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Table of Contents
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
    (Mark One)
 
x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2002
 
OR
 
¨     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                         to                        
 
COMMISSION FILE NUMBER 1-6780
 
 
RAYONIER INC.
 
Incorporated in the State of North Carolina
I.R.S. Employer Identification Number 13-2607329
 
50 North Laura Street, Jacksonville, FL 32202
(Principal Executive Office)
 
Telephone Number: (904) 357-9100
 
Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of l934 during the preceding l2 months and (2) has been subject to such filing requirements for the past 90 days.
 
YES x     NO ¨
 
As of July 31, 2002, there were outstanding 27,752,168 Common Shares of the Registrant.
 

Table of Contents
 
RAYONIER INC.
FORM 10-Q
JUNE 30, 2002
 
TABLE OF CONTENTS
 
         
PAGE
PART I.
        
Item l.
        
       
1
       
2
       
3
       
4
Item 2.
      
9
Item 3.
      
14
PART II.
        
Item 1.
      
15
Item 4.
      
15
Item 5.
      
16
Item 6.
      
18
       
18
       
19

Table of Contents
 
PART I.     FINANCIAL INFORMATION
 
Item I.     Financial Statements
 
RAYONIER INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(unaudited)
(Thousands of dollars, except per share data)
 
    
Three Months Ended June 30,
       
Six Months Ended June 30,
  
    
2002
       
2001
       
2002
       
2001
  
SALES
   
$
269,276
 
     
$
336,705
 
     
$
537,980
 
     
$
606,000
 
    
    
    
    
COSTS AND EXPENSES
                                          
Cost of sales
   
 
220,763
 
     
 
262,781
 
     
 
450,051
 
     
 
487,437
 
Selling and general expenses
   
 
10,361
 
     
 
9,635
 
     
 
21,816
 
     
 
17,193
 
Other operating income, net
   
 
(1,363
)
     
 
(81
)
     
 
(793
)
     
 
(551
)
    
    
    
    
    
 
229,761
 
     
 
272,335
 
     
 
471,074
 
     
 
504,079
 
    
    
    
    
OPERATING INCOME
   
 
39,515
 
     
 
64,370
 
     
 
66,906
 
     
 
101,921
 
Interest expense
   
 
(15,094
)
     
 
(17,537
)
     
 
(30,317
)
     
 
(36,452
)
Interest and miscellaneous (expense) income, net
   
 
(45
)
     
 
737
 
     
 
331
 
     
 
214
 
    
    
    
    
INCOME FROM CONTINUING OPERATIONS, BEFORE TAX
   
 
24,376
 
     
 
47,570
 
     
 
36,920
 
     
 
65,683
 
Provision for income taxes
   
 
(6,783
)
     
 
(16,082
)
     
 
(10,350
)
     
 
(22,060
)
    
    
    
    
INCOME FROM CONTINUING OPERATIONS
   
 
17,593
 
     
 
31,488
 
     
 
26,570
 
     
 
43,623
 
    
    
    
    
DISCONTINUED OPERATIONS (Note 3)
                                          
Loss on sale of discontinued operations, net of income tax expense of $3,260
   
 
(1,743
)
     
 
—  
 
     
 
(1,743
)
     
 
—  
 
Income (loss) from discontinued operations, net of income tax expense of $373, $176, $739 and $387
   
 
392
 
     
 
(25
)
     
 
816
 
     
 
92
 
    
    
    
    
(LOSS) INCOME FROM DISCONTINUED OPERATIONS
   
 
(1,351
)
     
 
(25
)
     
 
(927
)
     
 
92
 
    
    
    
    
NET INCOME
   
 
16,242
 
     
 
31,463
 
     
 
25,643
 
     
 
43,715
 
OTHER COMPREHENSIVE INCOME (LOSS)
                                          
Unrealized gain on hedged transactions, net of income tax expense of $280, $0, $474 and $0
   
 
497
 
     
 
—  
 
     
 
843
 
     
 
—  
 
    
    
    
    
COMPREHENSIVE INCOME
   
$
16,739
 
     
$
31,463
 
     
$
26,486
 
     
$
43,715
 
    
    
    
    
EARNINGS / (LOSS) PER COMMON SHARE
                                          
BASIC EARNINGS / (LOSS) PER SHARE
                                          
Continuing operations
   
$
0.64
 
     
$
1.16
 
     
$
0.97
 
     
$
1.61
 
Discontinued operations
   
 
(0.05
)
     
 
—  
 
     
 
(0.04
)
     
 
—  
 
    
    
    
    
Net income
   
$
0.59
 
     
$
1.16
 
     
$
0.93
 
     
$
1.61
 
    
    
    
    
DILUTED EARNINGS / (LOSS) PER SHARE
                                          
Continuing operations
   
$
0.62
 
     
$
1.14
 
     
$
0.94
 
     
$
1.58
 
Discontinued operations
   
 
(0.05
)
     
 
—  
 
     
 
(0.04
)
     
 
0.01
 
    
    
    
    
Net income
   
$
0.57
 
     
$
1.14
 
     
$
0.90
 
     
$
1.59
 
    
    
    
    
 
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these consolidated statements.

1

Table of Contents
 
RAYONIER INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Thousands of dollars)
 
    
June 30,
2002
   
December 31,
2001
  
ASSETS
CURRENT ASSETS
                
Cash and cash equivalents
   
$
38,691
   
$
14,123
 
Accounts receivable, less allowance for doubtful accounts of $2,931 and $3,392
   
 
100,246
   
 
101,480
 
Inventory
                
Finished goods
   
 
64,363
   
 
55,530
 
Work in process
   
 
9,279
   
 
8,570
 
Raw materials
   
 
9,603
   
 
9,636
 
Manufacturing and maintenance supplies
   
 
17,179
   
 
17,274
 
    
  
Total inventory
   
 
100,424
   
 
91,010
 
Notes receivable
   
 
50,500
   
 
—  
 
Timber purchase agreements
   
 
18,003
   
 
18,996
 
Other current assets
   
 
8,544
   
 
9,451
 
    
  
Total current assets
   
 
316,408
   
 
235,060
 
    
  
OTHER ASSETS
   
 
74,061
   
 
77,448
 
TIMBER, TIMBERLANDS AND LOGGING ROADS, NET OF DEPLETION AND AMORTIZATION
   
 
1,048,324
   
 
1,131,723
 
PROPERTY, PLANT AND EQUIPMENT
                
Land, buildings, machinery and equipment
   
 
1,377,727
   
 
1,371,550
 
Less—accumulated depreciation
   
 
827,720
   
 
790,769
 
    
  
Total property, plant and equipment, net
   
 
550,007
   
 
580,781
 
    
  
TOTAL ASSETS
   
$
1,988,800
   
$
2,025,012
 
    
  
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
                
Accounts payable
   
$
66,273
   
$
65,247
 
Bank loans and current maturities
   
 
400
   
 
7,600
 
Accrued taxes
   
 
18,324
   
 
13,606
 
Accrued payroll and benefits
   
 
12,945
   
 
14,471
 
Accrued interest
   
 
26,179
   
 
6,391
 
Accrued customer incentives
   
 
7,049
   
 
12,935
 
Other current liabilities
   
 
18,539
   
 
17,360
 
Current reserves for dispositions
   
 
15,230
   
 
15,310
 
    
  
Total current liabilities
   
 
164,939
   
 
152,920
 
    
  
DEFERRED INCOME TAXES
   
 
133,737
   
 
131,723
 
LONG-TERM DEBT
   
 
768,021
   
 
842,205
 
NON-CURRENT RESERVES FOR DISPOSITIONS
   
 
149,909
   
 
153,394
 
OTHER NON-CURRENT LIABILITIES
   
 
39,359
   
 
35,976
 
SHAREHOLDERS' EQUITY
                
Common Shares, 60,000,000 shares authorized, 27,747,168 and 27,345,395 shares issued and outstanding
   
 
77,213
   
 
59,721
 
Retained earnings
   
 
655,481
   
 
649,775
 
Accumulated other comprehensive income (loss)
   
 
141
   
 
(702
)
    
  
    
 
732,835
   
 
708,794
 
    
  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
   
$
1,988,800
   
$
2,025,012
 
    
  
 
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these consolidated statements.

2

Table of Contents
 
RAYONIER, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Thousands of dollars)
 
    
Six Months Ended June 30,
  
    
2002
     
2001
  
OPERATING ACTIVITIES
                  
Income from continuing operations
   
$
26,570
 
   
$
43,623
 
Non-cash items included in income:
                  
Depreciation, depletion and amortization
   
 
80,230
 
   
 
96,830
 
Deferred income taxes
   
 
(3,269
)
   
 
(703
)
Non-cash cost of land sales
   
 
3,273
 
   
 
8,170
 
Increase (decrease) in other non-current liabilities
   
 
7,373
 
   
 
(33
)
Change in accounts receivable, inventory and accounts payable
   
 
(8,555
)
   
 
(25,032
)
Decrease in current timber purchase agreements and other current assets
   
 
2,626
 
   
 
8,388
 
Decrease in other assets
   
 
2,715
 
   
 
4,437
 
Increase in accrued liabilities
   
 
20,229
 
   
 
13,856
 
Expenditures for dispositions, net of tax benefits of $1,284 and $1,411
   
 
(2,281
)
   
 
(2,370
)
    
  
Cash provided by operating activities of continuing operations
   
 
128,911
 
   
 
147,166
 
    
  
INVESTING ACTIVITIES
                  
Capital expenditures, net of sales and retirements of $1,205 and $237
   
 
(33,597
)
   
 
(38,580
)
    
  
Cash used for investing activities of continuing operations
   
 
(33,597
)
   
 
(38,580
)
    
  
FINANCING ACTIVITIES
                  
Issuance of debt
   
 
41,110
 
   
 
135,000
 
Repayment of debt
   
 
(123,310
)
   
 
(228,795
)
Dividends paid
   
 
(19,937
)
   
 
(19,552
)
Repurchase of common shares
   
 
(1,146
)
   
 
—  
 
Issuance of common shares
   
 
13,640
 
   
 
4,015
 
    
  
Cash used for financing activities of continuing operations
   
 
(89,643
)
   
 
(109,332
)
    
  
CASH PROVIDED BY DISCONTINUED OPERATIONS
   
 
18,897
 
   
 
1,035
 
    
  
CASH AND CASH EQUIVALENTS
                  
Increase in cash and cash equivalents
   
 
24,568
 
   
 
289
 
Balance, beginning of period
   
 
14,123
 
   
 
9,824
 
    
  
Balance, end of period
   
$
38,691
 
   
$
10,113
 
    
  
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
                  
Cash paid during the period for:
                  
Interest
   
$
9,207
 
   
$
21,972
 
    
  
Income taxes
   
$
8,253
 
   
$
14,221
 
    
  
NON-CASH INVESTING AND FINANCING ACTIVITIES:
                  
Note receivable from sale of New Zealand East Coast operations
   
$
52,500
 
   
$
—
 
    
  
 
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these consolidated statements.

3

Table of Contents
 
RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollar amounts in thousands unless otherwise stated)
 
1.
 
BASIS OF PRESENTATION
 
The unaudited financial statements reflect, in the opinion of Rayonier Inc. and subsidiaries (“Rayonier” or “the Company”), all adjustments (which include normal recurring adjustments) necessary for a fair presentation of the results of operations, the financial position and the cash flows for the periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires the use of certain estimates by management (e.g., useful economic lives of assets) in determining the amount of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. There are risks inherent in estimating, and therefore, actual results could differ from those estimates. For a full description of the Company’s significant accounting policies, please refer to the Notes to Consolidated Financial Statements in the 2001 Annual Report on Form 10-K.
 
New Accounting Standards
 
In April 2002, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 145, Rescission of FASB Statements No 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. As allowed by the FASB, the Company early adopted the Standard on April 1, 2002. During the second quarter of 2002, the Company refinanced $23.1 million of its revenue bonds. In accordance with the Standard, the write-off of the balance of the deferred financing fees of $0.2 million and the premium of $0.5 million paid upon the redemption of the original bonds were not classified as an extraordinary item in the Company’s Condensed Statements of Consolidated Income.
 
Reclassifications
 
Certain items in prior year’s condensed consolidated financial statements have been reclassified to conform to the current year presentation.
 
2.    EARNINGS PER COMMON SHARE
 
The following table provides details of the calculation of basic and diluted earnings per common share (share and earnings per share amounts actual):
 
    
Three Months Ended June 30,
    
Six Months Ended June 30,
    
2002
     
2001
     
2002
     
2001
Income from continuing operations
   
$
17,593
 
   
$
31,488
 
   
$
26,570
 
   
$
43,623
(Loss) income from discontinued operations
   
 
(1,351
)
   
 
(25
)
   
 
(927
)
   
 
92
    
  
  
  
Net income
   
$
16,242
 
   
$
31,463
 
   
$
25,643
 
   
$
43,715
    
  
  
  
Shares used for determining basic earnings per common share
   
 
27,728,798
 
   
 
27,166,182
 
   
 
27,628,014
 
   
 
27,145,779
Dilutive effect of:
                                  
Stock options
   
 
345,986
 
   
 
216,054
 
   
 
330,556
 
   
 
210,763
Contingent shares
   
 
250,000
 
   
 
202,000
 
   
 
250,000
 
   
 
202,000
    
  
  
  
Shares used for determining diluted earnings per common share
   
 
28,324,784
 
   
 
27,584,236
 
   
 
28,208,570
 
   
 
27,558,542
    
  
  
  
Basic earnings per common share
                                  
Continuing operations
   
$
0.64
 
   
$
1.16
 
   
$
0.97
 
   
$
1.61
Discontinued operations
   
 
(0.05
)
   
 
—  
 
   
 
(0.04
)
   
 
—  
    
  
  
  
Net income
   
$
0.59
 
   
$
1.16
 
   
$
0.93
 
   
$
1.61
    
  
  
  
Diluted earnings per common share
                                  
Continuing operations
   
$
0.62
 
   
$
1.14
 
   
$
0.94
 
   
$
1.58
Discontinued operations
   
 
(0.05
)
   
 
—  
 
   
 
(0.04
)
   
 
0.01
    
  
  
  
Net income
   
$
0.57
 
   
$
1.14
 
   
$
0.90
 
   
$
1.59
    
  
  
  

4

Table of Contents
 
RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollar amounts in thousands unless otherwise stated)
 
3.    SHAREHOLDERS’ EQUITY
 
An analysis of shareholders’ equity for the six months ended June 30, 2002, and the year ended December 31, 2001, follows (share amounts actual):
 
    
Common Shares
       
Accumulated
Other
Comprehensive
     
Retained
     
Shareholders’
  
    
Shares
     
Amount
       
Income/(Loss)
     
Earnings
     
Equity
  
January 1, 2001
   
27,104,462
 
   
$
48,717
 
     
$
—  
 
   
$
631,384
 
   
$
680,101
 
Net income
   
—  
 
   
 
—  
 
     
 
—  
 
   
 
57,598
 
   
 
57,598
 
Dividends paid ($1.44 per share)
   
—  
 
   
 
—  
 
     
 
—  
 
   
 
(39,207
)
   
 
(39,207
)
Issuance of shares under incentive stock plans
   
293,833
 
   
 
11,561
 
     
 
—  
 
   
 
—  
 
   
 
11,561
 
Unrealized gain on hedged transactions
   
—  
 
   
 
—  
 
     
 
7
 
   
 
—  
 
   
 
7
 
Minimum pension liability adjustments
   
—  
 
   
 
—  
 
     
 
(709
)
   
 
—  
 
   
 
(709
)
Repurchase of common shares
   
(52,900
)
   
 
(2,031
)
     
 
—  
 
   
 
—  
 
   
 
(2,031
)
Tax benefit on exercise of stock options
   
—  
 
   
 
1,474
 
     
 
—  
 
   
 
—  
 
   
 
1,474
 
    
  
    
  
  
December 31, 2001
   
27,345,395
 
   
 
59,721
 
     
 
(702
)
   
 
649,775
 
   
 
708,794
 
Net income
   
—  
 
   
 
—  
 
     
 
—  
 
   
 
25,643
 
   
 
25,643
 
Dividends paid ($0.72 per share)
   
—  
 
   
 
—  
 
     
 
—  
 
   
 
(19,937
)
   
 
(19,937
)
Issuance of shares under incentive stock plans
   
424,673
 
   
 
16,265
 
     
 
—  
 
   
 
—  
 
   
 
16,265
 
Unrealized gain on hedged transactions, net
   
—  
 
   
 
—  
 
     
 
843
 
   
 
—  
 
   
 
843
 
Repurchase of common shares
   
(22,900
)
   
 
(1,146
)
     
 
—  
 
   
 
—  
 
   
 
(1,146
)
Tax benefit on exercise of stock options
   
—  
 
   
 
2,373
 
     
 
—  
 
   
 
—  
 
   
 
2,373
 
    
  
    
  
  
June 30, 2002
   
27,747,168
 
   
$
77,213
 
     
$
141
 
   
$
655,481
 
   
$
732,835
 
    
  
    
  
  
 
4.
 
SEGMENT INFORMATION
 
Rayonier operates in three reportable segments: Performance Fibers, Timber and Land, and Wood Products and Trading.
 
Total assets by segment were as follows:
 
    
June 30, 2002
   
December 31, 2001
Performance Fibers
   
$
556,653
   
$
576,265
Timber and Land
   
 
1,187,212
   
 
1,210,676
Wood Products and Trading
   
 
200,084
   
 
205,818
Corporate and other
   
 
34,477
   
 
21,829
Dispositions
   
 
10,374
   
 
10,424
    
  
Total
   
$
1,988,800
   
$
2,025,012
    
  

5

Table of Contents
 
RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollar amounts in thousands unless otherwise stated)
 
The amounts and relative contributions to sales and operating income (loss) attributable to each of Rayonier’s reportable segments were as follows (thousands of dollars):
 
    
Three Months Ended June 30,
     
Six Months Ended June 30,
  
    
2002
     
2001
     
2002
     
2001
  
SALES
                                    
Performance Fibers
   
$
124,110
 
   
$
145,723
 
   
$
253,400
 
   
$
284,755
 
Timber and Land
   
 
58,013
 
   
 
109,987
 
   
 
119,404
 
   
 
171,446
 
Wood Products and Trading
   
 
91,249
 
   
 
82,626
 
   
 
172,881
 
   
 
159,244
 
Intersegment Eliminations
   
 
(4,096
)
   
 
(1,631
)
   
 
(7,705
)
   
 
(9,445
)
    
  
  
  
TOTAL SALES
   
$
269,276
 
   
$
336,705
 
   
$
537,980
 
   
$
606,000
 
    
  
  
  
OPERATING INCOME (LOSS)
                                    
Performance Fibers
   
$
10,701
 
   
$
13,158
 
   
$
17,282
 
   
$
27,878
 
Timber and Land
   
 
31,643
 
   
 
55,763
 
   
 
60,955
 
   
 
91,947
 
Wood Products and Trading
   
 
(9
)
   
 
(312
)
   
 
(2,440
)
   
 
(6,972
)
Corporate and other
   
 
(2,820
)
   
 
(4,239
)
   
 
(8,891
)
   
 
(10,932
)
    
  
  
  
TOTAL OPERATING INCOME
   
$
39,515
 
   
$
64,370
 
   
$
66,906
 
   
$
101,921
 
    
  
  
  
 
Operating income (loss) as stated in the preceding tables and as presented in the Condensed Statements of Consolidated Income is equal to Segment income (loss). The income (loss) items below “Operating income” in the Condensed Statements of Consolidated Income are not allocated to segments. These items, which include interest (expense) income, miscellaneous income (expense) and income tax (expense) benefit, are not considered by Company management to be part of segment operations.
 
5.    DISCONTINUED OPERATIONS
 
During the second quarter of 2002, the Company sold its New Zealand East Coast timberland operations and associated assets for $64.4 million. At closing the Company received $11.9 million in cash and a note receivable for $52.5 million. The note is payable in interest-bearing monthly payments through December 30, 2002. During June 2002, the Company received its first monthly installment payment of $2 million on the note receivable. Also, monthly payments have been and will be deposited in a trust, payable to Rayonier at December 30, 2002. In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the sale and results of operations were recorded as a discontinued operation. The Company recorded an after-tax loss from discontinued operations of approximately $1.3 million or $0.05 per share in the second quarter of 2002, consisting of an after-tax loss of approximately $1.7 million from the sale, net of after-tax income from East Coast operations of $0.4 million. The Condensed Statements of Consolidated Income, Condensed Statements of Consolidated Cash Flows and related Notes have been reclassified to present the East Coast operations as a discontinued operation. The East Coast operations and associated assets were previously reported in the Company’s Timber and Land and Wood Products and Trading segments.
 
Operating results of the discontinued operation are summarized below:
 
    
Three Months Ended
     
Six Months Ended
    
June 30,
     
June 30,
    
2002
   
2001
     
2002
   
2001
Net sales
   
11,442
   
9,658
 
   
19,005
   
16,850
Operating income
   
572
   
153
 
   
1,365
   
479
Net income/(loss) from discontinued operations
   
392
   
(25
)
   
816
   
92

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RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollar amounts in thousands unless otherwise stated)
 
The Condensed Consolidated Balance Sheets, which have not been reclassified, include assets and liabilities of discontinued operations as follows:
 
    
June 30, 2002
     
December 31, 2001
Current assets
   
$
2,560
     
$
4,017
Long-term assets
   
 
—  
     
 
65,822
    
    
Total assets
   
 
2,560
     
 
69,839
Current liabilities
   
 
1,767
     
 
1,350
Other liabilities
   
 
—  
     
 
1,366
    
    
Net assets of discontinued operations
   
$
793
     
$
67,123
    
    
 
A provision in the Company’s original agreement to purchase the East Coast property from the New Zealand government requires the Company, in the event of a sale, to guarantee five years of Crown Forest license obligations, estimated at $1.2 million per year. However, the purchaser (Huaguang Forests Co. Limited of China) is the primary obligor and has posted a performance bond with the New Zealand government.
 
6.    FINANCIAL INSTRUMENTS
 
The Company is exposed to various market risks, including changes in commodity prices, interest rates and foreign exchange rates. The Company’s objective is to minimize the economic impact of these market risks. Derivatives are used, as noted below, in accordance with policies and procedures approved by the Finance Committee of the Board of Directors and are managed by a senior executive committee, whose responsibilities include initiating, managing and monitoring resulting exposures. The Company does not enter into such financial instruments for trading purposes.
 
In our New Zealand timber operations and at our New Zealand medium density fiberboard (“MDF”) manufacturing facility, certain normal operating expenses, including contractor and license fees, care and maintenance of timberlands, salaries and wages, wood purchases and other production costs incurred in manufacturing MDF, are denominated in New Zealand dollars. Rayonier hedges US/New Zealand dollar currency rate-risk with respect to these operating expenditures (cash flow hedging).
 
In the Company’s Condensed Statements of Consolidated Income for the three and six months ended June 30, 2002, gains of approximately $0.1 million and $0.4 million, respectively, were recorded on foreign currency contracts reflecting primarily realized gains on contracts that matured, plus the time value changes for outstanding contracts. The Company recorded mark to market after-tax gains on foreign currency contracts of approximately $0.8 million in “Accumulated other comprehensive income (loss)” (“AOCI”) in the Condensed Consolidated Balance Sheet as of June 30, 2002. When the forecasted transactions come to fruition and are recorded, the amounts in AOCI are reclassified to the Condensed Statements of Consolidated Income. We expect to reclassify this amount into earnings during the next ten months.
 
At June 30, 2002, the Company held foreign currency forward contracts maturing through April 2003 totaling $11.0 million (nominal value). The largest amount of contracts outstanding during the first six months of 2002 totaled $13.1 million (nominal value).
 
In March 2002, the Company entered into an interest rate swap on $50 million of 6.15% fixed rate notes payable maturing in February 2004. The swap converts interest payments from fixed rates to floating rates and matures in February 2004. The interest rate swap qualifies as a fair value hedge under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. As such, the net effect from the interest rate swap is recorded as part of interest expense. The swap agreement settles every May 15, and November 15, until maturity. During the second quarter, the Company’s interest expense was reduced by $0.3 million. Based upon the current interest rates for similar transactions, the fair value of the interest rate swap agreement resulted in an asset of approximately $0.8 million and an increase in debt of approximately $0.8 million at June 30, 2002.

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RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollar amounts in thousands unless otherwise stated)
 
7.    LEGAL PROCEEDINGS
 
The Company considers the accounting for its environmental liabilities to be one of its critical accounting policies. Between 1985 and 1995, the Company sent contaminated soil excavated in connection with the cleanup of various closed wood processing sites to a third-party processor for recycling. The processing facility closed in 1995 and is the subject of a variety of environmental related charges by the EPA and the Louisiana Department of Environmental Quality. Also in dispute is disposal liability for approximately 150,000 tons of recycled material from Company sites that are still owned and retained by the processor. A consent decree was entered in 1998 approving sale of the processing facility and assumption by the buyer of responsibility for movement of all remaining recycled material to a landfill. The parties have been unable to complete the sale and the consent decree was vacated in May 2002. As a result, the status of the sale of the facility and ultimate responsibility for removal and disposal of the recycled material on-site are now uncertain. There are numerous possible outcomes, including the purchase of the facility by a third-party recycler, that will determine the Company’s ultimate liability, if any. None of these outcomes are considered sufficiently probable at this time to warrant the recognition of a liability in the Company’s financial statements. The Company is unable to formulate a range of possible losses. As such, the final outcome could have a material adverse effect on the Company’s results of operations.

8

Table of Contents
 
PART I.    FINANCIAL INFORMATION
 
Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Critical Accounting Policies
 
The preparation of Rayonier’s financial statements requires estimates, assumptions and judgements that affect the Company’s assets, liabilities, revenues and expenses. The Company bases these estimates and assumptions on historical data and trends, current fact patterns, expectations and other sources of information it believes are reasonable. Actual results may differ from these estimates under different conditions. For a full description of the Company’s critical accounting policies, see the Management Discussion and Analysis in the 2001 Annual Report on Form 10-K.
 
Segment Information
 
Rayonier operates in three reportable segments: Performance Fibers, Timber and Land, and Wood Products and Trading. Performance Fibers includes two business units, Cellulose Specialties and Absorbent Materials. The Timber and Land segment includes two business units, Timber and Land.
 
The amounts and relative contributions to sales and operating income (loss) attributable to each of Rayonier’s reportable business segments were as follows (thousands of dollars):
 
    
Three Months Ended June 30,
     
Six Months Ended June 30,
  
    
2002
     
2001
     
2002
     
2001
  
SALES
                                    
Performance Fibers
                                    
Cellulose Specialties
   
$
86,629
 
   
$
95,931
 
   
$
177,184
 
   
$
185,885
 
Absorbent Material
   
 
37,481
 
   
 
49,792
 
   
 
76,216
 
   
 
98,870
 
    
  
  
  
Total Performance Fibers
   
 
124,110
 
   
 
145,723
 
   
 
253,400
 
   
 
284,755
 
    
  
  
  
Timber and Land
                                    
Timber
   
 
45,434
 
   
 
47,763
 
   
 
87,748
 
   
 
107,989
 
Land
   
 
12,579
 
   
 
62,224
 
   
 
31,656
 
   
 
63,457
 
    
  
  
  
Total Timber and Land
   
 
58,013
 
   
 
109,987
 
   
 
119,404
 
   
 
171,446
 
    
  
  
  
Wood Products and Trading
   
 
91,249
 
   
 
82,626
 
   
 
172,881
 
   
 
159,244
 
Intersegment Eliminations
   
 
(4,096
)
   
 
(1,631
)
   
 
(7,705
)
   
 
(9,445
)
    
  
  
  
TOTAL SALES
   
$
269,276
 
   
$
336,705
 
   
$
537,980
 
   
$
606,000
 
    
  
  
  
OPERATING INCOME (LOSS)
                                    
Performance Fibers
   
$
10,701
 
   
$
13,158
 
   
$
17,282
 
   
$
27,878
 
Timber and Land
                                    
Timber
   
 
20,889
 
   
 
21,420
 
   
 
41,619
 
   
 
56,762
 
Land
   
 
10,754
 
   
 
34,343
 
   
 
19,336
 
   
 
35,185
 
    
  
  
  
Total Timber and Land
   
 
31,643
 
   
 
55,763
 
   
 
60,955
 
   
 
91,947
 
    
  
  
  
Wood Products and Trading
   
 
(9
)
   
 
(312
)
   
 
(2,440
)
   
 
(6,972
)
Corporate and other
   
 
(2,820
)
   
 
(4,239
)
   
 
(8,891
)
   
 
(10,932
)
    
  
  
  
TOTAL OPERATING INCOME
   
$
39,515
 
   
$
64,370
 
   
$
66,906
 
   
$
101,921
 
    
  
  
  
 
Operating income (loss) as stated in the preceding tables and as presented in the Condensed Statements of Consolidated Income is equal to Segment income (loss). The income (loss) items below “Operating income” in the Condensed Statements of Consolidated Income are not allocated to segments. These items, which include interest (expense) income, miscellaneous income (expense) and income tax (expense) benefit, are not considered by Company management to be part of segment operations.

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Table of Contents
 
Results of Operations
 
Sales and Operating Income
 
Sales and operating income for the second quarter of 2002 of $269 million and $40 million, respectively, were $67 and $25 million lower than the comparable period in the prior year. These declines were primarily due to a major land sale in the second quarter of 2001, that contributed $59 million in sales and $33 million in operating income. Excluding that transaction, sales decreased due to lower Performance Fibers volume, absorbent materials prices, Southeast U.S. timber volume and Northwest U.S. timber prices, but operating income increased due to lower Performance Fibers manufacturing costs, higher routine land sales and higher Northwest U.S. timber volumes.
 
Sales and operating income of $538 million and $67 million, respectively, for the six months ended June 30, 2002, were $68 million and $35 million lower compared to the same period in the prior year. Excluding the major land sale, sales decreased slightly due to lower Performance Fibers volume and absorbent materials prices, Southeast U.S. timber volume and U.S. timber prices, while operating income was essentially flat.
 
Performance Fibers
 
Sales for the second quarter of 2002 were $124 million, down $22 million from the prior year second quarter due to lower absorbent materials volume and prices and lower cellulose specialties volume partially due to higher in-transit shipments. Operating income for the second quarter of 2002 of $11 million was $2 million below the prior year second quarter primarily due to lower fluff pulp prices (the major component of the absorbent materials business), and volumes, partially offset by lower manufacturing costs. Fluff pulp prices are impacted by commodity market paper pulp prices, which declined during 2001 and have continued to fall during 2002 due to the sluggish global economy.
 
Sales for the six months ended June 30, 2002, were $253 million, $31 million below the same period in the prior year due to lower absorbent materials prices and decreases in absorbent materials and cellulose specialties volumes. Operating income for the six months ended June 30, 2002, was $17 million, $11 million below the same period in the prior year, mainly due to lower absorbent materials prices and sales volumes, partly offset by favorable manufacturing costs.
 
Cellulose Specialties
 
Sales of $87 million for the second quarter of 2002 were $9 million below the prior year second quarter. While prices dropped by 1 percent, there was a 9 percent decrease in volume partly due to higher in-transit shipments. Sales of $177 million for the six months ended June 30, 2002, were $9 million below the same period in the prior year, primarily due to a 1 percent decrease in price and a 4 percent decrease in volume. The slight price decrease in both the second quarter and the six months ended June 30, 2002 was due to a change in product mix.
 
Absorbent Materials
 
Sales of $37 million for the second quarter of 2002 were $12 million lower than the prior year second quarter. The decrease was primarily due to a 15 percent decline in average fluff pulp prices and approximately 12 percent lower sales volume partially due to higher in-transit shipments. Sales of $76 million for the six months ended June 30, 2002, were $23 million below the same period in the prior year as prices were 17 percent lower and volumes were on average 7 percent below the six months ended June 30, 2001.
 
Timber and Land
 
Sales of $58 million for the second quarter of 2002 were $52 million below the prior year second quarter. The decrease was primarily due to the $59 million major land sale that occurred in the second quarter of 2001 and slightly lower timber sales. Operating income of $32 million for the second quarter of 2002 was $24 million lower than the prior year second quarter due to the major land sale in 2001. Excluding the major land sale, higher volume in the Northwest U.S and higher routine land sales in 2002 more than offset lower timber volume in the Southeast U.S. and lower prices in the Northwest U.S.
 
Sales and operating income of $119 million and $61 million, respectively, for the six months ended June 30, 2002, were $52 million and $31 million below the same period in the prior year. These decreases were principally due to the major land sale in 2001 and lower timber prices, partly offset by higher volume in the Northwest U.S. and higher routine land sales in 2002.

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Table of Contents
 
Timber
 
Sales for the second quarter of 2002 were $45 million, $2 million below the prior year second quarter due to a 26 percent decrease in volume in the Southeast U.S. and a 13 percent price decrease in the Northwest U.S., partially offset by an increase in Northwest U.S. volume of 64 percent. Operating income of $21 million for the second quarter of 2002 was essentially flat compared to the prior year second quarter. Sales of $88 million and operating income of $42 million for the six months ended June 30, 2002, were $20 million and $15 million lower compared to the same period in the prior year, respectively. The decrease in sales and operating income was due to price reductions in the Northwest and Southeast U.S. of 14 and 5 percent, respectively, as well as lower Southeast U.S. volume of 24 percent. These unfavorable variances were partly offset by higher Northwest U.S. volume of 9 percent.
 
Land
 
Sales for the second quarter of 2002 of $13 million decreased $50 million from the prior year second quarter and operating income of $11 million decreased $24 million, primarily due to the major land sale in 2001. Sales of $32 million for the six months ended June 30, 2002, were down $32 million compared to the same period in the prior year. Excluding the major land sale, sales and operating income improved $27 million and $17 million, respectively, due to higher routine land sales.
 
Wood Products and Trading
 
Sales for the second quarter of 2002 were $91 million compared to $83 million in the prior year second quarter. The operating results for the second quarters of both 2002 and 2001 were essentially breakeven. Sales increased due to higher lumber volume attributable to increased operating hours and improved productivity as well as favorable trading activity, partly offset by lower lumber prices compared to 2001. Second quarter 2002 lumber prices were adversely impacted as a result of Canadian producers’ shipping additional lumber to the U.S. prior to the implementation of the countervailing and anti-dumping duty on Canadian shipments.
 
Sales for the six months ended June 30, 2002, of $173 million were $14 million above the same period in the prior year. The increase was due to higher prices and volumes for both lumber and medium-density fiberboard partially offset by lower trading activity. The operating loss of $2 million for the six months ended June 30, 2002, was $5 million favorable compared to the same period in the prior year. This was due to improved trading margins and productivity, and lower lumber manufacturing costs.
 
Corporate and Other
 
Corporate and other expenses for the second quarter of 2002 were $2 million compared to $4 million in the prior year second quarter. The improvement resulted from the favorable impact of New Zealand foreign exchange rates and lower stock price-based incentive compensation. Corporate and other expenses for the six months ended June 30, 2002, were $9 million, $2 million lower than the same period in the prior year. The decrease primarily resulted from favorable New Zealand foreign exchange rates, slightly offset by higher stock price-based incentive compensation.
 
Other Income / Expense
 
Interest expense for the second quarter of 2002 was $15 million, a decrease of $2 million from the prior year second quarter mainly due to lower debt. Interest expense for the six months ended June 30, 2002, was $30 million compared to $36 million for the same period in the prior year resulting from lower debt and slightly lower rates.
 
Interest and miscellaneous income (expense) for the second quarter of 2002 was an expense of $0.1 million compared to income of $0.7 million in the prior year second quarter. The unfavorable variance was due principally to $0.5 million of expense in the second quarter of 2002 for redemption premiums paid to refinance a tax-exempt bond issue at favorable rates.
 
The effective tax rate for the second quarter of 2002 was 27.8 percent compared to 33.8 percent for the prior year second quarter. The six months ended June 30, 2002, effective tax rate was 28.0 percent compared to 33.6 percent for the same period in the prior year. During the second quarter and the six months ended June 30, 2002, the Company’s effective tax rate continued to be below the U.S. statutory and 2001 levels due to lower taxes on foreign operations.

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Table of Contents
 
The following table reconciles the Company’s income tax provision at the U.S. statutory tax rate to the reported provision and effective tax rate for the second quarters of 2002 and 2001 (in millions):
 
    
Three months ended June 30,
  
    
2002
     
%
     
2001
     
%
  
Income tax provision from continuing operations at U.S. statutory rate
   
$
8.5
 
   
35.0
 
   
$
16.6
 
   
35.0
 
State and local taxes, net of foreign tax benefit
   
 
0.2
 
   
0.8
 
   
 
0.6
 
   
1.3
 
Foreign operations
   
 
(1.2
)
   
(5.1
)
   
 
(0.2
)
   
(0.5
)
Foreign sales corporations
   
 
(0.8
)
   
(3.4
)
   
 
(1.2
)
   
(2.5
)
Permanent differences
   
 
0.1
 
   
0.5
 
   
 
0.2
 
   
0.4
 
Research and development tax credits, net
   
 
—  
 
   
—  
 
   
 
0.1
 
   
0.1
 
    
  
  
  
Income tax provision from continuing operations as reported
   
$
6.8
 
   
27.8
%
   
$
16.1
 
   
33.8
%
    
  
  
  
 
Income from Continuing Operations
 
Income from continuing operations for the second quarter of 2002 was $18 million, or $0.62 per diluted common share, compared to $31 million, or $1.14 per diluted common share, for the prior year second quarter. The decrease is primarily due to the major land sale in 2001 partially offset by higher routine land sales in 2002 and lower interest expense and corporate and other operating costs. Income from continuing operations of $27 million, or $0.94 per diluted common share, for the six months ended June 30, 2002, was $17 million lower than the same period in the prior year. The decrease was due to the absence of the major land sale in 2001 and lower timber harvest volume, partially offset by higher routine land sales.
 
Income (loss) from Discontinued Operations
 
The Company had a loss of $1.3 million or $0.05 per share from discontinued operations in the second quarter of 2002. This consisted of income from operations of $0.4 million and a loss of $1.7 million on the sale of the discontinued operations. For the six months ended June 30, 2002, the loss from discontinued operations was $0.9 million or $0.04 per share.
 
Other Items
 
The Company expects third quarter 2002 earnings to be lower than second quarter primarily due to seasonal volume declines in the Northwest U.S. timber operations.
 
Liquidity and Capital Resources
 
Cash Flow
 
Cash flow provided by operating activities from continuing operations of $129 million for the six months ended June 30, 2002, was $18 million lower than the same period in the prior year. The decrease was primarily from lower income in 2002 due to the absence of the major land sale, partially offset by lower working capital requirements. Cash provided by operating activities from continuing operations for the six months ended June 30, 2002, financed capital expenditures of $34 million, dividends of $20 million and debt payments of $82 million (net). Cash flow used for financing activities for the six months ended June 30, 2002, was supplemented by $14 million in new capital from the exercise of stock options, but reflected a decrease of $20 million from same period in the prior year due to higher debt repayments (net), in 2001. The Company repurchased 22,900 of its common shares during the six months ended June 30, 2002, for $1.1 million. No shares were repurchased in the first six months of 2001. Cash from discontinued operations provided an additional $19 million in 2002. On June 30, 2002, the Company had cash investments of $30.8 million, an increase of $25 million from year-end. The cash investments consisted of marketable securities with maturities at date of acquisition of 90 days or less.
 
The discussion below is presented to enhance the reader’s understanding of Rayonier’s ability to generate cash, its liquidity and its ability to satisfy rating agency and creditor requirements. This information includes two measures of financial results: EBITDA and Free Cash Flow. EBITDA is defined as earnings from continuing operations before significant non-recurring items, provision for dispositions, interest expense, income taxes, depreciation, depletion, amortization and the non-cash cost of land sales. Free Cash Flow is defined as EBITDA plus or minus significant non-recurring items, changes in working capital and long-term assets and liabilities (excluding the non-cash costs of land sales), less income taxes, interest expense, custodial capital spending and

12

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prior-year dividend levels. These two measures are not defined by Generally Accepted Accounting Principles, (“GAAP”). The discussion of EBITDA and Free Cash Flow is not intended to conflict with or change any of the GAAP disclosures described above, but to provide supplementary information that management deems to be relevant to analysts, investors and creditors. EBITDA and Free Cash Flow as defined may not be comparable to similarly titled measures reported by other companies.
 
EBITDA for the second quarter of 2002 was $78 million, $53 million below the prior year second quarter. The decrease was primarily due to the major land sale in 2001, which contributed $58 million to EBITDA, plus lower absorbent materials and timber prices, lower lumber and performance fibers manufacturing costs. These decreases were partly offset by higher routine land sales and lumber prices. EBITDA for the six months ended June 30, 2002, was $151 million, $56 million below the same period in the prior year, due to the major land sale in 2001.
 
Below is a reconciliation of Income from Continuing Operations to EBITDA for the respective periods (in millions except diluted per share amounts):
 
    
Three months ended June 30,
    
2002
   
Per Share
   
2001
   
Per Share
Income from continuing operations
   
$
17.5
   
0.62
   
$
31.5
   
1.14
Add:  Income tax expense
   
 
6.8
   
0.24
   
 
16.1
   
0.58
    Interest expense
   
 
15.1
   
0.53
   
 
17.5
   
0.64
    Depreciation, depletion and amortization
   
 
37.8
   
1.33
   
 
57.7
   
2.09
    Non-cash cost of land sales
   
 
0.6
   
0.02
   
 
7.9
   
0.29
    
  
  
  
EBITDA
   
$
77.8
   
2.74
   
$
130.7
   
4.74
    
  
  
  
    
Six months ended June 30,
    
2002
   
Per Share
   
2001
   
Per Share
Income from continuing operations
   
$
26.5
   
0.94
   
$
43.6
   
1.58
Add:  Income tax expense
   
 
10.4
   
0.37
   
 
22.0
   
0.80
    Interest expense
   
 
30.3
   
1.07
   
 
36.5
   
1.32
    Depreciation, depletion and amortization
   
 
80.2
   
2.84
   
 
96.8
   
3.52
    Non-cash cost of land sales
   
 
3.3
   
0.12
   
 
8.2
   
0.30
    
  
  
  
EBITDA
   
$
150.7
   
5.34
   
$
207.1
   
7.52
    
  
  
  
 
Free cash flow decreased $46 million, to $54 million for the first six months of 2002. The decrease resulted primarily from lower income in 2002 due to the absence of the 2001 major land sale and a $24 million increase in cash and short-term investments during the six months ended June 30, 2002, over the same period in the prior year. These were partially offset by lower working capital requirements.
 
Below is a reconciliation of Cash Provided by Operating Activities of Continuing Operations to Free Cash Flow for the respective periods (in millions except diluted per share amounts):
 
    
Six months ended June 30,
  
    
2002
     
2001
  
Cash provided by operating activities of continuing operations
   
$
128.9
 
   
$
147.2
 
Custodial capital spending, net
   
 
(28.1
)
   
 
(27.9
)
Dividends at prior year level
   
 
(19.9
)
   
 
(19.6
)
Tax benefit on exercise of stock options
   
 
(2.4
)
   
 
—  
 
Increase in cash and short-term investments
   
 
(24.6
)
   
 
(0.3
)
Free Cash Flow
  
$
53.9
 
   
$
99.4
 
    
  
Free Cash Flow per share
   
$
1.91
 
   
$
3.61
 
    
  
 
Debt
 
At June 30, 2002, debt was $768 million, a reduction of $81 million from December 31, 2001, and the debt-to-capital ratio was 51.2 percent compared to 54.5 percent at December 31, 2001. Net debt, defined as debt less cash invested, was $738 million at

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June 30, 2002, and the net debt-to-capital ratio was 50.2 percent. Net debt is not a measure defined by GAAP and is provided as supplementary information relevant to analysts, investors and creditors. The Company refinanced $23.1 million of its tax-exempt revenue bonds in the second quarter of 2002.
 
As of June 30, 2002, Rayonier had $300 million available under its committed revolving credit facilities. In conjunction with the Company’s long-term debt, certain covenant restrictions are required on the ratio of EBITDA to interest expense and EBITDA to total debt. In addition, there are covenant requirements in effect for Rayonier Timberlands Operating Company (“RTOC”) on the ratio of cash flow available for fixed charges to fixed charges and the ratio of debt to cash flow available for fixed charges. The covenants listed above are calculated on a trailing 12-month basis.
 
The most restrictive long-term debt covenants in effect for Rayonier as of June 30, 2002, were as follows:
 
    
Covenant Requirement
   
Actual ratio at
June 30, 2002
EBITDA to consolidated interest expense should not be less than
   
2.50 to 1
   
4.34 to 1
Total debt to EBITDA should not exceed
   
4.00 to 1
   
2.85 to 1
Consolidated cash flow available for fixed charges
to consolidated fixed charges should not be less than
   
1.65 to 1
   
1.98 to 1
Consolidated debt to consolidated cash flow for fixed charges may not exceed
   
4.25 to 1
   
3.63 to 1
 
In addition to the covenants listed above, the revolving credit agreements include customary covenants that limit the incurrence of debt, the disposition of assets and the making of certain payments between RTOC and Rayonier. The Company is currently in compliance with all of these covenants.
 
The Company has on file with the Securities and Exchange Commission shelf registration statements to offer $150 million of new public debt securities. The Company believes that internally generated funds, combined with available external financing, will enable Rayonier to fund capital expenditures, share repurchases, working capital and other liquidity needs for the foreseeable future.
 
During the second quarter of 2002, the Company guaranteed five years of Crown forest timberland lease obligations estimated at $1.2 million per year in conjunction with the sale of its New Zealand East Coast operations. See Note 3. “Discontinued Operations” in the Notes to the Condensed Consolidated Financial Statements for additional information regarding the guarantee. No other material changes in guarantees or financial instruments such as letters of credit and surety bonds occurred during the first six months of 2002.
 
New Accounting Standards
 
In April 2002, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 145, Rescission of FASB Statements No 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. As allowed by the FASB, the Company early adopted the Standard on April 1, 2002. During the second quarter of 2002, the Company refinanced $23.1 million of its revenue bonds. In accordance with the Standard, the write-off of the balance of the deferred financing fees of $0.2 million and the premium of $0.5 million paid upon the redemption of the original bonds were not classified as an extraordinary item in the Company’s Condensed Statements of Consolidated Income.
 
PART I.    FINANCIAL INFORMATION
 
Item 3.     Quantitative and Qualitative Disclosures About Market Risk
 
Market Risk
 
The Company is exposed to various market risks, including changes in commodity prices, foreign exchange rates and interest rates. The Company’s objective is to minimize the economic impact of these market risks. Derivatives are used, as noted above, in accordance with policies and procedures approved by the Finance Committee of the Board of Directors and are managed by a senior executive committee whose responsibilities include initiating, managing and monitoring resulting exposures. The Company does not enter into financial instruments for trading purposes. See Note 6. “Financial Instruments” included in this Form 10-Q.

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Table of Contents
 
The fair market value of long-term fixed interest rate debt is subject to interest rate risk; however, Rayonier intends to hold most of its debt until maturity. During the first quarter of 2002, the Company entered into an interest rate swap in order to achieve a desired ratio of fixed and floating interest rates in its portfolio. As of June 30, 2002, the interest rate swap’s fair market value resulted in an asset of $0.8 million. Generally, the fair market value of fixed-interest-rate debt will increase as interest rates fall and decrease as interest rates rise.
 
Circumstances surrounding the Company’s exchange rate risk, commodity price risk and interest rate risk remain unchanged from December 31, 2001. For a full description of the Company’s market risk, please refer to Item 7, Management Discussion and Analysis of Financial Condition and Results of Operations, in the 2001 Annual Report on Form 10-K.
 
Safe Harbor
 
Comments about market trends and anticipated earnings and sales volumes are forward-looking and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The following important factors, among others, could cause actual results to differ materially from those expressed in the forward-looking statements: changes in global market trends and world events that could impact customer demand; interest rate and currency movements; fluctuations in demand for cellulose specialties, absorbent materials, timber and wood products; the impact of such market factors on the company’s timber sales in the U.S. and New Zealand; adverse weather conditions; changes in production costs for wood products and performance fibers, particularly for raw materials such as wood, energy and chemicals; unexpected delays in the closing of land sale transactions or collection of proceeds from installment sales; and implementation or revision of governmental policies and regulations affecting the environment, import and export controls and taxes. For additional factors that could impact future results, please see the Company’s 2001 Annual Report on Form 10-K on file with the Securities and Exchange Commission.
 
PART II.     OTHER INFORMATION
 
Item 1.     Legal Proceedings
 
Between 1985 and 1995, the Company sent contaminated soil excavated in connection with the cleanup of various closed wood processing sites to a third-party processor for recycling. The processing facility closed in 1995 and is the subject of a variety of environmental related charges by the EPA and the Louisiana Department of Environmental Quality. Also in dispute is disposal liability for approximately 150,000 tons of recycled material from Company sites that are still owned and retained by the processor. A consent decree was entered in 1998 approving sale of the processing facility and assumption by the buyer of responsibility for movement of all remaining recycled material to a landfill. The parties have been unable to complete the sale and the consent decree was vacated in May 2002. As a result, the status of the sale of the facility and ultimate responsibility for removal and disposal of the recycled material on-site are now uncertain. There are numerous possible outcomes, including the purchase of the facility by a third-party recycler, that will determine the Company’s ultimate liability, if any. None of these outcomes are considered sufficiently probable at this time to warrant the recognition of a liability in the Company’s financial statements. The Company is unable to formulate a range of possible losses. As such, the final outcome could have a material adverse effect on the Company’s results of operations.
 
Item 4.     Submission of Matters to a Vote of Security Holders
 
The Annual Meeting of Shareholders of the Company was held on May 16, 2002. At that meeting, three directors were elected as follows (there were no broker non-votes with respect to the election of directors):
 
    
Votes For
    
Votes Withheld
Directors of Class II, Term Expires in 2005
            
Paul G. Kirk, Jr.
   
22,336,331
     
318,640
Carl S. Sloane
   
22,567,146
     
87,825
Gordon I. Ulmer
   
22,395,982
     
258,989

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Table of Contents
 
ITEM 5(a).     SELECTED OPERATING INFORMATION *
 
    
Three Months Ended June 30,
     
Six Months Ended June 30,
    
2002
     
2001
     
2002
     
2001
Performance Fibers
                          
Sales Volume
                          
Cellulose specialties,
in thousands of metric tons
   
101
     
110
     
205
     
213
Absorbent materials,
in thousands of metric tons
   
66
     
75
     
136
     
147
Production as a percent of capacity
   
99
     
98
     
98
     
98
Timber and Land
                          
Sales volume—Timber
                          
Northwest U.S.,
in millions of board feet
   
80
     
49
     
150
     
137
Southeast U.S.,
in thousands of short green tons
   
1,191
     
1,611
     
2,432
     
3,186
New Zealand,
in thousands of metric tons **
   
168
     
174
     
289
     
338
Timber sales volume—  
                          
Intercompany
                          
Northwest U.S.,
in millions of board feet
   
19
     
6
     
34
     
35
Southeast U.S.,
in thousands of short green tons
   
3
     
16
     
8
     
30
New Zealand,
in thousands of metric tons **
   
10
     
9
     
23
     
25
Acres sold
   
3,995
     
57,858
     
22,895
     
58,273
Wood Products and Trading
                          
Lumber sales volume,
in millions of board feet
   
86
     
63
     
165
     
120
Medium-density fiberboard
sales volume,
in thousands of cubic meters
   
41
     
39
     
77
     
76
Log trading sales volume
North America
in millions of board feet
   
32
     
37
     
59
     
86
New Zealand,
in thousands of cubic meters
   
85
     
74
     
160
     
162
Other
in thousands of cubic meters
   
86
     
109
     
204
     
232
 
*
 
Prior period amounts were reclassified to reflect the New Zealand East Coast operations as discontinued operations.
**
 
2001 volume restated from cubic meters to metric tons.

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Table of Contents
 
ITEM 5(a).    SELECTED OPERATING DATA * (millions of dollars, except per share data)
 
    
Three Months Ended June 30,
     
Six Months Ended June 30,
  
    
2002
     
2001
     
2002
     
2001
  
Geographical Data (Non-U.S.)
                                    
Sales
                                    
New Zealand
   
$
17.5
 
   
$
16.6
 
   
$
37.3
 
   
$
33.4
 
Other
   
 
11.5
 
   
 
13.2
 
   
 
24.8
 
   
 
25.2
 
    
  
  
  
Total
   
$
29.0
 
   
$
29.8
 
   
$
62.1
 
   
$
58.6
 
    
  
  
  
Operating income (loss)
                                    
New Zealand
   
$
2.5
 
   
$
(0.2
)
   
$
1.9
 
   
$
(4.6
)
Other
   
 
0.4
 
   
 
(0.3
)
   
 
(1.0
)
   
 
(0.8
)
    
  
  
  
Total
   
$
2.9
 
   
$
(0.5
)
   
$
0.9
 
   
$
(5.4
)
    
  
  
  
Timber and Land
                                    
Sales
                                    
Northwest U.S.
   
$
21.3
 
   
$
13.5
 
   
$
38.6
 
   
$
38.2
 
Southeast U.S.
   
 
33.0
 
   
 
91.8
 
   
 
68.6
 
   
 
123.9
 
New Zealand
   
 
3.7
 
   
 
4.6
 
   
 
12.2
 
   
 
9.3
 
    
  
  
  
Total
   
$
58.0
 
   
$
109.9
 
   
$
119.4
 
   
$
171.4
 
    
  
  
  
Operating income (loss)
                                    
Northwest U.S.
   
$
15.6
 
   
$
8.7
 
   
$
28.4
 
   
$
28.8
 
Southeast U.S.
   
 
16.0
 
   
 
45.8
 
   
 
33.2
 
   
 
59.9
 
New Zealand
   
 
—  
 
   
 
1.2
 
   
 
(0.7
)
   
 
3.2
 
    
  
  
  
Total
   
$
31.6
 
   
$
55.7
 
   
$
60.9
 
   
$
91.9
 
    
  
  
  
EBITDA per Share
                                    
Performance Fibers
   
$
1.04
 
   
$
1.18
 
   
$
1.90
 
   
$
2.40
 
Timber and Land
   
 
1.67
 
   
 
3.59
 
   
 
3.58
 
   
 
5.56
 
Wood Products and Trading
   
 
0.14
 
   
 
0.12
 
   
 
0.18
 
   
 
—  
 
Corporate and other
   
 
(0.11
)
   
 
(0.15
)
   
 
(0.32
)
   
 
(0.44
)
    
  
  
  
Total
   
$
2.74
 
   
$
4.74
 
   
$
5.34
 
   
$
7.52
 
    
  
  
  
 
*
 
Prior period amounts were reclassified to reflect the New Zealand East Coast operations as discontinued operations.

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Table of Contents
Item 5(b).    Other Information
 
(b)
 
Approval of Non-Audit Services To Be Performed By Independent Auditors
 
At the Audit Committee’s regularly scheduled August meeting, the Committee approved a budget of non-audit services to be provided by Deloitte & Touche, independent auditors, covering tax advice to expatriate employees, tax consultation on general business matters, and tax return reviews of foreign entities in the aggregate amount of $187,000, representing 24% of the total fees anticipated, at this time, to be due Deloitte & Touche for fiscal 2002 activities (on an accrual basis).
 
Item 6.     Exhibits and Reports on Form 8-K
 
 
(a)
 
See Exhibit Index
 
 
(b)
 
(1) Rayonier, Inc. filed a report on Form 8-K dated May 23, 2002, to announce the rescission of Arthur Andersen and the appointment of Deloitte & Touche LLP as independent auditors for the Rayonier Investment and Savings Plan for Salaried Employees financial statements for the year ended December 31, 2001.
 
(2) Rayonier, Inc. filed a report on Form 8-K dated May 23, 2002, to announce the appointment of Deloitte & Touche LLP as the Company’s independent auditors for 2002.
 
 
 
SIGNATURE
 
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
RAYONIER INC. (Registrant)
By: /s/    HANS E. VANDEN NOORT
Hans E. Vanden Noort
Vice President and
Corporate Controller
 
CERTIFICATION OF PERIODIC FINANCIAL REPORTS UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
The undersigned hereby certify that this Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained herein fairly presents, in all material respects, the financial condition and results of operations of Rayonier Inc.
 
 
/s/    W. L. NUTTER
      
/s/    GERALD J. POLLACK
W. L. Nutter
      
Gerald J. Pollack
Chairman, President and
      
Senior Vice President and
Chief Executive Officer
      
Chief Financial Officer
 
August 12, 2002

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Table of Contents
 
EXHIBIT INDEX
 
 
EXHIBIT NO.
   
DESCRIPTION
   
LOCATION
2
   
Plan of acquisition, reorganization, arrangement, liquidation or succession
   
None
3.1
   
Amended and restated articles of incorporation
   
No amendments
3.2
   
By-laws
   
Filed herewith
4
   
Instruments defining the rights of security holders, including indentures
   
Not required to be filed. The
Registrant hereby agrees to file with the Commission a copy of any instrument defining the rights of holders of the Registrant’s long-term debt upon request of the Commission.
11
   
Statement re: computation of per share earnings
   
Not required to be filed
12
   
Statement re: computation of ratios
   
Filed herewith
15
   
Letter re: unaudited interim financial information
   
None
18
   
Letter re: change in accounting principles
   
None
19
   
Report furnished to security holders
   
None
22
   
Published report regarding matters submitted to vote of security holders
   
None
23
   
Consents of experts and counsel
   
None
24
   
Power of attorney
   
None
99
   
Additional exhibits
   
None

19