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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, 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 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
APPENDIX A - GLOSSARY OF DEFINED TERMS
SCOTIA PACIFIC COMPANY LLC
BALANCE SHEET
(IN MILLIONS OF DOLLARS)
SEPTEMBER 30, DECEMBER 31,
2003 2002
-------------- --------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 3.4 $ 10.1
Marketable securities............................................................ 22.2 19.3
Receivables from Pacific Lumber.................................................. 8.5 2.6
Prepaid timber harvesting costs.................................................. 6.1 7.3
Other current assets............................................................. 1.5 0.9
-------------- --------------
Total current assets.......................................................... 41.7 40.2
Timber and timberlands, net of accumulated depletion of $280.0 and
$272.5, respectively............................................................. 232.5 239.4
Property and equipment, net of accumulated depreciation of $16.5 and
$15.0, respectively............................................................. 25.0 23.7
Deferred financing costs, net....................................................... 13.9 15.1
Restricted cash, marketable securities and other investments........................ 36.6 52.9
Other assets........................................................................ 5.0 5.6
-------------- --------------
$ 354.7 $ 376.9
============== ==============
LIABILITIES AND MEMBER DEFICIT
Current liabilities:
Due to Pacific Lumber............................................................ $ 1.3 $ 0.8
Accrued interest................................................................. 10.7 24.9
Other accrued liabilities........................................................ 2.9 2.1
Short-term borrowings............................................................ 20.3 -
Current maturities of long-term debt, excluding $4.0 and $2.6, respectively, of
repurchased Timber Notes held in the SAR Account.............................. 18.3 16.8
-------------- --------------
Total current liabilities..................................................... 53.5 44.6
Long-term debt, less current maturities and excluding $52.6 and $52.8, respectively,
of repurchased Timber Notes held in the SAR Account.............................. 715.6 737.7
Other noncurrent liabilities........................................................ 0.3 0.1
-------------- --------------
Total liabilities............................................................. 769.4 782.4
-------------- --------------
Contingencies (See Note 3)
Member deficit...................................................................... (414.7) (405.5)
-------------- --------------
$ 354.7 $ 376.9
============== ==============
The accompanying notes are an integral part of these financial statements.
SCOTIA PACIFIC COMPANY LLC
STATEMENT OF LOSS
(IN MILLIONS OF DOLLARS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2003 2002 2003 2002
------------ ------------ ----------- ------------
(UNAUDITED)
Log sales to Pacific Lumber.................................. $ 22.4 $ 19.7 $ 55.9 $ 49.7
------------ ------------ ----------- ------------
Operating expenses:
General and administrative................................ 6.1 6.1 16.5 14.5
Depletion, depreciation and amortization.................. 3.7 4.0 9.8 10.2
------------ ------------ ----------- ------------
9.8 10.1 26.3 24.7
------------ ------------ ----------- ------------
Operating income............................................. 12.6 9.6 29.6 25.0
------------ ------------ ----------- ------------
Other income (expense):
Interest and other income................................. 1.0 1.1 2.8 4.0
Gain on repurchase of debt................................ - - 0.4 -
Gain on sales of assets................................... - - 0.8 -
Interest expense.......................................... (14.1) (14.5) (42.6) (43.5)
------------ ------------ ----------- ------------
(13.1) (13.4) (38.6) (39.5)
------------ ------------ ----------- ------------
Net loss..................................................... $ (0.5) $ (3.8) $ (9.0) $ (14.5)
============ ============ =========== ============
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,
-------------------------
2003 2002
----------- ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................................. $ (9.0) $ (14.5)
Adjustments to reconcile net loss to net cash used for
operating activities:
Gain on repurchase of debt........................................................ (0.4) -
Gain on sales of assets........................................................... (0.8) -
Depletion, depreciation and amortization.......................................... 9.8 10.2
Amortization of deferred financing costs.......................................... 1.0 1.0
Increase (decrease) in cash resulting from changes in:
Receivables from Pacific Lumber................................................. (5.9) (3.2)
Prepaid timber harvest costs.................................................... 1.2 -
Due to Pacific Lumber........................................................... 0.5 -
Accrued interest................................................................ (14.2) (14.4)
Other accrued liabilities....................................................... 0.8 (0.7)
Other........................................................................... (0.6) (0.6)
----------- ------------
Net cash used for operating activities............................................ (17.6) (22.2)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of assets........................................................ 3.2 -
Capital expenditures................................................................. (5.9) (4.9)
----------- ------------
Net cash used for investing activities............................................ (2.7) (4.9)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on Timber Notes and other timber-related debt..................... (16.5) (14.9)
Member distributions................................................................. - (29.4)
Borrowings (repayments) under the Line of Credit, net................................ 20.3 5.5
Net changes in debt related restricted cash, marketable securities and other
investments....................................................................... 9.8 30.1
----------- ------------
Net cash provided by (used for) financing activities.............................. 13.6 (8.7)
----------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................................... (6.7) (35.8)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................................ 10.1 37.8
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............................................. $ 3.4 $ 2.0
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid........................................................................ $ 55.9 $ 56.9
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, 2003, the results of operations for the three and
nine months ended September 30, 2003 and 2002, and the cash flows for the nine
months ended September 30, 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. 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, in accordance with the Master Purchase Agreement, the
Company so 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 were 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.
In June 2003, the State Board of Equalization adopted the new Harvest
Value Schedule for the second half of 2003. The prices published in that
schedule reflected a 22% increase in the SBE Price for small redwood logs and an
11% increase for small Douglas-fir logs from the prices published for the first
half of 2003, and a 7% increase from the price in effect for small redwood logs
(i.e., the prices established using the independent forestry consultant) during
the first half of 2003.
With respect to the note payment date in January 2004, the Company expects
to use funds available under the Line of Credit to pay a substantial portion of
the $27.3 million of interest due (in addition to $2.0 million due in respect of
Timber Notes held by the Company). The Company expects to repay $13.1 million of
principal on the Timber Notes (an amount equal to Scheduled Amortization) using
funds held in the SAR Account.
As discussed further in Note 3, regulatory compliance and litigation have
caused and may continue to cause delays in harvesting which 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.
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
debt service obligations through 2004; however, there can be no assurance that
this will be the case. 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 will be adversely affected if harvest levels decline
or costs increase as a result of various regulatory, environmental and
litigation matters discussed in Note 3.
NEW ACCOUNTING STANDARDS
Accounting for Asset Retirement Obligations
In January 2003, the Company adopted 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.
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 position or
results of operations.
Classification of Gains and Losses from Extinguishment of Debt
In January 2003, the Company adopted 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 adoption of SFAS No. 145 resulted in the inclusion of gains on
repurchases of debt for the three and nine months ended September 30, 2003, in
other income rather than as an extraordinary item in the financial statements.
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):
September 30, DECEMBER 31,
2003 2002
------------- --------------
Current assets:
Restricted cash and cash equivalents............................................. $ - $ 5.2
Marketable securities, restricted:
Amounts held in SAR Account................................................... 22.2 19.3
------------- --------------
22.2 24.5
Long-term restricted cash, marketable securities and other investments:
Amounts held in SAR Account...................................................... 85.5 101.6
Other amounts restricted under the Indenture..................................... 2.6 2.6
Less: Amounts attributable to repurchased Timber Notes held in SAR Account...... (51.5) (51.3)
------------- --------------
36.6 52.9
------------- --------------
Total restricted cash, cash equivalents, marketable securities and other investments $ 58.8 $ 77.4
============= ==============
3. CONTINGENCIES
Regulatory and environmental matters play a significant role in the
Company's business, which is subject to a variety of California and federal laws
and regulations, as well as the HCP, dealing with timber harvesting practices,
threatened and endangered species and habitat for such species, and air and
water quality.
From March 1999 until October 2002, the Company prepared THPs in
accordance with the SYP. The SYP was intended to comply 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 forest
practice rules allow companies which do not have a sustained yield plan to
follow an alternative procedure. As discussed below, on October 31, 2003, the
Court hearing the EPIC-SYP/Permits and USWA lawsuits entered a judgment
invalidating the SYP and the California Permits. As a result of this case, the
Company has since October 2002 been obtaining review and approval of prepared
THPs under this alternative procedure and expects to follow this procedure for
the foreseeable future.
The HCP and related Federal Permits allow incidental "take" of certain
species located on the Company's timberlands which species have been listed by
the federal government under the ESA 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 HCP and Federal 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 fall
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 eliminated 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 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 and
costs could increase.
In October 2003, California enacted Senate Bill 810, which provides
regional water quality control boards with additional authority related to the
approval of THPs. Under this law, which will become effective on January 1,
2004, a THP "may not be approved if the appropriate regional water quality
control board finds, based on substantial evidence, that the timber operations
proposed in the plan will result in a discharge into a watercourse that has been
classified as impaired due to sediment...that causes or contributes, to a
violation of the regional water quality control plan." The Company is uncertain
of the operational and financial effects which will ultimtely result from Senate
Bill 810; however, because substantially all rivers and waterbodies on the
Company's timberlands are classified as impaired, implementation of this law
could result in delays in obtaining approval of THPs, increased costs and
additional protection measures beyond those contained in the HCP.
The North Coast Water Board has issued orders for the Elk River and
Freshwater watersheds requiring the Company and Pacific Lumber to submit
"Reports of Waste Discharge" to the North Coast Water Board in order to conduct
winter harvesting activities in these 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 for the 2002-2003 winter operating period. These additional
requirements have somewhat increased operating costs. Reports of Waste Discharge
for the 2003-2004 winter operating period have been submitted and the North
Coast Water Board imposed requirements similar to those imposed for the
2002-2003 winter operating period. In addition, the North Coast Water Board has
issued the Elk River Order for the Elk River watershed which is aimed at
addressing existing sediment production sites through clean up actions. The
North Coast Water Board has also initiated the process which could result in
similar orders for the Freshwater and Bear Creek watersheds, and are
contemplating similar actions for the Jordon and Stitz Creek watersheds. The Elk
River Order, as well as additional orders in the other watersheds (should they
be issued), could result in significant costs to the Company beginning in 2004
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 by the Company and Pacific Lumber with the North Coast
Water Board and its staff.
Lawsuits are pending which seek to prevent the Company from implementing
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
alleged, 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 California Permits. The plaintiffs sought, among other
things, to set aside California's approval of the SYP and the California Permits
and injunctive relief to prevent implementation of THPs approved in reliance
upon these documents. In March 1999, the USWA lawsuit was filed challenging the
validity and legality of the SYP. The EPIC-SYP/Permits and USWA lawsuits were
consolidated for trial, which concluded on March 28, 2003. On October 31, 2003,
the Court entered a judgment invalidating the SYP and the California Permits due
to several deficiencies in agency procedures and the failure of the Company and
Pacific Lumber to submit a complete and comprehensible SYP. The Court's
decision, however, allows for harvesting on THPs which rely on the SYP and were
approved prior to July 23, 2003. The short-term effect of the ruling will be to
preclude approval, under the SYP, of a small number of THPs which were under
review but had not been approved, and which will result in a minor reduction in
2003 harvesting that had been expected from these specific THPs. As a result of
this case, the Company has since October 2002 been obtaining review and approval
of new THPs under a procedure provided for in the forest practice rules that
does not depend upon the SYP and the California Permits and expects to follow
this procedure for the forseeable future. In addition, the Company is in the
process of considering the options available to it in light of this development,
including appealing the Court's decision and resubmission of an SYP.
In July 2001, the Bear Creek lawsuit was filed. The lawsuit alleges that
the Company's and Pacific Lumber's harvesting and other forestry activities
under certain of its approved 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. On October 14,
2003, in connection with certain motions that had been filed, the Court upheld
the validity of an EPA regulation which exempts harvesting and other forestry
activities from certain discharge requirements. Both state and federal agencies,
along with Pacific Lumber and other timber companies, have relied upon this
regulation for more than 25 years. However, the Court interpreted the regulation
in such a way as to narrow the forestry operations which are exempted, thereby
limiting the regulation's applicability. This ruling has widespread implications
for the timber industry in the United States. The case is not yet final as the
trial has not yet been held, and there are many unresolved issues involving
interpretation of the Court's decision and its application to actual operations.
Should the decision ultimately become final and held to apply to Pacific
Lumber's timber operations, it may have some or all of the following effects:
impose additional permitting requirements, delay approvals of THPs, increase
harvesting costs and add water protection measures beyond those contained in the
HCP. Nonetheless, due to the historical reliance by timber companies on the
regulation, it is not likely that civil penalties will be awarded for operations
that occurred prior to the Court's decision. While the impact of a conclusion to
this case that upholds the October 14, 2003 ruling may be adverse, the Company
does not believe that such an outcome would have a material adverse impact on
the Company's financial condition, results of operations and/or liquidity.
Nevertheless, due to the numerous ways in which the Court's interpretation of
the regulation could be applied to actual operations, there can be no assurance
that this will be the case.
On November 20, 2002, the HWC lawsuit was filed seeking to enjoin timber
operations in the Elk and Freshwater watersheds of the Company's timberlands
until and unless the regional and state water boards imposed on those operations
waste discharge requirements that met standards demanded by the plaintiff. In
August 2003, this case was dismissed by the Court at the request of the
plaintiff.
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. A hearing on the
Company's motions for sanctions and requested dismissal of the case was held on
July 28, 2003, and the Company is awaiting the Court's decision. 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 the
Company's timberlands beyond those provided for by the Environmental Plans or
could provide additional regulatory powers to the regional and state water
boards and their staffs beyond those provided in Senate Bill 810.
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 damage 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.
4. COMPREHENSIVE LOSS AND MEMBER DEFICIT
Comprehensive loss includes the following (in millions):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2003 2002 2003 2002
------------ ------------ ----------- ------------
Net loss....................................................... $ (0.5) $ (3.8) $ (9.0) $ (14.5)
Other comprehensive income (loss):
Net change in fair value of available-for-sale investments.. (0.1) 0.4 (0.2) (0.1)
------------ ------------ ----------- ------------
Total comprehensive loss....................................... $ (0.6) $ (3.4) $ (9.2) $ (14.6)
============ ============ =========== ============
A reconciliation of the activity in member deficit is as follows (in
millions):
NINE MONTHS
ENDED
SEPTEMBER 30,
2003
------------
Balance at beginning of period....................................................................... $ (405.5)
Comprehensive loss................................................................................... (9.2)
------------
Balance at end of period............................................................................. $ (414.7)
============
5. SUBSEQUENT EVENT
In November 2003, Pacific Lumber and the Company sold approximately 681
acres of timberlands within an area known as the Grizzly Creek grove. The
Company received $8.2 million in cash, and expects to recognize a gain of
approximately $7.5 million in the fourth quarter of 2003 related to this sale.
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,
developments in litigation, 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.
Regulatory compliance and litigation have caused and may continue to 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 and Elk River
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. These requirements could cause increased
costs and delays in harvesting.
Also discussed in Note 3 is the enactment of Senate Bill 810, which
provides regional water quality control boards with additional authority related
to the approval of THPs. Implementation of this law could result in delays in
obtaining approvals of THPs, increased costs and additional water protection
measures beyond those contained in the HCP.
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 legislative matters and legal proceedings
relating to 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 were 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.
In June 2003, the State Board of Equalization adopted the new Harvest
Value Schedule for the second half of 2003. The prices published in that
schedule reflected a 22% increase in the SBE Price for small redwood logs and an
11% increase for small Douglas-fir logs from the prices published for the first
half of 2003, and a 7% increase from the price in effect for small redwood logs
(i.e., the prices established using the independent forestry consultant) during
the first half of 2003.
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 legislation, regulation or 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.
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, 2003 THREE MONTHS ENDED SEPTEMBER 30, 2002
-------------------------------------- ---------------------------------------
PRICE PRICE
MBFES $/MBFE REVENUES MBFES $/MBFE REVENUES
---------- ------------ ------------ ----------- ------------ ------------
Redwood............................ 26,200 $ 691 $ 18.1 27,000 $ 550 $ 14.8
Douglas Fir........................ 8,200 502 4.1 11,000 417 4.6
Other.............................. 800 216 0.2 1,000 281 0.3
---------- ------------ ----------- ------------
35,200 636 $ 22.4 39,000 505 $ 19.7
========== ============ =========== ============
NINE MONTHS ENDED SEPTEMBER 30, 2003 NINE MONTHS ENDED SEPTEMBER 30, 2002
-------------------------------------- ---------------------------------------
PRICE PRICE
MBFES $/MBFE REVENUES MBFES $/MBFE REVENUES
---------- ------------ ------------ ----------- ------------ ------------
Redwood............................ 73,200 $ 672 $ 49.2 74,200 $ 573 $ 42.5
Douglas Fir........................ 13,900 453 6.3 17,600 389 6.8
Other.............................. 1,600 250 0.4 1,500 235 0.4
---------- ------------ ----------- ------------
88,700 630 $ 55.9 93,300 533 $ 49.7
========== ============ =========== ============
For the three months ended September 30, 2003, the Company experienced an
increase in log revenues due predominately to the increase in the price for
redwood logs as well as an increase in the volume of larger logs delivered;
however, this increase was offset somewhat by an increase in the use of the
helicopter method of logging (which reduces the price received for the log to
reflect the increased cost of harvesting). The Company experienced an increase
in log sales for the first nine months of 2003 versus the same period of 2002
due predominantly to a 19% increase in average realized price.
Operating Income and Net Loss
Operating income was $12.6 million and $9.6 million for the three months
ended September 30, 2003 and 2002, respectively. Operating income was $29.6
million and $25.0 million for the nine months ended September 30, 2003 and 2002,
respectively. Changes for the three and nine month periods were principally due
to the increase in log sales discussed above offset by increases in expenses
relating to winter road maintenance, insurance, employee benefits, and security
costs.
Net losses were $0.5 million and $3.8 million for the three months ended
September 30, 2003 and 2002, respectively. Net losses for the nine months ended
September 30, 2003 and 2002, were $9.0 million and $14.5 million, respectively.
The decreases in losses between periods are due to the increase in operating
income discussed above, gains resulting from the sale of timberlands and
repurchases of debt, and to a lesser extent, a decrease in interest expense
between periods. The favorable impact from these items was offset somewhat by a
decrease in interest income realized from cash, cash equivalents and other
investments.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
This section contains statements which constitute "forward-looking
statements" within the meaning of the PSLRA. See this section and above for
cautionary information with respect to such forward-looking statements.
Due to its highly leveraged condition, the Company is more sensitive than
less leveraged companies to factors affecting its operations, including low log
prices, governmental regulation and litigation affecting its timber harvesting
practices (see "--Results of Operations--Background" above and Note 3), and
general economic conditions. The Company's cash flows from operations are
significantly impacted by harvest volumes and log prices. The Master Purchase
Agreement between the Company and Pacific Lumber 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. See "--Results of
Operations--Master Purchase Agreement" above for further information on this
agreement.
On June 20, 2003, the Line of Credit was extended to July 7, 2006. At or
near the completion of such extension, the Company will request that the Line of
Credit be extended for a further 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, 2003,
the Company could have borrowed a maximum of $58.5 million under the Line of
Credit, and there was $20.3 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 of interest due 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.
On the note payment date in July 2003, the Company used $27.4 million (in
addition to $2.0 million due 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 repaid $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 the note payment date in January 2004, the Company expects
to use the funds available under the Line of Credit to pay a substantial portion
of the $27.3 million of interest due (in addition to $2.0 million due in respect
of Timber Notes held by the Company). The Company expects to repay $13.1 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.
On August 12, 2003, Standard & Poor's Ratings Services announced that
it was lowering its ratings on all classes of the Timber Notes. Ratings on the
Class A-1 Timber Notes were lowered from A to BBB+; ratings on the Class A-2
Timber Notes were lowered from A to BBB; and ratings on the Class A-3 Timber
Notes were lowered from BBB to BB. Standard & Poor's also indicated that the
ratings remain on CreditWatch with negative implications and that the lowered
ratings reflect the negative impact that depressed timber prices, lower harvest
levels, and higher operating costs have had on the Company's cash flow available
for debt service.
As discussed in Note 5, the Company received $8.2 million in November 2003
for the sale of timberlands in the Grizzly Creek grove. The proceeds will be used
to pay down a portion of the Line of Credit.
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
debt service obligations through 2004; however, there can be no assurance that
this will be the case. 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 will be adversely affected if harvest levels decline
or costs increase as a result of the various regulatory, environmental and
litigation matters 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 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 September 30, 2003, there were
$20.3 million in borrowings outstanding under the Line of Credit. Based on the
amount of borrowings outstanding under the Line of Credit during the nine months
ended September 30, 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.
None of the Company's other debt is exposed 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.
As of the end of the period covered by 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:
* 31.1 Section 302 Certification of Chief Executive Officer
* 31.2 Section 302 Certification of Chief Financial Officer
* 32.1 Section 906 Certification of Chief Executive Officer
* 32.2 Section 906 Certification of Chief Financial Officer
* Included with this filing
B. REPORTS ON FORM 8-K:
Since the filing of the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003, the Company has filed or furnished on the dates
indicated the following current reports on Form 8-K:
August 20, 2003 - report under Item 9 related to the filing of a
certificate in respect of the Company's Timber Notes.
September 22, 2003 - report under Item 9 related to the filing of a
certificate in respect of the Company's Timber Notes.
September 26, 2003 - report under Item 5 related to a supplemental
statement of decision with respect to the EPIC- SYP/Permits and USWA lawsuits.
October 20, 2003 - report 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 14, 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
California Permits: The incidental take permits issued by California pursuant to
the HCP
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, California
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, California ( No. CV990452)
ESA: The federal Endangered Species Act
Federal Permits: The incidental take permits issued by the federal government
pursuant to the HCP
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 SBE Prices which is 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 in March
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 in March 1999
Humboldt DA action: A civil suit filed in the Superior Court of Humboldt County,
California 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 County Watershed Council, et al. v.
North Coast Regional Water Quality Control Board, et al. (No. CV03-0438), naming
Pacific Lumber as real party in interest, which had been pending in the Superior
Court of Humboldt 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 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
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 in March 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, California
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