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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 COMMISSION FILE NUMBER 333-63825
SCOTIA PACIFIC COMPANY LLC
(Exact name of Registrant as Specified in its Charter)
DELAWARE 68-0414690
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
P. O. BOX 712 95565
125 MAIN STREET, 2ND FLOOR (Zip Code)
SCOTIA, CALIFORNIA
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (707) 764-2330
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Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
None.
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
The Registrant is a limited liability company wholly owned by
an affiliate of the Registrant.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
(I)(1)(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING
THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
DOCUMENTS INCORPORATED BY REFERENCE:
Not applicable.
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TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Report of Independent Public Accountants
Balance Sheet
Statement of Income
Statement of Cash Flows
Notes to Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Items
10-13. Not applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
ITEM 1. BUSINESS
GENERAL
Scotia Pacific Company LLC (the "COMPANY"), a special purpose Delaware
limited liability company wholly owned by The Pacific Lumber Company ("PACIFIC
LUMBER"), was organized by Pacific Lumber in May 1998 to facilitate the sale of
$160.7 million of the Company's 6.55% Series B Class A-1 Timber Collateralized
Notes due 2028, (the "CLASS A-1 NOTES"), $243.2 million of the Company's 7.11%
Series B Class A-2 Timber Collateralized Notes due 2028 (the "CLASS A-2 NOTES")
and $463.3 million of the Company's 7.71% Series B Class A-3 Timber
Collateralized Notes due 2028 (the "CLASS A-3 NOTES," together with the Class
A-1 Timber Notes and the Class A-2 Timber Notes, the "TIMBER NOTES"). The
Indenture governing the Timber Notes is referred to herein as the "INDENTURE."
Pacific Lumber is a wholly owned subsidiary of MAXXAM Group Inc. ("MGI"), and
Pacific Lumber also wholly owns Salmon Creek LLC ("SALMON CREEK"). MGI is a
wholly owned subsidiary of MAXXAM Group Holdings Inc. ("MGHI"), which in turn is
a wholly owned subsidiary of MAXXAM Inc. ("MAXXAM"). As used herein, the terms
"MGHI," "MGI," "Pacific Lumber," or "MAXXAM" refer to the respective companies
and their subsidiaries, unless otherwise noted or the context indicates
otherwise.
This Annual Report on Form 10-K contains statements which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear in a number of places
(see Item 1. "Business--Harvesting Practices" and "--Regulatory and
Environmental Factors," Item 3. "Legal Proceedings" and Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Background," "--Results of Operations" and "--Financial Condition
and Investing and Financing Activities"). Such statements can be identified by
the use of forward-looking terminology such as "believes," "expects," "may,"
"estimates," "will," "should," "plans" or "anticipates" or the negative thereof
or other variations thereon or comparable terminology, or by discussions of
strategy. Readers are cautioned that any such forward-looking statements are not
guarantees of future performance and involve significant risks and
uncertainties, and that actual results may vary materially from the
forward-looking statements as a result of various factors. These factors include
the effectiveness of management's strategies and decisions, general economic and
business conditions, developments in technology, new or modified statutory or
regulatory requirements and changing prices and market conditions. This Report
identifies other factors that could cause such differences between such
forward-looking statements and actual results. No assurance can be given that
these are all of the factors that could cause actual results to vary materially
from the forward-looking statements.
TIMBER AND TIMBERLANDS
The Company owns, and the obligations of the Company under the Timber
Notes are secured by, (i) approximately 205,000 acres of timberlands, (ii) the
timber and related harvesting rights (the "COMPANY TIMBER RIGHTS") with respect
to an additional approximately 12,200 acres of timberlands that are owned by
Pacific Lumber, Salmon Creek and an unaffiliated third party, (iii)
approximately 400 acres of timberlands with respect to which Pacific Lumber owns
the Timber Rights (the "PACIFIC LUMBER TIMBER RIGHTS"), (iv) certain computer
hardware and software, including a geographic information system ("GIS")
containing information on numerous aspects of the Company's timberlands (subject
to certain rights of concurrent use by Pacific Lumber) and (v) certain other
assets. Substantially all of the Company's assets serve as security for the
Timber Notes. The timberlands owned by the Company (including the timberlands
which are subject to the Pacific Lumber Timber Rights) and the timberlands
subject to the Company Timber Rights are hereinafter collectively referred to as
the "COMPANY TIMBERLANDS." The timber located on the Company Timberlands which
is not subject to the Pacific Lumber Timber Rights is hereinafter referred to as
the "COMPANY TIMBER."
In March 1999, Pacific Lumber, the Company and Salmon Creek (collectively,
the "PALCO COMPANIES") consummated the Headwaters Agreement (the "HEADWATERS
AGREEMENT") with the United States and California. Pursuant to the agreement,
approximately 5,600 acres of timberlands owned by the Palco Companies known as
the Headwaters Forest and the Elk Head Springs Forest (the "HEADWATERS
TIMBERLANDS") were transferred to the United States. In exchange, Salmon Creek
was paid $299.9 million, the Company was paid $150,000 and approximately 7,700
acres of timberlands known as the Elk River Timberlands (the "ELK RIVER
TIMBERLANDS") were transferred to Pacific Lumber and subsequently transferred to
the Company. In addition, habitat conservation and sustained yield plans (the
"ENVIRONMENTAL PLANS") were approved covering the Company's timberlands and
California agreed to purchase a portion of Pacific Lumber's Grizzly Creek grove
as well as all of the Company's Owl Creek grove. In December 2000, California
purchased the Owl Creek grove for $67.0 million in cash, and on November 15,
2001, purchased a portion of the Grizzly Creek grove for $19.8 million in cash.
Salmon Creek placed $169.0 million of the proceeds from the sale of the
Headwaters Timberlands into a Scheduled Amortization Reserve Account ("SAR
ACCOUNT") in order to support principal payments on the Timber Notes. See
"--Regulatory and Environmental Factors" below and Notes 2 and 5 to the
Financial Statements.
Timber generally is categorized by species and the age of a tree when it
is harvested. "OLD GROWTH" trees are often defined as trees which have been
growing for approximately 200 years or longer, and "YOUNG GROWTH" trees are
those which have been growing for less than 200 years. The forest products
industry grades lumber into various classifications according to quality. The
two broad categories into which all grades fall based on the absence or presence
of knots are called "upper" and "common" grades, respectively. Old growth trees
have a higher percentage of upper grade lumber than young growth trees.
The Company estimates that the amount of Company Timber consists of
approximately 3.1 million Mbfe (as described below) of timber by volume, and is
comprised of primarily young growth and old growth redwood and Douglas-fir
timber. In addition, substantial quantities of sub-merchantable trees exist on
the Company Timberlands which are not yet mature and have not been included in
the inventory of the Company Timber. The estimates of the volume of timber
comprising the Company Timber are based on a timber cruise performed in 1986 of
all of Pacific Lumber's properties at that time, as adjusted to reflect
acquisitions, dispositions, and actual harvest levels since the cruise and
estimated growth rates of the Company Timber. A similar timber cruise is
currently underway, but it is not expected to be finalized until the end of
2002.
Under the Mbfe concept, one thousand board feet, net Scribner scale, of
old growth redwood timber equals one Mbfe. One thousand board feet, net Scribner
scale, of each other species and category of timber included in the Company
Timber was assigned a value equal to a fraction of an Mbfe. This fraction was
generally determined by dividing the June 1998 SBE Price applicable to such
species and category by the June 1998 SBE Price applicable to old growth
redwood. "SBE PRICE" is the applicable stumpage price for each species of timber
and category thereof pursuant to a schedule published periodically by the
California State Board of Equalization. See "--Operation of Company Timberlands"
and "--Harvesting Practices" below.
Legal challenges have severely restricted the ability to harvest the
virgin old growth timber on the Company's property, and to a lesser extent,
residual old growth timber. In addition, the ability to harvest the Company's
old growth timber has also been and is expected to continue to be subject to
restrictions under federal and state environmental laws, and also be subject to
the provisions of the Environmental Plans. See "--Regulatory and Environmental
Factors" below.
Redwood lumber is a premium, high value-added product which has different
supply and demand characteristics from the general lumber market. Redwood is
known for its natural beauty, superior ability to retain paints and finishes,
dimensional stability and its innate resistance to decay, insects and chemicals.
As a result, redwood lumber is generally not used for commodity applications
such as structural frames for construction, but is used instead for specialty
applications such as exterior siding, trim and fascia for both residential and
commercial construction, outdoor furniture, decks, planters and retaining walls.
Redwood also has a variety of industrial applications because of its resistance
to chemicals and because it does not impart any taste or odor to liquids or
solids. Redwood prices have exhibited stability compared to most other softwood
timber types, and redwood lumber has historically commanded a substantial price
premium to other softwood timber types. Redwood is grown commercially only in
North America in a region that extends for approximately 375 miles along the
coast of the Pacific Northwest. The combination of excellent soil conditions and
climate makes this region one of the most productive timber regions in North
America.
Douglas-fir is used primarily for new construction and some decorative
purposes and is widely recognized for its strength, hard surface and attractive
appearance. Douglas-fir is grown commercially along the west coast of North
America and in Chile and New Zealand.
Pacific Lumber engages in extensive efforts to supplement the natural
regeneration of the Company Timber and increase the amount of timber on the
Company Timberlands. The Company is required to comply with California forestry
regulations regarding reforestation, which generally require that an area be
reforested to specified standards within an established period of time. Pursuant
to the Services Agreement described below (see "--Operation of Company
Timberlands"), Pacific Lumber conducts regeneration activities on the Company
Timberlands for the Company. Regeneration of redwood timber generally is
accomplished through the natural growth of new redwood sprouts from the stump
remaining after a redwood tree is harvested. Such new redwood sprouts grow
quickly, thriving on existing mature root systems. In addition, Pacific Lumber
supplements natural redwood regeneration by planting redwood seedlings.
Douglas-fir timber is regenerated almost entirely by planting seedlings. During
2001, Pacific Lumber planted an estimated 1,006,000 redwood and Douglas-fir
seedlings on the Company Timberlands.
California law requires timber owners such as the Company to demonstrate
that their operations will not decrease the sustainable productivity of their
timberlands. A timber company may comply with this requirement by submitting a
sustained yield plan to the California Department of Forestry and Fire
Protection ("CDF") for review and approval. A sustained yield plan contains a
timber growth and yield assessment, which evaluates and calculates the amount of
timber and long-term production outlook for a company's timberlands, a fish and
wildlife assessment, which addresses the condition and management of fisheries
and wildlife in the area, and a watershed assessment, which addresses the
protection of aquatic resources. The relevant regulations require determination
of a long-term sustained yield ("LTSY") harvest level, which is the average
annual harvest level that the management area is capable of sustaining in the
last decade of a 100-year planning horizon. The LTSY is determined based upon
timber inventory, projected growth and harvesting methodologies, as well as
soil, water, air, wildlife and other relevant considerations. A sustained yield
plan must demonstrate that the average annual harvest over any rolling ten-year
period within the planning horizon does not exceed the LTSY.
The Company is also subject to federal and state laws providing for the
protection and conservation of wildlife species which have been designated as
endangered or threatened, certain of which are found on the Company Timberlands.
These laws generally prohibit certain adverse impacts on such species (referred
to as a "TAKE"), except for incidental takes which do not jeopardize the
continued existence of the affected species and which are made in accordance
with an approved habitat conservation plan and related incidental take permit. A
habitat conservation plan analyzes the impact of the incidental take and
specifies measures to monitor, minimize and mitigate such impact. As part of the
Headwaters Agreement, the Company and Pacific Lumber reached agreement with
various federal and state regulatory agencies with respect to the Environmental
Plans, consisting of a sustained yield plan (the "SYP") and a multi-species
habitat conservation plan (the "HCP"). See "--Regulatory and Environmental
Factors" below.
OPERATION OF COMPANY TIMBERLANDS
The Company's foresters, wildlife and fisheries biologists, geologists and
other personnel are responsible for providing a number of forest stewardship
techniques, including protecting the Company Timber from forest fires, erosion,
insects and other damage, overseeing reforestation activities and monitoring
environmental and regulatory compliance. The Company's personnel are also
responsible for preparing timber harvesting plans ("THPS") and updating the GIS
that contains information on numerous aspects of the Company Timberlands, such
as timber type, tree class, wildlife data, roads, rivers and streams. See
"--Harvesting Practices" below for a description of the Company's GIS updating
process and the THP preparation process.
The Company is a party with Pacific Lumber to a master purchase agreement
(the "MASTER PURCHASE AGREEMENT") which governs the sale to Pacific Lumber of
logs harvested from the Company Timberlands. As Pacific Lumber purchases logs
from the Company pursuant to the Master Purchase Agreement, Pacific Lumber is
responsible, at its own expense, for harvesting and removing the standing
Company Timber covered by approved THPs, with the purchase price being based
upon "stumpage prices." Title to, and the obligation to pay for, harvested logs
passes to Pacific Lumber once the logs are measured. The Master Purchase
Agreement generally contemplates that all sales of logs by the Company to
Pacific Lumber will be at a price which equals or exceeds the applicable SBE
Price, which is the stumpage price for each species and category of timber as
set forth in the most recent "HARVEST VALUE SCHEDULE" (or any successor
publication) published by the California State Board of Equalization (or any
successor agency) applicable to the timber sold during the applicable period.
Harvest Value Schedules are published twice a year for purposes of computing a
yield tax imposed on timber harvested between January 1 through June 30 and July
1 through December 31. SBE Prices are not necessarily representative of actual
prices that would be realized from unrelated parties at subsequent dates.
After obtaining an approved THP, the Company offers for sale the logs to
be harvested pursuant to such THP. While the Company may sell logs to third
parties, it derives substantially all of its revenue from the sale of logs to
Pacific Lumber pursuant to the Master Purchase Agreement. Each sale of logs by
the Company to Pacific Lumber is made pursuant to a separate log purchase
agreement that relates to the Company Timber covered by an approved THP and
incorporates the provisions of the Master Purchase Agreement. Each such log
purchase agreement provides for the sale to Pacific Lumber of the logs harvested
from the Company Timber covered by such THP and generally constitutes an
exclusive agreement with respect to the timber covered thereby, subject to
certain limited exceptions. However, the timing and amount of log purchases by
Pacific Lumber is affected by factors outside the control of the Company,
including regulatory and environmental factors, the financial condition of
Pacific Lumber, and the supply and demand for lumber products (which, in turn,
will be influenced by demand in the housing, construction and remodeling
industries).
The Company continues to rely on Pacific Lumber to provide operational,
management and related services not performed by its own employees with respect
to the Company Timberlands pursuant to a services agreement (the "SERVICES
AGREEMENT"). The services include the furnishing of all equipment, personnel and
expertise not within the Company's possession and reasonably necessary for the
operation and maintenance of the Company Timberlands and the Company Timber as
well as timber management techniques designed to supplement the natural
regeneration of, and increase the amount of, Company Timber. Pacific Lumber is
required to provide all services under the Services Agreement in a manner
consistent in all material respects with prudent business practices which are
consistent with then current applicable industry standards and are in compliance
in all material respects with all applicable timber laws. The Company pays
Pacific Lumber a services fee ("SERVICES FEE") which is adjusted annually based
on a specified government index relating to wood products and reimburses Pacific
Lumber for the cost of constructing, rehabilitating and maintaining roads, and
performing reforestation services, on the Company Timberlands. Certain of such
reimbursable expenses vary in relation to the amount of timber to be harvested
in any given period.
The Company provides further services to Pacific Lumber pursuant to an
additional services agreement (the "ADDITIONAL SERVICES AGREEMENT"). These
services include (i) assisting Pacific Lumber to operate, maintain and harvest
its own timber properties, (ii) updating and providing access to the GIS with
respect to information concerning Pacific Lumber's own timber properties and
(iii) assisting Pacific Lumber with its statutory and regulatory compliance.
Pacific Lumber pays the Company a fee for such services equal to the actual cost
of providing such services, as determined in accordance with generally accepted
accounting principles.
The Company, Pacific Lumber and Salmon Creek are also parties to a
reciprocal rights agreement (the "RECIPROCAL RIGHTS AGREEMENT") whereby, among
other things, the parties have granted to each other certain reciprocal rights
of egress and ingress through their respective properties in connection with the
operation and maintenance of such properties and their respective businesses. In
addition, Pacific Lumber and the Company are parties to an environmental
indemnification agreement (the "ENVIRONMENTAL INDEMNIFICATION AGREEMENT"),
pursuant to which Pacific Lumber has agreed to indemnify the Company from and
against certain present and future liabilities arising with respect to hazardous
materials, hazardous materials contamination or disposal sites, or under
environmental laws with respect to the Company Timberlands. In particular,
Pacific Lumber is liable with respect to any contamination which occurred on the
Company Timberlands prior to the date of their transfer to the Company.
HARVESTING PRACTICES
This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See Item 1. "Business--General" in this section for cautionary
information with respect to such forward-looking statements.
The GIS contains information regarding numerous aspects of the Company
Timberlands, including timber type, tree class, wildlife data, roads, rivers and
streams. Subject to the terms of the Services Agreement, Pacific Lumber, to the
extent necessary, provides the Company with personnel and technical assistance
to assist the Company in updating, upgrading and improving the GIS and the other
computer systems owned by the Company. By carefully monitoring and updating this
data base and conducting field studies, the Company's foresters, with the
assistance (if required) of Pacific Lumber pursuant to the Services Agreement,
are better able to develop detailed THPs addressing the various regulatory
requirements. The Company also utilizes a Global Positioning System ("GPS")
which allows precise location of geographic features through satellite
positioning. Use of the GPS greatly enhances the quality and efficiency of the
GIS data.
The ability of the Company to harvest timber will depend, in part, upon
its ability to obtain regulatory approval of THPs. Prior to harvesting timber in
California, companies are required to obtain the CDF's approval of a detailed
THP for the area to be harvested. A THP must be submitted by a registered
professional forester and must include information regarding the method of
proposed timber operations for a specified area, whether the operations will
have any adverse impact on the environment and, if so, the mitigation measures
to be used to reduce any such impact. The CDF's evaluation of THPs incorporates
review and analysis of such THPs by several California and federal agencies and
public comments received with respect to such THPs. An approved THP is
applicable to specific acreage and specifies the harvesting method and other
conditions relating to the harvesting of the timber covered by such THP. The
number of the Company's approved THPs and the amount of timber covered by such
THPs varies significantly from time to time, depending upon the timing of agency
review and other factors. Timber covered by an approved THP is typically
harvested within a one year period from the date harvesting first begins. The
Indenture requires the Company to use its best efforts (consistent with prudent
business practices) to maintain a number of pending THPs which, together with
THPs previously approved, would cover rights to harvest a quantity of Company
Timber adequate to pay interest and principal amortization based on the Minimum
Principal Amortization Schedule for the Timber Notes for the next succeeding
twelve month period. Despite its best efforts, the Company has experienced an
absence of a sufficient number of THPs available for harvest to enable it to
conduct its operations at levels it had experienced prior to 1998 or at levels
which meet the Company's expectations, although the Company has recently
experienced improvements. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Background" and "--Results of
Operations--Log Sales to Pacific Lumber." However, the Company believes that the
Environmental Plans should in the long-term expedite the preparation and
facilitate approval of its THPs.
The Company employs a variety of well-accepted methods of selecting trees
for harvest designed to achieve optimal regeneration. These methods, referred to
as "silvicultural systems" in the forestry profession, range from very light
thinnings aimed at enhancing the growth rate of retained trees to clear cutting
which results in the harvest of all trees in an area and replacement with a new
forest stand. In between are a number of varying levels of partial harvests
which can be employed.
EMPLOYEES
As of March 1, 2002, the Company employed 96 persons, 89 of whom were
registered professional foresters, geologists, wildlife and fisheries biologists
or otherwise involved in the management of the Company Timberlands. None of the
Company's employees are covered by a collective bargaining agreement.
PRINCIPAL EXECUTIVE OFFICES
The principal executive offices of the Company are located at 125 Main
Street, 2nd Floor, P.O. Box 712, Scotia, California 95565. The telephone number
of the Company is (707) 764-2330.
REGULATORY AND ENVIRONMENTAL FACTORS
This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See Item 1. "Business--General" in this section for cautionary
information with respect to such forward-looking statements.
General
The Company's business is subject to the Environmental Plans and a variety
of California and federal laws and regulations dealing with timber harvesting,
threatened and endangered species and habitat for such species, and air and
water quality. Compliance with such laws and regulations also plays a
significant role in Pacific Lumber's business. The California Forest Practice
Act (the "FOREST PRACTICE ACT") and related regulations adopted by the
California Board of Forestry and Fire Protection (the "BOF") set forth detailed
requirements for the conduct of timber harvesting operations in California.
These requirements include the obligation of timber companies submitting THPs to
obtain regulatory approval of detailed THPs containing information with respect
to areas proposed to be harvested (see "--Harvesting Practices" above).
California law also requires large timber companies submitting THPs to
demonstrate that their proposed timber operations will not decrease the
sustainable productivity of their timberlands (see "--Timber and Timberlands"
above). The federal Endangered Species Act (the "ESA") and California Endangered
Species Act (the "CESA") provide in general for the protection and conservation
of specifically listed wildlife and plants which have been declared to be
endangered or threatened. These laws generally prohibit the take of certain
species, except for incidental takes pursuant to otherwise lawful activities
which do not jeopardize the continued existence of the affected species and
which are made in accordance with an approved habitat conservation plan and
related incidental take permits. A habitat conservation plan, among other
things, analyzes the potential impact of the incidental take of species and
specifies measures to monitor, minimize and mitigate such impact. The operations
of the Company are also subject to the California Environmental Quality Act (the
"CEQA"), which provides for protection of the state's air and water quality and
wildlife, and the California Water Quality Act and federal Clean Water Act
("CWA"), which require that Pacific Lumber conduct its operations so as to
reasonably protect the water quality of nearby rivers and streams. Compliance
with such laws, regulations and judicial and administrative interpretations,
together with other regulatory and environmental matters, have resulted in
restrictions on the scope and timing of the Company's timber operations and
increased operational costs. They have also engendered litigation and other
challenges to the Company's operations.
The Environmental Plans
The Environmental Plans, consisting of the HCP and the SYP, were approved
by the applicable federal and state regulatory agencies upon the consummation of
the Headwaters Agreement. In connection with approval of the Environmental
Plans, incidental take permits ("PERMITS") were issued with respect to certain
threatened, endangered and other species found on the Company Timberlands. The
Permits cover the 50-year term of the HCP and allow incidental takes of 17
different species covered by the HCP, including four species found on the
Company Timberlands that had previously been listed as endangered or threatened
under the ESA and/or the CESA. The agreements which implement the Environmental
Plans also provide for various remedies (including the issuance of written stop
orders and liquidated damages) in the event of a breach by the Company of these
agreements or the Environmental Plans.
Under the Environmental Plans, harvesting activities are prohibited or
restricted on certain areas of the Company Timberlands. For a 50-year period,
harvesting activities are severely restricted in several areas (consisting of
substantial quantities of old growth redwood and Douglas-fir timber) to serve as
habitat conservation areas for the marbled murrelet, a coastal seabird, and
certain other species. Harvesting in certain other areas of the Company
Timberlands is currently prohibited while these areas are evaluated for the
potential risk of landslide and the degree to which harvesting activities will
be prohibited or restricted in the future. Further, additional areas alongside
streamsides have been designated as buffers, in which harvesting is prohibited
or restricted, to protect aquatic and riparian habitat. Streamside buffers and
restrictions related to potential landslide prone acres may be adjusted up or
down, subject to certain minimum and maximum buffers, based upon an ongoing
watershed analysis process, which the HCP requires be completed within five
years of its effective date. The first analysis by the Company of a watershed,
Freshwater, was released in June 2001. This analysis was used by the Company to
develop proposed harvesting prescriptions. Because the Company and the
government agencies were unable to reach agreement on the appropriate
prescriptions, the matter is being reviewed by an independent panel of
scientists. Analyses for two additional watersheds are currently undergoing
agency review. The Company and the agencies are working to streamline the
watershed analysis process prior to beginning up to three more watershed studies
in 2002.
The HCP also imposes certain restrictions on the use of roads on the
timberlands covered by the HCP during several months of the year and during
periods of wet weather. However, the Company anticipates that some harvesting
will be able to be conducted during these months. The HCP also requires that 75
miles of roads be stormproofed on an annual basis (within a specified six month
period) and that certain other roads must be built or repaired (within a
specified five month period).
The HCP contains an adaptive management provision, which various
regulatory agencies have clarified will be implemented on a timely and efficient
basis, and in a manner which will be both biologically and economically sound.
This provision allows the Company and Pacific Lumber to propose changes to any
of the HCP prescriptions based on, among other things, certain economic
considerations. The regulatory agencies have also clarified that in applying
this adaptive management provision, to the extent the changes proposed do not
result in the jeopardy of a particular species, the regulatory agencies will
consider the practicality of the suggested changes, including the cost and
economic feasibility and viability. Pacific Lumber and the agencies are
currently discussing proposed adaptive management changes related to roads,
streamside buffers, wildlife and rare plants.
Water Quality
Under the CWA, the Environmental Protection Agency (the "EPA") is required
to establish total maximum daily load limits ("TMDLS") in water courses that
have been declared to be "water quality impaired." The EPA and the North Coast
Regional Water Quality Control Board (the "NORTH COAST WATER BOARD") are in the
process of establishing TMDLs for 17 northern California rivers and certain of
their tributaries, including certain water courses that flow within the Company
Timberlands. The Company expects this process to continue into 2010. In December
1999, the EPA issued a report dealing with TMDLs on two of the nine water
courses. The agency indicated that the requirements under the HCP would
significantly address the sediment issues that resulted in TMDL requirements for
these water courses. However, a September 2000 report by the staff of the North
Coast Water Board proposed various actions, including restrictions on harvesting
beyond those required under the HCP. Establishment of the final TMDL
requirements applicable to the Company Timberlands will be a lengthy process,
and the final TMDL requirements applicable to the Company's Timberlands may
require aquatic protection measures that are different from or in addition to
the prescriptions to be developed pursuant to the watershed analysis process
provided for in the HCP.
Impact of Future Legislation
Laws, regulations and related judicial decisions and administrative
interpretations dealing with the Company's business are subject to change and
new laws and regulations are frequently introduced concerning the California
timber industry. From time to time, bills are introduced in the California
legislature and the U.S. Congress which relate to the business of the Company,
including the protection and acquisition of old growth and other timberlands,
threatened and endangered species, environmental protection, air and water
quality and the restriction, regulation and administration of timber harvesting
practices. In addition to existing and possible new or modified statutory
enactments, regulatory requirements and administrative and legal actions, the
California timber industry remains subject to potential California or local
ballot initiatives and evolving federal and California case law which could
affect timber harvesting practices. It is not possible to assess the effect of
such future legislative, judicial and administrative events on the Company or
its business.
Timber Operations
In order to conduct logging operations, stormproofing and certain other
activities, a company must obtain from the CDF a Timber Operator's License. In
December 2001, Pacific Lumber was granted a Timber Operator's License for 2002.
Pacific Lumber had historically conducted logging operations on the Company
Timberlands with its own staff of logging personnel as well as through contract
loggers. However, effective April 1, 2002, Pacific Lumber has terminated its
staff of logging personnel, and intends to rely exclusively on third party
contract loggers to conduct these activities.
ITEM 2. PROPERTIES
A description of the Company's properties is included under Item 1. above.
ITEM 3. LEGAL PROCEEDINGS
This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See Item 1. "Business--General" for cautionary information with respect
to such forward-looking statements.
TIMBER HARVESTING LITIGATION
On December 2, 1997, a lawsuit entitled Kristi Wrigley, et al. v. Charles
Hurwitz, John Campbell, Pacific Lumber, MAXXAM Group Holdings Inc., Scotia
Pacific Holding Company, MAXXAM Group Inc., MAXXAM Inc., Scotia Pacific Company
LLC, et al. (No. 9700399) (the "WRIGLEY LAWSUIT") was filed in the Superior
Court of Humboldt County. This action alleges, among other things, that
defendants' logging practices have contributed to an increase in flooding and
damage to domestic water systems in a portion of the Elk River watershed.
Plaintiffs further allege that in order to have THPs approved in connection with
these areas, the defendants submitted false information to the CDF in violation
of California's business and professions code and the Racketeering Influence and
Corrupt Practices Act. The Company believes that it has strong factual and legal
defenses with respect to the Wrigley lawsuit; however, there can be no assurance
that it will not have a material adverse effect on its financial position,
results of operations or liquidity.
On March 31, 1999, an action entitled Environmental Protection Information
Association, Sierra Club v. California Department of Forestry and Fire
Protection, California Department of Fish and Game, The Pacific Lumber Company,
Scotia Pacific Company LLC, Salmon Creek Corporation, et al. (No. 99CS00639)
(the "EPIC-SYP/PERMITS LAWSUIT") was filed alleging, among other things, that
the CDF and the CDFG violated the CEQA and the CESA, and challenging, among
other things, the validity and legality of the SYP and the Permits issued by
California. This action is now pending in Humboldt County, California (No.
CV-990445). The plaintiffs seek, among other things, injunctive relief to set
aside the CDF's and the CDFG's decisions approving the SYP and the Permits
issued by California. The Court recently denied the plaintiffs' motion for
injunctive relief, and set a trial date of August 5, 2002. On March 31, 1999, an
action entitled United Steelworkers of America, AFL-CIO, CLC, and Donald Kegley
v. California Department of Forestry and Fire Protection, The Pacific Lumber
Company, Scotia Pacific Company LLC and Salmon Creek Corporation (No. 99CS00626)
(the "USWA LAWSUIT") was also filed challenging the validity and legality of the
SYP. This case is set for trial on June 10, 2002. The Company believes that
appropriate procedures were followed throughout the public review and approval
process concerning the Environmental Plans, and the Company is working with the
relevant government agencies to defend these challenges. Although uncertainties
are inherent in the final outcome of the EPIC-SYP/Permits lawsuit and the USWA
lawsuit, the Company believes that the resolution of these matters should not
result in a material adverse effect on its financial condition, results of
operations or the ability to harvest timber.
On July 24, 2001, a lawsuit entitled Environmental Protection Information
Association v. Pacific Lumber, Scotia Pacific Company LLC (No. CD1-2821) was
filed in the U.S. District Court in the Northern District of California (the
"BEAR CREEK LAWSUIT"). The lawsuit alleges that the Company and Pacific Lumber's
harvesting and other activities under certain of its approved and proposed THPs
will result in discharges of pollutants in violation of the CWA. The plaintiff
asserts that the CWA requires the defendants to obtain a permit from the North
Coast Water Board before beginning timber harvesting and road construction
activities in the Bear Creek watershed, and seeks to enjoin these activities
until such permit has been obtained. The plaintiff also seeks civil penalties of
up to $27,000 per day for the defendant's alleged continued violation of the
CWA. The Company believes that the requirements under the HCP are adequate to
ensure that sediment and pollutants from its harvesting activities will not
reach levels harmful to the environment. Furthermore, EPA regulations
specifically provide that such activities are not subject to CWA permitting
requirements. The Company continues to believe that it has strong legal defenses
in this matter; however, there can be no assurance that this lawsuit will not
have a material adverse effect on its financial condition, results of operations
or liquidity.
OTHER LITIGATION
The Company is involved in other claims, lawsuits and proceedings,
including certain pending or threatened actions seeking to prevent Pacific
Lumber and the Company from conducting harvesting and certain other operations.
While uncertainties are inherent in the final outcome of such matters and it is
presently impossible to determine the actual costs that ultimately may be
incurred or their effect on the Company, management believes that the resolution
of such uncertainties and the incurrence of such costs should not have a
material adverse effect on the Company's financial position, results of
operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Pacific Lumber holds a 100% member interest in the Company. Accordingly,
there is no established public trading market for the Company's equity
securities. The Company did not make any cash distributions in respect of such
interest during 1999 or 2000. During 2001, $79.9 million in distributions were
made to Pacific Lumber, including a $73.1 million distribution in connection
with the sale of the Company's Owl Creek grove. In March 2002, a distribution of
$29.4 million was made to Pacific Lumber. See Note 3 to the Financial
Statements.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the Company's Financial
Statements and the Notes thereto appearing in Item 8.
BACKGROUND
This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See Item 1. "Business--General" for cautionary information with respect
to such forward-looking statements.
The Company is a single member Delaware limited liability company owned by
Pacific Lumber and did not conduct any significant operations prior to the
issuance of the Timber Notes in May 1998. Regulatory and environmental matters
play a significant role in the Company's operations. See Item 1.
"Business--Regulatory and Environmental Matters" and Note 7 to the Financial
Statements for a discussion of these matters. Regulatory compliance and related
litigation have caused delays in obtaining approvals of THPs and delays in
harvesting on THPs once they are approved. This has resulted in a decline in
harvest, an increase in the cost of logging operations, and lower net sales.
Since the consummation of the Headwaters Agreement in March 1999, there
has been a significant amount of work required in connection with the
implementation of the Environmental Plans, and this work is expected to continue
for several more years. During the implementation period, government agencies
had until recently failed to approve THPs in a timely manner. The rate of
approvals of THPs during 2001 improved over that for the prior year, and further
improvements have been experienced thus far in 2002. However, it continues to be
below levels which meet the Company's expectations. Nevertheless, the Company
anticipates that once the Environmental Plans are fully implemented, the process
of preparing THPs will become more streamlined, and the time to obtain approval
of THPs will potentially be shortened.
While the Company has experienced recent improvements in the THP approval
process, there can be no assurance that the Company will not in the future have
difficulties in receiving approvals of its THPs similar to those experienced in
the past. Furthermore, there can be no assurance that certain pending legal,
regulatory and environmental matters or future governmental regulations,
legislation or judicial or administrative decisions, or adverse weather
conditions, would not have a material adverse effect on the Company's financial
position, results of operations or liquidity. See Item 3. "Legal Proceedings"
and Note 7 to the Financial Statements for further information regarding
regulatory and legal proceedings affecting the Company.
RESULTS OF OPERATIONS
This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See Item 1. "Business--General" for cautionary information with respect
to such forward-looking statements.
General
Mbfe Concept. The Mbfe concept was used in structuring the Timber Notes in
order to take account of the relative values of the species and categories of
timber included in the Company Timber. Under the Mbfe concept, one thousand
board feet, net Scribner scale, of old growth redwood timber equates to one
Mbfe. One thousand board feet, net Scribner scale, of each other species and
category of timber included in the Company Timber was assigned a value in Mbfe
equal to a fraction of an Mbfe. This fraction was generally determined by
dividing the SBE Price applicable to such species and category for the first
half of 1998 by the SBE Price applicable to old growth redwood for the first
half of 1998. Historical harvest volumes reflected in this report are stated on
an Mbfe basis.
Master Purchase Agreement Governing Log Sales to Pacific Lumber. The
Master Purchase Agreement generally contemplates that all sales of logs by the
Company to Pacific Lumber will be at the SBE Price. Harvest Value Schedules
setting forth the SBE Prices are published by the California State Board of
Equalization twice a year for the purpose of computing a yield tax imposed on
timber harvested between January 1 and June 30 and July 1 and December 31.
Harvest Value Schedules are based on twenty-four months of actual log and timber
sales that occur within nine specified timber value areas. These sales are arms
length transactions adjusted for time by indexing the prices (using log and
lumber price trends) to a specific date, which is approximately sixty days prior
to the effective date of the Harvest Value Schedules. However, SBE prices may
not necessarily be representative of actual prices that would be realized from
unrelated parties at subsequent dates.
Seasonality
Logging operations on the Company's timberlands are highly seasonal and
have historically been significantly higher in the months of April through
November than in the months of December through March. Management expects that
the Company's revenues and cash flows will continue to be markedly seasonal
because of the harvesting, road use, wet weather and other restrictions imposed
by the HCP. As a result, a substantial majority of the future harvesting of
Company Timber can be expected to be concentrated during the period from June
through October of each year. Some of these restrictions may be modified under
the adaptive management provision contained in the HCP, and as a result of the
watershed analysis process to be performed over the five-year period which began
March 1, 1999. See Note 7 to the Financial Statements.
Log Sales to Pacific Lumber
Net sales from logs were $99.0 million and $128.0 million for the years
ended December 31, 2001 and 2000, respectively. Log deliveries for such periods
were 117,300 Mbfe and 109,400 Mbfe, respectively. The decrease in net sales
between periods was due to a substantial decrease in SBE prices for redwood
logs. SBE prices published for the six months beginning July 1, 2001, reflected
declines in the prices for redwood logs in the range of 35% to 40% from the
previous six-month period. Although the Company had an increase in log volumes,
the supply of approved THPs remains well below that available prior to 1998 and
that required to meet the Company's operating objectives.
The Company's net sales from logs increased from $51.4 million for the
year ended December 31, 1999 to $128.0 million for the year ended December 31,
2000. Log deliveries for such periods were 69,100 Mbfe and 109,400 Mbfe,
respectively. This increase in net sales was due to a substantial increase in
the SBE prices for redwood logs as well as the increase in log delivery volumes.
The increase in log volumes was due largely to a rise in the Company's
available- to-log THPs; however, the supply of approved THPs remained well below
that available prior to 1998 and that required to meet the Company's operating
objectives.
Operating Income and Net Income
Operating income was $64.5 million and $93.1 million for the years ended
December 31, 2001 and 2000, respectively. The decrease in operating income is
principally due to the decrease in log sales discussed above. General and
administrative costs decreased slightly principally as a result of lower yield
taxes caused by the lower SBE prices as discussed above. Depletion and
depreciation increased as a result of increased harvest levels.
In addition to the decrease in operating income discussed previously, net
income decreased in 2001 because 2000 results included two significant gains:
the $59.5 million gain on the sale of the Owl Creek grove in December 2000 as
well as an extraordinary gain of $6.0 million on the reacquisition of Timber
Notes (which are being held in the SAR Account).
Operating income was $93.1 million and $31.2 million for the years ended
December 31, 2000 and 1999, respectively. The increase in operating income is
principally due to the increase in log sales discussed above. This was offset by
an increase in general and administrative expenses due to the addition of
personnel, increased professional services for THP preparation and watershed
analysis, higher road maintenance costs and additional yield taxes due to higher
SBE prices and harvest volumes. Depletion increased as a result of increased
harvest volumes. The Company had net income of $104.6 million for the year ended
December 31, 2000 as compared to a net loss of $32.4 million for the year ended
December 31, 1999. In addition to the increase in operating income discussed
above, other income (expenses) had significant increases in 2000 due the sale of
the Owl Creek grove noted above and increases in interest income from a full
year's interest on funds held in the SAR account (which was funded in late
November of 1999).
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See Item 1. "Business--General" and below for cautionary information
with respect to such forward-looking statements.
Note 5 to the Financial Statements contains additional information
concerning the Company's indebtedness and certain restrictive debt covenants.
The December 2000 sale of the Owl Creek grove generated proceeds of $67.0
million.
On November 18, 1999, $169.0 million of funds from the sale of the
Headwaters Timberlands were contributed to the Company and set aside in the SAR
Account. During the year ended December 31, 2000, $52.5 million in funds from
the SAR Account were used to reacquire Timber Notes, representing $60.0 million
in principal, as permitted under the Indenture. As of December 31, 2001, the
fair value of cash, marketable securities and other investments held in the SAR
Account, including the reacquired Timber Notes, was $154.7 million.
The Indenture contains various covenants which, among other things, limit
the ability of the Company to incur additional indebtedness and liens, to engage
in transactions with affiliates, to pay dividends and to make investments. Under
the terms of the Indenture, the Company will generally have available cash for
distribution to Pacific Lumber when the Company's cash flows from operations
exceed the amounts required by the Indenture to be reserved for the payment of
current debt service (including interest, principal and premiums) on the Timber
Notes, capital expenditures, certain other operating expenses and replenishment
of the SAR Account.
The Company has an agreement with a group of banks which allows it to
borrow up to one year's interest on the Timber Notes (the "LINE OF CREDIT"). On
June 1, 2001, this facility was extended for an additional year to July 12,
2002. At December 31, 2001, the Company could have borrowed a maximum of $60.9
million under the Line of Credit, and there were no borrowings outstanding under
the Line of Credit. Annually, the Company will request that the Line of Credit
be extended for a period of not less than 364 days. If not extended, the
Company may draw upon the full amount available. The amount drawn would be
repayable in 12 semiannual installments on each note payment date (after the
payment of certain other items, including the Aggregate Minimum Principal
Amortization Amount, as defined, then due), commencing approximately two and
one-half years following the date of the draw.
Principal and interest on the Timber Notes are payable semi-annually on
approximately January 20 and July 20. During the year ended December 31, 2001,
the Company used $67.3 million set aside in the note payment account to pay the
$57.4 million of interest due as well as $9.9 million of principal. The Company
repaid an additional $4.3 million of principal on the Timber Notes using funds
held in the SAR Account, resulting in total principal payments of $14.2 million,
an amount equal to Scheduled Amortization.
On the note payment date in January 2002, the Company had $33.9 million
set aside in the note payment account to pay the $28.4 million of interest due
as well as $5.5 million of principal. The Company repaid an additional $6.1
million of principal on the Timber Notes using funds held in the SAR Account,
resulting in a total principal payment of $11.6 million, an amount equal to
Scheduled Amortization (as defined in the Indenture).
With respect to the note payment due in July 2002, the Company expects
that it will require funds from the Line of Credit to pay a portion of the
interest due, and that all of the funds used to pay the Scheduled Amortization
amount will be provided from the SAR Account.
On March 5, 2002, the Company notified the trustee for the Timber Notes
that the Company had met all of the requirements of the SAR Reduction Date, as
defined in the Indenture. Accordingly, on March 20, 2002, the Company released
$29.4 million from the SAR Account and distributed this amount to Pacific
Lumber.
Pacific Lumber's financial condition will affect its ability to purchase
logs from the Company and to meet its obligations under the Services Agreement.
During 2001, comprehensive external and internal reviews were conducted of
Pacific Lumber's business operations. These reviews were an effort to identify
ways in which Pacific Lumber could operate on a more efficient and cost
effective basis. Based upon the results of these reviews, Pacific Lumber has,
among other things, indefinitely curtailed two of its four operating sawmills,
eliminated certain of its operations, including its soil amendment and concrete
block manufacturing operations, begun utilizing more efficient harvesting
methods and adopted certain other cost saving measures. Most of these
operational changes were implemented by Pacific Lumber during the last quarter
of 2001, or during the first quarter of 2002. Pacific Lumber also terminated its
internal logging operations as of April 1, 2002, and intends to rely on third
party contract loggers to conduct these activities.
Pacific Lumber's 2001 cash flows from operations were adversely affected
by operating inefficiencies, lower lumber prices, an inadequate supply of logs
and a related slowdown in lumber production. The adverse impact on liquidity of
its poor operating results was offset by $79.9 million in distributions made by
the Company to Pacific Lumber (principally from the sale of the Owl Creek
grove), $9.3 million in repayments on an intercompany loan by MGI, and $18.5
million of proceeds received from the sale of a portion of the Grizzly Creek
grove. The $29.4 million release from the SAR Account discussed above will also
improve Pacific Lumber's liquidity. However, Pacific Lumber may require funds
available under Pacific Lumber's revolving credit agreement, additional
repayments by MGI of an intercompany loan and/or capital contributions from MGI
to enable it to meet its working capital and capital expenditure requirements
for the next year. With respect to long-term liquidity, although Pacific Lumber
expects that its existing cash and cash equivalents should provide sufficient
funds to meet its working capital and capital expenditure requirements, until
such time as Pacific Lumber has adequate cash flows from operations and/or
dividends from the Company, there can be no assurance that this will be the
case.
The Company's capital expenditures, excluding timberland acquisitions,
relate primarily to reforestation of timberlands and to construction and
rehabilitation of logging roads. The Company's capital expenditures for 2001,
2000 and 1999, excluding contributions by Pacific Lumber and timberland
acquisitions, were approximately $6.5 million, $7.0 million and $6.5 million,
respectively. The Company's capital expenditures, excluding expenditures for
timberlands, for the next several years are expected to be approximately $6
million to $7 million per year.
With respect to long-term liquidity, the Company believes that its
existing cash, including cash available for principal payments from the SAR
Account, and funds available under the Line of Credit, together with its ability
to generate sufficient levels of cash flows from operations over the long term,
should provide sufficient funds to meet its long-term working capital, capital
expenditures and required debt service obligations. If the Company generates
excess funds after the payment of operating expenses, capital expenditures,
interest, premiums, required principal payments and replenishment of the SAR
Account, it may at its option either make distributions, retain these funds for
internal purposes or make voluntary principal payments. Cash flows from
operations may continue to be adversely affected if the Company does not
experience improvements in the SBE Price, continuation of the recent
improvements in the THP approval process, or if inclement weather conditions or
seasonal operating restrictions under the HCP hamper harvesting operations. Cash
flows from operations would also be adversely affected if additional judicial or
regulatory restrictions are imposed on the Company's harvesting activities, or
if the Environmental Plans are not implemented in accordance with the Company's
expectations.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the Company's financial condition and
results of operations is based upon the Company's financial statements, which
have been prepared in accordance with generally accepted accounting principles.
The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosures of contingent assets and
liabilities. Estimates are based on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. The
result of this process forms the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. The Company reevaluates its estimates and judgments on a regular,
ongoing basis. Actual results may differ from these estimates under different
assumptions and conditions.
The following accounting policies are considered critical in light of the
potentially material impact that the estimates, judgments and uncertainties
affecting the application of these policies might have on the Company's reported
financial information.
Loss Contingencies
The Company is involved in various claims, lawsuits and other proceedings
discussed in Note 7 to the financial statements. Such litigation involves
uncertainty as to possible losses to the Company that will ultimately be
realized when one or more future events occur or fail to occur. The Company
accrues and charges to income estimated losses from contingencies when it is
probable (at the balance sheet date) that an asset has been impaired or
liability incurred and the amount of loss can be reasonably estimated.
Differences between estimates recorded and actual amounts determined in
subsequent periods are treated as changes in accounting estimates (i.e., they
are reflected in the financial statements in the period in which they are
determined to be losses, with no retroactive restatement).
The Company estimates the probability of losses on legal contingencies
based on the advice of internal and external counsel, the outcomes from similar
litigation, the status of lawsuits (including settlement initiatives),
legislative developments, and other factors. Risks and uncertainties are
inherent with respect to the ultimate outcome of litigation.
Depletion
Depletion of the Company's timber and timberlands is computed utilizing
the units-of-production method based upon estimates of timber quantities. The
depletion base is the total historical cost attributable to the Company's
timberlands. Depletion for the period is determined by multiplying the depletion
base by the ratio of harvested units for the period over the total expected
recoverable units. The Company's total for expected recoverable units is
reviewed on a periodic basis and revised, if necessary. Any adjustments are made
prospectively (i.e., the remaining undepleted cost is expensed over the
remaining recoverable units).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Managers and Member of
Scotia Pacific Company LLC:
We have audited the accompanying balance sheets of Scotia Pacific Company
LLC (a Delaware limited liability company and a wholly owned subsidiary of The
Pacific Lumber Company) as of December 31, 2001 and 2000, and the related
statements of income and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Scotia Pacific Company LLC
as of December 31, 2001 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
San Francisco, California
March 6, 2002
SCOTIA PACIFIC COMPANY LLC
BALANCE SHEET
(IN MILLIONS OF DOLLARS)
DECEMBER 31,
-----------------------
2001 2000
---------- -----------
ASSETS
Current assets:
Cash, cash equivalents, and restricted cash............................................ $ 37.8 $ 98.1
Marketable securities, restricted...................................................... 17.1 16.3
Receivables from Pacific Lumber........................................................ 3.8 11.2
Prepaid timber harvesting costs........................................................ 7.9 5.7
Other current assets................................................................... 0.6 0.5
---------- -----------
Total current assets................................................................ 67.2 131.8
Timber and timberlands, net of accumulated depletion of $261.6 and
$251.8, respectively................................................................... 247.9 255.0
Property and equipment, net of accumulated depreciation of $13.0 and
$11.3, respectively................................................................... 20.9 19.0
Deferred financing costs, net............................................................. 16.4 17.8
Restricted cash, marketable securities and other investments.............................. 87.6 94.6
Other assets.............................................................................. 6.5 7.4
---------- -----------
$ 446.5 $ 525.6
========== ===========
LIABILITIES AND MEMBER DEFICIT
Current liabilities:
Due to Pacific Lumber.................................................................. $ 1.0 $ 0.3
Accrued interest....................................................................... 25.4 26.3
Other accrued liabilities.............................................................. 3.0 3.4
Current maturities of long-term debt, excluding $2.3 and $2.2, respectively, of
repurchased Timber Notes held in the SAR Account.................................... 14.9 14.2
---------- -----------
Total current liabilities........................................................... 44.3 44.2
Long-term debt, less current maturities and excluding $55.4 and $57.7, respectively,
of repurchased Timber Notes held in the SAR Account.................................... 754.5 769.4
---------- -----------
Total liabilities................................................................... 798.8 813.6
---------- -----------
Contingencies (See Note 7)
Member deficit............................................................................ (352.3) (288.0)
---------- -----------
$ 446.5 $ 525.6
========== ===========
The accompanying notes are an integral part of these financial statements.
SCOTIA PACIFIC COMPANY LLC
STATEMENT OF INCOME (LOSS)
(IN MILLIONS OF DOLLARS)
YEARS ENDED DECEMBER 31,
-----------------------------------
2001 2000 1999
---------- ---------- -----------
Log sales to Pacific Lumber................................................... $ 99.0 $ 128.0 $ 51.4
---------- ---------- -----------
Operating expenses:
General and administrative................................................. 22.0 22.5 12.7
Depletion and depreciation and amortization................................ 12.5 12.4 7.5
---------- ---------- -----------
34.5 34.9 20.2
---------- ---------- -----------
Operating income.............................................................. 64.5 93.1 31.2
Other income (expense):
Gains on sales of timberlands.............................................. 1.2 59.5 0.2
Interest and other income.................................................. 8.3 8.6 1.7
Interest expense........................................................... (58.9) (62.6) (65.5)
---------- ---------- -----------
Income (loss) before extraordinary items...................................... 15.1 98.6 (32.4)
Extraordinary items:
Gains on repurchases of debt............................................... - 6.0 -
---------- ---------- -----------
Net income (loss)............................................................. $ 15.1 $ 104.6 $ (32.4)
========== ========== ===========
The accompanying notes are an integral part of these financial statements.
SCOTIA PACIFIC COMPANY LLC
STATEMENT OF CASH FLOWS
(IN MILLIONS OF DOLLARS)
YEARS ENDED DECEMBER 31,
-----------------------------------
2001 2000 1999
---------- ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................................................... $ 15.1 $ 104.6 $ (32.4)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Extraordinary gains on repurchases of debt.............................. - (6.0) -
Gain on sale of timberlands............................................. (1.2) (59.5) (0.2)
Depletion, depreciation and amortization................................ 12.5 12.4 7.5
Amortization of deferred financing costs................................ 1.4 1.4 1.5
Increase (decrease) in cash resulting from changes in:
Receivables from Pacific Lumber....................................... 7.4 (6.7) (1.6)
Prepaid timber harvesting costs....................................... (2.2) (1.4) (2.1)
Due to Pacific Lumber................................................. 0.3 (0.2) (0.2)
Accrued interest...................................................... (0.9) (1.8) (0.2)
Other accrued liabilities............................................. (0.4) 0.7 1.3
Other................................................................. - (0.2) -
---------- ---------- -----------
Net cash provided by (used for) operating activities.................. 32.0 43.3 (26.4)
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures....................................................... (6.2) (8.2) (19.2)
Proceeds from sale of assets............................................... 1.3 67.0 0.3
Restricted cash withdrawals used to acquire timberlands ................... - 0.8 12.9
---------- ---------- -----------
Net cash provided by (used for) investing activities.................. (4.9) 59.6 (6.0)
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on Timber Notes and other timber related debt........... (14.2) (16.0) (8.3)
Incurrence of deferred financing costs..................................... - - (0.7)
Other changes in restricted cash........................................... 6.7 9.9 (169.0)
Member contributions (distributions)....................................... (79.9) - 179.8
---------- ---------- -----------
Net cash provided by (used for) financing activities.................... (87.4) (6.1) 1.8
---------- ---------- -----------
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH......... (60.3) 96.8 (30.6)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD............. 98.1 1.3 31.9
---------- ---------- -----------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD................... $ 37.8 $ 98.1 $ 1.3
========== ========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Repurchases of debt using restricted cash.................................. $ - $ 52.5 $ -
Contribution of assets by Pacific Lumber................................... - 5.7 6.1
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.............................................................. $ 58.4 $ 63.1 $ 64.3
The accompanying notes are an integral part of these financial statements.
SCOTIA PACIFIC COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Scotia Pacific Company LLC (the "COMPANY") is a Delaware limited liability
company wholly owned by The Pacific Lumber Company ("PACIFIC LUMBER"), which is
a wholly owned subsidiary of MAXXAM Group Inc. ("MGI"). MGI is a wholly owned
subsidiary of MAXXAM Group Holdings Inc. ("MGHI"), which is a wholly owned
subsidiary of MAXXAM Inc. ("MAXXAM"). The Company is a special purpose limited
liability company organized in May 1998 to facilitate the offering of $160.7
million of 6.55% Class A-1, $243.2 million of 7.11% Class A-2 and $463.3 million
of 7.71% Class A-3 Timber Collateralized Notes due 2028 (the "TIMBER NOTES").
Concurrent with the closing (the "CLOSING") on July 20, 1998, of the offering of
the Timber Notes, Scotia Pacific Holding Company ("SCOTIA PACIFIC") was merged
into the Company and Pacific Lumber and Salmon Creek LLC, a wholly owned
subsidiary of Pacific Lumber ("SALMON CREEK"), transferred to the Company
approximately 13,500 acres of timberlands and the timber and related timber
harvesting rights (but not the underlying land) with respect to an additional
approximately 19,700 acres of timberlands. The Company in turn transferred to
Pacific Lumber the timber and related timber harvesting rights (but not the
underlying land) with respect to approximately 1,400 acres of timberlands. The
merger and the transfers have been accounted for as a reorganization of entities
under common control which requires the Company to record the assets,
liabilities and results of operations of Scotia Pacific after giving effect to
the transfers as well as the assets, liabilities and results of operations
acquired from Pacific Lumber and Salmon Creek at their respective historical
cost. Accordingly, the Company is the successor entity to all of Scotia
Pacific's historical operations (exclusive of the assets transferred to Pacific
Lumber) and to the historical operations attributable to the timberlands and
timber and related timber harvesting rights acquired from Pacific Lumber and
Salmon Creek.
Consistent with the Company's purpose and pursuant to the terms of the
indenture governing the Timber Notes (the "INDENTURE"), the Company is obligated
to set aside each month a portion of the funds it receives from the sale of logs
to Pacific Lumber sufficient to make the specified payments of principal and
interest on the Timber Notes computed in accordance with the Indenture and to
have a sufficient amount to pay operating expenses and capital improvements.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and assumptions
that affect (i) the reported amounts of assets and liabilities, (ii) the
disclosure of contingent assets and liabilities known to exist as of the date
the financial statements are published and (iii) the reported amount of revenues
and expenses recognized during each period presented. The Company reviews all
significant estimates affecting its financial statements on a recurring basis
and records the effect of any necessary adjustments prior to filing the
financial statements with the Securities and Exchange Commission. Adjustments
made using estimates often relate to improved information not previously
available. Uncertainties regarding such estimates and assumptions are inherent
in the preparation of the Company's financial statements; accordingly, actual
results could differ from estimates, and it is possible that the subsequent
resolution of any one of the contingent matters described in Note 7 could differ
materially from current estimates. The results of an adverse resolution of such
uncertainties could have a material effect on the Company's financial position,
results of operations or liquidity.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Prepaid Timber Harvesting Costs and Other Long-term Assets
Direct costs associated with the preparation of timber harvesting plans
("THPS") are capitalized and reflected in prepaid timber harvesting costs on the
balance sheet. These costs are expensed as the timber covered by the related THP
is harvested. Costs associated with the preparation of a sustained yield plan
("SYP") and a multi-species habitat conservation plan ("HCP") are capitalized
and reflected in other long-term assets. These costs are being amortized over 10
years.
Timber and Timberlands
Timber and timberlands were recorded at the historical cost of Scotia
Pacific, Pacific Lumber and Salmon Creek. Depletion is computed utilizing the
unit-of-production method based upon estimates of timber quantities.
Periodically, the Company will reassess its depletion rates considering
currently estimated merchantable timber and will adjust the depletion rates
prospectively.
Deferred Financing Costs
Costs incurred to obtain financing are deferred and amortized over the
estimated term of the related borrowing. The amortization of deferred financing
costs is included in interest expense on the income statement.
Concentrations of Credit Risk
Cash equivalents and marketable securities are invested primarily in
short-term investment grade debt instruments as well as other types of corporate
and government debt obligations. The Company mitigates its concentration of
credit risk with respect to these investments by purchasing for the most part
high grade investments (ratings of A1/P1 short-term or at least AA/aa long-term
debt). No more than 10% is invested in the same issue.
Income Taxes
The Company, a single member limited liability company, has not made an
election to be treated as an association and, therefore, is disregarded as a
separate taxable entity solely for income tax purposes. The Company is treated
as a division of Pacific Lumber for tax purposes. All income taxes with respect
to the Company are shown on Pacific Lumber's financial statements, and all
deferred income tax assets and deferred income tax liabilities with respect to
the Company at December 31, 2001 and 2000 are reflected in Pacific Lumber's
financial statements.
New Accounting Standard
In August 2001, the Financial Accounting Standards Board issued SFAS No.
143 which addresses accounting and reporting standards for obligations
associated with the retirement of tangible long-lived assets and the related
asset retirement costs. The Company is required to adopt SFAS No. 143 beginning
on January 1, 2003. Management is assessing the impact of the standard on its
results of operations and financial position.
2. SIGNIFICANT ACQUISITIONS AND DISPOSITIONS
Headwaters Transactions
In March 1999, the United States and California acquired approximately
5,600 acres of timberlands containing a significant amount of virgin old growth
timber, from Salmon Creek and Pacific Lumber (the "HEADWATERS TIMBERLANDS").
Salmon Creek received $299.9 million for its 4,900 acres, and for its 700 acres
Pacific Lumber received the 7,700 acre Elk River Timberlands, which Pacific
Lumber contributed to the Company in June 1999. See Note 7 below for a
discussion of additional arrangements entered into at the time.
The Company also entered into an agreement with California for the sale of
a timber property known as the Owl Creek grove. On December 29, 2000, the
Company sold the Owl Creek grove to California for $67.0 million, resulting in a
pre-tax gain of $59.5 million.
3. CASH, MARKETABLE SECURITIES AND OTHER INVESTMENTS
Cash equivalents consist of highly liquid money market instruments with
original maturities of three months or less. As of December 31, 2001 and 2000,
the carrying amounts approximated fair value.
Marketable securities consist primarily of investments in debt securities.
The Company determines the appropriate classification of its investments in debt
securities at the time of purchase and reevaluates such determinations at each
balance sheet date. Debt securities are classified as "held-to-maturity" when
the Company has the positive intent and ability to hold the securities to
maturity. Debt securities which the Company does not have the intent or ability
to hold to maturity are classified as "available-for-sale." "Held-to-maturity"
securities are stated at amortized cost. Debt securities classified as
"held-to-maturity" as of December 31, 2001 and 2000, totaled $11.9 million and
$18.9 million, respectively, and had a fair market value of $11.9 million and
$18.9 million, respectively. "Available-for-sale" securities are carried at fair
market value, with the unrealized gains and losses included in other
comprehensive income and reported in member's deficit. The fair value of
substantially all securities is determined by quoted market prices.
Cash, marketable securities and other investments include the following
amounts which are restricted under the terms of the Company's debt agreements
(in millions):
DECEMBER 31,
---------------------------
2001 2000
------------- -------------
Current assets:
Cash and cash equivalents, restricted............................................... $ 35.3 $ 29.2
Marketable securities, restricted:
Amounts held in SAR Account...................................................... 17.1 16.3
------------- -------------
52.4 45.5
Long-term restricted cash, marketable securities and other investments:
Amounts held in SAR Account......................................................... 137.8 144.4
Other amounts restricted under the Indenture........................................ 2.8 2.9
Less: Amounts attributable to repurchased Timber Notes held in
SAR Account...................................................................... (53.0) (52.7)
------------- -------------
87.6 94.6
------------- -------------
Total restricted cash, marketable securities and other investments..................... $ 140.0 $ 140.1
============= =============
Amounts in the Scheduled Amortization Reserve Account (the "SAR ACCOUNT")
are being held by the trustee under the Indenture to support principal payments
on the Timber Notes. See Note 5 for further discussion of the SAR Account. The
current portion of the SAR Account is determined based on the liquidity needs of
the Company which corresponds directly with the current portion of Scheduled
Amortization. Interest and other income from restricted cash deposits for 2001,
2000 and 1999 was $7.9 million, $8.5 million and $1.6 million, respectively.
On March 5, 2002, the Company notified the trustee for the Timber Notes
that the Company had met all of the requirements of the SAR Reduction Date as
defined in the Indenture. Accordingly, on March 20, 2002, the Company released
$29.4 million from the SAR Account and distributed this amount to Pacific
Lumber.
Funds held in the SAR Account include a limited partnership interest in
the "EQUITY FUND PARTNERSHIP," which invests in a diversified portfolio of
common stocks and other equity securities whose issuers are involved in merger,
tender offer, spin-off or recapitalization transactions. This investment is
accounted for under the equity method. The following table shows the Company's
investment in the Equity Fund Partnership and the ownership interest (dollars in
millions).
DECEMBER 31, DECEMBER 31,
2001 2000
------------- --------------
Investment in Equity Fund Partnership..................$ 10.6 $ 10.1
Percentage of ownership held........................... 3.1% 10.8%
As of December 31, 2001, long-term restricted cash, marketable securities,
and other investments also included $5.1 million related to an investment in a
limited partnership which invests in, among other things, debt and equity
securities associated with developed and emerging markets.
4. PROPERTY AND EQUIPMENT
Property and equipment were recorded at the historical cost of Scotia
Pacific, Pacific Lumber and Salmon Creek. Subsequent acquisitions of property
and equipment are recorded at cost. Depreciation is computed principally
utilizing the straight-line method at rates based upon the estimated useful
lives of the various classes of assets. The carrying value of property and
equipment is assessed when events and circumstances indicate that an impairment
might exist. The existence of an impairment is determined by comparing the net
carrying value of the asset to its estimated undiscounted future cash flows. If
an impairment is present, the asset is reported at the lower of carrying value
or fair value. The major classes of property and equipment are as follows
(dollar amounts in millions):
DECEMBER 31,
ESTIMATED -------------------
USEFUL LIVES 2001 2000
----------- --------- ---------
Logging roads ........................................ 15 years $ 32.3 $ 28.9
Other.................................................. 5 - 15 years 1.6 1.4
--------- ---------
33.9 30.3
Less: accumulated depreciation........................ (13.0) (11.3)
--------- ---------
$ 20.9 $ 19.0
========= =========
Depreciation expense for the years ended December 31, 2001, 2000 and 1999
was $1.8 million, $1.9 million and $1.6 million, respectively.
5. DEBT
The Company issued $867.2 million aggregate principal amount of Timber
Notes on July 20, 1998, which are due at various times through July 20, 2028.
The Timber Notes are senior secured obligations of the Company and do not
constitute obligations of, and are not guaranteed by, Pacific Lumber or any
other person. The Timber Notes were issued in three classes: Class A-1 Timber
Notes aggregating $160.7 million, Class A-2 Timber Notes aggregating $243.2
million and Class A-3 Timber Notes aggregating $463.3 million. Pursuant to the
terms of the Indenture, the Company is permitted to incur up to $75.0 million at
any one time of non-recourse indebtedness secured by purchase money mortgages to
acquire additional timberlands, an unspecified amount of Additional Timber Notes
(as defined in the Indenture) provided certain conditions are met, and certain
other debt on a limited basis. The Company is not permitted to incur any other
indebtedness for borrowed money. The Timber Notes and the Line of Credit (as
defined below) are secured by a lien on (i) the Company's timber, timberlands
and timber rights (subject to Pacific Lumber's ownership of the timber and
related timber harvesting rights on approximately 400 acres of such
timberlands), (ii) certain contract rights and certain other assets, (iii) the
proceeds of the foregoing and (iv) funds held in various accounts by the Trustee
for the Timber Notes. Amounts payable on the Timber Notes are paid
semi-annually, generally on January 20 and July 20 of each year (each, a "NOTE
PAYMENT DATE").
The Timber Notes were structured to link, to the extent of cash available,
the deemed depletion of the Company's timber (through the harvest and sale of
logs) to the required amortization of the Timber Notes. The required amount of
amortization on any Note Payment Date is determined by various mathematical
formulas set forth in the Indenture. Scheduled Amortization of the Timber Notes
represents the amount of principal which the Company must pay through each Note
Payment Date in order to avoid payment of prepayment or deficiency premiums. The
Scheduled Maturity Dates for the Class A-1 and Class A-2 Timber Notes, which are
January 20, 2007 and January 20, 2014, respectively, represent the Note Payment
Dates on which the Company will pay the final installment of principal if all
payments of principal are made in accordance with Scheduled Amortization. The
Scheduled Amortization for the Class A-3 Timber Notes does not include any
principal amortization prior to their Scheduled Maturity Date of January 20,
2014 on which the aggregate principal amount of $463.3 million will be scheduled
to be paid. Minimum Principal Amortization of the Timber Notes represents the
minimum amount of principal which the Company must pay (on a cumulative basis
and subject to available cash) on such Class, to the extent of available funds
on deposit in the Payment Account, through any Note Payment Date. If the Timber
Notes were amortized in accordance with Minimum Principal Amortization, the
final installments of principal would be paid on January 20, 2010, July 20, 2017
and July 20, 2028 for the Class A-1, Class A-2 and Class A-3 Timber Notes,
respectively.
In November 1999, $169.0 million of funds from the sale of the Headwaters
Timberlands were contributed to the Company and set aside in the SAR Account.
Amounts in the SAR Account are part of the collateral securing the Timber Notes
and will be used to make principal payments to the extent that other available
amounts are insufficient to pay Scheduled Amortization on the Class A-1 and
Class A-2 Timber Notes. In addition, during the six years beginning January 20,
2014, amounts in the SAR Account will be used to amortize the Class A-3 Timber
Notes as set forth in the Indenture, as amended. Funds may from time to time be
released to the Company from the SAR Account if the amount in the account
exceeds the then Required Scheduled Amortization Reserve Balance (as defined in
the Indenture). If the balance in the SAR Account falls below the Required
Scheduled Amortization Reserve Balance, up to 50% of any Remaining Funds (funds
that could otherwise be released to the Company free of the lien securing the
Timber Notes) is required to be used on each monthly deposit date to replenish
the SAR Account. The amount attributable to Timber Notes held in the SAR Account
of $53.0 million reflected in Note 3 represents $57.7 million principal amount
of reacquired Timber Notes. Repurchases made during the year ended December 31,
2000, resulted in an extraordinary gain of $6.0 million.
The Company has the right to cause additional prepayments of principal to
be made on any Note Payment Date. If the principal of the Timber Notes is paid
in advance of Scheduled Amortization, the Company will pay a prepayment premium
on such accelerated payment. The prepayment premium on any Note Payment Date is
equal to the excess, if any, of (a) the sum of (i) the present value of the
prepayment amount (discounted from the date(s) that the prepayment amount would
otherwise have been paid under the Scheduled Amortization to the Note Payment
Date) plus (ii) the sum of the present values of the amounts of interest that
would have accrued thereafter with respect to the prepayment amount over (b) the
amount of the prepayment. The present value is computed using a "Reinvestment
Yield" (as defined in the Indenture) which is comparable to the yield of like
term U.S. Treasury securities plus 0.50% per annum.
If the principal of the Timber Notes is paid later than as provided for
under the Scheduled Amortization, the Company will pay a deficiency premium on
such deficient amount. The deficiency premium payable on any Note Payment Date
equals an amount of interest on the amount of the deficient principal amount
from the previous Note Payment Date to the current Note Payment Date at 1.50%
per annum. In addition, if the Class A-3 Timber Notes are not paid in full on or
before their Scheduled Maturity Date, a Cash Retention Event (as defined in the
Indenture) will occur as a result of which 75% of all Excess Funds (as defined
in the Indenture) will be deposited in the Payment Account until all classes of
Timber Notes are paid in full.
The following table presents the amortization of the Timber Notes,
excluding $57.7 million face value of repurchased Timber Notes held in the SAR
Account, based on Minimum Principal Amortization and Scheduled Amortization (in
millions):
MINIMUM
PRINCIPAL SCHEDULED
AMORTIZATION AMORTIZATION
------------- --------------
Years Ending December 31:
2002.......................................... $ - $ 14.8
2003.......................................... 4.0 16.7
2004.......................................... 12.8 19.2
2005.......................................... 14.7 21.7
2006.......................................... 17.9 25.3
Thereafter.................................... 719.7 671.4
------------- --------------
$ 769.1 $ 769.1
============= ==============
As of December 31, 2001 and 2000, the estimated fair value of debt,
including current maturities, was $640.6 million and $688.1 million,
respectively. The estimated fair value of debt is determined based on the quoted
market price for the Timber Notes. The Timber Notes are thinly traded financial
instruments; accordingly, their market price at any balance sheet date may not
be representative of the price which would be derived from a more active market.
Pursuant to certain liquidity requirements under the Indenture, the
Company has entered into an agreement (the "LINE OF CREDIT") with a group of
banks (the "LIQUIDITY PROVIDERS") pursuant to which the Company may borrow to
pay interest on the Timber Notes. The maximum amount the Company may borrow is
equal to one year's interest on the aggregate outstanding principal balance of
the Timber Notes (the "REQUIRED LIQUIDITY AMOUNT"). At December 31, 2001, the
Required Liquidity Amount was $60.9 million. The Line of Credit expires on July
12, 2002. Annually, the Company will request that the Liquidity Providers extend
the Line of Credit for a period of not less than 364 days. If not extended, the
Company may draw upon the full amount available. The amount drawn would be
repayable in 12 semiannual installments on each Note Payment Date (after the
payment of certain other items, including the Aggregate Minimum Principal
Amortization Amount, as defined, then due), commencing approximately two and
one-half years following the date of the draw. Borrowings under the Line of
Credit generally bear interest at the Base Rate (as defined in the Line of
Credit) plus 0.25% or at a one month or six month LIBOR rate plus 1.0% at any
time the borrowings have not been continually outstanding for more than six
months. As of December 31, 2001, the Company had no borrowings outstanding under
the Line of Credit.
During the year ended December 31, 2001, the Company used $67.3 million
set aside in the note payment account to pay the $57.4 million of interest due
as well as $9.9 million of principal. The Company repaid an additional $4.3
million of principal on the Timber Notes using funds held in the SAR Account,
resulting in total principal payments of $14.2 million, an amount equal to
Scheduled Amortization.
On the note payment date in January 2002, the Company had $33.9 million
set aside in the note payment account to pay the $28.4 million of interest due
as well as $5.5 million of principal. The Company repaid an additional $6.1
million of principal on the Timber Notes using funds held in the SAR Account,
resulting in a total principal payment of $11.6 million, an amount equal to
Scheduled Amortization.
With respect to the note payment due in July 2002, the Company expects
that it will require funds from the Line of Credit to pay a portion of the
interest due, and that all of the funds used to pay the Scheduled Amortization
amount will be provided from the SAR Account.
6. RELATED PARTY TRANSACTIONS
At the time of Closing, the Company and Pacific Lumber entered into a
master purchase agreement (the "MASTER PURCHASE AGREEMENT") which governs all
log sales by the Company to Pacific Lumber. Substantially all of the Company's
revenues have been and are expected to continue to be derived from the sale of
logs to Pacific Lumber. The harvested logs are purchased by Pacific Lumber
(i.e., title passes and the obligation to make payment therefor is incurred) at
the time each log is measured. The Master Purchase Agreement generally
contemplate that all sales of logs by the Company to Pacific Lumber will be at
the applicable stumpage prices for each species of timber and category thereof,
as set forth in the most recent Harvest Value Schedule published by the
California State Board of Equalization (the "SBE PRICE"). Harvest Value
Schedules are published twice a year for purposes of computing timber yield
taxes.
The Company and Pacific Lumber also entered into a services agreement at
the time of Closing (the "SERVICES AGREEMENT"), pursuant to which Pacific Lumber
provides a variety of operational, management and related services in respect of
the Company's timber properties not provided by the Company employees, including
reforestation, fire protection and road maintenance, rehabilitation and
construction. In addition, Pacific Lumber provides services to the Company with
respect to the defense of any legal challenges. The Company pays a Services Fee
(as defined) in an initial amount of $107,000 per month adjusted annually based
on the producer price index and reimburses Pacific Lumber for the cost of
constructing, rehabilitating and maintaining roads and performing reforestation
services. For the years ended December 31, 2001, 2000, and 1999, $9.7 million,
$11.6 million, and $9.9 million was recorded under the Services Agreement,
respectively.
7. CONTINGENCIES
Regulatory and environmental matters play a significant role in the
Company's business, which is subject to a variety of California and federal laws
and regulations, as well as the HCP and SYP, dealing with timber harvesting
practices, threatened and endangered species and habitat for such species, and
air and water quality.
The SYP complies with regulations of the California Board of Forestry and
Fire Protection requiring timber companies to project timber growth and harvest
on their timberlands over a 100-year planning period and to demonstrate that
their projected average annual harvest for any decade within a 100-year planning
period will not exceed the average annual harvest level during the last decade
of the 100-year planning period. The SYP is effective for 10 years (subject to
review after five years) and may be amended by Pacific Lumber, subject to
approval by the California Department of Forestry and Fire Protection (the
"CDF"). Revised SYPs will be prepared every decade that address the harvest
level based upon assessment of changes in the resource base and other factors.
The HCP and the Permits allow incidental "take" of certain species located on
the Company's timberlands which species have been listed as endangered or
threatened under the federal Endangered Species Act (the "ESA") and/or the
California Endangered Species Act ("CESA") so long as there is no "jeopardy" to
the continued existence of such species. The HCP identifies the measures to be
instituted in order to minimize and mitigate the anticipated level of take to
the greatest extent practicable. The SYP is also subject to certain of these
provisions. The HCP and related Permits have a term of 50 years.
Under the federal Clean Water Act (the "CWA"), the Environmental
Protection Agency ("EPA") is required to establish total maximum daily load
limits ("TMDLS") in water courses that have been declared to be "water quality
impaired." The EPA and the North Coast Regional Water Quality Control Board (the
"NORTH COAST WATER BOARD") are in the process of establishing TMDLs for 17
northern California rivers and certain of their tributaries, including nine
water courses that flow within the Company's timberlands. The Company expects
this process to continue into 2010. In December 1999, the EPA issued a report
dealing with TMDLs on two of the nine water courses. The agency indicated that
the requirements under the HCP would significantly address the sediment issues
that resulted in TMDL requirements for these water courses. However, the
September 2000 report by the staff of the North Coast Water Board proposed
various actions, including restrictions on harvesting beyond those required
under the HCP. Establishment of the final TMDL requirements applicable to the
Company's timberlands will be a lengthy process, and the final TMDL requirements
applicable to the Company's timberlands may require aquatic protection measures
that are different from or in addition to the prescriptions to be developed
pursuant to the watershed analysis process provided for in the HCP.
Since the consummation of the Headwaters Agreement in March 1999, there
has been a significant amount of work required in connection with the
implementation of the Environmental Plans, and this work is expected to continue
for several more years. During the implementation period, government agencies
had until recently failed to approve THPs in a timely manner. The rate of
approvals of THPs during 2001 improved over that for the prior year, and further
improvements have been experienced thus far in 2002. However, it continues to be
below levels which meet the Company's expectations. Nevertheless, the Company
anticipates that once the Environmental Plans are fully implemented, the process
of preparing THPs will become more streamlined, and the time to obtain approval
of THPs will potentially be shortened.
Lawsuits are pending and threatened which seek to prevent the Company from
implementing the HCP and/or the SYP, implementing certain of the Company's
approved THPs, or carrying out certain other operations. On December 2, 1997, an
action entitled Kristi Wrigley, et al. v. Charles Hurwitz, John Campbell,
Pacific Lumber, MAXXAM Group Holdings Inc., Scotia Pacific Holding Company,
MAXXAM Group Inc., MAXXAM Inc., Scotia Pacific Company LLC, et al. (the "WRIGLEY
LAWSUIT") was filed. This action alleges, among other things, that the
defendants' logging practices have contributed to an increase in flooding and
damage to domestic water systems in a portion of the Elk River watershed. The
Company believes that it has strong factual and legal defenses with respect to
the Wrigley lawsuit; however, there can be no assurance that it will not have a
material adverse effect on the Company's financial position, results of
operations or liquidity.
On March 31, 1999, an action entitled Environmental Protection Information
Center, Sierra Club v. California Department of Forestry and Fire Protection,
California Department of Fish and Game, The Pacific Lumber Company, Scotia
Pacific Company LLC, Salmon Creek Corporation, et al. ("EPIC-SYP/PERMITS
LAWSUIT") was filed alleging, among other things, various violations of the CESA
and the California Environmental Quality Act, and challenging, among other
things, the validity and legality of the SYP and the Permits issued by
California. August 5, 2002, has been set as the trial date. On March 31, 1999,
an action entitled United Steelworkers of America, AFL-CIO, CLC, and Donald
Kegley vs. California Department of Forestry and Fire Protection, The Pacific
Lumber Company, Scotia Pacific Company LLC and Salmon Creek Corporation ("USWA
LAWSUIT") was filed also challenging the validity and legality of the SYP. June
10, 2002, has been set as the trial date. The Company believes that appropriate
procedures were followed throughout the public review and approval process
concerning the HCP and the SYP, and the Company is working with the relevant
government agencies to defend these challenges. Although uncertainties are
inherent in the final outcome of the EPIC-SYP/Permits lawsuit and the USWA
lawsuit, the Company believes that the resolution of these matters should not
result in a material adverse effect on its financial condition, results of
operations or the ability to harvest timber.
On July 24, 2001, an action entitled Environmental Protection Information
Association v. Pacific Lumber, Scotia Pacific Company LLC (the "BEAR CREEK
LAWSUIT") was filed. The lawsuit alleges that the Company and Pacific Lumber's
harvesting and other activities under certain of its approved and proposed THPs
will result in discharges of pollutants in violation of the CWA. The plaintiff
asserts that the CWA requires the defendants to obtain a permit from the North
Coast Water Board before beginning timber harvesting and road construction
activities in the Bear Creek watershed, and is seeking to enjoin these
activities until such permit has been obtained. The plaintiff also seeks civil
penalties of up to $27,000 per day for the defendant's alleged continued
violation of the CWA. The Company believes that the requirements under the HCP
are adequate to ensure that sediment and pollutants from its harvesting
activities will not reach levels harmful to the environment. Furthermore, EPA
regulations specifically provide that such activities are not subject to CWA
permitting requirements. The Company believes that it has strong legal defenses
in this matter; however, there can be no assurance that this lawsuit will not
have a material adverse effect on its consolidated financial condition or
results of operations.
While the Company expects environmentally focused objections and lawsuits
to continue, it believes that the HCP, the SYP and the Permits should enhance
its position in connection with these continuing challenges and, over time,
reduce or minimize such challenges.
8. COMPREHENSIVE INCOME (LOSS) AND MEMBER DEFICIT
Comprehensive income (loss) includes the following (in millions):
YEARS ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
------------ ---------- ----------
Net income (loss)........................................................... $ 15.1 $ 104.6 $ (32.4)
Other comprehensive income:
Change in value of available-for-sale investments........................ 0.5 1.1 -
------------ ---------- ----------
Total comprehensive income (loss)........................................... $ 15.6 $ 105.7 $ (32.4)
============ ========== ==========
A reconciliation of the activity in member deficit is as follows (in
millions):
YEARS ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
------------ ---------- -----------
Balance at beginning of period.............................................. $ (288.0) $ (399.4) $ (552.9)
Comprehensive income (loss)................................................. 15.6 105.7 (32.4)
Contribution of assets by Pacific Lumber.................................... - 5.7 6.1
Other contributions (distributions)........................................ (79.9) - 179.8
------------ ---------- -----------
Balance at end of period.................................................... $ (352.3) $ (288.0) $ (399.4)
============ ========== ===========
9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summary quarterly financial information for the years ended December 31,
2001 and 2000 is as follows (in millions):
THREE MONTHS ENDED
-----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------- -------------- -------------- --------------
2001:
Log sales to Pacific Lumber......................... $ 13.1 $ 32.7 $ 30.4 $ 22.8
Operating income.................................... 7.8 24.9 19.6 12.2
Net income (loss)................................... (4.6) 12.2 6.6 0.9
2000:
Log sales to Pacific Lumber......................... $ 20.3 $ 26.8 $ 47.3 $ 33.6
Operating income.................................... 14.4 19.5 37.3 21.9
Net income (loss)................................... 2.2 5.9 24.3 72.2
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) INDEX TO FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8):
Report of Independent Public Accountants
Balance Sheet at December 31, 2001 and 2000
Statement of Income for the Years Ended December 31, 2001, 2000 and 1999
Statement of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999
Notes to Financial Statements
2. FINANCIAL STATEMENT SCHEDULES:
Schedules are inapplicable or the required information is included in
the financial statements or the notes thereto.
(B) REPORTS ON FORM 8-K
B. REPORTS ON FORM 8-K:
On October 22, 2001, the Company filed a current report on Form 8-K (under
Item 9), related to the filing of a certificate in respect of the Company's
Timber Notes.
On November 20, 2001, the Company filed a current report on Form 8-K
(under Item 9), related to the filing of a certificate in respect of the
Company's Timber Notes.
On December 20, 2001, the Company filed a current report on Form 8-K
(under Item 9), related to the filing of a certificate in respect of the
Company's Timber Notes.
On January 22, 2002, the Company filed a current report on Form 8-K (under
Item 9), related to the filing of two certificates in respect of the Company's
Timber Notes.
On February 20, 2002, the Company filed a current report on Form 8-K
(under Item 9), related to the filing of a certificate in respect of the
Company's Timber Notes.
On March 20, 2002, the Company filed a current report on Form 8-K (under
Item 9), related to the filing of a certificate in respect of the Company's
Timber Notes.
(C) EXHIBITS
Reference is made to the Index of Exhibits immediately preceding the
exhibits hereto (beginning on page 30, which index is incorporated herein by
reference).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SCOTIA PACIFIC COMPANY LLC
Date: April 1, 2002 By: /S/ ROBERT E. MANNE
-------------------------------------------
Robert E. Manne
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: April 1, 2002 By: /S/ JOHN A. CAMPBELL
-------------------------------------------
John A. Campbell
Chairman of the Board and Manager
Date: April 1, 2002 By: /S/ JARED G. CARTER
-------------------------------------------
Jared G. Carter
Manager
Date: April 1, 2002 By: /S/ J. KENT FRIEDMAN
-------------------------------------------
J. Kent Friedman
Manager
Date: April 1, 2002 By: /S/ EZRA G. LEVIN
-------------------------------------------
Ezra G. Levin
Manager
Date: April 1, 2002 By: /S/ ROBERT E. MANNE
-------------------------------------------
Robert E. Manne
Manager
Date: April 1, 2002 By: /S/ PAUL N. SCHWARTZ
-------------------------------------------
Paul N. Schwartz
Manager
Date: April 1, 2002 By: /S/ JACK M. WEBB
-------------------------------------------
Jack M. Webb
Independent Manager
Date: April 1, 2002 By: /S/ SID C. WEISS
-------------------------------------------
Sid C. Weiss
Independent Manager
Date: April 1, 2002 By: /S/ GARY L. CLARK
-------------------------------------------
Gary L. Clark
Vice President - Finance and Administration
(Principal Financial and Accounting Officer)
INDEX OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------------
3.1 Certificate of Formation of Scotia Pacific Company LLC (the "Company")
(incorporated herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-4 dated September 21, 1998;
Registration No. 333-63825; the "Company's Form S-4")
3.2 Agreement of Limited Liability Company of the Company, effective as of
July 20, 1998 (incorporated herein by reference to Exhibit 3.2 to the
Company's Form S-4)
4.1 Agreement and Plan of Merger, dated as of July 20, 1998, between the
Company and Scotia Pacific Holding Company (incorporated herein by
reference to Exhibit 4.1 to the Company's Form S-4)
4.2 Indenture, dated as of July 20, 1998, between the Company and State
Street Bank and Trust Company ("State Street") regarding the Company's
Class A-1, Class A-2 and Class A-3 Timber Collateralized Notes (the
"Indenture") (incorporated herein by reference to Exhibit 4.2 to the
Quarterly Report on Form 10-Q/A of MAXXAM Inc. ("MAXXAM") for the
quarter ended June 30, 1998; File No. 1-3924; the "MAXXAM June 1998
Form 10-Q")
4.3 First Supplemental Indenture, dated as of July 16, 1999, to the
Indenture (incorporated herein by reference to Exhibit 4.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999; the "Company June 1999 Form 10-Q")
4.4 Second Supplemental Indenture, dated as of November 18, 1999, to the
Indenture (incorporated herein by reference to Exhibit 99.3 to the
Company's Report on Form 8-K dated November 19, 1999)
4.5 Credit Agreement, dated as of July 20, 1998, among the Company, the
financial institutions party thereto and Bank of America National
Trust and Savings Association, as agent (the "Bank of America Credit
Agreement") (incorporated herein by reference to Exhibit 4.3 to the
MAXXAM June 1998 Form 10-Q)
4.6 First Amendment, dated as of July 16, 1999, to the Bank of America
Credit Agreement (incorporated herein by reference to the Company June
1999 Form 10-Q)
4.7 Second Amendment, dated as of June 15, 2001, to the Bank of America
Credit Agreement (incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001)
4.8 Deed of Trust, Security Agreement, Financing Statement, Fixture Filing
and Assignment of Proceeds, dated as of July 20, 1998, among the
Company, Fidelity National Title Insurance Company, as trustee, and
State Street, as collateral agent (incorporated herein by reference to
Exhibit 4.2 to the MAXXAM June 1998 Form 10-Q)
10.1 New Master Purchase Agreement, dated as of July 20, 1998, between the
Company and The Pacific Lumber Company ("Pacific Lumber")
(incorporated herein by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q of MAXXAM Group Holdings Inc. for the quarter
ended June 30, 1998; File No. 333-18723; the "MGHI June 1998
Form 10-Q")
10.2 New Services Agreement, dated as of July 20, 1998, between Pacific
Lumber and the Company (incorporated herein by reference to Exhibit
10.2 to the MGHI June 1998 Form 10-Q)
10.3 New Additional Services Agreement, dated as of July 20, 1998, between
the Company and Pacific Lumber (incorporated herein by reference to
Exhibit 10.3 to the MGHI June 1998 Form 10-Q)
10.4 New Reciprocal Rights Agreement, dated as of July 20, 1998, among
Pacific Lumber, the Company and Salmon Creek Corporation ("Salmon
Creek") (incorporated herein by reference to Exhibit 10.4 to the MGHI
June 1998 Form 10-Q)
10.5 New Environmental Indemnification Agreement, dated as of July 20,
1998, between Pacific Lumber and the Company (incorporated herein by
reference to Exhibit 10.5 to the MGHI June 1998 Form 10-Q)
10.6 Implementation Agreement with Regard to Habitat Conservation Plan for
the Properties of Pacific Lumber, the Company and Salmon Creek dated
as of February 1999 by and among the United States Department of the
Interior Fish and Wildlife Service ("USFWS"), the National Marine
Fisheries Service, the California Department of Fish and Game
("CDF&G"), the California Department of Forestry and Fire
Protection (the "CDF") and Pacific Lumber, Salmon Creek and the
Company (incorporated herein by reference to Exhibit 99.3 to the
Company's Form 8-K dated March 19, 1999; the "Company March 19, 1999
Form 8-K")
10.7 Agreement Relating to Enforcement of AB 1986 dated as of February 25,
1999 by and among The California Resources Agency, CDF&G, the CDF,
The California Wildlife Conservation Board, Pacific Lumber, Salmon
Creek and the Company (incorporated herein by reference to Exhibit
99.4 to the Company March 19, 1999 Form 8-K)
10.8 Habitat Conservation Plan dated as of February 1999 for the Properties
of Pacific Lumber, Scotia Pacific Holding Company and Salmon Creek
(incorporated herein by reference to Exhibit 99.5 to the Company March
19, 1999 Form 8-K)
10.9 Letter dated as of February 25, 1999 from the CDF to Pacific Lumber
(incorporated herein by reference to Exhibit 99.8 to the Company March
19, 1999 Form 8-K)
10.10 Letter dated as of March 1, 1999 from the CDF to Pacific Lumber
(incorporated herein by reference to Exhibit 99.9 to the Company March
19, 1999 Form 8-K)
10.11 Letter dated as of March 1, 1999 from the USFWS and the U.S.
Department of Commerce National Oceanic and Atmospheric Administration
to Pacific Lumber, Salmon Creek and the Company (incorporated herein
by reference to Exhibit 99.10 to the Company March 19, 1999 Form 8-K)
*99.1 Letter dated April 1, 2002, to the Securities and Exchange Commission
from the Company related to assurances the Company has received from
Arthur Andersen LLP with respect to the audit of its financial
statements for the fiscal year ended December 31, 2001.
- ----------------------
* Included with this filing