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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, 2004
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. Controls and Procedures
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits
Signature
APPENDIX A - GLOSSARY OF DEFINED TERMS
SCOTIA PACIFIC COMPANY LLC
BALANCE SHEET
(IN MILLIONS OF DOLLARS)
SEPTEMBER 30, DECEMBER 31,
2004 2003
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash, cash equivalents, and restricted cash................................................... $ 3.5 $ 5.2
Marketable securities, restricted............................................................. 25.1 22.2
Receivables from Palco........................................................................ 7.8 4.9
Prepaid timber harvesting costs............................................................... 6.0 5.6
Other current assets.......................................................................... 1.5 1.2
----------- ------------
Total current assets....................................................................... 43.9 39.1
Timber and timberlands, net of accumulated depletion of $288.2 and
$282.2, respectively.......................................................................... 226.6 230.0
Property and equipment, net of accumulated depreciation of $19.0 and
$17.1, respectively.......................................................................... 27.3 25.7
Deferred financing costs, net.................................................................... 12.3 13.5
Restricted cash, marketable securities and other investments..................................... 15.1 35.4
Other assets..................................................................................... 4.1 4.7
----------- ------------
$ 329.3 $ 348.4
=========== ============
LIABILITIES AND MEMBER DEFICIT
Current liabilities:
Payables to Palco............................................................................. $ 1.0 $ 0.9
Accrued interest.............................................................................. 10.5 24.5
Other accrued liabilities..................................................................... 2.8 2.4
Short-term borrowings ........................................................................ 31.4 -
Current maturities of long-term debt, excluding $7.0 and $4.6, respectively,
of repurchased Timber Notes held in the SAR Account.......................................... 18.0 17.6
----------- ------------
Total current liabilities.................................................................. 63.7 45.4
Long-term debt, less current maturities and excluding $51.8 and $54.3, respectively,
of repurchased Timber Notes held in the SAR Account........................................... 691.4 713.9
Other noncurrent liabilities..................................................................... 0.3 0.3
----------- ------------
Total liabilities.......................................................................... 755.4 759.6
----------- ------------
Contingencies (See Note 3)
Member deficit................................................................................... (426.1) (411.2)
----------- ------------
$ 329.3 $ 348.4
=========== ============
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,
------------------------- -------------------------
2004 2003 2004 2003
------------ ------------ ----------- ------------
(UNAUDITED)
Log sales to Palco..................................................... $ 21.7 $ 22.4 $ 50.9 $ 55.9
------------ ------------ ----------- ------------
Operating expenses:
General and administrative.......................................... 6.4 6.1 16.3 16.5
Depletion, depreciation and amortization............................ 3.3 3.7 8.6 9.8
Gain on sales of timberlands and other assets....................... - - - (0.8)
------------ ------------ ----------- ------------
9.7 9.8 24.9 25.5
------------ ------------ ----------- ------------
Operating income....................................................... 12.0 12.6 26.0 30.4
------------ ------------ ----------- ------------
Other income (expense):
Interest and other income (expense)................................. (0.2) 1.0 1.1 3.2
Interest expense.................................................... (13.8) (14.1) (41.4) (42.6)
------------ ------------ ----------- ------------
Net loss............................................................... $ (2.0) $ (0.5) $ (14.3) $ (9.0)
============ ============ =========== ============
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,
-------------------------
2004 2003
---------- ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................................................... $ (14.3) $ (9.0)
Adjustments to reconcile net loss to net cash used for
operating activities:
Gain on repurchase of debt................................................................. - (0.4)
Gain on sales of timberlands and other assets.............................................. - (0.8)
Depletion, depreciation and amortization................................................... 8.6 9.8
Amortization of deferred financing costs................................................... 1.0 1.0
Increase (decrease) in cash resulting from changes in:
Receivables from Palco................................................................... (2.9) (5.9)
Prepaid timber harvesting costs.......................................................... (0.4) 1.2
Payables to Palco........................................................................ 0.1 0.5
Accrued interest......................................................................... (14.0) (14.2)
Other accrued liabilities................................................................ 0.4 0.8
Other.................................................................................... (0.3) (0.6)
----------- ------------
Net cash used for operating activities................................................... (21.8) (17.6)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of timberlands and other assets........................................... - 3.2
Capital expenditures.......................................................................... (6.1) (5.9)
----------- ------------
Net cash used for investing activities................................................... (6.1) (2.7)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on Timber Notes and other timber related debt.............................. (17.2) (16.5)
Net changes in restricted cash................................................................ 12.0 9.8
Borrowings under line of credit agreement, net................................................ 31.4 20.3
----------- ------------
Net cash provided by financing activities................................................ 26.2 13.6
----------- ------------
NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH...................................... (1.7) (6.7)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD................................ 5.2 10.1
----------- ------------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD...................................... $ 3.5 $ 3.4
=========== ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Repurchases of debt using restricted cash..................................................... $ 4.8 $ 3.4
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid................................................................................. $ 54.3 $ 55.9
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, 2004, the results of operations for the three and
nine months ended September 30, 2004 and 2003, and the cash flows for the nine
months ended September 30, 2004 and 2003. The Company is a wholly owned
subsidiary of Palco 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 2004, the State Board of Equalization
adopted the new Harvest Value Schedule for the second half of 2004. The prices
published in that schedule reflected a 1.6% increase in the SBE Price for small
redwood logs and a 14.3% increase for small Douglas-fir logs from the prices
published for the first half of 2004.
On the note payment date in January 2004, the Company had $4.1 million set
aside in the note payment account to pay the $27.2 million of interest due (net
of $2.0 million of additional interest due in respect of Timber Notes held by
the Company). The funds available under the Line of Credit were used to pay the
remaining amount of interest due. The Company repaid $12.7 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 2004, the Company used $26.6 million (net
of $2.1 million of additional interest 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 $4.5 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 2005, the Company expects
to use the funds available under the Line of Credit to pay the entire $26.3
million of interest which will be due (net of $2.2 million of additional
interest which would be due in respect of Timber Notes held by the Company). The
Company expects to repay $10.8 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.
With respect to short-term liquidity, the Company believes that cash flows
from operations and funds available under the Line of Credit (in respect of
interest payments) and the SAR Account (in respect of principal payments),
should provide sufficient funds to meet its working capital, capital
expenditures and debt service obligations for the next twelve months; however,
there can be no assurance that this will be the case. With respect to long-term
liquidity, although the Company believes that cash flows from operations and
funds available under the Line of Credit and the SAR Account should be adequate
to meet its working capital, capital expenditure and debt service obligations,
unless log prices continue to improve, there can be no assurance that this will
be the case. In addition, liquidity, capital resources and results of 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 Note 3.
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,
2004 2003
----------- ------------
Current assets:
Restricted cash and cash equivalents.......................................................... $ - $ 1.4
Marketable securities, restricted:
Amounts held in SAR Account................................................................ 25.1 22.2
----------- ------------
25.1 23.6
Long-term restricted cash, cash equivalents, marketable securities and other
investments:
Amounts held in SAR Account................................................................... 66.9 87.7
Other amounts restricted under the Indenture.................................................. 2.5 2.5
Less: Amounts attributable to Timber Notes held in
SAR Account................................................................................ (54.3) (54.8)
----------- ------------
15.1 35.4
----------- ------------
Total restricted cash, cash equivalents, marketable securities and other
investments................................................................................... $ 40.2 $ 59.0
=========== ============
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.
Environmental Plans
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 would 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 to document compliance with the sustained yield
requirements. As discussed below, on October 31, 2003, the Court hearing the
EPIC-SYP/Permits lawsuit entered a judgment invalidating the SYP and the
California Permits. As a result of an earlier stay order issued in this case,
the Company has since October 2002 been obtaining review and approval of 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
federally listed species located on the Company's timberlands 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 terms 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.
Water Quality
Laws and regulations dealing with water quality are impacting the Company
primarily in three areas: efforts by the EPA and the North Coast Water Board to
establish TMDLs in water courses that have been declared to be water quality
impaired; actions by the North Coast Water Board to impose waste discharge
reporting requirements in respect of watersheds on the Company's timberlands and
in some cases, clean-up or prevention measures; and other actions by the North
Coast Water Board during the THP approval process which impose certain
operational requirements on individual THPs.
Under the California Water Quality Control Act and 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. 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.
Since the 2002-2003 winter operating period, the Company and Palco have
been required to submit "Reports of Waste Discharge" to the North Coast Water
Board each year in order to conduct winter harvesting activities in the Elk
River and Freshwater watersheds. After consideration of these reports, the North
Coast Water Board imposed requirements on the Company and Palco to implement
additional mitigation and erosion control practices in these watersheds for the
last two winter operating periods. In addition, the North Coast Water Board has
extended the requirements for certain mitigation and erosion control practices
to the Bear, Jordan and Stitz watersheds. Reporting and mitigation requirements
imposed by the North Coast Water Board have modestly increased operating costs
and may in the future further increase costs, cause delays in THP approvals or
lower harvest levels. In addition, the North Coast Water Board has issued the
Elk River Order which is aimed at addressing existing sediment production sites
in the Elk River watershed 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 is contemplating similar actions for
the Jordan and Stitz Creek watersheds. The Elk River Order has resulted in
increased costs to Palco that could extend over a number of years. Additional
orders in other watersheds (should they be issued) may also result in increased
costs. Palco's appeal of the Elk River Order to the State Water Board was
denied. Palco is in the process of appealing in state court the decision of the
State Water Board. These matters could reduce harvest levels as Palco is not
able to readily move its harvesting activities between watersheds due to, among
other things, historic harvest patterns, adjacency restrictions, and the age
classes of trees.
Effective January 1, 2004, California Senate Bill 810 provides regional
water quality control boards with additional authority related to the approval
of THPs on land within impaired watersheds. The Company is uncertain of the
operational and financial effects which will ultimately 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 approvals of THPs, lower harvest levels and increased
costs and additional protection measures beyond those contained in the HCP.
Timber Harvest Litigation
A California state court has invalidated the SYP in connection with two
lawsuits filed against Palco and the Company, as described below, which decision
has been appealed. Other judicial and administrative proceedings are pending
which could have the result of preventing the Company from implementing the HCP,
implementing certain of the Company's approved THPs, or carrying out certain
other operations. The Services Agreement requires Palco to prepare and file on
behalf of the Company (at Palco'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 challenged, 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, a similar
action, was filed challenging the validity and legality of the SYP. The
EPIC-SYP/Permits and USWA lawsuits were consolidated for trial. 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 Palco to submit a complete and comprehensible SYP. The Court's
decision, however, allowed for harvesting on THPs which rely on the SYP and were
approved prior to July 23, 2003. The short-term effect of the ruling was to
preclude approval, under the SYP, of a small number of THPs which were under
review but had not been approved, and 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, when the Court issued a stay order preventing
future reliance upon the SYP, 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 foreseeable future. In November 2003, Palco appealed the October 31, 2003,
decision. In January 2004, the plaintiffs in these lawsuits filed claims against
the defendants totaling $5.8 million for reimbursement of attorneys fees and
other expenses incurred in connection with these matters, and the trial judge
granted the request for reimbursement on September 24, 2004. Palco and the State
of California have appealed this decision.
In July 2001, the Bear Creek lawsuit was filed and later amended to add
the EPA as a defendant. The lawsuit alleges that the Company's and Palco'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. 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
Palco 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 and subjecting culverts and ditches to permit requirements. 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 be held to apply to all Palco'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, it is not likely that civil
penalties will be awarded for operations that occurred prior to the Court's
decision due to the historical reliance by timber companies on the regulation
and the Company's belief 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. 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 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.
In November 2002, the Cook and the Cave actions were filed which name
Palco and certain affiliates as defendants. 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.
In February 2003, the District Attorney of Humboldt County filed the
Humboldt DA action. The suit was filed under California's unfair competition law
and alleges that Palco, the Company 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 sought
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. In response to motions filed by the
Company and Palco for sanctions and dismissal of this suit, on April 30, 2004,
the Court issued a ruling requiring the District Attorney to amend his suit to
prove that "extrinsic" fraud occurred. In addition, the Court eliminated the
remedies being sought, other than for civil penalties, and suggested that it
would be inappropriate to base civil penalties on the additional trees
harvested. The Court also ruled that it declined "at this juncture" to impose
sanctions on the District Attorney. The Company believes that this suit is
without merit and that the April 30 ruling diminished significantly its exposure
with respect to this matter; however, there can be no assurance that the Company
will ultimately prevail or that an adverse outcome would not be material to the
Company's financial condition, results of operations and/or liquidity.
In December 2003, the HWC 2003 lawsuit, naming the Company and Palco as
real parties in interest, was filed. The plaintiffs allege that the North Coast
Water Board should have required waste discharge reports in respect of all
timber harvesting activities in the Freshwater and Elk River watersheds, and are
seeking to have this requirement imposed on the Company and Palco. The Company
does not believe that the resolution of this action should result in a material
adverse effect on its financial condition, results of operations or liquidity.
On November 2, 2004, the EPIC-USFWS/NOAA lawsuit was filed. The lawsuit
alleges that two federal agencies have violated certain federal laws and related
regulations in connection with their oversight of the HCP and Federal Permits.
The plaintiff also alleges that the Federal Permit for the northern spotted owl
was unlawfully issued and that the Company and Palco violated California's
unfair competition law by using false advertising and making misleading
environmental claims. The plaintiff seeks a variety of remedies including
requiring additional actions by the federal agencies and precluding them from
authorizing take of the northern spotted owl, an injunction requiring the
Company and Palco to cease certain alleged unlawful activities, as well as
restitution and remediation by the Company and Palco. The Company and Palco are
still in the process of evaluating this lawsuit.
The Van Duzen THPs lawsuit was filed on November 4, 2004, seeking a writ
of mandate to stay or set aside CDF's approval of six THPs along the Van Duzen
River submitted by the Company and Palco. The plaintiffs allege that these THPs
rely on information submitted to CDF by the Company and Palco intended to
demonstrate the Company's and Palco's compliance with California's sustained
yield requirements that was not made available for public review and comment. In
addition to the relief described above, the plaintiffs seek a writ of mandate
ordering CDF to conduct further review and analysis of the six THPs and to
refrain from reliance on the information not made public. The Company and Palco
are still in the process of evaluating this lawsuit.
In November 2001, Palco 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,
Palco appealed to the State Water Board, which imposed certain of the requested
mitigation measures and rejected others. Palco filed the THP No. 520 lawsuit
challenging the State Water Board's decision, and in January 2003, the Superior
Court granted Palco's request for an order invalidating the imposition of these
additional measures. The State Water Board appealed this decision and on March
18, 2004 the appellate court reversed the decision of the Superior Court. The
appellate court's decision could result in increased demands by the regional and
state water boards and their staffs to impose controls and limitations upon
Palco's timber harvesting 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. Palco has
filed a petition for review of the appellate court's decision by the California
Supreme Court, which has agreed to review the decision.
4. COMPREHENSIVE LOSS AND MEMBER DEFICIT
Comprehensive loss includes the following (in millions):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2004 2003 2004 2003
------------ ------------ ----------- ------------
Net loss............................................................... $ (2.0) $ (0.5) $ (14.3) $ (9.0)
Other comprehensive income (loss):
Net change in fair value of available-for-sale investments 0.1 (0.1) (0.6) (0.2)
------------ ------------ ----------- ------------
Total comprehensive loss............................................... $ (1.9) $ (0.6) $ (14.9) $ (9.2)
============ ============ =========== ============
A reconciliation of the activity in member deficit is as follows (in millions):
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2004 2003
---------- -----------
Balance at beginning of period................................................................... $ (411.2) $ (405.5)
Comprehensive loss............................................................................... (14.9) (9.2)
----------- ------------
Balance at end of period......................................................................... $ (426.1) $ (414.7)
=========== ============
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, litigation
developments, 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.
RESULTS OF OPERATIONS
Regulatory and environmental matters as well as certain pending legal
matters play a significant role in the Company's operations. See Item 1.
"Business - Regulatory and Environmental Factors" in the Form 10-K and Note 3
for a discussion of these matters.
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 and regulation. As a result of these restrictions, 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, 2004 THREE MONTHS ENDED SEPTEMBER 30, 2003
-------------------------------------- ---------------------------------------
PRICE PRICE
MBFES $/MBFE REVENUES MBFES $/MBFE REVENUES
---------- ------------ ------------ ----------- ------------ ------------
Redwood................................ 19,900 $ 811 $ 16.2 26,200 $ 691 $ 18.1
Douglas Fir............................ 9,800 545 5.3 8,200 502 4.1
Other.................................. 500 351 .2 800 216 0.2
---------- ------------ ----------- ------------
30,200 717 $ 21.7 35,200 636 $ 22.4
========== ============ =========== ============
NINE MONTHS ENDED SEPTEMBER 30, 2004 NINE MONTHS ENDED SEPTEMBER 30, 2003
-------------------------------------- ---------------------------------------
PRICE PRICE
MBFES $/MBFE REVENUES MBFES $/MBFE REVENUES
---------- ------------ ------------ ----------- ------------ ------------
Redwood................................ 55,200 $ 762 $ 42.1 73,200 $ 672 $ 49.2
Douglas Fir............................ 16,500 513 8.5 13,900 453 6.3
Other.................................. 1,300 259 .3 1,600 250 0.4
---------- ------------ ----------- ------------
73,000 697 $ 50.9 88,700 630 $ 55.9
========== ============ =========== ============
For the three months ended September 30, 2004, the Company experienced a
10% decrease in redwood log revenues compared to the three months ended
September 30, 2003, due predominately to a decrease in the volume of larger
redwood logs sold; however, this decrease was offset somewhat by a realized price
increase of 17% for redwood logs.
For the nine months ended September 30, 2004, the Company experienced a
decrease in redwood log volume of 25% compared to the same period of 2003. A 13%
increase in the average realized price for redwood logs somewhat offset the
impact of the decrease in redwood log volume. A 19% increase in Douglas-fir
volume and a 13% increase in the average realized price for Douglas fir logs,
during the nine months ended September 30, 2004, compared to the same period of
2003, also offset the decrease in redwood log revenue. Although the number of
harvested redwood logs was comparable between the nine months ended September
30, 2004, and the nine months ended September 30, 2003, the decrease in redwood
volume is primarily attributable to a smaller size-class of log available in
current timber harvest plans compared to the prior year period.
Operating Income and Net Loss
Operating income for the three and nine months ended September 30, 2004
declined from the prior year period due to the decrease in log sales discussed
above.
The net loss between 2003 and 2004 for both the three and nine month
periods increased due to lower operating income discussed above and decreases in
gains resulting from sales of timberlands and repurchases of debt, and low
returns on 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 timber harvesting
practices on the Company's timberlands (see Note 3), and general economic
conditions.
On September 30, 2004, the Company had unused availability of $25.6
million under the Line of Credit, and there was $31.4 million outstanding under
this facility.
On the note payment date in January 2004, the Company had $4.1 million set
aside in the note payment account to pay the $27.2 million of interest due (net
of $2.0 million of additional interest due in respect of Timber Notes held by
the Company). The funds available under the Line of Credit were used to pay the
remaining amount of interest due. The Company repaid $12.7 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 2004, the Company used $26.6 million (net
of $2.1 million of additional interest 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 $4.5 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 2005, the Company expects
to use the funds available under the Line of Credit to pay the entire $26.3
million of interest which will be due (net of $2.2 million of additional
interest which would be due in respect of Timber Notes held by the Company). The
Company expects to repay $10.8 million of principal on the Timber Notes (an
amount equal to Scheduled Amortization) using funds held in the SAR Account.
During the first nine months of 2004, $4.8 million of funds from the SAR
Account were used to repurchase $5.0 million principal amount of Timber Notes,
as permitted under the Indenture, resulting in a small gain (net of unamortized
deferred financing costs) on the repurchase of debt.
Subsequent to September 30, 2004, $5.7 million of funds from the SAR
Account were used to repurchase $5.7 million principal amount of Timber Notes,
as permitted under the Indenture, resulting in a loss of $0.3 million (net of
unamortized deferred financing costs) on the repurchase of debt.
On June 8, 2004, Standard & Poor's Ratings Service 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 BBB+ to BBB-; ratings on the Class A-2
Timber Notes were lowered from BBB to BB; and ratings on the Class A-3 Timber
Notes were lowered from BB to B. Standard & Poor's also indicated that all
ratings were removed from the agency's negative CreditWatch, where they were
placed in November 2002, and that the lowered ratings reflect the negative
impact that depressed timber prices, lower harvest levels and higher
capital/operating costs have had on the Company's cash flow available for debt
service.
With respect to short-term liquidity, the Company believes that cash flows
from operations and funds available under the Line of Credit (in respect of
interest payments) and the SAR Account (in respect of principal payments),
should provide sufficient funds to meet its working capital, capital
expenditures and debt service obligations for the next twelve months; however,
there can be no assurance that this will be the case. With respect to long-term
liquidity, although the Company believes that cash flows from operations and
funds available under the Line of Credit and the SAR Account should be adequate
to meet its working capital, capital expenditure and debt service obligations,
unless log prices continue to improve, there can be no assurance that this will
be the case. In addition, liquidity, capital resources and results of 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 Note 3.
Palco, which has historically purchased all of the Company's logs, will
require funds available under its credit agreement in order to meet its working
capital and capital expenditure requirements for the next year. Furthermore,
Palco's cash flows from operations may be adversely affected by diminished
availability of logs from the Company, lower lumber prices, adverse weather
conditions, and pending legal, regulatory and environmental matters.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet financing or
unconsolidated special purpose entities. The Company does not utilize interest
rate swaps, hedging arrangements or any other type of derivative instruments.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Critical Accounting Policies and Estimates" of the
Form 10-K for a discussion of the Company's critical accounting policies and
estimates. There have been no material changes to the Company's critical
accounting policies and estimates provided in the Form 10-K.
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. As of September 30, 2004, there were $31.4 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,
2004, the impact of a 1% 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.
ITEM 4. 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
* 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
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 12, 2004 By: /S/ GARY L. CLARK
--------------------------------------------------
Gary L. Clark
Vice President - Finance and Administration
(Principal Financial and Accounting Officer)
APPENDIX A
GLOSSARY OF DEFINED TERMS
Set forth below is a list of all terms used in this Report.
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 Permits issued by California pursuant to the HCP
Cave action: An action entitled Steve Cave, et al. v. Gary Clark, et al. (No.
DR020719) 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 Palco
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 Palco 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. CV990445)
EPIC-USFWS/NOAA lawsuit: An action entitled Environmental Protection Information
Center v. U.S. Fish & Wildlife Service, NOAA Fisheries, et al. (No. C04-4647),
pending in U.S. Court for the Northern District of California
Federal Permits: The 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, 2003
Harvest Value Schedule: A schedule setting forth SBE Prices which is published
biannually 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 Palco, 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 Palco 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 2003 lawsuit: An action entitled Humboldt County Watershed Council, et al.
v. North Coast Regional Water Quality Control Board, et al. (No. CV030961),
naming Palco as real party in interest, pending in the Superior Court of
Humboldt County, California
Indenture: The indenture governing the Timber Notes
Line of Credit: The agreement between a group of lenders and the Company pursuant
to which the Company may borrow in order to pay up to one year's interest on the
Timber Notes
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 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
Palco: 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 Palco
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 Palco under which Palco
provides operational, management and related services to the Company with respect
to the Company's timberlands
State Board of Equalization: The California State Board of Equalization
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
take: Adverse impacts on species which have been designated as endangered or
threatened
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. CV990452) pending in the Superior Court of Sacramento County, California
Van Duzen THPs lawsuit: An action entitled Environmental Protection Information
Center, et al. v. California Department of Forestry and Fire Protection, et al.
(No. CV04-0809), pending in the Superior Court of Humboldt County, California