secondary Account, so that Class A unitholders will then have a 4 percent interest in all Partnership activities. Through the Initial Term, the Secondary Account will incur substantial debt attributable to reforestation and the management of the timber base to be cut after the year 2000. This debt will have to be repaid from future cash flow beginning in 2001 and will reduce the amount available for distribution after the end of the Initial Term.
CLASS A UNITHOLDERS SHOULD EXPECT THAT THE MARKET PRICE OF CLASS A UNITS WILL BEGIN TO DECREASE SUBSTANTIALLY SOMETIME PRIOR TO DECEMBER 31, 2000. AS INDICATED ABOVE, THEY WILL PROBABLY NOT RECEIVE ANY SIGNIFICANT AMOUNT OF CASH AS A RESULT OF THE END OF THE INITIAL TERM IN THE YEAR 2000. THE PERCENTAGE OF CASH AVAILABLE TO THEM FROM PARTNERSHIP HARVESTING ACTIVITIES AFTER THAT YEAR (AFTER ALLOWING FOR THE REPAYMENT OF SECONDARY ACCOUNT DEBT) WILL DECLINE FROM 95 PERCENT TO 4 PERCENT.
DISTRIBUTIONS. A unitholder (Limited Partner) of Rayonier Timberlands, L.P., assuming there are sufficient sales and profits, will receive cash distributions from the Primary Account activity. In accordance with the Partnership Agreement, the distribution policy is to make quarterly distributions to Class A unitholders from cash available from operations after provision for working capital, capital expenditures, asset acquisitions, and such other reserves as the Managing General Partner's Board of Directors deems appropriate.
On February 17, 1995, the Board declared a first quarter distribution of $1.90 per Class A Unit payable on March 31, 1995 to unitholders of record February 28, 1995. The amount represents operating results and distribution of excess working capital from fiscal 1994 operations. The previous quarterly distribution was $1.30. A portion of the distribution represents return of capital, depending on each unitholder's tax basis. As the Initial Term approaches its expiration date (December 31, 2000), the Board has determined that capital needs for reserves, acquisitions, and working capital will be less and that excess cash will be distributed. Future distributions will 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 year following to bring the cumulative distribution in line with Partnership results. The first quarter 1995 distribution of $1.90 includes this adjustment. It is expected that the second quarter distribution will be less than the first. The Board indicated that it would continue to maintain a minimum of cash in working capital to be distributed following the end of the Initial Term.
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.
Beginning with 1994, only a portion of the Partnership's income will constitute unrelated business income. Tax-exempt entities (including IRAs and other retirement plans) may be required to report their income from the Partnership to the Internal Revenue Service as unrelated business taxable income and pay taxes on such income.
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.
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. A cunit equals 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. For convenience, the Partnership follows the convention that timber older than 13 years in the Southeast and 40 years in the Northwest is of minimum merchantable size. It should be recognized that timber of minimum merchantable size has not yet reached its optimum economic value and the typical harvest cycle is about 25 years in the Southeast and 55 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 in a prepared seedbed. 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.
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. which 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.
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.

ITEM 2. PROPERTIES
See Item 1. Business.
ITEM 3.

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.

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.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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, 1995, the high and low market prices of RTLP Class A Units were $38.25 and $35.25.
(a) Includes a $4.00 per Class A Unit special distribution paid on March 31, 1994.
On February 17, 1995, the Board of Directors of RFR declared a first quarter distribution of $1.90 per Class A Unit payable on March 31, 1995 to unitholders of record February 28, 1995. The amount represents operating results and distribution of excess working capital from fiscal 1994 operations. The previous quarterly distribution was $1.30. A portion of the distribution represents return of capital, depending on each unitholder's tax basis. As the Initial Term approaches its expiration date (December 31, 2000), RFR has determined that capital needs for reserves, acquisitions, and working capital will be less and that excess cash will be distributed. Future distributions will 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. The first quarter 1995 distribution of $1.90 includes this adjustment. It is expected that the second quarter distribution will be less than the first. The Board indicated that it would continue to maintain a minimum of cash in working capital to be distributed following the end of the Initial Term. See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Cash Flow.
As of February 28, 1995, there were approximately 2,900 unitholders of record of Class A Units.
ITEM 6.

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.
(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 2.3 million MBF of wood, approximately 92 percent of which is softwood. Stumpage volumes for 1992, 1991, and 1990 exclude the Quinault timberland sales.
(3) The Southeastern Timberlands are in the states of Georgia, Florida, and South Carolina and consist of approximately 793,000 acres owned in fee or held under long-term leases, and contain approximately 19.0 million tons of wood, approximately 66 percent of which is pine.
(4) Cash distributions in 1994 include a $4.00 per Class A Unit special distribution paid on March 31, 1994.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Earnings for 1994 improved 49 percent over 1993 reflecting higher stumpage volume and improved prices in the Partnership's Northwest region as customers carried over 1993 timber sales contracts into the first quarter of 1994.
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):
Timber and timberland sales in 1994 were up 43 percent from 1993. Partnership income was up $40.7 million, or $1.96 per Class A Unit, over 1993 results. Sales in 1993 of $116.0 million, decreased $0.4 million from 1992 and partnership income of $82.2 million decreased 4 percent from 1992, which included significant timberland sales.
Timber harvest sales in 1994 were up 44 percent from 1993, following a 17 percent increase in 1993. Higher 1994 sales resulted from higher stumpage volume and improved prices in the Northwest region as Partnership customers carried over 1993 timber sales contracts into the first quarter of 1994. In 1993, sales reflected an overall improvement in prices due to worldwide concern over timber availability and increased harvest activity in the Southeast region, partially offset by the reduced harvest volume in the Northwest region.
In 1994, timber sales to Rayonier represented 13 percent of total timber sales compared to 17 percent in both 1993 and 1992. Timber sales to three customers under common ownership (not affiliated with the Partnership) accounted for approximately 18 percent, 15 percent, and 10 percent of total timber sales in 1994, 1993, and 1992, respectively. In 1992, the
Partnership also had one other unaffiliated customer who accounted for approximately 12 percent of timber sales. See Note 4 of the accompanying Notes to Financial Statements for further information.
Timberland sales in 1994 were $1.3 million, up $0.2 million from 1993, which, in turn, were $16.7 million lower than 1992 levels. Sales for 1992 included $16.8 million from two major timberland tract sales in the Northwest region to the Quinault Indian Nation. The tracts sold in 1992 contributed $15.6 million to Partnership income and completed the Partnership's program to divest land within the Quinault Indian Reservation.
Income per publicly traded Class A Unit was $6.41 in 1994, up $1.96 from 1993. Results in 1993 were down 4 cents from 1992. Excluding the effect of the 1992 Quinault timberland sales, which generated 61 cents of income per publicly traded Class A Unit, 1993 results improved by 57 cents per unit over the prior year.
Operating cash flow allocable to Class A unitholders, after capital expenditures and certain provisions for working capital, was $132.8 million in 1994, up $40.3 million, or $1.98 per unit, from 1993. Operating cash flow in 1993 was $0.4 million, or 6 cents per unit, lower than 1992. In 1992, operating cash flow allocable to a Class A Unit includes 63 cents from the Quinault timberland sales.
Most of the timber from Partnership lands in the Northwest is resold by the Partnership's customers into log export markets, primarily in Japan, Korea, and China. Unfavorable market conditions in 1993 caused many customers to defer harvesting until 1994. As a result, the harvest level was unusually low in 1993 and unusually high in 1994, rising 36 percent to 194 million board feet. Stumpage prices, which also benefited from the carryover of high-priced 1993 contracts, increased 25 percent over the prior year. As a result of increased volume and prices, 1994 timber sales rose 63 percent to $115.0 million and operating income rose 68 percent to $94.6 million. Although timber sales in 1993 increased 9 percent to $70.6 million, operating income decreased 18 percent to $56.2 million reflecting lower 1993 timberland sales. In 1993, average stumpage prices in the Northwest were 53 percent above 1992 levels as limited timber availability throughout the Northwest caused contract stumpage prices to rise steadily late in 1992 and into the second quarter of 1993. During the second half of 1993, prices declined due to high consumer inventories and a marked increase in alternative global timber supplies. Total 1993 sales volume in the Northwest of 143 million board feet represented a decrease of 27 percent from the 1992 levels as harvesting of contract timber slowed in response to changing market conditions and the Partnership's continuing program of gradually reducing the amount of timber offered in the region. See Future Operations.
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. Timber sales for 1994 were $50.2 million, up $5.9 million from 1993 and operating income increased $5.7 million to $39.2 million. In 1994, harvest volume peaked in the third quarter due to heavy rains and flooding, which caused customers to accelerate harvesting on drier Partnership lands. Harvest volume returned to a more normal level in the fourth quarter. Overall, 1994 pine volume increased 9 percent over the prior year to 1.9 million tons. Pine prices increased approximately 4 percent, reflecting increased demand for high quality sawlogs. In 1993, timber sales were $44.3 million, up 32 percent from 1992, reflecting both stronger pricing and increased harvest volumes. Operating income in the Southeast rose 42 percent to $33.5 million in 1993. Southeast pine prices were 24 percent higher than 1992 levels, benefiting from worldwide concern over timber availability and from strong demand for lumber as a result of the resurgence in U.S. housing. In 1993, Southeast pine volume was 1.7 million tons, increasing 7 percent from 1992.
Corporate and other operating income is comprised of general and administrative expenses not specifically attributable to either the Northwest or Southeast regions. Corporate expenses decreased $0.6 million during 1994 to $1.7 million, primarily due to lower commission expenses paid to a foreign sales corporation affiliated with the Partnership's Special General Partner, Rayonier. Legislation, enacted effective August 10, 1993, eliminated tax benefits related to log exports for foreign sales corporations. The Partnership's commission expense was fully allocated to Rayonier and the General Partners, and therefore the legislation did not impact the earnings or cash flows of the publicly traded Class A Units. See Note 1 of the accompanying Notes to Financial Statements for further information. In 1993, corporate expenses decreased $1.0 million to $2.3 million, reflecting lower commission expenses paid to the foreign sales corporation.
Harvest activity in 1994 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, 50 percent of the full year harvest was cut by June 30, 1994. During 1993 and 1992, harvest activity followed the historical cutting pattern that is more concentrated in the first half of the year, with 59 percent and 60 percent, respectively, of the total cut completed by June 30.
The Partnership is continuing its strategy of gradually reducing the amount of timber offered each year in the Northwest until it reaches a sustainable harvest level. See Future Operations. In the Northwest, the 1995 harvest plan contemplates a harvest volume approximately 7 percent lower than the 1994 volume, which included the 1993 carryover volume. As of December 31, 1994, contracts representing 25 percent of the projected 1995 harvest volume were outstanding. As of
December 31, 1993, outstanding contracts represented 30 percent of the actual 1994 harvest volume. Three customers under common ownership (not affiliated with the Partnership) accounted for approximately 12 percent of the harvest volume under contract as of December 31, 1994. In addition, two other unaffiliated customers accounted for approximately 23 percent and 19 percent, respectively, of the uncut volume under contract at December 31, 1994. Outstanding Northwest contract prices at December 31, 1994 are 14 percent lower than the average of harvest prices realized in 1994. In 1994, realized prices included the effect of the high-priced 1993 carryover volume.
The Southeast 1995 harvest plan anticipates a volume reduction of approximately 5 percent from 1994 to balance 1994's higher than planned harvest. In the Southeast, the Partnership awarded contracts for 32 percent of the 1995 harvest plan volume as of December 31, 1994. As of December 31, 1993, outstanding contracts represented 15 percent of the actual 1994 harvest volume. Average prices on uncut contracts at December 31, 1994 are approximately 11 percent higher than those realized for the 1994 actual harvest in the region.
Operating costs and expenses in 1994 were $37.0 million, up $6.2 million from 1993, which was up $1.0 million from 1992. Cost of timber sold rose $6.5 million in 1994 primarily due to higher logging costs in the Northwest region resulting from increased contract logging and commercial thinning activities. In addition, forest excise taxes and road costs rose due to increased timber sales in the Northwest. In 1993, cost of timber sold rose $2.7 million from 1992, due to higher logging costs in the Northwest region. The cost of timberland sold was $0.4 million in both 1994 and 1993, and was $2.1 million in 1992 due primarily to the Quinault timberland sales.
Interest income, earned mainly from the Primary Account's investment notes of Rayonier, decreased $1.9 million to $3.2 million in 1994 due to a lower average balance of investment notes. Interest expense on increased loans and advances to the Secondary Account by Rayonier rose $1.6 million to $11.1 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 long standing policy has been to reach a sustainable annual harvest level in the Northwest by gradually reducing its harvest volume each year. The projected annual harvest in this region will continue to trend down, with the harvest in the year 2000 approaching 80 percent of the 1994 actual harvest. In the Southeast, due to intensive forest and land management as well as silvicultural investment, pine volume available for harvest is expected to increase approximately 2 percent annually.
Regional timber availability continues to be restricted by legislation, litigation, and pressure from various preservationist groups. Over the past four 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 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. The U.S. Fish and Wildlife Service has developed a proposed rule under the ESA to redefine protective measures for the northern spotted owl on private lands. This rule, as currently drafted, would reduce the harvest restrictions on private lands except within specified special emphasis areas, where restrictions would be increased. One proposed special emphasis area is on the Olympic Peninsula, where a significant portion of the Partnership's Washington timberlands is located. Separately, the state of Washington Forest Practices Board is in the process of adopting new harvest regulations to protect the northern spotted owl and the marbled murrelet (also recently listed as a threatened species). The State Department of Natural Resources draft of this rule also provides for a special emphasis area to protect the northern spotted owl on the Olympic Peninsula, which would increase harvest restrictions on the Partnership's lands. The Partnership is unable at this time to predict the form in which the federal or state rules will eventually be adopted. However, if either rule is adopted in the form proposed by the respective agencies, the result will be some reduction in the volume of Partnership timber available for harvest.
LIQUIDITY AND CASH FLOW
As of December 31, 1994, the Partnership held trade and intercompany receivables from Rayonier and affiliates of $4.2 million. In addition, the Primary Account of the Partnership held $42.7 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 can call 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. At the end of the first quarter of 1994, the Partnership called, or allowed to mature, $75.0 million of the short-term investment notes to fund a special distribution of $4.00 per Class A Unit, which was paid on March 31, 1994. As a result of this transaction, interest income after March 31, 1994 was significantly below the comparable periods of 1993.
The Secondary Account of the Partnership had total outstanding debt of $144.6 million at December 31, 1994, including long-term notes payable to Rayonier of $143.8 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 $13.1 million, $13.4 million, and $14.0 million in 1994, 1993, and 1992, respectively. Capital expenditures are expected to be approximately $14.4 million in 1995. Funding of future capital requirements is expected to continue from Rayonier.
The Partnership made regular distributions of $104.0 million ($5.20 per Class A Unit) and a special distribution of $80.0 million ($4.00 per Class A Unit) in 1994; $92.0 million ($4.60 per Class A Unit) in 1993; and $72.0 million ($3.60 per Class A Unit) in 1992 to all outstanding Class A unitholders. An additional $9.7 million in 1994, $4.8 million in 1993, and $3.8 million in 1992 was distributed in cash to Class B unitholders and to the General Partners. Recontributions of $1.0 million and $1.7 million were made in 1993 and 1992, respectively, by Rayonier and the General Partners of RTLP relating to the commission expense paid to a Rayonier affiliated foreign sales corporation.
On February 17, 1995, the Board of Directors of Rayonier Forest Resources Company (RFR) declared a first quarter distribution of $1.90 per Class A Unit payable on March 31, 1995 to unitholders of record February 28, 1995. The amount represents operating results and distribution of excess working capital from fiscal 1994 operations. The previous quarterly distribution was $1.30. A portion of the distribution represents return of capital, depending on each unitholder's tax basis. As the Initial Term approaches its expiration date (December 31, 2000), RFR has determined that capital needs for reserves, acquisitions and working capital will be less and that excess cash will be distributed. Future distributions will 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. The first quarter 1995 distribution of $1.90 includes this adjustment. It is expected that the second quarter distribution will be less than the first. The Board indicated that it would continue to maintain a minimum of cash in working capital to be distributed following the end of the Initial Term.
WHEN THE INITIAL TERM ENDS ON DECEMBER 31, 2000, THE PRIMARY ACCOUNT OF THE PARTNERSHIP WILL BE CLOSED BUT THERE WILL NOT BE ANY REDEMPTION OF THE PARTNERS' CAPITAL ACCOUNTS. 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. POSITIVE CASH FLOWS WILL BE SUBSTANTIALLY AFFECTED BY SECONDARY ACCOUNT DEBT THAT WILL HAVE TO BE REPAID. AS A RESULT, IT IS EXPECTED THAT THE MARKET PRICE OF CLASS A UNITS SHOULD BEGIN TO DECREASE SUBSTANTIALLY SOMETIME PRIOR TO DECEMBER 31, 2000.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Financial Statements" on Page ii.
ITEM 9.

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.
(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, 61, is Chairman of the Board, President and Chief Executive Officer of Rayonier. He joined 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. Mr. Gross is also currently a director of Lukens Inc. He serves as a member of the Executive Committee of the Board of Directors of the American Forest and Paper Association (AFPA).
WILLIAM J. ALLEY, 65, is Chairman of the Executive Committee and director of American Brands, Inc. (global consumer products holding company). He has been a director of American Brands since 1979 and was Chairman of the Board and Chief Executive Officer of that corporation from 1987 to 1994. He is also a director of Rayonier, CIPSCO Incorporated, Central Illinois Public Service Company, Bunn-O-Matic Corporation, Olin Corporation, and Amsted Industries Incorporated (a private company). He is a senior member of The Conference Board.
MACDONALD AUGUSTE, 46, 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, 53, is Senior Vice President, Forest Resources and Corporate Development of Rayonier. He was 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. Since May 1988 he has served as a Senior Vice President of RFR after having been Vice President of RFR from September 1985. He also serves on the Executive Boards of the American Forest Council and the Center for Streamside Studies.
JOHN B. CANNING, 51, 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 and of the Corporate Bar Association of Westchester and Fairfield, Inc.
DONALD W. GRIFFIN, 58, is President and Chief Operating Officer, Olin Corporation (diversified manufacturing corporation). He joined Olin in 1961 and was elected an Executive Vice President of Olin in 1987. He became a director of Olin in 1990, was elected Vice Chairman of the Board for Operations in 1993, and President and Chief Operating Officer in 1994. He is also a director of Rayonier, River Bend Bancshares, Inc., and Illinois State Bank and Trust. He is a trustee of the Buffalo Bill Historical Center, the Olin Charitable Trust, and the National Security Industrial Association. He is a member of 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.
KENNETH P. JANETTE, 49, is Vice President and Corporate Controller of Rayonier. He joined Rayonier in August 1994 and was elected Vice President and Corporate Controller of Rayonier and RFR in October 1994. He came to Rayonier from Sunkyong America, Inc., a Korean international trading organization, which he joined in 1990 as Corporate Controller. He became a Vice President in 1992. From 1977 to 1990, he served in various capacities with AMAX Inc., most recently as Assistant Corporate Controller and Director of Auditing. He is a Certified Public Accountant and served with Arthur Andersen & Co.
THOMAS W. KEESEE, Jr. 80, is a former Director, President and Chief Executive Officer of Bessemer Securities Corporation and Bessemer Trust Company. He is a corporate director and financial consultant. He is a director emeritus of ITT Corporation (ITT) and of Duke University Asset Management Co. He is former Chairman of the Board of Directors of the National Audubon Society and a former director of King Ranch Inc. From 1985 to 1991, Mr. Keesee served on the Board of Directors of RFR.
GERALD J. POLLACK, 53, is Senior Vice President and Chief Financial Officer of Rayonier. He was elected Senior Vice President and Chief Financial Officer of Rayonier 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 served as Controller of RFR from September 1985 until August 1986, when he became a Vice President as well. He was elected Chief Financial Officer of RFR on March 6, 1989 and a Senior Vice President of RFR on July 27, 1992. He is a member of the New York Advisory Board of The Allendale Insurance Co., the financial management committee of AFPA, and the Financial Executive Institute.
DEROY C. THOMAS, 69, is 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 is retired President and Chief Operating Officer of ITT. Prior to moving to the parent ITT, Mr. Thomas was Chairman, President and Chief Executive Officer of The Hartford Insurance Group. Before going to The Hartford, Mr. Thomas was assistant general counsel of the Association of Casualty and Surety Companies in New York City and was an associate professor of law at Fordham School of Law. Mr. Thomas serves on the board of directors of ITT Hartford, as well as Connecticut Natural Gas Corporation and Houghton Mifflin Company. He also serves as Chairman of the Old State House, Hartford, CT; Chairman of the Connecticut Health System, Inc., Hartford, CT; Director, Goodspeed Opera House; Trustee, Fordham University; Trustee Emeritus, University of Hartford and as a member of the Advisory Board of Iona College. From 1987 to 1991, Mr. Thomas served on the Board of Directors of RFR.
ITEM 11.

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 two directors of RFR who are directors but not employees of Rayonier receive a $750 fee for each Board meeting attended. These fees were paid by RFR and charged to the Partnership. During 1994, the Partnership was charged for compensation paid to 13 officers and directors of RFR in an amount totaling $241,000. The Partnership was not charged for cash compensation to any officer or director of RFR in excess of $100,000.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All references to beneficial ownership in this Item 12 are as of March 14, 1995.
ITEM 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.

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 page 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.
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, which is comprised of 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, which is comprised of non-employee directors, reviews these transactions and obtains opinions from outside consultants as to their fairness.
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, 1994 and 1993, and the related statements of income, cash flows, and partners' capital for each of the three years in the period ended December 31, 1994. 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, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut January 31, 1995
RAYONIER TIMBERLANDS, L.P.
STATEMENTS OF INCOME
FOR THE THREE YEARS ENDED DECEMBER 31, 1994 Thousands, except per unit information
The accompanying Notes to Financial Statements are an integral part of these financial statements.
RAYONIER TIMBERLANDS, L.P.
BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND 1993 Thousands
ASSETS
LIABILITIES AND PARTNERS' CAPITAL
The accompanying Notes to Financial Statements are an integral part of these financial statements.
RAYONIER TIMBERLANDS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1994 Thousands
The accompanying Notes to Financial Statements are an integral part of these financial statements.
RAYONIER TIMBERLANDS, L.P.
STATEMENTS OF PARTNERS' CAPITAL
FOR THE THREE YEARS ENDED DECEMBER 31, 1994 Thousands
The accompanying Notes to Financial Statements are an integral part of these financial statements.
RAYONIER TIMBERLANDS, L.P.
NOTES TO FINANCIAL STATEMENTS
(Dollar amounts in thousands, 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 timberlands business 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 follows:
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.
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 are 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, pre-commercial thinning, and similar activities, 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.
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.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 reduce Rayonier's and RFR's income from RTLP and RTOC and the cash flow attributed to their Partnership interests. The special allocations do 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 will not incur foreign sales commission expense for sales made after August 10, 1993. However, during the second quarter of 1994, the Partnership recorded commission expenses 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 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 presentation.
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 have been 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 recoverable 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.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 and for recontributions to RTLP by Rayonier and RFR as follows:
The amount recontributed by Rayonier and RFR is equal to the foreign sales commission expense paid by the Partnership during the year, which was fully allocated to Rayonier and the General Partners. See Special Allocations.
In addition to the RTLP distributions, RTOC distributed $1,242, $978, and $764, in 1994, 1993, and 1992, respectively, to its General Partners. Recontributions were also made to RTOC by the General Partners for their interest in the commission expense paid.
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:
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, 1994, 1993, and 1992 totaled $21,935, $19,929, and $16,982, 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.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The balances in the current RTLP intercompany accounts with Rayonier as of December 31 were as follows:
Interest income received from Rayonier on the Primary Intercompany Account balance was $197 and $147 in 1994 and 1993 on an average outstanding receivable of $4,163 and $4,185, respectively. Interest expense paid to Rayonier on the Secondary Intercompany Account was $492 and $334 in 1994 and 1993 on an average outstanding payable of $12,447 and $11,740, 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 $6,799, $6,850, and $6,031 in 1994, 1993, and 1992, respectively.
4. MAJOR UNAFFILIATED CUSTOMERS
Sales for 1994, 1993, and 1992 include timber stumpage sales of $29,300, $16,900, and $10,200, respectively, to three customers affiliated with the Quinault Indian Nation. In addition, sales for 1992 include $16,800 from two major timberland tract sales in the Northwest to the Quinault Indian Nation.
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 being 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, 1994 and 1993, the RTLP Primary Account included investment notes of Rayonier of $47,700 and $106,200, respectively. The notes bear fixed interest rates that range from 6.8 to 8.1 percent, as of December 31, 1994, and 3.9 to 4.2 percent, as of December 31, 1993. The fair value of the investment notes of Rayonier approximates its carrying value.
The weighted average interest rate, based on the principal amount, was 6.9 percent as of December 31, 1994 and 4.1 percent as of December 31, 1993. Interest income earned by the Primary Account on the investment notes of Rayonier was $3,043, $4,964, and $5,718 in 1994, 1993, and 1992, 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, pre-commercial thinning, and similar activities, 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 a note bearing interest through 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 $143,800 and $120,900 as of December 31, 1994 and 1993, respectively. Based on the spread over the current rates of U.S. Government Notes having a maturity date in early 2001, the fair value of the long-term notes payable to Rayonier is $143,500.
At both December 31, 1994 and 1993, interest rates on the individual notes range from 6.5 to 10.6 percent, with a weighted average interest rate of 8.7 percent. Interest expense incurred by the Secondary Account on the notes payable to Rayonier was $10,596, $9,118, and $7,737 in 1994, 1993, and 1992, respectively.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM TIMBER OBLIGATIONS
As of December 31, 1994 and 1993, total timber obligations amounted to $793 and $931, respectively. Interest rates ranged from 6.0 to 8.6 percent, with a weighted average interest rate of 8.4 percent at both December 31, 1994 and 1993.
The obligations are payable as follows: 1995 - $148; 1996 - $159; 1997 - $149; 1998 - $162; and 1999 - $175.
8. ENVIRONMENTAL MATTERS
Over the past four 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 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. The U.S. Fish and Wildlife Service has developed a proposed rule under the ESA to redefine protective measures for the northern spotted owl on private lands. This rule, as currently drafted, would reduce the harvest restrictions on private lands except within specified special emphasis areas, where restrictions would be increased. One proposed special emphasis area is on the Olympic Peninsula, where a significant portion of the Partnership's Washington timberlands is located. Separately, the state of Washington Forest Practices Board is in the process of adopting new harvest regulations to protect the northern spotted owl and the marbled murrelet (also recently listed as a threatened species). The State Department of Natural Resources draft of this rule also provides for a special emphasis area to protect the northern spotted owl on the Olympic Peninsula, which would increase harvest restrictions on the Partnership's lands. The Partnership is unable at this time to predict the form in which the federal or state rules will eventually be adopted. However, if either rule is adopted in the form proposed by the respective agencies, the result will be some reduction in the volume of Partnership timber available for harvest.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. 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:
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. OPERATING CASH FLOW ALLOCABLE TO CLASS A UNITS
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:
QUARTERLY RESULTS FOR 1994 AND 1993 (unaudited): (Thousands, except per unit information)
(a) Includes a $4.00 per Class A Unit special distribution paid on March 31, 1994.
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 24, 1995
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
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EXHIBIT INDEX
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EXHIBIT INDEX (CONTINUED)
* Registrant's only subsidiary is Rayonier Timberlands Operating Company, L.P., a Delaware limited partnership in which Registrant holds a 99% limited partner's interest. See Item 1 - "Business - Description of Business."
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