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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 MARCH 31, 2003
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 |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes |_| No |X|
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
Statement of Income (Loss)
Statement of Cash Flows
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)
MARCH 31, DECEMBER 31,
2003 2002
------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 3.4 $ 10.1
Marketable securities............................................................... 21.3 19.3
Receivables from Pacific Lumber..................................................... 6.2 2.6
Prepaid timber harvesting costs..................................................... 7.0 7.3
Other current assets................................................................ 1.0 0.9
------------- -------------
Total current assets............................................................. 38.9 40.2
Timber and timberlands, net of accumulated depletion of $275.0 and
$272.5 respectively................................................................. 236.8 239.4
Property and equipment, net of accumulated depreciation of $15.4 and
$15.0, respectively................................................................ 24.3 23.7
Deferred financing costs, net.......................................................... 14.7 15.1
Restricted cash, marketable securities and other investments........................... 41.0 52.9
Other assets........................................................................... 5.4 5.6
------------- -------------
$ 361.1 $ 376.9
============= =============
LIABILITIES AND MEMBER DEFICIT
Current liabilities:
Due to Pacific Lumber............................................................... $ 1.6 $ 0.8
Accrued interest.................................................................... 10.8 24.9
Other accrued liabilities........................................................... 1.9 2.1
Short-term borrowings............................................................... 14.7 -
Current maturities of long-term debt, excluding $2.9 and $2.6, respectively, of
repurchased Timber Notes held in the SAR Account............................... 18.5 16.8
------------- -------------
Total current liabilities........................................................ 47.5 44.6
Long-term debt, less current maturities and excluding $50.6 and $52.8, respectively,
of repurchased Timber Notes held in the SAR Account................................. 723.8 737.7
Other noncurrent liabilities........................................................... 0.2 0.1
------------- -------------
Total liabilities................................................................ 771.5 782.4
------------- -------------
Contingencies (See Note 3)
Member deficit......................................................................... (410.4) (405.5)
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$ 361.1 $ 376.9
============= =============
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
MARCH 31,
-----------------------
2003 2002
---------- -----------
(UNAUDITED)
Log sales to Pacific Lumber............................................................... $ 18.4 $ 15.9
---------- -----------
Operating expenses:
General and administrative............................................................. 5.5 4.5
Depletion, depreciation and amortization............................................... 3.3 3.4
---------- -----------
8.8 7.9
---------- -----------
Operating income.......................................................................... 9.6 8.0
Other income (expense):
Interest and other income.............................................................. 0.3 1.4
Loss on sale of timberlands............................................................ (0.4) -
Interest expense....................................................................... (14.3) (14.5)
---------- -----------
(14.4) (13.1)
---------- -----------
Net loss.................................................................................. $ (4.8) $ (5.1)
========== ===========
The accompanying notes are an integral part of these financial statements.
SCOTIA PACIFIC COMPANY LLC
STATEMENT OF CASH FLOWS
(IN MILLIONS OF DOLLARS)
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
---------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................................... $ (4.8) $ (5.1)
Adjustments to reconcile net loss to net cash used for operating activities:
Depletion, depreciation and amortization............................................. 3.3 3.4
Amortization of deferred financing costs............................................. 0.3 0.3
Loss on sale of timberlands.......................................................... 0.4 -
Increase (decrease) in cash resulting from changes in:
Receivables from Pacific Lumber.................................................... (3.7) (2.3)
Prepaid timber harvesting costs.................................................... 0.3 (0.1)
Due to Pacific Lumber.............................................................. 0.1 (0.3)
Accrued interest................................................................... (14.1) (14.4)
Other accrued liabilities.......................................................... (0.1) (0.5)
Other.............................................................................. - 0.3
---------- -----------
Net cash used for operating activities............................................. (18.3) (18.7)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................................... (1.6) (1.3)
Proceeds from sale of assets............................................................ 0.7 -
---------- -----------
Net cash used for investing activities............................................. (0.9) (1.3)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on Timber Notes and other timber related debt........................ (12.1) (11.6)
Restricted cash withdrawals, net........................................................ 9.9 31.2
Borrowings (repayments) under line of credit agreement, net............................. 14.7 -
Member distributions.................................................................... - (29.4)
---------- -----------
Net cash provided by (used for) financing activities............................... 12.5 (9.8)
---------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................................................. (6.7) (29.8)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................................... 10.1 37.8
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................................. $ 3.4 $ 8.0
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid........................................................................... $ 28.1 $ 28.5
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 March 31, 2003, and the results of operations and cash flows for
the three months ended March 31, 2003 and 2002. The Company is a wholly owned
subsidiary of Pacific Lumber which is a wholly owned subsidiary of MGI. MGI is
an indirect wholly owned subsidiary of MAXXAM.
LIQUIDITY AND CASH RESOURCES
The Company's cash flows from operations are significantly impacted by
harvest volumes and log prices. In June 2002, the State Board of Equalization
adopted the new Harvest Value Schedule for the second half of 2002. The prices
published in that schedule reflected an approximate 16% decline in the SBE Price
for small redwood logs and no price change for small Douglas-fir logs from the
prior period. The decline in SBE Prices had an adverse impact on the Company's
net sales and liquidity during the second half of 2002. Accordingly, with
respect to the note payment in January 2003, the Company required funds from its
line of credit to pay a portion of the interest due. All of the funds used to
pay Scheduled Amortization were provided from the SAR Account.
The Master Purchase Agreement contemplates that all sales of logs by the
Company to Pacific Lumber will be at fair market value (based on stumpage
prices) for each species and category of timber. The Master Purchase Agreement
provides that if the purchase price equals or exceeds the SBE Price and a
structuring price set forth in a schedule to the Indenture, the purchase price
is deemed to be at fair market value. If the purchase price equals or exceeds
the SBE Price, but is less than the structuring price, then the Company is
required to engage an independent forestry consultant to confirm that the
purchase price reflects fair market value. In January 2003, the Company so
engaged a consultant with respect to establishing the purchase prices of logs to
be sold to Pacific Lumber in the first half of 2003. The consultant determined
that with respect to certain categories of logs, the fair market value was
higher than the comparable SBE Price. The prices for redwood logs are expected
to be on average approximately 20% higher for the first half of 2003 than those
for the second half of 2002. There was relatively no price change for
Douglas-fir logs.
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. With respect to long-term
liquidity, although the Company expects that cash flows from operations and
funds available under the SAR Account and the Line of Credit should be adequate
to meet its debt service, working capital and capital expenditure requirements,
unless log prices continue to improve, there can be no assurance that this will
be the case. In addition, cash flows from operations may continue to be
adversely affected if harvest levels decline as a result of regulatory
compliance and the litigation discussed in Note 3.
NEW ACCOUNTING STANDARDS
Accounting for Asset Retirement Obligations
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 adopted
SFAS No. 143 effective 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 result 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 adoption of SFAS No. 143 did not have a
material impact on the Company's financial statements.
Classification of Gains and Losses on Extinguishment of Debt
In April 2002, the FASB issued SFAS No. 145, which, among other things,
rescinds the previous guidance for debt extinguishments. 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 No. 30. Applying the
provisions of APB Opinion No. 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. The Company
adopted SFAS No. 145 effective January 1, 2003.
2. RESTRICTED CASH, CASH EQUIVALENTS, MARKETABLE SECURITIES AND OTHER INVESTMENTS
The following amounts are restricted under the terms of the Company's debt
agreements (in millions):
March 31, DECEMBER 31,
2003 2002
------------- ------------
Current assets:
Cash and cash equivalents.......................................................... $ - $ 5.2
Marketable securities:
Amounts held in SAR Account..................................................... 21.3 19.3
------------- ------------
21.3 24.5
Long-term cash, marketable securities and other investments:
Amounts held in SAR Account........................................................ 87.0 101.6
Other amounts restricted under the Indenture....................................... 2.6 2.6
Less: Amounts attributable to repurchased Timber Notes held in
SAR Account..................................................................... (48.6) (51.3)
------------- ------------
41.0 52.9
------------- ------------
Total restricted cash, cash equivalents, marketable securities and other investments.. $ 62.3 $ 77.4
============= ============
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 growth 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 allow incidental "take" of certain species
located on the Company's timberlands which species have been listed by
government entities 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 could continue for
several more years.
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 many 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, with a targeted completion of spring
2004 for these two 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. The North Coast Water
Board has renewed the waiver for timber companies through December 31, 2003.
Should the North Coast Water Board decide not to extend this or another waiver
beyond December 31, 2003, it may thereafter notify a company that the North
Coast Water 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. Accordingly, harvesting activities could be delayed and/or adversely
affected as these waste discharge requirements are developed and implemented.
Beginning with the 2002-2003 winter operating period, the Company and
Pacific Lumber have been required to submit "Reports of Waste Discharge" to the
North Coast Water Board in order to conduct winter harvesting activities in the
Freshwater Creek and Elk River watersheds. After consideration of these reports,
the North Coast Water Board imposed requirements on the Company and Pacific
Lumber to implement additional mitigation and erosion control practices in these
watersheds. These additional requirements have somewhat increased operating
costs. The North Coast Water Board issued the Elk River Order for the Elk River
watershed. In addition, the North Coast Water Board has initiated the process
which could result in similar orders for the Freshwater and Bear Creek
watersheds, and is contemplating similar actions for the Jordan and Stitz Creeks
watersheds. The Elk River Order is aimed at addressing existing sediment
production sites through clean up actions. The order, as well as additional
orders in the other watersheds (should they be issued), could result in
significant costs to the Company beginning in 2003 and extending over a number
of years. Pacific Lumber has appealed the Elk River Order to the State Water
Board, but the appeal is being held in abeyance while the matter is discussed with
the North Coast Water Board and its staff.
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. The Services Agreement
requires Pacific Lumber to prepare and file on behalf of the Company (at Pacific
Lumber's cost) all pleadings and motions, and otherwise diligently pursue,
appeals of any denial, and defense of any challenge to approval, of any THP or
the Environmental Plans or similar plan or permit and related matters.
In March 1999, the EPIC-SYP/Permits lawsuit was filed. This action
alleges, among other things, various violations of the CESA and the California
Environmental Quality Act, and challenges, among other things, the validity and
legality of the SYP and the Permits issued by California. The plaintiffs seek,
among other things, injunctive relief to set aside California's approval of the
SYP and the Permits issued by California. In March 1999, the USWA lawsuit was
filed challenging the validity and legality of the SYP. In connection with the
EPIC-SYP/Permits lawsuit, the trial judge has issued a stay of the effectiveness
of the Permits for approval of new THPs, but released from the stay, and refused
to enjoin, operations under THPs that were previously approved consistent with
the Permits. In addition, on November 26, 2002, the Court exempted from the stay
all in-process THPs submitted through mid-October 2002. Although the stay
prevents the CDF from approving new THPs that rely upon the Permits, the Company
is obtaining review and approval of new THPs under a procedure provided for in
the forest practice rules that does not depend upon the Permits. Because certain
THPs will not qualify for this procedure, there could be a reduction in 2003
harvest levels which could have an adverse impact on the Company. These two
cases were consolidated for trial, which concluded on March 28, 2003. The judge
has indicated that he expects to rule no earlier than July 2003. The Company
believes that appropriate procedures were followed throughout the public review
and approval process concerning the Environmental Plans and is working with the
relevant government agencies to defend these challenges. The Company does not
believe the resolution of these matters should result in a material adverse
effect on its financial condition, results of operations or liquidity. 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.
In July 2001, the Bear Creek lawsuit was filed. The lawsuit alleges that
the Company's and Pacific Lumber's harvesting and other activities under certain
of its approved and proposed THPs will result in discharges of pollutants in
violation of the CWA. The plaintiff asserts that the CWA requires the defendants
to obtain a permit from the North Coast Water Board before beginning timber
harvesting and road construction activities, and is seeking to enjoin these
activities until such permit has been obtained. The plaintiff also seeks civil
penalties of up to $27,500 per day for the defendant's alleged continued
violation of the CWA. The Company believes that the requirements under the HCP
are adequate to ensure that sediment and pollutants from its harvesting
activities will not reach levels harmful to the environment. Furthermore, EPA
regulations specifically provide that such activities are not subject to CWA
permitting requirements. The Company believes that it has strong legal defenses
in this matter; however, there can be no assurance that this lawsuit will not
have a material adverse impact on the Company's financial condition, results of
operations and/or liquidity.
On November 20, 2002, the HWC lawsuit, naming Pacific Lumber as real party
in interest, was filed. The suit seeks to enjoin timber operations in the Elk
and Freshwater watersheds of the Company's timberlands until and unless the
regional and state water boards impose on those operations waste discharge
requirements that meet standards demanded by the plaintiff. The Company believes
that Pacific Lumber and the regional and state boards have valid defenses to
this action. However, an adverse ruling could result in a delay of timber
operations that could have a material adverse impact on the Company's financial
position, results of operations and/or liquidity.
On February 24, 2003, the recently elected District Attorney of Humboldt
County filed the Humboldt DA action. The suit was filed under the California
unfair competition law and alleges that the Company, Pacific Lumber and Salmon
Creek used certain unfair business practices in connection with completion of
the Headwaters Agreement, and that this resulted in the ability to harvest
significantly more trees under the Environmental Plans than would have otherwise
been the case. The suit seeks a variety of remedies including a civil penalty of
$2,500 for each additional tree that has been or will be harvested due to this
alleged increase in harvest, as well as restitution and an injunction in respect
of the additional timber harvesting allegedly being conducted. On March 27,
2003, the Company filed a motion for sanctions and requested dismissal of the
case. A hearing has been scheduled for May 23, 2003. The Company believes that
this suit is without merit; however, there can be no assurance that the Company
will prevail or that an adverse outcome would not be material to the Company's
financial position, results of operations and/or liquidity.
In November 2001, Pacific Lumber filed the THP No. 520 lawsuit alleging
that the State Water Board had no legal authority to impose mitigation measures
that were requested by the staff of the North Coast Water Board during the THP
review process and rejected by the CDF. When the staff of the North Coast Water
Board attempted to impose these mitigation measures in spite of the CDF's
decision, Pacific Lumber appealed to the State Water Board, which imposed
certain of the requested mitigation measures and rejected others. Pacific Lumber
filed the THP No. 520 lawsuit challenging the State Water Board's decision, and
on January 24, 2003, the Court granted Pacific Lumber's request for an order
invalidating the imposition of these additional measures. Other claims included
in this action have been dismissed by Pacific Lumber without prejudice to its
future rights. On March 25, 2003, the State Water Board appealed this decision.
While the Company believes the Court's decision will be sustained, a reversal
could result in increased demands by the regional and state water boards and
their staffs to impose controls and limitations on timber harvesting on Pacific
Lumber's timberlands beyond those provided for by the Environmental Plans.
The Company, Pacific Lumber and certain of their affiliates are the
defendants in the Cook action and the Cave action. On April 4, 2003, the
plaintiffs in these actions filed amended complaints and served the defendants
with notice of the actions. The Cook action alleges, among other things, that
defendants' logging practices have contributed to an increase in flooding along
Freshwater Creek (which runs through the Company's timberlands), resulting in
personal injury and damages to the plaintiffs' properties. Plaintiffs further
allege that in order to have THPs approved in the affected areas, the defendants
engaged in certain unfair business practices. The plaintiffs seek, among other
things, compensatory and exemplary damages, injunctive relief, and appointment
of a receiver to ensure that the watershed is restored. The Cave action contains
similar allegations and requests similar relief with respect to the Elk River
watershed (a portion of which is contained on the Company's timberlands). The
Company does not believe the resolution of these actions should result in a
material adverse effect on its financial condition, 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 LOSS AND MEMBER DEFICIT
Comprehensive loss includes the following (in millions):
THREE MONTHS ENDED
MARCH 31,
---------------------------
2003 2002
------------ ------------
Net loss.............................................................................. $ (4.8) $ (5.1)
Other comprehensive loss:
Net change in fair value of available-for-sale investments......................... (0.1) (1.0)
------------ ------------
Total comprehensive loss.............................................................. $ (4.9) $ (6.1)
============ ============
A reconciliation of the activity in member deficit is as follows (in
millions):
THREE MONTHS ENDED
MARCH 31,
---------------------------
2003 2002
------------ ------------
Balance at beginning of period........................................................ $ (405.5) $ (352.3)
Comprehensive loss.................................................................... (4.9) (6.1)
Member distribution................................................................... - (29.4)
------------ ------------
Balance at end of period.............................................................. $ (410.4) (387.8)
============ ============
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 and 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 Condensed Notes to Financial Statements included herein.
This Quarterly Report on Form 10-Q contains statements which constitute
"forward-looking statements" within the meaning of the PSLRA. 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 which could cause differences between such forward-looking statements
and actual results. No assurance can be given that these are all of the factors
that could cause actual results to vary materially from the forward-looking
statements.
BACKGROUND
Regulatory and environmental matters play a significant role in the
Company's operations. See Item 1. "Business--Regulatory and Environmental
Factors" of the Form 10-K and Note 3 for a discussion of these matters. Although
the Company experienced improvements in the rate of approvals of THPs in 2001
and 2002, regulatory compliance and related litigation may at times cause delays
in obtaining approvals of THPs and delays in harvesting on THPs once they are
approved. This could result in a decline in harvest, an increase in the cost of
logging operations, and lower net sales, as well as increased costs related to
timber harvest litigation. As discussed in Note 3, the North Coast Water Board
is requiring Pacific Lumber and the Company to apply certain waste discharge
requirements to approved THPs covering winter harvesting operations in the
Freshwater, Elk River and Bear Creek watersheds, and the North Coast Water Board
could require Pacific Lumber and the Company to follow waste discharge
requirements before harvesting operations are conducted on THPs in other
watersheds. This requirement could cause delays in harvesting. A stay issued in
connection with the EPIC-SYP/Permits lawsuit requires Pacific Lumber and the
Company to follow an alternative THP approval process for THPs submitted to the
CDF after mid-October of 2002, which could result in a reduction of 2003 harvest
levels.
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 log prices will not have a material adverse effect on the Company's
financial position, results of operations or liquidity. See Note 3 for further
information regarding regulatory and legal proceedings affecting the Company's
operations.
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 Provisions. The Master Purchase Agreement
contemplates that all sales of logs by the Company to Pacific Lumber will be at
fair market value (based on stumpage prices) for each species and category of
timber. The Master Purchase Agreement provides that if the purchase price equals
or exceeds the SBE Price and a structuring price set forth in a schedule to the
Indenture, the purchase price is deemed to be at fair market value. If the
purchase price equals or exceeds the SBE Price, but is less than the structuring
price, then the Company is required to engage an independent forestry consultant
to confirm that the purchase price reflects fair market value. 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. SBE
Prices may not necessarily be representative of actual prices that would be
realized from unrelated parties at subsequent dates.
In January 2003, in accordance with the Master Purchase Agreement, the
Company engaged an independent forestry consultant with respect to establishing
the purchase prices of logs to be sold to Pacific Lumber in the first half of
2003. The consultant determined that with respect to certain categories of logs,
the fair market value was higher than the comparable SBE Price. The prices for
redwood logs are expected to be on average approximately 20% higher for the
first half of 2003 than those for the second half of 2002. There was relatively
no price change for Douglas-fir logs.
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 somewhat under the adaptive management provision contained in the HCP,
and as a result of the watershed analysis process currently being performed.
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 MARCH 31, 2003 THREE MONTHS ENDED MARCH 31, 2002
--------------------------------------- ------------------------------------------
PRICE PRICE
MBFES $/MBFE REVENUES MBFES $/MBFE REVENUES
------------ ----------- ----------- ------------- ------------ ------------
Redwood...................... 26,600 $ 650 $ 17.3 27,400 $ 537 $ 14.7
DOUGLAS FIR.................. 3,000 344 1.0 4,300 257 1.1
OTHER........................ 500 236 0.1 400 91 0.1
------------ ----------- ------------- ------------
30,100 612 $ 18.4 32,100 494 $ 15.9
============ =========== ============= ============
The Company experienced an increase in log sales for the first quarter of
2003 versus the same period of 2002 due to various factors, including a 3%
increase in the market price of small redwood logs from that of the first
quarter of 2002, an 18% decrease in the use of the helicopter method of logging
(which reduces the value of the log to reflect the increased cost of
harvesting), as well as an increase in the size of logs delivered. The favorable
impact on log sales of the increase in prices was slightly offset by a reduction
in the volume of logs delivered.
Operating Income and Net Loss
Operating income was $9.6 million and $8.0 million for the three months
ended March 31, 2003 and 2002, respectively. The increase was principally due to
the increase in log sales discussed above offset somewhat by an increase in
winter road costs as well as increased insurance costs.
Net losses were $4.8 million and $5.1 million for the three months ended
March 31, 2003 and 2002, respectively. The decrease between periods is due to
the increase in operating income discussed above, offset somewhat by a decrease
in interest income realized from cash, cash equivalents and other investments
(see Note 2).
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
This section contains statements which constitute "forward-looking
statements" within the meaning of the PSLRA. See above for cautionary
information with respect to such forward-looking statements.
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 March 31, 2003, the Company could have
borrowed a maximum of $58.9 million under the Line of Credit, and there was
$14.7 million outstanding under the Line of Credit.
On the note payment date in January 2003, the Company had $5.6 million set
aside in the note payment account to pay the $27.9 million of interest due. The
Company used $22.3 million (in addition to $1.6 million which was borrowed in
respect of Timber Notes held by the Company) of the funds available under the
Line of Credit to pay the remaining amount of interest due. The Company repaid
$12.1 million of principal on the Timber Notes (an amount equal to Scheduled
Amortization) using funds held in the SAR Account.
In April 2003, $3.4 million of funds from the SAR Account were used to
repurchase $4.0 million principal amount of Timber Notes, as permitted under the
Indenture, resulting in a gain of $0.4 million (net of unamortized deferred
financing costs) on extinguishment of debt.
With respect to the note payment date in July 2003, the Company expects to
use $27.4 million (in addition to $2.0 million which would be borrowed in respect of
Timber Notes held by the Company) of the funds available under the Line of
Credit to pay the entire amount of interest due. The Company expects to repay
$4.4 million of principal on the Timber Notes (an amount equal to Scheduled
Amortization) using funds held in 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. With respect to long-term
liquidity, although the Company expects that cash flows from operations and
funds available under the SAR Account and the Line of Credit should be adequate
to meet its debt service, working capital and capital expenditure requirements,
unless log prices continue to improve, there can be no assurance that this will
be the case. 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.
Pacific Lumber's cash flows from operations may be adversely affected by
diminished availability of logs from the Company, lower lumber prices, adverse
weather conditions, or pending legal, regulatory and environmental matters.
Pacific Lumber may require funds available under its credit agreement and/or
additional prepayments by MGI of an intercompany loan in order to meet its
working capital and capital expenditure requirements for the next year.
CRITICAL ACCOUNTING POLICIES
See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Critical Accounting Policies" of the Form 10-K for a
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
The Company is exposed to changes in interest rates under the Line of
Credit, which was established in conjunction with the offering of the Timber
Notes. This facility bears interest at either the prime interest rate or LIBOR
plus a specified percentage point spread. As of March 31, 2003, there were $14.7
million in borrowings outstanding under the Line of Credit. Based on the amount
of borrowings outstanding under the Line of Credit during the three months ended
March 31, 2003, the impact of a 1.0% change in interest rates effective from the
beginning of the year would not have been material to the Company's interest
expense for the period.
All of the Company's other debt is fixed-rate, and therefore, does not
expose the Company to the risk of higher interest payments due to changes in
market interest rates. The Company does not utilize interest rate swaps or
similar hedging arrangements.
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 reports
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, 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 is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
* 99.1 Section 906 Certification of Chief Executive Officer
* 99.2 Section 906 Certification of Chief Financial Officer
* Included with this filing
B. REPORTS ON FORM 8-K:
On January 21, 2003, 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 February 20, 2003, 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 February 25, 2003, the Company filed a current report on Form 8-K
(under Item 5), related to the Humboldt DA action.
On March 20, 2003, 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 April 21, 2003, 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: May 15, 2003 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: May 15, 2003 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: May 15, 2003 By: /S/ GARY L. CLARK
----------------------------------------------
Gary L. Clark
Vice President-Finance and Administration
(Principal Financial and Accounting Officer)
APPENDIX A
GLOSSARY OF DEFINED TERMS
APB Opinion No. 30: Accounting Principles Board Opinion 30, "Reporting the
Results of Operations - Reporting Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions"
Bear Creek lawsuit: An action entitled Environmental Protection Information
Association v. Pacific Lumber, Scotia Pacific Company LLC (No. C01-2821) pending
in the U.S. District Court for the Northern District of California
Cave action: An action entitled Steve Cave, et al. v. Gary Clark, et al. (No.
DR0220719) pending in the Superior Court of Humboldt County, 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
Cook action: An action entitled Alan Cook, et al. v. Gary Clark, et al. (No.
DR020718) pending in the Superior Court of Humboldt County
CWA: Federal Clean Water Act
Elk River Order: Clean up and abatement order issued to Pacific Lumber by the
North Coast Water Board for the Elk River watershed
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. pending in
the Superior Court of Humboldt County ( No. CV990452)
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, 2002
Harvest Value Schedule: A schedule setting forth the SBE Prices published
bi-annually by the California State 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 1996 agreement between Pacific Lumber, the
Company, Salmon Creek , 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
Humboldt DA action: A civil suit filed in the Superior Court of Humboldt County
by the District Attorney of Humboldt County entitled The People of the State of
California v. Pacific Lumber, Scotia Pacific Holding Company and Salmon Creek
Corporation (No. DR030070)
HWC lawsuit: An action entitled Humboldt Watershed Council, et al v. North
Coast Regional Water Quality Control Board, et al. (No. CPF02-502062), naming
Pacific Lumber as real party in interest, pending in the Superior Court of San
Francisco County, California
Indenture: The indenture governing the Timber Notes
LIBOR: London Inter Bank Offering Rate
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.
Mbfe: A concept used in structuring the Timber Notes; under this concept one
thousand board feet, net Scribner scale, of old growth redwood timber equates to
one Mbfe
MGI: MAXXAM Group Inc., an indirect wholly owned subsidiary of MAXXAM
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
PSLRA: Private Securities Litigation Reform Act of 1995
Salmon Creek: Salmon Creek LLC, a wholly owned subsidiary of Pacific Lumber
SAR Account: Funds held in a reserve account titled the Scheduled Amortization
Reserve Account and used 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: Agreement between the Company and Pacific Lumber under
which Pacific Lumber provides operational, management and related services to
the Company with respect to the Company's timberlands
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"
State Water Board: California State Water Resources Control Board
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
THP No. 520 lawsuit: An action entitled The Pacific Lumber Company, et al. v.
California State Water Resources Control Board (No. DR010860) pending in the
Superior Court of Humboldt County
Timber Notes: The Company's 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) pending in the Superior Court of Sacramento County, California