AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 21, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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SCOTIA PACIFIC COMPANY LLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3334 68-0414690
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
125 MAIN STREET
SECOND FLOOR
P.O. BOX 712
SCOTIA, CALIFORNIA 95565
(707) 764-2330
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
GARY L. CLARK
VICE PRESIDENT--FINANCE AND ADMINISTRATION
125 MAIN STREET
SECOND FLOOR
P.O. BOX 712
SCOTIA, CALIFORNIA 95565
(707) 764-2330
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
BERNARD L. BIRKEL, SECRETARY HOWARD A. SOBEL, ESQ.
SCOTIA PACIFIC COMPANY LLC KRAMER, LEVIN, NAFTALIS & FRANKEL
5847 SAN FELIPE 919 THIRD AVENUE
SUITE 2600 NEW YORK, NEW YORK 10022
HOUSTON, TEXAS 77057 (212) 715-9100
(713) 975-7600
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
TITLE OF EACH CLASS AMOUNT MAXIMUM MAXIMUM AMOUNT OF
OF SECURITIES TO TO BE OFFERING PRICE AGGREGATE REGISTRATION
BE REGISTERED REGISTERED PER NOTE (1) OFFERING PRICE FEE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series B Class A-1 Timber
Collateralized Notes............... $160,700,000 100% $160,700,000 $47,406
Series B Class A-2 Timber
Collateralized Notes............... $243,200,000 100% $243,200,000 $71,744
Series B Class A-3 Timber
Collateralized Notes............... $463,348,000 100% $463,348,000 $136,688
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
<FN>
(1) Calculated pursuant to Rule 457(f)(2) solely for purposes of calculating the
registration fee.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 21, 1998
PROSPECTUS
SCOTIA PACIFIC COMPANY LLC
OFFER TO EXCHANGE ITS
6.55% SERIES B CLASS A-1 TIMBER COLLATERALIZED NOTES DUE 2028,
7.11% SERIES B CLASS A-2 TIMBER COLLATERALIZED NOTES DUE 2028 AND
7.71% SERIES B CLASS A-3 TIMBER COLLATERALIZED NOTES DUE 2028
FOR ANY AND ALL OF ITS OUTSTANDING
6.55% CLASS A-1 TIMBER COLLATERALIZED NOTES DUE 2028,
7.11% CLASS A-2 TIMBER COLLATERALIZED NOTES DUE 2028 AND
7.71% CLASS A-3 TIMBER COLLATERALIZED NOTES DUE 2028, RESPECTIVELY.
THE EXCHANGE OFFER (DEFINED BELOW) WILL EXPIRE AT
5:00 P.M., NEW YORK CITY TIME, ON , 1998
(AS SUCH DATE MAY BE EXTENDED, THE "EXPIRATION DATE").
Scotia Pacific Company LLC (the "Company"), a special purpose Delaware
limited liability company wholly owned by The Pacific Lumber Company ("Pacific
Lumber"), hereby offers (the "Exchange Offer"), upon the terms and subject to
the conditions set forth in this Prospectus and the accompanying letter of
transmittal (the "Letter of Transmittal"), to exchange $1,000 in principal
amount of its 6.55% Series B Class A-1 Timber Collateralized Notes due 2028 (the
"New Class A-1 Notes"), its 7.11% Series B Class A-2 Timber Collateralized
Notes due 2028 (the "New Class A-2 Notes") and its 7.71% Series B Class A-3
Timber Collateralized Notes due 2028 (the "New Class A-3 Notes")
(collectively, the "New Notes") for each $1,000 in principal amount of its
outstanding 6.55% Class A-1 Timber Collateralized Notes due 2028 (the "Old
Class A-1 Notes" and, together with the New Class A-1 Notes, the "Class A-1
Timber Notes"), its outstanding 7.11% Class A-2 Timber Collateralized Notes
dues 2028 (the "Old Class A-2 Notes" and, together with the New Class A-2
Notes, the "Class A-2 Timber Notes") and its outstanding 7.71% Class A-3
Timber Collateralized Notes due 2028 (the "Old Class A-3 Notes" and, together
with the New Class A-3 Notes, the "Class A-3 Timber Notes"), respectively
(collectively, the "Old Notes" and, together with the New Notes, the "Timber
Notes"), held by registered owners ("Eligible Holders") of any Old Notes that
remain Registrable Securities (defined below) as reflected on the records of
State Street Bank and Trust Company, as registrar for the Old Notes (in such
capacity, the "Registrar"), or any person whose Old Notes are held of record
by the depository of the Old Notes. For purposes of the Exchange Offer,
"Registrable Securities" means each Old Note until the earliest to occur of
(i) the date on which such Old Note has been exchanged for a New Note in the
Exchange Offer and is thereafter freely tradeable by the holder thereof not an
affiliate of the Company, (ii) the date on which such Old Note is registered
under the Securities Act of 1933, as amended (the "Securities Act"), and
disposed of in accordance with a registration statement, (iii) the date on which
such Old Note is distributed to the public pursuant to Rule 144 under the
Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act,
or (iv) the date on which such Old Note shall have ceased to be outstanding.
(CONTINUED ON NEXT PAGE)
SEE "RISK FACTORS," BEGINNING ON PAGE 37, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY ELIGIBLE HOLDERS IN EVALUATING THE EXCHANGE
OFFER.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY OR STATE SECURITIES COMMIS-
SION OR REGULATORY AUTHORITY, NOR HAS ANY SUCH COMMISSION
OR REGULATORY AUTHORITY PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTA-
TION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The Company will accept for exchange any and all Old Notes that are validly
tendered prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders
of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City
time, on the Expiration Date. The Exchange Offer is not conditioned upon any
minimum principal amount of the Old Notes being tendered for exchange. However,
the Exchange Offer is subject to certain customary conditions, which may be
waived by the Company, and to the terms and provisions of the Registration
Rights Agreement, dated as of July 20, 1998 (the "Registration Rights
Agreement"), between the Company and Salomon Brothers Inc, as the
representative (in such capacity, the "Representative") of Salomon Brothers
Inc, BancAmerica Robertson Stephens, Bear, Stearns & Co. Inc. and Donaldson,
Lufkin & Jenrette Securities Corporation (collectively, the "Initial
Purchasers"). The Old Notes may be tendered only in multiples of $1,000. See
"The Exchange Offer."
The Old Notes were issued by the Company to the Initial Purchasers in a
transaction (the "Offering") on July 20, 1998 (the "Closing Date") pursuant
to a note purchase agreement, dated as of July 9, 1998 (the "Purchase
Agreement"), between the Company and the Representative. The Initial Purchasers
subsequently resold the Old Notes in reliance on Rule 144A under the Securities
Act and certain other exemptions under the Securities Act. The Company and the
Representative also entered into the Registration Rights Agreement, pursuant to
which the Company granted certain registration rights for the benefit of the
holders of the Old Notes. The Exchange Offer is intended to satisfy certain of
the Company's obligations under the Registration Rights Agreement with respect
to the Old Notes. See "The Exchange Offer--Purpose and Effect."
The Old Notes were issued under an indenture, dated as of the Closing Date
(the "Indenture"), among the Company and State Street Bank and Trust Company,
as trustee (in such capacity, the "Trustee"). The New Notes will be issued
under the Indenture as it relates to the New Notes. The form and terms of the
New Notes will be identical in all material respects to the form and terms of
the Old Notes, except that (i) the New Notes have been registered under the
Securities Act and, therefore, will not bear legends restricting the transfer
thereof, (ii) holders of New Notes will not be entitled to Non-Registration
Premiums (as defined in the Indenture) otherwise payable under the terms of the
Indenture in respect of Old Notes held by such holders during any period in
which a Registration Default (as defined in the Indenture) is continuing, and
(iii) holders of New Notes will not be, and upon the consummation of the
Exchange Offer Eligible Holders of Old Notes will no longer be, entitled to
certain rights under the Registration Rights Agreement intended for the holders
of unregistered securities. The Exchange Offer shall be deemed consummated upon
the delivery by the Company to the Registrar under the Indenture of New Notes in
the same Class and aggregate principal amount as the Old Notes that are validly
tendered by holders thereof pursuant to the Exchange Offer. See "The Exchange
Offer--Termination of Certain Rights" and "--Procedures for Tendering Old
Notes" and "Description of the Timber Notes." Each of the Class A-1 Timber
Notes, the Class A-2 Timber Notes and the Class A-3 Timber Notes is referred to
herein as a "Class."
The New Notes will bear interest from and including their date of issuance.
Interest and, to the extent of available funds, principal payments on the New
Notes are payable semiannually on January 20 and July 20 of each year,
commencing January 20, 1999 (each such date, a "Note Payment Date"). Failure
to pay interest on the Timber Notes of any Class on any Note Payment Date, or
failure to pay any remaining principal balance of the Timber Notes on July 20,
2028 (the "Final Maturity Date"), will constitute an Event of Default, as
described herein. Each Class of Timber Notes will have a Minimum Principal
Amortization Schedule and a Scheduled Amortization Schedule, as described
herein. Failure to pay principal on the Timber Notes of any Class in accordance
with the Minimum Principal Amortization Schedule for such Class will not
constitute an Event of Default if funds are not available therefor, but will
generally require the application of all available funds to make payments on the
Timber Notes, as described herein. Failure to pay principal on the Timber Notes
of any Class in accordance with the Scheduled Amortization Schedule for such
Class will not constitute an Event of Default, but may result in a premium being
due and payable, as described herein.
2
<PAGE>
Based on their respective Scheduled Amortization Schedules, the Class A-1
Timber Notes will mature on January 20, 2007, the Class A-2 Timber Notes will
mature on January 20, 2014 and the Class A-3 Timber Notes will mature on January
20, 2014 (each such date, a "Scheduled Maturity Date" with respect to the
applicable Class of Timber Notes). The Class A-3 Timber Notes will generally
receive payments of principal after the Class A-2 Timber Notes have been paid in
full, and the Class A-2 Timber Notes will generally receive payments of
principal after the Class A-1 Timber Notes have been paid in full. The Scheduled
Amortization Schedule for the Class A-3 Timber Notes does not provide for any
payments of principal on the Class A-3 Timber Notes before the Scheduled
Maturity Date for that Class. The Company may make optional prepayments of
principal on any Note Payment Date. Such optional prepayments may require a
Prepayment Premium, as described herein. The Timber Notes of any Class or
Classes may be redeemed in order of maturity at the option of the Company, in
whole but not in part, on any date at a redemption price equal to the sum, for
each Class of Timber Notes, of (i) the unpaid principal amount thereof, (ii) any
accrued and unpaid premiums thereon, as described herein, (iii) accrued and
unpaid interest and (iv) if the redemption date is prior to the applicable
Scheduled Maturity Date, a Prepayment Premium.
The Timber Notes are senior secured obligations of the Company and are not
obligations of, or guaranteed by, Pacific Lumber, any of the Company's other
affiliates or any other person. The Timber Notes are secured by a lien on and
security interest in substantially all of the Company's assets. See
"Description of the Timber Notes."
Based on positions of the staff of the Securities and Exchange Commission
(the "Commission") enunciated in MORGAN STANLEY & CO., INCORPORATED (available
June 5, 1991) and EXXON CAPITAL HOLDINGS CORPORATION (available May 13, 1988),
and interpreted in the Commission's letters to SHEARMAN & STERLING (available
July 2, 1993) and K-III COMMUNICATIONS CORPORATION (available May 14, 1993), and
similar no-action or interpretive letters issued to third parties, the Company
believes that the New Notes issued pursuant to the Exchange Offer to an Eligible
Holder in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by such Eligible Holder, other than as set forth below, without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that the Eligible Holder is not an affiliate of the
Company within the meaning of Rule 405 under the Securities Act, is acquiring
the New Notes in the ordinary course of business and is not participating, and
has no arrangement or understanding with any person to participate, in the
distribution of the New Notes. Eligible Holders wishing to accept the Exchange
Offer must represent to the Company, as required by the Registration Rights
Agreement, that such conditions have been met. If any Eligible Holder acquires
New Notes in the Exchange Offer for the purpose of distributing or participating
in a distribution of the New Notes, such Eligible Holder cannot rely on the
position of the staff of the Commission set forth in the above no-action and
interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction, unless an exemption from registration is otherwise
available. Each broker-dealer that acquired Old Notes directly from the Company
and that receives New Notes for its own account pursuant to the Exchange Offer
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale transaction (unless an
exemption from registration is otherwise available). See "The Exchange
Offer--Resales of the New Notes." Each broker-dealer that receives New Notes in
exchange for Old Notes that were acquired by such broker-dealer as a result of
market-making or other trading activities must, in connection with any resale of
such New Notes, comply with the prospectus delivery requirements of the
Securities Act and must acknowledge that it will deliver a prospectus in
connection with any such resale. The Company has agreed that, for a period of 90
days after the effective date of this Prospectus, it will make this Prospectus,
as it may be amended or supplemented from time to time, available for use by any
broker-dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such broker-dealer as a result
of market-making or other trading activities.
As of , 1998, Cede & Co. ("Cede"), as nominee for The
Depository Trust Company, New York, New York ("DTC"), was the registered
holder of $ million, $ million and $ million aggregate principal amount of
the Old Class A-1 Notes, the Old Class A-2 Notes and the Old Class A-3 Notes,
respectively, and held such Old Notes for , and
of its participants,
3
<PAGE>
respectively. The Company believes that no such participant is an affiliate (as
such term is defined in Rule 405 of the Securities Act) of the Company. There
has previously been only a limited secondary market, and no public market, for
the Old Notes. There can be no assurance as to the liquidity of the trading
market for either the New Notes or the Old Notes. The New Notes constitute
securities for which there is no established trading market, and the Company
does not currently intend to list the New Notes on any securities exchange. If
such a trading market develops for the New Notes, future trading prices will
depend on many factors, including, among other things, prevailing interest
rates, the Company's results of operations and the market for similar
securities. Depending on such factors, the New Notes may trade at a discount
from their face value. See "Risk Factors--Lack of Public Market for the New
Notes."
The Company will not receive any proceeds from this Exchange Offer.
Pursuant to the Registration Rights Agreement, the Company will bear all
expenses incident to the Company's consummation of the Exchange Offer and
compliance with the Registration Rights Agreement.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
The $160,700,000, $243,200,000 and $463,348,000 aggregate principal amounts
of the Old Class A-1 Notes, the Old Class A-2 Notes and the Old Class A-3 Notes,
respectively, were issued originally in global form (the "Global Old Notes").
The Global Old Notes were deposited with, or on behalf of, DTC, as the initial
depository with respect to the Old Notes (in such capacity, the "Depository").
The Global Old Notes are registered in the name of Cede, as nominee of DTC, and
beneficial interests in the Global Old Notes are shown on, and transfers thereof
are effected only through, records maintained by the Depository and its
participants. The use of the Global Old Notes to represent Old Notes permits the
Depository's participants, to transfer interests in the Old Notes electronically
in accordance with the Depository's established procedures without the need to
transfer a physical certificate. The New Notes will also be issued initially in
global form (the "Global New Notes", and together with the Global Old Notes,
the "Global Notes") and deposited with, or on behalf of, the Depository. See
"Description of the Timber Notes--Delivery, Form and Transfer."
4
<PAGE>
TABLE OF CONTENTS
PAGE
-----
Available Information .................................................... 6
Summary .................................................................. 7
Risk Factors ............................................................. 37
The Exchange Offer ....................................................... 46
Overview and Structure of the
Transaction ............................................................ 54
Capitalization ........................................................... 66
Selected Historical and Pro Forma
Financial Data ......................................................... 67
Unaudited Pro Forma Balance Sheet ........................................ 68
Unaudited Pro Forma Statements of
Income ................................................................. 69
Notes to Unaudited Pro Forma Financial
Statements ............................................................. 70
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................................................. 71
Business of the Company .................................................. 75
Management ............................................................... 89
Certain Transactions ..................................................... 92
Description of the Timber Notes .......................................... 93
Certain Defined Terms .................................................... 136
Description of Certain Principal
Agreements ............................................................. 153
Certain Legal Considerations ............................................. 161
United States Income Tax Consequences .................................... 162
Plan of Distribution ..................................................... 164
Legal Matters ............................................................ 165
Experts .................................................................. 165
Financial Statements of the Company ...................................... F-1
Annex 1--Structuring Schedule ............................................ I-1
Annex 2--The Pacific Lumber Company ...................................... II-1
5
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (which
term shall include any amendments thereto) on Form S-4 under the Securities Act
(the "Registration Statement") with respect to the securities offered by this
Prospectus. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto, to which reference is hereby
made. Each statement made in this Prospectus referring to a document filed as an
exhibit or schedule to the Registration Statement is not necessarily complete
and is qualified in its entirety by reference to the exhibit or schedule for a
complete statement of its terms and conditions. In addition, upon the
effectiveness of the Registration Statement the Company will become subject to
the informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and, in accordance therewith, the Company will
file periodic reports and other information with the Commission relating to its
business, financial statements and other matters. Any interested parties may
inspect and/or copy the Registration Statement, its schedules and exhibits, and
the periodic reports and other information filed in connection therewith, at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's
regional offices located at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511, and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of such materials can be obtained at prescribed
rates by addressing written requests for such copies to the Public Reference
Room of the Commission at its principal office at Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549. Information on the operation of
the Public Reference Room may be obtained by calling the Commission at
1-800-SEC-0330. The Commission also maintains a site on the World Wide Web, the
address of which is http://www.sec.gov, that contains reports, proxy and
information statements and other information regarding issuers, such as the
Company, that file electronically with the Commission. The obligations of the
Company under the Exchange Act to file periodic reports and other information
with the Commission may, to the extent that such obligations arise from the
registration of the New Notes, be suspended, under certain circumstances, if the
New Notes are held of record by fewer than 300 holders at the beginning of any
fiscal year and are not listed on a national securities exchange. The Company
has agreed that, whether or not it is required to do so by the rules and
regulations of the Commission, for so long as any of the Timber Notes remain
outstanding, it will furnish to the holders of the Timber Notes and file with
the Commission (unless the Commission will not accept such a filing) all annual,
quarterly and current reports that the Company is or would be required to file
with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENT
HEREIN OR DELIVERED HEREWITH. COPIES OF ANY DOCUMENTS FILED BY THE COMPANY,
INCLUDING EXHIBITS TO SUCH DOCUMENTS, ARE AVAILABLE TO ANY REGISTERED HOLDER OR
BENEFICIAL OWNER OF THE OLD NOTES UPON WRITTEN OR ORAL REQUEST AND WITHOUT
CHARGE FROM SCOTIA PACIFIC COMPANY LLC, 5847 SAN FELIPE, SUITE 2600, HOUSTON,
TEXAS 77057, ATTENTION: SHAREHOLDER SERVICES COORDINATOR. TELEPHONE REQUESTS MAY
BE DIRECTED TO THE COMPANY AT (713) 267-3675. IN ORDER TO ENSURE TIMELY DELIVERY
OF THE DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE BY , 1998.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION WITH RESPECT TO ANY SECURITY OTHER THAN THE SECURITIES OFFERED
HEREBY OR AN OFFER TO OR SOLICITATION OF ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
6
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO (INCLUDING THE PRO FORMA
FINANCIAL INFORMATION) APPEARING ELSEWHERE IN THIS PROSPECTUS. SEE "CERTAIN
DEFINED TERMS" FOR THE DEFINITION OF CERTAIN CAPITALIZED TERMS USED IN THIS
PROSPECTUS.
The New Notes will be senior secured obligations of the Company, and will
not be obligations of, or guaranteed by, Pacific Lumber, any of the Company's
other affiliates or any other person. Information with respect to Pacific Lumber
is provided in this Summary and in Annex 2 to this Prospectus in light of the
significance of the relationships between the Company and Pacific Lumber.
Pacific Lumber provides certain operational, management and related services for
the Company's timber and timberlands pursuant to the New Services Agreement (as
defined below), and the Company contemplates that substantially all of its
revenues will be derived from the sale of logs to Pacific Lumber pursuant to the
New Master Purchase Agreement (as defined below).
This Prospectus contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements appear in a number of places (see "Risk Factors,"
"Business of the Company--Regulatory and Environmental Factors" and "--Legal
Proceedings," and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Financial Condition and Investing and Financing
Activities" and "--Trends"). Such statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may,"
"estimates," "will," "should," "plans," "contemplates" 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 Prospectus identifies 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.
THE COMPANY
Scotia Pacific Company LLC (the "Company"), a special purpose Delaware
limited liability company wholly owned by The Pacific Lumber Company ("Pacific
Lumber"), was organized by Pacific Lumber to facilitate the offering of the Old
Notes. The Company is the successor to Pacific Lumber's wholly owned subsidiary,
Scotia Pacific Holding Company, a Delaware corporation ("Scotia Pacific"), and
succeeded in substantially all respects to the business and operations of Scotia
Pacific, effective as of the date of issuance of the Old Notes (the "Closing
Date"). The Company's principal executive offices are located at 125 Main
Street, Second Floor, P.O. Box 712, Scotia, California 95565 and its telephone
number is (707) 764-2330.
Scotia Pacific was organized by Pacific Lumber as a special purpose
Delaware corporation in connection with the offering of Scotia Pacific's 7.95%
Timber Collateralized Notes due 2015 (the "Original Timber Notes"). On March
23, 1993, the issuance date of the Original Timber Notes (the "Original
Issuance Date"), Pacific Lumber transferred (the "Original Transfer") to
Scotia Pacific (i) approximately 171,400 acres of timberlands in Humboldt
County, California, including the timber and related timber harvesting rights
with respect to such acreage, (ii) 8,000 additional acres of timberlands
(consisting substantially of scattered stands of virgin old growth timber) on
which Pacific Lumber retained the timber and related timber harvesting rights
(the "Original Pacific Lumber Timber Rights"), (iii) certain computer hardware
and software, including a geographic information system (the "GIS") that
contains information on numerous aspects of the timberlands of Pacific Lumber
and its subsidiaries, such as timber type, tree class, wildlife data, roads,
rivers and streams (subject to certain rights of concurrent use with Pacific
7
<PAGE>
Lumber) and (iv) certain other assets. Since the date of the Original Transfer,
Scotia Pacific had derived substantially all of its revenues from the sale to
Pacific Lumber of logs harvested from Scotia Pacific's timberlands by Pacific
Lumber pursuant to a Master Purchase Agreement entered into between Scotia
Pacific and Pacific Lumber on the Original Issuance Date (the "Original Master
Purchase Agreement"). Pursuant to a Services Agreement entered into at the same
time (the "Original Services Agreement"), Pacific Lumber had provided
operational, management and related services with respect to Scotia Pacific's
timberlands not performed by Scotia Pacific's employees.
FORMATION TRANSACTIONS
On or prior to the Closing Date, Pacific Lumber transferred to the Company
(the "Palco Transfers") an aggregate of (i) approximately 13,500 acres of
timberlands, including the timber and related timber harvesting rights (the
"Transferred Timberlands"), (ii) the timber and related timber harvesting
rights with respect to approximately 7,500 acres of the 8,000 acres of
timberlands which had been subject to the Original Pacific Lumber Timber Rights
and (iii) the timber and related timber harvesting rights with respect to an
additional approximately 12,200 acres of timberlands (the "Company Timber
Rights") that are still owned by Pacific Lumber, Salmon Creek Corporation
("Salmon Creek"), a wholly owned subsidiary of Pacific Lumber, or an
unaffiliated third party. The timber and related timber harvesting rights
("Timber Rights") that were transferred, as described above and pursuant to
the Company Transfer, as described below, constitute a real property interest
which includes the right to harvest in perpetuity all trees and timber now
located or hereafter planted or growing on the timberlands to which they relate
(or, in the case of Company Timber Rights in respect of not more than 200 acres
of timberlands, such right expiring not earlier than November 1, 2027). As a
real property interest, such Timber Rights may be conveyed by deed and are able
to be mortgaged.
On the Closing Date, Scotia Pacific was merged into the Company (the
"Merger"), and the Company transferred to Pacific Lumber the Timber Rights in
respect of approximately 1,400 acres of the Company's timberlands (the "Company
Transfer"). All references in this Prospectus to the business and operations of
the Company prior to the Closing Date refer to the business and operations of
Scotia Pacific and to the operations attributable to the timberlands and Timber
Rights transferred to the Company pursuant to the Palco Transfers.
The chart on the following page summarizes the Merger, the Palco Transfers
and the Company Transfer.
8
<PAGE>
THE MERGER, PALCO TRANSFERS AND COMPANY TRANSFER(1)
<TABLE>
<S> <C> <C>
----------------
------------------------------|Pacific Lumber|<---------------------------------|
| ---------------- |
| | |
\|/ | |
|---------------------------------| \|/ |
| Palco Transfers | |---------------------------------| |
| | | Merger | |
|Pacific Lumber transferred | | | |
|to the Company: | |Scotia Pacific merged into the | ----------------------------------|
| | |Company. Scotia Pacific's assets | | Company Transfer |
|o The Transferred Timberlands, | |included: | | |
| consisting of 13,500 acres | | | |The Company transfered to Pacific|
| of timberlands | |o 171,400 acres of timberlands | |Lumber: |
| | | | | |
|o Timber Rights on 7,500 acres | |o 8,000 acres of aditional | |o Timber Rights on 1,400 acres |
| subject to the Origonal Pacific| | timberlands subject to the | |---------------------------------|
| Lumber Timber Rights(2) | | Original Pacific Lumber Timber | /|\
| | | Rights | |
|o The Company Timber Rights, | |---------------------------------| |
| consisting of Timber Rights on | | |
| 12,200 acres | | |
|---------------------------------| | |
| | |
| \|/ |
| |----------------------------------------| |
| | The Company | |
| | | |
| |As a result of the Palco Transfers, | |
| |the Merger and the Company Transfer, | |
| |the Company owns ther following | |
| |timber assets(1): | |
| | | |
| |o 191,000 acres of timberlands(3) | |
| | | |
|----------------------->|o The Compant Timber Rights |-----------------|
| consisting of Timber Rights on |
| 12,200 acres |
| |
|o 1,900 acres of timberlands subject |
| to the Pacific Lumber Timber Rights(4)|
|----------------------------------------|
<FN>
- ---------------
(1) This chart does not reflect the following transactions to be effected if the
Headwaters Agreement is consummated, as discussed below: (a) the transfer to
the Company of 7,700 acres of timberlands known as the Elk River Timberlands
and (b) the transfer to the federal and state governments by the Company of
800 acres of timberlands which are subject to the Pacific Lumber Timber
Rights (as defined in note 4 below). See "--Company Timberlands and Other
Assets" and "--Regulatory and Environmental Matters; The Headwaters
Agreement."
(2) These Timber Rights relate to 7,500 of the 8,000 acres of timberlands
subject to the Original Pacific Lumber Timber Rights transferred to the
Company pursuant to the Merger.
(3) Consists of (a) 171,400 acres of timberlands received as a result of the
Merger, (b) the 13,500 acres of Transferred Timberlands received pursuant to
the Palco Transfers and (c) the 7,500 acres referred to in Note 2 above,
less (d) the 1,400 acres of timberlands subject to the Company Transfer.
(4) Consists of timberlands subject to (a) Timber Rights on 1,400 acres
transferred to Pacific Lumber pursuant to the Company Transfer and (b)
Timber Rights on the remaining 500 acres subject to the Original Pacific
Lumber Timber Rights and which were not transferred to the Company
(collectively the "Pacific Lumber Timber Rights").
</TABLE>
9
<PAGE>
COMPANY TIMBERLANDS AND OTHER ASSETS
As a result of the Merger, the Palco Transfers and the Company Transfer,
the Company owns, and the obligations of the Company under the Timber Notes are
secured by, (i) approximately 191,000 acres of timberlands, including the timber
and related timber harvesting with respect to such acreage, (ii) the Company
Timber Rights relating to an additional approximately 12,200 acres of
timberlands that are owned by Pacific Lumber, Salmon Creek and an unaffiliated
third party, (iii) approximately 1,900 acres of timberlands with respect to
which Pacific Lumber owns the Timber Rights (the "Pacific Lumber Timber
Rights"), (iv) certain computer hardware and software, including the GIS
(subject to certain rights of concurrent use by Pacific Lumber), and (v) certain
other assets. Substantially all of the Company's assets serve as security for
the Timber Notes. The timberlands owned by the Company (including the
timberlands which are subject to the Pacific Lumber Timber Rights) and the
timberlands subject to the Company Timber Rights are hereinafter collectively
referred to as the "Company Timberlands." The timber located on the Company
Timberlands which is not subject to the Pacific Lumber Timber Rights is
hereinafter referred to as the "Company Timber." References to the transfer to
the Company of the Company Timberlands, the ownership by the Company of the
Company Timberlands or the pledge of Company Timberlands as security for the
Timber Notes means, with respect to the timberlands subject to the Company
Timber Rights, the transfer, ownership or pledge of the Company Timber Rights
only and not the underlying land relating thereto.
It is anticipated that if the Headwaters Agreement referred to below (see
"--Regulatory and Environmental Matters; The Headwaters Agreement") is
consummated (i) approximately 7,700 acres of timberlands known as the Elk River
Timberlands or substantially comparable property (which include approximately
0.2 million Mbfe (as defined below) of timber) will, within 180 days thereof, be
transferred to the Company and will become subject to the Lien of the Deed of
Trust (as defined herein) securing the Timber Notes and (ii) approximately 800
acres of Company Timberlands subject to the Pacific Lumber Timber Rights will be
transferred by the Company to the federal and state governments. The Initial
Harvest Schedule (as defined herein) prepared by the Company in connection with
the structuring of the Timber Notes (see "Overview and Structure of the
Transaction--Summary of Structure--Structuring Cash Flows") assumed that the
Headwaters Agreement would be consummated and, accordingly, that the Elk River
Timberlands or substantially similar property (in either case, the "Elk River
Timberlands") would be acquired by the Company. However, the Company
Timberlands and the Company Timber do not presently include the Elk River
Timberlands and its timber. References to the Company Timberlands and the
Company Timber include the Elk River Timberlands and its timber, and to any
other timberlands and related timber subsequently acquired by the Company, as
the context requires, when and as any such timberlands are acquired by the
Company and made subject to the Lien of the Deed of Trust.
A bill recently enacted by the California Legislature (the "California
Headwaters Bill"), in addition to appropriating California's portion of the
funds necessary to consummate the Headwaters Agreement, also authorized the
expenditure of up to $80 million toward the acquisition at fair market value of
a forest grove owned by the Company commonly referred to as "Owl Creek." The
bill also provides that if any portion of the $80 million remains after purchase
of the Owl Creek grove, it may be used to purchase certain other timberlands.
The Initial Harvest Schedule did not reflect the potential sale to the state of
California of any Company Timberlands. See "Risk Factors -- Factors Affecting
Actual Amortization" and "--Headwaters Agreement."
The Company Timberlands consist of substantially contiguous acreage
situated in Humboldt County, located on the northern California coast. Assuming
consummation of the Headwaters Agreement, including transfer of the Elk River
Timberlands to the Company, the Company Timberlands will be comprised of
approximately 212,000 acres of primarily young growth and old growth redwood and
Douglas-fir timber. The Company Timber will equal approximately 3.0 million
"Mbfe" of timber (approximately 3.2 million Mbfe including the Elk River
Timberlands) comprised (by volume on an Mbfe basis) of approximately 48% young
growth redwood timber, 6% young growth Douglas-fir timber, 32% old growth
redwood timber, 12% old growth Douglas-fir timber and 2% other types of timber.
The "Mbfe" concept was used in
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<PAGE>
structuring the Timber Notes to account for the relative values of the species
and categories of timber included in the Company Timber. Under the Mbfe concept,
one thousand board feet, net Scribner scale, of old growth redwood timber equals
one Mbfe. One thousand board feet, net Scribner scale, of each other species and
category of timber included in the Company Timber is assigned a value equal to a
fraction of an Mbfe as described herein.
Under the habitat conservation plan covering multiple species
("Multi-Species HCP") currently undergoing public review and comment in
connection with the Headwaters Agreement, harvesting activities would be
prohibited or restricted on approximately 34,600 acres of the Company
Timberlands. These timberlands include (without giving effect to an estimated
1,000 overlapping acres) approximately 7,600 acres, consisting of substantial
quantities of old growth redwood and Douglas-fir timber, to serve as habitat
conservation areas for the marbled murrelet (a coastal seabird), and 28,000
acres to serve as buffers to protect aquatic and riparian (streamside) habitat.
The Initial Harvest Schedule assumed the existence of these restrictions. The
Initial Harvest Schedule also assumed the harvesting over time of the Owl Creek
grove rather than its designation as a marbled murrelet habitat conservation
area, as provided for by the California Headwaters Bill. See "Overview and
Structure of the Transaction--Summary of Structure--Structuring Cash Flows,"
"Business of the Company--Regulatory and Environmental Matters--Endangered and
Threatened Species" and "--Headwaters Agreement."
Redwood lumber is a premium, high value-added product which has different
supply and demand characteristics from the general lumber market. Redwood is
known for its natural beauty, superior ability to retain paints and finishes,
dimensional stability and innate resistance to decay, insects and chemicals. As
a result, redwood lumber is generally not used for commodity applications such
as structural frames for construction, but is used instead for specialty
applications such as exterior siding, trim and fascia for residential and
commercial construction, outdoor furniture, decks, planters and retaining walls.
Redwood also has a variety of industrial applications because of its resistance
to chemicals and because it does not impart any taste or odor to liquids or
solids. Redwood prices have exhibited stability compared to most other softwood
timber types, and redwood lumber has historically commanded a substantial price
premium to other softwood timber types.
Redwood is grown commercially only in North America in a region that
extends for approximately 375 miles along the coast of the Pacific Northwest.
The combination of excellent soil conditions and climate makes this region one
of the most productive timber regions in North America. Over the last several
decades, the overall supply of upper grade redwood lumber has been diminishing
due to increasing environmental and regulatory restrictions and other factors.
The Company Timberlands are among the largest privately-owned contiguous tracts
of redwood timberlands and represent one of the most valuable redwood timberland
holdings as a result of their prime location, which contributes to their
superior growth characteristics and high timber density.
BUSINESS OF THE COMPANY
Substantially all of the Company's revenues have been and are expected to
continue to be derived from the sale of logs harvested from the Company Timber.
On the Closing Date, the Company entered into a New Master Purchase Agreement
with Pacific Lumber (the "New Master Purchase Agreement") which governs the
sale to Pacific Lumber of logs harvested from the Company Timberlands. See
"Description of Certain Principal Agreements." The Company pledged to the
Trustee under the Indenture, as security for the Timber Notes, the Company
Timberlands, the Company Timber, substantially all of the Company's personal
property (subject to certain rights of concurrent use by Pacific Lumber), all of
the Company's rights under the New Services Agreement (as defined below), the
New Master Purchase Agreement, the New Reciprocal Rights Agreement (as defined
below), the New Additional Services Agreement (as defined below) and certain
other related agreements (collectively, the "Subject Contracts"), certain
other assets and the proceeds of all of the foregoing, as well as its rights to
amounts on deposit in certain accounts maintained with the Trustee
(collectively, together with any additional property, including the Elk River
Timberlands, which may be acquired by the Company in the future and made subject
to the Lien of the
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<PAGE>
Deed of Trust, the "Mortgaged Property"). The Mortgaged Property constitutes
substantially all of the Company's assets. See "Description of Certain
Principal Agreements" and "Description of the Timber Notes."
As of September 1, 1998, the Company had 44 employees, 41 of whom were
registered professional foresters, wildlife and fisheries biologists or
otherwise involved in the management of the Company Timberlands. In connection
with the issuance of the Original Timber Notes, Scotia Pacific acquired from
Pacific Lumber certain computer hardware and software, including the GIS
(subject to certain rights of concurrent use with Pacific Lumber), and certain
other assets relevant to the stewardship and management of the Company
Timberlands. The Company will continue to rely on Pacific Lumber to provide,
pursuant to the New Services Agreement entered into on the Closing Date (the
"New Services Agreement"), operational, management and related services not
performed by its own employees with respect to the Company Timberlands. Such
services include the furnishing of all equipment, personnel and expertise not
within the Company's possession and reasonably necessary for the operation and
maintenance of the Company Timberlands and the Company Timber, as well as timber
management techniques designed to supplement the natural regeneration of, and
increase the amount of, Company Timber. As compensation for the services
provided by Pacific Lumber pursuant to the New Services Agreement, the Company
pays Pacific Lumber a fee (the "Services Fee"), which will be adjusted each
year based on a specified government index relating to wood products, and
reimburses Pacific Lumber for the cost of constructing, rehabilitating and
maintaining roads, and performing reforestation services, on the Company
Timberlands. Certain of such reimbursable expenses are expected to vary in
relation to the amount of timber to be harvested in any given period. As of the
Closing Date, the monthly portion of the Services Fee was approximately $107,000
and it is expected that the amount of such reimbursable expenses will aggregate
approximately $8.0 million for fiscal 1999. The Company believes that the
services provided by Pacific Lumber under the New Services Agreement are
currently available from other sources at prices which would not differ
materially from those in the New Services Agreement. See "Description of
Certain Principal Agreements--New Services Agreement."
The Company Timberlands contain an extensive network of roads spanning
approximately 1,500 miles. This road system allows the Company's foresters
access to employ forest stewardship techniques designed to protect the Company
Timber from forest fires, erosion, insects and other damage and, in addition,
facilitates the transportation of logs harvested from the Company Timber. In
connection with the issuance of the Original Timber Notes, Pacific Lumber,
Scotia Pacific and Salmon Creek entered into a Reciprocal Rights Agreement (the
"Original Reciprocal Rights Agreement") pursuant to which each party granted
to the other parties certain reciprocal rights of egress and ingress through
their respective properties in connection with the operation and maintenance of
such properties and their respective businesses. On the Closing Date, the
Company, Pacific Lumber and Salmon Creek entered into a New Reciprocal Rights
Agreement (the "New Reciprocal Rights Agreement") granting, among other
things, reciprocal rights of egress and ingress to each other. See "Business of
the Company;" "Description of Certain Principal Agreements--New Reciprocal
Rights Agreement" and "Annex 2--The Pacific Lumber Company--Business."
The Company believes that its employees, the GIS and the other assets it
owns, together with the services provided to the Company under the New Services
Agreement and the access rights granted to the Company pursuant to the New
Reciprocal Rights Agreement, are adequate for the operation and maintenance of
the Company Timberlands, including compliance with applicable regulatory
requirements, in each case substantially as conducted prior to the issuance of
the Timber Notes.
Prior to harvesting Company Timber, the Company is required to file with
the California Department of Forestry (the "CDF"), and obtain its approval of,
a detailed timber harvesting plan (a "THP") for the area to be harvested. A
THP includes information regarding the method of proposed timber operations for
a specified forest area, whether the operations will have any adverse impact on
the environment and, if so, the
12
<PAGE>
mitigation measures to be used to reduce any such impact. On the Closing Date,
Pacific Lumber transferred to the Company its rights under all THPs that it
holds. Pursuant to the Indenture, the Company covenants to use its best efforts
(consistent with prudent business practices) to maintain a number of pending
THPs which, together with THPs previously approved, would cover rights to
harvest a quantity of Company Timber adequate to pay interest and amortization
of principal based on the Minimum Principal Amortization Schedules (as defined
below) for the next succeeding twelve month period. See "Business of the
Company--Harvesting Practices" and "--Regulatory and Environmental Matters"
and "Description of the Timber Notes--Certain Covenants--Timber Harvesting
Plans, Etc." The ability of the Company to sell logs to Pacific Lumber pursuant
to the New Master Purchase Agreement depends in part upon its ability to obtain
regulatory approval of THPs. In addition, Pacific Lumber and the Company have
filed a sustained yield plan ("SYP") and Multi-Species HCP which, if approved,
could result in a number of substantial benefits, including faster preparation
and approval of THPs and the ability to harvest in certain areas of the Company
Timberlands in which it has previously been difficult to obtain such approval.
See "--Regulatory and Environmental Matters; The Headwaters Agreement" below
and "Risk Factors--Regulatory and Environmental Factors" and "Business of the
Company--Regulatory and Environmental Matters."
It is expected that the Company will continue to derive substantially all
of its revenue from the sale of logs to Pacific Lumber. The New Master Purchase
Agreement governs all sales of logs by the Company to Pacific Lumber. Each sale
of logs by the Company to Pacific Lumber is made pursuant to a separate log
purchase agreement (which incorporates the terms of the New Master Purchase
Agreement) for the Company Timber covered by an approved THP. Each log purchase
agreement generally constitutes an exclusive agreement with respect to the
timber covered thereby, subject to certain limited exceptions. The purchase
price shall be at least equal to the SBE Price. The New Master Purchase
Agreement defines the "SBE Price" for any species and category of timber as
the stumpage price for such species and category, 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 Harvest Value Schedule.
Harvest Value Schedules are published twice a year for purposes of computing a
yield tax imposed on timber harvested between January 1 and June 30 and July 1
and December 31. Although based on actual market transactions, SBE Prices are
not necessarily representative of actual prices that would be realized from
unrelated parties at subsequent dates. SBE Prices applicable to the six month
period ended June 30, 1998 (the "June 1998 SBE Prices") were used in
structuring the Timber Notes.
Under the New Master Purchase Agreement and related log purchase
agreements, Pacific Lumber is responsible, at its own expense, for harvesting
and removing Company Timber covered by approved THPs. Title to the harvested
logs does not pass to Pacific Lumber until the logs are transported to Pacific
Lumber's log decks and measured. The New Master Purchase Agreement requires that
Pacific Lumber harvest and remove the Company Timber covered by the applicable
THP in accordance with applicable law and the terms and conditions of such THP
and any applicable SYP and HCP. Pacific Lumber continues to mill logs and
produce and market lumber products from the Company Timber in substantially the
same manner as it had prior to the issuance of the Old Notes. See "Description
of Certain Principal Agreements--New Master Purchase Agreement;" "Business of
the Company--Harvesting Practices" and "Annex 2--The Pacific Lumber
Company--Business."
Although substantially all of the Company's revenues are derived from the
sale of logs to Pacific Lumber under the New Master Purchase Agreement, the
Company may sell logs or standing timber to third parties. In addition, subject
to the collateral release provisions of the Indenture, the Company may sell
portions of the Company Timberlands or make Lump Sum Sales (as defined in the
Indenture) of Company Timber during the term of the New Master Purchase
Agreement. See "Description of the Timber Notes--Collateral Release
Provisions."
13
<PAGE>
REGULATORY AND ENVIRONMENTAL MATTERS; THE HEADWATERS AGREEMENT
Regulatory and environmental matters play a significant role in the
Company's operations, which are subject to a variety of California and federal
laws and regulations dealing with timber harvesting practices, threatened and
endangered species, and air and water quality. Regulatory and environmental
concerns have resulted in restrictions on the geographic scope and timing of the
Company's timber operations, increased operational costs and engendered
litigation and other challenges to the Company's THPs, although they have not
historically had a significant adverse effect on the Company's financial
position, results of operations or liquidity. See "Business of the
Company--Legal Proceedings" for a description of certain of the Company's timber
harvesting litigation, including a recent lawsuit which could potentially result
in severe restrictions on the ability to harvest Company Timber for up to
several months. See also "Risk Factors--Regulatory and Environmental Factors"
and "Business of the Company--Regulatory and Environmental Matters."
In addition to the filing of THPs, California law requires timber owners
such as the Company to demonstrate that their operations will not decrease the
sustainable productivity of their timberlands. A timber company may comply with
this requirement by submitting an SYP to the CDF for review and approval. An SYP
contains a timber growth and yield assessment, which evaluates and calculates
the amount of timber and long-term production outlook for a company's
timberlands, a fish and wildlife assessment, which addresses the condition and
management of fisheries and wildlife in the area, and a watershed assessment,
which addresses the protection of aquatic resources.
The Company is also subject to federal and state laws providing for the
protection and conservation of wildlife species which have been designated as
endangered or threatened, certain of which are found on the Company Timberlands.
These laws generally prohibit certain adverse impacts on such species (referred
to as a "take"), except for incidental takes which do not jeopardize the
continued existence of the affected species and which are made in accordance
with an approved HCP and related incidental take permit. An HCP analyzes the
impact of the incidental take and specifies measures to monitor, minimize and
mitigate such impact.
THE HEADWATERS AGREEMENT. In September 1996, Pacific Lumber and MAXXAM
Inc., the ultimate parent of Pacific Lumber ("MAXXAM"), entered into an
agreement (the "Headwaters Agreement") with the United States and California
that provides the framework for the acquisition by the United States and
California of approximately 5,600 acres of Pacific Lumber's timberlands commonly
referred to as the Headwaters Forest and the Elk Head Springs Forest (the
"Headwaters Timberlands"). A substantial portion of the Headwaters Timberlands
consists of virgin old growth timberlands. None of the Headwaters Timberlands
are owned by the Company. Consummation of the Headwaters Agreement is
conditioned upon, among other things (i) federal and state funding, (ii) state
approval of an SYP covering the Company Timberlands (iii) federal approval of an
HCP covering the Company Timberlands, (iv) the issuance of incidental take
permits with respect to threatened or endangered species found on the Company
Timberlands (the "Permits") and (v) tax closing agreements satisfactory to
MAXXAM and Pacific Lumber.
In November 1997, President Clinton signed an appropriations bill which
contains authorization for the expenditure of $250 million of federal funds
toward consummation of the Headwaters Agreement. These funds remain available
until March 1, 1999. On August 31, 1998, the California Legislature passed the
California Headwaters Bill which, among other things, appropriated $130 million
toward consummation of the Headwaters Agreement. The state funds remain
available until June 30, 1999. California Governor Pete Wilson has announced his
intention to sign the California Headwaters Bill. The aggregate of $380 million
in federal and state funds would be used to purchase the Headwaters Timberlands
from Pacific Lumber (for $300 million) and the Elk River Timberlands to be
acquired and transferred to the Company pursuant to the Headwaters Agreement.
The California Headwaters Bill also authorized the expenditure of up to $80
million toward the acquisition at fair market value of the Owl Creek grove. The
bill also provides that if any portion of the $80 million remains after purchase
of the Owl Creek grove, it may be used to purchase certain other timberlands.
See "Risk Factors--Factors Affecting Actual Amortization."
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<PAGE>
Pacific Lumber and the Company have released a combined SYP and
Multi-Species HCP (the "Combined Plan") for the purpose of public review and
comment. The Combined Plan provides that the Permits and the Multi-Species HCP
would have a term of 50 years. The Combined Plan also provides for certain
measures designed to protect habitat for the marbled murrelet, a coastal
seabird, and requires Pacific Lumber to undertake a specified watershed
assessment process designed to result in site-specific protective zones for fish
and other wildlife being established adjacent to the streams on the Company
Timberlands. The California Headwaters Bill requires the inclusion of certain
environmentally focused provisions, such as wider interim stream buffers, in the
final version of the Multi-Species HCP. See "Business of the
Company--Regulatory and Environmental Factors--The Combined Plan and California
Headwaters Bill."
If the transactions contemplated by the Headwaters Agreement are concluded
(including approval of the Combined Plan and issuance of the Permits), the
Company expects to realize a number of substantial benefits, including a more
streamlined THP preparation and review process, approval to harvest in certain
areas of the Company Timberlands for which it has previously been difficult to
obtain such approval, greater certainty and protection for the Company with
regard to the future designation of other species as endangered or threatened
and an enhanced position in litigation and similar challenges. The Company
believes that the prospects that the Headwaters Agreement will be consummated,
the Combined Plan will be approved and that the Permits will be obtained are
favorable. However, there can be no assurances to that effect. See "Risk
Factors--Regulatory and Environmental Factors" and "--Headwaters Agreement"
and "Business of the Company--Regulatory and Environmental Matters" and
"--Headwaters Agreement."
MANAGEMENT
The Board of Managers of the Company consists of six managers (who
generally perform functions similar to a board of directors), four of whom are
officers or directors of Pacific Lumber, and two of whom are independent
managers. Actions requiring approval of the managers are sufficient if approved
by a majority of the managers; provided, however, that certain actions,
including any filing of a voluntary bankruptcy petition by the Company, require
the approval of all managers. See "Management--Executive Officers and
Managers."
RECENT OPERATING RESULTS
The Company's revenues from log sales declined from $53.8 million for the
six months ended June 30, 1997 to $34.5 million for the six months ended June
30, 1998 as a result of the decrease in the volume of log deliveries for such
periods from 79,800 Mbfe to 50,600 Mbfe, respectively. This decline was
principally due to well-above-normal rainfall during the first half of 1998 and
additional restrictions on wet weather operations due to a stipulation entered
into with the CDF on December 30, 1997, together with logging restrictions
during the nesting seasons for both the northern spotted owl and the marbled
murrelet, which impeded the harvesting and transporting of logs on the Company
Timberlands. This resulted in a significant increase in the volume of logs which
could not be transported to Pacific Lumber's log decks (where they are measured
and sold).
Operating cash flow (operating income before depletion and depreciation)
for the first half of 1998 was slightly below the interest that, on a pro forma
basis, would have been payable on the Timber Notes during such period. The
Company expects that its revenues and operating cash flow in the third quarter
of 1998 will increase significantly over its revenues and operating cash flow
for the second quarter of 1998, as the Company has been able to conduct
operations in areas where the Company has been restricted due to inclement
weather, wet weather operating restrictions, and the nesting seasons which end
during the third quarter of 1998.
See "Business of the Company--Legal Proceedings" for a description of
certain of the Company's timber harvest litigation, including a recent lawsuit
which could potentially result in severe restrictions on the ability to harvest
Company Timber for up to several months. See also "Risk Factors--Regulatory and
Environmental Factors" and "Business of the Company--Regulatory and
Environmental Matters."
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<PAGE>
PACIFIC LUMBER
Pacific Lumber and its subsidiaries engage in several principal aspects of
the lumber industry--the growing and harvesting of redwood and Douglas-fir
timber, the milling of logs into lumber products and the manufacturing of lumber
into a variety of value-added finished products. Pacific Lumber has been in
continuous operation for over 125 years. Pacific Lumber harvests and purchases
from the Company all or substantially all of the logs harvested from the Company
Timber pursuant to the New Master Purchase Agreement and related log purchase
agreements. Pursuant to the New Services Agreement, Pacific Lumber provides
operational, management and related services with respect to the Company Timber
not performed by the Company's own employees.
As a result of the Palco Transfers and the Company Transfer, Pacific Lumber
(excluding its subsidiaries) directly owns lumber milling, manufacturing,
cogeneration and related facilities, approximately 100 acres of timberlands, the
Pacific Lumber Timber Rights in respect of approximately 1,900 acres of
timberlands, as well as the real property associated with its manufacturing and
related operations and substantially all of the real property subject to the
Company Timber Rights. Salmon Creek owns approximately 3,000 contiguous acres of
virgin old growth redwood timber together with an additional approximately 3,000
acres of adjacent young growth timberlands (which includes approximately 1,100
acres of real property subject to the Company Timber Rights) (the "Salmon Creek
Property").
Pacific Lumber owns and operates four highly mechanized sawmills located
near the Company Timberlands. These sawmills historically have been supplied
almost entirely by the timberlands of Scotia Pacific and Pacific Lumber. Pacific
Lumber also owns and operates 34 kilns which dry certain of its lumber, a
finishing plant, end and edge glue facilities which manufacture longer, wider
and more valuable upper grade lumber from short and narrow boards, a
remanufacturing facility relating to redwood fence products, a concrete block
facility, a soil amendment operation and a highly modernized cogeneration power
plant which is fueled almost entirely by residue from Pacific Lumber's milling
and production operations. The cogeneration facility generates a substantial
portion of Pacific Lumber's energy requirements and excess power generated by
the plant is sold to a regional utility. In order to enhance timber harvesting
activities, to increase the efficiency of its operations, improve the yield from
harvested trees and enhance the value of its lumber products, Pacific Lumber and
its subsidiaries have invested over $68 million in capital expenditures during
the past five years (including $22 million expended for timberland acquisitions
during such five year period). Over the past three years, Pacific Lumber's
annual lumber production has averaged approximately 297 million board feet, with
approximately 309, 291 and 290 million board feet produced in 1997, 1996 and
1995, respectively. See "Annex 2--The Pacific Lumber Company--Business."
Pacific Lumber sells certain logs that, due to their size or quality,
cannot be efficiently processed by its mills into lumber. The majority of these
logs are purchased by Britt Lumber Co., Inc. ("Britt"), an affiliate of
Pacific Lumber, which uses such logs to manufacture a variety of fencing
products. The Company estimates that Britt accounted for approximately one-third
of the total redwood fence market in 1997.
Pacific Lumber is an indirect wholly owned subsidiary of MAXXAM Group Inc.
("MGI"). MGI is a wholly owned subsidiary of MAXXAM Group Holdings Inc.
("MGHI"), which in turn is a wholly owned subsidiary of MAXXAM. Mr. Charles E.
Hurwitz, the Chairman of the Board and Chief Executive Officer of MAXXAM, and
affiliates of Federated Development Company ("Federated"), a New York business
trust that is wholly owned by Mr. Hurwitz, members of his immediate family and
trusts for the benefit thereof, collectively own approximately 68.8% of the
aggregate voting power of MAXXAM.
RECENT OPERATING RESULTS
Pacific Lumber's operating results for the six months ended June 30, 1998
were also adversely affected by inclement weather as well as the wet weather
operating and nesting season restrictions described under
16
<PAGE>
"--The Company--Recent Operating Results." See "Annex 2--The Pacific Lumber
Company--Management's Discussion and Analysis of Financial Condition and Results
of Operations--Results of Operations--Recent Operating Results."
ISSUANCE OF THE OLD NOTES
The $160,700,000, $243,200,000 and $463,348,000 aggregate principal amounts
of the Old Class A-1 Notes, the Old Class A-2 Notes and the Old Class A-3 Notes,
respectively, were sold by the Company to the Initial Purchasers on the Closing
Date pursuant to the Purchase Agreement. The Initial Purchasers subsequently
resold the Old Notes in reliance on Rule 144A under the Securities Act and other
available exemptions under the Securities Act. The Company also entered into the
Registration Rights Agreement, pursuant to which the Company granted certain
registration rights for the benefit of the holders of the Old Notes. Under the
Registration Rights Agreement, the Company agreed, for the benefit of the
holders of the Old Notes that it would, at its own cost, (i) within 90 days
after the Closing Date file a registration statement with the Commission with
respect to a registered offer to exchange the Old Notes for New Notes, which
will have terms substantially identical to the Old Notes and (ii) use its
reasonable best efforts to cause such registration statement to be declared
effective under the Securities Act within 180 days after the Closing Date. If
the Company is unable to effect such an Exchange Offer or if for any other
reason the Exchange Offer is not consummated within 240 days after the Closing
Date, the Company is obligated under the Registration Rights Agreement to file a
shelf registration statement with the Commission covering resales of the Old
Notes. If there is a Registration Default (as defined in the Indenture) the
Company will be obligated to pay a Non-Registration Premium equal to an amount
of interest at a rate of 0.50% per annum on the outstanding principal amount of
the Timber Notes with respect to which a Registration Default is continuing
until such Registration Default has been cured. The Exchange Offer is intended
to satisfy certain of the Company's obligations under the Registration Rights
Agreement with respect to the Old Notes. See "--The Exchange Offer" and "The
Exchange Offer--Purpose and Effect."
17
<PAGE>
THE EXCHANGE OFFER
The Exchange Offer........................ The Company is offering, upon the
terms and subject to the conditions
set forth herein and in the
accompanying letter of transmittal
(the "Letter of Transmittal"), to
exchange $1,000 in principal amount
of the New Class A-1 Notes, the New
Class A-2 Notes and the New Class A-3
Notes, for each $1,000 in principal
amount of the outstanding Old Class
A-1 Notes, the Old Class A-2 Notes
and the Old Class A-3 Notes,
respectively (the "Exchange
Offer"). As of the date of this
Prospectus, $160.7 million, $243.2
million and $463.3 million in
aggregate principal amounts of the
Old Class A-1 Notes, the Old Class
A-2 Notes and the Old Class A-3
Notes, respectively, are outstanding,
the maximum amount authorized by the
Indenture for all Timber Notes. See
"The Exchange Offer--Terms of the
Exchange Offer."
Expiration Date........................... 5:00 p.m., New York City time, on
, 1998, as the
same may be extended. See "The
Exchange Offer--Expiration Date;
Extensions; Amendments."
Conditions of the Exchange Offer.......... The Exchange Offer is not conditioned
upon any minimum principal amount of
Old Notes being tendered for
exchange. However, the Exchange Offer
is subject to the condition that it
does not violate any applicable law
or interpretation of the staff of the
Commission. See "The Exchange Of-
fer--Conditions of the Exchange
Offer."
Termination of Certain Rights............. Pursuant to the Registration Rights
Agreement, the Indenture and the Old
Notes, Eligible Holders of Old Notes
(i) have rights to receive
Non-Registration Premiums (as defined
in the Indenture) at the rate of .50%
per annum of the outstanding
principal balance of the Old Notes
during the continuance of a
Registration Default in respect of
such Old Notes and (ii) have certain
other rights intended for the holders
of unregistered securities. Holders
of New Notes will not be and, upon
consummation of the Exchange Offer,
Eligible Holders of Old Notes will no
longer be, entitled to (i) the right
to receive Non-Registration Premiums,
except in certain limited circum-
stances, and (ii) certain other
rights under the Registration Rights
Agreement intended for holders of
unregistered securities. See "The
Exchange Offer--Termination of
Certain Rights."
Accrued Interest on the Old Notes......... The New Notes will bear interest per
annum from and including their date
of issuance. Eligible Holders whose
Old Notes are accepted for exchange
will have the right to receive
interest accrued thereon from the
date of original issuance of the Old
Notes or the last date to which
interest has been paid on the Old
Notes, as applicable, to, but not
including, the date of issuance of
the New Notes, such interest to be
payable with the first interest
payment on the New Notes. Interest on
the Old Notes accepted for exchange
will cease to accrue on the day prior
to the issuance of the New Notes.
18
<PAGE>
Procedures for Tendering Old Notes........ Unless a tender of Old Notes is
effected pursuant to the procedures
for book-entry transfer as provided
herein, each Eligible Holder desiring
to accept the Exchange Offer must
complete and sign the Letter of
Transmittal, have the signature
thereon guaranteed if required by the
Letter of Transmittal, and mail or
deliver the Letter of Transmittal,
together with the Old Notes or a
Notice of Guaranteed Delivery and any
other required documents (such as
evidence of authority to act, if the
Letter of Transmittal is signed by
someone acting in a fiduciary or
representative capacity), to the
Exchange Agent (as defined) at one of
the addresses set forth on the back
cover page of this Prospectus prior
to 5:00 p.m., New York City time, on
the Expiration Date. Any Beneficial
Owner (as defined) of the Old Notes
whose Old Notes are registered in the
name of a nominee, such as a broker,
dealer, commercial bank or trust
company, and who wishes to tender Old
Notes in the Exchange Offer, should
instruct such entity or person to
promptly tender on such Beneficial
Owner's behalf. See "The Exchange
Offer--Procedures for Tendering Old
Notes." By tendering Old Notes for
exchange, each registered holder will
represent to the Company that, among
other things, (i) the New Notes to be
received in connection with the
Exchange Offer by the Eligible Holder
and each Beneficial Owner of the Old
Notes are being acquired by the
Eligible Holder and each Beneficial
Owner in the ordinary course of
business of the Eligible Holder and
each Beneficial Owner, (ii) the
Eligible Holder and each Beneficial
Owner are not participating, do not
intend to participate, and have no
arrangement or understanding with any
person to participate, in the
distribution of the New Notes, (iii)
the Eligible Holder and each
Beneficial Owner acknowledge and
agree that any person participating
in the Exchange Offer for the purpose
of distributing the New Notes must
comply with the registration and
prospectus delivery requirements of
the Securities Act in connection with
a secondary resale transaction of the
New Notes acquired by such person and
cannot rely on the position of the
staff of the Commission enunciated in
MORGAN STANLEY & CO., INCORPORATED
(available June 5, 1991) and EXXON
CAPITAL HOLDINGS CORPORATION
(available May 13, 1988), and
interpreted in the Commission's
letters to SHEARMAN & STERLING
(available July 2, 1993) and K-III
COMMUNICATIONS CORPORATION (availa-
ble May 14, 1993), and similar
no-action or interpretive letters
issued to third parties, (iv) that if
the Eligible Holder or Beneficial
Owner, as applicable, is a
broker-dealer that acquired Old Notes
for its own account as a result of
market making or other trading
activities, it will deliver a
prospectus in connection with any
resale of New Notes acquired in the
Exchange Offer, (v) the Eligible
Holder and each Beneficial Owner
understand that a secondary resale
transaction described in clause (iii)
above should be covered by an effec-
tive registration statement
containing the selling security hold-
er information required by Item 507
of Regulation S-K of the
19
<PAGE>
Commission, and (vi) neither the
Eligible Holder nor any Beneficial
Owner is an "affiliate," as defined
under Rule 405 of the Securities Act,
of the Company except as otherwise
disclosed to the Company in writing.
In connection with a book-entry
transfer, each participant will
confirm that it makes the
representations and warranties
contained in the Letter of
Transmittal.
Guaranteed Delivery Procedures............ Eligible Holders of Old Notes who
wish to tender their Old Notes and
(i) whose Old Notes are not
immediately available or (ii) who
cannot deliver their Old Notes or any
other documents required by the
Letter of Transmittal to the Ex-
change Agent prior to the Expiration
Date (or complete the procedure for
book-entry transfer on a timely
basis), may tender their Old Notes
according to the guaranteed delivery
procedures set forth in the Letter of
Transmittal. See "The Exchange
Offer--Procedures for Tendering Old
Notes--Guaranteed Delivery
Procedures."
Acceptance of Old Notes and Delivery of
New Notes............................... Upon satisfaction or waiver of all
conditions of the Exchange Offer, the
Company will accept any and all Old
Notes that are properly tendered in
the Exchange Offer prior to 5:00
p.m., New York City time, on the
Expiration Date. The New Notes issued
pursuant to the Exchange Offer will
be delivered as soon as practicable
after acceptance of the Old Notes.
See "The Exchange Offer--Acceptance
of Old Notes for Exchange; Delivery
of New Notes."
Withdrawal Rights......................... Tenders of the Old Notes may be
withdrawn at any time prior to 5:00
p.m., New York City time, on the
Expiration Date. See "The Exchange
Offer--Withdrawal Rights."
Certain United States Income Tax
Considerations.......................... Generally, the exchange pursuant to
the Exchange Offer will not be a
taxable event for federal income tax
purposes. See "Certain United States
Income Tax Consequences--The Ex-
change Offer."
The Exchange Agent........................ State Street Bank and Trust Company
is the exchange agent (in such
capacity, the "Exchange Agent").
The addresses and telephone number of
the Exchange Agent are set forth in
"The Exchange Offer--The Exchange
Agent; Assistance."
Fees and Expenses......................... All expenses incident to the
Company's consummation of the
Exchange Offer and compliance with
the Registration Rights Agreement
will be borne by the Company. See
"The Exchange Offer--Solicitation of
Tenders; Fees and Expenses."
Resales of the New Notes.................. Based on positions of the staff of
the Commission enunciated in MORGAN
STANLEY & CO., INCORPORATED
(available June 5, 1991) and EXXON
CAPITAL HOLDINGS CORPORATION
(available May 13, 1988), and
interpreted in the Commission's
letters to
20
<PAGE>
SHEARMAN & STERLING (available July
2, 1993) and K-III COMMUNICATIONS
CORPORATION (available May 14, 1993),
and similar no-action or interpretive
letters issued to third parties, the
Company believes that the New Notes
issued pursuant to the Exchange Offer
to an Eligible Holder in exchange for
Old Notes may be offered for resale,
resold and otherwise transferred by
such Eligible Holder (other than (i)
a broker-dealer who purchased the Old
Notes directly from the Company for
resale pursuant to Rule 144A under
the Securities Act or any other
available exemption under the
Securities Act or (ii) a person who
is an affiliate of the Company within
the meaning of Rule 405 under the
Securities Act), without compliance
with the registration and prospectus
delivery provisions of the Securities
Act, provided that the Eligible
Holder is acquiring the New Notes in
the ordinary course of business and
is not participating, and has no
arrangement or understanding with any
person to participate, in a
distribution of the New Notes. If any
Eligible Holder acquires New Notes in
the Exchange Offer for the purpose of
distributing or participating in a
distribution of the New Notes, such
Eligible Holder cannot rely on the
position of the staff of the
Commission set forth in the above
no-action and interpretive letters
and must comply with the registration
and prospectus delivery requirements
of the Securities Act in connection
with a secondary resale transaction,
unless an exemption from registration
is otherwise available. Each
broker-dealer that receives New Notes
for its own account in exchange for
Old Notes, where such Old Notes were
acquired by such broker-dealer as a
result of market making or other
trading activities, must acknowledge
that it will deliver a prospectus in
connection with any resale of such
New Notes. See "The Exchange
Offer -- Resales of the New Notes"
and "Plan of Distribution."
21
<PAGE>
TERMS OF THE NEW NOTES
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that (i) the New Notes
have been registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof, (ii) holders of the New Notes will not
be entitled to Non-Registration Premiums, and (iii) holders of the New Notes
will not be, and upon consummation of the Exchange Offer Eligible Holders of the
Old Notes will no longer be, entitled to certain rights under the Registration
Rights Agreement intended for the holders of unregistered securities. See "The
Exchange Offer--Termination of Certain Rights." The Exchange Offer shall be
deemed consummated upon the occurrence of the delivery by the Company to the
Registrar under the Indenture of New Notes in the same Class and aggregate
principal amounts as the Old Notes that are validly tendered by holders thereof
pursuant to the Exchange Offer. See "The Exchange Offer--Termination of Certain
Rights" and "--Procedures for Tendering Old Notes" and "Description of the
Timber Notes."
<TABLE>
<CAPTION>
CLASS A-1 TIMBER NOTES CLASS A-2 TIMBER NOTES CLASS A-3 TIMBER NOTES
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Principal Amount........................ $160,700,000 $243,200,000 $463,348,000
Note Rate............................... 6.55% 7.11% 7.71%
Ratings:(1)
Moody's............................... A1 A3 Baa2
S&P................................... A A BBB
Scheduled Principal Paydown............. Amortizing Amortizing Bullet
Weighted Average Life/Maturity (from the
Closing Date):
Scheduled............................. 5.0/8.5 Years 12.4/15.5 Years 15.5/15.5 Years
Minimum Principal..................... 6.8/11.5 Years 15.9/19.0 Years 25.5/30.0 Years
Final Maturity.......................... 30.0 Years 30.0 Years 30.0 Years
Scheduled Maturity Date................. January 20, 2007 January 20, 2014 January 20, 2014
Final Maturity Date..................... July 20, 2028 July 20, 2028 July 20, 2028
<FN>
- ---------------
(1) See "--Ratings."
</TABLE>
Issuer............. Scotia Pacific Company LLC, a special purpose Delaware
limited liability company, was organized by Pacific Lumber
to facilitate the Offering and is whol- ly owned by Pacific
Lumber. The business of the Company is limited to the
ownership and operation of the Mortgaged Property, the
issuance and sale of the Timber Notes, the purchase of
certain additional properties (which may be subject to
certain non- recourse purchase money indebtedness), the
issuance of certain additional debt secured by the Mortgaged
Property and matters incidental thereto.
Ranking............ The Timber Notes are senior obligations of the Company and
each Class thereof is equally and ratably secured by the
Mortgaged Property. On each Note Payment Date, the holders
of each Class of Timber Notes will be entitled to receive
payments of interest due on such Class and, to the extent of
funds on deposit in the Payment Account (as defined herein)
22
<PAGE>
available therefor, principal at least equal, on a
cumulative basis, through each Note Payment Date, to the
Minimum Principal Amortization set forth herein for such
Class. In addition, to the extent of funds on deposit in the
Payment Account available therefor, the Company will be
required to make certain additional principal payments
intended to maintain a link between the deemed depletion of
the Company Timber and the required amortization of the
Timber Notes in the aggregate. See "Overview and Structure
of the Transaction--Payments on the Timber Notes-- Actual
Timber Note Amortization."
The Class A-3 Timber Notes will generally receive payments
of principal after the Class A-2 Timber Notes have been paid
in full, and the Class A-2 Timber Notes will generally
receive payments of principal after the Class A-1 Timber
Notes have been paid in full.
Following the occurrence of an Event of Default under the
Indenture and the acceleration of the Timber Notes (unless
such acceleration has been rescinded), all Classes of Timber
Notes outstanding and any Additional Timber Notes (as
defined herein) will receive payments of principal and
interest on a PRO RATA basis from funds available for such
payment. Each Class of Timber Notes and any Additional
Timber Notes will be mutually cross-collateralized and
cross-defaulted.
Collateral......... The Timber Notes are secured by a lien on and security
interest in, or an assignment of, the Mortgaged Property,
which include the Company Timberlands (subject to the
Pacific Lumber Timber Rights), any Additional Timber
Properties (as defined herein), the Subject Contracts,
certain computer hardware and software (subject to certain
rights of concurrent use with Pacific Lumber) and certain
other assets, and the proceeds of all of the foregoing, as
well as all amounts on deposit in the Accounts (as described
herein).
Interest........... Each Class of Timber Notes will bear interest at the rate
set forth on the cover page hereof (each, a "Note Rate"),
payable semiannually in arrears on January 20 and July 20 of
each year (each, a "Note Payment Date"), commencing January
20, 1999. See "Description of the Timber Notes--Principal;
Interest; Premium--Interest."
23
<PAGE>
Scheduled Maturity
Date............. The Scheduled Maturity Date for each Class of Timber Notes
represents the Note Payment Date on which the Company will
pay the final installment of principal to the holders of
such Class if all payments of principal are made in
accordance with the related Scheduled Amortization Schedule.
See "--Scheduled Amortization."
Minimum Principal
Maturity Date.... If the Timber Notes are repaid in accordance with the
Minimum Principal Amortization Schedule, the principal
amount thereof would be paid in full by Janu- ary 20, 2010,
July 20, 2017 and July 20, 2028 for Classes A-1, A-2 and
A-3, respectively (each such date, the "Minimum Principal
Maturity Date" for the applicable Class of Timber Notes).
Final Maturity
Date............. July 20, 2028 (the "Final Maturity Date") is the date by
which the Rating Agencies (as defined herein) have rated the
ultimate payment of principal of each Class of Timber Notes.
An Event of Default (as described herein) will occur if the
Timber Notes have not been paid in full by the Final
Maturity Date.
Certain Structuring
Assumptions...... In structuring the transaction and determining the Minimum
Principal Amortization Schedule and the Scheduled
Amortization Schedule for each Class of Timber Notes,
certain assumptions regarding, among other things, harvest
levels, timber prices, related yield taxes, operating
expenses, capital expenditures and other expenses were made.
See "Overview and Structure of the Transaction--Summary of
Structure and Structuring Assumptions," "--Scheduled
Assumptions," and "Annex 1--Structuring Schedule
Assumptions."
Minimum Principal
Amortization..... For each Class of Timber Notes, the Minimum Principal
Amortization represents the minimum amount of principal
which the Company must pay (on a cumulative basis) on such
Class, to the extent of the funds on deposit in the Payment
Account available therefor, through each Note Payment Date.
The Minimum Principal Amortization Schedule for each Class
of Timber Notes is set forth under "Overview and Structure
of the Transaction--Payments on the Timber Notes--Actual
Timber Note Amortization." Failure to pay principal on the
Timber Notes of any Class in accordance with the Minimum
Principal Amortization Schedule for such Class will not
constitute an Event of Default if funds are not available
therefor, but will generally result in the application of
all available funds to make payments on the Timber Notes, as
described herein.
24
<PAGE>
Scheduled
Amortization..... For each Class of Timber Notes, the Scheduled Amortization
represents the amount of principal which the Company must
pay (on a cumulative basis) through each Note Payment Date
in order to avoid the payment of Prepayment or Deficiency
Premiums to the holders of such Class. The Scheduled
Maturity Date, which is January 20, 2007 in the case of the
Class A-1 Timber Notes and January 20, 2014 in the case of
the Class A-2 and Class A-3 Timber Notes, for each Class of
Timber Notes represents the Note Payment Date on which the
Company will pay the final installment of principal on the
Timber Notes of such Class if all payments of principal are
made to the holders of such Class in accordance with the
Scheduled Amortization Schedule for such Class. The amount
of amortization actually required to be paid, subject to
available cash, may be greater or less than Scheduled
Amortization and will be generally dependent on harvest
levels. See "--Actual Amortization of the Timber Notes."
The Scheduled Amortization Schedule for the Class A-3 Timber
Notes does not include any payments of principal to the
holders of such Class before the Scheduled Maturity Date for
such Class. Accordingly, the entire original principal
amount of the Class A-3 Timber Notes is scheduled to be paid
in a single payment on such Scheduled Maturity Date. In the
event that the Class A-3 Timber Notes are not paid in full
on or before their Scheduled Maturity Date, a "Cash
Retention Event" will occur, as a result of which 75% of all
Excess Funds (as defined herein) will be deposited in the
Payment Account until all Classes of Timber Notes are paid
in full, generally in sequential order. See "Description of
the Timber Notes--Principal; Interest; Premium--Principal."
The Scheduled Amortization Schedule for each Class of Timber
Notes is set forth under "Overview and Structure of the
Transaction--Payments on the Timber Notes--Actual Timber
Note Amortization."
Actual Amortization
of the Timber
Notes............ The Timber Notes are generally structured to link, to the
extent of funds on deposit in the Payment Account available
therefor, deemed depletion of the Company Timber (through
the harvest and sale of logs) to the required amortization
of the Timber Notes through each Note Payment Date. See
"Overview and Structure of the Transac- tion--Payments on
the Timber Notes--Actual Timber Note Amortization." The
amount of principal required to be paid to the holders of
the Timber Notes
25
<PAGE>
on any Note Payment Date, to the extent of funds on deposit
in the Payment Account available therefor, that exceeds the
Minimum Principal Amortization Amount (as defined herein)
for all Classes of Timber Notes on such date is referred to
as the "Depletion Amortization Amount." Such amount is
generally derived from a deemed collateral value of the
Company Timber, calculated pursuant to certain fixed
assumptions and taking into account actual harvest levels.
See "Description of the Timber Notes--Principal; Interest;
Premium--Principal." The calculation of the Depletion
Amortization Amount could be revised in connection with any
issuance of Additional Timber Notes. See "--Addi- tional
Timber Notes."
Premiums........... To the extent that principal is paid, on a cumulative basis,
to the holders of any Class of Timber Notes earlier or later
than as provided in the Scheduled Amortization Schedule for
such Class, a Prepayment Premium or a Deficiency Premium
will generally be due. In addition, the occurrence of a
Registration Default will cause a Non-Registration Premium
to be due. Prepayment Premiums, Deficiency Premiums and
Non-Registration Premiums are generally collectively
referred to herein as "Premiums." Premiums will be payable
solely out of funds available after providing for payment of
all interest and principal then due on the Timber Notes. Any
deficiency in the payment of Premiums will bear interest at
the applicable Note Rate and will be included in the
Premiums owing on the next Note Payment Date. The rating of
any Class of Timber Notes does not address the payment of
any Premiums or interest on Premiums.
If the amount of principal paid to the holders of a Class of
Timber Notes on any date (including any redemption date),
plus the sum of all principal paid to the holders of such
Class of Timber Notes on all previous dates, exceeds the sum
of all Scheduled Amortization for such Class of Timber Notes
through such date, the Company will pay a prepayment premium
(a "Prepayment Premium") on the lesser of (i) the amount of
such excess and (ii) the amount of principal paid to the
holders of such Class of Timber Notes on such date (such
lesser amount, an "Excess Payment"), calculated based upon
the yield of like term Treasury securities plus 0.50% per
annum. If the amount of principal paid to the holders of a
Class of Timber Notes on any Note Payment Date, plus the sum
of all principal paid to the holders of such Class
26
<PAGE>
on all previous Note Payment Dates, is less than the sum of
all Scheduled Amortization for such Class of Timber Notes
through such Note Payment Date (such amount, a "Payment
Deficiency"), the Company will pay a deficiency premium (a
"Deficiency Premium") on such Payment Deficiency equal to
interest on the Payment Deficiency at a rate of 1.50% per
annum. See "Description of the Timber Notes--Principal;
Interest; Premium--Premium."
Optional Redemption
and Optional
Prepayments of
Principal........ The Timber Notes of any Class may be redeemed at the option
of the Company, in whole but not in part, at any time,
provided that no Timber Notes of a Class having an earlier
Scheduled Maturity Date (or, in the case of redemption of
the Class A-3 Timber Notes, no Timber Notes) remain
outstanding following such redemption. The redemption price
for any Class of Timber Notes will equal the sum, for such
Class, of (i) all unpaid principal amounts on such Class of
Timber Notes, (ii) any accrued and unpaid Premiums on such
Class of Timber Notes, (iii) all accrued and unpaid interest
(including any default interest and any interest on
Premiums) on such Class of Timber Notes and (iv) a
Prepayment Premium on any Excess Pay- ment, computed as
described under "--Premiums."
In addition, the Company may, at its option, prepay the
principal of the Timber Notes, in whole or in part, on any
Note Payment Date, subject to payment of any applicable
Prepayment Premium. Any such optional prepayments will be
made, first, to the holders of the Class A-1 Timber Notes,
second, to the holders of the Class A-2 Timber Notes and,
third, to the holders of the Class A-3 Timber Notes. See
"Description of the Timber Notes--Optional Redemption and
Optional Prepayments."
Required Liquidity
Amount........... The "Required Liquidity Amount" is an amount equal to one
year's interest at the applicable Note Rates on the
principal balance of all outstanding Timber Notes. The
Required Liquidity Amount is currently approximately $63.5
million.
Line of Credit..... The Company has obtained a line of credit pursuant to a Line
of Credit Agreement (as defined below) for the benefit of
holders of the Timber Notes in an initial amount equal to
the initial Required Liquidity Amount. The total amount that
can be borrowed under the Line of Credit Agreement (the
"Commitments") is reduced to the extent that the
availability under the Line of Credit Agreement exceeds the
then
27
<PAGE>
Required Liquidity Amount. The Line of Credit Agreement is
provided by financial institutions (the "Liquidity
Providers") whose debt ratings are satisfactory to the
Rating Agencies (generally, a short-term unsecured debt
rating of not less than "A-1" by S&P and "P-1" by Moody's).
The Company (or the Trustee) may generally borrow under the
Line of Credit Agreement to make payments of interest (other
than interest on Premiums) on the Timber Notes on any Note
Payment Date, to the extent that funds available or to be
available in the Payment Account are otherwise insufficient
for such purpose (such borrowing, an "Interest Advance").
Interest Advances, together with interest thereon (other
than any Supplemental Liquidity Provider In- terest (as
defined below), which, together with any Additional
Liquidity Provider Fees (as defined below), are paid only
out of funds that would other- wise be released to the
Company free of the Lien of the Deed of Trust), are repaid
to the Liquidity Providers on a monthly basis prior to
making monthly deposits in the Payment Account.
The Line of Credit Agreement initially has a term of 364
days. Prior to each Scheduled Termination Date (as defined
below) for the Line of Credit Agreement, the Company will
request that the Line of Credit Agreement be extended for an
additional term of not less than 364 days. In the event that
any Liquidity Provider (x) fails to renew its Commitment or
(y) ceases to meet the required rating criteria, then either
(i) such Liquidity Provider will be replaced or (ii) the
entire amount of the then available Commitments will be
borrowed and deposited into an account (such account, the
"Liquidity Account" and such borrowing, a "Termination
Advance"). Amounts on deposit in the Liquidity Account will
generally be used as a substitute for the Line of Credit
Agreement. If the Company obtains a replacement Line of
Credit Agreement following the creation of a Liquidity
Account, the funds on deposit in the Liquidity Account will
be used to repay the Advances under the original Line of
Credit Agreement or, if any funds remain in the Liquidity
Account after such repayments, released to the Company.
If a Termination Advance occurs, interest thereon (other
than any Supplemental Liquidity Provider In- terest) will be
paid to the Liquidity Providers on a pro rata basis with
interest on the Timber Notes. On any
28
<PAGE>
Note Payment Date, principal repayments pursuant to the
terms of the Line of Credit Agreement will be paid after
payment of the Aggregate Minimum Princi- pal Amortization
Amount, if any, but prior to payment of the Depletion
Amortization Amount.
During the continuance of a Triggering Event (as defined
below), the Liquidity Providers may cause a Line of Credit
Acceleration (as defined below) to occur. Upon the
occurrence of a Line of Credit Acceleration, no further
Advances will be required to be made under the Line of
Credit Agreement and all amounts then owing to the Liquidity
Providers (other than any Additional Liquidity Provider Fees
and any Supplemental Liquidity Provider Interest) will be
repaid prior to any further payments of interest or
principal being made on the Timber Notes.
The initial Line of Credit Agreement is the Bank of America
Credit Agreement (as defined below). Under the Bank of
America Credit Agreement, Interest Ad- vances initially
accrue interest at a LIBOR rate plus 0.75% per annum. In
addition, each Liquidity Provider will be separately
obligated to fund its pro rata share of each Advance.
However, if a Liquidity Provider defaults in making its
share of any Advance, the other Liquidity Providers will be
obligated to fund such share up to the full dollar amount of
their respective Commitments.
If a Termination Advance occurs under the Bank of America
Credit Agreement, the principal of outstanding Advances will
be repaid in 12 semiannual install- ments on each Note
Payment Date (after payment of the Aggregate Minimum
Principal Amortization Amount, if any, for such Note Payment
Date), beginning approximately two and one-half years
following the Termination Advance. The Triggering Events (as
defined in the Bank of America Credit Agreement) that would
permit the Liquidity Providers under the Bank of America
Credit Agreement to cause a Line of Credit Acceleration to
occur include, among other things, acceleration of the
Timber Notes by reason of an interest payment Event of
Default, the existence of an interest payment Event of
Default for six months plus 10 Business Days or certain
events of insolvency with respect of the Company.
Subject to certain exceptions, the Company may not amend any
Line of Credit Agreement unless such amendment has received
Rating Agency Confirmation (as defined below). Upon
satisfaction of certain
29
<PAGE>
conditions, including Rating Agency Confirmation, the
Company may, at its option, arrange for a replacement Line
of Credit Agreement to replace the then existing Line of
Credit Agreement. See "Description of the Timber Notes--Line
of Credit."
Expense Reserve.... The Expense Reserve was funded in an initial amount of $1.1
million. Thereafter, funds have and will be transferred to
the Expense Reserve monthly to provide for estimated
operating and capital expenses of the Company, subject to a
minimum in the Expense Reserve of $1.1 million as of any
Monthly Deposit Date. Funds in the Expense Reserve are
generally used to pay capital costs or expenses relating to
the operation of the Mortgaged Property or the operations of
the Company. See "Description of the Timber Notes--Accounts;
Payments on the Timber Notes--Monthly Deposit Dates" and
"Expense Reserve."
Prefunding
Account.......... $25 million of the proceeds of the ffering was deposited
into an account (the "Prefunding Account") to be available
for the purchase at any time of Additional Timber Properties
(as defined below), subject to satisfaction of certain
conditions. As of September 1, 1998, approximately $595,000
had been withdrawn from the Prefunding Account for the
purchase of Additional Timber Properties. Any amount on
deposit in the Prefunding Account may be withdrawn on any
Note Payment Date at the direction of the Company and used
to prepay the Timber Notes. See "Description of the Timber
Notes-- Prefunding."
Summary of
Accounts......... All revenues from the Mortgaged Property (including payments
from Pacific Lumber under the New Master Purchase Agreement)
are required to be deposited into a trust account (the
"Collection Account") upon receipt, except DE MINIMIS
Receipts (as defined herein), which the Company must deposit
in the Collection Account at least monthly.
Transfers on Monthly
Deposit Dates.... On the 20th day of each month or, if such 20th day is not a
Business Day, the next succeeding Business Day (each, a
"Monthly Deposit Date"), the amounts on deposit in the
Collection Account will generally be applied or transferred
in the following order of priority:
(i) to fund the Expense Reserve in an amount equal to
estimated operating expenses and capital expenditures
30
<PAGE>
of the Company (including amounts payable under the New
Services Agreement);
(ii) to pay the Trustee's and Collateral Agent's Expenses,
and to pay the Liquidity Providers' Expenses (as defined
below);
(iii) to pay interest on any outstanding Interest Advances
under the Line of Credit Agreement (other than any
Supplemental Liquidity Provider Interest (as defined below))
and to repay the principal amount of any Interest Advances;
(iv) to the Payment Account (as defined below) to fund a
portion of the interest, principal and Premium, if any,
estimated to be payable to the holders of the Timber Notes
on the next succeeding Note Payment Date (or if the Monthly
Deposit Date is a Note Payment Date, on such Note Payment
Date) and a portion of the interest and principal, if any,
estimated to be payable to the Liquidity Providers on the
next succeeding Note Payment Date (or if such Monthly
Deposit Date is a Note Payment Date, on such Note Payment
Date) following any Termination Advance;
(v) if a Termination Advance has been made and the Line of
Credit has not been replaced, to replenish the Liquidity
Account, if necessary;
(vi) to transfer additional funds to the Expense Reserve
under certain circumstances; and
(vii) so long as no Cash Retention Event or Trapping Event
(as defined below) shall have occurred and be continuing,
any remaining funds (the "Excess Funds"), first, to pay any
Additional Liquidity Fees or Supplemental Liquidity Provider
Interest payable under the Line of Credit Agreement and,
second, to the Company, free and clear of the Lien of the
Deed of Trust. In the event that a Trapping Event shall have
occurred and be continuing, 100%, or in the event that a
Cash Retention Event shall have occurred and be continuing,
75%, of Excess Funds shall be deposited in the Payment
Account, and, in the case of a Cash Retention Event, the
remainder shall be applied as described in this clause (vii)
above. See "Description of the Timber Notes--Accounts;
Payment on the Timber Notes--Monthly Deposit Dates."
It is expected that substantially all of the cash released
to the Company free of the Lien of the Deed of Trust will be
distributed to Pacific Lumber on a
31
<PAGE>
monthly basis. See "Risk Factors--Factors Affecting Payments
on the Timber Notes."
Notwithstanding the foregoing order of priority, in the
event that a Line of Credit Acceleration has occurred or an
Acceleration Event (as defined below) shall have occurred
and be continuing, all interest, principal and other amounts
(other than any Additional Liquidity Provider Fees and any
Supplemental Liquidity Provider Interest) then owing to the
Liquidity Providers shall be paid to the Liquidity Providers
on each Monthly Deposit Date, immediately after payment of
amounts referred to in clauses "(i)" and "(ii)" above, and
no amounts shall be deposited in the Payment Account until
such interest, principal and other amounts have been paid in
full.
Transfers on Note
Payment Dates.... On each Note Payment Date, amounts are to be transferred or
applied from the Payment Account in the following order of
priority:
(i) to pay interest due on each Class of Timber Notes and
any Additional Timber Notes and interest due to the
Liquidity Providers (other than any Supplemental Liquidity
Provider Interest) following any Termination Advance, on a
PARI PASSU basis;
(ii) if a Termination Advance has been made and the Line of
Credit Agreement has not been replaced, to replenish the
Liquidity Account, if necessary;
(iii) to pay the Minimum Principal Amortization, if any,
then due on each Class of Timber Notes;
(iv) to pay any Line of Credit Amortization Amount (as
defined below) then due to the Liquidity Providers following
any Termination Advance;
(v) to pay any Depletion Amortization Amount then payable on
any Class of Timber Notes; and
(vi) to pay any interest on Premiums and Premiums then due.
So long as no Cash Retention Event or Trapping Event shall
have occurred and be continuing, any remaining funds in the
Payment Account will generally be released to or as directed
by the Company, free and clear of the Lien of the Deed of
Trust. In the event that a Trapping Event or a Cash
Retention Event shall have occurred and be continuing, any
remaining funds shall be used to make payments on the Timber
Notes. See "Description of the Timber
32
<PAGE>
Notes--Accounts; Payment on the Timber Notes--Note Payment
Dates."
Notwithstanding the foregoing order of priority, in the
event that a Line of Credit Acceleration has occurred or an
Acceleration Event shall have occurred and be continuing,
all interest, principal and other amounts (other than any
Additional Liquidity Provider Fees and any Supplemental
Liquidity Provider Interest) then owing to the Liquidity
Providers shall be paid in full to the Liquidity Providers
on each Note Payment Date from the Payment Account before
any other amounts are paid from the Payment Account.
Certain Principal
Covenants........ The Indenture, among other things, requires the Company to
observe procedures to maintain a separate existence and
restricts the ability of the Company to incur indebtedness,
make investments, merge or consolidate, engage in other
businesses, engage in transactions with affiliates, enter
into other agreements or sell or encumber any of the
Mortgaged Property. See "Description of the Timber
Notes--Certain Covenants."
Additional Timber
Notes............ The Company may issue additional debt secured by the
Mortgaged Property on a PARI PASSU basis with the Timber
Notes (any such debt, "Additional Timber Notes"). The
issuance of Additional Timber Notes is subject to certain
conditions, including, among others, that, after giving
effect to the issuance of the Additional Timber Notes and
the redemption of any Class of Timber Notes being called for
redemption on, and the payment of any principal on, the date
of issuance of the Additional Timber Notes, (a) the Rating
Agency Condition (as defined herein) will be satisfied, (b)
the Additional Timber Notes will be rated no lower than
"Baa2" by Moody's and "BBB" by S&P and (c) the Class A-1
Timber Notes shall, prior to or simultaneously with the
issuance of the Additional Timber Notes, be paid in full or
called for redemption.
Subject to the limitations set forth herein, the Company and
the Trustee may amend the Indenture and the other Operative
Documents (as defined herein), without consent of the
Noteholders, as necessary or required to effect the issuance
of Additional Timber Notes. Such amendments may, among other
things, modify the Required Liquidity Amount and provide for
the use of the Line of Credit Agreement (or other
33
<PAGE>
liquidity arrangement) to make such liquidity available to
pay interest on Additional Timber Notes or change the basis
upon which the actual amortization of the Timber Notes is
calculated. However, the issuance of Additional Timber Notes
cannot affect the Scheduled Amortization used to determine
Prepay- ment Premiums and Deficiency Premiums, cannot reduce
(but may increase) the Minimum Principal Amortization, of
any Class of Timber Notes and cannot substantially change
the nature of the Events of Default under the Indenture.
Moreover, unless the Timber Notes and Additional Timber
Notes have been accelerated (and such acceleration has not
been rescinded), no principal payments will be made on any
Additional Timber Notes until all Timber Notes have been
paid in full. Interest on the Timber Notes and any
Additional Timber Notes will be paid pro rata. See
"Description of the Timber Notes-- Additional Timber Notes."
Nonrecourse Timber
Acquisition
Indebtedness..... The Company may have outstanding at any time up to $75
million of nonrecourse purchase money indebtedness incurred
in connection with the future acquisition of timberlands or
timber rights.
Ratings............ THE RATING FOR EACH CLASS OF TIMBER NOTES ADDRESSES ONLY THE
PAYMENT OF INTEREST WHEN DUE AND THE ULTIMATE PAYMENT OF
PRINCIPAL NO LATER THAN THE FINAL MATURITY DATE, AND DOES
NOT ADDRESS THE PAYMENT OF PRINCIPAL AT ANY FASTER RATE OR
THE PAYMENT OF ANY PREMIUMS OR ANY INTEREST ON PREMIUMS. A
security rating is not a recommendation to buy, sell or hold
securities, and such ratings may be subject to revision or
withdrawal at any time.
Certain Legal
Considerations... Reference is made to "Certain Legal Considerations" for a
description of certain legal considerations relevant to an
investment in the Timber Notes, including, but not limited
to, certain bankruptcy, tax and other legal considerations,
including the possibility that the Mortgaged Property and
other assets and liabilities of the Company might be brought
into a bankruptcy case of Pacific Lumber, be consolidated
with the assets and liabilities of Pacific Lumber and be
available for the satisfaction of claims of creditors of
Pacific Lumber, subject, in most circumstances, to the prior
Lien of the Deed of Trust.
34
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following summary of audited historical financial data for each of the
years in the three year period ended December 31, 1997 and unaudited historical
financial data for the six months ended June 30, 1998 and 1997 is derived from
the "Selected Historical and Pro Forma Financial Data" appearing elsewhere in
this Prospectus, and should be read in conjunction with the Company's Financial
Statements and Notes thereto and the information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein. The financial data shown in the "historical"
columns reflects (a) the historical assets, liabilities and results of
operations of Scotia Pacific after giving effect to the Company Transfer and (b)
Pacific Lumber's and Salmon Creek's historical assets, liabilities and results
of operations attributable to the timberlands and the timber and related timber
harvesting rights transferred pursuant to the Palco Transfers, in each case, as
if such transactions occurred on January 1, 1995 (the beginning of the earliest
period presented). As of and for the year ended December 31, 1997, the
historical data is as follows:
COMBINING 1997 HISTORICAL DATA
----------------------------------------
SCOTIA PACIFIC SALMON
PACIFIC LUMBER CREEK TOTAL
-------- ------- ------- ------
(IN MILLIONS OF DOLLARS)
Revenues............................. $110.4 $14.7 $ 1.3 $126.4
Net income........................... 37.8 7.1 0.7 45.6
Assets............................... 261.4 93.1 2.4 356.9
Liabilities.......................... 332.2 7.6 -- 339.8
Logging operations on the Company Timberlands are highly seasonal with
significantly higher activity in the months of April through November.
Therefore, results in any particular quarter may not be indicative of results
for a full year.
The unaudited financial data shown in the "pro forma" columns has been prepared
based upon the historical financial data of the Company, as described above. The
unaudited pro forma balance sheet data gives effect to the issuance of the
Timber Notes, the retirement of the Original Timber Notes, and the distribution
of $506.4 million in cash to Pacific Lumber and other adjustments described in
note (1) below (collectively, the "Pro Forma Adjustments") as if they occurred
on June 30, 1998. The pro forma operating data gives effect to the Pro Forma
Adjustments as if they occurred on January 1, 1997 and is not necessarily
indicative of the results of future operations. The pro forma balance sheet and
operating data do not, however, give effect to the transfer of the Elk River
Timberlands to the Company.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------------------ ---------------------------------------------
1998 1997
---------------------- HISTORICAL ---------------------- HISTORICAL
PRO ---------- PRO --------------------
HISTORICAL FORMA(1) 1997 HISTORICAL FORMA(1) 1996 1995
---------- -------- ---------- ---------- -------- --------- ---------
(IN MILLIONS OF DOLLARS, EXCEPT VOLUME, PRICE AND RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Log sales to Pacific Lumber........ $ 34.5 $ 34.5 $ 53.8 $126.4 $126.4 $ 135.0 $ 129.4
General and administrative
expenses......................... 3.3 5.9 3.9 8.3 10.4 7.8 7.6
Depletion and depreciation......... 5.0 5.0 7.4 16.8 16.8 16.8 17.5
Operating income................... 26.2 23.6 42.5 101.3 99.2 110.4 104.3
Interest and other income.......... 1.3 .9 1.4 2.8 1.9 2.9 3.0
Interest expense................... 13.2 32.8 13.7 27.3 65.6 28.3 29.2
Income (loss) before income
taxes............................ 14.3 (8.3) 30.2 76.8 35.5 85.0 78.1
Income (loss) before extraordinary
item............................. 8.5 (8.3) 17.9 45.6 35.5 51.5 46.0
Extraordinary item................. -- -- -- -- (26.5) -- --
Net income (loss).................. 8.5 (8.3) 17.9 45.6 9.0 51.5 46.0
OTHER DATA:
Harvest volumes (thousands of
Mbfe)(2)......................... 50.6 50.6 79.8 182.3 182.3 182.5 187.5
Average realized SBE Price per
Mbfe(2).......................... $ 682 $ 682 $ 674 $ 693 $ 693 $ 740 $ 690
EBITDA(3).......................... 31.2 28.6 49.9 118.1 116.0 127.2 121.8
Ratio of earnings to fixed
charges.......................... 2.1x -- 3.2x 3.8x 1.5x 4.0x 3.7x
Fixed charge coverage deficiency... -- 8.3 -- -- -- -- --
Capital expenditures (including
timberland acquisitions)......... 2.9 2.9 8.2 14.8 14.8 7.3 4.2
Dividends and distributions........ 6.1 -- 24.4 74.7 540.7 84.1 79.1
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
JUNE 30, 1998
----------------------- HISTORICAL
PRO -------------------------------
HISTORICAL FORMA(1) 1997 1996 1995
----------- -------- --------- --------- ---------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents(4)....... $ 13.7 $ 5.0 $ 20.9 $ 20.3 $ 21.5
Timber and timberlands............. 247.3 247.3 249.7 255.6 268.2
Restricted cash(4)................. 28.1 25.0 28.4 30.0 31.4
Total assets....................... 353.5 329.7 356.9 362.5 378.8
Total indebtedness................. 316.7 867.7 327.5 336.9 351.6
Member capital (deficit)........... 24.7 (539.1) 17.1 12.7 12.9
<FN>
- ---------------
(1) The unaudited pro forma data gives effect to the issuance of the Timber
Notes and the application of the net proceeds therefrom to (a) fund the
initial deposits to the Expense Reserve, the Prefunding Account and other
reserve account, (b) retire the Original Timber Notes and (c) make a $506.4
million distribution to Pacific Lumber. Pro forma payments assumed to be
made on June 30, 1998 in connection with the retirement of the Original
Timber Notes aggregate approximately $348.2 million, consisting of $309.2
million of principal, $28.0 million of prepayment premiums and $11.0 million
of accrued interest.
The pro forma operating data reflects the following adjustments to the
historical operating data: (a) general and administrative expenses were
increased to reflect the additional fees payable and amounts reimbursable to
Pacific Lumber (net of amounts capitalized) under the New Services
Agreement; (b) interest expense reflects the amount of interest due with
respect to the outstanding aggregate principal amount of the Timber Notes,
commitment fees under the Line of Credit Agreement and the amortization of
the estimated fees and expenses associated with the Offering and the Line of
Credit Agreement and excludes interest expense and amortization of deferred
financing costs associated with the Original Timber Notes; and (c) an
extraordinary loss was recognized associated with the retirement of the
Original Timber Notes. See "Unaudited Pro Forma Balance Sheet;"
"Unaudited Pro Forma Statement of Income" and the Notes thereto.
(2) Historical harvest volumes reflected here and elsewhere in this Prospectus
are stated on an Mbfe basis as described herein using SBE Prices for the
January 1998 to June 1998 period. Harvest volumes reflected in Scotia
Pacific's Annual Report on Form 10-K for the year ended December 31, 1997
were stated on an Mbfe basis using SBE Prices for the January 1992 to June
1992 period.
(3) Reference is made to the Statement of Cash Flows contained in the Company's
Financial Statements contained elsewhere in this Prospectus for a complete
presentation of cash flows from operating, investing and financing
activities prepared in accordance with generally accepted accounting
principles. EBITDA means operating income plus depreciation and depletion.
EBITDA is not intended to represent cash flow, an alternative to net income
or any other measure of performance in accordance with generally accepted
accounting principles; it is included because the Company believes that
certain investors find it a useful tool for measuring the ability of the
Company to service its debt.
(4) Historical cash and cash equivalents principally includes amounts deposited
in the expense reserve and payment account held by the trustee under the
indenture which governed the Original Timber Notes (the "Original
Indenture") for the payment of interest and principal on the next
semiannual note payment date for the Old Timber Notes. Historical restricted
cash represents amounts held in the liquidity account for the Original
Timber Notes (the "Original Liquidity Account"). Pro forma cash and cash
equivalents includes amounts deposited in the Expense Reserve. Pro forma
restricted cash represents amounts held in the Prefunding Account.
</TABLE>
36
<PAGE>
RISK FACTORS
HOLDERS OF THE OLD NOTES SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH
BELOW REGARDING AN INVESTMENT IN THE NEW NOTES AS WELL AS THE OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS.
SOURCE OF PAYMENTS ON THE TIMBER NOTES
The Timber Notes are secured by, and are payable from the proceeds
of, the Mortgaged Property. The Company does not have any material assets other
than the Mortgaged Property. Accordingly, in the event such proceeds are
insufficient to pay amounts payable on the Timber Notes when due, the Trustee
and, to the extent permitted under the Indenture, the holders of the Timber
Notes (the "Noteholders"), will effectively be limited to the exercise of
remedies against the Mortgaged Property, including foreclosure or exercise of
power of sale under the Deed of Trust.
In the event the Trustee were to exercise foreclosure or power of sale
remedies under the Deed of Trust, there is a substantial likelihood that the
Multi-Species HCP, SYP and Permits, if approved or issued by the relevant
federal and state authorities, would not be transferable to a purchaser of the
Mortgaged Property without further action by the relevant regulatory authorities
issuing an amended Multi-Species HCP and SYP as well as amended Permits to such
purchaser after an opportunity for public notice and comment. For the effects
that the absence of the Multi-Species HCP, SYP and Permits would likely have on
the Company's business, see "--Regulatory and Environmental Factors" and
"--Headwaters Agreement."
The Timber Notes will not constitute obligations of, or interests in,
Pacific Lumber or any other person. Noteholders will not have recourse against
Pacific Lumber or any other person, or any of Pacific Lumber's assets in respect
of the Timber Notes. Pacific Lumber will not be liable to fund any portion of
the Company's obligations in respect of the Timber Notes or to make additional
investments in the Company.
FACTORS AFFECTING PAYMENTS ON THE NEW NOTES
Amounts payable on the Timber Notes on each Note Payment Date are expected
to be funded from cash on deposit in the Payment Account. See "Overview and
Structure of the Transaction--Payments on the Timber Notes--Funding of Timber
Note Payments; Cash Release Mechanism." The amount of such cash will depend
primarily upon the quantities and timing of log sales and, to a lesser extent,
sales prices received for logs harvested from the Company Timber. Although the
New Master Purchase Agreement permits the Company to sell logs or timber to
purchasers other than Pacific Lumber, it is expected that Pacific Lumber will
purchase substantially all of the Company's logs that would otherwise be
available for sale to third parties. Accordingly, the quantities and timing of
log sales and sales prices received for logs harvested from the Company Timber
are expected to depend largely upon purchases of logs by Pacific Lumber. The
timing and amount of such purchases by Pacific Lumber may be affected by factors
outside the control of the Company, including regulatory and environmental
factors, the financial condition of Pacific Lumber, and the supply and demand
for lumber products (which, in turn, will be influenced by demand in the
housing, construction and remodeling industries). For additional information
concerning Pacific Lumber, see "Annex 2--The Pacific Lumber Company." In light
of the current milling capacity of companies in the lumber industry and the
declining industry wide-inventory of commercially harvestable timber resulting
from increasing restrictions on timber harvesting on publicly and privately
owned lands, the expansion of national and state parks, and other factors, the
Company expects, but can give no assurance, that third parties with excess
milling capacity would be available to purchase the Company Timber covered by an
approved THP (or logs harvested from such Company Timber). There can be no
assurance that actual quantities of logs sold and actual prices received for
logs will be sufficient to pay all amounts of principal of, and any Premiums and
interest on, the Timber Notes.
Prior to making payments on the Timber Notes, the Company will be required
to pay, or reserve for the payment of, certain taxes imposed on the Company
Timberlands and yield taxes imposed on the harvesting of logs therefrom, capital
expenditures and expenses relating to the operation and servicing of the Company
Timberlands. The Structuring Cash Flows (as defined herein under "Overview and
Structure of the
37
<PAGE>
Transaction--Summary of Structure--Structuring Cash Flows") are based on
certain assumptions about the amount of these expenditures (including
escalations thereof), quantities and prices of log sales by the Company and
other factors. To the extent that actual results differ adversely from the
assumptions used to create the Structuring Cash Flows, whether by reason of (i)
actual harvesting levels and quantities of log sales being lower than those
assumed in the Structuring Cash Flows, (ii) increases in taxes or other
operating expenses (including any increases in operating costs resulting from a
termination of the New Services Agreement) or capital expenditures, (iii) actual
log prices being lower than those assumed in the Structuring Cash Flows or (iv)
other factors, the Company's ability to make payments on the Timber Notes could
be impaired.
It is expected that, consistent with the Company's purposes and its needs
to fund operating expenses and capital expenditures, substantially all of the
cash released from accounts maintained by the Trustee to the Company free of the
Lien of the Deed of Trust will be distributed to Pacific Lumber on a monthly
basis. See "Overview and Structure of the Transaction--Payments on the Timber
Notes--Funding of Timber Note Payments; Cash Release Mechanism." The Company
expects that substantially all of the funds distributed by it to Pacific Lumber
will be utilized by Pacific Lumber for general corporate purposes, including
funding operating expenses and capital expenditures and paying dividends to its
parent company. Any funds so distributed to Pacific Lumber by the Company will
be in addition to (and not credited against) the fees payable and amounts
reimbursable by the Company to Pacific Lumber for services provided under the
New Services Agreement. See "Description of Certain Principal Agreements--New
Services Agreement."
In the event that the Company's cash flows are not sufficient to generate
distributable funds to Pacific Lumber, Pacific Lumber's ability to satisfy its
operating expenses and capital expenditure requirements would be materially
impaired. In addition, if Pacific Lumber is unable to meet its operating
expenses and capital expenditure requirements, the Company's operations could be
adversely affected if it impacts Pacific Lumber's ability to perform its
obligations under the New Services Agreement or the New Purchase Agreement. See
"Annex 2--The Pacific Lumber Company--Management's Discussion and Analysis of
Financial Condition and Results of Operations of Pacific Lumber--Financial
Condition and Investing and Financing Activities." The Structuring Cash Flows,
and the assumptions used to create the Structuring Cash Flows, were not prepared
with reference to (and do not take account of) Pacific Lumber's operating and
other expenses. Under the assumptions underlying the Structuring Cash Flows,
there would be no funds available for distribution by the Company to Pacific
Lumber. However, the Company believes, although there can be no assurance, that
the assumptions underlying the Structuring Cash Flows are conservative (see
"Overview and Structure of the Transaction--Summary of Structure--Structuring
Cash Flows") and, to the extent that actual results differ positively from the
assumptions used to create the Structuring Cash Flows, the rate of amortization
for the Timber Notes could be faster and the amount of funds available for
distribution by the Company to Pacific Lumber could be increased. See
"--Factors Affecting Actual Amortization." On a pro forma basis, assuming that
all of the Company's available cash would have been distributed to Pacific
Lumber on a monthly basis, Pacific Lumber would have received dividends of
approximately $36.9 million in respect of the year ended December 31, 1997,
excluding dividends paid with the proceeds of the Offering. These pro forma
dividends are not necessarily indicative of amounts that the Company will
actually distribute to Pacific Lumber in the future. See "Annex 2--The Pacific
Lumber Company--Management's Discussion and Analysis of Financial Condition and
Results of Operations of Pacific Lumber--Financial Condition and Investing and
Financing Activities." For information concerning recent operating results of
the Company and Pacific Lumber, see "Summary--The Company--Recent Operating
Results" and "Annex 2--The Pacific Lumber Company--Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations--Recent Operating Results."
The demand for timber is influenced by the demand for lumber products
which, in turn, is influenced by conditions in the housing, construction and
remodeling industries. The housing, construction and remodeling industries are
highly cyclical and are affected by numerous factors, including real estate
prices, interest rates, credit availability, property taxes, federal and state
income tax policy, energy costs and
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general economic conditions, all of which are beyond the control of the Company.
In addition, the ability of the Company to sell logs will depend upon its
ability to obtain regulatory approval of THPs. See "--Regulatory and
Environmental Factors" and "Business of the Company--Legal Proceedings."
FACTORS AFFECTING ACTUAL AMORTIZATION
No assurance can be given that revenues received from the sale of logs to
Pacific Lumber under the New Master Purchase Agreement or from other sources
(net of operating expenses) will be sufficient to pay all amounts of interest,
principal, Premiums and interest on Premiums with respect to the Timber Notes.
In addition, even if such revenues are sufficient to pay amounts due on the
Timber Notes, actual payments of principal on any particular Note Payment Date
will generally depend upon the amount of logs or timber sold (or deemed sold) by
the Company. Accordingly, the actual rate of amortization of each Class of
Timber Notes may be faster or slower than that indicated on the applicable
Scheduled Amortization Schedule (as described herein). See "Overview and
Structure of the Transaction--Payments on the Timber Notes." The Company
expects that the actual rate of amortization of the Timber Notes will be faster
than that indicated on the Minimum Principal Amortization Schedules. Although
Noteholders will generally be entitled to Prepayment Premiums or Deficiency
Premiums in the event that the Timber Notes are amortized more rapidly or more
slowly than contemplated by the applicable Scheduled Amortization Schedule (see
"Overview and Structure of the Transaction--Payments on the Timber
Notes--Premiums"), the timing of payments of principal on each Class of the
Timber Notes will affect the actual yield Noteholders ultimately receive in
respect of the Timber Notes.
The Timber Notes may be redeemed, in whole but not in part, on any date,
and the Company must make prepayments of principal on the Timber Notes in excess
of Minimum Principal Amortization to the extent required by the Indenture and
may make optional prepayments of principal of the Timber Notes from any
available source of funds on any Note Payment Date. While a Prepayment Premium
would be required to be paid if such redemption or prepayment caused the
cumulative amount of principal paid on the Timber Notes of any Class through the
date of such redemption or prepayment to be in excess of the cumulative
Scheduled Amortization for such Class through such date, no assurance can be
made that the amount of such Prepayment Premium would adequately compensate a
holder of the Timber Notes for the cost to such holder of such redemption or
prepayment.
In addition to the purchase of the Headwaters Timberlands, the California
Headwaters Bill authorizes the expenditure of $80 million toward the acquisition
at fair market value of certain Company Timberlands. This appropriation is
available from July 1, 1999 to June 30, 2001. The bill specifically authorizes
the acquisition at fair market value of the Owl Creek grove and requires that
the California Wildlife Conservation Board make an offer to purchase this grove
by no later than July 1, 2000. The bill also provides that if any portion of the
$80 million remains after purchase of the Owl Creek grove, such remainder may be
used to purchase certain other timberlands.
The Combined Plan contemplates the harvesting over time, of either the Owl
Creek grove or a forest grove owned by Pacific Lumber commonly referred to as
"Grizzly Creek." The Initial Harvest Schedule assumed that the Owl Creek grove
would be harvested over time; however, a provision of the California Headwaters
Bill designates the Owl Creek grove as a conservation area for the marbled
murrelet, which would have the effect of restricting the activities which could
be conducted in the grove to only management activities not detrimental to the
marbled murrelet.
The Owl Creek grove consists of approximately 900 acres of primarily old
growth redwood timber and the Company estimates that the Owl Creek grove
constitutes approximately 2% of the aggregate Mbfe contained in the Company
Timber. It is uncertain whether the Owl Creek grove will ultimately be sold to
the state of California. Furthermore, the Company could arrange to exchange the
Owl Creek grove for other timberlands pursuant to the substitute collateral
provisions of the Indenture. See "Description of the Timber Notes--Substitute
Collateral." Were the Owl Creek grove to be sold to the state of California, the
Company would be required to recognize Deemed Production (as defined in the
Indenture) with respect to
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the Mbfe contained within the grove, which could result in substantial
prepayments (and related prepayment premiums) with respect to the Timber Notes.
The Scheduled Amortization Schedule for the Class A-3 Timber Notes does not
provide for any payments of principal on the Class A-3 Timber Notes before the
Scheduled Maturity Date for that Class. It is not anticipated that the Company
will have sufficient funds from operations to repay the principal amount of the
Class A-3 Timber Notes on their Scheduled Maturity Date, and, accordingly, the
Company intends to refinance the Class A-3 Timber Notes. If the Company fails to
repay the Class A-3 Timber Notes by the Scheduled Maturity Date thereof, a
Deficiency Premium would be payable and a Cash Retention Event will occur which
results in 75% of all Excess Funds being deposited in the Payment Account. The
Company's ability to refinance such indebtedness, at all or on terms considered
acceptable to the Company, will depend on market conditions and other factors
which may be beyond the Company's control. There can be no assurance, therefore,
that the Class A-3 Timber Notes will be repaid on their Scheduled Maturity Date.
LINE OF CREDIT PRIORITY
The Company has entered into a Line of Credit Agreement pursuant to which
the Company or the Trustee may borrow to pay interest on the Timber Notes if
amounts otherwise available therefor are insufficient. The Line of Credit
Agreement provides liquidity only and not credit enhancement. Upon the
occurrence of certain Triggering Events under a Line of Credit Agreement,
including, among other things, in the case of the Bank of America Credit
Agreement, acceleration of the Timber Notes by reason of an interest payment
Event of Default, the existence of an interest payment Event of Default for six
months plus 10 Business Days or certain insolvency events with respect to the
Company, the Liquidity Providers may terminate the Line of Credit Agreement.
Upon such termination, no further Advances will be required to be made under the
Line of Credit Agreement and all amounts then owing to the Liquidity Providers
(other than any Additional Liquidity Provider Fees and any Supplemental
Liquidity Provider Interest) will be repaid prior to any further payments of
interest or principal being made on the Timber Notes. See "Description of the
Timber Notes--Line of Credit." In addition, Interest Advances and interest
thereon (other than any Supplemental Liquidity Provider Interest) will be paid
on a monthly basis to the Liquidity Providers prior to funding payments to
holders of Timber Notes. Principal payments due following any Termination
Advance would be made after payments of Minimum Principal Amortization Amounts
but prior to any additional principal payments on the Timber Notes.
ADDITIONAL TIMBER NOTES
Subject to the conditions set forth herein, the Company may issue
Additional Timber Notes that rank PARI PASSU with the Timber Notes. There can be
no assurance that, despite the conditions to the issuance of Additional Timber
Notes, the Company will have adequate funds after the issuance of such
Additional Timber Notes to pay amounts that would otherwise have been paid with
respect to any Class of Timber Notes. Moreover, the formula by which the amount
of principal the Company must pay with respect to any Class of Timber Notes (to
the extent cash is available therefor in the Payment Account) may be revised
upon the issuance of any Additional Timber Notes, although (i) the issuance of
Additional Timber Notes cannot affect the Scheduled Amortization used to
determine Prepayment Premiums and Deficiency Premiums, and cannot reduce (but
may increase) the Minimum Principal Amortization of any Class of Timber Notes
and (ii) unless the Timber Notes and the Additional Timber Notes have been
accelerated (and such acceleration has not been rescinded), no principal
payments will be made on any Additional Timber Notes until all Timber Notes have
been paid in full. Subject to the limitations set forth herein, the Company and
the Trustee may amend the Indenture and the other Operative Documents without
consent of the Noteholders, as necessary or required to effect the issuance of
such Additional Timber Notes. The holders of any Additional Timber Notes will
share in certain rights to vote or consent under the Indenture.
REGULATORY AND ENVIRONMENTAL FACTORS
Regulatory and environmental matters play a significant role in the
Company's operations, which are subject to a variety of California and federal
laws and regulations dealing with timber harvesting practices,
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threatened and endangered species, and air and water quality. See "Business of
the Company--Regulatory and Environmental Matters." Regulatory and
environmental concerns have resulted in restrictions on the geographic scope of
and the timing of the Company's timber operations, increased operational costs
and engendered litigation and other challenges to the Company's THPs. The
environmental laws and related administrative actions and legal challenges have
severely restricted the ability to harvest virgin old growth timber, and to a
lesser extent, residual old growth timber, on the timberlands of the Company and
Pacific Lumber. Legal challenges with respect to the Company's young growth
timber have historically been limited, although certain lawsuits are pending or
threatened which could affect the Company's ability to harvest young growth
timber. See "Business of the Company--Legal Proceedings--Timber Harvesting
Litigation" for a description of certain of these lawsuits, including a recent
lawsuit which could potentially result in severe restrictions on the ability to
harvest Company Timber for up to several months.
The designation of a species as endangered or threatened under the
Endangered Species Act (the "ESA") or the California Endangered Species Act
("CESA") can significantly affect the Company's operations if that species
inhabits the Company Timberlands. To date, the northern spotted owl, the marbled
murrelet (a coastal seabird) and the coho salmon are species whose designation
has the potential to significantly affect the Company's business. In the absence
of an approved HCP, the Company has been required to operate on a "no-take"
basis with respect to these species. While this method of operation has not had
a material adverse effect on the Company in respect of the northern spotted owl,
the designations of the marbled murrelet and the coho salmon have resulted or
could in the future result in significant additional restrictions on the
Company's ability to harvest in certain areas of the Company Timberlands. Also,
in the absence of an approved SYP, each of the Company's THPs is required to
separately analyze the impact of the Company's operations and mitigation
measures on the endangered or threatened species (other than with respect to the
northern spotted owl, as to which Pacific Lumber has formulated owl management
plans endorsed by the appropriate regulatory authorities). This has delayed or
prevented the approval of certain of the Company's THPs. The designation of
endangered or threatened species on the Company Timberlands and the associated
environmental concerns has increased the time required to prepare and obtain
approval of THPs and has tended to reduce the Company's supply of approved THPs.
The supply of THPs approved at any time could continue to decrease if the
Combined Plan is not approved. The approval of an SYP should facilitate a more
streamlined THP preparation and review process.
Various groups and individuals have filed objections with the CDF and the
California Board of Forestry ("BOF") regarding actions and rulings with
respect to certain THPs of the Company and Pacific Lumber. Lawsuits are also
pending or threatened which seek to prevent the Company and Pacific Lumber from
implementing certain of their approved THPs or other operations. The Company
expects such environmentally focused objections and challenges to continue.
While legal challenges have not in the past had a significant adverse effect on
the Company, there can be no assurance that this will continue to be the case.
Among the conditions to the consummation of the Headwaters Agreement are
that the appropriate federal regulatory authorities approve the Multi-Species
HCP, that the appropriate state regulatory authorities approve an SYP with
respect to the Company Timberlands and that the Permits be issued to Pacific
Lumber and its affiliates (including the Company). See "--Headwaters Agreement"
below. While the parties to the Headwaters Agreement are working diligently
toward satisfaction of the conditions required to consummate the Headwaters
Agreement, there can be no assurance that the Combined Plan in its current form
will be approved, that the Permits will be issued or that the other conditions
will be satisfied. The federal funding for the Headwaters Agreement expires on
March 1, 1999. If the necessary regulatory approvals are not obtained and other
conditions precedent to consummation are not satisfied by that date, the
Headwaters Agreement may not be consummated, or its consummation may be
substantially delayed. If the Headwaters Agreement is not consummated, the
Combined Plan, which assumes the consummation of the Headwaters Agreement, would
have to be significantly revised, and the Company cannot predict whether or when
any such revised plan would be presented to or approved by the regulatory
authorities. See "--Headwaters Agreement."
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Laws, regulations and related judicial decisions and administrative
interpretations dealing with the Company's business are subject to change and
new laws and regulations are frequently introduced concerning the California
timber industry. From time to time, bills are introduced in the California
legislature and in the U.S. Congress which relate to the business of the
Company, including the protection and acquisition of old growth and other
timberlands, endangered species, environmental protection, air and water quality
and the restriction, regulation and administration of timber harvesting
practices. In addition to existing and possible new or modified statutory
enactments, regulatory requirements and administrative and legal actions, the
California timber industry remains subject to potential California or local
ballot initiatives and evolving federal and California case law which could
affect timber harvesting practices. It is not possible to assess the effect of
such future legislative, judicial and administrative events on the Company or
its business.
HEADWATERS AGREEMENT
MAXXAM and Pacific Lumber have entered into the Headwaters Agreement (see
"Regulatory and Environmental Factors" above and "Business of the
Company--Headwaters Agreement"). The Structuring Schedule Assumptions and the
Structuring Cash Flows (as defined herein), which were utilized in structuring
the Offering and determining the Minimum Principal Amortization Schedule and the
Scheduled Amortization Schedule for each Class of Timber Notes, assumed the
consummation of the Headwaters Agreement (see "Overview and Structure of the
Transaction" and "Annex 1--Structuring Schedule Assumptions.") Among other
things, the Headwaters Agreement provides for approximately 7,700 acres of
adjacent timberlands to be acquired by the United States and California from a
third party and transferred to Pacific Lumber. The Headwaters Agreement also
contemplates, and the Structuring Schedule Assumptions assume, approval of the
Combined Plan and the issuance of the Permits, which, among other things, should
facilitate more streamlined preparation and review of the Company's THPs and
allow the Company to conduct operations in certain areas of the Company
Timberlands in which the Company previously experienced substantial difficulty
in obtaining regulatory approval for harvesting operations. See "--Regulatory
and Environmental Factors."
The Combined Plan contemplates the harvesting over time of either the Owl
Creek grove owned by the Company or the Grizzly Creek grove owned by Pacific
Lumber. The Initial Harvest Schedule assumed that the Owl Creek grove would be
harvested over time; however, a provision in the California Headwaters Bill
designates the Owl Creek grove as a conservation area for the marbled murrelet,
which would have the effect of restricting the activities which could be
conducted in the grove to only management activities not detrimental to the
marbled murrelet. The California Headwaters Bill also appropriates up to $80
million toward the acquisition at fair market value of the Owl Creek grove. The
bill also provides that if any portion of the $80 million remains after purchase
of the Owl Creek grove, it may be used to purchase certain other timberlands.
See "Risk Factors--Factors Affecting Actual Amortization."
The federal funding for the Headwaters Agreement, which is $250 million,
remains available until March 1, 1999 and is subject to, among other things,
contribution by the State of California of its portion of funding for the
Headwaters Agreement. On August 31, 1998, the California Legislature enacted the
California Headwaters Bill, which, among other things, appropriated California's
$130 million portion of funding required to consummate the Headwaters Agreement.
The state funds remain available until June 30, 1999. California Governor Pete
Wilson has announced his intention to sign the California Headwaters Bill.
California's portion of the funding is subject to certain conditions, including
contribution by the United States of its portion of the funding and the
inclusion of certain environmentally focused provisions in the final version of
the Multi-Species HCP such as wider interim streamside buffers than provided for
in the Combined Plan. See "Business of the Company--Regulatory and
Environmental Matters."
Approval of the Combined Plan and issuance of the related Permits, each in
form and substance satisfactory to Pacific Lumber, is also a condition to
consummation of the Headwaters Agreement. Pacific Lumber and the Company have
released the Combined Plan for the purpose of public review and comment. The
issuance by the Internal Revenue Service and the California Franchise Tax Board
of tax closing agreements in form and substance satisfactory to Pacific Lumber
and its affiliates, acquisition by the federal and state governments of the Elk
River Timberlands and the absence of a judicial decision in any litigation
brought by third parties that any party to the Headwaters Agreement reasonably
believes will significantly
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delay or impair the transactions described in the Headwaters Agreement are also
conditions to consummation of the Headwaters Agreement. While the parties to the
Headwaters Agreement are working diligently towards satisfaction of these and
the other conditions prior to the March 1, 1999 expiration of federal funding,
there can be no assurance that the conditions will be satisfied by that date and
therefore no assurance that the Headwaters Agreement will be consummated.
Litigation could also be brought to block or delay implementation of the
Headwaters Agreement or the approvals of the Combined Plan and issuance of the
Permits.
If the Headwaters Agreement is not consummated and the Combined Plan is not
approved, the Company is likely to experience adverse effects on its operations
as it has in the past several years. These include continuing restrictions on
harvesting in areas containing old growth timber, possible additional
restrictions on harvesting in areas bordering the banks of fish bearing and
other streams, continuing and possibly increasing delays in approval of its THPs
and increased expense associated with compliance with government regulations and
response to legal challenges to the Company's business. The Company believes,
however, that it will have sufficient resources to pay interest and Minimum
Principal Amortization on the Timber Notes whether or not the Headwaters
Agreement is consummated and the Combined Plan is approved. There can be no
assurance, however, that this will be the case.
Prior to entering into the Headwaters Agreement, Pacific Lumber and its
affiliates had commenced litigation seeking constitutional just compensation
from the United States and California on the grounds that the harvesting
restrictions imposed under the environmental laws constitute an uncompensated
governmental taking of private property for public use (the "Takings
Litigation"). The Takings Litigation has been voluntarily stayed pursuant to
the terms of the Headwaters Agreement. In the event that the Headwaters
Agreement is not consummated, Pacific Lumber and its affiliates intend to
continue or expand the Takings Litigation. Although Pacific Lumber and the
Company believe that the claims in the Takings Litigation are meritorious, there
can be no assurance that Pacific Lumber and its affiliates would be successful
in the Takings Litigation. Moreover, even if the Takings Litigation is
successful, there can be no assurance as to the amount or timing of any recovery
that might be received by the Company. Of the over 3,800 acres presently
identified in the Takings Litigation as timberlands that Pacific Lumber and the
Company assert that the government has taken without just compensation,
approximately 900 acres consist of Company Timber. The costs of the Takings
Litigation will be borne by Pacific Lumber pursuant to the New Services
Agreement. See "Business of the Company--Legal Proceedings--Takings
Litigation" and "Description of the Timber Notes--Deemed Production."
RISK OF LOSS FROM EARTHQUAKES, FLOOD, FIRE OR OTHER CASUALTIES
Pacific Lumber believes that it possesses adequate insurance coverage
relating to damage to its facilities and equipment and the disruption of its
business from earthquakes. Consistent with the past practices of Pacific Lumber
and the owners of most other timber tracts in the United States, the Company
does not intend to maintain earthquake insurance in respect of standing timber.
The Company will assume substantially all risks of loss from fire, flood
and other casualties on the Company Timberlands, similar to the risks previously
assumed by Scotia Pacific and currently assumed by Pacific Lumber and the owners
of most other timber tracts in the United States. The risk of forest fire damage
to the Company Timberlands is relatively low as a result of the foggy climate
along the northern California coast and the natural fire resistance of redwood
timber. The Company is a participant with the CDF and Pacific Lumber and other
timberland owners in cooperative fire fighting and aerial fire surveillance
programs. The extensive roads on the Company Timberlands also serve as fire
breaks and facilitate implementation of fire control techniques and utilization
of fire fighting equipment. The last forest fire of any significance affecting
the Company Timberlands occurred in 1990 with minimal loss. Consistent with the
past practices of Scotia Pacific, Pacific Lumber and the owners of most other
timber tracts in the United States, the Company does not intend to maintain fire
insurance in respect of standing timber.
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SALES TO THIRD PARTIES
Although it is currently contemplated that all or substantially all of the
Company's revenue will be derived from the sale of logs to Pacific Lumber, the
Company could sell logs or standing Company Timber to other purchasers. Although
the Company believes that it should be able to enter into agreements with
purchasers other than Pacific Lumber if it determines such agreements are in its
best interest, no assurance can be given that such purchasers will be available
or, if available, that such purchasers will have sufficient milling capacity to
enable them to acquire sufficient quantities of logs on terms adequate for the
payment of all amounts of principal of, and premium and interest on, the Timber
Notes.
CERTAIN LEGAL CONSIDERATIONS
An investment in the Timber Notes involves the consideration of certain
bankruptcy issues. In the event that Pacific Lumber or the Company becomes a
debtor in a judicial proceeding (a "Bankruptcy Case") seeking reorganization
or other relief under Title 11 of the United States Code (the "Bankruptcy
Code"), a delay or reduction in the payment of the Timber Notes may occur. Even
if the Company is not itself a debtor in a Bankruptcy Case, a creditor,
receiver, conservator or trustee-in-bankruptcy of Pacific Lumber, or Pacific
Lumber as a debtor-in-possession, might request a court to order that the
Company Timber and other assets and liabilities of the Company be brought into a
Bankruptcy Case of Pacific Lumber and be consolidated with its assets and
liabilities. In the event such request were granted, the Company's assets,
including the Company Timberlands, would be available for the satisfaction of
claims of creditors of Pacific Lumber, subject, in most circumstances, to the
prior Lien of the Deed of Trust. If the assets and liabilities of the Company
were consolidated into a Bankruptcy Case of Pacific Lumber, such action could
delay any foreclosure on the Mortgaged Property, delay any payment on the Timber
Notes until the conclusion of the Bankruptcy Case or later or diminish the
amount or share of proceeds derived from the harvesting or sale of the Company
Timber available for payment of the Timber Notes. In addition, a party could
seek to subordinate the Timber Notes or the lien on and the security interests
in the Mortgaged Property to the claims of other creditors. See "Certain Legal
Considerations--Insolvency and Other Bankruptcy Considerations."
In addition, an investment in the Timber Notes involves certain federal and
state income tax, and other legal considerations that investors should consider
carefully. For a discussion of such legal considerations see "Certain Legal
Considerations."
RATING OF THE TIMBER NOTES
The ratings of the Timber Notes relate only to the payment of interest when
due and the ultimate payment of principal no later than the Final Maturity Date
and do not address the payment of principal at any faster rate or the payment of
any Premiums or interest on Premiums. A security rating is not a recommendation
to buy, sell or hold securities, and such ratings may be subject to revision or
withdrawal at any time. It is possible that the Rating Agencies referred to
above may in the future change their ratings of the Timber Notes.
POTENTIAL CONFLICTS OF INTEREST
Pacific Lumber, which is the sole member of the Company, controls the votes
on all matters subject to a vote of the Company's members. The Company is
managed by six managers, of whom four are officers or directors of Pacific
Lumber, and two of whom are independent managers who are not employees of, or
consultants to, the Company. The Company's managers, each of whom was a director
of Scotia Pacific, were elected in June 1998. Actions requiring approval of the
managers are sufficient if approved by a majority of the managers; provided,
however, that certain actions, including any filing of a voluntary bankruptcy
petition by the Company, require the approval of all of the managers. Pacific
Lumber is an indirect wholly owned subsidiary of MGI. MGI is an indirect wholly
owned subsidiary of MAXXAM. Mr. Charles E. Hurwitz, the Chairman of the Board
and Chief Executive Officer of MAXXAM, and affiliates of Federated, a New York
business trust that is wholly owned by Mr. Hurwitz, members of his immediate
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family and trusts for the benefit thereof, collectively own approximately 68.8%
of the aggregate voting power of MAXXAM.
Although the Indenture requires that the Company maintain two independent
managers, on the date of this Prospectus a majority of the officers and managers
of the Company are officers and directors of Pacific Lumber. The New Master
Purchase Agreement generally contemplates that all sales of logs from the
Company to Pacific Lumber will be at prices which equal or exceed the SBE Prices
and the Structuring Prices applicable to such logs. While both Pacific Lumber
and the Company have an economic incentive for the Company to obtain the best
possible prices for any sales of logs to third parties, there may be conflicts
of interest between Pacific Lumber and the Company in determining the purchase
prices under the New Master Purchase Agreement, and negotiations regarding third
party log sales could be affected by factors that are of economic significance
to Pacific Lumber but not to Noteholders.
The New Master Purchase Agreement provides that Pacific Lumber is
responsible for the measuring of all logs purchased thereunder pursuant to
certain specified methods. Although the New Master Purchase Agreement requires
the Company to use independent scalers for at least two consecutive business
days in each six month period (and also at any time upon notice from the Trustee
or holders of 25% in aggregate outstanding principal amount of Timber Notes and
any Additional Timber Notes (excluding any such Timber Notes or Additional
Timber Notes that may be held by affiliates of Pacific Lumber), to the extent
specified in such notice) and permits the Company to utilize independent scalers
at any time to verify the scaling by Pacific Lumber, there could be conflicts of
interest between the Company and Pacific Lumber in respect of the scaling of
logs purchased pursuant to the New Master Purchase Agreement.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Notes under the Securities Act. New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold or otherwise transferred by holders thereof (other than any such
holder which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act and other than any broker-dealer who purchased Old
Notes directly from the Company for resale pursuant to Rule 144A under the
Securities Act or any other available exemption under the Securities Act)
without compliance with the registration and prospectus delivery provisions of
the Securities Act provided that such New Notes are acquired in the ordinary
course of such holders' business and such holders have no arrangement with any
person to participate in the distribution of such New Notes. Each broker-dealer
that acquired Old Notes for its own account as a result of market making or
other trading activities and that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that, by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 90 days after the effective date of this Prospectus, it will make this
Prospectus, as it may be amended or supplemented from time to time, available to
any broker-dealer for use in connection with any such resale. See "Plan of
Distribution." However, to comply with the securities laws of certain
jurisdictions, if applicable, the New Notes may not be offered or sold unless
they have been registered or qualified for sale in such jurisdictions or an
exemption from registration or qualification is available and is complied with.
To the extent that Old Notes
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are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Old Notes will be adversely affected.
LACK OF A PUBLIC MARKET FOR THE NEW NOTES
The New Notes represent a new issue of securities for which there is
currently no market. If a market for the New Notes were to develop, the New
Notes may trade at a discount from their principal amount, depending upon
prevailing interest rates, the market for other securities and other factors. No
assurance can be given that a holder of New Notes will be able to sell New Notes
in the future or that any such sale will be at a price equal to or higher than
the initial offering price of the Old Notes. The Initial Purchasers have
informed the Company that, subject to applicable laws and regulations, they
currently intend to make a market in the New Notes. The Initial Purchasers are
not obligated to do so, however, and any market making may be discontinued at
any time without notice. The Company does not intend to apply for listing of the
New Notes on any securities exchange.
BOOK-ENTRY REGISTRATION
Except as set forth herein, to the extent the Old Notes being delivered for
exchange are represented by global notes registered in the name of Cede & Co.
("Cede"), as nominee for DTC, the New Notes will be initially represented by
global notes registered in the name of Cede, as the nominee of DTC, and will not
be registered in the names of the beneficial owners of the New Notes or their
nominees. Because of this, the beneficial owners of interests in the Global New
Notes will not be recognized by the Trustee as Noteholders and, therefore, may
only exercise the rights of Noteholders indirectly through DTC and its
participating organizations, unless and until Definitive New Notes are issued to
replace their beneficial interests in the Global New Notes. In particular, under
the book-entry system, actions permitted to be taken under the Indenture by
Noteholders holding specified percentages of the Timber Notes (including actions
with respect to Events of Default and amendments to the Indenture) may only be
taken by the beneficial owners of the Timber Notes through their direct or
indirect participants in DTC pursuant to terms established by DTC and its
participating organizations. DTC may take conflicting actions with respect to
various Timber Notes to the extent such actions are taken on behalf of DTC's
participating organizations whose holdings include such Timber Notes. The
foregoing arrangements do not impair the right of a beneficial owner of New
Notes to receive principal and interest payments, or to institute suit to
enforce such payments pursuant to the terms of the Indenture, which rights
beneficial owners of New Notes will be required to exercise in accordance with
the rules and procedures of DTC and its participating organizations.
THE EXCHANGE OFFER
PURPOSE AND EFFECT
The Old Notes were sold by the Company to the Initial Purchasers on July
20, 1998, pursuant to the Purchase Agreement. The Initial Purchasers
subsequently resold the Old Notes in reliance on Rule 144A under the Securities
Act and certain other exemptions under the Securities Act. The Company and the
Representative, on behalf of the Initial Purchasers, also entered into a
Registration Rights Agreement, pursuant to which the Company agreed, with
respect to the Old Notes and subject to the Company's determination that the
Exchange Offer is permitted under applicable law, to (i) cause to be filed, on
or prior to October 19, 1998, a registration statement with the Commission under
the Securities Act concerning the Exchange Offer, (ii) use its reasonable best
efforts to cause such registration statement to be declared effective by the
Commission on or prior to January 18, 1999, and (iii) to cause the Exchange
Offer to remain open for a period of not less than 20 days. This Exchange Offer
is intended to satisfy the Company's exchange offer obligations under the
Registration Rights Agreement.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth herein and in the accompanying Letter of Transmittal, to exchange $1,000
in principal amount of any Class of the New Notes for each $1,000 in principal
amount of the similar Class of outstanding Old Notes. The Company will
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accept for exchange any and all Old Notes that are validly tendered on or prior
to 5:00 p.m., New York City time, on the Expiration Date. Tenders of the Old
Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on
the Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes being tendered for exchange. However, the Exchange
Offer is subject to the conditions, terms and provisions of the Registration
Rights Agreement. The form and terms of the New Notes will be identical in all
material respects to the form and terms of the Old Notes, except that (i) the
New Notes have been registered under the Securities Act and, therefore, will not
bear legends restricting the transfer thereof, (ii) holders of New Notes will
not be entitled to Non-Registration Premiums, and (iii) holders of New Notes
will not be, and upon consummation of the Exchange Offer Eligible Holders of Old
Notes will no longer be, entitled to certain rights under the Registration
Rights Agreement intended for holders of unregistered securities. See
"--Conditions of the Exchange Offer."
Old Notes may be tendered only in multiples of $1,000. Subject to the
foregoing, Holders may tender less than the aggregate principal amount
represented by the Old Notes held by them, provided that they appropriately
indicate this fact on the Letter of Transmittal accompanying the tendered Old
Notes (or so indicate pursuant to the procedures for book-entry transfer).
As of the date of this Prospectus, $160.7 million, $243.2 million and
$463.3 million in aggregate principal amounts of the Old Class A-1 Notes, the
Old Class A-2 Notes and the Old Class A-3 Notes, respectively, are outstanding,
the maximum amount authorized by the Indenture for all Timber Notes. Solely for
reasons of administration (and for no other purpose), the Company has fixed the
close of business on , 1998, as the record date (the "Record Date")
for purposes of determining the persons to whom this Prospectus and the Letter
of Transmittal will be mailed initially. Only an Eligible Holder of the Old
Notes (or such Eligible Holder's legal representative or attorney-in-fact) may
participate in the Exchange Offer. There will be no fixed record date for
determining Eligible Holders of the Old Notes entitled to participate in the
Exchange Offer. The Company believes that, as of the date of this Prospectus, no
such Eligible Holder is an affiliate (as defined in Rule 405 under the
Securities Act) of the Company.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Eligible
Holders of Old Notes and for the purposes of receiving the New Notes from the
Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering Eligible Holder thereof as promptly as
practicable after the Expiration Date.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Expiration Date shall be , 1998 at 5:00 p.m., New York City
time, unless the Company, in its sole discretion, extends the Exchange Offer, in
which case the Expiration Date shall be the latest date and time to which the
Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date and will make a public announcement thereof, by press release, or
otherwise, as promptly thereafter as reasonably practicable. Such notice and
public announcement shall set forth the new Expiration Date of the Exchange
Offer.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) if any of the
conditions set forth below under "Conditions of the Exchange Offer" shall not
have been satisfied, to terminate the Exchange Offer, by giving oral or written
notice of such delay, extension, or termination to the Exchange Agent, and (iv)
to amend the terms of the Exchange Offer in any manner. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will, in accordance with applicable law, file a post-effective
amendment to the Registration Statement (a "Post-effective Amendment") and
resolicit the registered
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holders of the Old Notes. If the Company files a Post-effective Amendment, it
will notify the Exchange Agent of an extension of the Exchange Offer by oral or
written notice prior to 9:00 a.m., New York City time, on the next business day
after the effectiveness of such Post-effective Amendment and will make a public
announcement thereof, by press release, or otherwise, as promptly thereafter as
reasonably practicable. Such notice and public announcement shall set forth the
new Expiration Date, which new Expiration Date shall be no less than five days
after the then applicable Expiration Date.
CONDITIONS OF THE EXCHANGE OFFER
The Exchange Offer is not conditioned upon any minimum principal amount of
the Old Notes being tendered for exchange. However, notwithstanding any other
provisions of the Exchange Offer, the Company shall not be required to accept
for exchange, or to issue the New Notes in exchange for any Old Notes, if the
Exchange Offer violates any applicable law or interpretation of the staff of the
Commission. The Company expects that the foregoing conditions will be satisfied.
TERMINATION OF CERTAIN RIGHTS
The Indenture provides that in the event of a Registration Default,
Eligible Holders of Old Notes are entitled to receive Non-Registration Premiums
at the rate of .50% per annum of the outstanding principal balance of the Old
Notes during the continuance of a Registration Default in respect of such Old
Notes. A "Registration Default" with respect to the Exchange Offer shall
generally occur if: (i) the registration statement concerning the exchange offer
(the "Registration Statement") is not declared effective on or prior to
January 18, 1999, or (ii) the Exchange Offer is not consummated on or prior to
March 18, 1999. Holders of New Notes will not be and, upon consummation of the
Exchange Offer, Eligible Holders of Old Notes will no longer be, entitled to the
right to receive Non-Registration Premiums and certain other rights under the
Registration Rights Agreement intended for holders of unregistered securities.
The Exchange Offer shall be deemed consummated upon the occurrence of the
delivery by the Company to the Registrar under the Indenture of New Notes in the
same Class and aggregate principal amounts as the Old Notes that are validly
tendered by holders thereof pursuant to the Exchange Offer.
ACCRUED INTEREST ON THE OLD NOTES
The New Notes will bear interest per annum from and including their date of
issuance. Eligible Holders whose Old Notes are accepted for exchange will have
the right to receive interest accrued thereon from the date of original issuance
of the Old Notes or the last date to which interest has been paid on the Old
Notes, as applicable, to, but not including, the date of issuance of the New
Notes, such interest to be payable with the first interest payment on the New
Notes. Interest on the Old Notes accepted for exchange will cease to accrue on
the day prior to the issuance of the New Notes.
PROCEDURES FOR TENDERING OLD NOTES
The tender of an Eligible Holder's Old Notes as set forth below and the
acceptance thereof by the Company will constitute a binding agreement between
the tendering Eligible Holder and the Company upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal. Except as set forth below, an Eligible Holder who wishes to tender
Old Notes for exchange pursuant to the Exchange Offer must transmit such Old
Notes, together with a properly completed and duly executed Letter of
Transmittal, including all other documents required by such Letter of
Transmittal, to the Exchange Agent at one of the addresses set forth on the back
cover page of this Prospectus prior to 5:00 p.m., New York City time, on the
Expiration Date. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE ELIGIBLE HOLDER.
IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY
INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL, IT
IS RECOMMENDED THAT THE ELIGIBLE HOLDER USE AN OVERNIGHT OR HAND DELIVERY
SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY
DELIVERY.
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Each signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered by exchange
pursuant hereto are tendered (i) by a registered holder of the Old Notes who has
not completed either the box entitled "Special Exchange Instructions" or the
box entitled "Special Delivery Instructions" in the Letter of Transmittal or
(ii) by an Eligible Institution (as defined below). In the event that a
signature on a Letter of Termination or a notice of withdrawal, as the case may
be, is required to be guaranteed, such a guarantee must be by a firm which is a
member of a registered national securities exchange or the National Association
of Securities Dealers, Inc., a commercial bank or trust company having an office
or correspondent in the United States or otherwise be an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(collectively, "Eligible Institutions"). If the Letter of Transmittal is
signed by a person other than the registered holder of the Old Notes, the Old
Notes surrendered for exchange must either (i) be endorsed by the registered
holder, with the signature thereon guaranteed by an Eligible Institution, or
(ii) be accompanied by a bond power, in satisfactory form as determined by the
Company in its sole discretion, duly executed by the registered holder, with the
signature thereon guaranteed by an Eligible Institution. The term "registered
holder" as used herein with respect to the Old Notes means any person in whose
name the Old Notes are registered on the books of the Registrar.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Old Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
Old Notes not properly tendered and to reject any Old Notes the Company's
acceptance of which might, in the judgment of the Company or its counsel, be
unlawful. The Company also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to particular Old Notes
either before or after the Expiration Date (including the right to waive the
ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer
(including the Letter of Transmittal and the instructions thereto) by the
Company shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes for exchange must be
cured within such period of time as the Company shall determine. The Company
will use reasonable efforts to give notification of defects or irregularities
with respect to tenders of Old Notes for exchange but shall not incur any
liability for failure to give such notification. Tenders of the Old Notes will
not be deemed to have been made until such irregularities have been cured or
waived.
If any Letter of Transmittal, endorsement, bond power, power of attorney or
any other document required by the Letter of Transmittal is signed by a trustee,
executor, corporation or other person acting in a fiduciary or representative
capacity, such person should so indicate when signing, and, unless waived by the
Company, proper evidence satisfactory to the Company, in its sole discretion, of
such person's authority to so act must be submitted.
Any beneficial owner of the Old Notes (a "Beneficial Owner") whose Old
Notes are registered in the name of a nominee, such as a broker, dealer,
commercial bank or trust company, and who wishes to tender Old Notes in the
Exchange Offer should contact such registered holder promptly and instruct such
registered holder to tender on such Beneficial Owner's behalf. If such
Beneficial Owner wishes to tender directly, such Beneficial Owner must, prior to
completing and executing the Letter of Transmittal and tendering Old Notes, make
appropriate arrangements to register ownership of the Old Notes in such
Beneficial Owner's name. Beneficial Owners should be aware that the transfer of
registered ownership may take considerable time.
By tendering Old Notes for exchange, each registered holder will represent
to the Company that, among other things, (i) the New Notes to be received in
connection with the Exchange Offer by the Eligible Holder and each Beneficial
Owner of the Old Notes are being acquired by the Eligible Holder and each
Beneficial Owner in the ordinary course of business of the Eligible Holder and
each Beneficial Owner, (ii) the Eligible Holder and each Beneficial Owner are
not participating, do not intend to participate, and have no arrangement or
understanding with any person to participate, in the distribution of the New
Notes, (iii) the Eligible Holder and each Beneficial Owner acknowledge and agree
that any person participating in
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the Exchange Offer for the purpose of distributing the New Notes must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with a secondary resale transaction of the New Notes acquired by
such person and cannot rely on the position of the staff of the Commission
enunciated in MORGAN STANLEY & CO., INCORPORATED (available June 5, 1991) and
EXXON CAPITAL HOLDINGS CORPORATION (available May 13, 1988), and interpreted in
the Commission's letters to SHEARMAN & STERLING (available July 2, 1993) and
K-III COMMUNICATIONS CORPORATION (available May 14, 1993), and similar no-action
or interpretive letters issued to third parties, (iv) that if the Eligible
Holder or Beneficial Owner, as applicable, is a broker-dealer that acquired Old
Notes for its own account as a result of market making or other trading
activities, it will deliver a prospectus in connection with any resale of New
Notes acquired in the Exchange Offer, (v) the Eligible Holder and each
Beneficial Owner understand that a secondary resale transaction described in
clause (iii) above should be covered by an effective registration statement
containing the selling security holder information required by Item 507 of
Regulation S-K of the Commission, and (vi) neither the Eligible Holder nor any
Beneficial Owner is an "affiliate," as defined under Rule 405 of the
Securities Act, of the Company except as otherwise disclosed to the Company in
writing. In connection with a book-entry transfer, each participant will confirm
that it makes the representations and warranties contained in the Letter of
Transmittal.
GUARANTEED DELIVERY PROCEDURES. Eligible Holders who wish to tender their
Old Notes and (i) whose Old Notes are not immediately available or (ii) who
cannot deliver their Old Notes or any other documents required by the Letter of
Transmittal to the Exchange Agent prior to the Expiration Date (or complete the
procedure for book-entry transfer on a timely basis), may tender their Old Notes
according to the guaranteed delivery procedures set forth in the Letter of
Transmittal. Pursuant to such procedures: (i) such tender must be made by or
through an Eligible Institution and a Notice of Guaranteed Delivery (as defined
in the Letter of Transmittal) must be signed by such Eligible Holder, (ii) on or
prior to the Expiration Date, the Exchange Agent must have received from the
Eligible Holder and the Eligible Institution a properly completed and duly
executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand
delivery) setting forth the name and address of the Eligible Holder, the
certificate number or numbers of the tendered Old Notes, and the principal
amount of tendered Old Notes, stating that the tender is being made thereby and
guaranteeing that, within three (3) business days after the date of delivery of
the Notice of Guaranteed Delivery, the tendered Old Notes, a duly executed
Letter of Transmittal and any other required documents will be deposited by the
Eligible Institution with the Exchange Agent, and (iii) such properly completed
and executed documents required by the Letter of Transmittal and the tendered
Old Notes in proper form for transfer (or confirmation of a book-entry transfer
of such Old Notes into the Exchange Agent's account at DTC) must be received by
the Exchange Agent within three (3) business days after the Expiration Date. Any
Eligible Holder who wishes to tender Old Notes pursuant to the guaranteed
delivery procedures described above must ensure that the Exchange Agent receives
the Notice of Guaranteed Delivery and Letter of Transmittal relating to such Old
Notes prior to 5:00 p.m., New York City time, on the Expiration Date.
BOOK-ENTRY DELIVERY. The Exchange Agent will establish an account with
respect to the Old Notes at DTC (the "Book-Entry Transfer Facility") for
purposes of the Exchange Offer promptly after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of the Old Notes by causing such
facility to transfer Old Notes into the Exchange Agent's account in accordance
with such facility's procedure for such transfer. Even though delivery of Old
Notes may be effected through book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility, a properly completed and duly
executed Letter of Transmittal (or a manually signed facsimile thereof), with
any required signature guarantees, or an Agent's Message (as defined below) in
connection with a book-entry transfer, and other documents required by the
Letter of Transmittal, must, in any case, be transmitted to and received by the
Exchange Agent at one of its addresses set forth on the back cover of this
Prospectus before the Expiration Date, or the guaranteed delivery procedure set
forth above must be followed. Delivery of the Letter of Transmittal and any
other required documents to the Book-Entry Transfer Facility does not constitute
delivery to the Exchange Agent. The Term "Agent's Message" means a message
transmitted by the Book-Entry Transfer Facility to, and received by, the
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Exchange Agent and forming a part of a book-entry confirmation, which states
that such Book-Entry Transfer Facility has received an express acknowledgment
from the participant in such Book-Entry Transfer Facility tendering the Old
Notes that such participant has received and agrees to be bound by the terms of
the Letter of Transmittal and that the Company may enforce such agreement
against such participant.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all the conditions of the Exchange Offer,
the Company will accept any and all Old Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date.
The New Notes issued pursuant to the Exchange Offer will be delivered as soon as
practicable after acceptance of the Old Notes. For purposes of the Exchange
Offer, the Company shall be deemed to have accepted validly tendered Old Notes,
when, as, and if the Company has given oral or written notice thereof to the
Exchange Agent.
In all cases, issuances of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents (or of confirmation of a
book-entry transfer of such Old Notes into the Exchange Agent's account at DTC);
provided, however, that the Company reserves the absolute right to waive any
defects or irregularities in the tender or conditions of the Exchange Offer. If
any tendered Old Notes are not accepted for any reason, such unaccepted Old
Notes will be returned without expense to the tendering Eligible Holder thereof
as promptly as practicable after the expiration or termination of the Exchange
Offer.
WITHDRAWAL RIGHTS
Tenders of the Old Notes may be withdrawn by delivery of a written notice
to the Exchange Agent at one of its addresses set forth on the back cover page
of this Prospectus at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes, as applicable), (iii) be signed
by the Eligible Holder in the same manner as the original signature on the
Letter of Transmittal by which such Old Notes were tendered (including any
required signature guarantees) or be accompanied by a bond power in the name of
the person withdrawing the tender, in satisfactory form as determined by the
Company in its sole discretion, duly executed by the registered holder, with the
signature thereon guaranteed by an Eligible Institution together with the other
documents required by the Indenture upon transfer, and (iv) specify the name in
which such Old Notes are to be re-registered, if different from the Depositor,
pursuant to such documents of transfer. Any questions as to the validity, form
and eligibility (including time of receipt) of such notices will be determined
by the Company, in its sole discretion. The Old Notes so withdrawn will be
deemed not to have been validly tendered for exchange for purposes of the
Exchange Offer. Any Old Notes which have been tendered for exchange but which
are withdrawn will be returned to the Eligible Holder thereof without cost to
such Eligible Holder as soon as practicable after withdrawal. Properly withdrawn
Old Notes may be retendered by following one of the procedures described under
"--Procedures for Tendering Old Notes" at any time on or prior to the
Expiration Date.
THE EXCHANGE AGENT; ASSISTANCE
State Street Bank and Trust Company is the Exchange Agent. Questions and
requests for assistance and requests for additional copies of the Prospectus,
the Letter of Transmittal and other related documents should be directed to the
Exchange Agent. All tendered Old Notes, executed Letters of Transmittal and
other related documents also should be addressed to the Exchange Agent as
follows:
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IF BY MAIL
State Street Bank and Trust Company
Corporate Trust Department
P.O. Box 778
Boston, MA 02102
IF BY HAND: BOSTON
State Street Bank and Trust Company
Two International Place
Fourth Floor, Corporate Trust Window
Boston, MA 02110
IF BY FACSIMILE
Facsimile number: 617-664-5290
To confirm receipt: 617-664-5587
IF BY OVERNIGHT MAIL
State Street Bank and Trust Company
Corporate Trust Department
Two International Place, Fourth Floor
Boston, MA 02110
IF BY HAND: NEW YORK
State Street Bank and Trust Company
61 Broadway
15th Floor, Corporate Trust Window
New York, NY 10006
SOLICITATION OF TENDERS; FEES AND EXPENSES
No person has been authorized to give any information or to make any
representation in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will offers be
accepted from or on behalf of) holders of Old Notes in any jurisdiction in which
the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Company may, at its
discretion, take such action as it may deem necessary to make the Exchange Offer
in any such jurisdiction permissible and extend the Exchange Offer to holders of
Old Notes in such jurisdiction.
All expenses incident to the Company's consummation of the Exchange Offer
and compliance with the Registration Rights Agreement will be borne by the
Company, including, without limitation: (i) all registration and filing fees
(including, without limitation, fees and expenses of compliance with state
securities or Blue Sky laws), (ii) printing expenses (including, without
limitation, expenses of printing certificates for the New Notes in a form
eligible for deposit with DTC and of printing copies of this Prospectus), (iii)
messenger, telephone and delivery expenses, (iv) fees and disbursements of
counsel for the Company, (v) fees and disbursements of independent certified
public accountants, (vi) rating agency fees, (vii) internal expenses of the
Company (including, without limitation, all salaries and expenses of officers
and employees of the Company performing legal or accounting duties), and (ix)
fees and expenses incurred in connection with the listing, if any, of the New
Notes on a securities exchange.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptance of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss will be recognized by the Company for accounting
purposes. The expenses of the Exchange Offer will be amortized over the term of
the New Notes.
RESALES OF THE NEW NOTES
Based on positions of the staff of the Commission enunciated in MORGAN
STANLEY & CO., INCORPORATED (available June 5, 1991) and EXXON CAPITAL HOLDINGS
CORPORATION (available May 13, 1988), and interpreted in the Commission's
letters to SHEARMAN & STERLING (available July 2, 1993) and K-III COMMUNICATIONS
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CORPORATION (available May 14, 1993), and similar no-action or interpretive
letters issued to third parties, the Company believes that the New Notes issued
pursuant to the Exchange Offer to an Eligible Holder in exchange for Old Notes
may be offered for resale, resold and otherwise transferred by such Eligible
Holder (other than (i) a broker-dealer who purchased the Old Notes directly from
the Company for resale pursuant to Rule 144A under the Securities Act or any
other available exemption under the Securities Act, or (ii) a person that is an
affiliate of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that the Eligible Holder is acquiring
the New Notes in the ordinary course of business and is not participating, and
has no arrangement or understanding with any person to participate, in a
distribution of the New Notes. The Company has not requested or obtained an
interpretive letter from the Commission staff with respect to this Exchange
Offer, and the Company and the Eligible Holders are not entitled to rely on
interpretive advice provided by the staff to other persons, which advice was
based on the facts and conditions represented in such letters. However, the
Exchange Offer is being conducted in a manner intended to be consistent with the
facts and conditions represented in such letters. If any Eligible Holder
acquires New Notes in the Exchange Offer for the purpose of distributing or
participating in a distribution of the New Notes, such Eligible Holder cannot
rely on the position of the staff of the Commission set forth in the above
no-action and interpretive letters and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction, unless an exemption from registration is otherwise
available. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market making or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
The Company has agreed that for a period of 90 days after the effective date of
this Prospectus, it will make this Prospectus, as amended and supplemented,
available to any broker-dealer who receives New Notes in the Exchange Offer for
use in connection with any such resale. See "Plan of Distribution."
CONSEQUENCE OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the offer or sale of the Old Notes pursuant to an exemption from,
or in a transaction not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable states securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. See "Risk Factors--Consequences of Failure to Exchange."
OTHER
Participation in the Exchange Offer is voluntary, and holders of Old Notes
should carefully consider whether to participate. Holders of the Old Notes are
urged to consult their financial and tax advisers in making their own decisions
on what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of, this Exchange Offer, the
Company will have fulfilled a covenant contained in the Registration Rights
Agreement. Holders of Old Notes who do not tender their Old Notes in the
Exchange Offer will continue to hold such Old Notes and will be entitled to all
the rights and limitations applicable thereto, except for any such rights under
the Registration Rights Agreement that by their terms terminate or cease to have
further effectiveness as a result of the making of this Exchange Offer. See
"Description of New Notes." All untendered Old Notes will continue to be
subject to the restrictions on transfer set forth in the Indenture. To the
extent that Old Notes are tendered and accepted in the Exchange Offer, the
trading market for untendered Old Notes could be adversely affected.
The Company may in the future seek to acquire untendered Old Notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. The Company has no present plan to acquire any Old Notes which are
not tendered in the Exchange Offer.
53
<PAGE>
OVERVIEW AND STRUCTURE OF THE TRANSACTION
SUMMARY OF STRUCTURE AND STRUCTURING ASSUMPTIONS
The Timber Notes have been structured based upon certain assumptions (the
"Structuring Assumptions") regarding, among other things, harvest levels,
timber prices, related yield taxes, operating expenses and capital expenditures.
STRUCTURING CASH FLOWS
In order to determine the initial aggregate principal amount of Timber
Notes and the amount and timing of payments which should be able to be supported
by the Company's cash flows attributable to the harvesting of the Company
Timber, the Company initially prepared a schedule of Company Timber which it
believed it could reasonably expect to harvest and sell during an approximately
30 year period, commencing in July 1998 (the "Initial Harvest Schedule"). The
Initial Harvest Schedule assumes that the Headwaters Agreement and the Combined
Plan will be implemented in July 1998, pursuant to which, among other things:
(i) the 7,700 acres of the Elk River Timberlands would be acquired by the
Company, (ii) the Company would be prohibited or restricted from harvesting on
approximately 34,600 acres of timberlands to serve as habitat conservation areas
and streamside buffers, (iii) the Company would harvest in accordance with the
SYP, which results in an initial annual harvest level approximately 10% less
than the Company's average timber harvest over the past three years and (iv) the
Company would be permitted to harvest certain acreage of old growth timber which
it was previously prevented from harvesting. The Initial Harvest Schedule also
assumes that the Company Timberlands will include Additional Timber Properties
which the Company expects to acquire over the next several years by utilizing
the amount deposited in the Prefunding Account. Based upon the above, certain
additional assumptions were made as to harvest levels in any given year during
the 30-year period.
The Combined Plan contemplates the harvesting over time of either the Owl
Creek grove owned by the Company or the Grizzly Creek grove owned by Pacific
Lumber. The Initial Harvest Schedule assumed that the Owl Creek grove would be
harvested over time; however, a provision in the California Headwaters Bill
designates the Owl Creek grove as a conservation area for the marbled murrelet,
which would have the effect of restricting the activities which could be
conducted in the grove to only management activities not detrimental to the
marbled murrelet. The California Headwaters Bill also appropriates up to $80
million toward the acquisition at fair market value of the Owl Creek grove. The
bill also provides that if any portion of the $80 million remains after purchase
of the Owl Creek grove, it may be used to purchase certain other timberlands.
See "Risk Factors--Factors Affecting Actual Amortization."
For purposes of producing the Structuring Cash Flows (as defined herein)
which were used to derive the Minimum Principal Amortization, the amount of
timber on the Initial Harvest Schedule was reduced by 10% over and above the net
reductions from current harvest levels described above, to produce a
hypothetical schedule of Company Timber to be harvested, as set forth in the
Structuring Schedule Assumptions and in column B of the Structuring Schedule
included in Annex 1 to this Prospectus. The sum of the annual harvest levels
resulting from such further reduction is called the "Structured Harvest
Quantity," which equals 3,397,345 Mbfe. The prices related to the sale of
harvested logs were derived from the June 1998 SBE Prices (the SBE Prices
applicable to the six month period ended June 30, 1998), which were initially
reduced by approximately 25% (on an effective basis) and then escalated at a
rate of 3 1/2% per year, commencing January 1, 1999, to produce a hypothetical
schedule of timber prices. These harvest and price schedules were combined,
together with certain assumptions regarding the yield tax rate and commitment
fees under the Line of Credit Agreement (the rates in effect as of July 9, 1998
with no escalations) and other operating and capital expenses (adjusted each
decade to reflect changes in assumed harvest levels between decades and
escalated at a rate of 5% per year, commencing January 1, 1999) to produce a
hypothetical schedule of cash flows (the "Structuring Cash Flows")
attributable to the Company Timber.
The Structuring Cash Flows were used to compute the amount of each Class of
Timber Notes to be issued and to establish a hypothetical amortization schedule
for all Classes of the Timber Notes. The Structuring Cash Flows, discounted
monthly at an effective semiannual rate that reflects the assumed applicable
Note Rate for each Class of Timber Notes, produced an amount of $867.2 million.
That amount is equal to the aggregate principal amount of the Old Notes issued
in the Offering. The principal payments on the amortization schedule resulting
from the Structuring Cash Flows were used to produce the "Minimum Principal
Amortization Schedule" for each Class of Timber Notes. Minimum Principal
Amortization is the cumulative minimum amount of principal which the Company is
required to pay to the holders of each Class of Timber Notes on or before each
Note Payment Date to the extent that funds on
54
<PAGE>
deposit in the Payment Account are available therefor. THE RATING OF EACH CLASS
OF TIMBER NOTES BY THE RATING AGENCIES RELATES ONLY TO THE PAYMENT OF INTEREST
WHEN DUE AND THE ULTIMATE PAYMENT OF PRINCIPAL NO LATER THAN THE FINAL MATURITY
DATE AND NOT TO THE PAYMENT OF PRINCIPAL AT ANY FASTER RATE (INCLUDING MINIMUM
PRINCIPAL AMORTIZATION OR SCHEDULED AMORTIZATION) OR THE PAYMENT OF PREMIUMS OR
ANY INTEREST ON PREMIUMS.
The 10% reduction from the Initial Harvest Schedule, the approximate 25%
reduction (on an effective basis) from the June 1998 SBE Prices and the 5%
escalation of operating and capital expenses, as assumptions for purposes of
generating the Structuring Cash Flows, are intended to reflect conservatism in
structuring the transaction. If lower percentage reductions in harvest levels
and prices, and a lower percentage escalation of expenses, had been used for
purposes of the Structuring Cash Flows, the resultant hypothetical schedule of
cash flows, the principal amount of Old Notes issued in the Offering and the
cash flows necessary to service the Timber Notes would have been greater.
The assumptions made in the Structuring Cash Flows were made solely for
purposes of generating the Structuring Cash Flows and structuring the
transaction. Accordingly, they have not been updated subsequent to the sale of
the Old Notes.
SCHEDULED AMORTIZATION
It is anticipated that the Company Timber will be harvested and sold at a
faster rate than the assumptions related thereto in the Structuring Cash Flows
and that each Class of Timber Notes will be repaid more rapidly than the
amortization schedule set forth in the related Minimum Principal Amortization
Schedule. Accordingly, a "Scheduled Amortization Schedule" was developed for
each Class of Timber Notes to reflect the amount of principal, if any, on each
Class of Timber Notes which the Company must pay on a cumulative basis through
each Note Payment Date to avoid the payment of Prepayment or Deficiency Premiums
(as described below) to the holders of such Class. In the case of the Class A-3
Timber Notes, the Scheduled Amortization Schedule does not include any payments
of principal prior to (or after) the Scheduled Maturity Date, but instead
consists of a single principal payment. In order to produce the Scheduled
Amortization Schedules, the annual harvest level of Company Timber as reflected
in the Initial Harvest Schedule was modified to reflect the implementation of
the Headwaters Agreement in 1999 (as so modified, the "Scheduled Harvest
Schedule") and was combined with a hypothetical schedule of timber prices
derived from the June 1998 SBE Prices (escalated at a rate of 3 1/2% per year,
commencing January 1, 1999), and assumptions regarding the yield tax rate and
commitment fees under the Line of Credit Agreement (the rates in effect as of
July 9, 1998 with no escalations) and other operating and capital expenses
(adjusted each decade to reflect changes in assumed harvest levels and escalated
at a rate of 3 1/2% per year, commencing January 1, 1999). The Scheduled
Amortization Schedule did not assume the sale to the state of California of the
Owl Creek grove or any other Company Timberlands (see "Risk Factors--Factors
Affecting Actual Amortization") or the designation of the Owl Creek grove as a
marbled murrelet conservation area (see "Business of the Company--Regulatory
and Environmental Matters--The Combined Plan and California Headwaters Bill" and
"-Endangered and Threatened Species--Marbled Murrelet"). The maturity date of
the Class A-1, Class A-2 and Class A-3 Timber Notes reflected on the related
Scheduled Amortization Schedules (each, a "Scheduled Maturity Date") occurs 21
1/2, 14 1/2 and 14 1/2 years, respectively, prior to the Final Maturity Date of
the Timber Notes.
COLLATERALIZATION
The inventory of the Company Timber equals approximately 3.0 million Mbfe
of timber (approximately 3.2 million Mbfe, including the Elk River Timberlands)
by volume and is comprised of primarily young growth and old growth redwood and
Douglas-fir timber. In addition, substantial quantities of sub-merchantable
trees exist on the Company Timberlands which are not yet mature and have not
been included in the inventory of the Company Timber. Under the SYP, the Company
estimates that its inventory at the Scheduled Maturity Date of the Class A-3
Timber Notes, assuming the harvest associated with the Initial Harvest Schedule
and after taking into account growth and other factors, would be approximately
2.3 million Mbfe. In order to take account of the relative values of the species
and categories of timber included in the Company Timber, the Mbfe concept was
developed for use in structuring the Original Timber Notes and was again used in
connection with the Timber Notes. Under the Mbfe concept, one thousand board
feet, net Scribner scale, of old growth redwood timber equates to one Mbfe. One
thousand board feet, net
55
<PAGE>
Scribner scale, of each other species and category of timber included in the
Company Timber was assigned a value in Mbfe equal to a fraction of an Mbfe. This
fraction was generally determined by dividing the June 1998 SBE Price applicable
to such species and category by the June 1998 SBE Price applicable to old growth
redwood. The following chart summarizes historical harvest levels of the Company
and other data with respect to the Company Timber:
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Company Timber Harvest (in thousands of
Mbfe)................................... 182.3 182.5 187.5
Average SBE Price per Mbfe.............. $ 693 $ 740 $ 690
Yield Tax Rate.......................... 2.90% 2.90% 2.90%
THE ASSUMPTIONS DESCRIBED ABOVE DO NOT PURPORT TO BE INDICATIVE OF FUTURE
EVENTS, AND ACTUAL PRICES AND SALES OF TIMBER, YIELD TAXES AND OTHER EXPENSES
WILL LIKELY DIFFER FROM THOSE DESCRIBED ABOVE. ACCORDINGLY, NO REPRESENTATION
CAN BE MADE AS TO THE LIKELIHOOD OF SUCH ASSUMPTIONS ACTUALLY OCCURRING, OR AS
TO THE ACTUAL AMORTIZATION OF THE TIMBER NOTES. SEE "--PAYMENTS ON THE TIMBER
NOTES" AND "RISK FACTORS--FACTORS AFFECTING PAYMENTS ON THE TIMBER NOTES."
PAYMENTS ON THE TIMBER NOTES
GENERAL
The Timber Notes, which represent senior secured debt of the Company, have
Scheduled Maturity Dates, Minimum Principal Maturity Dates and Final Maturity
Dates as follows:
<TABLE>
<CAPTION>
SCHEDULED MINIMUM PRINCIPAL FINAL
MATURITY DATE MATURITY DATE MATURITY DATE
----------------- ----------------- --------------
<S> <C> <C> <C>
Class A-1............................ January 20, 2007 January 20, 2010 July 20, 2028
Class A-2............................ January 20, 2014 July 20, 2017 July 20, 2028
Class A-3............................ January 20, 2014 July 20, 2028 July 20, 2028
</TABLE>
Principal on the Class or Classes of Timber Notes then entitled thereto and
interest on the Timber Notes will be paid on a semiannual basis, generally out
of the Company's cash flow from the Company Timber. See "Description of the
Timber Notes--Principal; Interest; Premium--Interest;" and "--Principal."
ACTUAL TIMBER NOTE AMORTIZATION
The Company must, to the extent of funds on deposit in the Payment Account
available therefor, make cumulative principal payments on the aggregate
principal amount of the Timber Notes in an amount at least equal to the
cumulative Minimum Principal Amortization. Depending upon the actual harvest,
the Company must make certain additional principal payments on the Timber Notes
(to the extent that cash is available therefor in the Payment Account) on each
Note Payment Date. The aggregate principal payments required to be made on the
Timber Notes in excess of the sum of the Minimum Principal Amortization Amounts
(as defined below) for all Classes of Timber Notes for any Note Payment Date are
referred to as the "Depletion Amortization Amount."
The Timber Notes are generally structured to link, to the extent of cash
available, the deemed depletion of the Company Timber (through the harvest and
sale of logs) to required amortization of the Timber Notes in the aggregate. The
actual required amount of such aggregate amortization on any Note Payment Date
is determined by various mathematical formulas set forth in the Indenture, which
are based primarily upon a concept termed the "Deemed Collateral Value." The
Deemed Collateral Value is intended to represent, under certain assumptions, the
present value of cash flows associated with the Company Timber which is deemed
to remain at particular times during the term of the Timber Notes. The purpose
of the Deemed Collateral Value concept and the related calculations is to
maintain a prescribed relationship between the amount of Company Timber deemed
to remain and the principal balance of the Timber Notes. DEEMED COLLATERAL VALUE
DOES NOT REPRESENT, AND IS NOT INTENDED TO REFLECT, THE ACTUAL VALUE OF THE
COMPANY TIMBER AT ANY TIME.
56
<PAGE>
The total amount of principal required to be paid (to the extent of
available cash) on deposit in the Payment Account on any Note Payment Date in
respect of the aggregate principal amount of the Timber Notes will generally be
the amount by which a calculation of the present value of the "fixed
liabilities" associated with the Company Timber (i.e., the aggregate principal
amount of the Timber Notes then outstanding plus the present value of certain
future operating expenses (the "Discounted Servicing Obligation") as assumed
in the Structuring Cash Flows) then exceeds the Total Collateral Value. The
"Total Collateral Value" is the lesser of (A) the "Structuring Collateral
Value" and (B) the "Deemed Collateral Value." The Structuring Collateral
Value is a pre-determined value set forth in Annex 1 (the "Structuring
Schedule"), which decreases each month, based on a present value calculation
utilizing the same assumptions as the Structuring Cash Flows (i.e. those
associated with the Minimum Principal Amortization Schedules). The Deemed
Collateral Value is equal to the product (in dollars) of the "Deemed Remaining
Harvest Quantity" and the "Collateral Value Factor." The Deemed Remaining
Harvest Quantity, in turn, is equal to the excess of the Structured Harvest
Quantity over the aggregate amount of Company Timber that has been (or is deemed
to have been) harvested and sold during the period from July 20, 1998 through
the end of the previous month. The Collateral Value Factor for each month-end is
set forth in the Structuring Schedule in Annex 1. If, as a result of the amount
of logs actually (or deemed to have been) harvested and sold through the end of
any month, the reduction in the Deemed Remaining Harvest Quantity is faster than
that associated with the Minimum Principal Amortization through such month, the
Total Collateral Value would be determined by the Deemed Collateral Value
calculation described above, which, subject to available cash, would produce
amortization faster than shown in the Minimum Principal Amortization Schedules.
DEEMED REMAINING HARVEST QUANTITY DOES NOT REPRESENT, AND IS NOT INTENDED TO
REFLECT, THE ACTUAL AMOUNT OF COMPANY TIMBER AT ANY POINT IN TIME.
The issuance of Additional Timber Notes is likely to require modifications
to the above-described computations, although no such modification may reduce
(though it may increase) the Minimum Principal Amortization Amount as of any
Note Payment Date for any Class of Timber Notes or affect the Scheduled
Amortization Schedules, among other limitations on such issuance. See
"Description of the Timber Notes--Additional Timber Notes."
Set forth on the following pages are the Minimum Principal Amortization
Schedules and the Scheduled Amortization Schedules with respect to each Class of
Timber Notes. Because principal on the Class A-3 Timber Notes is scheduled to be
paid in a single payment on January 20, 2014, the Class A-3 Timber Notes have no
Minimum Principal Amortization or Scheduled Amortization before that date.
The hypothetical harvest level associated with Minimum Principal
Amortization reflects 90% of the Initial Harvest Schedule. However, an
indeterminable number of harvest scenarios could result in the Timber Notes
being amortized at a rate approximately equal to that shown on the Minimum
Principal Amortization Schedules, subject to available cash.
The Scheduled Maturity Date of the Class A-3 Timber Notes will be January
20, 2014. Under the related Scheduled Amortization Schedule, 100% of the
original principal amount of the Class A-3 Timber Notes would be outstanding
immediately before that date. In order to fund the repayment of the Class A-3
Timber Notes on or prior to their Scheduled Maturity Date, the Company intends
to refinance the Class A-3 Timber Notes. There can be no assurance, however,
that refinancing will be available to the Company at such time on favorable
terms. If the Class A-3 Timber Notes are not repaid by their Scheduled Maturity
Date, a Cash Retention Event will occur, upon which 75% of any Excess Funds will
be required to be deposited in the Payment Account. In addition, Deficiency
Premiums at the rate of 1.50% per annum will be payable on the outstanding
principal amount of Class A-3 Timber Notes after their Scheduled Maturity Date.
However, any failure to pay the Class A-3 Timber Notes by their Scheduled
Maturity Date will not result in an Event of Default. An Event of Default will
occur as a result of failure to pay principal on the Timber Notes only if
principal is not paid on or prior to the Final Maturity Date or if amounts
available therefor in the Payment Account are not used to make required payments
on the Timber Notes.
57
<PAGE>
MINIMUM PRINCIPAL AMORTIZATION AND SCHEDULED AMORTIZATION SCHEDULES
<TABLE>
<CAPTION>
CLASS A-1 TIMBER NOTES
------------------------------------------------------------------------------------
(in thousands) MINIMUM PRINCIPAL
AMORTIZATION SCHEDULED AMORTIZATION
----------------------------------------- -----------------------------------------
Note Principal Principal Principal Principal
Payment Date Year Payment Balance Payment Balance
- ---------------------------- -------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
Initial 0.0 ---- $160,700 ---- $160,700
January 20, 1999 0.5 $415 160,285 $5,360 155,340
July 20, 1999 1.0 448 159,837 2,825 152,515
January 20, 2000 1.5 10,047 149,790 12,950 139,565
July 20, 2000 2.0 411 149,379 2,915 136,650
January 20, 2001 2.5 9,996 139,383 13,114 123,537
July 20, 2001 3.0 480 138,903 3,213 120,324
January 20, 2002 3.5 10,087 128,816 13,448 106,875
July 20, 2002 4.0 703 128,113 3,693 103,182
January 20, 2003 4.5 10,378 117,735 14,015 89,167
July 20, 2003 5.0 2,062 115,672 5,306 83,861
January 20, 2004 5.5 12,121 103,552 16,013 67,847
July 20, 2004 6.0 2,649 100,902 6,193 61,654
January 20, 2005 6.5 12,856 88,046 17,066 44,588
July 20, 2005 7.0 4,182 83,864 8,015 36,573
January 20, 2006 7.5 14,794 69,071 19,291 17,282
July 20, 2006 8.0 5,857 63,213 9,988 7,294
January 20, 2007 8.5 16,892 46,321 7,294 0
July 20, 2007 9.0 7,688 38,633 0 0
January 20, 2008 9.5 19,163 19,469 0 0
July 20, 2008 10.0 1,572 17,898 0 0
January 20, 2009 10.5 11,087 6,810 0 0
July 20, 2009 11.0 2,858 3,952 0 0
January 20, 2010 11.5 3,952 0 0 0
July 20, 2010 12.0 0 0 0 0
January 20, 2011 12.5 0 0 0 0
July 20, 2011 13.0 0 0 0 0
January 20, 2012 13.5 0 0 0 0
July 20, 2012 14.0 0 0 0 0
January 20, 2013 14.5 0 0 0 0
July 20, 2013 15.0 0 0 0 0
January 20, 2014 15.5 0 0 0 0
July 20, 2014 16.0 0 0 0 0
January 20, 2015 16.5 0 0 0 0
July 20, 2015 17.0 0 0 0 0
January 20, 2016 17.5 0 0 0 0
July 20, 2016 18.0 0 0 0 0
January 20, 2017 18.5 0 0 0 0
July 20, 2017 19.0 0 0 0 0
January 20, 2018 19.5 0 0 0 0
July 20, 2018 20.0 0 0 0 0
<CAPTION>
CLASS A-2 TIMBER NOTES
------------------------------------------------------------------------------------
(in thousands) MINIMUM PRINCIPAL
AMORTIZATION SCHEDULED AMORTIZATION
----------------------------------------- -----------------------------------------
Note Principal Principal Principal Principal
Payment Date Year Payment Balance Payment Balance
- ---------------------------- -------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
Initial 0.0 ---- $243,200 ---- $243,200
January 20, 1999 0.5 $0 243,200 $0 243,200
July 20, 1999 1.0 0 243,200 0 243,200
January 20, 2000 1.5 0 243,200 0 243,200
July 20, 2000 2.0 0 243,200 0 243,200
January 20, 2001 2.5 0 243,200 0 243,200
July 20, 2001 3.0 0 243,200 0 243,200
January 20, 2002 3.5 0 243,200 0 243,200
July 20, 2002 4.0 0 243,200 0 243,200
January 20, 2003 4.5 0 243,200 0 243,200
July 20, 2003 5.0 0 243,200 0 243,200
January 20, 2004 5.5 0 243,200 0 243,200
July 20, 2004 6.0 0 243,200 0 243,200
January 20, 2005 6.5 0 243,200 0 243,200
July 20, 2005 7.0 0 243,200 0 243,200
January 20, 2006 7.5 0 243,200 0 243,200
July 20, 2006 8.0 0 243,200 0 243,200
January 20, 2007 8.5 0 243,200 14,383 228,817
July 20, 2007 9.0 0 243,200 12,120 216,696
January 20, 2008 9.5 0 243,200 24,231 192,466
July 20, 2008 10.0 0 243,200 5,975 186,490
January 20, 2009 10.5 0 243,200 16,051 170,439
July 20, 2009 11.0 0 243,200 7,622 162,817
January 20, 2010 11.5 8,826 234,374 18,099 144,717
July 20, 2010 12.0 4,287 230,087 9,430 135,287
January 20, 2011 12.5 14,626 215,460 20,317 114,971
July 20, 2011 13.0 5,880 209,580 11,416 103,555
January 20, 2012 13.5 16,633 192,947 22,701 80,854
July 20, 2012 14.0 7,626 185,321 13,569 67,285
January 20, 2013 14.5 18,811 166,510 25,258 42,028
July 20, 2013 15.0 9,537 156,973 15,893 26,134
January 20, 2014 15.5 21,173 135,800 26,134 0
July 20, 2014 16.0 11,625 124,175 0 0
January 20, 2015 16.5 23,733 100,442 0 0
July 20, 2015 17.0 13,905 86,536 0 0
January 20, 2016 17.5 26,505 60,032 0 0
July 20, 2016 18.0 16,392 43,639 0 0
January 20, 2017 18.5 29,505 14,134 0 0
July 20, 2017 19.0 14,134 0 0 0
January 20, 2018 19.5 0 0 0 0
July 20, 2018 20.0 0 0 0 0
<CAPTION>
CLASS A-3 TIMBER NOTES
------------------------------------------------------------------------------------
(in thousands) MINIMUM PRINCIPAL
AMORTIZATION SCHEDULED AMORTIZATION
----------------------------------------- -----------------------------------------
Note Principal Principal Principal Principal
Payment Date Year Payment Balance Payment Balance
- ---------------------------- -------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
Initial 0.0 ---- $463,348 ---- $463,348
January 20, 1999 0.5 $0 463,348 $0 463,348
July 20, 1999 1.0 0 463,348 0 463,348
January 20, 2000 1.5 0 463,348 0 463,348
July 20, 2000 2.0 0 463,348 0 463,348
January 20, 2001 2.5 0 463,348 0 463,348
July 20, 2001 3.0 0 463,348 0 463,348
January 20, 2002 3.5 0 463,348 0 463,348
July 20, 2002 4.0 0 463,348 0 463,348
January 20, 2003 4.5 0 463,348 0 463,348
July 20, 2003 5.0 0 463,348 0 463,348
January 20, 2004 5.5 0 463,348 0 463,348
July 20, 2004 6.0 0 463,348 0 463,348
January 20, 2005 6.5 0 463,348 0 463,348
July 20, 2005 7.0 0 463,348 0 463,348
January 20, 2006 7.5 0 463,348 0 463,348
July 20, 2006 8.0 0 463,348 0 463,348
January 20, 2007 8.5 0 463,348 0 463,348
July 20, 2007 9.0 0 463,348 0 463,348
January 20, 2008 9.5 0 463,348 0 463,348
July 20, 2008 10.0 0 463,348 0 463,348
January 20, 2009 10.5 0 463,348 0 463,348
July 20, 2009 11.0 0 463,348 0 463,348
January 20, 2010 11.5 0 463,348 0 463,348
July 20, 2010 12.0 0 463,348 0 463,348
January 20, 2011 12.5 0 463,348 0 463,348
July 20, 2011 13.0 0 463,348 0 463,348
January 20, 2012 13.5 0 463,348 0 463,348
July 20, 2012 14.0 0 463,348 0 463,348
January 20, 2013 14.5 0 463,348 0 463,348
July 20, 2013 15.0 0 463,348 0 463,348
January 20, 2014 15.5 0 463,348 463,348 0
July 20, 2014 16.0 0 463,348 0 0
January 20, 2015 16.5 0 463,348 0 0
July 20, 2015 17.0 0 463,348 0 0
January 20, 2016 17.5 0 463,348 0 0
July 20, 2016 18.0 0 463,348 0 0
January 20, 2017 18.5 0 463,348 0 0
July 20, 2017 19.0 4,966 458,382 0 0
January 20, 2018 19.5 32,870 425,512 0 0
July 20, 2018 20.0 6,089 419,423 0 0
</TABLE>
(continued)
58
<PAGE>
MINIMUM PRINCIPAL AMORTIZATION AND SCHEDULED AMORTIZATION SCHEDULES
<TABLE>
<CAPTION>
CLASS A-1 TIMBER NOTES
------------------------------------------------------------------------------------
(in thousands) MINIMUM PRINCIPAL
AMORTIZATION SCHEDULED AMORTIZATION
----------------------------------------- -----------------------------------------
Note Principal Principal Principal Principal
Payment Date Year Payment Balance Payment Balance
- ---------------------------- -------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
January 20, 2019 20.5 0 0 0 0
July 20, 2019 21.0 0 0 0 0
January 20, 2020 21.5 0 0 0 0
July 20, 2020 22.0 0 0 0 0
January 20, 2021 22.5 0 0 0 0
July 20, 2021 23.0 0 0 0 0
January 20, 2022 23.5 0 0 0 0
July 20, 2022 24.0 0 0 0 0
January 20, 2023 24.5 0 0 0 0
July 20, 2023 25.0 0 0 0 0
January 20, 2024 25.5 0 0 0 0
July 20, 2024 26.0 0 0 0 0
January 20, 2025 26.5 0 0 0 0
July 20, 2025 27.0 0 0 0 0
January 20, 2026 27.5 0 0 0 0
July 20, 2026 28.0 0 0 0 0
January 20, 2027 28.5 0 0 0 0
July 20, 2027 29.0 0 0 0 0
January 20, 2028 29.5 0 0 0 0
July 20, 2028 30.0 0 0 0 0
------------------- -------------------
Total $160,700 $160,700
=================== ===================
Weighted Average Life 6.8 Years 5.0 Years
=================== ===================
<CAPTION>
CLASS A-2 TIMBER NOTES
------------------------------------------------------------------------------------
(in thousands) MINIMUM PRINCIPAL
AMORTIZATION SCHEDULED AMORTIZATION
----------------------------------------- -----------------------------------------
Note Principal Principal Principal Principal
Payment Date Year Payment Balance Payment Balance
- ---------------------------- -------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
January 20, 2019 20.5 0 0 0 0
July 20, 2019 21.0 0 0 0 0
January 20, 2020 21.5 0 0 0 0
July 20, 2020 22.0 0 0 0 0
January 20, 2021 22.5 0 0 0 0
July 20, 2021 23.0 0 0 0 0
January 20, 2022 23.5 0 0 0 0
July 20, 2022 24.0 0 0 0 0
January 20, 2023 24.5 0 0 0 0
July 20, 2023 25.0 0 0 0 0
January 20, 2024 25.5 0 0 0 0
July 20, 2024 26.0 0 0 0 0
January 20, 2025 26.5 0 0 0 0
July 20, 2025 27.0 0 0 0 0
January 20, 2026 27.5 0 0 0 0
July 20, 2026 28.0 0 0 0 0
January 20, 2027 28.5 0 0 0 0
July 20, 2027 29.0 0 0 0 0
January 20, 2028 29.5 0 0 0 0
July 20, 2028 30.0 0 0 0 0
------------------- -------------------
Total $243,200 $243,200
=================== ===================
Weighted Average Life 15.9 Years 12.4 Years
=================== ===================
<CAPTION>
CLASS A-3 TIMBER NOTES
------------------------------------------------------------------------------------
(in thousands) MINIMUM PRINCIPAL
AMORTIZATION SCHEDULED AMORTIZATION
----------------------------------------- -----------------------------------------
Note Principal Principal Principal Principal
Payment Date Year Payment Balance Payment Balance
- ---------------------------- -------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
January 20, 2019 20.5 15,292 404,131 0 0
July 20, 2019 21.0 7,508 396,624 0 0
January 20, 2020 21.5 17,080 379,544 0 0
July 20, 2020 22.0 9,061 370,483 0 0
January 20, 2021 22.5 19,020 351,463 0 0
July 20, 2021 23.0 10,759 340,703 0 0
January 20, 2022 23.5 21,123 319,581 0 0
July 20, 2022 24.0 12,616 306,965 0 0
January 20, 2023 24.5 23,401 283,564 0 0
July 20, 2023 25.0 14,642 268,922 0 0
January 20, 2024 25.5 25,869 243,053 0 0
July 20, 2024 26.0 16,853 226,201 0 0
January 20, 2025 26.5 28,540 197,661 0 0
July 20, 2025 27.0 19,262 178,399 0 0
January 20, 2026 27.5 31,431 146,969 0 0
July 20, 2026 28.0 21,885 125,084 0 0
January 20, 2027 28.5 34,558 90,526 0 0
July 20, 2027 29.0 24,740 65,785 0 0
January 20, 2028 29.5 37,940 27,845 0 0
July 20, 2028 30.0 27,845 0 0 0
------------------- -------------------
Total $463,348 $463,348
=================== ===================
Weighted Average Life 25.5 Years 15.5 Years
=================== ===================
</TABLE>
59
<PAGE>
PREMIUMS
Premiums will be payable on any Class of Timber Notes that is repaid more
rapidly or more slowly than the payments contemplated by the Scheduled
Amortization Schedule for such Class of Timber Notes. If the Company makes a
principal payment on a Class of Timber Notes on any date and the amount of such
principal payment, plus the sum of all amounts of principal previously paid on
such Class, exceeds the cumulative Scheduled Amortization for such Class of
Timber Notes through such date in the related Scheduled Amortization Schedule,
the Company will pay a Prepayment Premium. The amount of the Prepayment Premium
will be calculated based upon the yield, as described herein, of like-term
Treasury securities plus 0.50% per annum applied to the amount of the Excess
Payment. If the amount of a principal payment on a Class of Timber Notes on any
Note Payment Date, plus the sum of all amounts of principal previously paid on
such Class, is less than the cumulative Scheduled Amortization for such Class of
Timber Notes through such date in the related Scheduled Amortization Schedule,
the Company will, on the next Note Payment Date, owe a Deficiency Premium on
such late payment at a rate equal to 1.50% per annum.
In the event of a Registration Default, a Non-Registration Premium of 0.50%
per annum will be due on each Note Payment Date, with respect to all Timber
Notes with respect to which a Registration Default is continuing, until all
Registration Defaults have been cured. See "The Exchange Offer."
The Indenture requires that there be reserved on Monthly Deposit Dates
amounts equal to a portion of the estimated Premiums to be paid on the next
succeeding Note Payment Date. However, in the event that current operating cash
flow (less payments in connection with the Line of Credit Agreement (other than
Additional Liquidity Provider Fees and Supplemental Liquidity Provider
Interest), and required principal and interest payments on the Timber Notes and
any Additional Timber Notes) is not sufficient to provide for the payment of
such Premiums, the obligation to pay such Premiums, with interest, will be
carried over to subsequent Note Payment Dates. Except for payments for operating
expenses and capital expenditures, no cash flow of the Company from the
harvesting of Company Timber will be released to the Company free and clear of
the Lien of the Deed of Trust during any time that the payment of such Premium
has been deferred and not provided for by a deposit into the Payment Account.
Payment of any Premium will, in effect, be subordinate to payment of such
operating expenses, capital expenditures, amounts then due (other than
Additional Liquidity Provider Fees and Supplemental Liquidity Provider
Interest), if any, to the Liquidity Providers, and principal and interest on the
Timber Notes and any Additional Timber Notes.
THE RATING OF THE TIMBER NOTES RELATES ONLY TO THE TIMELY PAYMENT OF INTEREST
(EXCLUDING INTEREST ON PREMIUMS) AND THE PAYMENT OF PRINCIPAL NO LATER THAN THE
FINAL MATURITY DATE AND NOT TO THE PAYMENT OF ANY MINIMUM PRINCIPAL AMORTIZATION
OR DEPLETION AMORTIZATION AMOUNT, PREMIUMS OR INTEREST ON PREMIUMS.
FUNDING OF TIMBER NOTE PAYMENTS; CASH RELEASE MECHANISM
Revenues from the sale of the Company's logs or timber from the Company
Timber is deposited directly into the Collection Account maintained with the
Trustee. Pursuant to the Indenture, the Expense Reserve is replenished on each
Monthly Deposit Date, and the Company is authorized to make disbursements from
the Collection Account and the Expense Reserve for, among other things, certain
capital expenditures and operating expenses, including taxes, the Services Fee
and other payments under the New Services Agreement, the Trustee's and
Collateral Agent's fees and expenses (to the extent, in certain cases, of the
balance of the Expense Reserve) and to make certain payments to the Liquidity
Providers. Amounts to be utilized for payments on the Timber Notes generally
will be withdrawn from the Collection Account on each Monthly Deposit Date,
deposited into the Payment Account, and (if the Monthly Deposit Date is not also
a Note Payment Date) invested in Eligible Investments (as defined below) until
the next Note Payment Date. The amount to be transferred from the Collection
Account to the Payment Account on each Monthly Deposit Date will (to the extent
of available cash) be calculated so that the amount in the Payment Account will
be sufficient to pay (i) all accrued interest, Deficiency Premiums and
Non-Registration Premiums, if any, on the Timber Notes and any Additional Timber
Notes to the Monthly Deposit Date and
60
<PAGE>
(ii) an appropriate portion of principal amortization and Prepayment Premiums,
if any, expected to be payable on the Timber Notes, and an appropriate portion
of any amounts expected to be payable to the Liquidity Providers, on the next
Note Payment Date (or, if such Monthly Deposit Date is also a Note Payment Date,
on such Note Payment Date). Amounts remaining in the Collection Account on a
Monthly Deposit Date after the required transfer of funds into the Payment
Account and any required transfers to the Expense Reserve may, unless a Trapping
Event or a Cash Retention Event has occurred and is continuing (and after
payment of any Additional Liquidity Fees and Supplemental Liquidity Provider
Interest that may be payable under the Line of Credit Agreement), be released to
the Company free and clear of the Lien of the Deed of Trust. See "Description
of the Timber Notes--Accounts; Payment on the Timber Notes--Monthly Deposit
Dates." It is expected that substantially all of the cash released to the
Company free and clear of the Lien of the Deed of Trust will be distributed to
Pacific Lumber on a monthly basis.
On each Note Payment Date, the amounts on deposit in the Payment Account
will (unless a Line of Credit Acceleration has occurred or an Acceleration Event
exists) be utilized to make required payments on the Timber Notes and any
Additional Timber Notes and to the Liquidity Providers following any Termination
Advance. To the extent funds on deposit in the Payment Account are inadequate to
make payments of interest (excluding interest on Premiums) to the holders of all
Classes of Timber Notes and any Additional Timber Notes when due, additional
amounts will be borrowed under the Line of Credit Agreement (or, if a Liquidity
Account has been created in connection with a Termination Advance, withdrawn
from the Liquidity Account, to the extent of the balance thereof). In the event
that amounts are so borrowed under the Line of Credit Agreement, or withdrawn
from the Liquidity Account, the Indenture requires that, amounts in the
Collection Account or the Payment Account be utilized to pay amounts then due in
connection with the Line of Credit Agreement (other than Additional Liquidity
Provider Fees and Supplemental Liquidity Provider Interest) or be deposited in
the Liquidity Account so that the aggregate of the amount available under the
Line of Credit Agreement or on deposit in the Liquidity Account will be
increased to the Required Liquidity Amount on or before the next Note Payment
Date before the payment of any principal on that date. To the extent that
amounts on deposit in the Payment Account on a Note Payment Date exceed the
required payments on the Timber Notes and any Additional Timber Notes and any
required payments to the Liquidity Providers following any Termination Advance
(and any required deposits to the Liquidity Account) on such Note Payment Date,
such excess amounts may, unless a Trapping Event or a Cash Retention Event has
occurred and is continuing, be released to the Company free and clear of the
Lien of the Deed of Trust. See "Description of the Timber Notes--Accounts;
Payment on the Timber Notes--Note Payment Dates." It is expected that
substantially all of the cash released to the Company free and clear of the Lien
of the Deed of Trust will be distributed to Pacific Lumber.
SCHEDULED ASSUMPTIONS
THE ASSUMPTIONS (THE "SCHEDULED ASSUMPTIONS") AND TABLES SET FORTH BELOW
REPRESENT POSSIBLE CASH FLOW SCENARIOS DESIGNED TO ILLUSTRATE CERTAIN PAYMENT
CHARACTERISTICS OF THE TIMBER NOTES AND ARE NOT INTENDED TO BE PROJECTIONS OR
FORECASTS, BUT, RATHER, SIMPLY REFLECT THE RESULTS OF MATHEMATICAL CALCULATIONS
UTILIZING THE SCHEDULED ASSUMPTIONS AND VARIATIONS THEREOF SET FORTH BELOW. THE
TABLES HAVE BEEN DEVELOPED BY FIXING CERTAIN OF THE SCHEDULED ASSUMPTIONS AND BY
VARYING OTHER SCHEDULED ASSUMPTIONS WHICH AFFECT THE COMPANY'S REVENUES, COSTS
AND CAPITAL EXPENDITURES (THE "SENSITIVITIES"). THE SCHEDULED ASSUMPTIONS DO
NOT REPRESENT A COMPLETE LIST OF FACTORS WHICH MAY AFFECT THE REVENUES, COSTS
AND CAPITAL EXPENDITURES OF THE COMPANY, BUT RATHER INDICATE THOSE FACTORS WHICH
ARE LIKELY TO SIGNIFICANTLY AFFECT THE PERFORMANCE OF THE COMPANY IN FUTURE
YEARS. IN ADDITION, THE RANGE OF POSSIBLE OUTCOMES WITH RESPECT TO EACH
SCHEDULED ASSUMPTION AND THE COMBINATION OF SCHEDULED ASSUMPTIONS SET FORTH
ABOVE DO NOT INDICATE A COMPREHENSIVE SET OF POSSIBLE RESULTS. IN PARTICULAR,
MORE SEVERE STRESSES MAY LEAD TO PAYMENTS OF PRINCIPAL ON THE TIMBER NOTES BEING
DELAYED OR DECREASED OR, IN CERTAIN CASES, AN EVENT OF DEFAULT.
ACCORDINGLY, INVESTORS SHOULD UNDERSTAND THAT THE FOLLOWING TABLES ARE
INTENDED MERELY TO ILLUSTRATE CERTAIN, BUT NOT ALL, PAYMENT SENSITIVITIES OF THE
TIMBER NOTES TO CERTAIN, BUT NOT ALL, CHANGES IN UNDERLYING ASSUMPTIONS. THE
COMPANY DOES NOT INTEND TO UPDATE OR REVISE THE INFORMATION PRESENTED TO REFLECT
CHANGES OCCURRING AFTER THE CLOSING DATE. IT IS HIGHLY LIKELY THAT ACTUAL
EXPERIENCE WILL VARY FROM THE SCHEDULED
61
<PAGE>
ASSUMPTIONS AND THE POSSIBLE CASH FLOW SCENARIOS REPRESENTED BY THE TABLES. THE
PRINCIPAL FACTORS THAT COULD CAUSE THE COMPANY'S ACTUAL CASH FLOW TO DIFFER
MATERIALLY FROM SUCH SCENARIOS ARE THE SENSITIVITIES AND CERTAIN "RISK
FACTORS" AS SET OUT HEREIN. IN ADDITION, THE TABLES DO NOT REFLECT THE POSSIBLE
EFFECT OF THE ISSUANCE OF ANY ADDITIONAL TIMBER NOTES ON THE WEIGHTED AVERAGE
LIFE OR FINAL MATURITY OF THE TIMBER NOTES.
OVERVIEW
The Scheduled Assumptions incorporate those described under "--Scheduled
Amortization" as well as certain other assumptions, including the following:
REVENUE ASSUMPTIONS
PRICES
(i) The initial SBE Price was assumed to be $724 per Mbfe.
(ii) The initial SBE Price was assumed to escalate at a rate of 3.5% per
annum starting in January 1999.
HARVEST LEVELS (MBFE)
It was assumed that the Company would harvest approximately the following
amount of timber per year for each of the periods set forth below:
TOTAL MBFE
----------
July 1998 through December 2007 (9.5
years)................................ 162,274
January 2008 through December 2017 (10.0
years)................................ 132,131
January 2018 through July 2028 (10.5
years)................................ 87,692
The above assumptions were used to determine the assumed gross monthly revenue
to the Company before principal and interest payments, administrative expenses,
yield taxes, property taxes, the Services Fee and other operating expenses,
capital expenditures and payments associated with the Line of Credit Agreement.
EXPENSE AND CAPITAL EXPENDITURES ASSUMPTIONS
GENERAL
(i) All operating expenses and capital expenditures were adjusted each
decade to reflect changes between decades in assumed harvest levels and
escalated at the rate of 3.5% per annum, commencing January 1, 1999.
(ii) All expenses were deducted from gross revenue to arrive at the
Company's cash flows.
(iii) Funds in the Payment Account were assumed to earn interest at the
rate of 4.00% per annum.
OPERATING EXPENSES
Operating expenses include administrative expenses, property taxes, the
Services Fee and road maintenance. Operating expenses were initially assumed to
be equal to $6.9 million per year ($3.5 million of which was assumed to vary
with harvest).
CAPITAL EXPENDITURES
Capital expenditures include reforestation and rehabilitation and
construction of logging roads. Capital expenditures were initially assumed to be
equal to $7.7 million per year ($5.6 million of which was assumed to vary with
harvest).
YIELD TAXES
Yield taxes were assumed to be equal to 2.9% of the gross revenue from
harvest.
LINE OF CREDIT COMMITMENT FEE
The commitment fee was assumed to be an annual cost based on the Required
Liquidity Amount. The Required Liquidity Amount is the amount necessary to
service one year's interest payments at the applicable Note Rates on all Classes
of Timber Notes.
62
<PAGE>
EFFECT OF HARVEST LEVEL CHANGES
The tables below have been prepared based on the Scheduled Assumptions,
except that the amount of timber harvested by the Company in each year has been
changed by the indicated percentages beginning as of July 20, 1998. If the
actual amount of Company Timber harvested were to vary as indicated below and
all of the other Scheduled Assumptions were to occur as assumed, then the final
maturities and weighted average lives of the respective Classes of Timber Notes
would be as set forth below. To the extent that operating expenses and capital
expenditures are assumed to vary with harvest levels, such variations have been
reflected in the calculations. Deficiency Premiums, to the extent applicable,
are paid in full in all scenarios. Prepayment Premiums have not been reflected
in the calculations.
FINAL MATURITY AND WEIGHTED AVERAGE LIFE OF TIMBER NOTES ASSUMING A
PERMANENT CHANGE IN HARVEST LEVELS AND A REFINANCING IN YEAR 15.5
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3
CHANGE IN -------------- -------------- --------------
HARVEST LEVELS WAL FINAL WAL FINAL WAL FINAL
--------------- ---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Harvest Level Increases.............. 10.00% 4.0 7.0 10.1 13.5 15.2 15.5
5.00% 4.5 7.5 11.1 14.5 15.4 15.5
Scheduled Harvest Schedule........... 0.00% 5.0 8.5 12.4 15.5 15.5 15.5
Harvest Level Decreases.............. 5.00% 5.7 9.5 13.6 15.5 15.5 15.5
10.00% 6.6 11.5 14.7 15.5 15.5 15.5
15.00% 6.8 11.5 14.8 15.5 15.5 15.5
20.00% 6.8 11.5 14.8 15.5 15.5 15.5
</TABLE>
FINAL MATURITY AND WEIGHTED AVERAGE LIFE OF TIMBER NOTES ASSUMING A
PERMANENT CHANGE IN HARVEST LEVELS AND NO REFINANCING
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3
CHANGE IN -------------- -------------- --------------
HARVEST LEVELS WAL FINAL WAL FINAL WAL FINAL
--------------- ---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Harvest Level Increases.............. 10.00% 4.0 7.0 10.1 13.5 16.6 19.0
5.00% 4.5 7.5 11.1 14.5 17.5 20.0
Scheduled Harvest Schedule........... 0.00% 5.0 8.5 12.4 15.5 18.7 21.5
Harvest Level Decreases.............. 5.00% 5.7 9.5 13.8 17.0 20.2 23.5
10.00% 6.6 11.5 15.5 18.5 22.3 26.0
15.00% 6.8 11.5 15.8 18.5 23.3 27.0
20.00% 6.8 11.5 15.8 19.0 24.2 28.5
</TABLE>
63
<PAGE>
EFFECT OF PRICE CHANGES
The tables below have been prepared based on the Scheduled Assumptions,
except that the price of logs that are sold by the Company in each year has been
changed by the indicated percentages beginning as of July 20, 1998. If the
actual prices that are realized by the Company were to vary as indicated below
and all of the other Scheduled Assumptions were to occur as assumed, then the
final maturities and weighted average lives of the respective Classes of Timber
Notes would be as set forth below. Deficiency Premiums, to the extent
applicable, are paid in full in all scenarios. No Prepayment Premiums would be
payable in these scenarios.
FINAL MATURITY AND WEIGHTED AVERAGE LIFE OF TIMBER NOTES ASSUMING A
PERMANENT CHANGE IN PRICE AND A REFINANCING IN YEAR 15.5
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3
CHANGE IN -------------- -------------- --------------
PRICE WAL FINAL WAL FINAL WAL FINAL
---------- ---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Price Increases...................... 20.00% 5.0 8.5 12.4 15.5 15.5 15.5
10.00% 5.0 8.5 12.4 15.5 15.5 15.5
Assumed Price........................ 0.00% 5.0 8.5 12.4 15.5 15.5 15.5
Price Decreases...................... 5.00% 5.0 8.5 12.4 15.5 15.5 15.5
10.00% 5.0 8.5 12.4 15.5 15.5 15.5
15.00% 5.0 8.5 12.4 15.5 15.5 15.5
20.00% 5.0 8.5 12.4 15.5 15.5 15.5
25.00% 5.1 8.5 12.4 15.5 15.5 15.5
30.00% 6.2 9.5 13.1 15.5 15.5 15.5
</TABLE>
FINAL MATURITY AND WEIGHTED AVERAGE LIFE OF TIMBER NOTES ASSUMING A
PERMANENT CHANGE IN PRICE AND NO REFINANCING
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3
CHANGE IN -------------- -------------- --------------
PRICE WAL FINAL WAL FINAL WAL FINAL
---------- ---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Price Increases...................... 20.00% 5.0 8.5 12.4 15.5 18.0 20.0
10.00% 5.0 8.5 12.4 15.5 18.2 20.5
Assumed Price........................ 0.00% 5.0 8.5 12.4 15.5 18.7 21.5
Price Decreases...................... 5.00% 5.0 8.5 12.4 15.5 18.9 22.0
10.00% 5.0 8.5 12.4 15.5 19.2 22.5
15.00% 5.0 8.5 12.4 15.5 19.6 23.5
20.00% 5.0 8.5 12.4 15.5 19.9 24.0
25.00% 5.1 8.5 12.4 15.5 20.0 24.5
30.00% 6.2 9.5 13.1 16.0 20.2 24.5
</TABLE>
64
<PAGE>
EFFECT OF EXPENSE CHANGES
The tables below have been prepared based on the Scheduled Assumptions,
except that the operating expenses and capital expenditures of the Company
(other than yield taxes and commitment fees under the Line of Credit Agreement)
in each year have been changed by the indicated percentages beginning as of July
20, 1998. If the actual operating expenses and capital expenditures of the
Company were to vary as indicated below and all of the other Scheduled
Assumptions were to occur as assumed, then the final maturities and weighted
average lives of the respective Classes of Timber Notes would be as set forth
below. Deficiency Premiums, to the extent applicable, are paid in full in all
scenarios. No Prepayment Premiums would be payable in these scenarios.
FINAL MATURITY AND WEIGHTED AVERAGE LIFE OF TIMBER NOTES ASSUMING A
PERMANENT CHANGE IN EXPENSES AND A REFINANCING IN YEAR 15.5
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3
CHANGE ------------- -------------- --------------
IN PRICE WAL FINAL WAL FINAL WAL FINAL
-------- --- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Expense Decreases....................... 20.00% 5.0 8.5 12.4 15.5 15.5 15.5
Assumed Expenses........................ 0.00% 5.0 8.5 12.4 15.5 15.5 15.5
Expense Increases....................... 20.00% 5.0 8.5 12.4 15.5 15.5 15.5
40.00% 5.0 8.5 12.4 15.5 15.5 15.5
60.00% 5.0 8.5 12.4 15.5 15.5 15.5
80.00% 5.0 8.5 12.4 15.5 15.5 15.5
100.00% 5.0 8.5 12.4 15.5 15.5 15.5
150.00% 5.0 8.5 12.4 15.5 15.5 15.5
200.00% 5.1 8.5 12.4 15.5 15.5 15.5
</TABLE>
FINAL MATURITY AND WEIGHTED AVERAGE LIFE OF TIMBER NOTES ASSUMING A
PERMANENT CHANGE IN EXPENSES AND NO REFINANCING
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3
CHANGE ------------ ------------- -------------
IN PRICE WAL FINAL WAL FINAL WAL FINAL
-------- --- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Expense Decreases....................... 20.00% 5.0 8.5 12.4 15.5 18.5 21.5
Assumed Expenses........................ 0.00% 5.0 8.5 12.4 15.5 18.7 21.5
Expense Increases....................... 20.00% 5.0 8.5 12.4 15.5 18.8 22.0
40.00% 5.0 8.5 12.4 15.5 18.9 22.0
60.00% 5.0 8.5 12.4 15.5 19.1 22.5
80.00% 5.0 8.5 12.4 15.5 19.3 23.0
100.00% 5.0 8.5 12.4 15.5 19.5 23.5
150.00% 5.0 8.5 12.4 15.5 20.0 24.5
200.00% 5.1 8.5 12.4 15.5 20.1 24.5
</TABLE>
65
<PAGE>
CAPITALIZATION
The following table sets forth, at June 30, 1998, the historical
capitalization of the Company and the unaudited pro forma capitalization of the
Company after giving effect to the Offering and the application of the net
proceeds therefrom. This table should be read in conjunction with the Company's
Financial Statements and Notes thereto and the Company's unaudited Pro Forma
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
JUNE 30, 1998
--------------------------
HISTORICAL PRO FORMA
---------- ---------
(IN MILLIONS OF DOLLARS)
Cash and cash equivalents(1)......... $ 13.7 $ 5.0
========== =========
Restricted cash(2)................... $ 28.1 $ 25.0
========== =========
Timber Notes, Original Timber Notes
and other debt:
Current maturities................. $ 20.6 $ 8.2
Long-term portion.................. 288.7 859.0
Other debt......................... 7.4 0.5
---------- ---------
Total debt...................... 316.7 867.7
Member capital (deficit)............. 24.7 (539.1)(3)
---------- ---------
Total capitalization.......... $341.4 $ 328.6
========== =========
- ---------------
(1) Historical cash and cash equivalents includes $10.2 million deposited in the
payment account under the Original Indenture for the payment of accrued
interest and principal on the Original Timber Notes. Pro forma cash and cash
equivalents includes $1.1 million of cash deposited in the Expense Reserve
on the Closing Date.
(2) Historical restricted cash represents amounts held in the Original Liquidity
Account and is classified as a noncurrent asset in the Company's Financial
Statements. Pro forma restricted cash represents amounts held in the
Prefunding Account and is classified as a noncurrent asset in the Company's
Pro Forma Financial Statements.
(3) Assumes (a) the write-off of $12.9 million of deferred financing costs and
the incurrence of $28.0 million of prepayment premiums on the Original
Timber Notes offset by the benefit from $6.6 million of unearned premiums
and make whole amounts under the investment rate agreement associated with
the Original Liquidity Account, (b) the distribution of $506.4 million to
Pacific Lumber and (c) the elimination of $23.1 million of deferred income
tax assets.
66
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following selected historical financial data should be read in
conjunction with the Company's Financial Statements and the Notes thereto and
the information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere herein. The selected
historical financial data as of and for the five years ended December 31, 1997
are derived from the audited Financial Statements of the Company. The selected
historical financial data as of and for the six months ended June 30, 1998 and
1997 are derived from the unaudited financial statements of the Company. As
discussed in "Summary--Summary Historical and Pro Forma Financial Data," the
financial data shown in the "historical" columns reflects (a) the historical
assets, liabilities and results of operations of Scotia Pacific after giving
effect to the Company Transfer and (b) Pacific Lumber's and Salmon Creek's
historical assets, liabilities and results of operations attributable to the
timberlands and the timber and related timber harvesting rights transferred
pursuant to the Palco Transfers, in each case, as if such transactions occurred
on January 1, 1993 (the beginning of the earliest period presented). The
following unaudited operating data for the six months ended June 30, 1998 and
for the year ended December 31, 1997 as shown in the "pro forma" columns gives
effect to the Pro Forma Adjustments as if they occurred on January 1, 1997. The
balance sheet data as shown in the "pro forma" columns gives effect to the Pro
Forma Adjustments as if they occurred on June 30, 1998. The pro forma operating
data is not necessarily indicative of the results of future operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
---------------------------------- --------------------------------------------
1998 1997
--------------------- HISTORICAL --------------------- HISTORICAL
PRO ---------- PRO --------------------
HISTORICAL FORMA(1) 1997 HISTORICAL FORMA(1) 1996 1995
---------- -------- ---------- ---------- -------- --------- ---------
(IN MILLIONS OF DOLLARS, EXCEPT VOLUME, PRICE AND RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Log sales to Pacific Lumber........... $ 34.5 $ 34.5 $ 53.8 $126.4 $126.4 $ 135.0 $ 129.4
General and administrative expenses... 3.3 5.9 3.9 8.3 10.4 7.8 7.6
Depletion and depreciation............ 5.0 5.0 7.4 16.8 16.8 16.8 17.5
Operating income...................... 26.2 23.6 42.5 101.3 99.2 110.4 104.3
Interest and other income............. 1.3 .9 1.4 2.8 1.9 2.9 3.0
Interest expense...................... 13.2 32.8 13.7 27.3 65.6 28.3 29.2
Income (loss) before income taxes..... 14.3 (8.3) 30.2 76.8 35.5 85.0 78.1
Income (loss) before extraordinary
item................................ 8.5 (8.3) 17.9 45.6 35.5 51.5 46.0
Extraordinary item.................... -- -- -- -- (26.5) -- --
Net income (loss)..................... 8.5 (8.3) 17.9 45.6 9.0 51.5 46.0
OTHER DATA:
Harvest volumes (thousands of
Mbfe(2))............................ 50.6 50.6 79.8 182.3 182.3 182.5 187.5
Average realized SBE Price per
Mbfe(2)............................. $ 682 $ 682 $ 674 $ 693 $ 693 $ 740 $ 690
EBITDA(3)............................. 31.2 28.6 49.9 118.1 116.0 127.2 121.8
Ratio of earnings to fixed charges.... 2.1x -- 3.2x 3.8x 1.5x 4.0x 3.7x
Fixed charge coverage deficiency...... -- 8.3 -- -- -- -- --
Capital expenditures (including
timberland acquisitions)............ 2.9 2.9 8.2 14.8 14.8 7.3 4.2
Dividends and distributions........... 6.1 -- 24.4 74.7 540.7 84.1 79.1
</TABLE>
1994 1993
--------- ---------
OPERATING DATA:
Log sales to Pacific Lumber........... $ 146.6 $ 135.0
General and administrative expenses... 8.8 6.8
Depletion and depreciation............ 17.5 16.9
Operating income...................... 120.3 111.3
Interest and other income............. 2.9 2.5
Interest expense...................... 30.3 24.9
Income (loss) before income taxes..... 92.9 88.9
Income (loss) before extraordinary
item................................ 60.2 52.4
Extraordinary item.................... -- (6.0)
Net income (loss)..................... 60.2 46.4
OTHER DATA:
Harvest volumes (thousands of
Mbfe(2))............................ 185.7 175.6
Average realized SBE Price per
Mbfe(2)............................. $ 789 $ 769
EBITDA(3)............................. 137.8 128.2
Ratio of earnings to fixed charges.... 4.1x 4.6x
Fixed charge coverage deficiency...... -- --
Capital expenditures (including
timberland acquisitions)............ 2.6 0.6
Dividends and distributions........... 99.1 87.6
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
JUNE 30, 1998
--------------------- HISTORICAL
PRO -----------------------------------------------------
HISTORICAL FORMA(1) 1997 1996 1995 1994 1993
---------- -------- --------- --------- --------- --------- ---------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents(4).......... $ 13.7 $ 5.0 $ 20.9 $ 20.3 $ 21.5 $ 20.2 $ 21.7
Timber and timberlands................ 247.3 247.3 249.7 255.6 268.2 281.8 294.9
Restricted cash(4).................... 28.1 25.0 28.4 30.0 31.4 32.4 33.6
Total assets.......................... 353.5 329.7 356.9 362.5 378.8 396.8 410.2
Total indebtedness.................... 316.7 867.7 327.5 336.9 351.6 364.7 376.9
Member capital (deficit).............. 24.7 (539.1 ) 17.1 12.7 12.9 18.3 18.5
<FN>
- ---------------
See "Summary--Summary Historical and Pro Forma Financial Data" for the text of
notes (1) through (4).
</TABLE>
67
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
JUNE 30, 1998
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------
ISSUANCE APPLICATION
OF OF PROCEEDS PRO
HISTORICAL TIMBER NOTES AND OTHER FORMA
---------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 13.7 $818.2 $ (826.9) $ 5.0
Receivables:
Due from Pacific Lumber............ 12.2 -- -- 12.2
Accrued interest................... 0.1 -- -- 0.1
Prepaid timber harvesting costs....... 2.5 -- -- 2.5
Other prepaid expenses and current
assets............................. 0.3 -- -- 0.3
---------- ------------ ------------ ---------
Total current assets............... 28.8 818.2 (826.9) 20.1
---------- ------------ ------------ ---------
Timber and timberlands, net............. 247.3 -- -- 247.3
Property and equipment, net............. 11.2 -- -- 11.2
Deferred financing costs, net........... 12.9 24.0 (12.9) 24.0
Deferred income taxes................... 23.1 -- (23.1) --
Restricted cash......................... 28.1 25.0 (28.1) 25.0
Other assets............................ 2.1 -- -- 2.1
---------- ------------ ------------ ---------
$353.5 $867.2 $ (891.0) $ 329.7
========== ============ ============ =========
Current liabilities:
Due to Pacific Lumber................. $ 0.1 $ -- $ -- $ 0.1
Accrued interest...................... 11.0 -- (11.0) --
Other accrued liabilities............. 1.0 -- -- 1.0
Long-term debt, current maturities.... 20.6 8.2 (20.6) 8.2
---------- ------------ ------------ ---------
Total current liabilities.......... 32.7 8.2 (31.6) 9.3
Long-term debt, less current
maturities............................ 296.1 859.0 (295.6) 859.5
---------- ------------ ------------ ---------
Total liabilities.................. 328.8 867.2 (327.2) 868.8
---------- ------------ ------------ ---------
Contingencies
Total member capital (deficit).......... 24.7 -- (563.8) (539.1)
---------- ------------ ------------ ---------
$353.5 $867.2 $ (891.0) $ 329.7
========== ============ ============ =========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
68
<PAGE>
UNAUDITED PRO FORMA STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1998
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------------
ISSUANCE APPLICATIONS
OF OF PROCEEDS PRO
HISTORICAL TIMBER NOTES AND OTHER FORMA
----------- ------------- ------------- ------
<S> <C> <C> <C> <C>
Log sales to Pacific Lumber.......... $34.5 $ -- $ -- $ 34.5
Operating expenses:
General and administrative
expenses........................ 3.3 2.8 (0.2) 5.9
Depletion and depreciation......... 5.0 -- -- 5.0
----------- ------------- ------------- ------
Operating income..................... 26.2 (2.8) 0.2 23.6
Other income (expense)
Interest and other income.......... 1.3 0.7 (1.1) 0.9
Interest expense................... (13.2) (32.5) 12.9 (32.8)
----------- ------------- ------------- ------
Income (loss) before income taxes.... 14.3 (34.6) 12.0 (8.3)
Provision in lieu of income taxes.... (5.8) -- 5.8 --
----------- ------------- ------------- ------
Net income (loss).................... $ 8.5 $ (34.6) $17.8 $ (8.3)
=========== ============= ============= ======
</TABLE>
YEAR ENDED DECEMBER 31, 1997
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------------
ISSUANCE APPLICATIONS
OF OF PROCEEDS PRO
HISTORICAL TIMBER NOTES AND OTHER FORMA
----------- ------------- ------------- ------
<S> <C> <C> <C> <C>
Log sales to Pacific Lumber.......... $ 126.4 $ -- -- $126.4
Operating expenses:
General and administrative
expenses........................ 8.3 2.5 (0.4) 10.4
Depletion and depreciation......... 16.8 -- -- 16.8
----------- ------------- ------------- ------
Operating income..................... 101.3 (2.5) 0.4 99.2
Other income (expense):
Interest and other income.......... 2.8 1.4 (2.3) 1.9
Interest expense................... (27.3) (65.3) 27.0 (65.6)
----------- ------------- ------------- ------
Income before income taxes........... 76.8 (66.4) 25.1 35.5
Provision in lieu of income taxes.... (31.2) -- 31.2 --
----------- ------------- ------------- ------
Income before extraordinary item..... $ 45.6 $ (66.4) $56.3 $ 35.5
=========== ============= ============= ======
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
69
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The Unaudited Pro Forma Balance Sheet gives effect to the Offering, the
repayment of $309.2 million aggregate principal amount of Original Timber Notes
and the distribution of $506.4 million in cash to Pacific Lumber and gives
effect to the other Pro Forma Adjustments described below as if they occurred on
June 30, 1998. The Unaudited Pro Forma Statements of Income reflect the Pro
Forma Adjustments as if they occurred on January 1, 1997. Such pro forma
financial statements are not necessarily indicative of the results of future
operations.
- -- Pro forma cash and cash equivalents include $1.1 million deposited in the
Expense Reserve.
- -- Deferred financing costs of $24.0 million incurred in connection with the
Offering are deferred and amortized over the estimated 15 year average life
of the Timber Notes. The pro forma adjustment to interest expense for the
six months ended June 30, 1998 and the year ended December 31, 1997 includes
$0.8 million and $1.6 million, respectively, attributable to such
amortization and excludes $0.6 million and $1.2 million, respectively, of
amortization attributable to the Original Timber Notes.
- -- Pro forma restricted cash represents the amount deposited into the
Prefunding Account.
- -- The pro forma adjustment to general and administrative expenses represents
$2.8 million and $2.5 million, respectively, of fees payable and amounts
reimbursable to Pacific Lumber during the six months ended June 30, 1998 and
the year ended December 31, 1997 pursuant to the New Services Agreement less
$0.2 million and $0.4 million, respectively, of fees payable to Pacific
Lumber pursuant the Original Services Agreement.
- -- The pro forma adjustment to interest and other income consists of the
estimated interest earnings on the funds held in the Prefunding Account at
an assumed rate of 5.50% per annum less interest earned during the period
funds were held in the Original Liquidity Account.
- -- The Class A-1, A-2 and A-3 Timber Notes are assumed to bear interest at an
overall effective rate of 7.43% per annum, respectively, and require
semiannual payments of principal and accrued interest. The pro forma
adjustment to interest expense adjusts for (i) interest expense on the
Timber Notes, (ii) the exclusion of interest expense on the Original Timber
Notes, (iii) commitment fees under the Line of Credit Agreement and
amortization of the estimated fees and expenses associated with the Offering
and the Line of Credit Agreement and (iv) the exclusion of amortization of
deferred financing costs related to the Original Timber Notes.
- -- Since the Company has elected to be disregarded as a separate taxable entity
and instead be treated as a division of Pacific Lumber solely for federal
and state income tax purposes, pro forma adjustments were made to eliminate
the deferred income tax asset and the provision in lieu of income taxes.
- -- The Unaudited Pro Forma Statement of Income for the year ended December 31,
1997 does not present the loss that would have been incurred in connection
with the retirement of the Original Timber Notes. The pro forma amount of
such loss as if the retirement occurred on January 1, 1997 would have been
$26.5 million which is comprised of (i) $14.7 million of unamortized
deferred financing costs and (ii) $18.0 million of prepayment premiums less
(iii) $6.2 million of unearned premiums and make whole amounts associated
with the Original Liquidity Account. The Unaudited Pro Forma Balance Sheet,
however, reflects a pro forma loss of $34.3 million that would have been
incurred in connection with the retirement of the Original Timber Notes if
such retirement occurred on June 30, 1998. Such loss is comprised of (i)
$12.9 million of unamortized deferred financing costs and (ii) $28.0 million
of prepayment premiums less (iii) $6.6 million of unearned premiums and make
whole amounts under the investment rate agreement associated with the
Original Liquidity Account.
- -- The pro forma adjustments to member capital (deficit) reflect the pro forma
loss of $34.3 million attributable to the retirement of the Original Timber
Notes, the $506.4 million cash dividend paid to Pacific Lumber and the
elimination of $23.1 million of deferred income tax asset discussed above.
70
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BACKGROUND
The Company is a recently formed single member Delaware limited liability
company owned by Pacific Lumber and did not conduct any significant operations
prior to the issuance of the Old Notes. As discussed in "Summary--Summary
Historical and Pro Forma Financial Data," the historical financial data
reflects (a) the historical assets, liabilities and results of operations of
Scotia Pacific after giving effect to the Company Transfer and (b) Pacific
Lumber's and Salmon Creek's historical assets, liabilities and results of
operations attributable to the timberlands and the timber and related timber
harvesting rights transferred pursuant to the Palco Transfers, in each case, as
if such transactions occurred on January 1, 1995 (the beginning of the earliest
period presented). The following should be read in conjunction with the
Company's Financial Statements and the Notes thereto.
RESULTS OF OPERATIONS
Logging operations on the Company's timberlands are highly seasonal.
Logging activity is normally significantly higher in the months of April through
November than in the months of December through March. Management expects that
the Company's revenues and cash flows will continue to reflect that seasonality.
RECENT OPERATING RESULTS
The Company's revenues from log sales declined from $53.8 million for the
first six months of 1997 to $34.5 million for the first half of 1998. This
decline reflects the decrease in the volume of log deliveries for such periods
from 79,800 Mbfe to 50,600 Mbfe, respectively. The decrease in log sales and
volumes was principally due to well-above-normal rainfall during the first half
of 1998, additional restrictions on wet weather operations due to a stipulation
entered into with the CDF on December 30, 1997 and logging restrictions during
the nesting seasons for both the northern spotted owl and the marbled murrelet,
which impeded Pacific Lumber's ability to transport logs to its mills and
hindered logging operations on the Company Timberlands. This resulted in a
significant increase in the volume of logs which could not be transported to
Pacific Lumber's log decks (where they are measured and sold).
Operating cash flow (operating income before depletion and depreciation)
for the first half of 1998 was slightly below the interest that, on a pro forma
basis, would have been payable on the Timber Notes during such period. The
Company expects that its revenues and operating cash flow in the third quarter
of 1998 will increase significantly over its revenues and operating cash flow
for the second quarter of 1998, as the Company will be able to conduct
operations in areas where the Company has been restricted due to inclement
weather, wet weather operating restrictions, and the nesting seasons which end
during the third quarter of 1998.
See "Business of the Company--Legal Proceedings" for a description of
certain of the Company's timber harvesting litigation, including a recent
lawsuit which could potentially result in severe restrictions on the ability to
harvest Company Timber for up to several months. See also "Risk
Factors--Regulatory and Environmental Factors" and "Business of the
Company--Regulatory and Environmental Matters."
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
LOG SALES TO PACIFIC LUMBER. Net sales from logs were $34.5 million and
$53.8 million for the six months ended June 30, 1998 and 1997, respectively. The
volume of log deliveries for such periods represented approximately 50,600 Mbfe
and 79,800 Mbfe, respectively. The decrease in volume was due to the factors
described above. See Note (2) to "Summary--Summary Historical and Pro Forma
Financial Data" regarding volumes reflected in Scotia Pacific's Annual Report
on Form 10-K for the year ended December 31, 1997.
OPERATING INCOME AND INCOME BEFORE INCOME TAXES. Operating income was
$26.2 million and $42.5 million for the six months ended June 30, 1998 and 1997,
respectively. Income before income taxes was
71
<PAGE>
$14.3 million and $30.2 million for the six months ended June 30, 1998 and 1997,
respectively. The decline in operating income and income before income taxes was
principally due to the decrease in log sales discussed above.
THREE YEARS ENDED DECEMBER 31, 1997
LOG SALES TO PACIFIC LUMBER. Revenues from the sale of logs were $126.4
million and $135.0 million for the years ended December 31, 1997 and 1996,
respectively. The decrease in sales from 1996 is principally due to a decline in
SBE prices in young growth redwood and Douglas-fir logs. The impact of lower SBE
prices was offset somewhat by the increase in the volume of log deliveries from
182,500 Mbfe in 1996 to 182,300 Mbfe in 1997.
Revenues from the sale of logs were $135.0 million and $129.4 million for
the years ended December 31, 1996 and 1995, respectively. The volume of log
deliveries for such periods represented approximately 182,500 Mbfe and 187,500
Mbfe, respectively. The increase in revenues was principally due to an increase
in average realized prices for young growth redwood and higher volumes for both
young growth redwood and Douglas-fir log deliveries partially offset by a lower
volume of old growth log deliveries. Average realized prices increased due to
higher SBE prices.
OPERATING INCOME. Operating income was $101.3 million, $110.4 million and
$104.3 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The changes between the years are primarily a result of the
factors affecting revenues described above. Operating income is net of a
provision for timber depletion and depreciation of property and equipment, the
estimated cost of yield taxes for the logs sold, administrative costs and the
costs for operational, management and related services provided by Pacific
Lumber in respect of Scotia Pacific's timberlands pursuant to the Original
Services Agreement.
INCOME BEFORE INCOME TAXES. Income before income taxes was $76.8 million,
$85.0 million and $78.1 million for the years ended December 31, 1997, 1996 and
1995, respectively. The decrease in 1997 compared to 1996 and the increase in
1996 compared to 1995 was primarily due to the change in operating income
between these years. Income before income taxes represents the sum of operating
income and interest income on the funds deposited in the Original Liquidity
Account and other deposits required pursuant to the terms of the Original
Indenture, less interest expense, including amortization of deferred financing
costs, on the Original Timber Notes.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
Pursuant to the Indenture, the amount of indebtedness which the Company is
permitted to incur other than the Timber Notes is limited to any Additional
Timber Notes, up to $75.0 million at any one time outstanding of Non-Recourse
Timber Acquisition Indebtedness, indebtedness under the Line of Credit Agreement
and certain capital lease obligations and certain other specified indebtedness.
The business activities of the Company are generally limited to the ownership
and operation of the Company Timberlands, the matters contemplated by the
Operative Documents and matters incidental to the foregoing.
Although the Company is permitted to sell logs or standing Company Timber
from its timberlands to other purchasers, management expects that the Company
will derive substantially all of its revenue from the sale of logs to Pacific
Lumber pursuant to the New Master Purchase Agreement and related log purchase
agreements. The quantities and timing of log sales for logs harvested from the
Company Timber will depend largely upon purchases of logs by Pacific Lumber
under the New Master Purchase Agreement and related log purchase agreements. The
timing and amount of such purchases by Pacific Lumber may be affected by factors
outside the control of the Company, including inclement weather, regulatory and
environmental factors, the financial condition of Pacific Lumber, Pacific
Lumber's own supply of timber and its ability to harvest such timber, and the
supply and demand for lumber products (which, in turn, will be influenced by
demand in the housing, construction and remodeling industries).
On each Monthly Deposit Date, revenues from the sale of the Company's logs
or timber from the Company Timber will be (a) transferred to the Expense Reserve
for use in the payment of operating expenses and capital expenditures, (b)
utilized for the payment of Trustee, Collateral Agent and Liquidity
72
<PAGE>
Providers' Expenses and to make any required payments of interest and repayments
of Advances under the Line of Credit Agreement and (c) to make required deposits
into the Payment Account for use on the next Note Payment Date to pay interest,
principal and Premium, if any, on the Timber Notes and, in certain
circumstances, payment of interest and repayment of Advances under the Line of
Credit Agreement. Amounts remaining after making such required payments,
transfers and deposits can be released to the Company free and clear of the Lien
of the Deed of Trust. To the extent funds are inadequate to make payments of
interest (excluding interest on premiums) on the Timber Notes when due,
additional amounts will be drawn under the Line of Credit Agreement to the
extent of the balance thereof. The amortization of the Timber Notes is generally
structured to link, to the extent of available cash, the deemed depletion of the
Company Timber as a result of the harvest and sale of logs (or sales of timber,
if any) to the required amortization on the Timber Notes. Principal payments
under the Scheduled Amortization Schedules for the Timber Notes would be $8.2
million, $15.9 million and $16.3 million in 1999, 2000 and 2001, respectively.
Once the Company's debt service, operating and capital expenditure requirements
have been met, substantially all of the cash released to the Company free of the
Lien of the Deed of Trust will be periodically distributed to Pacific Lumber. On
a pro forma basis, assuming that all of the Company's available cash would have
been distributed to Pacific Lumber on a monthly basis, Pacific Lumber would have
received dividends of approximately $36.9 million in respect of the year ended
December 31, 1997, excluding the dividends paid with the proceeds of the
Offering. See "Description of the Timber Notes--Accounts; Payment on the Timber
Notes."
The Original Indenture also provided for amortization linked, to the extent
of available cash, to the deemed depletion of Scotia Pacific's timber as a
result of the harvest and sale of logs. During January 1998 and the years ended
December 31, 1997 and 1996, Scotia Pacific repaid approximately $10.8 million,
$16.2 million and $14.1 million, respectively, of the aggregate principal amount
outstanding on the Original Timber Notes. Once Scotia Pacific's debt service,
operating and capital expenditure requirements were met, substantially all of
the cash released to Scotia Pacific free of the lien of the deed of trust for
the Original Timber Notes was distributed monthly to Pacific Lumber. In
connection with the foregoing, Scotia Pacific paid $60.8 million, $76.9 million
and $59.0 million of dividends during 1997, 1996 and 1995, respectively, and
$6.7 million during the six months ended June 30, 1998 as compared to $21.6
million for the six months ended June 30, 1997. The decline in dividends between
periods is the result of lower net sales and operating income described above.
The Company expects that dividends subsequent to the Closing Date will be
significantly lower than those paid in prior periods.
The Company's capital expenditures, excluding timberland acquisitions,
relate primarily to reforestation of timberlands and to construction and
rehabilitation of logging roads. The Company's capital expenditures for 1997,
1996 and 1995, including contributions by Pacific Lumber but excluding
timberland acquisitions, were approximately $7.3 million, $5.2 million and $2.0
million, respectively. The Company's capital expenditures, excluding
expenditures for timberlands, for the next several years are expected to
approximate $8.0 million per year.
The Company anticipates that cash flow from operations will be sufficient
to fund its working capital, capital expenditures and debt service obligations
for the next year. With respect to its long-term liquidity, the Company believes
that its existing cash, together with its ability to generate sufficient levels
of cash flow from operations, should provide sufficient funds to meet its
long-term working capital, capital expenditure and debt service obligations.
See "Business of the Company--Legal Proceedings" for a description of
certain of the Company's timber harvesting litigation, including a recent
lawsuit which could potentially result in severe restrictions on the ability to
harvest Company Timber for up to several months. See also "Risk
Factors--Regulatory and Environmental Factors" and "Business of the
Company--Regulatory and Environmental Matters."
TRENDS
The Company'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. Moreover, these
laws and regulations are modified from time to time and are subject to judicial
and administrative interpretation. There can be no assurance that certain
pending regulatory and legal 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 "Risk Factors--Regulatory and Environmental Factors" and
"--Headwaters Agreement"; "Business of the
73
<PAGE>
Company--Regulatory and Environmental Matters," "--Headwaters Agreement" and
"--Legal Proceedings--Timber Harvesting Litigation" and Note 5 to the
Financial Statements for further information regarding regulatory and legal
proceedings affecting the Company.
Judicial or regulatory actions adverse to the Company, increased regulatory
delays and inclement weather in northern California, independently or
collectively, could impair Pacific Lumber's ability to conduct normal timber
harvesting operations on the Company Timberlands.
YEAR 2000
Internal assessments undertaken for the Company have determined that the
Company's and Pacific Lumber's software and related technologies will not be
materially affected by the year 2000 date change. Spending is expected to be
less than $100,000 for system modification costs, which will be expensed as
incurred. Costs associated with any new systems will be capitalized and
amortized over the estimated useful lives of the systems.
74
<PAGE>
BUSINESS OF THE COMPANY
GENERAL
The Company is a special purpose Delaware limited liability company wholly
owned by Pacific Lumber, and was recently organized by Pacific Lumber to
facilitate the Offering and to be the successor to Scotia Pacific. Scotia
Pacific was organized by Pacific Lumber in November 1992 in connection with the
offering of the Original Timber Notes. On March 23, 1993, the issuance date of
the Original Timber Notes, Pacific Lumber completed the Original Transfer,
consisting of the transfer to the Company of (i) approximately 171,400 acres of
commercial timberlands in Humboldt County, California, including the Timber
Rights with respect to such acreage, (ii) approximately 8,000 additional acres
of timberlands (consisting substantially of scattered stands of virgin old
growth timber) on which Pacific Lumber retained the Timber Rights, (iii) certain
computer hardware and software, including the GIS, (subject to certain rights of
concurrent use by Pacific Lumber) and (iv) certain other assets. Substantially
all of Scotia Pacific's assets served as collateral for the Original Timber
Notes. Since the date of the Original Transfer, Scotia Pacific had derived
substantially all of its revenues from the sale to Pacific Lumber of logs
harvested from Scotia Pacific's timberlands by Pacific Lumber pursuant to the
Original Master Purchase Agreement. Pursuant to the Original Services Agreement,
Pacific Lumber provided operational, management and related services with
respect to Scotia Pacific's timberlands not performed by the Company's
employees.
THE TRANSACTION
On or prior to the Closing Date, Pacific Lumber made the Palco Transfers,
as a result of which there were transferred to the Company (i) the Transferred
Timberlands, consisting of approximately 13,500 acres of timberlands (including
the Timber Rights thereon), (ii) the Timber Rights with respect to approximately
7,500 acres of the timberlands which were subject to the Original Pacific Lumber
Timber Rights, and (iii) the Company Timber Rights, consisting of the Timber
Rights with respect to an additional approximately 12,200 acres of timberlands
that will continue to be owned by Pacific Lumber, Salmon Creek or an
unaffiliated third party.
On the Closing Date, (i) the Merger was effected, pursuant to which Scotia
Pacific was merged into the Company and (ii) the Company made the Company
Transfer pursuant to which the Company transferred to Pacific Lumber the Timber
Rights in respect of 1,400 acres of Company Timberlands. As a result of the
Merger, the Palco Transfers and the Company Transfer, the Company owns (i)
approximately 192,900 acres of timberlands (subject to the Pacific Lumber Timber
Rights on 1,900 of such acres), (ii) the Company Timber Rights consisting of the
Timber Rights on an additional 12,200 acres of timberlands that will continue to
be owned by Pacific Lumber, Salmon Creek or an unaffiliated third party, (iii)
certain computer hardware and software, including the GIS (subject to certain
rights of concurrent use by Pacific Lumber), and (iv) certain other assets.
Substantially all of the Company's assets serve as security for the Timber
Notes.
TIMBER AND TIMBERLANDS
The Company Timber (the timber located on the Company Timberlands which is
not subject to the Pacific Lumber Timber Rights) is contained on substantially
contiguous acreage situated in Humboldt County, located on the northern
California coast, an area which has very favorable soil and climate conditions
for growing redwood and Douglas-fir timber.
Timber generally is categorized by species and the age of a tree when it is
harvested. "Old growth" trees are often defined as trees which have been
growing for approximately 200 years or longer, and "young growth" trees are
those which have been growing for less than 200 years. "Residual old growth"
trees are located in timber stands which have been partially harvested in the
past. "Virgin" old growth trees are located in timber stands that have not
previously been harvested. The forest products industry grades lumber into
various classifications according to quality. The two broad categories within
which all grades fall based on the absence or presence of knots are called
"upper" and "common" grades, respectively. Old growth trees have a higher
percentage of upper grade lumber than young growth trees.
The Company Timber consists of approximately 3.0 million Mbfe of timber
(3.2 million Mbfe, including the Elk River Timberlands) by volume, and is
comprised of primarily young growth and old growth redwood and Douglas-fir
timber. In addition, substantial quantities of sub-merchantable trees exist on
the Company Timberlands which are not yet mature and have not been included in
the inventory of the
75
<PAGE>
Company Timber. Under the SYP, the Company estimates that its inventory at the
Scheduled Maturity Date of the Class A-3 Timber Notes, assuming the harvest
associated with the Initial Harvest Schedule and after taking into account
growth and other factors, would be approximately 2.3 million Mbfe. The foregoing
figures do not give effect to the potential sale to the state of California of
the Owl Creek grove (which the Company estimates constitutes approximately 2% of
the aggregate Mbfe contained in the Company Timber) or other Company
Timberlands. See "Risk Factors--Factors Affecting Actual Amortization." The
"Mbfe" concept is being used in structuring the Timber Notes to account for
the relative values of the species and categories of timber found in the Company
Timber. Under the Mbfe concept, one thousand board feet, net Scribner scale, of
old growth redwood timber equals one Mbfe. One thousand board feet, net Scribner
scale, of each other species and category of timber found in the Company Timber
was assigned a value equal to a fraction of an Mbfe. This fraction was generally
determined by dividing the June 1998 SBE Price applicable to such species and
category by the June 1998 SBE Price applicable to old growth redwood.
Under certain plans and agreements being negotiated with federal and state
regulatory authorities in connection with the Headwaters Agreement, harvesting
activities would be prohibited or restricted on approximately 34,600 acres of
the Company Timberlands. These timberlands include (without giving effect to an
estimated 1,000 overlapping acres) approximately 7,600 acres, consisting of
substantial quantities of old growth redwood and Douglas-fir timber, to serve as
habitat conservation areas for the marbled murrelet (a coastal seabird), and
28,000 acres to serve as buffers to protect aquatic and riparian (streamside)
habitat. The Initial Harvest Schedule assumed the existence of these
restrictions. The Combined Plan comtemplates the harvesting over time of either
the Owl Creek grove owned by the Company or the Grizzly Creek grove owned by
Pacific Lumber. The Initial Harvest Schedule assumed that the Owl Creek grove
would be harvested over time; however, a provision in the California Headwaters
Bill designates the Owl Creek grove as a conservation area for the marbled
murrelet, which would have the effect of restricting the activities which could
be conducted in the grove to only management activities not detrimental to the
marbled murrelett. The California Headwaters Bill also appropriates up to $80
million toward the acquisition at fair market value of the Owl Creek grove. The
bill also provides that if any portion of the $80 million remains after the
purchase of the Owl Creek grove, it may be used to purchase certain other
timberlands. See "Risk Factors--Factors Affecting Actual Amortization." See also
"--Regulatory and Environmental Matters--Endangered an the activities which
could be conducted in the grove to only management activities not detrimental to
the marbled murrelet. The California Headwaters Bill also appropriates up to $80
million toward the acquisition at fair market value of the Owl Creek grove. The
bill also provides that if any portion of the $80 million remains after purchase
of teh Owl Creek grove, it may be used to purchase certain other timberlands.
See "Risk Factors--Factors Affecting Actual Amortization." Threatened Species"
and "--Headwaters Agreement."
Legal challenges have severely restricted Pacific Lumber's ability to
harvest the virgin old growth timber on its property during the past few years,
and to a lesser extent residual old growth timber. The Company's ability to
harvest old growth timber has also been and is expected to continue to be
subject to restrictions under federal and state environmental laws as well as
pursuant to the Combined Plan that may be entered into in connection with the
Headwaters Agreement. It is anticipated that if the Headwaters Agreement is
consummated the Elk River Timberlands, consisting of approximately 7,700 acres
of timberlands or substantially comparable property will, within 180 days
thereof, be transferred to the Company and will become subject to the Lien of
the Deed of Trust securing the Timber Notes. See "Risk Factors--Regulatory and
Environmental Factors" and "--Regulatory and Environmental Matters" and
"--Headwaters Agreement" below. The table below sets forth, on an Mbfe basis,
the approximate composition of the measurable Company Timber as of December 31,
1997, with and without the Elk River Timberlands. The estimates of the volume of
timber comprising the Company Timber are based on a timber cruise performed in
1986 of all of Pacific Lumber's properties (including the Company Timber), as
adjusted to reflect actual harvest levels since the cruise and estimated growth
rates of the Company Timber.
PERCENTAGE PERCENTAGE
EXCLUDING INCLUDING
ELK RIVER ELK RIVER
TIMBERLANDS TIMBERLANDS
----------- -----------
Redwood
Old growth...................... 32% 30%
Young growth.................... 48% 50%
--- ---
Total redwood.............. 80% 80%
--- ---
Douglas-fir
Old growth...................... 12% 11%
Young growth.................... 6% 7%
--- ---
Total Douglas-fir.......... 18% 18%
--- ---
Other types of timber................ 2% 2%
--- ---
Total...................... 100% 100%
=== ===
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Redwood lumber is a premium, high value-added product which has different
supply and demand characteristics from the general lumber market. Redwood is
known for its natural beauty, superior ability to retain paints and finishes,
dimensional stability and its innate resistance to decay, insects and chemicals.
As a result, redwood lumber is generally not used for commodity applications
such as structural frames for construction, but is used instead for specialty
applications such as exterior siding, trim and fascia for both residential and
commercial construction, outdoor furniture, decks, planters and retaining walls.
Redwood also has a variety of industrial applications because of its resistance
to chemicals and because it does not impart any taste or odor to liquids or
solids. Redwood prices have exhibited stability compared to most other softwood
timber types, and redwood lumber has historically commanded a substantial price
premium to other softwood timber types.
Redwood is grown commercially only in North America in a region that
extends for approximately 375 miles along the coast of the Pacific Northwest.
The combination of excellent soil conditions and climate makes this region one
of the most productive timber regions in North America. The Company Timberlands
are among the largest privately-owned contiguous tracts of redwood timberlands
and represents one of the most valuable redwood timberland holdings as a result
of their prime location, which contributes to their superior growth
characteristics and high timber density.
Douglas-fir is used primarily for new construction and some decorative
purposes and is widely recognized for its strength, hard surface and attractive
appearance. Douglas-fir is grown commercially along the west coast of North
America and in Chile and New Zealand.
Pacific Lumber engages in extensive efforts to supplement the natural
regeneration of the Company Timber and increase the amount of timber on the
Company Timberlands. The Company is required to comply with California forestry
regulations regarding reforestation, which generally require that an area be
reforested to specified standards within an established period of time. Pursuant
to the New Services Agreement described below (see "--Operation of Company
Timberlands"), Pacific Lumber will conduct regeneration activities on the
Company Timberlands for the Company. Regeneration of redwood timber generally is
accomplished through the natural growth of new redwood sprouts from the stump
remaining after a redwood tree is harvested. Such new redwood sprouts grow
quickly, thriving on existing mature root systems. In addition, Pacific Lumber
supplements natural redwood regeneration by planting redwood seedlings.
Douglas-fir timber is regenerated almost entirely by planting seedlings. During
1997, Pacific Lumber planted an estimated 659,000 redwood and Douglas-fir
seedlings on the Company Timberlands.
Subject to the terms of the Indenture, the Timber Notes and the Deed of
Trust, the Company may from time to time purchase additional timberlands in
connection with its timber operations and may trade or exchange certain of its
timberland parcels for property owned by other persons.
OPERATION OF COMPANY TIMBERLANDS
The Company's foresters, wildlife and fisheries biologists and other
personnel are responsible for providing a number of forest stewardship
techniques, including protecting the Company Timber from forest fires, erosion,
insects and other damage, overseeing reforestation activities and monitoring
environmental and regulatory compliance. The Company's personnel are also
responsible for preparing THPs and updating the information contained in the
GIS. See "--Harvesting Practices" for a description of the Company's GIS and
the THP preparation process.
The Company continues to rely on Pacific Lumber to provide, pursuant to the
New Services Agreement, operational, management and related services not
performed by its own employees with respect to the Company Timberlands. These
services had been performed pursuant to the Original Services Agreement, and
following the Closing Date have continued to be performed pursuant to the New
Services Agreement. The services under the New Services Agreement include the
furnishing of all equipment, personnel and expertise not within the Company's
possession and reasonably necessary for the operation and maintenance of the
Company Timberlands and the Company Timber as well as timber management
techniques designed to supplement the natural regeneration of, and increase the
amount of, Company Timber. Pacific Lumber is required to provide all services
under the New Services Agreement in a manner
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consistent in all material respects with prudent business practices which, in
the reasonable judgment of Pacific Lumber, (a) are consistent with then current
applicable industry standards and (b) are in compliance in all material respects
with all applicable Timber Laws (as hereinafter defined). As compensation for
the services provided by Pacific Lumber pursuant to the Original Services
Agreement, the Company paid a monthly fee which was adjusted annually based upon
a specified government index relating to wood products. As compensation for the
services provided by Pacific Lumber pursuant to the New Services Agreement, the
Company pays Pacific Lumber a Services Fee which is adjusted each year based on
a specified government index relating to wood products and reimburses Pacific
Lumber for the cost of constructing, rehabilitating and maintaining roads, and
performing reforestation services, on the Company Timberlands, as determined in
accordance with generally accepted accounting principles. Certain of such
reimbursable expenses are expected to vary in relation to the amount of timber
to be harvested in any given period. As of the date of this Prospectus, the
monthly portion of the Services Fee is approximately $107,000 and the amount of
such reimbursable expenses will aggregate approximately $8.0 million for fiscal
1999.
Prior to the Closing Date, the Company was also a party to an Additional
Services Agreement with Pacific Lumber (the "Original Additional Services
Agreement") whereby the Company had agreed to provide to Pacific Lumber (and
its subsidiaries) a variety of services. Following the Closing Date, these
services continued to be provided pursuant to a New Additional Services
Agreement (the "New Additional Services Agreement"). Services include (a)
assisting Pacific Lumber to operate, maintain and harvest its own timber
properties, (b) updating and providing access to the GIS with respect to
information concerning Pacific Lumber's own timber properties and (c) assisting
Pacific Lumber with its statutory and regulatory compliance. Pacific Lumber pays
the Company a fee for such services equal to the actual cost of providing such
services, as determined in accordance with generally accepted accounting
principles. See "Description of Certain Principal Agreements."
HARVESTING PRACTICES
The ability of the Company to sell logs will depend, in part, upon its
ability to obtain regulatory approval of THPs. THPs are required to be developed
by registered professional foresters and must be filed with, and approved by,
the CDF prior to the harvesting of timber. Each THP is designed to comply with
applicable laws and regulations. The CDF's evaluation of submitted THPs
incorporates review and analysis of such THPs by several California and federal
agencies and public comments received with respect to such THPs. An approved THP
is applicable to specific acreage and specifies the harvesting method and other
conditions relating to the harvesting of the timber covered by such THP. See
"--Regulatory and Environmental Matters" for information regarding critical
habitat designations, sustained yield regulations and other matters with respect
to the Company Timberlands.
The GIS contains information regarding numerous aspects of the Company
Timberlands, including timber type, tree class, wildlife data, roads, rivers and
streams. Subject to the terms of the New Services Agreement, Pacific Lumber
will, to the extent necessary, provide the Company with personnel and technical
assistance to assist the Company in updating, upgrading and improving the GIS
and the other computer systems owned by the Company. By carefully monitoring and
updating this data base and conducting field studies, the Company's foresters,
with the assistance (if required) of Pacific Lumber pursuant to the New Services
Agreement, are better able to develop detailed THPs addressing the various
regulatory requirements. The Company also utilizes a Global Positioning System
("GPS") which allows precise location of geographic features through satellite
positioning. Use of the GPS greatly enhances the quality and efficiency of GIS
data.
The number of the Company's approved THPs and the amount of timber covered
by such THPs varies significantly from time to time, depending upon the timing
of agency review and other factors. Timber covered by an approved THP is
typically harvested over more than one year. The Indenture requires the Company
to use its best efforts (consistent with prudent business practices) to maintain
a number of pending THPs which, together with THPs previously approved, would
cover rights to harvest a quantity of Company Timber adequate to pay interest
and principal amortization based on the Minimum Principal Amortization Schedule
for the next succeeding twelve month period. Pursuant to the Original Services
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Agreement, Pacific Lumber provided, and pursuant to the New Services Agreement
continues to provide, a variety of services to the Company in connection with
the preparation, filing and performance of THPs by the Company, including
defending any legal challenge to a THP.
After obtaining an approved THP, the Company offers for sale the logs to be
harvested pursuant to such THP. While the Company may sell logs to third
parties, the Company had derived, pursuant to the Original Master Purchase
Agreement, and continues to derive, pursuant to the New Master Purchase
Agreement, substantially all of its revenue from the sale of logs to Pacific
Lumber. Each sale of logs by the Company to Pacific Lumber will be made pursuant
to a separate log purchase agreement that will relate to the Company Timber
covered by an approved THP and will incorporate the provisions of the New Master
Purchase Agreement. Each such log purchase agreement provides for the sale to
Pacific Lumber of the logs harvested from the Company Timber covered by such THP
and generally constitutes an exclusive agreement with respect to the timber
covered thereby, subject to certain limited exceptions. However, the timing and
amount of log purchases by Pacific Lumber will be affected by factors outside
the control of the Company, including regulatory and environmental factors, the
financial condition of Pacific Lumber, Pacific Lumber's own supply of timber and
its ability to harvest such timber, and the supply and demand for lumber
products (which, in turn, will be influenced by demand in the housing,
construction and remodeling industries). See "Risk Factors--Factors Affecting
Payments on the Timber Notes."
As Pacific Lumber purchases logs from the Company pursuant to the New
Master Purchase Agreement, Pacific Lumber is responsible, at its own expense,
for harvesting and removing the standing Company Timber covered by approved
THPs, and the purchase price is therefore based upon "stumpage prices." Title
to, and the obligation to pay for, harvested logs does not pass to Pacific
Lumber until the logs are transported to Pacific Lumber's log decks and
measured. See "Description of Certain Principal Agreements--Master Purchase
Agreement." The New Master Purchase Agreement generally contemplates that all
sales of logs by the Company to Pacific Lumber will be at a price which equals
or exceeds the applicable SBE Price. The New Master Purchase Agreement defines
the "SBE Price" for any species and category of timber as the stumpage price
for such species and category, 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 Harvest Value Schedule. Harvest Value
Schedules are published twice a year for purposes of computing a yield tax
imposed on timber harvested between January 1 and June 30 and July 1 and
December 31. SBE Prices are not necessarily representative of actual prices that
would be realized from unrelated parties at subsequent dates.
The Company employs a variety of well-accepted methods of selecting trees
for harvest. These methods, which are designed to achieve optimal regeneration,
are referred to as "silvicultural systems" in the forestry profession.
Silvicultural systems range from very light thinnings aimed at enhancing the
growth rate of retained trees to clear cutting which results in the harvest of
all trees in an area and replacement with a new forest stand. In between are a
number of varying levels of partial harvests which can be employed.
OTHER PRINCIPAL AGREEMENTS
On the Closing Date, Pacific Lumber, the Company and Salmon Creek entered
into the New Reciprocal Rights Agreement granting to each other, among other
things, certain reciprocal rights of egress and ingress through their respective
properties in connection with maintenance of their respective properties and
operations of their respective businesses. See "Description of Certain
Principal Agreements--New Reciprocal Rights Agreement." In addition, on the
Closing Date, the Company and Pacific Lumber entered into an Environmental
Indemnification Agreement (the "New Environmental Indemnification Agreement")
pursuant to which Pacific Lumber agreed to indemnify the Company from and
against (i) certain present and future liabilities arising with respect to
hazardous materials, hazardous materials contamination or disposal sites, or
under environmental laws with respect to the Mortgaged Property as a result of
activities occurring prior to the date on which the Company acquired the
Mortgaged Property or caused by Pacific Lumber subsequent thereto, except to the
extent caused by gross negligence or willful misconduct of the Indemnified Party
or (ii) breach by Pacific Lumber of the representations and warranties contained
in the
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New Environmental Indemnification Agreement. See "Description of Certain
Principal Agreements--Environmental Indemnification Agreements." The New
Reciprocal Rights Agreement and the New Environmental Indemnification Agreement
contain terms and provisions substantially identical to those contained in the
corresponding agreements which had been in effect prior to the Closing Date to
which Scotia Pacific was a party.
EMPLOYEES
As of September 1, 1998, the Company employed 44 persons, 41 of whom were
registered professional foresters, wildlife and fisheries biologists or
otherwise involved in the management of the Company Timberlands. None of the
Company's employees are covered by a collective bargaining agreement.
PRINCIPAL EXECUTIVE OFFICES
The principal executive offices of the Company are located at 125 Main
Street, 2nd Floor, P.O. Box 712, Scotia, California 95565. The telephone number
of the Company is (707) 764-2330.
REGULATORY AND ENVIRONMENTAL MATTERS
OVERVIEW
Regulatory and environmental matters play a significant role in the
Company's business, which is subject to a variety of California and federal laws
and regulations dealing with timber harvesting practices, threatened and
endangered species, and air and water quality. The California Forest Practice
Act and related regulations adopted by the BOF set forth detailed requirements
for the conduct of timber harvesting operations in the state. Timber owners such
as the Company are required to file with the CDF and obtain the CDF's approval
of detailed THPs prior to the harvesting of timber. A THP includes information
regarding the method of proposed timber operations for a specified area of
forest, whether the operations will have any adverse impact on the environment
and, if so, the mitigation measures to be used to reduce any such impact.
California law also requires timber owners such as the Company to demonstrate
that their proposed operations will not decrease the sustainable productivity of
their timberlands. A timber company may comply with this requirement by
submitting an SYP to the CDF for review and approval. An SYP contains a timber
growth and yield assessment, which evaluates and calculates the amount of
harvestable timber and long-term production outlook for a company's timberlands,
a fish and wildlife assessment, which addresses the conditions and management of
fisheries and wildlife areas, and a watershed assessment, which demonstrates
that aquatic resources are not negatively affected by timber operations.
The Company's business is also subject to the federal Clean Water Act and
its California equivalent, and the ESA and the CESA. The federal Clean Water Act
and its California equivalent require the Company to conduct its business so as
to avoid impairment of the water quality of local rivers and streams. The ESA
and CESA provide in general for the protection and conservation of wildlife and
plants which have been declared to be endangered or threatened. These laws
generally prohibit certain adverse impacts on such species (referred to as a
"take"). Under the ESA, this includes an unintentional take that is incidental
to otherwise lawful activities such as timber harvesting. However, federal law
provides that the United States Fish and Wildlife Service ("USFWS"), in the
case of terrestrial species, and the National Marine Fisheries Service
("NMFS"), in the case of aquatic species, may issue permits for incidental
takes which do not jeopardize the continued existence of the affected species,
where such takes are made in accordance with an approved HCP and such permits.
An HCP analyzes the impact of the incidental takes and specifies measures to
monitor, minimize and mitigate such impact. California law provides that the
California Department of Fish and Game ("CDFG") may issue similar take
permits.
Regulatory and environmental concerns have resulted in restrictions on the
geographic scope of and the timing of operations on the Company Timberlands,
increased operational costs and engendered litigation and other challenges to
the Company's THPs and other operations. While these matters have not
historically had a significant adverse effect on the Company's financial
position, liquidity or results of operations, the environmental laws and related
administrative actions and legal challenges have severely restricted the ability
to harvest virgin old growth timber, and to a lesser extent, residual old growth
timber
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on the timberlands of the Company and Pacific Lumber. See "--Legal Proceedings
- --Timber Harvesting Litigation" with respect to certain lawsuits which are
pending or threatened which could affect the ability to harvest Company Timber,
including one lawsuit which could potentially result in severe restrictions on
the ability to harvest Company Timber for up to several months.
MAXXAM and Pacific Lumber have released the Combined Plan for the purpose
of public review and comment. If the Combined Plan is approved and the Permits
are issued by the appropriate government agencies (the "Agencies"), the
Company expects to realize a number of substantial benefits. The Company should
experience a more streamlined THP preparation and review process because the
THPs may incorporate the provisions of the Combined Plan by reference. As a
result of the Multi-Species HCP and the Permits, the Company should be allowed
to conduct operations in certain of the Company's forest areas in which the
Company previously experienced substantial difficulty in obtaining regulatory
approval for harvesting operations. The Multi-Species HCP would not only provide
for the Company's compliance with habitat requirements for currently listed
species, it would also provide greater certainty and protection for the Company
with regard to identified species that may be listed in the future (often
referred to as the "no surprises" rule of the USFWS and the NMFS). Also, the
coordinated approval by both the federal and California state governments of the
SYP, Multi-Species HCP and Permits should enhance the Company's position in
litigation and similar challenges by environmental groups.
THE HEADWATERS AGREEMENT
In September 1996, MAXXAM, Pacific Lumber, the United States and California
entered into the Headwaters Agreement, which provides for, among other things,
the proposed purchase by the United States and California of the Headwaters
Timberlands, consisting of approximately 5,600 acres of Pacific Lumber's
timberlands. See "--Headwaters Agreement" below. One of the conditions to
consummation of the Headwaters Agreement is approval of a Multi-Species HCP and
an SYP. In February 1998, MAXXAM, Pacific Lumber and various government agencies
entered into a Pre-Permit Agreement in Principle (the "Pre-Permit Agreement")
embodying certain agreements in principle they had reached regarding the
Multi-Species HCP, the Permits and the SYP. In July 1998, Pacific Lumber
released the Combined Plan for public review and comment. In addition, a draft
environmental impact statement/report (the "EIR/EIS") analyzing the Headwaters
Agreement, SYP and Multi-Species HCP is being prepared by an environmental
consulting firm under the direction of the United States and California. The
EIR/EIS is expected to be made available for public review and comment in the
next few weeks. After the public review and comment process is completed, the
regulatory agencies will determine whether to approve (with or without
conditions) or disapprove the Combined Plan.
The Company believes that release of the Combined Plan for public review
and comment and passage of the California Headwaters Bill are favorable
developments that enhance the prospects for the consummation of the Headwaters
Agreement and the issuance of the Permits. However, neither the Headwaters
Agreement nor the Pre-Permit Agreement obligates the Agencies to approve the
Combined Plan in its current form or to issue the Permits. While the
parties to the Headwaters Agreement are working diligently toward completion of
the conditions to the closing of the Headwaters Agreement prior to the March 1,
1999 expiration of federal funding, there can be no assurance that any or all
such conditions will be satisfied by such date. Litigation could also be brought
to block or delay implementation of the Headwaters Agreement or the approvals of
the Combined Plan and issuance of the Permits. If the Headwaters Agreement is
not or cannot be consummated, the Combined Plan, which assumes the completion of
the Headwaters Agreement, would have to be significantly revised, and the
Company cannot predict whether or when any such revised plan would be presented
to or approved by the Agencies.
THE COMBINED PLAN AND CALIFORNIA HEADWATERS BILL
The Combined Plan provides that the Permits and Multi-Species HCP would
have a term of 50 years. The Combined Plan also provides that for the term of
the Permits, only certain management activities can be conducted by Pacific
Lumber in eleven forest groves ("murrelet conservation areas") not being sold
to the United States and California. The murrelet conservation areas set forth
in the Combined Plan aggregate
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approximately 7,600 acres and consist of substantial quantities of virgin and
residual old growth redwood and Douglas-fir timber. These limitations are
designed primarily to protect habitat for the marbled murrelet, a coastal
seabird which has been listed as endangered under the CESA and threatened under
the ESA. The Combined Plan would have allowed the harvesting over time of
either the Owl Creek grove owned by the Company or the Grizzly Creek grove owned
by Pacific Lumber, and the Initial Harvest Schedule reflected the harvesting
over time of the Owl Creek grove. Under the Combined Plan, the other grove would
have been set aside as a murrelet conservation area. However, the California
Headwaters Bill removes this option and designates the Owl Creek grove as an
additional murrelet conservation area. The Combined Plan also requires Pacific
Lumber to complete, within three years, a specified watershed assessment process
(on a watershed by watershed basis). Pacific Lumber has commenced this process
as part of the Pre-Permit Agreement. This process is intended to result in
site-specific protective buffers for fish and other wildlife adjacent to the
streams on the Company Timberlands. Until the watershed assessment process is
complete, the Company has agreed to incorporate certain interim stream
protective measures into its THPs. These interim stream protection measures are
more stringent than the measures currently required by existing state
regulations. The Company is uncertain when all or any portion of the watershed
assessment process will be completed or what results will be.
The California Headwaters Bill contains provisions requiring the inclusion
of additional environmentally focused provisions in the final version of the
Multi-Species HCP, including establishing wider interim streamside buffers
(while the watershed assessment process is being completed) than provided for in
the Combined Plan, obligating Pacific Lumber and the government agencies to
establish a schedule that results in completion of the watershed assessment
process within five years, imposing minimum and maximum "no-cut" buffers upon
the watershed assessment process, and designating the Company's Owl Creek grove
as an additional marbled murrelet conservation area (the Combined Plan had
contemplated the harvesting of either the Owl Creek grove or Pacific Lumber's
Grizzly Creek grove). The California Headwaters Bill also provides that the SYP
shall be subject to the foregoing provisions. The bill also appropriates an
additional $20 million toward purchase of the Grizzly Creek grove from Pacific
Lumber at fair market value and prohibits harvesting for a period of five years
in the Grizzly Creek grove in order to provide an opportunity for the grove to
be purchased.
ENDANGERED AND THREATENED SPECIES
The designation of a species as endangered or threatened under the ESA or
the CESA can significantly affect the Company's business if that species
inhabits the Company Timberlands. The northern spotted owl, the marbled murrelet
and the coho salmon are species the designation of which has the potential to
significantly impact the Company's business. In the absence of an approved HCP
and incidental take permit, the Company has been required to operate on a
"no-take" basis with respect to these species. While this method of operation
has not had a material adverse affect on the Company in respect of the northern
spotted owl, the designation of the marbled murrelet and the coho salmon has
resulted and could in the future result in significant restrictions on the
ability to harvest in certain areas of the Company Timber. Also, in the absence
of an approved SYP, Multi-Species HCP and the Permits (with the exception noted
below in respect of the northern spotted owl), each of the Company's THPs is
required to separately analyze the impact of the harvesting operations and
mitigation measures on these endangered or threatened species. This has delayed
or prevented the approval of certain of the Company's THPs. If the Combined Plan
is approved and the Company obtains the Permits, the Company's ability to
incorporate by reference the terms of the Combined Plan into its THPs should
expedite the preparation and approval of THPs. The Combined Plan, if approved,
would also help insulate the Company from additional regulatory burdens that
could otherwise be imposed in the future in respect of certain species that may
subsequently be designated as endangered or threatened or as a result of changed
or unforeseen circumstances. See "--The "No Surprises Rule' " below.
NORTHERN SPOTTED OWL. In 1990, the USFWS designated the northern spotted
owl as threatened under the ESA. The owl's range includes the Company
Timberlands. Pacific Lumber has developed and the appropriate federal and state
regulatory agencies have endorsed northern spotted owl management plans (the
"Owl Plans") as not likely to result in the take of owls. By incorporating the
Owl Plans into each relevant THP filed with the CDF, the Company has been able
to expedite preparation and agency
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consideration of such THPs to the extent they relate to the northern spotted
owl. Accordingly, the designation of the northern spotted owl as threatened has
not had a material adverse effect on the Company's business.
MARBLED MURRELET. In 1992, the marbled murrelet was listed as endangered
under the CESA and threatened under the ESA. Approximately 27,700 acres of
timberlands containing Company Timber have been designated as critical habitat
of the marbled murrelet. In connection with the preparation of THPs for areas of
potential marbled murrelet habitat, the Agencies have required the Company to
conduct surveys that would facilitate site-specific mitigation strategies to
prevent adverse impact to the marbled murrelet. The survey requirement has
delayed the submission, review and approval process for such THPs, and surveys
conducted pursuant thereto have indicated that the Company has certain
timberlands that are occupied marbled murrelet habitat. The Combined Plan and
California Headwaters Bill designate several marbled murrelet conservation
areas, totaling up to approximately 8,500 acres and consisting of substantial
quantities of old growth redwood and Douglas-fir timber, in which only
management activities not detrimental to the marbled murrelet would be
permitted. If the Combined Plan is not approved, the Company cannot predict when
or whether timber operations could be conducted in its remaining old growth
areas.
THE COHO SALMON. In 1997, the NMFS announced the listing of the coho
salmon as threatened in northern California, including the Company Timberlands.
This designation could potentially affect the ability to harvest in areas of
young growth Company Timber, which have in the past not been the subject of
significant environmental challenges. See "--Legal Proceedings--Timber
Harvesting Litigation" for the description of a pending case relating to a
significant number of the Company's THPs and seeking additional protection for
the coho salmon. The Company has also received notice from certain environmental
groups of additional threatened actions in respect of the coho salmon. The
Combined Plan requires Pacific Lumber to complete within three years a watershed
assessment program (on a watershed by watershed basis) which would contribute to
the conservation of the coho salmon and other aquatic species. Pacific Lumber
has already commenced this process as part of the Pre-Permit Agreement. This
program would create buffers, totaling approximately 28,000 acres, in which
timber harvesting activity would be restricted, along the banks of the Company's
fish bearing and certain other streams. In addition, the Pre-Permit Agreement
requires the Company to incorporate certain interim stream protection measures
into its THPs. These interim stream protection measures are more stringent than
the measures currently required by state regulations. The Combined Plan requires
that these interim stream protection measures be followed until the watershed
assessment process is completed. The California Headwaters Bill requires the
Multi-Species HCP to include provisions establishing wider interim streamside
buffers than provided for in the Combined Plan and obligating Pacific Lumber and
government agencies to establish a schedule that results in completion of the
watershed assessment process within five years. The Company is uncertain when
all or any portion of the watershed assessment process will be completed or what
the results will be.
THE "NO SURPRISES" RULE. The Combined Plan provides for habitat
conservation measures not only with respect to presently designated species but
also with respect to identified species that could become listed in the future.
Under the "no surprises" rule of the USFWS and the NMFS, if unforeseen
circumstances warrant additional mitigation with respect to any species covered
by the Combined Plan, whether or not currently designated as endangered or
threatened, the USFWS and NMFS would have the burden of establishing that such
circumstances exist. In any such case, the government would be precluded from
imposing additional requirements on the Company that would have additional costs
or require more timberlands to be set aside. Accordingly, the Combined Plan
should provide the Company with a significant measure of certainty and
protection against future environmental restrictions regarding endangered or
threatened species covered by the Combined Plan.
TIMBER HARVESTING REGULATION
APPROVAL AND HARVESTING OF THPS. The ability of the Company to sell logs
will depend in part upon its ability to obtain regulatory approval of its THPs.
Various groups and individuals have in the past filed objections with CDF and
the BOF regarding the CDF's and the BOF's actions and rulings with respect to
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certain of the Company's THPs. In addition, lawsuits are pending or threatened
which seek to prevent the Company from implementing certain of its approved
THPs. The Company expects these environmentally focused objections and lawsuits
to continue. While challenges with respect to the Company's young growth timber
have historically been limited, a lawsuit relating to the coho salmon has been
filed under the ESA which relates to a significant number of THPs covering young
growth timber of the Company. As noted above, the Company has also received
notice of additional threatened actions in respect of the coho salmon. See
"--Legal Proceedings--Timber Harvesting Litigation" for a description of the
COHO LAWSUIT and certain other lawsuits which are pending or threatened which
could affect the ability to harvest Company Timber, including one recently filed
lawsuit which could potentially result in severe restrictions on the ability to
harvest Company Timber for up to several months. While these environmental
challenges have not in the past had a significant adverse effect on the Company,
there can be no assurance that this will continue to be the case. The Company
expects that consummation of the Headwaters Agreement and approval of the
Combined Plan would facilitate the Company's ability to respond to such
challenges.
Pacific Lumber conducts logging operations on the Company Timberlands with
its own staff as well as through contract loggers. See "--Legal
Proceedings--Timber Harvesting Litigation" with respect to a stipulation
recently entered into by Pacific Lumber regarding its timber operators license.
THE SYP. An SYP is a method for demonstrating maximum sustained
productivity of timberlands, as required by California law. An SYP addresses
long-term issues of timber production, including watershed assessment, fish and
wildlife assessment and sustained production assessment, over a broad management
area and on a comprehensive long-term basis. Once the SYP has been approved, the
Company may satisfy certain requirements for its THPs by incorporating the
relevant information and analysis by reference from the SYP. An approved SYP is
expected to be effective for a ten year period, but is subject to review after
five years. A revised SYP would be filed every ten years and would include
changes based upon a reassessment of the Company's timber resource base and
other relevant factors.
An SYP must also contain provisions quantifying projected timber production
consistent with the concept of maximum sustained productivity. The relevant
regulations require determination of a long-term sustained yield ("LTSY")
harvest level, which is the average annual harvest level that the management
area is capable of sustaining in the last decade of a 100-year planning horizon.
The LTSY is determined based upon timber inventory, projected growth and
harvesting methodologies, as well as soil, water, air, wildlife and other
relevant considerations. The SYP must demonstrate that the average annual
harvest over any rolling ten-year period within the planning horizon does not
exceed the LTSY.
The SYP included in the Combined Plan covers substantially all of the
Company Timber, including approximately 10,900 acres of timberlands acquired
since January 1996, and assumes consummation of the Headwaters Agreement
(including acquisition of the Elk River Timberlands, which consist of
approximately 7,700 acres of timberlands proposed to be acquired from a third
party). The SYP included in the Combined Plan provides for an average annual
harvest during the first decade of the planning horizon that is approximately
10% less than the average timber harvest of the Company over the last three
years. The SYP contemplates a reduction in the average annual timber harvest for
each decade thereafter through the fifth decade of the planning horizon, after
which the average annual timber harvest would increase so that it approximates
the LTSY in the final decade of the planning period. The Company anticipates
that it should be able to increase the LTSY through the acquisition of
additional timberlands by Pacific Lumber or its affiliates (including the
Company), although the ability to make such acquisitions will depend on the
financial resources of Pacific Lumber and its affiliates and the availability of
suitable properties.
WATER QUALITY
Under the Federal Clean Water Act, the Environmental Protection Agency (the
"EPA") is required to establish total maximum daily load limits ("TMDLs") in
water courses that have been declared to be "water quality impaired." The EPA
and the North Coast Regional Water Quality Control Board ("NCRWQCB") are in
the process of establishing TMDL limits for seventeen northern California rivers
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and certain of their tributaries, including certain water courses that flow
within the Company Timberlands. As part of this process, the EPA and NCRWQCB are
expected to submit the TMDL requirements on the Company Timberlands for public
review and comment. Following the comment period, the NCRWQCB would finalize the
TMDL requirements applicable to the Company Timberlands, which may require
aquatic measures that are different from or in addition to the prescriptions to
be developed pursuant to the watershed assessment process contained in the
Combined Plan.
COMPLIANCE EXPENSE
The Company has in the past and is expected to continue in the future to
incur material expense to comply with relevant regulatory requirements. These
include the continuing expenses of bringing existing roads in the Company
Timberlands into compliance with revised state forest practice rules, as well as
for constructing new roads in accordance with such standards. The Company also
anticipates that its costs will increase as a result of the aquatic and riparian
protections required by the Combined Plan and the intensive forestation
management techniques which would be required under the SYP (and which would
result in a greater and better quality timber inventory and a higher LTSY).
These higher anticipated costs have either been included in the Structuring Cash
Flows or are reflected in the fees to be paid or costs to be reimbursed to
Pacific Lumber under the New Services Agreement.
IMPACT OF FUTURE LEGISLATION
Laws, regulations and related judicial decisions and administrative
interpretations dealing with the Company's business are subject to change and
new laws and regulations are frequently introduced concerning the California
timber industry. From time to time, bills are introduced in the California
legislature and the U.S. Congress which relate to the business of the Company,
including the protection and acquisition of old growth and other timberlands,
threatened and endangered species, environmental protection, air and water
quality and the restriction, regulation and administration of timber harvesting
practices. In addition to existing and possible new or modified statutory
enactments, regulatory requirements and administrative and legal actions, the
California timber industry remains subject to potential California or local
ballot initiatives and evolving federal and California case law which could
affect timber harvesting practices. It is not possible to assess the effect of
such future legislative, judicial and administrative events on the Company or
its business.
HEADWATERS AGREEMENT
As a result of government restrictions which effectively prohibited
operations on certain portions of Pacific Lumber's timberlands, in early 1996
two actions (the "Takings Litigation") were filed by Pacific Lumber and/or
certain of its subsidiaries. The actions allege that such restrictions
constitute an uncompensated taking by California and the United States of
private property for public use and seek constitutional just compensation. On
September 28, 1996, Pacific Lumber (on behalf of itself, its subsidiaries and
affiliates) and MAXXAM (collectively, the "Pacific Lumber Parties") entered
into the Headwaters Agreement with the United States and California. The
Headwaters Agreement provides for a stay of the Takings Litigation and provides
the framework for the acquisition by the United States and California of
approximately 5,600 acres of Pacific Lumber's timberlands commonly referred to
as the Headwaters Forest and the Elk Head Springs Forest (collectively, the
"Headwaters Timberlands"). A substantial portion of the Headwaters Timberlands
consists of virgin old growth timberlands. None of the Headwaters Timberlands
are owned by the Company. The Headwaters Timberlands would be transferred in
exchange for (a) property and other consideration from the United States and
California having an aggregate fair market value of $300 million and (b) the Elk
River Timberlands, consisting of approximately 7,700 acres of the timberlands to
be acquired by the United States and California from a third party. As part of
the Headwaters Agreement, the Pacific Lumber Parties agreed not to enter the
Headwaters Forest or the Elk Head Springs Forest to conduct any logging or
salvage operations.
Closing of the Headwaters Agreement is subject to various conditions,
including (a) the United States and California furnishing the requisite
consideration, (b) approval of an SYP, approval of a Multi-Species HCP and
issuance of Permits, each in form and substance satisfactory to Pacific Lumber,
(c) the issuance by
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the Internal Revenue Service and the California Franchise Tax Board of tax
closing agreements in form and substance sought by and satisfactory to the
Pacific Lumber Parties, (d) acquisition by the federal and state governments of
the Elk River Timberlands, (e) the absence of a judicial decision in any
litigation brought by third parties that any party to the Headwaters Agreement
reasonably believes will significantly delay or impair the transactions
described in the Headwaters Agreement and (f) the dismissal with prejudice at
closing of the Takings Litigation.
In November 1997, President Clinton signed an appropriations bill which
authorized the expenditure of $250 million of federal funds toward consummation
of the Headwaters Agreement. The federal funding remains available until March
1, 1999. On August 31, 1998, the California Legislature enacted the California
Headwaters Bill, which, among other things, appropriated $130 million toward
consummation of the Headwaters Agreement. The state funds remain available until
June 30, 1999. California Governor Pete Wilson has announced his intention to
sign the California Headwaters Bill. An aggregate of $380 million in federal and
state funds would be used to purchase both the Headwaters Timberlands from
Pacific Lumber (for $300 million) and the Elk River Timberlands from a third
party. The California Headwaters Bill also appropriated an additional up to $80
million toward purchase of the Owl Creek grove from the Company. See "Risk
Factors--Factors Affecting Actual Amortization." The bill also provides that if
any portion of the $80 million remains after purchase of the Owl Creek grove, it
may be used to purchase certain other timberlands. Additionally, the bill
appropriated a further additional $20 million toward purchase of the Grizzly
Creek grove from Pacific Lumber. The Bill also prohibits Pacific Lumber from
harvesting the Grizzly Creek for five years in order to provide an opportunity
for its sale.
See "--Regulatory and Environmental Matters" above for the status of the
Multi-Species HCP and the SYP and the description of certain environmentally
focused provisions which were included in the California Headwaters Bill. The
parties have been discussing the tax closing agreements but have not reached
agreement. While the parties to the Headwaters Agreement are continuing to work
diligently to satisfy the closing conditions to the Headwaters Agreement, there
can be no assurance that the Headwaters Agreement will be consummated. See "Risk
Factors--Regulatory and Environmental Factors" and "--Headwaters Agreement."
In the event that the Headwaters Agreement is not consummated and
harvesting on portions of the Company Timberlands cannot be conducted or is
severely limited, Pacific Lumber, the Company and Salmon Creek intend to
continue or expand the Takings Litigation. Although Pacific Lumber and the
Company believe that the claims in the Takings Litigation are meritorious, there
can be no assurance that the Company and its affiliates would be successful in
the Takings Litigation. Moreover, even if the Takings Litigation is successful,
there can be no assurance as to the amount or timing of any recovery that might
be received by the Company. Of the over 3,800 acres presently identified in the
Takings Litigation as timberlands that the government has taken without just
compensation, approximately 900 acres consist of Company Timber. See "Legal
Proceedings--Takings Litigation" below.
LEGAL PROCEEDINGS
TIMBER HARVESTING LITIGATION
On August 12, 1998, an action entitled ENVIRONMENTAL PROTECTION INFORMATION
CENTER, INC., SIERRA CLUB V. PACIFIC LUMBER, SCOTIA PACIFIC HOLDING COMPANY,
SALMON CREEK CORPORATION (No. C98-3129) (the "EPIC LAWSUIT") was filed against
Pacific Lumber, Scotia Pacific and Salmon Creek in the United States District
Court for the Northern District of California. The action relates to three THPs
consisting principally of old growth Douglas fir timber. The plaintiffs allege
that certain procedural violations of the ESA have resulted from defendants'
logging activities on the Company Timberlands and seek to prevent the defendants
from carrying out any harvesting activities until certain purported wildlife
agency consultation requirements under the ESA are satisfied in connection with
the Multi-Species HCP which is a condition to consummation of the Headwaters
Agreement. See "Business of the Company--Regulatory and Environmental Matters"
and "--Headwaters Agreement." On September 3, 1998, the Court granted
plaintiffs' motion for preliminary injunction pending an evidentiary hearing
scheduled to be held on September 23-24, 1998. The Company is uncertain what
impact this matter will have upon its operations and financial results, but were
the Court to keep the preliminary injunction in force after the evidentiary
hearing it is possible that other approved timber harvesting activities on the
Company's timberlands could be severely restricted (and revenues potentially
significantly adversely affected) until such time as the consultation
requirements are satisfied. The Company estimates that it could take up to
several months to complete these consultation
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requirements. The Company is vigorously defending this matter and should the
preliminary injunction remain in force after the evidentiary hearing, the
Company will devote sufficient resources to facilitate completion of the
consultation requirements as soon as practicable.
On January 26, 1998, an action entitled COHO SALMON, ET AL. V. PACIFIC
LUMBER, ET AL. (No. 98-0283) (the "COHO LAWSUIT") was filed against the Company,
Pacific Lumber and Salmon Creek in the United States District Court for the
Northern District of California. This action alleges, among other things,
violations of the ESA and claims that defendants' logging operations in five
watersheds have contributed to the "take" of the coho salmon. Plaintiffs'
original filing related to a significant number of the Company's THPs (a
substantial portion of which have been or are in the process of being
harvested). The plaintiffs' original filing sought, among other things, to
enjoin timber harvesting on the THPs and acreage identified. On July 31, 1998,
plaintiffs amended their complaint to include certain additional THPs and
seeking to require the Company to restore coho habitat allegedly harmed by
adverse cumulative effects of past (approved) timber harvesting. While the
Company believes that execution of the Pre-Permit Agreement and release of the
Combined Plan for public review and comment are positive developments in respect
of the COHO LAWSUIT, the Company is unable to predict the outcome of this case
or its ultimate impact on the Company's financial condition or results or the
ability to harvest timber on the Company's THPs. The Company has also received
notice of additional threatened actions in respect of the coho salmon.
Pacific Lumber conducts logging operations on the Company Timberlands with
its own staff of approximately 170 logging personnel as well as through contract
loggers. In order to conduct logging operations in California, a logging company
must obtain from the CDF a timber operator's license ("TOL"), which license is
subject to annual renewal. On December 30, 1997, the CDF issued a statement of
issues in connection with an administrative action entitled IN THE MATTER OF THE
STATEMENT OF ISSUES AGAINST: THE PACIFIC LUMBER COMPANY, TIMBER OPERATOR LICENSE
A-5326 (No. LT 97-8). This administrative action sought to deny Pacific Lumber's
application for a TOL based on various violations of the rules and regulations
of the Forest Practice Act. On the same date, Pacific Lumber entered into a
stipulation with the CDF and received a conditional TOL for 1998. The 1998 TOL
and Stipulation, which is in effect for one year, are conditioned on, among
other things, Pacific Lumber complying with (a) existing requirements governing
timber harvesting, as well as additional obligations concerning, primarily, wet
weather operations and minimizing the flow of sediment into water courses on
properties of the Company and Pacific Lumber, and (b) additional inspection and
self-monitoring obligations. Compliance with the obligations set forth in the
Stipulation has restricted Pacific Lumber's ability to harvest timber and
transport logs during periods of wet weather and has impaired Pacific Lumber's
ability to maintain adequate log inventories during those periods. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Recent Operating Results" and "Annex 2--The
Pacific Lumber Company--Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations--Recent Operating
Results." To ensure future compliance with the forest practice rules and
facilitate a return to unconditional licensed status, Pacific Lumber assembled a
special compliance team, hired two additional registered professional foresters
and instituted a reporting system for potential violations. Should Pacific
Lumber's TOL nevertheless be revoked, Pacific Lumber could engage independent
contractors to complete these activities on its behalf (independent contractors
currently account for approximately 60% of the harvesting activities on the
Company Timberlands). The Company therefore does not believe that loss of
Pacific Lumber's TOL would have a significant adverse effect on its business or
financial performance. On July 28, 1998, the CDF notified Pacific Lumber of
certain violations of Forest Practice Act rules and regulations in respect of
one of its THPs. This matter is currently under review by the Company, CDF and
other government authorities.
On May 27, 1998, an action entitled MATEEL ENVIRONMENTAL JUSTICE FOUNDATION
V. PACIFIC LUMBER, ET AL. (No. 995329) was filed against Scotia Pacific, Pacific
Lumber and Salmon Creek in the California Superior Court, San Francisco County
(and is currently in the process of being transferred to the Superior
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Court of Humboldt County). This action alleges, among other things, violations
of California's unfair competition law of the business and professional code
based on citations and violations (primarily water quality related) issued
against the 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 providing 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.
TAKINGS LITIGATION
On May 7, 1996, Scotia Pacific, Pacific Lumber and Salmon Creek filed a
lawsuit entitled THE PACIFIC LUMBER COMPANY, ET AL. V. THE UNITED STATES OF
AMERICA (No. 96-257L) in the United States Court of Federal Claims. The suit
alleges that the federal government has "taken" without compensation over
3,800 acres of Pacific Lumber's old growth timberlands (including approximately
900 acres of which consist of Company Timber) through its application of the
ESA. Scotia Pacific, Pacific Lumber and Salmon Creek seek constitutional "just
compensation" damages for the taking of these timberlands by the federal
government's actions. Salmon Creek has filed a similar action in the Superior
Court of Sacramento County with respect to eight acres of virgin old growth
timber. The court in each of these actions has granted the parties' agreed
motions to stay the actions pursuant to the Headwaters Agreement. These actions
would be dismissed if the Headwaters Agreement is consummated. See "--Regulatory
and Environmental Matters" and "--Headwaters Agreement."
USAT MATTER
In January 1995, an action entitled U.S., EX REL., MARTEL V. HURWITZ, ET
AL. (No. C950322) was filed against MAXXAM, MGI and others and is pending in the
U.S. District Court for the Southern District of Texas. This action is
purportedly brought by the plaintiff on behalf of the U.S. government; however,
the U.S. government has declined to participate in the suit. Neither the Company
nor Pacific Lumber is a defendant in this suit. The suit alleges that the
defendants made false statements and claims in violation of the Federal False
Claims Act in connection with United Savings Association of Texas ("USAT").
The plaintiff alleges, among other things, that the defendants used the
federally insured assets of USAT to acquire junk bonds from Michael Milken and
Drexel, Burnham, Lambert Inc. ("Drexel"). The plaintiff alleges that in
exchange Mr. Milken and Drexel arranged financing for defendants' various
business ventures, including the acquisition of Pacific Lumber by MAXXAM. The
plaintiff alleges that, as a result of USAT's insolvency, the defendants should
be required to pay $1.6 billion (subject to trebling) to cover USAT's losses.
The plaintiff asks, among other things, that the Court impose a constructive
trust upon the fruits of the alleged improper use of USAT funds. On February 6,
1998, the defendants' motion to dismiss was taken under submission by the Court.
OTHER LITIGATION
The Company is involved in other claims, lawsuits and proceedings,
including certain pending or threatened actions seeking to prevent Pacific
Lumber and the Company from harvesting under certain of their THPs and
conducting certain other operations. While uncertainties are inherent in the
final outcome of such matters and it is presently impossible to determine the
actual costs that ultimately may be incurred or their effect on the Company,
management believes that the resolution of such uncertainties and the incurrence
of such costs should not have a material adverse effect on the Company's
financial position, results of operations or liquidity.
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MANAGEMENT
EXECUTIVE OFFICERS AND MANAGERS
The table below sets forth certain information with respect to the persons
who are executive officers and managers of the Company. The Company is managed
by six managers, of whom four are officers or directors of Pacific Lumber, and
two are independent managers who are not employees of, or consultants to, the
Company. The Company's managers, each of whom was a director of Scotia Pacific,
were elected in June 1998. Actions requiring approval of the managers are
sufficient if approved by a majority of the managers; provided, however, that
any filing of a voluntary bankruptcy petition by the Company requires the
approval of all of the managers.
All officers and managers of the Company hold office until their respective
successors are elected and qualified or until their earlier resignation or
removal.
NAMES TITLES
- ---------------------------- ----------------------------------------------
John A. Campbell............ Chairman of the Board, President and Manager
John T. La Duc.............. Vice President and Manager
Gary L. Clark............... Vice President--Finance and Administration
Thomas M. Herman............ Vice President--Resources Management
Ronald L. Reman............. Vice President--Taxes
William S. Riegel........... Vice President--Sales
Paul N. Schwartz............ Vice President and Manager
Bernard L. Birkel........... Secretary
Ezra G. Levin............... Manager
Stuart C. Lewis............. Manager
Jack M. Webb................ Manager
JOHN A. CAMPBELL. Mr. Campbell, age 56, has served as Chairman of the
Board, President and a manager of the Company since its inception. He had served
as a director and President of Scotia Pacific from November 1992 until the
Merger and has served Pacific Lumber in such capacities since January 1989. Mr.
Campbell had served as Chairman of the Board of Scotia Pacific from June 1993
until the Merger and Chief Executive Officer of Pacific Lumber since February
1993. Mr. Campbell served as Pacific Lumber's Executive Vice President--Forest
Products Operations from January 1985 to January 1989. He also served as Pacific
Lumber's Vice President--Wood Products from April 1982 to January 1985.
Commencing shortly after he joined Pacific Lumber in 1969 until April 1982, Mr.
Campbell served Pacific Lumber in a variety of managerial positions.
JOHN T. LA DUC. Mr. La Duc, age 55, has served as a manager and Vice
President of the Company since its inception. He had served as a director and
Vice President of Scotia Pacific from November 1992 until the Merger and has
served Pacific Lumber in such capacities since October 1990. He has served as
Senior Vice President of MAXXAM since September 1990. He has also served Kaiser
Aluminum Corporation ("Kaiser") as Executive Vice President since July 1998,
Chief Financial Officer since May 1990 and as a Vice President from June 1989 to
July 1998. Mr. La Duc has served Kaiser Aluminum & Chemical Corporation
("KACC") as Executive Vice President since July 1998, a Vice President from
June 1989 to July 1998 and Chief Financial Officer since January 1990. He served
as Kaiser's Treasurer from August 1995 until February 1996, and from January
1993 until April 1993, and as KACC's Treasurer from June 1995 until February
1996, and from January 1993 until April 1993. Mr. La Duc has also been a Vice
President and a director of MGI since October 1990 and January 1994,
respectively. He served MAXXAM and MGI as Chief Financial Officer from September
1990 until December 1994 and February 1995, respectively. Mr. La Duc previously
served as Chief Financial Officer of Pacific Lumber and of Scotia Pacific from
October 1990 and November 1992, respectively, until February 1995.
WILLIAM S. RIEGEL. Mr. Riegel, age 51, has served as Vice President--Sales
of the Company since its inception. He had served as Vice President--Sales of
Scotia Pacific from November 1992 until the Merger. He has also served Pacific
Lumber as a director since January 1992, and as Vice President--Sales since
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January 1990. From the time he joined Pacific Lumber in 1971 until January 1990,
Mr. Riegel served in various sales management positions.
GARY L. CLARK. Mr. Clark, age 55, has served as Vice President--Finance
and Administration of the Company since its inception. He had served as Vice
President--Finance and Administration of Scotia Pacific from January 1993 until
the Merger. He assumed the position of Vice President, Finance and
Administration of Pacific Lumber in January 1993. Prior to assuming this
position, he had served Pacific Lumber as Vice President and Treasurer since
October 1990. Mr. Clark also served as Vice President and Treasurer of MAXXAM
and MGI from September 1990 and October 1990, respectively, to December 31,
1992. Mr. Clark also served as the Treasurer of Kaiser and of KACC from May 1990
and January 1990, respectively, to December 1992. From September 1987 until
January 1990, Mr. Clark was the Director of Financial Planning and Analysis of
KACC, and from April 1985 until September 1987, Mr. Clark served as the Business
Manager and Controller of KACC's Primary Products Division.
THOMAS M. HERMAN. Mr. Herman, age 45, has served as Vice
President--Resources Management of the Company since its inception. He had
served as Vice President--Resources Management of Scotia Pacific from April 1992
until the Merger and has served as Resource Manager of Pacific Lumber since
April 1992. From February 1992, when he joined Pacific Lumber, until April 1992,
Mr. Herman served as Assistant to the President. From January 1988 until he
joined Pacific Lumber, Mr. Herman served as Vice President and General Manager
for Rellim Redwood Company, Crescent City, California, a comprehensive forest
land management and logging enterprise. Mr. Herman is the immediate past
President and currently serves as a member of the Board of Directors of the
California Licensed Foresters Association and is also a member of the California
State Bar.
RONALD L. REMAN. Mr. Reman, age 40, has served as Vice President--Taxes of
the Company since its inception. He had served as Vice President--Taxes of
Scotia Pacific from October 1995 until the Merger and has also served Pacific
Lumber in such capacity since October 1995. He has also served as Vice
President--Taxes of MAXXAM since September 1992. Prior to September 1992, he had
served MAXXAM as Director of Taxes since joining MAXXAM in October 1986. From
July 1984 until October 1986, Mr. Reman was a Senior Manager in the Tax
Department of the New York office of Price Waterhouse after having served seven
years with the New York office of Coopers & Lybrand, both of which are
accounting firms. Mr. Reman also serves as Vice President--Taxes of MGHI and
certain other subsidiaries of MAXXAM and as Assistant Treasurer of Kaiser and
KACC.
PAUL N. SCHWARTZ. Mr. Schwartz, age 52, has served as a manager and Vice
President of the Company since its inception. He had served as a director of
Scotia Pacific from February 1993 until the Merger and has served as a director
of Pacific Lumber since February 1993. Mr. Schwartz has also served as a Vice
President of Scotia Pacific since November 1992 and has served Pacific Lumber in
such capacity since January 1987. He was named a director and President of
MAXXAM in January 1998. He has also served as Chief Financial Officer of MAXXAM
since January 1995. He previously served as Executive Vice President and Chief
Financial Officer of MAXXAM since January 1995 and Senior Vice
President--Corporate Development of MAXXAM from June 1987 until December 1994.
Mr. Schwartz also serves as a director of MGHI, MGI and SHRP General Partner,
Inc. ("SHRP"), a subsidiary of MAXXAM and the managing general partner of Sam
Houston Race Park, Ltd., which operates a horse racing facility in Texas. Mr.
Schwartz also serves as Chairman of the Board and sole executive officer of
United Financial Group, a Delaware corporation, and is a director of SLM Funding
Corporation which is a subsidiary of the Student Loan Marketing Association.
BERNARD L. BIRKEL. Mr. Birkel, age 48, has served as Secretary of the
Company since its inception. He had served as Secretary of Scotia Pacific from
May 1997 until the Merger and has also served MAXXAM, MGHI, MGI, Pacific Lumber
and SHRP in such capacity since May 1997. He has served as Managing
Counsel--Corporate of MAXXAM since May 1997. Until May 1997, Mr. Birkel was
Assistant Secretary of (i) Scotia Pacific from November 1992; (ii) MAXXAM and
MGI from May 1991; and (iii) MGHI from November 1996. Mr. Birkel was Senior
Corporate Counsel of MAXXAM from August 1992 until May
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1997. Prior to joining MAXXAM as Corporate Counsel in August 1990, Mr. Birkel
was a partner in the Houston law firm of Woodard, Hall & Primm, P.C.
EZRA G. LEVIN. Mr. Levin, age 64, has served as a manager of the Company
since its inception. he had served as a director of Scotia Pacific from February
1993 until the Merger and has served as a director of Pacific Lumber since
February 1993. Mr. Levin has also been a director of MAXXAM since May 1978, a
director of Kaiser since July 1991 and a director of KACC since November 1988.
Mr. Levin also served as a director of Kaiser from April 1988 to May 1990. From
January 1974 through December 1995, Mr. Levin served as a Trustee of Federated.
Mr. Levin is a partner in the law firm of Kramer, Levin, Naftalis, & Frankel.
From May 1982 through December 1993, he also served as a director of MGI.
STUART C. LEWIS. Mr. Lewis, age 58, has served as an independent manager
of the Company since its inception. He had served as an independent director of
Scotia Pacific from February 1993 until the Merger. Mr. Lewis has been with
Signius Corporation (an owner and operator of telemessaging call centers
throughout the U.S.) since January 1995, where he is Vice
President--Acquisitions. From March 1992 through December 1994, Mr. Lewis was
Senior Vice President--Development and Acquisitions of U.S. Physical Therapy,
Inc., an owner and operator of physical therapy clinics. From January 1990 until
March 1992, Mr. Lewis was President of Finco, Inc., a private merchant banking
firm. From 1982 through 1989, he was a partner in Gertner, Aron, Ledet & Lewis,
a private venture capital firm.
JACK M. WEBB. Mr. Webb, age 62, has served as an independent manager of
the Company since its inception. He had served as an independent director of
Scotia Pacific from February 1993 until the Merger. Mr. Webb is President of
Jack M. Webb & Associates, a management consulting firm formed by Mr. Webb in
1982. Prior to forming that firm, Mr. Webb served Gulf Resources & Chemical
Corp. from 1973 to 1982 in a variety of positions, including Vice President,
Government Relations & Administrative Assistant to the Chairman of the Board,
Secretary and Assistant General Counsel. Mr. Webb serves on the Board of
Directors of the Houston First Financial, the Boy Scouts of America and the
Medical Community Insurance Company.
COMPENSATION OF THE MANAGERS AND EXECUTIVE OFFICERS OF THE COMPANY
Managers (other than independent managers) of the Company are not
compensated by the Company for their service as managers. Each of the
independent managers receives a fee of $15,000 per year. Managers of the Company
are reimbursed for travel and other disbursements relating to their attendance
at meetings of managers (and committees thereof). The compensation arrangements
for the managers of the Company are the same as those that were in effect for
the directors of Scotia Pacific during 1997.
The Company's executive officers are not compensated directly by the
Company for their performance of services to the Company. Certain of the
Company's executive officers are employees of Pacific Lumber and are compensated
directly by Pacific Lumber. Certain executive officers of the Company also are
employees of, and are compensated directly by, MAXXAM or KACC.
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CERTAIN TRANSACTIONS
MAXXAM, Pacific Lumber, Salmon Creek and Scotia Pacific entered into a tax
allocation agreement on March 23, 1993 which in part modified MAXXAM's existing
tax allocation agreement (collectively, the "Tax Allocation Agreements") with
Pacific Lumber and certain other subsidiaries of MAXXAM. Pursuant to the terms
of the Tax Allocation Agreements, MAXXAM pays any consolidated federal income
tax liability for its affiliated group of corporations (the "Group") within
the meaning of Section 1504 of the Internal Revenue Code of 1986, as amended
(the "Code"). Pacific Lumber is currently a member of the Group. The Company,
which is not a separate member of the Group, elected to be disregarded as a
separate entity and treated as a division of Pacific Lumber solely for income
tax purposes. Under the Tax Allocation Agreements, Pacific Lumber is liable to
MAXXAM for the federal consolidated income tax liability of Pacific Lumber
(including the activities of the Company reported for income tax purposes in
Pacific Lumber) and certain other subsidiaries of Pacific Lumber (but excluding
Salmon Creek) (collectively, the "PL Subgroup") computed as if the PL Subgroup
were a separate affiliated group of corporations which was never affiliated with
the Group (taking into account all limitations under the Code and regulations
applicable to the PL Subgroup). To the extent such calculation results in a net
operating loss or a net capital loss or credit which the PL Subgroup could have
carried back to a prior taxable period under the principles of Sections 172 and
1502 of the Code, MAXXAM pays to Pacific Lumber an amount equal to the tax
refund to which the PL Subgroup would have been entitled (but not in excess of
the aggregate net amount previously paid by Pacific Lumber to MAXXAM for the
current year and the three preceding taxable years). If such separately
calculated net operating loss or net capital loss or credit of the PL Subgroup
cannot be carried back to a prior taxable year of the PL Subgroup for which
Pacific Lumber paid its consolidated tax liability to MAXXAM, the net operating
loss or net capital loss or credit becomes a loss or credit carryover of the PL
Subgroup to be used in computing the PL Subgroup's consolidated income tax
liability for future taxable years. The Company is not liable to MAXXAM for
income taxes under the Tax Allocation Agreements. Although, under Treasury
regulations, all members of the Group, including the members of the PL Subgroup,
are severally liable for the Group's federal tax liability, under the Tax
Allocation Agreements, MAXXAM indemnifies each PL Subgroup member for all
federal tax liabilities relating to taxable years during which such PL Subgroup
member is a member of the Group, except for payments required of Pacific Lumber
or Salmon Creek under the Tax Allocation Agreements. The same principles are
applied to any consolidated or combined state or local income tax returns filed
by the Group with respect to the PL Subgroup.
The Company and Pacific Lumber entered into or amended various agreements
in connection with the transactions contemplated by the Offering. See
"Description of Certain Principal Agreements."
Mr. Levin, a manager of the Company, is a partner of the law firm of
Kramer, Levin, Naftalis & Frankel, which provides legal services for MAXXAM and
its affiliates, including the Company. See "Legal Matters."
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DESCRIPTION OF THE TIMBER NOTES
The New Notes will be issued under the Indenture, dated as of the Closing
Date, between the Company and State Street Bank and Trust Company, as trustee
(the "Trustee"). The New Notes will be issued solely in exchange for the same
Class and an equal principal amount of Old Notes. See "The Exchange Offer." As
used herein, the term "Timber Notes" shall mean the Old Notes and the New
Notes unless otherwise indicated.
The form and terms of the New Notes are substantially identical to the form
and terms of the Old Notes, except that the New Notes (i) will be registered
under the Securities Act, (ii) will not provide for payment of Non-Registration
Premiums, which terminates upon consummation of the Exchange Offer, and (iii)
will not bear any legends restricting transfer thereof.
Except as otherwise indicated below, the following summary applies to both
the Old Notes and the New Notes. The following summary, which describes certain
provisions of the Indenture, the Timber Notes and the Deed of Trust, does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the Indenture, the Timber Notes and the Deed of Trust, copies or
forms of which are filed as exhibits to the Registration Statement of which this
Prospectus is a part. Certain of the terms used in this section are used
elsewhere in this Prospectus with different meaning. See "Certain Defined
Terms" for the definition of certain terms utilized in this section and in
"Description of Certain Principal Agreements."
GENERAL
The Timber Notes constitute obligations of the Company, and do not
constitute obligations of, and are not guaranteed by, Pacific Lumber or any
other person. The Company is a special purpose Delaware limited liability
company established to facilitate the offering of the Timber Notes, and, as of
the date of this Prospectus, has no material assets other than the Mortgaged
Property. The Timber Notes are secured by a Lien on the Mortgaged Property,
pursuant to a Deed of Trust, effective as of the Closing Date, among the
Company, as trustor, the Trustee, as beneficiary and as Collateral Agent for the
Noteholders and the Liquidity Providers, and a trustee thereunder, and will be
payable from cash flow generated by the Mortgaged Property.
Amounts payable on the Timber Notes will be paid on January 20 and July 20
of each year (each, a "Note Payment Date"), beginning January 20, 1999. If the
date scheduled to be a Note Payment Date is not a Business Day, the next
succeeding day that is a Business Day will be the Note Payment Date, but all
calculations of interest and other items will be as of the 20th day of the
applicable month.
RATINGS OF THE TIMBER NOTES
The Timber Notes were given the following ratings at the time of their
issuance:
RATING FOR
-----------------------------------
RATING AGENCY CLASS A-1 CLASS A-2 CLASS A-3
- ---------------------------------------- --------- --------- ---------
Moody's................................. A1 A3 Baa2
S&P..................................... A A BBB
THE RATINGS ON THE TIMBER NOTES ADDRESS ONLY THE PAYMENT OF INTEREST WHEN
DUE AND THE PAYMENT OF ALL PRINCIPAL BY JULY 20, 2028 (THE "FINAL MATURITY
DATE") AND DO NOT ADDRESS PAYMENT OF PRINCIPAL AT ANY FASTER RATE OR THE
PAYMENT OF ANY PREMIUM OR INTEREST ON PREMIUM. A SECURITY RATING IS NOT A
RECOMMENDATION TO BUY, SELL OR HOLD SECURITIES, AND SUCH RATINGS MAY BE SUBJECT
TO REVISION OR WITHDRAWAL AT ANY TIME.
PRINCIPAL; INTEREST; PREMIUM
PRINCIPAL
For each Class of Timber Notes, the Scheduled Amortization represents the
amount of principal that the Company must pay (on a cumulative basis) on such
Class through each Note Payment Date in order to avoid the payment of Prepayment
or Deficiency Premiums to the holders of such Class. The Scheduled
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Maturity Date, which is January 20, 2007 in the case of the Class A-1 Timber
Notes and January 20, 2014 in the case of the Class A-2 and Class A-3 Timber
Notes, for each Class of Timber Notes, represents the Note Payment Date on which
the Company will pay the final installment of principal on the Timber Notes of
such Class if all payments of principal are made to the holders of such Class in
accordance with the Scheduled Amortization Schedule for such Class. The Company
is not required to pay Scheduled Amortization on any Note Payment Date to the
extent that it exceeds the principal amount otherwise required to be paid on
such Note Payment Date.
The Scheduled Amortization Schedule for the Class A-3 Timber Notes does not
include any payments of principal to the holders of such Class before the
Scheduled Maturity Date for such Class. Accordingly, the entire original
principal amount of the Class A-3 Timber Notes is scheduled to be paid in a
single payment on such Scheduled Maturity Date. In the event that the Class A-3
Timber Notes have not been paid in full by their Scheduled Maturity Date, a
"Cash Retention Event" will occur, as a result of which 75% of all Excess
Funds will be deposited in the Payment Account until all Classes of Timber Notes
are paid in full.
For each Class of Timber Notes, the Minimum Principal Amortization
represents the minimum amount of principal which the Company must pay (on a
cumulative basis) on such Class, to the extent of the funds on deposit in the
Payment Account available therefor, through each Note Payment Date.
The Scheduled Amortization Schedules and the Minimum Principal Amortization
Schedules for the respective Classes of Timber Notes are set forth under
"Overview and Structure of the Transaction--Payments on the Timber
Notes--Actual Timber Note Amortization."
The amount of principal required to be paid, in the aggregate, to the
holders of the Timber Notes on each Note Payment Date will generally be (to the
extent of cash available in the Payment Account) the Aggregate Minimum Principal
Amortization Amount for such date plus the Depletion Amortization Amount, if
any, on such Note Payment Date.
The "Minimum Principal Amortization Amount" for any Class of Timber
Notes, as of any Note Payment Date, equals the excess, if any, of (i) the
cumulative amount of all Minimum Principal Amortization for such Class of Timber
Notes through and including such Note Payment Date over (ii) the cumulative
amount of all principal paid on such Class prior to and excluding such Note
Payment Date. The "Aggregate Minimum Principal Amortization Amount" as of any
Note Payment Date is the aggregate for all Classes of Timber Notes of the
respective Minimum Principal Amortization Amounts for such date.
The "Depletion Amortization Amount," on any Note Payment Date, is an
amount, if any, equal to the lesser of (a) the excess, if any, of (i) the
balance in the Payment Account on such date over (ii) the sum of the Minimum
Obligations on such date or (b) the Excess Debt Obligations Amount on such date;
PROVIDED, HOWEVER, that the issuance of Additional Timber Notes may result in
modifications to the computation of the Depletion Amortization Amount.
The "Minimum Obligations," on any Note Payment Date, is the sum of (a)
the Aggregate Minimum Principal Amortization Amount on such Note Payment Date,
(b) all accrued and unpaid interest (excluding interest on premiums) due and
payable to the holders of the Timber Notes and any Additional Timber Notes on
such Note Payment Date and (c) the aggregate amount, if any, of principal and
interest (other than any Supplemental Liquidity Provider Interest) in respect of
outstanding Advances under the Line of Credit Agreement to be paid from the
Payment Account on such Note Payment Date.
The "Excess Debt Obligations Amount," on any Note Payment Date, is an
amount equal to the excess, if any, of (a) the sum of (i) the Adjusted Debt
Obligations on such date plus (ii) the Discounted Servicing Obligation at such
date over (b) the Total Collateral Value at such date.
"Adjusted Debt Obligations," on any Note Payment Date, is an amount equal
to the excess, if any, of (a) the aggregate unpaid principal amount of the
outstanding Timber Notes on such date, determined before giving effect to the
payment of any amount paid in respect of the Timber Notes on such date, over (b)
the Aggregate Minimum Principal Amortization Amount at such date.
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"Discounted Servicing Obligation," on any Monthly Deposit Date or Note
Payment Date, is the amount specified as such in the Structuring Schedule in
Annex 1 opposite the monthly period preceding such date.
"Total Collateral Value," on any date, is an amount equal to the lesser
of (a) the Deemed Collateral Value for the Monthly Calculation Date immediately
preceding such date and (b) the Structuring Collateral Value for the Monthly
Calculation Date immediately preceding such date.
"Deemed Collateral Value," for any Monthly Calculation Date, is an amount
equal to the product (in dollars) of the Collateral Value Factor and the Deemed
Remaining Harvest Quantity for such date.
The "Collateral Value Factor," and the Structuring Collateral Value, for
any Monthly Calculation Date, are the amounts specified as such in the
Structuring Schedule in Annex 1.
The "Deemed Remaining Harvest Quantity," for any Monthly Calculation
Date, is an amount equal to excess, if any, of (i) 3,397,345 Mbfe (which is the
Structured Harvest Quantity) over (ii) the sum of the Actual Production and the
Deemed Production through such date.
The "Actual Production," through any date, means the number of Mbfe of
Company Timber actually harvested and sold from July 20, 1998 through such date,
except any such Company Timber that has been included in Deemed Production for
such period.
The "Deemed Production," through any date, means the number of Mbfe of
Company Timber deemed harvested and sold from July 20, 1998 through such date as
described under "--Deemed Production."
The "Required Liquidity Amount," as of any date, is an amount equal to
the aggregate, for all Classes of Timber Notes outstanding, of (i) the Note Rate
(as defined below) for such Class multiplied by (ii) the principal amount of
such Class then outstanding. The Required Liquidity Amount may be modified in
connection with the issuance of Additional Timber Notes.
Unless the Timber Notes have been accelerated during the continuance of an
Event of Default (and such acceleration has not been rescinded), the Depletion
Amortization Amount, if any, payable on any Note Payment Date will be applied to
pay the outstanding principal of the Class A-1 Timber Notes, the Class A-2
Timber Notes and the Class A-3 Timber Notes, in that order.
If, on any date (including any redemption date), the principal paid to the
holders of any Class of Timber Notes on such date exceeds the Scheduled
Amortization Amount for such Class on such date, a premium (a "Prepayment
Premium") will be payable on such date with respect to the lesser of (i) the
amount of such excess and (ii) the amount of principal paid to the holders of
such Class of Timber Notes on such date (such lesser amount, an "Excess
Payment"). If, on any Note Payment Date, the principal paid to the holders of
any Class of Timber Notes on such date is less than the Scheduled Amortization
Amount for such Class at that Note Payment Date (such deficiency, a "Payment
Deficiency"), a premium (a "Deficiency Premium") will be payable on the next
Note Payment Date with respect to such Payment Deficiency. The "Scheduled
Amortization Amount" for each Class of Timber Notes at any date equals the
excess, if any, of (i) the cumulative amount of all Scheduled Amortization for
such Class through and including such date over (ii) the cumulative amount of
all principal paid on the Timber Notes of such Class prior to such date. See
"--Premium".
July 20, 2028 (the "Final Maturity Date") is the date by which the Rating
Agencies have rated the payment in full of the principal amount of each Class of
Timber Notes. An Event of Default will occur if the Timber Notes have not been
paid in full by the Final Maturity Date.
INTEREST
Interest is payable on the outstanding principal amount of each Class of
Timber Notes at the annual rate set forth for such Class on the cover page
hereof (computed on the basis of a 360-day year of twelve 30-day months) (each,
a "Note Rate") on each Note Payment Date. Interest on overdue principal and,
to the extent permitted by law, overdue interest will accrue at the applicable
Note Rate plus 2.00% per annum
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(the "Default Rate") and will be payable on each Note Payment Date. Interest
on any Premium payable in respect of any Class of Timber Notes is payable at the
applicable Note Rate on each Note Payment Date. Under certain limited
circumstances, interest on Premium may be payable monthly. See "--Premium"
below.
PREMIUM
The amount of the Prepayment Premium for any Class of Timber Notes payable
on any date with respect to any Excess Payment on such Class on such date (each,
a "Prepayment Premium Amount") equals the excess, if any, of (a) the sum of
(i) the present value (as defined below and subject to the assumption below) at
such date of such Excess Payment plus (ii) the sum of the present values (as so
defined and subject to said assumption) at such date of the amounts of interest,
computed at the applicable Note Rate, that would thereafter have accrued with
respect to such Excess Payment over (b) such Excess Payment.
For purposes of computing the Prepayment Premium Amount in the preceding
paragraph, (1) the present values of such Excess Payment and interest thereon
shall be calculated assuming that such Excess Payment had been paid on the Note
Payment Date or Note Payment Dates on which such Excess Payment would have
otherwise been paid if a portion of the principal amount of the applicable Class
of Timber Notes that equals (but does not exceed) the Scheduled Amortization
Amount for such Class on each such Note Payment Date were paid on such Note
Payment Date, (2) "present value" shall be computed in accordance with
generally accepted financial practice based on a 360-day year of twelve 30-day
months and at a discount rate, compounded semiannually on each Note Payment
Date, equal to the Reinvestment Yield and (3) the "Reinvestment Yield" shall
be determined by reference to the most recent Federal Reserve Statistical
Release H. 15(519) (or, if such Statistical Release is no longer published, any
publicly available source of similar market data) that became publicly available
at least two, but not more than six, Business Days prior to the date on which
the Excess Payment occurs or, in the case of an optional redemption, prior to
the redemption date and shall be the sum of (A) 0.50% per annum plus (B) the
most recent weekly average yield on actively traded U.S. Treasury securities
adjusted to a constant maturity equal to the then remaining weighted average
life (computed as described in the following paragraph) of such Excess Payment.
For purposes of clause (1) of the preceding sentence, the Scheduled Amortization
Amount for the applicable Class of Timber Notes on any Note Payment Date or Note
Payment Dates shall be calculated assuming that, after the date on which the
payment of the Excess Payment occurs, no payments of principal (other than those
assumed to be made in clause (1) of the preceding sentence) will be made to the
holders of such Class of Timber Notes. If the weighted average life of the
Excess Payment (so computed) is not equal to the constant maturity of a U.S.
Treasury security for which a weekly average yield is given, the Reinvestment
Yield shall be obtained by linear interpolation (calculated to the nearest
one-twelfth of a year) from the weekly average yields of U.S. Treasury
securities for which such yields are given, except that if the weighted average
life of the Excess Payment (so computed) is less than one year, the weekly
average yield in actively traded U.S. Treasury securities adjusted to a constant
maturity of one year shall be used.
For the purpose of clause (3)(B) of the preceding paragraph, "weighted
average life" shall mean the number of years (calculated to the nearest
one-twelfth year) obtained by dividing (a) the sum of the products obtained by
multiplying, for each date on which an Excess Payment (or portion thereof) would
have been paid if such Excess Payment had been paid in accordance with the
Scheduled Amortization Schedule for the applicable Class of Timber Notes, (i)
the number of years (calculated to the nearest one-twelfth year) which will
elapse between the date on which such Excess Payment is made and the date on
which such Excess Payment (or portion thereof) would have been paid if such
Excess Payment had been paid in accordance with the Scheduled Amortization
Schedule for the applicable Class of Timber Notes by (ii) the Excess Payment (or
portion thereof) which would have been paid if such Excess Payment had been paid
in accordance with the Scheduled Amortization Schedule for such Class by (b) the
Excess Payment on which the Prepayment Premium Amount is computed.
The Deficiency Premium payable on any Note Payment Date with respect to a
Payment Deficiency on the previous Note Payment Date (the "Deficiency Premium
Amount") equals an amount of interest
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(computed on the basis of a 360-day year of twelve 30-day months) on the Payment
Deficiency, for the period from and including the previous Note Payment Date to
but excluding such Note Payment Date, at a rate per annum equal to 1.50%.
Upon the occurrence of a Registration Default, a Non-Registration Premium
equal to an amount of interest (computed on the basis of a 360-day year of
twelve 30-day months) at a rate of 0.50% per annum on the outstanding principal
amount of the Timber Notes with respect to which a Registration Default is
continuing will accrue until such Registration Default is cured.
Non-Registration Premiums, if any, will be payable on each Note Payment Date.
If any portion of the principal amount of any Class of Timber Notes remains
unpaid after the Final Maturity Date, for the purpose of payments of Deficiency
Premiums and Non-Registration Premiums and interest thereon to the holders of
such Class of Timber Notes, the last day of each month that occurs after the
Final Maturity Date shall be deemed to constitute a Note Payment Date.
Premiums and interest on Premiums are payable on a Note Payment Date solely
out of funds available after payments of interest (including interest on any
past due principal and interest), Minimum Principal Amortization Amounts and
Depletion Amortization Amounts to the holders of the Timber Notes and after any
required payments to or for the benefit of the Liquidity Providers (other than
any Additional Liquidity Fees or Supplemental Liquidity Provider Interest) or,
if applicable, deposit to the Liquidity Account on such Note Payment Date. In
addition, neither the Line of Credit Agreement nor any funds in the Liquidity
Account are available for payment of Premiums or interest on Premiums to the
holders of the Timber Notes. Accordingly, payments of Premiums and interest on
Premiums are effectively subordinated to payments of the foregoing amounts, and
the ratings of the Timber Notes do not apply to the payment of Premiums or
interest on Premiums. See "--Accounts; Payments on the Timber Notes--Note
Payment Dates."
OPTIONAL REDEMPTION AND OPTIONAL PREPAYMENT
The Timber Notes of any Class may be redeemed at the option of the Company,
in whole but not in part, on any date, on at least 15 days (or 30 days if
legally required by The Depository Trust Company) but not more than 60 days
notice, provided that no Timber Notes of a Class having an earlier Scheduled
Maturity Date (or, in the case of redemption of the Class A-3 Timber Notes, no
Timber Notes) remain outstanding following such redemption. The redemption price
for any Class of Timber Notes will equal the sum, for such Class, of (i) all
unpaid principal amounts of such Class of Timber Notes, (ii) any accrued and
unpaid Premiums on such Class of Timber Notes, (iii) all accrued and unpaid
interest (including any default interest and any interest on Premiums) on such
Class of Timber Notes and (iv) a Prepayment Premium on any Excess Payment,
computed as described under "--Premium."
The Company also has the right, at its option, to cause the Timber Notes to
be prepaid, in whole or in part, on any Note Payment Date by making additional
deposits to the Payment Account from funds not otherwise subject to the Lien of
the Deed of Trust, by using funds then on deposit in the Prefunding Account or
by using funds that could then be released to the Company free of the Lien of
the Deed of Trust. Any such prepayments will be made, first, to the holders of
the Class A-1 Timber Notes, second, to the holders of the Class A-2 Timber Notes
and, third, to the holders of the Class A-3 Timber Notes. See "--Accounts;
Payment on the Timber Notes--Note Payment Dates." To the extent that any such
additional deposit causes an Excess Payment to be made on any Class of Timber
Notes, a Prepayment Premium will be payable in respect of such Excess Payment.
See "--Principal; Interest; Premium--Premium."
ACCOUNTS; PAYMENT ON THE TIMBER NOTES
Except for DE MINIMIS Receipts, all payments received by the Company in
connection with the harvesting, severing, cutting or sale of Company Timber and
all other cash proceeds received by the Company of or from the Mortgaged
Property (including, without limitation, insurance proceeds, condemnation
awards, proceeds from sales of Company Timber, including Pay-as-You-Harvest
Sales, Lump Sum Sales and Unallocated Payments, whether pursuant to the New
Master Purchase Agreement or otherwise, proceeds from the sales of Company Owned
Timberlands or Company Timber Rights, and proceeds in
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respect of any Agreement Not to Cut, but excluding proceeds of any title
insurance) shall be deposited in the Collection Account, maintained with the
Trustee, subject to a Lien for the benefit of the holders of the Timber Notes
and any Additional Timber Notes and the Liquidity Providers. "DE MINIMIS
Receipts" means payments received by the Company in an aggregate amount not
greater than $50,000 at any one time that would otherwise be required to be
deposited in the Collection Account and which the Company has deposited into
another bank account. Under the Indenture, the Company must forward all DE
MINIMIS Receipts to the Collection Account at least monthly.
In addition, the Trustee shall maintain, subject to a Lien for the benefit
of holders of the Timber Notes, any Additional Timber Notes and the Liquidity
Providers, (i) in the event of a Termination Advance under the Line of Credit
Agreement, a Liquidity Account into which will be deposited the amount of the
Termination Advance (and which thereafter (until a replacement Line of Credit
Agreement, if any, has been provided) will be maintained, to the extent of
available funds, in an amount equal to the Required Liquidity Amount) to provide
liquidity for the Timber Notes and, if so provided in connection with the
issuance of any Additional Timber Notes, such Additional Timber Notes and (ii)
an account, into which funds will be transferred on each Monthly Deposit Date,
for disbursement on each Note Payment Date (the "Payment Account"). The
indenture will also require that the Company maintain an expense reserve account
(the "Expense Reserve") for the payment of certain capital and operating
expenses.
MONTHLY DEPOSIT DATES
The New Master Purchase Agreement provides that the purchase price for all
logs sold by the Company in a calendar month will be deposited into the
Collection Account by 11:00 a.m. New York City time on the 20th day of the
following month (each, a "Monthly Deposit Date"). If the 20th day of the month
is not a Business Day, the next succeeding Business Day will be the Monthly
Deposit Date, but all calculations as of the Monthly Deposit Date (other than
those under the Line of Credit Agreement) will be as of the 20th day of the
applicable month. The Indenture provides that, as of 11:00 a.m. (New York City
time) on each Monthly Deposit Date, the Collateral Agent will make the following
deposits in and withdrawals from the Accounts, in the following order of
priority:
FIRST, any amount necessary to cause the balance in the Expense
Reserve to equal the greater of (I) the sum of (a) all accrued and unpaid
Yield Taxes attributable to Company Timber which was cut, harvested,
severed or sold during the month to which such Monthly Deposit Date relates
and all prior Monthly Periods and (b) an amount equal to all expenses of a
nature permitted to be paid from the Expense Reserve (including capital
expenditures, personnel costs, the Services Fee and other amounts payable
under the New Services Agreement) known or estimated by the Company to be
payable prior to the next Monthly Deposit Date and (II) $1.1 million will,
to the extent of the balance in the Collection Account, be withdrawn from
the Collection Account and deposited in the Expense Reserve;
SECOND, all unpaid Trustee's Expenses, Collateral Agent Expenses and
Liquidity Providers' Expenses incurred during or prior to the Monthly
Period to which such Monthly Deposit Date relates will, to the extent of
the balance in the Collection Account not theretofore withdrawn, be
withdrawn by the Collateral Agent from the Collection Account and, at the
direction of the Company, be paid to the Trustee, the Collateral Agent or
the Liquidity Providers, as the case may be, or, if the Company shall have
previously paid such expenses, such amounts will be withdrawn by the
Collateral Agent from the Collection Account and disbursed at the direction
of the Company to reimburse the Company for such expenses;
THIRD, if there has not been a Termination Advance under a Line of
Credit Agreement or there has been a Termination Advance under a Line of
Credit Agreement that has been replaced in accordance with the terms of the
Indenture, an amount equal to all accrued and unpaid interest (other than
any Supplemental Liquidity Provider Interest) on, plus the outstanding
principal amount of, any outstanding Advances (other than Advances made on,
or within three Business Days preceding, such Monthly Deposit Date) under
the Line of Credit Agreement will, to the extent of the balance in the
Collection Account not theretofore withdrawn, be withdrawn by the
Collateral Agent from the Collection Account
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and disbursed to the Liquidity Providers in payment, first, of such accrued
and unpaid interest and, second, of such outstanding principal amount;
FOURTH, the balance of funds in the Liquidity Account (if any) in
excess of the Required Liquidity Amount as of such Monthly Deposit Date
will be withdrawn by the Collateral Agent from the Liquidity Account and
deposited in the Collection Account and will be included together with
other funds to be withdrawn from the Collection Account on such Monthly
Deposit Date;
FIFTH, an amount equal to (a) the product of (i) the Targeted Monthly
Deposit Amount for such Monthly Deposit Date and (ii) the Reinvestment
Factor for such Monthly Deposit Date less (b), if such Monthly Deposit Date
is neither a Note Payment Date nor the first Monthly Deposit Date following
a Note Payment Date, the Premium Provision Refundable Amount for such
Monthly Deposit Date will, to the extent of the balance in the Collection
Account not theretofore withdrawn, be withdrawn by the Collateral Agent
from the Collection Account and deposited in the Payment Account;
SIXTH, if there has been a Termination Advance under a Line of Credit
Agreement that has not been replaced in accordance with the terms of the
Indenture, an amount equal to the excess of (a) the sum of (i) all accrued
and unpaid interest on all outstanding Advances (other than any
Supplemental Liquidity Provider Interest) under the Line of Credit
Agreement as of such Monthly Deposit Date and (ii) the product obtained by
multiplying the Line of Credit Amortization Amount, if any, for the next
Note Payment Date, by a fraction, the numerator of which is the number of
months from the immediately preceding Note Payment Date and the denominator
of which is six, over (b) the amount, if any, of all amounts deposited
pursuant to this clause Sixth in the Payment Account after the immediately
preceding Note Payment Date (or, if the first Note Payment Date has not yet
occurred, after the Closing Date) will, to the extent of the balance in the
Collection Account not theretofore withdrawn, be withdrawn by the
Collateral Agent from the Collection Account and deposited in the Payment
Account;
SEVENTH, if there has been a Termination Advance under a Line of
Credit Agreement that has not been replaced in accordance with the terms of
the Indenture, any amount necessary to cause the balance in the Liquidity
Account to equal the Required Liquidity Amount as of such Monthly Deposit
Date will, to the extent of the balance in the Collection Account not
theretofore withdrawn, be withdrawn by the Collateral Agent from the
Collection Account and deposited in the Liquidity Account;
EIGHTH, an amount equal to the Premium Provision for such Monthly
Deposit Date will, to the extent of the balance in the Collection Account
not theretofore withdrawn, be withdrawn by the Collateral Agent from the
Collection Account and deposited in the Payment Account;
NINTH, if (a) the aggregate expenses of a nature permitted to be paid
from the Expense Reserve known or estimated by the Company to be payable
through any date within the following six months exceeds (b) the sum of (i)
the amount in the Expense Reserve and (ii) the amounts that the Company
estimates will become available to the Company through such date for the
payment of the expenses referred to in the preceding clause (a), an amount
equal to the amount of such excess will, to the extent of the balance in
the Collection Account not theretofore withdrawn, be withdrawn from the
Collection Account and deposited in the Expense Reserve; and
TENTH, all funds in the Collection Account as of such Monthly Deposit
Date, after giving effect to all deposits and withdrawals pursuant to the
preceding clauses "FIRST" through "NINTH," inclusive, on such Monthly
Deposit Date (collectively, "Excess Funds"), will be paid by the
Collateral Agent, first, to the payment of any unpaid Additional Liquidity
Provider Fees incurred during or prior to the Monthly Period to which such
Monthly Deposit Date relates and to the payment of any accrued and unpaid
Supplemental Liquidity Provider Interest as of such Monthly Deposit Date
and, second, to or as directed by the Company, free and clear of the Lien
of the Deed of Trust.
Notwithstanding the preceding clause "TENTH," the Indenture provides that
(i) if an Event of Default consisting of a payment default, the bankruptcy or
insolvency of the Company, or certain other Events of
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Default relating to, among other things, the collateral, title thereto and the
preservation of the Lien of the Deed of Trust thereon has occurred and is
continuing on such Monthly Deposit Date and such Event of Default has, or, with
the passage of time, would have, a Material Adverse Effect, all Excess Funds
will be deposited in the Payment Account on such Monthly Deposit Date or (ii) if
(A) the Timber Notes have been accelerated and such acceleration shall not have
rescinded as provided in the Indenture or (B) an Event of Default described in
clauses (6) through (10) or in clause (12) under the caption "Events of
Default; Remedies" shall have occurred and be continuing, and the Trustee,
within the previous 60 days, has commenced a consent solicitation for an
election to accelerate the Timber Notes or any Additional Timber Notes by reason
of such Event of Default (either of the events described in clause (i) or (ii),
a "Trapping Event"), all Excess Funds shall be deposited in the Payment
Account on such Monthly Deposit Date.
In addition, the Indenture provides that if the Class A-3 Timber Notes are
not paid in full by their Scheduled Maturity Date, a Cash Retention Event will
occur, as a result of which 75% of the Excess Funds (up to the amount necessary
to pay in full any Timber Notes remaining outstanding) shall be retained and
deposited in the Payment Account and the remainder will be applied as set forth
in "TENTH" above.
Further, notwithstanding the foregoing order of priority, in the event that
a Line of Credit Acceleration has occurred or an Acceleration Event shall have
occurred and be continuing, all interest, principal and other amounts (other
than Additional Liquidity Provider Fees and Supplemental Liquidity Provider
Interest) then owing by the Company under the Line of Credit Agreement shall be
paid on each Monthly Deposit Date, immediately after payment of amounts in
clauses "FIRST" and "SECOND" above, and no amounts shall be deposited in the
Payment Account until such interest, principal and other amounts have been paid
in full.
The Indenture provides that the "Targeted Monthly Deposit
Amount"(referred to in the preceding clause "FIFTH") for any Monthly Deposit
Date is an amount equal to the excess of (a) the sum of (i) the Debt Obligations
as of such Monthly Deposit Date plus (ii) the Discounted Servicing Obligation as
of such Monthly Deposit Date over (b) the sum of (i) the Total Collateral Value
as of such Monthly Deposit Date plus (ii) all amounts then on deposit in the
Payment Account, including interest earned thereon as of such Monthly Deposit
Date (before giving effect to any deposits made in the Payment Account, or to
any transactions described under the caption "--Note Payment Date" below, on
such Monthly Deposit Date but after deducting the amount of any deposits made
pursuant to clauses "SIXTH" and "EIGHTH" after the immediately preceding
Note Payment Date or, if the first Note Payment Date has not yet occurred, after
the Closing Date); PROVIDED that in no event shall the Targeted Monthly Deposit
Amount be less than the excess (if any) of (x) the amount of accrued and unpaid
interest on the principal of the outstanding Timber Notes on such Monthly
Deposit Date over (y) the balance in the Payment Account on such Monthly Deposit
Date (before giving effect to any deposits made in the Payment Account, or to
any transactions described under the caption "--Note Payment Date" below, on
such Monthly Deposit Date but after deducting the amount of any deposits made
pursuant to clauses "SIXTH" and "EIGHTH" after the immediately preceding
Note Payment Date or, if the first Note Payment Date has not yet occurred, after
the Closing Date).
The "Reinvestment Factor" is defined under "Certain Defined Terms," and
is intended to increase the amount of the deposit in the Payment Account
pursuant to the preceding clause "SIXTH" to reflect the difference between an
assumed rate of return on the Payment Account and the Note Rate.
The Indenture defines "Debt Obligations," as of any date (in each case
determined before giving effect to any payment made on such date), as the sum of
(a) the outstanding principal balance of the Timber Notes as of such date plus
(b) interest accrued and unpaid on the Timber Notes to such date, including any
interest on unpaid interest, computed on the basis of a 360-day year of twelve
30-day months, plus (c) any Premium accrued and unpaid on the Timber Notes and
any interest accrued and unpaid thereon. For the purpose of calculating the
Targeted Monthly Deposit Amount, the Total Collateral Value and Discounted
Servicing Obligation are computed, on a monthly basis for the relevant Monthly
Deposit Date, in substantially the same manner as such items are determined
semiannually for each Note Payment Date. See "--Principal; Interest;
Premium--Principal" above.
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The Indenture provides that the "Premium Provision" (referred to in the
preceding clause "EIGHTH"), for any Monthly Deposit Date, is an amount equal
to that described in either paragraph (a) or (b) below:
(a) if such Monthly Deposit Date is a Note Payment Date, the Premium
Provision will equal the amount, if any, of the Prepayment Premium that
will become payable on such Monthly Deposit Date by virtue of the payments
or prepayments of principal on the Timber Notes being made on such Note
Payment Date, less the amount, if any, of all amounts of Premium Provision
deposits made in the Payment Account since the immediately preceding Note
Payment Date and the interest earned on such deposits to such Monthly
Deposit Date; and
(b) if such Monthly Deposit Date is not a Note Payment Date, the
Premium Provision will equal an amount equal to the present value at such
Monthly Deposit Date (discounted from the immediately succeeding Note
Payment Date at the Collection Account Rate, compounded monthly) of the
excess, if any, of (i) the amount, if any, of the Prepayment Premium that
would become payable on the Timber Notes on such Monthly Deposit Date if
such Monthly Deposit Date were a Note Payment Date and the Scheduled
Amortization for each Class of Timber Notes with respect to such Monthly
Deposit Date were the amount obtained by multiplying the Scheduled
Amortization for such Class of Timber Notes with respect to the immediately
succeeding Note Payment Date by a fraction, the numerator of which is the
number of months from the immediately preceding Note Payment Date to such
Monthly Deposit Date and the denominator of which is six over (ii) the
amount, if any, of all amounts of Premium Provision deposited in the
Payment Account after the immediately preceding Note Payment Date and the
interest earned on such deposits to such Monthly Deposit Date.
The Indenture defines "Premium Provision Refundable Amount" for any
Monthly Deposit Date (except any Monthly Deposit Date immediately following a
Monthly Deposit Date that is a Note Payment Date) as the amount, if any, by
which the Premium Provision for the immediately preceding Monthly Deposit Date
exceeded the Premium Provision for such Monthly Deposit Date. The "Premium
Provision Refundable Amount" for any Monthly Deposit Date immediately following
a Monthly Deposit Date that is a Note Payment Date shall be zero.
The Indenture defines the "Collection Account Rate" for any date as a
rate per annum equal to the rate per annum (determined as of a date not more
than three Business Days prior to such date) for the offering to leading banks
in the London interbank market of Dollar deposits having a term of 30 days and
in an amount comparable to the amount to which such rate is applied.
NOTE PAYMENT DATES
The Indenture provides that, by 1:00 p.m. New York City time on each Note
Payment Date (after giving effect to any deposits on such date from the
Liquidity Account to the Collection Account and from the Collection Account to
the Liquidity Account), the Collateral Agent will deposit the following amounts
in the Payment Account in the following order of priority:
FIRST, unless a Line of Credit Acceleration has occurred or an
Acceleration Event exists, from a borrowing under the Line of Credit
Agreement or from the Liquidity Account, any amounts available under the
Line of Credit Agreement or on deposit in the Liquidity Account, up to an
amount equal to the excess, if any, of (i) the amount required to pay
accrued and unpaid interest (excluding interest on premiums) on the Timber
Notes and, if so provided in connection with the issuance of any Additional
Timber Notes, such Additional Timber Notes on such Note Payment Date over
(ii) the amount available in the Payment Account to be paid to the holders
of Timber Notes and such Additional Timber Notes pursuant to clause
"FIRST" below (after giving effect to any transfer on such date pursuant
to clauses "FIFTH," "SIXTH," and "EIGHTH" (and the two paragraphs
following clause "TENTH") under "--Monthly Deposit Dates"); and
SECOND, from any other funds available to the Company, any amounts
that the Company, at its option, elects to deposit in the Payment Account
to pay or prepay any amounts on the Timber Notes.
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The Indenture provides that, by 1:00 p.m. (New York City time) on each Note
Payment Date, from amounts on deposit in the Payment Account on such date
(including transfers from the Collection Account on such Note Payment Date,
interest earned on the Payment Account and the transfers described in the
preceding paragraph), the Collateral Agent will make the following transfers in
the following order of priority:
FIRST, from amounts on deposit in the Payment Account (exclusive of
amounts borrowed under the Line of Credit Agreement or withdrawn from the
Liquidity Account pursuant to clause "FIRST" of the preceding paragraph
for the payment of interest on such Note Payment Date), to the Holders of
the Timber Notes and any Additional Timber Notes, an amount equal to all
interest accrued and unpaid on the Timber Notes and any Additional Timber
Notes as of such date, computed on the basis of a 360-day year of twelve
30-day months (including interest on past due principal and interest, but
not including interest on premium), and, if there has been a Termination
Advance under a Line of Credit Agreement that has not been replaced in
accordance with the terms of the Indenture, to the Liquidity Providers, an
amount equal to all accrued and unpaid interest (other than any
Supplemental Liquidity Provider Interest) on all outstanding Advances under
the Line of Credit Agreement, as of such date, PROVIDED, that, if the
amount on deposit in the Payment Account (exclusive of amounts borrowed
under the Line of Credit Agreement or withdrawn from the Liquidity Account
pursuant to clause "FIRST" of the preceding paragraph for the payment of
interest on such Note Payment Date) is insufficient to make such payment in
full on all Classes of Timber Notes and any Additional Timber Notes and to
the Liquidity Providers, such payments shall be made on each Class of
Timber Notes and any Additional Timber Notes and to the Liquidity Providers
PRO RATA in proportion to the interest (other than Supplemental Liquidity
Provider Interest) due on each such Class and to the Liquidity Providers;
SECOND, to the Holders of the Timber Notes and, if so provided in
connection with the issuance of any Additional Timber Notes, such
Additional Timber Notes, the amount borrowed under the Line of Credit
Agreement or withdrawn from the Liquidity Account pursuant to clause
"FIRST" of the preceding paragraph for the payment of interest on such
Note Payment Date in payment of accrued and unpaid interest as of such date
(including interest on past due principal and interest, but not including
interest on premium) on the Timber Notes and such Additional Timber Notes,
to the extent that the payments to such Holders pursuant to the immediately
preceding clause "FIRST" are insufficient to make payment in full of such
accrued and unpaid interest, provided that, if the amount on deposit in the
Payment Account is insufficient to make such payments in full on all
Classes of Timber Notes and Additional Timber Notes, such payments shall be
made on each Class of Timber Notes and Additional Timber Notes PRO RATA in
proportion to the amounts payable to each such Class pursuant to this
clause SECOND;
THIRD, if there has been a Termination Advance under a Line of Credit
Agreement that has not been replaced in accordance with the terms of the
Indenture, to the Liquidity Account, to the extent, if any, necessary to
cause the amount on deposit in the Liquidity Account to equal the Required
Liquidity Amount;
FOURTH, to the Holders of each Class of Timber Notes, an amount equal
to any Minimum Principal Amortization Amount due on such Class of Timber
Notes as of such date, provided that, if the amount on deposit in the
Payment Account is insufficient to make such payments in full on all
Classes of Timber Notes, such payments shall be made, first, on the Class
A-1 Timber Notes, second, on the Class A-2 Timber Notes, and, third, on the
Class A-3 Timber Notes;
FIFTH, if there has been a Termination Advance under a Line of Credit
Agreement that has not been replaced in accordance with the terms of the
Indenture, to the Liquidity Providers, an amount equal to the Line of
Credit Amortization Amount (as defined below), if any, due as of such Note
Payment Date;
SIXTH, to the Holders of the Timber Notes, an amount equal to any
Depletion Amortization Amount due as of such Note Payment Date;
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SEVENTH, to the Holders of each Class of Timber Notes, an amount equal
to any interest on Premium then due and owing on such Class of Timber
Notes, provided that, if the amount on deposit in the Payment Account is
insufficient to make such payments in full on all Classes of Timber Notes,
such payments shall be made on each Class of Timber Notes PRO RATA in
proportion to the interest on Premium due on each such Class;
EIGHTH, to the Holders of each Class of Timber Notes, an amount equal
to any Premium then due and owing on such Class of Timber Notes, provided
that, if the amount on deposit in the Payment Account is insufficient to
make such payments in full on all Classes of Timber Notes, such payments
shall be made PRO RATA in proportion to the Premium then due on each such
Class;
NINTH, if a Trapping Event or a Cash Retention Event shall have
occurred and be continuing, or to the extent directed by the Company, or to
the extent of amounts otherwise deposited to the Payment Account pursuant
to certain provisions of the Indenture (including any net proceeds of title
insurance as described under "--Title Insurance" and any amount deposited
in the Payment Account from the Prefunding Account as described under
"--Prefunding"), to the Holders of the Timber Notes, to prepay principal
of, and any Prepayment Premium on, the Timber Notes; and
TENTH, unless a Trapping Event or a Cash Retention Event shall have
occurred and be continuing, to the Company, free and clear of the Lien of
the Deed of Trust.
The Indenture provides that principal payments payable pursuant to clauses
"SIXTH" and "NINTH" of the preceding paragraph shall be paid, first, to the
holders of the Class A-1 Timber Notes until the Class A-1 Timber Notes have been
paid in full, second, to the holders of the Class A-2 Timber Notes until the
Class A-2 Timber Notes have been paid in full and, third, to the holders of the
Class A-3 Timber Notes. In addition, the Indenture provides that if, on any Note
Payment Date, there are insufficient funds in the Payment Account to pay to the
holders of any Class of Timber Notes all amounts pursuant to clauses "FIRST,"
"SECOND," "FOURTH," "SIXTH," "SEVENTH," "EIGHTH" or "NINTH" of the
preceding paragraph, any partial payment on such Class with respect to any such
clause shall be made to the Holders of such Class PRO RATA in proportion to the
unpaid principal amount of the outstanding Timber Notes of such Class (or, in
the case of Non-Registration Premiums, pro rata in proportion to the unpaid
principal amount of the outstanding Timber Notes of such Class with respect to
which a Registration Default is continuing) held by such Holders on such date.
Notwithstanding the foregoing order of priority, in the event that a Line
of Credit Acceleration has occurred or an Acceleration Event shall have occurred
and be continuing, all interest, principal and other amounts (other than
Additional Liquidity Provider Fees and Supplemental Liquidity Provider Interest)
then owing under the Line of Credit Agreement shall be paid in full on each Note
Payment Date from the Payment Account before any other amounts are paid from the
Payment Account.
DEEMED PRODUCTION
The Indenture provides that upon receipt by the Company of (i) any proceeds
in respect of any Lump Sum Sale, (ii) any proceeds in respect of any sale of
Company Owned Timberlands or Company Timber Rights, (iii) any payments in
respect of any condemnation or taking for public use under the power of eminent
domain of any of the Mortgaged Property (including any recovery in the Takings
Litigation), (iv) any insurance proceeds in respect of any damage to or loss or
diminution in value of or income from any of the Mortgaged Property, (v) any
proceeds of any Agreement Not to Cut or (vi) any Up Front Payment in respect of
a Pay-As-You-Harvest Sale (an "Unallocated Payment"), the Company shall
recognize Deemed Production in the month in which such amount is received (or,
if received prior to the Monthly Deposit Date or prior to 11:00 A.M. New York
City time on the Monthly Deposit Date, in the next preceding month). In the case
of the preceding clauses (i) to (iv) (other than a recovery in the Takings
Litigation), the amount of Deemed Production shall equal the number of Mbfe of
Company Timber (or Company Timber located on Company Owned Timberlands or on the
Company Timber Rights Property that is subject to the Company Timber Rights, as
applicable) sold, condemned, taken, damaged or destroyed. In the case of a
recovery in the Takings Litigation, Deemed Production shall be a number of
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Mbfe of Company Timber equal to the amount of such recovery divided by the then
applicable SBE price per Mbf of old growth redwood, size quality code 2, for
tractor logging. In the case of clause (v), Deemed Production shall equal the
number of Mbfe of Company Timber to which such Agreement Not to Cut relates. In
the case of the preceding clause (vi), Deemed Production shall equal the number
of Mbfe of Company Timber to which such Pay-As-You-Harvest Sale relates,
multiplied by the percentage that such Up Front Payment represents of the entire
contract.
In addition, Deemed Production may occur upon the consummation of certain
transactions as described under "--Substitute Collateral" below.
The occurrence of any event resulting in Deemed Production will cause a
relative decrease in the Deemed Collateral Value, and thus (unless the
Structuring Collateral Value is less than the Deemed Collateral Value for the
relevant month) a relative decrease in the Total Collateral Value, for the
relevant month. A relative decrease in the Total Collateral Value will result in
a relative increase in the Targeted Monthly Deposit Amount for the relevant
Monthly Deposit Date, and a relative increase in the Depletion Amortization
Amount for the relevant Note Payment Date. Such events, however, may also
increase Excess Funds released to the Company on the relevant Monthly Deposit
Date.
EXPENSE RESERVE
The Indenture provides that the Expense Reserve will be funded in an
initial amount of $1.1 million, and thereafter funded on each Monthly Deposit
Date as described under "--Accounts; Payment on the Timber Notes--Monthly
Deposit Dates." The Indenture further provides that the Company may cause the
Collateral Agent to withdraw from the Expense Reserve (to the extent of amounts
then on deposit in the Expense Reserve), at any time or from time to time (so
long as the Timber Notes shall not have been accelerated upon a bankruptcy or
insolvency of the Company), amounts required to pay (i) capital costs or
expenses, including the Services Fee and other amounts payable pursuant to the
New Services Agreement, with respect to the Mortgaged Property, (ii) Taxes,
(iii) Personnel Costs and (iv) other reasonable and necessary expenses related
to the business operations of the Company or as contemplated by the Operative
Documents. Notwithstanding the foregoing, the Indenture provides that no
releases from the Expense Reserve may be effected at any time when (x) the
Timber Notes have been accelerated for any reason other than bankruptcy or
insolvency pursuant to the terms of the Indenture, (y) such acceleration has not
been rescinded pursuant to the terms of the Indenture and (z) there shall be in
effect a written notice delivered by the Trustee to the Company, or by the
Holders of a majority of outstanding principal amount of the Timber Notes and
any Additional Timber Notes to the Company and the Trustee, stating that
releases from the Expense Reserve are prohibited.
LINE OF CREDIT
On the Closing Date, the Company entered into a Line of Credit Agreement
(as defined below) in order to provide liquidity for the payment of interest on
the Timber Notes. Each Liquidity Provider (as defined below) under the Line of
Credit Agreement must have a rating (the "Required Liquidity Provider Rating")
on its short-term unsecured debt obligations of not less than "P-1" by Moody's
and "A-1" by S&P or, if S&P and Moody's have not rated such Liquidity
Provider's short-term unsecured debt obligations, a rating on its long-term
unsecured debt obligations of not less than "Aa2" by Moody's and not less than
"AA" by S&P. The Trustee is a third party beneficiary of the Line of Credit
Agreement for the benefit of the holders of the Timber Notes. The initial Line
of Credit Agreement is the Bank of America Credit Agreement (as defined below)
with Bank of America National Trust and Savings Association ("Bank of
America"). Bank of America has assigned its obligations under the Line of
Credit Agreement in respect of approximately 80% of the Commitments (as
hereinafter defined) to four additional financial institutions. The aggregate
maximum principal amount of the Advances (as defined below) that the Liquidity
Providers are required to make under the Bank of America Credit Agreement (the
"Commitments") is approximately $63.5 million, which is equal to one year's
interest at the applicable Note Rates on the initial aggregate principal balance
of each Class of Timber Notes. The amount of the Commitments will be reduced
with reductions in the Required Liquidity Amount (as defined below).
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If the funds in the Payment Account on any Note Payment Date are
insufficient or are expected to be insufficient (the amount of such
insufficiency being referred to as a "Funding Deficiency") to pay the interest
on the Timber Notes required to be paid on such Note Payment Date (other than
interest on premiums), the Company will deliver in advance of such Note Payment
Date a notice of borrowing under the Line of Credit Agreement for an Advance (an
"Interest Advance") to be made on such Note Payment Date in an amount (the
"Deficiency Amount") equal to the lesser of (i) the amount then available
under the Line of Credit Agreement and (ii) the Funding Deficiency. If the
relevant Note Payment Trustee Certificate required to be delivered by the
Company to the Trustee prior to each Note Payment Date indicates that a Funding
Deficiency exists and the Company has not timely delivered a notice of borrowing
under the Line of Credit Agreement, or if for any other reason there exists a
Funding Deficiency on any Note Payment Date, the Trustee will deliver a notice
of borrowing under the Line of Credit Agreement in the Deficiency Amount. If so
provided in connection with the issuance of Additional Timber Notes, the
Indenture would permit the borrowing of Interest Advances to pay interest (other
than interest on premiums) under such Additional Timber Notes. Under the terms
of the Bank of America Credit Agreement, however, Additional Timber Notes may
not be issued without the consent of the Liquidity Providers.
The initial Scheduled Termination Date (as defined below) of the Bank of
America Credit Agreement is 364 days from and including the Closing Date. No
earlier than the 120th day and no later than the 90th day prior to the Scheduled
Termination Date of the Line of Credit Agreement, the Company will request that
the Liquidity Providers extend the Scheduled Termination Date for a period not
less than 364 days (unless previously a Line of Credit Acceleration (as defined
below) has occurred or a Termination Advance (as defined below) has been made).
If the Trustee has not received a copy of such a request from the Company within
such time period, the Trustee will make a request for extension. Unless all of
the Liquidity Providers (including any replacement Liquidity Provider satisfying
the Liquidity Provider Rating Condition) have agreed to extend the Scheduled
Termination Date prior to 10 days before the Scheduled Termination Date, the
Company, or if the Company has not done so, the Trustee, will deliver a notice
of borrowing under the Line of Credit Agreement for an Advance (a "Non-Renewal
Advance") in an amount equal to the entire amount then available under the Line
of Credit Agreement. The proceeds of any Non-Renewal Advance will be deposited
in the Liquidity Account. Amounts on deposit in the Liquidity Account will
generally be used as a substitute for Interest Advances under the Line of Credit
Agreement.
If any Liquidity Provider has been downgraded such that it ceases to have
the Required Liquidity Provider Rating and no replacement Liquidity Provider
with the Required Liquidity Provider Rating has assumed the Commitment of such
downgraded Liquidity Provider within 30 days of such downgrade, the Company, or,
if the Company does not do so, the Trustee, will deliver a notice of borrowing
under the Line of Credit Agreement for an Advance (a "Downgrade Advance") in
an amount equal to the entire amount then available under the Line of Credit
Agreement. The proceeds of any Downgrade Advance will be deposited in the
Liquidity Account.
A Non-Renewal Advance or a Downgrade Advance is referred to as a
"Termination Advance." This term also includes any Interest Advance
outstanding on the date a Non-Renewal Advance or Downgrade Advance is made, and
any such Interest Advance will thereafter become payable under the Line of
Credit Agreement on the same terms as such Non-Renewal Advance or Downgrade
Advance. Upon the making of a Termination Advance, the obligations of the
Liquidity Providers to make Interest Advances will terminate.
Upon delivery of a notice of borrowing, each Liquidity Provider will be
separately required to fund its pro rata share of the requested Advance up to
the amount of its then available Commitment. Under the Bank of America Credit
Agreement, if any Liquidity Provider defaults on its obligation to make an
Interest Advance, the other Liquidity Providers would be obligated to fund the
share of the defaulting Liquidity Provider up to the respective amounts of their
then available Commitments.
Interest (other than Supplemental Liquidity Provider Interest (as defined
below)) and principal on Interest Advances under the Line of Credit Agreement
will be paid monthly on each Monthly Deposit Date prior to making any deposits
into the Payment Account. If a Termination Advance is made, neither an
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Acceleration Event (as defined below) nor a Triggering Event (as defined below)
exists and a Line of Credit Acceleration has not occurred, (x) interest on the
Termination Advance (other than Supplemental Liquidity Provider Interest) will
be payable on each Note Payment Date, PARI PASSU with interest payments on the
Timber Notes and any Additional Timber Notes, (y) principal payments on the
Termination Advance will be payable on Note Payment Dates as provided under the
Line of Credit Agreement, and (z) such principal payments will, to the extent of
funds available therefor in the Payment Account, be paid after payment of the
Aggregate Minimum Principal Amortization Amount, if any, and prior to payment of
the Depletion Amortization Amount, if any, on the Timber Notes on such Note
Payment Dates. Under the Bank of America Credit Agreement, the principal of a
Termination Advance will be payable in semi-annual installments on 12 Note
Payment Dates commencing on the first Note Payment Date that occurs 27 months or
more after such Termination Advance is made. Such payments will be based upon a
level payment amortization schedule, calculated as if a specified interest rate
determined shortly prior to the commencement of such principal payments remained
constant over the repayment period. (The amount of such principal payment due on
any Note Payment Date is referred to as a "Line of Credit Amortization
Amount".) See "--Accounts; Payment on the Timber Notes--Monthly Deposit
Dates" and "--Note Payment Dates."
At any time that a Triggering Event (as defined below) exists, the
Liquidity Providers may elect to terminate their obligations to make Advances
(if not previously terminated as a result of the making of a Termination
Advance) or, if a Termination Advance is outstanding, elect to require that
interest (other than Supplemental Liquidity Provider Interest) and principal on
such Advance be paid on each Monthly Deposit Date and Note Payment Date before
any amounts are deposited in the Payment Account or any payments are made to the
holders of the Timber Notes. In addition, the obligation of the Liquidity
Providers to make Advances will be suspended at any time that an Acceleration
Event or a Triggering Event has occurred and is continuing. Under the Bank of
America Credit Agreement, a Triggering Event will be deemed to exist if (1) the
Timber Notes are accelerated during the continuance of an Event of Default
described in clause (3) under the caption "Events of Default; Remedies" (an
"Interest Payment Event of Default") and such acceleration has not been
rescinded, or (2) the Timber Notes are accelerated by reason of any other Event
of Default, such acceleration has remained in effect for 90 days and such
acceleration has not been rescinded, or (3) an Interest Payment Event of Default
exists for a period of six months plus 10 Business Days or longer (excluding any
such default that would not have existed or that would have been cured had a
Liquidity Provider not defaulted in its obligations under the Line of Credit
Agreement), or (4) a default exists in payment of interest on any Interest
Advance (other than any Supplemental Liquidity Provider Interest) for a period
of one month plus 10 Business Days or longer during which there exists an
Interest Payment Event of Default (excluding any such default that would not
have existed or that would have been cured had a Liquidity Provider not
defaulted in its obligations under the Line of Credit Agreement), or (5) the
principal of the Timber Notes is not repaid in full prior to the Final Maturity
Date, or (6) the Company becomes Bankrupt or Insolvent (as defined below).
Under the Bank of America Credit Agreement, a commitment fee of 0.625% per
annum is payable on the unutilized portion of the Commitments. Outstanding
Advances under the Bank of America Credit Agreement will bear interest at the
Base Rate (as defined) or at a one month or six month LIBOR rate plus 0.75% at
any time that Advances have not been continually outstanding for more than six
months. At any time that Advances have been continually outstanding for more
than six months, the interest rate will be the Base Rate plus 0.50% per annum or
a one month or six month LIBOR rate plus 1.50% per annum. Interest rates will
increase by (x) 2% per annum if an Acceleration Event or a Triggering Event
exists or if a Line of Credit Acceleration has occurred and (y) by an additional
0.75% per annum in the event that a Termination Advance has not been repaid
following the 12 semi-annual Note Payment Dates for such repayment described
above.
The Company may not consent to any amendment to the Line of Credit
Agreement, unless (i) such amendment has been approved by a resolution of the
Board of Managers, including all Independent Managers and either (A) such
amendment is to (1) cure any ambiguity, omission, defect or inconsistency, (2)
add to the covenants of the other parties thereto for the benefit of the
Company, the holders of the
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Timber Notes or the Trustee, (3) surrender any right of the other parties
thereto, (4) modify the obligations of the other parties thereto among such
other parties, (5) provide for the assignment to, and assumption by, Liquidity
Providers having the Required Liquidity Provider Rating of the rights and
obligations of one or more Liquidity Providers, (6) extend the Scheduled
Termination Date of the Line of Credit Agreement, and/or (7) modify the fees or
the interest rates payable by the Company under the Line of Credit Agreement;
provided that no such amendment may adversely affect in any material respect the
interests of the holders of the Timber Notes (it being understood that no
amendment referred to in the preceding clauses (5), (6) and (7) will be deemed
to have such adverse effect) or (B) such amendment has received Rating Agency
Confirmation. If any amendment referred to in clause (7) of the preceding
sentence increases the commitment fee, agent's fee or any similar fee, or the
interest rates, under the Line of Credit Agreement, above those payable under
the Bank of America Credit Agreement as in effect on the Closing Date, the
Additional Liquidity Provider Fees and/or Supplemental Liquidity Provider
Interest will be payable monthly on each Monthly Deposit Date, after all
required transfers to the Payment Account and the Expense Reserve, out of funds
that would otherwise be released to the Company free of the Lien of the Deed of
Trust.
The Company may at any time arrange for a replacement Line of Credit
Agreement to replace the then existing Line of Credit Agreement. No such
replacement Line of Credit Agreement will become effective, however, unless each
of the following conditions has been satisfied: (i) such replacement Line of
Credit Agreement has received Rating Agency Confirmation; (ii) the terms of such
replacement Line of Credit Agreement are not inconsistent with the relevant
provisions of the Indenture; (iii) all monetary obligations then owing under the
Line of Credit Agreement being replaced have been paid (which payment shall be
made first from any available funds in the Liquidity Account) and the
Commitments thereunder have been terminated; (iv) the amount available under the
replacement Line of Credit Agreement is not less than the Required Liquidity
Amount; and (v) an Officer's Certificate shall have been delivered to the
Trustee stating that each of the foregoing conditions has been satisfied.
DESCRIPTION OF MORTGAGED PROPERTY
The Old Notes and the obligations of the Company under the Line of Credit
are, and the New Notes will be, secured by a Lien on the Company Owned
Timberlands, the Company Timber Rights, the Company Timber and any Additional
Timber Properties. The Old Notes and the obligations of the Company under the
Line of Credit Agreement are, and the New Notes will be, also secured by (i) an
assignment of the rights of the Company under the New Master Purchase Agreement,
the New Services Agreement, the New Additional Services Agreement and certain
other contracts, (ii) a Lien on all amounts on deposit in the Collection
Account, the Payment Account, any Liquidity Account, the Expense Reserve and the
Prefunding Account (collectively, the "Accounts") and (iii) a Lien on certain
other assets, including certain data processing hardware and software (subject
to certain rights of concurrent use with Pacific Lumber) utilized in the
preparation of Timber Harvesting Plans.
Reference is made to the definition of "Mortgaged Property" under
"--Certain Definitions" for a more detailed description of the Mortgaged
Property.
TITLE INSURANCE
The holders of the Old Notes and the Liquidity Providers have, and the
holders of the New Notes will have, the benefit of an ALTA lenders' policy of
title insurance in favor of the Trustee, in an amount not less than the
aggregate principal balance of the Timber Notes plus the aggregate Commitments
under the Line of Credit Agreement. The policy will be subject to certain
exceptions, including an exception for matters which would be disclosed by a
survey (which will not be obtained). The Company has no reason to believe that
the exceptions to the title policy will reflect matters which could have a
material adverse effect upon the value of the Mortgaged Property or the
operations of the Company.
The Indenture provides that all proceeds of the title insurance policy
received by the Trustee or the Collateral Agent shall be held in Trust by the
Collateral Agent subject to the Lien of the Deed of Trust and shall be invested
in Eligible Investments until distributed as provided in the Indenture. The
Indenture also
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provides that on the Note Payment Date next succeeding the receipt of any such
proceeds, after deducting any expenses of the Trustee and the Collateral Agent
therefrom, the Collateral Agent shall deposit such proceeds into the Payment
Account and apply all such amounts as described under "--Accounts; Payment on
the Timber Notes--Note Payment Dates" above.
POSSESSION AND USE OF COLLATERAL
Unless a Trapping Event shall have occurred and be continuing, the Company
shall have the right to remain in possession and retain exclusive control of the
Mortgaged Property (other than proceeds from the Mortgaged Property deposited
with the Trustee for deposit into the Accounts or as otherwise provided in the
Indenture) and to operate the Mortgaged Property (subject to the provisions of
the Operative Documents).
COLLATERAL RELEASE PROVISIONS
The Indenture provides that the Company has the right, at any time and from
time to time, to (i) sell or otherwise dispose of any of the Company Owned
Timberlands or Company Timber Rights or (ii) enter into any Lump Sum Sale only
upon compliance with the requirements and conditions of the Indenture. The
Indenture requires that the Trustee instruct the Collateral Agent (A) in the
case of clause (i), to release the relevant Company Owned Timberlands or Company
Timber Rights from the Lien of the Deed of Trust or (B) in the case of clause
(ii), to release the relevant Company Timber from the Lien of the Deed of Trust
or grant the proposed purchaser harvesting rights to the relevant Company Timber
prior to the Lien of the Deed of Trust, upon receipt by the Trustee and the
Collateral Agent of a Release Notice (as hereinafter defined) requesting such
release and describing the property to be so released. Each Release Notice must
be accompanied by each of the following items (unless such item is by its terms
required to be provided simultaneously with such release):
(a) If the fair value of the Company Owned Timberlands, Company Timber
Rights or Company Timber, as the case may be, to be released, exceeds
$2,500,000, a Board Resolution requesting such release and authorizing an
application to the Trustee and Collateral Agent therefor;
(b) An Officer's Certificate, dated not more than 30 days prior to the
date of the application for such release stating substantially as follows:
(i) that, in the opinion of the signer, the security afforded by
the Deed of Trust will not be impaired by such release in contravention
of the provisions of the Indenture or the Deed of Trust;
(ii) that the Company will dispose of the Company Owned
Timberlands, Company Timber Rights or Company Timber, as the case may
be, so to be released, for a consideration representing, in the opinion
of the signer, not less than its fair value, and that either (A) in the
case of a Lump Sum Sale, that such consideration consists solely of cash
or (B) in the case of a sale of Company Owned Timberlands or Company
Timber Rights other than as described in clause (C), that such
consideration consists solely of cash, or (C) in the case of a sale of
Company Owned Timberlands or Company Timber Rights, if such
consideration does not consist solely of cash, that (x) the non-cash
portion of such consideration consists of one or more promissory note(s)
or other instruments representing the deferred portion of such sales
price which do not, in the aggregate, exceed the Maximum Non-Cash
Consideration Amount (as defined below) and (y) attached to such Release
Notice is a schedule which sets forth the basis for computation of the
Maximum Non-Cash Consideration Amount which schedule, to the best
knowledge of such signer, represents a true, complete and accurate
computation of such amount and (z) the non-cash portion of such
consideration shall be subjected to the Lien of the Deed of Trust
concurrently with any such release;
(iii) that (A) no Event of Default has occurred and is continuing
and (B) in the case of a sale of Company Owned Timberlands or Company
Timber Rights, if such consideration does not consist solely of cash,
that no event or condition exists which, with the giving of notice or
passage of time, or both, would constitute a Trapping Event as of the
next succeeding Monthly Deposit Date;
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(iv) the fair value, in the opinion of the signer, of the Company
Owned Timberlands, Company Timber Rights or Company Timber, as the case
may be, to be released at the date of such application for release and,
in the case of a sale of Company Owned Timberlands or Company Timber
Rights, if the consideration does not consist solely of cash, the fair
value of the non-cash portion of such consideration;
(v) if such release relates to Company Owned Timberlands, that the
remaining Company Owned Timberlands have sufficient access to other
portions of the Company Owned Timberlands, public or private roads and
other transportation structures for the continued use of such remaining
Company Owned Timberlands in substantially the manner carried on by the
Company prior to such release;
(vi) if the fair value of the property to be released is to be in
excess of the greater of (A) 5% of the then-remaining aggregate
principal balance of all outstanding Timber Notes and any outstanding
Additional Timber Notes or (B) $45 million multiplied by the Lumber PPI
Inflation Factor applicable on the date of such Officer's Certificate,
(I) that Rating Agency Confirmation has been obtained or (II) that (x)
such sale is made at a price no less than the Collateral Release Price
(as defined below) and (y) the amount on deposit in the Payment Account
on the next succeeding Note Payment Date (or, if the date of such
release is a Note Payment Date, on such Note Payment Date) will, in the
opinion of the signer (based on such assumptions as the signer considers
to be reasonable in the circumstances), be sufficient to pay all
Premiums expected to be payable on such Note Payment Date; and
(vii) that all conditions precedent and other requirements in the
Indenture and the Deed of Trust relating to the release of the Company
Owned Timberlands, Company Timber Rights or Company Timber, as the case
may be, in question have been complied with (or, with respect to
conditions that cannot be satisfied until the time of such release, that
such conditions will be satisfied at the time of such release, and
specifying the same);
(c) If (i) the fair value of the Company Owned Timberlands, Company
Timber Rights or Company Timber, as the case may be, to be released exceeds
$25,000 and 1% of the aggregate principal balance of the Timber Notes and
any Additional Timber Notes or (ii) the fair value of the Company Owned
Timberlands, Company Timber Rights or Company Timber, as the case may be,
to be released, together with the fair value of all Company Owned
Timberlands, Company Timber Rights and Company Timber theretofore released
in such calendar year, exceeds 10% of the aggregate principal balance of
the Timber Notes and any Additional Timber Notes, a certificate of an
independent appraiser, stating:
(1) the fair value, in the opinion of the signer, of the Company
Owned Timberlands, Company Timber Rights or Company Timber, as the case
may be, to be released at the date of such application for release and,
in the case of the sale of Company Owned Timberlands or Company Timber
Rights, if such consideration does not consist solely of cash, the fair
value of the non-cash portion of such consideration; and
(2) that, in the opinion of the signer, the security afforded by
the Deed of Trust will not be impaired by such release in contravention
of the terms of the Deed of Trust or the Indenture.
(d) Simultaneously with such release, all cash proceeds from the
Company Owned Timberlands, Company Timber Rights or Company Timber, as the
case may be, shall have been deposited into the Collection Account and, in
the case of the sale of Company Owned Timberlands or Company Timber Rights,
if such consideration does not consist solely of cash, (i) the non-cash
portion of such consideration consists of one or more promissory note(s) or
other instruments representing the deferred portion of such sales price
which do not, in the aggregate, exceed the Maximum Non-Cash Consideration
Amount and (ii) all action necessary to grant to the Trustee a first
priority perfected security interest in the non-cash portion of such
consideration shall have been taken;
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(e) Simultaneously with such release, an opinion of counsel,
substantially to the effect that all conditions precedent and other
requirements in the Indenture and the Deed of Trust relating to the release
of such Company Owned Timberlands, Company Timber Rights or Company Timber,
as the case may be, have been complied with;
(f) If such release relates to Company Owned Timberlands or Company
Timber Rights, and the Company Owned Timberlands or Company Timber Rights
to be released are less than all of the Company Owned Timberlands and
Company Timber Rights, simultaneously with such release evidence that a
title insurance company shall have committed to issue an endorsement to the
mortgagee's title insurance policy relating to the remaining Company Owned
Timberlands and Company Timber Rights confirming that after such release
such mortgagee's title insurance policy insures against any loss that may
be sustained by the Trustee or the Collateral Agent by reason of any loss
of priority of the Lien of the Deed of Trust on the remaining Company Owned
Timberlands and Company Timber Rights occasioned by the release of the
Company Owned Timberlands or Company Timber Rights being released; and
(g) If required by the preceding paragraph (b)(vi), a copy of the
Rating Agency Confirmation.
The Indenture provides that, in connection with any such release, the
Company will execute, deliver and record or file and obtain such instruments as
the Collateral Agent and the Trustee may reasonably require.
The Indenture provides that the Company must exercise its rights under the
collateral release provision by delivery to the Collateral Agent and the Trustee
of a notice (each, a "Release Notice") which describes with particularity the
items of property proposed to be covered by the release and is accompanied by a
form of the instruments proposed to give effect to the release, in form for
execution by the Collateral Agent and/or the trustee under the Deed of Trust.
The Indenture provides that if the non-cash portion of any consideration
received for the release of Company Owned Timberlands or Company Timber Rights
consists of any real property, such release shall be governed by the covenants
described under "--Substitute Collateral" and not by the foregoing covenant.
The Indenture defines "Lump Sum Sale" as any agreement or arrangement for
the sale of Company Timber pursuant to which the Company receives full cash
payment in advance for the purchase price of a specified quantity of Company
Timber (or Company Timber covered by one or more Timber Harvesting Plans or
contained on one or more parcels of land), and is required to provide,
subsequent to the date of payment, the quantity of Company Timber provided
therein (or covered by such Timber Harvesting Plans or contained on such
parcels). As sales of logs to Pacific Lumber pursuant to the New Master Purchase
Agreement will be made on a "pay-as-you-harvest" basis, a Lump Sum Sale could
occur only with respect to Company Timber not subject to a log purchase
agreement, if the New Master Purchase Agreement were terminated or if the
transactions were specifically permitted under the New Master Purchase
Agreement. See "Description of Certain Principal Agreements--New Master
Purchase Agreement."
The Indenture defines "Maximum Non-Cash Consideration Amount", as of the
date of any proposed release, as an amount equal to the amount of Excess Funds
which would be available for payment to or as directed by the Company pursuant
to clause "TENTH" under the caption "--Accounts; Payments on the Timber
Notes--Monthly Deposit Dates" above, on the next succeeding Monthly Deposit
Date, based upon the following assumptions: (i) all notes proposed to be
received in connection with the sale of Company Owned Timberlands or Company
Timber Rights were to be received in the form of cash, (ii) no proceeds from any
Company Owned Timberlands or Company Timber Rights (pursuant to sales under the
New Master Purchase Agreement or otherwise) were received during the period from
the date of the release (the "Release Date") through and including the next
succeeding Monthly Deposit Date (except for the proceeds of sales pursuant to
the New Master Purchase Agreement made prior to the Release Date in the Monthly
Period to which such next succeeding Monthly Deposit Date relates), (iii) except
for Deemed Production attributable to such sale of Company Owned Timberlands or
Company Timber Rights, there was no Actual
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Production or Deemed Production during the period, if any, from and including
the Release Date through the end of the Monthly Period to which such next
succeeding Monthly Deposit Date relates, (iv) the balances in the Collection
Account, the Liquidity Account, if any, plus any amount available under the Line
of Credit Agreement and the Expense Reserve shall equal the respective balances
(and amount so available) as of such Release Date (giving effect to the
transactions on such date and to payments under the New Master Purchase
Agreement to be made on such next succeeding Monthly Deposit Date in respect of
sales made prior to the Release Date) and (v) all transfers to and from the
Collection Account as described in clauses "FIRST" through "NINTH" under the
caption "--Accounts; Payments on the Timber Notes--Monthly Deposit Dates"
above, except to the extent provided in the preceding clauses (ii), (iii) and
(iv), will be computed in the same manner as such items would be computed on the
next succeeding Monthly Deposit Date. Generally, the Indenture permits notes
received from sales of Company Owned Timberlands or Company Timber Rights during
a given month to be released from the Lien of the Deed of Trust and distributed
to Pacific Lumber on the next Monthly Deposit Date if a like amount of cash
could be released on such Monthly Deposit Date (assuming such sales were for
cash); otherwise, Pacific Lumber is required to purchase the note (or portion
thereof which cannot be released).
SALE OF PACIFIC LUMBER TIMBER RIGHTS PROPERTY
The timber subject to the Pacific Lumber Timber Rights is not part of the
Mortgaged Property, was not pledged under the Deed of Trust, and the proceeds
thereof are not available for payment of the Timber Notes. Accordingly, all
sales of Pacific Lumber Timber may be made without the need for any action under
the Indenture. However, for administrative convenience, Pacific Lumber Timber
Rights Property will be held of record by the Company, and such real property
will (subject to the Pacific Lumber Timber Rights) initially constitute a part
of the Mortgaged Property subject to the Lien of the Deed of Trust.
Notwithstanding the foregoing, upon release of the Pacific Lumber Timber Rights
Property from the Lien of the Deed of Trust, all of the proceeds thereof will be
payable to the Company free and clear of the Lien of the Deed of Trust, and none
of such proceeds will be available for the payment of the Timber Notes.
Accordingly, the Indenture provides that the Company may, at any time or
from time to time, sell or otherwise dispose of any Pacific Lumber Timber Rights
Property, and the relevant Pacific Lumber Timber Rights Property shall be
released from the Lien of the Deed of Trust if the Trustee and the Collateral
Agent shall have received a Pacific Lumber Timber Rights Property Release Notice
requesting such release and describing the property to be so released, together
with:
(a) An Officer's Certificate, dated not more than 30 days prior to the
date of the application for such release stating substantially as follows:
(i) that the remaining Company Owned Timberlands have sufficient
access to other portions of the Company Owned Timberlands, public or
private roads and other transportation structures for the continued use
of such remaining Company Owned Timberlands in substantially the manner
carried on by the Company prior to such release;
(ii) that the Company Owned Timberlands for which the release is
sought consist solely of Pacific Lumber Timber Rights Property (or, if
such Company Owned Timberlands consists partially of Pacific Lumber
Timber Rights Property, that the conditions described under
"--Collateral Release Provisions" or "--Substitute Collateral" with
respect to the portion of such Company Owned Timberlands which is not
Pacific Lumber Timber Rights Property have been satisfied) (or, with
respect to conditions that cannot be satisfied until the time of such
release, that such conditions will be satisfied at the time of such
release, and specifying the same); and
(iii) that all conditions precedent and other requirements provided
for in the Indenture and the Deed of Trust relating to the release of
such Pacific Lumber Timber Rights Property have been complied with (or,
with respect to conditions that cannot be satisfied until the time of
such release, that such conditions will be satisfied at the time of such
release, and specifying the same).
(b) Simultaneously with such release, evidence that a title insurance
company shall have committed to issue an endorsement to the mortgagee's
title insurance policy relating to the remaining
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Company Owned Timberlands and Company Timber Rights confirming that after
such release such mortgagee's title insurance policy insures against any
loss that may be sustained by the Trustee or the Collateral Agent by reason
of any loss of priority of the Lien of the Deed of Trust on the remaining
Company Owned Timberlands and Company Timber Rights occasioned by the
release of the Company Owned Timberlands being released.
SUBSTITUTE COLLATERAL
The Indenture provides that the Company has the right, at any time and from
time to time, to obtain the release of Company Owned Timberlands (or timber
rights thereon) or Company Timber Rights from the Lien of the Deed of Trust upon
the addition of additional timber property (the "Substitute Timber Property")
to the Mortgaged Property and compliance with the requirements and conditions of
the Indenture, and the Indenture requires that the Trustee instruct the
Collateral Agent to release the same from the Lien of the Deed of Trust upon
receipt by the Trustee and the Collateral Agent of a Release and Substitution
Notice (as hereinafter defined) requesting such release and describing the
property to be released and the Substitute Timber Property, which Release and
Substitution Notice shall be accompanied by the following items (unless such
item is by its terms required to be provided simultaneously with such release):
(a) If the fair value of the Company Owned Timberlands (or timber
rights thereon) or Company Timber Rights, as the case may be, to be
released, as set forth in an Officer's Certificate, exceeds $2,500,000, a
Board Resolution requesting such release and substitution and authorizing
an application to the Trustee and the Collateral Agent therefor;
(b) An Officer's Certificate, dated not more than 30 days prior to the
date of the application for such release and substitution stating
substantially as follows:
(i) that, in the opinion of the signer, after giving effect to the
release and substitution, the security afforded by the Deed of Trust
will not be impaired by such release and substitution in contravention
of the provisions of this Indenture or the Deed of Trust;
(ii) that no Event of Default has occurred and is continuing;
(iii) the fair value, in the opinion of the signer, of the Company
Owned Timberlands (or timber rights thereon) or Company Timber Rights to
be released at the date of such application for release;
(iv) the fair value, in the opinion of the signer, of the
Substitute Timber Property to be subjected to the Lien of the Deed of
Trust;
(v) that the consideration to be received by the Company consists
solely of Substitute Timber Property, or a combination of cash and
Substitute Timber Property.
(vi) that the remaining Company Owned Timberlands (after giving
effect to the addition of the Substitute Timber Property) have
sufficient access to other Company Owned Timberlands, public or private
roads and other transportation structures for the continued use of such
remaining Company Owned Timberlands in substantially the manner carried
on by the Company prior to such release;
(vii) if the fair value of the property to be released is to be in
excess of the greater of (A) 5% of the then-remaining aggregate
principal balance of all outstanding Timber Notes and any outstanding
Additional Timber Notes or (B) $45 million multiplied by the Lumber PPI
Inflation Factor applicable on the date of such Officer's Certificate,
that Rating Agency Confirmation has been obtained;
(viii) that the signer knows of no reason why a Timber Harvesting
Plan with respect to the Substitute Timber Property should not be
available on terms not materially more onerous than would have been the
case with respect to the released property;
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(ix) that all conditions precedent and other requirements provided
for in the Indenture and the Deed of Trust relating to the release of
the Company Owned Timberlands (or timber rights thereon) or Company
Timber Rights and substitution of the Substitute Timber Property in
question have been complied with (or, with respect to conditions that
cannot be satisfied until the time of such release and substitution,
that such conditions will be satisfied at the time of such release and
substitution, and specifying the same); and
(x) in the event that any of the Substitute Timber Property
consists of timber rights, that such timber rights consist of the
ownership of, and (subject to compliance with applicable law) the right,
in perpetuity or until at least December 31, 2048, to harvest, all trees
and timber (including standing timber) now located or hereafter growing
in the soil of the timberlands which are subject to such timber rights.
(c) If (i) the fair value of the Company Owned Timberlands (or timber
rights thereon) or Company Timber Rights to be released exceeds $25,000 and
1% of the aggregate principal balance of the Timber Notes and any
Additional Timber Notes or (ii) the fair value of the Company Owned
Timberlands (or timber rights thereon) or Company Timber Rights to be
released, together with the fair value of all Company Owned Timberlands (or
timber rights thereon), Company Timber Rights and Company Timber
theretofore released in such calendar year, exceeds 10% of the aggregate
principal balance of the Timber Notes and any Additional Timber Notes, a
certificate of an independent appraiser, stating:
(1) the fair value, in the opinion of the signer, of (x) the
Company Owned Timberlands (or timber rights thereon) or Company Timber
Rights to be released and (y) the Substitute Timber Property to be
substituted, in each case at the date of such application for release;
and
(2) that, in the opinion of the signer, the security afforded by
the Deed of Trust will not be impaired by such release and substitution
in contravention of the terms of the Deed of Trust or this Indenture.
(d) The then fair value of the Substitute Timber Property, together
with any cash consideration received, shall be at least equal to the then
fair value of the Company Owned Timberlands (or timber rights thereon) or
Company Timber Rights to be released as evidenced by the certificate
delivered pursuant to clause (b) above and/or (c) above.
(e) Simultaneously with any release and substitution, all actions
necessary to grant to the Collateral Agent a first priority perfected Lien
on the Substitute Timber Property (subject only to Permitted Encumbrances)
shall have been taken, and if any cash consideration is received, all such
cash shall be deposited into the Collection Account.
(f) Simultaneously with such release an opinion of counsel,
substantially to the effect that all conditions precedent and other
requirements in the Indenture and the Deed of Trust relating to the release
of, and substitution for, such Company Owned Timberlands (or timber rights
thereon) or Company Timber Rights have been complied with.
(g) Simultaneously with such release, evidence that a title company
shall have committed to issue an endorsement to the mortgagee's title
insurance policy relating to the remaining Company Owned Timberlands and
Company Timber Rights confirming that after such release such mortgagee's
title insurance policy insures against any loss that may be sustained by
the Trustee or the Collateral Agent by reason of any loss of priority of
the Lien of the Deed of Trust on the remaining Company Owned Timberlands
and Company Timber Rights occasioned by the release of the Company Owned
Timberlands or Company Timber Rights being released, and further insuring,
by endorsement to the existing mortgagee's title insurance policy or by
issuance of a new mortgagee's title insurance policy in an amount equal to
the lesser of (i) the fair value of the Substitute Timber Property or (ii)
the then outstanding principal balance of the Timber Notes and any
Additional Timber Notes, plus the amount of the then existing Commitments
under the Line of Credit Agreement, that the Lien of the Deed of Trust is a
first priority perfected lien upon the Substitute Timber Property, subject
only to Permitted
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Encumbrances, and that the Substitute Timber Property is in compliance with
the California Subdivision Map Act.
(h) If required by the preceding paragraph (b)(vii), a copy of the
Rating Agency Confirmation.
The Indenture provides that, in connection with any such release, the
Company will execute, deliver and record or file and obtain such instruments as
the Collateral Agent and the Trustee may reasonably require including, without
limitation, an amendment to the Deed of Trust subjecting the Substitute Timber
Property to the Lien thereof.
The Indenture provides that the Company must exercise its rights under the
release and substitution provision by delivery to the Collateral Agent and the
Trustee of a notice (each, a "Release and Substitution Notice"), which
describes with particularity the items of property proposed to be covered by the
release and proposed to be substituted for such released property and is
accompanied by a form of the instruments proposed to give effect to the release
and substitution, in form for execution by each of the Collateral Agent and the
Trustee. For purposes of this provision, timber rights on Company Owned
Timberlands means the ownership of, and (subject to compliance with applicable
law) the right in perpetuity (or for a period of time) to harvest, all or a
portion of the trees and timber, including standing timber and crops, now
located or hereafter growing in the soil of the Company Owned Timberlands which
are subject to such timber rights.
In addition to the foregoing requirements, the Indenture provides that no
release and substitution of Company Owned Timberlands (or timber rights thereon)
or Company Timber Rights will be permitted pursuant to the preceding covenant,
unless:
(i) the aggregate fair value of all Company Owned Timberlands (or
timber rights thereon) and Company Timber Rights released or to be released
in accordance with the preceding covenant at any time during the term of
the Timber Notes would not exceed $90 million multiplied by the Lumber PPI
Inflation Factor then applicable (unless Rating Agency Confirmation shall
have been obtained);
(ii) the types of timber contained in the Substitute Timber Property
are of the same types as contained on the Company Owned Timberlands (or
timber rights thereon) or Company Timber Rights to be released or are
otherwise included on the Structuring Schedule; and
(iii) either (A) the number of Mbfe of timber on the Substitute Timber
Property being acquired (as indicated in an Officer's Certificate) is at
least equal to the number of Mbfe of Company Timber on the Company Owned
Timberlands (or in respect of the timber rights thereon), or subject to the
Company Timber Rights, being released (as indicated in an Officer's
Certificate) (or, if Company Owned Timberlands (or timber rights thereon)
or Company Timber Rights are being released in exchange for Substitute
Timber Property and cash, the number of Mbfe of timber on the Substitute
Timber Property being acquired (as indicated in an Officer's Certificate)
is at least equal to the number of Mbfe of Company Timber on the Company
Owned Timberlands (or in respect of the timber rights thereon), or subject
to the Company Timber Rights, being released (as indicated in an Officer's
Certificate) multiplied by a fraction, the numerator of which is the fair
value of the Substitute Timber Property to be acquired and the denominator
of which is the sum of the fair value of the Substitute Timber Property to
be acquired and the cash to be received) or (B) the Company elects (in an
Officer's Certificate) to recognize Deemed Production in respect of a
number of Mbfe of Company Timber equal to the excess, if any, of the number
of Mbfe of Company Timber on the Company Owned Timberlands (or in respect
of the timber rights thereon), or subject to the Company Timber Rights,
being released (or, if Company Owned Timberlands (or timber rights thereon)
or Company Timber Rights are being released in exchange for Substitute
Timber Property and cash, equal to the excess, if any, of the number of
Mbfe of Company Timber on the Company Owned Timberlands (or in respect of
the timber rights thereon), or subject to the Company Timber Rights, being
released multiplied by a fraction, the numerator of which is the fair value
of the Substitute Timber Property to be acquired and the denominator of
which is the sum of the fair value of the Substitute Timber Property to be
acquired and the cash to be received) over the number of Mbfe of timber on
the Substitute Timber Property being acquired or (C) the value of the
Company Owned Timberlands (or timber rights thereon) or
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Company Timber Rights being released is less than $100,000 multiplied by
the Lumber PPI Inflation Factor then applicable.
The Indenture provides that for the purpose of determining whether a
certificate of an independent appraiser is required pursuant to the preceding
clause (c), or clause (c) under the caption "--Collateral Release Provisions,"
the fair value of Company Owned Timberlands, Company Timber Rights and Company
Timber released in any calendar year shall include all Lump Sum Sales and sales
of Company Owned Timberlands and Company Timber Rights pursuant to the covenant
described under "--Collateral Release Provisions" and all releases and
substitutions of Company Owned Timberlands and Company Timber Rights described
under this caption, but shall exclude all Pacific Lumber Timber Rights Property
released pursuant to the covenant described under "--Sale of Pacific Lumber
Timber Rights Property" and all sales of Company Timber without release as
described under "--Disposition of Collateral Without Release."
DISPOSITION OF COLLATERAL WITHOUT RELEASE
Notwithstanding the provisions described under "--Collateral Release
Provisions" and "--Substitute Collateral" above, the Company shall have the
right, without any release or consent of the Trustee or the Collateral Agent:
(a) to sell Company Timber pursuant to Pay-as-you-Harvest Sales in the
manner and to the extent contemplated by the Indenture and the Deed of
Trust (including, without limitation, pursuant to the New Master Purchase
Agreement);
(b) to sell or exchange portions of the Company Owned Timberlands or
Company Timber Rights; provided that (i) the aggregate Mbfe of Company
Timber on Company Owned Timberlands, or subject to Company Timber Rights,
sold pursuant to this clause (b) shall not exceed 2,000 Mbfe and (ii) all
sales of Company Owned Timberlands or Company Timber Rights pursuant to
this clause (b) shall be for money which shall be, forthwith upon its
receipt by the Company, deposited in the Collection Account and will be
included in the funds transferred from amounts on deposit in the Collection
Account on the next succeeding Monthly Deposit Date as described under
"--Accounts; Payment on the Timber Notes--Monthly Deposit Dates";
(c) to abandon, surrender, terminate, release or amend any
right-of-way, easement, license, permit, franchise, certificate of public
convenience and necessity, lease or similar right or privilege subject to
the Lien of the Deed of Trust if (i) such right or privilege is no longer
necessary for (x) the cutting, harvesting, severing, sale, marketing or
disposal of Company Timber or (y) compliance by the Company with, and will
not materially adversely affect the ability of the Company to perform, its
covenants and obligations under the Indenture or the Deed of Trust or (ii)
in the case of an amendment, the amendment of such right or privilege will
not materially adversely affect the ability of the Company to perform its
covenants and obligations under the Indenture or the Deed of Trust;
provided that (x) any amended right or privilege forthwith becomes subject
to the Lien of the Deed of Trust to the same extent as those previously
existing and (y) if the Company shall receive any money or property as
consideration or compensation for such abandonment, surrender, termination,
release or amendment, such money or property shall be subjected to the Lien
of the Deed of Trust and such money, forthwith upon its receipt by the
Company, except for DE MINIMIS Receipts, will be deposited in the
Collection Account and will be included in the funds transferred from
amounts on deposit in the Collection Account on the next succeeding Monthly
Deposit Date as described under "--Accounts; Payment on the Timber
Notes--Monthly Deposit Dates." Notwithstanding the foregoing, amendments
to the New Master Purchase Agreement, the New Services Agreement and the
Conveyance Documents shall be governed in accordance with the covenant of
the Indenture described under "--Certain Covenants--Certain Consents";
(d) to abandon, surrender, terminate, release or amend any Subject
Contract if the abandonment, surrender, termination, release or amendment
of such Subject Contract will not materially adversely affect the ability
of the Company to perform its covenants and obligations under the Indenture
or the
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Deed of Trust; provided that (i) all right, title and interest of the
Company in and to any amended Subject Contract shall forthwith, become
subject to the Lien of the Deed of Trust to the same extent as those
previously existing and (ii) if the Company shall receive any money or
property as consideration or compensation for such abandonment, surrender,
termination, release or amendment, such money or property shall be subject
to the Lien of the Deed of Trust and such money, except for DE MINIMIS
Receipts, forthwith upon its receipt by the Company, will be deposited in
the Collection Account and will be included in the funds transferred from
amounts on deposit in the Collection Account on the next succeeding Monthly
Deposit Date as described under "--Accounts; Payment on the Timber
Notes--Monthly Deposit Dates." Notwithstanding the foregoing, amendments
to the New Master Purchase Agreement, the New Services Agreement and the
Conveyance Documents shall be governed in accordance with the covenant of
the Indenture described under "--Certain Covenants--Certain Consents";
and
(e) to sell, abandon or otherwise dispose of, or alter or modify, any
Data Processing Equipment, any other machinery, equipment or other tangible
personal property (other than Company Timber, to which other provisions of
the Deed of Trust apply), any fixtures or improvements situated upon any
part of the Company Owned Timberlands or Company Timber Rights Property,
any Data Processing Information, any other information, programs, know-how,
methods, methodology, or other intangible personal property (other than the
Subject Contracts, to which the foregoing paragraph (d) applies, and the
Collection Account (including reserves therein), Payment Account, Expense
Reserve, Prefunding Account and Liquidity Account, to which provisions of
the Indenture described herein apply), if the sale, abandonment or other
disposition, or the alteration or modification of the same will not
materially adversely affect the ability of the Company to perform its
covenants and obligations under the Indenture or the Deed of Trust;
provided that (i) all right, title and interest of the Company in any new,
altered or modified Mortgaged Property shall forthwith become subject to
the Lien of the Deed of Trust to the same extent as those previously
existing and (ii) if the Company shall receive any money or property as
consideration or compensation for such sale, abandonment or other
disposition, or alteration or modification, such money or property shall be
subject to the Lien of the Deed of Trust and such money, except for DE
MINIMIS Receipts, forthwith upon its receipt by the Company, shall be
deposited in the Collection Account and will be included in the funds
transferred from amounts on deposit in the Collection Account on the next
succeeding Monthly Deposit Date as described under "--Accounts; Payment on
the Timber Notes--Monthly Deposit Dates."
PREFUNDING
$25 million of the proceeds of the Offering were deposited into an account
(the "Prefunding Account") to be available for purchase of Additional Timber
Properties, subject to satisfaction of the following conditions. The Indenture
provides that the Company has the right, at any time and from time to time, to
obtain the release of funds from the Prefunding Account upon the addition of an
Additional Timber Property or Properties (other than the Elk River Timberlands)
to the Mortgaged Property and compliance with the requirements and conditions of
the Indenture, and the Indenture requires that the Trustee release the same to
the Company upon receipt by the Collateral Agent of a Prefunding Release Notice
requesting such release, stating the amount of funds to be released and
describing the Additional Timber Property or Properties to be added to the
Mortgaged Property, which Prefunding Release Notice shall be accompanied by the
following items (unless such item is by its terms required to be provided
simultaneously with such release):
(a) If the amount to be released exceeds $2,500,000, a Board
Resolution requesting such release and authorizing an application to the
Collateral Agent therefor.
(b) An Officer's Certificate, dated not more than 30 days prior to the
date of the application for such release stating substantially as follows:
(i) that, in the opinion of the signer, after giving effect to the
release and the addition of the Additional Timber Property or Properties
to the Mortgaged Property, the security afforded by the
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Indenture and the Deed of Trust will not be impaired by such release and
addition in contravention of the provisions of the Indenture or the Deed
of Trust;
(ii) that no Event of Default has occurred and is continuing;
(iii) the purchase price of the Additional Timber Property or
Properties to be subjected to the Lien of the Deed of Trust;
(iv) that the amount of funds to be released from the Prefunding
Account does not exceed the lesser of (A) the purchase price of the
Additional Timber Property or Properties to be subjected to the Lien of
the Deed of Trust or (B) the then remaining amount in the Prefunding
Account;
(v) that all conditions precedent and other requirements provided
for in the Indenture and the Deed of Trust relating to the release have
been complied with (or, with respect to conditions that cannot be
satisfied until the time of such release that such conditions will be
satisfied at the time of such release, and specifying the same); and
(vi) that, in the opinion of the signer, the acquisition of the
Additional Timber Property or Properties does not materially adversely
affect the ability of the Company to pay interest and Minimum Principal
Amortization on the Timber Notes.
(c) Simultaneously with such release, all actions necessary to grant
to the Collateral Agent a first priority perfected Lien on the Additional
Timber Property or Properties (subject only to Permitted Encumbrances)
shall have been taken.
(d) Simultaneously with such release, an opinion of counsel,
substantially to the effect that all conditions precedent and other
requirements in the Indenture and the Deed of Trust relating to the release
of such funds from the Prefunding Account have been complied with.
(e) Simultaneously with such release, evidence that a title insurance
company shall have committed to insure, by endorsement to the existing
mortgagee's title insurance policy relating to the Company Owned
Timberlands and the Company Timber Rights or by issuance of a new
mortgagee's title insurance policy in an amount equal to the lesser of (i)
the fair value of the Additional Timber Property or Properties or (ii) the
then outstanding principal balance of the Timber Notes and any Additional
Timber Notes plus the amount of the then existing Commitments under the
Line of Credit Agreement, that the Lien of the Deed of Trust is a first
priority perfected lien upon the Additional Timber Property or Properties,
subject only to Permitted Encumbrances, and that the Additional Timber
Property or Properties are in compliance with the California Subdivision
Map Act.
The Company may direct that any funds in the Prefunding Account on any Note
Payment Date be transferred to the Payment Account and used to make a prepayment
on the Timber Notes.
To the extent that the amount on deposit in the Prefunding Account on any
Monthly Deposit Date exceeds $25,000,000 less the sum of the amounts, if any,
theretofore released to the Company, or transferred to the Payment Account, from
the Prefunding Account pursuant to the foregoing provisions, the Company may
direct that an amount up to the amount of such excess be transferred from the
Prefunding Account to the Collection Account on such Monthly Deposit Date.
ADDITIONAL TIMBER NOTES
Pursuant to the Indenture, the Company is permitted, subject to
satisfaction of the conditions described below, to issue additional indebtedness
secured by the Lien of the Deed of Trust on a PARI PASSU basis with the Timber
Notes (any such additional indebtedness so issued, "Additional Timber Notes").
In order to issue Additional Timber Notes, the Company will be required to
satisfy the conditions set forth in the Indenture, which include the following:
(i) After giving effect to the issuance of such Additional Timber
Notes (including any amendment or supplement to the Indenture or the other
Operative Documents in connection with such issuance), the Rating Agency
Condition shall be satisfied with respect to each Class of Timber Notes
then outstanding (other than any Class of Timber Notes then being called
for redemption or paid in full);
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(ii) The Scheduled Amortization Amount for each Class of Timber Notes
shall be zero on the date of the issuance of such Additional Timber Notes,
after giving effect to any payments of principal to be made to the holders
of Timber Notes on such date and any redemption of any Timber Notes called,
on or prior to such date, for redemption (including any payment of
principal or redemption to be made with the proceeds of the issuance of
such Additional Timber Notes);
(iii) The amount available under the Line of Credit Agreement plus the
funds on deposit in the Liquidity Account shall equal or exceed the
Required Liquidity Amount (as such amount may be modified in connection
with such issuance) after giving effect to the issuance of such Additional
Timber Notes;
(iv) Each issuance of Additional Timber Notes shall be in a principal
amount of at least $100,000,000;
(v) The Additional Timber Notes shall be rated at least as high as
"Baa2" by Moody's and "BBB" by S&P;
(vi) No Class A-1 Timber Notes shall be outstanding or, simultaneously
with the issuance of such Additional Timber Notes, all outstanding Class
A-1 Timber Notes shall be paid in full or called for redemption; and
(vii) The issuance of the Additional Timber Notes does not violate the
Line of Credit Agreement.
If each of the foregoing conditions is satisfied, the Indenture and the
other Operative Documents and the Line of Credit Agreement may be amended or
supplemented, without the consent of the Noteholders, as necessary or required
to effect the issuance of such Additional Timber Notes. Such amendments may,
among other things, modify the Required Liquidity Amount and provide for the use
of the Line of Credit Agreement (or other liquidity arrangement) to make such
liquidity available to pay interest on the Additional Timber Notes or change the
basis upon which the actual amortization of the Timber Notes is calculated. No
such amendment or supplement, however, may, except as otherwise permitted by the
provisions of the second paragraph under "--Amendment, Supplement and Waiver,"
without the consent of Noteholders (i) effect any of the changes referred to in
the last sentence of the first paragraph under "--Amendment, Supplement and
Waiver," (ii) extend the Minimum Principal Amortization Schedule or change the
Scheduled Amortization Schedule for any Class of then outstanding Timber Notes,
(iii) cause any Additional Timber Notes or other Indebtedness (except
Indebtedness arising pursuant to a liquidity facility that supports the payment
of interest, but not the payment of principal, premiums, or interest on
premiums, on the Timber Notes and/or on any Additional Timber Notes) to have a
Lien senior to the Lien securing the Timber Notes under the Deed of Trust, (iv)
permit any payments of principal on any Additional Timber Notes while any Timber
Notes are outstanding (unless the Timber Notes and the Additional Timber Notes
have been accelerated), (v) change the Note Payment Dates or provide that the
Note Payment Dates for the payment of interest on Additional Timber Notes will,
so long as any Timber Notes are outstanding, be different from the Note Payment
Dates for the Timber Notes, (vi) change the definition of "Cash Retention
Event" in a manner adverse to the interests of the holders of the Timber Notes,
(vii) during the continuance of a Cash Retention Event, permit the release of
any funds to the Company free and clear of the Lien of the Deed of Trust (except
as contemplated by clause "FIRST," clause "SECOND" and clause "TENTH" (as
modified by the second paragraph following such clause "TENTH") under
"--Accounts; Payment of the Timber Notes--Monthly Deposit Dates"), (viii)
modify any covenant contained in the Indenture which is described under
"--Certain Covenants" (except for any modification that is to cure any
ambiguity, omission, defect or inconsistency, or to add to the covenants of the
Company for the benefit of the holders of the Timber Notes and any Additional
Timber Notes), (ix) amend the Events of Default described in clauses (1) through
(12) under "Events of Default; Remedies" (except for any amendment that is to
cure any ambiguity, omission, defect or inconsistency, or to add to the Events
of Default for the benefit of the holders of the Timber Notes and any Additional
Timber Notes) under the Indenture or provide for any event of default or remedy
with respect to the Additional Timber Notes that is not, while any Timber Notes
are outstanding, substantially identical to the Events of Default and remedies
with respect to the Timber Notes or (x) except to the extent necessary or
appropriate to secure the Additional Timber Notes on a PARI PASSU
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basis, or to make the Indebtedness represented by the Additional Timber Notes
PARI PASSU, with the Timber Notes, modify the provisions of any Operative
Document other than the Indenture in a manner that would have a material adverse
effect on the Holders of the Timber Notes.
CERTAIN COVENANTS
The Indenture contains certain covenants including, among others, the
following:
SEPARATE EXISTENCE AND FORMALITIES. The Indenture requires that the
Company observe certain procedures, including maintaining separate books and
records and separate offices, maintaining at least two independent managers, and
not commingling assets, which are intended to establish and maintain the
existence of the Company separate from that of Pacific Lumber.
LIMITATION ON LIENS ON COMPANY OWNED TIMBERLANDS OR COMPANY TIMBER
RIGHTS. The Indenture provides that the Company shall not create, incur,
assume, suffer or permit to exist any Lien on the Company Owned Timberlands or
Company Timber Rights or any portion thereof or any interest therein other than
(x) the Lien of the Deed of Trust or (y) other Permitted Encumbrances.
LIMITATION ON INDEBTEDNESS. The Indenture provides that the Company shall
not issue, assume, incur, create, guarantee or otherwise become liable for,
directly or indirectly, any Indebtedness other than (u) nonrecourse Indebtedness
outstanding on the Closing Date in a principal amount not exceeding $510,000,
provided that an amount equal to the principal amount of such Indebtedness from
time to time outstanding is held by the Trustee in a separate cash collateral
account so long as such Indebtedness is outstanding, (v) Indebtedness
represented by the Timber Notes, (w) Indebtedness represented by any Additional
Timber Notes, (x) Nonrecourse Timber Acquisition Indebtedness (as defined
herein) in an aggregate principal amount not exceeding $75,000,000 outstanding
at any one time, (y) Indebtedness under the Line of Credit Agreement or any
other liquidity arrangement in connection with payment of interest (excluding
interest on premiums), but not in connection with the payment of principal or
any premiums, on the Timber Notes or any Additional Timber Notes and (z)
Indebtedness for capital leases; PROVIDED, HOWEVER, that (i) the aggregate
amount of such obligations under all such leases accruing during any consecutive
12 month period does not exceed $100,000 multiplied by the Producer Price Index
Inflation Factor then applicable and (ii) the aggregate amount of such
obligations under all such leases accruing over the terms of such leases does
not exceed $500,000 multiplied by the Producer Price Index Inflation Factor then
applicable.
INVESTMENTS, LOANS AND ADVANCES. The Indenture provides that except for
Permitted Investments or as otherwise contemplated by or provided in the
Indenture, the Deed of Trust or any other Operative Document, the Company shall
not make any loan or advance or extend any credit to (excluding (i) the
extension of trade credit in the ordinary course of business or (ii) advances to
employees or managers, in the ordinary course of business, for reasonable
business expenses or salary, not to exceed $100,000 in the aggregate at any one
time), or own, purchase, repurchase or acquire (or agree contingently to do so)
any stock, obligations or securities of, or any other ownership interest in, or
all or substantially all of the assets of, or make any capital contribution to
or any other investment in, any Affiliate or other Person. Although there is no
single established meaning of the phrase "all or substantially all of the
assets" under the law governing the Indenture and the amount of assets that
will constitute "all or substantially all of the assets" of any Affiliate or
other Person is not readily quantifiable, a determination as to whether the
Company shall own or shall have purchased, repurchased or acquired such assets
will depend on the percentage of operating and total assets of such Affiliate or
Person, among other measurements, and other facts and circumstances of the
transaction. Based upon the foregoing factors, it is possible that the
ownership, purchase, repurchase or acquisition by the Company of a significant
amount of assets would not be deemed to constitute the ownership, purchase,
repurchase or acquisition of "all or substantially all of the assets" under
the Indenture. In any particular transaction, this determination will be made by
the Company and, subject to the limitations on a Noteholder's rights to
institute suit with respect to the Indenture (as described under "--Events of
Default; Remedies"), a Noteholder could institute an action to dispute the
Company's determination in any particular transaction.
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LIMITATION ON RESTRICTED PAYMENTS. The Indenture provides that the Company
shall not, directly or indirectly, declare, make or pay any distribution or
other payment (whether in cash, property or obligations) in respect of any
equity interest in the Company, or, directly or indirectly, purchase, redeem,
retire or otherwise acquire for value any equity interest in the Company (a
"Restricted Payment"), except for any such Restricted Payment made solely with
funds or other assets that are free of the Lien of the Deed of Trust; PROVIDED,
HOWEVER, that if an Event of Default described in clause (12) (without regard to
the grace period set forth therein) under the caption "--Events of Default;
Remedies" shall have occurred and be continuing, the Company shall not make any
Restricted Payment.
CERTAIN CONSENTS. The Indenture provides that the Company shall not give
consent to any amendment to the New Master Purchase Agreement, the New Services
Agreement, any Conveyance Document or the Escrow Agreement referred to in the
definitions of Pacific Lumber Timber Rights Property and Company Timber Rights
Property unless (i) such amendment has been approved by a Board Resolution,
including the affirmative vote of all independent managers and (ii) either (A)
such amendment is to cure any ambiguity, omission, defect or inconsistency, or
to add to the covenants of the other party thereto for the benefit of the
Company or the holders of the Timber Notes or of any Additional Timber Notes, or
to surrender any right or power conferred therein on the other party thereto, or
in respect of certain action to be taken by the Company pursuant to the New
Reciprocal Rights Agreement; provided, that no such amendment may adversely
affect in any material respect the interests of the holders of the Timber Notes
or any Additional Timber Notes, or (B) such amendment has received Rating Agency
Confirmation, or (C) such amendment has received Rating Agency Evaluation and
has been approved by the Supermajority Holders (after prior notice of such
Rating Agency Evaluation) or (D) such amendment is in connection with the
issuance of Additional Timber Notes, subject to the limitations set forth above
under "--Additional Timber Notes." The Indenture provides that the Company
will exercise its rights under the New Master Purchase Agreement to require
Pacific Lumber to utilize the Net Short Log Scribner Scale methodology of
scaling, or to utilize third party scalers (see "Description of Certain
Principal Agreements--New Master Purchase Agreement--Scaling"), upon receipt of
notice from the Trustee, or from the holders of 25% in aggregate outstanding
principal amount of the Timber Notes and any Additional Timber Notes.
RESTRICTIONS ON CONSOLIDATION, ETC. The Indenture provides that the
Company shall not (except as set forth below) consolidate with or merge with or
into any other Person; or lease any of its material assets to any other Person
(other than leases constituting Permitted Encumbrances); or make any amendment
to certain sections of its Operating Agreement. Except as set forth below, the
Company shall not sell or convey all or substantially all of its assets to any
other Person unless the Company, as a condition precedent to any such sale or
conveyance, shall pay in full or defease pursuant to the terms of the Indenture
all principal of, Premium, if any, interest on and other amounts payable with
respect to the Timber Notes and any Additional Timber Notes or under the
Indenture or the Line of Credit Agreement. Although there is no single
established meaning of the phrase "all or substantially all of the assets"
under the law governing the Indenture and the amount of assets that will
constitute "all or substantially all" of the Company's assets is not readily
quantifiable, a determination as to whether such a sale or conveyance has
occurred will depend on the percentage of operating and total assets
transferred, among other measurements, and other facts and circumstances of the
transaction. Based upon the foregoing factors, it is possible that the transfer
of a significant amount of assets by the Company would not be deemed to
constitute a transfer of "all or substantially all" of the assets of the
Company under the Indenture. In any particular transaction, this determination
will be made by the Company and, subject to the limitations on a Noteholder's
rights to institute suit with respect to the Indenture (as described under
"--Events of Default; Remedies"), a Noteholder could institute an action to
dispute the Company's determination in any particular transaction.
Notwithstanding the foregoing, the Company may consolidate with or merge
into any newly formed wholly owned subsidiary of Pacific Lumber (or any
successor to Pacific Lumber) that has no material assets or liabilities
immediately prior to such consolidation or merger if (a) the Person formed by
such consolidation or into which the Company is merged is a corporation, limited
liability company or other entity organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia and
shall expressly assume, by a supplemental indenture in form and substance
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satisfactory to the Trustee, the due and punctual payment of the principal of
(and Premiums, if any) and interest on all the Timber Notes and any Additional
Timber Notes then outstanding and the performance of every covenant of the
Indenture and the other Operative Documents on the part of the Company to be
performed or observed; (b) immediately after giving effect to such transaction,
no Event of Default, and no event which, after notice or lapse of time or both,
would become an Event of Default, shall have occurred and be continuing; (c)
such consolidation or merger is approved by a Board Resolution, including the
affirmative vote of both independent managers; (d) such consolidation or merger
has obtained Rating Agency Confirmation; and (e) the Company has delivered to
the Trustee an Officer's Certificate (with the Rating Agency Confirmation
attached thereto) and an opinion of counsel, each stating that such
consolidation or merger and such supplemental indenture comply with the
Indenture and the Line of Credit Agreement.
NO OTHER BUSINESS. The Indenture provides that, except for sales of
Company Owned Timberlands, Company Timber Rights or Company Timber or transfers
of Company Owned Timberlands or Company Timber Rights in exchange for Substitute
Timber Property in accordance with the procedures described above under
"--Collateral Release Provisions" and "--Substitute Collateral," the Company
will not engage in any business that is not related directly to (i) the
operation, management, sale or maintenance of the Company Owned Timberlands, the
Company Timber Rights and the Company Timber as provided by the Operative
Documents or (ii) the execution, delivery and performance of the Operative
Documents, the Line of Credit Agreement and the New Additional Services
Agreement or (iii) issuing and selling Timber Notes and any Additional Timber
Notes pursuant to the Indenture or (iv) issuing any Nonrecourse Timber
Acquisition Indebtedness and acquiring property secured by such Nonrecourse
Timber Acquisition Indebtedness or (v) acquiring Additional Timber Property or
(vi) actions reasonably incidental to the foregoing which do not, individually
or in the aggregate, have a Material Adverse Effect.
TRANSACTIONS WITH AFFILIATES. The Indenture provides that, except for
sales of Company Owned Timberlands, Company Timber Rights or Company Timber or
transfers of Company Owned Timberlands or Company Timber Rights in exchange for
Substitute Timber Property in accordance with the procedures described above
under "--Collateral Release Provisions" and "--Substitute Collateral," the
Company will not enter into any transaction, arrangement or understanding,
formal or informal, written or oral (collectively, a "Transaction") with any
Affiliate of the Company unless (a) such Transaction has received Rating Agency
Confirmation if the amount involved in such Transaction and in all prior
Transactions not excepted by the following proviso in any fiscal year shall
exceed $2,000,000 and (b) either (x) such Transaction is on terms that are at
least as favorable to the Company as would be available to the Company in a
comparable Transaction with a Person that is not an Affiliate of the Company or
(y) in the event no comparable Transaction between the Company and an
unaffiliated third party is available, such Transaction is on terms that are
fair from a financial point of view to the Company; PROVIDED, that this
provision does not prohibit or otherwise restrict (i) compensation (in the form
of reasonable manager's fees and reimbursement or advancement of reasonable
out-of-pocket expenses) paid to any independent manager of the Company for
services rendered in such person's capacity as a manager, (ii) indemnification
of officers, managers, and employees, and the obtaining of liability insurance
for the Company's managers, officers and employees, (iii) compensation and other
benefits paid or made available to officers and employees of the Company (who
are not also officers or employees of Pacific Lumber) for services actually
rendered, comparable to those generally paid or made available by entities
engaged in the same or similar businesses (including reimbursement or
advancement of reasonable out-of-pocket expenses), (iv) participation by
employees of the Company in employee benefit plans of Pacific Lumber or other
Affiliates of the Company, (v) lease of office space by the Company from Pacific
Lumber in an annual amount not to exceed $60,000 per year, (vi) coverage for the
Company under blanket insurance policies of Affiliates of the Company, (vii) the
leasing of vehicles or other equipment by the Company from Pacific Lumber in an
annual amount not to exceed $250,000 per year multiplied by the Producer Price
Index Inflation Factor then applicable, (viii) leases of portions of Company
Owned Timberlands to Pacific Lumber, provided that (A) such leases are Permitted
Encumbrances pursuant to clause (g) of the definition of such term, (B) Pacific
Lumber subleases, in the ordinary course of business, the portions of Company
Owned Timberlands that it leases
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from the Company and (C) the rent paid by Pacific Lumber under such leases shall
not be less than 80% of the rent received by Pacific Lumber under such
subleases, (ix) participation by the Company with one or more of its Affiliates
in the Takings Litigation, provided that any recovery in such litigation shall
be allocated between the Company and its Affiliates on a pro rata basis so that
the Company will receive as its share of such recovery a percentage of such
recovery equal to the ratio of (A) the number of acres of the Company Timber
Property which is the subject of such litigation to (B) the total number of
acres of timberlands of the Company and its Affiliates that is the subject of
such litigation, or (x) any other Transaction with an Affiliate of the Company
to the extent such Transaction with such Affiliate is contemplated by, and
conducted in all material respects in accordance with the terms of, the
Operative Documents; PROVIDED, FURTHER, that in the case of clauses (i), (ii),
(iii) and (v), such amounts shall be paid solely from amounts on deposit in the
Expense Reserve, from Excess Funds or from other available funds of the Company
that are free and clear of the Lien of the Deed of Trust.
The Indenture provides that the Company shall provide each Rating Agency
with a notice, on or about June 30th and December 31st of each year, of all
Transactions with any Affiliate of the Company (other than sales of Company
Timber or Transactions excepted by the first proviso in the preceding paragraph)
entered into during the preceding six-month period which do not require Rating
Agency Confirmation under clause (a) of the preceding paragraph.
TIMBER SALES. The Indenture provides that all sales of Company Timber
which are made by the Company to Pacific Lumber shall be made pursuant to the
New Master Purchase Agreement and related log purchase agreements. The Indenture
provides that all sales of Company Timber which are made by the Company to any
other Person (other than Lump Sum Sales permitted by the provisions described
under "--Collateral Release Provisions") shall be made pursuant to written
Purchase Agreements satisfying the criteria specified in the Deed of Trust.
OPINION AS TO MORTGAGED PROPERTY. The Indenture provides that promptly
after the execution and delivery of the Indenture, and on or before June 30 of
each calendar year, commencing June 30, 1999, the Company shall furnish to the
Trustee and the Rating Agencies an opinion of counsel stating that, in the
opinion of such counsel, either (a) such action has been taken with respect to
the recording, filing, rerecording and refiling of the Deed of Trust (including,
without limitation, the recordation of the real property assignments referred to
therein), any supplements and any other requisite documents and with respect to
the execution and filing of any UCC financing statements and continuation
statements as is necessary to maintain the validity and perfection of the Lien
of the Deed of Trust and reciting the details of such action or (b) as of the
date of such opinion, no such action is necessary to maintain the validity and
perfection of the Lien of the Deed of Trust. Such opinion of counsel shall also
describe the recording, filing, rerecording and refiling of the Deed of Trust,
any supplements and any other requisite documents and the execution and filing
of any UCC financing statements and continuation statements that will, in the
opinion of such counsel, be required to maintain the validity and perfection of
the Lien of the Deed of Trust with respect to the Mortgaged Property in
existence as of the date of such opinion until September 1 in the following
calendar year.
PERFORMANCE OF OBLIGATIONS. The Indenture provides that, except as
expressly contemplated therein or in another Operative Document, the Company
will not take any action, and will use all reasonable efforts not to permit any
action to be taken by any other Person, that would release any Person from any
of such Person's material covenants or obligations to the Company under any
Operative Document or that would result in the amendment, modification,
hypothecation, subordination, termination or discharge of, or impair the
validity, enforceability or effectiveness of, any such Operative Document. The
Indenture provides that the Company shall punctually perform and observe in all
material respects all of its obligations and agreements contained in the New
Services Agreement and the New Master Purchase Agreement and the other Operative
Documents.
NEW SERVICES AGREEMENT; OPERATING DEFAULT; TERMINATION OF NEW SERVICES
AGREEMENT. The Indenture provides that if an Operating Default (as defined
below) shall have occurred and be continuing, the Trustee may, and, upon receipt
of written instructions from the Majority Holders directing the Trustee to
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take such action, shall, give notice to Pacific Lumber of its intention to
terminate the New Services Agreement in accordance with the terms thereof;
provided that any such termination of the New Services Agreement will not become
effective, and the Services Provider will not be relieved of its obligations
under the New Services Agreement and will continue (so long as the Services
Provider continues to perform in all material respects the services as
contemplated by the New Services Agreement with the same standard of care and
diligence as were observed before such Operating Default) to receive
compensation for the services performed by the Services Provider thereunder,
unless and until a replacement Services Provider shall have entered into a New
Services Agreement. The Indenture also provides that, upon any such termination
of the New Services Agreement, the Company shall promptly solicit bids from not
fewer than three Persons to serve as a replacement Services Provider or Services
Providers.
NEW MASTER PURCHASE AGREEMENT; PURCHASE AGREEMENT DEFAULT; TERMINATION OF
NEW MASTER PURCHASE AGREEMENT. The Indenture provides that if a Purchase
Agreement Default (as defined below) shall have occurred and be continuing, the
Trustee may, and, upon receipt of written instructions from the Majority Holders
directing the Trustee to take such action, shall, give notice to Pacific Lumber
of its intention to terminate the New Master Purchase Agreement in accordance
with the terms thereof. The Indenture also provides that, upon any such
termination of the New Master Purchase Agreement, the Company shall promptly
solicit new purchasers on such terms as it deems appropriate, consistent with
the requirements described under "--Certain Deed of Trust Covenants--Purchase
Agreements."
STATUS OF THE DEED OF TRUST. The Indenture provides that at all times (a)
the Deed of Trust will be a valid and binding obligation of the Company; and (b)
the Lien of the Deed of Trust shall be a valid and perfected mortgage lien on or
a valid and perfected security interest in the Mortgaged Property, subject to no
liens other than Permitted Encumbrances. The Indenture also provides that the
Company will cause to be delivered to the Collateral Agent an ALTA lenders'
policy of title insurance (and such endorsements or additional policies as may
from time to time be required pursuant to the terms and provisions of the
Indenture or in connection with the issuance of Additional Timber Notes)
insuring the Collateral Agent in the principal amount of the Timber Notes, and
the Commitments under the Line of Credit Agreement that the Deed of Trust is a
valid lien against the Company Owned Timberlands and the Company Timber Rights,
subject only to Permitted Encumbrances.
NO OTHER AGREEMENTS. The Indenture provides that the Company shall not
enter into any agreements other than (i) the Operative Documents, the New
Additional Services Agreement, the Operating Agreement, or the Line of Credit
Agreement or as contemplated by the Operative Documents, the New Additional
Services Agreement, the Operating Agreement or the Line of Credit Agreement,
(ii) agreements for or in connection with the sale of Company Timber, Company
Owned Timberlands or Company Timber Rights as permitted by the Indenture and the
Deed of Trust, (iii) trade accounts payable in the ordinary course of business,
(iv) agreements for expenditures expressly contemplated by the Operative
Documents, the New Additional Services Agreement, the Operating Agreement, or
the Line of Credit Agreement, (v) agreements required by the Indenture or the
Deed of Trust, (vi) if Pacific Lumber is no longer the Services Provider under
the New Services Agreement, such agreements as may be necessary or appropriate
to obtain the Services, (vii) agreements in the ordinary course of business
related to actions permitted by the covenant described under "--No Other
Business" and not otherwise prohibited by the Indenture, (viii) agreements in
respect of the issuance of Additional Timber Notes or in respect of the issuance
of Nonrecourse Timber Acquisition Indebtedness, (ix) agreements in respect of
the acquisition of Additional Timber Properties or property that secures
Nonrecourse Timber Acquisition Indebtedness, and (x) such other agreements as
are not, individually or in the aggregate, material to the business, financial
condition or results of operations of the Company.
RELOCATION OF CHIEF EXECUTIVE OFFICE, ETC. The Indenture provides that the
Company shall not (a) relocate its chief executive office or principal place of
business from its address on the date of the Indenture or (b) maintain any of
its books and records with respect to the Mortgaged Property at any location
other than such office or another office identified in the Indenture unless (i)
the Trustee shall have been provided with notice 30 days prior to such
relocation and (ii) the Company shall have delivered an
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opinion of counsel to the Trustee that any filings necessary to continue the
perfection of the Lien of the Deed of Trust have been accomplished. The
Indenture provides that the Company shall not change its name, or the name under
which it does business, from "Scotia Pacific Company LLC," except in
connection with a merger or consolidation permitted under the second paragraph
of "--Restrictions on Consolidation, Etc."
TIMBER HARVESTING PLANS, ETC. The Indenture provides that the Company
shall (i) prepare and file, and use its best efforts to obtain approval of,
Timber Harvesting Plans with respect to all Company Timber to be sold pursuant
to the Purchase Agreements, (ii) not enter into any Purchase Agreement (other
than the New Master Purchase Agreement) for the sale of stumpage unless the
Company Timber to be cut pursuant thereto is subject to a valid and subsisting
Timber Harvesting Plan or the Company reasonably believes that the purchaser
thereunder (or the Company) has the capacity to obtain a Timber Harvesting Plan
with respect thereto, (iii) at all times retain sufficient persons with
requisite professional qualifications to prepare and file Timber Harvesting
Plans, (iv) comply in all material respects with all federal, state or local
regulations or statutes relating to the Timber Harvesting Plans and the
harvesting, cutting or severing of timber, including laws relating to wildlife
habitat and endangered species, (v) use its best efforts (consistent with
prudent business practices) to maintain a number of pending applications for
Timber Harvesting Plans which, if approved, would, together with Timber
Harvesting Plans already approved, cover sales of Company Timber adequate to
pay, on any date, an amount equal to the sum of (a) the excess, if any, of (i)
the sum of (A) all amounts specified as Minimum Principal Amortization for all
Classes of Timber Notes in the Structuring Schedule (Column L) (as such amount
may be modified as set forth above under "--Additional Timber Notes") from the
date of the Indenture through a date which is 12 months subsequent to such date
and (B) any amount as provided in any supplement to the Indenture executed in
connection with the issuance of any Additional Timber Notes over (ii) the
aggregate principal amount of the Timber Notes previously paid and (b) the
interest (not including any interest on premiums) which will accrue on the
Timber Notes and any Additional Timber Notes for such 12-month period and (vi)
prepare and file any 10 year plan, master plan, or any other development or
strategic plan required to be prepared in respect of the Company Timber Property
by any Governmental Authority.
SALE OF COMPANY TIMBER OR LOGS. The Indenture provides that the Company
shall use its best efforts (consistent with prudent business practices) to sell
Company Timber or logs in an amount sufficient to pay, as and when due, an
amount equal to (a) the excess, if any, of (i) the sum of (A) the sum of all
amounts specified as Minimum Principal Amortization in the Structuring Schedule
(Column L) (as such amount may be modified as set forth above under
"--Additional Timber Notes") from the date of the Indenture through the next
Note Payment Date and (B) any amount as provided in respect of this provision in
any supplement to the Indenture executed in connection with the issuance of any
Additional Timber Notes over (ii) the aggregate principal amount of the Timber
Notes previously paid plus (b) the interest (not including any interest on
premiums) which will accrue on the Timber Notes and any Additional Timber Notes
to such Note Payment Date.
LINE OF CREDIT AGREEMENT; LIQUIDITY ACCOUNT. The Indenture provides that
if at any time the Company reasonably determines that amounts will be required
to be borrowed under the Line of Credit Agreement or withdrawn from the
Liquidity Account pursuant to the first paragraph under the caption
"--Accounts; Payment on the Timber Notes--Note Payment Dates" (or drawn upon
or withdrawn from any similar facility or account that supports the interest
payable on any Additional Timber Notes) on the next succeeding Note Payment
Date, and funds to be so borrowed or on deposit in the Liquidity Account (or
available from any similar facility or account that supports interest on any
Additional Timber Notes) are for any reason unavailable, during the continuance
of such unavailability, the Company shall use its best efforts (consistent with
prudent business practices) to obtain funds in the amount of such shortfall from
third parties, by offering logs for sale to third parties or otherwise.
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EVENTS OF DEFAULT; REMEDIES
An "Event of Default" is defined in the Indenture as the occurrence of
any one of the following events:
(1) default in the payment of principal of any Timber Note on the
Final Maturity Date;
(2) failure of the Company to cause the amount on deposit in the
Payment Account on any Note Payment Date, to the extent such amount is
available for such application pursuant to the provisions of the Indenture,
to be applied to pay any amount of Minimum Principal Amortization Amount
(as such amount may be modified as set forth above under "--Additional
Timber Notes") or Depletion Amortization Amount (as such amount may be
modified as set forth above under "--Additional Timber Notes") that has
become due or payable on any Class of Timber Notes, and the continuation of
such default for a period of five days;
(3) default in the payment of any Regular Interest or Default Interest
on any Timber Note or in the payment of any interest on any Additional
Timber Note (except interest on any premiums) when the same becomes due and
payable and the continuation of such default for a period of five days;
(4) failure of the Company to cause the amount on deposit in the
Payment Account on any Note Payment Date, to the extent such amount is
available for such application pursuant to the provisions of the Indenture,
to be applied to pay any amount of premium that has become due or payable
on any Timber Note or Additional Timber Note and the continuation of such
default for a period of five days;
(5) failure of the Company to cause the amount on deposit in the
Payment Account on any Note Payment Date, to the extent such amount is
available for such application pursuant to the provisions of the Indenture,
to be applied to pay any amount of interest that has become due or payable
on any amount of Premium on any Timber Note (or on any premium on any
Additional Timber Note), and the continuation of such default for a period
of five days;
(6) the sale, transfer, conveyance, pledge or hypothecation of any
membership interest in the Company or any interest therein by Pacific
Lumber (other than any transfer incidental to a merger or sale or other
disposition of substantially all of the assets of Pacific Lumber (or
substantially all of the assets of Pacific Lumber excluding its interest in
Salmon Creek) consistent with the covenant described under "Description of
Certain Principal Agreements--New Services Agreement--Certain Covenants of
the Services Provider" or a transfer incidental to a merger, consolidation
or transfer of assets of the Company consistent with the covenant described
under "--Certain Covenants--Company may not Consolidate, Etc.");
(7) default in the performance or observance of certain specified
covenants of the Company in the Indenture and the Deed of Trust, including,
among others, those relating to existence, compliance with laws, payment of
taxes, separateness, limitations on indebtedness, liens and restricted
payments, merger, amendments to certain documents, type of business,
transactions with Affiliates, giving termination notices under the New
Services Agreement or the New Purchase Agreement, maintaining the Lien of
the Deed of Trust and defending title to the Company Owned Timberlands and
Company Timber Rights, relocating its chief executive office, preparing
Timber Harvesting Plans and prohibition of Liens other than Permitted
Encumbrances on the Mortgaged Property (and, in each such case, to the
extent such default is remediable, such default shall continue for a period
of 15 days following written notice from the Trustee, or from the holders
of 25% in aggregate principal amount of the outstanding Timber Notes and
any Additional Timber Notes);
(8) the failure of the Board of Managers to contain at least two
individuals who are independent managers, and the continuation of such
failure for a period of 30 consecutive days (or, if such failure results
from the death or resignation of an independent manager, and provided that
the Company is diligently attempting to obtain a replacement independent
manager, the continuation of such failure for a period of 90 days);
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(9) default in the observance or performance of any covenant or
agreement of the Company made in the Indenture or the Deed of Trust (other
than a covenant or agreement, a default in the observance or performance of
which is elsewhere in the definition of Event of Default specifically dealt
with); or the Services Provider shall default in the observance or
performance of any covenant or agreement made by it in the New Services
Agreement; or Pacific Lumber shall default in the observance of any
covenant or agreement made by it in the New Master Purchase Agreement or in
any Conveyance Document (and, in each such case, to the extent such default
is remediable, such default shall continue for a period of 30 days
following written notice from the Trustee, or from the holders of 25% in
aggregate principal amount of the Timber Notes and any Additional Timber
Notes);
(10) any representation or warranty of the Company made in the
Indenture, the Deed of Trust or any other Operative Document, or any
representation or warranty made by Pacific Lumber in any Operative
Document, or, in each such case, in any certificate or other writing
delivered pursuant thereto or in connection therewith, shall prove to have
been incorrect in any material respect as of the time when the same was
made (and, in each such case, to the extent such default is remediable,
such default shall continue for a period of 30 days following written
notice from the Trustee, or from the holders of 25% in aggregate principal
amount of the outstanding Timber Notes and any Additional Timber Notes);
(11) the Company shall become Bankrupt or Insolvent; or
(12) a final judgment or judgments for the payment of money in excess
of $500,000 in the aggregate shall be rendered against the Company by one
or more courts, administrative tribunals or other bodies having
jurisdiction over the Company and the same shall not be discharged (or
provision shall not be made for such discharge), or a stay of execution
thereof shall not be procured, within 30 days from the date of entry
thereof and the Company shall not, within said period of 30 days, or such
longer period during which execution of the same shall have been stayed,
appeal therefrom and cause the execution thereof to be stayed during such
appeal.
If an Event of Default related to Bankruptcy or Insolvency shall occur, the
Indenture provides that an amount equal to all amounts payable with respect to
the Timber Notes and any Additional Timber Notes shall, without any demand,
presentment or notice, become immediately due and payable. If any Event of
Default described in any of clauses (1) through (5) above shall occur and be
continuing, the Trustee may, or if the holders of 25% in aggregate outstanding
principal amount of the Timber Notes and any Additional Timber Notes so elect,
shall, declare all amounts payable with respect to the Timber Notes and any
Additional Timber Notes to be immediately due and payable, and upon any
declaration of acceleration such amount shall become immediately due and
payable. If an Event of Default described in clauses (6) through (10) or in
clause (12) above shall occur and be continuing, if the Majority Holders so
elect, the Trustee shall declare all amounts payable with respect to the Timber
Notes and any Additional Timber Notes to be immediately due and payable, and
upon any such declaration of acceleration such amount shall become immediately
due and payable. The Indenture provides that at any time after such declaration
of acceleration of maturity has been made (other than a declaration approved by
holders of all of the outstanding Timber Notes and any outstanding Additional
Timber Notes) and before a judgment or decree for payment of the money due has
been obtained by the Trustee as provided in the Indenture, the Majority Holders,
by written notice to the Company and the Trustee, may rescind and annul such
declaration of acceleration and its consequences if (1) the Company has paid or
deposited with the Trustee a sum sufficient to pay (x) all payments of principal
of and interest and premium, if any, on the Timber Notes and any Additional
Timber Notes and all other amounts that would then be due and payable under the
Indenture or upon the Timber Notes and any Additional Timber Notes otherwise
than by virtue of such declaration of acceleration and (y) all sums paid or
advanced by the Trustee and the Collateral Agent under the Indenture or the Deed
of Trust on behalf of the Company and the reasonable compensation, expenses,
disbursements and advances of the Trustee and the Collateral Agent and their
agents and counsel and (2) all Events of Default, other than the nonpayment of
the principal of any Timber Notes or any Additional Timber Notes that has become
due and payable solely by such declaration of acceleration, have been cured or
waived. The Indenture provides
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that no such rescission and annulment shall affect any subsequent default or
impair any right consequent thereon.
In the event that the Timber Notes have been accelerated and such
acceleration has not been rescinded, any monies collected by the Trustee or the
Collateral Agent shall be deposited into the Payment Account and shall be
applied, FIRST, to Trustee's Expenses and Collateral Agent Expenses (exclusive
of indemnification payments) and to Liquidity Providers' Expenses (exclusive of
indemnification payments), SECOND, to the payment of all interest (other than
Supplemental Liquidity Provider Interest) and principal owing to the Liquidity
Providers, THIRD, to the payment of interest (other than interest on premiums)
due on each Class of Timber Notes and any Additional Timber Notes PRO RATA in
proportion to the interest (other than interest on premiums) due on each such
Class, FOURTH, to the payment of principal on each Class of Timber Notes and any
Additional Timber Notes PRO RATA in proportion to the principal due on each such
Class, FIFTH, to the payment of any interest on premiums on each Class of Timber
Notes and any Additional Timber Notes PRO RATA in proportion to the interest on
premiums due on each such Class, SIXTH, to the payment of any premiums on each
Class of Timber Notes and any Additional Timber Notes PRO RATA in proportion to
the premiums due on each such Class, SEVENTH, to the payment of any Additional
Liquidity Provider Fees and any Supplemental Liquidity Provider Interest owing
under the Line of Credit Agreement, EIGHTH, to the payment of indemnification
payments owing to the Trustee and the Collateral Agent and to indemnification
payments owing under the Line of Credit Agreement and, NINTH, to the Company,
free and clear of the Lien of the Deed of Trust. In addition, the Liquidity
Providers will have the right to vote pro rata with the Holders of the Timber
Notes with respect to the exercise of certain remedies following an Event of
Default and acceleration of the Timber Notes.
The Indenture provides that no holder of any Timber Note shall have any
right to institute any proceeding with respect to the Indenture, the Timber
Notes or the Deed of Trust, or for the appointment of a receiver or trustee, or
for any other remedy thereunder, unless (a) such Noteholder has previously given
written notice to the Trustee of a continuing Event of Default; (b) the holders
of not less than 25% in aggregate outstanding principal amount of Timber Notes,
any Additional Timber Notes and Advances shall have made a written request to
the Trustee to institute a proceeding in respect of such Event of Default in its
own name thereunder or under the Deed of Trust; (c) such holders have offered to
the Trustee reasonable indemnity against the costs, expenses and liabilities to
be incurred in complying with such request; (d) the Trustee for 60 days after
its receipt of such notice, vote and offer of indemnity has failed to institute
such proceeding; and (e) no direction inconsistent with such written request has
been given to the Trustee during such 60-day period by the holders of a majority
in aggregate outstanding principal amount of Advances under the Line of Credit
Agreement, Timber Notes and any Additional Timber Notes.
Notwithstanding the foregoing, the Indenture provides that the holder of
any Timber Note shall have the right, which is absolute and unconditional, to
receive payment of the principal of, and interest and Premium, if any, on, such
Timber Note on or after the respective due dates thereof expressed in such
Timber Note or in the Indenture and to institute suit for the enforcement of any
such payment, and such right shall not be impaired without the consent of such
Noteholder; PROVIDED, HOWEVER, that no Noteholder shall have the right to
institute any such suit, if and to the extent that the institution or
prosecution of such suit or the entry of judgment therein would, under
applicable law, result in the surrender, impairment, waiver or loss of the Lien
of the Deed of Trust. Without limiting the foregoing, in no event shall any
Noteholder exercise any right of set-off, banker's lien, or the like, against
any deposit account or property of the Company held or maintained by such
Noteholder or amount owing by such Noteholder to the Company, without the prior
consent of the Majority Holders, which rights of set-off, banker's lien and the
like are waived by the Noteholder's acceptance of its Note and the benefits of
the Indenture.
The Indenture provides that if an Event of Default has occurred and is
continuing, the Trustee and the Collateral Agent shall exercise the rights and
powers vested in it by the Indenture and the Deed of Trust and use the same
degree of care and skill in their exercise as a prudent person would exercise or
use under the circumstances in the conduct of such person's own affairs.
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The Indenture provides that, in connection with any trustee sale or
judicial sale under the Deed of Trust, the Collateral Agent shall not accept any
cash bid in an amount less than the aggregate amount payable on the Timber Notes
and any Additional Timber Notes plus the aggregate amount, if any, of principal
and interest then owed to the Liquidity Providers, unless the holders of 66 2/3%
in aggregate outstanding principal amount of Advances under the Line of Credit
Agreement, Timber Notes and any Additional Timber Notes shall have approved the
taking of such action (which approval may be given generally and need not be
given in respect of any specific sale or bid). In addition, in the event that
relevant law provides that a trustee sale or judicial sale may be made in
respect of less than all of the Company Owned Timberlands and Company Timber
Rights, and the Collateral Agent shall determine to permit a trustee sale or
judicial sale for less than all of the Company Owned Timberlands and Company
Timber Rights, in connection with any such trustee sale or judicial sale, the
Collateral Agent shall not accept any cash bid in an amount less than the PRO
RATA portion of the aggregate amount payable on the Timber Notes and any
Additional Timber Notes plus the aggregate amount, if any, of principal and
interest then owed to the Liquidity Providers, unless the holders of 66 2/3% in
aggregate outstanding principal amount of Advances under the Line of Credit
Agreement, Timber Notes and any Additional Timber Notes shall have approved the
taking of such action (which approval may be given generally and need not be
given in respect of any specific sale or bid).
The Indenture gives the Trustee the right to withhold notice of any Default
to Noteholders unless such default is a payment default or notice is otherwise
required by the Indenture.
The Indenture requires that the Company provide notice of any Default or
Event of Default to the Trustee if such Default or Event of Default is
continuing for five Business Days after a responsible officer of the Company
obtains knowledge thereof. In addition, the Company must provide an annual
certificate to the Trustee with respect to compliance by the Company with the
conditions and covenants under the Indenture and the occurrence of any Event of
Default, during such year and to the date of such certificate.
REPORTS TO NOTEHOLDERS
The Indenture provides that so long as the Company is subject to the
periodic reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), it will furnish copies of the information
required thereby it files with the Securities and Exchange Commission (or such
portions of such information as the Commission may by rules and regulations
prescribe) to the Trustee, each Rating Agency and the holders of the Timber
Notes and any Additional Timber Notes. The Indenture provides that if the
Company is not subject to the periodic reporting requirements under the Exchange
Act, it will nonetheless continue to furnish substantially equivalent
information to the Trustee, each Rating Agency and the holders of the Timber
Notes and any Additional Timber Notes as if it were subject to such periodic
reporting requirements.
In addition, the Indenture provides that monthly statements containing
certain information in respect of the related Monthly Deposit Date will be
mailed to the holders of Timber Notes (and, to the extent so provided and
specified in any supplemental indenture in connection with the issuance of any
Additional Timber Notes, specified information to the holders of any Additional
Timber Notes) on each Monthly Deposit Date and semiannual statements containing
certain information in respect of the related Note Payment Date will be mailed
to the holders of Timber Notes (and, to the extent so provided and specified in
any supplemental indenture in connection with the issuance of any Additional
Timber Notes, specified information to the holders of any Additional Timber
Notes) on each Note Payment Date.
OTHER REPORTS, NOTICES AND CERTIFICATES
The Indenture provides that the Company will provide to the Trustee (i) by
April 30th of each year, commencing April 30, 1999, a statement of the Company's
accountants relating, among other things, to the statements provided to the
Trustee for the Monthly Deposit Dates and Note Payment Dates during the prior
year, (ii) by April 30th of each year, an Officer's Certificate to the effect
that, to such person's knowledge, (A) the Company has complied with all of the
conditions and covenants under the Indenture (determined without regard to any
period of grace or requirement of notice under the Indenture) during the
preceding
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fiscal year and to the date of such Certificate and (B) no Event of Default
existed at any time during such preceding fiscal year and to the date of such
certificate, except for those, if any, described in such certificate in
reasonable detail, (iii) at least two Business Days prior to each Monthly
Deposit Date, a statement (the "Monthly Trustee Certificate") with respect to
the transactions on such Monthly Deposit Date and (iv) at least two Business
Days prior to each Note Payment Date, a statement (the "Note Payment Trustee
Certificate") with respect to the transactions on such Note Payment Date. The
Indenture provides that the Monthly Trustee Certificate and Note Payment Trustee
Certificate will not be available to Noteholders, and will be maintained as
confidential by the Trustee.
AMENDMENT, SUPPLEMENT AND WAIVER
Subject to certain exceptions, the Indenture, the Timber Notes and any
Additional Timber Notes may be amended or supplemented with either (i) the
consent of the holders of at least a majority in outstanding principal amount of
the Timber Notes and any Additional Timber Notes and Rating Agency Confirmation
or (ii) the consent of the holders of at least 66 2/3% in outstanding principal
amount of the Timber Notes and any Additional Timber Notes (after prior notice
of the Rating Agency Evaluation) and Rating Agency Evaluation. Any past default
or compliance with any provisions may be waived with the consent of the holders
of at least a majority in outstanding principal amount of the Timber Notes and
any Additional Timber Notes. In addition, without the consent of each Noteholder
affected thereby, no amendment may, among other things, (i) reduce the aggregate
outstanding principal amount of Timber Notes (or of Timber Notes and Additional
Timber Notes, as applicable) whose Holders must consent to any amendment,
supplement, other modification or waiver, (ii) reduce the rate of or extend the
time for payment of interest on any Timber Note or Additional Timber Note, (iii)
reduce the principal of or extend the fixed maturity of any Timber Note or
Additional Timber Note, (iv) reduce the premium payable (including any change in
the formulas utilized to compute such amount) upon the redemption or prepayment
of any Timber Note or Additional Timber Note, (v) make any Timber Note or
Additional Timber Note payable in money other than that stated in the Timber
Note or Additional Timber Note or (vi) impair the right to institute suit for
the enforcement of any payment on or with respect to any Timber Note or
Additional Timber Note.
Without the consent of any Noteholder, the Company and the Trustee may
amend or supplement the Indenture to cure any ambiguity, omission, defect or
inconsistency, to provide for uncertificated notes in addition to or in place of
certificated notes (PROVIDED that the uncertificated notes are issued in
registered form for purposes of Section 163(f) of the Code or in a manner such
that the uncertificated notes satisfy the criteria contained in Section
163(f)(2)(B) of the Code), to make any change that does not adversely affect the
rights of any Noteholder, to add to the covenants of the Company, for the
benefit of the Noteholders, to surrender any right or power conferred upon the
Company, to comply with the TIA, to comply with the provisions of the second
paragraph under "--Certain Covenants--Restrictions on Consolidation, Etc." or,
subject to the limitations described under "--Additional Timber Notes," in
connection with the issuance of any Additional Timber Notes.
The consent of the Noteholders is not necessary under the Indenture to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company will
mail to Noteholders a notice briefly describing such amendment. However, the
failure to give such notice to all Noteholders or any defect therein, will not
impair or affect the validity of the amendment.
DEFEASANCE OR COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have the
obligations of the Company discharged with respect to the outstanding Timber
Notes and any Additional Timber Notes ("defeasance"). Such defeasance means
that the Company shall be deemed to have paid and discharged the entire
indebtedness represented by the outstanding Timber Notes and any Additional
Timber Notes, except for (i) the rights of Holders of outstanding Timber Notes
and any Additional Timber Notes to receive payments in respect of the principal
of, premium, if any, and interest on such Timber Notes and any Additional
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Timber Notes when such payments are due, (ii) the Company's obligations with
respect to the Timber Notes and any Additional Timber Notes concerning
registration of Timber Notes and any Additional Timber Notes, mutilated,
destroyed, lost or stolen Timber Notes and any Additional Timber Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee and (iv) the defeasance provisions of the Indenture. In addition, the
Company may, at its option and at any time, elect to have the obligations of the
Company released with respect to certain covenants that are described in the
Indenture ("covenant defeasance") and any omission to comply with such
obligations shall not constitute a Default or an Event of Default with respect
to the Timber Notes or any Additional Timber Notes. In the event covenant
defeasance occurs, certain events (not including non-payment, bankruptcy and
insolvency events) described under "--Events of Default" will no longer
constitute a Default or an Event of Default with respect to the Timber Notes or
any Additional Timber Notes.
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee (or another trustee satisfying
criteria set forth in the Indenture), in trust, for the benefit of the holders
of the Timber Notes and any Additional Timber Notes, cash, U.S. Government
Obligations, or a combination thereof, in such amounts as will be sufficient (in
the written opinion of a nationally recognized firm of independent public
accountants), without consideration of reinvestment of interest on such U.S.
Government Obligations, to pay the principal of, Premium, if any, and interest
on the outstanding Timber Notes and any Additional Timber Notes of each Class to
maturity (based upon the Scheduled Amortization of the Timber Notes (and any
similar amount with respect to any Additional Timber Notes) for such Class with
adjustments to such Scheduled Amortization Schedule (and any similar schedule
with respect to any Additional Timber Notes), which adjustments shall (A)
increase the amount of principal payable in accordance with the original
Scheduled Amortization Schedule (and any similar schedule with respect to any
Additional Timber Notes) for such Class on the next succeeding Note Payment Date
by the amount of any Payment Deficiency on the date of defeasance or covenant
defeasance and (B) decrease, in order of maturity, the amount of principal
payable in accordance with the original Scheduled Amortization Schedule (and any
similar schedule with respect to any Additional Timber Notes) for such Class on
the next succeeding Note Payment Date(s) by the excess, if any, of (i) aggregate
principal amount that was paid on or prior to the date of defeasance or covenant
defeasance on the defeased Notes of such Class, over (ii) the sum of all amounts
specified in the original Scheduled Amortization Schedule (and any similar
schedule with respect to any Additional Timber Notes) for such Class as
Scheduled Amortization on or before the date of defeasance or covenant
defeasance; (ii) the Company shall have delivered to the Trustee an opinion of
independent counsel or a ruling from the Internal Revenue Service to the effect
that the holders of the outstanding Timber Notes and any Additional Timber Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such defeasance or covenant defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such defeasance or covenant defeasance had not
occurred; (iii) no Default or Event of Default resulting from the Company having
become Bankrupt or Insolvent shall have occurred and be continuing on the date
of such deposit or at any time during the 91-day period following such deposit;
(iv) such defeasance or covenant defeasance shall not result in a breach or
violation of, or constitute a default under, any of the Operative Documents or
any other material agreement or instrument to which the Company is a party or by
which it is bound; (v) the Company shall have delivered to the Trustee an
opinion of independent counsel to the effect that (A) the trust funds will not
be subject to any rights of other creditors of the Company and (B) after the
91st day following the deposit, the trust funds will not be subject to the
effect of any applicable United States bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally; (vi) no event or condition
shall exist that would prevent the Company from making payments of the principal
of, Premium, if any, and interest on the Timber Notes and any Additional Timber
Notes on the date of such deposit or at any time ending on the 91st day after
the date of such deposit; and (vii) the Company shall have delivered to the
Trustee an Officer's Certificate and an opinion of independent counsel, each
stating that all conditions precedent (other than conditions requiring the
passage
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of time) provided for relating to either the defeasance or the covenant
defeasance, as the case may be, have been complied with.
SATISFACTION AND DISCHARGE
The Indenture provides that it shall cease to be of further effect at such
time as all outstanding Timber Notes and any Additional Timber Notes have become
due and payable or will become due and payable within six months (based upon the
actual principal amount of the Timber Notes and any Additional Timber Notes
previously paid and future payments of principal based upon Minimum Principal
Amortization), or have been or will be called for redemption on a redemption
date that is within six months under arrangements satisfactory to the Trustee
for giving notice of redemption and the Company shall have irrevocably deposited
with the Trustee funds or U.S. Government Obligations sufficient to pay all
outstanding Timber Notes and Additional Timber Notes, including unpaid principal
thereof, accrued and unpaid interest and premiums, if any, and interest on
premiums, if any, thereon, and the Company shall have paid in full all other
sums payable under the Indenture and the Deed of Trust by the Company.
Notwithstanding the foregoing, the Company's obligations with respect to the
registration, transfer and exchange of the Timber Notes and Additional Timber
Notes, compensation and indemnity with respect to the Trustee and the
replacement of the Trustee shall survive until the Timber Notes and any
Additional Timber Notes have been paid in full, and thereafter the Company's
obligations with respect to indemnity and compensation of the Trustee shall
continue to survive.
THE DEED OF TRUST
The Lien on the Mortgaged Property will be created by a deed of trust (the
"Deed of Trust"), which contains customary provisions with respect to the
granting of a Lien on the collateral and customary representations and
warranties. In addition, the Deed of Trust includes certain covenants, described
below.
CERTAIN DEED OF TRUST COVENANTS
The Deed of Trust contains certain covenants including, among others, the
following:
SECURITY. The Deed of Trust provides that the Company will take such
actions as are required to maintain the priority of the Lien of the Deed of
Trust, and to defend title to the Mortgaged Property, free and clear of defects
and irregularities of title, and free and clear of all liens, security
interests, charges or other encumbrances other than those created by the Deed of
Trust and Permitted Encumbrances. The Deed of Trust also provides that the
Company will not mortgage, pledge or hypothecate, or create, suffer or permit to
exist any Lien or other encumbrance on, any of the Mortgaged Property, other
than the Lien of the Deed of Trust and Permitted Encumbrances.
OTHER AGREEMENTS. The Deed of Trust provides that, with such exceptions as
do not, and are not likely to, have a Material Adverse Effect, the Company will
promptly take or cause to be taken all such action as is within its control and
may be reasonably required from time to time to enforce or secure the observance
or performance in all material respects of all terms, covenants, agreements or
conditions to be observed or performed by any third parties under any material
Subject Contract or other material instrument or agreement, or any Environmental
Law, General Law or Timber Law, applicable to any of the Mortgaged Property.
MORTGAGED PROPERTY. The Deed of Trust requires that the Company perform,
or arrange for the performance of (pursuant to the New Services Agreement or
otherwise), those services described under "Description of Certain Principal
Agreements--New Services Agreement--Services." The Deed of Trust provides that
the Company will comply, or cause compliance with, such covenants in a manner
consistent in all material respects with prudent business practices, in the
reasonable judgment of the Company, (i) are consistent with then current
applicable industry standards or prudent business practices, (ii) do not,
individually or in the aggregate, have a Material Adverse Effect and (iii) are
in compliance in all material respects with applicable Timber Laws.
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In addition, the Deed of Trust requires that (i) the Company cause all of
its liabilities incurred with respect to or affecting the Mortgaged Property to
be paid punctually when due, unless the same constitute a Permitted Encumbrance,
or unless non-payment is otherwise permitted by the Indenture or the Deed of
Trust or the other Operative Documents, or such liability is not material; (ii)
the Company cause all applicable taxes, unless the same constitute a Permitted
Encumbrance, to be paid punctually before the same become delinquent and (iii)
the Company comply (in accordance with the terms thereof) with any final order,
judgment or other non-appealable direction of any Tribunal requiring the
removal, treatment or disposal of any Hazardous Materials or Hazardous Materials
Contamination with respect or attributable to any of the Mortgaged Property or
any Disposal Site.
PURCHASE AGREEMENTS. The Deed of Trust provides that, in the event the
Company enters into any agreement for the sale of Company Timber, other than the
New Master Purchase Agreement and related log purchase agreements or an
agreement for a Lump Sum Sale in accordance with the requirements of the
Indenture, such purchase agreement must (i) permit verification by an
independent third party or by the Company of the scaling and measuring of the
amount of Company Timber or Harvested Timber sold in a manner substantially
similar to the verification rights of the Company under the New Master Purchase
Agreement (see "Description of Certain Principal Agreements--New Master
Purchase Agreement--Scaling"); (ii) state that such contract and all rights of
the counterparty thereunder are fully subordinate to the Deed of Trust; (iii)
contain a non-petition agreement substantially similar to that included in the
New Master Purchase Agreement; (iv) contain provisions with respect to
compliance with applicable law by the purchaser substantially similar to those
included in the New Master Purchase Agreement and (v) not contain provisions in
violation of the Indenture or the Deed of Trust.
INSURANCE. The Deed of Trust provides that the Company will insure and
keep insured (or cause to be insured or be kept insured) all of the material
Mortgaged Property of an insurable nature (other than Company Timber and
Harvested Timber) in accordance with prudent standards then being followed by
other companies engaged in the same or similar lines of business and in the same
general area.
INDEMNIFICATION. The Deed of Trust provides that the Company will
indemnify the Trustee, the Collateral Agent, the trustee under the Deed of Trust
and their respective directors, officers, employees, attorneys, and agents
against certain liabilities including, among others, environmental liabilities
in respect of the Company Timberlands.
THE TRUSTEE AND THE COLLATERAL AGENT
State Street Bank and Trust Company is to be the Trustee under the
Indenture and the Collateral Agent under the Deed of Trust, and has been
appointed by the Company as Registrar and, together with its affiliate, State
Street Bank and Trust Company, N.A., as Paying Agent with regard to the Timber
Notes.
GOVERNING LAW
The Indenture provides that it will be governed by, and construed in
accordance with, the laws of the State of New York. The Deed of Trust provides
that it will be governed by, and construed in accordance with, the laws of the
State of California.
DELIVERY, FORM AND TRANSFER
The Old Notes sold in the Offering were issued in fully registered form
without interest coupons to qualified institutional buyers meeting the
requirements of Rule 144A under the Securities Act ("QIBs"), in the form of
beneficial interests in one or more global Notes (the "Global Old Notes"),
deposited with State Street Bank and Trust Company as custodian for DTC (in such
capacity, the "Custodian"). The Global Old Notes are registered in the name of
Cede & Co. ("Cede"), as nominee of DTC. The New Notes also will be issued
initially as a note in global form (the "Global New Notes," and together with
the Global Old Notes, the "Global Notes") and deposited with the Trustee as
custodian for DTC and registered in the name of Cede, or such other nominee as
DTC may designate.
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DTC will credit, on its internal system, the respective principal amount of
the beneficial interests represented by each Global New Note to the accounts of
persons who have accounts with DTC. Beneficial interests in the Global New Notes
may be held in minimum denominations of U.S. $100,000 or any integral multiple
of $1,000 in excess thereof. Ownership of beneficial interests in a Global New
Note will be limited to persons who have accounts with DTC ("Participants") or
persons who hold interests directly or indirectly through Participants.
Ownership of beneficial interests in the Global New Notes will be shown on, and
the transfer of that ownership will be effected only through, records maintained
by DTC or its nominee (with respect to interests of Participants) and the
records of Participants (with respect to interests of persons who hold directly
or indirectly through Participants). The use of the Global Notes to represent
certain of the Timber Notes permits the Participants to transfer interests in
the Timber Notes electronically in accordance with DTC's established procedures
without the need to transfer a physical certificate.
So long as DTC or its nominee is the registered owner or Holder of a Global
New Note, DTC or such nominee, as the case may be, will be considered the sole
owner or Holder of the Timber Notes represented by such Global New Note for all
purposes under the Indenture and the New Notes. No owner of a beneficial
interest in a Global New Notes will be able to transfer that interest except in
accordance with DTC's applicable procedures. Payments of the principal of,
premium, if any, and interest on the Global New Notes will be made to DTC or its
nominee, as the case may be, as the registered owner thereof. Neither the
Company, the trustee, nor the paying agent will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the Global New Notes or for maintaining,
supervising or reviewing any records of such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect to the Global New Notes, will
credit Participants' accounts with payments in amounts proportionate to their
respective beneficial ownership interests in the principal amount of such Global
New Notes, as shown on the records of DTC or its nominee. The Company also
expects that payments by Participants to owners of beneficial interests in such
Global New Notes held through such Participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such Participants.
DTC has advised the Trustee that, unless and until Definitive Notes are
issued, DTC will take any action permitted to be taken by a Noteholder under the
Indenture only at the direction of one or more Participants to whose accounts
with DTC the Timber Notes are credited. DTC has advised the Trustee that DTC
will take such action with respect to any aggregate principal amount of the
Timber Notes only at the direction of and on behalf of such Participants with
respect to such aggregate principal amount of the Timber Notes. DTC may take
actions, at the direction of the related Participants, with respect to some
Timber Notes which conflict with actions taken with respect to other Timber
Notes.
TRANSFERS WITHIN DTC. Transfers between Participants in DTC will be
effected in the ordinary way in accordance with DTC rules and will be settled in
same-day funds. The laws of some states require that certain persons take
physical delivery in definitive form of securities. Consequently, the ability to
transfer beneficial interests in a Global New Note to such persons may be
limited. Because DTC can only act on behalf of Participants, who in turn act on
behalf of indirect participants and certain banks, the ability of a person
having a beneficial interest in a Global New Note to pledge such interest to
persons or entities that do not participate in the DTC system or otherwise take
actions in respect of such interest may be affected by the lack of a physical
certificate evidencing such interest.
Neither the Company nor the Trustee will have any responsibility for the
performance by DTC or its Participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
DEFINITIVE NEW NOTES. Definitive New Notes may be issued in minimum
denominations of U.S. $100,000 or any integral multiple of $1,000 in excess
thereof. Definitive New Notes will be issued to Noteholders or their nominees,
if (i) DTC notifies the Registrar that it is no longer willing or able to
discharge properly its responsibilities as depository with respect to the Global
New Notes and the Registrar
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is unable to appoint a qualified successor within 90 days of receiving notice of
such ineligibility on the part of DTC, (ii) the Registrar or the Trustee has
instituted or has been directed to institute any judicial proceeding in a court
to enforce the rights of the Noteholders under the Timber Notes and the
Registrar or the Trustee has been advised by counsel that in connection with
such proceeding it is necessary or appropriate for the Registrar or the Trustee
to obtain possession of the Timber Notes or (iii) a Holder of a beneficial
interest in a Global New Note requests that such interest be exchanged for a
Definitive New Note or Notes.
Holders of beneficial interests in the Global New Notes may, subject to the
rules and procedures of DTC, cause DTC (or its nominee) to notify the Registrar
in writing of a request for transfer or exchange of such beneficial interest for
a Definitive New Note or Notes (in a principal amount equal to the minimum
authorized denomination or any integral multiple of $1,000 in excess thereof).
The Holder of any Definitive New Note may transfer or exchange the same in whole
or in part (in a principal amount equal to the minimum authorized denomination
or any integral multiple of $1,000 in excess thereof) by surrendering such
Definitive New Note at the corporate trust office of the Registrar in Boston,
Massachusetts or at the office of any transfer agent, together with an executed
instrument of assignment and transfer substantially in the form attached to the
Indenture in the case of transfer and a written request for exchange in the case
of exchange. In exchange for any Definitive New Note or beneficial interest in a
Global New Note properly presented for transfer or exchange with all necessary
accompanying documentation, the Registrar will, within five Business Days of
such request if made at the corporate trust office of the Registrar, or within
10 Business Days if made at the office of a transfer agent (other than the
Registrar), authenticate and deliver at the corporate trust office of the
Registrar or the office of the transfer agent, as the case may be, to the
transferee (in the case of transfer) or Holder (in the case of exchange) or send
by first class mail at the risk of the transferee (in the case of transfer) or
Holder (in the case of exchange) to such address as the transferee or Holder, as
applicable, may request, a Definitive New Note or Notes, as the case may
require, for a like Class and aggregate principal amount and in such authorized
denomination or denominations as may be requested. The presentation for transfer
or exchange of any Definitive New Note will not be valid unless made at the
corporate trust office of the Registrar in Boston, Massachusetts or at the
office of a transfer agent by the registered Holder in person, or by a duly
authorized attorney-in-fact. The Registrar may decline to accept any request for
an exchange or registration of transfer of any New Note called for redemption
during the period of 15 days preceding any Note Payment Date. The Holder of a
New Note will not be required to bear the costs and expenses of effecting any
exchange, transfer or registration of transfer, except that the relevant Holder
will be required to bear (i) the expenses of delivery by other than regular mail
(if any) and (ii) if the Registrar shall so require, the payment of a sum
sufficient to cover any stamp, duty, tax or governmental charge or insurance
charges that may be imposed with respect thereto.
PAYMENT
MECHANICS OF PAYMENT. Payments on the Timber Notes will be made at the
corporate trust office of the Trustee (acting in its capacity as a Paying Agent)
in Boston, Massachusetts or at the corporate trust office of the Trustee's
affiliate, State Street Bank and Trust Company, N.A., in New York, New York or,
subject to applicable laws and regulations, at the office of any paying agent
subsequently appointed. All payments on the Timber Notes will be made to the
persons in whose name such Timber Notes are registered at the close of business
on the fifth day of the month in which the Note Payment Date occurs (the
"Record Date"). Payments on Definitive Notes will be made (i) by a U.S. dollar
check drawn on a bank in New York City or Boston, Massachusetts mailed to the
Holder at such Holder's registered address or (ii) upon application by the
Holder of at least U.S. $5,000,000 in principal amount of Definitive Notes to a
Paying Agent not later than five Business Days prior to the related Record Date,
by wire transfer in immediately available funds to a U.S. dollar account
maintained by the Holder with a bank in New York City or Boston, Massachusetts.
Distributions of interest to Holders of the Global Notes will be made (i) by a
U. S. dollar check drawn on a bank in New York City or Boston, Massachusetts
delivered to the registered owner of such Global Notes at its registered address
or (ii) by wire transfer in immediately available funds to a U.S.
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dollar account maintained by such registered owner with a bank in New York City
or Boston, Massachusetts. However, the final distribution with respect to each
Class of Timber Notes will be made only against surrender of the Timber Notes of
such Class at the corporate trust office of the Paying Agent, in Boston,
Massachusetts or of its affiliate in New York, New York.
Neither the Issuer, the Trustee, the Authenticating Agent, the Paying
Agents nor the Note Registrar will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
interests in the Global Notes or for maintaining, supervising or reviewing any
records relating to such beneficial interests. It is expected that DTC or its
nominee, upon receipt of any payment of principal or interest distributable in
respect of a Global Note, will immediately credit Participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
such Global Note as shown on the records of the depositories or their respective
nominees. It is also expected that payments by Participants to owners of
beneficial interests in such Global Note held through such Participants will be
governed by standing instructions and customary practices, as is now the case
with securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
Participants.
All monies distributable with respect to any Timber Note and remaining
unclaimed for two years after the date upon which such amount shall have become
available for distribution will be repaid by the Trustee or any Paying Agent to
or for the account of the Company, the receipt of such repayment to be confirmed
promptly in writing by the Company, and, to the extent permitted by law, the
Holder of such Timber Note shall thereafter look only to the Company for payment
which such Holder may be entitled to collect, and all liability of the Trustee
or such Paying Agent with respect to such monies will thereupon cease.
The appointment of any paying agent may be terminated and/or additional
paying agents may be appointed. Notice of any such termination or appointment,
and of any changes in the specified offices, shall be given to the Noteholders.
NON-PETITION
The Indenture provides that neither the Trustee nor any of the holders of
the Timber Notes will, prior to the date which is one year and one day after the
payment in full of all outstanding Timber Notes and any outstanding Additional
Timber Notes, institute against, or join any other Persons in instituting
against, the Company any bankruptcy, reorganization, arrangement, insolvency or
liquidation proceeding or other similar proceeding under any Bankruptcy Law,
unless the consent of the Holders of 51% in aggregate outstanding principal
amount of the Timber Notes and any Additional Timber Notes to the taking of such
action is obtained.
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CERTAIN DEFINED TERMS
Certain defined terms utilized in this Prospectus are defined as follows.
These definitions are qualified in their entirety by the definitions of these
terms in the Indenture and the other Operative Documents.
An "ACCELERATION EVENT" will be deemed to exist at any time when the
Timber Notes have been accelerated and such acceleration has not been rescinded.
"ACTUAL PRODUCTION" through any date means the number of Mbfe of Company
Timber actually harvested and sold from July 20, 1998 through such date, except
any such Company Timber that has been included in Deemed Production for such
period.
"ADDITIONAL LIQUIDITY PROVIDER FEES" means any commitment fee, agent's
fee or similar fee payable to the Liquidity Providers or to any agent for the
Liquidity Providers under the Line of Credit Agreement to the extent, but only
to the extent, that the amount or rate of such fee is in excess of the amount
that would be payable therefor under the terms of the Bank of America Credit
Agreement as in effect on the Closing Date, it being understood that no amount
of any such fee that is or becomes payable pursuant to the terms of the Bank of
America Credit Agreement as in effect on the Closing Date, whether or not such
amount is actually payable on the Closing Date, shall constitute Additional
Liquidity Provider Fees.
"ADDITIONAL TIMBER PROPERTIES" means (a) any timber rights or timberlands
located in the State of California which are purchased by the Company subsequent
to the Closing Date and subjected to the Lien of the Deed of Trust in connection
with the release of funds from the Prefunding Account and (b) the Elk River
Timberlands if and when the Elk River Timberlands become subject to the Lien of
the Deed of Trust.
"ADJUSTED DEBT OBLIGATIONS" means, on any Note Payment Date, an amount
equal to the excess, if any, of (a) the aggregate unpaid principal amount of the
outstanding Timber Notes on such date, determined before giving effect to the
payment of any amount paid in respect of the Timber Notes on such date, over (b)
the Aggregate Principal Amortization Amount on such date.
"ADVANCE" means any Interest Advance and any Termination Advance, which
may be a borrowing, draw or other cash receipt obtained by the Company or the
Trustee on behalf of the Company from the Liquidity Providers under the Line of
Credit Agreement. The term "borrow" when used with respect to any Advance
means to obtain such Advance under the Line of Credit Agreement and the term
"borrowing" has a like meaning.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition of
"Affiliate," "control," when used with respect to any specified Person,
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise, and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"AGGREGATE MINIMUM PRINCIPAL AMORTIZATION AMOUNT" as of any Note Payment
Date means the aggregate, for all Classes of Timber Notes of the respective
Minimum Principal Amortization Amounts for such date.
"AGREEMENT NOT TO CUT" means any agreement by the Company to limit or
refrain from cutting, harvesting, severing or selling any Company Timber in
exchange for a monetary payment to the Company.
"ALTERNATE PROPERTY" means timberlands (a) containing at least the number
of Mbfe of timber as the Headwaters Acquisition Property, (b) having a fair
value at least equal to the Headwaters Acquisition Property, (c) having expected
operating costs not materially greater than the Headwaters Acquisition Property,
and (d) having sufficient access or access rights to enable harvesting
operations to be conducted thereon, all of which matters shall be reflected in
an Officer's Certificate.
"BANK OF AMERICA CREDIT AGREEMENT" means the Credit Agreement, dated July
20, 1998, among the Company, Bank of America National Trust and Savings
Association, as Agent, and the other financial institutions parties thereto, as
such credit agreement may from time to time be extended, amended, modified,
supplemented or amended and restated in accordance with the provisions of the
Indenture.
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"BANKRUPTCY LAW" means any Federal or State bankruptcy, insolvency,
reorganization or similar law for the relief of debtors from time to time in
effect.
"BANKRUPT OR INSOLVENT" or "BANKRUPTCY OR INSOLVENCY" shall have
occurred or exist with respect to any Person if:
(a) such Person shall (i) apply for or consent to the appointment of,
or the taking of possession by, a receiver, custodian, trustee or
liquidator of itself or of all or a substantial part of its property under
any Bankruptcy Law, (ii) make a general assignment for the benefit of its
creditors, (iii) commence a voluntary case under the Federal Bankruptcy
Code, (iv) file a petition seeking to take advantage of any other
Bankruptcy Law, or (v) acquiesce in writing to any petition filed against
it in an involuntary case under the Federal Bankruptcy Code;
(b) a proceeding or case shall be commenced, without the application
or consent of such Person, in any court of competent jurisdiction, seeking
under any Bankruptcy Law (i) its liquidation, reorganization, dissolution
or winding-up, or the composition or readjustment of its debts, (ii) the
appointment of a trustee, receiver, custodian, liquidator or the like of
such Person or of all or any substantial part of its assets or (iii)
similar relief in respect of such Person under any Bankruptcy Law, and such
proceeding or case shall continue undismissed, or an order, judgment or
decree approving or ordering any of the foregoing (other than an order
referred to in clause (c) below) shall be entered and continue unstayed and
in effect, for a period of 60 or more consecutive days; or
(c) an order for relief against such Person shall be entered in an
involuntary case under the Federal Bankruptcy Code.
"BOARD OF MANAGERS" means:
(a) the Board of Managers of the Company; or
(b) any Manager or committee of such Board of Managers duly authorized
under applicable law to act on behalf of such Board of Managers.
"BOARD RESOLUTION" means a resolution duly adopted by the Board of
Managers of the Company.
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a day on
which banking institutions in the Borough of Manhattan, the City of New York,
New York, in San Francisco, California or in the Commonwealth of Massachusetts
are authorized or required by law or executive order to close.
A "CASH RETENTION EVENT" shall be deemed to exist on any date, subsequent
to January 20, 2014, on which any Timber Notes are outstanding.
"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act, as the same may be in effect from time to time, any successor
statute, and the rules and regulations thereunder.
"CLASS" means any of (i) the Class A-1 Timber Notes, (ii) the Class A-2
Timber Notes and (iii) the Class A-3 Timber Notes or (iv) any class of
Additional Timber Notes.
"CLOSING DATE" shall mean July 20, 1998.
"COLLATERAL AGENT EXPENSES" means any expenses or damages of or
compensation owing to the Collateral Agent (including, without limitation, the
reasonable fees and disbursements of counsel to the Collateral Agent) incurred
with respect to the enforcement or administration of the Deed of Trust or owing
to the Collateral Agent as part of the Secured Obligations.
"COLLATERAL RELEASE PRICE" means, as of any date, in respect of any
Company Owned Timberlands or Company Timber Rights to be released from the Lien
of the Deed of Trust on such date pursuant to the provisions described under
"Description of the Timber Notes--Collateral Release Provisions," an amount
equal to the product of (a) the number of Mbfe of Company Timber located on the
Company Owned Timberlands to be released (or on the Company Timber Rights
Property that is subject to the Company Timber Rights to be released, as
applicable) and (b) an amount equal to $724, escalated at a rate of 3 1/2% per
annum (compounded annually, commencing January 1, 1999) to such date.
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"COMMITMENT" means, at any time, the maximum principal or face amount of
the Advances, whether or not outstanding, that a Liquidity Provider is required
to make under the Line of Credit Agreement at such time, as such amount may be
varied or adjusted from time to time. "COMMITMENTS" means, at any time, the
aggregate amount of the Commitments of all Liquidity Providers at such time.
"COMPANY OWNED TIMBERLANDS" means:
(a) the parcels of land described in (i) Exhibit A to the Deed of
Trust and (ii) any amendment to the Deed of Trust with respect to the
addition of Substitute Timber Property or Additional Timber Properties,
together with the entire right, title and interest of the Company in and to
such parcels of land, subject to Permitted Encumbrances, together with (a)
all right, title and interest of the Company in and to all buildings,
structures and other improvements now standing, or at any time hereafter
constructed or placed, upon such land, including, without limitation, all
right in and to all equipment and fixtures of every kind and nature on such
land or in any such buildings, structures or other improvements (such
buildings, structures, other improvements, equipment and fixtures being
herein collectively called the "Improvements"), (b) all right, title and
interest of the Company in and to all and singular the tenements,
hereditaments, easements, rights of way, rights, privileges and
appurtenances in and to such land belonging or in any way appertaining
thereto, including without limitation, all right, title and interest of the
Company in, to and under any streets, ways, alleys, vaults, gores or strips
of land adjoining such land and (c) all claims or demands of the Company,
in law or in equity, in possession or expectancy of, in and to such land
together with all rents, income, revenues, issues and profits from and in
respect of the property described above in this paragraph (a) and the
present and continuing right to make claim for, collect, receive and
receipt for the same as hereinafter provided. It is the intention of the
Company that, so far as may be permitted by law, all of the foregoing,
whether now owned or hereafter acquired by the Company, affixed, attached
or annexed to such land shall be and remain or become and constitute a part
of the Mortgaged Property and the security covered by and subject to the
Lien of the Deed of Trust;
(b) all right, title and interest of the Company in and to (i) all
extensions, improvements, betterments, renewals, substitutes and
replacements of and on the property described in the foregoing clause (a)
and (ii) all additions and appurtenances thereto not presently leased to or
owned by the Company and hereafter leased to, acquired by or released to
the Company or, constructed, assembled or placed upon the Company Owned
Timberlands immediately upon such leasing, acquisition, release,
construction, assembling or placement, and without any further grant or
other act by the Company (including, without limitation, all lands added by
lot line adjustment to any existing legal parcel constituting part of the
Company Owned Timberlands); and
(c) all the estate, right, title and interest of the Company, in and
to all contract rights, actions and rights in action, relating to the
property described in clause (a), including, without limitation, all rights
to insurance proceeds and unearned premiums arising from or relating to
damage to such property.
Notwithstanding the foregoing, Company Owned Timberlands shall not include
any Pacific Lumber Timber.
"COMPANY TIMBER" means (i) all trees and timber, including, without
limitation, standing timber and crops, now located on or hereafter planted or
growing in the soil of any Company Timber Property (other than the Pacific
Lumber Timber Rights Property), or any part or parcel thereof, and all
additions, substitutions and replacements thereof (including timber to be cut
pursuant to a Purchase Agreement) and (ii) any and all Harvested Timber.
"COMPANY TIMBER PROPERTY" means the Company Owned Timberlands and the
Company Timber Rights Property.
"COMPANY TIMBER RIGHTS" means (i) the timber rights of the Company in
respect of the Company Timber Rights Property referred to in clause (i) of the
definition of such term, including, without limitation, the ownership of, and
(subject to compliance with applicable law) the right in perpetuity (or, in the
case of Company Timber Rights in respect of not more than 200 acres of
timberlands, the right expiring not earlier
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than November 1, 2027) to harvest, all trees and timber, including, without
limitation, standing timber and crops, now located on or hereafter planted or
growing in the soil of such Company Timber Rights Property or any part or parcel
thereof and (ii) any timber rights which are (A) purchased by the Company
subsequent to the Closing Date with funds from the Prefunding Account, (B) in
perpetuity or expire no earlier than December 31, 2048 and (C) described in an
amendment to the Deed of Trust.
"COMPANY TIMBER RIGHTS PROPERTY" means (i) those portions of the
timberlands owned by Pacific Lumber, Salmon Creek or an unrelated third party on
the date hereof which are subject to the Company Timber Rights and are described
with particularity in the Pacific Lumber Timber Deeds and, as to a portion of
such lands, in certain maps referenced in the Pacific Lumber Timber Deeds and
held by an escrow agent pursuant to an Escrow Agreement by and among the
Company, Pacific Lumber, Salmon Creek and such escrow agent, dated as of the
Closing Date, and (ii) any timberlands that are subject to timber rights
referred to in clause (ii) of the definition of Company Timber Rights.
"CONTINGENT OBLIGATION" means, as to any Person, any obligation of such
Person guaranteeing any Indebtedness, leases, dividends or other obligations
("primary obligations") of any other Person (the "primary obligor") in any
manner, whether directly or indirectly, including, without limitation, any
obligations of such Person, whether or not contingent, (i) to purchase any such
primary obligation or any property constituting direct or indirect security
therefor, (ii) to advance or supply funds (x) for the purchase or payment of any
such primary obligation or (y) to maintain working capital or equity capital of
the primary obligor or otherwise to maintain the net worth or solvency of the
primary obligor, (iii) to purchase property, securities or services primarily
for the purpose of assuring the owner of any such primary obligation of the
ability of the primary obligor to make payment of such primary obligation or
(iv) otherwise to assure or hold harmless the holder of such primary obligation
against loss in respect thereof; provided, however, that the term Contingent
Obligation shall not include endorsements of instruments for deposit or
collection in the ordinary course of business or obligations in connection with
surety or appeal bonds.
"CONVEYANCE DOCUMENTS" means (i) the Grant Deed dated March 18, 1993 from
Pacific Lumber, as grantor, to Scotia Pacific, as grantee, conveying certain of
the Company Owned Timberlands to Scotia Pacific and reserving in Pacific Lumber
certain timber rights (the "First Pacific Lumber Grant Deed"), (ii) the Grant
Deed dated on or prior to the Closing Date from Pacific Lumber, as grantor, to
the Company, as grantee, conveying certain Company Owned Timberlands to the
Company (the "Second Pacific Lumber Grant Deed"), (iii) the Quitclaim Deed
dated on or prior to the Closing Date from Pacific Lumber to the Company
conveying to the Company all of Pacific Lumber's interest in certain of the
timber rights previously reserved by Pacific Lumber in the First Pacific Lumber
Grant Deed (the "Pacific Lumber Quitclaim Deed"), (iv) three Grant Deeds, each
dated on or prior to the Closing Date, from Pacific Lumber, as grantor, to the
Company, as grantee, conveying the Company Timber Rights to the Company (the
"Pacific Lumber Timber Deeds"), (v) the Bill of Sale and General Assignment
dated as of March 23, 1993 transferring from Pacific Lumber certain of the Data
Processing Information and other personal property to Scotia Pacific (the "Bill
of Sale"), (vi) the Bill of Sale and General Assignment dated as of the Closing
Date transferring from Pacific Lumber certain Data Processing Information and
other personal property with respect to certain Company Owned Timberlands and
the Company Timber Rights to the Company (the "New Bill of Sale"), (vii) the
New Environmental Indemnification Agreement, (viii) the New Reciprocal Rights
Agreement and (ix) the Transfer Agreement dated as of the Closing Date (the
"New Transfer Agreement") among the Company, Pacific Lumber and Salmon Creek.
"DATA PROCESSING EQUIPMENT" means all hardware, software, or other data
processing systems or equipment, whether now owned or hereafter acquired by the
Company, and wherever located.
"DATA PROCESSING INFORMATION" means all information, programs, know-how,
methods or methodology relating to the management of the Company Timber
Property, the harvesting, severing or cutting of Company Timber, and the
preparation of applications for Timber Harvesting Plans, including, without
limitation, all such information, programs, know-how, methods or methodology
relating to the GIS.
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"DEBT OBLIGATIONS" as of any date (in each case determined before giving
effect to any payment made on such date), means the sum of (a) the outstanding
principal balance of the Timber Notes as of such date plus (b) interest accrued
and unpaid on the Timber Notes to such date, including any interest on unpaid
interest (computed on the basis of a 360-day year of twelve 30-day months), plus
(c) any Premium accrued and unpaid on the Timber Notes and any interest accrued
and unpaid thereon.
"DEEMED COLLATERAL VALUE", for any Monthly Calculation Date, means an
amount equal to the product (in dollars) of the Collateral Value Factor for such
date and the Deemed Remaining Harvest Quantity for such date.
"DEEMED PRODUCTION" through any date means the number of Mbfe of Company
Timber deemed harvested and sold from July 20, 1998 through such date as
described under "Deemed Production."
"DEEMED REMAINING HARVEST QUANTITY" means, for any Monthly Calculation
Date, an amount equal to the excess of (i) of the structured Harvest Quantity
over (ii) the sum of all Actual Production and all Deemed Production (each
expressed in Mbfe) through such date.
"DEFAULT" means any occurrence or condition that, with notice or the
lapse of time, or both, would become an Event of Default.
"DEFAULT INTEREST" means interest on any amount of principal or Regular
Interest on any Class of Timber Notes that was not paid when such amount became
due and payable.
"DEFAULT RATE" means the applicable Note Rate plus 2.00%.
"DEFEASANCE" shall have the meaning set forth in Section 8.2 of the
Indenture.
"DEFICIENCY PREMIUM AMOUNT" with respect to any Payment Deficiency on any
Class of Timber Notes with respect to which a Deficiency Premium Amount is
payable on a Note Payment Date, means an amount of interest (computed on the
basis of a 360-day year of twelve 30-day months) on such Payment Deficiency, for
the period from and including the Note Payment Date immediately preceding such
Note Payment Date to but excluding such Note Payment Date, at a rate per annum
equal to 1.50%.
"DEFINITIVE NEW NOTES" means a New Note issued in certificated form.
"DEPLETION AMORTIZATION AMOUNT" means, on any Note Payment Date, an
amount, if any, equal to the lesser of (a) the excess, if any, of (i) the
balance in the Payment Account on such date over (ii) the sum of the Minimum
Obligations on such date or (b) the Excess Debt Obligations Amount on such date;
PROVIDED, HOWEVER, that the issuance of Additional Timber Notes may result in
modification to the computation of the Depletion Amortization Amount.
"DEPOSITORY" means, with respect to the Global Notes, DTC or such other
Person or Persons as shall be designated as Depository by the Registrar.
"DISCOUNTED SERVICING OBLIGATION" on any Monthly Deposit Date or Note
Payment Date, means the amount specified as such in the Structuring Schedule in
Annex I opposite the monthly period preceding such date.
"DISPOSAL SITE" means any site, facility or location to which any
Hazardous Materials from or attributable to the Company Owned Timberlands have
been transported for treatment, disposal, storage or deposit.
"DOWNGRADE ADVANCE" has the meaning set forth under "Description of the
Timber Notes--Line of Credit".
"DTC" means the Depository Trust Company, a New York corporation.
"ELIGIBLE INVESTMENTS" means any one or more of the following, which, in
each case, matures (or is redeemable by the holder thereof without the
incurrence of a loss) not later than the date the funds invested therein are
required to be used: (a) direct obligations of, and obligations fully guaranteed
or insured by, the United States of America or any agency or instrumentality of
the United States of America, the obligations of which are backed by the full
faith and credit of the United States of America; (b) demand deposits
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(including but not limited to controlled disbursement accounts or other similar
accounts) and time deposits with, and certificates of deposit and bankers'
acceptances issued by, any bank or trust company organized under the laws of the
United States of America or any State thereof whose unsecured, unguaranteed
long-term senior debt obligations are rated "AA" by S&P and "Aa2" by Moody's
or higher, or whose unsecured, unguaranteed commercial paper obligations are
rated "A-1" by S&P and "P-1" by Moody's or higher, including the Trustee, so
long as the Trustee otherwise satisfies such requirements (or, in the case of
the Expense Reserve, whether or not the Trustee satisfies such requirements);
(c) repurchase agreements entered into with entities whose unsecured,
unguaranteed long-term debt obligations are rated "AA" by S&P and "Aa2" by
Moody's or higher, or whose unsecured, unguaranteed commercial paper obligations
are rated "A-1" by S&P and "P-1" by Moody's or higher, pursuant to a written
agreement with respect to any obligation described in clause (a) above; (d)
commercial paper (including both noninterest-bearing discount obligations and
interest-bearing obligations payable on demand or on a specified date not later
than 150 days from the date of acquisition thereof) and having a rating of
"A-1" by S&P and "P-1" by Moody's or higher; (e) direct obligations or
shares of any money market fund or other similar investment company all of whose
investments consist of obligations described in the foregoing clauses of this
definition and that is rated "AAm" by S&P and "Aa" by Moody's or higher; (f)
taxable auction rate securities commonly known as "money market notes" that at
the time of purchase have been rated and the ratings for which (i) for direct
issues, must not be less than "P-1" if rated by Moody's and not less than
"A-1" if rated by S&P, or (ii) for collateralized issues which follow the
asset coverage tests set forth in the Investment Company Act of 1940, as
amended, must have long-term ratings of at least "AAA" if rated by S&P and
"Aaa" if rated by Moody's; or (g) with Rating Agency Confirmation, any
investments hereafter developed which are substantially comparable to those
described above, which, in any case mature (or are redeemable by the holder
thereof without the incurrence of a loss) not later than the date such funds are
required to be utilized.
"ELK RIVER TIMBERLANDS" means, in the event that any Headwaters
Acquisition Property is acquired by an Affiliate of the Company upon
consummation of the Headwaters Agreement (as such term is defined in the
Offering Memorandum), (a) such Headwaters Acquisition Property or (b) the
Alternate Property, either (a) or (b) of which will be transferred to the
Company within 180 days after consummation of the Headwaters Agreement and made
subject to the Lien of the Deed of Trust promptly after the acquisition thereof
by the Company.
"ENVIRONMENTAL LAWS" means all federal, state or local statutes, laws,
ordinances, regulations, rules, rulings, orders, restrictions, requirements,
writs, injunctions, decrees or other official acts relating to the environment
or hazardous or similar substances (including, without limitation, CERCLA and
similar state laws), whether now or hereafter enacted or imposed by any
Governmental Authority.
"EUROCLEAR" means Morgan Guaranty Trust Company of New York, Brussels
office, as operator of the Euroclear System.
"EXCESS DEBT OBLIGATIONS AMOUNT," means, on any Note Payment Date, an
amount equal to the excess, if any, of (a) the sum of (i) the Adjusted Debt
Obligations on such date plus (ii) the Discounted Servicing Obligation at such
date over (b) the Total Collateral Value at such date.
"EXCESS FUNDS" has the meaning set forth for such term in clause
"TENTH" under "Description of the Timber Notes--Accounts; Payment on the
Timber Notes--Monthly Deposit Dates."
"EXCESS PAYMENT" means, on any date on which principal is paid on the
Timber Notes, the lesser of (i) the amount of principal paid to the holders of
any Class of Timber Notes on such date minus the Scheduled Amortization Amount
for such Class on such date and (ii) the amount of principal paid to the Holders
of such Class on such date.
"EXCHANGE OFFER REGISTRATION STATEMENT" shall mean a registration
statement of the Company on an appropriate form under the Securities Act with
respect to the Registered Exchange Offer, all amendments and supplements to such
registration statement, including post-effective amendments thereto, in each
case
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including the prospectus contained therein, all exhibits thereto and all
material incorporated by reference therein.
"EXCHANGE TIMBER NOTES" shall mean debt securities of the Company
identical in all material respects to the Timber Notes (except that the
Non-Registration Premium provisions and the transfer restrictions shall be
modified or eliminated, as appropriate, and interest thereon shall accrue from
and including the last date to which interest was paid on the Timber Notes or,
if no such interest has been paid, from the Closing Date) to be issued under the
Indenture to Holders in exchange for Registrable Securities pursuant to the
Registered Exchange Offer.
"FINAL MATURITY DATE" means July 20, 2028.
"FINANCIAL ASSET" means "financial asset" as defined in Section
8-102(a)(9) of the Uniform Commercial Code.
"GENERAL LAWS" means all applicable statutes, laws, ordinances,
regulations, rules, rulings, orders, restrictions, requirements, writs,
injunctions, decrees or other official acts of any Governmental Authority, now
and hereafter existing at any time or times, other than Environmental Laws and
Tax Laws.
"GIS" means the geographical information system of the Company, including
any Data Processing Equipment and/or Data Processing Information which is a part
of such system , and any updates, upgrades or modifications thereto developed by
Pacific Lumber or the Company.
"GOVERNMENTAL AUTHORITY" means (a) the United States of America, (b) any
State, commonwealth, county, parish, municipality, territory, possession or
other governmental subdivision within the United States of America or under the
jurisdiction of the United States of America and (c) any Tribunal.
"HCP" means a habitat conservation plan.
"HARVESTED TIMBER" means all trees, timber and crops which have been
severed, cut or harvested from the Company Timber Property (other than the
Pacific Lumber Timber Rights Property), or any parcel thereof, and with respect
to which title has not yet passed to a third party purchaser in compliance with
the terms of the Indenture.
"HAZARDOUS MATERIALS" means (a) any "hazardous waste," "hazardous
substance," "hazardous material," "hazardous constituent," "toxic
chemical," "toxic substance," "acutely toxic substance," "pollutant" or
"contaminant," or any other formulation intended to define, list or classify
substances by reason of hazardous, dangerous, toxic or other deleterious
properties, such as ignitability, corrosivity, reactivity, carcinogenicity,
reproductive toxicity or "EP toxicity," as defined in any Environmental Law
(including, without limitation, asbestos, polychlorinated biphenyls, oil,
petroleum, petroleum-related or petroleum-derived products, natural gas, natural
gas liquids, liquified natural gas or synthetic natural gas), or any similar
substances, (b) any substance the presence of which on any property included in
the Company Owned Timberlands is prohibited by any Environmental Law, (c) any
underground storage tanks, (d) any flammable substances or explosives or any
radioactive materials and (e) any other substances subject to any rules or
regulations (including, without limitation, any notice requirements or special
handling requirements) of any Governmental Authority under any Environmental
Law.
"HAZARDOUS MATERIALS CONTAMINATION" means the contamination (whether now
existing or hereafter occurring) of any improvements, facilities, soil,
groundwater, air or other elements on or of any property included in the Company
Owned Timberlands or the contamination of any improvements, facilities, soil,
groundwater, air or other elements on or of any other lands as a result of
Hazardous Materials at any time (before or after the date of the Deed of Trust)
emanating from any Company Owned Timberlands.
"HEADWATERS ACQUISITION PROPERTY" means, of the approximately 7,700 acres
of timberlands expected to be acquired by an Affiliate of the Company upon the
consummation of the Headwaters Agreement, that portion of such timberlands, if
any, actually so acquired by an affiliate of the Company upon consummation of
the Headwaters Agreement.
"HOLDER" means the Person in whose name a Timber Note or an Additional
Timber Note is registered on the Register or on any similar register for any
Additional Timber Notes, as the case may be.
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"INDEBTEDNESS" means, as to any Person, without duplication, (i) all
indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, (ii) the face amount of all letters of credit
issued for the account of such Person and all drafts drawn thereunder, (iii) the
aggregate amount payable under all capital leases under which such person is the
lessee, (iv) all Contingent Obligations of such Person, (v) all net obligations
of such Person under any interest rate protection agreements, (vi) all
obligations of such Person under "take-or-pay" or other similar agreements and
(vii) all liabilities of the types described in clauses (i), (ii), (iii), (iv),
(v) and (vi) secured by any Lien on any property owned by such Person, whether
or not such liabilities have been assumed by such Person; PROVIDED, HOWEVER,
that Indebtedness shall not include (a) trade payables due within 90 days,
accrued expenses and other current liabilities arising in the ordinary course of
business in commercially reasonable amounts not inconsistent with industry
standards, (b) compensation, pension obligations and other obligations arising
from employee benefits and employee arrangements in commercially reasonable
amounts not inconsistent with industry standards, (c) indebtedness consisting of
letters of credit or otherwise required by law in respect of workers'
compensation obligations or similar social insurance and (d) indebtedness the
occurrence of which is expressly contemplated by the terms of the Indenture or
other Operative Documents.
"INSTITUTIONAL ACCREDITED INVESTOR" means a Person which is an
institution and is an "accredited investor" as defined in Rule 501(a)(1), (2),
(3) or (7) of Regulation D under the Securities Act, but is not a QIB.
"INTEREST ADVANCE" has the meaning set forth under "Description of the
Timber Notes--Line of Credit".
"LEGENDED DEFINITIVE NOTE" means a Definitive Note bearing the Securities
Legend.
"LIEN" means any deed of trust, security interest, assignment, pledge,
hypothecation, charge or other encumbrance.
"LIEN OF THE DEED OF TRUST" means the lien, assignment and security
interest created or granted, or renewed, extended and continued in force and
effect, by the Deed of Trust (including the after-acquired property provisions
of the Deed of Trust), or created by any subsequent conveyance under the Deed of
Trust or supplement to the Deed of Trust in favor of the Collateral Agent
(whether made by the Company or any other Person), or otherwise created,
effectively constituting any property a part of the security and Mortgaged
Property held by the Collateral Agent for the benefit of the Secured Parties.
"LINE OF CREDIT ACCELERATION" means the election of the Liquidity
Providers, during the continuance of a Triggering Event, to permanently cancel
their obligations to make Advances under the Line of Credit Agreement (other
than by reason of a Termination Advance having been made or the occurrence of
the Scheduled Termination Date) or, if a Termination Advance has been made, to
require that such Advance be payable on each Monthly Deposit Date and Note
Payment Date in accordance with the provisions described under "Description of
the Timber Notes--Accounts; Payment on the Timber Notes--Monthly Deposit Dates"
and "--Note Payment Dates", in each case as provided in the Line of Credit
Agreement, or such other meaning as provided in the Line of Credit Agreement
then in effect.
"LINE OF CREDIT AGENT" means the financial institution or other agent under
the Line of Credit Agreement, designated thereunder from time to time, through
whom the Liquidity Providers make Advances to the Company or to the Trustee on
behalf of the Company and who is authorized to receive payments of interest and
principal payable to the Liquidity Providers from the Company, in accordance
with the terms of the Line of Credit Agreement.
"LINE OF CREDIT AGREEMENT" means a credit facility, including a line of
credit, revolving loan agreement, letter of credit facility or any similar
financing facility, of the Company in effect from time to time with one or more
Liquidity Providers each of whom, as of the date such credit facility is first
entered into, or, if later with respect to any Liquidity Provider, as of the
date it first becomes party thereto, has the Required Liquidity Provider Rating,
pursuant to which the Company or the Trustee on behalf of the Company may obtain
Interest Advances or a Termination Advance from the Liquidity Providers
thereunder, as such credit facility may from time to time be extended, amended,
modified, supplemented or amended
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and restated in accordance with the provisions described under "Description of
the Timber Notes--Line of Credit"; provided, however, that such credit facility
is either (I) the Bank of America Credit Agreement or (II) a replacement for a
then existing Line of Credit Agreement in accordance with the provisions
described under "Description of the Timber Notes--Line of Credit". As of the
Closing Date, the Line of Credit Agreement is the Bank of America Credit
Agreement.
"LINE OF CREDIT AMORTIZATION AMOUNT" means, as of any Note Payment Date,
the amount, if any, of principal, which, under the terms of the Line of Credit
Agreement is payable on such Note Payment Date in respect of a Termination
Advance.
"LIQUIDITY PROVIDER" means any financial institution that is at the
relevant time a party to the Line of Credit Agreement and has a Commitment
thereunder or has Advances outstanding thereunder.
"LIQUIDITY PROVIDERS' EXPENSES" means, as of any date, all amounts then
due from the Company under the Line of Credit Agreement, other than interest
(including any Supplemental Liquidity Provider Interest) and principal and other
than any Additional Liquidity Provider Fees); provided, however, that
indemnification obligations under the Line of Credit Agreement shall not be
deemed to be Liquidity Providers' Expenses (but shall be deemed to be
obligations for interest and principal on Advances) to the extent that such
indemnification obligations include, or represent compensation for or damages
constituting, the principal of and interest on Advances.
"LUMBER PPI INDEX" means, with respect to any date, the 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 or any substitute index hereafter adopted
by the Department of Labor.
"LUMBER PPI INFLATION FACTOR" means, with respect to any date, a
fraction, the numerator of which is the then most recent Lumber PPI Index and
the denominator of which is the PPI Index in effect with respect to January 1,
1998.
"MAJORITY HOLDERS" at any date, means the Holders of a majority in
aggregate outstanding principal amount of Timber Notes and any Additional Timber
Notes at such date.
"MATERIAL ADVERSE EFFECT" means any material adverse effect on (a) the
Mortgaged Property or the operation, use or value thereof, (b) the ability of
the Company to perform and observe in all material respects its covenants and
obligations under the Deed of Trust, the Indenture or any of the other Operative
Documents, (c) the condition (financial or otherwise), results of operations,
business or business prospects of the Company or (d) the rights or remedies of
the Trustee or any Noteholder under the Indenture or of the Deed of Trust
Trustee or the Collateral Agent under the Deed of Trust.
"MBFE" means, with respect to (i) old growth redwood, one Mbfe for each
one thousand board feet, net Scribner scale, of Company Timber, (ii) old growth
Douglas-fir, 0.723757 Mbfe for each one thousand board feet, net Scribner scale,
of Company Timber, (iii) young growth redwood, 0.751381 Mbfe for each one
thousand board feet, net Scribner scale, of Company Timber, (iv) young growth
Douglas-fir, 0.488950 Mbfe for each one thousand board feet, net Scribner scale,
of Company Timber and (v) each other species or category of Company Timber other
than hardwoods (i.e., trees which are not conifers), 0.309392 Mbfe for each one
thousand feet, net Scribner scale, of Company Timber.
"MINIMUM OBLIGATIONS" means, on any Note Payment Date, the sum of (a) the
Aggregate Minimum Principal Amortization Amount on such Note Payment Date, (b)
all accrued and unpaid interest (excluding interest on premiums) due and payable
to the Holders of the Timber Notes and any Additional Timber Notes on such Note
Payment Date, and (c) the aggregate amount, if any, of principal and interest
(other than any Supplemental Liquidity Provider Interest) in respect of
outstanding Advances under the Line of Credit Agreement to be paid from the
Payment Account on such Note Payment Date.
"MONTHLY CALCULATION DATE" means the last day of each calendar month.
"MONTHLY PERIOD" means, with respect to any Monthly Calculation Date, the
calendar month ending on such Monthly Calculation Date.
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"MORTGAGED PROPERTY" means all of the rights, titles, interests and
estates now owned or hereafter acquired by the Company in, to and under, each of
the following:
(a) the Company Owned Timberlands;
(b) the Company Timber Rights;
(c) all Company Timber;
(d) the Accounts, all funds, investments, securities and Financial
Assets from time to time held in or credited to any Account, all Security
Entitlements with respect to any Account and all interests, profits,
Proceeds, or other income derived from such funds, investments, securities,
Financial Assets and Security Entitlements and all the Company's rights in
any funds held in any Account;
(e) all the Subject Contracts, and all the Proceeds now or hereafter
receivable, owing, deliverable, performable or attributable to or under the
Subject Contracts;
(f) all Data Processing Equipment and all other machinery, equipment
and other tangible personal property and all fixtures and improvements now
or hereafter situated upon any part of the Company Owned Timberlands;
(g) all Data Processing Information and all other information,
programs, know-how, methods or methodology relating to the management of
the Company Timber Property and the harvesting, severing or cutting of
Company Timber;
(h) all existing and future permits, licenses, rights-of-way,
easements, leases, franchises, certificates of public convenience and
necessity, and all similar rights and privileges, that relate to or are
appurtenant to any part of the Company Timber Property;
(i) all Proceeds of and other rights relating to insurance or
condemnation (including, without limitation, any judgments, insurance
proceeds, awards of damages and settlements) receivable or accruing by
reason of the loss of, damage to, diminution in the value of or income or
revenues from, or taking (by power of eminent domain or otherwise) of all
or any part of the properties or interests hereinabove or hereinbelow
described in this definition of the Mortgaged Property;
(j) all documents, instruments, drafts, acceptances, general
intangibles, chattel paper, deposit accounts, accounts, and all the
Proceeds therefrom or attributable thereto, whether now or hereafter
existing, arising out of or relating to the sale, use, exchange,
development, operation, cutting, harvesting, storage, gathering,
transportation, improvement, marketing, disposal, lease, handling or other
dealings with or of all or any portion of the properties or interests
hereinabove or hereinbelow described in this definition of Mortgaged
Property;
(k) without limiting the foregoing descriptions, all equipment and
inventory (as such terms are defined in the Uniform Commercial Code) and
all documents (as defined in the Uniform Commercial Code) now and at any
time or times hereafter obtained or acquired by the Company covering or
representing all or any portion of the properties or interests hereinabove
or hereinbelow described in this definition of Mortgaged Property;
(l) all Timber Harvesting Plans and any other permits, documents or
other governmental approvals pertaining to the harvesting, cutting,
severing, transporting, storing, processing or handling of the Company
Timber; and all plans, engineering reports, land planning, maps, surveys,
and information and any other reports, plans, maps, surveys or information
to be used in connection with the Company Owned Timberlands or the Company
Timber Rights;
(m) all property of any kind or description that (i) may from time to
time after the date of the Deed of Trust by delivery or by writing of any
kind be conveyed, mortgaged, pledged, assigned or transferred to the
Collateral Agent by the Company, or by any Person, with the consent of the
Company, or otherwise as expressly permitted by the terms of the Deed of
Trust and accepted by the Collateral Agent to be held as part of the
Mortgaged Property or (ii) is required by the terms of the Indenture or the
Deed of Trust to be subjected to the Lien of the Deed of Trust;
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(n) each and every right, privilege, hereditament and/or appurtenance
in anywise incident or appertaining to any of the properties or interests
hereinabove or hereinbelow described in this definition of the Mortgaged
Property;
(o) the Proceeds from or attributable to the rights, titles, interests
and estates hereinabove referred to in this definition of the Mortgaged
Property (including, without limitation, all Assigned Proceeds) (as defined
in the Deed of Trust), all guarantees and suretyship agreements relating to
any such Proceeds, and the rights, titles and interests of the Company
therein, and all security for payment or performance thereof, now or
hereafter existing or arising;
(p) all other personal property used in connection with the
above-described Mortgaged Property; and
(q) all extensions, renewals, proceeds, accessions, improvements,
substitutions and replacements of and to any of the above-described
Mortgaged Property.
Notwithstanding the foregoing, Mortgaged Property shall not include (i) any
Pacific Lumber Timber, (ii) any motor vehicles subject to a certificate of title
law, (iii) any Timber Harvesting Plans, to the extent that the Company is
prohibited from granting a security interest therein, (iv) any permits,
documents or other governmental approvals other than Timber Harvesting Plans
which the Company is prohibited by applicable law from granting a security
interest in or (v) any accounts or inventory (as each such term is defined in
the Uniform Commercial Code) of Pacific Lumber or any proceeds thereof.
"NONRECOURSE TIMBER ACQUISITION INDEBTEDNESS" means purchase money
indebtedness incurred by the Company in the course of acquisition of any
timberlands or timber rights, provided that (i) in the event of nonpayment of
such purchase money indebtedness, the holder thereof shall only have recourse
for repayment to the property securing such indebtedness and (ii) the agreements
in respect of such purchase money indebtedness shall contain a non-petition
agreement substantially similar to that included in the New Master Purchase
Agreement.
"NON-RENEWAL ADVANCE" has the meaning set forth under "Description of
the Timber Notes--Line of Credit".
"NOTEHOLDER" means a Holder.
"NOTE RATE" means, for each Class of Timber Notes, the interest rate
indicated on the face of such Class of Timber Notes.
"OPERATING AGREEMENT" means the Agreement of Limited Liability Company of
the Company, as amended from time to time.
"OPERATIVE DOCUMENTS" means the Indenture, the Deed of Trust, the Timber
Notes from time to time outstanding, the New Services Agreement, the New Master
Purchase Agreement (and log purchase agreements entered into pursuant thereto)
and the Conveyance Documents.
"OUTSTANDING" when used with reference to any Timber Notes or any
Additional Timber Notes, means, as of any particular time, all Timber Notes (or
Additional Timber Notes, as applicable) theretofore authenticated and delivered
by the Trustee, other than Timber Notes (or Additional Timber Notes, as
applicable) in respect of which all outstanding or accrued principal of, Regular
Interest and Default Interest on, Premium on and interest on Premium (or similar
amounts with respect to the Additional Timber Notes, as applicable) shall have
been paid in full in accordance with the Indenture; Timber Notes or Additional
Timber Notes theretofore canceled by the Trustee, or surrendered to the Trustee
for cancellation, pursuant to the Indenture; Timber Notes or Additional Timber
Notes in substitution for which other Timber Notes or Additional Timber Notes
shall theretofore have been authenticated and delivered pursuant to the
Indenture; and solely for purposes of determining whether the holders of the
requisite aggregate outstanding principal amount of Timber Notes (or Timber
Notes and Additional Timber Notes, as applicable) have given any request,
demand, authorization, direction, notice, consent or waiver hereunder, Timber
Notes (and Additional Timber Notes, as applicable) registered in the name of (i)
the Company or any other obligor upon the Timber Notes (or Additional Timber
Notes, as applicable), (ii) any nominee or Affiliate of the Company or
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such other obligor, (iii) any successor to the interest of the Company in all or
substantially all of the Mortgaged Property, (iv) any nominee or Affiliate of
any such successor, (v) Pacific Lumber or (vi) any nominee or Affiliate or
nominee of any Affiliate of Pacific Lumber.
"PACIFIC LUMBER" means The Pacific Lumber Company and any successor in
interest thereto.
"PACIFIC LUMBER TIMBER" means (i) all trees and timber, including,
without limitation, standing timber and crops, now located on or hereafter
planted or growing in the soil of any Pacific Lumber Timber Rights Property, or
any part or parcel thereof, and all additions, substitutions and replacements
thereof and (ii) any and all of the foregoing which have been severed, cut or
harvested from the Pacific Lumber Timber Rights Property or any part of parcel
thereof.
"PACIFIC LUMBER TIMBER RIGHTS" means the timber rights of Pacific Lumber
in respect of the Pacific Lumber Timber Rights Property, including, without
limitation, the ownership of, and (subject to compliance with applicable law)
the right in perpetuity to harvest, all trees and timber, including, without
limitation, standing timber and crops, now located on or hereafter planted or
growing in the soil of any Pacific Lumber Timber Rights Property or any part or
parcel thereof.
"PACIFIC LUMBER TIMBER RIGHTS PROPERTY" means those portions of the
Company Owned Timberlands specifically identified as Pacific Lumber Timber
Rights Property on those certain maps held by an escrow agent pursuant to an
Escrow Agreement by and among the Company, Pacific Lumber, Salmon Creek and such
escrow agent, dated as of the Closing Date.
"PAY-AS-YOU-HARVEST SALE" means, with respect to any sale of Company
Timber, any agreement or arrangement pursuant to which (A) the Company shall
receive any Up Front Payment or (B) the Company shall receive payments for the
purchase of a specified quantity of Company Timber (or Company Timber covered by
one or more Timber Harvesting Plans or contained on one or more parcels of land)
as (or after) such Company Timber is harvested and/or delivered.
"PERMITTED ENCUMBRANCES" means:
(a) the specific matters, if any, to which the Deed of Trust is
expressly made subject as set forth in a Schedule to a mortgagee title
insurance policy in favor of the Trustee or Collateral Agent in respect of
the Mortgaged Property;
(b) the New Reciprocal Rights Agreement;
(c) easements, restrictions, rights-of-way, servitudes, restrictive
covenants, permits, licenses, use agreements, boundary agreements, surface
leases, subsurface leases, or other similar encumbrances on, over or in
respect of the Company Timber or the Company Timber Property contained in
or arising from or in respect of any document, instrument or agreement
entered into by or with the consent of the Company in connection with any
Timber Harvesting Plans, Timber Laws or Environmental Laws;
(d) discrepancies, conflicts in boundary lines, shortages in area,
encroachments or any other facts which a correct survey would disclose,
none of which, singly or in the aggregate, materially adversely affects the
operation or value of the Mortgaged Property or materially adversely
impairs the Company's or the Collateral Agent's right to receive and retain
the proceeds of cutting, harvesting or severing of Company Timber
attributable to the Company Owned Timberlands or the Company Timber Rights;
(e) Liens for certain taxes not yet delinquent and payable or that are
being diligently contested by the Company in good faith by appropriate
proceedings and against which adequate reserves are being maintained in
accordance with generally accepted accounting principles by the Company,
provided that the enforcement or foreclosure of any such lien shall have
been stayed pending the resolution of such proceedings;
(f) operators' liens or mechanics' or materialmen's liens arising in
the ordinary course of business and incidental to the incurrence of
reasonable expenses permitted by the Indenture or Deed of Trust with
respect to the Mortgaged Property for amounts not yet due and payable or
that are being diligently contested by the Company in good faith by
appropriate proceedings and against which adequate
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reserves are being maintained by the Company, provided that the enforcement
or foreclosure of any such lien shall have been stayed pending the
resolution of such proceedings and such lien is fully subordinate to and
subject in right of prior payment of the Secured Obligations;
(g) easements, restrictions, rights-of-way, servitudes, restrictive
covenants, permits, licenses, use agreements, boundary agreements, surface
leases, subsurface leases or other similar encumbrances on, over or in
respect of the Company Timber or Company Owned Timberlands, none of which,
singly or in the aggregate, materially adversely affects the operation or
value of the Mortgaged Property or materially adversely impairs the
Company's or the Collateral Agent's right to receive and retain the
Proceeds of cutting, harvesting or severing Company Timber attributable to
the Company Owned Timberlands or the Company Timber Rights;
(h) such sales contracts and other similar agreements as are
customarily found in connection with operating properties comparable to the
Company Owned Timberlands or Company Timber Rights, none of which, singly
or in the aggregate, materially adversely affects the operation or value of
the Mortgaged Property or materially adversely impairs the Company's or the
Collateral Agent's right to receive and retain the Proceeds of cutting,
harvesting or severing Company Timber attributable to the Company Owned
Timberlands or the Company Timber Rights;
(i) any lease, contract or other agreement or encumbrance (including,
without limitation, the interest of any purchaser under a Lump Sum Sale
Agreement entered into in accordance with the Indenture in and to Company
Timber so purchased) granted or created by the Company after the date of
the Deed of Trust that is specifically permitted and authorized under the
terms of the Indenture and the Deed of Trust; and
(j) Liens securing the Indebtedness referred to in clause (u) under
"Description of the Timber Notes--Certain Covenants--Limitation on
Indebtedness."
"PERMITTED INVESTMENTS" means (i) Eligible Investments, (ii) any
promissory notes representing the deferred portion of the sales price of Company
Owned Timberlands or Company Timber Rights as described under "Collateral
Release Provisions" and (iii) investments of a nature described in the
definition of "Eligible Investments," without regard to the required ratings
or maturities set forth therein.
"PERSON" means an individual, a corporation, a partnership, a trust, an
unincorporated organization, a limited liability company (including, without
limitation, the Company), or a government or political subdivision thereof.
"PPI INDEX" means, with respect to any date, the most recent Producer
Price Index (all Commodities) as published by the United States Department of
Labor, Bureau of Labor Statistics or any substitute index hereafter adopted by
the Department of Labor.
"PREMIUM" means any Prepayment Premium payable in respect of an Excess
Payment, any Deficiency Premium Amount payable in respect of a Payment
Deficiency pursuant to the Indenture and any Non-Registration Premium.
"PREMIUM PROVISION REFUNDABLE AMOUNT" means for any Monthly Deposit Date
(except any Monthly Deposit Date immediately following a Monthly Deposit Date
that is a Note Payment Date), the amount, if any, by which the Premium Provision
for the immediately preceding Monthly Deposit Date exceeded the Premium
Provision for such Monthly Deposit Date. The "Premium Provision Refundable
Amount" for any Monthly Deposit Date immediately following a Monthly Deposit
Date that is a Note Payment Date shall be zero.
"PROCEEDS" means all proceeds, products, offspring, rents or profits of
or derived from the Mortgaged Property. The term "Proceeds" includes whatever
is receivable or received when any of the Mortgaged Property or Proceeds is
sold, collected, exchanged or otherwise disposed of, whether such disposition is
voluntary or involuntary, and includes, without limitation, all rights to
payment, including return premiums, with respect to any insurance relating
thereto.
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"PRODUCER PRICE INDEX INFLATION FACTOR" means, with respect to any date,
a fraction, the numerator of which is the then most recent PPI Index and the
denominator of which is the PPI Index in effect with respect to January 1, 1998.
"PURCHASE AGREEMENT" means (i) the New Master Purchase Agreement or (ii)
any other agreement for the purchase of stumpage or logs between the Company and
any other Person, as the same may be extended, renewed, modified, amended or
supplemented.
"QIB" means "qualified institutional buyer" as defined in Rule 144A
under the Securities Act.
"RATING AGENCIES" means, at any time, S&P and Moody's or any successor to
any such corporation's business of rating securities, which is then providing a
rating for any of the Timber Notes.
"RATING AGENCY CONDITION" means, with respect to the issuance of any
Additional Timber Notes, that at the time of the issuance of such Additional
Timber Notes and after giving effect to the issuance thereof, the Timber Notes
shall be rated by S&P and Moody's not lower than the Required Note Ratings.
"RATING AGENCY CONFIRMATION" means, with respect to any action proposed
to be taken by the Company, that each of the Rating Agencies which is then
providing a rating for the Timber Notes shall have unconditionally (except for
conditions which will be fulfilled prior to consummation of the transaction
requiring Rating Agency Confirmation) confirmed in writing that the contemplated
action will not result in a downgrade, withdrawal, or qualification of the then
current rating given each Class of Timber Notes then outstanding by such Rating
Agency.
"RATING AGENCY EVALUATION" shall mean, with respect to any action
proposed to be taken by the Company, that each of the Rating Agencies which is
then providing a rating for the respective Classes of Timber Notes shall have
indicated in writing the rating which will be given to the Timber Notes of each
Class then outstanding by such Rating Agency as a consequence of such action,
which may be a downgrading of such rating.
"RECORD DATE" for any Note Payment Date, means the close of business on
the fifth day of the month in which such Note Payment Date occurs. If a Record
Date is not a Business Day, the Record Date shall not be affected.
"REGISTERED EXCHANGE OFFER" shall mean the proposed offer of the Company
to issue and deliver to the Holders of the Registrable Securities that are not
prohibited by any law or policy of the SEC from participating in such offer, in
exchange for the Registrable Securities of each Class, a like aggregate
principal amount of the Exchange Timber Notes of such Class.
"REGISTRABLE SECURITIES" shall mean the Timber Notes; provided, however,
that any Timber Note shall cease to be a Registrable Security when (i) such
Timber Note has been exchanged for a freely tradeable Exchange Timber Note upon
consummation of the Registered Exchange Offer and is thereafter freely tradeable
by the holder thereof not an Affiliate of the Issuer, (ii) a Registration
Statement with respect to such Timber Note shall have been declared effective
under the Securities Act and such Timber Note shall have been disposed of
pursuant to such Registration Statement, (iii) such Timber Note shall have been
sold to the public in compliance with Rule 144 (or any similar provision then in
force) under the Securities Act or is saleable pursuant to Rule 144(k) under the
Securities Act, or (iv) such Timber Note shall have ceased to be outstanding.
"REGISTRATION DEFAULT" means, if (i) the Exchange Offer Registration
Statement or a Shelf Registration Statement, if applicable, is not declared
effective on or prior to 180 days after the Closing Date, (ii) the Registered
Exchange Offer is not consummated on or prior to 240 days after the Closing Date
or (iii) a Shelf Registration Statement is filed and declared effective on or
prior to 180 days after the Closing Date but shall thereafter cease to be
effective or usable (at any time that the Company is obligated to maintain the
effectiveness thereof) in connection with resales of Timber Notes or Exchange
Timber Notes in accordance with and during the periods specified in the
Registration Rights Agreement.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement,
dated the Closing Date, between the Issuer and Salomon Brothers Inc, as
representative for Salomon Brothers Inc, BancAmerica
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Robertson Stephens, Bear, Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation, as initial purchasers.
"REGISTRATION STATEMENT" means any Exchange Offer Registration Statement
or Shelf Registration Statement.
"REGULAR INTEREST" means interest on the unpaid portions of the principal
amounts of the outstanding Timber Notes (computed on the basis of a 360-day year
of twelve 30-day months).
"REINVESTMENT FACTOR" means the following factors for the following
Monthly Deposit Dates in each year:
FACTOR MONTHLY DEPOSIT DATES
- ------------------------------------- ------------------------
1.00000.............................. January 20 and July 20
February 20 and
1.02872.............................. August 20
March 20 and
1.02291.............................. September 20
1.01713.............................. April 20 and October 20
1.01139.............................. May 20 and November 20
1.00568.............................. June 20 and December 20
"REQUIRED LIQUIDITY AMOUNT," as of any date, is an amount equal to the
aggregate, for all Classes of Timber Notes outstanding, of (i) the Note Rate for
such Class multiplied by (ii) the principal amount of such Class then
outstanding. The Required Liquidity Amount may be modified in connection with
the issuance of Additional Timber Notes.
"REQUIRED LIQUIDITY PROVIDER RATING" means, with respect to a Liquidity
Provider, a rating on its short-term unsecured debt obligations of not less than
P-1 by Moody's and A-1 by S&P or, if S&P and Moody's have not rated such
Liquidity Provider's short-term unsecured debt obligations, a rating on its
long-term unsecured debt obligations of not less than Aa2 by Moody's and not
less than AA by S&P or, in each case, if any such Rating Agency adopts a new
rating system, any successor rating thereto.
"REQUIRED NOTE RATINGS" shall mean:
RATING FOR
-----------------------------------
RATING AGENCY CLASS A-1 CLASS A-2 CLASS A-3
- ------------------------------------- --------- --------- ---------
Moody's.............................. A1 A3 Baa2
S&P.................................. A A BBB
or, if any such Rating Agency adopts a new rating system, any successor rating
thereto.
"RESTRICTED PERIOD" means the period from the Closing Date through the
40th day after the Closing Date.
"SCHEDULED AMORTIZATION" means, for any Class of Timber Notes, the amount
of principal payments on the Timber Notes of such Class set forth for such Class
in the schedule set forth under "Overview and Structure of the Transaction."
"SCHEDULED AMORTIZATION AMOUNT" means, for any Class of Timber Notes as
of any date, the excess, if any, of: (i) the sum of all amounts specified with
respect to such Class in the schedule set forth under "Overview and Structure
of the Transaction" as Scheduled Amortization opposite the respective dates
occurring on or before such date, over (ii) the aggregate principal amount that
was paid on the Timber Notes of such Class prior to such date.
"SCHEDULED TERMINATION DATE" means the date specified under the Line of
Credit Agreement, as of which, at 5:00 p.m. New York City time or such other
time as is stated in the Line of Credit Agreement, the Liquidity Providers
thereunder cease to be required to make Advances (other than by reason of the
occurrence of a Line of Credit Acceleration or a Termination Advance having been
made), as such date may be extended from time to time.
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"SECURITIES INTERMEDIARY" means State Street Bank and Trust Company,
acting in its capacity as a "securities intermediary" (as defined in Section
8-102(a)(14) of the Uniform Commercial Code), and any successor entity thereto.
"SECURITIES LEGEND" means the legend set forth in "Transfer
Restrictions," which legend describes certain restrictions on transfer.
"SECURITY ENTITLEMENT" means "security entitlement" as defined in
Section 8-102(a)(17) of the Uniform Commercial Code.
"SHELF REGISTRATION STATEMENT" shall mean a "shelf" registration
statement of the Company pursuant to the provisions of Section 3 of the
Registration Rights Agreement which covers some or all of the Registrable
Securities or Exchange Timber Notes, as applicable, on an appropriate form under
Rule 415 under the Securities Act, or any similar rule that may be adopted by
the Commission, amendments and supplements to such registration statement,
including post-effective amendments, in each case including the prospectus
contained therein, all exhibits thereto and all material incorporated by
reference therein.
"STRUCTURED HARVEST QUANTITY" shall mean 3,397,345 Mbfe.
"STRUCTURING SCHEDULE" means the schedule attached hereto as Annex I.
"STRUCTURING PRICES" means the prices per Mbfe set forth under Column C
in the Structuring Schedule.
"SUBJECT CONTRACTS" means (a) all presently existing and future contracts
or leases relating in any manner to the purchase, sale, removal, regeneration,
cutting, harvesting, hauling or storing of any Company Timber, including,
without limitation, the New Master Purchase Agreement, (b) the New Services
Agreement, (c) the Conveyance Documents, and (d) any other agreements entered
into by the Company subsequent to the date of the Deed of Trust, whether or not
of the same general nature as set forth in clauses (a) through (d).
"SUPERMAJORITY HOLDERS" at any date, means the Holders of 66 2/3% in
aggregate outstanding principal amount of Timber Notes and any Additional Timber
Notes at such date.
"SUPPLEMENTAL LIQUIDITY PROVIDER INTEREST" means any interest payable
under the Line of Credit Agreement to the extent, but only to the extent, that
such interest is payable at a rate per annum that is in excess of the rate per
annum for such interest payable under the terms of the Bank of America Credit
Agreement as in effect on the Closing Date, it being understood that no amount
of interest that is or becomes payable pursuant to the terms of the Bank of
America Credit Agreement as in effect on the Closing Date (including by reason
of any payments provided for in Article III of the Bank of America Credit
Agreement), whether or not such amount is actually payable on the Closing Date,
shall constitute Supplemental Liquidity Provider Interest.
"TAKINGS LITIGATION" means any existing or future action brought by the
Company alleging uncompensated taking, by any governmental authority, of Company
Owned Timberlands or Company Timber Rights for public use, and seeking just
compensation from or other relief against such governmental authority.
"TAX LAWS" means all applicable statutes, laws, ordinances, regulations,
rules, rulings, orders, restrictions, requirements, writs, injunctions, decrees
or other official acts relating to the reporting, imposition, rendition,
collection, enforcement or other aspects of certain taxes, of every kind or
character now imposed or hereafter enacted by any Governmental Authority.
"TAXES" means all Yield Taxes and all ad valorem, occupation, property
and other taxes and assessments imposed with respect to the Company Owned
Timberlands or the Company Timber Rights subject to the Lien of the Deed of
Trust (excluding income taxes and franchise taxes).
"TERMINATION ADVANCE" means a Downgrade Advance or a Non-Renewal Advance,
together with any Interest Advances outstanding on the date such Downgrade
Advance or Non-Renewal Advance is made.
"TIA" means the Trust Indenture Act of 1939, as amended and in effect
from time to time.
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"TIMBER HARVESTING PLANS" means all permits, whether now existing or
hereafter created, filed with any Governmental Authority with respect to the
harvesting, cutting or severance of Company Timber.
"TIMBER LAWS" means all applicable statutes, laws, ordinances,
regulations, rules, rulings, orders, restrictions, requirements, writs,
injunctions, decrees or other official acts relating to the harvesting, cutting,
severance, handling or transporting of Company Timber, and the maintenance,
operation and management of the Company Timber Property, whether now or
hereafter enacted or imposed by any Governmental Authority, including, without
limitation, those relating to streams, waterways, wildlife habitat and
endangered species, exclusive of Environmental Laws.
"TOTAL COLLATERAL VALUE" means, on any date, an amount equal to the
lesser of (a) the Deemed Collateral Value for the Monthly Calculation Date
immediately preceding such date and (b) the Structuring Collateral Value for the
Monthly Calculation Date immediately preceding such date.
"TRIBUNAL" means any court or any governmental department, commission,
board, bureau, agency or instrumentality of the United States of America or of
any State, commonwealth, territory, possession, county, parish, municipality or
other governmental subdivision within the United States of America or under the
jurisdiction of the United States of America, whether now or hereafter
constituted or existing.
"TRIGGERING EVENT", at any time, has the meaning assigned to such term in
the Line of Credit Agreement at such time.
"TRUSTEE'S EXPENSES" means any fees, expenses, and damages of, or
compensation to, the Trustee (including, without limitation, the reasonable fees
and disbursements of counsel to the Trustee) incurred pursuant to the Indenture
or owing to the Trustee as part of the Secured Obligations.
"U.S. GOVERNMENT OBLIGATIONS" means (i) direct obligations of the United
States of America for the timely payment of which its full faith and credit is
pledged or (ii) obligations of a Person controlled or supervised by and acting
as an agency or instrumentality of the United States of America the timely
payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America, which, in either case, are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank (as defined in Section 3(a)(2) of
the Securities Act), as custodian with respect to any such U.S. Government
Obligation or a specific payment of principal of or interest on any such U.S.
Government Obligation held by such custodian for the account of the holder of
such depository receipt, PROVIDED that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from any amount received by the custodian in
respect of the U.S. Government Obligation or the specific payment of principal
of or interest on the U.S. Government Obligation evidenced by such depository
receipt.
"UNIFORM COMMERCIAL CODE" means the Uniform Commercial Code as now or
hereafter in effect in the State of California.
"UNLEGENDED DEFINITIVE NOTE" means a Definitive Note which does not bear
the Securities Legend.
"UP FRONT PAYMENT" means, with respect to any Pay-As-You-Harvest Sale,
any partial payment in advance for the purchase of a specified quantity of
Company Timber (or Company Timber covered by one or more Timber Harvesting Plans
or contained on one or more parcels of land), and the balance of which shall be
paid as (or after) such Company Timber is harvested and/or delivered.
"YIELD TAXES" means all yield, severance, excise, sales and other taxes
imposed on the cutting, harvesting, severing or sale of Company Timber from the
Company Owned Timberlands, or the Company Timber Rights Property, which are
subject to the Lien of the Deed of Trust (excluding income taxes and franchise
taxes).
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DESCRIPTION OF CERTAIN PRINCIPAL AGREEMENTS
THE FOLLOWING SUMMARIES, WHICH DESCRIBE CERTAIN PROVISIONS OF CERTAIN
AGREEMENTS TO WHICH THE COMPANY IS A PARTY, DO NOT PURPORT TO BE COMPLETE AND
ARE SUBJECT TO, AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO, SUCH
AGREEMENTS, COPIES OF WHICH ARE FILED AS EXHIBITS TO THE REGISTRATION STATEMENT
OF WHICH THIS PROSPECTUS IS A PART.
NEW MASTER PURCHASE AGREEMENT
The New Master Purchase Agreement, which governs all sales of logs by the
Company to Pacific Lumber, was entered into by the Company and Pacific Lumber on
the Closing Date. Each sale of logs by the Company to Pacific Lumber will be
made pursuant to a separate log purchase agreement that will relate to the
Company Timber covered by an approved THP and will incorporate the provisions of
the New Master Purchase Agreement.
PURCHASE OF LOGS
The purchase of standing Company Timber by a purchaser which is responsible
for harvesting and transporting such timber is referred to herein as the
"purchase of stumpage," and the related purchase price is referred to as the
"stumpage price." The purchase of Company Timber which has already been
harvested is referred to as the "purchase of logs," and the related purchase
price is referred to herein as the "log price." Pacific Lumber will be
responsible for harvesting the standing Company Timber and transporting
harvested logs to its log decks and, accordingly, will purchase logs from the
Company at stumpage prices. The harvested logs will be purchased by Pacific
Lumber (i.e., title will pass and the obligation to make payment therefor, as
described below, will be incurred) at the time each log is delivered to Pacific
Lumber's log decks and scaled (as described below). Pacific Lumber will pay for
such logs by 11:00 a.m. New York City time on the Monthly Deposit Date following
the month in which the logs were purchased.
PURCHASE PRICE
All logs purchased by Pacific Lumber will be purchased at 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 Company and Pacific Lumber
(the "Purchase Price"). The Purchase Price shall be at least equal to the SBE
Price (as defined below). 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 of timber, is the stumpage price for such species and category, 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 Harvest
Value Schedule. Harvest Value Schedules are published by the California State
Board of Equalization twice a year for the purpose of computing a yield tax
imposed on timber harvested between January 1 and June 30 and July 1 and
December 31. Harvest Value Schedules are based on twenty four months of actual
log and timber sales that occur within nine specified timber value areas. These
sales are arms length transactions adjusted for time by indexing (using log and,
in the case of old growth redwood, lumber price trends) to a specific date,
which is approximately sixty days prior to the effective date of the Harvest
Value Schedules. However, SBE Prices may not necessarily be representative of
actual prices that would be realized from unrelated parties at subsequent dates.
If (x) the Harvest Value Schedule (or a successor publication) is no longer
published or (y) the Harvest Value Schedule (or a successor publication) is
prepared on a basis fundamentally different than that in effect on the date of
the New Master Purchase 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 (1) the
value of the most recently published index for the Lumber and Wood Products
Commodity Groups of the Producer Price Index (Standard Industrial Classification
2400) published by the United States Department of Labor, Bureau of Labor
Statistics (or any successor index) (the "Lumber PPI Index") as of the first
day of such six month period DIVIDED by (2) the value of the Lumber PPI Index as
of the first day of the first such six month period.
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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 Company 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), the Company has
determined such price reflects the fair market value (based upon stumpage
prices) of such species and category of timber.
HARVESTING
Pacific Lumber, at its own expense, will cut and remove the Company Timber
to be purchased from the Company in a manner consistent in all material respects
with prudent business practices which, in the reasonable judgment of Pacific
Lumber, (i) are consistent with then current applicable industry standards and
(ii) are in compliance in all material respects with applicable law. Pacific
Lumber is required to complete harvesting of any Company Timber covered by a THP
within the applicable time period set forth in such THP (including any
extensions thereof). In addition, so long as Pacific Lumber is the Services
Provider (as defined below) under the New Services Agreement, Pacific Lumber is
entitled, at its option and at no additional cost to the Company, (a) to harvest
and retain for its own use any and all hardwood trees which are permitted to be
harvested and any and all residual parts of trees harvested (including, but not
limited to, breaks, limbs and tops) pursuant to any THP subject to a log
purchase agreement and (b) to remove from the Company Timber Property and retain
for its own use or sell any gravel.
The New Master Purchase Agreement requires that all harvesting of Company
Timber be conducted on timber property with respect to which a valid THP is in
effect and 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 that such harvesting be conducted in all material
respects in accordance with the terms, provisions, restrictions and conditions
of each applicable THP, SYP and HCP and all federal, state and local laws, rules
and regulations relating to or incorporated therein, including laws, rules and
regulations relating to streams, waterways, wildlife habitat and endangered
species.
SCALING
Pacific Lumber is responsible for the scaling and measuring of all logs
purchased. Pacific Lumber is required, at its expense, to furnish one or more
scalers acceptable to the Company, who may be employees of Pacific Lumber.
The New Master Purchase Agreement requires Pacific Lumber, as soon as
practicable upon delivery of logs to its log deck, to scale logs according to
the Net Short Log Scribner Scale methodology of scaling. However, subject to the
Indenture covenant described under "Description of the Timber Notes--Certain
Covenants--Certain Consents," Pacific Lumber may, at its option, use the weight
equivalency method of scaling for young and old growth redwood and Douglas-fir.
The Net Short Log Scribner Scale method involves measuring a log, making certain
allowances for defects and applying certain standard assumptions with respect to
the log. The weight equivalency method is a more recently developed technique,
designed to estimate the recoverable board feet of lumber from a truckload of
logs. The method involves weighing a truckload of logs and applying certain
statistical factors developed by the Company with respect to such logs. The
California State Board of Equalization has historically accepted the Net Short
Log Scribner Scale method, and more recently has accepted the weight equivalency
method of scaling for purposes of computing yield taxes. Pacific Lumber must
conduct any scaling using the weight equivalency method in accordance with the
requirements of the California State Board of Equalization (or any successor
agency).
If Pacific Lumber uses the weight equivalency method of scaling, the
Company may require that Pacific Lumber scale truckloads of logs from time to
time utilizing the Net Short Log Scribner Scale method. Pacific Lumber is
required to appropriately adjust the assumptions used in its weight equivalency
methodology on an ongoing basis to reflect the results of such scaling. The
Company must use independent scalers for at least two consecutive business days
in each six month period upon reasonable notice to Pacific Lumber. Pacific
Lumber shall appropriately adjust the results of its scaling on a prospective
basis to reflect the results of such third party scaling. In addition, the
Company has the right, at its option and cost, at any
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time upon reasonable notice to Pacific Lumber, to use independent scalers to
verify the scaling conducted by Pacific Lumber. The Company has not established
any policy as to when it intends to exercise its option to use independent
scalers (other than as required) and will analyze relevant circumstances from
time to time. The Indenture requires the Company to exercise its right to cause
Pacific Lumber to use the Net Short Log Scribner Scale method of scaling or its
right to use independent scalers upon the receipt of notice from the Trustee, or
from holders of 25% in aggregate outstanding principal amount of the Timber
Notes (to the extent specified in such notice). See "Description of the Timber
Notes--Certain Covenants--Certain Consents."
If, as of any Note Payment Date, the cumulative amount of principal of the
Timber Notes paid by the Company is less than the sum of all Minimum Principal
Amortization in respect of all Classes of Timber Notes then outstanding through
such date (the "Target Level"), the Company 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 and (B) $500,000, sell any timber (as logs or stumpage)
which is subject to a log purchase agreement entered into with Pacific Lumber to
any third party prior to the time that title to any log is transferred to
Pacific Lumber. If (and for so long as) the provisions of the Indenture
described under "Description of the Timber Notes--Certain Covenants--Line of
Credit; Liquidity Account" are applicable, the Company may sell any timber (as
logs or stumpage) which is the subject of any log purchase agreement entered
into with Pacific Lumber to any third party prior to the time that title to such
log is transferred to Pacific Lumber, to the extent provided by the foregoing
provisions of the Indenture. If the Company sells any timber which has been
felled by Pacific Lumber to third parties pursuant to the foregoing provisions,
Pacific Lumber shall receive an appropriate credit for the costs of felling such
timber, based upon Pacific Lumber's costs incurred in connection with the
felling thereof, as determined in accordance with generally accepted accounting
principles.
Although the Company expects to sell substantially all of its logs
available for sale to Pacific Lumber, the Company may sell logs from the Company
Timber to other purchasers. In addition, subject to the collateral release
provisions of the Indenture, the Company may make Lump Sum Sales of Company
Timber to third parties and may sell portions of the Company Timber Property to
third parties. See "Description of the Timber Notes--Collateral Release
Provisions."
AMENDMENT
The New Master Purchase Agreement may be amended with the consent of the
Company and Pacific Lumber in accordance with the covenant described under the
caption "Description of the Timber Notes--Certain Covenants--Certain
Consents." The Indenture provides that the Company may not give such consent
unless (i) such amendment has been approved by a resolution of the Board of
Managers, including all independent Managers and (ii) either (A) such amendment
is to cure any ambiguity, omission, defect or inconsistency, to add to the
covenants of Pacific Lumber for the benefit of the Company or the Noteholders,
or to surrender any right or power conferred in the New Master Purchase
Agreement on Pacific Lumber; provided, that no such amendment may adversely
affect in any material respect the interests of the Noteholders, (B) such
amendment has received Rating Agency Confirmation or (C) such amendment has
received Rating Agency Evaluation and has been approved by the Supermajority
Holders (after prior notice of such Rating Agency Evaluation). See "Description
of the Timber Notes--Certain Covenants--Certain Consents."
TERMINATION
The New Master Purchase Agreement may be terminated by the Company or the
Trustee (i) as provided in the Indenture (see "Description of the Timber
Notes--Certain Covenants--New Master Purchase Agreement; Purchase Agreement
Default; Termination of New Master Purchase Agreement") upon the occurrence and
during the continuation of a Purchase Agreement Default (as defined below) or
(ii) upon the giving of notice of acceleration of the Timber Notes under the
terms of the Indenture. Upon any termination of the New Master Purchase
Agreement, the Company is required promptly to solicit new purchasers on such
terms as it deems appropriate, consistent with the requirements described under
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"Description of the Timber Notes--Certain Deed of Trust Covenants--Purchase
Agreements." A "Purchase Agreement Default" consists of (a) any failure by
Pacific Lumber to make any payment, transfer or deposit to the Company or the
Trustee in accordance with the New Master Purchase Agreement, and the
continuation of such failure for ten Business Days after notice thereof from the
Company or the Trustee; (b) any failure by Pacific Lumber to observe or perform
any covenant or agreement of Pacific Lumber under the New Master Purchase
Agreement that has a Material Adverse Effect (and if such default is remediable,
the continuation of such default for a period of 30 days after notice thereof
from the Company or the Trustee); (c) the execution by Pacific Lumber of any
instrument purporting to assign any of its duties or responsibilities under the
New Master Purchase Agreement, except as expressly permitted; (d) any
representation or warranty of Pacific Lumber in the New Master Purchase
Agreement shall prove to have been incorrect as of the time when the same was
made and the circumstance or condition in respect of which such representation
or warranty was incorrect has a Material Adverse Effect (and if such default is
remediable, the continuation of such default for a period of 30 days after
notice thereof from the Company or the Trustee); (e) the Bankruptcy or
Insolvency of Pacific Lumber or (f) the failure by the applicable Affiliate of
the Company to transfer the Elk River Timberlands, if any, to the Company within
the time period specified under the definition of "Elk River Timberlands," and
the continuation of such failure for ten Business Days after notice from the
Company or the Trustee.
NEW SERVICES AGREEMENT
The New Services Agreement was entered into between the Company and Pacific
Lumber, as initial Services Provider (in such capacity, the "Services
Provider"), on the Closing Date.
SERVICES
The New Services Agreement requires that Pacific Lumber perform the
following services (the "Services") for the Company: (i) provide necessary
supervisory and oversight services to the Company in connection with the
operation and maintenance of the Company Timber Property; (ii) furnish to the
Company all equipment, personnel and expertise not within the possession of the
Company and reasonably necessary for the operation and maintenance of the
Company Timber Property and the provision of the Services; (iii) operate the
Company Timber Property as commercial timberland, having due regard to soil
conditions, stand arrangements and other factors relevant to the conduct of
silvicultural and harvesting practices, including: (A) taking measures to
protect 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 and
continuing to observe all arrangements, agreements and other undertakings with
respect to fire prevention from time to time in effect with the CDF, (B)
maintaining and rehabilitating the existing road system and any newly
constructed roads and constructing new roads on the Company Timber Property to
permit the harvesting of timber as contemplated by the Subject Contracts and
access of mobile fire-fighting equipment to the Company Timber Property, (C)
taking measures to replant and otherwise regenerate commercial timber stands on
the Company Timber Property, (D) maintaining measures to prevent the development
of and to control the spread of disease and insect infestation on the Company
Timber Property, (E) salvaging and harvesting trees which are dead, diseased,
fallen or otherwise damaged by casualty, and (F) 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; (iv)
provide necessary personnel and technical assistance to the Company to enable
the Company 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 Company's current merchantable timber; (v) provide advice to, be available
for consultation with, and provide required assistance to, the Company in
respect of all matters relating to the preparation, filing and prosecution of
THPs, sustained yield plans, habitat conservation plans, and similar or related
plans or permits by the Company as required by the Indenture (it being
understood that the filing of such THPs, sustained yield plans, habitat
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conservation plans, and similar or related plans or permits shall be the
responsibility of the Company), 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; (vi) provide advice to and be available for consultation
with the Company in respect of federal, state or local legislative matters
affecting or relating to the Company Timber Property or the operation,
management or harvesting thereof; (vii) provide advice to and be available for
consultation with the Company in respect of the entering into by the Company of
any log purchase agreement, consistent with the terms of the Indenture; (viii)
prepare and file on behalf of the Company all pleadings and motions, and
otherwise diligently pursue, appeals of any denial of any THPs, sustained yield
plans, habitat conservation plans, and similar or related plans or permits and
related matters, and defense of any legal challenge to any approval of any THPs,
sustained yield plans, habitat conservation plans, and similar or related plans
or permits and related matters; (ix) provide necessary personnel and technical
assistance to the Company to enable the Company to monitor compliance with each
THP, sustained yield plan, habitat conservation plan, and similar or related
plan or permit and to obtain all certificates of completion or similar
certifications from the requisite governmental authority; (x) provide necessary
personnel and technical assistance to the Company to enable the Company to
prepare and file any development or strategic plan required to be prepared in
respect of the Company Timber Property by any Governmental Authority; (xi)
provide necessary personnel and technical assistance to the Company to permit
the Company 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; and provide
information in its possession to the Company relating to updating the Company's
geographical information system; (xii) assist the Company in preparing reports
required pursuant to the terms of the Indenture; (xiii) provide the Company with
access to such of its data processing equipment and information as necessary in
order for the Company to store, collect and gather information necessary to the
conduct of its business; (xiv) provide advice to and be available for
consultation with the Company in respect of any updates, upgrades or
improvements to, or replacement of, the Data Processing Equipment; (xv) provide
advice to and be available for consultation with the Company in respect of any
governmental or regulatory filings or reports required by the Company (other
than as specifically addressed elsewhere in this paragraph); (xvi) provide
necessary personnel and technical assistance to assist the Company'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 Property (other than as
specifically addressed elsewhere in this paragraph); (xvii) maintain membership
in professional, industry and trade organizations, and maintain relationships
with other industry participants, community groups, environmental groups and
regulators; (xviii) provide to or otherwise procure on behalf of the Company 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 Subject Contracts; (xix) provide such other similar services
as may be necessary or appropriate to enable the Company to continue the
management and operations of the Company Timber Property in accordance with
prudent business practices and (xx) 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 matters
relevant to the Takings Litigation.
Pacific Lumber is required to provide such services in a manner consistent
in all material respects with prudent business practices which, in the
reasonable judgment of Pacific Lumber, (i) are consistent with then current
applicable industry standards and (ii) are in compliance in all material
respects with applicable laws.
COMPENSATION
As compensation for the services provided by Pacific Lumber pursuant to the
New Services Agreement, the Company (a) pays to Pacific Lumber on each Monthly
Deposit Date, a fee, in cash (the "Services Fee"), in an amount equal to
approximately $1.3 million per year, payable in 12 equal installments, which
amount shall be adjusted annually on May 1 of each year by multiplying such
amount by a fraction, the numerator of which shall be the most recent Lumber PPI
Index in effect with respect to the first day of
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January of such year, and the denominator of which shall be the Lumber PPI Index
in effect with respect to January 1, 1998, commencing with the 12 month period
beginning May 1, 1999, and (b) reimburse Pacific Lumber on each Monthly Deposit
Date, in cash, for the cost of constructing, rehabilitating and maintaining
roads, and performing reforestation services, on the Company Timber Property in
respect of prior periods, in each case as determined in accordance with
generally accepted accounting principles. Certain of such reimbursable expenses
are expected to vary in relation to the amount of timber to be harvested in any
given period. It is expected that the amount of such reimbursable expenses will
aggregate approximately $8.0 million for fiscal 1999. See "Description of the
Timber Notes--Accounts; Payment on the Timber Notes--Monthly Deposit Dates."
CERTAIN COVENANTS OF SERVICES PROVIDER
Pacific Lumber must observe certain procedures, including maintaining
separate books, records and offices, and not commingling assets with the
Company, all of which are intended to establish and maintain the existence of
Pacific Lumber separate from that of the Company.
Pacific Lumber may merge with or into, consolidate with or transfer 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 under the Indenture shall have occurred
and be continuing, (ii) the surviving entity shall remain qualified to perform
the services to be rendered under the New Services Agreement, (iii) the
surviving entity (if not Pacific Lumber) 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 the New Services Agreement to be performed by Pacific
Lumber, (iv) (A) the long-term unsecured debt obligations of the entity with
which Pacific Lumber proposes to merge or consolidate, or to which Pacific
Lumber 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 by the Rating Agencies at least equal to the then current long-term
unsecured debt obligations of Pacific Lumber and, in no event, lower than "BB"
by S&P and "Ba2" by Moody's, (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) and
(iv)(A) or (C) (if applicable) of this paragraph shall have been delivered to
the Trustee and each Rating Agency.
AMENDMENT
The New Services Agreement may be amended with the consent of the Company
and Pacific Lumber in accordance with the covenant described under the caption
"Description of the Timber Notes--Certain Covenants--Certain Consents." The
Indenture provides that the Company may not give such consent unless (i) such
amendment has been approved by a resolution of the Board of Managers, including
all independent Managers and (ii) either (A) such amendment is to cure any
ambiguity, omission, defect or inconsistency, to add to the covenants of Pacific
Lumber for the benefit of the Company or the Noteholders or to surrender any
right or power conferred in the New Services Agreement on Pacific Lumber;
provided, that no such amendment may adversely affect in any material respect
the interests of the Noteholders, (B) such amendment has received Rating Agency
Confirmation or (C) such amendment has received Rating Agency Evaluation and has
been approved by the Supermajority Holders (after prior notice of such Rating
Agency Evaluation). See "Description of the Timber Notes--Certain
Covenants--Certain Consents."
TERMINATION
The New Services Agreement may be terminated (i) by Pacific Lumber if the
Company shall have failed to pay compensation payable to Pacific Lumber under
the New Services Agreement and such failure shall be continuing for more than 90
days after notice thereof from Pacific Lumber; provided, that no such
termination shall become effective until a successor to Pacific Lumber has
agreed by written instrument to perform the Services provided by Pacific Lumber
under the New Services Agreement, (ii) by the Company
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or the Trustee, as provided in the Indenture (see "Description of the Timber
Notes--Certain Covenants--New Services Agreement; Operating Default; Termination
of New Services Agreement") upon the occurrence and during the continuation of
an Operating Default (as defined below); PROVIDED, HOWEVER, that termination of
the New Services Agreement shall not become effective, and Pacific Lumber shall
not be relieved of its obligations as the Services Provider thereunder and shall
continue (so long as Pacific Lumber continues to perform the Services
contemplated by the New Services Agreement with the same standard of care and
diligence as were observed before such Operating Default) to be entitled to
receive compensation for its services thereunder, unless and until a new
Services Provider has been obtained by the Company, and such successor Services
Provider has agreed by written instrument to perform the Services provided by
Pacific Lumber under the New Services Agreement or (iii) by the Company or the
Trustee upon the giving of notice of acceleration of the Timber Notes under the
Indenture.
An "Operating Default" consists of (a) any failure by the Services
Provider to give any certificate, report or notice to the Company or the
Trustee, all in accordance with the New Services Agreement, and the continuation
of such failure for five Business Days after notice thereof from the Company or
the Trustee; (b) any failure by the Services Provider to observe or perform any
covenant or agreement of the Services Provider under the New Services Agreement
that has a Material Adverse Effect (and if such default is remediable, the
continuation of such default for a period of 30 days after notice thereof from
the Company or the Trustee); (c) the execution by the Services Provider of any
instrument purporting to assign any of its duties or responsibilities under the
New Services Agreement except as expressly permitted; (d) any representation or
warranty of the Services Provider made by Pacific Lumber as initial Services
Provider in the New Services Agreement (or by any successor Services Provider in
any other successor agreement) shall prove to have been incorrect as of the time
when the same was made and the circumstance or condition in respect of which
such representation or warranty was incorrect has a Material Adverse Effect (and
if such default is remediable, the continuation of such default for a period of
30 days after notice thereof from the Company or the Trustee); or (e) the
Bankruptcy or Insolvency of the Services Provider.
The New Services Agreement provides that upon termination as provided
therein, the Company will 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 Company 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 to Pacific Lumber and otherwise on substantially the same terms.
The selection of a new Services Provider will 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.
The New Services Agreement permits any successor Services Provider to
contract with one or more subcontractors, provided that (i) if such
subcontractors, individually or in the aggregate, are to provide all or
substantially all of the services thereunder, such successor Services Provider
is required to provide an Officer's Certificate to the Trustee to the effect
that such successor Services Provider reasonably believes that each of the
subcontractors is qualified to perform its obligations under such subcontract
and (ii) such subcontracting shall not relieve the successor Services Provider
from any of its obligations thereunder. In the event that an amendment to the
New Services Agreement is required in order to obtain a successor Services
Provider, such amendment shall require Rating Agency Confirmation.
NEW ADDITIONAL SERVICES AGREEMENT
The Company and Pacific Lumber entered into the New Additional Services
Agreement on the Closing Date whereby the Company agrees to provide Pacific
Lumber (and its subsidiaries) with the following additional services (the
"Additional Services"): (i) provide advice to and be available for
consultation with Pacific Lumber in respect of all matters relating to the
preparation, filing and prosecution of THPs, sustained yield plans, habitat
conservation plans, similar or related plans, permits by Pacific Lumber in
respect of any timber property and timber harvesting rights owned by Pacific
Lumber or any of its subsidiaries; (ii) file, jointly on behalf of Pacific
Lumber and the Company, any THPs, sustained yield
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plans, habitat conservation plans, similar or related plans, permits in respect
of any timber property owned by the Company with respect to which Pacific Lumber
owns timber harvesting rights; (iii) 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; (iv) 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 and; (v) update the GIS 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 GIS and provide necessary personnel and
technical assistance to Pacific Lumber to enable Pacific Lumber to utilize the
GIS in connection with Pacific Lumber's or any of its subsidiaries operations
and provide Pacific Lumber, upon the request of Pacific Lumber, with copies of
all Data Processing Information related to the GIS; (vi) provide personnel and
technical assistance to Pacific Lumber or any of its subsidiaries to enable
Pacific Lumber to manage the harvesting of its timber in a manner reasonably
calculated to produce growth, consistent with the production of the quality and
quantity of Pacific Lumber's current merchantable timber; (vii) provide advice
to and be available for consultation with Pacific Lumber or any of its
subsidiaries in respect of the federal, state or local legislative matters
affecting or relating to any timber property owned by Pacific Lumber or any of
its subsidiaries and timber property with respect to which Pacific Lumber or any
of its subsidiaries has timber harvesting rights or the operation, management or
harvesting thereof; (viii) provide personnel and technical assistance to Pacific
Lumber or any of its subsidiaries to enable Pacific Lumber to monitor compliance
with each THP, sustained yield plan, habitat conservation plan, similar or
related plan or permits with respect to Pacific Lumber or its subsidiaries and
to obtain all certificates of completion or similar certifications from the
requisite Governmental Authority; (ix) 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 to be prepared in
respect of any timber property and timber harvesting rights owned by Pacific
Lumber or any of its subsidiaries by any Governmental Authority; (x) 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; (xi) 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; (xii) provide personnel and technical assistance to assist Pacific
Lumber's or any of its subsidiaries efforts to maintain in force and effect each
permit, license, franchise, right of way, licensee 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; and (xiii)
provide such other services as may be necessary or appropriate to carry out the
Additional Services.
Pacific Lumber pays the Company a fee for any such services provided by the
Company equal to actual costs of providing such services, as determined in
accordance with generally accepted accounting principles. If Pacific Lumber is
no longer the Services Provider under the New Services Agreement, such fee will
be based upon market rates for such services.
NEW ENVIRONMENTAL INDEMNIFICATION AGREEMENT
The Company and Pacific Lumber entered into the New Environmental
Indemnification Agreement on the Closing Date whereby Pacific Lumber indemnifies
the Company and the Company's managers, officers, employees, attorneys and
agents (collectively, the "Indemnified Parties") in respect of (i) certain
present and future liabilities arising with respect to or as a direct or
indirect result of, Hazardous Materials, Hazardous Materials Contamination,
Disposal Sites, or otherwise arising under Environmental Laws with respect to
the Company Timber Property, as a result of activities occurring prior to the
date on which the Company acquired the Company Timber Property or caused by
Pacific Lumber, subsequent thereto, except to the extent caused by gross
negligence or willful misconduct of the Indemnified Party or (ii) breach by
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Pacific Lumber of the representations and warranties contained in the New
Environmental Indemnification Agreement. See "Business of the
Company--Harvesting Practices."
NEW RECIPROCAL RIGHTS AGREEMENT
The Company, Pacific Lumber and Salmon Creek entered into the New
Reciprocal Rights Agreement on the Closing Date whereby, among other things,
each party grants to the other party, among other things, reciprocal rights of
ingress and egress with respect to such party's real property.
CERTAIN LEGAL CONSIDERATIONS
INSOLVENCY AND OTHER BANKRUPTCY CONSIDERATIONS
In the event that Pacific Lumber or the Company becomes a debtor in a
Bankruptcy Case seeking reorganization or other relief under the Bankruptcy
Code, a delay or reduction in the payment of the Timber Notes may occur. Even if
the Company is not itself a debtor in a Bankruptcy Case, a creditor, receiver,
conservator or trustee-in-bankruptcy of Pacific Lumber, or Pacific Lumber as a
debtor-in-possession, might request a court to order that the Company Timber and
other assets and liabilities of the Company be brought into a Bankruptcy Case of
Pacific Lumber and be consolidated with its assets and liabilities. In the event
such request were granted, the Company's assets, including the Company
Timberlands would be available for the satisfaction of claims of creditors of
Pacific Lumber, subject, in most circumstances, to the prior Lien of the Deed of
Trust. If the assets and liabilities of the Company were consolidated into a
Bankruptcy Case of Pacific Lumber, such action could delay any foreclosure on
the Mortgaged Property, delay any payment on the Timber Notes until the
conclusion of the Bankruptcy Case or later or diminish the amount or share of
proceeds derived from the harvesting or sale of the Company Timber available for
payment of the Timber Notes. In addition, a party could seek to subordinate the
Timber Notes or the lien on and the security interests in the Mortgaged Property
to the claims of other creditors.
The voluntary or involuntary application for relief under the United States
federal bankruptcy code or any similar applicable state law with respect to
Pacific Lumber should not necessarily result in a similar voluntary application
with respect to the Company so long as the Company is solvent and does not
reasonably foresee becoming insolvent either by reason of Pacific Lumber's
insolvency or otherwise. It was a condition to the consummation of the Offering
that Kramer, Levin, Naftalis & Frankel, counsel to the Company, deliver an
opinion to the Company, the Initial Purchasers, the Trustee and the Rating
Agencies to the effect that (i) neither the Palco Transfers nor the operation of
the Company in conformity with its organizational documents and the Operative
Documents will cause the assets and liabilities of the Company to be
substantively consolidated with the assets and liabilities of Pacific Lumber in
the event of an application for relief under the Bankruptcy Code with respect to
Pacific Lumber, and (ii) the timberlands and timber and related timber
harvesting rights to be transferred by Pacific Lumber pursuant to the Palco
Transfers would not be property of Pacific Lumber in the event of the filing of
an application for relief by or against Pacific Lumber under the Bankruptcy
Code. The foregoing conclusions were reasoned conclusions, based upon various
assumptions regarding factual matters and future events, as to which there
necessarily can be no assurance, and are subject to the limitations set forth in
the opinion containing such conclusions, including, without limitation, that
such conclusions are limited to matters under the federal bankruptcy law, do not
cover matters under non-bankruptcy law or the effects of any non-bankruptcy law
issues under federal bankruptcy law. If a bankruptcy trustee for Pacific Lumber,
Pacific Lumber as debtor-in-possession, or a creditor of Pacific Lumber were to
take the position that Pacific Lumber and the Company should be substantively
consolidated or that the Palco Transfers should be recharacterized as a pledge
of such assets (or otherwise should be property of Pacific Lumber), then delays
in payments on the Timber Notes or (should the bankruptcy court rule in favor of
any such trustee, debtor-in-possession or creditor) reductions in such payments
on the Timber Notes could result.
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CHARACTERIZATION OF TIMBER NOTES AS INDEBTEDNESS
The Company will treat the Timber Notes as debt for federal income tax
purposes. Upon closing of the Offering, Kramer, Levin, Naftalis & Frankel
rendered an opinion to the Company to the effect that, subject to the
assumptions and qualifications stated therein, the Timber Notes will be treated
for federal income tax purposes as indebtedness and not as an equity interest in
the Company, and Skadden, Arps, Slate, Meagher & Flom LLP rendered an opinion to
the Initial Purchasers that, subject to the assumptions and qualifications
stated therein, the Timber Notes will be treated for California state income
purposes as indebtedness and not as an equity interest in the Company.
UNITED STATES INCOME TAX CONSEQUENCES
The following is a general discussion of anticipated U.S. federal income
tax consequences of the acquisition, ownership and disposition of the Timber
Notes to holders thereof. This summary is based upon laws, regulations, rulings
and decisions currently in effect, all of which are subject to change at any
time, possibly with retroactive effect. Moreover, it deals only with purchasers
who hold Timber Notes as "capital assets" within the meaning of Section 1221
of the Code, as amended, and does not purport to deal with persons in special
tax situations, such as financial institutions, insurance companies, regulated
investment companies, tax exempt investors, dealers in securities or currencies,
persons holding Timber Notes as a hedge against currency risk or as a position
in a "straddle," "hedge," "conversion" or another integrated transaction
for tax purposes, holders who are not U.S. Holders (as defined below) or holders
whose functional currency is not the U.S. dollar. Further, this discussion does
not address the consequences under U.S. federal estate or gift tax laws, the
laws of any U.S. state or locality or the tax laws of any foreign jurisdiction.
Holders of Timber Notes are urged to consult their own tax advisors
concerning the consequences, in their particular circumstances, of the
acquisition, ownership and disposition of the Timber Notes under the U.S.
federal tax laws and the laws of any relevant state, local or foreign taxing
jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of Timber
Notes that is, for U.S. federal income tax purposes, (i) a citizen or resident
of the United States, (ii) a corporation, partnership or other entity (other
than a trust) created or organized in or under the laws of the United States or
of any political subdivision thereof (other than a partnership that is not
treated as a U.S. person under any applicable Treasury regulations), (iii) an
estate whose income is subject to U.S. federal income tax regardless of its
source or (iv) a trust if, in general, a court within the United States is able
to exercise primary jurisdiction over its administration and one or more U.S.
persons have authority to control all of its substantial decisions.
THE EXCHANGE OFFER
The exchange of the New Notes for the Old Notes pursuant to the Exchange
Offer should not be taxable to a holder thereof for federal income tax purposes.
An exchanging holder's tax basis in the New Notes should be equal to his
adjusted tax basis in the Old Notes, and the holding period of the New Notes
should include the holding period of the Old Notes.
CHARACTERIZATION OF TIMBER NOTES
The Company will treat the Timber Notes as debt for federal income tax
purposes. Upon closing of the Offering, Kramer, Levin, Naftalis & Frankel
rendered an opinion to the effect that, subject to the assumptions and
qualifications stated therein, the Timber Notes will be treated for federal
income tax purposes as indebtedness and not as an equity interest in the
Company.
INTEREST AND DISPOSITION GENERALLY
The Company believes that the Timber Notes do not contain original issue
discount ("OID") and will so treat the Timber Notes. That belief is based on
the Company's determination that, under all reasonably expected market
conditions at the time of the issuance of the Old Notes, the potential amount of
Prepayment
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Premiums and Deficiency Premiums expected to be paid is insignificant relative
to the total expected payments under the Timber Notes. The Company's
determination to that effect is binding on all holders, other than holders who
explicitly disclose a different determination on a statement attached to a
timely filed federal income tax return for the taxable year in which the Timber
Notes were acquired.
In accordance with the Company's treatment of the Timber Notes as not being
issued with OID, payments of interest on the Timber Notes (including, in
general, payments of premiums) will be taxable as ordinary income for U.S.
federal income tax purposes when received or accrued by a holder in accordance
with such holder's method of tax accounting. In addition, upon the sale,
redemption or other taxable disposition of a Timber Note, a holder will
recognize capital gain or loss equal to the difference between the amount
realized (excluding any amount attributable to previously accrued interest or
previously accrued premiums, which will be taxable as ordinary interest income
as described above) and the holder's tax basis in the Timber Notes at the time
of such sale, redemption or other taxable disposition. Such gain or loss will be
long term capital gain or loss if the Timber Notes are held for more than one
year. The deductibility of capital losses is subject to certain limitations.
Special rules apply to Timber Notes exchanged for Timber Notes that were
acquired at a market discount or premium, which are discussed below.
If, contrary to the Company's determination, the Internal Revenue Service
or a court were to subsequently determine that, at the time of issuance of the
Timber Notes, the potential amount of Prepayment Premiums and Deficiency
Premiums was not insignificant relative to the total expected payments under the
Timber Notes, then the Timber Notes could be subject to special rules concerning
contingent payment debt obligations. In such case, the timing and character of
income on the Timber Notes could be affected. Among other things, holders,
regardless of their usual method of tax accounting, would be required to accrue
OID income annually, subject to the adjustments described below, that is
determined in accordance with a projected payment schedule based on a
"comparable yield" on a debt instrument maturing on the Final Maturity Date
that provides for the same amortization provisions as the Timber Notes but that
does not contain provisions for the payment of premiums. Such OID could be
higher than the actual cash payments received on the Timber Notes in a taxable
year. In addition, adjustments to income accruals would be required to be made
to account for differences between actual payments and projected payments.
Furthermore, any gain realized upon a sale, redemption or other taxable
disposition of the Timber Notes would generally be treated as ordinary income,
and any loss realized would generally be treated as ordinary loss to the extent
of the holder's ordinary income inclusions with respect to the Timber Notes. Any
remaining loss generally would be treated as capital loss.
BOND PREMIUM ON THE NEW NOTES
If a holder of a Timber Note purchased the Timber Notes for an amount in
excess of the amount payable at the maturity date of the Timber Notes, the
holder may deduct such excess as amortizable bond premium over the aggregate
terms of the Old Notes and the Timber Notes, under a yield-to-maturity formula.
The deduction is available only if an election is made by the purchaser or if
such an election is in effect. This election is revocable only with the consent
of the Internal Revenue Service. The election applies to all obligations owned
or subsequently acquired by the holder. The holder's adjusted tax basis in the
Timber Notes and the Timber Notes will be reduced to the extent of the deduction
of amortizable bond premium. The amortizable bond premium is treated as an
offset to interest income on the Timber Notes and the New Notes rather than as a
separate deduction item.
MARKET DISCOUNT
Tax consequences of a disposition of the Timber Notes may be affected by
the market discount provisions of the Code. These rules generally provide that
if a holder acquired the Timber Notes (other than in an original issue) at a
market discount which equals or exceeds 1/4 of 1% of the stated redemption price
of the Timber Notes at maturity multiplied by the number of remaining complete
years to maturity and thereafter recognizes gain upon a disposition (or makes a
gift) of the Timber Notes, the lesser of (i) such gain (or appreciation, in the
case of a gift) or (ii) the portion of the market discount which accrued on a
straight line basis (or, if the holder so elects, on a constant interest rate
basis) while the Timber Notes or
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Timber Notes were held by such holder will be treated as ordinary income at the
time of the disposition (or gift). In addition, a holder may be required to
include in gross income, as ordinary interest income, accrued market discount to
the extent of principal payments received with respect to the Timber Notes. For
these purposes, market discount means the excess (if any) of the stated
redemption price at maturity over the basis of such Timber Notes immediately
after their acquisition by the holder. A holder of the Timber Notes may elect to
include accrued market discount in income currently, which would increase the
holder's basis in the New Notes, rather than upon disposition of, or receipt of
principal payments with respect to, the New Notes. This election once made
applies to all market discount obligations acquired on or after the first
taxable year to which the election applies, and may not be revoked without the
consent of the Internal Revenue Service.
A holder of any Timber Note who acquired the Timber Note at a market
discount generally will be required to defer the deduction of a portion of the
interest on any indebtedness incurred or maintained to purchase or carry such
Timber Note or Timber Note until the market discount is recognized upon a
subsequent disposition of such Timber Note. Such a deferral is not required,
however, if the holder elects to include accrued market discount in income
currently.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company will, where required, report to holders of Timber Notes and to
the Internal Revenue Service the amount of any interest (and premiums) paid on
the Timber Notes in each calendar year and the amounts of tax withheld, if any,
with respect to such payments.
A holder of Timber Notes may be subject to backup withholding at a rate of
31% with respect to payments of interest (and premiums) on, and gross proceeds
upon the sale or retirement of, the Timber Notes, unless such holder: (i) is a
corporation or other exempt recipient and, when required, demonstrates that
fact, or (ii) provides a correct taxpayer identification number, certifies, when
required, that such holder is not subject to backup withholding and otherwise
complies with applicable requirements of the backup withholding rules. Backup
withholding is not an additional tax. Rather, any amounts so withheld are
creditable against the holder's federal income tax liability, provided the
required information is provided to the Internal Revenue Service.
THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INTENDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE TO A PARTICULAR HOLDER'S
SITUATION. PERSONS CONSIDERING AN EXCHANGE OF OLD NOTES FOR NEW NOTES ARE URGED
TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE PARTICULAR TAX CONSEQUENCES OF
ACQUIRING, OWNING AND DISPOSING OF THE TIMBER NOTES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL OR FOREIGN TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES (POSSIBLY INCLUDING RETROACTIVE CHANGES) IN U.S. FEDERAL AND OTHER TAX
LAWS.
PLAN OF DISTRIBUTION
Each broker-dealer that holds Old Notes that were acquired for its own
account as a result of market making or other trading activities (other than Old
Notes acquired directly from the Company), may exchange Old Notes for New Notes
in the Exchange Offer. However, any such broker-dealer may be deemed to be an
"underwriter" within the meaning of such term under the Securities Act and
must, therefore, acknowledge that it will deliver a prospectus in connection
with any resale of New Notes received in the Exchange Offer. This prospectus
delivery requirement may be satisfied by the delivery by such broker-dealer of
this Prospectus, as it may be amended or supplemented from time to time. The
Company has agreed that, for a period of 90 days after the effective date of
this Prospectus, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer who receives New Notes in the Exchange Offer for
use in connection with any such sale. The Company will not receive any proceeds
from any sales of New Notes by broker-dealers. New Notes received by
broker-dealers for their own accounts pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
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combination of such methods of resale, at market prices at the time of resale,
at prices related to such prevailing market prices or negotiated prices. Any
such resale of New Notes by broker-dealers may be made directly to a purchaser
or to or through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or the purchasers of
any such New Notes. In addition, if any Eligible Holder acquires New Notes in
the Exchange Offer for the purpose of distributing or participating in a
distribution of the New Notes, such Eligible Holder cannot rely on the position
of the staff of the Commission enunciated in MORGAN STANLEY & CO., INCORPORATED
(available June 5, 1991) and EXXON CAPITAL HOLDINGS CORPORATION (available May
13, 1988), and interpreted in the Commission's letters to SHEARMAN & STERLING
(available July 2, 1993) and K-III COMMUNICATIONS CORPORATION (available May 14,
1993), and similar no-action or interpretive letters issued to third parties,
and must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction, unless an
exemption from registration is otherwise available. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker-dealer that participates in a distribution of such
New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Company has agreed to
pay all expenses incident to the Exchange Offer other than commissions or
concessions of any brokers or dealers and will indemnify Eligible Holders
(including any broker-dealer) against certain liabilities, including liabilities
under the Securities Act.
By acceptance of the Exchange Offer, each broker-dealer that receives New
Notes pursuant to the Exchange Offer hereby agrees to notify the Company prior
to using the Prospectus in connection with the sale or transfer of New Notes,
and acknowledges and agrees that, upon receipt of notice from the Company of the
happening of any event which makes any statement in the Prospectus untrue in any
material respect or which requires the making of any changes in the Prospectus
in order to make the statements herein not misleading (which notice the Company
agrees to deliver promptly to such broker-dealer), such broker-dealer will
suspend use of the Prospectus until the Company has amended or supplemented the
Prospectus to correct such misstatement or omission and has furnished copies of
the amended or supplemented prospectus to such broker-dealer.
LEGAL MATTERS
The validity of the New Notes will be passed upon for the Company by
Kramer, Levin, Naftalis & Frankel, New York, New York. Kramer, Levin, Naftalis &
Frankel performs legal services for MAXXAM and its subsidiaries. Ezra G. Levin
is a partner of that firm and is a director of MAXXAM and certain of MAXXAM's
subsidiaries (including Pacific Lumber) and is a Manager of the Company.
EXPERTS
The financial statements of the Company and Pacific Lumber for the years
ended December 31, 1997, 1996 and 1995 included in this Prospectus (including
Annex 2 hereto) and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
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SCOTIA PACIFIC COMPANY LLC
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
SCOTIA PACIFIC COMPANY LLC:
Audited Financial Information:
Report of Independent Public
Accountants ............................................. F-2
Balance Sheet at December 31, 1997
and 1996 ................................................ F-3
Statement of Income for the Years
Ended December 31, 1997, 1996
and 1995 ................................................ F-4
Statement of Cash Flows for the
Years Ended December 31, 1997,
1996 and 1995 ........................................... F-5
Notes to Financial Statements .............................. F-6
Unaudited Quarterly Financial
Information:
Balance Sheet at June 30, 1998 ............................. F-16
Statement of Income for the Six
Months Ended June 30, 1998 and
1997 .................................................... F-17
Statement of Cash Flows for the Six
Months Ended June 30, 1998 and
1997 .................................................... F-18
Condensed Notes to Financial
Statements .............................................. F-19
Unaudited Summary Quarterly
Financial Data .......................................... F-23
THE PACIFIC LUMBER COMPANY:
Audited Financial Information:
Report of Independent Public
Accountants ............................................. II-F-1
Consolidated Balance Sheet as of
December 31, 1997 and 1996 .............................. II-F-2
Consolidated Statement of
Operations for the Years Ended
December 31, 1997, 1996
and 1995 ................................................ II-F-3
Consolidated Statement of Cash
Flows for the Years Ended
December 31, 1997, 1996
and 1995 ................................................ II-F-4
Notes to Consolidated Financial
Statements .............................................. II-F-5
Unaudited Quarterly Financial
Information:
Consolidated Balance Sheet at June
30, 1998 ................................................ II-F-17
Consolidated Statement of
Operations for the Six Months
Ended June 30, 1998 and 1997 ............................ II-F-18
Consolidated Statement of Cash
Flows for the Six Months Ended
June 30, 1998
and 1997 ................................................ II-F-19
Condensed Notes to Consolidated
Financial Statements .................................... II-F-20
Unaudited Summary Quarterly
Financial Data .......................................... II-F-25
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Managers and Stockholder of
Scotia Pacific Company LLC:
We have audited the accompanying balance sheets of Scotia Pacific Company
LLC (a Delaware limited liability company and a wholly owned subsidiary of The
Pacific Lumber Company) as of December 31, 1997 and 1996, and the related
statements of income and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Scotia Pacific Company LLC
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years ended December 31, 1997, 1996 and 1995, in conformity with
generally accepted accounting principles.
San Francisco, California
May 8, 1998
ARTHUR ANDERSEN LLP
F-2
<PAGE>
SCOTIA PACIFIC COMPANY LLC
BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
DECEMBER 31,
----------------------
1997 1996
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents.......... $ 20,926 $ 20,345
Receivables:
Due from Pacific Lumber......... 5,304 5,007
Accrued interest................ 107 150
Prepaid timber harvesting costs.... 2,053 1,897
Other prepaid expenses and current
assets.......................... 385 98
---------- ----------
Total current assets............ 28,775 27,497
Timber and timberlands, net of
accumulated depletion of $233,188
and $217,446, respectively......... 249,654 255,616
Property and equipment, net of
accumulated depreciation of $6,590
and
$5,563, respectively............... 11,019 7,030
Deferred financing costs, net........ 13,475 14,707
Deferred income taxes................ 23,763 26,564
Restricted cash...................... 28,434 29,967
Other assets......................... 1,827 1,139
---------- ----------
$ 356,947 $ 362,520
========== ==========
LIABILITIES AND MEMBER CAPITAL
Current liabilities:
Due to Pacific Lumber.............. $ 147 $ 174
Accrued interest................... 11,358 11,903
Other accrued liabilities.......... 846 892
Long-term debt, current
maturities...................... 19,429 16,258
---------- ----------
Total current liabilities....... 31,780 29,227
Long-term debt, less current
maturities......................... 308,044 320,596
---------- ----------
Total liabilities............... 339,824 349,823
---------- ----------
Contingencies
Member capital....................... 17,123 12,697
---------- ----------
$ 356,947 $ 362,520
========== ==========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SCOTIA PACIFIC COMPANY LLC
STATEMENT OF INCOME
(IN THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
Log sales to Pacific Lumber.......... $ 126,415 $ 135,064 $ 129,430
---------- ---------- ----------
Operating expenses:
General and administrative
expenses........................ 8,347 7,821 7,606
Depletion and depreciation......... 16,775 16,840 17,463
---------- ---------- ----------
25,122 24,661 25,069
---------- ---------- ----------
Operating income..................... 101,293 110,403 104,361
Other income (expense):
Interest and other income.......... 2,798 2,901 3,036
Interest expense................... (27,366) (28,311) (29,321)
---------- ---------- ----------
Income before income taxes........... 76,725 84,993 78,076
Provision in lieu of income taxes.... (31,169) (33,456) (32,050)
---------- ---------- ----------
Net income........................... $ 45,556 $ 51,537 $ 46,026
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
SCOTIA PACIFIC COMPANY LLC
STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 45,556 $ 51,537 $ 46,026
Adjustments to reconcile net income
to net cash provided by
operating activities:
Provision in lieu of income
taxes......................... 31,169 33,456 32,050
Depletion and depreciation...... 16,775 16,840 17,463
Amortization of deferred
financing costs............... 1,232 1,247 1,142
Increase (decrease) in cash
resulting from changes in:
Receivables due from Pacific
Lumber..................... (718) (536) 89
Accrued interest receivable... 43 7 (55)
Prepaid timber harvesting
costs...................... (845) (882) (524)
Due to Pacific Lumber......... (27) (651) 618
Accrued interest.............. (545) (472) (480)
Other accrued liabilities..... (46) (244) 403
Other........................... (248) 40 (83)
--------- ---------- ----------
Net cash provided by operating
activities................. 92,346 100,342 96,649
--------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............... (2,334) (4,043) (3,573)
--------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid..................... (60,800) (76,900) (59,000)
Principal payments on Old Timber
Notes and other debt............ (16,300) (14,767) (13,670)
Restricted cash withdrawals........ 1,533 1,400 1,035
Distributions...................... (13,864) (7,229) (20,059)
--------- ---------- ----------
Net cash used for financing
activities................. (89,431) (97,496) (91,694)
--------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 581 (1,197) 1,382
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD................ 20,345 21,542 20,160
--------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................. $ 20,926 $ 20,345 $ 21,542
========= ========== ==========
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
SCOTIA PACIFIC COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Scotia Pacific Company LLC (the "Company") is a Delaware limited
liability company wholly owned by The Pacific Lumber Company ("Pacific
Lumber") which is a wholly owned indirect subsidiary of MAXXAM Group Inc.
("MGI"). MGI is a wholly owned subsidiary of MAXXAM Group Holdings Inc., which
is a wholly owned subsidiary of MAXXAM Inc. ("MAXXAM"). The Company is a
special purpose limited liability company organized in May 1998 to facilitate
the offering (the "Offering") of $160,700,000 6.55% Class A-1, $243,200,000
7.11% Class A-2 and $463,348,000 7.71% Class A-3 Timber Collateralized Notes due
2028 bearing interest at an overall effective rate of 7.43% (the "Timber
Notes"). Concurrent with the closing of the Offering of the Timber Notes on
July 20, 1998 (the "Closing Date"), Scotia Pacific Holding Company ("Scotia
Pacific") was merged into the Company (the "Merger") and Pacific Lumber and
Salmon Creek Corporation, a wholly owned subsidiary of Pacific Lumber ("Salmon
Creek"), transferred to the Company approximately 13,500 acres of timberlands
and the timber and related timber harvesting rights (but not the underlying
land) with respect to an additional approximately 19,700 acres of timberlands
(the "Palco Transfers"). The Company in turn transferred to Pacific Lumber the
timber and related timber harvesting rights (but not the underlying land) with
respect to approximately 1,400 acres of timberlands (the "Company Transfer,"
and together with the Palco Transfers, the "Transfers"). On the Closing Date,
the 7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015 (the
"Old Timber Notes") were retired and the Company paid a cash dividend of
$526.1 million. The Merger and the Transfers have been accounted for as a
reorganization of entities under common control which requires the Company to
record the assets, liabilities and results of operation of Scotia Pacific after
giving effect to the Company Transfer as well as the assets, liabilities and
results of operations acquired from Pacific Lumber and Salmon Creek acquired
pursuant to the Palco Transfers at their respective historical cost.
Accordingly, the Company will be the successor entity to all of Scotia Pacific's
historical operations (exclusive of the assets transferred to Pacific Lumber)
and to the historical operations attributable to the timberlands and timber and
related timber harvesting rights acquired from Pacific Lumber and Salmon Creek.
The Merger and the Transfers have been reflected in the financial statements of
the Company as if such transactions had occurred as of the beginning of the
earliest period presented. However, the retirement of the Old Timber Notes, the
issuance of the Timber Notes and the payment of a $526.1 million cash dividend
will not be reflected in the financial statements until the period in which such
transactions have occurred.
Consistent with the Company's purpose and pursuant to the terms of the
indenture governing the Timber Notes (the "Indenture"), the Company is
obligated to set aside each month a portion of the funds it receives from the
sale of logs to Pacific Lumber sufficient to make the specified payments of
principal and interest on the Timber Notes computed in accordance with the
Indenture and to have a sufficient amount to pay operating expenses and capital
improvements. Once the Company has satisfied these obligations under the
Indenture, the Company is free to distribute any remaining cash to Pacific
Lumber free of the lien of the deed of trust securing the Timber Notes (the
"Deed of Trust"). Accordingly, the Company's ability to make distributions to
Pacific Lumber is not dependent upon any measure of financial performance. The
Company expects that substantially all of its cash which is free of the lien of
the Deed of Trust will be periodically distributed to Pacific Lumber.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and assumptions
that affect (i) the reported amounts of assets and liabilities, (ii) the
disclosure of contingent assets and liabilities known to exist as of the date
the financial statements are published and (iii) the reported amount of revenues
and expenses recognized during each period
F-6
<PAGE>
SCOTIA PACIFIC COMPANY LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
presented. The Company reviews all significant estimates affecting its financial
statements on a recurring basis and records the effect of any necessary
adjustments prior to their publication. Adjustments made with respect to the use
of estimates often relate to improved information not previously available.
Uncertainties with respect to such estimates and assumptions are inherent in the
preparation of the Company's financial statements; accordingly, it is possible
that the subsequent resolution of any one of the contingent matters described in
Note 5 could differ materially from current estimates. The results of an adverse
resolution of such uncertainties could have a material effect on the Company's
financial position, results of operations or liquidity.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Cash equivalents consist of highly liquid money market instruments with
original maturities of three months or less. At December 31, 1997 and 1996, the
Company had approximately $17,784,000 and $17,600,000, respectively, of such
money market instruments deposited in a payment account held by the trustee
under the indenture ("Existing Indenture") for the Old Timber Notes for the
payment of accrued interest and principal on the next note payment date.
PREPAID TIMBER HARVESTING COSTS
Prepaid timber harvesting costs are expensed as the timber covered by the
related timber harvesting plans ("THPs") is harvested.
TIMBER AND TIMBERLANDS
Timber and timberlands were recorded at the historical cost of Scotia
Pacific, Pacific Lumber and Salmon Creek as of the beginning of the earliest
period presented, net of accumulated depletion. Depletion is computed utilizing
the unit-of-production method based upon estimates of timber values and
quantities.
PROPERTY AND EQUIPMENT
Property and equipment were recorded at the historical cost of Scotia
Pacific, Pacific Lumber and Salmon Creek as of the beginning of the earliest
period presented, net of accumulated depreciation. Depreciation is computed
utilizing the straight-line method at rates based upon the estimated useful
lives of the various classes of assets. The major classes of property and
equipment are as follows (dollar amounts in thousands):
DECEMBER 31,
ESTIMATED ------------------------
USEFUL LIVES 1997 1996
------------- ------------ ---------
Logging roads.................... 15 years $ 16,638 $ 11,769
Other............................ 5-15 years 971 824
------------ ---------
17,609 12,593
Less: accumulated depreciation... (6,590) (5,563)
------------ ---------
$ 11,019 $ 7,030
============ =========
Depreciation expense for 1997, 1996 and 1995 was $1,035,000, $634,000 and
$606,000, respectively.
DEFERRED FINANCING COSTS
Costs incurred to obtain financing are deferred and amortized over the
estimated term of the related borrowing. Subsequent to December 31, 1997, an
extraordinary loss of $35.4 million will be recorded in
F-7
<PAGE>
SCOTIA PACIFIC COMPANY LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
connection with the retirement of the Old Timber Notes. Such loss is comprised
of $12.8 million of unamortized deferred financing costs and $29.2 million of
prepayment premiums offset by the benefit from $6.6 million of unearned premiums
and make whole amounts under the investment note agreement associated with the
Existing Liquidity Account.
RESTRICTED CASH
Restricted cash reflected in these financial statements represents the
amount deposited into an account held by the trustee under the Existing
Indenture (the "Existing Liquidity Account"). The Existing Liquidity Account
is not available, except under certain limited circumstances, for working
capital purposes; however, it is available to pay the Rated Amortization (as
defined in the Existing Indenture) and interest on the Old Timber Notes if and
to the extent that cash flows are insufficient to make such payments. Interest
and other income for 1997, 1996 and 1995 includes approximately $2,336,000,
$2,457,000 and $2,560,000, respectively, attributable to an investment rate
agreement (at 7.95% per annum) with the financial institution which holds the
Existing Liquidity Account.
The Indenture for the Timber Notes requires the Company to maintain a line
of credit (the "Line of Credit") or a liquidity account which equals interest
expense for one year on the outstanding principal balance (the "Required
Liquidity Amount"). The Required Liquidity Amount will generally decline as
principal payments are made on the Timber Notes.
LOG SALES TO PACIFIC LUMBER
Scotia Pacific and Pacific Lumber entered into a Master Purchase Agreement
on March 23, 1993 (the "Master Purchase Agreement") which governed all log
sales by Scotia Pacific to Pacific Lumber, and on the Closing Date, the Company
and Pacific Lumber entered into a New Master Purchase Agreement (the "New
Master Purchase Agreement," and together the "Master Purchase Agreements")
which will govern all log sales by the Company to Pacific Lumber. Substantially
all of the Company's revenues have been and are expected to continue to be
derived from the sale of logs to Pacific Lumber. The harvested logs are
purchased by Pacific Lumber (i.e., title passes and the obligation to make
payment therefor is incurred) at the time each log is delivered to Pacific
Lumber's log decks and measured. The Master Purchase Agreements generally
contemplate that all sales of logs by the Company to Pacific Lumber will be at
the applicable stumpage prices for each species of timber and category thereof,
as set forth in the most recent Harvest Value Schedule published by the
California State Board of Equalization (the "SBE Price"). Harvest Value
Schedules are published twice a year for purposes of computing timber yield
taxes.
CONCENTRATIONS OF CREDIT RISK
The Existing Payment Account and the Existing Liquidity Account are each
held by a different financial institution. In the event of nonperformance by
such financial institutions, the Company's exposure to credit loss is
represented by the amounts deposited plus any unpaid accrued interest thereon.
The Company mitigates its concentrations of credit risk with respect to these
restricted cash deposits by maintaining them at high credit quality financial
institutions and monitoring the credit ratings of these institutions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash equivalents and restricted cash approximate
fair value. As of December 31, 1997 and 1996, the estimated fair value of the
Old Timber Notes, including current maturities, was $331,164,000 and
$338,231,000, respectively. The estimated fair value of long-term debt is
determined based on the quoted market price for the Old Timber Notes. The Old
Timber Notes are thinly
F-8
<PAGE>
SCOTIA PACIFIC COMPANY LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
traded financial instruments; accordingly, their market price at any balance
sheet date may not be representative of the price which would be derived from a
more active market.
2. LONG-TERM DEBT
Long-term debt consists primarily of the Old Timber Notes which was
$319,965,000 and $336,130,000 as of December 31, 1997 and 1996, respectively.
The Company issued the $385,000,000 aggregate original principal amount of Old
Timber Notes on March 23, 1993. The net proceeds from the sale of the Old Timber
Notes were utilized by the Company (i) to fund the initial deposits to the
Existing Liquidity Account of $35,000,000 and an expense reserve of $625,000
(the "Expense Reserve") held by the trustee under the Existing Indenture, and
(ii) to redeem certain of Pacific Lumber's debt which had been assumed by Scotia
Pacific. Since the offering of the Old Timber Notes, the Company has paid
Scheduled Amortization (as defined in the Existing Indenture).
The Company repaid $10,773,000, $16,165,000, $14,103,000 and $13,578,000 in
January 1998, and the years 1997, 1996, and 1995, respectively, of the aggregate
principal amount outstanding on the Old Timber Notes in accordance with
Scheduled Amortization under the Existing Indenture.
At December 31, 1997, the Existing Indenture permitted the payment of
$1,500,000 of dividends, which were paid in January 1998.
On the Closing Date, the Company completed the offering of the Timber
Notes. The Timber Notes were not registered under the Securities Act of 1933,
and may not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements. The Timber Notes are senior
secured obligations of the Company and do not constitute obligations of, and are
not guaranteed by, Pacific Lumber or any other person. The Timber Notes were
issued in three classes: Class A-1 Timber Notes aggregating $160,700,000, Class
A-2 Timber Notes aggregating $243,200,000 and Class A-3 Timber Notes aggregating
$463,348,000. Pursuant to the terms of the Indenture, the Company is permitted
to incur up to $75 million at any one time of non-recourse indebtedness secured
by purchase money mortgages to acquire additional timberlands, the original
amount of the Timber Notes, an unspecified amount of Additional Timber Notes (as
defined in the Indenture) provided certain conditions are met, indebtedness
under the Line of Credit Agreement (as defined in the Indenture), and certain
other debt on a limited basis. The Company is not permitted to incur any other
indebtedness for borrowed money. The Timber Notes are secured by a lien on (i)
the Company's timber and timberlands (subject to Pacific Lumber's ownership of
the timber and related timber harvesting rights on approximately 1,900 acres of
such timberlands), (ii) certain contract rights and certain other assets, (iii)
the proceeds of the foregoing, (iv) the Payment Account, (v) the Line of Credit
Agreement, and (vi) substantially all of the other property and equipment
transferred to the Company by Pacific Lumber (subject to certain rights of
concurrent use by Pacific Lumber). Amounts payable on the Timber Notes are paid
semi-annually generally on January 20 and July 20 of each year (each, a "Note
Payment Date").
The Timber Notes are structured to link, to the extent of cash available,
the deemed depletion of the Company's timber (through the harvest and sale of
logs) to the required amortization of the Timber Notes. The required amount of
amortization on any Note Payment Date is determined by various mathematical
formulas set forth in the Indenture. Scheduled Amortization of the Timber Notes
represents the amount of principal which the Company must pay through each Note
Payment Date in order to avoid payment of prepayment or deficiency premiums. The
Scheduled Maturity Dates for the Class A-1 and Class A-2 Timber Notes, which are
January 20, 2007 and January 20, 2014, respectively, represent the Note Payment
Dates on which the Company will pay the final installment of principal if all
payments of principal are made in accordance with Scheduled Amortization. The
Scheduled Amortization for the Class A-3 Timber
F-9
<PAGE>
SCOTIA PACIFIC COMPANY LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Notes does not include any principal amortization prior to their Scheduled
Maturity Date of January 20, 2014 on which the aggregate principal amount of
$463,348,000 will be scheduled to be paid. Minimum Principal Amortization of the
Timber Notes represents the minimum amount of principal which the Company must
pay (on a cumulative basis and subject to available cash) on such Class, to the
extent of the funds on deposit in the Payment Account, through any Note Payment
Date in order to avoid an Event of Default (as defined). Regardless of the
amount of timber actually harvested and sold, if there is sufficient cash (which
could be available due to, among other things, favorable prices realized from
harvested timber), principal on the Timber Notes will be paid at least as fast
as Minimum Principal Amortization. If the Timber Notes were amortized in
accordance with Minimum Principal Amortization, the final installments of
principal would be paid on January 20, 2010, July 20, 2017 and July 20, 2028 for
the Class A-1, Class A-2 and Class A-3 Timber Notes, respectively.
The Company has the right to cause additional prepayments of principal to
be made on any Note Payment Date. If the principal of the Timber Notes is paid
in advance of Scheduled Amortization, the Company will generally pay a
prepayment premium on such accelerated payment. The prepayment premium on any
Note Payment Date is equal to the excess, if any, of (a) the sum of (i) the
present value of the prepayment amount (discounted from the date(s) that the
prepayment amount would otherwise have been paid under the Scheduled
Amortization to the Note Payment Date) plus (ii) the sum of the present values
of the amounts of interest that would have accrued thereafter with respect to
the prepayment amount over (b) the amount of the prepayment. The present value
shall be computed using a "Reinvestment Yield" (as defined in the Indenture)
which is comparable to the yield of like term U.S. Treasury securities plus
0.50% per annum.
If the principal of the Timber Notes is paid later than as provided for
under the Scheduled Amortization, the Company will pay a deficiency premium on
such deficient amount. The deficiency premium payable on any Note Payment Date
equals an amount of interest on the amount of the deficient principal amount
from the previous Note Payment Date to the current Note Payment Date at 1.50%
per annum. In addition, if the Class A-3 Timber Notes are not paid in full on or
before their Scheduled Maturity Date, a Cash Retention Event (as defined in the
Indenture) will occur, as a result of which 75% of all Excess Funds (as defined
in the Indenture) will be deposited in the Payment Account until all classes of
Timber Notes are paid in full.
The following table presents the amortization of the Timber Notes based on
Minimum Principal Amortization and Scheduled Amortization (in thousands):
MINIMAL
PRINCIPAL SCHEDULED
AMORTIZATION AMORTIZATION
------------ ------------
Years Ending December 31:
1998............................... $ -- $ --
1999............................... 863 8,185
2000............................... 10,458 15,865
2001............................... 10,476 16,327
2002............................... 10,790 17,141
Thereafter......................... 834,661 809,730
------------ ------------
$867,248 $867,248
============ ============
3. RELATED PARTY TRANSACTIONS
The Master Purchase Agreements and the related log purchase agreements
govern all log sales by the Company to Pacific Lumber. Under the Master Purchase
Agreements, Pacific Lumber is responsible for
F-10
<PAGE>
SCOTIA PACIFIC COMPANY LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
harvesting the Company's standing timber and transporting harvested logs to its
log decks. Payments for the log sales outstanding at December 31, 1997 were
received by the Company in January 1998.
Scotia Pacific and Pacific Lumber also entered into a Services Agreement on
March 23, 1993 (the "Services Agreement"), pursuant to which Pacific Lumber
provided a variety of operational, management and related services in respect of
the Company's timber properties not provided by the Company's employees,
including reforestation, fire protection and road maintenance, rehabilitation
and construction. The Company pays Pacific Lumber an annual fee, payable in
equal monthly installments and subject to annual adjustment provisions, for such
services. For the years ended December 31, 1997, 1996 and 1995, amounts recorded
by the Company for services pursuant to the terms of the Services Agreement
totaled $1,384,000, $1,345,000 and $1,382,000, respectively. On the Closing
Date, the Company and Pacific Lumber entered into a New Services Agreement (the
"New Services Agreement") under which the Company will pay a Services Fee (as
defined) in an initial amount of $107,000 per month and reimburse Pacific Lumber
for the cost of constructing, rehabilitating and maintaining roads and
performing reforestation services.
4. PROVISION IN LIEU OF INCOME TAXES
Although the Company will elect to be disregarded as a separate taxable
entity and instead be treated as a division of Pacific Lumber solely for income
tax purposes, these financial statements treat the Company as a taxable entity
for the periods presented.
Income taxes are determined using an asset and liability approach which
requires the recognition of deferred income tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Under this method, deferred
income tax assets and liabilities are determined based on the temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates.
Scotia Pacific and Pacific Lumber are members of MAXXAM's consolidated
return group for federal income tax purposes. Pursuant to the tax allocation
agreement among MAXXAM, Pacific Lumber, Salmon Creek and Scotia Pacific (the
"Tax Allocation Agreement"), all federal and state income tax liabilities of
the Company will be paid by Pacific Lumber and all federal and state income tax
refunds of the Company will be paid to Pacific Lumber. Accordingly, the Company
records a charge or benefit for income taxes computed as if the Company filed
separate income tax returns and a corresponding adjustment to capital (net of
the applicable adjustments relating to the Company's deferred income tax
assets).
The provision in lieu of income taxes on income before income taxes
consists of the following (in thousands):
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Current provision in lieu of income
taxes:
Federal............................ $ 22,168 $ 22,407 $ 21,236
State.............................. 6,200 6,789 6,336
--------- --------- ---------
28,368 29,196 27,572
--------- --------- ---------
Deferred provision in lieu of income
taxes:
Federal............................ 2,221 3,144 3,552
State.............................. 580 1,116 926
--------- --------- ---------
2,801 4,260 4,478
--------- --------- ---------
$ 31,169 $ 33,456 $ 32,050
========= ========= =========
F-11
<PAGE>
SCOTIA PACIFIC COMPANY LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A reconciliation between the provision in lieu of income taxes and the
amount computed by applying the federal statutory income tax rate to income
before income taxes is as follows (in thousands):
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Income before income taxes........... $ 76,725 $ 84,993 $ 78,076
========= ========= =========
Amount of federal income tax based
upon the statutory rate............ $ 26,854 $ 29,748 $ 27,327
State taxes, net of federal tax
benefit............................ 4,407 5,138 4,720
Other................................ (92) (1,430) 3
--------- --------- ---------
$ 31,169 $ 33,456 $ 32,050
========= ========= =========
The components of the Company's net deferred income tax assets
(liabilities) are as follows (in thousands):
DECEMBER 31,
--------------------
1997 1996
--------- ---------
Deferred income tax assets:
Timber and timberlands............. $ 24,341 $ 27,389
Property and equipment............. 224 140
--------- ---------
Total deferred income tax
assets........................ 24,565 27,529
--------- ---------
Deferred income tax liabilities:
Other.............................. (802) (965)
--------- ---------
Total deferred income tax
liabilities..................... (802) (965)
--------- ---------
Net deferred income tax assets....... $ 23,763 $ 26,564
========= =========
The principal component of the net deferred income tax assets listed above
relates to the excess of the tax basis over financial statement basis with
respect to timber and timberlands. The Company believes that it is more likely
than not that this net deferred income tax asset will be realized, based
primarily upon the estimated value of its timber and timberlands which is in
excess of its tax basis. The Company has not provided a valuation allowance on
its deferred income tax assets. The net deferred income tax assets listed above
are recorded pursuant to the Tax Allocation Agreement.
5. CONTINGENCIES
The Company'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 the Company'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 the Company, 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 the Company's timberlands.
On September 28, 1996, Pacific Lumber (on behalf of itself, its
subsidiaries and affiliates) and MAXXAM (collectively, the "Pacific Lumber
Parties") entered into an agreement with the United States and California
("Headwaters Agreement") which provides the framework for the acquisition by
the United
F-12
<PAGE>
SCOTIA PACIFIC COMPANY LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
States and California of approximately 5,600 acres of Pacific Lumber's
timberlands. These timberlands are commonly referred to as the Headwaters Forest
and the Elk Head Springs Forest (collectively, 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 the Company (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 (the "Elk River
Timberlands") to be acquired 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 obtaining federal and California funding, approval of a sustained
yield plan ("SYP"), approval of a habitat conservation plan covering multiple
species ("Multi-Species HCP") and issuance of a related incidental take
permits (the "Permits") 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. On February 27, 1998, Pacific
Lumber, MAXXAM and various government agencies entered into a Pre-Permit
Application Agreement in Principle (the "Pre-Permit Agreement") regarding
certain understandings that they had reached regarding the Multi-Species HCP,
the Permits and the SYP. The Pre-Permit Agreement provides that the Permits and
Multi-Species HCP 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 the Pre-Permit Agreement is a favorable
development that enhances its position in connection with legal and regulatory
challenges to its 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 federal Endangered Species Act ("ESA") and/or the
California Endangered Species Act ("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 the 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 the Company's compliance with
habitat requirements for currently listed species, it would also provide greater
certainty and protection for the Company 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 timber harvesting plans ("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 Pre-Permit Agreement will enhance its position in connection with
F-13
<PAGE>
SCOTIA PACIFIC COMPANY LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
these challenges. The Company also believes that the Multi-Species HCP would
expedite the preparation and facilitate approval of its THPs.
The Pre-Permit Agreement also contains certain provisions relating to the
SYP. The Company expects Pacific Lumber to propose a long-term sustained yield
harvest level ("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
California Department of Forestry, Pacific Lumber will have complied with
certain BOF regulations requiring that timber companies 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. An approved
SYP is expected to be valid for ten years, although it would be subject to
review after five years. Thereafter, revised SYPs will be prepared every decade
that address the LTSY harvest level based upon reassessment of changes in the
resource base and other factors.
The final terms of the SYP, the Multi-Species HCP and the Permits are
subject to additional negotiation and agreement among the parties as well as
public review and comment. 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 an 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 a Multi-Species HCP is not approved, Pacific Lumber will
not enjoy the benefits of a more streamlined THP preparation and review process.
Furthermore, if a Multi-Species HCP acceptable to Pacific Lumber is not
approved, it is impossible for the Company to determine the potential adverse
effect of the listings of the marbled murrelet and coho salmon or the EPA's
potential regulatory limitations on river sedimentation 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.
6. MEMBER CAPITAL
A reconciliation of the activity in member capital is as follows (in
thousands):
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
Balance at beginning of period....... $ 12,697 $ 12,869 $ 18,330
Net income........................... 45,556 51,537 46,026
Contribution of assets by Pacific
Lumber............................. 5,166 3,224 --
Assumption of net tax liabilities by
Pacific Lumber..................... 28,368 29,196 27,572
Dividends paid....................... (60,800) (76,900) (59,000)
Distributions........................ (13,864) (7,229) (20,059)
---------- ---------- ----------
Balance at end of period............. $ 17,123 $ 12,697 $ 12,869
========== ========== ==========
F-14
<PAGE>
SCOTIA PACIFIC COMPANY LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SUPPLEMENTAL CASH FLOW INFORMATION
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
Supplemental information on non-cash
investing and financing activities:
Assumption of net tax liabilities
by Pacific Lumber............... $ 28,368 $ 29,196 $ 27,572
Contribution of assets by Pacific
Lumber.......................... 5,166 3,224 --
Acquisition of timber and
timberlands subject to long-term
debt and other liabilities...... 7,340 -- 615
Supplemental disclosure of cash flow
information:
Interest paid...................... $ 26,679 $ 27,536 $ 28,659
F-15
<PAGE>
SCOTIA PACIFIC COMPANY LLC
BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......... $ 13,691 $ 20,926
Receivables:
Due from Pacific Lumber......... 12,229 5,304
Accrued interest................ 85 107
Prepaid timber harvesting costs.... 2,464 2,053
Other prepaid expenses and current
assets.......................... 326 385
----------- ------------
Total current assets............ 28,795 28,775
Timber and timberlands, net of
accumulated depletion of $237,587
and $233,188, respectively......... 247,319 249,654
Property and equipment, net of
accumulated depreciation of $7,158
and $6,590, respectively........... 11,219 11,019
Deferred financing costs, net........ 12,868 13,475
Deferred income taxes................ 23,100 23,763
Restricted cash...................... 28,108 28,434
Other assets......................... 2,081 1,827
----------- ------------
$ 353,490 $356,947
=========== ============
LIABILITIES AND MEMBER CAPITAL
Current liabilities:
Due to Pacific Lumber.............. $ 165 $ 147
Accrued interest................... 10,977 11,358
Other accrued liabilities.......... 1,017 846
Long-term debt, current
maturities...................... 20,607 19,429
----------- ------------
Total current liabilities....... 32,766 31,780
Long-term debt, less current
maturities......................... 296,046 308,044
----------- ------------
Total liabilities............... 328,812 339,824
----------- ------------
Contingencies
Member capital....................... 24,678 17,123
----------- ------------
$ 353,490 $356,947
=========== ============
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
SCOTIA PACIFIC COMPANY LLC
STATEMENT OF INCOME
(IN THOUSANDS OF DOLLARS)
SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1997
---------- ----------
(UNAUDITED)
Log sales to Pacific Lumber.......... $ 34,520 $ 53,764
---------- ----------
Operating expenses:
General and administrative......... 3,271 3,849
Depletion and depreciation......... 5,013 7,437
---------- ----------
8,284 11,286
---------- ----------
Operating income..................... 26,236 42,478
Other income (expense):
Interest and other income.......... 1,329 1,379
Interest expense................... (13,253) (13,695)
---------- ----------
Income before income taxes........... 14,312 30,162
Provision in lieu of income taxes.... (5,832) (12,289)
---------- ----------
Net income........................... $ 8,480 $ 17,873
========== ==========
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
SCOTIA PACIFIC COMPANY LLC
STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1997
---------- ----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 8,480 $ 17,873
Adjustments to reconcile net income
to net cash provided by
operating activities:
Provision in lieu of income
taxes.......................... 5,832 12,289
Depletion and depreciation...... 5,013 7,437
Amortization of deferred
financing costs................ 607 616
Increase (decrease) in cash
resulting from changes in:
Receivables................... (6,925) (7,906)
Prepaid expenses and other
assets....................... (658) --
Amounts due to Pacific
Lumber....................... 18 (59)
Accrued interest.............. (381) (334)
Other accrued liabilities..... 172 231
Other........................... 63 (338)
---------- ----------
Net cash provided by operating
activities..................... 12,221 29,809
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............... (2,877) (3,345)
Net proceeds from sale of assets... 9 --
---------- ----------
Net cash used for investing
activities..................... (2,868) (3,345)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on Old Timber
Notes and other debt............ (10,820) (8,801)
Dividends paid..................... (6,700) (21,600)
Restricted cash withdrawals, net... 326 202
(Distributions) contributions...... 606 (2,752)
---------- ----------
Net cash used for financing
activities..................... (16,588) (32,951)
---------- ----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS........................ (7,235) (6,487)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD................ 20,926 20,345
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................. $ 13,691 $ 13,858
========== ==========
SUPPLEMENTARY SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Assumption of net tax liabilities
by Pacific Lumber............... $ 5,169 $ 11,095
Acquisition of timber and
timberlands subject to other
liabilities..................... -- 4,814
Contribution of capital assets by
subsidiary...................... -- 421
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid...................... $ 13,027 $ 13,413
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
SCOTIA PACIFIC COMPANY LLC
CONDENSED NOTES TO FINANCIAL STATEMENTS
1. GENERAL
The information contained in the following notes to the financial
statements is condensed from that which would appear in the annual financial
statements; accordingly, the financial statements included herein should be
reviewed in conjunction with the audited financial statements and related notes
thereto contained in the Offering Memorandum. Any capitalized terms used but not
defined in these Condensed Notes to Financial Statements are defined in the
audited financial statements and related notes thereto. Accounting measurements
at interim dates inherently involve greater reliance on estimates than at year
end. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the entire year.
The financial statements included herein are unaudited; however, they
include all adjustments of a normal recurring nature necessary, in the opinion
of management, to present fairly the financial position of the Company at June
30, 1998, the results of operations for the six months ended June 30, 1998 and
1997 and cash flows for the six months ended June 30, 1998 and 1997. The Company
is a wholly owned subsidiary of Pacific Lumber, which is a wholly owned indirect
subsidiary of MGI. MGI is a wholly owned subsidiary of MGHI, which is a wholly
owned subsidiary of MAXXAM.
As discussed in the notes to the audited financial statements, concurrent
with the offering of the Timber Notes, Scotia Pacific was merged into the
Company and the Transfers were made. The Merger and the Transfers have been
reflected in the financial statements of the Company as if such transactions had
occurred as of the beginning of the earliest period presented, and the financial
statements reflect the historical assets, liabilities and results of operations
of Scotia Pacific after giving effect to the Company Transfer and Pacific
Lumber's and Salmon Creek's historical assets, liabilities and results of
operations attributable to the timberlands and the timber and related timber
harvesting rights transferred pursuant to the Palco Transfers. However, the
retirement of the Old Timber Notes, the issuance of the Timber Notes and the
payment of the $526.1 million cash dividend to Pacific Lumber will not be
reflected in the financial statements until July 1998, the period in which such
transactions occurred. Assuming such transactions had occurred on June 30, 1998,
pro forma assets, liabilities and member deficit would have been $329.7 million,
$868.8 million and $539.1 million, respectively.
SFAS No. 130 was issued in June 1997 and 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. For the six months ended June 30, 1998 and 1997, the Company did not
have any items which would cause such a difference between "traditional" net
income and comprehensive net income.
2. RESTRICTED CASH
Restricted cash represents the amount held by the trustee under the
indenture governing the Old Timber Notes. In addition, cash and cash equivalents
includes $10,245,000 and $17,784,000 at June 30, 1998 and December 31, 1997,
respectively, which is restricted for debt service payments on the Old Timber
Notes.
3. CONTINGENCIES
The Company'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 the Company'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 the Company, they have not historically 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 the Company's
timberlands. On
F-19
<PAGE>
SCOTIA PACIFIC COMPANY LLC
CONDENSED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
August 12, 1998, an action was filed by two environmental groups against Pacific
Lumber, Scotia Pacific and Salmon Creek (the "EPIC LAWSUIT") under which the
environmental groups allege certain procedural violations of the ESA resulting
from the defendants' logging activities on the Company's Timberlands and seek to
prevent the defendants from carrying out any harvesting activities until certain
purported wildlife agency consultation requirements under the ESA are satisfied
in connection with the Multi-Species HCP (see below). The Company is uncertain
what impact the EPIC LAWSUIT will have upon its operations and financial
results, but it is possible that other approved timber harvesting activities on
the Company's timberlands could be severely restricted (and revenues potentially
significantly adversely affected) until such time as the consultation
requirements are satisfied. The Company estimates that it could take up to
several months to complete these consultation requirements.
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 the Company (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 from a third party. As part of the Headwaters
Agreement, the Pacific Lumber Parties agreed to not enter the Headwaters
Timberlands to conduct any logging or salvage operations. Closing of the
Headwaters Agreement is subject to various conditions, including obtaining
federal and California funding, approval of an SYP, approval of a Multi-Species
HCP and issuance of the Permits, acquisition 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
authorizing 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. On August 31, 1998, the California Legislature enacted a
bill (the "California Headwaters Bill"), which among other things, appropriated
California's $130 million portion of the funding required to consummate the
Headwaters Agreement. The state funds remain available until June 30, 1999.
Governor Pete Wilson has announced his intention to sign the California
Headwaters Bill. The bill also contains an additional appropriation available
from July 1, 1999 until June 30, 2000 authorizing the expenditure of up to $80
million toward acquisition of the "Owl Creek" grove owned by the Company. The
bill also provides that if any portion of the $80 million remains after purchase
of the Owl Creek grove, it may be used to purchase certain other timberlands.
The SYP and Multi-Species HCP (see below) would have allowed the harvesting over
time of either the Owl Creek grove or a forest grove owned by Pacific Lumber
commonly referred to as "Grizzly Creek." The Scheduled Amortization schedule for
the Timber Notes assumed that the Owl Creek grove would be harvested over time;
however, a provision of the California Headwaters Bill designates the Owl Creek
grove as an additional conservation area for the marbled murrelet, which would
have the effect of restricting the activities which could be conducted in the
grove.
The Company estimates that the Owl Creek grove constitutes approximately 2%
of the aggregate "Mbfe" (board foot equivalents of timber as defined in the
Indenture) contained in the timber owned by the Company . It is uncertain
whether the Owl Creek grove will ultimately be sold to the state of California.
Furthermore, the Company could arrange to exchange the Owl Creek grove for other
timberlands pursuant to the substitute collateral provisions of the Indenture.
Were the Owl Creek grove to be sold to the state of California, the Company
would be required to recognize Deemed Production (as defined in the Indenture)
with respect to the Mbfe contained within the grove, which could result in
substantial prepayments (and related prepayment premiums).
The Califonia Headwaters Bill contains provisions requiring the inclusion
of additional environmentally focused provisions in the final version of the
Multi-Species HCP, including establishing wider interim streamside buffers
(while the watershed assessment process is being completed) than provided for in
the Multi-Species HCP, obligating Pacific Lumber and
F-20
<PAGE>
SCOTIA PACIFIC COMPANY LLC
CONDENSED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the government agencies to establish a schedule that results in completion of
the watershed assessment process within five years, imposing minimum and
maximum "no-cut" buffers upon the watershed assessment process. The California
Headwaters Bill also provides that the SYP shall be subject to the foregoing
provisions.
In July 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 various forest groves to those which
would not be detrimental to marbled murrelet habitat. Under the Multi-Species
HCP and the California Headwaters Bill, these groves aggregate approximately
8,500 acres and consist of substantial quantities of virgin and residual old
growth redwood and Douglas-fir timber. A draft environmental impact
statement/report analyzing the Headwaters Agreement, SYP and Multi-Species HCP
is being prepared by a consulting firm under the direction of the United States
and California, and is expected to be made available for public review and
comment in the next few weeks. After the public review and comment process is
completed, the regulatory agencies will determine whether to approve (with or
without conditions) or disapprove the SYP and Multi-Species HCP.
The Company believes that submission of the proposed SYP and Multi-Species
HCP for public review and comment and passage of the California Headwaters Bill
are favorable developments that enhance the prospects for consummation of the
Headwaters Agreement, 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 ("no-take") 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 and the Company 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 practicable. The Multi-Species HCP would
not only provide for the Company's compliance with habitat requirements for
currently listed species, it would also provide greater certainty and protection
for the Company with regard to identified species that may be listed in the
future.
Lawsuits are pending or threatened which seek to prevent the Company from
implementing certain of its approved THPs or other operations. While challenges
with respect to the Company's young growth timber have historically been
limited, a lawsuit relating to the coho salmon was filed under the ESA which
relates to a significant number of THPs covering young growth timber of the
Company and the EPIC LAWSUIT discussed above could also have an adverse impact
on the harvesting of the Company's timberlands for up to several months. While
the Company expects these environmentally focused objections and lawsuits to
continue, it believes that the Multi-Species HCP and SYP would enhance its
position in connection with these challenges. The Company also believes that the
Multi-Species HCP and SYP 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 that timber companies 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 will be prepared
every decade that address the LTSY harvest level based upon reassessment of
changes in the resource base and other factors.
F-21
<PAGE>
SCOTIA PACIFIC COMPANY LLC
CONDENSED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 if the SYP
and Multi-Species HCP are approved by the regulatory agencies, the terms of such
approval will be acceptable to Pacific Lumber and the Company. If the Headwaters
Agreement is not consummated and the Company 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 governmental 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, the Company 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 and the
Company 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 the Company
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.
4. MEMBER CAPITAL
A reconciliation of the activity in member capital is as follows (in
thousands):
SIX MONTHS
ENDED
JUNE 30,
1998
----------
Balance at beginning of period....... $ 17,123
Net income........................... 8,480
Assumption of net tax liabilities by
Pacific Lumber..................... 5,169
Dividends paid....................... (6,700)
Contributions........................ 606
----------
Balance at end of period............. $ 24,678
==========
5. SUBSEQUENT EVENT
On July 20, 1998, the Company 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
Collaterized Notes which are due on July 20, 2028 and have an overall effective
interest rate of 7.43% per annum. Net proceeds fron the offering were used
primarily to prepay the Old Timber Notes and to pay a cash dividend of $526.1
million to Pacific Lumber. The Company expects to recognize an extraordinary
loss of approximately $35.4 million in the quarter ended September 30, 1998 for
the early extinguishment of the Old Timber Notes. For further discussion, see
notes to the audited financial statements.
F-22
<PAGE>
SCOTIA PACIFIC COMPANY LLC
UNAUDITED SUMMARY QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- --------- ------------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
1998 Quarterly Information:
Net sales.................... $ 9,663 $ 24,857
Operating income............. 6,591 19,645
Net income................... 350 8,130
1997 Quarterly Information:
Net sales.................... 19,122 $ 34,642 $51,325 $ 21,326
Operating income............. 14,588 27,889 42,095 16,721
Net income................... 4,976 12,897 21,262 6,421
1996 Quarterly Information:
Net sales.................... 22,128 41,841 43,678 27,417
Operating income............. 17,699 34,842 35,970 21,892
Net income................... 6,632 16,766 17,456 10,683
</TABLE>
F-23
<PAGE>
ANNEX 1
STRUCTURING SCHEDULE ASSUMPTIONS
(Dollars in thousands, except prices)
ANNUAL ESCALATORS
--------------------------------------
Operating Costs 5.00%
Capital Expenditures 5.00%
Prices 3.50%
OTHER
-------------------------------------------------------------------------------
Years
--------------------------------------------------
1.0 - 11.5 11.5 - 19.0 19.0 - 30.0
--------------- --------------- ---------------
Structuring Note Rate (1) 6.55% 7.11% 7.71%
Class A-1 Class A-2 Class A-3
--------------- --------------- ---------------
Note Balance $160,700 $243,200 $463,348
Production Haircut (2) 10%
Effective Price Haircut (3) 25%
SEASONALITY (% OF YEAR'S
HARVEST ALLOCATED TO EACH MONTH)
------------------------------------------------
January 1.37%
February 2.76%
March 4.88%
April 11.77%
May 10.92%
June 12.82%
July 12.59%
August 13.67%
September 11.84%
October 10.59%
November 4.62%
December 2.18%
----------------------- -----------------------
100.00%
<TABLE>
<CAPTION>
ANNUAL HARVEST STRUCTURING
LEVELS AFTER PRICE LEVELS SCHEDULED
PRODUCTION AFTER PRICE ANNUAL ANNUAL ANNUAL
HAIRCUT HAIRCUT OPERATING YIELD CAPITAL
YEAR (MBFE) ($ PER MBFE) COSTS (4) TAXES (5) EXPENDITURES (6)
-------------------- -------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C>
1998 (7) 69,375 $568 $2,827 $1,142 $2,965
1999 146,047 619 6,474 2,621 6,795
2000 146,047 618 6,796 2,618 7,135
2001 146,047 619 7,134 2,623 7,492
2002 146,047 623 7,489 2,639 7,866
2003 146,047 645 7,862 2,731 8,260
2004 146,047 653 8,254 2,766 8,673
2005 146,047 676 8,665 2,863 9,106
2006 146,047 700 9,097 2,964 9,562
2007 146,047 724 9,550 3,067 10,040
2008 118,918 750 9,502 2,585 9,708
2009 118,918 776 9,975 2,675 10,193
2010 118,918 803 10,473 2,769 10,703
2011 118,918 831 10,995 2,866 11,238
2012 118,918 860 11,543 2,966 11,800
2013 118,918 890 12,119 3,070 12,390
2014 118,918 921 12,723 3,177 13,010
2015 118,918 954 13,358 3,289 13,660
2016 118,918 987 14,024 3,404 14,343
2017 118,918 1,022 14,724 3,523 15,060
2018 78,923 1,057 13,773 2,420 13,135
2019 78,923 1,094 14,460 2,505 13,791
2020 78,923 1,133 15,182 2,592 14,481
2021 78,923 1,172 15,939 2,683 15,205
2022 78,923 1,213 16,735 2,777 15,965
2023 78,923 1,256 17,570 2,874 16,763
2024 78,923 1,300 18,447 2,975 17,602
2025 78,923 1,345 19,368 3,079 18,482
2026 78,923 1,392 20,335 3,187 19,406
2027 78,923 1,441 21,350 3,298 20,376
2028 (7) 35,140 1,491 11,208 1,520 10,697
-------------------- ------------------- ------------------- ------------------- ------------------- -------------------
3,397,345 $377,952 $86,269 $375,902
=================== =================== =================== ===================
- ---------------
<FN>
(1) The transaction was sized using interest rates for each class with an
overall effective rate of 7.43%.
(2) Discount from Initial Harvest Schedule.
(3) Effective discount from June 1998 SBE Prices. Haircuts range from
approximately 17.4% to 26.6% to effect the equivalent of a 25% overall
haircut.
(4) Annual Operating Costs include Administrative Expenses, Property Taxes and
the Services Fee.
(5) Annual Yield Taxes are calculated by multiplying revenues by 2.9%.
(6) Annual Capital Expenditures relate primarily to reforestation of
timberlands and construction and rehabilitation of logging roads.
(7) Amounts for 1998 and 2028 represent approximately six months of operations.
</TABLE>
I-1
<PAGE>
<TABLE>
<CAPTION>
A B C D E F G
- ------------- ----------- ------------ --------- ----- --------------- -----------
Structuring
Deemed
Production Structuring Remaining
Month Structuring Mbfe Harvest
(Period Harvest Price Operating Yield Capital Quantity
Ending) (Mbfe) ($ per Mbfe) Costs(1) Taxes Expenditures(2) (Mbfe)(3)
- ------------- ----------- ------------ --------- ----- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Initial (as of
Closing) 3,397,345
Jul-98 6,742 $568 $195 $111 $203 3,390,603
Aug-98 19,967 568 526 329 552 3,370,636
Sep-98 17,285 568 526 284 552 3,353,351
Oct-98 15,461 568 526 255 552 3,337,890
Nov-98 6,742 568 526 111 552 3,331,148
Dec-98 3,178 568 526 52 552 3,327,970
Jan-99 1,998 619 539 36 566 3,325,972
Feb-99 4,031 619 539 72 566 3,321,942
Mar-99 7,127 619 539 128 566 3,314,814
Apr-99 17,193 619 539 309 566 3,297,621
May-99 15,952 619 539 286 566 3,281,670
Jun-99 18,725 619 539 336 566 3,262,944
Jul-99 18,388 619 539 330 566 3,244,556
Aug-99 19,967 619 539 358 566 3,224,590
Sep-99 17,285 619 539 310 566 3,207,305
Oct-99 15,461 619 539 278 566 3,191,843
Nov-99 6,742 619 539 121 566 3,185,102
Dec-99 3,178 619 539 57 566 3,181,924
Jan-00 1,998 618 566 36 595 3,179,926
Feb-00 4,031 618 566 72 595 3,175,895
Mar-00 7,127 618 566 128 595 3,168,768
Apr-00 17,193 618 566 308 595 3,151,575
May-00 15,952 618 566 286 595 3,135,623
Jun-00 18,725 618 566 336 595 3,116,898
Jul-00 18,388 618 566 330 595 3,098,509
Aug-00 19,967 618 566 358 595 3,078,543
Sep-00 17,285 618 566 310 595 3,061,258
Oct-00 15,461 618 566 277 595 3,045,796
Nov-00 6,742 618 566 121 595 3,039,055
Dec-00 3,178 618 566 57 595 3,035,877
Jan-01 1,998 619 595 36 624 3,033,879
Feb-01 4,031 619 595 72 624 3,029,848
Mar-01 7,127 619 595 128 624 3,022,721
Apr-01 17,193 619 595 309 624 3,005,528
May-01 15,952 619 595 286 624 2,989,576
Jun-01 18,725 619 595 336 624 2,970,851
Jul-01 18,388 619 595 330 624 2,952,463
Aug-01 19,967 619 595 359 624 2,932,496
Sep-01 17,285 619 595 310 624 2,915,211
Oct-01 15,461 619 595 278 624 2,899,750
Nov-01 6,742 619 595 121 624 2,893,008
Dec-01 3,178 619 595 57 624 2,889,830
<CAPTION>
A H I J K L
- --------------- ----------- ----------- ----------- ----------- ---------------
Column I = Column J + Column K
------------------------------
Production Collateral Structuring Discounted Minimum
Month Value Collateral Servicing Structuring Principal
(Period Ending) Factor(4) Value Obligation Balance Amortization(5)
- --------------- ----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Initial (as of 0.291331621 $989,754 $122,506 $867,248
Closing
Jul-98 0.292674900 992,344 123,061 869,293 $0
Aug-98 0.293161304 988,140 123,288 864,852 0
Sep-98 0.293828925 985,312 123,516 861,796 0
Oct-98 0.294621701 983,415 123,745 859,670 0
Nov-98 0.296067639 986,245 123,976 862,269 0
Dec-98 0.297791251 991,040 124,208 866,833 415
Jan-99 0.299589922 996,428 124,428 871,999 0
Feb-99 0.301224321 1,000,650 124,650 875,999 0
Mar-99 0.302598435 1,003,058 124,873 878,184 0
Apr-99 0.303091129 999,480 125,098 874,382 0
May-99 0.303678647 996,573 125,324 871,249 0
Jun-99 0.304000316 991,936 125,551 866,385 448
Jul-99 0.304434115 987,754 125,780 861,974 0
Aug-99 0.304710604 982,567 126,010 856,557 0
Sep-99 0.305202120 978,876 126,241 852,635 0
Oct-99 0.305841456 976,198 126,474 849,724 0
Nov-99 0.307265191 978,671 126,709 851,962 0
Dec-99 0.309021410 983,283 126,944 856,338 10,047
Jan-00 0.310905981 988,658 127,155 861,503 0
Feb-00 0.312626710 992,870 127,366 865,503 0
Mar-00 0.314087457 995,270 127,579 867,691 0
Apr-00 0.314665934 991,693 127,793 863,900 0
May-00 0.315339782 988,787 128,009 860,778 0
Jun-00 0.315747496 984,153 128,226 855,927 411
Jul-00 0.316271667 979,971 128,444 851,527 0
Aug-00 0.316638787 974,786 128,663 846,123 0
Sep-00 0.317221282 971,096 128,884 842,212 0
Oct-00 0.317952117 968,417 129,106 839,311 0
Nov-00 0.319468793 970,883 129,330 841,554 0
Dec-00 0.321319079 975,485 129,554 845,931 9,996
Jan-01 0.323298126 980,847 129,753 851,095 0
Feb-01 0.325112767 985,042 129,952 855,091 0
Mar-01 0.326666925 987,423 130,152 857,271 0
Apr-01 0.327335133 983,815 130,354 853,461 0
May-01 0.328099585 980,879 130,557 850,322 0
Jun-01 0.328596753 976,212 130,761 845,451 480
Jul-01 0.329215514 971,997 130,966 841,030 0
Aug-01 0.329677015 966,777 131,173 835,603 0
Sep-01 0.330354915 963,054 131,381 831,673 0
Oct-01 0.331182158 960,345 131,590 828,755 0
Nov-01 0.332799184 962,791 131,801 830,990 0
Dec-01 0.334752039 967,377 132,012 835,364 10,087
</TABLE>
I-2
<PAGE>
<TABLE>
<CAPTION>
A B C D E F G
- ------------- ----------- ------------ --------- ----- --------------- -----------
Structuring
Deemed
Production Structuring Remaining
Month Structuring Mbfe Harvest
(Period Harvest Price Operating Yield Capital Quantity
Ending) (Mbfe) ($ per Mbfe) Costs(1) Taxes Expenditures(2) (Mbfe)(3)
- ------------- ----------- ------------ --------- ----- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jan-02 1,998 623 624 36 656 2,887,832
Feb-02 4,031 623 624 73 656 2,883,801
Mar-02 7,127 623 624 129 656 2,876,674
Apr-02 17,193 623 624 311 656 2,859,481
May-02 15,952 623 624 288 656 2,843,530
Jun-02 18,725 623 624 338 656 2,824,804
Jul-02 18,388 623 624 332 656 2,806,416
Aug-02 19,967 623 624 361 656 2,786,449
Sep-02 17,285 623 624 312 656 2,769,164
Oct-02 15,461 623 624 279 656 2,753,703
Nov-02 6,742 623 624 122 656 2,746,962
Dec-02 3,178 623 624 57 656 2,743,784
Jan-03 1,998 645 655 37 688 2,741,786
Feb-03 4,031 645 655 75 688 2,737,755
Mar-03 7,127 645 655 133 688 2,730,628
Apr-03 17,193 645 655 322 688 2,713,435
May-03 15,952 645 655 298 688 2,697,483
Jun-03 18,725 645 655 350 688 2,678,758
Jul-03 18,388 645 655 344 688 2,660,369
Aug-03 19,967 645 655 373 688 2,640,403
Sep-03 17,285 645 655 323 688 2,623,118
Oct-03 15,461 645 655 289 688 2,607,656
Nov-03 6,742 645 655 126 688 2,600,915
Dec-03 3,178 645 655 59 688 2,597,737
Jan-04 1,998 653 688 38 723 2,595,739
Feb-04 4,031 653 688 76 723 2,591,708
Mar-04 7,127 653 688 135 723 2,584,581
Apr-04 17,193 653 688 326 723 2,567,338
May-04 15,952 653 688 302 723 2,551,436
Jun-04 18,725 653 688 355 723 2,532,711
Jul-04 18,388 653 688 348 723 2,514,323
Aug-04 19,967 653 688 378 723 2,494,356
Sep-04 17,285 653 688 327 723 2,477,071
Oct-04 15,461 653 688 293 723 2,461,610
Nov-04 6,742 653 688 128 723 2,454,868
Dec-04 3,178 653 688 60 723 2,451,690
<CAPTION>
A H I J K L
- --------------- ----------- ----------- ----------- ----------- ---------------
Column I = Column J + Column K
------------------------------
Production Collateral Structuring Discounted Minimum
Month Value Collateral Servicing Structuring Principal
(Period Ending) Factor(4) Value Obligation Balance Amortization(5)
- --------------- ----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Jan-02 0.336834024 972,720 132,196 840,524 0
Feb-02 0.338750034 976,888 132,380 844,507 0
Mar-02 0.340403522 979,230 132,566 846,664 0
Apr-02 0.341162116 975,547 132,753 842,794 0
May-02 0.342018369 972,539 132,941 839,599 0
Jun-02 0.342604539 967,791 133,130 834,661 703
Jul-02 0.343318482 963,494 133,320 830,174 0
Aug-02 0.343873995 958,187 133,512 824,676 0
Sep-02 0.344648162 954,387 133,704 820,683 0
Oct-02 0.345573532 951,607 133,898 817,709 0
Nov-02 0.347297332 954,012 134,093 819,920 0
Dec-02 0.349361192 958,571 134,289 824,283 10,378
Jan-03 0.351544351 963,859 134,455 829,404 0
Feb-03 0.353548166 967,928 134,622 833,306 0
Mar-03 0.355268707 970,107 134,791 835,316 0
Apr-03 0.356023751 966,047 134,960 831,087 0
May-03 0.356883168 962,686 135,130 827,556 0
Jun-03 0.357449989 957,522 135,302 822,220 2,062
Jul-03 0.358154683 952,824 135,474 817,350 0
Aug-03 0.358687038 947,078 135,648 811,431 0
Sep-03 0.359454365 942,891 135,822 807,069 0
Oct-03 0.360384113 939,758 135,998 803,760 0
Nov-03 0.362176799 941,991 136,174 805,817 0
Dec-03 0.364337027 946,452 136,352 810,100 12,121
Jan-04 0.366636790 951,693 136,498 815,195 0
Feb-04 0.368752519 955,699 136,645 819,053 0
Mar-04 0.370578142 957,789 136,793 820,996 0
Apr-04 0.371413065 953,561 136,942 816,619 0
May-04 0.372355251 950,041 137,092 812,949 0
Jun-04 0.372996769 944,693 137,243 807,450 2,649
Jul-04 0.373784758 939,815 137,394 802,421 0
Aug-04 0.374395947 933,877 137,547 796,330 0
Sep-04 0.375248051 929,516 137,700 791,816 0
Oct-04 0.376266973 926,222 137,855 788,368 0
Nov-04 0.378172431 928,363 138,010 790,353 0
Dec-04 0.380456025 932,760 139,166 794,594 12,856
</TABLE>
I-3
<PAGE>
<TABLE>
<CAPTION>
A B C D E F G
- ------------- ----------- ------------ --------- ----- --------------- -----------
Structuring
Deemed
Production Structuring Remaining
Month Structuring Mbfe Harvest
(Period Harvest Price Operating Yield Capital Quantity
Ending) (Mbfe) ($ per Mbfe) Costs(1) Taxes Expenditures(2) (Mbfe)(3)
- ------------- ----------- ------------ --------- ----- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jan-05 1,998 676 722 39 759 2,449,692
Feb-05 4,031 676 722 79 759 2,445,661
Mar-05 7,127 676 722 140 759 2,438,534
Apr-05 17,193 676 722 337 759 2,421,341
May-05 15,952 676 722 313 759 2,405,389
Jun-05 18,725 676 722 367 759 2,386,664
Jul-05 18,388 676 722 361 759 2,368,276
Aug-05 19,967 676 722 391 759 2,348,309
Sep-05 17,285 676 722 339 759 2,331,024
Oct-05 15,461 676 722 303 759 2,315,563
Nov-05 6,742 676 722 132 759 2,308,821
Dec-05 3,178 676 722 62 759 2,305,643
Jan-06 1,998 700 758 41 797 2,303,646
Feb-06 4,031 700 758 82 797 2,299,615
Mar-06 7,127 700 758 145 797 2,292,488
Apr-06 17,193 700 758 349 797 2,275,295
May-06 15,952 700 758 324 797 2,259,343
Jun-06 18,725 700 758 380 797 2,240,617
Jul-06 18,388 700 758 373 797 2,222,229
Aug-06 19,967 700 758 405 797 2,202,263
Sep-06 17,285 700 758 351 797 2,184,978
Oct-06 15,461 700 758 314 797 2,169,516
Nov-06 6,742 700 758 137 797 2,162,775
Dec-06 3,178 700 758 64 797 2,159,597
Jan-07 1,998 724 796 42 837 2,157,599
Feb-07 4,031 724 796 85 837 2,153,568
Mar-07 7,127 724 796 150 837 2,146,441
Apr-07 17,193 724 796 361 837 2,129,248
May-07 15,952 724 796 335 837 2,113,296
Jun-07 18,725 724 796 393 837 2,094,571
Jul-07 18,388 724 796 386 837 2,076,183
Aug-07 19,967 724 796 419 837 2,056,216
Sep-07 17,285 724 796 363 837 2,038,931
Oct-07 15,461 724 796 325 837 2,023,470
Nov-07 6,742 724 796 142 837 2,016,728
Dec-07 3,178 724 796 67 837 2,013,550
<CAPTION>
A H I J K L
- --------------- ----------- ----------- ----------- ----------- ---------------
Column I = Column J + Column K
------------------------------
Production Collateral Structuring Discounted Minimum
Month Value Collateral Servicing Structuring Principal
(Period Ending) Factor(4) Value Obligation Balance Amortization(5)
- --------------- ----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Jan-05 0.382872823 937,921 138,289 799,631 0
Feb-05 0.385089926 941,800 138,413 803,386 0
Mar-05 0.386992713 943,695 138,538 805,157 0
Apr-05 0.387822170 939,050 138,663 800,387 0
May-05 0.388766581 935,135 138,789 796,346 0
Jun-05 0.389383662 929,328 138,916 790,412 4,182
Jul-05 0.390159604 924,006 139,043 784,962 0
Aug-05 0.390742149 917,583 139,171 778,412 0
Sep-05 0.391584535 912,793 139,301 773,493 0
Oct-05 0.392606777 909,106 139,430 769,675 0
Nov-05 0.394591728 911,042 139,561 771,481 0
Dec-05 0.396987360 915,311 139,693 775,619 14,794
Jan-06 0.399527565 920,370 139,789 780,581 0
Feb-06 0.401850072 924,100 139,886 784,214 0
Mar-06 0.403830476 925,776 139,983 785,793 0
Apr-06 0.404642726 920,681 140,081 780,600 0
May-06 0.405578537 916,341 140,180 776,161 0
Jun-06 0.406156150 910,041 140,279 769,761 5,857
Jul-06 0.406906499 904,240 140,379 763,860 0
Aug-06 0.407444031 897,299 140,480 756,819 0
Sep-06 0.408262961 892,045 140,581 751,465 0
Oct-06 0.409276582 887,932 140,683 747,250 0
Nov-06 0.411340932 889,638 140,785 748,853 0
Dec-06 0.413853575 893,757 140,888 752,869 16,892
Jan-07 0.416523908 898,692 140,954 757,738 0
Feb-07 0.418955621 902,249 141,020 761,229 0
Mar-07 0.421012980 903,679 141,087 762,593 0
Apr-07 0.421792142 898,100 141,154 756,946 0
May-07 0.422704573 893,300 141,221 752,079 0
Jun-07 0.423222624 886,470 141,289 745,181 7,688
Jul-07 0.423929016 880,154 141,357 738,797 0
Aug-07 0.424399550 872,657 141,426 731,231 0
Sep-07 0.425176297 866,905 141,495 725,410 0
Oct-07 0.426164791 862,331 141,564 720,767 0
Nov-07 0.428306992 863,779 141,634 722,144 0
Dec-07 0.430941505 867,722 141,705 726,017 19,163
</TABLE>
I-4
<PAGE>
<TABLE>
<CAPTION>
A B C D E F G
- ------------- ----------- ------------ --------- ----- --------------- -----------
Structuring
Deemed
Production Structuring Remaining
Month Structuring Mbfe Harvest
(Period Harvest Price Operating Yield Capital Quantity
Ending) (Mbfe) ($ per Mbfe) Costs(1) Taxes Expenditures(2) (Mbfe)(3)
- ------------- ----------- ------------ --------- ----- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jan-08 1,627 750 792 35 809 2,011,923
Feb-08 3,282 750 792 71 809 2,008,641
Mar-08 5,803 750 792 126 809 2,002,838
Apr-08 13,999 750 792 304 809 1,988,839
May-08 12,989 750 792 282 809 1,975,850
Jun-08 15,247 750 792 331 809 1,960,603
Jul-08 14,973 750 792 325 809 1,945,630
Aug-08 16,258 750 792 353 809 1,929,372
Sep-08 14,074 750 792 306 809 1,915,298
Oct-08 12,589 750 792 274 809 1,902,709
Nov-08 5,489 750 792 119 809 1,897,219
Dec-08 2,588 750 792 56 809 1,894,632
Jan-09 1,627 776 831 37 849 1,893,005
Feb-09 3,282 776 831 74 849 1,889,723
Mar-09 5,803 776 831 131 849 1,883,920
Apr-09 13,999 776 831 315 849 1,869,920
May-09 12,989 776 831 292 849 1,856,932
Jun-09 15,247 776 831 343 849 1,841,684
Jul-09 14,973 776 831 337 849 1,826,712
Aug-09 16,258 776 831 366 849 1,810,454
Sep-09 14,074 776 831 317 849 1,796,380
Oct-09 12,589 776 831 283 849 1,783,790
Nov-09 5,489 776 831 123 849 1,778,301
Dec-09 2,588 776 831 58 849 1,775,714
Jan-10 1,627 803 873 38 892 1,774,087
Feb-10 3,282 803 873 76 892 1,770,805
Mar-10 5,803 803 873 135 892 1,765,001
Apr-10 13,999 803 873 326 892 1,751,002
May-10 12,989 803 873 302 892 1,738,013
Jun-10 15,247 803 873 355 892 1,722,766
Jul-10 14,973 803 873 349 892 1,707,794
Aug-10 16,258 803 873 379 892 1,691,536
Sep-10 14,074 803 873 328 892 1,677,462
Oct-10 12,589 803 873 293 892 1,664,872
Nov-10 5,489 803 873 128 892 1,659,383
Dec-10 2,588 803 873 60 892 1,656,795
<CAPTION>
A H I J K L
- --------------- ----------- ----------- ----------- ----------- ---------------
Column I = Column J + Column K
------------------------------
Production Collateral Structuring Discounted Minimum
Month Value Collateral Servicing Structuring Principal
(Period Ending) Factor(4) Value Obligation Balance Amortization(5)
- --------------- ----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Jan-08 0.433768748 872,709 141,780 730,930 0
Feb-08 0.436382413 876,536 141,855 734,681 0
Mar-08 0.438664756 878,574 141,931 736,644 0
Apr-08 0.439810302 874,712 142,007 732,705 0
May-08 0.441081886 871,512 142,084 729,428 0
Jun-08 0.442010224 866,606 142,161 724,446 1,572
Jul-08 0.443112636 862,133 142,238 719,895 0
Aug-08 0.444015150 856,671 142,316 714,354 0
Sep-08 0.445196612 852,684 142,395 710,289 0
Oct-08 0.446572245 849,697 142,474 707,223 0
Nov-08 0.448967362 851,790 142,554 709,236 0
Dec-08 0.451798662 855,992 142,634 713,358 11,087
Jan-09 0.454787557 860,915 142,675 718,240 0
Feb-09 0.457545807 864,635 142,716 721,919 0
Mar-09 0.459946995 866,503 142,758 723,746 0
Apr-09 0.461122531 862,262 142,799 719,463 0
May-09 0.462432848 858,706 142,841 715,865 0
Jun-09 0.463371469 853,384 142,884 710,500 2,858
Jul-09 0.464499629 848,507 142,926 705,581 0
Aug-09 0.465409340 842,602 142,969 699,633 0
Sep-09 0.466617146 838,222 143,012 695,210 0
Oct-09 0.468032392 834,872 143,055 691,816 0
Nov-09 0.470548407 836,777 143,099 693,678 0
Dec-09 0.473536426 840,865 143,143 697,722 12,778
Jan-10 0.476695955 845,700 143,146 702,554 0
Feb-10 0.479606654 849,290 143,148 706,141 0
Mar-10 0.482132005 850,964 143,151 707,813 0
Apr-10 0.483331290 846,314 143,154 703,160 0
May-10 0.484673857 842,370 143,157 699,213 0
Jun-10 0.485611073 836,594 143,159 693,435 4,287
Jul-10 0.486753744 831,275 143,162 688,113 0
Aug-10 0.487657651 824,890 143,165 681,725 0
Sep-10 0.488882640 820,082 143,168 676,914 0
Oct-10 0.490331081 816,339 143,171 673,168 0
Nov-10 0.492974065 818,033 143,174 674,859 0
Dec-10 0.496129491 821,995 143,177 679,808 14,626
</TABLE>
I-5
<PAGE>
<TABLE>
<CAPTION>
A B C D E F G
- ------------- ----------- ------------ --------- ----- --------------- -----------
Structuring
Deemed
Production Structuring Remaining
Month Structuring Mbfe Harvest
(Period Harvest Price Operating Yield Capital Quantity
Ending) (Mbfe) ($ per Mbfe) Costs(1) Taxes Expenditures(2) (Mbfe)(3)
- ------------- ----------- ------------ --------- ----- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jan-11 1,627 831 916 39 937 1,655,168
Feb-11 3,282 831 916 79 937 1,651,886
Mar-11 5,803 831 916 140 937 1,646,083
Apr-11 13,999 831 916 337 937 1,632,084
May-11 12,989 831 916 313 937 1,619,095
Jun-11 15,247 831 916 367 937 1,603,848
Jul-11 14,973 831 916 361 937 1,588,875
Aug-11 16,258 831 916 392 937 1,572,618
Sep-11 14,074 831 916 339 937 1,558,543
Oct-11 12,589 831 916 303 937 1,545,954
Nov-11 5,489 831 916 132 937 1,540,465
Dec-11 2,588 831 916 62 937 1,537,877
Jan-12 1,627 860 962 41 983 1,536,250
Feb-12 3,282 860 962 82 983 1,532,968
Mar-12 5,803 860 962 145 983 1,527,165
Apr-12 13,999 860 962 349 983 1,513,166
May-12 12,989 860 962 324 983 1,500,177
Jun-12 15,247 860 962 380 983 1,484,930
Jul-12 14,973 860 962 373 983 1,469,957
Aug-12 16,258 860 962 406 983 1,453,699
Sep-12 14,074 860 962 351 983 1,439,625
Oct-12 12,589 860 962 314 983 1,427,036
Nov-12 5,489 860 962 137 983 1,421,546
Dec-12 2,588 860 962 65 983 1,418,959
Jan-13 1,627 890 1,010 42 1,033 1,417,332
Feb-13 3,282 890 1,010 85 1,033 1,414,050
Mar-13 5,803 890 1,010 150 1,033 1,408,247
Apr-13 13,999 890 1,010 361 1,033 1,394,247
May-13 12,989 890 1,010 335 1,033 1,381,259
Jun-13 15,247 890 1,010 394 1,033 1,366,011
Jul-13 14,973 890 1,010 387 1,033 1,351,039
Aug-13 16,258 890 1,010 420 1,033 1,334,781
Sep-13 14,074 890 1,010 363 1,033 1,320,707
Oct-13 12,589 890 1,010 325 1,033 1,308,117
Nov-13 5,489 890 1,010 142 1,033 1,302,628
Dec-13 2,588 890 1,010 67 1,033 1,300,041
<CAPTION>
A H I J K L
- --------------- ----------- ----------- ----------- ----------- ---------------
Column I = Column J + Column K
------------------------------
Production Collateral Structuring Discounted Minimum
Month Value Collateral Servicing Structuring Principal
(Period Ending) Factor(4) Value Obligation Balance Amortization(5)
- --------------- ----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Jan-11 0.499471208 826,709 143,136 683,573 0
Feb-11 0.502541835 830,142 143,095 687,047 0
Mar-11 0.505193626 831,591 143,054 688,537 0
Apr-11 0.506403528 826,493 143,013 683,480 0
May-11 0.507767302 822,124 142,971 679,152 0
Jun-11 0.508687643 815,858 142,929 672,928 5,880
Jul-11 0.509833018 810,061 142,887 667,174 0
Aug-11 0.510715781 803,161 142,845 660,316 0
Sep-11 0.511945785 797,890 142,802 655,088 0
Oct-11 0.513417451 793,720 142,759 650,961 0
Nov-11 0.516192241 795,176 142,716 652,460 0
Dec-11 0.519526327 798,968 142,673 656,295 16,633
Jan-12 0.523063815 803,557 142,583 660,974 0
Feb-12 0.526304288 806,808 142,493 664,314 0
Mar-12 0.529087000 808,003 142,403 665,600 0
Apr-12 0.530293132 802,421 142,312 660,109 0
May-12 0.531665060 797,592 142,220 655,371 0
Jun-12 0.532548725 790,797 142,128 648,669 7,626
Jul-12 0.533679832 784,486 142,036 642,451 0
Aug-12 0.534519877 777,031 141,942 635,089 0
Sep-12 0.535737279 771,261 141,849 629,412 0
Oct-12 0.537217295 766,628 141,754 624,874 0
Nov-12 0.540127995 767,817 141,659 626,158 0
Dec-12 0.543653080 771,421 141,564 629,858 18,811
Jan-13 0.547401665 775,850 141,420 634,430 0
Feb-13 0.550822586 779,891 141,275 637,616 0
Mar-13 0.553739820 779,802 141,129 638,674 0
Apr-13 0.554921442 773,698 140,982 632,716 0
May-13 0.556282408 768,370 140,834 627,535 0
Jun-13 0.557101438 761,007 140,686 620,321 9,537
Jul-13 0.558193732 754,141 140,536 613,605 0
Aug-13 0.558960362 746,090 140,386 605,704 0
Sep-13 0.560139504 739,780 140,235 599,545 0
Oct-13 0.561605695 734,646 140,082 594,564 0
Nov-13 0.564655051 735,536 139,929 595,606 0
Dec-13 0.568384716 738,923 139,775 599,148 21,173
</TABLE>
I-6
<PAGE>
<TABLE>
<CAPTION>
A B C D E F G
- ------------- ----------- ------------ --------- ----- --------------- -----------
Structuring
Deemed
Production Structuring Remaining
Month Structuring Mbfe Harvest
(Period Harvest Price Operating Yield Capital Quantity
Ending) (Mbfe) ($ per Mbfe) Costs(1) Taxes Expenditures(2) (Mbfe)(3)
- ------------- ----------- ------------ --------- ----- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jan-14 1,627 921 1,060 43 1,084 1,298,414
Feb-14 3,282 921 1,060 88 1,084 1,295,132
Mar-14 5,803 921 1,060 155 1,084 1,289,328
Apr-14 13,999 921 1,060 374 1,084 1,275,329
May-14 12,989 921 1,060 347 1,084 1,262,340
Jun-14 15,247 921 1,060 407 1,084 1,247,093
Jul-14 14,973 921 1,060 400 1,084 1,232,121
Aug-14 16,258 921 1,060 434 1,084 1,215,863
Sep-14 14,074 921 1,060 376 1,084 1,201,789
Oct-14 12,589 921 1,060 336 1,084 1,189,199
Nov-14 5,489 921 1,060 147 1,084 1,183,710
Dec-14 2,588 921 1,060 69 1,084 1,181,122
Jan-15 1,627 954 1,113 45 1,138 1,179,495
Feb-15 3,282 954 1,113 91 1,138 1,176,213
Mar-15 5,803 954 1,113 160 1,138 1,170,410
Apr-15 13,999 954 1,113 387 1,138 1,156,411
May-15 12,989 954 1,113 359 1,138 1,143,422
Jun-15 15,247 954 1,113 422 1,138 1,128,175
Jul-15 14,973 954 1,113 414 1,138 1,113,202
Aug-15 16,258 954 1,113 450 1,138 1,096,945
Sep-15 14,074 954 1,113 389 1,138 1,082,870
Oct-15 12,589 954 1,113 348 1,138 1,070,281
Nov-15 5,489 954 1,113 152 1,138 1,064,792
Dec-15 2,588 954 1,113 72 1,138 1,062,204
Jan-16 1,627 987 1,169 47 1,195 1,060,577
Feb-16 3,282 987 1,169 94 1,195 1,057,295
Mar-16 5,803 987 1,169 166 1,195 1,051,492
Apr-16 13,999 987 1,169 401 1,195 1,037,492
May-16 12,989 987 1,169 372 1,195 1,024,504
Jun-16 15,247 987 1,169 436 1,195 1,009,257
Jul-16 14,973 987 1,169 429 1,195 994,284
Aug-16 16,258 987 1,169 465 1,195 978,026
Sep-16 14,074 987 1,169 403 1,195 963,952
Oct-16 12,589 987 1,169 360 1,195 951,363
Nov-16 5,489 987 1,169 157 1,195 945,873
Dec-16 2,588 987 1,169 74 1,195 943,286
<CAPTION>
A H I J K L
- --------------- ----------- ----------- ----------- ----------- ---------------
Column I = Column J + Column K
------------------------------
Production Collateral Structuring Discounted Minimum
Month Value Collateral Servicing Structuring Principal
(Period Ending) Factor(4) Value Obligation Balance Amortization(5)
- --------------- ----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Jan-14 0.572361896 743,163 139,570 603,593 0
Feb-14 0.575974537 745,963 139,363 606,599 0
Mar-14 0.579028310 746,558 139,155 607,402 0
Apr-14 0.580155240 739,889 138,946 600,943 0
May-14 0.581477063 734,022 138,736 595,286 0
Jun-14 0.582191363 726,047 138,524 587,523 11,625
Jul-14 0.583208886 718,584 138,311 580,273 0
Aug-14 0.583857668 709,891 138,097 571,794 0
Sep-14 0.584960675 702,999 137,881 565,118 0
Oct-14 0.586379688 697,322 137,664 559,658 0
Nov-14 0.589568017 697,878 137,446 560,431 0
Dec-14 0.593517243 701,016 137,226 563,790 23,733
Jan-15 0.597743290 705,035 136,953 568,083 0
Feb-15 0.601559473 707,562 136,677 570,885 0
Mar-15 0.604749016 707,804 136,400 571,404 0
Apr-15 0.605776593 700,527 136,121 564,405 0
May-15 0.607017103 694,077 135,841 558,236 0
Jun-15 0.607567919 685,443 135,558 549,884 13,905
Jul-15 0.608456935 677,336 135,274 542,061 0
Aug-15 0.608922020 667,954 134,989 532,965 0
Sep-15 0.609891799 660,434 134,701 525,732 0
Oct-15 0.611212547 654,169 134,412 519,757 0
Nov-15 0.614535813 654,353 134,121 520,231 0
Dec-15 0.618721105 657,208 133,828 523,380 26,505
Jan-16 0.623219920 660,973 133,478 527,495 0
Feb-16 0.627251672 663,190 133,126 530,064 0
Mar-16 0.630571265 663,041 132,772 530,269 0
Apr-16 0.631431776 655,106 132,415 522,690 0
May-16 0.632526374 648,026 132,057 515,969 0
Jun-16 0.632825088 638,683 131,696 506,987 16,392
Jul-16 0.633503001 629,882 131,333 498,549 0
Aug-16 0.633683696 619,759 130,967 488,792 0
Sep-16 0.634431579 611,562 130,600 480,962 0
Oct-16 0.635573585 604,661 130,230 474,431 0
Nov-16 0.639019778 604,432 129,858 474,574 0
Dec-16 0.643459123 606,966 129,484 477,482 29,505
</TABLE>
I-7
<PAGE>
<TABLE>
<CAPTION>
A B C D E F G
- ------------- ----------- ------------ --------- ----- --------------- -----------
Structuring
Deemed
Production Structuring Remaining
Month Structuring Mbfe Harvest
(Period Harvest Price Operating Yield Capital Quantity
Ending) (Mbfe) ($ per Mbfe) Costs(1) Taxes Expenditures(2) (Mbfe)(3)
- ------------- ----------- ------------ --------- ----- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jan-17 1,627 1,022 1,227 48 1,255 941,659
Feb-17 3,282 1,022 1,227 97 1,255 938,377
Mar-17 5,803 1,022 1,227 172 1,255 932,574
Apr-17 13,999 1,022 1,227 415 1,255 918,574
May-17 12,989 1,022 1,227 385 1,255 905,585
Jun-17 15,247 1,022 1,227 452 1,255 890,338
Jul-17 14,973 1,022 1,227 444 1,255 875,366
Aug-17 16,258 1,022 1,227 482 1,255 859,108
Sep-17 14,074 1,022 1,227 417 1,255 845,034
Oct-17 12,589 1,022 1,227 373 1,255 832,444
Nov-17 5,489 1,022 1,227 163 1,255 826,955
Dec-17 2,588 1,022 1,227 77 1,255 824,367
Jan-18 1,080 1,057 1,148 33 1,095 823,288
Feb-18 2,178 1,057 1,148 67 1,095 821,110
Mar-18 3,851 1,057 1,148 118 1,095 817,258
Apr-18 9,291 1,057 1,148 285 1,095 807,967
May-18 8,620 1,057 1,148 264 1,095 799,347
Jun-18 10,119 1,057 1,148 310 1,095 789,228
Jul-18 9,937 1,057 1,148 305 1,095 779,291
Aug-18 10,790 1,057 1,148 331 1,095 768,501
Sep-18 9,341 1,057 1,148 286 1,095 759,160
Oct-18 8,355 1,057 1,148 256 1,095 750,805
Nov-18 3,643 1,057 1,148 112 1,095 747,162
Dec-18 1,717 1,057 1,148 53 1,095 745,445
Jan-19 1,080 1,094 1,205 34 1,149 744,365
Feb-19 2,178 1,094 1,205 69 1,149 742,187
Mar-19 3,851 1,094 1,205 122 1,149 738,335
Apr-19 9,291 1,094 1,205 295 1,149 729,044
May-19 8,620 1,094 1,205 274 1,149 720,424
Jun-19 10,119 1,094 1,205 321 1,149 710,305
Jul-19 9,937 1,094 1,205 315 1,149 700,368
Aug-19 10,790 1,094 1,205 342 1,149 689,578
Sep-19 9,341 1,094 1,205 296 1,149 680,238
Oct-19 8,355 1,094 1,205 265 1,149 671,882
Nov-19 3,643 1,094 1,205 116 1,149 668,239
Dec-19 1,717 1,094 1,205 55 1,149 666,522
<CAPTION>
A H I J K L
- --------------- ----------- ----------- ----------- ----------- ---------------
Column I = Column J + Column K
------------------------------
Production Collateral Structuring Discounted Minimum
Month Value Collateral Servicing Structuring Principal
(Period Ending) Factor(4) Value Obligation Balance Amortization(5)
- --------------- ----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Jan-17 0.648259469 610,439 129,049 481,390 0
Feb-17 0.652520179 612,310 128,612 483,698 0
Mar-17 0.655958348 611,729 128,171 483,558 0
Apr-17 0.656548921 603,089 127,728 475,360 0
May-17 0.657394308 595,327 127,283 468,044 0
Jun-17 0.657297089 585,217 126,835 458,382 19,100
Jul-17 0.657621458 575,659 126,384 449,276 0
Aug-17 0.657341164 564,727 125,930 438,797 0
Sep-17 0.657700957 555,780 125,473 430,306 0
Oct-17 0.658503770 548,168 125,014 423,154 0
Nov-17 0.662012877 547,455 124,552 422,903 0
Dec-17 0.666692084 549,599 124,087 425,512 32,870
Jan-18 0.671762307 553,054 123,698 429,355 0
Feb-18 0.676404547 555,402 123,307 432,095 0
Mar-18 0.680417192 556,076 122,914 433,162 0
Apr-18 0.682235703 551,224 122,518 428,706 0
May-18 0.684289686 546,985 122,120 424,864 0
Jun-18 0.685661273 541,143 121,720 419,423 6,089
Jul-18 0.687384691 535,673 121,317 414,356 0
Aug-18 0.688701641 529,268 120,911 408,356 0
Sep-18 0.690547961 524,237 120,504 403,733 0
Oct-18 0.692766768 520,133 120,093 400,040 0
Nov-18 0.697008336 520,778 119,680 401,098 0
Dec-18 0.702126340 523,396 119,265 404,131 15,292
Jan-19 0.707584447 526,701 118,790 407,911 0
Feb-19 0.712569351 528,860 118,312 410,548 0
Mar-19 0.716859709 529,283 117,831 411,452 0
Apr-19 0.718727879 523,984 117,347 406,638 0
May-19 0.720852216 519,319 116,860 402,460 0
Jun-19 0.722216178 512,994 116,370 396,624 7,508
Jul-19 0.723976630 507,050 115,877 391,173 0
Aug-19 0.725280735 500,138 115,381 384,757 0
Sep-19 0.727165522 494,645 114,882 379,763 0
Oct-19 0.729460015 490,111 114,380 375,731 0
Nov-19 0.734004985 490,491 113,875 376,616 0
Dec-19 0.739526877 492,911 113,367 379,544 17,080
</TABLE>
I-8
<PAGE>
<TABLE>
<CAPTION>
A B C D E F G
- ------------- ----------- ------------ --------- ----- --------------- -----------
Structuring
Deemed
Production Structuring Remaining
Month Structuring Mbfe Harvest
(Period Harvest Price Operating Yield Capital Quantity
Ending) (Mbfe) ($ per Mbfe) Costs(1) Taxes Expenditures(2) (Mbfe)(3)
- ------------- ----------- ------------ --------- ----- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jan-20 1,080 1,133 1,265 35 1,207 665,442
Feb-20 2,178 1,133 1,265 72 1,207 663,264
Mar-20 3,851 1,133 1,265 127 1,207 659,413
Apr-20 9,291 1,133 1,265 305 1,207 650,122
May-20 8,620 1,133 1,265 283 1,207 641,501
Jun-20 10,119 1,133 1,265 332 1,207 631,382
Jul-20 9,937 1,133 1,265 326 1,207 621,445
Aug-20 10,790 1,133 1,265 354 1,207 610,656
Sep-20 9,341 1,133 1,265 307 1,207 601,315
Oct-20 8,355 1,133 1,265 274 1,207 592,960
Nov-20 3,643 1,133 1,265 120 1,207 589,316
Dec-20 1,717 1,133 1,265 56 1,207 587,599
Jan-21 1,080 1,172 1,328 37 1,267 586,519
Feb-21 2,178 1,172 1,328 74 1,267 584,341
Mar-21 3,851 1,172 1,328 131 1,267 580,490
Apr-21 9,291 1,172 1,328 316 1,267 571,199
May-21 8,620 1,172 1,328 293 1,267 562,579
Jun-21 10,119 1,172 1,328 344 1,267 552,459
Jul-21 9,937 1,172 1,328 338 1,267 542,523
Aug-21 10,790 1,172 1,328 367 1,267 531,733
Sep-21 9,341 1,172 1,328 318 1,267 522,392
Oct-21 8,355 1,172 1,328 284 1,267 514,037
Nov-21 3,643 1,172 1,328 124 1,267 510,394
Dec-21 1,717 1,172 1,328 58 1,267 508,676
Jan-22 1,080 1,213 1,395 38 1,330 507,597
Feb-22 2,178 1,213 1,395 77 1,330 505,418
Mar-22 3,851 1,213 1,395 136 1,330 501,567
Apr-22 9,291 1,213 1,395 327 1,330 492,276
May-22 8,620 1,213 1,395 303 1,330 483,656
Jun-22 10,119 1,213 1,395 356 1,330 473,537
Jul-22 9,937 1,213 1,395 350 1,330 463,600
Aug-22 10,790 1,213 1,395 380 1,330 452,810
Sep-22 9,341 1,213 1,395 329 1,330 443,469
Oct-22 8,355 1,213 1,395 294 1,330 435,114
Nov-22 3,643 1,213 1,395 128 1,330 431,471
Dec-22 1,717 1,213 1,395 60 1,330 429,754
<CAPTION>
A H I J K L
- --------------- ----------- ----------- ----------- ----------- ---------------
Column I = Column J + Column K
------------------------------
Production Collateral Structuring Discounted Minimum
Month Value Collateral Servicing Structuring Principal
(Period Ending) Factor(4) Value Obligation Balance Amortization(5)
- --------------- ----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Jan-20 0.745429612 496,040 112,796 383,244 0
Feb-20 0.750804467 497,982 112,221 385,760 0
Mar-20 0.755406499 498,125 111,643 386,482 0
Apr-20 0.757310530 492,344 111,061 381,283 0
May-20 0.759494846 487,217 110,476 376,741 0
Jun-20 0.760822550 480,370 109,887 370,483 9,061
Jul-20 0.762601518 473,915 109,294 364,621 0
Aug-20 0.763861410 466,456 108,698 357,758 0
Sep-20 0.765763516 460,465 108,098 352,367 0
Oct-20 0.768119884 455,464 107,495 347,969 0
Nov-20 0.773009125 455,547 106,888 348,659 0
Dec-20 0.779000360 457,740 106,277 351,463 19,020
Jan-21 0.785423406 460,666 105,599 355,067 0
Feb-21 0.791250842 462,360 104,918 357,443 0
Mar-21 0.796208824 462,191 104,232 357,959 0
Apr-21 0.798126673 455,889 103,542 352,347 0
May-21 0.800353369 450,262 102,847 347,414 0
Jun-21 0.801601112 442,852 102,149 340,703 10,759
Jul-21 0.803368808 435,846 101,446 334,400 0
Aug-21 0.804535759 427,798 100,739 327,059 0
Sep-21 0.806420321 421,268 100,027 321,240 0
Oct-21 0.808814140 415,760 99,311 316,449 0
Nov-21 0.814102613 415,513 98,591 316,922 0
Dec-21 0.820654158 417,447 97,867 319,581 21,123
Jan-22 O.827703518 420,140 97,072 323,068 0
Feb-22 0.834070727 421,555 96,271 325,283 0
Mar-22 0.839445487 421,038 95,467 325,572 0
Apr-22 0.841341648 414,172 94,657 319,516 0
May-22 0.843581133 408,003 93,842 314,161 0
Jun-22 0.844679990 399,987 93,022 306,965 12,616
Jul-22 0.846387358 392,385 92,197 300,188 0
Aug-22 0.847382661 383,703 91,367 292,336 0
Sep-22 0.849190717 376,590 90,533 286,057 0
Oct-22 0.851578096 370,534 89,693 280,841 0
Nov-22 0.857344379 369,919 88,847 281,072 0
Dec-22 0.864590848 371,561 87,997 283,564 23,401
</TABLE>
I-9
<PAGE>
<TABLE>
<CAPTION>
A B C D E F G
- ------------- ----------- ------------ --------- ----- --------------- -----------
Structuring
Deemed
Production Structuring Remaining
Month Structuring Mbfe Harvest
(Period Harvest Price Operating Yield Capital Quantity
Ending) (Mbfe) ($ per Mbfe) Costs(1) Taxes Expenditures(2) (Mbfe)(3)
- ------------- ----------- ------------ --------- ----- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jan-23 1,080 1,256 1,464 39 1,397 428,674
Feb-23 2,178 1,256 1,464 79 1,397 426,496
Mar-23 3,851 1,256 1,464 140 1,397 422,644
Apr-23 9,291 1,256 1,464 338 1,397 413,353
May-23 8,620 1,256 1,464 314 1,397 404,733
Jun-23 10,119 1,256 1,464 369 1,397 394,614
Jul-23 9,937 1,256 1,464 362 1,397 384,677
Aug-23 10,790 1,256 1,464 393 1,397 373,887
Sep-23 9,341 1,256 1,464 340 1,397 364,547
Oct-23 8,355 1,256 1,464 304 1,397 356,191
Nov-23 3,643 1,256 1,464 133 1,397 352,548
Dec-23 1,717 1,256 1,464 63 1,397 350,831
Jan-24 1,080 1,300 1,537 41 1,467 349,751
Feb-24 2,178 1,300 1,537 82 1,467 347,573
Mar-24 3,851 1,300 1,537 145 1,467 343,721
Apr-24 9,291 1,300 1,537 350 1,467 334,430
May-24 8,620 1,300 1,537 325 1,467 325,810
Jun-24 10,119 1,300 1,537 381 1,467 315,691
Jul-24 9,937 1,300 1,537 375 1,467 305,754
Aug-24 10,790 1,300 1,537 407 1,467 294,964
Sep-24 9,341 1,300 1,537 352 1,467 285,624
Oct-24 8,355 1,300 1,537 315 1,467 277,268
Nov-24 3,643 1,300 1,537 137 1,467 273,625
Dec-24 1,717 1,300 1,537 65 1,467 271,908
Jan-25 1,080 1,345 1,614 42 1,540 270,828
Feb-25 2,178 1,345 1,614 85 1,540 268,650
Mar-25 3,851 1,345 1,614 150 1,540 264,799
Apr-25 9,291 1,345 1,614 362 1,540 255,508
May-25 8,620 1,345 1,614 336 1,540 246,887
Jun-25 10,119 1,345 1,614 395 1,540 236,768
Jul-25 9,937 1,345 1,614 388 1,540 226,831
Aug-25 10,790 1,345 1,614 421 1,540 216,042
Sep-25 9,341 1,345 1,614 364 1,540 206,701
Oct-25 8,355 1,345 1,614 326 1,540 198,346
Nov-25 3,643 1,345 1,614 142 1,540 194,703
Dec-25 1,717 1,345 1,614 67 1,540 192,985
<CAPTION>
A H I J K L
- --------------- ----------- ----------- ----------- ----------- ---------------
Column I = Column J + Column K
------------------------------
Production Collateral Structuring Discounted Minimum
Month Value Collateral Servicing Structuring Principal
(Period Ending) Factor(4) Value Obligation Balance Amortization(5)
- --------------- ----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Jan-23 0.872424644 373,986 87,072 286,913 0
Feb-23 0.879461137 375,086 86,142 288,945 0
Mar-23 0.885342188 374,185 85,205 288,980 0
Apr-23 0.887157894 366,710 84,263 282,446 0
May-23 0.889359432 359,953 83,315 276,638 0
Jun-23 0.890195186 351,283 82,362 268,922 14,642
Jul-23 0.891757660 343,039 81,402 261,636 0
Aug-23 0.892446417 333,674 80,437 253,237 0
Sep-23 0.894072481 325,931 79,466 246,465 0
Oct-23 0.896370786 318,279 78,489 240,790 0
Nov-23 0.902736756 318,258 77,506 240,752 0
Dec-23 0.910894728 319,570 76,517 243,053 25,869
Jan-24 0.919769515 321,690 75,449 246,242 0
Feb-24 0.927685028 322,438 74,374 248,064 0
Mar-24 0.934216956 321,110 73,293 247,817 0
Apr-24 0.935850014 312,977 72,205 240,772 0
May-24 0.937922365 305,585 71,111 234,474 0
Jun-24 0.938291080 296,210 70,010 226,201 16,853
Jul-24 0.939551335 287,272 68,902 218,370 0
Aug-24 0.939680365 277,172 67,787 209,385 0
Sep-24 0.940917110 268,748 66,666 202,082 0
Oct-24 0.942955486 261,452 65,538 195,914 0
Nov-24 0.950132725 259,980 64,403 195,578 0
Dec-24 0.959594034 260,921 63,261 197,661 28,540
Jan-25 0.969978363 262,698 62,035 200,663 0
Feb-25 0.979156638 263,051 60,802 202,249 0
Mar-25 0.986605944 261,252 59,561 201,691 0
Apr-25 0.987863943 252,407 58,313 194,094 0
May-25 0.989628425 244,327 57,057 187,270 0
Jun-25 0.989120963 234,193 55,793 178,399 19,262
Jul-25 0.989746805 224,506 54,522 169,984 0
Aug-25 0.988765830 213,615 53,243 160,371 0
Sep-25 0.989134875 204,455 51,956 152,499 0
Oct-25 0.990493822 196,460 50,662 145,799 0
Nov-25 0.998916382 194,492 49,359 145,132 0
Dec-25 1.010529182 195,017 48,049 146,969 31,431
</TABLE>
I-10
<PAGE>
<TABLE>
<CAPTION>
A B C D E F G
- ------------- ----------- ------------ --------- ----- --------------- -----------
Structuring
Deemed
Production Structuring Remaining
Month Structuring Mbfe Harvest
(Period Harvest Price Operating Yield Capital Quantity
Ending) (Mbfe) ($ per Mbfe) Costs(1) Taxes Expenditures(2) (Mbfe)(3)
- ------------- ----------- ------------ --------- ----- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jan-26 1,080 1,392 1,695 44 1,617 191,906
Feb-26 2,178 1,392 1,695 88 1,617 189,727
Mar-26 3,851 1,392 1,695 156 1,617 185,876
Apr-26 9,291 1,392 1,695 375 1,617 176,585
May-26 8,620 1,392 1,695 348 1,617 167,965
Jun-26 10,119 1,392 1,695 409 1,617 157,846
Jul-26 9,937 1,392 1,695 401 1,617 147,909
Aug-26 10,790 1,392 1,695 436 1,617 137,119
Sep-26 9,341 1,392 1,695 377 1,617 127,778
Oct-26 8,355 1,392 1,695 337 1,617 119,423
Nov-26 3,643 1,392 1,695 147 1,617 115,780
Dec-26 1,717 1,392 1,695 69 1,617 114,062
Jan-27 1,080 1,441 1,779 45 1,698 112,983
Feb-27 2,178 1,441 1,779 91 1,698 110,805
Mar-27 3,851 1,441 1,779 161 1,698 106,953
Apr-27 9,291 1,441 1,779 388 1,698 97,662
May-27 8,620 1,441 1,779 360 1,698 89,042
Jun-27 10,119 1,441 1,779 423 1,698 78,923
Jul-27 9,937 1,441 1,779 415 1,698 68,986
Aug-27 10,790 1,441 1,779 451 1,698 58,196
Sep-27 9,341 1,441 1,779 390 1,698 48,855
Oct-27 8,355 1,441 1,779 349 1,698 40,500
Nov-27 3,643 1,441 1,779 152 1,698 36,857
Dec-27 1,717 1,441 1,779 72 1,698 35,140
Jan-28 1,080 1,491 1,868 47 1,783 34,060
Feb-28 2,178 1,491 1,868 94 1,783 31,882
Mar-28 3,851 1,491 1,868 167 1,783 28,030
Apr-28 9,291 1,491 1,868 402 1,783 18,739
May-28 8,620 1,491 1,868 373 1,783 10,119
Jun-28 10,119 1,491 1,868 438 1,783 0
-----------
Total 3,397,345
<CAPTION>
A H I J K L
- --------------- ----------- ----------- ----------- ----------- ---------------
Column I = Column J + Column K
------------------------------
Production Collateral Structuring Discounted Minimum
Month Value Collateral Servicing Structuring Principal
(Period Ending) Factor(4) Value Obligation Balance Amortization(5)
- --------------- ----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Jan-26 1.023449847 196,406 46,650 149,756 0
Feb-26 1.034738502 196,318 45,242 151,076 0
Mar-26 1.043708428 194,000 43,826 150,174 0
Apr-26 1.044180660 184,387 42,401 141,985 0
May-26 1.045232502 175,562 40,968 134,595 0
Jun-26 1.042847605 164,609 39,525 125,084 21,885
Jul-26 1.041957325 154,115 38,074 116,040 0
Aug-26 1.038303984 142,371 36,614 105,757 0
Sep-26 1.036304872 132,417 35,146 97,271 0
Oct-26 1.035528273 123,666 33,668 89,998 0
Nov-26 1.046374270 121,149 32,181 88,968 0
Dec-26 1.062671817 121,211 30,685 90,526 34,558
Jan-27 1.081262717 122,164 29,096 93,068 0
Feb-27 1.097305506 121,586 27,497 94,090 0
Mar-27 1.109799568 118,697 25,888 92,809 0
Apr-27 1.108440736 108,253 24,269 83,984 0
May-27 1.107601374 98,623 22,640 75,983 0
Jun-27 1.099643863 86,787 21,002 65,785 24,740
Jul-27 1.093288273 75,421 19,353 56,069 0
Aug-27 1.078427339 62,760 17,694 45,066 0
Sep-27 1.063307268 51,948 16,026 35,923 0
Oct-27 1.046368977 42,378 14,347 28,031 0
Nov-27 1.065134348 39,258 12,657 26,600 0
Dec-27 1.104259468 38,803 10,958 27,845 37,940
Jan-28 1.152941973 39,269 9,159 30,110 0
Feb-28 1.196530844 38,148 7,350 30,798 0
Mar-28 1.235393737 34,628 5,529 29,100 0
Apr-28 1.242740520 23,288 3,697 19,591 0
May-28 1.263680410 12,787 1,854 10,933 0
Jun-28 0.000000000 0 0 0 27,845
---------------
$867,248
<FN>
All dollars in thousands, except for Column C and Column H
(1) Operating Costs include administrative expenses, property taxes, the
Services Fee, and certain amounts reimbursable under the New Services
Agreement.
(2) A portion of Capital Expenditures is reimbursable under the New Services
Agreement.
(3) The Structured Harvest Quantity is 3,397,345 Mbfe. In all subsequent
periods the column represents the Deemed Remaining Harvest Quantity, which
is equal to the previous period of Column G less current period Column B.
(4) Amount in Column I divided by amount in Column G, expressed in units of
dollars (in thousands) per Mbfe.
(5) Payments to Holders on Timber Notes are due on the 20th day of the
subsequent month.
I-11
</TABLE>
<PAGE>
ANNEX 2
THE PACIFIC LUMBER COMPANY
THE TIMBER NOTES ARE SENIOR SECURED OBLIGATIONS OF SCOTIA PACIFIC COMPANY
LLC (THE "COMPANY") AND ARE NOT OBLIGATIONS OF, OR GUARANTEED BY, PACIFIC
LUMBER (AS DEFINED BELOW), ANY OF THE COMPANY'S OTHER AFFILIATES OR ANY OTHER
PERSON. ALL TERMS NOT OTHERWISE DEFINED IN THIS ANNEX 2 HAVE THE SAME
DEFINITIONS ASSIGNED THEM IN THE PROSPECTUS TO WHICH THIS ANNEX 2 IS ATTACHED.
BUSINESS
GENERAL
The Pacific Lumber Company and its subsidiaries (collectively referred to
herein as "Pacific Lumber," unless the context indicates otherwise) engage in
several principal aspects of the lumber industry--the growing and harvesting of
redwood and Douglas-fir timber, the milling of logs into lumber products and the
manufacturing of lumber into a variety of value-added finished products. Pacific
Lumber has been in continuous operation for over 125 years.
Pacific Lumber is an indirect wholly owned subsidiary of MAXXAM Group Inc.
("MGI"). MGI is a wholly owned subsidiary of MAXXAM Group Holdings Inc.
("MGHI"), which in turn is a wholly owned subsidiary of MAXXAM Inc.
("MAXXAM"). Pacific Lumber's principal wholly owned subsidiaries are the
Company and Salmon Creek Corporation ("Salmon Creek"). As used herein, the
terms "Pacific Lumber," "MGHI," "MGI," or "MAXXAM" refer to the
respective companies and their subsidiaries, unless otherwise noted or the
context indicates otherwise.
THIS ANNEX 2 TO THE PROSPECTUS CONTAINS STATEMENTS WHICH CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THESE STATEMENTS APPEAR IN A NUMBER OF PLACES
(SEE "--REGULATORY AND ENVIRONMENTAL MATTERS," "--LEGAL PROCEEDINGS," AND
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF PACIFIC LUMBER--BACKGROUND," "--FINANCIAL CONDITION AND
INVESTING AND FINANCING ACTIVITIES" AND "--TRENDS"). 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 ANNEX 2 TO THE PROSPECTUS
IDENTIFIES 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.
TIMBERLANDS
Pacific Lumber owns and manages approximately 205,000 acres of virtually
contiguous commercial timberlands located in Humboldt County along the northern
California coast, an area which has very favorable soil and climate conditions
for growing timber. These timberlands contain approximately three-quarters
redwood and one-quarter Douglas-fir timber, are located in close proximity to
Pacific Lumber's four sawmills and contain an extensive network of roads.
Approximately 179,400 acres of Pacific Lumber's timberlands are owned by the
Company (the "Scotia Pacific Timberlands"), a special purpose Delaware limited
liability company and wholly owned subsidiary of Pacific Lumber. Pacific Lumber
has the exclusive right to harvest (the "Pacific Lumber Harvest Rights")
approximately 8,000 acres of the Scotia Pacific Timberlands consisting
substantially of virgin old growth redwood and virgin old growth Douglas-fir
timber located on numerous small parcels throughout the Scotia Pacific
Timberlands. The timber on the Scotia Pacific Timberlands which is not subject
to the Pacific Lumber Harvest Rights is referred to herein as the "Scotia
Pacific Timber." Substantially all of the Company's assets are pledged as
security for the
II-1
<PAGE>
Company's 6.55% Class A-1 Timber Collateralized Notes due 2028, 7.11% Class A-2
Timber Collateralized Notes due 2028, and 7.71% Class A-3 Timber Collateralized
Notes due 2028 (collectively, the "Timber Notes"). Pacific Lumber harvests and
purchases from the Company all of the logs harvested from the Scotia Pacific
Timber. See "--Relationships With Scotia Pacific and Britt" for a description
of this and other relationships among Pacific Lumber, the Company and Britt
Lumber Co., Inc. ("Britt"), an affiliate of Pacific Lumber.
The forest products industry grades lumber in various classifications
according to quality. The two broad categories within which all grades fall,
based on the absence or presence of knots, are called "upper" and "common"
grades, respectively. "Old growth" trees, often defined as trees which have
been growing for approximately 200 years or longer, have a higher percentage of
upper grade lumber than "young growth" trees (those which have been growing
for less than 200 years). "Virgin" old growth trees are located in timber
stands that have not previously been harvested. "Residual" old growth trees
are located in timber stands which have been partially harvested in the past.
Pacific Lumber engages in extensive efforts to supplement the natural
regeneration of timber and increase the amount of timber on its timberlands.
Pacific Lumber is required to comply with California forestry regulations
regarding reforestation, which generally require that an area be reforested to
specified standards within an established period of time. Pacific Lumber also
actively engages in efforts to establish timberlands from open areas such as
pasture land. Regeneration of redwood timber generally is accomplished through
the natural growth of new redwood sprouts from the stump remaining after a
redwood tree is harvested. Such new redwood sprouts grow quickly, thriving on
existing mature root systems. In addition, Pacific Lumber supplements natural
redwood regeneration by planting redwood seedlings. Douglas-fir timber grown on
Pacific Lumber's timberlands is regenerated almost entirely by planting
seedlings. During 1997, Pacific Lumber planted an estimated 659,000 redwood and
Douglas-fir seedlings.
HARVESTING PRACTICES
The ability of Pacific Lumber to sell logs or lumber products will depend,
in part, upon its ability to obtain regulatory approval of timber harvesting
plans ("THPs"). THPs are required to be developed by registered professional
foresters and must be filed with, and approved by, the California Department of
Forestry ("CDF") prior to the harvesting of timber. Each THP is designed to
comply with applicable laws and regulations. The CDF's evaluation of proposed
THPs incorporates review and analysis of such THPs by several California and
federal agencies and public comments received with respect to such THPs. An
approved THP is applicable to specific acreage and specifies the harvesting
method and other conditions relating to the harvesting of the timber covered by
such THP. See "--Regulatory and Environmental Factors" and "--Headwaters
Agreement" for information regarding Pacific Lumber's obligation to develop a
plan establishing a long-term sustained yield level for its timberlands. That
section also contains information regarding threatened and endangered species
listings, a critical habitat designation and similar matters concerning the
Company, Pacific Lumber and their respective operations. The number of Pacific
Lumber's approved THPs and the amount of timber covered by such THPs varies
significantly from time to time, depending upon a variety of factors, including
the timing of agency review. Pacific Lumber maintains a detailed geographical
information system covering its timberlands (the "GIS"). The GIS covers
numerous aspects of Pacific Lumber's properties, including timber type, tree
class, wildlife data, roads, rivers and streams. By carefully monitoring and
updating this data base and conducting field studies, Pacific Lumber's foresters
are better able to develop detailed THPs addressing the various regulatory
requirements. Pacific Lumber also utilizes a Global Positioning System ("GPS")
which allows precise location of geographic features through satellite
positioning.
Pacific Lumber employs a variety of well-accepted methods of selecting
trees for harvest. These methods, which are designed to achieve optimal
regeneration, are referred to as "silvicultural systems" in the forestry
profession. Silvicultural systems range from very light thinnings aimed at
enhancing the growth rate of retained trees to clear cutting which results in
the harvest of all trees in an area and replacement with a new forest stand. In
between are a number of varying levels of partial harvests which can be
employed.
II-2
<PAGE>
PRODUCTION FACILITIES
Pacific Lumber owns four highly mechanized sawmills and related facilities
located in Scotia, Fortuna and Carlotta, California. The sawmills historically
have been supplied almost entirely from timber harvested from Pacific Lumber's
timberlands. Pacific Lumber has implemented numerous technological advances that
have increased the operating efficiency of its production facilities and the
recovery of finished products from its timber. Over the past three years,
Pacific Lumber's annual lumber production has averaged approximately 297 million
board feet, with approximately 309, 291 and 290 million board feet produced in
1997, 1996 and 1995, respectively. The Fortuna sawmill produces primarily common
grade lumber. During 1997, the Fortuna mill produced approximately 101 million
board feet of lumber. The Carlotta sawmill produces both common and upper grade
redwood lumber. During 1997, the Carlotta mill produced approximately 76 million
board feet of lumber. Sawmills "A" and "B" are both located in Scotia.
Sawmill "A" processes Douglas-fir logs and Sawmill "B" primarily processes
large diameter redwood logs. During 1997, Sawmills "A" and "B" produced 91
million and 41 million board feet of lumber, respectively.
Pacific Lumber operates a finishing and manufacturing plant in Scotia which
processes rough lumber into a variety of finished products such as trim, fascia,
siding and paneling. These finished products include the redwood lumber
industry's largest variety of customized trim and fascia patterns.
Remanufacturing enhances the value of some grades of lumber by assembling
knot-free pieces of narrower and shorter lumber into wider or longer pieces in
its state-of-the-art end and edge glue plants. The result is a standard sized
upper grade product which can be sold at a premium over common grade products.
Pacific Lumber has also installed a lumber remanufacturing facility at its mill
in Fortuna which processes low grade redwood common lumber into value-added,
higher grade redwood fence and related products.
Pacific Lumber dries the majority of its upper grade lumber before it is
sold. Upper grades of redwood lumber are generally air-dried for three to twelve
months and then kiln-dried for seven to twenty-four days to produce a
dimensionally stable and high quality product which generally commands higher
prices than "green" lumber (which is lumber sold before it has been dried).
Upper grade Douglas-fir lumber is generally kiln-dried immediately after it is
cut. Pacific Lumber owns and operates 34 kilns, having an annual capacity of
approximately 95 million board feet, to dry its upper grades of lumber
efficiently in order to produce a quality, premium product. Pacific Lumber also
maintains several large enclosed storage sheds which hold 27 million board feet
of lumber.
In addition, Pacific Lumber owns and operates a modern 25-megawatt
cogeneration power plant which is fueled almost entirely by the wood residue
from Pacific Lumber's milling and finishing operations. This power plant
generates substantially all of the energy requirements of Scotia, California,
the town adjacent to Pacific Lumber's timberlands where several of its
manufacturing facilities are located. Pacific Lumber sells surplus power to
Pacific Gas and Electric Company. In 1997, the sale of surplus power accounted
for approximately 2% of Pacific Lumber's total revenues.
II-3
<PAGE>
PRODUCTS
The following table sets forth the distribution of Pacific Lumber's lumber
production (on a net board foot basis) and revenues by product line:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
------------------------------------- -------------------------------------
% OF TOTAL % OF TOTAL
LUMBER % OF TOTAL LUMBER % OF TOTAL
PRODUCTION LUMBER % OF TOTAL PRODUCTION LUMBER % OF TOTAL
PRODUCT VOLUME REVENUES REVENUES VOLUME REVENUES REVENUES
- ------------------------------------- ----------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Upper grade redwood lumber........... 12% 34% 29% 13% 33% 28%
Common grade redwood lumber.......... 55% 42% 35% 53% 42% 35%
--- --- -- --- --- --
Total redwood lumber............... 67% 76% 64% 66% 75% 63%
--- --- -- --- --- --
Upper grade Douglas-fir lumber....... 4% 6% 5% 3% 6% 5%
Common grade Douglas-fir lumber...... 25% 16% 13% 27% 16% 13%
--- --- -- --- --- --
Total Douglas-fir lumber........... 29% 22% 18% 30% 22% 18%
--- --- -- --- --- --
Other grades of lumber............... 4% 2% 2% 4% 3% 2%
--- --- -- --- --- --
Total lumber....................... 100% 100% 84% 100% 100% 83%
=== === == === === ==
Logs................................. 7% 9%
== ==
Hardwood chips....................... 3% 2%
Softwood chips....................... 4% 4%
-- --
Total wood chips................... 7% 6%
== ==
</TABLE>
LUMBER. In 1997, Pacific Lumber sold approximately 312 million board feet
of lumber, which accounted for approximately 84% of Pacific Lumber's total
revenues. Lumber products vary greatly by the species and quality of the timber
from which it is produced. Lumber is sold not only by grade (such as "upper"
grade versus "common" grade), but also by board size and the drying process
associated with the lumber.
Redwood lumber is Pacific Lumber's largest product category. Redwood is
commercially grown only along the northern coast of California and possesses
certain unique characteristics that permit it to be sold at a premium to many
other wood products. Such characteristics include its natural beauty, superior
ability to retain paint and other finishes, dimensional stability and innate
resistance to decay, insects and chemicals. Typical applications include
exterior siding, trim and fascia for both residential and commercial
construction, outdoor furniture, decks, planters, retaining walls and other
specialty applications. Redwood also has a variety of industrial applications
because of its chemical resistance and because it does not impart any taste or
odor to liquids or solids.
Upper grade redwood lumber, which is derived primarily from large diameter
logs and is characterized by an absence of knots and other defects, is used
primarily in distinctive interior and exterior applications. The overall supply
of upper grade lumber has been diminishing due to increasing environmental and
regulatory restrictions and other factors, and Pacific Lumber's supply of upper
grade lumber has decreased in some premium product categories. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Background." Common grade redwood lumber, Pacific Lumber's largest
volume product, has many of the same aesthetic and structural qualities of
redwood uppers, but has some knots, sapwood and a coarser grain. Such lumber is
commonly used for construction purposes, including outdoor structures such as
decks, hot tubs and fencing.
Douglas-fir lumber is used primarily for new construction and some
decorative purposes and is widely recognized for its strength, hard surface and
attractive appearance. Douglas-fir is grown commercially along the west coast of
North America and in Chile and New Zealand. Upper grade Douglas-fir lumber is
derived primarily from old growth Douglas-fir timber and is used principally in
finished carpentry applications. Common grade Douglas-fir lumber is used for a
variety of general construction purposes and is largely interchangeable with
common grades of other whitewood lumber.
II-4
<PAGE>
LOGS
Pacific Lumber currently sells certain logs that, due to their size or
quality, cannot be efficiently processed by its mills into lumber. The majority
of these logs are purchased by Britt. The balance are purchased by surrounding
mills which do not own sufficient timberlands to support their mill operations.
See "--Relationships with Scotia Pacific and Britt" below. Except for the
agreement with Britt described below, Pacific Lumber does not have any
significant contractual relationships with third parties relating to the
purchase of logs. Pacific Lumber has historically not purchased significant
quantities of logs from third parties; however, Pacific Lumber may from time to
time purchase logs from third parties for processing in its mills or for resale
to third parties if, in the opinion of management, economic factors are
advantageous to Pacific Lumber.
WOOD CHIPS
Pacific Lumber uses a whole-log chipper to produce wood chips from hardwood
trees which would otherwise be left as waste. These chips are sold to third
parties primarily for the production of facsimile and other specialty papers.
Pacific Lumber also produces softwood chips from the wood residue and waste from
its milling operations. These chips are sold to third parties for the production
of wood pulp and paper products.
OTHER PRODUCTS
Pacific Lumber also derives revenues from a soil amendment operation and a
concrete block manufacturing operation.
BACKLOG AND SEASONALITY
Pacific Lumber's backlog of sales orders at December 31, 1997 and 1996 was
approximately $26.4 million and approximately $21.3 million, respectively, the
substantial portion of which was delivered in the first quarter of the next
fiscal year. Pacific Lumber has historically experienced lower first quarter
sales due largely to the general decline in construction-related activity during
the winter months. As a result, Pacific Lumber's results in any one quarter are
not necessarily indicative of results to be expected for the full year.
MARKETING
The housing, construction and remodeling markets are the primary markets
for Pacific Lumber's lumber products. Pacific Lumber's policy is to maintain a
wide distribution of its products both geographically and in terms of the number
of customers. Pacific Lumber sells its lumber products throughout the country to
a variety of accounts, the large majority of which are wholesalers, followed by
retailers, industrial users, exporters and manufacturers. Upper grades of
redwood and Douglas-fir lumber are sold throughout the entire United States, as
well as to export markets. Common grades of redwood lumber are sold principally
west of the Mississippi River, with California accounting for approximately 66%
of these sales in 1997. Common grades of Douglas-fir lumber are sold primarily
in California. In 1997, Pacific Lumber had three customers which accounted for
approximately 10%, 5% and 5%, respectively, of total revenues. Exports of lumber
accounted for approximately 6% of Pacific Lumber's total revenues in 1997.
Pacific Lumber markets its products through its own sales staff which focuses
primarily on domestic sales.
Pacific Lumber actively follows trends in the housing, construction and
remodeling markets in order to maintain an appropriate level of inventory and
assortment of products. Due to its high quality products, large inventory,
competitive prices and long history, Pacific Lumber believes it has a strong
degree of customer loyalty.
COMPETITION
Pacific Lumber's lumber is sold in highly competitive markets. Competition
is generally based upon a combination of price, service, product availability
and product quality. Pacific Lumber's products compete not only with other wood
products but with metals, masonry, plastic and other construction materials made
from non-renewable resources. The level of demand for Pacific Lumber's products
is dependent on such broad factors as overall economic conditions, interest
rates and demographic trends. In addition, competitive considerations, such as
total industry production and competitors' pricing, as well as the price of
other
II-5
<PAGE>
construction products, affect the sales prices for Pacific Lumber's lumber
products. Pacific Lumber currently enjoys a competitive advantage in the upper
grade redwood lumber market due to the quality of its timber holdings and
relatively low cost production operations. Competition in the common grade
redwood and Douglas-fir lumber market is more intense, and Pacific Lumber
competes with numerous large and small lumber producers.
EMPLOYEES
As of September 1, 1998, Pacific Lumber had approximately 1,570 employees,
none of whom are covered by a collective bargaining agreement.
RELATIONSHIPS WITH SCOTIA PACIFIC AND BRITT
In March 1993, Pacific Lumber consummated its offering of 10 1/2% Senior
Notes due 2003 (the "Pacific Lumber Notes") and Scotia Pacific consummated its
offering of the Original Timber Notes. Upon the closing of such offerings,
Pacific Lumber, Scotia Pacific and Britt entered into a variety of agreements.
Pacific Lumber and Scotia Pacific entered into the Original Services Agreement
and the Original Additional Services Agreement. Pursuant to the Original
Services Agreement, Pacific Lumber provided operational, management and related
services with respect to the timber owned by Scotia Pacific ("Scotia Pacific
Timber") not performed by Scotia Pacific's own employees. Such services
included the furnishing of all equipment, personnel and expertise not within
Scotia Pacific's possession and reasonably necessary for the operation and
maintenance of the Scotia Pacific Timber. In particular, Pacific Lumber was
required to regenerate Scotia Pacific Timber, prevent and control loss of Scotia
Pacific Timber by fires, maintain a system of roads throughout the Scotia
Pacific Timberlands, take measures to control the spread of disease and insect
infestation affecting Scotia Pacific Timber and comply with environmental laws
and regulations. Pacific Lumber was also required (to the extent necessary) to
assist Scotia Pacific personnel in updating the GIS and to prepare and file, on
Scotia Pacific's behalf, all pleadings and motions and otherwise diligently
pursue appeals of any denial of any THP and related matters. Pacific Lumber
performs substantially similar services for the Company under the New Services
Agreement. As compensation for these and the other services to be provided by
Pacific Lumber, the Company pays a fee which is adjusted on January 1 of each
year based on a specified government index relating to wood products. As of the
date of this Prospectus, the fee is approximately $107,000 per month for the
remainder of 1998.
Pursuant to the Original Additional Services Agreement, Scotia Pacific
provided Pacific Lumber with a variety of services, including (a) assisting
Pacific Lumber to operate, maintain and harvest its own timber properties, (b)
updating and providing access to the GIS with respect to information concerning
Pacific Lumber's own timber properties and (c) assisting Pacific Lumber with its
statutory and regulatory compliance. Pacific Lumber paid Scotia Pacific a fee
for such services equal to the actual cost of providing such services, as
determined in accordance with generally accepted accounting principles. The
Company provides substantially similar services to Pacific Lumber under
substantially similar arrangements pursuant to the New Additional Services
Agreement.
Pacific Lumber and Scotia Pacific also had entered into the Original Master
Purchase Agreement. The Original Master Purchase Agreement governed all
purchases of logs by Pacific Lumber from Scotia Pacific. Each purchase of logs
by Pacific Lumber from Scotia Pacific was made pursuant to a separate log
purchase agreement (which incorporated the terms of the Original Master Purchase
Agreement) for the Scotia Pacific Timber covered by an approved THP. Such log
purchase agreement generally provided for the sale to Scotia Pacific of the logs
harvested from the Scotia Pacific Timber covered by such THP and constituted an
exclusive agreement with respect to the timber covered thereby, subject to
certain limited exceptions. The Original Master Purchase Agreement generally
contemplated that all sales of logs by Scotia Pacific to Pacific Lumber would be
at prices which equal or exceed the applicable stumpage price for each species
and category, as set forth in the most recent Harvest Value Schedule published
by the California State Board of Equalization (the "SBE Price"). The Harvest
Value Schedule is published by the California State Board of Equalization at six
month intervals for the purpose of computing yield taxes imposed on the
harvesting of timber. SBE prices are based on average actual log prices between
unrelated parties over a prior twenty-four month period. As Pacific Lumber
purchased logs from Scotia Pacific pursuant to the
II-6
<PAGE>
Original Master Purchase Agreement, Pacific Lumber was responsible, at its own
expense, for harvesting and removing the standing Scotia Pacific Timber covered
by approved THPs, and the purchase prices were therefore based upon "stumpage
prices." Substantially all of Scotia Pacific's revenues were derived from the
sale of logs to Pacific Lumber under the Original Purchase Agreement. Pacific
Lumber purchased logs from the Company under substantially similar terms
pursuant to the New Master Purchase Agreement.
Pacific Lumber, Scotia Pacific and Salmon Creek also had entered into the
Original Reciprocal Rights Agreement granting to each other certain reciprocal
rights of egress and ingress through their respective properties in connection
with the operation and maintenance of such properties and their respective
businesses. In addition, Pacific Lumber had entered into an Environmental
Indemnification Agreement with Scotia Pacific pursuant to which Pacific Lumber
agreed to indemnify Scotia Pacific from and against certain present and future
liabilities arising with respect to hazardous materials, hazardous materials
contamination or disposal sites, or under environmental laws with respect to the
Scotia Pacific Timberlands. In particular, Pacific Lumber was liable with
respect to any contamination which occurred on the Scotia Pacific timberlands
prior to the date of the agreement. Pacific Lumber, Salmon Creek and the Company
have entered into the New Reciprocal Rights Agreement providing for
substantially similar rights. Pacific Lumber and the Company have entered into a
New Environmental Indemnification Agreement pursuant to which Pacific Lumber
agrees to indemnify the Indemnified Parties in respect of (i) certain present
and future liabilities arising with respect to or as a direct or indirect result
of, Hazardous Materials, Hazardous Materials Contamination, Disposal Sites, or
otherwise arising under Environmental Laws with respect to the Mortgaged
Property, as a result of activities occurring prior to the date on which the
Company acquired the Mortgaged Property or caused by Pacific Lumber, subsequent
thereto, except to the extent caused by gross negligence or willful misconduct
of the Indemnified Party or (ii) breach by Pacific Lumber of the representations
and warranties contained in the New Environmental Indemnification Agreement.
Pacific Lumber entered into an agreement with Britt (the "Britt
Agreement") which governs the sale of logs by Pacific Lumber and Britt to each
other, the sale of hog fuel (wood residue) by Britt to Pacific Lumber for use in
Pacific Lumber's cogeneration plant, the sale of lumber by Pacific Lumber and
Britt to each other, and the provision by Pacific Lumber of certain
administrative services to Britt (including accounting, purchasing, data
processing, safety and human resources services). The logs which Pacific Lumber
sells to Britt and which are used in Britt's manufacturing operations are sold
at approximately 75% of applicable SBE prices (to reflect the lower quality of
these logs). Logs which either Pacific Lumber or Britt purchases from third
parties and which are then sold to each other are transferred at the actual cost
of such logs. Lumber is sold at fair market value and hog fuel is sold at
applicable market prices. Administrative services are provided by Pacific Lumber
based on Pacific Lumber's actual costs and an allocable share of Pacific
Lumber's overhead expenses consistent with past practice.
REGULATORY AND ENVIRONMENTAL MATTERS
The information under "Business of the Company--Regulatory and
Environmental Matters" in the accompanying Prospectus is incorporated herein by
reference.
HEADWATERS AGREEMENT
The information under "Business of the Company--Headwaters Agreement" in
the accompanying Prospectus is incorporated herein by reference.
LEGAL PROCEEDINGS
See "Business of the Company--Legal Proceedings" in the accompanying
Prospectus for a discussion of certain specific litigation matters involving
Pacific Lumber and/or the Company. Pacific Lumber is involved in other claims,
lawsuits and other proceedings. While uncertainties are inherent in the final
outcome of such matters and it is presently impossible to determine the actual
costs that ultimately may be incurred, management believes that the resolution
of such uncertainties and the incurrence of such costs should not have a
material adverse effect on Pacific Lumber's consolidated financial position,
results of operations or liquidity.
II-7
<PAGE>
CAPITALIZATION OF PACIFIC LUMBER
The following table sets forth, at June 30, 1998, the historical
consolidated capitalization of Pacific Lumber and the pro forma capitalization
of Pacific Lumber as of the same date after giving effect to the Offering and
the application of the net proceeds therefrom. This table should be read in
conjunction with Pacific Lumber's Consolidated Financial Statements and Notes
thereto and Pacific Lumber's unaudited Pro Forma Financial Statements and Notes
thereto appearing elsewhere in this Prospectus.
JUNE 30, 1998
------------------------
ACTUAL PRO FORMA
--------- ----------
(IN MILLIONS OF DOLLARS)
Cash and cash equivalents(1)......... $ 29.4 $ 20.7
========= ==========
Restricted cash(2)................... $ 28.1 $ 25.0
========= ==========
Short-term debt:
Current maturities of long-term
debt(3)......................... $ 20.6 $ 8.2(3)
--------- ----------
Long-term debt:
Timber Notes and Original Timber
Notes........................... 288.7 859.0(3)
Pacific Lumber Notes............... 235.0 --
Other.............................. 9.9 0.5
--------- ----------
Total long-term debt............ 533.6 859.5
--------- ----------
Stockholder's deficit:
Common stock, $.01 par value, 100
shares authorized and issued.... -- --
Additional capital................. 157.5 157.5
Accumulated deficit................ (188.9) (470.6)(4)
--------- ----------
Total stockholder's deficit..... (31.4) (313.1)
--------- ----------
Total capitalization.......... $ 522.8 $ 554.6
========= ==========
- ---------------
(1) Actual cash and cash equivalents of Pacific Lumber includes $10.2 million
deposited in the payment account under the Original Indenture for the
payment of accrued interest and principal on the Original Timber Notes. Pro
forma cash and cash equivalents of the Pacific Lumber includes $1.1 million
of cash deposited in the Expense Reserve on the Closing Date.
(2) Actual restricted cash represents amounts held in the Original Liquidity
Account and is classified as a noncurrent asset in Pacific Lumber's
Financial Statements. Pro forma restricted cash represents amounts held in
the Prefunding Account and is classified as a noncurrent asset in Pacific
Lumber's Pro Forma Financial Statements.
(3) Current maturities of $20.5 million relates to the Original Timber Notes.
The pro forma amount reflects current maturities of $8.2 million and
long-term debt of $859.0 million relating to the Timber Notes.
(4) Assumes the write-off of (a) $16.9 million of deferred financing costs and
the incurrence of $35.1 million redemption and prepayment premiums on the
Pacific Lumber Notes and the Original Timber Notes offset by the benefit
from $6.6 million of unearned premiums and make whole amounts under the
investment rate agreement associated with the Original Liquidity Account and
the related tax benefit of $17.2 million and (b) the dividend of $253.5
million to Pacific Lumber's parent.
II-8
<PAGE>
SELECTED HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL DATA OF PACIFIC LUMBER
The following selected historical consolidated financial data should be
read in conjunction with Pacific Lumber's Consolidated Financial Statements and
the Notes thereto and the information contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Pacific Lumber"
appearing elsewhere herein. The selected historical consolidated financial data
as of and for the five years ended December 31, 1997 are derived from the
audited Consolidated Financial Statements of Pacific Lumber. The selected
historical consolidated financial data as of and for the six months ended June
30, 1998 and 1997 are derived from the unaudited quarterly Consolidated
Financial Statements of Pacific Lumber. The unaudited pro forma consolidated
financial data for Pacific Lumber contained in this Prospectus has been prepared
based upon the historical data of Pacific Lumber. The pro forma consolidated
balance sheet data gives effect to the Pro Forma Adjustments described in note
(1) below as if they occurred on June 30, 1998. The pro forma consolidated
operating data gives effect to the Pro Forma Adjustments as if they occurred as
of January 1, 1997. The pro forma consolidated operating data is not necessarily
indicative of the results of future operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------------------ ----------------------------------------------------
1998 1997
------------------ ------------------
PRO PRO
ACTUAL FORMA(1) 1997 ACTUAL FORMA(1) 1996 1995 1994
------ -------- --------- ------ -------- --------- --------- ---------
(IN MILLIONS OF DOLLARS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales.......................... $101.5 $ 101.5 $ 128.7 $261.4 $261.4 $ 244.8 $ 221.9 $ 227.4
Cost of sales (exclusive of
depletion and depreciation)...... 64.4 64.4 71.5 147.4 147.4 136.3 116.4 116.3
Gross profit....................... 37.1 37.1 57.2 114.0 114.0 108.5 105.5 111.1
Selling, general and administrative
expenses......................... 6.0 6.0 6.5 12.9 12.9 14.6 15.0 15.2
Depletion and depreciation......... 11.3 11.3 13.4 26.5 26.5 27.6 25.9 25.5
Operating income................... 19.8 19.8 37.3 74.6 74.6 66.3 64.6 70.4
Investment, interest and other
income........................... 2.9 2.5 1.5 2.5 1.6 4.2 3.9 12.0
Interest expense................... 26.3 33.1 26.8 53.6 66.3 54.4 55.5 56.1
Income (loss) before income
taxes............................ (3.6 ) (10.8 ) 12.0 23.5 9.9 16.1 13.0 26.3
Income (loss) before extraordinary
items and cumulative effect of
changes in accounting
principles....................... (2.2 ) (6.6 ) 7.1 15.6 6.5 9.9 6.6 24.9
Extraordinary items, net of related
income taxes(2).................. -- -- -- -- (30.0) -- -- (14.9)
Cumulative effect of changes in
accounting principles(3)......... -- -- -- -- -- -- -- --
Net income (loss).................. (2.2 ) (6.6 ) 7.1 15.6 (23.5) 9.9 6.6 10.0
OTHER DATA:
EBITDA(4).......................... 31.1 31.1 50.7 101.1 101.1 93.9 90.5 95.9
Ratio of earnings to fixed
charges.......................... -- -- 1.4x 1.4x 1.1x 1.3x 1.2x 1.5x
Fixed charge coverage deficiency... 3.7 10.8 -- -- -- -- -- --
Capital expenditures (including
timberland acquisitions)......... 5.7 5.7 12.2 22.2 22.2 14.6 9.7 11.9
</TABLE>
1993
---------
OPERATING DATA:
Net sales.......................... $ 210.6
Cost of sales (exclusive of
depletion and depreciation)...... 115.2
Gross profit....................... 95.4
Selling, general and administrative
expenses......................... 18.8
Depletion and depreciation......... 25.4
Operating income................... 51.2
Investment, interest and other
income........................... 3.9
Interest expense................... 59.1
Income (loss) before income
taxes............................ (4.0)
Income (loss) before extraordinary
items and cumulative effect of
changes in accounting
principles....................... (2.4)
Extraordinary items, net of related
income taxes(2).................. (10.8)
Cumulative effect of changes in
accounting principles(3)......... 2.7
Net income (loss).................. (10.5)
OTHER DATA:
EBITDA(4).......................... 76.6
Ratio of earnings to fixed
charges.......................... --
Fixed charge coverage deficiency... 4.0
Capital expenditures (including
timberland acquisitions)......... 10.5
II-9
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------- DECEMBER 31,
PRO -----------------------------------------------------
ACTUAL FORMA(1) 1997 1996 1995 1994 1993
------ ------- --------- --------- --------- --------- ---------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities(5)........ $ 29.4 $ 20.7 $ 31.8 $ 26.0 $ 26.5 $ 24.3 $ 44.4
Working capital.................... 36.9 57.5 56.4 55.2 68.9 60.0 71.7
Timber and timberlands............. 319.2 319.2 321.2 325.0 337.4 350.9 365.5
Restricted cash(5)................. 28.1 25.0 28.4 30.0 31.4 32.4 33.6
Total assets....................... 594.9 609.9 617.1 629.2 662.6 684.3 712.9
Total indebtedness................. 554.2 867.7 565.0 571.9 586.0 599.7 612.0
Stockholder's equity (deficit)..... (31.4) (313.1) (22.1) (14.7) (4.2) 11.3 25.7
<FN>
- ---------------
(1) The pro forma data give effect to the Offering and the application of the
net proceeds therefrom to (a) fund the initial deposits to the Expense
Reserve, the Prefunding Account and other reserve account, (b) retire the
Pacific Lumber Notes and the Original Timber Notes and (c) pay a $253.5
million dividend to its parent. Pro forma payments assumed to be made on
June 30, 1998 in connection with the retirement of the Pacific Lumber Notes
and the Original Timber Notes aggregate approximately $598.6 million,
consisting of $544.2 million of principal, $35.1 million of redemption and
prepayment premiums and $19.3 million of accrued interest.
The pro forma operating data reflects the following adjustments: (a)
interest expense reflects the amount of interest due with respect to the
outstanding aggregate principal amount of the Timber Notes, commitment fees
under the Line of Credit Agreement and the amortization of the fees and
expenses associated with the Offering and the Line of Credit Agreement and
excludes interest expense and amortization of deferred financing costs
associated with the Pacific Lumber Notes and the Original Timber Notes and
(b) an extraordinary loss was recognized associated with the retirement of
the Pacific Lumber Notes and the Original Timber Notes. See "Unaudited Pro
Forma Balance Sheet;" "Unaudited Pro Forma Statement of Operations" and
the Notes thereto.
(2) The extraordinary loss for 1994 of $14.9 million (net of tax benefits of
$6.3 million) relates to the settlement of litigation which arose from MGI's
acquisition of Pacific Lumber in 1986. The extraordinary loss for 1993 of
$10.8 million (net of tax benefits of $5.6 million) arose from the early
extinguishment of Pacific Lumber debt.
(3) As of January 1, 1993, Pacific Lumber adopted Statement of Financial
Accounting Standards Number 109 ("SFAS No. 109") and SFAS No. 106. The
cumulative effect of the change in accounting principle for the adoption of
SFAS No. 109 increased results of operations by $5.0 million. The cumulative
effect of the change in accounting principle for the adoption of SFAS No.
106 reduced results of operations by $2.4 million, net of related benefits
for income taxes of $1.6 million. The accounting standards had no effect on
Pacific Lumber's cash outlays for postretirement and postemployment benefits
nor did the cumulative effect of the changes in accounting principles affect
Pacific Lumber's compliance with its debt covenants.
(4) Reference is made to the Statement of Cash Flows contained in Pacific
Lumber's Consolidated Financial Statements contained elsewhere in this
Prospectus for a complete presentation of cash flows from operating,
investing and financing activities prepared in accordance with generally
accepted accounting principles. EBITDA means operating income plus
depreciation and depletion. EBITDA is not intended to represent cash flow,
an alternative to net income or any other measure of performance in
accordance with generally accepted accounting principles; it is included
because Pacific Lumber believes that certain investors find it a useful tool
for measuring the ability of Pacific Lumber to service its consolidated
debt.
(5) Actual cash and cash equivalents includes amounts deposited in the expense
reserve and the payment account held by the Trustees under the Original
Indenture for the payment of interest and principal on the next semi-annual
note payment date for the Original Timber Notes. Actual restricted cash
represents amounts held in the Original Liquidity Account. Pro forma cash
and cash equivalents includes amounts deposited in the Expense Reserve. Pro
forma restricted cash represents amounts held in the Prefunding Account.
</TABLE>
II-10
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET OF PACIFIC LUMBER
JUNE 30, 1998
(IN MILLIONS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------------
ISSUANCE APPLICATION OF
OF PROCEEDS AND PRO
ACTUAL TIMBER NOTES OTHER FORMA
--------- ------------ -------------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.......... $ 29.4 $818.2 $ (826.9) $ 20.7
Receivables:
Trade........................... 12.6 -- -- 12.6
Other........................... 2.2 -- -- 2.2
Inventories........................ 49.3 -- -- 49.3
Prepaid expenses and other current
assets.......................... 8.6 -- -- 8.6
--------- ------------ -------------- ---------
Total current assets............ 102.1 818.2 (826.9) 93.4
Timber and timberlands, net.......... 319.2 -- -- 319.2
Property and equipment, net.......... 95.2 -- -- 95.2
Deferred financing costs, net........ 16.9 24.0 (16.9) 24.0
Deferred income taxes................ 28.4 -- 19.7 48.1
Restricted cash...................... 28.1 25.0 (28.1) 25.0
Other assets......................... 5.0 -- -- 5.0
--------- ------------ -------------- ---------
$ 594.9 $867.2 $ (852.2) $ 609.9
========= ============ ============== =========
Current liabilities:
Accounts payable................... $ 4.9 $ -- $ -- $ 4.9
Accrued compensation and related
benefits........................ 9.6 -- -- 9.6
Accrued interest................... 19.3 -- (19.3) --
Deferred income taxes.............. 9.7 -- 2.5 12.2
Other accrued liabilities.......... 1.0 -- -- 1.0
Long-term debt, current
maturities...................... 20.6 8.2 (20.6) 8.2
--------- ------------ -------------- ---------
Total current liabilities....... 65.1 8.2 (37.4) 35.9
Long-term debt, less current
maturities......................... 533.6 859.0 (533.1) 859.5
Other noncurrent liabilities......... 27.6 -- -- 27.6
--------- ------------ -------------- ---------
Total liabilities............... 626.3 867.2 (570.5) 923.0
--------- ------------ -------------- ---------
Contingencies
Stockholder's deficit:
Common stock, $.01 par value, 100
shares authorized and issued.... -- -- -- --
Additional capital................. 157.5 -- -- 157.5
Accumulated deficit................ (188.9) -- (281.7) (470.6)
--------- ------------ -------------- ---------
Total stockholder's deficit..... (31.4) -- (281.7) (313.1)
--------- ------------ -------------- ---------
$ 594.9 $867.2 $ (852.2) $ 609.9
========= ============ ============== =========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
II-11
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS OF PACIFIC LUMBER
SIX MONTHS ENDED JUNE 30, 1998
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------
ISSUANCE APPLICATION
OF OF PROCEEDS PRO
ACTUAL TIMBER NOTES AND OTHER FORMA
------- ------------- ------------ ------
<S> <C> <C> <C> <C>
Net sales:
Lumber and logs.................... $ 92.7 $ -- $ -- $ 92.7
Other.............................. 8.8 -- -- 8.8
------- ------------- ------------ ------
101.5 -- -- 101.5
------- ------------- ------------ ------
Operating expenses:
Cost of goods sold (exclusive of
depletion and depreciation)..... 64.4 -- -- 64.4
Selling, general and administrative
expenses........................ 6.0 -- -- 6.0
Depletion and depreciation......... 11.3 -- -- 11.3
------- ------------- ------------ ------
Operating income..................... 19.8 -- -- 19.8
Other income (expense)
Investment, interest and other
income.......................... 2.9 0.7 (1.1) 2.5
Interest expense................... (26.3) (32.5) 25.7 (33.1)
------- ------------- ------------ ------
Loss before income taxes............. (3.6) (31.8) 24.6 (10.8)
Credit in lieu of income taxes....... 1.4 12.1 (9.3) 4.2
------- ------------- ------------ ------
Net loss............................. $ (2.2) $ (19.7) $ 15.3 $ (6.6)
======= ============= ============ ======
</TABLE>
YEAR ENDED DECEMBER 31, 1997
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------
ISSUANCE APPLICATION
OF OF PROCEEDS PRO
ACTUAL TIMBER NOTES AND OTHER FORMA
------- ------------- ------------ ------
<S> <C> <C> <C> <C>
Net sales:
Lumber and logs.................... $ 235.6 $ -- $ -- $235.6
Other.............................. 25.8 -- -- 25.8
------- ------------- ------------ ------
261.4 -- -- 261.4
------- ------------- ------------ ------
Operating expenses:
Cost of goods sold (exclusive of
depletion and depreciation)..... 147.4 -- -- 147.4
Selling, general and administrative
expenses........................ 12.9 -- -- 12.9
Depletion and depreciation......... 26.5 -- -- 26.5
------- ------------- ------------ ------
Operating income..................... 74.6 -- -- 74.6
Other income (expense):
Investment, interest and other
income.......................... 2.5 1.4 (2.3) 1.6
Interest expense................... (53.6) (65.3) 52.6 (66.3)
------- ------------- ------------ ------
Income before income taxes........... 23.5 (63.9) 50.3 9.9
Provision in lieu of income taxes.... (7.9) 21.1 (16.6) (3.4)
------- ------------- ------------ ------
Income before extraordinary item..... $ 15.6 $ (42.8) $ 33.7 $ 6.5
======= ============= ============ ======
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
II-12
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF PACIFIC LUMBER
The Unaudited Pro Forma Balance Sheet gives effect to the Offering, the
repayment of $309.2 million aggregate principal amount of Original Timber Notes
and $235.0 million aggregate principal amount of Pacific Lumber Notes and the
dividend of $253.5 million in cash and gives effect to the Pro Forma Adjustments
described below as if they occurred on June 30, 1998. The Unaudited Pro Forma
Statement of Income reflects the Pro Forma Adjustments as if they occurred on
January 1, 1997. Such pro forma financial statements are not necessarily
indicative of the results of future operations.
o Pro forma cash and cash equivalents include $1.1 million deposited in the
Expense Reserve.
o Deferred financing costs of $24.0 million incurred in connection with the
Offering are deferred and amortized over the estimated 15 year average life
of the Timber Notes. The pro forma adjustment to interest expense for the
six months ended June 30, 1998 and the year ended December 31, 1997
includes $0.8 million and $1.6 million, respectively, attributable to such
amortization and excludes $1.0 and $2.1 million, respectively, of
amortization attributable to the Original Timber Notes and the Pacific
Lumber Notes.
o Pro forma restricted cash represents the amount to be deposited into the
Prefunding Account.
o The pro forma adjustment to interest and other income consists of the
estimated interest earnings on the funds held in the Prefunding Account at
an assumed rate of 5.50% less interest earned during the period funds were
held in the Original Liquidity Account.
o The Class A-1, A-2 and A-3 Timber Notes are assumed to bear interest at an
overall effective rate of 7.43% per annum, respectively, and require
semiannual payments of principal and accrued interest. The pro forma
adjustment to interest expense adjusts for (i) interest expense on the
Timber Notes, (ii) the exclusion of interest expense on the Original Timber
Notes, (iii) commitment fees under the Line of Credit and amortization of
the estimated fees and expenses associated with the Offering and the Line
of Credit and (iv) the exclusion of amortization of deferred financing
costs related to the Original Timber Notes.
o The Unaudited Pro Forma Statement of Income for the year ended December 31,
1997 does not present the loss that would have been incurred in connection
with the retirement of the Original Timber Notes and the Pacific Lumber
Notes. The pro forma amount of such loss as if the retirement occurred on
January 1, 1997 would have been $30.0 million which is comprised of (i)
$20.0 million of unamortized deferred financing costs and (ii) $34.6
million of prepayment and redemption premiums less (iii) $6.2 million of
unearned premiums and make whole amounts associated with the Original
Liquidity Account and (iv) a $18.4 million related tax benefit. The
Unaudited Pro Forma Balance Sheet, however, reflects a pro forma loss of
$28.2 million that would have been incurred in connection with the
retirement of the Original Timber Notes and the Pacific Lumber Notes, if
such retirement occurred on June 30, 1998. Such loss is comprised of (i)
$16.9 million of unamortized deferred financing costs and (ii) $35.1
million of prepayment and redemption premiums less (iii) $6.6 million of
unearned premiums and make whole amounts under the investment rate
agreement associated with the Original Liquidity Account and (iv) a $17.2
million related tax benefit.
o The pro forma adjustments to stockholder's deficit reflect the pro forma
loss of $28.2 million attributable to the retirement of the Original Timber
Notes and the Pacific Lumber Notes and the $253.5 million cash dividend.
II-13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PACIFIC LUMBER
BACKGROUND
THIS SECTION CONTAINS STATEMENTS WHICH CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. SEE "BUSINESS--GENERAL" FOR CAUTIONARY INFORMATION WITH RESPECT TO
SUCH FORWARD-LOOKING STATEMENTS.
Pacific Lumber'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. The following
should be read in conjunction with Pacific Lumber's Consolidated Financial
Statements and the Notes thereto which are contained elsewhere herein.
Old growth trees constitute Pacific Lumber's principal source of upper
grade redwood lumber, its most valuable product. Due to the severe restrictions
on Pacific Lumber's ability to harvest old growth timber on its property,
Pacific Lumber's supply of upper grade lumber has decreased in some premium
product categories. Furthermore, logging costs have increased, primarily due to
the harvest of smaller diameter logs and compliance with environmental
regulations relating to the harvesting of timber and litigation costs incurred
in connection with certain THPs filed by Pacific Lumber. Pacific Lumber has been
able to lessen the impact of these factors by instituting a number of measures
at its sawmills during the past several years designed to enhance the efficiency
of its operations, such as expansion of its manufactured lumber facilities and
other improvements in lumber recovery and installation of a lumber
remanufacturing facility at its Fortuna lumber mill. However, unless Pacific
Lumber is able to sustain the harvest level of old growth trees, Pacific Lumber
expects that its production of premium upper grade lumber products will decline
and that its manufactured lumber products will constitute a higher percentage of
its shipments of upper grade lumber products. See also "Trends" below and
"Business--Regulatory and Environmental Matters" and "--Headwaters
Agreement."
II-14
<PAGE>
RESULTS OF OPERATIONS
The following table presents selected operational and financial information
for the six months ended June 30, 1998 and 1997 and the years ended December 31,
1997, 1996 and 1995.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(IN MILLIONS OF DOLLARS EXCEPT SHIPMENTS AND PRICES)
<S> <C> <C> <C> <C> <C>
Shipments:
Lumber:(1)
Redwood upper grades............ 22.1 26.3 52.4 49.7 46.5
Redwood common grades........... 70.2 78.3 160.3 159.4 146.8
Douglas-fir upper grades........ 3.5 5.0 11.5 10.6 7.4
Douglas-fir common grades....... 21.3 36.5 75.3 74.9 64.6
Other........................... 5.3 7.3 12.0 12.5 11.4
--------- --------- --------- --------- ---------
Total lumber.................. 122.4 153.4 311.5 307.1 276.7
========= ========= ========= ========= =========
Logs(2)......................... 17.0 23.7 43.9 49.4 40.3
========= ========= ========= ========= =========
Wood chips(3)...................... 71.4 117.2 224.3 187.2 192.8
========= ========= ========= ========= =========
Average sales price:
Lumber:(4)
Redwood upper grades............ $ 1,503 $ 1,373 $ 1,443 $ 1,380 $ 1,495
Redwood common grades........... 570 572 575 542 496
Douglas-fir upper grades........ 1,281 1,181 1,203 1,154 1,301
Douglas-fir common grades....... 340 491 455 439 392
Logs(4)............................ 404 383 394 450 396
Wood chips(5)...................... 74 78 76 79 107
Net sales:
Lumber, net of discount............ $ 85.8 $ 106.5 $ 218.3 $ 202.8 $ 181.4
Logs............................... 6.9 9.1 17.3 22.2 15.9
Wood chips......................... 5.3 9.1 17.0 14.8 20.7
Cogeneration power................. 1.8 2.2 4.5 3.3 2.5
Other.............................. 1.7 1.8 4.3 1.7 1.4
--------- --------- --------- --------- ---------
Total net sales............... $ 101.5 $ 128.7 $ 261.4 $ 244.8 $ 221.9
========= ========= ========= ========= =========
Operating income..................... $ 19.8 $ 37.3 $ 74.6 $ 66.3 $ 64.6
========= ========= ========= ========= =========
Operating cash flow(6)............... $ 31.1 $ 50.7 $ 101.1 $ 93.9 $ 90.5
========= ========= ========= ========= =========
Income (loss) before income taxes.... $ (3.6) $ 12.0 $ 23.5 $ 16.1 $ 13.0
========= ========= ========= ========= =========
Net income (loss).................... $ (2.2) $ 7.1 $ 15.6 $ 9.9 $ 6.6
========= ========= ========= ========= =========
<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>
II-15
<PAGE>
RECENT OPERATING RESULTS
Pacific Lumber's revenues declined from $128.7 million for the first half
of 1997 to $101.5 million for the first half of 1998 primarily due to lower
shipments of lumber, logs and wood chips. This decrease was principally due to
well-above-normal rainfall during the first six months of 1998 which reduced
demand for Pacific Lumber's products and severely limited the availability of
rail transportation. The increased rainfall, combined with additional
restrictions on Pacific Lumber's wet weather operations due to a stipulation
entered into with the CDF on December 30, 1997 and the applicability of logging
restrictions during the nesting seasons for both the northern spotted owl and
the marbled murrelet, also impeded Pacific Lumber's ability to transport logs to
its mills and hindered logging operations, thereby reducing the volume of logs
available for the production of lumber products. These difficulties in
harvesting and transporting logs affected the types of logs available for the
mills and Pacific Lumber'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 Pacific Lumber's products and its ability to
ship its products using rail transportation.
Pacific Lumber expects that its revenues in the third quarter of 1998 will
increase over the second quarter of 1998, as Pacific Lumber will be able to
conduct operations in areas where Pacific Lumber has been restricted due to
inclement weather, wet weather operating restrictions and the nesting seasons
which end during the third quarter of 1998 and be able to achieve normal levels
of lumber production as well as a more desirable mix of lumber products.
Scotia Pacific Company LLC's operating cash flow (operating income before
depletion and depreciation) for the first half of 1998 was slightly below the
interest that, on a pro forma basis, would have been payable on the Timber Notes
during such period, and Scotia Pacific Company LLC would not have had cash
available to dividend to Pacific Lumber free and clear of the Lien of the Deed
of Trust.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
NET SALES. Net sales for the first half of 1998 decreased from the
comparable prior year period due primarily to lower shipments of lumber, logs,
and chips and to lower average realized prices for common grade Douglas-fir
lumber. This impact was partially offset by higher average realized prices for
upper grade redwood lumber. The decrease in volumes was due to the factors
described above.
OPERATING INCOME AND INCOME (LOSS) BEFORE INCOME TAXES. Operating income
and income (loss) before income taxes for the six months ended June 30, 1998
decreased from the comparable prior year period, principally due to the decrease
in net sales discussed above. This impact was partially offset by a gain on the
sale of a non-timber property.
THREE YEARS ENDED DECEMBER 31, 1997
NET SALES. Net sales for 1997 increased from 1996 principally due to
higher average realized prices for most categories of redwood and Douglas-fir
lumber and to a lesser extent due to an increase in shipments for redwood and
Douglas-fir lumber.
Net sales for 1996 increased compared to 1995 principally due to higher
lumber shipments in all categories and higher average realized prices for common
grade lumber. Partially offsetting these improvements were lower average
realized prices for upper grade redwood lumber and wood chips. Shipments of
fencing and other value-added common lumber products from Pacific Lumber's new
remanufacturing facility were a contributing factor in the improved redwood
common lumber realizations.
OPERATING INCOME. Operating income increased in 1997 principally due to
the increase in net sales discussed above. Operating income, after excluding
from 1995 the benefit from a $1.5 million insurance settlement, increased in
1996 due to the increase in net sales discussed above. Increases in costs of
goods sold reflect both the impact of additional manufacturing costs
attributable to the increased shipments of manufactured lumber products, higher
shipments of lower margin lumber and the increasing cost of regulatory
compliance for Pacific Lumber's timber harvesting operations.
II-16
<PAGE>
INCOME BEFORE INCOME TAXES. Income before income taxes for 1997 increased
over 1996, principally due to the increase in operating income discussed above.
Income before income taxes for 1996 increased from 1995, primarily as a result
of the increase in operating income as discussed above and lower interest
expense.
PROVISION IN LIEU OF INCOME TAXES. The provision in lieu of income taxes
for 1996 includes a credit relating to reserves Pacific Lumber no longer
believes are necessary.
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 "BUSINESS--GENERAL" FOR CAUTIONARY INFORMATION WITH RESPECT TO
SUCH FORWARD-LOOKING STATEMENTS.
Prior to the Closing Date, a significant portion of Pacific Lumber's
consolidated assets were owned by Scotia Pacific. Moreover, Scotia Pacific
provided a substantial portion of Pacific Lumber's log requirements. Pacific
Lumber harvested and purchased logs from Scotia Pacific's timberlands at prices
established pursuant to the Original Master Purchase Agreement. The holders of
the Original Timber Notes had priority over the claims of creditors of Pacific
Lumber with respect to the assets and cash flow of Scotia Pacific.
Effective as of the Closing Date, the portion of Pacific Lumber's
consolidated assets owned by the Company are larger than the portion owned by
Scotia Pacific prior to the Closing Date. As with the Original Master Purchase
Agreement, Pacific Lumber harvests and purchases logs from the Company Timber at
prices established pursuant to the New Master Purchase Agreement. Holders of the
Timber Notes have priority over the claims of creditors of Pacific Lumber with
respect to the assets and cash flow of the Company. Under the terms of the
Indenture, the Company does not have available cash for distribution to Pacific
Lumber unless its cash flow from operations exceeds the amounts required by the
Indenture to be (a) transferred to the Expense Reserve for use in the payment of
operating expenses and capital expenditures, (b) utilized for the payment of
Trustee, Collateral Agent and Liquidity Expenses and to make any required
payments of interest and repayments of funds borrowed under the Line of Credit
Agreement and (c) to make required deposits into the Payment Account for use on
the next Note Payment Date for the payment of interest, principal and Premium,
if any, on the Timber Notes. Once appropriate provision is made for such
payments, transfers and deposits, the Indenture does not limit monthly
distributions of available cash from the Company to Pacific Lumber, and
substantially all of the Company's available cash is periodically distributed to
Pacific Lumber. In the event the Company's cash flows are not sufficient to
generate distributable funds to Pacific Lumber, Pacific Lumber's ability to
service its indebtedness would be materially impaired. Similar provisions in the
Original Indenture also permitted Scotia Pacific to make monthly distributions
of available cash after meeting its requirements for debt service and operating
and capital expenditures. Scotia Pacific paid $60.8 million, $76.9 million and
$59.0 million of dividends to Pacific Lumber during the years ended December 31,
1997, 1996 and 1995, respectively, and $6.7 million during the six months ended
June 30, 1998.
During the six months ended June 30, 1998 and the years ended December 31,
1997, 1996 and 1995, Pacific Lumber's operating income before depletion and
depreciation ("operating cash flow") amounted to $31.1 million, $101.1
million, $93.9 million and $90.5 million, respectively, which exceeded interest
incurred on all of its indebtedness in those periods by $4.8 million, $47.5
million, $39.5 million and $35.0 million, respectively.
The indentures governing the Timber Notes and Pacific Lumber's revolving
credit agreement (the "Credit Agreement") contain various covenants which,
among other things, limit the ability to incur additional indebtedness and
liens, to engage in transactions with affiliates, to pay dividends and to make
investments. Pacific Lumber can pay dividends in an amount that is generally
equal to 50% of its consolidated net income plus depletion and cash dividends
received from the Company, exclusive of the net income and depletion of the
Company as long as any Original Timber Notes were outstanding. As of June 30,
1998, under the most restrictive of these covenants, approximately $9.6 million
of dividends could have been paid by Pacific Lumber. Pacific Lumber paid an
aggregate of $23.0 million, $20.5 million and $22.0
II-17
<PAGE>
million of dividends in 1997, 1996 and 1995, respectively. No dividends were
paid during the six months ended June 30, 1998.
On October 9, 1997, the Credit Agreement was amended to, among other
things, extend the date on which it expires to May 31, 2000. The Credit
Agreement provides for borrowings of up to $60.0 million, of which $20.0 million
may be used for standby letters of credit and $30.0 million is restricted to
acquisitions of timberlands. Borrowings made pursuant to the portion of the
credit facility restricted to timberland acquisitions are secured by the
purchased timberlands. As of June 30, 1998, $9.4 million of borrowings were
outstanding, and $14.4 million in letters of credit were outstanding. As of June
30, 1998, $31.1 million of borrowings was available under the Credit Agreement,
of which $5.6 million was available for letters of credit and $20.5 million was
restricted to timberland acquisitions.
Recent capital expenditures were made to improve production efficiency,
reduce operating costs and acquire additional timberlands. Pacific Lumber's
capital expenditures were $22.2 million, $14.6 million and $9.7 million for the
years ended December 31, 1997, 1996 and 1995, respectively, and $5.7 million for
the six months ended June 30, 1998. Capital expenditures, excluding expenditures
for timberlands, are estimated to be between $10.0 million and $20.0 million per
year for the 1998--2000 period. Pacific Lumber expects to purchase additional
timberlands from time to time as will enable it to maintain recent harvest
levels. However, there can be no assurance that Pacific Lumber would be able to
do so, and any timberland acquisitions would be limited by Pacific Lumber's
financial resources and the availability of acceptable properties.
As of June 30, 1998, Pacific Lumber had consolidated working capital of
$36.9 million and long-term debt of $505.5 million (net of current maturities
and restricted cash deposited in the Original Liquidity Account for the benefit
of the holders of the Original Timber Notes) as compared to $56.4 million and
$517.1 million, respectively, at December 31, 1997. The decrease in long-term
debt was primarily due to principal payments on the Original Timber Notes of
$10.8 million. Pacific Lumber anticipates that cash from operations, together
with existing cash and available sources of financing, will be sufficient to
fund its working capital and capital expenditure requirements for the next year.
See "Business of the Company--Legal Proceedings" for a description of certain of
the timber harvest litigation related to Scotia Pacific Company LLC, including a
recent lawsuit which could potentially result in severe restrictions on its
ability to harvest timber for up to several months. See also "Risk
Factors--Regulatory and Environmental Factors" and "Business of the
Company--Regulatory and Environmental Matters." With respect to its long-term
liquidity, Pacific Lumber believes that its existing cash and cash equivalents,
together with its ability to generate sufficient cash from operations and 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, Pacific Lumber is more sensitive than less
leveraged companies to factors affecting its operations, including governmental
regulation 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 "BUSINESS--GENERAL" FOR CAUTIONARY INFORMATION WITH RESPECT TO
SUCH FORWARD-LOOKING STATEMENTS.
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 Pacific
Lumber's financial position, results of operations or liquidity. See "Risk
Factors--Regulatory and Environment Factors" and "--Headwaters Agreement";
"Business of the Company--Regulatory and Environmental Matters" and
"--Headwaters Agreement" and "--Legal Proceedings--Timber Harvesting
Litigation" in the Prospectus and Note 9 to Pacific Lumber's Consolidated
Financial Statements for further information regarding regulatory and legal
proceedings affecting Pacific Lumber's operations.
II-18
<PAGE>
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.
YEAR 2000
Internal assessments undertaken for Pacific Lumber have determined that
Pacific Lumber's software and related technologies will not be materially
affected by the year 2000 date change. Spending is expected to be less than
$100,000 for system modification costs, which will be expensed as incurred.
Costs associated with any new systems will be capitalized and amortized over the
estimated useful lives of the systems.
RECENT ACCOUNTING PRACTICES PRONOUNCEMENTS
During June 1997, two new accounting standards were issued that will affect
future financial reporting. Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("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). Pacific Lumber
adopted SFAS No. 130 in the first quarter ended March 31, 1998. For the quarters
ended March 31, 1998 and 1997, there is not a significant difference between
"traditional" net income and comprehensive net income as the amount of the
adjustments required to arrive at comprehensive net income is not significant.
Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS No. 131"), requires
that segment reporting for public reporting purposes be conformed to the segment
reporting used by management for internal purposes. SFAS No. 131 must be adopted
in Pacific Lumber's year-end 1998 reporting and also adds a requirement for the
presentation of certain segment data on a quarterly basis starting in 1999.
Early adoption is acceptable but not required. Management is evaluating the
impact of this standard on Pacific Lumber's future financial reporting.
II-19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
The Pacific Lumber Company:
We have audited the accompanying consolidated balance sheets of The Pacific
Lumber Company (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of operations and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Pacific
Lumber Company and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California
January 30, 1998 (Except for the matter discussed in the fourth paragraph of
Note 9 as to which the date
is February 27, 1998.)
II-F-1
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AMOUNTS)
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.......... $ 31,768 $ 26,027
Receivables:
Trade........................... 19,216 18,080
Other........................... 2,123 2,514
Inventories........................ 56,079 65,690
Prepaid expenses and other current
assets.......................... 12,898 5,329
------------ ------------
Total current assets.......... 122,084 117,640
Timber and timberlands, net of
accumulated depletion of $236,824
and $221,063, respectively......... 321,206 324,986
Property, plant and equipment, net of
accumulated depreciation of
$82,070 and $73,772,
respectively....................... 96,292 95,515
Deferred financing costs, net........ 17,912 20,003
Deferred income taxes................ 27,018 34,639
Restricted cash...................... 28,434 29,967
Other assets......................... 4,186 6,424
------------ ------------
$ 617,132 $ 629,174
============ ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable................... $ 3,538 $ 3,765
Accrued compensation and related
benefits........................ 12,365 9,673
Accrued interest................... 19,650 20,211
Deferred income taxes.............. 9,671 10,173
Other accrued liabilities.......... 1,042 2,325
Long-term debt, current
maturities...................... 19,429 16,258
------------ ------------
Total current liabilities..... 65,695 62,405
Long-term debt, less current
maturities......................... 545,571 555,596
Other noncurrent liabilities......... 27,991 25,887
------------ ------------
Total liabilities............. 639,257 643,888
------------ ------------
Contingencies
Stockholder's deficit:
Common stock, $.01 par value, 100
shares authorized and issued -- --
Additional capital................. 157,520 157,520
Accumulated deficit................ (179,645) (172,234)
------------ ------------
Total stockholder's deficit... (22,125) (14,714)
------------ ------------
$ 617,132 $ 629,174
============ ============
The accompanying notes are an integral part of these financial statements.
II-F-2
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
Net sales:
Lumber and logs.................... $ 235,588 $ 225,017 $ 197,320
Other.............................. 25,789 19,832 24,619
---------- ---------- ----------
261,377 244,849 221,939
---------- ---------- ----------
Operating expenses:
Cost of goods sold................. 147,372 136,335 116,445
Selling, general and administrative
expenses........................ 12,915 14,570 14,992
Depletion and depreciation......... 26,525 27,644 25,927
---------- ---------- ----------
186,812 178,549 157,364
---------- ---------- ----------
Operating income..................... 74,565 66,300 64,575
Other income (expense):
Investment, interest and other
income.......................... 2,516 4,209 3,928
Interest expense................... (53,613) (54,456) (55,462)
---------- ---------- ----------
Income before income taxes........... 23,468 16,053 13,041
Provision in lieu of income taxes.... (7,879) (6,107) (6,480)
---------- ---------- ----------
Net income........................... $ 15,589 $ 9,946 $ 6,561
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
II-F-3
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 15,589 $ 9,946 $ 6,561
Adjustments to reconcile net income
to net cash provided
by operating activities:
Depletion and depreciation...... 26,525 27,644 25,927
Amortization of deferred
financing costs............... 2,091 2,394 2,269
Net loss on asset
dispositions.................. 67 6 419
Increase (decrease) in cash
resulting from changes in:
Receivables................... (740) 803 5,913
Inventories, net of
depletion.................. 8,039 7,304 (7,301)
Prepaid expenses and other
current assets............. (5,331) 682 (3,273)
Accounts payable.............. (548) (164) 589
Accrued interest.............. (561) (455) (443)
Accrued and deferred income
taxes...................... 7,425 7,135 7,572
Other liabilities............. 3,513 (8,046) 7,406
Other........................... -- (12) 423
---------- ---------- ----------
Net cash provided by operating
activities................. 56,069 47,237 46,062
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of assets... 226 115 13
Capital expenditures............... (12,788) (14,552) (9,140)
---------- ---------- ----------
Net cash used for investing
activities................. (12,562) (14,437) (9,127)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid..................... (23,000) (20,500) (22,000)
Redemptions, repurchase of and
principal payments on
long-term debt.................. (16,299) (14,153) (13,670)
Incurrence of financing costs...... -- -- (150)
Decrease in restricted cash........ 1,533 1,400 1,035
---------- ---------- ----------
Net cash used for financing
activities................. (37,766) (33,253) (34,785)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 5,741 (453) 2,150
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 26,027 26,480 24,330
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 31,768 $ 26,027 $ 26,480
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
II-F-4
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The Pacific
Lumber Company and its wholly owned subsidiaries, collectively referred to
herein as the "Company." The Company is an indirect wholly owned subsidiary of
MAXXAM Group Inc. ("MGI"). MGI is a wholly owned subsidiary of MAXXAM Group
Holdings Inc. ("MGHI") which is a wholly owned subsidiary of MAXXAM Inc.
("MAXXAM"). Pacific Lumber's principal wholly owned subsidiaries are Scotia
Pacific Holding Company ("Scotia Pacific") and Salmon Creek Corporation
("Salmon Creek"). Intercompany balances and transactions have been eliminated.
Certain reclassifications have been made to prior years' financial statements to
be consistent with the current year's presentation.
The Company grows and harvests redwood and Douglas-fir timber, mills logs
into lumber and manufactures lumber into a variety of finished products.
Housing, construction and remodeling are the principal markets for the Company's
lumber products. Export sales approximate 6% of the Company's sales. A
significant portion of the Company's sales are made to third parties located
west of the Mississippi River.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and assumptions
that affect (i) the reported amounts of assets and liabilities, (ii) the
disclosure of contingent assets and liabilities known to exist as of the date
the financial statements are published and (iii) the reported amount of revenues
and expenses recognized during each period presented. The Company reviews all
significant estimates affecting its consolidated financial statements on a
recurring basis and records the effect of any necessary adjustments prior to
their publication. Adjustments made with respect to the use of estimates often
relate to improved information not previously available. Uncertainties with
respect to such estimates and assumptions are inherent in the preparation of the
Company's consolidated financial statements; accordingly, it is possible that
the subsequent resolution of any one of the contingent matters described in Note
9 could differ materially from current estimates. The results of an adverse
resolution of such uncertainties could have a material effect on the Company's
consolidated financial position, results of operations or liquidity.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Cash equivalents consist of highly liquid money market instruments with
original maturities of three months or less.
MARKETABLE SECURITIES
Marketable securities are carried at fair value. The cost of the securities
sold is determined using the first-in, first-out method. Included in investment,
interest and other income for the years ending 1997, 1996 and 1995 were net
realized gains of $40,000, $52,000 and $478,000, respectively.
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the last-in, first-out ("LIFO") method.
TIMBER AND TIMBERLANDS
Timber and timberlands are stated at cost, net of accumulated depletion.
Depletion is computed utilizing the unit-of-production method based upon
estimates of timber values and quantities.
II-F-5
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including capitalized interest, is stated at
cost, net of accumulated depreciation. Depreciation is computed utilizing the
straight-line method at rates based upon the estimated useful lives of the
various classes of assets.
DEFERRED FINANCING COSTS
Costs incurred to obtain financing are deferred and amortized over the
estimated term of the related borrowing.
RESTRICTED CASH AND CONCENTRATIONS OF CREDIT RISK
Restricted cash represents the amount deposited into an account (the
"Liquidity Account") held by the Trustee under the Indenture governing the
7.95% Timber Collateralized Notes due 2015 (the "Timber Notes") of Scotia
Pacific. See Note 4. The Liquidity Account is not available, except under
certain limited circumstances, for Scotia Pacific's working capital purposes;
however, it is available to pay the Rated Amortization (as defined in Note 4)
and interest on the Timber Notes if and to the extent that cash flows are
insufficient to make such payments. The required Liquidity Account balance will
generally decline as principal payments are made on the Timber Notes.
Investment, interest and other income for the years ended December 31, 1997,
1996 and 1995 includes interest of approximately $2,336,000, $2,457,000 and
$2,560,000, respectively, attributable to an investment rate agreement (at 7.95%
per annum) with the financial institution which holds the Liquidity Account.
At December 31, 1997 and 1996, cash and cash equivalents include
$17,784,000 and $17,600,000, respectively, (the "Payment Account") which is
reserved for debt service payments on the Timber Notes (see Note 4). The Payment
Account and the Liquidity Account are each held by a different financial
institution. In the event of nonperformance by such financial institutions, the
Company's exposure to credit loss is represented by the amounts deposited plus
any unpaid accrued interest thereon. The Company mitigates its concentrations of
credit risk with respect to these restricted cash deposits by maintaining them
at high credit quality financial institutions and monitoring the credit ratings
of these institutions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash equivalents and restricted cash approximate
fair value. Marketable securities are carried at fair value which is determined
based on quoted market prices. As of December 31, 1997 and 1996, the estimated
fair value of long-term debt, including current maturities, was $584,423,000 and
$579,102,000, respectively. The estimated fair value of long-term debt is
determined based on the quoted market prices for the Timber Notes and the
Company's 10 1/2% Senior Notes due 2003 (the "Senior Notes"), and on the
current rates offered for borrowings similar to the Company's other debt. Some
of the Company's publicly traded debt issues are thinly traded financial
instruments; accordingly, their market prices at any balance sheet date may not
be representative of the prices which would be derived from a more active
market.
II-F-6
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31,
--------------------
1997 1996
--------- ---------
Lumber............................... $ 41,737 $ 46,882
Logs................................. 14,342 18,808
--------- ---------
$ 56,079 $ 65,690
========= =========
3. PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment are as follows (dollar
amounts in thousands):
DECEMBER 31,
ESTIMATED ----------------------
USEFUL LIVES 1997 1996
------------- ---------- ----------
Machinery and equipment.............. 5 -15 years $ 126,079 $ 123,909
Buildings............................ 33 years 36,217 34,285
Logging roads........................ 15 years 16,066 11,093
---------- ----------
178,362 169,287
Less: accumulated depreciation....... (82,070) (73,772)
---------- ----------
$ 96,292 $ 95,515
========== ==========
Depreciation expense for the years ended December 31, 1997, 1996 and 1995 was
$9,191,000, $8,850,000 and $9,185,000, respectively.
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
DECEMBER 31,
----------------------
1997 1996
---------- ----------
7.95% Scotia Pacific Timber
Collateralized Notes due through
July 20, 2015...................... $ 319,965 $ 336,130
10 1/2% Pacific Lumber Senior Notes
due March 1, 2003.................. 235,000 235,000
Revolving Credit Agreement........... 9,445 --
Other................................ 590 724
---------- ----------
565,000 571,854
Less: current maturities............. (19,429) (16,258)
---------- ----------
$ 545,571 $ 555,596
========== ==========
The indenture governing the Timber Notes (the "Timber Note Indenture")
prohibits Scotia Pacific from incurring any additional indebtedness for borrowed
money and generally limits the business activities of Scotia Pacific to the
ownership and operation of its timber and timberlands. The Timber Notes are
senior secured obligations of Scotia Pacific and are not obligations of, or
guaranteed by, the Company or any other person. The Timber Notes are secured by
a lien on (i) Scotia Pacific's timber and timberlands (representing $154,288,000
of the Company's consolidated balance at December 31, 1997), (ii) Scotia
Pacific's contract rights and certain other assets, (iii) the funds deposited in
the Payment Account and the Liquidity Account, and (iv) substantially all of
Scotia Pacific's other property and equipment.
II-F-7
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Timber Notes are structured to link, to the extent of available cash,
the deemed depletion of Scotia Pacific's timber (through the harvest and sale of
logs) to the required amortization of the Timber Notes. The required amount of
amortization due on any Timber Note payment date is determined by various
mathematical formulas set forth in the Timber Note Indenture. The minimum amount
of principal which Scotia Pacific must pay (on a cumulative basis) through any
Timber Note payment date in order to avoid an Event of Default (as defined) is
referred to as rated amortization ("Rated Amortization"). If all payments of
principal are made in accordance with Rated Amortization, the payment date on
which Scotia Pacific will pay the final installment of principal is July 20,
2015. The amount of principal which Scotia Pacific must pay through each Timber
Note payment date in order to avoid prepayment or deficiency premiums is
referred to as scheduled amortization ("Scheduled Amortization"). If all
payments of principal are made in accordance with Scheduled Amortization, the
payment date on which Scotia Pacific will pay the final installment of principal
is July 20, 2009.
Principal and interest on the Timber Notes are payable semi-annually on
January 20 and July 20. On January 20, 1998, Scotia Pacific paid $10,773,000 of
principal on the Timber Notes. The Timber Notes are redeemable at the option of
Scotia Pacific, in whole but not in part, 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.
Interest on the Senior Notes is payable semi-annually on March 1 and
September 1. The Senior Notes are redeemable at the option of the Company, in
whole or in part, on or after March 1, 1998, at a price of 103% of the principal
amount plus accrued interest. The redemption price is reduced annually until
March 1, 2000, after which time the Senior Notes are redeemable at par. The
Senior Notes are unsecured and are senior indebtedness of the Company; however,
they are effectively subordinated to the Timber Notes. The indenture governing
the Senior Notes contains various covenants which, among other things, limit the
Company's ability to incur additional indebtedness and liens, to engage in
transactions with affiliates, to make investments and to pay dividends.
On October 9, 1997, the Company amended its revolving credit agreement with
a bank (the "Revolving Credit Agreement") to extend the date on which it
expires to May 31, 2000. Borrowings under the Revolving Credit Agreement are
secured by the Company's trade receivables and inventories, with interest
currently computed at the bank's reference rate plus 1 1/4% or the bank's
offshore rate plus 2 1/4%. The Revolving Credit Agreement 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.
Borrowings made pursuant to the portion of the credit facility restricted to
timberland acquisitions would also be secured by the purchased timberlands. As
of December 31, 1997, $35,484,000 of borrowings was available under the
Revolving Credit Agreement, of which $4,929,000 was available for letters of
credit and $20,554,000 was restricted to timberland acquisitions. $9,445,000 of
borrowings were outstanding as of December 31, 1997, and letters of credit
outstanding amounted to $15,071,000. The Revolving Credit Agreement contains
covenants substantially similar to those contained in the indenture governing
the Senior Notes.
As of December 31, 1997, under the most restrictive covenants contained in
the indentures governing the Senior Notes, the Timber Notes and the Revolving
Credit Agreement, the Company could pay approximately $15,900,000 of dividends.
Scheduled maturities of long-term debt outstanding at December 31, 1997,
using the Scheduled Amortization for the Timber Notes, are as follows: years
ending December 31, 1998--$19,429,000; 1999--$24,107,000; 2000--$26,426,000;
2001--$27,189,000; 2002--$27,213,000; thereafter--$440,636,000.
II-F-8
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROVISION IN LIEU OF INCOME TAXES
Income taxes are determined using an asset and liability approach which
requires the recognition of deferred income tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Under this method, deferred
income tax assets and liabilities are determined based on the temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates.
The Company and its subsidiaries are members of MAXXAM's consolidated
return group for federal income tax purposes. The Company's tax allocation
agreement with MAXXAM (the "Tax Allocation Agreement") provides that the
Company, excluding its wholly owned subsidiaries ("Pacific Lumber"), is liable
to MAXXAM for the federal consolidated income tax liability of Pacific Lumber,
Scotia Pacific and certain other subsidiaries of Pacific Lumber (but excluding
Salmon Creek) (collectively, the "PL Subgroup") computed as if the PL Subgroup
was a separate affiliated group of corporations which was never connected with
MAXXAM. The Tax Allocation Agreement further provides that Salmon Creek is
liable to MAXXAM for its federal income tax liability computed as if Salmon
Creek was a separate corporation which was never affiliated with MAXXAM.
The provision in lieu of income taxes on income before income taxes and
extraordinary item consists of the following (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Current:
Federal provision in lieu of income
taxes........................... $ 369 $ 189 $ 239
State and local.................... 391 28 61
--------- --------- ---------
760 217 300
--------- --------- ---------
Deferred:
Federal provision in lieu of income
taxes........................... 6,851 5,613 4,755
State and local.................... 268 277 1,425
--------- --------- ---------
7,119 5,890 6,180
--------- --------- ---------
$ 7,879 $ 6,107 $ 6,480
========= ========= =========
A reconciliation between the provision in lieu of income taxes and the
amount computed by applying the federal statutory income tax rate to income
before income taxes is as follows (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Income before income taxes........... $ 23,468 $ 16,053 $ 13,041
========= ========= =========
Amount of federal income tax based
upon the statutory rate............ $ 8,213 $ 5,619 $ 4,564
Revision of prior years' tax
estimates.......................... (1,134) (981) 651
State and local taxes, net of federal
tax effect......................... 428 1,080 966
Expenses for which no federal tax
benefit is available............... 176 489 --
Other................................ 196 (100) 299
--------- --------- ---------
$ 7,879 $ 6,107 $ 6,480
========= ========= =========
Revision of prior years' tax estimates as shown in the table above
primarily include amounts for the reversal of reserves which the Company no
longer believes are necessary. Generally, the reversal of reserves relates to
the expiration of the relevant statute of limitations with respect to certain
income tax
II-F-9
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
returns or the resolution of specific income tax matters with the relevant tax
authorities. For the years ended December 31, 1996 and 1995, the reversal of
reserves which the Company believes are no longer necessary resulted in a credit
to the income tax provision of $883,000 and $127,000, respectively. There was no
reversal of reserves for the year ended December 31, 1997.
The components of the Company's net deferred income tax assets
(liabilities) are as follows (in thousands):
DECEMBER 31,
----------------------
1997 1996
---------- ----------
Deferred income tax assets:
Timber and timberlands............. $ 25,800 $ 28,992
Loss and credit carryforwards...... 14,619 22,089
Other liabilities and other........ 12,407 8,468
Valuation allowances............... (2,795) (1,884)
---------- ----------
Total deferred income tax
assets, net................... 50,031 57,665
---------- ----------
Deferred income tax liabilities:
Inventories........................ (15,803) (15,102)
Property, plant and equipment...... (12,771) (15,917)
Other.............................. (4,110) (2,180)
---------- ----------
Total deferred income tax
liabilities................... (32,684) (33,199)
---------- ----------
Net deferred income tax assets..... $ 17,347 $ 24,466
========== ==========
A principal component of the net deferred income tax assets listed above
relates to the excess of the tax basis over financial statement basis with
respect to timber and timberlands. The Company believes that it is more likely
than not that this net deferred income tax asset will be realized, based
primarily upon the estimated value of its timber and timberlands which is well
in excess of its tax basis. The valuation allowances listed above relate to loss
and credit carryforwards. The Company evaluated all appropriate factors to
determine the proper valuation allowances for loss and credit carryforwards.
These factors included any limitations concerning use of the carryforwards, the
year the carryforwards expire and the levels of taxable income necessary for
utilization. The Company has concluded that it will more likely than not
generate sufficient taxable income to realize the benefit attributable to the
loss and credit carryforwards for which valuation allowances were not provided.
Included in the net deferred income tax assets listed above are $15,735,000
and $22,586,000 at December 31, 1997 and 1996, respectively, which are recorded
pursuant to the Tax Allocation Agreement with MAXXAM.
The following table presents the Company's estimated tax attributes, for
federal income tax purposes, under the terms of the Tax Allocation Agreement at
December 31, 1997 (in thousands):
EXPIRING
THROUGH
-----------
Regular Tax Attribute Carryforwards:
Net operating losses............... $ 31,589 2012
Charitable contribution
deduction....................... 99 2002
Minimum tax credit................. 733 Indefinite
Alternative Minimum Tax Attribute
Carryforwards:
Net operating losses............... $ 1,929 2012
II-F-10
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN
The Company has a defined benefit plan which covers all employees of the
Company. Under the plan, employees are eligible for benefits at age 65 or
earlier, if certain provisions are met. The benefits are determined under a
career average formula based on each year of service with the Company and the
employee's compensation for that year. The Company's funding policy is to
contribute annually an amount at least equal to the minimum cash contribution
required by The Employee Retirement Income Security Act of 1974, as amended.
A summary of the components of net periodic pension cost is as follows (in
thousands):
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Service cost--benefits earned during
the year........................... $ 1,937 $ 1,903 $ 1,483
Interest cost on projected benefit
obligation......................... 1,892 1,682 1,693
Actual gain on plan assets........... (3,988) (2,762) (3,900)
Net amortization and deferral........ 2,451 1,448 2,460
--------- --------- ---------
Net periodic pension cost............ $ 2,292 $ 2,271 $ 1,736
========= ========= =========
The following table sets forth the funded status and amounts recognized in
the Consolidated Balance Sheet (in thousands):
DECEMBER 31,
----------------------
1997 1996
---------- ----------
Actuarial present value of
accumulated plan benefits:
Vested benefit obligation.......... $ 22,181 $ 18,506
Non-vested benefit obligation...... 2,176 1,371
---------- ----------
Total accumulated benefit
obligation.................... $ 24,357 $ 19,877
========== ==========
Projected benefit obligation......... $ 28,940 $ 23,582
Plan assets at fair value, primarily
equity and debt securities......... (25,872) (21,800)
---------- ----------
Projected benefit obligation in
excess of plan assets.............. 3,068 1,782
Unrecognized net transition asset.... 12 18
Unrecognized net gain................ 4,226 2,855
Unrecognized prior service cost...... (950) (39)
---------- ----------
Accrued pension liability....... $ 6,356 $ 4,616
========== ==========
The assumptions used in accounting for the defined benefit plan were as
follows (in thousands):
1997 1996 1995
--------- --- ---------
Rate of increase in compensation
levels............................. 5.0% 5.0% 5.0%
Discount rate........................ 7.25% 7.5% 7.25%
Expected long-term rate of return on
assets............................. 8.0% 8.0% 8.0%
POSTRETIREMENT MEDICAL BENEFITS
The Company has an unfunded benefit plan for certain postretirement medical
benefits which covers substantially all employees of the Company. Participants
of the plan are eligible for certain health care benefits upon termination of
employment and retirement and commencement of pension benefits. Participants
make contributions for a portion of the cost of their health care benefits. The
expected costs of
II-F-11
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
postretirement medical benefits are accrued over the period the employees
provide services to the date of their full eligibility for such benefits.
A summary of the components of net periodic postretirement medical benefit
cost is as follows (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Service cost--medical benefits earned
during the year.................... $ 287 $ 332 $ 228
Interest cost on accumulated
postretirement medical benefit
obligation......................... 362 415 317
Net amortization and deferral........ (42) -- (53)
--------- --------- ---------
Net periodic postretirement medical
benefit cost....................... $ 607 $ 747 $ 492
========= ========= =========
The postretirement medical benefit liability recognized in the Company's
Consolidated Balance Sheet is as follows (in thousands):
DECEMBER 31,
--------------------
1997 1996
--------- ---------
Retirees............................. $ 710 $ 1,182
Actives eligible for benefits........ 893 905
Actives not eligible for benefits.... 3,434 3,818
--------- ---------
Accumulated postretirement medical
benefit obligation.............. 5,037 5,905
Unrecognized net gain (loss)......... 1,003 (86)
--------- ---------
Postretirement medical benefit
liability....................... $ 6,040 $ 5,819
========= =========
The annual assumed rate of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) is 10.0% for 1998 and is assumed to
decrease gradually to 5.5% in 2009 and remain at that level thereafter. Each one
percentage point increase in the assumed health care cost trend rate would
increase the accumulated postretirement medical benefit obligation as of
December 31, 1997 by approximately $655,000 and the aggregate of the service and
interest cost components of net periodic postretirement medical benefit cost by
approximately $112,000.
The discount rates used in determining the accumulated postretirement
medical benefit obligation were 7.25% and 7.5% at December 31, 1997 and 1996,
respectively.
EMPLOYEE SAVINGS PLAN
The Company's employees are eligible to participate in a defined
contribution savings plan sponsored by MAXXAM. This plan is designed to enhance
the existing retirement programs of participating employees. Employees may elect
to defer up to 16% of their base compensation to the plan. For those
participants who have elected to defer a portion of their compensation to the
plan, the Company's contributions consist of matching contributions of up to 4%
of the base compensation of participants. The cost to the Company of this plan
was $1,516,000, $1,388,000 and $1,281,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
WORKERS' COMPENSATION BENEFITS
The Company is self-insured for workers' compensation benefits. Included in
accrued compensation and related benefits and other noncurrent liabilities are
accruals for workers' compensation claims amounting to $10,800,000 and
$8,000,000 at December 31, 1997 and 1996, respectively. Workers' compensation
expenses amounted to $4,381,000, $2,409,000 and $3,302,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
II-F-12
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS
MAXXAM provides the Company with personnel, insurance, legal, accounting,
financial, and certain other services. MAXXAM is compensated by the Company
through the payment of a fee representing the reimbursement of actual
out-of-pocket expenses incurred by MAXXAM, including, but not limited to, labor
costs of personnel of MAXXAM rendering services to the Company. Charges by
MAXXAM for such services were $1,358,000, $1,664,000 and $1,694,000, for the
years ended December 31, 1997, 1996, and 1995, respectively. The Company
believes that the services being rendered are on terms not less favorable to the
Company than those which would be obtainable from unaffiliated third parties.
An agreement with Britt Lumber Co., Inc., an indirect wholly owned
subsidiary of MGI ("Britt"), governs, among other things, the sale of logs and
lumber by the Company and Britt to each other and the sale of hog fuel (wood
residue) by Britt to the Company. The logs which the Company sells to Britt are
sold at approximately 75% of the applicable price for such species and category
as established by the California State Board of Equalization, which reflects the
lower quality of these logs. Logs which either the Company or Britt purchases
from third parties and which are then sold to each other are transferred at the
actual cost of such logs. Hog fuel is sold to the Company by Britt at applicable
market prices. Net sales for the years ended December 31, 1997, 1996 and 1995
include revenues of $13,907,000, $14,710,000 and $13,627,000, respectively, from
Britt. The Company recognized operating income of $6,505,000, $6,784,000 and
$5,527,000 on these revenues for the years ended December 31, 1997, 1996 and
1995, respectively. At December 31, 1997 and 1996, receivables include
$1,049,000 and $1,281,000, respectively, related to these affiliate sales.
All of the Company's issued and outstanding common stock is pledged as
collateral for MGI's $100,000,000 11 1/4% Senior Secured Notes due 2003 and
$125,720,000 12 1/4% Senior Secured Discount Notes due 2003 (collectively, the
"MGI Notes"). MGI conducts its operations primarily through subsidiary
companies. The Company represents the substantial portion of MGI's assets and
operations. The indenture governing the MGI Notes requires the Company's board
of directors to declare and pay dividends on the Company's common stock to the
maximum extent permitted by any consensual restriction or encumbrance on the
Company's ability to declare and pay dividends, unless the Board determines in
good faith that such declaration and payment would be detrimental to the capital
or other operating needs of the Company.
8. STOCKHOLDER'S DEFICIT
Changes in stockholder's deficit were (in thousands):
<TABLE>
<CAPTION>
COMMON
STOCK ADDITIONAL ACCUMULATED
($.01 PAR) CAPITAL DEFICIT TOTAL
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Balance, January 1, 1995............. $ -- $ 157,520 $(146,241) $ 11,279
Net income......................... -- -- 6,561 6,561
Dividends.......................... -- -- (22,000) (22,000)
---------- ---------- ----------- --------
Balance, December 31, 1995........... -- 157,520 (161,680) (4,160)
Net income......................... -- -- 9,946 9,946
Dividends.......................... -- -- (20,500) (20,500)
---------- ---------- ----------- --------
Balance, December 31, 1996........... -- 157,520 (172,234) (14,714)
Net income......................... -- -- 15,589 15,589
Dividends.......................... -- -- (23,000) (23,000)
---------- ---------- ----------- --------
Balance, December 31, 1997........... $ -- $ 157,520 $(179,645) $(22,125)
========== ========== =========== ========
</TABLE>
II-F-13
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CONTINGENCIES
The Company'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 the Company'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, have increased the costs of the
Company, they have not had a significant adverse effect on its financial
position, results of operations or liquidity. However, these laws and related
administrative actions and legal challenges have severely restricted the ability
of the Company to harvest virgin old growth timber on its timberlands, and to a
lesser extent, residual old growth timber.
On September 28, 1996, the Company (on behalf of itself, its subsidiaries
and affiliates) and MAXXAM (collectively, the "Pacific Lumber Parties")
entered into an agreement with the United States and California ("Headwaters
Agreement") which provides the framework for the acquisition by the United
States and California of approximately 5,600 acres of the Company's timberlands.
These timberlands are commonly referred to as the Headwaters Forest and the Elk
Head Springs Forest (collectively, the "Headwaters Timberlands"). A
substantial portion of the Headwaters Timberlands consists of virgin old growth
timberlands. Approximately 4,900 of these acres are owned by Salmon Creek, with
the remaining acreage being owned by Scotia Pacific (the Company having
harvesting rights on approximately 300 of such acres). The Headwaters
Timberlands would be transferred in exchange for (a) property and other
consideration from the United States and California having an aggregate fair
market value of $300 million, and (b) approximately 7,755 acres of adjacent
timberlands (the "Elk River Timberlands") to be acquired from a third party.
As part of the Headwaters Agreement, the Pacific Lumber Parties agreed to not
enter the Headwaters Forest or the Elk Head Springs Forest to conduct any
logging or salvage operations.
Closing of the Headwaters Agreement is subject to various conditions,
including federal and California funding, approval of a sustained yield plan
("SYP"), approval of a habitat conservation plan covering multiple species
("Multi-Species HCP") and issuance of a related incidental take permit (the
"Permit") 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. On February 27, 1998, Pacific
Lumber, MAXXAM and various government agencies entered into a Pre-Permit
Application Agreement in Principle (the "Pre-Permit Agreement," and in a prior
report the "HCP/SYP Agreement") regarding certain understandings that they had
reached regarding the Multi-Species HCP, the Permit and the SYP. The Pre-Permit
Agreement provides that the Permit and Multi-Species HCP would have a term of 50
years, and would limit the activities which could be conducted by the Company in
twelve forest groves to those which would enhance habitat. These groves
aggregate approximately 8,000 acres and consist of substantial quantities of
virgin and residual old growth redwood and Douglas-fir timber.
In addition to being an important milestone toward completion of the
Headwaters Agreement, the Company also believes that the Pre-Permit Agreement is
a positive development in respect of the environmental challenges that it has
faced over the last several years. Several species, including the northern
spotted owl, the marbled murrelet and the coho salmon, have been listed as
endangered or threatened under the federal Endangered Species Act ("ESA")
and/or the California Endangered Species Act ("CESA"). The Company has
developed federal and state northern spotted owl management plans which permit
harvesting activities to be conducted so long as the Company 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, the Company would be issued the Permit, which
would allow limited incidental "take" of listed species so long as there was
no "jeopardy" to the
II-F-14
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 be designed to protect currently
listed species as well as to consider candidate and future-listed species. The
Company is also attempting to include in the Multi-Species HCP a resolution of
the potential effect of limits by the Environmental Protection Agency ("EPA")
on sedimentation, temperature and other factors for seventeen northern
California rivers and certain of their tributaries, including rivers within the
Company's timberlands. These limitations will be aimed at protecting water
quality.
Lawsuits are pending or threatened which seek to prevent the Company from
implementing certain of its approved timber harvesting plans ("THPs"). While
challenges with respect to the Company's young growth timber have historically
been limited, a lawsuit was recently filed under the ESA which relates to a
significant number of THPs covering young growth timber of the Company. While
the Company expects these environmentally focused objections and lawsuits to
continue, it believes that the Pre-Permit Agreement will enhance its 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.
The Pre-Permit Agreement also contains certain provisions relating to the
SYP. Subject to further study, the Company expects the Company to propose a
long-term sustained yield harvest level ("LTSY") which is somewhat less than
the Company's recent harvest levels. If the SYP is approved, the Company will
have complied with certain BOF regulations requiring that timber companies
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 the Company's projected timber inventory is capable of
sustaining the LTSY harvest level in the last decade of the 100-year planning
period. An approved SYP is expected to be valid for ten years, although it would
be subject to review after five years. Thereafter, revised SYPs will be prepared
every decade that address the LTSY harvest level based upon reassessment of
changes in the resource base and other factors.
The final terms of the SYP, the Multi-Species HCP and the Permit are
subject to additional negotiation and agreement among the parties as well as
public review and comment. While the parties are working diligently to complete
the Multi-Species HCP and the SYP as well as the other closing conditions
contained in the Headwaters Agreement, there can be no assurance that the
Headwaters Agreement will be consummated or that an SYP, Multi-Species HCP or
Permit acceptable to the Company will be approved.
In the event that a Multi-Species HCP is not approved, the Company will not
enjoy the benefits of expedited preparation and facilitated review of its THPs.
Furthermore, if a Multi-Species HCP acceptable to the Company is not approved,
it is impossible for the Company to determine the potential adverse effect of
the listings of the marbled murrelet and coho salmon or the EPA's limitations 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 the
Company 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.
II-F-15
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION
ITEMS RELATED TO 1992 EARTHQUAKE
In 1995, the Company recorded reductions in cost of sales of $1,527,000
resulting from business interruption insurance reimbursements for higher
operating costs and the related loss of revenues resulting from the April 1992
earthquake.
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
--------- -------------- ---------
(IN THOUSANDS)
Supplemental information on non-cash
investing and financing activities:
Timber and timberlands acquired
subject to long-term debt..... $ 9,445 $ -- $ 615
Supplemental disclosure of cash flow
information:
Interest paid, net of
capitalized interest.......... $ 52,380 $ 52,517 $ 53,636
Income taxes paid (refunded).... 166 221 (5,190)
Tax allocation payments to
MAXXAM........................ 454 330 --
II-F-16
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......... $ 29,433 $ 31,768
Receivables:
Trade........................... 12,558 19,216
Other........................... 2,179 2,123
Inventories........................ 49,306 56,079
Prepaid expenses and other current
assets.......................... 8,586 12,898
----------- ------------
Total current assets.......... 102,062 122,084
Timber and timberlands, net of
accumulated depletion of $241,225
and $236,824, respectively......... 319,199 321,206
Property, plant and equipment, net of
accumulated depreciation of $86,382
and $82,070, respectively.......... 95,243 96,292
Deferred financing costs, net........ 16,876 17,912
Deferred income taxes................ 28,430 27,018
Restricted cash...................... 28,108 28,434
Other assets......................... 5,012 4,186
----------- ------------
$ 594,930 $ 617,132
=========== ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable................... $ 4,899 $ 3,538
Accrued compensation and related
benefits........................ 9,643 12,365
Accrued interest................... 19,262 19,650
Deferred income taxes.............. 9,671 9,671
Other accrued liabilities.......... 1,042 1,042
Long-term debt, current
maturities...................... 20,607 19,429
----------- ------------
Total current liabilities..... 65,124 65,695
Long-term debt, less current
maturities......................... 533,572 545,571
Other noncurrent liabilities......... 27,609 27,991
----------- ------------
Total liabilities............. 626,305 639,257
----------- ------------
Contingencies
Stockholder's deficit:
Common stock, $.01 par value, 100
shares authorized and issued.... -- --
Additional capital................. 157,520 157,520
Accumulated deficit................ (188,895) (179,645)
----------- ------------
Total stockholder's deficit... (31,375) (22,125)
----------- ------------
$ 594,930 $ 617,132
=========== ============
The accompanying notes are an integral part of these financial statements.
II-F-17
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1997
---------- ----------
unaudited
Net sales:
Lumber and logs.................... $ 92,744 $ 115,542
Other.............................. 8,792 13,117
---------- ----------
101,536 128,659
Operating expenses:
Cost of goods sold................. 64,415 71,505
Selling, general and administrative
expenses........................ 6,019 6,457
Depletion and depreciation......... 11,316 13,375
---------- ----------
81,750 91,337
---------- ----------
Operating income..................... 19,786 37,322
Other income (expense):
Investment, interest and other
income.......................... 2,887 1,490
Interest expense................... (26,335) (26,836)
---------- ----------
Income (loss) before income taxes.... (3,662) 11,976
Credit (provision) in lieu of income
taxes.............................. 1,412 (4,878)
---------- ----------
Net income (loss).................... $ (2,250) $ 7,098
========== ==========
The accompanying notes are an integral part of these financial statements.
II-F-18
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1997
---------- ----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ (2,250) $ 7,098
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depletion and depreciation......... 11,316 13,375
Amortization of deferred financing
costs........................... 1,036 1,046
Net gain on asset dispositions..... (1,864) --
Increase (decrease) in cash
resulting from changes in:
Receivables..................... 6,639 5,258
Inventories, net of depletion... 4,333 6,156
Prepaid expenses and other
assets......................... (1,253) (2,437)
Accounts payable................ 1,621 373
Accrued and deferred income
taxes.......................... (1,778) 4,667
Accrued interest................ (388) (351)
Other liabilities............... (3,104) 601
Other.............................. -- 106
---------- ----------
Net cash provided by operating
activities...................... 14,308 35,892
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............... (5,671) (5,813)
Net proceeds from sale of assets... 6,523 66
---------- ----------
Net cash provided for (used for)
investing activities........... 852 (5,747)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid..................... (7,000) (10,000)
Redemptions, repurchases of and
principal payments on long-term
debt............................ (10,821) (8,801)
Restricted cash withdrawals, net... 326 202
---------- ----------
Net cash used for financing
activities...................... (17,495) (18,599)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (2,335) 11,546
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD................ 31,768 26,027
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................. $ 29,433 $ 37,573
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid, net of capitalized
interest........................ $ 25,688 $ 26,130
Tax allocation payments to MAXXAM
Inc............................. 366 211
SUPPLEMENTAL INFORMATION ON NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Timber and timberlands acquired
subject to long-term debt....... $ -- $ 6,413
The accompanying notes are an integral part of these financial statements.
II-F-19
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Offering Memorandum. Any capitalized terms used but not defined in these
Condensed Notes to Consolidated Financial Statements are defined in the audited
consolidated financial statements and related notes thereto. All references to
the "Company" include the Company 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 necessary, in
the opinion of management, to present fairly the consolidated financial position
of the Company at June 30, 1998, the consolidated results of operations for the
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 an indirect, wholly owned
subsidiary of MGI. MGI is a wholly owned subsidiary of MGHI which is a wholly
owned subsidiary of MAXXAM.
SFAS No. 130 was issued in June 1997 and 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). For the six months ended June 30,
1998 and 1997, there is not a significant difference between "traditional" net
income and comprehensive net income as the amount of the adjustments required to
arrive at comprehensive income is not significant.
2. INVENTORIES
Inventories consist of the following (in thousands):
JUNE 30, DECEMBER 31,
1998 1997
--------- ------------
Lumber............................... $ 35,830 $ 41,737
Logs................................. 13,476 14,342
--------- ------------
$ 49,306 $ 56,079
========= ============
3. RESTRICTED CASH
Restricted cash represents the amount held by the trustee under the
indenture governing the Timber Notes of the Company's wholly owned subsidiary,
Scotia Pacific. In addition, cash and cash equivalents includes $10,245,000 and
$17,784,000 at June 30, 1998 and December 31, 1997, respectively, which is
restricted for debt service payments on the Timber Notes.
II-F-20
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
7.95% Scotia Pacific Timber
Collateralized Notes due July 20,
2015............................... $ 309,192 $319,965
10 1/2% Pacific Lumber Senior Notes
due March 1, 2003.................. 235,000 235,000
Revolving Credit Agreement........... 9,445 9,445
Other................................ 542 590
---------- ------------
554,179 565,000
Less: current maturities............. (20,607) (19,429)
---------- ------------
$ 533,572 $545,571
========== ============
5. CONTINGENCIES
The Company'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 the Company'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, have increased the costs of the
Company, they have not historically 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 the Company to harvest virgin old growth timber, and
to a lesser extent, residual old growth timber on its timberlands. On August 12,
1998, an action was filed by two enviromental groups against the Company and two
of its subsidiaries (the "EPIC LAWSUIT") under which the environmental groups
allege certain procedural violations of the ESA resulting from the defendants'
logging activities on the Company's timberlands and seek to prevent the
defendants from carying out any harvesting activities until certain purported
wildlife agency consultation requirements under ESA are satisfied in connection
with the Multi-Species HCP (see below). The Company is uncertain what impact the
EPIC LAWSUIT will have upon its operations and financial results, but it is
possible that other approved timber harvesting activities on the Company's
timberlands could be severly restricted (and revenues potentially signifigantly
adversly affected) until such time as the consultation requirements are
satisfied. The Company estimates that it could take up to several months to
complete these consultation requirements.
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 Pacific (the
Company having harvesting rights on acreage after giving effect to the
transactions described in Note 6 below). 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 7,800 acres of timberlands to be acquired from a third party.
As part of the Headwaters Agreement, the Pacific Lumber Parties agreed to not
enter the Headwaters Timberlands to conduct any logging or salvage operations.
Closing of the Headwaters Agreement is subject to various conditions,
including obtaining federal and California funding, approval of an SYP, approval
of a Multi-Species HCP and issuance of the Permits, acquisition of the third
party timberlands and the issuance of certain tax agreements satisfactory to the
Pacific Lumber Parties.
II-F-21
<PAGE>
In November 1997, President Clinton signed an appropriations bill
authorizing 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. On August 31, 1998, the California Legislature enacted a
bill the "California Headwaters Bill" which among other things, appropriated
California's $130 million portion of the funding required to consummate the
Headwaters Agreement. The state funds remain available until June 30, 1999.
Governor Pete Wilson has announced his intention to sign the California
Headwaters Bill. The bill also contains an additional appropriation available
from July 1, 1999 until June 30, 2000 authorizing the expenditure of up to $80
million toward acquisition of the "Owl Creek" grove owned by Scotia Pacific
Company LLC ("Scotia LLC"), Scotia Pacific's successor (see Note 6 below). The
bill also provides that if any portion of the $80 million remains after purchase
of the OWL Creek grove, it may be used to purchase certain other timberlands.
The SYP and Multi-Species HCP (see below) would have allowed harvesting over
time of either the Owl Creek grove or a forest grove owned by the Company
commonly referred to as "Grizzly Creek". Scheduled Amortization under the New
Timber Notes (see Note 6 below) assumed that the Owl Creek grove would be
harvested over time; however, a provision of the California Headwaters Bill
designates the Owl Creek grove as an additional conservation area for the
marbled murrelet, which would have the effect of restricting the activities
which could be conducted in the grove. The Company estimates that the Owl Creek
grove constitutes approximately 2% of aggregate "Mbfe" (board foot equivalents
of timber as defined in the New Timber Notes Indenture) contained on the timber
owned by. It is uncertain whether the Owl Creek grove will ultimately be sold to
the state of California. Furthermore, Scotia LLC could arrange to exchange the
Owl Creek grove for other timberlands pursuant to the substitute collateral
provisions of the New Timber Notes Indenture. Were the Owl Creek grove to be
sold to the state of California, the Company would be required to recognize
Deemed Production (as defined in the New Timber Notes Indenture) with respect to
the Mbfe contained in the grove, which would result in substantial prepayments
(and related Prepayment premiums) on the New Timber Notes.
The California Headwaters Bill contains provisions for requiring the
inclusion of additional environmentally focused provisions in the final version
of the Multi-Species HCP, including establishing a wider interim streamside
buffers (while the watershed assessment process is being completed) than
provided for in the Multi-Species HCP, obligating the Company and the government
agencies to establish a schedule that results in completion of the watershed
assessment process within five years, imposing minimum and maximum "no cut"
buffers upon the watershed assessment process. The California Headwaters Bill
also provides that the SYP shall be subject to the foregoing provisions.
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In July 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 the Company in various forest groves to those which would
not be detrimental to marbled murrelet habitat. Under the Multi-Species HCP and
the California Headwaters Bill, these groves aggregate approximately 8,500 acres
and consist of substantial quantities of virgin and residual old growth redwood
and Douglas-fir timber. A draft environmental impact statement/report analyzing
the Headwaters Agreement, SYP and Multi-Species HCP is being prepared by a
consulting firm under the direction of the United States and California, and is
expected to be made available for public review and comment in the next few
weeks. After the public review and comment process is completed, the regulatory
agencies will determine whether to approve (with or without conditions) or
disapprove the SYP and Multi-Species HCP.
The Company believes that submission of the proposed SYP and Multi-Species
HCP for public review and comment and passage of the California Headwaters Bill
are favorable developments that enhance the prospects for consummation of the
Headwaters Agreement, 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. The
II-F-22
<PAGE>
Company has developed federal and state northern spotted owl management plans
which permit harvesting activities to be conducted so long as the Company
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, the Company 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 the Company's
compliance with habitat requirements for currently listed species, it would also
provide greater certainty and protection for the Company with regard to
identified species that may be listed in the future. The Company is attempting
to include in the Multi-Species HCP a resolution of the effect of potential
regulatory limits by the EPA on sedimentation, temperature and other factors for
seventeen northern California rivers and certain of their tributaries, including
rivers within the Company's timberlands. These limitations would be aimed at
protecting water quality.
Lawsuits are pending or threatened which seek to prevent the Company from
implementing certain of its approved THPs or other operations. While challenges
with respect to the Company'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
the Company and the EPIC LAWSUIT discussed above could also have an adverse
impact on the harvesting of the Company's timberlands for up to several months.
While the Company expects these environmentally focused objections and lawsuits
to continue, it believes that the the Multi-Species HCP and SYP would enhance
its position in connection with these challenges. The Company also believes that
the Multi-Species HCP and SYP would expedite the preparation and facilitate
approval of its THPs.
With respect to the SYP, the Company has proposed an LTSY which is
approximately 10% less than the Company's average timber harvest over the last
three years. If the SYP is approved by the CDF, the Company will have complied
with certain BOF regulations requiring that timber companies 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 the Company'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
II-F-23
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for ten years, although it would be subject to review after five years.
Thereafter, revised SYPs will 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 if the SYP
and Multi-Species HCP are approved by the regulatory agencies, the terms of such
approval will be acceptable to the Company. If the Headwaters Agreement is not
consummated and the Company 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
governmental 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, the Company 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 the Company 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 the Company 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.
6. SUBSEQUENT EVENT
On July 20, 1998, Scotia LLC, a recently formed limited liability company
wholly owned by the Company, issued the New Timber Notes which consist of an
aggregate of $867,200,000 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 Timber Notes and to redeem the Senior Notes
effective August 19, 1998. The Company expects to recognize an extraordinary
loss of approximately $28,500,000, net of the related income tax benefit
$17,900,000, in the quarter ended September 30, 1998 for the early
extinguishment of the Timber Notes and the Senior Notes. Concurrently with the
issuance of the New Timber Notes, (i) Scotia Pacific was merged into Scotia LLC,
(ii) the Company transferred to Scotia LLC approximately 13,500 acres of
timberlands and the timber and harvesting rights with respect to an additional
19,700 acres of timberlands, and (iii) Scotia LLC transferred to the Company the
timber and harvesting rights related to approximately 1,400 acres of
timberlands.
Under the New Timber Notes Indenture, the business activities of Scotia LLC
are generally limited to the ownership and operation of its timber and
timberlands. The New Timber Notes are senior secured obligations of Scotia LLC
and are not obligations of, or guaranteed by, the Company or any other person.
The New Timber Notes are secured by a lien on (i) Scotia LLC's timber and
timberlands (representing $246,200,000 of the Company's consolidated balance at
June 30, 1998), and (ii) substantially all of Scotia LLC's other property.
Interest on the New Timber Notes is further secured by the $63,500,000 Timber
Notes Line of Credit. The New Timber Notes Indenture permits Scotia LLC to have
outstanding up to $75,000,000 of non-recourse indebtedness to acquire additional
timberlands, to issue additional timber notes provided certain conditions are
met (including repayment or redemption of the $160,700,000 Class A-1 Timber
Notes), and to incur indebtedness under the Timber Notes Line of Credit.
The New 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 New Timber
II-F-23
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Notes. The required amount of amortization on any New Timber Note payment date
is determined by various mathematical formulas set forth in the New Timber Notes
Indenture. The minimum amount of principal which Scotia LLC must pay (on a
cumulative basis and subject to available cash) through any New Timber Note
payment date in order to avoid an Event of Default is referred to as Minimum
Principal Amortization. If the New 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 New 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 $463,300,000 related to the Class
A-3 New Timber Notes.
Principal and interest on the New Timber Notes are payable semi annually on
January 20 and July 20. The New Timber Notes are redeemable at the option of
Scotia LLC at any time. The redemption price of the New 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.
II-F-24
<PAGE>
PACIFIC LUMBER COMPANY
UNAUDITED SUMMARY QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
1998 Quarterly Information:
Net sales.......................... $46,514 $ 55,022
Operating income................... 7,861 11,925
Net loss........................... (2,039) (211)
1997 Quarterly Information:
Net sales.......................... 60,849 $ 67,810 $66,592 $ 66,126
Operating income................... 16,512 20,810 20,584 16,659
Net income......................... 2,193 4,905 4,678 3,813
1996 Quarterly Information:
Net sales.......................... 54,903 65,299 62,965 61,682
Operating income................... 14,310 17,485 15,415 19,090
Net income......................... 884 3,144 1,473 4,445
</TABLE>
II-F-25
<PAGE>
Questions and requests for assistance and requests for additional copies of
this Prospectus, the Letter of Transmittal and other related documents should be
directed to the Exchange Agent. All tendered Old Notes, executed Letters of
Transmittal and other related documents should be addressed to the Exchange
Agent as follows:
BY MAIL:
State Street Bank and Trust Company
Corporate Trust Department
P.O. Box 778
Boston, MA 02102
BY OVERNIGHT MAIL:
State Street Bank and Trust Company
Corporate Trust Department
Two International Place, Fourth Floor
Boston, MA 02110
BY HAND (BOSTON):
State Street Bank and Trust Company
Two International Place
Fourth Floor, Corporate Trust Window
Boston, MA 02110
BY HAND (NEW YORK):
State Street Bank and Trust Company
61 Broadway
15th Floor, Corporate Trust Window
New York, NY 10006
BY FACSIMILE TRANSMISSION:
(617) 664-5290
TO CONFIRM RECEIPT:
(617) 664-5587
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE AS OF WHICH
INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
SOLICITATION.
OFFER TO EXCHANGE ITS
6.55% SERIES B CLASS A-1
TIMBER COLLATERALIZED NOTES DUE 2028,
7.11% SERIES B CLASS A-2
TIMBER COLLATERALIZED NOTES DUE 2028
AND
7.71% SERIES B CLASS A-3
TIMBER COLLATERALIZED NOTES DUE 2028
FOR ANY AND ALL OF ITS OUTSTANDING
6.55% CLASS A-1
TIMBER COLLATERALIZED NOTES DUE 2028,
7.11% CLASS A-2
TIMBER COLLATERALIZED NOTES DUE 2028
AND
7.71% CLASS A-3
TIMBER COLLATERALIZED NOTES DUE 2028,
RESPECTIVELY.
SCOTIA PACIFIC
COMPANY LLC
------------------------------------
PROSPECTUS
------------------------------------
, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 18-108 of the Delaware Limited Liability Company Act (the
"DLLCA") provides that, subject to such standards and restrictions, if any, as
are set forth in its limited liability company agreement, a limited liability
company may, and shall have the power to, indemnify and hold harmless any member
or manager or other person from and against any and all claims and demands
whatsoever. The limited liability company agreement of Scotia Pacific Company
LLC, a limited liability company formed under the DLLCA (the "Company"),
contains provisions which generally require it to indemnify any person who was
or is a party or is threatened to be made a party to any pending or completed
action or proceeding by reason of the fact that he or she was a manager,
officer, employee or agent of the Company.
Subject to certain limitations and exceptions, the Company has insurance
coverage for losses by any person who is or hereafter may be a manager or
officer of the Company arising from claims against that person for any wrongful
act in his or her capacity as a manager or officer of the Company. The policy
also provides for reimbursement to the Company for indemnification given by the
Company pursuant to common or statutory law or its limited liability company
agreement to any such person arising from any such claims.
The foregoing discussion is qualified in its entirety by reference to the
DLLCA and the referenced limited liability company agreement.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
EXHIBIT NO. EXHIBIT
- -------------------------------------------------------------
*3.1 Certificate of Formation of the
Company, dated May 29, 1998.
*3.2 Agreement of Limited Liability
Company of the Company, effective as
of July 20, 1998.
*4.1 Agreement and Plan of Merger, dated
as of July 20, 1998, between the
Company and Scotia Pacific Holding
Company.
4.2 Indenture, dated as of July 20, 1998,
between the Company and State Street
Bank and Trust Company, as trustee,
regarding the Timber Notes
(incorporated herein by reference to
Exhibit 4.1 to the Quarterly Report
on Form 10-Q/A of MAXXAM Inc. for the
quarter ended June 30, 1998, File No.
1-3924.
*4.3 Note Purchase Agreement, dated as of
July 9, 1998, between the Company and
Salomon Brothers Inc, as
representative of the initial
purchasers of the Notes.
*4.4 Registration Rights Agreement, dated
as of July 20, 1998, between the
Company and Salomon Brothers Inc, as
representative of the initial
purchasers of the Notes.
4.5 Credit Agreement, dated as of July
20, 1998, among the Company, the
financial institutions party thereto
and Bank of America, as agent
(incorporated herein by reference to
Exhibit 4.3 to the Quarterly Report
on Form 10-Q of MAXXAM Inc. for the
quarter ended June 30, 1998, File No.
1-3924, the "MAXXAM June 1998 Form
10-Q").
4.6 Deed of Trust, Security Agreement,
Financing Statement, Fixture Filing
and Assignment of Proceeds, dated
July 20, 1998, among the Company,
Fidelity National Title Insurance
Company, as trustee, and State Street
Bank and Trust Company, as collateral
agent (incorporated herein by
reference to Exhibit 4.2 to the
MAXXAM June 1998 Form 10-Q).
**5 Opinion with respect to the Timber
Notes.
10.1 New Master Purchase Agreement, dated
as of July 20, 1998, between the
Company and The Pacific Lumber
Company ("Pacific Lumber")
(incorporated herein by reference to
Exhibit 10.1 to the Quarterly Report
on Form 10-Q of MAXXAM Group Holdings
Inc. for the quarter ended June 30,
1998, File No. 333-18723; the "MGHI
June 1998 Form 10-Q").
II-1
<PAGE>
EXHIBIT NO. EXHIBIT
- -------------------------------------------------------------
10.2 New Services Agreement, dated as of
July 20, 1998, between Pacific Lumber
and the Company (incorporated herein
by reference to Exhibit 10.2 to the
MGHI June 1998 Form 10-Q).
10.3 New Additional Services Agreement,
dated as of July 20, 1998, between
the Company and Pacific Lumber
(incorporated herein by reference to
Exhibit 10.3 to the MGHI June 1998
Form 10-Q).
10.4 New Reciprocal Rights Agreement,
dated as of July 20, 1998, among
Pacific Lumber, the Company and
Salmon Creek Corporation
(incorporated herein by reference to
Exhibit 10.4 to the MGHI June 1998
Form 10-Q).
10.5 New Environmental Indemnification
Agreement, dated as of July 20, 1998,
between Pacific Lumber and the
Company (incorporated herein by
reference to Exhibit 10.5 to the MGHI
June 1998 Form 10-Q).
*12 Computation of ratio of earnings to
fixed charges of the Company.
*23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Kramer, Levin, Naftalis &
Frankel (to be contained in Exhibit
5).
*24 Power of Attorney (on signature page)
*25 Form T-1 Statement of Eligibility of
State Street Bank and Trust Company,
as trustee.
*27 Financial Data Schedule
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed
Delivery.
- ---------------
* Filed herewith
** To be filed by amendment
All other schedules are omitted because the required information is
included in the Financial Statements or the Notes thereto or is otherwise
inapplicable.
ITEM 22. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be permitted to
managers, officers and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a manager, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
manager, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act") (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in the Registration Statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT, SCOTIA PACIFIC COMPANY LLC, HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED IN THE CITY OF SCOTIA, STATE OF CALIFORNIA, ON THE 18TH DAY OF
SEPTEMBER, 1998.
SCOTIA PACIFIC COMPANY LLC
By: /s/ JOHN A. CAMPBELL
JOHN A. CAMPBELL, CHAIRMAN OF THE
BOARD, PRESIDENT
AND MANAGER (PRINCIPAL EXECUTIVE
OFFICER)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints J. Kent Friedman, Bernard L. Birkel and
Timothy J. Neumann, and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any or all amendments,
including any post-effective amendments, to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the above premises, as fully to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof. This Power of Attorney may
be executed in multiple counterparts, each of which shall be deemed an original,
but which taken together shall constitute one instrument.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- --------------------------------------------------------------------------------
/s/ John A. Campbell Chairman of the Board, President and September 18, 1998
JOHN A. CAMPBELL Manager (Principal Executive Officer)
/s/ Paul N. Schwartz Vice President and Manager (Principal September 18, 1998
PAUL N. SCHWARTZ Financial Officer)
/s/ Gary L. Clark Vice President--Finance and September 18, 1998
GARY L. CLARK Administration
(Principal Accounting Officer)
/s/ John T. La Duc Vice President and Manager September 18, 1998
JOHN T. LA DUC
/s/ Ezra G. Levin Manager September 18, 1998
EZRA G. LEVIN
/s/ Stuart C. Lewis Manager September 18, 1998
STUART C. LEWIS
/s/ Jack M. Webb Manager September 18, 1998
JACK M. WEBB
CERTIFICATE OF FORMATION
OF
SCOTIA PACIFIC COMPANY LLC
The undersigned, an authorized natural person, for the purpose of
forming a limited liability company, under the provisions and subject to the
requirements of the State of Delaware (particularly Chapter 18, Title 6 of the
Delaware Code and the acts amendatory thereof and supplemental thereto, and
known, identified, and referred to as the "Delaware Limited Liability Company
Act"), hereby certifies that:
FIRST: The name of the limited liability company (hereinafter
called the "limited liability company") is SCOTIA PACIFIC COMPANY LLC.
SECOND: The address of the registered office and the name and the
address of the registered agent of the limited liability company required to be
maintained by Section 18-104 of the Limited Liability Company Act of the State
of Delaware are Corporation Service Company, 1013 Centre Road, Wilmington,
Delaware 19805-1297.
THIRD: The nature of the business to be conducted by, and the purposes
of, the limited liability company are to engage in any lawful act or activity
for which a limited liability company may be organized under the Limited
Liability Company Act of the State of Delaware.
FOURTH: No member of the limited liability company may bind the
limited liability company except in accordance with the limited liability
company agreement of the limited liability company as in effect from time to
time.
FIFTH: The limited liability company shall indemnify and hold harmless
each member, each manager and each officer of the limited liability company, to
the fullest extent permitted by law.
Executed on May 29, 1998.
/s/ Timothy J. Neumann
Timothy J. Neumann, Authorized Person
AGREEMENT OF LIMITED LIABILITY COMPANY, effective as of July 20, 1998
(the "Agreement"), of Scotia Pacific Company LLC (the "Company"), by The Pacific
Lumber Company ("Pacific Lumber"), as the sole member of the Company.
Preliminary Statement
Pacific Lumber desires to operate the Company under the Delaware
Limited Liability Company Act (as amended from time to time, the "Act") to carry
on any lawful business, purpose or activity not restricted by the Act or any
other applicable law or the Agreement.
In that connection, Pacific Lumber desires to enter into a written
agreement, in accordance with the Act, as to the affairs of the Company and the
conduct of its business.
ARTICLE I
Definitions
1.1 As used in this Agreement, the following terms shall have the following
meanings:
"Act" means the Delaware Limited Liability Company Act and any successor
statute, as amended from time to time.
"Additional Timber Property" shall have the meaning for such term set forth
in the Indenture.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition of
"Affiliate," "control," when used with respect to any specified Person, means
the power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise, and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Additional Timber Notes" shall have the meaning for such term in the
Indenture.
"Agreement" means this Agreement of Limited Liability Company as originally
adopted and as amended from time to time in accordance with the terms of this
Agreement.
"Bankruptcy Law" shall have the meaning for such term set forth in the
Indenture.
"Bankrupt or Insolvent" and "Bankruptcy or Insolvency" shall have the
meaning for such term set forth in the Indenture.
"Business Day" means any day other than a Saturday, a Sunday, or a holiday
on which national banking associations in the State of Delaware or the City of
New York are permitted or required by law or administrative order to be closed.
"Capital Account" shall have the meaning set forth in Section 6.3.
"Capital Contribution" means any capital contribution by a Member of cash
or the fair market value of property to the Company.
"Certificate of Formation" means the Certificate of Formation of the
Company as originally filed with the Secretary of State of the State of Delaware
on May 29, 1998 and as amended from time to time.
"Closing Date" means the date the Timber Notes are originally issued.
"Code" means the Internal Revenue Code of 1986 and any successor statute,
as amended from time to time.
"Company Owned Timberlands" shall have the meaning for such term set forth
in the Indenture.
"Company Timber" shall have the meaning for such term set forth in the
Indenture.
"Company Timber Rights" shall have the meaning for such term set forth in
the Indenture.
"Deed of Trust" means the deed of trust dated as of the Closing Date by the
Company in favor of State Street Bank and Trust Company, as collateral agent and
Fidelity National Title Insurance Company, as trustee.
"DGCL" means that Delaware General Corporation Law and any successor
statute, as amended from time to time.
"Fiscal Year" means the Company's fiscal year, which shall be the calendar
year.
"Indenture" means the indenture, dated as of the Closing Date, to be
entered into between the Company and State Street Bank and Trust Company as
trustee (the "Trustee"), pursuant to which the Company shall issue the Timber
Notes, as the same may be amended, modified or supplemented in accordance with
the terms thereof.
"Indebtedness" shall have the meaning for such term set forth in the
Indenture.
"Independent Manager" means a Person who, on any date on which a
determination thereof is to be made:
(a) is not an Affiliate of the Company (otherwise than to the extent
such Person may be deemed an Affiliate of the Company by virtue of such position
as a manager or as a director of the Company or of any entity merged with or
consolidated into the Company) or Pacific Lumber, or an employee, officer or
director of Pacific Lumber, or an employee or officer of the Company;
(b) has not received, directly or indirectly, at any time during the
two years immediately preceding such date, material compensation or payment from
the Company or Pacific Lumber or from any Affiliate of the Company or Pacific
Lumber (except for director's or manager's fees and expense reimbursement for
serving as such); and
(c) does not own, directly or indirectly, any beneficial or other
interest in the Company or Pacific Lumber.
"Line of Credit Agreement" means the Credit Agreement, dated as of the
Closing Date, among the Company, Bank of America National Trust and Savings
Association, as Agent, and the other financial institutions party thereto, as
the same may be amended, modified, supplemented or extended from time to time,
and any credit facility of the Company entered into in replacement therefor in
accordance with the terms of the Indenture.
"Manager" means any Person hereafter elected to act as a manager of the
Company as provided in this Agreement (each in the capacity as a manager of the
Company), including each Class A Manager and Class B Manager as set forth in
Section 3.2, but does not include any Person who has ceased to be a manager of
the Company.
"Member" means any Person executing this Agreement as of the date of this
Agreement as a member of the Company or any Person hereafter admitted to the
Company as a member as provided in this Agreement (each in the capacity as a
member of the Company), but does not include any Person who has ceased to be a
member of the Company. "Members" shall refer to each and every Member (in their
capacity as such) collectively and, should there be only a single Member, to
such Member (in its capacity as such).
"Membership Interest" means the interest of a Member in the Company,
including without limitation, rights to distributions (liquidating or
otherwise), allocations, information, and to vote, consent or approve, if any.
The holders of Membership Interests shall have the rights set forth herein to
vote on, or to consent to or approve or disapprove, certain actions or decisions
regarding the Company provided herein. Pacific Lumber shall have 100% of the
initial Membership Interest.
"Mortgaged Properties" shall have the meaning for such term set forth
in the Indenture.
"New Additional Services Agreement" shall have the meaning for such term
set forth in the Indenture.
"Non-Recourse Timber Acquisition Indebtedness" shall have the meaning for
such term set forth in the Indenture.
"Operative Documents" shall have the meaning for such term set forth
in the Indenture.
"Person" includes an individual, partnership, limited partnership, limited
liability company or partnership, foreign limited liability company, trust,
estate, corporation, custodian, trustee, executor, administrator, nominee or
entity in a representative capacity.
"Proceeding" means any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, arbitrative, or
investigative.
"Substitute Timber Property" shall have the meaning for such term set forth
in the Indenture.
"Timber Notes" shall have the meaning for such term set forth in the
Indenture.
1.2 Related Definitions. Any capitalized terms contained within definitions
in this Section 1.1 that are defined by reference to the Indenture shall have
the meanings assigned to such terms in the Indenture.
ARTICLE II
Organization
2.1 Name and Formation. The name of the Company shall be "Scotia Pacific
Company LLC", and all Company business shall be conducted in such name or such
other names that comply with applicable law as the Board of Managers may select
from time to time. The Company was formed upon the filing of the original
Certificate of Formation of the Company by the Secretary of State of the State
of Delaware on May 29, 1998, pursuant to the Act.
2.2 Principal Place of Business. The principal place of business of the
Company shall be at 125 Main Street, 2nd Floor, P.O. Box 712, Scotia, California
95565. The Company may locate its place(s) of business at any other place or
places as the Board of Managers may from time to time deem necessary or
advisable.
2.3 Registered Office and Registered Agent. The Company's initial
registered agent and office in the State of Delaware is Corporation Service
Company, and the post office address of the registered agent is 1013 Centre
Road, Wilmington, Delaware 19805-1297. The Company may change its registered
office to any other place or places as the Board of Managers may from time to
time deem necessary or advisable. The Company may change its registered agent to
any other Person as the Board of Managers may from time to time deem necessary
or advisable.
2.4 Term. The Company shall have a perpetual existence, unless the Company
is earlier dissolved in accordance with the provisions of this Agreement.
2.5 Purposes and Powers. The purpose of the Company is (i) the operation,
management, sale and maintenance of the Company Owned Timberlands, the Company
Timber Rights and the Company Timber as provided by the Operative Documents,
(ii) the execution, delivery and performance of the Operative Documents, the
Line of Credit Agreement and the New Additional Services Agreement, (iii)
issuing and selling Timber Notes and any Additional Timber Notes pursuant to the
Indenture, (iv) issuing any Nonrecourse Timber Acquisition Indebtedness and
acquiring property secured by such Nonrecourse Timber Acquisition Indebtedness,
(v) acquiring Additional Timber Property, (vi) sales of Company Owned
Timberlands, Company Timber Rights or Company Timber or transfers of Company
Owned Timberlands or Company Timber Rights in exchange for Substitute Timber
Property in accordance with the procedures set forth in Article 6 of the
Indenture, and (vii) actions reasonably incidental to the foregoing which do
not, individually or in the aggregate, have a Material Adverse Effect.
Notwithstanding any other provision of this Agreement, the Certificate of
Formation, and any provision of law that otherwise so empowers the Company, for
so long as any Timber Notes, any Additional Timber Notes or any Indebtedness
under the Line of Credit Agreement shall remain outstanding, the Company shall
not engage in any business or activity other than those set forth in this
Section 2.5 and those otherwise permitted by the Indenture.
2.6 Separateness. For so long as any Timber Notes, any Additional Timber
Notes or any Indebtedness under the Line of Credit Agreement shall remain
outstanding:
(a) the Company's funds and other assets shall not be commingled with
those of Pacific Lumber;
(b) all actions taken by the Company shall be taken pursuant to
authority granted by the Board of Managers of the Company, to the extent
required by law or by this Agreement;
(c) the Company shall maintain records and books of account separate
from those of Pacific Lumber in accordance with generally accepted accounting
principles;
(d) the Company shall conduct its business at an office or offices
that are identifiably segregated from the offices of Pacific Lumber and shall
have telephone numbers, a mailing address, stationery and other business forms
separate from Pacific Lumber;
(e) the Company shall conduct its business solely in its own name
(except to the extent required for federal, state or local tax purposes) and
shall not knowingly or negligently mislead any other Person as to the identity
or authority of the Company;
(f) all oral and written communications of the Company, including,
without limitation, letters, invoices, purchase orders, contracts, statements
and applications, shall (except to the extent required for federal, state or
local tax purposes) be made solely in the name of the Company;
(g) the Company shall provide for all of its operating expenses and
liabilities from its own separate funds;
(h) the Company shall maintain correct minutes of the meetings and
other proceedings of its members and the Board of Managers and otherwise comply
with the formalities required by law; and
(i) the Company shall 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 Pacific Lumber.
2.7 No State Law Partnership. The Members intend that the Company shall not
be a partnership (including, without limitation, a general partnership or a
limited partnership) or joint venture, and that no Member or Manager shall be a
partner or joint venturer of any other Member or Manager with respect to the
business of the Company, for any purpose, and this Agreement shall not be
construed to suggest otherwise.
2.8 Lack of Authority of Members.
2.8.1 No Member (other than a Manager or an officer of the Company in
his or her capacity as such) shall have the authority or power to act for or on
behalf of the Company, to do any act that would be binding on the Company, or to
incur any expenditures, debts, liabilities or obligations on behalf of the
Company.
2.8.2 Without limiting the foregoing, no Member, acting individually
or with other Members, shall have any power or authority to institute any
proceedings to cause the Company to become Bankrupt or Insolvent or to cause any
Bankruptcy or Insolvency to occur or exist with respect to the Company.
2.9 Liability to Third Parties. No Member or Manager shall be liable for
the debts, obligations or liabilities of the Company (whether arising in
contract, tort or otherwise), including without limitation under a judgment,
decree or order of a court, by reason of being a member or acting as a manager
of the Company.
2.10 No Personal Liability of Members, Managers, Etc. No Member of the
Company shall be subject in such capacity to any personal liability whatsoever
to any Person in connection with the assets or the acts, obligations or affairs
of the Company. Members shall have the same limitation of personal liability as
is extended to stockholders of a private corporation for profit incorporated
under the DGCL. To the extent permitted by the Act, no Manager or officer of the
Company shall be subject in such capacity to any personal liability whatsoever
to any Person, in connection with the assets or the acts, obligations or affairs
of the Company, save only liability to the Company or its Members arising from
bad faith, willful misfeasance, gross negligence or reckless disregard for his
or her duty to such Person; and, subject to the foregoing exception, all such
Persons shall look solely to the assets of the Company for satisfaction of
claims of any nature arising in connection with the affairs any Member.
2.11 Business Transactions of a Member with the Company. In accordance with
Section 18-107 of the Act, a Member may transact business with the Company and,
subject to applicable law, shall have the same rights and obligations with
respect to any such matter as a person who is not a Member.
2.12 Member Representations.
Each Member hereby represents and warrants to the Company and each
Manager that (a) if it is a corporation, it is duly organized, validly existing,
and in good standing under the law of the state of its incorporation and is duly
qualified and in good standing as a foreign corporation in the jurisdiction of
its principal place of business (if not incorporated therein); (b) that such
Member has full corporate or other applicable power and authority to execute and
deliver this Agreement and to perform its obligations hereunder and all
necessary actions by the board of directors, shareholders, managers, members,
partners, trustees, beneficiaries, or other Persons necessary for the due
authorization, execution, delivery, and performance of this Agreement by such
Member have been duly taken; (c) that the Member has duly executed and delivered
this Agreement; and (d) that such Member's authorization, execution, delivery,
and performance of this Agreement do not conflict with any other agreement or
arrangement to which such Member is a party or by which it is bound.
ARTICLE III
Management
3.1 Management by the Board of Managers. The powers of the Company shall be
exercised by or under the authority of, and the business and affairs of the
Company shall be managed under the direction of, a Board of Managers.
3.2 Number and Classification; Chairman. For so long as any Timber Notes,
any Additional Timber Notes or any Indebtedness under the Line of Credit
Agreement shall be outstanding, the Board of Managers shall consist of two
classes of Managers, Class A Managers, who shall be at least two in number and
who shall all be Independent Managers, and Class B Managers, who shall be not
required to be Independent Managers. References hereinafter in this Agreement to
Independent Managers shall refer to the Class A Managers. If neither the Timber
Notes, any Additional Timber Notes nor any Indebtedness under the Line of Credit
Agreement is outstanding, the Board of Managers shall consist of only one class
of Managers, all of whom shall be Class B Managers.
The initial Class A Managers shall be Stuart C. Lewis and Jack M.
Webb. The initial Class B Managers shall be John A. Campbell, John T. La
Duc, Paul N. Schwartz and Ezra G. Levin.
The Board of Managers shall appoint a Chairman to serve at the
pleasure of the Board. The Chairman of the Board of Managers shall
initially be John A. Campbell.
3.3 Actions Requiring Vote of Independent Managers.
Notwithstanding any other provision of this Agreement, the Certificate
of Formation and any provision of law that otherwise so empowers the Company,
for so long as any Timber Notes, any Additional Timber Notes or any Indebtedness
under the Line of Credit Agreement shall remain outstanding, the Company shall
not without the unanimous vote of the Board of Managers, including all
Independent Managers, do any of the following: (i) engage in any business or
activity other than those set forth in Section 2.5 and those otherwise permitted
by the Indenture; (ii) incur any Indebtedness, other than the Timber Notes, the
Additional Timber Notes, the Indebtedness under the Line of Credit Agreement,
Non-Recourse Timber Acquisition Indebtedness and any other Indebtedness
permitted under the Indenture; (iii) consolidate or merge with or into any other
entity or convey or transfer substantially all of its properties and assets
substantially as an entirety to any entity or convert into any other
organizational form, except as permitted under the Indenture; (iv) institute any
proceedings to cause the Company to become Bankrupt or Insolvent or to cause any
Bankruptcy or Insolvency to occur or exist with respect to the Company; (v)
amend this Agreement; (vii) admit or permit the withdrawal or removal of any
Member; (vii) institute any proceedings or take any other action to dissolve or
liquidate the Company; or (viii) take action in furtherance of any action listed
in this sentence.
With regard to any action contemplated by the preceding sentence, each
Independent Manager will owe his or her primary fiduciary duty to the Company
(including the creditors of the Company). Without limiting the foregoing, in
instituting any proceedings to cause the Company to become Bankrupt or Insolvent
or to cause any Bankruptcy or Insolvency to occur or exist with respect to the
Company or to cause the Company to dissolve or liquidate, the Independent
Managers shall consider the interests of the creditors of the Company, whether
or not at the relevant time the Company is solvent.
3.4 Term. Each Manager shall hold office until his or her successor shall
be elected and qualified or until his or her earlier death, resignation or
removal as provided in this Agreement.
3.5 Vacancy. Any Manager position to be filled by reason of an increase in
the number of Managers may be filled by election at a meeting of the Members
called for that purpose. Any vacancy occurring in the Board of Managers other
than by reason of an increase in the number of Managers may be filled (i) by
election at any meeting of the Members called for that purpose or (ii) by the
affirmative vote of a majority of the remaining Managers though less than a
quorum of the Board of Managers.
3.6 Removal. At any meeting of the Members at which a quorum of Members is
present called expressly for such purpose, any Manager, other than an
Independent Manager, may be removed at any time, with or without cause, by the
affirmative vote of a majority of all the Members represented in person, by
telephone or by proxy at such meeting. Except as may otherwise be provided by
the Act, any Independent Manager may be removed only with cause; provided,
however, that the removal of an Independent Manager shall not be effective until
a replacement Independent Manager has been appointed.
3.7 Resignation. Any Manager may resign at any time. Such resignation shall
be made in writing and shall take effect at the time specified therein or, if no
time is specified therein, at the time of its receipt by the remaining Managers;
provided, however, that the resignation of an Independent Manager shall not be
effective until a replacement Independent Manager has been appointed. The
acceptance of a resignation shall not be necessary to make it effective, unless
so expressly provided in the resignation.
3.8 Place of Meetings of Managers. Meetings of the Board of Managers may be
held either within or without the State of Delaware at such place or places as
shall be determined from time to time by resolution of the Board of Managers.
3.9 Meetings of Managers. Meetings of the Board of Managers may be held
when called by the Chairman of the Board of Managers or by a majority of the
Board of Managers. The Manager or Managers calling any meeting shall cause
notice to be given of such meeting, including therein the time, date and place
of such meeting, to each Manager at least two Business Days before such meeting.
The business to be transacted at, or the purpose of, any meeting of the Board of
Managers shall be specified in the notice or waiver of notice of any such
meeting. If fewer than all the Board of Managers are present in person, by
telephone or by proxy, business transacted at any such meeting shall be confined
to the business or purposes specifically stated in the notice or waiver of
notice of such meeting.
3.10 Quorum; Majority Vote. At all meetings of the Board of Managers, the
presence in person, by telephone or by proxy of a majority of the Board of
Managers shall be necessary and sufficient to constitute a quorum for the
transaction of business unless a greater number is required by law, the
Certificate of Formation or the terms of this Agreement. The act of a majority
of the Board of Managers present in person, by telephone or by proxy at a
meeting at which a quorum is present in person, by telephone or by proxy shall
be the act of the Board of Managers, except as otherwise provided by law, the
Certificate of Formation, the terms of this Agreement or, so long as any Timber
Notes or Additional Timber Notes are outstanding, the Indenture. If a quorum
shall not be present in person, by telephone or by proxy at any meeting of the
Board of Managers, the Board of Managers present in person, by telephone or by
proxy at the meeting may adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present in
person, by telephone or by proxy.
3.11 Methods of Voting; Proxies. A Manager may vote either in person, by
telephone or by proxy executed in writing by the Manager; provided, however,
that the Person designated to act as proxy shall be a Manager; provided,
further, that the Person designated to act as proxy for an Independent Manager
must be an Independent Manager. A telegram, telex, cablegram or similar
transmission by the Manager, or a photographic, photostatic, facsimile or
similar reproduction of a writing executed by the Manager shall be treated as an
execution in writing for purposes of this Section 3.11. Proxies for use at any
meeting of Managers or in connection with the taking of any action by written
consent shall be filed with the Chairman of the Board of Managers, before or at
the time of the meeting or execution of the written consent, as the case may be.
All proxies shall be received and taken charge of and all ballots shall be
received and canvassed by the Chairman of the Board of Managers, who shall
decide all questions touching upon the qualifications of voters, the validity of
the proxies, and the acceptance or rejection of votes. No proxy shall be valid
after 30 calendar days from the date of its execution unless otherwise provided
in the proxy.
3.12 Order of Business. At any meeting of the Board of Managers, business
shall be transacted in the order as the Chairman of the Board of Managers may
determine from time to time (and in the absence of the Chairman, such other
person so designated by the Board of Managers). The secretary of the meeting
shall prepare minutes of the meeting and such minutes shall be placed in the
minute book of the Company.
3.13 Attendance and Waiver of Notice. Attendance of a Manager at any
meeting shall constitute a waiver of notice of such meeting, except where a
Manager attends a meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
3.14 Compensation of Managers. Managers may receive any stated amount for
their services, as determined by the Board of Managers, and expenses of
attendance, if any, may be allowed for attendance at each meeting of the Board
of Managers. Nothing contained in this Agreement shall be construed to preclude
any Manager (other than an Independent Manager) from serving the Company or any
Affiliate in any other capacity and receiving compensation for such service.
3.15 Committees. The Managers may, by resolution, designate (i) from among
the Board of Managers one or more committees, each of which shall be comprised
of at least one Manager, and (ii) one or more of the Board of Managers as
alternate members of any committee, who may, subject to any limitations imposed
by the Board of Managers, replace absent or disqualified Managers at any meeting
of that committee. Such committee shall have and may exercise all of the
authority of the Board of Managers, subject to the limitations set forth in the
Act and this Agreement.
3.16 Actions Without a Meeting. Except as otherwise provided by law, the
Certificate of Formation or this Agreement, any action required or permitted to
be taken at a meeting of the Board of Managers or any committee thereof may be
taken without a meeting, without prior notice, and without a vote, if a consent
in writing, setting forth the action so taken, is signed by the Board of
Managers or members of the committee, as the case may be, having not fewer than
the minimum number of votes that would be necessary to take the action at a
meeting at which all Managers or committee members, as the case may be, entitled
to vote on the action were present and voted. Such consent shall have the same
force and effect, as of the date stated therein, as a vote of such Managers or
members of the committee, as the case may be, and may be stated as such in any
document or instrument filed with the Secretary of State of the State of
Delaware or in any certificate or other document delivered to any person or
entity. The signed consent shall be placed in the minute book of the Company.
3.17 Telephone and Similar Meetings. The Managers, or members of any
committee thereof, may participate in and hold meetings by means of
conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other. Such
participation in any such meeting shall constitute presence in person at such
meeting, except where a Person participates in such meeting for the express
purpose of objecting to the transaction of any business on the ground that such
meeting is not lawfully called or convened.
3.18 Presumption of Assent. A Manager, or any member of a committee
thereof, who is present in person, by telephone or by a general proxy at a
meeting of the Board of Managers or a committee thereof at which action on any
matter is taken shall be presumed to have assented to the action unless his or
her dissent is entered in the minutes of the meeting or unless he files his or
her written dissent to such action with the Person acting as secretary of the
meeting before the adjournment thereof. Such right to dissent shall not apply to
a Manager or committee member who voted in favor of such action.
ARTICLE IV
Officers
4.1 Designation; Term; Qualifications. The Board of Managers may, from time
to time, designate one or more Persons to be officers of the Company. Any
officer so designated shall have such authority and perform such duties as the
Board of Managers may, from time to time, delegate to them. In the absence of
any such delegation, the applicable officer shall have the authority and duties
that are normally associated with that office. Each officer shall hold office
for the term for which such officer is designated and until his successor shall
be duly designated and shall qualify or until his death, resignation or removal
as provided in this Agreement. Any Person may hold any number of offices. No
officer need be a Manager, a Member, a Delaware resident, or a United States
citizen. Designation of a Person as an officer of the Company shall not of
itself create any contract rights. The original officers of the Company shall be
the persons set forth in Exhibit A hereto.
4.2 Removal and Resignation. Any officer of the Company may be removed as
such, with or without cause, by the Board of Managers. Any officer may resign at
any time. Such resignation shall be made in writing and shall take effect at the
time specified therein or, if no time is specified therein, at the time of its
receipt by the Chairman of the Board of Managers. The acceptance of a
resignation shall not be necessary to make it effective, unless so expressly
provided in the resignation.
4.3 Vacancies. Any vacancy occurring in any office of the Company may be
filled by the Board of Managers.
ARTICLE V
Meetings of Members
5.1 Meetings of Members. A meeting of the Members may be called at any time
by the Chairman of the Board of Managers, by the Board of Managers or by the
holders of not less than 20% of the Membership Interests. The date, time and
place of the meeting shall be designated by the Person(s) calling such special
meeting and shall be stated in the notice of such meeting or in a duly executed
waiver of notice of such meeting. If fewer than all holders of Membership
Interests are present in person, by telephone or by proxy, business transacted
at any such meeting shall be confined to the business or purposes specifically
stated in the notice or waiver of notice of such meeting.
5.2 Place of Meetings of Members. All meetings of the Members shall be held
at the principal office of the Company unless another place is designated for
meetings in the manner provided in Section 5.1 of this Agreement.
5.3 Notice of Meetings of Members. Except as otherwise provided by
applicable law, written or printed notice stating the place, day and hour of
each meeting of the Members, and the purpose or purposes for which the meeting
is called, shall be delivered not less than ten Business Days nor more than 60
calendar days before the date of the meeting, either personally or by mail, by
or at the direction of the Board of Managers or Members calling the meeting, to
each Member of record entitled to vote at such meeting.
5.4 Record Date for Notice and Voting.
5.4.1 Matters Other than Consents to Action. For the purpose of
determining the Members entitled to notice of, or to vote at, any meeting of the
Members or any adjournment thereof, or entitled to receive a distribution, or in
order to make a determination of the Members for any other proper purpose (other
than determining the Members entitled to consent to action by the Members
proposed to be taken without a meeting of the Members), the Board of Managers
may fix in advance a date as the record date for any such determination of the
Members, such date in any case to be not more than 60 calendar days and not less
than ten Business Days prior to the date on which the particular action
requiring such determination of the Members is to be taken. If no record date is
fixed for the determination of the Members entitled to notice of, or to vote at,
a meeting of the Members, the date on which the notice of the meeting is mailed
shall be the record date for such determination of the Members. When a
determination of the Members entitled to vote at any meeting of the Members has
been made as provided in this Section 5.4.1, such determination shall apply to
any adjournment thereof.
5.4.2 Consents to Action. Unless a record date has previously been
fixed or determined pursuant to this Section 5.4, whenever action by the Members
is proposed to be taken by consent in writing without a meeting of the Members,
the Board of Managers may fix a record date for the purpose of determining the
Members entitled to consent to that action, which record date may not precede,
and may not be more than ten calendar days after, the date upon which the
resolution fixing the record date has been adopted by the Board of Managers. If
no record date has been fixed by the Board of Managers and the prior action of
the Board of Managers is not required by applicable law, the record date for
determining the Members entitled to consent to action in writing without a
meeting will be the first date on which a signed written consent setting forth
the action taken or proposed to be taken is delivered to the Company in the
manner provided in Section 5.10.1 of this Agreement. If no record date has been
fixed by the Board of Managers and prior action of the Board of Managers is
required by applicable law, the record date for determining the Members entitled
to consent to action in writing without a meeting shall be at the close of
business on the date on which the Board of Managers adopt a resolution taking
such prior action.
5.5 Quorum. A quorum shall be present at any meeting of the Members if the
holders of a majority interest in the Company are represented at the meeting in
person or by proxy, except as otherwise provided by law or the Certificate of
Formation.
5.6 Methods of Voting; Proxies. A Member may vote either in person, by
telephone or by proxy executed in writing by the Member. A telegram, telex,
cablegram or similar transmission by such Member, or a photographic,
photostatic, facsimile or similar reproduction of a writing executed by such
Member shall be treated as an execution in writing for purposes of this Section
5.6. Proxies for use at any meeting of Members or in connection with the taking
of any action by written consent shall be filed with the Board of Managers,
before or at the time of the meeting or execution of the written consent, as the
case may be. All proxies shall be received and taken charge of and all ballots
shall be received and canvassed by the Board of Managers, who shall decide all
questions touching upon the qualification of voters, the validity of the
proxies, and the acceptance or rejection of votes. No proxy shall be valid after
11 months from the date of its execution unless otherwise provided in the proxy.
A proxy shall be revocable unless the proxy form conspicuously states that the
proxy is irrevocable and the proxy is coupled with an interest.
5.7 Conduct of Meetings. All meetings of the Members shall be presided over
by the chairman of the meeting, who shall be the Chairman of the Board of
Managers (and in the Chairman's absence, such other person so designated by the
Board of Managers). The Chairman of the Board of Managers shall determine the
order of business and the procedure at the meeting, including without limitation
such regulation of the manner of voting and the conduct of discussion as
determined by the Chairman of the Board of Managers.
5.8 Voting on Matters. For purposes of voting on matters at any meeting of
the Members at which a quorum is present, the act of the Members shall be the
affirmative vote of the Member or Members holding a majority of the Membership
Interest represented in person, by telephone or by proxy at such meeting.
5.9 Registered Members. The Company shall be entitled to treat the holder
of record of any Membership Interest as the holder in fact of such Membership
Interest for all purposes, and, accordingly, shall not be bound to recognize any
equitable or other claim to or interest in such Membership Interest on the part
of any other Person, whether or not it shall have express or other notice of
such claim or interest, except as expressly provided in this Agreement or the
laws of Delaware.
5.10 Actions Without a Meeting.
5.10.1 Except as otherwise provided by law or by the Certificate of
Formation, any action required or permitted to be taken, or which may be taken,
by law or the Certificate of Formation or this Agreement, at any meeting of
Members, may be taken without a meeting, and without a vote, if a consent or
consents in writing, setting forth the action so taken, shall be signed by the
holder or holders of Membership Interests constituting not less than the minimum
amount of Membership Interests that would be necessary to authorize or take such
action at a meeting at which the holders of all Membership Interests entitled to
vote on the action were present and voted. Every written consent shall bear the
date of signature of each Member who signs the consent. The signed consent or
consents of Members shall be placed in the minute book of the Company. A
telegram, telex, cablegram or similar transmission by a Member, or a
photographic, photostatic, facsimile or similar reproduction of a writing signed
by a Member, shall be regarded as signed by such Member for purposes of this
Section 5.10.
5.10.2 If any action by Members is taken by written consent, any
articles or documents filed with the Secretary of State of the State of Delaware
as a result of the taking of the action shall state, in lieu of any statement
required by applicable law concerning any vote of Members, that written consent
has been given in accordance with the provisions of applicable law and that any
written notice required by applicable law has been given.
5.11 Telephone and Similar Meetings. The Members may participate in and
hold meetings by means of conference telephone or similar communications
equipment by means of which all Persons participating in the meeting can hear
each other. Participation in any such meeting shall constitute presence in
person at such meeting, except where a Person participates in such meeting for
the express purpose of objecting to the transaction of any business on the
ground that such meeting is not lawfully called or convened.
ARTICLE VI
Contributions to Capital
6.1 Initial Capital Contribution. The sole Member has heretofore
contributed the sum of $1,000 in cash to the Company.
6.2 Additional Capital Contributions. The Members may, but shall not be
obligated to, make additional Capital Contributions to the Company.
6.3 Capital Accounts. There shall be established for each Member, on the
books of the Company, an account maintained (a "Capital Account"), which shall
initially be $1,000 and be adjusted for income and losses allocable to such
Member and which shall be further adjusted as follows:
(i) The amount of all additional Capital Contributions contributed to
the Company by any Member shall be credited to the Capital
Account of such Member; and
(ii) The amount of (A) cash distributed by the Company to any member
and (B) the fair market value of other property, net of liabilities, distributed
in kind by the Company to any Member shall be debited against the Capital
Account of such Member.
6.4 Withdrawal or Reduction of Members' Contributions to Capital.
6.4.1 No Member shall have the right to withdraw all or any part of
its Capital Contribution or to receive any return on any portion of its Capital
Contribution, except as may be otherwise specifically provided in this
Agreement. Under circumstances involving a return of any Capital
Contribution, no Member shall have the right to receive property other than
cash.
6.4.2 No Member shall be paid interest on any of its Capital
Contributions.
6.4.3 An unrepaid Capital Contribution shall not be a liability of the
Company or of any Member. A Member shall not be required to contribute or to
lend any cash or property to the Company to enable the Company to return any
Member's Capital Contributions.
ARTICLE VII
Distributions; Books;
Records; and Bank Accounts
7.1 Distributions. All distributions shall be made to the Members upon the
adoption of a resolution of the Board of Managers declaring a distribution. All
distributions shall be made in such amounts and at such times as determined by
the Board of Managers.
7.2 Limitation Upon Distributions. No distribution shall be declared and
paid unless, after the distribution is made, the fair value of the Company
assets is in excess of all liabilities of the Company or as otherwise permitted
by the Act.
7.3 Maintenance of Books. The Company shall keep books and records of
accounts and shall keep minutes of the proceedings of the Members, the Board of
Managers and each committee of the Board of Managers. The books of account for
the Company shall be maintained in accordance with the accounting method
selected by the Board of Managers (or in accordance with generally accepted
accounting principles in the absence of any such selection) consistently
applied. The calendar year shall be the accounting year of the Company.
7.4 Reports. Within one hundred and twenty days following the end of each
Fiscal Year during the term of the Company, the Board of Managers shall cause
each Member to be furnished with a balance sheet, an income statement and a
statement of changes in Members' capital. These financial statements shall be
prepared in accordance with the accounting method selected by the Board of
Managers (or in accordance with generally accepted accounting principles in the
absence of any such selection) consistently applied (except as therein noted).
If required by law or any other agreement, or if a Member should request so in
writing, the financial statements shall be accompanied by an audit report from a
nationally recognized accounting firm. The Managers also may cause to be
prepared or delivered such other reports as they may deem appropriate. The
Company shall bear the costs of all such financial statements and reports.
7.5 Bank and Investment Accounts. The Managers shall establish and maintain
one or more separate bank and investment accounts and arrangements for Company
funds in the Company name with financial institutions and firms that the Board
of Managers determine. The Managers shall not commingle the Company's funds with
the funds of any Member or any other Person.
ARTICLE VIII
Dissolution, Liquidation and Termination
8.1 Dissolution.
8.1.1 The Company shall be dissolved and its affairs shall be wound up
upon the first of the following to occur: (i) upon the election to dissolve the
Company by the Board of Managers, provided, however, that for so long as any
Timber Notes, any Additional Timber Notes or any Indebtedness under the Line of
Credit Agreement shall remain outstanding, the election to dissolve the Company
shall require the unanimous vote of the Board of Managers, including all of the
Independent Managers, or (ii) the entry of a decree of judicial dissolution of
the Company under Section 18-802 of the Act. Notwithstanding anything to the
contrary in this Agreement or the Act (including, without limitation, Section
18-801(a)(3) or Section 18-801(b) thereof), for so long as any Timber Notes, any
Additional Timber Notes or any Indebtedness under the Line of Credit Agreement
is outstanding, the Members, or any of them, shall not dissolve or wind-up the
affairs of the Company.
8.1.2 Dissolution of the Company shall be effective as of the day on
which the event occurs giving rise to the dissolution, but the Company shall not
terminate until there has been a winding up of the Company's business and
affairs, and the Company's assets have been distributed as provided in Section
8.2 of this Agreement and in the Act.
8.2 Liquidation and Termination. Upon dissolution of the Company, the Board
of Managers shall act as liquidators or may appoint one or more Managers or
Members (with its or their consent) as liquidators. The liquidators shall
proceed diligently to wind up the affairs of the Company and make final
distributions as provided in this Section 8.2 and in the Act. The costs of
liquidation shall be borne as a Company expense. Until final distribution, the
liquidators shall continue to operate the Company's assets and the Company's
affairs with all the power and authority of the Board of Managers. The steps to
be accomplished by the liquidators are as follows:
(i) As promptly as possible after dissolution and again after final
liquidation, the liquidators shall cause an accounting to be made by a
recognized firm of certified public accountants of the Company's assets and the
Company's liabilities and operations through the last day of the calendar month
in which the dissolution occurs or the final liquidation is completed, as the
case may be;
(ii) The liquidators may cause all or any part of the Company's assets
to be sold to any Person (including, without limitation, to Members) as the
liquidators shall reasonably determine, and any resulting gain or loss from each
such sale shall be computed and allocated to the Members;
(iii) The liquidators shall pay, satisfy or discharge from the
Company's assets all of the debts, liabilities and obligations of the Company
(including, without limitation, all expenses incurred in liquidation, but
excluding liabilities to Members on account of their Capital Contributions) in
the order of priority as provided by law, or otherwise make adequate provision
for payment and discharge thereof (including, without limitation, the
establishment of a cash escrow fund for contingent liabilities in such amount
and for such term as the liquidators may reasonably determine);
(iv) After payment, satisfaction or discharge of the Company's debts,
liabilities and obligations (or adequate provision therefor) has been made
pursuant to clause (iii) of this Section 8.2, all remaining Company assets shall
be distributed to the Members as follows:
(a) With respect to any asset of the Company that has not been
sold pursuant to clause (ii) above, the fair market value of such asset of the
Company shall be determined by the liquidators and the Capital Accounts of the
Members shall be adjusted to reflect the manner in which the unrealized income,
gain, loss, and deduction inherent in such asset of the Company that has not
been reflected in the Capital Accounts of the Members previously would be
allocated among the Members if there were a disposition of such asset for the
fair market value of such asset on the date of distribution;
(b) An amount equal to the then remaining positive balances in
the Capital Accounts of the Members (as determined after taking into account all
Capital Account adjustments for the year of the Company during which the
liquidation of the Company occurs, other than those made by reason of this
subclause (b)) shall be distributed to the Members in proportion to the amount
of such balances; and
(c) Any remainder shall be distributed to the Members, pro rata,
in accordance with their respective Membership Interests.
All distributions in kind of the Company's assets to the Members shall be
made subject to the cost, expenses or liability relating to such Company assets
incurred or for which the Company has committed prior to the date of termination
of the Company and such costs, expenses and liabilities shall be allocated to
the distributee in accordance with this Section 8.2.
The distribution of the Company's assets to a Member in accordance with the
provisions of this Section 8.2 constitutes a complete return to the Member of
its Capital Contributions and a complete distribution to such Member of its
Membership Interest and all of the Company's assets, and constitutes a
compromise to which all Members have consented in writing within the meaning of
Section 18-502(b) of the Act. To the extent that a Member returns funds to the
Company, such Member shall have no claim against any other Member for such
funds.
8.3 Certificate of Cancellation. When all liabilities and obligations of
the Company have been paid or discharged, or adequate provision has been made
therefor, and all of the remaining Company assets have been distributed to the
Members according to their respective rights and interests as provided in
Section 8.2 of this Agreement, the Company is terminated and a Certificate of
Cancellation shall be executed on behalf of the Company by the Board of Managers
(or such other Person or Persons as the Act may require or permit) and shall be
filed with the Office of the Secretary of State of the State of Delaware, and
the Board of Managers or such other Person or Persons shall take such other
actions, and shall execute, acknowledge and file any and all other instruments,
as may be necessary or appropriate to reflect the dissolution and termination of
the Company.
ARTICLE IX
Indemnification
9.1 Mandatory Indemnification of Managers and Officers. Any Person who was
or is a party or is threatened to be made a party to or is involved in any
Proceeding, or any appeal in such a Proceeding or any inquiry or investigation
that could lead to such a Proceeding, by reason of the fact that such Person is
or was a Manager or an officer, or while a Manager or an officer is or was
serving at the request of the Company as a director, manager, officer, partner,
venturer, proprietor, trustee, employee, agent or similar functionary of another
foreign or domestic corporation, limited liability company or partnership, joint
venture, partnership, trust, sole proprietorship, employee benefit plan or other
entity or enterprise, shall be indemnified by the Company to the fullest extent
permitted by applicable law, as the same exist or may hereafter be amended (but,
in the case of any such amendment, only to the extent that such amendment
permits the Company to provide greater or broader indemnification rights than
such law permitted the Company to provide prior to such amendment) against
judgments, penalties (including, without limitation, excise and similar taxes
and punitive damages), fines, settlements and reasonable expenses (including,
without limitation, attorneys' fees) actually incurred by such Person in
connection with such Proceeding. It is expressly acknowledged that the
indemnification provided in this Article IX could involve indemnification for
negligence or under theories of strict liability.
9.2 Mandatory Advancement of Expenses. Expenses incurred by a Person of the
type entitled to be indemnified under Section 9.1 of this Agreement in defending
any Proceeding shall be paid or reimbursed by the Company in advance of the
final disposition of the Proceeding, without any determination as to such
Person's ultimate entitlement to indemnification under Section 9.1 of this
Agreement, upon receipt of a written undertaking by or on behalf of such Person
to repay all amounts so advanced if it shall ultimately be determined that such
Person is not entitled to be indemnified by the Company as authorized in Section
9.1 of this Agreement or otherwise. The written undertaking shall be an
unlimited general obligation of the Person but need not be secured and shall be
accepted without reference to financial ability to make repayment.
9.3 Indemnification of Employees and Agents. The Company may, as determined
by the Board of Managers, indemnify and pay and advance expenses to an employee
or agent of the Company to the same extent and subject to the same conditions
under which it may indemnify and pay and advance expenses to Managers and
officers under this Article IX; and the Company may, as determined by the Board
of Managers, indemnify and pay and advance expenses to any Person who is not or
was not a Manager, officer, employee or agent of the Company but who is or was
serving at the request of the Company as a Manager, director, officer, partner,
venturer, proprietor, trustee, employee, agent or similar functionary of another
foreign or domestic limited liability company or partnership, corporation,
partnership, joint venture, sole proprietorship, trust, employee benefit plan or
other enterprise against any liability asserted against such Person and incurred
by such Person in such a capacity or arising out of such Person's status as such
to the same extent and subject to the same conditions that the Company may
indemnify and pay and advance expenses to Managers under this Article IX.
9.4 Nonexclusivity of Rights. The indemnification and advancement and
payment of expenses provided by this Article IX (i) shall not be deemed
exclusive of any other rights to which a Manager, officer or other Person
seeking indemnification may be entitled under any statute, provision of the
Certificate of Formation, agreement, vote of Members or disinterested Managers,
or otherwise, both as to action in such Person's official capacity and as to
action in another capacity while holding such office, (ii) shall continue as to
any Person who has ceased to serve in the capacity which initially entitled such
Person to indemnity and advancement and payment of expenses, and (iii) shall
inure to the benefit of the heirs, executors, administrators, successors and
assigns of such Manager, officer or other Person.
9.5 Contract Rights. Rights granted pursuant to this Article IX shall be
deemed to be contract rights, and no amendment, modification or repeal of this
Article IX shall have the effect of limiting or denying any such rights with
respect to actions taken or Proceedings arising prior to any such amendment,
modification or repeal.
9.6 Insurance. The Company may purchase and maintain insurance or other
arrangement or both, at its expense, on behalf of itself or any Person who is or
was serving as a Manager, officer, employee or agent of the Company, or is or
was serving at the request of the Company as a manager, director, officer,
partner, venturer, proprietor, trustee, employee, agent or similar functionary
of another foreign or domestic limited liability company, partnership,
corporation, partnership, joint venture, sole proprietorship, trust, employee
benefit plan or other entity or enterprise, against any liability, expense or
loss, whether or not the Company would have the power to indemnify such Person
against such liability under the provisions of this Article IX.
9.7 Appearance as a Witness. Notwithstanding any other provision of this
Article IX, the Company may pay or reimburse expenses incurred by a Person in
connection with such Person's appearance as a witness or other participation in
a Proceeding at a time when such Person is not a named defendant or respondent
in the Proceeding.
9.8 Savings Clause. If this Article IX or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Company shall nevertheless indemnify and hold harmless each Manager or officer
indemnified pursuant to this Article IX as to costs, charges and expenses
(including, without limitation, attorneys' fees), judgments, fines and amounts
paid in settlement with respect to any action, suit or proceeding, whether
civil, criminal, administrative or investigative, to the fullest extent
permitted by any applicable portion of this Article IX that shall not have been
invalidated and to the fullest extent permitted by applicable law.
ARTICLE X
Members
10.1 Admission of Members. New members shall be admitted only with the
approval of all Members, and the Board of Managers as and to the extent provided
in Section 3.3, in which event this Agreement shall be modified accordingly.
10.2 Single Class. There shall be only one class of Membership Interest in
the Company. Each Membership Interest shall be identical with all other
Membership Interests, except that, should additional members be admitted, the
Membership Interest of each Member shall reflect its Capital Account relative to
the other Members.
10.3 Access to and Confidentiality of Information; Records. Any Member
shall have the right to obtain from the Company, from time to time, upon
reasonable written demand stating the purpose thereof[, for any purpose
reasonably related to the Member's Membership Interest, the documents and other
information described in Section 18-305(a) of the Act.
10.4 Withdrawal and Removal of Members. No Member may withdraw as a member
of the Company (a) without the written consent of all of the Members, and the
Board of Managers as and to the extent provided in Section 3.3, and (b) if,
after such permitted withdrawal, there remains at least one Member. No Member
may be removed as a Member of the Company.
ARTICLE XI
Miscellaneous Provisions
11.1 Offset. Whenever the Company is to pay any sum to any Member, any
amounts such Member owes the Company may be deducted from such sum payment
therefor.
11.2 Notices. Except as expressly set forth to the contrary in this
Agreement, all notices, requests, or consents provided for or permitted to
be given under this Agreement shall be in writing and shall be given either by
depositing such writing in the United States mail, addressed to the recipient,
postage paid, and registered or certified with return receipt requested or by
delivering such writing to the recipient in person, by courier, or by facsimile
transmission; and a notice, request, or consent given under this Agreement shall
be effective on receipt by the Person to whom sent. All notices, requests, and
consents to be sent to a Member shall be sent to or made at the address given
for such Member at the address such Member may specify by notice to the Company,
the Board of Managers, and the other Members. Any notice, request, or consent to
the Company or the Board of Managers must be given to the Board of Managers at
the following address: 125 Main Street, 2nd Floor, P.O. Box 712, Scotia,
California 95565. Whenever any notice is required to be given by law, the
Certificate of Formation or this Agreement, a written waiver thereof, signed by
the Person entitled to notice, whether before or after the time stated therein,
shall be deemed equivalent to the giving of such notice.
11.3 Effect of Waiver or Consent. A waiver or consent, express or implied,
to or of any breach or default by any Person in the performance by such Person
of its obligations with respect to the Company shall not be a consent or waiver
to or of any other breach or default in the performance by such Person of the
same or any other obligations of such Person with respect to the Company.
Failure on the part of a Person to complain of any act or omission of any Person
or to declare any Person in default with respect to the Company, irrespective of
how long that failure continues, shall not constitute a waiver by such Person of
its rights with respect to that default until the applicable
statute-of-limitations period has run.
11.4 Governing Law; Severability. This Agreement shall be governed by and
shall be construed in accordance with the law of the State of Delaware,
excluding any conflict-of- laws rule or principle that might refer the
governance or the construction of this Agreement to the law of another
jurisdiction. If any provision of this Agreement or the application thereof to
any Person or circumstance is held invalid or unenforceable to any extent, the
remainder of this Agreement and the application of that provision to other
Persons or circumstances shall not be affected thereby and such provision shall
be enforced to the fullest extent permitted by law.
11.5 Further Assurances. In connection with this Agreement and the
transactions contemplated hereby, each Member shall execute and deliver any
additional documents and instruments and perform any additional acts that may be
necessary or appropriate to effectuate and perform the provisions of this
Agreement and those transactions.
11.6 Waiver of Certain Rights. Each Member irrevocably waives any right it
may have to maintain any action for dissolution of the Company or for partition
of any Company asset.
11.7 Indemnification. To the fullest extent permitted by law, each Member
shall indemnify the Company, each Manager and each other Member and hold them
harmless from and against any and all losses, costs, liabilities, damages, and
expenses (including, without limitation, costs of suit and attorneys' fees) they
may incur on account of any breach by such Member of this Agreement.
11.8 Headings and Sections. The headings in this Agreement are inserted for
convenience only and are in no way intended to describe, interpret, define, or
limit the scope, extent or intent of this Agreement or any provision hereof.
Unless the context requires otherwise, all references in this Agreement to
Sections or Articles shall be deemed to mean and refer to Sections or Articles
of this Agreement.
11.9 Numbers and Gender. Where the context so indicates, the masculine
shall include feminine and neuter, and the neuter shall include the masculine
and feminine, and the singular shall include the plural.
11.10 Binding Effect. Except as otherwise provided in this Agreement to the
contrary, this Agreement shall be binding upon and inure to the benefit of the
Members and their legal representatives, executors, administrators, successors
and assigns.
11.11 Conflicts of Interest. Subject to applicable law and the other
express provisions of this Agreement, or any other applicable agreement, or
except as otherwise expressly agreed in writing, each Manager, Member and
officer of the Company at any time and from time to time may engage in and
possess interests in other business ventures of any and every type and
description, independently or with others, including ones in competition with
the Company, with no obligation to offer to the Company or any other Member,
Manager or officer the right to participate therein.
11.12 Entire Agreement. This Agreement amends, restates and supercedes,
effective as of the date first written above, any prior agreement of limited
liability company heretofore executed and delivered by the sole Member.
IN WITNESS WHEREOF, this Agreement is executed and delivered as of the date
first written above by the undersigned and the undersigned, being the sole
Member, does hereby agree to be bound by the terms and provisions set forth in
this Agreement.
THE PACIFIC LUMBER COMPANY
By: /s/ John A. Campbell
Name: John A. Campbell
Title: President
<PAGE>
Scotia Pacific Company LLC
Exhibit A
Initial Officers of the Company
John A. Campbell President
John T. La Duc Vice President
Gary L. Clark Vice President-Finance and Administration
Thomas M. Herman Vice President-Resources Management
William S. Riegel Vice President-Sales
Paul N. Schwartz Vice President
Bernard L. Birkel Secretary
Lisa Blaha Assistant Secretary
Erik Eriksson Assistant Secretary
Timothy Neumann Assistant Secretary
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of July 20,
1998, is between Scotia Pacific Holding Company, a Delaware corporation (the
"Non-Surviving Corporation"), and Scotia Pacific Company LLC, a Delaware limited
liability company ("Scotia Pacific"), (the Non-Surviving Corporation and Scotia
Pacific being collectively referred to herein as the "Constituent Entities").
PRELIMINARY STATEMENT
1. The Board of Directors of the Non-Surviving Corporation desires for such
corporation to merge with and into Scotia Pacific (the "Merger"), believes the
Merger to be desirable and in the best interests of the stockholder of the
Non-Surviving Corporation and has approved this Agreement and the Merger.
2. The Board of Managers of Scotia Pacific also believes that the Merger is
desirable and in the best interests of its member and has also approved this
Agreement and the Merger.
3. The terms, conditions and manner of consummating the Merger are set
forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual agreements,
covenants and provisions herein contained, the parties hereto agree as follows:
ARTICLE I
THE MERGER AND ITS EFFECTS
1.1 Merger Effective Time. Subject to the provisions of this Agreement, the
Constituent Entities shall duly prepare and execute a certificate of merger
setting forth the information required by, and otherwise in compliance with, the
Delaware General Corporation Law (the "DGCL") and the Delaware Limited Liability
Company Act (the "Act"), as appropriate, for filing pursuant to the Merger, and
thereafter shall have such certificate delivered for filing with the office of
the Secretary of State of the state of Delaware, on July 20, 1998 (the "Closing
Date"). Scotia Pacific has previously prepared an offering memorandum relating
to the offering of three classes of timber collateralized notes (the "Offering
Memorandum"). The Merger shall become effective for all purposes as of July 20,
1998, contemporaneously with the consummation of the other transactions
contemplated by the Offering Memorandum (the "Merger Effective Time").
1.2 Effect of the Merger. At the Merger Effective Time, by virtue of the
Merger and without any action on the part of any person, the following shall
occur:
(a) The Non-Surviving Corporation shall be merged with and into Scotia
Pacific, the separate existence of the Non-Surviving Corporation shall cease,
and Scotia Pacific shall be the surviving entity, shall continue to exist, and
shall be governed by the laws of the state of Delaware.
(b) Scotia Pacific shall thereupon and thereafter possess all the
rights, privileges, powers and franchises of a public as well as a private
nature, and be subject to all the restrictions, disabilities and duties, of each
Constituent Entity; and all and singular, the rights, privileges, power and
franchises of each Constituent Entity, and all property, real, personal and
mixed, and all debts due to either Constituent Entity on whatever account, as
well as for all other things in action or belonging to each Constituent Entity,
shall be vested in Scotia Pacific; and all property, real or personal, tangible
or intangible, rights, privileges, powers and franchises, and all and every
other interest shall be thereafter as effectually the property of Scotia Pacific
as they were of the respective Constituent Entity, and the title to any real
estate vested by deed or otherwise in either Constituent Entity shall not revert
or be in any way impaired by reason of the merger; but all rights of creditors
and all liens upon any property of either Constituent Entity shall be preserved
unimpaired, and all debts, liabilities, and duties of the respective Constituent
Entity shall thenceforth attach to Scotia Pacific and may be enforced against it
to the same extent as if said debts, liabilities and duties had been incurred or
contracted by it; and any action or proceeding whether civil, criminal or
administrative, pending by or against either Constituent Entity shall be
prosecuted as if the Merger had not taken place, or Scotia Pacific may be
substituted in such action or proceeding. Neither the rights of creditors nor
any liens upon the property of either Constituent Entity shall be impaired by
such Merger.
(c) The Agreement of Limited Liability Company of Scotia Pacific
attached hereto as Exhibit A shall become the limited liability company
agreement of Scotia Pacific upon the occurrence of the Merger Effective Time
(the "New Operating Agreement"). The New Operating Agreement shall supersede and
replace the Agreement of Limited Liability Company of Scotia Pacific dated June
10, 1998.
(d) The managers and officers of Scotia Pacific immediately prior to
the Merger Effective Time shall remain the managers and officers of Scotia
Pacific.
(e) At the Merger Effective Time, each share of capital stock of the
Non-Surviving Corporation issued and outstanding immediately prior to the Merger
Effective Time shall be canceled and retired and shall cease to exist, and each
interest in Scotia Pacific issued and outstanding immediately prior to the
Merger Effective Time shall remain issued and outstanding.
(f) From and after the Merger Effective Time, the Merger shall have
all the other effects provided by applicable law.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF THE CONSTITUENT ENTITIES
Each of the Constituent Entities hereby represents and warrants to the
other the following:
2.1 Formation; Qualification. It is an entity duly organized under the
state of Delaware and is validly existing and in good standing under the laws of
such state and has all requisite power and authority to own, operate or lease
its properties and to carry on its business as now being conducted.
2.2 Capitalization. All outstanding shares of capital stock or membership
interests of the Constituent Entities are duly authorized, validly issued, fully
paid and nonassessable. There are no material outstanding subscriptions, options
or other arrangements or commitments obligating the Constituent Entities to
issue any additional shares of capital stock or membership interests.
2.3 No Conflicts. Assuming this Agreement is approved by the requisite vote
of its stockholder or member as of the Closing Date and all other conditions
precedent to the Merger have been fulfilled, consummation of the transactions
contemplated hereby and compliance with the terms and provisions of this
Agreement will not materially conflict with, result in a material breach of,
require notice under or constitute a material default under any judgment, order,
injunction, decree or ruling of any court or governmental authority or under any
material agreement, indenture or instrument to which it is a party.
2.4 Authority and Authorization. It has all requisite power and authority
to enter into and perform the provisions of this Agreement. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary action on its part, and when
executed and delivered will constitute legal, valid and binding obligations of
each Constituent Entity, enforceable in accordance with their respective terms
and conditions except as such enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and of general principles of equity.
ARTICLE III
CONDITIONS PRECEDENT TO EACH PARTY'S
OBLIGATIONS TO EFFECT THE MERGER
The respective obligations of each party to effect the Merger shall be
subject to the fulfillment (or waiver) at or prior to the Merger Effective Time
of the following conditions:
(a) The approval and adoption of the Agreement by the sole stockholder
of the Non-Surviving Corporation and the sole member of Scotia Pacific.
(b) The absence of any order or injunction of any court or
governmental authority of competent jurisdiction preventing consummation of the
transactions contemplated hereby.
(c) Each party to this Agreement shall have performed in all material
respects their respective agreements contained in this Agreement required to be
performed at or prior to the Merger Effective Time.
ARTICLE IV
ADDITIONAL AGREEMENTS
4.1 Other Actions. As soon as reasonably practicable after the execution of
this Agreement, each of the Constituent Entities agrees to take all action
necessary to duly call, give notice of, convene and hold meetings or obtain the
requisite written consents of its stockholder or member, as applicable, to
consider and vote upon approval of the Merger and the transactions contemplated
hereby and to use all reasonable efforts to take all other action necessary or
advisable to secure any vote or consent of such stockholder or member required
by their respective organizational documents, this Agreement or applicable law
to effect the Merger.
4.2 Additional Agreements. Subject to the terms and conditions provided
herein, each of the parties hereto shall use all reasonable efforts to obtain in
a timely manner all necessary waivers, consents and approvals and to effect all
necessary registrations and filings, and to use all reasonable efforts to take,
or cause to be taken, all other actions and to do, or cause to be done, all
other things necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement.
ARTICLE V
TERMINATION
5.1 Termination. This Agreement may be terminated and the Merger
contemplated hereby may be abandoned at any time prior to the Merger Effective
Time by written agreement of the parties hereto.
5.2 Effect of Termination. If this Agreement is terminated as provided,
there shall be no liabilities or obligations hereunder on the part of the
parties hereto.
ARTICLE VI
MISCELLANEOUS
6.1 Further Cooperation. At, and from time to time, at the request of
another party hereto but without further consideration, each party hereto will
take all such actions and deliver all such documents as shall be reasonably
necessary or appropriate to carry out the terms and provisions of this
Agreement.
6.2 Expenses. Whether or not the Merger is effected, all costs and
expenses, including but not limited to broker, legal and accounting fees and
expenses, incurred in connection with this Agreement and the transactions
contemplated hereby shall be the responsibility of the party incurring such fees
and expenses.
6.3 Invalid Provisions. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws effective during
the term hereof, such provision shall be fully severable; this Agreement shall
be construed and enforced as if such illegal, invalid or unenforceable provision
had never comprised a part hereof; and the remaining provisions hereof shall
remain in full force and effect and shall not be affected by the illegal,
invalid or unenforceable provision or by its severance therefrom. Furthermore,
in lieu of such illegal, invalid or unenforceable provision, there shall be
added automatically as a part of the Agreement a provision as similar in terms
to such illegal, invalid or unenforceable provision as may be possible and be
legal, valid and enforceable.
6.4 Income Tax Treatment. For federal income tax purposes, it is intended
that the Merger be treated as a tax-free liquidation of the Non- Surviving
Corporation into its sole stockholder, The Pacific Lumber Company, pursuant to
section 332 of the Internal Revenue Code of 1986, as amended.
6.5 Entirety and Amendments. This instrument embodies the entire agreement
between the parties, and supersedes all prior agreements and understandings, if
any, relating to the subject matter hereof and may be amended only by an
instrument in writing executed by the party to be bound thereby, and
supplemented only by documents delivered in accordance with the express terms
hereof.
6.6 Headings. The headings, captions and arrangements used in this
Agreement are, unless specified otherwise, for convenience only and shall not be
deemed to limit, amplify or modify the terms of this Agreement or affect the
meaning hereof.
6.7 Governing Law. The terms and conditions of this agreement shall be
governed by and construed in accordance with the laws of the state of Delaware.
6.8 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
[The remainder of this page intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, this Agreement and Plan of Merger between Scotia
Pacific Holding Company and Scotia Pacific Company LLC has been duly executed
and delivered on the date first above written.
NON-SURVIVING CORPORATION:
SCOTIA PACIFIC HOLDING COMPANY
By: /s/ John T. La Duc
Name: John T. La Duc
Title: Vice President
SCOTIA PACIFIC:
SCOTIA PACIFIC COMPANY LLC
By: /s/ Paul N. Schwartz
Name: Paul N. Schwartz
Title: Vice President
SCOTIA PACIFIC COMPANY LLC
$160,700,000 6.55% Class A-1 Timber Collateralized Notes
$243,200,000 7.11% Class A-2 Timber Collateralized Notes
$463,348,000 7.71% Class A-3 Timber Collateralized Notes
Note Purchase Agreement
New York, New York
as of July 9, 1998
SALOMON BROTHERS INC
As Representative of the Initial Purchasers
Seven World Trade Center
New York, New York 10048
Ladies and Gentlemen:
Scotia Pacific Company LLC, a Delaware limited liability company (the
"Company") and a wholly-owned subsidiary of The Pacific Lumber Company, a
Delaware corporation ("Palco"), proposes to sell to the several parties named in
Schedule I hereto (the "Initial Purchasers"), for whom we are acting as
representative (the "Representative") $160,700,000 initial principal amount of
its 6.55% Class A-1 Timber Collateralized Notes, $243,200,000 initial principal
amount of its 7.11% Class A-2 Timber Collateralized Notes and $463,348,000
initial principal amount of its 7.71% Class A-3 Timber Collateralized Notes,
each with a final maturity date of July 20, 2028 (collectively, the "Timber
Notes") to be issued under an indenture (the "Indenture") to be dated as of July
20, 1998 between the Company and State Street Bank and Trust Company, as trustee
(the "Trustee").
The obligations of the Company under the Timber Notes will be secured
by a Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and
Assignment of Proceeds (the "Deed of Trust"), to be dated on or prior to July
20, 1998, from the Company to Fidelity National Title Insurance Company as
trustee thereunder, for the benefit of State Street Bank and Trust Company, in
its capacity as collateral agent for the Holders of the Timber Notes and the
Liquidity Providers, as beneficiary and agent of the secured parties, covering
(i) certain timberlands and timber (the "Company Timber Property") which the
Company will own on the Closing Date (A) as successor by merger to Scotia
Pacific Holding Company, a Delaware corporation ("Scotia Pacific") or (B) which
are to be transferred pursuant to a Grant Deed dated on or prior to the Closing
Date from Palco, as grantor, to the Company, as grantee, conveying certain
Company Owned Timberlands to the Company (the "Second Pacific Lumber Grant
Deed"), a Quitclaim Deed dated on or prior to the Closing Date from Palco to the
Company conveying to the Company all of Palco's interest in certain timber
rights affecting the Company Owned Timberland (the "Pacific Lumber Quitclaim
Deed"), three Grant Deeds dated on or prior to the Closing Date from Palco, as
grantor, to the Company, as grantee, conveying the Company Timber Rights to the
Company (collectively, the "Pacific Lumber Timber Deeds") and (ii) certain
contractual rights and certain accounts and proceeds thereof which the Company
will own on the Closing Date (A) as successor by merger to Scotia Pacific or (B)
which are to be transferred pursuant to a Bill of Sale and General Assignment
dated as of the Closing Date from Palco to the Company (the "New Bill of Sale").
On or prior to the Closing Date (i) the Company and Scotia Pacific
will enter into an Agreement and Plan of Merger (the "Merger Agreement"); (ii)
the Company and Palco will enter into a Master Purchase Agreement (the "New
Master Purchase Agreement"), a Services Agreement (the "New Services
Agreement"), an Additional Services Agreement (the "New Additional Services
Agreement"), a Master Lease Agreement (the "Master Lease Agreement"), and an
Environmental Indemnification Agreement (the "New Environmental Indemnification
Agreement"); (iii) the Company, Palco and Salmon Creek will enter into a
Reciprocal Rights Agreement (the "New Reciprocal Rights Agreement") and a
Transfer Agreement (the Transfer Agreement"); (iv) the Company, Bank of America
National Trust and Savings Association and the other financial institutions
party thereto will enter into a Credit Agreement (the "Credit Agreement"); (v)
the Company, Palco, Salmon Creek and U.S. Bank of California will enter into an
Escrow Agreement (the "New Escrow Agreement") and (vi) the Company and the
Representative, as representative of the Initial Purchasers, will enter into a
Registration Rights Agreement (the "Registration Rights Agreement").
The Second Pacific Lumber Grant Deed, the Pacific Lumber Quitclaim Deed,
the Pacific Lumber Timber Deeds, the Transfer Agreement, the New Bill of Sale,
the New Environmental Indemnification Agreement and the New Reciprocal Rights
Agreement are sometimes collectively hereinafter referred to as the "1998
Conveyance Documents." The Indenture, the Deed of Trust, the Merger Agreement,
the New Master Purchase Agreement, the New Services Agreement, the New
Additional Services Agreement, the Master Lease Agreement, the Registration
Rights Agreement, the Credit Agreement, the New Escrow Agreement and the 1998
Conveyance Documents are sometimes collectively hereinafter referred to as the
"1998 Operative Documents."
Defined terms used herein but not defined herein (including Section 18
hereof) shall have the meaning given such terms in the Final Memorandum.
The sale of the Timber Notes to the Initial Purchasers will be made
without registration of the Timber Notes under the Act in reliance upon
exemptions from the registration requirements of the Act.
In connection with the sale of the Timber Notes, the Company has
prepared a preliminary offering memorandum, dated June 19, 1998 (including any
and all exhibits thereto and any information incorporated by reference therein,
the "Preliminary Memorandum"), and a final offering memorandum, dated July 9,
1998 (as amended or supplemented at the Execution Time, including any and all
exhibits thereto (the "Final Memorandum"). Each of the Preliminary Memorandum
and the Final Memorandum sets forth certain information concerning the Company
and the Timber Notes. The Company hereby confirms that it has authorized the use
of the Preliminary Memorandum and the Final Memorandum, and any amendment or
supplement thereto, in connection with the offer and sale of the Timber Notes by
the Initial Purchasers in accordance with applicable law. Unless stated to the
contrary, any references herein to the terms "amend", "amendment" or
"supplement" with respect to the Final Memorandum shall be deemed to refer to
and include any information filed under the Exchange Act, subsequent to the
Execution Time which is incorporated by reference therein.
1. Representations and Warranties. The Company and Palco severally and
not jointly represent and warrant to, and agree with, the Initial Purchasers as
set forth below in this Section 1, it being understood, however, that the
Company represents and warrants only with respect to those matters which pertain
to the Company and Palco represents and warrants only with respect to those
matters which pertain to Palco and its subsidiaries. Certain terms used but not
defined in this Agreement have the meaning ascribed to such terms in Schedule A
to the Indenture.
(a) The Preliminary Memorandum, at the date thereof, did not
contain any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading. As of its date, and at all times
subsequent thereto up to and as of the Closing, the Final Memorandum, as amended
or supplemented to such time, will not contain any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the Company and Palco make no
representation or warranty as to the information contained in or omitted from
the Preliminary Memorandum or the Final Memorandum, or any amendment or
supplement thereto, in reliance upon and in conformity with information
furnished in writing to the Company or Palco by or on behalf of the Initial
Purchasers through the Representative specifically for inclusion therein.
(b) Neither the Company, nor any of its Affiliates, nor any
person acting on its or their behalf has, directly or indirectly, made offers or
sales of any security, or solicited offers to buy any security, under
circumstances that would require the registration of the Timber Notes under the
Act; provided, however, that no representation or warranty is made with respect
to the manner in which the Timber Notes are distributed by the Initial
Purchasers.
(c) Each of the Company and Palco has been duly formed and is
validly existing as a limited liability company or a corporation, as applicable,
in good standing under the laws of its respective jurisdiction of organization
with the requisite power and authority to own, lease and operate its properties,
to conduct its business as described in the Final Memorandum, and to enter into
and perform its obligations under this Agreement and the 1998 Operative
Documents, and each of them is duly qualified to transact business and, if
applicable, is in good standing under the laws of each respective jurisdiction
in which such qualification is required, whether by reason of ownership or
leasing of property or the conduct of business, except where the failure to so
qualify or be in good standing, if applicable, would not have a Material Adverse
Effect.
(d) This Agreement has been duly authorized, executed and
delivered by the Company and by Palco.
(e) The Timber Notes will be duly authorized by the Company for
issuance and sale to the Initial Purchasers pursuant to this Agreement on or
before the Closing Date. The Timber Notes, when executed by the Company and
authenticated by the Trustee in accordance with the Indenture and delivered
against payment therefor in accordance with the terms thereof, will be duly
executed, authenticated, issued and delivered and will constitute valid and
legally binding obligations of the Company enforceable against the Company in
accordance with their terms, except to the extent that enforcement thereof may
be limited by (i) bankruptcy, insolvency, reorganization, moratorium or other
similar laws and court decisions now or hereafter in effect relating to or
affecting creditors' rights and remedies generally and (ii) general principles
of equity (regardless of whether such enforcement is considered in a proceeding
at law or in equity).
(f) The Indenture will be duly authorized by the Company on
or before the Closing Date and, when executed and delivered by the Company, will
have been duly executed and delivered by the Company, and (assuming the due
authorization, execution and delivery thereof by the Trustee) will constitute a
valid and legally binding instrument of the Company, enforceable against the
Company in accordance with its terms, except to the extent that enforcement
thereof may be limited by (i) bankruptcy, insolvency, reorganization, moratorium
or other similar laws and court decisions now or hereafter in effect relating to
or affecting creditors' rights and remedies generally and (ii) general
principles of equity (regardless of whether such enforcement is considered in a
proceeding at law or in equity). The Timber Notes and the Indenture will conform
in all material respects to the descriptions thereof contained in the Final
Memorandum under the caption "Description of the Timber Notes."
(g) The Deed of Trust will be duly authorized by the Company on
or before the Closing Date and, when executed and delivered by the Company, will
have been duly executed and delivered by the Company and (assuming the due
authorization, execution and delivery thereof by each of the other parties
thereto) will constitute a valid and legally binding obligation of the Company,
enforceable against the Company in accordance with its terms, except to the
extent that (i) enforcement may be limited by (A) bankruptcy, insolvency,
reorganization, moratorium or other similar laws and court decisions now or
hereafter in effect relating to or affecting creditors' rights and remedies
generally and (B) general principles of equity (regardless of whether such
enforceability is considered in a proceeding at law or in equity) and (ii)
certain of the remedial provisions therein may be unenforceable in whole or in
part, provided, however, that the inclusion of such provisions does not affect
the enforceability of the Deed of Trust as a whole, and the Deed of Trust,
together with applicable law, is sufficient for the practical realization of the
benefits of the security created thereby. On or before the Closing Date, the
Deed of Trust is in proper form for recording and, as of the Closing Date, will
be duly recorded or submitted for recording in the proper public offices
together with all requisite recording fees and, upon such recording, and filing
in the proper public offices of duly executed UCC-1 Financing Statements
describing the Collateral Mortgaged Property (as defined below), will constitute
a valid, perfected, first priority lien on and security interest in all of the
Mortgaged Property, subject only to Permitted Encumbrances. The Deed of Trust
will conform in all material respects to the description thereof in the Final
Memorandum under the caption "Description of the Timber Notes."
(h) Each of the other 1998 Operative Documents to which the
Company or Palco is a party will be duly authorized on or before the Closing
Date, and when executed and delivered by each of the Company and Palco, will be
duly executed by the Company and Palco, as the case may be, and will constitute
a valid and legally binding obligation of each of the Company and Palco, as the
case may be, enforceable against each of the Company and Palco, as the case may
be, in accordance with its terms, except to the extent that enforcement may be
limited by (i) bankruptcy, insolvency, reorganization, moratorium or other
similar laws and court decisions now or hereafter in effect relating to or
affecting creditors' rights and remedies generally and (ii) general principles
of equity (regardless of whether such enforceability is considered in a
proceeding at law or in equity). Each such 1998 Operative Document will conform
in all material respects to the descriptions thereof in the Final Memorandum
under the caption "Description of the Timber Notes" or "Description of Certain
Principal Agreements," as applicable.
(i) All of the issued membership interests in the Company have
been duly and validly authorized, and all membership interests in the Company
issued and outstanding are fully paid and nonassessable; all outstanding
membership interests in the Company are owned beneficially and of record by
Palco, free and clear of all pledges, liens, security interests, charges,
claims, equities or encumbrances.
(j) There is no pending or, to the knowledge of the Company or
Palco, threatened, action, suit or proceeding before any court or governmental
agency, authority or body or any arbitrator to which the Company or Palco is a
party that (i) could reasonably be expected to have a material adverse effect on
the performance by the Company, Palco or any of its subsidiaries of this
Agreement, or the consummation by the Company, Palco or any of its subsidiaries
of any of the transactions contemplated hereby; or (ii) could reasonably be
expected to have a Material Adverse Effect that has not been disclosed in the
Final Memorandum, and the statements in the Final Memorandum under the headings
"Summary -- The Company -- Regulatory and Environmental Matters; The Headwaters
Agreement," "Risk Factors -- Regulatory and Environmental Factors," "Risk
Factors -- Headwaters Agreement," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Trends," "Business of the
Company -- Regulatory and Environmental Matters," "Business of the Company --
Legal Proceedings," "Certain United States Income Tax Consequences," "Annex 2 --
The Pacific Lumber Company -- Business-- Regulatory and Environmental Matters,"
"Annex 2 -- The Pacific Lumber Company -- Legal Proceedings" and "Annex 2 -- The
Pacific Lumber Company -- Business -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Trends" adequately summarize
the matters described therein.
(k) No consent, approval, authorization or order of any court or
government agency or body is required for the consummation by the Company, Palco
or any of its subsidiaries of the transactions contemplated by this Agreement or
the 1998 Operative Documents, except such as may be required under the blue sky
laws of any jurisdiction in connection with the purchase and distribution of the
Timber Notes by the Initial Purchasers and except for the filing with the
California Department of Forestry of a notice of transfer and/or amendments to
any Timber Harvesting Plans being transferred to the Company (which shall be
completed promptly following the Closing Date) and except such authorizations,
approvals, consents or orders which would not have a Material Adverse Effect on
the Company or Palco, as the case may be, if not obtained.
(l) Neither the issuance or sale of the Timber Notes, nor the
consummation of any other of the transactions contemplated by this agreement,
conflicts with, results in a breach of, or constitutes a default under, the
articles of incorporation, by-laws, certificate of formation or agreement of
limited liability company, or other organizational documents, as applicable, of
the Company or Palco, or the terms of any indenture or other material agreement
or instrument to which the Company or Palco is a party or by which any of their
properties are bound, or any statute, law, rule or regulation applicable to the
Company or Palco, or any order, judgment or decree applicable to the Company or
Palco of any court, regulatory body, administrative agency, governmental body or
arbitrator having jurisdiction over the Company or Palco, where such conflict,
breach or default, singly or in the aggregate, would have a Material Adverse
Effect.
(m) Neither the Company nor Palco is in violation of its
respective articles of incorporation, by-laws, certificate of formation,
agreement of limited liability company or other organization documents, or of
any law, ordinance, administrative or governmental rule or regulation applicable
to the Company or Palco, or of any decree of any court or governmental agency or
body having jurisdiction over the Company or Palco, or in default in the
performance of any obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or of any agreement,
indenture, lease or other instrument to which the Company or Palco is a party or
by which either of them or any of their respective properties may be bound,
where such violation or default, singly or in the aggregate, would have a
Material Adverse Effect.
(n) Each of the Company and Palco will, on or before the Closing
Date, have all licenses, consents, approvals, authorizations, permits,
franchises and other agreements as are necessary to own and maintain their
respective properties and to conduct their respective businesses in the manner
described in the Final Memorandum, except where the failure to have any such
licenses, consents, approvals, authorizations, permits, franchises and other
agreements would not have a Material Adverse Effect on the Company or Palco, and
the Company and Palco are in compliance in all material respects with such
licenses, consents, approvals, authorizations, permits, franchises and other
agreements, all of which are in full force and effect (except as set forth in
the Final Memorandum).
(o) The accountants, Arthur Andersen LLP, who have certified or
shall certify the financial statements filed or to be filed as part of the Final
Memorandum are independent public accountants.
(p) The financial statements, together with related schedules and
notes thereto forming part of the Final Memorandum, as of its date, will fairly
present the financial position, results of operations and cash flows of the
Company and Palco on the basis stated in the Final Memorandum and at the
respective dates or for the respective periods to which they apply; such
statements and related schedules and notes have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved, except as disclosed or referred to therein; the pro forma
financial statements included in the Final Memorandum will include assumptions
that provide a reasonable basis for presenting the significant effects directly
attributable to the transactions and events described therein, the related pro
forma adjustments give appropriate effect to those assumptions; the pro-forma
financial information included in the Final Memorandum, as of its date, will
comply in all material respects with the requirements of Regulation S-X, and the
pro forma adjustments have been properly applied to the historical amounts in
the compilation of such information; the selected financial data set forth under
the caption "Selected Historical and Pro Forma Financial Data" in the Final
Memorandum, as of its date, will fairly present, on the basis stated in the
Final Memorandum, the information included therein; the other financial
information and data set forth in the Final Memorandum (and any amendments or
supplements thereto), as of its date, will be fairly presented, and have been
prepared on a basis consistent with such financial statements and the books and
records of the Company and Palco; and the Initial Harvest Schedule and the
Scheduled Harvest Schedule (each as defined in the Final Memorandum) and all
other data related to possible future harvesting levels, prices and expenses
included in the Final Memorandum or the Structuring Cash Flows (as defined in
the Final Memorandum) and the assumptions embodied in the Minimum Principal
Amortization Schedules and the Scheduled Amortization Schedules (each as defined
in the Final Memorandum) and the Structuring Cash Flows, have been prepared by
the Company and Palco in good faith and are based upon assumptions the Company
and Palco believe to be reasonable in all material respects under the
circumstances in which they were prepared.
(q) Except as disclosed or referred to in the Final Memorandum,
subsequent to the respective dates as of which such information is given in the
Final Memorandum, neither the Company nor Palco has incurred any liability or
obligation, direct or contingent, or entered into any transaction, not in the
ordinary course of business, that is material to the Company, or to Palco and
its subsidiaries taken as a whole, and there has not been any material change in
the member capital, capital stock or other equity, or material increase in the
short-term debt or long-term debt, of the Company or Palco or any material
adverse change, or any development involving or which may reasonably be expected
to involve, a prospective material adverse change, in the condition (financial
or other), business, net worth, results of operations or prospects of the
Company, or of Palco and its subsidiaries taken as a whole.
(r) Except as disclosed in the Final Memorandum, Palco will have
good title to all property (real and personal) described in the Final Memorandum
as being owned by it that are material to Palco and its subsidiaries taken as a
whole and, upon the consummation of the transactions on or prior to the Closing
Date, the Company will have good and marketable title to all property (real and
personal) described in the Final Memorandum to be owned by it that are material
to the Company, as of the Closing Date, in each case free and clear of all
liens, claims, security interests or other encumbrances except the Lien of the
Deed of Trust and Permitted Encumbrances and such as are described in the Final
Memorandum, or such as are not materially burdensome and do not interfere in any
material respect with the conduct of the business of Palco and its subsidiaries
taken as a whole, or the Company, respectively, and the property held under
lease by each of the Company and Palco is held by it, or will be held by it, as
applicable, under valid and enforceable leases, with only such exceptions as in
the aggregate are not materially burdensome and do not interfere in any material
respect with the conduct of the business of the Company, or of Palco and its
subsidiaries taken as a whole.
(s) Neither the Company, nor any of its Affiliates, nor any
person acting on its or their behalf has engaged in any form of general
solicitation or general advertising (within the meaning of Regulation D) in
connection with any offer or sale of the Timber Notes in the United States. The
Company has not distributed, and will not distribute prior to the Closing Date,
any offering material in connection with the offering and sale of the Timber
Notes other than the Preliminary Memorandum and the Final Memorandum. The
Company and its Affiliates and each person acting on its or their behalf has
complied with the offering restrictions of Regulation S; provided, however, that
no representation or warranty is made with respect to the manner in which the
Timber Notes are distributed by the Initial Purchasers.
(t) Other than as described in the Final Memorandum, there are no
outstanding warrants, options or other agreements that constitute the right to
receive or purchase any membership interest in the Company, and there are no
restrictions upon the voting or transfer of, or the declaration or payment of
any dividend or distribution on, any membership interest in the Company.
(u) No holder of securities of the Company has the right to
require the Company to register securities of the Company under the Act except
as set forth in the Registration Rights Agreement.
(v) Neither the Company nor Palco is an "investment company" or
under the "control" of an "investment company" as such terms are defined under
the Investment Company Act of 1940, as amended.
(w) The Company will use the net proceeds received by it from a
sale of the Timber Notes in the manner specified in the Final Memorandum under
"Use of Proceeds and Certain Related Transactions."
(x) Except as disclosed in the Preliminary Memorandum and the
Final Memorandum: (i) the Company and Palco are in compliance in all material
respects with all applicable federal, state, local and foreign laws and
regulations (which compliance includes, without limitation, the possession of
all material permits and other governmental authorizations, and compliance with
the terms and conditions thereof) relating to protection of human health or the
environment or imposing liability or standards of conduct concerning any
Hazardous Materials (including, without limitation, laws relating to emissions,
discharges, releases or threatened releases of Hazardous Materials, as such term
is defined below, or the manufacture, processing, distribution, use, generation,
treatment, storage, disposal, transport or handling of any written Hazardous
Materials) (collectively, "Environmental Laws"), and there are no circumstances
that would prevent or interfere with such compliance in the future, (ii) the
Company and Palco have not received any written notice and there is no pending
or, to the knowledge of the Company and Palco, threatened action, suit or
proceeding before or by any court or governmental agency or body (hereinafter,
"Environmental Claim") alleging potential liability (including, but not limited
to, potential liability for investigatory costs, cleanup costs, governmental
response costs, natural resources damages, property damages, personal injuries,
or penalties) of the Company, Palco, or any person or entity for whom the
Company or Palco has retained or assumed responsibility contractually, arising
out of, based on, or resulting from the presence, release, discharge, emission
or disposal into the environment, of any Hazardous Materials at any location,
whether or not owned or operated by the Company or Palco or any violation or
alleged violation of any Environmental Law which singly or in the aggregate
would have a Material Adverse Effect on the Company, or Palco and its
subsidiaries taken as a whole, and (iii) there are no past or present actions,
activities, circumstances, conditions, events or incidents that could reasonably
be expected to form the basis for any such Environmental Claim except where such
non-compliance, liability or requirement to take (or refrain from taking)
action, or potential liability (as the case may be), singly or in the aggregate,
would not have a Material Adverse Effect on the Company, or Palco and its
subsidiaries, taken as a whole; the term "Hazardous Materials" means any
"hazardous constituent," "toxic chemical," "toxic substance," "acutely toxic
substance," "pollutant" or "contaminant," or any other formulation intended to
define, list or classify substances by reason of hazardous, dangerous, toxic or
other deleterious properties, such as ignitability, corrosivity, reactivity,
carcinogenicity, reproductive toxicity or "EP toxicity," as defined in any
Environmental Law (including, without limitation, asbestos, polychlorinated
biphenyls, oil, petroleum, petroleum-related or petroleum-derived products,
natural gas, natural gas liquids, liquified natural gas or synthetic natural
gas), or any similar substances, (b) any substance the presence of which on any
property included in the Company Timber Properties is prohibited by any
Environmental Law, (c) any underground storage tanks, (d) any flammable
substances or explosives or any radioactive materials and (e) any other
substances subject to any rules or regulations (including, without limitation,
any notice requirements or special handling requirements) of any governmental
authority under any Environmental Laws.
(y) Each of the representations and warranties to be made by the
Company in the Deed of Trust are made to the Initial Purchasers, to the same
extent as if fully set forth herein.
(z) The Company is either exempt from or is subject to and in
full compliance with the reporting requirements of Section 13 or Section 15(d)
of the Exchange Act.
(aa) The Company has not paid or agreed to pay to any person any
compensation for soliciting another to purchase any securities of the Company
(except as contemplated by this Agreement).
(bb) There are no material transfer taxes or other similar fees
or charges under Federal law or the laws of any state, or any political
subdivision thereof, required to be paid in connection with the execution and
delivery of this Agreement or the issuance by the Company or sale by the Company
of the Timber Notes, except in connection with the real property transfers
described in the Final Memorandum.
(cc) The Company has filed all foreign, federal, state and local
tax returns that are required to be filed or has requested extensions thereof
(except in any case in which the failure so to file would not have a material
adverse effect on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company, whether or not arising from transactions
in the ordinary course of business, except as set forth in or contemplated in
the Final Memorandum (exclusive of any amendment or supplement thereto) and has
paid all taxes required to be paid by it and any other assessment, fine or
penalty levied against it, to the extent that any of the foregoing is due and
payable, except for any such assessment, fine or penalty that is currently being
contested in good faith or as would not have a material adverse effect on the
condition (financial or otherwise), prospects, earnings, business or properties
of the Company, whether or not arising from transactions in the ordinary course
of business, except as set forth in or contemplated in the Final Memorandum
(exclusive of any amendment or supplement thereto).
(dd) No labor problem or dispute with the employees of the
Company or Palco or any of its subsidiaries exists or is threatened or imminent.
(ee) The Company, Palco and each of its subsidiaries are insured
by insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in which they
are engaged; all policies of insurance and fidelity or surety bonds insuring the
Company or its business, assets, employees, officers and directors are in full
force and effect; the Company is in compliance with the terms of such policies
and instruments in all material respects; and there are no claims by the Company
under any such policy or instrument as to which any insurance company is denying
liability or defending under a reservation of rights clause; the Company has not
been refused any insurance coverage sought or applied for; and the Company has
no reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not have a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company whether
or not arising from transactions in the ordinary course of business, except as
set forth in or contemplated in the Final Memorandum (exclusive of any amendment
or supplement thereto).
(ff) The Company owns or leases all such properties as are
necessary to the conduct of its operations as presently conducted.
2. Purchase and Sale. Subject to the terms and conditions and in
reliance upon the representations and warranties herein set forth, the Company
agrees to sell to Initial Purchasers, and Initial Purchasers agree to purchase
from the Company, at a purchase price of 98.425%, 98.175% and 97.480% (which
price reflects the structuring fee set forth in Section 14 hereof) on the
principal amount of the Class A-1 Timber Notes, Class A-2 Timber Notes and the
Class A-3 Timber Notes, respectively, in the amounts set forth in Schedule I
hereto, plus accrued interest, if any, on such Timber Notes from July 20, 1998
to the Closing Date.
3. Delivery and Payment. Delivery of and payment for the Timber Notes
shall be made at the office of Kramer, Levin, Naftalis & Frankel, 919 Third
Avenue, New York, New York at 10:00 AM, New York City time, on July 20, 1998,
which date and time may be modified by agreement between the Representative and
the Company or as provided in Section 9 hereof (such date and time of delivery
and payment for the Timber Notes being herein called the "Closing Date").
Delivery of the Timber Notes shall be made to the Initial Purchasers against
payment by the Initial Purchasers of the aggregate purchase price thereof to or
upon the order of the Company by wire transfer of immediately available funds.
Delivery of the Timber Notes shall be made through the facilities of The
Depository Trust Company unless the Representative shall otherwise instruct.
Certificates for the Timber Notes shall be registered in such names and in such
denominations as the Representative may request not less than three full
business days in advance of the Closing Date.
The Company agrees to have the Timber Notes available for inspection,
checking and packaging by the Initial Purchasers in New York, New York, not
later than 1:00 p.m. on the business day prior to the Closing Date.
4. Offering by the Initial Purchasers. Each Initial Purchaser,
severally and not jointly, represents and warrants to and agrees with the
Company that:
(a) It has not offered or sold, and will not offer or sell, any
Timber Notes except (i) to those it reasonably believes to be qualified
institutional buyers (as defined in Rule 144A under the Act) and that, in
connection with each such sale, it has taken or will take reasonable steps to
ensure that the purchaser of such Timber Notes is aware that such sale is being
made in reliance on Rule 144A; (ii) to other institutional "accredited
investors" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D) who
provide to it and to the Company a letter in the form of Exhibit A hereto or a
letter containing substantially similar representations and agreements; or (iii)
outside the United States to persons other than U.S. persons in accordance with
Regulation S.
(b) Neither it nor any person acting on its behalf has made or
will make offers or sales of the Timber Notes in the United States by means of
any form of general solicitation or general advertising (within the meaning of
Regulation D) in the United States.
5. Agreements. The Company and Palco jointly and severally agree with
each Initial Purchaser that:
(a) The Company will promptly advise the Initial Purchaser of the
receipt by the Company of any notification with respect to the suspension of the
qualification of the Timber Notes for sale in any jurisdiction or the initiation
or threatening of any proceeding for such purpose. The Company will use its best
efforts to prevent the issuance of any such suspension and, if issued, to obtain
as soon as possible the withdrawal thereof.
(b) The Company will furnish to each Initial Purchaser and to
counsel for the Initial Purchasers, without charge, during the period referred
to in paragraph (d) below, as many copies of the Final Memorandum and any
amendments and supplements thereto as it may reasonably request.
(c) The Company will not amend or supplement the Final
Memorandum, other than by filing documents under the Exchange Act which are
incorporated by reference therein, without the prior written consent of the
Representative; provided, however, that, prior to the Closing Date, the Company
will not file any document under the Exchange Act which is incorporated by
reference in the Final Memorandum unless, prior to such proposed filing, the
Company has furnished the Representative with a copy of such document for its
review and the Representative has not reasonably objected to the filing of such
document. The Company will promptly advise the Representative when any document
filed under the Exchange Act which is incorporated by reference in the Final
Memorandum shall have been filed with the Commission.
(d) If at any time prior to the completion of the sale of the
Timber Notes by the Initial Purchasers (as determined by the Representative),
any event occurs as a result of which the Final Memorandum, as then amended or
supplemented, would include any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, or if it should
be necessary to amend or supplement the Final Memorandum to comply with
applicable law, the Company promptly (i) will notify the Representative of any
such event and
(ii) subject to the requirements of paragraph (c) of this Section 5, will
prepare an amendment or supplement which will correct such statement or omission
or effect such compliance.
(e) The Company will cooperate with the Initial Purchasers and
their counsel in connection with the qualification of the Timber Notes for offer
and sale under the applicable state securities or blue sky laws of such
jurisdictions as the Initial Purchasers may designate, will maintain such
qualifications in effect for so long as required for the distribution of the
Timber Notes and to facilitate secondary transactions in the Timber Notes, and
will cooperate with the Initial Purchasers in any determination of the legality
of the Timber Notes for purchase by institutional investors; provided, however,
that the Company shall not be obligated to qualify to do business in any
jurisdiction in which it is not so qualified or to take any action that would
subject it to general consent to service of process in any jurisdiction in which
it is not now so subject. The Company will pay the fees in connection with any
review of the offering and the fees of any rating agencies in connection with
the review and rating of the Timber Notes.
(f) Neither the Company, or any Affiliate, nor any person acting
on its or their behalf will, directly or indirectly, make offers or sales of any
security, or solicit offers to buy any security, under circumstances that would
require the registration of the Timber Notes under the Act, except as
contemplated in the Registration Rights Agreement.
(g) Neither the Company, nor any Affiliate, nor any person acting
on their behalf will engage in any form of general solicitation or general
advertising (within the meaning of Regulation D) in connection with any offer or
sale of the Timber Notes in the United States except as contemplated in the
Registration Rights Agreement.
(h) So long as any of the Timber Notes are restricted securities
within the meaning of Rule 144(a)(3) under the Act, the Company will, during any
period (except any period in which it is either (i) subject to, and in
compliance with, Section 13 or 15(d) of the Exchange Act or (ii) exempt from
such reporting requirements in accordance with Rule 12g3-2(b) under the Exchange
Act), provide to each holder of such restricted securities and to each
prospective purchaser (as designated by such holder) of such restricted
securities, upon the request of such holder or prospective purchaser, any
information required to be provided by Rule 144A(d)(4) under the Act. This
covenant is intended to be for the benefit of the holders, and the prospective
purchasers designated by such holders, from time to time of such restricted
securities.
(i) The Company, its Affiliates, and any person acting on their
behalf will comply with the offering restrictions of Regulation S; provided,
however, that no covenant is made with respect to the manner in which the Timber
Notes are distributed by the Initial Purchasers.
(j) The Company will cooperate with the Representative and use
its best efforts to permit the Timber Notes to be eligible for clearance and
settlement through The Depository Trust Company.
(k) Neither the Company nor any Affiliate will take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result, under the Exchange Act or otherwise,
in stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Timber Notes.
(l) The Company and Palco jointly and severally agree to pay the
costs and expenses relating to the following matters: (i) the preparation of the
1998 Operative Documents, the issuance of the Timber Notes and the fees of the
Trustee; (ii) the preparation, printing or reproduction of the Preliminary
Memorandum and Final Memorandum and each amendment or supplement to either of
them; (iii) the printing (or reproduction) and delivery (including postage, air
freight charges and charges for counting and packaging) of such copies of the
Preliminary Memorandum and Final Memorandum, and all amendments or supplements
to either of them, as may, in each case, be reasonably requested for use in
connection with the offering and sale of the Timber Notes; (iv) the preparation,
printing, authentication, issuance and delivery of certificates for the Timber
Notes, including any stamp or transfer taxes in connection with the original
issuance and sale of the Timber Notes; (v) the reproduction and delivery of this
Agreement, any blue sky memorandum and all other agreements or documents
reproduced and delivered in connection with the offering of the Timber Notes;
(vi) any registration or qualification of the Timber Notes for offer and sale
under the Timber Notes or blue sky laws of the several states (including filing
fees and the reasonable fees and expenses of counsel for the Initial Purchasers
relating to such registration and qualification);(vii) the transportation and
other expenses incurred by or on behalf of Company representatives in connection
with presentations to prospective purchasers of the Timber Notes; (viii) the
fees and expenses of the Company s accountants and the fees and expenses of
counsel (including local and special counsel) for the Company; and (ix) all
other costs and expenses of the Company and Palco incident to the performance of
their obligations hereunder. Notwithstanding anything to the contrary contained
in this subsection (l), neither the Company nor Palco shall be liable for fees
and expenses of counsel to the Initial Purchasers (except pursuant to clauses
(v) and (vi) herein).
(m) The Company, Palco and Salmon Creek shall execute and deliver
all such documents or instruments as the Title Company (as hereinafter defined)
may reasonably request in connection with the recordation of the Deed of Trust
and the issuance of the Title Policy (as hereinafter defined).
(n) The Company shall deliver to the Representative a copy of
each Monthly Trustee Certificate, Note Payment Trustee Certificate and each
statement sent to the Noteholders. The Initial Purchasers acknowledge that the
contents of each Monthly Trustee Certificate and Note Payment Trustee
Certificate are confidential information and agrees to keeps such information
confidential.
6. Conditions to the Obligations of the Initial Purchaser. The
obligations of the Initial Purchasers to purchase the Timber Notes shall be
subject to the accuracy in all material respects of the representations and
warranties on the part of the Company and Palco contained herein as of the
Execution Time and the Closing Date, to the accuracy in all material respects of
the statements of the Company and Palco made in any certificates pursuant to the
provisions hereof, to the performance in all material respects by the Company
and Palco of their obligations hereunder and to the following additional
conditions:
(a) The Company shall have furnished to the Initial Purchasers
and the Trustee the opinions of:
(i) Kramer, Levin, Naftalis & Frankel, counsel for the Company
and Palco, dated the Closing Date, to the effect that:
(1) each of the Company and Palco has been duly organized
and is validly existing as a limited liability company and a
corporation, respectively, under the laws of the State of Delaware,
with the requisite power and authority to own, lease and operate its
respective properties, to conduct its business as described in the
Final Memorandum, and to enter into and perform its respective
obligations under this Agreement and the 1998 Operative Documents, as
applicable;
(2) this Agreement has been duly authorized, executed and
delivered by the Company and by Palco;
(3) the Timber Notes have been duly authorized by the
Company for issuance and sale to the Initial Purchasers pursuant
to this Agreement. The Timber Notes, when executed by the Company and
authenticated by the Trustee in accordance with the provisions of the
Indenture and delivered to and paid for by the Initial Purchasers
pursuant to this Agreement, will have been duly executed,
authenticated, issued and delivered and will constitute valid and
legally binding obligations of the Company enforceable against the
Company in accordance with their terms, except to the extent that
enforcement thereof may be limited by (i) bankruptcy, insolvency,
reorganization, arrangement, moratorium, fraudulent conveyance or
transfer or other laws and court decisions now or hereafter in effect,
relating to or affecting the rights of creditors generally and (ii)
the remedy of specific performance and injunctive and other forms of
equitable relief are subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be
brought;
(4) the Indenture has been duly authorized, executed and
delivered by the Company, (assuming the due authorization, execution
and delivery thereof by the Trustee) constitutes a valid and legally
binding instrument of the Company, enforceable against the Company in
accordance with its terms, except to the extent that enforcement
thereof may be limited by (i) bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or transfer or other laws and court
decisions now or hereafter in effect, relating to or affecting the
rights of creditors generally and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief are
subject to equitable defenses and to the discretion of the court
before which any proceeding therefor may be brought, and the Timber
Notes and the Indenture conform in all material respects to the
statements relating thereto contained in the Final Memorandum under
the caption "Description of the Timber Notes;"
(5) the Deed of Trust has been duly authorized, executed and
delivered by the Company;
(6) each of the other 1998 Operative Documents to which the
Company or Palco is a party has been duly authorized, executed and
delivered by the Company and by Palco, as the case may be, and the New
Master Purchase Agreement and the New Services Agreement conform in
all material respects to the statements relating thereto contained in
the Final Memorandum under the caption "Description of Certain
Principal Agreements";
(7) no consent, approval, authorization or order of any
court or governmental agency is legally required to be obtained by the
Company or Palco in connection with the sale of the Timber Notes by
the Company to the Initial Purchasers under this Agreement (except, in
each case, such as may be required under state securities or blue sky
laws, as to which no opinion need be expressed), except for the filing
with the California Department of Forestry of a notice of transfer
and/or amendments to any Timber Harvesting Plans being transferred to
the Company (which shall be completed promptly following the Closing
Date) and except such authorizations, approvals, consents or orders
which would not have a Material Adverse Effect on the Company if not
obtained;
(8) neither the issue and sale of the Timber Notes by the
Company to the Initial Purchasers under this Agreement, nor the
execution and delivery by the Company and Palco of this Agreement or
the 1998 Operative Documents, violates any applicable law (other than
state securities or blue sky laws or regulations, as to which no
opinion need be expressed) or the articles of incorporation,
certificate of formation, agreement of limited liability company,
by-laws or other organizational documents, as applicable, of the
Company or Palco, or any judgment, order or decree known to such
counsel to be applicable to the Company or Palco of any court,
regulatory body, administrative agency, governmental body or
arbitrator having jurisdiction over the Company or Palco (in each
case, as in effect on the date of the opinion) except, in each case,
where such violation would not have a Material Adverse Effect;
(9) assuming the accuracy of the representations and
warranties and compliance with the agreements contained herein, no
registration of the Timber Notes under the Act, and no qualification
of an indenture under the Trust Indenture Act, are required for the
offer and sale by the Initial Purchasers of the Timber Notes in the
manner contemplated by this Agreement; and
(10) the Company is not required to be registered as an
"investment company" and is not under the "control" of an "investment
company" as such terms are defined under the Investment Company Act of
1940, as amended.
(ii) the General Counsel or a Managing Counsel of the Company,
dated the Closing Date, to the effect that:
(1) to the knowledge of such counsel, after due inquiry, the
Company is duly qualified to transact business and is in good standing
in each jurisdiction in which such qualification is required, except
where the failure to so qualify or be in good standing should not
reasonably be expected to have a Material Adverse Effect on the
Company;
(2) to the knowledge of such counsel, there are no legal or
governmental proceedings pending or threatened against the Company
which could have a Material Adverse Effect on the Company other than
those that were disclosed in the Preliminary Memorandum and in the
Final Memorandum;
(3) all of the issued and outstanding membership interests
in the Company have been duly authorized and validly issued, are fully
paid and nonassessable and, to the knowledge of such counsel, all
outstanding membership interests of the Company are owned beneficially
and of record by Palco free and clear of all pledges, liens, security
interests, charges, claims, equities, encumbrances, preemptive rights
or other restrictions;
(4) to the knowledge of such counsel, there are no material
franchises, contracts or other instruments to which the Company is a
party or by which it may be bound other than those described in the
Final Memorandum or attached or incorporated by reference as exhibits
thereto;
(5) no authorization, approval, consent or order of any
court or governmental authority or agency is legally required to be
obtained by the Company in connection with the sale of the Timber
Notes to the Initial Purchasers under the Agreement and the other
transactions contemplated by the 1998 Operative Documents (except such
as may be required under state securities or blue sky laws or
regulations, as to which no opinion is expressed), and except for the
filing with the California Department of Forestry of a notice of
transfer and/or amendments to any Timber Harvesting Plans being
transferred to the Company (which shall be completed promptly
following the Closing Date) and except such authorizations, approvals,
consents or orders which would not have a Material Adverse Effect on
the Company if not obtained. The execution and delivery by the Company
of this Agreement and the 1998 Operative Documents and the
consummation by the Company of the transactions contemplated therein
does not conflict with, result in a breach or violation of, or
constitute a default under (i) the provisions of the certificate of
formation, agreement of limited liability company or other
organizational document of the Company, (ii) the terms of any
indenture, agreement or other instrument known to such counsel after
due inquiry, and to which the Company is a party or bound, or (iii)
any applicable law or administrative regulation, the breach or
violation of which have a Material Adverse Effect on the Company
(other than state securities or blue sky laws or regulations, as to
which no opinion is expressed), or administrative or court decree
entered against or applicable to the Company;
(6) to the knowledge of such counsel, after due inquiry, the
descriptions contained in the Final Memorandum under "Summary -- The
Company -- Regulatory and Environmental Matters; The Headwaters
Agreement," "Risk Factors -- Regulatory and Environmental Factors,"
"Risk Factors -- Headwaters Agreement," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Trends,"
and "Business of the Company -- Regulatory and Environmental Matters,"
"Business of the Company - - Legal Proceedings" (other than numerical
computations as to which no opinion is expressed) adequately summarize
in all material respects the matters described therein; and
(iii) the General Counsel or a Managing Counsel of Palco, dated
the Closing Date, to the effect that:
(1) to the knowledge of such counsel, after due inquiry,
Palco is duly qualified as a foreign corporation to transact business
and is in good standing in each jurisdiction in which such
qualification is required, except where the failure to so qualify or
be in good standing could not reasonably be expected to have a
Material Adverse Effect on Palco;
(2) to the knowledge of such counsel, there are no legal or
governmental proceedings pending or threatened against Palco which
could have a Material Adverse Effect on Palco other than those that
were disclosed in the Preliminary Memorandum and in the Final
Memorandum;
(3) all outstanding membership interests of the Company are
owned beneficially and of record by Palco free and clear of all
pledges, liens, security interests, charges, claims, equities,
encumbrances, preemptive rights or other restrictions;
(4) no authorization, approval, consent or order of
any court or governmental authority or agency is legally required to
be obtained by Palco in connection with the sale of the Timber Notes
to the Initial Purchasers under this Agreement and the other
transactions contemplated by the 1998 Operative Documents (except such
as may be required under state securities or blue sky laws or
regulations, as to which no opinion is expressed), except for the
filing with the California Department of Forestry of a notice of
transfer and/or amendments to any Timber Harvesting Plans being
transferred to the Company (which shall be completed promptly
following the Closing Date) and except such authorizations, approvals,
consents or orders which would not have a Material Adverse Effect on
Palco if not obtained. The execution and delivery by Palco of this
Agreement and the 1998 Operative Documents and the consummation by
Palco of the transactions contemplated therein does not conflict with,
result in a breach or violation of, or constitute a default under (i)
the provisions of the certificate of incorporation, or by-laws, of
Palco, (ii) the terms of any indenture, agreement or other instrument
known to such counsel after due inquiry, and to which Palco is a party
or bound, or (iii) any applicable law or administrative regulation,
the breach or violation of which have a Material Adverse Effect (other
than state securities or blue sky laws or regulations, as to which no
opinion is expressed), or administrative or court decree entered
against or applicable to the Company or Palco;
(5) to the knowledge of such counsel, after due inquiry, the
descriptions contained in the Final Memorandum under "Summary -- The
Company -- Regulatory and Environmental Matters; The Headwaters
Agreement," "Risk Factors -- Regulatory and Environmental Factors,"
"Risk Factors -- Headwaters Agreement," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Trends"
and "Business of the Company -- Regulatory and Environmental Matters,"
"Business of the Company - - Legal Proceedings" (other than numerical
computations as to which no opinion is expressed) adequately
summarizes in all material respects the matters described therein; and
Each counsel referred to in paragraphs (i), (ii) and (iii) shall also
state that he or she has participated in conferences with officers and other
representatives of the Company, representatives of the independent public
accountants for the Company and representatives of the Initial Purchaser at
which the contents of the Final Memorandum and related material were discussed
and have reviewed certain other documents and, although such counsel is not
passing upon and does not assume any responsibility for, the accuracy,
completeness or fairness of the statements contained in the Final Memorandum on
the basis of the foregoing, but without independent check or verification, each
such counsel confirms to you that no information has come to his or her
attention which has caused him or her to believe that the Final Memorandum
contains an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading. Without limiting the foregoing, such counsel may further state
that he or she assumes no responsibility for, and has not independently
verified, the accuracy, completeness or fairness of the financial statements and
schedules and other financial and statistical data included in or excluded from
the Final Memorandum, and he or she has not examined the accounting, financial
or statistical records from which such financial statements, schedules and data
are derived.
In rendering such opinion, each such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other than the
States of Delaware or New York (with respect to paragraph (i)) or California
(with respect to paragraphs (ii) and (iii)) or the United States, to the extent
he or she deems proper and specified in such opinion, upon the opinion of other
counsel of good standing whom they believe to be reliable and who are
satisfactory to counsel for the Initial Purchaser and (B) as to matters of fact,
to the extent they deem proper, on certificates of responsible officers of the
Company, Palco and public officials. References to the Final Memorandum in this
paragraph (a) include any amendments or supplements thereto at the Closing Date.
(b) The Initial Purchaser shall have received from Skadden, Arps,
Slate, Meagher & Flom LLP, counsel for the Initial Purchaser, such opinion or
opinions, dated the Closing Date, with respect to the issuance and sale of the
Timber Notes, the Indenture, the fiduciary duties of the independent managers of
the Company, the Final Memorandum (together with any amendments or supplements
thereto) and other related matters as the Initial Purchaser may reasonably
require, and the Company shall have furnished to such counsel such documents as
they reasonably request for the purpose of enabling them to pass upon such
matters.
(c) The Company shall have furnished to the Initial Purchaser and
the Trustee the opinion of Sheppard Mullin Richter & Hampton LLP, California
counsel for the Company, Palco, and Salmon Creek dated the Closing Date, to the
effect that:
(i) the Deed of Trust has been duly executed and delivered by the
Company and, assuming due authorization, is a valid and legally binding
obligation of the Company enforceable against the Company in accordance
with its terms, except to the extent that (1) enforcement may be limited by
(i) bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or transfer or other laws and court decisions now or hereafter
in effect, relating to or affecting the rights of creditors generally and
(ii) the remedy of specific performance and injunctive and other forms of
equitable relief are subject to equitable defenses and to the discretion of
the court before which any proceeding therefor may be brought and (2)
certain of the remedial provisions therein may be unenforceable in whole or
in part, provided, however, that the inclusion of such provisions does not
affect the enforceability of the Deed of Trust as a whole, and the Deed of
Trust, together with applicable law, is sufficient for the practical
realization of the benefits of the security created thereby;
(ii) the Deed of Trust, the 1998 Conveyance Documents, the New
Master Purchase Agreement, the New Services Agreement, the New Additional
Services Agreement, the Master Lease Agreement and the New Escrow Agreement
have been duly executed and delivered by the Company, Palco and Salmon
Creek and, assuming due authorization, each such agreement is a valid and
legally binding obligation of the Company and Palco, as the case may be,
enforceable against the Company and Palco, as the case may be, in
accordance with its terms, except to the extent that enforcement may be
limited by (1) bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or transfer or other laws and court decisions now or
hereafter in effect, relating to or affecting the rights of creditors
generally and (2) the remedy of specific performance and injunctive and
other forms of equitable relief are subject to equitable defenses and to
the discretion of the court before which any proceeding therefor may be
brought;
(iii) to the knowledge of such counsel, no consent, approval,
authorization or order of any California court or governmental agency or
body is required for the execution and delivery of this Agreement and the
1998 Operative Documents, the Merger and the issue and sale of the Timber
Notes, the transfer of the Transferred Property to the Company or the
creation of the lien described in the Deed of Trust (except such as may be
required under the blue sky laws of such state in connection with the
purchase and distribution of the Timber Notes by the Initial Purchasers, as
to which no opinion need be given), and such other approvals (specified in
such opinion) as have been obtained, except for the filing with the
California Department of Forestry of a notice of transfer and/or amendments
to any Timber Harvesting Plans being transferred to the Company, which will
be obtained promptly following the Closing Date, and except such
authorizations, approvals, consents or orders which would not have a
Material Adverse Effect on the Company, Palco or Salmon Creek, as the
case may be, if not obtained;
(iv) to the knowledge of such counsel, neither the execution and
delivery of this Agreement and the 1998 Operative Documents, the issue and
sale of the Timber Notes, the Merger, the Company Transfer nor the Palco
Transfer (as such terms are defined in the Final Memorandum) or the
creation of the lien described in the Deed of Trust, will conflict with any
California statute, law, rule or regulation;
(v) the Deed of Trust is in proper form for recording, and in
form sufficient to create a valid lien in favor of the trustee thereunder
for the benefit of the Collateral Agent, as beneficiary. Upon the due
execution and delivery and proper recordation of the Deed of Trust in the
Official Records of Humboldt County, California, the Deed of Trust will
provide constructive notice of a valid lien against the real property
described therein in favor of the trustee thereunder for the benefit of the
Collateral Agent, as beneficiary. Except for the recording of a Notice of
Intent to Preserve Security Interest pursuant to California Civil Code
Sections 880.310-880.370, it is not necessary to rerecord the Deed of Trust
in order to maintain the priority of the lien against the real property
created thereby; and
(vi) the UCC-1 financing statement with respect to that portion
of the Mortgaged Property to which Article 9 of the Uniform Commercial Code
applies (the "Collateral Mortgaged Property") is in appropriate form for
filing with the California Secretary of State; upon such filing and the
recording of the Deed of Trust as a fixture filing in the official records
of Humboldt County, all action will have been taken to create and to
perfect the security interest granted by the Deed of Trust in the
Collateral Mortgaged Property.
(d) The Company shall have furnished to the Representative a
certificate, signed by its Chairman of the Board, the President or Vice
President and the Chief Financial Officer, dated the Closing Date, to the effect
that:
(i) the representations and warranties of the Company in this
Agreement are true and correct in all material respects on and as of the
Closing Date with the same effect as if made on the Closing Date and the
Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the
Closing Date;
(ii) since the date of the most recent financial statements
included in the Final Memorandum (exclusive of any supplement thereto),
there has been no material adverse change in the condition (financial or
other), earnings, business, prospects or properties of the Company, whether
or not arising from transactions in the ordinary course of business, except
as set forth in or contemplated in the Final Memorandum (exclusive of any
supplement thereto).
(e) Palco shall have furnished to the Representative a
certificate, signed by its Chairman of the Board, the President, Vice President
or the Chief Financial Officer, dated the Closing Date, to the effect that:
(i) the representations and warranties of Palco in this Agreement
are true and correct in all material respects on and as of the Closing Date
with the same effect as if made on the Closing Date and Palco has complied
with all the agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to the Closing Date;
(ii) since the date of the most recent financial statements
included in the Final Memorandum (exclusive of any supplement thereto),
there has been no material adverse change in the condition (financial or
other), earnings, business, prospects or properties of Palco and its
subsidiaries, taken as a whole, whether or not arising from transactions in
the ordinary course of business, except as set forth in or contemplated in
the Final Memorandum (exclusive of any supplement thereto).
(f) As of the date hereof and at the Closing Date, the Company
and Palco shall have requested and caused Arthur Andersen LLP to furnish to the
Representative letters, dated respectively as of the date hereof and as of the
Closing Date, in form and substance satisfactory to the Representative,
confirming that they are independent accountants under Rule 101 of the AICPA's
Code of Professional Conduct and its interpretations and rulings, that they have
performed a review of the unaudited interim financial information of the Company
and Palco for the 3- month period ended March 31, 1998 and as of March 31, 1998
and stating in effect that:
(i) in their opinion the audited financial statements and
financial statement schedules included or incorporated in the Final
Memorandum and reported on by them are fairly stated in accordance with
generally accepted accounting principles;
(ii) on the basis of a reading of the latest unaudited financial
statements made available by the Company and Palco and its subsidiaries;
their limited review in accordance with the standards established under
Statement on Auditing Standards No. 71, of the unaudited interim financial
information for the 3-month period ended March 31, 1998, and as of March
31, 1998, carrying out certain specified procedures (but not an examination
in accordance with generally accepted auditing standards) which would not
necessarily reveal matters of significance with respect to the comments set
forth in such letter; a reading of the minutes of the meetings of the
directors and/or managers of the Company and Palco; and inquiries of
certain officials of the Company who have responsibility for financial and
accounting matters of the Company as to transactions and events subsequent
to March 31, 1998, nothing came to their attention which caused them to
believe that:
(1) any material modifications should be made to the
unaudited financial statements included in the Final Memorandum, for
them to be in conformity with generally accepted accounting
principles; or
(2) at July 9, 1998 or the Closing Date, as applicable there
was any change in the member capital, capital stock or long-term debt
of the Company or Palco or any decreases in net current assets or net
assets as compared with amounts shown in the March 31, 1998 financial
statements, or for the period from April 1, 1998 to July 9, 1998 or
the Closing Date, as applicable there were any decreases, compared
with the corresponding period in the preceding year, in net sales or
of net income except for changes or decreases that the Final
Memorandum discloses have occurred or may occur.
(iii) they have performed certain other specified procedures as a
result of which they determined that (A) certain information of an
accounting or financial nature (which is limited to accounting or financial
information derived from the general accounting records of the Company and
Palco) set forth in the Final Memorandum, including the information set
forth under the captions "Prospectus Summary," "Overview and Structure of
the Transaction," "Risk Factors," "Use of Proceeds and Certain Related
Transactions," "Other Financings of Pacific Lumber," "Capitalization,"
"Selected Historical and Pro Forma Financial Data," "Notes to Unaudited Pro
Forma Financial Statements," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business of the Company,"
"Management," "Description of the Timber Notes," "Annex 1 - Structuring
Schedule Assumptions" and "Annex 2 - The Pacific Lumber Company" in the
Final Memorandum is mathematically accurate and agrees with the accounting
records of the Company and Palco, or, in the case of Annex 1, is
mathematically accurate and agrees with the financial model prepared by the
Company, in each case excluding any questions of legal interpretation and
(B) certain information of an accounting or financial nature set forth in
certain written presentations provided to the Rating Agencies agrees with
the accounting records of the Company and Palco; and
(iv) they have determined that the pro forma adjustments have
been properly applied to the historical financial statements (but no
comment is made to the propriety or amount of the pro forma adjustments).
References to the Final Memorandum in this paragraph include any
amendment or supplement thereto at the date of the letter.
(g) Subsequent to the date hereof, or, if earlier, the dates as
of which information is given in the Final Memorandum, there shall not have been
(i) any change or decrease specified in the letter or letters referred to in
paragraph (f) of this Section 6 or (ii) any change, or any development involving
a prospective change, in or affecting the business or properties of the Company
and Palco the effect of which, in any case referred to in clause (i) or (ii)
above, is, in the judgment of the Initial Purchasers, so material and adverse as
to make it impractical or inadvisable to proceed with the offering or the
delivery of the Timber Notes as contemplated by the Final Memorandum.
(h) On or before the Closing Date, the Representative shall have
received satisfactory evidence that the Class A-1 Timber Notes, Class A-2 Timber
Notes and Class A-3 Timber Notes shall be rated not less than "A1," "A3" and
"Baa2," respectively, by Moody's and "A," "A" and "BBB," respectively, by S&P.
(i) On the Closing Date, the Initial Purchasers and the Trustee
shall have received (i) opinions of Kramer, Levin, Naftalis & Frankel (1) with
respect to matters concerning "nonconsolidation" and "true sale" and (2) to the
effect that, for federal income tax purposes, the Timber Notes will constitute
indebtedness of the Company and (ii) any additional opinions delivered to the
Rating Agencies in connection with the rating of the Timber Notes, all of which
shall be addressed to the Initial Purchasers or accompanied by reliance letters.
(j) On the Closing Date, the Initial Purchasers shall have
received the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, dated the
Closing Date, to the effect that, for California income tax purposes and subject
to the conditions therein, the Timber Notes will constitute indebtedness of the
Company.
(k) On the Closing Date, the Initial Purchasers shall have
received the opinion, dated the Closing Date, of Shipman & Goodwin LLP, counsel
for the Trustee, to the effect that:
(i) State Street Bank & Trust Company is validly existing as a
trust company with trust powers and in good standing under the laws of the
Commonwealth of Massachusetts with full power and authority to enter into
and perform its obligations under the Indenture;
(ii) based on the assumption that, in all relevant and material
respects, New York and Massachusetts laws are identical, the Indenture has
been duly authorized, executed and delivered by the Trustee and constitutes
the legal, valid and binding obligation of the Trustee enforceable against
the Trustee in accordance with its terms, except that (a) enforceability
thereof may be subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to
creditors' rights generally, and (b) the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceedings
therefor may be brought; and
(iii) to their knowledge, neither the execution nor the delivery
by the Trustee of the Indenture nor the consummation of any of the
transactions by the Trustee contemplated thereunder requires the consent or
approval of, the giving of notice to, or the registration with, or the
taking of any other action with respect to, any governmental authority or
agency under any existing federal or Massachusetts law governing the
banking or trust powers of the Trustee, except such as have been made or
obtained.
(l) On or prior to the Closing Date, (i) the Representative shall
have received completed requests for information, listing all effective
financing statements filed as of the date thereof in any jurisdictions necessary
or desirable to protect or perfect the Lien of the Deed of Trust in the
Collateral Mortgaged Property and (ii) UCC-1 financing statements with respect
to the Collateral Mortgaged Property shall have been filed in each such
jurisdiction.
(m) On or prior to the Closing Date, (i) the Merger and the
Merger and the transfer and sale of the Transferred Property shall have been
consummated in the manner described in the Final Memorandum, (ii) the Company or
Palco shall have paid and discharged all encumbrances of record securing
monetary obligations or otherwise specified by the Representative with respect
to the Transferred Property, except as disclosed in the Final Memorandum, and
(iii) the Representative shall have received evidence which is reasonably
available and is reasonably satisfactory to the Initial Purchasers, which may be
a tax lien search, that all past and current (if then delinquent) taxes and
assessments applicable to the Company Timberlands or payable by the Company,
Palco or Salmon Creek in respect thereof have been paid in full.
(n) The initial deposits to the Expense Reserve shall have been
made as described in the Final Memorandum.
(o) The Company shall have entered into the 1998 Operative
Documents as described in the Final Memorandum.
(p) Palco shall have taken all steps necessary to assign all
existing and pending Timber Harvest Plans of Palco to the Company.
(q) On or prior to the Closing Date, (i) Fidelity National Title
Insurance Company (the "Title Company") shall have irrevocably agreed and be
prepared to deliver an ALTA extended coverage first mortgagee's policy of title
insurance insuring, as of the Closing Date, that the Company Owned Timberlands
and the Company Timber Rights are vested of record in the Company and that the
Deed of Trust is a first priority lien encumbering the Company Owned Timberlands
and the Company Timber Rights, subject only to the Permitted Encumbrances, with
endorsements, and otherwise in form and substance, reasonably acceptable to the
Representative, in an amount not less than the aggregate principal balance of
the Timber Notes (the "Title Policy") and (ii) the Company and Palco shall have
executed and delivered such other documents, including escrow instructions
satisfactory to the Initial Purchasers, as may be requested by the Title Company
in connection with the recordation of the Deed of Trust and the issuance of the
Title Policy.
(r) Prior to the Closing Date, the Company shall have furnished
to the Initial Purchasers such further information, certificates and documents
as the Initial Purchasers may reasonably request.
(s) The First Supplemental Indenture dated as of July 8, 1998 to
the Indenture dated as of December 23, 1996, in connection with MAXXAM Group
Holdings Inc. 12% Senior Secured Notes due 2003, shall have become effective.
If any of the conditions specified in this Section 6 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
or if any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Initial Purchasers and counsel for the Initial Purchasers,
this Agreement and all obligations of the Initial Purchasers hereunder may be
canceled at, or at any time prior to, the Closing Date by the Initial
Purchasers. Notice of such cancellation shall be given to the Company in writing
or by telephone or telegraph confirmed in writing.
7. Reimbursement of Initial Purchaser' Expenses. If the sale of the
Timber Notes provided for herein is not consummated because any condition to the
obligation of the Initial Purchasers set forth in Section 6 hereof is not
satisfied, because of any termination pursuant to Section 10 hereof or because
of any refusal, inability or failure on the part of the Company or Palco to
perform any agreement herein or comply with any provision hereof other than by
reason of a default by any of the Initial Purchasers, the Company and Palco will
jointly and severally reimburse the Initial Purchasers severally upon demand for
all out-of-pocket expenses (including reasonable fees and disbursements of
counsel) that shall have been incurred by them in connection with the proposed
purchase and sale of the Timber Notes and the other transactions contemplated
hereby; provided, however, that the Company and Palco shall not be liable for
such expenses in the event that (i) such failure to consummate the sale of the
Timber Notes is due to the failure of the condition specified in Section 6(h)
hereof and (ii) such failure is not due to the failure of the Company to comply
with a reasonable request, requirement or condition of any Rating Agency;
provided, further, that the determination of reasonableness in the preceding
clause (ii) shall take into account the effect of such request, requirement or
condition on the offering of the Timber Notes, and other relevant
considerations.
8. Indemnification and Contribution. (a) The Company and Palco jointly
and severally agree to indemnify and hold harmless each Initial Purchaser, the
directors, partners, officers, employees and agents of each Initial Purchaser
and each person who controls any Initial Purchaser within the meaning of the Act
or the Securities Exchange Act of 1934, as amended (the "Exchange Act") against
any and all losses, claims, damages or liabilities, joint or several, to which
they or any of them may become subject under the Act, the Exchange Act or other
federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the Preliminary Memorandum, the Final
Memorandum or in any amendment thereof or supplement thereto, or arise out of or
are based upon the omission or alleged omission to state therein, in light of
the circumstances under which they were made, a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and agree to reimburse
each such indemnified party, as incurred, for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
loss, claim, damage, liability or action; provided, however, that neither the
Company nor Palco will be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information furnished to
the Company or Palco by or on behalf of any Initial Purchaser specifically for
use in connection with the preparation thereof. Notwithstanding the foregoing,
the Company and Palco will not be liable to any Initial Purchaser in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission
made in any Preliminary Memorandum if (i) such Initial Purchaser failed to send
or deliver a copy of the Final Memorandum with or prior to the delivery of
written confirmation of the sale of Timber Notes and (ii) the Final Memorandum
would have corrected such untrue statement or alleged untrue statement or
omission; and the Company and Palco shall not be liable to any Initial Purchaser
in any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission in the Final Memorandum, if such untrue
statement or alleged untrue statement, omission or alleged omission is corrected
in an amendment or supplement to the Final Memorandum and if, having previously
been furnished by or on behalf of the Company (prior to the date of mailing by
such Initial Purchaser of the applicable confirmation), with a sufficient number
of copies of the Final Memorandum as so amended or supplemented, such Initial
Purchaser thereafter failed to deliver such Final Memorandum as so amended or
supplemented, prior to or concurrently with the sale of Timber Notes to the
person asserting such loss, claim, damage or liability who purchased such Timber
Notes which are the subject thereof from such Initial Purchaser. This indemnity
agreement will be in addition to any liability which the Company or Palco may
otherwise have.
(b) Each Initial Purchaser severally, but not jointly, agrees to
indemnify and hold harmless the Company and Palco, each of their directors,
officers, employees, partners, and agents, and each person who controls the
Company or Palco within the meaning of the Act or the Exchange Act, to the same
extent as the foregoing indemnity from the Company and Palco to each Initial
Purchaser, but only with reference to written information relating to such
Initial Purchaser furnished to the Company or Palco by or on behalf of such
Initial Purchaser specifically for use in the preparation of the documents
referred to in the foregoing indemnity. This indemnity agreement will be in
addition to any liability which any Initial Purchaser may otherwise have. The
Company and Palco acknowledge that the statements set forth in the last
paragraph of the cover page (relating to the delivery of the Timber Notes), and
the table of Initial Purchasers and the first two sentences of the second
paragraph following such table under the heading "Plan of Distribution"
constitute the only information furnished in writing by or on behalf of any
Initial Purchaser for inclusion in any Preliminary Memorandum or the Final
Memorandum, and you confirm that such statements are correct.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure to so notify the indemnifying party (i)
will not relieve it from liability under paragraph (a) or (b) above unless and
to the extent it did not otherwise learn of such action and such failure results
in the forfeiture by the indemnifying party of substantial rights and/or
defenses and (ii) will not, in any event, relieve the indemnifying party from
any obligations to any indemnified party other than the indemnification
obligation provided in paragraph (a) or (b) above. The indemnifying party shall
be entitled to appoint counsel of the indemnifying party's choice at the
indemnifying party's expense to represent the indemnified party in any action
for which indemnification is sought (in which case the indemnifying party shall
not thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
provided, however, that such counsel shall be reasonably satisfactory to the
indemnified party. Notwithstanding the indemnifying party's election to appoint
counsel to represent the indemnified party in an action, the indemnified party
shall have the right to employ separate counsel (including local counsel), and
the indemnifying party shall bear the reasonable fees, costs and expenses of
such separate counsel if (i) the use of counsel chosen by the indemnifying party
to represent the indemnified party would present such counsel with a conflict of
interest, (ii) the actual or potential defendants in, or targets of, any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, (iii) the
indemnifying party shall not have employed counsel reasonably satisfactory to
the indemnified party to represent the indemnified party within a reasonable
time after notice of the institution of such action or (iv) the indemnifying
party shall authorize the indemnified party to employ separate counsel at the
expense of the indemnifying party. An indemnifying party will not, without the
prior written consent of the indemnified parties, settle or compromise or
consent to the entry of any judgment with respect to any pending or threatened
claim, action, suit or proceeding in respect of which indemnification or
contribution may be sought hereunder (whether or not the indemnified parties are
actual or potential parties to such claim or action) unless such settlement,
compromise or consent includes an unconditional release of each indemnified
party from all liability arising out of such claim, action, suit or proceeding.
So long as the indemnifying parties are honoring their indemnification
obligations under this Section 8, an indemnified party will not, without the
prior written consent of the indemnifying parties, settle or compromise or
consent to the entry of any judgment with respect to any pending or threatened
claim, action, suit or proceeding in respect of which indemnification or
contribution may be sought hereunder (whether or not the indemnifying parties
are actual or potential parties to such claim or action) unless such settlement,
compromise or consent includes an unconditional release of each indemnifying
party from all liability arising out of such claim, action, suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a) or
(b) of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company, Palco and the Initial Purchasers
agree to contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection with
investigating or defending same) (collectively "Losses") to which the Company,
Palco and any of the Initial Purchasers may be subject in such proportion as is
appropriate to reflect the relative benefits received by the Company and Palco,
on the one hand, and by the Initial Purchasers, on the other hand, from the
offering of the Timber Notes; provided, however, that in no case shall any
Initial Purchaser be responsible for any amount in excess of the sum of (i) the
discount applicable to the Timber Notes purchased by such Initial Purchasers
hereunder and (ii) any structuring fee paid to such Initial Purchaser pursuant
to Section 14 hereof. If the allocation provided by the immediately preceding
sentence is unavailable for any reason, the Company, Palco and the Initial
Purchasers shall contribute in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of the Company and
Palco, on the one hand, and of the Initial Purchasers, on the other hand, in
connection with the statement or omissions which resulted in such Losses as well
as any other relevant equitable considerations. Benefits received by the Company
and Palco shall be deemed to be equal to the total net proceeds from the
offering as set forth on the cover page of the Final Memorandum (net of the
structuring fee, but before deducting any other expenses), and benefits received
by the Initial Purchasers shall be deemed to be equal to the sum of (i) the
total purchase discounts and commissions, as set forth on the cover page of the
Final Memorandum, plus (ii) the structuring fee paid pursuant to Section 14
hereof. Relative fault shall be determined by reference to whether any alleged
untrue statement or omission relates to information provided by the Company or
Palco, on the one hand, or the Initial Purchasers, on the other hand. The
Company, Palco and the Initial Purchasers agree that it would not be just and
equitable if contribution were determined by pro rata allocation or any other
method of allocation which does not take account of the equitable considerations
referred to above. Notwithstanding the provisions of this paragraph (d), no
person guilty of fraudulent misrepresentation (within the meaning of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 8, each person who
controls an Initial Purchaser within the meaning of either the Act or the
Exchange Act and each director, officer, employee and agent of an Initial
Purchaser shall have the same rights to contribution as such Initial Purchaser,
and each person who controls the Company or Palco within the meaning of either
the Act or the Exchange Act, each executive officer of the Company or Palco and
each manager or director of the Company or Palco shall have the same rights to
contribution as the Company or Palco, as the case may be, subject in each case
to the applicable terms and conditions of this paragraph (d).
9. Default by an Initial Purchaser. If any Initial Purchaser shall
fail to purchase and pay for any of the Timber Notes agreed to be purchased by
such Initial Purchaser hereunder and such failure to purchase shall constitute a
default in the performance of its obligations under this Agreement, the
remaining Initial Purchasers shall be obligated to take up and pay for the
Timber Notes which the defaulting Initial Purchasers agreed but failed to
purchase; provided, however, that in the event that the aggregate amount of
Timber Notes which the defaulting Initial Purchaser agreed but failed to
purchase shall exceed 10% of the aggregate amount of the Timber Notes set forth
in Schedule I hereto, the remaining Initial Purchasers shall have the right to
purchase all, but shall not be under any obligation to purchase any, of the
Timber Notes, and if such non-defaulting Initial Purchasers do not purchase all
the Timber Notes, this Agreement will terminate without liability to any
non-defaulting Initial Purchaser or the Company. In the event of a default by
any Initial Purchaser as set forth in this Section 9, the Closing Date shall be
postponed for such period, not exceeding seven days, as the Representative shall
determine in order that the required changes in the Final Memorandum or in any
other documents or arrangements may be effected. Nothing contained in this
Agreement shall relieve any defaulting Initial Purchaser of its liability, if
any, to the Company or Palco, and any non-defaulting Initial Purchaser, for
damages occasioned by its default hereunder.
10. Termination. This Agreement shall be subject to termination in the
absolute discretion of the Initial Purchasers, by notice given to the Company
and Palco prior to delivery of and payment for the Timber Notes, if prior to
such time (i) trading in securities generally on the New York Stock Exchange,
the American Stock Exchange or the Nasdaq Stock Market's National Market shall
have been suspended or limited or minimum prices shall have been established on
either of such Exchanges or Market or (ii) a banking moratorium shall have been
declared by either federal or New York State authorities or (iii) there shall
have occurred any outbreak or escalation of hostilities, declaration by the
United States of a national emergency or war or other calamity or crisis the
effect of which on the financial markets is such as to make it, in the judgment
of the Initial Purchasers, impracticable or inadvisable to proceed with the
offering or delivery of the Timber Notes as contemplated by the Final Memorandum
(exclusive of any supplement thereto).
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or Palco or their officers and of the Initial Purchasers set forth in or
made pursuant to this Agreement will remain in full force and effect, regardless
of any investigation made by or on behalf of any Initial Purchaser or the
Company or Palco or any of the officers, directors or controlling persons
referred to in Section 8 hereof, and will survive delivery of and payment for
the Timber Notes. The provisions of Sections 7 and 8 hereof shall survive the
termination or cancellation of this Agreement.
12. Notices. All communications hereunder will be in writing and
effective only on receipt, and, if sent to the Initial Purchasers, will be
mailed, delivered or telecopied and confirmed to them c/o Salomon Brothers Inc,
Seven World Trade Center, New York, New York, 10048 attention: Janice L. Warne,
Structured Finance, telecopy number 212-783- 2316; or, if sent to the Company,
will be mailed, delivered or telecopied and confirmed to it at 125 Main Street,
P.O. Box 712, Scotia, California 95565, Attention: Vice President, Finance and
Administration, telecopy number 707-764-4269, with a copy to 5847 San Felipe,
Suite 2600, Houston, Texas 77057, attention: General Counsel, telecopy number
713-267-3702; or, if sent to Palco, will be mailed, delivered or telecopied and
confirmed to it at 125 Main Street, P.O. Box 37, Scotia, California 95565,
Attention: Vice President, Finance and Administration, telecopy number
707-764-4269, with a copy to 5847 San Felipe, Suite 2600, Houston, Texas 77057,
attention: General Counsel, telecopy number 713-267-3702.
13. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the
officers, directors, employees, agents and controlling persons referred to in
Section 8 hereof, and, except as expressly set forth in Section 6(i) hereof, no
other person will have any right or obligation hereunder.
14. Structuring Fee. Upon the closing of the transactions contemplated
hereby, the Company will pay to Salomon Brothers Inc a structuring fee equal to
0.925% of the aggregate principal balance of the Timber Notes issued and sold
hereunder (which structuring fee shall be reflected in the purchase price
referred to in Section 2).
15. Applicable Law. This Agreement will be governed by and construed
in accordance with the laws of the State of New York, without regard to the
principles of conflicts of laws thereof.
16. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same instrument.
17. Headings. The section headings used herein are for convenience
only and shall not affect the construction hereof.
18. Definitions. The terms which follow, when used in this Agreement,
shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and the rules
and regulations of the Commission promulgated thereunder.
"Affiliate" shall have the meaning specified in Rule 501(b) of
Regulation D.
"AICPA" shall mean the American Institute of Certified Public
Accountants.
"Business Day" shall mean any day other than a Saturday, a Sunday or a
legal holiday or a day on which banking institutions or trust companies are
authorized or obligated by law to close in The City of New York or the
Commonwealth of Massachusetts.
"Closing Date" has the meaning set forth in Section 3 hereof.
"Commission" shall mean the U.S. Securities and Exchange
Commission.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated thereunder.
"Execution Time" shall mean, the date and time that this Agreement is
executed and delivered by the parties hereto.
"Investment Company Act" shall mean the Investment Company Act of
1940, as amended, and the rules and regulations of the Commission promulgated
thereunder.
"NASD" shall mean the National Association of Securities Dealers,
Inc.
"Material Adverse Effect," when applied to any entity, means any
material adverse effect on the condition (financial or otherwise), earnings,
business, assets, results of operations or prospects of such entity and its
subsidiaries, if any, taken as a whole.
"Regulation D" shall mean Regulation D under the Act.
"Regulation S" shall mean Regulation S under the Act.
"Trust Indenture Act" shall mean the Trust Indenture Act of 1939, as
amended, and the rules and regulations of the Commission promulgated thereunder.
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement between the
Company, Palco and the Initial Purchasers.
Very truly yours,
SCOTIA PACIFIC COMPANY LLC
By: /s/ Paul N. Schwartz
Name: Paul N. Schwartz
Title: Vice President
THE PACIFIC LUMBER COMPANY
By: /s/ Paul N. Schwartz
Name: Paul N. Schwartz
Title: Vice President and
Chief Financial Officer
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
SALOMON BROTHERS INC
BANCAMERICA ROBERTSON STEPHENS
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: SALOMON BROTHERS INC
as Representative
By: /s/ Janice L. Warne
Name: Janice L. Warne
Title: Managing Director
<PAGE>
SCHEDULE I
Principal Amount
of Timber Notes to be
Purchased
Initial Purchasers Class A-1 Class A-2 Class A-3
--------- --------- ---------
Salomon Brothers Inc $129,400,000 $195,800,000 $373,048,000
BancAmerica Robertson $14,100,000 $21,300,000 $40,500,000
Stevens
Bear, Stearns & Co., $14,100,000 $21,300,000 $40,500,000
Inc.
Donaldson, Lufkin &
Jenrette Securities
Corporation $3,100,000 $4,800,000 $9,300,000
---------- ---------- ----------
Total $160,700,000 $243,200,000 $463,348,000
<PAGE>
EXHIBIT A
Non-Distribution Letter for Institutional Accredited Investors
____________, 199_
Salomon Brothers Inc
As Representative of the
Initial Purchasers
Seven World Trade Center
New York, New York
Re: Purchase of approximately $____________ principal amount of ____%
Class [A-1] [A-2] [A-3] Timber Collateralized Notes (the Securities )
of Scotia Pacific Company LLC (the Company )
Ladies and Gentlemen:
In connection with our purchase of the Securities we confirm that:
1. We understand that the Securities are not being and will not
(except as set forth under the heading "Description of the Timber
Notes--Exchange Offer; Registration Rights" in the Offering Memorandum
dated July __, 1998 relating to the Securities (the Final Memorandum )) be
registered under the Securities Act of 1933, as amended (the Act ), and are
being sold to us in a transaction that is exempt from the registration
requirements of the Act.
2. We have such knowledge and experience in financial and business
matters as to be capable of evaluating the merits and risks of an investment in
the Securities, and we are (or any account for which we are purchasing under
paragraph 3 below is) an institutional accredited investor (within the meaning
of Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Act) able to bear
the economic risk of investment in the Securities.
3. We are acquiring the Securities for our own account (or for
accounts as to which we exercise sole investment discretion and have authority
to make, and do make, the statements contained in this letter) and not with a
view to any distribution of the Securities, subject, nevertheless, to the
understanding that the disposition of our property will at all times be and
remain within our control.
4. We understand that (a) the Securities will be in registered form
only and that any certificates delivered to us in respect of the Securities will
bear a legend substantially to the following effect:
"THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER ANY
STATE SECURITIES OR BLUE SKY LAW OF ANY STATE OF THE UNITED STATES OR ANY
FOREIGN SECURITIES LAW. THE HOLDER HEREOF, BY PURCHASING THIS NOTE, AGREES
FOR THE BENEFIT OF THE COMPANY AND THE TRUSTEE THAT THIS NOTE MAY BE
REOFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH
THE SECURITIES ACT AND OTHER APPLICABLE LAWS AND ONLY (1) PURSUANT TO RULE
144A UNDER THE SECURITIES ACT ("RULE 144A") TO AN INSTITUTIONAL INVESTOR
THAT THE HOLDER REASONABLY BELIEVES IS A QUALIFIED INSTITUT10NAL BUYER,
WITHIN THE MEANING OF RULE 144A ("QUALIFIED INSTITUTIONAL BUYER"),
PURCHASING FOR ITS OWN ACCOUNT OR A QUALIFIED INSTITUTIONAL BUYER
PURCHASING FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER, WHOM THE
HOLDER HAS INFORMED, IN EACH CASE, THAT THE REOFFER, RESALE, PLEDGE, OR
OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (2) IN AN OFFSHORE
TRANSACTION IN ACCORDANCE WITH RULE 903 OR 904 OF REGULATION S UNDER THE
SECURITIES ACT, (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY
RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), OR (4) IN CERTIFICATED
FORM TO AN "INSTITUTIONAL ACCREDITED INVESTOR" WITHIN THE MEANING THEREOF
IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT
PURSUANT TO ANY OTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT, SUBJECT, IN THE CASE OF TRANSFERS PURSUANT TO THIS CLAUSE
(4), TO (A) THE RECEIPT BY THE REGISTRAR OF A LETTER SUBSTANTIALLY IN THE
FORM PROVIDED IN THE INDENTURE OR (B) THE RECEIPT BY THE REGISTRAR OF SUCH
OTHER EVIDENCE ACCEPTABLE TO THE REGISTRAR THAT SUCH REOFFER, RESALE,
PLEDGE OR TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT AND OTHER
APPLICABLE LAWS OR (5) TO THE ISSUER OR ITS AFFILIATES."
and (b) the Company has agreed to reissue such certificates without
the foregoing legend only in the event of a disposition of the Securities in
accordance with the provisions of paragraph 6 below (provided, in the case of a
disposition of the Securities in accordance with paragraph 6(f) below, that the
legal opinion referred to in such paragraph so permits), or at our request at
such time as we would be permitted to dispose of them in accordance with
paragraph 6(a) below.
5. We understand that further offers or sales of these Securities are
subject to certain restrictions, as set forth in the Final Memorandum relating
to these Securities.
6. We agree that in the event that at some future time we wish to
dispose of any of the Securities, we will not do so unless such disposition is
made in accordance with any applicable securities laws of any state of the
United States and:
(a) the Securities are sold in compliance with Rule 144(k) under
the Act; or
(b) the Securities are sold in compliance with Rule 144A under the
Act; or
(c) the Securities are sold in compliance with Rule 904 of Regulation
S under the Act; or
(d) the Securities are sold pursuant to an effective registration
statement under the Act; or
(e) the Securities are sold to the Company or an affiliate (as defined
in Rule 501(b) of Regulation D) of the Company; or
(f) the Securities are disposed of in any other transaction that does
not require registration under the Act, and we theretofore have furnished to the
Company or its designee an opinion of counsel experienced in securities law
matters to such effect or such other documentation as the Company or its
designee may reasonably request.
Very truly yours,
By ______________________
(Authorized Officer)
REGISTRATION RIGHTS AGREEMENT
SCOTIA PACIFIC COMPANY LLC
July 20, 1998
SCOTIA PACIFIC COMPANY LLC
6.55% Class A-1 Timber Collateralized Notes
7.11% Class A-2 Timber Collateralized Notes
7.71% Class A-3 Timber Collateralized Notes
REGISTRATION RIGHTS AGREEMENT
New York, New York
July 20, 1998
Salomon Brothers Inc.
As Representative of the Initial Purchasers
Seven World Trade Center
New York, New York 10048
Dear Sirs:
Scotia Pacific Company LLC, a limited liability company organized
under the laws of the State of Delaware (the "Company"), proposes to issue and
sell to certain purchasers (the "Initial Purchasers"), upon the terms set forth
in a purchase agreement of even date herewith (the "Purchase Agreement"), its
6.55% Class A-1 Timber Collateralized Notes, 7.11% Class A-2 Timber
Collateralized Notes and 7.71% Class A-3 Timber Collateralized Notes
(collectively, the "Timber Notes") relating to the initial placement of the
Timber Notes (the "Initial Placement"). To induce the Initial Purchasers to
enter into the Purchase Agreement and to satisfy a condition of your obligations
thereunder, the Company agrees with you for your benefit and the benefit of the
holders from time to time of the Timber Notes (including the Initial Purchasers)
(each a "Holder" and, together, the "Holders"), as follows:
1. Definitions. Capitalized terms used herein without definition shall have
their respective meanings set forth in Schedule A to the Indenture and if not
defined therein, in the Purchase Agreement. As used in this Agreement, the
following capitalized defined terms shall have the following meanings:
"Act" shall mean the Securities Act of 1933, as amended, and the rules
and regulations of the Commission promulgated thereunder.
"Affiliate" of any specified Person shall mean any other Person that,
directly or indirectly, is in control of, is controlled by, or is under common
control with, such specified Person. For purposes of this definition, control of
a Person shall mean the power, direct or indirect, to direct or cause the
direction of the management and policies of such Person whether by contract or
otherwise; and the terms "controlling" and "controlled" shall have meanings
correlative to the foregoing.
"Broker-Dealer" shall mean any broker or dealer registered as such
under the Exchange Act.
"Business Day" shall mean any day other than a Saturday, a Sunday or a
legal holiday or a day on which banking institutions or trust companies are
authorized or obligated by law to close in New York City or the Commonwealth of
Massachusetts.
"Commission" shall mean the Securities and Exchange Commission.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated thereunder.
"Exchange Offer Registration Period" shall mean the 20 day period
following the consummation of the Registered Exchange Offer, exclusive of any
period during which any stop order shall be in effect suspending the
effectiveness of the Exchange Offer Registration Statement.
"Exchange Offer Registration Statement" shall mean a registration
statement of the Company on an appropriate form under the Act with respect to
the Registered Exchange Offer, all amendments and supplements to such
registration statement, including post-effective amendments thereto, in each
case including the Prospectus contained therein, all exhibits thereto and all
material incorporated by reference therein.
"Exchange Timber Notes" shall mean debt securities of the Company
identical in all material respects to the Timber Notes (except that the
Non-registration Premium provisions and the transfer restrictions shall be
modified or eliminated, as appropriate, and interest thereon shall accrue from
and including the last date to which interest was paid on the Timber Notes or,
if no such interest has been paid, from the Closing Date) to be issued under the
Indenture to Holders in exchange for Registrable Securities pursuant to the
Registered Exchange Offer.
"Exchanging Dealer" shall mean any Holder (which may include any
Initial Purchaser) that is a Broker-Dealer and elects to exchange any Timber
Notes that it acquired for its own account as a result of market-making
activities or other trading activities (but not directly from the Company or any
Affiliate of the Company) for Exchange Timber Notes.
"Final Memorandum" shall have the meaning set forth in the
Purchase Agreement.
"Holder" shall have the meaning set forth in the preamble hereto.
"Indenture" shall mean the Indenture relating to the Timber Notes,
dated as of July 20, 1998, between the Company and State Street Bank and Trust
Co., as trustee, as the same may be amended from time to time in accordance with
the terms thereof.
"Initial Placement" shall have the meaning set forth in the
preamble hereto.
"Initial Purchaser" shall have the meaning set forth in the
preamble hereto.
"Losses" shall have the meaning set forth in Section 6(d) hereof.
"Majority Holders" shall mean the Holders of a majority of the
aggregate principal amount of outstanding Registrable Securities.
"Managing Underwriters" shall mean the investment banker or investment
bankers and manager or managers that shall administer an underwritten offering.
"Prospectus" shall mean the prospectus included in any Registration
Statement (including, without limitation, a prospectus that discloses
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A under the Act), as amended or
supplemented by any prospectus supplement, with respect to the terms of the
offering of any portion of the Registrable Securities or the Exchange Timber
Notes covered by such Registration Statement, and all amendments and supplements
thereto and all material incorporated by reference therein.
"Purchase Agreement" shall have the meaning set forth in the
preamble hereto.
"Registered Exchange Offer" shall mean the proposed offer of the
Company to issue and deliver to the Holders of the Registrable Securities that
are not prohibited by any law or policy of the Commission from participating in
such offer, in exchange for the Registrable Securities of each Class, a like
aggregate principal amount of the Exchange Timber Notes of such Class.
"Registrable Securities" shall mean the Timber Notes; provided,
however, that Timber Notes shall cease to be Registrable Securities when (i)
such Timber Note has been exchanged for a freely tradeable Exchange Timber Note
upon consummation of the Registered Exchange Offer and are thereafter freely
tradeable by the holder thereof not an affiliate of the Company, (ii) a
Registration Statement with respect to such Timber Notes shall have been
declared effective under the Act and such Timber Notes shall have been disposed
of pursuant to such Registration Statement, (iii) such Timber Notes shall have
been sold to the public in compliance with Rule 144 (or any similar provision
then in force) under the Act or is saleable pursuant to Rule 144(k) under the
Act, or (iv) such Timber Notes shall have ceased to be outstanding.
"Registration Statement" shall mean any Exchange Offer
Registration Statement or Shelf Registration Statement.
"Timber Notes" shall have the meaning set forth in the preamble
hereto.
"Shelf Registration" shall mean a registration effected pursuant to
Section 3 hereof.
"Shelf Registration Period" has the meaning set forth in Section
3(b) hereof.
"Shelf Registration Statement" shall mean a "shelf" registration
statement of the Company pursuant to the provisions of Section 3 hereof which
covers some or all of the Registrable Securities or Exchange Timber Notes, as
applicable, on an appropriate form under Rule 415 under the Act, or any similar
rule that may be adopted by the Commission, amendments and supplements to such
registration statement, including post-effective amendments, in each case
including the Prospectus contained therein, all exhibits thereto and all
material incorporated by reference therein.
"Trustee" shall mean the trustee with respect to the Timber Notes
under the Indenture.
"underwriter" shall mean any underwriter of Registrable
Securities in connection with an offering thereof under a Shelf Registration
Statement.
2. Registered Exchange Offer. (a) The Company shall prepare and, not
later than 90 days following the date of the original issuance of the Timber
Notes (or if such 90th day is not a Business Day, the next succeeding Business
Day), shall file with the Commission the Exchange Offer Registration Statement
with respect to the Registered Exchange Offer. The Company shall use its
reasonable best efforts to cause the Exchange Offer Registration Statement to
become effective under the Act within 180 days of the date of the original
issuance of the Timber Notes (or if such 180th day is not a Business Day, the
next succeeding Business Day).
(b) on the effectiveness of the Exchange Offer Registration Statement,
the Company shall as promptly as practicable commence the Registered Exchange
Offer, it being the objective of such Registered Exchange Offer to enable each
Holder electing to exchange Registrable Securities for Exchange Timber Notes
(assuming that such Holder is not an Affiliate of the Company, acquires the
Exchange Timber Notes in the ordinary course of such Holder's business, has no
arrangements with any Person to participate in the distribution of the Exchange
Timber Notes and is not prohibited by any law or policy of the Commission from
participating in the Registered Exchange Offer) to trade such Exchange Timber
Notes from and after their receipt, subject to prospectus delivery requirements
of Broker-Dealers, without any limitations or restrictions under the Act and
without material restrictions under the securities laws of the states of the
United States.
(c) In connection with the Registered Exchange Offer, the Company
shall:
(i) mail to each Holder a copy of the Prospectus forming part of
the Exchange Offer Registration Statement, together with an appropriate
letter of transmittal and related documents;
(ii) keep the Registered Exchange Offer open for not less than 20
days after the date notice thereof is mailed to the Holders (or longer if
required by applicable law);
(iii) use its reasonable best efforts to keep the Exchange Offer
Registration Statement continuously effective under the Act, supplemented
and amended as required, under the Act to ensure that it is available for
sales of Exchange Timber Notes during the Exchange Offer Registration
Period;
(iv) utilize the services of a depositary for the Registered
Exchange Offer with an address in the Borough of Manhattan in New York
City, which may be the Trustee or an Affiliate of the Trustee;
(v) permit Holders to withdraw tendered Registrable Securities at
any time prior to the close of business, New York time, on the last
Business Day on which the Registered Exchange Offer is open by sending to
the institution specified in the notice, a telegram, telex, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Registrable Securities delivered for exchange, and a statement
that such Holder is withdrawing his election to have such Registrable
Securities exchanged;
(vi) prior to effectiveness of the Exchange Offer Registration
Statement, provide a supplemental letter to the Commission (A) stating that
the Company is conducting the Registered Exchange Offer in reliance on the
position of the Commission in Exxon Capital Holdings Corporation (pub.
avail. May 13, 1988), and Morgan Stanley and Co., Inc. (pub. avail. June 5,
1991); and (B) including a representation that the Company has not entered
into any arrangement or understanding with any Person to distribute the
Exchange Timber Notes to be received in the Registered Exchange Offer and
that, to the best of the Company's information and belief, each Holder
participating in the Registered Exchange Offer is acquiring the Exchange
Timber Notes in the ordinary course of business and has no arrangement or
understanding with any Person to participate in the distribution of the
Exchange Timber Notes; and
(vii) comply in all material respects with all applicable laws
relating to the Registered Exchange Offer.
(d) As soon as practicable after the close of the Registered Exchange
Offer, the Company shall:
(i) accept for exchange all Registrable Securities tendered and
not validly withdrawn pursuant to the Registered Exchange Offer;
(ii) deliver, or cause to be delivered, to the Trustee for
cancellation in accordance with Section 4(s) all Registrable Securities so
accepted for exchange by the Company; and
(iii) cause the Trustee under the Indenture promptly to
authenticate and deliver to each Holder a principal amount of Exchange
Timber Notes equal to the principal amount of the Registrable Securities of
such Holder so accepted for exchange.
(e) Each Holder hereby acknowledges and agrees that any Broker- Dealer
and any such Holder using the Registered Exchange Offer to participate in a
distribution of the Exchange Timber Notes (x) could not under Commission policy
as in effect on the date of this Agreement rely on the position of the
Commission in Morgan Stanley and Co., Inc. (avail. June 5, 1991) and Exxon
Capital Holdings Corporation (avail. May 13, 1988), as interpreted in the
Commission's letter to Shearman & Sterling dated July 2, 1993 and similar
no-action letters; and (y) must comply with the registration and prospectus
delivery requirements of the Act in connection with any secondary resale
transaction that must be covered by an effective registration statement
containing the selling security holder information required by Item 507 or 508,
as applicable, of Regulation S-K under the Act if the resales are of Exchange
Timber Notes obtained by such Holder in exchange for Registrable Securities
acquired by such Holder directly from the Company or one of its Affiliates.
Accordingly, each Holder participating in the Registered Exchange Offer shall be
required to represent in writing to the Company that, at the time of the
consummation of the Registered Exchange Offer:
(i) any Exchange Timber Notes received by such Holder will be
acquired in the ordinary course of business;
(ii) such Holder will have no arrangement or understanding with
any Person to participate in the distribution of the Exchange Timber Notes
within the meaning of the Act; and
(iii) such Holder is not an Affiliate of the Company;
(iv) such Holder is not a Broker-Dealer tendering Registrable
Securities acquired directly from the Company or an affiliate of the
Company; and
(v) such Holder is not acting on behalf of any person who could
not truthfully make the foregoing representations.
(f) If any Initial Purchaser determines that it is not eligible to
participate in the Registered Exchange Offer with respect to the exchange of
Registrable Securities constituting any portion of an unsold allotment, at the
request of such Initial Purchaser, the Company shall issue and deliver to such
Initial Purchaser, to the extent permitted by applicable law, or the Person
purchasing Exchange Timber Notes registered under a Shelf Registration Statement
as contemplated by Section 3 hereof from such Initial Purchaser, in exchange for
such Registrable Securities, a like principal amount of exchange timber notes
that will, upon sale pursuant to a Shelf Registration Statement become Exchange
Timber Notes. The Company shall use its best efforts to cause the CUSIP Service
Bureau to issue the same CUSIP number for such Exchange Timber Notes as for
Exchange Timber Notes issued pursuant to the Registered Exchange Offer.
3. Shelf Registration. (a) If (i) because of any change in law or
applicable interpretations thereof by the Commission's staff, the Company
determines upon advice of its counsel that it is not permitted to effect the
Registered Exchange Offer as contemplated by Section 2 hereof; (ii) for any
other reason the Exchange Offer Registration Statement is not declared effective
within 180 days of the Closing Date or the Registered Exchange Offer is not
consummated within 240 days of the Closing Date; (iii) any Initial Purchaser so
requests with respect to Registrable Securities that are not eligible to be
exchanged for Exchange Timber Notes in the Registered Exchange Offer or the
Initial Purchasers do not receive freely tradeable Exchange Timber Notes in the
Registered Exchange Offer; (iv) any Holder notifies the Company in writing
within 15 days after receipt of the Prospectus forming part of the Exchange
Offer Registration Statement that (A) in the opinion of nationally-recognized
counsel for such Holder (or counsel acting for or by reference to all Holders),
due to a change in law or Commission staff interpretation which change occurs
subsequent to the date hereof, such Holder is not entitled to participate in the
Registered Exchange Offer or (B) in the opinion of nationally-recognized counsel
for such Holder (or counsel acting for or by reference to all Holders), due to a
change in law or Commission staff interpretation which change occurs subsequent
to the date hereof, such Holder may not resell the Exchange Timber Notes
acquired by it in the Registered Exchange Offer to the public without delivering
a Prospectus and (x) the Prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales by such Holder and
(y) such Prospectus is not promptly amended or modified in order to be suitable
for use in connection with resales by such Holder; (v) any Holder (other than an
Initial Purchaser) of Registrable Securities is not eligible to participate in
the Registered Exchange Offer or such Holder does not receive freely tradeable
Exchange Timber Notes in the Registered Exchange Offer other than by reason of
such Holder being an Affiliate of the Company (it being understood that (x) the
requirement that an Initial Purchaser deliver a Prospectus containing the
information required by Item 507 or 508 of Regulation S-K under the Act in
connection with sales of Exchange Timber Notes acquired in exchange for such
Registrable Securities shall not result in such Exchange Timber Notes being not
"freely tradeable" and (y) the requirement that an Exchanging Dealer deliver a
Prospectus in connection with sales of Exchange Timber Notes acquired in the
Registered Exchange Offer in exchange for Timber Notes acquired as a result of
market-making activities or other trading activities shall not result in such
Exchange Timber Notes being not "freely treadable") or (vi) the Company so
elects, the Company shall effect a Shelf Registration Statement in accordance
with subsection (b) below.
(b) The Company shall as promptly as practicable file with the
Commission and thereafter shall use its reasonable best efforts to cause to be
declared effective under the Act a Shelf Registration Statement relating to the
offer and sale of the Registrable Securities or the Exchange Timber Notes, as
applicable, by the Holders thereof from time to time in accordance with the
methods of distribution elected by such Holders and set forth in such Shelf
Registration Statement; provided, however, that no Holder shall be entitled to
have the Registrable Securities held by it covered by such Shelf Registration
Statement unless such Holder agrees in writing to be bound by all of the
provisions of this Agreement applicable to such Holder and furnishes to the
Company in writing such information as the Company may reasonably request for
inclusion in any Shelf Registration Statement or Prospectus included therein
with regard to information relating to such Holders; and provided further, that
with respect to Exchange Timber Notes received by an Initial Purchaser in
exchange for Registrable Securities constituting any portion of an unsold
allotment, the Company may, if permitted by current interpretations by the
Commission's staff, file a post-effective amendment to the Exchange Offer
Registration Statement containing the information required by Item 507 or 508 of
Regulation S-K, as applicable, in satisfaction of its obligations under this
subsection with respect thereto, and any such Exchange Offer Registration
Statement, as so amended, shall be referred to herein as, and governed by the
provisions herein applicable to, a Shelf Registration Statement.
(i) The Company shall use its reasonable best efforts to keep the
Shelf Registration Statement continuously effective, supplemented and
amended as required by the Act, in order to permit the Prospectus forming
part thereof to be usable by Holders for a period of two years from the
Closing Date or for such shorter period which will terminate when all of
the Registrable Securities covered by the Shelf Registration Statement have
been sold pursuant to the Shelf Registration Statement or otherwise cease
to be Registrable Securities (such period being called the "Shelf
Registration Period"). The Company shall be deemed not to have used its
reasonable best efforts to keep the Shelf Registration Statement effective
during the requisite period if it voluntarily takes any action that would
result in Holders of Registrable Securities covered thereby not being able
to offer and sell such Registrable Securities during that period, unless
(A) such action is required by applicable law or interpretations of the
staff of the Commission; or (B) such action is taken by the
Company in good faith and for valid business reasons (not including
avoidance of the Company's obligations hereunder), including the
acquisition or divestiture of assets.
(ii) The Company shall cause the Shelf Registration Statement and
the related Prospectus and any amendment or supplement thereto, as of the
effective date of the Shelf Registration Statement or such amendment or
supplement, (A) to comply in all material respects with the applicable
requirements of the Act and the rules and regulations of the Commission;
and (B) not to contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order
to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
4. Additional Registration Procedures. In connection with any Shelf
Registration Statement and, to the extent applicable, any Exchange Offer
Registration Statement, the following provisions shall apply.
(a) The Company shall:
(i) furnish to you, in a time and manner that presents reasonable
opportunity for review and comment thereof with the Commission, a copy of
any Exchange Offer Registration Statement and any Shelf Registration
Statement, and each amendment thereof and each amendment or supplement, if
any, to the Prospectus included therein (including all documents
incorporated by reference therein after the initial filing) and shall use
its reasonable best efforts to reflect in each such document, when so filed
with the Commission, such comments as you reasonably propose;
(ii) include the information set forth in Annex A hereto on the
facing page of the Exchange Offer Registration Statement, in Annex B hereto
in the forepart of the Exchange Offer Registration Statement in a section
setting forth details of the Exchange Offer, in Annex C hereto in the
underwriting or plan of distribution section of the Prospectus contained in
the Exchange Offer Registration Statement, and in Annex D hereto in the
letter of transmittal delivered pursuant to the Registered Exchange Offer;
(iii) if requested by an Initial Purchaser, include the
information required by Item 507 or 508 of Regulation S-K, as applicable,
in the Prospectus contained in the Exchange Offer Registration Statement;
and
(iv) in the case of a Shelf Registration Statement, include the
names of the Holders that propose to sell Registrable Securities pursuant
to the Shelf Registration Statement as selling security holders.
(b) The Company shall ensure that:
(i) any Registration Statement and any amendment thereto and any
Prospectus forming part thereof and any amendment or supplement thereto
complies in all material respects with the Act and the rules and
regulations thereunder;
(ii) any Registration Statement and any amendment thereto does
not, when it becomes effective, contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading (excluding
statements or omission made in reliance upon and in conformity with written
information furnished to the Company by any Holder, any Broker-Dealer or
any underwriter with respect to either such Holder, Broker-Dealer or
underwriter, as the case may be, expressly for use in the Registration
Statement (or any amendment thereto)); and
(iii) any Prospectus forming part of any Registration Statement
and any amendment or supplement to such Prospectus do not include an untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading (excluding statements or
omission made in reliance upon and in conformity with written information
furnished to the Company by any Holder, any Broker-Dealer or any
underwriter with respect to either such Holder, Broker-Dealer or
underwriter, as the case may be, expressly for use in any Prospectus (or
amendment or supplement thereto)).
(c) The Company shall advise you, the Holders of Registrable
Securities covered by any Shelf Registration Statement and any Exchanging Dealer
under any Exchange Offer Registration Statement that has provided in writing to
the Company a telephone or facsimile number and address for notices, and, if
requested by you or any such Holder or Exchanging Dealer, shall confirm such
advice in writing (which notice pursuant to clauses (ii)-(v) hereof shall be
accompanied by an instruction to suspend the use of the Prospectus until the
Company shall have remedied the basis for such suspension):
(i) when a Registration Statement and any amendment thereto has
been filed with the Commission and when the Registration Statement or any
post-effective amendment thereto has become effective;
(ii) of any request by the Commission for any amendment or
supplement to the Registration Statement or the Prospectus or for
additional information;
(iii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose;
(iv) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the securities included
therein for sale in any jurisdiction or the initiation of any proceeding
for such purpose; and
(v) of the happening of any event that requires any change in the
Registration Statement or the Prospectus so that, as of such date, the
statements therein are not misleading and do not omit to state a material
fact required to be stated therein or necessary to make the statements
therein (in the case of the Prospectus, in the light of the circumstances
under which they were made) not misleading.
(d) The Company shall use its reasonable best efforts to obtain the
withdrawal of any order suspending the effectiveness of any Registration
Statement or the qualification of the securities therein for sale in any
jurisdiction at the earliest possible time.
(e) The Company shall furnish to each Holder of Registrable Securities
covered by any Shelf Registration Statement, without charge, at least one copy
of such Shelf Registration Statement and any post-effective amendment thereto,
and, if the Holder so requests in writing, all material incorporated therein by
reference, and all exhibits thereto (including exhibits incorporated by
reference therein).
(f) The Company shall, during the Shelf Registration Period, deliver
to each Holder of Registrable Securities covered by any Shelf Registration
Statement, without charge, as many copies of the Prospectus (including each
preliminary Prospectus) included in such Shelf Registration Statement and any
amendment or supplement thereto as such Holder may reasonably request. The
Company consents to the use of the Prospectus or any amendment or supplement
thereto by each of the selling Holders of securities in connection with the
offering and sale of the securities covered by the Prospectus, or any amendment
or supplement thereto, included in the Shelf Registration Statement.
(g) The Company shall furnish to each Exchanging Dealer which so
requests, without charge, at least one copy of the Exchange Offer Registration
Statement and any post-effective amendment thereto, and, if the Exchanging
Dealer so requests in writing, all material incorporated by reference therein,
and all exhibits thereto (including exhibits incorporated by reference therein).
(h) If required under applicable securities laws, upon prior written
request, the Company shall make available for a period of 90 days after the
consummation of the Registered Exchange Offer, to each Initial Purchaser, each
Exchanging Dealer and each other Person required to deliver a Prospectus during
the Exchange Offer Registration Period, without charge, as many copies of the
Prospectus included in such Exchange Offer Registration Statement and any
amendment or supplement thereto as any such Person may reasonably request. The
Company consents to the use of the Prospectus or any amendment or supplement
thereto by any Initial Purchaser, any Exchanging Dealer and any such other
Person that may be required to deliver a Prospectus following the Registered
Exchange Offer in connection with the offering and sale of the Exchange Timber
Notes covered by the Prospectus, or any amendment or supplement thereto,
included in the Exchange Offer Registration Statement.
(i) Prior to the Registered Exchange Offer or any other offering of
Registrable Securities pursuant to any Registration Statement, the Company shall
use its reasonable best efforts to arrange, if necessary, for the qualification
of the Registrable Securities or the Exchange Timber Notes for sale under the
laws of such jurisdictions as any Holder shall reasonably request and will
maintain such qualification in effect so long as required; provided that in no
event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not then so qualified or to take any action that would
subject it to service of process in suits, in any such jurisdiction where it is
not then so subject.
(j) The Company shall cooperate with the Holders of Registrable
Securities to facilitate the timely preparation and delivery of certificates
representing Exchange Timber Notes or Timber Notes to be issued or sold pursuant
to any Registration Statement free of any restrictive legends and in such
denominations (consistent with the provisions of the Indenture) and registered
in such names as Holders may reasonably request at least two Business Days prior
to closing of a sale.
(k) Upon the occurrence of any event contemplated by subsections
(c)(ii) through (v) above, the Company shall promptly prepare a post-effective
amendment to the applicable Registration Statement or an amendment or supplement
to the related Prospectus or file any other required document so that, as
thereafter delivered to Initial Purchasers of the securities included therein,
the Prospectus will not include an untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading. In such
circumstances, the period of effectiveness of the Exchange Offer Registration
Statement provided for in Section 2 and the Shelf Registration Statement
provided for in Section 3(b) shall each be extended by the number of days from
and including the date of the giving of a notice of suspension pursuant to
Section 4(c) to and including the date when such amended or supplemented
Prospectus pursuant to this Section was sent to the Initial Purchasers, the
Holders of the Registrable Securities and any known Exchanging Dealer.
(l) Not later than the effective date of any Registration Statement,
the Company shall provide a CUSIP number for the Registrable Securities or the
Exchange Timber Notes, as the case may be, registered under such Registration
Statement and provide the Trustee with printed certificates for such Registrable
Securities or Exchange Timber Notes, in a form eligible for deposit with The
Depository Trust Company.
(m) The Company shall comply with all applicable rules and regulations
of the Commission and shall make generally available to its security holders as
soon as practicable after the effective date of the applicable Registration
Statement an earnings statement satisfying the provisions of Section 11(a) of
the Act.
(n) The Company shall cause the Indenture to be qualified under the
Trust Indenture Act in a timely manner.
(o) The Company may require each Holder of securities to be sold
pursuant to any Shelf Registration Statement to furnish to the Company such
information regarding the Holder and the distribution of such securities as the
Company may from time to time reasonably require for inclusion in such
Registration Statement. The Company may exclude from such Shelf Registration
Statement the Registrable Securities of any Holder that unreasonably fails to
furnish such information within a reasonable time after receiving such request.
(p) In the case of any Shelf Registration Statement, the Company shall
enter into such agreements and take all other appropriate actions (including if
requested an underwriting agreement in customary form) in order to expedite or
facilitate the registration or the disposition of the Registrable Securities,
and in connection therewith, if an underwriting agreement is entered into, cause
the same to contain indemnification provisions and procedures no less favorable
than those set forth in Section 6 (or such other provisions and procedures
acceptable to the Majority Holders and the Managing Underwriters, if any, with
respect to all parties to be indemnified pursuant to Section 6).
(q) In the case of any Shelf Registration Statement, the Company
shall:
(i) make reasonably available for inspection during normal
business hours by the Holders of Registrable Securities to be registered
thereunder, any underwriter participating in any disposition pursuant to
such Registration Statement, and any attorney, accountant or other agent
retained by the Holders or any such underwriter all relevant financial and
other records, pertinent corporate documents and properties of the Company
and its subsidiaries as shall be reasonably necessary to enable such
persons to exercise any applicable due diligence responsibilities;
(ii) cause the Company's officers, managers and employees to
supply all relevant information reasonably requested by the Holders or any
such underwriter, attorney, accountant or agent in connection with any such
Registration Statement as is customary for similar due diligence
examinations; provided, however, that any information that is designated in
writing by the Company, in good faith, as confidential at the time of
delivery of such information shall be kept confidential by the Holders or
any such underwriter, attorney, accountant or agent, unless such disclosure
is made in connection with a court proceeding or required by law, or such
information becomes available to the public generally or through a third
party without an accompanying obligation of confidentiality, in which case
the Company will be given prompt notice and will be entitled to take
appropriate action to prevent disclosure of such information; and
(iii) make such representations and warranties to the Holders of
Registrable Securities registered thereunder and the underwriters, if any,
in form, substance and scope as are customarily made by issuers in
offerings pursuant to shelf registrations and covering matters including,
but not limited to, those set forth in the Purchase Agreement.
(iv) obtain opinions of counsel to the Company and updates
thereof (which counsel and opinions (in form, scope and substance) shall be
reasonably satisfactory to the Managing Underwriters, if any)
addressed to each selling Holder and the underwriters, if any, covering
such matters as are customarily covered in opinions requested in offerings
pursuant to shelf registrations and such other matters as may be reasonably
requested by such Holders and underwriters;
(v) obtain "cold comfort" letters and updates thereof from the
independent certified public accountants of the Company and Palco, (and, if
necessary, any other independent certified public accountants of any
subsidiary of the Company or Palco of any business acquired by the Company
or Palco for which financial statements and financial data are, or are
required to be, included in the Registration Statement), addressed to each
selling Holder of Registrable Securities registered hereunder and the
underwriters, if any, in customary form and covering matters of the type
customarily covered in "cold comfort" letters in connection with offerings
pursuant to shelf registrations ; or if requested by such Initial Purchaser
or its counsel in lieu of or in addition to a "cold comfort" letter, an
agreed-upon procedures letter under Statement on Auditing Standards No. 35,
covering matters requested by such Initial Purchaser or its counsel; and
(vi) deliver such documents and certificates as may be reasonably
requested by the Majority Holders and the Managing Underwriters, if any,
including those to evidence compliance with Section 4(k) and with any
customary conditions contained in the underwriting agreement or other
agreement entered into by the Company.
The actions set forth in clauses (iii), (iv), (v) and (vi) of this Section shall
be performed at (A) the effectiveness of such Registration Statement and each
post-effective amendment thereto; and (B) each closing under any underwriting or
similar agreement as and to the extent required thereunder.
(r) In the case of any Exchange Offer Registration Statement, the
Company shall:
(i) make reasonably available for inspection during normal
business hours by such Initial Purchaser, and any attorney, accountant or
other agent retained by such Initial Purchaser, all relevant financial and
other records, pertinent corporate documents and properties of the Company
and its subsidiaries as shall be reasonably necessary to enable such
persons to exercise any applicable due diligence responsibilities;
(ii) cause the Company's officers, managers, and employees to
supply all relevant information reasonably requested by such Initial
Purchaser or any such attorney, accountant or agent in connection with any
such Registration Statement as is customary for similar due diligence
examinations; provided, however, that any information that is designated in
writing by the Company, in good faith, as confidential at the time of
delivery of such information shall be kept confidential by such Initial
Purchaser or any such attorney, accountant or agent, unless such disclosure
is made in connection with a court proceeding or required by law, or such
information becomes available to the public generally or through a third
party without an accompanying obligation of confidentiality, in which case
the Company will be given prompt notice and will be entitled to take
appropriate action to prevent disclosure of such information; and
(iii) make such representations and warranties to such Initial
Purchaser, in form, substance and scope as are customarily made by issuers
to underwriters in primary underwritten offerings and covering matters
including, but not limited to, those set forth in the Purchase Agreement.
(s) If a Registered Exchange Offer is to be consummated, upon delivery
of the Registrable Securities by Holders to the Company (or to such other Person
as directed by the Company) in exchange for the Exchange Timber Notes, the
Company shall mark, or caused to be marked, on the Registrable Securities so
exchanged that such Registrable Securities are being canceled in exchange for
the Exchange Timber Notes. In no event shall the Timber Notes be marked as paid
or otherwise satisfied.
(t) The Company will use its best efforts to cause the Registrable
Securities covered by a Registration Statement to be rated by the Rating
Agencies, if so requested by Majority Holders with respect to the related
Registration Statement or by any Initial Purchaser.
(u) In the event that any Broker-Dealer shall underwrite any
Registrable Securities or participate as a member of an underwriting syndicate
or selling group or "assist in the distribution" (within the meaning of the
Rules of Fair Practice and the By-Laws of the National Association of Securities
Dealers, Inc.) thereof, whether as a Holder of such Registrable Securities or as
an underwriter, a placement or sales agent or a broker or dealer in respect
thereof, or otherwise, the Company shall assist such Broker-Dealer in complying
with the requirements of such Rules and By-Laws, including, without limitation,
by:
(i) if such Rules or By-Laws shall so require, engaging a
"qualified independent underwriter" (as defined in such Rules) to
participate in the preparation of the Registration Statement, to
exercise usual standards of due diligence with respect thereto;
(ii) indemnifying any such qualified independent underwriter to
the extent of the indemnification of underwriters provided in Section 6
hereof; and
(iii) providing such information to such Broker-Dealer as may be
required in order for such Broker-Dealer to comply with the requirements of
such Rules.
(v) The Company shall use its reasonable best efforts to take all
other steps necessary to effect the registration of the Registrable Securities
or the Exchange Timber Notes, as the case may be, covered by a Registration
Statement.
5. Registration Expenses. The Company shall bear all expenses incurred
in connection with the performance of its obligations under Sections 2, 3 and 4
hereof and, in the event of any Shelf Registration Statement, will reimburse the
Holders for the reasonable fees and disbursements of one firm or counsel
designated by the Majority Holders to act as counsel for the Holders in
connection therewith, and, in the case of any Exchange Offer Registration
Statement, will reimburse the Initial Purchasers for the reasonable fees and
disbursements of one counsel acting in connection therewith.
6. Indemnification and Contribution. (a) The Company and Palco jointly
and severally agree to indemnify and hold harmless each Holder of Registrable
Securities or Exchange Timber Notes, as the case may be, covered by any
Registration Statement (including each Initial Purchaser and, with respect to
any Prospectus delivery as contemplated in Section 4(h) hereof, each Exchanging
Dealer), the directors, officers, employees and agents of each such Holder and
each Person who controls any such Holder within the meaning of either the Act or
the Exchange Act against any and all losses, claims, damages or liabilities,
joint or several, to which they or any of them may become subject under the Act,
the Exchange Act or other Federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement as
originally filed or in any amendment thereof, or in the Prospectus, or in any
amendment thereof or supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and agrees to reimburse each such
indemnified party, as incurred, for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that neither the Company
nor Palco will be liable in any case to the extent that any such loss, claim,
damage or liability arises out of or is based upon any such untrue statement or
alleged untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of any such Holder specifically for inclusion therein.
This indemnity agreement will be in addition to any liability which the Company
and Palco may otherwise have.
The Company and Palco, jointly and severally, further agree to
indemnify or contribute as provided in Section 6(d) to Losses of any underwriter
of Registrable Securities or Exchange Timber Notes, as the case may be,
registered under a Shelf Registration Statement, their directors, officers,
employees or agents and each Person who controls such underwriter on
substantially the same basis as that of the indemnification of the Initial
Purchasers and the selling Holders provided in this Section 6(a) and shall, if
requested by any Holder, enter into an underwriting agreement reflecting such
agreement, as provided in Section 4(p) hereof.
(b) Each Holder of securities covered by a Registration Statement
(including each Initial Purchaser and, with respect to any Prospectus delivery
as contemplated in Section 4(h) hereof, each Exchanging Dealer) severally agrees
to indemnify and hold harmless the Company, each of its managers, each of its
officers, employees and agents and each Person, if any, who controls the Company
within the meaning of either the Act or the Exchange Act, to the same extent as
the foregoing indemnity from the Company to each such Holder, but only with
reference to written information relating to such Holder furnished to the
Company by or on behalf of such Holder specifically for inclusion in the
documents referred to in the foregoing indemnity. This indemnity agreement will
be in addition to any liability which any such Holder may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
6 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section, notify the indemnifying party in writing of the commencement thereof;
but the failure so to notify the indemnifying party (i) will not relieve it from
liability under paragraph (a) or (b) above unless and to the extent it did not
otherwise learn of such action and such failure results in the forfeiture by the
indemnifying party of substantial rights and defenses; and (ii) will not, in any
event, relieve the indemnifying party from any obligations to any indemnified
party other than the indemnification obligation provided in paragraph (a) or (b)
above. The indemnifying party shall be entitled to appoint counsel of the
indemnifying party's choice at the indemnifying party's expense to represent the
indemnified party in any action for which indemnification is sought (in which
case the indemnifying party shall not thereafter be responsible for the fees and
expenses of any separate counsel retained by the indemnified party or parties
except as set forth below); provided, however, that such counsel shall be
reasonably satisfactory to the indemnified party. Notwithstanding the
indemnifying party's election to appoint counsel to represent the indemnified
party in an action, the indemnified party shall have the right to employ one
separate counsel (including local counsel), and the indemnifying party shall
bear the reasonable fees, costs and expenses of such separate counsel if (i) the
use of counsel chosen by the indemnifying party to represent the indemnified
party would present such counsel with a conflict of interest; (ii) the actual or
potential defendants in, or targets of, any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be legal defenses available to it
and/or other indemnified parties which are different from or additional to those
available to the indemnifying party; (iii) the indemnifying party shall not have
employed counsel reasonably satisfactory to the indemnified party to represent
the indemnified party within a reasonable time after notice of the institution
of such action; or (iv) the indemnifying party shall authorize the indemnified
party to employ separate counsel at the expense of the indemnifying party. An
indemnifying party will not, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless (i) such settlement, compromise or
consent includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party. An indemnified party will not,
without the prior written consent of the indemnifying parties, settle or
compromise or consent to the entry of any judgment with respect to any pending
or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnifying parties are actual or potential parties to such claim or action)
unless (i) such settlement, compromise or consent includes an unconditional
release of each indemnifying party from all liability arising out of such claim,
action, suit or proceeding and (ii) does not include a statement as to or an
admission of fault, culpability or a failure to act by or on behalf of any
indemnifying party.
(d) In the event that the indemnity provided in paragraph (a) or
(b) of this Section is unavailable to or insufficient to hold harmless an
indemnified party for any reason, then each applicable indemnifying party shall
have a joint and several obligation to contribute to the aggregate losses,
claims, damages and liabilities (including legal or other expenses reasonably
incurred in connection with investigating or defending same) (collectively
"Losses") to which such indemnified party may be subject in such proportion as
is appropriate to reflect the relative benefits received by such indemnifying
party, on the one hand, and such indemnified party, on the other hand, from the
Initial Placement and the Registration Statement which resulted in such Losses;
provided, however, that in no case shall any Initial Purchaser or any subsequent
Holder of any Registrable Securities or Exchange Timber Note be responsible, in
the aggregate, for any amount in excess of the purchase discount or commission
applicable to such Registrable Securities, or in the case of a Exchange Timber
Note, applicable to the Registrable Securities that was exchangeable into such
Exchange Timber Note, as set forth on the cover page of the Final Memorandum,
nor shall any underwriter be responsible for any amount in excess of the
underwriting discount or commission applicable to the securities purchased by
such underwriter under the Registration Statement which resulted in such Losses.
If the allocation provided by the immediately preceding sentence is unavailable
for any reason, the indemnifying party and the indemnified party shall
contribute in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of such indemnifying party, on the
one hand, and such indemnified party, on the other hand, in connection with the
statements or omissions which resulted in such Losses as well as any other
relevant equitable considerations. Benefits received by the Company [and Palco]
shall be deemed to the total net proceeds from the Initial Placement (before
deducting expenses) as set forth on the cover page of the Final Memorandum.
Benefits received by the Initial Purchasers shall be deemed to be equal to the
total purchase discounts and commissions as set forth on the cover page of the
Final Memorandum, and benefits received by any other Holders shall be deemed to
be equal to the value of receiving Registrable Securities or Exchange Timber
Notes, as applicable, registered under the Act. Benefits received by any
underwriter shall be deemed to be equal to the total underwriting discounts and
commissions, as set forth on the cover page of the Prospectus forming a part of
the Registration Statement which resulted in such Losses. Relative fault shall
be determined by reference to, among other things, whether any alleged untrue
statement or omission relates to information provided by the indemnifying party,
on the one hand, or by the indemnified party, on the other hand, the intent of
the parties and their relative knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission. The parties agree that
it would not be just and equitable if contribution were determined by pro rata
allocation (even if the Holders were treated as one entity for such purpose) or
any other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
paragraph (d), no Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
Person who was not guilty of such fraudulent misrepresentation. For purposes of
this Section, each Person who controls a Holder within the meaning of either the
Act or the Exchange Act and each director, officer, employee and agent of such
Holder shall have the same rights to contribution as such Holder, and each
Person who controls the Company within the meaning of either the Act or the
Exchange Act, and each manager, officer, employee and agent of the Company shall
have the same rights to contribution as the Company, subject in each case to the
applicable terms and conditions of this paragraph (d).
(e) The provisions of this Section will remain in full force and
effect, regardless of any investigation made by or on behalf of any Holder or
the Company or any of the officers, managers or controlling Persons referred to
in this Section hereof, and will survive the sale by a Holder of securities
covered by a Registration Statement.
7. Underwritten Registrations. (a) If any of the Registrable
Securities or Exchange Timber Notes, as the case may be, covered by any Shelf
Registration Statement are to be sold in an underwritten offering, the Managing
Underwriter(s) shall be selected by the Majority Holders or, after the
consummation of any Registered Exchange Offer in accordance with Section 2
hereof, of Holders of not less than a majority in aggregate principal amount of
the then outstanding Exchange Timber Notes.
(b) No Person may participate in any underwritten offering pursuant to
any Shelf Registration Statement, unless such Person (i) agrees to sell such
Person's Registrable Securities or Exchange Timber Notes, as the case may be, on
the basis reasonably provided in any underwriting arrangements approved by the
Persons entitled hereunder to approve such arrangements; and (ii) completes and
executes all questionnaires, powers of attorney, indemnities, underwriting
agreements, lock-up letters and other documents reasonably required under the
terms of such underwriting arrangements.
8. No Inconsistent Agreements. The Company has not, as of the date
hereof, entered into, nor shall it, on or after the date hereof, enter into, any
agreement with respect to its securities that is inconsistent with the rights
granted to the Holders herein or otherwise conflicts with the provisions hereof.
9. Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, qualified,
modified or supplemented, and waivers or consents to departures from the
provisions hereof may not be given, unless the Company has obtained the written
consent of the Majority Holders or, after the consummation of any Registered
Exchange Offer in accordance with Section 2 hereof, of Holders of not less than
a majority in aggregate principal amount of the then outstanding Exchange Timber
Notes; provided that, with respect to any matter that directly or indirectly
affects the rights of any Initial Purchaser hereunder, the Company shall obtain
the written consent of each such Initial Purchaser against which such amendment,
qualification, supplement, waiver or consent is to be effective. Notwithstanding
the foregoing (except the foregoing proviso), a waiver or consent to departure
from the provisions hereof with respect to a matter that relates exclusively to
the rights of Holders whose Registrable Securities or Exchange Timber Notes, as
the case may be, are being sold pursuant to a Registration Statement and that
does not directly or indirectly affect the rights of other Holders may be given
by the Majority Holders, determined on the basis of Registrable Securities or
Exchange Timber Notes, as the case may be, being sold under such Registration
Statement.
10. Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class mail,
telex, telecopier or air courier guaranteeing overnight delivery:
(a) if to a Holder, at the most current address given by such Holder
to the Company in accordance with the provisions of this Section, which address
initially is, with respect to each Holder, the address of such Holder maintained
by the Registrar under the Indenture, with a copy in like manner to Salomon
Brothers Inc;
(b) if to you, initially at the respective addresses set forth in the
Purchase Agreement; and
(c) if to the Company, initially at its address set forth in the
Purchase Agreemnt, with a copy to Kramer, Levin, Naftalis & Frankel.
All such notices and communications shall be deemed to have been duly
given when received.
The Initial Purchasers or the Company by notice to the other parties
may designate additional or different addresses for subsequent notices or
communications.
11. Successors. This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of each of the parties,
including, without the need for an express assignment or any consent by the
Company thereto, subsequent Holders of Registrable Securities and the Exchange
Timber Notes. Notwithstanding the foregoing, nothing herein shall be deemed to
permit any assignment, transfer or other disposition of Registrable Securities
in violation of the terms of the Purchase Agreement or the Indenture. The
Company hereby agrees to extend the benefits of this Agreement to any Holder of
Registrable Securities and the Exchange Timber Notes, and any such Holder may
specifically enforce the provisions of this Agreement as if an original party
hereto.
12. Counterparts. This agreement may be in signed counterparts, each
of which shall an original and all of which together shall constitute one and
the same agreement.
13. Headings. The headings used herein are for convenience only and
shall not affect the construction hereof.
14. Applicable Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York applicable to contracts
made and to be performed in the State of New York without application of the
conflict of laws provisions thereof.
15. Severability. In the event that any one of more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions hereof shall not be in any way impaired or affected
thereby, it being intended that all of the rights and privileges of the parties
shall be enforceable to the fullest extent permitted by law.
16. Registrable Securities Held by the Company, etc. Whenever the
consent or approval of Holders of a specified percentage of principal amount of
Registrable Securities or Exchange Timber Notes is required hereunder,
Registrable Securities or Exchange Timber Notes, as applicable, held by the
Company or its Affiliates (other than subsequent Holders of Registrable
Securities or Exchange Timber Notes if such subsequent Holders are deemed to be
Affiliates solely by reason of their holdings of such Registrable Securities or
Exchange Timber Notes) shall not be counted in determining whether such consent
or approval was given by the Holders of such required percentage.
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us the enclosed duplicate hereof, whereupon this
letter and your acceptance shall represent a binding agreement among the Company
and the several Initial Purchasers.
Very truly yours,
SCOTIA PACIFIC COMPANY LLC
By: /S/ GARY L. CLARK
Name: Gary L. Clark
Title: Vice President - Finance
and Administration
SALOMON BROTHERS INC
BANCAMERICA ROBERTSON STEPHENS
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: SALOMON BROTHERS INC
as Representative
By: /S/ MARK C. GRAHAM
Name: Mark C. Graham
Title: Vice President
The foregoing Agreement is hereby confirmed by THE PACIFIC LUMBER COMPANY
and accepted as of the date first above written with respect to Section 6 above.
By: /S/ TIMOTHY J. NEUMANN
Name: Timothy J. Neumann
Title: Assistant Secretary
<PAGE>
ANNEX A
Each Broker-Dealer that receives Exchange Timber Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Timber Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Act. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a Broker-Dealer in
connection with resales of Exchange Timber Notes received in exchange for Timber
Notes where such Timber Notes were acquired by such Broker- Dealer as a result
of market-making activities or other trading activities. The Company has agreed
that, starting on the Expiration Date (as defined herein) and ending on the
close of business one year after the Expiration Date, it will make this
Prospectus available to any Broker-Dealer for use in connection with any such
resale. See "Plan of Distribution."
ANNEX B
Each Broker-Dealer that receives Exchange Timber Notes for its own account in
exchange for Timber Notes, where such Timber Notes were acquired by such
Broker-Dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Timber Notes. See "Plan of Distribution."
ANNEX C
PLAN OF DISTRIBUTION
Each Broker-Dealer that receives Exchange Timber Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Timber Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Broker-Dealer in connection with resales of Exchange Timber Notes received
in exchange for Timber Notes where such Timber Notes were acquired as a result
of market-making activities or other trading activities. The Company has agreed
that, starting on the Expiration Date and ending on the close of business one
year after the Expiration Date, it will make this Prospectus, as amended or
supplemented, available to any Broker-Dealer for use in connection with any such
resale. In addition, until [date] all dealers effecting transactions in the
Exchange Timber Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of
Exchange Timber Notes by brokers-dealers. Exchange Timber Notes received
by Broker-Dealers for their own account pursuant to the Exchange Offer may be
sold from time to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the
Exchange Timber Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such Broker-Dealer and/or the
purchasers of any such Exchange Timber Notes. Any Broker-Dealer that resales
Exchange Timber Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such Exchange Timber Notes may be deemed to be an "underwriter" within the
meaning of the Act and any profit of any such resale of Exchange Timber Notes
and any commissions or concessions received by any such Persons may be deemed to
be underwriting compensation under the Act. The Letter of Transmittal states
that by acknowledging that it will deliver and by delivering a prospectus, a
Broker-Dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Act.
For a period of one year after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Broker-Dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
holder of the Timber Notes) other than commissions or concessions of any brokers
or dealers and will indemnify the holders of the Timber Notes (including any
Broker-Dealers) against certain liabilities, including liabilities under the
Act.
[If applicable, add information required by Regulation S-K Items
507 and/or 508.]
ANNEX D
Rider A
CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES
OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name:
Address:
Rider B
If the undersigned is not a Broker-Dealer, the undersigned represents that it
acquired the Exchange Timber Notes in the ordinary course of its business, it is
not engaged in, and does not intend to engage in, a distribution of Exchange
Timber Notes and it has no arrangements or understandings with any Person to
participate in a distribution of the Exchange Timber Notes. If the undersigned
is a Broker-Dealer that will receive Exchange Timber Notes for its own account
in exchange for Timber Notes, it represents that the Timber Notes to be
exchanged for Exchange Timber Notes were acquired by it as a result of
market-making activities or other trading activities and acknowledges that it
will deliver a prospectus in connection with any resale of such Exchange Timber
Notes; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
EXHIBIT 12
SCOTIA PACIFIC COMPANY LLC
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
------------------ -------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- -------- -------- -------- -------- -------- --------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Historical:
Earnings are calculated as follows:
Income before income taxes and
extraordinary item: $14,312 $30,162 $ 76,725 $ 84,993 $ 78,076 $ 92,911 $ 88,937
Add:
Fixed charges as calculated below 13,274 13,704 27,390 28,328 29,337 30,287 24,870
------- ------- -------- -------- -------- -------- --------
$27,586 $43,866 $104,115 $113,321 $107,413 $123,198 $113,807
======= ======= ======== ======== ======== ======== ========
Fixed charges are calculated as follows:
Interest expense $12,646 $13,079 $ 26,134 $ 27,064 $ 28,179 $ 29,134 $ 23,350
Amortization of deferred financing costs .... 607 616 1,232 1,247 1,142 1,137 1,508
Interest component of rental expense ........ 21 9 24 17 16 16 12
------- ------- -------- -------- -------- -------- --------
$13,274 $13,704 $ 27,390 $ 28,328 $ 29,337 $ 30,287 $ 24,870
======= ======= ======== ======== ======== ======== ========
Ratio of earnings to fixed charges ............ 2.1 x 3.2 x 3.8 x 4.0 x 3.7 x 4.1 x 4.6 x
======= ======= ======== ======== ======== ======== ========
Pro Forma:
Earnings are calculated as follows:
Income (loss) before income taxes and
extraordinary item: ($ 8,300) $ 35,500
Add (deduct):
Fixed charges as calculated below 32,821 65,624
------- --------
$24,521 $101,124
======= ========
Fixed charges are calculated as follows:
Interest expense $32,000 $64,000
Amortization of deferred financing costs 800 1,600
Interest component of rental expense 21 24
------- --------
$32,821 $65,624
======= ========
Ratio of earnings to fixed charges - 1.5 x
======= ========
Fixed charge coverage deficiency ($ 8,300) -
======= ========
</TABLE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
San Francisco, California
September 17, 1998
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM T-1
---------
STATEMENT OF ELIGIBILITY UNDER THE
TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
Check if an Application to Determine Eligibility
of a Trustee Pursuant to Section 305(b)(2)
STATE STREET BANK AND TRUST COMPANY
(Exact name of trustee as specified in its charter)
Massachusetts 04-1867445
(Jurisdiction of incorporation or (I.R.S. Employer
organization if not a U.S. Identification No.)
national bank)
225 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Maureen Scannell Bateman, Esq. Executive Vice President and General Counsel
225 Franklin Street, Boston, Massachusetts 02110
(617) 654-3253
(Name, address and telephone number of agent for service)
SCOTIA PACIFIC COMPANY LLC
(Exact name of obligor as specified in its charter)
DELAWARE 68-0414690
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
125 MAIN STREET, SECOND FLOOR, P.O. BOX 712, SCOTIA, CALIFORNIA 95565
(Address of principal executive offices) (Zip Code)
<PAGE>
6.55% SERIES B CLASS A-1 TIMBER COLLATERALIZED NOTES DUE 2028 7.11%
SERIES B CLASS A-2 TIMBER COLLATERALIZED NOTES DUE 2028 7.71& SERIES B
CLASS A-3 TIMBER COLLATERALIZED NOTES DUE 2028
(Title of indenture securities)
GENERAL
ITEM 1. GENERAL INFORMATION.
FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO WHICH
IT IS SUBJECT.
Department of Banking and Insurance of The Commonwealth of
Massachusetts, 100 Cambridge Street, Boston, Massachusetts.
Board of Governors of the Federal Reserve System,
Washington, D.C., Federal Deposit Insurance Corporation,
Washington, D.C.
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
The obligor is not an affiliate of the trustee or of its parent, State
Street Corporation.
(See note on page 2.)
ITEM 3. THROUGH ITEM 15. NOT APPLICABLE.
ITEM 16. LIST OF EXHIBITS.
LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF
ELIGIBILITY.
1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN
EFFECT.
<PAGE>
A copy of the Articles of Association of the trustee, as now in
effect, is on file with the Securities and Exchange Commission as
Exhibit 1 to Amendment No. 1 to the Statement of Eligibility and
Qualification of Trustee (Form T-1) filed with the Registration
Statement of Morse Shoe, Inc. (File No. 22-17940) and is
incorporated herein by reference thereto.
2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE
BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION.
A copy of a Statement from the Commissioner of Banks of
Massachusetts that no certificate of authority for the trustee to
commence business was necessary or issued is on file with the
Securities and Exchange Commission as Exhibit 2 to Amendment No.
1 to the Statement of Eligibility and Qualification of Trustee
(Form T-1) filed with the Registration Statement of Morse Shoe,
Inc. (File No. 22- 17940) and is incorporated herein by reference
thereto.
3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE TRUST
POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE DOCUMENTS
SPECIFIED IN PARAGRAPH (1) OR (2), ABOVE.
A copy of the authorization of the trustee to exercise corporate
trust powers is on file with the Securities and Exchange
Commission as Exhibit 3 to Amendment No. 1 to the Statement of
Eligibility and Qualification of Trustee (Form T-1) filed with
the Registration Statement of Morse Shoe, Inc. (File No.
22-17940) and is incorporated herein by reference thereto.
4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS
CORRESPONDING THERETO.
A copy of the by-laws of the trustee, as now in effect, is on
file with the Securities and Exchange Commission as Exhibit 4 to
the Statement of Eligibility and Qualification of Trustee (Form
T-1) filed with the Registration Statement of Eastern Edison
Company (File No. 33-37823) and is incorporated herein by
reference thereto.
5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS IN
DEFAULT.
<PAGE>
Not applicable.
6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY
SECTION 321(B) OF THE ACT.
The consent of the trustee required by Section 321(b) of the Act
is annexed hereto as Exhibit 6 and made a part hereof.
7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED
PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING
AUTHORITY.
A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or
examining authority is annexed hereto as Exhibit 7 and made a
part hereof.
NOTES
In answering any item of this Statement of Eligibility which relates to
matters peculiarly within the knowledge of the obligor or any underwriter for
the obligor, the trustee has relied upon information furnished to it by the
obligor and the underwriters, and the trustee disclaims responsibility for the
accuracy or completeness of such information.
The answer furnished to Item 2. of this statement will be amended, if
necessary, to reflect any facts which differ from those stated and which would
have been required to be stated if known at the date hereof.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, State Street Bank and Trust Company, a corporation
organized and existing under the laws of The Commonwealth of Massachusetts, has
duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of Boston and The
Commonwealth of Massachusetts, on the 16TH day of SEPTEMBER, 1998
STATE STREET BANK AND TRUST COMPANY
By: /s/ PAUL D. ALLEN
PAUL D. ALLEN
VICE PRESIDENT
<PAGE>
EXHIBIT 6
CONSENT OF THE TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act
of 1939, as amended, in connection with the proposed issuance by SCOTIA PACIFIC
COMPANY LLC of its 6.55% SERIES B CLASS A-1 TIMBER COLLATERALIZED NOTES DUE
2028, 7.11% SERIES B CLASS A-2 TIMBER COLLATERALIZED NOTES DUE 2028 AND 7.71%
SERIES B CLASS A-3 COLLATERALIZED TIMBER COLLATERALIZED NOTES DUE 2028, we
hereby consent that reports of examination by Federal, State, Territorial or
District authorities may be furnished by such authorities to the Securities and
Exchange Commission upon request therefor.
STATE STREET BANK AND TRUST COMPANY
By: /s/ PAUL D. ALLEN
PAUL D. ALLEN
VICE PRESIDENT
DATED: SEPTEMBER 16, 1998
<PAGE>
EXHIBIT 7
Consolidated Report of Condition of State Street Bank and Trust Company,
Massachusetts and foreign and domestic subsidiaries, a state banking institution
organized and operating under the banking laws of this commonwealth and a member
of the Federal Reserve System, at the close of business June 30, 1998, published
in accordance with a call made by the Federal Reserve Bank of this District
pursuant to the provisions of the Federal Reserve Act and in accordance with a
call made by the Commissioner of Banks under General Laws, Chapter 172, Section
22(a).
<PAGE>
THOUSANDS OF
DOLLARS
--------------
ASSETS
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin ........ 1,553,703
Interest-bearing balances ................................. 12,440,716
Securities ..................................................... 9,436,138
Federal funds sold and securities purchased
under agreements to resell in domestic offices
of the bank and its Edge subsidiary ....................... 8,785,353
Loans and lease financing receivables:
Loans and leases, net of unearned income .................. 6,633,608
Allowance for loan and lease losses ....................... 92,999
Allocated transfer risk reserve ........................... 0
Loans and leases, net of unearned income and
allowances ........................................... 6,540,609
Assets held in trading accounts ................................ 1,267,679
Premises and fixed assets ...................................... 491,928
Other real estate owned ........................................ 100
Investments in unconsolidated subsidiaries ..................... 1,278
Customers' liability to this bank on acceptances
outstanding ............................................... 68,312
Intangible assets .............................................. 231,294
Other assets ................................................... 1,667,282
-----------
Total assets ................................................... 42,484,392
===========
LIABILITIES
Deposits:
In domestic offices ...................................... 12,553,371
Noninterest-bearing ................................. 10,204,405
Interest-bearing .................................... 2,348,966
In foreign offices and Edge subsidiary ................... 16,961,571
Noninterest-bearing ................................. 154,792
Interest-bearing .................................... 16,806,779
Federal funds purchased and securities sold under
agreements to repurchase in domestic offices of the
bank and of its Edge subsidiary .......................... 8,182,794
Demand notes issued to the U.S. Treasury and Trading
Liabilities .............................................. 0
Trading liabilities ........................................... 883,096
Other borrowed money .......................................... 361,141
Subordinated notes and debentures ............................. 0
Bank's liability on acceptances executed and outstanding ...... 68,289
Other liabilities ............................................. 1,017,284
Total liabilities ............................................. 40,027,546
-----------
EQUITY CAPITAL
Perpetual preferred stock and related surplus ................. 0
Common stock .................................................. 29,931
Surplus ....................................................... 455,288
Undivided profits and capital reserves/Net unrealized
holding gains (losses) ................................... 1,964,924
Net unrealized holding gains (losses) on available-for-sale
securities ............................................... 15,557
Cumulative foreign currency translation adjustments ........... (8,854)
Total equity capital .......................................... 2,456,846
-----------
Total liabilities and equity capital .......................... 42,484,392
-----------
<PAGE>
I, Rex S. Schuette, Senior Vice President and Comptroller of the above named
bank do hereby declare that this Report of Condition has been prepared in
conformance with the instructions issued by the Board of Governors of the
Federal Reserve System and is true to the best of my knowledge and belief.
Rex S. Schuette
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
David A. Spina
Marshall N. Carter
Truman S. Casner
<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> <C> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1998 JAN-01-1997 JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> JUN-30-1998 JUN-30-1997 DEC-31-1997 DEC-31-1996 DEC-31-1995
<EXCHANGE-RATE> 1 1 1 1 1
<CASH> 13,691 13,858 20,926 20,345 21,542
<SECURITIES> 0 0 0 0 0
<RECEIVABLES> 12,229 12,542 5,304 5,007 4,471
<ALLOWANCES> 0 0 0 0 0
<INVENTORY> 0 0 0 0 0
<CURRENT-ASSETS> 28,795 28,421 28,775 27,497 28,430
<PP&E> 18,377 14,314 17,609 12,593 8,907
<DEPRECIATION> 7,158 6,048 6,590 5,563 4,962
<TOTAL-ASSETS> 353,490 362,985 356,947 362,520 378,829
<CURRENT-LIABILITIES> 32,766 31,126 31,780 29,227 29,146
<BONDS> 316,653 332,867 327,473 336,854 351,621
0 0 0 0 0
0 0 0 0 0
<COMMON> 0 0 0 0 0
<OTHER-SE> 24,678 17,311 17,123 12,697 12,872
<TOTAL-LIABILITY-AND-EQUITY> 353,490 362,985 356,947 362,520 378,829
<SALES> 34,520 53,764 126,415 135,064 129,430
<TOTAL-REVENUES> 34,520 53,764 126,415 135,064 129,430
<CGS> 0 0 0 0 0
<TOTAL-COSTS> 0 0 0 0 0
<OTHER-EXPENSES> 8,284 11,286 25,122 24,661 25,069
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 13,253 13,695 27,366 28,311 29,321
<INCOME-PRETAX> 14,312 30,162 76,725 84,993 78,076
<INCOME-TAX> 5,832 12,289 31,169 33,456 32,050
<INCOME-CONTINUING> 8,480 17,873 45,556 51,537 46,026
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 8,480 17,873 45,556 51,537 46,026
<EPS-PRIMARY> 0 0 0 0 0
<EPS-DILUTED> 0 0 0 0 0
</TABLE>
EXHIBIT 99.1
FORM OF LETTER OF TRANSMITTAL
SCOTIA PACIFIC COMPANY LLC
OFFER TO EXCHANGE
ALL OF ITS
6.55% Series B Class A-1 Timber Collateralized Notes due 2028,
7.11% Series B Class A-2 Timber Collateralized Notes due 2028 and
7.71% Series B Class A-3 Timber Collateralized Notes due 2028
for any and all of its outstanding
6.55% Class A-1 Timber Collateralized Notes due 2028,
7.11% Class A-2 Timber Collateralized Notes due 2028 and
7.71% Class A-3 Timber Collateralized Notes due 2028, respectively
PURSUANT TO THE PROSPECTUS DATED , 1998
----------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , , 1998, UNLESS EXTENDED.
----------------------------------------------------------------
To: EXCHANGE AGENT
STATE STREET BANK AND TRUST COMPANY
By Mail: By Hand/Overnight Express:
State Street Bank and Trust Company State Street Bank and Trust Company
Corporate Trust Department Corporate Trust Department
P.O. Box 778 Two International Place, 4th Floor
Boston, Massachusetts 02102 Boston, Massachusetts 02110
Attention: Kellie Mullen Attention: Kellie Mullen
Facsimile Transmission:
(617) 664-5290
To confirm receipt:
(617) 664-5587
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE
LISTED ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS CONTAINED
HEREIN SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
The undersigned acknowledges receipt of the Prospectus, dated , 1998
("Exchange Offer"), of Scotia Pacific Company LLC (the
"Company"), a special purpose Delaware limited liability company wholly owned by
The Pacific Lumber Company ("Pacific Lumber"), relating to the offer of the
Company, upon the terms and subject to the conditions set forth in the Exchange
Offer and in this Letter of Transmittal and the instructions hereto (which
together with the Exchange Offer and the instructions hereto constitute the
"Offer"), to exchange $1,000 in principal amount of its 6.55% Series B Class A-1
Timber Collateralized Notes due 2028 (the "New Class A-1 Notes"), its 7.11%
Series B Class A-2 Timber Collateralized Notes due 2028 (the "New Class A-2
Notes") and its 7.71% Series B Class A-3 Timber Collateralized Notes due 2028
(the "New Class A-3 Notes," and collectively with the New Class A-1 Notes and
the New Class A-2 Notes, the "New Notes") for each $1,000 in principal amount of
its outstanding 6.55% Class A-1 Timber Collateralized Notes due 2028 (the "Old
Class A-1 Notes"), its outstanding 7.11% Class A-2 Timber Collateralized Notes
due 2028 (the "Old Class A-2 Notes") and its outstanding 7.71% Class A-3 Timber
Collateralized Notes due 2028 (the "Old Class A-3 Notes," and collectively with
the Old Class A-1 Notes and the Old Class A-2 Notes, the "Old Notes").
Capitalized terms used but not defined herein have the meanings given to them in
the Exchange Offer.
The undersigned has completed the appropriate boxes below and signed
this Letter of Transmittal to indicate the action the undersigned desires to
take with respect to the Offer.
This Letter of Transmittal is to be used whether the Old Notes are to
be physically delivered herewith, or whether guaranteed delivery procedures or
book-entry delivery procedures are being used, pursuant to the procedures set
forth under "The Exchange Offer" in the Exchange Offer. If delivery of Old Notes
is to be made by book-entry transfer to the account maintained by the Exchange
Agent at The Depository Trust Company ("DTC"), this Letter of Transmittal need
not be manually executed, provided, however, that tenders of Old Notes must be
effected in accordance with the procedures mandated by DTC and the procedures
set forth in the Exchange Offer under the caption "The Exchange
Offer--Procedures for Tendering Old Notes--Book Entry Delivery." If a person or
entity in whose name Old Notes are registered on the books of the Registrar (a
"Registered Holder") desires to tender Old Notes and such Old Notes are not
immediately available or time will not permit all documents required by the
Offer to reach the Exchange Agent (or such Registered Holder is unable to
complete the procedure for book-entry transfer on a timely basis) prior to the
Expiration Date, a tender may be effected in accordance with the guaranteed
delivery procedures set forth in the Exchange Offer under the caption "The
Exchange Offer--Procedures for Exchanging Old Notes--Guaranteed Delivery
Procedures." See Instruction 1.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
LADIES AND GENTLEMEN:
Upon the terms and subject to the conditions of the Offer, the
undersigned hereby tenders to the Company the principal amount of the Old Notes
indicated below. Subject to, and effective upon, the acceptance for exchange of
the Old Notes tendered hereby, the undersigned hereby irrevocably sells, assigns
and transfers to or upon the order of the Company all right, title and interest
in and to such Old Notes and hereby irrevocably constitutes and appoints the
Exchange Agent the true and lawful agent and attorney-in-fact of the undersigned
(with full knowledge that said exchange agent also acts as the agent of the
Company) with respect to such Old Notes, with full power of substitution (such
power of attorney being deemed to be an irrevocable power coupled with an
interest), to take such further action as may be required in connection with the
delivery, tender and exchange of the Old Notes.
The undersigned acknowledges that this Offer is being made in reliance
on an interpretation by the staff of the Securities and Exchange Commission (the
"SEC") that the New Notes issued pursuant to the Exchange Offer in exchange for
the Old Notes may be offered for resale, resold and otherwise transferred by
holders thereof (other than (i) a broker-dealer who purchased Old Notes directly
from the Company for resale pursuant to Rule 144A under the Securities Act of
1933, as amended (the "Securities Act"), or (ii) a person that is an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act provided that such New Notes are acquired in the ordinary course
of such holders' business and such holders have no arrangement with any person
to participate in the distribution of such New Notes. See "Morgan Stanley & Co.
Inc.," SEC No-Action Letter (available June 5, 1991); The Exchange Offer under
the caption "The Exchange Offer -- Resales of the New Notes."
THE UNDERSIGNED UNDERSTANDS AND AGREES THAT THE COMPANY RESERVES
THE RIGHT NOT TO ACCEPT TENDERED OLD NOTES FROM ANY TENDERING HOLDER IF THE
COMPANY DETERMINES, IN ITS SOLE AND ABSOLUTE DISCRETION, THAT SUCH ACCEPTANCE
COULD RESULT IN A VIOLATION OF APPLICABLE SECURITIES LAWS.
The undersigned, if the undersigned is a beneficial holder, represents,
or, if the undersigned is a broker, dealer, commercial bank, trust company or
other nominee, represents that it has received representations from the
beneficial owners of the Old Notes stating, (as defined in the Exchange Offer)
that (i) the New Notes to be acquired in connection with the Exchange Offer by
the Eligible Holder and each Beneficial Owner of the Old Notes are being
acquired by the Eligible Holder (as defined in the Exchange Offer) and each
Beneficial Owner in the ordinary course of business of the Eligible Holder and
each Beneficial Owner, (ii) the Eligible Holder and each Beneficial Owner are
not participating, do not intend to participate, and have no arrangement or
understanding with any person to participate, in the distribution of the New
Notes, (iii) the Eligible Holder and each Beneficial Owner acknowledge and agree
that any person participating in the Exchange Offer for the purpose of
distributing the New Notes must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction of the New Notes acquired by such person and cannot rely on
the position of the staff of the Commission set forth in no-action letters that
are discussed in the Exchange Offer under the caption "The Exchange Offer --
Resales of the New Notes," (iv) that if the Eligible Holder is a broker-dealer
that acquired Old Notes as a result of market making or other trading
activities, it will deliver a prospectus in connection with any resale of New
Notes acquired in the Exchange Offer, (v) the Eligible Holder and each
Beneficial Owner understand that a secondary resale transaction described in
clause (iii) above should be covered by an effective registration statement
containing the selling security holder information required by item 507 of
Regulations S-K of the Securities Act and (vi) neither the Eligible Holder nor
any Beneficial Owner is an "affiliate," as defined under Rule 405 of the
Securities Act, of the Company or of the Guarantor except as otherwise disclosed
to the Company in writing.
In addition, if the undersigned is not a broker-dealer, the undersigned
represents that it is not engaged in, and does not intend to engage in, a
distribution of New Notes. If the undersigned is a broker-dealer that will
receive New Notes for its own account in exchange for Old Notes, it represents
that the Old Notes to be exchanged for New Notes were acquired by it as a result
of market-making activities or other trading activities and acknowledges that it
will deliver a prospectus in connection with any resale of such New Notes;
however, by so acknowledging and by delivering a prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
The undersigned understands and acknowledges that the Company reserves
the right in its sole discretion to purchase or make offers for any Old Notes
that remain outstanding subsequent to the Expiration Date or as set forth in the
Exchange Offer under the caption "The Exchange Offer -- Conditions of the
Exchange Offer," to terminate the Exchange Offer and, to the extent permitted by
applicable law, purchase Old Notes in the open market, in privately negotiated
transactions or otherwise. The term of any such purchases or offers could differ
from the terms of the Exchange Offer.
The undersigned hereby represents and warrants that the undersigned
accepts the terms and conditions of the Offer, has full power and authority to
tender, exchange, assign and transfer the Old Notes tendered hereby, and that
when the same are accepted for exchange by the Company, the Company will acquire
good and unencumbered title thereto, free and clear of all liens, restrictions,
charges and encumbrances and not subject to any adverse claim or right. The
undersigned will, upon request, execute and deliver any additional documents
deemed by the Exchange Agent or the Company to be reasonably necessary or
desirable to complete the sale, assignment and transfer the Old Notes tendered
hereby.
The undersigned agrees that all authority conferred or agreed to be
conferred by this Letter of Transmittal and every obligation of the undersigned
hereunder shall be binding upon the successors, assigns, heirs, executors,
administrators, trustees in bankruptcy and legal representatives of the
undersigned and shall not be affected by, and shall survive, the death or
incapacity of the undersigned.
The undersigned understands that tenders of the Old Notes pursuant to
any one of the procedures described under "The Exchange Offer -- Procedures for
Tendering Old Notes" in the Exchange Offer and in the instructions hereto will
constitute a binding agreement between the undersigned and the Company in
accordance with the terms and subject to the conditions of the Offer.
The undersigned understands that by tendering Old Notes pursuant to one
of the procedures described in the Exchange Offer and the instructions thereto,
the tendering holder will be deemed to have waived the right to receive any
payment in respect of interest on the Old Notes accrued up to the date of
issuance of the New Notes.
The undersigned recognizes that, under certain circumstances set forth
in the Exchange Offer, the Company may not be required to accept for exchange
any of the Old Notes tendered. Old Notes not accepted for exchange or withdrawn
will be returned to the undersigned as the address set forth below unless
otherwise indicated under "Special Delivery Instructions" below.
Unless otherwise indicated herein under the box entitled "Special
Exchange Instructions" below, please deliver New Notes in the name of the
undersigned. Similarly, unless otherwise indicated under the box entitled
"Special Delivery Instructions" below, please send New Notes to the undersigned
at the address shown below the signature of the undersigned. The undersigned
recognizes that the Company has no obligation pursuant to the "Special Exchange
Instructions" to transfer any Old Notes from the name of the Registered Holder
thereof if the Company does not accept for exchange any of the principal amount
of such Old Notes so tendered.
THE UNDERSIGNED BY COMPLETING THE BOX "DESCRIPTION OF OLD NOTES" BELOW
AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES AND MADE
CERTAIN REPRESENTATIONS DESCRIBED HEREIN AND IN THE EXCHANGE OFFER.
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(SEE INSTRUCTIONS 1 AND 3 AND THE FOLLOWING PARAGRAPH)
(IMPORTANT: ALSO COMPLETE SUBSTITUTE FORM W-9 ON THE REVERSE SIDE)
___________________________________________________________________________
___________________________________________________________________________
SIGNATURE(S) OF OWNER(S)
Dated: ______________________________________________________________, 1998
If the holder(s) is/are tendering any Old Notes, this Letter of Transmittal must
be signed by the Registered Holder(s) as the name(s) appear(s) on the Old Notes
or on a security position listing or by person(s) authorized to become
Registered Holder(s) by endorsements and documents transmitted herewith. If
signature is by a trustee, executor, administrator, guardian, officer or other
person acting in a fiduciary or representative capacity, please set forth full
title. See Instruction 3.
Name(s)____________________________________________________________________
___________________________________________________________________________
(PLEASE TYPE OR PRINT)
Capacity:__________________________________________________________________
Address:___________________________________________________________________
___________________________________________________________________________
(INCLUDE ZIP CODE)
Area Code and Telephone Number_____________________________________________
Tax Identification or
Social Security No(s).:____________________________________________________
(SEE INSTRUCTION 12 AND COMPLETE SUBSTITUTE FORM W-9 ON THE REVERSE SIDE)
SIGNATURE GUARANTEE
(IF REQUIED BY INSTRUCTION 3)
Signature(s) Guaranteed by
an Eligible Institution:
Authorized Signature:______________________________________________________
Printed Name:______________________________________________________________
Title: ____________________________________________________________________
Name of Firm: _____________________________________________________________
Address: __________________________________________________________________
___________________________________________________________________________
(INCLUDE ZIP CODE)
Area Code and Telephone Number ____________________________________________
Dated: ______________________________________________________________, 1998
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE OLD NOTES OR A
NOTICE OF GUARANTEED DELIVERY AND ALL OTHER REQUIRED DOCUMENTS) MUST BE RECEIVED
BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION
DATE.
List below the Old Notes to which this Letter of Transmittal relates.
If the space provided below is inadequate, the certificate numbers and principal
amounts should be listed on a separate signed schedule affixed thereto. See
Instruction 7. The minimum permitted tender is $1,000 principal amount of Old
Notes; all other tenders must be in integral multiples of $1,000.
<TABLE>
<CAPTION>
DESCRIPTION OF OLD NOTES
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(I) (II) (III) (IV)
NAME(S) AND ADDRESS(ES) OF HOLDER(S) CERTIFICATE AGGREGATE PRINCIPAL PRINCIPAL AMOUNT
(PLEASE FILL IN, IF BLANK) NUMBER(S) AMOUNT REPRESENTED TENDERED
---------------- ------------------------- ----------------
---------------- ------------------------- ----------------
---------------- ------------------------- ----------------
---------------- ------------------------- ----------------
TOTAL_______________________________________________________________________________________________________
</TABLE>
* Unless otherwise indicated in the column labeled "Principal Amount
Tendered" and subject to the terms and conditions of the Offer, the
undersigned will be deemed to have tendered the entire aggregate
principal amount represented by the Old Notes indicated in the column
labeled "Aggregate Principal Amount Represented." See Instruction 8.
[ ] CHECK HERE IF TENDERED OLD NOTES ARE ENCLOSED HEREWITH.
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE
AGENT AND COMPLETE THE FOLLOWING (See Instructions 1 and 3):
Name(s) of Registered Holder(s):__________________________________
Date of Execution of Notice of Guaranteed Delivery:_______________
Name of Eligible Institution that Guaranteed Delivery:____________
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10
ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY
AMENDMENTS OR SUPPLEMENTS THERETO.
Name:______________________________________________________________________
Address:___________________________________________________________________
___________________________________________________________________________
If delivery of Old Notes is to be made by book-entry transfer to the
account maintained by the Exchange Agent at DTC, then tenders of Old Notes must
be effected in accordance with the procedures mandated by DTC and the procedures
set forth in the Exchange Offer under the caption "The Exchange Offer --
Procedures for Tendering Old Notes--Book Entry Delivery."
SPECIAL EXCHANGE INSTRUCTIONS
(SEE INSTRUCTIONS 4 AND 5)
To be completed ONLY if Old Notes in a principal amount not exchanged and/or New
Notes are to be registered in the name of or issued to someone other than the
person or persons whose signature(s) appear(s) on this Letter of Transmittal
above.
Issue and mail: (check appropriate box(es)):
[ ] New Notes to: [ ] Old Notes to:
Name(s)____________________________________________________________________
(PLEASE TYPE OR PRINT)
___________________________________________________________________________
(PLEASE TYPE OR PRINT)
Address____________________________________________________________________
___________________________________________________________________________
(ZIP CODE)
___________________________________________________________________________
EMPLOYER IDENTIFICATION OR SOCIAL SECURITY NUMBER
(COMPLETE THE SUBSTITUTE FORM W-9)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 4 AND 5)
To be completed ONLY if Old Notes in a principal amount not exchanged and/or New
Notes are to be sent to someone other than the person or persons whose
signature(s) appear(s) on this Letter of Transmittal above or to such person or
persons at an address other than that shown in the box entitled "Description of
Old Notes" on this Letter of Transmittal above.
Mail and deliver: (check appropriate box(es)):
[ ] New Notes to: [ ] Old Notes to:
Name(s)____________________________________________________________________
(PLEASE TYPE OR PRINT)
___________________________________________________________________________
(PLEASE TYPE OR PRINT)
Address____________________________________________________________________
___________________________________________________________________________
(ZIP CODE)
___________________________________________________________________________
EMPLOYER IDENTIFICATION OR SOCIAL SECURITY NUMBER
(COMPLETE THE SUBSTITUTE FORM W-9)
TO BE COMPLETED BY ALL EXCHANGING HOLDERS
(SEE INSTRUCTION 5)
PAYER'S NAME: STATE STREET BANK AND TRUST COMPANY
<TABLE>
- ----------------------------------------------------------------------------------
<S> <C> <C>
SUBSTITUTE PART I - PLEASE PROVIDE YOUR TIN SOCIAL SECURITY NUMBER
FORM W-9 IN THE BOX AT RIGHT AND CERTIFY BY OR _______________ EMPLOYER
DEPARTMENT OF THE TREASURY SIGNING AND DATING BELOW. IDENTIFICATION NUMBER
INTERNAL REVENUE SERVICE
PAYER'S REQUEST FOR TAXPAYER
IDENTIFICATION NUMBER (TIN)
</TABLE>
PART 2 -- CERTIFICATION -- Under penalties of perjury, I certify that: (1) The
number shown on this form is my correct Taxpayer Identification Number (or I am
waiting for a number to be issued to me) and (2) I am not subject to backup
withholding because: (a) I am exempt from backup withholding, or (b) I have not
been notified by the Internal Revenue Service ("IRS") that I am subject to
backup withholding as a result of a failure to report all interest or dividends,
or (c) the IRS has notified me that I am no longer subject to backup
withholding.
CERTIFICATION INSTRUCTIONS -- You must cross out Item (2) above if you have been
notified by the IRS that you are currently subject to backup withholding because
of under-reporting interest or dividends on your tax return. However, if after
being notified by the IRS that you were subject to backup withholding you
received another notification from the IRS that you are no longer subject to
backup withholding, do not cross out such Item (2).
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PART 3
SIGNATURE ___________________ DATE ______________, 1998 AWAITING TIN [ ]
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NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE
EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION
OF TAXPAYER IDENTIFICATION ON SUBSTITUTE FORM W-9 FOR ADDITIONAL
DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE
BOX IN PART 3 OF SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a Taxpayer Identification
Number has not been issued to me, and either (1) I have mailed or delivered an
application to receive a Taxpayer Identification Number to the appropriate
Internal Revenue Service Center or Social Security Administration Office, or (2)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a Taxpayer Identification Number within sixty days, 31% of
all reportable payments made to me thereafter will be withheld until I provide a
Taxpayer Identification Number.
SIGNATURE ________________________________ DATE ___________________ 1998
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER
1. Delivery of this Letter of Transmittal and Old Notes: Guaranteed
Delivery Procedures. To be effectively tendered pursuant to the Offer, the Old
Notes, together with a properly completed Letter of Transmittal (or manually
signed facsimile hereof) duly executed by the Registered Holder thereof, and any
other documents required by this Letter of Transmittal must be received by the
Exchange Agent at one of its addresses set forth on the front page of this
Letter of Transmittal and tendered Old Notes must be received by the Exchange
Agent at one of such addresses on or prior to the Expiration Date; provided,
however, that book-entry transfers of Old Notes may be effected in accordance
with the procedures set forth in the Exchange Offer under the caption "The
Exchange Offer -- Procedures For Tendering Old Notes -- Book Entry Delivery." If
the Beneficial Owner of any Old Notes is not the Registered Holder, then such
person may validly tender such person's Old Notes only by obtaining and
submitting to the Exchange Agent a properly completed Letter of Transmittal from
the Registered Holder. LETTERS OF TRANSMITTAL OF OLD NOTES SHOULD BE DELIVERED
ONLY BY HAND OR BY COURIER, OR TRANSMITTED BY MAIL, AND ONLY TO THE EXCHANGE
AGENT AND NOT TO THE COMPANY OR TO ANY OTHER PERSON.
THE METHOD OF DELIVERY OF OLD NOTES AND ALL OTHER REQUIRED DOCUMENTS TO
THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER, AND IF SUCH
DELIVERY IS BY MAIL, IT IS SUGGESTED THAT THE HOLDER USE PROPERLY INSURED,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED. IF OLD NOTES ARE SENT BY MAIL, IT
IS SUGGESTED THAT THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION
DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY
TIME, ON THE EXPIRATION DATE.
If a holder desires to tender Old Notes and such holder's Old Notes are
not immediately available or time will not permit such holder to complete the
procedures for book-entry transfer on a timely basis or time will not permit
such holder's Letter of Transmittal and other required documents to reach the
Exchange Agent on or before the Expiration Date, such holder's tender may be
effected if:
(a) such tender is made by or through an Eligible
Institution (as defined below);
(b) on or prior to the Expiration Date, the Exchange Agent has
received a telegram, facsimile transmission or letter from such
Eligible Institution setting forth the name and address of the holder
of such Old Notes, the certificate number(s) of such Old Notes (except
in the case of book-entry tenders) and the principal amount of Old
Notes tendered and stating that the tender is being made thereby and
guaranteeing that, within three business days after the Expiration
Date, a duly executed Letter of Transmittal, or facsimile thereof,
together with the Old Notes, and any other documents required by this
Letter of Transmittal and Instructions, will be deposited by such
Eligible Institution with the Exchange Agent; and
(c) this Letter of Transmittal, or a manually signed facsimile
hereof, and Old Notes, in proper form for transfer (or a Book-Entry
confirmation with respect to such Old Notes), and all other required
documents are received by the Exchange Agent within three business days
after the Expiration Date.
2. Withdrawal of Tenders. Tendered Old Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the Expiration Date.
To be effective, a written, telegraphic or facsimile transmission
notice of withdrawal must (i) be timely received by the Exchange Agent at one of
its addresses set forth on the first page of this Letter of Transmittal before
the Exchange Agent receives notice of acceptance from the Company, (ii) specify
the name of the person who tendered the Old Notes, (iii) contain the description
of the Old Notes to be withdrawn, the certificate number(s) of such Old Notes
(except in the case of book-entry tenders) and the aggregate principal amount
represented by such Old Notes or a Book-Entry Confirmation with respect to such
Old Notes, and (iv) be signed by the holder of such Old Notes in the same manner
as the original signature appears on this Letter of Transmittal (including any
required signature guarantees) or be accompanied by evidence satisfactory to the
Company that the person withdrawing the tender has succeeded to the beneficial
ownership of the Old Notes. The signature(s) on the notice of withdrawal must be
guaranteed by an Eligible Institution unless such Old Notes have been tendered
(i) by a Registered Holder (which term for purposes of this document shall
include any participant tendering by book-entry transfer) of Old Notes who has
not completed either the box entitled "Special Exchange Instruction" or the box
entitled "Special Delivery Instructions" on this Letter of Transmittal or (ii)
for the account of an Eligible Institution. If the Old Notes have been tendered
pursuant to the procedure for book-entry tender set forth in the Exchange Offer
under the caption "Exchanging Book Entry Old Notes," a notice of withdrawal is
effective immediately upon receipt by the Exchange Agent of a written,
telegraphic or facsimile transmission notice of withdrawal even if physical
release is not yet effected. In addition, such notice must specify, in the case
of Old Notes tendered by delivery of such Old Notes, the name of the Registered
Holder (if different from that of the tendering holder) to be credited with the
withdrawn Old Notes. Withdrawals may not be rescinded, and any Old Notes
withdrawn will thereafter be deemed not validly tendered for purposes of the
Offer. However, properly withdrawn Old Notes may be retendered by following one
of the procedures described under "The Exchange Offer -- Procedures for
Tendering Old Notes" in the Exchange Offer at any time on or prior to the
applicable Expiration Date.
3. Signatures on this Letter of Transmittal, Bond Powers and
Endorsements; Guarantee of Signatures. If this Letter of Transmittal is signed
by the Registered Holder of the Old Notes tendered hereby, the signature must
correspond exactly with the name as written on the face of the Old Notes without
any change whatsoever.
If any Old Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If any Old Notes tendered hereby are registered in different names, it
will be necessary to complete, sign and submit as many separate copies of this
Letter of Transmittal as there are different registrations of Old Notes.
When this Letter of Transmittal is signed by the Registered Holder or
Holders specified herein and tendered hereby, no endorsements of such Old Notes
or separate bond powers are required. If, however, New Notes are to be issued,
or any untendered principal amount of Old Notes are to be reissued to a person
other than the Registered Holder, then endorsements of any Old Notes transmitted
hereby or separate bond powers are required.
If this Letter of Transmittal is signed by a person other than the
Registered Holder or Holders, such Old Notes must be endorsed or accompanied by
appropriate bond powers, in either case signed exactly as the name or names of
the Registered Holder or Holders appear(s) on the Old Notes.
If this Letter of Transmittal or a Notice of Guaranteed Delivery or any
Old Notes or bond powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, such persons should so indicate when
signing, and, unless waived by the Company, proper evidence satisfactory to the
Company of their authority so to act must be submitted.
Except as describe in this paragraph, signatures on this Letter of
Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by
an Eligible Institution which is a firm which is a member of a registered
national securities exchange or the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent in
the United States or otherwise be an "eligible guarantor institution" within the
meaning of Rule 17Ad-15 under the Exchange Act (each an "Eligible Institution").
Signatures on this Letter of Transmittal or a notice of withdrawal, as the case
may be, need not be guaranteed if the Old Notes tendered pursuant hereto are
tendered (i) by a Registered Holder of Old Notes who has not completed either
the box entitled "Special Exchange Instructions" or the box entitled "Special
Delivery Instructions" on this Letter of Transmittal or (ii) for the account of
an Eligible Institution.
Endorsement on Old Notes or signatures on bond forms required by this
Instruction 3 must be guaranteed by an Eligible Institution.
4. Special Issuance and Delivery Instructions. Tendering holders should
indicate in the applicable box the name and address to which New Notes and/or
substitute Old Notes for the principal amounts not exchanged are to be issued or
sent, if different from the name and address of the person signing this Letter
of Transmittal. In the case of issuance in a different name, the employer
identification or social security number of the person named must also be
indicated. If no such instructions are given, such Old Notes not exchanged will
be returned to the name and address of the person signing this Letter of
Transmittal.
5. Taxpayer Identification Number and Backup Withholding.
Federal income tax law of the United States requires that a holder of Old Notes
whose Old Notes are accepted for exchange provide the Company with such holder's
correct taxpayer identification number, which, in the case of a holder who is an
individual, is the holder's social security number, or otherwise establish an
exemption from backup withholding. If the Company is not provided with the
holder's correct taxpayer identification number, the exchanging holder of Old
Notes may be subject to a penalty imposed by the Internal Revenue Service. In
addition, interest on the New Notes acquired pursuant to the Offer may be
subject to backup withholding in an amount equal to 31 percent of any interest
payment. If withholding occurs and results in an overpayment of taxes, a refund
may be obtained from the Internal Revenue Service by filing a return.
To prevent backup withholding, each exchanging holder of Old Notes
subject to backup withholding must provide his correct taxpayer identification
number by completing the Substitute Form W-9 provided in this Letter of
Transmittal, certifying that the taxpayer identification number provided is
correct (or that the exchanging holder of Old Notes is awaiting a taxpayer
identification number) and that either (a) the exchanging holder has not been
notified by the Internal Revenue Service that he is subject to backup
withholding as a result of failure to report all interest or dividends or (b)
the Internal Revenue Service has notified the exchanging holder that he is no
longer subject to backup withholding.
Certain exchanging holders of Old Notes (including, among others, all
corporations and certain foreign individuals) are not subject to these backup
withholding requirements. A foreign individual and other exempt holders (e.g.,
corporations) should certify, in accordance with the enclosed Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9, to such
exempt status on the Substitute Form W-9 provided in this Letter of Transmittal.
Nonresident aliens should submit Form W-8, available from the Exchange Agent
upon request.
6. Transfer Taxes. Holders tendering pursuant to the Offer will not be
obligated to pay brokerage commissions or fees or to pay transfer taxes with
respect to their exchange under the Offer unless the box entitled "Special
Issuance Instructions" in this Letter of Transmittal has been completed, or
unless the securities to be received upon exchange are to be issued to any
person other than the holder of the Old Notes tendered for exchange. The Company
will pay all other charges or expenses in connection with the Offer. If holders
tender Old Notes for exchange and the Offer is not consummated, such Old Notes
will be returned to the holders at the Company expense.
Except as provided in this Instruction 6, it will not be necessary
for transfer tax stamps to be affixed to the Old Notes specified in this
Letter of Transmittal.
7. Inadequate Space. If the space provided herein is inadequate, the
aggregate principal amount of the Old Notes being tendered and the security
numbers (if available) should be listed on a separate schedule attached hereto
and separately signed by all parties required to sign this Letter of
Transmittal.
8. Partial Tenders. Tenders of Old Notes will be accepted only in
integral multiples of $1,000. If tenders are to be made with respect to less
than the entire principal amount of any Old Notes, fill in the principal amount
of Old Notes which are tendered in column (iv) of the "Description of Old
Notes." In the case of partial tenders, the Old Notes in fully registered form
for the remainder of the principal amount of the Old Notes will be sent to the
persons(s) signing this Letter of Transmittal, unless otherwise indicated in the
appropriate place on this Letter of Transmittal, as promptly as practicable
after the expiration or termination of the Offer.
Unless otherwise indicated in column (iv) in the box labeled
"Description of Old Notes," and subject to the terms and conditions of the
Offer, tenders made pursuant to this Letter of Transmittal will be deemed to
have been made with respect to the entire aggregate principal amount represented
by the Old Notes indicated in column (iii) of such box.
9. Mutilated, Lost, Stolen or Destroyed Old Notes. Any holder whose Old
Notes have been mutilated, lost, stolen or destroyed should contact the Exchange
Agent at the address indicated above for further instructions.
10. Validity and Acceptance of Tenders. All questions as to the
validity, form, eligibility (including time of receipt), acceptance and
withdrawal of Old Notes tendered for exchange will be determined by the Company
in its sole discretion, which determination shall be final and binding. The
Company reserves the absolute right to reject any and all Old Notes not properly
tendered and to reject any Old Notes the Company's acceptance of which might, in
the judgment of the Company or its counsel, be unlawful. The Company also
reserves the absolute right to waive any defects or irregularities or conditions
of the Exchange Offer as to particular Old Notes either before or after the
Expiration Date (including the right to waive the ineligibility of any holder
who seeks to tender Old Notes in the Exchange Offer). The interpretation of the
terms and conditions of the Exchange Offer (including the Letter of Transmittal
and the instructions thereto) by the Company shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Notes for exchange must be cured within such period of time as the
Company shall determine. The Company will use reasonable efforts to give
notification of defects or irregularities with respect to tenders of Old Notes
for exchange but shall not incur any liability for failure to give such
notification. Tenders of the Old Notes will not be deemed to have been made
until such irregularities have been cured or waived.
11. Requests for Assistance or Additional Copies. State Street Bank and
Trust Company is the Exchange Agent. All tendered Old Notes, executed Letters of
Transmittal and other related documents should be directed to the Exchange Agent
at the addresses or facsimile number set forth on the first page of this Letter
of Transmittal. Questions and requests for assistance and requests for
additional copies of the Prospectus, the Letter of Transmittal and other related
documents should be addressed to the Exchange Agent as follows:
State Street Bank and Trust Company
Corporate Trust Department
Two International Place, 4th Floor
Boston, Massachusetts 02110
Attention: Kellie Mullen
Facsimile Transmission:
(617) 664-5290
To confirm receipt:
Tel. (617) 664-5587
EXHIBIT 99.2
FORM OF NOTICE OF GUARANTEED DELIVERY
SCOTIA PACIFIC COMPANY LLC
OFFER TO EXCHANGE
ALL OF ITS OUTSTANDING
6.55% Series B Class A-1 Timber Collateralized Notes due 2028,
7.11% Series B Class A-2 Timber Collateralized Notes due 2028 and
7.71% Series B Class A-3 Timber Collateralized Notes due 2028
for any and all of its outstanding
6.55% Class A-1 Timber Collateralized Notes due 2028,
7.11% Class A-2 Timber Collateralized Notes due 2028 and
7.71% Class A-3 Timber Collateralized Notes due 2028, respectively.
As set forth in Prospectus described below, this Notice of Guaranteed
Delivery or one substantially equivalent hereto must be used to tender for
exchange the Company's 6.55% Class A-1 Timber Collateralized Notes due 2028,
7.11% Class A-2 Timber Collateralized Notes due 2028 and 7.71% Class A-3 Timber
Collateralized Notes due 2028 (collectively, the "Old Notes"), of Scotia Pacific
Company LLC (the "Company"), a special purpose Delaware limited liability
company wholly owned by The Pacific Lumber Company pursuant to the Exchange
Offer (as defined below) if certificates for Old Notes are not immediately
available or the certificates for Old Notes and all other required documents
cannot be delivered to the Exchange Agent on or prior to the Expiration Date (as
defined in the Prospectus), or if the procedures for delivery by book-entry
transfer cannot be completed on a timely basis. This instrument may be delivered
by hand or transmitted by facsimile transmission or mailed to the Exchange
Agent.
The Exchange Agent for the Exchange Offer is:
STATE STREET BANK AND TRUST COMPANY
By Mail: By Hand/Overnight Express:
State Street Bank and Trust Company State Street Bank and Trust Company
Corporate Trust Department Corporate Trust Department
P.O. Box 778 Two International Place, 4th Floor
Boston, Massachusetts 02102 Boston, Massachusetts 02110
Attention: Kellie Mullen Attention: Kellie Mullen
By Facsimile Transmission:
(617) 664-5290
Confirm by telephone:
(617) 664-5587
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE
OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN AS SET FORTH
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
This Notice of Guaranteed Delivery is not to be used to guarantee
signatures. If a signature on a Letter of Transmittal is required to be
guaranteed by an Eligible Institution under the Instructions to the Letter of
Transmittal, such signature guarantee must appear in the applicable space
provided in the signature box in the Letter of Transmittal.
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THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , , 1998,
UNLESS THE EXCHANGE OFFER IS EXTENDED.
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GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, an Eligible Institution (as defined in the
Prospectus), having an office or correspondent in the United States, hereby (a)
represents that the above named person(s) "own(s)" the Old Notes tendered hereby
within the meaning of Rule 14e-4 promulgated under the Securities Exchange Act
of 1934, as amended ("Rule 14e-4"), (b) represents that such tender of Old Notes
complies with Rule 14e-4, and (c) guarantees to either deliver to the Exchange
Agent the certificates representing all the Old Notes tendered hereby, in proper
form for transfer, or to deliver such Old Notes pursuant to the procedure for
book-entry transfer into the Exchange Agent's account at The Depository Trust
Company, in either case together with the Letter of Transmittal (or a facsimile
thereof), properly completed and duly executed, with any required signature
guarantees or an Agent's Message (as defined in the Prospectus) in the case of a
book-entry transfer, and any other required documents, all within three New York
Stock Exchange trading days after the date hereof.
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<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------ ------------------------------------
Name of Firm Authorized Signature
- ------------------------------------ Name ------------------------------
Address Please Type or Print
- ------------------------------------ Title -----------------------------
Zip Code
</TABLE>
NOTE: DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS NOTICE.
CERTIFICATES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL.
