AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 24, 1998
REGISTRATION NO. 333-63825
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
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.)
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)
</TABLE>
COPIES TO:
BERNARD L. BIRKEL, SECRETARY
SCOTIA PACIFIC COMPANY LLC HOWARD A. SOBEL, ESQ.
5847 SAN FELIPE KRAMER LEVIN NAFTALIS & FRANKEL LLP
SUITE 2600 919 THIRD AVENUE
HOUSTON, TEXAS 77057 NEW YORK, NEW YORK 10022
(713) 975-7600 (212) 715-9100
------------------------
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 (2)
- ------------------------------------------------------------------------------------------------------------------
<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
==================================================================================================================
</TABLE>
(1) Calculated pursuant to Rule 457(f)(2) solely for purposes of calculating the
registration fee.
(2) Previously paid.
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.
================================================================================
<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 DECEMBER 24, 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 ON THIS PAGE) WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1999 (AS SUCH DATE MAY BE EXTENDED, BUT
NO LATER THAN ; 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 on this page) 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 40, 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.
------------------------------------------------------
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 the last date to which
interest has been paid on the Old Notes, or, if no such interest has been paid,
from and including July 20, 1998. 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. There has previously been only a limited secondary market, and no
public market, for
3
<PAGE>
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............................ 40
The Exchange Offer...................... 52
Overview and Structure of the
Transaction........................... 60
Capitalization.......................... 73
Selected Historical and Pro Forma
Financial Data........................ 74
Unaudited Pro Forma Statements of
Income................................ 75
Notes to Unaudited Pro Forma Financial
Statements............................ 76
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 77
Business of the Company................. 82
Management.............................. 98
Certain Transactions.................... 101
Description of the Timber Notes......... 102
Certain Defined Terms................... 145
Description of Certain Principal
Agreements............................ 162
Certain Legal Considerations............ 170
United States Income Tax Consequences... 171
Plan of Distribution.................... 173
Legal Matters........................... 174
Experts................................. 174
Financial Statements of the Company..... F-1
Annex 1--Structuring Schedule........... I-1
Annex 2--The Pacific Lumber Company..... II-1
Annex 3--Moody's Press Release.......... III-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. 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. 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.
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 on page 12), 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 on page 12).
This Prospectus contains statements which constitute "forward-looking
statements." These statements appear in a number of places (see this section,
"Risk Factors," "Overview and Structure of the Transaction," "Business of
the Company--Regulatory and Environmental Factors" and "--Legal Proceedings,"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations"--Results of Operations--Recent Operating Results" and
"--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.
THIS SECTION CONTAINS STATEMENTS WHICH CONSTITUTE "FORWARD-LOOKING
STATEMENTS." SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--RESULTS OF OPERATIONS--RECENT OPERATING RESULTS,"
"RISK FACTORS," AND "BUSINESS OF THE COMPANY--REGULATORY AND ENVIRONMENTAL
MATTERS," "--HEADWATERS AGREEMENT," AND "--LEGAL PROCEEDINGS" FOR
CAUTIONARY INFORMATION WITH RESPECT TO SUCH 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
7
<PAGE>
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 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>
<CAPTION>
<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").
</FN>
</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 rights 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 on page 153 and as described 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 on page 152) securing the
Timber Notes and (ii) approximately 800 acres of Company Timberlands subject to
the Pacific Lumber Timber Rights will be transferred to the federal and state
governments. The Initial Harvest Schedule (as defined on page 60) 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. In October 1998, an agreement in principle was executed providing for
the sale of the Elk River Timberlands to the United States and California.
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." See also "--Regulatory
and Environmental Factors; The Headwaters Agreement," "Risk
Factors--Regulatory and Environmental Factors" and "Business of the
Company--Regulatory and Environmental Matters--The Combined Plan and California
Headwaters Bill" regarding certain potential effects of the California
Headwaters Bill.
10
<PAGE>
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 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 draft habitat conservation plan covering multiple species
("Multi-Species HCP") prepared by Pacific Lumber and the Company 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 California
Headwaters Bill would add approximately 4,500 acres to serve as interim
streamside buffers. The aggregate acreage required to serve as streamside
buffers may be adjusted based upon a watershed assessment process required to be
conducted in connection with the Headwaters Agreement, which adjustments were
not assumed in the Initial Harvest Schedule. 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 "--Regulatory and Environmental Matters;
the Headwaters Agreement"; "Risk Factors--Factors Affecting Actual
Amortization," "--Regulatory and Environmental Factors," and "--Headwaters
Agreement"; "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.
11
<PAGE>
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 on this page),
the New Master Purchase Agreement, the New Reciprocal Rights Agreement (as
defined on the following page), the New Additional Services Agreement (as
defined on page 85) 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 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 November 17, 1998, the Company had 41 employees, 38 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
12
<PAGE>
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 and consultants, 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 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 held in respect of Company Timber. 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 (which are set forth on pages
65-66) 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. See "--Recent Operating Results" for a
description of difficulties the Company has been experiencing in the THP
submission and approval process. Pacific Lumber and the Company have released a
draft sustained yield plan ("SYP") and a draft 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.
13
<PAGE>
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 habitat conservation plan
("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."
In order to conduct its own harvesting and logging operations in
California, Pacific Lumber is required to have a timber operator's license
("TOL") issued by the CDF. On November 9, 1998, Pacific Lumber was notified
that the CDF had suspended its TOL for the remainder of 1998. Pacific Lumber
believes that it will be able to engage independent contractors to complete
harvesting activities on all of the THPs that Pacific Lumber was operating on,
as well as any other THPs on which harvesting activities will be conducted,
during the balance of 1998 and during calendar year 1999, if necessary.
Accordingly, the Company does not believe that the revocation of Pacific
Lumber's TOL will have a significant adverse effect on the Company's business or
financial performance. See "Business of the Company--Legal Proceedings--Timber
Harvesting Litigation."
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."
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 habitat for such species, and air and water quality.
While 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, they have not historically had a significant adverse effect on
the Company's financial position, results of operations or liquidity, although
the Company's recent results of operations have been adversely affected by the
absence of a sufficient number of available THPs to enable the Company to
conduct its operations at historic levels. See "--Recent Operating Results".
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 until certain purported intra-agency wildlife consultation
requirements under the federal Endangered Species Act (the "ESA") are
satisfied in connection with the Combined Plan (as defined on the following
page). 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. See "--The Headwaters
Agreement" below regarding the potential effect on the SYP of the California
Headwaters Bill and possible proposed amendments to the Combined Plan.
14
<PAGE>
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"), (v) acquisition of the Elk River Timberlands and
(vi) tax closing agreements satisfactory to MAXXAM and Pacific Lumber.
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. These funds remain available until March 1, 1999.
In September 1998, California Governor Wilson signed the California Headwaters
Bill which, among other things, appropriates $130 million toward consummation of
the Headwaters Agreement. The state funds remain available until June 30, 1999.
An 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, which would be transferred to the Company. 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." In October 1998, an
agreement in principle was executed providing for the sale of the Elk River
Timberlands to the United States and California. The parties have been
discussing the tax closing agreements but have not reached agreement.
In July 1998, Pacific Lumber and the Company released a draft combined SYP
and Multi-Species HCP (the "Combined Plan") for the purpose of public review
and comment. The public review and comment period with respect to the Combined
Plan concluded on November 16, 1998. 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 contains
provisions requiring the inclusion of additional environmentally focused
provisions in the final version of the Multi-Species HCP, including establishing
wider interim streamside "no-cut" buffers (while the watershed assessment
process referred to below 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 (on a watershed by watershed basis), imposing minimum and maximum
"no-cut" buffers upon the watershed assessment process and designating the
Company's Owl Creek grove as a marbled murrelet conservation area. The
California Headwaters Bill also provides that the SYP shall be subject to the
foregoing provisions. See "Business of the Company--Regulatory and
Environmental Factors--The Combined Plan and California Headwaters Bill."
15
<PAGE>
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, although there
can be no assurance that the Company will not face difficulties in the THP
submission and approval process as it implements the Combined Plan. See
"--Recent Operating Results." See also "Risk Factors--Regulatory and
Environmental Factors" and "--Headwaters Agreement" and "Business of the
Company--Regulatory and Environmental Matters" and "--Headwaters Agreement".
The Company believes that submission of the proposed Combined Plan 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. However, certain
provisions of the California Headwaters Bill, including its provisions relating
to the watershed assessment process, are required to be included in the final
version of the Combined Plan. In addition, discussions are expected to occur
with federal and state regulatory agencies in light of the recent conclusion of
the public review and comment period relating to the Combined Plan, which
discussions are expected to result in proposed amendments to the Combined Plan.
The provisions of the California Headwaters Bill impose, and the potential
proposed amendments could impose, more stringent harvesting requirements and
reduce the amount of Company Timber that may be harvested as contemplated by the
SYP in its current form. In this regard, the Company has recently received from
the federal and state governments a number of proposed revisions to the
Multi-Species HCP. Certain of these proposed revisions were previously
considered and rejected by the Company in the course of negotiations concerning
the Pre-Permit Agreement and the Combined Plan as, among other things, being
unduly restrictive on timber harvesting operations on the Company Timberlands.
On December 17, 1998, the Company announced that its negotiations with the
regulatory agencies regarding these proposed revisions had not produced
agreement on a Multi-Species HCP, as the Company could not agree to certain of
these proposed revisions and continue to operate effectively. Although the
Company anticipates that it will have further discussions with federal and state
regulatory agencies regarding these and other proposed revisions with respect to
the Combined Plan, there can be no assurance that these discussions will result
in a Combined Plan acceptable to the Company. Inasmuch as approval of the
Multi-Species HCP and the SYP are conditions to the consummation of the
Headwaters Agreement and certain modifications proposed by the regulatory
agencies may not be acceptable to Pacific Lumber, any such proposed
modifications could also affect the consummation of the Headwaters Agreement.
Accordingly, while the parties are working diligently to complete the closing
conditions contained in the Headwaters Agreement, there can be no assurance that
the Multi-Species HCP and the SYP will be approved, that the Permits will be
issued or that the Headwaters Agreement will be consummated.
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 $105.1 million for the
nine months ended September 30, 1997 to $67.8 million for the nine months ended
September 30, 1998 as a result of the decrease in the volume of log deliveries
for such periods from 151,800 Mbfe to 97,500 Mbfe, respectively.
16
<PAGE>
The well-above-normal rainfall during the first half of 1998 and additional
restrictions on wet weather operations pursuant to the terms of the Stipulation
(as defined on page 96), together with logging restrictions during the nesting
seasons for both the northern spotted owl and the marbled murrelet, were the
principal factors which impeded logging operations in the Company Timber during
the first half of 1998. Revenues for the three months ended September 30, 1998
were primarily affected by a reduction in the volume of logs harvested as a
result of the factors discussed below.
The reduced level of logging activities in the Company Timber during the
third quarter of 1998 was due in substantial part to the absence of a sufficient
number of available THPs to enable the conduct of operations at levels
consistent with those in the comparable period of 1997. The diminished supply of
available THPs was attributable to a reduced volume of approved THPs during the
third quarter of 1998 as well as regulatory and judicial restrictions imposed
upon harvesting activities in areas covered by previously approved THPs. See
"Business of the Company--Regulatory and Environmental Matters" and "--Legal
Proceedings--Timber Harvesting Litigation." The reduced number of approved THPs
was, and continues to be, attributable to several factors, including a
significantly reduced level of THPs submitted by the Company to the CDF during
the first nine months of 1998 due to (a) the extensive amount of time devoted by
the Company's foresters, wildlife and fisheries biologists and other personnel
to (i) amending a significant number of previously submitted THPs to incorporate
various new requirements which Pacific Lumber agreed to as part of the
Pre-Permit Agreement (as defined on page 89), (ii) preparing the Combined Plan
and all the related data (see "Business of the Company--Regulatory and
Environmental Matters--Overview"), (iii) responding to comments received by the
Company from various federal and state governmental agencies with respect to its
filed THPs in light of the new and more stringent requirements that Pacific
Lumber agreed to observe pursuant to the Pre-Permit Agreement and (iv) assisting
Pacific Lumber with responding to newly filed litigation involving certain of
the Company's THPs (see "Business of the Company--Legal Proceedings--Timber
Harvesting Litigation") and (b) implementation of a provision contained in the
Pre-Permit Agreement which requires, for the first time, a licensed geologist to
review virtually all of the Company's THPs prior to submission to the CDF. The
Company has also experienced an unexpected significantly slower rate of review
and approval with respect to its filed THPs due, in large part, to the issues
that have emerged in applying the requirements embodied in the Pre-Permit
Agreement to the Company's THPs, certain of which requirements impose new
forestry practices that apply solely to operations in the Company Timber. As a
result of the factors discussed above, the Company had a severely dimished
inventory of approved THPs at December 1, 1998, which is limiting the ability to
conduct harvesting operations in the Company Timber. Harvesting levels during
the fourth quarter of 1998 have been significantly below that of the fourth
quarter of 1997.
Pacific Lumber has released a draft of the Combined Plan for public review
and comment and believes that it has completed most of its work in connection
with preparation of the Combined Plan; however, additional work will be required
as a result of completion of the public review and comment process for the
Combined Plan and as a result of the California Headwaters Bill. The Company has
also retained several geologists, and believes it has made progress with the
various state and federal government agencies in resolving issues regarding the
application of the requirements of the Pre-Permit Agreement to the Company's
filed THPs. Accordingly, the Company believes that it will be able to increase
its rate of THP submissions during the first half of 1999. In addition, if the
Combined Plan and the Permits are approved, the Company expects to experience a
more streamlined THP process, which should result in an increased volume of
approved THPs. However, there can be no assurance that the Company will not
continue to experience difficulties in submitting and receiving approvals of its
THPs similar to those difficulties it has been experiencing.
The Company expects that cash flow from operations, together with other
available sources of funds, will be sufficient to fund its working capital,
capital expenditures and required debt service obligations for the next year.
Based upon the Company's financial results through the date of this Prospectus,
the Company does not expect to have sufficient cash on hand from the sale of
logs to pay the interest due on the Timber
17
<PAGE>
Notes on the January 20, 1999 payment due. In such event, a capital contribution
will be made by Pacific Lumber or an indirect parent of the Company to fund such
interest shortfall. The Company is required to pay principal on a Note Payment
Date (as defined on page 25) only to the extent of available funds in the
Payment Account (as defined on page 107) after the payment of interest. Thus, if
a capital contribution is made only to the extent of any interest shortfall, no
principal payment will be due on the January 20, 1999 payment date. No
determination has been made as to whether a capital contribution will be made
with respect to the payment of any principal on the Timber Notes on the January
20, 1999 payment date or any future shortfalls with respect to interest or
principal. See "Risk Factors--Sources of Payments on the Timber Notes."
In addition, cash flows from operations may be adversely affected if the Company
continues to experience difficulties in the THP submission and approval process,
additional judicial or regulatory restrictions are imposed on harvesting
activities in the Company Timber, inclement weather conditions hamper harvesting
operations or the final Combined Plan is not approved or is not acceptable to
Pacific Lumber. 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.
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.
On November 9, 1998, the CDF notified Pacific Lumber that it had suspended
Pacific Lumber's 1998 TOL. Pacific Lumber has ceased all operations under its
1998 TOL. Pacific Lumber has made the necessary arrangements for independent
contract loggers to be substituted as the licensed timber operator on those THPs
where Pacific Lumber's logging crews were working prior to the suspension
(independent contractors historically account for approximately 60% of the
harvesting activities on the Company Timberlands). Pacific Lumber believes it
will be able to engage independent contractors to conduct harvesting activities
on any other approved THPs during the balance of calender year 1998 and during
calendar year 1999, if necessary. Accordingly, the Company does not believe that
revocation of Pacific Lumber's 1998 TOL will have a significant adverse effect
on the Company's business or financial performance. Pacific Lumber has
determined not to appeal the suspension of its 1998 TOL, and has applied for a
new TOL from the CDF for 1999. The CDF has indicated to Pacific Lumber that it
is considering a denial of Pacific Lumber's TOL for calendar year 1999 and that
any agreements for the issuance of a conditional TOL for 1999 must contain
sufficient provisions to the CDF's satisfaction to ensure that Pacific Lumber
complies with the California Forest Practice Act (the "Forest Practice Act").
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,
18
<PAGE>
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 nine months ended September 30,
1998 were also adversely affected by the factors described under "--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."
19
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<CAPTION>
<S> <C>
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
, 1999, as the
same may be extended, but in any
event not later than
. 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 the last
date to which interest has been paid
on the Old Notes or, if no such
interest has been paid, from and
including July 20, 1998. Eligible
Holders whose Old Notes are accepted
for exchange will not have the right
to receive interest accrued thereon
since such interest will be payable
to the holders of the New Notes with
the first interest payment on the New
Notes.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 on page
22) 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 on page 55) 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 (avail-
able 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 con-
taining the selling security holder
information required by
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 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
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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."
</TABLE>
23
<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 Non-Amortizing(2)
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
</TABLE>
- ---------------
(1) See "--Ratings."
(2) Single principal payment on Scheduled Maturity Date.
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 on
24
<PAGE>
page 107) 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 cer-
tain 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 on page 36) 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 on page 145), 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--see "Description of Timber
Notes--Accounts; Payment on the Timber
Note").
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."
25
<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
January 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 on page 158) 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 and without regard to
actual harvest levels) 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
26
<PAGE>
the application of all available funds
to make payments on the Timber Notes, as
described herein. The issuance of
Additional Timber Notes cannot reduce
(but may increase) the Minimum Principal
Amortization of one or more Classes of
Timber Notes.
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 and
without regard to actual harvest levels)
through each Note Payment Date in order
to avoid the payment of Prepayment or
Deficiency Premiums (each as defined on
page 29) 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 issuance of Additional
Timber Notes cannot affect the Scheduled
Amortization for any Class of Timber
Notes. 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 sole purpose of the
Scheduled Amortization Schedules is in
connection with the calculation of any
Prepayment or Deficiency Premiums.
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 on
page 34) 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
27
<PAGE>
"Overview and Structure of the Transac-
tion--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 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 on page 103) 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
"--Additional 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
28
<PAGE>
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 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 Deficiency Premiums,
Non-Registration Premiums and/or
Prepayment 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
resulting from the redemption, 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
29
<PAGE>
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 on page 152) 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 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 on page 160), which,
together with any Additional Liquidity
Provider Fees (as defined on page 145),
are paid only out of funds that would
otherwise 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
on page 159) 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
30
<PAGE>
(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 (as defined on page 145)
under the original Line of Credit Agree-
ment or, if any funds remain in the
Liquidity Account after such repayments,
released to the Company.
If a Termination Advance is made, an
Acceleration Event (as defined on page
145) does not exist and a Line of Credit
Acceleration (as defined on page 152)
has not occurred, interest on the
Termination Advance (other than any
Supplemental Liquidity Provider
Interest) will be paid to the Liquidity
Providers on a pro rata basis with
interest on the Timber Notes, and
principal repayments pursuant to the
terms of the Line of Credit Agreement
will be paid after payment of the
Minimum Principal Amortization Amount,
if any, then due for each class of
Timber Notes, but prior to payment of
the Depletion Amortization Amount.
During the continuance of a Triggering
Event (as defined on page 161), the
obligation to make Advances under the
Line of Credit Agreement will be
suspended and the Liquidity Providers
may cause a Line of Credit Acceleration
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. In addition, during the continu-
ance of an Acceleration Event, 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 on page 145).
31
<PAGE>
Under the Bank of America Credit
Agreement, Interest Advances 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 Minimum Principal
Amortization Amount, if any, then due
for each class of Timber Notes),
beginning approximately two and one-half
years following the Termination Advance.
However, if a Line of Credit
Acceleration occurs or an Acceleration
Event exists, 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 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 on page 158). Upon satisfaction
of certain 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.... On the Closing Date, an Expense Reserve
(the "Expense Reserve") was
established for the purpose generally of
paying capital costs or expenses
relating to the operation of the
Mortgaged Property or the operations of
the Company. The Expense Reserve was
funded in an initial amount of $1.1
million.
32
<PAGE>
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. See "De-
scription 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
Offering was deposited into an account
(the "Prefunding Account") to be
available for the purchase at any time
of Additional Timber Properties, subject
to satisfaction of certain conditions.
As of November 1, 1998, approximately
$2.6 million 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 on page
107), 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 of the
Company (including amounts payable under
the New Services Agreement);
(ii) to pay the Trustee's and Collateral
Agent's Expenses (as defined on pages
161 and 146, respectively), and to pay
the Liquidity Providers' Expenses (as
defined on page 153);
(iii) to pay interest on any outstanding
Interest Advances under the Line of
Credit Agreement (other than any
Supplemental Liquidity Provider
Interest) and to repay the principal
amount of any Interest Advances;
33
<PAGE>
(iv) to the Payment Account 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 on page
109) shall have occurred and be
continuing, any remaining funds (the
"Excess Funds"), first, to pay any
Additional Liquidity Provider Fees or
Supplemental Liquidity Provider Inter-
est 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
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 on page
145) shall have occurred and be
continuing, all interest, principal and
other amounts (other than any Additional
Liquidity Provider Fees and any Supple-
mental Liquidity Provider Interest) then
owing to the Liquidity Providers shall
be paid to the Liquidity
34
<PAGE>
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 Amount, if any, then due on
each Class of Timber Notes;
(iv) to pay any Line of Credit
Amortization Amount (as defined on page
153) 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
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
35
<PAGE>
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 on page 158) 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 on page
155), 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
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. How-
ever, the issuance of Additional Timber
Notes cannot affect the Scheduled
Amortization used to determine
Prepayment Premiums and Deficiency
Premiums, cannot extend the Minimum
Principal Amortization Schedule, of any
Class of Timber Notes and cannot
36
<PAGE>
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. On November
24, 1998, Moody's Investor Service Inc.
("Moody's") announced that it has
placed the Timber Notes on review for
possible downgrade of their assigned
rating. Moody's indicated that its
rating action was prompted by the
suspension by the CDF of Pacific
Lumber's 1998 TOL on November 10, 1998.
See "Business of the Company--Legal
Proceedings--Timber Harvesting
Litigation." See also Annex 3 for a
copy of the Moody's announcement.
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.
37
<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 nine months ended September 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 0 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
The historical balance sheet data as of September 30, 1998 reflects the issuance
of the Timber Notes, the retirement of the Original Timber Notes, and the
distribution of $526.1 million in cash to Pacific Lumber and other adjustments
which occurred on July 20, 1998. 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 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 operating data does not, however, give effect
to the transfer of the Elk River Timberlands to the Company.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 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........ $ 67.8 $ 67.8 $105.1 $126.4 $126.4 $ 135.0 $ 129.4
General and administrative
expenses......................... 6.7 8.0 6.7 8.3 10.4 7.8 7.6
Depletion and depreciation......... 9.3 9.3 13.8 16.8 16.8 16.8 17.5
Operating income................... 51.8 50.5 84.6 101.3 99.2 110.4 104.3
Interest and other income.......... 1.9 1.6 2.0 2.8 1.9 2.9 3.0
Interest expense................... 27.5 48.9 20.6 27.3 65.6 28.3 29.2
Income before income taxes......... 26.2 3.2 66.0 76.8 35.5 85.0 78.1
Income before extraordinary item... 18.7 3.2 39.1 45.6 35.5 51.5 46.0
Extraordinary item................. (35.4) -- -- -- --
Net income (loss).................. (16.8) 39.1 45.6 51.5 46.0
OTHER DATA:
Harvest volumes (thousands of
Mbfe)(2)......................... 97.5 97.5 151.8 182.3 182.3 182.5 187.5
Average realized SBE Price per
Mbfe(2).......................... $ 695 $ 695 $ 692 $ 693 $ 693 $ 740 $ 690
EBITDA(3).......................... 61.1 59.8 98.4 118.1 116.0 127.2 121.8
Ratio of earnings to fixed
charges.......................... 2.0x 1.1x 4.2x 3.8x 1.5x 4.0x 3.7x
Capital expenditures (including
timberland acquisitions)......... 7.2 7.2 11.1 14.8 14.8 7.3 4.2
Dividends and distributions........ 532.8 -- 48.6 74.7 540.7 84.1 79.1
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------------------
DECEMBER 31,
SEPTEMBER 30, -------------------------------
1998 1997 1996 1995
------------------- --------- --------- ---------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents(4)....... $ 18.0 $ 20.9 $ 20.3 $ 21.5
Timber and timberlands............. 246.2 249.7 255.6 268.2
Restricted cash(4)................. 23.7 28.4 30.0 31.4
Total assets....................... 338.2 356.9 362.5 378.8
Total indebtedness................. 867.8 327.5 336.9 351.6
Member capital (deficit)........... (547.1) 17.1 12.7 12.9
</TABLE>
- ---------------
(1) 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; and (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. See "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 as of September 30, 1998 includes
amounts deposited in the Expense Reserve. Historical restricted cash as of
September 30, 1998 represents amounts held in the Prefunding Account.
Historical cash and cash equivalents for prior periods 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 Original Timber Notes. Historical
restricted cash for prior periods represents amounts held in the liquidity
account for the Original Timber Notes (the "Original Liquidity Account").
39
<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. THIS SECTION CONTAINS STATEMENTS WHICH CONSTITUTE
"FORWARD-LOOKING STATEMENTS." SEE THIS SECTION, "SUMMARY--THE COMPANY--RECENT
OPERATING RESULTS" AND "BUSINESS OF THE COMPANY--REGULATORY AND ENVIRONMENTAL
MATTERS," "--HEADWATERS AGREEMENT," AND "--LEGAL PROCEEDINGS" FOR
CAUTIONARY INFORMATION WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS.
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). The Company's recent results
of operations have been adversely affected by the absence of a sufficient number
of available THPs to enable the Company to conduct its operations at 1997
levels. In addition, the Company may not have sufficient cash on hand from the
sale of logs to pay the interest due on the Timber Notes on the January 20, 1999
payment date, but anticipates that a capital contribution would be made to the
Company to fund such interest shortfall. See "Summary--The Company--Recent
Operating Results." 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
40
<PAGE>
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 on page 61 under "Overview
and Structure of the 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. As discussed under "Business of the
Company--Regulatory and Environmental Matters--The Combined Plan and California
Headwaters Bill," the provisions of the California Headwaters Bill impose, and
potential proposed amendments to the Combined Plan could impose, more stringent
harvesting requirements and reduce the amount of Company Timber that may be
harvested as contemplated by the SYP in its current form and assumed in the
Initial Harvest Schedule described in "Overview and Structure of the
Transaction" and "--Regulatory and Environmental Factors." The Company is
unable to estimate what effect these changes might have on reducing the required
amortization of the Timber Notes.
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
41
<PAGE>
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." See also "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 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." The Company's recent results of operations have
been adversely affected by the absence of a sufficient number of available THPs
to enable the Company to conduct its operations at 1997 levels. See
"Summary--The Company--Recent Operating Results."
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 generally
be faster than that indicated on the Minimum Principal Amortization Schedules.
However, certain provisions of the California Headwaters Bill impose, and
potential proposed amendments to the Combined Plan could impose, more stringent
harvesting requirements and reduce the amount of Company Timber that may be
harvested as contemplated by the SYP in its current form and assumed in the
Initial Harvest Schedule. See also "--Regulatory and Environmental Factors."
The Company is unable to estimate what effect these changes might have on
reducing the required amortization of the Timber Notes. 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.
In addition, the Company may not have sufficient cash on hand from the sale of
logs to pay the interest due on the Timber Notes on the January 20, 1999 payment
date, but anticipates that a capital contribution would be made to the Company
to fund such interest shortfall. See "Summary--The Company--Recent Operating
Results."
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
42
<PAGE>
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 on page
149) with respect to the Mbfe contained within the grove. This Deemed Production
could result in an increase in required amortization of the Timber Notes by up
to approximately $17 million (assuming a sale in the payment period ended July
20, 1999) which might be offset by a reduction of required amortization in later
years attributable to not having any actual harvest from the Owl Creek grove. In
addition, this Deemed Production would result in the obligation to pay
Prepayment Premiums, computed as described under "Description to the Timber
Notes--Principal; Interest Premium--Premium," on Excess Payments so long as
actual amortization of the Timber Notes exceeds their Scheduled Amortization. If
the Owl Creek grove is not sold to the State of California or exchanged for
other timberlands and cannot be harvested, the inability to harvest the Owl
Creek grove could, all other things being equal, have the effect of reducing the
required amortization of the Timber Notes during the ten years ending July 2008
by up to approximately $17 million, and have the effect of further reductions in
later years. Any decision by the Company to sell the Owl Creek grove or other
timberlands pursuant to the terms of the California Headwaters Bill would
depend, among other things, upon the adequacy of the consideration to be
received for the sale of such timberlands. Aside from the proposed sale of
certain Company Timberlands pursuant to the terms of the California Headwaters
Bill, the Company does not have any plans to sell any portions thereof or to
make any Lump Sum Sales (as defined on page 120).
Certain other provisions of the California Headwaters Bill impose, and
potential proposed amendments to the Combined Plan could impose, more stringent
harvesting requirements and reduce the amount of Company Timber that may be
harvested as contemplated by the SYP in its current form and assumed in the
Initial Harvest Schedule. See "--Regulatory and Environmental Factors." The
Company is unable to estimate what effect these changes might have on reducing
the required amortization of 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
43
<PAGE>
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. During the
continuance 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 obligation to make Advances under the Line of Credit Agreement will
be suspended and 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 on Note Payment Dates after payment of the
Aggregate Minimum Principal Amortization Amount (as defined on page 145) as of
the respective Note Payment Dates but prior to any additional principal payments
on the Timber Notes. However, if a Line of Credit Acceleration occurs or an
Acceleration Event exists, 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.
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 extend the
Minimum Principal Amortization Schedule 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, threatened and
endangered species and habitat for such 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
Company's recent results of operations have been adversely affected by the
absence of a sufficient number
44
<PAGE>
of available THPs to enable the Company to conduct its operations at 1997
levels. See "Summary--The Company--Recent Operating Results." 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 adversely 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 until certain purported intra-agency
wildlife consultation requirements under the ESA are satisfied in connection
with the Combined Plan.
The designation of a species as endangered or threatened under 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 have increased the
time required to prepare and obtain approval of THPs and have tended to reduce
the Company's supply of approved THPs. See "Summary--The Company--Recent
Operating Results" for difficulties the Company has been experiencing in
connection with the THP submission and approval process. The supply of THPs
approved at any time could continue to decrease if the Combined Plan is not
approved. The Company believes that the Combined Plan should expedite the
preparation and facilitate approval of its THPs, although there can be no
assurance that the Company will not face difficulities in the THP submission and
approval process as it implements the Combined Plan. See "Summary--The
Company--Recent Operating Results."
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.
See "Business of the Company--Legal Proceedings--Timber Harvesting Litigation"
with respect to certain lawsuits which are pending or threatened which could
adversely affect the ability to harvest Company Timber, including one lawsuit
which could potentially result in severe restrictions on the ability to harvest
Company Timber until certain purported intra-agency wildlife conservation
requirements under the ESA are satisfied in connection with the Combined Plan.
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. Certain provisions of the California Headwaters Bill,
including its provisions relating to the watershed assessment process, are
required to be included in the final version of the Combined Plan. In addition,
discussions are expected to occur with federal and state regulatory agencies in
light of the recent conclusion of the public review and comment period relating
to the Combined Plan, which discussions are expected to result in
45
<PAGE>
proposed amendments to the Combined Plan. The provisions of the California
Headwaters Bill impose, and the potential proposed amendments to the Combined
Plan could impose, more stringent harvesting requirements and reduce the amount
of timber that Pacific Lumber will be permitted to harvest as contemplated by
the SYP in its current form. In this regard, the Company has recently received
from the federal and state governments a number of proposed revisions to the
Multi-Species HCP. Certain of these proposed revisions were previously
considered and rejected by the Company in the course of negotiations concerning
the Pre-Permit Agreement and the Combined Plan as, among other things, being
unduly restrictive on timber harvesting operations on the Company Timberlands.
On December 17, 1998, the Company announced that its negotiations with the
regulatory agencies regarding these proposed revisions had not produced
agreement on a Multi-Species HCP, as the Company could not agree to certain of
these proposed revisions and continue to operate effectively. Although the
Company anticipates that it will have further discussions with federal and state
regulatory agencies regarding these and other proposed revisions with respect to
the Combined Plan, there can be no assurance that these discussions will result
in a Combined Plan acceptable to the Company. Inasmuch as approval of the
Multi-Species HCP and the SYP are conditions to the consummation of the
Headwaters Agreement and certain modifications proposed by the regulatory
agencies may not be acceptable to Pacific Lumber, any such proposed
modifications could also affect the consummation of the Headwaters Agreement.
Accordingly, while the parties are working diligently to complete the closing
conditions contained in the Headwaters Agreement, there can be no assurance that
the Multi-Species HCP and the SYP will be approved, that the Permits will be
issued or that the Headwaters Agreement will be consummated. In addition,
litigation could also be brought to block or delay implementation of the
Headwaters Agreement or the approvals of the Combined Plan and the issuance of
the Permits.
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."
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 (see
Annex 1 to this Prospectus) and the Structuring Cash Flows (each as defined on
page 61), 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 and approval of the Combined Plan (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
46
<PAGE>
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 a 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."
However, there can be no assurance that the Company will not face difficulties
in the THP submission and approval process as it implements the Combined Plan.
See "Summary--The Company--Recent Operating Results."
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 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 (as defined on page 48).
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. In September 1998, California Governor Wilson signed the
California Headwaters Bill, which, among other things, appropriates California's
$130 million portion of funding required to consummate the Headwaters Agreement.
The state funds remain available until June 30, 1999. See "Business of the
Company--Regulatory and Environmental Matters". In October 1998, an agreement
in principle was executed providing for the sale of the Elk River Timberlands to
the United States and California. The parties have been discussing the tax
closing agreements but have not reached agreement.
In July 1998, Pacific Lumber and the Company released the Combined Plan for
public review and comment. The public review and comment period concluded on
November 16, 1998. 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 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 contains provisions requiring the inclusion of
additional environmentally focused provisions in the final version of the
Multi-Species HCP, including establishing wider interim streamside "no-cut"
buffers (while the watershed assessment process referred to below 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 (on a watershed by watershed
basis), imposing minimum and maximum "no-cut" buffers upon the watershed
assessment process and designating the Company's Owl Creek grove as a marbled
murrelet conservation area. See "Business of the Company--Regulatory and
Environmental Matters--Endangered and Threatened Species--The Coho Salmon." The
California Headwaters Bill also provides that the SYP shall be subject to the
foregoing provisions. The California Headwaters Bill would add approximately
4,500 acres to serve as interim streamside buffers. The aggregate acreage
required to serve as streamside buffers may be adjusted based upon a watershed
assessment process required to be conducted in connection with the Headwaters
Agreement.
The Company believes that submission of the proposed Combined Plan and the
draft EIR/EIS 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.
However, certain provisions of the California Headwaters Bill, including its
provisions relating to the watershed assessment process, are required to be
included in the final version of the Combined Plan. In
47
<PAGE>
addition, discussions are expected to occur with the federal and state
regulatory agencies in light of the recent conclusion of the public review and
comment period relating to the Combined Plan, which discussions are expected to
result in proposed amendments to the Combined Plan. The provisions of the
California Headwaters Bill impose, and the potential proposed amendments could
impose, more stringent harvesting requirements and reduce the amount of Company
Timber that may be harvested as contemplated by the SYP in its current form. In
this regard, the Company has recently received from the federal and state
governments a number of proposed revisions to the Multi-Species HCP. Certain of
these proposed revisions were previously considered and rejected by the Company
in the course of negotiations concerning the Pre-Permit Agreement and the
Combined Plan as, among other things, being unduly restrictive on timber
harvesting operations on the Company Timberlands. On December 17, 1998, the
Company announced that its negotiations with the regulatory agencies regarding
these proposed revisions had not produced agreement on a Multi-Species HCP, as
the Company could not agree to certain of these proposed revisions and continue
to operate effectively. Although the Company anticipates that it will have
further discussions with federal and state regulatory agencies regarding these
and other proposed revisions with respect to the Combined Plan, there can be no
assurance that these discussions will result in a Combined Plan acceptable to
the Company. Inasmuch as approval of the Multi-Species HCP and the SYP are
conditions to the consummation of the Headwaters Agreement and certain
modifications proposed by the regulatory agencies may not be acceptable to
Pacific Lumber, any such proposed modifications could also affect the
consummation of the Headwaters Agreement. Accordingly, while the parties are
working diligently to complete the closing conditions contained in the
Headwaters Agreement, there can be no assurance that the Multi-Species HCP and
the SYP will be approved, that the Permits will be issued or that the Headwaters
Agreement will be consummated. In addition, litigation could also be brought to
block or delay implementation of the Headwaters Agreement or the approvals of
the Combined Plan and the 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. See "--Regulatory and
Environmental Factors" regarding certain provisions of the California
Headwaters Bill which impose, and potential proposed amendments to the Combined
Plan which could impose, more stringent harvesting requirements and reduce the
amount of Company Timber that may be harvested as contemplated by the SYP in its
current form.
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."
48
<PAGE>
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.
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
49
<PAGE>
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. On November 24, 1998, Moody's announced that
it has placed the Timber Notes on review for possible downgrade of their
assigned rating. Moody's indicated that its rating action was prompted by the
suspension by the CDF of Pacific Lumber's 1998 TOL on November 10, 1998. See
"Business of the Company--Legal Proceedings--Timber Harvesting Litigation."
See also Annex 3 for a copy of the Moody's announcement.
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
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 (as defined on page 162) 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
50
<PAGE>
"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 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, 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.
51
<PAGE>
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 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
52
<PAGE>
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 , 1999 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 no later than ,
1999.
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, 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 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, 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 the last date
to which interest has been paid on the Old Notes or, if no such interest has
been paid, from and including July 20, 1998. Eligible Holders whose Old Notes
are accepted for exchange will not have the right to receive interest accrued
53
<PAGE>
thereon since such interest will be payable to holders of the New Notes with the
first interest payment on 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.
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 in this paragraph). 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
54
<PAGE>
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 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
55
<PAGE>
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 on
this page) 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 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
56
<PAGE>
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:
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
57
<PAGE>
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
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.
58
<PAGE>
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.
59
<PAGE>
OVERVIEW AND STRUCTURE OF THE TRANSACTION
THIS SECTION CONTAINS STATEMENTS WHICH CONSTITUTE "FORWARD-LOOKING
STATEMENTS." SEE "SUMMARY--THE COMPANY--RECENT OPERATING RESULTS," "RISK
FACTORS," AND "BUSINESS OF THE COMPANY--REGULATORY AND ENVIRONMENTAL
MATTERS," "--HEADWATERS AGREEMENT," AND "--LEGAL PROCEEDINGS" FOR
CAUTIONARY INFORMATION WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS.
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 (which acreage for streamside buffers may be adjusted
based upon the watershed assessment process, which adjustments were not assumed
in the Initial Harvest Schedule), (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." Certain other provisions of the California
Headwaters Bill (including those which would establish wider steamside buffers
than those provided for in the Combined Plan in its current form) impose, and
potential proposed amendments to the Combined Plan could impose, more stringent
harvesting requirements and reduce the amount of Company Timber that may be
harvested as contemplated by the SYP in its current form and assumed in the
Initial Harvest Schedule. See "Risk Factors--Regulatory and Environmental
Factors" and "Business of the Company--Regulatory and Environmental
Matters--The Combined Plan and California Headwaters Bill."
For purposes of producing the Structuring Cash Flows (as defined on the
following page) 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
60
<PAGE>
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, without regard
to actual harvest levels, 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 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 (DEFINED ON PAGE 103) 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 (and the Company does not
intend to update them) subsequent to the sale of the Old Notes.
SCHEDULED AMORTIZATION
It is anticipated that the Company Timber will generally 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 generally be repaid more
rapidly than the amortization schedule set forth in the related Minimum
Principal Amortization Schedule; however, certain provisions of the California
Headwaters Bill impose, and potential proposed amendments to the Combined Plan
could impose, more stringent harvesting requirements and reduce the amount of
Company Timber that may be harvested as contemplated by the SYP in its current
form and assumed in the Initial Harvest Schedule. The Company is unable to
estimate what effect these changes might have on reducing the required
amortization of the Timber Notes. 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, without regard to actual harvest
levels, 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 and the Combined Plan 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
61
<PAGE>
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"), 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") or the provisions of the California Headwaters Bill or potential
proposed amendments to the Combined Plan (see "Risk Factors--Factors Affecting
Actual Amortization" and "--Regulatory and Environmental Factors"). 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 as currently
proposed, 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. See "Risk Factors--Regulatory and
Environmental Factors." 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 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>
62
<PAGE>
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 and without regard to actual harvest levels, 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 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.
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 present value of
certain future operating expenses (the "Discounted Servicing Obligation") as
assumed in the Structuring Cash Flows plus the aggregate principal amount of the
Timber Notes then outstanding) 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 (i.e., the aggregate
harvest in Mbfe in the Structuring Assumptions for the approximately 30 year
period commencing in July 1998) 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, which is expressed in units of dollars (in thousands) per Mbfe, is a
pre-determined value set forth in the Structuring Schedule which increases each
month and, as of each month-end, equals the amount determined by dividing the
Structuring Collateral Value by the Deemed Remaining Harvest Quantity. 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. 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 slower than that
associated with the Minimum Principal Amortization through such month, the Total
Collateral Value would be determined by the Structuring Collateral Value. In
this circumstance unless the negative effect on cash flow resulting from the
amount of logs sold
63
<PAGE>
being lower than the amount assumed in the Structuring Assumptions were offset
by other factors, such as sales prices higher than those assumed in the
Structuring Assumptions, the actual amortization of the Timber Notes would be
slower 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 extend
the Minimum Principal Amortization Schedule 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 (when combined with scenarios as to
prices and/or operating and capital expenses that differ from those in the
Structuring Assumptions) 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. For example, if prices were approximately
10% higher than those in the Structuring Assumptions and aggregate operating and
capital expenses were the same as those in the Structuring Assumptions, a
harvest level of approximately 81% of the Initial Harvest Schedule would result
in the Timber Notes being amortized at a rate approximately equal to that shown
on the Minimum Principal Amortization Schedules. Similarly, if all other
variables remained the same except that prices were approximately 10% lower than
those in the Structuring Assumptions, a harvest level of approximately 99% of
the Initial Harvest Schedule would result in the Timber Notes being amortized at
a rate approximately equal to that shown on the Minimum Principal Amortization
Schedules. If the Timber Notes are amortized at a rate approximately equal to
that shown on the Minimum Principal Amortization Schedules (or at any other rate
that is slower than that shown on the Scheduled Amortization Schedules), the
Company will be required to pay Deficiency Premiums out of funds available
therefor after providing for payment of all interest and principal then due on
the Timber Notes.
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.
64
<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)
65
<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>
66
<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 on page 149)
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
67
<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 Provider 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
68
<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 (i.e., the estimated average initial price per
Mbfe of Company Timber) was based on the June 1998 SBE Prices and 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 (based on the Scheduled Harvest Schedule) 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
(based on the Services Fee provided for in the New Services Agreement and the
estimated initial level of other operating expenses) 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
(based on the estimated initial level of capital expenditures) 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% (the rate in effect as of July
9, 1998) of the gross revenue from harvest.
69
<PAGE>
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.
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>
70
<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>
71
<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>
72
<PAGE>
CAPITALIZATION
The following table sets forth, at September 30, 1998, the historical
capitalization of the Company which reflects completion of 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 appearing
elsewhere in this Prospectus.
SEPTEMBER 30, 1998
------------------
HISTORICAL
------------------
(IN MILLIONS OF
DOLLARS)
Cash and cash equivalents(1)......... $ 18.0
==================
Restricted cash(2)................... $ 23.7
==================
Timber Notes and other debt:
Current maturities................. $ 8.3
Long-term portion.................. 858.9
Other debt......................... 0.6
------------------
Total debt...................... 867.8
Member deficit(3).................... (547.1)
------------------
Total capitalization.......... $ 320.7
==================
- ---------------
(1) Historical cash and cash equivalents includes $13.2 million deposited in the
Payment Account under the Indenture for the payment of accrued interest and
principal on the Timber Notes.
(2) Historical restricted cash represents amounts held in the Prefunding Account
and is classified as a noncurrent asset in the Company's Financial
Statements.
(3) Includes (a) the write-off of $12.8 million of deferred financing costs and
the incurrence of $29.2 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 $526.1 million to
Pacific Lumber and (c) the elimination of $22.9 million of deferred income
tax assets.
73
<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 nine months ended September 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
historical balance sheet data as of September 30, 1998 gives effect to the
issuance of the Timber Notes, the retirement of the Original Timber Notes and
the payment of a $526.1 million cash dividend to Pacific Lumber. The following
unaudited operating data for the nine months ended September 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
pro forma operating data is not necessarily indicative of the results of future
operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 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........... $ 67.8 $ 67.8 $105.1 $126.4 $126.4 $ 135.0 $ 129.4
General and administrative expenses... 6.7 8.0 6.7 8.3 10.4 7.8 7.6
Depletion and depreciation............ 9.3 9.3 13.8 16.8 16.8 16.8 17.5
Operating income...................... 51.8 50.5 84.6 101.3 99.2 110.4 104.3
Interest and other income............. 1.9 1.6 2.0 2.8 1.9 2.9 3.0
Interest expense...................... 27.5 48.9 20.6 27.3 65.6 28.3 29.2
Income before income taxes............ 26.2 3.2 66.0 76.8 35.5 85.0 78.1
Income before extraordinary item...... 18.7 3.2 39.1 45.6 35.5 51.5 46.0
Extraordinary item.................... (35.4) -- -- -- --
Net income (loss)..................... (16.7) 39.1 45.6 51.5 46.0
OTHER DATA:
Harvest volumes (thousands of
Mbfe(2))............................ 97.5 97.5 151.8 182.3 182.3 182.5 187.5
Average realized SBE Price per
Mbfe(2)............................. $ 695 $ 695 $ 692 $ 693 $ 693 $ 740 $ 690
EBITDA(3)............................. 61.1 59.8 98.4 118.1 116.0 127.2 121.8
Ratio of earnings to fixed charges.... 2.0x 1.1x 4.2x 3.8x 1.5x 4.0x 3.7x
Capital expenditures (including
timberland acquisitions)............ 7.2 7.2 11.1 14.8 14.8 7.3 4.2
Dividends and distributions........... 532.8 -- 48.6 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 before income taxes............ 92.9 88.9
Income 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
Capital expenditures (including
timberland acquisitions)............ 2.6 0.6
Dividends and distributions........... 99.1 87.6
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------------------------------
DECEMBER 31,
SEPTEMBER 30, -----------------------------------------------------
1998 1997 1996 1995 1994 1993
------------- --------- --------- --------- --------- ---------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents(4).......... $ 18.0 $ 20.9 $ 20.3 $ 21.5 $ 20.2 $ 21.7
Timber and timberlands................ 246.2 249.7 255.6 268.2 281.8 294.9
Restricted cash(4).................... 23.7 28.4 30.0 31.4 32.4 33.6
Total assets.......................... 338.2 356.9 362.5 378.8 396.8 410.2
Total indebtedness.................... 867.8 327.5 336.9 351.6 364.7 376.9
Member capital (deficit).............. (547.1) 17.1 12.7 12.9 18.3 18.5
</TABLE>
- ---------------
See "Summary--Summary Historical and Pro Forma Financial Data" for the text of
notes (1) through (4).
74
<PAGE>
UNAUDITED PRO FORMA STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 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.......... $ 67.8 $ -- $ -- $ 67.8
Operating expenses:
General and administrative
expenses........................ 6.7 1.5 (0.2) 8.0
Depletion and depreciation......... 9.3 -- -- 9.3
----------- ------------- ------------- ------
Operating income..................... 51.8 (1.5) 0.2 50.5
Other income (expense)
Interest and other income.......... 1.9 0.9 (1.2) 1.6
Interest expense................... (27.5) (48.5) 27.1 (48.9)
----------- ------------- ------------- ------
Income before income taxes........... 26.2 (49.1) 26.1 3.2
Provision in lieu of income taxes.... (7.5) -- 7.5 --
----------- ------------- ------------- ------
Income before extraordinary item..... $ 18.7 $ (49.1) $33.6 $ 3.2
=========== ============= ============= ======
</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>
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.
75
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
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.
- -- 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
nine months ended September 30, 1998 and the year ended December 31, 1997
includes $1.2 million and $1.6 million, respectively, attributable to such
amortization and excludes $1.0 million and $1.2 million, respectively, of
amortization attributable to the Original Timber Notes.
- -- The pro forma adjustment to general and administrative expenses represents
$1.5 million and $2.5 million, respectively, of fees payable and amounts
reimbursable to Pacific Lumber during the nine months ended September 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 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.
- -- A pro forma balance sheet is not presented as the Company's historical
balance sheet as of September 30, 1998 reflects the issuance of the Timber
Notes, the retirement of the Original Timber Notes, the dividend to Pacific
Lumber and other transactions and adjustments as more fully described in the
Company's Financial Statements. See 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.
76
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS SECTION CONTAINS STATEMENTS WHICH CONSTITUTE "FORWARD-LOOKING
STATEMENTS." SEE "RISK FACTORS," AND "BUSINESS OF THE COMPANY--REGULATORY
AND ENVIRONMENTAL MATTERS," "--HEADWATERS AGREEMENT," AND "--LEGAL
PROCEEDINGS" FOR CAUTIONARY INFORMATION WITH RESPECT TO SUCH FORWARD-LOOKING
STATEMENTS.
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 $105.1 million for the
nine months ended September 30, 1997 to $67.8 million for the nine months ended
September 30, 1998 as a result of the decrease in the volume of log deliveries
for such periods from 151,800 Mbfe to 97,500 Mbfe, respectively. The
well-above-normal rainfall during the first half of 1998 and additional
restrictions on wet weather operations pursuant to the terms of the Stipulation,
together with logging restrictions during the nesting seasons for both the
northern spotted owl and the marbled murrelet, were the principal factors which
impeded logging operations in the Company Timber during the first half of 1998.
Revenues for the three months ended September 30, 1998 were primarily affected
by a reduction in the volume of logs harvested as a result of the factors
discussed below.
The reduced level of logging activities in the Company Timber during the
third quarter of 1998 was due in substantial part to the absence of a sufficient
number of available THPs to enable the conduct of operations at levels
consistent with those in the comparable period of 1997. The diminished supply of
available THPs was attributable to a reduced volume of approved THPs during
third quarter of 1998 as well as regulatory and judicial restrictions imposed
upon harvesting activities in areas covered by previously approved THPs. See
"Business of the Company--Regulatory and Environmental Matters" and "--Legal
Proceedings--Timber Harvesting Litigation". The reduced number of approved THPs
was, and continues to be, attributable to several factors, including a
significantly reduced level of THPs submitted by the Company to the CDF during
the first nine months of 1998 due to (a) the extensive amount of time devoted by
the Company's foresters, wildlife and fisheries biologists and other personnel
to (i) amending a significant number of previously submitted THPs to incorporate
various new requirements which Pacific Lumber agreed to as part of the
Pre-Permit Agreement, (ii) preparing the Combined Plan and all the related data
(see "Business of the Company--Regulatory and Environmental
Matters--Overview"), (iii) responding to comments received by the Company from
various federal and state governmental agencies with respect to its filed THPs
in light of the new and more stringent requirements that Pacific Lumber agreed
to observe pusuant to the Pre-Permit Agreement and (iv) assisting Pacific Lumber
with responding to newly filed litigation involving certain of the Company's
THPs (See "Business of the Company--Legal Proceedings--Timber Harvesting
Litigation") and (b) implementation of a provision contained in the Pre-Permit
Agreement which requires, for the first time, a licensed geologist to review
virtually all of the Company's THPs prior to submission to the CDF. The Company
has also experienced an unexpected significantly slower rate of review and
approval with respect to its filed THPs due, in large part, to the issues that
have emerged in applying the requirements embodied in the Pre-Permit Agreement
to the Company's THPs, certain of which requirements impose new forestry
practices that apply solely to operations in the Company Timber. As a result of
the factors discussed above, the Company had a severely
77
<PAGE>
diminished inventory of approved THPs at December 1, 1998, which is limiting the
ability to conduct harvesting operations in the Company Timber. Harvesting
levels during the fourth quarter of 1998 have been significantly below that of
the fourth quarter of 1997.
Pacific Lumber has released a draft of the Combined Plan for public review
and comment and believes that it has completed most of its work in connection
with preparation of the Combined Plan; however, additional work will be required
as a result of completion of the public review and comment process for the
Combined Plan and as a result of the California Headwaters Bill. The Company has
also retained several geologists, and believes it has made progress with the
various state and federal government agencies in resolving issues regarding the
application of the requirements of the Pre-Permit Agreement to the Company's
filed THPs. Accordingly, the Company believes that it will be able to increase
its rate of THP submissions during the first half of 1999. In addition, if the
Combined Plan and the Permits are approved, the Company expects to experience a
more streamlined THP process, which should result in an increased volume of
approved THPs. However, there can be no assurance that the Company will not
continue to experience difficulties in submitting and receiving approvals of its
THPs similar to those difficulties it has been experiencing.
The Company expects that cash flow from operations, together with other
available sources of funds, will be sufficient to fund its working capital,
capital expenditures and required debt service obligations for the next year.
Based upon the Company's financial results through the date of this Prospectus,
the Company does not expect to have sufficient cash on hand from the sale of
logs to pay the interest due on the Timber Notes on the January 20, 1999 payment
date. In such event, a capital contribution will be made by Pacific Lumber or an
indirect parent of the Company to fund such interest shortfall. The Company is
required to pay principal on a Note Payment Date only to the extent of available
funds in the Payment Account after the payment of interest. Thus, if a capital
contribution is made only to the extent of any interest shortfall, no principal
payment will be due on the January 20, 1999 payment date. No determination has
been made as to whether a capital contribution will be made with respect to the
payment of any principal on the Timber Notes on the January 20, 1999 payment
date or any future shortfalls with respect to interest or principal. See "Risk
Factors--Sources of Payments on the Timber Notes." In addition, cash flows from
operations may be adversely affected if the Company continues to experience
difficulties in the THP submission and approval process, additional judicial or
regulatory restrictions are imposed on harvesting activities in the Company
Timber, inclement weather conditions hamper harvesting operations or the final
Combined Plan is not approved or is not acceptable to Pacific Lumber. 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.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
LOG SALES TO PACIFIC LUMBER. Net sales from logs were $67.8 million and
$105.1 million for the nine months ended September 30, 1998 and 1997,
respectively. The volume of log deliveries for such periods represented
approximately 97,500 Mbfe and 151,800 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
$51.8 million and $84.6 million for the nine months ended September 30, 1998 and
1997, respectively. Income before income taxes was $26.2 million and $66.0
million for the nine months ended September 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, offset by a decline in depletion
and depreciation expense attributed to the decrease in harvest volumes between
periods. General and administrative expenses were nearly unchanged between the
two comparable periods. In addition to the impact from lower operating income,
income before income taxes also declined between periods due to the higher
interest expense resulting from the increase in debt related to the issuance of
the Timber Notes.
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
78
<PAGE>
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. Additionally, operating income was
affected by the increase in general and administrative expenses for the year
ended December 31, 1997 compared to the year ended December 31, 1996 which was
primarily attributable to higher labor costs and higher professional and
consulting services fees. With respect to the change in operating income between
1996 and 1995, the increase was also in part due to the decline in depletion and
depreciation expense for the year ended December 31, 1996 from the year ended
December 31, 1995 which was due to the decrease in harvest volumes.
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 are (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 Providers' Expenses
and to make any required payments of interest and repayments of Advances under
the Line of Credit Agreement and (c) utilized 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
79
<PAGE>
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.
Excluding the $526.1 million cash dividend paid to Pacific Lumber related to the
issuance of the Timber Notes, the Company paid dividends to Pacific Lumber of
$6.7 million during the nine months ended September 30, 1998 as compared to
$48.6 million for the nine months ended September 30, 1997. The decline in
dividends between periods is primarily 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
primarily as a result of the increase in interest expense related to the Timber
Notes. See "--Results of Operations--Recent Operating Results."
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 expects that cash flow from operations, together with other
available sources of funds, will be sufficient to fund its working capital,
capital expenditures and required debt service obligations for the next year.
Based upon the Company's financial results through the date of this Prospectus,
the Company does not expect to have sufficient cash on hand from the sale of
logs to pay the interest due on the Timber Notes on the January 20, 1999 payment
date. In such event, a capital contribution will be made by Pacific Lumber or an
indirect parent of the Company to fund such interest shortfall. The Company is
required to pay principal on a Note Payment Date only to the extent of available
funds in the Payment Account after the payment of interest. Thus, if a capital
contribution is made only to the extent of any interest shortfall, no principal
payment will be due on the January 20, 1999 payment date. No determination has
been made as to whether a capital contribution will be made with respect to the
payment of any principal on the Timber Notes on the January 20, 1999 payment
date or any future shortfalls with respect to interest or principal. See "Risk
Factors--Sources of Payments on the Timber Notes." In addition, cash flows from
operations may be adversely affected if the Company continues to experience
difficulties in the THP submission and approval process, additional judicial or
regulatory restrictions are imposed on harvesting activities on the Company
Timber, inclement weather conditions hamper harvesting operations or the final
Combined Plan is not approved or is not acceptable to Pacific Lumber. 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 "-- Results of
Operations--Recent Operating Results."
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
80
<PAGE>
future governmental regulations, legislation or judicial or administrative
decisions, or adverse weather conditions would not have a material adverse
effect on the Company's financial position, results of operations or liquidity.
In connection with the EPIC LAWSUIT (as defined on page 95), a preliminary
injunction remains in effect covering three of the Company's THPs pending the
Court's review of certain evidence and review of additional briefs requested by
and filed with the Court on November 9, 1998. The Company is uncertain what
impact this matter will have upon its operations and financial results, but were
the Court to reaffirm the preliminary injunction after review of the evidence
and the additional briefs, it is possible that other approved timber harvesting
activities on the Company's Timber could be severely restricted (and revenues
potentially significantly adversely affected) until such time as certain
purported intra-agency wildlife consultation requirements are satisfied. Pacific
Lumber is vigorously defending this matter, and the Company and Pacific Lumber
are devoting resources toward facilitating completion of the consultation
requirements as soon as practicable. See "Risk Factors--Regulatory and
Environmental Factors" and "--Headwaters Agreement"; "--Results of
Operations--Recent Operating Results"; "Business of the 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.
YEAR 2000
Management has completed its assessment of the Company's critical
information technology and embedded technology and determined that the principal
software and equipment of the Company that will be affected by the date change
to the year 2000 are the financial information systems, the GIS and certain
personal computers and field equipment used by the foresters and other
professional staff. Year 2000 progress and readiness has also been the subject
of the Company's normal, recurring internal audit function. The Company is now
in the process of making the required modifications for these systems to be year
2000 compliant, and expects to be completed with these modifications by the end
of the first quarter of 1999 and to be completed with testing of the
modifications by mid-year 1999. The modification costs and the costs associated
with new systems are expected to be immaterial, costing less than $50,000.
Systems modification costs are being expensed as incurred. Costs associated with
new systems are being capitalized and will be amortized over the life of the
product.
In addition to addressing the Company's internal systems, management is in
the process of identifying key vendors that could be impacted by year 2000
issues, and surveys are being conducted regarding their compliance efforts. The
Company expects to evaluate the responses to the surveys over the next several
months and will make direct contact with parties which are deemed to be
critical. These inquiries are being made by the Company's own staff, and the
costs associated with this program are expected to be minimal. Pacific Lumber
has also completed its assessment of the susceptibility of its internal systems
and equipment to the year 2000 date change and expects to be completed with the
required modifications and substantially all of the testing by mid-year 1999.
While the Company believes that its program is sufficient to identify the
critical issues and associated costs necessary to address possible year 2000
problems in a timely manner, there can be no assurance that the program, or
underlying steps implemented, will be successful in resolving all such issues
prior to the year 2000. If the steps taken by the Company (or critical third
parties) are not made in a timely manner, or are not successful in identifying
and remedying all significant year 2000 issues, business interruptions or delays
could occur. However, based on the information the Company has gathered to date
and its expectations of its ability to remedy problems encountered, the Company
believes that it will not experience significant business interruptions that
would have a material impact on its results or financial condition. The most
reasonably likely worst case scenario which the Company could experience would
be problems with certain of the Company's personal computers, field equipment,
financial software or GIS software. The Company believes that any such problems
could be easily remedied within a few days and that contingency plans used in
the past for dealing with problems with its equipment and software are adequate
to address the types of problems which could be encouraged in such a scenario.
These plans include purchases of replacement equipment, use of third parties for
processing GIS information and working with vendors to make any needed software
modifications.
81
<PAGE>
BUSINESS OF THE COMPANY
THIS SECTION CONTAINS STATEMENTS WHICH CONSTITUTE "FORWARD-LOOKING
STATEMENTS." SEE "SUMMARY--THE COMPANY--RECENT OPERATING RESULTS," "RISK
FACTORS," AND "REGULATORY AND ENVIRONMENTAL MATTERS," "--HEADWATERS
AGREEMENT," AND "--LEGAL PROCEEDINGS" FOR CAUTIONARY INFORMATION WITH RESPECT
TO SUCH FORWARD-LOOKING STATEMENTS.
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
82
<PAGE>
"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 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 was 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 the Combined Plan prepared by Pacific Lumber and the Company,
harvesting activities would be prohibited or restricted on approximately 34,600
acres of the Company Timberlands to serve as habitat conservation areas and
streamside buffers. 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 California Headwaters Bill would add approximately 4,500 acres
to serve as interim streamside buffers. The aggregate acreage required to serve
as streamside buffers may be adjusted based upon a watershed assessment process
required to be conducted in connection with the Headwaters Agreement, which
adjustments were not assumed in the Initial Harvest Schedule. 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." See also "--Regulatory and Environmental
Matters--Endangered and 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
83
<PAGE>
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%
=== ===
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.
84
<PAGE>
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 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 defined on page 161). 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. See "Summary--The
Company--Recent Operating Results" for a description of the difficulties the
Company has been experiencing in connection with the THP submission and approval
process. 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
85
<PAGE>
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. See "Summary--The Company--Recent
Operating Results" for a description of the difficulties the Company has been
experiencing in the THP submission and approval process. Pursuant to the
Original Services 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." The Company's recent results of operations have
been adversely affected by the absence of a sufficient number of available THPs
to enable the Company to conduct its operations at 1997 levels. See
"Summary--The Company--Recent Operating Results."
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
86
<PAGE>
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.
In order to conduct its own harvesting and logging operations in
California, Pacific Lumber is required to have a TOL issued by the CDF. On
November 9, 1998, Pacific Lumber was notified that the CDF had suspended its TOL
for the remainder of 1998. Pacific Lumber has engaged independent contractors to
complete harvesting activities on all of the THPs that Pacific Lumber was
operating at the time of the notification, and believes it will be able to
engage independent contractors to conduct harvesting activities on any other
approved THPs during the balance of calendar year 1998 and during calendar year
1999, if necessary. Accordingly, the Company does not believe that the
revocation of Pacific Lumber's TOL will have a significant adverse effect on the
Company's business or financial performance. See "Business of the
Company--Legal Proceedings--Timber Harvesting Litigation.
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 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 November 17, 1998, the Company employed 41 persons, 38 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.
87
<PAGE>
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 habitat for such 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.
While regulatory and environmental concerns have resulted in restrictions
on the geographic scope and timing of operations on the Company Timberlands,
increased operational costs and engendered litigation and other challenges to
the Company's THPs, they have not historically had a significant adverse effect
on the Company's financial position, results of operations or liquidity,
although the Company's recent results of operations have been adversely affected
by the absence of a sufficient number of available THPs to enable the Company to
conduct its operations at 1997 levels. These 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. See "--Legal
Proceedings--Timber Harvesting Litigation" with respect to certain lawsuits
which are pending or threatened which could adversely affect the ability to
harvest Company Timber, including a recent lawsuit which could potentially
result in severe restrictions on the ability to harvest Company Timber until
certain purported intra-agency wildlife consultation requirements under the ESA
are satisfied in connection with the Combined Plan. See also "Summary--The
Company--Recent Operating Results" for a description of the difficulties the
Company has been experiencing in the THP submission and approval process.
In July 1998, Pacific Lumber and the Company 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
88
<PAGE>
may incorporate the provisions of the Combined Plan by reference. However, there
can be no assurance that the Company will not face difficulties in the THP
submission and approval process as it implements the Combined Plan. See
"Summary--The Company--Recent Operating Results." 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 embodying certain agreements in
principle they had reached regarding the Multi-Species HCP, the Permits and the
SYP (the "Pre-Permit Agreement"). 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 was released for public review and comment in early
October 1998. The public review and comment periods for the Combined Plan and
the draft EIR/EIS closed on November 16, 1998.
The Company believes that submission of the proposed Combined Plan and the
draft EIR/EIS 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.
However, certain provisions of the California Headwaters Bill, including its
provisions relating to the watershed assessment process, are required to be
included in the final version of the Combined Plan. In addition, discussions are
expected to occur with federal and state regulatory agencies in light of the
recent conclusion of the public review and comment period relating to the
Combined Plan, which discussions are expected to result in proposed amendments
to the Combined Plan. The provisions of the California Headwaters Bill impose,
and the potential proposed amendments could impose, more stringent harvesting
requirements and reduce the amount of Company Timber that may be harvested as
contemplated by the SYP in its current form. In this regard, the Company has
recently received from the federal and state governments a number of proposed
revisions to the Multi-Species HCP. Certain of these proposed revisions were
previously considered and rejected by the Company in the course of negotiations
concerning the Pre-Permit Agreement and the Combined Plan as, among other
things, being unduly restrictive on timber harvesting operations on the Company
Timberlands. On December 17, 1998, the Company announced that its negotiations
with the regulatory agencies regarding these proposed revisions had not produced
agreement on a Multi-Species HCP, as the Company could not agree to certain of
these proposed revisions and continue to operate effectively. Although the
Company anticipates that it will have further discussions with federal and state
regulatory agencies regarding these and other proposed revisions with respect to
the Combined Plan, there can be no assurance that these discussions will result
in a Combined Plan acceptable to the Company. Inasmuch as approval of the
Multi-Species HCP and the SYP are conditions to the consummation of the
Headwaters Agreement and certain modifications proposed by the regulatory
agencies may not be acceptable to Pacific Lumber, any such proposed
modifications could also affect the consummation of the Headwaters Agreement.
Accordingly, while the parties are working diligently to complete the closing
conditions contained in the Headwaters Agreement, there can be no assurance that
the Multi-Species HCP and the SYP will be approved, that the Permits will be
issued or that the Headwaters Agreement will
89
<PAGE>
be consummated. See "Risk Factors--Regulatory and Environmental Factors" and
"--Headwaters Agreement."
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 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 a 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 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 "no-cut"
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 a murrelet conservation area. The California Headwaters Bill also
provides that the SYP shall be subject to the foregoing provisions. See
"--Headwaters Agreement" and "Risk Factors--Factors Affecting Actual
Amortization" for further information regarding provisions of the California
Headwaters Bill relating to the Owl Creek grove and the Grizzly Greek grove, and
"--Headwaters Agreement" above for information regarding certain possible
effects of the California Headwaters Bill and potential proposed modifications
to the Combined Plan.
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 permits, 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, although there can be no
assurance that the Company will not face difficulties in the THP submission and
approval process as it implements the Combined Plan. See "Summary--The
Company--Recent Operating Results." The
90
<PAGE>
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 identified 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 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
for the marbled murrelet. In connection with the preparation of THPs for areas
of potential marbled murrelet habitat, the Company has been required 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 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 and proposed designating critical
habitat on certain lands, including streams within the Company Timberlands.
These designations 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. 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 interim measures provided for in the Combined Plan 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. The California Headwaters Bill would add approximately
4,500 acres to serve as interim streamside buffers. The aggregate acreage
required to serve as streamside buffers may be adjusted based upon a watershed
assessment process required to be conducted in connection with the Headwaters
Agreement. The California Headwaters Bill also obligates Pacific Lumber and the
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. See "--The Headwaters Agreement" above.
THE "NO SURPRISES" RULE. As noted above, the Permits would allow
incidental takes which do not jeopardize the continued existence of the affected
species. The Combined Plan provides for habitat conservation measures not only
with respect to presently designated species but also with respect to
91
<PAGE>
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
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 until certain purported intra-agency wildlife
consultation requirements under the ESA are satisfied in connection with the
Combined Plan. While these environmental challenges have not historically had a
significant adverse effect on the Company, there can be no assurance that this
will continue to be the case (see "Summary--The Company--Recent Operating
Results" for a description of difficulties the Company has been experiencing in
the THP submission and approval process). 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. In order to conduct its own
harvesting and logging operations in California, Pacific Lumber is required to
have a TOL issued by the CDF. See "--Legal Proceedings--Timber Harvesting
Litigation" for information regarding the CDF's recent suspension of Pacific
Lumber's 1998 TOL.
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.
92
<PAGE>
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. As discussed above under
"--The Headwaters Agreement," the provisions of the California Headwaters Bill
impose, and potential proposed amendments to the Combined Plan could impose,
more stringent harvesting requirements and reduce the amount of Company Timber
that may be harvested as contemplated by the SYP in its current form. 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
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 and the
Combined Plan, 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 forest management techniques which would be required under the SYP
(which resulted in 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.
93
<PAGE>
HEADWATERS AGREEMENT
As a result of government restrictions which effectively prohibited
operations on certain portions of Pacific Lumber's timberlands, in early 1996,
the Takings Litigation was filed by Pacific Lumber and/or certain of its
subsidiaries. The Takings Litigation consists of two actions alleging 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 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. In September 1998, California Governor Wilson signed the California
Headwaters Bill, which, among other things, appropriates $130 million toward
consummation of the Headwaters Agreement. The state funds remain available until
June 30, 1999. 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 and certain contiguous 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 at fair
market value. 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 at fair market value.
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 a description of environmentally focused
provisions contained in the California Headwaters Bill. The parties have been
discussing the tax closing agreements but have not reached agreement. In October
1998, an agreement in principle was executed providing for the sale of the Elk
River Timberlands to the United States and California. 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."
94
<PAGE>
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 a number of
the Company's THPs. The plaintiffs allege that certain procedural violations of
the ESA have resulted from logging activities on the Company Timberlands and
seek to prevent the defendants from carrying out any harvesting activities until
certain purported intra-agency wildlife consultation requirements under the ESA
are satisfied in connection with the Combined Plan. See "Business of the
Company--Regulatory and Environmental Matters" and "--Headwaters Agreement."
On September 3, 1998, the Court granted plaintiffs' motion for preliminary
injunction covering three THPs (consisting principally of old growth Douglas-fir
timber) pending evidentiary hearings. Following the evidentiary hearings, which
concluded on October 22, 1998, the Court requested additional briefing, which
was filed on November 9, 1998. The preliminary injunction remains in effect
pending the Court's review of the evidence and the additional briefs. The
Company is uncertain what impact this matter will have upon its operations and
financial results, but were the Court to reaffirm the preliminary injunction
after consideration of the evidence and additional briefs, 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.
Pacific Lumber is vigorously defending this matter, and the Company and Pacific
Lumber are devoting resources toward facilitating 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 Scotia
Pacific, 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'
lawsuit relates to a significant number of the Company's THPs (a substantial
portion of which have been or are in process of being harvested). The
plaintiffs' lawsuit seeks, among other things, to enjoin timber harvesting on
the THPs and acreage identified. On July 31, 1998, plaintiffs amended their
complaint to add certain other THPs and seek to require the Company to restore
coho habitat allegedly harmed by adverse cumulative effects of past (approved)
timber harvesting. On December 9, 1998, the Court denied defendants' motion for
summary judgment. While the Company believes that release of the Combined Plan
and draft EIR/EIS 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 under the Company's THPs. The Company has also
received notice of additional threatened actions in respect of the coho salmon.
The Company is also subject to certain other pending THP cases which would
not be expected to have a material adverse effect upon the Company; however, due
to the diminished supply of THPs currently held by the Company, the issuance of
injunctive or similar relief in certain of these cases could exacerbate the
difficulties that the Company has been experiencing with respect to the conduct
of normal harvesting operations. See "Summary--The Company--Recent Operating
Results."
95
<PAGE>
Historically, Pacific Lumber has conducted 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 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 1998 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 (the "Stipulation") and received a conditional
TOL for 1998. The 1998 TOL and Stipulation were 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 delivery 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
"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." 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 violations which are found. In June 1998, an audit
inspection performed by the CDF to evaluate forest practice violations found
that Pacific Lumber was not in violation of the Stipulation.
However, due to subsequent violations found or alleged by the CDF since its
June 1998 inspection, the CDF notified Pacific Lumber on November 9, 1998 that
it had suspended Pacific Lumber's 1998 TOL. As a result, Pacific Lumber has
ceased all operations under its 1998 TOL. Pacific Lumber has made the necessary
arrangements for independent contract loggers to be substituted as the licensed
timber operator on those THPs where Pacific Lumber's logging crews were working
prior to the suspension (independent contractors historically account for
approximately 60% of the harvesting activities on Pacific Lumber's timberlands).
Pacific Lumber believes it will be able to engage independent contractors to
conduct harvesting activities on any other approved THPs during the balance of
calendar year 1998 and during calendar year 1999, if necessary. Accordingly,
Pacific Lumber does not believe that the revocation of its 1998 TOL will have a
significant adverse effect on its business or financial performance. Pacific
Lumber has determined not to appeal the suspension of its 1998 TOL, and has
applied for a new TOL from the CDF for 1999. The CDF has indicated to Pacific
Lumber that it is considering a denial of Pacific Lumber's TOL for calendar year
1999 and that any agreements for the issuance of a conditional TOL for 1999 must
contain sufficient provisions to the CDF's satisfaction to ensure that Pacific
Lumber complies with the Forest Practice Act.
In addition to revocation of Pacific Lumber's TOL, other remedies could be
sought against Pacific Lumber and the Company in connection with violations of
the Forest Practice Act. In the past, fines and probation have been imposed on
Pacific Lumber in connection with similar violations of the Forest Practices
Act.
On May 27, 1998, an action entitled MATEEL ENVIRONMENTAL JUSTICE FOUNDATION
V. PACIFIC LUMBER, ET AL. (No. DR980301) was brought and is now pending in the
Superior Court of Humboldt County against Scotia Pacific, Pacific Lumber, Salmon
Creek and MGI. This action alleges, among other things, violations of
California's unfair competition law of the business and professions code based
on citations and violations (primarily water quality related) issued against 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.
96
<PAGE>
On November 24, 1998, an action entitled WILLIAM HUNSAKER, ET AL. V.
CHARLES E. HURWITZ, PACIFIC LUMBER, MAXXAM GROUP INC., MXM CORP., FEDERATED
DEVELOPMENT COMPANY AND DOES I-50 (NO. C-98-4515) was filed in the United States
District Court for the Northern District of California. This action alleges,
among other things, that a class consisting of the vested employees and retirees
of the former Pacific Lumber Company (Maine) ("Old Palco") is entitled to
recover approximately $60 million of surplus funds allegedly obtained through
deceit and fraudulent acts from the Old Palco retirement plan that was
terminated in 1986 following MAXXAM's acquisition of Pacific Lumber. Plaintiffs
further allege that defendants violated the Racketeering Influence and Corrupt
Practices Act ("RICO") and engaged in numerous acts of unfair business
practices in violation of the California Business and Professions Code. In
addition to seeking the surplus funds, plaintiffs also seek, among other things,
a constructive trust on the assets traceable from the surplus funds, plus
interest, trebling of damages for violation of RICO, punitive damages, and
injunctive and other relief. While Pacific Lumber does not believe this matter
will have a material adverse effect on its financial position, results of
operations or liquidity, there can be no assurance that this will be the case.
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. The Company (as successor to 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 pending negotiations
concerning 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 seeks, among other things, the Court's imposition of 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.
97
<PAGE>
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.
<TABLE>
<CAPTION>
NAMES TITLES
- ---------------------------------------- ------------------------------------------------------
<S> <C>
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
</TABLE>
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 52, 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
98
<PAGE>
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 56, 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 a licensed California
Forester 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, 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.
BERNARD L. BIRKEL. Mr. Birkel, age 49, 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 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.
99
<PAGE>
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 LLP.
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.
Charles E. Hurwitz is the Chairman of the Board and Chief Executive Officer
of MAXXAM. Mr. Hurwitz and members of his immediate family collectively own
approximately 68.8% of the aggregate voting power of MAXXAM. Sam Houston Race
Park, Ltd., a Texas limited partnership in which a wholly owned subsidiary of
MAXXAM is the general partner, together with certain other MAXXAM affiliates,
had a Sixth Amended Joint Plan of Reorganization under Chapter 11 of the United
States Bankruptcy Code confirmed on September 22, 1995 by the Bankruptcy Court
for the Southern District of Texas, Houston Division.
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.
COMMITTEES
The Company currently has no committees of its Board of Managers, and has
no current intention to establish any committees.
100
<PAGE>
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 taxable entity and instead is 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 LLP, which provides legal services for MAXXAM and its
affiliates, including the Company. See "Legal Matters."
101
<PAGE>
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" (beginning on page 145) 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. ON NOVEMBER 24, 1998, MOODY'S ANNOUNCED
THAT IT HAS PLACED THE TIMBER NOTES ON REVIEW FOR POSSIBLE DOWNGRADE OF THEIR
ASSIGNED RATING. MOODY'S INDICATED THAT ITS RATING ACTION WAS PROMPTED BY THE
SUSPENSION BY THE CDF OF PACIFIC LUMBER'S 1998 TOL ON NOVEMBER 10, 1998. SEE
"BUSINESS OF THE COMPANY--LEGAL PROCEEDINGS--TIMBER HARVESTING LITIGATION."
SEE ALSO ANNEX 3 FOR A COPY OF THE MOODY'S ANNOUNCEMENT.
102
<PAGE>
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 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 and without regard to actual harvest levels) 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.
103
<PAGE>
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.
"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 on the following page) 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".
104
<PAGE>
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 (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
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.
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 on this page 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
105
<PAGE>
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 (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
106
<PAGE>
sum, for such Class, of (i) all unpaid principal amounts of such Class of Timber
Notes, (ii) any accrued and unpaid Deficiency Premiums, Non-Registration
Premiums and/or Prepayment 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 resulting from the redemption, computed as described under
"--Principal; Interest; Premium--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 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 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,
107
<PAGE>
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 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
108
<PAGE>
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 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 (these being Events of Default which would not
authorize the Trustee to accelerate the Timber Notes unless the Majority Holders
so elect), and the Trustee, within the previous 60 days, has commenced a consent
solicitation for an election by the Majority Holders 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
109
<PAGE>
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 on page 157 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.
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.
110
<PAGE>
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.
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
111
<PAGE>
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 on page 153), 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;
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
112
<PAGE>
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 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
113
<PAGE>
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 on page 152) in order to provide liquidity for the payment of
interest on the Timber Notes. Each Liquidity Provider (as defined on page 153)
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 on
page 145) 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 on this page) to four additional financial institutions. The
aggregate maximum principal amount of the Advances (as defined on page 145) 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 on
page 159).
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 on page 159) 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
on page 152) has occurred or a Termination Advance (as defined on page 115) 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
114
<PAGE>
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
on page 160)) 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
Acceleration Event (as defined on page 145) 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 on page 161) 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
115
<PAGE>
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 on page 146).
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 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.
116
<PAGE>
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 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 defined on page 119) 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):
117
<PAGE>
(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 on page 120) 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;
(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 on page 146) 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
118
<PAGE>
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;
(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.
119
<PAGE>
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 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
120
<PAGE>
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 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 defined on page 123) 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:
121
<PAGE>
(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;
(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
122
<PAGE>
(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 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
123
<PAGE>
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 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
124
<PAGE>
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 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,
125
<PAGE>
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 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.
126
<PAGE>
(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);
(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
127
<PAGE>
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 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 on
page 155) in an aggregate principal amount not exceeding $75,000,000 outstanding
at any one time, (y) Indebtedness under
128
<PAGE>
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.
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
129
<PAGE>
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
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.
130
<PAGE>
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 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.
131
<PAGE>
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 on
page 168) 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 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 on page 165) 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
132
<PAGE>
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 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,
133
<PAGE>
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.
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
134
<PAGE>
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);
(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.
The Events of Default under the Indenture do not include an event of
default under the Line of Credit Agreement or Pacific Lumber's Credit Agreement
(as defined on page II-18 of Annex 2). If an Event of Default related to
Bankruptcy or Insolvency shall occur, the Indenture provides that an amount
equal to all
135
<PAGE>
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 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
136
<PAGE>
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.
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
137
<PAGE>
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 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
138
<PAGE>
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 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
139
<PAGE>
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 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
140
<PAGE>
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.
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.
141
<PAGE>
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.
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
142
<PAGE>
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 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,
143
<PAGE>
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. 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.
144
<PAGE>
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.
145
<PAGE>
"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.
146
<PAGE>
"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
147
<PAGE>
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.
148
<PAGE>
"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
149
<PAGE>
(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 on page 15),
(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 including the prospectus contained therein, all exhibits thereto and all
material incorporated by reference therein.
150
<PAGE>
"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.
"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
151
<PAGE>
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 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
152
<PAGE>
(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.
"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:
153
<PAGE>
(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;
154
<PAGE>
(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
155
<PAGE>
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
156
<PAGE>
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.
157
<PAGE>
"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
158
<PAGE>
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.
159
<PAGE>
"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.
160
<PAGE>
"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).
161
<PAGE>
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 on this page). 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.
162
<PAGE>
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 on page 165) 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
163
<PAGE>
the results of such third party scaling. In addition, the Company has the right,
at its option and cost, at any 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 on page 165)
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
164
<PAGE>
purchasers on such terms as it deems appropriate, consistent with the
requirements described under "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
165
<PAGE>
by the Indenture (it being understood that the filing of such THPs, sustained
yield plans, habitat 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
166
<PAGE>
numerator of which shall be the most recent Lumber PPI Index in effect with
respect to the first day of 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
167
<PAGE>
perform the Services provided by Pacific Lumber under the New Services
Agreement, (ii) by the Company 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 on this page);
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
168
<PAGE>
subsidiaries; (ii) file, jointly on behalf of Pacific Lumber and the Company,
any THPs, sustained yield 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
169
<PAGE>
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. 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.
170
<PAGE>
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 the anticipated material 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 on this page) 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
171
<PAGE>
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
term of the Timber Note, 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 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 were
172
<PAGE>
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 Timber Notes, rather than upon disposition of, or receipt of
principal payments with respect to, the Timber 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 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
173
<PAGE>
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
Kramer Levin Naftalis & Frankel LLP 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.
174
<PAGE>
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 September 30,
1998............................ F-16
Statement of Income for the Nine
Months Ended September 30, 1998
and 1997........................ F-17
Statement of Cash Flows for the
Nine Months Ended September 30,
1998 and 1997................... F-18
Condensed Notes to Financial
Statements...................... F-19
Unaudited Summary Quarterly
Financial Data.................. F-24
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 Nine Months
Ended September 30, 1998 and
1997............................ II-F-18
Consolidated Statement of Cash
Flows for the Nine Months Ended
September 30, 1998
and 1997........................ II-F-19
Condensed Notes to Consolidated
Financial Statements............ II-F-20
Unaudited Summary Quarterly
Financial Data.................. II-F-26
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.
ARTHUR ANDERSEN LLP
San Francisco, California
May 8, 1998
(Except for the matter discussed in Note 8 to which the date is November 9,
1998.)
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):
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ------------------------
USEFUL LIVES 1997 1996
------------- ------------ ---------
<S> <C> <C> <C>
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
============ =========
</TABLE>
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, on January 26, 1998, an action entitled
COHO SALMON, ET AL. V. PACIFIC LUMBER, ET AL. (the "COHO LAWSUIT") was filed
against Scotia Pacific, Pacific Lumber and Salmon Creek. This action relates to
a significant number of THPs covering young growth timber and 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. The plaintiffs seek,
F-13
<PAGE>
SCOTIA PACIFIC COMPANY LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
among other things, to enjoin timber harvesting on the THPs and acreage
identified, and to require the Company to restore coho habitat allegedly harmed
by adverse cumulative effects of past (approved) timber harvesting. The Company
has also received notice of additional threatened actions in respect of the coho
salmon. 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. 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. 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.
F-14
<PAGE>
SCOTIA PACIFIC COMPANY LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
========== ========== ==========
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
8. SUBSEQUENT EVENT
On November 9, 1998, the CDF notified Pacific Lumber that it had suspended
Pacific Lumber's 1998 timber operator's license ("TOL"). As a result, Pacific
Lumber has ceased all operations under its TOL. Pacific Lumber has made the
necessary arrangements for independent contract loggers to be substituted as the
licensed timber operator on those THPs where Pacific Lumber's logging crews were
working prior to the suspension (independent contractors historically account
for approximately 60% of the harvesting activities on Pacific Lumber's
timberlands). Pacific Lumber believes it will be able to engage independent
contractors to conduct harvesting activities on any other approved THPs during
the balance of calendar year 1998 and during calendar year 1999, if necessary.
Accordingly, the Company does not believe that the revocation of Pacific
Lumber's TOL will have a significant adverse effect on its business or financial
performance. Pacific Lumber has determined not to appeal the suspension of its
TOL, and will apply for a new TOL from the CDF. The CDF has indicated to Pacific
Lumber that it is considering a denial of Pacific Lumber's TOL for calendar year
1999 and that any agreements for the issuance of a conditional TOL for 1999 must
contain sufficient provisions to the CDF's satisfaction to ensure that Pacific
Lumber complies with the California Forest Practice Act.
F-15
<PAGE>
SCOTIA PACIFIC COMPANY LLC
BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......... $ 17,980 $ 20,926
Receivables:
Due from Pacific Lumber......... 9,955 5,304
Accrued interest................ 83 107
Prepaid timber harvesting costs.... 2,376 2,053
Other prepaid expenses and current
assets.......................... 380 385
-------------- ------------
Total current assets............ 30,774 28,775
Timber and timberlands, net of
accumulated depletion of $241,547
and $233,188, respectively......... 246,153 249,654
Property and equipment, net of
accumulated depreciation of $7,466
and $6,590, respectively........... 12,466 11,019
Deferred financing costs, net........ 22,866 13,475
Deferred income taxes................ -- 23,763
Restricted cash...................... 23,743 28,434
Other assets......................... 2,193 1,827
-------------- ------------
$338,195 $356,947
============== ============
LIABILITIES AND MEMBER CAPITAL
(DEFICIT)
Current liabilities:
Due to Pacific Lumber.............. $ 2,053 $ 147
Accrued interest................... 12,442 11,358
Other accrued liabilities.......... 3,084 846
Long-term debt, current
maturities...................... 8,270 19,429
-------------- ------------
Total current liabilities....... 25,849 31,780
Long-term debt, less current
maturities......................... 859,488 308,044
-------------- ------------
Total liabilities............... 885,337 339,824
-------------- ------------
Contingencies
Member capital (deficit)............. (547,142) 17,123
-------------- ------------
$338,195 $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)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
(UNAUDITED)
Log sales to Pacific Lumber.......... $ 67,800 $ 105,089
---------- ----------
Operating expenses:
General and administrative......... 6,694 6,690
Depletion and depreciation......... 9,278 13,827
---------- ----------
15,972 20,517
---------- ----------
Operating income..................... 51,828 84,572
Other income (expense):
Interest and other income.......... 1,859 2,019
Interest expense................... (27,461) (20,543)
---------- ----------
Income before income taxes........... 26,226 66,048
Provision in lieu of income taxes.... (7,549) (26,913)
---------- ----------
Income before extraordinary item..... 18,677 39,135
Extraordinary item:
Loss on early extinguishment of
debt........................... (35,448) --
---------- ----------
Net income (loss).................... $ (16,771) $ 39,135
========== ==========
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)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1997
------------ ----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ (16,771) $ 39,135
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Extraordinary loss on early
extinguishment of debt......... 35,448 --
Provision in lieu of income
taxes.......................... 7,549 26,913
Depletion and depreciation...... 9,278 13,827
Amortization of deferred
financing costs................ 974 924
Increase (decrease) in cash
resulting from changes in:
Receivables................... (11,348) (9,058)
Prepaid expenses and other
assets....................... (688) (507)
Amounts due to Pacific
Lumber....................... 1,078 (41)
Accrued interest.............. 1,084 (6,907)
Other accrued liabilities..... 447 778
Other........................... 14 (167)
------------ ----------
Net cash provided by operating
activities..................... 27,065 64,897
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............... (6,321) (5,313)
Restricted cash withdrawals used to
acquire timberlands............. 1,767 --
Net proceeds from sale of assets... 9 --
------------ ----------
Net cash used for investing
activities..................... (4,545) (5,313)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Timber
Notes........................... 867,248 --
Principal payments on Old Timber
Notes and other debt............ (326,960) (16,256)
Premium for early retirement of
debt............................ (29,208) --
Incurrance of deferred financing
costs........................... (21,374) --
Dividends paid..................... (532,786) (48,600)
Change in restricted cash resulting
from retirement of debt......... 9,486 1,149
Other (distributions)
contributions................... 8,128 (7,740)
------------ ----------
Net cash used for financing
activities..................... (25,466) (71,447)
------------ ----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS........................ (2,946) (11,863)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD................ 20,926 20,345
------------ ----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................. $ 17,980 $ 8,482
============ ==========
SUPPLEMENTARY SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Assumption of net tax liabilities
by Pacific Lumber............... $ 6,691 $ 24,582
Acquisition of assets subject to
other liabilities............... 906 5,414
Deferred financing costs payable... 1,792 --
Distribution of assets to Pacific
Lumber.......................... 6,622 --
Transfer of deferred tax assets to
Pacific Lumber.................. 22,905 --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid...................... $ 25,402 $ 26,526
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 Condensed Notes to 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
September 30, 1998, the results of operations for the nine months ended
September 30, 1998 and 1997 and cash flows for the nine months ended September
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. 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 are reflected in the financial
statements for the nine months ended September 30, 1998, the period in which
these transactions occurred.
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 nine months ended September 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
applicable indentures governing the Timber Notes and the Old Timber Notes. In
addition, cash and cash equivalents includes $13.2 million and $17.8 million
which is restricted for debt service payments on the Timber Notes and the Old
Timber Notes, at September 30, 1998 and December 31, 1997, respectively.
3. LONG-TERM DEBT
On July 20, 1998, the Company issued the Timber Notes, which consist of
$867.2 million aggregate principal amount 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 of
the Timber Notes were used primarily to prepay the Old Timber Notes and to pay a
cash dividend of $526.1 million to Pacific Lumber. The Company recognized an
extraordinary loss of $35.4 million in the nine months ended September 30, 1998
for the early extinguishment of the Old Timber Notes. For further discussion,
see the notes to the audited financial statements.
F-19
<PAGE>
SCOTIA PACIFIC COMPANY LLC
CONDENSED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. 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 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, although the Company's recent
results of operations have been adversely affected by the absence of a
sufficient number of THPs to enable the Company to conduct its operations at
historic levels. These laws and related administrative actions and legal
challenges have also 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 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 that certain
procedural violations of the ESA have resulted from logging activities on the
Company's timberlands and seek to prevent the defendants from carrying out any
harvesting activities until certain purported intra-agency wildlife agency
consultation requirements under the ESA are satisfied in connection with the
Combined Plan (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.
Pacific Lumber is vigorously defending this matter, and Pacific Lumber and the
Company are devoting resources toward facilitating completion of the
consultation requirements as soon as practicable.
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 which
authorizes 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.
In September 1998, California Governor Wilson signed 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. 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, at fair
market value, of the "Owl Creek" grove from the Company. If any portion of the
$80 million remains after purchase of the Owl Creek grove, it may be used to
purchase certain other timberlands. An additional $20 million was appropriated
under the bill toward purchase of a forest grove referred to as "Grizzly
Creek" from Pacific Lumber at fair market value. The Combined Plan
F-20
<PAGE>
SCOTIA PACIFIC COMPANY LLC
CONDENSED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(see below) would have allowed the harvesting over time of either the Owl Creek
grove or Grizzly Creek grove. 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 a
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 significant prepayments
(and related prepayment premiums) which might be offset by a reduction in the
required amortization in later years attributable to not having any actual
harvest from the Owl Creek grove.
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 "no-cut"
buffers (while the watershed assessment process is being completed) than
provided for in the Combined Plan (a plan containing both the Multi-Species HCP
and the SYP), obligating Pacific Lumber and the government agencies to establish
a schedule that results in completion of the watershed assessment process within
five years (on a watershed by watershed basis), imposing minimum and maximum
"no-cut" buffers upon the watershed assessment process and designating the
Company's Owl Creek grove as a marbled murrelet conservation area. The
California Headwaters Bill also provides that the SYP shall be subject to the
foregoing provisions.
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 calendar years. If the SYP is approved by the CDF, Pacific Lumber
will have complied with certain BOF regulations requiring timber companies to
project timber growth and harvest on their timberlands over a 100-year planning
period and establish an LTSY harvest level. The SYP must demonstrate that the
average annual harvest over any rolling ten-year period will not exceed the LTSY
harvest level and that Pacific Lumber's projected timber inventory is capable of
sustaining the LTSY harvest level in the last decade of the 100-year planning
period. The SYP is expected to be valid for ten years, although it would be
subject to review after five years. Thereafter, revised SYPs would be prepared
every decade that address the LTSY harvest level based upon reassessment of
changes in the resource base and other factors.
In July 1998, the proposed Combined Plan was 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, among other things, 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. The Combined Plan and a
draft environmental impact statement/report (the "EIR/EIS") analyzing the
Headwaters Agreement were released and made available for public review and
comment in July 1998 and early October 1998, respectively. The public review and
comment periods for the Combined Plan and the draft EIR/EIS closed on November
16, 1998.
The Company believes that submission of the proposed Combined Plan and the
draft EIR/EIS 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.
F-21
<PAGE>
SCOTIA PACIFIC COMPANY LLC
CONDENSED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
However, certain provisions of the California Headwaters Bill, including its
provisions relating to the watershed assessment process, are required to be
included in the final version of the Combined Plan. In addition, discussions are
expected to occur with regulatory agencies following the conclusion of the
public review and comment periods referred to above, which discussions are
expected to result in proposed amendments to the Combined Plan. The provisions
of the California Headwaters Bill impose, and the potential proposed amendments
could impose, more stringent harvesting requirements and reduce the amount of
the Company's timber that may be harvested as contemplated by the SYP in its
current form. Inasmuch as approval of the Multi-Species HCP and the SYP are
conditions to the consummation of the Headwaters Agreement and certain
modifications proposed by the regulatory agencies may not be acceptable to
Pacific Lumber, any such proposed modifications could also affect the
consummation of the Headwaters Agreement. Accordingly, while the parties are
working diligently to complete the closing conditions contained in the
Headwaters Agreement, there can be no assurance that the Multi-Species HCP and
the SYP will be approved, that the Permits will be issued or that the Headwaters
Agreement will be consummated. 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 government agencies on
the grounds that such restrictions constitute an uncompensated governmental
taking of private property for public use.
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, on January 26, 1998, the COHO LAWSUIT was filed against Scotia Pacific,
Pacific Lumber and Salmon Creek. 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. The plaintiffs
seek, among other things, to enjoin timber harvesting on the THPs and acreage
identified, and to require the Company to restore coho habitat allegedly harmed
by adverse cumulative effects of past (approved) timber harvesting. Pacific
Lumber has also received notice of additional threatened actions with respect to
the coho salmon. The Company is unable to predict the outcome of this case or
its ultimate impact on the Company's financial condition or results of
operations or the ability to harvest timber on its THPs. While the Company
expects environmentally focused objections and lawsuits to continue, it believes
that the Combined Plan should enhance its position in connection with these
challenges. The Company also believes that the Combined Plan should expedite the
preparation and facilitate approval of its THPs, although there can be no
assurance that the Company will not face difficulties in the THP submission and
approval process as it implements the Combined Plan.
In the event that the final Combined Plan is not approved or is not
acceptable to Pacific Lumber, 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
F-22
<PAGE>
SCOTIA PACIFIC COMPANY LLC
CONDENSED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the marbled murrelet and coho salmon if the Combined Plan is not approved or is
not acceptable to Pacific Lumber or (ii) the EPA's potential regulations
regarding water quality on the Company's financial position, results of
operations or liquidity until such time as the various regulatory and legal
issues are resolved; however, if 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.
On November 9, 1998, the CDF notified Pacific Lumber that it has suspended
Pacific Lumber's 1998 TOL. As a result, Pacific Lumber has ceased all operations
under its TOL. Pacific Lumber has made the necessary arrangements for
independent contract loggers to be substituted as the licensed timber operator
on those THPs where Pacific Lumber's logging crews were working prior to the
suspension (independent contractors historically account for approximately 60%
of the harvesting activities on Pacific Lumber's timberlands). Pacific Lumber
believes it will be able to engage independent contrctors to conduct harvesting
activities on any other approved THPs during the balance of calendar year 1998
and during calendar year 1999, if necessary. Accordingly, the Company does not
believe that the revocation of Pacific Lumber's TOL will have a significant
adverse effect on its business or financial performance. Pacific Lumber has
determined not to appeal the suspension of its TOL, and will apply for a new TOL
from the CDF. The CDF has indicated to Pacific Lumber that it is considering a
denial of Pacific Lumber's TOL for calendar year 1999 and that any agreements
for the issuance of a conditional TOL for 1999 must contain sufficient
provisions to the CDF's satisfaction to ensure that Pacific Lumber complies with
the California Forest Practice Act.
5. MEMBER CAPITAL (DEFICIT)
A reconciliation of the activity in member capital is as follows (in
thousands):
NINE MONTHS
ENDED
SEPTEMBER 30,
1998
-------------
Balance at beginning of period....... $ 17,123
Net loss............................. (16,771)
Transfer of deferred tax assets to
Pacific Lumber..................... (22,905)
Assumption of net tax liabilities by
Pacific Lumber..................... 6,691
Dividends paid....................... (6,700)
Dividend from Offering............... (526,086)
Contributions........................ 1,506
-------------
Balance at end of period............. $(547,142)
=============
F-23
<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>
1998 Quarterly Information:
Net sales.......................... $ 9,663 $ 24,857 $33,280
Operating income................... 6,591 19,645 25,592
Income before extraordinary item... 350 8,130 10,197
Net income (loss).................. 350 8,130 (25,251)
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-24
<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 $375,902
=================== =================== =================== ===================
</TABLE>
- ---------------
(1) The transaction was sized using interest rates for each class with an
overall effective rate of 7.43%.
(2) Discount from Initial Harvest Schedule.
(3) Effective discount from June 1998 SBE Prices. Haircuts range from
approximately 17.4% to 26.6% to effect the equivalent of a 25% overall
haircut.
(4) Annual Operating Costs include Administrative Expenses, Property Taxes and
the Services Fee.
(5) Annual Yield Taxes are calculated by multiplying revenues by 2.9%.
(6) Annual Capital Expenditures relate primarily to reforestation of
timberlands and construction and rehabilitation of logging roads.
(7) Amounts for 1998 and 2028 represent approximately six months of operations.
I-1
<PAGE>
STRUCTURING SCHEDULE
<TABLE>
<CAPTION>
A B C D E F G
- ------------- ----------- ------------ --------- ----- --------------- -----------
Structuring
Deemed
Production Structuring Remaining
Month Structuring Mbfe Harvest
(Period Harvest Price Operating Yield Capital Quantity
Ending) (Mbfe) ($ 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>
STRUCTURING SCHEDULE
<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>
STRUCTURING SCHEDULE
<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>
STRUCTURING SCHEDULE
<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>
STRUCTURING SCHEDULE
<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>
STRUCTURING SCHEDULE
<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>
STRUCTURING SCHEDULE
<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>
STRUCTURING SCHEDULE
<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>
STRUCTURING SCHEDULE
<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>
STRUCTURING SCHEDULE
<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
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." 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"). Pacific Lumber's recent results of operations have been
adversely affected by the absence of a sufficient number of available THPs to
enable it to conduct its operations at historic levels. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Recent Operating Results." 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
II-2
<PAGE>
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.
On November 9, 1998, the CDF notified Pacific Lumber that it had suspended
Pacific Lumber's 1998 timber operator's license ("TOL"). Pacific Lumber has
ceased all operations under its TOL. Pacific Lumber has made the necessary
arrangements for independent contract loggers to be substituted as the licensed
timber operator on those THPs where Pacific Lumber's logging crews were working
prior to the suspension (independent contractors historically account for
approximately 60% of the harvesting activities on Pacific Lumber's Timberlands).
Pacific Lumber has also engaged independent contractors to complete harvesting
activities on all of the THPs that Pacific Lumber was operating at the time of
the notification, and believes it will be able to engage independent contractors
to conduct harvesting activities on any other approved THPs during the balance
of calendar year 1998 and during calendar year 1999, if necessary. Accordingly,
Pacific Lumber does not believe that the revocation of its TOL will have a
significant adverse effect on its business or financial performance. Pacific
Lumber has determined not to appeal the suspension of its TOL and has applied
for a new TOL from the CDF for 1999. The CDF has indicated to Pacific Lumber
that it is considering a denial of Pacific Lumber's TOL for calendar year 1999
and that any agreements for the issuance of a conditional TOL for 1999 must
contain sufficient provisions to the CDF's satisfaction to ensure that Pacific
Lumber complies with the Forest Practice Act.
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
II-3
<PAGE>
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.
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
II-4
<PAGE>
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.
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.
II-5
<PAGE>
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 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
II-6
<PAGE>
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 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.
II-7
<PAGE>
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 which could have a material adverse effect on
Pacific Lumber. 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-8
<PAGE>
CAPITALIZATION OF PACIFIC LUMBER
The following table sets forth, at September 30, 1998, the historical
consolidated capitalization of Pacific Lumber which reflects completion of 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 appearing elsewhere in this Prospectus.
SEPTEMBER 30,
1998
-------------
ACTUAL
-------------
(IN MILLIONS
OF DOLLARS)
Cash and cash equivalents(1)......... $ 19.9
=============
Restricted cash(2)................... $ 23.7
=============
Timber Notes and other debt:
Current maturities................. $ 8.3
Long-term portion.................. 858.9
Other debt......................... 0.6
-------------
Total debt...................... 867.8
-------------
Stockholder's deficit:
Common stock, $.01 par value, 100
shares authorized and issued.... --
Additional capital................. 157.5
Accumulated deficit(3)............. (484.0)
-------------
Total stockholder's deficit..... (326.5)
-------------
Total capitalization.......... $ 541.3
=============
- ---------------
(1) Actual cash and cash equivalents of Pacific Lumber includes $13.2 million
deposited in the Payment Account under the Indenture for the payment of
accrued interest and principal on the Timber Notes.
(2) Actual restricted cash represents amounts held in the Prefunding Account and
is classified as a noncurrent asset in Pacific Lumber's Financial
Statements.
(3) Includes the write-off of (a) $16.7 million of deferred financing costs and
the incurrence of $36.3 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 $17.9 million and (b) the dividend of $263.0
million to Pacific Lumber's parent.
II-9
<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 nine months ended
September 30, 1998 and 1997 are derived from the unaudited quarterly
Consolidated Financial Statements of Pacific Lumber. The consolidated balance
sheet data as of September 30, 1998 reflects the issuance of the Timber Notes,
the retirement of the Original Timber Notes and the Pacific Lumber Notes, and
the payment of a $263.0 million cash dividend to Pacific Lumber's parent. 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 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>
NINE MONTHS ENDED
SEPTEMBER 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.......................... $160.9 $160.9 $ 195.3 $261.4 $261.4 $ 244.8 $ 221.9 $ 227.4
Cost of sales (exclusive of
depletion and depreciation)...... 104.1 104.1 107.9 147.4 147.4 136.3 116.4 116.3
Gross profit....................... 56.8 56.8 87.4 114.0 114.0 108.5 105.5 111.1
Selling, general and administrative
expenses......................... 9.0 9.0 9.7 12.9 12.9 14.6 15.0 15.2
Depletion and depreciation......... 17.4 17.4 19.8 26.5 26.5 27.6 25.9 25.5
Operating income................... 30.4 30.4 57.9 74.6 74.6 66.3 64.6 70.4
Investment, interest and other
income........................... 3.0 2.7 2.2 2.5 1.6 4.2 3.9 12.0
Interest expense................... 43.0 49.4 40.2 53.6 66.3 54.4 55.5 56.1
Income (loss) before income
taxes............................ (9.6 ) (16.3) 19.9 23.5 9.9 16.1 13.0 26.3
Income (loss) before extraordinary
items and cumulative effect of
changes in accounting
principles....................... (5.9 ) (10.0) 11.8 15.6 6.5 9.9 6.6 24.9
Extraordinary items, net of related
income taxes(2).................. (28.5 ) -- -- -- -- (14.9)
Cumulative effect of changes in
accounting principles(3)......... -- -- -- -- -- --
Net income (loss).................. (34.4 ) 11.8 15.6 9.9 6.6 10.0
OTHER DATA:
EBITDA(4).......................... 47.8 47.8 77.7 101.1 101.1 93.9 90.5 95.9
Ratio of earnings to fixed
charges.......................... -- -- 1.5x 1.4 x 1.1x 1.3x 1.2x 1.5x
Fixed charge coverage deficiency... 9.6 16.3 -- -- -- -- -- --
Capital expenditures (including
timberland acquisitions)......... 10.0 10.0 16.2 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-10
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------------------------------------------
1998 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)........ $ 19.9 $ 31.8 $ 26.0 $ 26.5 $ 24.3 $ 44.4
Working capital.................... 44.9 56.4 55.2 68.9 60.0 71.7
Timber and timberlands............. 317.7 321.2 325.0 337.4 350.9 365.5
Restricted cash(5)................. 23.7 28.4 30.0 31.4 32.4 33.6
Total assets....................... 609.3 617.1 629.2 662.6 684.3 712.9
Total indebtedness................. 867.8 565.0 571.9 586.0 599.7 612.0
Stockholder's equity (deficit)..... (326.5) (22.1) (14.7) (4.2) 11.3 25.7
</TABLE>
- ---------------
(1) The pro forma operating data reflects adjustments to interest expense to
reflect 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 exclude interest
expense and amortization of deferred financing costs associated with the
Pacific Lumber Notes and the Original Timber Notes. See "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) Cash and cash equivalents as of September 30, 1998 includes amounts
deposited in the Expense Reserve. Retricted cash as of September 30, 1998
represents amounts held in Prefunding Account. Cash and cash equivalents for
prior periods 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. Restricted cash for prior periods represents
amounts held in the Original Liquidity Account.
II-11
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS OF PACIFIC LUMBER
NINE MONTHS ENDED SEPTEMBER 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.................... $ 145.3 $ -- $ -- $145.3
Other.............................. 15.6 -- -- 15.6
------- ------------- ------------ ------
160.9 -- -- 160.9
------- ------------- ------------ ------
Operating expenses:
Cost of goods sold (exclusive of
depletion and depreciation)..... 104.1 -- -- 104.1
Selling, general and administrative
expenses........................ 9.0 -- -- 9.0
Depletion and depreciation......... 17.4 -- -- 17.4
------- ------------- ------------ ------
Operating income..................... 30.4 -- -- 30.4
Other income (expense)
Investment, interest and other
income.......................... 3.0 0.9 (1.2) 2.7
Interest expense................... (43.0) (48.5) 42.1 (49.4)
------- ------------- ------------ ------
Loss before income taxes............. (9.6) (47.6) 40.9 (16.3)
Credit in lieu of income taxes....... 3.7 18.1 (15.5) 6.3
------- ------------- ------------ ------
Loss before extraordinary item....... $ (5.9) $ (29.5) $ 25.4 $(10.0)
======= ============= ============ ======
</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 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.
-- 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 nine months ended September 30, 1998 and the year ended
December 31, 1997 includes $1.2 million and $1.6 million, respectively,
attributable to such amortization and excludes $1.5 and $2.1 million,
respectively, of amortization attributable to the Original Timber Notes
and the Pacific Lumber Notes.
-- 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.
-- 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.
-- 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.
-- A pro forma balance sheet is not presented as Pacific Lumber's
historical balance sheet as of September 30, 1998 reflects the issuance
of the Timber Notes, the retirement of the Original Timber Notes and
the Pacific Lumber Notes, the dividend to Pacific Lumber's parent and
other transactions and adjustments as more adequately described in the
Company's Financial Statements. See the Pacific Lumber'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.
II-13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PACIFIC LUMBER
THIS SECTION CONTAINS STATEMENTS WHICH CONSTITUTE "FORWARD-LOOKING
STATEMENTS." SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--RESULTS OF OPERATIONS--RECENT OPERATING RESULTS" IN
THIS ANNEX II AND "RISK FACTORS," AND "BUSINESS OF THE COMPANY--REGULATORY
AND ENVIRONMENTAL MATTERS," "--HEADWATERS AGREEMENT," AND "--LEGAL
PROCEEDINGS" IN THE ACCOMPANYING PROSPECTUS FOR CAUTIONARY INFORMATION WITH
RESPECT TO SUCH FORWARD-LOOKING STATEMENTS.
BACKGROUND
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 of the Company--Regulatory and Environmental Matters" and
"--Headwaters Agreement" in the accompanying Prospectus.
II-14
<PAGE>
RESULTS OF OPERATIONS
The following table presents selected operational and financial information
for the nine months ended September 30, 1998 and 1997 and the years ended
December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 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............ 33.2 39.0 52.4 49.7 46.5
Redwood common grades........... 114.3 112.8 160.3 159.4 146.8
Douglas-fir upper grades........ 5.1 8.3 11.5 10.6 7.4
Douglas-fir common grades....... 32.9 59.0 75.3 74.9 64.6
Other........................... 5.9 11.2 12.0 12.5 11.4
--------- --------- --------- --------- ---------
Total lumber.................. 191.4 230.3 311.5 307.1 276.7
========= ========= ========= ========= =========
Logs(2)......................... 25.7 34.8 43.9 49.4 40.3
========= ========= ========= ========= =========
Wood chips(3)...................... 124.9 176.7 224.3 187.2 192.8
========= ========= ========= ========= =========
Average sales price:
Lumber:(4)
Redwood upper grades............ $ 1,486 $ 1,426 $ 1,443 $ 1,380 $ 1,495
Redwood common grades........... 582 579 575 542 496
Douglas-fir upper grades........ 1,275 1,205 1,203 1,154 1,301
Douglas-fir common grades....... 353 473 455 439 392
Logs(4)............................ 415 392 394 450 396
Wood chips(5)...................... 76 77 76 79 107
Net sales:
Lumber, net of discount............ $ 134.7 $ 161.5 $ 218.3 $ 202.8 $ 181.4
Logs............................... 10.6 13.7 17.3 22.2 15.9
Wood chips......................... 9.5 13.7 17.0 14.8 20.7
Cogeneration power................. 3.2 3.4 4.5 3.3 2.5
Other.............................. 3.0 3.0 4.3 1.7 1.4
--------- --------- --------- --------- ---------
Total net sales............... $ 161.0 $ 195.3 $ 261.4 $ 244.8 $ 221.9
========= ========= ========= ========= =========
Operating income..................... $ 30.4 $ 57.9 $ 74.6 $ 66.3 $ 64.6
========= ========= ========= ========= =========
Operating cash flow(6)............... $ 47.8 $ 77.7 $ 101.1 $ 93.9 $ 90.5
========= ========= ========= ========= =========
Income (loss) before income taxes.... $ (9.6) $ 19.9 $ 23.5 $ 16.1 $ 13.0
========= ========= ========= ========= =========
Net income (loss)(7)................. $ (34.4) $ 11.8 $ 15.6 $ 9.9 $ 6.6
========= ========= ========= ========= =========
</TABLE>
- ---------------
(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."
(7) The net loss for the nine months ended September 30, 1998 includes an
extraordinary loss of $28.5 million for the early extinguishment of debt.
II-15
<PAGE>
RECENT OPERATING RESULTS
Pacific Lumber's revenues declined from $195.3 million for the nine months
ended September 30, 1997 to $161.0 million for the comparable period of 1998
primarily due to lower shipments of lumber, logs and wood chips. The decline in
shipments which occurred during the first six months of 1998 was principally due
to well-above-normal rainfall 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. Revenues for the three months ended September 30, 1998 were primarily
affected by a reduction in the volume of logs harvested and converted into
lumber products. Pacific Lumber's reduced harvest level during the third quarter
of 1998 was due in substantial part to the absence of a sufficient number of
available THPs to enable it to conduct its operations at levels consistent with
those in the comparable period of 1997. The diminished supply of available THPs
was attributable to a reduced volume of approved THPs during the third quarter
of 1998 as well as regulatory and judicial restrictions imposed upon harvesting
activities in areas covered by previously approved THPs. See "Business of the
Company--Regulatory and Environmental Matters" and "--Legal
Proceedings--Timber Harvesting Litigation" in the accompanying Prospectus.
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 reduced number of approved THPs was, and continues to be, attributable
to several factors, including a significantly reduced level of THPs submitted by
Pacific Lumber to the CDF during the first nine months of 1998 due to (a) the
extensive amount of time devoted by Pacific Lumber's foresters, wildlife and
fisheries biologists and other personnel to (i) amending a significant number of
previously submitted THPs to incorporate various new requirements which Pacific
Lumber agreed to as part of the Pre-Permit Agreement, (ii) preparing the
Combined Plan and all the related data (see "Business of the
Company--Regulatory and Environmental Matters--Overview" in the accompanying
Prospectus), (iii) responding to comments received by the Company from various
federal and state governmental agencies with respect to its filed THPs in light
of the new and more stringent requirements that Pacific Lumber agreed to observe
pursuant to the Pre-Permit Agreement and (iv) assisting the Company with newly
filed litigation involving certain of the Company's approved THPs (see
"Business of the Company--Legal Proceedings--Timber Harvesting Litigation" in
the accompanying Prospectus) and (b) implementation of a provision contained in
the Pre-Permit Agreement which requires, for the first time, a licensed
geologist to review virtually all of Pacific Lumber's THPs prior to submission
to the CDF. Pacific Lumber has also experienced an unexpected significantly
slower rate of review and approval with respect to its filed THPs due, in large
part, to the issues that have emerged in applying the requirements embodied in
the Pre-Permit Agreement to Pacific Lumber's THPs, certain of which requirements
impose new forestry practices that apply solely to Pacific Lumber's operations.
As a result of the factors discussed above, Pacific Lumber had a severely
diminished inventory of approved THPs at November 1, 1998 which is limiting
Pacific Lumber's ability to conduct harvesting operations. Pacific Lumber
believes that its harvesting levels during the fourth quarter of 1998 will be
significantly below that of the fourth quarter of 1997 which will in turn have
an adverse impact on lumber production and shipments.
Pacific Lumber has released a draft of the Combined Plan for public review
and comment and believes that it has completed most of its work in connection
with preparation of the Combined Plan; however, additional work will be required
as a result of the public review and comment process for the Combined Plan and
as a result of the California Headwaters Bill. Pacific Lumber has also retained
several geologists, and believes it has made progress with the various state and
federal government agencies in resolving issues regarding the application of the
requirements of the Pre-Permit Agreement to Pacific Lumber's filed THPs.
Accordingly, Pacific Lumber believes that it will be able to increase its rate
of THP submissions during the first half of 1999. In addition, if the Combined
Plan and the Permits are approved, Pacific Lumber expects
II-16
<PAGE>
to experience a more streamlined THP process, which should result in an
increased volume of approved THPs. However, there can be no assurance that
Pacific Lumber will not continue to experience difficulties in submitting and
receiving approvals of its THPs similar to those difficulties it has been
experiencing.
Pacific Lumber expects that its cash flow from operations, together with
other available sources of funds, will be sufficient to fund its working
capital, capital expenditures and required debt service obligations for the next
year. However, cash flows from operations may be adversely affected if Pacific
Lumber continues to experience difficulties in the THP submission and approval
process, additional judicial restrictions are imposed on Pacific Lumber's
harvesting activities, inclement weather conditions hamper harvesting operations
or the final Combined Plan is not approved or is not acceptable to Pacific
Lumber. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Financial Condition and Investing and Financing
Activities."
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
NET SALES. Net sales for the first nine months 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 nine months ended September 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
decrease in logging costs and depletion expense as a result of the decline in
volumes discussed above. Pacific Lumber had income before income taxes of $19.9
million for the nine months ended September 30, 1997 as compared to a loss
before income taxes of $9.6 million for the nine months ended September 30, 1998
primarily as a result of the decrease in operating income discussed above and as
a result of the increase in interest expense due to the increase in debt from
the Timber Notes.
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. Operating income
also improved as a result of lower selling, general and administrative expenses
which declined over the three year period primarily due to lower legal fees. The
decrease in depletion and depreciation expense in 1997 from 1996 was due to a
higher proportion of young growth logs harvested which are depleted at a lower
value. The increase in depletion and depreciation expense in 1996 from 1995 was
related to the increase in the volume of lumber shipments discussed above.
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.
II-17
<PAGE>
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
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 $532.8 million during the nine months
ended September 30, 1998. Dividends for the 1998 period included a $526.1
million dividend paid with proceeds from the Timber Notes.
During the nine months ended September 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 $47.8 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 Credit
Agreement (as defined below) 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 paid an aggregate of $23.0 million, $20.5 million and $22.0
million of dividends in 1997, 1996 and 1995, respectively. Dividends of $270.0
million were paid during the nine months ended September 30, 1998, $263.0
million of which was paid with proceeds from the Timber Notes.
On December 18, 1998, Pacific Lumber entered into an amended and restated
three-year credit facility (the "Credit Agreement") with the bank that
provided the prior credit facility. The Credit Agreement allows for borrowings
of up to $60 million, all of which may be used for revolving borrowings, $20
million of which may be used for standby letters of credit and $30 million of
which may be used for timberland acquisitions. Borrowings are secured by all of
Pacific Lumber's domestic accounts receivable and inventory. Borrowings for
timberland acquisitions are also secured by the acquired timberlands and,
commencing in April 2001, are to be repaid annually from 50% of Pacific Lumber's
excess cash flow (as defined). The remaining excess cash flow is available for
dividends. Upon maturity of the facility, all borrowings used for
II-18
<PAGE>
timberland acquisitions will convert to a term loan repayable over four years.
As of December 18, 1998, Pacific Lumber had borrowings outstanding of $2.0
million and letters of credit of $14.4 million; $27.1 million of borrowings was
available under the Credit Agreement, all of which was available for revolving
borrowings, $5.6 million of which was available for letters of credit and all of
which was available for 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 $10.0 million
for the nine months ended September 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 September 30, 1998, Pacific Lumber had consolidated working capital
of $44.9 million and long-term debt of $ 859.5 million (net of current
maturities) as compared to $56.4 million and $545.6 million, respectively, at
December 31, 1997. The increase in long-term debt was primarily due to the
issuance of the Timber Notes, offset by the payment of the Original Timber Notes
and the redemption of the Pacific Lumber Notes. In addition to principal
payments, proceeds from the issuance of the Timber Notes were used to pay
redemption premiums and financing costs, and provided $25.0 million for
timberland acquisitions. Pacific Lumber expects that its cash flow from
operations, together with other available sources of funds, will be sufficient
to fund its working capital, capital expenditures and required debt service
obligations for the next year. However, cash flows from operations may be
adversely affected if Pacific Lumber continues to experience difficulties in the
THP submission and approval process, additional judicial restrictions are
imposed on Pacific Lumber's harvesting activities, inclement weather conditions
hamper harvesting operations or the final Combined Plan is not approved or is
not acceptable to Pacific Lumber. See "--Results of Operations--Recent
Operating Results" regarding the recent decline in operating cash flow and
"Business of the Company--Legal Proceedings" for a description of certain of
the timber harvest litigation related to the Company, including a recent lawsuit
which could potentially result in severe restrictions on its ability to harvest
timber for up to several months. See "Risk Factors--Regulatory and
Environmental Factors" and "Business of the Company--Regulatory and
Environmental Matters" in the accompanying Prospectus. 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 long-term working capital, capital expenditure
requirements and required debt service obligations. 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
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, or adverse weather conditions would not have a
material adverse effect on Pacific Lumber's financial position, results of
operations or liquidity. In connection with the EPIC LAWSUIT, a preliminary
injunction remains in effect covering three of Pacific Lumber's THPs
II-19
<PAGE>
pending the Court's review of certain evidence and review of additional briefs
requested by and filed with the Court on November 9, 1998. Pacific Lumber is
uncertain what impact this matter will have upon its operations and financial
results, but were the Court to reaffirm the preliminary injunction after review
of the evidence and the additional briefs, it is possible that other approved
timber harvesting activities on Pacific Lumber's timberlands could be severely
restricted (and revenues potentially significantly adversely affected) until
such time as certain intra-agency wildlife consultation requirements are
satisfied. Pacific Lumber is vigorously defending this matter and the Company
and Pacific Lumber are devoting resources toward facilitating completion of the
consultation requirements as soon as practicable. 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,
"--Results of Operations--Recent Operating Results" and Note 9 to Pacific
Lumber's Consolidated Financial Statements for further information regarding
regulatory and legal proceedings affecting Pacific Lumber's operations.
YEAR 2000
Pacific Lumber utilizes software and related technologies throughout its
business that will be affected by the date change to the year 2000. There may
also be technology embedded within certain equipment owned or used by Pacific
Lumber that is susceptible to the year 2000 date change as well. Year 2000
progress and readiness has been a subject of Pacific Lumber's normal, recurring
internal audit function.
Pacific Lumber has established a team to address the potential impacts of
the year 2000 on each of its critical business functions. The team has
substantially completed its assessment of Pacific Lumber's critical information
technology and embedded technology, including the GIS and equipment and systems
used in operating its sawmills and cogeneration plant, and is now in the process
of making the required modifications for these systems to be year 2000
compliant. The modification costs and the costs associated with new systems are
expected to be immaterial, costing less than $100,000. The required
modifications are expected to be completed by mid-year 1999 and in most cases
testing of the modifications will also be completed by such time. Systems
modification costs are being expensed as incurred. Costs associated with new
systems are being capitalized and will be amortized over the life of the
product.
In addition to addressing Pacific Lumber's internal systems, the team is in
the process of identifying key vendors that could be impacted by year 2000
issues, and surveys are being conducted regarding their compliance efforts.
Management expects to evaluate the responses to the surveys over the next
several months and will make direct contact with parties which are deemed to be
critical. These inquiries are being made by Pacific Lumber's own staff, and the
costs associated with this program are expected to be minimal.
While Pacific Lumber believes that its program is sufficient to identify
the critical issues and associated costs necessary to address possible year 2000
problems in a timely manner, there can be no assurance that the program, or
underlying steps implemented, will be successful in resolving all such issues
prior to the year 2000. If the steps taken by Pacific Lumber (or critical third
parties) are not made in a timely manner, or are not successful in identifying
all significant year 2000 issues, business interruptions or delays could occur.
However, based on the information Pacific Lumber has gathered to date and its
expectations of its ability to remedy problems encountered, Pacific Lumber
believes that it will not experience significant business interruptions that
would have a material impact on its results or financial condition. The most
reasonably likely worst case scenario which Pacific Lumber could experience
would be an interruption in the power supply from the cogeneration plant or
problems with certain of the Company's sawmill equipment, field equipment,
personal computers, financial software or GIS software. Pacific Lumber believes
that any such problems could be easily remedied within a few days and that
contingency plans used in the past for dealing with problems with its
cogeneration plant, equipment and software are adequate to address the types of
problems which could be encountered in such a scenario. These plans include
using its available alternative power supply, purchases of replacement
equipment, use of third parties for processing GIS information and working with
vendors to make any needed software modifications.
II-20
<PAGE>
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 nine
months ended September 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 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-21
<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 and the matter discussed in Note 11 to which the date is
November 9, 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, on January 26, 1998, an action entitled COHO SALMON, ET AL. V.
PACIFIC LUMBER, ET AL. (the "COHO LAWSUIT") was filed against Scotia Pacific,
Pacific Lumber and Salmon Creek. This action relates to a significant number of
THPs covering young growth timber and 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. The plaintiffs seek, among other
things, to enjoin timber harvesting on the THPs and acreage identified, and to
require the Company to restore coho habitat allegedly harmed by adverse
cumulative effects of past (approved) timber harvesting. The Company has also
received notice of additional threatened actions in respect of the coho salmon.
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. 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 --
11. SUBSEQUENT EVENT
On November 9, 1998, the CDF notified the Company that it had suspended
its 1998 TOL. As a result, the Company has ceased all operations under its TOL.
The Company has made the necessary arrangements for independent contract loggers
to be substituted as the licensed timber operator on those THPs where the
Company's logging crews were working prior to the suspension (independent
contractors historically account for approximately 60% of the harvesting
activities on the Company's timberlands). The Company believes it will be able
to engage independent contractors to conduct harvesting activities on any other
approved THPs during the balance of calendar year 1998 and during calendar year
1999, if necessary. Accordingly, the Company does not believe that the
revocation of its TOL will have a significant adverse effect on its business or
financial performance. The Company has determined not to appeal the suspension
of its TOL, and will apply for a new TOL from the CDF. The CDF has indicated to
the Company that it is considering a denial of its TOL for calendar year 1999
and that any agreements for the issuance of a conditional TOL for 1999 must
contain sufficient provisions to the CDF's satisfaction to ensure that the
Company complies with the California Forest Practice Act.
II-F-16
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......... $ 19,912 $ 31,768
Receivables:
Trade........................... 11,455 19,216
Other........................... 4,980 2,123
Inventories........................ 48,986 56,079
Prepaid expenses and other current
assets.......................... 8,349 12,898
-------------- ------------
Total current assets.......... 93,682 122,084
Timber and timberlands, net of
accumulated depletion of $245,254
and $236,824, respectively......... 317,744 321,206
Property, plant and equipment, net of
accumulated depreciation of $88,617
and $82,070, respectively.......... 96,557 96,292
Deferred financing costs, net........ 22,866 17,912
Deferred income taxes................ 48,585 27,018
Restricted cash...................... 23,743 28,434
Other assets......................... 6,143 4,186
-------------- ------------
$ 609,320 $ 617,132
============== ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable................... $ 5,698 $ 3,538
Accrued compensation and related
benefits........................ 9,327 12,365
Accrued interest................... 12,467 19,650
Deferred income taxes.............. 9,671 9,671
Other accrued liabilities.......... 3,389 1,042
Long-term debt, current
maturities...................... 8,270 19,429
-------------- ------------
Total current liabilities..... 48,822 65,695
Long-term debt, less current
maturities......................... 859,488 545,571
Other noncurrent liabilities......... 27,502 27,991
-------------- ------------
Total liabilities............. 935,812 639,257
-------------- ------------
Contingencies
Stockholder's deficit:
Common stock, $.01 par value, 100
shares authorized and issued.... -- --
Additional capital................. 157,520 157,520
Accumulated deficit................ (484,012) (179,645)
-------------- ------------
Total stockholder's deficit... (326,492) (22,125)
-------------- ------------
$ 609,320 $ 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)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
(UNAUDITED)
Net sales:
Lumber and logs.................... $ 145,321 $ 175,161
Other.............................. 15,641 20,090
---------- ----------
160,962 195,251
Operating expenses:
Cost of goods sold................. 104,132 107,902
Selling, general and administrative
expenses........................ 9,028 9,653
Depletion and depreciation......... 17,390 19,790
---------- ----------
130,550 137,345
---------- ----------
Operating income..................... 30,412 57,906
Other income (expense):
Investment, interest and other
income.......................... 2,960 2,201
Interest expense................... (42,954) (40,242)
---------- ----------
Income (loss) before income taxes.... (9,582) 19,865
Credit (provision) in lieu of income
taxes.............................. 3,673 (8,089)
---------- ----------
Income (loss) before extraordinary
item............................... (5,909) 11,776
Extraordinary item:
Loss on early extinguishment of
debt, net of income tax benefit
of $17,894...................... (28,500) --
---------- ----------
Net income (loss).................... $ (34,409) $ 11,776
========== ==========
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)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1997
------------ ----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ (34,409) $ 11,776
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Extraordinary loss on early
extinguishment of debt, net..... 28,500 --
Depletion and depreciation......... 17,390 19,790
Amortization of deferred financing
costs........................... 1,518 1,568
Net gain on asset dispositions..... (1,866) --
Increase (decrease) in cash
resulting from changes in:
Receivables..................... (1,872) 5,760
Inventories, net of depletion... 4,868 (1,839)
Prepaid expenses and other
assets......................... (2,146) (3,695)
Accounts payable................ 7,448 465
Accrued and deferred income
taxes.......................... (4,039) 7,878
Accrued interest................ (7,183) (13,095)
Other liabilities............... (2,972) 2,565
Other........................... -- 161
------------ ----------
Net cash provided by operating
activities...................... 5,237 31,334
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............... (10,034) (9,164)
Restricted cash withdrawals used to
acquire timberlands............. 1,767 --
Net proceeds from sale of assets... 6,524 84
------------ ----------
Net cash used for investing
activities..................... (1,743) (9,080)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Timber
Notes........................... 867,248 --
Premium for early retirement of
debt............................ (36,258) --
Redemptions, repurchases of and
principal payments on long-term
debt............................ (564,494) (16,256)
Change in restricted cash resulting
from retirement of debt......... 9,486 1,149
Incurrence of deferred financing
costs........................... (21,374) --
Dividends paid..................... (269,958) (18,000)
------------ ----------
Net cash used for financing
activities...................... (15,350) (33,107)
------------ ----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS........................ (11,856) (10,853)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD................ 31,768 26,027
------------ ----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................. $ 19,912 $ 15,174
============ ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid, net of capitalized
interest........................ $ 49,737 $ 52,054
Tax allocation payments to MAXXAM
Inc............................. 366 211
Income taxes paid.................. -- 166
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Timber and timberlands acquired
subject to long-term debt....... $ -- $ 7,014
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. See Note 4 below
regarding the formation of Scotia Pacific Company LLC ("Scotia LLC"), and the
merger of Scotia Pacific into Scotia LLC on July 20, 1998. 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 September 30, 1998, the consolidated results of operations for
the nine months ended September 30, 1998 and 1997 and consolidated cash flows
for the nine months ended September 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 nine months ended
September 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):
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
Lumber............................... $34,285 $ 41,737
Logs................................. 14,701 14,342
------------- ------------
$48,986 $ 56,079
============= ============
3. RESTRICTED CASH
Restricted cash represents the amount held by the trustee under the
indentures governing the New Timber Notes (as defined below) and the Timber
Notes. In addition, cash and cash equivalents includes $13,166,000 and
$17,784,000, which is restricted for debt service payments on the New Timber
Notes and the Timber Notes at September 30, 1998 and December 31, 1997,
respectively.
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):
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
7.95% Scotia Pacific Timber
Collateralized Notes due July 20,
2015............................... $ -- $319,965
7.43% Scotia LLC Timber
Collateralized Notes due July 20,
2028............................... 867,248 --
10 1/2% Pacific Lumber Senior Notes
due March 1, 2003.................. 235,000
Revolving Credit Agreement........... -- 9,445
Other................................ 510 590
------------- ------------
867,758 565,000
Less: current maturities............. (8,270) (19,429)
------------- ------------
$ 859,488 $545,571
============= ============
On July 20, 1998, Scotia LLC, a recently formed limited liability company
wholly owned by the Company, issued the new timber notes ("New Timber Notes")
which consist of $867,248,000 aggregate principal amount 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 of the New Timber Notes were used primarily to prepay the Timber
Notes and to redeem the Senior Notes effective August 19, 1998. The Company
recognized an extraordinary loss of approximately $28,500,000, net of the
related income tax benefit $17,894,000, in the nine months 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 Indenture governing the New Timber Notes (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 $245,053,000
of the Company's consolidated balance at September 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 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 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 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
II-F-21
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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, although the
Company's recent results of operations have been adversely affected by the
absence of a sufficient number of available THPs to enable the Company to
conduct its operations at historic levels. These laws and related administrative
actions and legal challenges have also 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 environmental groups against the Company and two of its subsidiaries (the
"EPIC LAWSUIT") under which the environmental groups allege that certain
procedural violations of the ESA have resulted from logging activities on the
Company's timberlands and seek to prevent the defendants from carrying out any
harvesting activities until certain purported intra-agency wildlife consultation
requirements under the ESA are satisfied in connection with the Combined Plan
(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 is
vigorously defending this matter and the Company and Scotia LLC are devoting
resources toward facilitating completion of the consultation requirements as
soon as practicable.
On September 28, 1996, the Pacific Lumber Parties entered into the
Headwaters Agreement with the United States and California which provides the
framework for the acquisition by the United States and California of the
Headwaters Timberlands. A substantial portion of the Headwaters Timberlands
contains virgin old growth timber. Approximately 4,900 of these acres are owned
by Salmon Creek, with the remaining acreage being owned by Scotia LLC (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.
In November 1997, President Clinton signed an appropriations bill which
authorizes 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.
In September 1998, California Governor Wilson signed 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. The bill also contains an
additional
II-F-22
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
appropriation available from July 1, 1999 until June 30, 2000 authorizing the
expenditure of up to $80 million toward acquisition at fair market value of the
"Owl Creek" grove from Scotia LLC, Scotia Pacific's successor (see Note 4
above). If any portion of the $80 million remains after purchases of the Owl
Creek grove, it may be used to purchase certain other timberlands. An additional
$20 million is appropriated under the bill toward purchase of a forest grove
referred to as "Grizzly Creek" from the Company at fair market value. The
Combined Plan (see below) would have allowed harvesting over time of either the
Owl Creek grove or Grizzly Creek grove. Scheduled Amortization under the New
Timber Notes (see Note 4 above) 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. The Company estimates that the Owl Creek grove
constitutes approximately 2% of the aggregate "Mbfe" (board foot equivalents
of timber as defined in the New Timber Notes Indenture) contained in the timber
owned by Scotia LLC. 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 within the grove, which could result in
significant prepayments (and related prepayment premiums) on the New Timber
Notes which might be offset by a reduction in the required amortization in later
years attributable to not having an actual harvest from the Owl Creek grove.
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 "no-cut"
buffers (while the watershed assessment process is being completed) than
provided for in the Combined Plan (a plan containing both the Multi-Species HCP
and the SYP), obligating the Company and the government agencies to establish a
schedule that results in completion of the watershed assessment process within
five years (on a watershed by watershed basis), imposing minimum and maximum
"no-cut" buffers upon the watershed assessment process and designating Scotia
LLC's Owl Creek grove as a marbled murrelet conservation area. The California
Headwaters Bill also provides that the SYP shall be subject to the foregoing
provisions.
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 calendar years. If the SYP is approved by the CDF, the Company will have
complied with certain BOF regulations requiring timber companies to project
timber growth and harvest on their timberlands over a 100-year planning period
and establish an LTSY harvest level. The SYP must demonstrate that the average
annual harvest over any rolling ten-year period will not exceed the LTSY harvest
level and that 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 for ten years, although it would be subject to
review after five years. Thereafter, revised SYPs would be prepared every decade
that address the LTSY harvest level based upon reassessment of changes in the
resource base and other factors.
In July 1998, the proposed Combined Plan 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, among other things, 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. The Combined Plan and a draft
environmental impact statement/report (the "EIR/EIS") analyzing the Headwaters
Agreement were released and made available for public review and comment in July
1998 and in early October 1998,
II-F-23
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
respectively. The public review and comment periods for the Combined Plan and
draft EIR/EIS closed on November 16, 1998.
The Company believes that submission of the proposed the Combined Plan and
the draft EIR/EIS 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.
However, certain provisions of the California Headwaters Bill, including its
provisions relating to the watershed assessment process, are required to be
included in the final version of the Combined Plan. In addition, discussions are
expected to occur with regulatory agencies following the conclusion of the
public review and comment periods referred to above, which discussions are
expected to result in proposed amendments to the Combined Plan. The provisions
of the California Headwaters Bill impose, and the potential proposed amendments
could impose, more stringent harvesting requirements and reduce the amount of
the Company's timber that may be harvested as contemplated by the SYP in its
current form. Inasmuch as approval of the Multi-Species HCP and the SYP are
conditions to the consummation of the Headwaters Agreement and certain
modifications proposed by the regulatory agencies may not be acceptable to the
Company, any such proposed modifications could also affect the consummation of
the Headwaters Agreement. Accordingly, while the parties are working diligently
to complete the closing conditions contained in the Headwaters Agreement, there
can be no assurance that the Multi-Species HCP and the SYP will be approved,
that the Permits will be issued or that the Headwaters Agreement will be
consummated. 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 government agencies on the grounds that
such restrictions constitute an uncompensated governmental taking of private
property for public use.
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 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, on January 26, 1998, the COHO LAWSUITwas filed against the Company,
Scotia Pacific and Salmon Creek. 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. The plantiffs
seek, among other things, to enjoin timber harvesting on the THPs and acreage
identified, and to require the Company to restore coho habitat allegedly harmed
by adverse cumulative effects of past (approved) timber harvesting. The Company
has also received notice of additional threatened actions with respect to the
coho salmon. The Company is unable to predict the outcome of this case or its
ultimate impact on the Company's financial condition or results of operations or
the ability to harvest timber on its THPs. While the Company expects
environmentally focused objections and lawsuits to continue, it believes
II-F-24
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
that the Combined Plan should enhance its position in connection with these
challenges. The Company also believes that the Combined Plan should expedite the
preparation and facilitate approval of its THPs, although there can be no
assurance that the Company will not face difficulties in the THP submission and
approval process as it implements the Combined Plan.
In the event that the final Combined Plan is not approved or is not
acceptable to the Company, 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 Combined Plan is not approved or 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.
On November 9, 1998, the CDF notified the Company that it had suspended its
1998 TOL. As a result, the Company has ceased all operations under its TOL. The
Company has made the necessary arrangements for independent contract loggers to
be substituted as the licensed timber operator on those THPs where the Company's
logging crews were working prior to the suspension (independent contractors
historically account for approximately 60% of the harvesting activities on the
Company's timberlands). The Company believes it will be able to engage
independent contractors to conduct harvesting activities on any other approved
THPs during the balance of calendar year 1998 and during calendar year 1999, if
necessary. Accordingly, the Company does not believe that the revocation of its
TOL will have a significant adverse effect on its business or financial
performance. The Company has determined not to appeal the suspension of its TOL,
and will apply for a new TOL from the CDF. The CDF has indicated to the Company
that it is considering a denial of its TOL for calendar year 1999 and that any
agreements for the issuance of a conditional TOL for 1999 must contain
sufficient provisions to the CDF's satisfaction to ensure that the Company
complies with the California Forest Practice Act.
II-F-25
<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>
1998 Quarterly Information:
Net sales.......................... $46,514 $ 55,022 $ 59,426
Operating income................... 7,861 11,925 10,626
Loss before extraordinary item..... (2,039) (211) (3,659)
Net loss........................... (2,039) (211) (32,159)
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-26
<PAGE>
ANNEX 3
New York New York
Maureen Coen Everett Rutan
Managing Director Vice President--Senior Analyst
Structured Finance Group Structured Finance Group
Moody's Investors Service Moody's Investors Service
JOURNALISTS: (212) 553-0376 JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653 SUBSCRIBERS: (212) 553-1653
MOODY'S PLACES SCOTIA PACIFIC COMPANY LLC TIMBER
COLLATERALIZED NOTES ON REVIEW FOR POSSIBLE DOWNGRADE
$867 MILLION OF SECURITIES AFFECTED
New York, <Rating Date Pending>--Moody's has placed the three classes of
Timber Collateralized Notes issued by Scotia Pacific Company LLC (Scotia) on
review for possible downgrade. The securities affected are:
$160.700 MM 6.55% Class A-1 Timber Collateralized Notes rated A1
$243.200 MM 7.11% Class A-2 Timber Collateralized Notes rated A3
$463.348 MM 7.71% Class A-3 Timber Collateralized Notes rated Baa2
Moody's rating action was prompted by the fact that on November 10 the
California Department of Forestry and Fire Protection (CDF) suspended the timber
operator's license of The Pacific Lumber Company (Palco) for continued
violations of forest practice rules. Under the terms of the transaction, Palco
purchases substantially all of the timber sold by Scotia, and is responsible for
either harvesting that timber itself, or contracting with third parties to
perform the harvesting. As a result of the suspension, Palco must remove its
equipment and personnel from Scotia's forests, though it can continue operations
using contractors who hold their own timber operator's licenses. Scotia's
long-term ability to service the securities depends on harvests being maintained
at certain minimum levels.
This event has potential negative implications for the securities in three
ways. First, in the short-term, Palco is moving to replace its equipment and
personnel with contractors in order to maintain current production. While
typically as much as 50-60% of the harvest has been performed by third parties,
there are questions as to availability of adequate outside contractors and
potential increased costs of using them. Due to the start of winter logging
conditions, Palco's need for outside contractors to replace its own operations
is minimized by the seasonal reduction in activity. The requirements will become
substantially greater if Palco has to continue its operations in this manner
throughout 1999.
Second, the suspension may affect whether Palco receives a timber
operator's license for 1999, and under what conditions. Palco's performance with
respect to compliance had actually been better in 1998 than in either 1997 or
1996, based on a count of the number of violations cited against the company.
However, Palco had been operating in 1998 under a conditional license with a
number of additional stipulations as to performance, and it was violation of
these that led to the suspension. Palco and the CDF are negotiating in good
faith towards some form of licensing for 1999, but it is unclear whether a
license will be issued, what additional conditions will be placed on it, and how
this will affect Palco's ability to harvest timber.
Third, Palco is working with state and federal authorities to obtain final
acceptance of its proposed Sustained Yield Plan (SYP) regarding future
harvesting plans, Habitat Conservation Plan (HCP) regarding steps to minimize
the environmental impact of its activities, and sale of the Headwaters Forest.
The suspension of Palco's timber operator's license is purely an enforcement
action, and is not directly linked to the approval of any of these three
measures. However, the process has been high profile and highly political, and
certain parties may seize on the CDF's action to attempt to delay or defeat
approval. While
III-1
<PAGE>
approval is not required for continued timber harvesting, failure would increase
the uncertainty as to the level of future activity.
Moody's will be monitoring developments with respect to Scotia's actual
harvest levels, progress towards a 1999 timber operator's license for Palco, and
successful conclusion of the HCP/SYP and Headwaters Agreement. A decision to
place a rating on review for possible downgrade does not indicate that a
reduction in the rating is imminent or planned. It is simply an alert to
investors that certain events with uncertain, but potentially negative,
implications have occurred, and that Moody's will be paying close attention to
how they unfold.
ISSUER
Scotia Pacific Company LLC, a wholly owned subsidiary of The Pacific Lumber
Company, was formed under the laws of the State of Delaware. The Pacific Lumber
Company is an indirect subsidiary of MGI, which is owned by MGHI, which is in
turn owned by MAXXAM. The Pacific Lumber Company has been in continuous
operation since 1869. It is engaged in the business of timber growth and
harvesting, and the manufacture of timber-related finished products.
III-2
<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.
**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
** Previously filed
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>
(c) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT, SCOTIA PACIFIC COMPANY LLC, HAS DULY CAUSED THIS AMENDMENT NO. 3 TO
THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED IN THE CITY OF SCOTIA, STATE OF CALIFORNIA, ON THE
24TH DAY OF DECEMBER, 1998.
SCOTIA PACIFIC COMPANY LLC
By: JOHN A. CAMPBELL*
JOHN A. CAMPBELL, CHAIRMAN OF THE
BOARD, PRESIDENT AND MANAGER
(PRINCIPAL EXECUTIVE OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------------------------------------------------- --------------------
<C> <S> <C>
JOHN A. CAMPBELL* Chairman of the Board, President and December 24, 1998
JOHN A. CAMPBELL Manager (Principal Executive Officer)
PAUL N. SCHWARTZ* Vice President and Manager (Principal December 24, 1998
PAUL N. SCHWARTZ Financial Officer)
GARY L. CLARK* Vice President--Finance and December 24, 1998
GARY L. CLARK Administration
(Principal Accounting Officer)
JOHN T. LA DUC* Vice President and Manager December 24, 1998
JOHN T. LA DUC
EZRA G. LEVIN* Manager December 24, 1998
EZRA G. LEVIN
STUART C. LEWIS* Manager December 24, 1998
STUART C. LEWIS
JACK M. WEBB* Manager December 24, 1998
JACK M. WEBB
*By: /s/BERNARD L. BIRKEL
BERNARD L. BIRKEL
ATTORNEY-IN-FACT
</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
December 22, 1998
