(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________to __________

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

Yes   x

No   o

PAGE

PART I.

FINANCIAL INFORMATION

Item l.

Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2003 and 2002

1

Condensed Consolidated Balance Sheets as of March 31, 2003 and December 3l, 2002

2

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002

3

Notes to Condensed Consolidated Financial Statements

4

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

12

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

18

Item 4.

Controls and Procedures

19

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

19

Item 5.

Other Information

20

Item 6.

Exhibits and Reports on Form 8-K

22

Signature

22

Certifications Under Exchange Act Rule 13a-14

23

Exhibit Index

25

Three Months Ended March 31,

2003

2002

SALES

$

265,938

$

268,704

Costs and Expenses

Cost of sales

238,253

229,037

Selling and general expenses

10,043

11,455

Other operating (income) expense, net

(1,604

)

570

246,692

241,062

OPERATING INCOME

19,246

27,642

Interest expense

(12,386

)

(15,473

)

Interest and miscellaneous income (expense), net

1,048

376

INCOME FROM CONTINUING OPERATIONS, BEFORE INCOME TAXES

7,908

12,545

Income tax benefit (expense)

328

(3,568

)

INCOME FROM CONTINUING OPERATIONS

8,236

8,977

INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX EXPENSE OF $366

—  

424

NET INCOME

8,236

9,401

OTHER COMPREHENSIVE INCOME (LOSS)

Unrealized (loss) gain on hedged transactions, net of income tax (benefit) expense of $(25) and $202

(45

)

345

COMPREHENSIVE INCOME

$

8,191

$

9,746

EARNINGS PER COMMON SHARE

BASIC EARNINGS PER SHARE

Continuing operations

$

0.30

$

0.33

Discontinued operations

—  

0.01

Net income

$

0.30

$

0.34

DILUTED EARNINGS PER SHARE

Continuing operations

$

0.29

$

0.32

Discontinued operations

—  

0.01

Net income

$

0.29

$

0.33

March 31, 2003

December 31, 2002

ASSETS

CURRENT ASSETS

Cash and cash equivalents

$

4,410

$

18,924

Accounts receivable, less allowance for doubtful accounts of $2,588 and $2,665

100,365

97,927

Inventory

Finished Goods

61,744

63,309

Work in process

7,115

7,303

Raw materials

5,682

6,564

Manufacturing and maintenance supplies

6,903

7,895

Total inventory

81,444

85,071

Timber purchase agreements

12,674

10,784

Other current assets

16,626

16,139

Total current assets

215,519

228,845

TIMBER PURCHASE AGREEMENTS

2,813

2,813

TIMBER, TIMBERLANDS AND LOGGING ROADS, NET OF DEPLETION AND AMORTIZATION

1,009,057

1,023,243

PROPERTY, PLANT AND EQUIPMENT

Land

20,321

19,847

Buildings

111,968

112,074

Machinery and equipment

1,262,551

1,255,406

Total property, plant and equipment

1,394,840

1,387,327

Less - accumulated depreciation

865,811

846,289

529,029

541,038

OTHER ASSETS

90,526

91,257

$

1,846,944

$

1,887,196

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES

Accounts payable

$

64,478

$

66,770

Bank loans and current maturities of long-term debt

8,520

3,520

Accrued taxes

22,256

29,994

Accrued payroll and benefits

13,805

18,399

Accrued interest

18,378

8,314

Accrued customer incentives

6,446

11,121

Other current liabilities

15,197

17,734

Current reserves for dispositions and discontinued operations

14,253

15,902

Total current liabilities

163,333

171,754

DEFERRED INCOME TAXES

119,167

110,160

LONG-TERM DEBT

618,948

649,628

NON-CURRENT RESERVES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS

146,016

146,295

OTHER NON-CURRENT LIABILITIES

90,800

99,647

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS’ EQUITY

Common Shares, 60,000,000 shares authorized, 27,805,314 and 27,719,409 shares issued and outstanding

77,399

76,613

Retained earnings

662,264

664,037

Accumulated other comprehensive income (loss)

(30,983

)

(30,938

)

708,680

709,712

$

1,846,944

$

1,887,196

Three Months Ended March 31,

2003

2002

OPERATING ACTIVITIES

Income from continuing operations

$

8,236

$

8,977

Non-cash items included in income from continuing operations:

Depreciation, depletion and amortization

41,570

43,224

Non-cash cost of land sales

2,963

2,700

Deferred income tax (benefit) expense

(766

)

276

Increase in accounts receivable

(2,438

)

(2,108

)

Decrease in inventory

3,444

3,355

Decrease in accounts payable

(2,292

)

(7,626

)

Increase in current timber purchase agreements and other current assets

(2,447

)

(1,681

)

(Decrease) increase in accrued liabilities

(266

)

10,984

(Decrease) increase in other non-current liabilities

(7,608

)

2,478

Decrease in timber purchase agreements and other assets

860

2,969

Expenditures for dispositions and discontinued operations

(1,928

)

(1,836

)

CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS

39,328

61,712

INVESTING ACTIVITIES

Capital expenditures, net of sales and retirements of $51 and $762

(18,192

)

(15,972

)

CASH USED FOR INVESTING ACTIVITIES OF CONTINUING OPERATIONS

(18,192

)

(15,972

)

FINANCING ACTIVITIES

Issuance of debt

43,000

9,500

Repayment of debt

(68,772

)

(45,272

)

Dividends paid

(9,998

)

(9,940

)

Issuance of Common Shares

120

8,392

CASH USED FOR FINANCING ACTIVITIES OF CONTINUING OPERATIONS

(35,650

)

(37,320

)

CASH PROVIDED BY DISCONTINUED OPERATIONS

—  

459

CASH AND CASH EQUIVALENTS

(Decrease) increase in cash and cash equivalents

(14,514

)

8,879

Balance, beginning of year

18,924

14,123

Balance, end of period

$

4,410

$

23,002

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid during the period:

Interest

$

1,670

$

2,719

Income taxes

$

10

$

2,604

1.

BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements of Rayonier Inc. and its subsidiaries (Rayonier or the Company), reflect 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 United States of America requires the use of certain estimates by management 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 2002 Annual Report on Form 10-K.

New Accounting Standards

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations. This statement requires entities to record the cost of any legal obligation for the retirement of a tangible long-lived asset in the period in which it is incurred.  SFAS No. 143 is effective for fiscal years beginning after June 15, 2002.  The Company adopted the standard effective January 1, 2003, and as anticipated, it did not have a material impact on the Company’s financial condition, results of operations or cash flows.  As a result, specific disclosures relating to asset retirement obligations are not required.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. This Interpretation applies to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date.  It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise held a variable interest that it acquired on or before January 31, 2003.  The Company will adopt this Interpretation as of July 1, 2003.  The Company believes it does not have any unconsolidated variable interests that constitute a majority variable interest requiring consolidation, and as a result, there will be no impact on its financial condition, results of operations or cash flows upon adoption.

Reclassifications

Certain items in prior year’s condensed consolidated financial statements have been reclassified to conform to the current year presentation.

2.

INCENTIVE STOCK PLANS

The Company accounts for stock based compensation utilizing the intrinsic value based method under Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees.  The 1994 Rayonier Incentive Stock Plan (the 1994 Plan) provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, performance shares and restricted stock, subject to certain limitations.

Pursuant to the disclosure requirements of SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, the following table provides a reconciliation for the three months ended March 31, 2003 and 2002 that adds back to reported net income the recorded expense under APB No. 25, net of related income tax effects, deducts the total fair value expense under SFAS No. 123 net of related income tax effects, and shows the reported and pro forma earnings per share amounts.  For additional information on the incentive stock plans see Note 18-Incentive Stock Plans in the Company’s 2002 Annual Report on Form 10-K.

Three Months Ended
March 31, 2003

Three Months Ended
March 31, 2002

Net income, as reported

$

8,236

$

9,401

Total stock-based employee compensation cost included in the determination of net income, net of related tax effects

1,136

1,869

Total stock-based employee compensation cost determined under fair value method for all awards, net of related tax effects

(1,315

)

(1,521

)

Pro forma net income

$

8,057

$

9,749

Earnings per share:

Basic, as reported

$

0.30

$

0.34

Basic, pro forma

$

0.29

$

0.35

Diluted, as reported

$

0.29

$

0.33

Diluted, pro forma

$

0.29

$

0.35

3.

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
March 31,

2003

2002

Income from continuing operations

$

8,236

$

8,977

Income from discontinued operations

—  

424

Net income

$

8,236

$

9,401

Shares used for determining basic earnings per common share

27,780,859

27,526,125

Dilutive effect of:

Stock options

125,300

309,708

Contingent shares

229,500

250,000

Shares used for determining diluted earnings per common share

28,135,659

28,085,833

Basic earnings per common share

Continuing operations

$

0.30

$

0.33

Discontinued operations

—  

0.01

Net income

$

0.30

$

0.34

Diluted earnings per common share

Continuing operations

$

0.29

$

0.32

Discontinued operations

—  

0.01

Net income

$

0.29

$

0.33

4.

SHAREHOLDERS’ EQUITY

An analysis of shareholders’ equity for the three months ended March 31, 2003, and the year ended December 31, 2002, follows (share and per share amounts actual):

Common  Shares

Accumulated
Other
Comprehensive
Income/(Loss)

Retained
Earnings

Shareholders’
Equity

Shares

Amount

Balance, January 1, 2002

27,345,395

$

59,721

$

(702

)

$

649,775

$

708,794

Net income

—  

—  

54,172

54,172

Dividends paid ($1.44 per share)

—  

—  

(39,910

)

(39,910

)

Issuance of shares under incentive stock plans

444,014

17,566

—  

—  

17,566

Repurchase of common shares

(70,000

)

(3,144

)

—  

—  

(3,144

)

Unrealized gain on hedged transactions

—  

697

—  

697

Minimum pension liability adjustments

—  

(30,933

)

—  

(30,933

)

Tax benefit on exercise of stock options

2,470

—  

—  

2,470

Balance, December 31, 2002

27,719,409

$

76,613

$

(30,938

)

$

664,037

$

709,712

Net income

$

—  

$

—  

$

8,236

$

8,236

Dividends paid ($0.36 per share)

—  

—  

(10,009

)

(10,009

)

Issuance of shares under incentive stock plans

85,905

771

—  

—  

771

Unrealized gain (loss) on hedged transactions

—  

(45

)

—  

(45

)

Tax benefit on exercise of stock options

15

—  

—  

15

Balance, March 31, 2003

27,805,314

$

77,399

$

(30,983

)

$

662,264

$

708,680

5.

SEGMENT INFORMATION

Rayonier operates in three reportable segments as defined by SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information: Performance Fibers, Timber and Land, and Wood Products.  The Company’s remaining operations are combined and reported in a category called “Other Operations” as permitted by SFAS No. 131.

Total assets, sales, and operating income by segment including corporate and dispositions were as follows:

ASSETS

As of
March 31, 2003

As of
December 31, 2002

Performance Fibers

$

537,613

$

548,426

Timber and Land

1,087,448

1,107,467

Wood Products

130,760

130,392

Other Operations

43,557

45,940

Corporate

41,948

42,411

Dispositions

5,618

12,560

Total

$

1,846,944

$

1,887,196

Three Months Ended March 31,

2003

2002

SALES

Performance Fibers

$

128,490

$

129,291

Timber and Land

61,223

61,390

Wood Products

29,980

34,040

Other Operations

46,578

47,593

Intersegment Eliminations

(333

)

(3,610

)

TOTAL SALES

$

265,938

$

268,704

OPERATING INCOME (LOSS)

Performance Fibers

$

(1,241

)

$

6,831

Timber and Land

25,792

29,312

Wood Products

(3,238

)

(833

)

Other Operations

(4

)

(1,594

)

Corporate and other

(2,063

)

(6,074

)

TOTAL OPERATING INCOME

$

19,246

$

27,642

Operating income (loss) as stated in the preceding tables and as presented in the Condensed Consolidated Statements of Income and Comprehensive Income is equal to Segment income (loss).  The income (loss) items below “Operating income” in the Condensed Consolidated Statements of Income and Comprehensive Income are not allocated to segments.  These items, which include interest (expense) income, miscellaneous income (expense) and income tax (expense) are not considered by Company management to be part of segment operations.

6.

DISCONTINUED OPERATIONS

During the second quarter of 2002, the Company sold its New Zealand East Coast timber operations and associated assets for $64.4 million.  In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the sale and results of operations were recorded as discontinued operations.  The Company recorded after-tax income of $0.4 million from discontinued operations in the first three months of 2002.  Cash flow for the three months ended March 31, 2002 from the operation was $0.5 million.  The sale of New Zealand’s East Coast timber operations did not impact the three months ended March 31, 2003.  The Condensed Consolidated Statements of Income and Comprehensive Income, Condensed Consolidated Statements of Cash Flows and related Notes for the three months ended March 31, 2002 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 segment and in the Other Operations category.

Operating results of the discontinued operations are summarized below:

Three Months Ended March 31,
2002

Net sales

$

7,563

Operating income

790

Net income from discontinued operations

424

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 $1.6 million per year.  However, the purchaser is the primary obligor and as such, has posted a performance bond with the New Zealand government.

7.

FINANCIAL INSTRUMENTS

The Company is exposed to various market risks, including changes in foreign exchange rates, interest rates and commodity prices.  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 the Company’s New Zealand timber operations and at its New Zealand medium density fiberboard (MDF) manufacturing facility, certain normal operating expenses, including salaries and wages, wood purchases, contractor and license fees, care and maintenance of timberlands and other production costs incurred in manufacturing MDF, are denominated in New Zealand dollars.  Rayonier hedges U.S./New Zealand dollar currency rate-risk with respect to these operating expenditures (cash flow hedges).

In the Company’s Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2003 and 2002, gains of approximately $0.7 million and $0.1 million, respectively, were recorded on foreign currency contracts primarily reflecting realized gains on contracts that matured, plus the time value changes for outstanding contracts.  The Company had mark to market after-tax gains on foreign currency contracts of approximately $0.7 million in “Accumulated other comprehensive income (loss)” (“AOCI”) in the Condensed Consolidated Balance Sheet recorded as of March 31, 2003.  When the forecasted transactions come to fruition and are recorded, the amounts in AOCI are reclassified to the Condensed Consolidated Statements of Income and Comprehensive Income.  The Company expects to reclassify the AOCI amount into earnings during the next thirteen months.

At March 31, 2003, the Company held foreign currency forward contracts maturing through April 2004 totaling a notional value of $10.0 million.  The largest notional amount of contracts outstanding during the first three months of 2003 totaled $10.2 million.

In March 2002, the Company entered into an interest rate swap on $50 million of 6.15 percent fixed rate notes payable maturing in February 2004.  The swap converts interest payments from the fixed rate to six month LIBOR plus 2.265 percent.  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 three months ended March 31, 2003 and 2002, this swap agreement reduced the Company’s interest expense by $0.3 million and $0.1 million, respectively.  Based upon current interest rates for similar transactions, the fair value of the interest rate swap agreement resulted in an asset of approximately $1.5 million and a corresponding increase in debt at March 31, 2003.  As of March 31, 2002, the interest rate swap agreement resulted in a liability of $0.1 million with a corresponding decrease in debt.

On April 9, 2003, the Company’s wholly owned subsidiary, Rayonier Timberlands Operating Company, L.P. (RTOC) entered into an interest rate swap on $40 million of 8.288 percent fixed rate notes payable maturing on December 31, 2007.  The swap converts interest payments from the fixed rate to six month LIBOR plus 4.99 percent and qualifies as a fair value hedge under SFAS No. 133.  As such, the net effect from the interest rate swap will be recorded as interest expense.

The Company periodically enters into commodity forward contracts to fix fuel oil costs at its Performance Fibers mills.  The forward contracts partially mitigate the risk of a change in Performance Fibers margins resulting from an increase or decrease in fuel oil costs.The Company does not enter into commodity forwards for trading or speculative purposes.  In February 2003, the Company entered into contracts that fixed 90,000 barrels of fuel oil at $24.90 for the second quarter of 2003 and 60,000 barrels at $22.82 for the third quarter of 2003.  This represents approximately 50 percent and 30 percent of the Company’s second and third quarter estimated fuel oil consumption, respectively.  These contracts do not qualify for hedge accounting under SFAS No. 133 and are required to be marked to market.  The market valuation on the contracts as of March 31, 2003 resulted in an increase in “Other Operating Expense” of $0.5 million.

8.

GUARANTEES

The Company issues financial guarantees to provide credit support for some creditors in case of default and to serve as collateral for certain self-insurance programs that the Company maintains.  As of March 31, 2003, the following were outstanding:

Maximum
Potential Payment

Carrying Amount
of Liability

Standby letters of credit (1)

$

76,591

$

62,239

Guarantees (2)

7,954

—  

Surety bonds (3)

14,187

870

Total

$

98,732

$

63,109

(1)  Approximately $62 million of the standby letters of credit serve as credit support for industrial revenue bonds.  The remaining letters of credit support various insurance coverages, primarily workers’ compensation and pollution requirements.  These letters of credit expire at various dates during 2003 and 2004 and are typically rolled over as required.

(2)  In conjunction with the sale of the New Zealand East Coast timber operations in 2002, the Company guaranteed five years of Crown Forest license obligations, estimated at $1.6 million per year.  The buyer of the property is the primary obligor and has posted a performance bond with the New Zealand government.  If the buyer fails to pay the obligations, the Company would then have to perform under the guarantee and seek legal redress from the buyer.  This guarantee expires in 2007.

(3) The Company has issued surety bonds primarily to secure timber in the State of Washington as well as providing collateral for the Company’s workers’ compensation self-insurance program in that state.  These surety bonds expire at various dates during 2003 and 2004 and are renewed as required.

Effective January 1, 2003, and in compliance with FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, the Company adopted the recognition requirements for guarantees entered into after December 31, 2002.The adoption did not have an impact on the Company’s consolidated results of operations or financial position for the three months ended March 31, 2003.

9.

CONTINGENCIES

From time to time, Rayonier may become liable with respect to pending and threatened litigation and environmental and other matters.  The following updates or repeats commentary included in the Company’s 2002 Annual Report filed on Form 10-K.

Legal Proceedings

The Company is involved in various legal actions, including those involving environmental matters that are discussed more fully in Note 10-Reserves for Dispositions and Discontinued Operations.  While the ultimate results of these legal actions and related claims cannot be determined, the Company does not expect that they will have a material adverse effect on the Company’s consolidated financial position or results of operations.

On February 22, 2001, the Company received a notice of proposed disallowance from the Internal Revenue Service (IRS), arising from an issue in dispute regarding the Company’s 1996 and 1997 federal tax returns, which could have resulted in an additional tax liability of $28.3 million. The Company had been discussing this issue with the IRS since 1999, and in the first quarter of 2003 accepted a proposal from the IRS (the “Settlement Initiative”) in order to expedite the resolution of the matter. Under the Settlement Initiative the maximum disallowance was set at a 90 percent level. Accordingly, the Company adjusted its estimated first quarter 2003 tax provision to recognize a tax benefit of $2.3 million at a 10 percent minimum allowance threshold.Final resolution of this matter is not likely to occur until after 2003.

In December 2001, the United States commenced a lawsuit against the Company in the United States District Court for the Western Division of Washington to recover costs allegedly incurred by EPA in 1997 to conduct an Expanded Site Investigation at the Company’s Port Angeles mill site.  The EPA currently claims approximately $3.0 million in such costs.  Rayonier is challenging the EPA’s authority to recover this type of cost, as well as the validity of the amount spent.  The Company believes

that the ultimate outcome will not have a material adverse impact on the Company’s financial position, liquidity or results of operations, and that its reserves at March 31, 2003 adequately include the probable costs to be incurred upon the ultimate resolution of the dispute.

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.  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 were 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 that could determine the Company’s ultimate liability, if any.  The Company believes that reserves at March 31, 2003 adequately include the probable costs to be incurred upon the ultimate resolution of the dispute.

Environmental Matters

Rayonier is subject to stringent environmental laws and regulations concerning air emissions, water discharges and waste disposal. Such environmental laws and regulations include the Federal Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, and the Comprehensive Environmental Response, Compensation and Liability Act. The Company closely monitors all of its environmental responsibilities, together with trends in environmental laws and believes that the Company is in compliance with current environmental requirements. It is the opinion of management that expenditures over the next 10 years will be required in the area of environmental compliance. During 1997, the Environmental Protection Agency (EPA) finalized its Cluster Rules governing air emissions but, due to the specialty nature of Rayonier’s Performance Fibers products and operations, the agency postponed finalizing water discharge rules and certain air emissions rules governing the Company’s Performance Fibers mills. The Company continues to work with the EPA to establish such rules for these mills, but the timing and costs associated with such rulemaking are uncertain. In the opinion of management, future capital costs associated with existing environmental rules will not have a material impact on the Company’s consolidated financial position or results of operations.

Federal, state and local laws and regulations intended to protect threatened and endangered species, as well as wetlands and waterways, limit and may prevent timber harvesting, road building and other activities on the Company’s timberlands. Over the past several years, the harvest of timber on private lands in the State of Washington has been restricted as a result of the listing of several species of birds and fish under the Endangered Species Act. The Company, through industry groups, has worked with the State of Washington to implement workable protective measures with respect to several endangered species. The effect has been to restrict harvesting on portions of the Company’s Washington timberlands. The Company has taken account of these restrictions in its harvest plans. Such efforts are ongoing and, in the opinion of management, will not have a material impact on the Company’s consolidated financial position or results of operations. Additionally, a number of environmental groups have filed suit in both federal and state courts challenging various aspects of existing and proposed state and federal regulations. This litigation is not expected to have a material impact on Rayonier’s annual harvest volume.

10.

RESERVES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS

The Company’s dispositions and discontinued operations include its Port Angeles, WA, mill, which was closed on February 28, 1997; its wholly owned subsidiary, Southern Wood Piedmont Company (SWP), which ceased operations in 1989 and included 10 former wood processing sites; its Eastern Research Division (ERD), which ceased operations in 1981; and other miscellaneous assets held for disposition.  SWP has been designated a potentially responsible party (PRP), or has had other claims made against it, under the U.S. Comprehensive Environmental Response, Compensation and Liability Act and/or comparable state statutes at various sites where the Company no longer operates.

March 31,
2003

December 31,
2002

Balance, January 1

$

162,197

$

168,704

Expenditures charged to reserves

(1,928

)

(9,241

)

Additions to reserves

—  

2,734

Balance, end of period

160,269

162,197

Less:  Current portion

(14,253

)

(15,902

)

Non-current portion

$

146,016

$

146,295

Three Months Ended
March 31

2003

2002

SALES

Performance Fibers

Cellulose Specialties

$

87,121

90,556

Absorbent Materials

41,369

38,735

Total Performance Fibers

128,490

129,291