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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
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)
March 31, December 31,
2005 2004
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(Unaudited)
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Assets
Current assets:
Cash, cash equivalents and restricted cash....................................... $ 0.5 $ 0.5
Marketable securities, including restricted amounts of $26.3 and $25.1,
respectively.................................................................. 28.9 28.2
Receivables from Palco........................................................... 5.4 3.3
Prepaid timber harvesting costs.................................................. 5.9 6.2
Other current assets............................................................. 0.8 1.1
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Total current assets.......................................................... 41.5 39.3
Timber and timberlands, net of accumulated depletion of $291.9 and
$290.1, respectively............................................................. 224.6 225.1
Property and equipment, net of accumulated depreciation of $20.3 and
$19.6, respectively............................................................. 28.3 28.1
Deferred financing costs, net....................................................... 11.4 11.8
Restricted cash, marketable securities and other investments........................ - 9.2
Intangible assets................................................................... 3.6 3.8
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$ 309.4 $ 317.3
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Liabilities and Member Deficit
Current liabilities:
Payable to Palco................................................................. $ 1.1 $ 1.5
Accrued interest................................................................. 10.7 23.8
Other accrued liabilities........................................................ 1.9 1.9
Short-term borrowings and current maturities of long-term debt, excluding
$10.3 and $9.5, respectively, of repurchased Timber Notes held in the
SAR Account .................................................................. 57.4 33.8
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Total current liabilities..................................................... 71.1 61.0
Long-term debt, less current maturities and excluding $48.1 and $55.4, respectively,
of repurchased Timber Notes held in the SAR Account.............................. 675.7 687.7
Other noncurrent liabilities........................................................ 0.6 0.2
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Total liabilities............................................................. 747.4 748.9
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Contingencies (See Note 3)
Member deficit...................................................................... (438.0) (431.6)
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$ 309.4 $ 317.3
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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
March 31,
-------------------------
2005 2004
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(Unaudited)
Log sales to Palco...................................................................... $ 16.1 $ 15.9
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Operating expenses:
General and administrative........................................................... 6.5 5.2
Depletion, depreciation and amortization............................................. 2.7 2.8
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9.2 8.0
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Operating income........................................................................ 6.9 7.9
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Other income (expense):
Interest and other income............................................................ 0.3 1.3
Interest expense..................................................................... (13.8) (13.9)
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(13.5) (12.6)
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Net loss................................................................................ $ (6.6) $ (4.7)
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The accompanying notes are an integral part of these financial statements.
SCOTIA PACIFIC COMPANY LLC
STATEMENT OF CASH FLOWS
(In millions of dollars)
Three Months Ended
March 31,
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2005 2004
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(Unaudited)
Cash flows from operating activities:
Net loss ............................................................................ $ (6.6) $ (4.7)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depletion, depreciation and amortization.......................................... 2.7 2.8
Amortization of deferred financing costs.......................................... 0.4 0.3
Increase (decrease) in cash resulting from changes in:
Receivables from Palco.......................................................... (2.1) (3.0)
Prepaid timber harvesting costs................................................. 0.3 -
Payable to Palco................................................................ (0.4) 0.3
Accrued interest................................................................ (13.1) (13.9)
Other accrued liabilities....................................................... 0.5 0.1
Other........................................................................... 0.3 0.4
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Net cash used for operating activities.......................................... (18.0) (17.7)
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Cash flows from investing activities:
Proceeds from sales of marketable securities and other investments................... 0.5 -
Capital expenditures................................................................. (2.2) (2.2)
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Net cash used for investing activities.......................................... (1.7) (2.2)
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Cash flows from financing activities:
Principal payments on Timber Notes and other timber related debt..................... (10.6) (12.7)
Net changes in restricted cash....................................................... 8.1 9.4
Borrowings under line of credit agreement, net....................................... 22.2 21.7
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Net cash provided by financing activities....................................... 19.7 18.4
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Net decrease in cash, cash equivalents, and restricted cash............................. - (1.5)
Cash, cash equivalents and restricted cash at beginning of period....................... 0.5 2.0
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Cash, cash equivalents and restricted cash at end of period............................. $ 0.5 $ 0.5
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Supplemental disclosure of non-cash financing activities:
Repurchases of debt using restricted cash............................................ $ - $ 3.6
Supplemental disclosure of cash flow information:
Interest paid........................................................................ $ 26.5 $ 27.4
The accompanying notes are an integral part of these financial statements.
SCOTIA PACIFIC COMPANY LLC
CONDENSED NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The information contained in the following condensed 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
needed in conjunction with the financial statements and related notes thereto
contained in the Form 10-K. Any capitalized terms used but not defined in these
Condensed Notes to Financial Statements are defined in the "Glossary of Defined
Terms" contained in Appendix A. Accounting measurements at interim dates
inherently involve greater reliance on estimates than at year end. The results
of operations for the interim periods presented are not necessarily indicative
of the results to be expected for the entire year.
The financial statements included herein are unaudited; however, they
include all adjustments of a normal recurring nature which, in the opinion of
management, are necessary for a fair presentation of the financial position of
the Company at March 31, 2005, the results of operations for the three months
ended March 31, 2005 and 2004, and the cash flows for the three months ended
March 31, 2005 and 2004. 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
Regulatory and environmental matters as well as legal actions have played
and are expected to continue to play a significant role in the Company's
operations. The Company has previously experienced delays in the approval of its
THPs as a result of regulatory compliance and related litigation, and expects
these difficulties to persist. Moreover, the Company expects a recurrence of
additional delays that have recently been experienced in harvesting on
previously- approved THPs due to regulatory oversight by the North Coast Water
Board (see below). The foregoing matters have in the past adversely affected
timber harvest and timber harvesting and other costs; these effects are expected
to continue.
The North Coast Water Board is requiring the Company and Palco to apply
various waste discharge reporting, mitigation and erosion control requirements
in respect of timber harvesting activities in several watersheds, and may impose
additional measures in the future. The North Coast Water Board in December 2003
directed its staff to formulate WWDRs for the Freshwater and Elk River
watersheds on the Company's timberlands. The WWDRs have not yet been formulated,
and, as a result, the North Coast Water Board has failed to release for harvest
THPs already approved by the other government agencies which review the
Company's THPs and significantly delayed the release of a substantial number of
other previously-approved THPs. The THPs approved for release by the North Coast
Water Board restrict the harvest allowed to only 75% of the harvest limit
established by the CDF for the Freshwater and Elk River watersheds. Moreover, a
hearing officer acting on behalf of the State Water Board has issued a stay
order which precludes harvest on a portion of the THPs that were released for
harvest by the North Coast Water Board. The Company and Palco are continuing
efforts to obtain clearance from the North Coast Water Board of the remaining
THPs, which constitute a significant portion of the harvest planned for the
first six months of 2005. The Company and Palco are also in the process of
appealing the decision of the State Water Board hearing officer. There can be no
assurance that these efforts will be successful. Additionally, should the
Freshwater-Elk River WWDRs not be formulated during 2005 or in the first few
months of 2006, there could be a material adverse impact to the Company's and
Palco's future cash flows from operations. See Note 3 for further discussion of
these matters.
The foregoing matters have materially adversely impacted the cash flows of
both the Company and Palco. The Company estimates that its cash flows from
operations, together with funds available under the Line of Credit, will be
inadequate to pay all of the $27.9 million of interest which will be due on the
July 20, 2005 payment date for the Timber Notes ($25.9 million net of interest
relating to Timber Notes held by the Company), which would be an event of
default under the Indenture. Under the new Revolving Credit Facility and Term
Loan, (discussed below), Palco is permitted to invest up to $5.0 million in the
Company. However, there can be no assurance that Palco will make such investment
in whole or part.
In the event of a failure to pay interest on the Timber Notes in full when
due, the Trustee under the Indenture or the holders of at least 25% of the
aggregate outstanding principal amount of the Timber Notes may cause all
principal, interest and other amounts related to the Timber Notes to become
immediately due and payable. Also, in the event of a failure by Palco or the
Company to perform its respective covenants or agreements under the Master
Purchase Agreement or the failure by Palco to perform its covenants or
agreements under the Services Agreement, which failure continues for 30 days
after notice from the Trustee or the holders of 25% or more of the outstanding
principal amount of the Timber Notes, the holders of a majority of the aggregate
outstanding principal amount of the Timber Notes may cause all principal,
interest and other amounts related to the Timber Notes to become immediately due
and payable. In the event of any such acceleration, the agent under the
Company's Line of Credit may also accelerate the advances then outstanding
thereunder. If such accelerations of Timber Notes and/or advances under the
Company's Line of Credit occur, the Trustee may exercise all rights under the
Indenture and related security documents, including applying funds to pay
accelerated amounts, and selling the Company's timberlands and other assets and
using the proceeds thereof to pay accelerated amounts. In the event that the
Company were to seek protection by filing under the Bankruptcy Code, all amounts
related to the Timber Notes would become immediately due and payable under the
Indenture and all advances under the Company's Line of Credit agreement could be
accelerated. The foregoing rights of the Trustee and holders of Timber Notes are
subject to the rights of the Company under the Bankruptcy Code.
The Company has entered into an agreement for UBS Securities LLC to assist
in seeking to restructure its obligations with respect to its outstanding Timber
Notes. The engagement will continue until July 27, 2005 unless earlier
terminated by either party. The Company agreed to pay such firm an advisory fee
of $150,000 per month, creditable in full against a success fee of $5,600,000
that would be payable upon consummation of any restructuring transaction during
or within twelve months after the term of the agreement, and also agreed to
indemnify the firm and its affiliates and to reimburse certain expenses. There
can be no assurance that the Company will be successful in its efforts to
restructure its Timber Notes.
At March 31, 2005, Palco continued to be in default under the Palco Credit
Agreement and its liquidity crisis continued. Previously-granted waivers of
default were subsequently extended through April 22, 2005. On April 19, 2005,
Palco and Britt, as borrowers, closed the five-year $30.0 million secured,
asset-based Revolving Credit Facility and the five-year $35.0 million secured
Term Loan. The Term Loan was fully funded on April 19, 2005 and the Borrowers
used approximately $10.8 million of the funds from the Term Loan to pay off
amounts previously borrowed under the Palco Credit Agreement and terminated that
facility. As of April 30, 2005, no borrowings had been made under the Revolving
Credit Facility. Palco estimates that its cash flow from operations will not
provide sufficient liquidity to fund its operations until the fourth quarter of
2006. Accordingly, Palco expects to be dependent on the funds available under
the Term Loan and Revolving Credit Facility to fund its working capital
requirements in 2005 and 2006. Borrowings under the Revolving Credit Facility
are limited to the sum of 85% of the Borrowers' eligible accounts receivable
plus 75% of the Borrowers' eligible inventories (up to a maximum of $30.0
million, subject to limitations such as the ability of the lender to establish
reasonable reserves). Additionally, both the Term Loan and the Revolving Credit
Facility contain EBITDA maintenance covenants that, if not met, could trigger a
mandatory prepayment of the borrowings. The operating cash flow estimates used
to establish the EBITDA maintenance covenants are subject to a number of
assumptions about future operating cash flow and actual results could differ
from these estimates. Accordingly, the availability of these funds to Palco is
largely dependent on Palco's ability to harvest adequate timber on the Company's
timberlands and reduce operating costs.
In the event of a Company default under the Indenture or a future Palco
liquidity shortfall, the Company and Palco could be forced to take extraordinary
actions, which may include: reducing expenditures by laying off employees and
shutting down various activities; seeking other sources of liquidity, such as
from asset sales; and seeking protection by filing under the Bankruptcy Code.
The financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
On February 7, 2005, Moody's lowered the ratings on the Class A-1 Timber
Notes from A1 to Baa2; the Class A-2 Timber Notes from A3 to Baa3; and the Class
A-3 Timber Notes from Baa2 to Bal. On April 7, 2005, S&P announced that it
had further lowered its ratings on all classes of the Timber Notes to CCC-. On
December 8, 2004, S&P lowered Palco's credit rating from B- to CCC+ and on
April 7, 2005, S&P announced that it had further lowered Palco's credit
rating to CCC- (which rating it affirmed on April 28, 2005). As a result of the
S&P credit actions, Palco may be required to post a security deposit for
workers compensation liabilities in July 2005 in the amount of $9.9 million. If
Palco's credit rating is raised to B- or better, or if a waiver of this
requirement is allowed under applicable law, then posting of such a security
deposit may not be necessary. However, there can be no assurance that such a
security deposit will not be required. Palco management is also evaluating
whether other potential obligations or unanticipated adverse financial
consequences may result from the S&P credit actions described above.
In addition, 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 lumber or log prices, will not have a material adverse effect on the
Company's financial condition, results of operations or liquidity. See Note 3
for further discussion regarding regulatory and legislative matters and legal
proceedings relating to the Company's operations.
The Company's Line of Credit allows it to borrow up to one year's interest
due on the Timber Notes. On June 20, 2003, the Line of Credit was extended to
July 7, 2006. At or near the completion of such extension, the Company intends
to request that the Line of Credit be extended for an additional 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 December 31, 2004, the Company could have borrowed a maximum of $57.1 million
under the Line of Credit, and there was $18.2 million outstanding under the
facility. At March 31, 2005, the maximum availability under the Line of Credit
was $55.9 million, and there were $40.4 million in borrowings outstanding under
this facility.
On the note payment date in January 2005, the Company used the Line of
Credit to pay all of the $28.5 million of interest due ($26.3 million net of
interest due in respect of Timber Notes held by the Company). The Company repaid
$10.6 million of principal on the Timber Notes (an amount equal to Scheduled
Amortization) using funds held in the SAR Account.
New Accounting Standard
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29. SFAS No. 153 is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. Opinion No. 29 provided an exception to this
principle for exchanges of similar productive assets. Under Opinion No. 29, an
exchange of a productive asset was based on the recorded amount of the asset
relinquished. SFAS No. 153 eliminated this exception and replaced it with an
exception for exchanges of nonmonetary assets that do not have commercial
substance. The new Statement is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Management does not
expect that adoption of this Statement will have a material impact on the
Company's financial condition and results of operations.
2. Restricted Cash, Cash Equivalents, Marketable Securities and Other
Investments
Cash, marketable securities and other investments include the following
amounts which are restricted under the terms of the Company's debt agreements
(in millions):
March 31, December 31,
2005 2004
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Current assets:
Restricted cash and cash equivalents............................................... $ - $ -
Marketable securities, restricted:
Amounts held in SAR Account..................................................... 26.3 25.1
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26.3 25.1
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Long-term restricted cash, cash equivalents, marketable securities and other
investments:
Amounts held in SAR Account........................................................ 52.0 68.5
Other amounts restricted under the Indenture....................................... 2.5 2.5
Less: Amounts attributable to Timber Notes held in
SAR Account..................................................................... (54.5) (61.8)
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- 9.2
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Total restricted cash, cash equivalents, marketable securities and other investments.. $ 26.3 $ 34.3
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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 CDF regulations requiring
timber companies to project timber growth and harvest on their timberlands over
a 100-year planning period and to demonstrate sustained yield, i.e. that their
projected average annual harvest for any decade within the 100-year planning
period will not exceed the average annual growth level at the end of the
100-year planning period. The forest practice rules allow companies which do not
have a sustained yield plan to follow alternative procedures 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, and that decision is now on
appeal. 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
alternative procedures pending approval of the Option A Plan, which is an
alternative to a sustained yield plan. The Option A Plan was approved by the CDF
in March 2005.
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 and additional costs
required in connection with the implementation of the HCP and SYP, and this work
and the additional costs are expected to continue for the forseeable future.
Water Quality
Laws and regulations dealing with water quality are impacting the Company
and Palco primarily in four areas: efforts by the federal EPA and the North
Coast Water Board to establish TMDLs in watercourses 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; actions by the
North Coast Water Board during the THP approval process which impose certain
operational requirements on individual THPs; and a directive of the North Coast
Water Board to its staff to develop WWDRs for the Freshwater and Elk River
watersheds.
Under the CWA, the EPA is required to establish TMDLs in watercourses 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 watercourses
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.
Beginning with 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 these 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
significantly increased Palco's operating costs and may in the future further
increase costs or cause delays in THP approvals or harvesting on approved THPs.
The North Coast Water Board has also issued the Elk River Order, which is a
clean up and abatement order 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 the Palco Companies that could extend over a number of years.
Additional orders in other watersheds (should they be issued) may also result in
further cost increases. Palco's appeal of the Elk River Order to the State Water
Board was denied. Palco has appealed the decision of the State Water Board but
is holding such appeal in abeyance until resolution of the THP 520 lawsuit
discussed below.
In addition to the foregoing actions, the North Coast Water Board in
December 2003 directed its staff to formulate WWDRs for the Freshwater and Elk
River watersheds. As harvesting activities on the Company's timberlands cannot
readily be moved between watersheds due to, among other things, historic harvest
patterns, adjacency restrictions, and the age classes of trees, that action and
the other matters described above could, in addition to the potential effects
noted above, individually or collectively result in reduced harvest. In that
regard, the staff of the North Coast Water Board has not yet formulated the
required WWDRs for the Freshwater and Elk River watersheds. As a result, the
North Coast Water Board for some time failed to release for harvest a number of
the Company's THPs which had already been approved by the other governmental
agencies which approve the Company's THPs. On February 25, 2005, the Executive
Officer of the staff of the North Coast Water Board enrolled THPs that would
allow the harvest of up to 50% of the harvest limit established by the CDF for
the Freshwater and Elk River watersheds. On March 16, 2005, the North Coast
Water Board ordered that additional THPs be enrolled that would allow the
harvest of up to 75% of the harvest limit established by the CDF for the
Freshwater and Elk River watersheds. This decision was subsequently appealed to
the State Water Board and on April 6, 2005, a hearing officer acting on behalf
of the State Water Board issued a stay order that precludes harvest of a portion
of the THPs that were released for harvest by the North Coast Water Board. The
Company's request for emergency reconsideration by the full State Water Board of
this decision was denied. The State Water Board is expected to hold a hearing on
the merits of the appeal in June 2005.
The unreleased and stayed THPs represent a significant portion of the
Company's planned harvest for the first half of 2005. The ongoing regulatory,
environmental and litigation matters faced by the Company and Palco, exacerbated
by the developments described in the previous paragraph, have materially
adversely impacted the cash flows of both the Company and Palco. Furthermore, it
is likely that additional delays in the development of the Freshwater and Elk
River WWDRs will occur, and such delays are expected to continue.
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 sediment-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. Also see the description of the THP No. 520 lawsuit below.
Timber Harvest Litigation
A California state court has invalidated the SYP in connection with two
lawsuits filed against the Palco Companies, as described below, which decision
has been appealed. Other pending judicial and administrative proceedings, as
described below, could affect the Company's and Palco's ability to implement the
HCP, implement certain approved THPs, or carry out other operations, as
described below. 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, a similar action, the USWA
lawsuit, was filed challenging the validity and legality of the SYP. The
EPIC-SYP/Permits and USWA lawsuits were consolidated for trial.
Following trial, the Court on October 31, 2003, entered a judgment
invalidating the SYP and the California Permits due to several deficiencies in
agency procedures and the failure of the Company and the Palco Companies 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
those 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 alternative procedures
pending approval of the Option A Plan. As noted above, the Option A Plan was
approved by the CDF in March 2005. The Palco Companies and the State of
California have appealed the October 31, 2003 decision. In September 2004, the
Court granted the plaintiffs' request for reimbursement of an aggregate of $5.8
million in attorneys fees and other expenses incurred in connection with these
matters. The Palco Companies and the State of California have also 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 harvesting and other forestry
activities under certain of the Company's 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 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 the Company 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 held to apply to all operations on the Company's timberlands, it may have
some or all of the following effects: imposing additional permitting
requirements, delaying approvals of THPs, increasing harvesting costs, and
adding 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 harvesting
activities on the Company's timberlands 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.
On November 20, 2002, the Cook action and the Cave action were filed, which
also name the Company, 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.
On February 25, 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 the Palco Companies used certain unfair business practices in
connection with completion of the Headwaters Agreement, and that this resulted
in these companies being able 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 Palco
Companies 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 District Attorney subsequently amended his suit, and the
Palco Companies later filed new motions to dismiss and for sanctions. After
delays resulting from the District Attorney's efforts to disqualify the trial
judge, and that judge's later self-disqualification, a hearing on these motions
was held on February 18, 2005. The Court rejected the sanctions motion, but has
not yet ruled on the motion for dismissal. The Company believes that this suit
is without merit and that the April 30, 2004 ruling diminished significantly its
exposure with respect to this matter; however, there can be no assurance that
the Palco Companies will ultimately prevail or that an adverse outcome would not
be material to the Company's financial condition, results of operations or
liquidity.
On November 2, 2004, the EPIC-USFWS/NOAA lawsuit was filed. This 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 asserted several claims, including that the Palco
Companies 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 Palco Companies to cease certain alleged unlawful
activities, as well as restitution and remediation by the Palco Companies. On
April 22, 2005, pursuant to motions to dismiss filed by the Palco Companies,
Palco and the federal defendants, the Court dismissed all but one of the claims.
The Company does not believe the resolution of this action should result in a
material adverse effect on its financial condition, results of operations or
liquidity.
On November 16, 2001, the Company and 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 prior to approving the THP. When
the staff of the North Coast Water Board attempted to impose these mitigation
measures in spite of the CDF's decision, the Company and Palco appealed to the
State Water Board, which imposed certain of the requested mitigation measures
and rejected others. The Company and Palco filed the THP No. 520 lawsuit
challenging the State Water Board's decision, and in January 2003, the Superior
Court granted their 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 on
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 and Palco filed a petition for review of the appellate
court's decision by the California Supreme Court, which in June 2004 agreed to
review the decision. Briefing was completed on April 26, 2005, but no date has
been set for oral argument.
4. Comprehensive Loss and Member Deficit
Comprehensive loss includes the following (in millions):
Three Months Ended
March 31,
-------------------------
2005 2004
----------- ------------
Net loss................................................................................ $ (6.6) $ (4.7)
Other comprehensive income (loss):
Net change in fair value of available-for-sale investments........................... 0.2 (0.3)
----------- ------------
Total comprehensive loss................................................................ $ (6.4) $ (5.0)
=========== ============
A reconciliation of the activity in member deficit is as follows (in
millions):
Three Months Ended
March 31,
------------------------
2005 2004
---------- -----------
Balance at beginning of period.......................................................... $ (431.6) $ (411.2)
Comprehensive loss...................................................................... (6.4) (5.0)
----------- ------------
Balance at end of period................................................................ $ (438.0) $ (416.2)
=========================
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," "intends," "projects," "seeks" 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
This section contains statements which constitute "forward-looking
statements" within the meaning of the PSLRA. See the statement in Item 2. above
for cautionary information with respect to such forward-looking statements.
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 Palco
The following table presents price, volume and revenue amounts for the
Company for the periods indicated (revenues in millions).
Three Months Ended March 31, 2005 Three Months Ended March 31, 2004
-------------------------------------- ---------------------------------------
Price Price
MBFEs $/MBFE Revenues MBFEs $/MBFE Revenues
---------- ------------ ------------ ----------- ------------ ------------
Redwood............................ 16,300 $ 827 $ 13.5 19,800 $ 717 $ 14.2
Douglas-fir........................ 4,500 562 2.5 3,500 447 1.6
0ther.............................. 700 59 0.1 400 174 0.1
---------- ------------ ----------- ------------
21,500 747 $ 16.1 23,700 668 $ 15.9
========== ============ =========== ============
For the three months ended March 31, 2005, the Company experienced an
overall 1% increase in revenues despite a 9% decrease in sales volume compared
to the first three months of 2004. For the first three months of 2005, the
Company experienced a 5% decrease in redwood log revenues compared to the three
months ended March, 31, 2004, due primarily to a decrease in the volume of
larger redwood logs sold; however, this decrease was partially offset by a
realized price increase of 15% for redwood logs. A 56% increase in Douglas-fir
revenues for the first three months of 2005 compared to the first three months
of 2004 was accomplished by a 29% increase in volume combined with a 26%
increase in average realized prices for Douglas-fir logs.
Operating Income and Net Loss
Operating income for the three months ended March 31, 2005 declined from
operating income for the same period in 2004 due to the decrease in log sales as
noted above combined with an increase in general and administrative operating
expenses. The $1.3 million increase in general and administrative operating
expenses for the three months ended March 31, 2005, as compared to the same
period a year ago, is principally due to increased THP costs related to logs
sold during the quarter and an increase in legal costs.
The net loss for the first three months ended March 31, 2005 was $1.9
million greater than for the same period of 2004 due to higher operating
expenses, as noted above, combined with lower 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 the statement in Item 2. 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 and financial
results, including adverse weather conditions, low log prices, governmental
regulation, environmental litigation, and general economic conditions. The
Company's cash flows from operations are significantly impacted by harvest
volumes and log prices.
Regulatory and environmental matters as well as legal actions have played
and are expected to continue to play a significant role in the Company's
operations. The Company has previously experienced delays in the approval of its
THPs as a result of regulatory compliance and related litigation, and expects
these difficulties to persist. Moreover, the Company expects a recurrence of
additional delays that have recently been experienced in harvesting on
previously- approved THPs due to regulatory oversight by the North Coast Water
Board (see below). The foregoing matters have in the past adversely affected
timber harvest and timber harvesting and other costs; these effects are expected
to continue. In addition, 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 lumber or log prices, will not have a material adverse effect on the
Company's financial condition, results of operations or liquidity. See Item 1.
"Business--Regulatory and Environmental Factors" of the Form 10-K and Note 3 for
discussion of these matters.
The North Coast Water Board is requiring the Company and Palco to apply
various waste discharge reporting, mitigation and erosion control requirements
in respect of timber harvesting activities in several watersheds, and may impose
additional measures in the future. The North Coast Water Board in December 2003
directed its staff to formulate WWDRs for the Freshwater and Elk River
watersheds on the Company's timberlands. The WWDRs have not yet been formulated,
and, as a result, the North Coast Water Board has failed to release for harvest
THPs already approved by the other government agencies which review the
Company's THPs and significantly delayed the release of a substantial number of
other previously-approved THPs. The THPs approved for release by the North Coast
Water Board restrict the harvest allowed to only 75% of the harvest limit
established by the CDF for the Freshwater and Elk River watersheds. Moreover, a
hearing officer acting on behalf of the State Water Board has issued a stay
order which precludes harvest on a portion of the THPs that were released for
harvest by the North Coast Water Board. The Company and Palco are continuing
efforts to obtain clearance from the North Coast Water Board of the remaining
THPs, which constitute a significant portion of the harvest planned for the
first six months of 2005. The Company and Palco are also in the process of
appealing the decision of the State Water Board hearing officer. There can be no
assurance that these efforts will be successful. Additionally, should the
Freshwater-Elk River WWDRs not be formulated during 2005 or in the first few
months of 2006 there could be a material adverse impact to the Company's and
Palco's future cash flows from operations. See Item 1. "Business--Regulatory and
Environmental Factors--Water Quality," of the Form 10-K and in Note 3 for a
further discussion of these matters.
The foregoing matters have materially adversely impacted the cash flows of
both the Company and Palco. The Company estimates that its cash flows from
operations, together with funds available under the Line of Credit, will be
inadequate to pay all of the $27.9 million of interest which will be due on the
July 20, 2005 payment date for the Timber Notes ($25.9 million net of interest
relating to Timber Notes held by Scotia LLC), which would be an event of default
under the Indenture. Under the new Revolving Credit Facility and Term Loan,
Palco is permitted to invest up to $5.0 million in the Company. However, there
can be no assurance that Palco will make such investment in whole or part.
In the event of a failure to pay interest on the Timber Notes in full when
due, the Trustee under the Indenture or the holders of at least 25% of the
aggregate outstanding principal amount of the Timber Notes may cause all
principal, interest and other amounts related to the Timber Notes to become
immediately due and payable. Also, in the event of a failure by Palco or the
Company to perform its respective covenants or agreements under the Master
Purchase Agreement or the failure by Palco to perform its covenants or
agreements under the Services Agreement, which failure continues for 30 days
after notice from the Trustee or the holders of 25% or more of the outstanding
principal amount of the Timber Notes, the holders of a majority of the aggregate
outstanding principal amount of the Timber Notes may cause all principal,
interest and other amounts related to the Timber Notes to become immediately due
and payable. In the event of any such acceleration, the agent under the
Company's Line of Credit may also accelerate the advances then outstanding
thereunder. If such accelerations of Timber Notes and/or advances under the
Company's Line of Credit occur, the Trustee may exercise all rights under the
Indenture and related security documents, including applying funds to pay
accelerated amounts, and selling the Company's timberlands and other assets and
using the proceeds thereof to pay accelerated amounts. In the event that the
Company were to seek protection by filing under the Bankruptcy Code, all amounts
related to the Timber Notes would become immediately due and payable under the
Indenture and all advances under the Company's Line of Credit agreement could be
accelerated. The foregoing rights of the Trustee and holders of Timber Notes are
subject to the rights of the Company under the Bankruptcy Code.
The Company has entered into an agreement for UBS Securities LLC to assist
in seeking to restructure its obligations with respect to its outstanding Timber
Notes. The engagement will continue until July 27, 2005 unless earlier
terminated by either party. The Company agreed to pay such firm an advisory fee
of $150,000 per month, creditable in full against a success fee of $5,600,000
that would be payable upon consummation of any restructuring transaction during
or within twelve months after the term of the agreement, and also agreed to
indemnify the firm and its affiliates and to reimburse certain expenses. There
can be no assurance that the Company will be successful in its efforts to
restructure its Timber Notes.
At March 31, 2005, Palco continued to be in default under the Palco Credit
Agreement and its liquidity crisis continued. Previously-granted waivers of the
default were subsequently extended through April 22, 2005. On April 19, 2005,
Palco and Britt, as borrowers, closed the five-year $30.0 million secured
asset-based Revolving Credit Facility and the five-year $35.0 million secured
Term Loan. The Term Loan was fully funded on April 19, 2005 and the Borrower
used approximately $10.8 million of the funds from the Term Loan to pay off
amounts previously borrowed under the Palco Credit Agreement and terminated that
facility. As of April 30, 2005, no borrowings had been made under the Revolving
Credit Facility. Palco estimates that its cash flow from operations will not
provide sufficient liquidity to fund its operations until the fourth quarter of
2006. Accordingly, Palco expects to be dependent on the funds available under
the Term Loan and Revolving Credit Facility to fund its working capital
requirements in 2005 and 2006. Borrowings under the Revolving Credit Facility
are limited to the sum of 85% of the Borrowers' eligible accounts receivable
plus 75% of the Borrowers' eligible inventories (up to a maximum of $30.0
million, subject to limitations such as the ability of the lender to establish
reasonable reserves). Additionally, both the Term Loan and the Revolving Credit
Facility contain EBITDA maintenance covenants that, if not met, could trigger a
mandatory prepayment of the borrowings. The operating cash flow estimates used
to establish the EBITDA maintenance covenants are subject to a number of
assumptions about Palco's future operating cash flow and actual results could
differ from these estimates. Accordingly, the availability of these funds to
Palco are dependent on Palco's ability to harvest adequate timber on the
Company's timberlands and reduce operating costs.
In the event of a Company default under the Indenture or a future Palco
liquidity shortfall, the Company and Palco could be forced to take extraordinary
actions, which may include: reducing expenditures by laying off employees and
shutting down various activities; seeking other sources of liquidity, such as
from asset sales; and seeking protection by filing under the Bankruptcy Code.
The financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
On February 7, 2005, Moody's lowered the ratings on the Class A-1 Timber
Notes from A1 to Baa2; the Class A-2 Timber Notes from A3 to Baa3; and the Class
A-3 Timber Notes from Baa2 to Bal. On April 7, 2005, S&P announced that it
had further lowered its ratings on all classes of the Timber Notes to CCC-. On
December 8, 2004, S&P lowered Palco's credit rating from B- to CCC+ and on
April 7, 2005, S&P announced that it had further lowered Palco's credit
rating to CCC- (which rating it affirmed on April 28, 2005). As a result of the
S&P credit actions, Palco may be required to post a security deposit for
workers compensation liabilities in July 2005 in the amount of $9.9 million. If
Palco's credit rating is raised to B- or better, or if a waiver of this
requirement is allowed under applicable law, then posting of such a security
deposit may not be necessary. There can be no assurance that such a security
deposit will not be required. Palco management is also evaluating whether other
potential obligations or unanticipated adverse financial consequences may result
from the S&P credit actions described above.
The Company's Line of Credit allows it to borrow up to one year's interest
due on the Timber Notes. On June 20, 2003, the Line of Credit was extended to
July 7, 2006. At or near the completion of such extension, the Company intends
to request that the Line of Credit be extended for an additional 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 December 31, 2004, the Company could have borrowed a maximum of $57.1 million
under the Line of Credit, and there was $18.2 million outstanding under the
facility. At March 31, 2005, the maximum availability under the Line of Credit
was $55.9 million, and there were $40.4 million in borrowings outstanding under
this facility.
On the January 2005 note payment date, the Company used the Line of Credit
to pay all of the $28.5 million of interest due ($26.3 million net of interest
due in respect of Timber Notes held by the Company). The Company repaid $10.6
million of principal on the Timber Notes (an amount equal to Scheduled
Amortization) using funds held in the SAR Account.
The Master Purchase Agreement between the Company and Palco (see Item 1.
"Business--Operation of Company Timberlands" of the Form 10-K) contemplates that
all sales of logs by the Company to Palco will be at fair market value (based on
stumpage prices) for each species and category of logs. 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 December 2004, the State Board of
Equalization adopted the new Harvest Value Schedule for the first half of 2005.
The prices published in that schedule (which exceeded the applicable structuring
prices) reflected a 14.3% increase in the SBE Price for small redwood logs and a
12.5% increase for small Douglas-fir logs from the prices published for the
second half of 2004.
Capital expenditures are estimated to be between $8.3 million and $8.9
million for 2005 (subject to available cash).
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet financing or unconsolidated
special purpose entities. The Company does not use derivatives for any of its
treasury or risk management activities.
Trends
See Note 3 and Part I, Item 2. "Management's Discussion and Analysis of
Financial Conditions and Results of Operations--Financial Condition and
Investing and Financing Activities" for information regarding various
regulatory, environmental, litigation and other matters which have caused and
are expected to continue to cause delays in the approval of the Company's THPs
and the ability to harvest on THPs once they are approved, as well as adverse
impacts on harvest levels and timber harvesting and other costs.
Critical Accounting Policies and Estimates
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. There have been no
material changes in the Company's critical accounting policies and estimates
provided in the December 31, 2004 Form 10-K.
New Accounting Pronouncements
See Note 1 for a discussion of a new accounting pronouncement and its
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. As of March 31, 2005, there were $40.4 million in borrowings outstanding
under the Line of Credit. Based on the amount of borrowings outstanding under
the Line of Credit during the three months ended March 31, 2005, 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.
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 evaluation, the
Company's Chief Executive Officer and Chief Financial Officer, concluded that
the Company's disclosure controls and procedures were effective as of March 31,
2005.
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
a. Exhibits:
*10.1Engagement letter, dated March 31, 2005, between the Company
and UBS Securities LLC, together with an attached
Indemnification Agreement
* 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: May 9, 2005 By: /S/ GARY L. CLARK
---------------------------------------------
Gary L. Clark
Vice President - Finance and Administration
(Principal Financial and Accounting Officer)
APPENDIX A
Glossary of Defined Terms
Bankruptcy Code: the U.S. Bankruptcy Code
Bear Creek lawsuit: An action entitled Environmental Protection Information
Association v. Pacific Lumber, Scotia Pacific Company LLC (No. C01-2821) filed
in the U.S. District Court for the Northern District of California
Britt: Britt Lumber Co., Inc., a wholly owned subsidiary of Palco
California Permits: The Permits issued by California pursuant to the HCP
California Senate Bill 810: Bill which became effective January 1, 2004
providing regional water quality control boards with additional authority
related to the approval of THPs on land within impaired watersheds
Cave action: An action entitled Steve Cave, et al. v. Gary Clark, et al. (No.
DR020719) filed 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) filed in the Superior Court of Humboldt County, California
CWA: Federal Clean Water Act
EBITDA: As defined in Section 1.01 in the Revolving Credit Facility and Term
Loan which, among other things, excludes the results of the Company
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: Environmental Protection Information Association
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. filed 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) filed in U.S. Court for the Northern District of California against
the Palco Companies and two federal agencies
FASB: Financial Accounting Standards Board
Federal Permits: The Permits issued by the federal government pursuant to the
HCP
Form 10-K: Annual Report on Form 10-K of the Company for the fiscal year ended
December 31, 2004
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 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)
Indenture: The indenture governing the Timber Notes
Line of Credit: The agreement between a group of lenders and the Company
pursuant to which the Company may borrow in order to pay up to one year's
interest on the Timber Notes
Master Purchase Agreement: Agreement which governs the sale of logs to Palco by
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 old growth redwood
timber equates to one Mbfe
MGI: MAXXAM Group Inc., an indirect wholly owned subsidiary of MAXXAM
Moody's: Moody's Investors Services
North Coast Water Board: North Coast Regional Water Quality Control Board
Option A Plan: Palco's plans for complying with California's sustained yield
requirements, which have been approved by the CDF
Palco: The Pacific Lumber Company, a wholly owned subsidiary of MGI
Palco Companies: Palco, Scotia LLC and Salmon Creek, collectively
Palco Credit Agreement: Palco's revolving credit facility with a bank which
provided for borrowings up to $30.0 million based on certain collateral
balances, which was terminated in connection with the closing of the Revolving
Credit Facility and Term Loan
Permits: The incidental take permits issued by the United States and California
pursuant to the HCP
PSLRA: Private Securities Litigation Reform Act of 1995
Revolving Credit Agreement: Agreement evidencing the Revolving Credit Facility
Revolving Credit Facility: $30 million revolving credit facility evidenced by
the Revolving Credit Agreement dated as of April 19, 2005 among Palco and Britt,
as borrowers, and Credit Suisse First Boston
S&P: Standard & Poor's Rating Services
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
SFAS No. 153: "Exchange of Nonmonetary Assets," an amendment of APB Opinion No.
29
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
Term Loan Agreement: Agreement evidencing the Term Loan
Term Loan: $35.0 million term loan evidenced by the Term Loan Agreement dated as
of April 19, 2005 among Palco and Britt, as borrowers, and the CIT
Group/Business Credit, Inc.
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
Trustee: the trustee under the Indenture
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) filed in the Superior Court of Humboldt County, California
WWDRs: Watershed-wide discharge requirements