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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
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
125 MAIN STREET, 2ND FLOOR 95565
SCOTIA, CALIFORNIA (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (707) 764-2330
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 |_|
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A) AND (B)
OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
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TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheet at June 30, 2002 and December 31, 2001
Statement of Income for the three and six months ended June 30, 2002 and 2001
Statement of Cash Flows for the six months ended June 30, 2002 and 2001
Condensed Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signature
APPENDIX A - GLOSSARY OF DEFINED TERMS
SCOTIA PACIFIC COMPANY LLC
BALANCE SHEET
(IN MILLIONS OF DOLLARS)
JUNE 30, DECEMBER 31,
2002 2001
------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents, and restricted cash...................................... $ 14.9 $ 37.8
Marketable securities, restricted................................................... 17.7 17.1
Receivables from Pacific Lumber..................................................... 5.1 3.8
Prepaid timber harvesting costs..................................................... 8.7 7.9
Other current assets................................................................ 1.5 0.6
------------- -------------
Total current assets............................................................. 47.9 67.2
Timber and timberlands, net of accumulated depletion of $266.5 and
$261.6, respectively................................................................ 244.6 247.9
Property and equipment, net of accumulated depreciation of $13.9 and
$13.0, respectively................................................................. 21.7 20.9
Deferred financing costs, net.......................................................... 15.8 16.4
Restricted cash, marketable securities and other investments........................... 56.5 87.6
Other assets........................................................................... 6.1 6.5
------------- -------------
$ 392.6 $ 446.5
============= =============
LIABILITIES AND MEMBER DEFICIT
Current liabilities:
Due to Pacific Lumber............................................................... $ 0.6 $ 1.0
Accrued interest.................................................................... 25.0 25.4
Other accrued liabilities........................................................... 2.2 3.0
Current maturities of long-term debt, excluding $2.4 and $2.3, respectively,
of repurchased Timber Notes held in the SAR Account.............................. 15.4 14.9
------------- -------------
Total current liabilities........................................................ 43.2 44.3
Long-term debt, less current maturities and excluding $53.5 and $55.4, respectively, of
Timber Notes held in SAR Account.................................................... 742.3 754.5
------------- -------------
Total liabilities................................................................ 785.5 798.8
------------- -------------
Contingencies (See Note 3)
Member deficit......................................................................... (392.9) (352.3)
------------- -------------
$ 392.6 $ 446.5
============= =============
The accompanying notes are an integral part of these financial statements.
SCOTIA PACIFIC COMPANY LLC
STATEMENT OF INCOME
(IN MILLIONS OF DOLLARS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2002 2001 2002 2001
----------- ---------- ---------- -----------
(UNAUDITED)
Log sales to Pacific Lumber...................................... $ 14.1 $ 32.7 $ 30.0 $ 45.8
----------- ---------- ---------- -----------
Operating expenses:
General and administrative.................................... 3.9 4.7 8.4 8.3
Depletion, depreciation and amortization...................... 2.8 3.1 6.2 4.8
----------- ---------- ---------- -----------
6.7 7.8 14.6 13.1
----------- ---------- ---------- -----------
Operating income................................................. 7.4 24.9 15.4 32.7
Other income (expense):
Interest and other income..................................... 1.5 2.0 2.9 4.4
Interest expense.............................................. (14.5) (14.7) (29.0) (29.5)
----------- ---------- ---------- -----------
(13.0) (12.7) (26.1) (25.1)
----------- ---------- ---------- -----------
Net income (loss)................................................ $ (5.6) $ 12.2 $ (10.7) $ 7.6
=========== ========== ========== ===========
The accompanying notes are an integral part of these financial statements.
SCOTIA PACIFIC COMPANY LLC
STATEMENT OF CASH FLOWS
(IN MILLIONS OF DOLLARS)
SIX MONTHS ENDED
JUNE 30,
----------------------
2002 2001
---------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................................... $ (10.7) $ 7.6
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities:
Depletion, depreciation and amortization............................................. 6.2 4.8
Amortization of deferred financing costs............................................. 0.7 0.7
Increase (decrease) in cash resulting from changes in:
Receivables from Pacific Lumber.................................................... (1.3) (5.5)
Prepaid timber harvest costs....................................................... (0.8) (1.9)
Due to Pacific Lumber.............................................................. (0.3) 0.7
Accrued interest................................................................... (0.4) (0.8)
Other accrued liabilities.......................................................... (0.9) (0.9)
Other.............................................................................. (0.8) (0.7)
---------- -----------
Net cash provided by (used for) operating activities................................. (8.3) 4.0
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................................... (3.3) (2.9)
---------- -----------
Net cash used for investing activities............................................... (3.3) (2.9)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on Timber Notes and other timber related debt........................ (11.7) (11.4)
Member distributions.................................................................... (29.4) (73.1)
Net changes in debt related restricted cash, marketable securities and other
investments.......................................................................... 29.8 8.1
---------- -----------
Net cash used for financing activities............................................... (11.3) (76.4)
---------- -----------
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH................................. (22.9) (75.3)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD.......................... 37.8 98.1
---------- -----------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD................................ $ 14.9 $ 22.8
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid........................................................................... $ 28.7 $ 29.6
The accompanying notes are an integral part of these financial statements.
SCOTIA PACIFIC COMPANY LLC
CONDENSED NOTES TO FINANCIAL STATEMENTS
1. GENERAL
The information contained in the following notes to the financial
statements is condensed from that which would appear in the annual financial
statements; accordingly, the financial statements included herein should be
reviewed in conjunction with the financial statements and related notes thereto
contained in the Form 10-K. Any capitalized terms used but not defined in these
Condensed Notes to Financial Statements are defined in the "Glossary of Defined
Terms" contained in Appendix A. Accounting measurements at interim dates
inherently involve greater reliance on estimates than at year end. The results
of operations for the interim periods presented are not necessarily indicative
of the results to be expected for the entire year.
The financial statements included herein are unaudited; however, they
include all adjustments of a normal recurring nature which, in the opinion of
management, are necessary for a fair presentation of the financial position of
the Company at June 30, 2002, and the results of operations for the three and
six months ended June 30, 2002 and 2001, and the cash flows for the six months
ended June 30, 2002 and 2001. The Company is a wholly owned subsidiary of
Pacific Lumber which is a wholly owned subsidiary of MGI. MGI is a wholly owned
subsidiary of MGHI which is a wholly owned subsidiary of MAXXAM.
LIQUIDITY AND CASH RESOURCES
The Company's cash flows from operations are significantly impacted by
harvest volumes and SBE prices. On June 19, 2002, the State Board of
Equalization adopted the new Harvest Value Schedule for the second half of 2002.
The SBE prices published in this schedule reflect an approximate 16% decline for
small redwood logs and no price change for small Douglas-fir logs. This decline
in SBE Prices will have an adverse impact on the Company's net sales and
liquidity for the second half of 2002. With respect to short-term liquidity, the
Company believes that existing cash available for principal payments from the
SAR Account, and funds available under the Line of Credit, together with cash
flows from operations, should provide sufficient funds to meet its working
capital, capital expenditures and required debt service obligations through
2003. However, cash flows from operations may be insufficient to allow the
Company to service its debt in the long-term if the Company does not experience
improvements in SBE Prices. In addition, cash flows from operations may continue
to be adversely affected if harvest levels decline as a result of the factors
discussed in Note 3.
NEW ACCOUNTING STANDARDS
In June 2001, the FASB 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. In general, SFAS
No. 143 requires the recognition of a liability resulting from anticipated asset
retirement obligations, offset by an increase in the value of the associated
productive asset for such anticipated costs. Over the life of the asset,
depreciation expense is to include the ratable expensing of the retirement cost
included with the asset value. The statement applies to all legal obligations
associated with the retirement of a tangible long-lived asset that results from
the acquisition, construction, or development and/or the normal operation of a
long-lived asset, except for certain lease obligations. Excluded from this
statement are obligations arising solely from a plan to dispose of a long-lived
asset and obligations that result from the improper operation of an asset (i.e.
certain types of environmental obligations). The Company is continuing its
evaluation of SFAS No. 143. However, the Company does not currently expect the
adoption of SFAS No. 143 to have a material impact on its future financial
statements.
In April 2002, the FASB issued SFAS No. 145 which rescinds the previous
guidance for debt extinguishments. This statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe applicability under changed conditions. SFAS No. 145
eliminates the requirement that gains and losses from extinguishment of debt be
aggregated and, if material, classified as an extraordinary item, net of related
income tax effect. However, transactions would not be prohibited from
extraordinary item classification if they meet the criteria in APB Opinion 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." Applying the provisions of APB 30 will distinguish
transactions that are part of an entity's recurring operations from those that
are unusual or infrequent or that meet the criteria for classification as an
extraordinary item. This statement is effective for fiscal years beginning after
May 15, 2002. The Company does not expect the adoption of SFAS No. 145 to have a
material impact on its financial statements.
2. CASH, MARKETABLE SECURITIES AND OTHER INVESTMENTS
RESTRICTED CASH, MARKETABLE SECURITIES AND OTHER INVESTMENTS
Cash, marketable securities and other investments include the following
amounts which are restricted under the terms of the Company's debt agreements
(in millions):
JUNE 30, DECEMBER 31,
2002 2001
------------- ------------
Current assets:
Cash and cash equivalents, restricted.............................................. $ 12.7 $ 35.3
Marketable securities, restricted:
Amounts held in SAR Account..................................................... 17.7 17.1
------------- ------------
30.4 52.4
Long-term restricted cash, marketable securities and other investments:
Amounts held in SAR Account........................................................ 105.5 137.8
Other amounts restricted under the Indenture....................................... 2.7 2.8
Less: Amounts attributable to Timber Notes held in SAR Account..................... (51.7) (53.0)
------------- ------------
56.5 87.6
------------- ------------
Total restricted cash, marketable securities and other investments.................... $ 86.9 $ 140.0
============= ============
On March 5, 2002, the Company notified the trustee for the Timber Notes
that it had met all of the requirements of the SAR Reduction Date, as defined in
the Indenture (e.g., certain harvest, THP inventory and Line of Credit
requirements). Accordingly, on March 20, 2002, the Company released $29.4
million from the SAR Account and distributed this amount to Pacific Lumber.
OTHER INVESTMENTS
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).
JUNE 30, DECEMBER 31,
2002 2001
------------- --------------
Investment in Equity Fund Partnership................................................ $ 7.8 $ 10.6
Percentage of ownership held......................................................... 2.4% 3.1%
As of June 30, 2002 and December 31, 2001, long-term restricted cash,
marketable securities, and other investments also included $5.6 million and $5.1
million, respectively, related to an investment in a limited partnership which
invests in, among other things, debt and equity securities associated with
developed and emerging markets.
3. CONTINGENCIES
Regulatory and environmental matters play a significant role in the
Company's forest products 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 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 related to the HCP allow incidental "take" of
certain species located on the Company's timberlands which species have been
listed as endangered or threatened under the ESA and/or the 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.
In late May 2002, the Company completed its timber cruise, its first since
1986. The results of the timber cruise provided the Company with an estimate of
the volume of merchantable timber on the Company's timberlands. The new cruise
data reflected a 0.1 million MBF decrease in estimated overall timber volume as
compared to the estimated volumes reported as of December 31, 2001, using the
1986 cruise data (adjusted for harvest and estimated growth), with an increase
in young growth timber volume almost equal to the decrease in old growth timber
volume. This shift in timber volume between classifications decreased the
overall timber volume reported in Mbfe by 0.2 million to 2.9 million. The new
cruise data indicates that there is significantly less old growth timber
available for harvest than estimated as of December 31, 2001, using the 1986
cruise data. This change in mix could potentially result in a decrease in the
Company's revenue. However, because there are many variables that affect
revenues and profitability, the Company cannot quantify the effect of the above
changes on current and future cash flows. The new timber volumes are now being
utilized in various aspects of the Company's operations, including estimating
volumes on THPs and determining depletion expense.
Under the CWA, the EPA is required to establish TMDLs in water courses
that have been declared to be "water quality impaired." The EPA and 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, in a September 2000 report,
the staff of the North Coast Water Board proposed various actions for certain
water courses on the Company's timberlands, including restrictions on harvesting
beyond those required under the HCP. The North Coast Water Board has begun the
process of establishing the TMDL requirements applicable to two other water
courses on the Company's timberlands in addition to the two covered by the EPA's
December 1999 report. This 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 those in the HCP
or that result from the prescriptions to be developed pursuant to the watershed
analysis process provided for in the HCP.
A California statute, which becomes effective December 31, 2002,
eliminates a waiver previously granted to timber companies. This waiver had been
in effect for a number of years and waived the requirement under California
water quality regulations for timber companies to follow certain waste discharge
requirements in connection with their timber harvesting and related operations.
The new statute provides, however, that regional water boards such as the North
Coast Water Board are authorized to renew the waiver. If a regional water board
decides not to renew the waiver by January 1, 2003, it may notify a company that
the board will require such company to follow certain waste discharge
requirements in order to conduct harvesting operations on a THP. The waste
discharge requirements may include aquatic protection measures that are
different from or in addition to those provided for in the THP approved by the
CDF. If the Company were to be so notified, harvesting activities could be
delayed and/or adversely affected, as a separate, additional regulatory process
would be required for THPs.
On August 7, 2002, the North Coast Water Board issued the Company an order
requiring reports of waste discharge in connection with the Company's winter
operations in the Elk River basin to be conducted under THPs approved by CDF.
This order impacts an estimated 15,100 Mbfe of timber covered by a number of
THPs. This order prohibits winter operations in the watershed until the reports
are submitted by the Company and a determination is made by the North Coast
Water Board regarding what, if any, waste discharge requirements would be
imposed. This process could result in a significant delay or reduction in
harvest. The Company is considering how to respond to this order.
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. Although delays in the
approvals of THPs may from time to time continue to impact the Company's ability
to meet its harvesting goals, 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 (subject to the matters discussed in the previous
paragraphs).
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 April 3, 2002, the Environmental Protection Information Association
filed a 60-day notice letter threatening suit against the Company and certain
federal agencies under the ESA. The threatened suit would seek to require the
federal agencies to consider new information obtained since the approval of the
HCP concerning marbled murrelets and salmon and to require a cessation of
certain harvesting operations. No suit has yet been filed. The Company believes
that it has strong factual and legal defenses with respect to this matter;
however, there can be no assurance that such a suit would not have a material
adverse effect on the Company's financial position, results of operations, or
liquidity.
On December 2, 1997, 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 trial date is set for November 12, 2002. 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, the 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. On March 31, 1999, the USWA
lawsuit was filed also challenging the validity and legality of the SYP. The
previously set trial dates for these matters have been postponed, and new trial
dates have not been set. 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, the Bear Creek lawsuit was filed. The lawsuit alleges
that 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 EPA has been joined as a defendant in this
case. 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 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.
4. COMPREHENSIVE INCOME (LOSS) AND MEMBER DEFICIT
Comprehensive income (loss) includes the following (in millions):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- -------------------------
2002 2001 2002 2001
------------ ------------ ----------- ------------
Net income (loss)........................................... $ (5.6) $ 12.2 $ (10.7) $ 7.6
Other comprehensive income loss:
Net change in fair value of available-for-sale investments 0.5 (0.2) (0.5) 0.4
------------ ------------ ----------- ------------
Total comprehensive income (loss)........................... $ (5.1) $ 12.0 $ (11.2) $ 8.0
============ ============ =========== ============
A reconciliation of the activity in member deficit is as follows (in
millions):
SIX MONTHS ENDED
JUNE 30, 2002
----------------
Balance at beginning of period................................................................... $ (352.3)
Comprehensive loss............................................................................... (11.2)
Member distribution.............................................................................. (29.4)
----------------
Balance at end of period......................................................................... $ (392.9)
================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the financial statements
in Part I, Item 1 of this Report, Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Item 8. "Financial
Statements and Supplementary Data" of the Form 10-K. Any capitalized terms used
but not defined in this Item are defined in the "Glossary of Defined Terms"
contained in Appendix A. Except as otherwise noted, all references to notes
represent the Notes to the Condensed Financial Statements included in Item 1.
This Quarterly Report on Form 10-Q 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 in
this section and in Part II. Item 1. "Legal Proceedings." 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 Form
10-Q and the Form 10-K identify other factors that could cause such differences
between the 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.
BACKGROUND
This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See above for cautionary information with respect to such
forward-looking statements.
Regulatory and environmental matters play a significant role in the
Company's operations. See Note 3 to the Condensed Financial Statements and Item
1. "Business--Regulatory and Environmental Factors" of the Form 10-K 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. Although delays in the
approvals of THPs may from time to time continue to impact the Company's ability
to meet its harvesting goals, 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. As discussed in Note 3 to the Condensed Financial
Statements, the North Coast Water Board is requiring the Company to apply
certain waste discharge requirements to approved THPs covering winter harvesting
operations in the Elk River basin, and the North Coast Water Board could
beginning in 2003 require the Company to follow waste discharge requirements
before harvesting operations are conducted on THPs in other watersheds. This
requirement could cause further delays in obtaining regulatory approval for
THPs.
While the Company experienced improvements in the THP approval process
during 2001 and 2002, 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 prior to 2001. 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, will not have a material adverse effect on the Company's
financial position, results of operations or liquidity. See Part II. Item 1.
"Legal Proceedings" and Note 3 to the Condensed Financial Statements for further
information regarding regulatory and legal proceedings affecting the Company.
RESULTS OF OPERATIONS
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.
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
on the Company's timberlands 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 3 to the Condensed Financial
Statements.
Timber Cruise. In late May 2002, the Company completed its timber cruise,
its first since 1986. The results of the timber cruise provided the Company with
an estimate of the volume of merchantable timber on the Company's timberlands.
The new cruise data reflected a 0.1 million MBF decrease in estimated overall
timber volume as compared to the estimated volumes reported as of December 31,
2001 using the 1986 cruise data (adjusted for harvest and estimated growth),
with an increase in young growth timber volume almost equal to the decrease in
old growth timber volume. This shift in timber volume between classifications
decreased the overall timber volume reported in Mbfe by 0.2 million to 2.9
million. The new cruise data indicates that there is significantly less old
growth timber available for harvest than estimated as of December 31, 2001,
using the 1986 cruise data. This change in mix could potentially result in a
decrease in the Company's revenue. However, because there are many variables
that affect revenues and profitability, the Company cannot quantify the effect
of the above changes on current and future cash flows. The new timber volumes
are now being utilized in various aspects of the Company's operations, including
estimating volumes on THPs and determining depletion expense.
Log Sales to Pacific Lumber
The following table presents price, volume and revenue amounts for the
Company for the periods indicated (revenues in millions).
THREE MONTHS ENDED JUNE 30, 2002 THREE MONTHS ENDED JUNE 30, 2001
--------------------------------------- ------------------------------------------
PRICE PRICE
MBFES $/MBFE REVENUES MBFES $/MBFE REVENUES
------------ ----------- ----------- ------------- ------------ ------------
Redwood...................... 19,800 $ 494 $ 12.9 23,700 $ 957 $ 29.7
Douglas Fir.................. 2,300 249 1.1 4,800 317 2.9
Other........................ 100 104 0.1 200 128 0.1
------------ ----------- ------------- ------------
22,200 $ 14.1 28,700 $ 32.7
============ =========== ============= ============
SIX MONTHS ENDED JUNE 30, 2002 SIX MONTHS ENDED JUNE 30, 2001
--------------------------------------- ------------------------------------------
PRICE PRICE
MBFES $/MBFE REVENUES MBFES $/MBFE REVENUES
------------ ----------- ----------- ------------- ------------ ------------
Redwood...................... 47,200 $ 452 $ 27.6 33,900 $ 944 $ 41.8
Douglas Fir.................. 6,600 203 2.2 7,100 298 3.9
Other........................ 500 45 0.2 400 91 0.1
------------ ----------- ------------- ------------
54,300 $ 30.0 41,400 $ 45.8
============ =========== ============= ============
Net sales from logs were $14.1 million and $32.7 million for the three
months ended June 30, 2002 and 2001, respectively. The decrease in revenue was
predominantly due to the significant decrease in redwood prices. SBE Prices for
redwood published for the six months beginning January 1, 2002 were
approximately 50% lower than those published for the same period of 2001. In
addition to the decrease in prices, volumes declined predominantly due to a
decline in the available-to-log THPs and the timing of the applicable seasonal
harvesting restrictions imposed under the HCP. See "--Background" for further
discussion of the factors affecting the supply of approved THPs. For the six
months ended June 30, 2002 and 2001, net sales from logs were $30.0 million and
$45.8 million, respectively. The decrease for the six month periods was
predominantly due to the decrease in redwood log prices discussed above, offset
by a 12,900 Mbfe increase in the volume of log deliveries.
Operating Income and Net Income (Loss)
Operating income was $7.4 million and $24.9 million for the three months
ended June 30, 2002 and 2001, respectively. Operating income was $15.4 million
and $32.7 million for the six months ended June 30, 2002 and 2001, respectively.
The decrease for the three months ended and six months ended is principally due
to the changes in log sales discussed above.
Net income (loss) for the second quarter decreased from $12.2 million in
2001 to $(5.6) million in 2002 primarily as a result of the decrease in net
sales from logs discussed above. The decrease in net income from $7.6 million
for the six months ended June 30, 2001, to $(10.7) million for the six months
ended June 30, 2002, was principally due to the decrease in net sales from logs
as discussed above.
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 above for cautionary information with respect to such
forward-looking statements.
The Line of Credit allows the Company to borrow up to one year's interest
on the Timber Notes. On May 31, 2002, the Line of Credit was extended for an
additional year to July 11, 2003. 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. At June 30, 2002, the
Company could have borrowed a maximum of $60.0 million under the Line of Credit,
and there were no borrowings outstanding under Line of Credit.
On March 5, 2002, the Company notified the trustee for the Timber Notes
that it had met all of the requirements of the SAR Reduction Date, as defined in
the Timber Notes Indenture (e.g., certain harvest, THP inventory and Line of
Credit requirements). Accordingly, on March 20, 2002, the Company released $29.4
million from the SAR Account and distributed this amount to Pacific Lumber.
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 Timber Notes Indenture).
On the note payment date in July 2002, the Company had $15.1 million set
aside in the note payment account and borrowed $13.0 million (net of $0.9
million for Timber Notes held by the Company) from the Line of Credit to pay the
$28.1 million of interest due. The Company repaid $3.2 million of principal on
the Timber Notes (an amount equal to Scheduled Amortization) using funds held in
the SAR Account.
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. During 2001, comprehensive external
and internal reviews were conducted of Pacific Lumber's business operations.
These reviews were conducted in 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, among other things, closed two of
its four sawmills, eliminated certain of its operations, including its soil
amendment and concrete block activities, began utilizing more efficient
harvesting methods and adopted certain other cost saving measures. Most of these
changes were implemented by Pacific Lumber in the last quarter of 2001, or the
first quarter of 2002. Pacific Lumber also ended its internal logging operations
(which historically performed approximately half of its logging operations) as
of March 31, 2002, and will rely exclusively on third party contract loggers to
conduct these activities in the future.
The $29.4 million release from the SAR Account discussed above improved
Pacific Lumber's liquidity during the six months ended June 30, 2002, and
operating results for the period met management's expectations. However, Pacific
Lumber's cash flows from operations may be adversely affected by the
availability of logs, including old growth logs. See "-Background" and "Results
of Operations-General-Timber Cruise" above as well as Note 3 to the Condensed
Financial Statements for further discussion on the regulatory and environmental
factors affecting harvest levels and the results of the timber cruise completed
in 2002. Pacific Lumber may require funds available under the Pacific Lumber
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.
The Company's cash flows from operations are significantly impacted by
harvest volumes and SBE prices. On June 19, 2002, the State Board of
Equalization adopted the new Harvest Value Schedule for the second half of 2002.
The SBE Prices published in this schedule reflect an approximate 16% decline for
small redwood logs and no price change for small Douglas-fir logs. This decline
in SBE Prices will have an adverse impact on the Company's net sales and
liquidity for the second half of 2002. With respect to short-term liquidity, the
Company believes that existing cash available for principal payments from the
SAR Account, and funds available under the Line of Credit, together with cash
flows from operations, should provide sufficient funds to meet its working
capital, capital expenditures and required debt service obligations through
2003. However, cash flows from operations may be insufficient to allow the
Company to service its debt in the long-term if the Company does not experience
improvements in SBE Prices. In addition, cash flows from operations may continue
to be adversely affected if harvest levels decline as a result of the factors
discussed in "--Background" above and Note 3 to the Condensed Financial
Statements.
CRITICAL ACCOUNTING POLICIES
The Company recently completed its timber cruise which resulted in new and
updated timber volume information (see also Note 3 to the Condensed Financial
Statements). Accordingly, the Company revised its estimated depletion rates
beginning April 1, 2002. There was relatively no impact on depletion expense for
the six months ended June 30, 2002, as a result of using the updated timber
volume information.
See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Critical Accounting Policies" of the Form 10-K for
additional discussion of the Company's critical accounting policies.
NEW ACCOUTING PRONOUNCEMENTS
See Note 1 to the Condensed Financial Statements for a discussion of new
accounting pronouncements and their potential impact on the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item is not applicable to the Company and its subsidiaries.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3 of the Form 10-K for information concerning
material legal proceedings with respect to the Company. The following material
developments have occurred with respect to such legal proceedings subsequent to
the filing of the Form 10-K.
TIMBER HARVESTING LITIGATION
On April 3, 2002, the Environmental Protection Information Association
filed a 60-day notice letter threatening suit against the Company and certain
federal agencies under the ESA. The threatened suit would seek to require the
federal agencies to consider new information obtained since the approval of the
HCP concerning marbled murrelets and salmon and to require a cessation of
certain harvesting operations. No suit has yet been filed. The Company believes
that it has strong factual and legal defenses with respect to this matter;
however, there can be no assurance that such a suit would not have a material
adverse effect on the Company's financial position, results of operations, or
liquidity.
With respect to the Wrigley lawsuit, the trial date is set for November
12, 2002.
With respect to both the EPIC-SYP/Permits lawsuit and the USWA lawsuit,
the previously set trial dates have been postponed, and new trial date has not
been set.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
None.
B. REPORTS ON FORM 8-K:
On April 22, 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 May 2, 2002, the Company filed a current report on Form 8-K dated as of
April 30, 2002 (under Item 4), related to the change of Registrant's certifying
accountant.
On May 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 June 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 July 22, 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.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, who has signed this report on behalf of
the Registrant and as the principal financial and accounting officer of the
Registrant.
SCOTIA PACIFIC COMPANY LLC
Date: August 13, 2002 By: /S/ GARY L. CLARK
------------------------------------------------
Gary L. Clark
Vice President - Finance and Administration
(Principal Financial and Accounting Officer)
APPENDIX A
GLOSSARY OF DEFINED TERMS
Bear Creek lawsuit: An action entitled Environmental Protection Information
Association v. Pacific Lumber, Scotia Pacific Company LLC (No. C01-2821), filed
July 24, 2001, in the U.S. District Court in the Northern District of California
CDF: California Department of Forestry and Fire Protection
CESA: California Endangered Species Act
Company: Scotia Pacific Company LLC, a limited liability company wholly owned by
Pacific Lumber
Company Timber: The timber located on the Company's timberlands which is not
subject to harvesting rights by Pacific Lumber
CWA: Federal Clean Water Act
Environmental Plans: The HCP and the SYP
EPA: Environmental Protection Agency
EPIC-SYP/Permits lawsuit: 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) filed March 31, 1999 in the Superior Court of Sacramento County
Equity Fund Partnership: A partnership investing in equity securities in which
the Company holds a limited partnership interest
ESA: The federal Endangered Species Act
FASB: Financial Accounting Standards Board
Form 10-K: The Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission for the fiscal year ended December 31, 2001
Harvest Value Schedules: A schedule setting forth the SBE Prices published
bi-annually by the California Board of Equalization for purposes of computing
yield taxes on timber sales
HCP: The habitat conservation plan covering multiple species approved on March
1, 1999, in connection with the consummation of the Headwaters Agreement
Headwaters Agreement: The September 28, 1996, agreement between Pacific Lumber,
Scotia LLC, Salmon Creek Corporation, the United States and California which
provided the framework for the acquisition by the United States and California
of the Headwaters Timberlands
Headwaters Timberlands: Approximately 5,600 acres of Pacific Lumber timberlands
consisting of two forest groves commonly referred to as the Headwaters Forest
and the Elk Head Springs Forest which were sold to the United States and
California on March 1, 1999
Indenture: The indenture governing the Timber Notes
Line of Credit: The agreement between a group of lenders and the Company
pursuant to which the Company may borrow in order to pay up to one year's
interest on the Timber Notes
Master Purchase Agreement: The agreement entered into between Pacific Lumber and
the Company that governs all purchases of logs by Pacific Lumber from the
Company
MAXXAM: MAXXAM Inc.
MBF: One thousand board feet
Mbfe: A concept developed for use in structuring the Timber Notes; under this
concept one thousand board feet, net Scribner scale, of residual old growth
redwood timber equates to one Mbfe
MGHI: MAXXAM Group Holdings Inc., a wholly owned subsidiary of MAXXAM
MGI: MAXXAM Group Inc., a wholly owned subsidiary of MGHI
North Coast Water Board: North Coast Regional Water Quality Control Board
Pacific Lumber: The Pacific Lumber Company, a wholly owned subsidiary of MGI
Permits: The incidental take permits issued by the United States and California
pursuant to the HCP
Salmon Creek: Salmon Creek LLC, a wholly owned subsidiary of Pacific Lumber
SAR Account: Funds held in a reserve account to support principal payments on the Timber Notes
SBE Price: The applicable stumpage price for a particular species and size of
log, as set forth in the most recent Harvest Value Schedule
Scheduled Amortization: The amount of principal which the Company must pay
through each Timber Note payment date in order to avoid prepayment or deficiency
premiums
Services Agreement: An agreement pursuant to which Pacific Lumber provides
operational, management and related services with respect to the Company's
timberlands and for which Pacific Lumber is paid a fee
SFAS No. 143: Statement of Financial Accounting Standard No. 143, "Accounting
for Asset Retirement Obligations"
SFAS No. 145: Statement of Financial Accounting Standard No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections"
SYP: The sustained yield plan approved on March 1, 1999, in connection with the
consummation of the Headwaters Agreement
THP: Timber harvesting plan required to be filed with and approved by the CDF
prior to the harvesting of timber
Timber Notes: The Company's $867.2 million original aggregate principal amount
of 6.55% Series B Class A-1 Timber Collateralized Notes, 7.11% Series B Class
A-2 Timber Collateralized Notes and 7.71% Series B Class A-3 Timber
Collateralized Notes due July 20, 2028
TMDLs: Total maximum daily load limits
USWA lawsuit: 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) filed March 31, 1999 in the Superior Court of Sacramento County
Wrigley lawsuit: 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 and
Federated Development Company (No. 9700399) filed December 2, 1997 in the
Superior Court of Humboldt County