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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 SEPTEMBER 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 September 30, 2002 and December 31, 2001
Statement of Income for the three and nine months ended September 30, 2002 and 2001
Statement of Cash Flows for the nine months ended September 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
Item 4. Disclosure Controls and Procedures
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signature
Certifications
APPENDIX A - GLOSSARY OF DEFINED TERMS
SCOTIA PACIFIC COMPANY LLC
BALANCE SHEET
(IN MILLIONS OF DOLLARS)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents .......................................................... $ 2.0 $ 37.8
Marketable securities............................................................... 19.3 17.1
Receivables from Pacific Lumber..................................................... 7.0 3.8
Prepaid timber harvesting costs..................................................... 7.9 7.9
Other current assets................................................................ 1.3 0.6
------------- -------------
Total current assets............................................................. 37.5 67.2
Timber and timberlands, net of accumulated depletion of $269.8 and
$261.6, respectively................................................................ 241.7 247.9
Property and equipment, net of accumulated depreciation of $14.4 and
$13.0, respectively................................................................. 22.7 20.9
Deferred financing costs, net.......................................................... 15.4 16.4
Restricted cash, marketable securities and other investments........................... 55.1 87.6
Other assets........................................................................... 5.9 6.5
------------- -------------
$ 378.3 $ 446.5
============= =============
LIABILITIES AND MEMBER DEFICIT
Current liabilities:
Due to Pacific Lumber............................................................... $ 1.3 $ 1.0
Accrued interest.................................................................... 11.0 25.4
Other accrued liabilities........................................................... 2.3 3.0
Short-term borrowings............................................................... 5.5 -
Current maturities of long-term debt, excluding $2.6 and $2.3, respectively,
of repurchased Timber Notes held in the SAR Account.............................. 16.8 14.9
------------- -------------
Total current liabilities........................................................ 36.9 44.3
Long-term debt, less current maturities and excluding $52.8 and $55.4, respectively,
of repurchased Timber Notes held in SAR Account..................................... 737.7 754.5
------------- -------------
Total liabilities................................................................ 774.6 798.8
------------- -------------
Contingencies (See Note 3)
Member deficit......................................................................... (396.3) (352.3)
------------- -------------
$ 378.3 $ 446.5
============= =============
The accompanying notes are an integral part of these financial statements.
SCOTIA PACIFIC COMPANY LLC
STATEMENT OF INCOME (LOSS)
(IN MILLIONS OF DOLLARS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2002 2001 2002 2001
----------- ---------- ---------- -----------
(UNAUDITED)
Log sales to Pacific Lumber...................................... $ 19.7 $ 30.4 $ 49.7 $ 76.3
----------- ---------- ---------- -----------
Operating expenses:
General and administrative.................................... 6.1 6.6 14.5 15.0
Depletion, depreciation and amortization...................... 4.0 4.2 10.2 9.0
----------- ---------- ---------- -----------
10.1 10.8 24.7 24.0
----------- ---------- ---------- -----------
Operating income................................................. 9.6 19.6 25.0 52.3
----------- ---------- ---------- -----------
Other income (expense):
Interest and other income..................................... 1.1 1.7 4.0 6.1
Interest expense.............................................. (14.5) (14.7) (43.5) (44.2)
----------- ---------- ---------- -----------
Net income (loss)................................................ $ (3.8) $ 6.6 $ (14.5) $ 14.2
=========== ========== ========== ===========
The accompanying notes are an integral part of these financial statements.
SCOTIA PACIFIC COMPANY LLC
STATEMENT OF CASH FLOWS
(IN MILLIONS OF DOLLARS)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2002 2001
---------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................................... $ (14.5) $ 14.2
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities:
Depletion, depreciation and amortization............................................. 10.2 9.0
Amortization of deferred financing costs............................................. 1.0 1.0
Increase (decrease) in cash resulting from changes in:
Receivables from Pacific Lumber.................................................... (3.2) 0.1
Prepaid timber harvest costs....................................................... - (1.8)
Accrued interest................................................................... (14.4) (15.1)
Other accrued liabilities.......................................................... (0.7) (0.6)
Other.............................................................................. (0.6) (0.2)
---------- -----------
Net cash provided by (used for) operating activities................................. (22.2) 6.6
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................................... (4.9) (4.2)
---------- -----------
Net cash used for investing activities............................................... (4.9) (4.2)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on Timber Notes and other timber related debt........................ (14.9) (14.2)
Member distributions.................................................................... (29.4) (77.4)
Borrowings (repayments) under line of credit agreement, net............................. 5.5 -
Net changes in debt related restricted cash, marketable securities and other
investments.......................................................................... 30.1 7.3
---------- -----------
Net cash used for financing activities............................................... (8.7) (84.3)
---------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................................................. (35.8) (81.9)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................................... 37.8 98.1
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................................. $ 2.0 $ 16.2
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid........................................................................... $ 56.9 $ 58.3
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 September 30, 2002, and the results of operations for the three
and nine months ended September 30, 2002 and 2001, and the cash flows for the
nine months ended September 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 continue to have an adverse impact on the Company's net sales
and liquidity during the fourth quarter of 2002. With respect to the note
payment due in January 2003, 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. 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 and funds available under the Line of Credit may be
insufficient to allow the Company to fulfill its interest and certain other
payment obligations in the long-term if SBE Prices do not improve. 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 the Company's fiscal year
beginning January 1, 2003. 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):
September 30, DECEMBER 31,
2002 2001
------------- ------------
Current assets:
Cash and cash equivalents, restricted.............................................. $ - $ 35.3
Marketable securities, restricted:
Amounts held in SAR Account..................................................... 19.3 17.1
------------- ------------
19.3 52.4
Long-term restricted cash, marketable securities and other investments:
Amounts held in SAR Account........................................................ 102.9 137.8
Other amounts restricted under the Indenture....................................... 2.6 2.8
Less: Amounts attributable to Timber Notes held in SAR Account..................... (50.4) (53.0)
------------- ------------
55.1 87.6
------------- ------------
Total restricted cash, marketable securities and other investments.................... $ 74.4 $ 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 interests in several limited
partnerships which invest in diversified portfolios of common stocks and other
equity securities. These investments are not consolidated, but are accounted for
under the equity method. As of September 30, 2002, and December 31, 2001, these
investments amounted to $13.7 million and $15.7 million, respectively.
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.
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. Nevertheless, the rate of approvals of THPs during 2001
improved over that for the prior year, and further improvements had been
experienced in 2002 prior to the recent developments in the EPIC-SYP/Permits
lawsuit described below. Despite the improvements in the THP approval process,
other factors such as actions by the North Coast Water Board and pending
litigation discussed below may adversely impact the Company's ability to meet
its harvesting goals.
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 revenues. 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 two water courses. 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. The North Coast Water Board has
targeted the fall of 2003 as the completion date of the TMDL process for these
four water courses. 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.
Effective January 1, 2003, a California statute eliminates a waiver
previously granted to, among others, 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. Harvesting activities could be delayed and/or adversely affected, as a
separate, additional regulatory process would be required for harvesting under
THPs.
In August 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 currently impacts an estimated 18,000 Mbfe of timber covered by a
number of THPs. This order prohibits sediment discharges caused by Company
operations during the winter period 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 are to be imposed.
The Company submitted a report of waste discharge, and on November 7, 2002, the
North Coast Water Board approved waste discharge requirements that the Company
believes will allow it to operate within this basin during the winter months.
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, 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. On September 20, 2002, an agreement was reached to settle
this litigation, and the parties are proceeding to implement that agreement.
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
trial judge has issued a stay of the effectiveness of the Permits but has not
issued an injunction against harvesting on the Company's lands under THPs that
were previously approved consistently with the Permits. The stay does, however,
prevent CDF from approving certain new THPs that rely upon the Permits, and
unless the stay can be vacated or amended, as the Company has requested, it
could force the Company to modify its pending THPs in accordance with
alternative Board of Forestry rules that do not depend upon an approved SYP.
This procedure could cause reductions in 2003 harvest levels and could have an
adverse impact on the Company. A trial date is set for January 20, 2003. The
judge has indicated that he expects to rule on this matter no earlier than July
2003. The Company believes that appropriate procedures were followed throughout
the public review and approval process concerning the HCP and the SYP, the
Company is working with the relevant government agencies to defend these
challenges, and does not believe the resolution of these matters should result
in a material adverse effect on its financial condition, results of operations
or the ability to harvest timber. However, in addition to the potential
short-term adverse impacts described above, these matters could have a long-term
negative impact if they are decided adversely to the Company.
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.
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.
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 includes the following (in millions):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2002 2001 2002 2001
------------ ------------ ----------- ------------
Net income (loss)........................................... $ (3.8) $ 6.6 $ (14.5) $ 14.2
Other comprehensive income:
Net change in fair value of available-for-sale
investments........................................... 0.4 1.1 (0.1) 1.5
------------ ------------ ----------- ------------
Total comprehensive income (loss)........................... $ (3.4) $ 7.7 $ (14.6) $ 15.7
============ ============ =========== ============
A reconciliation of the activity in member deficit is as follows (in
millions):
NINE MONTHS
ENDED
SEPTEMBER 30,
2002
----------------
Balance at beginning of period.................................................................... $ (352.3)
Comprehensive loss................................................................................ (14.6)
Member distribution............................................................................... (29.4)
----------------
Balance at end of period.......................................................................... $ (396.3)
================
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. 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. As discussed in Note 3 to the Condensed Financial Statements, other
factors may adversely impact the Company's abilities to meet its harvesting
goals. 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 beginning in 2003 the North Coast Water
Board could 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 harvesting. A stay issued in
connection with the EPIC-SYP/Permits lawsuit could require the Company to follow
an alternative THP approval process, resulting in delays in obtaining approvals
of THPs which have already been submitted or are currently being prepared.
Furthermore, there can be no assurance that certain other pending legal,
regulatory and environmental matters or future governmental regulations,
legislation or judicial or administrative decisions, adverse weather conditions
or low SBE Prices 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's
operations.
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 above 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.
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 revenues. 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 SEPTEMBER 30, 2002 THREE MONTHS ENDED SEPTEMBER 30, 2001
--------------------------------------- ------------------------------------------
PRICE PRICE
MBFES $/MBFE REVENUES MBFES $/MBFE REVENUES
------------ ----------- ----------- ------------- ------------ ------------
Redwood...................... 27,000 $ 550 $ 14.8 32,800 $ 774 $ 25.4
Douglas Fir.................. 11,000 417 4.6 9,000 522 4.7
Other........................ 1,000 281 0.3 700 440 0.3
------------ ----------- ------------- ------------
39,000 $ 19.7 42,500 $ 30.4
============ =========== ============= ============
NINE MONTHS ENDED SEPTEMBER 30, 2002 NINE MONTHS ENDED SEPTEMBER 30, 2001
--------------------------------------- ------------------------------------------
PRICE PRICE
MBFES $/MBFE REVENUES MBFES $/MBFE REVENUES
------------ ----------- ----------- ------------- ------------ ------------
Redwood...................... 74,200 $ 573 $ 42.5 66,700 $ 1,007 $ 67.2
Douglas Fir.................. 17,600 389 6.8 16,100 537 8.6
Other........................ 1,500 235 0.4 1,100 390 0.4
------------ ----------- ------------- ------------
10
------------ ----------- ------------- ------------
93,300 $ 49.7 83,900 $ 76.2
============ =========== ============= ============
Net sales from logs were $19.7 million and $30.4 million for the three
months ended September 30, 2002 and 2001, respectively. The decrease in revenue
was due to the significant decrease in redwood prices. SBE Prices for small
redwood logs for the six month periods beginning January 1, 2002 and July 1,
2002 are 50% and 30% lower, respectively, than those for the same periods of
2001. In addition to the decrease in prices, volumes were lower due to the
timing of the applicable seasonal harvesting restrictions imposed under the HCP
predominantly in the month of July. See "--Background" for further discussion of
the factors affecting the supply of approved THPs. For the nine months ended
September 30, 2002 and 2001, net sales from logs were $49.7 million and $76.3
million, respectively. The decrease for the nine month periods was due to the
decrease in redwood log prices discussed above, offset by a 9,400 Mbfe increase
in the volume of log deliveries.
Operating Income and Net Income (Loss)
Operating income was $9.6 million and $19.6 million for the three months
ended September 30, 2002 and 2001, respectively. Operating income was $25.0
million and $52.3 million for the nine months ended September 30, 2002 and 2001,
respectively. The decrease for the three and nine month periods is principally
due to the decrease in net sales from logs discussed above. Overall, general and
administrative expenses have remained relatively stable. The Company has had a
notable decrease in yield taxes caused by the lower SBE Prices as discussed
above, as well as a reduction in the cost of preparing THPs (predominantly in
the areas of geology and botany) by hiring fewer outside contractors. However,
these gains have been offset by notable increases in insurance costs and
increased administrative staffing. Depletion expense fluctuates directly with
the change in harvest levels, however, the Company has experienced a slight
increase in expense as a result of updated depletion rates resulting from the
Company's recently completed Timber Cruise discussed above (see also "Critical
Accounting Policies" below).
Net income (loss) for the third quarter decreased from $6.6 million in
2001 to $(3.8) million in 2002 and from $14.2 million for the nine months ended
September 30, 2001, to $(14.5) million for the nine months ended September 30,
2002, principally due to the decrease in net sales from logs as discussed above.
In addition, interest and other income decreased $0.6 million for the three
months ended September 30, 2002 and $2.1 million for the nine months ended
September 30, 2002, principally due to lower investment earnings as a result of
lower amounts of funds available for investment in cash, marketable securities
and other investments (see also Note 2 to the Condensed Financial Statements).
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 September 30, 2002,
the Company could have borrowed a maximum of $54.3 million under the Line of
Credit, and there was $5.5 million outstanding under the 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) as of March 31,
2002, and now relies exclusively on contract loggers to conduct these
activities. Further actions may be taken during the next year as a result of
Pacific Lumber's continuing evaluation process, and additional writedowns of
certain assets may be required.
The $29.4 million release from the SAR Account discussed above improved
Pacific Lumber's liquidity during the nine months ended September 30, 2002.
However, Pacific Lumber's cash flows from operations may be adversely affected
by the availability of 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 and/or additional repayments by MGI of an intercompany loan in
order 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 continue to have an adverse impact on the Company's net sales
and liquidity during the fourth quarter of 2002. With respect to the note
payment due in January 2003, 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. 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 fulfill its
interest and certain other payment obligations in the long-term if SBE Prices do
not improve. 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
In the second quarter of 2002, the Company 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. For the nine months ended
September 30, 2002, there was relatively no impact on depletion expense 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 ACCOUNTING 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.
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Within 90 days prior to the date of this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect the internal controls
subsequent to the date the Company completed its evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 3 to the Condensed Financial Statements
in Part I, Item 1 of this Form 10-Q is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
None.
B. REPORTS ON FORM 8-K:
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.
On August 13, 2002, the Company filed a current report on Form 8-K dated
August 13, 2002, related to the Certification of the Chief Executive and Chief
Financial Officers pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
On August 21, 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 September 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 October 4, 2002, the Company filed a current report on Form 8-K dated
October 1, 2002, related to the EPIC- SYP/Permits lawsuit.
On October 21, 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: November 13, 2002 By: /S/ GARY L. CLARK
--------------------------------------------------
Gary L. Clark
Vice President - Finance and Administration
(Principal Financial and Accounting Officer)
CERTIFICATIONS
I, Robert E. Manne, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Scotia Pacific Company LLC;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2002 By: /S/ ROBERT E. MANNE
--------------------------------------
Robert E. Manne
President and Chief Executive Officer
(Principal Executive Officer)
I, Gary L. Clark, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Scotia Pacific Company LLC;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 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
(Order Granting Change of Venue was filed on May 27, 1999, and assigned Case No.
CV990452 in Humboldt County Superior Court)
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 Schedule: 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
SFAS No. 143: Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations"
SFAS No. 145: Statement of Financial Accounting Standards 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