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 JUNE 30, 1998
Commission File Number 333-18723
MAXXAM GROUP HOLDINGS INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 76-0518669
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
5847 SAN FELIPE, SUITE 2600 77057
HOUSTON, TEXAS (Zip Code)
(Address of Principal
Executive Offices)
Registrant's telephone number, including area code: (713) 975-7600
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 / /
Number of shares of common stock outstanding at July 31, 1998: 1,000
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.
TABLE OF CONTENTS
PAGE
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheet at June 30, 1998 and
December 31, 1997 3
Consolidated Statement of Operations for the three and
six months ended June 30, 1998 and 1997 4
Consolidated Statement of Cash Flows for the six months
ended June 30, 1998 and 1997 5
Condensed Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures S-1
Appendix A - Glossary of Defined Terms A-1
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
$ 123,718 $ 91,753
Marketable securities 21,996 51,324
Receivables:
Trade 13,522 19,269
Other 7,755 6,667
Inventories 53,992 61,355
Prepaid expenses and other current assets 8,754 13,080
------------ ------------
Total current assets 229,737 243,448
Timber and timberlands, net of accumulated
depletion of $173,242 and $169,167,
respectively 297,458 299,153
Property, plant and equipment, net of accumulated
depreciation of $81,079 and $76,420,
respectively 102,282 103,388
Note receivable from MAXXAM Inc. 125,875 125,000
Investment in Kaiser Aluminum Corporation 51,532 41,402
Deferred financing costs, net 24,003 25,739
Deferred income taxes 61,932 58,767
Restricted cash 28,108 28,434
Other assets 5,039 4,209
------------ ------------
$ 925,966 $ 929,540
============ ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 5,125 $ 3,535
Accrued interest 30,450 30,838
Accrued compensation and related benefits 9,888 12,544
Deferred income taxes 10,784 10,882
Other accrued liabilities 1,592 1,631
Long-term debt, current maturities 20,607 19,429
------------ ------------
Total current liabilities 78,446 78,859
Long-term debt, less current maturities 888,083 892,896
Other noncurrent liabilities 28,594 28,976
------------ ------------
Total liabilities 995,123 1,000,731
------------ ------------
Contingencies
Stockholder's deficit:
Common stock, $1.00 par value; 3,000 shares
authorized; 1,000 shares issued 1 1
Additional capital 123,167 123,167
Accumulated deficit (192,325) (194,359)
------------ ------------
Total stockholder's deficit (69,157) (71,191)
------------ ------------
$ 925,966 $ 929,540
============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales:
Lumber and logs $ 57,789 $ 70,139 $ 106,291 $ 130,405
Other 5,730 6,709 9,135 13,258
------------- ------------- ------------- -------------
63,519 76,848 115,426 143,663
------------ ------------ ------------ ------------
Operating expenses:
Cost of goods sold 39,526 42,057 72,590 80,102
Selling, general and
administrative expenses 3,527 3,867 6,698 7,248
Depletion and depreciation 5,734 6,660 11,351 13,207
------------ ------------ ------------ ------------
48,787 52,584 90,639 100,557
------------ ------------ ------------ ------------
Operating income 14,732 24,264 24,787 43,106
Other income (expense):
Equity in earnings of Kaiser
Aluminum Corporation 5,819 - 10,130 -
Investment, interest and
other income 5,627 7,709 14,103 12,107
Interest expense (23,831) (23,623) (47,650) (47,343)
------------ ------------ ------------ ------------
Income before income taxes 2,347 8,350 1,370 7,870
Credit (provision) for income
taxes 1,313 (3,326) 3,164 (3,158)
------------ ------------ ------------ ------------
Net income $ 3,660 $ 5,024 $ 4,534 $ 4,712
============ ============ ============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1998 1997
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,534 $ 4,712
Adjustments to reconcile net income to net
cash provided by operating activities:
Depletion and depreciation 11,351 13,207
Equity in undistributed earnings of
Kaiser Aluminum Corporation (10,130) -
Amortization of deferred financing
costs and discounts on long-term
debt 8,922 8,126
Net gain on asset dispositions (1,902) -
Net sales of marketable securities 32,373 6,941
Net gain on marketable securities (2,990) (3,196)
Deferral of interest payment on note
receivable from MAXXAM Inc. (875) -
Increase (decrease) in cash resulting from
changes in:
Receivables 5,572 (1,034)
Inventories, net of depletion 4,923 8,256
Prepaid expenses and other assets (1,243) (2,438)
Accounts payable 1,521 440
Accrued interest (388) 5,802
Other liabilities (3,126) (34)
Accrued and deferred income taxes (4,182) 3,017
Other - 108
------------ ------------
Net cash provided by operating
activities 44,360 43,907
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,961) (6,034)
Net proceeds from sale of assets 6,561 69
------------ ------------
Net cash provided by (used for)
investing activities 600 (5,965)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (10,821) (8,801)
Dividends paid (2,500) -
Restricted cash withdrawals, net 326 202
------------ ------------
Net cash used for financing
activities (12,995) (8,599)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 31,965 29,343
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 91,753 73,595
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 123,718 $ 102,938
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest $ 39,116 $ 33,404
Income taxes paid 50 -
Tax allocation payments to MAXXAM Inc. 4 169
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Timber and timberlands acquired subject to
long-term debt $ - $ 6,413
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
1. GENERAL
The information contained in the following notes to the
consolidated financial statements is condensed from that which would appear
in the annual consolidated financial statements; accordingly, the
consolidated financial statements included herein should be reviewed in
conjunction with the consolidated financial statements and related notes
thereto contained in the Form 10-K filed by the Company. Any capitalized
terms used but not defined in these Condensed Notes to Consolidated
Financial Statements are defined in the "Glossary of Defined Terms"
contained in Appendix A. All references to the "Company" include MAXXAM
Group Holdings Inc. and its subsidiary companies unless otherwise indicated
or the context indicates otherwise. 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 consolidated financial statements included herein are
unaudited; however, they include all adjustments of a normal recurring
nature which, in the opinion of management, are necessary to present fairly
the consolidated financial position of the Company at June 30, 1998, the
consolidated results of operations for the three and six months ended June
30, 1998 and 1997 and consolidated cash flows for the six months ended June
30, 1998 and 1997. The Company is a wholly owned subsidiary of MAXXAM.
SFAS No. 130 was issued in June 1997 was adopted by the Company
as of January 1, 1998. SFAS No. 130 requires the presentation of an
additional income measure (termed "comprehensive income"), which adjusts
traditional net income for certain items that previously were only
reflected as direct charges to equity (such as minimum pension
liabilities). As the amount of the adjustments to arrive at comprehensive
income is not significant, there is not a significant difference between
"traditional" net income and comprehensive income for the three and six
months ended June 30, 1998 and 1997.
SFAS No. 133, issued in June 1998, requires companies to
recognize all derivative instruments as assets or liabilities in the
balance sheet and to measure those instruments at fair value. Kaiser, the
Company's equity investee, has hedging programs which use various
derivative products to "lock-in" a price (or range of prices) for products
sold/used so that earnings and cash flows are subject to reduced risk of
volatility. Under SFAS No. 133, Kaiser will be required to "mark-to-
market" its hedging positions at the end of each period in advance of the
period of recognition for the transactions to which the hedge relates.
Pursuant to SFAS No. 130, Kaiser will reflect changes in the fair value of
its open hedging positions as an increase or reduction in stockholders'
equity through comprehensive income. Under SFAS No. 130, the impact of the
changes in the fair value of financial instruments will be reversed from
comprehensive income (net of any fluctuations in other "open" positions)
and will be reflected in traditional net income upon occurrence of the
transaction to which the hedge relates. Under the equity method of
accounting which the Company follows in accounting for its investment in
Kaiser, the Company will reflect its equity share of Kaiser's adjustments
to stockholder's equity through comprehensive income.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Lumber $ 43,235 $ 49,734
Logs 10,757 11,621
------------- -------------
$ 53,992 $ 61,355
============= =============
</TABLE>
3. RESTRICTED CASH
Restricted cash represents the amount held by the trustee under
the indenture governing the Old Timber Notes of the Company's indirect
wholly owned subsidiary, Scotia Pacific.
4. INVESTMENT IN KAISER
Subsequent to its formation, the Company received, as a capital
contribution from MAXXAM, 27,938,250 Pledged Kaiser Shares. Kaiser is an
integrated producer and marketer of alumina, primary aluminum and
fabricated aluminum products. Kaiser's common stock is publicly traded on
the New York Stock Exchange under the trading symbol "KLU." The Pledged
Kaiser Shares represent a 35.3% equity interest in Kaiser at June 30, 1998.
The Company follows the equity method of accounting for its investment in
Kaiser.
The Company and MAXXAM are entities under common control;
accordingly, the Company has recorded its investment in Kaiser at MAXXAM's
historical cost. During the first quarter of 1993, losses exhausted
Kaiser's equity with respect to its common stockholders. The Company
recorded its equity share of such losses in January 1993 up to the amount
of its investment in the Pledged Kaiser Shares. From January 1993 until
August 1997, cumulative losses with respect to the results of operations
attributable to Kaiser's common stockholders exceeded cumulative earnings.
However, this was no longer the case when equity attributable to Kaiser's
common stockholders increased upon conversion of the PRIDES into Kaiser
common stock. As a result, the Company recorded a $33,400 adjustment to
reduce the stockholder's deficit reflecting the Company's 35.4% equity
interest in the impact of the PRIDES conversion on the common stockholders.
In addition, the Company began recording its equity in Kaiser's results of
operations.
The market value for the Pledged Kaiser Shares based on the price
per share quoted at the close of business on July 30, 1998 was $256,697.
There can be no assurance that such value would be realized should the
Company dispose of its investment in the Pledged Kaiser Shares. The
following table contains summarized financial information of Kaiser. For
more information regarding Kaiser's financial condition and operations,
reference is made to Kaiser's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 and Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, both filed with the SEC.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Current assets $ 1,060,400 $ 1,045,600
Property, plant and equipment, net 1,159,500 1,171,800
Other assets 792,000 796,500
------------- -------------
Total assets $ 3,011,900 $ 3,013,900
============= =============
Current liabilities $ 565,200 $ 594,100
Long-term debt, less current maturities 962,500 962,900
Other liabilities 1,216,200 1,212,200
Minority interests 120,700 127,700
Stockholders' equity 147,300 117,000
------------- -------------
Total liabilities and
stockholders' equity $ 3,011,900 $ 3,013,900
============= =============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 614,800 $ 597,100 $ 1,211,800 $ 1,144,500
Costs and expenses (559,500) (542,100) (1,111,700) (1,058,200)
Restructuring of operations - (19,700) - (19,700)
Other expenses (29,600) (31,300) (56,800) (56,200)
------------ ------------ ------------ ------------
Income before income taxes and
minority interests 25,700 4,000 43,300 10,400
Credit (provision) for income
taxes (9,000) 11,000 (15,200) 8,600
Minority interests - (1,300) 600 (2,700)
------------ ------------ ------------ ------------
Net income 16,700 13,700 28,700 16,300
Dividends on preferred stock - (2,100) - (4,200)
------------ ------------ ------------ ------------
Net income available to common $ 16,700 $ 11,600 $ 28,700 $ 12,100
stockholders ============ ============ ============ ============
Equity in earnings of Kaiser $ 5,819 $ - $ 10,130 $ -
============ ============ ============ ============
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
7.95% Scotia Pacific Timber Collateralized Notes
due July 20, 2015 $ 309,191 $ 319,965
10-1/2% Pacific Lumber Senior Notes due March 1,
2003 235,000 235,000
Pacific Lumber Credit Agreement 9,445 9,445
11-1/4% MGI Senior Secured Notes due August 1,
2003 100,000 100,000
12-1/4% MGI Senior Secured Discount Notes due
August 1, 2003, net of discount 124,511 117,325
12% MGHI Senior Secured Notes due August 1, 2003 130,000 130,000
Other 543 590
------------ ------------
908,690 912,325
Less: current maturities (20,607) (19,429)
------------ ------------
$ 888,083 $ 892,896
============ ============
</TABLE>
See Note 7 for discussion of (i) the issuance of the Timber Notes
on July 20, 1998, (ii) the prepayment of the Old Timber Notes and outstanding
borrowings under the Pacific Lumber Credit Agreement and (iii) the
redemption of the Pacific Lumber Senior Notes and MGI Notes.
6. CONTINGENCIES
Pacific Lumber's business is subject to a variety of California
and federal laws and regulations dealing with timber harvesting, threatened
and endangered species and habitat for such species, and air and water
quality. Compliance with such laws and regulations plays a significant
role in Pacific Lumber's business. While compliance with such laws,
regulations and judicial and administrative interpretations, together with
the cost of litigation incurred in connection with certain timber
harvesting operations of Pacific Lumber, have increased the costs of
Pacific Lumber, they have not had a significant adverse effect on the
Company's financial position, results of operations or liquidity. However,
these laws and related administrative actions and legal challenges have
severely restricted the ability of Pacific Lumber to harvest virgin old
growth timber, and to a lesser extent, residual old growth timber on its
timberlands.
On September 28, 1996, the Pacific Lumber Parties entered into
the Headwaters Agreement with the United States and California which
provides the framework for the acquisition by the United States and
California of the Headwaters Timberlands. A substantial portion of the
Headwaters Timberlands contains virgin old growth timber. Approximately
4,900 of these acres are owned by Salmon Creek, with the remaining acreage
being owned by Scotia LLC (Pacific Lumber owning the timber and related
timber harvesting rights on this acreage). The Headwaters Timberlands
would be transferred in exchange for (a) cash or other consideration from
the United States and California having an aggregate fair market value of
$300 million, and (b) approximately 7,700 acres of timberlands to be
acquired by the government from a third party. As part of the Headwaters
Agreement, the Pacific Lumber Parties agreed not to enter the Headwaters
Timberlands to conduct any logging or salvage operations.
Closing of the Headwaters Agreement is subject to various
conditions, including federal and California funding, approval of an SYP,
approval of a Multi-Species HCP, issuance of the Permits, acquisitions of
the third party timberlands and the issuance of certain tax agreements
satisfactory to the Pacific Lumber Parties.
In November 1997, President Clinton signed an appropriations bill
which contains authorization for the expenditure of $250 million of federal
funds towards consummation of the Headwaters Agreement. These funds remain
available until March 1, 1999 and their availability is subject to, among
other things, contribution by California of its $130 million portion of
funding for the Headwaters Agreement. While the State of California has not
enacted legislation providing funds for its portion of the acquisition
contemplated by the Headwaters Agreement, on May 11, 1998, California Governor
Wilson announced that he would request that funding of California's portion be
included as part of the Budget Bill. The Budget Bill is subject to approval by
the California Senate and Assembly and signature by the Governor. As of the
date of this Report, funding of California's portion of the purchase price under
the Headwaters Agreement had not yet been included in the Budget Bill. While
a separate bill has been introduced in the California Senate which would fund
California's portion of the purchase price, this bill would impose additional
restrictions on Pacific Lumber, including more restrictions on harvesting in
streamside buffers. While Pacific Lumber is working diligently toward approval
of funding (without such restrictions) for California's portion of the purchase
price as part of the Budget Bill prior to the March 1, 1999 expiration of the
federal funding, there can be no assurance that Pacific Lumber will be
successful or that the terms of any legislation which may be enacted will be
acceptable to Pacific Lumber.
On July 14, 1998, the proposed SYP and Multi-Species HCP were
made available to the public for review and comment. The proposed Multi-
Species HCP and related Permits would have a term of 50 years, and would
limit the activities which could be conducted by Pacific Lumber in eleven
forest groves to those which would not be detrimental to marbled murrelet
habitat. These groves aggregate approximately 7,600 acres and consist of
substantial quantities of virgin and residual old growth redwood and
Douglas-fir timber.
The Company believes that submission of the proposed SYP and
Multi-Species HCP for public review and comment is a favorable development
that enhances its position in connection with legal and regulatory
challenges to Pacific Lumber's THPs as well as the prospects for
consummation of the Headwaters Agreement, the approval of the Multi-Species
HCP and SYP and the issuance of the Permits. Several species, including
the northern spotted owl, the marbled murrelet and the coho salmon, have
been listed as endangered or threatened under the ESA and/or the CESA.
Pacific Lumber has developed federal and state northern spotted owl
management plans which permit harvesting activities to be conducted so long
as Pacific Lumber adheres to certain measures designed to protect the
northern spotted owl. The potential impact of the listings of the marbled
murrelet and the coho salmon is more uncertain. If the Multi-Species HCP
is approved, Pacific Lumber would be issued the Permits, which would allow
limited incidental "take" of listed species so long as there was no
"jeopardy" to the continued existence of such species, and the Multi-Species
HCP would identify the measures to be instituted in order to minimize and
mitigate the anticipated level of take to the greatest extent possible.
The Multi-Species HCP would not only provide for Pacific Lumber's
compliance with habitat requirements for currently listed species, it would
also provide greater certainty and protection for Pacific Lumber with
regard to identified species that may be listed in the future.
Lawsuits are pending or threatened which seek to prevent Pacific
Lumber from implementing certain of its approved THPs or other operations.
While challenges with respect to Pacific Lumber's young growth timber have
historically been limited, a lawsuit relating to the coho salmon was
recently filed under the ESA which relates to a significant number of THPs
covering young growth timber of Pacific Lumber. While the Company expects
these environmentally focused objections and lawsuits to continue, it
believes that the proposed Multi-Species HCP will enhance Pacific Lumber's
position in connection with these challenges. The Company also believes
that the Multi-Species HCP would expedite the preparation and facilitate
approval of its THPs.
With respect to the SYP, Pacific Lumber has proposed an LTSY
which is approximately 10% less than Pacific Lumber's average timber
harvest over the last three years. If the SYP is approved by the CDF,
Pacific Lumber will have complied with certain BOF regulations requiring
timber companies to project timber growth and harvest on their timberlands
over a 100-year planning period and establish an LTSY harvest level. The
SYP must demonstrate that the average annual harvest over any rolling ten-
year period will not exceed the LTSY harvest level and that Pacific
Lumber's projected timber inventory is capable of sustaining the LTSY
harvest level in the last decade of the 100-year planning period. The
SYP is expected to be valid for ten years, although it would be subject
to review after five years. Thereafter, revised SYPs would be prepared
every decade that address the LTSY harvest level based upon reassessment of
changes in the resource base and other factors.
After the public review and comment process is completed, the
regulatory agencies will determine whether to approve or disapprove the SYP
and Multi-Species HCP. While the parties are working diligently to
complete the closing conditions contained in the Headwaters Agreement,
there can be no assurance that the Headwaters Agreement will be consummated
or that the SYP, Multi-Species HCP or Permits acceptable to Pacific Lumber
will be approved. If the Headwaters Agreement is not consummated and
Pacific Lumber is unable to harvest or is severely limited in harvesting on
various of its timberlands, it intends to continue and/or expand its
takings litigation seeking just compensation from the appropriate
government agencies on the grounds that such restrictions constitute an
uncompensated governmental taking of private property for public use.
In the event that the Multi-Species HCP is not approved, Pacific
Lumber will not enjoy the benefits of a more streamlined THP preparation
and review process. Furthermore, it is impossible for the Company to
determine the potential adverse effect of (i) the listings of the marbled
murrelet and coho salmon if the Multi-Species HCP as approved is not
acceptable to Pacific Lumber or (ii) the EPA's potential regulations
regarding water quality on the Company's financial position, results
of operations or liquidity until such time as the various regulatory and
legal issues are resolved; however, if Pacific Lumber is unable to harvest,
or is severely limited in harvesting, on significant amounts of its
timberlands, such effect could be materially adverse to the Company.
7. SUBSEQUENT EVENT
On July 20, 1998, Scotia LLC, a recently formed limited liability
company wholly owned by Pacific Lumber, issued the Timber Notes which consist
of an aggregate of $867.2 million of Class A-1, Class A-2 and Class A-3
timber collateralized notes which are due on July 20, 2028 and have an
overall effective interest rate of 7.43% per annum. Net proceeds from the
offering were used primarily to prepay the Old Timber Notes and to redeem
the Pacific Lumber Senior Notes and the MGI Notes effective August 19, 1998.
The Company expects to recognize an extraordinary loss of $41.8 million,
net of the related income tax benefit of $23.6 million, in the quarter
ended September 30, 1998 for the early extinguishment of the Old Timber
Notes, Pacific Lumber Senior Notes and MGI Notes. Concurrently with the
issuance of the Timber Notes, (i) Scotia Pacific was merged into Scotia
LLC, (ii) Pacific Lumber transferred to Scotia LLC approximately 13,500
acres of timberlands and the timber and timber harvesting rights with
respect to an additional 19,700 acres of timberlands, and (iii) Scotia
LLC transferred to Pacific Lumber the timber and timber harvesting rights
related to approximately 1,400 acres of timberlands.
Under the Timber Notes Indenture, the business activities of
Scotia LLC are generally limited to the ownership and operation of its
timber and timberlands. The Timber Notes are senior secured obligations of
Scotia LLC and are not obligations of, or guaranteed by, Pacific Lumber or
any other person. The Timber Notes are secured by a lien on (i) Scotia
LLC's timber and timberlands (representing $246.2 million of the Company's
consolidated balance at June 30, 1998), and (ii) substantially all of
Scotia LLC's other property. Interest on the Timber Notes is further
secured by the $63.5 million Timber Notes Line of Credit. The Timber Notes
Indenture permits Scotia LLC to have outstanding up to $75.0 million of
non-recourse indebtedness to acquire additional timberlands, to issue
additional timber notes provided certain conditions are met (including
repayment or redemption of the $160.7 million Class A-1 Timber Notes)
and to incur indebtedness under the Timber Notes Line of Credit.
The Timber Notes are structured to link, to the extent of cash
available, the deemed depletion of Scotia LLC's timber (through the harvest
and sale of logs) to the required amortization of the Timber Notes. The
required amount of amortization on any Timber Note payment date is
determined by various mathematical formulas set forth in the Timber Notes
Indenture. The minimum amount of principal which Scotia LLC must pay (on a
cumulative basis and subject to available cash) through any Timber Note
payment date in order to avoid an Event of Default is referred to as
Minimum Principal Amortization. If the Timber Notes were amortized in
accordance with Minimum Principal Amortization, the final installment of
principal would be paid on July 20, 2028. The minimum amount of principal
which Scotia LLC must pay (on a cumulative basis) through any Timber Note
payment date in order to avoid payment of prepayment or deficiency premiums
is referred to as Scheduled Amortization. If all payments of principal are
made in accordance with Scheduled Amortization, the payment date on which
Scotia LLC will pay the final installment of principal is January 20, 2014.
Such final installment would include a single bullet principal payment of
$463.3 million related to the Class A-3 Timber Notes.
Principal and interest on the Timber Notes are payable semi
annually on January 20 and July 20. The Timber Notes are redeemable at the
option of Scotia LLC at any time. The redemption price of the Timber Notes
is equal to the sum of the principal amount, accrued interest and a
prepayment premium calculated based upon the yield of like-term Treasury
securities plus 50 basis points.
The indenture for the MGHI Notes provided that in the event the
27,938,250 shares of Kaiser common stock which it owns were released from
the pledge securing the MGI Notes, the Company would pledge 16,055,000 of
such shares. In connection with the redemption of the MGI Notes and the
issuance of the Timber Notes, the Company agreed to amend the indenture for
the MGHI Notes to, among other things, pledge all of the 27,938,250 shares
of Kaiser common stock which it owns.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with the response to
Part I, Item 1 of this Report and Items 7 and 8 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.
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements appear in several places in this Form
10-Q. 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 those in
the forward-looking statements as a result of various factors. These
factors include the effectiveness of management's strategies and decisions,
general economic and business conditions, developments in technology, new
or modified statutory or regulatory requirements and changing prices and
market conditions. This section and the Form 10-K identify other factors
that could cause such differences. 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
The Company engages in forest products operations principally
through its subsidiaries, Pacific Lumber and Britt. The Company's business
is seasonal in that the forest products business generally experiences
lower first quarter sales due largely to the general decline in
construction-related activity during the winter months. Accordingly, the
Company's results for any one quarter are not necessarily indicative of
results to be expected for the full year. The following table presents
selected operational and financial information for the three and six months
ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(IN MILLIONS OF DOLLARS, EXCEPT SHIPMENTS AND PRICES)
<S> <C> <C> <C> <C>
Shipments:
Lumber: (1)
Redwood upper grades 11.9 13.3 22.1 26.3
Redwood common
grades 59.6 67.6 113.5 124.8
Douglas-fir upper
grades 1.6 2.5 3.5 5.0
Douglas-fir common
grades 12.1 17.1 21.3 36.5
Other 3.2 4.9 5.7 8.8
------------ ------------ ------------ ------------
Total lumber 88.4 105.4 166.1 201.4
============ ============ ============ ============
Logs (2) 1.3 4.1 1.3 6.6
============ ============ ============ ============
Wood chips (3) 48.6 62.1 80.8 122.3
============ ============ ============ ============
Average sales price:
Lumber: (4)
Redwood upper grades $ 1,513 $ 1,423 $ 1,503 $ 1,373
Redwood common
grades 550 546 529 527
Douglas-fir upper
grades 1,296 1,153 1,281 1,181
Douglas-fir common
grades 331 497 340 491
Logs (4) 414 359 414 404
Wood chips (5) 75 76 70 76
Net sales:
Lumber, net of discount $ 57.3 $ 68.6 $ 105.8 $ 127.7
Logs .5 1.5 .5 2.7
Wood chips 3.7 4.7 5.7 9.2
Cogeneration power 1.2 1.2 1.8 2.2
Other .8 .8 1.6 1.9
------------ ------------ ------------ ------------
Total net sales $ 63.5 $ 76.8 $ 115.4 $ 143.7
============ ============ ============ ============
Operating income $ 14.7 $ 24.3 $ 24.8 $ 43.1
============ ============ ============ ============
Operating cash flow (6) $ 20.5 $ 31.0 $ 36.2 $ 56.3
============ ============ ============ ============
Income before income taxes $ 2.4 $ 8.4 $ 1.4 $ 7.9
============ ============ ============ ============
Net income $ 3.6 $ 5.0 $ 4.5 $ 4.7
============ ============ ============ ============
Capital expenditures $ 3.2 $ 10.2 $ 6.0 $ 12.4
============ ============ ============ ============
<FN>
- ---------------
(1) Lumber shipments are expressed in millions of board feet.
(2) Log shipments are expressed in millions of feet, net Scribner scale.
(3) Wood chip shipments are expressed in thousands of bone dry units of
2,400 pounds.
(4) Dollars per thousand board feet.
(5) Dollars per bone dry unit.
(6) Operating income before depletion and depreciation, also referred to
as "EBITDA."
</TABLE>
Net sales
Net sales declined from $76.9 million and $143.7 million in the
second quarter and first half of 1997, respectively, to $63.5 million and
$115.4 million for the second quarter and first half of 1998, respectively,
primarily due to lower shipments of lumber, logs and wood chips. This
decrease was principally due to the inclement weather during the 1998
periods, combined with wet weather operating restrictions and the
applicability of logging restrictions during the nesting seasons for the
northern spotted owl and the marbled murrelet, which factors have
restricted the Company's harvesting and transporting of logs to its mills.
These difficulties in harvesting and transporting logs affected the types
of logs available for the mills and the Company's ability to produce a
desirable mix of lumber products which in turn adversely affected sales.
The poor weather conditions also had an unfavorable impact on demand for
the Company's lumber products and its ability to ship its products using
rail transportation. The Company expects that its revenues in the third
quarter of 1998 will increase materially over the second quarter of 1998,
as it will, assuming normal rainfall patterns during such quarter, be able
to conduct operations in areas where it has been restricted due to
inclement weather, wet weather operating restrictions and the nesting
seasons which end during the third quarter of 1998, and therefore be able
to achieve normal levels of lumber production as well as a more desirable
mix of lumber products.
Operating income
Operating income for the three and six months ended June 30, 1998
decreased from the comparable prior year periods primarily due to the
decrease in net sales discussed above.
Income before income taxes
Income before income taxes for the three and six months ended
June 30, 1998 decreased from the comparable 1997 periods, primarily due to
the decrease in operating income discussed above. This impact was
partially offset by equity in earnings from Kaiser. As discussed in Note 4
to the Consolidated Financial Statements, the Company began reflecting its
equity share of earnings in Kaiser in September 1997. Results for the
second quarter of 1998 were also affected by a decrease in investment
income from marketable securities.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. See above for cautionary information with respect to
such forward-looking statements.
As discussed further in Note 7 to the Consolidated Financial
Statements, on July 20, 1998, Scotia LLC issued $867.2 million of Timber
Notes. Proceeds from the offering were used primarily to prepay the Old
Timber Notes and to redeem the Pacific Lumber Senior Notes and the MGI
Notes effective August 19, 1998.
The Pacific Lumber Credit Agreement and the indenture governing
the Timber Notes contain various covenants which, among other things, limit
the ability of Pacific Lumber and Scotia LLC to incur additional
indebtedness and liens, to engage in transactions with affiliates, to pay
dividends and to make investments. As of June 30, 1998, under the most
restrictive of these covenants, approximately $24.6 million of dividends
could be paid by Pacific Lumber to its parent.
As of June 30, 1998, $31.1 million of borrowings was available
under the Pacific Lumber Credit Agreement, of which $5.6 million was
available for letters of credit and $20.5 million was restricted to
timberland acquisitions. As of June 30, 1998, $9.4 million of borrowings
were outstanding and letters of credit outstanding amounted to $14.4
million. All of the $9.4 million of borrowings were repaid on July 20,
1998 in connection with the issuance of the Timber Notes.
The indenture governing the MGHI Notes, among other things,
restricts the ability of the Company to incur additional indebtedness and
liens, engage in transactions with affiliates, pay dividends and make
investments. During the six months ended June 30, 1998, $2.5 million of
dividends were paid by the Company.
As of June 30, 1998, the Company had consolidated long-term debt
of $860.0 million (net of current maturities and restricted cash deposited
in the Liquidity Account) as compared to $864.5 million at December 31,
1997. The decrease in long-term debt was primarily due to $10.8 million in
principal payments on the Old Timber Notes offset by $7.2 million in
accretion of discount on the MGI Discount Notes. The Company anticipates
that cash flow from operations, together with existing cash, cash
equivalents, marketable securities and available sources of financing, will
be sufficient to fund its working capital and capital expenditure
requirements for the next year. With respect to its long-term liquidity,
the Company believes that its existing cash and cash equivalents, together
with its ability to generate sufficient levels of cash from operations and
its ability to obtain both short- and long-term financing, should provide
sufficient funds to meet its working capital and capital expenditure
requirements. However, due to its highly leveraged condition, the Company
is more sensitive than less leveraged companies to factors affecting its
operations, including governmental regulation and litigation affecting
timber harvesting practices (see "--Trends" below), increased competition
from other lumber producers or alternative building products and general
economic conditions.
TRENDS
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. See above for cautionary information with respect to
such forward-looking statements.
The Company's forest products operations are conducted by Pacific
Lumber and Britt. Pacific Lumber's operations are subject to a variety of
California and federal laws and regulations dealing with timber harvesting,
threatened and endangered species and habitat for such species, and air and
water quality. Moreover, these laws and regulations are modified from time
to time and are subject to judicial and administrative interpretation.
Compliance with such laws, regulations and judicial and administrative
interpretations, together with the cost of litigation incurred in
connection with certain timber harvesting operations of Pacific Lumber,
have increased the cost of logging operations. There can be no assurance
that certain pending regulatory and environmental matters or future
governmental regulations, legislation or judicial or administrative
decisions would not have a material adverse effect on the Company's
financial position, results of operations or liquidity. See Part II. Item
1. "Legal Proceedings" and Note 6 to the Condensed Consolidated Financial
Statements for further information regarding regulatory and legal
proceedings affecting the Company's operations.
Judicial or regulatory actions adverse to Pacific Lumber,
increased regulatory delays and inclement weather in northern California,
independently or collectively, could impair Pacific Lumber's ability to
maintain adequate log inventories and force Pacific Lumber to temporarily
idle or curtail operations at certain lumber mills from time to time.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 27, 1998, an action entitled Mateel Environmental Justice
Foundation v. Pacific Lumber, et. al. (No. 995329) was filed against MGI,
Scotia Pacific, Pacific Lumber and Salmon Creek in the California Superior
Court, San Francisco County. This action alleges, among other things,
violations of California's unfair competition law of the business and
professions code based on citations and violations (primarily water quality
related) issued against certain defendants since 1994 in connection with a
substantial number of THPs. The plaintiff seeks, among other things, an
injunction prohibiting alleged unlawful actions and requiring corrective
action, disgorgement of profits, appointment of a receiver to ensure
compliance with the law and any judgment, and financial security with
respect to future THPs to ensure full compliance with the Forest Practice
Act. The Company does not believe that this matter will have a material
adverse effect upon its business or financial condition.
Reference is made to Item 3 of the Form 10-K for information
concerning material legal proceedings with respect to the Company. No
material developments have occurred with respect to such legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
4.1 Indenture between Scotia LLC and State Street Bank and Trust
Company ("State Street"), as Trustee, regarding the Timber
Notes (incorporated herein by reference to Exhibit 4.1 to
the Quarterly Report on Form 10-Q of MAXXAM for the quarter
ended June 30, 1998, File No. 1-3924; the "MAXXAM June 30,
1998 10-Q")
4.2 Deed of Trust, Security Agreement, Financing Statement,
Fixture Filing and Assignment of Proceeds among Scotia LLC,
Fidelity National Title Insurance Company, as Trustee, and
State Street, as Collateral Agent (incorporated herein by
reference to Exhibit 4.2 to the MAXXAM June 30, 1998 10-Q)
4.3 Credit Agreement among Scotia LLC, Bank of America National
Trust and Savings Association and other financial
institutions party thereto (incorporated herein by reference
to Exhibit 4.3 to the MAXXAM June 30, 1998 10-Q)
*10.1 New Master Purchase Agreement between Pacific Lumber and
Scotia LLC
*10.2 New Services Agreement between Pacific Lumber and Scotia LLC
*10.3 New Additional Services Agreement between Pacific Lumber and
Scotia LLC
*10.4 New Reciprocal Rights Agreement among Pacific Lumber, Scotia
LLC and Salmon Creek
*10.5 New Environmental Indemnification Agreement between Pacific
Lumber and Scotia LLC
*27 Financial Data Schedule
* Included with this filing.
B. REPORTS ON FORM 8-K:
None.
SIGNATURES
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 accounting officer of the
Registrant.
MAXXAM GROUP HOLDINGS INC.
Date: July 31, 1998 By: /S/ PAUL N. SCHWARTZ
Paul N. Schwartz
Vice President, Chief Financial
Officer and Director
Date: July 31, 1998 By: /S/ ELIZABETH D. BRUMLEY
Elizabeth D. Brumley
Assistant Controller
(Principal Accounting Officer)
APPENDIX A
GLOSSARY OF DEFINED TERMS
BOF: California Board of Forestry
Britt: Britt Lumber Co., Inc., an indirect, wholly owned subsidiary of MGI
Budget Bill: California's 1998-99 budget bill
CDF: California Department of Forestry
CESA: California Endangered Species Act
Company: MAXXAM Group Holdings Inc., a wholly owned subsidiary of MAXXAM
EPA: Environmental Protection Agency
ESA: The federal Endangered Species Act
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,
1997
HCP: Habitat Conservation Plan
Headwaters Agreement: The September 28, 1996 agreement among the Pacific
Lumber Parties, the United States and California which provides the
framework for the acquisition by the United States and California of the
Headwaters Timberlands
Headwaters Timberlands: Approximately 5,600 acres of Pacific Lumber's
timberlands consisting of two forest groves commonly referred to as the
Headwaters Forest and the Elk Head Springs Forest
Kaiser: Kaiser Aluminum Corporation, an equity investee of the Company
engaged in aluminum operations
Liquidity Account: A liquidity account maintained by Scotia Pacific with
respect to the Old Timber Notes
LTSY: Long-term sustained yield
MAXXAM: MAXXAM Inc., including its subsidiaries unless otherwise noted or
the context indicates otherwise
MGHI Notes: 12% MGHI Senior Secured Notes due August 1, 2003
MGI: MAXXAM Group Inc., a wholly owned subsidiary of the Company
MGI Discount Notes: 12-1/4% MGI Senior Secured Discount Notes due August
1, 2003
MGI Notes: MGI Discount Notes and MGI Senior Notes
MGI Senior Notes: 11-1/4% MGI Senior Secured Notes due August 1, 2003
Minimum Principal Amortization: The minimum amount of principal on the
Timber Notes which Scotia LLC must pay (on a cumulative basis and subject
to available cash) through any Timber Note payment date in order to avoid
an Event of Default (as defined in the Timber Note Indenture)
Multi-Species HCP: The HCP covering multiple species contemplated by the
Headwaters Agreement
NMFS: National Marine Fisheries Service
Old Timber Notes: The 7.95% Scotia Pacific Timber Collateralized Notes due
July 20, 2015
Pacific Lumber: The Pacific Lumber Company, an indirect, wholly owned
subsidiary of MGI
Pacific Lumber Credit Agreement: The revolving credit agreement between
Pacific Lumber and a bank which provides for borrowings of up to
$60,000,000 of which $20,000,000 may be used for standby letters of credit
and $30,000,000 is restricted to timberland acquisitions.
Pacific Lumber Parties: Pacific Lumber, including its subsidiaries and
affiliates, and MAXXAM
Pacific Lumber Senior Notes: 10-1/2% Pacific Lumber Senior Notes due March
1, 2003
Permits: The incidental take permits related to the Multi-Species HCP
Pledged Kaiser Shares: The 27,938,250 shares of common stock of Kaiser
pledged as security for the MGI Notes
Pre-Permit Agreement: A February 27, 1998 Pre-Permit Application Agreement
in Principle entered into by Pacific Lumber, MAXXAM and various government
agencies regarding certain understandings that they had reached regarding
the Multi-Species HCP, the Permits and the SYP
PRIDES: 8,855,550 8.255% Preferred Redeemable Increased Dividend Equity
Securities issued by Kaiser during the first quarter of 1994; all
outstanding shares were converted into 7,227,848 shares of Kaiser common
stock in August 1997
Salmon Creek: Salmon Creek Corporation, a wholly owned subsidiary of
Pacific Lumber
Scheduled Amortization: The minimum amount of principal on the Timber
Notes which Scotia LLC must pay (on a cumulative basis) through any Timber
Note payment date in order to avoid payment of prepayment or deficiency
premiums.
Scotia LLC: Scotia Pacific Company LLC, a limited liability company
wholly owned by Pacific Lumber
Scotia Pacific: Scotia Pacific Holding Company, a wholly owned subsidiary
of Pacific Lumber, which was merged into Scotia LLC on July 20, 1998
SEC: Securities and Exchange Commission
SFAS No. 130: Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income"
SFAS No. 133: Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
SYP: The sustained yield plan establishing LTSY harvest levels for Pacific
Lumber's timberlands
THP: Timber harvesting plan required to be filed with and approved by the
CDF prior to the harvesting of timber
Timber Note Indenture: The indenture dated July 20, 1998 governing the
Timber Notes
Timber Notes: The Scotia LLC 6.55% Class A-1, 7.11% Class A-2 and 7.71%
Class A-3 Timber Collateralized Notes due July 20, 2028
Timber Notes Line of Credit: A line of credit agreement provided as
security for the payment of interest on the Timber Notes
USFWS: United States Fish and Wildlife Service
NEW MASTER PURCHASE AGREEMENT
This NEW MASTER PURCHASE AGREEMENT (this "Agreement"), dated as
of July 20, 1998, is entered into by and between Scotia Pacific Company
LLC, a Delaware limited liability company (the "Seller"), and The Pacific
Lumber Company, a Delaware corporation (the "Purchaser").
WITNESSETH:
The Seller and the Purchaser are parties to a Master Purchase
Agreement dated as of March 23, 1993, which is being terminated effective
as of the date hereof (the "Existing Master Purchase Agreement").
The Seller and the Trustee have entered into the Indenture,
pursuant to which the Seller has issued the Timber Notes; and the Seller,
the Collateral Agent and the Deed of Trust Trustee have entered into the
Deed of Trust, securing, among other things, the Seller's obligations under
the Timber Notes and the Indenture; and
This Agreement is being entered into in connection with the
issuance and sale of the Timber Notes.
NOW, THEREFORE, in consideration of the mutual agreements
contained herein and in the Operative Documents and other good and valuable
consideration, the sufficiency of which is hereby acknowledged, the Seller
and the Purchaser hereby agree as follows:
I
DEFINITIONS
1.1 For all purposes of this Agreement, unless the context
otherwise requires, all defined terms which are used but not defined herein
shall have the meaning set forth in Schedule A to the Indenture, which is
incorporated by reference as if fully set forth herein.
II
MASTER AGREEMENT
2.1 This Agreement shall govern all sales of logs from Seller to
Purchaser, including the sale of any logs covered by a log purchase
agreement entered into pursuant to the Existing Master Purchase Agreement
to the extent the logs covered thereby have not been sold thereunder prior
to the date hereof. Each sale shall be made pursuant to a Log Purchase
Agreement substantially in the form of Exhibit A hereto (each, a "Log
Purchase Agreement"). Each Log Purchase Agreement shall be consistent with
the terms and conditions of this Agreement, and all of the terms and
conditions of this Agreement shall be incorporated by reference into each
Log Purchase Agreement. References to "this Agreement" shall refer to this
New Master Purchase Agreement and each Log Purchase Agreement entered into
pursuant hereto.
2.2 If, as of any Note Payment Date, the cumulative amount of
principal on the Notes paid by the Seller (the "Amount Paid") is less than
the sum of all Minimum Principal Amortization in respect of the Notes
through such date (the "Target Level"), the Seller may, to the extent of
the greater of (A) the amount (expressed as gross revenues from the sale of
logs) necessary to reach the Target Level or (B) $500,000, sell any timber
(as logs or stumpage) which is the subject of any Log Purchase Agreement to
any third party, prior to the time that title to such log is transferred to
the Purchaser pursuant to Section 3.5. In addition, if and for so long as
the provisions of Section 4.31 of the Indenture are applicable, the Seller
may sell timber (as logs or stumpage) which is the subject of any Log
Purchase Agreement to any third party, prior to the time that title to such
log is transferred to the Purchaser pursuant to Section 3.5, to the extent
provided by Section 4.31 of the Indenture. If the Seller sells to third
parties any timber which has been felled by Purchaser pursuant to a Log
Purchase Agreement, the Purchaser shall receive a credit for the costs of
felling such timber, based upon the Purchaser's costs incurred in
connection with the felling thereof, as determined in accordance with
generally accepted accounting principles. Any stumpage or logs sold by the
Seller to a third party in compliance with this Section 2.2 shall be free
and clear of any rights or claims of the Purchaser, and the Purchaser shall
be relieved of its obligations to purchase such logs.
III
PRICE, QUANTITY AND PAYMENT TERMS
3.1 The price (the "Purchase Price") payable to the Seller by
the Purchaser for logs purchased pursuant to this Agreement shall be the
fair market value (based upon stumpage prices) for each species of timber
and category thereof as determined from time to time in good faith by the
Seller and the Purchaser. The Purchase Price shall be at least equal to
the SBE Price (as defined below). In addition, it is generally
contemplated that the Purchase Price shall be at least equal to the
Structuring Price, except as provided in this Article III.
3.2 If the Purchase Price equals or exceeds (i) the price for
such species and category thereof set forth on the Structuring Schedule
(the "Structuring Price") and (ii) the SBE Price, then such price shall be
deemed to be the fair market value of such logs. The "SBE Price", for any
species and category thereof, shall be the stumpage price for such species
and category thereof as set forth in the most recent Harvest Value Schedule
(or any successor publication) published by the California State Board of
Equalization (or any successor agency) applicable to the timber sold during
the period covered by such publication. In the event that (x) such
publication (or a successor publication) is no longer published or (y) such
publication (or a successor publication) is prepared on a basis
fundamentally different than that in effect on the date of this Agreement,
the SBE Price for any six-month period subsequent to the period covered by
the last such publication shall equal the product of (A) the last SBE Price
so published and (B) the quotient of (I) the value of the most recently
published Producer Price Index (Lumber and Wood Products Commodity Group)
(Standard Industrial Classification No. 2400) as published by the United
States Department of Labor, Bureau of Labor Statistics (or any successor
index) (the "Index"), as of the first day of such six month period, divided
by (II) the value of the Index as of the first day of the first such six
month period.
3.3 If the Purchase Price (i) is less than the Structuring Price
and (ii) equals or exceeds the SBE Price, then such price shall be deemed
to be the fair market value of such logs if the Seller shall have delivered
to the Trustee an Officer's Certificate to the effect that, after due
inquiry (consisting of consultation with an independent forestry
consultant), such price reflects the fair market value of such species and
category thereof (based upon stumpage prices).
3.4 The Purchase Price for all logs purchased by the Purchaser
during each Monthly Period shall be payable by the Purchaser not later than
11:00 a.m., New York City time, on the Monthly Deposit Date with respect to
such Monthly Period by deposit of immediately available funds to the
Collection Account on such date.
3.5 The title to all logs harvested by the Purchaser pursuant to
this Agreement shall remain in the Seller until such time as each log is
scaled. At such time, title shall pass to the Purchaser and the Purchaser
shall become obligated to make payment as provided in Section 3.4.
IV
TIMBER HARVESTING PLANS, RELATED MATTERS
4.1 All harvesting of timber hereunder shall be conducted on
Company Timber Property with respect to which a valid Timber Harvesting
Plan is in effect.
4.2 All harvesting of timber and other related activities
conducted by the Purchaser under this Agreement shall be conducted in all
material respects in accordance with all applicable Environmental Laws,
Timber Laws and General Laws, including, without limitation, those relating
to streams, waterways, wildlife habitat and endangered species, and shall
be conducted in all material respects in accordance with the terms,
provisions, restrictions and conditions of each applicable Timber
Harvesting Plan, sustained yield plan, habitat conservation plan, other
similar plan or permit and all federal, state and local laws, rules and
regulations relating to or incorporated into any Timber Harvesting Plan,
including laws relating to streams, waterways, wildlife habitat and
endangered species.
V
REPRESENTATIONS AND WARRANTIES
5.1 The Purchaser hereby represents and warrants to the Seller
as follows:
(a) The Purchaser has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with full corporate power and authority to own its properties and
conduct its business as presently conducted, and is duly qualified to do
business as a foreign corporation and is in good standing under the laws of
each jurisdiction material to the performance of its obligations under this
Agreement.
(b) This Agreement has been duly authorized, executed and
delivered by the Purchaser and constitutes the valid and legally binding
agreement of the Purchaser enforceable against the Purchaser in accordance
with its terms, except to the extent such enforceability may be limited by
Bankruptcy Law or general principles of equity; and the Purchaser has full
corporate power and authority to enter into and perform its obligations
under this Agreement.
(c) No consent, approval, authorization or order of any
Governmental Authority is required for the execution and delivery by the
Purchaser of this Agreement.
(d) The execution, delivery and performance by the
Purchaser of this Agreement does not violate, conflict with, result in a
breach of, or constitute a default (or an event which with the giving of
notice or the lapse of time or both would be reasonably likely to
constitute a default) under the charter or by-laws of the Purchaser, or any
General Law, Timber Law or Environmental Law applicable to the Purchaser
and in effect on the date hereof, or the terms of any bond, debenture, note
or any other evidence of indebtedness or any agreement, indenture, lease or
other similar instrument to which the Purchaser is a party or by which it
or any of its properties is subject.
(e) Except as disclosed in the Offering Memorandum, there
is not pending or, to the knowledge of the Purchaser, threatened, any
action, suit, proceeding or investigation involving the Purchaser (and, to
the knowledge of the Purchaser, no basis for any such action, suit,
proceeding or investigation exists) before any Governmental Authority which
could reasonably be expected to have a material adverse effect upon this
Agreement or the ability of the Purchaser to perform its obligations
hereunder.
(f) Except as disclosed in the Offering Memorandum, during
the term of the Existing Master Purchase Agreement, Pacific Lumber complied
in all material respects with (A) the terms and conditions of each approved
Timber Harvesting Plan in connection with timber harvested by Pacific
Lumber from the Company Timber Property and (B) all other material Timber
Laws applicable to such operations, as then in effect.
VI
SCALING, RELATED MATTERS
6.1 The Purchaser shall be responsible for all scaling and
measuring of logs purchased pursuant to this Agreement. The Purchaser
shall, at its own expense, furnish one or more qualified scalers acceptable
to the Seller. Such scalers may be employees of the Purchaser.
6.2 Scaling shall be done as soon as practicable upon delivery
of logs to the Purchaser's log deck according to the Net Short Log Scribner
Scale methodology of scaling. Notwithstanding the foregoing, and subject
to Section 4.12 of the Indenture, the Purchaser may, at its option, utilize
the weight equivalency methodology of scaling. In such event, the
Purchaser shall scale in accordance with the requirements of the California
State Board of Equalization (or any successor agency) for the weight
equivalency methodology of scaling, as in effect from time to time. In
accordance therewith, the Purchaser shall scale truckloads of logs from
time to time upon request of the Seller according to the Net Short Log
Scribner Scale methodology, and shall appropriately adjust the assumptions
used in its weight equivalency methodology on an ongoing basis to reflect
the results of such scaling.
6.3 The Seller may, upon reasonable notice to the Purchaser, at
its option and cost, at any time or from time to time utilize independent
scalers from the Northern California Log Scaling and Grading Bureau (or any
successor organization) or any other recognized third party log scaling and
grading bureau to verify the scaling by the Purchaser. The Purchaser shall
cooperate fully in any such verification by the Seller. The Seller shall
utilize independent scalers for at least two consecutive Business Days in
each six month period, upon reasonable notice to the Purchaser. The
Purchaser shall appropriately adjust the results of its scaling on a
prospective basis to reflect the results of such third party scaling.
6.4 Not later than each Monthly Certificate Delivery Date, the
Purchaser shall prepare and deliver to the Seller a report (the "Monthly
Production Report") substantially in the form of Exhibit B hereto, to be
included in summary form in the Monthly Trustee Certificate.
VII
HARVESTING
7.1 The Purchaser, at its own expense, agrees to cut and remove
the timber described in each Log Purchase Agreement in a manner consistent
in all material respects with prudent business practices which, in the
reasonable judgment of the Purchaser, (i) are consistent with then current
applicable industry standards and (ii) are in compliance in all material
respects with Section 4.2 and all applicable Timber Laws, Environmental
Laws and General Laws.
7.2 Provided that the Purchaser is the Services Provider under
the New Services Agreement, the Purchaser shall be entitled, at its option
and at no additional cost to the Purchaser, (a) to harvest and retain for
its own use, any and all hardwood trees which are permitted to be harvested
pursuant to any Timber Harvesting Plan subject to a Log Purchase Agreement,
(b) to remove for its own use, any and all residual parts of trees
harvested pursuant to any Timber Harvesting Plan subject to a Log Purchase
Agreement, including, but not limited to, breaks, limbs and tops, and (c)
to remove for its own use or to sell, gravel and rock from the Company
Timber Property.
7.3 The Purchaser shall complete harvesting of any timber
covered by a Timber Harvesting Plan within the applicable time period set
forth in such Timber Harvesting Plan (inclusive of any extensions thereof).
VIII
INDEMNIFICATION; INSURANCE
8.1 The Purchaser shall be liable for, and shall indemnify,
protect, defend and hold harmless the Seller, the Trustee and the
Collateral Agent, their respective subsidiary and affiliate companies and
their respective agents, employees, managers, directors, partners,
officers, servants and representatives against, any and all claims,
demands, causes of action, expenses or liabilities (including reasonable
attorneys' fees and disbursements) of every kind and character (whether
known or unknown, fixed or contingent, liquidated or unliquidated, secured
or unsecured, choate or inchoate, accrued, absolute or otherwise), suffered
or sustained, arising from (i) the breach by the Purchaser of any of its
representations, warranties, covenants and agreements set forth in this
Agreement, (ii) actions or omissions of the Purchaser in connection with
its obligations hereunder and (iii) failure of the Purchaser to have
complied with the terms and conditions of approved Timber Harvesting Plans
in connection with Timber harvested from its property or any other Timber
Laws, Environmental Laws and General Laws applicable to such operations, as
then in effect. The Seller shall notify the Purchaser promptly of any claim
for which it may seek indemnity. The Purchaser shall have the right to
defend the claim, and the Seller shall cooperate in the defense. If the
Purchaser does not defend such claim, the Seller may have separate counsel
and the Purchaser shall pay the reasonable fees and expenses of such
counsel.
8.2 The Purchaser shall at all times maintain comprehensive
general and automobile liability insurance against claims for personal
injury, death or property damage with limits of liability of not less than
$10,000,000 per occurrence and deductibles of up to $3,000,000 per
occurrence and (ii) all such worker's compensation or similar insurance as
may be required by applicable laws, provided that the Purchaser may
self-insure any or all worker's compensation liabilities. To the extent
that any of the insurance required by this Section 8.2 ceases to be
available at commercially reasonable rates, the Purchaser may maintain
insurance coverage in accordance with the prudent standards then being
followed by other companies engaged in the same or similar lines of
business or having comparable properties.
IX
INDEPENDENT CONTRACTOR STATUS
9.1 The Purchaser shall harvest the timber and perform its other
obligations hereunder as an independent contractor. The number of
employees, the selection and retention of such employees, the hours of
labor and the compensation for services to be paid to any and all such
employees of the Purchaser shall be determined by the Purchaser. All
employees, agents, contractors and subcontractors hired by the Purchaser to
perform any obligations of the Purchaser hereunder shall not be deemed to
be the employees, agents, contractors and subcontractors of the Seller, and
all salaries and compensation payable to them shall be the exclusive
responsibility of the Purchaser.
X
MISCELLANEOUS
10.1 Term. This Agreement shall become effective upon the date
first noted above and shall continue in effect until all amounts payable
under the Timber Notes (including any Additional Timber Notes), the
Indenture and the Deed of Trust shall have been paid in full.
10.2 Termination.
(a) The Seller or the Trustee, in each case to the extent
provided in Section 4.21(a) of the Indenture, shall have the right to
terminate this Agreement if a Purchase Agreement Default has occurred and
is continuing. The Seller or the Trustee may also terminate this Agreement
upon the giving of any notice of acceleration under Section 7.2(b) of the
Indenture. The Purchaser shall promptly notify the Seller and the Trustee
in writing of any Purchase Agreement Default.
(b) In the event that this Agreement is terminated as
provided in Section 10.2(a) hereof, (i) the Seller shall in good faith seek
to enter into one or more agreements for the sale of logs or stumpage
consistent with Section 7.1(f)(6) of the Deed of Trust and (ii) the Seller
shall be relieved of all obligations to sell, and the Purchaser shall be
relieved of obligations to purchase, timber under any Log Purchase
Agreement.
(c) The provisions of Sections 8.1, 10.4 and 10.5 shall
survive the expiration or termination of this Agreement; provided, however,
that Section 8.1 shall survive only with respect to matters occurring prior
to such expiration or termination.
10.3 Amendments.
(a) This Agreement may be amended by an agreement in
writing signed by the Seller and the Purchaser in accordance with Section
4.12 of the Indenture.
(b) Promptly following the execution of any amendment to
this Agreement, the Seller will furnish to the Trustee and each Rating
Agency a true, correct and complete copy of such amendment.
10.4 No Bankruptcy Petition. The Purchaser hereby covenants and
agrees that, prior to the date which is one year and one day after the
payment in full of all outstanding Notes, it will not institute against, or
join any other Persons in instituting against, the Seller, any bankruptcy,
reorganization, arrangement, insolvency or liquidation proceeding or other
similar proceeding under any Bankruptcy Law.
10.5 Subordination. This Agreement and all rights of the
Purchaser hereunder are junior and subordinate to the lien of the Deed of
Trust.
10.6 Notices. All notices and other communications required or
permitted hereunder shall be in writing and, unless otherwise provided in
this Agreement, shall be deemed to have been duly given when delivered in
person or by mail or when dispatched by telegram or electronic facsimile
transfer (confirmed in writing by mail simultaneously dispatched) to the
addressee at the address specified below:
If to the Purchaser:
The Pacific Lumber Company
P.O. Box 37
Scotia, California 95565
Fax: (707) 764-4269
Attention: Vice President, Finance and
Administration
If to the Seller:
Scotia Pacific Company LLC
P.O. Box 712
Scotia, California 95565
Fax: (707) 764-5001
Attention: Vice President, Finance
and Administration
If to any Rating Agency:
Standard & Poor's, a division of
The McGraw Hill Companies
26 Broadway - 10th Floor
New York, NY 10004-1010
Fax: (212) 208-8208
Attention: Asset-Backed Surveillance Group
Moody's Investors Service, Inc.
99 Church Street - 4th Floor
New York, NY 10007
Fax: (212) 553-4948
Attention: ABS Monitoring Department
or such other address as either party may from time to time designate by
like notice.
10.7 Limitations on Assignment. Neither the Purchaser nor the
Seller shall assign or transfer any of its rights or obligations under this
Agreement without the prior written consent of the other (except for the
lien of the Deed of Trust and any transfer of the rights and obligations of
the Seller hereunder by virtue of the exercise of remedies provided for in
the Deed of Trust); provided that the Purchaser shall not transfer any of
its obligations under this Agreement unless (i) no Default or Event of
Default shall have occurred and be continuing and (ii) either (A) the prior
written consent of the Majority Holders and Rating Agency Confirmation
shall have been obtained or (B) the prior written consent of the
Supermajority Holders (after prior notice of the Rating Agency Evaluation)
and Rating Agency Evaluation shall have been obtained. Notwithstanding the
foregoing, (x) nothing herein shall prohibit the Purchaser from hiring any
subcontractors or agents; provided that such hiring shall not relieve the
Purchaser of any of its obligations hereunder and (y) nothing herein shall
prohibit any assignment occurring as a result of a transaction permitted by
Section 4.2 of the New Services Agreement.
10.8 Effect of Provisions of the Other Operative Documents.
Notwithstanding any provision of the Indenture or the Deed of Trust
requiring the Seller to pay an expense or perform an obligation, the
Purchaser shall not be relieved from any of its obligations under this
Agreement to pay expenses or perform obligations as expressly provided in
this Agreement. Nothing in this Agreement shall be interpreted so as to
limit or construe any of the obligations of the Servicer under the Services
Agreement.
10.9 Governing Law. This Agreement shall be governed by the
internal laws of the State of California without regard to principles of
conflict of laws.
10.10 Counterparts. This Agreement may be executed in any
number of counterparts, each of which when so executed shall be deemed an
original but all of which together shall constitute one and the same
instrument.
10.11 Entire Agreement. This Agreement constitutes the
entire agreement of the parties with respect to the subject matter hereof.
10.12 Headings. The section headings of this Agreement are
only for the purpose of reference and shall not effect the meaning hereof.
[REST OF PAGE INTENTIONALLY LEFT BLANK.]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this New Master
Agreement as of the date first above written.
PURCHASER:
THE PACIFIC LUMBER COMPANY
By: /S/ JOHN A. CAMPBELL
Name: John A. Campbell
Title: President
SELLER:
SCOTIA PACIFIC COMPANY LLC
By: /S/ GARY L. CLARK
Name: Gary L. Clark
Title: Vice President-Finance
and Administration
<PAGE>
Exhibit A
Form of Log Purchase Agreement
Log Purchase Agreement
This Agreement is entered into between Scotia Pacific Company LLC
(the "Seller") and The Pacific Lumber Company (the "Purchaser") as of
____________, ____.
Timber Harvesting
Plan No. ______ (the "THP") _______________
Estimated Mbfe covered
by the THP _______________
Estimated Starting Date _______________
Contact person at Purchaser _______________
. Seller agrees to sell, and Purchaser agrees to purchase, the
timber covered by the THP, at prices that comply with Article III of the
New Master Purchase Agreement.
. The Seller and the Purchaser agree that the terms and
conditions of the New Master Purchase Agreement are incorporated by
reference as if fully set forth herein.
SCOTIA PACIFIC COMPANY LLC,
Seller
By:____________________________
Name:
Title:
THE PACIFIC LUMBER COMPANY,
Purchaser
By:____________________________
Name:
Title:
<PAGE>
Exhibit B to
New Master Purchase Agreement
Form of Monthly Production Report
The undersigned, the _____________ of The Pacific Lumber Company (the
"Purchaser"), DOES HEREBY CERTIFY:
1. This Monthly Production Report is delivered pursuant to Section
6.4 of the New Master Purchase Agreement dated as of July __,
1998 between the Purchaser and Scotia Pacific Company LLC.
2. The undersigned has made such examination or investigation as is
necessary to enable him or her to express an informed opinion on
the matters referred to herein.
3. To the best of the undersigned's knowledge, the attached
calculations are in accordance with the books and records of the
Purchaser.
Delivered this ____ day of ___, _____.
______________________________
Name:
<PAGE>
Exhibit B To New Master Purchase Agreement
Monthly
Production Report
for month of:
<TABLE>
<CAPTION>
Purchases Purchases
Type (net scribner scale) Factor
(Mbfe)
<S> <C> <C> <C>
Old Growth Redwood _____ 1.0000 Mbfe
Old Growth Douglas Fir _____ 0.723757 Mbfe
Young Growth Redwood _____ 0.751381 Mbfe
Young Growth Douglas Fir _____ 0.488950 Mbfe
Other _____ 0.309392 Mbfe
Total: Mbfe
</TABLE>
NEW SERVICES AGREEMENT
THIS NEW SERVICES AGREEMENT (this "Agreement"), dated as of July
20, 1998, is entered into by and between The Pacific Lumber Company, a
Delaware corporation ("Pacific Lumber" and, in its capacity as the initial
Services Provider hereunder, the "Services Provider"), and Scotia Pacific
Company LLC, a Delaware limited liability company (the "Issuer").
WITNESSETH:
The Issuer and Pacific Lumber are parties to a Services Agreement
dated as of March 23, 1993, which is being terminated effective as of the
date hereof (the "Existing Services Agreement");
The Issuer and the Trustee have entered into the Indenture,
pursuant to which the Issuer has issued the Timber Notes; and the Issuer,
the Collateral Agent and the Deed of Trust Trustee have entered into the
Deed of Trust, securing, among other things, the Issuer's obligations under
the Timber Notes and the Indenture;
This Agreement is being entered into in connection with the
issuance and sale of the Timber Notes; and
Pacific Lumber is capable of rendering the services described in
Schedule 1 hereto (the "Services") and supplying the equipment, personnel
and expertise necessary to perform the Services as contemplated by this
Agreement.
NOW, THEREFORE, in consideration of the mutual agreements
contained herein and in the Operative Documents and other good and valuable
consideration, the sufficiency of which is hereby acknowledged, Pacific
Lumber and the Issuer hereby agree as follows:
I
DEFINITIONS
1.1 For all purposes of this Agreement, unless the context
otherwise requires, all defined terms shall have the meaning set forth in
Schedule A to the Indenture, which is incorporated by reference as if fully
set forth herein.
II
SERVICES
2.1 Services. Subject to the terms and provisions set forth in
this Agreement, the Services Provider shall provide to the Issuer the
Services.
2.2 Personnel Matters. Without limiting the generality of
Section 2.1 of this Agreement, the Services Provider shall provide all
labor and professional and supervisory persons necessary to perform the
Services which are not provided by the Issuer, including, but not limited
to, biologists, fire protection personnel, foresters, technicians,
accountants, lawyers and office, field and other employees; provided that
the Services Provider shall have the right at its own expense to use
independent contractors, outside legal counsel or other outside specialists
or other persons in performing the Services as it shall deem advisable in
its reasonable judgment.
2.3 Performance of Services. The Services Provider shall
perform or cause to be performed its duties under this Agreement in a
manner consistent in all material respects with prudent business practices
which, in the reasonable judgment of the Services Provider, (i) are
consistent with then current applicable industry standards, and (ii) are in
compliance in all material respects with applicable laws. The Services
Provider shall, in connection with the performance of the Services
hereunder, apply for, and use its best efforts to obtain, all permits,
licenses, certificates or other administrative or regulatory authorizations
as may be required by any Governmental Authority from time to time as may
be necessary or appropriate for the Services Provider's performance of its
obligations under this Agreement, except for such permits, licenses,
certificates or other authorizations as the Issuer is specifically required
to procure pursuant to the terms of the Indenture or by reason of
applicable law. The Issuer shall use all reasonable efforts to assist the
Services Provider in obtaining such authorizations as the Services Provider
is required to obtain, and the Services Provider shall use all reasonable
efforts to assist the Issuer in obtaining such authorizations as the Issuer
is required to obtain. In connection with the performance of the Services,
the Services Provider shall comply with all laws, rules and regulations
applicable to it, and with all agreements applicable to it that now
pertain, or in the future may pertain, to the Services, other than such
events of non-compliance which would not, individually or in the aggregate,
have a Material Adverse Effect. In addition, the Services Provider shall,
in the performance of its obligations under this Agreement, abide by any
applicable restrictions contained in any agreement to which the Issuer is a
party, including, without limitation, the Operative Documents.
2.4 Independent Contractor Status. The Services Provider shall
perform the Services as an independent contractor. The number of
employees, the selection and retention of such employees, the hours of
labor and the compensation for services to be paid to any and all such
employees of the Services Provider shall be determined by the Services
Provider. The Services Provider or a foreman, supervisor, manager or
officer of the Services Provider with whom the Issuer may consult
concerning the Services shall be available to the Issuer at all reasonable
times. All employees, agents, contractors and subcontractors hired by the
Services Provider to perform services hereunder shall not be deemed to be
the employees, agents, contractors and subcontractors of the Issuer, and
all salaries and compensation payable to them shall be the exclusive
responsibility of the Services Provider.
2.5 Necessary Information. The Issuer shall furnish the
Services Provider with all information, programs, know-how, methods or
methodology within the Issuer's control as may be necessary or appropriate
for the performance of the Services by the Services Provider.
III
REPRESENTATIONS AND WARRANTIES
3.1 Pacific Lumber hereby represents and warrants to the Issuer
as follows:
(a) Pacific Lumber has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
State of Delaware, with full corporate power and authority to own its
properties and conduct its business as presently conducted, and is duly
qualified to do business as a foreign corporation and is in good standing
under the laws of each jurisdiction material to the performance of its
obligations under this Agreement.
(b) This Agreement has been duly authorized, executed and
delivered by Pacific Lumber and constitutes the valid and legally binding
agreement of Pacific Lumber enforceable against Pacific Lumber in
accordance with its terms, except to the extent such enforceability may be
limited by Bankruptcy Law or general principles of equity; and Pacific
Lumber has full corporate power and authority to enter into and perform its
obligations under this Agreement.
(c) No consent, approval, authorization or order of any
Governmental Authority or Tribunal is required for the execution and
delivery by Pacific Lumber of this Agreement.
(d) The execution, delivery and performance by Pacific
Lumber of this Agreement does not violate, conflict with, result in a
breach of, or constitute a default (or an event which with the giving of
notice or the lapse of time or both would be reasonably likely to
constitute a default) under the charter or by-laws of Pacific Lumber, or
any General Law, Timber Law or Environmental Law applicable to Pacific
Lumber and in effect on the date hereof, or the terms of any bond,
debenture, note or any other evidence of indebtedness or any agreement,
indenture, lease or other similar instrument to which Pacific Lumber is a
party or by which it or any of its properties is subject.
(e) Except as disclosed in the Offering Memorandum, there
is not pending or, to the knowledge of Pacific Lumber, threatened, any
action, suit, proceeding or investigation involving Pacific Lumber (and, to
the knowledge of Pacific Lumber, no basis for any such action, suit,
proceeding or investigation exists) before any Tribunal or Governmental
Authority which could reasonably be expected to have a material adverse
effect upon this Agreement or the ability of Pacific Lumber to perform its
obligations hereunder.
(f) Except as disclosed in the Offering Memorandum, during
the term of the Existing Services Agreement, Pacific Lumber complied in all
material respects with (A) the terms and conditions of its approved Timber
Harvesting Plans in connection with timber harvested by Pacific Lumber from
its property and (B) the material Timber Laws, Environmental Laws and
General Laws applicable to such operations, as then in effect.
(g) Pacific Lumber has such properties and equipment, and
such experience, information and know-how as are necessary, when taken
together with the properties, equipment, personnel, experience, information
and know-how of the Issuer, to perform the Services.
IV
COVENANTS
4.1 No Bankruptcy Petition. The Services Provider hereby
covenants and agrees that, prior to the date which is one year and one day
after the payment in full of all outstanding Timber Notes, it will not
institute against, or join any other Persons in instituting against, the
Issuer, any bankruptcy, reorganization, arrangement, insolvency or
liquidation proceeding or other similar proceeding under any Bankruptcy
Law.
4.2 Maintenance of Existence. The Services Provider shall
maintain its separate existence as a legal entity; provided that this
provision shall not prevent the Services Provider from merging with or
into, consolidating with or transferring all or substantially all of its
assets or substantially all of its assets excluding its interest in Salmon
Creek to a successor corporation or other entity, provided that (i) no
Default or Event of Default shall have occurred and be continuing, (ii) the
surviving corporation or other entity shall, consistent with the provisions
of Section 2.3 hereof, remain qualified to perform the Services, (iii) the
surviving corporation or other entity (if not the Services Provider) shall
be duly and validly existing under the laws of the United States, any State
thereof or the District of Columbia and shall assume by written instrument
the performance and observance of each covenant in this New Services
Agreement to be performed by the Services Provider, (iv)(A) the long-term
unsecured debt obligations of the corporation or other entity with which
the Services Provider proposes to merge or consolidate, or to which the
Services Provider proposes to transfer all or substantially all of its
assets or substantially all of its assets excluding its interest in Salmon
Creek, immediately prior to (and without giving effect to) such
transaction, shall be rated at least equal to the then current long-term
unsecured debt obligations of the Services Provider, (B) Rating Agency
Confirmation shall have been obtained and evidence thereof delivered to the
Trustee or (C) the entity which survives such merger or consolidation or to
which such assets are transferred is a newly formed wholly-owned subsidiary
of Pacific Lumber with no material assets or liabilities immediately prior
to such merger, consolidation or transfer and (v) an Officer's Certificate
to the effect of Clauses (i), (ii), (iii) (if applicable) and (iv)(A) or
(C) (if applicable) shall have been delivered to the Trustee and each
Rating Agency. Any Person into which the Services Provider may be merged
or consolidated or any Person resulting from any merger or consolidation to
which the Services Provider is a party, or any Person succeeding to the
business of all or substantially all of the assets of the Services Provider
or substantially all of the assets of the Services Provider excluding its
interest in Salmon Creek will be the successor to the Services Provider
under this Agreement.
4.3 Separate Existence and Formalities. The Services Provider
hereby covenants and agrees that:
(a) The Services Provider's funds and other assets will not
be commingled with those of the Issuer;
(b) The Services Provider will maintain records and books
of account separate from those of the Issuer in accordance with generally
accepted accounting principles;
(c) The Services Provider will conduct its business at an
office or offices that are identifiably segregated from the offices of the
Issuer and will have telephone numbers, a mailing address, stationery and
other business forms separate from the Issuer;
(d) The Services Provider will conduct its business solely
in its own name and will not knowingly or negligently mislead any other
Person as to the identity or authority of the Services Provider;
(e) all oral and written communications of the Services
Provider, including, without limitation, letters, invoices, purchase
orders, contracts, statements and applications, will be made solely in the
name of the Services Provider;
(f) The Services Provider will provide for all of its
operating expenses and liabilities from its own separate funds;
(g) The Services Provider will maintain correct minutes of
the meetings and other corporate proceedings of the owners of its capital
stock and its Board of Directors and otherwise comply with requisite
corporate formalities required by law; and
(h) Except as provided in the Purchase Agreement, the
Services Provider will not hold itself out or knowingly permit itself to be
held out as having agreed to pay or as being liable for any indebtedness of
the Issuer.
4.4 Purchase of Section 6.1 Timber Notes. Pacific Lumber agrees
to purchase Section 6.1 Notes from the Issuer to the extent required by
Section 5.3(c)(x) of the Indenture.
V
COMPENSATION
5.1 Compensation for Services.
(a) As compensation for the Services provided by the
Services Provider pursuant to this Agreement, the Issuer shall (i) pay to
the Services Provider on each Monthly Deposit Date during the term of this
Agreement, a fee, in cash (the "Services Fees"), in an amount equal to
$1,284,000 per year, payable in 12 equal installments, which amount shall
be adjusted for each 12 month period, commencing with the 12 month period
beginning January 1, 1999 (each, an "Adjustment Period"), by multiplying
such amount by a fraction, the numerator of which shall be the then most
recent Producer Price Index (Lumber and Wood Products Commodity Groups)
(Standard Industrial Classification No. 2400), as published by the United
States Department of Labor, Bureau of Labor Statistics (the "PPI Index"),
in effect with respect to the first day of such Adjustment Period, and the
denominator of which shall be the PPI Index in effect with respect to
January 1, 1998 and (ii) reimburse the Services Provider on each Monthly
Deposit Date during the term of this Agreement (the "Reimbursable
Amounts"), in cash (the "Reimbursable Amounts") for the cost incurred by
the Services Provider in connection with constructing, rehabilitating and
maintaining roads, and performing reforestation services on, the Company
Timber Property in respect of Monthly Periods prior to such Monthly Deposit
Date, in each case as determined in accordance with generally accepted
accounting principles.
(b) The parties hereto acknowledge and agree that the
Services Provider's right to be compensated pursuant to this Agreement
shall be limited to its right to receive the Services Fees and the
Reimbursable Amounts and that the Services Provider shall not be entitled
to any further payment pursuant to this Agreement, whether by way of
reimbursement of its expenses in performing the Services or otherwise. If
this New Services Agreement is terminated and any accrued compensation
through the date of such termination shall remain unpaid, the Services
Provider shall be entitled to receive such accrued and unpaid compensation.
VI
INDEMNIFICATION
6.1 Indemnity by the Services Provider. The Services Provider
shall be liable for, and shall indemnify, protect, defend and hold harmless
the Issuer, the Trustee and the Collateral Agent, their respective
subsidiary and affiliate companies and their respective agents, employees,
managers, directors, partners, officers, servants and representatives
against, any and all claims, demands, causes of action, expenses or
liabilities (including reasonable attorneys' fees and disbursements) of
every kind and character (whether known or unknown, fixed or contingent,
liquidated or unliquidated, secured or unsecured, choate or inchoate,
accrued, absolute or otherwise), suffered or sustained, arising from (i)
the breach by the Services Provider of any of its representations,
warranties, covenants and agreements set forth in this Agreement, (ii)
actions or omissions of the Services Provider in connection with its
obligations hereunder, (iii) any claim, demand or cause of action asserted
against the Services Provider as of the date of this Agreement and (iv)
failure of the Services Provider to have complied with the terms and
conditions of approved Timber Harvesting Plans in connection with timber
harvested from the Company Timber Property or any other Timber Laws
applicable to such operations, as then in effect. The Issuer shall notify
the Services Provider promptly of any claim for which it may seek
indemnity. The Services Provider shall have the right to defend the claim,
and the Issuer shall cooperate in the defense. If the Services Provider
does not defend such claim, the Issuer may have separate counsel and the
Services Provider shall pay the reasonable fees and expenses of such
counsel. The Services Provider shall have no obligation to pay for any
settlement of any such claim made without its consent.
VII
MISCELLANEOUS
7.1 Term. This Agreement shall become effective upon the date
first noted above and shall continue in effect until all amounts payable
under the Timber Notes (including any Additional Timber Notes), the
Indenture and the Deed of Trust shall have been paid in full.
7.2 Termination.
(a) The Services Provider may terminate this Agreement if
the Issuer shall have failed to pay any amount payable to the Services
Provider pursuant to Section 5.1(a) hereof and such failure shall be
continuing for more than ninety (90) days after notice thereof from Pacific
Lumber; provided that no such termination shall become effective until a
successor to the Services Provider has agreed by written instrument to
perform the Services provided by the Services Provider under this
Agreement.
(b) The Issuer or the Trustee, in each case to the extent
provided in Section 4.20(a) of the Indenture, shall have the right to
terminate this Agreement and replace Pacific Lumber as the Services
Provider if an Operating Default has occurred and is continuing; provided,
however, that termination of this Agreement shall not become effective, and
Pacific Lumber shall not be relieved of its obligations as the Services
Provider hereunder and shall continue (so long as the Services Provider
continues to perform the Services contemplated by this Agreement with the
same standard of care and diligence as were observed during the term of
this Agreement before such Operating Default) to be entitled to receive
compensation for its services hereunder, unless and until a new Services
Provider has been obtained by the Issuer, and such successor Services
Provider has agreed by written instrument to perform the Services provided
by the Services Provider under this Agreement. The Issuer or the Trustee
may also terminate this Agreement upon the giving of any notice of
acceleration under Section 7.2(b) of the Indenture. The Services Provider
shall promptly notify the Issuer and the Trustee in writing of any
Operating Default.
(c) In the event that this Agreement is terminated as
provided in Sections 7.2(a) or 7.2(b) hereof, the Issuer shall in good
faith solicit bids for a new Services Provider from at least three parties
that are engaged in the forestry industry and have sufficient capability to
provide the Services. In conducting its solicitation, the Issuer shall
endeavor to obtain a Services Provider willing to provide the Services for
compensation not in excess of the Services Fee and Reimbursable Amounts
payable hereunder to the Services Provider and otherwise on substantially
the same terms hereof. The selection of a new Services Provider shall be
based upon, among other factors, the capacity of the bidding parties to
provide the Services, the quality of services the bidding parties can
provide and the amount of compensation sought by such bidding parties. Any
replacement Services Provider or Services Providers shall require Rating
Agency Confirmation.
(d) The outgoing Services Provider shall fully cooperate in
good faith in any transition to a new Services Provider, including, without
limitation, producing all relevant books, records and documentation,
participating in meetings and discussions, responding to questions of the
successor Services Provider and the Trustee, and assisting in obtaining any
necessary Rating Agency Confirmation; provided, however, that the
obligations of the outgoing Services Provider pursuant to this Section
7.2(d) shall be limited to six months from the date of termination if this
Agreement was terminated by the Services Provider pursuant to Section
7.2(a).
(e) Any successor Services Provider may contract with one
or more sub-Services Providers, provided that (i) if such subcontractors,
individually or in the aggregate, are to provide all or substantially all
of the Services hereunder, such successor Services Provider shall provide
an Officer's Certificate to the Trustee to the effect that such successor
Services Provider reasonably believes that each subcontractor is qualified
to perform its obligations under such subcontract and (ii) in any event,
such subcontracting shall not relieve the successor Services Provider from
any of its obligations hereunder.
(f) Any material amendment to this Agreement required in
connection with the appointing of a successor Services Provider shall
require Rating Agency Confirmation.
(g) The provisions of Sections 4.1, 4.3 and 6.1 shall
survive any expiration or termination of this Agreement; provided, however,
that Section 6.1 shall survive only with respect to matters occurring prior
to such expiration or termination.
7.3 Amendments.
(a) This Agreement may be amended by an agreement in
writing signed by the Services Provider and the Issuer in accordance with
Section 4.12 of the Indenture.
(b) Promptly following the execution of any amendment to
this Agreement, the Issuer will furnish to the Trustee and each Rating
Agency a true, correct and complete copy of such amendment.
7.4 Indenture. The Issuer agrees that while this Agreement is
in effect it shall not, without the written consent of the Services
Provider, amend, or consent to any amendment of, the Indenture that would
(a) in any way change the priority of payment of the Services Fees and the
Reimbursable Amounts from the Collection Account or the Expense Reserve or
(b) otherwise subordinate the payment of the Services Fees or the
Reimbursable Amounts hereunder to the payment of other amounts from the
Collection Account or the Expense Reserve pursuant to the Indenture.
7.5 Notices. All notices and other communications required or
permitted hereunder shall be in writing and, unless otherwise provided in
this Agreement, shall be deemed to have been duly given when delivered in
person or by mail or when dispatched by telegram or electronic facsimile
transfer (confirmed in writing by mail simultaneously dispatched) to the
addressee at the address specified below:
If to the Services Provider:
The Pacific Lumber Company
P.O. Box 37
Scotia, California 95565
Fax: (707) 764-4269
Attention: Vice President,
Finance and
Administration
If to the Issuer:
Scotia Pacific Company LLC
P.O. Box 712
Scotia, California 95565
Fax: (707) 764-5001
Attention: Vice President,
Finance and
Administration
If to any Rating Agency:
Standard & Poor's, a division of
The McGraw Hill Company
26 Broadway - 10th Floor
New York, New York 10004-1010
Fax: (212) 208-8208
Attention: Asset-Backed Surveillance
Group
Moody's Investors Service, Inc.
99 Church Street - 4th Floor
New York, New York 10007
Fax: (212) 553-4948
Attention: ABS Monitoring Department
or such other address as either party may from time to time designate by
like notice.
7.6 Limitations on Assignment. Subject to the provisions of
this Agreement, neither the Services Provider nor the Issuer shall assign
or transfer any of its rights or obligations under this Agreement without
the prior written consent of the other (except for the lien of the Deed of
Trust and any transfer of the rights and obligations of the Issuer
hereunder by virtue of the exercise of remedies provided for in the Deed of
Trust); provided that, subject to the provisions of this Agreement, the
Services Provider shall not transfer any of its obligations under this
Agreement unless (i) no Default or Event of Default shall have occurred and
be continuing and (ii) either (A) the prior written consent of the Majority
Holders and Rating Agency Confirmation shall have been obtained or (B) the
prior written consent of the Supermajority Holders (after prior notice of
the Rating Agency Evaluation) and Rating Agency Evaluation shall have been
obtained. Notwithstanding the foregoing, (x) nothing herein shall prohibit
the Services Provider from hiring any subcontractors or agents; provided
that such hiring shall not relieve the Services Provider of any of its
obligations hereunder and (y) nothing herein shall prohibit any assignment
occurring as a result of a transaction permitted by Section 4.2.
7.7 Effect of Provisions of the Indenture and the Deed of Trust.
Notwithstanding any provision of the Indenture or the Deed of Trust
requiring the Issuer to pay an expense or perform an obligation, the
Services Provider shall not be relieved from any of its obligations under
this Agreement to pay expenses or perform obligations as expressly provided
in this Agreement.
7.8 Governing Law. This Agreement shall be governed by the
internal laws of the State of California without regard to principles of
conflicts of laws.
7.9 Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed an original
but all of which together shall constitute one and the same instrument.
7.10 Entire Agreement. This Agreement constitutes the entire
agreement of the parties with respect to the subject matter hereof.
7.11 Headings. The section headings of this Agreement are only
for the purpose of reference and shall not affect the meaning hereof.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this New
Services Agreement as of the date first above written.
SERVICES PROVIDER:
THE PACIFIC LUMBER COMPANY
By: /S/ JOHN A. CAMPBELL
Name: John A. Campbell
Title: President
ISSUER:
SCOTIA PACIFIC COMPANY LLC
By: /S/ GARY L. CLARK
Name: Gary L. Clark
Title: Vice President-Finance
and Administration
<PAGE>
SCHEDULE 1
Services
The Services Provider shall perform the following Services
consistent with the standards in Section 2.3 of the Agreement.
1. Provide necessary supervisory and oversight services to the
Issuer in connection with the operation and maintenance of the
Company Timber Property.
2. Furnish all equipment, personnel and expertise not within the
possession of the Issuer and reasonably necessary for the
operation and maintenance of the Company Timber Property and the
provision of the Services.
3. Operate the Company Timber Property as commercial timberlands,
having due regard to soil conditions, stand arrangements and
other factors relevant to the conduct of silvicultural and
harvesting practices, including:
(a) Fire Protection. Taking measures to protect the Timber and
the Company Timber Property from loss by fire, which
measures shall be equal in all material respects to
fire-control practices generally followed on timber-
producing property of the same nature in the same general
area, including the adoption of prevention and control
measures, the maintenance of fire-fighting equipment,
disposal of slash and slabs, and cooperation with local,
state and federal agencies on matters of fire prevention and
control. The Services Provider shall continue to observe
all arrangements, agreements and other understandings with
respect to fire prevention from time to time in effect with the California
Department of Forestry.
(b) Maintenance, Rehabilitation and Construction of Roads.
Maintaining and rehabilitating the existing road system and
any newly constructed roads on the Company Timber Property
and constructing new roads to permit the harvesting of
timber as contemplated by the Operative Documents and access
of mobile fire-fighting equipment to the Company Timber
Property.
(c) Reforestation. Taking measures to replant and otherwise
regenerate commercial timber stands on the Company Timber
Property.
(d) Salvage. Salvaging and harvesting trees which are dead,
diseased, fallen or otherwise damaged by casualty.
(e) Environmental. Providing measures to comply with federal,
state or local Environmental Laws, and continuing measures
to effect compliance with such laws, including, without
limitation, measures with respect to waterways, habitat,
hatcheries, endangered species and the like.
4. Provide necessary personnel and technical assistance to the
Issuer to enable the Issuer to manage the harvesting of timber in
a manner reasonably calculated to produce growth, consistent with
the production of the quality and quantity of the Issuer's
current merchantable timber.
5. Provide advice to, be available for consultation with, and
provide required assistance to, the Issuer in respect of all
matters relating to the preparation, filing and prosecution of
Timber Harvesting Plans, sustained yield plans, habitat
conservation plans or similar plans and permits by the Issuer, as
required by the Indenture (it being understood that the filing of
such Timber Harvesting Plans, sustained yield plans, habitat
conservation plans or similar plans and permits shall be the
responsibility of the Issuer), and matters relating to compliance
with all federal, state and local laws, rules and regulations
relating to or incorporated therein, including laws relating to
streams, waterways, wildlife habitat and endangered species.
6. Provide advice to and be available for consultation with the
Issuer in respect of federal, state or local legislative matters
affecting or relating to the Company Timber Property or the operation,
management or harvesting thereof.
7. Provide advice to and be available for consultation with the
Issuer in respect of the entering into by the Issuer of any
Purchase Agreement (other than the Master Purchase Agreement),
consistent with the terms of the Indenture.
8. Prepare and file on behalf of the Issuer, all pleadings and
motions, and otherwise diligently pursue, appeals of any denial
of any Timber Harvesting Plan, sustained yield plan, habitat
conservation plan or similar plan or permit and related matters,
and defense of any legal challenge to any approval of any Timber
Harvesting Plan, sustained yield plan, habitat conservation plan
or similar plan or permit and related matters. All such
pleadings, motions and related documents shall be executed by a
duly authorized officer of the Issuer in the Issuer's own name.
9. Provide necessary personnel and technical assistance to the
Issuer to enable the Issuer to monitor compliance with each
Timber Harvesting Plan, sustained yield plan, habitat
conservation plan or similar plan or permit and to obtain all
certificates of completion or similar certifications from the
requisite Governmental Authority.
10. Provide necessary personnel and technical assistance to the
Issuer to enable the Issuer to prepare and file any development
or strategic plan required by any Governmental Authority to be
prepared in respect of the Company Timber Property.
11. Provide necessary personnel and technical assistance to the
Issuer to permit the Issuer to update, upgrade or improve Data
Processing Information as required or permitted by the Indenture,
and to provide estimates of Mbfe in respect of the Company Timber
Property as required by the Indenture. Provide information in
its possession to the Issuer relating to updating the Issuer's
geographical information system.
12. Assist the Issuer in preparing reports required pursuant to the
terms of the Indenture.
13. Provide the Issuer with access to such of its data processing
equipment and information as necessary in order for the Issuer to
store, collect and gather information necessary to the conduct of
its business.
14. Provide advice to and be available for consultation with the
Issuer in respect of any updates, upgrades or improvements to, or
replacement of, the Data Processing Equipment.
15. Provide advice to and be available for consultation with the
Issuer in respect of any governmental or regulatory filings or
reports required by the Issuer (other than as specifically
addressed elsewhere in this Schedule 1).
16. Provide necessary personnel and technical assistance to assist
the Issuer's efforts to maintain in force and effect each permit,
license, franchise, right of way, license or easement necessary
to the harvesting, cutting, severing, sale, marketing or
disposition of the Company Timber (other than as specifically
addressed elsewhere in this Schedule 1).
17. Maintain membership in professional, industry and trade
organizations, and maintain relationships with other industry
participants, community groups, environmental groups and
regulators.
18. Provide to or otherwise procure on behalf of the Issuer all
legal, accounting or other similar professional services
necessary or appropriate in connection with the operation of the
Company Timber Property as contemplated by the Operative
Documents.
19. Provide such other similar services as may be necessary or
appropriate to enable the Issuer to continue the management and
operations of the Company Timber Property in accordance with
prudent business practices.
20. In the event that Pacific Lumber and/or the Company continue or
expand any existing Takings Litigation or commence other Takings
Litigation, prepare and file on behalf of the Company all
pleadings and motions and otherwise diligently pursue appeals in
respect of any matter relating to the Takings Litigation or any
such similar actions.
NEW ADDITIONAL SERVICES AGREEMENT
THIS NEW ADDITIONAL SERVICES AGREEMENT (this "Agreement)", dated
as of July 20, 1998, is entered into by and between Scotia Pacific Company
LLC, a Delaware limited liability company (the "Issuer" and, in its
capacity as Services Provider hereunder, the "Services Provider"), and The
Pacific Lumber Company, a Delaware corporation ("Pacific Lumber").
WITNESSETH:
The Issuer and the Trustee have entered into the Indenture,
pursuant to which the Issuer has issued the Timber Notes; and the Issuer,
the Collateral Agent and the Deed of Trust Trustee have entered into the
Deed of Trust, securing, among other things, the Issuer's obligations under
the Timber Notes and the Indenture;
The Issuer and Pacific Lumber are parties to an Additional
Services Agreement dated as of March 23, 1993, which is being terminated
effective as of the date hereof (the "Existing Additional Services
Agreement");
This Agreement is being entered into in connection with the
issuance and sale of the Timber Notes; and
The Issuer is capable of rendering the services described in
Schedule 1 hereto (the "Additional Services") and supplying the equipment,
personnel and expertise necessary to perform the Additional Services as
contemplated by this Agreement.
NOW, THEREFORE, in consideration of the mutual agreements
contained herein and in the Operative Documents and other good and valuable
consideration, the sufficiency of which is hereby acknowledged, the Issuer
and Pacific Lumber hereby agree as follows:
I
DEFINITIONS
1.1 For all purposes of this Agreement, unless the context
otherwise requires, all defined terms shall have the meaning set forth in
Schedule A to the Indenture, which is incorporated by reference as if fully
set forth herein.
II
SERVICES
2.1 Services. Subject to the terms and provisions set forth in
this Agreement, the Services Provider shall provide to Pacific Lumber
(including any subsidiaries of Pacific Lumber) the Additional Services.
2.2 Personnel Matters. Without limiting the generality of
Section 2.1 of this Agreement, the Services Provider shall provide all
labor and professional and supervisory persons necessary to perform the
Additional Services which are not provided by Pacific Lumber; provided that
the Services Provider shall have the right to use independent contractors
or other outside specialists or other persons in performing the Additional
Services as it shall deem advisable in its reasonable judgment.
2.3 Independent Contractor Status. The Services Provider shall
perform the Additional Services as an independent contractor. The number
of employees, the selection and retention of such employees, the hours of
labor and the compensation for services to be paid to any and all such
employees of the Services Provider shall be determined by the Services
Provider. All employees, agents, contractors and subcontractors hired by
the Services Provider to perform services hereunder shall not be deemed to
be the employees, agents, contractors and subcontractors of Pacific Lumber,
and all salaries and compensation payable to them shall be the exclusive
responsibility of the Services Provider.
2.4 Necessary Information. Pacific Lumber shall furnish the
Services Provider with all information, programs, know-how, methods or
methodology within Pacific Lumber's control as may be necessary or
appropriate for the performance of the Additional Services by the Services
Provider.
III
COMPENSATION
3.1 Compensation for Services.
(a) As compensation for the Additional Services provided by
the Services Provider pursuant to this Agreement, Pacific Lumber shall
pay to the Services Provider by deposit to the Collection Account on each
Monthly Deposit Date immediately preceding each Note Payment Date during
the term of this Agreement a fee, in cash (the "Additional Services Fee"),
which, so long as Pacific Lumber is the Services Provider under the
Services Agreement, shall be in an amount equal to the Services Provider's
actual costs of providing the Additional Services for the six (6) full (or
portion thereof) calendar months immediately preceding each such Monthly
Deposit Date, as determined in accordance with generally accepted
accounting principles. The Services Provider shall notify Pacific Lumber
of its costs of providing the Additional Services for such six (6) month
period (or portion thereof) at least two Business Days prior to each such
Monthly Deposit Date. If Pacific Lumber is not the Services Provider under
the New Services Agreement, the Additional Services Fee shall be based upon
a market rate for such services in the relevant area, adjusted in each
subsequent year in the manner in which the Services Fee is adjusted
pursuant to Section 5.1(a) of the New Services Agreement.
(b) The parties hereto acknowledge and agree that the
Services Provider's right to be compensated pursuant to this Agreement
shall be limited to its right to receive the Additional Services Fee and
that the Services Provider shall not be entitled to any further payment
pursuant to this Agreement, whether by way of reimbursement of its expenses
in performing the Additional Services or otherwise. If this New Additional
Services Agreement is terminated and any accrued compensation through the
date of such termination shall remain unpaid, the Services Provider shall
be entitled to receive such accrued and unpaid compensation.
IV
MISCELLANEOUS
4.1 Term. This Agreement shall become effective upon the date
first noted above and shall continue in effect until all amounts payable
under the Timber Notes (including any Additional Timber Notes), the
Indenture and the Deed of Trust shall have been paid in full.
4.2 Termination. Pacific Lumber and the Services Provider
may, at any time, terminate this Agreement by mutual written consent.
4.3 Amendments.
(a) This Agreement may be amended by an agreement in
writing signed by the Services Provider and Pacific Lumber. No such
amendment shall add to the obligations of the Services Provider or require
the Services Provider to assume any obligations or liabilities other than
expressly set forth herein, unless Rating Agency Confirmation shall have
been obtained.
(b) Promptly following the execution of any amendment to
this Agreement, the Issuer will furnish to the Trustee and each Rating
Agency a true, correct and complete copy of such amendment.
4.4 Notices. All notices and other communications required or
permitted hereunder shall be in writing and, unless otherwise provided in
this Agreement, shall be deemed to have been duly given when delivered in
person or by mail or when dispatched by telegram or electronic facsimile
transfer (confirmed in writing by mail simultaneously dispatched) to the
addressee at the address specified below:
If to Pacific Lumber:
The Pacific Lumber Company
P.O. Box 37
Scotia, California 95565
Fax: (707) 764-4269
Attention: Vice President,
Finance and
Administration
If to the Services Provider:
Scotia Pacific Company LLC
P.O. Box 712
Scotia, California 95565
Fax: (707) 764-5001
Attention: Vice President,
Finance and
Administration
If to any Rating Agency:
Standard & Poor's, a division of
The McGraw Hill Companies
26 Broadway - 10th Floor
New York, New York 10004-1010
Fax: (212) 208-8208
Attention: Asset-Backed Surveillance
Group
Moody's Investors Service, Inc.
99 Church Street - 4th Floor
New York, New York 10007
Fax: (212) 553-4948
Attention: ABS Monitoring Department
or such other address as either party may from time to time designate by
like notice.
4.5 Governing Law. This Agreement shall be governed by the
internal laws of the State of California without regard to principles of
conflicts of laws.
4.6 Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed an original
but all of which together shall constitute one and the same instrument.
4.7 Entire Agreement. This Agreement constitutes the entire
agreement of the parties with respect to the subject matter hereof.
4.8 Headings. The section headings of this Agreement are only
for the purpose of reference and shall not affect the meaning hereof.
<PAGE>
[REST OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereto have executed this New
Additional Services Agreement as of the date first above written.
SCOTIA PACIFIC COMPANY LLC
By: /S/ Gary L. Clark
Name: Gary L. Clark
Title: Vice President-Finance
and Administration
THE PACIFIC LUMBER COMPANY
By: /S/ John A. Campbell
Name: John A. Campbell
Title: President
<PAGE>
SCHEDULE 1
Additional Services
The Services Provider shall perform the following Additional Services.
1. Provide advice to and be available for consultation with
Pacific Lumber in respect of all matters relating to the preparation,
filing and prosecution of Timber Harvesting Plans, sustained yield plans,
habitat conservation plans, similar plans or permits by Pacific Lumber (or
any of its subsidiaries) in respect of any timber property and timber
harvesting rights owned by Pacific Lumber (or any of its subsidiaries).
2. File, jointly on behalf of Pacific Lumber and the Issuer,
all Timber Harvesting Plans in respect of any timber property owned by the
Issuer with respect to which Pacific Lumber (or any of its subsidiaries)
owns timber harvesting rights.
3. Provide advice to and be available for consultation with
Pacific Lumber (or any of its subsidiaries) in respect of all matters
relating to compliance with all federal, state and local laws, rules and
regulations, including laws relating to streams, waterways, wildlife
habitat and endangered species.
4. Provide supervisory and oversight services to Pacific Lumber
in connection with Pacific Lumber's measures to replant and otherwise
regenerate commercial timber stands in respect of any timber property owned
by Pacific Lumber and timber property with respect to which Pacific Lumber
(or any of its subsidiaries) has timber harvesting rights.
5. Update the Issuer's geographical information system with
information provided by Pacific Lumber relating to any timber property
owned by Pacific Lumber and timber property with respect to which Pacific
Lumber (or any of its subsidiaries) has timber harvesting rights. Provide
Pacific Lumber (or any of its subsidiaries) with access to the Issuer's
geographical information system and provide necessary personnel and
technical assistance to Pacific Lumber to enable Pacific Lumber to utilize
the Issuer's geographical information system in connection with Pacific
Lumber's (or any of its subsidiaries) operations. Provide Pacific Lumber,
upon the request of Pacific Lumber, with copies of all Data Processing
Information related to the Issuer's geographical information system.
6. Provide personnel and technical assistance to Pacific Lumber
(or any of its subsidiaries) to enable Pacific Lumber to manage the
harvesting of any timber owned by Pacific Lumber in a manner reasonably
calculated to produce growth, consistent with the production of the quality
and quantity of Pacific Lumber's current merchantable timber.
7. Provide advice to and be available for consultation with
Pacific Lumber (or any of its subsidiaries) in respect of federal, state
or local legislative matters affecting or relating to any timber property
and timber harvesting rights owned by Pacific Lumber and timber property
with respect to which Pacific Lumber has timber harvesting rights or the
operation, management or harvesting thereof.
8. Provide personnel and technical assistance to Pacific Lumber
(or any of its subsidiaries) to enable Pacific Lumber to monitor compliance
with each Timber Harvesting Plan, sustained yield plan, habitat
conservation plan, similar plan or permit and to obtain all certificates of
completion or similar certifications from the requisite Governmental
Authority.
9. Provide personnel and technical assistance to Pacific Lumber
(or any of its subsidiaries) to enable Pacific Lumber to prepare and file
any development or strategic plan required by any Governmental Authority to
be prepared in respect of any timber, timber property or timber harvesting
rights owned by Pacific Lumber.
10. Provide advice to and be available for consultation with
Pacific Lumber (or any of its subsidiaries) in respect of any updates,
upgrades, or improvements to, or replacement of, the Data Processing
Equipment.
11. Provide advice to and be available for consultation with
Pacific Lumber (or any of its subsidiaries) in respect of any governmental
or regulatory filings or reports required by Pacific Lumber.
12. Provide personnel and technical assistance to assist Pacific
Lumber's (or any of its subsidiaries) efforts to maintain in force and
effect or to obtain each permit, license, franchise, right of way, license
or easement necessary to the harvesting, cutting, severing, sale, marketing
or disposition of any timber, timber property or timber harvesting rights
owned by Pacific Lumber.
13. Provide such other services as may be necessary or
appropriate to carry out the services described in the preceding
paragraphs.
RECORDING REQUESTED BY:
Fidelity National Title Insurance Company
WHEN RECORDED, RETURN TO:
Sheppard, Mullin, Richter & Hampton LLP
4 Embarcadero Center, 17th Floor
San Francisco, CA 94111
Attn: Joan H. Story, Esq.
NEW RECIPROCAL RIGHTS AGREEMENT
THIS NEW RECIPROCAL RIGHTS AGREEMENT (the "Agreement") is made and
entered into as of July 20, 1998 by and among THE PACIFIC LUMBER COMPANY, a
Delaware corporation ("Pacific Lumber"), SCOTIA PACIFIC COMPANY LLC, a
Delaware limited liability company ("Scotia Pacific"), and SALMON CREEK
CORPORATION, a Delaware corporation ("Salmon Creek").
RECITALS
A. Scotia Pacific Holding Company, a Delaware corporation ("SPH"),
previously acquired from Pacific Lumber approximately 179,200 acres of
commercial timberlands located in Humboldt County, California, which land
is more particularly described in Exhibit A attached hereto and
incorporated herein by this reference (the "SPH Property"). At that time,
Pacific Lumber retained ownership of and the right in perpetuity to harvest
all trees and timber now or in the future growing on approximately 7,900
acres of the SPH Property (the "Original Pacific Lumber Timber Rights").
B. Scotia Pacific is the successor by merger to SPH, and accordingly
has succeeded in title to the SPH Property.
C. Scotia Pacific has acquired from Pacific Lumber approximately
13,500 acres of additional commercial timberlands located in Humboldt
County, California, which land is more particularly described in Exhibit B
attached hereto and incorporated herein by this reference (the "New Scotia
Pacific Property"), and the Original Pacific Lumber Timber Rights with
respect to approximately 7,500 acres of the SPH Property. The SPH Property
and the New Scotia Pacific Property are hereinafter referred to
collectively as the "Scotia Pacific Property."
D. Pacific Lumber retains title to certain additional real property
in Humboldt County, California, near to or adjoining the Scotia Pacific
Property and the Salmon Creek Property (as defined below), which land
includes developed parcels, log decks, grasslands and timberlands and is
more particularly described in Exhibit C attached hereto and incorporated
herein by this reference (the "Pacific Lumber Property").
E. Pacific Lumber has transferred to Scotia Pacific title to and the
right in perpetuity to harvest all trees and timber now or in the future
growing on approximately 11,100 acres of the Pacific Lumber Property (the
"Scotia Pacific/PL Timber Rights").
F. Scotia Pacific has transferred to Pacific Lumber title to and the
right in perpetuity to harvest all trees and timber now or in the future
growing on approximately 1,300 acres of the SPH Property (together with the
Original Pacific Lumber Timber Rights to approximately 350 acres retained
by Pacific Lumber, the "Pacific Lumber Timber Rights").
G. Salmon Creek previously acquired from Pacific Lumber
approximately 6,000 acres of land located in Humboldt County, California,
which land is more particularly described in Exhibit D attached hereto and
incorporated herein by this reference (the "Salmon Creek Property").
H. Salmon Creek has transferred to Pacific Lumber, which has in turn
transferred to Scotia Pacific, title to and the right in perpetuity to
harvest all trees and timber now or in the future growing on approximately
1,100 acres of the Salmon Creek Property (the "Scotia Pacific/SC Timber
Rights").
I. The location of the lands subject to the Scotia Pacific/SC Timber
Rights, and the Pacific Lumber Timber Rights, are shown with particularity
on certain maps held in trust by U.S. Bank of California ("Escrow Holder")
pursuant to the terms of that certain New Escrow Agreement dated as of
July 20, 1998 (the "Escrow Agreement") among Scotia Pacific, Pacific
Lumber, Salmon Creek, and the Escrow Holder. The Scotia Pacific/PL Timber
Rights and the Scotia Pacific/SC Timber Rights are hereinafter referred to
collectively as the "Scotia Pacific Timber Rights." The land subject to
the Scotia Pacific Timber Rights is hereinafter referred to as the "Scotia
Pacific Timber Rights Property," and the land subject to the Pacific Lumber
Timber Rights is hereinafter referred to as the "Pacific Lumber Timber
Rights Property."
J. Pacific Lumber and Scotia Pacific have executed, or intend to
execute, a New Services Agreement pursuant to which Pacific Lumber will
provide certain land and timber operational and management services with
respect to the Scotia Pacific Property and the Scotia Pacific Timber Rights
Property (the "New Services Agreement"), a New Master Purchase Agreement
governing the sale of logs by Scotia Pacific to Pacific Lumber and the
harvesting and removal by Pacific Lumber of the logs so purchased (the "New
Master Purchase Agreement"), a New Additional Services Agreement pursuant
to which Scotia Pacific will provide certain services to Pacific Lumber
(the "New Additional Services Agreement").
K. Pacific Lumber, SPH and Salmon Creek previously entered into that
certain Reciprocal Rights Agreement dated March 18, 1993 and recorded March
22, 1993 as Document No. 1993-1890-136 in the Official Records of Humboldt
County, California (the "Old Reciprocal Rights Agreement").
L. Pacific Lumber, Scotia Pacific and Salmon Creek now desire to
provide for reciprocal rights of access over, entry onto and use of the
lands of the other parties hereto in connection with the exercise of the
Scotia Pacific Timber Rights and the Pacific Lumber Timber Rights, the
performance of the New Services Agreement, the New Master Purchase
Agreement and related log purchase agreements, and the New Additional
Services Agreement and for various other purposes related to the operation,
management and utilization of the lands and the timber owned by each, and
on terms differing from the Old Reciprocal Rights Agreement.
<PAGE>
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby expressly acknowledged, the parties hereto
agree as follows:
1. Termination of Old Reciprocal Rights Agreement. Pacific Lumber,
Scotia Pacific, as successor in interest to SPH, and Salmon Creek, the
parties to the Old Reciprocal Rights Agreement and the holders of all the
real property subject to the Old Reciprocal Rights Agreement, hereby
terminate the Old Reciprocal Rights Agreement (except to the extent
otherwise provided in Section 9(a) of this Agreement).
2. Access Rights. Pacific Lumber, Scotia Pacific and Salmon Creek
hereby each grant to each of the other parties hereto, for the benefit of
each party, its officers, directors, employees, agents, representatives,
servants, invitees, successors and assigns (collectively, the "Related
Persons"), the right to enter upon the Pacific Lumber Property, the Scotia
Pacific Property and the Salmon Creek Property, respectively, for the
following purposes (the "Purposes"):
(i) to conduct wildlife and other studies and to gather any
other data reasonably necessary, advisable or desirable to prepare
timber harvesting plans and/or any other studies, reports, plans or
documents in connection with the business and activities of Pacific
Lumber, Scotia Pacific and/or Salmon Creek, whether or not required to
be filed with any governmental departments, agencies or other entities
having jurisdiction thereof;
(ii) to survey or examine any portions of the Scotia Pacific
Property, the Pacific Lumber Property, the Salmon Creek Property or
the timber or other resources located thereon;
(iii) to carry out conservation, management, operation and
utilization activities with respect to timber, land and other
resources, whether or not pursuant to the New Services Agreement, the
New Master Purchase Agreement and related log purchase agreements
and/or the New Additional Services Agreement;
(iv) to implement and maintain fisheries and/or wildlife
management or conservation programs, whether or not required by
applicable law;
(v) to conduct timber harvesting operations, including, without
limitation, the removal of logs, with respect to timber owned by such
party or subject to an agreement to cut or similar agreement in favor
of such party;
(vi) to carry out timber replanting and regeneration activities;
(vii) to explore, test for and extract minerals, gas, oil and
hydrocarbon substances owned by such party;
(viii) to extract gravel and rock for any purpose permitted by
paragraph 3 hereof;
(ix) to extract water for any purpose permitted by paragraph 4
hereof;
(x) to exercise hunting rights granted pursuant to paragraph 5
hereof;
(xi) to conduct fire protection, fire suppression and fire
control activities pursuant to paragraph 6 hereof;
(xii) to provide ingress and egress from public roadways over the
lands of the other parties to the Scotia Pacific Property, the Scotia
Pacific Timber Rights Property, the Pacific Lumber Property, the
Pacific Lumber Timber Rights Property and the Salmon Creek Property,
utilizing existing and future roadways and rights-of-way on such
lands;
(xiii) to exercise any other rights granted by or reasonably
necessary, advisable or desirable to perform such party's obligations
under this Agreement, the New Services Agreement, the New Master
Purchase Agreement, the New Additional Services Agreement or any of
the other Operative Documents, as such term is defined in that certain
Indenture dated as of even date herewith between Scotia Pacific and
State Street Bank and Trust Company, as trustee, governing the Timber
Notes issued by Scotia Pacific as of such date and any Additional
Timber Notes subsequently issued by Scotia Pacific (the "Indenture"),
or the Indenture or any other documents contemplated by the Indenture;
and
(xiv) to otherwise manage, operate and utilize such party's
interest in the Scotia Pacific Property, the Scotia Pacific Timber
Rights Property, the Pacific Lumber Property, the Pacific Lumber
Timber Rights Property and the Salmon Creek Property and the assets
located on or relating to any of the foregoing lands.
(a) Existing Rights of Way. The foregoing grant of access shall
include, without limitation, rights of way over all existing and future
roads located on the Scotia Pacific Property, the Pacific Lumber Property
and the Salmon Creek Property for any of the Purposes. This reciprocal
grant of rights of way shall include the right of all lessees, licensees
and permittees of Pacific Lumber, Scotia Pacific and Salmon Creek to use
any roadways, now or hereafter existing, on the Scotia Pacific Property,
the Pacific Lumber Property or the Salmon Creek Property which are
reasonably necessary or advisable for ingress to and egress from that
portion of the Scotia Pacific Property, the Pacific Lumber Property or the
Salmon Creek Property subject to any lease, use agreement or similar
agreement or arrangement. Pacific Lumber, Scotia Pacific and Salmon Creek
each agree, from and after the date of this Agreement, not to enter into
any lease, use agreement or similar agreement or arrangement with a third
party which requires access over the lands owned by or subject to the
timber rights of either of the other parties without obtaining the prior
consent of such party, which consent shall not be unreasonably withheld.
(b) New Roads. Pacific Lumber, Scotia Pacific and Salmon Creek, and
their respective Related Persons, shall each have the right to construct
such new roads over the lands of the other parties as are reasonably
necessary, advisable or desirable to carry out any of the Purposes. All
new roads shall be constructed so as to minimize any adverse affects on the
land and otherwise in accordance with the provisions of Section 9(b)
hereof. Before constructing any new road on the property of another party
to this Agreement, Pacific Lumber, Scotia Pacific and Salmon Creek shall
each obtain the approval of such party, which approval shall not be
unreasonably withheld. If the burdened landowner objects to the proposed
location of the new road, such owner shall propose an alternative location
for construction of the proposed road, which alternative location shall
not, in any material respect, increase the cost of constructing the road or
decrease the usefulness of the road to the benefited party.
(c) Road Construction and Maintenance Costs. So long as the New
Services Agreement is in effect, Pacific Lumber shall be responsible for
and Scotia Pacific shall bear the cost, in accordance with the provisions
of the New Services Agreement, of maintaining all roads on or serving the
Scotia Pacific Property or the Scotia Pacific Timber Rights Property and
Pacific Lumber shall be responsible, at its own cost, for maintaining all
roads on or serving the Pacific Lumber Property or the Pacific Lumber
Timber Rights Property. Pacific Lumber and Scotia Pacific shall in the
event of termination of the New Services Agreement, and Salmon Creek shall
at all times, be responsible for maintaining all roads existing on or
serving its own lands in a manner consistent in all material respects with
prudent business practices, which, in the reasonable judgment of the
responsible party, are (i) consistent with the current applicable industry
standards, and (ii) in compliance in all material respects with applicable
laws. Subject to the terms of the New Services Agreement, each party shall
be responsible for construction of roads for its own benefit on its own
lands. Any party desiring to construct a new road over the lands of
another party shall be responsible for all costs of constructing such road,
which thereafter shall be subject to the maintenance provisions of this
paragraph.
(d) Access Fees. No party shall charge the other parties any fees
for access under the terms of this Agreement.
3. Extraction of Rock and Gravel. In addition to the rights granted
to Pacific Lumber by Scotia Pacific pursuant to the New Master Purchase
Agreement, Pacific Lumber, Scotia Pacific and Salmon Creek hereby each
grant to the other parties hereto, for the benefit of each party, and its
Related Persons, the right to extract from the Pacific Lumber Property, the
Scotia Pacific Property, and the Salmon Creek Property, respectively, rock
and gravel in such quantities as may be required for use in the
construction and maintenance of roads or as may be reasonably necessary,
advisable or desirable to carry out any of the other Purposes. All such
extractions of rock and gravel shall be performed in a manner reasonably
designed to minimize any adverse affects on the land and otherwise in
accordance with the provisions of Section 9(b) hereof.
4. Water Rights. Pacific Lumber, Scotia Pacific and Salmon Creek
hereby each grant to the other parties hereto, for the benefit of each
party, and its Related Persons, the right to draw water from the creeks,
streams and rivers on the Pacific Lumber Property, the Scotia Pacific
Property and the Salmon Creek Property, respectively, as reasonably
necessary, advisable or desirable to carry out any of the Purposes. Water
shall be extracted only in amounts consistent in all material respects with
the past practices of Pacific Lumber, with such modifications thereto from
time to time as are reasonably necessary or advisable in light of changed
circumstances or required by changes in the laws and/or governmental
regulations applicable to such waterways, in a manner which does not
impede, in any material respect, the legal or contractual rights of any
downstream water users and otherwise in accordance with the provisions of
Section 9(b) hereof.
5. Hunting and Fishing Rights. Pacific Lumber, Scotia Pacific and
Salmon Creek hereby each grant to each of the other parties hereto, for the
benefit of the officers, directors, employees, permittees and invitees of
each party, the right to come onto the lands of the other for the purpose
of hunting, at all times permitted by applicable law, all fish, game
animals and birds permitted by applicable law to be hunted. Pacific Lumber
shall have the sole authority and responsibility to supervise all hunting
and game management activities on the Pacific Lumber Property, the Scotia
Pacific Property and the Salmon Creek Property, including, without
limitation, the issuance of hunting access permits and keys to locked
access roads. Hunting access permits shall be issued only to persons
holding valid hunting or fishing licenses and shall be issued only for use
during legal hunting and/or fishing seasons established by the State of
California.
6. Soil Conservation Districts; Fire Fighting. Pacific Lumber,
Scotia Pacific and Salmon Creek hereby each covenant to cooperate with each
of the other parties hereto in (i) the establishment of soil conservation
districts, and (ii) the conduct of fire protection, fire suppression and
fire control activities, benefiting the Pacific Lumber Property, the Scotia
Pacific Property and/or the Salmon Creek Property. All decisions
concerning the establishment of soil conservation districts or the conduct
of fire protection, suppression or control activities shall be made jointly
by the parties whose land is benefited thereby, and the costs thereof shall
be borne as agreed by the parties.
7. Joint Plans and Permits. Pacific Lumber, Scotia Pacific and
Salmon Creek hereby each covenant to cooperate with each of the other
parties in preparing, filing and updating, as required by any governmental
department, agency or other entity having jurisdiction thereof or as
otherwise deemed necessary, advisable or desirable by the parties, joint
management, habitat conservation, sustained yield or similar plans or
permits, with respect to the Pacific Lumber Property, the Scotia Pacific
Property and the Salmon Creek Property and the timber and other resources
thereon.
8. Establishment of Agreed Boundaries. Pacific Lumber, Scotia
Pacific and Salmon Creek hereby acknowledge that certain boundary lines
have not been established by survey and, in many cases, section corners
have not been physically located and marked to delineate the Pacific Lumber
Property, the Scotia Pacific Property, the Salmon Creek Property, the
Scotia Pacific Timber Rights Property, and the Pacific Lumber Timber Rights
Property. Pacific Lumber, Scotia Pacific, and Salmon Creek agree that
boundary determinations to delineate the land subject to the Scotia
Pacific/SC Timber Rights, and the Pacific Lumber Timber Rights Property,
shall be made pursuant to the New Escrow Agreement. Pacific Lumber, Scotia
Pacific, and Salmon Creek agree that boundary determinations with respect
to the remainder of the Scotia Pacific Timber Rights Property, and the
Pacific Lumber Property, the Scotia Pacific Property, and the Salmon Creek
Property reasonably made by any individual or firm selected jointly by all
parties shall be binding upon Pacific Lumber, Scotia Pacific, and Salmon
Creek. In the event Pacific Lumber, Scotia Pacific, and Salmon Creek are
not able to agree upon an individual or firm to make the boundary
determination, each party shall designate its own representative and the
representatives shall work together in good faith to establish the agreed
boundary. Nothing in the foregoing shall prevent any party from obtaining,
at such party's cost, a survey by a licensed surveyor of any disputed
boundary line. All agreed boundaries shall be blazed on trees and/or
otherwise marked in accordance with then-existing standard industry
practice for similar lands. In the event standing timber owned by Pacific
Lumber, Scotia Pacific or Salmon Creek (or any two of them as appropriate)
is harvested pursuant to a joint timber harvesting plan, the parties shall
account for the timber volume harvested by each party, based on the agreed
boundary established in accordance with this paragraph.
9. Indemnities and Covenants.
(a) Pacific Lumber, Scotia Pacific and Salmon Creek (each, an
"Indemnifying Party") hereby each agree to indemnify each of the other
parties hereto, any subsidiary or affiliate companies of the other parties
hereto, and their respective shareholders and members, and the Related
Persons of any of the foregoing (the "Indemnified Parties") from and
against any and all claims, demands, causes of action, expenses or
liabilities (including reasonable attorneys fees and disbursements) of
every kind and character (whether known or unknown, fixed or contingent,
liquidated or unliquidated, secured or unsecured, choate or inchoate,
accrued, absolute or otherwise), suffered or sustained, arising out of the
activities or omissions of the Indemnifying Party under the Old Reciprocal
Rights Agreement or this Agreement or the breach by the Indemnifying Party
of any of the provisions of the Old Reciprocal Rights Agreement or this
Agreement. Any Indemnified Party claiming a right of indemnity pursuant to
this Section 9(a) shall notify the Indemnifying Party promptly of such
claim after learning of the same. The Indemnifying Party shall have the
right to defend the claim, and the Indemnified Party shall cooperate in the
defense. If the Indemnifying Party does not defend the claim, the
Indemnified Party may engage separate counsel and the Indemnifying Party
shall pay the reasonable fees and expenses of such counsel. Neither
Indemnifying Party shall have any obligation to pay for any settlement of a
claim made without its consent. Notwithstanding the foregoing, the monetary
obligations of Scotia Pacific under this Section 9(a) or any other
provisions of this Agreement shall be payable solely from, and the parties
acknowledge that such obligations are expressly limited to, Excess Funds as
such term is defined in the Indenture) or other funds not subject to the
Lien of the Deed of Trust (as those terms are defined in the Indenture).
(b) Pacific Lumber, Scotia Pacific and Salmon Creek each agree
to carry out all activities permitted by the terms of this Agreement on the
lands of the other parties hereto in compliance with all local, state and
federal laws, ordinances, rules and regulations and regulatory permits or
plans, or agreements with regulatory authorities, applicable to such lands
and otherwise in a manner consistent in all material respects with the
prudent business practices which, in the reasonable judgment of the acting
party, are (i) consistent with then current applicable industry standards,
and (ii) in compliance in all material respects with applicable laws. Each
party shall supervise its employees, agents, representatives, servants and
invitees while on the lands of the other party in a reasonably prudent
manner.
10. Covenants Running With the Land. The provisions of this
Agreement shall be binding upon and shall inure to the benefit of the
successors of Pacific Lumber, Scotia Pacific and Salmon Creek, and the
covenants contained in this Agreement shall, except as expressly provided
to the contrary herein, be appurtenant to and run with the land and shall
be binding upon all successor owners of the Pacific Lumber Property, the
Scotia Pacific Property and the Salmon Creek Property. In the event (i)
Pacific Lumber desires to sell or otherwise transfer: (x) all or a
material portion of its interest in any portion of the Pacific Lumber
Property or the Pacific Lumber Timber Rights Property; or (y) a majority of
the then outstanding capital stock of Salmon Creek (whether in one or in a
series of transactions), or (ii) Scotia Pacific desires to sell or
otherwise transfer all or a material portion of its interest in any portion
of the Scotia Pacific Property or the Scotia Pacific Timber Rights
Property, or (iii) Salmon Creek desires to sell or otherwise transfer all
or a material portion of its interest in any portion of the Salmon Creek
Property, to an unrelated third party, it shall, prior to such sale or
transfer, notify the other two parties. In the event that either or both
of such other two parties determine, in its (their) reasonable business
judgment, that a legitimate business purpose exists to terminate all or a
portion of the reciprocal rights that would be received by the prospective
transferee, then, upon written request from such other party or parties,
the prospective transferor shall relinquish all of the reciprocal rights
granted herein requested to be relinquished, provided that and only to the
extent such termination and relinquishment shall not have a material
adverse effect on any portion of the operations or business to be conducted
by the prospective transferee on the property to be transferred as
determined by the parties hereto in their reasonable business judgment.
Such relinquishment shall be binding upon successor owners of the property
to be transferred, and relinquishment of rights shall not terminate the
burdens imposed by this Agreement upon the property to be transferred,
which burdens shall not be terminated in connection with a transfer of
property except as otherwise provided below. Furthermore, if the
prospective transferor determines, in its reasonable business judgment,
that the transferability or marketability of the property sought to be
transferred will be impaired if burdened by one or more of the rights
granted to the other party by this Agreement, then, upon receipt of a
written request from the transferor prior to such transfer, the other
parties to this Agreement shall relinquish all of the reciprocal rights
granted herein requested to be relinquished with respect to the property to
be transferred, provided that and only to the extent such termination and
relinquishment shall not have a Material Adverse Effect (as defined in the
Indenture) on Scotia Pacific, or a material adverse effect on any portion
of the operations or business of any other relinquishing party as
determined by the parties hereto in their reasonable business judgment.
Such relinquishment shall be binding upon successor owners of the property
to be transferred, and such relinquishment of rights shall not terminate
the rights granted pursuant to this Agreement benefiting property to be
transferred, which rights shall not be terminated in connection with a
transfer of the property, except as otherwise provided above. Pacific
Lumber, Scotia Pacific and Salmon Creek each agree to cooperate with each
of the other parties hereto in granting to successor owners of any portion
of the Pacific Lumber Property, the Scotia Pacific Property and the Salmon
Creek Property such rights of way and/or other rights as may be reasonably
required to make the parcel being transferred transferrable or marketable
and to execute and deliver to the other such documents as may be necessary
or appropriate to evidence any such grant or any termination of any rights
granted herein, provided that no such document or agreement shall have a
Material Adverse Effect (as defined in the Indenture) on Scotia Pacific, or
a material adverse effect on the operation or business of any other party
to this Agreement or its successors as determined by the parties hereto in
their reasonable business judgment.
11. Amendments. This Agreement may be amended only by an agreement
in writing executed by all the parties in accordance with Section 4.12 of
the Indenture. Promptly following the execution of any amendment to this
Agreement, Scotia Pacific shall furnish to the Trustee and each Rating
Agency (as those terms are defined in the Indenture) a true, correct and
complete copy of such amendment.
12. No Bankruptcy Petition. Pacific Lumber and Salmon Creek each
hereby covenant and agree that prior to the date which is one year and one
day after payment in full of all outstanding Notes (as defined in the
Indenture), it will not institute against or join any other Persons (as
that term is defined in the Indenture) in instituting against Scotia
Pacific, any bankruptcy, reorganization, arrangement, insolvency or
liquidation proceeding or other similar proceeding under any Bankruptcy Law
(as that term is defined in the Indenture).
13. Entire Agreement. This Agreement (together with the Escrow
Agreement with respect to the establishment of boundaries) contains the
entire understanding between the parties with respect to the subject matter
hereof and supersedes any other representations or understandings of the
parties.
14. Severability. If any provision of the Agreement shall be
determined to be illegal or unenforceable, such determination shall not
affect any other provision of this Agreement and all other such provisions
shall remain in full force and effect.
15. Notices. All notices and other communications required or
permitted hereunder shall be in writing and shall be deemed to have been
duly given when delivered in person or by mail or when dispatched by
telegram or electronic facsimile transfer (confirmed in writing by mail
simultaneously dispatched) to the addressee at the address specified below:
If to Pacific Lumber: The Pacific Lumber Company
125 Main Street
P.O. Box 37
Scotia, California 95565
Attn: Vice President, Finance and
Administration
Fax: (707) 764-4269
If to Scotia Pacific: Scotia Pacific Company LLC
Second Floor
125 Main Street
P.O. Box 712
Scotia, California 95565
Attn: Vice President, Finance and
Administration
Fax: (707) 764-5001
If to Salmon Creek: Salmon Creek Corporation
125 Main Street
P. O. Box 37
Scotia, California 95565
Attn: Vice President, Finance and
Administration
Fax: (707) 764-4269
If to any Rating Standard & Poor's, a division of the McGraw Hill
Agency: Companies
26 Broadway - 10th Floor
New York, New York 10004
Fax: (212) 208-8208
Attention: Asset-Backed Surveillance Group
Moody's Investors Service, Inc.
99 Church Street - 4th Floor
New York, New York 10007
Fax: (212) 553-4948
Attention: ABS Monitoring Department
or such other address as either party may from time to time designate by
like notice.
16. Limitation on Rights. Notwithstanding any other provision of
this Agreement to the contrary, neither Pacific Lumber nor Salmon Creek
shall exercise any of the rights granted to such party hereunder
(including, without limitation, all rights granted pursuant to paragraph 3
and 4 hereof) in such a manner so as to have a Material Adverse Effect, as
that term is defined in the Indenture, on Scotia Pacific.
17. Headings. The section headings in this Agreement are for the
purpose of reference only and shall not affect the meaning of any of the
provisions of this Agreement.
18. Governing Law. This Agreement shall be governed by the internal
laws of the State of California, without regard to principles of conflicts
of law.
19. Termination Upon Transfer to Governmental Entities.
Notwithstanding the provisions of Section 10, in the event (i) Pacific
Lumber sells or otherwise transfers any portion of the Pacific Lumber
Property or the Pacific Lumber Timber Rights Property; or (ii) Scotia
Pacific sells or otherwise transfers any portion of the Scotia Pacific
Property or the Scotia Pacific Timber Rights Property, or (iii) Salmon
Creek sells or otherwise transfers any portion of the Salmon Creek
Property, to any federal, state or local governmental entity, this
Agreement, including without limitation the reciprocal rights provided
hereby and the burdens imposed hereby, shall automatically terminate with
respect to the property being transferred. Pacific Lumber, Scotia Pacific
and Salmon Creek each agree to execute and deliver to the other such
documents as may be necessary or appropriate to evidence any such
termination.
[Rest of page intentionally left blank]
IN WITNESS WHEREOF, the parties hereto have executed this
Reciprocal Rights Agreement as of the date first written above.
THE PACIFIC LUMBER COMPANY, a
Delaware corporation
By: /S/ John A. Campbell
Print: John A. Campbell
As Its: President and CEO
SCOTIA PACIFIC COMPANY LLC,
a Delaware limited liability
company
By: /s/ Gary L. Clark
Print: Gary L. Clark
As Its: Vice President
SALMON CREEK CORPORATION, a
Delaware corporation
By: /s/ William S. Riegel
Print: William S. Riegel
As Its: Vice President
STATE OF CALIFORNIA )
)
COUNTY OF HUMBOLDT )
On July 16, 1998, before me, Susan Pryor-Colby,
a Notary Public for the State of California, personally appeared
John A. Campbell, personally known to me (or proved to
me on the basis of satisfactory evidence) to be the person(s) whose name(s)
is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies),
and that by his/her/their signature(s) on the instrument the person(s), or
the entity on behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
Signature: /s/ Susan Pryor-Colby (Seal)
STATE OF CALIFORNIA )
)
COUNTY OF HUMBOLDT )
On July 16, 1998, before me, Susan Pryor-Colby,
a Notary Public for the State of California, personally appeared
Gary L. Clark, personally known to me (or proved to
me on the basis of satisfactory evidence) to be the person(s) whose name(s)
is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies),
and that by his/her/their signature(s) on the instrument the person(s), or
the entity on behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
Signature: /s/ Susan Pryor-Colby (Seal)
STATE OF CALIFORNIA )
)
COUNTY OF HUMBOLDT )
On July 16, 1998, before me, Susan Pryor-Colby,
a Notary Public for the State of California, personally appeared
William S. Riegel, personally known to me (or proved to
me on the basis of satisfactory evidence) to be the person(s) whose name(s)
is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies),
and that by his/her/their signature(s) on the instrument the person(s), or
the entity on behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
Signature: /s/ Susan Pryor-Colby (Seal)
NEW ENVIRONMENTAL INDEMNIFICATION AGREEMENT
This NEW ENVIRONMENTAL INDEMNIFICATION AGREEMENT (the
"Agreement"), dated as of July 20, 1998, is entered into between The
Pacific Lumber Company ("Pacific Lumber") and Scotia Pacific Company LLC
(the "Issuer").
The Issuer and the Trustee have entered into the Indenture,
pursuant to which the Issuer has issued the Timber Notes and may issue
Additional Timber Notes; and the Issuer, the Collateral Agent and the Deed
of Trust Trustee have entered into the Deed of Trust, securing, among other
things, the Issuer's obligations under the Timber Notes, the Line of Credit
Agreement, any Additional Timber Notes and the Indenture; and
This Agreement is being entered into in connection with the
issuance and sale of the Timber Notes and any Additional Timber Notes.
NOW, THEREFORE, in consideration of the mutual agreements herein
contained and other good and valuable consideration, the sufficiency of
which is hereby acknowledged, the Issuer and Pacific Lumber hereby agree as
follows:
I.
DEFINITIONS
For all purposes of this Agreement, unless the context otherwise
requires, all defined terms which are used but not defined herein shall
have the meaning set forth in Schedule A to the Indenture, which is
incorporated by reference as if fully set forth herein.
II.
REPRESENTATIONS AND WARRANTIES
Pacific Lumber hereby represents and warrants to the Issuer, as
of the time of the transfer of each parcel of land comprising the Company
Owned Timberlands by Pacific Lumber to Issuer or Issuer's predecessor, as
follows:
a. (i) Except as disclosed or referred to in the Offering
Memorandum or in respect of matters which are not likely to have a Material
Adverse Effect, or in respect of suspected or known Hazardous Materials
Contamination on lands adjoining the Company Owned Timberlands, which are
set forth on Schedule 1 hereto, Pacific Lumber is and has been in
compliance in all material respects with all Environmental Laws in
connection with its ownership and use of the Company Timber Property and
the harvesting, cutting, severing and marketing of timber and the disposal
or handling of any materials, products, wastes or other substances in, on,
from or attributable to the Company Timber Property; (ii) except as dis-
closed in or referred to in the Offering Memorandum, in respect of matters
which are not likely to have a Material Adverse Effect, or in respect of
suspected or known Hazardous Materials Contamination on lands adjoining the
Company Owned Timberlands, which are set forth on Schedule 1 hereto,
Pacific Lumber has not received (from governmental agencies or private
parties) any citations, complaints, consent orders, compliance schedules or
other similar enforcement orders, or any other written notice or commu-
nication, that indicates or alleges that the Company Timber Property is or
may be subject to any response, remedial action, penalty or fine or is not
or may not be (or that Pacific Lumber or Salmon Creek is not or may not
have been with respect to any such Company Timber Property) in material
compliance with any such Environmental Laws; and, (iii) as of the date
hereof, except for matters that have not had, and are not likely to have, a
Material Adverse Effect, (including, without limitation, any Incidental
Waste Disposal (as defined in Schedule A to the Deed of Trust) or in
respect of suspected or known Hazardous Materials Contamination on lands
adjoining the Company Owned Timberlands, which are set forth on Schedule 1
hereto) there were no current or past spills, discharges or releases of
gas, liquid or gaseous hydrocarbons or products therefrom, contaminants,
pollutants and/or Hazardous Materials from, affecting or in any way related
to the Company Timber Property that had not been (i) remedied and cleaned
up in accordance with applicable Environmental Law to the satisfaction of
any Governmental Authorities requiring clean-up, (ii) disclosed in writing
to the Trustee and the Issuer prior to the Closing Date and (iii) disclosed
to all appropriate Governmental Authorities if required under any Environ-
mental Law to be disclosed.
b. Except for Hazardous Materials contained in commercial
products used in the ordinary course of Pacific Lumber's business which
have been stored, used and disposed of in accordance with applicable
Environmental Laws, (i) there are no Hazardous Materials now located on,
at, in or under any of the Company Timber Property or any part thereof
which could have a Material Adverse Effect; (ii) no part of any of the
Company Timber Property is being used or, to the best of Pacific Lumber's
knowledge, has been used at any previous time for the disposal, storage,
treatment, processing or other handling of any Hazardous Material nor is
any part of any Company Timber Property affected by any Hazardous Materials
Contamination, other than such as do not individually in the aggregate have
a Material Adverse Effect, (including, without limitation any Incidental
Waste Disposal and suspected or known Hazardous Materials Contamination on
lands retained by Pacific Lumber adjoining the Company Owned Timberlands
Property, which are set forth on Schedule 1 hereto); (iii) to the best of
the knowledge and belief of Pacific Lumber, no property adjoining any
Company Timber Property is being used, or has ever been used at any previ-
ous time, for the disposal, storage, treatment, processing or other han-
dling of any Hazardous Material nor is any property adjoining any Company
Timber Property affected by Hazardous Materials Contamination, other than
(x) such as do not individually in the aggregate have a Material Adverse
Effect (including, without limitation, Incidental Waste Disposal and
suspected or known Hazardous Materials Contamination on lands retained by
Pacific Lumber adjoining the Company Owned Timberlands, which are set forth
on Schedule 1 hereto); (iv) each Disposal Site now being used, or, to the
best of Pacific Lumber's knowledge, that has been used, is or has been
properly licensed to the extent required by law; and (v) no administrative
order, consent order and agreement, litigation, settlement or, to the best
of Pacific Lumber's knowledge, investigation, with respect to Hazardous
Materials or Hazardous Materials Contamination is in existence or, to the
best of Pacific Lumber's knowledge, proposed, threatened or anticipated,
with respect to any of the Company Timber Property other than lands
affected by the known or suspected Hazardous Materials Contamination set
forth on Schedule I hereto. No part of any Company Timber Property is
currently on, and to Pacific Lumber's knowledge has ever been on, CERCLA's
Information System or National Priorities list, or any other Federal or
State "Superfund" or "Superlien" list. Pacific Lumber has not received
notice that any Disposal Site is currently on or has ever been on CERCLA's
Information System or National Priorities list, or any other Federal or
State "Superfund" or "Superlien" list.
c. Pacific Lumber has made available to the Issuer copies of
all environmental inspection reports obtained by or for the benefit of
Pacific Lumber, Issuer and Salmon Creek, or otherwise in the possession of
Pacific Lumber, Issuer and Salmon Creek through the date hereof.
III.
INDEMNIFICATION
Pacific Lumber shall indemnify, protect, defend and hold harmless
the Issuer, and its managers, directors, officers, employees, attorneys and
agents (collectively referred to as the "Indemnified Parties" in this
Agreement) from and against any and all liabilities (including, without
limitation, strict liability), actions, demands, orders, penalties, losses,
costs or expenses (including, without limitation, reasonable attorneys'
fees and expenses and remedial costs), suits, costs of any settlement or
judgment and claims of any and every kind whatsoever (including, without
limitation, those arising under CERCLA or similar state statutes) that may
now or in the future (whether before or after payment in full of the
Secured Obligations, whether before or after any final and full release of
the Deed of Trust, or whether before or after any exercise of any power of
sale, any foreclosure sale, judicial or non-judicial, under the Deed of
Trust or a conveyance in lieu of foreclosure) be paid, incurred or suffered
by or asserted against the Indemnified Parties by any Person or entity or
Tribunal for, with respect to, or as a direct or indirect result of, (i)
the actual or threatened presence in, on or under, or the actual or
threatened escape, seepage, leakage, spillage, discharge, emission or re-
lease from, any of the Company Timber Property or any Disposal Site, of any
Hazardous Materials, or any Hazardous Materials Contamination, or arising
out of or relating to the applicability of any Environmental Law relating
to Hazardous Materials (including, without limitation, any Federal, State
or local so-called "Superfund" or "Superlien" laws, statute, law,
ordinance, code, rule, regulation, order or decree), except to the extent
that a court of competent jurisdiction shall have made a final
determination that such liability was caused by the gross negligence or
willful misconduct of such Indemnified Party or (ii) any breach of the
representations and warranties in Article II hereof; provided, however,
that this indemnity shall be limited to matters occurring, with respect to
the various properties and assets comprising the Company Timber Property,
prior to the respective dates the Issuer acquired such Company Timber Prop-
erty or as a result of actions of Pacific Lumber occurring after the
respective dates the Issuer acquired such Company Timber Property or as a
result of migration of Hazardous Materials existing on, under or around the
Company Timber Property as of the date Issuer acquired such property onto
or under adjoining properties, which migration occurred or occurs after
such date; provided, further, that the foregoing proviso shall not be con-
strued to limit any claim arising after the date hereof in respect of the
foregoing matters.
An Indemnified Party shall notify Pacific Lumber promptly of any
claim for which it may seek indemnity. Pacific Lumber shall have the right
to defend the claim, and the Indemnified Party shall cooperate in the
defense. If Pacific Lumber does not defend such claim, the Indemnified
Party may have separate counsel and Pacific Lumber shall pay the reasonable
fees and expenses of such counsel. Pacific Lumber shall have no obligation
to pay for any settlement of any such claim made without its consent.
IV.
MISCELLANEOUS
4.1 Survival. The representations, warranties, covenants and
indemnities contained in Articles II and III hereof shall survive the sale
of the Company Timber Property, and any exercise of a power of sale or any
foreclosure sale (whether judicial or nonjudicial) under the Deed of Trust
or conveyance in lieu of foreclosure, and the covenants and indemnities in
Article III hereof shall survive payment in full of the Secured Obligations
and any final and full release of the Deed of Trust.
4.2 Term. This Agreement shall become effective upon the date
first noted above and, subject to Section 4.1, shall continue in effect
until all amounts payable under the Timber Notes, the Additional Timber
Notes, the Line of Credit Agreement, the Indenture and the Deed of Trust
shall have been paid in full. This Agreement may not be amended or
terminated prior to the expiration of its term.
4.3 No Bankruptcy Petition. Pacific Lumber hereby covenants and
agrees that, prior to the date which is one year and one day after the
payment in full of all outstanding Timber Notes, it will not institute
against, or join any other Persons in instituting against, the Issuer, any
bankruptcy, reorganization, arrangement, insolvency or liquidation
proceeding or other similar proceeding under any Bankruptcy Law.
4.4 Notices. All notices and other communications required or
permitted hereunder shall be in writing and, unless otherwise provided in
this Agreement, shall be deemed to have been duly given when delivered in
person or by mail or when dispatched by telegram or electronic facsimile
transfer (confirmed in writing by mail simultaneously dispatched) to the
addressee at the address specified below:
If to Pacific Lumber:
The Pacific Lumber Company
P.O. Box 37
Scotia, California 95565
Fax: (707) 764-4269
Attention: Vice President, Finance and Administration
If to the Issuer:
Scotia Pacific Company LLC
P.O. Box 712
Scotia, California 95565
Fax: (707) 764-5001
Attention: Vice President, Finance and Administration
or such other address as either party may from time to time designate by
like notice.
4.5 Limitations on Assignment. Neither Pacific Lumber nor the
Issuer shall assign or transfer any of its rights or obligations under this
Agreement (except for the lien of the Deed of Trust and any transfer of the
rights of the Issuer hereunder by virtue of the exercise of remedies
provided for in the Deed of Trust). Notwithstanding the foregoing, nothing
herein shall prohibit any assignment occurring as a result of a transaction
permitted by Section 4.2 of the Services Agreement.
4.6 Effect of Provisions of the Other Operative Documents.
Notwithstanding any provision of the Indenture or the Deed of Trust
requiring the Issuer to pay an expense or perform an obligation, Pacific
Lumber shall not be relieved from any of its obligations under this
Agreement to pay expenses or perform obligations as expressly provided in
this Agreement.
4.7 Governing Law. This Agreement shall be governed by the
internal laws of the State of California without regard to principles of
conflict of laws.
4.8 Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed an original
but all of which together shall constitute one and the same instrument.
4.9 Entire Agreement. This Agreement constitutes the entire
agreement of the parties with respect to the subject matter hereof.
4.10 Headings. The section headings of this Agreement are only
for the purpose of reference and shall not effect the meaning hereof.
<PAGE>
[REST OF PAGE INTENTIONALLY LEFT BLANK.]
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
THE PACIFIC LUMBER COMPANY
By: /S/ JOHN A. CAMPBELL
John A. Campbell
President
SCOTIA PACIFIC COMPANY LLC
By: /S/ GARY L. CLARK
Gary L. Clark
Vice-President,
Finance & Administration
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated balance sheet and consolidated statement of operations
and is qualified in its entirety by reference to such consolidated financial
statements together with the related footnotes thereto.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 123,718
<SECURITIES> 21,996
<RECEIVABLES> 13,522
<ALLOWANCES> 0
<INVENTORY> 53,992
<CURRENT-ASSETS> 229,737
<PP&E> 183,361
<DEPRECIATION> 81,079
<TOTAL-ASSETS> 925,966
<CURRENT-LIABILITIES> 78,446
<BONDS> 908,690
0
0
<COMMON> 1
<OTHER-SE> (69,158)
<TOTAL-LIABILITY-AND-EQUITY> 925,966
<SALES> 115,426
<TOTAL-REVENUES> 115,426
<CGS> 72,590
<TOTAL-COSTS> 72,590
<OTHER-EXPENSES> 18,049
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,650
<INCOME-PRETAX> 1,370
<INCOME-TAX> (3,164)
<INCOME-CONTINUING> 4,534
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,534
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
