LONGVIEW FIBRE CO - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2001

COMMISSION FILE NO. 0-1370
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LONGVIEW FIBRE COMPANY
(Exact name of registrant as specified in its charter)

WASHINGTON 91-0298760
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

300 FIBRE WAY, LONGVIEW, WASHINGTON 98632
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(360) 425-1550

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE.

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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant computed by reference to the closing price
of such common equity as of November 26, 2001, was $587,775,344. For purposes of
this computation, all executive officers and directors of the registrant have
been deemed affiliates. This shall not be deemed an admission that such persons
are affiliates.

The number of shares outstanding of the registrant's Common Stock, $1.50
Ascribed Value per share, as of November 26, 2001 was 51,076,567 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference portions of the Company's Notice of
Annual Meeting of Shareholders and Proxy Statement to be filed in connection
with the Company's Annual Meeting of Stockholders to be held January 22, 2002.
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TABLE OF CONTENTS

1

PART I

This Annual Report on Form 10-K contains forward-looking statements. These
statements relate to future events or our future financial performance. In some
cases, you can identify forward-looking statements by terminology such as may,
will, should, expect, plan, intend, anticipate, believe, estimate, predict,
potential or continue, the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially. In evaluating these statements, you should specifically
consider various factors, including the risks outlined in the "Factors That May
Affect Our Operating Results" below. These factors may cause our actual results
to differ materially from any forward-looking statement.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date of this annual report to conform such statements to actual
results or to changes in our expectations.

ITEM 1. BUSINESS

GENERAL

Longview Fibre Company is a publicly held forest, paper and packaging
products company engaged in three primary businesses: the ownership and
management of timberlands in Oregon and Washington, which principally produce
logs for sale; the ownership and operation of a pulp and paper mill, which
produces kraft paper and paperboard; and the ownership and operation of
converting plants, which produce finished products such as corrugated
containers, specialty packaging and merchandise bags.

We commenced operations in Longview, Washington in 1927 with a single
paperboard machine to produce paper products. Since our inception, we have
continued to expand our operations and currently own one of the world's largest
pulp and paper making complexes, 17 converting plants in 12 states and
significant holdings of valuable timberlands in the Pacific Northwest composed
of slightly more than 572,000 acres of timberlands.

Longview Fibre Company was incorporated in the State of Washington in 1990
as a successor to a company of the same name incorporated in the State of
Delaware in 1926.

PRODUCTS

We are an integrated forest, paper and packaging products company engaged
in three primary businesses: timber, paper and paperboard, and converted
products.

The following table sets forth the relative contribution to net sales of
each of our segments (including allocated sales of power).

Please see Note 7 of Item 8 of Part II of this Form 10-K for financial
information about industry segments and export sales.

TIMBER

We own and manage approximately 572,000 acres of timberlands in nine tree
farms in Oregon and Washington that contain an estimated 4.4 billion board feet
of 30-year old and older timber. Approximately 60% of our specie mix is Douglas
Fir, which is a premium species of softwood primarily used in residential and
commercial construction. During fiscal year 2001, 66.2% of our timber net sales
were to domestic customers

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consisting of approximately 60 independent sawmills and plywood plants, with the
balance exported primarily to Japan. We are the third largest U.S. exporter of
logs to the Japanese market and we realize a significant price premium on the
logs we sell into that market. Our timber holdings have an appraised market
value of approximately $1 billion, based on an October 2001 appraisal we
received from Atterbury Consultants, Inc., a nationally recognized appraisal
firm specializing in timber inventory and valuations.

We also operate a sawmill near Leavenworth, Washington that processes logs
into lumber, wood chips and various by-products for domestic and Pacific Rim
construction and other markets. This sawmill provides improved log realization
at one of our tree farms, and also produces wood chips for use at our pulp and
paper mill in Longview, Washington. In addition, we maintain six log chipping
operations principally located along the Snake River and Columbia River
corridors. We supply these chipping facilities with lower-quality timber, also
known as pulpwood, that would command relatively low prices if sold as logs to
sawmills, and we also purchase pulpwood from third parties. We process the wood
chips for pulp for our Longview mill. Our timber is harvested by independent
logging contractors.

In addition to the docks on the Columbia River at our Longview complex, we
have close access to the Port of Longview on the Columbia River that allows us
to conveniently ship our logs, paper and paperboard to our overseas customers.

Timberlands. We believe that our timber resources represent significant
value and will remain an important contributor to our continued success. Over
90% of our timber is softwood such as Douglas Fir and Hemlock that, because of
their long fiber, strength and flexibility, are generally preferred over
hardwoods for construction lumber and plywood. Our timberlands have primarily
second or third growth timber, a substantial amount of which is easily
accessible given the moderate terrain and extensive road systems where our
timber is located. Approximately 85% of our timberlands are located west of the
Cascade Mountains in Oregon and Washington. The remaining 15% of our timberlands
are in eastern Oregon and Washington.

We believe our timberlands are well diversified by age and advantageously
dispersed geographically. The well-balanced age distribution of our timber
reduces the likelihood of an interruption in timber supply and our
geographically non-contiguous timberlands reduce our risk of significant loss
due to forest fires, disease and other natural disasters. As a matter of policy,
we have consistently acquired timberlands to increase our inventory when
available at acceptable prices reflecting the site, quality of timber and
growing stock. We have purchased 18,426 acres of timberlands over the last five
years.

As a substantial U.S. timberland owner, we believe we are positioned to
benefit from the continuing reduction in the availability of U.S. federal timber
for harvesting. The federal government has curtailed the harvesting of timber in
response to heightened environmental concerns. This curtailment is pronounced in
the Pacific Northwest due to concern over threatened and endangered wildlife
species such as the spotted owl, marbled murrelet and salmon. We believe that
the shift in governmental forest management emphasis from timber resource
production to conservation and habitat preservation has added to the value of
our private timberlands.

Appraisal. In October 2001, Atterbury Consultants, Inc., a nationally
recognized appraisal firm specializing in timber inventory and valuations,
appraised our timberlands. Using a 14-year discounted cash flow analysis and
estimated terminal value, Atterbury arrived at an overall property value of
approximately $1 billion. The future cash flows were estimated assuming: (1)
approximately 289 million board feet of logs harvested every year; (2) an
average sales price and cost per thousand board feet of $510 and $220,
respectively, based on Atterbury's market estimates; (3) an annual 1% real price
increase starting after year 4; and (4) a 9.0% discount rate. Average costs
include estimates for logging, hauling, road maintenance, administrative
expenses, reforesting and harvest tax. Atterbury also considered two comparable
transactions in conducting the appraisal.

The amount of timber harvested is based on Atterbury's views as to expected
harvesting by a buyer of our timberlands as a whole during the 14-year period
given our timber inventory, not on our long-term approach of harvesting on a
60-year sustainable yield basis. The harvesting level assumed by Atterbury would
result in a long-term decrease in our inventory level.

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The appraisal is not intended to be, and should not be interpreted as, an
estimate of our cash flows from our timber segment for any future period. The
information does not include, among other things, the effect of future changes
in prices, costs, tax rates and environmental and regulatory conditions, which
past experience indicates are likely to occur. These changes may have a
significant impact on our future net cash flows from our timber segment and the
value of our timber inventory.

Timber Resource Management. We maintain a conservative forest management
plan that seeks to enhance timber growth and quality in our timberlands while
simultaneously meeting or exceeding environmental requirements. We view our
timberland holdings as assets with substantial value apart from our
manufacturing facilities and manage the timberlands on a "sustained yield"
basis; that is, we harvest levels of timber that can be sustained into
perpetuity due to natural growth and our reforestation efforts. We operate our
timberlands on a sustained yield basis with rotations of 40 years for hardwood
and 55 to 70 years for softwood. Our average rotation age has been 60 years.
Timber growth rates and existing age class distribution are important variables
for a forest products company as they ultimately determine how much timber can
be harvested. More accelerated growth rates and proportionally larger acreage of
older age classes permit larger annual harvests. Growth rates vary depending on
species, location, age and forestry practices.

We can harvest approximately 280 million board feet of merchantable timber
per year from our timberlands on a sustained yield basis, based on our average
60-year rotation. Under this sustained yield rotation, our inventory of mature,
standing timber 30-years old and older would remain at approximately 4.4 billion
board feet in perpetuity. Our timber harvest plans are principally based on
forecasted demand, price and the availability of timber from external sources.
These harvest plans are reviewed several times throughout the year and revised
at least annually, and are sufficiently flexible to permit modification in
response to fluctuations in the log market.

Our timber operations involve forest management, harvesting operations and
ongoing reforestation. We employ a professional team of foresters and engineers
who lead these activities. Proper management of the forest cycle includes
preparing land for reforestation, pre-commercial and commercial thinning,
fertilizing and harvesting mature trees. The majority of seedlings planted on
our lands are developed through our forest genetics tree-improvement program.

Our forestry practices vary by geographic region and depend upon factors
such as soil productivity, weather, terrain, tree size, age and density. Forest
stands are thinned and fertilized periodically to improve growth and stand
quality until they are harvested. We typically reforest within one year of
harvest, thereby continuing our balanced distribution of age classes. Any
deficiency in a particular age class is managed by maintaining adequate
harvestable inventory levels of other age classes and through acquisitions. A
balanced distribution of age classes will tend to provide a more regular source
of cash flow, as the various timber stands reach their harvestable age. We
actively use pre-commercial and commercial thinning, which is the practice of
harvesting immature and lower-value trees in order to maximize the long-term
value of our timberlands and generate incremental cash flow. In addition to
providing another source of wood chips, we believe that thinning improves the
overall productivity of our timberlands by enhancing the growth of the remaining
trees.

Timber harvest timing depends in part on growth cycles and in part on
economic conditions. Growth cycles for timber tend to change over time as a
result of technological, biological and genetic advances that improve forest
management practices. We continue to develop our forest management operations to
benefit from such advances to improve timber yields.

Sales and Customers. As a steady supplier of timber for over 40 years, we
have cultivated and established long-standing relationships with many of our
timber customers. The majority of our domestic sales are to independent sawmills
and plywood plants within a reasonable hauling distance from our timberlands.
Our exports are principally to Japan through sales to U.S. exporters or directly
to foreign importers. Sales are generated mostly through long-standing
relationships, generally at negotiated market prices. During fiscal year 2001,
our top 5 customers, including exporters, accounted for approximately 36% of our
timber net sales, which represented approximately 7% of our total net sales. Our
largest customer accounted for approximately 8% of our segment net sales during
this period, which represented 1.4% of our total net sales.

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PAPER AND PAPERBOARD

We produce our high-quality kraft paper and paperboard at our Longview,
Washington mill, one of the world's largest pulp and paper making complexes with
an aggregate annual paper and paperboard capacity in excess of 1 million tons.
Based on production capacity, we are North America's second-largest unbleached
kraft paper manufacturer with a 14.3% share. Our mill complex is located on 350
acres with deep water frontage on the Columbia River, and has connections with
two transcontinental railroads as well as close access to the main north-south
interstate on the West Coast. We produce a wide variety of paper and paperboard
at our mill, including corrugating medium and linerboard, which are combined to
make corrugated containers; kraft paper; and heavier grades of paper for
multi-wall shipping sacks used by the agricultural, pet food, chemical and
cement industries.

We have established a reputation for manufacturing strong, high-quality
paper and paperboard using a variety of fibers for superior packaging products.
We produce most of our high-quality kraft pulp through the use of what we
believe to be two of the world's largest continuous pulp digesters. These
high-efficiency Kamyr brand digesters break down wood chips into wood pulp that
can then be used to make paper and related products. Purchased bleached pulp and
pulp from sawdust and old corrugated containers ("OCC") provide the balance of
our pulp. Approximately 22% of the pulp that we used in fiscal year 2001 was
from OCC, which makes our paper and paperboard products more attractive to an
increasingly environmentally conscious public.

Manufacturing. We have continuously upgraded and expanded our paper mill
to produce higher-quality paper more quickly and economically. Our mill consists
of one pulp mill and twelve paper machines with more than 3,300 tons average
daily paper and paperboard production capacity. Our rated annual paper and
paperboard production capacity exceeds 1 million tons.

Most of the paper mill's pulp is produced by the kraft process, in which
raw material fibers from wood chips are cooked under pressure in a chemical
mixture in vessels called digesters. The kraft process is widely considered to
be the most desirable process for making pulp because it produces paper and
paperboard with high structural strength due to the relatively longer fibers in
the pulp. Our fully automated digesters can produce large quantities of
unbleached pulp and feature an energy- and chemical-efficient pulping process.
In addition to digesting our own unbleached pulp, we purchase bleached pulp from
third parties and process recycled material into pulp. Pulp is then refined,
diluted and subsequently fed into our paper machines to be made into paper.

The kraft process is an expensive method of producing pulp and is
economically feasible only through energy conservation and efficient recovery
and reuse of pulping chemicals. Accordingly, we recycle used chemicals both to
produce heat and to be re-fed into the digesters for additional pulp making. We
also continue to pursue computer-controlled process automation to improve mill
energy conservation, process control and quality. Our continuous Kamyr digesters
use only half the energy used by batch digesting, another widely employed
pulping process. The design and development efforts of a professional staff of
more than 50 engineers and chemists contribute significantly to all phases of
pulp and paper making.

The flexibility of our paper machines enables us to focus on individual
customer needs by developing customized grades for specific product requirements
and enable us to rapidly adjust to market conditions. We currently have several
swing machines that can produce paper or paperboard. In addition, paper machines
of various trim widths and capabilities have been added periodically, while our
smaller machines have been utilized to make small lots of specialty paper and
paperboard.

We also recently engaged a third-party consulting group to assist us with
our corporate business process improvements, or BPI, initiative. Our BPI
initiative has identified cost savings throughout all of our segments by
utilizing system improvements to enhance business processes, implementing new
procurement practices, and decreasing working capital by reducing inventories
and improving customer service. The new procurement practices should leverage
our buying power by consolidating purchases of commodity items and rationalizing
the number of vendors and transactions. We have identified improvements that we
believe should result in substantial cost savings. Additionally, we will focus
on increasing overall efficiency by, among other things, workforce
rationalization, possible closure or curtailment of non-competitive facilities,
reallocation of

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production and implementation of a strategy to reduce energy consumption by
better utilizing existing capacity.

Raw Materials and Suppliers. Our mill's advanced technology combined with
our papermaking flexibility enables us to use virtually all species of Pacific
Northwest wood, including various firs, pines, cedars, hemlock and hardwoods.
Our raw material fibers come primarily from purchased wood chips and sawdust
with important contributions from fiber reclaimed from post-consumer and
post-industrial waste such as OCC and purchased bleach pulp from a variety of
sources. In addition to the wood chips and sawdust that we purchase, we source
raw materials from our own sawmill at Leavenworth and our six log chipping
facilities. Our chip operations are located principally along the Snake and
Columbia River corridors, allowing for low-cost transport by barge. Residual
wood chips and sawdust are also supplied by many of our timber customers that
generate these residuals from logs purchased from us.

During fiscal year 2001, approximately 12% of our fiber requirements were
generated from internal operations, and approximately 22% were generated from
recycled materials. The remainder of our fiber came from more than 60 chip
suppliers composed of sawmills, plywood plants and whole log chipping facilities
primarily located in Washington, Oregon, Idaho and Montana within a 1,300-mile
radius of our Longview mill. Actual sourcing levels vary with market conditions.
We can receive over 30 rail cars, as many as 300 truckloads and a number of
barges full of wood chips at the mill daily. In addition, approximately 17% of
our fiber is from wood chips that are purchased at market prices from sawmills
to which we also sell our logs. We believe our stable historical relationships
with these mills result in a dependable supply of wood chips from them. We
purchase bleached pulp from various sources and have an arrangement to purchase
pressed bleached pulp (which has not been dried) from a nearby mill that has
excess capacity. We continue to broaden our raw material supply and reduce fiber
costs by increased recovery of wastes and use of OCC, which has been made
possible through ongoing plant and machine upgrades.

Sales and Customers. We continue to emphasize quality, service, continuity
and design of our paper and paperboard products to meet our customer needs. We
have been engaged in a long campaign to increase the production of value-added
specialty and custom paper grades and broaden our product lines. Our paper
products are sold by our sales forces located in Walnut Creek and Los Angeles,
California; Longview, Washington; Milwaukee, Wisconsin; and Atlanta, Georgia, or
through paper merchants. In fiscal year 2001, our converted products segment
obtained approximately 98% of its paper and paperboard requirements from our
Longview mill, representing approximately 61% of total mill production. We sell
the remaining mill production to a small number of export customers and a large
number of geographically dispersed domestic customers.

Where possible, we develop products in conjunction with our customers and
enter into long-term relationships. Within our paper and paperboard segment,
approximately 17% of our segment net sales during fiscal year 2001 were from our
specialty TEA-Kraft(TM) paper, a highly rupture-resistant multi-wall bag used in
the agriculture, pet food, chemical and cement industries. Excluding sales to
our converting plants, during fiscal year 2001, our top 5 domestic customers and
top 5 export customers accounted for approximately 32% and 29%, respectively, of
our paper and paperboard net sales. The domestic customers represented
approximately 7% of our total net sales and the export customers represented
approximately 6% of our total net sales. Our largest customer, an exporter who
resells our products to a number of smaller customers, accounted for
approximately 19% of our total segment net sales during this period, which
represented approximately 4% of our total net sales. There were no other
customers accounting for more than 10% of segment net sales.

CONVERTED PRODUCTS

We own and operate 17 converting plants located in 12 states that produce
value-added corrugated containers, specialty packaging, creative
point-of-purchase displays, handle shopping bags and merchandise bags. We are
capable of producing containers in virtually any size, type, color and design,
and we believe that we have established a reputation for high-quality products
and services. With our advanced technologies, we are able to produce products
with high-quality six color graphics printed directly on corrugated material
using

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our computerized ink-blending expertise. We also produce complex structural
designs by employing micro-flute corrugating, precision die-cutting and
specialized folding-gluing capabilities. Our corrugated containers are typically
used for packaging of items such as fresh and frozen fruits and vegetables,
juice, wine, beer, appliances, furniture, toys and electronics. Virtually all of
our products in this segment are sold to domestic customers.

In addition to manufacturing standard corrugated shipping containers, our
container products include solid-fiber boxes, containers with specialty
folding-gluing characteristics and a full line of jumbo boxes in a variety of
sizes. We also produce Liquiplex(R), a family of bulk-liquid disposable bins
available in sizes up to 330-gallons, as well as a number of different types of
consumer bags including handle shopping bags, merchandise bags and other
specialty bags. Similar to boxes, bags are produced according to customer
specifications in a variety of colors, sizes and shapes, complete with exacting
printing of designs or promotional messages.

Manufacturing. Our commitment to automation and improvements in plant and
equipment is evidenced by our recent investments to modernize our facilities and
equipment. Investments in newer technology have produced a variety of
capabilities including high-speed corrugating, high-quality graphics printing
and other precise box finishing. As a result, we believe our converting
facilities are some of the best-equipped in the United States, capable of
producing corrugated containers and merchandise bags in virtually any size,
shape and design based on customer needs.

We recently implemented a process standardization initiative for order
entry, production scheduling, shipping and inventory control at our converting
plants which involves taking "best practices" from each of our plants and
applying them to our other plants. This initiative is expected to result in a
number of improvements, including more efficient production, inventory
management and on-time order fulfillment. We also expect that the BPI initiative
will result in cost savings and efficiencies in our converted products
operations similar to those in our paper and paperboard segment.

Of our 17 converting plants: 3 are sheet plants that fashion corrugated
sheets obtained from our corrugator plants into finished products; 12 are
corrugator plants that, in addition to converting corrugated sheets into
finished products, can also produce corrugated sheets from corrugating medium
and linerboard; and 2 are bag plants. We do not operate any sheet-feeder plants.
See "Properties" for the locations of our converting plants.

Raw Material Sources and Supply. The principal raw material used by our
converting plants is paper and paperboard. Our converting plants receive
approximately 98% of their paper and paperboard from our Longview mill either
directly or through barter arrangements, whereby one of our converting plants
acquires paper and paperboard from a third party's paper mill that is
geographically closer to it than our Longview mill. In return, our mill supplies
paper and paperboard to such third party's converting plant.

Sales and Customers. Sales of converted products are made directly to end
users, as well as through jobbers. Each plant has its own sales force that
reports to a full-time sales manager for that location. Both sales managers and
plant managers in turn report to regional divisional managers. We have
approximately 90 full-time direct sales employees in our converted products
segment.

We sell our converted products to over 3,500 customers nationwide. We
maintain long-standing relationships with many of our customers, some of whom
have purchased from us for over 50 years. Although we have large account
customers with whom we have established relationships, we seek to focus on
market-niche business opportunities where we add value through service,
customized design, and specialty product capabilities. We believe we often
encounter less competition in pursuing those opportunities as many of our larger
competitors do not find such specialty niches to have the volume of production
that would make this business attractive to them. Our vertical integration with,
and the process flexibility of, our Longview mill allow us to quickly and
efficiently respond to our customers' changing needs. During fiscal year 2001,
our top 5 customers accounted for approximately 26% of our converted products
net sales, with no customer accounting for more than 8% of segment net sales.
The top 5 customers represented approximately 13% of our total net sales and our
largest customer represented approximately 4% of our total net sales.

7

ENERGY

Our Longview mill contains six steam-driven turbine generators and one
natural gas-fired co-generation facility, all of which are capable of producing
electric power. The steam-driven generators generally have a combined capacity
to produce 40 megawatts of power and the co-generation facility generally has a
capacity to produce 60 megawatts of power. The primary contracts pursuant to
which we purchased and sold power in the past have expired. Under new terms, we
have agreed to use all of our steam-driven generator capacity for internal use
and, except under limited circumstances, sell all of our power produced from our
co-generation facility into the market. Our future decisions regarding electric
power generation, including the extent to which we operate our co-generation
facility into the market, will change from period to period based on market
conditions and our own power requirements. We do not expect sales of power to
meaningfully contribute to our results in the coming year.

COMPETITION

We compete to varying degrees with a number of U.S. and foreign forest,
paper and packaging products companies in different product lines and in
different quality segments within each product line. Each segment in which we
compete is highly competitive. We compete on the basis of price and our strong
reputation as a quality producer, which we support through our product
consistency, modern facilities, highly trained workforce, manufacturing and
delivery flexibility and experienced field sales force.

There are numerous large timber suppliers in the United States for the
domestic and export markets and these suppliers compete on the basis of price
and quality. Ranked on the basis of annual board feet, Weyerhaeuser Company was
the largest domestic producer and exporter of timber in 2000. Longview Fibre
Company and Willamette Industries were other significant exporters in 2000.

Our paper and paperboard segment primarily competes in the
highly-concentrated U.S. unbleached kraft paper market. The 10 largest U.S.
producers of kraft paper comprised approximately 84% of industry capacity.
International Paper was the largest producer in 2000, based on industry
capacity, and we were the second largest. Abroad, we compete with many domestic
producers as well as with foreign competitors such as Eurocan, New Zealand Paper
and Canadian Forest Products. Competition in the unbleached kraft paper market
is primarily based on price, service and quality.

In the world paperboard market we compete with many of the same foreign and
domestic paper producers. Many foreign companies also compete with us in the
domestic linerboard market. We believe Smurfit-Stone Container was the largest
producer in 2000 based on industry capacity. The paperboard market competes
primarily in the same manner as does the paper market.

There are many competitors in the markets for our converted packaging
products, including other large, vertically-integrated companies and numerous
smaller companies. Although no single company is dominant in any particular
market, we have significant competitors in this market, including Smurfit-Stone
Container who is our largest competitor. The packaging industry competes on
price as well as design, quality and service, with varying emphasis on these
factors depending on the product line. Due to the high cost of transporting
corrugated containers, competition from foreign manufacturers does not have a
significant impact on the corrugated container market in the United States.

REGULATION

The forest, paper and packaging products industries are highly regulated in
the United States, subject to a variety of federal, state and local
environmental, pollution control and other laws and regulations.

Our forestry and manufacturing operations are subject to federal, state and
local environmental laws and regulations relating to the protection of the
environment, including laws relating to water quality, air quality, waste
management and hazardous substances. We believe that we are in substantial
compliance with all relevant local, state and federal regulations. All of our
facilities meet current regulatory standards in all material respects, and we
believe we are operating in an environmentally responsible manner. We maintain
environmental and industrial safety and health compliance programs and
periodically conduct internal
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regulatory audits of our operations to monitor compliance with relevant laws and
regulations. We continually review all known environmental exposures, including
the costs of remediation. At the present time, we are not aware of any
environmental liabilities that would have a material impact on our results of
operations.

Environmental impacts at some of our facilities resulting from current and
historic operations, and at certain third-party sites to which we sent hazardous
substances for disposal or storage, require expenditures for remediation.
Liability arising out of prior ownership or past operations is sometimes imposed
without regard to causation or prior knowledge of contamination. Violations of
environmental laws and regulations can subject us, and in certain cases have
subjected us, to additional costs and expenses, including defense costs and
expenses and civil penalties. Violations of environmental laws and regulations
can also subject us to criminal penalties.

In addition, the operations of our manufacturing facilities and timberlands
are subject to the requirements of the federal Occupational Safety and Health
Act and comparable state statutes relating to the health and safety of
employees. We conduct internal safety audits to identify potential violations of
law or unsafe conditions, and we believe that we are in material compliance with
all applicable safety and health laws and regulations.

In fiscal year 2002, we expect to spend approximately $3.6 million on
capital expenditures associated with achieving or maintaining compliance with
environmental laws and regulations, and approximately $7 million on operating
and other non-qualified expenditures relating to environmental matters.

Timberlands. Operations on timberlands are subject to specialized statutes
and regulations in the states of Oregon and Washington. These include Forest
Practices Acts that address many timber growing, harvesting and processing
activities and require us to establish "no-cut" zones in environmentally
sensitive areas. Other state laws and regulations control timber slash burning
operations during fire hazard periods to protect air quality. Regulations also
control road construction and maintenance activities, and logging activities
affecting water quality or in proximity to certain ocean and inland shorelines
or wetlands.

Water Quality and Wastewater. The federal Clean Water Act and comparable
state statutes regulate discharges of process wastewater, and require National
Pollutant Discharge Elimination System ("NPDES") permits for discharge of
industrial wastewater and stormwater runoff into regulated public waters. Our
manufacturing facilities are generally in compliance with NPDES wastewater and
stormwater requirements.

Air Quality. The federal Clean Air Act and comparable state statutes
regulate emissions into the air, and require air permits that set limits on such
air emissions. Our manufacturing facilities are generally in compliance with
these air permit requirements.

Cluster Rule. The Environmental Protection Agency issued a final air and
water quality rule for the pulp and paper industry referred to as the "Cluster
Rule" in 1998. The Cluster Rule requires that pulp and paper mills become
elemental chlorine free in the pulp bleaching process. Upcoming regulatory
milestones include implementation of "MACT II," which relates to combustion
sources, by January 2004, and implementation of "MACT I," which relates to the
pulping and bleaching processes, by April 2006. We estimate that over the next
several years, required pollution control capital expenditures to comply with
this regulatory program will range from $15.0 million to $20.0 million.

Endangered Species. The Federal Endangered Species Act and counterpart
state legislation protect species threatened with possible extinction.
Protection of endangered species habitat includes restrictions on timber
harvesting and related activities. A number of species indigenous to the Pacific
Northwest have already been protected under the Endangered Species Act,
including the northern spotted owl, marbled murrelet, mountain caribou, grizzly
bear, goshawk, bald eagle and various anadromous fish species. Some of these
species, including the northern spotted owl, marbled murrelet and goshawk, are
found in some of our timberlands, requiring us to refrain from harvesting some
of our timberland resources. There can be no assurance that additional species
within our timberlands will not subsequently receive protected status under the
Endangered Species Act or that more members of species currently protected will
not be discovered within our timberlands, requiring us to refrain from
harvesting timber on additional acres.

9

Timber Exports. Federal law prohibits the export of unprocessed timber
acquired from federal lands in the Western United States, or the substitution of
unprocessed federal timber from the Western United States for unprocessed
private timber that is exported. Persons owning timber-processing facilities may
seek authorization from the U.S. Department of Agriculture for a "sourcing area"
within which the person may purchase federal timber while exporting unprocessed
private timber originating from outside the sourcing area. We have one such
sourcing area.

Energy. Although we generally are not regulated as a public utility, we
must comply with federal and state utility regulations in order to sell the
electricity that we produce into the market. Relevant regulations provide that
an industrial producer of electrical power such as Longview Fibre may sell power
into the wholesale market without being regulated as a public utility, by
obtaining certification as a Qualified Facility from the Federal Energy
Regulatory Commission. We currently have such certification and are not
regulated as a public utility.

EMPLOYEES

As of October 31, 2001, we employed approximately 3,700 employees, of which
approximately 2,330 employees are parties to collective bargaining agreements
between us and one of five unions. We have 11 collective bargaining agreements,
which expire at various dates through the year 2006, including agreements
covering approximately 332 employees that will expire in 2002. We believe that
our relationship with our employees is good and we have recently signed a new
collective bargaining agreement with our 1,400 Longview mill employees that
extends through 2006.

ITEM 2. PROPERTIES

As of October 31, 2001, we owned in fee 572,418 acres of tree farms located
in various counties of Washington and Oregon. As a matter of policy we have
consistently acquired and intend to continue to acquire more timberlands
whenever available at acceptable prices, dependent on the location and quality
of the site involved and the species and quality of the merchantable timber and
growing stock thereon.

Our production facilities are listed below:

- ---------------

(a) Our Longview facility is used for pulp, paper and paperboard production,
converted products production and as our corporate headquarters.

(b) Corrugated sheet plants.

(c) Our Spanish Fork facilities are located in the same complex. These are
considered separate facilities but share a common warehouse and other
structures.

(d) Chip production facilities do not have significant covered building space.
Buildings consist of office and shop buildings and special purpose
structures over chipping equipment.

In addition to the facilities listed above, we have twelve strategically
located corrugated container storage facilities that are used primarily as
warehouse space. We also have one chip reload facility.

ITEM 3. LEGAL PROCEEDINGS

We have recently agreed to participate in the arbitration of two disputes
concerning our electric power generation. The first dispute involves
approximately $2 million that we believe the Bonneville Power Administration, or
BPA, owes us for power we indirectly sold to BPA through our local public
utility district pursuant to a now expired contract. The second dispute involves
approximately $5 million that BPA claims is owed by our public utility district
in connection with power we sold over the last several years. We have agreed
with the public utility district that it may pass through to us as a cost under
our contract the amount of such claim, if any, that is awarded to BPA in the
arbitration. We do not believe that the results of these disputes will have a
material financial impact on us.

From time to time we have been, and expect to continue to be, subject to
other legal proceedings and claims in the ordinary course of our business. These
include various proceedings relating to the cleanup of hazardous waste under the
federal Comprehensive Environmental Response Compensation and Liability Act, and
similar state laws. These claims, even when lacking merit, can result in the
expenditure of significant financial and managerial resources as we defend
ourselves. Although the final outcome of any legal proceeding cannot be
predicted with any degree of certainty, we presently believe that any ultimate
liability resulting from any of the legal proceedings, or all of them combined,
would not have a material effect on our financial position or results of
operation.

11

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Nothing was submitted to a vote of the shareholders during the fourth
quarter of the fiscal year.

EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of the Company as of November 30, 2001, and certain
biographical information about each of these individuals, are set forth below:

RICHARD P. WOLLENBERG was elected Chairman of the Board in 1985, and has
been a Director since 1946. He has served as Chief Executive Officer since 1978
and as President from 1969 to September 2001. He is a member of the Executive
Committee of the Board. Mr. Wollenberg has been active at Longview Fibre since
1939. Mr. Wollenberg received a bachelor of science degree in mechanical
engineering from the University of California at Berkeley and a master's degree
in business administration from Harvard University. Richard P. Wollenberg is the
father of Richard H. Wollenberg and David A. Wollenberg.

RICHARD H. WOLLENBERG was elected Executive Vice President in January 2001
and the President and Chief Operating Officer in September 2001, effective
October 1, 2001, and has been a Director since 1995. Mr. Wollenberg previously
served as our Vice President -- Production, Western Container Division and has
been with Longview Fibre since 1988. Mr. Wollenberg received a juris doctorate
from Willamette University and a bachelor of philosophy degree from Reed
College.

RICHARD J. PARKER was elected Senior Vice President -- Production and Mill
Manager in 1994 and has been a Director since 1997. He previously served as Vice
President and Assistant to the President, and Pulp Mill Superintendent and has
been with Longview Fibre since 1972. Mr. Parker received a bachelor of science
degree in chemical engineering from Washington State University, and is a
graduate of the Harvard Business School's Program for Management Development.

KEN D. GETTMAN was elected Senior Vice President -- Container Group in
September 2001, effective October 1, 2001. He previously served as Vice
President -- Sales, Western Container Division from January 1998 to September
2001 and Sales Manager from 1994 to 1997. Mr. Gettman has been with Longview
Fibre since 1967.

DAVID L. BOWDEN was elected Senior Vice President -- Timber in 1992, and
has been a Director since 1990. He previously served as Vice
President -- Timber. He serves on the Executive Committee of the Board. Mr.
Bowden has been with Longview Fibre since 1960. Mr. Bowden received a bachelor
of science degree in forest engineering from Oregon State University.

LISA J. HOLBROOK was elected Senior Vice President -- Finance, Secretary
and Treasurer in 1992 and has been a Director since 1992. Ms. Holbrook
previously served as Vice President -- Finance, Secretary and Treasurer and has
been with Longview Fibre since 1977. Ms. Holbrook received a bachelor of arts
degree in

12

business administration from Washington State University, and is a graduate of
the Harvard Business School's Program for Management Development.

ROBERT B. ARKELL was elected Vice President -- Industrial Relations and
General Counsel in 1979 and has been a Director since 1986. Mr. Arkell
previously served as Judge, Superior Court for Cowlitz County, Washington. Mr.
Arkell received a juris doctorate from the University of California, Hastings
College of Law, and a bachelor of business administration degree from the
University of Washington.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Company's common stock trades on the New York Stock Exchange under the
symbol "LFB". The following table sets forth, for the periods indicated, the
range of high and low market prices for the Company's common stock as reported
by the New York Stock Exchange.

The Company estimates that there are approximately 10,000 beneficial owners
of the Company's common stock.

Dividends per share paid in fiscal 2001, 2000 and 1999:

The Company's Board of Directors declared a regular dividend of $0.03 per
share to be paid on January 10, 2002 to shareholders of record on December 24,
2001.

The Company's financing arrangements outstanding from time to time include
covenants that restrict the payment of dividends. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

13

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial information concerning
the Company and should be read in conjunction with the audited financial
statements and notes included in "Financial Statements and Supplementary Data."

- ---------------

(a) Includes allocated results from power sales.

14

15

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

Our business is organized into three segments: timber, paper and paperboard
and converted products. We benefit from significant integration between our
business segments. During fiscal year 2001, our paper and paperboard segment
obtained approximately 10% of its wood chips from logs that were harvested from
our timberlands and chipped by our chipping operations. In the same period, our
converted products segment obtained approximately 98% of its paper and
paperboard requirements from our Longview mill, representing approximately 61%
of total mill production. In addition, our business segments share centralized
corporate management, accounting, human resources and information systems
support. Our fiscal year ends on October 31.

Net sales for individual segments are reported net of intercompany
transfers. Segment operating profits reflect allocations of selling, general and
administrative expenses on the basis of the relative cost to produce products in
each segment. In the case of intercompany transfers of products between
segments, cost of products sold is based upon transfer pricing policies that we
believe assist us in managing and optimizing the consolidated financial
performance of our business as a whole. For example, when our paper and
paperboard segment obtains logs from our timber segment for whole log chipping
at our chipping facilities, we assign a transfer price to those logs based upon
the historical cost and hauling expenses of the logs, regardless of the market
price of those logs or wood chips at the time of transfer. For paperboard
acquired from our paper mill and used in our converting operations, we assign a
transfer price equal to the paper mill's cost. Depending on market conditions,
our transfer pricing practices may understate or overstate the actual price at
which we could have sold those products into the open market or the actual price
in the open market at which we could have purchased the raw materials used to
produce those products. As a consequence, these allocations and transfer pricing
policies sometimes result in individual segment results that do not reflect the
financial performance that would have resulted for a segment operating as a
stand-alone business.

Our timber segment owns and operates timberlands in Oregon and Washington
and produces logs for sale in the domestic and export markets. During fiscal
year 2001, our domestic customers consisted of approximately 60 independent
sawmills and plywood plants. Results of operations for our timber segment also
include our sawmill. Net sales of our timber segment are primarily affected by
housing starts and other construction activity in the domestic and Japanese
markets. Construction activity is influenced by mortgage interest rates and
general economic conditions in those markets. Net sales in this segment are also
affected by supply-side factors such as government regulation restricting the
harvest of timber from public and certain private lands and competition from
logs supplied by foreign producers, especially Canadian producers. The strength
of the Japanese export market can significantly influence the results of our
timber segment since our sales into that market tend to be at higher prices than
sales into the domestic market. Because all of our sales are U.S. dollar
denominated, our export sales are also significantly influenced by the relative
strength of the U.S. dollar. Cost of products sold in the timber segment
primarily include contract logging expense, the cost of operating our sawmill
and depletion, which is based on the historical cost of timber that is
harvested.

Our paper and paperboard segment produces a wide variety of paper and
paperboard at our Longview mill. We sell our paper and paperboard products to a
number of domestic and export customers. In fiscal year 2001, our converted
products segment used approximately 61% of our paper and paperboard output. Net
sales in the paper and paperboard segment are primarily affected by general
economic activity in the United States and Southeast Asia and the relative
strength of the U.S. dollar. Average prices in this segment have also been
favorably affected by industry capacity rationalization over the last several
years. The demand for certain specialty products manufactured by our paper and
paperboard segment tends to be less dependent on the economic cycles affecting
the commodity paper market. The major component of cost of products sold for the
paper and paperboard segment is fiber, which consists primarily of wood chips,
but also includes sawdust and recycled materials. We have recently invested in
processes that allow us to use an increased amount of less expensive sawdust and
recycled materials in making our paper and paperboard products. Cost of products
sold also includes labor, energy and chemicals used in processing.

16

Our converted products segment produces corrugated containers, solid fiber
boxes, creative point-of-purchase displays, handle shopping bags and merchandise
bags. Nearly all of our converted products are sold domestically for end uses
that include packaging for consumables such as fresh and frozen produce and
beverages, as well as for toys, furniture and electronics. Net sales in the
converted products segment are primarily affected by general economic activity
in the United States. The primary constituent materials for converted products
are paper and paperboard. Our converted products segment obtains approximately
98% of its paper and paperboard requirements from our Longview mill at mill
cost. Cost of products sold also includes energy, labor, ink and glue.

Our Longview mill contains six steam-driven generators and one natural
gas-fired co-generation facility, all of which are capable of producing electric
power. During fiscal year 2001, we elected, based on the relationship between
rates we could obtain for third-party sales of electricity and the cost to us of
purchasing electricity and natural gas, to sell a significant percentage of the
electricity that we generated into the market. As a result, we realized $77.1
million from net sales of electric power during the period. The operating profit
from power sales allocated to our paper and paperboard segment was $15.6 million
in fiscal year 2001, compared with $1.3 million in fiscal year 2000. The
operating profit allocated to our converted products segment was $19.4 million
in fiscal year 2001, compared with $1.2 million in fiscal year 2000. We made
allocations between those segments based on the relative cost to produce
products in each segment. The operating profit of those segments for fiscal year
2001, net of the contribution from power sales, does not reflect the results
that we would have obtained for those segments in the absence of our decision to
sell power externally. These sales had the effect of significantly increasing
our energy costs for operation as well as increasing our requirements for
natural gas used to fuel the co-generation facility.

Our power sales decreased during the third and fourth quarters of fiscal
year 2001 primarily due to decreased prices available to us in the electric
power market. Our future decisions concerning electric power generation,
including the extent to which we operate our co-generation facility for sales
into the market, will change from period to period based on market conditions.
However, the primary contracts pursuant to which we purchased and sold power in
the past have expired and, under new terms, we have significantly less
flexibility in selling and using power generated by our facilities. We do not
expect sales of power to meaningfully contribute to our results in the coming
year.

We can curtail the operation of certain of our equipment and facilities
from time to time to provide us with flexibility in managing our operations and
cost structure. Under certain market conditions, we may fully or partially
curtail the operation of one or more of the paper machines at our Longview mill.
When we curtail a machine, we typically switch production from the curtailed
machine to maximize the efficient use of other machines that we would not
otherwise fully utilize. In addition, we may curtail the operation of certain of
our converting facilities if we believe it is advantageous to do so.

17

RESULTS OF OPERATIONS

The following table highlights our net sales and profits for the periods
indicated:

- ---------------

(1) Includes allocated power profits for fiscal years 2001 and 2000.

FISCAL YEAR 2001 COMPARED TO FISCAL YEAR 2000

CONSOLIDATED RESULTS

Net sales. Fiscal year 2001 net sales were $876.0 million, compared with
$876.3 million for fiscal year 2000. Net sales remained relatively unchanged as
a result of an incremental $68.6 million of opportunistic net sales of
internally generated power to third parties on economically favorable terms,
offset by a decrease in net sales in our paper and paperboard segments of $59.3
million, or 23.2%, and in our converted products segment of $9.2 million, or
2.0%. See "Selected Segment Results" below.

Cost of products sold. Fiscal year 2001 cost of products sold was $725.3
million, or 82.8% of net sales, compared with $710.2 million, or 81.0% of net
sales, for fiscal year 2000. This increase as a percentage of net sales was
primarily due to a 5% increase in average wood chip costs and a 59% increase in
average natural gas costs at the Longview mill, which were partially due to
increased power sales discussed above. These were partially offset by an
approximately 29% decrease in average OCC costs and high margins on power sales.
Our cost of products sold includes depreciation, depletion and amortization
costs. Depreciation, depletion and amortization consist primarily of
depreciation of our plant and equipment, the cost of timber harvested and, to a
lesser degree, amortization of logging roads. This expense was $71.6 million for
fiscal year 2001, compared with $67.4 million for fiscal year 2000.

Selling, general and administrative expenses. Fiscal year 2001 selling,
general and administrative expenses were $74.9 million, or 8.6% of net sales,
compared with $69.1 million, or 7.9% of net sales, for fiscal year 2000. This
increase as a percentage of net sales was primarily attributable to salary
increases including market adjustments, the opening of our new Bowling Green,
Kentucky converting plant and costs associated with our business process
improvement plan.

Operating profit. Fiscal year 2001 operating profit was $75.7 million, or
8.6% of net sales, compared with $97.0 million, or 11.1% of net sales, for the
fiscal year 2000. See "Selected Segment Results" below.

Provision for taxes on income. Fiscal year 2001 provision for income taxes
was $13.0 million, reflecting a tax rate of 34.5%. Fiscal year 2000 provision
for income taxes was $21.3 million, reflecting a tax rate of 36.1%. The decrease
was primarily the result of a decrease in net income.

18

Net income. For the reasons noted above, net income decreased to $24.7
million from $37.6 million in fiscal year 2000, representing a 34.5% decrease.

SELECTED SEGMENT RESULTS

Timber

Fiscal year 2001 timber net sales were $161.1 million, compared with $161.6
million for fiscal year 2000. The fiscal year 2001 results were impacted by a
decrease in log prices of 10.6% and a decrease in lumber prices of 9.5%, offset
by an increase in log volume of 12.4% and an increase in lumber volume of 7.5%.
The price decline was in part due to a soft Japanese housing market and adverse
U.S. dollar to Japanese yen exchange rates. Weak export market prices
significantly influence our average prices as export prices tend to be
significantly higher than domestic prices. The volume increases were largely due
to relatively strong demand in the domestic market, where prices, although lower
overall in fiscal year 2001, improved from levels in the first half of the year,
as well as to greater timber harvesting in 2001 as a result of improved logging
conditions over those experienced in 2000. Fiscal year 2001 export sales in the
timber segment were $54.5 million, or 33.8%, of timber net sales compared with
$66.4 million, or 41.1%, for fiscal year 2000. This decrease was a result of
export price and volume declines. Fiscal year 2001 timber operating profit was
$65.2 million, compared with $69.4 million for fiscal year 2000. The primary
reason for this 6.0% decline was a decrease in average log and lumber prices,
partially offset by an increase in log and lumber volume due to relatively
strong demand in the domestic market and less curtailment of harvesting in
fiscal year 2001, which resulted in some shifting of export sales to domestic
sales.

Paper and Paperboard

Fiscal year 2001 paper and paperboard net sales were $195.8 million,
compared with $255.0 million for fiscal year 2000. This 23.2% decrease is
primarily due to a 25.6% decrease in paper and paperboard volume, along with a
decrease in paperboard pricing, partially offset by an increase in paper
pricing. Paperboard volume decreased by 42.1% primarily as a result of our
decision not to sell into the Asian market at prices that were depressed due to
a general worsening of business conditions in Asia and the strength of the U.S.
dollar. In addition, Chinese and other Asian producers added Kraft top recycled
linerboard capacity that tended to reduce export Kraft linerboard prices. As a
result of our decision, we have fully curtailed our least efficient paperboard
machine in addition to curtailing two other machines to match production with
incoming orders.

19

Fiscal year 2001 export sales in the paper and paperboard segment were $60.2
million, or 30.7%, of paper and paperboard net sales, compared with $95.8
million, or 37.6%, for fiscal year 2000. Paper volume decreased as a result of a
general economic slowdown in the U.S. market and increased competition from
European producers in the export market due to, among other things, strength in
the U.S. dollar. However, paper prices increased due to a change in our product
mix as we continued to increase sales of TEA-Kraft(TM) paper in the domestic
market and other value-added products. Fiscal year 2001 paper and paperboard
operating profit was $2.2 million, compared with $6.5 million for fiscal year
2000. Operating profits were negatively impacted by a 5% increase in the average
cost of wood chips. In fiscal year 2001, residual wood chip costs increased and
we used a greater proportion of more expensive wood chips from whole log
chipping operations. We have since reduced our use of whole log chips and are
taking advantage of lower-cost residual chips. Operating profits were also
negatively affected by increased costs caused by low machine utilization rates
in the first half of fiscal year 2001 and higher energy prices. Operating
profits were favorably impacted by the profits from the sale of electrical power
allocated to the paper and paperboard segment. We allocated $15.6 million to the
segment operating profit as a result of power sales in fiscal year 2001,
compared with $1.3 million in fiscal year 2000. The basis for this allocation
was consistent with the method used to allocate identifiable assets and other
costs between segments. These sales had the effect of significantly increasing
our energy costs for operation of the paper and paperboard segment as well as
increasing our requirements for natural gas used to fuel the co-generation
facility. Due to the increased sale of power in fiscal year 2001, plus the
increased cost of natural gas, energy costs increased from 8% to 14% of paper
and paperboard and converted products net sales (including allocated power
sales) in fiscal years 2000 and 2001, respectively. However, energy prices have
decreased in the fourth quarter of fiscal year 2001 and we expect decreased
sales of energy into the market in fiscal year 2002. The Longview mill operated
at 80% of capacity during fiscal year 2001 compared with 88% during fiscal year
2000.

Converted Products

Fiscal year 2001 converted products net sales were $442.0 million, compared
with $451.2 million for fiscal year 2000. Converted products volume decreased
2.7% due to general softening of the economy. Converted product pricing was
favorably impacted by increased sales of value-added products such as
point-of-purchase displays and higher-quality print orders. Our specialty
products, which we identify as print jobs with four colors or more, jobs with a
high percentage of die-cuts and other enumerated converted products, represented
26.7% of our converted products net sales for fiscal year 2001, compared with
26.3% for fiscal year 2000. Fiscal year 2001 converted products operating profit
was $8.3 million, compared with $21.1 million for the fiscal year 2000.
Operating profits were negatively impacted by the increased cost of paper and
paperboard supplied to us by the Longview mill and increased converting costs,
including labor and converting supplies, offset by the favorable impact of the
profits from the sale of electrical power allocated to the converted products
segment. The increase in paper and paperboard cost was due to the Longview
mill's increased cost of wood chips and natural gas and power related costs
described above and the increased costs due to a lower operating rate at the
mill. The average mill cost of paper and paperboard supplied to our converting
plants increased by 4.7% for fiscal year 2001, as compared to fiscal year 2000.
The increased cost was also partially attributable to the increased use of
high-quality paperboard used in manufacturing value-added products. We allocated
$19.4 million to the segment operating profit as a result of power sales in
fiscal year 2001, compared with $1.2 million in fiscal year 2000.

20

FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999

CONSOLIDATED RESULTS

Net sales. Fiscal year 2000 net sales were $876.3 million, compared with
$774.3 million for fiscal year 1999. This 13.2% increase was attributable to an
increase in paper and paperboard net sales of $28.7 million, or 12.7%, converted
products net sales of $74.2 million, or 19.7%, and new power sales of $8.5
million, offset by a decrease in net sales in our timber segment of $9.4
million, or 5.5%.

Cost of products sold. Fiscal year 2000 cost of products sold was $710.2
million, or 81.0% of net sales, compared with $644.1 million, or 83.2% of net
sales, for fiscal year 1999. The decrease as a percentage of net sales was
primarily due to improved margins resulting from an increase in prices in most
of our segments and a decrease in depreciation, depletion and amortization
costs. Expense for depreciation, depletion and amortization amounted to $67.4
million for fiscal year 2000, compared with $84.2 million for fiscal year 1999.
This change resulted primarily from the extension of the depreciable lives of
our major equipment following a study we conducted to assess the average useful
life of certain of our capital assets and to approximate industry standards.

Selling, general and administrative expenses. Fiscal year 2000 selling,
general and administrative expenses were $69.1 million, or 7.9% of net sales,
compared with $62.7 million, or 8.1% of net sales, for fiscal year 1999. The
decrease as a percentage of net sales was partially due to an increase in net
sales due to pricing increases in most of our segments. This decrease was offset
by an increase in our converted products sales force and other staff, in
conjunction with the expansion of our converting plants in 2000 and our focus on
marketing specialty, value-added converted products, coupled with salary
increases and increased training costs.

Operating profit. Fiscal year 2000 operating profit was $97.0 million, or
11.1% of net sales, compared with $67.6 million, or 8.7% of net sales, for
fiscal year 1999. This increase was attributable to a $10.6 million increase in
paper and paperboard operating profit, and $32.5 million increase in converted
products operating profit, offset by a $13.8 million decrease in timber
operating profit.

Provision for taxes on income. Fiscal year 2000 provision for income taxes
was $21.3 million, reflecting a tax rate of 36.1%. Fiscal year 1999 provision
for income taxes was $11.5 million, reflecting a tax rate of 36.5%. This
increase was primarily due to an increase in net income resulting from increased
operating profit.

Net income. For the reasons noted above, fiscal year 2000 net income
increased to $37.6 million from $20.0 million in fiscal year 1999.

SELECTED SEGMENT RESULTS

Timber

Fiscal year 2000 timber net sales were $161.6 million, compared with $171.0
million for fiscal year 1999. This 5.5% decrease was primarily due to a decrease
in log volume of 9.1% and a decrease in lumber prices of 5.6%, partially offset
by an increase in log prices and lumber volume. Domestic log volume and prices
decreased as a result of the deterioration of domestic demand throughout the
year, while export prices increased overall in fiscal year 2000, with export
volume remaining stable. Fiscal year 2000 export sales in the

21

timber segment were $66.4 million, or 41.1%, of timber net sales, compared with
$63.9 million, or 37.4%, for fiscal year 1999. Prices in the domestic lumber
markets declined throughout most of the period primarily due to an increase in
Canadian lumber exports. Lumber volume increased despite falling prices due to
our decision to maintain certain customer relationships. Fiscal year 2000 timber
operating profit was $69.4 million, compared with $83.2 million for fiscal year
1999. The primary reason for this 16.5% decline was a decrease in log volume and
lumber prices and, to a lesser extent, higher logging expenses, costs associated
with installing a new saw in our sawmill and increased depletion costs related
to the mix of timber harvested in 2000.

Paper and Paperboard

Fiscal year 2000 paper and paperboard net sales were $255.0 million,
compared with $226.3 million for fiscal year 1999. This 12.7% increase was
primarily due to increases in average paper and paperboard prices of 2.7% and
15.3%, respectively. The price increases were primarily due to lower domestic
inventories resulting from the rationalization of paper machines following
industry consolidation in 1999 and the curtailment of paper machines by a number
of manufacturers. Additionally, we continued to increase our domestic sales of
specialty, value-added products such as TEA-Kraft(TM) paper through a targeted
marketing effort. Paper volume increased by 23.7% primarily due to sales of
TEA-Kraft(TM) paper and sales to new Canadian customers that we established
during fiscal year 2000. The paper volume increase was offset by a 23.8%
decrease in paperboard volume. We significantly increased export sales of
corrugated medium and linerboard in fiscal year 1999 following improved demand
and constrained supply. As a result of deteriorating margins on these products
due to strong competition and weak prices, we significantly reduced export
paperboard volume in fiscal year 2000. Fiscal year 2000 export sales in the
paper and paperboard segment were $95.8 million, or 37.6%, of paper and
paperboard net sales compared with $95.1 million, or 42.0%, in fiscal year 1999.
Fiscal year 2000 paper and paperboard operating profit was $6.5 million,
compared with an operating loss of $4.1 million for fiscal year 1999. Operating
profits were favorably impacted by higher prices, increased domestic sales of
value-added products such as TEA-Kraft(TM) paper and significantly reduced
export sales of low margin corrugated medium and linerboard. This favorable
impact to operating profits was partially offset by increased wood chip and
energy costs. Average wood chip costs were about 4% higher in fiscal year 2000
than in the prior fiscal year. The average cost of OCC, a significant source of
this segment's raw materials, was 27% higher in fiscal year 2000 compared with
fiscal year 1999 due to increased prices resulting from unusually high demand
for OCC. For fiscal year 2000, these two raw materials combined represented
approximately 38% of our total segment cost of products produced, not including
shipping, warehousing and outward freight, compared with approximately 37% for
fiscal year 1999. The average cost of electricity and natural gas increased
approximately 5% and 21%, respectively, for fiscal year 2000 compared with
fiscal year 1999. The Longview mill operated at approximately 88% of capacity
during fiscal year 2000 compared with approximately 85% during fiscal year 1999.

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Converted Products

Fiscal year 2000 converted products net sales were $451.2 million, compared
with $377.0 million for fiscal year 1999. This 19.7% increase was primarily due
to increases in volume of 10.0% and an increase in price of 8.8%. Although
general corrugated container demand was relatively flat for fiscal year 2000, we
believe our volume improved due in large part to our efforts to expand
specialty, value-added product sales through an increased focus on marketing
specialty products and increased value placed by customers on the quality and
service we provide. In the middle of fiscal year 2000, we were also successful
in implementing price increases for most of our converted products. In fiscal
year 2000, our specialty products represented 26.3% of net average sales,
compared with 24.6% for fiscal year 1999. Fiscal year 2000 converted products
operating profit was $21.1 million, compared with an operating loss of $11.5
million for fiscal year 1999. The primary reasons for the improvement were the
price and volume increases, partially offset by increases in the cost of
producing paperboard supplied from the Longview mill as described above, and
increases in wages and the hiring of additional sales representatives at our
converting plants.

LIQUIDITY AND CAPITAL RESOURCES

At October 31, 2001, our financial position included long-term debt of
$585.4 million, including current installments of long-term debt of $45.0
million. Additionally, short-term borrowings at October 31, 2001 were $8.0
million.

Net cash provided by operations was $110.5 million in fiscal year 2001,
$112.4 million in fiscal year 2000 and $117.1 million in fiscal year 1999. The
decrease in fiscal year 2001 was primarily due to a decrease in operating
profits. The decrease in fiscal year 2000 was largely the result of increased
pension and other noncurrent assets.

Net cash used for investing was $118.5 million in fiscal year 2001, $104.9
million in fiscal year 2000 and $27.6 million in fiscal year 1999. Our capital
expenditures, including timberland acquisitions, were $119.6 million in fiscal
year 2001, $106.2 million in fiscal year 2000 and $32.8 million in fiscal year
1999. In fiscal year 2000, we started a capital program to enable us to increase
our domestic converted products business in an effort to reduce our reliance on
the competitive export paperboard market. Significant capital expenditures in
2001 included the construction of our new Bowling Green, Kentucky converting
plant; purchasing of flexo folder gluers, expansion of the material handling
system and other equipment upgrades at our Spanish Fork, Utah converting plant;
upgrading our Amsterdam, New York converting facility by expanding the building,
increasing the corrugator's capacity and purchasing a flexo folder gluer; and
the completion of the replacement of the press section of a paper machine which
began in 2000. Significant capital expenditures in fiscal year 2000 included the
purchase of a corrugator for our Spanish Fork converting plant; the construction
of our Seward, Nebraska converting plant; the rebuilding of a paper machine; and
the commencement of work to replace the press section on a paper machine. In
fiscal year 1999, we made lower capital expenditures as a result of lower
operating profits and our ability to curtail investing based on prior year's
expenditures.

Capital expenditures are expected to total approximately $43 million for
each of fiscal years 2002 and 2003, including expenditures for timber purchases,
plant and equipment maintenance and improvements and environmental compliance.

Net cash provided by financing was $8.0 million in fiscal year 2001, while
the net cash used for financing was $7.6 million in fiscal year 2000 and $89.5
million in fiscal year 1999. The change in fiscal year 2001

23

primarily reflects a $39.4 million increase in borrowings during fiscal year
2001 to fund capital expenditures such as the construction of our Bowling Green,
Kentucky converting plant and the purchase of founders' stock for $6.8 million.
Debt increased by $10.0 million in fiscal year 2000 and decreased by $73.6
million in fiscal year 1999. The reduction in our debt in 1999 was due to a
reduced level of capital expenditures from previous years, and an increase in
operating profit and a decrease in interest expense over the same period, which
allowed more of our cash to be used to repay our debt.

During fiscal years 2001 and 2000, we purchased a total of 600,000 shares
of our stock for approximately $6.8 million and $1.3 million, respectively.
During fiscal year 1999 we did not purchase shares of our stock.

Each quarter we determine the amount of our dividend based on operating
results, current market conditions and debt levels. Cash dividends of $0.12 per
share were declared and paid in the fourth quarter of 2001 in the aggregate
amount of $6.1 million. During fiscal year 2001, we declared and paid total
dividends of $0.48 per share, for an aggregate amount of $24.6 million.
Dividends of $0.48 and $0.28 per share were paid in fiscal year 2000 and fiscal
year 1999, respectively, for an aggregate amount of $24.8 million and $14.5
million, respectively.

The Board of Directors declared a dividend of $0.03 per share to be paid on
January 10, 2002 to shareholders of record on December 24, 2001. The reduction
was based on fourth quarter earnings and current economic conditions that are
negatively affecting our business.

At October 31, 2001, we had bank lines of credit totaling $370 million. Of
this amount, $320 million was provided by a group of banks under a credit
agreement expiring in February 2003. At October 31, 2001, we had $282.0 million
outstanding under this agreement. In addition, at October 31, 2001, we had an
outstanding balance of $35.0 million under the remaining $50.0 million of our
lines of credit. Also outstanding at October 31, 2001, were various senior notes
totaling $249.5 million, which includes a $72.5 million senior note offering
that closed during the third quarter 2001, and revenue bonds of $26.9 million.
Our financing arrangements require us to be in compliance with certain financial
covenants, including minimum net worth, short- and long-term borrowing ratio,
current ratio and fixed charge coverage ratio requirements and restrict our
payment of dividends.

In December 2001, we decided to refinance our $320 million and $35 million
lines of credit and $45.0 million of our senior notes. We anticipate that we
will enter into a new $250 million senior unsecured revolving credit facility
and privately place $185 million of senior subordinated notes with institutional
investors in January 2002. The refinancing transactions are contingent upon a
number of factors, including market conditions.

For the quarter ended April 30, 2001, we obtained amendments from the
holders of certain senior notes with respect to compliance with covenants that
require us to maintain a specified current ratio. The amendments affected the
quarters ended April 30, 2001 and July 31, 2001. As of June 2001, when we closed
a senior note offering, we were in full compliance with all financial covenants
of the original note agreements without regard to the amendments. As a result of
amendments to certain senior notes obtained in 1999, we continue to pay an
additional 0.75% per annum over the original note coupon rates until an
investment grade credit rating is obtained for our unsecured debt.

OTHER

During the year ended October 31, 1999, we adjusted the estimated useful
lives of some capital assets. As a result of an updated comparison of the
estimated useful lives for various asset categories of certain companies in the
industry and further study of our own asset base, we adjusted the estimated
useful lives of our machinery and equipment for fiscal year 2000. The estimated
useful lives now range from 20 to 40 years for buildings and principally from 15
to 20 years for machinery and equipment. These changes increased fiscal 2000 and
fiscal 1999 net income by approximately $10.2 million and $5.8 million,
respectively.

We continually review any known environmental exposures including the cost
of remediation. At the present time, we are not aware of any environmental
liabilities that would have a material impact on the consolidated financial
statements.
24

Although we believe that we are in substantial compliance with federal,
state and local laws regarding environmental quality, the Environmental
Protection Agency (EPA) has issued a final air and water quality rule referred
to as the "Cluster Rule." We estimate that over the next 5 years required
pollution control capital expenditures could range from $15.0 million to $20.0
million. We have included these estimated expenditures in our capital
expenditure budget discussed above.

Although future pollution control expenditures cannot be predicted with any
certainty and could continue to escalate because of continuing changes in laws
and regulations and uncertainty as to how they will be interpreted and applied,
we believe that compliance with these regulations will not have a material
impact on our capital expenditures, earnings or competitive position.

As part of an industry-supported effort, forestry regulations have been
developed in Oregon and Washington to protect salmon. These regulations restrict
the harvest of timber near streams and other environmentally sensitive areas,
thereby reducing the timber that can be harvested and increasing costs.

Our exposure to market risks on our financial instruments is limited to
interest rate changes on variable rate debt, including debt under our revolving
credit facilities. The interest rates applied to our variable rate 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 is dependent upon the amount outstanding during the year
and the extent to which interest rates rise and fall. We do not engage in
commodity, currency or interest rate hedging arrangements or engage in
transactions involving derivatives.

FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS

You should carefully consider the risks and uncertainties described below
and the other information in this report. They are not the only ones we face.
Additional risks and uncertainties that we are not aware of or that we currently
deem immaterial also may impair our business. If any of the following risks
actually occur, our business, financial condition and operating results could be
materially adversely affected and the trading price of our common stock could
decline.

CYCLICAL INDUSTRY CONDITIONS AND COMMODITY PRICING HAVE ADVERSELY AFFECTED AND
MAY CONTINUE TO ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.

Our operating results reflect the general cyclical pattern of the forest,
paper and packaging products industries. Most of our products are commodity
products and are subject to competition from other timber companies and paper
and paperboard products manufacturers worldwide. Historically, prices for our
products have been volatile, and we, like other participants in the forest,
paper and packaging products industries, have limited 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, paper and
packaging products industries. 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 is primarily affected by the level of new residential construction
activity and home repair and remodeling activity. Demand for our paper and
packaging products is primarily affected by the state of the global economy in
general and the economies in North America and East Asia in particular. Due to
generally weak worldwide economic conditions, especially in our main export
market, Asia, global demand for our paper and paperboard products has generally
declined. A prolonged and severe weakness in the markets for one or more of our
principal products could seriously harm our financial condition and results of
operations and our ability to satisfy our cash requirements, including the
payment of interest and principal on our debt.

OUR INDUSTRIES ARE HIGHLY COMPETITIVE AND SUBJECT TO WIDE PRICE FLUCTUATIONS
THAT COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.

The forest, paper and packaging products industries are highly competitive
globally, and no single company is dominant. These industries have suffered from
excess capacity and are also capital intensive, which leads to high fixed costs
and generally results in continued production as long as prices are sufficient
to cover marginal

25

costs. Our competitors include large, vertically integrated forest, paper and
packaging products companies and numerous smaller companies. Larger companies
that compete with us in each of our markets may be better able to withstand the
adverse nature of the business cycle because they may have greater financial
resources than we do. In the past year, we have seen significant competition in
the Japanese timber market as European competitors have benefited from the
strength of the U.S. dollar relative to the Euro. These conditions have
contributed to substantial price competition and volatility within our industry,
especially during periods of reduced demand. Future decreases in prices for our
products would adversely affect our operating results. These factors, coupled
with our substantial leveraged position, may harm our ability to respond to
competition and other market conditions.

Pricing in the U.S. softwood lumber industry has been impacted historically
by Canadian exports into the United States. In 1996, the Softwood Lumber
Agreement, a five-year quota accord, was put in place in an attempt to reduce
Canadian softwood lumber exports to the United States. The agreement taxed
exports that exceeded certain levels from the Canadian provinces of British
Columbia, Alberta, Ontario and Quebec. Despite the quota, exports from Canada to
the United States increased each year the quota was in effect as shipments from
other Canadian provinces rose sharply. Following the expiration of the Softwood
Lumber Agreement in March 2001, exports of Canadian softwood lumber into the
United States have increased. According to the American Pulp and Paper
Association, from April through August 2001, imports of Canadian softwood lumber
into the United States increased by 6.0% compared with the same period in 2000.
At the request of U.S. lumber producers, the U.S. Department of Commerce
introduced a temporary 19.3% countervailing duty on August 15, 2001 on lumber
shipments from the four Canadian provinces originally affected by the Softwood
Lumber Agreement. On October 31, 2001, an additional 12.6% anti-dumping tariff,
which applies to all Canadian producers, was introduced as a result of an
investigation that identified six Canadian producers selling lumber into the
United States at prices below production costs. The temporary 19.3%
countervailing duty expired December 15, 2001. However, the Department of
Commerce is continuing to review whether to impose a new countervailing duty.
The 12.6% anti-dumping tariff is expected to remain in place until a final
decision is made regarding the duty.

PRICE FLUCTUATIONS IN RAW MATERIALS COULD ADVERSELY AFFECT OUR ABILITY TO
OBTAIN THE MATERIALS NEEDED TO MANUFACTURE OUR PRODUCTS.

The most significant raw material used in our operations is fiber, including
wood, recycled and other fiber, which during fiscal year 2001 accounted for
43.0% of our costs of products produced in our paper and paperboard segment, not
including shipping, warehousing and outward freight. We obtained approximately
90% of our wood fiber requirements at open market prices during fiscal year
2001. We also obtained almost all of our recycled fiber on the open market. Wood
and recycled fiber are both subject to commodity pricing, which fluctuates on
the basis of market factors over which we have no control. In addition, the cost
of fiber that we purchase in the market has at times fluctuated greatly because
of economic or industry conditions, particularly the conditions in the Pacific
Northwest, where we purchase most of our fiber. Further, our access to wood
fiber could be adversely affected by consolidation of sawmills in the Pacific
Northwest that supply wood fiber to our Longview mill, as well as more stringent
environmental or other regulations affecting the supply or cost of timber to
those sawmills. We may not be able to pass any future raw material cost
increases through to our customers through product price increases. Our
inability to pass increased costs through to our customers could harm our
financial condition, results of operations and cash flow.

OUR OPERATIONS REQUIRE SUBSTANTIAL CAPITAL AND OUR CAPITAL RESOURCES MAY NOT
BE ADEQUATE TO PROVIDE FOR ALL OF OUR CASH REQUIREMENTS.

Our operations require substantial capital. Capital requirements for
expansion, replacement and maintenance of existing facilities or equipment or to
comply with existing and future changes in environmental laws and regulations
may be substantial. Although we maintain our equipment with regular periodic and
scheduled maintenance, we cannot assure you that key pieces of equipment will
not need to be repaired or replaced or that we will not incur significant
additional costs associated with environmental compliance. The costs of
repairing or replacing equipment and the associated downtime of an affected
production line could harm our financial condition, results of operations and
cash flow. If our future capital resources are inadequate to

26

provide for our operating needs, capital expenditures and other cash
requirements on economic terms, our business, financial condition, results of
operations and cash flow could be harmed.

WE ARE SUBJECT TO SIGNIFICANT ENVIRONMENTAL REGULATION AND ENVIRONMENTAL
COMPLIANCE EXPENDITURES AND LIABILITIES.

Our businesses are subject to many federal, state and local environmental,
health and safety laws and regulations, particularly with respect to the
restoration and reforestation of timberlands, harvesting timber near waterways,
discharges of pollutants and emissions, and the management, disposal and
remediation of hazardous substances or other contaminants. Compliance with these
laws and regulations is a significant factor in our business and we have
incurred, and expect to continue to incur, significant expenditures to remain in
compliance. We expect that the environmental laws and regulations to which we
are subject will become more stringent and more stringently enforced in the
future. Our failure to comply with applicable environmental laws and regulations
and permit requirements could result in civil or criminal fines or penalties or
enforcement actions, including regulatory or judicial orders enjoining or
curtailing operations or requiring corrective measures, installation of
pollution control equipment or remedial actions.

Some environmental laws and regulations impose liability and responsibility
on present and former owners, operators or users of facilities and sites for
contamination at such facilities and sites without regard to causation or
knowledge of contamination. Investigations may lead to discoveries of
contamination that must be remediated, and closures of facilities may trigger
compliance requirements that are not applicable to operating facilities.
Consequently, we cannot assure you that existing or future circumstances or
developments with respect to contamination, including unanticipated discovery of
contamination or discharges of hazardous substances, will not require
significant expenditures by us or that internally generated funds or other
sources of liquidity and capital will be sufficient to fund unforeseen
environmental liabilities or expenditures.

Some environmental laws permit individuals, citizens groups and other third
parties to file claims against us based upon alleged violations of laws or
damages to property stemming from contamination, or upon alleged injury to
persons stemming from exposure to hazardous substances used or otherwise
controlled by us. We may be required to expend significant sums to defend and/or
settle existing or future claims.

NATURAL DISASTERS OR OTHER EVENTS MAY CAUSE LOSSES TO OUR TIMBER HOLDINGS OR
LIMIT OUR ABILITY TO HARVEST OUR TIMBER.

The volume and value of timber that can be harvested from our lands may be
limited by natural disasters and other events such as fire, insect infestation,
disease, ice storms, wind storms, flooding, other weather conditions and other
causes. The occurrence of any of these events could harm our business, financial
condition and results of operations. Further, as is typical in the industry, we
do not maintain insurance for any loss of our standing timber from natural
disasters or other causes. In addition, fire and other natural disasters in
adjacent or nearby timberlands may limit our access to, or impede our ability to
harvest, our timber. In periods of poor logging conditions, we may harvest less
timber than expected, thus impacting our net sales of timber during that period.

HIGH ENERGY COSTS COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.

Through the fir