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Table of Contents
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
 
For Quarter Ended June 30, 2002
 
Commission file number 1-5313
 
 
POTLATCH CORPORATION
(Exact name of registrant as specified in its charter)
 
A Delaware Corporation
  
82-0156045
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
 
601 West Riverside Ave., Suite 1100
Spokane, Washington
  
99201
(Address of principal executive offices)
  
(Zip Code)
 
Registrant’s telephone number, including area code (509) 835-1500
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ¨
 
The number of shares of common stock outstanding as of June 30, 2002:  28,464,844 shares of Common Stock, par value $1 per share.
 
 

Table of Contents
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
Index to Form 10-Q
 
         
Page Number
PART I.    FINANCIAL INFORMATION
     
Item 1.
   
Financial Statements
     
       
2
       
3
       
4
       
5-16
Item 2.
      
17-27
Item 3.
      
28
PART II.    OTHER INFORMATION
     
Item 4.
      
28-29
Item 6.
      
29
  
30
  
31

1

Table of Contents
PART I
 
Item 1.    Financial Statements
 
Potlatch Corporation and Consolidated Subsidiaries
 
Statements of Operations
Unaudited (Dollars in thousands—except per-share amounts)
 
    
Quarter Ended June 30
     
Six Months Ended June 30
  
    
2002
     
2001
     
2002
     
2001
  
Net sales
   
$
333,178
 
   
$
335,026
 
   
$
651,367
 
   
$
647,898
 
    
  
  
  
Costs and expenses:
                                    
Depreciation, amortization and cost of fee timber harvested
   
 
31,157
 
   
 
27,630
 
   
 
61,641
 
   
 
54,872
 
Materials, labor and other operating expenses
   
 
278,119
 
   
 
276,392
 
   
 
551,259
 
   
 
570,213
 
Selling, general and administrative expenses
   
 
20,928
 
   
 
20,848
 
   
 
42,947
 
   
 
41,042
 
Restructuring charge
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
4,217
 
    
  
  
  
    
 
330,204
 
   
 
324,870
 
   
 
655,847
 
   
 
670,344
 
    
  
  
  
Earnings (loss) from operations
   
 
2,974
 
   
 
10,156
 
   
 
(4,480
)
   
 
(22,446
)
Interest expense
   
 
(15,679
)
   
 
(18,634
)
   
 
(34,305
)
   
 
(35,368
)
Other income, net
   
 
1,956
 
   
 
2,076
 
   
 
3,548
 
   
 
2,530
 
    
  
  
  
Loss before taxes on income
   
 
(10,749
)
   
 
(6,402
)
   
 
(35,237
)
   
 
(55,284
)
Provision (benefit) for taxes on income (Note 2)
   
 
(4,192
)
   
 
(2,497
)
   
 
(13,742
)
   
 
(21,561
)
    
  
  
  
Loss from continuing operations
   
 
(6,557
)
   
 
(3,905
)
   
 
(21,495
)
   
 
(33,723
)
Discontinued operations (Note 3):
                                    
Loss from discontinued operations, (including loss on disposal of $9,397, $0, $254,970 and $0)
   
 
(22,182
)
   
 
(9,646
)
   
 
(272,090
)
   
 
(12,252
)
Income tax benefit
   
 
(8,650
)
   
 
(3,762
)
   
 
(106,115
)
   
 
(4,778
)
    
  
  
  
Net loss
   
$
(20,089
)
   
$
(9,789
)
   
$
(187,470
)
   
$
(41,197
)
    
  
  
  
Net loss per common share from continuing operations (Note 4):
                                    
Basic
   
$
(.23
)
   
$
(.14
)
   
$
(.76
)
   
$
(1.19
)
Diluted
   
 
(.23
)
   
 
(.14
)
   
 
(.76
)
   
 
(1.19
)
Net loss per common share:
                                    
Basic
   
 
(.70
)
   
 
(.35
)
   
 
(6.60
)
   
 
(1.46
)
Diluted
   
 
(.70
)
   
 
(.35
)
   
 
(6.60
)
   
 
(1.46
)
Dividends per common share (annual rate)
   
 
.60
 
   
 
1.74
 
   
 
.60
 
   
 
1.74
 
Average shares outstanding (in thousands):
                                    
Basic
   
 
28,441
 
   
 
28,254
 
   
 
28,397
 
   
 
28,292
 
Diluted
   
 
28,441
 
   
 
28,254
 
   
 
28,397
 
   
 
28,292
 
Certain 2001 balances have been conformed to the 2002 presentation. See Note 1.
 
The accompanying notes are an integral part of these financial statements.

2

Table of Contents
Potlatch Corporation and Consolidated Subsidiaries
 
Condensed Balance Sheets
2002 amounts unaudited (Dollars in thousands—except per-share amounts)
 
    
June 30,
2002
   
December 31,
2001
Assets
              
Current assets:
              
Cash
   
$
6,325
   
$
7,475
Restricted cash (Note 5)
   
 
—  
   
 
98,200
Short-term investments
   
 
176,657
   
 
30,509
Receivables, net (Note 6)
   
 
154,751
   
 
118,632
Inventories (Note 7)
   
 
104,480
   
 
107,713
Prepaid expenses
   
 
36,121
   
 
31,274
Assets held for sale (Note 3)
   
 
28,429
   
 
772,033
    
  
Total current assets
   
 
506,763
   
 
1,165,836
Land, other than timberlands
   
 
8,667
   
 
8,668
Plant and equipment, at cost less accumulated depreciation
   
 
774,429
   
 
808,763
Timber, timberlands and related logging facilities
   
 
394,342
   
 
395,668
Other assets
   
 
114,084
   
 
108,211
    
  
    
$
1,798,285
   
$
2,487,146
    
  
Liabilities and Stockholders’ Equity
              
Current liabilities:
              
Current installments on long-term debt
   
$
15,607
   
$
132,603
Accounts payable and accrued liabilities
   
 
198,343
   
 
189,916
Early maturing long-term debt (Note 3)
   
 
—  
   
 
197,000
Liabilities related to assets held for sale (Note 3)
   
 
3,672
   
 
33,933
    
  
Total current liabilities
   
 
217,622
   
 
553,452
Long-term debt
   
 
758,158
   
 
820,522
Other long-term obligations
   
 
199,506
   
 
195,258
Deferred taxes
   
 
106,605
   
 
210,610
Stockholders’ equity
   
 
516,394
   
 
707,304
    
  
    
$
1,798,285
   
$
2,487,146
    
  
Stockholders’ equity per common share
   
$
18.14
   
$
24.98
Working capital
   
$
289,141
   
$
612,384
Current ratio
   
 
2.3:1
   
 
2.1:1
Certain 2001 balances have been conformed to the 2002 presentation. See Note 1.
 
The accompanying notes are an integral part of these financial statements.

3

Table of Contents
Potlatch Corporation and Consolidated Subsidiaries
 
Condensed Statements of Cash Flows
Unaudited (Dollars in thousands)
 
    
Six Months Ended June 30
  
    
2002
     
2001
  
Cash Flows From Continuing Operations
                  
Net loss
   
$
(187,470
)
   
$
(41,197
)
Adjustments to reconcile net loss to net operating cash flows:
                  
Loss from discontinued operations
   
 
10,443
 
   
 
7,474
 
Loss on disposal of discontinued operations
   
 
221,223
 
   
 
—  
 
Depreciation, amortization and cost of fee timber harvested
   
 
61,641
 
   
 
54,872
 
Deferred taxes
   
 
(104,004
)
   
 
(18,539
)
Working capital changes
   
 
(21,734
)
   
 
(5,361
)
Other, net
   
 
(2,651
)
   
 
(729
)
    
  
Net cash used for operating activities of continuing operations
   
 
(22,552
)
   
 
(3,480
)
    
  
Cash Flows From Investing
                  
Decrease (increase) in restricted cash
   
 
98,200
 
   
 
(96,600
)
Increase in short-term investments
   
 
(146,157
)
   
 
(1,916
)
Additions to investments
   
 
(2,277
)
   
 
(2,171
)
Reductions in investments
   
 
970
 
   
 
944
 
Additions to plant and properties
   
 
(13,520
)
   
 
(24,172
)
    
  
Net cash used for investing activities of continuing operations
   
 
(62,784
)
   
 
(123,915
)
    
  
Cash Flows From Financing
                  
Change in book overdrafts
   
 
(7,572
)
   
 
(5,137
)
Decrease in notes payable
   
 
—  
 
   
 
(188,943
)
Proceeds from long-term debt
   
 
—  
 
   
 
450,000
 
Repayment of long-term debt
   
 
(376,360
)
   
 
(100,285
)
Long-term debt issuance fees
   
 
—  
 
   
 
(14,133
)
Issuance of treasury stock
   
 
4,168
 
   
 
1,669
 
Purchase of treasury stock
   
 
—  
 
   
 
(8,349
)
Dividends
   
 
(8,515
)
   
 
(24,629
)
Other, net
   
 
(9,213
)
   
 
(3,378
)
    
  
Net cash provided by (used for) financing activities of continuing operations
   
 
(397,492
)
   
 
106,815
 
    
  
Cash from continuing operations
   
 
(482,828
)
   
 
(20,580
)
Cash from discontinued operations
   
 
481,678
 
   
 
19,321
 
    
  
Decrease in cash
   
 
(1,150
)
   
 
(1,259
)
Balance at beginning of period
   
 
7,475
 
   
 
10,657
 
    
  
Balance at end of period
   
$
6,325
 
   
$
9,398
 
    
  
Net interest payments (net of amounts capitalized) for the six months ended June 30, 2002 and 2001 were $40.6 million and $35.4 million, respectively. Net income tax payments (refunds) for the six months ended June 30, 2002 and 2001 were $(16.0) million and $.5 million, respectively.
 
Certain 2001 balances have been conformed to the 2002 presentation. See Note 1.
 
The accompanying notes are an integral part of these financial statements.

4

Table of Contents
 
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
NOTES TO FINANCIAL STATEMENTS
Unaudited (Dollars in thousands)
 
NOTE 1.    GENERAL – The accompanying condensed balance sheets at June 30, 2002, and December 31, 2001, the statements of operations for the quarter and six months ended June 30, 2002 and 2001, and the condensed statements of cash flows for the six months ended June 30, 2002 and 2001, have been prepared in conformity with accounting principles generally accepted in the United States of America. We believe that all adjustments necessary for a fair statement of the results of such interim periods have been included. On March 18, 2002, we announced that we had signed a definitive agreement to sell a majority of the assets of our Printing Papers segment to a domestic subsidiary of Sappi Limited, and upon completion of the sale in May 2002, we exited the printing papers business. On June 3, 2002, we announced that we intend to close our hardwood lumber mill in Warren, Arkansas, and exit the hardwood lumber business. As a result, the Printing Papers segment and the hardwood lumber mill operations have been classified as “discontinued operations” and “assets held for sale” in the financial statements for the quarter and six months ended June 30, 2002. Year 2001 comparative amounts have been reclassified to conform to the 2002 presentation. Except for an adjustment to the carrying value of the Printing Papers segment and hardwood lumber mill assets, made in conjunction with the announcements and pursuant to Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” all adjustments were of a normal recurring nature; there were no other material nonrecurring adjustments.
 
NOTE 2.    INCOME TAXES – The provision or benefit for taxes on income has been computed by applying an estimated annual effective tax rate. This rate was 39 percent for the quarter and six months ended June 30, 2002 and 2001.
 
NOTE 3.    DISCONTINUED OPERATIONS – On March 18, 2002, we announced that we had signed a definitive agreement with a domestic subsidiary of Sappi Limited for the sale of our Cloquet, Minnesota, pulp and printing papers facilities and certain associated assets (“Printing Papers segment assets”) for $480 million in cash. The sale was completed in May 2002. In conjunction with the sale, we closed our Brainerd, Minnesota, printing papers mill and exited the coated printing papers business. An active search is currently underway to identify potential buyers for the Brainerd facility.
 
As a result of the transaction, we recorded an after-tax charge of $149.8 million in the first quarter of 2002. The charge represents estimated costs associated with the write-down of the carrying value of the assets involved in the sale and closure, as well as other costs associated with exiting the coated paper business. The charge and year-to-date operating losses of $9.9 million, after-tax, are presented as discontinued operations in the Statements of Operations, as required by SFAS No. 144.
 
On June 3, 2002, we announced that we would close our Bradley hardwood mill in Warren, Arkansas, and exit the hardwood lumber business. We recorded an after-tax charge of $5.7 million for estimated asset write-down and closure costs. The charge and year-to date operating losses of $.6 million, after-tax, are presented as discontinued operations in the Statements of Operations, as required by SFAS No. 144.

5

Table of Contents

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
NOTES TO FINANCIAL STATEMENTS—(Continued)
Unaudited (Dollars in thousands)

 
The assets and liabilities of the Printing Papers segment and the Bradley lumber mill are presented in the Balance Sheets under the captions “Assets held for sale” and “Liabilities related to assets held for sale.” The carrying amounts of the major classes of these assets and liabilities are as follows:
 
    
June 30, 2002
     
December 31, 2001
    
(Dollars in thousands)
Assets
                
Cash
   
$
—  
     
$
292
Receivables, net
   
 
—  
     
 
40,715
Inventories
   
 
10,015
     
 
76,858
Land, other than timberlands
   
 
121
     
 
374
Plant and equipment, net
   
 
18,293
     
 
653,785
Other assets
   
 
—  
     
 
9
    
    
Total assets held for sale
   
$
28,429
     
$
772,033
    
    
Liabilities
                
Accounts payable and accrued liabilities
   
$
3,672
     
$
33,933
    
    
 
Upon consummation of the sale of the Printing Papers segment assets in May, all outstanding amounts under our bank credit facility became due and payable, including the four-year term loan. Accordingly, amounts outstanding under the four-year term loan at December 31, 2001, of which $2.0 million was due within one year and $197.0 million was due in 2003 and later years, are classified as current liabilities.
 
NOTE 4.    LOSS PER COMMON SHARE – Loss per common share is computed by dividing the net loss and loss from continuing operations by the weighted average number of common shares outstanding in accordance with SFAS No. 128, “Earnings Per Share.”
 
The following table reconciles the number of common shares used in the basic and diluted earnings per share calculations (in thousands):
 
    
Quarter Ended June 30
   
Six Months Ended June 30
    
2002
     
2001
   
2002
     
2001
Basic average common shares outstanding
   
28,441
     
28,254
   
28,397
     
28,292
Incremental shares due to common stock options and put options
   
—  
     
—  
   
—  
     
—  
    
    
  
    
Diluted average common shares outstanding
   
28,441
     
28,254
   
28,397
     
28,292
    
    
  
    
 
Incremental shares due to common stock options and put options were not included in the diluted average common shares outstanding totals due to their antidilutive effect as a result of our net loss for the periods presented. The amounts (in thousands) not included for stock options and put options totaled 48 and 0, respectively, for the quarter ended June 30, 2002; 19 and 43, respectively, for the quarter ended June 30, 2001; 29 and 0, respectively, for the six months ended June 30, 2002; and 10 and 51,

6

Table of Contents

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
NOTES TO FINANCIAL STATEMENTS—(Continued)
Unaudited (Dollars in thousands)

respectively, for the six months ended June 30, 2001. Stock options to purchase 2,309, 1,967, 2,309 and 1,967 shares (in thousands) of common stock for the quarters ended June 30, 2002 and 2001 and six months ended June 30, 2002 and 2001, respectively, were not included in the computation of diluted earnings per share because the exercise prices of the stock options were greater than the average market price of the common shares.
 
NOTE 5.    RESTRICTED CASH – In June 2001, we entered into a new credit facility. Under the terms of that financing we placed $96.6 million of the proceeds into an interest-bearing escrow account. The escrow account’s use was restricted to the repayment of our $100 million 6.25% debentures, which occurred on March 15, 2002.
 
NOTE 6.    RECEIVABLES, NET – Included in the “Receivables, net” balance at June 30, 2002, and December 31, 2001, is approximately $22.3 million due to settlements reached with the Internal Revenue Service for the years 1989 through 1994. The settlement exceeds the threshold amount that requires review by the Joint Committee on Taxation, which is currently in process.
 
NOTE 7.    INVENTORIES – Inventories related to continuing operations at the balance sheet dates consist of:
 
    
June 30,
2002
   
December 31,
2001
Raw materials
   
$
44,458
   
$
55,443
Work in process
   
 
663
   
 
456
Finished goods
   
 
59,359
   
 
51,814
    
  
    
$
104,480
   
$
107,713
    
  
 
NOTE 8.    DEBT – Our current bank credit facility contains certain financial maintenance covenants. Although no amounts were outstanding under the credit facility at June 30, 2002, we obtained a waiver of the fixed charge coverage ratio covenant contained in the facility. We expect it may be necessary to obtain an additional waiver of the fixed charge coverage ratio covenant to be in compliance as of September 30, 2002. However, we are currently negotiating amendments to our bank credit facility, including a revision to the fixed charge coverage ratio, to reflect our current financial condition following the closing of the sale of the Printing Papers segment assets.

7

Table of Contents

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
NOTES TO FINANCIAL STATEMENTS—(Continued)
Unaudited (Dollars in thousands)

 
NOTE 9.    SEGMENT INFORMATION – 
 
    
Quarter Ended June 30
     
Six Months Ended June 30
  
    
2002
     
2001
     
2002
     
2001
  
    
(Dollars in thousands)
  
Segment Sales
                                    
Resource
   
$
88,115
 
   
$
81,473
 
   
$
207,738
 
   
$
172,760
 
    
  
  
  
Wood products
                                    
Oriented strand board
   
 
46,840
 
   
 
48,211
 
   
 
93,505
 
   
 
80,537
 
Lumber
   
 
71,850
 
   
 
74,346
 
   
 
139,283
 
   
 
128,916
 
Plywood
   
 
9,248
 
   
 
11,827
 
   
 
18,813
 
   
 
22,553
 
Particleboard
   
 
4,575
 
   
 
3,813
 
   
 
7,751
 
   
 
7,702
 
Other
   
 
5,644
 
   
 
7,206
 
   
 
11,379
 
   
 
12,960
 
    
  
  
  
    
 
138,157
 
   
 
145,403
 
   
 
270,731
 
   
 
252,668
 
    
  
  
  
Pulp and paper
                                    
Paperboard
   
 
98,973
 
   
 
105,153
 
   
 
192,935
 
   
 
221,793
 
Tissue
   
 
81,315
 
   
 
78,889
 
   
 
162,337
 
   
 
162,016
 
Pulp
   
 
4,186
 
   
 
4,665
 
   
 
7,326
 
   
 
7,495
 
    
  
  
  
    
 
184,474
 
   
 
188,707
 
   
 
362,598
 
   
 
391,304
 
    
  
  
  
    
 
410,746
 
   
 
415,583
 
   
 
841,067
 
   
 
816,732
 
Elimination of intersegment sales
   
 
(77,568
)
   
 
(80,557
)
   
 
(189,700
)
   
 
(168,834
)
    
  
  
  
Total consolidated net sales
   
$
333,178
 
   
$
335,026
 
   
$
651,367
 
   
$
647,898
 
    
  
  
  
Intersegment sales or transfers
                                    
Resource
   
$
74,234
 
   
$
75,149
 
   
$
182,516
 
   
$
159,484
 
Wood products
   
 
3,327
 
   
 
5,397
 
   
 
7,165
 
   
 
9,330
 
Pulp and paper
   
 
7
 
   
 
11
 
   
 
19
 
   
 
20
 
    
  
  
  
Total
   
$
77,568
 
   
$
80,557
 
   
$
189,700
 
   
$
168,834
 
    
  
  
  
Operating Income (Loss)
                                    
Resource
   
$
12,502
 
   
$
10,007
 
   
$
22,527
 
   
$
17,870
 
Wood products
   
 
853
 
   
 
7,593
 
   
 
(263
)
   
 
(12,691
)
Pulp and paper
   
 
5,166
 
   
 
4,711
 
   
 
(574
)
   
 
(10,384
)
Eliminations and adjustments
   
 
17
 
   
 
(1,468
)
   
 
355
 
   
 
866
 
    
  
  
  
    
 
18,538
 
   
 
20,843
 
   
 
22,045
 
   
 
(4,339
)
Corporate
   
 
(29,287
)
   
 
(27,245
)
   
 
(57,282
)
   
 
(50,945
)
    
  
  
  
Consolidated loss from continuing operations before taxes on income
   
$
(10,749
)
   
$
(6,402
)
   
$
(35,237
)
   
$
(55,284
)
    
  
  
  
Certain 2001 balances have been conformed to the 2002 presentation.

8

Table of Contents

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
NOTES TO FINANCIAL STATEMENTS—(Continued)
Unaudited (Dollars in thousands)

 
NOTE 10.    SUBSIDIARY GUARANTORS – A portion of our outstanding debt is unconditionally guaranteed, on a joint and several basis, by four of our subsidiaries, which are also guarantors, on an unconditional, joint and several basis, of any obligations under our current bank credit facilities.
 
Consolidating statements of operations for the quarter and six months ended June 30, 2002 and 2001 are as follows (unaudited):
 
    
For the quarter ended June 30, 2002
  
    
Parent Company
     
Subsidiary Guarantors
       
Eliminations
     
Consolidated
  
    
(Dollars in thousands)
  
Net sales
   
$
333,178
 
   
$
211
 
     
$
(211
)
   
$
333,178
 
    
  
    
  
Costs and expenses:
                                      
Depreciation, amortization and cost of fee timber harvested
   
 
31,137
 
   
 
20
 
     
 
—  
 
   
 
31,157
 
Materials, labor and other operating expenses
   
 
278,272
 
   
 
58
 
     
 
(211
)
   
 
278,119
 
Selling, general and administrative expenses
   
 
20,823
 
   
 
105
 
     
 
—  
 
   
 
20,928
 
    
  
    
  
    
 
330,232
 
   
 
183
 
     
 
(211
)
   
 
330,204
 
    
  
    
  
Earnings (loss) from operations
   
 
2,946
 
   
 
28
 
     
 
—  
 
   
 
2,974
 
Interest expense
   
 
(15,679
)
   
 
—  
 
     
 
—  
 
   
 
(15,679
)
Other income (expense), net
   
 
1,957
 
   
 
(1
)
     
 
—  
 
   
 
1,956
 
    
  
    
  
Earnings before taxes on income and equity in net income of consolidated subsidiaries
   
 
(10,776
)
   
 
27
 
     
 
—  
 
   
 
(10,749
)
Equity in net income of consolidated subsidiaries
   
 
16
 
   
 
—  
 
     
 
(16
)
   
 
—  
 
Provision (benefit) for taxes on income
   
 
(4,203
)
   
 
11
 
     
 
—  
 
   
 
(4,192
)
    
  
    
  
Earnings (loss) from continuing operations
   
 
(6,557
)
   
 
16
 
     
 
(16
)
   
 
(6,557
)
Discontinued operations:
                                      
Loss from discontinued operations
   
 
(22,182
)
   
 
(4
)
     
 
4
 
   
 
(22,182
)
Income tax benefit
   
 
(8,650
)
   
 
(2
)
     
 
2
 
   
 
(8,650
)
    
  
    
  
Net earnings (loss)
   
$
(20,089
)
   
$
14
 
     
$
(14
)
   
$
(20,089
)
    
  
    
  

9

Table of Contents

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
NOTES TO FINANCIAL STATEMENTS—(Continued)
Unaudited (Dollars in thousands)

 
    
For the quarter ended June 30, 2001
  
    
Parent Company
     
Subsidiary Guarantors
       
Eliminations
     
Consolidated
  
    
(Dollars in thousands)
  
Net sales
   
$
335,026
 
   
$
296
 
     
$
(296
)
   
$
335,026
 
    
  
    
  
Costs and expenses:
                                      
Depreciation, amortization and cost of fee timber harvested
   
 
27,608
 
   
 
22
 
     
 
—  
 
   
 
27,630
 
Materials, labor and other operating expenses
   
 
276,695
 
   
 
(7
)
     
 
(296
)
   
 
276,392
 
Selling, general and administrative expenses
   
 
20,750
 
   
 
98
 
     
 
—  
 
   
 
20,848
 
    
  
    
  
    
 
325,053
 
   
 
113
 
     
 
(296
)
   
 
324,870
 
    
  
    
  
Earnings from operations
   
 
9,973
 
   
 
183
 
     
 
—  
 
   
 
10,156
 
Interest expense
   
 
(18,634
)
   
 
—  
 
     
 
—  
 
   
 
(18,634
)
Other income, net
   
 
2,076
 
   
 
—  
 
     
 
—  
 
   
 
2,076
 
    
  
    
  
Earnings (loss) before taxes on income and equity in net income of consolidated subsidiaries
   
 
(6,585
)
   
 
183
 
     
 
—  
 
   
 
(6,402
)
Equity in net income of consolidated subsidiaries
   
 
111
 
   
 
—  
 
     
 
(111
)
   
 
—  
 
Provision (benefit) for taxes on income
   
 
(2,569
)
   
 
72
 
     
 
—  
 
   
 
(2,497
)
    
  
    
  
Earnings (loss) from continuing operations
   
 
(3,905
)
   
 
111
 
     
 
(111
)
   
 
(3,905
)
Discontinued operations:
                                      
Earnings (loss) from discontinued operations
   
 
(9,646
)
   
 
168
 
     
 
(168
)
   
 
(9,646
)
Income tax provision (benefit)
   
 
(3,762
)
   
 
65
 
     
 
(65
)
   
 
(3,762
)
    
  
    
  
Net earnings (loss)
   
$
(9,789
)
   
$
214
 
     
$
(214
)
   
$
(9,789
)
    
  
    
  

10

Table of Contents

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
NOTES TO FINANCIAL STATEMENTS—(Continued)
Unaudited (Dollars in thousands)

 
    
For the six months ended June 30, 2002
  
    
Parent Company
     
Subsidiary Guarantors
       
Eliminations
     
Consolidated
  
    
(Dollars in thousands)
  
Net sales
   
$
651,367
 
   
$
498
 
     
$
(498
)
   
$
651,367
 
    
  
    
  
Costs and expenses:
                                      
Depreciation, amortization and cost of fee timber harvested
   
 
61,601
 
   
 
40
 
     
 
—  
 
   
 
61,641
 
Materials, labor and other operating expenses
   
 
551,600
 
   
 
157
 
     
 
(498
)
   
 
551,259
 
Selling, general and administrative expenses
   
 
42,742
 
   
 
205
 
     
 
—  
 
   
 
42,947
 
    
  
    
  
    
 
655,943
 
   
 
402
 
     
 
(498
)
   
 
655,847
 
    
  
    
  
Earnings (loss) from operations
   
 
(4,576
)
   
 
96
 
     
 
—  
 
   
 
(4,480
)
Interest expense
   
 
(34,305
)
   
 
—  
 
     
 
—  
 
   
 
(34,305
)
Other income (expense), net
   
 
3,549
 
   
 
(1
)
     
 
—  
 
   
 
3,548
 
    
  
    
  
Earnings (loss) before taxes on income and equity in net income of consolidated subsidiaries
   
 
(35,332
)
   
 
95
 
     
 
—  
 
   
 
(35,237
)
Equity in net income of consolidated subsidiaries
   
 
58
 
   
 
—  
 
     
 
(58
)
   
 
—  
 
Provision (benefit) for taxes on income
   
 
(13,779
)
   
 
37
 
     
 
—  
 
   
 
(13,742
)
    
  
    
  
Earnings (loss) from continuing operations
   
 
(21,495
)
   
 
58
 
     
 
(58
)
   
 
(21,495
)
Discontinued operations:
                                      
Loss from discontinued operations
   
 
(272,090
)
   
 
(82
)
     
 
82
 
   
 
(272,090
)
Income tax benefit
   
 
(106,115
)
   
 
(32
)
     
 
32
 
   
 
(106,115
)
    
  
    
  
Net earnings (loss)
   
$
(187,470
)
   
$
8
 
     
$
(8
)
   
$
(187,470
)
    
  
    
  

11

Table of Contents

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
NOTES TO FINANCIAL STATEMENTS—(Continued)
Unaudited (Dollars in thousands)

 
    
For the six months ended June 30, 2001
  
    
Parent Company
     
Subsidiary Guarantors
     
Eliminations
     
Consolidated
  
    
(Dollars in thousands)
  
Net sales
   
$
647,898
 
   
$
590
     
$
(590
)
   
$
647,898
 
    
  
    
  
Costs and expenses:
                                    
Depreciation, amortization and cost of fee timber harvested
   
 
54,827
 
   
 
45
     
 
—  
 
   
 
54,872
 
Materials, labor and other operating expenses
   
 
570,697
 
   
 
106
     
 
(590
)
   
 
570,213
 
Selling, general and administrative expenses
   
 
40,854
 
   
 
188
     
 
—  
 
   
 
41,042
 
Restructuring charge
   
 
4,217
 
   
 
—  
     
 
—  
 
   
 
4,217
 
    
  
    
  
    
 
670,595
 
   
 
339
     
 
(590
)
   
 
670,344
 
    
  
    
  
Earnings (loss) from operations
   
 
(22,697
)
   
 
251
     
 
—  
 
   
 
(22,446
)
Interest expense
   
 
(35,368
)
   
 
—  
     
 
—  
 
   
 
(35,368
)
Other income, net
   
 
2,530
 
   
 
—  
     
 
—  
 
   
 
2,530
 
    
  
    
  
Earnings (loss) before taxes on income and equity in net income of consolidated subsidiaries
   
 
(55,535
)
   
 
251
     
 
—  
 
   
 
(55,284
)
Equity in net income of consolidated subsidiaries
   
 
153
 
   
 
—  
     
 
(153
)
   
 
—  
 
Provision (benefit) for taxes on income
   
 
(21,659
)
   
 
98
     
 
—  
 
   
 
(21,561
)
    
  
    
  
Earnings (loss) from continuing operations
   
 
(33,723
)
   
 
153
     
 
(153
)
   
 
(33,723
)
Discontinued operations:
                                    
Earnings (loss) from discontinued operations
   
 
(12,252
)
   
 
449
     
 
(449
)
   
 
(12,252
)
Income tax provision (benefit)
   
 
(4,778
)
   
 
175
     
 
(175
)
   
 
(4,778
)
    
  
    
  
Net earnings (loss)
   
$
(41,197
)
   
$
427
     
$
(427
)
   
$
(41,197
)
    
  
    
  

12

Table of Contents

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
NOTES TO FINANCIAL STATEMENTS—(Continued)
Unaudited (Dollars in thousands)

 
Condensed consolidating balance sheets as of June 30, 2002 and December 31, 2001 are as follows (2002 amounts unaudited):
 
    
June 30, 2002
    
Parent Company
   
Subsidiary Guarantors
     
Eliminations
     
Consolidated
    
(Dollars in thousands)
Assets
                                
Current assets:
                                
Cash
   
$
6,258
   
$
67
 
   
$
—  
 
   
$
6,325
Short-term investments
   
 
176,657
   
 
—  
 
   
 
—  
 
   
 
176,657
Receivables, net
   
 
154,560
   
 
191
 
   
 
—  
 
   
 
154,751
Inventories
   
 
104,301
   
 
179
 
   
 
—  
 
   
 
104,480
Prepaid expenses
   
 
36,164
   
 
(43
)
   
 
—  
 
   
 
36,121
Assets held for sale
   
 
28,426
   
 
3
 
   
 
—  
 
   
 
28,429
    
  
  
  
Total current assets
   
 
506,366
   
 
397
 
   
 
—  
 
   
 
506,763
Land, other than timberlands
   
 
8,271
   
 
396
 
   
 
—  
 
   
 
8,667
Plant and equipment, at cost less accumulated depreciation
   
 
773,592
   
 
837
 
   
 
—  
 
   
 
774,429
Timber, timberlands and related logging facilities
   
 
394,342
   
 
—  
 
   
 
—  
 
   
 
394,342
Other assets
   
 
115,330
   
 
—  
 
   
 
(1,246
)
   
 
114,084
    
  
  
  
    
$
1,797,901
   
$
1,630
 
   
$
(1,246
)
   
$
1,798,285
    
  
  
  
Liabilities and Stockholders’ Equity
                                
Current liabilities:
                                
Current installments on long-term debt
   
$
15,607
   
$
—  
 
   
$
—  
 
   
$
15,607
Accounts payable and accrued liabilities
   
 
198,247
   
 
96
 
   
 
—  
 
   
 
198,343
Liabilities related to assets held for sale
   
 
3,672
   
 
—  
 
   
 
—  
 
   
 
3,672
    
  
  
  
Total current liabilities
   
 
217,526
   
 
96
 
   
 
—  
 
   
 
217,622
Intercompany transfers
   
 
30,683
   
 
(30,683
)
   
 
—  
 
   
 
—  
Long-term debt
   
 
758,158
   
 
—  
 
   
 
—  
 
   
 
758,158
Other long-term obligations
   
 
199,506
   
 
—  
 
   
 
—  
 
   
 
199,506
Deferred taxes
   
 
106,605
   
 
—  
 
   
 
—  
 
   
 
106,605
Stockholders’ equity
   
 
485,423
   
 
32,217
 
   
 
(1,246
)
   
 
516,394
    
  
  
  
    
$
1,797,901
   
$
1,630
 
   
$
(1,246
)
   
$
1,798,285
    
  
  
  

13

Table of Contents

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
NOTES TO FINANCIAL STATEMENTS—(Continued)
Unaudited (Dollars in thousands)

 
    
December 31, 2001
    
Parent Company
   
Subsidiary Guarantors
     
Eliminations
     
Consolidated
    
(Dollars in thousands)
Assets
                                
Current assets:
                                
Cash
   
$
7,391
   
$
84
 
   
$
—  
 
   
$
7,475
Restricted cash
   
 
98,200
   
 
—  
 
   
 
—  
 
   
 
98,200
Short-term investments
   
 
30,509
   
 
—  
 
   
 
—  
 
   
 
30,509
Receivables, net
   
 
118,509
   
 
123
 
   
 
—  
 
   
 
118,632
Inventories
   
 
107,553
   
 
160
 
   
 
—  
 
   
 
107,713
Prepaid expenses
   
 
31,274
   
 
—  
 
   
 
—  
 
   
 
31,274
Assets held for sale
   
 
770,784
   
 
1,249
 
   
 
—  
 
   
 
772,033
    
  
  
  
Total current assets
   
 
1,164,220
   
 
1,616
 
   
 
—  
 
   
 
1,165,836
Land, other than timberlands
   
 
8,272
   
 
396
 
   
 
—  
 
   
 
8,668
Plant and equipment, at cost less accumulated depreciation
   
 
807,886
   
 
877
 
   
 
—  
 
   
 
808,763
Timber, timberlands and related logging facilities
   
 
395,668
   
 
—  
 
   
 
—  
 
   
 
395,668
Other assets
   
 
109,457
   
 
—  
 
   
 
(1,246
)
   
 
108,211
    
  
  
  
    
$
2,485,503
   
$
2,889
 
   
$
(1,246
)
   
$
2,487,146
    
  
  
  
Liabilities and Stockholders’ Equity
                                
Current liabilities:
                                
Current installments on long-term debt
   
$
132,603
   
$
—  
 
   
$
—  
 
   
$
132,603
Accounts payable and accrued liabilities
   
 
189,823
   
 
93
 
   
 
—  
 
   
 
189,916
Early maturing long-term debt
   
 
197,000
   
 
—  
 
   
 
—  
 
   
 
197,000
Liabilities related to assets held for sale
   
 
34,023
   
 
(90
)
   
 
—  
 
   
 
33,933
    
  
  
  
Total current liabilities
   
 
553,449
   
 
3
 
   
 
—  
 
   
 
553,452
Intercompany transfers
   
 
29,872
   
 
(29,872
)
   
 
—  
 
   
 
—  
Long-term debt
   
 
820,522
   
 
—  
 
   
 
—  
 
   
 
820,522
Other long-term obligations
   
 
195,258
   
 
—  
 
   
 
—  
 
   
 
195,258
Deferred taxes
   
 
210,610
   
 
—  
 
   
 
—  
 
   
 
210,610
Stockholders’ equity
   
 
675,792
   
 
32,758
 
   
 
(1,246
)
   
 
707,304
    
  
  
  
    
$
2,485,503
   
$
2,889
 
   
$
(1,246
)
   
$
2,487,146
    
  
  
  

14

Table of Contents

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
NOTES TO FINANCIAL STATEMENTS—(Continued)
Unaudited (Dollars in thousands)

 
Condensed consolidating statements of cash flows for the six months ended June 30, 2002 and 2001 are as follows (unaudited):
 
    
For the six months ended June 30, 2002
  
    
Parent Company
     
Subsidiary Guarantors
       
Eliminations
   
Consolidated
  
    
(Dollars in thousands)
  
Cash Flows From Continuing Operations
                                    
Net earnings (loss)
   
$
(187,478
)
   
$
8
 
     
$
—  
   
$
(187,470
)
Adjustments to reconcile net earnings (loss) to net operating cash flows:
                                    
Loss from discontinued operations
   
 
10,393
 
   
 
50
 
     
 
—  
   
 
10,443
 
Loss on disposal of discontinued operations
   
 
221,223
 
   
 
—  
 
     
 
—  
   
 
221,223
 
Depreciation, amortization and cost of fee timber harvested
   
 
61,601
 
   
 
40
 
     
 
—  
   
 
61,641
 
Deferred taxes
   
 
(104,004
)
   
 
—  
 
     
 
—  
   
 
(104,004
)
Working capital changes
   
 
(21,693
)
   
 
(41
)
     
 
—  
   
 
(21,734
)
Other, net
   
 
(2,651
)
   
 
—  
 
     
 
—  
   
 
(2,651
)
    
  
    
  
Net cash provided by (used for) operating activities of continuing operations
   
 
(22,609
)
   
 
57
 
     
 
—  
   
 
(22,552
)
    
  
    
  
Cash Flows From Investing
                                    
Decrease in restricted cash
   
 
98,200
 
   
 
—  
 
     
 
—  
   
 
98,200
 
Increase in short-term investments
   
 
(146,157
)
   
 
—  
 
     
 
—  
   
 
(146,157
)
Additions to investments
   
 
(2,277
)
   
 
—  
 
     
 
—  
   
 
(2,277
)
Reductions in investments
   
 
970
 
   
 
—  
 
     
 
—  
   
 
970
 
Investments and advances from subsidiaries
   
 
341
 
   
 
(341
)
     
 
—  
   
 
—  
 
Additions to plant and properties
   
 
(13,520
)
   
 
—  
 
     
 
—  
   
 
(13,520
)
    
  
    
  
Net cash used for investing activities of continuing operations
   
 
(62,443
)
   
 
(341
)
     
 
—  
   
 
(62,784
)
    
  
    
  
Cash Flows From Financing
                                    
Change in book overdrafts
   
 
(7,572
)
   
 
—  
 
     
 
—  
   
 
(7,572
)
Repayment of long-term debt
   
 
(376,360
)
   
 
—  
 
     
 
—  
   
 
(376,360
)
Issuance of treasury stock
   
 
4,168
 
   
 
—  
 
     
 
—  
   
 
4,168
 
Dividends
   
 
(8,515
)
   
 
—  
 
     
 
—  
   
 
(8,515
)
Other, net
   
 
(9,213
)
   
 
—  
 
     
 
—  
   
 
(9,213
)
    
  
    
  
Net cash used for financing activities of continuing operations
   
 
(397,492
)
   
 
—  
 
     
 
—  
   
 
(397,492
)
    
  
    
  
Cash from continuing operations
   
 
(482,544
)
   
 
(284
)
     
 
—  
   
 
(482,828
)
Cash from discontinued operations
   
 
481,412
 
   
 
266
 
     
 
—  
   
 
481,678
 
    
  
    
  
Decrease in cash
   
 
(1,132
)
   
 
(18
)
     
 
—  
   
 
(1,150
)
Balance at beginning of period
   
 
7,391
 
   
 
84
 
     
 
—  
   
 
7,475
 
    
  
    
  
Balance at end of period
   
$
6,259
 
   
$
66
 
     
$
—  
   
$
6,325
 
    
  
    
  

15

Table of Contents

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
NOTES TO FINANCIAL STATEMENTS—(Continued)
Unaudited (Dollars in thousands)

 
    
For the six months ended June 30, 2001
  
    
Parent Company
     
Subsidiary Guarantors
       
Eliminations
   
Consolidated
  
    
(Dollars in thousands)
  
Cash Flows From Continuing Operations
                                    
Net earnings (loss)
   
$
(41,624
)
   
$
427
 
     
$
—  
   
$
(41,197
)
Adjustments to reconcile net earnings (loss) to net operating cash flows:
                                    
Loss (earnings) from discontinued operations
   
 
7,748
 
   
 
(274
)
     
 
—  
   
 
7,474
 
Depreciation, amortization and cost of fee timber harvested
   
 
54,827
 
   
 
45
 
     
 
—  
   
 
54,872
 
Deferred taxes
   
 
(18,539
)
   
 
—  
 
     
 
—  
   
 
(18,539
)
Working capital changes
   
 
(5,385
)
   
 
24
 
     
 
—  
   
 
(5,361
)
Other, net
   
 
(729
)
   
 
—  
 
     
 
—  
   
 
(729
)
    
  
    
  
Net cash provided by (used for) operating activities of continuing operations
   
 
(3,702
)
   
 
222
 
     
 
—  
   
 
(3,480
)
    
  
    
  
Cash Flows From Investing
                                    
Increase in restricted cash
   
 
(96,600
)
   
 
—  
 
     
 
—  
   
 
(96,600
)
Increase in short-term investments
   
 
(1,916
)
   
 
—  
 
     
 
—  
   
 
(1,916
)
Additions to investments
   
 
(2,171
)
   
 
—  
 
     
 
—  
   
 
(2,171
)
Reductions in investments
   
 
944
 
   
 
—  
 
     
 
—  
   
 
944
 
Investments and advances from subsidiaries
   
 
948
 
   
 
(948
)
     
 
—  
   
 
—  
 
Additions to plant and properties
   
 
(24,172
)
   
 
—  
 
     
 
—  
   
 
(24,172
)
    
  
    
  
Net cash used for investing activities of continuing operations
   
 
(122,967
)
   
 
(948
)
     
 
—  
   
 
(123,915
)
    
  
    
  
Cash Flows From Financing
                                    
Change in book overdrafts
   
 
(5,137
)
   
 
—  
 
     
 
—  
   
 
(5,137
)
Decrease in notes payable
   
 
(188,943
)
   
 
—  
 
     
 
—  
   
 
(188,943
)
Proceeds from long-term debt
   
 
450,000
 
   
 
—  
 
     
 
—  
   
 
450,000
 
Repayment of long-term debt
   
 
(100,285
)
   
 
—  
 
     
 
—  
   
 
(100,285
)
Long-term debt issuance fees
   
 
(14,133
)
   
 
—  
 
     
 
—  
   
 
(14,133
)
Issuance of treasury stock
   
 
1,669
 
   
 
—  
 
     
 
—  
   
 
1,669
 
Purchase of treasury stock
   
 
(8,349
)
   
 
—  
 
     
 
—  
   
 
(8,349
)
Dividends
   
 
(24,629
)
   
 
—  
 
     
 
—  
   
 
(24,629
)
Other, net
   
 
(3,378
)
   
 
—  
 
     
 
—  
   
 
(3,378
)
    
  
    
  
Net cash provided by financing activities of continuing operations
   
 
106,815
 
   
 
—  
 
     
 
—  
   
 
106,815
 
    
  
    
  
Cash from continuing operations
   
 
(19,854
)
   
 
(726
)
     
 
—  
   
 
(20,580
)
Cash from discontinued operations
   
 
18,622
 
   
 
699
 
     
 
—  
   
 
19,321
 
    
  
    
  
Decrease in cash
   
 
(1,232
)
   
 
(27
)
     
 
—  
   
 
(1,259
)
Balance at beginning of period
   
 
10,526
 
   
 
131
 
     
 
—  
   
 
10,657
 
    
  
    
  
Balance at end of period
   
$
9,294
 
   
$
104
 
     
$
—  
   
$
9,398
 
    
  
    
  

16

Table of Contents
ITEM 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
We are a vertically integrated and diversified forest products company. We own approximately 1.5 million acres of timberland and operate 15 manufacturing facilities, located primarily in Arkansas, Idaho and Minnesota. Our business is organized into three segments: (i) Resource, which manages our timberlands and supplies wood fiber to our manufacturing segments and third parties; (ii) Wood Products, which manufactures oriented strand board (OSB), plywood, lumber and particleboard, and (iii) Pulp and Paper, which manufactures bleached paperboard, consumer tissue and bleached softwood market pulp.
 
In May 2002, we exited a fourth business segment, Printing Papers, which produced primarily high grade coated printing papers and bleached hardwood market pulp. Our exit from this business was done in conjunction with the sale of our Cloquet, Minnesota, pulp and printing papers facilities and certain associated assets to a domestic subsidiary of Sappi Limited for $480 million in cash. We closed our Brainerd, Minnesota, printing papers mill at the same time. We are currently seeking buyers for the Brainerd facilities. The sale reflects a strategic realignment to focus in particular on our natural resources, wood products and consumer tissue businesses, which we believe have the greatest potential for growth.
 
This report contains, in addition to historical information, forward-looking statements. These forward-looking statements are based on management’s best estimates and assumptions regarding future events, and are therefore subject to known and unknown risks and uncertainties and are not guarantees of future performance. Our actual results could differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed below under “Factors Influencing Our Results of Operations.”
 
Critical Accounting Policies
 
Our principal accounting policies are discussed on pages 30-32 of our Form 10-K for the year ended December 31, 2001. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported financial position and operating results of the company. Management believes the accounting policies discussed below represent the most complex, difficult and subjective judgments it makes in this regard.
 
Long-lived assets. We account for long-lived assets in accordance with Financial Accounting Standards Board (FASB) Statement No. 144. The statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The test for impairment requires management to estimate future cash flows, which can differ materially from actual future results based upon many factors, including but not limited to changes in economic conditions, environmental requirements, and capital spending.
 
Restructuring and other charges. In 2000 and 2001 we recorded charges for the restructuring of our salaried workforce, the closure of a manufacturing plant and the reduction of the hourly workforce at another site. We also completed the sale of a majority of our Printing Papers

17

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segment assets, and the corresponding closure of a printing papers facility in May 2002. In June 2002 we announced plans to close a hardwood lumber mill in Warren, Arkansas. These events require estimates of liabilities for employee benefits, demolition, environmental clean-up and other costs, which could differ from actual costs incurred.
 
Environmental liabilities.    We record accruals for estimated environmental liabilities in accordance with FASB Statement No. 5. These estimates reflect assumptions and judgments as to the probable nature, magnitude and timing of required investigation, remediation and monitoring activities. Due to the numerous uncertainties and variables associated with these assumptions and judgments, and changes in governmental regulations and environmental technologies, our accruals are subject to substantial uncertainties and our actual costs could be materially more or less than the estimated amounts.
 
Pension and postretirement benefits.    Substantially all of our employees are covered by noncontributory defined benefit pension plans, and certain salaried and hourly employees are covered by company-sponsored defined benefit retiree health care and life insurance plans. The cost of these plans is accounted for in accordance with FASB Statement No. 87 and Statement No. 106. Both statements require assumptions regarding discount rates and asset returns and the postretirement benefits plan requires assumptions regarding medical cost trends. Actual asset returns and medical costs which are more favorable than our assumptions can have the effect of lowering our expense and cash contributions, and conversely, actual results which are less favorable than our assumptions could increase our expense and cash contributions. Due to our recent exit from the coated printing papers business and the resulting reduction in the number of salaried and hourly employees, we believe that our costs should decline in the future for pension and postretirement benefits.
 
Factors Influencing Our Results of Operations
 
Our operating results have been and will continue to be influenced by a variety of factors, including the cyclical nature of the forest products industry, competition, the efficiency and level of capacity utilization of our manufacturing operations, changes in our principal expenses such as wood fiber expenses and energy costs, changes in the production capacity of our manufacturing operations as a result of major capital spending projects and other factors.
 
Our operating results reflect the general cyclical pattern of the forest products industry. Our wood products are subject to competition from manufacturers in North and South America. In addition, our pulp-based products, other than tissue products, are globally-traded commodity products. Historical prices for our products have been volatile, and we, like other participants in the forest products industry, have limited direct influence over the timing and extent of price changes for our products. Product pricing is significantly affected by the relationship between supply and demand in the forest products industry. Product supply is influenced primarily by fluctuations in available manufacturing capacity. Demand is affected by the state of the economy in general and a variety of other factors. The demand for our timber resources and wood products is affected by the level of new residential construction activity and, to a lesser extent, home repair and remodeling activity, which are subject to fluctuations due to changes in economic conditions, interest rates, population growth, weather conditions and other factors. The demand for most of our pulp and paper products is primarily affected by the state of the

18

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global economy, in general, and, in particular, the economies in North America and east Asia.
 
The markets for our products are highly competitive and companies that have substantially greater financial resources than we do compete with us in each of our markets. Our competitors are located throughout the world, and variations in exchange rates between the U.S. dollar and other currencies significantly affect our competitive position compared to our international competitors. In addition, our industry is capital intensive, which leads to high fixed costs and generally results in continued production as long as prices are sufficient to cover variable costs. These conditions have contributed to substantial price competition, particularly during periods of reduced demand. Some of our competitors are currently lower-cost producers in some of the businesses in which we operate, particularly in our pulp-based businesses, and accordingly these competitors may be less adversely affected than we are by price decreases.
 
Energy has become one of our most volatile operating expenses over the past several years. Substantial price increases commenced in late 2000 and continued in the first half of 2001, before moderating in the second half of 2001. In 2002, energy prices have returned to more normal historical levels, which has had a favorable effect on our results compared to the same period of 2001. In periods of high energy prices, market conditions may prevent us from passing higher energy costs on to our customers through price increases and therefore could adversely affect our operating results. We have taken steps to reduce our exposure to the volatile spot market for electricity. Our energy costs in future periods will depend principally on our ability to continue to produce internally a substantial portion of our electricity needs and on changes in market prices for natural gas.
 
Another significant expense is the cost of wood fiber needed to supply our manufacturing facilities. Our timberlands provided approximately 53% of the log requirements for our sawmill and plywood manufacturing facilities in 2001 and an average of approximately 62% of those requirements over the past five calendar years. Including the logs used for pulp and OSB, the percentages of our fiber requirements supplied by our timberlands were approximately 28% in 2001 and an average of approximately 37% over the past five calendar years. Adjusted for our exit from the printing papers and hardwood lumber businesses, the percentage of our fiber requirements supplied by our timberlands was approximately 35% in 2001 and an average of approximately 42% over the past five years. The percentage of our wood fiber requirements supplied by our timberlands will fluctuate based on a variety of factors, including changes in our timber harvest levels and changes in our manufacturing capacity. The cost of various types of wood fiber that we purchase in the market has at times fluctuated greatly because of economic or industry conditions. Selling prices of our products have not always increased in response to wood fiber price increases. On occasion, our results of operations have been and may in the future be adversely affected if we are unable to pass cost increases through to our customers.
 
Finally, changes in our manufacturing capacity primarily as a result of capital spending programs have significantly affected our results of operations in recent periods. In September 2000, we closed our plywood mill in Jaype, Idaho, as a result of poor plywood markets, lack of adequate raw materials and long-term transportation concerns. In January 2001, we completed a modernization and expansion of our OSB mill in Cook, Minnesota, resulting in an increase in annual production capacity from 250.0 million square feet to 435.0 million square feet. In May 2002, we sold a majority of our Printing Papers segment assets to a domestic subsidiary of Sappi Limited

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and exited the printing papers business. In June 2002, we announced our intention to close a hardwood sawmill in Arkansas and exit the hardwood lumber business. Each of these changes has affected or will affect our levels of net sales and expenses, as well as the comparability of our operating results from period to period. Additionally, the profitability of our manufacturing segments depends largely on our ability to operate our manufacturing facilities efficiently and at or near full capacity. Our operating results could be harmed if market demand does not justify operating at these levels or if our operations are inefficient or suffer significant interruption for any reason.
 
Results of Operations
 
As noted above, our business is now organized into three reporting segments: Resource; Wood Products; and Pulp and Paper. Sales or transfers between the segments are recorded as intersegment sales based on prevailing market prices. Because of the role of the Resource segment in supplying our manufacturing segments with wood fiber from both our own timberlands and from outside third parties, intersegment sales represent a significant portion of the Resource segment’s total net sales. Intersegment sales represent a substantially lower percentage of net sales for our other segments.
 
A summary of period-to-period changes in items included in the statements of operations is presented on page 27 of this Form 10-Q. In the period-to-period discussion of our results of operations below, when we discuss our consolidated net sales, contributions by each of the segments to our net sales are reported after elimination of intersegment sales. In the “Discussion of Business Segments” sections below, each segment’s net sales are set forth before elimination of intersegment sales. Also, in discussing our operating results we refer to net sales realizations, which for each product line are calculated by subtracting freight from net sales and then dividing the result by the relevant quantities of the product shipped for the period. We believe net sales realizations are helpful in showing trends in the pricing of our products.
 
As a result of the sale of a majority of our Printing Papers segment assets and our announcement to close the Bradley hardwood sawmill, those operations have been classified as “discontinued operations” and “assets held for sale” in the financial statements for the quarter and six months ended June 30, 2002. Year 2001 comparative amounts in the financial statements have been reclassified to conform to the 2002 presentation. The discussion below addresses our continuing businesses.
 
Six Months Ended June 30, 2002, Compared to Six Months Ended June 30, 2001
 
Net Sales – Net sales increased less than 1%, from $647.9 million for the six months ended June 30, 2001, to $651.4 million for the same period in 2002. The increase was primarily the result of the increases in net sales for the Wood Products segment of $20.2 million and the Resource segment of $11.9 million, which were substantially offset by a decline of $28.7 million in net sales for the Pulp and Paper segment. Increased shipments of oriented strand board and lumber were responsible for the increase in net sales for the Wood Products segment. An increase in sales to external customers was responsible for the net sales rise in the Resource segment. Lower net sales realizations for paperboard and pulp and decreased paperboard shipments caused net sales for the Pulp and Paper segment to decline.
 
Depreciation, amortization and cost of fee timber harvested – For the six months ended June 30, 2002, depreciation, amortization and cost of fee timber

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harvested expense totaled $61.6 million, an increase of $6.7 million from the prior year period total of $54.9 million. The increase was largely due to higher depletion and amortization expense. Depletion expense was $3.2 million higher as a result of increased permit timber harvests in Minnesota and Arkansas and our activities at our hybrid poplar plantation in Boardman, Oregon. Amortization expense increased $3.2 million due to the early repayment of debt in the second quarter of 2002, causing the write-off of related financing costs which are normally amortized over the period the debt is outstanding.
 
Materials, labor and other operating expenses – Materials, labor and other operating expenses decreased 3%, or $18.9 million, from $570.2 million for the six months ended June 30, 2001, to $551.3 million for the six months ended June 30, 2002. A decline of $23.8 million in energy costs for the first six months of 2002 compared to 2001 was partially offset by higher wood fiber costs.
 
Selling, general and administrative expenses – Selling, general and administrative expenses amounted to $42.9 million for the six months ended June 30, 2002, up slightly from $41.0 million for the same period of 2001.
 
Restructuring charge – In March 2001 we recorded a $4.2 million pre-tax charge associated with a workforce reduction plan at our pulp, paperboard and consumer products operations in Idaho.
 
Interest expense, net of capitalized interest – Interest expense was $34.3 million for the six months ended June 30, 2002, a decrease of $1.1 million from the prior year period. The decrease reflects our repayment of $376.4 million of debt during the first six months of 2002, offset partially by a reduction in the amount of interest capitalized for major construction projects in 2002.
 
Other income, net – For the six months ended June 30, 2002, other income was $3.5 million, compared to $2.5 million for the 2001 period.
 
Provision (benefit) for taxes on income – For the six months ended June 30, 2002, we recorded an income tax benefit from continuing operations of $13.7 million, reflecting our net loss before taxes, based on an estimated tax rate of 39%. For the six months ended June 30, 2001, we recorded an income tax benefit from continuing operations of $21.6 million, also reflecting a tax rate of 39%.
 
Loss from continuing operations – We recorded a loss from continuing operations of $21.5 million for the six months ended June 30, 2002, compared to a loss from continuing operations of $33.7 million for the same period in 2001.
 
Discussion of business segments – The Resource segment reported operating income of $22.5 million for the first six months of 2002, up from $17.9 million earned in the same period of 2001. Segment net sales increased 20% from $172.8 million for the 2001 period to $207.7 million for the 2002 period. The increase in net sales was due to increased wood fiber sales to our other operating segments in Arkansas, Idaho and Minnesota, and to increased sales to third parties in Idaho and Minnesota. Resource segment expenses increased $30.3 million, to $185.2 million for the first six months of 2002, compared to $154.9 million for the first six months of 2001. Increased outside fiber purchases and logging costs were largely responsible for the increase in expenses.

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The Wood Products segment reported an operating loss of $.3 million for the first six months of 2002, a substantial improvement compared to the $12.7 million loss in the first six months of 2001. Segment net sales were $270.7 million for the first six months of 2002, 7% higher than the $252.7 million recorded for the 2001 period. Oriented strand board net sales increased $13.0 million, to $93.5 million for the first six months of 2002 compared to 2001 due to an 18% increase in shipments. Lumber net sales rose to $139.3 million, from $128.9 million in 2001. Lumber shipments increased 9%, although net sales realizations were slightly lower than in the first six months of 2001. Segment expenses were slightly higher in the first six months of 2002, totaling $271.0 million versus $265.4 million in 2001. Wood fiber costs were higher for the first six months of 2002, largely due to higher log costs in Arkansas and operating the Cook, Minnesota, oriented strand board mill for the full six months in 2002. The mill was shut down for a portion of the first quarter of 2001 to complete a modernization and expansion project.
 
The Pulp and Paper segment reported an operating loss for the first six months of 2002 of $.6 million, compared to a loss of $10.4 million for 2001’s first six months. Segment net sales decreased to $362.6 million for the first six months of 2002 from $391.3 million for the 2001 period. The decrease was due largely to lower net sales realizations and decreased shipments for paperboard. Net sales realizations declined 9% and shipments were 5% below first half 2001 levels. Segment expenses were also lower for the first six months of 2002, totaling $363.2 million compared to $401.7 million for the first six months of 2001. Energy expenses were significantly lower than in the first half of 2001 and the decline in paperboard shipments and production also reduced expenses.
 
Our discontinued operations, which consist of our former Printing Papers segment and our Bradley sawmill in Warren, Arkansas, reported a loss, before taxes, of $17.1 million in 2002’s first six months, compared to a loss, before taxes, of $12.3 million in 2001. The Printing Papers segment operated until mid-May, when a majority of its assets were sold. The Bradley sawmill is scheduled for closure in early August. Additionally, during the first six months of 2002 we recorded losses on the disposal of discontinued operations totaling $255.0 million, before taxes.
 
Three Months Ended June 30, 2002, Compared to Three Months Ended June 30, 2001
 
Net Sales – Net sales decreased less than 1%, from $335.0 million for the three months ended June 30, 2001, to $333.2 million for the same period in 2002. An increase in Resource segment net sales of $7.6 million was offset by declines in net sales for the Wood Products segment of $5.2 million and the Pulp and Paper segment of $4.2 million. Resource segment net sales benefited from increased sales to third parties in Idaho and Minnesota. Lower net sales realizations for oriented strand board and lumber were largely responsible for the decrease in net sales for the Wood Products segment. Lower net sales realizations for paperboard caused net sales for the Pulp and Paper segment to decline.
 
Depreciation, amortization and cost of fee timber harvested – For the three months ended June 30, 2002, depreciation, amortization and cost of fee timber harvested expense totaled $31.2 million, an increase of $3.5 million from the prior year amount of $27.6 million. Higher amortization expense in the second quarter of 2002, due to the accelerated amortization of debt financing costs, resulting from early debt repayments, was responsible for the increase.

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Table of Contents
 
Materials, labor and other operating expenses – Materials, labor and other operating expenses increased less than 1%, to $278.1 million for the three months ended June 30, 2002, from $276.4 million for the three months ended June 30, 2001. Increases in wood fiber and other production costs were mostly offset by lower energy costs of $6.9 million in the second quarter of 2002 compared to 2001.
 
Selling, general and administrative expenses – Selling, general and administrative expenses were not materially different between the two quarters, amounting to $20.9 million for the three months ended June 30, 2002, compared to $20.8 million for the same period of 2001.
 
Interest expense, net of capitalized interest – Interest expense was $15.7 million for the three months ended June 30, 2002, a decrease from $18.6 million in the prior year period. The decrease reflects our payment in the first half of 2002 of approximately $376.4 million in debt, which was outstanding during the second quarter of 2001.
 
Other income, net – For the three months ended June 30, 2002, other income was $2.0 million, compared to $2.1 million for the 2001 period.
 
Provision (benefit) for taxes on income – For the three months ended June 30, 2002, we recorded an income tax benefit from continuing operations of $4.2 million, reflecting our net loss before taxes, based on an estimated tax rate of 39%. For the three months ended June 30, 2001, we recorded a tax benefit from continuing operations of $2.5 million, also reflecting a tax rate of 39%.
 
Loss from continuing operations – We recorded a loss from continuing operations of $6.6 million for the three months ended June 30, 2002, compared to a loss from continuing operations of $3.9 million for the same period in 2001.
 
Discussion of business segments – The Resource segment reported operating income of $12.5 million for the second quarter of 2002, up from $10.0 million earned in the same period of 2001. Segment net sales increased 8% from $81.5 million for the 2001 period to $88.1 million for the 2002 period. The increase in net sales was due to increased wood fiber sales to our other operating segments in Arkansas, Idaho and Minnesota, and to third parties in Idaho and Minnesota. Resource segment expenses increased $4.1 million, to $75.6 million in the second quarter of 2002, compared to $71.5 million in the second quarter of 2001. Increased outside fiber purchases in Arkansas were largely responsible for the increase in expenses.
 
The Wood Products segment reported operating income of $.9 million for the second quarter of 2002, substantially below the $7.6 million earned in the second quarter of 2001. Segment net sales were $138.2 million for the second quarter of 2002, 5% lower than the $145.4 million recorded for the 2001 period. Oriented strand board net sales decreased to $46.8 million for the second quarter of 2002, compared to $48.2 million in the 2001 period, due to an 8% decrease in net sales realizations. Increased oriented strand board shipments partially offset the decline in realizations. Lumber net sales were $71.9 million, down from $74.3 million in 2001. Lumber shipments increased 4%. However, net sales realizations were 7% lower than in the second quarter of 2001. Segment expenses were slightly lower in the second quarter of 2002, totaling $137.3 million versus $137.8 million in 2001.

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Table of Contents
 
The Pulp and Paper segment reported operating income for the second quarter of 2002 totaling $5.2 million, compared to income of $4.7 million for 2001’s second quarter. Segment net sales decreased to $184.5 million for the second quarter of 2002 from $188.7 million for the 2001 period. The decrease was due largely to decreased net sales for paperboard that were partially offset by slightly increased tissue net sales. Net sales realizations for paperboard declined 10% and for tissue declined 2%. However, increased shipments of 2% for paperboard and 5% for tissue compared to second quarter 2001 levels favorably affected results. Segment expenses were lower for the second quarter of 2002, totaling $179.3 million, compared to $184.0 million in the second quarter of 2001. Energy expenses were approximately $6 million lower than in the second quarter of 2001.
 
Our discontinued operations incurred a loss of $22.2 million, before taxes, for the second quarter of 2002. The amount reflects a $9.4 million charge for estimated closure costs at the Bradley hardwood sawmill, $.5 million in operating losses for the mill, and $12.3 million in losses related to the winding down of operations in the former Printing Papers segment.
 
Liquidity and Capital Funding
 
At June 30, 2002, our financial position included long-term debt of $773.8 million, including current installments on long-term debt of $15.6 million. Our ratio of long-term debt (excluding current installments) to stockholders’ equity was 1.47 to 1 at June 30, 2002, compared to 1.16 to 1 at December 31, 2001. Long-term debt at June 30, 2002 (including current installments and early maturing long-term debt) declined $376.4 million from the December 2001 balance. Our debt declined due to normal payments on maturing debt of $131.0 million and the early repayment of $245.4 million of long-term debt, using a portion of the proceeds from the sale of a majority of the Printing Papers segment assets. We anticipate using the proceeds from the sale to make further reductions in our long-term debt. Stockholders’ equity declined $190.9 million, largely due to a net loss of $187.5 million for the first six months of 2002.
 
We had working capital of $289.1 million at June 30, 2002, a decrease of $323.2 million from December 31, 2001. The decrease was largely due to a decrease in assets held for sale of $743.6 million, as a result of the sale of Printing Papers segment assets, and a decrease in restricted cash of $98.2 million, used to repay maturing debt. Partially offsetting these amounts were increases in short-term investments of $146.1 million and receivables of $36.1 million, combined with decreases in current installments on long-term debt of $117.0 million, early maturing long-term debt of $197.0 million and liabilities related to assets held for sale of $30.3 million.
 
Net cash used for operations for the first six months of 2002 totaled $22.6 million, compared with $3.5 million for the same period in 2001. An increase in cash used for working capital items accounts for the unfavorable comparison.
 
For the six months ended June 30, 2002, net cash used for investing was $62.8 million, compared to cash used for investing of $123.9 million during the six months ended June 30, 2001. In March 2002 we applied the balance in our restricted cash account to the repayment of current installment debt. Short-term investments increased $146.2 million in the first half of 2002 due to proceeds received from the sale of Printing Papers segment assets. Capital spending totaled $13.5 million in the first six months of 2002, compared to $24.2 million for the same period in 2001. Spending in 2002 has

24

Table of Contents
been focused on routine general replacement, safety, forest resource and environmental projects.
 
Net cash used for financing was $397.5 million for the six months ended June 30, 2002, compared to cash provided by financing of $106.8 million during the same period in 2001. The majority of the cash used in the current year was for the repayment of $376.4 million of long-term debt. As discussed above, we used our restricted cash to repay our $100 million 6.25% debentures, and paid other debt using a portion of the proceeds from asset sales. Our dividend payments declined for the first six months of 2002, to $8.5 million from $24.6 million for the same period in 2001, due largely to a dividend rate cut announced on August 10, 2001.
 
In connection with the sale of our Printing Papers segment assets, we were required under the terms of our bank credit facility to use the proceeds to repay approximately $198.5 million under the term loan portion of the facility, and all outstanding debt under our revolving credit line, totaling $33.2 million. We have also used a portion of the proceeds to repay approximately $46.9 million of additional debt. We expect to use the proceeds from the sale to further reduce our other outstanding debt and for capital expenditures.
 
Our current bank credit facility is comprised of a three-year revolving line of credit of up to $200.0 million that expires June 28, 2004, including a $110.0 million subfacility for letters of credit, usage of which reduces availability under the revolving line of credit. Our obligations under the bank credit facility are secured by approximately 130,000 acres of our timberlands in Arkansas and our accounts receivable and inventory. As of June 30, 2002, there were no amounts outstanding under the credit facility. Approximately $59.0 million of the revolving line of credit was used to support outstanding letters of credit. Approximately $55.4 million of these letters of credit provide credit enhancement for a portion of our outstanding floating interest rate bonds. As of June 30, 2002, we obtained a waiver of the fixed charge coverage ratio covenant contained in our bank credit facility. We expect it may be necessary to obtain an additional waiver of the fixed charge coverage ratio covenant to be in compliance as of September 30, 2002. However, we are currently negotiating amendments to our bank credit facility, including a revision to the fixed charge coverage ratio, to reflect our current financial condition following the closing of the sale of the Printing Papers segment assets.
 
We believe that our cash, cash flow from operations and available borrowings under our revolving credit facility will be sufficient to fund our operations, capital expenditures and debt service obligations for the next twelve months and for the foreseeable future. We cannot assure, however, that our business will generate sufficient cash flow from operations or that we will remain in compliance with the financial covenants in the credit facilities so that future borrowings thereunder will be available to us. This will be dependent upon our future financial performance, which will be affected by general economic, competitive and other factors, including those discussed under “Factors Influencing Our Results of Operations,” many of which are beyond our control.
 
On July 12, 2002, Standard & Poor’s Ratings Services announced that it had affirmed its ratings on our debt, including our BBB- corporate rating. Standard & Poor’s also announced that it has removed us from CreditWatch, where we had been placed in April 2001. During the quarter Fitch also reaffirmed our BBB- rating, classifying us as stable, and removed us from CreditWatch. Moody’s has yet to act on updating our credit ratings.

25

Table of Contents
 
It is our practice to periodically review strategic and operational alternatives to improve our operating results and financial position. In this regard, we consider and plan to continue to consider, among other things, adjustments to our capital expenditures and overall spending, the restructuring of our operations to achieve greater efficiencies, and the disposition of assets that may have greater value to others. There can be no assurance that we will be successful in implementing any new strategic or operational initiatives or, if implemented, that they will have the effect of improving our operating results and financial position.

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POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
Changes in Statements of Operations
(Dollars in thousands)
 
    
Quarter Ended June 30
     
Six Months Ended June 30
  
    
2002
     
2001
       
Increase (Decrease)
     
2002
     
2001
     
Increase (Decrease)
  
Net sales
   
$
333,178
 
   
$
335,026
 
     
(1
%)
   
$
651,367
 
   
$
647,898
 
   
1
%
Costs and expenses:
                                                    
Depreciation, amortization and cost of fee timber harvested
   
 
31,157
 
   
 
27,630
 
     
13
%
   
 
61,641
 
   
 
54,872
 
   
12
%
Materials, labor and other operating expenses
   
 
278,119
 
   
 
276,392
 
     
1
%
   
 
551,259
 
   
 
570,213
 
   
(3
%)
Selling, general and administrative expenses
   
 
20,928
 
   
 
20,848
 
     
—  
 
   
 
42,947
 
   
 
41,042
 
   
5
%
Restructuring charge
   
 
—  
 
   
 
—  
 
     
—  
 
   
 
—  
 
   
 
4,217
 
   
*
 
Earnings (loss) from operations
   
 
2,974
 
   
 
10,156
 
     
(71
%)
   
 
(4,480
)
   
 
(22,446
)
   
(80
%)
Interest expense
   
 
(15,679
)
   
 
(18,634
)
     
(16
%)
   
 
(34,305
)
   
 
(35,368
)
   
(3
%)
Other income, net
   
 
1,956
 
   
 
2,076
 
     
(6
%)
   
 
3,548
 
   
 
2,530
 
   
40
%
Provision (benefit) for taxes on income
   
 
(4,192
)
   
 
(2,497
)
     
68
%
   
 
(13,742
)
   
 
(21,561
)
   
(36
%)
Loss from continuing operations
   
 
(6,557
)
   
 
(3,905
)
     
68
%
   
 
(21,495
)
   
 
(33,723
)
   
(36
%)
Discontinued operations:
                                                    
Loss from discontinued operations
   
 
(22,182
)
   
 
(9,646
)
     
130
%
   
 
(272,090
)
   
 
(12,252
)
   
2,121
%
Income tax benefit
   
 
(8,650
)
   
 
(3,762
)
     
130
%
   
 
(106,115
)
   
 
(4,778
)
   
2,121
%
Net loss
   
$
(20,089
)
   
$
(9,789
)
     
105
%
   
$
(187,470
)
   
$
(41,197
)
   
355
%
*
 
Not a meaningful figure.

27

Table of Contents
 
ITEM 3.    Quantitative and Qualitative Disclosures About Market Risk
 
Our exposure to market risks on our financial instruments includes interest rate risk on our outstanding variable rate debt under our revenue bonds and our bank credit facility. As of June 30, 2002, we had approximately $54 million of variable rate debt and no credit line debt outstanding. The interest rates applied to these borrowings are adjusted often and therefore react quickly to any movement in the general trend of market interest rates. Interest expense incurred annually related to our variable rate debt depends upon the amount outstanding during the year and the extent to which interest rates rise or fall. Maturities for the variable rate debt begin in 2007 and extend through 2030.
 
All of our other long-term debt is fixed-rate and therefore changes in market interest rates do not expose us to risk for these financial instruments. However, in December 2001 we entered into a fixed-to-variable interest rate swap to hedge a portion of our 10% senior subordinated debentures. The swap has been designed as a fair value hedge and calls for us to pay a variable interest amount, based on LIBOR rates, and receive a fixed rate payment from a financial institution, calculated on $165.0 million of our 10% senior subordinated debentures. We assume there is no ineffectiveness in the hedge and, accordingly, a fair value increase or decrease in the swap is offset by a corresponding decrease or increase in the value of the underlying debt instrument.
 
PART II
 
ITEM 4.    Submission of Matters to a Vote of Security Holders
 
At the annual meeting of stockholders of the company held on May 15, 2002, the company’s stockholders voted on four proposals as follows:
 
Proposal 1
 
Election of Three Directors
 
    
Votes For
   
Votes Withheld
Jerome C. Knoll
   
51,442,431
   
2,008,408
Toni Rembe
   
51,451,774
   
1,999,065
William T. Weyerhaeuser
   
51,481,864
   
1,968,975
 
Proposal 2
 
Amendment of the Restated Certificate of Incorporation
 
Shares For
   
24,393,372
Shares Against
   
283,678
Shares Withheld
   
106,850
 
Proposal 3
 
Stockholder Proposal Requesting Preparation of Dividend Policy Report
 
Votes For
   
6,539,377
Votes Against
   
39,371,288
Votes Withheld
   
1,538,763

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Table of Contents
 
Proposal 4
 
Ratification of the Selection of KPMG LLP as Independent Auditor for 2002
 
Votes For
   
51,707,072
Votes Against
   
1,301,742
Votes Withheld
   
442,025
 
ITEM 6.    Exhibits and Reports on Form 8-K
 
Exhibits
 
The exhibit index is located on page 31 of this Form 10-Q.
 
Reports on Form 8-K
 
A current report on Form 8-K was filed on May 24, 2002. Under Item 2, Disposition of Assets, we reported that on May 13, 2002, we completed the sale of our Cloquet, Minnesota, pulp and printing papers facilities and associated assets to Sappi Cloquet LLC (formerly named Northern Holdings LLC), a domestic subsidiary of Sappi Limited. In consideration for the assets, Northern Holdings paid us approximately $480 million in cash and assumed certain liabilities. Under Item 7, Financial Statements and Exhibits, we filed unaudited pro forma condensed consolidated financial statements.

29

Table of Contents
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
POTLATCH CORPORATION
(Registrant)
By:
  
/S/    GERALD L. ZUEHLKE        
   
Gerald L. Zuehlke
Vice President, Finance, Chief
Financial Officer and Treasurer
(Duly Authorized; Principal
Financial Officer)
 
 
By:
  
/S/    TERRY L. CARTER        
   
Terry L. Carter
Controller
(Duly Authorized; Principal
Accounting Officer)
 
Date:  August 12, 2002

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Table of Contents
 
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
Exhibit Index
 
Exhibit
   
PART II
(4)
   
Registrant undertakes to file with the Securities and Exchange Commission, upon request, any instrument with respect to long-term debt.
(10)(o)(v)
   
Consent and Modification, dated June 12, 2002, amending the definition of Consolidated Net Worth.
(10)(o)(vi)
   
Fourth Amendment to Credit Agreement and Waiver, dated as of July 16, 2002, waiving the fixed charge coverage ratio covenant for the second quarter of 2002 and various other amendments.

31